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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 June 30, 2001
--------------
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
As of August 14, 2001 there were 15,267,875 shares of the registrant's
common stock, par value $0.01 per share, outstanding.
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NN, Inc.
INDEX
Page No.
Part I. Financial Information
Item 1. Financial Statements:
Consolidated Statements of Income and Comprehensive Income for the
three and six months ended June 30, 2001 and 2000 2
Consolidated Balance Sheets at June 30, 2001 and December 31, 2000 3
Consolidated Statements of Changes in Stockholders' Equity
for the six months ended June 30, 2001 and 2000 4
Consolidated Statements of Cash Flows for the six months
ended June 30, 2001 and 2000 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk 15
Part II. Other Information
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 6. Exhibits and Reports on Form 8-K 17
Signatures 18
PART I. FINANCIAL INFORMATION
NN, Inc.
Consolidated Statements of Income and Comprehensive Income
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
Thousands of Dollars, Except Per Share Data 2001 2000 2001 2000
-
- ------------------------------------------------------------------------------------------------------------------------------------
Net sales $47,350 $25,643 $97,577 $53,645
Cost of goods sold 35,320 17,965 73,504 38,311
------------- ------------- -------------- -------------
Gross profit 12,030 7,678 24,073 15,334
Selling, general and administrative 3,886 2,463 7,900 4,781
Depreciation and amortization 3,386 1,726 6,696 3,568
------------- ------------- -------------- -------------
Income from operations 4,758 3,545 9,477 7,026
Interest expense, net 1,112 268 2,294 559
Equity in earnings (loss) of unconsolidated
affiliates 23 -- (26) --
Net gain on involuntary conversion (2,542) -- (2,542) --
Other income (344) -- (476) --
------------- ------------- -------------- -------------
Income before provision for income taxes 6,509 3,277 10,227 6,467
Provision for income taxes 2,437 1,035 4,073 2,115
Minority interest in consolidated subsidiary 566 -- 1,102 --
------------- ------------- -------------- -------------
Income before cumulative effect of change 3,506 2,242 5,052
in accounting principle 4,352
------------- ------------- -------------- -------------
Cumulative effect of change in accounting -- -- 98 --
principle, net of income tax benefit of $112
and related minority interest impact of $84
------------- ------------- -------------- -------------
Net income $3,506 $2,242 $4,954 $4,352
Other comprehensive income (loss):
Foreign currency translation adjustments 205 (27) (3,181) (422)
------------- ------------- -------------- -------------
Comprehensive income $3,711 $2,215 $1,773 $3,930
============= ============= ============== =============
Basic income per share:
Income before cumulative effect of change
in accounting principle $ 0.23 $ 0.15 $ 0.33 $ 0.28
Cumulative effect of change in accounting
principle -- -- (0.01) --
------------- ------------- -------------- -------------
Net income $ 0.23 $ 0.15 $ 0.32 $ 0.28
============= ============= ============== =============
Weighted average shares outstanding 15,253 15,244 15,251 15,244
============= ============= ============== =============
Diluted income per share:
Income before cumulative effect of change
in accounting principle $ 0.23 $ 0.15 $ 0.33 $ 0.28
Cumulative effect of change in accounting
principle -- -- (0.01) --
------------- ------------- -------------- -------------
Net Income $ 0.23 $ 0.15 $ 0.32 $ 0.28
============= ============= ============== =============
Weighted average shares outstanding 15,532 15,436 15,522 15,437
============= ============= ============== =============
See accompanying notes.
2
NN, Inc.
Consolidated Balance Sheets
June 30, December 31,
2001 2000
Thousands of Dollars (Unaudited)
- ------------------------------------------------------------------------------------------------------------------------------------
Assets
Current assets:
Cash and cash equivalents $ 6,629 $ 8,273
Accounts receivable, net 34,334 29,549
Inventories, net 23,523 23,742
Other current assets 3,475 1,512
Net current deferred tax asset 104 962
--------------- ----------------
Total current assets 68,065 64,038
Property, plant and equipment, net 87,057 91,693
Goodwill, net 41,315 27,865
Other non-current assets 5,127 4,212
--------------- ----------------
Total assets $201,564 $187,808
=============== ================
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ $ 17,337
16,790
Accrued salaries and wages 5,504 6,929
Income taxes payable 3,057 1,341
Payable to affiliates 2,739 1,762
Short-term notes -- 2,000
Short-term portion of long-term debt 5,250 --
Other liabilities 10,694 6,490
--------------- ----------------
Total current liabilities 44,034 35,859
Minority interest in consolidated subsidiaries 28,095 30,257
Deferred income taxes 4,388 5,353
Long-term debt 59,592 50,515
Other 775 578
--------------- ----------------
Total liabilities 136,884 122,562
Total stockholders' equity 64,680 65,246
--------------- ----------------
Total liabilities and stockholders' equity $201,564 $187,808
=============== ================
See accompanying notes.
3
Consolidated Statements of Changes in Stockholders' Equity
(Unaudited)
Common stock
Thousands of Dollars Number Par Additional Retained Accumulated other
of shares Value paid in capital earnings comprehensive loss Total
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, January 1, 2000 15,244 $153 $30,398 $31,255 $ (1,678) $60,128
Net income -- -- -- 4,352 -- 4,352
Dividends -- -- -- (2,439) -- (2,439)
Other comprehensive loss -- -- -- (422) (422)
----------- ---------- ------------ -------------- ------------- ------------
Balance, June 30, 2000 15,244 $153 $30,398 $33,168 $ (2,100) $61,619
=========== ========== ============ ============== ============= ============
Balance, January 1, 2001 15,247 $153 $30,414 $36,364 $ (1,685) $65,246
Net income -- -- -- 4,954 -- 4,954
Dividends -- -- -- (2,440) -- (2,440)
Stock options exercised 18 -- 101 -- -- 101
Other comprehensive loss -- -- -- -- (3,181) (3,181)
----------- ---------- ------------ -------------- -------------- ------------
Balance, June 30, 2001 15,265 $153 $30,515 $38,878 $ (4,866) $64,680
=========== ========== ============ ============== ============= ============
See accompanying notes.
4
NN, Inc.
Consolidated Statements of Cash Flows
(Unaudited)
Six Months Ended
June 30,
Thousands of Dollars 2001 2000
- ------------------------------------------------------------------------------------------------------------------------------------
Operating Activities:
Net income $4,954 $4,352
Adjustments to reconcile net income:
Depreciation and amortization 6,696 3,568
Cumulative effect of change in accounting principle 98 --
Equity earnings of unconsolidated affiliate 26 (66)
Interest income on receivable from unconsolidated affiliate (104) (45)
Minority interest in consolidated subsidiary 1,102 --
Changes in operating assets and liabilities:
Accounts receivable (5,150) (2,497)
Inventories 337 1,110
Other current assets (264) (1,962)
Other assets (93) 356
Accounts payable 4,019 3,609
Other liabilities 1,789 453
------------- --------------
Net cash provided by operating activities 13,410 8,878
------------- --------------
Investing Activities:
Acquisition of Delta Rubber Company, net of cash acquired (23,674) --
Acquisition of plant, property, and equipment (2,939) (3,663)
Long-term note receivable -- (3,120)
Investment in unconsolidated earnings -- (100)
------------- -- --------------
Net cash used by investing activities (26,613) (6,883)
------------- -- --------------
Financing Activities:
Net proceeds under revolving credit facility -- 1,889
Proceeds from long-term debt 21,066 --
Repayment of long-term debt (4,456) --
Repayment of short-term debt (2,000) --
Proceeds from issuance of stock 101 --
Dividends paid (2,440) (2,439)
------------- --------------
Net cash provided (used) by financing activities 12,271 (550)
------------- --------------
Effect of exchange rate changes (712) (422)
Net Change in Cash and Cash Equivalents (1,644) 1,445
Cash and Cash Equivalents at Beginning of Period 8,273 1,409
------------- --------------
Cash and Cash Equivalents at End of Period $ 6,629 $2,432
============= ==============
See accompanying notes.
5
NN, Inc.
Notes To Consoldiated Financial Statements
Note 1. Interim Financial Statements
The accompanying consolidated financial statements of NN, Inc. (the Company)
have not been audited by independent accountants, except for the balance sheet
at December 31, 2000. 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 six month periods ended June 30, 2001 and 2000, the
Company's financial position at June 30, 2001 and December 31, 2000, and the
cash flows for the six month periods ended June 30, 2001 and 2000. 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.
Certain information and footnote disclosures normally included in 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.
The results for the first and second quarters of 2001 are not necessarily
indicative of future results.
Note 2. Derivate Financial Instruments
The Company has 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 the
Company's 54% owned subsidiary, NN Euroball ApS 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 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 principal payments on the
underlying debt over the life of the swap.
The cumulative effect of a change in accounting principles for the adoption of
SFAS No. 133 effective January 1, 2001 resulted in a transition adjustment net
loss of $98,000 which is net of an income tax benefit of $112,000 and the
related minority interest impact of $84,000. The interest rate swap does not
qualify for hedge accounting under the provisions of SFAS No. 133; therefore,
the transition adjustment for adoption of SFAS No. 133 and any subsequent
periodic changes in fair value of the interest rate swap are recorded in
earnings.
As of June 30, 2001, the fair value of the swap is a loss of approximately
$273,000 which is recorded in other noncurrent liabilities. The change in fair
value during the six-month period ended June 30, 2001 was a gain of
approximately $69,000 which has been included as a component of other income.
6
Note 3. Inventories
Inventories are stated at the lower of cost or market, with cost being
determined by the first-in, first-out method.
Inventories are comprised of the following (in thousands):
June 30, December 31,
2001 2000
(Unaudited)
--------------- ---------------
Raw materials $ 5,422 $ 4,431
Work in process 6,174 5,265
Finished goods 12,032 14,106
Less inventory reserve 105 60
--------------- ---------------
$ 23,523 $ 23,742
=============== ===============
Note 4. Net Income Per Share
Three Months Ended Six Months Ended
June 30, June 30,
2001 2000 2001 2000
Thousands of Dollars, Except Share and Per Share Data
- ---------------------------------------------------- ----------------- --- --------------- --- ---------------- --- ----------------
Net income $ 3,506 $ 2,242 $ 4,954 $ 4,352
Adjustments to net income -- -- -- --
----------------- --------------- ---------------- ----------------
Net income $ 3,506 $ 2,242 $ 4,954 $ 4,352
================= =============== ================ ================
Weighted average basic shares 15,253,276 15,244,308 15,250,547 15,244,308
Effect of dilutive stock options 279,147 191,204 271,420 192,509
----------------- --------------- ---------------- ----------------
Weighted average dilutive shares outstanding 15,532,423 15,435,512 15,521,967 15,436,817
================= =============== ================ ================
Basic net income per share $ 0.23 $ 0.15 $ 0.32 $ 0.28
================= =============== ================ ================
Diluted net income per share $ 0.23 $ 0.15 $ 0.32 $ 0.28
================= =============== ================ ================
Excluded from the shares outstanding for each of the second quarters ended June
30, 2001 and 2000 were 10,750 antidilutive options which had exercise prices
ranging from $9.75 to $11.50. Excluded from the shares outstanding for each of
the six months ended June 30, 2001 and 2000 were 10,750 antidilutive options
which had exercise prices ranging from $9.75 to $11.50.
Note 5. Segment Information
During 2001, the Company's reportable segments are based on differences in
product lines and geographic locations and are divided between balls and
rollers, European operations ("Euroball") and plastics. The ball and roller
segment comprises three manufacturing facilities in the eastern United States.
The Euroball segment acquired in July 2000, comprises manufacturing facilities
located in Kilkenny, Ireland, Eltmann, Germany and Pinerolo, Italy. All of the
facilities in the ball and roller and Euroball segments are engaged in the
production of precision balls and rollers used primarily in the bearing
industry. The plastics segment is comprised of the Industrial Molding
Corporation ("IMC") business, located in Lubbuck, Texas, which was acquired in
July 1999 and the Delta Rubber Company ("Delta") business, located in Danielson,
Connecticut, which was acquired in February 2001. IMC is engaged in the
production of plastic injection
7
molded products for the bearing, automotive, instrumentation, fiber optic and
consumer hardware markets. Delta is engaged in the production of engineered
bearing seals and other precision-molded rubber products to original equipment
manufacturers.
The accounting policies of the segments are the same as those described in the
summary of significant accounting policies in the December 31, 2000 Form 10-K.
The Company evaluates segment performance based on profit or loss from
operations before income taxes not including nonrecurring gains and losses. The
Company accounts for intersegment sales and transfers at current market prices;
however, the Company did not have any material intersegment transactions during
the three month or six month periods ended June 30, 2001 and 2000.
Three Months Ended June 30,
2001 2000
Thousands of Dollars Ball & Roller Euroball Plastics Ball & Roller Euroball Plastics
- ------------------------------------- --------------- ---------------- ---------------- --------------- --------------- ------------
Revenues from external customers $ 14,214 $ 22,520 $ 10,616 $ 18,296 $ -- $ 7,347
Segment pretax profit (loss) 4,390 2,310 (191) 3,142 -- 135
Segment assets 58,959 84,719 57,886 66,866 -- 30,944
Six Months Ended June 30,
2001 2000
Thousands of Dollars Ball & Roller Euroball Plastics Ball & Roller Euroball Plastics
- ------------------------------------- --------------- ---------------- ---------------- --------------- --------------- ------------
Revenues from external customers $ 30,013 47,857 $ 19,707 $ 37,421 -- $ 16,224
Segment pretax profit (loss) 5,936 4,968 (677) 5,957 -- 510
Segment assets 58,959 84,719 57,886 66,866 -- 30,944
Note 6. Acquisitions and Joint Ventures
On February 16, 2001, the Company completed the acquisition of all of the
outstanding stock of The Delta Rubber Company, a Connecticut corporation
("Delta") for $22.5 million in cash, of which $500,000 is to be held in escrow
for one year from the date of closing. Delta provides high quality engineered
bearing seals and other precision-molded rubber products to original equipment
manufacturers. The Company plans to continue the operation of the Delta
business, which operates a manufacturing facility in Danielson, Connecticut.
AmSouth Bank provided financing for the transaction.
On March 16, 2000, the Company entered into a 50/50 joint venture with General
Bearing Corporation called NN General LLC ("NN General"), which owns a 60%
position in Jiangsu General Ball & Roller Company, Ltd. ("JGBR"), a Chinese
precision ball and roller manufacturer located in Rugao City, Jiangsu
Providence, China. The Company's investment includes a cash loan of $3.4
million. The remaining 40% of the Chinese company is owned by Jiangsu Steel Ball
Factory.
On July 31, 2000, the Company formed a majority owned stand-alone company in
Europe, NN Euroball ApS ("Euroball"), for the manufacture and sale of chrome
steel balls used for ball bearings and other products. The Company owns 54% of
Euroball. AB SKF ("SKF")and FAG Kugelfisher Georg Shafer AG ("FAG") each own
23%. As part of the transaction, Euroball acquired the ball factories located in
Pinerolo, Italy (previously owned by SKF), Eltmann, Germany (previously owned by
FAG), and Kilkenny, Ireland (previously owned by the Company). Acquisition
financing of approximately 31.5 million Euro (approximately $29.7 million) was
drawn at closing, and the credit facility provides for additional working
capital expenditure financing. The Company is required to consolidate Euroball
due to its ability to
8
exercise control over its operations and has accounted for the acquisitions of
the Pinerolo, Italy and Eltmann, Germany ball factories using the purchase
method of accounting. Goodwill arising from this acquisition is being amortized
on a straight-line basis over 20 years.
On August 31, 2000 the Company acquired a 51% ownership interest in NN Mexico,
LLC ("NN Mexico"), a Delaware limited liability company. NN Mexico holds as its
sole investment a 100% ownership interest in NN Arte, a manufacturer of plastic
components located in Guadalajara, Mexico. To acquire its 51% ownership of NN
Mexico, the Company made an initial contribution of $879,000, an additional
contribution of $671,000, and is obligated to provide additional funding of
$600,000 payable upon certain performance conditions at NN Arte. The Company is
required to consolidate NN Mexico due to its ability to exercise control over NN
Arte's operations and has accounted for this acquisition using the purchase
method of accounting
Note 7. Fire
On March 12, 2000, the Company experienced a fire at its Erwin, Tennessee
facility. The fire was contained to approximately 30% of the production area and
did not result in serious injury to any employee. Effected production was
shifted to the Company's other facilities as possible as well as the use of
other suppliers to protect product supply to customers. Insurance coverage for
the loss provides for the reimbursement of replacement value of property and
equipment damaged in the fire. A net gain of $2.5 million was recorded during
the quarter ended June 30, 2001. The gain is due to insurance proceeds received
from the insurance company related to the excess of insurance proceeds over the
net book value of assets destroyed in the March 12, 2000 fire at the Erwin,
Tennessee facility.
Note 8. Subsequent Event
On July 20, 2001, the Company entered into a syndicated loan agreement with
AmSouth Bank ("AmSouth") as the administrative agent for the lenders, for a
senior non-secured revolving credit facility of up to $25 million, expiring on
July 25, 2003 and a senior non-secured term loan for $35 million expiring on
July 1, 2006. This credit facility replaces the $25 million revolving credit
facility that was temporarily extended and restated in February of 2001 to $50
million and the additional $2 million of availiablity extended in March of 2001.
Amounts outstanding under the revolving facility and the term loan facility bear
interest at a floating rate equal to LIBOR plus an applicable margin between
0.75% to 2.00% based upon calculated financial ratios. The loan agreement
contains customary financial and non-financial covenants.
Note 9. New Accounting Pronouncements
In July 2001, the FASB issued Statement of Financial Accounting Standards No.
141, "Business Combinations"(Statement No. 141), and Statement of Financial
Accounting Standards No. 142, "Goodwill and Other Intangible Assets" (Statement
No. 142). Statement No. 141 requires that the purchase method of accounting be
used for all business combinations initiated after June 30, 2001. Statement No.
141 also specifies criteria intangible assets acquired in a purchase method
business combination must meet to be recognized and reported apart from
goodwill. Statement No. 142 will require that goodwill and intangible assets
with indefinite useful lives no longer be amortized, but instead tested for
impairment. The effective date of Statement No. 142 is January 1, 2002. As of
the date of adoption, the Company expects to have unamortized goodwill of
approximately $38.0 million, which will be subject to the provisions of
Statement No. 142. Amortization expense related to goodwill was $0.9 million and
$0.8 million for the year ended December 31, 2000 and the six months ending June
30, 2001, respectively. The Company is currently evaluating the impact of
adoption of Statement No. 142.
9
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
Three Months Ended June 30, 2001 Compared to the Three Months Ended June 30,
2000
Net Sales. Net sales increased by approximately $21.7 million, or 84.7%, from
$25.6 million for the second quarter of 2000 to $47.4 million for the second
quarter of 2001. The formation of Euroball in July of 2000 contributed $20.0
million of the increase, excluding the second quarter sales of the Ireland
facility, which was consolidated into the results of the Company prior to the
formation of Euroball. The Company's acquistion of Delta on February 16, 2001
contributed an additional $4.5 million to the increase. Offsetting these
increases were decreased sales of $1.5 million and $1.3 million for the
Company's domestic ball and roller and plastics divisions, respectively. These
decreases were due mainly to decreased demand for the Company's products in the
U. S related to the soft domestic economy.
Gross Profit. Gross profit increased approximately $4.3 million or 56.7%, from
$7.7 million for the second quarter of 2000 to $12.0 million for the second
quarter of 2001. Excluding the Ireland facility's gross profit for the second
quarter of 2001, Euroball contributed $4.8 million to the increase. The
acquisiton of Delta accounted for $1.2 million of the increase. Offsetting these
increases were decreased gross profits of $1.7 million at the domestic ball and
roller and plastics divisions, primarily due to decreased revenues. As a
percentage of net sales, gross profit decreased from 29.9% in the second quarter
of 2000 to 25.4% for the same period in 2001. This decrease in gross profit as a
percentage of net sales was due primarily to decreased levels of revenue volumes
at the domestic divisions and the resulting deleverage of margins as compared to
the same period in the prior year.
Selling, General and Administrative. Selling, general and administrative
expenses increased by approximately $1.4 million or 57.8% from $2.5 million in
the second quarter of 2000 to $3.9 million in the second quarter of 2001. The
formation of Euroball contributed $1.6 million of the increase. The acqusition
of Delta contributed $0.3 million of the increase. Primarily offsetting these
increases were decreases of $0.6 million for the plastic divisions due primarily
to planned administrative reductions. As a percentage of net sales, selling,
general and administrative expenses decreased from 9.6% for the second quarter
of 2000 to 8.2% for the same period in 2001.
Depreciation and Amortization. Depreciation expense increased by approximately
$1.7 million from $1.7 million for the second quarter of 2000 to $3.4 million
for the same period in 2001. Excluding the Ireland facility's depreciation for
the second quarter of 2001, Euroball contributed $1.3 million to the increase.
The acquisition of Delta accounted for $0.4 million of the increase. As a
percentage of net sales, depreciation expense increased from 6.7% in the second
quarter of 2000 to 7.2% in the second quarter of 2001.
Interest Expense. Interest expense, net increased by approximately $0.8 million
from $0.3 million in the second quarter of 2000 to $1.1 million during the same
period in 2001. Interest expense incurred by Euroball to finance the joint
venture transaction accounted for $0.3 million of the increase. The remainder of
the increase was due to amounts outstanding under the Company's line of credit
in the second quarter of 2001. In February 2001, the Company borrowed $22.5
million under the line of credit for the purchase of Delta. As a percentage of
net sales, interest expense, net increased from 1.0% in the second quarter of
2000 to 2.2% for the same period in 2001.
Equity in Earnings (Loss) of Unconsolidated Affiliates. Equity in earnings
(loss) of unconsolidated affiliates changed from $53,000 in the second quarter
of 2000 to a loss of $23,000 during the same period of 2001. The decrease is due
to the Company's share of earnings from the NN General joint venture with
10
General Bearing Corporation. Earnings from this venture were offset by losses
incurred from the start-up of NN Asia, a joint venture formed to market products
produced by NN General.
Net Gain on Involuntary Conversion. The Company recognized a net gain on
involuntary conversion of $2.5 million in the second quarter of 2001. The gain
is due to insurance proceeds received from the insurance company related to the
excess of insurance proceeds over the net book value of assets destroyed in the
March 12, 2000 fire at the Erwin, Tennessee facility.
Minority Interest of Consolidated Subsidiary. Minority interest of consolidated
subsidiary increased $0.6 million from $0 for the second quarter of 2000 to $0.6
million for the second quarter of 2001. This increase is due to Company's
Euroball and Arte joint ventures which began operations in the third quarter and
fourth quarter of 2000, respectively. The Company is required to consolidate
these joint ventures due to its majority voting ownership. The Company owns 54%
of the shares of Euroball and 51% of the shares of Arte. Minority interest of
consolidated subsidiary represents the combined interest of the minority
partners of Euroball at 46% and Arte at 49%, respectively.
Net Income. Net income increased by $1.3 million or 56.4%, from $2.2 million for
the second quarter of 2000 to $3.5 million for the same period in 2001. As a
percentage of net sales, net income decreased from 8.7% in the second quarter of
2000 to 7.4% for the second quarter of 2001.
Six Months Ended June 30, 2001 Compared to the Six Months Ended June 30, 2000
Net Sales. Net sales increased by approximately $44.0 million, or 81.9%, from
$53.6 million for the first six months of 2000 to $97.6 million for the same
period in 2001 The formation of Euroball in July of 2000 contributed $42.9
million of the increase, excluding the first six months sales of the Ireland
facility, which was consolidated into the results of the Company prior to the
formation of Euroball. The Company's acquisition of Delta on February 16, 2001
contributed an additional $6.7 million of the increase. Offsetting these
increases were decreased sales of $2.4 million and $3.2 million from the
Company's ball and roller division and IMC, respectively. These decreases were
due mainly to domestic economic conditions and resulting reduced demand for the
Company's products for the first half of 2001.
Gross Profit. Gross profit increased by approximately $8.8 million, or 57.0%,
from $15.3 million for the first six months of 2000 to $24.1 million for the
same period in 2001. The formation of Euroball in July 2000, excluding the
Ireland facility, contributed $10.5 million of the increase. The Delta
acquisition in February of 2001contributed an additional $1.8 million of the
increase. Offsetting these increases were decreased gross profits of $1.8
million and $1.7 million at the domestic ball and roller division and IMC
respectively. As a percentage of net sales, gross profit decreased from 28.6% in
the first six months of 2000 to 24.7% in the same period of 2001.
Selling, General and Administrative. Selling, general and administrative
expenses increased by approximately $3.1 million, or 65.2%, from $4.8 million in
the first six months of 2000 to $7.9 million in the same period in 2001. The
formation of Euroball in July 2000, excluding the Ireland facility, contributed
$3.1 million of the increase. The Company's acqusition of Delta in February 2001
contributed $0.5 million of the increase. Offsetting this increase were
decreases related to planned administrative reductions at the Company's plastic
division of $0.8 million. As a percentage of net sales, selling, general and
administrative expenses decreased from 8.9% in the first six months of 2000 to
8.1% for the same period in 2001.
Depreciation and Amortization. Depreciation expense increased by approximately
$3.1 million from $3.6 million for the first six months of 2000 to $6.7 million
for the same period in 2001. The formation of Euroball in July 2000, excluding
the Ireland facility, contributed $2.3 million. The Company's acquisition of
Delta in February 2001 contributed $0.5 million of the increase. The remainder
of the increase was due to purchases of capital equipment at the Company's
domestic ball and roller and IMC facilities. As a
11
percentage of net sales, depreciation expense increased from 6.7% for the first
six months of 2000 to 6.9% for the same period in 2001.
Interest Expense. Interest expense, net increased by approximately $1.7 million
from $0.6 in the first six months of 2000 to $2.3 million during the same period
in 2001. Interest expense incurred by Euroball to finance the joint venture
transaction accounted for $0.9 million of the increase. The remainder of the
increase was due to amounts outstanding under the Company's line of credit in
the first half of 2001. In February 2001, the Companys borrowed $22.5 million
under the line of credit for the purchase of the Delta Rubber Company. As a
percentage of net sales, interest expense, net increased from 1.0% in the first
half of 2000 to 2.3% for the same period in 2001.
Equity in Earnings of Unconsolidated Affiliates. Equity in earnings of
unconsolidated affiliates changed from $0 in the first half of 2000 to a gain of
$26,000 during the same period of 2001. The increase is due to the Company's
share of earnings from the NN General joint venture with General Bearing
Corporation. Earnings from this venture were offset by losses incurred from the
start-up of NN Asia, a joint venture formed to market products produced by NN
General.
Net Gain on Involuntary Conversion. The Company recognized a net gain on
involuntary conversion of $2.5 million in the first half of 2001. The gain is
due to insurance proceeds received from the insurance company related to the
excess of insurance proceeds over the net book value of assets destroyed in the
March 12, 2000 fire at the Erwin, Tennessee facility.
Minority Interest of Consolidated Subsidiary. Minority interest of consolidated
subsidiary increased $1.1 million from $0 for the first half of 2000 to $1.1
million for the first half of 2001. This increase is due to Company's Euroball
and Arte joint ventures which began operations in the third and fourth quarters
in 2000, respectively. The Company is required to consolidate these joint
ventures due to its ability to exercise control over the operations. The Company
owns 54% of the shares of Euroball and 51% of the shares of Arte. Minority
interest of consolidated subsidiary represents the combined interest of the
minority partners of Euroball at 46% and Arte at 49% respectively.
Net Income. Net income increased by approximately $0.6 million, or 13.8%, from
$4.4 million for the first six months of 2000 to $5.0 million for the same
period for 2001. As a percentage of net sales, net income decreased from 8.1%
for the first six months of 2000 to 5.1% for the same period for 2001.
Liquidity and Capital Resources
On July 20, 2001, the Company entered into a syndicated loan agreement with
AmSouth Bank ("AmSouth") as the administrative agent for the lenders, for a
senior revolving credit facility of up to $25 million, expiring on July 25, 2003
and a senior term loan for $35 million expiring on July 1, 2006. These
facilities are unsecured except for certain inter-company loans. This credit
facility replaces the $25 million revolving credit facility that was temporarily
extended and restated in February of 2001 to $50 million and the additional $2
million of availablity extended in March of 2001. Amounts outstanding under the
revolving facility and the term loan facility bear interest at a floating rate
equal to LIBOR plus an applicable margin between 0.75% to 2.00% based upon
calculated finacial ratios. The loan agreement contains customary financial and
non-financial covenants.
In July 2000, NN Euroball ApS, and its subsidiaries entered into a loan
agreement with HypoVereinsbank Luxembourg S.A. as agent for Bayerische Hypo-und
Vereinsbank AG of Munich, Germany for a senior secured revolving credit facility
of Euro 5 million, expiring on July 15, 2006 and a senior secured term loan of
Euro 36 million, expiring on July 15, 2006. On July 31, 2000, upon the
consummation of the joint venture, NN Euroball ApS borrowed a total of Euro
31,500,000 against these facilities for acquisition financing. Additional
working capital and capital expenditure financing are provided for under the
facility. Amounts outstanding under the facilities accrue interest at a floating
rate equal to EURIBOR plus an applicable margin of between 1.125% to 2.25% based
upon calculated financial ratios. Additionally, the Company has an interest rate
swap that fixes the interest rate for 12.5 million Euros outstanding under the
12
facilities. The interest rate swap agreement expires in July 2006. The loan
agreement contains various restrictive financial and non financial covenants.
The Company, as of June 30, 2001, was in compliance with all such covenants.
The Company's arrangements with its domestic customers typically provide that
payments are due within 30 days following the date of the Company's shipment of
goods, while arrangements with foreign customers (other than foreign customers
that have entered into an inventory management program with the Company)
generally provide that payments are due within either 90 or 120 days following
the date of shipment. Under the Company's inventory management program, payments
typically are due within 30 days after the product is used by the customer. The
Company's net sales historically have not been of a seasonal nature. However,
seasonality has become a factor for the foreign ball and roller sales in that
many foreign customers cease production during the month of August. The Company
also experiences seasonal fluctuation through its plastics division which
provides several lines of seasonal hardware.
The Company bills and receives payment from some of its foreign customers in
their local currency. To date, the Company has not been materially adversely
affected by currency fluctuations or foreign exchange restrictions. Nonetheless,
as a result of these sales, the Company's foreign exchange risk has increased.
Various strategies to manage this risk are under development and implementation,
including a hedging program. In addition, a strengthening of the U.S. dollar
against foreign currencies could impair the ability of the Company to compete
with international competitors for foreign as well as domestic sales.
Working capital, which consists principally of accounts receivable and
inventories, was $24.0 million at June 30, 2001 as compared to $28.2 million at
December 31, 2000. The decrease is primarily attributable to the Company's
refinancing activity as discussed above in this section. The ratio of current
assets to current liabilities decreased from 1.79:1 at December 31, 2000 to
1.55:1 at June 30, 2001. Cash flow from operations increased from $8.9 million
during the first six months of 2000 to $13.4 million during the same period in
2001. The increase is primarily attributable to the Company's acquisition and
joint venture activity.
During 2001, the Company plans to spend approximately $5.3 million on capital
expenditures of which approximately $2.9 million has been spent through June 30,
2001. The Company intends to finance these activities with cash generated from
operations and funds available under the credit facility described above. The
Company believes that funds generated from operations and borrowings from the
credit facility will be sufficient to finance the Company's working capital
needs and projected capital expenditure requirements through December 2001.
The Euro
The treaty on European Union provided that an economic and monetary union be
established in Europe whereby a single European currency, the Euro, was
introduced to replace the currencies of participating member states. The Euro
was introduced on January 1, 1999, at which time the value of participating
member state currencies were irrevocably fixed against the Euro and the European
Currency Unit. For the three year transitional period ending December 31, 2001,
the national currencies of member states will continue to circulate but be in
sub-units of the Euro. At the end of the transitional period, Euro bank notes
and coins will be issued, and the national currencies of the member states will
be legal tender no later than June 30, 2002.
The Company currently has operations in Italy, Germany and Ireland, all of which
are Euro participating countries, and sells product to customers in many of the
participating countries. The Euro has been adopted as the functional currency at
these locations.
13
Seasonality and Fluctuation in Quarterly Results
The Company's net sales historically have not been of a seasonal nature.
However, as foreign sales have increased as a percentage of total sales,
seasonality has become a factor for the Company in that many foreign customers
cease production during the month of August.
Inflation and Changes in Prices
While the Company's operations have not been affected by inflation during recent
years, prices for 52100 Steel and other raw materials purchased by the Company
are subject to change. For example, during 1995, 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, the Company experienced an increase in the price
of 52100 Steel and some difficulty in obtaining an adequate supply of 52100
Steel from its existing suppliers. Typically, the Company's pricing arrangements
with its steel suppliers are subject to adjustment once every six months. In an
effort to limit its exposure to fluctuations in steel prices, the Company has
generally avoided the use of long-term, fixed price contracts with its
customers. Instead, the Company typically reserves the right to increase product
prices periodically in the event of increases in its raw material costs. The
Company was able to minimize the impact on its operations resulting from the
52100 Steel price increases by taking such measures.
Cautionary Statements for Purposes of the "Safe Harbor" Provisions of the
Private Securities Litigation Reform Act of 1995
The Company wishes to caution readers that this report contains, and future
filings by the Company, press releases and oral statements made by the Company's
authorized representatives may contain, forward-looking statements that involve
certain risks and uncertainties. Readers can identify these forward-looking
statements by the use of such verbs as expects, anticipates, believes or similar
verbs or conjugations of such verbs. The Company's actual results could differ
materially from those expressed in such forward-looking statements due to
important factors bearing on the Company's business, many of which already have
been discussed in this filing and in the Company's prior filings. The
differences could be caused by a number of factors or combination of factors
including, but not limited to, the risk factors described below. Readers are
strongly encouraged to consider these factors when evaluating any such
forward-looking statement.
The following paragraphs discuss the risk factors the Company regards as the
most significant, although the Company wishes to caution that other factors that
are currently not considered as significant or that currently cannot be foreseen
may in the future prove to be important in affecting the Company's financial
position and results of operations. The Company undertakes no obligation to
update or revise any forward-looking statements, whether as a result of new
information, future events or otherwise.
Industry Risks. Both the precision ball and roller and precision plastics
industries are cyclical and tend to decline in response to overall declines in
industrial production. The Company's sales in the past have been negatively
affected, and in the future very likely would be negatively affected, by adverse
conditions in the industrial production sector of the economy or by adverse
global or national economic conditions generally.
Competition. The precision ball and roller market and the precision
plastics market are highly competitive, and many of the manufacturers in each of
the markets are larger and have substantially greater resources than the
Company. The Company's competitors are continuously exploring and implementing
improvements in technology and manufacturing processes in order to improve
product quality, and the Company's ability to remain competitive will depend,
among other things, on whether it is able, in a cost effective manner, to keep
pace with such quality improvements. In addition, the Company competes with many
of its ball and roller customers that, in addition to producing bearings, also
internally produce balls and rollers for sale to third parties. The Company
faces a risk that its customers will decide to produce balls and rollers
internally rather than outsourcing their needs to the Company.
14
Rapid Growth. The Company has significantly expanded its ball and roller
production facilities and capacity over the last several years. During 1997, the
Company purchased an additional manufacturing plant in Kilkenny, Ireland. The
Company continued this expansion in 2000 through its 54% ownership of the NN
Euroball joint venture with SKF and FAG. In addition, the Company invested in
Jiangsu General Ball & Roller Company, a Chinese joint venture specializing in
various types of ball production. The Company's Ball & Roller Division currently
is not operating at full capacity and faces risks of further under-utilization
or inefficient utilization of its production facilities in future years. The
Company also faces risks associated with start-up expenses, inefficiencies,
delays and increased depreciation costs associated with these joint ventures and
expansions.
Raw Material Shortages. Because the balls and rollers manufactured by the
Company have highly-specialized applications, their production requires the use
of very particular types of steel. Due to quality constraints, the Company
obtains the majority of its steel from overseas suppliers. Steel shortages or
transportation problems, particularly with respect to 52100 Steel, could have a
detrimental effect on the Company's business.
Risks Associated with International Trade. Because the Company (a) obtains
a majority of its raw materials for the manufacture of balls and rollers from
overseas suppliers, (b) now actively participates in overseas manufacturing
operations and (c) sells to a large number of international customers, the
Company faces risks associated with (i) adverse foreign currency fluctuations,
(ii) changes in trade, monetary and fiscal policies, laws and regulations, and
other activities of governments, agencies and similar organizations, (iii) the
imposition of trade restrictions or prohibitions, (iv) the imposition of import
or other duties or taxes, and (v) unstable governments or legal systems in
countries in which the Company's suppliers, manufacturing operations, and
customers are located. An increase in the value of the United States dollar
relative to foreign currencies adversely affects the ability of the Company to
compete with its foreign-based competitors for international as well as domestic
sales.
Dependence on Major Customers. During 2000, the Company's ten largest
customers accounted for approximately 69% of its net sales. Sales to various US
and foreign divisions of SKF, which is one of the largest bearing manufacturers
in the world, accounted for approximately 32% of net sales in 2000, and sales to
FAG accounted for approximately 17% of net sales. None of the Company's other
customers accounted for more than 5% of its net sales in 2000. The loss of all
or a substantial portion of sales to these customers would have a material
adverse effect on the Company's business.
Acquisitions. The Company's growth strategy includes growth through
acquisitions. In 1999, the Company acquired the IMC businesses as part of that
strategy. In 2000, the Company formed the NN Euroball joint venture with SKF and
FAG and began operating two new ball manufacturing facilities. In February of
2001, the Company continued to implement this strategy through the acquisition
of Delta. Although the Company believes that it will be able to continue to
integrate the operations of IMC, NN Euroball, Delta and other companies acquired
in the future into its operations without substantial cost, delays or other
problems, its ability to do so will depend on, among other things, the adequacy
of its implementation plans, the ability of its management to effectively
oversee and operate the combined operations of the Company and the acquired
businesses and its ability to achieve desired operating efficiencies and sales
goals. If the Company is not able to successfully integrate the operations of
acquired companies into its business, its future earnings and profitability
could be materially and adversely affected.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company is exposed to changes in financial market conditions in the normal
course of its business due to its use of certain financial instruments as well
as transacting in various foreign currencies. To mitigate its exposure to these
market risks, the Company has established policies, procedures and internal
processes governing its management of financial market risks.
15
The Company is exposed to changes in interest rates primarily as a result of its
borrowing activities, which include a $25.0 million floating rate revolving
credit facility which is used to maintain liquidity and fund its business
operations as well as a $35.0 million floating rate term loan. Additionally,
Euroball has a 5.0 million Euro floating rate revolving credit facility and a
36.0 million Euro floating rate secured term loan. Additionally, the Company has
an interest rate swap that fixes the interest rate for 12.5 million Euros
outstanding under the facilities. The interest rate swap expires in July 2006.
At June 30, 2001, the Company had $45.8 million outstanding under the domestic
revolving credit facility and term loan and Euroball had $19.1 million
outstanding under the Euroball revolving credit facility and term loan. A
one-percent increase in the interest rate charged on the Company's outstanding
borrowings under the revolving credit facility and term loans would result in
interest expense increasing by approximately $524,000. The nature and amount of
the Company's borrowings may vary as a result of future business requirements,
market conditions and other factors.
The Company's operating cash flows denominated in foreign currencies are exposed
to changes in foreign exchange rates. Beginning in the 1997 fourth quarter, upon
the commencement of production in its Kilkenny, Ireland facility, the Company
began to bill and receive payment from some of its foreign customers in their
own currency. To date, the Company has not been materially adversely affected by
currency fluctuations of foreign exchange restrictions The Company did not hold
a position in any foreign currency instruments as of June 30, 2001.
16
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders.
The Company's Annual Meeting of Stockholders was held on May 17, 2001. As of
March 17, 2001, the record date for the meeting, there were 15,246,909 shares of
common stock outstanding and entitled to vote at the meeting. There were present
at said meeting, in person or by proxy, stockholders holding 14,447,781 shares
of common stock, constituting approximately 95% of the shares of common stock
outstanding and entitled to vote, which constituted a quorum.
The first matter voted upon at the meeting was the election of Michael D. Huff
and Michael E. Werner as Class I Directors to serve for three-year terms. The
results of the voting in connection with such elections were as follows:
FOR WITHHELD
Michael D. Huff 13,747,666 700,115
Michael E. Werner 13,747,204 700,577
Accordingly, all nominees were elected to serve until the 2004 Annual Meeting of
Stockholders and until their successors are duly elected and qualified. In
addition to the foregoing directors, G. Ronald Morris, Steven T. Warshaw and
James L. Earsley are serving terms to expire at the 2002 Annual Meeting of
Stockholders, and Richard D. Ennen and Roderick R. Baty are serving terms which
are to expire at the 2003 Annual Meeting of Stockholders. Mr. Ennen, the
Company's founder, continues in his position as Chairman of the Company's Board
of Directors.
The second matter voted upon at the 2001 Annual Meeting of Stockholders was the
approval of an amendment to the Company's Stock Incentive Plan to change the
name of the number of shares from 1,625,000 to 2,450,000. The vote was 9,197,320
For and 2,830,908 Against, and there were 5,605 Abstentions.
The Third matter voted upon at the 2001 Annual Meeting of Stockholders was the
ratification of KPMG LLP as independent public accountants to audit the
Company's accounts for the fiscal year ending December 31, 2001. The vote was
14,438,365 For and 3,811 Against, and there were 5,605 Abstentions.
Item 6. Exhibits and Reports on Form 8-K.
None
17
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: August 14, 2000 /s/ Roderick R. Baty
-----------------------------------
Roderick R. Baty,
President and Chief Executive
Officer
(Duly Authorized Officer)
Date: August 14, 2000 /s/ David Dyckman
-----------------------------------
David Dyckman
Chief Financial Officer
(Principal Financial Officer)
(Duly Authorized Officer)
Date: August 14, 2000 /s/ William C. Kelly, Jr.
-----------------------------------
William C. Kelly, Jr.,
Treasurer, Secretary and
Chief Accounting Officer
(Principal Accounting Officer)
(Duly Authorized Officer)
18