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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 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 November 14, 2001 there were 15,296,672 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 nine months ended September 30, 2001 and 2000 2
Consolidated Balance Sheets at September 30, 2001 and December 31, 2000 3
Consolidated Statements of Changes in Stockholders' Equity for the nine
months ended September 30, 2001 and 2000 4
Consolidated Statements of Cash Flows for the nine months ended
September 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 11
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K 18
Signatures 19
1
PART I. FINANCIAL INFORMATION
NN, Inc.
Consolidated Statements of Income and Comprehensive Income
(Unaudited)
Three Months Ended Nine Months Ended
Thousands of Dollars, Except Per Share September 30, September 30,
Data 2001 2000 2001 2000
- ------------------------------------------------------------------------------------------------
Net sales $ 42,576 $ 37,075 $ 140,153 $ 90,720
Cost of goods sold 32,889 26,103 106,393 64,415
----------- --------- ----------- ----------
Gross profit 9,687 10,972 33,760 26,305
Selling, general and administrative 4,147 3,236 12,047 8,017
Depreciation and amortization 3,474 2,535 10,170 6,103
Restructuring costs 750 -- 750 --
----------- --------- ----------- ----------
Income from operations 1,316 5,201 10,793 12,185
Interest expense, net 920 651 3,214 1,209
Equity in (earnings) loss of
unconsolidated affiliates 13 (39) (13) (105)
Net (gain) loss on involuntary
conversion (1,359) -- (3,901) 25
Other (income) expense 15 -- (461) --
----------- --------- ----------- ----------
Income before provision for income taxes 1,727 4,589 11,954 11,056
Provision for income taxes 806 1,722 4,879 3,837
Minority interest of consolidated 177 424 1,279 424
subsidiaries ----------- --------- ----------- ----------
Income before cumulative effect of
change in accounting principle 744 2,443 5,796 6,795
Cumulative effect of change in
accounting principle, net of income
tax benefit of $112 and related minority
interest impact of $84 -- -- 98 --
----------- --------- ----------- ----------
Net income 744 2,443 5,698 6,795
Other comprehensive income (loss):
Foreign currency translation 306 (2,058) (2,875) (2,480)
----------- --------- ----------- ----------
Comprehensive income $ 1,050 $ 385 $ 2,823 $ 4,315
=========== ========= =========== ==========
Basic income per common share:
Income before cumulative effect of
change in accounting principle $ 0.05 $ 0.16 $ 0.38 $ 0.45
Cumulative effect of change in
accounting principle -- -- (0.01) --
----------- --------- ----------- ----------
Net income $ 0.05 $ 0.16 $ 0.37 $ 0.45
=========== ========= =========== ==========
Weighted average shares outstanding 15,286 15,245 15,253 15,245
=========== ========= =========== ==========
Diluted income per common share:
Income before cumulative effect of
change in accounting principle $ 0.05 $ 0.16 $ 0.37 $ 0.44
Cumulative effect of change in
accounting principle -- -- (0.01) --
----------- --------- ----------- ----------
Net income $ 0.05 $ 0.16 $ 0.37 $ 0.44
=========== ========= =========== ==========
Weighted average shares outstanding 15,584 15,424 15,505 15,433
=========== ========= =========== ==========
See accompanying notes.
2
NN, Inc.
Consolidated Balance Sheets
September 30, December 31,
2001 2000
Thousands of Dollars (Unaudited)
- ----------------------------------------------------------------------------------------------
Assets
Current assets:
Cash and cash equivalents $ 7,705 $ 8,273
Accounts receivable, net 30,837 29,549
Inventories, net 24,001 23,742
Other current assets 2,568 1,512
Net current deferred tax asset 746 962
----------- -----------
Total current assets 65,857 64,038
Property, plant and equipment, net 88,039 91,693
Goodwill, net 42,241 27,865
Other assets 5,468 4,212
----------- -----------
Total assets $ 201,605 $ 187,808
=========== ===========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 14,563 $ 17,337
Accrued salaries & wages 4,326 6,929
Income taxes payable 4,229 1,341
Payable to affiliates 1,382 1,762
Short-term notes payable -- 2,000
Short-term portion of long-term notes 7,000 --
Other current liabilities 12,016 6,490
----------- -----------
Total current liabilities 43,516 35,859
Minority interest in consolidated subsidiaries 30,763 30,257
Long-term notes 57,215 50,515
Deferred income taxes 4,932 5,353
Other non-current liabilities 529 578
----------- -----------
Total liabilities 136,955 122,562
Total stockholders' equity 64,650 65,246
----------- -----------
Total liabilities and stockholders' equity $201,605 $187,808
=========== ===========
See accompanying notes.
3
NN, Inc.
Consolidated Statements of Changes in Stockholders' Equity
(Unaudited)
Accumulated
Common stock Additional other
Thousands of Dollars Number Par paid in Retained comprehensive
Of shares value capital earnings (loss) Total
- -----------------------------------------------------------------------------------------------------
Balance, January 1, 2000 15,244 $153 $30,398 $31,255 $(1,678) $60,128
Shares issued 3 -- 16 -- -- 16
Net income -- -- -- 6,795 -- 6,795
Dividends paid -- -- -- (3,659) -- (3,659)
Other comprehensive loss -- -- -- -- (2,480) (2,480)
------- ------ -------- -------- --------- --------
Balance, September 30, 2000 15,247 $153 $30,414 $34,391 $(4,158) $60,800
======= ====== ======== ======== ========= ========
Balance, January 1, 2001 15,247 $153 $30,414 $36,364 $ $65,246
(1,685)
Shares issued 50 1 242 -- -- 243
Net income -- -- -- 5,698 -- 5,698
Dividends paid -- -- -- (3,662) -- (3,662)
Other comprehensive loss -- -- -- -- (2,875) (2,875)
------- ------ -------- -------- --------- --------
Balance, September 30, 2001 15,297 $154 $30,656 $38,400 $(4,560) $64,650
======= ====== ======== ======== ========= ========
See accompanying notes.
4
NN, Inc.
Consolidated Statements of Cash Flows
(Unaudited)
Nine Months Ended
September 30,
Thousands of Dollars 2001 2000
- ----------------------------------------------------------------------------------------------
Operating Activities:
Net income $5,698 $6,795
Adjustments to reconcile net income:
Depreciation and amortization 10,170 6,103
Cumulative effect of change in accounting principle 98 -
Equity earnings of unconsolidated affiliate (13) (105)
Interest income on receivable from unconsolidated affiliate (104) (95)
Minority interest in consolidated subsidiary 1,279 424
Restructuring costs 750 -
Changes in operating assets and liabilities:
Accounts receivable 1,317 (3,392)
Inventories 1,005 54
Other current assets (1,611) (2,119)
Other assets (1,330) (1,413)
Accounts payable (3,824) 8,074
Other liabilities 5,744 420
--------- --------
Net cash provided by operating activities 19,179 14,746
--------- --------
Investing Activities:
Acquisition of Delta Rubber Company, net of cash acquired (23,674) -
Acquisition of property, plant, and equipment (4,961) (4,971)
Long-term note receivable - (3,120)
Investment in unconsolidated affiliates - (100)
Acquisition of Euroball, net of cash acquired - (56,521)
--------- --------
Net cash used by investing activities (28,635) (64,712)
--------- --------
Financing Activities:
Net proceeds under revolving credit facility - 5,480
Proceeds from long-term debt 71,429 27,796
Repayment of long-term debt (56,762) -
Repayment of short-term debt (2,000) -
Proceeds from issuance of stock 243 15
Minority shareholders capital contribution - 29,600
Dividends paid (3,662) (3,659)
--------- --------
Net cash provided by financing activities 9,248 59,232
--------- --------
Effect of exchange rate changes (360) (2,480)
Net Change in Cash and Cash Equivalents (568) 6,786
Cash and Cash Equivalents at Beginning of Period 8,273 1,408
--------- --------
Cash and Cash Equivalents at End of Period $ 7,705 $ 8,194
========= ========
See accompanying notes.
5
NN, Inc.
Notes To Consolidated 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 nine month periods ended September 30, 2001 and
2000, the Company's financial position at September 30, 2001 and December 31,
2000, and the cash flows for the nine month periods ended September 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 three 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 September 30, 2001, the fair value of the swap is a loss of approximately
$455,000, which is recorded in other non-current liabilities. The change in fair
value during the three and nine-month periods ended September 30, 2001 was a
loss of approximately $182,000 and $113,000, respectively, which has been
included as a component of other (income) expense.
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):
September 30, December 31,
2001 2000
(Unaudited)
---------- ----------
Raw materials $ $
5,686 4,431
Work in process 5,490 5,265
Finished goods 12,952 14,106
Less inventory reserves 127 60
---------- ----------
$24,001 $23,742
========== ==========
Note 4. Net Income Per Share
Three Months Ended Nine Months Ended
September 30, September 30,
2001 2000 2001 2000
Thousands of Dollars, Except Share and Per Share Data
- ---------------------------------------------------------------------------------------------
Net income $ 744 $ 2,443 $ 5,698 $ 6,795
Adjustments to net income -- -- -- --
----------- ----------- ----------- -----------
Net income $ 744 $ 2,443 $ 5,698 $ 6,795
=========== =========== =========== ===========
Weighted average basic shares 15,285,606 15,245,147 15,252,869 15,244,565
Effect of dilutive stock options 298,870 178,980 252,545 188,905
----------- ----------- ----------- -----------
Weighted average dilutive shares 15,584,476 15,424,127 15,505,414 15,433,470
outstanding =========== =========== =========== ===========
Basic net income per share $ 0.05 $ 0.16 $ 0.37 $ 0.45
=========== =========== =========== ===========
Diluted net income per share $ 0.05 $ 0.16 $ 0.37 $ 0.44
=========== =========== =========== ===========
Excluded from the shares outstanding for each of the three and nine month
periods ended September 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 Lubbock, Texas, which was acquired in
July 1999, NN Arte ("Arte") formed on August of 2000, located in Guadalajara,
Mexico and the Delta Rubber Company ("Delta") business, located in Danielson,
Connecticut, which was acquired in February 2001. IMC and Arte are engaged in
the production of plastic injection 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.
7
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 inter-segment sales and transfers at current market prices;
however, the Company did not have any material inter-segment transactions during
the three month or nine month periods ended September 30, 2001 and 2000.
Three Months Ended September 30,
2001 2000
Ball & Ball &
Thousands of Dollars Roller Euroball Plastics Roller Euroball Plastics
- --------------------------- --------- ----------- ----------- ----------- ---------- ----------
Revenues from external $ 11,884 $ 19,541 $ 11,151 $ 16,203 $ 13,040 $ 7,832
customers
Segment pretax profit 1,714 1,056 (1,043) 2,272 1,618 699
(loss)
Segment assets 61,162 82,200 58,243 60,819 87,368 30,855
Nine Months Ended September 30,
2001 2000
Ball & Ball &
Thousands of Dollars Roller Euroball Plastics Roller Euroball Plastics
- --------------------------- --------- ----------- ----------- ----------- ---------- ----------
Revenues from external $ 41,897 $ 67,398 $ 30,858 $ 53,624 $ 13,040 $ 24,056
customers
Segment pretax profit 7,699 5,975 (1,720) 7,808 1,618 1,630
(loss)
Segment assets 61,162 82,200 58,243 60,819 87,368 30,855
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
and $0.1 million of equity. Jiangsu Steel Ball Factory owns the remaining 40% of
the Chinese company.
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 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%
8
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
provides for the reimbursement of replacement value of property and equipment
damaged in the fire. During September 2001, after receiving reimbursement for
all property damaged in the fire, the Company reached a final settlement with
the insurance company and anticipates no further proceeds from them. A gain of
$1.4 million was recorded during the quarter ended September 30, 2001 and a gain
of $3.9 million was recorded during the nine months ended September 30, 2001.
Note 8. Plant Closing
In September of 2001, the Company announced that it would close its Walterboro,
South Carolina ball manufacturing facility as part of its ongoing strategy to
locate manufacturing capacity in closer proximity to customers. The Euroball
joint venture concluded in August of 2000 was a part of this strategy of
redistributing global manufacturing capacity beyond North America. In addition
to its three European ball manufacturing facilities operating under Euroball,
the Company will continue to operate two domestic facilities in Erwin, Tennessee
and Mountain City, Tennessee. Transfer of production from the Walterboro
facility will continue through the fourth quarter and conclude prior to
year-end. Management plans to relocate the machinery and equipment located at
the Walterboro facility to its other global manufacturing facilities. Current
plans are to sell the land and building. The plant closing will result in the
termination of approximately 80 full time hourly and salaried employees prior to
the end of the year. The Company recorded a restructuring charge of $750,000 in
the third quarter of 2001 pertaining to severance pay to the terminated
employees. Accrued restructuring charges of $750,000 are included in other
current liabilities at September 30, 2001. Expenses for moving machinery and
equipment and other costs associated with closing the facility will be charged
in the period they are incurred.
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 $42.0 million, which will be subject to the provisions of
Statement No. 142. Amortization expense related to goodwill was $0.9 million and
$1.8 million for the year ended December 31, 2000 and the nine months ending
September 30, 2001, respectively. The Company is currently evaluating the impact
of adoption of Statement No. 142.
In July 2001, the FASB issued Statement of Financial Accounting Standards No.
143, "Accounting For Asset Retirement Obligations." This Statement requires
capitalizing any retirement costs as part of the total cost of the related
long-lived asset and subsequently allocating the total expense to future periods
using a systematic and rational method. Adoption of this Statement is required
for fiscal years beginning after June 15, 2002. The Company is currently
evaluating the impact of adoption of Statement No. 143.
In October 2001, The FASB issued Statement of Financial Accounting Standards No.
144, "Accounting
9
For The Impairment or Disposal of Long-lived Assets." This Statement supercedes
Statement No. 121 but retains many of its fundamental provisions. Additionally,
this Statement expands the scope of discontinued operations to include more
disposal transactions. The provisions of this Statement are effective for
financial statements issued for fiscal years beginning after December 15, 2001.
The Company is currently evaluating the impact of adoption of Statement No. 144.
Note 10. Long-Term Debt
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 availability 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 of 0.75% to
2.00% based upon calculated financial ratios. The loan agreement contains
customary financial and non-financial covenants. The Company, as of September
30, 2001 was in compliance with all such covenants.
Note 11. Subsequent Event
On November 6, 2001, a customer of IMC filed for voluntary Chapter 7 bankruptcy.
As of September 30, 2001 the Company had a trade accounts receivable balance of
approximately $1.0 million with this customer, which has subsequently been
reduced to approximately $0.8 million. For the nine-month period ended September
30, 2001, the Company recorded sales of approximately $1.8 million to this
customer. As of September 30, 2001, the Company has increased its allowance for
doubtful accounts by approximately $0.4 million as a result of this bankruptcy
filing.
10
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
Three Months Ended September 30, 2001 Compared to the Three Months Ended
September 30, 2000
Net Sales. Net sales increased by approximately $5.5 million, or 14.8%, from
$37.1 million for the third quarter of 2000 to $42.6 million for the third
quarter of 2001. The formation of Euroball in July of 2000 contributed $5.8
million of the increase, including the third quarter net 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 $3.6 million to the increase. Offsetting these
increases were decreased sales of $3.4 million and $0.5 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 decreased approximately $1.3 million or 11.7%, from
$11.0 million for the third quarter of 2000 to $9.7 million for the third
quarter of 2000. This decrease was due to decreased gross profits at the
domestic ball and roller and plastics divisions of $1.7 million and $0.9 million
respectively primarily due to decreased revenues. Offsetting these decreases
were contributions from Euroball of $0.5 million. The acquisition of Delta
accounted for $0.8 million of increase. As a percentage of net sales, gross
profit decreased from 29.6% in the third quarter of 2000 to 22.8% 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 de-leverage of margins as compared to the same period in the
prior year.
Selling, General and Administrative. Selling, general and administrative
expenses increased by approximately $0.9 million or 28.2% from $3.2 million in
the third quarter of 2001 to $4.1 million in the third quarter of 2001. The
formation of Euroball contributed $0.6 million of the increase. The acquisition
of Delta contributed $0.4 million of the increase. Additionally, the recording
of a reserve for doubtful accounts related to a plastics customer declaring
bankruptcy contributed $0.4 million of the increase. Primarily offsetting these
increases were decreases for the plastic and the ball and roller division due
primarily to planned administrative reductions. As a percentage of net sales,
selling, general and administrative expenses increased from 8.7% for the third
quarter of 2000 to 9.7% for the same period in 2001.
Depreciation and Amortization. Depreciation and amortization expense
increased by approximately $1.0 million or 37.0% from $2.5 million for the third
quarter of 2000 to $3.5 million for the same period in 2001. Euroball
contributed $0.4 million to the increase. The acquisition of Delta accounted for
$0.4 million of the increase. The remainder of the increase is due to an
increase in the amortization of loan costs of the Company's new credit facility
and the amortization of goodwill related to Euroball joint venture and the Delta
acquisition. As a percentage of net sales, depreciation and amortization expense
increased from 6.8% in the third quarter of 2000 to 8.2% in the third quarter of
2001.
Restructuring costs. The Company recorded a restructuring charge of $0.7 million
in the third quarter of 2001. The restructuring costs pertain to the Company's
decision and announcement to close the Walterboro, South Carolina ball facility
in December of the current year. The $0.7 million charge represents the accrual
of severance costs for the approximately 80 people that will be terminated as a
result of the closing. As a percentage, restructuring costs represent 1.8% of
net sales in the third quarter of 2001.
Interest Expense. Interest expense, net increased by approximately $0.2 million
from $0.7 million in the third quarter of 2000 to $0.9 million during the same
period in 2001. The increase was due to interest expense incurred by the Company
to finance the Delta acquisition. In February 2001, the Company borrowed $22.5
million under its credit facility for the purchase of Delta. This increase was
partially offset by decreased interest rates on the Company's credit facility as
well as decreased amounts outstanding on the Euroball debt. As a percentage of
net sales, interest expense, net increased from 1.8% in the third quarter of
2000 to 2.2% for the same period in 2001.
11
Equity in (Earnings) Loss of Unconsolidated Affiliates. Equity in (earnings)
loss of unconsolidated affiliates changed from a gain of $39,000 in the third
quarter of 2000 to a loss of $13,000 during the same period of 2001. The
decrease is due to the Company's share of earnings from the NN General joint
venture with 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 $1.4 million in the third 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 Subsidiaries. Minority interest of
consolidated subsidiaries decreased $0.2 million from $0.4 million for the third
quarter of 2000 to $0.2 million for the third quarter of 2001. This decrease is
due to decreased earnings at the 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 ability to exercise control over its 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 decreased by $1.7 million or 69.5%, from $2.4 million for
the third quarter of 2000 to $0.7 million for the same period in 2001. As a
percentage of net sales, net income decreased from 6.6% in the third quarter of
2000 to 1.7% for the third quarter of 2001.
Nine Months Ended September 30, 2001 Compared to the Nine Months Ended September
30, 2000
Net Sales. Net sales increased by approximately $49.4 million, or 54.5%, from
$90.7 million for the first nine months of 2000 to $140.2 million for the same
period in 2001. The formation of Euroball in July of 2000 contributed $48.7
million of the increase and the Company's acquisition of Delta on February 16,
2001 contributed an additional $10.3 million of the increase. Offsetting these
increases were decreased sales of $6.1 million and $3.5 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 $7.5 million, or 28.3%,
from $26.3 million for the first nine months of 2000 to $33.8 million for the
same period in 2001. The formation of Euroball in July 2000 contributed $11.0
million of the increase. The acquisition of Delta, in February of 2001,
contributed an additional $2.6 million of the increase. Offsetting these
increases were decreased gross profits of $3.1 million and $3.0 million at the
domestic ball and roller division and plastics divisions respectively primarily
due to decreased revenues at the domestic ball and roller and plastics division.
As a percentage of net sales, gross profit decreased from 29.0% in the first
nine months of 2000 to 24.1% in the same period of 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 de-leverage of
margins as compared to the same period in the prior year.
Selling, General and Administrative.Selling, general and administrative
expenses increased by approximately $4.0 million, or 50.3%, from $8.0 million in
the first nine months of 2000 to $12.0 million in the same period in 2001. The
formation of Euroball in July 2000 contributed $3.6 million of the increase. The
Company's acquisition of Delta in February 2001 contributed $0.8 million of the
increase. Additionally, the recording of a reserve for doubtful accounts related to a
plastics customer declaring bankruptcy contributed $0.4 million of the increase.
Offsetting this increase were decreases related to planned administrative
reductions mainly at the Company's plastic division.. As a percentage of net
sales, selling, general and administrative expenses decreased from 8.8% in the
first nine months of 2000 to 8.6% for the same period in 2001.
Depreciation and Amortization. Depreciation and amortization expense increased
approximately $4.1
12
million, from $6.1 million for the first nine months of 2000 to $10.2 million
for the same period in 2001. The formation of Euroball in July 2000 contributed
$2.8 million. The Company's acquisition of Delta in February 2001 contributed
$0.9 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 well as the amortization of loan costs related to the Company's
new credit facility. As a percentage of net sales, depreciation and amortization
expense increased from 6.7% for the first nine months of 2000 to 7.2% for the
same period in 2001.
Restructuring costs. The Company recorded a restructuring charge of $0.7 million
in the third quarter of 2001. The restructuring costs pertain to the Company's
decision and announcement to close the Walterboro, South Carolina ball facility
in December of the current year. The $0.7 million charge represents the accrual
of severance costs for the approximately 80 people that will be terminated as a
result of the closing. As a percentage, restructuring costs represent 0.5% of
net sales for the first nine months of 2001.
Interest Expense. Interest expense, net increased by approximately $2.0 million
from $1.2 in the first nine months of 2000 to $3.2 million during the same
period in 2001. Interest expense incurred by Euroball to finance the joint
venture transaction accounted for $1.0 million of the increase. The remainder of
the increase was due to amounts outstanding under the Company's credit facility
in the first nine months of 2001. In February 2001, the Company borrowed $22.5
million under the credit facility for the purchase of the Delta Rubber Company.
As a percentage of net sales, interest expense, net increased from 1.3% in the
first nine months 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 a gain of $105,000 in the first nine
months of 2000 to a gain of $13,000 during the same period of 2001. The decrease
is due to the Company's share of earnings from the NN General joint venture with
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 $3.9 million in the first nine months 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 $0.9 million from $0.4 million for the first nine months of
2000 to $1.3 million for the first nine months of 2001. This change is due to
the 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 its
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 decreased by approximately $1.1 million, or 16.1%, from
$6.8 million for the first nine months of 2000 to $5.7 million for the same
period for 2001. As a percentage of net sales, net income decreased from 7.5%
for the first nine months of 2000 to 4.1% 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 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 availability 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 of 0.75% to
2.00% based upon calculated financial ratios. The loan agreement contains
customary financial and non-financial covenants. The Company, as of September
30, 2001 was in compliance with all such covenants.
13
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 5,000,000, expiring on July 15, 2006 and a senior secured term loan of
Euro 36,000,000, expiring on July 15, 2006. On July 31, 2000, upon closing 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 1.50% to 2.25% based upon calculated
financial ratios. The loan agreement contains various restrictive financial and
non-financial covenants. The Company, as of September 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 customer uses the product. 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 fluctuations through its plastics division, which
provides several lines of Christmas 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 $22.3 million at September 30, 2001 as compared to $28.2
million at December 31, 2000. The ratio of current assets to current liabilities
decreased from 1.79:1 at December 31, 2000 to 1.51:1 at September 30, 2001. Cash
flow from operations increased from $14.7 million during the nine months of 2000
to $19.2 million during the first nine months of 2001.
During 2001, the Company plans to spend approximately $7.2 million on capital
expenditures (of which approximately $5.0 million has been spent through
September 30, 2001) including the purchase of additional machinery and equipment
for all of the Company's domestic facilities as well as the three European
facilities. The Company intends to finance these activities with cash generated
from operations and funds available under the credit facilities described above.
The Company believes that funds generated from operations and borrowings from
the credit facilities 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 provides 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
14
countries, and sells product to customers in many of the participating
countries. The Euro has been adopted as the functional currency at these
locations.
Seasonality and Fluctuation in Quarterly Results
The Company's net sales historically have 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.
Other Information
On September 5, 2001 the Company's board of directors named Roderick R. Baty as
Chairman and Chief Executive Officer effectively immediately. Mr. Baty has
served as the Company's President and Chief Executive Officer since 1997. Mr.
Baty replaces Richard D. Ennen who has served as Chairman for the past 21 years.
Mr. Ennen will continue to serve on the Company's board.
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. 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 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 results of
operations. The Company undertakes no obligation to publicly update or revise
any forward looking statements, whether as a result of new information, future
events or otherwise.
Industry Risks. Both the precision ball & 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 & roller market and the precision plastics
markets are highly competitive, and many of 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
15
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.
Rapid Growth. The Company has significantly expanded its ball and roller
production facilities and capacity over the last several years, and during the
third quarter of 2000 started a jointly owned stand-alone company in Europe for
the manufacture and sale of precision chrome steel balls. Although the Company's
Ball & Roller division is currently operating at near full capacity, downturns
in the economy and other factors could result in 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 its plant 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 obtains a
majority of its raw materials for the manufacture of balls and rollers from
overseas suppliers and 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 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.
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
16
outstanding under the facilities. The interest rate swap expires in July 2006.
At September 30, 2001, the Company had $46.7 million outstanding under the
domestic revolving credit facility and term loan and Euroball had $17.5 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 $517,000. 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 related to foreign exchange rates. The Company did not
hold a position in any foreign currency instruments as of September 30, 2001.
17
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits Required by Item 601 of Regulation S-K
(b) Reports on Form 8-K
On September 5, 2001, the Company filed a Report on Form 8-K to announce
the naming of Roderick R. Baty to Chairman of the Board.
On September 11, 2001, the Company filed a Report on Form 8-K to announce
the closing of its Walterboro, South Carolina ball facility.
18
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 14, 2001 /s/ Roderick R. Baty
Roderick R. Baty,
President and Chief Executive
Officer
(Duly Authorized Officer)
Date: November 14, 2001 /s/ David Dyckman
David Dyckman
Chief Financial Officer
(Principal Financial Officer)
(Duly Authorized Officer)
Date: November 14, 2001 /s/ William C. Kelly, Jr.
William C. Kelly, Jr.,
Treasurer, Secretary and
Chief Accounting Officer
(Principal Accounting Officer)
(Duly Authorized Officer)