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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2002
--------------
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
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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 May 10, 2002 there were 15,359,773 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 (Loss) for the three
months ended March 31, 2002 and 2001 2
Condensed Consolidated Balance Sheets at March 31, 2002 and December 31, 2001 3
Consolidated Statements of Changes in Stockholders' Equity for the three
months ended March 31, 2002 and 2001 4
Consolidated Statements of Cash Flows for the three months ended
March 31, 2002 and 2001 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
Item 3. Quantitative and Qualitative Disclosures about Market Risk 15
Part II. Other Information
Item 1. Legal Proceedings 16
Item 2. Exhibits and Reports on Form 8-K 16
Signatures 18
1
PART I. FINANCIAL INFORMATION
NN, Inc.
Consolidated Statements of Income and Comprehensive Income (Loss)
(Unaudited)
Three Months Ended
March 31,
Thousands of Dollars, Except Per Share Data 2002 2001
Net sales $ 47,200 $ 50,227
Cost of goods sold 35,532 38,184
-------------- -------------
Gross profit 11,668 12,043
Selling, general and administrative 4,498 4,014
Depreciation and amortization 2,825 3,310
Restructuring costs 78 --
-------------- -------------
Income from operations 4,267 4,719
Interest expense, net 601 1,182
Equity in earnings of unconsolidated
affiliates -- (49)
Other income (355) (132)
-------------- -------------
Income before provision for income taxes 4,021 3,718
Provision for income taxes 1,505 1,636
Minority interest of consolidated subsidiaries 668 536
-------------- -------------
Income before cumulative effect of change
in accounting principle 1,848 1,546
Cumulative effect of change in accounting
principle, net of income tax benefit of $112
and related minority interest impact of $84 -- 98
-------------- -------------
Net income 1,848 1,448
Other comprehensive income (loss):
Foreign currency translation (80) (3,386)
-------------- -------------
Comprehensive income (loss) $ 1,768 $ (1,938)
============== =============
Basic income per common share:
Income before cumulative effect of change
in accounting principle $ 0.12 $ 0.10
Cumulative effect of change in accounting
principle -- --
-------------- -------------
Net income $ 0.12 $ 0.10
============== =============
Weighted average shares outstanding 15,341 15,247
============== =============
Diluted income per common share:
Income before cumulative effect of change
in accounting principle $ 0.12 $ 0.10
Cumulative effect of change in accounting
principle -- (0.01)
-------------- -------------
Net income $ 0.12 $ 0.09
============== =============
Weighted average shares outstanding 15,735 15,396
============== =============
See accompanying notes.
2
NN, Inc.
Condensed Consolidated Balance Sheets
March, 31 December 31,
2002 2001
Thousands of Dollars (Unaudited)
- -----------------------------------------------------------------------------------------------------------------
Assets
Current assets:
Cash and cash equivalents $ 2,204 $ 3,024
Accounts receivable, net 30,808 24,832
Inventories, net 21,720 23,418
Other current assets 4,844 4,343
------------- -------------
Total current assets 59,576 55,617
Property, plant and equipment, net 80,742 82,770
Assets held for sale 3,929 4,348
Goodwill, net 39,666 39,805
Other assets 5,507 5,595
------------- -------------
Total assets $ 189,420 $ 188,135
============= =============
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 14,446 $ 14,552
Bank overdraft 646 1,141
Accrued salaries & wages 3,826 3,813
Income taxes payable 3,799 2,377
Payable to affiliates 935 1,277
Short-term portion of long-term notes 7,000 7,000
Other current liabilities 8,232 7,576
------------- -------------
Total current liabilities 38,884 37,736
Minority interest in consolidated subsidiaries 31,186 30,932
Non-current deferred tax liability 6,482 6,499
Long-term debt 47,047 47,661
Accrued pension 2,292 2,390
Other 801 878
------------- -------------
Total liabilities 126,692 126,096
Total stockholders' equity 62,728 62,039
------------- -------------
Total liabilities and stockholders' equity $189,420 $188,135
============= =============
See accompanying notes.
3
NN, Inc.
Consolidated Statements of Changes in Stockholders' Equity
(Unaudited)
Common Stock Accumulated
Additional Other
Thousands of Dollars Number of Par paid in Retained Comprehensive
Shares value capital Earnings Loss Total
- -------------------------------------------------------------------------------------------------------------------------------
Balance, January 1, 2001 15,247 $153 $ 30,414 $ 36,364 $ (1,685) $ 65,246
Net income -- -- -- 1,448 -- 1,448
Dividends paid -- -- -- (1,220) -- (1,220)
Other comprehensive loss -- -- -- -- (3,386) (3,386)
-------------- ----------- ---------- ----------- ----------- ----------
Balance, March 31, 2001 15,247 $153 $ 30,414 $ 36,592 $ (5,071) $ 62,088
============== =========== ========== =========== =========== ==========
Balance, January 1, 2002 15,317 $154 $ 30,841 $ 36,139 $ (5,095) $ 62,039
Shares issued 24 -- 148 -- -- 148
Net income -- -- -- 1,848 -- 1,848
Dividends paid -- -- -- (1,227) -- (1,227)
Other comprehensive loss -- -- -- -- (80) (80)
-------------- ----------- ---------- ----------- ----------- ----------
Balance, March 31, 2002 15,341 $154 $ 30,989 $ 36,760 $ (5,175) $ 62,728
============== =========== ========== =========== =========== ==========
See accompanying notes.
4
NN, Inc.
Consolidated Statements of Cash Flows
(Unaudited)
Three Months Ended
March 31,
Thousands of Dollars 2002 2001
- -----------------------------------------------------------------------------------------------------------------
Operating Activities:
Net income $1,848 $1,448
Adjustments to reconcile net income:
Depreciation and amortization 2,825 3,310
Cumulative effect of change in accounting principle -- 98
Equity earnings of unconsolidated affiliate -- (49)
Interest income on receivable from unconsolidated affiliate -- (52)
Minority interest in consolidated subsidiary 668 536
Restructuring costs 78 --
Changes in operating assets and liabilities:
Accounts receivable (5,996) (6,363)
Inventories 1,578 702
Other current assets (558) (127)
Other assets 2 1,049
Accounts payable (1,371) (2,251)
Income taxes payable 1,421 1,675
Other liabilities 571 3,501
----------- ----------
Net cash provided by operating activities 1,066 3,477
----------- ----------
Investing Activities:
Acquisition of Delta Rubber Company, net of cash acquired -- (23,472)
Acquisition of property, plant, and equipment (849) (1,978)
----------- ----------
Net cash used by investing activities (849) (25,450)
----------- ----------
Financing Activities:
Net proceeds under revolving credit facility -- 24,642
Proceeds from long-term debt 1,710 --
Bank overdraft 495 3,081
Repayment of long-term debt (2,132) (4,731)
Repayment of short-term debt -- (2,000)
Proceeds from issuance of stock 148 --
Dividends paid (1,227) (1,220)
----------- ----------
Net cash provided (used) by financing activities (1,006) 19,772
----------- ----------
Effect of exchange rate changes (31) 1,415
Net Change in Cash and Cash Equivalents (820) (786)
Cash and Cash Equivalents at Beginning of Period 3,024 8,273
----------- ----------
Cash and Cash Equivalents at End of Period $2,204 $7,487
=========== ==========
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 that the balance sheet
at December 31, 2001 is derived from the Company's audited financial statements.
In the opinion of the Company's management, the financial statements reflect all
adjustments necessary to present fairly the results of operations for the three
month periods ended March 31, 2002 and 2001, the Company's financial position at
March 31, 2002 and December 31, 2001, and the cash flows for the three month
periods ended March 31, 2002 and 2001. 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 the financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted from the interim financial statements presented
in this Quarterly Report on Form 10-Q.
The results for the first quarter of 2002 are not necessarily indicative of
future results.
Certain 2001 amounts have been reclassified to conform with the 2002
presentation.
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 its debt financing. The interest rate swap
provides for the Company to receive variable Euribor interest payments and pay
5.51% fixed interest. The interest rate swap agreement expires in July 2006 and
the notional amount amortizes in relation to initially established principal
payments on the underlying debt over the life of the swap.
As of March 31, 2002, the fair value of the swap is a loss of approximately
$312,000, which is recorded in other non-current liabilities. The change in fair
value during the three month period ended March 31, 2002 and 2001 was a gain of
approximately $56,000 and a loss of approximately $48,000, respectively, which
have been included as a component of other income.
6
Note 3. Inventories
Inventories are stated at the lower of cost or market. Cost is being determined
using the first-in, first-out method.
Inventories are comprised of the following (in thousands):
March 31, Dec. 31,
2002 2001
(Unaudited)
------------- --------------
Raw materials $ 5,083 $ 5,494
Work in process 4,453 5,016
Finished goods 12,373 13,065
Less inventory reserves (189) (157)
------------- --------------
$21,720 $23,418
============= ==============
Note 4. Net Income Per Share
Three Months Ended
March 31,
Thousands of Dollars, Except Share and Per Share Data 2002 2001
- ----------------------------------------------------- ------------- --------------
Net income $ 1,848 $ 1,448
Adjustments to net income -- --
------------- --------------
Net income $ 1,848 $ 1,448
============= ==============
Weighted average basic shares 15,340,806 15,246,909
Effect of dilutive stock options 393,904 149,543
------------- --------------
Weighted average dilutive shares outstanding 15,734,710 15,396,452
============= ==============
Basic net income per share $ 0.12 $ 0.10
============= ==============
Diluted net income per share $ 0.12 $ 0.09
============= ==============
Excluded from the shares outstanding for each of the three month periods ended
March 31, 2002 and 2001 were 0 and 10,750 antidilutive options, respectively,
which had exercise prices ranging from $9.75 to $11.50 as of March 31, 2001.
Note 5. Segment Information
During 2002 and 2001, the Company's reportable segments are based on differences
in product lines and geographic locations and are divided among Domestic Ball
and Roller, European operations ("Euroball") and Plastics. The Domestic Ball and
Roller Segment is comprised of two manufacturing facilities in the eastern
United States. The Euroball Segment was acquired in July 2000 and is comprised
of manufacturing facilities located in Kilkenny, Ireland, Eltmann, Germany and
Pinerolo, Italy. All of the facilities in the Domestic Ball and Roller and
Euroball Segment 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 in 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 principally in the production of engineered bearing seals used
principally in automotive, industrial, agricultural, mining and aerospace
applications.
The accounting policies of each segment are the same as those described in the
summary of significant accounting policies in the December 31, 2001 Form 10-K/A
including those policies as discussed in Note
7
8. The Company evaluates segment performance based on profit or loss from
operations before income taxes and minority interest 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 periods ended March 31, 2002
and 2001.
Three Months Ended March 31,
2002 2001
Domestic Domestic
Ball & Ball &
Thousands of Dollars Roller Euroball Plastics Roller Euroball Plastics
- -------------------------------------------------------------------------------------------------------------------------------------
Revenues from external
customers $ 13,203 $ 21,725 $ 12,272 $ 15,799 $ 25,337 $ 9,091
Segment pretax profit (loss) 998 2,351 672 1,546 2,658 (486)
Segment assets 65,982 66,412 57,026 62,468 86,955 59,904
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. Delta manufactures and sells high quality
engineered bearing seals to original equipment manufacturers and operates a
manufacturing facility in Danielson, Connecticut. The Company has accounted for
this acquisition using the purchase method of accounting.
Note 7. Restructuring Charges
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 closure was
substantially completed by December 31, 2001. Current plans are to sell the land
and building. The plant closing resulted in the termination of approximately 80
full time hourly and salaried employees in 2001.
Prior to December 31, 2001, production capacity and certain machinery and
equipment were transferred from the Walterboro facility to the Company's two
domestic ball facilities in Erwin, Tennessee and Mountain City, Tennessee. The
Company has recorded restructuring costs of $62,000 for additional severance
payments during the quarter ended March 31, 2002. Additionally, prior to
December 31, 2001, the Company decided to sell the Walterboro land, building and
certain machinery and incurred an impairment charge of approximately $1.1
million during 2001 to write down the land and building to its net realizable
value of approximately $1.7 million, which was based upon fair market appraisals
less costs to sell. The amounts the Company will ultimately realize upon
disposition of these assets could differ materially from the amounts assumed in
arriving at the 2001 impairment loss. The remaining equipment recorded at a
historical net book value of $2.2 million is also held for sale. The Company
anticipates selling the land, building and machinery during 2002.
Accrued restructuring costs of $114,000 are included in other current
liabilities as of March 31, 2002. The Company has charged expenses for moving
machinery, equipment and inventory to other production facilities and other
costs to close the facility which will benefit future operations in the period
they are incurred.
The Company's Euroball subsidiary incurred restructuring charges of $16,000 for
the quarter ended March 31, 2002 for additional severance payments as a result
of the termination of 15 hourly employees and 3 salaried employees at its Italy
production facility. Approximately $69,000 of the severance payments were paid
during the quarter ended March 31, 2002 and there are no remaining accrued
restructuring costs included in other current liabilities as of March 31, 2002
related to Euroball.
8
The following summarizes the 2002 activity related to the restructurings:
Accrual Accrual
Balance at Balance at
Thousands of Dollars 12/31/01 Charges Paid in 2002 3/31/02
-------- ------- ------------ -------
Severance and other employee
costs $513 $78 $477 $114
---------------- ---------------- --------------- ---------------
Total $513 $78 $477 $114
================ ================ =============== ===============
Note 8. New Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board ("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 that
intangible assets acquired in a purchase method business combination must meet
to be recognized and reported apart from goodwill. Statement No. 142 requires
that goodwill and intangible assets with indefinite useful lives no longer be
amortized, but rather, periodically tested for impairment. The effective date of
Statement No. 142 is January 1, 2002. As of the date of adoption, the Company
had unamortized goodwill of approximately $39.8 million, which is subject to the
provisions of Statement No. 142.
As a result of adopting these standards in the first quarter of 2002, the
Company no longer amortizes goodwill. The Company estimates that amortization
expense for goodwill would have been approximately $2.1 million (or $1.2 million
net of tax and minority interest) for the year ended December 31, 2002.
As a result of adopting these new standards, the Company's accounting policies
for goodwill and other intangibles changed on January 1, 2002, as described
below:
Goodwill: The Company recognizes the excess of the purchase price of an acquired
entity over the fair value of the net identifiable assets as goodwill. Goodwill
is tested for impairment on an annual basis and between annual tests in certain
circumstances. Impairment losses are recognized whenever the implied fair value
of goodwill is less than its carrying value. Prior to January 1, 2002, goodwill
was amortized over a twenty-year period using the straight-line method.
Beginning January 1, 2002, goodwill is no longer amortized.
Other Acquired Intangibles: The Company recognizes an acquired intangible asset
apart from goodwill whenever the asset arises from contractual or other legal
rights, or whenever it is capable of being divided or separated from the
acquired entity or sold, transferred, licensed, rented, or exchanged, whether
individually or in combination with a related contract, asset or liability. An
intangible asset other than goodwill is amortized over its estimated useful life
unless that life is determined to be indefinite. The Company will review the
lives of intangible assets each reporting period and, if necessary, recognize
impairment losses if the carrying amount of an intangible asset subject to
amortization is not recoverable from expected future cash flows and its carrying
amount exceeds its fair value.
The Company is currently evaluating the impact of adoption of Statement No. 142
related to the transitional goodwill impairment review required by the new
standards during the first six months after adoption.
9
The table below describes the impact of the amortization of goodwill for the
three months ended March 31, 2002 and 2001:
For the Quarter Ended
March 31,
(Thousands of Dollars except per-share data) 2002 2001
-------------- -------------
Reported net income $ 1,848 $ 1,448
Add back: Goodwill amortization, net of tax -- 220
-------------- -------------
Pro-forma net income $ 1,848 $ 1,668
============== =============
Basic earnings per share:
Reported net income $ 0.12 $ 0.10
Goodwill amortization -- 0.01
-------------- -------------
Pro-forma net income $ 0.12 $ 0.11
============== =============
Diluted earnings per share:
Reported net income $ 0.12 $ 0.09
Goodwill amortization -- 0.01
-------------- -------------
Pro-forma net income $ 0.12 $ 0.11
============== =============
In June 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 August 2001, the FASB issued Statement of Financial Accounting Standards No.
144, "Accounting 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 has adopted Statement No. 144
effective January 1, 2002. Management believes that as of March 31, 2002 no
asset impairment exists under the provisions of Statement No. 144.
Note 9. 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 (1.88% at March 31, 2002) 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 was in compliance with all such covenants as of March 31, 2002.
In connection with the Euroball transaction the Company and NN Euroball ApS,
entered into a Facility Agreement with a bank to provide up to Euro 36,000,000
in Term Loans and Euro 5,000,000 in revolving credit loans. The Company borrowed
Euro 30,500,000 ($28,755,000) under the term loan facility and Euro 1,000,000
($943,000) under the revolving credit facility. Amounts outstanding under the
Facility Agreement are secured by inventory and accounts receivable and bear
interest at EURIBOR (3.36% at March 31, 2002) plus an applicable margin between
1.125% and 2.25% based upon financial ratios. The shareholders of NN Euroball
ApS have provided guarantees for the Facility Agreement. The Facility Agreement
contains restrictive covenants, which specify, among other things, restrictions
on the incurrence of indebtedness and the maintenance of certain financial
ratios. Euroball was in compliance with all such covenants as of March 31, 2002.
10
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
Three Months Ended March 31, 2002 Compared to the Three Months Ended March 31, 2001
Net Sales. Net sales decreased by approximately $3.0 million, or 6.0%, from
$50.2 million for the first quarter of 2001 to $47.2 million for the first
quarter of 2002. By segment, sales decreased $2.6 million and $3.6 million for
the Company's Domestic Ball and Roller and Euroball Segments, respectively.
These decreases were due mainly to decreased demand for the Company's products
as a result of the economic environment. Offsetting this decrease, the Plastics
Segment's sales were $3.2 million higher versus the first quarter of 2001
resulting from the acquisition of Delta (incremental $2.4 million) as well as
sales increases at NN Arte (incremental $0.4 million) and at IMC (incremental
$0.4 million).
Gross Profit. Gross profit decreased approximately $0.4 million or 3.1%, from
$12.1 million for the first quarter of 2001 to $11.7 million for the first
quarter of 2002. Sales volume decreases in the Domestic Ball and Roller Segment
were offset by cost savings associated with the closing of the South Carolina
ball manufacturing facility netting a $0.6 million decrease. Sales volume
decreases in the Euroball Segment were similarly offset by cost reductions,
netting a $0.8 million decrease. Offsetting these decreases were improvements
from IMC and NN Arte of $0.2 million and $0.3 million, respectively. The
inclusion of a full quarter of Delta results in 2002 versus six weeks in 2001
accounted for $0.5 million of increases in 2002. As a percentage of net sales,
gross profit increased from 24.0% in the first quarter of 2001 to 24.7% for the
same period in 2002. This increase in gross profit as a percentage of sales was
due primarily to cost savings associated with the closing of the South Carolina
ball manufacturing facility as well as other cost reduction and containment
programs initiated during 2001.
Selling, General and Administrative. Selling, general and administrative
expenses increased by approximately $0.5 million or 12.1% from $4.0 million in
the first quarter of 2001 to $4.5 million in the first quarter of 2002. The
acquisition of Delta contributed $0.2 million of the increase. Advisory service
expenses associated with the previously announced desire of certain original
founders of the Company to diversify and thus liquidate their holdings in the
Company's stock contributed $0.2 million of the increase. Strategic planning and
information technology initiatives at Euroball contributed $0.3 million of the
increase. Offsetting these increases were cost reduction and containment
programs throughout the Company. As a percentage of net sales, selling, general
and administrative expenses increased from 8.0% for the first quarter of 2001 to
9.5% for the same period in 2002.
Depreciation and Amortization. Depreciation and amortization expense decreased
by approximately $0.5 million or 14.6% from $3.3 million for the first quarter
of 2001 to $2.8 million for the same period in 2002. The adoption of Statement
No. 142 eliminated the amortization of goodwill and contributed $0.4 million of
the decrease. Additionally, the assets held for sale as a result of the closing
of the Walterboro, South Carolina ball facility contributed $0.3 million of the
decrease. This was offset by a full quarter of Delta in 2002 which resulted in a
$0.2 million increase. As a percentage of net sales, depreciation and
amortization expense decreased from 6.6% in the first quarter of 2001 to 6.0% in
the first quarter of 2002.
Restructuring costs. The Company recorded a restructuring charge of $0.1 million
in the first quarter of 2002. The restructuring costs principally pertain to the
Company's decision and announcement to close the Walterboro, South Carolina ball
facility in 2001. The $0.1 million charge primarily represents the accrual for
additional severance costs related to the closing of this facility. As a
percentage, restructuring costs represent 0.2% of net sales in the first quarter
of 2002. There were no charges during the first quarter of 2001.
Interest Expense. Interest expense, decreased by approximately $0.6 million from
$1.2 million in the first quarter of 2001 to $0.6 million during the same period
in 2002. This was due to decreased interest rates on the Company's credit
facilities as well as decreased amounts outstanding on the debt. Total debt
decreased from $70.4 million at March 31, 2001 to $54.0 million at March 31,
2002. As a percentage of net sales, interest expense, decreased from 2.4% in the
first quarter of 2001 to 1.3% for the same period in 2002.
11
Equity in Earnings of Unconsolidated Affiliates. Equity in earnings of
unconsolidated affiliates decreased from earnings of $49,000 in the first
quarter of 2001 to $0 during the same period of 2002. The decrease is due to the
Company's sale of its minority interest in Jiangsu General Ball & Roller
Company, Ltd. effective December 31, 2001.
Minority Interest of Consolidated Subsidiaries. Minority interest of
consolidated subsidiaries increased $0.2 million from $0.5 million for the first
quarter of 2001 to $0.7 million for the first quarter of 2002. This increase is
due to increased earnings at the Company's Euroball joint venture. The Company
is required to consolidate this joint venture due to its majority ownership. The
Company owns 54% of the shares of Euroball. Minority interest of consolidated
subsidiary represents the combined interest of the minority partners of Euroball
at 46%.
Net Income. Net income increased by $0.4 million or 27.6%, from $1.5 million for
the first quarter of 2001 to $1.9 million for the same period in 2002. As a
percentage of net sales, net income increased from 2.9% in the first quarter of
2001 to 3.9% for the first quarter of 2002.
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 (1.88% at March 31, 2002) 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 was in compliance with all such covenants as of March 31, 2002.
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 (3.36% at March 31, 2002) plus an applicable margin of 1.125% to 2.25%
based upon calculated financial ratios. The loan agreement contains various
restrictive financial and non-financial covenants. The Company was in compliance
with all such covenants as of March 31, 2002.
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 have historically been of a seasonal nature due to a
significant portion of the Company's sales being to foreign customers that cease
or significantly slow production during the month of August.
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
$20.7 million at March 31, 2002 as compared to $17.9 million at December 31,
2001. The ratio of current assets to current
12
liabilities increased from 1.47:1 at December 31, 2001 to 1.53:1 at March 31,
2002. Cash flow from operations decreased from $3.5 million during the three
months of 2001 to $1.1 million during the first three months of 2002.
During 2002, the Company plans to spend approximately $6.8 million on capital
expenditures (of which approximately $0.9 million has been spent through March
31, 2002) 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 2002.
Beginning in January 2003 FAG and SKF may each exercise their right under the
Shareholders Agreement to cause the Company to purchase their respective
interest in Euroball based on the Put Formula in the Shareholders Agreement. The
Company anticipates that if such purchase becomes necessary, it may need to
borrow additional funds. Because the purchase price is based on a formula using
Euroball's historical cash flow, the exact amount of the put cannot be
determined until the put right is exercised.
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 were circulated in sub-units of the
Euro. At the end of the transitional period, Euro bank notes and coins were
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.
...
Seasonality and Fluctuation in Quarterly Results
The Company's net sales historically have been of a seasonal nature; and as
foreign sales have increased as a percentage of total sales, seasonality has
become a more significant 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.
13
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.
The Company operates in a cyclical industry. The precision ball and roller,
precision plastics industries and the bearing seal industry 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.
The Company's markets are highly competitive. The precision ball and roller
market, the precision plastics markets and the bearing seal 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 internal production and 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.
The Company has experienced 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.
The Company depends on foreign sources for its primary raw material and is
subject to risks of shortages and price fluctuation. 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.
The Company operates in and sells products to customers outside of the U.S. and
is subject to several related risks. 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.
14
The Company is heavily dependent on a relatively few number of customers. During
2001, the Company's ten largest customers accounted for approximately 73% 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 35% of
net sales in 2001, and sales to FAG accounted for approximately 19% of net
sales. None of the Company's other customers accounted for more than 5% of its
net sales in 2001. The loss of all or a substantial portion of sales to these
customers would have a material adverse effect on the Company's business.
The costs and difficulties of acquiring and integrating complementary businesses
could impede the Company's future growth. 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 senior, non-secured floating
rate revolving credit facility which is used to maintain liquidity and fund its
business operations as well as a $35.0 million senior, non-secured floating rate
term loan. Additionally, Euroball has a Euro 5.0 million floating rate revolving
credit facility and a Euro 36.0 million floating rate secured term loan.
Additionally, the Company has an interest rate swap that fixes the interest rate
for Euro 12.5 million outstanding under the facilities. The interest rate swap
expires in July 2006. At March 31, 2002, the Company had $43.0 million
outstanding under the domestic revolving credit facility and term loan and
Euroball had $11.0 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
$540,000. 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 March 31, 2002.
15
Part II. Other Information
Item 1. Legal Proceedings
The Company is currently the defendant in a lawsuit involving the minority
shareholder of the NN Arte business located in Guadalajara, Mexico. Management
believes the claims are without merit and the ultimate disposition will not have
a material adverse effect on the Company's financial position or results of
operations.
All other legal proceedings and actions involving the Company are of an ordinary
and routine nature and are incidental to the operations of the Company.
Management believes that such proceedings should not, individually or in the
aggregate, have a material adverse effect on the Company's business or financial
condition or on the results of operations.
Item 2. Exhibits and Reports on Form 8-K.
(a) Exhibits Required by Item 601 of Regulation S-K
10.1 Amendment No. 1 dated January 21, 2002, to Employment Agreement
between the Company and Frank T. Gentry (incorporated by
reference to Exhibit 10.16 of the Company's Annual Report on Form
10-K/A for the fiscal year ended December 31, 2001).
10.2 Change of Control and Noncompetition Agreement, dated January 21,
2002, between the Company and Frank T. Gentry (incorporated by
reference to Exhibit 10.17 of the Company's Annual Report on Form
10-K/A for the fiscal year ended December 31, 2001).
10.3 Amendment No. 1 dated January 21, 2002, to Employment Agreement
between the Company and Roderick R. Baty (incorporated by
reference to Exhibit 10.18 of the Company's Annual Report on Form
10-K/A for the fiscal year ended December 31, 2001).
10.4 Change of Control and Noncompetition Agreement, dated January 21,
2002, between the Company and Roderick R. Baty (incorporated by
reference to Exhibit 10.19 of the Company's Annual Report on Form
10-K/A for the fiscal year ended December 31, 2001).
10.5 Employee Agreement dated January 21, 2002, between the Company
and Robert R. Sams (incorporated by reference to Exhibit 10.20 of
the Company's Annual Report on Form 10-K/A for the fiscal year
ended December 31, 2001).
10.6 Change of Control and Noncompetition Agreement, dated January 21,
2002, between the Company and Robert R. Sams (incorporated by
reference to Exhibit 10.21 of the Company's Annual Report on Form
10-K/A for the fiscal year ended December 31, 2001).
10.7 Employee Agreement dated January 21, 2002, between the Company
and William C. Kelly (incorporated by reference to Exhibit 10.22
of the Company's Annual Report on Form 10-K/A for the fiscal year
ended December 31, 2001).
10.8 Change of Control and Noncompetition Agreement, dated January 21,
2002, between the Company and William C. Kelly(incorporated by
reference to Exhibit 10.23 of the Company's Annual Report on Form
10-K/A for the fiscal year ended December 31, 2001).
16
10.9 Employee Agreement dated January 21, 2002, between the Company
and David L. Dyckman (incorporated by reference to Exhibit 10.24
of the Company's Annual Report on Form 10-K/A for the fiscal year
ended December 31, 2001).
10.10 Change of Control and Noncompetition Agreement, dated January
21, 2002, between the Company and David L. Dyckman (incorporated
by reference to Exhibit 10.25 of the Company's Annual Report on
Form 10-K/A for the fiscal year ended December 31, 2001).
(b) Reports on Form 8-K
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: May 10, 2002 /s/ Roderick R. Baty
----------------------- --------------------------------
Roderick R. Baty,
Chairman, President and
Chief Executive Officer
(Duly Authorized Officer)
Date: May 10, 2002 /s/ David Dyckman
----------------------- --------------------------------
David Dyckman
Chief Financial Officer
(Principal Financial Officer)
(Duly Authorized Officer)
Date: May 10, 2002 /s/ William C. Kelly, Jr.
----------------------- --------------------------------
William C. Kelly, Jr.,
Treasurer, Secretary and
Chief Accounting Officer
(Principal Accounting Officer)
(Duly Authorized Officer)
18