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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 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
NN, Inc.
(Exact name of registrant as specified in its charter)
Delaware 62-1096725
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
2000 Waters Edge Drive
Building C, Suite 12
Johnson City, Tennessee 37604
(Address of principal executive offices, including zip code)
(423) 743-9151
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No ___
As of August, 13, 2002 there were 15,367,773 of the registrant's common stock,
par value $0.01 per share, outstanding.
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NN, Inc.
INDEX
Page No.
Part I. Financial Information
Item 1. Financial Statements:
Consolidated Statements of Income and Comprehensive Income for the three
and six months ended June 30, 2002 and 2001.......................................2
Condensed Consolidated Balance Sheets at June 30, 2002 and December 31, 2001.........3
Consolidated Statements of Changes in Stockholders' Equity for the six
months ended June 30, 2002 and 2001...............................................4
Consolidated Statements of Cash Flows for the six months ended
June 30, 2002 and 2001............................................................5
Notes to Consolidated Financial Statements...........................................6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.................................................12
Item 3. Quantitative and Qualitative Disclosures about Market Risk......................18
Part II. Other Information
Item 1. Legal Proceedings................................................................19
Item 2. Submission of Matters to a Vote of Security Holders..............................19
Item 3. Exhibits and Reports on Form 8-K.................................................19
Signatures...............................................................................20
1
PART I. FINANCIAL INFORMATION
NN, Inc.
Consolidated Statements of Income and Comprehensive Income
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
Thousands of Dollars, Except Per Share Data 2002 2001 2002 2001
- -----------------------------------------------------------------------------------------
Net sales $ 49,186 $ 47,350 $ 96,386 $ 97,577
Cost of goods sold 36,139 35,228 71,670 73,319
-------- -------- ------- -------
Gross profit 13,047 12,122 24,716 24,258
Selling, general and administrative 4,819 3,978 9,317 8,085
Depreciation and amortization 2,795 3,386 5,620 6,696
Restructuring costs -- -- 78 --
------- ------- ------- -------
Income from operations 5,433 4,758 9,701 9,477
Interest expense, net 539 1,112 1,140 2,294
Equity in (earnings) loss of unconsolidated
affiliates -- 23 -- (26)
Net gain on involuntary conversion -- (2,542) -- (2,542)
Other income (141) (344) (496) (476)
------- ------- ------- -------
Income before provision for income taxes 5,035 6,509 9,057 10,227
Provision for income taxes 1,840 2,437 3,345 4,073
Minority interest of consolidated subsidiaries 787 566 1,454 1,102
------- ------- ------- -------
Income before cumulative effect of change
in accounting principle 2,408 3,506 4,258 5,052
Cumulative effect of change in accounting
principle, net of income tax benefit of
$112 and related minority interest impact
of $84 -- -- -- 98
------- ------- ------- -------
Net income 2,408 3,506 4,258 4,954
Other comprehensive income (loss):
Foreign currency translation 1,413 205 1,333 (3,181)
------- ------- ------- -------
Comprehensive income $ 3,821 $ 3,711 $ 5,591 $ 1,773
======= ======= ======= =======
Basic income per common share:
Income before cumulative effect of change
in accounting principle $ 0.16 $ 0.23 $ 0.28 $ 0.33
Cumulative effect of change in accounting
principle -- -- -- (0.01)
------- ------- ------- -------
Net income $ 0.16 $ 0.23 $ 0.28 $ 0.32
======= ======= ======= =======
Weighted average shares outstanding 15,359 15,253 15,336 15,251
======= ======= ======= =======
Diluted income per common share:
Income before cumulative effect of change
in accounting principle $ 0.15 $ 0.23 $ 0.27 $ 0.33
Cumulative effect of change in accounting
principle -- -- -- (0.01)
------- ------- ------- -------
Net income $ 0.15 $ 0.23 $ 0.27 $ 0.32
======= ======= ======= =======
Weighted average shares outstanding 15,868 15,532 15,798 15,522
======= ======= ======= =======
See accompanying notes.
2
NN, Inc.
Condensed Consolidated Balance Sheets
June 30, December 31,
2002 2001
Thousands of Dollars (Unaudited)
- -------------------------------------------------------------------------
Assets
Current assets:
Cash and cash equivalents $ 3,710 $ 3,024
Accounts receivable, net 31,600 24,832
Inventories, net 21,897 23,418
Other current assets 4,955 4,343
-------- --------
Total current assets 62,162 55,617
Property, plant and equipment, net 84,756 82,770
Assets held for sale 3,628 4,348
Goodwill, net 41,265 40,282
Other assets 5,027 5,118
-------- --------
Total assets $196,838 $188,135
======== ========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 18,480 $ 14,552
Bank overdraft 1,643 1,141
Accrued salaries & wages 5,757 3,813
Income taxes payable 3,421 2,377
Payable to affiliates 1,027 1,277
Short-term portion of long-term notes 7,000 7,000
Other current liabilities 9,129 7,576
-------- --------
Total current liabilities 46,457 37,736
Minority interest in consolidated subsidiaries 36,104 30,932
Non-current deferred tax liability 6,651 6,499
Long-term debt 37,957 47,661
Accrued pension 3,315 2,390
Other 852 878
-------- --------
Total liabilities 131,336 126,096
Total stockholders' equity 65,502 62,039
-------- --------
Total liabilities and stockholders' equity $196,838 $188,135
======== ========
See accompanying notes.
3
NN, Inc.
Consolidated Statements of Changes in Stockholders' Equity
(Unaudited)
Common Stock
Accumulated
Thousands of Dollars Additional Other
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
Shares issued 18 -- 101 -- -- 101
Net income -- -- -- 4,954 -- 4,954
Dividends paid -- -- -- (2,440) -- (2,440)
Other comprehensive loss -- -- -- -- (3,181) (3,181)
-------- -------- -------- -------- -------- --------
Balance, June 30, 2001 15,265 $ 153 $ 30,515 $ 38,878 $ (4,866) $ 64,680
======== ======== ======== ======== ======== ========
Balance, January 1, 2002 15,317 $ 154 $ 30,841 $ 36,139 $ (5,095) $ 62,039
Shares issued 50 -- 329 -- -- 329
Net income -- -- -- 4,258 -- 4,258
Dividends paid -- -- -- (2,457) -- (2,457)
Other comprehensive income -- -- -- -- 1,333 1,333
-------- -------- -------- -------- -------- --------
Balance, June 30, 2002 15,367 $ 154 $ 31,170 $ 37,940 $ (3,762) $ 65,502
======== ======== ======== ======== ======== ========
See accompanying notes.
4
NN, Inc.
Consolidated Statements of Cash Flows
(Unaudited)
Six Months Ended
June 30,
Thousands of Dollars 2002 2001
- -----------------------------------------------------------------------------------------
Operating Activities:
Net income $ 4,258 $ 4,954
Adjustments to reconcile net income:
Depreciation and amortization 5,620 6,696
Cumulative effect of change in accounting principle -- 98
Gain on disposals of property, plant and equipment (7) --
Equity earnings of unconsolidated affiliate -- 26
Interest income on receivable from unconsolidated affiliate -- (104)
Minority interest in consolidated subsidiary 1,454 1,102
Restructuring costs 78 --
Changes in operating assets and liabilities:
Accounts receivable (5,959) (5,150)
Inventories 2,714 337
Other current assets (316) (264)
Other assets 5 (93)
Accounts payable 3,153 3,683
Income taxes payable 1,044 1,716
Other liabilities 2,974 73
-------- --------
Net cash provided by operating activities 15,018 13,074
-------- --------
Investing Activities:
Acquisition of Delta Rubber Company, net of cash acquired -- (23,674)
Acquisition of property, plant, and equipment (1,829) (2,939)
Proceeds from disposals of property, plant and equipment 10 --
-------- --------
Net cash used by investing activities (1,819) (26,613)
-------- --------
Financing Activities:
Net proceeds under revolving credit facility -- 21,066
Increase (decrease) in bank overdraft (83) 336
Repayment of long-term debt (10,683) (4,456)
Repayment of short-term debt -- (2,000)
Proceeds from issuance of stock 329 101
Dividends paid (2,457) (2,440)
-------- --------
Net cash provided (used) by financing activities (12,894) 12,607
-------- --------
Effect of exchange rate changes 381 (712)
Net Change in Cash and Cash Equivalents 686 (1,644)
Cash and Cash Equivalents at Beginning of Period 3,024 8,273
-------- --------
Cash and Cash Equivalents at End of Period $ 3,710 $ 6,629
======== ========
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
and six month periods ended June 30, 2002 and 2001, the Company's financial
position at June 30, 2002 and December 31, 2001, and the cash flows for the six
month periods ended June 30, 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 and seconds quarters of 2002 are not necessarily
indicative of future results.
Certain 2001 amounts have been reclassified to conform with the 2002
presentation.
Note 2. Derivative 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 June 30, 2002, the fair value of the swap is a loss of approximately
$310,000, which is recorded in other non-current liabilities. The change in fair
value during the six month periods ended June 30, 2002 and 2001 was a gain of
approximately $97,000 and a gain of approximately $69,000, 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):
June 30, Dec. 31,
2002 2001
(Unaudited)
------------- --------------
Raw materials $ 4,665 $ 5,494
Work in process 4,753 5,016
Finished goods 12,680 13,065
Less inventory reserves (201) (157)
------------- --------------
$21,897 $23,418
============= ==============
Note 4. Net Income Per Share
Three Months Ended Six Months Ended
June 30, June 30,
2002 2001 2002 2001
------------- ------------- ------------ -------------
Thousands of Dollars, Except Share and Per Share Data
-----------------------------------------------------
Net income $2,408 $3,506 $4,258 $4,954
Adjustments to net income -- -- -- --
------------- ------------- ------------ -------------
Net income $2,408 $3,506 $4,258 $4,954
Weighted average basic shares 15,359,173 15,253,276 15,336,368 15,250,547
Effect of dilutive stock options 508,815 279,147 461,916 271,420
------------- ------------- ------------ -------------
Weighted average dilutive shares 15,867,988 15,532,423 15,798,284 15,521,967
Basic net income per share $0.16 $0.23 $0.28 $0.32
Diluted net income per share $0.15 $0.23 $0.27 $0.32
Excluded from the shares outstanding for each of the six month periods ended
June 30, 2002 and 2001 were 0 and 10,750 antidilutive options, respectively,
which had exercise prices ranging from $9.75 to $11.50 as of June 30, 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 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 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 certain consumer 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
and those policies as discussed in Note 8. The
7
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 or six month periods ended June 30, 2002 and 2001.
Three Months Ended June 30,
2002 2001
Thousands of Dollars
Domestic Domestic
Ball & Ball &
Roller Euroball Plastics Roller Euroball Plastics
- ------------------------------------------------------------------------------------------------
Revenues from external $ 13,721 $ 23,180 $ 12,285 $ 14,214 $ 22,520 $ 10,616
customers
Segment pretax profit (loss) 1,434 2,709 892 4,390 2,310 (191)
Segment assets 62,552 78,460 55,826 58,959 84,719 57,886
Six Months Ended June 30,
2002 2001
Thousands of Dollars
Domestic Domestic
Ball & Ball &
Roller Euroball Plastics Roller Euroball Plastics
- -------------------------------------------------------------------------------------------------
Revenues from external $ 26,925 $ 44,905 $ 24,556 $ 30,013 $ 47,857 $ 19,707
customers
Segment pretax profit (loss) 2,434 5,059 1,564 5,936 4,968 (677)
Segment assets 62,552 78,460 55,826 58,959 84,719 57,886
Note 6. Acquisitions and Joint Ventures
On February 16, 2001, the Company completed the acquisition of all of the
outstanding stock of 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 and $0 for additional
severance payments during the three month periods ended March 31, 2002 and June
30, 2002, respectively. 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 $1.9 million is
also held for sale. The Company anticipates selling the land, building and
machinery during 2002.
Accrued restructuring costs of $18,000 are included in other current liabilities
as of June 30, 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.
8
Accrual Accrual
Balance at Balance at
12/31/01 Charges Paid in 2002 6/30/02
-------- ------- ------------ -------
Thousands of Dollars
- --------------------
Severance and other employee
costs $513 $78 $573 $18
---------------- ---------------- --------------- ---------------
Total $513 $78 $573 $18
================ ================ =============== ===============
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 $40.3 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 $0.5 million (or $0.3 million
net of tax and minority interest) for the three month period ended June 30, 2002
and $1.0 million (or $0.6 million net of tax and minority interest) for the six
month period ended June 30, 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 completed the transitional goodwill impairment reviews required by
the new standards during the first six months of 2002. In performing the
impairment reviews, the Company estimated the fair values of the reportable
segments using a method that incorporates valuations derived from EBITDA
multiples based upon market multiples and recent capital market transactions and
also incorporates valuations determined by each segments' discounted future cash
flows. As of January 1, 2002, the transition date, there was no impairment to
goodwill as the fair values exceeded the carrying values of the segments. As of
June 30, 2002, the carrying amounts of goodwill by segment are as follows: $26.1
million for the Plastic segment and $15.2 million for the Euroball segment.
Since the transition date, January 1, 2002, the increase in goodwill of $1.0
million is principally due to foreign currency translation adjustments at the
Euroball segment.
9
The table below describes the impact of the amortization of goodwill for the
three and six month periods ended June 30, 2002 and 2001:
For the Three Months For the Six Months
Ended June 30, Ended June 30,
2002 2001 2002 2001
----------------------------------------------
Thousands of Dollars except per-share data
Reported net income $ 2,408 $ 3,506 $ 4,258 $ 4,954
Add back: Goodwill amortization, net of tax -- 270 -- 490
--------- --------- --------- ---------
Pro-forma net income $ 2,408 $ 3,776 $ 4,258 $ 5,444
========= ========= ========= =========
Basic earnings per share:
Reported net income $ 0.16 $ 0.23 $ 0.28 $ 0.32
Goodwill amortization -- 0.02 -- 0.03
--------- --------- --------- ---------
Pro-forma net income $ 0.16 $ 0.25 $ 0.28 $ 0.36
========= ========= ========= =========
Diluted earnings per share:
Reported net income $ 0.15 $ 0.23 $ 0.27 $ 0.32
Goodwill amortization -- 0.02 -- 0.03
--------- --------- --------- ---------
Pro-forma net income $ 0.15 $ 0.24 $ 0.27 $ 0.35
========= ========= ========= =========
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 June 30, 2002 no asset
impairment exists under the provisions of Statement No. 144.
In April 2002, the Financial Accounting Standards Board (FASB) issued SFAS No.
145, "Rescission of FASB Statements No. 4,44, and 64, Amendment of FASB
Statement No. 13, and Technical Corrrections". SFAS No. 4 had required all gains
and losses from extinguishment of debt to be aggregated and, if material,
classified as an extraordinary item, net of related income tax effect. SFAS No.
145 rescinds SFAS No. 4 and the related required classification gains and losses
from extinguishment of debt as extraordinary items. Additionally, SFAS No. 145
amends SFAS No. 13 to require that certain lease modifications that have
economic effects similar to sale-leaseback transactions be accounted for in the
same manner as sale-leaseback transactions. SFAS No. 145 is applicable for the
Company at the beginning of fiscal year 2003, with the provisions related to
SFAS No. 13 for transactions occurring after May 15, 2002. The Company is
currently evaluating the impact of adoption of Statement No. 145.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities". SFAS No. 146 requires costs associated with
exit or disposal activities to be recognized when they are incurred rather than
at the date of a commitment to an exit or disposal plan. SFAS No. 146 is to be
applied prospectively to exit or disposal activities initiated after December
31, 2002. The Company is currently evaluating the impact of adoption of
Statement No. 146.
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
10
on July 1, 2006. On July 12, 2002, the Company amended its U.S. credit facility
to convert the term loan portion into a reducing revolving credit line providing
initial availability equivalent to the balance of the term loan prior to the
amendment. Amounts available for borrowing under this facility will be reduced
by $7.0 million per annum and the facility will expire on July 1, 2006.
Additionally, on July 31, 2002, the Company amended the credit facility again to
extend the $25 million senior non-secured revolving credit facility to July 25,
2004. Amounts outstanding under the revolving facility and the term loan
facility bear interest at a floating rate equal to LIBOR (1.86% at June 30,
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 June 30, 2002.
In connection with the Euroball transaction, NN Euroball ApS, entered into a
Facility Agreement with HypoVereinsbank Luxembourg S.A. as agent for Bayerische
Hypo-und Vereinsbank AG of Munich, Germany to provide up to Euro 36.0 million in
term loans and Euro 5.0 million in revolving credit loans. The Company borrowed
Euro 30.5 million ($28.8 million) under the term loan facility and Euro 1.0
million ($0.9 million) under the revolving credit facility. Amounts outstanding
under the Facility Agreement are secured by inventory and accounts receivable
and bear interest at EURIBOR (3.44% at June 30, 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. NN Euroball ApS was in compliance with all such covenants as
of June 30, 2002.
Note 10. Subsequent Event Share Offering
On June 7, 2002 the Company filed a registration statement with the Securities
and Exchange Commission for a follow-on public offering of 6,500,000 shares of
its common stock, of which 2,600,000 shares were to be offered by the Company
and 3,900,000 shares were to be offered by several selling shareholders. The
registration statement on Form S-3 relating to the Common Stock became effective
on August 1, 2002. On August 6, 2002, the Company announced that due to
unfavorable market conditions, it was postponing the proposed follow-on public
offering.
11
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
Three Months Ended June 30, 2002 Compared to the Three Months Ended June 30, 2001
Net Sales. Net sales increased by approximately $1.8 million, or 3.9%, from
$47.4 million for the second quarter of 2001 to $49.2 million for the second
quarter of 2002. By segment, sales decreased $0.5 million for the Company's
Domestic Ball and Roller segment. This decrease was due mainly to decreased
demand for the Company's products as a result of the economic environment.
Offsetting this decrease, the Plastics segment sales were $1.7 million higher
versus the second quarter of 2002 driven by new growth programs within the
segment. Additionally, the Euroball segment's sales were $0.7 million higher
principally due to favorable currency impacts.
Gross Profit. Gross profit increased approximately $0.9 million or 7.6%, from
$12.1 million for the second quarter of 2001 to $13.0 million for the second
quarter of 2002. Sales volume increases in the Euroball segment, in addition to
cost reduction efforts, netted a $0.4 million increase. Additionally,
improvements from IMC and NN Arte contributed $0.6 million and $0.1 million,
respectively. Offsetting these increases was a $0.2 million decrease in the
Domestic Ball & Roller segment due to increased insurance costs and sales volume
decreases offset by cost savings associated with the closing of the South
Carolina ball manufacturing facility. As a percentage of net sales, gross profit
increased from 25.6% in the second quarter of 2001 to 26.5% for the same period
in 2002.
Selling, General and Administrative. Selling, general and administrative
expenses increased by approximately $0.8 million or 21.1% from $4.0 million in
the second quarter of 2001 to $4.8 million in the second quarter of 2002.
Advisory service expenses associated with the previously announced desire of
certain original founders of the Company to liquidate their holdings in the
Company's stock contributed $0.3 million of the increase. Additionally, non-cash
compensation charges associated with a portion of certain employee stock options
contributed $0.3 million of the increase. As a percentage of net sales, selling,
general and administrative expenses increased from 8.4% for the second quarter
of 2001 to 9.8% for the same period in 2002.
Depreciation and Amortization.Depreciation and amortization expense decreased
by approximately $0.6 million or 17.5% from $3.4 million for the second 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 $0.5 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. Currency impacts accounted for $0.1 million of the increase. As a
percentage of net sales, depreciation and amortization expense decreased from
7.2% in the second quarter of 2001 to 5.7% in the second quarter of 2002.
Interest Expense. Interest expense, decreased by approximately $0.6 million from
$1.1 million in the second quarter of 2001 to $0.5 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 $64.8 million at June 30, 2001 to $45.0 million at June 30, 2002.
As a percentage of net sales, interest expense, decreased from 2.3% in the
second quarter of 2001 to 1.1% for the same period in 2002.
Equity in Earnings of Unconsolidated Affiliates. Equity in earnings of
unconsolidated affiliates increased from a loss of $23,000 in the second 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 21, 2001.
Net Gain on Involuntary Conversion. Net gain on involuntary conversion decreased
$2.5 million from $2.5 million for the second quarter of 2001 to $0 for the
second quarter of 2002. The Company realized a net gain on involuntary
conversion of $2.5 million in the second quarter of 2001. The gain is due to
insurance proceeds received over the net book value of assets destroyed in the
March 12, 2000 fire at the Erwin,
12
Tennessee facility.
Minority Interest of Consolidated Subsidiaries. Minority interest of
consolidated subsidiaries increased $0.2 million from $0.6 million for the
second quarter of 2001 to $0.8 million for the second 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 and ability to exercise control. 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 decreased by $1.1 million or 31.3%, from $3.5 million for
the second quarter of 2001 to $2.4 million for the same period in 2002. The net
gain on involuntary conversion recorded during the first quarter of 2001
contributed $1.6 million of the decrease, net of tax. As a percentage of net
sales, net income decreased from 7.4% in the second quarter of 2001 to 4.9% for
the second quarter of 2002.
Six Months Ended June 30, 2002 Compared to the Six Months Ended June 30, 2001
Net Sales. Net sales decreased by approximately $1.2 million, or 1.2%, from
$97.6 million for the first six months of 2001 to $96.4 million for the first
six months of 2002. By segment, sales decreased $3.1 million and $3.0 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 $4.9 million higher versus the first six months of 2001
resulting from the acquisition of Delta (incremental $2.9 million) as well as
sales increases at NN Arte (incremental $0.8 million) and at IMC (incremental
$1.2 million).
Gross Profit. Gross profit increased approximately $0.5 million or 1.9%, from
$24.3 million for the first six months of 2001 to $24.7 million for the first
six months of 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. During the first six months of 2002, sales
volume decreases and insurance increases in the Domestic Ball and Roller segment
were partially offset by cost savings associated with the closing of the South
Carolina ball manufacturing facility netting a $0.8 million decrease in gross
profit. During the same period, sales volume decreases in the Euroball segment
were similarly partially offset by cost reductions, netting a $0.5 million
decrease in gross profit. Within the Plastics segment were improvements from IMC
and NN Arte of $0.9 million and $0.4 million, respectively, while the inclusion
of a full six months of Delta results in 2002 versus approximately 4.5 months in
2001 contributed $0.5 million of increases in 2002. As a percentage of net
sales, gross profit increased from 24.9% in the first six months of 2001 to
25.6% for the same period in 2002.
Selling, General and Administrative. Selling, general and administrative
expenses increased by approximately $1.2 million or 15.2% from $8.1 million in
the first six months of 2001 to $9.3 million in the first six months of 2002.
The acquisition of Delta contributed $0.3 million of the increase. Advisory
service expenses principally associated with the previously announced desire of
certain original founders of the Company to liquidate their holdings in the
Company's stock contributed $0.5 million of the increase. Strategic planning and
information technology initiatives at Euroball contributed $0.2 million of the
increase. Additionally, non-cash compensation charges associated with a portion
of the employee stock options contributed $0.3 million of the increase. As a
percentage of net sales, selling, general and administrative expenses increased
from 8.3% for the first six months of 2001 to 9.7% for the same period in 2002.
Depreciation and Amortization. Depreciation and amortization expense decreased
by approximately $1.1 million or 16.1% from $6.7 million for the first six
months of 2001 to $5.6 million for the same period in 2002. The adoption of
Statement No. 142 eliminated the amortization of goodwill and contributed $0.9
million of the decrease. Additionally, the assets held for sale as a result of
the closing of the Walterboro, South Carolina ball facility, which are no longer
depreciated, contributed $0.6 million of the decrease. This was offset in part
by a full six months of Delta in 2002 as compared to 4.5 months in 2001 due to
the February 2001 acquisition, which resulted in a $0.1 million increase. As a
percentage of net sales, depreciation and amortization expense decreased from
6.9% in the first six months of 2001 to 5.8% for the same period in 2002.
13
Restructuring costs. The Company recorded a restructuring charge of $0.1 million
in the first six months of 2002, all of which was recorded 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 0.1% of net sales in the first six months of 2002.
There were no charges during the first six months of 2001.
Interest Expense. Interest expense, decreased by approximately $1.2 million from
$2.3 million in the first six months of 2001 to $1.1 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 $64.8 million at June 30, 2001 to $45.0 million at June 30, 2002.
As a percentage of net sales, interest expense decreased from 2.4% in the first
six months of 2001 to 1.2% for the same period in 2002.
Equity in Earnings of Unconsolidated Affiliates. Equity in earnings of
unconsolidated affiliates decreased from earnings of $26,000 in the first six
months 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 21, 2001.
Net Gain on Involuntary Conversion. Net gain on involuntary conversion decreased
$2.5 million from $2.5 million for the first six months of 2001 to $0 for the
first six months of 2002. The Company realized a net gain on involuntary
conversion of $2.5 million in the second quarter of 2001. The gain is due to
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 increased $0.4 million from $1.1 million for the first
six months of 2001 to $1.5 million for the first six months 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 and ability to exercise control. 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 decreased by $0.7 million or 14.0%, from $5.0 million for
the first six months of 2001 to $4.3 million for the same period in 2002. The
net gain on involuntary conversion recorded during the first quarter of 2001
contributed $1.6 million of the decrease, net of tax. As a percentage of net
sales, net income decreased from 5.1% in the first six months of 2001 to 4.4%
for the first six months of 2002.
Liquidity and Capital Resources
The Company has a $25 million senior non-secured revolving credit facility with
AmSouth Bank ("AmSouth"), as the administrative agent for the lenders, expiring
on July 25, 2003 and a senior non-secured term loan for $35 million expiring on
July 1, 2006. Amounts outstanding under the revolving facility and the term loan
facility bear interest at a floating rate equal to LIBOR (1.86% at June 30,
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 June 30, 2002. Amounts available for borrowing under this term loan
facility will be reduced by $7.0 million per annum and the facility will expire
on July 1, 2006. On July 12, 2002, the Company amended its U.S. credit facility
to convert the term loan portion into a reducing revolving credit line providing
initial availability equivalent to the balance of the term loan prior to the
amendment. Amounts available for borrowing under this facility will be reduced
by $7.0 million per annum and the facility will expire on July 1, 2006.
Additionally, on July 31, 2002, the Company amended the credit facility again to
extend the $25 million senior non-secured revolving credit facility to July 25,
2004.
In July 2000, NN Euroball ApS, and its subsidiaries entered into a senior
secured revolving credit facility of Euro 5.0 million, expiring on July 15, 2006
and a senior secured term loan of Euro 36.0 million, expiring on July 15, 2006
with HypoVereinsbank Luxembourg S.A. as agent for Bayerische Hypo-und
Vereinsbank
14
AG of Munich, Germany. On July 31, 2000, upon closing of the joint venture, NN
Euroball ApS borrowed a total of Euro 31.5 million 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 (3.44% at June
30, 2002) plus an applicable margin of 1.125% to 2.25% based upon calculated
financial ratios. The loan agreement contains various restrictive covenants that
specify, among other things, restrictions on the incurrence of indebtedness and
the maintenance of certain financial ratios. These facilities also include
certain negative pledges. Euroball was in compliance with all such covenants as
of June 30, 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 with
certain European customers, payments typically are due within 30 days after the
customer uses the product. The Company's net sales and receivables can be
influenced by seasonality due to the Company's relative percentage of European
business coupled with many foreign customers ceasing or significantly slowing
production during the month of August.
The Company bills and receives payment from some of its foreign customers in
Euro or other currencies. To date, the Company has not been materially adversely
affected by currency fluctuations or foreign exchange restrictions. To manage
risks associated with currency fluctuations and foreign exchange restrictions,
the Company has strategies in place, including a hedging program, which allows
management to hedge foreign currencies when exposures reach certain levels.
However, the Company has not entered into any currency hedges in 2001 or during
the current year. 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 $15.7 million
at June 30, 2002 as compared to $17.9 million at December 31, 2001. The ratio of
current assets to current liabilities decreased from 1.47:1 at December 31, 2001
to 1.34:1 at June 30, 2002. Cash flow from operations increased from $13.1
million during the six months of 2001 to $15.0 million during the first six
months of 2002.
During 2002, the Company plans to spend approximately $6.8 million on capital
expenditures (of which approximately $1.8 million has been spent through June
30, 2002) including the purchase of additional machinery and equipment for all
of the Company's domestic and international ball 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 at least December 2002.
In addition, FAG and SKF have the right to require the Company to purchase their
interests in Euroball beginning in January 2003, based on a formula using
Euroball's historical net income and cash flow. As a result, the exact amount of
the purchase price cannot be determined until the put right is exercised. The
Company anticipates that if such purchase becomes necessary, it may need to
borrow additional funds.
The Euro
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 Results of Operations
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.
15
Inflation and Changes in Prices
While the Company's operations have not been affected by inflation during recent
years, prices for 52100 chrome steel and other raw materials are subject to
change. For example, during 1995, due to an increase in worldwide demand for
52100 chrome 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 chrome steel and some difficulty in obtaining an adequate supply of
52100 chrome steel from its existing suppliers. In our U.S. operations, the
Company's typical 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 chrome steel price
increases by taking such measures.
Cautionary Statements for Purposes of the "Safe Harbor" Provisions of the
Private Securities Litigation Reform Act of 1995
The Company wishes to caution readers that this report contains, and future
filings by the Company, press releases and oral statements made by the Company's
authorized representatives may contain forward looking statements that involve
certain risks and uncertainties. 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 is heavily dependent on a relatively few number of customers and the
loss of any major customer would have a material adverse effect on its business.
Sales to various U.S. and foreign divisions of SKF, which is one of the largest
bearing manufacturers in the world, accounted for approximately 35% of net sales
in 2001, and sales to INA/FAG accounted for approximately 19% of net sales.
During 2001, the Company's ten largest customers accounted for approximately 73%
of its consolidated net sales. None of the Company's other customers accounted
for more than 5% of its net sales for 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 demand for the Company's products is cyclical, which could adversely impact
its revenues. The end markets for fully assembled bearings are cyclical and tend
to decline in response to overall declines in industrial production. As a
result, the market for bearing components is also cyclical and impacted by
overall levels of industrial production. The Company's sales in the past have
been negatively affected, and in the future very likely will 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 may not be able to continue to make the acquisitions necessary for
it to realize its growth strategy. Acquiring businesses that complement or
expand the Company's operations has been and continues to be an important
element of its business strategy. The Company bought its plastic bearing
component business in 1999, formed Euroball in 2000 and acquired its bearing
seal operations in 2001. The Company cannot give assurances that it will be
successful in identifying attractive acquisition candidates or completing
acquisitions on favorable terms in the future. In addition, the Company may
borrow funds to acquire other businesses, increasing its interest expense and
debt levels. The Company's inability to acquire businesses, or to operate them
profitably once acquired, could have a material adverse effect on its business,
financial condition and results of operations.
The costs and difficulties of integrating acquired businesses could impede the
Company's future growth. The Company cannot give assurances that any future
acquisition will enhance its financial performance.
16
The Company's ability to effectively integrate any future acquisitions will
depend on, among other things, the adequacy of its implementation plans, the
ability of its management to oversee and operate effectively the combined
operations and its ability to achieve desired operating efficiencies and sales
goals. If the Company is not able to integrate the operations of acquired
companies successfully into its business, the Company's future earnings and
profitability could be materially and adversely affected.
The Company depends on a very limited number of foreign sources for its primary
raw material and is subject to risks of shortages and price fluctuation. The
steel that the Company uses to manufacture precision balls and rollers is of an
extremely high quality and is available from a limited number of producers on a
global basis. Due to quality constraints in the U.S. steel industry, the Company
obtains substantially all of the steel used in its U.S. ball and roller
production from overseas suppliers. In addition, the Company obtains
substantially all of the steel from sources other than its current suppliers,
particularly in the case of its European operations, it could face higher prices
and transportation costs, increased duties or taxes, and shortages of steel.
Problems in obtaining steel, and particularly 52100 chrome steel, in the
quantities that it requires and on commercially reasonable terms, could have a
material adverse effect on the operating and financial results of the Company.
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 from overseas suppliers, actively participates in overseas
manufacturing operations and sells to a large number of international customers,
it faces risks associated with the following:
o adverse foreign currency fluctuations;
o changes in trade, monetary and fiscal policies, laws and regulations,
and other activities of governments, agencies and similar
organizations;
o the imposition of trade restrictions or prohibitions;
o high tax rates that discourage the repatriation of funds to the U.S.;
o the imposition of import or other duties or taxes; and
o unstable governments or legal systems in countries in which our
suppliers, manufacturing operations, and customers are located.
The Company does not have a hedging program in place to help limit the risk
associated with consolidating the operating results of our foreign businesses
into U.S. dollars. An increase in the value of the U.S. dollar and/or the Euro
related to other currencies may adversely affect its ability to compete with its
foreign-based competitors for international, as well as domestic, sales. Also, a
decline in the value of the Euro relative to the U.S. dollar will negatively
impact the Company's consolidated financial results, which are denominated in
U.S. dollars.
The Company's growth strategy depends on outsourcing, and if the industry trend
toward outsourcing does not continue, its business could be adversely affected.
The Company's growth strategy depends in significant part on major bearing
manufacturers continuing to outsource components, and expanding the number of
components being outsourced. This requires manufacturers to depart significantly
from their traditional methods of operations. If major bearing manufacturers do
not continue to expand outsourcing efforts or determine to reduce their use of
outsourcing, the Company's business could be materially adversely affected.
The Company's markets are highly competitive. The global market for bearing
components is highly competitive with a majority of production represented by
the captive production operations of certain large bearing manufacturers and the
balance represented by independent manufacturers. Captive manufacturers make
components for internal use and sale to third parties. All of the captive
manufacturers, and many independent manufacturers, are significantly larger and
have greater resources than the Company does. The Company's competitors are
continuously exploring and implementing improvements in technology
17
and manufacturing processes in order to improve product quality, and the
Company's ability to remain competitive will depend, among other things, on
whether the Company is able to keep pace with such quality improvements in a
cost effective manner.
The production capacity that the Company has added over the last several years
has at times resulted in its having more capacity than it needs, causing its
operating costs to be higher than expected. The Company has significantly
expanded its ball and roller production facilities and capacity over the last
several years. During 1997, it build an additional manufacturing plant in
Kilkenny, Ireland, and it continued this expansion in 2000 through the formation
of Euroball with SKF and INA/FAG. The Company's ball and roller facilities
currently are not operating at full capacity and its results of operations for
2001 were adversely affected by the under-utilization of its production
facilities, and it faces risks of further under-utilization or inefficient
utilization of its production facilities in future years.
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 senior secured floating
rate revolving credit facility and a Euro 36.0 million floating rate senior
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 June 30, 2002, the Company had
$36.8 million outstanding under the domestic revolving credit facility and term
loan and Euroball had $8.2 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 annual interest expense increasing by
approximately $450,000. 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 June 30, 2002.
18
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 of 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. Submission of Matters to a Vote of Security Holders
The Company's Annual Meeting of Stockholders was held on May 16, 2002. As of
March 25, 2002, the record date for the meeting, there were 15,340,806 shares of
common stock outstanding and entitled to vote at the meeting. There were present
at said meeting, in person or by proxy, stockholders holding 10,499,621 shares
of common stock, constituting approximately 68% of the shares of common stock
outstanding and entitled to vote, which constituted a quorum.
The first matter voted upon at the meeting was the election of G. Ronald Morris,
Steven T. Warshaw and James L. Earsley as Class III Directors to serve for
three-year terms. The results of the voting in connection with such elections
were as follows:
For Withheld
-------------------- -------------------
G. Ronald Morris 10,433,247 66,374
Steven T. Warshaw 10,436,886 62,735
James L. Earsley 10,436,886 62,735
All nominees were elected to serve until the 2005 Annual Meeting of Stockholders
and until their successors are duly elected and qualified. In addition to the
foregoing directors, Roderick R. Baty and Richard D. Ennen are serving terms
that will expire in 2003, and Michael D. Huff and Michael E. Werner are serving
terms that will expire in 2004. Mr. Baty continues in his position as Chairman
of the Company's Board of Directors.
The second matter voted upon the 2002 Annual Meeting of Stockholders was the
ratification of KPMG LLP as independent public accountants to audit the
Company's accounts for the fiscal year ending December 31, 2002. The vote was
10,489,635 For and 3,661 Against, and there were 6,325 Abstentions.
Item 3. Exhibits and Reports on Form 8-K.
(a) Exhibits Required by Item 601 of Regulation S-K
10.1 Amendment No. 3 dated as of July 31, 2002 to Credit Agreement among
NN, Inc., as the Borrower, the Lenders identified therein, Bank One,
Kentucky, NA, as Co-Agent, and AmSouth Bank as Administrative Agent.
10.2 Amendment No. 2 dated July 12, 2002 to Credit Agreement among NN, Inc.
as the Borrower, the Lenders identified therein, Bank One, Kentucky, NA,
as Co-Agent, and AmSouth Bank, as Administrative Agent (incorporated
by reference to Exhibit 10.9 of the Company's Registration Statement
on Form S-3/A filed July 15, 2002).
99.1 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
The Company filed a Form 8-K on June 7, 2002 announcing it filed a
registration statement with the Securities and Exchange Commission on
June 6, 2002.
19
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.
Date: August 13, 2002 /s/ Roderick R. Baty
- ----------------------------- ---------------------------------------------------
Roderick R. Baty,
Chairman, President and Chief Executive Officer
Date: August 13, 2002 /s/ David Dyckman
- ----------------------------- ---------------------------------------------------
David Dyckman,
Chief Financial Officer
(Principal Financial Officer)
Date: August 13, 2002 /s/ William C. Kelly, Jr.
- ----------------------------- ---------------------------------------------------
William C. Kelly, Jr.,
Treasurer, Secretary and Chief Accounting Officer
(Principal Accounting Officer)
20
Exhibit 10.1
AMENDMENT NO. 3 TO CREDIT AGREEMENT
THIS AMENDMENT NO. 3 TO CREDIT AGREEMENT (this "Amendment"), dated July
31, 2002, is made and entered into on the terms and conditions hereinafter set
forth, by and among NN, INC., a Delaware corporation (the "Borrower"), the
subsidiaries of the Borrower who are parties to the Credit Agreement, as
hereinafter defined (the "Guarantors"), the several lenders who are now or
hereafter become parties to the Credit Agreement (the "Lenders"), AMSOUTH BANK,
an Alabama state bank, individually and as administrative agent for the Lenders
(in such capacity, the "Administrative Agent"), and BANK ONE, KENTUCKY, NA,
individually and as co-agent for the Lenders (in such capacity, the "Co-Agent").
RECITALS:
1. Pursuant to a Credit Agreement dated as of July 20, 2001, among the
Borrower, the Guarantors, the Administrative Agent, the Lenders and the
Co-Agent, as amended by that certain Amendment No. 1 to Credit Agreement dated
October 4, 2001, and that certain Amendment No. 2 to Credit Agreement dated July
12, 2002 (as the same heretofore may have been and/or hereafter may be amended,
restated, supplemented, extended, renewed, replaced or otherwise modified from
time to time, the "Credit Agreement"), the Lenders have agreed to make Loans,
all as more specifically described in the Credit Agreement. Capitalized terms
used but not otherwise defined in this Agreement have the same meanings as in
the Credit Agreement.
2. The parties hereto desire to amend the Credit Agreement in certain
respects, as more particularly hereinafter set forth.
AGREEMENTS:
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto agree as
follows:
1. Defined Terms. Subsection 1.1 of the Agreement is hereby amended by
amending the definition of "Revolving Commitment Period Expiration Date" to
provide as follows:
"Revolving Commitment Period Expiration Date" shall mean July 25,
2004.
2. Extension Fee. Upon execution of this Amendment, the Borrower shall pay
to the Administrative Agent, for distribution to the Lenders in proportion to
their respective Percentages, an extension fee in the amount of $25,000.00.
3. Effectiveness. This Amendment shall be effective only upon execution and
delivery by the Borrower, the Guarantors, the Administrative Agent and the
Lenders.
4. Representations and Warranties of the Borrower and the Guarantors. As an
inducement to the Administrative Agent, the Co-Agent and the Lenders to enter
into this Amendment, the Borrower and the Guarantors hereby represent and
warrant to the Administrative Agent, the Co-Agent and the Lenders that, on and
as of the date hereof:
(a) the representations and warranties contained in the Credit
Agreement and the other Loan Documents are true and correct, except
for (1) representations and warranties that expressly relate to an
earlier date, which remain true and correct as of said earlier date,
and (2) representations and warranties that have become untrue or
incorrect solely because of changes permitted by the terms of the
Credit Agreement and the other Loan Documents, and
(b) no Default or Event of Default has occurred and is
continuing.
5. Effect of Amendment; Continuing Effectiveness of Credit Agreement and
Loan Documents.
(a) Neither this Amendment nor any other indulgences that may
have been granted to the Borrower or any of the Guarantors by the
Administrative Agent, the Co-Agent or any Lender shall constitute a
course of dealing or otherwise obligate the Administrative Agent, the
Co-Agent or any Lender to modify, expand or extend the agreements
contained herein, to agree to any other amendments to the Credit
Agreement or to grant any consent to, waiver of or indulgence with
respect to any other noncompliance with any provision of the Loan
Documents.
(b) This Amendment shall constitute a Loan Document for all
purposes of the Credit Agreement and the other Loan Documents. Except
to the extent amended hereby, the Credit Agreement, the other Loan
Documents and all terms, conditions and provisions thereof shall
continue in full force and effect in all respects.
6. Counterparts. This Amendment may be executed in multiple counterparts or
copies, each of which shall be deemed an original hereof for all purposes. One
or more counterparts or copies of this Amendment may be executed by one or more
of the parties hereto, and some different counterparts or copies executed by one
or more of the other parties. Each counterpart or copy hereof executed by any
party hereto shall be binding upon the party executing same even though other
parties may execute one or more different counterparts or copies, and all
counterparts or copies hereof so executed shall constitute but one and the same
agreement. Each party hereto, by execution of one or more counterparts or copies
hereof, expressly authorizes and directs any other party hereto to detach the
signature pages and any corresponding acknowledgment, attestation, witness or
similar pages relating thereto from any such counterpart or copy hereof executed
by the authorizing party and affix same to one or more other identical
counterparts or copies hereof so that upon execution of multiple counterparts or
copies hereof by all parties hereto, there shall be one or more counterparts or
copies hereof to
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which is(are) attached signature pages containing signatures of all parties
hereto and any corresponding acknowledgment, attestation, witness or similar
pages relating thereto.
7. Miscellaneous.
(a) This Amendment shall be governed by, construed and enforced in
accordance with the laws of the State of Tennessee, without reference to
the conflicts or choice of law principles thereof.
(b) The headings in this Amendment and the usage herein of defined
terms are for convenience of reference only, and shall not be construed as
amplifying, limiting or otherwise affecting the substantive provisions
hereof.
(c) Any reference herein to any instrument, document or agreement, by
whatever terminology used, shall be deemed to include any and all
amendments, modifications, supplements, extensions, renewals, substitutions
and/or replacements thereof as the context may require.
(d) When used herein, (1) the singular shall include the plural, and
vice versa, and the use of the masculine, feminine or neuter gender shall
include all other genders, as appropriate, (2) "include", "includes" and
"including" shall be deemed to be followed by "without limitation"
regardless of whether such words or words of like import in fact follow
same, and (3) unless the context clearly indicates otherwise, the
disjunctive "or" shall include the conjunctive "and".
[Signatures Begin Next Page]
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IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
duly executed and delivered as of the date first written above.
BORROWER:
NN, INC.,
a Delaware corporation
By: /s/ William C. Kelly, Jr.
--------------------------------------
Name: William C. Kelly, Jr.
Title: Treasurer
GUARANTORS:
INDUSTRIAL MOLDING GP, LLC,
a Delaware limited liability company
By: /s/ David L. Dyckman
---------------------------------------
Name: David L. Dyckman
Title: Manager
INDUSTRIAL MOLDING LP, LLC,
a Tennessee limited liability company
By: /s/ William C. Kelly, Jr.
--------------------------------------
Name: William C. Kelly, Jr.
Title: Treasurer/Manager
[Signatures Continued Next Page]
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INDUSTRIAL MOLDING GROUP, L.P.,
a Tennessee limited partnership
By: Industrial Molding GP, LLC, a Delaware limited
liability company, its general partner
By: /s/ David L. Dyckman
---------------------------------------
Name: David L. Dyckman
Title: Manager
DELTA RUBBER COMPANY,
a Connecticut corporation
By: /s/ David L. Dyckman
---------------------------------------
Name: David L. Dyckman
Title: Vice President
LENDERS:
AMSOUTH BANK, as a Lender and as
Administrative Agent
By: /s/ Robert T. Page
---------------------------------------
Name: Robert T. Page
Title: Vice President
BANK ONE, KENTUCKY, NA, as a Lender and as
Co-Agent
By: /s/ Thelma B. Ferguson
---------------------------------------
Name: Thelma B. Ferguson
Title: First Vice President
[Signatures Continued Next Page]
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FIRSTAR BANK, N.A., as a Lender
By: /s/ Russell S. Rogers
---------------------------------------
Name: Russell S. Rogers
Title: Vice President
SUNTRUST BANK, as a Lender
By: /s/ William E. Edwards III
---------------------------------------
Name: William E. Edwards III
Title: Group Vice President
FIRST TENNESSEE BANK, NATIONAL
ASSOCIATION, as a Lender
By: /s/ Vincent K. Hickam
---------------------------------------
Name: Vincent K. Hickam
Title: Executive Vice President
CERTIFICATION PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of NN, Inc. (the "Company") on
Form 10-Q for the quarterly period ended June 30, 2002, as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), the
undersigned, in the capacities and dates indicated below, hereby certify
pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the
Sarbanes-Oxley Act of 2002, that, to our knowledge: (1) The Report fully
complies with the requirements of Section 13(a) or 15(d) of the Securities
Exchange Act of 1934; and (2) The information contained in the Report fairly
presents, in all material respects, the financial condition and results of
operations of the Company.
Date: 8/13/02 /s/ Roderick R. Baty
---------------- --------------------------------------
Roderick R. Baty
Chairman, President and Chief Executive Officer
Date: 8/13/02 /s/ David L. Dyckman
------------- -----------------------------------
David L. Dyckman
Chief Financial Officer