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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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 November, 14, 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 nine months ended September 30, 2002 and 2001.......................2
Condensed Consolidated Balance Sheets at September 30, 2002 and
December 31, 2001.......................................................3
Consolidated Statements of Changes in Stockholders' Equity for the nine
months ended September 30, 2002 and 2001................................4
Consolidated Statements of Cash Flows for the nine months ended
September 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
Item 4. Controls and Procedures...............................................19
Part II. Other Information
Item 1. Legal Proceedings.....................................................20
Item 2. Exhibits and Reports on Form 8-K......................................20
Signatures....................................................................21
Certifications................................................................22
PART I. FINANCIAL INFORMATION
NN, Inc.
Consolidated Statements of Income and Comprehensive Income
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
Thousands of Dollars, Except Per Share Data 2002 2001 2002 2001
- ---------------------------------------------------------------------------------------------------------
Net sales $ 47,451 $ 42,576 $ 143,836 $ 140,153
Cost of goods sold 35,631 32,797 107,302 106,116
----------- ----------- ----------- -----------
Gross profit 11,820 9,779 36,534 34,037
Selling, general and administrative 4,076 4,239 13,311 12,324
Depreciation and amortization 2,881 3,474 8,443 10,170
Restructuring costs -- 750 78 750
----------- ----------- ----------- -----------
Income from operations 4,863 1,316 14,702 10,793
Interest expense, net 597 920 1,876 3,214
Equity in (earnings) loss of unconsolidated
affiliates -- 13 -- (13)
Net gain on involuntary conversion -- (1,359) -- (3,901)
Other (income) expense (20) 15 (516) (461)
----------- ----------- ----------- -----------
Income before provision for income taxes 4,286 1,727 13,342 11,954
Provision for income taxes 1,612 806 4,957 4,879
Minority interest of consolidated 555 177 2,010 1,279
subsidiaries ----------- ----------- ----------- -----------
Income before cumulative effect of change
in accounting principle 2,119 744 6,375 5,796
Cumulative effect of change in accounting
principle, net of income tax benefit of $112
and related minority interest impact of $84 -- -- -- 98
----------- ----------- ----------- -----------
Net income 2,119 744 6,375 5,698
Other comprehensive income (loss):
Foreign currency translation (66) 306 1,267 (2,875)
----------- ----------- ----------- -----------
Comprehensive income $2,053 $1,050 $7,642 $2,823
=========== =========== =========== ===========
Basic income per common share:
Income before cumulative effect of change
in accounting principle $0.14 $0.05 $0.42 $0.38
Cumulative effect of change in accounting
principle -- -- -- (0.01)
----------- ----------- ----------- -----------
Net income $0.14 $0.05 $0.42 $0.37
=========== =========== =========== ===========
Weighted average shares outstanding 15,368 15,286 15,344 15,253
=========== =========== =========== ===========
Diluted income per common share:
Income before cumulative effect of change
in accounting principle $0.14 $0.05 $0.40 $0.37
Cumulative effect of change in accounting
principle -- -- -- (0.01)
----------- ----------- ----------- -----------
Net income $0.14 $0.05 $0.40 $0.37
=========== =========== =========== ===========
Weighted average shares outstanding 15,648 15,584 15,755 15,505
=========== =========== =========== ===========
Dividends declared per share $0.08 $0.08 $0.24 $0.24
=========== =========== =========== ===========
See accompanying notes.
2
NN, Inc.
Condensed Consolidated Balance Sheets
September 30, December 31,
2002 2001
Thousands of Dollars (Unaudited)
- -----------------------------------------------------------------------------------
Assets
Current assets:
Cash and cash equivalents $4,607 $3,024
Accounts receivable, net 30,705 24,832
Inventories, net 22,618 23,418
Other current assets 4,276 4,343
-------------- --------------
Total current assets 62,206 55,617
Property, plant and equipment, net 84,483 82,770
Assets held for sale 3,599 4,348
Goodwill, net 41,192 40,282
Other assets 5,013 5,118
-------------- --------------
Total assets $196,493 $188,135
============== ==============
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $17,872 $14,552
Bank overdraft 881 1,141
Accrued salaries & wages 5,688 3,813
Income taxes payable 4,261 2,377
Payable to affiliates 633 1,277
Short-term portion of long-term notes 7,000 7,000
Other current liabilities 9,799 7,576
-------------- --------------
Total current liabilities 46,134 37,736
Minority interest in consolidated subsidiaries 36,421 30,932
Non-current deferred tax liability 6,643 6,499
Long-term debt 36,660 47,661
Accrued pension 3,331 2,390
Other 976 878
-------------- --------------
Total liabilities 130,165 126,096
Total stockholders' equity 66,328 62,039
-------------- --------------
Total liabilities and stockholders' equity $196,493 $188,135
============== ==============
See accompanying notes.
3
NN, Inc.
Consolidated Statements of Changes in Stockholders' Equity
(Unaudited)
Common Stock
Accumulated
In Thousands 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 50 1 242 -- -- 243
Net income -- -- -- 5,698 -- 5,698
Dividends paid -- -- -- (3,662) -- (3,662)
Other comprehensive loss -- -- -- -- (2,875) (2,875)
-------------- ----------- ---------- ----------- ----------- ----------
Balance, September 30, 2001 15,297 $154 $30,656 $38,400 $(4,560) $64,650
============== =========== ========== =========== =========== ==========
Balance, January 1, 2002 15,317 $154 $30,841 $36,139 $(5,095) $ 62,039
Shares issued 51 -- 332 -- -- 332
Net income -- -- -- 6,375 -- 6,375
Dividends paid -- -- -- (3,685) -- (3,685)
Other comprehensive income -- -- -- -- 1,267 1,267
-------------- ----------- ---------- ----------- ----------- ----------
Balance, September 30, 2002 15,368 $154 $31,173 $38,829 $(3,828) $66,328
============== =========== ========== =========== =========== ==========
See accompanying notes.
4
NN, Inc.
Consolidated Statements of Cash Flows
(Unaudited)
Nine Months Ended
September 30,
Thousands of Dollars 2002 2001
- -----------------------------------------------------------------------------------------
Operating Activities:
Net income $6,375 $5,698
Adjustments to reconcile net income:
Depreciation and amortization 8,443 10,170
Cumulative effect of change in accounting principle -- 98
Gain on disposals of property, plant and equipment (12) --
Equity in earnings of unconsolidated affiliate -- (13)
Interest income on receivable from unconsolidated affiliate -- (104)
Minority interest in consolidated subsidiary 2,010 1,279
Restructuring costs 78 750
Changes in operating assets and liabilities:
Accounts receivable (5,117) 1,317
Inventories 1,738 1,005
Other current assets 425 (1,611)
Other assets (6) (1,330)
Accounts payable 1,515 (4,278)
Income taxes payable 1,883 2,888
Other liabilities 4,063 2,856
---------- ----------
Net cash provided by operating activities 21,395 18,725
---------- ----------
Investing Activities:
Acquisition of Delta Rubber Company, net of cash acquired -- (23,674)
Acquisition of property, plant, and equipment (4,626) (4,961)
Proceeds from disposals of property, plant and equipment 43 --
---------- ----------
Net cash used by investing activities (4,583) (28,635)
---------- ----------
Financing Activities:
Net proceeds under revolving credit facility -- 71,429
Increase (decrease) in bank overdraft (260) 454
Repayment of long-term debt (11,971) (56,762)
Repayment of short-term debt -- (2,000)
Proceeds from issuance of stock 332 243
Dividends paid (3,686) (3,662)
---------- ----------
Net cash provided (used) by financing activities (15,585) 9,702
---------- ----------
Effect of exchange rate changes 356 (360)
Net Change in Cash and Cash Equivalents 1,583 (568)
Cash and Cash Equivalents at Beginning of Period 3,024 8,273
---------- ----------
Cash and Cash Equivalents at End of Period $4,607 $7,705
========== ==========
See accompanying notes.
5
NN, Inc.
Notes To Consolidated Financial Statements
(unaudited)
Note 1. Interim Financial Statements
The accompanying consolidated financial statements of NN, Inc. (the "Company")
have not been audited by 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 nine month periods ended September 30, 2002 and 2001, the Company's
financial position at September 30, 2002 and December 31, 2001, and the cash
flows for the nine month periods ended September 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 three 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 September 30, 2002, the fair value of the swap is a loss of approximately
$448,000, which is recorded in other non-current liabilities. The change in fair
value during the nine month periods ended September 30, 2002 and 2001 was a loss
of approximately $42,000 and a loss of approximately $113,000, respectively,
which have been included as a component of other (income) expense.
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):
September 30, Dec. 31,
2002 2001
(Unaudited)
-------------- --------------
Raw materials $5,096 $5,494
Work in process 4,684 5,016
Finished goods 13,042 13,065
Less inventory reserves (204) (157)
-------------- --------------
$22,618 $23,418
============== ==============
Inventories on consignment at customer locations as of September 30, 2002 and
December 31, 2001 were $2,643 and $2,908, respectively.
Note 4. Net Income Per Share
Three Months Ended Nine Months Ended
September 30, September 30,
2002 2001 2002 2001
------------- ------------- ------------ -------------
Thousands of Dollars, Except Share and Per Share Data
Net income $2,119 $744 $6,375 $5,698
Adjustments to net income -- -- -- --
------------- ------------- ------------ -------------
Net income $2,119 $744 $6,375 $5,698
Weighted average basic shares 15,367,773 15,285,606 15,344,116 15,252,869
Effect of dilutive stock options 279,865 298,870 411,297 252,545
------------- ------------- ------------ -------------
Weighted average dilutive shares 15,647,638 15,584,476 15,755,413 15,505,414
Basic net income per share $0.14 $0.05 $0.42 $0.37
Diluted net income per share $0.14 $0.05 $0.40 $0.37
Excluded from the shares outstanding for each of the nine month periods ended
September 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
September 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.
7
The accounting policies of each segment are the same as those described in the
summary of significant accounting policies in the Company's Annual Report on
Form 10-K/A for the fiscal year ended December 31, 2001 and those policies as
discussed in Note 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 or nine month periods ended
September 30, 2002 and 2001.
Three Months Ended September 30,
2002 2001
Thousands of Dollars
Domestic
Domestic Ball Ball &
& Roller Euroball Plastics Roller Euroball Plastics
- ---------------------------- ------------ ---------- ---------- --------- --------- ----------
Net sales $13,253 $21,734 $12,464 $11,884 $19,541 $11,151
Segment pretax profit (loss) 1,613 1,996 677 1,714 1,056 (1,043)
Segment assets 64,211 75,254 57,028 61,162 82,200 58,243
Nine Months Ended September 30,
2002 2001
Thousands of Dollars
Domestic
Domestic Ball Ball &
& Roller Euroball Plastics Roller Euroball Plastics
- ---------------------------- ------------ ---------- ---------- --------- --------- ---------
Net sales $40,177 $66,639 $37,020 $41,897 $67,398 $30,858
Segment pretax profit (loss) 4,046 7,055 2,241 7,699 5,975 (1,720)
Segment assets 64,211 75,254 57,028 61,162 82,200 58,243
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, building and machinery. 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, $0 and $0 for additional
severance payments during the three month periods ended March 31, 2002, June 30,
2002 and September 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 within the next twelve months.
The Company has charged expenses for moving machinery, equipment and inventory
to other production
8
facilities and other costs to close the facility, which will benefit future
operations in the period they are incurred.
Accrual Accrual
Balance at Balance at
12/31/01 Charges Paid in 2002 9/30/02
------------ --------- --------------- --------------
Thousands of Dollars
- --------------------
Severance and other
employee costs $513 $78 $591 $0
------------ --------- --------------- --------------
Total $513 $78 $591 $0
============ ========= =============== ==============
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 September 30,
2002 and $1.4 million (or $0.8 million net of tax and minority interest) for the
nine month period ended September 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
September 30, 2002, the carrying amounts of goodwill by segment are as follows:
$26.1 million for the Plastics segment and $15.1 million for the Euroball
segment. Since the transition date, January 1, 2002,
9
the increase in goodwill of $0.9 million is principally due to foreign currency
translation adjustments at the Euroball segment.
The table below describes the impact of the amortization of goodwill for the
three and nine month periods ended September 30, 2002 and 2001:
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
2002 2001 2002 2001
------------ ------------ ------------ -------------
Thousands of Dollars except per-share data
Reported net income $2,119 $744 $6,375 $5,698
Add back: Goodwill amortization, net of tax
and minority interest -- 273 -- 765
------------ ------------ ------------ ------------
Pro-forma net income $2,119 $1,017 $6,375 $6,463
============ ============ ============ ============
Basic earnings per share:
Reported net income $0.14 $0.05 $0.42 $0.37
Goodwill amortization -- 0.02 -- 0.05
------------ ------------ ------------ ------------
Pro-forma net income $0.14 $0.07 $0.42 $0.42
============ ============ ============ ============
Diluted earnings per share:
Reported net income $0.14 $0.05 $0.40 $0.37
Goodwill amortization -- 0.02 -- 0.05
------------ ------------ ------------ ------------
Pro-forma net income $0.14 $0.07 $0.40 $0.42
============ ============ ============ ============
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 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 September 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
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 evaluating the impact of adoption of Statement No. 146.
10
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 facility for $35 million. On
July 12, 2002, the Company amended this 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 (1.71% at September 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. Such
covenants specify that the Company must maintain a minimum fixed charge coverage
ratio, a minimum funded indebtedness to EBITDA ratio and a maximum funded
indebtedness to capitalization ratio and limits the amount of capital
expenditures we may make in any fiscal year. The loan agreement also contains
customary restrictions on, among other things, additional indebtedness, liens on
our assets, sales or transfers of assets, investments, restricted payments
(including payment of dividends and stock repurchases), issuance of equity
securities, and mergers, acquisitions and other fundamental changes in our
business. The Company was in compliance with all such covenants as of September
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, computed at exchange rate on July 31, 2000,
the date of the formation of Euroball) under the term loan facility and Euro 1.0
million ($0.9 million, computed at exchange rate on July 31, 2000, the date of
the formation of Euroball) under the revolving credit facility. Amounts
outstanding under the Facility Agreement are secured by the stock of Euroball
ApS, inventory and accounts receivable and bear interest at EURIBOR (3.20% at
September 30, 2002) plus an applicable margin between 1.125% and 2.25% based
upon financial ratios. The shareholders of NN Euroball ApS, including the
Company, have provided guarantees for the Facility Agreement. 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.
Amounts outstanding under the Facility Agreement are secured by the stock of
Euroball ApS, inventory and accounts receivable. NN Euroball ApS was in
compliance with all such covenants as of September 30, 2002.
11
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
Three Months Ended September 30, 2002 Compared to the Three Months Ended
September 30, 2001
Net Sales. Net sales increased by approximately $4.9 million, or 11.5%,
from $42.6 million for the third quarter of 2001 to $47.5 million for the third
quarter of 2002. By segment, sales increased $1.4 million or 11.5% from $11.9
million for the third quarter of 2001 to $13.3 million for the same period in
2002 for the Domestic Ball and Roller segment. The Euroball segment sales
increased $2.2 million or 11.2% from $19.5 million for the third quarter of 2001
to $21.7 million for the same period in 2002. The Plastics segment sales
increased $1.3 million or 11.8% from $11.2 million for the third quarter of 2001
to $12.5 million for the same period in 2002. The Euroball segment's sales
increase of $2.2 million was principally due to favorable currency impacts.
Gross Profit. Gross profit increased approximately $2.0 million or 20.9%, from
$9.8 million for the third quarter of 2001 to $11.8 million for the third
quarter of 2002. Sales volume increases in the Euroball and Domestic Ball &
Roller segments, in addition to cost reduction efforts, netted a $0.9 million
increase. Additionally, sales volume increases and cost improvements from IMC
and NN Arte contributed $0.4 million and $0.3 million, respectively. As a
percentage of net sales, gross profit increased from 23.0% in the third quarter
of 2001 to 24.9% for the same period in 2002.
Selling, General and Administrative. Selling, general and administrative
expenses decreased by approximately $0.1 million or 3.8% from $4.2 million in
the third quarter of 2001 to $4.1 million in the third quarter of 2002. The
reversal of non-cash compensation charges associated with the variable portion
of certain employee stock options offset by increases related to currency
impacts contributed $0.2 million. As a percentage of net sales, selling, general and
administrative expenses decreased from 10.0% for the third quarter of 2001 to
8.6% for the same period in 2002.
Depreciation and Amortization. Depreciation and amortization expense decreased
by approximately $0.6 million or 17.1% from $3.5 million for the third quarter
of 2001 to $2.9 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. Offsetting these decreases were currency impacts in the Euroball
Segment accounting for a $0.2 million increase. As a percentage of net sales,
depreciation and amortization expense decreased from 8.2% in the third quarter
of 2001 to 6.1% in the third quarter of 2002.
Interest Expense. Interest expense, decreased by approximately $0.3 million from
$0.9 million in the third 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 $64.2 million at September 30, 2001 to $43.7 million at September
30, 2002. As a percentage of net sales, interest expense decreased from 2.2% in
the third quarter of 2001 to 1.3% for the same period in 2002.
Equity in Earnings of Unconsolidated Affiliates. Equity in earnings of
unconsolidated affiliates increased from a loss of $13,000 in the third quarter
of 2001 to $0 during the same period of 2002. The change is due to the Company's
sale of its minority interest in Jiangsu General Ball & Roller Company, Ltd.
effective December 21, 2001.
Restructuring Costs. Restructuring costs decreased by $0.7 million from $0.7
million in the third quarter of 2001 to $0 in the third quarter of 2002. The
$0.7 million charge recorded during the third quarter of 2001 represented the
accrual of severance costs for the approximately 80 people terminated as a
result of the closing of the Company's Walterboro, South Carolina ball facility
in December of 2001. As a percentage, restructuring costs were 1.8% of net sales
in the third quarter of 2001.
12
Net Gain on Involuntary Conversion. Net gain on involuntary conversion decreased
$1.4 million from $1.4 million for the third quarter of 2001 to $0 for the third
quarter of 2002. The Company realized a net gain on involuntary conversion of
$1.4 million in the third 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, Tennessee facility.
Minority Interest of Consolidated Subsidiaries. Minority interest of
consolidated subsidiaries increased by $0.4 million from $0.2 million for the
third quarter of 2001 to $0.6 million for the third 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 increased by $1.4 million or 184.8%, from $0.7 million
for the third quarter of 2001 to $2.1 million for the same period in 2002. As a
percentage of net sales, net income increased from 1.7% in the third quarter of
2001 to 4.5% for the third quarter of 2002.
Nine Months Ended September 30, 2002 Compared to the Nine Months Ended September
30, 2001
Net Sales. Net sales increased by approximately $3.7 million, or 2.6%, from
$140.2 million for the first nine months of 2001 to $143.8 million for the first
nine months of 2002. By segment, sales decreased $1.7 million or 4.1% from $41.9
million for the first nine months of 2001 to $40.2 million for the same period
in 2002 for the Domestic Ball and Roller segment. The Euroball segment sales
decreased $0.8 million or 1.1% from $67.4 million for the first nine months of
2001 to $66.6 million for the same period in 2002. These decreases were due
mainly to decreased demand for the Company's products as a result of the
economic environment. Offsetting these decreases, the Plastics segment's sales
increased $6.2 million or 20.0% from $30.8 million for the first nine months of
2001 to $37.0 million for the same period in 2002 versus the first nine months
of 2001 resulting from the acquisition of Delta (incremental $4.4 million) as
well as sales increases at NN Arte (incremental $1.0 million) and at IMC
(incremental $0.8 million).
Gross Profit. Gross profit increased approximately $2.5 million or 7.3%, from
$34.0 million for the first nine months of 2001 to $36.5 million for the first
nine 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 nine 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 $0.4 million decrease in gross
profit. During the same period, sales volume decreases in the Euroball segment
were offset by cost reductions, netting a $0.4 million increase in gross profit.
Within the Plastics segment were sales volume increases and cost improvements
from IMC and NN Arte netting $1.2 million and $0.5 million, respectively, while
the inclusion of a full nine months of Delta results in 2002 versus
approximately 7.5 months in 2001 contributed $0.7 million of increases in 2002.
As a percentage of net sales, gross profit increased from 24.3% in the first
nine months of 2001 to 25.4% for the same period in 2002.
Selling, General and Administrative. Selling, general and administrative
expenses increased by approximately $1.0 million or 8.0% from $12.3 million in
the first nine months of 2001 to $13.3 million in the first nine 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 $0.3 million of the increase. Strategic planning and
information technology initiatives at Euroball in addition to currency impacts
contributed $0.5 million of the increase. As a percentage of net sales, selling,
general and administrative expenses increased from 8.8% for the first nine
months of 2001 to 9.3% for the same period in 2002.
Depreciation and Amortization. Depreciation and amortization expense decreased
by approximately $1.7 million or 17.0% from $10.2 million for the first nine
months of 2001 to $8.4 million for the same period in 2002. The adoption of
Statement No. 142 eliminated the amortization of goodwill and contributed $1.4
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 $0.9 million of the decrease.
13
This was offset in part by a full nine months of Delta in 2002 as compared to
7.5 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 7.3% in the first nine months of 2001 to
5.9% for the same period in 2002.
Restructuring costs. Restructuring costs decreased by $0.7 million from $0.8
million during the first nine months of 2001 to $0.1 million for the same period
in 2002. The Company recorded a restructuring charge of $0.8 million and $0.1
million in the first nine months of 2001 and 2002, respectively. The
restructuring costs principally pertain to the Company's decision and
announcement to close the Walterboro, South Carolina ball facility in 2001. The
$0.7 million charge recorded in 2001 and the $0.1 million charge recorded in
2002 primarily represent the accrual for severance costs related to the closing
of this facility. As a percentage, restructuring costs represent 0.5% and 0.1%
of net sales in the first nine months of 2001 and 2002, respectively.
Interest Expense. Interest expense decreased by approximately $1.3 million from
$3.2 million in the first nine months of 2001 to $1.9 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 $64.2 million at September 30, 2001 to $43.7 million at September
30, 2002. As a percentage of net sales, interest expense decreased from 2.3% in
the first nine months of 2001 to 1.3% for the same period in 2002.
Equity in Earnings of Unconsolidated Affiliates. Equity in earnings of
unconsolidated affiliates decreased from earnings of $13,000 in the first nine
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
$3.9 million from $3.9 million for the first nine months of 2001 to $0 for the
first nine months of 2002. The Company realized a net gain on involuntary
conversion of $2.5 million and $1.4 million in the second and third quarters of
2001, respectively. The gain was 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 $0.7 million from $1.3 million for the first
nine months of 2001 to $2.0 million for the first nine 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 increased by $0.7 million or 11.9%, from $5.7 million for
the first nine months of 2001 to $6.4 million for the same period in 2002. As a
percentage of net sales, net income increased from 4.1% in the first nine months
of 2001 to 4.4% for the same period in 2002.
Liquidity and Capital Resources
On July 20, 2001 the Company entered into a $25 million syndicated senior
non-secured revolving credit facility and a senior non-secured term loan for $35
million. Amounts outstanding under the revolving facility and the reducing
revolving credit line facility bear interest at a floating rate equal to LIBOR
(1.71% at September 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. Such covenants specify that the Company
must maintain a minimum fixed charge coverage ratio, a minimum funded
indebtedness to EBITDA ratio and a maximum funded indebtedness to capitalization
ratio and limits the amount of capital expenditures we may make in any fiscal
year. The loan agreement also contains customary restrictions on, among other
things, additional indebtedness, liens on our assets, sales or transfers of
assets, investments, restricted payments (including payment of dividends and
stock repurchases), issuance of equity securities, and mergers, acquisitions and
other fundamental changes in our business.
14
The Company was in compliance with all such covenants as of September 30, 2002.
On July 12, 2002, the Company amended its 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 from July 25, 2003 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.
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 (3.20% at September 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. Amounts outstanding under the Facility Agreement are secured by the
stock of Euroball ApS, inventory and accounts receivable. Euroball was in
compliance with all such covenants as of September 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 generally provide that payments
are due within 90 to 120 days following the date of shipment. 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 allow
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 $16.1 million
at September 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 1.35:1 at September 30, 2002. Cash flow from operations increased
from $18.7 million during the first nine months of 2001 to $21.4 million during
the first nine months of 2002.
During 2002, the Company plans to spend approximately $6.5 million on capital
expenditures (of which approximately $4.6 million has been spent through
September 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 2003.
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 is required, it may need to borrow
additional funds.
15
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.
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
Certain statements contained in this report, future filings of the Company,
press releases and other statements made by the Company or its authorized
representatives may be deemed to be forward-looking statements. These statements
discuss, among other things, future acquisitions and dispositions, proposed
financings and refinancings, future revenues, costs, and expenses, and projected
working capital needs and are based on current expectations. The forward looking
statements involve risks and uncertainties that could cause actual results to
differ materially from those described.
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 demand for our products is cyclical, which could adversely impact our revenues.
The end markets for fully assembled bearings are cyclical and tend to decline in
response to overall declines in industrial production. As a result, the market
for bearing components is also cyclical and impacted by overall levels of
industrial production. Our sales in the past have been negatively affected, and
in the future will be negatively affected, by adverse conditions in the
industrial production sector of the economy or by adverse global or national
economic conditions generally.
We depend on a very limited number of foreign sources for our primary raw
material and are subject to risks of shortages and price fluctuation. The steel
that we use to manufacture precision balls and rollers is of an extremely high
quality and is available from a limited number of producers on a global basis.
Due to quality constraints in the U.S. steel industry, we obtain substantially
all of the steel used in our U.S. ball and roller production from overseas
suppliers. In addition, we obtain substantially all of the steel used in our
European ball production from a single European source. If we had to obtain
steel from sources other than our current suppliers, particularly in the case of
our European operations, we could face higher prices
16
and transportation costs, increased duties or taxes, and shortages of steel.
Problems in obtaining steel, and particularly 52100 chrome steel, in the
quantities that we require and on commercially reasonable terms, could increase
our costs, negatively impact our ability to operate our business efficiently and
have a material adverse effect on the operating and financial results of our
Company.
We operate in and sell products to customers outside the U.S. and are subject to
several related risks. Because we obtain a majority of our raw materials from
overseas suppliers, actively participate in overseas manufacturing operations
and sell to a large number of international customers, we face risks associated
with the following:
• adverse foreign currency fluctuations;
• changes in trade, monetary and fiscal policies, laws and regulations,
and other activities of governments, agencies and similar organizations;
• the imposition of trade restrictions or prohibitions;
• high tax rates that discourage the repatriation of funds to the U.S.;
• the imposition of import or other duties or taxes; and
• unstable governments or legal systems in countries in which our
suppliers, manufacturing operations, and customers are located.
We do not have a hedging program in place 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 relative to other
currencies may adversely affect our ability to compete with our foreign-based
competitors for international, as well as domestic, sales. Also, a decline in
the value of the Euro relative to the U.S. dollar will negatively impact our
consolidated financial results, which are denominated in U.S. dollars.
In addition, due to the typical slower summer manufacturing season in Europe, we
expect that revenues in the third fiscal quarter will reflect lower sales, as
our sales to foreign customers have increased as a percentage of net sales.
We depend heavily on a relatively limited number of customers, and the loss of
any major customer would have a material adverse effect on our business. Sales
to various U.S. and foreign divisions of SKF, which is one of the largest
bearing manufacturers in the world, accounted for approximately 35% of
consolidated net sales in 2001, and sales to INA/FAG accounted for approximately
19% of consolidated net sales in 2001. During 2001, our ten largest customers
accounted for approximately 73% of our consolidated net sales. None of our other
customers individually accounted for more than 5% of our consolidated net sales
for 2001. The loss of all or a substantial portion of sales to these customers
would have a material adverse effect on our financial position, results of
operations and cash flows.
The costs and difficulties of integrating acquired business could impede our
future growth. We cannot assure you that any future acquisition will enhance our
financial performance. Our ability to effectively integrate any future
acquisitions will depend on, among other things, the adequacy of our
implementation plans, the ability of our management to oversee and operate
effectively the combined operations and our ability to achieve desired operating
efficiencies and sales goals. If we are not able to integrate the operations of
acquired companies successfully into our business, our future earnings and
profitability could be materially and adversely affected.
We may not be able to continue to make the acquisitions necessary for us to
realize our growth strategy. Acquiring businesses that complement or expand our
operations has been and continues to be an important element of our business
strategy. This strategy calls for growth through acquisitions constituting
approximately two-thirds of our future growth, with the remainder resulting from
internal growth and market penetration. We bought our plastic bearing component
business in 1999, formed NN Euroball, ApS ("Euroball") with our two largest
bearing customers, SKF and INA/FAG, in 2000 and acquired our bearing
17
seal operations in 2001. We cannot assure you that we will be successful in
identifying attractive acquisition candidates or completing acquisitions on
favorable terms in the future. In addition, we may borrow funds to acquire other
businesses, increasing our interest expense and debt levels. Our inability to
acquire businesses, or to operate them profitably once acquired, could have a
material adverse effect on our business, financial position, results of
operations and cash flows.
Additionally, SKF and INA/FAG, the minority shareholders in Euroball, each have
the right to require us to purchase their interest beginning in January 2003.
The Company may need to borrow funds to pay for all or a portion of the purchase
of an interest or may be required to make a purchase at a time that is less
favorable to the Company.
Our growth strategy depends on outsourcing, and if the industry trend toward
outsourcing does not continue, our business could be adversely affected. Our
growth strategy depends in significant part on major bearing manufacturers
continuing to outsource components, and expanding the number of components being
outsourced. This requires manufacturers to depart significantly from their
traditional methods of operations. If major bearing manufacturers do not
continue to expand outsourcing efforts or determine to reduce their use of
outsourcing, our ability to grow our business could be materially adversely
affected.
Our market is highly competitive and many of our competitors have significant
advantages that could adversely affect our business. The global market for
bearing components is highly competitive, with a majority of production
represented by the captive production operations of certain large bearing
manufacturers and the balance represented by independent manufacturers. Captive
manufacturers make components for internal use and for sale to third parties.
All of the captive manufacturers, and many independent manufacturers, are
significantly larger and have greater resources than do we. Our competitors are
continuously exploring and implementing improvements in technology and
manufacturing processes in order to improve product quality, and our ability to
remain competitive will depend, among other things, on whether we are able to
keep pace with such quality improvements in a cost effective manner.
The production capacity we have added over the last several years has at times
resulted in our having more capacity than we need, causing out operating costs
to be higher than expected. We have significantly expanded our ball and roller
production facilities and capacity over the last several years. During 1997, we
built an additional manufacturing plant in Kilkenny, Ireland, and we continued
this expansion in 2000 through the formation of Euroball with SKF and INA/FAG.
Our ball and roller facilities currently are not operating at full capacity and
our results of operations for 2001 and the first and second quarters of 2002
were adversely affected by the under utilization of our production facitilies,
and we face risks of further under utilization or inefficient utilization of our
production facilities in future years.
18
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 reducing revolving credit line facility.
Additionally, Euroball has a Euro 5.0 million senior secured floating rate
revolving credit facility and a Euro 6.0 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 September 30, 2002, the Company had
$37.7 million outstanding under the domestic revolving credit facility and
reducing revolving credit line and Euroball had $6.0 million outstanding under
the Euroball revolving credit facility and term loan. At these debt levels, 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 $440,000. 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 derivative instruments as of September
30, 2002.
Item 4. Controls and Procedures
a) Within the 90-day period prior to the date of this report, the Company
carried out an evaluation, under the supervision and with the participation
of the Company's management, including the Company's Chief Executive
Officer and Chief Financial Officer, of the effectiveness of the design and
operation of the Company's disclosure controls and procedures pursuant to
Rule 13a-14 and 15d-14 of the Securities Exchange Act of 1934 (the
"Exchange Act"). Based upon that evaluation, the Company's management,
including the Chief Executive Officer and Chief Financial Officer,
concluded that the Company's disclosure controls and procedures are
effective in timely alerting them to material information relating to the
Company (including its consolidated subsidiaries) required to be included
in the Company's Exchange Act filings.
b) There have been no significant changes in the Company's internal controls
or in other factors which could significantly affect internal controls
subsequent to the date the Company carried out its evaluation.
19
Part II. Other Information
Item 1. Legal Proceedings
The Company is involved in various legal proceedings that 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. 3 dated July 31, 2002 to Credit Agreement among NN,
Inc., as the Borrower, the Lenders identified therein, Bank One,
Kentucky, N A, as Co-Agent, and AmSouth Bank as Administrative
Agent (incorporated by reference to Exhibit 10.1 of the Company's
Quarterly Report on Form 10-Q for the period ended June 30,
2002).
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, N A, 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 Certifications 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 July 18, 2002 announcing its second
quarter earnings.
The Company filed a Form 8-K on August 6, 2002 announcing that, due to
unfavorable market conditions, it has postponed the proposed follow-on
public offering of its common stock.
The Company filed a Form 8-K on September 26, 2002 announcing it filed
a shelf registration statement with the Securities and Exchange
Commission.
20
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: November 14, 2002 /s/ Roderick R. Baty
- ---------------------------------------- -----------------------------------
Roderick R. Baty,
Chairman, President and Chief
Executive Officer
Date: November 14, 2002 /s/ David L. Dyckman
- ---------------------------------------- -----------------------------------
David L. Dyckman,
Chief Financial Officer
(Principal Financial Officer)
Date: November 14, 2002 /s/ William C. Kelly, Jr.
- ---------------------------------------- ----------------------------------
William C. Kelly, Jr.,
Treasurer, Secretary and Chief
Accounting Officer
(Principal Accounting Officer)
21
CERTIFICATIONS
I, Roderick R. Baty, certify that:
1. I have reviewed this quarterly report on Form 10-Q of NN, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of this disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 14, 2002
/s/ Roderick R. Baty
--------------------------------
Roderick R. Baty
Chairman, President and Chief Executive Officer
22
I, David L. Dyckman, certify that:
1. I have reviewed this quarterly report on Form 10-Q of NN, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of this disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 14, 2002
/s/ David L. Dyckman
--------------------------------
David L. Dyckman
Chief Financial Officer