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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, 2003
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 | | No |X|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes |X| No |_|
As of January 30, 2004 there were 16,711,590 shares of the registrant's common
stock, par value $0.01 per share, outstanding.
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NN, Inc.
INDEX
Page No.
Part I. Financial Information
Item 1. Financial Statements:
Consolidated Statements of Income and Comprehensive Income
for the three and nine months ended September 30, 2003 and
2002 (unaudited) 2
Condensed Consolidated Balance Sheets at September 30, 2003 and
December 31, 2002 (unaudited) 3
Consolidated Statements of Changes in Stockholders' Equity
for the nine months ended September 30, 2003 and 2002 (unaudited) 4
Consolidated Statements of Cash Flows for the nine months ended
September 30, 2003 and 2002 (unaudited) 5
Notes to Consolidated Financial Statements (unaudited) 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 17
Item 3. Quantitative and Qualitative Disclosures about Market Risk 26
Item 4. Controls and Procedures 27
Part II. Other Information
Item 1. Legal Proceedings 28
Item 2. Changes in Securities and Use of Proceeds 28
Item 3. Defaults Upon Senior Securities 28
Item 4. Other Information 28
Item 5. Exhibits and Reports on Form 8-K 28
Signatures 29
1
PART I. FINANCIAL INFORMATION
NN, Inc.
Consolidated Statements of Income and Comprehensive Income
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
Restated Restated
Thousands of Dollars, Except Per Share Data 2003 2002 2003 2002
- ------------------------------------------------------------------------------------------------------------------------
Net sales $ 64,612 $ 47,451 $ 186,415 $ 143,836
Cost of goods sold (exclusive of depreciation
shown separately below) 50,294 35,631 142,758 107,302
Selling, general and administrative 5,247 4,076 15,650 13,311
Depreciation and amortization 3,642 2,881 10,203 8,443
Restructuring and impairment costs (gain) (224) -- 2,498 78
-------------- ------------- ------------- -------------
Income from operations 5,653 4,863 15,306 14,702
Interest expense, net 881 597 2,225 1,876
Other (income) expense (38) (20) 272 (516)
-------------- ------------- ------------- -------------
Income before provision for income taxes 4,810 4,286 12,809 13,342
Provision for income taxes 1,646 1,612 4,630 4,957
Minority interest in consolidated subsidiaries -- 555 675 2,010
-------------- ------------- ------------- -------------
Net income 3,164 2,119 7,504 6,375
Other comprehensive income:
Foreign currency translation 1,292 (125) 5,460 2,255
-------------- ------------- ------------- -------------
Comprehensive income $ 4,456 $ 1,994 $ 12,964 $ 8,630
============== ============= ============= =============
Basic income per common share: $ 0.19 $ 0.14 $ 0.48 $ 0.42
============== ============= ============= =============
Weighted average shares outstanding 16,660 15,368 15,804 15,344
============== ============= ============= =============
Diluted income per common share: $ 0.18 $ 0.14 $ 0.46 $ 0.40
============== ============= ============= =============
Weighted average shares outstanding 17,167 15,648 16,194 15,755
============== ============= ============= =============
Cash dividends per common share $ 0.08 $ 0.08 $ 0.24 $ 0.24
============== ============= ============= =============
See accompanying notes.
2
NN, Inc.
Condensed Consolidated Balance Sheets
(Unaudited)
Restated
September 30, December 31,
Thousands of Dollars 2003 2002
- ----------------------------------------------------------------------------------------------
Assets
Current assets:
Cash and cash equivalents $ 4,790 $ 5,144
Accounts receivable, net 45,432 28,965
Inventories, net 34,391 23,402
Other current assets 5,859 3,901
------------------ ------------------
Total current assets 90,472 61,412
Property, plant and equipment, net 105,621 88,199
Assets held for sale 1,805 2,214
Goodwill, net 53,061 39,374
Other assets 4,667 4,016
------------------ ------------------
Total assets $ 255,626 $ 195,215
================== ==================
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $32,666 $ 22,983
Book overdraft -- 37
Accrued salaries and wages 11,453 6,354
Income taxes payable 1,755 620
Short-term debt 2,000 --
Current maturities of long-term debt 10,675 7,000
Other current liabilities 3,743 3,240
------------------ ------------------
Total current liabilities 62,292 40,234
Non-current deferred tax liability 10,732 9,334
Long-term debt 72,722 46,135
Accrued pension and other 10,468 9,319
------------------ ------------------
Total liabilities 156,214 105,022
Minority interest in consolidated subsidiaries -- 12,285
------------------ ------------------
Total stockholders' equity 99,412 77,908
------------------ ------------------
Total liabilities and stockholders' equity $255,626 $195,215
================== ==================
See accompanying notes.
3
NN, Inc.
Consolidated Statements of Changes in Stockholders' Equity
(Unaudited)
Common Stock Accumulated
Number Additional Other
Of Par paid in Retained Comprehensive
Thousands of Dollars and Shares Shares value capital Earnings Income (Loss) Total
- --------------------------------------------------------------------------------------------------------------------------------
Balance, January 1, 2002, Restated 15,317 $154 $ 40,111 $ 36,139 $ (5,422) $ 70,982
Shares issued 51 -- 332 -- -- 332
Net income -- -- -- 6,375 -- 6,375
Dividends declared -- -- -- (3,685) -- (3,685)
Other comprehensive income -- -- -- -- 2,255 2,255
----------- --------- ---------- ----------- ----------- -----------
Balance, September 30, 2002, Restated 15,368 $154 $ 40,443 $ 38,829 $ (3,167) $ 76,259
=========== ========= ========== =========== =========== ===========
Balance, January 1, 2003, Restated 15,370 $154 $ 40,457 $ 38,984 $ (1,687) $77,908
Shares issued 1,330 14 12,421 -- -- 12,435
Net income -- -- -- 7,504 -- 7,504
Dividends declared -- -- -- (3,895) -- (3,895)
Other comprehensive income -- -- -- -- 5,460 5,460
----------- --------- ---------- ----------- ---------- -----------
Balance, September 30, 2003 16,700 $168 $ 52,878 $ 42,593 $3,773 $99,412
=========== ========= ========== =========== =========== ===========
See accompanying notes.
4
NN, Inc.
Consolidated Statements of Cash Flows
(Unaudited)
Nine Months Ended
September 30,
Thousands of Dollars 2003 2002
- --------------------------------------------------------------------------------------------------------------
Operating Activities:
Net income $ 7,504 $ 6,375
Adjustments to reconcile net income to net cash provided (used) by operating
activities:
Depreciation and amortization 10,203 8,443
(Gain) loss on disposals of property, plant and equipment (145) (12)
Minority interest in consolidated subsidiary 675 2,010
Loss on extinguishment of debt 455 --
Restructuring and impairment costs 2,742 78
Changes in operating assets and liabilities:
Accounts receivable (14,506) (5,117)
Inventories (3,736) 1,738
Other current assets (406) 425
Other assets (3,056) (6)
Accounts payable 6,653 1,515
Income taxes payable (128) 1,883
Other liabilities 2,015 4,063
------------ -----------
Net cash provided by operating activities 8,271 21,395
------------ -----------
Investing Activities:
Acquisition of Veenendaal, The Netherlands (17,933) --
Purchase of minority interest (15,583) --
Acquisition of property, plant, and equipment (7,200) (4,626)
Proceeds from disposals of property, plant and equipment 145 43
------------ -----------
Net cash used by investing activities (40,571) (4,583)
------------ -----------
Financing Activities:
Proceeds from long-term debt 89,745 --
Proceeds from short-term debt 2,000 --
Debt issuance costs (823) --
Book overdraft (37) (260)
Repayment of long-term debt (60,962) (11,971)
Repayment of short-term debt -- --
Proceeds from issuance of stock 5,498 332
Dividends paid (3,895) (3,686)
------------ -----------
Net cash provided (used) by financing activities 31,526 (15,585)
------------ -----------
Effect of exchange rate changes on cash and cash equivalents 420 356
Net Change in Cash and Cash Equivalents (354) 1,583
Cash and Cash Equivalents at Beginning of Period 5,144 3,024
------------ -----------
Cash and Cash Equivalents at End of Period $ 4,790 $ 4,607
============ ===========
Supplemental schedule of non-cash investing and financing activities:
Stock issued related to acquisition of Veenendaal $ 6,937 $ --
============ ===========
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, 2002 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, 2003 and 2002, the Company's
financial position at September 30, 2003 and December 31, 2002, and the cash
flows for the nine month periods ended September 30, 2003 and 2002. 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. As used in this Quarterly Report on
Form 10-Q, the terms "NN", "the Company", "we", "our", or "us" mean NN, Inc. and
its subsidiaries.
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. These Condensed, Consolidated, Unaudited
Financial Statements should be read in conjunction with our audited Consolidated
Financial Statements and the Notes thereto included in our most recent annual
report on Form 10-K/A which we filed with the Commission on January 30, 2004.
The results for the first, second and third quarters of 2003 are not necessarily
indicative of future results.
Certain 2002 amounts have been reclassified to conform with the 2003
presentation.
The Company has revised the accounting treatment for the formation of NN
Euroball, ApS ("Euroball") on July 31, 2000 and the Company's subsequent
purchase of the minority interests held by INA/FAG and SKF. See Note 12.
Additionally, the Company has reclassified minority interest in consolidated
subsidiaries from a component of total liabilities to a separate line item in
the Consolidated Balance Sheet at December 31, 2002.
Note 2. Derivative Financial Instruments
We have 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, our
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. This original debt was repaid in May
2003, however, the swap remains pursuant to its original terms.
As of September 30, 2003, the fair value of the swap was approximately $508,000,
which is recorded in other non-current liabilities. The change in fair value
during the nine month period ended September 30, 2003 and 2002 was a loss of
approximately $63,000 and a loss of approximately $42,000, 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 determined using
the first-in, first-out method.
Inventories are comprised of the following (in thousands):
Sept. 30, Dec. 31,
2003 2002
(Unaudited)
------------- --------------
Raw materials $ 7,517 $ 5,400
Work in process 7,662 5,139
Finished goods 19,433 13,065
Less inventory reserves (221) (202)
------------- --------------
$ 34,391 $ 23,402
============= ==============
Inventories on consignment at customer locations as of September 30, 2003 and
December 31, 2002 were $2,255 and $3,093, respectively.
Note 4. Net Income Per Share
Three Months Ended Nine Months Ended
September 30, September 30,
Thousands of Dollars, Except Share and Per Share Data 2003 2002 2003 2002
- ----------------------------------------------------- -------------- -------------- ------------- --------------
Net income $3,164 $2,119 $7,504 $6,375
============== ============== ============= ==============
Weighted average basic shares 16,660,350 15,367,773 15,804,069 15,344,116
Effect of dilutive stock options 506,293 279,865 389,831 411,297
-------------- -------------- ------------- --------------
Weighted average dilutive shares outstanding 17,166,643 15,647,638 16,193,900 15,755,413
============== ============== ============= ==============
Basic net income per share $0.19 $0.14 $0.48 $0.42
============== ============== ============= ==============
Diluted net income per share $0.18 $0.14 $0.46 $0.40
============== ============== ============= ==============
Excluded from the shares outstanding for each of the three and nine month
periods ended September 30, 2003 and 2002 were no antidilutive options, in
either period.
Note 5. Segment Information
During 2003 and 2002, 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 ("NN Europe") and Plastic and Rubber Components.
The Domestic Ball and Roller Segment is comprised of two manufacturing
facilities in the eastern United States. The NN Europe Segment is comprised of
precision ball manufacturing facilities located in Kilkenny, Ireland, Eltmann,
Germany and Pinerolo, Italy acquired in July 2000 and Veenendaal, The
Netherlands ("Veenendaal") a tapered roller and metal cage manufacturing
operation acquired in May 2003. See Note 6, "Acquisitions and Joint Ventures".
All of the facilities in the Domestic Ball and Roller Segment are engaged in the
production of precision balls and rollers used primarily in the bearing
industry. All of the facilities in the NN Europe Segment are engaged in the
production of precision balls used primarily in the bearing industry except for
Veenendaal which is engaged in the production of tapered rollers and cages for
use primarily in the bearing industry. The Plastic and Rubber Components 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 (see Note 7), 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 office automation markets. Delta is engaged principally in the
production of engineered bearing seals used principally in automotive,
industrial, agricultural, mining and aerospace applications. The Plastic and
Rubber Components Segment's name has been changed from the Plastics Segment
effective with the
7
March 31, 2003 quarterly report on Form 10-Q. The businesses and methods of
calculation comprising this segment have not changed.
The NN Europe Segment, prior to the filing of the June 30, 2003 quarterly report
on Form 10-Q, was referred to as the Euroball Segment and was comprised only of
the manufacturing facilities located in Kilkenny, Ireland, Eltmann, Germany, and
Pinerolo, Italy. The name of this segment has been changed following the
Veenendaal acquisition.
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, as amended, for the fiscal year ended December 31, 2002 including
those policies as discussed in Note 1. We evaluate segment performance based on
profit or loss from operations before income taxes and minority interest. We
account for inter-segment sales and transfers at current market prices; however,
we did not have any material inter-segment transactions during the three or nine
month periods ended September 30, 2003 and 2002.
Three Months Ended September 30,
2003 2002
Domestic Plastic and Domestic Plastic and
Ball & Rubber Ball & Restated Rubber
Thousands of Dollars Roller NN Europe Components Roller NN Europe Components
- ------------------------------------------------------------------------------------------------------------------------------
Revenues from external
customers $ 14,414 $ 37,784 $ 12,414 $ 13,253 $ 21,734 $ 12,464
Segment pretax profit 1,090 2,897 823 1,613 1,996 677
Segment assets 53,077 144,560 57,989 64,211 71,192 57,028
Nine Months Ended September 30,
2003 2002
Domestic Plastic and Domestic Plastic and
Ball & Rubber Ball & Restated Rubber
Thousands of Dollars Roller NN Europe Components Roller NN Europe Components
- ------------------------------------------------------------------------------------------------------------------------------
Revenues from external
customers $ 42,588 $104,829 $ 38,998 $ 40,177 $ 66,639 $ 37,020
Segment pretax profit (loss) 3,469 9,871 (531) 4,046 7,055 2,241
Segment assets 53,077 144,560 57,989 64,211 71,192 57,028
Note 6. Acquisitions and Joint Ventures
On December 20, 2002, we acquired the 23 percent interest in NN Euroball, ApS
("Euroball") held by INA/FAG. INA/FAG is a global bearing manufacturer and one
of our largest customers. We paid approximately 13.4 million Euros ($13.8
million) for INA/FAG's interest in Euroball. Euroball was formed in 2000 by the
Company, FAG Kugelfischer George Shaefer AG, which was subsequently acquired by
INA - Schaeffler KG ("INA/FAG"), and AB SKF ("SKF"). See Note 12 for additional
information.
On May 2, 2003 we acquired the 23 percent interest in NN Euroball, ApS
("Euroball") held by SKF. We paid approximately 13.8 million Euros ($15.6
million) for SKF's interest in Euroball. Upon consummation of this transaction,
we became the sole owner of Euroball. See Note 12 for additional information.
On May 2, 2003 we acquired 100 percent of the tapered roller and metal cage
manufacturing operations of SKF in Veenendaal, The Netherlands. The results of
Veenendaal's operations have been included in the consolidated financial
statements since that date. We paid consideration of approximately 23.0 million
Euros ($25.7 million) and incurred other costs of approximately $1.0 million,
for the Veenendaal net assets acquired from SKF. The Veenendaal operation
manufactures rollers for tapered roller bearings and metal cages for both
tapered roller and spherical roller bearings allowing us to expand our bearing
component offering. The results of the Veenendaal operation are included in the
NN Europe Segment.
In connection with the acquisition of SKF's Veenendaal, The Netherlands
operations, SKF purchased from us 700,000 shares of our common stock for an
aggregate fair value of approximately $6.9 million which was applied to the
purchase of SKF's Veenendaal, The Netherlands operations. For purposes of
valuing
8
the 700,000 common shares issued in our Consolidated Financial Statements, the
value was determined based on the average market price of NN, Inc.'s common
shares over the two-day period before, the day of, and the two-day period after
the terms of the acquisition were agreed to, April 14, 2003.
The following table summarizes the estimated fair value of the assets acquired
and liabilities assumed at the date of acquisition. The purchase price is
subject to adjustment due to working capital changes. We are in the process of
obtaining third-party valuations of certain tangible and intangible assets;
thus, the allocation of the purchase price is subject to refinement.
(In thousands)
At May 2, 2003
-------------------
Current assets $ 6,081
Property, plant and equipment 14,747
Goodwill and other intangible assets 11,263
-------------------
Total assets acquired 32,091
Current liabilities 5,431
-------------------
Net assets acquired $ 26,660
===================
The full amount assigned to goodwill is expected to be deductible for tax
purposes.
The following unaudited proforma summary presents the financial information for
the three and nine month periods ended September 30, 2003 and 2002 as if our
Veenendaal acquisition had occurred as of the beginning of each of the periods
presented. These pro forma results have been prepared for comparative purposes
and do not purport to be indicative of what would have occurred had the
acquisition been made as of the beginning of each of the periods presented, nor
are they indicative of future results.
(In thousands, except per share data)
-----------------------------------------
Three months Nine months
ended ended
September 30, September 30,
2003 2003
(unaudited) (unaudited)
-------------------- --------------------
Net sales $ 64,612 $ 203,859
Net income 3,164 7,813
Basic earnings per share 0.19 0.49
Diluted earnings per share 0.18 0.48
(In thousands, except per share data)
-----------------------------------------
Three months Nine months
ended ended
September 30, September 30,
2002 2002
(unaudited) (unaudited)
--------------------- -------------------
Net sales $ 59,962 $ 183,085
Net income 2,414 7,068
Basic earnings per share 0.16 0.46
Diluted earnings per share 0.15 0.45
On April 1, 2003, we exercised our call right and purchased the remaining 49
percent interest in NN Mexico, LLC. Based on the purchase price formula
contained in the principal agreement between the parties, the purchase price for
the 49 percent interest was zero.
9
Note 7. Restructuring and Impairment Charges
NN Arté Plant Closing in Guadalajara, Mexico
In May, 2003, we decided to close our Guadalajara, Mexico plastic injection
molding facility. This operation was started in September of 2000 to supply
certain Mexican operations of multi-national manufacturers of office automation
equipment. Several of these customers have recently shifted their manufacturing
operations to other geographic regions in the world. The closure was
substantially completed during the third quarter of 2003. The financial results
of this operation have been included in the Plastic and Rubber Components
Segment.
The plant closing is expected to result in the termination of approximately 42
full time hourly and salary employees located at the Guadalajara facility.
During the three months ended June 30, 2003 we recorded restructuring costs of
approximately $282,000 related to the severance payments for the affected
employees. During the three months ended September 30, 2003 we re-evaluated the
adequacy of the severance reserve and reduced the charge by approximately
$52,000. For the nine months ended September 30, 2003 total restructuring costs
of $230,000 have been recorded related to the severance payments for the
affected employees.
As a result of the closing, we have performed a test of the recoverability of
the goodwill asset associated with the Guadalajara, Mexico operation. This test
was pursuant to the provisions of Statement of Financial Accounting Standards
No. 142 "Goodwill and Other Intangible Assets" which require that interim tests
of the recoverability of goodwill be performed under certain circumstances. As a
result, we recorded an impairment charge of approximately $0 and $1.3 million to
fully write-off the goodwill asset during the three and nine month periods ended
September 30, 2003, respectively.
We have decided to sell much of the machinery and equipment with certain pieces
of machinery and equipment to be transferred and utilized by our Industrial
Molding facility in Lubbock, Texas. Pursuant to the provisions of Statement of
Accounting Standards No. 144 "Accounting for the Impairment or Disposal of
Long-lived Assets" we recorded an impairment charge of $1.1 million during the
three months ended June 30, 2003 to write-down the machinery and equipment to
its estimated fair market value. During the three months ended September 30,
2003 we recorded a gain of $145,000 related to the disposition of certain pieces
of the machinery and equipment assets that were previously assessed as impaired.
During the nine months ended September 30, 2003, we recorded a total impairment
charge related to the machinery and equipment of $0.9 million.
During the three months ended June 30, 2003, we recorded an accounts receivable
write-down of $107,000 to reduce accounts receivable to its estimated fair
market value. During the three months ended September 30, 2003, we recorded a
gain of $76,000 related to recoveries of accounts receivable that were
previously determined to be uncollectible. During the nine months ended
September 30, 2003, we recorded a total impairment charge related to the
accounts receivable asset of $31,000.
Additionally, during the three months ended June 30, 2003, we recorded an
inventory write-down of $324,000 to reduce the carrying value of inventory to
its estimated fair market value. During the three months ended September 30,
2003, we recorded a gain related to the disposition of the impaired inventory
asset of $216,000. During the nine months ended September 30, 2003, we recorded
a total write-down related to the inventory asset of $108,000. These amounts
related to the inventory asset have been recorded as a component of cost of
goods sold.
The amounts we will ultimately realize upon disposition of these assets could
differ materially from the amounts assumed in arriving at the net impairment
losses recorded during the nine months ended September 30, 2003.
The following summarizes the 2003 restructuring and impairment charges related
to the closure of NN Arté:
10
Reserve
Non-Cash Paid in Balance
In thousands Charges Write-downs 2003 At 9/30/03
--------------- ----------------- ---------------- ---------------
Asset impairments $2,368 $2,368 $ -- $ --
Lease exit costs 40 -- -- 40
Severance and other employee costs 230 -- 45 185
--------------- ----------------- ---------------- ---------------
Total $2,598 $2,368 $ 45 $ 225
=============== ================= ================ ===============
Walterboro, South Carolina Plant Closing
In September of 2001, we announced that we would close our Walterboro, South
Carolina ball manufacturing facility as part of our 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 our two domestic ball
facilities in Erwin, Tennessee and Mountain City, Tennessee. We recorded
restructuring costs of $62,000 for additional severance payments during the nine
months ended September 30, 2002. There were no restructuring costs recorded for
the nine months ended September 30, 2003.
Termination of Employees in Italy
Our Euroball subsidiary incurred restructuring charges of $16,000 for the nine
months ended September 30, 2002 for additional severance payments as a result of
the termination of 15 hourly employees and 3 salaried employees at its
production facility in Italy. Additionally, approximately $69,000 of the
severance payments recorded during 2001 and 2002 were paid during the nine
months ended September 30, 2002 and there are no remaining accrued restructuring
costs included in other current liabilities as of September 30, 2002 and
September 30, 2003 related to Euroball.
Note 8. New Accounting Pronouncements
In June 2001, the FASB issued Statement of Financial Accounting Standards No.
141, "Business Combinations" (Statement No. 141), and Statement of Financial
Accounting Standards No. 142, "Goodwill and Other Intangible Assets" (Statement
No. 142). Statement No. 141 requires that the purchase method of accounting be
used for all business combinations initiated after June 30, 2001. Statement No.
141 also specifies criteria 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, we had unamortized goodwill of approximately $36.6
million, which is subject to the provisions of Statement No. 142.
As a result of adopting these new standards, our accounting policies for
goodwill and other intangibles changed on January 1, 2002, as described below:
Goodwill: We recognized 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: We recognize 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
11
over its estimated useful life unless that life is determined to be indefinite.
We 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.
We completed the transitional goodwill impairment reviews required by the new
standards during the first six months of 2002 and the annually required goodwill
impairment review during the fourth quarter of 2002. In performing the
impairment reviews, we estimated the fair values of the reporting units using a
method that incorporates valuations derived from earnings before interest
expense, taxes, depreciation and amortization ("EBITDA") multiples based upon
market multiples and recent capital market transactions and also incorporates
valuations determined by each segment's discounted future cash flows. As of
January 1, 2002, the transition date and as of October 1, 2002, the most recent
annual review date, there was no impairment to goodwill as the fair values
exceeded the carrying values of the reporting units.
The changes in the carrying amount of goodwill for the nine month period ended
September 30, 2003 are as follows:
Plastic and
Rubber
Components NN Europe
In thousands Segment Segment Total
------------------- --------------- -----------------
Balance as of January 1, 2003 $ 26,712 $ 12,662 $ 39,374
Goodwill acquired -- 14,000 14,000
Impairment losses (1,285) -- (1,285)
Currency impacts -- 972 972
------------------- --------------- -----------------
Balance as of September 30, 2003 $ 25,427 $ 27,634 $ 53,061
=================== =============== =================
In July 2001, the FASB issued Statement of Financial Accounting Standards No.
143, "Accounting For Asset Retirement Obligations." This Statement requires
capitalizing any retirement costs as part of the total cost of the related
long-lived asset and subsequently allocating the total expense to future periods
using a systematic and rational method. Adoption of the Statement is required
for fiscal years beginning after June 15, 2002. We adopted SFAS No. 143 on
January 1, 2003 and this adoption did not have a material impact on the
financial statements.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No.
4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections".
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
classifications gains and losses form extinguishment of debt as extraordinary
items. Additionally, the 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 us at the beginning of fiscal year 2003, with the
provisions related to SFAS No. 13 for transactions occurring after May 15, 2002.
We adopted SFAS No. 145 effective January 1, 2003 and this adoption did not have
a material impact on the financial statements.
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. We adopted SFAS No. 146 on January 1, 2003 and this adoption did not
have a material impact on the financial statements.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure - an amendment of FASB Statement No.
123". SFAS No. 148 provides alternative methods of transition for a voluntary
change to the fair value based method of accounting for stock-based employee
compensation. In addition, SFAS No. 148, which was effective for the year ending
December 31, 2002, amends the disclosures in both annual and interim financial
statements about the method of accounting for stock-based employee compensation
and the effect of the method used on
12
reported results. We have adopted the provisions of SFAS 123, which encourages
but does not require a fair value based method of accounting for stock
compensation plans. We have elected to continue accounting for its stock
compensation plan using the intrinsic value based method under Auditing
Practices Board ("APB") Opinion No. 25 and, accordingly, have not recorded
compensation expense for each of the three and nine month periods ended
September 30, 2003 and September 30, 2002. Had compensation cost for our stock
compensation plan been determined based on the fair value at the option grant
dates, our net income and earnings per share would have been reduced to the
proforma amounts indicated below:
Three months ended Nine months ended
September 30, September 30,
In Thousands, Except per Share Data
- -----------------------------------
2003 2002 2003 2002
------------ ----------- ----------- -----------
Net income - as reported $ 3,164 $ 2,119 $ 7,504 $ 6,375
Stock based compensation costs
(income), net of income tax,
included in net income as reported (5) (219) 195 (69)
Stock based compensation costs,
net of income tax, that would have
been included in net income if the
fair value method had been applied 424 278 494 516
------------ ----------- ----------- -----------
Net income - proforma $ 2,735 $ 1,622 $ 7,205 $ 5,790
============ =========== =========== ===========
Basic earnings per share - as reported $ 0.19 $ 0.14 $ 0.48 $ 0.42
Stock based compensation costs
(income), net of income tax,
included in net income as reported -- (0.01) 0.01 (0.01)
Stock based compensation costs,
net of income tax, that would have
been included in net income if the
fair value method had been applied 0.03 0.02 0.03 0.03
------------ ----------- ----------- -----------
Basic earnings per share - proforma $ 0.16 $ 0.11 $ 0.46 $ 0.38
============ =========== =========== ===========
Earnings per share-assuming dilution - $ 0.18 $ 0.14 $ 0.46 $ 0.40
as reported
Stock based compensation costs
(income), net of income tax,
included in net income as reported -- (0.01) 0.01 --
Stock based compensation costs,
net of income tax, that would have
been included in net income if the
fair value method had been applied 0.02 0.02 0.03 0.03
------------ ----------- ----------- -----------
Earnings per share - assuming dilution-
proforma $ 0.16 $ 0.11 $ 0.44 $ 0.37
============ =========== =========== ===========
The fair value of each option grant was estimated based on actual information
available through September 30, 2003 and 2002 using the Black Scholes
option-pricing model with the following assumptions:
Term Vesting period
Risk free interest rate 3.28% and 3.28% at September 30,2003 and 2002, respectively
Dividend yield 3.66% and 3.46% at September 30, 2003 and 2002, respectively
Volatility 50.62% and 50.37% at September 30, 2003 and 2002, respectively
In November 2002, the FASB issued FASB Interpretation ("FIN") No. 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others," an interpretation of FASB
Statements No. 5, 57, and 107 and rescission of FASB Interpretation No. 34. This
interpretation elaborates the disclosures to be made by a guarantor in its
interim and annual financial
13
statements about its obligations under certain guarantees that it has issued. It
also clarifies that a guarantor is required to recognize, at the inception of a
guarantee, a liability for the fair value of the obligation undertaken in
issuing the guarantee. The initial recognition and initial measurement
provisions of this interpretation are applicable on a prospective basis to
guarantees issued or modified after December 31, 2002 and have not had a
material effect on the Company's consolidated results of operations, financial
position or cash flows.
In January 2003, the FASB issued Financial Interpretation No. 46, "Consolidation
of Variable Interest Entities," ("FIN 46"). This interpretation addresses
consolidation by business enterprises of variable interest entities with certain
defined characteristics. Based on our current understanding, we do not expect
FIN 46 to have a significant impact on our consolidated financial statements.
In April 2003, the FASB issued SFAS No. 149, "Derivative Instruments and Hedging
Activities". SFAS No. 149 amends and clarifies financial accounting and
reporting for derivative instruments, including certain derivative instruments
embedded in other contracts and for hedging activities under SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities". SFAS No. 149
requires that contracts with comparable characteristics be accounted for
similarly and is effective for contracts entered into or modified after June 30,
2003 and for hedging relationships designated after June 30, 2003. The adoption
of this standard has not had a material impact on the financial statements.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity". SFAS No. 150
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. SFAS
No. 150 is otherwise generally effective for financial instruments entered into
or modified after May 31, 2003, and otherwise is effective at the beginning of
the first interim period beginning after June 15, 2003. The Company adopted SFAS
No. 150 on July 1, 2003 and this adoption did not have a material impact on the
financial statements.
Note 9. Long-Term Debt and Short-Term Debt
On May 1, 2003 in connection with the purchase of SKF's Veenendaal component
manufacturing operations and SKF's 23 percent interest in Euroball, we entered
into a new $90 million syndicated credit facility with AmSouth Bank ("AmSouth")
as the administrative agent and Suntrust Bank as the Euro loan agent for the
lenders under which we borrowed $60.4 million and 26.3 million Euros ($29.6
million). This new financing arrangement replaces our prior credit facility with
AmSouth and Hypo Vereinsbank Luxembourg, S.A. The credit facility consists of a
$30.0 million revolver expiring on March 1, 2005, bearing interest at a floating
rate equal to LIBOR (1.16% at September 30, 2003) plus an applicable margin of
1.25 to 2.0, a $30.4 million term loan expiring on May 1, 2008, bearing interest
at a floating rate equal to LIBOR (1.16% at September 30, 2003) plus an
applicable margin of 1.25 to 2.0 and a 26.3 million ($29.6 million) Euros term
loan expiring on May 1, 2008 which bears interest at a floating rate equal to
Euro LIBOR (2.13% at September 30, 2003) plus an applicable margin of 1.25 to
2.0. The loan agreement contains customary financial and non-financial
covenants. Such covenants specify that we must maintain certain liquidity
measures. 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 the Company's business. The credit agreement is
un-collateralized except for the pledge of stock of certain foreign
subsidiaries. We were in compliance with all such covenants as of September 30,
2003. In connection with this refinancing, capitalized costs in the amount of
$455,000 associated with the paid-off credit facilities were written-off during
the three month period ended June 30, 2003 and are included as a component of
other (income) expense.
On October 9, 2003, we acquired certain assets comprised of land, building and
machinery and equipment of the precision ball operations of KLF - Gulickaren
("KLF"), based in Kysucke Nove Mesto, Slovakia. We paid consideration of
approximately 1.7 million Euros ($2.0 million). The assets will be utilized by
our newly established subsidiary AKMCH s.r.o. ("AKMCH") based in Kysucke Nove
Mesto, Slovakia, which will begin production in early 2004. The financial
results of the operations will be included in our NN Europe Segment.
14
In connection with the acquisition of KLF's operations in Slovakia, on September
23, 2003 we entered into a $2.0 million short-term unsecured promissory note
with AmSouth as the lender. This note, which bears interest at the prime rate
(4.0% at September 30, 2003), matured on November 14, 2003. We have extended the
maturity date of this note for an additional 90 days.
Note 10. Sale of Common Stock
During May 2003, we completed a public offering of 3.6 million shares of our
stock by a group of selling shareholders. We did not receive any proceeds from
the sale of the shares previously held by the group of selling shareholders,
however, the underwriters did exercise their over-allotment option of 533,600
shares, which were offered by us. Net proceeds received by us in connection with
the exercise of the over-allotment option were approximately $5.1 million.
Note 11. Subsequent Events
On October 9, 2003, we acquired certain assets comprised of land, building and
machinery and equipment of the precision ball operations of KLF - Gulickaren
("KLF"), based in Kysucke Nove Mesto, Slovakia. We paid consideration of
approximately 1.7 million Euros ($2.0 million). The assets will be utilized by
our newly established subsidiary AKMCH based in Kysucke Nove Mesto, Slovakia,
which will begin production in early 2004. The financial results of the
operations will be included in our NN Europe Segment. See Note 9.
Note 12. Restatement
The Company has restated its Consolidated Financial Statements for the year
ended December 31, 2002 and the three and nine months ended September 30, 2002
solely to amend the financial reporting of certain transactions related to the
formation of Euroball on July 31, 2000 and the subsequent purchases of the
minority interests held by INA/FAG and SKF on December 20, 2002 and May 2, 2003,
respectively. These restatements had no material effect on
the Company's reported net sales, gross profit, income from operations or
cash flows for the three and nine month periods ended September 30,
2003 and September 30, 2002.
We have revised the valuation of the original purchase associated with the
formation of Euroball in July 2000. This revision resulted in a reduction of
goodwill of approximately 4,108 Euro ($3,792). Further, we increased
stockholders' equity by approximately 10,044 Euro ($9,270) to reflect the amount
by which the Company's proportionate interest in Euroball exceeded the book
value of the net assets exchanged by the Company. As a result of these two
adjustments, minority interest in consolidated subsidiaries has been reduced by
approximately $7,421 at December 31, 2002, goodwill has decreased by $4,308 at
December 31, 2002 and paid-in-capital increased by $9,270 at December 31, 2002
from amounts previously reported. Comprehensive income has also been restated at
December 31, 2002 and for the three and nine months ended September 30, 2002 for
foreign currency translation effects of these adjustments.
In the previously issued December 31, 2002 Consolidated Financial Statements,
when the Company acquired the 23% interests in Euroball held by INA/FAG in
December 2002 and the 23% interest held by SKF in May 2003, the excess of
minority interest in consolidated subsidiaries over the purchase price was
recorded as a non-taxable gain in the amount of approximately $5,904 and $6,600,
respectively. As restated in the accompanying Consolidated Financial Statements,
the non-taxable gains have been excluded and the excess of the purchase price
over the fair value of INA/FAG's 23% interest and SKF's 23% interest in the net
assets of Euroball was allocated to goodwill. The resulting impact to the
Consolidated Financial Statements is an increase to goodwill of approximately
$1,517 and $3,667 and a decrease in retained earnings of approximately $5,904
and $12,504 at December 31, 2002 and September 30, 2003, respectively, and
reversal of the gain previously recorded in the Consolidated Statement of Income
and Comprehensive Income for the year ended December 31, 2002.
Additionally, the Company has reclassified minority interest in consolidated
subsidiaries from a component of total liabilities to a separate line item in
the Consolidated Balance Sheet at December 31, 2002.
15
Effect on selected Consolidated Financial Statement data as of December 31,
2002, 2001 and 2000:
Selected Consolidated Balance Sheet Data
December 31, 2002
(In thousands)
As Previously
Reported As Restated
------------- ------------
Goodwill $ 42,166 $ 39,374
Total assets 198,007 195,215
Total liabilities 124,728 105,022
Minority interest in consolidated subsidiaries 19,706 12,285
Additional paid-in capital 31,187 40,457
Retained earnings 44,888 38,984
Accumulated other comprehensive loss (2,950) (1,687)
Total stockholders' equity 73,279 77,908
Total liabilities and stockholders' equity 198,007 195,215
Selected Consolidated Statement of Income and Comprehensive Income Data
Three months ended September 30, 2002
(In thousands)
As Previously
Reported As Restated
-------------- ------------
Foreign currency translation $ (66) $ (125)
Comprehensive income 2,053 1,994
Nine months ended September 30, 2002
(In thousands)
As Previously
Reported As Restated
------------- ------------
Foreign currency translation $ 1,268 $ 2,255
Comprehensive income 7,643 8,630
16
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
Three Months Ended September 30, 2003 Compared to the Three Months Ended
September 30, 2002
Net Sales. Net sales increased by approximately $17.1 million or 36.2% from
$47.5 million for the third quarter of 2002 to $64.6 million for the third
quarter of 2003. By segment, net sales increased $1.2 million, and $16.0 million
for the Domestic Ball and Roller Segment and the NN Europe Segment,
respectively. Net sales for the Plastic and Rubber Components Segment decreased
by $0.1 million. Within the NN Europe Segment, $12.5 million of the increase is
related to our May 2, 2003 acquisition of Veenendaal and the inclusion of three
months of its operations. Of the remaining $3.5 million increase $3.2 million is
related to the impact of currency exchange rates and $0.3 million is related to
increased demand. Within the Domestic Ball and Roller Segment the $1.2 million
increase is related to increased demand.
Cost of Goods Sold. Cost of goods sold increased by $14.7 million or 41.2% from
$35.6 million in the third quarter of 2002 to $50.3 million in the third quarter
of 2003. By segment, cost of goods sold increased $1.2 million for the Domestic
Ball and Roller Segment, $0.2 million for the Plastic and Rubber Components
Segment and $13.3 million for the NN Europe Segment. Within the Domestic Ball
and Roller Segment the increase is principally related to increased net sales
demand. Within the NN Europe Segment, $10.2 million is related to the inclusion
of Veenendaal results due to the May 2, 2003 acquisition, $2.5 million is
related to impact of currency exchange rates and $0.6 million is principally
related to increases in net sales demand and material surcharges. Within the
Plastic and Rubber Components Segment the increase is related to cost increases
within the Guadalajara, Mexico facility.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased by $1.1 million, or 28.7%, from $4.1 million
in the third quarter of 2002 to $5.2 million in the third quarter of 2003. By
segment, selling, general and administrative expenses increased by $0.9 million
and $0.3 million for the Domestic Ball and Roller Segment and the NN Europe
Segment, respectively. Within the NN Europe Segment, the inclusion of a full
quarter of Veenendaal results due to the May 2, 2003 acquisition contributed
$0.9 million of the increase and the impact of currency exchange rates resulted
in a $0.2 million increase. Selling, general and administrative expenses
remained unchanged for the Plastic and Rubber Components Segment. As a
percentage of net sales, selling, general and administrative expenses decreased
from 8.6% in the third quarter of 2002 to 8.1% in the third quarter of 2003.
Depreciation and Amortization. Depreciation and amortization expenses increased
by $0.8 million, or 26.4%, from $2.8 million in the third quarter of 2002 to
$3.6 million in the third quarter of 2003. Within the NN Europe Segment the
inclusion of a full quarter of Veenendaal results due to the May 2, 2003
acquisition contributed $0.6 million of the increase and currency impacts
resulted in a $0.2 million increase. Depreciation and amortization expense
remained unchanged for the Domestic Ball and Roller and Plastic and Rubber
Components Segments. As a percentage of net sales, depreciation and amortization
decreased from 6.1% in the third quarter of 2002 to 5.6% in the third quarter of
2003.
Restructuring and Impairment Costs. Restructuring and impairment costs decreased
by $0.2 million from $0 in the third quarter of 2002 to ($0.2 million) in the
third quarter of 2003. The decrease is related to gains recorded during the
third quarter of 2003 related to the disposition of certain previously impaired
NN Arte assets. Restructuring and impairment charges had no effect on net sales
in the third quarter of 2002.
Interest Expense. Interest expense increased by $0.3 million from $0.6 million
in the third quarter of 2002 to $0.9 million in the third quarter of 2003. The
increase is attributed to increased debt levels due to the previously announced
acquisition of Veenendaal during May 2003, the previously announced purchase of
the 23% interest in Euroball held by INA/FAG during December 2002, and the
previously announced purchase of the 23% interest in Euroball held by SKF during
May 2003.
Minority Interest in Consolidated Subsidiary. Minority interest of consolidated
subsidiary decreased $0.6
17
million from $0.6 million in the third quarter of 2002 to $0 in the third
quarter of 2003. This decrease is due entirely to the Euroball joint venture,
which the Company has been required to consolidate since its formation on August
1, 2000. During the third quarter of 2002, minority interest in consolidated
subsidiary represented the 46% of the shares of the joint venture held by the
minority partners. On May 2, 2003 we purchased the 23% interest held by SKF. As
previously announced, we purchased the 23% interest in Euroball held by INA/FAG
on December 20, 2002. Effective May 2, 2003 and as of September 30, 2003, we own
100% of the shares of Euroball. Minority interest in consolidated subsidiary
represents the combined interest in Euroball's earnings of the minority partner
and the 49% interest in Arte's earnings of the minority partner (the 49%
interest in NN Arte's earnings is zero in the third quarter of 2002).
Net Income. Net income increased by $1.1 million, or 49.3%, from $2.1 million in
the third quarter of 2002 to $3.2 million in the third quarter of 2003. As a
percentage of net sales, net income increased from 4.5% in the third quarter of
2002 to 4.9% in the third quarter of 2003.
Nine Months Ended September 30, 2003 Compared to the Nine Months Ended September
30, 2002
Net Sales. Net sales increased by approximately $42.6 million or 29.6% from
$143.8 million for the first nine months of 2002 to $186.4 million for the first
nine months of 2003. By segment, net sales increased $38.2 million, $2.0 million
and $2.4 million for the NN Europe Segment, the Plastic and Rubber Components
Segment and the Domestic Ball and Roller Segment, respectively. Within the NN
Europe Segment, $21.8 million of the increase is related to the inclusion of
five months of Veenendaal results which we acquired on May 2, 2003, $14.4
million is related to currency impacts and $2.0 million is related to increases
in demand. Within the Plastic and Rubber Components Segment and Domestic Ball
and Roller Segment the increase is principally related to increases in demand as
well as new programs within the Plastic and Rubber Components Segment.
Cost of Goods Sold. Cost of goods sold increased by $35.5 million or 33.0% from
$107.3 million for the first nine months of 2002 to $142.8 million for the first
nine months of 2003. By segment, cost of goods sold increased $1.9 million for
the Domestic Ball and Roller Segment, $2.9 million for the Plastic and Rubber
Components Segment and $30.7 million for the NN Europe Segment. Within the
Domestic Ball and Roller Segment the increase is principally related to
increased net sales demand. Within the NN Europe Segment, $18.2 million is
related to the inclusion of Veenendaal results due to the May 2, 2003
acquisition, $10.8 million is related to impact of currency exchange rates and
$1.7 million is principally related to increases in net sales demand and
material surcharges. Within the Plastic and Rubber Components Segment $0.2
million of the increase is related to cost increases and $0.1 million is related
to inventory write-offs within the Guadalajara, Mexico facility and $2.1 of the
increase is related to net sales demand related to other business units included
in the Segment.
Selling, General and Administrative. Selling, general and administrative
expenses increased by approximately $2.3 million, or 17.6%, from $13.3 million
for the first nine months of 2002 to $15.6 million for the first nine months of
2003. By segment, selling general and administrative expenses decreased $0.2
million for the Plastic and Rubber Components Segment due principally to
staffing reductions. For the Domestic Ball and Roller Segment and the NN Europe
Segment, selling, general and administrative expenses increased $0.1 million and
$2.4 million, respectively. Within the Domestic Ball and Roller Segment the
increase of $0.1 million consists of $0.3 million of non-cash compensation
charges associated with a portion of certain employee stock options offset by
$0.2 million of cost reductions. Within the NN Europe Segment, $1.6 million of
the increase is related to the inclusion of five months of Veenendaal results
which we acquired on May 2, 2003 and $1.1 million of the increase is related to
currency impacts. As a percentage of net sales, selling, general and
administrative expenses decreased from 9.3% for the first nine months of 2002 to
8.4% for the first nine months of 2003.
Depreciation and Amortization. Depreciation and amortization expenses increased
by $1.8 million, or 20.9%, from $8.4 million in the first nine months of 2002 to
$10.2 million for the first nine months of 2003. Within the NN Europe Segments
$1.0 million of the increase is related to the inclusion of five months of
Veenendaal results due to the May 2, 2003 acquisition and $0.7 million of the
increase is related to currency impacts. As a percentage of net sales,
depreciation and amortization expenses decreased from 5.9% for the first nine
months of 2002 to 5.5% for the first nine months of 2003.
18
Restructuring and Impairment Costs. Restructuring and impairment costs increased
by $2.4 million from $0.1 million for the first nine months of 2002 to $2.5
million for the first nine months of 2003. The increase is related to the
restructuring and impairment charges recorded in the second and third quarters
of 2003 due to the previously announced closure of our Guadalajara, Mexico
injection molding facility. The charges, net of gains recorded related to the
disposition of certain assets, consist of $2.2 million related to asset
write-downs to their estimated fair market values, including $1.3 million
related to goodwill, and $0.9 million related to property, plant and equipment.
In addition, a $0.3 million charge related to employee severance costs and lease
exit costs has been recorded.
Interest Expense. Interest expense increased by $0.3 million from $1.9 million
for the first nine months of 2002 to $2.2 million for the first nine months of
2003. The increase is attributed to increased debt levels due to the previously
announced acquisition of Veenendaal during May 2003, the previously announced
purchase of the 23% interest in Euroball held by INA/FAG during December 2002,
and the previously announced purchase of the 23% interest in Euroball held by
SKF during May 2003.
Minority Interest in Consolidated Subsidiary. Minority interest of consolidated
subsidiary decreased $1.3 million from $2.0 million for the first nine months of
2002 to $0.7 million for the first nine months of 2003. This decrease is due
entirely to the Euroball joint venture, which the Company has been required to
consolidate since its formation on August 1, 2000. During the first nine months
of 2002, minority interest in consolidated subsidiary represented the 46% of the
shares of the joint venture held by the minority partners. During the first nine
months of 2003, minority interest in consolidated subsidiary represents the 23%
of the shares of the joint venture held by SKF through May 2, 2003. On May 2,
2003 we purchased the 23% interest held by SKF. Effective May 2, 2003 and as of
September 30, 2003, we own 100% of the shares of Euroball. Minority interest in
consolidated subsidiary represents the combined interest in Euroball's earnings
of the minority partner and the 49% interest in NN Arte's earnings of the
minority partner (the 49% interest in NN Arte's earnings is zero in the first
nine months of 2002 and 2003).
Net Income. Net income increased by $1.1 million, or 17.7%, from $6.4 million in
the first nine months of 2002 to $7.5 million in the first nine months of 2003.
As a percentage of net sales, net income decreased from 4.4% in the first nine
months of 2002 to 4.0% in the first nine months of 2003.
Recent Developments
On October 9, 2003 we acquired certain assets comprised of land, building and
machinery and equipment of the precision ball operations of KLF - Gulickaren
("KLF"), based in Kysucke Nove Mesto, Slovakia. We paid consideration of
approximately 1.7 million Euros ($2.0 million). The assets will be utilized by
our newly established subsidiary AKMCH based in Kysucke Nove Mesto, Slovakia,
which will begin production in early 2004. The financial results of the
operations will be included in our NN Europe Segment.
Liquidity and Capital Resources
In connection with the acquisition of KLF's operations in Slovakia, on September
23, 2003 we entered into a $2.0 million short-term promissory note with AmSouth
Bank ("AmSouth") as the lender. This note, which bears interest at the prime
rate (4.0% at September 30, 2003), matures on November 14, 2003. We have
extended the maturity of this note for an additional 90 days. See Note 9 and
Note 11 of the Notes to Consolidated Financial Statements.
On May 1, 2003 in connection with the purchase of SKF's Veenendaal component
manufacturing operations and SKF's 23 percent interest in Euroball, we entered
into a new $90 million syndicated credit facility with AmSouth Bank ("AmSouth")
as the administrative agent and Suntrust Bank as the Euro loan agent for the
lenders under which we borrowed $60.4 million and 26.3 million Euros ($29.6
million). This new financing arrangement replaces our prior credit facility with
AmSouth and Euroball's credit facility with Hypo Vereinsbank Luxembourg, S.A.
The credit facility consists of a $30.0 million revolver expiring on March 1,
2005, bearing interest at a floating rate equal to LIBOR (1.16% at September 30,
2003) plus an applicable margin of 1.25 to 2.0, a $30.4 million term loan
expiring on May 1, 2008, bearing interest at a floating rate equal to LIBOR
(1.16% at September 30, 2003) plus an applicable margin of 1.25 to 2.0 and a
26.3 million ($29.6 million) Euros term loan expiring on May 1, 2008 which bears
interest at a floating rate
19
equal to Euro LIBOR (2.13% at September 30, 2003) plus an applicable margin of
1.25 to 2.0. The loan agreement contains customary financial and non-financial
covenants. Such covenants specify that we must maintain certain liquidity
measures. 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 credit facility is
un-collateralized except for the pledge of stock of certain foreign
subsidiaries. We were in compliance with all such covenants as of September 30,
2003.
Our arrangements with our domestic customers typically provide that payments are
due within 30 days following the date of shipment of goods by us, while
arrangements with certain export customers (other than export 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. Our net sales have historically been of a seasonal nature due to our
relative percentage of European business coupled with slower European production
during the month of August.
We bill and receive payment from some of our customers in Euro as well as other
currencies. To date, we have not been materially adversely affected by currency
fluctuations. Nonetheless, as a result of these sales, our foreign exchange
transaction and translation risk has increased. Various strategies to manage
this risk are available to management including producing and selling in local
currencies and hedging programs. As of September 30, 2003, no currency hedges
were in place. In addition, a strengthening of the U.S. dollar and/or Euro
against foreign currencies could impair our ability to compete with
international competitors for foreign as well as domestic sales.
Working capital, which consists principally of accounts receivable and
inventories, was $28.2 million at September 30, 2003 as compared to $21.2
million at December 31, 2002. The ratio of current assets to current liabilities
decreased from 1.53:1 at December 31, 2002 to 1.45:1 at September 30, 2003. Cash
flow from operations decreased to $8.3 million during the first nine months of
2003 from $21.4 million during the first nine months of 2002.
During 2003, we plan to spend approximately $9.0 million to $10.0 million on
capital expenditures of which approximately $7.1 million has been spent through
September 30, 2003 including the purchase of additional machinery and equipment
for all of our domestic facilities as well as four European facilities. We
intend to finance these activities with cash generated from operations and funds
available under the credit facilities described above. We believe that funds
generated from operations and borrowings from the credit facilities will be
sufficient to finance our working capital needs and projected capital
expenditure requirements through December 2004.
20
The Euro
We currently have operations in Italy, Germany, Ireland, and The Netherlands,
all of which are Euro participating countries, and sell product to customers in
many of the participating countries. The Euro has been adopted as the functional
currency at these locations.
Seasonality and Fluctuation in Quarterly Results
Our net sales historically have been of a seasonal nature due to a significant
portion of our sales to European customers that cease or significantly slow
production during the month of August.
Inflation and Changes in Prices
While the Company's operations have not been materially affected by inflation
during recent years, prices for 52100 Steel, engineered resins and other raw
materials purchased by the Company are subject to material change. For example,
during 1995, due to an increase in worldwide demand for 52100 Steel and the
decrease in the value of the United States Dollar relative to foreign
currencies, the Company experienced an increase in the price of 52100 Steel and
some difficulty in obtaining an adequate supply of 52100 Steel from its existing
suppliers. In the Company's U.S. operations our typical pricing arrangements
with steel suppliers are subject to adjustment once every six months. The
Company's NN Europe Segment has entered into long term agreements with its
primary steel supplier, which provide for standard terms and conditions and
annual pricing adjustments to offset material price fluctuations in steel. The
Company typically reserves the right to increase product prices periodically in
the event of increases in its raw material costs. In the past, the Company has
been able to minimize the impact on its operations resulting from the 52100
Steel price fluctuations by taking such measures. Certain sales agreements are
in effect with SKF and INA/FAG, which provide for minimum purchase quantities
and specified, annual sales price reductions that may be modified up or down for
changes in material costs. These agreements expire during 2006 and 2008.
Critical Accounting Policies
Our significant accounting policies, including the assumptions and judgments
underlying them, are disclosed in the Company's Annual Report on Form 10-K, as
amended, for the fiscal year ended December 31, 2002 including those policies as
discussed in Note 2. These policies have been consistently applied in all
material respects and address such matters as revenue recognition, inventory
valuation, asset impairment recognition, business combination accounting and
pension and postretirement benefits. Due to the estimation processes involved,
management considers the following summarized accounting policies and their
application to be critical to understanding the Company's business operations,
financial condition and results of operations. There can be no assurance that
actual results will not significantly differ from the estimates used in these
critical accounting policies.
Accounts Receivable. Substantially all of the Company's accounts receivable are
due primarily from the served markets: bearing manufacturers, automotive
industry, electronics, industrial, agricultural and aerospace. In establishing
allowances for doubtful accounts, the Company performs credit evaluations of its
customers, considering numerous inputs when available including the customers'
financial position, past payment history, relevant industry trends, cash flows,
management capability, historical loss experience and economic conditions and
prospects. While management believes that adequate allowances for doubtful
accounts have been provided in the Consolidated Financial Statements, it is
possible that the Company could experience additional unexpected credit losses.
Inventories. Inventories are stated at the lower of cost or market. Cost is
determined using the first-in, first-out method. The Company's inventories are
not generally subject to obsolescence due to spoilage or expiring product life
cycles. The Company operates generally as a make-to-order business; however, the
Company also stocks products for certain customers in order to meet delivery
schedules. While management believes that adequate write-downs for inventory
obsolescence have been made in the Consolidated Financial Statements, the
Company could experience additional inventory write-downs in the future.
21
Acquisitions and Acquired Intangibles. For new acquisitions, the Company uses
estimates, assumptions and appraisals to allocate the purchase price to the
assets acquired and to determine the amount of goodwill. These estimates are
based on market analyses and comparisons to similar assets. Annual tests are
required to be performed to assess whether recorded goodwill is impaired. The
annual tests require management to make estimates and assumptions with regard to
the future operations of its reporting units, the expected cash flows that they
will generate, and their market value. These estimates and assumptions therefore
impact the recorded value of assets acquired in a business combination,
including goodwill, and whether or not there is any subsequent impairment of the
recorded goodwill and the amount of such impairment.
Impairment of Long-Lived Assets. The Company's long-lived assets include
property, plant and equipment. The recoverability of the long-term assets is
dependent on the performance of the companies which the Company has acquired, as
well as volatility inherent in the external markets for these acquisitions. In
assessing potential impairment for these assets the Company will consider these
factors as well as forecasted financial performance. For assets held for sale,
appraisals are relied upon to assess the fair market value of those assets.
Future adverse changes in market conditions or adverse operating results of the
underlying assets could result in the Company having to record additional
impairment charges not previously recognized.
Pension and Post-Retirement Obligations. The Company uses several assumptions in
determining its periodic pension and post-retirement expense and obligations
which are included in the Consolidated Financial Statements. These assumptions
include determining an appropriate discount rate, rate of compensation increase
as well as the remaining service period of active employees. The Company uses an
independent actuary to calculate the periodic pension and post-retirement
expense and obligations based upon these assumptions and actual employee census
data.
22
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. Statements regarding capital expenditures,
future borrowings, and financial commitments are forward-looking statements.
Readers can identify forward-looking statements by the use of such verbs as
expects, anticipates, believes or similar verbs or conjugations of such verbs.
The Company's actual results could differ materially from those expressed in
such forward-looking statements due to important factors bearing on the
Company's business, many of which already have been discussed in this filing and
in the Company's prior filings. The differences could be caused by a number of
factors or combination of factors including, but not limited to, the risk
factors described below.
You should carefully consider the following risks and uncertainties, and all
other information contained in or incorporated by reference in this quarterly
report on Form 10-Q, before making an investment in our common stock. Any of the
following risks could have a material adverse effect on our business, financial
condition or operating results. In such case, the trading price of our common
stock could decline and you may lose all or part of your investment.
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 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:
23
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.
We do not have a hedging program in place 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. In the first nine months of 2003,
approximately 34% of the $42.6 million increase in revenues was attributable to
favorable currency fluctuations. 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 European 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 33% of
consolidated net sales in 2002, and sales to INA/FAG accounted for approximately
19% of consolidated net sales in 2002. Our recent acquisition at SKF's tapered
roller and metal cage production facility, along with the related long-term
supply agreement with SKF, will increase our dependence on SKF in the future.
During 2002, 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 2002. Recent consolidation of
certain of our bearing customers, including the acquisition at the Torrington
Company by Timken, will increase our dependence on a smaller number of
customers. The loss of all or a substantial portion of sales to these customers
would cause us to lose a substantial portion of our revenue and would lower our
profit margin and cash flows from operations.
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. The integration of any acquired businesses might cause us to incur
unforeseen costs, which would lower our profit margin and future earnings and
would prevent us from realizing the expected benefits of these acquisitions.
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
Euroball with our two largest bearing customers, SKF and INA/FAG, in 2000 and
acquired our bearing seal operations in
24
2001. During 2002, we purchased INA/FAG's minority interest in Euroball and on
May 2, 2003, we acquired SKF's minority interest in Euroball, to become the sole
owner at Euroball. On May 2, 2003 we acquired SKF's tapered roller and metal
cage manufacturing operations in Veenendaal, The Netherlands. 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.
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 our operating costs
to be higher than expected.
We have 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 have not always
operated at full capacity and from time to time our results of operations have
been adversely affected by the under-utilization of our production facilities,
and we face risks of further under-utilization or inefficient utilization of our
production facilities in future years.
The price of our common stock may be volatile.
The market price of our common stock could be subject to significant
fluctuations and may decline. Among the factors that could affect our stock
price are:
o our operating and financial performance and prospects;
o quarterly variations in the rate of growth of our financial
indicators, such as earnings per share, net income and revenues;
o changes in revenue or earnings estimates or publication of research
reports by analysts;
o loss of any member of our senior management team;
o speculation in the press or investment community;
o strategic actions by us or our competitors, such as acquisitions or
restructurings;
25
o sales of our common stock by stockholders;
o general market conditions; and
o domestic and international economic, legal and regulatory factors
unrelated to our performance.
The stock markets in general have experienced extreme volatility that has often
been unrelated to the operating performance of particular companies. These broad
market fluctuations may adversely affect the trading price of our common stock.
Provisions in our charter documents and Delaware law may inhibit a takeover,
which could adversely affect the value of our common stock.
Our certificate of incorporation and bylaws, as well as Delaware corporate law,
contain provisions that could delay or prevent a change of control or changes in
our management that a stockholder might consider favorable and may prevent you
from receiving a takeover premium for your shares. These provisions include, for
example, a classified board of directors and the authorization of our board of
directors to issue up to 5,000,000 preferred shares without a stockholder vote.
In addition, our restated certificate of incorporation provides that
stockholders may not call a special meeting.
We are a Delaware corporation subject to the provisions of Section 203 of the
Delaware General Corporation Law, an anti-takeover law. Generally, this statute
prohibits a publicly-held Delaware corporation from engaging in a business
combination with an interested stockholder for a period of three years after the
date of the transaction in which such person became an interested stockholder,
unless the business combination is approved in a prescribed manner. A business
combination includes a merger, asset sale or other transaction resulting in a
financial benefit to the stockholder. We anticipate that the provisions of
Section 203 may encourage parties interested in acquiring us to negotiate in
advance with our board of directors, because the stockholder approval
requirement would be avoided if a majority of the directors then in office
approve either the business combination or the transaction that results in the
stockholder becoming an interested stockholder.
These provisions apply even if the offer may be considered beneficial by some of
our stockholders. If a change of control or change in management is delayed or
prevented, the market price of our common stock could decline.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to changes in financial market conditions in the normal course of
our business due to our use of certain financial instruments as well as
transacting in various foreign currencies. To mitigate our exposure to these
market risks, we have established policies, procedures and internal processes
governing our management of financial market risks. We are exposed to changes in
interest rates primarily as a result of our borrowing activities. At September
30, 2003, these borrowings included a $30 million term loan and a $30 million
revolving credit facility which was used to maintain liquidity and fund our
business operations. At September 30, 2003, we had $55.9 million outstanding
under the domestic credit facilities and Euroball had 25.0 million Euro ($28.5
million) outstanding under the Euro term loan. At September 30, 2003, a
one-percent increase in the interest rate charged on our outstanding borrowings
under both credit facilities would result in interest expense increasing
annually by approximately $0.8 million. In connection with a variable EURIBOR
rate debt financing in July 2000 our majority owned subsidiary, Euroball entered
into an interest rate swap with a notional amount of Euro 12.5 million for the
purpose of fixing the interest rate on a portion of their debt financing. The
interest rate swap provides for us to receive variable Euribor interest payments
and pay 5.51% fixed interest. The interest rate swap agreement expires in July
2006 and the notional amount amortizes in relation to principal payments on the
underlying debt over the life of the swap. This original debt was repaid in May
2003, however, the swap remains pursuant to its original terms. On May 1, 2003,
we entered into a new $90 million syndicated credit facility. This new financing
arrangement replaces our prior credit facility with AmSouth and Euroball's
credit facility with Hypo Vereinsbank Luxembourg, S.A., see "Management's
Discussion and Analysis of Financial
26
Condition and Results of Operations - Liquidity and Capital Resources". The
nature and amount of our borrowings may vary as a result of future business
requirements, market conditions and other factors.
Translation of our operating cash flows denominated in foreign currencies is
impacted by changes in foreign exchange rates. Our NN Europe Segment, bills and
receives payments from some of its foreign customers in their own currency. To
date, we have not been materially adversely affected by currency fluctuations of
foreign exchange restrictions. However, to help reduce exposure to foreign
currency fluctuation, management has incurred debt in Euros and has periodically
used foreign currency hedges. These currency hedging programs allow management
to hedge currency exposures when these exposures meet certain discretionary
levels. We did not hold a position in any foreign currency hedging instruments
as of September 30, 2003.
Item 4. Controls and Procedures
a) As of September 30, 2003, we 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 changes in this fiscal quarter in the Company's
internal control over financial reporting or in other factors that
have materially affected, or are reasonably likely to materially
affect, the registrant's internal control over financial reporting.
27
Part II. Other Information
Item 1. Legal Proceedings
All 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. Change in Securities and Use of Proceeds
None
Item 3. Defaults upon Senior Securities
None
Item 4. Other Information
None
Item 5. Exhibits and Reports on Form 8-K.
(a) Exhibits Required by Item 601 of Regulation S-K
31.1 Certification of Chief Executive Officer pursuant to Section 302 of
Sarbanes-Oxley Act.
31.2 Certification of Chief Financial Officer pursuant to Section 302 of
Sarbanes-Oxley Act.
32.1 Certification of Chief Executive Officer pursuant to Section 906 of
Sarbanes-Oxley Act.
32.2 Certification of Chief Financial Officer pursuant to Section 906 of
Sarbanes-Oxley Act.
(b) Reports on Form 8-K
The Company furnished a Form 8-K, in response to Items 12 and 7, on
July 29, 2003 announcing its second quarter 2003 earnings.
The Company filed a Form 8-K, in response to Item 4, on August 25,
2003 announcing the dismissal of KPMG LLP as the Company's independent
auditors, following approval by the Audit Committee of the Company's
Board of Directors.
The Company filed an amended Form 8-K, in response to Items 4 and 7,
on August 26, 2003 to file the letter from KPMG to the Securities and
Exchange Commission.
The Company filed a Form 8-K, in response to Item 4, on August 26,
2003 announcing the appointment of PricewaterhouseCooopers LLP to
serve as the Company's independent auditors for the year ending
December 31, 2003, following approval by the Audit Committee of the
Company's Board of Directors.
28
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NN, Inc.
(Registrant)
Date: January 30, 2004 /s/ Roderick R. Baty
---------------- ---------------------------
Roderick R. Baty,
Chairman, President and
Chief Executive Officer
(Duly Authorized Officer)
Date: January 30, 2004 /s/ David L. Dyckman
---------------- ---------------------------
David L. Dyckman
Vice President - Corporate Development
Chief Financial Officer
(Principal Financial Officer)
(Duly Authorized Officer)
Date: January 30, 2004 /s/ William C. Kelly, Jr.
---------------- ---------------------------
William C. Kelly, Jr.,
Treasurer, Secretary and
Chief Administrative Officer
(Duly Authorized Officer)
Exhibit 31.1
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 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 report;
3. Based on my knowledge, the financial statements, and other
financial information included in this 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
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-15(e) and 15d-15(e)) for the registrant
and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, 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 report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our
conclusions about the effectiveness of the controls and
procedures, as of the end of the period covered by this report
based on such evaluation; and
(c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the
registrant's most recent fiscal quarter (the registrant's fourth
fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially
affect, the registrant's internal control over financial
reporting; and
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of the
registrant's board of directors (or persons performing the equivalent
functions):
(a) All significant deficiencies and material weaknesses in the
design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant's
ability to record, process, summarize and report financial
information; and
(b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal control over financial reporting.
Date: January 30, 2004
----------------
/s/ Roderick R. Baty
-----------------------------------
Roderick R. Baty
Chairman, President and
Chief Executive Officer
Exhibit 31.2
CERTIFICATIONS
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 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 report;
3. Based on my knowledge, the financial statements, and other
financial information included in this 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
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-15(e) and 15d-15(e)) for the registrant
and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, 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 report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our
conclusions about the effectiveness of the controls and
procedures, as of the end of the period covered by this report
based on such evaluation; and
(c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the
registrant's most recent fiscal quarter (the registrant's fourth
fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially
affect, the registrant's internal control over financial
reporting; and
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of the
registrant's board of directors (or persons performing the equivalent
functions):
(d) All significant deficiencies and material weaknesses in the
design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant's
ability to record, process, summarize and report financial
information; and
(b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal control over financial reporting.
Date: January 30, 2004
----------------
/s/ David L. Dyckman
---------------------------------------
David L. Dyckman
Chief Financial Officer
Exhibit 32.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER 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 interim period ended September 30, 2003, as filed with the Securities
and Exchange Commission on the date hereof (the "Report"), the undersigned, in
the capacity and date indicated below, hereby certifies pursuant to 18 U.S.C.
ss.1350, as adopted pursuant to ss.906 of the Sarbanes-Oxley Act of 2002, that,
to my 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: January 30, 2004 /s/ Roderick R. Baty
---------------- --------------------
Roderick R. Baty
Chairman, President and Chief
Executive Officer
[A signed original of this written statement required by Section 906 has
been provided to NN, Inc. and will be retained by NN, Inc. and furnished to
the Securities and Exchange Commission or its staff upon request.]
Exhibit 32.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER 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 interim period ended September 30, 2003, as filed with the Securities
and Exchange Commission on the date hereof (the "Report"), the undersigned, in
the capacity and date indicated below, hereby certifies pursuant to 18 U.S.C.
ss.1350, as adopted pursuant to ss.906 of the Sarbanes-Oxley Act of 2002, that,
to my 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: January 30, 2004 /s/ David L. Dyckman
---------------- --------------------
David L. Dyckman
Chief Financial Officer
[A signed original of this written statement required by Section 906 has been
provided to NN, Inc. and will be retained by NN, Inc. and furnished to the
Securities and Exchange Commission or its staff upon request.]