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, 2004
------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from _________ to _________
Commission File Number 0-23486
NN, Inc.
(Exact name of registrant as specified in its charter)
Delaware 62-1096725
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
2000 Waters Edge Drive
Building C, Suite 12
Johnson City, Tennessee 37604
(Address of principal executive offices, including zip code)
(423) 743-9151
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
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 November 5, 2004 there were 16,772,092 shares of the registrant's common
stock, par value $0.01 per share, outstanding.
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,
2004 and 2003 (unaudited)...............................................2
Condensed Consolidated Balance Sheets at September 30,
2004 (unaudited) and December 31, 2003 .................................3
Consolidated Statements of Changes in Stockholders'
Equity for the nine months ended September 30,
2004 and 2003 (unaudited)...............................................4
Consolidated Statements of Cash Flows for the nine
months ended September 30, 2004 and 2003 (unaudited)....................5
Notes to Consolidated Financial Statements (unaudited)...................6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.................................13
Item 3. Quantitative and Qualitative Disclosures about
Market Risk.........................................................24
Item 4. Controls and Procedures.............. ...............................26
Part II. Other Information
Item 1. Legal Proceedings...................................................27
Item 2. Change in Securities and Use of Proceeds............................27
Item 3. Defaults Upon Senior Securities.....................................27
Item 4. Other Information...................................................27
Item 5. Exhibits and Reports on Form 8-K....................................27
Signatures...................................................................29
-1-
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
NN, Inc.
Consolidated Statements of Income and Comprehensive Income
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
Thousands of Dollars, Except Per Share Data 2004 2003 2004 2003
- ------------------------------------------------------------------------------------------------------------------
Net sales $72,917 $64,612 $225,815 $ 186,415
Cost of products sold (exclusive of depreciation
shown separately below) 57,263 50,294 176,590 142,758
Selling, general and administrative 7,126 5,247 22,309 15,650
Depreciation and amortization 3,999 3,602 11,918 10,103
Restructuring and impairment costs -- (224) -- 2,498
----------- ----------- ------------ ------------
Income from operations 4,529 5,693 14,998 15,406
Interest expense, net 1,101 921 2,925 2,325
Other (income) expense, net (177) (38) (208) 272
----------- ----------- ------------ ------------
Income before provision for income taxes 3,605 4,810 12,281 12,809
Provision for income taxes 1,453 1,646 4,926 4,630
Minority interest in consolidated subsidiaries -- -- -- 675
----------- ----------- ------------ ------------
Net income 2,152 3,164 7,355 7,504
Other comprehensive income:
Foreign currency translation 1,184 1,292 (1,304) 5,460
----------- ----------- ------------ ------------
Comprehensive income $ 3,336 $ 4,456 $ 6,051 $ 12,964
=========== =========== ============ ============
Basic income per common share: $ 0.13 $ 0.19 $ 0.44 $ 0.48
=========== =========== ============ ============
Weighted average shares outstanding 16,767 16,660 16,721 15,804
=========== =========== ============ ============
Diluted income per common share: $ 0.13 $ 0.18 $ 0.43 $ 0.46
=========== =========== ============ ============
Weighted average shares outstanding 17,135 17,167 17,142 16,194
=========== =========== ============ ============
Cash dividends per common share $ 0.08 $ 0.08 $ 0.24 $ 0.24
=========== =========== ============ ============
See accompanying notes.
-2-
NN, Inc.
Condensed Consolidated Balance Sheets
(Unaudited)
September 30, December 31,
Thousands of Dollars 2004 (Unaudited) 2003
- -----------------------------------------------------------------------------------------------------------------
Assets
Current assets:
Cash and cash equivalents $ 7,773 $ 4,978
Accounts receivable, net 50,656 40,864
Inventories, net 32,292 36,278
Other current assets 6,092 6,299
------------------ ------------------
Total current assets 96,813 88,419
Property, plant and equipment, net 125,463 128,996
Assets held for sale -- 1,805
Goodwill, net 42,544 42,893
Other assets 4,871 4,304
------------------ ------------------
Total assets $ 269,691 $ 266,417
================== ==================
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 37,418 $ 32,867
Accrued salaries and wages 12,106 12,032
Short-term debt -- 2,000
Current maturities of long-term debt 6,523 12,725
Other current liabilities 6,519 3,070
------------------ ------------------
Total current liabilities 62,566 62,694
Non-current deferred tax liability 14,102 13,423
Long-term debt 70,735 69,752
Accrued pension and other 13,355 14,080
------------------ ------------------
Total liabilities 160,758 159,949
Total stockholders' equity 108,933 106,468
------------------ ------------------
Total liabilities and stockholders' equity $ 269,691 $ 266,417
================== ==================
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
Shares value capital Earnings Income (Loss) Total
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, January 1, 2003 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
=========== ======== =========== ============ ============= ============
Balance, January 1, 2004 16,712 $168 $ 52,960 $ 43,931 $ 9,409 $106,468
Shares issued 60 -- 430 -- -- 430
Net income -- -- -- 7,355 -- 7,355
Dividends declared -- -- -- (4,016) -- (4,016)
Other comprehensive (loss) -- -- -- -- (1,304) (1,304)
----------- ------- ---------- ----------- ------------ -----------
Balance, September 30, 2004 16,772 $168 $ 53,390 $ 47,270 $ 8,105 $108,933
=========== ======== =========== ============ ============= ============
See accompanying notes.
-4-
NN, Inc.
Consolidated Statements of Cash Flows
(Unaudited)
Nine Months Ended
September 30,
Thousands of Dollars 2004 2003
- -------------------------------------------------------------------------------------------------------------
Operating Activities:
Net income $ 7,355 $ 7,504
Adjustments to reconcile net income to net cash provided (used) by operating
activities:
Depreciation and amortization 11,918 10,103
Amortization of debt issue costs 106 128
Write-off of unamortized debt issue costs 260 455
Gain (loss) on disposal of property, plant and equipment 30 (145)
Interest income on note receivable 77 61
Minority interest in consolidated subsidiary -- 675
Restructuring costs and impairment costs -- 2,742
Changes in operating assets and liabilities:
Accounts receivable (9,609) (14,506)
Inventories 3,587 (3,736)
Other current assets (717) (594)
Other assets (306) (3,056)
Accounts payable 4,897 6,653
Income taxes payable 2,079 (128)
Other liabilities 2,299 2,015
------------ -----------
Net cash provided by operating activities 21,976 8,171
------------ -----------
Investing Activities:
Acquisition of Veenendaal, The Netherlands -- (17,933)
Purchase of minority interest -- (15,583)
Acquisition of property, plant, and equipment (7,999) (7,100)
Proceeds from disposals of property, plant and equipment 51 145
------------ -----------
Net cash used by investing activities (7,948) (40,471)
------------ -----------
Financing Activities:
Proceeds from long-term debt 40,000 89,745
Proceeds from short-term debt -- 2,000
Book overdraft -- (37)
Debt issue costs paid (771) (823)
Repayment of long-term debt (44,642) (60,962)
Repayment of short-term debt (2,000) --
Proceeds from issuance of stock 431 5,498
Dividends paid (4,016) (3,895)
------------ -----------
Net cash provided (used) by financing activities (10,998) 31,526
------------ -----------
Effect of exchange rate changes on cash and cash equivalents (235) 420
Net Change in Cash and Cash Equivalents 2,795 (354)
Cash and Cash Equivalents at Beginning of Period 4,978 5,144
------------ -----------
Cash and Cash Equivalents at End of Period $ 7,773 $ 4,790
============ ===========
Supplemental schedule of non-cash investing and financing activities:
Stock issued related to acquisition on 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 our independent registered public accounting firm,
except that the balance sheet at December 31, 2003 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,
2004 and 2003, the Company's financial position at September 30, 2004 and
December 31, 2003, and the cash flows for the nine month periods ended September
30, 2004 and 2003. 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 which we filed with the Securities and Exchange Commission
on March 15, 2004.
The results for the first, second and third quarters of 2004 are not necessarily
indicative of future results.
Certain 2003 amounts have been reclassified to conform with the 2004
presentation.
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 Europe ApS (formerly known as NN Euroball ApS) entered into an
interest rate swap with a notional amount of 12.5 million Euro 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, 2004, the fair value of the swap was approximately $264,000,
which is recorded as a component of other non-current liabilities. The change in
fair value during the nine month periods ended September 30, 2004 and 2003 was a
gain of approximately $73,000 and a loss of $63,000, 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):
September 30, December 31,
2004 2003
------------------ -----------------
Raw materials $ 8,392 $ 8,492
Work in process 6,160 6,808
Finished goods 19,012 22,128
Less inventory reserves (1,272) (1,150)
------------------ -----------------
$ 32,292 $ 36,278
================== =================
Inventories on consignment at customer locations as of September 30, 2004 and
December 31, 2003 were $4,341 and $3,046, 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 2004 2003 2004 2003
Data
- --------------------------------------------------- ------------- ------------- ------------- ------------
Net income $ 2,152 $ 3,164 $ 7,355 $ 7,504
============= ============= ============= ============
Weighted average basic shares 16,767,092 16,660,350 16,720,515 15,804,069
Effect of dilutive stock options 367,414 506,293 421,633 389,831
------------- ------------- ------------- ------------
Weighted average dilutive shares outstanding 17,134,506 17,166,643 17,142,148 16,193,900
============= ============= ============= ============
Basic net income per share $ 0.13 $ 0.19 $ 0.44 $ 0.48
============= ============= ============= ============
Diluted net income per share $ 0.13 $ 0.18 $ 0.43 $ 0.46
============= ============= ============= ============
Excluded from the shares outstanding for each of the periods ended September 30,
2004 and 2003 were 438,000 and 0 antidilutive options, respectively, which had
an exercise price of $12.62 as of September 30, 2004.
Note 5. Segment Information
During 2004 and 2003, 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, Pinerolo, Italy, Kysucke Nove Mesto, Slovakia, which began production
in the second quarter of 2004, and Veenendaal, The Netherlands ("Veenendaal")
which is 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 and
The Delta Rubber Company ("Delta") business, located in Danielson, Connecticut.
IMC is engaged in the production of plastic injection molded products for the
bearing, automotive, instrumentation, fiber optic and general industrial
markets. Delta is engaged principally in the production of engineered bearing
seals used principally in automotive, industrial, agricultural, mining and
aerospace applications.
-7-
The accounting policies of each segment are the same as those described in the
summary of significant accounting policies in the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 2003, 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, 2004 or 2003.
Three Months Ended September 30,
2004 2003
-----------------------------------------------------------------------------------------
Plastic and Domestic Plastic and
Domestic Ball NN Europe Rubber Ball & NN Europe Rubber
Thousands of Dollars & Roller Segment Components Roller Segment Components
- -----------------------------------------------------------------------------------------------------------------------
Revenues from external
customers $ 14,440 $ 45,485 $ 12,992 $ 14,414 $ 37,784 $ 12,414
Pretax profit (loss) 233 3,874 (502) 1,090 2,897 823
Assets 51,818 160,594 57,279 53,077 144,560 57,989
Nine Months Ended September 30,
2004 2003
-----------------------------------------------------------------------------------------
Plastic and Domestic Plastic and
Domestic Ball NN Europe Rubber Ball & NN Europe Rubber
Thousands of Dollars & Roller Segment Components Roller Segment Components
- -----------------------------------------------------------------------------------------------------------------------
Revenues from external
customers $ 43,417 $143,926 $ 38,472 $ 42,588 $104,829 $ 38,998
Pretax profit (loss) 862 10,752 667 3,469 9,871 (531)
Assets 51,818 160,594 57,279 53,077 144,560 57,989
Note 6. Acquisitions and Joint Ventures
On May 2, 2003 we acquired the 23 percent interest in NN Europe, ApS ("NN
Europe") (formerly known as NN Euroball ApS) held by SKF. On March 12, 2004 we
changed the name of our primary European entity from NN Euroball, ApS to NN
Europe ApS. To avoid confusion between the entity and the segment, we will refer
to the segment as the NN Europe Segment and the entity as NN Europe. 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 NN Europe.
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 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 unaudited pro-forma summary presents the financial information for
the nine month period ended September 30, 2003 as if our Veenendaal acquisition
had occurred as of the beginning of the period 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.
-8-
Nine months ended
September 30, 2003
(In thousands, except per share data) (unaudited)
------------------------------------------------------------------------
Net sales $197,209
Net income 8,168
Basic earnings per share 0.52
Diluted earnings per share 0.50
Note 7. New Accounting Pronouncements
On March 31, 2004, the FASB issued an Exposure Draft, "Share-Based Payment",
that addresses the accounting for share-based payment transactions in which an
enterprise receives employee services in exchange for (a) equity instruments of
the enterprise or (b) liabilities that are based on the fair value of the
enterprise's equity instruments or that may be settled by the issuance of such
equity instruments. The proposed Statement would eliminate the ability to
account for share-based compensation transactions using APB Opinion No. 25,
"Accounting for Stock Issued to Employees", and generally would require instead
that such transactions be accounted for using a fair-value method. On October
13, 2004, the FASB announced the final Statement for public companies would be
effective for any interim or annual period beginning after June 15, 2005. We are
currently evaluating the impacts of this Exposure Draft on the Company's
consolidated financial statements.
On May 19, 2004, the Financial Accounting Standards Board ("FASB") issued FASB
Staff Position (FSP) No. 106-2, "Accounting and Disclosure Requirements Related
to the Medicare Prescription Drug, Improvement and Modernization Act of 2003",
which supersedes FSP No. 106-1, "Accounting and Disclosure Requirements Related
to the Medicare Prescription Drug, Improvement and Modernization Act of 2003,"
(the Act). FSP No. 106-2 permits a sponsor of a postretirement health care plan
that provides a prescription drug benefit to make a one-time election to defer
accounting for the effects of the Act until authoritative guidance on accounting
for subsidies provided by the Act is issued. The Act introduces a prescription
drug benefit under Medicare as well as a federal subsidy to sponsors of retiree
health care benefit plans. The Company does not anticipate that the Act will
have an effect on the Company's Financial Statements.
In December 2003, the FASB issued Financial Interpretation No. 46(R),
"Consolidation of Variable Interest Entities," ("FIN 46(R)"). This
interpretation addresses consolidation by business enterprises of variable
interest entities with certain defined characteristics and replaces Financial
Interpretation No. 46. The interpretation was effective January 1, 2004 for
variable interest entities existing prior to February 2003. FIN 46(R) did not
have a significant impact on the Company's consolidated financial statements.
In December 2003 the FASB issued SFAS No. 132 (revised 2003), "Employers'
Disclosures about Pensions and Other Postretirement Benefits". SFAS No. 132R
revises employers' disclosures about pension plans and other postretirement
benefit plans. It does not change the measurement or recognition of those plans
required by FASB Statements No. 87, "Employers' Accounting for Pensions", No.
88, "Employers' Accounting for Settlements and Curtailments of Defined Benefit
Pensions Plans and for Termination Benefits, and No. 106, "Employers' Accounting
for Postretirement Benefits Other Than Pensions". SFAS No. 132R requires
additional disclosures to those in the original Statement 132 about the assets,
obligations, cash flows, and net periodic benefit cost of defined benefit
pension plans and other defined benefit postretirement plans. With certain
exceptions, principally related to disclosure requirements of foreign plans,
SFAS No. 132R is effective for financial statements with fiscal years ending
after December 15, 2003.We have complied with the disclosure requirements of
SFAS No. 132R.
We have a defined benefit pension plan covering the employees at our Eltmann,
Germany facility. The benefits are based on the expected years of service
including the rate of compensation increase. The plan is unfunded.
-9-
Components of Net Periodic Pension Cost:
Three months ended Nine months ended
September 30, September 30,
(in thousands of dollars) 2004 2003 2004 2003
- ----------------------------------------------------------- ----------- ------------
Service cost $26 $29 $ 78 $ 86
Interest cost 58 52 174 156
Amortization of net gain -- 2 -- 7
------------ ----------- ----------- ------------
Net periodic pension cost $84 $83 $252 $249
============ =========== =========== ============
We expect to contribute approximately $0.3 million to our pension plan in 2004.
As of September 30, 2004, approximately $0.3 million of contributions have been
made.
-10-
Note 8. 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 $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) (the "$90 million credit facility"). This financing arrangement
replaced our prior credit facility with AmSouth and Hypo Vereinsbank Luxembourg,
S.A. The credit facility as originally entered into consisted of a $30.0 million
revolver ("$30.0 million revolver") expiring on March 15, 2005, subsequently
extended to March 31, 2006 bearing interest at a floating rate equal to LIBOR
(2.02% at September 30, 2004) 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 (2.02% at September 30, 2004) plus an applicable margin of 1.25%
to 2.0% and a 26.3 million Euro ($29.6 million) term loan ("26.3 million Euro
term loan") expiring on May 1, 2008 which bears interest at a floating rate
equal to Euro LIBOR (2.15% at September 30, 2004) plus an applicable margin of
1.25% to 2.0%. All amounts owed under the $30.4 million term loan were paid
during the second quarter of 2004 with the proceeds from our $40 million notes
and we no longer have borrowing capacity under that portion of the $90 million
credit facility. The terms of the $30.0 million revolver and the 26.3 million
Euro term loan remain unchanged. 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, 2004.
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
(the "$2.0 million note") with AmSouth as the lender. This note bore interest at
the prime rate. All amounts owed under this note were paid during the second
quarter of 2004 with the proceeds from our $40 million notes.
On March 23, 2004 we entered into a $2.7 million short-term promissory note (the
"$2.7 million note") with AmSouth Bank ("AmSouth") as the lender. This note bore
interest at the prime rate. This agreement was entered into to fund short term
operating capital requirements. All amounts owed under this note were paid
during the second quarter of 2004 with the proceeds from our $40 million notes.
On April 26, 2004 we issued $40.0 million aggregate principal amount of senior
notes in a private placement (the "$40 million notes"). These notes bear
interest at a fixed rate of 4.89% and mature on April 26, 2014. Interest is paid
semi-annually. As of September 30, 2004, $40.0 million remained outstanding.
Annual principal payments of approximately $5.7 million begin on April 26, 2008
and extend through the date of maturity. Proceeds from this credit facility were
used to repay our existing US dollar denominated term loan, $24 million, and
repay a portion, of our borrowings under our US dollar denominated revolving
credit facility, $13 million, which are both components of our $90 million
credit facility, and to repay borrowings remaining under our $2.0 million note
and our $2.7 million note of $2 million and $1 million, respectively. The
agreement contains customary financial and non-financial covenants. Such
covenants specify that we must maintain certain liquidity measures. The
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. No event of default had occurred as of
September 30, 2004. The notes are not collateralized except for the pledge of
stock of certain foreign subsidiaries. We incurred $0.7 million of related costs
as a result of issuing these notes which have been recorded as a component of
other non-current assets and are being amortized over the term of the notes. In
connection with the issuance of the $40 million notes, capitalized costs in the
amount of approximately $0.3 million associated with structuring of the $90
million credit facility were written off during the three months ended June 30,
2004 and are included as a component of other (income) expense.
-11-
Note 9. Goodwill
The changes in the carrying amount of goodwill for the twelve and nine month
periods ended December 31, 2003 and September 30, 2004, respectively, are as
follows:
In thousands of dollars Plastic and Rubber
Components Segment NN Europe Segment Total
------------------- ------------------- ----------------
Balance as of January 1, 2003 $ 26,712 $ 12,662 $ 39,374
Goodwill acquired -- 2,151 2,151
Impairment losses (1,285) -- (1,285)
Currency impacts/reclassification 328 2,325 2,653
------------------- ------------------- ----------------
Balance as of December 31, 2003 $ 25,755 $ 17,138 $ 42,893
=================== =================== ================
Plastic and Rubber
In thousands of dollars Components Segment NN Europe Segment Total
------------------- ------------------- ----------------
Balance as of January 1, 2004 $ 25,755 $ 17,138 $ 42,893
Currency impacts -- (349) (349)
------------------- ------------------- ----------------
Balance as of September 30, 2004 $ 25,755 $ 16,789 $ 42,544
=================== =================== ================
Note 10. Stock Compensation
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 our 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 the three and
nine month periods ended September 30, 2004 and September 30, 2003, except as
related to stock options accounted for under the variable method of accounting.
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 changed to the pro-forma amounts indicated below:
Three months ended Nine months ended
September 30, September 30,
In Thousands, Except per Share Data 2004 2003 2004 2003
- -------------------------------------------------- ------------ ----------- ------------ -----------
Net income - as reported $ 2,152 $ 3,164 $ 7,355 $ 7,504
Stock based compensation costs (income), net of
income tax, included in net income as
reported (98) (5) (86) 195
Stock based compensation costs, net of income
tax, that would have been included in net
income if the fair value method had been
applied (388) (424) (442) (494)
------------ ----------- ------------ -----------
Net income - pro-forma $ 1,666 $ 2,735 $ 6,827 $ 7,205
============ =========== ============ ===========
Basic earnings per share - as reported $ 0.13 $ 0.19 $ 0.44 $ 0.48
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) (0.03) (0.03) (0.03)
------------ ----------- ------------ -----------
Basic earnings per share - pro-forma $ 0.10 $0.16 $ 0.41 $ 0.46
============ =========== ============ ===========
-12-
Earnings per share-assuming dilution - as
reported $ 0.13 $ 0.18 $ 0.43 $ 0.46
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 (0.02) (0.02) (0.02) (0.03)
------------ ----------- ------------ -----------
Earnings per share - assuming dilution-pro-forma $ 0.10 $ 0.16 $ 0.40 $ 0.44
============ =========== ============ ===========
The fair value of each option grant was estimated based on actual information
available through September 30, 2004 and 2003 using the Black Scholes
option-pricing model with the following assumptions:
Term Vesting period
- ---- --------------
Risk free interest rate 3.50% and 3.28% at September 30, 2004 and 2003, respectively
Dividend yield 2.79% and 3.66% at September 30, 2004 and 2003, respectively
Volatility 48.88% and 50.62% at September 30, 2004 and 2003, respectively
Note 11. Lease Commitment
On June 1, 2004, our wholly owned subsidiary, NN Precision Bearing Products
Company LTD, entered into a twenty year lease agreement with Kunshan Tian Li
Steel Structure Co. LTD for the lease of land and building (approximately
110,000 square feet) in the Kunshan Economic and Technology Development Zone,
Jiangsu, The People's Republic of China. The building will be newly constructed
and we expect to begin usage of the leased property during the second quarter of
2005. The land and building remain under the control of the lessor until such
time as usage of the leased property commences. The agreement satisfies the
requirements of a capital lease at June 1, 2004 and we anticipate recording the
lease as a capital lease in our Consolidated Financial Statements when usage of
the leased property begins. Accordingly, as of September 30, 2004, no amount has
been recorded related to the asset and corresponding obligation associated with
the lease agreement in our Consolidated Financial Statements. We estimate the
fair value of the land and building to be approximately $2.0 million and
undiscounted annual lease payments of approximately $0.2 million (approximately
$4.1 million aggregate non-discounted lease payments over the twenty year term).
The lease terms include fair value buy-out provisions and we maintain the option
to extend the lease term.
Note 12. Subsequent Event
On October 27, 2004 we completed the sale of our idle warehouse in Kilkenny,
Ireland for approximately 1.6 million euro ($2.0 million), net of selling costs
incurred. As a result of this transaction, we anticipate recording a loss on
sale of fixed assets of approximately 0.1 million euro ($0.1 million) during the
fourth quarter which will be recorded as a component of Other (income) expense,
net. As of December 31, 2003 and September 30, 2004 this asset has been
classified as a component of Property, plant and equipment, net. Proceeds
received from the sale of this asset will be used to repay a portion of our $90
million credit facility.
-13-
Item 2. Management's Discussion and Analysis of Financial Condition and Results
Of Operations
Overview and Management Focus
Our strategy and management focus is based upon the following long-term
objectives:
o Captive growth, providing a competitive and attractive alternative to
the operations of our global customers
o Expansion of our bearing product offering, and
o Global expansion of our manufacturing base to better address the
global requirements of our customers
Management generally focuses on these trends and relevant market
indicators:
o Global industrial growth and economics
o Global automotive production rates
o Costs subject to the global inflationary environment, including, but
not limited to:
o Raw material
o Wages and benefits, including health care costs
o Energy
o Trends related to manufacturing's geographic migration of competitive
manufacturing
o Regulatory environment for United States public companies
o Currency and exchange rate movements and trends
o Interest rate levels and expectations
Management generally focuses on the following key indicators of operating
performance:
o Sales growth
o Cost of products sold levels
o Selling, general and administrative expense levels
o Net income
o Cash flow from operations and capital spending
Our core business is the manufacture and sale of high quality, precision steel
balls and rollers. In 2003, sales of balls and rollers accounted for
approximately 76% of the Company's total net sales with 63% and 13% of sales
from balls and rollers, respectively. Sales of metal bearing retainers accounted
for 4% and sales of precision molded plastic and rubber parts accounted for the
remaining 20%.
Since our formation in 1980 we have grown primarily through the displacement of
captive ball manufacturing operations of domestic and international bearing
manufacturers resulting in increased sales
-14-
of high precision balls for quiet bearing applications. Management believes that
our core business sales growth since our formation has been due to our ability
to capitalize on opportunities in global markets and provide precision products
at competitive prices, as well as our emphasis on product quality and customer
service.
Results of Operations
Three Months Ended September 30, 2004 Compared to the Three Months Ended
September 30, 2003
Net Sales. Net Sales increased by approximately $8.3 million, or 12.9%, from
$64.6 million for the third quarter of 2003 to $72.9 million for the third
quarter of 2004. By segment, sales increased $7.7 million and $0.6 million for
the NN Europe Segment and the Plastic and Rubber Components Segment,
respectively. Within the NN Europe Segment, $4.4 million of the increase is
related to increases in product demand and $3.2 million is related to the impact
of currency exchange rates. Within the Plastic and Rubber Components Segment,
the total increase of $0.6 million is related to increases in product demand.
Net Sales remained approximately unchanged for the Domestic Ball and Roller
Segment.
Cost of Products Sold. Cost of products sold increased by approximately $7.0
million, or 13.9%, from $50.3 million for the third quarter of 2003 to $57.3
million for the third quarter of 2004. By segment, cost of products sold
increased $5.7 million and $1.3 million for the NN Europe Segment and the
Plastic and Rubber Components Segment, respectively. Within the NN Europe
Segment, $3.2 million of the increase is related to increases in product demand,
increased material costs and the impact of inventory reductions and $2.5 million
is related to the impact of currency exchange rates. Within the Plastic and
Rubber Components Segment, the total increase of $1.3 million is related to
increases in product demand and the impact of inventory reductions. Cost of
products sold remained approximately unchanged for the Domestic Ball and Roller
Segment. As a percentage of net sales, cost of products sold increased from
77.8% during the third quarter of 2003 to 78.5% during the third quarter of
2004.
The price of steel has risen over the last twelve to eighteen months with fourth
quarter of 2004 and possibly 2005 prices expected to reflect even greater
increases. The increase is principally due to general increases in global demand
and, more recently, due to China's increased consumption of steel. This has had
the impact of increasing scrap surcharges we pay in procuring our steel. Our
contracts with key customers allow us to pass a majority of the steel price
increases we incur on to those customers. However, by contract, material price
changes in any given year are typically passed along with price adjustments in
January of the following year. Until the current increases can be passed through
to our customers, income from operations, net income and cash flow from
operations will be adversely affected.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased by approximately $1.9 million, or 35.8%, from
$5.2 million for the third quarter of 2003 to $7.1 million for the third quarter
of 2004. By segment, selling, general and administrative expenses increased $0.9
million, $0.6 million and $0.3 million for the NN Europe Segment, Domestic Ball
and Roller Segment and the Plastic and Rubber Components Segment, respectively.
Within the NN Europe Segment, $0.6 million of the increase is related to the
start-up of our previously announced Level 3 program which integrates the
principles of Lean Enterprise, Six Sigma and Total Productive Maintenance (the
"Level 3 Program"), expenses associated with our Slovakia ball production
facility and severance costs, and, $0.3 million is related to the impact of
currency exchange rates. Within the Domestic Ball and Roller Segment, the
increase of $0.6 million is principally related to Sarbanes-Oxley compliance
efforts in the area of internal controls and the Level 3 Program. Within the
Plastic and Rubber Components Segment, the $0.3 million increase is principally
related to employee severance. As a percentage of net sales, selling, general
and administrative expenses increased from 8.1% during the third quarter of 2003
to 9.8% during the third quarter of 2004.
Depreciation and Amortization. Depreciation and amortization expenses increased
by approximately $0.4 million or 11.0% from $3.6 million for the third quarter
of 2003 to $4.0 million for the third quarter of 2004. Principally all of the
$0.4 million increase is attributable to the NN Europe Segment. Within the NN
Europe Segment, $0.2 million of the increase is related to capital investments
in machinery, equipment and processes and $0.2 million of the increase is
related to the impact of foreign currency exchange rates. As a percentage of net
sales, depreciation and amortization expense decreased from 5.6% during the
third
-15-
quarter of 2003 to 5.5% during the third quarter of 2004.
Restructuring and Impairment Costs. Restructuring and impairment costs increased
by $0.2 million from ($0.2 million) in the third quarter of 2003 to $0 in the
third quarter of 2004. The increase is related to gains recorded during the
third quarter of 2003 associated with the disposition of certain previously
impaired NN Arte assets. Restructuring and impairment charges were (0.4%) of net
sales in the third quarter of 2003 and 0% of net sales in the third quarter of
2004.
Interest Expense. Interest expense increased by approximately $0.2 million from
$0.9 million in the third quarter of 2003 to $1.1 million in the third quarter
of 2004. The increase is principally related to our April 26, 2004 issuance of
our $40.0 million aggregate principal amount of senior notes in a private
placement. These notes bear interest at a fixed rate of 4.89%. See "Liquidity
and Capital Resources".
Net Income. Net income decreased by approximately $1.0 million, or 32.0%, from
$3.2 million in the third quarter of 2003 to $2.2 million in the third quarter
of 2004. As a percentage of net sales, net income decreased from 4.9% during the
third quarter of 2003 to 3.0% during the third quarter of 2004.
Nine Months Ended September 30, 2004 Compared to the Nine Months Ended September
30, 2003
Net Sales. Net Sales increased by approximately $39.4 million, or 21.1%, from
$186.4 million for the first nine months of 2003 to $225.8 million for the first
nine months of 2004. By segment, Net Sales increased $39.1 million and $0.8
million for the NN Europe Segment and the Domestic Ball and Roller Segment,
respectively. Net Sales decreased by $0.5 million for the Plastic and Rubber
Components Segment. Within the NN Europe Segment, $17.2 million of the increase
is related to our May 2, 2003 acquisition of Veenendaal and a full nine months
of its results included in 2004 versus five months of its results included in
the first nine months of 2003, $11.6 million is related to the impact of
currency exchange rates and $10.3 million is related to increases in product
demand. Within the Domestic Ball and Roller Segment, the increase of $0.8
million is principally related to increases in product demand. The decrease of
$0.5 million in the Plastic and Rubber Components Segment is principally related
increases in product demand of approximately $1.1 million offset by decreased
net sales of approximately $1.6 million resulting from to the closure of our
Guadalajara, Mexico injection molding facility in 2003.
Cost of Products Sold. Cost of products sold increased by approximately $33.8
million, or 23.7%, from $142.8 million for the first nine months of 2003 to
$176.6 million for the first nine months of 2004. By segment, cost of products
sold increased $32.9 million, $0.6 million and $0.3 million for the NN Europe
Segment, the Domestic Ball and Roller Segmet and the Plastic and Rubber
Components Segment, respectively. Within the NN Europe Segment, $14.4 million of
the increase is related to our May 2, 2003 acquisition of Veenendaal and a full
nine months of its results included in 2004 versus five months of its results
included in the first nine months of 2003, $9.2 million is related to the impact
of currency exchange rates and $9.3 million is related to increases in product
demand and the impact of inventory reductions. The increase of $0.3 million in
the Plastic and Rubber Components Segment is principally related increases in
product demand and the impact of inventory reductions of approximately $2.3
million offset by decreased cost of products sold of approximately $2.1 million
resulting from the closure of our Guadalajara, Mexico injection molding facility
in 2003. As a percentage of net sales, cost of products sold increased from
76.6% during the first nine months of 2003 to 78.2% during the first nine months
of 2004.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased by approximately $6.7 million, or 42.6%, from
$15.6 million for the first nine months of 2003 to $22.3 million for the first
nine months of 2004. By segment, selling, general and administrative expenses
increased $3.8 million, $2.4 million and $0.5 million for the NN Europe Segment,
Domestic Ball and Roller Segment and the Plastic and Rubber Components Segment,
respectively. Within the NN Europe Segment, $1.6 million of the increase is
related to our May 2, 2003 acquisition of Veenendaal and a full nine months of
its results included in 2004 versus five months of its results included in the
first nine months of 2003, $1.3 million is related to the start-up of our Level
3 Program, expenses associated with our Slovakia ball production facility and
employee severance and $0.9 million is related to the impact of currency
exchange rates. Within the Domestic Ball and Roller Segment, approximately $1.4
million is principally related to Sarbanes-Oxley compliance efforts in the area
of internal controls, approximately $0.7 million is related to our Level 3
Program and approximately $0.3 million is related to the start-up of our China
operation.
-16-
Within the Plastic and Rubber Components Segment, $0.3 million of the increase
is related to employee severance. As a percentage of net sales, selling, general
and administrative expenses increased from 8.4% during the first nine months of
2003 to 9.9% during the first nine months of 2004.
Depreciation and Amortization. Depreciation and amortization expenses increased
by approximately $1.8 million or 18.0% from $10.1 million for the first nine
months of 2003 to $11.9 million for the first nine months of 2004. Principally
all of the $1.8 million increase is attributable to the NN Europe Segment.
Within the NN Europe Segment, $1.0 million of the increase is related to our May
2, 2003 acquisition of Veenendaal and a full nine months of its results included
in 2004 versus five months of its results included in the first nine months of
2003, $0.2 million of the increase is related to capital investments in
machinery, equipment and processes and $0.6 million of the increase is related
to the impact of foreign currency exchange rates. As a percentage of net sales,
depreciation and amortization expense decreased from 5.4% during the first nine
months of 2003 to 5.3% during the first nine months of 2004.
Interest Expense. Interest expense increased by approximately $0.6 million from
$2.3 million in the first nine months of 2003 to $2.9 million in the first nine
months of 2004. Approximately $0.4 million of the increase is related to
increased debt levels due to the May 2003 acquisition of Veenendaal and the May
2003 purchase of the 23% interest in NN Europe held by SKF. Effective with the
completion of this transaction, we own 100% of NN Europe. Additionally,
approximately $0.2 million of the increase is related to our April 26, 2004
issuance of $40.0 million aggregate principal amount of senior notes in a
private placement. These notes bear interest at a fixed rate of 4.89%. See
"Liquidity and Capital Resources".
Net Income. Net income decreased by approximately $0.1 million, or 2.0%, from
$7.5 million in the first nine months of 2003 to $7.4 million in the first nine
months of 2004. As a percentage of net sales, net income decreased from 4.0%
during the first nine months of 2003 to 3.3% during the first nine months of
2004.
Liquidity and Capital Resources
On May 1, 2003 in connection with the purchase of SKF's Veenendaal component
manufacturing operations and SKF's 23 percent interest in NN Europe, we entered
into a $90 million syndicated credit facility with 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) (the "$90 million
credit facility") This financing arrangement replaced our prior credit facility
with AmSouth and NN Europe's credit facility with Hypo Vereinsbank Luxembourg,
S.A. The credit facility, as originally entered into, consisted of a $30.0
million revolver expiring on March 15, 2005, subsequently extended to March 31,
2006, bearing interest at a floating rate equal to LIBOR (2.02% at September 30,
2004) 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
(2.02% at September 30, 2004) plus an applicable margin of 1.25 to 2.0 and a
26.3 million Euro ($29.6 million) term loan expiring on May 1, 2008 which bears
interest at a floating rate equal to Euro LIBOR (2.15% at September 30, 2004)
plus an applicable margin of 1.25 to 2.0. All amounts owed under the $30.4
million term loan were paid during the second quarter of 2004 with the proceeds
from our $40 million notes and we no longer have borrowing capacity under that
portion of the $90 million credit facility. The terms of the $30.0 million
revolver and the 26.3 million Euro term loan remain unchanged. 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 not collateralized
except for the pledge of stock of certain foreign subsidiaries. No event of
default had occurred as of September 30, 2004.
On March 23, 2004 we entered into a $2.7 million short-term promissory note
("the $2.7 million note") with AmSouth Bank as the lender. This note bore
interest at the prime rate. This agreement was entered into to fund short term
operating capital requirements. All amounts owed under this note were paid
during the second quarter of 2004 with the proceeds from our $40 million notes.
See Note 8 of the Notes to Consolidated Financial Statements.
-17-
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 ("the $2.0
million note") with AmSouth as the lender. This note bore interest at the prime
rate. All amounts owed under this note were paid during the second quarter 2004
with the proceeds from our $40 million notes. See Note 8 of the Notes to
Consolidated Financial Statements.
On April 26, 2004 we issued $40.0 million aggregate principal amount of senior
notes in a private placement (the "$40 million notes"). These notes bear
interest at a fixed rate of 4.89% and mature on April 26, 2014. Interest is paid
semi-annually. As of September 30, 2004, $40.0 million remained outstanding.
Annual principal payments of approximately $5.7 million begin on April 26, 2008
and extend through the date of maturity. Proceeds from this credit facility were
used to repay our existing US dollar denominated term loan, $24 million, and
repay a portion of our borrowings under our US dollar denominated revolving
credit facility, $13 million, which are both components of our $90 million
credit facility, and to repay borrowings remaining under our $2.0 million note
and our $2.7 million note of $2 million and $1 million, respectively. The
agreement contains customary financial and non-financial covenants. Such
covenants specify that we must maintain certain liquidity measures. The
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. No event of default had occurred as of
September 30, 2004. The notes are not collateralized except for the pledge of
stock of certain foreign subsidiaries. We incurred $0.7 million of related costs
as a result of issuing these notes which have been recorded as a component of
other non-current assets and are being amortized over the term of the notes. In
connection with the issuance of the $40 million notes, capitalized costs in the
amount of approximately $0.3 million associated with structuring of the $90
million credit facility were written off during the three months ended June 30,
2004 and are included as a component of other (income) expense. See Note 8 of
the Notes to Consolidated Financial Statements.
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 Euros 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, 2004, 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 $34.2 million at September 30, 2004 as compared to $25.7
million at December 31, 2003. The ratio of current assets to current liabilities
increased from 1.41:1 at December 31, 2003 to 1.55:1 at September 30, 2004. Cash
flow from operations increased to $22.0 million during the first nine months of
2004 from $8.2 million during the first nine months of 2003. Contributing to the
improvement in cash flow from operations for the nine months ended September 30,
2004 was a reduction in inventory levels of approximately $3.6 million.
During 2004, we plan to spend approximately $9.0 million on capital expenditures
related primarily to equipment and process upgrades and replacements and
approximately $2.5 million principally related to geographic expansion of our
manufacturing base. Of these amounts approximately $8.0 million has been spent
through September 30, 2004. 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 September 2005.
On October 27, 2004 we completed the sale of our idle warehouse in Kilkenny,
Ireland for approximately
-18-
1.6 million euro ($2.0 million), net of selling costs incurred. As a result of
this transaction, we anticipate recording a loss on sale of fixed assets of
approximately 0.1 million euro ($0.1 million) during the fourth quarter which
will be recorded as a component of Other (income) expense, net. As of December
31, 2003 and September 30, 2004 this asset has been classified as a component of
Property, plant and equipment, net. Proceeds received from the sale of this
asset will be used to repay a portion of our $90 million credit facility.
During the fourth quarter of 2004 we anticipate selling our idled land and
building assets located in Walterboro, South Carolina in an auction sale. The
approximate $1.1 million carrying value of these assets is classified as a
component of Property, plant and equipment, net and is based principally upon
fair market value appraisals. While the net selling price of these assets is not
known, amounts we ultimately recover may differ from the assets carrying value
resulting in the recording of a gain or loss. No such amounts have been recorded
as of September 30, 2004. Any proceeds received from the sale of these assets
will be used to repay a portion of our $90 million credit facility.
New Accounting Pronouncements
On March 31, 2004, the FASB issued an Exposure Draft, "Share-Based Payment",
that addresses the accounting for share-based payment transactions in which an
enterprise receives employee services in exchange for (a) equity instruments of
the enterprise or (b) liabilities that are based on the fair value of the
enterprise's equity instruments or that may be settled by the issuance of such
equity instruments. The proposed Statement would eliminate the ability to
account for share-based compensation transactions using APB Opinion No. 25,
"Accounting for Stock Issued to Employees", and generally would require instead
that such transactions be accounted for using a fair-value method. On October
13, 2004, the FASB announced the final Statement for public companies would be
effective for any interim or annual period beginning after June 15, 2005. We are
currently evaluating the impacts of this Exposure Draft on the Company's
consolidated financial statements.
On May 19, 2004, the Financial Accounting Standards Board ("FASB") issued FASB
Staff Position (FSP) No. 106-2, "Accounting and Disclosure Requirements Related
to the Medicare Prescription Drug, Improvement and Modernization Act of 2003",
which supersedes FSP No. 106-1, "Accounting and Disclosure Requirements Related
to the Medicare Prescription Drug, Improvement and Modernization Act of 2003,"
(the Act). FSP No. 106-2 permits a sponsor of a postretirement health care plan
that provides a prescription drug benefit to make a one-time election to defer
accounting for the effects of the Act until authoritative guidance on accounting
for subsidies provided by the Act is issued. The Act introduces a prescription
drug benefit under Medicare as well as a federal subsidy to sponsors of retiree
health care benefit plans. The Company does not anticipate that the Act will
have an effect on the Company's Financial Statements.
In December 2003, the FASB issued Financial Interpretation No. 46(R),
"Consolidation of Variable Interest Entities," ("FIN 46(R)"). This
interpretation addresses consolidation by business enterprises of variable
interest entities with certain defined characteristics and replaces Financial
Interpretation No. 46. The interpretation was effective January 1, 2004 for
variable interest entities existing prior to February 2003. FIN 46(R) did not
have a significant impact on the Company's consolidated financial statements.
In December 2003, the FASB issued SFAS No. 132 (revised 2003), "Employers'
Disclosures about Pensions and Other Postretirement Benefits". SFAS No. 132R
revises employers' disclosures about pension plans and other postretirement
benefit plans. It does not change the measurement or recognition of those plans
required by FASB Statements No. 87, "Employers' Accounting for Pensions", No.
88, "Employers' Accounting for Settlements and Curtailments of Defined Benefit
Pensions Plans and for Termination Benefits, and No. 106, "Employers' Accounting
for Postretirement Benefits Other Than Pensions". SFAS No. 132R requires
additional disclosures to those in the original Statement 132 about the assets,
obligations, cash flows, and net periodic benefit cost of defined benefit
pension plans and other defined benefit postretirement plans. With certain
exceptions, principally related to disclosure requirements of foreign plans,
SFAS No. 132R is effective for financial statements with fiscal years ending
after December 15, 2003. As of September 30, 2004, we have complied with the
disclosure requirements of SFAS No. 132R.
-19-
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 general
inflation during recent years, prices for 52100 Steel and other steel related
raw materials have increased significantly during the past twelve months. 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, annual unit price adjustments, and
quarterly pricing adjustments in the form of scrap surcharges. In both our U.S.
and European operations, the steel price increases we have experienced are
related to increasing global demand for scrap and other steel related raw
materials, principally from China. While we reserve the right to increase
product prices periodically in the event of increases in its raw material costs,
our current contracts in effect with SKF and INA/FAG call for adjustments in
selling prices for raw material inflation to occur in January of the following
year. As such, the majority of the inflation we are currently experiencing in
raw material pricing will not be passed through until January 2005. For other
customers, we are currently in the process of adjusting pricing levels to
reflect the increases in steel pricing.
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, for
the fiscal year ended December 31, 2003 including those policies as discussed in
Note 1. These policies, which have not significantly changed since December 31,
2003 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. Accounts receivable are written off when considered to be
uncollectible. 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.
-20-
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-lived 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 as
of December 31, 2003, appraisals are relied upon to assess the fair market value
of those assets. The assets held for sale of $1.8 million as of December 31,
2003 have been reclassified as held for use effective March 31, 2004. The
amounts reclassified are carried at fair value which is lower than the carrying
amount before the assets were classified as held for sale adjusted for
depreciation expense. The reclassification of these assets did not have a
material impact to our income from operations, net income or cash flow from
operations for the three and nine months ended September 30, 2004. 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.
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.
-21-
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 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 42% of
consolidated net sales in 2003, and sales to INA/FAG accounted for approximately
16% of consolidated net sales in 2003. During 2003, our ten largest customers
accounted for approximately 77% of our consolidated net sales. None of our other
customers individually accounted for more than 5% of our consolidated net sales
for 2003. 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.
-22-
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:
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. Also, a decline in the value of the
Euro relative to the U.S. Dollar could 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.
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 NN
Europe with our two largest bearing customers, SKF and INA/FAG, in 2000 and
acquired our bearing seal operations in 2001. During 2002, we purchased
INA/FAG's minority interest in NN Europe and on May 2, 2003 we acquired SKF's
minority interest in NN Europe, to become the sole owner at NN Europe. On May 2,
2003 we acquired SKF's tapered roller and metal cage manufacturing operations in
Veenendaal, The Netherlands. On October 9, 2003 we acquired the precision ball
producing assets of KLF-Gulickaren in Kysucke Nove Mesto, Slovakia. 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.
-23-
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 NN Europe 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;
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.
-24-
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, 2004, we had $14.4 million outstanding under the domestic credit facilities,
$40.0 million aggregate principal amount of senior notes outstanding and NN
Europe had 18.4 million Euro ($22.8 million) outstanding under the Euro term
loan. See Note 8 of the Notes to Consolidated Financial Statements. At September
30, 2004, a one-percent increase in the interest rate charged on our outstanding
borrowings under our credit facilities, that are subject to variable interest
rates, would result in interest expense increasing annually by approximately
$0.4 million. In connection with a variable EURIBOR rate debt financing in July
2000 our majority owned subsidiary, NN Europe 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 the $90 million credit facility. This new financing arrangement
replaces our prior credit facility with AmSouth and NN Europe's credit facility
with Hypo Vereinsbank Luxembourg, S.A. On April 26, 2004, we issued $40.0
million of aggregate principal amounts of senior notes in a private placement,
replacing a portion of our $90 million credit facility, see "Management's
Discussion and Analysis of Financial 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.
-25-
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, 2004.
Item 4. Controls and Procedures
As of September 30, 2004, 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.
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.
-26-
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.
-27-
Reports on Form 8-K
The Company furnished a Form 8-K, in response to Item 5, on July 9, 2004
announcing its expected date of release of second quarter 2004 financial
results and conference call, and that increased Sarbanes-Oxley compliance
costs and additional inventory reduction would impact results for the
second quarter and full year.
The Company furnished a Form 8-K, in response to Items 5 and 7, on July 29,
2004 announcing its financial results for the second quarter ended June 30,
2004.
-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: November 9, 2004 /s/ Roderick R. Baty
---------------- ----------------------------------------
Roderick R. Baty,
Chairman, President and
Chief Executive Officer
(Duly Authorized Officer)
Date: November 9, 2004 /s/ David L. Dyckman
---------------- ----------------------------------------
David L. Dyckman
Vice President-Corporate Development
Chief Financial Officer
(Principal Financial Officer)
(Duly Authorized Officer)
Date: November 9, 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: November 9, 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):
(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: November 9, 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, 2004, 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 Section 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: November 9, 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, 2004, 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 Section 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: November 9, 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.]
