UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended March 31, 2005
--------------
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 May 6, 2005 there were 16,910,579 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 months ended March 31, 2005
and 2004 (unaudited).................................................2
Condensed Consolidated Balance Sheets at March 31, 2005
and December 31, 2004(unaudited).....................................3
Consolidated Statements of Changes in Stockholders' Equity
for the three months ended March 31, 2005 and 2004 (unaudited).......4
Consolidated Statements of Cash Flows for the three months
ended March 31, 2005 and 2004 (unaudited)............................5
Notes to Consolidated Financial Statements (unaudited)...............6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.................................14
Item 3. Quantitative and Qualitative Disclosures about Market Risk..........22
Item 4. Controls and Procedures.............................................23
Part II. Other Information
Item 1. Legal Proceedings...................................................24
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases
of Equity Securities................................................24
Item 3. Defaults Upon Senior Securities.....................................24
Item 4. Submission of Matters to a Vote of Security Holders.................24
Item 5. Other Information...................................................24
Item 6. Exhibits and Reports on Form 8-K....................................24
Signatures....................................................................25
1
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
NN, Inc.
Consolidated Statements of Income and Comprehensive Income
(Unaudited)
Three Months Ended
March 31,
Thousands of Dollars, Except Per Share Data 2005 2004
- -------------------------------------------------------------------------------------
Net sales $ 86,715 $ 77,632
Cost of products sold (exclusive of depreciation
shown separately below) 67,666 60,390
Selling, general and administrative 7,484 7,143
Depreciation and amortization 4,174 3,999
(Gain) loss on disposal of assets 4 (8)
----------- ----------
Income from operations 7,387 6,108
Interest expense, net 984 841
Other (income) expense (171) (48)
----------- ----------
Income before provision for income taxes 6,574 5,315
Provision for income taxes 2,551 2,097
----------- ----------
Net income 4,023 3,218
Other comprehensive income (loss):
Unrealized holding gain on securities, net
of tax (73) --
Foreign currency translation (4,070) (2,489)
----------- ----------
Comprehensive income (loss) $ (120) $ 729
=========== ==========
Basic income per common share: $ 0.24 $ 0.19
=========== ==========
Weighted average shares outstanding 16,889 16,712
=========== ==========
Diluted income per common share: $ 0.23 $ 0.19
=========== ==========
Weighted average shares outstanding 17,261 17,189
=========== ==========
Cash dividends per common share $ 0.08 $ 0.08
=========== ==========
See accompanying notes.
2
NN, Inc.
Condensed Consolidated Balance Sheets
(Unaudited)
March 31, December 31,
Thousands of Dollars 2005 2004
- ---------------------------------------------------------------------- ------------------ ----- ------------------
Assets
Current assets:
Cash and cash equivalents $ 4,445 $ 10,772
Accounts receivable, net 60,110 51,597
Inventories, net 34,272 35,629
Income tax receivable 3,072 4,401
Other current assets 10,050 5,939
------------------ ------------------
Total current assets 111,949 108,338
Property, plant and equipment, net 123,232 131,169
Goodwill, net 43,420 44,457
Other assets 5,983 5,905
------------------ ------------------
Total assets $ 284,584 $ 289,869
================== ==================
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 42,012 $ 45,217
Dividends payable 1,351 --
Accrued salaries and wages 14,285 16,332
Income taxes 3,229 1,599
Current maturities of long-term debt 7,240 7,160
Other current liabilities 5,040 4,123
------------------ ------------------
Total current liabilities 73,157 74,431
Non-current deferred tax liability 17,432 17,857
Long-term loans 65,031 67,510
Accrued pension and other 14,305 14,931
------------------ ------------------
Total liabilities 169,925 174,729
Total stockholders' equity 114,659 115,140
------------------ ------------------
Total liabilities and stockholders' equity $ 284,584 $ 289,869
================== ==================
See accompanying notes.
3
NN, Inc.
Consolidated Statements of Changes in Stockholders' Equity
(Unaudited)
Common Stock Accumulated
Number Additional Other
Of Par paid in Retained Comprehensive
Thousands of Dollars and Shares Shares value capital Earnings Income (Loss) Total
- ------------------------------------------- ----------- ----------- ------------- -------------- -------------- --------------
Balance, January 1, 2004 16,712 $168 $ 52,960 $ 43,931 $ 9,409 $ 106,468
Shares issued -- -- 2 -- -- 2
Net income -- -- -- 3,218 -- 3,218
Dividends declared -- -- -- (1,337) -- (1,337)
Other comprehensive income -- -- -- -- (2,489) (2,489)
----------- -------- ----------- ------------ ------------- ------------
Balance, March 31, 2004 16,712 $168 $ 52,962 $ 45,812 $ 6,920 $ 105,862
=========== ======== =========== ============ ============= ============
Balance, January 1, 2005 16,777 $168 $ 53,423 $ 45,676 $15,873 $ 115,140
Shares issued 134 2 988 -- -- 990
Net income -- -- -- 4,023 -- 4,023
Dividends declared -- -- -- (1,351) -- (1,351)
Unrealized holding gain on securities -- -- -- -- (73) (73)
Other comprehensive income -- -- -- -- (4,070) (4,070)
----------- -------- ----------- ------------ ------------- ------------
Balance, March 31, 2005 16,911 $170 $ 54,411 $ 48,348 $11,730 $ 114,659
=========== ======== =========== ============ ============= ============
See accompanying notes.
4
NN, Inc.
Consolidated Statements of Cash Flows
(Unaudited)
Three Months Ended
March 31,
Thousands of Dollars 2005 2004
- -------------------------------------------------------------------------------- ------------ -----------
Operating Activities:
Net income $ 4,023 $ 3,218
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Depreciation and amortization 4,174 3,999
(Gain) loss on disposals of property, plant and equipment 4 (8)
Amortization of debt issue costs 59 54
Changes in operating assets and liabilities:
Accounts receivable (9,990) (8,859)
Inventories 417 2,348
Income tax receivable 1,097 --
Other current assets (3,598) 67
Other assets (183) (129)
Accounts payable (1,600) 3,835
Other liabilities 1,086 1,625
------------ -----------
Net cash provided by (used in) operating activities (4,511) 6,150
------------ -----------
Investing Activities:
Acquisition of property, plant, and equipment (832) (2,322)
Proceeds from disposals of property, plant and equipment -- 36
----------- -----------
Net cash used in investing activities (832) (2,286)
----------- -----------
Financing Activities:
Proceeds from short-term debt -- 1,000
Repayment of long-term debt (1,289) (2,584)
Proceeds from issuance of stock 990 2
----------- -----------
Net cash used in financing activities (299) (1,582)
----------- -----------
Effect of exchange rate changes on cash and cash equivalents (685) (117)
Net Change in Cash and Cash Equivalents (6,327) 2,165
Cash and Cash Equivalents at Beginning of Period 10,772 4,978
------------ -----------
Cash and Cash Equivalents at End of Period $ 4,445 $ 7,143
============ ===========
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, 2004 is derived from the Company's
audited financial statements. In the opinion of the Company's management, the
financial statements reflect all adjustments necessary to present fairly the
results of operations for the three month periods ended March 31, 2005 and 2004,
the Company's financial position at March 31, 2005 and December 31, 2004, and
the cash flows for the three month period ended March 31, 2005 and 2004. 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 16, 2005.
The results for the first quarter of 2005 are not necessarily indicative of
future results.
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." 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 March 31, 2005, the fair value of the swap was approximately $154,000,
which is recorded in other non-current liabilities. The change in fair value
during the three month periods ended March 31, 2005 and 2004 was a loss of
approximately $14,000 and $8,000, 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):
March 31, December 31,
2005 2004
------------------- -------------------
Raw materials $ 8,265 $ 8,584
Work in process 6,541 6,356
Finished goods 21,086 22,334
Less inventory reserves (1,620) (1,645)
------------------- -------------------
$ 34,272 $ 35,629
=================== ===================
Inventories on consignment at customer locations as of March 31, 2005 and
December 31, 2004 were $3,963 and $3,755, respectively.
Note 4. Net Income Per Share
Three Months Ended
March 31,
Thousands of Dollars, Except Share and Per Share Data 2005 2004
- ------------------------------------------------------ ------------------- ------------------
Net income $ 4,023 $ 3,218
=================== ==================
Weighted average basic shares 16,888,524 16,711,651
Effect of dilutive stock options 372,260 477,099
------------------- -------------------
Weighted average dilutive shares outstanding 17,260,784 17,188,750
=================== ==================
Basic net income per share $0.24 $0.19
=================== ==================
Diluted net income per share $0.23 $0.19
=================== ==================
Excluded from the shares outstanding for each of the periods ended March 31,
2005 and 2004 were 357,000 and 438,000 antidilutive options, respectively, which
had exercise prices of $12.62 as of March 31, 2005 and March 31, 2004.
Note 5. Segment Information
During 2005 and 2004, 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. Additionally, costs related to our
start-up operation in China and corporate office costs are included in the
Domestic Ball and Roller Segment. The NN Europe Segment is comprised of
precision ball manufacturing facilities located in Kilkenny, Ireland, Eltmann,
Germany, Pinerolo, Italy, Veenendaal, The Netherlands ("Veenendaal") which is a
tapered roller and metal cage manufacturing operation and Kysucke Nove Mesto,
Slovakia, which began production in 2004. See Note 6, "Acquisitions, Joint
Ventures and New Business Expansion". 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 office automation 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, 2004. We evaluate segment
performance based on profit or loss from operations before income taxes. 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 month
periods ended March 31, 2005 or 2004.
Three Months Ended March 31,
2005 2004
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 $ 15,927 $ 55,937 $ 14,851 $ 14,427 $ 50,055 $ 13,150
customers
Segment pretax profit 1,322 4,550 702 767 3,790 758
Segment assets 52,250 171,380 60,954 50,033 160,321 57,671
Note 6. Acquisitions, Joint Ventures and New Business Expansion
During 2004, we formed a wholly-owned subsidiary, NN Precision Bearing Products
Company, LTD, ("NN Asia)". This subsidiary, which is expected to begin precision
ball production during the second half of 2005, will be located in the Kunshan
Economic and Technology Development Zone, Jiangsu, The People's Republic of
China and is a component of our strategy to globally expand our manufacturing
base. The costs incurred as a result of this start-up for the three month
periods ended March 31, 2005 and 2004 of approximately $0.2 million and $0.1
million, respectively, were expensed and are included in the Domestic Ball and
Roller Segment.
On October 9, 2003, we acquired certain assets comprised of land, building and
machinery and equipment of the precision ball operations of KLF - Gulickaren
("KLF"), based in Kysucke Nove Mesto, Slovakia. We paid consideration of
approximately 1.7 million Euros ($2.0 million). The assets are being utilized by
our wholly-owned subsidiary NN Slovakia based in Kysucke Nove Mesto, Slovakia,
which began production in 2004. The financial results of the operations are
included in our NN Europe Segment.
8
Note 7. Pension
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. At March
31, 2005, 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.
Components of Net Periodic Pension Cost:
Three months ended
March 31,
(in thousands of dollars) 2005 2004
-------------------------------------------- -------- --------
Service cost $27 $26
Interest cost 60 58
-------- -------
Net periodic pension cost $87 $84
======== =======
We expect to contribute approximately $0.3 million to our pension plan in 2005.
As of March 31, 2005, approximately $0.1 million of contributions have been
made.
Note 8. New Accounting Pronouncements
In March 2005 the FASB issued FASB Interpretation No. 47, "Accounting for
Conditional Asset Retirement Obligations" ("FIN 47"). FIN 47 clarifies that the
term "conditional asset retirement obligation" as used in FASB Statement No.
143, "Accounting for Asset Retirement Obligations", refers to a legal obligation
to perform an asset retirement activity in which the timing and (or) method of
settlement are conditional on a future event that may or may not be within the
control of the entity. FIN 47 is effective no later than the end of fiscal years
ending after December 15, 2005. We are currently evaluating the impacts of FIN
47 on the Company's consolidated financial statements.
On December 16, 2004, the FASB issued SFAS No. 123R, "Share-Based Payment,"
which requires companies to expense the value of employee stock options and
similar awards and establishes standards for the accounting for transactions in
which an entity exchanges its equity instruments for goods. SFAS No. 123R was
effective for annual periods beginning after June 15, 2005 and applies to all
outstanding and unvested share-based payment awards. This Statement requires a
public entity to measure the cost of employee services received in exchange for
an award of equity instruments based on the grant-date fair value of the award
(with limited exception). That cost will be recognized over the period during
which an employee is required to provide service in exchange for the award-the
requisite service period (usually the vesting period). We are currently
evaluating the impacts of SFAS No. 123R on the Company's consolidated financial
statements.
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs". SFAS No. 151
clarifies the accounting for abnormal amounts of idle facility expense, freight,
handling costs and wasted material (spoilage). SFAS No. 151 requires these items
be recognized as current-period charges. In addition, SFAS No. 151 requires the
allocation of fixed production overheads to the costs of conversion be based on
the normal capacity of the production facilities. This statement is effective
for fiscal years beginning after June 15, 2005. We are currently evaluating the
impact of SFAS No. 151 on the company's financial statements.
9
In December 2004, the FASB issued SFAS No. 153, "Exchanges of Nonmonetary Assets
an amendment of APB Opinion No. 29". SFAS No. 153 eliminates the exception from
fair value measurement for nonmonetary exchanges of similar productive assets in
paragraph 21(b) of APB Opinion No. 29, Accounting for Nonmonetary Transactions,
and replaces it with an exception for exchanges that do not have commercial
substance. This Statement specifies that a nonmonetary exchange has commercial
substance if the future cash flows of the entity are expected to change
significantly as a result of the exchange. The provisions of this Statement are
effective for nonmonetary asset exchanges occurring in fiscal periods beginning
after June 15, 2005. We are currently evaluating the impact of SFAS 153 on the
Company's Financial Statements.
Deduction for Qualified Domestic Production Activities
On October 22, 2004, the President signed the American Jobs Creation Act of 2004
(the "Act"). The Act provides a deduction for income from qualified domestic
production activities, which will be phased in from 2005 through 2010. In
return, the Act also provides for a two-year phase out of the existing
extra-territorial income exclusion (ETI) for foreign sales that was viewed to be
inconsistent with international trade protocols by the European Union. We are
not yet in a position to determine the net effect of the phase out of the ETI
and the phase in of this new deduction on the effective tax rate in future
years. We expect to be in a position to finalize our assessment by December 31,
2005.
Under the guidance in FASB Staff Position No. FAS 109-1, Application of FASB
Statement No. 109, "Accounting for Income Taxes," to the Tax Deduction on
Qualified Production Activities Provided by the American Jobs Creation Act of
2004, issued and effective on December 21, 2004, the deduction will be treated
as a "special deduction" as described in FASB Statement No. 109. As such, the
special deduction has no effect on deferred tax assets and liabilities existing
at the enactment date. Rather, the impact of this deduction will be reported in
the period in which qualifying activities occur.
Repatriation of Foreign Earnings
On October 22, 2004, the President signed the American Jobs Creation Act of 2004
(the "Act"). The Act creates a temporary incentive for U.S. corporations to
repatriate accumulated income earned abroad by providing an 85 percent dividends
received deduction for certain dividends from controlled foreign corporations.
The deduction is subject to a number of limitations and uncertainty remains as
to how to interpret numerous provisions in the Act. As such, we are not yet in a
position to decide on whether, and to what extent, we might repatriate foreign
earnings that have not yet been remitted to the U.S. We expect to be in a
position to finalize our assessment by December 31, 2005.
Note 9. Long-Term Debt and Short-Term Debt
On May 1, 2003 in connection with the purchase of SKF's Veenendaal component
manufacturing operations and SKF's 23 percent interest in Euroball, we entered
into a $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 June 30, 2007 bearing interest at a floating rate equal to LIBOR
(3.12% at March 31, 2005) 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 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 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,
10
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 March 31, 2005.
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 March 31, 2005, $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 other short term borrowings totaling approximately
$4.7 million. 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. We were in compliance with all such
covenants as of March 31, 2005. 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.
The fair value of our fixed rate long-term borrowings are estimated using
discounted cash flow analysis based on our incremental borrowing rates for
similar types of borrowing arrangements. We estimate the fair value of the $40
million notes to be $40.2 million at March 31, 2005 and $40.4 million at
December 31, 2004.
Note 10. Goodwill
The changes in the carrying amount of goodwill for the three month period ended
March 31, 2005 and the twelve month period ended December 31, 2004 are as
follows:
In thousands of dollars Plastic and Rubber
Components Segment NN Europe Segment Total
------------------------ ------------------- ---------------
Balance as of January 1, 2004 $ 25,755 $ 17,138 $ 42,893
Currency impacts -- 1,564 1,564
------------------------ ------------------- ---------------
Balance as of December 31, 2004 $ 25,755 $ 18,702 $ 44,457
======================== =================== ===============
In thousands of dollars Plastic and Rubber
Components Segment NN Europe Segment Total
------------------------ ------------------- ---------------
Balance as of January 1, 2005 $ 25,755 $ 18,702 $ 44,457
Currency impacts -- (1,037) (1,037)
------------------------ ------------------- ---------------
Balance as of March 31, 2005 $ 25,755 $ 17,665 $ 43,420
======================== =================== ===============
11
Note 11. 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 Accounting Principals Board ("APB") Opinion
No. 25 and, accordingly, have not recorded compensation expense for the three
month periods ended March 31, 2005 or March 31, 2004 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
reduced to the pro-forma amounts indicated below:
Three months ended
March 31,
In Thousands, Except per Share Data 2005 2004
- --------------------------------------------------------------------- ------------- -----------
Net income - as reported $ 4,023 $3,218
Stock based compensation costs (income), net of income tax,
included in net income as reported (61) (67)
Stock based compensation costs, net of income tax, that would have
been included in net income if the fair value method had been
applied (251) (7)
------------- -----------
Net income - pro-forma $ 3,711 $3,144
============= ===========
Basic earnings per share - as reported $ 0.24 $ 0.19
Stock based compensation costs (income), net of income tax,
included in net income as reported -- --
Stock based compensation costs, net of income tax, that would have
been included in net income if the fair value method had been
applied (0.01) --
------------- -----------
Basic earnings per share - pro-forma $ 0.23 $ 0.19
============= ===========
Earnings per share-assuming dilution - as reported $ 0.23 $ 0.19
Stock based compensation costs (income), net of income tax,
included in net income as reported -- --
Stock based compensation costs, net of income tax, that would have
been included in net income if the fair value method had been
applied (0.01) --
------------- -----------
Earnings per share - assuming dilution-pro-forma $ 0.22 $ 0.19
============= ===========
The fair value of each option grant was estimated based on actual information
available through March 31, 2005 and 2004 using the Black Scholes option-pricing
model with the following assumptions:
Term Vesting period
- ---- -------------------
Risk free interest rate 4.00% and 3.85% at March 31, 2005 and 2004, respectively
Dividend yield 2.60% and 2.74% at March 31, 2005 and 2004, respectively
Volatility 48.38% and 49.16% at March 31, 2005 and 2004, respectively
12
Note 12. 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 half 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 satisfied 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 March 31, 2005, 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 term includes a fair value buy-out provision and the option to extend
the lease term under the same terms and conditions as the original agreement.
Note 13. Restructuring Charges
Eltmann, Germany Restructuring
- ------------------------------
During the fourth quarter of 2004, the Company's NN Europe subsidiary, a
component of the Company's NN Europe Segment, announced a reduction in staffing
at its Eltmann, Germany ball production facility. This restructuring will affect
approximately 86 employees and is expected be completed during 2005. As a
result, during 2004, the Company recorded restructuring charges of approximately
1,700 Euro ($2,290) related to severance costs of approximately $2,115 and other
related charges of approximately $175. The workforce reduction is a result of
the Company's continuing strategy of rationalizing its global manufacturing
capacity and transfer of production principally to its facility in Kysucke Nove
Mesto, Slovakia. The charges were recorded in restructuring and impairment
costs, a component of income from operations in the fourth quarter of 2004.
The following summarizes the restructuring charges related to the restructuring
at the Company's Eltmann, Germany facility for the twelve months ended December
31, 2004 and the three months ended March 31, 2005:
Three months ended March 31, 2005
Reserve Reserve
Balance at Paid in Currency Balance at
12/31/04 Charges 2005 Impacts 03/31/05
- --------------------------- --------------- -------------- ------------ ------------- -------------
Severance and other $ 2,290 $ -- $ 184 $ (86) $ 2,020
employee costs
- --------------------------- --------------- -------------- ------------ ------------- -------------
$ 2,290 $ -- $ 184 $ (86) $ 2,020
- --------------------------- --------------- -------------- ------------ ------------- -------------
Twelve months ended December 31, 2004
- --------------------------------------
Charges Paid in 2004 Reserve Balance at
12/31/04
-------------- --------------- ---------------------
- -------------------------------------------- --------------- --------------- ---------------------
Severance and other employee costs $2,290 -- $2,290
- -------------------------------------------- --------------- --------------- ---------------------
Total $2,290 -- $2,290
- -------------------------------------------- =============== =============== =====================
We expect to pay all amounts during 2005 and no additional charges are expected
to be incurred.
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 Regulatory compliance
o Energy
o Raw material availability
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 2004, sales of balls and rollers accounted for
approximately 77% of the Company's total net sales with 59% and 18% of sales
from balls and rollers, respectively. Sales of metal bearing retainers accounted
for 6% and sales of precision molded plastic and rubber parts accounted for the
remaining 17%.
14
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 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 March 31, 2005 Compared to the Three Months Ended March 31,
2004
Net Sales. Net sales increased by approximately $9.1 million, or 11.7%, from
$77.6 million in the first quarter of 2004 to $86.7 million in the first quarter
of 2005. By segment, net sales increased by $5.9 million for the NN Europe
Segment, $1.7 million for the Plastic and Rubber Components Segment and $1.5
million for the Domestic Ball and Roller Segment. Within the NN Europe Segment,
approximately $3.4 million of the increase is related to the impact of foreign
currency exchange rates, approximately $1.6 million is related to price
adjustments associated with raw material pass through and approximately $0.9
million is related to increased product demand. Within the Plastic and Rubber
Components Segment, approximately $0.4 million is related to price adjustments
associated with raw material pass through and approximately $1.3 million is
related to increased product demand. Within the Domestic Ball and Roller
Segment, approximately $1.1 million of the increase is related to price
adjustments associated with raw material pass through and $0.4 million is
related to increased product demand.
Cost of Products Sold. Cost of products sold increased by approximately $7.3
million, or 12.0%, from $60.4 million in the first quarter of 2004 to $67.7
million for the first quarter of 2005. By segment, cost of products sold
increased by $4.8 million for the NN Europe Segment, $1.9 million for the
Plastic and Rubber Components Segment and $0.6 million for the Domestic Ball and
Roller Segment. Within the NN Europe Segment, approximately $2.7 million of the
increase is related to the impact of foreign currency exchange rates and
approximately $2.1 million is related to increased product demand, material cost
increases and inventory management efforts. Within the Plastic and Rubber
Components Segment, the increase of approximately $1.9 million is related to
increases in product demand and material cost increases. Within the Domestic
Ball and Roller Segment, the increase of approximately $0.6 million is related
to increased product demand. As a percentage of net sales, cost of products sold
increased from 77.8% during the first quarter of 2004 to 78.0% during the first
quarter of 2005.
The price of steel has risen over the last twelve to eighteen months with the
potential for 2005 prices 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
steel prices we pay in procuring our steel in the form of higher unit prices and
scrap surcharges and could adversely impact the availability of steel. Our
contracts with key customers allow us to pass a majority of the steel price
increases on to those customers. However, for our NN Europe Segment, 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 $0.3 million, or 4.8%, from
$7.2 million in the first quarter of 2004 to $7.5 million for the first quarter
of 2005. Approximately $0.2 million of the increase is related to the impact of
foreign currency exchange rates within the NN Europe Segment and approximately
$0.1 million of the increase is a result of costs incurred at our China start-up
operation. As a percentage of net sales, selling, general and administrative
expenses decreased from 9.2% during the first quarter of 2004 to 8.6% during the
first quarter of 2005.
15
Depreciation and Amortization. Depreciation and amortization expense increased
by $0.2 million, or 4.4%, from $4.0 million in the first quarter of 2004 to $4.2
million in the first quarter of 2005. Principally all of the $0.2 million
increase is related to the impact of foreign currency exchange rates within the
NN Europe Segment. As a percentage of net sales, depreciation and amortization
expense decreased from 5.2% during the first quarter of 2004 to 4.8% during the
first quarter of 2005.
Interest Expense. Interest expense increased by $0.2 million, or 17.0%, from
$0.8 million in the first quarter of 2004 to $1.0 million in the first quarter
of 2005. The increase is principally related to increase in market interest
rates and 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 increased by approximately $0.8 million, or 25.0%, from
$3.2 million in the first quarter of 2004 to $4.0 million in the first quarter
of 2005. As a percentage of net sales, net income increased from 4.1% during the
first quarter of 2004 to 4.6% during the first quarter of 2005.
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 new $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 new financing arrangement replaced our
prior credit facility with AmSouth and NN Europe's credit facility with Hypo
Vereinsbank Luxembourg, S.A. The credit facility consists of a $30.0 million
revolver expiring on June 30, 2007, bearing interest at a floating rate equal to
LIBOR (3.12% at March 31, 2005) 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 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 (2.14% at March 31, 2005) plus
an applicable margin of 1.25% to 2.0%. The loan agreement contains customary
financial and non-financial covenants. Such covenants specify that we must
maintain certain liquidity measures. The loan agreement also contains customary
restrictions on, among other things, additional indebtedness, liens on our
assets, sales or transfers of assets, investments, restricted payments
(including payment of dividends and stock repurchases), issuance of equity
securities, and mergers, acquisitions and other fundamental changes in our
business. The credit facility is not collateralized except for the pledge of
stock of certain foreign subsidiaries. We were in compliance with all such
covenants as of March 31, 2005.
On April 26, 2004 we issued $40.0 million aggregate principal amount of senior
notes in a private placement. These notes bear interest at a fixed rate of 4.89%
and mature on April 26, 2014. Interest is paid semi-annually. Annual principal
payments 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 and repay a portion of our borrowings under our US dollar
denominated revolving credit facility, which are both components of our $90
million credit facility, and to repay other short term borrowings totaling
approximately $4.7 million. 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. We were in compliance with all such
covenants as of March 31, 2005. The notes are not collateralized except for the
pledge of stock of certain foreign subsidiaries.
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.
16
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 March 31, 2005, 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 $38.8 million at March 31, 2005 as compared to $33.9 million at
December 31, 2004. The ratio of current assets to current liabilities increased
from 1.46:1 at December 31, 2004 to 1.53:1 at March 31, 2005. Cash flow from
operations decreased to ($4.5 million) during the first three months of 2005
from $6.2 million during the first three months of 2004.
During 2005, we plan to spend approximately $9.1 million on capital expenditures
related primarily to equipment and process upgrades and replacements and
approximately $7.9 million principally related to geographic expansion of our
manufacturing base. Of these amounts approximately $0.8 million has been spent
through March 31, 2005. We intend to finance these activities with cash
generated from operations and funds available under the credit facilities
described above. We believe that funds generated from operations and borrowings
from the credit facilities will be sufficient to finance our working capital
needs and projected capital expenditure requirements through December 2005.
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 all locations in the NN Europe Segment, except Slovakia whose
functional currency is the Slovak Korona. Slovakia joined the European Union in
May 2004 and current plans call for Slovakia to adopt the Euro as its functional
currency at a later date.
Seasonality and Fluctuation in Quarterly Results
Our net sales historically have been of a seasonal nature due to a significant
portion of our sales to European customers that cease or significantly slow
production during the month of August.
Inflation and Changes in Prices
While the Company's operations have not been materially affected by inflation
during recent years, prices for 52100 Steel, engineered resins and other raw
materials purchased by the Company are subject to material change, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Overview and Management Focus". For example due to an increase in
worldwide demand for 52100 Steel and the decrease in the value of the United
States dollar relative to foreign currencies, the Company experienced an
increase in the price of 52100 Steel and may experience difficulty in obtaining
an adequate supply of 52100 Steel from its existing suppliers. In our U.S.
operations our typical pricing arrangements with steel suppliers are subject to
adjustment once every six months. The Company's NN Europe Segment has entered
into long term agreements with its primary steel supplier which provide for
standard terms and conditions and annual pricing adjustments to offset material
price fluctuations in steel and quarterly scrap surcharge adjustments. The
Company typically reserves the right to increase product prices periodically in
the event of increases in its raw material costs. In the past, the Company has
been able to minimize the impact on its operations resulting from the 52100
Steel price fluctuations by taking such measures. However, by contract, material
price changes in any given year are passed along with price adjustments in
January of the following year. Certain sales agreements are in effect with SKF
and INA, which provide for minimum purchase quantities and specified, annual
sales price adjustments that may be modified up or down for changes in material
costs. These agreements expire during 2006 and 2008.
17
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, 2004 including those policies as discussed in
Note 1. These policies have been consistently applied in all material respects
and address such matters as revenue recognition, inventory valuation, asset
impairment recognition, business combination accounting and pension and
postretirement benefits. Due to the estimation processes involved, management
considers the following summarized accounting policies and their application to
be critical to understanding the Company's business operations, financial
condition and results of operations. There can be no assurance that actual
results will not significantly differ from the estimates used in these critical
accounting policies.
Accounts Receivable. Substantially all of the Company's accounts receivable are
due primarily from the served markets: bearing manufacturers, automotive
industry, electronics, industrial, agricultural and aerospace. In establishing
allowances for doubtful accounts, the Company performs credit evaluations of its
customers, considering numerous inputs when available including the customers'
financial position, past payment history, relevant industry trends, cash flows,
management capability, historical loss experience and economic conditions and
prospects. 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.
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. 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.
18
Cautionary Statements for Purposes of the "Safe Harbor" Provisions of the
Private Securities Litigation Reform Act of 1995
The Company wishes to caution readers that this report contains, and future
filings by the Company, press releases and oral statements made by the Company's
authorized representatives may contain, forward-looking statements that involve
certain risks and uncertainties. Statements regarding capital expenditures,
future borrowings, and financial commitments are forward-looking statements.
Readers can identify forward-looking statements by the use of such verbs as
expects, anticipates, believes or similar verbs or conjugations of such verbs.
The Company's actual results could differ materially from those expressed in
such forward-looking statements due to important factors bearing on the
Company's business, many of which already have been discussed in this filing and
in the Company's prior filings. The differences could be caused by a number of
factors or combination of factors including, but not limited to, the risk
factors described below.
You should carefully consider the following risks and uncertainties, and all
other information contained in or incorporated by reference in this quarterly
report on Form 10-Q, before making an investment in our common stock. Any of the
following risks could have a material adverse effect on our business, financial
condition or operating results. In such case, the trading price of our common
stock could decline and you may lose all or part of your investment.
The demand for our products is cyclical, which could adversely impact our
revenues.
The end markets for fully assembled bearings are cyclical and tend to decline in
response to overall declines in industrial production. As a result, the market
for bearing components is also cyclical and impacted by overall levels of
industrial production. Our sales in the past have been negatively affected, and
in the future will be negatively affected, by adverse conditions in the
industrial production sector of the economy or by adverse global or national
economic conditions generally.
We depend on a very limited number of foreign sources for our primary raw
material and are subject to risks of shortages and price fluctuation.
The steel that we use to manufacture precision balls and rollers is of an
extremely high quality and is available from a limited number of producers on a
global basis. Due to quality constraints in the U.S. steel industry, we obtain
substantially all of the steel used in our U.S. ball and roller production from
overseas suppliers. In addition, we obtain substantially all of the steel used
in our European ball production from a single European source. If we had to
obtain steel from sources other than our current suppliers, particularly in the
case of our European operations, we could face higher prices and transportation
costs, increased duties or taxes, and shortages of steel. Problems in obtaining
steel, and particularly 52100 chrome steel, in the quantities that we require
and on commercially reasonable terms, could increase our costs, negatively
impact our ability to operate our business efficiently and have a material
adverse effect on the operating and financial results of our Company.
We 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 48% of
consolidated net sales in 2004, and sales to INA accounted for approximately 14%
of consolidated net sales in 2004. During 2004, our ten largest customers
accounted for approximately 81% of our consolidated net sales. None of our other
customers individually accounted for more than 5% of our consolidated net sales
for 2004. 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.
19
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, in 2000 and acquired
our bearing seal operations in 2001. During 2002, we purchased INA'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.
20
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.
21
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 March 31,
2005, we had $51.8 million outstanding under the domestic credit facilities and
NN Europe had 15.8 million Euro ($20.5 million) outstanding under the Euro term
loan. See Note 8 of the Notes to Consolidated Financial Statements. At March 31,
2005, a one-percent increase in the interest rate charged on our outstanding
borrowings under both credit facilities would result in interest expense
increasing annually by approximately $0.5 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., 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.
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 March 31, 2005.
22
Item 4. Controls and Procedures
As of March 31, 2005, 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 Principal Accounting 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 Pincipal Accounting Officer, concluded that the
Company's disclosure controls and procedures are effective.
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.
23
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, Use of Proceeds and Issuer Purchases of Equity
Securities
None
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K.
a. Exhibits Required by Item 601 of Regulation S-K
10.1 Amendment No. 5 dated March 30, 2005, to the Credit Agreement dated
May 1, 2003, among NN, Inc. and NN Europe ApS as the Borrowers, the
subsidiaries as Guarantors, the Lenders as identified therein, Am
South Bank as Administrative Agent and Sun Trust as Documentation
Agent and Euro Loan Agent.
31.1 Certification of Chief Executive Officer pursuant to Section 302 of
Sarbanes-Oxley Act.
31.2 Certification of Chief Financial Officer pursuant to Section 302 of
Sarbanes-Oxley Act.
32.1 Certification of Chief Executive Officer pursuant to Section 906 of
Sarbanes-Oxley Act.
32.2 Certification of Chief Financial Officer pursuant to Section 906 of
Sarbanes-Oxley Act.
b. Reports on Form 8-K
The Company furnished a Form 8-K, in response to Items 12 and 7, on
February 28, 2005 announcing its fourth quarter and fiscal year 2004
earnings.
The Company furnished a Form 8-K on January 3, 2005 announcing the
sale of its Walterboro plant facility and the recording of a charge
for loss on sale of fixed assets.
24
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NN, Inc.
--------------------------------------
(Registrant)
Date: May 10, 2005 /s/ Roderick R. Baty
-------------- ----------------------------------
Roderick R. Baty,
Chairman, President and
Chief Executive Officer
(Duly Authorized Officer)
Date: May 10, 2005 /s/ Steven W. Fray
-------------- ----------------------------------
Steven W. Fray
Corporate Controller
(Principal Accounting Officer)
(Duly Authorized Officer)
25
EXHIBIT 10.1
AMENDMENT NO. 5 TO CREDIT AGREEMENT
THIS AMENDMENT NO. 5 TO CREDIT AGREEMENT (this "Amendment"), dated as of
March 30, 2005, is made and entered into on the terms and conditions hereinafter
set forth, by and among NN, INC., a Delaware corporation ("Domestic Borrower"),
NN EUROPE ApS, a Denmark limited liability company (successor by name change to
NN Euroball ApS) ("Euro Borrower"; Domestic Borrower and Euro Borrower are
sometimes hereinafter individually and collectively referred to as the
"Borrower"), all subsidiaries (except for the Euro Borrower) of the Domestic
Borrower who are now or hereafter become parties to the Credit Agreement, as
hereinafter defined (the "Domestic Guarantors"), the several lenders who are now
or hereafter become parties to the Credit Agreement (the "Lenders"), AMSOUTH
BANK, an Alabama state bank, individually and as administrative agent for the
Lenders (in such capacity, the "Administrative Agent"), and SUNTRUST BANK, as
documentation agent and euro loan agent for the Lenders (in such capacity, the
"Euro Loan Agent").
RECITALS:
1. Pursuant to that certain Credit Agreement dated as of May 1, 2003, by
and among the Borrower, the Domestic Guarantors, the Administrative Agent, the
Lenders and the Euro Loan Agent, as amended by that certain Amendment No.1 to
Credit Agreement dated August 1, 2003, that certain Amendment No. 2 to Credit
Agreement dated March 12, 2004, that certain Amendment No. 3 to Credit Agreement
and Waiver dated March 31, 2004, and that certain Consent and Amendment No. 4 to
Credit Agreement dated November 12, 2004, by and among the Borrower, the
Domestic Guarantors, the Administrative Agent, the Lenders and the Euro Loan
Agent (as the same heretofore may have been and/or hereafter may be amended,
restated, supplemented, extended, renewed, replaced or otherwise modified from
time to time, the "Credit Agreement"), the Lenders have agreed to make the Loans
available to the Borrower, all as more specifically described in the Credit
Agreement. Capitalized terms used but not otherwise defined in this Amendment
have the same meanings as in the Credit Agreement.
2. The parties hereto desire to further amend the Credit Agreement in
certain respects, as more particularly hereinafter set forth.
AGREEMENTS:
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto agree as
follows:
1. Defined Terms. Section 1.1 of the Credit Agreement is hereby amended by
substituting the following definition for the existing definition of the
following term:
"Revolving Commitment Period Expiration Date" shall mean June 30, 2007.
2. Facility Fee. In consideration of the Lenders' agreement to extend the
Revolving Commitment Period Expiration Date, the Borrower agrees to pay to the
Administrative Agent a facility fee in the amount of $37,500.00 (the "Facility
Fee") for distribution to the Lenders in proportion to their respective
Percentages. The Facility Fee shall be fully earned and due and payable upon the
execution of this Amendment by the Borrower and the Domestic Guarantors.
3. Effectiveness. This Amendment shall become effective when the
Administrative Agent shall have received counterparts or signature pages
executed by the Borrower, the Domestic Guarantors, the Administrative Agent and
the Lenders.
4. Representations and Warranties of the Borrower and the Guarantors. As an
inducement to the Administrative Agent, the Euro Loan Agent and the Lenders to
enter into this Amendment, the Borrower and the Domestic Guarantors hereby
represent and warrant to the Administrative Agent, the Euro Loan Agent and the
Lenders that, on and as of the date hereof:
(a) the representations and warranties contained in the Credit
Agreement and the other Loan Documents are true and correct, except for (1)
representations and warranties that expressly relate to an earlier date,
which remain true and correct as of said earlier date, and (2)
representations and warranties that have become untrue or incorrect solely
because of changes permitted by the terms of the Credit Agreement and the
other Loan Documents, and
(b) no Default or Event of Default has occurred and is continuing.
5. Effect of Amendment; Continuing Effectiveness of Credit Agreement and
Loan Documents.
(a) Neither this Amendment nor any other indulgences that may have
been granted to the Borrower or any of the Domestic Guarantors by the
Administrative Agent, the Euro Loan Agent or any Lender shall constitute a
course of dealing or otherwise obligate the Administrative Agent, the Euro
Loan Agent or any Lender to modify, expand or extend the agreements
contained herein, to agree to any other amendments to the Credit Agreement
or to grant any consent to, waiver of or indulgence with respect to any
other noncompliance with any provision of the Loan Documents.
(b) This Amendment shall constitute a Loan Document for all purposes
of the Credit Agreement and the other Loan Documents. Any noncompliance by
the Borrower or any Domestic Guarantor with any of the covenants, terms,
conditions or provisions of this Amendment shall constitute an Event of
Default. Except to the extent amended hereby, the Credit Agreement, the
other Loan Documents and all terms, conditions and provisions thereof shall
continue in full force and effect in all respects.
6. Counterparts. This Amendment may be executed in multiple counterparts or
copies, each of which shall be deemed an original hereof for all purposes. One
or more counterparts or copies of this Amendment may be executed by one or more
of the parties hereto, and some different counterparts or copies executed by one
or more of the other parties. Each
2
counterpart or copy hereof executed by any party hereto shall be binding upon
the party executing same even though other parties may execute one or more
different counterparts or copies, and all counterparts or copies hereof so
executed shall constitute but one and the same agreement. Each party hereto, by
execution of one or more counterparts or copies hereof, expressly authorizes and
directs any other party hereto to detach the signature pages and any
corresponding acknowledgment, attestation, witness or similar pages relating
thereto from any such counterpart or copy hereof executed by the authorizing
party and affix same to one or more other identical counterparts or copies
hereof so that upon execution of multiple counterparts or copies hereof by all
parties hereto, there shall be one or more counterparts or copies hereof to
which is(are) attached signature pages containing signatures of all parties
hereto and any corresponding acknowledgment, attestation, witness or similar
pages relating thereto.
7. Miscellaneous.
(a) This Amendment shall be governed by, construed and enforced in
accordance with the laws of the State of Tennessee, without reference to
the conflicts or choice of law principles thereof.
(b) The headings in this Amendment and the usage herein of defined
terms are for convenience of reference only, and shall not be construed as
amplifying, limiting or otherwise affecting the substantive provisions
hereof.
(c) Any reference herein to any instrument, document or agreement, by
whatever terminology used, shall be deemed to include any and all
amendments, modifications, supplements, extensions, renewals, substitutions
and/or replacements thereof as the context may require.
(d) When used herein, (1) the singular shall include the plural, and
vice versa, and the use of the masculine, feminine or neuter gender shall
include all other genders, as appropriate, (2) "include", "includes" and
"including" shall be deemed to be followed by "without limitation"
regardless of whether such words or words of like import in fact follow
same, and (3) unless the context clearly indicates otherwise, the
disjunctive "or" shall include the conjunctive "and."
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
duly executed and delivered as of the date first written above.
BORROWER:
NN, INC.,
a Delaware corporation
By:
-----------------------------------------
Name:
----------------------------------------
Title:
----------------------------------------
3
NN EUROPE ApS, a Denmark limited
liability company (successor by name
change to NN Euroball ApS)
By:
-----------------------------------------
Name:
---------------------------------------
Title:
--------------------------------------
DOMESTIC GUARANTORS:
INDUSTRIAL MOLDING GP, LLC,
a Delaware limited liability company
By:
-----------------------------------------
Name:
----------------------------------------
Title:
----------------------------------------
INDUSTRIAL MOLDING LP, LLC,
a Tennessee limited liability company
By:
----------------------------------------
Name:
----------------------------------------
Title:
-----------------------------------------
INDUSTRIAL MOLDING GROUP, L.P.,
a Tennessee limited partnership
By: Industrial Molding GP, LLC,
a Delaware limited liability company,
its general partner
By:
----------------------------------------
Name:
---------------------------------------
Title:
--------------------------------------
[Signatures Continued Next Page]
4
DELTA RUBBER COMPANY,
a Connecticut corporation
By:
----------------------------------------
Name:
--------------------------------------
Title:
-------------------------------------
KUGELFERTIGUNG ELTMANN GmbH,
a German Company
By:
----------------------------------------
Name:
--------------------------------------
Title:
--------------------------------------
By:
---------------------------------------
Name:
--------------------------------------
Title:
--------------------------------------
NN NETHERLANDS B.V., a Dutch company
By:
----------------------------------------
Name:
--------------------------------------
Title:
--------------------------------------
NN EUROBALL IRELAND LIMITED,
an Irish company
By:
----------------------------------------
Name:
--------------------------------------
Title:
-------------------------------------
[Signatures Continued Next Page]
5
NN HOLDINGS, B.V., a Dutch company
By:
----------------------------------------
Name:
--------------------------------------
Title:
-------------------------------------
NN SLOVAKIA, s.r.o.
By:
----------------------------------------
Name:
--------------------------------------
Title:
-------------------------------------
LENDERS:
AMSOUTH BANK, as a Lender
By:
----------------------------------------
Name:
---------------------------------------
Title:
-------------------------------------
FIRST TENNESSEE BANK NATIONAL ASSOCIATION,
as a Lender
By:
----------------------------------------
Name:
--------------------------------------
Title:
--------------------------------------
[Signatures Continued Next Page]
6
UNION PLANTERS BANK, NATIONAL ASSOCIATION,
as a Lender
By:
----------------------------------------
Name:
--------------------------------------
Title:
-------------------------------------
INTEGRA BANK, N.A., as a Lender
By:
----------------------------------------
Name:
--------------------------------------
Title:
-------------------------------------
SUNTRUST BANK, as a Lender and
Euro Loan Agent
By:
----------------------------------------
Name:
--------------------------------------
Title:
--------------------------------------
7
Exhibit 31.1
CERTIFICATION PURSUANT TO SECTION 302 OF SARBANES-OXLEY ACT OF 2002
I, Roderick R. Baty, principal executive officer of NN, Inc., certify that:
1) I have reviewed this quarterly report on Form 10-Q of NN, Inc.
2) Based on my knowledge, this annual 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 annual report;
3) Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual report.
4) The registrant's other certifying officer(s) 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)) and internal control over
financial reporting (as defined in Exchange Act Rules 13a-15(f) and
15d-15(f)) 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) Designed such internal control over financial reporting, or caused
such internal control over financial reporting to be designed under
our supervision, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted
accounting principles;
c) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
d) 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 the 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 officer(s) 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: May 10, 2005
Signature: /S/ RODERICK R. BATY
--------------------------
Roderick R. Baty
Principal Executive Officer
Exhibit 31.2
CERTIFICATION PURSUANT TO SECTION 302 OF SARBANES-OXLEY ACT OF 2002
I, Steven W. Fray, principal accounting officer of NN, Inc., certify that:
1) I have reviewed this quarterly report on Form 10-Q of NN, Inc.
2) Based on my knowledge, this annual 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 annual report;
3) Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual report.
4) The registrant's other certifying officer(s) 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)) and internal control over
financial reporting (as defined in Exchange Act Rules 13a-15(f) and
15d-15(f)) 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) Designed such internal control over financial reporting, or caused
such internal control over financial reporting to be designed under
our supervision, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted
accounting principles;
c) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
d) 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 the 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 officer(s) 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: May 10, 2005
Signature: /S/ STEVEN W. FRAY
--------------------------
Steven W. Fray
Principal Accounting 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 March 31, 2005, as filed with the Securities and
Exchange Commission on the date hereof (the "Report"), the undersigned, in the
capacity and date indicated below, hereby certifies pursuant to 18 U.S.C.
ss.1350, as adopted pursuant to ss.906 of the Sarbanes-Oxley Act of 2002, that,
to my knowledge: (1) The Report fully complies with the requirements of Section
13(a) or 15(d) of the Securities Exchange Act of 1934, and (2) The information
contained in the Report fairly presents, in all material respects, the financial
condition and results of operations of the Company.
Date: May 10, 2005 /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 March 31, 2005, as filed with the Securities and
Exchange Commission on the date hereof (the "Report"), the undersigned, in the
capacity and date indicated below, hereby certifies pursuant to 18 U.S.C.
ss.1350, as adopted pursuant to ss.906 of the Sarbanes-Oxley Act of 2002, that,
to my knowledge: (1) The Report fully complies with the requirements of Section
13(a) or 15(d) of the Securities Exchange Act of 1934, and (2) The information
contained in the Report fairly presents, in all material respects, the financial
condition and results of operations of the Company.
Date: May 10, 2005 /s/ Steven W. Fray
------------ ------------------
Steven W. Fray
Corporate Controller
[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.]