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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QA
| | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 2001
---------------
OR
| | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________ to _________
Commission File Number 0-23486
NN, Inc.
(Exact name of registrant as specified in its charter)
Delaware 62-1096725
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
2000 Waters Edge Drive
Building C, Suite 12
Johnson City, Tennessee 37604
(Address of principal executive offices, including zip code)
(423) 743-9151
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
As of May 14, 2001 there were 15,246,909 shares of the registrant's common
stock, par value $0.01 per share, outstanding.
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NN, Inc.
INDEX
Page No.
--------
Part I. Financial Information
Item 1. Restated Consolidated Financial Statements:
Consolidated Statements of Income and Comprehensive Income (Loss)
for the three months ended March 31, 2001 (Restated) and 2000 2
Consolidated Balance Sheet at March 31, 2001 (Restated) and
December 31, 2000 3
Consolidated Statements of Changes in Stockholders' Equity
for the three months ended March 31, 2001 (Restated) and 2000 4
Consolidated Statements of Cash Flows for the three months
ended March 31, 2001 (Restated) and 2000 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K 16
Signatures 17
PART I. FINANCIAL INFORMATION
NN, Inc.
Consolidated Statements of Income and Comprehensive Income (Loss)
(Unaudited)
Three Months Ended
March 31,
2001 2000
Thousands of Dollars, Except Share and Per Share Data (Restated)
--------------------------------------------------------------------------------------------------------------------
Net sales $50,227 $28,002
Cost of goods sold 38,184 20,346
--------------- --------------
Gross profit 12,043 7,656
Selling, general and administrative 4,014 2,318
Depreciation and amortization 3,310 1,845
--------------- --------------
Income from operations 4,719 3,493
Interest expense 1,182 291
Equity in earnings of unconsolidated affiliate (49) (13)
Net loss on involuntary conversion -- 25
Other income (132) --
--------------- --------------
Income before provision for income taxes 3,718 3,190
Provision for income taxes 1,636 1,080
Minority interest in consolidated subsidiary 536 --
--------------- --------------
Income before cumulative effect of change in accounting principle 1,546 2,110
Cumulative effect of change in accounting principle, net of income tax
benefit of $112 and related minority interest impact of $84 98 --
--------------- --------------
Net income 1,448 2,110
Other comprehensive loss:
Foreign currency translation adjustments (3,386) (395)
--------------- --------------
Comprehensive income (loss) $(1,938) $ 1,715
=============== ==============
Basic income per share:
Income before cumulative effect of change in accounting principle $ 0.10 $ 0.14
Cumulative effect of change in accounting principle -- --
--------------- --------------
Net Income $ 0.10 $ 0.14
=============== ==============
Weighted average shares outstanding 15,247 15,244
=============== ==============
Diluted income per share:
Income before cumulative effect of change in accounting principle $ 0.10 $ 0.14
Cumulative effect of change in accounting principle (0.01) --
--------------- --------------
Net income $ 0.09 $ 0.14
=============== ==============
Weighted average shares outstanding 15,396 15,458
=============== ==============
See accompanying notes.
2
NN, Inc.
Consolidated Balance Sheets
March 31, December 31,
2001 2000
Thousands of Dollars (Unaudited)
(Restated)
------------------------------------------------------------------------------------------------------------------------------------
Assets
Current assets:
Cash $ 7,487 $ 8,273
Accounts receivable, net 38,429 29,549
Inventories, net 24,086 23,742
Other current assets 2,009 1,512
Net current deferred tax asset 1,092 962
------------- --------------
Total current assets 73,103 64,038
Property, plant and equipment, net 89,834 91,693
Goodwill, net 41,967 27,865
Other non-current assets 4,423 4,212
------------- --------------
Total assets $209,327 $187,808
============= ==============
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $19,429 $17,337
Accrued salaries, wages and benefits 10,833 6,929
Income taxes payable 2,964 1,341
Accrued pension 1,991 2,133
Payable to affiliates 3,450 1,762
Short-term loan -- 2,000
Short-term portion of long-term debt 5,250 --
Other liabilities 3,061 4,357
------------- --------------
Total current liabilities 46,978 35,859
Minority interest in consolidated subsidiaries 28,691 30,257
Deferred income taxes 5,524 5,353
Long-term debt 65,176 50,515
Other 870 578
------------- --------------
Total liabilities 147,239 122,562
Total stockholders' equity 62,088 65,246
------------- --------------
Total liabilities and stockholders' equity $209,327 $187,808
============= ==============
See accompanying notes.
3
NN, Inc.
Consolidated Statements of Changes in Stockholders' Equity
(Unaudited)
Common Stock
Number Par Additional Retained Accumulated other
Thousands of Dollars of shares Value paid in capital earnings comprehensive loss Total
-----------------------------------------------------------------------------------------------------------------------------------
Balance, January 1, 2000 15,244 $ 153 $30,398 $31,255 $(1,678) $60,128
Net income 2,110 2,110
Dividends (1,220) (1,220)
Other comprehensive loss (395) (395)
----------- ---------- ------------ ------------ ------------- ------------
Balance, March 31, 2000 15,244 $153 $30,398 $32,145 $(2,073) $60,623
=========== ========== ============ ============ ============= ============
Balance, January 1, 2001 15,247 $ 153 $30,414 $36,364 $(1,685) $65,246
Net income 1,448 1,448
Dividends (1,220) (1,220)
Other comprehensive loss (3,386) (3,386)
----------- ---------- ------------ ------------ ------------- ------------
Balance, March 31, 2001 (Restated) 15,247 $ 153 $30,414 $36,592 $(5,071) $62,088
=========== ========== ============ ============ ============= ============
See accompanying notes.
4
NN, Inc.
Consolidated Statements of Cash Flows (Restated)
(Unaudited)
Three Months Ended
March 31,
2001 2000
Thousands of Dollars (Restated)
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Operating Activities:
Net income $ 1,448 $ 2,110
Adjustments to reconcile net income to net cash provided by
operating activities:
Cumulative effect of change in accounting principle 98 --
Depreciation and amortization 3,310 1,845
Loss on disposal of property, plant and equipment -- 2,001
Equity in earnings of unconsolidated affiliate (49) (13)
Interest income from receivable from unconsolidated affiliate (52) --
Minority interest in consolidated subsidiaries 536 --
Accounts receivable (6,363) (3,132)
Inventories 702 903
Other current assets (127) (1,364)
Other assets 1,049 (446)
Accounts payable 830 2,535
Income taxes payable 1,675 671
Other liabilities 3,501 (87)
---------------- --------------
Net cash provided by operations 6,558 5,023
---------------- --------------
Investing Activities:
Acquisition of Delta Rubber Company, net of cash acquired (23,472) --
Acquisition of property, plant and equipment and other investing
activities, net 2,823 (194)
Long-term note receivable -- (2,500)
---------------- --------------
Net cash used by investing activities (20,649) (2,694)
---------------- --------------
Financing Activities:
Net borrowings (payments) under revolving line of credit 24,642 (607)
Repayment of long-term debt (4,731) --
Repayment of short-term loan (2,000) --
Dividends (1,220) (1,220)
---------------- --------------
Net cash provided (used) by financing activities 16,691 (1,827)
---------------- --------------
Net change in cash and cash equivalents 2,600 502
Effect of exchange rates changes (3,386) (395)
Cash and Cash Equivalents at Beginning of Period 8,273 1,409
---------------- --------------
Cash and Cash Equivalents at Period-End $ 7,487 $ 1,516
================ ==============
See accompanying notes.
5
NN, Inc.
Notes To Consolidated Financial Statements
Note 1. Interim Financial Statements
The accompanying consolidated financial statements of NN, Inc. have not been
audited by independent accountants, except for the balance sheet at December
31, 2000. 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, 2001 and 2000, the
Company's financial position at March 31, 2001 and December 31, 2000, and the
cash flows for the three-month periods ended March 31, 2001 and 2000. These
adjustments are of a normal recurring nature and are, in the opinion of
management, necessary for fair presentation of the financial position and
operating results for the interim periods.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted from the interim financial
statements presented in this Quarterly Report on Form 10-Q.
The results for the first quarter of 2001 are not necessarily indicative of
future results.
Note 2. Restatement and Accounting Change
The Company has determined that an interest rate swap was not recorded or
disclosed in the previously filed March 31, 2001 quarterly financial statements
and needs to be accounted for in accordance with Statement of Financial
Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and
Hedging Activities", effective January 1, 2001. The Company was required on
January 1, 2001, to adopt SFAS No. 133 which establishes accounting and
reporting standards for derivative instruments and for hedging activities. The
Standard requires the recognition of all derivative instruments on the balance
sheet at fair value. The Standard allows for hedge accounting if certain
requirements are met including documentation of the hedging relationship at
inception and upon adoption of the Standard.
In connection with a variable Euribor rate debt financing in July 2000 the
Company's 54% owned subsidiary, NN Euroball ApS entered into an interest rate
swap with a notional amount of Euro 12.5 million for the purpose of fixing
the interest rate on a portion of their 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 principal payments
on the underlying debt over the life of the swap.
The cumulative effect of a change in accounting principles for the adoption of
SFAS No. 133 effective January 1, 2001 resulted in a transition adjustment net
loss of $98,000 which is net of an income tax benefit of $112,000 and the
related minority interest impact of $84,000. The interest rate swap does not
qualify for hedge accounting since the Company has not designated the interest
rate swap as a hedging instrument; therefore, the transition adjustment for
adoption of SFAS No. 133 and any subsequent periodic changes in fair value of
the interest rate swap are recorded in earnings.
As of March 31, 2001, the fair value of the swap is a loss of approximately
$342,000 which is recorded in other noncurrent liabilities. The change in
fair value during the three-month period ended March 31, 2001 was a loss of
approximately $48,000 which has been included as a component of other income.
6
The impact of recording the interest rate swap and the reclass of short-term
financing on the Company's March 31, 2001 financial statements is as follows:
(in thousands, except per share information):
As Previously
Consolidated Balance Sheets Reported As Restated
----------------------------------------------------------------------------
Current assets $ 72,973 $ 73,103
Total assets 209,197 209,327
Current liabilities 66,370 46,978
Total liabilities 146,995 147,239
Stockholders' equity 62,202 62,088
Total liabilities and
stockholders' equity 209,197 209,327
Consolidated Statements of Income and Comprehensive As Previously
Income Reported As Restated
------------------------------------------------------ --------------------- -------------------
Income from operations $ 4,719 $ 4,719
Other income (180) (132)
Income before provision for income taxes 3,766 3,718
Provision for income taxes 1,654 1,636
Minority interest in consolidated subsidiary 550 536
Cumulative effect of change in accounting
principle, net of income tax benefit of
$112 and related minority interest of $84 -- 98
Net income 1,562 1,448
Comprehensive loss $(1,824) $ (1,938)
Basic income per share:
Before cumulative effect of change in
accounting principle $0.10 $0.10
Cumulative effect of change in accounting
principle -- --
--------------------- -------------------
Net income $0.10 $0.10
===================== ===================
Diluted earnings per share:
Before cumulative effect of change in
accounting principle $0.10 $0.10
Cumulative effect of change in accounting
principle -- (0.01)
--------------------- -------------------
Net income $0.10 $0.09
===================== ===================
7
Note 3. Inventories
Inventories are stated at the lower of cost or market, with cost being
determined by the first-in, first-out method.
Inventories are comprised of the following (in thousands):
March 31, December 31,
2001 2000
(Unaudited)
--------- ---------
Raw materials $ 5,154 $ 4,431
Work in process 5,442 5,265
Finished goods 13,572 14,106
Less inventory reserve 60 60
--------- ---------
$24,086 $ 23,742
========= =========
Note 4. Net Income Per Share
Three Months Ended
March 31,
Thousands of Dollars, Except Share and Per Share Data 2001 2000
------------------------------------------------------------------------------------------ ----------------- --- ----------------
Net income $ 1,448 $ 2,110
Adjustments to net income -- --
----------------- ----------------
Net income $ 1,448 $ 2,110
================= ================
Weighted average shares outstanding 15,246,909 15,244,271
Effect of dilutive stock options 149,543 213,387
----------------- ----------------
Dilutive shares outstanding 15,396,452 15,457,658
================= ================
Basic net income per share $ 0.10 $ 0.14
================= ================
Diluted net income per share $ 0.09 $ 0.14
================= ================
Excluded from the shares outstanding at March 31, 2001 were 10,750
antidilutive options to purchase common shares at an exercise price of $9.75
to $11.50. Excluded from shares outstanding at March 31, 2000 were 12,750
antidilutive options to purchase common shares at an exercise price of $9.75
to $12.50.
8
Note 5. Segment Information
During 2001, the Company's reportable segments are based on differences in
product lines and geographic locations and are divided between balls and
rollers, European operations ("Euroball") and plastics. The ball and roller
segment comprises three manufacturing facilities in the eastern United
States. The Euroball segment acquired in July 2000, comprises manufacturing
facilities located in Kilkenny, Ireland, Eltmann, Germany and Pinerolo,
Italy. All of the facilities in the ball and roller and Euroball segments
are engaged in the production of precision balls and rollers used primarily
in the bearing industry. The plastics segment is comprised of the Industrial
Molding Corporation ("IMC") business, located in Lubbuck, Texas, which was
acquired in July 1999 and the Delta Rubber Company ("Delta") business,
located in Danielson, Connecticut, which was acquired in February 2001. IMC
is engaged in the production of plastic injection molded products for the
bearing, automotive, instrumentation, fiber optic and consumer hardware
markets. Delta is engaged in the production of engineered bearing seals and
other precision-molded rubber products to original equipment manufacturers.
The accounting policies of the segments are the same as those described in
the summary of significant accounting policies in the Company's December 31,
2000 Form 10-K. The Company evaluates segment performance based on profit or
loss from operations before income taxes not including nonrecurring gains and
losses. The Company accounts for intersegment sales and transfers at current
market prices; however, the Company did not have any material intersegment
transactions during the three month periods ended March 31, 2001 and 2000.
7
Three Months Three Months Ended
March 31, March 31,
2001 2000
Thousands of Dollars Ball & Roller Euroball Plastics Ball & Roller Euroball Plastics
-------------------------- --------------- -------------- ------------- -------------- -------------- --------------
Revenues from external
customers $ 15,799 $ 25,337 $ 9,091 $ 19,125 $ -- $ 8,877
Segment pre-tax profit
(loss) 1,546 2,658 (486) 2,815 -- 375
Segment assets 62,468 86,955 59,904 61,673 -- 31,689
Note 6. Acquisitions and Joint Ventures
On February 16, 2001, the Company completed the acquisition of all of the
outstanding stock of The Delta Rubber Company, a Connecticut corporation
("Delta") for $22.5 million in cash, of which $500,000 is to be held in
escrow for one year from the date of closing. Delta provides high quality
engineered bearing seals and other precision-molded rubber products to
original equipment manufacturers. NN plans to continue the operation of the
Delta business, which operates a manufacturing facility in Danielson,
Connecticut. AmSouth Bank provided financing for the transaction.
On March 16, 2000, the Company entered into a 50/50 joint venture with
General Bearing Corporation called NN General LLC ("NN General"), which owns
a 60% position in Jiangsu General Ball & Roller Company, Ltd. ("JGBR"), a
Chinese precision ball and roller manufacturer located in Rugao City, Jiangsu
Providence, China. The Company's investment includes a cash loan of $3.4
million. The remaining 40% of the Chinese company is owned by Jiangsu Steel
Ball Factory.
On July 31, 2000, the Company formed a majority owned stand-alone company in
Europe, NN Euroball ApS ("Euroball"), for the manufacture and sale of chrome
steel balls used for ball bearings and other products. The Company owns 54%
of Euroball. AB SKF ("SKF")and FAG Kugelfisher Georg Shafer AG ("FAG") each
own 23%. As part of the transaction, Euroball acquired the ball factories
located in Pinerolo, Italy (previously owned by SKF), Eltmann, Germany
(previously owned by FAG), and Kilkenny, Ireland (previously owned by the
Company). Acquisition financing of approximately 31.5 million Euro
(approximately $29.7 million) was drawn at closing, and the credit facility
provides for additional working capital expenditure financing. The Company
is required to consolidate Euroball due to its ability to exercise control
over its operations and has accounted for the acquisitions of the Pinerolo,
Italy and Eltmann, Germany ball factories using the purchase method of
accounting. Goodwill arising from this acquisition is being amortized on a
straight-line basis over 20 years.
On August 31, 2000, the Company acquired a 51% ownership interest in NN
Mexico, LLC ("NN Mexico"), a Delaware limited liability company. NN Mexico
holds as its sole investment a 100% ownership interest in NN Arte, a
manufacturer of plastic components located in Guadalajara, Mexico. To
acquire its 51% ownership of NN Mexico, the Company made an initial
contribution of $879,000, an additional contribution of $671,000, and is
obligated to provide additional funding of $600,000 payable upon certain
performance conditions at NN Arte. The Company is required to consolidate NN
Mexico due to its ability to exercise control over NN Arte's operations and
has accounted for this acquisition using the purchase method of accounting.
Note 7. Fire
On March 12, 2000, the Company experienced a fire at its Erwin, Tennessee
facility. The fire was contained to approximately 30% of the production area
and did not result in serious injury to any employee. Effected production
was shifted to the Company's other facilities as possible as well as the use
of other suppliers to protect product supply to customers. Insurance
coverage for the loss provides for the reimbursement of replacement value of
property and equipment damaged in the fire. At March 31, 2001 the Company is
in the process of settling the insurance claim. A net loss of $25,000 was
recorded during the quarter ended March 31, 2000. No gain or loss was
recorded during the quarter ended March 31, 2001.
Note 8. Subsequent Event
On July 20, 2001, the Company entered into a syndicated loan agreement with
AmSouth Bank ("AmSouth") as the administrative agent for the lenders, for a
senior non-secured revolving credit facility of up to $25 million, expiring on
July 25, 2003 and a senior non-secured term loan for $35 million expiring on
July 1, 2006. This credit facility replaces the $25 million revolving credit
facility that was temporarily extended and restated in February of 2001 to $50
million and the additional $2 million of availiablity extended in March of 2001.
Amounts outstanding under the revolving facility and the term loan facility bear
interest at a floating rate equal to LIBOR plus an applicable margin between
0.75% to 2.00% based upon calculated financial ratios. The loan agreement
contains customary financial and non-financial covenants.
8
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
Net Sales. Net sales increased by approximately $22.2 million, or 79.3%,
from $28.0 million for the first quarter of 2000 to $50.2 million for the
first quarter of 2001. The formation of Euroball in July of 2000 contributed
$22.6 of the increase, excluding the first quarter sales of the Ireland
facility, which was consolidated into the results of the Company prior to the
formation of Euroball. The Company's acqusition of the Delta Rubber Company
on February 16, 2001 contributed $2.2 million of the increase. Offsetting
these increases was decreased sales of $2.0 million for IMC and $900,000 at
the domestic ball and roller facilities.
Gross Profit. Gross profit increased $4.4 million, or 57.1%, from $7.7
million for the first quarter of 2000 to $12.0 million for the first quarter
of 2001. Excluding the Ireland facility's first quarter, Euroball
contributed $5.5 million of the increase. The Delta acquisition contributed
$511,000. Offsetting these increases were decreased gross profits of
$600,000 and $1.1 million at the domestic ball and roller facility and the
IMC facility. As a percentage of net sales, gross profit decreased from
27.3% in the first quarter of 2000 to 24.0 % for the same period in 2001.
The decrease in gross profit as a percentage of sales was due to inventory
reductions at the domestic ball and roller facilities as well as related
margin decline due to soft economic conditions.
Selling, General and Administrative. Selling, general and administrative
expenses increased $1.7 million from $2.3 million for the first quarter of
2000 to $4.0 million in 2001. The Euroball segment, excluding the Ireland
facility, accounted for $1.5 million of the increase. The acquisiton of
Delta accounted for the remaining $170,000 of the increase. As a percentage
of net sales, selling, general and administrative expenses decreased slightly
from 8.3% in the first quarter of 2000 to 8.0% for the first quarter of 2001.
Depreciation and Amortization. Depreciation and amortization expense
increased from $1.8 million or 79.4% for the first quarter of 2000 to $3.3
million for the same period in 2001. The Euroball segment accounted for $1.2
million of the increase. The Delta acquisition accounted for approximately
$150,000 of the increase. The remainder of the increase was due primarily to
purchases of capital equipment at the Company's domestic ball and roller
facilities. As a percentage of net sales, depreciation and amortization
expense remained at 6.6% for first quarters of 2000 and 2001.
Interest Expense. Interest expense increased by $891,000 from $291,000 in
the first quarter of 2000 to $1.2 million during the same period in 2001.
Interest expense incurred by Euroball to finance the joint venture
transaction accounted for $531,000 of the increase. The remainder of the
increase was due to increased amounts outstanding under the Company's line of
credit in the first quarter of 2001. In February of 2001, the Company
borrowed $22.5 million under the line of credit for the purchase of the Delta
Rubber Company. As a percentage of net sales, interest expense increased
from 1.0% in the first quarter of 2000 to 2.5% for the same period in 2001.
Equity in Earnings of Unconsolidated Affiliates. Equity in earnings of
unconsolidated affiliates increased $36,000 from $13,000 in the first quarter
of 2000 to $49,000 during the same period of 2001. The increase is due to
the Company's share of earnings from the NN General joint venture with
General Bearing Corporation. Earnings from this venture were offset by
losses incurred from the start-up of NN Asia, a joint venture formed to
market products produced by NN General.
Net loss on Involuntary Conversion. The Company recorded a net loss of
$25,000 on loss on involuntary conversion in the first quarter of 2000
related to the March 12, 2000 fire at the Erwin Tennessee ball and roller
facility.
Minority Interest in Consolidated Subsidiary. Minority interest in
consolidated subsidiary increased $536,000 from $0 in the first quarter of
2000 to $536,000 in the first quarter of 2001. This increase is due to
minority interest of $665,000 recorded for the Euroball transaction and
($129,000) recorded for NN Arte. The Company is required to consolidate
Euroball and NN Arte due to its ability to exercise control over the
operations. The Company owns 54% and 51% respectively of Euroball and NN
Arte with the minority shareholders owning the remaining 46% and 49%
respectively.
9
Net Income. Net income decreased from $2.1 million for the first quarter of
2000 to $1.4 million for the same period in 2001. As a percentage of net
sales, net income decreased from 7.5% in the first quarter of 2000 to 2.9%
for the first quarter of 2001. This decrease in net income as a percentage
of net sales was due primarily to decreased gross profits as a percentage of
sales, increased interest expense associated with the Company's acquisitions,
minority interest recorded, and the cumulative effect of change in accounting
principle.
Liquidity and Capital Resources
In July 1997, the Company entered into a loan agreement with First American
National Bank ("First American") which provides for a revolving credit
facility of up to $25 million, expiring on June 30, 2000. In July 2000, the
Company extended the terms of the loan agreement with First American to
expire on October 30, 2001. Amounts outstanding under the revolving facility
are unsecured and bear interest at a floating rate equal to, at the Company's
option, either LIBOR plus 0.65% or the Fed Funds effective rate plus 1.5%.
In August 2000, the Company entered into an agreement, which provided an
additional $2 million of availability to the revolving credit facility
through December 31, 2000. The loan agreement contains customary financial
and operating restrictions on the Company, including covenants, restricting
the Company, without First American's consent, from incurring additional
indebtedness from, or pledging any of its assets to, other lenders and from
disposing of a substantial portion of its assets. In addition, the Company
is prohibited from declaring any dividend if a default exists under the
revolving credit facility at the time of, or would occur as a result of, such
declaration. The loan agreement also prohibits sales of property outside of
the ordinary course of business. The loan agreement also contains customary
financial covenants with respect to the Company, including a covenant that
the Company's earnings will not decrease in any year by more than fifty
percent of earnings in the Company's immediately preceding fiscal year. In
February of 2001, the Company extended and restated the $25 million revolving
credit facility with AmSouth Bank to temporarily increase the facility to $50
million. The facility is planned to be reduced to $25 million on June 30,
2001 in anticipation of the Company structuring long-term financing
arrangements for this amount. The original $25 million revolving credit
facility will expire on July 25, 2003. In February 2001, the Company drew
$23 million against the new line to finance the acquisition of Delta.
Amounts outstanding under the amended revolving facility are unsecured and
bear interest at a floating rate equal to LIBOR plus an applicable margin of
between 0.65% and 2.15% based upon calculated financial ratios. The loan
contains various restrictive financial and non-financial covenants. The
Company, as of March 31, 2001, was in compliance with all such covenants.
On March 1, 2001, the Company entered into an agreement with AmSouth Bank
which provides an additional $2 million of availability to the revolving
credit facility through June 1, 2001. At March 31, 2001, the Company had no
amounts outstanding under this agreement.
In July 2000, NN Euroball ApS, and its subsidiaries entered into a loan
agreement with HypoVereinsbank Luxembourg S.A. as agent for Bayerische
Hypo-und Vereinsbank AG of Munich, Germany for a senior secured revolving
credit facility of Euro 5,000,000, expiring on July 15, 2006 and a senior
secured term loan of Euro 36,000,000, expiring on July 15, 2006. On July 31,
2000, upon closing of the joint venture, NN Euroball ApS borrowed a total of
Euro 31,500,000 against these facilities for acquisition financing.
Additional working capital and capital expenditure financing are provided for
under the facility. Amounts outstanding under the facilities accrue interest
at a floating rate equal to EURIBOR plus an applicable margin of between
1.125% to 2.25% based upon calculated financial ratios. Additionally, the
Company has an interest rate swap that fixes the interest for 12.5 million
Euros outstanding under the facilities at 5.51%. 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. The
loan agreement contains various restrictive financial and non financial
covenants. The Company, as of March 31, 2001, was in compliance with all such
covenants.
10
The Company's arrangements with its domestic customers typically provide that
payments are due within 30 days following the date of the Company's shipment
of goods, while arrangements with foreign customers (other than foreign
customers that have entered into an inventory management program with the
Company) generally provide that payments are due within either 90 or 120 days
following the date of shipment. Under the Company's inventory management
program, payments typically are due within 30 days after the product is used
by the customer. The Company's net sales historically have not been of a
seasonal nature. However, seasonality has become a factor for the foreign
ball and roller sales in that many foreign customers cease production during
the month of August. The Company also experiences seasonal fluctuation
through its plastics division which provides several lines of seasonal
hardware.
The Company bills and receives payment from some of its foreign customers in
their local currency. To date, the Company has not been materially adversely
affected by currency fluctuations or foreign exchange restrictions.
Nonetheless, as a result of these sales, the Company's foreign exchange risk
has increased. Various strategies to manage this risk are under development
and implementation, including a hedging program. In addition, a
strengthening of the U.S. dollar against foreign currencies could impair the
ability of the Company to compete with international competitors for foreign
as well as domestic sales.
Working capital, which consists principally of accounts receivable and
inventories, was $26.1 million at March 31, 2001 as compared to $28.2 million at
December 31, 2000. The ratio of current assets to current liabilities decreased
from 1.79:1 at December 31, 2000 to 1.56:1 at March 31, 2001. Cash flow from
operations increased from $5.0 million during the first quarter of 2000 to $6.6
million during the same period in 2001.
During 2001, the Company plans to spend approximately $5.3 million on capital
expenditures of which approximately $1.1 million has been spent through March
31, 2001. The Company intends to finance these activities with cash
generated from operations and funds available under the credit facility
described above. The Company believes that funds generated from operations
and borrowings from the credit facility will be sufficient to finance the
Company's working capital needs and projected capital expenditure
requirements through December 2001.
The Euro
The treaty on European Union provided that an economic and monetary union be
established in Europe whereby a single European currency, the Euro, was
introduced to replace the currencies of participating member states. The
Euro was introduced on January 1, 1999, at which time the value of
participating member state currencies were irrevocably fixed against the Euro
and the European Currency Unit. For the three year transitional period
ending December 31, 2001, the national currencies of member states will
continue to circulate but be in sub-units of the Euro. At the end of the
transitional period, Euro bank notes and coins will be issued, and the
national currencies of the member states will be legal tender no later than
June 30, 2002.
The Company currently has operations in Italy, Germany and Ireland, all of
which are Euro participating countries, and sells product to customers in
many of the participating countries. The Euro has been adopted as the
functional currency at these locations.
Seasonality and Fluctuation in Quarterly Results
The Company's net sales historically have not been of a seasonal nature.
However, as foreign sales have increased as a percentage of total sales,
seasonality has become a factor for the Company in that many foreign
customers cease production during the month of August.
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Inflation and Changes in Prices
While the Company's operations have not been affected by inflation during
recent years, prices for 52100 Steel and other raw materials purchased by the
Company are subject to change. For example, during 1995, due to an increase
in worldwide demand for 52100 Steel and the decrease in the value of the
United States dollar relative to foreign currencies, the Company experienced
an increase in the price of 52100 Steel and some difficulty in obtaining an
adequate supply of 52100 Steel from its existing suppliers. Typically, the
Company's pricing arrangements with its steel suppliers are subject to
adjustment once every six months. In an effort to limit its exposure to
fluctuations in steel prices, the Company has generally avoided the use of
long-term, fixed price contracts with its customers. Instead, the Company
typically reserves the right to increase product prices periodically in the
event of increases in its raw material costs. The Company was able to
minimize the impact on its operations resulting from the 52100 Steel price
increases by taking such measures.
Cautionary Statements for Purposes of the "Safe Harbor" Provisions of the
Private Securities Litigation Reform Act of 1995
The Company wishes to caution readers that this report contains, and
future filings by the Company, press releases and oral statements made by the
Company's authorized representatives may contain, forward-looking statements
that involve certain risks and uncertainties. Readers can identify these
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. Readers are strongly encouraged to consider these factors
when evaluating any such forward-looking statement.
The following paragraphs discuss the risk factors the Company regards
as the most significant, although the Company wishes to caution that other
factors that are currently not considered as significant or that currently
cannot be foreseen may in the future prove to be important in affecting the
Company's results of operations. The Company undertakes no obligation to
update or revise any forward-looking statements, whether as a result of new
information, future events or otherwise.
Industry Risks. Both the precision ball and roller and precision
plastics industries are cyclical and tend to decline in response to overall
declines in industrial production. The Company's sales in the past have been
negatively affected, and in the future very likely would be negatively
affected, by adverse conditions in the industrial production sector of the
economy or by adverse global or national economic conditions generally.
Competition. The precision ball and roller market and the precision
plastics market are highly competitive, and many of the manufacturers in each
of the markets are larger and have substantially greater resources than the
Company. The Company's competitors are continuously exploring and
implementing improvements in technology and manufacturing processes in order
to improve product quality, and the Company's ability to remain competitive
will depend, among other things, on whether it is able, in a cost effective
manner, to keep pace with such quality improvements. In addition, the Company
competes with many of its ball and roller customers that, in addition to
producing bearings, also internally produce balls and rollers for sale to
third parties. The Company faces a risk that its customers will decide to
produce balls and rollers internally rather than outsourcing their needs to
the Company
Rapid Growth. The Company has significantly expanded its ball and
roller production facilities and capacity over the last several years. During
1997, the Company purchased an additional manufacturing plant in Kilkenny,
Ireland. The Company continued this expansion in 2000 through its 54%
ownership of the NN Euroball joint venture with SKF and FAG. In addition,
the Company invested in Jiangsu General Ball & Roller Company, a Chinese
joint venture specializing in various types of ball production. The
Company's Ball & Roller Division currently is not operating at full capacity
and faces risks of further under-utilization or inefficient utilization of
its production facilities in future years. The Company also faces risks
associated with start-up expenses, inefficiencies, delays and increased
depreciation costs associated with these joint ventures and expansions.
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Raw Material Shortages. Because the balls and rollers manufactured by
the Company have highly-specialized applications, their production requires
the use of very particular types of steel. Due to quality constraints, the
Company obtains the majority of its steel from overseas suppliers. Steel
shortages or transportation problems, particularly with respect to 52100
Steel, could have a detrimental effect on the Company's business.
Risks Associated with International Trade. Because the Company (a)
obtains a majority of its raw materials for the manufacture of balls and
rollers from overseas suppliers, (b) now actively participates in overseas
manufacturing operations and (c) sells to a large number of international
customers, the Company faces risks associated with (i) adverse foreign
currency fluctuations, (ii) changes in trade, monetary and fiscal policies,
laws and regulations, and other activities of governments, agencies and
similar organizations, (iii) the imposition of trade restrictions or
prohibitions, (iv) the imposition of import or other duties or taxes, and (v)
unstable governments or legal systems in countries in which the Company's
suppliers, manufacturing operations, and customers are located. An increase
in the value of the United States dollar relative to foreign currencies
adversely affects the ability of the Company to compete with its
foreign-based competitors for international as well as domestic sales.
Dependence on Major Customers. During 2000, the Company's ten largest
customers accounted for approximately 69% of its net sales. Sales to various
US and foreign divisions of SKF, which is one of the largest bearing
manufacturers in the world, accounted for approximately 32% of net sales in
2000, and sales to FAG accounted for approximately 17% of net sales. None of
the Company's other customers accounted for more than 5% of its net sales in
2000. The loss of all or a substantial portion of sales to these customers
would have a material adverse effect on the Company's business.
Acquisitions. The Company's growth strategy includes growth through
acquisitions. In 1999, the Company acquired the IMC businesses as part of
that strategy. In 2000, the Company formed the NN Euroball joint venture
with SKF and FAG and began operating two new ball manufacturing facilities.
In February of 2001, the Company continued to implement this strategy through
the acquisition of Delta. Although the Company believes that it will be able
to continue to integrate the operations of IMC, NN Euroball, Delta and other
companies acquired in the future into its operations without substantial
cost, delays or other problems, its ability to do so will depend on, among
other things, the adequacy of its implementation plans, the ability of its
management to effectively oversee and operate the combined operations of the
Company and the acquired businesses and its ability to achieve desired
operating efficiencies and sales goals. If the Company is not able to
successfully integrate the operations of acquired companies into its
business, its future earnings and profitability could be materially and
adversely affected.
13
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) On March 1, 2001, the Company filed a Report on Form 8-K to announce
the acquisition of the outstanding stock from Delta Rubber Company, a
Conneticut corporation,
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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: August 14, 2001 /s/ Roderick R. Baty
---------------------------------
Roderick R. Baty, President and
Chief Executive Officer
(Duly Authorized Officer)
Date: August 14, 2001 /s/ David L. Dyckman
---------------------------------
David L. Dyckman
Chief Financial Officer and
Vice President
(Principal Financial Officer)
(Duly Authorized Officer)
Date: August 14, 2001 /s/ William C. Kelly, Jr.
---------------------------------
William C. Kelly, Jr.,
Treasurer, Assistant Secretary and
Chief Accounting Officer
(Principal Accounting Officer)
(Duly Authorized Officer)
15