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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended 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. Consolidated Financial Statements:
Consolidated Statements of Income and Comprehensive Income for the three
months ended March 31, 2001 and 2000 2
Consolidated Balance Sheet at March 31, 2001 and December 31, 2000 3
Consolidated Statements of Changes in Stockholders' Equity
for the three months ended March 31, 2001 and 2000 4
Consolidated Statements of Cash Flows for the three months
ended March 31, 2001 and 2000 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K 14
Signatures 15
PART I. FINANCIAL INFORMATION
NN, Inc.
Consolidated Statements of Income and Comprehensive Income
(Unaudited)
Three Months Ended
March 31,
Thousands of Dollars, Except Share and Per Share Data 2001 2000
---------------------------------------------------------------- ----------- ------------
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 (gain)/loss on involuntary conversion -- 25
Other (income)/expense (180) --
----------- -----------
Income before provision for income taxes 3,766 3,190
Provision for income taxes 1,654 1,080
Minority interest in consolidated subsidiary 550 --
----------- -----------
Net income 1,562 2,110
Other comprehensive income (loss):
Foreign currency translation adjustments (3,386) (395)
----------- -----------
Comprehensive income (loss) $(1,824) $1,715
=========== ===========
Basic income per share $0.10 $0.14
=========== ===========
Weighted average shares outstanding 15,246,909 15,244,271
=========== ===========
Diluted income per share $0.10 $0.14
===========
===========
Weighted average shares outstanding 15,396,452 15,457,658
=========== ===========
See accompanying notes.
2
NN, Inc.
Consolidated Balance Sheets
March 31, December 31,
2001 2000
Thousands of Dollars (Unaudited)
---------------------------------------------------------------------------------------
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 962 962
--------- ---------
Total current assets 72,973 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 $209,197 $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
Acquisition bridge financing 24,642 --
Short-term loan -- 2,000
Other liabilities 3,061 4,357
--------- ---------
Total current liabilities 66,370 35,859
Minority interest in consolidated subsidiaries 28,789 30,257
Deferred income taxes 5,524 5,353
Long-term debt 45,784 50,515
Other 528 578
--------- ---------
Total liabilities 146,995 122,562
Total stockholders' equity 62,202 65,246
--------- ---------
Total liabilities and stockholders' equity $209,197 $187,808
========= =========
See accompanying notes.
3
NN, Inc.
Consolidated Statements of Changes in Stockholders' Equity
(Unaudited)
Accumulated
Common stock Additional Retained other
Number Par paid in earnings comprehensive
Thousands of Dollars of shares Value capital (deficit) (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 1,562 1,562
Dividends (1,220) (1,220)
Other comprehensive loss (3,386) (3,386)
------- ------- ------- -------- --------- --------
Balance, March 31, 2001 15,247 $ 153 $30,414 $36,706 $(5,071) $62,202
======= ======= ======= ======== ========= ========
See accompanying notes.
4
NN, Inc.
Consolidated Statements of Cash Flows
(Unaudited)
Three Months Ended
March 31,
Thousands of Dollars 2001 2000
--------------------------------------------------------------------------------------------
Operating Activities:
Net income $ 1,562 $ 2,110
Adjustments to reconcile net income to net cash provided by
Operating activities:
Depreciation and amortization 3,310 1,845
Loss on disposals 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 550 --
Accounts receivable (6,363) (3,132)
Inventories 702 903
Other current assets (127) (1,364)
Other assets (211) (446)
Accounts payable 830 2,535
Income taxes payable 1,675 671
Other liabilities 3,453 (87)
-------- --------
Net cash provided by operations 5,280 5,023
-------- --------
Investing Activities:
Acquisition of Delta Rubber Company, net of cash acquired (22,194) --
Acquisition of property, plant and equipment
and other investing activities, net 2,823 (194)
Long-Term Note Receivable -- (2,500)
-------- --------
Net cash provided (used) by investing activities (19,371) (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 rate 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. 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
========== ==========
6
Note 3. Net Income Per Share
Three Months Ended
March 31,
Thousands of Dollars, Except Share and Per Share Data 2001 2000
------------------------------------------------------------------------------------------
Net income $ 1,562 $ 2,110
Adjustments to net income -- --
----------- -----------
Net income $ 1,562 $ 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 $ 0.10 $ 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.
Note 4. Segment Information
During 2000, 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. 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 period ended March
31, 2001 and 2000.
Three Months Three Months Ended
March 31, March 31,
2001 2000
Thousands of Ball & Ball &
Dollars Roller Euroball Plastics Roller Euroball Plastics
------------------- ---------- --------- --------- --------- ---------- ----------
Revenues from
external customers $ 15,799 $ 25,337 $ 9,091 $ 19,195 $ -- $ 8,877
Segment profit 1,546 2,657 (486) 2,815 -- 375
Segment assets 62,468 86,825 59,904 61,673 -- 31,689
7
Note 5. 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. At December 31, 2000, NN Arte had not commenced
operations.
Note 6. 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
8
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.
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 2.4%
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
9
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 increase $550,000 from $0 in the first quarter of 2000 to $550,000 in
the first quarter of 2001. This increase is due to minority interest of $679,000
recorded for the Euroball transaction and ($129,000) recorded for NN Arte. The
Company is required to consolidate Euroball and NN Arte as the Company owns 54%
and 51% respectively of Euroball and NN Arte with the minority shareholders
owning the remaining 46% and 49% respectively.
Net Income. Net income decreased from $2.1 million for the first quarter of 2000
to $1.6 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 3.1% 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 and minority
interest recorded.
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
10
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. 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.
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 $6.6 million at March 31, 2001 as compared to $28.2 million at
December 31, 2000. The decrease is primarily attributable to the Company's
short-term acquisition financing of $24.6 million as discussed above in this
section. The ratio of current assets to current liabilities decreased from
1.79:1 at December 31, 2000 to 1.10:1 at March 31, 2001. Cash flow from
operations increased slightly from $5.0 million during the first quarter of 2000
to $5.3 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.
11
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.
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.
12
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.
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 the 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)
May 11, 2001 /s/ Roderick R. Baty
Date:----------------- --------------------------------
Roderick R. Baty, President and
Chief Executive Officer
(Duly Authorized Officer)
May 11, 2001 /s/ David L. Dyckman
Date:----------------- --------------------------------
David L. Dyckman
Chief Financial Officer and
Vice President
(Principal Financial Officer)
(Duly Authorized Officer)
May 11, 2001
Date:----------------- /s/ William C. Kelly, Jr.
--------------------------------
William C. Kelly, Jr.,
Treasurer, Assistant Secretary and
Chief Accounting Officer
(Principal Accounting Officer)
(Duly Authorized Officer)
15