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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 2000
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 November 10, 2000 there were 15,246,909 shares of the registrant's common
stock, par value $0.01 per share, outstanding.
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<PAGE>
<TABLE>
<CAPTION>
NN, Inc.
INDEX
Page No.
Part I. Financial Information
<S> <C> <C>
Item 1. Financial Statements:
Condensed Statements of Income and Comprehensive Income for the three
and nine months ended September 30, 2000 and 1999 2
Condensed Balance Sheets at September 30, 2000 and December 31, 1999 3
Condensed Statements of Changes in Stockholders' Equity for the nine
months ended September 30, 2000 and 1999 4
Condensed Statements of Cash Flows for the nine months ended
September 30, 2000 and 1999 5
Notes to Condensed Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K 16
Signatures 17
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION
NN, Inc.
Condensed Statements of Income and Comprehensive Income
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
Thousands of Dollars, Except Per Share Data 2000 1999 2000 1999
---------------------------------------------------------- ---------------- --------------- -------------- ---------------
<S> <C> <C> <C> <C>
Net sales $ 37,075 $ 25,601 $ 90,720 $ 60,988
Cost of goods sold 26,103 18,289 64,415 43,403
---------------- --------------- -------------- ---------------
Gross profit 10,972 7,312 26,305 17,585
Selling, general and administrative 3,236 2,223 8,017 4,468
Depreciation and Amortization 2,535 1,821 6,103 4,296
Loss on involuntary conversion 1,695 -- 10,179 --
Gain on involuntary conversion (1,695) -- (10,154) --
Equity in earnings of unconsolidated affiliate (39) -- (105) --
---------------- --------------- -------------- ---------------
Income from operations 5,240 3,268 12,265 8,821
Interest expense, net 651 247 1,209 256
---------------- --------------- -------------- ---------------
Income before provision for income taxes 4,589 3,021 11,056 8,565
Provision for income taxes 1,722 1,077 3,837 2,944
Minority interest of consolidated subsidiary 424 -- 424 --
---------------- --------------- -------------- ---------------
Net income $ 2,443 $ 1,944 $ 6,795 $ 5,621
Other comprehensive income:
Foreign currency translation (2,058) 391 (2,480) (896)
---------------- --------------- -------------- ---------------
Other comprehensive income (2,058) 391 (2,480) (896)
---------------- --------------- -------------- ---------------
Comprehensive income $ 385 $ 2,335 $ 4,315 $ 4,725
================ =============== ============== ===============
Basic income per common share: $ 0.16 $ 0.13 $ 0.45 $ 0.37
================ =============== ============== ===============
Weighted average number of
Shares outstanding 15,245 15,244 15,245 15,244
================ =============== ============== ===============
Diluted income per common share: $ 0.16 $ 0.13 $ 0.44 $ 0.37
================ =============== ============== ===============
Weighted average number of
shares outstanding 15,424 15,317 15,433 15,264
================ =============== ============== ===============
</TABLE>
See accompanying notes.
2
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<TABLE>
<CAPTION>
NN, Inc.
Condensed Balance Sheets
September 30, December 31,
2000 1999
Thousands of Dollars (Unaudited)
-------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 8,194 $ 1,409
Accounts receivable, net 34,012 18,183
Inventories, net 20,186 13,122
Other current assets 3,368 688
--------------- ----------------
Total current assets 65,760 33,402
Property, plant and equipment, net 82,028 43,452
Goodwill, net 23,933 12,779
Equity in affiliates 1,397 --
Other assets 5,924 735
--------------- ----------------
Total assets $ 179,042 90,368
=============== ================
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 18,637 $ 5,343
Accrued pension obligation 5,856 --
Accrued wages 2,766 676
Accrued bonuses 1,567 207
Deferred income 624 875
Income taxes payable 2,010 1,283
Other current liabilities 3,653 2,094
--------------- ----------------
Total current liabilities 35,113 10,478
Long-term debt 50,427 17,151
Minority interest in consolidated subsidiary 30,024 --
Deferred income taxes 2,678 2,611
--------------- ----------------
Total liabilities 118,242 30,240
Total stockholders' equity 60,800 60,128
--------------- ----------------
Total liabilities and stockholders' equity $179,042 $90,368
=============== ================
</TABLE>
See accompanying notes.
3
<PAGE>
<TABLE>
<CAPTION>
NN, Inc.
Condensed Statements of Changes in Stockholders' Equity
(Unaudited)
Common stock Additional Other
Number Par paid in Retained comprehensive
Thousands of Dollars Of shares value capital earnings income Total
------------------------------------------------- ----------- --------- ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1999 14,804 $149 $27,902 $28,306 $ (115) $56,242
Net income 5,621 5,621
Dividends (3,588) (3,588)
Acquisitions 440 4 2,496 2,500
Other comprehensive income (loss) (896) (896)
----------- ---------- ------------ ------------- ------------ ------------
Balance, September 30, 1999 15,244 $153 $30,398 $30,339 $(1,011) $59,879
=========== ========== ============ ============= ============ ============
Balance, January 1, 2000 15,244 $153 $30,398 $31,255 $ (1,678) $60,128
Shares issued 3 16 16
Net income 6,795 6,795
Dividends paid (3,659) (3,659)
Other comprehensive income (2,480) (2,480)
----------- ---------- ------------ ------------- ------------ ------------
Balance, September 30, 2000 15,247 $153 $30,414 $34,391 $ (4,158) $60,800
=========== ========== ============ ============= ============ ============
</TABLE>
See accompanying notes.
4
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<TABLE>
<CAPTION>
NN, Inc.
Condensed Statements of Cash Flows
(Unaudited)
Nine Months Ended
September 30,
Thousands of Dollars 2000 1999
---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Operating Activities:
Net income $6,795 $5,621
Adjustments to reconcile net income:
Depreciation and amortization 6,103 4,296
Equity earnings of unconsolidated affiliate (105) --
Interest income on receivable from unconsolidated affiliate (95) --
Minority interest in earnings of affiliated subsidiary 424 --
Changes in operating assets and liabilities, net of effects of acquisitions:
Accounts receivable (3,392) (3,518)
Inventories 54 5,101
Income taxes 238 409
Other current assets (2,357) (66)
Other assets (1,413) 29
Accounts payable 6,714 624
Accrued bonuses 1,360 1,485
Other liabilities 420 902
------------- ------------
Net cash provided by operating activities 14,746 14,883
------------- ------------
Investing Activities:
Acquisition of plant, property, and equipment (6,972) (1,240)
Involuntary conversion of plant, property and equipment 2,001 --
Long-term note receivable (3,120) --
Investment in unconsolidated affiliate (100) --
Payments for acquisitions, net of cash acquired (56,521) (27,414)
------------- ------------
Net cash used by investing activities (64,712) (28,654)
------------- ------------
Financing Activities:
Proceeds (payments) under revolving credit facility 5,480 18,714
Proceeds from issuance of stock 15 --
Minority shareholders capital contributions 29,600 --
Proceeds from long-term debt 27,796 --
Dividends (3,659) (3,588)
------------- ------------
Net cash provided by financing activities 59,232 15,126
------------- ------------
Effect Of Exchange Rates On Cash (2,480) (896)
Net Change in Cash and Cash Equivalents 9,266 1,355
Cash and Cash Equivalents at Beginning of Period 1,408 1,430
------------- ------------
Cash and Cash Equivalents at End of Period $ 8,194 $ 1,889
============= ============
</TABLE>
See accompanying notes.
5
<PAGE>
NN, Inc.
Notes To Condensed Financial Statements
Note 1. Interim Financial Statements
The accompanying condensed financial statements of NN, Inc. (the "Company") have
not been audited by independent accountants, except for the balance sheet at
December 31, 1999. In the opinion of the Company's management, the financial
statements reflect all adjustments necessary to present fairly the results of
operations for the three and nine month periods ended September 30, 2000 and
1999, respectively, the Company's financial position at September 30, 2000 and
December 31, 1999, and the cash flows for the nine month periods ended September
30, 2000 and 1999, respectively. 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 three quarters of 2000 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):
September 30, December 31,
2000 1999
(Unaudited)
----------------- ----------------
Raw materials $ 3,364 $ 3,131
Work in process 4,748 2,585
Finished goods 12,074 7,406
----------------- ----------------
20,186 13,122
================= ================
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Note 3. Net Income Per Share
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
2000 1999 2000 1999
Thousands of Dollars, Except Share and Per Share Data
---------------------------------------------------- ----------------- --------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Net income $ 2,443 $ 1,944 $ 6,795 $ 5,621
Adjustments to net income -- -- -- --
----------------- --------------- ---------------- ----------------
Net income $ 2,443 $ 1,944 $ 6,795 $ 5,621
================= =============== ================ ================
Basic shares outstanding 15,245,147 15,244,282 15,244,565 15,244,282
Effect of dilutive stock options 178,980 72,658 188,905 19,532
----------------- --------------- ---------------- ----------------
Dilutive shares outstanding 15,424,127 15,316,940 15,433,470 15,263,814
================= =============== ================ ================
Basic net income per share $ 0.16 $ 0.13 $ 0.45 $ 0.37
================= =============== ================ ================
Diluted net income per share $ 0.16 $ 0.13 $ 0.44 $ 0.37
================= =============== ================ ================
</TABLE>
Excluded from the shares outstanding for the third quarter ended September 30,
2000 and 1999 were 10,750 and 470,125 antidilutive options, respectively, which
had exercise prices ranging from $9.75 to $11.50 and $9.39 to $15.50. Excluded
from the shares outstanding for the nine months ended September 30, 2000 and
1999 were 10,750 and 510,125 antidilutive options, respectively, which had
exercise prices ranging from $9.75 to $11.50 and $6.38 to $15.50.
Note 4. Segment Information
In connection with the Company's acquisition of certain assets and liabilities
of Earsley Capital Corporation in July 1999, the Company has chosen to realign
its reportable segments on the basis of manufactured products. As a result of
this realignment, the Company now has two reportable segments which include
balls & rollers and plastics. The Company's ball & roller operations are
distributed among two manufacturing facilities in Tennessee, one manufacturing
facility in South Carolina and the three European facilities comprising the
Company's 54% owned subsidiary, NN Euroball ApS. All of these facilities are
engaged in the production of precision balls and rollers used primarily in the
bearing industry. The Company's plastic operations are located in two
manufacturing facilities located in Lubbock, Texas. The facility is engaged in
the production of precision plastic injection molded components.
The accounting policies of the segments do not differ from those of the
consolidated entity. The Company evaluates segment performance based on profit
or loss from operations before income taxes not including non-recurring gains or
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 or nine-month period ended September 30, 2000.
<TABLE>
<CAPTION>
Three Months Ended
September 30,
2000 1999
Thousands of Dollars Ball & Roller Plastics Ball & Roller Plastics
------------------------------------ --------------------- -------------------- ---------------------- ------------------
<S> <C> <C> <C> <C>
Revenues from external customers $29,243 $ 7,832 $ 15,993 $ 9,608
Segment profit 3,937 228 2,324 697
Segment assets 148,187 30,855 61,465 33,455
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
2000 1999
Thousands of Dollars Ball & Roller Plastics Ball & Roller Plastics
------------------------------------ --------------------- ------------------- --------------------- ------------------
<S> <C> <C> <C> <C>
Revenues from external customers $66,664 $24,056 $51,380 $ 9,608
Segment profit/(loss) 9,919 738 7,868 697
Segment assets 148,188 30,855 61,465 33,455
</TABLE>
Segment assets for balls and rollers and plastics at December 31, 1999 were
$58.6 million and $31.8 million respectively.
Note 5. Acquisitions
On July 31, 2000, the Company completed its Euroball transaction. Completion of
the transaction required the Company to start a jointly owned stand-alone
company in Europe, NN Euroball ApS, for the manufacture and sale of chrome steel
balls used for the ball bearings and other products. The Company owns 54% of the
shares of the new company, SKF and FAG Kugelfischer Georg Schager AG own 23%
each. NN Euroball ApS subsequently acquired the ball factories located in
Pinerolo, Italy (previously owned by SKF), Eltmann, Germany (previously owned by
FAG) and Kilkenny, Ireland (previously owned by NN, Inc.). NN Euroball ApS'
employment is approximately 700 and yearly sales are planned to be approximately
95 million euro. Financing for the transaction was provided by HypoVereinsbank
Luxembourg S.A. as an agent for Bayerische Hypo-und Vereinsbank AG of Munich,
Germany. Acquisition financing of approximately 31.5 million euro was drawn at
closing, and the credit facilty provides for additional working capital and
capital expenditure financing. The Company is required to consolidate NN
Euroball ApS due to their ability to exercise control over its operations and NN
Euroball Aps 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.
Effective July 4, 1999 the Company acquired substantially all of the assets and
assumed certain liabilities of Earsley Capital Corporation, a Nevada corporation
and successor to and formerly known as Industrial Molding Corporation ("IMC").
IMC, located in Lubbock, Texas, operates as a premier full-service designer and
manufacturer of precision plastic injection molded components. The Company paid
consideration of approximately $29 million, consisting of cash in the amount of
$26.7 million and 440,038 shares of its common stock, for the net assets
acquired from IMC. Cash used in the acquisition was obtained from the Company's
existing line of credit. The Company has accounted for this acquisition using
the purchase method of accounting and is amortizing the associated goodwill on a
straight-line basis over a period of 20 years.
IMC reported earnings of $1.9 million and $1.2 million on net sales of $28.1
million and $13.7 million for the year ended January 2, 1998 and the six-month
period ended July 4, 1999, respectively. Net assets of IMC which were acquired
by the Company approximated $13.7 million and $16 million at January 2, 1999 and
July 4, 1999, respectively.
On August 31, 2000 the Company acquired a 51% ownership interest in NN Mexico,
LLC, 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 was required to make an initial contribution of $879,000 and
provide additional funding of $1.27 million payable upon certain performance
conditions at NN Arte. The Company is required to consolidate NN Mexico due to
their ability to exercise control over its operations and has accounted for this
acquisition using the purchase method of accounting. At September 30, 2000, NN
Arte had not commenced operations.
The following unaudited pro forma summary presents the financial information as
if the Company's acquisitions occurred on January 1, 1999. These pro forma
results have been prepared for comparative
8
<PAGE>
purposes and do not purport to be indicative of what would have occurred had the
acquisition been made on January 1, 1999, nor is it indicative of future
results.
Nine Months Ended
September 30,
Thousands of Dollars 2000 1999
----------------------------------- --------------------- -------------------
Revenues from external customers $114,564 $ 141,796
Net profit 5,447 4,965
EPS $ 0.36 $ 0.33
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 is
available for the loss. At September 30, 2000, the Company recorded a loss of
approximately $10.2 million representing the net book value of assets destroyed
in the fire and other fire related expenses. The Company also recorded a gain of
approximately $10.2 million at September 30, 2000 representing the amount it
believes the Company will recover from insurance proceeds for losses already
recognized.
9
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
Three Months Ended September 30, 2000 Compared to the Three Months Ended
September 30, 1999
Net Sales. Net sales increased by approximately $11.5 million, or 44.8%, from
$25.6 million for the third quarter of 1999 to $37.1 million for the third
quarter of 2000. Excluding 2000 third quarter sales of the Ireland facility,
which were consolidated into the results of the Company prior to the formation
of Euroball which contributed $11.8 million in sales for the quarter. The
remainder of the difference is accounted for by increased domestic ball and
roller sales which were offset by decreased sales by the plastics division. The
decrease in the plastics division was primarily due to decreased sales to one
existing customer.
Gross Profit. Gross profit increased $3.7 million, or 50.1%, from $7.3 million
for the third quarter of 1999 to $11.0 million for the third quarter of 2000.
Net of the Ireland facility 2000 third quarter gross profit, the Euroball joint
venture contributed $3.5 million of the increase. The remainder of the increase
is due to increased gross profit contribution from the ball and roller division
due to higher sales volume and profitability. This increase was somewhat offset
by decreased gross profit in the plastics division due to decreased sales
volumes. As a percentage of net sales, gross profit increased from 28.6% in the
third quarter of 1999 to 29.6% for the same period in 2000. This increase in
gross profit as a percentage of net sales was due primarily to increased
efficiencies in the ball and roller division in the third quarter of 2000 as
compared to the third quarter of 1999.
Selling, General and Administrative. Selling, general and administrative
expenses increased from $2.2 million in the third quarter of 1999 to $3.2
million in the third quarter of 2000. Euroball net of the Ireland facility
accounted for approximately $700,000 of the increase. The remainder of the
increase was due primarily to the Company's business development activities. As
a percentage of net sales, selling, general and administrative expenses remained
flat at 8.7% for the third quarter of 1999 and 2000.
Depreciation. Depreciation expense increased from $1.8 million for the third
quarter of 1999 to $2.5 million for the same period in 2000. This increase was
due mainly to the addition of depreciation and amortization expense associated
with Euroball. As a percentage of net sales, depreciation expense decreased from
7.1% for in the third quarter of 1999 to 6.8% in the third quarter of 2000.
Interest Expense. Interest expense increased from $247,000 in the third quarter
of 1999 to $650,000 during the same period in 2000. The increase was due to
primarily to amounts drawn against a credit facility to finance the Euroball
transaction. Additionally, increased levels outstanding under the Company's
domestic line of credit account for the remainder of the increase. See the
"Liquidity and Capital Resources Section."
Net Income. Net income increased by $499,000, or 25.7%, from $1.9 million for
the third quarter of 1999 to $2.4 million for the same period in 2000. The
majority of the increase was due to Euroball. As a percentage of net sales, net
income decreased from 7.6% in the third quarter of 1999 to 6.6% for the third
quarter of 2000.
Nine Months Ended September 30, 2000 Compared to the Nine Months Ended September
30, 1999
Net Sales. Net sales increased by approximately $29.7 million, or 48.8%, from
$61.0 million for the first nine months of 1999 to $90.7 million for the same
period in 2000. Euroball, excluding, sales of the Ireland facility, accounted
for $11.8 million of the increase. The July 1999 acquisition of IMC
10
<PAGE>
accounted for approximately $16.2 of the increase due to only three months of
revenues being included in the nine months ended September 30, 1999 as compared
to a full nine months of revenues included in the current year. The remainder of
the increase was due to increased ball and roller sales in for the nine-month
period ended September 30, 2000. This increase was somewhat offset by decreased
sales in the plastics division.
Gross Profit. Gross profit increased $8.7 million, or 49.6%, from $17.6 million
for the first nine months of 1999 to $26.3 million for the same period of 2000.
Euroball net of Ireland gross profit accounted for $3.5 million in increased
gross profit. The acquisition of IMC in July of 1999 accounted for approximately
$4.0 million due to only three months of results included in the prior year's
period as compared to nine months in the current year's period. The remainder of
the increase was due to increased ball and roller profitablity. As a percentage
of net sales, gross profit increased from 28.8% in the first nine months of 1999
to 29.0% in the same period of 2000.
Selling, General and Administrative. Selling, general and administrative
expenses increased by $3.5 million or 79.4%, from $4.5 million in the first nine
months of 1999 to $8.0 million in the same period of 2000. This increase was due
primarily to the Company's increased business development activities.
Additionally Euroball, net of third quarter 2000 Ireland selling, general and
administrative expenses added approximately $700,000. The acquisition of IMC
accounted for approximately $1.8 million due to only three months of expenses
included in the prior year's period as compared to nine months in the current
year's period. As a percentage of net sales, selling, general and administrative
expenses increased from 7.3% in the first nine months of 1999 to 8.8% for the
same period in 2000.
Depreciation. Depreciation expense increased from $4.3 million for the first
nine months of 1999 to $6.1 million for the same period in 2000. This increase
was due primarily to Euroball, which contributed $835,000 of depreciation and
amortization expense. The IMC acquisition in July 1999 and the inclusion of
three months of depreciation being included in the prior year's period as
compared to nine months included in the current year accounted for the remainder
of the increase. As a percentage of net sales, depreciation expense decreased
from 7.0% for the first nine months of 1999 to 6.7% for the same period in 2000.
Interest Expense. Interest expense increased from $256,000 in the first nine
months of 1999 to $1.2 million during the same period in 2000. The increase was
due to primarily to amounts drawn against a credit facility to finance Euroball.
Additionally, increased levels outstanding under the Company's domestic line of
credit account for the remainder of the increase. See the "Liquidity and Capital
Resources Section."
Net Income. Net income increased by $1.2 million, or 20.9%, from $5.6 million
for the first nine months of 1999 to $6.8 million for the same period for 2000.
As a percentage of net sales, net income decreased from 9.2% for the first nine
months of 1999 to 7.5% for the same period for 2000.
Liquidity and Capital Resources
In July 1997, the Company entered into a loan agreement, which provides for a
revolving credit facility of up to $25 million, expiring on June 30, 2000. In
December 1999, the Company extended the term of the loan agreement to 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 provides an additional $2 million of
availability to the revolving credit facility through December 31, 2000. At
September 30, 2000 and 1999 amounts outstanding under this revolving credit
facility approximated $22.6 million and $18.7 million, respectively, The loan
agreement contains various restrictive financial and nonfinancial covenants. The
Company, as of November 10, 2000 was in compliance with or had received waivers
on all such covenants.
In July 2000, NN Euroball ApS, and its subsidiaries entered into a loan
agreement with HypoVereinsbank
11
<PAGE>
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, 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 1.50% to 2.25% based
upon calculated financial ratios. The loan agreement contains various
restrictive financial and nonfinacial covenants. The Company, as of November 10,
2000 was in compliance with or had received waivers on 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 IMC Plastics division which
provides several lines of Christmas 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 $30.6 million at September 30, 2000 as compared to $22.9
million at December 31, 1999. The ratio of current assets to current liabilities
decreased from 3.2:1 at December 31, 1999 to 1.9:1 at September 30, 2000. Cash
flow from operations decreased from $14.9 million during the first nine months
of 1999 to $14.7 million during the first nine months of 2000.
During 2000, the Company plans to spend approximately $9.0 million on capital
expenditures (of which approximately $7.0 million has been spent through
September 30, 2000) including the purchase of additional machinery and equipment
for all three of the Company's U.S. facilities as well as the three European
facilities. The Company intends to finance these activities with cash generated
from operations and funds available under the credit facilities described above.
The Company believes that funds generated from operations and borrowings from
the credit facilities will be sufficient to finance the Company's working
capital needs and projected capital expenditure requirements through December
2000.
Recently Issued Accounting Standards
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which standardizes the accounting for
derivative instruments, including certain derivative instruments embedded in
other contracts, by requiring an entity recognize those items as assets or
liabilities in the statement of financial position and measure them at fair
value. SFAS No. 133 is effective for all fiscal quarters of all fiscal years
beginning after June 15, 2000. The Company is evaluating the effect of this
standard on its financial statements and will comply with the requirements of
the new standard which becomes effective for the Company's 2001 financial
reporting cycle.
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In December 1999, the Securities and Exchange Commission ("SEC") issued SEC
Staff Accounting Bulletin 101 ("SAB 101"), "Revenue Recognition in Financial
Statements". SAB 101 summarizes certain of the staff's views in applying
generally accepted accounting principles to revenue recognition in financial
statements. The Company will adopt the provisions of SAB 101 in the fourth
quarter 2000 and does not expect SAB 101 to have a significant impact on NN's
consolidated financial statements.
Name Change
On May 11, 2000, the stockholders of NN Ball & Roller, Inc., at an Annual
Meeting of stockholders, approved an amendment to the Company's Certificate of
Incorporation changing the name of the company from NN Ball & Roller, Inc. to
NN, Inc. On May 23, 2000 the Company filed a Certificate of Amendment to the
Certificate of Incorporation with the Delaware Secretary of State.
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.
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
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releases and oral statements made by the Company's authorized representatives
may contain, forward looking statements that involve certain risks and
uncertainties. 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 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 publicly update or revise
any forward looking statements, whether as a result of new information, future
events or otherwise.
Industry Risks. Both the precision ball & 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 & roller market and the precision plastics
markets are highly competitive, and many of 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, and during the
third quarter of 2000 started a jointly owned stand-alone company in Europe for
the manufacture and sale of precision chrome steel balls. Although the Company's
Ball & Roller division is currently operating at near full capacity, downturns
in the economy and other factors could result in 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 its plant 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 obtains a
majority of its raw materials for the manufacture of balls and rollers from
overseas suppliers and 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 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 1999, 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 27% of net sales in 1999, and sales to
FAG accounted for approximately 11% of net sales. None of the Company's other
customers accounted for more than 10% of its net sales in 1999, but sales to
three of its customers each represented
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more than 5% of the Company's 1999 net sales. With acquisition of Industrial
Molding in July of the 1999 and the Euroball transaction in the current year,
the Company estimates that the ten largest customers will account for
approximately 70% of its net sales calculated on an annual basis. Sales to SKF
and FAG are estimated to approximate 32% and 21% respectively of the annualized
net sales of the Company. None of the Company's other customers are currently
expected to account for over 10%.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 July 1999, the Company acquired IMC and in July 2000 completed
its Euroball transaction as part of that strategy. Although the Company believes
that will be able to integrate the operations of IMC, Euroball 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.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company is exposed to changes in financial market conditions in the
normal course of its business due to its use of certain financial instruments as
well as transacting in various foreign currencies. To mitigate its exposure to
these market risks, the Company has established policies, procedures and
internal processes governing its management of financial market risks.
The Company is exposed to changes in interest rates primarily as a result
of its borrowing activities, which include a $27 million floating rate revolving
credit facility which is used to maintain liquidity and fund its business
operations. In July 2000, NN Euroball ApS and its subsidiaries entered into a
senior secured revolving credit facility of Euro 5,000,000 and a senior term
loan of Euro 36,000,000. At September 30, 2000 NN Euroball ApS had approximately
$28 million outstanding under these facilities. At September 30, 2000, the
Company had $22.6 million outstanding under the revolving credit facility. A
one-percent increase in the interest rate charged on the Company's outstanding
borrowings under the above facilities would result in interest expense
increasing by approximately $500,000. The nature and amount of the Company's
borrowings may vary as a result of future business requirements, market
conditions and other factors.
The Company's operating cash flows denominated in foreign currencies are
exposed to changes in foreign exchange rates. Beginning in the 1997 fourth
quarter, upon the commencement of production in its Kilkenny, Ireland facility,
the Company began to bill and receive payment from some of its foreign customers
in their own currency. To date, the Company has not been materially adversely
affected by currency fluctuations of foreign exchange restrictions. However, as
foreign sales approximate 38% of total revenues, management is currently
evaluating various strategies to manage this financial market risk, including
the implementation of a foreign currency hedging program. The Company did not
hold a position in any foreign currency instruments of September 30, 2000.
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PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits Required by Item 601 of Regulation S-K
10.20 Joint Venture Formation Agreement, dated as of April 6, 2000,
with Amendment No. 1 dated June 15, 2000 and Amendment No. 2
dated July 31, 2000 by and among NN Ball & Roller, Inc.,
AB SKF, and FAG Kugelfischer Georg Schafer AG (incorporated by
reference from Exhibit 10.20 of the Company's Form 8-K filed on
August 10, 2000).
27 Financial Data Schedule
(b) Reports on Form 8-K
On August 10, 2000, we filed a Report on Form 8-K to announce the
completion of a joint venture transaction with FAG Kugelfischer Georg
Schafer AG, a German company, and AB SKF, a Swedish company, to form a
new Danish holding company, NN Euroball ApS.
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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 Ball & Roller, Inc.
(Registrant)
Date: November 10, 2000 /s/ Roderick R. Baty
Roderick R. Baty,
President and Chief Executive
Officer
(Duly Authorized Officer)
Date: November 10, 2000 /s/ David Dyckman
David Dyckman
Chief Financial Officer
(Principal Financial Officer)
(Duly Authorized Officer)
Date: November 10, 2000 /s/ William C. Kelly, Jr.
William C. Kelly, Jr.,
Treasurer, Secretary and
Chief Accounting Officer
(Principal Accounting Officer)
(Duly Authorized Officer)
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