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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended JUNE 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
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As of August 11, 2000 there were 15,244,308 shares of the registrant's common
stock, par value $0.01 per share, outstanding.
<PAGE>
NN, INC.
INDEX
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
Part I. Financial Information
Item 1. Financial Statements:
Condensed Statements of Income and Comprehensive Income for the
three and six months ended June 30, 2000 and 1999 2
Condensed Balance Sheets at June 30, 2000 and December 31, 1999 3
Condensed Statements of Changes in Stockholders' Equity
for the six months ended June 30, 2000 and 1999 4
Condensed Statements of Cash Flows for the six months
ended June 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
Item 3. Quantitative and Qualitative Disclosures About Market Risk 14
Part II. Other Information
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 5. Other Information 15
Item 6. Exhibits and Reports on Form 8-K 15
Signatures 17
Index To Exhibits 18
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION
NN, INC.
CONDENSED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA 2000 1999 2000 1999
----------------------------------------------- ---------------- ---------------- ---------------- ------------
<S> <C> <C> <C> <C>
Net sales $25,643 $17,475 $53,645 $35,387
Cost of goods sold 17,965 12,591 38,311 25,114
----------- ----------- ------------ -----------
Gross profit 7,678 4,884 15,334 10,273
Selling, general and administrative 2,463 1,027 4,781 2,245
Depreciation and amortization 1,723 1,231 3,568 2,475
Loss on involuntary conversion 4,505 -- 8,483 --
Gain on involuntary conversion (4,505) -- (8,458) --
Equity in earnings of unconsolidated affiliate (53) -- (66) --
----------- ----------- ------------ -----------
Income from operations 3,545 2,626 7,026 5,553
Interest expense, net 268 8 559 9
----------- ----------- ------------ -----------
Income before provision for income taxes 3,277 2,618 6,467 5,544
Provision for income taxes 1,035 903 2,115 1,867
----------- ----------- ------------ -----------
Net income $2,242 $1,715 $4,352 $3,677
Other comprehensive income:
Foreign currency translation (27) (426) (422) (1,287)
----------- ----------- ------------ -----------
Other comprehensive income (27) (426) (422) (1,287)
----------- ----------- ------------ -----------
Comprehensive income $2,215 $1,289 $3,930 $2,390
=========== =========== ============ ===========
Basic income per common share $ 0.15 $ 0.12 $ 0.28 $ 0.25
=========== =========== ============ ===========
Weighted average shares outstanding 15,244 14,804 15,244 14,804
=========== =========== ============ ===========
Diluted income per common share $ 0.15 $ 0.12 $ 0.28 $ 0.25
=========== =========== ============ ===========
Weighted average shares outstanding 15,436 14,808 15,437 14,806
=========== =========== ============ ===========
</TABLE>
SEE ACCOMPANYING NOTES.
3
<PAGE>
<TABLE>
<CAPTION>
NN, INC.
CONDENSED BALANCE SHEETS
JUNE 30, DECEMBER 31,
2000 1999
THOUSANDS OF DOLLARS (UNAUDITED)
--------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 2,432 $ 1,409
Accounts receivable, net 20,680 18,183
Inventories, net 12,012 13,122
Other current assets 4,651 688
------------- ------------
Total current assets 39,775 33,402
Property, plant and equipment, net 41,925 43,452
Goodwill, net 12,400 12,779
Receivable from unconsolidated affiliate 3,165 --
Equity in unconsolidated affiliate 166 --
Other non-current assets 379 735
------------- ------------
Total assets $ 97,810 $90,368
============= ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 5,343 $ 8,952
Accrued vacation and holiday expense 710 676
Deferred Income 777 875
Accrued bonuses 871 --
Income taxes payable 901 1,283
Other current liabilities 2,329 2,301
------------- ------------
Total current liabilities 14,540 10,478
Deferred income taxes 2,611 2,611
Long-term debt 19,040 17,151
------------- ------------
Total liabilities 36,191 30,240
Total stockholders' equity 61,619 60,128
------------- ------------
Total liabilities and stockholders' equity $97,810 $90,368
============= ============
</TABLE>
SEE ACCOMPANYING NOTES.
4
<PAGE>
<TABLE>
<CAPTION>
NN, INC.
CONDENSED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(UNAUDITED)
COMMON STOCK ADDITIONAL RETAINED ACCUMULATED OTHER
NUMBER PAR PAID IN EARNINGS COMPREHENSIVE
THOUSANDS OF DOLLARS OF SHARES VALUE CAPITAL (DEFICIT) 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 3,677 3,677
Dividends (2,368) (2,368)
Other comprehensive income (1,287) (1,287)
--------- --------- ---------- ------------ ----------- ----------
Balance, June 30, 1999 14,804 $149 $27,902 $29,615 $ (1,402) $56,264
========= ========= ========== ============ =========== ==========
Balance, January 1, 2000 15,244 $153 $30,398 $31,255 $ (1,678) $60,128
Net income 4,352 4,352
Dividends (2,439) (2,439)
Other comprehensive income (422) (422)
--------- --------- ---------- ------------ ----------- ----------
Balance, June 30, 2000 15,244 $153 $30,398 $33,168 $ (2,100) $61,619
========= ========= ========== ============ =========== ==========
SEE ACCOMPANYING NOTES.
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
NN, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
SIX MONTHS ENDED
JUNE 30,
THOUSANDS OF DOLLARS 2000 1999
-----------------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $4,352 $3,677
Adjustments to reconcile net income:
Depreciation and amortization 3,568 2,475
Equity earnings of unconsolidated affiliate (66) --
Interest income on receivable from unconsolidated affiliate (45) --
Changes in operating assets and liabilities:
Accounts receivable (2,497) (2,303)
Inventories 1,110 4,054
Taxes payable (382) (452)
Other current assets (3,963) (175)
Other assets 356 --
Accounts payable 3,609 (401)
Other liabilities 835 995
----------- ----------
Net cash provided by operating activities 6,877 7,870
----------- ----------
INVESTING ACTIVITIES:
Acquisition of plant, property, and equipment (3,663) (261)
Proceeds from disposals of property, plant and equipment -- 65
Involuntary conversion of property, plant and equipment 2,001 --
Long-term note receivable (3,120) --
Investment in unconsolidated earnings (100) --
----------- ----------
Net cash used by investing activities (4,882) (196)
----------- ----------
FINANCING ACTIVITIES:
Net proceeds under revolving credit facility 1,889 --
Dividends paid (2,439) (2,368)
----------- ----------
Net cash used by financing activities (550) (3,655)
Effect of exchange rate changes (422) (1,287)
Net Change in Cash and Cash Equivalents 1,445 4,019
Cash and Cash Equivalents at Beginning of Period 1,409 1,430
----------- ----------
Cash and Cash Equivalents at End of Period $ 2,432 $5,449
=========== ==========
</TABLE>
SEE ACCOMPANYING NOTES.
6
<PAGE>
NN, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
NOTE 1. INTERIM FINANCIAL STATEMENTS
The accompanying condensed financial statements of NN, Inc. 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 six month periods ended June 30, 2000 and 1999, the Company's
financial position at June 30, 2000 and December 31, 1999, and the cash flows
for the six month periods ended June 30, 2000 and 1999. 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 and second 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):
JUNE 30, DECEMBER 31,
2000 1999
(UNAUDITED)
--------- ---------
Raw materials $ 2,539 $ 3,131
Work in process 2,607 2,585
Finished goods 6,926 7,466
--------- ---------
12,072 13,182
Less - Reserve for excess and obsolete inventory 60 60
--------- ---------
$ 12,012 $ 13,122
========= =========
7
<PAGE>
NOTE 3. NET INCOME PER SHARE
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
2000 1999 2000 1999
THOUSANDS OF DOLLARS, EXCEPT SHARE AND PER SHARE DATA
-----------------------------------------------------------------------------
Net income $ 2,242 $ 1,715 $ 4,352 $ 3,677
Adjustments to net income -- -- -- --
---------- --------- --------- ---------
Net income $ 2,242 $ 1,715 $ 4,352 $ 3,677
========== ========= ========= =========
Basic shares outstanding 15,244,308 14,804,244 15,244,308 14,804,244
Effect of dilutive stock 191,204 3,606 192,509 1,444
options ---------- ---------- ---------- ----------
Dilutive shares outstanding 15,435,512 14,807,850 15,436,817 14,805,688
========== ========== ========== ==========
Basic net income per share $ 0.15 $ 0.12 $ 0.28 $ 0.25
========== ========= ========= =========
Diluted net income per share $ 0.15 $ 0.12 $ 0.28 $ 0.25
========== ========= ========= =========
Excluded from the shares outstanding for the second quarter ended June 30, 2000
and 1999 were 10,750 and 438,125 antidilutive options, respectively, which had
exercise prices ranging from $9.75 to $11.50 and $6.38 to $15.50. Excluded from
the shares outstanding for the six months ended June 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 $6.00 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 one manufacturing facility in Kilkenny, Ireland.
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 six-month period ended June 30, 2000.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JUNE 30,
2000 1999
THOUSANDS OF DOLLARS BALL & ROLLER PLASTICS BALL & ROLLER PLASTICS
----------------------------------- ----------------- ----------------- ------------------- ---------------
<S> <C> <C> <C> <C>
Revenues from external customers $ 18,296 $ 7,347 $ 17,475 $ --
Segment profit 3,142 135 2,618 --
Segment assets 66,866 30,944 67,024 --
8
<PAGE>
SIX MONTHS ENDED
JUNE 30,
2000 1999
THOUSANDS OF DOLLARS BALL & ROLLER PLASTICS BALL & ROLLER PLASTICS
----------------------------------- ----------------- ----------------- ------------------- ---------------
Revenues from external customers $ 37,421 $ 16,224 $ 35,387 $ --
Segment profit 5,982 510 5,544 --
Segment assets 66,866 30,944 67,024 --
</TABLE>
NOTE 5. ACQUISITION
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 $30 million, consisting of cash in the amount of
$27.5 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.
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.
NOTE 6. JOINT VENTURE
On March 16, 2000, the Company entered into a joint venture with General Bearing
Corporation. The new venture, NN General, LLC, owns a majority position in
Jiangsu General Ball & Roller Company, Ltd., a Chinese precision ball and roller
manufacturer located in Rugao City, Jiangsu Providence China. Through NN
General, LLC, the Company equally shares a 60% interest with General Bearing
Company in the Chinese company. At inception, the Company was required to make
an intial investment of $100,000 and provide a loan to NN General, LLC in the
amount of $2.4 million. During the second quarter of 2000, the Company loaned NN
General, LLC an additional $720,000. The remaining 40% of the Chinese company is
owned by Jiangsu Steel Ball Factory. The Company accounts for this investment
under the equity method and recorded income of approximately $53,000 and $66,000
during the three and six month periods ended June 30, 2000, respectively.
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 is
available for the loss. At June 30, 2000, the Company recorded a loss of
approximately $8.5 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 $8.5 million at June 30, 2000 representing the amount it believes
the Company will recover from insurance proceeds for losses already recognized.
NOTE 8. SUBSEQUENT EVENT
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 will have 54%
of the shares of the new company, ABSKF ("SKF") and FAG Kugelfischer Georg
Schager AG ("FAG") will have 23% each. Euroball ApS, through its newly-formed
subsidiaries, acquired the ball factories located in Pinerolo, Italy (SKF),
Eltmann, Germany (FAG) and Kilkenny, Ireland (NN, Inc.). Employment will be
approximately 700 and yearly sales are planned to be approximately 95 million
euro. Euroball will manufacture and sell high precision chrome steel balls used
for ball bearings and other products. 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 capital expenditure financing. The Company will be
required to consolidate NN Euroball ApS.
9
<PAGE>
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2000 COMPARED TO THE THREE MONTHS ENDED JUNE 30,
1999
NET SALES. Net sales increased by approximately $8.1 million, or 46.3%, from
$17.5 million for the second quarter of 1999 to $25.6 million for the second
quarter of 2000. The acquisition of IMC accounted for $7.3 million of the
increase. For the Ball & Roller division, foreign sales increased $1.4 million,
or 17.7%, from $7.9 million in the second quarter of 1999 to $9.3 million during
the second quarter of 2000. The increase in foreign sales was due primarily to
increased global demand for the Company's products to existing customers in
Europe and Asia as well as a new Asian customer. Domestic sales decreased
$600,000, or 6.2%, from $9.6 million in the second quarter of 1999 to $9.0
million in the second quarter of 2000. This decrease was due primarily to
decreased sales to one existing customer.
GROSS PROFIT. Gross profit increased $2.8 million or 57.1%, from $4.9 million
for the second quarter of 1999 to $7.7 million for the second quarter of 2000.
The acquisition of IMC accounted for $1.9 million of the increase. As a
percentage of net sales, gross profit increased from 27.9% in the second quarter
of 1999 to 29.9% for the same period in 2000. This increase in gross profit as a
percentage of net sales was due primarily to decreased levels of volume and the
reduction of $2.6 million of inventory in the second quarter of 1999.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses increased by $1.5 million from $1.0 million in the second quarter of
1999 to $2.5 million in the second quarter of 2000. The acquisition of IMC
accounted for $1.0 million of the increase. The remainder of the increase was
due primarily to the Company's business development activities as well as
increased levels of travel. As a percentage of net sales, selling, general and
administrative expenses increased from 5.9% for the second quarter of 1999 to
9.6% for the same period in 2000.
DEPRECIATION AND AMORTIZATION. Depreciation expense increased from $1.2 million
for the second quarter of 1999 to $1.7 million for the same period in 2000. The
acquisition of IMC accounted for $553,000 of the increase. As a percentage of
net sales, depreciation expense decreased from 7.0% in the second quarter of
1999 to 6.7% in the second quarter of 2000.
INTEREST EXPENSE. Interest expense increased from $8,000 in the second quarter
of 1999 to $268,000 during the same period in 2000. The increase is due to
increased levels outstanding under the Company's line of credit in the second
quarter of 2000. In July and August of 1999, the Company borrowed $21.7 million
under the line of credit for the purchase of certain assets of Earsley Capital
Corporation. During the first and second quarter of 2000, the Company also
borrowed $3.2 million for the formation of NN General, LLC.
NET INCOME. Net income increased by $527,000 or 29.4%, from $1.7 million for the
second quarter of 1999 to $2.2 million for the same period in 2000. As a
percentage of net sales, net income decreased from 9.8% in the second quarter of
1999 to 8.7% for the second quarter of 2000.
SIX MONTHS ENDED JUNE 30, 1999 COMPARED TO THE SIX MONTHS ENDED JUNE 30, 1998
NET SALES. Net sales increased by approximately $18.2 million, or 51.4%, from
$35.4 million for the first six months of 1999 to $53.6 million for the same
period in 2000. The acquistion of IMC accounted for $16.2 million of the
increase. Foreign sales increased $3.6 million, or 23.1%, from $15.6 million in
the first six months of 1999 to $19.2 million during the same period of 2000.
The increase in foreign sales was due primarily to increased global demand for
the Company's products in Europe and Asia. Domestic sales decreased $1.6
million, or 8.1%, from $19.8 million in the first six months of 1999 to $18.2
million in the same period of 2000. This decrease was due primarily to decreased
sales to existing customers.
10
<PAGE>
GROSS PROFIT. Gross profit increased $5.0 million, or 48.5%, from $10.3 million
for the first six months of 1999 to $15.3 million for the same period of 2000.
The acquisition of IMC accounted for $4.0 million of the increase. As a
percentage of net sales, gross profit decreased slightly from 29.0% in the first
six months of 1999 to 28.6% in the same period of 2000. This decrease in gross
profit as a percentage of net sales was due primarily to decreased production
efficiencies resulting from the March 2000 fire at the Erwin facility.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses increased by $2.6 million, or 118.0%, from $2.2 million in the first
six months of 1999 to $4.8 million in the same period of 2000. The acquisition
of IMC accounted for $1.9 of the increase. The remainder of the increase was due
primarily to the Company's business development activity as well as increased
levels of travel. As a percentage of net sales, selling, general and
administrative expenses increased from 6.3% in the first six months of 1999 to
8.9% for the same period in 2000.
DEPRECIATION AND AMORTIZATION. Depreciation expense increased from $2.5 million
for the first six months of 1999 to $3.6 million for the same period in 2000.
The acqusition of IMC accounted for $1.1 million of the increase. As a
percentage of net sales, depreciation expense decreased from 7.0% for the first
six months of 1999 to 6.6% for the same period in 2000.
INTEREST EXPENSE. Interest expense increased from $9,000 in the first six months
of 1999 to $559,000 during the same period in 2000. The increase is due to
increased levels outstanding under the Company's line of credit in the second
quarter of 2000. In July and August of 1999, the Company borrowed $21.7 million
under the line of credit for the purchase of certain assets of Earsley Capital
Corporation. During the first and second quarter of 2000, the Company also
borrowed $3.2 million for the formation of NN General, LLC.
NET INCOME. Net income increased by $675,000, or 18.9%, from $3.7 million for
the first six months of 1999 to $4.4 million for the same period for 2000. As a
percentage of net sales, net income decreased from 10.4% for the first six
months of 1999 to 8.1% 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 July 25,
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%. The loan agreement contains
various financial and nonfinancial restrictive covenants. The Company, as of
August 11, 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 seasonal hardware.
11
<PAGE>
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 $25.2 million at June 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 2.7:1at June 30, 2000. Cash flow from
operations decreased from $7.9 million during the second quarter of 1999 to $6.9
million during the same period in 2000. This decrease was primarily attributed
to an increase of $4.0 million in insurance reimbursement receivables related to
the March fire and $4.1 million in decreased inventories in the 1999 second
quarter as compared to a $ 1.1 million decrease in inventories in the current
year second quarter.
During 2000, the Company plans to spend approximately $5.3 million on capital
expenditures, exclusive of expenditures made to replace destroyed facilities and
equipment from the March fire, of which approximately $1.1 has been spent
through June 30, 2000. 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 2000.
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 Admendment 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 Ireland, which is one of the Euro
participating countries, and sells product to customers in many of the
participating countries. The functional currency of the Company's Ireland
operations was changed to the Euro effective September 1999.
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.
12
<PAGE>
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. 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 1997 purchased an additional manufacturing plant in Kilkenny,
Ireland. 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 its plant 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 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 more than 5% of the Company's 1999 net
sales. 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 as part of that strategy.
Although the Company believes that it will be able to integrate the operations
of IMC 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 $25 million floating rate revolving
credit facility which is used to maintain liquidity and fund its business
operations. At June 30, 2000, the Company had $19.0 million outstanding under
the revolving credit facility. A one-percent increase in the interest rate
charged on the Company's outstanding borrowings under the revolving credit
facility would result in interest expense increasing by approximately $190,000.
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 June 30, 2000.
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PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Company's Annual Meeting of Stockholders was held on May 11, 2000. As of
March 20, 2000, the record date for the meeting, there were 15,244,308 shares of
common stock outstanding and entitled to vote at the meeting. There were present
at said meeting, in person or by proxy, stockholders holding 13,691,904 shares
of common stock, constituting approximately 87% of the shares of common stock
outstanding and entitled to vote, which constituted a quorum.
The first matter voted upon at the meeting was the election of Richard D. Ennen
and Roderick R. Baty as Class III Directors to serve for three-year terms. The
results of the voting in connection with such elections were as follows:
FOR WITHHELD
Richard D. Ennen 13,574,418 117,486
Roderick R. Baty 13,638,368 53,536
Accordingly, all nominees were elected to serve until the 2003 Annual Meeting of
Stockholders and until their successors are duly elected and qualified. In
addition to the foregoing directors, Michael D. Huff and Michael E. Werner are
serving terms to expire at the 2001 Annual Meeting of Stockholders, and G.
Ronald Morris, Steven T. Warshaw and James L. Earsley are serving terms which
are to expire at the 2002 Annual Meeting of Stockholders. Mr. Ennen, the
Company's founder, continues in his position as Chairman of the Company's Board
of Directors.
The second matter voted upon at the 2000 Annual Meeting of Stockholders was the
approval of an amendment to the Company's Certificate of Incorporation to change
the name of the corporation to NN, Inc. The vote was 13,663,681 For and 26,073
Against, and there were 2,150 Abstentions.
The Third matter voted upon at the 2000 Annual Meeting of Stockholders was the
ratification of PricewaterhouseCoopers, LLP as independent public accountants to
audit the Company's accounts for the fiscal year ending December 31, 2000. The
vote was 13,688,758 For and 2,396 Against, and there were 750 Abstentions.
ITEM 5. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits Required by Item 601 of Regulation S-K
10.17 Asset Purchase Agreement, dated as of July 4, 1999, by and
between NN Ball & Roller, Inc. and Earsley Capital Corporation
(incorporated by reference to Exhibit 10.17 of the Company's
Form 8-K filed on July 16, 1999).
10.18 Operating Agreement of NN General, LLC (incorporated by
reference to Exhibit 99.1 of the Company's Quarterly Report on
Form 10-Q for the quarter ended March 31, 2000).
10.19 Operating Agreement of NNA, LLC (incorporated by reference to
Exhibit 99.2 of the Company's Quarterly Report on Form 10-Q
for the quarter ended March 31, 2000).
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27 Financial Data Schedules (for information of SEC only)
(b) The Company filed reports on Form 8-K during the quarter ending June 30,
2000, as follows:
Date Description
---- -----------
May 23, 2000 Reporting change of Company name
from NN Ball & Roller, Inc. to NN, Inc.
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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 11, 2000 /s/ Roderick R. Baty
Roderick R. Baty,
President and Chief Executive
Officer
(Duly Authorized Officer)
Date: August 11, 2000 /s/ David Dyckman
David Dyckman
Chief Financial Officer
(Principal Financial Officer)
(Duly Authorized Officer)
Date: August 11, 2000 /s/ William C. Kelly, Jr.
William C. Kelly, Jr.,
Treasurer, Secretary and
Chief Accounting Officer
(Principal Accounting Officer)
(Duly Authorized Officer)
17
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INDEX TO EXHIBITS
Exhibit
Number Description
------ -----------
27 Financial Data Schedules (for information of SEC only)
