Back to GetFilings.com
--------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------
FORM 10-K
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2003
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 No.)
2000 Waters Edge Drive
Johnson City, Tennessee 37604
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (423) 743-9151
Securities registered pursuant to Section 12(b) of the Act:
Title of Name of each exchange
each class on which registered
None None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01
(Title of class)
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 and Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes |X| No |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |X|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes |X| No |_|
The number of shares of the registrant's common stock outstanding on March
11, 2004 was 16,711,958.
The aggregate market value of the voting stock held by non-affiliates of
the registrant at March 11, 2004, based on the closing price on the NASDAQ
National Market System on that date was approximately $125,809,512.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement with respect to the 2004 Annual Meeting of
Stockholders are incorporated by reference in Part III of this Form 10-K.
--------------------------------------------------------------------------------
PART I
Item 1. Business Overview
NN, Inc. manufactures and supplies high precision bearing components,
consisting of balls, cylindrical rollers, tapered rollers, seals, and plastic
and metal retainers, for leading bearing manufacturers on a global basis. We are
a leading independent manufacturer of precision steel bearing balls for the
North American and European markets. In 1998, we began implementing a strategic
plan designed to position us as a worldwide supplier of a broad line of bearing
components and other precision plastic components. Through a series of
acquisitions executed as part of that plan, we have built on our strong core
ball business and expanded our bearing component product offering. Today, we
offer among the industry's most complete line of commercially available bearing
components. We emphasize engineered products that take advantage of our
competencies in product design and tight tolerance manufacturing processes. Our
bearing customers use our components in fully assembled ball and roller
bearings, which serve a wide variety of industrial applications in the
transportation, electrical, agricultural, construction, machinery, mining and
aerospace markets. As used in this Annual Report on Form 10-K, the terms "NN",
"the Company", "we", "our", or "us" mean NN, Inc. and its subsidiaries.
For managerial and financial analysis purposes, management views the
Company's operation in three segments: the domestic ball and roller operations
of Erwin, Tennessee and Mountain City, Tennessee ("Domestic Ball and Roller
Segment"), the European facilities of Kilkenny, Ireland, Eltmann, Germany and
Pinerolo, Italy, Veenendaal, The Netherlands and Kysucke Nove Mesto, Slovakia
("NN Europe Segment" or "NN Europe") and the operations of Industrial Molding
Corporation ("IMC"), The Delta Rubber Company ("Delta") and NN Arte ("Plastic
and Rubber Components Segment"). Financial information about the Domestic Ball
and Roller Segment, the NN Europe Segment and the Plastic and Rubber Components
Segment is set forth in Note 11 of the Notes to Consolidated Financial
Statements.
Recent Developments
On May 2, 2003, we acquired the 23 percent interest in NN Euroball, ApS
("Euroball") held by AB SKF ("SKF"). Euroball was formed in 2000 by the Company,
FAG Kugelfischer George Schaefer AG, which was subsequently acquired by INA -
Schaeffler KG (collectively, "INA/FAG"), and AB SKF ("SKF"). SKF is a global
bearing manufacturer and one of our largest customers. We paid approximately
13.8 million Euros ($15.6 million) for SKF's interest in Euroball. Following the
closing of the transaction, we own 100 percent of the outstanding shares of
Euroball.
On May 2, 2003 we acquired 100 percent of the tapered roller and metal cage
manufacturing operation of SKF in Veenendaal, The Netherlands. The results of
Veenendaal's operations have been included in the consolidated financial
statements since that date. We paid consideration of approximately 23.0 million
Euros ($25.7 million) and incurred other costs of approximately $1.0 million,
for the Veenendaal net assets acquired from SKF. The Veenendaal operation
manufactures rollers for tapered roller bearings and metal cages for both
tapered roller and spherical roller bearings allowing us to expand our bearing
component offering. The financial results of the Veenendaal operation are
included in the NN Europe Segment.
On October 9, 2003, we acquired certain assets comprised of land, building
and machinery and equipment of the precision ball operations of KLF - Gulickaren
("KLF"), based in Kysucke Nove Mesto, Slovakia. We paid consideration of
approximately 1.7 million Euros ($2.0 million). The assets will be utilized by
our newly established subsidiary AKMCH ("NN Slovakia") based in Kysucke Nove
Mesto, Slovakia, which is expected to begin production in 2004. The financial
results of the operations are included in our NN Europe Segment.
Corporate Information
NN, originally organized in October 1980, is incorporated in Delaware, with
our principal executive offices located at 2000 Water's Edge Drive, Johnson
City, Tennessee 37604 and our telephone number is (423) 743-9151. Our web site
address is www.nnbr.com. Information contained on our web site is not part of
this Annual Report. Our annual report on Form 10-K, as amended, quarterly
reports on Form 10-Q, as amended, current reports on Form 8-K and amendments
thereto are available on our web site under "SEC Reports." Prior to February 5,
2003, these reports were available through a hyperlink to a third-party service
which provided limited free access to such reports. We believed that such
hyperlink
2
provided unlimited free access to our filings with the Commission; however, this
hyperlink did not provide unlimited free access to the reports. Therefore, the
amendments to our Form 10-Q and Form 10-K filed on November 22, 2002 and our
Forms 8-K filed December 9, 2002 and December 20, 2002 were not available free
of charge to all viewers through our web site. After February 5, 2003, our
hyperlink provides unlimited free access to our filings with the Commission on
our web site under "SEC Reports".
Products
Precision Steel Balls. At our Domestic Ball and Roller Segment facilities
and our NN Europe Segment facilities, we manufacture and sell high quality,
precision steel balls in sizes ranging in diameter from 1/8 of an inch to 12 1/2
inches. We produce and sell balls in grades ranging from grade 3 to grade 1000,
as established by the American Bearing Manufacturers Association. The grade
number for a ball or a roller indicates the degree of spherical or cylindrical
precision of the ball or roller; for example, grade 3 balls are manufactured to
within three-millionths of an inch of roundness and grade 50 rollers are
manufactured to within fifty-millionths of an inch of roundness. Our steel balls
are used primarily by manufacturers of anti-friction bearings where precise
spherical, tolerance and surface finish accuracies are required. At our Domestic
Ball and Roller Segment, sales of steel balls accounted for approximately 86%,
88% and 89% of the segment's net sales in 2003, 2002 and 2001, respectively. At
our NN Europe Segment, sales of steel balls accounted for approximately 76%,
100% and 100% of the segment's net sales in 2003, 2002 and 2001, respectively.
Steel Rollers. We manufacture cylindrical rollers at our Erwin, Tennessee
facility. These cylindrical rollers are produced in a wide variety of sizes,
ranging from grade 50 to grade 1000. Rollers are used in place of balls in
anti-friction bearings that are subjected to heavy load conditions. Our roller
products are used primarily for applications similar to those of our ball
product lines, plus certain non-bearing applications such as hydraulic pumps and
motors. We manufacture tapered rollers at our Veenendaal, The Netherlands
facility. These tapered rollers are used in tapered roller bearings that are
used in a variety of applications including automotive gearbox applications,
automotive wheel bearings and a wide variety of industrial applications.
Bearing Seals. We manufacture and sell a wide range of precision bearing
seals produced through a variety of compression and injection molding processes
and adhesion technologies to create rubber-to-metal bonded bearing seals. The
seals are used in applications for automotive, industrial, agricultural, mining
and aerospace markets.
Retainers: We manufacture and sell precision metal and plastic retainers
for ball and roller bearings used in a wide variety of industrial applications.
Retainers are used to separate and space balls or rollers within a fully
assembled bearing. We manufacture plastic retainers at our Lubbock, Texas
facility and metal retainers at our Veenendaal, The Netherlands facility.
Precision Plastic Components. We also manufacture and sell a wide range of
specialized plastic products including automotive under-the-hood components,
electronic instrument cases and precision electronic connectors and lenses, as
well as a variety of other specialized parts.
Research and Development. The amount spent on research and development
activities by us during each of the last three fiscal years are not material.
Customers
Our bearing component products are supplied primarily to bearing
manufacturers for use in a broad range of industrial applications, including
transportation, electrical, agricultural, construction, machinery, mining and
aerospace. We supply over 500 customers; however, our top 10 customers account
for approximately 77% of our revenue. These top 10 customers include SKF,
INA/FAG, Timken, Torrington, GKN, SNR, Iljin, NTN, Delphi, Automotive Products
and NSK. In 2003, 34% of our products were sold to customers in North America,
53% to customers in Europe, and the remaining 13% to customers located
throughout the rest of the world, primarily Asia. Sales to various U.S. and
foreign divisions of SKF accounted for approximately 42% of net sales in 2003
and sales to INA/FAG accounted for approximately 16% of net sales in 2003,
demonstrating our long-term, strategic relationships with these key customers.
Historically, we have increased our supply to SKF and INA/FAG on an annual basis
and we have more than tripled our sales to these two companies since 1999. These
gains are directly attributed to the success of Euroball, Veenendaal and our
efforts to develop a closer partnering relationship with our global bearing
customers. None of our other customers accounted for more than 5% of our net
sales in 2003.
3
Certain customers have contracted to purchase all or a majority of their
bearing component requirements from us, although only a few are contractually
obligated to purchase any specific amounts. While firm orders are generally
received on a monthly basis, we are normally aware of future order levels well
in advance of the placement of a firm order. For our domestic ball and roller
operations, we maintain a computerized, bar coded inventory management system
with most of our major customers that enables us to determine on a day-to-day
basis the amount of these components remaining in a customer's inventory. When
such inventories fall below certain levels, we automatically ship additional
product.
Euroball has entered into six-year supply agreements with SKF and INA/FAG
providing for the purchase of Euroball products in amounts and at prices that
are subject to adjustment on an annual basis. The agreements contain provisions
obligating Euroball to maintain specified quality standards and comply with
various ordering and delivery procedures, as well as other customary provisions.
SKF may terminate its agreement if, among other things, Euroball acquires or
becomes acquired by a competitor of SKF. INA/FAG may terminate its agreement if,
among other things, Euroball assigns its rights under the agreement, whether
voluntarily or by operation of law. These agreements expire during 2006.
Veenendaal has entered into a five-year supply agreement with SKF providing
for the purchase of Veenendaal products in amounts and at prices that are
subject to adjustment on an annual basis. The agreement contains provisions
obligating Veenendaal to maintain specified quality standards and comply with
various ordering and delivery procedures, as well as other customary provisions.
This agreement expires during 2008.
We ordinarily ship our products directly to customers within 60 days, and
in some cases, during the same calendar month, of the date on which a sales
order is placed. Accordingly, we generally have an insignificant amount of open
(backlog) orders from customers at month end. Certain of our customers have
entered into contracts with us pursuant to which they have agreed to purchase
all of their requirements of specified balls and rollers and plastic molded
products from us, although only a few are contractually obligated to purchase
any specific amounts. Certain agreements are in effect with some of our largest
customers, which provide for targeted, annual price adjustments that may be
offset by material cost fluctuations.
During 2003, the Domestic Ball and Roller Segment sold its products to more
than 250 customers located in more than 25 different countries. Approximately
54% of the Domestic Ball and Roller Segments net sales in 2003 were to customers
outside the United States. Sales to the Domestic Ball & Roller Segment's top ten
customers accounted for approximately 72% of the segment's net sales in 2003.
Sales to SKF and INA/FAG accounted for approximately 26% and 14% of the
segment's net sales in 2003, respectively.
During 2003, the NN Europe Segment sold its products to more than 70
customers located in more than 30 different countries. Approximately 87% of its
net sales in 2003 were to customers within Europe. Sales to the segment's top
ten customers accounted for approximately 95% of the segment's net sales in
2003. Sales to SKF and INA/FAG accounted for approximately 63% and 18% of the
segment's net sales in 2003, respectively. Sales to SKF and INA/FAG are made
pursuant to the terms of supply agreements which expire in 2006 and 2008.
During 2003, the Plastic and Rubber Components Segment sold its products to
more than 100 customers located in more than 10 different countries.
Approximately 20% of the Plastics Segment's net sales were to customers outside
the United States. Sales to the segment's top ten customers accounted for
approximately 67% of the Plastics Segment's net sales in 2003.
See Note 11 of the Notes to Consolidated Financial Statements and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Results of Operations" for additional segment financial
information. In both the foreign and domestic markets, the Company principally
sells its products directly to manufacturers and not to distributors.
4
The following table presents a breakdown of our net sales for fiscal years
2001 through 2003:
(In Thousands)
2003 2002 2001
------------ ------------- ------------
Domestic Ball and Roller Segment $ 55,437 $ 52,634 $ 52,692
21.9% 27.3% 29.3%
NN Europe Segment 147,127 90,653 86,719
58.0% 47.0% 48.1%
Plastic and Rubber Components Segment 50,898 49,569 40,740
20.1% 25.7% 22.6%
------------ ------------- ------------
Total $253,462 $ 192,856 $ 180,151
============ ============= ============
100% 100% 100%
============ ============= ============
Sales and Marketing
A primary emphasis of our marketing strategy is to expand key customer
relationships by offering them the value of a single supply chain partner for a
wide variety of components. As a result, we have progressed toward integrating
our sales organization on a global basis across all of our product lines. Our
sales organization includes eight direct sales and 12 customer service
representatives. Due to the technical nature of many of our products, our
engineers and manufacturing management personnel also provide technical sales
support functions, while internal sales employees handle customer orders and
other general sales support activities.
Our bearing component marketing strategy focuses on increasing our
outsourcing relationships with global bearing manufacturers that maintain
captive bearing component manufacturing operations. Our marketing strategy for
our other precision plastic products is to offer custom manufactured, high
quality, precision parts to niche markets with high value-added characteristics
at competitive price levels. This strategy focuses on relationships with key
customers that require the production of technically difficult parts, enabling
us to take advantage of our strengths in custom product development, tool
design, and precision molding processes.
As shown in the chart below, the addition of the plastic and metal
retainer, tapered roller and seal product lines have further enhanced many of
our key customer relationships, making us a more complete and integrated
supplier of bearing component parts.
Products
Name Country Description Balls & Rollers Seals Retainers
SKF Sweden Global bearing manufacturer X X X
INA/FAG Germany Global bearing manufacturer X X X
NTN Japan Global bearing manufacturer X X X
SNR France Global bearing manufacturer X
Timken USA Global bearing manufacturer X X X
Delphi USA Automotive component supplier X X X
Iljin Korea Global bearing manufacturer X
NSK Japan Global bearing manufacturer X X
Koyo Japan Global bearing manufacturer X X X
GKN Germany Global bearing manufacturer X
Our arrangements with our domestic customers typically provide that
payments are due within 30 days following the date of shipment of goods. With
respect to foreign customers, payments generally are due within 90 to 120 days
following the date of shipment in order to allow for additional freight time and
customs clearance. For customers that participate in our Domestic Ball and
Roller Segment's inventory management program, sales are recorded when the
customer uses the product. See "Business -- Customers" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Liquidity and Capital Resources."
5
Manufacturing Process
We have become a leading independent bearing component manufacturer through
exceptional service and high quality manufacturing processes and are recognized
throughout the industry as a low-cost producer. Because our ball and roller
manufacturing processes incorporate the use of standardized tooling, load sizes,
and process technology, we are able to produce large volumes of products while
maintaining high quality standards.
The key to our low-cost, high quality production of seals and retainers is
the incorporation of customized engineering into our manufacturing processes,
metal to rubber bonding competency and experience with a broad range of
engineered resins. We employ 20 skilled engineers who design and customize the
tooling necessary to meet the needs of each customer's product. This design
process includes the testing and quality assessment of each product.
Employees
As of December 31, 2003, we employed a total of 1,715 full-time employees.
Our Domestic Ball and Roller Segment employed 257 workers, the NN Europe Segment
employed 1,023 workers, our Plastic and Rubber Components Segment employed 428
workers, and there were 7 employees at the Company's corporate headquarters. Of
our total employment, 17% are management/staff employees and 83% are production
employees. We believe we are able to attract and retain high quality employees
because of our quality reputation, technical expertise, history of financial and
operating stability, attractive employee benefit programs, and our progressive,
employee-friendly working environment. Only the employees in the Eltmann,
Germany, Pinerolo, Italy, and Veenendaal, The Netherlands plants are unionized
and we have never experienced any involuntary work stoppages. We consider our
relations with our employees to be excellent.
Competition
The precision ball and roller and metal retainer industry is intensely
competitive, and many of our competitors have greater financial resources than
we do. Our primary domestic competitor is Hoover Precision Products, Inc., a
division of Tsubakimoto Precision Products Co. Ltd. Our primary foreign
competitors are Amatsuji Steel Ball Manufacturing Company, Ltd. and Tsubakimoto
Precision Products Co. Ltd.
We believe that competition within the precision ball, roller and metal
retainer market is based principally on quality, price and the ability to
consistently meet customer delivery requirements. Management believes that our
competitive strengths are our precision manufacturing capabilities, our
reputation for consistent quality and reliability, and the productivity of our
workforce.
The markets for the Plastic and Rubber Components Segment's products are
also intensely competitive. Since the plastic injection molding industry is
currently very fragmented, IMC must compete with numerous companies in each of
its marketing segments. Many of these companies have substantially greater
financial resources than we do and many currently offer competing products
nationally and internationally. IMC's primary competitor in the bearing retainer
segment is Nakanishi Manufacturing Corporation. Domestically, Nypro, Inc. and
Key Plastics are the main competitors in the automotive segment.
We believe that competition within the plastic injection molding industry
is based principally on quality, price, design capabilities and speed of
responsiveness and delivery. Management believes that IMC's competitive
strengths are product development, tool design, fabrication, and tight tolerance
molding processes. With these strengths, IMC has built its reputation in the
marketplace as a quality producer of technically difficult products.
While intensely competitive, the markets for Delta's products are less
fragmented than IMC. The bearing seal market is comprised of approximately six
major competitors that range from small privately held companies to Fortune 500
global enterprises. Bearing seal manufacturers compete on design, service,
quality and price. Delta's primary competitors in the United States bearing seal
market are Freudenburg-NOK, Chicago Rawhide Industries (an SKF subsidiary),
Trostel, and Uchiyama.
Raw Materials
The primary raw material used in our Domestic Ball and Roller Segment and
NN Europe Segment is 52100 Steel. During 2003, approximately 98% and 99% of the
steel used by these two segments, respectively, was 52100 Steel in rod and wire
form. Our other steel requirements include type 440C stainless steel and type S2
rock bit steel.
6
The Domestic Ball and Roller Segment purchases substantially all of its
52100 Steel requirements from foreign mills in Europe and Japan because of the
lack of domestic producers of such steel in the form we require. The principal
suppliers of 52100 Steel to the Domestic Ball and Roller Segment are Daido Steel
Inc. (America), Shinso Steel America, Lucchini USA Inc. (affiliate of Ascometal
France) and Ohio Star Forge Co. The NN Europe Segment purchases all of its 52100
Steel requirements from European mills. The principal supplier of 52100 Steel to
the NN Europe Segment is Ascometal France (See Note 14 of the Notes to
Consolidated Financial Statements). Our other steel requirements are purchased
principally from foreign steel manufacturers. There are a limited number of
suppliers of the 52100 Steel that we use in our Domestic Ball and Roller and NN
Europe Segments. We believe that if any of our current suppliers were unable to
supply 52100 Steel to us, we would be able to obtain our 52100 Steel
requirements from alternate sources. We cannot provide assurances that we would
not face higher costs or production interruptions as a result of obtaining 52100
Steel from alternate sources.
We allocate steel purchases among suppliers on the basis of price and, more
significantly, composition and quality. The pricing arrangements with our
suppliers are typically subject to adjustment once every six months for the
Domestic Ball and Roller Segment. Steel pricing is contractually adjusted on an
annual basis within the NN Europe Segment. Scrap surcharges are adjusted
quarterly based upon market activity in the preceding quarter. In general, we do
not enter into written supply agreements with suppliers or commit to maintain
minimum monthly purchases of steel except for the supply arrangements between
Ascometal and Euroball (see Note 14 of the Notes to Consolidated Financial
Statements). For the Domestic Ball and Roller and NN Europe Segments, the
average price of 52100 Steel increased approximately 3.2% in 2003, decreased
approximately 2.5% in 2002, and increased approximately 1.9% in 2001.
Because 52100 Steel is principally produced by foreign manufacturers, the
Company's operating results would be negatively affected in the event that the
U.S. or European governments imposes any significant quotas, tariffs or other
duties or restrictions on the import of such steel, if the U.S. dollar decreases
in value relative to foreign currencies or if supplies available to us would
significantly decrease. On March 6, 2002, the U.S. government adopted
legislation that imposed certain tariffs on the import of certain foreign
produced steel into the United States. Because the vast majority of the 52100
Steel we use was exempted from these recent U.S. tariffs on imported steel, we
were not materially affected by related import regulations.
In 2001, we established a supply alliance with The Torrington Company,
which was acquired by the Timken Company in February 2003, to leverage our
combined supply requirements. The purchasing entity is empowered to negotiate
and execute supply agreements for both companies. Because we both use similar
raw materials from many common sources, we believe the potential synergies in
raw material procurement will be of value.
The primary raw materials used by IMC are engineered resins. Injection
grade nylon is utilized in bearing retainers, gears, automotive and other
industrial products. We purchase substantially all of our resin requirements
from domestic manufacturers and suppliers. The majority of these suppliers are
international companies with resin manufacturing facilities located throughout
the world. We experienced price decreases for engineered resins of approximately
1.0% in 2003, price decreases of approximately 2.5% in 2002, and price increases
of approximately 4.3% in 2001.
Delta uses certified vendors to provide a custom mix of proprietary rubber
compounds. Delta also procures metal stampings from several domestic suppliers.
We experienced price decreases for Delta's raw materials of approximately 2.5%
in 2003 and 0% in 2002 and 2001.
For the Plastic and Rubber Components Segment, we base purchase decisions
on price, quality and service. Generally, we do not enter into written supply
contracts with our suppliers or commit to maintain minimum monthly purchases of
resins. The pricing arrangements with our suppliers typically can be adjusted at
anytime.
Patents, Trademarks and Licenses
We do not own any U.S. or foreign patents, trademarks or licenses that are
material to our business. We do rely on certain data and processes, including
trade secrets and know-how, and the success of our business depends, to some
extent, on such information remaining confidential. Each executive officer is
subject to a non-competition and confidentiality agreement that seeks to protect
this information.
7
Seasonal Nature of Business
Historically, due to a substantial portion of sales to European customers,
seasonality has been a factor for our business in that some European customers
typically significantly reduce their production activities during the month of
August.
Environmental Compliance
Our operations and products are subject to extensive federal, state and
local regulatory requirements both domestically and abroad relating to pollution
control and protection of the environment. We maintain a compliance program to
assist in preventing and, if necessary, correcting environmental problems. Based
on information compiled to date, management believes that our current operations
are in substantial compliance with applicable environmental laws and
regulations, the violation of which would have a material adverse effect on our
business and financial condition. There can be no assurance, however, that
currently unknown matters, new laws and regulations, or stricter interpretations
of existing laws and regulations will not materially affect our business or
operations in the future. More specifically, although we believe that we dispose
of wastes in material compliance with applicable environmental laws and
regulations, there can be no assurance that we will not incur significant
liabilities in the future in connection with the clean-up of waste disposal
sites.
Executive Officers of the Registrant
Our executive officers are:
Name Age Position
Roderick R. Baty 50 Chairman of the Board, Chief Executive
Officer, President and Director
Frank T. Gentry, III 48 Vice President - Manufacturing
Robert R. Sams 46 Vice President - Market Services
David L. Dyckman 39 Vice President - Corporate Development and
Chief Financial Officer
William C. Kelly, Jr. 45 Treasurer, Secretary and Chief
Administrative Officer
Charles C. Leach 46 Vice President/General Manager - Industrial
Molding Corporation
Paul N. Fortier 42 Vice President/General Manager - Delta
Rubber Company
Dario E. Galetti 49 Managing Director - NN Europe
Set forth below is certain additional information with respect to each of our
executive officers.
Roderick R. Baty was elected Chairman of the Board in September 2001 and
continues to serve as Chief Executive Officer and President. He has served as
President and Chief Executive Officer since July 1997. He joined NN in July 1995
as Vice President and Chief Financial Officer and was elected to the Board of
Directors in 1995. Prior to joining NN, Mr. Baty served as President and Chief
Operating Officer of Hoover Precision Products from 1990 until January 1995, and
as Vice President and General Manager of Hoover Group from 1985 to 1990.
Frank T. Gentry, III, was originally appointed Vice President -
Manufacturing in August 1995. Mr. Gentry is responsible for the global
operations of the Ball and Roller and NN Europe Segments. Mr. Gentry's
responsibilities include purchasing, inventory control and transportation. Mr.
Gentry joined NN in 1981 and held various production control positions within NN
from 1981 to August 1995.
Robert R. Sams joined NN in 1996 as Plant Manager of the Mountain City,
Tennessee facility. In 1997, Mr. Sams served as Managing Director of the
Kilkenny facility and in 1999 was elected to the position of Vice President -
Market Services. Prior to joining NN, Mr. Sams held various positions with
Hoover Precision Products from 1980 to 1994 and most recently as Vice President
of Production for Blum, Inc. from 1994 to 1996.
David L. Dyckman was appointed Vice President of Corporate Development and
Chief Financial Officer in April 1998. Prior to joining NN, Mr. Dyckman served
from January 1997 until April 1998 as Vice President--Marketing and
International Sales for the Veeder-Root Division of the Danaher Corporation.
From 1987 until 1997, Mr. Dyckman held various positions with Emerson Electric
Company including General Manager and Vice President of the Gearing Division of
Emerson's Power Transmission subsidiary.
8
William C. Kelly, Jr. joined NN in 1993 as Assistant Treasurer and Manager
of Investor Relations. In March, 2003, Mr. Kelly was elected to serve as NN's
Chief Administrative Officer. In July 1994, Mr. Kelly was elected to serve as
NN's Chief Accounting Officer, and served in that capacity through March 2003.
In February 1995, Mr. Kelly was elected Treasurer and Assistant Secretary. In
March 1999 he was elected Secretary of NN and still serves in that capacity as
well as that of Treasurer. Prior to joining NN, Mr. Kelly served from 1988 to
1993 as a Staff Accountant and as a Senior Auditor with the accounting firm of
PricewaterhouseCoopers LLP.
Charles C. Leach was named Vice President and General Manager - IMC in
January of 2002. Prior to being named Vice President and General Manager, from
1989 to 2002 Mr. Leach held increasingly responsible positions in materials,
manufacturing, and operations management at IMC.
Paul N. Fortier was appointed Vice President and General Manager - Delta in
May 2001 shortly after the Company's acquisition of Delta in February 2001.
Prior to joining the Company, from 1988 to 2001, Mr. Fortier held a variety of
quality, manufacturing, marketing, and general management positions with Siemens
in its precision materials and general lighting divisions.
Dario Galetti was named Managing Director - Euroball in August 2000. From
1993 to 2000, he served as the Factory Manager Director of SKF's Pinerolo, Italy
ball facility. From 1990 to 1993 he was Factory Manager of the SKF Bari Bearing
Factory.
Item 2. Properties
The Company has two operating domestic ball manufacturing facilities
located in Erwin, Tennessee and Mountain City, Tennessee. Rollers are produced
only at the Erwin, Tennessee facility. Production began in early 1996 at the
Mountain City facility. During December 2001, we ceased production and closed
our facility in Walterboro, South Carolina. The Walterboro, South Carolina
facility is classified as held for sale at December 31, 2003 and 2002.
The Erwin and Mountain City plants currently have approximately 125,000 and
86,400 square feet of manufacturing space, respectively. The Erwin plant is
located on a 12 acre tract of land owned by the Company and the Mountain City
plant is located on an eight acre tract of land owned by the Company.
Through Euroball we manufacture precision steel balls in three
manufacturing facilities located in Kilkenny, Ireland, Eltmann, Germany and
Pinerolo, Italy. The facilities currently have approximately 125,000, 175,000
and 330,000 square feet of manufacturing space, respectively. The Kilkenny
facility is located on a two acre tract owned by Euroball, the Eltmann facility
is leased from FAG and the Pinerolo facility is located on a nine acre tract
owned by Euroball.
Our Veenendaal, The Netherlands operation manufactures rollers for tapered
roller bearings and metal retainers in two facilities. The facilities, owned by
the Company, have approximately 107,000 and 52,000 square feet of manufacturing
space, respectively.
Our Kysucke Nove Mesto, Slovakia operation, expected to begin production in
2004, will be engaged in the production of precision steel balls. The facility,
owned by the Company, has approximately 135,000 square feet of manufacturing
space.
IMC manufactures a wide range of plastic molded products through two
facilities located in Lubbock, Texas. The Slaton facility, located on a six and
one half acre tract of land owned by the Company, contains approximately 193,000
square feet of manufacturing, warehouse and office space. The Cedar facility is
situated on a two and one half acre tract of land which is also owned by the
Company and contains approximately 35,000 square feet of manufacturing and
warehouse space.
Delta's operations are located in two facilities on a 12-acre site in
Danielson, Connecticut, owned by the Company. The two facilities encompass over
50,000 square feet of rubber seal manufacturing and administrative functions.
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources."
9
Item 3. Legal Proceedings
From time to time the Company is subject to legal actions related to its
operations, most of which are of an ordinary and routine nature and are
incidental to the operations of the Company. Management believes that such
proceedings should not, individually or in the aggregate, have a material
adverse effect on the Company's business or financial condition or on the
results of operations.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted for a vote of stockholders during the fourth
quarter of 2003.
10
Part II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters
Since the Company's initial public offering in 1994, the Common Stock has
been traded on the Nasdaq National Market under the trading symbol "NNBR." Prior
to such time there was no established market for the Common Stock. As of March
11, 2004, there were approximately 4,500 holders of the Common Stock.
The following table sets forth the high and low closing sales prices of the
Common Stock, as reported by Nasdaq, and the dividends paid per share on the
Common Stock during each calendar quarter of 2003, 2002 and 2001.
Close Price
High Low Dividend
2003
First Quarter $10.00 $8.01 $0.08
Second Quarter 12.66 9.35 0.08
Third Quarter 13.75 11.12 0.08
Fourth Quarter 12.90 10.70 0.08
2002
First Quarter $11.00 $9.15 $0.08
Second Quarter 12.80 9.68 0.08
Third Quarter 12.45 8.08 0.08
Fourth Quarter 10.10 6.98 0.08
2001
First Quarter $ 9.17 $6.53 $0.08
Second Quarter 10.81 6.50 0.08
Third Quarter 10.84 7.25 0.08
Fourth Quarter 11.30 7.75 0.08
The declaration and payment of dividends are subject to the sole discretion
of the Board of Directors of the Company and depend upon the Company's
profitability, financial condition, capital needs, future prospects and other
factors deemed relevant by the Board of Directors. The terms of the Company's
revolving credit facility restrict the payment of dividends by prohibiting the
Company from declaring or paying any dividend if an event of default exists at
the time of, or would occur as a result of, such declaration or payment.
Additionally, the terms of the Company's revolving credit facility restrict the
declaration and payment of dividends in excess of certain amounts specified in
the credit agreement in any fiscal year. The amount of consolidated retained
earnings which represents undistributed earnings of 50 percent or less owned
persons accounted for by the equity method is zero at December 31, 2003, 2002
and 2001. For further description of the Company's revolving credit facility,
see "Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources" herein.
Item 6. Selected Financial Data
The following selected financial data of the Company are qualified by
reference to and should be read in conjunction with the Consolidated Financial
Statements and the Notes thereto included as Item 8. The data set forth below as
of December 31, 2003 and for the year then ended has been derived from the
Consolidated Financial Statements of the Company which have been audited by
PricewaterhouseCoopers LLP, independent auditors, whose report thereon is
included as part of Item 8. The data below as of December 31, 2002, 2001 and
2000 and for the periods then ended has been derived from the Consolidated
Financial Statements of the Company, which have been audited by KPMG LLP,
independent auditors. The data below as of December 31, 1999 and for the year
then ended has been derived from the Consolidated Financial Statements of the
Company, which have been audited by PricewaterhouseCoopers LLP, independent
auditors. These historical results are not necessarily indicative of the results
to be expected in the future. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
11
(In Thousands, Except Per Share Data) Year Ended December 31,
2003 2002 2001 2000 1999
Statement of Income Data:
Net sales $253,462 $192,856 $180,151 $132,129 $85,294
Cost of products sold (exclusive of depreciation
shown separately below) 195,650 144,274 137,221 93,926 59,967
Selling, general and administrative expenses 21,700 17,134 16,752 11,571 6,854
Depreciation and amortization 13,836 11,212 13,150 9,165 6,131
Restructuring and impairment costs 2,498 1,277 2,312 -- --
------------- ------------- -------------- ------------ ------------
Income from operations 19,778 18,959 10,716 17,467 12,342
Interest expense 3,247 2,451 4,196 1,773 523
Equity in earnings of unconsolidated affiliate -- -- -- (48) --
Net gain on involuntary conversion -- -- (3,901) (728) --
Other income (48) (487) (186) (136) --
------------- ------------- -------------- ------------ ------------
Income before provision for income taxes 16,579 16,995 10,607 16,606 11,819
Provision for income taxes 5,726 6,457 4,094 5,959 4,060
Minority interest in income of consolidated
subsidiary 675 2,778 1,753 660 --
------------- ------------- -------------- ------------ ------------
Income before cumulative effect of change in
accounting principle 10,178 7,760 4,760 9,987 7,759
Cumulative effect of change in accounting
principle, net of income tax benefit of $112
and related minority interest impact of $84 -- -- 98 -- --
------------- ------------- -------------- ------------ ------------
Net income $ 10,178 $ 7,760 $ 4,662 $ 9,987 $ 7,759
============= ============= ============== ============ ============
Basic income per share:
Income before cumulative effect of change in
accounting principle $ 0.64 $ 0.51 $ 0.31 $ 0.66 $ 0.52
Cumulative effect of change in accounting
principle -- -- (0.01) -- --
------------- ------------- -------------- ------------ ------------
Net income $ 0.64 $ 0.51 $ 0.31 $ 0.66 $ 0.52
============= ============= ============== ============ ============
Diluted income per share:
Income before cumulative effect of change in
accounting principle $ 0.62 $ 0.49 $ 0.31 $ 0.64 $ 0.52
Cumulative effect of change in accounting
principle -- -- (0.01) -- --
------------- ------------- -------------- ------------ ------------
Net income $ 0.62 $ 0.49 $ 0.30 $ 0.64 $ 0.52
============= ============= ============== ============ ============
Dividends declared $ 0.32 $ 0.32 $ 0.32 $ 0.32 $ 0.32
============= ============= ============== ============ ============
Weighted average number of shares
outstanding - Basic 15,973 15,343 15,259 15,247 15,021
============= ============= ============== ============ ============
Weighted average number of shares
outstanding - Diluted 16,379 15,714 15,540 15,531 15,038
============= ============= ============== ============ ============
12
(In Thousands, Except Per Share Data)
Year Ended December 31,
2003 2002 2001 2000 1999
Balance Sheet Data:
Current assets $ 88,419 $ 61,412 $ 55,617 $ 63,866 $ 34,397
Current liabilities 62,694 40,234 32,534 33,840 10,478
Total assets 266,417 195,215 184,477 183,951 91,363
Long-term debt 69,752 46,135 47,661 50,515 17,151
Stockholders' equity 106,468 77,908 70,982 74,675 60,128
On October 9, 2003, we acquired certain assets comprised of land, building
and machinery and equipment of the precision ball operations of KLF - Gulickaren
("KLF"), based in Kysucke Nove Mesto, Slovakia.
On May 2, 2003 we acquired 100% of the tapered roller and metal cage
manufacturing operations of SKF in Veenendaal, The Netherlands.
On May 2, 2003 we acquired the 23% interest in Euroball, held by SKF. Upon
consummation of this transaction, we became the sole owner of Euroball.
On December 20, 2002 we completed the purchase of the 23% interest in
Euroball held by INA/FAG. As a result of this transaction, we own 77% of the
shares of Euroball.
Effective January 1, 2002 we adopted the provision of Statement of
Financial Accounting Standards (SFAS) No. 142. SFAS No. 142 requires that
goodwill and intangible assets with indefinite useful lives no longer be
amortized. See Note 1 of the Notes to Consolidated Financial Statements.
On February 16, 2001 we completed the acquisition of all of the outstanding
stock of The Delta Rubber Company.
On July 31, 2000 we completed the formation of Euroball. As a result of
this transaction, we owned 54% of the shares of NN Euroball ApS.
On July 4, 1999 we acquired all of the assets and assumed certain
liabilities of Earsley Capital Corporation, formerly known as Industrial Molding
Corporation.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion should be read in conjunction with, and is
qualified in its entirety by, the Consolidated Financial Statements and the
Notes thereto and Selected Financial Data included elsewhere in this Form 10-K.
Historical operating results and percentage relationships among any amounts
included in the Consolidated Financial Statements are not necessarily indicative
of trends in operating results for any future period.
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.
13
You should carefully consider the following risks and uncertainties, and
all other information contained in or incorporated by reference in this annual
report on Form 10-K, before making an investment in our common stock. Any of the
following risks could have a material adverse effect on our business, financial
condition or operating results. In such case, the trading price of our common
stock could decline and you may lose all or part of your investment.
The demand for our products is cyclical, which could adversely impact our
revenues.
The end markets for fully assembled bearings are cyclical and tend to
decline in response to overall declines in industrial production. As a result,
the market for bearing components is also cyclical and impacted by overall
levels of industrial production. Our sales in the past have been negatively
affected, and in the future will be negatively affected, by adverse conditions
in the industrial production sector of the economy or by adverse global or
national economic conditions generally.
We depend on a very limited number of foreign sources for our primary raw
material and are subject to risks of shortages and price fluctuation.
The steel that we use to manufacture precision balls and rollers is of an
extremely high quality and is available from a limited number of producers on a
global basis. Due to quality constraints in the U.S. steel industry, we obtain
substantially all of the steel used in our U.S. ball and roller production from
overseas suppliers. In addition, we obtain substantially all of the steel used
in our European ball production from a single European source. If we had to
obtain steel from sources other than our current suppliers, particularly in the
case of our European operations, we could face higher prices and transportation
costs, increased duties or taxes, and shortages of steel. Problems in obtaining
steel, and particularly 52100 chrome steel, in the quantities that we require
and on commercially reasonable terms, could increase our costs, adversely
impacting our ability to operate our business efficiently and have a material
adverse effect on the operating and financial results of our Company.
We depend heavily on a relatively limited number of customers, and the loss
of any major customer would have a material adverse effect on our business.
Sales to various U.S. and foreign divisions of SKF, which is one of the
largest bearing manufacturers in the world, accounted for approximately 42% of
consolidated net sales in 2003, and sales to INA/FAG accounted for approximately
16% of consolidated net sales in 2003. During 2003, our ten largest customers
accounted for approximately 77% of our consolidated net sales. None of our other
customers individually accounted for more than 5% of our consolidated net sales
for 2003. The loss of all or a substantial portion of sales to these customers
would cause us to lose a substantial portion of our revenue and would lower our
operating profit margin and cash flows from operations.
We operate in and sell products to customers outside the U.S. and are
subject to several related risks.
Because we obtain a majority of our raw materials from overseas suppliers,
actively participate in overseas manufacturing operations and sell to a large
number of international customers, we face risks associated with the following:
• adverse foreign currency fluctuations;
• changes in trade, monetary and fiscal policies, laws and
regulations, and other activities of governments, agencies and
similar organizations;
• the imposition of trade restrictions or prohibitions;
• high tax rates that discourage the repatriation of funds to the
U.S.;
• the imposition of import or other duties or taxes; and
• unstable governments or legal systems in countries in which our
suppliers, manufacturing operations, and customers are located.
We do not have a hedging program in place associated with consolidating the
operating results of our foreign businesses into U.S. dollars. An increase in
the value of the U.S. dollar and/or the Euro relative to other currencies may
14
adversely affect our ability to compete with our foreign-based competitors for
international, as well as domestic, sales. Also, a decline in the value of the
Euro relative to the U.S. dollar will negatively impact our consolidated
financial results, which are denominated in U.S. dollars.
In addition, due to the typical slower summer manufacturing season in
Europe, we expect that revenues in the third fiscal quarter will reflect lower
sales, as our sales to European customers have increased as a percentage of net
sales.
The costs and difficulties of integrating acquired business could impede
our future growth.
We cannot assure you that any future acquisition will enhance our financial
performance. Our ability to effectively integrate any future acquisitions will
depend on, among other things, the adequacy of our implementation plans, the
ability of our management to oversee and operate effectively the combined
operations and our ability to achieve desired operating efficiencies and sales
goals. The integration of any acquired businesses might cause us to incur
unforeseen costs, which would lower our profit margin and future earnings and
would prevent us from realizing the expected benefits of these acquisitions.
We may not be able to continue to make the acquisitions necessary for us to
realize our growth strategy.
Acquiring businesses that complement or expand our operations has been and
continues to be an important element of our business strategy. This strategy
calls for growth through acquisitions constituting approximately three-fourths
of our future growth, with the remainder resulting from internal growth and
market penetration. We bought our plastic bearing component business in 1999,
formed Euroball with our two largest bearing customers, SKF and INA/FAG, in 2000
and acquired our bearing seal operations in 2001. During 2002, we purchased
INA/FAG's minority interest in Euroball and during 2003 we purchased SKF's
minority interest in Euroball and SKF's tapered roller and metal cage
manufacturing operations in Veenendaal, The Netherlands. See Note 2 of the Notes
to Consolidated Financial Statements. We cannot assure you that we will be
successful in identifying attractive acquisition candidates or completing
acquisitions on favorable terms in the future. In addition, we may borrow funds
to acquire other businesses, increasing our interest expense and debt levels.
Our inability to acquire businesses, or to operate them profitably once
acquired, could have a material adverse effect on our business, financial
position, results of operations and cash flows.
Our growth strategy depends on outsourcing, and if the industry trend
toward outsourcing does not continue, our business could be adversely
affected.
Our growth strategy depends in significant part on major bearing
manufacturers continuing to outsource components, and expanding the number of
components being outsourced. This requires manufacturers to depart significantly
from their traditional methods of operations. If major bearing manufacturers do
not continue to expand outsourcing efforts or determine to reduce their use of
outsourcing, our ability to grow our business could be materially adversely
affected.
Our market is highly competitive and many of our competitors have
significant advantages that could adversely affect our business.
The global market for bearing components is highly competitive, with a
majority of production represented by the captive production operations of
certain large bearing manufacturers and the balance represented by independent
manufacturers. Captive manufacturers make components for internal use and for
sale to third parties. All of the captive manufacturers, and many independent
manufacturers, are significantly larger and have greater resources than do we.
Our competitors are continuously exploring and implementing improvements in
technology and manufacturing processes in order to improve product quality, and
our ability to remain competitive will depend, among other things, on whether we
are able to keep pace with such quality improvements in a cost effective manner.
The production capacity we have added over the last several years has at
times resulted in our having more capacity than we need, causing our
operating costs to be higher than expected.
We have expanded our ball and roller production facilities and capacity
over the last several years. During 1997, we built an additional manufacturing
plant in Kilkenny, Ireland, and we continued this expansion in 2000 through the
formation of Euroball with SKF and INA/FAG. Our ball and roller production
facilities have not always operated at full capacity and from time to time our
results of operations have been adversely affected by the under-utilization of
our production facilities, and we face risks of further under-utilization or
inefficient utilization of our production facilities in future years.
15
The price of our common stock may be volatile.
The market price of our common stock could be subject to significant
fluctuations and may decline. Among the factors that could affect our stock
price are:
• our operating and financial performance and prospects;
• quarterly variations in the rate of growth of our financial
indicators, such as earnings per share, net income and revenues;
• changes in revenue or earnings estimates or publication of research
reports by analysts;
• loss of any member of our senior management team;
• speculation in the press or investment community;
• strategic actions by us or our competitors, such as acquisitions or
restructurings;
• sales of our common stock by stockholders;
• general market conditions; and
• domestic and international economic, legal and regulatory factors
unrelated to our performance.
The stock markets in general have experienced extreme volatility that has
often been unrelated to the operating performance of particular companies. These
broad market fluctuations may adversely affect the trading price of our common
stock.
Provisions in our charter documents and Delaware law may inhibit a
takeover, which could adversely affect the value of our common stock.
Our certificate of incorporation and bylaws, as well as Delaware corporate
law, contain provisions that could delay or prevent a change of control or
changes in our management that a stockholder might consider favorable and may
prevent you from receiving a takeover premium for your shares. These provisions
include, for example, a classified board of directors and the authorization of
our board of directors to issue up to 5,000,000 preferred shares without a
stockholder vote. In addition, our restated certificate of incorporation
provides that stockholders may not call a special meeting.
We are a Delaware corporation subject to the provisions of Section 203 of
the Delaware General Corporation Law, an anti-takeover law. Generally, this
statute prohibits a publicly-held Delaware corporation from engaging in a
business combination with an interested stockholder for a period of three years
after the date of the transaction in which such person became an interested
stockholder, unless the business combination is approved in a prescribed manner.
A business combination includes a merger, asset sale or other transaction
resulting in a financial benefit to the stockholder. We anticipate that the
provisions of Section 203 may encourage parties interested in acquiring us to
negotiate in advance with our board of directors, because the stockholder
approval requirement would be avoided if a majority of the directors then in
office approve either the business combination or the transaction that results
in the stockholder becoming an interested stockholder.
These provisions apply even if the offer may be considered beneficial by
some of our stockholders. If a change of control or change in management is
delayed or prevented, the market price of our common stock could decline.
Overview and Management Focus
Our strategy and management focus is based upon the following long-term
objectives:
• Captive growth, providing a competitive and attractive alternative to
the operations of our global customers
16
• Expansion of our bearing product offering, and
• Global expansion of our manufacturing base to better address the
global requirements of our customers
Management generally focuses on these trends and relevant market
indicators:
• Global industrial growth and economics
• Global automotive production rates
• Costs subject to the global inflationary environment, including, but
not limited to:
• Raw material
• Wages and benefits, including health care costs
• Energy
• Trends related to manufacturing's geographic migration of competitive
manufacturing
• Regulatory environment for United States public companies
• Currency and exchange rate movements and trends
• Interest rate levels and expectations
Management generally focuses on the following key indicators of operating
performance:
• Sales growth
• Cost of products sold levels
• Selling, general and administrative expense levels
• Net income
• Cash flow from operations and capital spending
Our core business is the manufacture and sale of high quality, precision
steel balls and rollers. In 2003, sales of balls and rollers accounted for
approximately 76% of the Company's total net sales with 63% and 13% of sales
from balls and rollers, respectively. Sales of metal bearing retainers accounted
for 4% and sales of precision molded plastic and rubber parts accounted for the
remaining 20%. See Note 11 of the Notes to Consolidated Financial Statements.
Since our formation in 1980 we have grown primarily through the
displacement of captive ball manufacturing operations of domestic and
international bearing manufacturers resulting in increased sales of high
precision balls for quiet bearing applications. Management believes that our
core business sales growth since our formation has been due to our ability to
capitalize on opportunities in global markets and provide precision products at
competitive prices, as well as our emphasis on product quality and customer
service.
In 1997, we recognized changing dynamics in the marketplace, and as a
result, developed and began implementing an extensive long-term growth strategy
building upon our core business and leveraging our inherent strengths to better
serve our global customer base. As part of this strategy, we sought to augment
our intrinsic growth with complementary acquisitions that fit specific criteria.
On July 4, 1999, we acquired substantially all of the assets of Earsley
Capital Corporation, formerly known as Industrial Molding Corporation ("IMC")
for consideration of approximately $30.0 million. Formed in 1947, IMC provides
full-service design and manufacture of plastic injection molded components to
the bearing, automotive, electronic, leisure and consumer markets with an
emphasis on value-added products that take advantage of its capabilities in
product
17
development, tool design and tight tolerance molding processes. IMC operates two
manufacturing facilities in Lubbock, Texas. During 2003, IMC sold its products
to more than 60 customers in 12 different countries.
On July 31, 2000, we 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. As a result of this transaction, we
owned 54% of Euroball. AB SKF and FAG Kugelfisher Georg Shafer AG, the parent
companies of SKF and FAG respectively each owned 23% of Euroball. 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 provided for additional working capital
expenditure financing. In connection with this transaction, total equity,
specifically additional paid in capital, increased by 10.0 million Euros ($9.3
million) to reflect the increase in our proportionate interest in Euroball as
related to our 54% ownership as more fully detailed in Note 2 to the
Consolidated Financial Statements. We have always consolidated Euroball due to
our majority ownership and have accounted for the acquisitions of the Pinerolo,
Italy and Eltmann, Germany ball factories in a manner similar to the purchase
method of accounting. On December 20, 2002 we completed the purchase of the 23%
interest held by INA/FAG. We paid approximately 13.4 million Euros ($13.8
million) for INA/FAG's interest in Euroball. The excess of the purchase price
paid to INA/FAG for its 23% interest over fair value of INA/FAG's 23% interest
in the net assets of Euroball of approximately $1.5 million has been allocated
to goodwill (see Note 2 of the Notes to Consolidated Financial Statements). On
May 2, 2003 we acquired the 23% interest in Euroball held by SKF. We paid
approximately 13.8 million Euros ($15.6 million) for SKF's interest in Euroball.
The excess of the purchase price paid to SKF for its 23% interest over the fair
value of SKF's 23% interest in the net assets of Euroball of approximately $2.1
million was allocated to goodwill.
On February 16, 2001, we completed the acquisition of all of the
outstanding stock of The Delta Rubber Company, a Connecticut corporation
("Delta"), for $22.5 million in cash. Delta provides high quality engineered
bearing seals and other precision-molded rubber products to original equipment
manufacturers. Delta operates two manufacturing facilities in Danielson,
Connecticut. We have accounted for this acquisition using the purchase method of
accounting.
On September 11, 2001, we announced the closing of our Walterboro, South
Carolina ball manufacturing facility effective December 2001. The closing was
made as part of our strategy to redistribute our global production in order to
better utilize capacity and serve the needs of our worldwide customers. The
precision ball production of the Walterboro facility has been fully absorbed by
our remaining U.S. ball & roller manufacturing facilities located in Erwin and
Mountain City, Tennessee. In 2002 and 2001 we recorded before tax charges
associated with the closing of $1.3 million and $1.9 million, respectively. In
2001, this amount includes a $1.1 million before-tax charge for the recording of
impairment on our manufacturing facility located in Walterboro, South Carolina
and $0.8 million related to employee severance costs. In 2002, this amount
includes a $0.6 million before-tax charge for the recording of an additional
impairment on the facility, a $0.6 million before-tax charge for the recording
of impairment on the machinery and equipment and a $0.1 million charge related
to employee severance costs. There were no impairment charges related to these
assets recorded in 2003. These amounts are reflected as restructuring and
impairment costs in the accompanying Consolidated Statements of Income. The
building along with certain machinery and equipment are held for sale as of
December 31, 2003. These assets have an aggregate carrying value of $1.8
million. The financial results of this operation have been reflected in the
Domestic Ball and Roller Segment. See Note 11 of the Notes to Consolidated
Financial Statements.
Effective December 21, 2001, we sold our minority interest in Jiangsu
General Ball & Roller Company, LTD, a Chinese ball and roller manufacturer
located in Rugao City, Jiangsu Province, China. To effect the transaction, we
sold our 50% ownership in NN General, LLC, which owns a 60% interest in the
Jiangsu joint venture to our partner, General Bearing Corporation for cash of
$0.6 million and notes of $3.3 million. In 2001, we recorded a non-cash
after-tax loss on sale of the investments in this joint venture of $0.2 million.
On May 2, 2003 we acquired 100% of the tapered roller and metal cage
manufacturing operations of SKF in Veenendaal, The Netherlands. The results of
Veenendaal's operations have been included in the consolidated financial
statements since that date. We paid consideration of approximately 23.0 million
Euros ($25.7 million) and incurred other costs of approximately $1.0 million,
for the Veenendaal net assets acquired from SKF. The Veenendaal operation
manufactures rollers for tapered roller bearings and metal cages for both
tapered roller and spherical roller bearings allowing us to expand our bearing
component offering. The financial results of the Veenendaal operation are
included in the NN Europe Segment.
On October 9, 2003, we acquired certain assets comprised of land, building
and machinery and equipment of the precision ball operations of KLF - Gulickaren
("KLF"), based in Kysucke Nove Mesto, Slovakia. We paid consideration of
approximately 1.7 million Euros ($2.0 million). The assets will be utilized by
our newly established subsidiary NN Slovakia
18
based in Kysucke Nove Mesto, Slovakia, which will begin production in 2004. The
financial results of the operations are included in our NN Europe Segment.
The implementation and successful execution of this acquisition strategy to
date has allowed the Company to expand its global presence and positions the
Company for continued global growth and expansion into core served markets.
Critical Accounting Policies
Our significant accounting policies, including the assumptions and judgment
underlying them, are disclosed in Note 1 of the Notes to Consolidated Financial
Statements. These policies have been consistently applied in all material
respects and address such matters as revenue recognition, inventory valuation,
asset impairment recognition, business combination accounting and pension and
post-retirement benefits. Due to the estimation processes involved, management
considers the following summarized accounting policies and their application to
be critical to understanding the Company's business operations, financial
condition and results of operations. There can be no assurance that actual
results will not significantly differ from the estimates used in these critical
accounting policies.
Accounts Receivable. Accounts receivable are recorded upon recognition of a sale
of goods and ownership is assumed by the customer. Substantially all of the
Company's accounts receivable are due primarily from the core served markets:
bearing manufacturers, automotive industry, electronics, industrial,
agricultural and aerospace. Due to the Chapter 7 voluntary bankruptcy of one IMC
customer and other write-offs, the Company experienced $1.7 million of bad debt
expense during 2001, $0.1 million during 2002 and $0.1 million during 2003. In
establishing allowances for doubtful accounts, the Company continuously performs
credit evaluations of its customers, considering numerous inputs when available
including the customers' financial position, past payment history, relevant
industry trends, cash flows, management capability, historical loss experience
and economic conditions and prospects. Accounts receivable are written off when
considered to be uncollectible. While management believes that adequate
allowances for doubtful accounts have been provided in the Consolidated
Financial Statements, it is possible that the Company could experience
additional unexpected credit losses.
Inventories. Inventories are stated at the lower of cost or market. Cost is
determined using the first-in, first-out method. The Company's inventories are
not generally subject to obsolescence due to spoilage or expiring product life
cycles. The Company operates generally as a make-to-order business; however, the
Company also stocks products for certain customers in order to meet delivery
schedules. While management believes that adequate write-downs for inventory
obsolescence have been made in the Consolidated Financial Statements, the
Company could experience additional inventory write-downs in the future.
Acquisitions and Acquired Intangibles. For new acquisitions, the Company uses
estimates, assumptions and appraisals to allocate the purchase price to the
assets acquired and to determine the amount of goodwill. These estimates are
based on market analyses and comparisons to similar assets. Annual tests are
required to be performed to assess whether recorded goodwill is impaired. The
annual tests require management to make estimates and assumptions with regard to
the future operations of its reporting units, the expected cash flows that they
will generate, and their market value. These estimates and assumptions therefore
impact the recorded value of assets acquired in a business combination,
including goodwill, and whether or not there is any subsequent impairment of the
recorded goodwill and the amount of such impairment.
Impairment of Long-Lived Assets. The Company's long-lived assets include
property, plant and equipment. The recoverability of the long-term assets is
dependent on the performance of the companies which the Company has acquired, as
well as volatility inherent in the external markets for these acquisitions. In
assessing potential impairment for these assets the Company will consider these
factors as well as forecasted financial performance. For assets held for sale,
appraisals are relied upon to assess the fair market value of those assets. The
Company estimates that if the assets held for sale were classified as held and
used, depreciation expense would have increased approximately $0.1 million
during 2003. Future adverse changes in market conditions or adverse operating
results of the underlying assets could result in the Company having to record
additional impairment charges not previously recognized.
Pension and Post-Retirement Obligations. The Company uses several assumptions in
determining its periodic pension and post-retirement expense and obligations
which are included in the Consolidated Financial Statements. These assumptions
include determining an appropriate discount rate, rate of compensation increase
as well as the remaining service period of active employees. The Company uses an
independent actuary to calculate the periodic pension and post-retirement
expense and obligations based upon these assumptions and actual employee census
data.
19
Results of Operations
The following table sets forth for the periods indicated selected financial
data and the percentage of the Company's net sales represented by each income
statement line item presented.
As a percentage of Net Sales
Year Ended December 31,
2003 2002 2001
------------ ----------- ----------
Net sales 100.0% 100.0% 100.0%
Cost of product sold (exclusive of depreciation shown
separately below) 77.2 74.8 76.2
Selling, general and administrative expenses 8.6 8.9 9.3
Depreciation and amortization 5.4 5.8 7.3
Restructuring and impairment costs 1.0 0.7 1.3
------------ ----------- ----------
Income from operations 7.8 9.8 5.9
Interest expense 1.3 1.3 2.3
Net gain on involuntary conversion -- -- (2.2)
Other income -- (0.3) (0.1)
------------ ----------- ----------
Income before provision for income taxes 6.5 8.8 5.9
Provision for income taxes 2.2 3.4 2.3
Minority interest in income of consolidated subsidiary 0.3 1.4 1.0
------------ ----------- ----------
Income before cumulative effect of change in accounting
principle 4.0 4.0 2.6
Cumulative effect of change in accounting principle, net
of income tax benefit of $112 and related minority
interest impact of $84 -- -- --
------------ ----------- ----------
Net income 4.0% 4.0% 2.6%
============ =========== ==========
Off Balance Sheet Arrangements
We have operating lease commitments for machinery, office equipment,
manufacturing and office space which expire on varying dates. The following is a
schedule by year of future minimum lease payments as of December 31, 2003 under
operating leases that have initial or remaining non-cancelable lease terms in
excess of one year.
Year ended December 31,
----------------------------------------------------------------
2004 $ 2,354
2005 2,086
2006 1,806
2007 1,770
2008 1,768
Thereafter 17,263
-------------
Total minimum lease payments $ 27,046
=============
20
Year Ended December 31, 2003 Compared to the Year Ended December 31, 2002
Net Sales. Our net sales increased by $60.6 million or 31.4% from $192.9
million in 2002 to $253.5 million in 2003. Net sales of the NN Europe Segment
increased $56.5 million or 62.3% from $90.7 million in 2002 to $147.2 million in
2003. Sales from our Veenendaal, The Netherlands tapered roller and metal
retainer operation acquired on May 2, 2003 accounted for $35.1 million of the
increase. Impacts of foreign currency translation within the NN Europe segment
contributed $18.7 million of the increase. The remaining increase of $2.7
million is a result of increased product demand. Net sales of the Domestic Ball
and Roller Segment increased $2.8 million or 5.3% from $52.6 million in 2002 to
$55.4 million in 2003. Net sales of the Plastics and Rubber Components Segment
increased $1.3 million or 2.7% from $49.6 million in 2002 to $50.9 million in
2003. Sales increases in these two segments are a result of increased product
demand.
Cost of Products Sold. Our cost of products sold increased by $51.3 million
or 35.6% from $144.3 million in 2002 to $195.7 million in 2003. Cost of products
sold of the NN Europe Segment increased $46.4 million or 68.4% from $67.9
million in 2002 to $114.3 million in 2003. Cost of products sold from our
Veenendaal, The Netherlands operation accounted for $29.2 million of the
increase and impacts of foreign currency translation accounted for $14.7 million
of the increase. The remaining increase of $2.5 million within the NN Europe
segment is principally attributed to increased product demands and material cost
increases. Cost of products sold of the Domestic Ball and Roller Segment
increased by $2.6 million due to production costs associated with increased
product demand of approximately $1.9 million and increases in material costs and
export costs of approximately $0.7 million. Cost of products sold of the
Plastics and Rubber Components Segment increased $2.3 million due to production
costs associated with increased product demand of approximately $1.0 million,
$0.1 million related to inventory impairment charges due to the closing of our
NN Arte business in Guadalajara, Mexico, and $1.2 million due to product mix and
insurance expense increases. As a percentage of sales, cost of products sold
increased from 74.8% in 2002 to 77.2% in 2003.
The price of steel has risen over the last twelve to eighteen months with
2004 prices expected to reflect even greater increases. Prior to that time,
steel prices had gradually declined since approximately 1997. The increase is
principally due to general increases in global demand and, more recently, due to
China's increased consumption of steel. This has had the impact of increasing
scrap surcharges we pay in procuring our steel. Our contracts with key customers
allow us to pass a majority of the steel price increases we incur on to those
customers. However, by contract, material price changes in any given year are
passed along with price adjustments in January of the following year. Until the
current increases are able to be passed through to our customers, income from
operations, net income and cash flow from operations will be adversely affected.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased by $4.6 million or 26.7% from $17.1 million
during 2002 to $21.7 million during 2003. Selling, general and administrative
expenses of the NN Europe Segment increased $3.8 million principally due to the
acquisition of Veenendaal on May 2, 2003 contributing $2.6 million of the
increase and impacts of foreign currency translation accounting for $1.5 million
of the increase, offset by decreased spending of $0.2 million. Selling, general
and administrative expenses of the Domestic Ball and Roller Segment increased by
$0.9 million over 2002 spending levels. The increase is attributed to non-cash
compensation charges associated with a portion of employee stock options
accounted for under the variable accounting method of $0.4 million, certain
audit and legal charges of $0.3 million and corporate development initiatives of
$0.2 million. Selling, general and administrative expenses decreased by $0.1
million within the Plastic and Rubber Components Segment. As a percentage of net
sales, selling, general and administrative costs decreased from 8.9% in 2002 to
8.6% in 2003.
Depreciation and Amortization. Depreciation and amortization expense
increased $2.6 million or 23.4% from $11.2 million in 2002 to $13.8 million in
2003. Depreciation and amortization expense of the NN Europe Segment increased
$2.8 million. Of this amount, $1.5 million is related to the acquisition of
Veenendaal on May 2, 2003 and impacts of foreign currency translation accounting
for $1.0 million of the increase. The other $0.1 million is related to capital
spending increases. Offsetting this amount was a decrease in depreciation and
amortization expense in the Plastic and Rubber Components Segment of $0.2
million related to decreased capital spending within this segment. There was no
change to depreciation and amortization expense within the Domestic Ball and
Roller Segment.
Interest Expense. Interest expense increased $0.8 million or 32.5% from
$2.5 million in 2002 to $3.3 million in 2003. Interest expense increased $0.9
million related to additional borrowings necessary to fund the May 2, 2003
acquisition of Veenendaal and $0.8 million related to the purchase of the
minority interests in Euroball held by INA/FAG and SKF on December 20, 2002 and
May 2, 2003, respectively. Offsetting these increases was a decrease interest
expense of $0.9 million due to debt principal payments and decreased interest
rates.
21
Minority Interest in Consolidated Subsidiary. Minority interest in
consolidated subsidiary decreased $2.1 million or 75.7% from $2.8 million in
2002 to $0.7 million in 2003. The decrease is attributed to the purchase of the
minority interests in Euroball held by INA/FAG and SKF on December 20, 2002 and
May 2, 2003, respectively. As of May 2, 2003 we became the sole owner of
Euroball.
Net Income. Net income increased $2.4 million or 31.2% from $7.8 million in
2002 to $10.2 million in 2003. As a percentage of net sales, net income was 4.0%
in both 2002 and 2003.
Year Ended December 31, 2002 Compared to the Year Ended December 31, 2001
Net Sales. The Company's net sales increased $12.7 million or 7.1% from
$180.2 million in 2001 to $192.9 million in 2002. The inclusion of a full year
of Delta contributed $2.5 million of the increase. Increased demand and new
programs within the Plastic and Rubber Components Segment contributed $6.3
million of the increase. Additionally, the impact of foreign currency
translation within the NN Europe Segment contributed $4.5 million of the
increase. In addition to these increases were contractual price decreases and
modest volume improvements in the NN Europe Segment resulting in a net decrease
of $0.6 million.
Cost of Products Sold. Cost of products sold increased by $7.1 million, or
5.1%, from $137.2 million in 2001 to $144.3 million in 2002. The inclusion of a
full year of Delta, acquired in February, 2001, contributed $5.1 million of the
increase. Additionally, increases in demand within the Plastics and Rubber
Components Segment, offset by cost reduction efforts, increased cost of products
sold by $1.4 million. Impacts related to foreign currency translation increased
cost of products sold in the NN Europe Segment by $3.3 million which was offset,
in part, by cost reduction programs of $2.2 million. Additionally, within the
Domestic Ball and Roller Segment principally related to the closing of our
Walterboro, South Carolina ball production facility cost of products sold
decreased $0.5 million. As a percentage of net sales, cost of products sold
decreased from 76.2% in 2001 to 74.8% in 2002.
Selling, General and Administrative Expenses. Selling, general and
administrative costs increased by $0.4 million, or 2.3%, from $16.8 million in
2001 to $17.1 million in 2002. The inclusion of a full year of Delta contributed
$0.1 million of the increase. Advisory services principally associated with the
previously announced desire of certain original founders of the Company to
liquidate their holdings in the Company's stock contributed $0.3 million of the
increase. Other increases totaling $0.5 million are primarily attributable to
incentive based compensation throughout the Company and initiatives at Euroball.
Offsetting these increases were decreased spending of approximately $0.8 million
related to bad debt expense primarily related to the bankruptcy filing of a
major Plastics Segment customer in 2001. As a percentage of net sales, selling,
general and administrative expenses decreased from 9.3% in 2001 to 8.9% in 2002.
Depreciation and Amortization. Depreciation and amortization expenses
decreased by $2.0 million from $13.2 million in 2001 to $11.2 million in 2002.
The adoption of FASB Statement No. 142 eliminated the amortization of goodwill
and contributed $1.8 million of the decrease. The assets held for sale as a
result of the closing of the Walterboro, South Carolina ball production
facility, which are no longer depreciated, contributed $0.9 million of the
decrease. Offsetting these decreases, were a full year of depreciation of Delta
assets contributing $0.3 million and currency impacts at Euroball contributing
$0.3 million. As a percentage of sales, depreciation and amortization decreased
from 7.3% in 2001 to 5.8% in 2002.
Restructuring and Impairment Costs. Restructuring and impairment costs
decreased by $1.0 million from $2.3 million in 2001 to $1.3 million in 2002. The
Company incurred a charge for the recording of impairment on the Company's
manufacturing facility and equipment in Walterboro, South Carolina of $1.2
million and $1.1 million in 2002 and 2001, respectively. A charge of $0.1
million and $0.8 million was recorded in 2002 and 2001, respectively, associated
with employee severance costs related to the closing of the Walterboro, South
Carolina facility. Additionally, charges related to Euroball of $0 million and
$0.4 million were recorded in 2002 and 2001, respectively. Restructuring and
impairment charges were 0.7% of sales in 2002 and 1.3% of sales in 2001.
Interest Expense. Interest expense decreased by $1.7 million from $4.2
million in 2001 to $2.5 million in 2002. The decrease is principally attributed
to the decrease in interest rates and decreased average debt levels in 2002. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources".
Net Gain on Involuntary Conversion. The Company had a gain on involuntary
conversion of $3.9 million in 2001 related to insurance proceeds as a result of
the March 12, 2000 fire at the Erwin production facility.
22
Minority Interest in Consolidated Subsidiary. Minority interest of
consolidated subsidiary increased $1.0 million from $1.8 million in 2001 to $2.8
million in 2002. This increase is due entirely to the Euroball joint venture
which has been consolidated since its formation, August 1, 2000. The Company is
required to consolidate Euroball in its Consolidated Financial Statements due to
its majority ownership. At December 31, 2002, the Company owned 77% of the
shares of the joint venture with the remaining minority partner owning the
remaining 23%. Minority interest in consolidated subsidiary represents the
combined interest in Euroball's earnings of the minority partners and the 49%
interest in NN Arte's earnings of the minority partner (the 49% interest in NN
Arte's earning is zero in 2002 and 2001). See "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Overview".
Net Income. Net income increased $3.0 million, or 66.5% from $4.8 million
in 2001 to $7.8 million in 2002. As a percentage of net sales, net income
increased from 2.6% in 2001 to 4.0% in 2002.
Liquidity and Capital Resources
On May 1, 2003 in connection with the purchase of SKF's Veenendaal
component manufacturing operations and SKF's 23 percent interest in Euroball, we
entered into a new $90 million syndicated credit facility with AmSouth Bank
("AmSouth") as the administrative agent and Suntrust Bank as the Euro loan agent
for the lenders under which we borrowed $60.4 million and 26.3 million Euros
($29.6 million). This new financing arrangement replaces our prior credit
facility with AmSouth and Hypo Vereinsbank Luxembourg, S.A. The credit facility
consists of a $30.0 million revolver expiring on March 1, 2005, bearing interest
at a floating rate equal to LIBOR (1.15% at December 31, 2003) plus an
applicable margin of 1.25 to 2.0, a $30.4 million term loan expiring on May 1,
2008, bearing interest at a floating rate equal to LIBOR (1.15% at December 31,
2003) plus an applicable margin of 1.25 to 2.0 and a 26.3 million ($29.6
million) Euros term loan expiring on May 1, 2008 which bears interest at a
floating rate equal to Euro LIBOR (2.12% at December 31, 2003) plus an
applicable margin of 1.25 to 2.0. The loan agreement contains customary
financial and non-financial covenants. Such covenants specify that we must
maintain a minimum fixed charge coverage ratio, must not exceed a maximum funded
indebtedness to EBITDA ratio as well as a maximum funded indebtedness to
capitalization ratio and limits the amount of capital expenditures we may make
in any fiscal year. The loan agreement also contains customary restrictions on,
among other things, additional indebtedness, liens on our assets, sales or
transfers of assets, investments, restricted payments (including payment of
dividends and stock repurchases), issuance of equity securities, and mergers,
acquisitions and other fundamental changes in our business. The credit agreement
is un-collateralized except for the pledge of stock of certain foreign
subsidiaries. Additionally, the terms of our revolving credit facility restrict
the declaration and payment of dividends in excess of certain amounts specified
in the credit agreement. As of December 31, 2003, we were not in compliance with
certain technical, non-financial covenants. Subsequently, the necessary waivers,
effective as of December 31, 2003, have been received from the participating
banks. Except for certain technical, non-financial covenants, we were in
compliance with all such covenants as of December 31, 2003. In connection with
this refinancing, capitalized costs in the amount of approximately $0.5 million
associated with the paid-off credit facilities were written-off and are included
as a component of other (income) expense. We incurred approximately $0.9 million
of debt issue costs as a result of entering into this credit facility.
During May 2003, we completed a public offering of 3.6 million shares of
our stock by a group of selling shareholders. We did not receive any proceeds
from the sale of the shares previously held by the group of selling
shareholders, however, the underwriters did exercise their over-allotment option
of 533,600 shares, which were offered by us. Net proceeds received by us in
connection with the exercise of the over-allotment option were approximately
$5.1 million, net of issue costs. Per the terms of our credit facility, we
repaid a portion of our credit facility with these proceeds.
To date, cash generated by NN Europe and its subsidiaries has been used
exclusively for general, NN Europe-specific purposes including investments in
property, plant and equipment and prepayment of the Euro term loan, which is
secured by NN Europe and its subsidiaries. Accordingly, no dividends have been
declared or paid by NN Europe that may have been used by the Company to pay down
our domestic credit facilities.
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 90 or 120 days following
the date of shipment. Under the Domestic Ball and Roller Segments inventory
management program with certain European customers, payments typically are due
within 30 days after the customer uses the product. The Company's sales and
receivables can be influenced by seasonality due to the Company's relative
percentage of European business coupled with many foreign customers ceasing
production during the month of August. For information concerning the Company's
quarterly results of operations for the years ended December 31, 2003 and 2002,
see Note 15 of the Notes to Consolidated Financial Statements.
23
The Company bills and receives payment from some of its foreign customers
in Euro as well as other currencies. 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 transaction and translation risk has increased. Various strategies to
manage this risk are available to management including producing and selling in
local currencies and hedging programs. As of December 31, 2003, no currency
hedges were in place. In addition, a strengthening of the U.S. dollar and/or
Euro 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 $25.7 million at December 31, 2003 as compared to $21.2 million
at December 31, 2002 and $23.1 million at December 31, 2001. The ratio of
current assets to current liabilities decreased from 1.71:1 at December 31, 2001
to 1.53:1 at December 31, 2002 and to 1.41:1 at December 31, 2003. Cash flow
from operations decreased to $19.6 million during 2003 from $31.1 million during
2002 and $24.6 million during 2001. Contributing to this change were initial
working capital requirements at our Veenendaal operation acquired in May 2003 of
approximately $2.7 million, increased working capital requirements, principally
inventory and accounts receivable, due to the geographic expansion of the
customer base, principally within the Domestic Ball and Roller Segment of
approximately $5.6 million and increased working capital requirements within NN
Europe and Plastics and Rubber Components Segment of approximately $0.9 million
and $2.3 million, respectively.
During 2004, we plan to spend approximately $9.0 million on capital
expenditures related primarily to equipment and process upgrades and
replacements and approximately $5.0 million principally related to geographic
expansion of our manufacturing base. We intend to finance these activities with
cash generated from operations and funds available under our credit facilities.
The Company believes that funds generated from operations and borrowings will be
sufficient to finance the Company's working capital needs and projected capital
expenditure requirements through December 2004.
The table below sets forth certain of the Company's contractual obligations
and commercial commitments as of December 31, 2003:
=========================== ================================================================================
Certain Payments Due by Period
Contractual Obligations
=========================== ================================================================================
Total Less than 1 1-3 years 3-5 years After 5 years
year
=========================== ================ ============== ================ =============== ===============
Long-Term Debt $ 82,477 $ 12,725 $ 55,450 $ 14,302 --
=========================== ================ ============== ================ =============== ===============
Short-Term Debt 2,000 2,000 -- -- --
=========================== ================ ============== ================ =============== ===============
Operating Leases 27,047 2,354 3,892 3,538 17,263
=========================== ================ ============== ================ =============== ===============
Other Long-Term
Obligations 47,751 23,639 24,112 -- --
=========================== ================ ============== ================ =============== ===============
Total Contractual Cash $159,275 $ 40,718 $ 83,454 $ 17,840 $ 17,263
Obligations
=========================== ================ ============== ================ =============== ===============
Other Long-Term Obligations consist of steel purchase commitments at the NN
Europe Segment (See Note 14 of the Notes to Consolidated Financial Statements.)
The Euro
The Company currently has operations in Ireland, Germany, Italy and The
Netherlands, all of which are Euro participating countries, and, each facility
sells product to customers in many of the participating countries. The Euro has
been adopted as the functional currency at all locations in the NN Europe
Segment, except Slovakia whose functional currency is the Slovak Korona. Current
plans call for Slovakia to join the European Union in May 2004 and to adopt the
Euro as its functional currency at a later date.
Seasonality and Fluctuation in Quarterly Results
The Company's net sales historically have been seasonal in nature, due to a
significant portion of the Company's sales being to European customers that
cease or significantly slow production during the month of August. For
information concerning the Company's quarterly results of operations for the
years ended December 31, 2003 and 2002, see Note 15 of the Notes to Consolidated
Financial Statements.
24
Inflation and Changes in Prices
While the Company's operations have not been materially affected by
inflation during recent years, prices for 52100 Steel, engineered resins and
other raw materials purchased by the Company are subject to material change, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Overview and Management Focus". For example, 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. In our U.S.
operations our typical pricing arrangements with steel suppliers are subject to
adjustment once every six months. The Company's NN Europe Segment has entered
into long term agreements with its primary steel supplier which provide for
standard terms and conditions and annual pricing adjustments to offset material
price fluctuations in steel and quarterly scrap surcharge adjustments. The
Company typically reserves the right to increase product prices periodically in
the event of increases in its raw material costs. In the past, the Company has
been able to minimize the impact on its operations resulting from the 52100
Steel price fluctuations by taking such measures. However, by contract, material
price changes in any given year are passed along with price adjustments in
January of the following year. Certain sales agreements are in effect with SKF
and INA/FAG, which provide for minimum purchase quantities and specified, annual
sales price adjustments that may be modified up or down for changes in material
costs. These agreements expire during 2006 and 2008.
Recently Issued Accounting Standards
In June 2001, the FASB issued Statement of Financial Accounting Standards
No. 141, "Business Combinations" (Statement No. 141), and Statement of Financial
Accounting Standards No. 142, "Goodwill and Other Intangible Assets" (Statement
No. 142). Statement No. 141 requires that the purchase method of accounting be
used for all business combinations initiated after June 30, 2001. Statement No.
141 also specifies criteria that intangible assets acquired in a purchase method
business combination must meet to be recognized and reported apart from
goodwill. Statement No. 142 requires that goodwill and intangible assets with
indefinite useful lives no longer be amortized, but rather, periodically tested
for impairment. The effective date of Statement No. 142 is January 1, 2002. As
of the date of adoption, the Company had unamortized goodwill of approximately
$36.6 million, which is subject to the provisions of Statement No. 142.
As a result of adopting these standards in the first quarter of 2002, the
Company no longer amortizes goodwill. The Company estimates that amortization
expense for goodwill would have been approximately $1.6 million ($0.9 million
net of tax and minority interest) and $1.9 million ($1.1 million net of tax and
minority interest) for the twelve-month period ended December 31, 2002 and 2003,
respectively.
In July 2001, the FASB issued Statement of Financial Accounting Standards
No. 143, "Accounting For Asset Retirement Obligations." This Statement requires
capitalizing any retirement costs as part of the total cost of the related
long-lived asset and subsequently allocating the total expense to future periods
using a systematic and rational method. Adoption of the Statement is required
for fiscal years beginning after June 15, 2002. The adoption of SFAS 143 did not
have a material impact on the Company's financial condition.
In October 2001, The FASB issued Statement of Financial Accounting
Standards No. 144, "Accounting For The Impairment or Disposal of Long-lived
Assets." This Statement supercedes Statement No. 121 but retains many of its
fundamental provisions. Additionally, this Statement expands the scope of
discontinued operations to include more disposal transactions. The provisions of
this Statement are effective for financial statements issued for fiscal years
beginning after December 15, 2001. The adoption of SFAS 144 did not have a
material impact on the Company's financial condition.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements
No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections". SFAS No. 4 had required all gains and losses from extinguishment
of debt to be aggregated and, if material, classified as an extraordinary item,
net of related income tax effect. SFAS No. 145 rescinds SFAS No. 4 and the
related required classifications gains and losses from extinguishment of debt as
extraordinary items. Additionally, the SFAS No. 145 amends SFAS No. 13 to
require that certain lease modifications that have economic effects similar to
sale-leaseback transactions be accounted for in the same manner as
sale-leaseback transactions. SFAS No. 145 is applicable for the Company at the
beginning of fiscal year 2003, with the provisions related to SFAS No. 13 are
effective for transactions occurring after May 15, 2002. The adoption of SFAS
145 did not have a material impact on the Company's financial condition or
results of operations.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities". SFAS No. 146 requires costs
associated with exit or disposal activities to be recognized when they are
incurred rather than at
25
the date of a commitment to an exit or disposal plan. SFAS No. 146 is to be
applied prospectively to exit or disposal activities initiated after December
31, 2002.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure - an amendment of FASB Statement No.
123". SFAS No. 148 provides alternative methods of transition for a voluntary
change to the fair value based method of accounting for stock-based employee
compensation. In addition, SFAS No. 148 amends the disclosures in both annual
and interim financial statements about the method of accounting for stock-based
employee compensation and the effect of the method used on reported results. The
Company has adopted the provisions of SFAS 123, which encourages but does not
require a fair value based method of accounting for stock compensation plans.
The Company has elected to continue accounting for its stock compensation plan
using the intrinsic value based method under APB Opinion No. 25. See Note 10 of
the Notes to Consolidated Financial Statements.
In November 2002, the FASB issued FASB Interpretation ("FIN") No. 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others," an interpretation of FASB
Statements No. 5, 57, and 107 and rescission of FASB Interpretation No. 34. This
interpretation elaborates the disclosures to be made by a guarantor in its
interim and annual financial statements about its obligations under certain
guarantees that it has issued. It also clarifies that a guarantor is required to
recognize, at the inception of a guarantee, a liability for the fair value of
the obligation undertaken in issuing the guarantee. The initial recognition and
initial measurement provisions of this interpretation are applicable on a
prospective basis to guarantees issued or modified after December 31, 2002 did
not have a material effect on the Company's consolidated results of operations,
financial position or cash flows.
In December 2003, the FASB issued Financial Interpretation No. 46(R),
"Consolidation of Variable Interest Entities," ("FIN 46(R)"). This
interpretation addresses consolidation by business enterprises of variable
interest entities with certain defined characteristics and replaces Financial
Interpretation No. 46. We do not expect FIN 46(R) to have a significant impact
on the Company's consolidated financial statements.
In April 2003, the FASB issued SFAS No. 149, "Derivative Instruments and
Hedging Activities". SFAS No. 149 amends and clarifies financial accounting and
reporting for derivative instruments, including certain derivative instruments
embedded in other contracts and for hedging activities under SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities". SFAS No. 149
requires that contracts with comparable characteristics be accounted for
similarly and is effective for contracts entered into or modified after June 30,
2003 and for hedging relationships designated after June 30, 2003. The adoption
of this standard has not had a material impact on the Company's financial
condition.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity". SFAS
No. 150 establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. SFAS
No. 150 is otherwise generally effective for financial instruments entered into
or modified after May 31, 2003, and otherwise is effective at the beginning of
the first interim period beginning after June 15, 2003. The Company adopted SFAS
No. 150 on July 1, 2003 and this adoption did not have a material impact on the
Company's financial condition.
In December 2003 the FASB issued SFAS No. 132 (revised 2003), "Employers'
Disclosures about Pensions and Other Postretirement Benefits". SFAS No. 132
revises employers' disclosures about pension plans and other postretirement
benefit plans. It does not change the measurement or recognition of those plans
required by FASB Statements No. 87, "Employers' Accounting for Pensions", No.
88, "Employers' Accounting for Settlements and Curtailments of Defined Benefit
Pensions Plans and for Termination Benefits, and No. 106, "Employers' Accounting
for Postretirement Benefits Other Than Pensions". SFAS No. 132 requires
additional disclosures to those in the original Statement 132 about the assets,
obligations, cash flows, and net periodic benefit cost of defined benefit
pension plans and other defined benefit postretirement plans. With certain
exceptions, principally related to disclosure requirements of foreign plans,
SFAS No. 132 is effective for financial statements with fiscal years ending
after December 15, 2003. As of December 31, 2003, we have complied with the
requirement of SFAS No. 132.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to changes in financial market conditions in the normal
course of our business due to our use of certain financial instruments as well
as transacting in various foreign currencies. To mitigate our exposure to these
market risks, we have established policies, procedures and internal processes
governing our management of financial market risks. We are exposed to changes in
interest rates primarily as a result of our borrowing activities. At December
31, 2003, these
26
borrowings included a $30.4 million term loan, a $30 million revolving credit
facility, and a 26.3 million Euro ($29.6 million) term loan which was used to
maintain liquidity and fund our business operations. At December 31, 2003, we
had $54.3 million outstanding under the domestic credit facilities and Euroball
had 22.3 million Euro ($28.2 million) outstanding under the Euro term loan.
Additionally, at December 31, 2003, we had $2.0 million outstanding under short
term borrowings. At December 31, 2003, a one-percent increase in the interest
rate charged on our outstanding borrowings under both credit facilities would
result in interest expense increasing annually by approximately $0.8 million. In
connection with a variable EURIBOR rate debt financing in July 2000 our majority
owned subsidiary, Euroball entered into an interest rate swap with a notional
amount of Euro 12.5 million for the purpose of fixing the interest rate on a
portion of their debt financing. The interest rate swap provides for us to
receive variable Euribor interest payments and pay 5.51% fixed interest. The
interest rate swap agreement expires in July 2006 and the notional amount
amortizes in relation to principal payments on the underlying debt over the life
of the swap. This original debt was repaid in May 2003, however, the swap
remains pursuant to its original terms. On May 1, 2003, we entered into a new
$90 million syndicated credit facility. This new financing arrangement replaces
our prior credit facility with AmSouth and Euroball's credit facility with Hypo
Vereinsbank Luxembourg, S.A., see "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Liquidity and Capital
Resources". The nature and amount of our borrowings may vary as a result of
future business requirements, market conditions and other factors.
Translation of the Company's operating cash flows denominated in foreign
currencies is impacted by changes in foreign exchange rates. Our NN Europe
Segment bills and receives 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, to help reduce
exposure to foreign currency fluctuation, management has incurred debt in Euros
and periodically used foreign currency hedges. These currency hedging programs
allow management to hedge currency exposures when these exposures meet certain
discretionary levels. The Company did not hold a position in any foreign
currency hedging instruments as of December 31, 2003.
27
Item 8. Financial Statements and Supplementary Data
Index to Financial Statements
Financial Statements Page
Report of Independent Auditors for the year ended December 31,
2003................................................................29
Report of Independent Auditors for the years ended December 31,
2002 and 2001.......................................................30
Consolidated Balance Sheets at December 31, 2003 and
2002................................................................31
Consolidated Statements of Income and Comprehensive Income for the
three years ended December 31,
2003................................................................32
Consolidated Statements of Changes in Stockholders' Equity for the
three years ended December 31,
2003................................................................33
Consolidated Statements of Cash Flows for the three years ended
December 31,
2003................................................................34
Notes to Consolidated Financial
Statements..........................................................35
28
Report of Independent Auditors
To the Board of Directors and
Shareholders of NN, Inc.:
In our opinion, the consolidated financial statements listed in the accompanying
index present fairly, in all material respects, the financial position of NN,
Inc. and its subsidiaries at December 31, 2003, and the results of their
operations and their cash flows for the year then ended in conformity with
accounting principles generally accepted in the United States of America. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audit. We conducted our audit of these statements in accordance with
auditing standards generally accepted in the United States of America, which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
/s/PricewaterhouseCoopers LLP
Greensboro, North Carolina
February 26, 2004
29
Independent Auditors' Report
The Board of Directors
NN, Inc.:
We have audited the accompanying consolidated balance sheet of NN, Inc. as of
December 31, 2002 and the related consolidated statements of income and
comprehensive income, consolidated statements of changes in stockholders'
equity, and consolidated statements of cash flows for each of the years in the
two year period ended December 31, 2002. These consolidated financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of NN, Inc. as of
December 31, 2002 and the results of their operations and their cash flows for
each of the years in the two year period ended December 31, 2002 in conformity
with accounting principles generally accepted in the United States of America.
As discussed in Note 1 to the consolidated financial statements, the Company
changed its method of accounting for goodwill and other intangible assets in
2002 and changed its method of accounting for derivative instruments and hedging
activities in 2001.
/s/ KPMG LLP
Charlotte, North Carolina
February 24, 2003
30
NN, Inc.
Consolidated Balance Sheets
December 31, 2003 and 2002
(In thousands, except per share data)
Assets 2003 2002
------------- --------------
Current assets:
Cash and cash equivalents $ 4,978 $ 5,144
Accounts receivable, net 40,864 28,965
Inventories, net 36,278 23,402
Other current assets 4,698 2,501
Current deferred tax asset 1,601 1,400
------------- --------------
Total current assets 88,419 61,412
Property, plant and equipment, net 128,996 88,199
Assets held for sale 1,805 2,214
Gooddwill 42,893 39,374
Other non-current assets 4,304 4,016
------------- --------------
Total assets $ 266,417 $ 195,215
============= ==============
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 32,867 $ 22,983
Bank overdraft -- 37
Accrued salaries, wages and benefits 12,032 6,354
Payable to affiliates -- 566
Short term loans 2,000 --
Current maturities of long-term debt 12,725 7,000
Other liabilities 3,070 3,294
------------- --------------
Total current liabilities 62,694 40,234
Non-current deferred tax liability 13,423 9,334
Long-term debt 69,752 46,135
Accrued pension and other 14,080 9,319
------------- --------------
Total liabilities 159,949 105,022
------------- --------------
Minority interest in consolidated subsidiaries -- 12,285
------------- --------------
Commitments and Contingencies (Note 14)
Stockholders' equity:
Common stock - $0.01 par value, authorized 45,000 shares,
issued and outstanding 16,712 shares in 2003 and,
15,370 shares in 2002 168 154
Additional paid-in capital 52,960 40,457
Retained earnings 43,931 38,984
Accumulated other comprehensive income (loss) 9,409 (1,687)
------------- --------------
Total stockholders' equity 106,468 77,908
------------- --------------
Total liabilities and stockholders' equity $ 266,417 $ 195,215
============= ==============
See accompanying notes to consolidated financial statements
31
NN, Inc.
Consolidated Statements of Income and Comprehensive Income
Years ended December 31, 2003, 2002 and 2001
(In thousands, except per share data)
2003 2002 2001
----------- ----------- ----------
Net sales $ 253,462 $ 192,856 $ 180,151
Cost of products sold (exclusive of depreciation 195,658 144,274 137,221
shown separately below)
Selling, general and administrative 21,700 17,134 16,752
Depreciation and amortization 13,836 11,212 13,150
Restructuring and impairment costs 2,490 1,277 2,312
----------- ----------- -----------
Income from operations 19,778 18,959 10,716
Interest expense 3,247 2,451 4,196
Net gain on involuntary conversion -- -- (3,901)
Other income (48) (487) (186)
----------- ----------- -----------
Income before provision for income taxes 16,579 16,995 10,607
Provision for income taxes 5,726 6,457 4,094
Minority interest in consolidated subsidiaries 675 2,778 1,753
----------- ----------- -----------
Income before cumulative effect of change in
accounting principle 10,178 7,760 4,760
Cumulative effect of change in accounting principle,
net of income tax benefit of $112 and related
minority interest impact of $84 -- -- 98
----------- ----------- -----------
Net income 10,178 7,760 4,662
Other comprehensive income (loss):
Additional minimum pension liability, net of tax (177) (28) (53)
Foreign currency translation 11,273 3,763 (3,843)
----------- ----------- -----------
Comprehensive income $ 21,274 $ 11,495 $ 766
=========== =========== ===========
Basic income per share:
Income before cumulative effect of change in $ 0.64 $ 0.51 $ 0.31
accounting principle
Cumulative effect of change in accounting
principle -- -- (0.01)
----------- ---------- -----------
Net income $ 0.64 $ 0.51 $ 0.31
=========== ========== ===========
Weighted average shares outstanding 15,973 15,343 15,259
=========== ========== ===========
Diluted income per share:
Income before cumulative effect of change in
accounting principle $ 0.62 $ 0.49 $ 0.31
Cumulative effect of change in accounting
principal -- -- (0.01)
----------- ---------- -----------
Net income $ 0.62 $ 0.49 $ 0.30
=========== ========== ===========
Weighted average shares outstanding 16,379 15,714 15,540
=========== ========== ===========
Cash dividends per common share $ 0.32 $ 0.32 $ 0.32
=========== ========== ===========
See accompanying notes to consolidated financial statements
32
NN, Inc.
Consolidated Statements of Changes in Stockholders' Equity
Years ended December 31, 2003, 2002 and 2001
(In thousands)
Common Stock Accumulated
----------------------- Additional Other
Number Par Paid-In Retained Comprehensive
of shares Value Capital Earnings Loss Total
----------- ---------- ------------ ---------- --------------- ----------
Balance, December 31, 2000 15,247 $ 153 $ 39,684 $ 36,364 $ (1,526) $ 74,675
Shares issued 70 1 427 -- -- 428
Net income -- -- -- 4,662 -- 4,662
Dividends declared -- -- -- (4,887) -- (4,887)
Additional minimum pension liability -- -- -- -- (53) (53)
Cumulative translation loss -- -- -- -- (3,843) (3,843)
----------- ---------- ------------ ---------- --------------- ----------
Balance, December 31, 2001 15,317 $ 154 $ 40,111 $ 36,139 $ (5,422) $ 70,982
Shares issued 53 -- 346 -- -- 346
Net income -- -- -- 7,760 -- 7,760
Dividends declared -- -- -- (4,915) -- (4,915)
Additional minimum pension liability -- -- -- -- (28) (28)
Cumulative translation gain -- -- -- -- 3,763 3,763
----------- ---------- ------------ ---------- --------------- ----------
Balance, December 31, 2002 15,370 $ 154 $ 40,457 $ 38,984 $ (1,687) $ 77,908
Shares issued 1,342 14 12,503 -- -- 12,517
Net income -- -- -- 10,178 -- 10,178
Dividends declared -- -- -- (5,231) -- (5,231)
Additional minimum pension liability -- -- -- -- (177) (177)
Cumulative translation gain -- -- -- -- 11,273 11,273
----------- ---------- ------------ ---------- --------------- ----------
Balance, December 31, 2003 16,712 $ 168 $ 52,960 $ 43,931 $ 9,409 $106,468
=========== ========== ============ ========== =============== ==========
See accompanying notes to consolidated financial statements
33
NN, Inc.
Consolidated Statements of Cash Flows
Years Ended December 31, 2003, 2002 and 2001
(In Thousands)
2003 2002 2001
---------- ---------- ----------
Cash flows from operating activities:
Net Income $ 10,178 $ 7,760 $ 4,662
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 13,836 11,212 13,150
Cumulative effect of change in accounting principle -- -- 98
Gain on disposals of property, plant and equipment (147) (25) --
Loss on sale of NNG -- -- 222
Allowance for doubtful accounts 183 138 1,668
Write-off of unamortized debt issue costs 455 -- --
Deferred income taxes 3,888 2,564 433
Interest income on receivable from unconsolidated
affiliates -- -- (104)
Minority interest in consolidated subsidiary 675 2,778 1,753
Restructuring costs and impairment costs 2,328 1,199 1,083
Changes in operating assets and liabilities:
Accounts receivable (9,352) (3,728) 5,170
Inventories (3,711) 1,479 1,175
Other current assets (1,047) 4,795 (1,461)
Other assets (1,281) 35 (618)
Accounts payable 5,118 5,535 (2,846)
Other liabilities (1,517) (2,655) 232
---------- ---------- ----------
Net cash provided by operating activities 19,606 31,087 24,617
---------- ---------- ----------
Cash flows from investing activities:
Acquisition of businesses, net of cash acquired (21,435) -- (23,496)
Purchase of minority interest (15,586) (13,802) --
Acquisition of property, plant and equipmen (11,574) (7,591) (6,314)
Sale of NNG -- -- 622
Long-term note receivable 200 200 --
Proceeds from disposals of property, plant
and equipment 212 65 106
---------- ---------- ----------
Net cash used by investing activities (48,183) (21,128) (29,082)
---------- ---------- ----------
Cash flows from financing activities:
Proceeds from long-term debt 90,332 13,802 71,430
Debt issue costs paid (939) -- --
Bank overdrafts 37 (1,103) 687
Repayment of long-term debt (64,196) 16,708) (65,946)
Proceeds (repayment) of short-term debt 2,000 -- (2,000)
Proceeds from issuance of stock and exercise
of stock options 5,579 346 428
Cash dividends (5,231) (4,915) (4,887)
---------- ---------- ----------
Net cash provided (used) by financing activities 27,582 (8,578) (288)
---------- ---------- ----------
Effect of exchange rate changes 829 739 (496)
Net change in cash and cash equivalents (166) 2,120 (5,249)
Cash and cash equivalents at beginning of period 5,144 3,024 8,273
---------- ---------- ----------
Cash and cash equivalents at end of period $ 4,978 $ 5,144 $ 3,024
========== ========== ==========
Supplemental schedule of non-cash investing and financing activities:
Note received related to sale of NNG $ -- $ -- $ 3,300
Stock issued related to acquisition of Veenendaal $ 6,938 $ -- $ --
Cash paid for interest and income taxes was as follows:
Interest $ 2,496 $ 1,965 $ 3,596
Income taxes 4,371 4,774 2,845
See accompanying notes to consolidated financial statements
34
1) Summary of Significant Accounting Policies and Practices
(a) Description of Business
NN, Inc. (the "Company") is a manufacturer of precision balls,
cylindrical and tapered rollers, bearing retainers, plastic injection
molded products, and precision bearing seals. The Company's balls,
rollers, retainers, and bearing seals are used primarily in the
domestic and international anti-friction bearing industry. The
Company's plastic injection molded products are used in the bearing,
automotive, instrumentation and fiber optic industries. The Domestic
Ball and Roller Segment is comprised of two manufacturing facilities
located in the eastern United States. The Company's NN Europe Segment
is comprised of manufacturing facilities located in Kilkenny, Ireland,
Eltmann, Germany, Pinerolo, Italy, Veenendaal, The Netherlands and
Kysucke Nove Mesto, Slovakia. The facilities in the NN Europe Segment
are engaged in the production of precision balls, tapered rollers and
metal retainers. The Plastic and Rubber Components Segment consists of
Industrial Molding Corporation ("IMC"), acquired in July 1999 and
Delta Rubber, acquired in February 2001. IMC has two production
facilities in Texas and Delta Rubber has two production facilities in
Connecticut (see Note 2). All of the Company's Segments sell to
foreign and domestic customers.
(b) Cash and Cash Equivalents
The Company considers all highly liquid investments with an original
maturity of three months or less as cash equivalents.
(c) Inventories
Inventories are stated at the lower of cost or market. Actual costs
are evaluated and do not exceed the lower of cost or market. Cost is
determined using the first-in, first-out method. The Company accounts
for inventory under a full absorption method, and accordingly, our
inventory carrying value includes cost elements of material, labor and
overhead.
Inventories include tools, molds and dies in progress that the Company
is producing and will ultimately sell to its customers. This activity
is principally related to our Plastic and Rubber Components Segment.
They are carried at the lower of cost or market. Any progress billings
related to these inventory assets are recorded as a component of other
current assets.
(d) Property, Plant and Equipment
Property, plant and equipment are stated at cost less accumulated
depreciation. Assets held for sale are stated at lower of cost or fair
market value less selling cost. Expenditures for maintenance and
repairs are charged to expense as incurred. Major renewals and
betterments are capitalized. When a major property item is retired,
its cost and related accumulated depreciation are removed from the
property accounts and any gain or loss is recorded in the statement of
income. The Company reviews the carrying values of long-lived assets
for impairment whenever events or changes in circumstances indicate
the carrying amount of an asset may not be recoverable. During the
years ended December 31, 2003, 2002 and 2001, the Company recorded an
impairment charge of $0, $1,199 and $1,083 respectively, to write-down
the land, building and equipment at the Walterboro, SC production
facility to its net realizable value, which was principally based upon
fair market value appraisals and valuations. As of December 31, 2003,
2002 and 2001, the carrying value of this land, building and equipment
was classified as a component of assets held for sale in the
accompanying financial statements at $1,805, $2,214 and $4,348,
respectively. During 2003, assets held for sale decreased principally
as a result of transferring certain machinery and equipment assets to
other NN locations.
Property, plant and equipment includes tools, molds and dies
principally used in our Plastic and Rubber Components Segment that are
the property of the Company. These assets are stated at cost less
accumulated depreciation.
Depreciation is provided principally on the straight-line method over
the estimated useful lives of the depreciable assets for financial
reporting purposes. Accelerated depreciation methods are used for
income tax purposes.
(e) Revenue Recognition
The Company generally recognizes a sale when goods are shipped and the
risks of ownership are transferred to the customer. The Company has an
inventory management program for certain major ball and roller
customers
35
NN, Inc.
Notes to Consolidated Financial Statements
December 31, 2003, 2002 and 2001
(In thousands, except per share data)
whereby sales are recognized when products are used by the customer
from consigned stock, rather than at the time of shipment. Under both
circumstances, revenue is recognized when persuasive evidence of an
arrangement exists, delivery has occurred, the sellers' price is
determinable and collectibility is reasonably assured.
(f) Income Taxes
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and
their respective tax bases and operating loss and tax credit
carryforwards. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change
in tax rates is recognized in income in the period that includes the
enactment date.
(g) Net Income Per Common Share
Basic earnings per share reflect reported earnings divided by the
weighted average number of common shares outstanding. Diluted earnings
per share include the effect of dilutive stock options outstanding
during the year.
(h) Stock Incentive Plan
The Company applies the intrinsic value-based method of accounting
prescribed by Accounting Principles Board ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees," and related
interpretations including Financial Accounting Standards Board (FASB)
Interpretation No. 44, "Accounting for Certain Transactions involving
Stock Compensation (an interpretation of APB Opinion No. 25)" issued
in March 2000, to account for its fixed plan stock options. Under this
method, compensation expense is recorded on the date of grant only if
the current market price of the underlying stock exceeds the exercise
price. The Company also applies the provision of APB Opinion No. 25 to
its variable stock options. Statement of Financial Accounting
Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation,"
established accounting and disclosure requirements using a fair
value-based method of accounting for stock-based employee compensation
plans. As allowed by SFAS No. 123, the Company has elected to continue
to apply the intrinsic value-based method of accounting described
above, and has adopted the disclosure requirements of SFAS No. 123 and
SFAS No. 148.
We have elected to continue accounting for our stock compensation plan
using the intrinsic value based method under APB Opinion No. 25 and,
accordingly, have not recorded compensation expense for each of the
three years ended December 31, 2003, except as related to stock
options accounted for under the variable method of accounting. Had
compensation cost for the Company's stock compensation plan been
determined based on the fair value at the option grant dates, the
Company's net income and earnings per share would have been reduced to
the proforma amounts indicated below:
36 Continued
NN, Inc.
Notes to Consolidated Financial Statements
December 31, 2003, 2002 and 2001
(In thousands, except per share data)
Year ended December 31,
2003 2002 2001
---------- ---------- ----------
Net income - as reported $ 10,178 $ 7,760 $ 4,662
Stock based compensation costs, net of income
tax, included in net income as reported 160 (69) 69
Stock based compensation costs, net of income
tax, that would have been included in net
income if the fair value method had been
applied (1,001) (488) (315)
---------- ---------- ----------
Net income - proforma $ 9,337 $ 7,203 $ 4,416
========== ========== ==========
Earnings per share - as reported $ 0.64 $ 0.51 $ 0.31
Stock based compensation costs, net of income
tax, included in net income as reported 0.01 (0.01) --
Stock based compensation costs, net of income
tax, that would have been included in net
income if the fair value method had been
applied (0.06) (0.03) (0.02)
---------- ---------- ----------
Earnings per share - proforma $0.59 $ 0.47 $ 0.29
========== ========== ==========
Earnings per share-assuming dilution - as reported $ 0.62 $ 0. 49 $ 0.30
Stock based compensation costs, net of income tax,
included in net income as reported 0.01 -- --
Stock based compensation costs, net of income tax,
that would have been included in net income if
the fair value method had been applied (0.06) (0.03) (0.02)
---------- ---------- ----------
Earnings per share - assuming dilution-proforma $ 0.57 $ 0.46 $ 0.28
========== ========== ==========
The fair value of each option grant was estimated based on actual
information available through December 31, 2003, 2002 and 2001 using
the Black Scholes option-pricing model with the following assumptions:
Term Vesting period
Risk free interest rate 3.38%, 3.28% and 4.75% for 2003, 2002 and 2001, respectively
Dividend yield 3.7%, 3.2%, and 2.8% annually for 2003, 2002 and 2001, respectively
Volatility 49.8%, 50.1% and 40.7% for 2003, 2002 and 2001, respectively
(i) Principles of Consolidation
The Company's consolidated financial statements include the accounts
of NN, Inc. and subsidiaries in which the Company owns more than 50%
voting interest. Unconsolidated subsidiaries and investments where
ownership is between 20% and 50% are accounted for under the equity
method. All significant intercompany profits, transactions, and
balances have been eliminated in consolidation. The ownership
interests of other shareholders in companies that are more than 50%
owned, but less than 100% owned by the Company, are reflected as
minority interests. Minority interest in consolidated subsidiaries
represents the minority shareholders interest of NN Euroball ApS at
December 31, 2002. There were no minority interests in consolidated
subsidiaries at December 31, 2003 as a result of the Company acquiring
the remaining additional interests in Euroball on May 2, 2003.
37 Continued
NN, Inc.
Notes to Consolidated Financial Statements
December 31, 2003, 2002 and 2001
(In thousands, except per share data)
(j) Foreign Currency Translation
Assets and liabilities of the Company's foreign subsidiaries are
translated at current exchange rates, while revenue, costs and
expenses are translated at average rates prevailing during each
reporting period. Translation adjustments are reported as a component
of other comprehensive income. Net exchange gains or losses resulting
from the translation of foreign financial statements are accumulated
with other comprehensive earnings as a separate component of
shareholders equity.
(k) Goodwill
In June 2001, the FASB issued Statement of Financial Accounting
Standards No. 141, "Business Combinations" (Statement No. 141), and
Statement of Financial Accounting Standards No. 142, "Goodwill and
Other Intangible Assets" (Statement No. 142). Statement No. 141
requires that the purchase method of accounting be used for all
business combinations initiated after June 30, 2001. Statement No. 141
also specifies criteria that intangible assets acquired in a purchase
method business combination must meet to be recognized and reported
apart from goodwill. Statement No. 142 requires that goodwill and
intangible assets with indefinite useful lives no longer be amortized,
but rather, periodically tested for impairment. The effective date of
Statement No. 142 was January 1, 2002. As of the date of adoption, the
Company had unamortized goodwill of approximately $36.6 million, which
is subject to the provisions of Statement No. 142.
As a result of adopting these new standards, the Company's accounting
policies for goodwill and other intangibles changed on January 1,
2002, as described below:
Goodwill: The Company recognized the excess of the purchase price of
an acquired entity over the fair value of the net identifiable assets
as goodwill. Goodwill is tested for impairment on an annual basis and
between annual tests in certain circumstances. Impairment losses are
recognized whenever the implied fair value of goodwill is less than
its carrying value. Prior to January 1, 2002, goodwill was amortized
over a twenty-year period using the straight-line method. Beginning
January 1, 2002, goodwill is no longer amortized.
Other Acquired Intangibles: The Company recognizes an acquired
intangible asset apart from goodwill whenever the asset arises from
contractual or other legal rights, or whenever it is capable of being
divided or separated from the acquired entity or sold, transferred,
licensed, rented, or exchanged, whether individually or in combination
with a related contract, asset or liability. An intangible asset other
than goodwill is amortized over its estimated useful life unless that
life is determined to be indefinite. The Company reviews the lives of
intangible assets each reporting period and, if necessary, recognizes
impairment losses if the carrying amount of an intangible asset
subject to amortization is not recoverable from expected future cash
flows and its carrying amount exceeds its fair value.
We completed the transitional goodwill impairment reviews required by
the new standards during the first six months of 2002 and the annual
required goodwill impairment review during the fourth quarter of 2002
and 2003. In performing the impairment reviews, the Company estimated
the fair values of the reporting units using a method that
incorporates valuations derived from EBITDA multiples based upon
market multiples and recent capital market transactions and also
incorporates valuations determined by each segment's discounted future
cash flows. As of January 1, 2002, the transition date and as of
October 1, 2002 and 2003, the annual review dates, there was no
impairment to goodwill as the fair values of the reporting units
exceeded their carrying values of the reporting units. As a result of
closing our NN Arte facility in Guadalajara, Mexico, we performed a
test of the recoverability of the goodwill asset associated with this
operation. This test was pursuant to the provisions of Statement of
Financial Accounting Standards No. 142 "Goodwill and Other Intangible
Assets" which require that interim tests of the recoverability of
goodwill be performed under certain circumstances. As a result, we
recorded an impairment charge of approximately $1.3 million to fully
write-off the goodwill asset during the twelve month period ended
December 31, 2003. See Note 3.
38 Continued
NN, Inc.
Notes to Consolidated Financial Statements
December 31, 2003, 2002 and 2001
(In thousands, except per share data)
As of December 31, 2003, the carrying amounts of goodwill by reporting
units are as follows: $25,755 for the Plastic and Rubber Components
Segment and $17,138 for the NN Europe Segment. Since the transition
date, January 1, 2002, approximately $3,558 of the increase in
goodwill is due to foreign currency translation adjustments at the NN
Europe Segment.
The changes in the carrying amount of goodwill for the years ended December 31,
2002 and 2003 are as follows:
Plastic and
Rubber
Components NN Europe
In thousands Segment Segment Total
---------------------------------------------
Balance as of January 1, 2002 $26,712 $ 9,912 $ 36,624
Goodwill acquired -- 1,517 1,517
Impairment losses -- -- --
Currency impacts/reclassification -- 1,233 1,233
---------------------------------------------
Balance as of January 1, 2003 $ 26,712 $ 12,662 $ 39,374
Goodwill acquired -- 2,151 2,151
Impairment losses (1,285) -- (1,285)
Currency impacts/reclassification 328 2,325 2,653
---------------------------------------------
Balance as of December 31, 2003 $ 25,755 $ 17,138 $ 42,893
=============================================
The table below describes the impact of the amortization of goodwill for the
years ended December 31, 2003, 2002 and 2001:
For the Twelve Months
Ended December 31,
2003 2002 2001(1)
----------- ---------- ----------
Reported net income $ 10,178 $ 7,760 $ 4,662
Add back: Goodwill
amortization, net of tax
and minority interest -- -- 983
----------- ---------- ---------
Pro-forma net income $ 10,178 $ 7,760 $ 5,645
=========== ========== ==========
Basic earnings per share:
Reported net income $ 0.64 $ 0.51 $ 0.31
Goodwill amortization -- -- 0.06
----------- ---------- ----------
Pro-forma net income $ 0.64 $ 0.51 $ 0.37
=========== ========== ==========
Diluted earnings per share:
Reported net income $ 0.62 $ 0.49 $ 0.30
Goodwill amortization -- -- 0.06
----------- ---------- ----------
Pro-forma net income $ 0.62 $ 0.49 $ 0.36
=========== ========== ==========
(1) For the twelve months ended December 31, 2001, income before
cumulative effect of change in accounting principle was $4,760 and
basic earnings per share and diluted earnings per share were $0.31 and
$0.31, respectively. Adjusting for the impact of the amortization of
goodwill during 2001, pro-forma net income was $5,743, pro-forma basic
earnings per share and pro-forma diluted earnings per share were $0.38
and $0.37, respectively.
39 Continued
NN, Inc.
Notes to Consolidated Financial Statements
December 31, 2003, 2002 and 2001
(In thousands, except per share data)
(l) Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed
Of
The Company accounts for long-lived assets in accordance with the
provisions of SFAS No. 144, "Accounting for the Impairment of or
Disposal of Long-Lived Assets." This Statement superceded Statement
No. 121 but retains many of its fundamental provisions. Additionally,
this Statement expanded the scope of discontinued operations to
include more disposal transactions. The provisions of this Statement
are effective for financial statements issued for fiscal years
beginning after December 15, 2001. The Company adopted Statement No.
144 effective January 1, 2002. Assets to be held and used are tested
for recoverability when indications of impairment are evident. If the
reviewed carrying value of the asset is not recoverable based on
underlying cash flows related to specific groups of acquired
long-lived assets, the asset is written down to the lesser of
recoverable value or carrying value. Assets held for sale are carried
at the lesser of carrying value or fair value less costs of disposal.
The fair value of impaired assets is generally determined by
independent appraisals and valuations, when available.
(m) Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
(n) Reclassifications
Certain 2002 and 2001 amounts have been reclassified to conform with
the 2003 presentation.
(o) Derivative Financial Instruments
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 133,
"Accounting for Derivative Instruments and Certain Hedging
Activities." In June 2000, the FASB issued SFAS No. 138, "Accounting
for Certain Derivative Instruments and Certain Hedging Activity, an
Amendment of SFAS 133." SFAS No. 133 and SFAS No. 138 require that all
derivative instruments be recorded on the balance sheet at their
respective fair values. SFAS No. 133 and SFAS No. 138 are effective
for all fiscal quarters of all fiscal years beginning after June 30,
2000, which for the Company was effective January 1, 2001.
The Company has an interest rate swap accounted for in accordance with
Statement of Financial Accounting Standards (SFAS) No. 133,
"Accounting for Derivative Instruments and Hedging Activities". The
Company adopted SFAS No. 133 on January 1, 2001, which establishes
accounting and reporting standards for derivative instruments and for
hedging activities. The Standard requires the recognition of all
derivative instruments on the balance sheet at fair value. The
Standard allows for hedge accounting if certain requirements are met
including documentation of the hedging relationship at inception and
upon adoption of the Standard.
In connection with a variable EURIBOR rate debt financing in July 2000
the Company's majority owned subsidiary, NN Euroball ApS entered into
an interest rate swap with a notional amount of 12.5 million Euro for
the purpose of fixing the interest rate on a portion of their debt
financing. The interest rate swap provides for the Company to receive
variable Euribor interest payments and pay 5.51% fixed interest. The
interest rate swap agreement expires in July 2006 and the notional
amount amortizes in relation to principal payments on the underlying
debt over the life of the swap.
The cumulative effect of a change in accounting principle for the
adoption of SFAS No. 133 effective January 1, 2001 resulted in a
transition adjustment net loss of $98 which is net of an income tax
benefit of $112 and the related minority interest impact of $84. The
interest rate swap does not qualify for hedge accounting under the
provisions of SFAS No. 133; therefore, the transition adjustment for
adoption of SFAS No. 133 and any subsequent periodic changes in fair
value of the interest rate swap are recorded in earnings as a
component of other income.
40 Continued
NN, Inc.
Notes to Consolidated Financial Statements
December 31, 2003, 2002 and 2001
(In thousands, except per share data)
As of December 31, 2003 and 2002, the fair value of the swap is a
liability of approximately $360 and $485, respectively, which is
recorded in other non-current liabilities. The change in fair value
during the year ended December 31, 2003 was a gain of approximately
$125 and for the years ended December 31, 2002 and 2001 the change in
fair value was a loss of approximately $51 and $80 (excluding the
impact of foreign currency), respectively, which has been included as
a component of other income.
(p) Recently Issued Accounting Standards
In July 2001, the FASB issued Statement of Financial Accounting
Standards No. 143, "Accounting For Asset Retirement Obligations." This
Statement requires capitalizing any retirement costs as part of the
total cost of the related long-lived asset and subsequently allocating
the total expense to future periods using a systematic and rational
method. Adoption of the Statement is required for fiscal years
beginning after June 15, 2002. The adoption of SFAS 143 did not have a
material impact on the Company's financial condition.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and
Technical Corrections". SFAS No. 4 had required all gains and losses
from extinguishment of debt to be aggregated and, if material,
classified as an extraordinary item, net of related income tax effect.
SFAS No. 145 rescinds SFAS No. 4 and the related required
classifications gains and losses from extinguishment of debt as
extraordinary items. Additionally, the SFAS No. 145 amends SFAS No. 13
to require that certain lease modifications that have economic effects
similar to sale-leaseback transactions be accounted for in the same
manner as sale-leaseback transactions. SFAS No. 145 was applicable for
the Company at the beginning of fiscal year 2003, with the provisions
related to SFAS No. 13 for transactions occurring after May 15, 2002.
The adoption of SFAS 145 did not have a material impact on the
Company's financial condition or results of operations.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities". SFAS No. 146 requires
costs associated with exit or disposal activities to be recognized
when they are incurred rather than at the date of a commitment to an
exit or disposal plan. SFAS No. 146 is to be applied prospectively to
exit or disposal activities initiated after December 31, 2002.
In November 2002, the FASB issued FASB Interpretation ("FIN") No. 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others," an
interpretation of FASB Statements No. 5, 57, and 107 and rescission of
FASB Interpretation No. 34. This interpretation elaborates the
disclosures to be made by a guarantor in its interim and annual
financial statements about its obligations under certain guarantees
that it has issued. It also clarifies that a guarantor is required to
recognize, at the inception of a guarantee, a liability for the fair
value of the obligation undertaken in issuing the guarantee. The
initial recognition and initial measurement provisions of this
interpretation were applicable on a prospective basis to guarantees
issued or modified after December 31, 2002 and did not have a material
effect on the Company's consolidated results of operations, financial
position or cash flows.
In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure - an amendment of
FASB Statement No. 123". SFAS No. 148 provides alternative methods of
transition for a voluntary change to the fair value based method of
accounting for stock-based employee compensation. In addition, SFAS
No. 148 amends the disclosures in both annual and interim financial
statements about the method of accounting for stock-based employee
compensation and the effect of the method used on reported results. We
have adopted the provisions of SFAS 123, which encourages but does not
require a fair value based method of accounting for stock compensation
plans. We have elected to continue accounting for its stock
compensation plan using the intrinsic value based method under
Auditing Practice Board ("APB") Opinion No. 25.
In December 2003, the FASB issued Financial Interpretation No. 46(R),
"Consolidation of Variable Interest Entities," ("FIN 46(R)"). This
interpretation addresses consolidation by business enterprises of
41 Continued
NN, Inc.
Notes to Consolidated Financial Statements
December 31, 2003, 2002 and 2001
(In thousands, except per share data)
variable interest entities with certain defined characteristics and
replaces Financial Interpretation No. 46. We do not expect FIN 46(R)
to have a significant impact on the Company's consolidated financial
statements.
In April 2003, the FASB issued SFAS No. 149, "Derivative Instruments
and Hedging Activities". SFAS No. 149 amends and clarifies financial
accounting and reporting for derivative instruments, including certain
derivative instruments embedded in other contracts and for hedging
activities under SFAS No. 133, "Accounting for Derivative Instruments
and Hedging Activities". SFAS No. 149 requires that contracts with
comparable characteristics be accounted for similarly and is effective
for contracts entered into or modified after June 30, 2003 and for
hedging relationships designated after June 30, 2003. The adoption of
this standard has not had a material impact on the Company's financial
statements.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and
Equity". SFAS No. 150 establishes standards for how an issuer
classifies and measures certain financial instruments with
characteristics of both liabilities and equity. SFAS No. 150 is
otherwise generally effective for financial instruments entered into
or modified after May 31, 2003, and otherwise is effective at the
beginning of the first interim period beginning after June 15, 2003.
The Company adopted SFAS No. 150 on July 1, 2003 and this adoption did
not have a material impact on the financial statements.
In December 2003 the FASB issued SFAS No. 132 (revised 2003),
"Employers' Disclosures about Pensions and Other Postretirement
Benefits". SFAS No. 132 revises employers' disclosures about pension
plans and other postretirement benefit plans. It does not change the
measurement or recognition of those plans required by FASB Statements
No. 87, "Employers' Accounting for Pensions", No. 88, "Employers'
Accounting for Settlements and Curtailments of Defined Benefit
Pensions Plans and for Termination Benefits, and No. 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions". SFAS No.
132 requires additional disclosures to those in the original Statement
132 about the assets, obligations, cash flows, and net periodic
benefit cost of defined benefit pension plans and other defined
benefit postretirement plans. With certain exceptions, principally
related to disclosure requirements of foreign plans, SFAS No. 132 is
effective for financial statements with fiscal years ending after
December 15, 2003. As of December 31, 2003, we have complied with the
requirements of SFAS No. 132.
42 Continued
NN, Inc.
Notes to Consolidated Financial Statements
December 31, 2003, 2002 and 2001
(In thousands, except per share data)
2) Acquisitions and Purchase of Minority Interest
On October 9, 2003, we acquired certain assets comprised of land, building
and machinery and equipment of the precision ball operations of KLF -
Gulickaren ("KLF"), based in Kysucke Nove Mesto, Slovakia. We paid
consideration of approximately 1,664 Euros ($1,967). The assets will be
utilized by our newly established subsidiary AKMCH based in Kysucke Nove
Mesto, Slovakia, which will begin production in 2004. The financial results
of the operations are included in our NN Europe Segment.
On May 2, 2003 we acquired the 23 percent interest in NN Euroball, ApS
("Euroball") held by SKF. We paid approximately 13,842 Euros ($15,586) for
SKF's interest in Euroball. The excess of the purchase price paid to SKF
for its 23% interest over the fair value of SKF's 23% interest in the net
assets of Euroball of approximately $2,151 was allocated to goodwill. Upon
consummation of this transaction, we became the sole owner of Euroball.
On May 2, 2003 we acquired 100 percent of the tapered roller and metal cage
manufacturing operations of SKF in Veenendaal, The Netherlands. The results
of Veenendaal's operations have been included in the consolidated financial
statements since that date. We paid consideration of approximately 22,952
Euros ($25,671) and incurred other costs of approximately $1,022, for the
Veenendaal net assets acquired from SKF. The excess of the fair value of
the net assets acquired over the purchase price paid of 4,195 Euros
($4,692) has been allocated as a proportionate reduction of certain assets
acquired. The Veenendaal operation manufactures rollers for tapered roller
bearings and metal cages for both tapered roller and spherical roller
bearings allowing us to expand our bearing component offering. The
financial results of the Veenendaal operation are included in the NN Europe
Segment.
In connection with the acquisition of SKF's Veenendaal, The Netherlands
operations, SKF purchased from us 700,000 shares of our common stock for an
aggregate fair value of approximately $6,937 million which was applied to
the purchase of SKF's Veenendaal, The Netherlands operations. For purposes
of valuing the 700,000 common shares issued in our Consolidated Financial
Statements, the value was determined based on the average market price of
NN, Inc.'s common shares over the two-day period before, the day of, and
the two-day period after the terms of the acquisition were agreed to, April
14, 2003.
The following table summarizes the allocation of the purchase price related
to the assets acquired and liabilities assumed at the date of acquisition.
(In thousands)
At May 2, 2003
----------------
Current assets $ 6,611
Property, plant and equipment 27,690
-------------
Total assets acquired 34,301
Total liabilities 7,608
-------------
Total purchase price $ 26,693
=============
The following unaudited proforma summary presents the financial information
for the twelve month periods ended December 31, 2003 and 2002 as if our
Veenendaal acquisition had occurred as of the beginning of each of the
periods presented. These pro forma results have been prepared for
comparative purposes and do not purport to be indicative of what would have
occurred had the acquisition been made as of the beginning of each of the
periods presented, nor are they indicative of future results.
43 Continued
NN, Inc.
Notes to Consolidated Financial Statements
December 31, 2003, 2002 and 2001
(In thousands, except per share data)
Twelve months
ended
December 31,
2003
(unaudited)
--------------------
Net sales $ 270,989
Net income 10,478
Basic earnings per share 0.66
Diluted earnings per share 0.64
Twelve months
ended
December 31,
2002
(unaudited)
-------------------
Net sales $ 245,437
Net income 8,658
Basic earnings per share 0.56
Diluted earnings per share 0.55
On December 20, 2002 the Company completed the purchase of the 23% interest in
NN Euroball, ApS ("Euroball") held by INA/FAG. Euroball was formed in 2000 by
the Company, FAG Kugelfischer George Schaefer AG, which was subsequently
acquired by INA - Schaeffler KG (collectively, "INA/FAG"), and AB SKF ("SKF").
INA/FAG is a global bearing manufacturer and one of our largest customers. The
Company paid approximately 13,400 Euro ($13,802) for INA/FAG's interest in
Euroball. The excess of the purchase price paid to INA/FAG for its 23% interest
over the fair value of INA/FAG's 23% interest in the net assets of Euroball of
approximately $1,517 was recorded as goodwill (see Note 1).
On February 16, 2001, the Company completed the acquisition of all of the
outstanding stock of The Delta Rubber Company, ("Delta") a Connecticut
corporation for $22,500 in cash, of which $500 was 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. The excess of the purchase price over the fair value of the net
identifiable assets acquired of $14,107 was recorded as goodwill.
Effective July 31, 2000, the Company completed its Euroball transaction.
Completion of the transaction required the Company to start a majority owned
stand-alone company in Europe, NN Euroball ApS, for the manufacture and sale of
precision steel balls used for ball bearings and other products. As a result of
this transaction the Company owned 54% of the shares of NN Euroball, ApS, AB SKF
(SKF), a Swedish Company, and FAG Kugelfischer Georg Schafer AG (FAG), a German
Company, owned 23% each. NN Euroball ApS subsequently acquired the steel ball
manufacturing facilities located in Pinerolo, Italy (previously owned by SKF),
Eltmann, Germany (previously owned by FAG) and Kilkenny, Ireland (previously
owned by the Company). NN Euroball ApS paid approximately $47,433 for the net
assets originally acquired from SKF and FAG. The acquisitions of the Pinerolo,
Italy and Eltmann, Germany ball manufacturing facilities have been accounted for
by the purchase method of accounting and, accordingly, the results of operations
of Euroball have been included in the Company's consolidated financial
statements from July 31, 2000. The excess of the purchase price over the fair
value of the net identifiable assets acquired of $8,761 was recorded as
goodwill.
3) Restructuring and Impairment Charges
NN Arte Plant Closing in Guadalajara, Mexico
44 Continued
NN, Inc.
Notes to Consolidated Financial Statements
December 31, 2003, 2002 and 2001
(In thousands, except per share data)
In May 2003, we decided to close our Guadalajara, Mexico plastic injection
molding facility. This operation was started in September of 2000 to supply
certain Mexican operations of multi-national manufacturers of office
automation equipment. The closure was substantially completed during the
third quarter of 2003. The financial results of this operation have been
included in the Plastic and Rubber Components Segment.
The plant closing resulted in the termination of approximately 42 full time
hourly and salary employees located at the Guadalajara facility. For the
twelve months ended December 31, 2003 total restructuring costs of $230
have been recorded related to the severance payments for the affected
employees.
As a result of the closing, we performed a test of the recoverability of
the goodwill asset associated with the Guadalajara, Mexico operation. This
test was pursuant to the provisions of Statement of Financial Accounting
Standards No. 142 "Goodwill and Other Intangible Assets" which require that
interim tests of the recoverability of goodwill be performed under certain
circumstances. As a result, we recorded an impairment charge of
approximately $1,285 to fully write-off the goodwill asset during the
twelve month period ended December 31, 2003.
We have decided to sell much of the machinery and equipment with certain
pieces of machinery and equipment to be transferred and utilized by our
Industrial Molding facility in Lubbock, Texas. Pursuant to the provisions
of Statement of Accounting Standards No. 144 "Accounting for the Impairment
or Disposal of Long-lived Assets" we recorded an impairment charge of
approximately $1,049 during 2003 to write-down the machinery and equipment
to its estimated fair market value. During the three months ended September
30, 2003 we recorded a gain of $145 related to the disposition of certain
pieces of the machinery and equipment assets that were previously assessed
as impaired. During the twelve months ended December 31, 2003, we recorded
a total impairment charge related to the machinery and equipment of
approximately $904.
During 2003, we also recorded an accounts receivable write-down of $31 to
reduce accounts receivable to its estimated fair market value.
Additionally, we recorded an inventory write-down of $108 during 2003 to
reduce the carrying value of inventory to its estimated fair market value.
These amounts related to the inventory asset have been recorded as a
component of cost of products sold.
The following summarizes the 2003 restructuring and impairment charges
related to the closure of NN Arte:
Reserve
Non-Cash Paid in Balance At
In thousands Charges Write-downs 2003 12/31/03
--------------------------------------------------------
Asset impairments $2,328 $2,328 $ -- $ --
Lease exit costs 40 -- 40 --
Severance and other employee
costs 230 -- 185 45
--------------------------------------------------------
Total $2,598 $2,328 $ 225 $ 45
========================================================
Walterboro, South Carolina Plant Closing
In September 2001, we announced the closure of our Walterboro, South
Carolina ball manufacturing facility as a part of our ongoing strategy to
locate manufacturing capacity in closer proximity to our customers. This
facility is included in our Domestic Ball and Roller Segment (see Note 11).
The closure was substantially completed by December 31, 2001.
Prior to December 31, 2001, production capacity and certain machinery and
equipment was transferred from the Walterboro facility to the Company's two
domestic ball facilities in Erwin, Tennessee and Mountain City, Tennessee.
The plant closing resulted in the termination of approximately 80 full time
hourly and salaried employees located at the Walterboro facility. The
Company recorded restructuring costs of $62 and $750 during the years ended
December 31, 2002 and 2001, respectively, for the related severance
payments. Additionally, prior to December 31, 2001, the Company decided to
sell the Walterboro land, building and certain machinery. The Company
incurred an impairment charge of $564 and $1,083 during 2002 and 2001,
45 Continued
NN, Inc.
Notes to Consolidated Financial Statements
December 31, 2003, 2002 and 2001
(In thousands, except per share data)
respectively, to write-down the land and building at the Walterboro
facility to its net realizable value of $1,128 at December 31, 2002 and
$1,692 at December 31, 2001, which were based upon fair market value
appraisals. Additionally, the Company incurred an impairment charge of $635
during 2002 to write down the equipment to its net realizable value of
$1,086. The amounts the Company will ultimately realize upon disposition of
these assets could differ materially from the amounts assumed in arriving
at the 2002 and 2001 impairment losses. The land, building, and equipment
assets with a recorded book value of $1,805 are held for sale. In arriving
at the carrying value of the assets held for sale, we have principally
relied upon independent, third party fair value appraisals and valuations.
These appraisals and valuations are as of December 31, 2002 and December
31, 2003 for the land and building, and machinery, respectively. The
Company is attempting to sell the land, building and machinery. All of the
severance payments were paid in 2002 and 2001.
The Company has charged expenses to cost of products sold for moving
machinery, equipment and inventory to other production facilities and other
costs to close the facility, which will benefit future operations, in the
period they are incurred.
Euroball Restructuring
In addition to this restructuring charge, the Company's Euroball subsidiary
incurred restructuring charges of $16 and $479 for severance payments as a
result of the termination of 15 hourly employees and 3 salaried employees
at its Italy production facility during 2002 and 2001, respectively. All of
the severance payments were paid during 2002 and 2001.
The following summarizes the 2002 restructurings (related to the Walterboro
closing and the Euroball restructuring):
Reserve
Non-Cash Paid in Balance
Charges Writedowns 2002 at 12/31/02
------------ ------------ ----------- --------------
Asset impairments $ 1,199 $ 1,199 $ -- $ --
Severance and other employee costs 78 -- 591 --
------------ ------------ ----------- --------------
Total $ 1,277 $ 1,199 $ 591 $ --
============ ============ =========== ==============
The following summarizes the 2001 restructurings (related to the Walterboro
closing and the Euroball restructuring):
Reserve
Non-Cash Paid in Balance
Charges Writedowns 2001 at 12/31/01
------------ ------------ ----------- --------------
Asset impairments $ 1,083 $ 1,083 $ -- $ --
Severance and other employee costs 1,229 -- 716 513
------------ ------------ ----------- --------------
Total $ 2,312 $ 1,083 $ 716 $ 513
============ ============ ============ ==============
4) Investments in Affiliated Companies
Effective December 21, 2001, the Company sold its 50% ownership in NN
General, LLC to its partner, General Bearing Corporation for cash of $622
and notes of $3,305. The notes are due in annual installments of $200 with
the balance due on December 21, 2006. The notes bear interest at an average
LIBOR (1.15% at December 31, 2003) plus 1.5%. In 2001, the Company recorded
a non-cash loss on the sale of its investment in this joint venture of
$144. Interest income on this note of $85 and $109 was recorded during 2003
and 2002, respectively, and has been included as a component of other
income in the accompanying consolidated statement of income. Payments
totaling $285 and $309 were received during 2003 and 2002, respectively
which include $200 of principal and $85 and $109 of interest payments,
respectively. At December 31, 2003, the note receivable balance is $2,905
and is included as a component of other non-current assets.
46 Continued
NN, Inc.
Notes to Consolidated Financial Statements
December 31, 2003, 2002 and 2001
(In thousands, except per share data)
5) Accounts Receivable
December 31,
2003 2002
------------- -------------
Trade $ 42,644 $ 30,631
Less - Allowance for doubtful accounts 1,780 1,666
------------- -------------
Accounts receivable, net $ 40,864 $ 28,965
============= =============
Activity in the allowance for doubtful accounts is as follows:
Description Balance at
beginning of Balance at
year Additions Write-offs end of year
-------------- ------------- ------------ -------------
December 31, 2002
Allowance for
doubtful accounts $ 1,791 $ 138 $ 263 $ 1,666
============== ============= ============ =============
December 31, 2003
Allowance for
doubtful accounts $ 1,666 $ 183 $ 69 $ 1,780
============== ============= ============ =============
On November 6, 2001, a customer of IMC filed for voluntary Chapter 7
bankruptcy. As of December 31, 2003 and 2002, we had a trade accounts
receivable balance of approximately $829 with this customer. For the years
ended December 31, 2003, 2002 and 2001, the Company recorded sales of
approximately $0, $0 and $1,900 to this customer. As of December 31, 2001,
the Company increased its allowance for doubtful accounts by approximately
$829 as a result of this bankruptcy filing. This receivable is fully
reserved as of December 31, 2001, 2002 and 2003.
6) Inventories
December 31,
2003 2002
---------------- ----------------
Raw materials $ 8,492 $ 5,400
Work in process 6,808 5,139
Finished goods 22,128 13,065
Less-inventory reserve (1,150) (202)
---------------- ----------------
Inventories, net $36,278 $ 23,402
================ ================
Inventory on consignment at December 31, 2003 and 2002 was approximately
$3,046 and $3,093, respectively.
47 Continued
NN, Inc.
Notes to Consolidated Financial Statements
December 31, 2003, 2002 and 2001
(In thousands, except per share data)
7) Property, Plant and Equipment
December 31,
Estimated Useful 2003 2002
Life
------------------ ------------ -------------
Land $ 7,940 $ 2,058
Buildings and improvements 10-40 years 31,415 23,877
Machinery and equipment 3-10 years 156,263 113,197
Construction in process 4,681 3,958
------------ -------------
200,299 143,090
Less - accumulated depreciation 71,303 54,891
------------ -------------
Property, plant and equipment, net $128,996 $ 88,199
============ =============
On September 11, 2001, the Company announced the closing of its Walterboro,
South Carolina ball manufacturing facility effective December 2001. As a
result of that closing, land and building was classified as a component of
assets held for sale in the accompanying consolidated financial statements
with a carrying value of $1,128 as of December 31, 2003 and 2002. Certain
machinery and equipment assets are also held for sale with a carrying value
of $677 and $1,086 as of December 31, 2003 and 2002, respectively.
8) Debt
a) Short-term
At December 31, 2003, we had outstanding a $2,000 unsecured note payable
to AmSouth Bank ("AmSouth") bearing interest at prime rate (4.0% at
December 31, 2003). The maturity date of this note is May 12, 2004.
b) Long-term debt at December 31, 2003 and 2002 consists of the
following:
2003 2002
------------- ------------
Borrowings under our $30,000 revolving credit
facility bearing interest at a floating rate
equal to LIBOR (1.15% at December 31, 2003)
plus an applicable margin of 1.25 to 2.0,
expiring on March 1, 2005 $27,104 --
Borrowings under our $30,400 term loan expiring
on May 1, 2008, bearing interest at a floating
rate equal to LIBOR (1.15% at December 31, 2003)
plus an applicable margin of 1.25 to 2.0 payable
in quarterly installments of $1,520 beginning
July 1, 2003 through April 1, 2008 27,152 --
Borrowings under our 26,300 Euro term loan
expiring on May 1, 2008, bearing interest at a
floating rate equal to Euro LIBOR (2.12% at
December 31, 2003) plus an applicable margin of
1.25 to 2.0 payable in quarterly installments of
Euro 1,314 beginning July 1, 2003 through
April 1, 2008 28,221 --
Borrowings under a revolving credit facility
bearing interest at variable rates (2.92% -
4.25% at December 31, 2002) paid during 2003 -- $ 24,270
48 Continued
NN, Inc.
Notes to Consolidated Financial Statements
December 31, 2003, 2002 and 2001
(In thousands, except per share data)
Reducing, revolving credit facility bearing
interest at variable rates (2.92% at December 31,
2002) paid during 2003 -- 23,878
Euro term loans bearing interest at variable rates
(3.75% at December 31, 2002) paid during 2003 -- 4,987
----------- -----------
Total long-term debt 82,477 53,135
Less current maturities of long-term debt 12,725 7,000
----------- -----------
Long-term debt, excluding current maturities
of long-term debt $ 69,752 $ 46,135
=========== ===========
On May 1, 2003, we entered into a new $90,000 syndicated credit facility
with AmSouth Bank ("AmSouth") as the administrative agent and Suntrust Bank
as the Euro loan agent for the lenders under which we borrowed $60,400 and
26,300 Euros ($29,600). This new financing arrangement replaces our prior
credit facilities with AmSouth and Hypo Vereinsbank Luxembourg, S.A. The
credit facility consists of a $30,000 revolver expiring on March 1, 2005,
bearing interest at a floating rate equal to LIBOR (1.15% at December 31,
2003) plus an applicable margin of 1.25 to 2.0, a $30,400 million term loan
expiring on May 1, 2008, bearing interest at a floating rate equal to LIBOR
(1.15% at December 31, 2003) plus an applicable margin of 1.25 to 2.0 and a
26,300 Euro ($29,600) term loan expiring on May 1, 2008 which bears
interest at a floating rate equal to Euro LIBOR (2.12% at December 31,
2003) plus an applicable margin of 1.25 to 2.0. The loan agreement contains
customary financial and non-financial covenants. Such covenants specify
that the Company must maintain a minimum fixed charge coverage ratio, must
not exceed a maximum funded indebtedness to EBITDA ratio as well as a
maximum funded indebtedness to capitalization ratio and limits the amount
of capital expenditures we may make in any fiscal year. The loan agreement
also contains customary restrictions on, among other things, additional
indebtedness, liens on our assets, sales or transfers of assets,
investments, restricted payments (including payment of dividends and stock
repurchases), issuance of equity securities, and mergers, acquisitions and
other fundamental changes in the Company's business. The credit agreement
is un-collateralized except for the pledge of stock of certain foreign
subsidiaries. Additionally, the terms of the Company's revolving credit
facility restrict the declaration and payment of dividends in excess of
certain amounts specified in the credit agreement. As of December 31, 2003,
we were not in compliance with certain technical, non-financial covenants.
Subsequently, the necessary waivers, effective as of December 31, 2003,
have been received from the participating banks. Except for certain
technical, non-financial covenants, we were in compliance with all such
covenants as of December 31, 2003. In connection with this refinancing,
capitalized costs in the amount of $455 associated with the paid-off credit
facilities were written-off during 2003 and are included as a component of
other (income) expense. We incurred $939 of debt issue costs as a result of
entering into this credit facility.
On July 20, 2001, the Company entered into a syndicated loan agreement with
AmSouth Bank ("AmSouth") as the administrative agent for the lenders, for a
senior non-secured revolving credit facility of up to $25,000, expiring on
July 25, 2003 and a senior non-secured term loan for $35,000 expiring on
July 1, 2006. On July 12, 2002, the Company amended this credit facility to
convert the term loan portion into a reducing revolving credit line
providing initial availability equivalent to the balance of the term loan
prior to the amendment. Amounts available for borrowing under this facility
reduce by $7,000 per annum and the facility expired on July 1, 2006.
Additionally, on July 31, 2002, the Company amended the credit facility
again to extend the $25,000 senior non-secured revolving credit facility to
July 25, 2004. Amounts outstanding under the revolving facility and term
loan facility bore interest at a floating rate equal to LIBOR (1.38% at
December 31, 2002) plus an applicable margin of 0.75 to 2.00 based upon
calculated financial ratios. The loan agreement contained customary
financial and non-financial covenants. Such covenants specified that the
Company must maintain a minimum fixed charge coverage ratio, must not
exceed a maximum funded indebtedness to EBITDA ratio as well as a maximum
funded indebtedness to capitalization ratio and limits the amount of
capital expenditures we may make in any fiscal year. The loan agreement
also contained customary restrictions on, among other things, additional
indebtedness, liens on the Company's assets, sales or transfers of assets,
investments, restricted payments (including payment of dividends and stock
repurchases), issuance
49 Continued
NN, Inc.
Notes to Consolidated Financial Statements
December 31, 2003, 2002 and 2001
(In thousands, except per share data)
of equity securities, and mergers, acquisitions and other fundamental
changes in the Company's business. Additionally, the terms of the Company's
loan agreement restricted the declaration and payment of dividends in
excess of $5,500 in any fiscal year. The Company's ownership in NN Euroball
ApS was pledged as collateral. All amounts owed under this credit facility
were paid during 2003.
In connection with the Euroball transaction (see Note 2) the Company and NN
Euroball ApS, entered into a Facility Agreement with a bank to provide up
to 36,000 Euros in Term Loans and 5,000 Euros in revolving credit loans.
The Company borrowed 30,500 Euros ($28,755) under the term loan facility
and 1,000 Euros ($943) under the revolving credit facility. Amounts
outstanding under the Facility Agreement are secured by inventory and
accounts receivable and bear interest at EURIBOR (2.87% at December 31,
2002) plus an applicable margin between 0.8 and 2.25 based upon financial
ratios. The shareholders of NN Euroball ApS have provided guarantees for
the Facility Agreement. The Facility Agreement contains restrictive
covenants, which specify, among other things, restrictions on the
incurrence of indebtedness and the maintenance of certain financial ratios.
Euroball was in compliance with all such covenants at December 31, 2002.
Amounts outstanding under the Facility Agreement are secured by the stock,
inventory and accounts receivable of NN Euroball ApS. At December 31, 2002,
9,800 Euros was available to Euroball under these facilities. All amounts
owed under this credit facility were paid during 2003.
The aggregate maturities of long-term debt for each of the five years
subsequent to December 31, 2003 are as follows:
2004 $12,725
2005 42,725
2006 12,725
2007 12,725
2008 1,577
------------
Total $ 82,477
============
9) Employee Benefit Plans
We have one defined contribution 401(k) profit sharing plan covering
substantially all employees of the Domestic Ball and Roller and Plastic and
Rubber Components Segments. All employees are eligible for the plan on the
first day of the month following their hire date. A participant may elect
to contribute between 1% and 60% of compensation to the plan, subject to
Internal Revenue Service ("IRS") dollar limitations. Participants age 50
and older may defer an additional amount up to the applicable IRS Catch Up
Provision Limit. The company provides a matching contribution which is
determined on an individual, participating company basis. Currently, the
matching contribution for employees of the Domestic Ball and Roller Segment
is the higher of $500 or 50% of the first 4% of compensation. The matching
contribution for IMC employees is 25% of the first 6% of compensation and
the matching contribution for Delta employees is 50% of the first 6% of
compensation. All participants are immediately vested at 100%.
Contributions by the Company for the Domestic Ball and Roller Segment were
$126, $126, and $152 in 2003, 2002 and 2001, respectively. Contributions by
the Company for the Plastic and Rubber Components Segment were $126, $100,
and $125 in 2003, 2002 and 2001, respectively.
The Company has a defined benefit pension plan covering its Eltmann,
Germany facility employees (a Euroball division). The benefits are based on
the expected years of service including the rate of compensation increase.
The plan is unfunded.
50 Continued
NN, Inc.
Notes to Consolidated Financial Statements
December 31, 2003, 2002 and 2001
(In thousands, except per share data)
Following is a summary of the changes in the projected benefit obligation
for the defined benefit pension plan during 2003 and 2002:
2003 2002
------------ -------------
Change in projected benefit obligation:
Benefit obligation at beginning of year $ 3,059 $ 2,390
Service cost 114 95
Interest cost 208 161
Benefits paid (45) (6)
Effect of currency translation 625 430
Actuarial loss 26 (11)
------------ -------------
Benefit obligation at December 31 $ 3,987 $ 3,059
============ =============
2003 2002 2001
------------ ------------- ------------
Weighted-average assumptions as of December 31:
Discount rate 5.5% 5.5% 5.5%
Rate of compensation increase 1.3%-2.5% 1.5% - 2.1% 1.5% - 2.1%
2003 2002 2001
------------ ------------- -------------
Components of net periodic benefit cost:
Service cost $ 114 $ 95 $ 77
Interest cost on projected benefit obligation 208 161 116
Amortization of net gain 9 9 --
------------ ------------- -------------
Net periodic pension benefit cost $ 331 $ 265 $ 193
============ ============= =============
Amounts recognized in the Consolidated Balance
Sheets consist of:
2003 2002
------------ -------------
Accrued benefit liability $ 3,987 $ 3,059
Accumulated other comprehensive loss, net
of tax (258) (81)
------------ -------------
Net amount recognized in other non-current
liabilities $ 3,729 $ 2,978
============ =============
Accumulated other comprehensive loss is shown net of tax of $135, $47 and $31 at
December 31, 2003, 2002 and 2001, respectively.
51 Continued
NN, Inc.
Notes to Consolidated Financial Statements
December 31, 2003, 2002 and 2001
(In thousands, except per share data)
10) Stock Incentive Plan
The Company has a Stock Incentive Plan under which 2,450 shares of the
Company's Common Stock were reserved for issuance to officers and key
employees of the Company. Awards or grants under the plan may be made in
the form of incentive and nonqualified stock options, stock appreciation
rights and restricted stock. The stock options and stock appreciation
rights must be issued with an exercise price not less than the fair market
value of the Common Stock on the date of grant. The awards or grants under
the plan may have various vesting and expiration periods as determined at
the discretion of the committee administering the plan.
A summary of the status of the Company's stock option plan as described
above as of December 31, 2003, 2002 and 2001, and changes during the years
ending on those dates is presented below:
2003 2002 2001
---------------------------- ---------------------------- -----------------------------
Weighted- Weighted- Weighted-
average average average
exercise exercise exercise
price price price
Shares per share Shares per share Shares per share
----------- --------------- ----------- --------------- ------------ --------------
Outstanding at
beginning of year 1,318 $ 7.33 1,373 $ 7.25 1,091 $ 6.87
Granted 52 10.67 37 9.39 396 8.09
Exercised (108) 6.74 (53) 6.61 (70) 6.09
Forfeited (11) 7.63 (39) 7.65 (44) 6.78
----------- ----------- ------------
Outstanding at end of
year 1,251 7.53 1,318 7.33 1,373 7.25
=========== =========== ============
Options exercisable at
year-end 1,058 $ 7.27 887 $ 7.01 290 $ 6.59
The following table summarizes information about stock options outstanding
at December 31, 2003:
Options outstanding Options exercisable
------------------------------------------------------ -----------------------------------
Weighted-
average Weighted- Number Weighted-
Number remaining average exercisable average
Range of exercise outstanding at contractual exercise price at exercise price
prices per share 12/31/2003 life per share 12/31/2003 per share
----------------- ---------------- ----------------- --------------- ------------------
$5.63 - $6.50 317 5.5 years $ 6.00 317 $ 6.00
$7.63 - $10.26 934 6.9 years $ 8.05 741 $ 7.81
All options granted in the period January 1, 1999 through December 31, 2003
vest ratably over three years, beginning one year from date of grant. The
exercise price of each option equals the market price of the Company's
stock on the date of grant, and an option's maximum term is 10 years. All
options granted in the period January 1, 1995 through December 31, 1998,
vest 20% - 33% annually beginning one year from date of grant. The exercise
price of each option equals the market price of the Company's stock on the
date of grant, and an option's maximum term is 10 years. Certain options
granted in July 1999 were deemed to be repriced
52 Continued
NN, Inc.
Notes to Consolidated Financial Statements
December 31, 2003, 2002 and 2001
(In thousands, except per share data)
options under the applicable accounting requirements. These options, which
were fully vested as of the effective date of FASB Interpretation No. 44,
are treated under variable accounting. Accordingly, compensation expense is
recognized, to the extent the market price of the Company's stock exceeds
$10.50. The Company recognized an increase to compensation expense of $250
during 2003, a reduction of compensation expense of $108 during 2002 and an
increase to compensation expense of $108 during 2001 related to these
options.
On August 4, 1998 the Company's Board of Directors authorized the
repurchase of up to 740 shares of its Common Stock, equaling 5% of the
company's issued and outstanding shares as of August 4, 1998. The program
may be extended or discontinued at any time, and there is no assurance that
the Company will purchase any or all of the full amount authorized. The
Company has not repurchased any shares under this program through December
31, 2003.
11) Segment Information
The Company determined its reportable segments under the provisions of SFAS
No. 131, "Disclosures about Segments of an Enterprise and Related
Information". The Company's reportable segments are based on differences in
product lines and geographic locations and are divided among Domestic Ball
and Roller, NN Europe and Plastic and Rubber Components. The Domestic Ball
and Roller Segment is comprised of two manufacturing facilities in the
eastern United States. The NN Europe Segment is comprised of manufacturing
facilities located in Kilkenny, Ireland, Eltmann, Germany, Pinerolo, Italy,
Veenendaal, The Netherlands, and Kysucke Nove Mesto, Slovakia. All of the
facilities in the Domestic Ball and Roller and NN Europe Segments are
engaged in the production of precision balls and rollers used primarily in
the bearing industry. The Plastic and Rubber Components Segment is
comprised of four facilities: two located in Lubbock, Texas, which
represents the IMC business acquired in July 1999 and two facilities
located in Danielson, Connecticut, which represents the Delta business
acquired in February 2001. These facilities are engaged in the production
of plastic injection molded products for the bearing, automotive,
instrumentation and fiber optic markets and precision rubber bearing seals
for the bearing, automotive, industrial, agricultural and aerospace
markets.
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 after income
taxes. The Company accounts for intersegment sales and transfers at current
market prices; however, the Company did not have any material intersegment
transactions during 2003, 2002 or 2001.
December 31, 2003 December 31, 2002 December 31, 2001
--------------------------------- --------------------------------- -----------------------------------
Domestic Plastic and Domestic Plastic and Domestic Plastic and
Ball and NN Rubber Ball and NN Rubber Ball and NN Rubber
Roller Europe Components Roller Europe Components Roller Europe Components
---------------------------------------------------------------------------------------------------------
Net sales $55,437 $ 147,127 $50,898 $ 52,634 $ 90,653 $49,569 $ 52,692 $86,719 $40,740
Interest expense 763 1,401 1,083 109 923 1,419 237 1,765 2,194
Depreciation &
amortization 3,755 7,546 2,535 3,732 4,780 2,700 4,439 5,236 3,475
Income tax
expense 2,117 4,858 (1,249) 2,595 3,855 7 2,435 2,474 (815)
Segment profit
(loss) 2,003 7,492 683 2,272 3,313 2,175 4,498 1,962 (1,798)
Segment assets 53,938 154,889 57,590 58,825 78,846 57,544 62,978 65,778 55,721
Expenditures for
long- lived
assets 3,093 5,609 2,872 1,778 3,452 2,361 1,117 3,537 1,660
53 Continued
NN, Inc.
Notes to Consolidated Financial Statements
December 31, 2003, 2002 and 2001
(In thousands, except per share data)
Sales to external customers and long-lived assets utilized by the Company
were concentrated in the following geographical regions:
December 31, 2003 December 31, 2002 December 31, 2001
------------------------------- ----------------------------- ----------------------------
Long-lived Long-lived Long-lived
Sales assets Sales assets Sales assets
---------------- ------------- -------------- ------------- ------------- -------------
United States $67,756 $36,523 $68,485 $35,582 $59,813 $38,900
Europe 134,914 92,473 89,750 51,674 88,649 42,799
Canada 10,727 -- 10,598 -- 8,278 --
Latin/S.America 13,435 -- 8,450 943 8,157 1,071
Other export 26,630 -- 15,573 -- 15,254 --
---------------- ------------- -------------- ------------- ------------- -------------
All foreign countries 185,706 92,473 124,371 52,617 120,338 43,870
---------------- ------------- -------------- ------------- ------------- -------------
Total $253,462 $ 128,996 $ 192,856 $88,199 $180,151 $82,770
================ ============= ============== ============= ============= =============
For the years ended December 31, 2003, 2002 and 2001, sales to SKF amounted
to $107,484, $64,235 and $62,539, respectively, or 42.4%, 33.3% and 34.7%
of consolidated revenues, respectively. For the years ended December 31,
2003, 2002 and 2001, sales to INA/FAG amounted to $40,110, $36,502, and
$36,436, respectively or 15.8%, 18.9%, and 20.2% of consolidated revenues,
respectively. None of the Company's other customers accounted for more than
5% of its net sales in 2003. Accounts receivable concentrations as of
December 31, 2003, 2002 and 2001 are generally reflective of sales
concentrations during the years then ended.
12) Income Taxes
Total income taxes (benefits) for the years ended December 31, 2003, 2002,
and 2001 are allocated as follows:
Year ended December 31,
2003 2002 2001
------------------- ------------------- -------------------
Income from operations: $ 5,726 $ 6,457 $ 4,094
Cumulative effect of change in accounting
principle -- (112)
Accumulated other comprehensive income (178) (47) (31)
------------------- ------------------- -------------------
$ 5,548 $ 6,410 $ 3,951
=================== =================== ===================
Income before provision for income taxes for the years ended December 31,
2003, 2002 and 2001 are as follows:
Year ended December 31,
2003 2002 2001
------------------- ------------------- -------------------
Income before provision for income taxes:
United States $ 3,711 $ 7,491 $ 5,125
Foreign 12,868 9,504 5,482
------------------- ------------------- -------------------
Total $ 16,579 $ 16,995 $ 10,607
=================== =================== ===================
54 Continued
NN, Inc.
Notes to Consolidated Financial Statements
December 31, 2003, 2002 and 2001
(In thousands, except per share data)
Income tax expense consists of:
Year ended December 31,
2003 2002 2001
------------ ----------- -----------
Current:
U.S. Federal $ (389) $1,753 $1,025
State (3) 249 146
Non-U.S. 2,229 1,891 1,627
------------ ----------- -----------
$1,838 $3,893 $2,798
------------ ----------- -----------
Deferred:
U.S. Federal $1,272 $ 533 $ 557
State (13) 66 57
Non-U.S. 2,629 1,965 682
----------- ----------- -----------
Total deferred expense 3,888 2,564 1,296
----------- ----------- -----------
$5,726 $6,457 $4,094
=========== =========== ===========
A reconciliation of taxes based on the U.S. federal statutory rate of 34%
for the years ended December 31, 2003, 2002 and 2001 is summarized as
follows:
Year ended December 31,
2003 2002 2001
----------- ----------- -----------
Income taxes at the federal statutory rate $5,637 $5,778 $3,606
State income taxes, net of federal benefit (15) 208 134
Foreign sales corporation benefit, net of liability -- -- (95)
Non-US earnings taxed at different rates 483 624 395
Other, net (379) (153) 54
----------- ----------- -----------
$5,726 $6,457 $4,094
=========== =========== ===========
55 Continued
NN, Inc.
Notes to Consolidated Financial Statements
December 31, 2003, 2002 and 2001
(In thousands, except per share data)
The tax effects of the temporary differences are as follows:
Year ended December 31,
2003 2002 2001
------------------- ------------------- ----------------
Deferred income tax liability
Tax in excess of book depreciation $ 9,355 $ 7,523 $ 6,360
Duty drawback receivable 68 48 37
Goodwill 3,053 1,582 688
Flow through loss from pass through entity 736 437 81
Other deferred tax liabilities 211 48 31
------------------- ------------------- ----------------
Gross deferred income tax liability 13,423 9,638 7,197
------------------- ------------------- ----------------
Deferred income tax assets
Inventories 564 351 337
Allowance for bad debts 167 710 632
Vacation accrual 131 244 264
Health insurance accrual -- 139 103
Other working capital accruals 355 235 358
Euroball net operating loss carryforward 212 25 133
Other deferred tax assets 172 -- --
------------------- ------------------- ----------------
Gross deferred income tax assets 1,601 1,704 1,827
------------------- ------------------- ----------------
Net deferred income tax liability $ 11,822 $ 7,934 $ 5,370
=================== =================== ================
Deferred income tax expense differs from the change in the net deferred
income tax liability due to the following:
2003 2002 2001
------------- ------------- ------------
Change in net deferred income tax liability $3,888 $ 2,564 $979
Other comprehensive income adjustment 88 16 31
Cumulative effect of a change in accounting principle -- -- 112
Acquisition of deferred tax asset (liability)
recorded
under purchase accounting -- -- 229
Effect of currency translation and other (88) (16) (55)
------------- ------------- ------------
Deferred income tax expense $3,888 $ 2,564 $1,296
============= ============= ============
Although realization of deferred tax assets is not assured, management
believes that it is more likely than not that all of the deferred tax
assets will be realized. However, the amount of the deferred tax assets
considered realizable could be reduced based on changing conditions.
The Company has not recognized a deferred tax liability for the
undistributed earnings of its non-U.S. subsidiaries and non-U.S. corporate
joint ventures. The Company expects to reinvest these undistributed
earnings indefinitely and does not expect such earnings to become subject
to U.S. taxation in the foreseeable future. A deferred tax liability will
be recognized when the Company expects that it will recover these
undistributed earnings in a taxable manner, such as through the receipt of
dividends or sale of the investments. It is not practicable to determine
the U.S. income tax liability, if any, that would be payable if such
earnings were not reinvested indefinitely.
56 Continued
NN, Inc.
Notes to Consolidated Financial Statements
December 31, 2003, 2002 and 2001
(In thousands, except per share data)
13) Reconciliation of Net Income Per Share
Year ended December 31,
2003 2002 2001
----------------- ------------------ ------------------
Net income $10,178 $ 7,760 $ 4,662
Weighted average shares outstanding 15,973 15,343 15,259
Effective of dilutive stock options 406 371 281
----------------- ------------------ ------------------
Dilutive shares outstanding 16,379 15,714 15,540
Basic net income per share $ 0.64 $ 0.51 $ 0.31
================= ================== ==================
Diluted net income per share $ 0.62 $ 0.49 $ 0.30
================= ================== ==================
Excluded from the shares outstanding for the years ended December 31, 2003,
2002 and 2001 were 0, 7 and 7 antidilutive options, respectively, which had
an exercise price of $0 during 2003, $10.26 during 2002, and $10.26 during
2001.
14) Commitments and Contingencies
The Company has operating lease commitments for machinery, office
equipment, manufacturing and office space which expire on varying dates.
Rent expense for 2003, 2002 and 2001 was $2,359, $1,855 and $1,650,
respectively. The following is a schedule by year of future minimum lease
payments as of December 31, 2003 under operating leases that have initial
or remaining noncancelable lease terms in excess of one year.
Year ended December 31,
- ----------------------------------------------------------------
2004 $ 2,354
2005 2,086
2006 1,806
2007 1,770
2008 1,768
Thereafter 17,262
-------------
Total minimum lease payments $ 27,046
=============
The Kilkenny operation of the NN Europe Segment has received certain grants
from the Ireland government. These grants are based upon the Kilkenny
facility hiring and retaining certain employment levels by the measurement
date. At December 31, 2003, actual employment levels are less than those
required by certain grant covenants. During 2002, the grant agreement
measurement date was amended to extend the measurement date. The Company
anticipates that, if necessary, the grant agreement measurement date and
/or employment level thresholds would again be adjusted. As of December 31,
2003 and 2002 the grant obligation is recorded as a component of other
non-current liabilities in the amount of $617 and $506, respectively.
The NN Europe Segment has entered into a supply contract with Ascometal
France ("Ascometal") for the purchase of steel for ball production. The
contract terms specify that Ascometal provide Euroball 90%, 90%, 85% and
85% of its steel requirements for the years ending December 31, 2002, 2003,
2004 and 2005,
57 Continued
NN, Inc.
Notes to Consolidated Financial Statements
December 31, 2003, 2002 and 2001
(In thousands, except per share data)
respectively. The contract, among other things, stipulates that Ascometal
achieve certain performance targets related to quality, reliability and
service. The contract provisions include annual price adjustments based
upon published indexes in addition to annual productivity improvement
factor multiples. In 2003, Euroball purchased approximately $23,400 under
the terms of this contract. Annual purchase commitments for the remaining
term of the contract are approximately $23,639 and $24,112 for 2004 and
2005, respectively. The contract expires December 31, 2005, however, it is
automatically renewed for one year periods thereafter unless notice is
provided by either Euroball or Ascometal.
15) Quarterly Results of Operations (Unaudited)
The following summarizes the unaudited quarterly results of operations for
the years ended December 31, 2003 and 2002.
Year ended December 31, 2003
March 31 June 30 Sept. 30 Dec. 31
----------------- ----------------- ----------------- -----------------
Net sales $57,609 $ 64,194 $ 64,612 $67,047
Income from operations 7,155 2,497 5,653 4,473
Net income 3,643 697 3,164 2,674
Basic net income per share 0.24 0.04 0.19 0.16
Dilutive net income per share 0.23 0.04 0.18 0.16
Weighted average shares
outstanding:
Basic number of shares 15,378 16,015 16,660 16,711
Effect of dilutive stock
options 196 450 507 470
----------------- ----------------- ----------------- -----------------
Diluted number of shares 15,574 16,465 17,167 17,181
================= ================= ================= =================
Year ended December 31, 2002
March 31 June 30 Sept. 30 Dec. 31
----------------- ----------------- ----------------- -----------------
Net sales $ 47,200 $ 49,186 $ 47,451 $ 49,019
Income from operations 4,335 5,503 4,863 4,258
Net income 1,848 2,408 2,119 1,384
Basic net income per share 0.12 0.16 0.14 0.09
Dilutive net income per share 0.12 0.15 0.14 0.09
Weighted average shares
outstanding:
Basic number of shares 15,341 15,359 15,368 15,368
Effect of dilutive stock
options 394 509 280 341
----------------- ----------------- ----------------- -----------------
Diluted number of shares 15,735 15,868 15,648 15,709
================= ================= ================= =================
Second quarter and third quarter results in 2003 include a pre-tax charge
of $3,047 ($1,950 of after-tax) and $(449) (($267) after-tax),
respectively, related to asset write downs due to the closure of our NN
Arte operation in Guadalajara, Mexico. These changes have been recorded as
a component of income from operations.
Fourth quarter results in 2002 include a pre-tax charge of $1,199 ($767
after-tax) related to asset write downs on the Company's Walterboro, SC
production facility. This change has been recorded as a component of income
from operations.
58 Continued
NN, Inc.
Notes to Consolidated Financial Statements
December 31, 2002, 2001 and 2000
(In thousands, except per share data)
16) Fair Value of Financial Instruments
Management believes the fair value of financial instruments approximate
their carrying value due to the short maturity of these instruments or in
the case of the Company's notes receivable and debt, due to the variable
interest rates.
17) Involuntary Conversion
On March 12, 2000, a fire damaged a portion of the Company's manufacturing
plant in Erwin, Tennessee. The fire was contained to approximately 30% of
the productions area and did not result in serious injury to any employee.
Affected production was shifted to the Company's other facilities as
possible as well as the use of other certain suppliers to protect product
supply to customers. Insurance coverage for the loss provided for
reimbursement of the replacement value of property and equipment damaged in
the fire. As of December 31, 2001 the Company has settled the insurance
claim. For the year ended December 31, 2001 the net gain on involuntary
conversion of $3,901 represents insurance proceeds received in excess of
costs incurred. There were no amounts recorded as related involuntary
conversion for the years ended December 31, 2003 and 2002.
18) Accumulated Other Comprehensive Income
At December 31, 2003 the Company has included in accumulated other
comprehensive income (loss) unrealized income due to foreign currency
translation of $9,667, and at December 31, 2002 the Company has included in
accumulated other comprehensive income (loss) an unrealized loss due to
foreign currency translation of ($1,606). Income taxes on the foreign
currency translation adjustment in other comprehensive income (loss) were
not recognized because the earnings are intended to be indefinitely
reinvested in those operations. Also included in accumulated other
comprehensive loss as of December 31, 2003, and 2002 were additional
minimum pension liability, net of tax of ($258) and ($81), respectively.
19) Sale of Common Stock
During May 2003, we completed a public offering of 3.6 million shares of
our stock by a group of selling shareholders. We did not receive any
proceeds from the sale of the shares previously held by the group of
selling shareholders, however, the underwriters did exercise their
over-allotment option of 533,600 shares, which were offered by us. Net
proceeds received by us in connection with the exercise of the
over-allotment option were approximately $5.1 million, net of issue costs.
Per the terms of our credit facility, we repaid a portion of our credit
facility with these proceeds.
59
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure
The information required by this Item was previously reported by the Company in
Current Reports on Form 8-K and 8-K/A, dated August 25, 2003 and August 26,
2003.
Item 9A.
Controls and Procedures
a) As of December 31, 2003, we carried out an evaluation, under the
supervision and with the participation of the Company's management, including
the Company's Chief Executive Officer and Chief Financial Officer, of the
effectiveness of the design and operation of the Company's disclosure controls
and procedures pursuant to Rule 13a-14 and 15d-14 of the Securities Exchange Act
of 1934 (the "Exchange Act"). Based upon that evaluation, the Company's
management, including the Chief Executive Officer and Chief Financial Officer,
concluded that the Company's disclosure controls and procedures are effective in
timely alerting them to material information relating to the Company (including
its consolidated subsidiaries) required to be included in the Company's Exchange
Act filings.
b) During the fiscal quarter ended December 31, 2003, there have been no
changes in the Company's internal control over financial reporting or in other
factors that have materially affected, or are reasonably likely to materially
affect, the registrant's internal control over financial reporting.
Part III
Item 10.
Directors and Executive Officers of the Registrant
Directors. The information required by Item 401 of Regulation S-K
concerning the Company's directors is contained in the section entitled
"Election of Directors -- Information about the Directors" of the Company's
definitive Proxy Statement to be filed with the Securities and Exchange
Commission within 120 days after December 31, 2003, in accordance with General
Instruction G to Form 10-K, is hereby incorporated herein by reference.
Executive Officers. Information required by Item 401 of Regulation S-K
concerning the Company's executive officers is set forth in Item 1 hereof under
the caption "Executive Officers of the Registrant."
Compliance with Section 16(a) of the Securities Exchange Act. The
information required by Item 405 of Regulation S-K concerning compliance with
Section 16(a) of the Securities Exchange Act by the Company's directors and
executive officers and any 10% beneficial owners is contained in the section
entitled "Section 16(a) Beneficial Ownership Reporting Compliance" of the
Company's definitive Proxy Statement and, in accordance with General Instruction
G to Form 10-K, is hereby incorporated herein by reference.
Code of Ethics. Our Code of Ethics (the "Code") was approved by our Board
on November 6, 2003. The Code will be applicable to all officers, directors and
employees. The Code will be posted on our website at http://www.nnbr.com. We
will satisfy any disclosure requirements under Item 10 of Form 8-K regarding an
amendment to, or waiver from, any provision of the Code with respect to our
principal executive officer, principal financial officer, principal accounting
officer and persons performing similar functions by disclosing the nature of
such amendment or waiver on our website or in a report on Form 8-K.
Audit Committee Financial Experts
Audit Committee Members and Financial Expert. Information required by Item
401 of Regulation S-K concerning the Company's Audit Committee Members and
Financial Expert is contained in the section entitled "Information about the
60
Directors" of the Company's definitive Proxy Statement and, in accordance with
General Instruction G to Form 10-K, is hereby incorporated herein by reference.
Item 11. Executive Compensation
The information required by Item 402 of Regulation S-K is contained in the
sections entitled "Information about the Election of Directors -- Compensation
of Directors" and "Executive Compensation" of the Company's definitive Proxy
Statement and, in accordance with General Instruction G to Form 10-K, is hereby
incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required by Items 201(d) and 403 of Regulation S-K is
contained in the section entitled "Beneficial Ownership of Common Stock" of the
Company's definitive Proxy Statement and, in accordance with General Instruction
G to Form 10-K, is hereby incorporated herein by reference.
Information required by Item 201 (d) of Regulations S-K concerning the Company's
equity compensation plans is set forth in the table below:
Table of Equity Compensation Plan Information
In thousands
- ----------------------- -------------------------- -------------------------------- --------------------------------------
Plan Category Number of securities to Weighted -average exercise Number of securities remaining
be issued upon exercise price of outstanding options, available for future issuance under
of outstanding options, warrants and rights equity compensation plans (excluding
warrants and rights securities reflected in column (a))
(a) (b) (c)
- ----------------------- -------------------------- -------------------------------- --------------------------------------
Equity
compensation
plans approved by
security holders 1,251 $7.53 447
- ----------------------- -------------------------- -------------------------------- --------------------------------------
Equity
compensation
plans not approved
by security holders -- -- --
- ----------------------- -------------------------- -------------------------------- --------------------------------------
Total 1,251 $7.53 447
- ----------------------- -------------------------- -------------------------------- --------------------------------------
Item 13. Related Party Relationships
None.
Item 14. Principal Accountant Fees and Services
Accountants' Fees and Services. Information required by Item 2-01 of
Regulation S-X and Section 10A(i) of the Securities Exchange Act concerning the
Company's Accountants' Fees and Services is contained in the section entitled
"Fees Paid to Independent Auditors" of the Company's definitive Proxy Statement
and, in accordance with General Instruction G to Form 10-K, is hereby
incorporated herein by reference.
61
Part IV
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) List of Documents Filed as Part of this Report
1. Financial Statements
The financial statements of the Company filed as part of this Annual Report
on Form 10-K begin on the following pages hereof:
Page
Report of Independent Auditors for the year ended December 31,
2003.................................................................29
Report of Independent Auditors for the years ended December 31,
2002 and 2001........................................................30
Consolidated Balance Sheets at December 31, 2003 and 2002............31
Consolidated Statements of Income and Comprehensive Income for the
three years ended December 31, 2003..................................32
Consolidated Statements of Changes in Stockholders' Equity for
the three years ended December 31, 2003..............................33
Consolidated Statements of Cash Flows for the three years ended
December 31, 2003....................................................34
Notes to Consolidated Financial Statements...........................35
2. Financial Statement Schedules
Not applicable.
3. See Index to Exhibits (attached hereto)
(b) Reports on Form 8-K
The Company filed a Form 8-K, in response to items 5 and 7, on October
2, 2003 announcing the formation of a new Slovakian company and a
related asset acquisition.
The Company furnished a Form 8-K, in response to items 12 and 7, on
October 30, 2003 announcing its third quarter earnings.
The Company furnished a Form 8-K, in response to items 12 and 7, on
November 21, 2003 announcing that it had delayed the filing of its
third quarter 10-Q, confirming previously announced third quarter
operating results and providing abbreviated qualitative information.
The Company filed a Form 8-K, in response to items 5 and 7, on
December 4, 2003 announcing that it had received a notice from Nasdaq
related to the delayed filing of its quarterly report on Form 10-Q for
the fiscal third quarter 2003.
(c) Exhibits: See Index to Exhibits (attached hereto).
The Company will provide without charge to any person, upon the
written request of such person, a copy of any of the Exhibits to this
Form 10-K.
62
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
By: /S/ RODERICK R. BATY
--------------------------------------
Roderick R. Baty
Chairman and Director
Dated: March 15, 2004
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the date indicated.
Name and Signature Title Date
/S/ RODERICK R. BATY Chairman, Chief Executive Officer, March 15, 2004
- --------------------------- President and Director (Principal
Roderick R. Baty Executive Officer)
/S/ WILLIAM C. KELLY, JR. Treasurer, Secretary and Chief March 15, 2004
- --------------------------- Administrative Officer (Principal
William C. Kelly, Jr. Accounting Officer)
/S/ DAVID L. DYCKMAN Vice President - Corporate Development March 15, 2004
- --------------------------- and Chief Financial Officer (Principal
David L. Dyckman Financial Officer)
/S/ MICHAEL D. HUFF Director March 15, 2004
- ---------------------------
Michael D. Huff
/S/ G. RONALD MORRIS Director March 15, 2004
- ---------------------------
G. Ronald Morris
/S/ MICHAEL E. WERNER Director March 15, 2004
- ---------------------------
Michael E. Werner
/S/ STEVEN T. WARSHAW Director March 15, 2004
- ---------------------------
Steven T. Warshaw
/S/ JAMES L. EARSLEY Director March 15, 2004
- ---------------------------
James L. Earsley
/S/ ROBERT M. AIKEN, JR.. Director March 15, 2004
- ---------------------------
Robert M. Aiken, Jr.
63
Index to Exhibits
2.1 Asset Purchase Agreement dated April 14, 2003 among SKF Holding
Maatschappij Holland B.V., SKF B.V., NN, Inc. and NN Netherlands B.V.
(incorporated by reference to Exhibit 2.1 of Form 8-K filed on May 16,
2003).
3.1 Restated Certificate of Incorporation of the Company (incorporated by
reference to Exhibit 3.1 of the Company's Registration Statement No.
333-89950 on Form S-3 filed June 6, 2002)
3.2 Restated By-Laws of the Company (incorporated by reference to Exhibit
3.2 of the Company's Registration Statement No. 333-89950 on Form S-3
filed June 6, 2002)
4.1 The specimen stock certificate representing the Company's Common
Stock, par value $0.01 per share (incorporated by reference to Exhibit
4.1 of the Company's Registration Statement No. 333-89950 on Form S-3
filed June 6, 2002)
4.2 Article IV, Article V (Sections 3 through 6), Article VI (Section 2)
and Article VII (Sections 1 and 3) of the Restated Certificate of
Incorporation of the Company (included in Exhibit 3.1)
4.3 Article II (Sections 7 and 12), Article III (Sections 2 and 15) and
Article VI of the Restated By-Laws of the Company (included in Exhibit
3.2)
10.1 NN, Inc. Stock Incentive Plan and Form of Incentive Stock Option
Agreement pursuant to the Plan (incorporated by reference to Exhibit
10.1 of the Company's Registration Statement No. 333-89950 on Form
S-3/A filed July 15, 2002)*
10.2 Amendment No. 1 to the NN, Inc. Stock Incentive Plan (incorporated by
reference to Exhibit 4.6 of the Company's Registration Statement No.
333-50934 on Form S-8 filed on November 30, 2000)*
10.3 Amendment No. 2 to the NN, Inc. Stock Incentive Plan (incorporated by
reference to Exhibit 4.7 of the Company's Registration Statement No.
333-69588 on Form S-8 filed on September 18, 2001)*
10.4 Form of Non-Competition and Confidentiality Agreement for Executive
Officers of the Company (incorporated by reference to Exhibit 10.4 of
the Company's Registration Statement No. 333-89950 on Form S-3/A filed
July 15, 2002)*
10.5 Form of Indemnification Agreement (incorporated by reference to
Exhibit 10.6 of the Company's Registration Statement No. 333-89950 on
Form S-3/A filed July 15, 2002)
10.6 Form of Stock Option Agreement, dated December 7, 1998, between the
Company and the non-employee directors of the Company (incorporated by
reference to Exhibit 10.15 of the Company's Annual Report on Form 10-K
filed March 31, 1999)*
10.7 Elective Deferred Compensation Plan, dated February 26, 1999
(incorporated by reference to Exhibit 10.16 of the Company's Annual
Report on Form 10-K filed March 31, 1999)*
10.8 Employment Agreement, dated August 1, 1997, between the Company and
Roderick R. Baty (incorporated by reference to Exhibit 10.14 of the
Company's Form 10-Q filed November 14, 1997)*
10.9 Amendment No. 1 to Employment Agreement between the Company and
Roderick R. Baty, dated January 21, 2002 (incorporated by reference to
Exhibit 10.18 of the Company's Annual Report on Form 10-K filed March
29, 2002)*
10.10 Change of Control and Noncompetition Agreement dated January 21, 2002
between the Company and Roderick R. Baty (incorporated by reference to
Exhibit 10.19 of the Company's Annual Report on Form 10-K filed March
29, 2002)*
10.11 Employment Agreement, dated May 7, 1998, between the Company and
Frank T. Gentry (incorporated by reference to Exhibit 10.14 of the
Company's Annual Report on Form 10-K filed March 31, 1999)*
64
10.12 Amendment No. 1 to Employment Agreement between the Company and Frank
T. Gentry, dated January 21, 2002 (incorporated by reference to
Exhibit 10.16 of the Company's Annual Report on Form 10-K filed March
29, 2002)*
10.13 Change of Control and Noncompetition Agreement dated January 21, 2002
between the Company and Frank T. Gentry (incorporated by reference to
Exhibit 10.17 to the Company's Annual Report on Form 10-K filed March
29, 2002)*
10.14 Employment Agreement, dated January 21, 2002, between the Company and
Robert R. Sams (incorporated by reference to Exhibit 10.20 of the
Company's Annual Report on Form 10-K filed March 29, 2002)*
10.15 Change of Control and Noncompetition Agreement dated January 21, 2002
between the Company and Robert R. Sams (incorporated by reference to
Exhibit 10.21 of the Company's Annual Report on Form 10-K filed March
29, 2002)*
10.16 Employment Agreement, dated January 21, 2002, between the Company and
David L. Dyckman (incorporated by reference to Exhibit 10.22 of the
Company's Annual Report on Form 10-K filed March 29, 2002)*
10.17 Change of Control and Noncompetition Agreement, dated January 21,
2002, between the Company and David L. Dyckman (incorporated by
reference to Exhibit 10.25 of the Company's Annual Report on Form 10-K
filed March 29, 2002)*
10.18 Employment Agreement dated January 21, 2002, between the Company and
William C. Kelly, Jr. (incorporated by reference to Exhibit 10.22 of
the Company's Annual Report on Form 10-K filed March 29, 2002)*
10.19 Change of Control and Noncompetition Agreement, dated January 21,
2002, between the Company and William C. Kelly, Jr. (incorporated by
reference to Exhibit 10.23 of the Company's Annual Report on Form 10-K
filed March 29, 2002)*
10.20 NN Euroball, ApS Shareholder Agreement dated April 6, 2000 among NN,
Inc., AB SKF and FAG Kugelfischer Georg Shafer AG (incorporated by
reference to Exhibit 10.26 of the Company's Annual Report on Form 10-K
filed March 29, 2002)
10.21 Frame Supply Agreement between Euroball S.p.A., Kugelfertigung
Eltmann GmbH, NN Euroball Ireland Ltd. and Ascometal effective January
1, 2002 (We have omitted certain information from the Agreement and
filed it separately with the Securities and Exchange Commission
pursuant to our request for confidential treatment under Rule 24b-2.
We have identified the omitted confidential information by the
following statement, "Confidential portions of material have been
omitted and filed separately with the Securities and Exchange
Commission," as indicated throughout the document with an asterisk in
brackets ([*])) (incorporated by reference to Exhibit 10.26 of the
Company's Annual Report on Form 10-K filed March 31, 2003)
10.22 Employment Agreement dated January 21, 2002, between the Company and
Paul N. Fortier.*
10.23 Amendment No. 3 to NN, Inc. Stock Incentive Plan as ratified by the
shareholders on May 15, 2003 amending the Plan to permit the issuance
of awards under the Plan to directors of the Company (incorporated by
reference to Exhibit 10.1 of the Company's Quarterly Report on Form
10-Q filed August 14, 2003)*
10.24 Credit Agreement dated as of May 1, 2003 among NN, Inc., and NN
Euroball as the Borrowers, the Subsidiaries as Guarantors, the Lenders
as identifies therein, AmSouth Bank as Administrative Agent, and
SunTrust Bank as Documentation Agent and Euro Loan Agent (incorporated
by reference to Exhibit 10.2 of the Company's Quarterly Report on Form
10-Q filed August 14, 2003)
10.25 Supply Agreement between NN Euroball ApS and AB SKF dated April 6,
2000. (We have omitted
65
certain information from the Agreement and filed it separately with
the Securities and Exchange Commission pursuant to our request for
confidential treatment under Rule 24b-2. We have identified the
omitted confidential information by the following statement,
"Confidential portions of material have been omitted and filed
separately with the Securities and Exchange Commission, " as indicated
throughout the document with a n asterisk in brackets([*])
(incorporated by reference to Exhibit 10.3 of the Company's Quarterly
Report on Form 10-Q filed August 14, 2003)
10.26 Global Supply Agreement among NN, Inc., NN Netherlands B.V. and SKF
Holding Maatschappij Holland B.V. dated April 14, 2003. (We have
omitted certain information from the Agreement and filed it separately
with the Securities and Exchange Commission pursuant to our request
for confidential treatment under Rule 24b-2. We have identified the
omitted confidential information by the following statement,
"Confidential portions of material have been omitted and filed
separately with the Securities and Exchange Commission, " as indicated
throughout the document with a n asterisk in
brackets([*])(incorporated by reference to Exhibit 10.4 of the
Company's Quarterly Report on Form 10-Q filed August 14, 2003)
21.1 List of Subsidiaries of the Company.
23.1 Consent of PricewaterhouseCoopers LLP, Independent Accountants
23.2 Consent of KPMG, LLP, Independent Auditors
31.1 Certification of Chief Executive Officer pursuant to Section 302 of
Sarbanes-Oxley Act
31.2 Certification of Chief Financial Officer pursuant to Section 302 of
Sarbanes-Oxley Act
32.1 Certification of Chief Executive Officer pursuant to Section 906 of
Sarbanes-Oxley Act
32.2 Certification of Chief Financial Officer pursuant to Section 906 of
Sarbanes-Oxley Act
______________
* Management contract or compensatory plan or arrangement.
66