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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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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
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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.
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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
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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%
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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