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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2004
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 0-23486
NN, INC.
(Exact name of registrant as specified in its charter)
Delaware 62-1096725
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2000 Waters Edge Drive
Johnson City, Tennessee 37604
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (423) 743-9151
Securities registered pursuant to Section 12(b) of the Act:
Title of Name of each exchange
each class on which registered
---------------- -------------------------
None None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities and Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |X|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes [X] No [_]
The number of shares of the registrant's common stock outstanding on March
9, 2005 was 16,885,913.
The aggregate market value of the voting stock held by non-affiliates of
the registrant at March 9, 2005, based on the closing price on the NASDAQ
National Market System on that date was approximately $123,917,374.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement with respect to the 2005 Annual Meeting of
Stockholders are incorporated by reference in Part III of this Form 10-K.
PART I
Item 1. Business Overview
NN, Inc. manufactures and supplies high precision bearing components, consisting
of balls, cylindrical rollers, tapered rollers, seals, and plastic and metal
retainers, for leading bearing manufacturers on a global basis. We are a leading
independent manufacturer of precision steel bearing balls for the North American
and European markets. In 1998, we began implementing a strategic plan designed
to position us as a worldwide supplier of a broad line of bearing components and
other precision plastic components. Through a series of acquisitions executed as
part of that plan, we have built on our strong core ball business and expanded
our bearing component product offering. Today, we offer among the industry's
most complete line of commercially available bearing components. We emphasize
engineered products that take advantage of our competencies in product design
and tight tolerance manufacturing processes. Our bearing customers use our
components in fully assembled ball and roller bearings, which serve a wide
variety of industrial applications in the transportation, electrical,
agricultural, construction, machinery, mining and aerospace markets. As used in
this Annual Report on Form 10-K, the terms "NN", "the Company", "we", "our", or
"us" mean NN, Inc. and its subsidiaries.
For managerial and financial analysis purposes, management views the Company's
operation in three segments: the domestic ball and roller operations of Erwin,
Tennessee and Mountain City, Tennessee, also includes costs related to our
start-up operation in China and corporate office costs, ("Domestic Ball and
Roller Segment"), the European facilities of Kilkenny, Ireland, Eltmann,
Germany, Pinerolo, Italy, Veenendaal, The Netherlands and Kysucke Nove Mesto,
Slovakia ("NN Europe Segment" or "NN Europe") and the operations of Industrial
Molding Corporation ("IMC") and The Delta Rubber Company ("Delta") (collectively
"Plastic and Rubber Components Segment"). On March 12, 2004 we changed the name
of our primary European entity from NN Euroball, ApS to NN Europe ApS. To avoid
confusion between the entity and the segment, we will refer to the segment as
the NN Europe Segment and the entity as NN Europe. 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 Europe, ApS ("NN
Europe") held by AB SKF ("SKF"). NN Europe was formed in 2000 by the Company,
FAG Kugelfischer George Schaefer AG, which was subsequently acquired by INA -
Schaeffler KG (collectively, "INA"), 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 NN Europe. Following the
closing of the transaction, we own 100 percent of the outstanding shares of NN
Europe.
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 are being utilized by
our wholly-owned subsidiary AKMCH ("NN Slovakia") based in Kysucke Nove Mesto,
Slovakia, which began production in June 2004. The financial results of the
operations are included in our NN Europe Segment.
During 2004 we formed a wholly owned subsidiary, NN Precision Bearing Products
Company, LTD, ("NN Asia)". This subsidiary, which is expected to begin
production of precision balls during the second half of 2005, will be located in
the Kunshan Economic and Technology Development Zone, Jiangsu, The People's
Republic of China and is a component of our strategy to globally expand our
manufacturing base. The costs incurred as a result of this start-up are included
in our Domestic Ball and Roller Segment.
2
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, quarterly reports on Form 10-Q,
current reports on Form 8-K and amendments thereto are available on our web site
under "Investor Relations."
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%,
86% and 88% of the segment's net sales in 2004, 2003 and 2002 respectively. At
our NN Europe Segment, sales of steel balls accounted for approximately 68%,
76%, and 100% of the segment's net sales in 2004, 2003 and 2002, 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. At our Plastic and Rubber Components Segments Danielson, CT
facility, 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. At our Plastic and Rubber Components Segments
Lubbock, TX facility, 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 amounts spent on research and development
activities by us during each of the last three fiscal years are not material.
Amounts spent are expensed as incurred.
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 81% of our revenue. These top 10 customers include SKF, INA,
Timken, GKN, SNR, Iljin, Delphi, Koyo, NTN and FTE. In 2004, 29% of our products
were sold to customers in North America, 60% to customers in Europe, and the
remaining 11% to customers located throughout the rest of the world, primarily
Asia. Sales to various U.S. and foreign divisions of SKF accounted for
approximately 48% of net sales in 2004 and sales to INA accounted for
approximately 14% of net sales in 2004, demonstrating our long-term, strategic
relationships with these key customers. These gains are directly attributed to
the success of NN Europe, Veenendaal and our efforts to develop a closer
partnering relationship with our global bearing customers. Sales to various
divisions of the Timken Co. accounted for approximately 6% of net sales in 2004.
None of our other customers accounted for more than 5% of our net sales in 2004.
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 Segment, 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.
NN Europe has entered into six-year supply agreements with SKF and INA providing
for the purchase of NN Europe products in amounts and at prices that are subject
to adjustment on an annual basis. The agreements contain provisions obligating
NN Europe 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, NN Europe acquires or becomes
acquired by a competitor of SKF. INA may terminate its agreement if, among other
things, NN Europe assigns its rights under the agreement, whether voluntarily or
by operation of law. These agreements expire May 31, 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 2004, the Domestic Ball and Roller Segment sold its products to more than
250 customers located in more than 25 different countries. Approximately 55% of
the Domestic Ball and Roller Segment net sales in 2004 were to customers outside
the United States. Sales to the Domestic Ball & Roller Segment's top ten
customers accounted for approximately 74% of the segment's net sales in 2004.
Sales to SKF and INA accounted for approximately 25% and 18%, respectively, of
the segment's net sales in 2004.
During 2004, the NN Europe Segment sold its products to more than 70 customers
located in more than 30 different countries. Approximately 89% of its net sales
in 2004 were to customers within Europe. Sales to the segment's top ten
customers accounted for approximately 95% of the segment's net sales in 2004.
Sales to SKF and INA accounted for approximately 66% and 16% of the segment's
net sales in 2004, respectively. Sales to SKF and INA are made pursuant to the
terms of supply agreements which expire in 2006 and 2008.
During 2004, the Plastic and Rubber Components Segment sold its products to more
than 100 customers located in more than 10 different countries. Approximately
11% of the Plastic and Rubber Components Segment net sales were to customers
outside the United States. Sales to the segment's top ten customers accounted
for approximately 68% of the Plastics Segment's net sales in 2004.
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 2002
through 2004:
(In Thousands)
2004 2003 2002
------------ ------------ -------------
Domestic Ball and Roller Segment $ 58,435 $ 55,437 $ 52,634
19.2% 21.9% 27.3%
NN Europe Segment 193,930 147,127 90,653
63.8% 58.0% 47.0%
Plastic and Rubber Components Segment 51,724 50,898 49,569
17.0% 20.1% 25.7%
------------ ------------ -------------
Total $304,089 $253,462 $192,856
============ ============ =============
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 nine direct sales and twelve 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 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. This design process includes the testing and quality assessment of each
product.
Employees
As of December 31, 2004, we employed a total of 1,747 full-time employees. Our
Domestic Ball and Roller Segment employed 288 workers, the NN Europe Segment
employed 1,025 workers, our Plastic and Rubber Components Segment employed 426
workers, and there were 8 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 2004, 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), Shinsho 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 purchase steel on the basis of price and, more significantly, composition and
quality. The pricing arrangements with our suppliers are typically subject to
adjustment once every three to six months for the Domestic Ball and Roller
Segment. Steel pricing is contractually adjusted on an annual basis within the
NN Europe Segment. For 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 NN Europe (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 9.8% in 2004, increased
approximately 3.5% in 2003, and increased approximately 2.5% in 2002.
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 impose 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.
The price of steel has risen over the last twelve to eighteen months with the
potential for 2005 prices to reflect even greater increases. 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
steel prices we pay in procuring our steel in the form of higher unit prices and
scrap surcharges and could adversely impact the availability of steel. Our
contracts with key customers allow us to pass a majority of the steel price
increases on to those customers. However, for our NN Europe Segment, material
price changes in any given year are typically passed along with price
adjustments in January of the following year. Until the current increases can be
passed through to our customers, income from operations, net income and cash
flow from operations will be adversely affected.
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 increases for engineered resins of approximately 5.3% in 2004,
price decreases of approximately 1.0% in 2003, and price decreases of
approximately 1.0% in 2002.
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 increases for Delta's raw materials of approximately 10.2%
in 2004, and price decreases of 2.5% in 2003 and 0% in 2002, respectively.
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 51 Chairman of the Board, Chief Executive Officer, President and Director
Frank T. Gentry, III 49 Vice President - Manufacturing
Robert R. Sams 47 Vice President - Market Services
David L. Dyckman 40 Vice President - Corporate Development and Chief Financial Officer
William C. Kelly, Jr. 46 Treasurer, Secretary and Chief Administrative and Compliance Officer
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 Domestic Ball and Roller Segment.
Mr. Gentry joined NN in 1981 and held various manufacturing management 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 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. Mr. Dyckman resigned his position effective January 14,
2005.
William C. Kelly, Jr. joined NN in 1993 as Assistant Treasurer and Manager of
Investor Relations. In July 1994, Mr. Kelly was elected to serve as NN's Chief
Accounting Officer, and served in that capacity through March 2003. In March,
2003, Mr. Kelly was elected to serve as NN's Chief Administrative and Compliance
Officer. 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.
8
Item 2. Properties
The Company has two operating domestic ball manufacturing facilities located in
Erwin, Tennessee and Mountain City, Tennessee. Of these two facilities, 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 and sold the land and
building assets during 2004.
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 NN Europe we manufacture precision steel balls in four manufacturing
facilities located in Kilkenny, Ireland, Eltmann, Germany, Pinerolo, Italy and
Kysucke Nove Mesto, Slovakia. The facilities currently have approximately
125,000, 175,000, 330,000 and 135,000 square feet of manufacturing space,
respectively. The Kilkenny facility is located on a two acre tract owned by NN
Europe, the Eltmann facility is leased from FAG and the Pinerolo facility is
located on a nine acre tract owned by NN Europe. The Kysucke facility is also
owned by NN Europe.
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.
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.
The property related to our NN Asia ball production facility in the People's
Republic of China is leased.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
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 2004.
9
Part II
Item 5. Market for the Registrant's Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities
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,
2005, 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 2004 and 2003.
Close Price
-----------
High Low Dividend
---- ----- --------
2004
First Quarter $13.13 $11.08 $0.08
Second Quarter 12.94 11.03 0.08
Third Quarter 12.00 9.40 0.08
Fourth Quarter 13.21 11.06 0.08
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
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, 2004 and
2003. 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, 2004 and 2003 and for the periods then ended has been derived from
the consolidated financial statements of the Company which have been audited by
PricewaterhouseCoopers LLP, an independent registered public accounting firm,
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, an independent registered public accounting firm. 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."
10
(In Thousands, Except Per Share Data) Year Ended December 31,
-----------------------
2004 2003 2002 2001 2000
---- ---- ---- ---- ----
Statement of Income Data:
Net sales $304,089 $253,462 $192,856 $180,151 $132,129
Cost of products sold (exclusive of
depreciation shown separately below) 240,580 195,658 144,274 137,221 93,926
Selling, general and administrative expenses 29,755 21,700 17,134 16,752 11,571
Depreciation and amortization 16,133 13,691 11,212 13,150 9,165
(Gain) loss on disposal of assets 856 (147) (25) -- 1,194
Restructuring and impairment costs 2,398 2,490 1,277 2,312 --
----------- ------------- ------------- ------------- -----------
Income from operations 14,367 20,070 18,984 10,716 16,273
Interest expense 4,029 3,392 2,451 4,196 1,773
Equity in earnings of unconsolidated affiliate -- -- -- -- (48)
Net gain on involuntary conversion -- -- -- (3,901) (728)
Other income (853) 99 (462) (186) (1,330)
---------- ------------- ------------- ------------- ------------
Income before provision for income taxes 11,191 16,579 16,995 10,607 16,606
Provision for income taxes 4,089 5,726 6,457 4,094 5,959
Minority interest in income of consolidated
subsidiary -- 675 2,778 1,753 660
---------- ------------- ------------- -------------- ------------
Income before cumulative effect of change in 7,102 10,178 7,760 4,760 9,987
accounting principle
Cumulative effect of change in accounting
principle, net of income tax benefit of $112
and related minority interest impact of $84 -- -- -- 98 --
---------- ------------- ------------- -------------- ------------
Net income $ 7,102 $ 10,178 $ 7,760 $ 4,662 $ 9,987
========== ============= ============= ============== ============
Basic income per share:
Income before cumulative effect of change in
accounting principle $ 0.42 $ 0.64 $ 0. 51 $ 0.31 $ 0.66
Cumulative effect of change in accounting
principle -- -- (0.01) --
---------- ------------- ------------- -------------- ------------
Net income $ 0.42 $ 0.64 $ 0. 51 $ 0.31 $ 0.66
========== ============= ============= ============== ============
Diluted income per share:
Income before cumulative effect of change in
accounting principle $ 0.41 $ 0.62 $ 0.49 $ 0.31 $ 0.64
Cumulative effect of change in accounting
principle -- -- -- (0.01) --
---------- ------------- ------------- -------------- -----------
Net income $ 0.41 $ 0.62 $ 0.49 $ 0.30 $ 0.64
========== ============= ============= ============== ===========
Dividends declared $ 0.32 $ 0.32 $ 0.32 $ 0.32 $ 0.32
========== ============= ============= ============== ===========
Weighted average number of shares 16,728 15,973 15,343 15,259 15,247
outstanding - Basic ========== ============= ============= ============== ===========
Weighted average number of shares 17,151 16,379 15,714 15,540 15,531
outstanding - Diluted =========== ============= ============= ============== ===========
11
(In Thousands, Except Per Share Data)
Year Ended December 31,
-----------------------
2004 2003 2002 2001 2000
---- ---- ---- ---- ----
Balance Sheet Data:
Current assets $ 108,338 $ 89,901 $ 61,412 $ 55,617 $ 63,866
Current liabilities 74,431 64,176 40,234 32,534 33,840
Total assets 289,869 267,899 195,215 184,477 183,951
Long-term debt 67,510 69,752 46,135 47,661 50,515
Stockholders' equity 115,140 106,468 77,908 70,982 74,675
During 2004 we formed a wholly owned subsidiary, NN Precision Bearing Products
Company, LTD. This subsidiary, which is expected to begin production of
precision balls during the second half of 2005, will be located in the Kunshan
Economic and Technology Development Zone, Jiangsu, The People's Republic of
China.
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 NN Europe, held by SKF. Upon
consummation of this transaction, we became the sole owner of NN Europe.
On December 20, 2002 we completed the purchase of the 23% interest in NN Europe
held by INA. As a result of this transaction, we own 77% of the shares of NN
Europe.
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 NN Europe. As a result of this
transaction, we owned 54% of the shares of NN Europe ApS.
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
12
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.
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 and automotive production. As a
result, the market for bearing components is also cyclical and impacted by
overall levels of industrial and automotive production. Our sales in the past
have been negatively affected, and in the future will be negatively affected, by
adverse conditions in the industrial and/or automotive production sectors 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 we could face higher
prices and transportation costs, increased duties or taxes, and shortages of
steel. Due to China's increasing consumption of steel, we have received
indications from our suppliers that steel availability in the quantities and
types we require may be volatile in 2005. 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 revenues and operating and financial results of our Company.
The price of steel has risen over the last twelve to eighteen months with the
potential for 2005 prices to reflect even greater increases. 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 in the form of higher unit prices
and scrap surcharges and could adversely impact the availability of steel. Our
contracts with key customers allow us to pass a majority of the steel price
increases on to those customers. However, by contract, material price changes in
any given year are typically passed along with price adjustments in January of
the following year. Until the current increases can be passed through to our
customers, income from operations, net income and cash flow from operations will
be adversely affected.
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 48% of
consolidated net sales in 2004, and sales to INA accounted for approximately 14%
of consolidated net sales in 2004. Sales to various divisions of the Timken
Company accounted for approximately 6% of our net sales in 2004. During 2004,
our ten largest customers accounted for approximately 79% of our consolidated
net sales. None of our other customers individually accounted for more than 5%
of our consolidated net sales for 2004. 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:
13
o adverse foreign currency fluctuations;
o changes in trade, monetary and fiscal policies, laws and regulations, and
other activities of governments, agencies and similar organizations;
o the imposition of trade restrictions or prohibitions;
o high tax rates that discourage the repatriation of funds to the U.S.;
o the imposition of import or other duties or taxes; and
o 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
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 NN Europe with our two largest bearing customers, SKF and INA, in 2000
and acquired our bearing seal operations in 2001. During 2002, we purchased
INA's minority interest in NN Europe and during 2003 we purchased SKF's minority
interest in NN Europe 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.
14
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 NN Europe with SKF and INA. 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.
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:
o our operating and financial performance and prospects;
o quarterly variations in the rate of growth of our financial indicators,
such as earnings per share, net income and revenues;
o changes in revenue or earnings estimates or publication of research reports
by analysts;
o loss of any member of our senior management team;
o speculation in the press or investment community;
o strategic actions by us or our competitors, such as acquisitions or
restructurings;
o sales of our common stock by stockholders;
o general market conditions;
o domestic and international economic, legal and regulatory factors unrelated
to our performance; and
o loss of a major customer.
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.
15
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:
o Captive growth, providing a competitive and attractive alternative to the
operations of our global customers
o Expansion of our bearing product offering, and
o 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:
o Global industrial growth and economics
o Global automotive production rates
o Costs subject to the global inflationary environment, including, but not
limited to:
o Raw material
o Wages and benefits, including health care costs
o Regulatory compliance
o Energy
o Raw material availability
o Trends related to the geographic migration of competitive manufacturing
o Regulatory environment for United States public companies
o Currency and exchange rate movements and trends
o Interest rate levels and expectations
Management generally focuses on the following key indicators of operating
performance:
o Sales growth
o Cost of products sold levels
o Selling, general and administrative expense levels
16
o Net income
o Cash flow from operations and capital spending
Our core business is the manufacture and sale of high quality, precision steel
balls and rollers. In 2004, sales of balls and rollers accounted for
approximately 77% of the Company's total net sales with 60% and 17% of sales
from balls and rollers, respectively. Sales of metal bearing retainers accounted
for 6% and sales of precision molded plastic and rubber parts accounted for the
remaining 17%. 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 development, tool design and tight tolerance molding processes. IMC
operates two manufacturing facilities in Lubbock, Texas.
On July 31, 2000, we formed a majority owned stand-alone company in Europe, NN
Europe ApS ("NN Europe"), 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 NN Europe. SKF and INA respectively each owned 23% of NN Europe. As
part of the transaction, NN Europe acquired the ball factories located in
Pinerolo, Italy (previously owned by SKF), Eltmann, Germany (previously owned by
INA), 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 NN
Europe as related to our 54% ownership as more fully detailed in Note 2 to the
Consolidated Financial Statements. We have always consolidated NN Europe 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. We paid approximately 13.4 million Euros ($13.8 million)
for INA/FAG's interest in NN Europe. The excess of the purchase price paid to
INA for its 23% interest over fair value of INA's 23% interest in the net assets
of NN Europe 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 NN Europe held by SKF. We paid approximately 13.8
million Euros ($15.6 million) for SKF's interest in NN Europe. 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 NN Europe 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
17
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 land and building assets
were sold during the fourth quarter of 2004. As a result, we recorded a loss on
disposal of assets of approximately $0.8 million which has been recorded as a
loss on disposal of assets, a component of income from operations. Additionally,
during the fourth quarter of 2004, we recorded an impairment charge of
approximately $0.1 million related to certain remaining machinery and equipment
assets of this facility. This amount was recorded as a component of
restructuring and impairment costs. 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.
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 are being utilized by
our wholly-owned subsidiary NN Slovakia based in Kysucke Nove Mesto, Slovakia,
which began production in 2004. The financial results of the operations are
included in our NN Europe Segment.
During 2004 we formed a wholly-owned subsidiary, NN Precision Bearing Products
Company, LTD. This subsidiary, which is expected to begin production of
precision balls during the second half of 2005, will be located in the Kunshan
Economic and Technology Development Zone, Jiangsu, The People's Republic of
China and is a component of our strategy to globally expand our manufacturing
base.
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 and risk of loss 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. The Company experienced
$0.1 million of bad debt expense during 2002, $0.1 million during 2003 and $0
million during 2004. In establishing allowances for doubtful accounts, the
Company 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 or reserves established when considered to be uncollectible or at
risk of being 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
18
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.
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.
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,
2004 2003 2002
----------- ---------- ---------
Net sales 100.0% 100.0% 100.0%
Cost of product sold (exclusive of depreciation shown
separately below) 79.0 77.2 74.8
Selling, general and administrative expenses 9.8 8.6 8.9
Depreciation and amortization 5.3 5.4 5.8
(Gain) loss on disposal of assets 0.3 (0.1) --
Restructuring and impairment costs 0.8 1.0 0.7
----------- ---------- ---------
Income from operations 4.8 7.9 9.8
Interest expense 1.3 1.3 1.3
Other income (0.2) 0.1 (0.3)
----------- ---------- ---------
Income before provision for income taxes 3.7 6.5 8.8
Provision for income taxes 1.4 2.2 3.4
Minority interest in income of consolidated subsidiary -- 0.3 1.4
----------- ---------- ---------
Net income 2.3% 4.0% 4.0%
=========== ========== =========
19
Off Balance Sheet Arrangements
We have operating lease commitments for machinery, office equipment, vehicles,
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, 2004 under
operating leases that have initial or remaining non-cancelable lease terms in
excess of one year.
Year ended December 31,
------------------------------------
2005 $ 2,306
2006 2,122
2007 1,879
2008 1,854
2009 1,789
Thereafter 15,315
-----------
Total minimum lease payments $ 25,265
===========
On June 1, 2004, our wholly-owned subsidiary, NN Precision Bearing Products
Company LTD, entered into a twenty year lease agreement with Kunshan Tian Li
Steel Structure Co. LTD for the lease of land and building (approximately
110,000 square feet) in the Kunshan Economic and Technology Development Zone,
Jiangsu, The People's Republic of China. The building will be newly constructed
and we expect to begin usage of the leased property during the second quarter or
third quarter of 2005. The land and building remain under the control of the
lessor until such time as usage of the leased property commences. The agreement
satisfies the requirements of a capital lease and we anticipate recording the
lease as a capital lease in our Consolidated Financial Statements when usage of
the leased property begins. Accordingly, as of December 31, 2004, no amount has
been recorded related to the asset and corresponding obligation associated with
the lease agreement in our Consolidated Financial Statements. We estimate the
fair value of the land and building to be approximately $2.0 million and
undiscounted annual lease payments of approximately $0.2 million (approximately
$4.1 million aggregate non-discounted lease payments over the twenty year term).
The lease terms include fair value buy-out provisions and we maintain the option
to extend the lease term.
20
Year Ended December 31, 2004 Compared to the Year Ended December 31, 2003
Net Sales. Our net sales increased by $50.6 million or 20.0% from $253.5 million
in 2003 to $304.1 million in 2004. Net sales of our NN Europe Segment increased
$46.8 million or 31.8% from $147.1 million in 2003 to $193.9 million in 2004.
The impact of a full year's activity in 2004 from our Veenendaal, The
Netherlands tapered roller and metal retainer operation acquired on May 2, 2004
accounted for $17.2 million of the increase. Impacts of foreign currency
translation within the NN Europe Segment contributed $15.9 million of the
increase. The remaining increase of $13.7 million within the NN Europe Segment
is a result of increased product demand. Net sales of our Domestic Ball and
Roller Segment increased $3.0 million or 5.4% from $55.4 million in 2003 to
$58.4 million in 2004 principally due to increases in product demand. Net sales
of our Plastic and Rubber Components Segment increased $0.8 million or 1.6% from
$50.9 million in 2003 to $51.7 million in 2003 principally due to increases in
product demand.
Cost of Products Sold. Our cost of products sold increased by $44.9 million or
23.0% from $195.7 million in 2003 to $240.6 million in 2004. Cost of products
sold of our NN Europe Segment increased $39.9 million or 34.9% from $114.3
million in 2003 to $154.2 million in 2004. The impact of a full year's activity
in 2004 from our Veenendaal, The Netherlands tapered roller and metal retainer
operation acquired on May 2, 2004 accounted for $14.4 million of the increase.
Impacts of foreign currency translation within the NN Europe Segment contributed
$15.3 million of the increase. The remaining increase of $10.2 million within
the NN Europe Segment is a result of increased product demand, increases in
material cost and the impact of inventory reductions. Cost of products sold of
our Domestic Ball and Roller Segment increased $3.1 million or 7.9% from $39.2
million in 2003 to $42.3 million in 2004 with the total increase principally due
to increases in product demand and increases in raw material steel cost. Cost of
products sold of our Plastic and Rubber Components Segment increased $1.9
million or 4.6% from $42.2 million in 2003 to $44.1 million in 2004 principally
due to increases in product demand and the impact of inventory reductions. As a
percentage of net sales, cost of products sold increased from 77.2% in 2003 to
79.0% in 2004.
The price of steel has risen over the last twelve to eighteen months with the
potential for 2005 prices to reflect even greater increases. 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 in the form of higher unit prices
and scrap surcharges and could adversely impact the availability of steel. Our
contracts with key customers allow us to pass a majority of the steel price
increases on to those customers. However, by contract, material price changes in
any given year are typically passed along with price adjustments in January of
the following year. Until the current increases can 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 $8.1 million or 37.1% from $21.7 million in
2003 to $29.8 million in 2004. Selling, general and administrative expenses of
our NN Europe Segment increased $4.3 million or 39.4% from $10.9 million in 2003
to $15.2 million in 2004. The impact of a full year's activity in 2004 from our
Veenendaal, The Netherlands tapered roller and metal retainer operation acquired
on May 2, 2004 accounted for $1.5 million of the increase. Impacts of foreign
currency translation within the NN Europe Segment contributed $1.4 million of
the increase. The remaining increase of $1.4 million within the NN Europe
Segment is related to the start-up of our previously announced Level 3 program
which integrates the principles of Lean Enterprise, Six Sigma and Total
Productive Maintenance (the "Level 3 Program"), expenses associated with our
Slovakia ball production facility and severance costs. Selling, general and
administrative expenses of our Domestic Ball and Roller Segment increased $2.8
million in 2004 over 2003 levels. The increase is principally related to
Sarbanes-Oxley compliance efforts in the area of internal controls, the Level 3
program and costs associated with the start-up of NN Asia. Selling, general and
administrative expenses of our Plastic and Rubber Components Segment increased
$0.5 million in 2004 over 2003 levels. The increase is principally related to
the Level 3 program and costs associated with employee severance. As a
percentage of net sales, selling, general and administrative expenses increased
from 8.6% in 2003 to 9.8% in 2004.
Depreciation and amortization. Depreciation and amortization expense increased
$2.3 million or 17.8% from $13.7 million in 2003 to $16.1 million in 2004.
Depreciation and amortization expense of our NN Europe Segment increased $2.3 or
30.3% from $7.6 million in 2003 to $9.9 million in 2004. Of this amount, the
impact of a full year's activity in 2004 from our Veenendaal, The Netherlands
tapered roller and metal retainer operation acquired on May 2, 2004 accounted
for $1.0 million of the increase. Impacts of foreign currency translation within
the NN Europe Segment contributed $0.9 million of the increase. The remaining
increase of $0.4 million within the NN Europe Segment is related to our Slovakia
ball production facility and capital spending increases. There was no change to
depreciation and amortization expense within the Domestic Ball and Roller
Segment and the Plastic and Rubber Components Segment. As a percentage of net
sales, depreciation and amortization expenses decreased from 5.4% in 2003 to
5.3% in 2004.
21
(Gain) loss on disposal of assets. (Gain) loss on disposal of assets changed
$1.0 million from a gain of $0.1 million in 2003 to a loss of $0.9 million in
2004. Within the Domestic Ball and Roller Segment, the loss recorded in 2004 is
principally associated with the December 2004 sale of our idle Walterboro, South
Carolina land and building assets. This ball production facility was closed in
2001 as a part of our ongoing strategy to locate manufacturing capacity in
closer proximity to our customers. The loss on disposal of assets was 0.3% of
net sales in 2004.
Restructuring and impairment costs. Restructuring and impairment costs decreased
by $0.1 million from $2.5 million in 2003 to $2.4 million in 2004. In 2004, the
$2.4 million of restructuring and impairment costs is related to severance costs
and related charges for approximately 86 employees at our Eltmann, Germany ball
production facility, a component of the NN Europe Segment. In 2003, the $2.5
million of restructuring and impairment costs are related to asset impairments,
severance and lease exit costs due to the closing of our Guadalajara, Mexico
plastic injection molding facility. As a percentage of net sales, restructuring
and impairment costs decreased from 1.0% in 2003 to 0.8% in 2004.
Interest expense. Interest expense increased $0.6 million, or 18.8%, from $3.4
million in 2003 to $4.0 million in 2004. Of this amount, approximately $0.4
million is related to the April 26, 2004 issuance of our $40.0 million aggregate
principal amount of senior notes in a private placement. These notes bear
interest at a fixed rate of 4.89%. See "Liquidity and Capital Resources." Within
our NN Europe Segment, $0.1 million is related the impacts of foreign currency
translation. As a percentage of net sales, interest expense was unchanged at
1.3% in 2003 and 2004.
Net income. Net income decreased $3.1 million or 30.2% from $10.2 million in
2003 to $7.1 million in 2004. As a percentage of net sales, net income decreased
from 4.0% in 2003 to 2.3% in 2004.
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 2.6% 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 $51.4 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 the
potential for 2005 prices 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
steel prices we pay in procuring our steel in the form of higher unit prices and
scrap surcharges and could adversely impact the availability of 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 can 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 26.6% 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
22
decreased spending of $0.3 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
$2.5 million or 22.1% from $11.2 million in 2002 to $13.7 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 accounted
for $1.0 million of the increase. The other $0.3 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 $0.3
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 $0.9 million or 38.4% from $2.5
million in 2002 to $3.4 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 NN Europe held by INA/FAG and SKF on December 20, 2002 and May 2, 2003,
respectively. Offsetting these increases was a decrease interest expense of $0.8
million due to debt principal payments and decreased interest rates.
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 NN Europe 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 NN Europe.
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.
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 NN Europe, we entered
into a $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) (the "$90 million credit facility"). This financing arrangement
replaced our prior credit facility with AmSouth and Hypo Vereinsbank Luxembourg,
S.A. The credit facility as originally entered into consisted of a $30.0 million
revolver ("$30.0 million revolver") originally expiring on March 15, 2005, and
subsequently extended to March 31, 2006 bearing interest at a floating rate
equal to LIBOR (2.56% at December 31, 2004) 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 (2.56% at December 31, 2004) plus an applicable
margin of 1.25% to 2.0% and a 26.3 million Euro ($29.6 million) term loan ("26.3
million Euro term loan") expiring on May 1, 2008 which bears interest at a
floating rate equal to Euro LIBOR (2.15% at December 31, 2004) plus an
applicable margin of 1.25% to 2.0%. All amounts owed under the $30.4 million
term loan were paid during the second quarter of 2004 with the proceeds from our
issuance of $40 million aggregate principal amount of senior notes in a private
placement and we no longer have borrowing capacity under that portion of the $90
million credit facility. The terms of the $30.0 million revolver and the 26.3
million Euro term loan remain unchanged except for the maturity date of the
$30.0 million revolver has been extended to March 31, 2006. The loan agreement
contains customary financial and non-financial covenants. Such covenants specify
that we must maintain certain liquidity measures. The loan agreement also
contains customary restrictions on, among other things, additional indebtedness,
liens on our assets, sales or transfers of assets, investments, restricted
payments (including payment of dividends and stock repurchases), issuance of
equity securities, and mergers, acquisitions and other fundamental changes in
the Company's business. The credit agreement is un-collateralized except for the
pledge of stock of certain foreign subsidiaries. We were in compliance with all
such covenants as of December 31, 2004.
In connection with the acquisition of KLF's operations in Slovakia, on September
23, 2003 we entered into a $2.0 million short-term unsecured promissory note
(the "$2.0 million note") with AmSouth as the lender. This note bore interest at
the prime rate. All amounts owed under this note were paid during the second
quarter of 2004 with the proceeds from our $40 million notes.
On March 23, 2004 we entered into a $2.7 million short-term promissory note (the
"$2.7 million note") with AmSouth Bank ("AmSouth") as the lender. This note bore
interest at the prime rate. This agreement was entered into to fund short term
23
operating capital requirements. All amounts owed under this note were paid
during the second quarter of 2004 with the proceeds from our $40 million notes.
On April 26, 2004 we issued $40.0 million aggregate principal amount of senior
notes in a private placement (the "$40 million notes"). These notes bear
interest at a fixed rate of 4.89% and mature on April 26, 2014. Interest is paid
semi-annually. As of December 31, 2004, $40.0 million remained outstanding.
Annual principal payments of approximately $5.7 million begin on April 26, 2008
and extend through the date of maturity. Proceeds from this credit facility were
used to repay our existing US dollar denominated term loan, $24 million, and
repay a portion, of our borrowings under our US dollar denominated revolving
credit facility, $13 million, which are both components of our $90 million
credit facility, and to repay borrowings remaining under our $2.0 million note
and our $2.7 million note of $2 million and $1 million, respectively. The
agreement contains customary financial and non-financial covenants. Such
covenants specify that we must maintain certain liquidity measures. The
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. No event of default had occurred as of
December 31, 2004. The notes are not collateralized except for the pledge of
stock of certain foreign subsidiaries. We incurred $0.8 million of related costs
as a result of issuing these notes which have been recorded as a component of
other non-current assets and are being amortized over the term of the notes. In
connection with the issuance of the $40 million notes, capitalized costs in the
amount of approximately $0.3 million associated with structuring of the $90
million credit facility were written off during the twelve months ended December
31, 2004 and are included as a component of other (income) expense.
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.
On October 27, 2004 we completed the sale of our idle warehouse in Kilkenny,
Ireland for approximately 1.6 million euro ($2.0 million), net of selling costs
incurred. As a result of this transaction, we recorded a loss on disposal of
assets of approximately 0.1 million euro ($0.1 million) during the fourth
quarter which was recorded as a component of loss on disposal of assets. Prior
to the sale this asset was classified as a component of Property, plant and
equipment, net. Proceeds received from the sale of this asset were used to repay
a portion of our $90 million credit facility.
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, 2004 and 2003, see Note 15 of the
Notes to Consolidated Financial Statements.
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, 2004, 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 $33.9 million at December 31, 2004 as compared to $25.7 million
at December 31, 2003. The ratio of current assets to current liabilities
increased from to 1.40:1 at December 31, 2003 and 1.46:1 at December 31, 2004.
Cash flow from operations increased to $31.6 million during 2004
24
from $19.5 million during 2003 and $31.1 million during 2002. Contributing to
this change were principally improvements in the changes in operating assets and
liabilities for the twelve months ended 2004 in comparison to the twelve months
ended 2003 as follows: inventory $5.8 million, accounts receivable $1.1 million
and accounts payable $4.7 million.
During 2005, we plan to spend approximately $9.1 million on capital expenditures
related primarily to equipment and process upgrades and replacements and
approximately $7.9 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, projected capital expenditure
requirements and dividend payments through December 2005.
The table below sets forth certain of the Company's contractual obligations and
commercial commitments as of December 31, 2004:
=========================== ===============================================================================
Certain Payments Due by Period
Contractual Obligations
=========================== ===============================================================================
Total Less than 1 1-3 years 3-5 years After 5 years
year
Long-Term Debt $ 74,670 $ 7,160 $25,720 $13,219 $28,571
=========================== ================ ============== ================ =============== ==============
Expected interest payments 15,091 3,293 4,915 3,390 3,493
=========================== ================ ============== ================ =============== ==============
Operating Leases 25,265 2,306 4,001 3,643 15,315
=========================== ================ ============== ================ =============== ==============
Capital Leases (1) 4,150 104 416 416 3,214
=========================== ================ ============== ================ =============== ==============
Expected pension
contributions and benefit
payments 5,978 468 1,056 1,134 3,320
=========================== ================ ============== ================ =============== ==============
Other Long-Term
Obligations (2) 44,710 44,710 -- -- --
=========================== ================ ============== ================ =============== ==============
Total Contractual Cash
Obligations $169,864 $58,041 $36,108 $21,802 $53,913
=========================== ================ ============== ================ =============== ==============
(1) On June 1, 2004, our wholly owned subsidiary, NN Precision Bearing Products
Company LTD, entered into a twenty year lease agreement with Kunshan Tian Li
Steel Structure Co. LTD for the lease of land and building (approximately
110,000 square feet) in the Kunshan Economic and Technology Development Zone,
Jiangsu, The People's Republic of China. The building will be newly constructed
and we expect to begin usage of the leased property during the second quarter of
2005. The land and building remain under the control of the lessor until such
time as usage of the leased property commences. The agreement satisfies the
requirements of a capital lease at June 1, 2004 and we anticipate recording the
lease as a capital lease in our consolidated financial statements when usage of
the leased property begins. Accordingly, as of December 31, 2004, no amount has
been recorded related to the asset and corresponding obligation associated with
the lease agreement in our consolidated financial statements. We estimate the
fair value of the land and building to be approximately $2.0 million and
undiscounted annual lease payments of approximately $0.2 million (approximately
$4.1 million aggregate non-discounted lease payments over the twenty year term).
The lease terms include fair value buy-out provisions and we maintain the option
of extend the lease term. Although no amounts have been recorded related to this
lease agreement in our consolidated financial statements as of December 31,
2004, the Capital Leases line in the table above reflects the obligation as if
the lease was recorded as of June 1, 2005, the date we estimate the Company will
begin to use the property. No other amounts are included in Capital Leases
above.
(2) 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 participatin