NN INC - Annual Report: 2007 (Form 10-K)
UNITED
STATES
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, 2007
OR
o
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)
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Delaware
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62-1096725
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|||
|
(State or
other jurisdiction of incorporation or
organization)
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(I.R.S.
Employer Identification
No.)
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| 2000 Waters Edge Drive | 37604 | |||
| Johnson City, Tennessee | (Zip Code) | |||
| (Address of principal executive offices) |
Registrant's
telephone number, including area code: (423) 743-9151
Securities
registered pursuant to Section 12(b) of the Act:
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Title of each
class
|
Name of each exchange on which
registered
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|||
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Common Stock,
par value $.01
|
The NASDAQ Stock Market
LLC
|
Securities
registered pursuant to Section 12(g) of the Act:
None
(Title of
class)
Indicate by check mark if the
registrant is a well-known seasoned issuer, as defined in Rule 405 of the
Securities Act.
Yes ¨ No
x
Indicate by check mark if the
registrant is not required to file reports pursuant to Section 13 or Section
15(d) of the Act.
Yes ¨ No
x
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 a large accelerated filer, an accelerated filer, a non-accelerated
filer or a smaller reporting company. See definition of “large
accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule
12b-2 of the Exchange Act. (Check one):
Large
accelerated filer ¨ Accelerated
filer x Non-accelerated
filer ¨ Smaller
reporting Company ¨
Indicate by check mark whether the
registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ¨No x
The aggregate market value of the voting stock held by non-affiliates of the
registrant at June 30, 2007, based on the closing price on the NASDAQ Stock
Market LLC on that date was approximately $176,899,780.
The number of shares of the
registrant's common stock outstanding on March 12, 2008 was 15,854,643.
DOCUMENTS INCORPORATED BY
REFERENCE
Portions
of the Proxy Statement with respect to the 2008 Annual Meeting of Stockholders
are incorporated by reference in Part III of this Form 10-K.
PART
I
Item
1. Business Overview
NN, Inc.
has three operating segments, the Metal Bearing Components Segment, the Plastic
and Rubber Components Segment, and the Precision Metal Components
Segment. Within the Metal Bearing Components Segment, we manufacture
and supply high precision bearing components, consisting of balls, cylindrical
rollers, tapered rollers, and metal retainers, for leading bearing manufacturers
on a global basis. We are a leading independent manufacturer of
precision steel bearing balls and rollers for the North American, European and
Asian markets. In 2007, Metal Bearing Components accounted for 72% of
total NN, Inc. sales. Sales of balls and rollers accounted for
approximately 66% of our total net sales with 48% of sales from balls and 18% of
sales from rollers. Sales of metal bearing retainers accounted for 6%
of net sales. See Note 13 of the Notes to Consolidated Financial
Statements. In 1998, we began implementing a strategic plan designed
to position us as a worldwide manufacturer and 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 upon 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.
Within
the Plastic and Rubber Components Segment, we manufacture high precision rubber
seals and plastic retainers for leading bearing manufacturers on a global
basis. In addition, we manufacture specialized plastic products
including automotive components, electronic instrument cases and precision
electronic connectors. We also manufacture rubber seals for use in
various industrial applications. In 2007, plastics products accounted
for 7% of net sales and rubber seals accounted for 5% of net sales.
In 2006,
we began to execute on a new five year strategic business plan to leverage our
competencies in precision metal products by creating an adjacent platform to
bearing components which would broaden our reach into attractive end
markets. As part
of this new strategy, on November 30, 2006, we added a Precision Metal
Components Segment through the acquisition of Whirlaway Corporation
(“Whirlaway”) (See Note 2 of the Notes to Consolidated Financial
Statements.) Whirlaway is a high precision metal components and
assemblies manufacturer that supplies customers serving the air conditioning,
appliance, automotive, commercial refrigeration and diesel engine
industries. Our entry into the precision metal components market is
part of our new strategy to serve markets and customers we view as adjacent to
bearing components that utilize our core manufacturing
competencies. These products accounted for 16% of net sales in
2007.
The three
business segments are composed of the following manufacturing
operations:
Metal Bearing Components
Segment
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·
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Erwin,
Tennessee Ball and Roller Plant (“Erwin
Plant”)
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|
·
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Mountain
City, Tennessee Ball Plant (“Mountain City
Plant”)
|
|
·
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Kilkenny, Ireland
Ball Plant (“Kilkenny Plant”)
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|
·
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Eltmann,
Germany Ball Plant (“Eltmann
Plant”)
|
|
·
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Pinerolo,
Italy Ball Plant (“Pinerolo Plant”)
|
|
·
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Veenendaal,
The Netherlands Roller and Stamped Metal Parts Plant (“Veenendaal
Plant”)
|
|
·
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Kysucke
Nove Mesto, Slovakia Ball Plant (“Kysucke
Plant”)
|
|
·
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Kunshan,
China Ball Plant (“Kunshan Plant”)
|
Plastic and Rubber
Components Segment
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·
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Delta
Rubber Company, Danielson, Connecticut Rubber Seal Plant (“Danielson
Plant”)
|
|
·
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Industrial
Molding Corporation, Inc. Lubbock, Texas Plastic Injection Molding Plant
(“Lubbock Plant”)
|
Precision Metal Components
Segment
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·
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Whirlaway
Corporation, Wellington, Ohio Metal Components Plant 1 (“Wellington Plant
1”)
|
|
·
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Whirlaway
Corporation, Wellington, Ohio Metal Components Plant 2 (“Wellington Plant
2”)
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·
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Whirlaway
Corporation, Hamilton, Ohio Metal Components Plant (“Hamilton
Plant”)
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|
·
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Whirlaway
Corporation, Tempe, Arizona Metal Components Plant, formerly known as
Triumph LLC (“Tempe Plant”)
|
2
Financial
information about the segments is set forth in Note 13 of the Notes to
Consolidated Financial Statements.
Recent
Developments
On
November 30, 2006, we purchased 100% of the stock of Whirlaway from its sole
shareholder for approximately $43.0 million. Whirlaway manufactures
precision metal components for the automotive and industrial end
markets. Whirlaway operates three manufacturing plants in Ohio and
one in Arizona.
In
January 2007, we entered into a two year supply agreement with Schaeffler Group,
our second largest customer, effective as of July 1, 2006 that replaced the
agreement that expired on June 30, 2006.
In May
2007, a new multi-year contract was signed with SKF, our largest customer, to
supply precision balls in Europe with terms retroactive to January 1, 2007 and
effective until December 31, 2009.
On
October 7, 2005, we entered into an agreement with SNR Roulements (“SNR”) to
purchase SNR’s entire internal precision ball producing equipment for
approximately 5.2 million Euros ($6.2 million). SNR is a global
bearing manufacturer and supplier to the automotive, industrial and aerospace
industries. As part of the transaction, we received a three-year supply
agreement for the business existing at the time of the acquisition
(approximately $8.0 million in annual revenue) and a five-year supply agreement
to provide SNR with its annual ball requirements of its former in-house
production (approximately $9.0 million in annual revenue).
Corporate
Information
NN,
originally organized in October 1980, is incorporated in
Delaware. Our principal executive offices are located at 2000 Waters
Edge Drive, Johnson City, Tennessee, 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 related amendments are available
via a link to “SEC.gov” on our web site under “Investor Relations.”
Products
Metal Bearing Components
Segment
Precision Steel
Balls. At our Metal Bearing Components Segment facilities, we
manufacture and sell high quality, precision steel balls in sizes ranging in
diameter from 5/32 of an inch (3.969mm) to 2 ½ inches (63.5mm). We
produce and sell balls in grades ranging from grade 3 to grade 1000, according
to international standards endorsed by the American Bearing Manufacturers
Association. The grade number for a ball, in addition to defining
allowable dimensional variation within production batches, indicates the degree
of spherical precision of the ball; for example, grade 3 balls are manufactured
to within three-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
the domestic locations, sales of steel balls accounted for approximately 77%,
80% and 87% of net sales in 2007, 2006, and 2005 respectively. At the
European locations, sales of steel balls accounted for approximately 65%, 67%,
and 65% of net sales in 2007, 2006 and 2005, respectively.
Steel Rollers. We
manufacture tapered rollers at our Veenendaal Plant and cylindrical rollers at
our Erwin Plant. Most cylindrical rollers are made to specific
customer requirements for diameter and length, so there is very little overlap
of common cylindrical rollers matching two or more customers’
needs. Rollers are an alternative rolling element used instead of
balls in anti-friction bearings that typically have heavier loading or different
speed requirements. Our roller products are used primarily for
applications similar to those of our precision steel ball product line, plus
certain non-bearing applications such as hydraulic pumps and
motors. Cylindrical rollers accounted for approximately 4% of
net sales in each year of 2007, 2006, and 2005, respectively. 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. Tapered
rollers accounted for approximately 14%, 16% and 16% of net sales in 2007, 2006
and 2005, respectively.
Metal
Retainers. We manufacture and sell precision metal retainers
for ball and roller bearings used in a wide variety of industrial
applications. Retainers are used to separate and space the rolling
elements (balls or rollers) within a fully assembled bearing. We
manufacture metal retainers at our Veenendaal Plant.
3
Plastic and Rubber
Components Segment
Bearing Seals. At
our Danielson Plant, 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.
Plastic
Retainers. We manufacture and sell precision plastic retainers
for ball and roller bearings used in a wide variety of industrial
applications. Retainers are used to separate and space the rolling
elements (balls or rollers) within a fully assembled bearing. We
manufacture plastic retainers at our Lubbock Plant.
Precision Plastic
Components. At our Lubbock Plant, 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.
Precision Metal Components
Segment
Precision Metal
Components. Beginning with the purchase of Whirlaway on
November 30, 2006, we began to sell a wide range of precision metal
components. These components are manufactured at the three Whirlaway
plants in Ohio and one plant in Arizona. The precision metal
components offered include fluid control components, fluid control assemblies,
shafts, and other precision metal parts. The components are used in
the following end markets: automotive brake/chassis, thermal air
conditioning systems, commercial refrigeration, automotive engine, diesel engine
fuel systems, other automotive, and other industrial applications.
Research and Development.
The
amounts spent on research and development activities by us during each of the
last three fiscal years are not material. We expensed amounts as
incurred.
Customers
Our
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. Additionally, we supply precision metal, rubber, and
plastic components to automotive and industrial companies that are not used in
bearing assemblies. We supply approximately 500 customers; however,
our top 10 customers account for approximately 75% of our
revenue. Only one of these customers, SKF, had sales levels that were
10% or greater of total net sales. In 2007, 33% of our products were sold to
customers in North America, 51% to customers in Europe, and the remaining 16% to
customers located throughout the rest of the world, primarily Asia and Latin
America. Sales to various U.S. and foreign divisions of SKF accounted
for approximately 40% of net sales in 2007.
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. Certain agreements are in effect
with some of our largest customers, which provide for prices that may be offset
by material cost fluctuations. 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. At the U.S.
operations of our Metal Bearings Component Segment, we maintain a computerized,
bar coded inventory management system with many 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, additional product is automatically shipped.
In
January 2007, we entered into a new two-year agreement with Schaeffler Group
(INA) effective as of July 1, 2006. In May 2007, a new
multi-year contract was signed with SKF to supply precision balls in Europe with
terms retroactively applied to January 1, 2007 and effective until December 31,
2009.
In 2003,
we entered into a five-year supply agreement with SKF providing for the purchase
of steel rollers and metal retainers manufactured at our Veenendaal Plant in
amounts and at prices that are subject to adjustment on an annual
basis. The agreement contains provisions obligating us to maintain
specified quality standards and comply with various ordering and delivery
procedures, as well as other customary provisions. This agreement
expires during 2008 and we are in the process of negotiating a new multi-year
agreement with SKF covering tapered rollers and metal retainers.
4
During
2007, the Metal Bearing Components Segment sold products to approximately 400
customers located in 33 different countries. Approximately 89% of the
net sales in 2007 were to customers outside the United
States. Approximately 71% of net sales in 2007 were to customers
within Europe. Sales to the top ten customers accounted for
approximately 82% of the net sales in 2007. Sales to SKF accounted
for approximately 55% of net sales of the segment in 2007.
During
2007, the Plastic and Rubber Components Segment sold its products to over 70
customers located principally in North America. Approximately 22% of
the Plastic and Rubber Components Segment’s net sales were to customers outside
the United States, almost all to customers in Mexico and
Canada. Sales to the Segment’s top ten customers accounted for
approximately 74% of the Segment’s net sales in 2007.
During
2007, the Precision Metal Components Segment sold its products to 16 customers
located in 7 countries. Approximately 95% of all sales were to
customers located within the United States. Sales to the segment’s
top ten customers accounted for approximately 88% of the segment’s net sales in
2007.
In both
the foreign and domestic markets, we principally sell our products directly to
manufacturers and do not sell significant amounts through distributors or
dealers.
See Note
13 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.
The
following table presents a breakdown of our net sales for fiscal years 2007,
2006 and 2005:
|
(In
Thousands)
|
2007
|
2006
|
2005
|
|
Metal
Bearing Components Segment
|
$ 303,059
|
$ 272,299
|
$ 263,485
|
|
Percentage of
Total Sales
|
72.0%
|
82.4%
|
82.0%
|
|
Precision
Metal Components Segment
|
67,384
|
4,722
|
--
|
|
Percentage of
Total Sales
|
16.0%
|
1.4%
|
--
|
|
Plastic
and Rubber Components Segment
|
50,851
|
53,304
|
57,902
|
|
Percentage of
Total Sales
|
12.0%
|
16.2%
|
18.0%
|
|
Total
|
$ 421,294
|
$
330,325
|
$
321,387
|
|
Percentage
of Total Sales
|
100%
|
100%
|
100%
|
The
increase in value of Euro denominated sales resulted in net sales increasing
$19.6 million in 2007 and $1.6 million in 2006 when converted to U.S.
Dollars.
The
Precision Metal Components Segment contains only one month of revenue in
2006. Based on pro-forma results, 2006 revenues would have been
$77,713 or 19% of the total pro-forma sales. (See Note 2 of the Notes to
Consolidated Financial Statements)
Sales
and Marketing
A primary
emphasis of our marketing strategy is to expand key customer relationships by
offering high quality, high precision products with the value of a single supply
chain partner for a wide variety of components. Within the Metal Bearing
Components Segment, our global sales organization includes 11 direct sales and
15 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. For
the Precision Metal Components Segment, the current sales structure consists of
utilizing manufacturers’ representatives at key accounts supported by senior
segment management and engineering involvement.
Our Metal
Bearing Component Segment marketing strategy focuses on increasing our
outsourcing relationships with global bearing manufacturers that maintain
captive bearing component manufacturing operations. Our marketing
strategy for the Plastic and Rubber Components Segment and the Precision Metal
Components Segment 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 and
assemblies, enabling us to take advantage of our strengths in custom product
development, tool design, and precision molding and machining
processes.
5
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 of our domestic business, 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 some customers that
participate in our 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."
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.
Within
the precision metal components industry we are well positioned in the market
place by virtue of our focus on critical components and assemblies for highly
engineered mechanical systems used in various durable goods.
Employees
As of
December 31, 2007, we employed a total of 2,223 full-time
employees. Our Metal Bearing Components Segment employed 283 in
the U.S., 975 in Europe, and 80 in China, our Plastic and Rubber Components
Segment employed 343, all in the U.S., our Precision Metal Components Segment
employed 534, all in the U.S. In addition, there were 8 employees at
our 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. The employees in the Eltmann
Plant, Pinerolo Plant and Veenendaal Plant are unionized. We have
good labor relations, and we have never experienced any significant involuntary
work stoppages. We consider our relations with our employees
worldwide to be excellent.
We signed
a new agreement with the union representatives of our workers at our Eltmann
Plant for significant contract revisions including new wage rates and increased
working hours during February 2008.
Competition
The Metal
Bearing Components Segment of our business is intensely
competitive. Our primary domestic competitor is Hoover Precision
Products, Inc., a wholly owned U.S. subsidiary of Tsubakimoto Precision Products
Co. Ltd. Our primary foreign competitors are Amatsuji Steel Ball Manufacturing
Company, Ltd. (Japan), a wholly owed division of NSK, Tsubakimoto Precision
Products Co. Ltd (Japan) and Jingsu General Ball and Roller
(China).
We
believe that competition within the Metal Bearing Components Segment 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 wide product
assortment, 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, we 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. Our primary competitor in the plastic
bearing retainer segment is Nakanishi Manufacturing
Corporation. Domestically, Nypro, Inc. and Key Plastics are among the
main competitors in the automotive market.
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 our competitive strengths are
product development, tool design, fabrication, and tight tolerance molding
processes. With these strengths, we have built our reputation in the
marketplace as a quality producer of technically difficult
products.
6
While
intensely competitive, the markets for our rubber seal products are less
fragmented than its plastic injection molding products. The bearing
seal market is comprised of approximately six major competitors that range from
small privately held companies to large global enterprises. Bearing
seal manufacturers compete on design, service, quality and price. Our
primary competitors in the U.S. bearing seal market are Freudenburg-NOK, Chicago
Rawhide Industries (an SKF subsidiary), Trostel, and Uchiyama.
In the
Precision Metal Components Segment market, internal production of components by
our customers can impact our business as the customers weigh the risk of
outsourcing strategically critical components or producing in-house. Our primary
competitors are Linamar (Canada), Stanadyne, A. Berger, C&A Tool, American
Turned Products and Autocam. We generally win new business on the
basis of technical competence and our proven track record of successful product
development.
Raw
Materials
The
primary raw material used in our core ball and roller business of the Metal
Bearing Components Segment is 52100 Steel, which is high quality chromium
steel. During 2007, approximately 90% of the steel used by the
segment was 52100 Steel in rod and wire form. Our other steel
requirements include metal strip, chrome rod and wire, and type S2 rock bit
steel.
The Metal
Bearing Components Segment locations purchase substantially all of their 52100
Steel requirements from mills in Europe and Japan and all of their metal strip
requirements from European mills and traders. The principal suppliers
of 52100 Steel in the U.S. are Daido Steel Inc., Kobe Steel, Lucchini (affiliate
of Ascometal France) and Ohio Star Forge Co. The principal supplier
of 52100 Steel in Europe is Ascometal France (See Note 16 of the Notes to
Consolidated Financial Statements), while the principal supplier of metal strip
is Thyssen. Our other steel requirements are purchased principally
from foreign steel manufacturers. 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 are
unable, however, to 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 every three to six months in the U.S. and contractually
adjusted on an annual basis within the European locations for the base steel
price and quarterly for surcharge adjustments for precision steel
balls. 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 our Metal Bearing Components
Segment (see Note 16 of the Notes to Consolidated Financial
Statements).
Because
52100 Steel is principally produced by foreign manufacturers, our 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. The relatively weak U.S. Dollar is a factor
for steel price increases since the suppliers' base currencies are the Euro and
Japanese Yen.
The Metal
Bearing Components Segment is affected by upward price pressure on steel
principally due to general increases in global demand and, more recently, due to
China’s increased consumption of steel. This has an impact of
increasing steel prices we pay in procuring our steel in the form of higher unit
prices and scrap surcharges. Our contracts with key customers allow
us to pass along steel price increases as incurred.
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 or rubber compounds. The pricing arrangements with our
suppliers typically can be adjusted at anytime.
The
primary raw materials used by the Plastic and Rubber Components Segment are
engineered resins, injection grade nylon and proprietary rubber
compounds. 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 use certified vendors to provide a
custom mix of proprietary rubber compounds. This Segment also
procures metal stampings from several domestic suppliers.
7
The
Precision Metal Components Segment produces products from a wide variety of
metals in various forms from various sources. Basic types include hot
rolled steel, cold rolled steel, (both carbon and alloy) stainless, extruded
aluminum, diecast aluminum, gray and ductile iron castings, and mechanical
tubing. Some material is purchased directly under customer global contracts,
some is consigned by the customer, and some is purchased directly from a
mill.
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.
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 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. In the Metal Bearing Components Segment the Eltmann Plant, Kilkenny
Plant, and Pinerolo Plant are ISO 14000 certified and received the EPD
(Environmental Product Declaration.) The Veenendaal Plant is also ISO
14000 certified. 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. We
have assessed conditional asset retirement obligations and have found them to be
immaterial to the consolidated financial statements. We cannot assure you,
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, we cannot assure you that we will not incur
significant liabilities in the future in connection with the clean-up of waste
disposal sites. We maintain long-term environmental insurance
covering the four manufacturing locations purchased with the Whirlaway
acquisition.
Executive
Officers of the Registrant
Our
executive officers are:
|
Name
|
Age
|
Position
|
|
Roderick
R. Baty
|
54
|
Chairman
of the Board, Chief Executive Officer and President
|
|
Frank
T. Gentry, III
|
52
|
Vice
President – General Manager U.S. Ball and Roller
Division
|
|
Robert
R. Sams
|
50
|
Vice
President – Sales
|
|
James
H. Dorton
|
51
|
Vice
President – Corporate Development and Chief Financial
Officer
|
|
William
C. Kelly, Jr.
|
49
|
Vice
President – Chief Administrative Officer, Secretary, and
Treasurer
|
|
Nicola
Trombetti
|
47
|
Vice
President – Managing Director of NN Europe
|
|
Thomas
G. Zupan
|
52
|
Vice
President – President of Whirlaway Corporation
|
|
James
Anderson
|
43
|
Vice
President – Plastic and Rubber Components and Precision Metal Components
Divisions
|
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.
8
Frank T.
Gentry, III, was appointed Vice President – General Manager U.S. Ball and Roller
Division in August 1995. 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 –
Sales. 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.
James H.
Dorton joined NN as Vice President of Corporate Development and Chief Financial
Officer in June 2005. Prior to joining NN, Mr. Dorton served as
Executive Vice President and Chief Financial Officer of Specialty Foods Group,
Inc. from 2003 to 2004, Vice President Corporate Development and Strategy and
Vice President – Treasurer of Bowater Incorporated from 1996 to 2002 and as
Treasurer of Intergraph Corporation from 1989 to 1996. Mr. Dorton is
a Certified Public Accountant.
William
C. Kelly, Jr. was named Vice President and Chief Administrative Officer in June
2005. In March 2003, Mr. Kelly was elected to serve as Chief
Administrative Officer. In March 1999, he was elected Secretary of NN
and still serves in that capacity as well as that of Treasurer. In
February 1995, Mr. Kelly was elected Treasurer and Assistant
Secretary. He 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. 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 Price
Waterhouse, LLP.
Nicola
Trombetti was elected NN Europe Managing Director in June 2004 and was elected a
Corporate Vice President in June 2005. Prior to being named NN Europe Managing
Director he was Vice President and Director of Operations, NN Europe. He joined
NN in September 2000 as Pinerolo Italy Plant Manager. Prior to joining NN
Europe, Mr. Trombetti was Plant Director for Tekfor - Neumaier GmbH Group, a
European-based steel component manufacturer for the auto industry. From 1996 to
1999 he was Manufacturing Manager and Plant Manager for SKF Group. He also spent
seven years as a manufacturing manager for Pininfarina, an Italian-based car
design, engineering, development and manufacturing company.
Thomas G.
Zupan co-founded Whirlaway in 1973 with his father and began his career as a
toolmaker. He gained further experience in every line business
function including Engineering, Production Operations, Quality Assurance, H/R,
Sales, Material Control, IS, and Finance as the company grew from owner operator
to professionally managed. In 1991, Mr. Zupan became CEO and sole
shareholder of Whirlaway. Upon the sale of Whirlaway to NN November
30, 2006 Mr. Zupan was appointed Vice President - President of Whirlaway
Corporation.
James. O.
Anderson was appointed Vice President-Plastics and Rubber Division in October
2006. In November, 2007, Mr. Anderson received additional
responsibility for the Precision Metal Components Division in addition to the
Plastic and Rubber Components Division. Mr. Anderson joined NN in
January 2005 and served as the General Manager of Industrial Molding in Lubbock,
Texas. Prior to joining NN, Mr. Anderson served for six years in the
U.S. Army as an artillery officer and worked in various manufacturing roles with
Dana Corporation and Accuma Corporation from 1996 to 2005.
Item
1A. Risk
Factors
Cautionary
Statements for Purposes of the "Safe Harbor" Provisions of the Private
Securities Litigation Reform Act of 1995
We wish
to caution readers that this report contains, and our future filings, press
releases and oral statements made by our 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. Our actual results could differ materially from
those expressed in such forward-looking statements due to important factors
bearing on our business, many of which already have been discussed in this
filing and in our 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.
9
The
demand for our products is cyclical, which could adversely impact our
revenues.
The end
markets for fully assembled bearings and other industrial and automotive
components are cyclical and tend to decline in response to overall declines in
industrial and automotive production. As a result, the market for
bearing components and precision metal, plastic, and rubber products 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 our metal bearing components 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. operations from overseas
suppliers. In addition, we obtain most of the steel used in our
European operations 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. 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 our revenues and
operating and financial results.
Increases
in the market demand for steel can have the impact of increasing scrap
surcharges we pay in procuring our steel in the form of higher unit prices and
could adversely impact the availability of steel. Our contracts with
key customers allow us to pass along steel price increases as
incurred.
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 40% of consolidated net
sales in 2007. No other customers accounted for more than 10% of
sales. During 2007, our ten largest customers accounted for
approximately 75% of our consolidated net sales. The loss of all or a
substantial portion of sales to these customers would cause us to lose a
substantial portion of our revenue and would lower our operating profit margin
and cash flows from operations.
We
operate in and sell products to customers outside the U.S. and are subject to
several related risks.
Because
we obtain a majority of our raw materials from overseas suppliers, actively
participate in overseas manufacturing operations and sell to a large number of
international customers, we face risks associated with the
following:
|
·
|
adverse
foreign currency fluctuations;
|
|
·
|
changes
in trade, monetary and fiscal policies, laws and regulations, and other
activities of governments, agencies and similar
organizations;
|
|
·
|
the
imposition of trade restrictions or
prohibitions;
|
|
·
|
high
tax rates that discourage the repatriation of funds to the
U.S.;
|
|
·
|
the
imposition of import or other duties or taxes;
and
|
|
·
|
unstable
governments or legal systems in countries in which our suppliers,
manufacturing operations, and customers are
located.
|
We do not
have a hedging program in place associated with consolidating the operating
results of our foreign businesses into U.S. Dollars. An increase in
the value of the U.S. Dollar and/or the Euro relative to other currencies may
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.
10
In
addition, due to the typical slower summer manufacturing season in Europe, we
expect that revenues in the third fiscal quarter of each year will reflect lower
sales than in the other quarters of the year.
Failure
of our product could result in a product recall
The
majority of our products go into bearings used in the automotive industry and
other critical industrial manufacturing applications. A failure of
our components could lead to a product recall. If a recall were to
happen as a result of our components failing, we could bear a substantial part
of the cost of correction. In addition to the cost of fixing the
parts affected by the component, a recall could result in the loss of a portion
of or all of customers’ business. To partially mitigate this risk, we
carry some product recall insurance and have invested heavily in TS16949 and
QS9000 quality programs.
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. Acquiring companies involves inherent risk in the areas
of environmental and legal issues, information technology, cultural and
regulatory matters, product/supplier issues, and financial risk. 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 future 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 the majority of our future growth
objectives, with the remainder resulting from internal growth and increased
market penetration. For recent acquisitions 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 in part on outsourcing, and if the industry trend toward
outsourcing does not continue, our business could be adversely
affected.
Our
growth strategy depends in part on major bearing manufacturers continuing to
outsource components, and expanding the number of components being
outsourced. This requires manufacturers to depart significantly from
their traditional methods of operations. If major bearing
manufacturers do not continue to expand outsourcing efforts or determine to
reduce their use of outsourcing, our ability to grow our business could be
materially adversely affected.
Our
market is highly competitive and many of our competitors have significant
advantages that could adversely affect our business.
The
global markets for bearing components, precision metal and precision plastic
parts are 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 metal bearing components production facilities and capacity over
the last several years. Our metal bearing component 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. Under-utilization or inefficient
utilization of our production facilities could be a risk in the future. We
have recently undertaken steps to address a portion of the capacity risk.
See Note 3 of the Notes to the Consolidated Financial Statements.
11
The
price of our common stock may be volatile.
The
market price of our common stock could be subject to significant fluctuations
and may decline. Among the factors that could affect our stock price
are:
|
·
|
our
operating and financial performance and
prospects;
|
|
·
|
quarterly
variations in the rate of growth of our financial indicators, such as
earnings per share, net income and
revenues;
|
|
·
|
changes
in revenue or earnings estimates or publication of research reports by
analysts;
|
|
·
|
loss
of any member of our senior management
team;
|
|
·
|
speculation
in the press or investment
community;
|
|
·
|
strategic
actions by us or our competitors, such as acquisitions or
restructurings;
|
|
·
|
sales
of our common stock by
stockholders;
|
|
·
|
general
market conditions;
|
|
·
|
domestic
and international economic, legal and regulatory factors unrelated to our
performance; and
|
|
·
|
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. In addition, due to the market capitalization of our stock
(less than $200 million), our stock tends to be more volatile than large
capitalization stocks that comprise the Dow Jones Industrial Average or Standard
and Poor’s 500 Index.
Provisions
in our charter documents and Delaware law may inhibit a takeover, which could
adversely affect the value of our common stock.
Our
certificate of incorporation and bylaws, as well as Delaware corporate law,
contain provisions that could delay or prevent a change of control or changes in
our management that a stockholder might consider favorable and may prevent you
from receiving a takeover premium for your shares. These provisions
include, for example, a classified board of directors and the authorization of
our board of directors to issue up to 5,000,000 preferred shares without a
stockholder vote. In addition, our restated certificate of
incorporation provides that stockholders may not call a special
meeting.
We are a
Delaware corporation subject to the provisions of Section 203 of the Delaware
General Corporation Law, an anti-takeover law. Generally, this
statute prohibits a publicly-held Delaware corporation from engaging in a
business combination with an interested stockholder for a period of three years
after the date of the transaction in which such person became an interested
stockholder, unless the business combination is approved in a prescribed
manner. A business combination includes a merger, asset sale or other
transaction resulting in a financial benefit to the stockholder. We
anticipate that the provisions of Section 203 may encourage parties interested
in acquiring us to negotiate in advance with our board of directors, because the
stockholder approval requirement would be avoided if a majority of the directors
then in office approve either the business combination or the transaction that
results in the stockholder becoming an interested stockholder.
These
provisions apply even if the offer may be considered beneficial by some of our
stockholders. If a change of control or change in management is
delayed or prevented, the market price of our common stock could
decline.
Item
1B. Unresolved Staff Comments
None
12
Item 2.
Properties
The
manufacturing plants for each of the company's segments are listed
below. In addition, the company leases a portion of a small office
building in Johnson City, Tennessee which serves as our corporate
headquarters.
|
Metal Bearing
Components Segment
|
|||
|
Manufacturing
Operation
|
Country
|
Sq.
Feet
|
Owned
or Leased
|
|
Erwin
Plant
|
U.S.A.
|
125,000
|
Owned
|
|
Mountain
City Plant
|
U.S.A.
|
86,400
|
Owned
|
|
Kilkenny
Plant
|
Ireland
|
125,000
|
Owned
|
|
Eltmann
Plant
|
Germany
|
175,000
|
Leased
|
|
Pinerolo
Plant
|
Italy
|
330,000
|
Owned
|
|
Kysucke
Plant
|
Slovakia
|
135,000
|
Owned
|
|
Veenendaal
Plant
|
The
Netherlands
|
159,000
|
Owned
|
|
Kunshan
Plant
|
China
|
110,000
|
Leased
|
The
Eltmann Plant is leased from the Schaeffler Group, which is also a
customer. The Kunshan Plant lease is accounted for as a capital lease
and we have an option to purchase the facility at various points in
the future.
|
Plastic and Rubber
Components Segment
|
|||
|
Manufacturing
Operation
|
Country
|
Sq.
Feet
|
Owned
or Leased
|
|
Danielson
Plant
|
U.S.A.
|
50,000
|
Owned
|
|
Lubbock
Plant
|
U.S.A.
|
228,000
|
Owned
|
|
Precision Metal
Components Segment
|
|||
|
Manufacturing
Operation
|
Country
|
Sq.
Feet
|
Owned
or Leased
|
|
Wellington
Plant 1
|
U.S.A.
|
86,000
|
Leased
|
|
Wellington
Plant 2
|
U.S.A.
|
132,000
|
Leased
|
|
Hamilton
Plant
|
U.S.A.
|
19,000
|
Owned
|
|
Tempe
Plant
|
U.S.A.
|
140,000
|
Leased
|
The
Wellington Plants are leased from a company controlled by the former owner of
Whirlaway Corporation, who is currently an officer of NN, Inc.
For more
information, please see "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital
Resources."
Item
3. Legal
Proceedings
On March
20, 2006, we, as well as numerous other parties, received correspondence from
the Environmental Protection Agency (“EPA”) requesting information regarding a
former waste recycling vendor which we previously used. The vendor
has since ceased operations and the EPA is investigating the clean up of the
site or sites used by the vendor. We have contributed to an escrow
fund along with 42 other potentially responsible parties for the purpose of
investigating and addressing the environmental issues at the
facility. Our contribution to the account was twenty-three thousand
dollars. A Remedial Investigation and Risk Assessment report funded
by the escrow fund was submitted to the EPA in December 2007. As of
the date of this report, we do not know whether we have any liability beyond the
contribution to the escrow account mentioned earlier, related to this vendor’s
actions, or estimatable range for any potential liability. We believe
our contribution to the remediation of the site, if any, would be approximately
1.083% or less of the volume of waste sent to the facility and we assert that
our waste was non-hazardous.
On June
20, 2007, we, as well as numerous other parties, received correspondence from
the New York State Department of Environmental Conservation notifying us that we
have been named as a potentially responsible party for the potential clean up of
a former waste recycling facility. As of the date of this report, we
estimate our maximum exposure to be ten thousand dollars. The maximum
exposure is based on the amount of gallons we sent to the waste facility
multiplied by the proposed charge per gallon as determined by the potentially
responsible parties.
13
All other
legal matters are of an ordinary and routine nature and are incidental to our
operations. Management believes that such proceedings should not,
individually or in the aggregate, have a material adverse effect on our business
or financial condition or on the results of operations.
No
matters were submitted for a vote of stockholders during the fourth quarter of
2007.
Part
II
Item
5. Market for the Registrant's Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities
Since our
initial public offering in 1994, the common stock has been traded on The NASDAQ
Stock Market LLC (“NASDAQ”) under the trading symbol “NNBR.” Prior to
such time there was no established market for the common stock. As of
March 12, 2008, there were approximately 2,100 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 2007 and 2006.
|
Close Price
|
|||
|
High
|
Low
|
Dividend
|
|
|
2007
|
|||
|
First
Quarter
|
$ 13.27
|
$ 11.40
|
$ 0.08
|
|
Second
Quarter
|
12.78
|
11.65
|
0.08
|
|
Third
Quarter
|
12.51
|
9.00
|
0.08
|
|
Fourth
Quarter
|
10.67
|
8.07
|
0.08
|
|
2006
|
|||
|
First
Quarter
|
$ 13.12
|
$ 10.77
|
$ 0.08
|
|
Second
Quarter
|
13.53
|
11.92
|
0.08
|
|
Third
Quarter
|
13.29
|
11.11
|
0.08
|
|
Fourth
Quarter
|
12.76
|
10.55
|
0.08
|
The
following graph compares the cumulative total shareholder return on our common
stock (consisting of stock price performance and reinvested dividends) from
December 31, 2002 with the cumulative total return (assuming reinvestment of all
dividends) of (i) the Value Line Machinery Index (“Machinery”) and (ii) the
Standard & Poor’s 500 Stock Index, for the period December 31, 2002 through
December 31, 2007. The Machinery index is an industry index comprised
of 49 companies engaged in manufacturing of machinery and machine parts, a list
of which is available from the company. The comparison assumes $100
was invested in our common stock and in each of the foregoing indices on
December 31, 2002. We cannot assure you that the performance of the
common stock will continue in the future with the same or similar trend depicted
on the graph.
14
Comparison
of Five-Year Cumulative Total Return*
NN,
Inc., Standard & Poors 500 and Value Line Machinery Index
(Performance
Results Through 12/31/07)
Assumes $100 invested at the close of trading on December 31, 2002 in NN, Inc. common stock, Standard & Poors 500 and Value Line Machinery Index.
*Cumulative
total return assumes reinvestment of dividends.
|
Cumulative
Return
|
|||||
|
12/31/2003
|
12/31/2004
|
12/31/2005
|
12/31/2006
|
12/31/2007
|
|
|
NN,
Inc.
|
129.54
|
140.06
|
115.51
|
139.07
|
108.57
|
|
Standard
& Poors 500
|
126.38
|
137.75
|
141.88
|
161.20
|
166.89
|
|
Machinery
|
157.91
|
196.03
|
212.77
|
268.57
|
382.73
|
The
declaration and payment of dividends are subject to the sole discretion of our
Board of Directors and depend upon our profitability, financial condition,
capital needs, future prospects and other factors deemed relevant by the Board
of Directors. The terms of our revolving credit facility restrict the
payment of dividends by prohibiting us 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 our revolving
credit facility restrict the declaration and payment of dividends in excess of
certain amounts specified in the credit agreement in any fiscal
year. For further description of our revolving credit facility, see
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations – Liquidity and Capital Resources” below.
During
the fourth
quarter of 2007, we repurchased 699,838 shares of common stock at a total cost
of $6.6 million under our publicly announced $25 million repurchase plan
authorized by the Board of Directors.
15
|
Issuer
Purchases of Equity Securities
In
the Fourth Quarter 2007
|
||||
|
Period
|
(a)
Total Number of Shares (or Units) Purchased
|
(b)
Average Price Paid
per
Share (or Unit) including commissions
|
(c)
Total Number of
Shares
(or Units)
Purchased
as Part of Publicly Announced
Plans
or Programs
|
(d)
Maximum Number
(or
Approximate
Dollar
Value) of Shares that May Yet
Be
Purchased Under
the
Plans or Programs
|
|
October
1 – October 31
|
216,684
|
$10.06
|
216,684
|
$21,816,042
|
|
November
1 – November 30
|
233,319
|
$ 9.24
|
233,319
|
$19,660,332
|
|
December
1 – December 31
|
249,835
|
$ 8.87
|
249,835
|
$17,444,402
|
For the
full year of 2007, we repurchased 1,008,439 shares for a total amount of $9.7
million at an average price of $9.64 including commissions.
See Part
III, Item 12 – “Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters” of this 2007 Annual Report on Form 10-K for
information required by Item 201 (d) of regulation S-K.
Item
6. Selected
Financial Data
The
following selected financial data has been derived from the audited financial
statements of the Company. The selected financial data should be read in
conjunction with “Management’s Discussion and Analysis of Financial Condition
and Results of Operations” and the audited consolidated financial statements,
including notes thereto.
16
| (In Thousands, Except Per Share Data) |
Year ended December
31,
|
||||
|
2007
|
2006
|
2005
|
2004
|
2003
|
|
|
Statement
of Income Data:
|
|||||
|
Net
sales
|
$ 421,294
|
$ 330,325
|
$ 321,387
|
$ 304,089
|
$ 253,462
|
|
Cost
of products sold (exclusive of depreciation shown separately
below)
|
337,024
|
257,703
|
248,828
|
240,580
|
195,658
|
|
Selling,
general and administrative expenses
|
36,473
|
30,008
|
29,073
|
29,755
|
21,700
|
|
Depreciation
and amortization
|
22,996
|
17,492
|
16,331
|
16,133
|
13,691
|
|
(Gain)
loss on disposal of assets
|
(71)
|
(705)
|
(391)
|
856
|
(147)
|
|
Restructuring
and impairment charges (income)
|
13,636
|
(65)
|
(342)
|
2,398
|
2,490
|
|
Income
from operations
|
11,236
|
25,892
|
27,888
|
14,367
|
20,070
|
|
Interest
expense
|
6,373
|
3,983
|
3,777
|
4,029
|
3,392
|
|
Other
(income) expense
|
(386)
|
(1,048)
|
(653)
|
(853)
|
99
|
|
Income
before provision for income taxes
|
5,249
|
22,957
|
24,764
|
11,191
|
16,579
|
|
Provision
for income taxes
|
6,422
|
8,522
|
9,752
|
4,089
|
5,726
|
|
Minority
interest in income of consolidated
subsidiary
|
--
|
--
|
--
|
--
|
675
|
|
Net
income (loss)
|
$ (1,173)
|
$ 14,435
|
$ 15,012
|
$ 7,102
|
$ 10,178
|
|
Basic
income per share:
|
|||||
|
Net
income (loss)
|
$ (0.07)
|
$ 0.84
|
$ 0.88
|
$ 0.42
|
$ 0.64
|
|
Diluted
income per share:
|
|||||
|
Net
income (loss)
|
$ (0.07)
|
$ 0.83
|
$ 0.87
|
$ 0.41
|
$ 0.62
|
|
Dividends
declared
|
$ 0.32
|
$ 0.32
|
$ 0.32
|
$ 0.32
|
$ 0.32
|
|
Weighted
average number of shares
outstanding
- Basic
|
16,749
|
17,125
|
17,004
|
16,728
|
15,973
|
|
Weighted
average number of shares
outstanding
– Diluted
|
16,749
|
17,351
|
17,193
|
17,151
|
16,379
|
17
|
As of December
31,
|
|||||
|
(In
Thousands, Except Per Share Data)
|
2007
|
2006
|
2005
|
2004
|
2003
|
|
Balance
Sheet Data:
|
|||||
|
Current
assets
|
$
138,024
|
$
125,864
|
$
105,950
|
$
108,440
|
$
89,901
|
|
Current
liabilities
|
84,256
|
74,869
|
64,839
|
74,431
|
64,176
|
|
Total
assets
|
350,078
|
342,701
|
269,655
|
288,342
|
267,899
|
|
Long-term
debt
|
100,193
|
80,711
|
57,900
|
67,510
|
69,752
|
|
Stockholders'
equity
|
130,043
|
133,169
|
116,074
|
115,140
|
106,468
|
For the
year ended December 31, 2007, Whirlaway added $62,662 in sales; $53,515 in cost
of products sold (exclusive of depreciation and amortization); $4,106 in
selling, general and administrative expenses; $3,991 in depreciation and
amortization; $2,406 in interest expense and $852 in net loss.
For the
year ended December 31, 2006, Whirlaway added $4,722 in sales; $4,706 in cost of
products sold (exclusive of depreciation and amortization); $363 in selling,
general and administrative expenses; $345 in depreciation and amortization; $240
in interest expense and $598 in net loss.
On
November 30, 2006, we purchased 100% of the stock of Whirlaway and incorporated
its assets and liabilities into our consolidated financial
statements. Included in the December 31, 2006 balance sheet data
are acquired total current assets of $19,276, assets of $55,673 and current
liabilities of $7,475. In addition, we incurred third party debt of
$24,700 related to the acquisition.
During
2004, we formed a wholly-owned subsidiary, NN Precision Bearing Products
Company, LTD. This subsidiary, which began production of precision
balls during the fourth quarter of 2005, is located in the Kunshan Economic and
Technology Development Zone, Jiangsu, The People’s Republic of
China.
On
October 9, 2003, we acquired 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.
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.
See Item
1A. “Risk Factors” for a discussion of risk factors that could materially impact
our actual results.
18
Overview
and Management Focus
Our
strategy and management focus is based upon the following long-term
objectives:
|
·
|
Growth
by taking over the in-house production of bearing components from our
global customers, providing a competitive and attractive outsourcing
alternative
|
|
·
|
Creation
of a new precision metal components
platform
|
|
·
|
Global
expansion of our manufacturing base to better address the global
requirements of our customers
|
Management
generally focuses on these trends and relevant market indicators:
|
·
|
Global
industrial growth and economics
|
|
·
|
Global
automotive production rates
|
|
·
|
Costs
subject to the global inflationary environment, including, but not limited
to:
|
|
o
|
Raw
material
|
|
o
|
Wages
and benefits, including health care
costs
|
|
o
|
Regulatory
compliance
|
|
o
|
Energy
|
|
·
|
Raw
material availability
|
|
·
|
Trends
related to the geographic migration of competitive
manufacturing
|
|
·
|
Regulatory
environment for United States public
companies
|
|
·
|
Currency
and exchange rate movements and
trends
|
|
·
|
Interest
rate levels and expectations
|
Management
generally focuses on the following key indicators of operating
performance:
|
·
|
Sales
growth
|
|
·
|
Cost
of products sold levels
|
|
·
|
Selling,
general and administrative expense
levels
|
|
·
|
Net
income
|
|
·
|
Cash
flow from operations and capital
spending
|
|
·
|
Customer
service reliability
|
|
·
|
External
and internal quality indicators
|
|
·
|
Employee
development
|
Since our
formation in 1980, we have grown primarily through the acquisition of in-house
component manufacturing operations of domestic and international bearing
manufacturers resulting in increased sales of high precision balls and rollers
for 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.
19
In 1998,
we recognized changing dynamics in the marketplace, and as a result, 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 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 one manufacturing facility in Lubbock, Texas
and is part of the Plastic and Rubber Components Segment.
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). 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. 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. NN Europe is a part of the Metal Bearing Components
Segment.
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 one manufacturing facility in
Danielson, Connecticut and is part of the Plastic and Rubber Components
Segment.
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. Metal Bearing Components
manufacturing facilities located in Erwin and Mountain City,
Tennessee.
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
Veenendaal Plant). 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 Metal Bearing Components 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 operation are included in our Metal Bearing Components
Segment.
During
2004, we formed a wholly-owned subsidiary, NN Precision Bearing Products
Company, Ltd (the Kunshan Plant). This subsidiary began production of
precision balls during the fourth quarter of 2005, and is 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. This operation is included in the financial results of the
Metal Bearing Components Segment.
20
In 2006,
we began to execute on a new five year strategic business plan to leverage our
competencies in precision metal products by creating an adjacent platform to
bearing components which would broaden our reach into attractive end
markets.
Consistent
with our new strategy, on November 30, 2006, we purchased 100% of the shares of
Whirlaway Corporation (“Whirlaway”) from the sole shareholder for $43.0
million. Whirlaway is a high precision metal component and fluid
control assembly manufacturer that supplies customers serving the air
conditioning, appliance, automotive, commercial refrigeration, and diesel engine
industries. Whirlaway produces highly engineered fluid control
components and assemblies, shafts, and prismatic machined
parts. Whirlaway has three locations in Ohio and one location in
Tempe, Arizona.
The
implementation and successful execution of this acquisition strategy to date has
allowed us to expand our global presence and positions us for continued global
growth and expansion into core served markets.
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 our business operations,
financial condition and results of operations. We cannot assure you
that actual results will not significantly differ from the estimates used in
these critical accounting policies.
Revenue
Recognition. The Company recognizes revenues based on the
stated shipping terms with the customer when these terms are satisfied and the
risks of ownership are transferred to the customer. The Company has an inventory
management program for certain major Metal Bearing Components Segment customers
whereby revenue is recognized when products are used by the customer from
consigned stock, rather than at the time of shipment. Under both
circumstances, revenue is recognized when persuasive evidence of an arrangement
exists, delivery has occurred, the sellers’ price is determinable and
collectability is reasonably assured.
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 is
due primarily from the core served markets: bearing manufacturers, automotive
industry, electronics, industrial, agricultural and aerospace. The
Company recorded $0.5 million, $0.3 million, and $0.3 million of bad debt
expense during 2007, 2006 and 2005. 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 assesses inventory obsolescence routinely and
records a reserve when inventory items are deemed non recoverable in future
periods. The Company operates generally as a make-to-order business;
however, the Company also stocks products for certain customers in order to meet
delivery schedules. While management believes that adequate
write-downs for inventory obsolescence have been made in the Consolidated
Financial Statements, the Company could experience additional inventory
write-downs in the future.
Acquisitions and Acquired
Intangibles. For new acquisitions, the Company uses estimates,
assumptions and appraisals to allocate the purchase price to the assets acquired
and to determine the amount of goodwill. These estimates are based on
market analyses and comparisons to similar assets. Annual tests are
required to be performed to assess whether recorded goodwill is
impaired. The annual tests require management to make estimates and
assumptions with regard to the future operations of its reporting units, and the
expected cash flows that they will generate. 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.
21
Income
taxes. Income taxes are
accounted for under the asset and liability method. Deferred tax assets and
liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases and operating loss and tax credit
carry forwards. Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date. The Company
has three locations that are currently incurring net operating
losses. Management has placed full valuation allowances against the
deferred tax assets from these net operating losses. (See Note 14 of
the Notes to Consolidated Financial Statements.)
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. 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
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 benefit
increase as well as the remaining service period of active
employees.
The
following table sets forth for the periods indicated selected financial data and
the percentage of our net sales represented by each income statement line item
presented.
|
As
a Percentage of Net Sales
Year
ended December 31,
|
|||
|
2007
|
2006
|
2005
|
|
|
Net
sales
|
100.0%
|
100.0%
|
100.0%
|
|
Cost
of product sold (exclusive of depreciation shown separately
below)
|
80.0
|
78.0
|
77.4
|
|
Selling,
general and administrative expenses
|
8.7
|
9.1
|
9.0
|
|
Depreciation
and amortization
|
5.4
|
5.3
|
5.1
|
|
Gain on
disposal of assets
|
0.0
|
(0.2)
|
(0.1)
|
|
Restructuring
and impairment charges (income)
|
3.2
|
--
|
(0.1)
|
|
Income
from operations
|
2.7
|
7.8
|
8.7
|
|
Interest
expense
|
1.5
|
1.2
|
1.2
|
|
Other
income
|
(0.0)
|
(0.4)
|
(0.2)
|
|
Income
before provision for income taxes
|
1.2%
|
7.0
|
7.7
|
|
Provision
for income taxes
|
1.5%
|
2.6
|
3.0
|
|
Net
income (loss)
|
(0.3%)
|
4.4%
|
4.7%
|
22
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, 2007 under operating leases that have initial or remaining non-cancelable
lease terms in excess of one year (in thousands).
|
Year
ended December 31,
|
|
|
2008
|
$4,333
|
|
2009
|
3,437
|
|
2010
|
2,823
|
|
2011
|
2,420
|
|
2012
|
1,170
|
|
Thereafter
|
9,131
|
|
Total
minimum lease payments
|
$
23,314
|
Sales
Concentration
Sales to
various U.S. and foreign divisions of SKF, which is one of the largest bearing
manufacturers in the world, accounted for approximately 40% of consolidated net
sales in 2007. During 2007, our ten largest customers accounted for
approximately 75% of our consolidated net sales. None of our other
customers individually accounted for more than 10% of our consolidated net sales
for 2007. 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 have a
corresponding negative impact on our operating profit margin due to operation
leverage these customers provide. This could lead to sales volumes not
being high enough to cover our current cost structure or provide adequate
operating cash flows. Due to a limit on the amount of excess bearing
component capacity it would be difficult for any of our top ten customers to
move a substantial portion of the product we supply in a short period of
time.
We
negotiated a two-year supply agreement effective July 1, 2006 with Schaeffler
Group that expires June 30, 2008. In May 2007, a new multi-year
contract for precision balls in Europe was signed with SKF with terms being
retroactive to January 1, 2007 and effective until December 31,
2009.
Year
Ended December 31, 2007 Compared to the Year Ended December 31,
2006.
OVERALL
RESULTS
|
(In
Thousands of Dollars)
|
Consolidated
NN, Inc.
|
||
|
2007
|
2006
|
Change
|
|
|
Net
sales
|
$
421,294
|
$
330,325
|
$
90,969
|
|
Cost
of products sold (exclusive of depreciation
and
amortization shown separately below)
|
337,024
|
257,703
|
79,321
|
|
Selling,
general, and administrative
|
36,473
|
30,008
|
6,465
|
|
Depreciation
and amortization
|
22,996
|
17,492
|
5,504
|
|
Restructuring
and impairment charges (income)
|
13,636
|
(65)
|
13,701
|
|
Interest
expense, net
|
6,373
|
3,983
|
2,390
|
|
Gain
on disposal of assets
|
(71)
|
(705)
|
634
|
|
Other
income, net
|
(386)
|
(1,048)
|
662
|
|
Income before
provision for income taxes
|
5,249
|
22,957
|
(17,708)
|
|
Provision
for income taxes
|
6,422
|
8,522
|
(2,100)
|
|
Net
income (loss)
|
$
(1,173)
|
$
14,435
|
$
(15,608)
|
23
Net Sales. Sales
have increased due to the addition of the Precision Metal Components Segment
with the acquisition of Whirlaway ($62.7 million) and due to appreciation in
value of Euro denominated sales relative to the U.S. Dollar ($19.6
million). In addition, sales have increased due to the pass through
of raw material inflation to customers ($5.5 million) and due to higher volume
to existing customers primarily at our European operations ($8.5
million). Partially offsetting these increases are price decreases
given to several large customers in agreement with contractual terms ($3.4
million) and unfavorable customer, product, and currency mix to existing
customers ($1.9 million).
Cost of Products Sold (exclusive of
depreciation and amortization). Cost of products sold
increased primarily due to the addition of the Precision Metal Components
Segment on November 30, 2006 ($53.5 million) and due to the increase in value of
Euro denominated costs relative to the U.S. Dollar ($15.7
million). In addition, raw material, labor and utility inflation
increased ($11.1 million) and costs increased related to higher sales volume
primarily at our European operations ($7.8 million). Offsetting these
increases were favorable mix impacts to cost of products sold ($0.4 million) and
the impact of projects focused on reducing cost of manufacturing ($8.4
million).
Selling, General and Administrative
Expenses. The selling, general and administrative (“SG&A”)
expense increase was primarily due to the addition of the Precision Metal
Components Segment on November 30, 2006 ($4.1 million). In addition,
SG&A expense increased due to the appreciation in the value of Euro
denominated expenses relative to the U.S. Dollar ($1.3
million). Finally, the total was higher due to increased stock
compensation expense ($0.3 million), from higher spending on consulting and
professional fees ($0.3 million), higher travel and salary cost ($0.3 million)
and additional bad debt expense ($0.2 million).
Depreciation and
Amortization. These costs were higher due to the acquisition
of the Precision Metal Components Segment ($4.0 million) and due to the increase
in the value of Euro based depreciation and amortization relative to the U.S.
Dollar ($1.0 million).
Interest expense.
Interest expense was primarily higher due to the additional debt assumed to
acquire the Precision Metal Components Segment on November 30, 2006 ($2.4
million).
Gain on disposal of
assets. In 2006, we incurred a gain from the sale of excess
land at our Pinerolo Plant facility ($1.8 million) partially offset by a loss on
disposal of excess equipment at the same facility ($1.1 million).
Restructuring and Impairment
Charges. We have begun to take steps to appropriately adjust our cost
structure and align our plant capacity in our Metal Bearing Components
Segment. This will include restructuring at the European operations
of the Metal Bearing Components Segment as we adjust our global precision ball
manufacturing capacity to take better advantage of favorable cost structures at
our two newest plants the Kysucke Plant and the Kunshan Plant. As a
result of this restructuring, certain goodwill and fixed assets in our European
operations are now considered impaired. As a result, during the
second quarter of 2007, we recorded approximately $13.3 million ($12.6 million
after-tax) of non-cash impairment costs. These costs include the
write-down of certain excess production equipment and the impairment of goodwill
to levels supported by projected cash flows after the
restructuring.
Provision for income taxes.
The 2007 effective tax rate was 122%, versus the effective tax rate in
2006 of 37%. The effective tax rate in 2007 was much higher than
normal due to the impact of the impairment charges taken during 2007, which
carried significant valuation allowances against the related tax benefits,
resulting in the high effective rate for 2007. Factoring out
the impairment impacts in 2007, our effective tax rate would have been
approximately 38%. There were two other significant
offsetting items affecting 2007 tax expense. During the fourth
quarter the deferred tax liabilities at our Italian operation of the Metal
Bearing Components Segment were lowered due to enacted reductions in the Italian
statutory tax rates which decreased tax expense by $1.0
million. Offsetting this reduction was a $0.8 million increase
in tax expense related to recording a full valuation allowance on
a deferred tax asset for tax loss carry forwards at a location still
incurring losses. The 2006 effective rate is lower than the historical effective
rate due to the favorable 19% tax rate on the gain from sale of land at our
Pinerolo Plant.
24
RESULTS
BY SEGMENT
METAL BEARING COMPONENTS
SEGMENT
|
(In
Thousands of Dollars)
|
Year
Ended December 31,
|
||
|
2007
|
2006
|
Change
|
|
|
Net
sales
|
$ 303,059
|
$ 272,299
|
$ 30,760
|
|
Segment
net income, excluding restructuring and impairment charges, net of
tax
|
18,443
|
18,331
|
112
|
|
Restructuring
and impairment charges, net of tax
|
(13,485)
|
--
|
(13,485)
|
|
Segment
net income
|
$ 4,958
|
$ 18,331
|
$ (13,373)
|
The sales
increase at the Metal Bearing Components Segment was primarily due to the
positive impacts from the rise in value of Euro based sales relative to the U.S.
Dollar ($19.6 million). Additionally, the Metal Bearing Components
Segment experienced higher volume with existing European customers for tapered
rollers and metal bearing retainers ($12.4 million) and increases related to the
pass through of raw material inflation to customers ($4.5
million). These increases were partially offset by unfavorable
product and currency mix to existing customers ($1.9 million) and due to
contractual price decreases to certain large customers ($3.8
million).
The major
negative factors affecting the segment net income, excluding restructuring
and impairment charges, net of tax, a non-GAAP accounting measure, were
price decreases given to certain customers under contractual terms in 2007 ($2.4
million, net of tax) and unfavorable customer, currency, and product mix,
($1.0 million, net of tax). Additionally, there was a gain on the
sale of land, net of loss on disposal of machinery, at our Pinerolo Plant in the
first quarter of 2006 ($0.8 million, net of tax) and gains on favorable foreign
exchange impacts from the appreciation of the Slovakian Koruna during 2006 ($0.7
million, net of tax) that did not repeat in 2007.
Offsetting
the negative impacts stated above were cost reduction projects that more than
offset utility and labor inflation ($1.4 million, net of
tax). Raw material cost inflation was offset by price increases
under contractual terms to certain customers, resulting in little impact on
segment profit. Additionally, Euro denominated profits were favorably impacted
by the appreciation in the value of the Euro against the U.S. Dollar ($1.5
million, net of tax). The effect from higher sales volumes in
Europe increased 2007 segment net income ($1.4 million, net of
tax). Finally, the favorable impact of reducing deferred tax
liabilities of our Italian operation of this segment due to the 5.9% reduction
in the Italian statutory tax rates increased segment net income in
2007 ($1.0 million).
PRECISION METAL COMPONENTS
SEGMENT
|
(In
Thousands of Dollars)
|
Year
Ended December 31,
|
|||
|
2007
|
2006
|
Change
|
||
|
Net
sales
|
$ 67,384
|
$
4,722
|
$
62,662
|
|
|
Segment
net loss
|
$
(1,450)
|
$
(598)
|
$ (852)
|
|
The
Precision Metal Components Segment was formed on November 30, 2006 by the
purchase of Whirlaway Corporation. Therefore, only one month of
operations of the segment was included in the financial statements for the year
ended December 31, 2006.
The
second and third quarters of 2007 were suppressed due to low demand for
customers that serve U.S. heavy truck and HVAC equipment markets. The demand in
the heavy truck and HVAC markets was low during this period due to large amounts
of purchases made in the fourth quarter of 2006 ahead of required environmental
changes to these products on January 1, 2007.
25
PLASTIC AND RUBBER
COMPONENTS SEGMENT
|
(In
Thousands of Dollars)
|
Year
Ended December 31,
|
||
|
2007
|
2006
|
Change
|
|
|
Net
sales
|
$
50,851
|
$ 53,304
|
$ (2,453)
|
|
Segment
net income
|
$ 2,242
|
$ 2,695
|
$ (453)
|
Revenues
in the Plastic and Rubber Components Segment were down due to lower sales volume
to the automotive market and to certain specialty non-automotive customers
($3.6 million). Partially offsetting the volume decreases were
benefits from raw material inflation pass through ($1.2 million).
Net
income was negatively affected by the volume decreases in sales ($1.0 million,
after tax). Partially offsetting the volume impacts were cost
reduction projects net of inflation ($0.6 million, after tax). The
increases in sales from raw material pass through were offset by raw material
inflation.
Year
ended December 31, 2006 compared to the year ended December 31,
2005
Overall
Results
|
Consolidated
2006
|
Consolidated
2005
|
Change
|
|
|
Net
sales
|
$ 330,325
|
$ 321,387
|
$
8,938
|
|
Cost
of products sold
|
257,703
|
248,828
|
8,875
|
|
Selling,
general and administrative expense
|
30,008
|
29,073
|
935
|
|
Depreciation
and amortization
|
17,492
|
16,331
|
1,161
|
|
Restructuring
and impairment
|
(65)
|
(342)
|
277
|
|
Gain
on sale of fixed assets
|
(705)
|
(391)
|
(314)
|
|
Interest
|
3,983
|
3,777
|
206
|
|
Other
(income) loss
|
(1,048)
|
(653)
|
(395)
|
|
Pre-tax
income (loss)
|
22,957
|
24,764
|
(1,807)
|
|
Taxes
|
8,522
|
9,752
|
(1,230)
|
|
Net
income (loss)
|
$ 14,435
|
$ 15,012
|
$
(577)
|
The table
above includes the results of the segments of NN, Inc., Metal Bearing Components
Segment and Plastic and Rubber Components Segment, plus one month of operations
of Whirlaway. Whirlaway was acquired November 30, 2006 and operations
from December 1 to December 31, 2006 are included in the consolidation of NN,
Inc.
The month
of December 2006 results of Whirlaway are not indicative of normalized annual
operations. December is normally a low volume month as many of
Whirlaway’s customers shut down over the holidays. Additionally, the
cost of products sold includes the elimination of the required step-up valuation
of inventory to sales value recorded as part of purchase accounting under SFAS
141 of $0.6 million. When recorded in the opening balance sheet as of
November 30, 2006, this step-up valuation represented the profit to be earned on
the inventory purchased.
As for
the two existing segments of NN, overall net income was unchanged from the prior
year at $15.0 million. Sales increases from passing on raw material
inflation were offset by raw material inflation having little impact on net
income. Increases in selling, general and administrative cost and
depreciation and amortization were offset by foreign exchange gains from the
appreciation of Slovakia Koruna, the gain on sale of excess land at our Pinerolo
plant, and an overall lower effective tax rate.
Sales
were up due to price increases from passing through to customers the impact of
raw material inflation. Sales were also up to a lesser extent from positive
currency translation of Euro-denominated sales. These increases were
partially offset by volume losses to two long-term customers and the unfavorable
effect of product mix. In one case, the volume loss was due to the
customer’s strategic decision to begin to manufacturer certain products for
themselves. In the other case, the volume loss was due to a downturn
in the U.S. automotive market. These volume losses were partially
offset by volume gains at newer customers.
26
Cost of
products sold increased primarily due to inflation in material cost, labor, and
energy. In addition, cost of products sold increased due to the on
going start-up of our China and Slovakian manufacturing
facilities. Both of these facilities are not yet operating at optimum
capacity as expansion is ongoing and should be complete at both locations in
2007. Offsetting a majority of these increases are savings from our
Level 3 program and other cost reduction initiatives. As mentioned
above, a majority of the raw material inflation is offset by raw material
pass-through to customers. These increases offset material inflation
and do not improve net income.
Selling,
general and administrative costs are higher due primarily to the recording of
stock option expense as a result of the adoption of SFAS 123(R). The
depreciation and amortization cost are higher in 2006 due to starting
depreciation on the fixed assets placed in service with the operations of China
and Slovakia and the amortization of the customer intangibles acquired in 2006
related to the SNR equipment purchase. In
2006, we had a gain related to the disposal of excess land and building of $1.8
million which was partially offset by a loss on disposal of excess equipment of
$1.1 million at our Pinerolo facility. In 2005, we had a gain from
the sale of excess land at the Veenendaal manufacturing
facility. Finally, the corporate tax rate was lower in 2006 due to a
larger portion of the profit in Europe coming from lower tax cost countries, the
reduction in tax rate in the Netherlands, from the gain on sale of land being
taxed at a lower capital gains rate, and the recognition of certain deferred tax
assets.
RESULTS
BY SEGMENT
METAL BEARING COMPONENTS
SEGMENT
|
(In
Thousands of Dollars)
|
||||
|
2006
|
2005
|
Change
|
||
|
Net
sales
|
$ 272,299
|
$ 263,485
|
$ 8,814
|
|
|
Segment
net income
|
$ 18,331
|
$ 18,725
|
$ (394)
|
|
The
revenue increase in the Metal Bearing Components Segment was primarily due to
price increases related to raw material inflation pass-through to customers
($8.9 million), and to a lesser extent, the positive impact of a stronger Euro
($1.6 million). Planned reductions in sales from existing customers were more
than offset by increased sales to new customers resulting in a net volume
increase ($2.6 million). Price decreases to existing customers and a
less favorable mix of bearing products sold had a negative impact ($4.3
million).
The
negative impacts to segment profit after tax were from the price decreases and
unfavorable product mix ($2.2 million). In addition, both our China
and Slovakia operations continue to have operational inefficiencies due to
transitioning in production and product lines, and each location not running at
optimal capacity ($2.1 million). Finally, depreciation and
amortization expense was higher due to depreciation and amortization of
machinery in China and Slovakia and contract intangibles from the SNR machinery
purchase ($0.7 million).
Mostly
offsetting these negative impacts were the sales price increases from passing
through raw material cost inflation to customers and cost reduction initiatives
more than offsetting material, labor, and utility inflation ($2.8
million). In addition, the net volume increases added $0.7 million to
segment profit. The gain from the sale of land at Pinerolo, net of
machinery disposals, added $0.5 million. Finally, favorable foreign
exchange impacts from the appreciation of the Slovakia Koruna and Euro favorably
impacted segment profit by $0.7 million.
PRECISION METAL COMPONENTS
SEGMENT
|
(In
Thousands of Dollars)
|
||||
|
2006
|
2005
|
Change
|
||
|
Net
sales
|
$ 4,722
|
$ --
|
$ 4,722
|
|
|
Segment
net loss
|
$ (598)
|
$ --
|
$ (598)
|
|
The
Precision Metal Components Segment was added on November 30, 2006 with the
purchase of Whirlaway. Therefore the segment’s results are only
for one month ending December 31, 2006.
27
The month
of December 2006 results of Whirlaway are not indicative of normalized annual
operations. December is normally a low volume month as many of
Whirlaway’s customers shut down over the holidays. Additionally, the
cost of products sold includes the elimination of the step-up of inventory to
sales value recorded as part of purchase accounting under SFAS
141. When recorded in the opening balance sheet as of December 1,
2006, this step-up represented the profit to be earned on the inventory
purchased.
Based on
pro-forma results, 2006 and 2005 revenues for the Precision Metal Components
Segment would have been $77,713 compared with $71,862,
respectively.
PLASTICS AND RUBBER
COMPONENTS SEGMENT
|
(In Thousands of
Dollars)
|
||||
|
2006
|
2005
|
Change
|
||
|
Net
sales
|
$ 53,304
|
$ 57,902
|
$ (4,598)
|
|
|
Segment
net income
|
$ 2,695
|
$ 1,673
|
$ 1,022
|
|
Sales at
the Plastics and Rubber Components Segment were down primarily due to lower
sales volume to one large customer resulting from the downturn in the U.S.
automotive market ($6.2 million) partially offset by targeted price increases in
the plastics portion of the segment ($1.7 million).
The
increase in segment profit, after tax, at the Plastics and Rubber Components
Segment was due to the price increases ($1.1 million) and to cost saving
initiatives in the areas of material usage, labor efficiency, and overhead cost
($1.6 million). These increases were partially offset by raw material
and utilities inflation ($0.2 million) and the impact, net of cost of products
sold, of reductions in sales volume ($1.5 million).
Liquidity
and Capital Resources
On
September 21, 2006, we entered into a five-year $90.0 million revolving credit
facility maturing in September 2011 with Key Bank as administrative
agent. This facility was increased to a maximum availability of
$135.0 million on May 30, 2007. The credit facility provides us the
ability to borrow in U.S. Dollars at LIBOR plus an applicable margin of .60% to
.925% or Euros at EURIBOR plus an applicable margin of .60% to
.925%. The facility has a $10.0 million swing line feature to meet
short term cash flow needs with an interest rate equal to the prime lending
rate. Any borrowings under this swing line are considered short
term. Costs associated with entering into the revolving credit
facility were capitalized and will be amortized into interest expense over the
life of the facility. As of December 31, 2007, $0.6 million of net
capitalized loan origination cost was on the balance sheet within other assets
and the gross costs were presented in the Financing Activities section of the
Statement of Cash Flows. The loan agreement contains customary
financial and non-financial covenants specifying 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 merger, acquisition and other fundamental changes in our
business. The credit agreement is collateralized by the pledge of
stock of certain foreign and domestic subsidiaries and guarantees of certain
domestic subsidiaries. At December 31, 2007, we have $64.5 million of
availability under the $135.0 million facility.
On April
26, 2004 we issued $40.0 million aggregate principal amount of senior notes in a
private placement. 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, 2007, $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. 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. The notes are collateralized by the pledge of stock of
certain foreign subsidiaries. As of December 31, 2007, we had
recorded $0.5 million of net capitalized loan origination cost as a result of
issuing these notes as a component of other non-current assets which are being
amortized over the term of the notes.
28
We were
in compliance with all covenants related to the $135.0 million credit facility
and the $40.0 million senior notes as of December 31, 2007. See Note 8 of the
Notes to Consolidated Financial Statements.
In
December 2005, we generated approximately $0.8 million in proceeds from sale of
excess land at our Veenendaal Plant. This transaction resulted in
recording a gain of approximately $0.4 million.
In
January 2006, we generated approximately $2.8 million in proceeds from sale of
excess land at our Pinerolo, Italy facility. The transaction resulted
in a net after tax gain of $1.4 million.
To date,
cash generated by foreign subsidiaries has been used primarily for general
purposes including investments in property, plant and equipment and prepayment
of the former Euro term loan. In 2007, a $5.0 million dividend, on
earnings for which U.S. Federal tax was previously paid, was declared and paid
to us by a foreign subsidiary. These funds were used to pay down
our domestic debt. Remaining undistributed foreign earnings
are deemed to be permanently reinvested. During 2006, a European
subsidiary repaid an $8.0 million loan with the parent company. These
funds were used to repay part of our domestic credit facilities.
Our
arrangements with our domestic customers typically provide that payments
are due within 30 days following the date of our shipment of goods, while
arrangements with foreign customers of our domestic business (other than foreign
customers that have entered into an inventory management program with us)
generally provide that payments are due within 90 or 120 days following the date
of shipment. Under the Metal Bearing Components Segment’s inventory
management program with certain European customers, payments typically are due
within 30 days after the customer uses the product. Our
arrangement with European customers regarding due dates vary from 30 to 90
days following date of sale with an average of approximately 50 days
outstanding. Our sales and receivables can be influenced by
seasonality due to our relative percentage of European business coupled with
many foreign customers ceasing production during the month of
August. For information concerning our quarterly results of
operations for the years ended December 31, 2007 and 2006, see Note 17 of
the Notes to Consolidated Financial Statements.
We
invoice and receive payment from many of our customers in Euro as well as other
currencies. In 2007, the fluctuation of the Euro against the U.S.
Dollar positively impacted sales and income. As a result of these
sales, our 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, 2007, no currency hedges were in
place. In addition, a strengthening of the U.S. Dollar and/or Euro
against foreign currencies could impair our ability to compete with
international competitors for foreign as well as domestic sales.
Sales to
various U.S. and foreign divisions of SKF, which is one of the largest bearing
manufacturers in the world, accounted for approximately 40% of consolidated net
sales in 2007. During 2007, our ten largest customers accounted for
approximately 75% of our consolidated net sales. None of our other
customers individually accounted for more than 10% of our consolidated net sales
for 2007. 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 have a
corresponding negative impact on our operating profit margin due to operation
leverage these customers provide. This could lead to sales volumes not
being high enough to cover our current cost structure or provide adequate
operating cash flows. Due to a limit on the amount of excess bearing
component capacity it would be difficult for any of our top ten customers to
move a substantial portion of the product we supply in a short period of
time.
Working
capital, which consists principally of accounts receivable and inventories
offset by accounts payable, was $53.8 million at December 31, 2007 as compared
to $51.0 million at December 31, 2006. Working capital increased by
$1.8 million due to Euro denominated assets and liabilities increasing in value
relative to the U.S. Dollar. The following comments have factored out
the effects of foreign exchange. Inventory increased by $6.1
million due to timing of purchases of raw steel and production of certain
finished goods being made ahead of orders. Accounts receivable
decreased $1.0 million due to timing of certain customer payments and an
increase in allowance for doubtful accounts reserves partially offset by higher
sales volume in the fourth quarter of 2007 versus the fourth quarter of
2006. Additionally, the accounts payable balance decreased $5.0
million from 2006, as the prior year balance included certain one-time payables
that were not in the balance at 2007 and payments to certain vendors were made
before year end in 2007 versus after year end in 2006. Finally, the
current portion of long term debt was $11.0 million higher in 2007 due to the
higher usage of short terms borrowings and reclassification of the first annual
installment of the private placement notes due in 2008. The ratio of
current assets to current liabilities decreased to 1.64:1 at December 31, 2007
from 1.68:1 at December 31, 2006.
29
Cash flow
from operations totaled $21.6 million in 2007, $33.0 million in 2006 and $30.0
million in 2005. The decrease in cash flow provided by operations is
due to inventories having increased in 2007 and accounts payable having
decreased in 2007, as discussed above.
Total
assets and current assets increased approximately $17.9 million and
approximately $6.9 million, respectively, from the December 31, 2006 balance due
to appreciation of Euro denominated assets relative to the U.S.
Dollar. Factoring out the foreign exchange effects, current assets
were higher due to increased inventory balances as mentioned above and property,
plant and equipment was lower due to certain fixed assets being impaired ($3.4
million) and from full year capital spending having been lower than
depreciation ($1.8 million).
Total
liabilities and current liabilities increased approximately $7.4 million and
approximately $5.1 million, respectively, from the December 31, 2006
balance due to appreciation of Euro denominated liabilities relative
to the U.S. Dollar. Factoring out the foreign exchange effects,
accounts payable was $5.0 million lower as discussed above and our short term
debt increased by $11.0 million as discussed above.
During
the second quarter, we recorded approximately $13.4 million ($12.7 million
after-tax) of non-cash impairment charges. These charges included the
write-down to estimated fair market value of certain excess production equipment
and the full impairment of goodwill at one location to levels supported by
projected cash flows after the restructuring. These charges did not
require the use of any of our existing cash flows from operations or available
credit lines.
During
2007, we spent approximately $18.9 million on capital
expenditures. Of this amount, approximately $7.2 million related to
geographic expansion of our manufacturing base and approximately $11.7 million
related to cost reduction, equipment upgrades, process upgrades, or
replacements. During 2008, we plan to spend approximately $18.5
million on capital expenditures. Of this amount, $3.5 million will be
related primarily to equipment upgrades and replacements, approximately $7.6
million will be principally related to geographic expansion of our manufacturing
base and approximately $7.4 million will be related to cost improvement
initiatives. We intend to finance these activities with cash
generated from operations and funds available under our credit
facilities. We believe that funds generated from operations and
borrowings will be sufficient to finance our working capital needs, projected
capital expenditure requirements, common stock repurchase plan and dividend
payments through December 31, 2008.
The table
below sets forth some of our contractual obligations and commercial commitments
as of December 31, 2007 (in thousands):
|
Certain
Contractual
Obligations
|
Payments
Due by Period
|
||||
|
Total
|
Less
than 1
year
|
1-3
years
|
3-5
years
|
After
5
years
|
|
|
Long-term
debt including current portion
|
$ 112,044
|
$ 11,851
|
$ 11,735
|
$ 77,028
|
$ 11,430
|
|
Expected
interest payments
|
20,707
|
5,702
|
10,145
|
4,348
|
512
|
|
Operating
leases
|
23,314
|
4,333
|
6,260
|
3,590
|
9,131
|
|
Capital
leases (1)
|
4,406
|
248
|
496
|
496
|
3,166
|
|
Expected
pension contributions and benefit payments
|
2,046
|
125
|
282
|
334
|
1,305
|
|
Other
long-term obligations (2)
|
106,600
|
53,300
|
53,300
|
--
|
--
|
|
Total
contractual cash obligations
|
$ 269,117
|
$ 75,559
|
$ 82,218
|
$ 85,796
|
$ 25,544
|
We have
approximately $1.7 million in unrecognized tax benefits and related
penalties and interest accrued within the liabilities section of our balance
sheet. We are unsure when or if at all these amounts might be paid to
U.S. and/or foreign taxing authorities. Accordingly these amounts have
been excluded from the table above. See Note 14 in the Notes to
Consolidated Financial Statements for additional details.
(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 in the Kunshan Economic and
Technology Development Zone, Jiangsu, The People’s Republic of
China. The lease is cancelable by us in the fifth, ninth, and
fourteenth year. The building was newly constructed and we began
using the leased property during the fourth quarter of
2005. The agreement is accounted for as a capital
lease. The Capital leases line in the table above reflects the
undiscounted future minimum lease payments as of October 1, 2005, the date we
began to use the property. No other amounts are included in Capital
leases above.
30
(2) Other
Long-Term Obligations consists of steel purchase commitments at our European
operations (See Note 16 of the Notes to Consolidated Financial
Statements.)
We
currently have operations in Ireland, Germany, Italy and The Netherlands, all of
which are Euro participating countries, and in Slovakia which joined the
European Union in May 2004 and is expected to adopt the Euro as its functional
currency within several years. Each of our European facilities sell product to
customers in many of the Euro participating countries. The Euro has
been adopted as the functional currency at all locations in Europe, except
Slovakia whose functional currency is the Slovak Koruna. The
functional currency of NN Asia is the Chinese Yuan.
Our net
sales historically have been seasonal in nature, due to a significant portion of
our sales being to European customers that cease or significantly slow
production during the month of August. For information concerning our
quarterly results of operations for the years ended December 31, 2007 and 2006,
see Note 17 of the Notes to Consolidated Financial Statements.
The cost
base of our operations has been materially affected by steel inflation during
recent years, but due to the ability to pass on this steel inflation to our
customers the overall financial impact has been minimized. The prices
for 52100 Steel, engineered resins and other raw materials which we purchase are
subject to material change. Our typical pricing arrangements with
steel suppliers are subject to adjustment every six months. We
typically reserve the right to increase product prices periodically in the event
of increases in our raw material costs. In the past, we have been
able to minimize the impact on our operations resulting from the 52100 Steel
price fluctuations by taking such measures.
In
September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (SFAS
157), which provides guidance on how to measure assets and liabilities that use
fair value. SFAS 157 will apply whenever another U.S. GAAP standard
requires (or permits) assets or liabilities to be measured at fair value but
does not expand the use of fair value to any new circumstances. This
standard also will require additional disclosures in both annual and quarterly
reports. SFAS 157 will be effective for financial statements issued
for fiscal years beginning after November 15, 2007. However, on
December 14, 2007, the FASB issued and on February 14, 2008, approved, FASB
Staff Position FAS 157-2 (“FSP FAS 157-2”) which would delay the effective date
of SFAS No. 157 for all non financial assets and non financial liabilities,
except those that are recognized or disclosed at fair value in the financial
statements on a recurring basis (at least annually). The FSP
partially defers the effective date of SFAS No. 157 to fiscal years beginning
after November 15, 2008. Effective for first quarter 2008, the
Company plans to adopt SFAS No. 157 except as it applies to those non financial
assets and liabilities as noted in FSP FAS 157-2. We are currently
evaluating the potential impact this standard may have on our consolidated
financial position and results of operations, but do not believe the impact of
the adoption will have a material effect.
In
February, 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities—Including an amendment of FASB
Statement No. 115." SFAS No. 159 permits companies to choose to
measure many financial instruments and certain other items at fair value at
specified election dates. Upon adoption, an entity shall report
unrealized gains and losses on items for which the fair value option has been
elected in earnings at each subsequent reporting date. Most of the
provisions apply only to entities that elect the fair value
option. However, the amendment to SFAS No. 115, "Accounting for
Certain Investments in Debt and Equity Securities," applies to all entities with
available for sale and trading securities. SFAS No. 159 will be
effective as of the beginning of an entity's first fiscal year that begins after
November 15, 2007. We are currently evaluating the effect SFAS No.
159 will have on its consolidated financial position, liquidity, or results of
operations.
In
December 2007, the FASB issued SFAS No. 141 (revised 2007), "Business
Combinations" ("SFAS No. 141R"), which establishes principles and requirements
for the acquirer in a business combination, including recognition and
measurement in the financial statements of the identifiable assets acquired, the
liabilities assumed, and any non-controlling interest in the acquiree. SFAS 141R
also provides guidance for the recognition and measurement of goodwill acquired
in the business combination and for disclosure to enable financial statement
users to evaluate the nature and financial effects of the business combination.
This Statement replaces SFAS No. 141, "Business Combinations" ("SFAS No. 141").
While SFAS No. 141R retains the fundamental requirements in SFAS No. 141 that
the acquisition method of accounting be used for all business combinations and
for an acquirer to be identified for each business combination, it also improves
the comparability of the information about business combinations provided in
financial reports. In addition, SFAS No. 141R defines the acquirer as the entity
that obtains control of one or more businesses in the business combination and
establishes the acquisition date as the date that the acquirer achieves control.
This Statement applies prospectively to business combinations for which the
acquisition date is on or after the beginning of the first annual reporting
period beginning on or after December 15, 2008.
31
European
Restructuring
In 2006,
we entered into negotiations with representatives of the Eltmann employees’
works council. We signed an agreement with the union representatives
of our workers at this facility for significant contract revisions including new
wages rates and increasing hours worked per week during February
2008.
In 2007,
we began the process to shift production to lower cost facilities, thereby
incurring costs for the production shifts and further restructuring at the
Eltmann Plant, including actions leading to downsizing that
location. Due to the agreement reached with the workers in February
2008, we postponed the downsizing of the location. In addition,
in the second quarter of 2007, we incurred non-cash impairment charges related
to restructuring. See Note 3 of the Notes to Consolidated Financial
Statements.
At this
time, it is possible additional cash and non-cash charges might be incurred to
reduce or eliminate the work force at the Eltmann plant in the
future.
We are
exposed to changes in financial market conditions in the normal course of our
business due to our use of certain financial instruments as well as transacting
in various foreign currencies. To mitigate our exposure to these
market risks, we have established policies, procedures and internal processes
governing our management of financial market risks. We are exposed to
changes in interest rates primarily as a result of our borrowing
activities. At December 31, 2007, these borrowings included $40.0
million aggregate principal amount of fixed rate senior notes and our $135
million revolving credit facility which was used to maintain liquidity, fund our
business operations, and fund acquisitions. At December 31, 2007, we
had $40.0 million of fixed rate senior notes outstanding and $70.5 million
outstanding under the variable rate revolving credit facilities. At
December 31, 2007, a one-percent increase in the interest rate charged on our
outstanding variable rate borrowings would result in interest expense increasing
annually by approximately $0.7 million. The nature and amount of our
borrowings may vary as a result of future business requirements, market
conditions and other factors.
Translation
of our operating cash flows denominated in foreign currencies is impacted by
changes in foreign exchange rates. Our Metal Bearing Component
Segment invoices and receives payment in currencies other than the U.S. Dollar
including the Euro. In 2007, the fluctuation of the Euro against the
U.S. Dollar positively impacted assets, revenue and income. To help
reduce exposure to foreign currency fluctuation, management has incurred debt in
Euros in the past and has, from time to time, used foreign currency hedges to
hedge currency exposures when these exposures meet certain discretionary
levels. We did not use any significant currency hedges in 2007, nor
did we hold a position in any foreign currency hedging instruments as of
December 31, 2007.
32
Index to
Financial Statements
Financial
Statements Page
Report
of Independent Registered Public Accounting
Firm .................................................................................................................................................. 34
Consolidated Balance Sheets at December 31, 2007 and
2006................................................................................................................................................ 35
Consolidated
Statements of Income (Loss) and Comprehensive Income
for the
years ended December 31, 2007, 2006 and
2005...........................................................................................................................................................
36
Consolidated
Statements of Changes in Stockholders’ Equity for the
years
ended December 31, 2007, 2006 and
2005 ......................................................................................................................................................................
37
Consolidated
Statements of Cash Flows for the years ended
December
31, 2007, 2006 and
2005 ............................................................................................................................................................................................ 38
Notes to
Consolidated Financial
Statements ......................................................................................................................................................................... 39
33
Report of
Independent Registered Public Accounting Firm
To the
Board of Directors and Stockholders of NN, Inc
In our
opinion, the consolidated financial statements listed in the accompanying index
appearing under Item 8, present fairly, in all material respects, the financial
position of NN, Inc and its subsidiaries at December 31, 2007 and 2006 and, the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 2007 in conformity with accounting principles
generally accepted in the United States of America. Also in our
opinion, the Company did not maintain, in all material respects, effective
internal control over financial reporting as of December 31, 2007, based on
criteria established in Internal Control - Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO) because a material weakness in internal control over
financial reporting related to ineffective controls over the accounting for the
impairment of long-lived assets existed as of that date. A material
weakness is a deficiency, or a combination of deficiencies, in internal control
over financial reporting, such that there is a reasonable possibility that a
material misstatement of the annual or interim financial statements will not be
prevented or detected on a timely basis. The material weakness
referred to above is described in the accompanying Management's Report on
Internal Control over Financial Reporting appearing under Item 9A. We
considered this material weakness in determining the nature, timing, and extent
of audit tests applied in our audit of the December 31, 2007 consolidated
financial statements, and our opinion regarding the effectiveness of the
Company’s internal control over financial reporting does not affect our opinion
on those consolidated financial statements. The Company's management
is responsible for these financial statements, for maintaining effective
internal control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting included in
management's report referred to above. Our responsibility is to
express opinions on these financial statements, and on the Company's internal
control over financial reporting based on our integrated audits. We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require
that we plan and perform the audits to obtain reasonable assurance about whether
the financial statements are free of material misstatement and whether effective
internal control over financial reporting was maintained in all material
respects. Our audits of the financial statements included examining,
on a test basis, evidence supporting the amounts and disclosures in the
financial statements, assessing the accounting principles used and significant
estimates made by management, and evaluating the overall financial statement
presentation. Our audit of internal control over financial reporting
included obtaining an understanding of internal control over financial
reporting, assessing the risk that a material weakness exists, and testing and
evaluating the design and operating effectiveness of internal control based on
the assessed risk. Our audits also included performing such other
procedures as we considered necessary in the circumstances. We believe that our
audits provide a reasonable basis for our opinions.
As
discussed in Notes 1 and 10 to the consolidated financial statements, the
Company changed the manner in which it accounts for share-based compensation as
of January 1, 2006. As discussed in Note 9 to the consolidated
financial statements, the Company changed the manner in which it accounts for
defined benefit plans effective December 31, 2006. As discussed in
Note 14 to the consolidated financial statements, the Company changed the manner
in which it accounts for uncertain tax positions as of January 1,
2007.
A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal
control over financial reporting includes those policies and procedures that
(i) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets of
the company; (ii) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and
(iii) provide reasonable assurance regarding prevention or timely detection
of unauthorized acquisition, use, or disposition of the company’s assets that
could have a material effect on the financial statements.
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation
of effectiveness to future periods are subject to the risk that controls may
become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
PricewaterhouseCoopers
LLP
Charlotte,
North Carolina
March 17,
2008
34
|
NN,
Inc.
|
|
December
31, 2007 and 2006
|
|
(In
thousands, except per share data)
|
|
Assets
|
2007
|
2006
|
||||||
|
Current
assets:
|
||||||||
|
Cash and cash
equivalents
|
$ | 13,029 | $ | 11,681 | ||||
|
Accounts receivable,
net
|
65,566 | 63,442 | ||||||
|
Inventories, net
|
51,821 | 43,538 | ||||||
|
Other current
assets
|
6,263 | 6,004 | ||||||
|
Current deferred tax
asset
|
1,345 | 1,199 | ||||||
|
Total current
assets
|
138,024 | 125,864 | ||||||
|
Property,
plant and equipment, net
|
161,008 | 156,447 | ||||||
|
Goodwill,
net
|
39,471 | 46,147 | ||||||
|
Intangible
assets, net
|
9,279 | 10,131 | ||||||
|
Non
current deferred tax assets
|
322 | 2,117 | ||||||
|
Other
non-current assets
|
1,974 | 1,995 | ||||||
|
Total
assets
|
$ | 350,078 | $ | 342,701 | ||||
|
Liabilities
and Stockholders’ Equity
|
||||||||
|
Current
liabilities:
|
||||||||
|
Accounts payable
|
$ | 51,124 | $ | 52,576 | ||||
|
Accrued salaries, wages and
benefits
|
15,087 | 13,519 | ||||||
|
Income taxes
|
144 | 94 | ||||||
|
Current maturities of long-term
debt
|
11,851 | 851 | ||||||
|
Current portion of obligation
under capital lease
|
249 | 224 | ||||||
|
Other liabilities
|
5,801 | 7,605 | ||||||
|
Total current
liabilities
|
84,256 | 74,869 | ||||||
|
Non-current
deferred tax liability
|
18,682 | 16,334 | ||||||
|
Long-term
debt
|
100,193 | 80,711 | ||||||
|
Related
party debt
|
-- | 21,305 | ||||||
|
Accrued
pension
|
13,498 | 13,187 | ||||||
|
Obligation
under capital lease
|
1,792 | 1,713 | ||||||
|
Other
non-current liabilities
|
1,614 | 1,413 | ||||||
|
Total
liabilities
|
220,035 | 209,532 | ||||||
|
Commitments
and Contingencies (Note 16)
|
||||||||
|
Stockholders’
equity:
|
||||||||
|
Common stock - $0.01 par value,
authorized 45,000 shares,
issued
and outstanding 15,855 in 2007 and 16,842 shares in 2006
|
159 | 169 | ||||||
|
Additional paid-in
capital
|
45,032 | 53,473 | ||||||
|
Retained earnings
|
57,083 | 64,178 | ||||||
|
Accumulated other comprehensive
income
|
27,769 | 15,349 | ||||||
|
Total stockholders’
equity
|
130,043 | 133,169 | ||||||
|
Total
liabilities and stockholders’ equity
|
$ | 350,078 | $ | 342,701 | ||||
See
accompanying notes to consolidated financial statements
35
|
NN,
Inc.
|
|
Years
ended December 31, 2007, 2006 and 2005
|
|
(In
thousands, except per share data)
|
|
2007
|
2006
|
2005
|
||||||||||
|
Net
sales
|
$ | 421,294 | $ | 330,325 | $ | 321,387 | ||||||
|
Cost
of products sold (exclusive of depreciation shown separately
below)
|
337,024 | 257,703 | 248,828 | |||||||||
|
Selling,
general and administrative
|
36,473 | 30,008 | 29,073 | |||||||||
|
Depreciation
and amortization
|
22,996 | 17,492 | 16,331 | |||||||||
|
Gain
on disposal of assets
|
(71 | ) | (705 | ) | (391 | ) | ||||||
|
Restructuring
and impairment charges (income)
|
13,636 | (65 | ) | (342 | ) | |||||||
|
Income
from operations
|
11,236 | 25,892 | 27,888 | |||||||||
|
Interest
expense
|
6,373 | 3,983 | 3,777 | |||||||||
|
Other
income
|
(386 | ) | (1,048 | ) | (653 | ) | ||||||
|
Income
before provision for income taxes
|
5,249 | 22,957 | 24,764 | |||||||||
|
Provision
for income taxes
|
6,422 | 8,522 | 9,752 | |||||||||
|
Net
income (loss)
|
$ | (1,173 | ) | $ | 14,435 | $ | 15,012 | |||||
|
Other
comprehensive income:
|
||||||||||||
|
Unrealized holding loss on
securities, net of tax
|
-- | -- | (73 | ) | ||||||||
|
Actuarial
gain recognized in change of projected benefit obligation
(net
of
tax $248)
|
656 | -- | -- | |||||||||
|
Foreign currency
translation
|
11,764 | 12,265 | (11,823 | ) | ||||||||
|
Comprehensive
income
|
11,247 | $ | 26,700 | $ | 3,116 | |||||||
|
Basic
income (loss) per share:
|
||||||||||||
|
Net income (loss)
|
$ | (0.07 | ) | $ | 0.84 | $ | 0.88 | |||||
|
Weighted average shares
outstanding
|
16,749 | 17,125 | 17,004 | |||||||||
|
Diluted
income (loss) per share:
|
||||||||||||
|
Net income (loss)
|
$ | (0.07 | ) | $ | 0.83 | $ | 0.87 | |||||
|
Weighted average shares
outstanding
|
16,749 | 17,351 | 17,193 | |||||||||
|
Cash
dividends per common share
|
$ | 0.32 | $ | 0.32 | $ | 0.32 | ||||||
See
accompanying notes to consolidated financial statements
36
|
NN,
Inc.
|
|
Consolidated
Statements of Changes in Stockholders’ Equity
|
|
Years
ended December 31, 2007, 2006 and 2005
|
|
(In
thousands)
|
|
Common
Stock
|
Additional
paid in capital
|
Additional
paid
in
capital
unearned
compen-
sation
|
Retained
Earnings
|
Accumulated
Other
Comprehensive
Income
|
Total
|
||
|
Number
of Shares
|
Par
Value
|
||||||
|
Balance,
December 31, 2004
|
16,777 | $ | 168 | $ | 53,423 | $ | -- | $ | 45,676 | $ | 15,873 | $ | 115,140 | |||||||||||||||
|
Shares
issued
|
376 | 4 | 3,658 | -- | -- | -- | 3,662 | |||||||||||||||||||||
|
Issuance
of restricted stock
|
53 | -- | 673 | (673 | ) | -- | ||||||||||||||||||||||
|
Amortization
of restricted
stock award
|
-- | -- | -- | 206 | -- | -- | 206 | |||||||||||||||||||||
|
Net
income
|
-- | -- | -- | -- | 15,012 | -- | 15,012 | |||||||||||||||||||||
|
Dividends
declared
|
-- | -- | -- | -- | (5,470 | ) | -- | (5,470 | ) | |||||||||||||||||||
|
Additional minimum
pension liability
(net of tax $326)
|
-- | -- | -- | -- | -- | (580 | ) | (580 | ) | |||||||||||||||||||
|
Unrealized
holding loss
(net of tax $41)
|
-- | -- | -- | -- | -- | (73 | ) | (73 | ) | |||||||||||||||||||
|
Cumulative
translation loss
|
-- | -- | -- | -- | -- | (11,823 | ) | (11,823 | ) | |||||||||||||||||||
|
Balance,
December 31, 2005
|
17,206 | $ | 172 | $ | 57,754 | $ | (467 | ) | $ | 55,218 | $ | 3,397 | $ | 116,074 | ||||||||||||||
|
Reclassification
of
unearned
compensation
|
-- | -- | (467 | ) | 467 | -- | -- | -- | ||||||||||||||||||||
|
Shares
issued
|
99 | 1 | 983 | -- | -- | -- | 984 | |||||||||||||||||||||
|
Repurchase
of outstanding
shares
|
(463 | ) | (4 | ) | (5,269 | ) | -- | -- | -- | (5,273 | ) | |||||||||||||||||
|
Elimination
of variable
stock option
liability
|
-- | -- | 8 | -- | -- | -- | 8 | |||||||||||||||||||||
|
Net
income
|
-- | -- | -- | -- | 14,435 | -- | 14,435 | |||||||||||||||||||||
|
Amortization
of restricted
stock
award
|
-- | -- | 283 | -- | -- | -- | 283 | |||||||||||||||||||||
|
Stock
option expense
|
-- | -- | 181 | -- | -- | -- | 181 | |||||||||||||||||||||
|
Dividends
declared
|
-- | -- | -- | -- | (5,475 | ) | -- | (5,475 | ) | |||||||||||||||||||
|
Elimination
of additional
minimum pension
liability
(net of tax of
$46)
|
-- | -- | -- | -- | -- | 80 | 80 | |||||||||||||||||||||
|
Adjustment
to initially
apply FAS 158
and
record unrecognized
net
losses that have
not
been recognized as
a
component of
pension
income (net of tax
$224)
|
-- | -- | -- | -- | -- | (393 | ) | (393 | ) | |||||||||||||||||||
|
Cumulative
translation gain
|
-- | -- | -- | -- | -- | 12,265 | 12,265 | |||||||||||||||||||||
|
Balance,
December 31, 2006
|
16,842 | $ | 169 | $ | 53,473 | $ | -- | $ | 64,178 | $ | 15,349 | $ | 133,169 | |||||||||||||||
|
Shares
issued
|
24 | -- | 292 | -- | -- | -- | 292 | |||||||||||||||||||||
|
Net
loss
|
-- | -- | -- | -- | (1,173 | ) | -- | (1,173 | ) | |||||||||||||||||||
|
Amortization
of restricted
stock
awards
|
-- | -- | 309 | -- | -- | -- | 309 | |||||||||||||||||||||
|
Forfeiture
of restricted
stock
|
(3 | ) | -- | -- | -- | -- | -- | -- | ||||||||||||||||||||
|
Repurchase
of outstanding
shares
|
(1,008 | ) | (10 | ) | (9,712 | ) | -- | -- | -- | (9,722 | ) | |||||||||||||||||
|
Stock
option expense
|
-- | -- | 670 | -- | -- | -- | 670 | |||||||||||||||||||||
|
Dividends
declared
|
-- | -- | -- | -- | (5,322 | ) | -- | (5,322 | ) | |||||||||||||||||||
|
Cumulative
effect of
adoption of FIN
48
|
-- | -- | -- | -- | (600 | ) | -- | (600 | ) | |||||||||||||||||||
|
Actuarial
gain recognized
in change of
projected
benefit obligation
(net
of tax
$248)
|
-- | -- | -- | -- | -- | 656 | 656 | |||||||||||||||||||||
|
Cumulative
translation gain
|
-- | -- | -- | -- | -- | 11,764 | 11,764 | |||||||||||||||||||||
|
Balance,
December 31, 2007
|
15,855 | $ | 159 | $ | 45,032 | -- | $ | 57,083 | $ | 27,769 | $ | 130,043 |
See
accompanying notes to consolidated financial statements
37
NN,
Inc.
Years
Ended December 31, 2007, 2006 and 2005
(In
thousands)
|
2007
|
2006
|
2005
|
||||||||||
| Cash flows from operating activities: | ||||||||||||
| Net Income (loss) | $ | (1,173 | ) | $ | 14,435 | $ | 15,012 | |||||
| Adjustments to reconcile net income (loss) to net cash provided by operating activities: | ||||||||||||
| Depreciation and amortization | 22,996 | 17,492 | 16,331 | |||||||||
| Amortization and write-off of debt issue costs | 219 | 460 | 246 | |||||||||
| Gain on disposals of property, plant and equipment | (71 | ) | (705 | ) | (391 | ) | ||||||
| Allowance for doubtful accounts | 496 | 311 | 287 | |||||||||
| Compensation expense from issuance of restricted stock and incentive stock options | 979 | 464 | 206 | |||||||||
| Deferred income tax benefit | (1,183 | ) | (1,384 | ) | (674 | ) | ||||||
| Capitalized interest and non cash interest expense | 66 | (204 | ) | -- | ||||||||
| (Gain) on sale of stock investment | -- | -- | (73 | ) | ||||||||
| Restructuring and impairment charges (income) | 13,636 | (65 | ) | (342 | ) | |||||||
| Changes in operating assets and liabilities, net of effect of acquisitions: | ||||||||||||
| Accounts receivable | (837 | ) | (759 | ) | 216 | |||||||
| Inventories | (5,974 | ) | 3,221 | (5,134 | ) | |||||||
| Income tax receivable | -- | (956 | ) | 1,465 | ||||||||
| Other current assets | 260 | (188 | ) | (1,033 | ) | |||||||
| Other assets | 801 | 920 | 105 | |||||||||
| Accounts payable | (5,533 | ) | 2,308 | 1,176 | ||||||||
| Other liabilities | (3,088 | ) | (2,347 | ) | 2,618 | |||||||
| Net cash provided by operating activities | 21,594 | 33,003 | 30,015 | |||||||||
|
Cash
flows from investing activities:
|
||||||||||||
| Cash paid to acquire business, net of cash received | (94 | ) | (25,025 | ) | -- | |||||||
| Acquisition of property, plant and equipment | (18,856 | ) | (19,282 | ) | (16,729 | ) | ||||||
| Principal received from note receivable | -- | 2,505 | 200 | |||||||||
| Proceeds from disposals of property, plant and equipment | 74 | 3,550 | 968 | |||||||||
| Proceeds from sale of investment | -- | -- | 198 | |||||||||
| Acquisition of intangible asset | (173 | ) | (1,846 | ) | (605 | ) | ||||||
| Net cash used by investing activities | (19,049 | ) | (40,098 | ) | (15,968 | ) | ||||||
|
Cash
flows from financing activities:
|
||||||||||||
| Proceeds from long-term debt | 26,400 | 47,188 | -- | |||||||||
| Debt issue costs paid | (251 | ) | (536 | ) | (64 | ) | ||||||
| Proceeds from bank overdrafts | 612 | 784 | 120 | |||||||||
| Repayment of long-term debt | -- | (30,556 | ) | (9,922 | ) | |||||||
| Proceeds (repayment) of short-term debt | 4,610 | 266 | -- | |||||||||
| Proceeds from issuance of stock and exercise of stock options | 292 | 984 | 2,806 | |||||||||
| Cash dividends paid | (5,322 | ) | (5,475 | ) | (5,470 | ) | ||||||
| Other financing activity | (38 | ) | (23 | ) | (8 | ) | ||||||
| Payment of related party debt | (18,638 | ) | -- | -- | ||||||||
| Repurchase of common stock | (9,722 | ) | (5,273 | ) | -- | |||||||
| Net cash provided (used) by financing activities | (2,057 | ) | 7,359 | (12,538 | ) | |||||||
| Effect of exchange rate changes on cash flows | 860 | 561 | (1,425 | ) | ||||||||
| Net change in cash and cash equivalents | 1,348 | 825 | 84 | |||||||||
| Cash and cash equivalents at beginning of period | 11,681 | 10,856 | 10,772 | |||||||||
| Cash and cash equivalents at end of period | $ | 13,029 | $ | 11,681 | $ | 10,856 | ||||||
|
Supplemental
schedule of non-cash investing and financing activities:
|
||||||||||||
| Incurred note payable to former owner as part of consideration for acquiring a business | -- | $ | 21,305 | $ | -- | |||||||
|
Stock
option exercise tax benefit ($856 in 2005), restricted stock expense ($309
in 2007, $283 in 2006 and $673 in 2005) and stock option
expense ($670 in 2007 and $181 in 2006) included in stockholders’
equity
|
$ | 979 | $ | 464 | $ | 1,529 | ||||||
| Obtained land and building by entering into capital lease obligation | -- | -- | $ | 1,917 | ||||||||
|
Reduced
note payable to customer with offsetting reduction to accounts receivable
($1,390) and an increase
to interest expense ($186)
|
$ | 1,204 | -- | -- | ||||||||
|
Adjusted
the goodwill balance related to Whirlaway acquisition for final fair value
of assets and liabilities acquired.
|
$ | 1,828 | -- | -- | ||||||||
|
Increase
in unrecognized tax benefits upon the adoption of FIN 48 charged to
beginning retained earnings
|
$ | 600 | -- | -- | ||||||||
|
Cash
paid for interest and income taxes was as follows:
|
||||||||||||
| Interest | $ | 6,174 | $ | 3,353 | $ | 3,440 | ||||||
| Income taxes | $ | 8,404 | $ | 11,911 | $ | 6,066 | ||||||
See
accompanying notes to consolidated financial statements
38
NN,
Inc.
Notes
to Consolidated Financial Statements
December
31, 2007, 2006 and 2005
(In
thousands, except per share data)
(a) Description of
Business
NN, Inc.
(the “Company”) is a manufacturer of precision balls, cylindrical and tapered
rollers, bearing retainers, plastic injection molded products, precision bearing
seals and beginning December 1, 2006, precision metal components. The Company’s
balls, rollers, retainers, and bearing seals are used primarily in the domestic
and international anti-friction bearing industry. The Company’s plastic
injection molded products are used in the bearing, automotive, instrumentation
and fiber optic industries. The precision metal components products are used in
automotive, diesel engine, refrigeration, and heating and cooling
industries.
(b) Cash and Cash
Equivalents
The
Company considers all highly liquid investments with an original maturity of
three months or less as cash equivalents.
(c)
Inventories
Inventories
are stated at the lower of cost or market. Cost is determined using
the first-in, first-out method. Our policy is to expense abnormal
amounts of idle facility expense, freight, handling cost, and
waste. In addition, we allocate fixed production overheads based on
the normal capacity of our facilities.
Inventories
also include tools, molds and dies in progress that the Company is producing and
will ultimately sell to its customers. This activity is principally
related to our Plastic and Rubber Components and Precision Metal Components
Segments. These inventories are carried at the lower of cost or
market.
(d) Property, Plant and
Equipment
Property,
plant and equipment are stated at cost less accumulated depreciation. Assets
held for sale are stated at lower of depreciated cost or fair market value less
estimated selling costs. Expenditures for maintenance and repairs are charged to
expense as incurred. Major renewals and betterments are capitalized. When a
major property item is retired, its cost and related accumulated depreciation
are removed from the property accounts and any gain or loss is recorded in the
statement of income. The Company reviews the carrying values of
long-lived assets for impairment whenever events or changes in circumstances
indicate the carrying amount of an asset may not be
recoverable. During the years ended December 31, 2007, 2006 and 2005,
the Company recorded impairment charges of $3,320, $0 and $0, respectively (See
Note 3 for further details). Property, plant and equipment includes
tools, molds and dies principally used in our Plastic and Rubber Components and
Precision Metal Components Segments that are the property of the
Company.
Depreciation
is provided principally on the straight-line method over the estimated useful
lives of the depreciable assets for financial reporting purposes. Accelerated
depreciation methods are used for income tax purposes. We capitalize
incremental interest cost related to certain large capital expenditure projects
in compliance with SFAS 34 “Capitalization of Interest Cost.” The
amount capitalized is the portion of interest cost incurred during the
acquisition period of these assets.
(e) Revenue
Recognition
The
Company recognizes revenues based on the stated shipping terms with the customer
when these terms are satisfied and the risks of ownership are transferred to the
customer. The Company has an inventory management program for certain Metal
Bearing Components Segment customers whereby revenue is recognized when products
are used by the customer from consigned stock, rather than at the time of
shipment. Under both circumstances, revenue is recognized when
persuasive evidence of an arrangement exists, delivery has occurred, the
sellers’ price is determinable and collectability is reasonably
assured.
39
NN,
Inc.
Notes
to Consolidated Financial Statements
December
31, 2007, 2006 and 2005
(In
thousands, except per share data)
(f) 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 is due primarily from the core served markets:
bearing manufacturers, automotive industry, electronics, industrial,
agricultural and aerospace. The Company experienced $0.5 million,
$0.3 million, and $0.3 million of bad debt expense during 2007, 2006 and 2005,
respectively. 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.
(g) Income
Taxes
Income
taxes are accounted for under the asset and liability method. Deferred tax
assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases and operating
loss and tax credit carry forwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment
date.
(h) Net Income Per Common
Share
Basic
earnings per share reflect reported earnings divided by the weighted average
number of common shares outstanding. Diluted earnings per share include the
effect of dilutive stock options, unvested restricted stock, and the respective
tax benefits.
(i) Stock Incentive Plan
Prior to
January 1, 2006, the Company applied the intrinsic value-based method of
accounting prescribed by Accounting Principles Board (“APB”) Opinion
No. 25, “Accounting for Stock Issued to Employees,” and related
interpretations including Financial Accounting Standards Board (FASB)
Interpretation No. 44, “Accounting for Certain Transactions Involving Stock
Compensation (an interpretation of APB Opinion No. 25)” issued in
March 2000, to account for its fixed plan stock options. Under this method,
compensation expense was recorded on the date of grant only if the current
market price of the underlying stock exceeded the exercise price. The
Company also applied the provision of APB Opinion No. 25 to its variable stock
options. For 2005, we elected to continue accounting for our stock
option compensation plan using the intrinsic value based method under APB
Opinion No. 25 and did not record compensation expense for stock options for the
year ended December 31, 2005 except as related to stock options accounted
for under the variable method of accounting and for restricted stock
awards.
Effective
January 1, 2006, the Company adopted SFAS 123(R) under the modified prospective
method. From that date onward, the Company is accounting for new
awards and awards modified under this new standard. Any options
issued henceforth will be expensed based on the fair value of the options at the
grant date. As of December 31, 2005, the Company did not have any
unvested stock options due to an accelerated vesting program implemented in
December 2005. As such, this statement only impacted the Company for
its outstanding restricted stock and stock option and restricted stock awards
issued subsequent to January 1, 2006. The cost of the options and
restricted stock awards will be expensed as compensation expense over the
vesting periods based on the fair value at the grant date. (See Note
10)
40
NN,
Inc.
Notes
to Consolidated Financial Statements
December
31, 2007, 2006 and 2005
(In
thousands, except per share data)
The
Company accounts for restricted stock awards by recognizing compensation expense
ratably over the vesting period as specified in the
award. Compensation expense to be recognized is based on the stock
price at date of grant.
(j) Principles of
Consolidation
The
Company’s consolidated financial statements include the accounts of NN, Inc. and
subsidiaries in which the Company owns more than 50% voting
interest. All of the Company’s subsidiaries are 100% owned and all
are included in the consolidated financial statements for the years end December
31, 2007, 2006, and 2005. All significant inter-company profits,
transactions, and balances have been eliminated in consolidation.
(k) Foreign Currency
Translation
Assets
and liabilities of the Company’s foreign subsidiaries are translated at current
exchange rates, while revenue, costs and expenses are translated at average
rates prevailing during each reporting period. Translation
adjustments arising from the translation of foreign subsidiary financial
statements are reported as a component of other comprehensive income and
accumulated other comprehensive income within shareholders’ equity.
(l) Goodwill and Other
Indefinite Lived Intangible Assets
The
Company recognizes the excess of the purchase price of an acquired entity over
the fair value of the net identifiable assets as goodwill. Goodwill
is tested for impairment on an annual basis as of October 1 and between annual
tests in certain circumstances. Impairment losses are recognized
whenever the implied fair value of goodwill is less than its carrying
value. Goodwill is not amortized.
(m) Long Lived
Intangible Assets
The
Company recognizes an acquired intangible asset apart from goodwill whenever the
asset arises from contractual or other legal rights, or whenever it is capable
of being divided or separated from the acquired entity or sold, transferred,
licensed, rented, or exchanged, whether individually or in combination with a
related contract, asset or liability. An intangible asset other than
goodwill is amortized over its estimated useful life unless that life is
determined to be indefinite. The Company reviews the lives of
intangible assets each reporting period and, if necessary, recognizes impairment
losses if the carrying amount of an intangible asset is not recoverable from
expected future cash flows and its carrying amount exceeds its fair
value.
(n) Impairment of Long-Lived
Assets and Long-Lived Assets to Be Disposed Of
The
Company accounts for long-lived assets in accordance with the provisions of SFAS
No. 144, “Accounting for the Impairment of or Disposal of Long-Lived
Assets.” Assets to be held and used are tested for recoverability
when indications of impairment are evident. If the reviewed carrying
value of the asset is not recoverable based on estimated undiscounted cash flows
related to the asset or asset group, the asset is written down to the fair
value. Assets held for sale are carried at the lesser of carrying
value or fair value less costs of disposal.
(o) Use of Estimates
in the Preparation of Financial Statements
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those
estimates.
41
NN,
Inc.
Notes
to Consolidated Financial Statements
December
31, 2007, 2006 and 2005
(In
thousands, except per share data)
(p) Recently Issued
Accounting Standards
In
September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (SFAS
157), which provides guidance on how to measure assets and liabilities that use
fair value. SFAS 157 will apply whenever another U.S. GAAP standard
requires (or permits) assets or liabilities to be measured at fair value but
does not expand the use of fair value to any new circumstances. This
standard also will require additional disclosures in both annual and quarterly
reports. SFAS 157 will be effective for financial statements issued
for fiscal years beginning after November 15, 2007. However, on
December 14, 2007, the FASB issued, and on February 14, 2008
approved, FASB Staff Position FAS 157-2 (“FSP FAS 157-2”) which would delay
the effective date of SFAS No. 157 for all non financial assets and non
financial liabilities, except those that are recognized or disclosed at fair
value in the financial statements on a recurring basis (at least
annually). The FSP partially defers the effective date of SFAS No.
157 to fiscal years beginning after November 15, 2008. Effective for
first quarter 2008, the Company plans to adopt SFAS No. 157 except as it applies
to those non financial assets and liabilities as noted in FSP FAS
157-2. The Company is currently evaluating the potential impact this
standard may have on our consolidated financial position and results of
operations, but do not believe the impact of the adoption will have a material
effect.
In
February, 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities—Including an amendment of FASB
Statement No. 115." SFAS No. 159 permits companies to choose to
measure many financial instruments and certain other items at fair value at
specified election dates. Upon adoption, an entity shall report
unrealized gains and losses on items for which the fair value option has been
elected in earnings at each subsequent reporting date. Most of the
provisions apply only to entities that elect the fair value
option. However, the amendment to SFAS No. 115, "Accounting for
Certain Investments in Debt and Equity Securities," applies to all entities with
available for sale and trading securities. SFAS No. 159 will be
effective as of the beginning of an entity's first fiscal year that begins after
November 15, 2007. The Company is currently evaluating the effect
SFAS No. 159 will have on its consolidated financial position, liquidity, or
results of operations.
2)
Acquisitions, Purchase of Minority Interest and New Businesses
Whirlaway
Acquisition
On
November 30, 2006, we purchased 100% of the common shares of Whirlaway from the
sole shareholder for $24,337 in cash and a note payable, paid in 2007, to the
former owner for $18,638. In addition, we incurred fees of $825 from
third parties as part of the purchase. The results of Whirlaway’s
operations have been consolidated with NN, Inc. since the date of
acquisition.
Whirlaway
is a high precision metal component and fluid control assembly manufacturer that
supplies customers serving the air conditioning, appliance, automotive,
commercial refrigeration, and diesel engine industries. Whirlaway
produces highly engineered fluid control components and assemblies, shafts, and
prismatic machined parts.
42
NN,
Inc.
Notes
to Consolidated Financial Statements
December
31, 2007, 2006 and 2005
(In
thousands, except per share data)
The
acquisition of Whirlaway represents a first step in our efforts to create a
precision metal components platform. The acquisition provides a base
from which to create a profitable precision metal components business of
significant size and scale over the next several years, consistent with our
strategic business plan.
The
following table summarized the final fair values of assets acquired and
liabilities assumed at date of acquisition.
|
At
November 30, 2006
|
Preliminary
Balances
December
31, 2006
|
Adjustments
during Year Ended December 31, 2007
|
Final
Balances December 31, 2007
|
|||||||||
|
Current
assets
|
$ | 19,276 | -- | $ | 19,276 | |||||||
|
Property,
plant, and equipment
|
25,837 | -- | 25,837 | |||||||||
|
Other
assets
|
128 | -- | 128 | |||||||||
|
Intangible
assets subject to amortization
|
7,180 | -- | 7,180 | |||||||||
|
Intangible
assets not subject to amortization
|
900 | -- | 900 | |||||||||
|
Goodwill
|
2,352 | 1,922 | 4,274 | |||||||||
|
Total assets
acquired
|
55,673 | 1,922 | 57,595 | |||||||||
|
Current
liabilities
|
7,475 | (229 | ) | 7,246 | ||||||||
|
Other
long-term liabilities
|
222 | 4,048 | 4,270 | |||||||||
|
Long
term debt
|
1,604 | 675 | 2,279 | |||||||||
|
Total liabilities
assumed
|
9,301 | 4,494 | 13,795 | |||||||||
|
Net assets
acquired
|
46,372 | (2,572 | ) | $ | 43,800 | |||||||
During
2007, the following adjustments were made to the fair values of assets acquired
and liabilities assumed as preliminarily reported for the year ended December
31, 2006. A deferred tax liability of $4,048 was added due to the
difference in the tax and book basis of the property, plant and
equipment. The long-term debt balance was increased by $676 to adjust
to the discounted value at November 30, 2006. The accounts payable
balance was reduced by $229 as this balance was overstated at November 30,
2006. The net assets acquired were reduced by $2,667 to eliminate a
tax indemnity to the former owner that was initially recorded but subsequently
determined not to be required. Finally, the net assets acquired
increased by $94 for acquisition related legal fees paid subsequent to December
31, 2006. The net impact of all of these changes totaled $1,922 and
increased goodwill from that originally reported.
43
NN,
Inc.
Notes
to Consolidated Financial Statements
December
31, 2007, 2006 and 2005
(In
thousands, except per share data)
The
intangible assets not subject to amortization are trade names that have
indefinite lives. The intangible assets subject to amortization are
customer relationship intangible asset of $6,900, a covenant not to compete of
$150, and a lease interest favorable to market of $130. The
intangible assets subject to amortization have a weighted average life of
approximately 10 years. Based on the Company’s analysis, all of
the goodwill and intangible assets will be deductible and amortized over 15
years for federal tax.
The
following unaudited pro-forma financial information shows the revenue, net
income, and earnings per share for the years ended December 31, 2006 and 2005,
as though the acquisition of Whirlaway occurred at the beginning of each
respective fiscal year. This pro-forma information has been
adjusted for the effects of purchase accounting on the assets and liabilities
acquired. These adjustments include amortization and
depreciation based on allocated values of assets acquired, interest expense
based on new debt incurred in acquisition, and recognizing the tax impacts of
each adjustment.
|
December
31, 2006
|
December
31, 2005
|
|||||||
|
Revenues
|
$ | 403,316 | $ | 393,249 | ||||
|
Net
income
|
$ | 15,848 | $ | 13,529 | ||||
|
Earnings
per share basic
|
$ | 0.93 | $ | 0.80 | ||||
|
Earnings
per share fully diluted
|
$ | 0.91 | $ | 0.79 | ||||
The
pro-forma financial results of Whirlaway in 2005 were dilutive due to abnormal
operational inefficiencies at Triumph from the transitioning of products from
Whirlaway and the integration of production processes. The operations
of Triumph and Whirlaway were profitable in 2006.
Others
On
October 7, 2005, we entered into an agreement with SNR Roulements (“SNR”) to
purchase all of SNR’s internal precision ball producing equipment for
approximately 5,166 Euros ($6,200). As part of the agreement, we
entered into a five-year supply agreement to provide SNR with its annual ball
requirements of the former in-house production for approximately $9.0
million. As of December 31, 2007, we have purchased all of
the equipment and intangibles related to this
acquisition. Approximately $3,710 has been recorded as tangible fixed
assets and approximately $2,502 has been recorded as an intangible asset and is
being amortized over the life of the agreement.
During
2004, we formed a wholly-owned subsidiary, NN Precision Bearing Products
Company, Ltd, (“NN Asia”). This subsidiary, which began precision
ball production during the fourth quarter of 2005, is 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 start–up costs incurred in 2005 of approximately $1,102
were expensed as incurred.
3)
Restructuring and Impairment Charges
Metal
Bearing Components Segment Restructuring, Impairment and Other Cost Reduction
Actions
On July
25, 2007, we announced several actions intended to improve corporate financial
performance that resulted in the recognition of certain restructuring,
impairment and other non-recurring charges. The most significant action is
a restructuring of the European precision ball plants operations of the Metal
Bearing Components Segment of the Company. As we have increased capacity
at our two newest ball plants in China and Slovakia, we now need to align our
capacity across our worldwide system of six ball plants, both in assets
currently in service and in production assets that have been held in reserve.
Earlier in July 2007, management made a decision that reducing output at
four of the six ball plants would be the best financial and logistical solution
to align capacity. Management believed that reducing capacity at that time
would necessitate changes in employment levels resulting in certain costs and
charges, as well as a reduction in cash flow from each of the plants.
Since the reporting value of tangible and intangible assets must be
supported by cash flow from the operations, the changes resulted in reduction in
value of certain tangible and intangible assets at the affected ball
plants.
44
NN,
Inc.
Notes
to Consolidated Financial Statements
December
31, 2007, 2006 and 2005
(In
thousands, except per share data)
During
the second quarter of 2007, we recorded approximately $13,336 ($12,624
after-tax) of non-cash impairment costs. These charges include the
write-down to estimated fair market value of certain excess production equipment
of $3,320 ($3,212 after tax) and the full impairment of goodwill at one European
reporting unit of $10,016 ($9,412 after tax) to levels supported by projected
cash flows after the restructuring. These impairments were calculated
using present value of expected future cash flows methods pursuant to SFAS 142
for the goodwill and estimates of fair value pursuant to SFAS 144 for the fixed
assets.
During
the third quarter of 2007, we recorded approximately $1,272 ($1,196 after tax)
of cash restructuring charges and approximately $90 ($66 after tax) of non-cash
impairment charges related to the write-down to estimated fair value of certain
excess production equipment as part of the Metal Bearings Components Segment
restructuring. The $1,272 charge was for severance booked in
accordance with SFAS 146, which was to be paid out upon completion of the
required legal notification period which was approximately one year. The
majority of the severance was for one time termination benefits of 19
production employees at our Eltmann Plant.
During
the fourth quarter of 2007, the German workers counsel approached management
with an unsolicited offer to increase working hours and lower wages if
management would reconsider the involuntary termination
order. Although management considered its notice final and
irrevocable, the workers’ offer was compelling, and management agreed to
consider it. Management presented the workers’ offer to the NN Board
of Directors and it directed management to agree to the contract as
presented. On February 13, 2008, we signed a new
agreement with the German workers and rescinded the layoff
order. Therefore, $1,062 ($1,062 after tax) of the severance charge
related to the 19 production employees no longer meets the requirements of SFAS
146 for a restructuring accrual and was reversed in the fourth quarter of
2007.
4) Notes
Receivable
Effective
December 21, 2001, the Company sold its 50% ownership in NN General, LLC to its
partner, General Bearing Corporation for cash of $622 and notes of
$3,305. The note was due in annual installments of $200 with the
balance of $2,505 due on December 21, 2006. The note was paid in full
by General Bearing Corporation in December 2006. Interest income on
this note of $164 and $129 was recorded during 2006 and 2005, respectively, and
has been included as a component of other income in the accompanying
consolidated statement of income. Payments totaling $2,669 and $329
were received during 2006 and 2005, respectively which included $2,505 and $200
of principal and $164 and $129 of interest payments, respectively.
45
NN,
Inc.
Notes
to Consolidated Financial Statements
December
31, 2007, 2006 and 2005
(In
thousands, except per share data)
5) Accounts
Receivable and Sales Concentrations
|
December
31,
|
||
|
2007
|
2006
|
|
|
Trade
|
$
66,978
|
$
64,443
|
|
Less
- allowance for doubtful accounts
|
1,412
|
1,001
|
|
Accounts
receivable, net
|
$65,566
|
$63,442
|
Activity
in the allowance for doubtful accounts is as follows:
|
Description
|
Balance
at beginning of year
|
Additions
|
Write-offs
|
Currency
Impacts
|
Additions
due
to
acquisition
|
Balance
at end of year
|
||
|
December 31,
2007
|
||||||||
|
Allowance
for doubtful accounts
|
$ 1,001
|
$ 496
|
$ (102)
|
$ 17
|
$ --
|
$ 1,412
|
||
|
December 31,
2006
|
||||||||
|
Allowance
for doubtful accounts
|
$ 1,119
|
$ 311
|
$ (818)
|
$ 10
|
$ 379
|
$ 1,001
|
||
|
December 31,
2005
|
||||||||
|
Allowance
for doubtful accounts
|
$ 1,734
|
$ 287
|
$ (871)
|
$ (31)
|
$ --
|
$ 1,119
|
||
For the
years ended December 31, 2007, 2006 and 2005, sales to SKF amounted to $169,765,
$150,841 and $151,175, respectively, or 40.3%, 45.6% and 47.0%, of consolidated
revenues, respectively. For the years ended December 31, 2006 and
2005, sales to Schaeffler Group (INA) amounted to $37,283 and $41,399,
respectively or 11.3% and 12.9% of consolidated revenues,
respectively. None of the Company’s other customers accounted for
more than 10% of our net sales in 2007, 2006 or 2005. SKF was the
only customer with an Accounts Receivable concentration in excess of
10%. This outstanding balance as of December 31, 2007 and 2006 was
$23,535 and $23,403, respectively. All revenues and receivables
related to SKF and Schaeffler Group (INA) are in the Metal Bearing Components
and Plastics and Rubber Components Segments.
6) Inventories
|
December 31,
|
||
|
2007
|
2006
|
|
|
Raw
materials
|
$ 15,076
|
$ 11,828
|
|
Work
in process
|
9,808
|
10,427
|
|
Finished
goods
|
28,925
|
23,596
|
|
Less-inventory
reserve
|
(1,988)
|
(2,313)
|
|
Inventories,
net
|
$ 51,821
|
$ 43,538
|
Inventory
on consignment at customers’ sites at December 31, 2007 and 2006 was
approximately $5,702 and $4,554, respectively.
46
NN,
Inc.
Notes
to Consolidated Financial Statements
December
31, 2007, 2006 and 2005
(In
thousands, except per share data)
7) Property, Plant and
Equipment
|
December 31,
|
|||
|
Estimated
Useful Life
|
2007
|
2006
|
|
|
Land
owned
|
$ 7,975
|
$ 7,020
|
|
|
Land
under capital lease
|
452
|
422
|
|
|
Buildings
and improvements owned
|
15-40
years
|
42,976
|
39,072
|
|
Building
under capital lease
|
20
years
|
1,671
|
1,564
|
|
Machinery
and equipment
|
3-12
years
|
235,062
|
209,493
|
|
Construction
in process
|
15,002
|
12,764
|
|
|
303,138
|
270,335
|
||
|
Less
- accumulated depreciation
|
142,130
|
113,888
|
|
|
Property,
plant and equipment, net
|
$
161,008
|
$
156,447
|
|
Fixed
assets at certain European operations of the Metal Bearing Components Segment
were impaired as a result of the Metal Bearing Components
Segment restructuring (see Note 3.) The total reduction in fixed
assets from the impairment charge was $3,410 and was reported in the
restructuring and impairment charges of the Consolidated Statements of
Income.
On
November 30, 2006, we added $25,837 in fixed assets with the purchase of
Whirlaway. (See Note 2)
During
January 2006, we completed the sale of excess land and two small buildings at
the Pinerolo Plant with a net book value of $1,013. The proceeds from
the sale were $2,804, resulting in a pre-tax gain of $1,791. In
addition, the Pinerolo plant disposed of excess machinery in the first quarter
of 2006 with a net book value of $1,087 resulting in a pre-tax loss of
$1,062.
47
NN,
Inc.
Notes
to Consolidated Financial Statements
December
31, 2007, 2006 and 2005
(In
thousands, except per share data)
8) Debt
Long-term
debt at December 31, 2007 and 2006 consisted of the following:
|
2007
|
2006
|
|
|
Borrowings
under our $135,000 revolving credit facility bearing interest at a
floating rate equal to LIBOR (4.60% at December 31, 2007) plus an
applicable margin of 0.60 to 0.925, expiring September 20,
2011
|
$ 70,
476
|
$ 39,466
|
|
Borrowings
under our $40,000 aggregate principal amount of senior notes bearing
interest at a fixed rate of 4.89% maturing on April 26,
2014. Annual principal payments of $5,714 begin on April 26,
2008 and extend through the date of maturity.
|
40,000
|
40,000
|
|
Long-term
note payable with customer related to acquiring equipment from customer as
part of long-term supply agreement. Note carries a 0% rate of
interest. Interest on this note has been imputed at a rate of
5.41%. Note is reduced by applying a fixed amount per
piece purchased by customer.
|
1,568
|
2,096
|
|
Total
long-term debt
|
112,044
|
81,562
|
|
Less
current maturities of long-term debt
|
11,851
|
851
|
|
Long-term
debt, excluding current maturities
|
$
100,193
|
$ 80,711
|
On
September 21, 2006, we entered into a five-year $90,000 revolving credit
facility maturing in September 2011 with Key Bank as the administrative
agent. On May 30, 2007, we entered into an agreement to amend
our $90,000 credit facility to increase the total commitment from $90,000 to
$135,000. Other than the increase in the total commitment, the other
terms of the credit facility remained substantially the same. In July
2007, we amended the $135,000 credit facility to amend the definitions of
certain components of the financial covenant calculations to exclude the
negative impacts of non-cash restructuring and impairment charges. We
incurred $184 of costs related to these amendments which have been
capitalized.
The
$135,000 credit facility provides the Company the ability to borrow in U.S.
Dollars at LIBOR plus an applicable margin of .60% to .925% or Euros at EURIBOR
plus an applicable margin of .60% to.925%. The facility has a $10,000
swing line feature to meet short term cash flow needs. Any borrowings
under this swing line are considered short term. Costs
associated with entering into the revolving credit facility were capitalized and
will be amortized into interest expense over the life of the
facility. As of December 31, 2007, $627 of net capitalized loan
origination cost was on the balance sheet within other non-current assets and
the gross amount was presented in the Financing Activities section of the
Statement of Cash Flows. The loan agreement contains customary
financial and non-financial covenants specifying 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 merger, acquisition and other fundamental changes in the
Company’s business. The credit agreement is collateralized by the
pledge of stock of certain foreign and domestic subsidiaries and guarantees of
certain domestic subsidiaries.
On April
26, 2004, we issued $40,000 aggregate principal amount of senior notes in a
private placement. 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, 2007, $40.0 million remained
outstanding. Annual principal payments of approximately $5,714 begin
on April 26, 2008 and extend through the date of maturity. 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. The notes are collateralized by the pledge of stock of
certain foreign subsidiaries. We incurred $845 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. The unamortized balance at December 31, 2007 was
$535.
48
NN,
Inc.
Notes
to Consolidated Financial Statements
December
31, 2007, 2006 and 2005
(In
thousands, except per share data)
We
believe we are in compliance with all covenants related to the $135.0 million
credit facility and the $40.0 million senior notes as of December 31,
2007. The table below summarizes the various financial covenants of
the two agreements:
|
Financial Covenants
|
Required Ratio
|
Actual Ratio
|
|
Fixed
charge coverage ratio
|
Not
less than 2.00 to 1.00
|
2.29
to 1.00
|
|
Funded
debt to EBITDA
|
Not
to exceed 2.50 to 1.00
|
2.37
to 1.00
|
|
Funded
indebtedness to
capitalization
ratio
|
Not
to exceed 0.55 to 1.00
|
0.47
to 1.00
|
|
Interest
and rent expense coverage ratio
|
No
less than 3.00 to 1.00
|
4.69
to 1.00
|
|
Capital
expenditures
|
Not
to exceed 150% of prior year
depreciation
|
Capital
expenditures 114%
of
prior year depreciation
|
|
Minimum
net worth
|
No
less than $79,500
|
$130,043
|
The
aggregate maturities of long-term debt including current portion for each of the
five years subsequent to December 31, 2007 are as follows:
|
2008
|
$ 11,851
|
|
2009
|
6,021
|
|
2010
|
5,714
|
|
2011
|
71,314
|
|
2012
|
5,714
|
|
Thereafter
|
11,430
|
|
Total
|
$
112,044
|
On June
1, 2004, our wholly owned subsidiary, NN Asia, 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 was newly constructed and we began usage of the
leased property October 1, 2005. The agreement satisfied the
requirements of a capital lease at June 1, 2004 and we recorded the lease as a
capital lease in our consolidated financial statements effective October 1,
2005. The fair value of the land and building are estimated to be
approximately $408 and $1,509, respectively and undiscounted annual lease
payments of approximately $224 (approximately $4,482 aggregate non-discounted
lease payments over the twenty year term). The lease is cancelable
after the fifth, ninth, and fourteenth years without payment or penalty by the
Company. In addition, after the end of year five we can buy the land
for its ascribed fair value and the building for actual cost less
depreciation.
Below are
the minimum future lease payments under the capital lease together with the
present value of the net minimum lease payments as of December 31,
2007:
49
NN,
Inc.
Notes
to Consolidated Financial Statements
December
31, 2007, 2006 and 2005
(In
thousands, except per share data)
|
Year
ended December 31
|
|
|
2008
|
$ 248
|
|
2009
|
248
|
|
2010
|
248
|
|
2011
|
248
|
|
2012
|
248
|
|
Thereafter
|
3,166
|
|
Total
minimum lease payments
|
4,406
|
|
Less
interest included in payments above
|
(2,365)
|
|
Present
value of minimum lease payments at 12/31/07
|
$ 2,041
|
9) Employee
Benefit Plans
We have
one defined contribution 401(k) profit sharing plan covering substantially all
U.S. employees of the Metal Bearing Components and Plastics and Rubber
Components Segments. All employees are eligible for the plan on the
first day of the month following their employment date. A participant
may elect to contribute between 1% and 60% of their compensation to the plan,
subject to Internal Revenue Service (“IRS”) dollar
limitations. Participants age 50 and older may defer an additional
amount up to the applicable IRS Catch Up Provision Limit. The Company
provides a matching contribution which is determined on an individual,
participating company basis. Currently, the matching contribution for
U.S. employees of the Metal Bearing Components Segment is the greater of five
hundred dollars or 50% of the first 4% of compensation
contributed. The matching contribution for IMC employees is 25% of
the first 6% of compensation contributed and the matching contribution for Delta
employees is 50% of the first 6% of compensation contributed. The
matching contribution for Precision Metal Components Segment employees is 25% of
the first 5% of compensation contributed. All participants are
immediately vested at 100%. Contributions by the Company for the
Metal Bearing Components Segment were $171, $146, and $139 in 2007, 2006, and
2005, respectively. Contributions by the Company for the Plastic and
Rubber Components Segment were $123, $110, and $128 in 2007, 2006 and 2005,
respectively. On November 30, 2006, we assumed Whirlaway's defined
contribution 401(k) plan. Contributions by the Company for the Precision Metal
Components Segment employees were $121 in 2007. All employees are eligible
for the plan six months after joining the company and matching contributions
vest over four years.
The
Company has a defined benefit pension plan covering its Eltmann Plant. The
benefits are based on the expected years of service. The plan is
unfunded.
For the
years ended December 31, 2007 and 2006, we accounted for the Eltmann plan under
SFAS 158. The impact of this adoption for the year ended December 31,
2006 was to increase the Pension Liability by $491, to increase accumulated
other comprehensive income by $313 (net of $178 in taxes) and increase
non-current deferred tax asset by $178.
Following
is a summary of the funded status and changes in the projected benefit
obligation for the defined benefit pension plan during 2007 and
2006:
50
NN,
Inc.
Notes
to Consolidated Financial Statements
December
31, 2007, 2006 and 2005
(In
thousands, except per share data)
|
2007
|
2006
|
||
|
Reconciliation
of Funded Status:
|
|||
|
Benefit
obligation
|
$ (4,947)
|
$ (5,167)
|
|
|
Fair
value of plan assets
|
--
|
--
|
|
|
Funded
status
|
$ (4,947)
|
$ (5,167)
|
|
|
Net
amount recognized under accrued pension
|
$ (4,947)
|
$ (5,167)
|
|
Items not yet recognized as a component of net periodic pension
cost:
|
|||
|
Unrecognized net actuarial
(gain) loss
|
$ (221)
|
$ 618
|
|
2007
|
2006
|
||
|
Change
in projected benefit obligation:
|
|||
|
Benefit
obligation at beginning of year
|
$5,167
|
$ 5,616
|
|
|
Service
cost
|
--
|
--
|
|
|
Interest
cost
|
239
|
218
|
|
|
Benefits
paid
|
(115)
|
(84)
|
|
|
Effect
of currency translation
|
560
|
597
|
|
|
Curtailment
gain
|
--
|
(1,147)
|
|
|
Actuarial
gain
|
(904)
|
(33)
|
|
|
Benefit
obligation at December 31
|
$ 4,947
|
$ 5,167
|
|
|
2007
|
2006
|
|
|
Weighted-average
assumptions as of December 31:
|
|||
|
Discount
rate
|
5.65%
|
4.5%
|
|
|
Rate
of compensation increase
|
0%
- 1.5%
|
0%
- 1.5%
|
|
|
Measurement
date
|
10/31/07
|
10/31/06
|
In
determining the pension discount rate to be used for the Company’s German
defined benefit plan, the Company utilizes the German Federal Reserve Bank yield
curve for high quality corporate bonds with maturities that are consistent with
the projected future benefit obligations of the plan
During
the year ended December 31, 2006, the plan benefits were curtailed by not
allowing new employees to join the plan and by eliminating any effects of future
wage increases. The net effect was to decrease the benefit obligation
and the unrecognized net loss by $1,147. The rate of compensation
increase of 1.5% only applies to current retirees during the years ended
December 31, 2007 and 2006.
The
expected pension benefit payments for the next ten fiscal years are as
follows:
|
Pension Benefits
|
||
|
2008
|
125
|
|
|
2009
|
136
|
|
|
2010
|
146
|
|
|
2011
|
150
|
|
|
2012
|
184
|
|
|
2013-2017
|
1,305
|
|
51
NN,
Inc.
Notes
to Consolidated Financial Statements
December
31, 2007, 2006 and 2005
(In
thousands, except per share data)
|
2007
|
2006
|
2005
|
|||
|
Components
of net periodic benefit cost:
|
|||||
|
Service
cost
|
$ --
|
$ --
|
$ 110
|
||
|
Interest
cost on projected benefit obligation
|
239
|
218
|
230
|
||
|
Amortization
of net loss
|
6
|
8
|
11
|
||
|
Net
periodic pension benefit cost
|
$ 245
|
$ 226
|
$ 351
|
|
2007
|
2006
|
2005
|
|||
|
Amounts
Recognized in Accumulated Other Comprehensive Income:
|
|||||
|
Period
actuarial (gain) loss
|
$ (904)
|
$ (33)
|
$ 1,026
|
||
|
Curtailment
gain
|
--
|
1,147
|
--
|
||
|
FAS
158 adoption impact
|
--
|
(491)
|
--
|
||
|
Net
periodic pension (benefit) cost
|
$ (904)
|
$ (623)
|
$ 1,026
|
The
amount of actuarial gain expected to be a component of net pension cost in 2008
is $0.
We do not
expect to make any contributions to the plan in 2008 or thereafter in excess of
the pension benefit payments listed above.
Severance
Indemnity
In
accordance with Italian law, the Company has an unfunded severance plan under
which all employees are entitled to receive severance indemnities (Trattamento
di Fine Rapporto or “TFR”) upon termination of their employment.
Effective
January 1, 2007, the amount payable based on salary paid is remitted to a
pension fund managed by a third party. The severance indemnities paid to the
pension fund accrue approximately at the rate of 1/13.5 of the gross salaries
paid during the year. The balance remaining is for the indemnities
accrued as of December 31, 2006 and is revalued applying a cost of living factor
established by the Italian Government. The amounts accrued become
payable upon termination of the individual employee, for any reason, e.g.,
retirement, dismissal or reduction in work force. Employees are fully
vested in TFR benefits after their first year of service. The amounts
shown in the table below represent the actual liability at December 31, 2007 and
2006 reported under accrued pension.
The
following table details the changes in Italian severance indemnity for the years
ended December 31, 2007 and 2006:
|
2007
|
2006
|
|
|
Beginning
balance
|
$ (8,020)
|
$
(6,644)
|
|
Amounts
accrued
|
(707)
|
(1,036)
|
|
Payments
to employees
|
406
|
320
|
|
Payments
to pension funds
|
601
|
130
|
|
Foreign
exchange
|
(831)
|
(790)
|
|
Ending
balance
|
$
(8,551)
|
$
(8,020)
|
52
NN,
Inc.
Notes
to Consolidated Financial Statements
December
31, 2007, 2006 and 2005
(In
thousands, except per share data)
On
January 1, 2006, the Company adopted SFAS No. 123(R) “Share-Based Payment.”
SFAS No. 123(R) replaced SFAS No. 123 “Accounting for Stock-Based Compensation”
and superseded Accounting Principles Board Opinion (“APB”) No. 25 “Accounting
for Stock Issued to Employees” and amended SFAS No. 95 “Statement of Cash
Flows.” Prior to adoption of SFAS No. 123(R) the Company followed the
disclosure-only requirements of SFAS No. 123 and continued to account for stock
compensation under the requirements of APB No. 25.
The
Company adopted SFAS No. 123(R) using the modified prospective method that
required compensation expense of all employee and non-employee director
share-based compensation awards to be recognized in the financial statements
based upon their fair value over the requisite service or vesting period for all
new awards granted after the effective date and for all awards granted prior to
the effective date of SFAS No. 123(R) that remain unvested on the effective
date. Under the requirements of APB No. 25, the Company was required to
recognize compensation cost only for stock option awards granted at a price
lower than the market price at the date of grant. Effective with
adoption of SFAS No. 123(R), compensation expense related to stock option awards
is recognized in the financial statements at the fair value of the
award. The Company accounts for restricted share awards by
recognizing the fair value of the awarded stock at the grant date as
compensation expense over the vesting period, less anticipated
forfeitures.
In
accordance with implementation requirements of SFAS No. 123(R) under the
modified prospective method, the Company did not restate prior fiscal periods
and is required to continue the same disclosure only requirements of SFAS
No. 123 for comparative purposes until all periods reported are comparable on
the same basis. The following table illustrates the reported net earnings for
2005 and pro-forma net earnings for 2005 including the effects of expensing
stock options and the related assumptions used. During the year ended
December 31, 2005 there was 267 options granted.
|
Year
ended
December
31,
|
||
|
(In
Thousands, Except per Share Data)
|
2005
|
|
|
Net
income – as reported
|
$ 15,012
|
|
|
Stock
based compensation (income) expense, net of income tax, included in net
income as reported
|
(182)
|
|
|
Stock
based compensation costs, net of income tax, that would have been included
in net income if the fair value method had been applied
|
(860)
|
|
|
Net
income –pro-forma
|
$ 13,970
|
|
|
Basic
earnings per share – as reported
|
$ 0.88
|
|
|
Stock
based compensation (income) expense, net of income tax, included in net
income as reported
|
(0.01)
|
|
|
Stock
based compensation costs, net of income tax, that would have been included
in net income if the fair value method had been applied
|
(0.05)
|
|
|
Basic
earnings per share – pro-forma
|
$ 0.82
|
|
|
Earnings
per share-assuming dilution – as reported
|
$ 0.87
|
|
|
Stock
based compensation (income) expense, net of income tax, included in net
income as reported
|
(0.01)
|
|
|
Stock
based compensation costs, net of income tax, that would have been included
in net income if the fair value method had been applied
|
(0.05)
|
|
|
Earnings
per share – assuming dilution-pro-forma
|
$ 0.81
|
53
NN,
Inc.
Notes
to Consolidated Financial Statements
December
31, 2007, 2006 and 2005
(In
thousands, except per share data)
|
Term
|
Vesting
Period
|
|
Risk
free rate
|
4.35%
for 2005
|
|
Dividend
yield
|
3.02%
annually for 2005
|
|
Expected
volatility
|
44.6%
for 2005
|
In the
years ended December 31, 2007 and 2006, approximately $981 and $464 of
compensation expense was recognized in selling, general and administrative
expense for all share-based awards. The cost recognized in the years
ended December 31, 2007 and 2006 related to stock options was $670 and $181,
related to restricted stock awards was $83 and $283, and related to our
long-term incentive plan was $226 and $0, respectively.
Stock
Option Awards
Option
awards are typically granted to non-employee directors and key employees on an
annual basis. A single option grant is typically awarded to eligible
employees and non-employee directors each year if and when granted by the
Compensation Committee of the Board of Directors and occasional individual
grants are awarded to eligible employees. All employee and
non-employee directors are awarded options at an exercise price equal to the
closing price of the Company's stock on the date of grant. The term life of
options is ten years with vesting periods of generally three years for key
employees and one year for non-employee directors. The fair value of
options cannot be determined by market value as our options are not traded in an
open market. Accordingly, a financial pricing model is utilized to determine
fair value. The Company utilizes the Black Scholes model which relies on certain
assumptions to estimate an option's fair value.
During
2007 and 2006, the Company granted 192 and 172 options, respectively, to certain
key employees and non-employee directors. The weighted average
grant date fair value of the options granted during the years ended December 31,
2007 and 2006 was $ 4.32 and $4.30. The number of options
available for future issuance under the current plan is 585. Upon
exercise of stock options, new shares of the Company’s stock are
issued. The weighted average assumptions relevant to
determining the fair value at the dates of grant are below:
|
2007
|
2006
|
|
|
Term
|
6
years
|
6
years
|
|
Risk
free interest rate
|
4.75%
|
4
.90%
|
|
Dividend
yield
|
2.66%
|
2.81%
|
|
Expected
volatility
|
41.23%
|
43.63%
|
|
Expected
forfeiture rate
|
6.20%,
0%
|
6.20%,
0%
|
The
expected volatility rate is derived from actual Company common stock historical
volatility over the same time period as the expected term. The volatility rate
is derived by mathematical formula utilizing daily closing price
data.
The
expected dividend yield is derived by mathematical formula which uses the
expected Company annual dividends over the expected term divided by the fair
market value of the Company's common stock at the grant date.
The
average risk-free interest rate is derived from United States Department of
Treasury published interest rates of daily yield curves for the same time period
as the expected term.
The
forfeiture rate is determined from examining the historical pre-vesting
forfeiture patterns of past option issuances to key employees. The
forfeiture rate is estimated to be 0% for non-employee
directors. While the forfeiture rate is not an input of the Black
Scholes model for determining the fair value of the options, it is an important
determinant of stock option compensation expense to be recorded.
54
NN,
Inc.
Notes
to Consolidated Financial Statements
December
31, 2007, 2006 and 2005
(In
thousands, except per share data)
The
term is derived from using the “Simplified Method” of determining stock option
terms as described under the Securities and Exchange Commissions Staff
Accounting Bulletin 107. Prior to the adoption of SFAS 123 (R), the
option term used was equal to the vesting period of 3 years.
The
following table provides a reconciliation of option activity for the year ended
December 31, 2007:
|
Options
|
Shares
(‘000)
|
Weighted-Average
Exercise Price
|
Weighted-Average
Remaining Contractual Term
|
Aggregate
Intrinsic Value ($000)
|
|
Outstanding
at January 1, 2007
|
1,452
|
$
9.81
|
||
|
Granted
|
192
|
12.05
|
||
|
Exercised
|
(26)
|
10.95
|
||
|
Forfeited
or expired
|
(88)
|
12.37
|
||
|
Outstanding
at December 31, 2007
|
1,530
|
$
9.93
|
5.51
|
$
(772)
|
|
Exercisable
at December 31, 2007
|
1,265
|
$
9.52
|
4.69
|
$
(124)
|
(1)
Intrinsic value is the amount by which the December 31, 2007 market price of the
stock ($9.42) is less than the exercise price of the options outstanding at
December 31, 2007.
At
December 31, 2005, all outstanding options were fully vested and no compensation
expense was incurred from these options. As of December
31, 2007 and 2006, there was approximately $556 and $476, respectively, of
unrecognized compensation cost to be recognized over approximately two
years.
Cash
proceeds from the exercise of options in the year ended December 31, 2007, 2006,
and 2005 totaled approximately $292, $984 and $2,806. For the years
ended December 31, 2007 and 2006, proceeds from stock options were presented
inclusive of tax benefits of $8 and $133, respectively, in the Financing
Activities section of the Consolidated Statements of Cash Flows. The
total intrinsic value of options exercised during the years ended December 31,
2007, 2006 and 2005 was $23, $421, and $1,846, respectively.
Restricted
Stock Awards
In
addition to stock option awards, the Company has restricted stock awards, the
first grant of which was in July 2005. The Company’s policy for
issuing restricted shares is similar to that described under “Stock Option
Awards.” The recognized compensation costs before tax for these
restricted stock awards in the years ended December 31, 2007, 2006, and 2005
were approximately $83, $283 and $206, respectively. The unrecognized
compensation cost before tax for these awards at December 31, 2007, 2006 and
2005 total approximately $32, $159 and $467, respectively, to be recognized over
approximately one, one, and two years, respectively. During the years
ended December 31, 2007 and 2006, the Company experienced forfeiture rates of 6%
and 4%, respectively, of the awards granted. Below is a summary of
the status of the restricted shares as of December 31, 2007 and changes during
the year ended December 31, 2007:
|
Non-vested
Shares
|
Shares
(‘000)
|
Weighted-
Average
Grant-
Date
Fair Value
|
|
Non-vested
at January 1, 2007
|
33
|
$
12.70
|
|
Granted
|
--
|
--
|
|
Vested
|
(15)
|
12.70
|
|
Forfeited
|
(3)
|
12.70
|
|
Non-vested
at December 31, 2007
|
15
|
$
12.70
|
55
NN,
Inc.
Notes
to Consolidated Financial Statements
December
31, 2007, 2006 and 2005
(In
thousands, except per share data)
Long-Term
Incentive Plan
On June
29, 2007, the Company granted certain directors and other key employees an award
of 151,500 performance units pursuant to the NN, Inc. 2005 Incentive
Plan. Each unit is equal to one share of NN common
stock. The award entitles the grantee to earn in a range from 90% to
150% of the total number of units based upon achieving earnings per share and
return on capital employed targets over a defined performance
cycle. The value of the performance units is based on the grant date
fair value of one share of NN common stock or $11.80 per unit. The
performance period is fiscal years 2007, 2008 and 2009 and the shares vest on
December 31, 2009. There was $226 of compensation expense recognized
during the year ended December 31, 2007 related to these performance units and
$905 of unrecognized compensation cost, before tax to be recognized over
approximately two years.
11) Goodwill,
Net
We
completed our annual goodwill impairment review during the fourth quarter of
2007, 2006, and 2005. In performing the impairment reviews for 2007,
2006, and 2005 the Company estimated the fair values of the reporting units from
discounting each segments’ projected future cash flows. During the
second quarter, we recorded $10,016 in impairment charges within the Metal
Bearing Component Segment related to the restructuring of the Metal Bearing
Segment (See Note 3 for further details). As of October 1, 2007 and
2006, the annual review dates, there was no impairment to the remaining goodwill
balances as the fair values of the reporting units exceeded their carrying
values of the reporting units.
The
changes in the carrying amount of goodwill for the years ended December 31, 2007
and 2006 are as follows:
|
(In
thousands)
|
Plastic
and Rubber Components Segment
|
Metal
Bearing Components Segment
|
Precision
Metal Components Segment
|
Total
|
|
Balance
as of January 1, 2006
|
$ 25,755
|
$
15,893
|
$ --
|
$ 41,648
|
|
Goodwill
acquired
|
--
|
--
|
2,352
|
2,352
|
|
Currency
impacts
|
--
|
2,147
|
--
|
2,147
|
|
Balance
as of December 31, 2006
|
$ 25,755
|
$ 18,040
|
$ 2,352
|
$ 46,147
|
|
Balance
as of January 1, 2007
|
$ 25,755
|
$ 18,040
|
$ 2,352
|
$ 46,147
|
|
Adjustments
to purchase price
allocation
|
--
|
--
|
1,922
|
1,922
|
|
Impairment
write down
|
--
|
(10,016)
|
--
|
(10,016)
|
|
Currency
impacts
|
--
|
1,418
|
--
|
1,418
|
|
Balance
as of December 31, 2007
|
$ 25,755
|
$ 9,442
|
$ 4,274
|
$ 39,471
|
The
adjustments to purchase price allocation under the Precision Metal Components
Segment related to changes made to the acquired assets and liabilities of
Whirlaway during the finalization of the purchase price allocation in 2007 (See
Note 2 for further details).
56
NN,
Inc.
Notes
to Consolidated Financial Statements
December
31, 2007, 2006 and 2005
(In
thousands, except per share data)
12) Intangible
Assets, Net
The changes
in the carrying amount of Intangible Assets, net for the years ended December
31, 2007 and 2006 are as follows:
Intangible assets subject to
amortization, net of amortization
|
(In
Thousands)
|
Precision
Metal
Components
Segment
|
Metal
Bearing Components
Segment
|
Total
|
|
Balance
as of January 1, 2006
|
$ --
|
$ 474
|
$ 474
|
|
Acquisition
of intangibles
|
7,180
|
1,855
|
9,035
|
|
Amortization
|
(39)
|
(402)
|
(441)
|
|
Currency
impacts
|
--
|
163
|
163
|
|
Balance
as of December 31, 2006
|
$ 7,141
|
$ 2,090
|
$ 9,231
|
|
Balance
as of January 1, 2007
|
$ 7,141
|
$ 2,090
|
$ 9,231
|
|
Acquisition
of intangibles
|
--
|
173
|
173
|
|
Amortization
|
(657)
|
(558)
|
(1,215)
|
|
Currency
impacts
|
--
|
190
|
190
|
|
Balance
as of December 31, 2007
|
$ 6,484
|
$ 1,895
|
$ 8,379
|
The
intangible asset within the Metal Bearing Components Segment is a contract
intangible related to the SNR purchase agreement and related supply agreement
(See Note 2.) This intangible asset is subject to amortization over
approximately 5 years and amortization expense will approximate $500 for each of
the five years. For the year ended December 31, 2007, the
amortization expense totaled $558 and accumulated amortization totaled
$960.
The
intangible assets within the Precision Metal Components segment were acquired on
November 30, 2006 with the purchase of Whirlaway (See Note 2.) The
majority of the value is a customer relationship intangible with a fair value of
$6,900. As of July 1, 2007, this intangible asset has an estimated
useful life of 10 years and $528 of amortization expense was recorded in
2007. Prior to July 1, 2007, the useful live was estimated to be 20
years. The remaining balance is made up of a covenant not to compete
of $150 and a favorable leasehold interest $130. These items are
amortizable over 2 and 2.5 years, respectively, and $75 and $54 in amortization
expense was recorded in 2007. The accumulated amortization related to
all of these intangible assets at December 31, 2007 is $696.
In
addition, as part of the Whirlaway acquisition we acquired an intangible asset
not subject to amortization of $900 related to the value of the trade names of
Whirlaway. This intangible asset has an indefinite life and as such
is not amortized but is subject to an annual impairment test.
The
Company determined its reportable segments under the provisions of SFAS No. 131,
“Disclosures about Segments of an Enterprise and Related
Information.” During the fourth quarter of 2006, the Company
changed its operational structure and strategic focus such that the operations
are now managed in three reportable segments. The core steel
ball and roller business is managed as one reportable segment as the operations
have become more fully inter-related and integrated. A new segment
entitled “Precision Metal Components” has been established as a result of the
Whirlaway acquisition. During 2006, the Company has integrated a new
information system that enables the Company to report non-segment specific
costs, including corporate expenses, as reconciling items from segment financial
statements to the total Company financial statements. We have
restated the year ended December 31, 2005 to conform to the current segment
reporting.
57
NN,
Inc.
Notes
to Consolidated Financial Statements
December
31, 2007, 2006 and 2005
(In
thousands, except per share data)
The
Company’s three reportable segments are based on differences in product lines
and are as follows:
Metal Bearing Components
Segment
· Erwin
Plant
· Mountain
City Plant
· Kilkenny
Plant
· Eltmann
Plant
· Pinerolo
Plant
· Veenendaal
Plant
· Kysucke
Plant
· Kunshan
Plant
Plastic and Rubber
Components Segment
· Danielson
Plant
· Lubbock
Plant
Precision Metal Components
Segment
· Wellington
Plant 1
· Wellington
Plant 2
· Hamilton
Plant
· Tempe
Plant
All of
the facilities in the Metal Bearing Components Segment are engaged in the
production of precision balls, rollers, and metal retainers and automotive
specialty products used primarily in the bearing industry. The Plastic and
Rubber Components Segment facilities are engaged in the production of plastic
injection molded products for the bearing, automotive, instrumentation and fiber
optic markets and precision rubber bearing seals for the bearing, automotive,
industrial, agricultural, and aerospace markets. The Precision Metal
Components Segment is engaged in the production of highly engineered fluid
control components and assemblies, shafts, and prismatic machined parts for the
air conditioning, appliance, automotive, commercial refrigeration, and diesel
engine industries.
The
accounting policies of the segments are the same as those described in the
summary of significant accounting policies. The Company evaluates segment
performance based on segment net income after income taxes. The Company
accounts for inter-segment sales and transfers at current market prices. The
Company did not have any individually material inter-segment transactions during
2007, 2006, or 2005.
58
NN,
Inc.
Notes
to Consolidated Financial Statements
December
31, 2007, 2006 and 2005
(In
thousands, except per share data)
|
Metal
Bearing Components Segment
|
Precision
Metal Components Segment
|
Plastic
and
Rubber
Components
Segment
|
All
Other
|
Total
|
|
|
December 31, 2007
|
|||||
|
Net
sales
|
$ 303,059
|
$
67,384
|
$ 50,851
|
$ --
|
$ 421,294
|
|
Interest
expense
|
67
|
2,646
|
960
|
2,700
|
6,373
|
|
Depreciation and
amortization
|
16,393
|
4,337
|
2,262
|
4
|
22,996
|
|
Income
tax expense (benefit)
|
9,452
|
(820)
|
1,255
|
(3,465)
|
6,422
|
|
Segment
net income (loss)
|
4,958
|
(1,450)
|
2,242
|
(6,923)
|
(1,173)
|
|
Segment
assets
|
238,276
|
53,422
|
51,997
|
6,383
|
350,078
|
|
Expenditures
for long- lived assets
|
15,634
|
1,541
|
1,681
|
--
|
18,856
|
|
December
31, 2006
|
|||||
|
Net
sales
|
$ 272,299
|
$ 4,722
|
$ 53,304
|
$ --
|
$ 330,325
|
|
Interest
expense
|
45
|
240
|
960
|
2,738
|
3,983
|
|
Depreciation
and amortization
|
14,783
|
345
|
2,324
|
40
|
17,492
|
|
Income
tax expense (benefit)
|
10,681
|
(336)
|
1,547
|
(3,370)
|
8,522
|
|
Segment
net income (loss)
|
18,331
|
(598)
|
2,695
|
(5,993)
|
14,435
|
|
Segment
assets
|
233,051
|
53,535
|
51,836
|
4,279
|
342,701
|
|
Expenditures
for long- lived assets
|
18,479
|
30
|
773
|
--
|
19,282
|
|
December
31, 2005
|
|||||
|
Net
sales
|
$ 263,485
|
$ --
|
$ 57,902
|
$ --
|
$ 321,387
|
|
Interest
expense
|
504
|
--
|
966
|
2,307
|
3,777
|
|
Depreciation
and amortization
|
13,850
|
--
|
2,481
|
--
|
16,331
|
|
Income
tax expense (benefit)
|
11,546
|
--
|
975
|
(2,769)
|
9,752
|
|
Segment
net income (loss)
|
18,725
|
--
|
1,673
|
(5,386)
|
15,012
|
|
Segment
assets
|
207,128
|
--
|
55,741
|
6,786
|
269,655
|
|
Expenditures
for long- lived assets
|
16,003
|
--
|
726
|
--
|
16,729
|
Due to
the large number of countries in which we sell our products, sales to external
customers and long-lived assets utilized by us are reported in the
following geographical regions:
|
December 31,
2007
|
December 31,
2006
|
December 31,
2005
|
||||
|
Sales
|
Long-lived
assets
|
Sales
|
Long-lived
assets
|
Sales
|
Long-lived
assets
|
|
|
United
States
|
$ 137,140
|
$ 51,363
|
$ 77,526
|
$ 54,617
|
$ 77,763
|
$ 31,821
|
|
Europe
|
215,209
|
97,238
|
194,359
|
94,369
|
185,786
|
81,348
|
|
Asia
|
31,879
|
12,407
|
24,119
|
7,461
|
19,689
|
5,660
|
|
Canada
|
5,089
|
--
|
8,028
|
--
|
8,835
|
--
|
|
Mexico
|
15,065
|
--
|
13,164
|
--
|
12,223
|
--
|
|
South
America/Other
|
16,912
|
--
|
13,129
|
--
|
17,091
|
--
|
|
All
foreign countries
|
284,154
|
109,645
|
252,799
|
101,830
|
243,624
|
87,008
|
|
Total
|
$ 421,294
|
$ 161,008
|
$ 330,325
|
$ 156,447
|
$
321,387
|
$
118,829
|
59
NN,
Inc.
Notes
to Consolidated Financial Statements
December
31, 2007, 2006 and 2005
(In
thousands, except per share data)
14) Income Taxes
Income
before provision for income taxes for the years ended December 31, 2007, 2006
and 2005 was as follows:
|
Year
ended December 31,
|
|||
|
2007
|
2006
|
2005
|
|
|
Income
before provision for income taxes:
|
|||
|
United
States
|
$ 630
|
$ 3,735
|
$ 6,227
|
|
Foreign
|
4,619
|
19,222
|
18,537
|
|
Total
|
$ 5,249
|
$ 22,957
|
$
24,764
|
Total
income tax expense (benefit) for the years ended December 31, 2007, 2006, and
2005 were as follows:
|
Year
ended December 31,
|
|||
|
2007
|
2006
|
2005
|
|
|
Current:
|
|||
|
U.S.
Federal
|
$ --
|
$ 3,035
|
$ 2,815
|
|
State
|
(18)
|
201
|
(78)
|
|
Non-U.S.
|
7,623
|
6,670
|
7,689
|
|
Total
current expense
|
$
7,605
|
$ 9,906
|
$ 10,426
|
|
Deferred:
|
|||
|
U.S.
Federal
|
$ 176
|
$
(3,388)
|
$ (609)
|
|
State
|
271
|
17
|
303
|
|
Valuation
allowance
|
5,082
|
1,581
|
--
|
|
Non-U.S.
|
(6,712)
|
406
|
(368)
|
|
Total
deferred expense (income)
|
(1,183)
|
(1,384)
|
(674)
|
|
Total
expense
|
$ 6,422
|
$ 8,522
|
$
9,752
|
A
reconciliation of taxes based on the U.S. federal statutory rate of 34%, 35% and
34% for the years ended December 31, 2007, 2006, and 2005 is summarized as
follows:
|
Year
ended December 31,
|
|||
|
2007
|
2006
|
2005
|
|
|
Income
taxes at the federal statutory rate
|
$ 1,785
|
$ 8,034
|
$
8,420
|
|
Lowering
of U.S. effective rate from 35% to 34%
|
(314)
|
219
|
--
|
|
Impact
of incentive stock options
|
228
|
63
|
--
|
|
Increase
in valuation allowance
|
5,082
|
--
|
--
|
|
Reduction
in net deferred tax liabilities in Italy due to lowering of statutory tax
rates
|
(1,050)
|
--
|
--
|
|
State
income taxes, net of federal benefit
|
(12)
|
143
|
225
|
|
Non-U.S.
earnings taxed at different rates
|
390
|
353
|
1,019
|
|
Other,
net
|
313
|
(290)
|
88
|
|
$
6,422
|
$ 8,522
|
$
9,752
|
|
60
NN,
Inc.
Notes
to Consolidated Financial Statements
December
31, 2007, 2006 and 2005
(In
thousands, except per share data)
The tax
effects of the temporary differences are as follows:
|
Year
ended December 31,
|
||
|
2007
|
2006
|
|
|
Deferred
income tax liability
|
||
|
Tax
in excess of book depreciation
|
$
13,199
|
$
11,073
|
|
Goodwill
|
4,969
|
6,902
|
|
Allowance
for bad debts
|
86
|
--
|
|
Other
deferred tax liabilities
|
428
|
291
|
|
Gross
deferred income tax liability
|
18,682
|
18,266
|
|
Deferred
income tax assets
|
||
|
Inventories
|
385
|
508
|
|
Allowance
for bad debts
|
--
|
16
|
|
Pension/Personnel
accruals
|
986
|
485
|
|
Environmental
provision
|
441
|
408
|
|
Net
operating loss carryforwards
|
3,149
|
912
|
|
Foreign
tax credits
|
3,244
|
3,423
|
|
Other
deferred tax assets
|
125
|
1,077
|
|
Gross
deferred income tax assets
|
8,330
|
6,829
|
|
Valuation
allowance on deferred tax assets
|
(6,663)
|
(1,581)
|
|
Net
deferred income tax assets
|
1,667
|
5,248
|
|
Net
deferred income tax liability
|
$ 17,015
|
$ 13,018
|
The net
operating loss carry forwards are composed of net operating losses in Germany,
Slovakia, and China for which full valuation allowances have been recorded as of
December 31, 2007, as it is management’s judgment that the resulting tax
benefits are not realizable. According to German law, there are not
any time limitations on carrying forward the $7,785 in net operating losses of
our German subsidiary. Slovakian net operating losses of $41, $901,
$641, $236 and $1,054 expire in 2008, 2009, 2010, 2011, and 2012,
respectively. The China net operating losses of $88, $814, $2,163 and
$2,037 expire in 2009, 2010, 2011, and 2012, respectively and have a effective
tax rate of 0% as these losses will be applied to income during our tax holiday
once profitability is achieved.
The
foreign tax credits relate to profits of certain foreign subsidiaries that were
taxed as deemed dividends. These credits represent the foreign taxes
paid by these subsidiaries at higher effective rates that will be used to offset
future foreign source income. A valuation allowance was placed
against these credits based on estimates of future foreign source income to be
generated that these credits can be used to offset. The
valuation allowance with be periodically reviewed as our estimates of future
foreign source income are amended based on actual foreign source income
recognized in our tax returns and future changes in foreign source
income.
As
realization of deferred tax assets is not assured, management has placed
valuation allowances against deferred tax assets it believes are not
recoverable. For the remainder management believes it is more likely
than not that those net deferred tax assets will be realized. However, the
amount of the deferred tax assets considered realizable could be reduced based
on changing conditions.
As of December 31, 2006, all of the
Company's foreign earnings have been previously taxed in the U.S. due to the
application of IRC Sec. 956. Accordingly, no deferred taxes have been
provided for undistributed earnings. The Company expects to reinvest future
earnings indefinitely in operations and expansions outside the U.S. and does not
expect such earnings to become subject to U.S. taxation in the foreseeable
future. If such earnings were distributed beyond the amount for which
taxes have been provided, foreign tax credits would substantially offset any
incremental U.S. tax liability. A deferred tax liability will be
recognized when the Company expects that it will recover these undistributed
earnings in a taxable manner, such as through the receipt of dividends or sale
of the investments. It is not practicable to determine the U.S. income tax
liability, if any, that would be payable if such earnings, were not reinvested
indefinitely.
61
NN,
Inc.
Notes
to Consolidated Financial Statements
December
31, 2007, 2006 and 2005
(In
thousands, except per share data)
The
Company adopted the provisions of FIN 48 on January 1, 2007. As a
result of the implementation of FIN 48, the Company recognized a $600 increase
in our income tax liabilities and a corresponding reduction in beginning
retained earnings.
As of the
date of adoption, the total unrecognized benefits were approximately $879, all
of which, if recognized, would affect the effective tax
rate. A reconciliation of the beginning and ending amounts of
unrecognized tax benefits, excluding interest and penalties is as
follows:
|
Balance
at January 1, 2007
|
$
879
|
|
Additions
based on tax positions related to the current year
|
--
|
|
Additions
for tax positions of prior years
|
386
|
|
Reductions
for tax positions of prior years
|
(220)
|
|
Settlements
|
--
|
|
Balance
at December 31, 2007
|
$
1,045
|
As of
December 31, 2007, the $1,045 of unrecognized tax benefits would, if recognized,
impact the Company’s effective tax rate.
Interest
and penalties related to federal, state, and foreign income tax matters are
recorded as a component of the provision for income taxes in our statements of
income. As of January 1, 2007, we had accrued $609 in both U.S. and
foreign interest and penalties. During 2007, we accrued an additional
$48 in foreign interest and penalties resulting in an accrued balance of $657of
interest and penalties as of December 31, 2007.
The
Company or its subsidiaries file income tax returns in the U.S. federal
jurisdiction, and in various states and foreign jurisdictions. With
few exceptions, the Company is no longer subject to federal, state and local
income tax examinations by tax authorities for years before 2003. The
Company is no longer subject to non-U.S. income tax examinations within various
European Union countries for years before 2002. We do not foresee any
changes to our unrecognized tax benefits within the next twelve months.
|
Year
ended December 31,
|
|||
|
2007
|
2006
|
2005
|
|
|
Net
income (loss)
|
$
(1,173)
|
$
14,435
|
$
15,012
|
|
Weighted
average shares outstanding
|
16,749
|
17,125
|
17,004
|
|
Effective
of dilutive stock options
|
--
|
226
|
189
|
|
Dilutive
shares outstanding
|
16,749
|
17,351
|
17,193
|
|
|
|||
|
Basic
net income per share
|
$
(0.07)
|
$ 0.84
|
$ 0.88
|
|
Diluted
net income per share
|
$
(0.07)
|
$ 0.83
|
$ 0.87
|
62
NN,
Inc.
Notes
to Consolidated Financial Statements
December
31, 2007, 2006 and 2005
(In
thousands, except per share data)
Excluded
from the shares outstanding for the years ended December 31, 2007, 2006,
and 2005 were 821, 301 and 344 anti-dilutive options, respectively, which had an
exercise prices of $11.29 to $12.62 for the year ended December 31, 2007 and
$12.62 per share for the years ended December 31, 2006 and 2005. In
addition in 2006, there were 172 options that were anti-dilutive due to the
large amount of unrecognized compensation expense associated with these
options.
The
Company has operating lease commitments for machinery, office equipment,
vehicles, manufacturing and office space which expire on varying dates. Rent
expense for 2007, 2006, and 2005 was $4,908, $2,617, and $2,422, respectively.
The following is a schedule by year of future minimum lease payments as of
December 31, 2007 under operating leases that have initial or remaining non
cancelable lease terms in excess of one year.
|
Year
ended December 31,
|
|
|
2008
|
$
4,333
|
|
2009
|
3,437
|
|
2010
|
2,823
|
|
2011
|
2,420
|
|
2012
|
1,170
|
|
Thereafter
|
9,131
|
|
Total
minimum lease payments
|
$
23,314
|
The
Kilkenny Plant of the Metal Bearing Components Segment has received certain
grants from the Ireland government. These grants are based upon the
Kilkenny Plant hiring and retention of certain employment levels by the
measurement date. At December 31, 2007, actual employment levels are
less than those required by certain grant covenants. The potential
impact to the Company is estimated to be approximately $370. However,
management believes as long as we maintain our operations in Ireland at current
levels there is a remote chance this amount will ever be demanded by the Irish
government. As of December 31, 2007 and 2006, the grant obligation is
recorded as a component of other non-current liabilities in the amount of $374
and $405, respectively.
The Metal
Bearing Components Segment has a supply contract with Ascometal France
(“Ascometal”) for the purchase of steel in Europe that covers the years 2007,
2008 and 2009. The contract will automatically renew annually unless
formal notice is sent by either party one year in advance. The
percentage of steel purchased for European operations granted to Ascometal under
the contract is 70% or approximately $53,300. The contract, among
other things, stipulates that Ascometal achieve certain performance targets
related to quality, reliability and service and the percentage granted can be
reduced if those targets are not met by the vendor. The contract
provisions include annual price adjustments based upon published
indexes. In 2007, we purchased approximately $47,800 under the
contract.
On March
20, 2006, we, as well as numerous other parties, received correspondence from
the Environmental Protection Agency (“EPA”) requesting information regarding a
former waste recycling vendor previously used by us. The vendor has
since ceased operations and the EPA is investigating the clean up of the site or
sites used by the vendor. The Company has contributed to an escrow
fund along with 42 other potentially responsible parties for the purpose of
investigating and addressing the environmental issues at the
facility. The Company’s contribution to the account was
$23. A Remedial Investigation and Risk Assessment report funded by
the escrow fund was submitted to the EPA in December 2007. As of the
date of this report, we do not know whether we have any liability beyond the
contribution to the escrow account mentioned earlier, related to this vendor’s
actions, or estimatable range for any potential liability. The
Company believes its contribution to the remediation of the site, if any, would
be approximately 1.083% or less of the volume of waste sent to the facility and
the Company asserts that its waste was non-hazardous.
63
NN,
Inc.
Notes
to Consolidated Financial Statements
December
31, 2007, 2006 and 2005
(In
thousands, except per share data)
On June
20, 2007, we, as well as numerous other parties, received correspondence from
the New York State Department of Environmental Conservation notifying us that we
have been named as a potentially responsible party for the potential clean up of
a former waste recycling facility. As of the date of this report, we
estimate our maximum exposure to be ten thousand dollars. The maximum
exposure is based on the amount of gallons we sent to the waste facility
multiplied by the proposed charge per gallon as determined by the potentially
responsible parties.
The
following summarizes the unaudited quarterly results of operations for the years
ended December 31, 2007 and 2006.
|
Year
ended December 31, 2007
|
||||
|
March 31
|
June 30
|
Sept. 30
|
Dec. 31
|
|
|
Net
sales
|
$
107,944
|
$
107,302
|
$
99,021
|
$
107,027
|
|
Income
(loss) from operations
|
7,920
|
(7,173)
|
3,212
|
7,277
|
|
Net
income (loss)
|
3,755
|
(10,365)
|
398
|
5,039
|
|
Basic
net income (loss) per share
|
0.22
|
(0.62)
|
0.02
|
0.31
|
|
Dilutive
net income (loss) per share
|
0.22
|
(0.62)
|
0.02
|
0.31
|
|
Weighted
average shares outstanding:
|
||||
|
Basic
number of shares
|
16,813
|
16,815
|
16,765
|
16,159
|
|
Effect
of dilutive stock options
|
220
|
--
|
139
|
121
|
|
Diluted
number of shares
|
17,033
|
16,815
|
16,904
|
16,280
|
|
Year
ended December 31, 2006
|
||||
|
March 31
|
June 30
|
Sept. 30
|
Dec. 31
|
|
|
Net
sales
|
$ 86,017
|
$ 83,554
|
$ 74,870
|
$ 85,884
|
|
Income
from operations
|
8,905
|
7,157
|
4,807
|
5,023
|
|
Net
income
|
5,262
|
3,453
|
2,633
|
3,087
|
|
Basic
net income per share
|
0.31
|
0.20
|
0.15
|
0.18
|
|
Dilutive
net income per share
|
0.30
|
0.20
|
0.15 |
0.18
|
|
Weighted
average shares outstanding:
|
||||
|
Basic
number of shares
|
17,152
|
17,157
|
17,105
|
16,941
|
|
Effect
of dilutive stock options
|
224
|
212
|
234
|
200
|
|
Diluted
number of shares
|
17,376
|
17,369
|
17,339
|
17,141
|
In the
fourth quarter of 2007, we benefited from a reduction in deferred tax
liabilities of $1,050 at our Italian operations due to the Italian government
enacting in December 2007 a reduction in statutory tax rates.
64
NN,
Inc.
Notes
to Consolidated Financial Statements
December
31, 2007, 2006 and 2005
(In
thousands, except per share data)
The third
quarter of 2007 included an accrual of $1,272 ($1,196 after tax) for cash
restructuring charges related to the Metal Bearing Components Segment
restructuring (See Note 3). During the fourth quarter of 2007, $1,062
$(1,062 after tax) of these restructuring charges was reversed.
The
second quarter of 2007 included $13,366 ($12,623 after tax) in non-cash charges
within our Metal Bearing Components Segment related to impairment of goodwill
and fixed assets to levels supported by projected cash flows after restructuring
activity within the segment (See Note 3).
The
fourth quarter of 2006 included one month of Whirlaway with sales of $4,722 and
a net loss of $598 due primarily to one time purchase accounting adjustments of
$385, net of tax, from increasing the inventory value from cost to fair
value.
The first
quarter results in 2006 include a net gain resulting from a $770 after-tax gain
on the sales of excess land less a loss on disposal of excess machinery at the
Pinerolo Plant.
Management
believes the fair value of financial instruments approximate their carrying
value due to the short maturity of these instruments or in the case of the
Company’s variable rate debt, due to the variable interest rates. The
fair value of the Company’s fixed rate long-term borrowings are estimated using
a discounted cash flow analysis based on the Company’s current incremental
borrowing rates for similar types of borrowing arrangements. The
carrying amounts and fair values of the Company’s long-term debt are in the
table below:
|
December
31, 2007
|
December
31, 2006
|
|||
|
Carrying
Amount
|
Fair
Value
|
Carrying
Amount
|
Fair
Value
|
|
|
Variable
rate long-term debt
|
$ 70,476
|
$ 70,476
|
$ 39,466
|
$ 39,466
|
|
Fixed
rate long-term debt
|
41,568
|
40,222
|
42,096
|
39,941
|
At
December 31, 2007 and 2006, the Company has added to accumulated other
comprehensive income unrealized income due to foreign currency translation of
$11,764 and $15,743. Income taxes on the foreign currency translation
adjustment in other comprehensive income were not recognized because the
earnings are intended to be indefinitely reinvested in those
operations.
Also added
to accumulated other comprehensive income as of December 31, 2007 was an
actuarial gain of from our pension liability, net of tax of
$656. Included in accumulated other comprehensive income as of
December 31, 2006 was an adjustment to initially apply SFAS 158 and record the
unrecognized actuarial net loss that has not been recognized as a component of
pension income of $394, net of tax . The additional minimum liability
that made up a portion of the 2005 balance was eliminated first by the plan
curtailment and then eliminated under adoption of SFAS 158. (See Note
9)
20) Common
Stock Repurchase
During
the first quarter of 2006, the Company’s Board of Directors authorized a stock
repurchase program under which the Company was authorized to repurchase up to
$10 million in common stock of the Company, during the subsequent 18 months in
the open market or in private transactions, in accordance with applicable laws
and regulations. This amount represented approximately 5% of the
Company’s outstanding stock at the date of authorization. During the
year ended December 31, 2007, the Company repurchased under this program
approximately 211 shares at an approximate average cost of $10.26 a share for a
total of $2,166. This program expired September 13, 2007 with a total
of approximately 674 shares being purchased totaling $7,441.
65
NN,
Inc.
Notes
to Consolidated Financial Statements
December
31, 2007, 2006 and 2005
(In
thousands, except per share data)
In August
2007, a new share repurchase program was established for a period of one year
beginning on September 13, 2007, and the amount approved for purchase, from this
date until the expiration of the program, was $25 million worth of shares to be
purchased in the open market from time to time in accordance with applicable
laws and market regulations. During the year ended December 31, 2007,
the Company repurchased approximately 797 shares under this program at an
average cost of $9.53 per share for a total of $7,556.
The total
of all share repurchases during the year ended December 31, 2007 was
approximately 1,008 shares for $9,722.
21) Related
Party Transactions
With the
acquisition of Whirlaway on November 30, 2006, the Company incurred a $21,305
note payable to the former shareholder of Whirlaway who is now an officer
of the Company. The Company remitted $18,638 to the former sole
shareholder of Whirlaway to partially repay the related party note
payable. The remainder was related to a tax indemnity that was
initially recorded but subsequently eliminated from the purchase price and note
payable with a corresponding reduction to goodwill. Additionally, on
November 30, 2006, the Company entered into operating leases covering two of the
Whirlaway manufacturing facilities with a company owned by the former
shareholder of Whirlaway who is now an officer of the company. The rent payments
in 2007 and 2006 to this related party were $644 and $50. The total
future rent payments will be $2,576 over 4 years or $644 per year.
66
NN,
Inc.
Notes
to Consolidated Financial Statements
December
31, 2007, 2006 and 2005
(In
thousands, except per share data)
Item
9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
The
Company's management, under the supervision and with the participation of the
Chief Executive Officer and Chief Financial Officer, conducted an evaluation of
the effectiveness of the design and operation of the Company's disclosure
controls and procedures as defined under Rule l3a-15(e) promulgated under the
Securities Exchange Act of 1934, as amended (the "Exchange
Act"). Based on this evaluation, the Chief Executive Officer and the
Chief Financial Officer concluded that the Company's disclosure controls and
procedures were not effective as of December 31, 2007, the end of the period
covered by this annual report on Form 10-K, due to the existence of the material
weakness described below.
Management's
Report on Internal Control Over Financial Reporting
The
management of NN, Inc. is responsible for establishing and maintaining adequate
internal control over financial reporting, as such term is defined in Exchange
Act Rule 13a-15(f). Management, under the supervision and with the
participation of the Chief Executive Officer and Chief Financial Officer,
conducted an evaluation of the effectiveness of the Company's internal control
over financial reporting based on the Internal Control- Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission ("COSO"). Based on its evaluation, management
concluded that the Company's internal control over financial reporting was not
effective as of December 31, 2007 due to the existence of a material weakness
discussed below.
A
material weakness is a deficiency, or a combination of deficiencies, in internal
control over financial reporting, such that there is a reasonable possibility
that a material misstatement of the annual or interim financial statements will
not be prevented or detected on a timely basis.
The
following material weakness was identified in our internal control over
financial reporting as of December 31, 2007. The Company did not maintain
effective controls over the accounting for the impairment of customer intangible
assets. Specifically, the Company did not maintain effective controls
to ensure that when circumstances indicate the carrying value of intangible
assets may not be recoverable these assets are appropriately grouped at the
lowest level for which identifiable cash flows are largely independent of the
cash flows of other assets and liabilities in accordance with generally accepted
accounting principles. This control
deficiency resulted in the restatement of the interim consolidated financial
statements for the second and third quarters of 2007 affecting depreciation and
amortization expense, restructuring and impairment charges and intangible assets
and other assets. Further, this control deficiency could result in
misstatements of the aforementioned accounts that would result in a material
misstatement of the annual or interim consolidated financial statements that
would not be prevented or detected.
The
effectiveness of our internal control over financial reporting as of December
31, 2007 has been audited by PricewaterhouseCoopers LLP, an independent
registered public accounting firm, as stated in their report which appears under
item 8 of this filing.
Remediation
of Material Weakness
Management
has determined that, as of the date of this filing, the material weakness in our
internal control over financial reporting with respect to accounting for the
impairment of customer intangible assets has been
remediated. Management's remediation efforts focused on applying a
correct interpretation of SFAS 144, Accounting for the Impairment or
Disposal of Long-Lived Assets, in evaluating whether the Company's
intangible assets are impaired.
Changes
in Internal Control over Financial Reporting
There
were no changes in the Company's internal control over financial reporting
during the quarter ended December 31, 2007 that have materially affected, or are
reasonably likely to materially affect, the Company's internal control over
financial reporting.
67
NN,
Inc.
Notes
to Consolidated Financial Statements
December
31, 2007, 2006 and 2005
(In
thousands, except per share data)
Item
9B. Other
Information
None
Part
III
The
information required by this item of Form 10-K concerning the Company's
directors is contained in the sections entitled "Information about the
Directors" and "Beneficial Ownership of Common Stock" of the Company's
definitive Proxy Statement to be filed with the Securities and Exchange
Commission within 120 days after December 31, 2007, in accordance with
General Instruction G to Form 10-K, is hereby incorporated herein by
reference.
Code of
Ethics. Our Code of Ethics (the “Code”) was approved by our
Board on November 6, 2003. The Code is applicable to all officers,
directors and employees. The Code is posted on our website at
http://www.nnbr.com. We will satisfy any disclosure requirements
under Item 10 of Form 8-K regarding an amendment to, or waiver from, any
provision of the Code with respect to our principal executive officer, principal
financial officer, principal accounting officer and persons performing similar
functions by disclosing the nature of such amendment or waiver on our website or
in a report on Form 8-K.
Item
11. Executive
Compensation
The
information required by Item 402 of Regulation S-K is contained in the sections
entitled "Information about the Directors -- Compensation of
Directors" and "Executive Compensation" of the Company's definitive Proxy
Statement and, in accordance with General Instruction G to Form 10-K, is hereby
incorporated herein by reference.
Item
12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
The
information required by Items 201(d) and 403 of Regulation S-K is contained in
the section entitled "Beneficial Ownership of Common Stock" of the Company's
definitive Proxy Statement and, in accordance with General Instruction G to Form
10-K, is hereby incorporated herein by reference.
Information
required by Item 201 (d) of Regulations S-K concerning the Company’s equity
compensation plans is set forth in the table below:
Table
of Equity Compensation Plan Information
(in
thousands)
|
Plan
Category
|
Number
of securities to
be issued upon exercise
of outstanding
options, warrants and
rights
(a)
|
Weighted –average exercise
price of outstanding options,
warrants and
rights
(b)
|
Number of securities remaining
available for future issuance under
equity compensation plans
(excluding securities reflected in
column (a))
(c)
|
|
Equity
compensation plans approved by security holders
|
1,651
|
$10.08
|
564
|
|
Equity
compensation plans not approved by security holders
|
--
|
--
|
--
|
|
Total
|
1,651
|
$10.08
|
564
|
68
With the
acquisition of Whirlaway on November 30, 2006, the company incurred a $21.3
million note payable to the former shareholder of Whirlaway, Thomas Zupan, who
is now Vice President – President of Whirlaway Corporation. As of
December 31, 2007 the Company has fully satisfied this note. During
2007, we paid $18.6 million to Mr. Zupan and $2.7 million was determined to be
not required and the note payable was reduced by thus
amount. Additionally, on November 30, 2006, the company entered into
operating leases covering two of the Whirlaway manufacturing facilities with a
company owed by Mr. Zupan. The rent payments in 2007 and 2006 to this
related party were $ 0.6 million and $0.1 million. The total future
rent payments as of December 31, 2007 will be $2.6 million over 4 years or
approximately $0.6 million per year.
Information
regarding director independence is contained in a section entitled “Information
about the Directors” of the Company’s definitive Proxy Statement and, in
accordance with General Instruction G to Form 10-K, is hereby incorporated
herein by reference.
Information
required by this item of Form 10-K concerning the Company’s accounting fees and
services is contained in the section entitled “Fees Paid to Independent
Registered Public Accounting Firm” of the Company’s definitive Proxy Statement
and, in accordance with General Instruction G to Form 10-K, is hereby
incorporated herein by reference.
Part IV
(a) List
of Documents Filed as Part of this Report
1.
Financial Statements
The
financial statements of the Company filed as part of this Annual Report on Form
10-K begins on the following pages hereof:
Page
Report of
Independent Registered Public Accounting
Firm .......................................................................................................................................
34
Consolidated
Balance Sheets at December 31, 2007 and
2006.................................................................................................................................... 35
Consolidated
Statements of Income and Comprehensive Income for the years
ended December 31, 2007, 2006, and 2005 ...........................
36
Consolidated
Statements of Changes in Stockholders’ Equity for the years
ended December 31, 2007, 2006, and
2005 ................................ 37
Consolidated
Statements of Cash Flows for the years ended December
31, 2007, 2006, and
2005 .....................................................................
38
Notes to
Consolidated Financial
Statements .............................................................................................................................................................
39
2. Financial Statement Schedules
Not applicable
3.
See Index to Exhibits (attached hereto)
(b) Exhibits: See Index to Exhibits (attached hereto).
69
The
Company will provide without charge to any person, upon the written request of
such person, a copy of any of the Exhibits to this Form 10-K.
(c) Not
Applicable
70
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
By: /s/
Roderick R.
Baty
Roderick R.
Baty
Chairman of the
Board,
Chief Executive
Officer and President
Dated: March 17,
2008
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the Registrant and in the
capacities and on the date indicated.
|
Name and Signature
|
Title
|
Date
|
| Chairman of the Board, Chief Executive Officer and President | ||
|
/s/
roderick r. baty
|
March 17, 2008
|
|
|
Roderick R. Baty
|
||
|
/s/
james h. dorton
|
Vice
President-Corporate Development and Chief
Financial Officer
|
March
17, 2008
|
|
James
H. Dorton
|
||
|
/s/
william c. kelly jr.
|
Vice
President-Chief Administrative Officer, Secretary and Treasurer
|
March
17, 2008
|
|
William
C. Kelly, Jr.
|
||
|
/s/
Thomas c. burwell, Jr.
|
Corporate
Controller
|
March
17, 2008
|
|
Thomas
C. Burwell, Jr.
|
||
|
/s/
g. ronald morris
|
Director
|
March
17, 2008
|
|
G.
Ronald Morris
|
||
|
/s/
michael e. werner
|
Director
|
March
17, 2008
|
|
Michael
E. Werner
|
||
|
/s/
steven t. warshaw
|
Director
|
March
17, 2008
|
|
Steven
T. Warshaw
|
||
|
/s/
richard g. fanelli
|
Director
|
March
17, 2008
|
|
Richard
G. Fanelli
|
||
|
/s/
robert m. aiken, jr.
|
Director
|
March
17, 2008
|
|
Robert
M. Aiken, Jr.
|
71
| 2.1 | Asset Purchase Agreement dated April 14, 2003 among SKF Holding Maatschappij Holland B.V., SKF B.V., NN, Inc. and NN Netherlands B.V. (incorporated by reference to Exhibit 2.1 of Form 8-K filed on May 16, 2003). |
|
3.1
|
Restated Certificate of Incorporation of the Cmopany (incorporated by reference to Exhibit 3.1 of the Company's Registration Statement No. 333-89950 on Form S-3 filed June 6, 2002). |
|
3.2
|
Restated By-Laws of the Company (incorporated by reference to Exhibit 3.2 of the Company's Registration Statement No. 333-89950 on Form S-3 filed June 6, 2002) |
|
4.1
|
The specimen stock certificate representing the Company's Common Stock, par value $0.01 per share (incorporated by reference to Exhibit 4.1 of the Company's Registration Statement No. 333-89950 on Form S-3 filed June 6, 2002) |
|
4.2
|
Article IV, Article V (Sections 3 through 6), Article VI (Section 2) and Article VII (Sections 1 and 3) of the Restated Certificate of Incorporation of the Company (included in Exhibit 3.1) |
|
4.3
|
Article II (Sections 7 and 12), Article III (Sections 2 and 15) and Article VI of the Restated By-Laws of the Company (included in Exhibit 3.2) |
|
10.1
|
NN, Inc. Stock Incentive Plan and Form of Incentive Stock Option Agreement pursuant to the Plan (incorporated by reference to Exhibit 10.1 of the Company’s Registration Statement No. 333-89950 on Form S-3/A filed July 15, 2002)* |
|
10.2
|
Amendment No. 1 to the NN, Inc. Stock Incentive Plan (incorporated by reference to Exhibit 4.6 of the Company’s Registration Statement No. 333-50934 on Form S-8 filed on November 30, 2000)* |
|
10.3
|
Amendment No. 2 to the NN, Inc. Stock Incentive Plan (incorporated by reference to Exhibit 4.7 of the Company’s Registration Statement No. 333-69588 on Form S-8 filed on September 18, 2001)* |
|
10.4
|
Amendment No. 3 to NN, Inc. Stock Incentive Plan as ratified by the shareholders on May 15, 2003 amending the Plan to permit the issuance of awards under the Plan to directors of the Company (incorporated by reference to Exhlibit 10-1 of the Company's Quarterly Report on Form 10-Q filed August 14, 2003)* |
|
10.5
|
Form of Indemnification Agreement (incorporated by reference to Exhibit 10.6 of the Company’s Registration Statement No. 333-89950 on Form S-3/A filed July 15, 2002) |
|
10.6
|
Form of Stock Option Agreement, dated December 7, 1998, between the Company and the non-employee directors of the Company (incorporated by reference to Exhibit 10.15 of the Company’s Annual Report on Form 10-K filed March 31, 1999)* |
|
10.7
|
Elective Deferred Compensation Plan, dated February 26, 1999 (incorporated by reference to Exhibit 10.16 of the Company’s Annual Report on Form 10-K filed March 31, 1999)* |
|
10.8
|
NN, Inc. 2005 Stock Incentive Plan (incorporated by reference to the Company's Form S-8 filed December 16, 2005)* |
|
10.9
|
Executive Employment Agreement, dated August 21, 2006, between the Company and Roderick R. Baty (incorporated by reference to the Company's Form 8-K filed August 24, 2006)* |
|
10.10
|
Executive Employment Agreement, dated August 21, 2006, between the Company and James H. Dorton (incorporated by reference to the Company's Form 8-K filed August 24, 2006)* |
|
10.11
|
Executive Employment Agreement, dated August 21, 2006, between the Company and Nicola Trombetti (incorporated by reference to the Company's Form 8-K filed August 24, 2006)* |
72
|
10.12
|
Executive Employment Agreement, dated August 21, 2006, between the Company and Thomas McKown (incorporated by reference to the Company's Form 8-K filed August 24, 2006)* |
|
10.13
|
Executive Employment Agreement, dated August 21, 2006, between the Company and James Anderson (incorporated by reference to the Company's Form 8-K filed August 24, 2006)* |
|
10.14
|
Executive Employment Agreement, dated August 21, 2006, between the Company and David M. Gilson (incorporated by reference to the Company's Form 8-K filed October 3, 2006)* |
|
10.15
|
Executive Employment Agreement, dated August 21, 2006, between the Company and Thomas G. Zupan (incorporated by reference to the Company's Form 8-K filed December 6, 2006)* |
|
10.16
|
Executive Employment Agreement, dated August 21, 2006, between the Company and Frank T. Gentry (incorporated by reference to Company's Current Report on Form 8-K filed August 24, 2006)* |
|
10.17
|
Executive Employment Agreement, dated August 21, 2006, between the Company and Robert R. Sams (incorporated by reference to the Company's Current Report on Form 8-K filed August 21, 2006)* |
|
10.18
|
Executive Employment Agreement dated August 21, 2006, between the Company and William C. Kelly, Jr. (incorporated by reference to the Company's Current Report on Form 8-K filed August 24, 2006)* |
|
10.19
|
NN Euroball, ApS Shareholder Agreement dated April 6, 2000 among NN, Inc., AB SKF and FAG Kugelfischer Georg ShaferAG (incorporated by reference to Exhibit 10.26 of the Company's Annual Report on Form 10-K filed March 29, 2002) |
| 10.20 | Frame Supply Agreement between Euroball S.p.A., Kugelfertigung Eltmann GmbH, NN Euroball Ireland Ltd. and Ascometal effective January 1, 2002 (We have omitted certain information from the Agreement and filed it separately with the Securities and Exchange Commission pursuant to our request for confidential treatment under Rule 24b-2. We have identified the omitted confidential information by the following statement, "Confidential portions of material have been omitted and filed separately with the Securities and Exchange Commission," as indicated throughout the document with an asterisk in brackets ([*])) (incorporated by reference to Exhibit 10.26 of the Company's Annual Report on Form 10-K filed March 31, 2003) |
|
10.21
|
Supply Agreement between NN Euroball ApS and AB SKF dated April 6, 2000. (We have omitted certain information from the Agreement and filed it separately with the Securities and Exchange Commission pursuant to our request for confidential treatment under Rule 24b-2. We have identified the omitted confidential information by the following statement, "Confidential portions of material have been omitted and filed separately with the Securities and Exchange Commission, " as indicated throughout the document with a n asterisk in brackets([*]) (incorporated by reference to Exhibit 10.3 of the Company's Quarterly Report on Form 10-Q filed August 14, 2003) |
|
10.22
|
Global Supply Agreement among NN, Inc., NN Netherlands B.V. and SKF Holding Maatschappij Holland B.V. dated April 14, 2003. (We have omitted certain information from the Agreement and filed it separately with the Securities and Exchange Commission pursuant to our request for confidential treatment under Rule 24b-2. We have identified the omitted confidential information by the following statement, "Confidential portions of material have been omitted and filed separately with the Securities and Exchange Commission, " as indicated throughout the document with a n asterisk in brackets([*])(incorporated by reference to Exhibit 10.4 of the Company's Quarterly Report on Form 10-Q filed August 14, 2003) |
|
10.23
|
Note Purchase Agreement dated April 22, 2004 among NN, Inc. as the Borrower and its Subsidiary Guarantors and the Prudential Insurance Company of America as Agent for the Purchase. (incorporated by reference to Exhibit 10.28 of the Company's Annual Report on Form 10-K filed March 16, 2005) |
|
10.24
|
First Amendment to Note Purchase Agreement dated as of September 1, 2006, among NN, Inc. and The Prudential Insurance and Annuity Company, American Bankers Life Assurance Company of Florida, Inc., Farmers New World Life Insurance Company and Times Insurance Company (incorporated by reference to the Company's Form 8-K filed September 27, 2006)* |
73
|
10.25
|
Credit
Agreement dated as of September 1, 2006 among NN, Inc., and the Lenders as
named therein, KeyBank National Association as Lead Arranger, Book Runner
and Administrative Agent, and AmSouth Bank, as Swing Line Lender
(incorporated by reference to the Company's Current Report on Form 8-K
filed September 27, 2006)
|
21.1 List of
Subsidiaries of the Company.
23.1 Consent
of PricewaterhouseCoopers LLP, Independent Registered Public Accounting
Firm
31.1 Certification
of Chief Executive Officer pursuant to Section 302 of Sarbanes-Oxley
Act
31.2 Certification
of Chief Financial Officer pursuant to Section 302 of Sarbanes-Oxley
Act
32.1 Certification
of Chief Executive Officer pursuant to Section 906 of Sarbanes-Oxley
Act
32.2 Certification
of Chief Financial Officer pursuant to Section 906 of Sarbanes-Oxley
Act
______________
* Management
contract or compensatory plan or arrangement.
74