NN INC - Quarter Report: 2007 June (Form 10-Q)
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
For
the
quarterly period ended June 30, 2007
OR
For
the
transition period from _________ to _________
Commission
File Number 0-23486
NN,
Inc.
(Exact
name of registrant as specified in its charter)
Delaware
62-1096725
(State
or other jurisdiction
of
(I.R.S. Employer
incorporation
or
organization)
Identification Number)
2000
Waters Edge Drive
Building
C, Suite 12
Johnson
City, Tennessee 37604
(Address
of principal executive offices, including zip code)
(423)
743-9151
(Registrant’s
telephone number, including area code)
Indicate
by check mark whether the registrant (1) has filed all reports required to
be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements
for
the
past
90 days. Yes x No o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of
“accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange
Act. (Check one):
Large
accelerated filer o Accelerated
filer x Non-accelerated
filer o
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes oNo x
As
of
July 8th, 2007, there were 16,863,082 shares of the registrant’s common stock,
par value $0.01 per share, outstanding.
NN,
Inc.
INDEX
Page
No.
Part
I. Financial Information
Item
1. Financial
Statements:
Consolidated
Statements of Income and Comprehensive Income for the three and six months
ended June 30, 2007 and 2006 (unaudited)
................................................... 2
Condensed
Consolidated Balance Sheets at June 30, 2007and
December 31, 2006
(unaudited)...............................................................................................................................
3
Consolidated
Statements of Changes in Stockholders’ Equity for the six
months ended June 30, 2007 (unaudited)
...........................................................................................
4
Consolidated
Statements of Cash Flows for the six months ended June
30, 2007 and 2006 (unaudited)
................................................................................................................
5
Notes
to
Consolidated Financial Statements
(unaudited) ...............................................................................................................................................................................................
6
Item
2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
.........................................................................................................................................
15
Item
3. Quantitative
and Qualitative Disclosures about Market
Risk .............................................................................................................................................................................................
21
Item
4. Controls
and
Procedures ............................................................................................................................................................................................................................................................
21
Part
II. Other Information
Item 1.
Legal
Proceedings...................................................................................................................................................................................................................................................................
22
Item
1A.
Risk
Factors .............................................................................................................................................................................................................................................................................
22
Item 2.
Unregistered Sales of Equity Securities and Use of
Proceeds .......................................................................................................................................................................................
22
Item 3.
Defaults Upon Senior
Securities ........................................................................................................................................................................................................................................
22
Item 4.
Submission of Matters to a Vote of Security
Holders ....................................................................................................................................................................................................
22
Item 5.
Other
Information ................................................................................................................................................................................................................................................................
23
Item 6.
Exhibits .................................................................................................................................................................................................................................................................................
23
Signatures .................................................................................................................................................................................................................................................................................................
24
1
PART
I. FINANCIAL INFORMATION
|
Item
1.
|
Financial
Statements
|
NN,
Inc.
Consolidated
Statements of Income and Comprehensive Income
(Unaudited)
|
Three
Months Ended
June
30,
|
Six
Months Ended
June
30,
|
|
(Thousands
of Dollars, Except Per Share Data)
|
2007
|
2006
|
2007
|
2006
|
||||
|
Net
sales
|
$ 107,302
|
$ 83,554
|
$
215,246
|
$
169,571
|
||||
|
Cost
of products sold (exclusive of depreciation
and
amortization shown separately below)
|
85,929
|
64,905
|
171,010
|
130,904
|
||||
|
Selling,
general and administrative
|
9,558
|
7,063
|
18,983
|
14,744
|
||||
|
Depreciation
and amortization
|
5,658
|
4,425
|
11,180
|
8,587
|
||||
|
Restructuring
and impairment charges
|
15,269
|
--
|
15,269
|
--
|
||||
|
(Gain)
loss on disposal of assets
|
(6)
|
4
|
(11)
|
(726)
|
||||
|
Income
(loss) from operations
|
(9,106)
|
7,157
|
(1,185)
|
16,062
|
||||
|
Interest
expense
|
1,630
|
1,021
|
3,325
|
2,007
|
||||
|
Other
(income) expense, net
|
(22)
|
449
|
3
|
240
|
||||
|
Income
(loss) before provision for income taxes
|
(10,714)
|
5,687
|
(4,513)
|
13,815
|
||||
|
Provision
for income taxes
|
1,104
|
2,234
|
3,550
|
5,100
|
||||
|
Net
income (loss)
|
(11,818)
|
3,453
|
(8,063)
|
8,715
|
||||
|
Other
comprehensive income:
|
||||||||
|
Foreign
currency translation gain
|
1,351
|
5,414
|
3,427
|
7,644
|
||||
|
Comprehensive
income
|
$ (10,467)
|
$ 8,867
|
$ (4,636)
|
$
16,359
|
||||
|
Basic
income (loss) per common share:
|
$ (0.70)
|
$ 0.20
|
$ (0.48)
|
$ 0.51
|
||||
|
Weighted
average shares outstanding
|
16,815
|
17,157
|
16,814
|
17,153
|
||||
|
Diluted
income (loss) per common share:
|
$ (0.69)
|
$ 0.20
|
$ (0.47)
|
$ 0.50
|
||||
|
Weighted
average shares outstanding
|
17,028
|
17,369
|
17,031
|
17,365
|
||||
|
Cash
dividends per common share
|
$ 0.08
|
$ 0.08
|
$ 0.16
|
$ 0.16
|
||||
The
accompanying notes are an integral part of the financial statements.
2
NN,
Inc.
Condensed
Consolidated Balance Sheets
(Unaudited)
|
June
30,
|
December
31,
|
||
|
(Thousands
of Dollars)
|
2007
|
2006
|
|
|
Assets
|
|||
|
Current
assets:
|
|||
|
Cash
and cash equivalents
|
$ 12,820
|
$ 11,681
|
|
|
Accounts
receivable, net of allowances of $1,315 and $1,278, respectively
|
74,267
|
63,442
|
|
|
Inventories,
net
|
45,273
|
43,538
|
|
|
Other
current assets
|
8,448
|
7,203
|
|
|
Total
current assets
|
140,808
|
125,864
|
|
|
Property,
plant and equipment, net
|
152,369
|
156,447
|
|
|
Goodwill,
net
|
36,523
|
46,147
|
|
|
Intangible
assets, net
|
7,804
|
10,131
|
|
|
Other
assets
|
4,884
|
4,112
|
|
|
Total
assets
|
$ 342,388
|
$ 342,701
|
|
|
Liabilities
and Stockholders’ Equity
|
|||
|
Current
liabilities:
|
|||
|
Accounts
payable
|
$ 49,782
|
$ 52,576
|
|
|
Accrued
salaries, wages and benefits
|
14,886
|
13,519
|
|
|
Income
taxes
|
830
|
94
|
|
|
Current
maturities of long-term debt
|
9,054
|
851
|
|
|
Other
current liabilities
|
8,168
|
7,829
|
|
|
Total
current liabilities
|
82,720
|
74,869
|
|
|
Non-current
deferred tax liability
|
16,926
|
16,334
|
|
|
Long-term
debt
|
97,493
|
80,711
|
|
|
Related
party debt
|
2,667
|
21,305
|
|
|
Accrued
pension and other
|
16,685
|
16,313
|
|
|
Total
liabilities
|
216,491
|
209,532
|
|
|
Total
stockholders’ equity
|
125,897
|
133,169
|
|
|
Total
liabilities and stockholders’ equity
|
$ 342,388
|
$ 342,701
|
The
accompanying notes are an integral
part of the financial statements.
3
NN,
Inc.
Consolidated
Statements of Changes in Stockholders’ Equity
(Unaudited)
|
Common
Stock
|
||||||||||||
| (Thousands of Dollars and shares) |
Number
of
Shares
|
Par
Value
|
Additional
Paid
in
Capital
|
Retained
Earnings
|
Accumulated
Other
Comprehensive
Income
|
Total |
||||||
|
Balance,
January 1, 2007
|
16,842
|
$ 169
|
$
53,473
|
$
64,178
|
$
15,349
|
$
133,169
|
||||||
|
Shares
issued
|
24
|
--
|
292
|
--
|
--
|
292
|
||||||
|
Net
income
|
--
|
--
|
--
|
(8,063)
|
--
|
(8,063)
|
||||||
|
Amortization
of restricted stock
award
|
--
|
--
|
53
|
--
|
--
|
53
|
||||||
|
Forfeiture
of restricted stock
|
(3)
|
--
|
--
|
--
|
--
|
--
|
||||||
|
Stock
option expense
|
--
|
--
|
315
|
--
|
--
|
315
|
||||||
|
Dividends
declared
|
--
|
--
|
--
|
(2,696)
|
--
|
(2,696)
|
||||||
|
Cumulative
effect of adoption of
FIN
48
|
--
|
--
|
--
|
(600)
|
--
|
(600)
|
||||||
|
Cumulative
translation gain
|
--
|
--
|
--
|
--
|
3,427
|
3,427
|
||||||
|
Balance,
June 30, 2007
|
16,863
|
$ 169
|
$
54,133
|
$
52,819
|
$
18,776
|
$
125,897
|
||||||
The
accompanying notes are an integral part of the financial statements.
4
NN,
Inc.
Consolidated
Statements of Cash Flows
(Unaudited)
|
Six
Months Ended
|
|||
|
June
30,
|
|||
|
(Thousands
of Dollars)
|
2007
|
2006
|
|
|
Operating
Activities:
|
|||
|
Net
income (loss)
|
$ (8,063)
|
$ 8,715
|
|
|
Adjustments
to reconcile net income (loss) to net cash provided by
operating
activities:
|
|||
|
Depreciation
and amortization
|
11,180
|
8,587
|
|
|
Amortization
of debt issue costs
|
100
|
261
|
|
|
Gain
on disposal of property, plant and equipment
|
--
|
(726)
|
|
|
Compensation
expense from issuance of restricted stock and incentive stock
options
|
368
|
206
|
|
|
Restructuring
and impairment charges
|
15,269
|
--
|
|
|
Deferred
income tax
|
(396)
|
--
|
|
|
Changes
in operating assets and liabilities:
|
|||
|
Accounts
receivable
|
(9,931)
|
(8,627)
|
|
|
Inventories
|
(1,221)
|
3,031
|
|
|
Accounts
payable
|
(3,585)
|
(1,692)
|
|
|
Other
assets and liabilities
|
302
|
212
|
|
|
Net
cash provided by operating activities
|
4,023
|
9,967
|
|
|
Investing
Activities:
|
|||
|
Acquisition
of property, plant and equipment
|
(6,824)
|
(6,413)
|
|
|
Proceeds
from disposals of property, plant and equipment
|
--
|
2,966
|
|
|
Acquisition
of intangibles and goodwill
|
(162)
|
(529)
|
|
|
Net
cash used by investing activities
|
(6,986)
|
(3,976)
|
|
|
Financing
Activities:
|
|||
|
Increase
in cash from book overdraft
|
84
|
657
|
|
|
Repayment
of long-term debt
|
(617)
|
(4,668)
|
|
|
Proceeds
from short-term debt
|
8,203
|
1,017
|
|
|
Principal
payment on capital lease
|
(18)
|
(13)
|
|
|
Repurchase
of common stock
|
--
|
(683)
|
|
|
Proceeds
from issuance of stock
|
292
|
696
|
|
|
Proceeds
from long term debt
|
17,400
|
--
|
|
|
Debt
issuance cost paid
|
(161)
|
--
|
|
|
Dividends
paid
|
(2,696)
|
(2,753)
|
|
|
Repayment
of related party debt
|
(18,638)
|
--
|
|
|
Net
cash provided (used) by financing activities
|
3,849
|
(5,747)
|
|
|
Effect
of exchange rate changes on cash and cash equivalents
|
253
|
1,041
|
|
|
Net
Change in Cash and Cash Equivalents
|
1,139
|
1,285
|
|
|
Cash
and Cash Equivalents at Beginning of Period
|
11,681
|
10,856
|
|
|
Cash
and Cash Equivalents at End of Period
|
$ 12,820
|
$ 12,141
|
|
The
accompanying notes are an integral
part of the financial statements.
5
NN,
Inc.
Notes
To Consolidated Financial
Statements
(In
Thousands, Except Share and Per Share
Data)
(unaudited) Note
1. Interim
Financial Statements
The
accompanying consolidated financial statements of NN, Inc. (the “Company”) have
not been audited, except that the balance sheet at December 31, 2006 is derived
from the Company’s consolidated audited financial statements. In the
opinion of the Company’s management, the financial statements reflect all
adjustments necessary to fairly state the results of operations for the three
and six month periods ended June 30, 2007 and 2006, the Company’s financial
position at June 30, 2007 and December 31, 2006, and the cash flows for the
six
month periods ended June 30, 2007 and 2006. These adjustments are of
a normal recurring nature and are, in the opinion of management, necessary
for
fair statement of the financial position and operating results for the interim
periods. As used in this Quarterly Report on Form 10-Q, the terms
“NN”, “the Company”, “we”, “our”, or “us” mean NN, Inc. and its
subsidiaries.
Certain
information and footnote disclosures normally included in the consolidated
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted from the interim financial statements
presented in this Quarterly Report on Form 10-Q. These unaudited,
condensed, consolidated and unaudited, consolidated financial statements should
be read in conjunction with our audited consolidated financial statements and
the notes thereto included in our most recent annual report on Form 10-K for
the
year ended December 31, 2006 which we filed with the Securities and Exchange
Commission on March 16, 2007.
The
results for the three and six month periods ended June 30, 2007 are not
necessarily indicative of results for the year ending December 31, 2007 or
any
other future periods.
Note
2. 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 result 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, at this time, reducing output at four of the
six ball plants would be the best financial and logistical solution to align
capacity. Reducing capacity will 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 will
result in reduction in value of certain tangible and intangible assets at the
affected ball plants.
During
the second quarter of 2007, we recorded approximately $15,269 ($14,076
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), the full impairment of goodwill at one European
reporting unit of $10,016 ($9,412 after tax) and the impairment of a customer
contract intangible asset of $1,932 ($1,452 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 Statement of Financial Accounting Standards (“SFAS”) 142 and SFAS
144 for the goodwill and intangible assets, respectively, and estimates of
fair
value pursuant to SFAS 144 for the fixed assets.
Eltmann,
Germany 2004 Restructuring
During
the fourth quarter of 2004, we announced a reduction in staffing at our Eltmann,
Germany ball production facility, a component of our Metal Bearing Components
Segments. The final severance payments to certain employees will
occur during 2007. The following summarizes the charges related to the 2004
restructuring at the Company’s Eltmann, Germany facility for the six months
ended June 30, 2007:
6
NN,
Inc.
Notes
To Consolidated Financial
Statements
(In
Thousands, Except Share and Per Share
Data)
(unaudited)
Six
months ended June 30, 2007
|
(In
Thousands of Dollars)
|
Reserve
Balance at 01/01/07
|
Charges
|
Paid
in 2007
|
Currency
Impacts
|
Reserve
Balance at 06/30/07
|
||||
|
Severance
and other employee costs
|
$ 309
|
$ --
|
$
(15)
|
$ 8
|
$ 302
|
||||
|
$ 309
|
$ --
|
$
(15)
|
$ 8
|
$ 302
|
Note
3. Inventories
Inventories
are stated at the lower of cost or market. Cost is determined using
the first-in, first-out method.
Inventories
are comprised of the following (in thousands):
|
June
30,
|
December
31,
|
||
|
2007
|
2006
|
||
|
Raw
materials
|
$ 12,848
|
$ 11,828
|
|
|
Work
in process
|
8,890
|
10,427
|
|
|
Finished
goods
|
25,422
|
23,596
|
|
|
Less
inventory reserves
|
(1,887)
|
(2,313)
|
|
|
$ 45,273
|
$ 43,538
|
Inventories
on consignment at customer locations as of June 30, 2007 and December 31, 2006
totaled $5,453 and $4,554, respectively.
Note
4. Net
Income Per Share
|
|
Three
Months Ended
June
30,
|
Six
Months Ended
June
30,
|
|
(Thousands
of Dollars, Except Share and Per Share Data)
|
|
2007
|
2006
|
2007
|
2006
|
|||
|
Net
income
|
$ (11,818)
|
$ 3,453
|
$ (8,063)
|
$ 8,715
|
||||
|
Weighted
average basic shares
|
16,815,249
|
17,156,721
|
16,813,871
|
17,152,713
|
||||
|
Effect
of dilutive stock options
|
212,928
|
211,863
|
217,667
|
212,291
|
||||
|
Weighted
average dilutive shares outstanding
|
17,028,177
|
17,368,584
|
17,031,538
|
17,365,004
|
||||
|
Basic
net income per share
|
$ (0.70)
|
$ 0.20
|
$ (0.48)
|
$ 0.51
|
||||
|
Diluted
net income per share
|
$ (0.69)
|
$ 0.20
|
$ (0.47)
|
$ 0.50
|
Excluded
from the shares outstanding for the three and six months ended June 30, 2007
were 624,000 anti-dilutive options which had exercise prices ranging from $11.29
to $12.62. There were no anti-dilutive options excluded from shares
outstanding for the three and six month periods ended June 30,
2006.
Note
5. Segment
Information
The
segment information and the accounting policies of each segment are the same
as
those described in the “Segment Information” footnote and the “Summary of
Significant Accounting Policies” footnote, respectively,
in our annual report on Form 10-K for the fiscal year ended December 31,
2006. We evaluate segment performance based on net income or loss
after income taxes. For the three and six month
periods ended June 30, 2007, we have reported segment profit excluding
restructuring and
7
NN,
Inc.
Notes
To Consolidated Financial
Statements
(In
Thousands, Except Share and Per Share
Data)
(unaudited)
impairment
charges, a non-GAAP accounting measure, as this information is utilized by
our
chief operating decision maker to examine segment profitability. Additionally,
this new line item was added to show only operational performance and to enhance
comparability to the prior periods. We account for
inter-segment sales and transfers at current market prices. We did
not have any significant inter-segment transactions during the three and six
month periods ended June 30, 2007 and 2006. As discussed in our
annual report on Form 10-K for the year ended December 31, 2006, we changed
our
segment reporting during the fourth quarter of 2006. The three and
six month periods ended June 30, 2006 have been restated to conform to the
current presentation.
Three Months Ended June 30,
|
2007
|
2006 | ||||||||
|
(In
Thousands of Dollars)
|
Metal
Bearing Components Segment
|
Precision
Metal Components Segment
|
Plastic
and Rubber Components
Segment
|
All
Other
|
Metal
Bearing Components Segment
|
Precision
Metal Components Segment
|
Plastic
and Rubber Components Segment
|
All
Other
|
|
|
Revenues
from external
customers
|
$
76,275
|
$
17,108
|
$
13,919
|
$
--
|
$
69,965
|
$
--
|
$
13,589
|
$
--
|
|
|
Segment
profit (loss)
excluding
restructuring and impairment
changes
|
4,826
|
(507)
|
630
|
(1,894)
|
4,120
|
--
|
777
|
(1,444)
|
|
|
Restructuring
and
impairment
charges
|
(15,269)
|
--
|
--
|
--
|
--
|
--
|
--
|
--
|
|
|
Deferred
income tax
impacts
|
396 | -- | -- | -- | -- | -- | -- | -- | |
|
Net
income (loss)
|
$
(10,047)
|
$
(507)
|
$
630
|
$
(1,894)
|
$
4,120
|
$
--
|
$
777
|
$
(1,444)
|
|
|
Assets
|
$ 230,161
|
$
53,064
|
$
52,182
|
$
6,981
|
$
229,456
|
$
--
|
$ 52,981
|
$
5,763
|
|
Six
Months Ended June 30,
| 2007 | 2006 | ||||||||
|
(In
Thousands of Dollars)
|
Metal
Bearing Components Segment
|
Precision
Metal Components Segment
|
Plastic
and Rubber Components
Segment
|
All
Other
|
Metal
Bearing Components Segment
|
Precision
Metal Components Segment
|
Plastic
and Rubber Components Segment
|
All
Other
|
|
|
Revenues
from external
customers
|
$
153,559
|
$
35,136
|
$
26,551
|
$
--
|
$
141,305
|
$ --
|
$
28,266
|
$
--
|
|
|
Segment
profit (loss)
excluding restructuring and
impairment changes
|
9,708
|
(460)
|
1,119
|
(3,557)
|
9,939
|
--
|
1,705
|
(2,929)
|
|
|
Restructuring
and
impairment charges
|
(15,269)
|
--
|
--
|
--
|
--
|
--
|
--
|
--
|
|
|
Deferred
income tax
impacts
|
396 | -- | -- | -- | -- | -- | -- | -- | |
|
Net
income (loss)
|
$
(5,165)
|
$
(460)
|
$ 1,119
|
$ (3,557)
|
$
9,939
|
$
--
|
$
1,705
|
$
(2,929)
|
|
|
Assets
|
$ 230,161
|
$
53,064
|
$
52,182
|
$
6,981
|
$
229,456
|
$
--
|
$
52,981
|
$
5,763
|
|
8
NN,
Inc.
Notes
To Consolidated Financial
Statements
(In
Thousands, Except Share and Per Share
Data)
(unaudited)
Note
6. Recent
Investing Activity
The
opening balance sheet for the Whirlaway Corporation (“Whirlaway”) acquisition on
November 30, 2006 is still in the process of being finalized. For the
six month period ended June 30, 2007, Goodwill decreased by $134 as certain
opening balance sheet liabilities were reduced to their proper values
partially offset by legal costs related to the acquisition paid during
2007. The following unaudited pro-forma financial information shows
the net sales, net income, and net income per share for the six month period
ended June 30, 2006, as though the acquisition of Whirlaway occurred at the
beginning of 2006.
|
Six
Months Ended
|
|
|
June
30, 2006
|
|
|
Net
sales
|
$ 211,547
|
|
Net
income
|
$ 9,856
|
|
Basic
net income per share
|
$ 0.57
|
|
Diluted
net income per share
|
$ 0.57
|
Note
7. Pensions
We
have a
defined benefit pension plan covering the employees at our Eltmann, Germany
facility. The benefits are based on the expected years of service;
however, as the plan was curtailed in 2006, the plan will no longer incur
service costs. The plan is unfunded. There were no prior
service costs recognized in the three and six month periods ended June 30,
2007
and 2006.
Components
of Net Periodic Pension Cost:
|
Three
Months Ended
June
30,
|
Six
Months Ended
June
30,
|
|
(In
Thousands of Dollars)
|
2007
|
2006
|
2007
|
2006
|
|||
|
Service
cost
|
$ --
|
$ 26
|
--
|
$ 52
|
|||
|
Interest
cost
|
60
|
66
|
118
|
128
|
|||
|
Net
loss
|
2
|
13
|
3
|
24
|
|||
|
Net
periodic pension cost
|
$ 62
|
$ 105
|
$ 121
|
$ 204
|
We
expect
to contribute approximately $240 to the Eltmann, Germany pension plan in
2007. As of June 30, 2007, approximately $120 of contributions had
been made.
Severance
Indemnity
In
accordance with Italian law, the Company has an unfunded severance plan covering
our Pinerolo, Italy employees under which all employees at that location are
entitled to receive severance indemnities upon termination of their
employment. The table below summarizes the changes to the severance
indemnity for the three and six months ended June 30, 2007 and
2006:
|
Three
Months Ended
June
30,
|
Six
Months Ended
June
30,
|
|
(In
Thousands of Dollars)
|
2007
|
2006
|
2007
|
2006
|
|||
|
Beginning
balance
|
$
(7,975)
|
$ (6,950)
|
$ (8,020)
|
$ (6,644)
|
|||
|
Amounts
accrued
|
(343)
|
(269)
|
(586)
|
(525)
|
|||
|
Payments
|
--
|
208
|
381
|
327
|
|||
|
Currency
impacts
|
(113)
|
(358)
|
(206)
|
(527)
|
|||
|
Ending
balance
|
$ (8,431)
|
$ (7,369)
|
$
(8,431)
|
$
(7,369)
|
9
NN,
Inc.
Notes
To Consolidated Financial
Statements
(In
Thousands, Except Share and Per Share
Data)
(unaudited)
Note
8. New
Accounting Pronouncements
In
July
2006, the Financial Accounting Standards Board (“FASB”) issued Interpretation
No. 48 ("FIN 48"), "Accounting for Uncertainty in Income Taxes—an Interpretation
of SFAS 109 "Accounting for Income Taxes". FIN 48 prescribes a comprehensive
model for how a company should recognize, measure, present, and disclose in
its
financial statements uncertain tax positions that a company has taken or expects
to take on a tax return. Under FIN 48, the financial statements will reflect
expected future tax consequences of such positions presuming the taxing
authorities' full knowledge of the position and all relevant facts, but without
considering time values. FIN 48 also revises disclosure requirements and
introduces a prescriptive, annual, tabular roll-forward of the unrecognized
tax
benefits. FIN 48 is effective for fiscal years beginning after December 15,
2006. The Company adopted FIN 48 on January 1, 2007, and the effects on our
consolidated financial position, liquidity, and results of operations were
not
material. See Note 15 for additional information.
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 US 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,
and will be adopted by us beginning in the first quarter of 2008. 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 be material.
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.
10
NN,
Inc.
Notes
To Consolidated Financial
Statements
(In
Thousands, Except Share and Per Share
Data)
(unaudited)
Note
9. Long-Term
Debt and Short-Term Debt
Long-term
debt at June 30, 2007 and December 31, 2006 consisted of the
following:
|
June
30, 2007
|
December
31, 2006
|
||
|
Borrowings
under our $135,000 revolving credit facility bearing interest at
a
floating rate equal to LIBOR (5.36% at June 30, 2007) plus an applicable
margin of 0.60 to 0.925, expiring September 20, 2011.
|
$ 65,069
|
$ 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 paid down by applying a fixed amount
per piece purchased by customer.
|
1,478
|
2,096
|
|
|
Total
debt
|
106,547
|
81,562
|
|
|
Less
current maturities of long-term debt
|
9,054
|
851
|
|
|
Long-term
debt, excluding current maturities of long-term debt and related
party
debt
|
$ 97,493
|
$ 80,711
|
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. The company incurred $114
of cost related to this amendment which has been capitalized.
The
increase in borrowings under the $135,000 credit facility is related primarily
to the payment of $18,600 in related party notes payable in connection with
the
Whirlaway acquisition. The majority of the current maturities of
long-term debt are borrowings under our $10,000 short-term swing line used
for
cash management purposes. As of June 30, 2007, $1,191 of capitalized
loan origination cost, net of amortization, for both facilities was recorded
on
the balance sheet within other assets and additions are presented in the
Financing Activities section of the Statements of Cash Flows.
The
Company received an amendment to the $135,000 credit facility, retroactive
to
June 30, 2007, that amends the definitions of certain components of the
financial covenant calculations to exclude the negative impact of non-cash
restructuring and impairment charges.
As
a
result of the Company’s cash management system including all U.S. operations,
checks issued but not presented to the banks for payment may create negative
book cash balances. Such negative balances are included in accounts
payable and totaled $868 and $784 as of June 30, 2007 and December 31, 2006,
respectively, with the change in the balances reported in the Financing
Activities section of the Statements of Cash Flows.
11
NN,
Inc.
Notes
To Consolidated Financial
Statements
(In
Thousands, Except Share and Per Share
Data)
(unaudited)
Note
10. Goodwill
The
changes in the carrying amount of goodwill for the six month period ended June
30, 2007 and the twelve month period ended December 31, 2006 are as
follows:
Goodwill
|
(In
Thousands of Dollars)
|
Precision
Metal Components Segment
|
Plastic
and Rubber Components Segment
|
Metal
Bearing 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
|
$ 2,352
|
$ 25,755
|
$ 18,040
|
$ 46,147
|
|
|
Balance
as of January 1, 2007
|
$ 2,352
|
$ 25,755
|
$ 18,040
|
$ 46,147
|
|
Adjustment
to the purchase price
Allocation
|
(134)
|
--
|
--
|
(134)
|
|
Goodwill
impaired
|
--
|
--
|
(10,016)
|
(10,016)
|
|
Currency
impacts
|
--
|
--
|
526
|
526
|
|
Balance
as of June 30, 2007
|
$ 2,218
|
$ 25,755
|
$ 8,550
|
$ 36,523
|
The
adjustment to the purchase price allocation during the six months ended June
30,
2007 related to legal cost paid subsequent to the year ended December 31, 2006
for the acquisition of Whirlaway offset by adjustments to certain beginning
liability balances.
The
goodwill impairment at our Metal Bearing Components Segment related to the
decision to restructure the European operations of this segment (see Note
2). Accordingly, the goodwill was tested for impairment at locations
affected by the planned restructuring using a present value of future expected
cash flows method performed pursuant to the provision of SFAS
142. The implied fair value of the goodwill was less than the
carrying amount of the goodwill at one European reporting unit and an impairment
charge of $10,016 was included within the Restructuring and impairment charges
of the Consolidated Statements of Income.
Note
11. Intangible
assets, net of amortization
|
(In
Thousands of Dollars)
|
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
|
--
|
66
|
66
|
|
Amortization
|
(237)
|
(267)
|
(504)
|
|
Currency
impacts
|
--
|
43
|
43
|
|
Impairment
|
(1,932)
|
(1,932)
|
|
|
Balance
as of June 30, 2007
|
$ 6,904
|
$ --
|
$ 6,904
|
Of
the
intangible assets within the Precision Metal Components Segment, the majority
of
the value is a customer relationship intangible with an estimated fair value
of
$6,900. This intangible asset has an estimated
useful life of 20 years and $173 of amortization expense was recorded in
2007. The remaining balance is made up of a covenant not to compete
of $150 and a favorable leasehold interest of $130. These items are
amortizable over two and two and a half years, respectively, and $38 and $26
in
amortization expense was recorded in 2007. The accumulated
amortization related to all of these intangible assets at June 30, 2007 was
$276. Additionally, in the Precision Metal Components Segment is an
intangible asset not subject to amortization of $900 related to the value of
the
trade names of Whirlaway. The Company is still in the process of
finalizing the valuation and estimated useful lives of these intangible
assets.
12
NN,
Inc.
Notes
To Consolidated Financial
Statements
(In
Thousands, Except Share and Per Share
Data)
(unaudited)
The
intangible asset within the Metal Bearing Components Segment is a contract
intangible related to the SNR purchase agreement and related supply
agreement. This intangible asset was originally subject to
amortization over approximately 5 years and amortization expense was originally
to approximate $500 for each of the five years. For the six month
period ended June 30, 2007, the amortization expense totaled $267 and
accumulated amortization totaled $812 at June 30, 2007. At June 30,
2007, the net value of this intangible asset of $1,932 was deemed to be fully
impaired as a result of the European restructuring (see Note 2). The
fair value was determined using a present value of expected future cash flows
method pursuant to SFAS 144 and the impairment charge was included within
Restructuring and impairment charges of the Consolidated Statements of
Income.
Note
12. Stock
Compensation
In
the
three and six month periods ended June 30, 2007 and 2006, approximately $234
and
$368 for 2007 and $103 and $206 for 2006, respectively, of compensation expense
was recognized in selling, general and administrative expense for all
share-based awards. On March 1, 2007 and May 25, 2007 the Company
granted 30,000 and 161,500 options, respectively, to directors and certain
employees of the Company. The fair value of the 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.
The
following table provides a reconciliation of option activity for the six month
period ended June 30, 2007:
|
Options
|
Shares
(000’s)
|
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
|
(41)
|
$
12.54
|
||||||
|
Outstanding
at June 30, 2007
|
1,577
|
$ 9.99
|
6.07
|
$ 2,850(1)
|
||||
|
Exercisable
at June 30, 2007
|
1,216
|
$ 9.46
|
5.05
|
$
2,850 (1)
|
(1)
Intrinsic value
is the amount by which the market price of the stock exceeds the weighted
average exercise price of the options at June 30, 2007.
Restricted
Stock Awards
The
unrecognized compensation cost before tax for these awards at June 30, 2007
and
2006 total approximately $63 and $262, respectively, to be recognized over
approximately one and two years, respectively. As of June 30, 2007,
the actual cumulative forfeiture rate of the awards granted was approximately
10%. Below is a summary of the status of the non-vested restricted
stock as of June 30, 2007 and changes during the six month period ended June
30,
2007:
|
Shares
(000’s)
|
Weighted-Average
Grant-Date Fair Value
|
||||
|
Non-vested
at January 1, 2007
|
33
|
$
12.70
|
|||
|
Granted
|
--
|
--
|
|||
|
Vested
|
--
|
--
|
|||
|
Forfeited
|
(3)
|
$12.70
|
|||
|
Non-vested
at June 30, 2007
|
30
|
$
12.70
|
|||
Long
term Incentive Plan
On
June
29, 2007, the Company granted certain directors and other key employees an
award
of 50,500 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
determined by using the Black-Scholes model which relies on certain assumptions
to estimate a unit's fair value. The performance period is fiscal
years 2007, 2008 and 2009 and the shares vest on December 31,
2009. There was no compensation expense recognized in the second
quarter of 2007 related to these performance units.
Note
13. Property,
Plant and Equipment
During
the first quarter of 2006, we completed a sale of excess land and two buildings
at our Pinerolo, Italy facility. The net book value of this land and
buildings was $1,013 and was classified as held for sale at December 31,
2005. The proceeds from the sale were $2,804, resulting in a pre-tax
gain of $1,791. In addition, the Pinerolo facility 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.
Fixed
assets at certain European operations of the Metal Bearing Components Segment
were impaired as a result of the European restructuring (see Note
2.) The total reduction in fixed assets from the impairment charge
was $3,320 and was reported in the Restructuring and impairment charges of
the Consolidated Statements of Income.
Note
14. Related
Party Transactions
During
the first quarter of 2007,
the Company remitted
$18,638 to the former sole shareholder of Whirlaway
to partially repay the related party note payable. The payment was
financed under our $135,000 credit facility.
Note
15. Provision
for Income Taxes
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 $1,464
all
of which, if recognized, would affect the effective tax rate. The
amount of unrecognized benefits increased approximately $340 during the six
months ended June 30, 2007. The increase in the unrecognized benefits
in 2007 was a result of previous tax planning strategies
from operations. During the six months ended June 30,
2007, this balance was reduced by approximately $220 due to a state tax
liability that was paid in the second quarter of 2007.
13
NN,
Inc.
Notes
To Consolidated Financial
Statements
(In
Thousands, Except Share and Per Share
Data)
(unaudited)
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. We recorded an insignificant amount of foreign interest and
penalties to the provision for income taxes in the three and six months ended
June 30, 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 2001. The
Company is no longer subject to non-U.S. income tax examinations within various
European Union countries for years before 2002.
For
the
six months ended June 30, 2007, the difference between the federal statutory
tax
rate of 34% and our
effective tax rate of negative 78% is primarily due to the large impairment
charges for the European restructuring with only an 8% effective tax
rate. The effective tax rate of the impairments is low as the tax
benefits created by these impairments have limited ability to be used in the
future based on expected income to be generated at the locations effected by
the
impairments.
Factoring
out the impairment impacts, the effective tax rate would have been
44.1%. The rate is higher than usual due to a valuation
reserve being placed on a deferred tax asset from tax loss carry forwards at
a
location still incurring losses (7.4%). Additionally, the rate is higher due
to
non-U.S. based earnings taxed at higher rates (1.7%), net of elimination of
a
$300 foreign tax reserve due to a tax claim that was favorably settled, and
non deductible incentive stock option expense (1.0%).
Note
16. Contingencies
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. As of the date of this report, we do not
know whether we have any liability related to this vendor’s actions or
estimatable range for any potential liability.
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 do not know whether we have any liability related to this vendor’s
actions or estimatable range for any potential liability.
14
|
Item
2.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
Risk
Factors
Our
risk
factors are disclosed in our Annual Report on Form 10-K for the fiscal year
ended December 31, 2006 under Item 1.A. “Risk Factors”. There have
been no material changes to these risk factors since December 31,
2006.
Results
of Operations
Three
Months Ended June 30, 2007 Compared to the Three Months Ended June 30,
2006.
OVERALL
RESULTS
|
(In
Thousands of Dollars)
|
Consolidated
NN, Inc.
|
||
|
2007
|
2006
|
Change
|
|
|
Net
sales
|
$ 107,302
|
$
83,554
|
$ 23,748
|
|
Cost
of products sold (exclusive of depreciation
and
amortization shown separately below)
|
85,929
|
64,905
|
21,024
|
|
Selling,
general, and administrative
|
9,558
|
7,063
|
2,495
|
|
Depreciation
and amortization
|
5,658
|
4,425
|
1,233
|
|
Restructuring
and asset impairment charges
|
15,269
|
--
|
15,269
|
|
Interest
expense, net
|
1,630
|
1,021
|
609
|
|
(Gain)
loss on disposal of assets
|
(6)
|
4
|
(10)
|
|
Other
(income) expense, net
|
(22)
|
449
|
(471)
|
|
Income
(loss) before provision for income taxes
|
(10,714)
|
5,687
|
(16,401)
|
|
Provision
for income taxes
|
1,104
|
2,234
|
(1,130)
|
|
Net
income (loss)
|
$ (11,818)
|
$ 3,453
|
$ (15,271)
|
Net
Sales. Sales have increased due to the addition of the Precision
Metal Components Segment with the acquisition of Whirlaway in November 2006
($17.1 million), from increases in sales volume in our European operations
($2.6
million), and due to appreciation in value of Euro denominated sales relative
to
the U.S. Dollar ($3.8 million). In addition, sales have increased due
to passing through raw material inflation to customers ($1.6
million). Partially offsetting these increases are reductions from
price decreases given to several large customers in agreement with contractual
terms ($1.1 million) and unfavorable product mix to existing customers ($0.3
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 in November 2006 ($15.0
million) and due to the increase in value of Euro denominated costs relative
to
the U.S. Dollar ($3.0 million). In addition, costs increased related
to higher sales volume overall ($2.1 million). Finally, raw material,
labor and utility inflation increased ($2.8 million). Offsetting
these increases were favorable mix impacts to cost of products sold ($0.3
million) and the impact of projects focused at reducing cost of
manufacturing ($1.6 million).
Selling,
General and Administrative Expenses. The increase was primarily
due to the addition of the Precision Metal Components Segment in November 2006
($1.1 million). In addition, the total increased due to the
appreciation in the value of the Euro relative to the U.S. Dollar ($0.3
million). Finally, the total was higher due to recognizing stock
option expense ($0.2 million), from higher spending on consulting and
professional fees ($0.2 million), higher travel and salary cost ($0.2
million) and additional bad debt expense ($0.2 million).
Depreciation
and Amortization. These costs are higher due to the acquisition
of the Precision Metal Components Segment ($1.0 million) and due to the increase
in the value of the Euro based depreciation and amortization relative to the
U.S. Dollar ($0.2 million).
Interest
expense. Interest expense is higher due to the additional debt
assumed to acquire the Precision Metal Components Segment in November 2006
($0.6
million).
Restructuring
and Asset Impairment Changes. The Company has 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 our European operations of the Metal Bearing Components Segment
as we adjust our global precision ball manufacturing capacity to better take
advantage of favorable cost structures at our Slovakian and Chinese Metal
Bearing Components manufacturing facilities. As a result of this
restructuring, certain goodwill, intangible assets, and fixed assets in our
European operations are now considered impaired. During the second
quarter, we recorded approximately $15.3 million ($14.1 million after-tax)
of
non-cash impairment costs. These costs include the write-down of
certain excess production equipment and the impairment of goodwill and other
intangible assets to levels supported by projected cash flows after the
restructuring.
Provision
for income taxes. The second quarter of 2007 effective tax rate of negative
10.30% is primarily due to the large impairment charges for the European
restructuring with only an 8% effective tax benefit. Factoring out
the impairment impacts, the tax rate would have
been 50%. A valuation reserve was placed on a loss carry
forward deferred tax asset at a location still incurring losses which increased
the rate 18%. Factoring about the valuation reserve the rate would have been
lower than normal by 6% due to a tax reserve being removed related to
a tax claim that was favorably settled.
RESULTS
BY SEGMENT
METAL
BEARING COMPONENTS SEGMENT
|
(In
Thousands of Dollars)
|
Three
Months Ended June 30,
|
|||
|
2007
|
2006
|
Change
|
||
|
Net
sales
|
$ 76,275
|
$ 69,965
|
$
6,310
|
|
|
Segment
profit, excluding restructuring and impairment charges
|
4,826
|
4,120
|
706
|
|
|
Restructuring
and impairment charges
|
(15,269)
|
--
|
$
(15,269)
|
|
| Deferred income tax impacts | 396 | -- |
396
|
|
|
Net
income (loss)
|
$(10,047)
|
$ 4,120
|
$
(14,167)
|
|
The
sales
increase at the Metal Bearing Components Segment was primarily due to the
positive impacts from the appreciation in value of Euro based sales relative
to
the U.S. Dollar ($3.8 million). Additionally, the Metal Bearing
Components Segment experienced higher volume with existing European customers
($2.9 million) and increases related to passing through raw material inflation
to customers ($1.0 million). The increases in sales were partially
offset by unfavorable product mix to existing customers ($0.3 million) and
due
to contractual price decreases to certain large customers ($1.1
million).
The
segment profit excluding restructuring and impairment charges, a non-GAAP
accounting measure, in the second quarter of 2007 was favorably impacted by
higher sales volumes in Europe ($0.5 million, net of tax). Euro
denominated profits were favorably impacted by the increase in the value of
the
Euro against the U.S. Dollar ($0.2 million, net of
tax). Additionally, the second quarter of 2006 had an unfavorable
effect related to the decrease in value of the Slovakian Koruna that did not
repeat in 2007 ($0.4 million, net of tax). Finally, the second
quarter of 2007 was favorably impacted by the removal of a tax reserve
related to a tax claim that was favorably settled ($0.3
million.) Partially offsetting these positive impacts were the effect
of price decreases given to certain customers under contractual terms ($0.7
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, cost reduction projects
offset utility and labor inflation.
15
PRECISION
METAL COMPONENTS SEGMENT
|
(In
Thousands of Dollars)
|
Three
Months Ended June 30,
|
|||
|
2007
|
2006
|
Change
|
||
|
Net
sales
|
$ 17,108
|
$ --
|
$ 17,108
|
|
|
Net loss
|
$ (507)
|
$ --
|
$ (507)
|
|
The
Precision Metal Components Segment was added on November 30, 2006 with the
purchase of Whirlaway. Therefore, the segment was not included
in the financial statements of the quarter ended June 30, 2006.
The
second quarter 2007 results of Whirlaway are not indicative of normalized annual
operations. Volume in the second quarter of 2007 was down
dramatically against historical sales levels due to lower demand at customers
that serve the U.S. heavy truck and heating, ventilation, and air conditioning
(“HVAC”) equipment markets. The demand in the heavy truck and HVAC
markets was abnormally low in the second quarter of 2007 due to large amounts
of
purchases made in the fourth quarter of 2006 of heavy trucks and HVAC
equipment. These purchases were made ahead of required environmental
changes to these products on January 1, 2007.
PLASTIC
AND RUBBER COMPONENTS SEGMENT
|
(In
Thousands of Dollars)
|
Three
Months Ended June 30,
|
|||
|
2007
|
2006
|
Change
|
||
|
Net
sales
|
$
13,919
|
$ 13,589
|
$ 330
|
|
|
Net
income
|
$ 630
|
$ 777
|
$ (147)
|
|
Revenues
in the Plastic and Rubber Components Segment were up primarily due to raw
material inflation pass through ($0.6 million). Additionally, the
segment experienced lower sales volume into the automotive market ($0.3
million).
Net
income was negatively affected by the volume decreases in sales of products
into the automotive market ($0.1 million, after tax). The increases
in sales from raw material pass through were offset by raw material
inflation.
Six
Months Ended June 30, 2007 Compared to the Six Months Ended June 30,
2006.
OVERALL
RESULTS
|
(In
Thousands of Dollars)
|
Consolidated
NN, Inc.
|
||
|
2007
|
2006
|
Change
|
|
|
Net
sales
|
$215,246
|
$
169,571
|
$45,675
|
|
Cost
of products sold (exclusive of depreciation
and
amortization shown separately below)
|
171,010
|
130,904
|
40,106
|
|
Selling,
general, and administrative
|
18,983
|
14,744
|
4,239
|
|
Depreciation
and amortization
|
11,180
|
8,587
|
2,593
|
|
Restructuring
and asset impairment charges
|
15,269
|
--
|
15,269
|
|
Interest
expense, net
|
3,325
|
2,007
|
1,318
|
|
Gain
on disposal of assets
|
(11)
|
(726)
|
715
|
|
Other
expense, net
|
3
|
240
|
(237)
|
|
Income
(loss) before provision for income taxes
|
(4,513)
|
13,815
|
(18,328)
|
|
Provision
for income taxes
|
3,550
|
5,100
|
(1,550)
|
|
Net
income (loss)
|
$
(8,063)
|
$ 8,715
|
$
(16,778)
|
16
Net
Sales. Sales have increased due to the addition of the Precision
Metal Components Segment with the acquisition of Whirlaway ($35.1 million)
and
due to appreciation in value of Euro denominated sales relative to the U.S.
Dollar ($9.3 million). In addition, sales have increased due to
passing through raw material inflation to customers ($2.6 million) and due
to
higher volume to existing customers at our European operations ($2.6
million). Partially offsetting these increases are reductions from
price decreases given to several large customers in agreement with contractual
terms ($2.2 million) and unfavorable product mix to existing customers ($1.7
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 in November 2006 ($30.1
million) and due to the increase in value of Euro denominated costs relative
to
the U.S. Dollar ($7.3 million). In addition, raw material, labor and
utility inflation increased ($4.8 million) and costs increased related to
higher sales volume at our European operations ($2.0
million). Offsetting these increases were favorable mix impacts to
cost of products sold ($1.3 million) and the impact of projects
focused on reducing cost of manufacturing ($2.8 million).
Selling,
General and Administrative Expenses. The increase was primarily
due to the addition of the Precision Metal Components Segment in November 2006
($2.3 million). In addition, the total increased due to
the appreciation in the value of the Euro relative to the U.S. Dollar ($0.6
million). Finally, the total was higher due to recognizing stock
option 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 ($2.1 million) and due to the increase
in the value of the Euro based depreciation and amortization relative to the
U.S. Dollar ($0.5 million).
Interest
expense. Interest expense is higher due to the additional debt
assumed to acquire the Precision Metal Components Segment in November 2006
($1.2
million) and from interest on a note assumed with that acquisition ($0.1
million).
Gain
on disposal of assets. In 2006, we incurred a gain from the sale
of excess land at our Pinerolo, Italy facility ($1.8 million) partially offset
by a loss on disposal of excess equipment at the same facility ($1.1
million).
Restructuring
and Asset Impairment Changes. The Company has begun to take steps to
appropriately adjust our cost structure and align our excess plant capacity
in our Metal Bearing Components Segment. This will include
restructuring at our European operations of the Metal Bearing Components Segment
as we adjust our global precision ball manufacturing capacity to better take
advantage of favorable cost structures at our Slovakian and Chinese Metal
Bearing Components manufacturing facilities. As a result of this
restructuring certain goodwill, intangible assets, and fixed assets in our
European operations are now considered impaired. During the second
quarter, we recorded approximately $15.3 million ($14.1 million after-tax)
of
non-cash impairment costs. These costs include the write-down of
certain excess production equipment and the impairment of goodwill and other
intangible assets to levels supported by projected cash flows after the
restructuring.
Provision
for income taxes. The 2007 effective tax rate of negative 78.66% was
primarily due to the large impairment charges for the European restructuring
with only an 8% effective tax rate. Factoring out the impairment
impacts, the effective tax rate would have
been 44%. A valuation reserve ($0.8 million) was
placed on a loss carry forward deferred tax asset at a location still incurring
losses which increased the 2007 rate 7%. Factoring about the valuation
reserve the rate would have been lower than normal by 3% due to a tax reserve
being removed related to a tax claim that was favorably settled. A tax
reserve was removed related to a tax claim that was favorably settled reducing
the 2007 rate 3%. 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, Italy facility.
17
RESULTS
BY SEGMENT
METAL
BEARING COMPONENTS SEGMENT
|
(In
Thousands of Dollars)
|
Six
Months Ended June 30,
|
|||
|
2007
|
2006
|
Change
|
||
|
Net
sales
|
$
153,559
|
$ 141,305
|
$
12,254
|
|
|
Segment
profit, excluding restructuring and asset impairment
changes
|
9,708
|
9,939
|
(231)
|
|
|
Restructuring
and impairment charges
|
(15,269)
|
--
|
(15,269)
|
|
| Deferred income tax impacts | 396 | -- | 396 | |
|
Net
income (loss)
|
$
(5,165)
|
$ 9,939
|
$
(15,104)
|
|
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 ($9.3 million). Additionally, the Metal Bearing Components
Segment experienced higher volume with existing European customers ($5.1
million) and increases related to passing through raw material inflation to
customers ($1.8 million). These increases were partially offset by
unfavorable product mix to existing customers ($1.7 million) and due to
contractual price decreases to certain large customers ($2.2
million).
The
$0.2
million difference in segment profit excluding restructuring and impairment
charges, a non-GAAP accounting measure, was primarily related to price
decreases given to certain customers under contractual terms in 2007 ($1.4
million, net of tax) and a gain on the sale of land at our Pinerolo, Italy
facility in the first quarter of 2006 that did not repeat in 2007 ($0.8 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. Partially offsetting the negative impacts
above were cost reduction projects that offset utility and labor inflation
($0.7
million, net of tax). Additionally, Euro denominated
profits were favorably impacted by the appreciation in the value of the
Euro against the U.S. Dollar ($0.6 million, net of
tax). The effect from higher sales volumes in
Europe favorably impacted 2007 ($0.4 million, net of tax).
Finally, the removal of a tax reserve related to a tax claim that was
favorably settled, had a positive impact on 2007 ($0.3
million).
PRECISION
METAL COMPONENTS SEGMENT
|
(In
Thousands of Dollars)
|
Six
Months Ended June 30,
|
|||
|
2007
|
2006
|
Change
|
||
|
Net
sales
|
$ 35,136
|
$ --
|
$ 35,136
|
|
|
Net
loss
|
$ (460)
|
$ --
|
$ (460)
|
|
The
Precision Metal Components Segment was added on November 30, 2006 with the
purchase of Whirlaway. Therefore, the segment was not included
in the financial statements of the six months ended June 30, 2006.
The
six
months ended June 30, 2007 results of Whirlaway are not indicative of normalized
annual operations. The first quarter of this segment historically has
had lower volume than average due to the purchasing patterns of the end markets
served and the second quarter of 2007 was down due to abnormally low demand
in
customers that serve U.S. heavy truck and HVAC equipment markets.
The
demand in the heavy truck and HVAC markets was abnormally low in the second
quarter of 2007 due to large amounts of purchases made in the fourth quarter
of
2006 of heavy trucks and HVAC equipment. These purchases were made
ahead of required environmental changes to these products on January 1,
2007.
18
PLASTIC
AND RUBBER COMPONENTS SEGMENT
|
(In
Thousands of Dollars)
|
Six
Months Ended June 30,
|
||
|
2007
|
2006
|
Change
|
|
|
Net
sales
|
$
26,551
|
$ 28,266
|
$ (1,715)
|
|
Net
income
|
$ 1,119
|
$ 1,705
|
$ (586)
|
Revenues
in the Plastic and Rubber Components Segment were down due to lower sales volume
into the automotive market ($1.7 million) and lower sales to certain specialty
non-automotive customers ($0.8 million). Partially offsetting the
volume decreases were benefits from raw material inflation pass through ($0.8
million).
Net
income was negatively affected by the volume decreases in sales net of cost
of goods sold ($0.8 million, after tax). Partially offsetting the
volume impacts were cost reduction projects net of inflation ($0.2 million,
after tax). The increases in sales from raw material pass through
were offset by raw material inflation.
Liquidity
and Capital Resources
Amounts
outstanding under our $135.0 million credit facility and our $40.0 million
notes
as of June 30, 2007 were $65.1 million and $40.0 million,
respectively. See Note 9 of the Notes to Consolidated Financial
Statements. We were in compliance with all covenants of our $135.0
million syndicated credit facility and our $40.0 million senior notes as of
June
30, 2007. The Company received an amendment to the $135.0 million
credit facility, retroactive to June 30, 2007, that amends the definitions
of
certain components of the financial covenant calculations to exclude the
negative impact of non-cash restructuring and impairment charges.
As
of
June 30, 2007, the Company had $70 million of availability under the $135.0
million five year revolving credit facility. Our borrowings under the
credit facility increased by $18.6 million related to the acquisition of
Whirlaway. In addition, short-term borrowings increased $8.2 million
due to short-term cash flow needs from increased receivable balances and
increased cash balances at our European operations.
Many
of
our locations use the Euro as their functional currency. In 2007, the
fluctuation of the Euro against the U.S. Dollar favorably impacted revenue
and
income and increased the value of assets and liabilities, as the average Euro
exchange rate was higher for the six months ended June 30, 2007 compared with
the six months ended June 30, 2006 and the spot rate at June 30,
2007 was higher than the exchange rate at December 31, 2006. As of
June 30, 2007, no currency hedges were in place. Changes in value 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.
Working
capital, which consists principally of accounts receivable and inventories
offset by accounts payable, was $58.1 million at June 30, 2007 as compared
to
$51.0 million at December 31, 2006. The ratio of current assets to
current liabilities increased from 1.68:1 at December 31, 2006 to 1.70:1 at
June
30, 2007. The increase in working capital was due primarily to the
increase in the cash balance at our European operations ($1.1 million) and
the
increase in accounts receivable balances ($10.8 million) due to higher sales
volume in the second quarter of 2007 compared to the fourth quarter of
2006. Partially offsetting these increases was a
higher short-term debt balance ($8.2 million) offset by a lower accounts
payable balance ($2.7 million)
Cash
flow
provided by operations was $4.0 million during the first six months of 2007,
compared with cash flow provided by operations of $10.0 million during the
first
six months of 2006. The decrease in cash flow provided by operations
is due to accounts receivable having increased in 2007 from higher sales volumes
in the six months of 2007 and due to inventory having increased in 2007 from
higher sales volumes and from building a level of customer service safety stock
ahead of the European restructuring.
19
Total
assets and current assets increased approximately $4.6 million and $1.7 million,
respectively, from the December 31, 2006 balance due to appreciation of the
Euro
relative to the U.S. Dollar. Factoring out the foreign exchange
effects, accounts receivable was up due to higher sales volume in the second
quarter of 2007 than the fourth quarter of 2006 ($10.0
million). Inventories were higher ($1.2 million) due to higher sales
volumes and planned stock increases ahead of the European
restructuring. Cash and cash equivalents were higher due to the
positive cash flow at our European operations ($0.9
million). Factoring out foreign exchange effects, property, plant and
equipment was lower due to certain fixed assets being impaired ($3.3 million)
and from year to date capital spending having been lower than depreciation
($3.1
million).
Total
liabilities and current liabilities increased approximately $1.9 million and
$1.3 million, respectively, from the December 31, 2006 balance due to
appreciation of the Euro relative to the U.S. Dollar. Factoring out
the foreign exchange effects, accounts payable was lower primarily due to the
pay-off of certain payables from year end December 31, 2006 ($3.7
million). The short-term portion of long-term debt increased as
we used our short-term swing line to finance the increase in working capital
from year end. Finally, liabilities increased due to the accrual of
taxes on first quarter income and from the adoption of FIN 48 ($0.7
million).
During
the second quarter, we recorded approximately $15,269 ($14,076 after-tax) of
non-cash impairment charges. These charges include the write-down to
estimated fair market value of certain excess production equipment, the full
impairment of goodwill at one location, and impairment of other intangible
assets to levels supported by projected cash flows after the
restructuring. These charges did not require the use of any of the
company’s existing cash flows from operations or available credit
lines.
During
the third quarter of 2007, it is anticipated that we will take additional
charges related to the European restructuring for adjustment of employment
levels and legal costs related to the restructuring of European legal entities
of approximately $0.5 million ($0.38 million after-tax). The second
announced action taken to improve corporate financial performance is a cost
reduction effort in the Precision Metal Components Segment to align production
with forecasted lower levels of sales in certain end markets. This is
anticipated to result in an adjustment in manufacturing employment levels and
a
realignment of sales and market personnel to support this business unit.
Charges for this action in the third quarter are not expected to exceed $0.4
million ($0.26 million after-tax). These charges of approximately
$0.9 million will require usage of cash and will be financed from existing
cash flow from operations.
During
2007, we plan to spend approximately $19.0 million on capital expenditures
of
which $11.3 million is related primarily to equipment, process upgrades, and
replacements and approximately $7.7 million is related to geographic expansion
of our manufacturing base. Of these amounts, approximately $6.8
million has been spent through June 30, 2007. We intend to finance
these activities with cash generated from operations and funds available under
the credit facilities described above. We believe that funds
generated from operations and borrowings from the credit facilities will be
sufficient to finance our working capital needs, projected capital expenditure
requirements and dividend payments through December 2007.
During
the first quarter of 2006, our Board of Directors authorized a stock repurchase
program under which we are authorized to repurchase up to $10 million in our
common stock during the subsequent 18 months in the open market or in private
transactions, in accordance with applicable laws and
regulations. During the three and six month periods ended June 30,
2007, the Company did not repurchase any shares under this plan or make any
other repurchases of common stock.
During
the second quarter of 2007, a dividend declared on March 14, 2007 totaling
$1.4
million was paid on April 6, 2007 and a dividend totaling $1.4 million
declared on May 22nd was paid
on June
20, 2007.
Seasonality
and Fluctuation in Quarterly Results
Our
net
sales in the Metal Bearing Components Segment historically have been of a
seasonal nature due to the fact that a significant portion of our sales are
to
European customers that significantly slow production during the month of
August. With the addition of the Precision Metal Components Segment,
the seasonality of the Company should become less pronounced as sales volumes
within this segment are lower in the first and fourth quarters and higher in
the
second and third quarters.
20
Critical
Accounting Policies
Our
significant accounting policies, including the assumptions and judgments
underlying them, are disclosed in our annual report on Form 10-K for the year
ended December 31, 2006, including those policies as discussed in Note 1 to
the
annual report. 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 postretirement benefits. There can be no assurance that
actual results will not significantly differ from the estimates used in these
critical accounting policies. The only change during the three and
six month periods ended June 30, 2007 was adoption of FIN 48 related to
accounting for uncertain tax positions. FIN 48 has had an immaterial
effect on the financial statements for the three and six month periods ended
June 30, 2007.
Sales
Concentration
In
January 2007, we entered into a two-year supply agreement with Schaeffler Group
(INA) 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 effective January 1, 2007 with the terms being retroactively
applied back to January 1, 2007 and effective until December 31,
2009.
European
Restructuring
As
previously mentioned in our annual report on Form 10-K for the year ended
December 31, 2006, during 2006 we entered into negotiations with representatives
of the Eltmann, Germany plant employees. The negotiations seek
significant wage reductions and changes in work rules. These
negotiations are still in process as of the date of this report.
In
the
third quarter of 2007, we will begin to shift production to lower cost
facilities, thereby incurring costs for the production shifts and further
restructuring at the Eltmann facility, including actions leading to downsizing
that location. In addition, in the second quarter of 2007, we
incurred non-cash impairment charges related to the decision to begin shifting
production away from Eltmann. See Note 2 of the Notes to Consolidated
Financial Statements.
|
Item
3.
|
Quantitative
and Qualitative Disclosures About Market
Risk
|
We
are
exposed to changes in financial market conditions in the normal course of our
business due to use of certain financial instruments as well as transacting
in
various foreign currencies. To mitigate the 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 June 30, 2007, we had $65.1 million outstanding under
the domestic credit facilities and $40.0 million aggregate principal amount
of
senior notes outstanding. See Note 9 of the Notes to Consolidated
Financial Statements. At June 30, 2007, a one-percent increase in the
interest rate charged on our outstanding borrowings under our credit facilities,
which are subject to variable interest rates, would result in interest expense
increasing annually by approximately $0.6 million.
Translation
of our operating cash flows denominated in foreign currencies is impacted by
changes in foreign exchange rates. We did not hold a position in any
foreign currency hedging instruments as of June 30, 2007.
|
Item
4.
|
Controls
and Procedures
|
Under
the
supervision and with the participation of our management, including our Chief
Executive Officer and Chief Financial Officer, the Company conducted an
evaluation of the effectiveness of the design and operation of our disclosure
controls and procedures pursuant to Rule 13a-15 and 15d-15 of the Securities
Exchange Act of 1934 (the “Exchange Act”). Based upon that
evaluation, our management, including the Chief Executive Officer and Chief
Financial Officer, concluded that our disclosure controls and procedures are
effective as of June 30, 2007, the end of the period covered by this quarterly
report.
21
There
have been no changes in this fiscal quarter in our internal control over
financial reporting or in other factors that have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.
Part
II. Other Information
|
Item
1.
|
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 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. As of the date of this report, we do not
know whether we have any liability related to this vendor’s actions or
estimatable range for any potential liability.
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 do not know whether we have any liability related to this vendor’s
actions or estimatable range for any potential liability.
All
of
our other legal proceedings 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.
Item
1.A. Risk Factors
There
has
not been any material changes in risk factors from those disclosed our annual
report on Form 10-K for the year ended December 31, 2006 filed on March 16,
2007.
|
Item
2.
|
Unregistered
Sales of Equity Securities and Use of
Proceeds
|
|
a)
|
None
|
|
b)
|
None
|
|
c)
|
None
|
|
Item
3.
|
Defaults
upon Senior Securities
|
None
|
Item
4.
|
Submission
of Matters to a Vote of Security
Holders
|
The
Company’s Annual Meeting of Stockholders was held on May 17, 2007. As
of March 30, 2007, the record date for the meeting, there were 16,848,082 shares
of common stock outstanding and entitled to vote at the
meeting. There were present at said meeting, in person or by proxy,
stockholders holding 15,738,678 shares of common stock, constituting
approximately 93% of the shares of common stock outstanding and entitled to
vote, which constituted a quorum.
The
first
matter voted upon at the meeting was the election of Michael E. Werner and
Richard G. Fanelli as Class III Directors to serve for three-year terms
each. The vote was 14,813,527 and 15,213,920 For and 925,151 and
524,758 Withheld for Messrs. Werner and Fanelli, respectively.
The
nominees were elected to serve until the 2010 Annual Meeting of Stockholders
and
until their successors are duly elected and qualified. In addition to
the foregoing directors, G. Ronald Morris and Steven T. Warshaw are serving
terms that will expire in 2008, and Roderick R. Baty and Robert M. Aiken, Jr.
are serving terms that will expire in 2009.
The
second matter voted upon at the meeting was the ratification of
PricewaterhouseCoopers LLP as the Company’s registered independent public
accounting firm for the fiscal year ending December 31, 2007. The
vote was 15,173,765 For, 540,305 Against and 24,607 abstentions.
22
|
Item
5.
|
Other
Information
|
None
|
Item
6.
|
Exhibits
|
10.1 Third
Amendment Agreement dated as of July 31, 2007, among NN, Inc., Lenders as
defined in the Credit Agreement, AmSouth Bank as Swing Line Lender, and
Key
Bank
National Association, as Agent.
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.
23
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant
has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
NN,
Inc.
(Registrant)
(Registrant)
|
Signature
|
|
Title
|
Date
|
|
|
/s/
Roderick R. Baty
|
|
|||
|
Roderick
R. Baty
|
Chairman,
President and Chief Executive Officer
(Duly
Authorized Officer)
|
Date: August
8, 2007
|
||
|
/s/
James H. Dorton
|
|
|||
|
James
H. Dorton
|
Vice
President - Corporate Development and
Chief
Financial Officer
(Principal
Financial Officer)
(Duly
Authorized Officer)
|
Date:
August 8, 2007
|
||
|
|
||||
|
/s/William
C. Kelly, Jr.
|
|
|||
|
William
C. Kelly, Jr.
|
Chief
Administrative Officer
(Duly
Authorized Officer)
|
Date:
August 8, 2007
|
24