UNITED
STATES
SECURITIES
AND EXCHANGE
COMMISSION
Washington,
D.C. 20549
FORM 10-Q
For the
quarterly period ended June 30,
2008
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
incorporation or
organization)
|
(I.R.S.
Employer
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, a non-accelerated filer, or a smaller reporting
company. See definitions of “large accelerated filer,”
“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act. (Check one):
Large accelerated filer o Accelerated
filer x
Non-accelerated filer o Smaller
reporting company o
(Do not check if a smaller reporting
company)
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
August 6, 2008, there were 16,147,783 shares of the registrant’s
common stock, par value $0.01 per share, outstanding.
NN,
Inc.
INDEX
|
Part
I.
|
Financial Information |
Page
No.
|
| Item 1. | Financial Statements: | |
| Consolidated Statements of Income and Comprehensive Income for the three and six months ended June 30, 2008 and 2007 (unaudited) .................................................................................................................................................................... |
2
|
|
| Condensed Consolidated Balance Sheets at June 30, 2008 and December 31, 2007 (unaudited) ..................................... |
3
|
|
| Consolidated Statements of Changes in Stockholders’ Equity for the six months ended June 30, 2008 (unaudited)... |
4
|
|
| Consolidated Statements of Cash Flows for the six months ended June 30, 2008 and 2007 (unaudited) ....................... |
5
|
|
| Notes to Consolidated Financial Statements (unaudited)...................................................................................................... |
6
|
|
| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations......................................... |
14
|
| 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
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)
|
2008
|
2007
|
2008
|
2007
|
||||||||||||
|
Net
sales
|
$ | 122,240 | $ | 107,302 | $ | 243,781 | $ | 215,246 | ||||||||
|
Cost
of products sold (exclusive of depreciation
and
amortization shown separately below)
|
97,248 | 85,929 | 193,741 | 171,010 | ||||||||||||
|
Selling,
general and administrative
|
10,011 | 9,558 | 20,220 | 18,983 | ||||||||||||
|
Depreciation
and amortization
|
6,387 | 5,658 | 12,650 | 11,180 | ||||||||||||
|
Restructuring
and impairment charges
|
-- | 13,336 | -- | 13,336 | ||||||||||||
|
Gain
on disposal of assets
|
(4,018 | ) | (6 | ) | (4,159 | ) | (11 | ) | ||||||||
|
Income
(loss) from operations
|
12,612 | (7,173 | ) | 21,329 | 748 | |||||||||||
|
Interest
expense
|
1,268 | 1,630 | 2,810 | 3,325 | ||||||||||||
|
Other
(income) expense, net
|
(284 | ) | (22 | ) | (419 | ) | 3 | |||||||||
|
Income
(loss) before provision for income taxes
|
11,628 | (8,781 | ) | 18,938 | (2,580 | ) | ||||||||||
|
Provision
for income taxes
|
2,455 | 1,584 | 4,665 | 4,030 | ||||||||||||
|
Net
(loss) income
|
9,173 | (10,365 | ) | 14,273 | (6,610 | ) | ||||||||||
|
Other
comprehensive income(loss):
|
||||||||||||||||
|
Foreign
currency translation gain
|
1,638 | 1,351 | 11,600 | 3,427 | ||||||||||||
|
Comprehensive
income (loss)
|
$ | 10,811 | $ | (9,014 | ) | $ | 25,873 | $ | (3,183 | ) | ||||||
|
Basic
income (loss) per common share:
|
$ | 0.58 | $ | ( 0.62 | ) | $ | 0.90 | $ | (0.39 | ) | ||||||
|
Weighted
average shares outstanding
|
15,899 | 16,815 | 15,867 | 16,814 | ||||||||||||
|
Diluted
income (loss) per common share:
|
$ | 0.57 | $ | (0.62 | ) | $ | 0.89 | $ | (0.39 | ) | ||||||
|
Weighted
average shares outstanding
|
16,054 | 16,815 | 15,978 | 16,814 | ||||||||||||
|
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)
|
(Thousands
of Dollars)
|
June
30,
2008
|
December
31,
2007
|
||||||
|
Assets
|
||||||||
|
Current
assets:
|
||||||||
|
Cash
and cash equivalents
|
$ | 14,273 | $ | 13,029 | ||||
|
Accounts
receivable, net of allowance for doubtful accounts of
$410
and $1,412, respectively
|
82,390 | 65,566 | ||||||
|
Inventories,
net
|
56,454 | 51,821 | ||||||
|
Other
current assets
|
8,406 | 7,608 | ||||||
|
Total
current assets
|
161,523 | 138,024 | ||||||
|
Property,
plant and equipment, net
|
167,075 | 161,008 | ||||||
|
Goodwill,
net
|
40,436 | 39,471 | ||||||
|
Intangible
assets, net
|
8,613 | 9,279 | ||||||
|
Other
assets
|
1,856 | 2,296 | ||||||
|
Total
assets
|
$ | 379,503 | $ | 350,078 | ||||
|
Liabilities
and Stockholders’ Equity
|
||||||||
|
Current
liabilities:
|
||||||||
|
Accounts
payable
|
$ | 53,306 | $ | 51,124 | ||||
|
Accrued
salaries, wages and benefits
|
16,807 | 15,087 | ||||||
|
Income
taxes payable
|
2,243 | 144 | ||||||
|
Current
maturities of long-term debt
|
7,624 | 11,851 | ||||||
|
Other
current liabilities
|
5,277 | 6,050 | ||||||
|
Total
current liabilities
|
85,257 | 84,256 | ||||||
|
Non-current
deferred tax liabilities
|
17,579 | 18,682 | ||||||
|
Long-term
debt (net of current portion)
|
103,172 | 100,193 | ||||||
|
Accrued
pension and other
|
17,995 | 16,904 | ||||||
|
Total
liabilities
|
224,003 | 220,035 | ||||||
|
Total
stockholders’ equity
|
155,500 | 130,043 | ||||||
|
Total
liabilities and stockholders’ equity
|
$ | 379,503 | $ | 350,078 | ||||
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
Comprehen-
sive
Income
|
Total | ||||||||||||||||||
|
Balance,
January 1, 2008
|
15,855 | $ | 159 | $ | 45,032 | $ | 57,083 | $ | 27,769 | $ | 130,043 | |||||||||||||
|
Shares
issued ($0.01 par value,
authorized 45,000 shares)
|
167 | 2 | 1,082 | -- | -- | 1,084 | ||||||||||||||||||
|
Tax
benefit on options exercised
|
-- | -- | 400 | -- | -- | 400 | ||||||||||||||||||
|
Net
income
|
-- | -- | -- | 14,273 | -- | 14,273 | ||||||||||||||||||
|
Amortization
of restricted stock
awards
|
-- | -- | 257 | -- | -- | 257 | ||||||||||||||||||
|
Stock
option expense
|
-- | -- | 388 | -- | -- | 388 | ||||||||||||||||||
|
Dividends
declared
|
-- | -- | -- | (2,545 | ) | -- | (2,545 | ) | ||||||||||||||||
|
Translation
gain
|
-- | -- | -- | -- | 11,600 | 11,600 | ||||||||||||||||||
|
Balance,
June 30, 2008
|
16,022 | $ | 161 | $ | 47,159 | $ | 68,811 | $ | 39,369 | $ | 155,500 | |||||||||||||
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)
|
2008
|
2007
|
||||||
|
Operating
Activities:
|
||||||||
|
Net
income (loss)
|
$ | 14,273 | $ | (6,610 | ) | |||
|
Adjustments
to reconcile net income (loss) to net cash provided by
operating
activities:
|
||||||||
|
Depreciation
and amortization
|
12,650 | 11,180 | ||||||
|
Amortization
of debt issue costs
|
126 | 100 | ||||||
|
Gain
on disposal of property, plant and equipment
|
(4,159 | ) | (11 | ) | ||||
|
Compensation
expense from issuance of restricted stock and incentive stock
options
|
645 | 368 | ||||||
|
Restructuring
and impairment charges
|
-- | 13,336 | ||||||
|
Deferred
income tax
|
(970 | ) | 84 | |||||
|
Non-cash
interest expense
|
102 | 90 | ||||||
|
Changes
in operating assets and liabilities:
|
||||||||
|
Accounts
receivable
|
(14,825 | ) | (10,021 | ) | ||||
|
Inventories
|
(2,608 | ) | (1,221 | ) | ||||
|
Accounts
payable
|
(739 | ) | (3,585 | ) | ||||
|
Other
assets and liabilities
|
1,795 | 313 | ||||||
|
Net
cash provided by operating activities
|
6,290 | 4,023 | ||||||
|
Investing
Activities:
|
||||||||
|
Acquisition
of property, plant and equipment
|
(8,945 | ) | (6,824 | ) | ||||
|
Proceeds
from disposals of property, plant and equipment
|
5,780 | -- | ||||||
|
Acquisition
of intangibles and goodwill
|
-- | (162 | ) | |||||
|
Net
cash used by investing activities
|
(3,165 | ) | (6,986 | ) | ||||
|
Financing
Activities:
|
||||||||
|
Increase
in cash from book overdraft
|
-- | 84 | ||||||
|
Repayment
of short-term debt
|
(3,839 | ) | -- | |||||
| Repayment of long-term debt | -- | (617 | ) | |||||
|
Proceeds
from short-term debt
|
-- | 8,203 | ||||||
|
Principal
payment on capital lease
|
(22 | ) | (18 | ) | ||||
|
Proceeds
from issuance of stock
|
1,084 | 292 | ||||||
|
Proceeds
from long term debt
|
3,286 | 17,400 | ||||||
|
Debt
issuance cost paid
|
-- | (161 | ) | |||||
|
Dividends
paid
|
(2,545 | ) | (2,696 | ) | ||||
|
Repayment
of related party debt
|
-- | (18,638 | ) | |||||
|
Net
cash provided (used) by financing activities
|
(2,036 | ) | 3,849 | |||||
|
Effect
of exchange rate changes on cash and cash equivalents
|
155 | 253 | ||||||
|
Net
Change in Cash and Cash Equivalents
|
1,244 | 1,139 | ||||||
|
Cash
and Cash Equivalents at Beginning of Period
|
13,029 | 11,681 | ||||||
|
Cash
and Cash Equivalents at End of Period
|
$ | 14,273 | $ | 12,820 | ||||
|
Supplemental
schedule of non-cash investing and financing activities:
|
||||||||
|
Reduced
note payable to customer with offsetting reduction to accounts receivable
($797 in 2008
and
$707 in 2007) and an increase to interest expense ($102 in 2008 and $90 in
2007)
|
$ | 695 | $ | 617 | ||||
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, 2007 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, 2008 and 2007, the Company’s financial
position at June 30, 2008 and December 31, 2007, and the cash flows for the six
month periods ended June 30, 2008 and 2007. 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 and 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, 2007 which we filed with the Securities and Exchange Commission on
March 17, 2008.
The
results for the three and six month periods ended June 30, 2008 are not
necessarily indicative of results for the year ending December 31, 2008 or any
other future periods.
Certain
amounts in the 2007 financial statements have been reclassified to conform to
the 2008 financial statement presentation.
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 resulted in the recognition of certain restructuring,
impairment and other non-recurring charges. Earlier in July 2007,
management made a decision that, at that time, to reduce output at
four of the six ball plants would be the best financial and logistical solution
to align capacity. Since the reporting value of tangible and
intangible assets must be supported by cash flow from the operations, the
changes resulted in reductions in value of certain tangible and intangible
assets at the affected ball plants.
During
the second quarter of 2007, we recorded approximately $13,336 ($12,624
after-tax) of non-cash impairment costs. These charges included 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.
Note
3. Inventories
Inventories
are stated at the lower of cost or market. Cost is determined using
the first-in, first-out method.
6
NN,
Inc.
Notes
To Consolidated Financial Statements
(In
Thousands, Except Share and Per Share Data)
(unaudited)
Inventories
are comprised of the following (in thousands):
|
June
30,
2008
|
December
31,
2007
|
|||||||
|
Raw
materials
|
$ | 16,078 | $ | 15,076 | ||||
|
Work
in process
|
13,034 | 9,808 | ||||||
|
Finished
goods
|
29,049 | 28,925 | ||||||
|
Less
inventory reserves
|
(1,707 | ) | (1,988 | ) | ||||
| $ | 56,454 | $ | 51,821 | |||||
Inventories
on consignment at customer locations as of June 30, 2008 and December 31, 2007
totaled $7,262 and $5,702, 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)
|
2008
|
2007
|
2008
|
2007
|
||||||||||||
|
Net
income (loss)
|
$ | 9,173 | $ | (10,365 | ) | $ | 14,273 | $ | (6,610 | ) | ||||||
|
Weighted
average basic shares outstanding
|
15,898,888 | 16,815,249 | 15,867,284 | 16,813,871 | ||||||||||||
|
Effect
of dilutive stock options
|
155,011 | -- | 110,962 | -- | ||||||||||||
|
Weighted
average dilutive shares outstanding
|
16,053,899 | 16,815,249 | 15,978,246 | 16,813,871 | ||||||||||||
|
Basic
net income (loss) per share
|
$ | 0.58 | $ | (0.62 | ) | $ | 0.90 | $ | (0.39 | ) | ||||||
|
Diluted
net income (loss) per share
|
$ | 0.57 | $ | (0.62 | ) | $ | 0.89 | $ | (0.39 | ) | ||||||
Excluded
from the dilutive shares outstanding for the three and six month periods ended
June 30, 2008 were 420,500 and 973,332, respectively, of anti-dilutive options
which had exercise prices ranging from $9.36 to $12.62. Excluded from
the dilutive shares outstanding for the three and six month periods ended June
30, 2007 were 624,000 anti-dilutive options which had exercise prices ranging
from $11.29 and $12.62.
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 and Practices” footnote, respectively, in our
financial statements included in our annual report on Form 10-K for the fiscal
year ended December 31, 2007. We evaluate segment performance based
on segment net income or loss after income taxes. 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, 2008 and 2007.
7
NN,
Inc.
Notes
To Consolidated Financial Statements
(In
Thousands, Except Share and Per Share Data)
(unaudited)
|
Three
Months Ended June 30,
|
||||||||
|
2008
|
2007
|
|||||||
|
(In
Thousands of Dollars)
|
Metal
Bearing
Com-
ponents
Segment
|
Precision
Metal Com-
ponents
Segment
|
Plastic
and
Rubber
Com-
ponents
Segment
|
All
Other
|
Metal
Bearing
Com-
ponents
Segment
|
Precision
Metal
Com-
ponents
Segment
|
Plastic
and
Rubber
Com-
ponents
Segment
|
All
Other
|
|
Revenues
from external customers
|
$ 94,248
|
$
17,188
|
$
10,804
|
$ --
|
$
76,275
|
$
17,108
|
$
13,919
|
$ --
|
|
Net
income (loss)
|
10,537
|
249
|
241
|
(1,854)
|
(8,594)
|
(507)
|
630
|
(1,894)
|
|
Total
Assets
|
$ 268,676
|
$
54,321
|
$
52,457
|
$
4,049
|
$
231,614
|
$
53,064
|
$
52,182
|
$ 6,981
|
|
Six
Months Ended June 30,
|
||||||||
|
2008
|
2007
|
|||||||
|
(In
Thousands of Dollars)
|
Metal
Bearing
Com-
ponents
Segment
|
Precision
Metal
Com-
ponents
Segment
|
Plastic
and
Rubber
Com-
ponents
Segment
|
All
Other
|
Metal
Bearing
Com-
ponents
Segment
|
Precision
Metal
Com-
ponents
Segment
|
Plastic
and
Rubber
Com-
ponents
Segment
|
All
Other
|
|
Revenues
from external customers
|
$ 184,688
|
$
36,287
|
$
22,806
|
$ --
|
$
153,559
|
$
35,136
|
$
26,551
|
$ --
|
|
Net
income (loss)
|
16,510
|
927
|
515
|
(3,679)
|
(3,712)
|
(460)
|
1,119
|
(3,557)
|
|
Total
Assets
|
$ 268,676
|
$
54,321
|
$
52,457
|
$ 4,049
|
$
231,614
|
$53,064
|
$52,182
|
$ 6,981
|
Note
6. 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 no longer incurs service
cost. The plan is unfunded. There were no prior service
costs recognized in the three and six months ended June 30, 2008 and 2007. We expect to
contribute approximately $297 to the Eltmann, Germany pension plan in
2008. As of June 30, 2008, approximately $149 of contributions had
been made.
8
NN,
Inc.
Notes
To Consolidated Financial Statements
(In
Thousands, Except Share and Per Share Data)
(unaudited)
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 month periods ended June 30, 2008 and
2007:
|
Three
months ended
June
30,
|
Six
months ended
June
30,
|
|
(In
Thousands of Dollars)
|
2008
|
2007
|
2008
|
2007
|
||||||||||||
|
Beginning
balance
|
$ | 9,085 | $ | 7,975 | $ | 8,551 | $ | 8,020 | ||||||||
|
Amounts
accrued
|
429 | 343 | 801 | 586 | ||||||||||||
|
Payments
to employees
|
(146 | ) | -- | (366 | ) | (381 | ) | |||||||||
|
Payments
to pension funds
|
(227 | ) | -- | (534 | ) | -- | ||||||||||
|
Currency
impacts
|
(21 | ) | 113 | 668 | 206 | |||||||||||
|
Ending
balance
|
$ | 9,120 | $ | 8,431 | $ | 9,120 | $ | 8,431 | ||||||||
Service
and Early Retirement Provisions
We have
two plans that cover our Veenendaal, The Netherlands employees. One
provides an award for employees who achieve 25 or 40 years of service and the
other is for employees who retire before normal retirement age. These
plans are both unfunded and the benefits are based on years of service and rate
of compensation increase. The table below summarizes the changes in
the two plans combined during the three and six month periods ended June 30,
2008 and 2007.
|
Three months ended
June 30,
|
Six
months ended
June 30,
|
|||||||||||||||
|
(In
Thousands of Dollars)
|
2008
|
2007
|
2008
|
2007
|
||||||||||||
|
Beginning
balance
|
$ | 985 | $ | 501 | $ | 897 | $ | 495 | ||||||||
|
Service
cost
|
13 | -- | 26 | -- | ||||||||||||
|
Interest
cost
|
15 | -- | 29 | -- | ||||||||||||
|
Benefits
paid
|
(73 | ) | -- | (86 | ) | -- | ||||||||||
|
Currency
impacts
|
(4 | ) | 7 | 70 | 13 | |||||||||||
|
Ending
balance
|
$ | 936 | $ | 508 | $ | 936 | $ | 508 | ||||||||
Note
7. New
Accounting Pronouncements
In
September 2006, the FASB issued SFAS 157, “Fair Value Measurements”
(SFAS 157), which provides guidance on how to measure assets and liabilities
that are measured at fair value. SFAS 157 applies 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 requires additional disclosures in both
annual and quarterly reports. SFAS 157 was effective for financial
statements issued for fiscal years beginning after November 15, 2007, excluding
non-financial assets and liabilities except those that are recognized or
disclosed at fair value on a recurring basis. The adoption of SFAS
157 for non-financial assets and liabilities was deferred until January 1,
2009. We are still evaluating the effect of adoption of SFAS 157 on
our non-financial assets and liabilities. We adopted the provisions
of SFAS 157 that pertain to financial assets and liabilities on January 1, 2008
and this has had no effect on our income from operations, cash flows, and
financial condition.
In
February, 2007, the FASB issued SFAS 159, "The Fair Value Option for Financial
Assets and Financial Liabilities—Including an amendment of FASB Statement No.
115" (SFAS 159). SFAS 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
9
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 115, "Accounting
for Certain Investments in Debt and Equity Securities," applies to all entities
with available for sale and trading securities. SFAS 159 was
effective for us as of January 1, 2008. We have elected not to adopt
the provisions of SFAS 159 for our existing financial liabilities. We
will continue to report our existing financial liabilities on a cost basis as we
believe this is a better representation of our actual financial
obligations.
In
December 2007, the FASB issued SFAS No. 141 (revised 2007) "Business
Combinations" ("SFAS No. 141R") which replaces SFAS No. 141 "Business
Combinations" ("SFAS No. 141"). SFAS No. 141R retains the fundamental
requirements of SFAS No. 141 that the acquisition method of accounting be used
for all business combinations. However, SFAS No. 141R provides for
the following changes from SFAS No. 141: an acquirer will record 100%
of assets and liabilities of acquired business, including goodwill, at fair
value, regardless of the level of interest acquired; certain contingent assets
and liabilities will be recognized at fair value at the acquisition date;
contingent consideration will be recognized at fair value on the acquisition
date with changes in fair value to be recognized in earnings upon settlement;
acquisition-related transaction and restructuring costs will be expensed as
incurred; reversals of valuation allowances related to acquired deferred tax
assets and changes to acquired income tax uncertainties will be recognized in
earnings; and when making adjustments to finalize preliminary accounting,
acquirers will revise any previously issued post-acquisition financial
information in future financial statements to reflect any adjustments as if they
occurred on the acquisition date. SFAS No. 141R applies prospectively
to business combinations for which the acquisition date is on or after January
1, 2009. SFAS No. 141R will not have an impact on the Company's
consolidated financial statements when effective, but the nature and magnitude
of the specific effects will depend upon the nature, terms, and size of the
acquisitions consummated after the effective date.
Note
8. Long-Term
Debt and Short-Term Debt
Long-term
debt at June 30, 2008 and December 31, 2007 consisted of the
following:
|
June
30,
2008
|
December
31, 2007
|
|||||||
|
Borrowings
under our $135,000 revolving credit facility bearing interest at a
floating rate equal to LIBOR (2.46% at June 30, 2008) plus an applicable
margin of 0.60 to 0.925, expiring September 20, 2011.
|
$ | 75,636 | $ | 70,476 | ||||
|
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 began on April 26,
2008 and extend through the date of maturity.
|
34,286 | 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.
|
874 | 1,568 | ||||||
|
Total
debt
|
110,796 | 112,044 | ||||||
|
Less
current maturities of long-term debt
|
7,624 | 11,851 | ||||||
|
Long-term
debt, excluding current maturities of long-term debt
|
$ | 103,172 | $ | 100,193 | ||||
10
NN,
Inc.
Notes
To Consolidated Financial Statements
(In
Thousands, Except Share and Per Share Data)
(unaudited)
The
current maturities of long-term debt as of June 30, 2008 are composed primarily
of $1,036 of short term borrowings under the short term portion of the revolving
credit facility and the $5,714 second installment on our senior notes due April
26, 2009.
We were
in compliance with all covenants related to the $135.0 million credit facility
and the $40.0 million senior notes as of June 30, 2008. The specific
covenants to which we are subject are disclosed in our annual report on Form
10-K for the year ended December 31, 2007.
Note
9. Goodwill
The
changes in the carrying amount of goodwill for the six month period ended June
30, 2008 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, 2008
|
$ | 4,274 | $ | 25,755 | $ | 9,442 | $ | 39,471 | ||||||||
|
Currency
impacts
|
-- | -- | 965 | 965 | ||||||||||||
|
Balance
as of June 30, 2008
|
$ | 4,274 | $ | 25,755 | $ | 10,407 | $ | 40,436 | ||||||||
Note
10. Intangible
assets, net of amortization
|
(In
Thousands of Dollars)
|
Precision
Metal
Components
Segment
|
Metal
Bearing Components
Segment
|
Total
|
|
Balance
of Amortizable Intangible Assets as of January 1, 2008
|
$ 6,484
|
$ 1,895
|
$ 8,379
|
|
Amortization
|
(423)
|
(322)
|
(745)
|
|
Currency
impacts
|
--
|
79
|
79
|
|
Balance
of Amortizable Intangible Assets as of June 30, 2008
|
$ 6,061
|
$ 1,652
|
$ 7,713
|
Of the
intangible assets within the Precision Metal Components Segment, the majority of
the value is a customer relationship intangible with a net carrying value of
$5,982. This intangible asset has an original estimated useful life
of 10 years and $361 of amortization expense was recorded in the six months
ended June 30, 2008. The remainder of the intangibles is made up of a
covenant not to compete and a favorable leasehold interest with net carrying
values of $31 and $48, respectively. These items were originally
amortizable over two and two and a half years, respectively, and $37 and $25 in
amortization expense, respectively, was recorded in 2008. The
accumulated amortization related to all of these intangible assets at June 30,
2008 was $1,118. Also, 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.
Within
the Metal Bearing Components Segment the intangible asset is a contract
intangible. This intangible asset is subject to amortization over
approximately 5 years. For the six months ended June 30, 2008, the
amortization expense totaled $322 and accumulated amortization totaled $1,282 at
June 30, 2008.
Note
11. Stock
Compensation
In the
three and six month periods ended June 30, 2008 and 2007, approximately $330 and
$645 for 2008 and $234 and $368 for 2007, respectively, of compensation expense
was recognized in selling, general and administrative expense for all
share-based awards. On March 6, 2008, the Company granted
160,000
11
NN,
Inc.
Notes
To Consolidated Financial Statements
(In
Thousands, Except Share and Per Share Data)
(unaudited)
options
to the non-executive directors, officers and certain other key
employees. 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, 2008.
|
Options
|
Shares
(000)
|
Weighted-
Average
Exercise
Price
|
Weighted-
Average
Remaining
Contractual
Term
|
Aggregate
Intrinsic
Value
($000)
|
||||||||||||
|
Outstanding
at January 1, 2008
|
1,530 | $ | 9.93 | |||||||||||||
|
Granted
|
160 | $ | 9.36 | |||||||||||||
|
Exercised
|
(167 | ) | 6.48 | |||||||||||||
|
Forfeited
or expired
|
(8 | ) | $ | 11.65 | ||||||||||||
|
Outstanding
at June 30, 2008
|
1,515 | $ | 10.26 | 5.9 | $ | 5,606 | (1) | |||||||||
|
Exercisable
at June 30, 2008
|
1,180 | $ | 10.16 | 5.0 | $ | 4,504 | (1) | |||||||||
(1)
Intrinsic value is the amount by which the market price of the stock ($13.94)
was greater than the exercise price of each individual option grant at June 30,
2008.
Restricted
Stock Awards
The
recognized compensation costs before tax for restricted stock awards in the
three and six month periods ended June 30, 2008 and 2007 were approximately $16
and $31 for 2008, and $26 and $53 for 2007, respectively. There is no
unrecognized compensation cost for these awards at June 30, 2008. As
of June 30, 2008, the actual cumulative forfeiture rate of the awards granted
was approximately 10%. During the six month period ended June 30,
2008 there have not been any shares granted, vested or forfeited.
Long
Term Incentive Plan
The
compensation expense recognized during the three and six month periods ended
June 30, 2008 and 2007 related to this plan was $113 and $226, respectively, and
$0 and $0, respectively. At June 30, 2008 there was $679 of
unrecognized compensation cost, before tax, to be recognized over approximately
one year and six months. During the six month period ended June 30, 2008, there
have not been any performance units granted, vested or forfeited.
Note
12. Provision
for Income Taxes
For the
three and six month periods ended June 30, 2008, the difference between the
federal statutory tax rate of 34% and our effective tax rate of 21% and 25%,
respectively, is primarily due to a $1,142 deferred tax benefit recognized by
our Italian operation resulting from our election under a new Italian tax
law to harmonize that operation's net fixed asset values for tax and statutory
reporting. Additionally, the $4,018 gain on sale of fixed assets was in a
jurisdiction with a lower effective tax rate than the U.S. Finally,
the income tax rates in many of the foreign countries in which we operate are
lower than the U.S federal rate. In addition, we utilized net
operating loss carryforwards to offset taxable income at our German and
Slovakian operations. For the remainder of 2008, our effective tax rate is
expected to be consistent with the U.S. statutory rate of 34%.
Note
13. Commitments
and 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. 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 through the end of June 30, 2008
to the
12
NN,
Inc.
Notes
To Consolidated Financial Statements
(In
Thousands, Except Share and Per Share Data)
(unaudited)
account
was $28. 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. 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.
Note
14. Property,
Plant and Equipment
During
the three month period ended June 30, 2008, the Veenendaal, The Netherlands
facility (part of the Metal Bearing Components Segment) disposed of excess land
with a book value of $1,610 for proceeds of $5,628 and a resulting gain of
$4,018 ($2,995, after tax).
During
the three month period ended June 30, 2007, 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, during period end June 30, 2007, was $3,320
and was reported in the Restructuring and impairment charges line of the
Consolidated Statements of Income.
13
|
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, 2007 under Item 1.A. “Risk Factors”. There have
been no material changes to these risk factors since December 31,
2007.
Results
of Operations
Three
Months Ended June 30, 2008 Compared to the Three Months Ended June 30,
2007.
OVERALL
RESULTS
|
(In
Thousands of Dollars)
|
Consolidated
NN, Inc.
|
|||||||||||
|
2008
|
2007
|
Change
|
||||||||||
|
Net
sales
|
$ | 122,240 | $ | 107,302 | $ | 14,938 | ||||||
|
Cost
of products sold (exclusive of depreciation
and
amortization shown separately below)
|
97,248 | 85,929 | 11,319 | |||||||||
|
Selling,
general, and administrative
|
10,011 | 9,558 | 453 | |||||||||
|
Depreciation
and amortization
|
6,387 | 5,658 | 729 | |||||||||
|
Restructuring
and impairment charges
|
-- | 13,336 | (13,336 | ) | ||||||||
|
Interest
expense, net
|
1,268 | 1,630 | (362 | ) | ||||||||
|
Gain
on disposal of assets
|
(4,018 | ) | (6 | ) | (4,012 | ) | ||||||
|
Other
income, net
|
(284 | ) | (22 | ) | (262 | ) | ||||||
|
Income
(loss) before provision for income taxes
|
11,628 | (8,781 | ) | 20,409 | ||||||||
|
Provision
for income taxes
|
2,455 | 1,584 | 871 | |||||||||
|
Net
income (loss)
|
$ | 9,173 | $ | (10,365 | ) | $ | 19,538 | |||||
Net Sales. Sales
have increased due to the appreciation in value of Euro denominated sales
relative to the U.S. Dollar ($10.4 million). In addition, sales have
increased due to higher sales volume in our Metal Bearings Components Segment
due to market share gains and strong levels of industrial end market demand in
North America and Europe partially offset by volume reductions in our Plastic
and Rubber Components Segment due to U.S. automotive market weakness ($4.6
million). Finally, sales have increased due to price increases from
passing through raw material inflation to customers ($1.2
million). Partially offsetting these increases are price decreases
given to several large customers in agreement with contractual terms net of
price increases given to non contractual customers ($0.5 million) and
unfavorable product mix to existing customers ($0.8 million).
Cost of Products Sold (exclusive of
depreciation and amortization). Cost of products sold
increased primarily due to the increase in value of Euro denominated costs
relative to the U.S. Dollar ($7.9 million). In addition, cost of
products sold increased due to higher sales volumes in our Metal Bearing
Components Segment partially offset by decreases in our Plastic and Rubber
Components Segment ($3.7 million). Finally, raw material, labor and
utility inflation increased the total ($2.1 million). Offsetting
these increases were favorable impacts from our Level 3 cost reduction program
and other planned projects focused on reducing cost of manufacturing and from
operating improvements at our three newest operations: Whirlaway, China, and
Slovakia ($1.1 million). Additionally, costs were down due to a
favorable mix of products sold ($0.7 million) and due to the reversal of an
environmental reserve related to the sale of excess land in the second quarter
of 2008 ($0.6 million).
Selling, General and Administrative
Expenses. The increase was primarily due to the increase in
the value of Euro denominated cost relative to the U.S. Dollar ($0.6
million). Excluding foreign exchange impacts, expenses were lower due
to overall lower levels of spending ($0.2 million).
Depreciation and
Amortization. These costs are higher due to the increase in
the value of the Euro based depreciation and amortization relative to the U.S.
Dollar ($0.5 million). Additionally, depreciation expense increased
on assets placed in service at our new plants in China and Slovakia ($0.2
million).
14
Interest expense.
Interest expense is lower due to decreases in the base LIBOR interest rate which
reduced the cost of borrowing under our variable rate credit
agreement.
Gain on disposal of
assets. During the three month period ended June 30, 2008 a
location in our Metal Bearings Components Segment sold excess land for a pre-tax
gain of $4.0 million.
Restructuring and impairment
charges. During the three month period ended June 30, 2007, we
impaired certain goodwill and fixed asset balances related to the Metal Bearing
Components restructuring.
Provision for income taxes.
The 2008 second quarter effective rate of 21.1% was higher than the 2007
second quarter effective rate of negative 18.1%. The second quarter
of 2008 rate was reduced, as compared to the U.S. statutory rate, by the effect
of electing to eliminate a portion of deferred tax liabilities at our Italian
location under provisions of a new Italian law. This provided a $1.1
million benefit which reduced the tax rate 9.8 percentage
points. Additionally, the gain of the sale of land was taxed at a
lower rate than our traditional blended tax rate which further reduced the tax
rate 2.9 percentage points. The tax rate of the second quarter of
2007 was impacted by the large impairments with the minimal tax impact due to
valuation reserves on the tax benefits from the impairment charges and other
related tax benefits.
RESULTS
BY SEGMENT
METAL BEARING COMPONENTS
SEGMENT
|
(In
Thousands of Dollars)
|
Three
months ended
June
30,
|
|||||||||||
|
2008
|
2007
|
Change
|
||||||||||
|
Net
sales
|
$ | 94,248 | $ | 76,275 | $ | 17,973 | ||||||
|
Segment
net income, excluding restructuring and impairment charges, net of
tax
|
10,537 | 4,826 | 5,711 | |||||||||
|
Restructuring
and impairment charges, net of tax
|
-- | (13,420 | ) | 13,420 | ||||||||
|
Segment
net income (loss)
|
$ | 10,537 | $ | (8,594 | ) | $ | 19,131 | |||||
The sales
increase in the Metal Bearing Components Segment was due to the positive impacts
from the rise in value of Euro based sales relative to the U.S. Dollar ($10.4
million). Additionally, the Metal Bearing Components Segment
experienced higher sales volume in North America, Europe and Asia due to new
programs, market share gains, and strong European and North American industrial
end market demand ($7.3 million). Finally, sales increased due to
price increases related to passing through raw material inflation to customers
($1.6 million). These increases were partially offset by unfavorable
product mix ($0.8 million) and due to contractual price decreases to certain
large customers net of price increases given to non contractual customers ($0.5
million).
The
second quarter of 2008 segment net income was positively impacted by two
non-operating one-time benefits. The first was a $3.0 million after
tax gain on sale of excess land. The other was a $1.1 million tax
benefit related to reducing certain deferred tax liabilities at our Italian
operation under a new Italian tax law. Additionally, second quarter
2008 segment net income was favorable to second quarter 2007 segment net loss
due to the $13.4 million of impairment charges in the second quarter of 2007
that did not repeat in the second quarter of 2008.
Without the
one-time non-operating benefits, segment net income increased due to the higher
sales volume ($1.3 million) and from the appreciation of Euro denominated sales
less Euro denominated cost ($0.6 million). Additionally, the gain
from the reversal of an environmental reserve, related to the excess land
sold in the second quarter of 2008, increased segment net income ($0.4
million). Offsetting these gains were inflation impacts, net of
material price pass through and cost reduction project savings ($0.7
million).
15
PRECISION METAL COMPONENTS
SEGMENT
|
(In
Thousands of Dollars)
|
Three
months ended
June
30,
|
|||||||||||
|
2008
|
2007
|
Change
|
||||||||||
|
Net
sales
|
$ | 17,188 | $ | 17,108 | $ | 80 | ||||||
|
Segment
net income
|
$ | 249 | $ | (507 | ) | $ | 756 | |||||
Sales
volume increased at both our largest heating, ventilation and air
conditioning equipment customer and our largest heavy truck customer from
unusually low levels in 2007. However, these volume increases were
offset by reduced sales to customers that serve the U.S. automotive market
particularly light trucks with diesel engines.
The
segment’s net income was higher due to production efficiencies that resulted
from projects targeting reduction in labor and manufacturing supplies costs
($0.6 million) and from lower net interest cost ($0.2 million).
PLASTIC AND RUBBER
COMPONENTS SEGMENT
|
(In
Thousands of Dollars)
|
Three
months ended
June
30,
|
|||||||||||
|
2008
|
2007
|
Change
|
||||||||||
|
Net
sales
|
$ | 10,804 | $ | 13,919 | $ | (3,115 | ) | |||||
|
Segment
net income
|
$ | 241 | $ | 630 | $ | (389 | ) | |||||
Revenues
in the Plastic and Rubber Components Segment were down due to lower sales volume
to customers that sell products to U.S. automotive manufacturers ($3.2
million). The lower sales were due to a general downturn in that
market and the effects of a strike at a major U.S. automotive supplier which
affected several of our customers’ sales volumes. This decrease was
partially offset by the impact of price increases at certain customers ($0.1
million).
Segment
net income was negatively affected by the volume decreases in sales net of cost
of goods sold ($0.7 million). Planned cost reduction projects and
price increases, net of inflation, partially offset the volume impacts ($ 0.3
million).
16
Six
Months Ended June 30, 2008 Compared to the Six Months Ended June 30,
2007.
OVERALL
RESULTS
|
(In
Thousands of Dollars)
|
Consolidated
NN, Inc.
|
|||||||||||
|
2008
|
2007
|
Change
|
||||||||||
|
Net
sales
|
$ | 243,781 | $ | 215,246 | $ | 28,535 | ||||||
|
Cost
of products sold (exclusive of depreciation
and
amortization shown separately below)
|
193,741 | 171,010 | 22,731 | |||||||||
|
Selling,
general, and administrative
|
20,220 | 18,983 | 1,237 | |||||||||
|
Depreciation
and amortization
|
12,650 | 11,180 | 1,470 | |||||||||
|
Restructuring
and impairment charges
|
-- | 13,336 | (13,336 | ) | ||||||||
|
Interest
expense, net
|
2,810 | 3,325 | (515 | ) | ||||||||
|
Gain
on disposal of assets
|
(4,159 | ) | (11 | ) | (4,148 | ) | ||||||
|
Other
(income) expense, net
|
(419 | ) | 3 | (422 | ) | |||||||
|
Income
(loss) before provision for income taxes
|
18,938 | (2,580 | ) | 21,518 | ||||||||
|
Provision
for income taxes
|
4,665 | 4,030 | 635 | |||||||||
|
Net
income (loss)
|
$ | 14,273 | $ | (6,610 | ) | $ | 20,883 | |||||
Net Sales. Sales
have increased due to the appreciation in value of Euro denominated sales
relative to the U.S. Dollar ($18.7 million). In addition, sales have
increased due to higher sales volume primarily in our Metal Bearings Components
Segment due to market share gains and strong levels of industrial end market
demand in North America and Europe ($10.2 million). Finally, sales
have increased due to price increases from passing through raw material
inflation to customers ($2.2 million). Partially offsetting these
increases are price decreases given to several large customers in agreement with
contractual terms net of prices increases given to non-contractual customers
($1.0 million) and unfavorable product mix to existing customers ($1.6
million).
Cost of Products Sold (exclusive of
depreciation and amortization). Cost of products sold
increased due to the increase in value of Euro denominated costs relative
to the U.S. Dollar ($14.8 million). In addition, cost of products
sold increased due to higher sales volumes primarily in our Metal Bearing
Components Segment ($8.0 million). Finally, raw material, labor and
utility inflation increased the total ($4.3 million). Offsetting
these increases were favorable impacts from our Level 3 cost reduction program
and other planned projects focused on reducing cost of manufacturing and from
operating improvements at our three newest operations: Whirlaway, China, and
Slovakia ($4.4 million).
Selling, General and Administrative
Expenses. The increase was primarily due to the increase in
the value of Euro denominated cost relative to the U.S. Dollar ($1.2
million).
Depreciation and
Amortization. These costs are higher due to the increase in
the value of the Euro based depreciation and amortization relative to the U.S.
Dollar ($0.9 million). Additionally, depreciation expense increased
for depreciation on assets placed in service at our new plants in China and
Slovakia ($0.6 million).
Restructuring and impairment
charges. During the quarter ended June 30, 2007, we impaired
certain goodwill and fixed asset balances related to the Metal Bearing
Components restructuring.
Interest expense.
Interest expense is lower due to decreases in the base LIBOR interest rate which
reduced the cost of borrowing under our variable rate credit
agreement.
Gain on disposal of
assets. During the three month period ended June 30, 2008 a
location in our Metal Bearings Components Segment sold excess land for a pre-tax
gain of $4.0 million.
Provision for income taxes.
The 2008 six month period ended June 30, 2008 effective rate of 24.5% was
higher than the 2007 six month period effective rate of negative
156.2%. The 2008 rate was reduced, as compared to the U. S. statutory
rate, by the effect of electing to eliminate a portion of deferred tax
liabilities at our Italian location under provisions of a new Italian
law. This provided a $1.1 million benefit and reduced the tax rate
6.0 percentage points. Additionally, the gain of the sale of land was
taxed at a lower rate than our traditional blended tax rate which reduced the
tax rate 1.8 percentage points. In addition, the tax rate for the six
months ended June 30, 2008 was favorably impacted by a reduction in certain
foreign tax rates and the utilization of net operating loss carry forwards to
offset taxable income at certain foreign locations. The tax rate of
the six months ended June 30, 2007 was impacted by the large impairments with
the minimal tax impact due to valuation reserves on the tax benefits from the
impairment charges and other related tax benefits.
17
RESULTS
BY SEGMENT
METAL BEARING COMPONENTS
SEGMENT
|
(In
Thousands of Dollars)
|
Six
Months Ended June 30,
|
|||||||||||
|
2008
|
2007
|
Change
|
||||||||||
|
Net
sales
|
$ | 184,688 | $ | 153,559 | $ | 31,129 | ||||||
|
Segment
profit, excluding restructuring and impairment changes, net of
tax
|
16,510 | 9,708 | 6,802 | |||||||||
|
Restructuring
and impairment charges, net of tax
|
-- | (13,420 | ) | 13,420 | ||||||||
|
Net
income (loss)
|
$ | 16,510 | $ | (3,712 | ) | $ | 20,222 | |||||
The sales
increase in the Metal Bearing Components Segment was due to the positive impacts
from the rise in value of Euro based sales relative to the U.S. Dollar ($18.7
million). Additionally, the Metal Bearing Components Segment
experienced higher sales volume in North America, Europe and Asia due to new
programs, market share gains, and strong European and North American industrial
end market demand ($12.7 million). Finally, sales increased due to
price increases related to passing through raw material inflation to customers
($2.6 million). These increases were partially offset by unfavorable
product and customer mix ($1.6 million) and due to contractual price decreases
to certain large customers net of price increases given to non-contractual
customers ($1.3 million).
The 2008
segment net income was positively impacted by two non-operating one-time
benefits. The first was a $3.0 million after tax gain on sale of
excess land. The other was a $1.1 million tax benefit related to
reducing certain deferred tax liabilities at our Italian operation under a new
Italian tax law. Additionally, 2008 segment net income was favorable
to 2007 segment net loss due to the $13.4 million of impairment charges in 2007
that did not repeat in 2008.
Factoring
out the one-time non-operating benefits, segment net income increased due to the
higher sales volume ($2.3 million) and from the appreciation of Euro denominated
sales less Euro denominated cost ($1.0 million.) In addition, planned
cost reduction initiatives especially at our Asia and Slovakia operation had a
net positive impact to segment net income ($1.4 million) along with the reversal
of an environmental reserve related to the excess land sold in the second
quarter of 2008 ($0.4 million). Offsetting these gains were the
effects of price decreases given to certain customers under contractual terms
and unfavorable customer and product mix impacts ($1.7
million). Additionally, inflation net of material inflation passed
through to customers reduced segment net income $(0.7 million).
18
PRECISION METAL COMPONENTS
SEGMENT
|
(In
Thousands of Dollars)
|
Six
Months Ended June 30,
|
|||||||||||
|
2008
|
2007
|
Change
|
||||||||||
|
Net
sales
|
$ | 36,287 | $ | 35,136 | $ | 1,151 | ||||||
|
Net
income (loss)
|
$ | 927 | $ | (460 | ) | $ | 1,387 | |||||
Sales
volume increased at both our largest heating, ventilation and air conditioning
equipment customer and our largest heavy truck customer from unusually low
levels in 2007 ($2.2 million). However, in the second quarter these
volume increases were offset by reduced sales to customers that serve the U.S.
automotive market particularly light trucks with diesel engines ($1.0
million).
The
segment’s net income was higher due to the increased sales volume ($0.2
million). In addition, net income was higher due to production
efficiencies in labor and manufacturing supplies ($1.0 million) and from lower
net interest cost ($0.2 million).
PLASTIC AND RUBBER
COMPONENTS SEGMENT
|
(In
Thousands of Dollars)
|
Six
Months Ended June 30,
|
|||||||||||
|
2008
|
2007
|
Change
|
||||||||||
|
Net
sales
|
$ | 22,806 | $ | 26,551 | $ | (3,745 | ) | |||||
|
Net
income
|
$ | 515 | $ | 1,119 | $ | (604 | ) | |||||
Revenues
in the Plastic and Rubber Components Segment were down due to lower sales volume
to customers that sell products to U.S. automotive manufacturers ($3.9
million). The lower sales were due to a general downturn in that
market and the effects of a strike at a major U.S. automotive supplier which
affected several of our customers’ sales volumes. This decrease was
partially offset by the impact of price increases at certain customers ($0.2
million).
Segment
net income was negatively affected by the volume decreases in sales net of cost
of goods sold ($0.9 million). Planned cost reduction projects and
price increases, net of inflation, partially offset the volume impacts and
impacts of price increases ($ 0.3 million).
Changes
in Financial Condition
Total
assets and current assets increased approximately $17.9 million and $5.9
million, respectively, from the December 31, 2007 balance due to appreciation of
Euro denominated account balances relative to the U.S.
Dollar. Factoring out the foreign exchange effects, accounts
receivable was higher due to increased sales volume in the second quarter of
2008 over the fourth quarter of 2007 and due to timing of certain customer
payments ($14.1 million). Inventories were higher ($2.7 million) due
to increased production levels in the second quarter of
2008. Factoring out foreign exchange effects, property, plant and
equipment decreased as year to date capital spending has been lower than
depreciation and land with a net book value of $1.4 million was disposed of in
the second quarter of 2008 ($4.6 million).
Total
liabilities and current liabilities increased approximately $5.8 million and
$4.0 million, respectively, from December 31, 2007 due to appreciation of Euro
denominated balances relative to the U.S. Dollar. Factoring out the
foreign exchange effects, accounts payable was down due to timing of
payments to certain customers ($0.6 million). Liabilities increased
due to the accrual of taxes owed on first six months 2008 income ($2.0 million)
but were partially offset by reductions in deferred tax liabilities ($1.7
million). Finally, liabilities decreased due to the utilization and
ultimate reversal of an EPA reserve related to the excess land sold in the
Netherlands ($0.8 million).
19
Working
capital, which consists principally of accounts receivable and inventories
offset by accounts payable, was $76.3 million at June 30, 2008 as compared to
$53.8 million at December 31, 2007. The ratio of current assets to
current liabilities increased from 1.64:1 at December 31, 2007 to 1.89:1 at June
30, 2008. The increase in working capital was due primarily to the
increase in accounts receivable balances ($14.1 million). In
addition, working capital increased due to higher inventory levels ($2.7
million). Finally, a reduction in the balance of the current portion
of long-term debt ($4.2 million) reduced working capital. The
majority of that reduction was reclassified to long-term debt.
Cash flow
provided by operations was $6.3 million during the first six months of 2008
compared with cash flow provided by operations of $4.0 million during the first
six months of 2007. The increase in cash flow provided by operations
is due to increased net income partially offset by higher levels of working
capital due to 2008 sales levels being greater than 2007 sales
levels.
During
the three month period ended June 30, 2007, we recorded approximately $13.3
million ($12.6 million after-tax) of non-cash impairment charges. These
charges include 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 the
company’s existing cash flows from operations or available credit
lines.
Liquidity
and Capital Resources
Amounts
outstanding under our $135.0 million credit facility and our $40.0 million notes
as of June 30, 2008 were $75.6 million and $34.3 million,
respectively. See Note 8 of the Notes to Consolidated Financial
Statements. We were in compliance with all covenants of our $135.0
million credit facility and our $40.0 million senior notes as of June 30,
2008. As of June 30, 2008, the Company had $59.4 million of
availability under the $135.0 million revolving credit facility.
Many of
our locations use the Euro as their functional currency. In 2008, 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, 2008 compared with
the six months ended June 30, 2007 and the spot rate at
June 30, 2008 was higher than the exchange rate at December 31,
2007. As of June 30, 2008, 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.
During
2008, we plan to spend approximately $18.5 million on capital expenditures. Of
this amount, approximately $8.9 million has been spent through June 30,
2008. We intend to finance future fixed asset purchases 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, possible stock
repurchases and expected dividend payments through December
2008.
During
the third quarter of 2007, our Board of Directors authorized a new stock
repurchase program under which we are authorized to repurchase up to $25 million
in our common stock during the subsequent 12 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,
2008, the Company did not repurchase any shares under this plan or make any
other repurchases of common stock.
During
the second quarter of 2008, a dividend declared on March 31, 2008 totaling $1.3
million was paid on April 30, 2008. In addition, a dividend totaling
$1.3 million was declared on May 29, 2008 and was paid on June 23,
2008.
Seasonality
and Fluctuation in Quarterly Results
Historically,
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 have significantly slower production during the month of
August.
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, 2007, 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 six month
period ended June 30, 2008 was adoption of SFAS 157 and SFAS 159 related to
accounting for financial assets and liabilities under fair
value. SFAS 157 and SFAS 159 have had no effect on the financial
statements for the six month period ended June 30, 2008.
Sales
Concentration
Our
supply agreements with SKF for tapered rollers and steel cages and with the
Schaeffler Group for steel balls expire May 1, 2008 and June 30, 2008,
respectively. We are in the process of negotiating new supply
contracts with SKF for the tapered rollers and steel cages. We have
an informal agreement in principle to continue the current commercial terms
until the end of 2008. A new contract for beyond 2008 is still in the
process of being negotiated. In regards to the Schaeffler Group, we
are still in the process of negotiating a new contract. We continue
to sell to Schaeffler under similar commercial terms as the prior formal
contract. For the three and six month periods ended June 30, 2008, our
percentage of total sales to SKF and Schaeffler are consistent with those
reported in our Annual Report on Form 10-K for the fiscal year ended December
31, 2007.
European
Restructuring
As
previously mentioned in our annual report on Form 10-K for the year ended
December 31, 2007, during the first quarter of 2008 we officially signed an
agreement with representatives of the Eltmann, Germany plant employees that
contained significant contract revisions including new wage rates and increase
hours worked per week. This contract is in effect for two years
through December 31, 2009. During this time we have agreed not to
involuntarily downsize employment levels at this location.
It is
possible we might incur significant cash and non-cash restructuring costs and
impairment charges related to reducing or eliminating the work force at this
location.
|
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, 2008, we had $75.6 million outstanding under
our variable rate revolving credit facilities and $34.3 million fixed rate
senior notes outstanding. See Note 8 of the Notes to Consolidated
Financial Statements. At June 30, 2008, a one-percent increase in the
interest rate charged on our outstanding variable rate borrowings would result
in interest expense increasing annually by approximately $0.8
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, 2008.
|
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 Chief Executive Officer and Chief Financial Officer, concluded
that our disclosure controls and procedures are effective as of June 30, 2008,
the end of the period covered by this quarterly report.
21
There
have been no changes in the fiscal quarter ended June 30, 2008 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. 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 through the end of June 30, 2008
to the account was $28 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. 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.
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, 2007 filed on March 17,
2008.
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 22, 2008. As
of March 31, 2008, the record date for the meeting, there were 15,854,643 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 15,036,079 shares of common stock, constituting
approximately 95% 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 G. Ronald Morris and Steven
T. Warshaw as Class I Directors to serve for three-year terms
each. The vote was 13,908,694 and 14,375,956 For and 1,127,385 and
660,123 Withheld for Messrs. Morris and Warshaw, respectively.
The
nominees were elected to serve until the 2011 Annual Meeting of Stockholders and
until their successors are duly elected and qualified. In addition to
the foregoing directors, Roderick R. Baty and Robert M. Aiken, Jr. are serving
terms that will expire in 2009 and Michael E. Werner and Richard G. Fanelli are
serving terms that will expire in 2010.
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, 2008. The
vote was 14,840,212 For, 191,459 Against and 4,407
abstentions.
22
Item 5. Other
Information
None
Item 6.
Exhibits
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) | |||
|
Date
August 8, 2008
|
By:
|
/s/ Roderick R. Baty | |
| Roderick R. Baty | |||
| Chairman, President and Chief Executive Officer | |||
| (Duly Authorized Officer) | |||
|
Date
August 8, 2008
|
By:
|
/s/ James H. Dorton | |
| James H. Dorton | |||
| Chief Financial Officer | |||
| (Principal Financial Officer) | |||
| (Duly Authorized Officer) |
|
Date
August 8, 2008
|
By:
|
/s/ William C. Kelly, Jr. | |
| William C. Kelly, Jr. | |||
| Chief Administrative Officer | |||
| (Duly Authorized Officer) | |||
|
Date
August 8, 2008
|
By:
|
/s/ Thomas C. Burwell, Jr. | |
| Thomas C. Burwell, Jr. | |||
| Corporate Controller | |||
| (Principal Accounting Officer) |
24