NN 10-Q 06-30-06
UNITED
STATES SECURITIES AND EXCHANGE
COMMISSION
Washington,
D.C. 20549
FORM
10-Q
x QUARTERLY
REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For
the
quarterly period ended June 30,
2006
OR
o
TRANSITION
REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For
the
transition period from _________ to _________
Commission
File Number 0-23486
NN,
Inc.
(Exact
name of registrant as specified in its charter)
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, 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 o No
x
As
of August 7, 2006 there were 17,218,311 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, 2006
and
2005 (unaudited)
|
2
|
|
Condensed
Consolidated Balance Sheets at June 30, 2006 and
December 31, 2005 (unaudited) |
3
|
|
Consolidated
Statements of Changes in Stockholders’ Equity for the six
months ended June 30, 2006 and 2005 (unaudited) |
4
|
|
Consolidated
Statements of Cash Flows for the six months ended June
30, 2006 and 2005 (unaudited) |
5
|
|
Notes to Consolidated Financial
Statements (unaudited) |
6
|
Item 2. |
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations |
16
|
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
|
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)
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
Net
sales
|
|
$
83,554
|
|
$
83,787
|
|
$
169,571
|
|
$
170,502
|
Cost
of products sold (exclusive of depreciation
and
amortization shown separately below)
|
|
64,905
|
|
66,005
|
|
130,904
|
|
133,670
|
Selling,
general and administrative
|
|
7,063
|
|
7,297
|
|
14,744
|
|
14,782
|
Depreciation
and amortization
|
|
4,425
|
|
4,130
|
|
8,587
|
|
8,303
|
(Gain)
loss on disposal of assets
|
|
4
|
|
2
|
|
(726)
|
|
6
|
Income
from operations
|
|
7,157
|
|
6,353
|
|
16,062
|
|
13,741
|
|
|
|
|
|
|
|
|
|
Interest
expense, net
|
|
1,021
|
|
1,025
|
|
2,007
|
|
2,008
|
Other
(income) expense, net
|
|
449
|
|
(168)
|
|
240
|
|
(340)
|
Income
before provision for income taxes
|
|
5,687
|
|
5,496
|
|
13,815
|
|
12,073
|
Provision
for income taxes
|
|
2,234
|
|
2,184
|
|
5,100
|
|
4,736
|
Net
income
|
|
3,453
|
|
3,312
|
|
8,715
|
|
7,337
|
|
|
|
|
|
|
|
|
|
Other
comprehensive income (loss):
|
|
|
|
|
|
|
|
|
Unrealized
holding loss on securities,
net
of tax
|
|
--
|
|
--
|
|
--
|
|
(73)
|
Foreign
currency translation gain (loss)
|
|
5,414
|
|
(5,895)
|
|
7,644
|
|
(9,965)
|
Comprehensive
income (loss)
|
|
$
8,867
|
|
$
(2,583)
|
|
$
16,359
|
|
$
(2,701)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
income per common share:
|
|
$
0.20
|
|
$
0.20
|
|
$
0.51
|
|
$
0.43
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding
|
|
17,157
|
|
16,971
|
|
17,153
|
|
16,914
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
income per common share:
|
|
$
0.20
|
|
$
0.19
|
|
$
0.50
|
|
$
0.43
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding
|
|
17,369
|
|
17,328
|
|
17,365
|
|
17,252
|
|
|
|
|
|
|
|
|
|
Cash
dividends per common share
|
|
$
0.08
|
|
$
0.08
|
|
$
0.16
|
|
$
0.16
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of the financial
statements.
NN,
Inc.
Condensed
Consolidated Balance Sheets
(Unaudited)
|
June
30,
|
|
December
31,
|
(Thousands
of Dollars)
|
2006
|
|
2005
|
Assets
|
|
|
|
Current
assets:
|
|
|
|
Cash
and cash equivalents
|
$
12,141
|
|
$
10,856
|
Accounts
receivable, net
|
58,188
|
|
47,297
|
Inventories,
net
|
36,538
|
|
38,096
|
Income
tax receivable
|
2,278
|
|
1,237
|
Other
current assets
|
10,032
|
|
8,464
|
Total
current assets
|
119,177
|
|
105,950
|
|
|
|
|
Property,
plant and equipment, net
|
121,987
|
|
118,829
|
Goodwill
|
43,049
|
|
41,648
|
Intangibles,
net and other assets
|
3,987
|
|
3,228
|
Total
assets
|
$
288,200
|
|
$
269,655
|
|
|
|
|
Liabilities
and Stockholders’ Equity
|
|
|
|
Current
liabilities:
|
|
|
|
Accounts
payable
|
$
44,312
|
|
$
41,660
|
Accrued
salaries and wages
|
12,705
|
|
12,407
|
Income
taxes
|
4,388
|
|
2,093
|
Current
maturities of long-term debt
|
18,917
|
|
4,668
|
Other
current liabilities
|
4,529
|
|
4,011
|
Total
current liabilities
|
84,851
|
|
64,839
|
|
|
|
|
Non-current
deferred tax liability
|
16,435
|
|
15,128
|
Long-term
debt
|
40,000
|
|
57,900
|
Accrued
pension and other
|
17,007
|
|
15,714
|
Total
liabilities
|
158,293
|
|
153,581
|
|
|
|
|
Total
stockholders’ equity
|
129,907
|
|
116,074
|
|
|
|
|
Total
liabilities and stockholders’ equity
|
$
288,200
|
|
$
269,655
|
The
accompanying notes are an integral part of the financial
statements.
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
|
|
Additional
paid in capital unearned compen-sation
|
|
Retained
Earnings
|
|
Accumulated
Other
Comprehen-sive
Income
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
January 1, 2005
|
16,777
|
|
$
168
|
|
$
53,423
|
|
$
--
|
|
$
45,676
|
|
$
15,873
|
|
$
115,140
|
Shares
issued
|
285
|
|
3
|
|
2,120
|
|
--
|
|
--
|
|
--
|
|
2,123
|
Net
income
|
--
|
|
--
|
|
--
|
|
--
|
|
7,337
|
|
--
|
|
7,337
|
Dividends
declared
|
--
|
|
--
|
|
--
|
|
--
|
|
(2,717)
|
|
--
|
|
(2,717)
|
Foreign
exchange translation loss
|
--
|
|
--
|
|
--
|
|
--
|
|
--
|
|
(9,965)
|
|
(9,965)
|
Write-off
of unrealized holding gain
on securities
|
--
|
|
--
|
|
--
|
|
--
|
|
--
|
|
(73)
|
|
(73)
|
Balance,
June 30, 2005
|
17,062
|
|
$
171
|
|
$
55,543
|
|
$
--
|
|
$
50,296
|
|
$
5,835
|
|
$
111,845
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
January 1, 2006
|
17,206
|
|
$
172
|
|
$
57,754
|
|
($467)
|
|
$
55,218
|
|
$
3,397
|
|
$
116,074
|
Reclassification
of unearned
compensation
|
--
|
|
--
|
|
(467)
|
|
467
|
|
--
|
|
--
|
|
--
|
Shares
issued
|
69
|
|
1
|
|
695
|
|
--
|
|
--
|
|
--
|
|
696
|
Repurchase
of outstanding shares
|
(57)
|
|
(1)
|
|
(682)
|
|
--
|
|
--
|
|
--
|
|
(683)
|
Elimination
of variable stock option
liability
|
--
|
|
--
|
|
8
|
|
--
|
|
--
|
|
--
|
|
8
|
Net
income
|
--
|
|
--
|
|
--
|
|
--
|
|
8,715
|
|
--
|
|
8,715
|
Amortization
of restricted stock
award
|
--
|
|
--
|
|
206
|
|
--
|
|
--
|
|
--
|
|
206
|
Dividends
declared
|
--
|
|
--
|
|
--
|
|
--
|
|
(2,753)
|
|
--
|
|
(2,753)
|
Foreign
exchange translation gain
|
--
|
|
--
|
|
--
|
|
--
|
|
--
|
|
7,644
|
|
7,644
|
Balance,
June 30, 2006
|
17,218
|
|
$
172
|
|
$
57,514
|
|
--
|
|
$
61,180
|
|
$
11,041
|
|
$
129,907
|
The
accompanying notes are an integral part of the financial
statements.
NN,
Inc.
Consolidated
Statements of Cash Flows
(Unaudited)
|
Six
Months Ended
|
|
June
30,
|
(Thousands
of Dollars)
|
2006
|
|
2005
|
Operating
Activities:
|
|
|
|
Net
income
|
$
8,715
|
|
$
7,337
|
Adjustments
to reconcile net income to net cash provided by operating
Activities:
|
|
|
|
Depreciation
and amortization
|
8,587
|
|
8,303
|
Amortization
of debt issue costs
|
261
|
|
119
|
(Gain)
loss on disposal of property, plant and equipment
|
(726)
|
|
6
|
Compensation
expense from issuance of restricted stock
|
206
|
|
--
|
Compensation
benefit from variable stock accounting
|
--
|
|
(95)
|
Changes
in operating assets and liabilities:
|
|
|
|
Accounts
receivable
|
(8,627)
|
|
(8,563)
|
Inventories
|
3,031
|
|
277
|
Accounts
payable
|
(1,692)
|
|
(4,549)
|
Other
assets and liabilities
|
212
|
|
(2,513)
|
Net
cash provided by operating activities
|
9,967
|
|
322
|
|
|
|
|
Investing
Activities:
|
|
|
|
Acquisition
of property, plant, and equipment
|
(6,413)
|
|
(2,906)
|
Proceeds
from disposals of property, plant and equipment
|
2,966
|
|
--
|
Acquisition
of Intangibles
|
(529)
|
|
--
|
Net
cash used by investing activities
|
(3,976)
|
|
(2,906)
|
|
|
|
|
Financing
Activities:
|
|
|
|
Increase
in cash from book overdraft
|
657
|
|
2,008
|
Repayment
of long-term debt
|
(4,668)
|
|
(1,560)
|
Repayment
of short-term debt
|
(21,208)
|
|
--
|
Proceeds
from short-term debt
|
22,225
|
|
899
|
Principal
payment on capital lease
|
(13)
|
|
--
|
Repurchase
of common stock
|
(683)
|
|
--
|
Proceeds
from issuance of stock
|
696
|
|
2,123
|
Dividends
Paid
|
(2,753)
|
|
(2,717)
|
Net
cash provided by (used by) financing activities
|
(5,747)
|
|
753
|
|
|
|
|
Effect
of exchange rate changes on cash and cash equivalents
|
1,041
|
|
(903)
|
|
|
|
|
Net
Change in Cash and Cash Equivalents
|
1,285
|
|
(2,734)
|
Cash
and Cash Equivalents at Beginning of Period
|
10,856
|
|
10,772
|
Cash
and Cash Equivalents at End of Period
|
$
12,141
|
|
$
8,038
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of the financial
statements.
NN,
Inc.
Notes
To Consolidated Financial Statements
(In
Thousands, Except 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, 2005 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, 2006 and 2005, the Company’s financial position at June
30, 2006 and December 31, 2005, and the cash flows for the six month periods
ended June 30, 2006 and 2005. 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, 2005 which we filed with the Securities and Exchange
Commission on March 16, 2006.
The
results for the first and second quarter of 2006 are not necessarily indicative
of results for the year ending December 31, 2006 or any other future
results.
Note
2. 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,
|
|
2006
|
|
2005
|
Raw
materials
|
$
9,488
|
|
$
10,153
|
Work
in process
|
6,095
|
|
5,845
|
Finished
goods
|
22,391
|
|
23,587
|
Less
inventory reserves
|
(1,436)
|
|
(1,489)
|
|
$
36,538
|
|
$
38,096
|
Inventories
on consignment at customer locations as of June 30, 2006 and December 31, 2005
totaled $4,534 and $4,669, respectively.
Note
3. Net
Income Per Share
|
Three
months ended
June
30,
|
|
Six
months ended
June
30,
|
(Thousands
of Dollars, Except Share and Per Share Data)
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
|
Net
income
|
$
3,453
|
|
$
3,312
|
|
$
8,715
|
|
$
7,337
|
|
|
|
|
|
|
|
|
Weighted
average basic shares
|
17,156,721
|
|
16,970,929
|
|
17,152,713
|
|
16,914,044
|
Effect
of dilutive stock options
|
211,863
|
|
357,487
|
|
212,291
|
|
338,150
|
Weighted
average dilutive shares outstanding
|
17,368,584
|
|
17,328,416
|
|
17,365,004
|
|
17,252,194
|
|
|
|
|
|
|
|
|
Basic
net income per share
|
$
0.20
|
|
$
0.20
|
|
$
0.51
|
|
$
0.43
|
Diluted
net income per share
|
$
0.20
|
|
$
0.19
|
|
$
0.50
|
|
$
0.43
|
NN,
Inc.
Notes
To Consolidated Financial Statements
(In
Thousands, Except Per Share Data)
(unaudited)
Excluded
from the shares outstanding for the period ended June 30, 2005 were 357,000
anti-dilutive options which had exercise prices of $12.62. There were no
anti-dilutive options in the three or six month periods ended June 30,
2006.
Note
4. Segment
Information
During
2006 and 2005, our reportable segments are based on differences in product
lines
and geographic locations and are divided among Domestic Ball and Roller,
European operations (“NN Europe”) and Plastic and Rubber Components. The
Domestic Ball and Roller Segment is comprised of two manufacturing facilities
in
the eastern United States. Additionally, costs related to our operation in
China
and corporate office costs are included in the Domestic Ball and Roller Segment.
The NN Europe Segment is comprised of precision ball, roller and metal cage
manufacturing facilities located in Kilkenny, Ireland; Eltmann, Germany;
Pinerolo, Italy; Kysucke Nove Mesto, Slovakia; and Veenendaal, The Netherlands
(“Veenendaal”). All of the facilities in the Domestic Ball and Roller Segment
are engaged in the production of precision balls and rollers used primarily
in
the bearing industry. All of the facilities in the NN Europe Segment are engaged
in the production of precision balls used primarily in the bearing industry,
except for Veenendaal which is engaged in the production of tapered rollers
and
cages for use primarily in the bearing industry. The Plastic and Rubber
Components Segment is comprised of the Industrial Molding Corporation (“IMC”)
business, located in Lubbock, Texas and The Delta Rubber Company (“Delta”)
business, located in Danielson, Connecticut. IMC is engaged in the production
of
plastic injection molded products for the bearing, automotive, instrumentation,
and fiber optic markets. Delta is engaged principally in the production of
engineered bearing seals used principally in automotive, industrial,
agricultural, mining and aerospace applications.
The
accounting policies of each segment are the same as those described in the
summary of significant accounting policies in our Annual Report on Form 10-K
for
the fiscal year ended December 31, 2005. We evaluate segment performance based
on income or loss from operations before income taxes. We account for
inter-segment sales and transfers at current market prices. We did not have
any
material inter-segment transactions during the three and six month periods
ended
June 30, 2005. For the three and six month periods ended June 30, 2006, we
had
inter-segment sales of $909 and $1,221, which were eliminated in consolidation
and from the segment financial results shown below.
|
Three
Months Ended June 30,
|
|
2006
|
2005
|
(In
Thousands of Dollars)
|
DomesticBall
& Roller
|
NN
Europe Segment
|
Plastic
and Rubber Components
|
Domestic
Ball & Roller
|
NN
Europe Segment
|
Plastic
and Rubber Components
|
Revenues
from external customers
|
$
17,569
|
$
52,396
|
$
13,589
|
$
16,508
|
$
52,773
|
$
14,506
|
Pre-tax income
(loss)
|
(657)
|
5,128
|
1,216
|
374
|
5,147
|
(25)
|
Assets
|
62,591
|
172,628
|
52,981
|
51,818
|
162,716
|
58,337
|
|
Six
Months Ended June 30,
|
|
2006
|
2005
|
(In
Thousands of Dollars)
|
DomesticBall
& Roller
|
NN
Europe Segment
|
Plastic
and Rubber Components
|
Domestic
Ball & Roller
|
NN
Europe Segment
|
Plastic
and Rubber Components
|
Revenues
from external customers
|
$
37,333
|
$
103,972
|
$
28,266
|
$
32,435
|
$
108,711
|
$
29,356
|
Pre-tax income
(loss)
|
29
|
11,120
|
2,666
|
1,698
|
9,698
|
677
|
Assets
|
62,591
|
172,628
|
52,981
|
51,818
|
162,716
|
58,337
|
NN,
Inc.
Notes
To Consolidated Financial Statements
(In
Thousands, Except Per Share Data)
(unaudited)
Note
5. Recent
Investing Activity
Our
wholly-owned subsidiary in China, NN Precision Bearing Products Company, LTD,
(“NN Asia”) started full operations in the first quarter of 2006. The costs
incurred as a result of the start-up for the six month period ended June 30,
2005 of approximately $0.4 million were classified as selling, general and
administrative expense.
On
October 7, 2005, we entered into an agreement with SNR Roulements (“SNR”) to
purchase all of SNR’s internal precision ball producing equipment for
approximately 5,000 Euros ($6,000). As part of the agreement, we entered into
a
five year supply agreement to provide SNR with an additional $9,000 of annual
ball requirements. Approximately $1,700 was paid in 2005 and $4,500 is expected
to be paid during 2006 to complete the equipment purchase, including related
legal and transportation cost of approximately $200. During the six months
ended
June 30, 2006, the Company acquired $3,064 of SNR equipment and related contract
intangibles. As of June 30, 2006, $2,719 has been recorded in tangible fixed
assets and $2,307 has been recorded in intangible assets relating to this
transaction.
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 including
the
rate of compensation increase. The plan is unfunded. There were no prior service
costs recognized in the six months ended June 30, 2006 and 2005.
Components
of Net Periodic Pension Cost:
|
Three
months ended
June
30,
|
|
Six
months ended
June
30,
|
(In
Thousands of Dollars)
|
2006
|
|
2005
|
|
2006
|
|
2005
|
Service
cost
|
$
26
|
|
$
25
|
|
$
52
|
|
$
52
|
Interest
cost
|
66
|
|
50
|
|
128
|
|
103
|
Amortization
of net gain
|
13
|
|
3
|
|
24
|
|
5
|
Net
periodic pension cost
|
$
105
|
|
$
78
|
|
$
204
|
|
$
160
|
We
expect
to contribute approximately $360 to the Eltmann, Germany pension plan in 2006.
As of June 30, 2006, approximately $172 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 at June 30,
2006 and 2005:
|
Three
months ended
June
30,
|
|
Six
months ended
June
30,
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
Beginning
balance
|
$
(6,950)
|
|
$
(7,261)
|
|
$
(6,644)
|
|
$
(7,503)
|
Amounts
accrued
|
(269)
|
|
(261)
|
|
(525)
|
|
(524)
|
Payments
|
208
|
|
533
|
|
327
|
|
710
|
Exchange
and other
|
(358)
|
|
509
|
|
(527)
|
|
837
|
Ending
balance
|
$(7,369)
|
|
$
(6,480)
|
|
$(7,369)
|
|
$
(6,480 )
|
NN,
Inc.
Notes
To Consolidated Financial Statements
(In
Thousands, Except Per Share Data)
(unaudited)
Note
7. New
Accounting Pronouncements
On
December 16, 2004, the FASB issued SFAS No. 123(R), “Share-Based Payment,” which
requires companies to expense the value of employee stock options and similar
awards and establishes standards for the accounting for transactions in which
an
entity exchanges its equity instruments for goods. SFAS No. 123(R) is effective
for annual periods beginning after June 15, 2005 and applies to all outstanding
and unvested share-based payment awards. This Statement requires a public entity
to measure the cost of employee services received in exchange for an award
of
equity instruments based on the grant-date fair value of the award (with limited
exception). That cost will be recognized over the period during which an
employee is required to provide service in exchange for the award - the
requisite service period (usually the vesting period). We adopted SFAS 123(R)
effective January 1, 2006. See Note 10 Stock Compensation.
In
November 2004, the FASB issued SFAS No. 151, “Inventory Costs”. SFAS No. 151
clarifies the accounting for abnormal amounts of idle facility expense, freight,
handling costs and wasted material (spoilage). SFAS No. 151 requires that these
items be recognized as current-period charges. In addition, SFAS No. 151
requires that the allocation of fixed production overheads to the costs of
conversion be based on the normal capacity of the production facilities. This
statement is effective for fiscal years beginning after June 15, 2005. We
adopted SFAS No. 151 effective January 1, 2006. SFAS No. 151 has not had a
material impact on our financial statements.
In
July
2006, the 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 is does not expect
FIN 48 will have a material effect on its consolidated financial position,
liquidity, or results of operations.
NN,
Inc.
Notes
To Consolidated Financial Statements
(In
Thousands, Except Per Share Data)
(unaudited)
Note
8. Long-Term
Debt and Short-Term Debt
Long-term
debt at June 30, 2006 and December 31, 2005 consisted of the
following:
|
June
30,
2006
|
|
December
31,
2005
|
|
|
|
|
Borrowings
under our $30,000 revolving credit facility bearing interest at a
floating
rate equal to LIBOR (5.48% at June 30, 2006) plus an applicable margin
of
1.25 to 2.0, expiring on June 30, 2007
|
$
18,917
|
|
$
17,900
|
|
|
|
|
Borrowings
under our 26,300 Euro term loan originally expiring on May 1, 2008,
bearing interest at a floating rate equal to Euro LIBOR (3.056% at
June
30, 2006) plus an applicable margin of 1.25 to 2.0 payable in quarterly
installments of Euro 1,314 beginning July 1, 2003 through April 1,
2008. This portion of the facility is paid in full and no longer
available.
|
--
|
|
4,668
|
|
|
|
|
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
|
|
|
|
|
Total
debt
|
58,917
|
|
62,568
|
|
|
|
|
Less
current maturities of long-term debt
|
18,917
|
|
4,668
|
|
|
|
|
Long-term
debt, excluding current maturities of long-term debt
|
$
40,000
|
|
$
57,900
|
The
$18,917 classified as current portion of long-term debt at June 30, 2006 is
the
remaining balance of the revolving credit facility which expires June 30, 2007.
The $4,668 under the Euro term loan classified as current portion of long-term
debt at December 31, 2005 was repaid in the first quarter of 2006. The
borrowings under the 26,300 Euro term loan have all been repaid and the facility
is no longer available. Capitalized loan costs related to this portion of the
facility amounting to $133 were written off as of June 30, 2006. We were in
compliance with all covenants related to the $90 million credit facility and
the
$40 million senior notes as of June 30, 2006.
The
fair
value of our fixed rate long-term borrowing is estimated using a discounted
cash
flow analysis based on our incremental borrowing rates for similar types of
borrowing arrangements. We estimate the fair value of the $40 million notes
to
be $37,434 and $38,739 at June 30, 2006 and December 31, 2005,
respectively.
Note
9. Goodwill
and Intangible Assets, net
The
changes in the carrying amount of goodwill for the six month period ended June
30, 2006 and the twelve month period ended December 31, 2005 are as
follows:
NN,
Inc.
Notes
To Consolidated Financial Statements
(In
Thousands, Except Per Share Data)
(unaudited)
Goodwill
(In
Thousands of Dollars)
|
Plastic
and Rubber Components Segment
|
NN
Europe Segment
|
Total
|
Balance
as of January 1, 2005
|
$
25,755
|
$
18,702
|
$
44,457
|
Currency
impacts
|
--
|
(2,809)
|
(2,809)
|
Balance
as of December 31, 2005
|
$
25,755
|
$
15,893
|
$
41,648
|
|
|
|
|
Balance
as of January 1, 2006
|
$
25,755
|
$
15,893
|
$
41,648
|
Currency
impacts
|
--
|
1,401
|
1,401
|
Balance
as of June 30, 2006
|
$
25,755
|
$
17,294
|
$
43,049
|
Intangible
Assets, net of
amortization
(In
Thousands of Dollars)
|
|
NN
Europe Segment
|
Total
|
Balance
as of January 1, 2005
|
|
$
--
|
$
--
|
Acquisition
of Intangibles
|
|
456
|
456
|
Amortization
|
|
--
|
-- |
Currency
impacts
|
|
(24)
|
(24)
|
Balance
as of December 31, 2005
|
|
$ 432
|
$
432
|
|
|
|
|
Balance
as of January 1, 2006
|
|
$ 432
|
$
432
|
Acquisition
of Intangibles
|
|
1,772
|
1,772
|
Amortization
|
|
(118)
|
(118)
|
Currency
impacts
|
|
103
|
103
|
Balance
as of June 30, 2006
|
|
$
2,189
|
$
2,189
|
The
intangible asset in the table above is a contract intangible related to the
SNR
purchase agreement and related supply agreement (See Note 5.)
This intangible asset is subject to amortization over
approximately 5 years and amortization expense will approximate $500 for each
of
the 5 years. For the six months ended June 30, 2006, amortization
expense and accumulated amortization totaled $118.
Note
10.
Stock Compensation
On
January 1, 2006, the Company adopted SFAS No. 123(R) “Share-Based Payment.”
SFAS No. 123(R) replaces SFAS No. 123 “Accounting for Stock-Based Compensation”
and supersedes Accounting Principles Board Opinion (“APB”) No. 25 “Accounting
for Stock Issued to Employees” and amends SFAS No. 95 “Statement of Cash Flows.”
Prior to adoption of SFAS No. 123(R) the Company followed the disclosure-only
requirements of SFAS No. 123 and continued to account for stock compensation
under the requirements of APB No. 25.
The
Company adopted SFAS No. 123(R) using the modified prospective method that
requires compensation expense of all employee and non-employee director
share-based compensation awards be recognized in the financial statements based
upon their fair value over the requisite service or vesting period for all
new
awards granted after the effective date and for all awards granted prior to
the
effective date of SFAS No. 123(R) that remain unvested on the effective date.
Under the requirements of APB No. 25, the Company was required to recognize
compensation cost only for stock option awards granted at a price lower than
the
market stock price at the date of grant. Effective with adoption of SFAS No.
123(R) , compensation expense related to stock option awards is recognized
in
the financial statements at the fair value of the award. The Company accounts
for restricted share awards by recognizing the fair value of the awarded stock
at the grant date as compensation expense ratably over the vesting period,
less
anticipated forfeitures.
NN,
Inc.
Notes
To Consolidated Financial Statements
(In
Thousands, Except Per Share Data)
(unaudited)
In
accordance with implementation requirements of SFAS No. 123(R) under the
modified prospective method, the Company did not restate prior fiscal periods
and is required to continue the same disclosure only requirements of SFAS
No. 123 for comparative purposes until all periods reported are comparable
on
the same basis. The following table illustrates the effect on net earnings
and
earnings per share as formerly provided under SFAS No. 123:
(In
Thousands, Except per Share Data)
|
Three
months ended
June
30, 2005
|
|
Six
months ended
June
30, 2005
|
Net
income - as reported
|
|
$
3,312
|
|
$7,337
|
Stock
based compensation (income)
expense, net of income tax, included in net income as
reported
|
|
3
|
|
(59)
|
Stock
based compensation costs, net of income tax, that would have been
included
in net income if the fair value method had been applied
|
|
(34)
|
|
(469)
|
Net
income - pro-forma
|
|
$
3,281
|
|
$
6,809
|
|
|
|
|
|
Basic
earnings per share - as reported
|
|
$
0.20
|
|
$
0.43
|
Stock
based compensation (income) expense, net of income tax, included
in net
income as reported
|
|
--
|
|
--
|
Stock
based compensation costs, net of income tax, that would have been
included
in net income if the fair value method had been applied
|
|
--
|
|
(0.03)
|
Basic
earnings per share - pro-forma
|
|
$
0.20
|
|
$0.40
|
|
|
|
|
|
Earnings
per share-assuming dilution - as reported
|
|
$
0.19
|
|
$0.43
|
Stock
based compensation (income) expense, net of income tax, included
in net
income as reported
|
|
--
|
|
--
|
Stock
based compensation costs, net of income tax, that would have been
included
in net income if the fair value method had been applied
|
|
--
|
|
(0.03)
|
Earnings
per share - assuming dilution-pro-forma
|
|
$
0.19
|
|
$
0.40
|
In
the
three and six months ended June, 2006, approximately $103 and $206,
respectively, of compensation expense was recognized in selling, general and
administrative expense for all share-based awards. The cost recognized was
related to the restricted stock awards. No compensation expense was recognized
related to stock options during the six months ended June 30, 2006, as
no new stock option awards were granted and all existing stock options were
fully vested as of December 31, 2005. The impact on net income of all stock
compensation expense in the six months ended June 30, 2006 was approximately
$132, net of tax benefits of $74.
Stock
Option Awards
Option
awards are typically granted to non-employee directors and key employees on
an
annual basis. A single option grant is typically awarded to eligible employees
in the third quarter of each year if and when granted by the Compensation
Committee of the Board of Directors and occasional individual grants are awarded
to eligible employees throughout the year. All employee and non-employee
directors are awarded options at an exercise price equal to the closing price
of
the Company's stock on the date of grant. The term life of options is ten years
with vesting periods of generally three years. Actual vesting usually occurs
ratably or at the end of the vesting period. The fair value of options cannot
be
determined by market value as our options are not traded in an open market.
Accordingly, a financial pricing model is utilized to determine fair value.
The
Company utilizes the Black Scholes model which relies on certain assumptions
to
estimate an option's fair value. As the Company has not granted any options
in
2006, the assumptions relevant to options outstanding as of June 30, 2005 are
identified in the table below:
NN,
Inc.
Notes
To Consolidated Financial Statements
(In
Thousands, Except Per Share Data)
(unaudited)
Term
|
-
|
Vesting
period
|
Risk
free interest rate
|
-
|
3.76%
|
Dividend
yield
|
-
|
2.52%
|
Volatility
|
-
|
46.47%
|
Expected
forfeiture rate
|
-
|
5%
|
The
volatility rate is derived from actual Company common stock volatility over
the
same time period as the expected term. The volatility rate is derived by
mathematical formula utilizing daily closing price data.
The
expected dividend yield is derived by mathematical formula which uses the
expected Company annual dividends over the expected term divided by the fair
market value of the Company's common stock at the grant date.
The
average risk-free interest rate is derived from United States Department of
Treasury published interest rates of daily yield curves for the same time period
as the expected term.
Prior
to
adoption of SFAS No. 123(R), the Company estimated forfeitures at a standard
5%
and recognized them as they occurred for pro forma disclosure of share-based
compensation expense. With adoption of SFAS No. 123(R), the company will
estimate the forfeiture rate based on detailed statistical analysis of prior
forfeitures.
The
following table provides a reconciliation of option activity for the six month
period ended June 30, 2006:
Options
|
|
Shares
(000)
|
|
Weighted-Average
Exercise Price
|
|
Weighted-Average
Remaining Contractual Term
|
|
Aggregate
Intrinsic Value ($000)
|
Outstanding
at January 1, 2006
|
|
1,403
|
|
$
9.56
|
|
|
|
|
Granted
|
|
--
|
|
--
|
|
|
|
|
Exercised
|
|
(69)
|
|
9.14
|
|
|
|
|
Forfeited
or expired
|
|
--
|
|
--
|
|
|
|
|
Outstanding
at June 30, 2006
|
|
1,334
|
|
$
9.60
|
|
6.2
|
|
$
3,667 (1)
|
Exercisable
at June 30, 2006
|
|
1,334
|
|
$
9.60
|
|
6.2
|
|
$
3,667 (1)
|
(1)
Intrinsic value is the amount by which the market price of the stock exceeds
the
exercise price of the option.
At
December 31, 2005, all options were fully vested and there will be no
compensation expense incurred from these options. Cash proceeds from the
exercise of options in three and six month periods ended June 30, 2006 totaled
approximately $593 and $696, respectively. In the three and six month periods
ended June 30, 2005, the Company received $1,133 and $2,123, respectively,
in
cash proceeds from the exercise of stock options. For both three and six month
periods ended June 30, 2006 and 2005, proceeds from stock options were presented
inclusive of tax benefits in the Financing Activities section of the
Consolidated Statements of Cash Flows.
No
stock
options were granted during the three and six month periods ended June 30,
2006
and 2005. The total intrinsic value of the options exercised during the six
month period ended June 30, 2006 and 2005 were $290 and $1,527,
respectively.
NN,
Inc.
Notes
To Consolidated Financial Statements
(In
Thousands, Except Per Share Data)
(unaudited)
Restricted
Stock Awards
In
addition to stock option awards, the Company has restricted stock awards, the
first grant of which was in July 2005. The Company’s policy for issuing
restricted shares is similar to that described under “Stock Option Awards”. The
recognized compensation cost before tax for these restricted stock awards in
the
three and six month periods ended June 30, 2006 were approximately $103 and
$206, respectively. There was not compensation expense for restricted stock
in
the six months ended June 30, 2005. The unrecognized compensation cost before
tax for these awards at June 30, 2006 and 2005 total approximately $262 and
$0,
respectively, to be recognized over approximately two years. The forfeiture
rate
of the awards granted is currently estimated at 0%. Below is a summary of the
status of the restricted shares as of June 30, 2006 and changes during the
quarter:
Non-vested
Shares
|
|
Shares
(000)
|
|
Weighted-
Average
Grant-
Date
Fair Value
|
Non-vested
at January 1, 2006
|
|
53
|
|
$
12.70
|
Granted
|
|
--
|
|
--
|
Vested
|
|
--
|
|
--
|
Forfeited
|
|
--
|
|
--
|
Non-vested
at June 30, 2006
|
|
53
|
|
$
12.70
|
Note
11. Common
Stock Repurchase
During
the first quarter of 2006, the Company’s Board of Directors authorized a stock
repurchase program under which the Company is authorized to repurchase up to
$10
million in common stock of the Company, during the subsequent 18 months in
the
open market or in private transactions, in accordance with applicable laws
and
regulations. This amount represented approximately 5% of the Company’s
outstanding stock at the date of authorization. During the second quarter of
2006, the Company repurchased 36,347 shares at approximately $12.00 a share
for
a total of $437. For the six months ended June 30, 2006, the Company has
repurchased 56,821 for a total of $683. These shares will be retired and were
recorded as an offset to additional paid in capital.
Note
12.
Restructuring Charges
Eltmann,
Germany Restructuring
During
the fourth quarter of 2004, we announced a reduction in staffing at our Eltmann,
Germany ball production facility, a component of our NN Europe Segment. This
restructuring has affected 76 employees and is expected to affect another 8
and
be completed during 2006.
The
following summarizes the restructuring charges related to the restructuring
at
the Company’s Eltmann, Germany facility for the twelve months ended December 31,
2005 and the six months ended June 30, 2006:
NN,
Inc.
Notes
To Consolidated Financial Statements
(In
Thousands, Except Per Share Data)
(unaudited)
Twelve
months ended December 31, 2005
(In
Thousands of Dollars)
|
Reserve
Balance at 01/01/05
|
|
Adjustment
to Reserve
|
|
Paid
in 2005
|
|
Currency
Impacts
|
|
Reserve
Balance at 12/31/05
|
|
|
|
|
|
|
|
|
|
|
Severance
and other employee costs
|
$
2,290
|
|
$
(342)
|
|
$
(884)
|
|
$
(219)
|
|
$
845
|
|
$
2,290
|
|
$
(342)
|
|
$
(884)
|
|
$
(219)
|
|
$
845
|
Six
months ended June 30, 2006
(In
Thousands of Dollars)
|
Reserve
Balance at 01/01/06
|
|
Charges
|
|
Paid
in 2006
|
|
Currency
Impacts
|
|
Reserve
Balance at 06/30/06
|
Severance
and other employee costs
|
$
845
|
|
$
--
|
|
$
(531)
|
|
$
48
|
|
$
362
|
|
$
845
|
|
$
--
|
|
$
(531)
|
|
$
48
|
|
$
362
|
No
additional charges are expected to be incurred related to the 2004 restructuring
program. We expect to pay all amounts by 2007, as some employees have elected
to
defer their severance payments. There were no additional restructuring charges
during the three and six month periods ended June 30, 2006 and
2005.
Note
13.
Property, Plant and Equipment
During
the first quarter of 2006 and 2005, we completed a sale of excess land and
two
buildings at NN Europe’s Pinerolo, Italy plant. 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 plant disposed of excess machinery in the
first quarter of 2006 with a net book value of $1,087, resulting in a pre-tax
loss of $1,062.
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, 2005 under Item 1.A. “Risk Factors”. There have been no
material changes to these risk factors since December 31, 2005.
Results
of Operations
Three
Months Ended June
30, 2006 Compared to the Three Months Ended June 30, 2005
CONSOLIDATED
(In
Thousands of Dollars)
|
Total
|
|
2006
|
2005
|
Change
|
Net
sales
|
$
83,554
|
$
83,787
|
$
(233)
|
Cost
of products sold (exclusive of depreciation
and amortization shown separately below)
|
64,905
|
66,005
|
(1,100)
|
Selling,
general, and administrative
|
7,063
|
7,297
|
(234)
|
Depreciation
and amortization
|
4,425
|
4,130
|
295
|
(Gain)
loss on disposal of assets
|
4
|
2
|
2
|
Interest
expense,net
|
1,021
|
1,025
|
(4)
|
Other
(income) expense, net
|
449
|
(168)
|
617
|
Income
before provision for income taxes
|
5,687
|
5,496
|
191
|
Provision
for income taxes
|
2,234
|
2,184
|
50
|
Net
income
|
$
3,453
|
$
3,312
|
$
141
|
Net
Sales.
Overall
revenues decreased as sales in the Plastics and Rubber Components Segment
(“Plastics and Rubber”) ($0.9 million) and Europe Segments (“NN Europe”) ($0.4
million) were lower and Domestic Ball and Roller Segment (“Domestic
Ball and Roller”) sales were up ($1.1 million). The Plastics and Rubber
sales to its automotive customers were lower than same quarter last year. The
NN
Europe reduction was due to lower sales to Schaeffler Group (INA) ($1.6 million)
partially offset by increases from passing through raw material cost increases
($1.0 million) and foreign exchange impacts ($0.2 million). Domestic
Ball and Roller sales were up due to increases from passing through raw
material cost increases and net share gains at existing customers.
Cost
of Products Sold (exclusive of depreciation and amortization.)
Cost of
products sold decreased in Plastics and Rubber ($2.1 million) and NN Europe
($1.0 million). Cost of products sold was up at Domestic Ball and Roller
($2.0 million). The Plastics and Rubber decrease was due to lower sales volume
to certain larger automotive customers and cost management and cost reduction
initiatives. NN Europe was down due to lower sales volume. Domestic
Ball and Roller was up due to increased sales volumes, inflation, and
inefficiencies from some sections of the segment.
Selling,
General and Administrative Expenses.
The
decrease in selling, general and administrative expenses was due primarily
to
overall cost control initiatives. These reductions were mainly in professional
service fees, travel and salaries.
Results
by Segment
NN
EUROPE SEGMENT
(In
Thousands of Dollars)
|
|
NN
Europe
|
|
|
2006
|
2005
|
Change
|
|
|
|
|
|
Net
sales
|
|
$
52,396
|
$
52,773
|
$
(377)
|
|
|
|
|
|
Pre-tax
income
|
|
$
5,128
|
$
5,147
|
$
(19)
|
The
sales
decrease at NN Europe was primarily due to lower sales volume to Schaeffler
(INA) ($1.6 million) partially offset by price increases for contractual pass
through of raw material cost increases to customers ($1.0 million) and positive
impacts from the increase in value of the Euro against the U.S. Dollar ($0.2
million).
The
pre-tax income of NN Europe was impacted by price increases, sale volume
reductions, inflation in wages and utilities, higher depreciation and
amortization costs, interest cost, and foreign exchange impacts. The sales
volume reduction ($0.5 million) and inflation in wages and utilities ($1.1
million) were more than offset by cost reductions in the areas of material
usage, labor, and fixed overhead cost ($1.1 million) and price increases from
passing through material inflation ($1.0 million). Depreciation and amortization
costs were higher due to depreciation and amortization of the machinery and
contract intangibles from the SNR machinery purchase ($0.3 million). Interest
costs were lower as NN Europe paid off its Euro based loans during the first
quarter of 2006 ($0.2 million). The negative impact of the foreign
exchange was from the devaluation of the Slovakian Koruna against the Euro
at our Slovakian operation ($0.4 million).
DOMESTIC
BALL AND ROLLER SEGMENT
(In
Thousands of Dollars)
|
|
Domestic
Ball and Roller
|
|
|
2006
|
2005
|
Change
|
|
|
|
|
|
Net
sales
|
|
$
17,569
|
$
16,508
|
$
1,061
|
|
|
|
|
|
Pre-tax
income (loss)
|
|
$
(657)
|
$
374
|
$
(1,031)
|
The
revenues at Domestic Ball and Roller were up due to price increases
from contractual pass through to customers of raw material cost increases ($0.6
million). Sales to Schaeffler (INA) were down but were more than offset by
share
gains at existing customers ($0.4 million).
The
decrease in pre-tax income was due to inflation of certain cost and operational
inefficiencies and higher interest expense partially offset by sales price
increases of our products and SG&A reductions. Cost of products sold
was higher due to inflation in raw materials, labor, energy, and supplies which
were only partially offset by cost reductions ($0.8 million) and operational
inefficiencies at a U.S. operation due to lower production volumes from planned
reductions in inventory and at the China operation due to start up cost of
operations ($0.9 million). Sales price increases for pass through of raw
material cost increases partially offset this decrease ($0.6 million).
The higher interest expense was due to higher interest rates on variable rate
debt ($0.2 million). The reduction in SG&A was due to lower professional
service fees ($0.3 million).
PLASTICS
AND RUBBER COMPONENTS SEGMENT
(In
Thousands of Dollars)
|
|
Plastics
And Rubber Components
|
|
|
2006
|
2005
|
Change
|
|
|
|
|
|
Net
sales
|
|
$
13,589
|
$
14,506
|
$
(917)
|
|
|
|
|
|
Pre-tax
income (loss)
|
|
$
1,216
|
$
(25)
|
$
1,241
|
Revenues
in Plastics and Rubber were down primarily due to lower sales volume
of rubber seals into the automotive market ($1.4 million). This decrease was
partially offset by price increases of the Plastics portion of the Segment
($0.5
million).
The
increase in pre-tax income was due primarily to cost reduction efforts. The
cost
reductions were due to material usage, labor, and fixed overhead cost reductions
($1.1 million). The impact on pre-tax net income of the sales volume reductions
($0.4 million) have been more than offset by the impact of the price increases
($0.5 million).
Six
Months Ended June 30, 2006 Compared to the Six Months Ended June 30, 2005
CONSOLIDATED
(In
Thousands of Dollars)
|
Total
|
|
2006
|
2005
|
Change
|
Net
sales
|
$
169,571
|
$
170,502
|
$
(931)
|
Cost
of products sold (exclusive of depreciation
and amortization shown separately below)
|
130,904
|
133,670
|
(2,766)
|
Selling,
general, and administrative
|
14,744
|
14,782
|
(38)
|
Depreciation
and amortization
|
8,587
|
8,303
|
284
|
(Gain)
loss on disposal of assets
|
(726)
|
6
|
(732)
|
Interest
expense, net
|
2,007
|
2,008
|
(1)
|
Other
(income) expense, net
|
240
|
(340)
|
580
|
Income
before provision for income taxes
|
13,815
|
12,073
|
1,742
|
Provision
for income taxes
|
5,100
|
4,736
|
364
|
Net
income
|
$
8,715
|
$
7,337
|
$
1,378
|
Net
Sales.
Overall
sales decreased due to the effects of foreign exchange of ($4.9 million) and
lower sales volume ($0.9 million) partially offset by higher selling prices
from
the pass through of raw material price increases of $4.9 million. The foreign
exchange effects were due to Euro denominated sales having less value relative
to the U.S. dollar in 2006 versus 2005. The lower sales volume was in NN Europe
and Plastics and Rubber offset by Domestic Ball and Roller. The price increases
were in all three segments.
Cost
of Products Sold (exclusive of depreciation and amortization.)
Cost of
products sold decreased primarily as Euro denominated cost were lower relative
to the U.S. dollar ($3.9 million), in addition to lower sales volume ($0.7
million), and impacts of cost reductions ($2.3 million). These decreases were
partially offset by increased cost of products sold due to inflation in raw
material, energy, labor, and other manufacturing costs ($4.2 million).
Selling,
General and Administrative Expenses.
The
increases in the first quarter due to stock compensation expense have been
offset by reductions in the second quarter in professional fees, travel, and
salaries.
(Gain)
Loss of Disposal of Assets. In
2006,
NN Europe had a gain related to the disposal of excess land and building of
$1.8
million which was partially offset by a loss on disposal of excess equipment
of
$1.1 million.
RESULTS
BY SEGMENT
NN
EUROPE SEGMENT
(In
Thousands of Dollars)
|
|
NN
Europe
|
|
|
2006
|
2005
|
Change
|
|
|
|
|
|
Net
sales
|
|
$
103,972
|
$
108,711
|
$
(4,739)
|
|
|
|
|
|
Pre-tax
income
|
|
$
11,120
|
$
9,698
|
$
1,422
|
The
revenues decrease at NN Europe was primarily due to the effect of Euro
denominated sales having less value relative to the U.S. Dollar in 2006 versus
2005 ($4.9 million). In addition, volume was lower ($2.4 million) primarily
due
to the forecasted loss of INA business. These reductions were partially offset
by price increases from pass through of raw material cost increases to customers
($2.6 million).
The
increase in pre-tax income at NN Europe is due to price increases to customers,
lower cost of products sold, gain from sale of land and building and lower
interest costs, partially offset by effects of devaluation of the Slovakian
Koruna and U.S. Dollar relative to the Euro, and effects of inflation in
material, labor and utilities. The sales price increase was due to contractual
pass through of raw material cost increases to customers ($2.6 million).
Material, labor, and utility inflation ($1.8 million) were almost offset by
cost
reduction initiatives ($1.4 million). The negative impact on net income of
the
devaluation of the Euro relative to the US dollar in 2006 ($0.4 million), the
negative impact on our Slovakian operation of the devaluation of the Slovakian
Koruna relative to the Euro ($0.4 million), and lower sales volume ($0.7
million) all reduced pre tax income. The gain from the sale of land at Pinerolo,
net of machinery disposals, added $0.7 million to pre tax income. Interest
cost
was lower ($0.4 million) due to the pay-off in the first quarter of 2006 of
the
Euro denominated loan and depreciation and amortization expense were higher
due
to depreciation and amortization of the machinery and contract intangible from
the SNR machinery purchase ($0.3 million).
DOMESTIC
BALL AND ROLLER SEGMENT
(In
Thousands of Dollars)
|
|
Domestic
Ball and Roller
|
|
|
2006
|
2005
|
Change
|
|
|
|
|
|
Net
sales
|
|
$
37,333
|
$
32,435
|
$
4,898
|
|
|
|
|
|
Pre-tax
income
|
|
$
29
|
$
1,698
|
$
(1,669)
|
The
sales
increases at Domestic Ball and Roller are due primarily to higher
sales volume of $3.3 million and price increases from passing through material
inflation to customers of $1.5 million. The Ball and Roller volume was due
to
additional sales to existing customers.
The
decrease in pre-tax income at Domestic Ball and Roller is due to increases
in
cost of products sold at the U.S. and China operations and higher SG&A,
depreciation, and interest cost. The positive impact of sales volume
increases ($1.4 million) and price increases from raw material inflation
pass-through (1.5 million) were offset by higher inflation in material, labor,
supplies ($2.2 million), and inefficiencies at US and China
operations ($1.6 million). The higher SG&A cost were due to stock
compensation expense and salaries ($0.2 million). The depreciation expense
was
due to starting to depreciate fixed assets at the China operation ($0.2
million). The interest cost increase was due to higher interest rates on our
variable rate debt ($0.4 million).
PLASTICS
AND RUBBER COMPONENTS SEGMENT
(In
Thousands of Dollars)
|
Plastics
And Rubber Components
|
|
|
2006
|
2005
|
Change
|
|
|
|
|
|
Net
sales
|
|
$
28,266
|
$
29,356
|
$
(1,090)
|
|
|
|
|
|
Pre-tax
income
|
|
$
2,666
|
$
677
|
$
1,989
|
Sales
at Plastics and Rubber were down primarily due to lower volume in the
rubber seal business sold into the automotive market ($1.7 million) partially
offset by price increases in the plastics portion of the segment ($0.6
million).
The
increase in pre-tax income at the Plastics and Rubber Components Segment was
due
to price increases ($0.6 million) and to Level 3 and other cost saving
initiatives in the areas of material usage, labor efficiency, and overhead
cost
($1.9 million). These increases were partially offset by raw material and
utilities inflation ($0.5 million.)
Liquidity
and Capital Resources
Amounts
outstanding under the $90.0 million credit facility and the $40.0 million notes
as of June 30, 2006 were $18.9 million and $40.0 million, respectively. See
Note
8 of the Notes to Consolidated Financial Statements. We were in compliance
with
all covenants of our $90.0 million syndicated credit facility and our $40.0
million senior notes as of June 30, 2006.
We
bill
and receive payment from some of our customers in Euros as well as other
currencies. In 2006, the fluctuation of the Euro against the U.S. Dollar has
negatively impacted revenue and income and increased the value of assets and
liabilities as the average exchange rate is lower from the six months ended
June
30, 2005 to six months ended June 30, 2006 and the spot rate at June 30, 2006
was higher than the exchange rate at December 31, 2005. As of June 30, 2006,
no
currency hedges were in place. A strengthening of the U.S. Dollar and/or Euro
against foreign currencies could impair our ability to compete with
international competitors for foreign as well as domestic sales.
Working
capital, which consists principally of accounts receivable and inventories
offset by accounts payable, was $34.3 million at June 30, 2006 as compared
to
$41.1 million at December 31, 2005. The ratio of current assets to current
liabilities decreased from 1.63:1 at December 31, 2005 to 1.40:1 at June 30,
2006. Cash flow provided by operations was $10.0 million during the first six
months of 2006, compared with cash flow provided by operations of $0.3 million
during the first six months of 2005. The primary reason for the improvement
in
operating cash flow from the first six months of 2005 was the reduction in
inventory and increase in accounts payable. Total assets and current assets
increased approximately $13.0 million and $4.9 million, respectively, from
the
December 31, 2005 balance due to appreciation of the Euro relative to the US
dollar.
During
2006, we plan to spend approximately $18.8 million on capital expenditures
of
which $7.6 million is related primarily to equipment, process upgrades, and
replacements, approximately $8.9 million principally related to geographic
expansion of our manufacturing base, and $2.3 million related to the completion
of the purchase of certain equipment at SNR. In addition, we will pay $2.0
million for contract intangibles related to the SNR equipment purchase. Of
these
amounts approximately $6.4 million has been spent through June 30, 2006. 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 and projected capital
expenditure requirements through December 2006.
During
the first quarter of 2006, the Company’s Board of Directors authorized a stock
repurchase program under which the Company is authorized to repurchase up to
$10
million in common stock of the Company, during the subsequent 18 months in
the
open market or in private transactions, in accordance with applicable laws
and
regulations. This amount represented approximately 5% of the Company’s
outstanding stock at the date of authorization. During the first six months
ended June 30, 2006, the Company repurchased 56,821 shares at approximately
$12.00 per share for a total of approximately $0.7 million. These shares will
be
retired and were recorded as on offset to additional paid in
capital.
During
the second quarter of 2006, the dividend declared on March 10, 2006 was paid
totaling $1.4 million. In addition a divided declared on May 24, 2006 totaling
$1.4 million was paid on June 23, 2006.
Seasonality
and Fluctuation in Quarterly Results
Our
net
sales historically have been of a seasonal nature due to the fact that a
significant portion of our sales are to European customers that cease or
significantly slow production during the month of August.
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 fiscal
year ended December 31, 2005 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 one material change during the six month period ended June 30,
2006 was adoption of SFAS 123(R) related to accounting for stock compensation
(see Note 10 of the financial statements). SFAS 123(R) has had a minimal effect
on the financial statements for the three and six month periods ended June
30,
2006, as there were no new options issued or amended and as outstanding options
were 100% vested at December 31, 2005. The only impact has been the elimination
of variable accounting under APB 25 and FIN 44 with the adoption of SFAS 123(R).
Sales
Concentration
The
contract covering sales to Schaeffler Group (INA) from our European locations
expired on June 30, 2006. We are in the final stages of developing a supply
agreement to replace the agreement that expired. Even though the contract has
technically expired, we are still actively selling to Schaeffler Group (INA)
and
expect to have a signed agreement during the third quarter of 2006.
In
addition, we are in process of negotiating a new long term agreement with SKF
to
replace the one for precision balls that expired July 31, 2006. SKF has
informally agreed in principle to carry the current agreement through to
December 31, 2006. We are in the final stages of negotiating a contract
extension with SKF and expect to have a signed agreement during the fourth
quarter of 2006.
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, 2006,
we
had $18.9 million outstanding under the domestic credit facilities and $40.0
million aggregate principal amount of senior notes outstanding. See Note 8
of
the Notes to Consolidated Financial Statements. At June 30, 2006, 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 $0.2 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, 2006.
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, 2006, the end of the period covered by this quarterly report.
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, the Company, 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 the
Company. 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 the Company has 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, 2005 filed on March 16,
2006.
Item 2.
|
Unregistered
Sales of Equity Securities and Use of
Proceeds
|
c) |
Issuer
purchases of equity
securities
|
Issuer
Purchases of Equity Securities
|
Period
|
(a)
Total Number of Shares (or Units) Purchased
|
(b)
Average Price Paid per Share (or Unit)
|
(c)
Total Number of Shares (or Units) Purchased as Part of Publicly Announced
Plans or Programs
|
(d)
Maximum Number (or Approximate Dollar Value) of Shares that May Yet
Be
Purchased Under the Plans or Programs
|
March
1- March 31
|
20,474
|
$12.00
|
20,474
|
$9,753,714
|
May
1 - May 31
|
36,347
|
$12.00
|
36,347
|
$9,318,353
|
All
purchases were made under the publicly announced $10 million repurchase plan
authorized by the Board of Directors.
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 18, 2006. As of March
31, 2006, the record date for the meeting, there were 17,197,598 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 16,343,518 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 Roderick R. Baty and Robert
M. Aiken, Jr. as Class II Directors to serve for three-year terms each. The
vote
was 13,973,322 and 15,945,815 For and 2,370,196 and 397,703 Withheld for Messrs
Baty and Aiken, respectively.
The
nominees were elected to serve until the 2009 Annual Meeting of Stockholders
and
until their successors are duly elected and qualified. In addition to the
foregoing directors, Michael E. Werner and Richard G. Fanelli are serving terms
that will expire in 2007, and G. Ronald Morris and Steven T. Warshaw are serving
terms that will expire in 2008.
The
second matter voted upon at the meeting was the ratification of
PricewaterhouseCooopers LLP as the Company’s registered independent public
accounting firm for the fiscal year ending December 31, 2006. The vote was
14,383,170 For, 1,960,348 Against and 0 abstentions.
Item 5. |
Other
Information
|
None
10.1 |
Consent
and Amendment No. 7 dated March 20, 2006 to the Credit Agreement dated
May
1, 2003, among NN, Inc. and NN Europe APS as Borrower, the subsidiaries
as
Guarantors, the Lenders as identified therein, AmSouth Bank as
Administrative Agent and SunTrust Bank as Documentation Agent and Euro
Loan Agent. |
|
|
10.2 |
Amendment
No. 8 dated as of June 30, 2006 to the Credit Agreement dated May 1,
2003,
among NN, Inc. and NN Europe APS as Borrower, the subsidiaries as
Guarantors, the Lenders as identified therein, AmSouth Bank as
Administrative Agent and SunTrust Bank as Documentation Agent and Euro
Loan 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. |
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
9, 2006 |
By: |
/s/ Roderick
R. Baty |
|
Roderick
R. Baty |
|
Chairman,
President and Chief Executive Officer
(Duly
Authorized Officer)
|
|
|
|
|
|
|
|
|
Date: August
9, 2006 |
By: |
/s/ James
H.
Dorton |
|
James
H. Dorton |
|
Vice
President - Corporate Development and
Chief Financial Officer
(Principal Financial Officer)
(Duly Authorized Officer)
|
|
|
|
|
|
|
|
|
Date: August
9, 2006 |
By: |
/s/ William
C. Kelly, Jr. |
|
William
C. Kelly, Jr. |
|
Vice
President and
Chief Administrative Officer
(Duly Authorized
Officer)
|