nn10qa113007.htm
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q/A
For the
quarterly period ended September
30, 2007
OR
For the
transition period from _________ to _________
Commission
File Number 0-23486
NN,
Inc.
(Exact
name of registrant as specified in its charter)
Delaware
|
62-1096725
|
(State or
other jurisdiction of 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 Acelerated
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
November 5, 2007, there were 16,279,997 shares of the registrant’s common stock,
par value $0.01 per share, outstanding.
Explanatory
Note
The
purpose of this amendment on Form 10-Q/A to the Quarterly Report on Form 10-Q of
NN, Inc. for the quarter ended September 30, 2007 is to restate our unaudited
Condensed Consolidated Balance Sheet as of September 30, 2007 and the related
Consolidated Statements of Income, Consolidated Statements of Changes in
Stockholders’ Equity and Consolidated Statements of Cash Flows, for the three
months and nine months ended September 30, 2007 to correct an error in asset
groups and cash flow assumptions used to test impairment of a customer contract
intangible asset under SFAS 144. See Note 2 to the Company's
unaudited consolidated financial statements for additional
information.
No
attempt has been made in this Form 10-Q/A to modify or update other disclosures
presented in the original report on Form 10-Q, except as required to reflect the
effects of the restatement. Information not affected by the
restatement is unchanged and reflects the disclosures made at the time of the
original filing of the Form 10-Q on November 9, 2007. Accordingly, this Form
10-Q/A should be read in conjunction with our filings made with the Securities
and Exchange Commission subsequent to the filing of the original Form 10-Q,
including any amendments to those filings. The following items have
been amended as a result of the restatement:
·
|
Part
I—Item 1—Financial Statements
|
·
|
Part
I—Item 2—Management's Discussion and Analysis of Financial Condition and
Results of Operations
|
·
|
Part
1—Item 4—Controls and Procedures
|
The
Company's Chief Executive Officer and Chief Financial Officer, with the
assistance of other members of management, have re-evaluated the effectiveness
of the Company's disclosure controls and procedures as of September 30, 2007,
and, based on this re-evaluation, have determined that the Company's disclosure
controls and procedures were ineffective as a result of a material weakness in
internal control over financial reporting with respect to the accounting for the
impairment of customer intangible assets.
NN,
Inc.
INDEX
|
|
Page
No. |
Part I. |
|
|
Item 1. |
Financial
Statements: |
|
|
|
|
|
Consolidated
Statements of Income and Comprehensive Income for the three and
nine months
ended September 30, 2007 and 2006 (unaudited).. |
2
|
|
|
|
|
Condensed
Consolidated Balance Sheets at September 30, 2007 and
December 31, 2006
(unaudited) ............................................................................ |
3
|
|
|
|
|
Consolidated
Statements of Changes in Stockholders’ Equity for the nine
months ended September 30, 2007
(unaudited) ....................................... |
4
|
|
|
|
|
Consolidated
Statements of Cash Flows for the nine months ended September
30, 2007 and 2006
(unaudited) ........................................................... |
5
|
|
|
|
|
Notes to
Consolidated Financial Statements (unaudited) ......................................................................................................................................................... |
6
|
|
|
|
Item
2. |
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations.............................................................................................
|
19
|
|
|
|
Item
3. |
Quantitative
and Qualitative Disclosures about Market
Risk................................................................................................................................................... |
27
|
|
|
|
Item
4. |
Controls and
Procedures.................................................................................................................................................................................................................. |
27
|
|
|
|
Part II. |
Other Information |
|
|
|
|
Item 1. |
Legal
Proceedings............................................................................................................................................................................................................................ |
28
|
|
|
|
Item
1A. |
Risk
Factors....................................................................................................................................................................................................................................... |
28
|
|
|
|
Item
2. |
Unregistered
Sales of Equity Securities and Use of
Proceeds.................................................................................................................................................. |
28
|
|
|
|
Item
3. |
Defaults Upon
Senior
Securities.................................................................................................................................................................................................... |
28
|
|
|
|
Item
4. |
Submission of
Matters to a Vote of Security
Holders................................................................................................................................................................ |
28
|
|
|
|
Item
5. |
Other
Information............................................................................................................................................................................................................................. |
28
|
|
|
|
Item
6. |
Exhibits............................................................................................................................................................................................................................................... |
28
|
|
|
|
Signatures |
............................................................................................................................................................................................................................................................. |
29
|
PART
I. FINANCIAL INFORMATION
Item 1. Financial
Statements
NN,
Inc.
Consolidated
Statements of Income and Comprehensive Income
(Unaudited)
|
Three
Months Ended
September
30,
|
Nine
Months Ended
September
30,
|
|
As restated
|
As restated
|
(Thousands
of Dollars, Except Per Share Data)
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
Net
sales
|
|
$ |
99,021 |
|
|
$ |
74,870 |
|
|
$ |
314,267 |
|
|
$ |
244,441 |
|
Cost
of products sold (exclusive of depreciation
and
amortization shown separately below)
|
|
|
80,264 |
|
|
|
58,693 |
|
|
|
251,274 |
|
|
|
189,597 |
|
Selling,
general and administrative
|
|
|
8,423 |
|
|
|
7,178 |
|
|
|
27,406 |
|
|
|
21,922 |
|
Depreciation
and amortization
|
|
|
5,771 |
|
|
|
4,192 |
|
|
|
16,951 |
|
|
|
12,779 |
|
Restructuring
and impairment charges
|
|
|
1,362 |
|
|
|
-- |
|
|
|
14,698 |
|
|
|
-- |
|
Gain
on disposal of assets
|
|
|
(11 |
) |
|
|
-- |
|
|
|
(23 |
) |
|
|
(726 |
) |
Income
(loss) from operations
|
|
|
3,212 |
|
|
|
4,807 |
|
|
|
3,961 |
|
|
|
20,869 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
1,496 |
|
|
|
916 |
|
|
|
4,821 |
|
|
|
2,923 |
|
Other
income, net
|
|
|
(154 |
) |
|
|
(550 |
) |
|
|
(150 |
) |
|
|
(310 |
) |
Income
(loss) before provision for income taxes
|
|
|
1,870 |
|
|
|
4,441 |
|
|
|
(710 |
) |
|
|
18,256 |
|
Provision
for income taxes
|
|
|
1,472 |
|
|
|
1,808 |
|
|
|
5,501 |
|
|
|
6,908 |
|
Net
income (loss)
|
|
|
398 |
|
|
|
2,633 |
|
|
|
(6,211 |
) |
|
|
11,348 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation gain (loss)
|
|
|
5,348 |
|
|
|
(867 |
) |
|
|
8,775 |
|
|
|
6,777 |
|
Comprehensive
income (loss)
|
|
$ |
5,746 |
|
|
$ |
1,766 |
|
|
$ |
2,564 |
|
|
$ |
18,125 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
income (loss) per common share:
|
|
$ |
0.02 |
|
|
$ |
0.15 |
|
|
$ |
(0.37 |
) |
|
$ |
0.66 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding
|
|
|
16,765 |
|
|
|
17,105 |
|
|
|
16,808 |
|
|
|
17,147 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
income (loss) per common share: |
|
$ |
0.02 |
|
|
$ |
0.15 |
|
|
$ |
(0.37 |
)
|
|
$ |
0.65 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding |
|
|
16,904 |
|
|
|
17,339 |
|
|
|
16,986 |
|
|
|
17,389 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
dividends per common share |
|
$ |
0.08 |
|
|
$ |
0.08 |
|
|
$ |
0.24 |
|
|
$ |
0.24 |
|
The accompanying notes are an integral
part of the financial statements.
NN,
Inc.
Condensed
Consolidated Balance Sheets
(Unaudited)
|
|
September
30,
|
|
|
December
31,
|
|
(Thousands
of Dollars)
|
|
2007
As
restated
|
|
|
2006
|
|
Assets
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
8,481 |
|
|
$ |
11,681 |
|
Accounts
receivable, net of allowances of $1,331 and $1,278,
respectively
|
|
|
71,420 |
|
|
|
63,442 |
|
Inventories,
net
|
|
|
47,836 |
|
|
|
43,538 |
|
Other
current assets
|
|
|
7,575 |
|
|
|
7,203 |
|
Total
current assets
|
|
|
135,312 |
|
|
|
125,864 |
|
|
|
|
|
|
|
|
|
|
Property,
plant and equipment, net
|
|
|
157,403 |
|
|
|
156,447 |
|
Goodwill,
net
|
|
|
38,510 |
|
|
|
46,147 |
|
Intangible
assets, net
|
|
|
9,601 |
|
|
|
10,131 |
|
Other
assets
|
|
|
3,105 |
|
|
|
4,112 |
|
Total
assets
|
|
$ |
343,931 |
|
|
$ |
342,701 |
|
|
|
|
|
|
|
|
|
|
Liabilities
and Stockholders’ Equity
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$ |
44,952 |
|
|
$ |
52,576 |
|
Accrued
salaries, wages and benefits
|
|
|
16,674 |
|
|
|
13,519 |
|
Income
taxes
|
|
|
1,313 |
|
|
|
94 |
|
Current
maturities of long-term debt
|
|
|
8,151 |
|
|
|
851 |
|
Other
current liabilities
|
|
|
8,763 |
|
|
|
7,829 |
|
Total
current liabilities
|
|
|
79,853 |
|
|
|
74,869 |
|
|
|
|
|
|
|
|
|
|
Non-current
deferred tax liability
|
|
|
20,643 |
|
|
|
16,334 |
|
Long-term
debt
|
|
|
97,514 |
|
|
|
80,711 |
|
Related
party debt
|
|
|
-- |
|
|
|
21,305 |
|
Accrued
pension and other
|
|
|
17,015 |
|
|
|
16,313 |
|
Total
liabilities
|
|
|
215,025 |
|
|
|
209,532 |
|
|
|
|
|
|
|
|
|
|
Total
stockholders’ equity
|
|
|
128,906 |
|
|
|
133,169 |
|
|
|
|
|
|
|
|
|
|
Total
liabilities and stockholders’ equity
|
|
$ |
343,931 |
|
|
$ |
342,701 |
|
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
|
|
|
Retained
Earnings
As
restated
|
|
|
Accumulated
Other
Comprehensive
Income
|
|
|
Total
As
restated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
January 1, 2007
|
|
|
16,842 |
|
|
$ |
169 |
|
|
$ |
53,473 |
|
|
$ |
64,178 |
|
|
$ |
15,349 |
|
|
$ |
133,169 |
|
Shares issued
|
|
|
24 |
|
|
|
-- |
|
|
|
292 |
|
|
|
-- |
|
|
|
-- |
|
|
|
292 |
|
Net Loss, as
restated
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
(6,211 |
) |
|
|
-- |
|
|
|
(6,211 |
) |
Amortization of restricted
stock awards
|
|
|
-- |
|
|
|
-- |
|
|
|
180 |
|
|
|
-- |
|
|
|
-- |
|
|
|
180 |
|
Forfeiture of restricted
stock
|
|
|
(3 |
) |
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
Repurchase of outstanding
shares
|
|
|
(309 |
) |
|
|
(3 |
) |
|
|
(3,153 |
) |
|
|
-- |
|
|
|
-- |
|
|
|
(3,156 |
) |
Stock option
expense
|
|
|
-- |
|
|
|
-- |
|
|
|
502 |
|
|
|
-- |
|
|
|
-- |
|
|
|
502 |
|
Dividends
declared
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
(4,045 |
) |
|
|
-- |
|
|
|
(4,045 |
) |
Cumulative effect of adoption
of FIN 48
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
(600 |
) |
|
|
-- |
|
|
|
(600 |
) |
Cumulative translation
gain
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
8,775 |
|
|
|
8,775 |
|
Balance,
September 30, 2007
|
|
|
16,554 |
|
|
$ |
166 |
|
|
$ |
51,294 |
|
|
$ |
53,322 |
|
|
$ |
24,124 |
|
|
$ |
128,906 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral
part of the financial statements.
NN,
Inc.
Consolidated
Statements of Cash Flows
(Unaudited)
|
|
Nine
Months Ended
|
|
|
|
September
30,
|
|
(Thousands
of Dollars)
|
|
2007
As
restated
|
|
|
2006
|
|
Operating
Activities:
|
|
|
|
|
|
|
Net
income (loss)
|
|
$ |
(6,211 |
) |
|
$ |
11,348 |
|
Adjustments
to reconcile net income (loss) to net cash provided by
operating
activities:
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
16,951 |
|
|
|
12,779 |
|
Amortization
of debt issue costs
|
|
|
158 |
|
|
|
427 |
|
Gain
on disposal of property, plant and equipment
|
|
|
(23 |
) |
|
|
(726 |
) |
Compensation
expense from issuance of restricted stock and incentive stock
options
|
|
|
682 |
|
|
|
321 |
|
Restructuring
and impairment charges
|
|
|
14,698 |
|
|
|
-- |
|
Deferred
income tax
|
|
|
61 |
|
|
|
-- |
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(5,375 |
) |
|
|
(772 |
) |
Inventories
|
|
|
(2,689 |
) |
|
|
2,201 |
|
Accounts
payable
|
|
|
(10,007 |
) |
|
|
(4,869 |
) |
Other
assets and liabilities
|
|
|
2,555 |
|
|
|
2,042 |
|
Net
cash provided by operating activities
|
|
|
10,800 |
|
|
|
22,751 |
|
|
|
|
|
|
|
|
|
|
Investing
Activities:
|
|
|
|
|
|
|
|
|
Acquisition
of property, plant and equipment
|
|
|
(12,841 |
) |
|
|
(11,766 |
) |
Proceeds
from disposals of property, plant and equipment
|
|
|
51 |
|
|
|
3,120 |
|
Acquisition
of intangibles and goodwill
|
|
|
(302 |
) |
|
|
(1,855 |
) |
Net
cash used by investing activities
|
|
|
(13,092 |
) |
|
|
(10,501 |
) |
|
|
|
|
|
|
|
|
|
Financing
Activities:
|
|
|
|
|
|
|
|
|
Increase
in cash from book overdraft
|
|
|
94 |
|
|
|
1,055 |
|
Repayment
of long-term debt
|
|
|
(883 |
) |
|
|
(4,668 |
) |
Proceeds
from short-term debt
|
|
|
1,586 |
|
|
|
243 |
|
Principal
payment on capital lease
|
|
|
(28 |
) |
|
|
(24 |
) |
Repurchase
of common stock
|
|
|
(3,156 |
) |
|
|
(2,534 |
) |
Proceeds
from issuance of stock
|
|
|
292 |
|
|
|
696 |
|
Proceeds
from long term debt
|
|
|
23,400 |
|
|
|
4,600 |
|
Debt
issuance cost paid
|
|
|
(251 |
) |
|
|
(457 |
) |
Dividends
paid
|
|
|
(4,045 |
) |
|
|
(4,118 |
) |
Repayment
of related party debt
|
|
|
(18,638 |
) |
|
|
-- |
|
Net
cash used by financing activities
|
|
|
(1,629 |
) |
|
|
(5,207 |
) |
|
|
|
|
|
|
|
|
|
Effect
of exchange rate changes on cash and cash equivalents
|
|
|
721 |
|
|
|
603 |
|
|
|
|
|
|
|
|
|
|
Net
Change in Cash and Cash Equivalents
|
|
|
(3,200 |
) |
|
|
7,646 |
|
Cash
and Cash Equivalents at Beginning of Period
|
|
|
11,681 |
|
|
|
10,856 |
|
Cash
and Cash Equivalents at End of Period
|
|
$ |
8,481 |
|
|
$ |
18,502 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral
part of the financial statements.
NN,
Inc.
Notes
To Consolidated Financial Statements
(In
Thousands, Except Share and Per Share Data)
(unaudited)
Note
1. Interim
Financial Statements
The
accompanying consolidated financial statements of NN, Inc. (the “Company”) have
not been audited, except that the balance sheet at December 31, 2006 is derived
from the Company’s consolidated audited financial statements. In the
opinion of the Company’s management, the financial statements reflect all
adjustments necessary to fairly state the results of operations for the three
and nine month periods ended September 30, 2007 and 2006, the Company’s
financial position at September 30, 2007 and December 31, 2006, and the cash
flows for the nine month periods ended September 30, 2007 and
2006. These adjustments are of a normal recurring nature and are, in
the opinion of management, necessary for fair statement of the financial
position and operating results for the interim periods. As used in
this Quarterly Report on Form 10-Q, the terms “NN”, “the Company”, “we”, “our”,
or “us” mean NN, Inc. and its subsidiaries.
Certain
information and footnote disclosures normally included in the consolidated
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted from the interim financial statements
presented in this Quarterly Report on Form 10-Q. These unaudited,
condensed, consolidated and unaudited, consolidated financial statements should
be read in conjunction with our audited consolidated financial statements and
the notes thereto included in our most recent annual report on Form 10-K for the
year ended December 31, 2006 which we filed with the Securities and Exchange
Commission on March 16, 2007.
The
results for the three and nine month periods ended September 30, 2007 are not
necessarily indicative of results for the year ending December 31, 2007 or any
other future periods.
Note
2. Restatement
of Form 10-Q filed November 9, 2007
In
preparing our financial statements for the three and nine months ended September
30, 2007, management concluded that, due to the lower than expected sales of the
Precision Metal Components segment in the third quarter, that the carrying
amount of certain long-lived assets may not be recoverable. As a
result, management performed impairment tests in the third quarter in accordance
with the provisions of Statement of Financial Accounting Standards
(“SFAS”) 144, Accounting for the Impairment or
Disposal of Long-Lived Assets ("SFAS 144").
An
impairment charge of $5,600 ($3,696 after-tax) was initially recorded in the
third quarter, which related to a customer relationship intangible asset that
had been recorded in conjunction with the November 30, 2006 acquisition of
Whirlaway Corporation. After performing the impairment tests
based on the Company's assumptions and interpretation of the provisions of SFAS
144, management determined that these intangible assets were impaired and
consequently recorded non-cash charges to write these assets down to the
value supported by a fair value analysis based on their forecasted cash
flows.
Also,
during the quarter ending June 30, 2007, management concluded that due to the
internal restructuring of the Metal Bearing Components segment in the second
quarter that the carrying amount of certain long-lived assets may not be
recoverable. As a result, management performed impairment tests in
accordance with the provisions of SFAS 144. An impairment charge of $1,933
($1,453 after-tax) was initially recorded in the second quarter, which related
to a customer contract intangible asset recorded in conjunction with the October
2005 acquisition of the assets of SNR Roulements. After performing
the impairment tests based on the Company's assumptions and interpretation of
the provisions of SFAS 144, management determined that these intangible assets
were impaired and consequently recorded non-cash charges to write these
intangible assets down to the value supported by a fair value analysis based on
their forecasted cash flows.
During
the preparation of its year-end financial statements and in response to a
comment letter issued by the Division of Corporation Finance of the Securities
and Exchange Commission related to a routine review of the Company's third
quarter 10-Q filings, management re-evaluated the assessment of asset groups
used to determine the grouping of long-lived assets and the lowest level for
which identifiable cash flows are largely independent of the cash flows of other
assets and liabilities to test for impairment pursuant
to SFAS
NN,
Inc.
Notes
To Consolidated Financial Statements
(In
Thousands, Except Share and Per Share Data)
(unaudited)
144
paragraph 10. After this re-evaluation, management determined that
different asset groups and cash flow assumptions should have been utilized in
its assessment of whether the carrying value of its asset groups was
recoverable. Upon testing the new asset groups for recoverability,
management has determined that the undiscounted cash flows indicated the asset
groups are recoverable. Accordingly, the previously recorded non-cash
impairment charges related to these intangible assets were not supported and
should be reversed. The Company has determined that the Precision
Metal Component's customer relationship intangible asset should be amortized
over a remaining useful life of ten years, which has been revised from its
originally assumed life of twenty years. The Company has
determined that the Metal Bearing Components contract intangible should continue
to be amortized over the remainder of its original useful life of five
years.
After
discussions between management and the Audit Committee of the Board of Directors
of NN, Inc. on February 20, 2008, management, at the direction of the Audit
Committee, concluded that the Company should
restate its previously issued financial statements for the three and nine months
ended September 30, 2007.
The
following tables summarize financial statement line items within the
Consolidated Statements of Income and Comprehensive Income for the three and
nine month periods ended September 30, 2007, the Condensed Consolidated Balance
Sheets as of September 30, 2007 and the Consolidated Statements of Cash flow for
the nine months ended September 30, 2007 that were amended with the restated
10-Q/A for the three and nine month period ended September 30,
2007.
Consolidated
Statements of Income and Comprehensive Income
|
|
Three
Months Ended
September
30 2007,
|
|
|
Nine
Months Ended
September
30 2007,
|
|
(Thousands
of Dollars, Except Per Share Data)
|
|
As
Originally Reported
|
|
|
As
restated
|
|
|
As
Originally Reported
|
|
|
As
restated
|
|
Depreciation
and amortization
|
|
$ |
5,542 |
|
|
$ |
5,771 |
|
|
|
16,723 |
|
|
$ |
16,951 |
|
Restructuring
and impairment charges
|
|
|
7,069 |
|
|
|
1,362 |
|
|
|
22,338 |
|
|
|
14,698 |
|
Income
(loss) from operations
|
|
|
(2,266 |
) |
|
|
3,212 |
|
|
|
(3,451 |
) |
|
|
3,961 |
|
Income
(loss) before provision for income taxes
|
|
|
(3,608 |
) |
|
|
1,870 |
|
|
|
(8,122 |
) |
|
|
(710 |
) |
Provision
for income taxes
|
|
|
(400 |
) |
|
|
1,472 |
|
|
|
3,150 |
|
|
|
5,501 |
|
Net
income (loss)
|
|
|
(3,208 |
) |
|
|
398 |
|
|
|
(11,272 |
) |
|
|
(6,211 |
) |
Foreign
currency translation gain
|
|
|
5,244 |
|
|
|
5,348 |
|
|
|
8,671 |
|
|
|
8,775 |
|
Comprehensive
income
|
|
|
2,036 |
|
|
|
5,746 |
|
|
|
(2,601 |
) |
|
|
2,564 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and Diluted Earnings Per Share
|
|
$ |
(0.19 |
) |
|
$ |
0.02 |
|
|
$ |
(0.67 |
) |
|
$ |
(0.37 |
) |
Condensed
Consolidated Balance Sheets
|
|
September
30,2007
|
|
(Thousands
of Dollars)
|
|
As
Originally
Reported
|
|
|
As
restated
|
|
|
|
|
|
|
|
|
Intangible
assets, net
|
|
$ |
2,087 |
|
|
$ |
9,601 |
|
Other
assets
|
|
|
5,487 |
|
|
|
3,105 |
|
Total
assets
|
|
|
338,799 |
|
|
|
343,931 |
|
Income
Taxes
|
|
|
1,346 |
|
|
|
1,313 |
|
Total
Current Liabilities
|
|
|
79,886 |
|
|
|
79,853 |
|
Total
Liabilities
|
|
|
215,058 |
|
|
|
215,025 |
|
Total
stockholders’ equity
|
|
|
123,741 |
|
|
|
128,906 |
|
Total
liabilities and stockholders’ equity
|
|
|
338,799 |
|
|
|
343,931 |
|
NN,
Inc.
Notes
To Consolidated Financial Statements
(In
Thousands, Except Share and Per Share Data)
(unaudited)
Consolidated
Statements of Cash Flows
|
|
September
30 2007,
|
|
(Thousands
of Dollars)
|
|
As
Originally
Reported
|
|
|
As
restated
|
|
Operating
Activities:
|
|
|
|
|
|
|
Net loss
|
|
$ |
(11,272 |
) |
|
$ |
(6,211 |
) |
Adjustments
to reconcile net loss to net cash provided by operating
activities:
|
|
|
|
|
|
|
|
|
Depreciation
and Amortization
|
|
|
16,723 |
|
|
|
16,951 |
|
Restructuring
and impairment charges
|
|
|
22,338 |
|
|
|
14,698 |
|
Deferred
Income tax
|
|
|
(2,323 |
) |
|
|
61 |
|
Other
assets and liabilities
|
|
|
2,588 |
|
|
|
2,555 |
|
Restructuring
and Impairment Charges
Note
3. Metal
Bearing Components Segment Restructuring, Impairment and Other Cost Reduction
Actions
On July
25, 2007, we announced several actions intended to improve corporate financial
performance that resulted in the recognition of certain restructuring,
impairment and other non-recurring charges. The most significant action is
a restructuring of the European precision ball plants operations of the Metal
Bearing Components Segment of the company. As we have increased capacity
at our two newest ball plants in China and Slovakia, we now need to align our
capacity across our worldwide system of six ball plants, both in assets
currently in service and in production assets that have been held in reserve.
Earlier in July 2007, management made a decision that, at this time,
reducing output at four of the six ball plants would be the best financial and
logistical solution to align capacity. Reducing capacity will necessitate
changes in employment levels resulting in certain costs and charges, as well as
a reduction in cash flow from each of the plants. Since the reporting
value of tangible and intangible assets must be supported by cash flow from the
operations, the changes resulted in reduction in value of certain tangible and
intangible assets at the affected ball plants.
During
the second quarter of 2007, we recorded approximately $13,336 ($12,623
after-tax) of non-cash impairment costs. These charges include the
write-down to estimated fair market value of certain excess production equipment
of $3,320 ($3,212 after tax) and the full impairment of goodwill at one European
reporting unit of $10,016 ($9,412 after tax) to levels supported by projected
cash flows after the restructuring. These impairments were calculated
using present value of expected future cash flows methods pursuant to SFAS 142
for the goodwill and estimates of fair value pursuant to SFAS 144 for the fixed
assets.
During
the third quarter of 2007, we recorded approximately $1,272 ($1,196 after tax)
of cash restructuring charges and approximately $90 ($66 after tax) of non-cash
impairment charges related to the write-down to estimated fair value of certain
excess production equipment as part of the Metal Bearings Components Segment
restructuring. The $1,272 was for severance charges booked in
accordance with SFAS 146, that will be paid out upon completion of the required
legal notification period which is approximately one year. No further
restructuring or impairment charges are expected for 2007.
NN,
Inc.
Notes
To Consolidated Financial Statements
(In
Thousands, Except Share and Per Share Data)
(unaudited)
The
following summarizes the charges related to the 2007 restructuring plan within
the Metal Bearing Components Segment for the nine months ended September 30,
2007 reported under accrued salaries and wages.
Nine
months ended September 30, 2007
(In
Thousands of Dollars)
|
Reserve
Balance
at
01/01/07
|
Charges
|
Paid
in 2007
|
Currency
Impacts
|
Reserve
Balance
at
09/30/07
|
Severance
and other employee costs
|
|
|
|
|
|
|
|
|
|
|
|
Note
4. 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):
|
September
30,
|
December
31,
|
|
2007
|
2006
|
Raw
materials
|
$ 13,611
|
$ 11,828
|
Work
in process
|
9,857
|
10,427
|
Finished
goods
|
26,413
|
23,596
|
Less
inventory reserves
|
|
|
|
|
|
Inventories
on consignment at customer locations as of September 30, 2007 and December 31,
2006 totaled $5,425 and $4,554, respectively.
Note
5. Net
Income Per Share
|
Three
Months Ended
September
30,
|
Nine
Months Ended
September
30,
|
(Thousands
of Dollars, Except Share and Per Share Data)
|
2007
As
restated
|
2006
|
2007
As
restated
|
2006
|
|
|
|
|
|
Net
income
|
|
|
|
|
|
|
|
|
|
Weighted
average basic shares
|
16,764,695
|
17,104,621
|
16,807,975
|
17,147,359
|
Effect
of dilutive stock options
|
|
|
|
|
Weighted
average dilutive shares outstanding
|
|
|
|
|
|
|
|
|
|
Basic
net income per share
|
|
|
|
|
Diluted
net income per share
|
|
|
|
|
Excluded
from the shares outstanding for the three and nine months ended September 30,
2007 were 858,000 anti-dilutive options which had exercise prices from $10.67 to
$12.62. Excluded from shares outstanding for the three and nine month
periods ended September 30, 2006 were 478,250 anti-dilutive options which had
exercise prices of $11.50 and $12.62.
Note
6. Segment
Information
The
segment information and the accounting policies of each segment are the same as
those described in the “Segment Information” footnote and the “Summary of
Significant Accounting Policies” footnote, respectively,
in our annual report on Form 10-K for the year ended December 31,
2006. We evaluate
NN,
Inc.
Notes
To Consolidated Financial Statements
(In
Thousands, Except Share and Per Share Data)
(unaudited)
segment
performance based on net income or loss after income taxes. For the
three and nine month periods ended September 30, 2007, we have reported segment
profit excluding restructuring and impairment charges, a non-GAAP accounting
measure, as this information is utilized by our chief operating decision maker
to examine segment profitability. Additionally, this new line item was added to
show only operational performance and to enhance comparability to the prior
periods. We account for inter-segment sales and transfers at
current market prices. We did not have any significant inter-segment
transactions during the three and nine month periods ended September 30, 2007
and 2006. As discussed in our annual report on Form 10-K for the year
ended December 31, 2006, we changed our segment reporting during the fourth
quarter of 2006. The three and nine month periods ended September 30,
2006 have been restated to conform to the current presentation.
|
Three
Months Ended September 30,
|
|
2007
|
2006
|
(In
Thousands of Dollars)
|
Metal
Bearing
Com-
ponents
Segment
As
restated
|
Precision
Metal
Com-
ponents
Segment
As
restated
|
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
|
$ 70,814
|
$
15,594
|
$
12,613
|
$ --
|
$ 62,228
|
$ --
|
$
12,642
|
$ --
|
|
|
|
|
|
|
|
|
|
Segment
profit (loss), excluding restructuring and
impairment changes
|
3,157
|
(633)
|
567
|
(1,431)
|
3,563
|
--
|
674
|
(1,604)
|
|
|
|
|
|
|
|
|
|
Restructuring
and impairment charges
|
(1,152)
|
--
|
--
|
(210)
|
--
|
--
|
--
|
--
|
|
|
|
|
|
|
|
|
|
Income tax
impacts
|
24
|
--
|
--
|
76
|
--
|
--
|
--
|
--
|
Net income (loss)
|
$ 2,029
|
$
(633)
|
$ 567
|
$
(1,565)
|
$ 3,563
|
$ --
|
$ 674
|
$
(1,604)
|
|
|
|
|
|
|
|
|
|
Assets |
$
230,737
|
$53,900 |
$52,259 |
$7,035 |
$226,324 |
$
-- |
$52,966
|
$5,985 |
NN,
Inc.
Notes
To Consolidated Financial Statements
(In
Thousands, Except Share and Per Share Data)
(unaudited)
|
Nine
Months Ended September 30,
|
|
2007
|
2006
|
(In
Thousands of Dollars)
|
Metal
Bearing
Com-
ponents
Segment
As
restated
|
Precision
Metal
Com-
ponents
Segment
As
restated
|
Plastic
and
Rubber
Com-
ponents
Segment
|
All
Other
|
Metal
Bearing
Com-
ponents
Segment
|
Precision
Metal
Com-
ponents
S
egment
|
Plastic
and
Rubber
Com-
ponents
Segment
|
All
Other
|
Revenues
from external customers
|
$
224,373
|
$ 50,730
|
$ 39,164
|
$ --
|
$
203,533
|
$ --
|
$ 40,908
|
$ --
|
|
|
|
|
|
|
|
|
|
Segment
profit (loss) excluding restructuring and
impairment changes
|
12,901
|
(1,093)
|
1,686
|
(5,023)
|
13,502
|
--
|
2,380
|
(4,534)
|
|
|
|
|
|
|
|
|
|
Restructuring
and impairment charges
|
(14,488)
|
--
|
--
|
(210)
|
--
|
--
|
--
|
--
|
|
|
|
|
|
|
|
|
|
Income
tax impacts
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
$
230,737
|
$ 53,900
|
$ 52,259
|
$ 7,035
|
$
226,324
|
$ --
|
$
52,966
|
$ 5,985
|
Note
7. Recent
Investing Activity
The
opening balance sheet for the Whirlaway Corporation (“Whirlaway”) acquisition on
November 30, 2006 was adjusted during the third quarter. For the nine
month period ended September 30, 2007, Goodwill increased by a net
$1,246. The increase was from recording a deferred tax liability of
$4,047 related to the differences in book and tax basis of fixed
assets. This increase was offset by the elimination of tax indemnity
liability of $2,667 to the former Whirlaway shareholder related to the tax basis
of the fixed assets. Finally, Goodwill decreased by $134 as certain
opening balance sheet liabilities were reduced to their proper values partially
offset by legal costs related to the acquisition paid during 2007.
The
following pro-forma financial information shows the net sales, net income, and
net income per share for the nine month period ended September 30, 2006, as
though the acquisition of Whirlaway occurred at the beginning of
2006.
|
Nine
Months Ended September 30, 2006
|
Net
sales
|
$ 304,515
|
Net
income
|
$ 12,583
|
Basic
net income per share
|
$ 0.73
|
Diluted
net income per share
|
$ 0.72
|
Note
8. Pensions
We have a
defined benefit pension plan covering the employees at our Eltmann, Germany
facility. The benefits are based on the expected years of service;
however, as the plan was curtailed in 2006, the plan will no longer incur
service costs. The plan is unfunded. There were no prior
service costs recognized in the three and nine month periods ended September 30,
2007 and 2006.
NN,
Inc.
Notes
To Consolidated Financial Statements
(In
Thousands, Except Share and Per Share Data)
(unaudited)
Components
of Net Periodic Pension Cost:
|
Three
Months Ended
September
30,
|
Nine
Months Ended
September
30,
|
(In
Thousands of Dollars)
|
2007
|
2006
|
2007
|
2006
|
Service
cost
|
$ --
|
$ 27
|
--
|
$ 79
|
Interest
cost
|
60
|
66
|
176
|
194
|
Net
loss
|
|
|
|
|
Net
periodic pension cost
|
|
|
|
|
We expect
to contribute approximately $240 to the Eltmann, Germany pension plan in
2007. As of September 30, 2007, approximately $180 of contributions
had been made.
Severance
Indemnity
In
accordance with Italian law, the Company has an unfunded severance plan covering
our Pinerolo, Italy employees under which all employees at that location are
entitled to receive severance indemnities upon termination of their
employment. The table below summarizes the changes to the severance
indemnity for the three and nine months ended September 30, 2007 and
2006:
|
Three
Months Ended
September
30,
|
Nine
Months Ended
September
30,
|
(In
Thousands of Dollars)
|
2007
|
2006
|
2007
|
2006
|
|
Beginning
balance
|
$
(8,431)
|
$ (7,369)
|
$ (8,020)
|
$ (6,644)
|
|
Amounts
accrued
|
(300)
|
(245)
|
(885)
|
(770)
|
|
Payments
|
729
|
(196)
|
1,110
|
133
|
|
Currency
impacts
|
|
|
|
|
|
Ending
balance
|
|
|
|
|
|
Note
9. New
Accounting Pronouncements
In July
2006, the Financial Accounting Standards Board (“FASB”) issued Interpretation
No. 48 ("FIN 48"), "Accounting for Uncertainty in Income Taxes—an Interpretation
of SFAS 109 "Accounting for Income Taxes". FIN 48 prescribes a comprehensive
model for how a company should recognize, measure, present, and disclose in its
financial statements uncertain tax positions that a company has taken or expects
to take on a tax return. Under FIN 48, the financial statements will reflect
expected future tax consequences of such positions presuming the taxing
authorities' full knowledge of the position and all relevant facts, but without
considering time values. FIN 48 also revises disclosure requirements and
introduces a prescriptive, annual, tabular roll-forward of the unrecognized tax
benefits. FIN 48 is effective for fiscal years beginning after December 15,
2006. We adopted FIN 48 on January 1, 2007, and the effects on our consolidated
financial position, liquidity, and results of operations were not material. See
Note 16 for additional information.
In
September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements”
(“SFAS 157”), which provides guidance on how to measure assets and liabilities
that use fair value. SFAS 157 will apply whenever another US
generally accepted accounting principal standard requires (or permits) assets or
liabilities to be measured at fair value but does not expand the use of fair
value to any new circumstances. This standard also will require
additional disclosures in both annual and quarterly reports. SFAS 157
will be effective for financial statements issued for fiscal years beginning
after November 15, 2007, and will be adopted by us beginning in the first
quarter of 2008. We are currently evaluating the potential impact
this standard may have on our consolidated financial position and results of
operations, but do not believe the impact of the adoption will be
material.
NN,
Inc.
Notes
To Consolidated Financial Statements
(In
Thousands, Except Share and Per Share Data)
(unaudited)
In
February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities—Including an amendment of FASB
Statement No. 115." SFAS No. 159 permits companies to choose to
measure many financial instruments and certain other items at fair value at
specified election dates. Upon adoption, an entity shall report
unrealized gains and losses on items for which the fair value option has been
elected in earnings at each subsequent reporting date. Most of the
provisions apply only to entities that elect the fair value
option. However, the amendment to SFAS No. 115, "Accounting for
Certain Investments in Debt and Equity Securities," applies to all entities with
available for sale and trading securities. SFAS No. 159 will be
effective as of the beginning of an entity's first fiscal year that begins after
November 15, 2007. We are currently evaluating the effect SFAS No.
159 will have on our consolidated financial position, liquidity, or results of
operations.
Note
10. Long-Term
Debt and Short-Term Debt
Long-term
debt at September 30, 2007 and December 31, 2006 consisted of the
following:
|
September
30,
2007
|
December
31,
2006
|
|
|
|
Borrowings
under our $135,000 revolving credit facility bearing interest at a
floating rate equal to LIBOR (5.23% at September 30, 2007) plus an
applicable margin of 0.60 to 0.925, expiring September 20,
2011.
|
$ 64,452
|
$ 39,466
|
|
|
|
Borrowings
under our $40,000 aggregate principal amount of senior notes bearing
interest at a fixed rate of 4.89% maturing on April 26,
2014. Annual principal payments of $5,714 begin on April 26,
2008 and extend through the date of maturity.
|
40,000
|
40,000
|
|
|
|
Long
term note payable with customer related to acquiring equipment from
customer as part of long term supply agreement. Note carries a
0% rate of interest. Interest on this note has been imputed at
a rate of 5.41%. Note is paid down by applying a fixed amount
per piece purchased by customer.
|
|
|
|
|
|
Total
debt
|
105,665
|
81,562
|
|
|
|
Less
current maturities of long-term debt
|
|
|
|
|
|
Long-term
debt, excluding current maturities of long-term debt and related party
debt
|
|
|
On May
30, 2007, we entered into an agreement to amend our $90,000 credit facility to
increase the total commitment from $90,000 to $135,000. Other than
the increase in the total commitment, the other terms of the credit facility
remained substantially the same. The Company incurred $114 of cost
related to this amendment which has been capitalized.
The
increase in borrowings under the $135,000 credit facility is related primarily
to the payment of $18,600 in related party notes payable in connection with the
Whirlaway acquisition. As of September 30, 2007, $1,222
of capitalized loan origination cost, net of amortization, for both facilities
was recorded on the balance sheet within other assets and additions are
presented in the Financing Activities section of the Statements of Cash
Flows.
The
Company received an amendment to the $135,000 credit facility, retroactive to
June 30, 2007, that amends the definitions of certain components of the
financial covenant calculations to exclude the negative
NN,
Inc.
Notes
To Consolidated Financial Statements
(In
Thousands, Except Share and Per Share Data)
(unaudited)
impact of
non-cash restructuring and impairment charges.
As a
result of the Company’s cash management system including all U.S. operations,
checks issued but not presented to the banks for payment may create negative
book cash balances. Such negative balances are included in accounts
payable and totaled $878 and $784 as of September 30, 2007 and December 31,
2006, respectively, with the change in the balances reported in the Financing
Activities section of the Consolidated Statements of Cash Flows.
Note
11. Goodwill
The
changes in the carrying amount of goodwill for the nine month period ended
September 30, 2007 and the twelve month period ended December 31, 2006 are as
follows:
Goodwill
(In
Thousands of Dollars)
|
Precision
Metal
Components
Segment
|
Plastic
and
Rubber
Components
Segment
|
Metal
Bearing
Components
Segment
|
Total
|
|
|
|
|
|
Balance
as of January 1, 2006 |
$ --
|
$ 25,755
|
$ 15,893
|
$ 41,648
|
|
|
|
|
|
Goodwill
acquired |
$
2,352 |
-- |
-- |
2,352 |
|
|
|
|
|
Currency
impacts |
-- |
-- |
2,147 |
2,147 |
|
|
|
|
|
Balance
as of December 31, 2006 |
$ 2,352
|
$ 25,755
|
$ 18,040
|
$ 46,147
|
|
|
|
|
|
Balance
as of January 1, 2007
|
$ 2,352
|
$ 25,755
|
$ 18,040
|
$ 46,147
|
Adjustment
to the purchase price
Allocation
|
1,246
|
--
|
--
|
1,246
|
Goodwill
impaired
|
--
|
--
|
(10,016)
|
(10,016)
|
Currency
impacts
|
|
|
|
|
Balance
as of September 30, 2007
|
|
|
|
|
The
$1,246 adjustment to the purchase price allocation in the Precision Metal
Components Segment during the nine months ended September 30, 2007 related to
recording a deferred tax liability for the difference in book and tax basis of
fixed assets ($4,047) offset by the elimination of a tax indemnity to the former
shareholder of Whirlaway related to the tax basis of the fixed assets
($2,667). Additionally, there were legal costs paid subsequent to the
year ended December 31, 2006 for the acquisition of Whirlaway offset by
adjustments to certain beginning liability balances.
The
goodwill impairment at our Metal Bearing Components Segment related to the
decision to restructure the European operations of this segment (see Note
2). Accordingly, the goodwill was tested for impairment at locations
affected by the planned restructuring using a present value of future expected
cash flows method performed pursuant to the provision of SFAS
142. The implied fair value of the goodwill was less than the
carrying amount of the goodwill at one European reporting unit and an impairment
charge of $10,016 was included within the restructuring and impairment charges
of the Consolidated Statements of Income.
NN,
Inc.
Notes
To Consolidated Financial Statements
(In
Thousands, Except Share and Per Share Data)
(unaudited)
Note
12. Intangible
assets, net of amortization
(In
Thousands of Dollars)
|
Precision
Metal
Components
Segment
As
restated
|
Metal
Bearing
Components
Segment
As
restated
|
Total
As
restated
|
Balance
as of January 1, 2006
|
$ --
|
$ 474
|
$ 474
|
Acquisition
of intangibles
|
7,180
|
1,855
|
9,035
|
Amortization
|
(39)
|
(402)
|
(441)
|
Currency
impacts
|
|
|
|
Balance
as of December 31, 2006
|
|
|
|
Balance
as of January 1, 2007
|
$ 7,141
|
$ 2,090
|
$ 9,231
|
Acquisition
of intangibles
|
--
|
173
|
173
|
Amortization
|
(446)
|
(404)
|
(850)
|
Currency
impacts
|
--
|
147
|
147
|
Balance
as of September 30, 2007
|
|
|
|
Of the
intangible assets within the Precision Metal Components Segment, the majority of
the value is a customer relationship intangible with an estimated fair value of
$6,900. Effective July 1, 2007, this intangible asset has an
estimated useful life of 10 years and $351 of amortization expense was recorded
in 2007. The remaining balance is made up of a covenant not to
compete of $150 and a favorable leasehold interest of $130. These
items are amortizable over two and two and a half years, respectively, and $56
and $39 in amortization expense was recorded in 2007. The accumulated
amortization related to all of these intangible assets at September 30, 2007 was
$485. Additionally, in the Precision Metal Components Segment is an
intangible asset not subject to amortization of $900 related to the value of the
trade names of Whirlaway.
The
intangible asset within the Metal Bearing Components Segment is a relationship
intangible asset related to the SNR purchase agreement and related supply
agreement. This intangible asset is subject to amortization over
approximately 5 years and related amortization expense will approximate $500 for
each of the five years. For the nine month period ended September 30,
2007, the amortization expense totaled $404.
Note
13. Stock
Compensation
In the
three and nine month periods ended September 30, 2007 and 2006, approximately
$317 and $682 for 2007 and $116 and $321 for 2006, respectively, of compensation
expense was recognized in selling, general and administrative expense for all
share-based awards. On March 1, 2007 and May 25, 2007, we granted
30,000 and 161,500 options, respectively, to directors and certain employees of
the Company. The fair value of the options cannot be determined by
market value as our options are not traded in an open market. Accordingly, a
financial pricing model is utilized to determine fair value. The Company
utilizes the Black-Scholes model which relies on certain assumptions to estimate
an option's fair value.
The
following table provides a reconciliation of option activity for the nine month
period ended September 30, 2007:
NN,
Inc.
Notes
To Consolidated Financial Statements
(In
Thousands, Except Share and Per Share Data)
(unaudited)
Options
|
Shares
(000’s)
|
Weighted-
Average
Exercise
Price
|
Weighted-
Average
Remaining
Contractual
Term
|
Aggregate
Intrinsic
Value
($000)
|
Outstanding
at January 1, 2007
|
1,452
|
$ 9.81
|
|
|
Granted
|
192
|
$
12.05
|
|
|
Exercised
|
(26)
|
$
10.95
|
|
|
Forfeited
or expired
|
(88)
|
$
12.37
|
|
|
Outstanding
at September 30, 2007
|
|
|
|
|
Exercisable
at September 30, 2007
|
|
|
|
|
(1)
Intrinsic value is the amount by which the market price of the stock exceeds the
weighted average exercise price of the options at September 30,
2007.
Restricted
Stock Awards
The
unrecognized compensation cost before tax for these awards at September 30, 2007
and 2006 total approximately $47 and $215, respectively, to be recognized over
approximately one and two years, respectively. As of September 30,
2007, the actual cumulative forfeiture rate of the awards granted was
approximately 10%. Below is a summary of the status of the non-vested
restricted stock as of September 30, 2007 and changes during the nine month
period ended September 30, 2007:
|
Shares
(000’s)
|
Weighted-
Average
Grant-
Date
Fair Value
|
Non-vested
at January 1, 2007
|
33
|
$
12.70
|
Granted
|
--
|
--
|
Vested
|
(15)
|
$12.70
|
Forfeited
|
|
|
Non-vested
at September 30, 2007
|
|
|
Long
term Incentive Plan
On June
29, 2007, the Company granted certain directors and other key employees an award
of 151,500 performance units pursuant to the NN, Inc. 2005 Incentive
Plan. Each unit is equal to one share of NN common
stock. The award entitles the grantee to earn in a range from 90% to
150% of the total number of units based upon achieving earnings per share and
return on capital employed targets over a defined performance
cycle. The value of the performance units is based on the grant date
fair value of one share of NN common stock or $11.80 per unit. The
performance period is fiscal years 2007, 2008 and 2009 and the shares vest on
December 31, 2009. There was $113 of compensation expense recognized
during the three and nine months ended September 30, 2007 related to these
performance units and $1,018 of unrecognized compensation cost, before tax to be
recognized over approximately two years.
Note
14. Property,
Plant and Equipment
During
the first quarter of 2006, we completed a sale of excess land and two buildings
at our Pinerolo, Italy facility. The net book value of this land and
buildings was $1,013 and was classified as held for sale at December 31,
2005. The proceeds from the sale were $2,804, resulting in a pre-tax
gain of $1,791. In addition, the Pinerolo facility disposed of excess
machinery in the first quarter of 2006 with a net book value of $1,087,
resulting in a pre-tax loss of $1,062.
NN,
Inc.
Notes
To Consolidated Financial Statements
(In
Thousands, Except Share and Per Share Data)
(unaudited)
Fixed
assets at certain European operations of the Metal Bearing Components Segment
were impaired as a result of the European restructuring (see Note
3.) The total reduction in fixed assets from the impairment charge
was $3,410 and was reported in the restructuring and impairment charges of the
Consolidated Statements of Income.
Note
15. Related
Party Transactions
During
the first quarter of 2007,
the Company remitted $18,638 to the former sole shareholder of Whirlaway
to partially repay the related party note payable. The payment was
financed under our $135,000 credit facility. The remaining $2,667
related party debt at December 31, 2006 related to a tax indemnity was
eliminated with a corresponding reduction to goodwill in the third quarter of
2007.
Note
16. Provision
for Income Taxes
The
Company adopted the provisions of FIN 48 on January 1, 2007. As a
result of the implementation of FIN 48, the Company recognized a $600 increase
in our income tax liabilities and a corresponding reduction in beginning
retained earnings.
As of the
date of adoption, the total unrecognized benefits were approximately $1,464, all
of which, if recognized, would affect the effective tax rate. The
amount of unrecognized benefits increased approximately $281 during the nine
months ended September 30, 2007. The increase in the unrecognized
benefits in 2007 was a result of previous tax planning strategies from
operations. During the nine months ended September 30, 2007,
this balance was reduced by approximately $220 due to a state tax liability that
was paid in the second quarter of 2007.
Interest
and penalties related to federal, state, and foreign income tax matters are
recorded as a component of the provision for income taxes in our statements of
income. We recorded an insignificant amount of foreign interest and
penalties to the provision for income taxes in the three and nine months ended
September 30, 2007.
The
Company or its subsidiaries file income tax returns in the U.S. federal
jurisdiction, and in various states and foreign jurisdictions. With
few exceptions, the Company is no longer subject to federal, state and local
income tax examinations by tax authorities for years before 2001. The
Company is no longer subject to non-U.S. income tax examinations within various
European Union countries for years before 2002.
For the
nine months ended September 30, 2007, the difference between the federal
statutory tax rate of 34% and our effective tax rate of negative 775% is
primarily due to the large impairment and restructuring charges for the European
restructuring with only an 6% effective tax rate. The effective tax
rate of the impairments is low as the tax benefits created by these impairments
have limited ability to be used in the future based on low amounts of expected
income to be generated at the locations effected by the
impairments.
Excluding
the impairment impacts, the effective tax rate would have been
39.3%. The effective rate is 5.1% higher than usual due to a
valuation reserve being placed on a deferred tax asset from tax loss carry
forwards at a location still incurring losses.
Note
17. Contingencies
On March
20, 2006, we, as well as numerous other parties, received correspondence from
the Environmental Protection Agency (“EPA”) requesting information regarding a
former waste recycling vendor previously used by us. The vendor has
since ceased operations and the EPA is investigating the clean up of the site or
sites used by the vendor. As of the date of this report, we do not
know whether we have any liability related to this vendor’s actions or
estimatable range for any potential liability.
NN,
Inc.
Notes
To Consolidated Financial Statements
(In
Thousands, Except Share and Per Share Data)
(unaudited)
On June
20, 2007, we, as well as numerous other parties, received correspondence from
the New York State Department of Environmental Conservation notifying
us that we have been named as a potentially responsible party for the potential
clean up of a former waste recycling facility. As of the date of this
report, we do not know whether we have any liability related to this vendor’s
actions or estimatable range for any potential liability.
Note
18. Common
Stock Repurchases
During
the quarter ended September 30, 2007, the Company repurchased approximately
211,000 shares at an approximate cost of $10.21 per share for a total of $2,156
under the $10 million common stock repurchase program initiated in February
2006. This program expired on September 13, 2007 and was replaced
with a new common stock repurchase program.
The new
share repurchase program will be in effect for a period of one year beginning on
September 13, 2007, and the amount approved for purchase, from this date until
the expiration of the program, will be $25 million worth of shares to be
purchased in the open market from time to time in accordance with applicable
laws and market regulations. During the quarter ended September 30,
2007, the Company repurchased approximately 98,000 shares at an average cost of
$10.27 per share for a total of $1,000.
The total
of all share repurchases was approximately 309,000 shares for
$3,156.
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 year ended
December 31, 2006 under Item 1.A. “Risk Factors”. There have been no
material changes to these risk factors since December 31, 2006.
Results
of Operations
Three
Months Ended September 30, 2007 Compared to the Three Months Ended September 30,
2006.
OVERALL
RESULTS
(In
Thousands of Dollars)
|
Consolidated
NN, Inc.
|
|
2007
As
restated
|
2006
|
Change
As
restated
|
Net
sales
|
$ 99,021
|
$
74,870
|
$ 24,151
|
Cost
of products sold (exclusive of depreciation
and
amortization shown separately below)
|
80,264
|
58,693
|
21,571
|
Selling,
general, and administrative
|
8,423
|
7,178
|
1,245
|
Depreciation
and amortization
|
5,771
|
4,192
|
1,579
|
Restructuring
and impairment charges
|
1,362
|
--
|
1,362
|
Interest
expense, net
|
1,496
|
916
|
580
|
Gain
on disposal of assets
|
(11)
|
--
|
(11)
|
Other
income, net
|
|
|
|
Income
(loss) before provision for income taxes
|
1,870
|
4,441
|
(2,571)
|
Provision
for income taxes
|
|
|
|
Net
income (loss)
|
|
|
|
Net Sales. Sales
have increased due to the addition of the Precision Metal Components Segment
with the acquisition of Whirlaway on November 30, 2006 ($15.6 million), from
increases in sales volume primarily in our Metal Bearing Components Segment
($4.0 million), and due to appreciation in value of Euro denominated sales
relative to the U.S. Dollar ($3.8 million). In addition, sales have
increased due to passing through raw material inflation to customers ($1.8
million). Partially offsetting these increases are reductions from
price decreases given to several large customers in agreement with contractual
terms ($0.8 million) and unfavorable product mix to existing customers ($0.3
million).
Cost of Products Sold (exclusive of
depreciation and amortization). Cost of products sold
increased primarily due to the addition of the Precision Metal Components
Segment on November 30, 2006 ($13.7 million) and due to the increase in the
value of Euro denominated costs relative to the U.S. Dollar ($3.1
million). In addition, costs increased related to higher sales volume
in our Metal Bearing Components Segment ($3.0 million). Finally, raw
material, labor and utility inflation increased ($2.0
million). Offsetting these increases were the impacts of cost
reduction projects that reduced cost of manufacturing ($0.3
million).
Selling, General and Administrative
Expenses. The increase was primarily due to the addition of
the Precision Metal Components Segment on November 30, 2006 ($1.1
million). In addition, SG&A expense increased due to the
appreciation in the value of Euro denominated expenses relative to the U.S.
Dollar ($0.2 million).
Depreciation and
Amortization. These costs are higher primarily due to the
acquisition of the Precision Metal Components Segment ($1.0 million) and due to
the increase in the value of the Euro based depreciation and amortization
relative to the U.S. Dollar ($0.2 million).
Interest expense.
Interest expense is higher due to the additional debt assumed to acquire the
Precision Metal Components Segment on November 30, 2006 ($0.6
million).
Restructuring and Impairment
Changes. During the third quarter of 2007, we accrued $1.3 million, in
accordance with SFAS 146, for severance cost to terminate 15 employees at our
Eltmann, Germany facility and 1 employee at our Metal Bearing Components Segment
headquarters . In addition, during the third quarter of 2007 an
additional $0.1 million of non-cash impairment charges were recorded in the
Metal Bearing Components Segment.
Provision for income taxes.
The third quarter of 2007 effective tax rate of 11.7% is primarily due to
the large impairment charges for the European restructuring without any tax
benefit.
RESULTS
BY SEGMENT
METAL BEARING COMPONENTS
SEGMENT
(In
Thousands of Dollars)
|
|
Three
Months Ended September 30,
|
|
|
2007
As
restated
|
2006
|
Change
As
restated
|
|
|
|
|
|
Net
sales
|
|
$ 70,814
|
$ 62,228
|
$ 8,586
|
Segment
profit, excluding restructuring and impairment charges
|
|
3,157
|
3,563
|
(406)
|
Restructuring
and impairment charges
|
|
(1,152)
|
--
|
(1,152)
|
Income
tax impacts
|
|
|
|
|
Net
income (loss)
|
|
|
|
|
The sales
increase at the Metal Bearing Components Segment was primarily due to higher
volume with existing European customers ($4.5 million). Additionally,
the Metal Bearing Components Segment experienced the positive impacts from the
appreciation in value of Euro based sales relative to the U.S. Dollar ($3.8
million). Finally, sales increased related to passing through raw
material inflation to customers ($1.4 million). The increases in
sales were partially offset by unfavorable product mix to existing customers
($0.3 million) and due to contractual price decreases to certain large customers
($0.8 million).
The
segment profit, excluding restructuring and impairment charges, a non-GAAP
accounting measure, in the third quarter of 2007 was favorably impacted by
higher sales volumes ($0.9 million, net of tax). Euro denominated
profits were favorably impacted by the increase in the value of the Euro against
the U.S. Dollar ($0.2 million, net of tax). Partially offsetting
these positive impacts were the effects of price decreases given to certain
customers under contractual terms ($0.5 million, net of tax) and the effects of
unfavorable product and customer mix ($0.3 million, net of tax). Raw
material cost inflation was offset by price increases under contractual terms to
certain customers, resulting in little impact on segment
profit. Additionally, the third quarter of 2006 had a favorable
effect related to the value of the Slovakian Koruna that did not repeat in 2007
($0.3 million, net of tax). Finally, net operational inefficiencies
primarily related to our China and Slovakia plants not operating at capacity
negatively affected segment profit ($0.3 million).
PRECISION METAL COMPONENTS
SEGMENT
(In
Thousands of Dollars)
|
|
Three
Months Ended September 30,
|
|
|
2007
As
restated
|
2006
|
Change
As
restated
|
|
|
|
|
|
Net
sales
|
|
$
15,594
|
$ --
|
$
15,594
|
|
|
|
|
|
Net
loss
|
|
$
(633)
|
$ --
|
$
(633)
|
The
Precision Metal Components Segment was added on November 30, 2006 with the
purchase of Whirlaway. Therefore, the segment was not included
in the financial statements for the quarter ended September 30,
2006.
The third
quarter 2007 results of Whirlaway are not indicative of normalized annual
operations. Volume in the third quarter of 2007 was down against
historical sales levels due to lower demand of customers that serve the U.S.
heavy truck and heating, ventilation, and air conditioning (“HVAC”) equipment
markets. The demand in the heavy truck and HVAC markets was
abnormally low in the third quarter of 2007 due to large amounts of purchases
made in the fourth quarter of 2006 of heavy trucks and HVAC
equipment. These purchases were made ahead of required environmental
changes to these products on January 1, 2007.
PLASTIC AND RUBBER
COMPONENTS SEGMENT
(In
Thousands of Dollars)
|
|
Three
Months Ended September 30,
|
|
|
2007
|
2006
|
Change
|
|
|
|
|
|
Net
sales
|
|
$
12,613
|
$ 12,642
|
$ (29)
|
|
|
|
|
|
Net
income
|
|
$ 567
|
$ 674
|
$ (107)
|
Revenues
in the Plastic and Rubber Components Segment were flat as sales increases
related to raw material inflation pass through ($0.5 million) were offset by
lower sales volume into the automotive market ($0.5 million).
Net
income was negatively affected by the volume decreases in sales of products into
the automotive market ($0.1 million, after tax). The increases in
sales from raw material pass through were offset by raw material
inflation.
Nine
Months Ended September 30, 2007 Compared to the Nine Months Ended September 30,
2006.
OVERALL
RESULTS
(In
Thousands of Dollars)
|
Consolidated
NN, Inc.
|
|
2007
As
restated
|
2006
|
Change
As
restated
|
Net
sales
|
$314,267
|
$
244,441
|
$69,826
|
Cost
of products sold (exclusive of depreciation
and
amortization shown separately below)
|
251,274
|
189,597
|
61,677
|
Selling,
general, and administrative
|
27,406
|
21,922
|
5,484
|
Depreciation
and amortization
|
16,951
|
12,779
|
4,172
|
Restructuring
and impairment charges
|
14,698
|
--
|
14,698
|
Interest
expense, net
|
4,821
|
2,923
|
1,898
|
Gain
on disposal of assets
|
(23)
|
(726)
|
703
|
Other
income, net
|
|
|
|
Income
(loss) before provision for income taxes
|
(710)
|
18,256
|
(18,966)
|
Provision
for income taxes
|
|
|
|
Net
income (loss)
|
|
|
|
Net Sales. Sales
have increased due to the addition of the Precision Metal Components Segment
with the acquisition of Whirlaway ($50.7 million) and due to appreciation in
value of Euro denominated sales relative to the U.S. Dollar ($13.1
million). In addition, sales have increased due to the pass through
of raw material inflation to customers ($4.4 million) and due to higher volume
to existing customers at our European operations ($6.6
million). Partially offsetting these increases are reductions from
price decreases given to several large customers in agreement with contractual
terms ($3.0 million) and unfavorable product mix to existing customers ($2.0
million).
Cost of Products Sold (exclusive of
depreciation and amortization). Cost of products sold
increased primarily due to the addition of the Precision Metal Components
Segment on November 30, 2006 ($43.8 million) and due to the increase in value of
Euro denominated costs relative to the U.S. Dollar ($10.4
million). In addition, raw material, labor and utility inflation
increased ($6.8 million) and costs increased related to higher sales volume at
our European operations ($5.7 million). Offsetting these increases
were favorable mix impacts to cost of products sold ($1.1 million) and the
impact of projects focused on reducing cost of manufacturing ($3.9
million).
Selling, General and Administrative
Expenses. The SG&A expense increase was primarily due to
the addition of the Precision Metal Components Segment on November 30, 2006
($3.4 million). In addition, SG&A expense increased due to the
appreciation in the value of Euro denominated expenses relative to the U.S.
Dollar ($0.9 million). Finally, the total was higher due to
recognizing stock option expense ($0.3 million), from higher spending on
consulting and professional fees ($0.3 million), higher travel and salary cost
($0.3 million) and additional bad debt expense ($0.2 million).
Depreciation and
Amortization. These costs were higher due to the acquisition
of the Precision Metal Components Segment ($3.1 million) and due to the increase
in the value of Euro based depreciation and amortization relative to the U.S.
Dollar ($0.7 million).
Interest expense.
Interest expense was primarily higher due to the additional debt assumed to
acquire the Precision Metal Components Segment on November 30, 2006 ($1.9
million).
Gain on disposal of
assets. In 2006, we incurred a gain from the sale of excess
land at our Pinerolo, Italy facility ($1.8 million) partially offset by a loss
on disposal of excess equipment at the same facility ($1.1
million).
Restructuring and Impairment
Changes. We have begun to take steps to appropriately adjust our cost
structure and align our plant capacity in our Metal Bearing Components
Segment. This will include
restructuring
at the European operations of the Metal Bearing Components Segment as we adjust
our global precision ball manufacturing capacity to better take advantage of
favorable cost structures at our Slovakian and Chinese Metal Bearing Components
manufacturing facilities. As a result of this restructuring, certain
goodwill and fixed assets in our European operations are now considered
impaired. As a result, during the second quarter, we recorded
approximately $13.3 million ($12.6 million after-tax) of non-cash impairment
costs. These costs include the write-down of certain excess
production equipment and the impairment of goodwill to levels supported by
projected cash flows after the restructuring.
During
the third quarter of 2007, we accrued $1.3 million, in accordance with SFAS 146,
for severance cost to terminate employment of 16 employees within our Metal
Bearing Components Segment. In addition, during the third
quarter of 2007, an additional $0.1 million of non-cash impairment charges were
recorded in the Metal Bearing Components Segment.
Provision for income taxes.
The 2007 effective tax rate of negative 774% was primarily due to the
large impairment charges for the European restructuring with an unusually low 6%
effective tax rate. Factoring out the impairment impacts, the
effective tax rate would have been a more normal 39%. A
valuation reserve ($0.8 million) was placed on a loss carry forward deferred tax
asset at a location still incurring losses which increased the 2007 effective
rate 5%. The 2006 effective rate is lower than the historical effective rate due
to the favorable 19% tax rate on the gain from sale of land at our Pinerolo,
Italy facility.
RESULTS
BY SEGMENT
METAL BEARING COMPONENTS
SEGMENT
(In
Thousands of Dollars)
|
|
Nine
Months Ended September 30,
|
|
|
2007
As
restated
|
2006
|
Change
As
restated
|
|
|
|
|
|
Net
sales
|
|
$ 224,373
|
$ 203,533
|
$ 20,840
|
Segment
profit, excludingrestructuring andimpairment changes
|
|
12,901
|
13,502
|
(601)
|
Restructuring
and impairmentcharges
|
|
(14,488)
|
--
|
(14,488)
|
Income
tax impacts
|
|
|
|
|
Net
income (loss)
|
|
|
|
|
The sales
increase at the Metal Bearing Components Segment was primarily due to the
positive impacts from the rise in value of Euro based sales relative to the U.S.
Dollar ($13.1 million). Additionally, the Metal Bearing Components
Segment experienced higher volume with existing European customers ($9.7
million) and increases related to the pass through of raw material inflation to
customers ($3.2 million). These increases were partially offset by
unfavorable product mix to existing customers ($2.0 million) and due to
contractual price decreases to certain large customers ($3.1
million).
The
difference in segment profit, excluding restructuring and impairment charges, a
non-GAAP accounting measure, was primarily related to price decreases given to
certain customers under contractual terms in 2007 ($1.9 million, net of tax) and
a gain on the sale of land, net of loss on disposal of machinery, at our
Pinerolo, Italy facility in the first quarter of 2006 that did not repeat in
2007 ($0.8 million, net of tax). Raw material cost inflation was
offset by price increases under contractual terms to certain customers,
resulting in little impact on segment profit. Partially offsetting
the negative impacts stated above were cost reduction projects that offset
utility and labor inflation ($0.7 million, net of tax). Additionally,
Euro denominated profits were favorably impacted by the appreciation in the
value of the Euro against the U.S. Dollar ($0.8 million, net of tax). Finally,
the effect from higher sales volumes in Europe favorably impacted 2007 ($0.8
million, net of tax).
PRECISION METAL COMPONENTS
SEGMENT
(In
Thousands of Dollars)
|
|
Nine
Months Ended September 30,
|
|
|
2007
As
restated
|
2006
|
Change
As
restated
|
|
|
|
|
|
Net
sales
|
|
$ 50,730
|
$ --
|
$ 50,730
|
|
|
|
|
|
Net
loss
|
|
$ (1,093)
|
$ --
|
$ (1,093)
|
The
Precision Metal Components Segment was added on November 30, 2006 with the
purchase of Whirlaway. Therefore, the segment was not included
in the financial statements for the nine months ended September 30,
2006.
The nine
months ended September 30, 2007 results of Whirlaway are not indicative of
normalized annual operations. The first quarter for this segment
historically has had lower volume than average due to the purchasing patterns of
the end markets served. The second and third quarters of 2007 were
down due to abnormally low demand in customers that serve U.S. heavy truck and
HVAC equipment markets.
The
demand in the heavy truck and HVAC markets was abnormally low in the second and
third quarters of 2007 due to large amounts of purchases made in the fourth
quarter of 2006 of heavy trucks and HVAC equipment. These purchases
were made ahead of required environmental changes to these products on January
1, 2007.
PLASTIC AND RUBBER
COMPONENTS SEGMENT
(In
Thousands of Dollars)
|
|
Nine
Months Ended September 30,
|
|
|
2007
|
2006
|
Change
|
|
|
|
|
|
Net
sales
|
|
$
39,164
|
$ 40,908
|
$ (1,744)
|
|
|
|
|
|
Net
income
|
|
$ 1,686
|
$ 2,380
|
$ (694)
|
Revenues
in the Plastic and Rubber Components Segment were down due to lower sales volume
to the automotive market ($2.3 million) and lower sales to certain specialty
non-automotive customers ($0.7 million). Partially offsetting the
volume decreases were benefits from raw material inflation pass through ($1.3
million).
Net
income was negatively affected by the volume decreases in sales net of cost of
goods sold ($1.0 million, after tax). Partially offsetting the volume
impacts were cost reduction projects net of inflation ($0.3 million, after
tax). The increases in sales from raw material pass through were
offset by raw material inflation.
Liquidity
and Capital Resources
Amounts
outstanding under our $135.0 million credit facility and our $40.0 million notes
as of September 30, 2007 were $64.5 million and $40.0 million,
respectively. See Note 10 of the Notes to Consolidated Financial
Statements. We were in compliance with all covenants of our $135.0
million syndicated credit facility and our $40.0 million senior notes as of
September 30, 2007. The Company received an amendment to the $135.0
million credit facility, retroactive to June 30, 2007, that amends the
definitions of certain components of the financial covenant calculations to
exclude the negative impact of non-cash restructuring and impairment
charges.
As of
September 30, 2007, we had $70.5 million of availability under the $135.0
million five year revolving credit facility. Our borrowings under the
credit facility increased by $18.6 million related to the acquisition of
Whirlaway. In addition, our borrowings increased $6.4 million from
December 31, 2006 due to short-term cash flow needs from increased receivable
and inventory balances.
Many of
our locations use the Euro as their functional currency. In 2007, the
fluctuation of the Euro against the U.S. Dollar favorably impacted our revenue
and income and increased the value of assets and liabilities, as the average
Euro exchange rate was higher for the nine months ended September 30, 2007
compared with the nine months ended September 30, 2006 and the spot rate at
September 30, 2007 was higher than the exchange rate at December 31,
2006. As of September 30, 2007, no currency hedges were in
place. Changes in value of the U.S. Dollar and/or Euro against
foreign currencies could impair our ability to compete with international
competitors for foreign as well as domestic sales.
Working
capital, which consists principally of accounts receivable, inventories, and
accounts payable, was $55.4 million at September 30, 2007 as compared to $51.0
million at December 31, 2006. The ratio of current assets to current
liabilities increased from 1.68:1 at December 31, 2006 to 1.69:1 at September
30, 2007. The increase in working capital was due primarily to the
increase in accounts receivable balances ($8.0 million) and inventory balances
($4.3 million) due to higher sales volume in the third quarter of 2007 compared
to the fourth quarter of 2006 and appreciation of Euro denominated
balances. Partially offsetting these increases was a lower accounts
payable balance ($7.6 million).
Cash flow
provided by operations was $10.8 million during the first nine months of 2007,
compared with cash flow provided by operations of $22.8 million during the first
nine months of 2006. The decrease in cash flow provided by operations
is due to accounts receivable having increased in 2007 from higher sales volumes
in the nine months of 2007 and due to inventory having increased in 2007 from
higher sales volumes and from building a level of customer service safety stock
ahead of the European restructuring.
Total
assets and current assets increased approximately $13.0 million and $5.1
million, respectively, from the December 31, 2006 balance due to appreciation of
the Euro relative to the U.S. Dollar. Factoring out the foreign
exchange effects, accounts receivable was up due to higher sales volume in the
third quarter of 2007 than the fourth quarter of 2006 ($5.4
million). Inventories were higher ($2.7 million) due to higher sales
volumes and planned stock increases ahead of the European
Restructuring. Factoring out foreign exchange effects, property,
plant and equipment was lower due to certain fixed assets being impaired ($3.4
million) and from year to date capital spending having been lower than
depreciation ($2.7 million).
Total
liabilities and current liabilities increased approximately $5.6 million and
$3.7 million, respectively, from the December 31, 2006 balance due to
appreciation of the Euro relative to the U.S. Dollar. Factoring out
the foreign exchange effects, accounts payable was lower primarily due to the
pay-off of certain payables from year end December 31, 2006 ($10.0
million). Our debt increased to finance the growth in working
capital from year end. Finally, liabilities increased due to the
accrual of taxes on three quarter’s of income and from the adoption of FIN 48
($1.1 million).
During
the second and third quarters, we recorded approximately $14.7 million ($13.9
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 our existing cash flows from
operations or available credit lines.
During
the third quarter of 2007, we recorded additional charges related to the
European restructuring for adjustment of employment levels related to the
restructuring of European operations of approximately $1.3 million ($1.2 million
after-tax). These charges will require use of cash and will be
financed from existing cash flows from operations.
During
2007, we plan to spend approximately $19.0 million on capital expenditures of
which $11.3 million is related primarily to equipment, process upgrades, and
replacements and approximately $7.7 million is related to geographic expansion
of our manufacturing base. Of these amounts, approximately $12.8
million has been spent through September 30, 2007. We intend to
finance these activities with cash generated from operations and funds available
under the credit facilities described above. We believe that funds
generated from operations and borrowings from the credit facilities will be
sufficient to finance our working capital
needs,
projected capital expenditure requirements and dividend payments through
December 2007.
During
the quarter ended September 30, 2007, the Company repurchased approximately
211,000 shares at an approximate cost of $10.21 per share for a total of $2.1
million under the existing $10 million common stock repurchase program initiated
in February 2006. This program expired on September 13, 2007 and was
replaced with a new common stock repurchase program.
The new
share repurchase program will be in effect for a period of one year beginning on
September 13, 2007, and the amount approved for purchase, from this date until
the expiration of the program, will be $25 million worth of shares to be
purchased in the open market from time to time in accordance with applicable
laws and market regulations. During the quarter ended September 30,
2007, the Company repurchased approximately 98,000 shares at an average cost of
$10.27 per share for a total of $1.0 million.
The total
of all share repurchases was 309,000 shares for $3.1 million.
During
the third quarter of 2007, a dividend declared on August 14, 2007 totaling $1.4
million was paid on September 13, 2007.
Seasonality
and Fluctuation in Quarterly Results
Our net
sales in the Metal Bearing Components Segment historically have been of a
seasonal nature due to the fact that a significant portion of our sales are to
European customers that significantly slow production during the month of
August. With the addition of the Precision Metal Components Segment,
the seasonality of the Company should become less pronounced as sales volumes
within this segment are lower in the first and fourth quarters and higher in the
second and third quarters.
Critical
Accounting Policies
Our
significant accounting policies, including the assumptions and judgments
underlying them, are disclosed in our annual report on Form 10-K for the year
ended December 31, 2006, including those policies as discussed in Note 1 to the
annual report. These policies have been consistently applied in all
material respects and address such matters as revenue recognition, inventory
valuation, asset impairment recognition, business combination accounting and
pension and postretirement benefits. There can be no assurance that
actual results will not significantly differ from the estimates used in these
critical accounting policies. The only change during the three and
nine month periods ended September 30, 2007 was adoption of FIN 48 related to
accounting for uncertain tax positions. FIN 48 has had an immaterial
effect on the financial statements for the three and nine month periods ended
September 30, 2007.
Sales
Concentration
In
January 2007, we entered into a two-year supply agreement with Schaeffler Group
(INA) effective as of July 1, 2006 that replaced the agreement that expired on
June 30, 2006. In May 2007, a new multi-year contract was signed with
SKF with the terms being retroactively applied back to January 1, 2007 and
effective until December 31, 2009.
European
Restructuring
As
previously mentioned in our annual report on Form 10-K for the year ended
December 31, 2006, during 2006 we entered into negotiations with representatives
of the Eltmann, Germany plant employees. The negotiations seek
significant wage reductions and changes in work rules. These
negotiations are still in process as of the date of this report.
In the
third quarter of 2007, we began the process to shift production to lower cost
facilities, thereby incurring costs for the production shifts and further
restructuring at the Eltmann facility, including actions leading to downsizing
that location. In addition, in the second quarter of 2007, we
incurred non-cash impairment charges related to the decision to begin shifting
production away from Eltmann. See Note 3 of the Notes to Consolidated
Financial Statements.
Item 3.
Quantitative
and Qualitative Disclosures About Market Risk
We are
exposed to changes in financial market conditions in the normal course of our
business due to use of certain financial instruments as well as transacting in
various foreign currencies. To mitigate the exposure to these market
risks, we have established policies, procedures and internal processes governing
our management of financial market risks. We are exposed to changes
in interest rates primarily as a result of our borrowing
activities. At September 30, 2007, we had $64.5 million outstanding
under the domestic credit facilities and $40.0 million aggregate principal
amount of senior notes outstanding. See Note 10 of the Notes to
Consolidated Financial Statements. At September 30, 2007, a
one-percent increase in the interest rate charged on our outstanding borrowings
under our credit facilities, which are subject to variable interest rates, would
result in interest expense increasing annually by approximately $0.6 million.
Translation
of our operating cash flows denominated in foreign currencies is impacted by
changes in foreign exchange rates. We did not hold a position in any
foreign currency hedging instruments as of September 30, 2007.
Item
4. Controls
and Procedures
Under the
supervision and with the participation of our management, including our Chief
Executive Officer and Chief Financial Officer, the Company conducted an
evaluation of the effectiveness of the design and operation of our disclosure
controls and procedures pursuant to Rule 13a-15 and 15d-15 of the Securities
Exchange Act of 1934 (the “Exchange Act”). Based upon that
evaluation, the Chief Executive Officer and Chief Financial Officer,
concluded that our disclosure controls and procedures are not effective as of
September 30, 2007, the end of the period covered by this quarterly report on
Form 10-Q/A due to the existence of the material weakness described
below.
A
material weakness is a control deficiency, or combination of control
deficiencies, in internal control over financial reporting, such that there is a
reasonable possibility that a material misstatement of the annual or interim
financial statements will not be prevented or detected on a timely
basis. In connection with the restatement disclosed in Note 2
"Restatement of Form 10-Q filed November 9, 2007" to the Consolidated
Financial Statements included in Part I Item 1 of this Form 10-Q/A, the
following material weakness was identified in our internal control over
financial reporting as of September 30, 2007. The Company did not maintain
effective controls over the accounting for the impairment of
customer intangible assets. Specifically, the Company did not
maintain effective controls to ensure that when circumstances indicate the
carrying value of intangible assets may not be recoverable these assets are
appropriately grouped at the lowest level for which identifiable cash flows are
largely independent of the cash flows of other assets and liabilities in
accordance with generally accepted accounting principles. This control
deficiency resulted in the restatement of the interim consolidated financial
statements for the second and third quarters of 2007 affecting depreciation and
amortization expense, restructuring and impairment charges and intangible assets
and other assets. Further, this control deficiency could result in
misstatements of the aforementioned accounts that would result in a material
misstatement of the annual or interim consolidated financial statements that
would not be prevented or detected.
Remediation
of Material Weakness
Management
has determined that, as of the date of this filing on Form 10 Q/A, the material
weakness in our internal control over financial reporting with respect to
accounting for the impairment of customer intangible assets has been
remediated. Management's remediation efforts focused on applying a
correct interpretation of SFAS 144, Accounting for the Impairment or
Disposal of Long-Lived Assets, in evaluating whether the Company's
intangible assets are impaired.
Changes in Internal Control Over Financial
Reporting
There
have been no changes during this fiscal quarter in our internal control over
financial reporting or in other factors that have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.
Part
II. Other Information
Item 1. Legal Proceedings
On March
20, 2006, we, as well as numerous other parties, received correspondence from
the Environmental Protection Agency (“EPA”) requesting information regarding a
former waste recycling vendor previously used by us. The vendor has
since ceased operations and the EPA is investigating the clean up of the site or
sites used by the vendor. As of the date of this report, we do not
know whether we have any liability related to this vendor’s actions or
estimatable range for any potential liability.
On June
20, 2007, we, as well as numerous other parties, received correspondence from
the New York State Department of Environmental Conservation notifying
us that we have been named as a potentially responsible party for the potential
clean up of a former waste recycling facility. As of the date of this
report, we do not know whether we have any liability related to this vendor’s
actions or estimatable range for any potential liability.
All of
our other legal proceedings are of an ordinary and routine nature and are
incidental to our operations. Management believes that such
proceedings should not, individually or in the aggregate, have a material
adverse effect on our business or financial condition or on the results of
operations.
Item
1.A. Risk Factors
There
have not been any material changes in risk factors from those disclosed our
annual report on Form 10-K for the year ended December 31, 2006 filed on March
16, 2007.
Item 2. Unregistered
Sales of Equity Securities and Use of Proceeds
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)
including
commissions
|
(c)
Total Number
of
Shares (or
Units)
Purchased
as
Part of Publicly
Announced
Plans
or
Programs
|
(d)
Maximum
Number
(or
Approximate
Dollar
Value) of
Shares
that May
Yet
Be Purchased
Under
the Plans or
Programs
|
August
24- August 31
|
79,861
|
$10.04
|
79,861
|
$3,918,974
|
September
1-September 30
|
228,740
|
$10.29
|
228,740
|
$23,996,791
|
Item 3. Defaults
upon Senior Securities
None
Item 4. Submission
of Matters to a Vote of Security Holders
None
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.
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:
February 27, 2008
|
By:
|
/s/ Roderick
R. Baty |
|
|
|
Roderick
R. Baty |
|
|
|
Chairman,
President and
Chief Executive Officer
(Duly Authorized Officer)
|
|
|
|
|
|
Date:
February 27, 2008
|
By:
|
/s/ James
H. Dorton |
|
|
|
James
H. Dorton |
|
|
|
Chief
Financial Officer
(Principal Financial
Officer)
(Duly
Authorized Officer)
|
|
|
|
|
Date:
February 27, 2008
|
By:
|
/s/ William
C. Kelly, Jr. |
|
|
|
William
C. Kelly, Jr. |
|
|
|
Vice
President and
Chief
Administrative Officer
(Duly
Authorized Officer)
|
|
|
|
|