UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
For the
quarterly period ended September
30, 2009
OR
For the
transition period from _________ to _________
Commission
File Number 0-23486
NN,
Inc.
(Exact
name of registrant as specified in its charter)
Delaware
62-1096725
(State
or other jurisdiction
of
(I.R.S.
Employer
incorporation or
organization)
Identification Number)
2000
Waters Edge Drive
Building
C, Suite 12
Johnson
City, Tennessee 37604
(Address
of principal executive offices, including zip code)
(423)
743-9151
(Registrant’s
telephone number, including area code)
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes x No o
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such
files). Yes ¨ No ¨
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See definitions of “large accelerated filer,”
“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act. (Check one):
Large
accelerated filer o Accelerated
filer x
Non-accelerated
filer o Smaller
reporting company o
(Do not check if a smaller reporting
company)
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes o No x
As of
November 5, 2009, there were 16,267,924 shares of the registrant’s common stock,
par value $0.01 per share, outstanding.
NN,
Inc.
INDEX
| Page No. | ||
| Part I. | Financial Information | |
| Item 1. | Financial Statements: | |
| Consolidated
Statements of Operations and Comprehensive Income (Loss) for the
three
and
nine months ended September 30, 2009 and 2008 (unaudited) . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . .
|
2 | |
| Condensed
Consolidated Balance Sheets at September 30, 2009
and
December 31, 2008 (unaudited) . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . .
|
3 | |
| Consolidated
Statements of Changes in Stockholders’ Equity for the
nine
months ended September 30, 2009 (unaudited). . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
..
|
4 | |
| Consolidated
Statements of Cash Flows for the nine months ended
September
30, 2009 and 2008 (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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . | 25 |
| Item 4. | Controls and Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . | 25 |
| Part II. | Other Information | |
| Item 1. | Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . | 26 |
| Item 1A. | Risk Factors. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . | 26 |
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . | 26 |
| Item 3. | Defaults Upon Senior Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . | 26 |
| Item 4. | Submission of Matters to a Vote of Security Holders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . | 26 |
| Item 5. | Other Information. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . | 27 |
| Item 6. | Exhibits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . |
27
|
|
Signatures
|
. . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . .
|
28
|
1
PART
I. FINANCIAL INFORMATION
Item
1. Financial Statements
NN,
Inc.
Consolidated
Statements of Operations and Comprehensive Income (Loss)
(Unaudited)
|
Three
Months Ended
September
30,
|
Nine
Months Ended
September
30,
|
|
(In
Thousands of Dollars, Except Per Share Data)
|
2009
|
2008
|
2009
|
2008
|
||||||||||||
|
Net
sales
|
$ | 66,110 | $ | 104,866 | $ | 181,119 | $ | 348,647 | ||||||||
|
Cost
of products sold (exclusive of depreciation
and
amortization shown separately below)
|
58,981 | 83,784 | 169,184 | 277,526 | ||||||||||||
|
Selling,
general and administrative
|
6,465 | 9,732 | 19,779 | 29,952 | ||||||||||||
|
Depreciation
and amortization
|
5,255 | 6,234 | 15,773 | 18,884 | ||||||||||||
|
(Gain)
loss on disposal of assets
|
(13 | ) | 6 | (41 | ) | (4,153 | ) | |||||||||
|
Restructuring
and impairment costs
|
4,070 | -- | 4,742 | -- | ||||||||||||
|
Income
(loss) from operations
|
(8,648 | ) | 5,110 | (28,318 | ) | 26,438 | ||||||||||
|
Interest
expense
|
1,833 | 1,259 | 4,719 | 4,068 | ||||||||||||
|
Reduction
of unamortized debt issue cost
|
-- | -- | 604 | -- | ||||||||||||
|
Other
income, net
|
(11 | ) | (391 | ) | (135 | ) | (810 | ) | ||||||||
|
Income
(loss) before provision (benefit) for
income
taxes
|
(10,470 | ) | 4,242 | (33,506 | ) | 23,180 | ||||||||||
|
Provision
(benefit) for income taxes
|
(1,487 | ) | 1,295 | (1,532 | ) | 5,960 | ||||||||||
|
Net
income (loss)
|
(8,983 | ) | 2,947 | (31,974 | ) | 17,220 | ||||||||||
|
Other
comprehensive income (loss):
|
||||||||||||||||
|
Foreign
currency translation gain (loss)
|
3,464 | (13,657 | ) | 3,851 | (2,057 | ) | ||||||||||
|
Comprehensive
income (loss)
|
$ | (5,519 | ) | $ | (10,710 | ) | $ | (28,123 | ) | $ | 15,163 | |||||
|
Basic
income (loss) per common share:
|
$ | (0.55 | ) | $ | 0.18 | $ | (1.97 | ) | $ | 1.08 | ||||||
|
Weighted
average shares outstanding
|
16,268 | 16,222 | 16,268 | 15,924 | ||||||||||||
|
Diluted
income (loss) per common share:
|
$ | (0.55 | ) | $ | 0.18 | $ | (1.97 | ) | $ | 1.08 | ||||||
|
Weighted
average shares outstanding
|
16,268 | 16,391 | 16,268 | 15,996 | ||||||||||||
|
Cash
dividends per common share
|
$ | -- | $ | 0.08 | $ | -- | $ | 0.24 | ||||||||
The
accompanying notes are an integral part of the financial statements.
2
NN,
Inc.
Condensed
Consolidated Balance Sheets
(Unaudited)
|
September
30,
|
December
31,
|
|||||||
|
(In
Thousands of Dollars)
|
2009
|
2008
|
||||||
|
Assets
|
||||||||
|
Current
assets:
|
||||||||
|
Cash
and cash equivalents
|
$ | 11,540 | $ | 11,052 | ||||
|
Accounts
receivable, net of allowance for doubtful accounts of
$556
and $635, respectively
|
46,804 | 50,484 | ||||||
|
Inventories,
net
|
33,445 | 53,173 | ||||||
|
Income
tax receivable
|
2,950 | 2,565 | ||||||
|
Other
current assets
|
6,656 | 7,347 | ||||||
|
Total
current assets
|
101,395 | 124,621 | ||||||
|
Property,
plant and equipment, net
|
137,728 | 145,690 | ||||||
|
Goodwill,
net
|
9,478 | 8,908 | ||||||
|
Intangible
assets, net
|
1,670 | 2,098 | ||||||
|
Other
assets
|
2,429 | 2,723 | ||||||
|
Total
assets
|
$ | 252,700 | $ | 284,040 | ||||
|
Liabilities
and Stockholders’ Equity
|
||||||||
|
Current
liabilities:
|
||||||||
|
Accounts
payable
|
$ | 32,544 | $ | 39,415 | ||||
|
Accrued
salaries, wages and benefits
|
15,207 | 12,745 | ||||||
|
Current
maturities of long-term debt
|
94,034 | 6,916 | ||||||
|
Other
current liabilities
|
8,294 | 4,279 | ||||||
|
Total
current liabilities
|
150,079 | 63,355 | ||||||
|
Deferred
tax liabilities
|
4,374 | 4,939 | ||||||
|
Long-term
debt, net of current portion
|
-- | 90,172 | ||||||
|
Accrued
pension and other
|
16,341 | 15,815 | ||||||
|
Total
liabilities
|
170,794 | 174,281 | ||||||
|
Total
stockholders’ equity
|
81,906 | 109,759 | ||||||
|
Total
liabilities and stockholders’ equity
|
$ | 252,700 | $ | 284,040 | ||||
The accompanying notes are an integral
part of the financial statements.
3
NN,
Inc.
Consolidated
Statements of Changes in Stockholders’ Equity
(Unaudited)
| Common Stock | ||||||||||||||||||||
| (In Thousands of Dollars and Shares) |
Number
of
Shares
|
Par
Value
|
Additional
Paid
in
Capital
|
Retained
Earnings
|
Accumulated
Other
Comprehensive
Income
|
Total | ||||||||||||||
|
Balance,
January 1, 2009
|
16,268 | $ | 163 | $ | 49,524 | $ | 35,593 | $ | 24,479 | $ | 109,759 | |||||||||
|
Net
loss
|
-- | -- | -- | (31,974 | ) | -- | (31,974 | ) | ||||||||||||
|
Stock
option expense
|
-- | -- | 270 | -- | -- | 270 | ||||||||||||||
|
Foreign
currency translation gain
|
-- | -- | -- | -- | 3,851 | 3,851 | ||||||||||||||
|
Balance,
September 30, 2009
|
16,268 | $ | 163 | $ | 49,794 | $ | 3,619 | $ | 28,330 | $ | 81,906 | |||||||||
The
accompanying notes are an integral part of the financial statements.
4
NN,
Inc.
Consolidated
Statements of Cash Flows
(Unaudited)
|
Nine
Months Ended
|
||||||||
|
September
30,
|
||||||||
|
(In
Thousands of Dollars)
|
2009
|
2008
|
||||||
|
Operating
Activities:
|
||||||||
|
Net
income (loss)
|
$ | (31,974 | ) | $ | 17,220 | |||
|
Adjustments
to reconcile net income (loss) to net cash provided by
operating
activities:
|
||||||||
|
Depreciation
and amortization
|
15,773 | 18,884 | ||||||
|
Amortization
of debt issue costs
|
787 | 181 | ||||||
|
Reduction
of unamortized debt issue cost
|
604 | -- | ||||||
|
Gain
on disposal of property, plant and equipment
|
(41 | ) | (4,153 | ) | ||||
|
Restructuring
charges
|
3,924 | -- | ||||||
|
Deferred
income tax
|
5,289 | (970 | ) | |||||
|
Compensation
expense from issuance of restricted stock and incentive stock
options
|
270 | 891 | ||||||
|
Non-cash
interest and other expenses
|
89 | 147 | ||||||
|
Changes
in operating assets and liabilities:
|
||||||||
|
Accounts
receivable
|
4,152 | (5,675 | ) | |||||
|
Inventories
|
20,206 | (7,407 | ) | |||||
|
Accounts
payable
|
(7,686 | ) | (10,337 | ) | ||||
|
Other
assets and liabilities
|
(1,843 | ) | 3,231 | |||||
|
Net
cash provided by operating activities
|
9,550 | 12,012 | ||||||
|
Investing
Activities:
|
||||||||
|
Acquisition
of property, plant and equipment
|
(3,968 | ) | (13,776 | ) | ||||
|
Proceeds
from disposals of property, plant and equipment
|
529 | 5,780 | ||||||
|
Net
cash used by investing activities
|
(3,439 | ) | (7,996 | ) | ||||
|
Financing
Activities:
|
||||||||
|
Repayment
of short-term debt
|
(2,693 | ) | (4,876 | ) | ||||
|
Principal
payment on capital lease
|
(38 | ) | (34 | ) | ||||
|
Proceeds
from long term debt
|
-- | 4,286 | ||||||
|
Proceeds
from issuance of stock
|
-- | 3,862 | ||||||
|
Dividends
paid
|
-- | (3,848 | ) | |||||
|
Debt
issuance cost paid
|
(3,293 | ) | -- | |||||
|
Net
cash used by financing activities
|
(6,024 | ) | (610 | ) | ||||
|
Effect
of exchange rate changes on cash and cash equivalents
|
401 | (1,323 | ) | |||||
|
Net
Change in Cash and Cash Equivalents
|
488 | 2,083 | ||||||
|
Cash
and Cash Equivalents at Beginning of Period
|
11,052 | 13,029 | ||||||
|
Cash
and Cash Equivalents at End of Period
|
$ | 11,540 | $ | 15,112 | ||||
|
Supplemental
schedule of non-cash investing and financing activities:
|
||||||||
|
Reduced
note payable to customer with offsetting reduction to accounts receivable
($411 in 2009
and
$1,149 in 2008) and an increase to interest expense ($50 in 2009 and $147
in 2008)
|
$ | 361 | $ | 1,002 | ||||
The accompanying notes are an integral
part of the financial statements.
5
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. have not been
audited, except that the balance sheet at December 31, 2008 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, 2009 and 2008, the Company’s financial position at
September 30, 2009 and December 31, 2008, and the cash flows for the nine month
periods ended September 30, 2009 and 2008. These adjustments are of a
normal recurring nature and are, in the opinion of management, necessary for
fair statement of the financial position and operating results for the interim
periods. As used in this Quarterly Report on Form 10-Q, the terms
“NN”, “the Company”, “we”, “our”, or “us” mean NN, Inc. and its
subsidiaries.
Certain
information and footnote disclosures normally included in the consolidated
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted from the interim financial statements
presented in this Quarterly Report on Form 10-Q. These unaudited,
condensed and consolidated financial statements should be read in conjunction
with our audited consolidated financial statements and the notes thereto
included in our most recent annual report on Form 10-K for the year ended
December 31, 2008 which we filed with the Securities and Exchange Commission on
March 31, 2009.
The
Company has experienced a significant loss of revenue and has sustained
significant loss of income during the global economic recession that began
to impact the Company in the fourth quarter of 2008 and is continuing as of the
date of this report. As a result, the Company has sustained a
significant weakening of its financial condition. Additionally, the
Company is dependent on the continued provision of financing from its revolving
credit lenders and its fixed rate lender in order to remain
solvent. The lenders have set revised covenant levels that provide
little flexibility in the case that the Company’s projections are not met
(although at the date of this report we are in compliance with all such
covenants). Furthermore, our lenders have not yet set covenant levels
for quarters ending after March 31, 2010 and these covenants will be set at the
discretion of the lenders. There is a substantial risk that if
projections are not achieved, the lenders may not amend the credit agreements,
which would accelerate the due date of the loans, putting the Company in
default. We believe that it is unlikely that new lenders could be
found to replace the existing lenders in case of an uncured
default. In such situation, the Company would be technically
insolvent and would need to seek a recapitalization of the
Company. If such transaction could not be successfully completed, the
Company would most likely have to file for protection under bankruptcy laws in
the U.S. and other jurisdictions. Although management believes that
fundamental business prospects for the Company are positive, there can be no
assurance that the current financial projections can be met or that
recapitalization could be achieved.
The
results for the three and nine month periods ended September 30, 2009 are not
necessarily indicative of results for the year ending December 31, 2009 or any
other future periods.
Note
2. Restructuring
Charges and Other
On
November 26, 2008, we announced the closure of our precision steel ball
manufacturing facility located in Kilkenny, Ireland. The closure
affected 68 employees and was completed in 2009. During the three and
nine month period ended September 30, 2009, we recorded restructuring charges of
$119 and $662 related to site closure costs and relocation of equipment and
inventory from this location to other facilities within the Metal Bearing
Components Segment. Included within the severance and other employee
cost accrual is a receivable from the Irish government of approximately $180 to
reimburse the Company for a portion of the severance cost paid to
date.
During
the first quarter of 2009, the Hamilton, Ohio plant was closed. This
closure affected 11 employees and $130 in severance and other associated closure
costs were incurred during the first quarter of 2009. Of this amount,
$108 was for employee severance cost which was paid in the second quarter of
2009.
6
NN,
Inc.
Notes
To Consolidated Financial Statements
(In
Thousands, Except Per Share Data)
(unaudited)
During
the third quarter of 2009, we informed our employees of the Veenendaal plant of
our intention to begin a reorganization of the plant’s labor force due to the
economic downturn. As of September 30, 2009, we accrued for severance
cost of $3,924 ($2,924 after tax) which covers the elimination of 56 permanent
positions or 18% of the workforce. It is expected the majority of the
severance cost will be paid out during the fourth quarter of 2009 and first
quarter of 2010.
The
following table summarizes the 2009 activity related to the three restructuring
programs discussed above:
|
(In
Thousands of Dollars)
|
Reserve
Balance at 1/01/09
|
Charges
|
Paid
in 2009
|
Currency
Impacts
|
Reserve
Balance at 09/30/2009
|
|||||||||||||||
|
Severance
and other employee
costs
|
$ | 2,058 | $ | 4,058 | $ | (2,134 | ) | $ | (141 | ) | $ | 3,841 | ||||||||
|
Site
closure and other associated
cost
|
-- | 684 | (684 | ) | -- | -- | ||||||||||||||
|
Total
|
$ | 2,058 | $ | 4,742 | $ | (2,818 | ) | $ | (141 | ) | $ | 3,841 | ||||||||
The
Severance and other employee cost are reported within the Accrued salaries,
wages and benefits line of the Condensed Consolidated Balance
Sheets.
Note
3. Inventories
Inventories
are stated at the lower of cost or market. Cost is determined using
the first-in, first-out method.
Inventories
are comprised of the following (in thousands):
|
September
30,
|
December
31,
|
|||||||
|
2009
|
2008
|
|||||||
|
Raw
materials
|
$ | 11,194 | $ | 15,599 | ||||
|
Work
in process
|
8,074 | 10,186 | ||||||
|
Finished
goods
|
16,432 | 29,729 | ||||||
|
Less
inventory reserves
|
(2,255 | ) | (2,341 | ) | ||||
| $ | 33,445 | $ | 53,173 | |||||
Inventories
on consignment at customer locations as of September 30, 2009 and December 31,
2008 totaled $3,355 and $5,878, respectively.
The
inventory valuations above were developed using normalized production capacities
for each of our manufacturing locations. Any costs from excess
capacity or under-utilization of fixed production overheads are expensed in the
period incurred and are not included as a component of inventory
valuation.
7
NN,
Inc.
Notes
To Consolidated Financial Statements
(In
Thousands, Except Per Share Data)
(unaudited)
Note
4. Net
Income (Loss) Per Share
|
Three
months ended
September
30,
|
Nine
months ended
September
30,
|
|
(In
Thousands of Dollars, Except Per Share Data)
|
2009
|
2008
|
2009
|
2008
|
||||||||||||
|
Net
income (loss)
|
$ | (8,983 | ) | $ | 2,947 | $ | (31,974 | ) | $ | 17,220 | ||||||
|
Weighted
average basic shares outstanding
|
16,268 | 16,222 | 16,268 | 15,924 | ||||||||||||
|
Effect
of dilutive stock options
|
-- | 169 | -- | 72 | ||||||||||||
|
Weighted
average dilutive shares outstanding
|
16,268 | 16,391 | 16,268 | 15,996 | ||||||||||||
|
Basic
net income (loss) per share
|
$ | (0.55 | ) | $ | 0.18 | $ | (1.97 | ) | $ | 1.08 | ||||||
|
Diluted
net income (loss) per share
|
$ | (0.55 | ) | $ | 0.18 | $ | (1.97 | ) | $ | 1.08 | ||||||
Excluded
from the dilutive shares outstanding for the three and nine month periods ended
September 30, 2009 were 1,399 anti-dilutive options which had exercise prices
ranging from $1.30 to $12.62. Excluded from the dilutive shares
outstanding for the three and nine month periods ended September 30, 2008 were 0
and 394 anti-dilutive options which had exercise prices ranging from $11.69 to
$12.62.
Note
5. Segment
Information
The
segment information and the accounting policies of each segment are the same as
those described in the “Segment Information” note and the “Summary of
Significant Accounting Policies and Practices” note, respectively, in our annual
report on Form 10-K for the fiscal year ended December 31, 2008. We
evaluate segment performance based on segment net income or loss after income
taxes. We account for inter-segment sales and transfers at current
market prices. We did not have any significant inter-segment
transactions during the three and nine month periods ended September 30, 2009
and 2008.
|
(In
Thousands of Dollars)
|
Metal
Bearing Components Segment
|
Precision
Metal Components Segment
|
Plastic
and Rubber Components
Segment
|
Other
Reconciling Items
|
Total
|
|||||||||||||||
|
Three Months ended September 30,
2009
|
||||||||||||||||||||
|
Revenues
from external customers
|
$ | 46,681 | $ | 11,014 | $ | 8,415 | $ | -- | $ | 66,110 | ||||||||||
|
Segment
net loss
|
$ | (5,189 | ) | $ | (1,106 | ) | $ | (338 | ) | $ | (2,350 | ) | $ | (8,983 | ) | |||||
|
Nine Months ended September 30,
2009
|
||||||||||||||||||||
|
Revenues
from external customers
|
$ | 125,637 | $ | 33,811 | $ | 21,671 | $ | -- | $ | 181,119 | ||||||||||
|
Segment
net loss
|
$ | (16,657 | ) | $ | (3,464 | ) | $ | (2,367 | ) | $ | (9,486 | ) | $ | (31,974 | ) | |||||
|
Total
Assets
|
$ | 199,057 | $ | 30,490 | $ | 18,411 | $ | 4,742 | $ | 252,700 | ||||||||||
8
NN,
Inc.
Notes
To Consolidated Financial Statements
(In
Thousands, Except Per Share Data)
(unaudited)
|
(In
Thousands of Dollars)
|
Metal
Bearing Components Segment
|
Precision
Metal Components Segment
|
Plastic
and Rubber Components
Segment
|
Other
Reconciling Items
|
Total
|
|||||||||||||||
|
Three Months ended September 30,
2008
|
||||||||||||||||||||
|
Revenues
from external customers
|
$ | 80,707 | $ | 15,166 | $ | 8,993 | $ | -- | $ | 104,866 | ||||||||||
|
Segment
net income (loss)
|
$ | 5,137 | $ | (150 | ) | $ | (338 | ) | $ | (1,702 | ) | $ | 2,947 | |||||||
|
Nine Months ended September 30,
2008
|
||||||||||||||||||||
|
Revenues
from external customers
|
$ | 265,457 | $ | 51,453 | $ | 31,737 | $ | -- | $ | 348,647 | ||||||||||
|
Segment
net income (loss)
|
$ | 21,647 | $ | 776 | $ | 176 | $ | (5,379 | ) | $ | 17,220 | |||||||||
|
Total
Assets
|
$ | 244,972 | $ | 51,859 | $ | 50,592 | $ | 6,951 | $ | 354,374 | ||||||||||
Note
6. Pensions
We have a
defined benefit pension plan covering the employees at our Eltmann, Germany
facility. The plan is unfunded. There were no prior
service costs recognized in the three and nine months ended September 30, 2009
and 2008. We incurred $71 and $203 of interest cost during the three
and nine months ended September 30, 2009 and expect to contribute approximately
$280 to the Eltmann, Germany pension plan in 2009. As of September
30, 2009, approximately $206 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, 2009 and
2008:
|
Three months
ended
September
30,
|
Nine
months ended
September
30,
|
|||||||||||||||
|
(In
Thousands of Dollars)
|
2009
|
2008
|
2009
|
2008
|
||||||||||||
|
Beginning
balance
|
$ | 7,950 | $ | 9,120 | $ | 8,073 | $ | 8,551 | ||||||||
|
Amounts
accrued
|
254 | 25 | 790 | 826 | ||||||||||||
|
Payments
to employees
|
(26 | ) | (18 | ) | (366 | ) | (384 | ) | ||||||||
|
Payments
to government
managed
plan
|
(178 | ) | 141 | (578 | ) | (393 | ) | |||||||||
|
Currency
impacts
|
298 | (978 | ) | 379 | (310 | ) | ||||||||||
|
Ending
balance
|
$ | 8,298 | $ | 8,290 | $ | 8,298 | $ | 8,290 | ||||||||
Service
and Early Retirement Provisions
We have
two plans that cover our Veenendaal, The Netherlands employees. One
provides an award for employees who achieve 25 or 40 years of service and the
other is an award for employees upon retirement. These plans are both
unfunded and the benefits are based on years of service and rate of compensation
at the time the award is paid. The table below summarizes the changes
in the two plans combined during the three and nine month periods ended
September 30, 2009 and 2008.
9
NN,
Inc.
Notes
To Consolidated Financial Statements
(In
Thousands, Except Per Share Data)
(unaudited)
|
Three
months ended
September
30,
|
Nine
months ended
September
30,
|
|
(In
Thousands of Dollars)
|
2009
|
2008
|
2009
|
2008
|
||||||||||||
|
Beginning
balance
|
$ | 874 | $ | 936 | $ | 852 | $ | 897 | ||||||||
|
Service
cost
|
67 | 12 | 101 | 38 | ||||||||||||
|
Interest
cost
|
12 | 15 | 35 | 44 | ||||||||||||
|
Benefits
paid
|
(38 | ) | (22 | ) | (83 | ) | (108 | ) | ||||||||
|
Currency
impacts
|
35 | (100 | ) | 45 | (30 | ) | ||||||||||
|
Ending
balance
|
$ | 950 | $ | 841 | $ | 950 | $ | 841 | ||||||||
Note
7. New
Accounting Pronouncements
In
September 2006, the Financial Accounting Standards Board (FASB) issued
authoritative guidance (Topic 820 within the Accounting Standards Codification)
on how to measure assets and liabilities that are measured at fair
value. The authoritative guidance applies whenever another U.S. GAAP
standard requires (or permits) assets or liabilities to be measured at fair
value but does not expand the use of fair value to any new
circumstances. The adoption for non-financial assets and liabilities
was deferred until January 1, 2009. We prospectively implemented the
provisions of this authoritative guidance that pertain to non-financial assets
and liabilities on January 1, 2009 and this has had no effect on our income from
operations, cash flows, and financial condition.
In
December 2007, the FASB revised the authoritative guidance for business
combinations (Topic 805 within the Accounting Standards
Codification). The revised guidance retains the fundamental
requirement that the acquisition method of accounting be used for all business
combinations. However, the following changes are included in the
revised guidance: an acquirer will record 100% of assets and
liabilities of acquired business, including goodwill, at fair value, regardless
of the level of interest acquired; certain contingent assets and liabilities
will be recognized at fair value at the acquisition date; contingent
consideration will be recognized at fair value on the acquisition date with
changes in fair value to be recognized in earnings upon settlement;
acquisition-related transaction and restructuring costs will be expensed as
incurred; reversals of valuation allowances related to acquired deferred tax
assets and changes to acquired income tax uncertainties will be recognized in
earnings; and when making adjustments to finalize preliminary accounting,
acquirers will revise any previously issued post-acquisition financial
information in future financial statements to reflect any adjustments as if they
occurred on the acquisition date. The revised guidance applies
prospectively to business combinations for which the acquisition date is on or
after January 1, 2009. The revised guidance did not have an impact on
our consolidated financial statements as of January 1, 2009, but the nature and
magnitude of the specific effects will depend upon the nature, terms, and size
of the acquisitions, if any, consummated after January 1, 2009.
In April
2009, the FASB issued revised authoritative guidance for interim
disclosures of financial instruments under fair value (Topic 820 within the
Accounting Standards Codification) to require disclosures about fair
value of financial instruments for interim reporting periods of publicly traded
companies, as well as in annual financial statements, including summarized
financial information at interim reporting periods. This revised guidance was
effective for interim reporting periods ending after June 15,
2009. We have adopted the additional required disclosures within this
quarterly report.
In
December 2008, the FASB issued revised authoritative guidance regarding
employers’ disclosures about postretirement benefit plan assets, (Topic 715
within the Accounting Standards Codification) which is effective for fiscal
years ending after December 15, 2009. The new standard expands disclosures
for assets held by employer pension and other postretirement benefit plans. This
revised guidance will not affect the Company’s financial position or results of
operations.
On
May 28, 2009, the FASB issued authoritative guidance that requires
companies, if applicable, to recognize in their financial statements the effects
of all subsequent events that provide additional evidence about conditions that
existed at the balance sheet date (Topic 855 within the Accounting Standards
Codification). Furthermore, subsequent events related to conditions
that did not exist at the balance sheet date may need to be
disclosed. Finally, the entity is required to disclose the date
through which subsequent events have been evaluated. The
authoritative guidance was effective on a prospective basis for interim or
annual financial periods ending after June 15, 2009. The Company
adopted the provisions during the quarter ended June 30, 2009. The
Company’s evaluation of subsequent events is disclosed within Footnote 13
“Commitments and Contingencies”.
10
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 September 30, 2009 and December 31, 2008 consisted of the
following:
|
September
30,
2009
|
December
31, 2008
|
|||||||
|
Borrowings
under our $90,000 revolving credit facility bearing interest at a floating
rate equal to LIBOR (0.29% at September 30, 2009) plus an applicable
margin of 4.00%, expiring September 20, 2011.
|
$ | 65,463 | $ | 62,441 | ||||
|
Borrowings
under our $40,000 aggregate principal amount of senior notes bearing
interest at a fixed rate of 8.50% maturing on April 26,
2014. Annual principal payments of $5,714 began on April 26,
2008 and extend through the date of maturity.
|
28,571 | 34,286 | ||||||
|
Long
term note payable with customer
|
-- | 361 | ||||||
|
Total
debt
|
94,034 | 97,088 | ||||||
|
Less
current maturities of long-term debt
|
94,034 | 6,916 | ||||||
|
Long-term
debt, excluding current maturities of long-term debt
|
$ | -- | $ | 90,172 | ||||
The
Company has reclassified its long-term debt as a current liability as of June
30, 2009 primarily because certain of the financial covenants with the lenders
are not yet defined for the period ending June 30, 2010 and
thereafter. The credit agreements were amended in the first quarter
of 2009 with a revised set of financial covenants as described
below. At that time, due to the uncertainty in the economy and the
global recession, the lenders defined certain of the covenants (i.e., the
Capitalization Ratio, the Interest Coverage Ratio, and the Minimum EBITDA) for
periods ending June 30, 2010 and after, to be determined in the sole discretion
of the lenders, after consultation with the Company. Since the
covenant levels are not yet known, the Company cannot be assured that it will be
in compliance as of June 30, 2010. Additionally, the existing
covenant levels provide limited leeway for unfavorable financial
performance. Therefore, the debt will be shown as a current liability
until such time as the definitive covenant levels are determined at a level
consistent with our forecasts. We expect covenants covering the
remainder of 2010 through March 2011 to be set during the first quarter of 2010
prior to the filing of our annual report on Form 10-K.
During
the first quarter of 2009, we entered into an amended and restated $90,000
revolving credit facility maturing September, 2011, with Key Bank as
administrative agent. The amended agreement was entered into to
conform the covenants to our current outlook for the next twelve months in this
difficult economic cycle. In addition to the reduction in
availability (from $135,000 to $90,000), the interest rate will be LIBOR plus an
applicable margin of 4.00%. The financial and non-financial covenants
have been amended to relax certain financial covenants and the facility is now
secured by assets of the Company in addition to pledges of stock of certain
foreign and domestic subsidiaries and guarantees of certain
subsidiaries. Finally, the new agreement places greater restrictions
on our usage of cash flows including prohibiting share repurchases, dividends
and investments and/or acquisitions without the approval of lenders and until
such time as we meet certain earnings and financial covenant
levels. We incurred $2,718 in debt issue cost during the nine months
ended September 30, 2009 related to the amended and restated
facility. In addition, $143 in unamortized debt issuance costs from
the original facility were eliminated during the first quarter of
2009.
11
NN,
Inc.
Notes
To Consolidated Financial Statements
(In
Thousands, Except Per Share Data)
(unaudited)
Additionally,
during the first quarter of 2009, the senior note agreement was
amended. The amended agreement was entered into to conform the
covenants to our current outlook for the next twelve months in this difficult
economic cycle. The term, principal balance, and principal payment
schedule all remain the same as the original agreement. The interest
rate was increased from 4.89% to 8.50%. In addition, the financial
and non-financial covenants were amended and additional collateralization and
restrictions on usage of cash flows were added to the agreement in line with the
amended $90,000 revolving credit facility. We incurred $575 in
debt issue cost during the first quarter of 2009 related to the amended
facility. In addition, $461 in unamortized debt issuance costs from
the original facility were eliminated during the first quarter of
2009.
Effective
June 30, 2009, an amendment was added to both the revolving credit facility and
the senior note agreement to adjust the capital expenditure limit by excluding
$934 of capital projects funded by customer advances and to waive a technicality
related to a weekly reporting requirement.
In
relation to entering into the amended and restated credit agreements mentioned
above, we forecasted reduced levels of revenue and cash flow based on our recent
sales levels, current economic conditions, published economic forecasts and
input from our major customers. These forecasts were used to set new
financial and operating covenants in our amended credit facilities through March
31, 2010. However, further deterioration of market conditions and sales
levels in excess of our forecasts for revenue and cash flow could result in the
Company failing to meet these covenants, which could cause a material adverse
impact on our liquidity and financial position. After the credit
agreements were amended as discussed above, we were in compliance with all
covenants related to the amended and restated $90,000 credit facility and the
amended and restated $40,000 senior notes as of September 30,
2009. We can provide no assurances we will be in compliance with the
existing covenants for the remainder of 2009 and the first quarter of
2010. The specific covenants to which we are subject, and the
actual results achieved for the periods ended September 30, 2009 are stated
below.
(In Thousands of Dollars)
| Financial Covenants | Required Covenant Level | Actual Covenant Level |
| Funded indebtedness to capitalization ratio | Not to exceed 0.60 to 1.00 | 0.54 to 1.00 |
| Minimum EBITDA |
EBITDA shall
not be less than
$(5,614) for the
most recent
four fiscal
quarters
|
($4,687) |
| Capital expenditures |
Not to exceed
$3,500
(excluding $935 of capital
projects funded by customer
advances)
|
$3,316 |
12
NN,
Inc.
Notes
To Consolidated Financial Statements
(In
Thousands, Except Per Share Data)
(unaudited
Note
9. Goodwill
The
changes in the carrying amount of goodwill for the nine month period ended
September 30, 2009 are as follows:
Goodwill
|
(In
Thousands of Dollars)
|
Metal
Bearing Components Segment
|
|
|
Balance
as of January 1, 2009
|
$ 8,908
|
|
|
Currency
impacts
|
570
|
|
|
Balance
as of September 30, 2009
|
$ 9,478
|
|
The
goodwill balance is tested for impairment on an annual basis during the fourth
quarter and more often if circumstances require. During the three and
nine month periods ended September 30, 2009, the financial impact from the
global economic recession on the remaining reporting unit with a goodwill
balance was consistent with the forecasted results used in testing for
impairment at December 31, 2008. Thus, as of September 30, 2009,
there are no further indications of impairment. However,
depending on the severity and the longevity of the future impacts of the global
economic recession, we could have an impairment in goodwill at this reporting
unit in the future.
Note
10. Intangible
assets subject to amortization, net of amortization
|
(In
Thousands of Dollars)
|
Precision
Metal Components
Segment
|
Metal
Bearing Components Segment
|
Total
|
|||||||||
|
Balance
as of January 1, 2009
|
$ | 23 | $ | 1,175 | $ | 1,198 | ||||||
|
Amortization
|
(23 | ) | (431 | ) | (454 | ) | ||||||
|
Currency
impacts
|
-- | 26 | 26 | |||||||||
|
Balance
as of September 30, 2009
|
$ | -- | $ | 770 | $ | 770 | ||||||
Not
included in the Precision Metal Components Segment above is an intangible asset
not subject to amortization of $900 related to the value of the trade names of
Whirlaway.
Within
the Metal Bearing Components Segment, the intangible asset is a contract
intangible. This intangible asset was subject to amortization over
approximately 5 years starting in 2006 and amortization expense was to
approximate $500 for each of the five years. For the three and nine
months ended September 30, 2009, the amortization expense totaled $151 and $431,
and accumulated amortization totaled $2,016 at September 30, 2009.
Note
11. Stock
Compensation
In the
three and nine month periods ended September 30, 2009 and 2008, approximately
$72 and $270 in 2009 and $246 and $891 in 2008, respectively, of compensation
expense was recognized in selling, general and administrative expense for all
share-based awards. On March 25, 2009, the Company granted 232,000
options to non-executive directors, officers and certain other key
employees.
The fair
value of the options cannot be determined by market value, as our options are
not traded in an open market. Accordingly, a financial pricing model is utilized
to determine fair value. The Company utilizes the Black Scholes model which
relies on certain assumptions to estimate an option's fair value.
13
NN,
Inc.
Notes
To Consolidated Financial Statements
(In
Thousands, Except Per Share Data)
(unaudited
The
following table provides a reconciliation of option activity for the nine month
period ended September 30, 2009:
|
Options
|
Shares
(000)
|
Weighted-Average
Exercise Price
|
Weighted-Average
Remaining Contractual Term
|
Aggregate
Intrinsic Value ($000)
|
||||||||||||
|
Outstanding
at January 1, 2009
|
1,184 | $ | 10.76 | |||||||||||||
|
Granted
|
232 | $ | 1.30 | |||||||||||||
|
Exercised
|
-- | -- | ||||||||||||||
|
Forfeited
or expired
|
(17 | ) | $ | 5.94 | ||||||||||||
|
Outstanding
at September 30, 2009
|
1,399 | $ | 9.24 | 6.1 | $ | (6,442 | ) (1) | |||||||||
|
Exercisable
at September 30, 2009
|
1,039 | $ | 10.88 | 5.1 | $ | (6,483 | ) (1) | |||||||||
(1) The
negative intrinsic value is the amount by which the exercise price of each
individual option grant was greater than the market price of the stock at
September 30, 2009.
Note
12. Provision
for Income Taxes
During
the second quarter of 2009, based on the recent negative financial performance
of our U.S. operations during the global economic recession, we determined that
there is a likelihood the U.S. locations would be unable to generate sufficient
profits in the near future to allow realization of existing deferred tax
assets. Consequently, during the second quarter, a valuation reserve
was placed on the deferred tax assets related to the U.S. operations in the
amount of $5,478 that increased to $6,215 as of September 30,
2009. The
determination to place a valuation allowance on the tax benefits incurred by our
U.S. based operations was made based upon the fact
that second quarter and cumulative 2009 results of these entities were much more
unfavorable than originally forecasted. Given the magnitude of the
incurred and expected losses from these entities for the remainder of 2009, we
determined that it was prudent not to recognize any deferred tax benefits and
fully reserve the existing deferred tax assets at June 30, 2009. If
U.S. operations return to a level of profitability sufficient to utilize these
deferred tax assets, they will used to offset future U.S. based taxable
income. Once we determine that this is more likely than not, a
deferred tax benefit will be recognized.
For the
three and nine months ended September 30, 2009, the difference between the U.S.
federal statutory tax rate of 34% and our effective tax rate of 14% and 5%,
respectively, was mainly due to the valuation allowance placed on deferred taxes
at our U.S. locations as discussed above. In
addition, we did not recognize tax benefits at four international locations in
which we operate. As, prior to 2009, valuation allowances were placed
on the net deferred tax assets at these foreign locations. Finally,
the effective rate was impacted by non-U.S. based earnings taxed at lower
rates. The statutory and effective income tax rates in many of the
foreign countries in which we operate are lower than the U.S. federal
rate. The table below summarizes the impacts on the effective tax
rate for the three and nine month periods ended September 30, 2009.
|
(In
Thousands of Dollars)
|
Three
Months ended September 30, 2009
|
Nine
Months ended September 30, 2009
|
||||||
|
Income
tax benefit at the federal statutory rate
of 34%
|
$ | (3,560 | ) | $ | (11,392 | ) | ||
|
Applied
U.S. valuation allowance
|
737 | 6,215 | ||||||
|
Increase
in foreign valuation allowance
|
430 | 1,277 | ||||||
|
Non-U.S.
earnings taxed at lower rates
|
689 | 2,260 | ||||||
|
Other
differences
|
217 | 108 | ||||||
|
Benefit
for income taxes
|
$ | (1,487 | ) | $ | (1,532 | ) | ||
As of
September 30, 2009 and for the remainder of 2009, we will only recognize taxable
benefits from expected losses at two European locations due to valuation
allowances placed on expected tax benefits at all other foreign and U.S.
operating units. We do not foresee any significant changes to our
unrecognized tax benefits within the next twelve months.
14
NN,
Inc.
Notes
To Consolidated Financial Statements
(In
Thousands, Except Per Share Data)
(unaudited
Note
13. Commitments
and Contingencies
There has
been no change in the status of our potential liability regarding Alternate
Energy Resources, Inc., a former waste recycling vendor used by our former
Walterboro, South Carolina facility and other potential responsible
parties. As of the date hereof, we do not know the amount of our
allocated share, if any, of the cost of remediation. However, we
believe our contribution to the remediation of the site, if any, would be
approximately 1.083% or less of the volume of waste sent to the facility and we
assert that our waste was non-hazardous.
All other
legal matters are of an ordinary and routine nature and are incidental to our
operations. Management believes that such proceedings should not,
individually or in the aggregate, have a material adverse effect on our business
or financial condition or on the results of operations.
Due to
the impacts of the global economic recession and the resulting reduction in
revenue and operating losses, our Eltmann, Germany Plant may reach a
point of technical insolvency or illiquidity during the fourth quarter of 2009
or the first quarter of 2010. If this occurs, local laws could
require the subsidiary to file for bankruptcy unless the Company provides
additional support in the form of financial guarantees or additional funding of
operations. If the Eltmann Plant files for bankruptcy, the Company
could potentially lose the value of the net assets of Eltmann of approximately
$700 at September 30, 2009. The Company believes that in the event of
bankruptcy, there could be a temporary disruption of normal product flow to
customers, but that it is unlikely that such an event would have a long-term
significant impact given the current level of excess capacity within the
Company’s European plants.
We have
evaluated the existence of both recognized and unrecognized subsequent events
through the date of issuance of this report, November 5, 2009, and have deemed
no adjustments or additional disclosures are necessary.
Note
14. Property
Plant and Equipment
During
the first quarter of 2009, the land and building of the former Hamilton, Ohio
Plant of the Precision Metal Components Segment was sold for proceeds of $508,
which resulted in no gain or loss from sale.
During
the three month period ended September 30, 2008, the Veenendaal, The Netherlands
facility (part of the Metal Bearing Components Segment) disposed of excess land
with a book value of $1,610 for proceeds of $5,628 and a resulting gain of
$4,018 ($2,995 after tax).
Note
15. Fair Value of Financial
Instruments
The fair
value of the Company’s fixed rate long-term borrowings is calculated by use of a
discounted cash flow analysis factoring in current market borrowing rates for
similar types of borrowing arrangements under our credit profile. The current
market borrowing rates are Level 2 inputs under the fair value hierarchy as
defined in Topic 820 of the Accounting Standard Codification. The
carrying amounts and fair values of the Company’s long-term debt are in the
table below:
|
September
30, 2009
|
December
31, 2008
|
|||||||||||||||
|
(In
Thousands of Dollars)
|
Carrying
Amount
|
Fair
Value
|
Carrying
Amount
|
Fair
Value
|
||||||||||||
|
Variable
rate short-term debt
|
$ | 65,463 | $ | 65,463 | $ | 62,441 | $ | 62,441 | ||||||||
|
Fixed
rate short-term debt
|
$ | 28,571 | $ | 28,670 | $ | 34,647 | $ | 30,188 | ||||||||
15
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, 2008 under Item 1.A. “Risk Factors.” There have
been no material changes to these risk factors since December 31, 2008 except
for the “Potential for default on long-term debt; risk of insolvency” risk
discussed below.
Potential
for default on long-term debt; risk of insolvency
The
Company has experienced a significant loss of revenue and has sustained
significant losses of income during the global economic recession that
began to impact the Company in the fourth quarter of 2008 and is continuing as
of the date of this report. As a result, the Company has
sustained a significant weakening of its financial
condition. Additionally, the Company is dependent on the continued
provision of financing from its revolving credit lenders and its fixed rate
lender in order to remain solvent. The lenders have set revised
covenant levels that provide little flexibility in the case that the Company’s
projections are not met. Furthermore, our lenders have not yet set
covenant levels for the quarter ending June 30, 2010, and thereafter, and these
covenants will be set at the discretion of the lenders. There is a
substantial risk that if projections are not achieved, the lenders may not amend
the credit agreements, which would accelerate the due date of the loans, putting
the Company in default. We believe that it is unlikely that new
lenders could be found to replace the existing lenders in case of an uncured
default. In such situation, the Company would be technically
insolvent and would need to seek a recapitalization of the
Company. If such transaction could not be successfully completed, the
Company would most likely have to file for protection under bankruptcy laws in
the U.S. and other jurisdictions. Although management believes that
fundamental business prospects for the Company are positive, there can be no
assurance that the current financial projections can be met or that
recapitalization could be achieved.
Economic
Impacts on the three and nine month periods ended September 30,
2009
During
the three month period ended September 30, 2009, sales showed some improvement
from the dramatic reductions witnessed in the first two quarters of 2009 due to
the worldwide recession. Sales increased 13% during the third quarter
of 2009 from the second quarter of 2009, excluding the effects of exchange
rates. For the three month period ended September 30, 2009, sales
were down approximately 35% compared to the three month period ended September
30, 2008 and were approximately 17% lower than the sales in the fourth quarter
of 2008, excluding the effects of exchange rates. During the first
half of 2009, sales were down 50% from the corresponding prior year
period.
We
believe the increase in sales that occurred during the third quarter of 2009,
from sales levels experienced in the first half of 2009, was due both to
customers adopting more normalized ordering patterns and increased demand in the
end markets we serve. It is unclear what portion of the increase was
due to ordering patterns versus demand. We believe during 2009,
demand for our products has decreased more than actual demand in the end markets
we serve. We refer to this as the “de-stocking effect” and believe it is due to
reduction in overall inventory levels throughout the supply chain. In
most cases, we are several tiers down the supply chain from the ultimate
customer. Thus, we are affected by our customers’ and their
customers’ order patterns. We believe those companies that are higher
in the supply chain have reduced production and order levels to control their
inventory balances. We are not certain how long this current
de-stocking process within the supply chain will last or even if, during the
current quarter, it has begun to be replaced by more normalized ordering
patterns. Until the excess inventory in the supply chain is removed,
we believe our sales and production levels will continue to be depressed
beyond any reductions in end market demand.
The
reduction in sales volume was the main cause of the net losses of $9.0 million
and $32.0 million, respectively, during the three and nine month periods ended
September 30, 2009. In response to the sales decrease, we focused
more aggressively on reducing costs and expenses. However, a
significant portion of our cost structure cannot be reduced in the short
term. In particular, at our manufacturing locations in Western
Europe, it is very difficult to reduce employment levels in line with reductions
in sales and production volumes. In these locations, we have limited
production costs by scheduling the production facilities on rolling shutdowns
and by temporarily allowing workers to not report to work under existing
government programs. In addition to the reduction in sales
volume, the net income of the three and nine month periods ended September 30,
2009 was further impacted by a $6.2 million valuation allowance placed on, and
effectively eliminating, all U.S. based deferred tax assets and related current year tax
benefits from incurred losses. Finally, the three and nine month
periods were negatively impacted by the restructuring charge taken at out
Veenendaal Plant totaling $3.9 million ($2.9 million after tax).
16
Results
of Operations
Three
Months Ended September 30, 2009 Compared to the Three Months Ended September 30,
2008.
OVERALL
RESULTS
|
NN,
Inc.
|
||||||||||||||||
|
(In
Thousands of Dollars)
|
2009
|
2008
|
Change
|
|||||||||||||
|
Net
sales
|
$ | 66,110 | $ | 104,866 | $ | (38,756 | ) | |||||||||
|
Foreign
exchange effects
|
(1,630 | ) | ||||||||||||||
|
Volume
|
(34,631 | ) | ||||||||||||||
|
Price
|
(119 | ) | ||||||||||||||
|
Mix
|
(957 | ) | ||||||||||||||
|
Material
inflation pass-through
|
(1,419 | ) | ||||||||||||||
|
Cost of products sold
(exclusive of depreciation
and
amortization shown separately below)
|
58,981 | 83,784 | (24,803 | ) | ||||||||||||
|
Foreign
exchange effects
|
(1,539 | ) | ||||||||||||||
|
Volume
|
(20,498 | ) | ||||||||||||||
|
Cost
reduction
|
(2,694 | ) | ||||||||||||||
|
Mix
|
(165 | ) | ||||||||||||||
|
Inflation
|
93 | |||||||||||||||
|
Selling,
general, and administrative
|
6,465 | 9,732 | (3,267 | ) | ||||||||||||
|
Foreign
exchange effects
|
(148 | ) | ||||||||||||||
|
Reductions
in spending
|
(3,119 | ) | ||||||||||||||
|
Depreciation
and amortization
|
5,255 | 6,234 | (979 | ) | ||||||||||||
|
Foreign
exchange effects
|
(152 | ) | ||||||||||||||
|
Reduction
in expense
|
(827 | ) | ||||||||||||||
|
Restructuring
and impairment charges
|
4,070 | -- | 4,070 | |||||||||||||
|
Interest
expense, net
|
1,833 | 1,259 | 574 | |||||||||||||
|
(Gain)
loss on disposal of assets
|
(13 | ) | 6 | (19 | ) | |||||||||||
|
Other
income, net
|
(11 | ) | (391 | ) | 380 | |||||||||||
|
Income
(loss) before provision (benefits) for
income
taxes
|
(10,470 | ) | 4,242 | (14,712 | ) | |||||||||||
|
Provision
(benefit) for income taxes
|
(1,487 | ) | 1,295 | (2,782 | ) | |||||||||||
|
Net
(loss) income
|
$ | (8,983 | ) | $ | 2,947 | $ | (11,930 | ) | ||||||||
Net Sales. The
volume losses were due to reductions in end market demand in the markets we
serve and due to a reduction in overall inventory within the supply chain as
discussed above. In addition, sales were lower as the value of Euro
denominated sales has decreased approximately 3% relative to the U.S. Dollar
from the third quarter of 2008. Changes related to price/mix were all
normal in nature although such changes had less of an impact given the depressed
sales levels. The impact on sales from material pass through was
negative as material prices have decreased since 2008 and these are being passed
to our contractual customers.
Cost of Products Sold (exclusive of
depreciation and amortization). The majority of the decreases
were due to the same sales volume reductions mentioned above. In
addition, the aforementioned devaluation of the Euro reduced Euro based
production costs relative to the U.S. Dollar.
While
many of our production costs adjust with reductions in sales and production, a
portion of our production costs are fixed in nature or cannot be reduced without
incurring additional significant restructuring costs. Additionally,
current production levels are much lower than our capacity. Any costs
from under-utilization of capacity and fixed production costs are expensed in
the period incurred. The main driver of the fixed component of costs
was labor cost at our Western European manufacturing locations. We
actively reduced labor costs where possible considering local and national labor
rules and regulations of the countries in which we
operate. Production costs were further reduced by the effects of
planned cost reduction projects. Despite the lower sales and
production levels, we continue to achieve results from planned cost reductions
at levels consistent with management expectations.
17
Returning
to a historically normal profitability range wherein cost of products sold is
approximately 80% of sales will depend completely upon sales volumes returning
to normalized levels. The very large reductions in sales due to the
global recession has lead to cost of products sold being a higher percentage of
sales than normal. As sales increase, we will be better able to
leverage our existing fixed cost base, as discussed above, thus reducing cost of
products sold as a percentage of sales.
Selling, General and Administrative
Expenses. The majority of the reduction in selling, general
and administrative expense was from wage cost reductions. The wage
cost reductions were achieved through a combination of salary cuts ranging from
10% to 20%, elimination of bonuses opportunities for 2009 and employment
reductions. In addition, discretionary expenses were reduced company
wide.
Depreciation and
Amortization. The reduction in depreciation and amortization
was due to lower depreciation and amortization from the effects of the year end
2008 impairments and accelerated depreciation of certain intangible assets and
fixed assets and due to lower spending on capital expenditures in
2009.
Interest
expense. Interest expense was higher due to increases in the
interest rate spread charged on our LIBOR credit facility and our senior
notes. The interest rate was increased upon amending our credit
facilities on March 13, 2009. In addition, we are amortizing $0.3
million more of capitalized loan costs into interest expense each quarter
related to the amended loan facilities.
Restructuring and impairment
charges. During the three month period ended September 30,
2009, we incurred $0.1 million of restructuring cost related to the closure of
the Kilkenny Plant and $3.9 million in restructuring charges related to the
reduction in force at our Veenendaal Plant. (See Footnote 2 of the
Notes to Consolidated Financial Statements.)
Provision for income taxes.
For the three months ended September 30, 2009, the difference between the
federal statutory tax rate of 34% and our effective tax rate of 14% was mainly
due to not recognizing the tax benefits incurred at our U.S. locations and four
of our foreign locations. We have placed valuation allowances on
these deferred tax benefits as the recoverability of these tax benefits in the
near future is in question. In addition, the effective rate was
impacted by non-U.S. based earnings taxed at lower rates. The
statutory and effective income tax rates in many of the foreign countries in
which we operate are lower than the U.S. federal rate. (See Footnote 12 of the
Notes to Consolidated Financial Statements.)
RESULTS
BY SEGMENT
METAL BEARING COMPONENTS
SEGMENT
|
(In
Thousands of Dollars)
|
Three
months ended
September
30,
|
|||||||||||||||
|
2009
|
2008
|
Change
|
||||||||||||||
|
Net
sales
|
$ | 46,681 | $ | 80,707 | $ | (34,026 | ) | |||||||||
|
Foreign
exchange effects
|
(1,630 | ) | ||||||||||||||
|
Volume
|
(29,729 | ) | ||||||||||||||
|
Price
|
(185 | ) | ||||||||||||||
|
Mix
|
(1,012 | ) | ||||||||||||||
|
Material
inflation pass-through
|
(1,470 | ) | ||||||||||||||
|
Segment
net income (loss)
|
$ | (5,189 | ) | $ | 5,137 | $ | (10,326 | ) | ||||||||
18
The U.S.
and European locations of the segment experienced sales decreases of
approximately 45% compared to the third quarter of 2008. Our Asia
facility experienced a sales increase of 71% from the third quarter of 2008 due
to the internal transfer of production and customer demand in the
region. As discussed above, the segment was impacted by both lower
demand in the industries we serve as well as de-stocking throughout the supply
chain. The devaluation of the Euro relative to the U.S. Dollar of 3%
further negatively impacted sales.
The
segment net loss was impacted primarily by the large reduction in sales volume
and the related production inefficiencies and under-utilization of fixed
production costs. The impact of fixed costs and under-utilization of
production capacity is more pronounced in this segment because a large portion
of our installed capacity is in Western Europe, where it is more difficult to
reduce labor costs in line with customer demand. Partially offsetting
these negative effects were reductions in production costs from planned cost
reduction projects and reductions in salaries, bonus opportunities, travel, and
other discretionary costs. Additionally, the segment net loss
was increased in 2009 by an after-tax restructuring charge of $2.9
million related to the reduction in force at our Veenendaal Plant.
PRECISION METAL COMPONENTS
SEGMENT
|
(In
Thousands of Dollars)
|
Three
months ended
September
30,
|
|||||||||||||||
|
2009
|
2008
|
Change
|
||||||||||||||
|
Net
sales
|
$ | 11,014 | $ | 15,166 | $ | (4,152 | ) | |||||||||
|
Volume
|
$ | (4,152 | ) | |||||||||||||
|
Segment
net loss
|
$ | (1,106 | ) | $ | (150 | ) | $ | (956 | ) | |||||||
The
majority of the decrease in this segment was due to much lower U.S. automotive
and industrial market demand in the third quarter of 2009. In
addition, sales were negatively impacted by de-stocking within the supply
chain.
The
reduced sales volume and related production inefficiencies and under-utilization
of fixed production costs were the main causes of the segment loss in the third
quarter of 2009. Planned cost reduction projects, net of inflation,
and reductions in selling and administration cost partially offset the impact of
volume decreases. Additionally, the segment net loss
was increased by $0.4 million as tax benefits from losses incurred in 2009
were not recognized due to valuation allowances being placed on the related
deferred tax assets.
PLASTIC AND RUBBER
COMPONENTS SEGMENT
|
(In
Thousands of Dollars)
|
Three
months ended
September
30,
|
|||||||||||||||
|
2009
|
2008
|
Change
|
||||||||||||||
|
Net
sales
|
$ | 8,415 | $ | 8,993 | $ | (578 | ) | |||||||||
|
Volume
|
(750 | ) | ||||||||||||||
|
Price/Mix
|
172 | |||||||||||||||
|
Segment
net loss
|
$ | (338 | ) | $ | (338 | ) | $ | - - | ||||||||
The
volume reduction for this segment was also related to lower U.S. automotive and
industrial end market demand; however, for this segment the third quarter of
2008 was already impacted by the global recession. Thus, the impact
in the current quarter from the recession at this segment was not as large as at
other segments.
The
segment net loss for the third quarter of 2009 would have been lower than the
third quarter of 2008 loss if tax benefits totaling $0.1 million from losses
incurred in 2009 were recognized. The tax benefits were not
recognized due to valuation allowances placed on the deferred tax
benefits.
19
Results
of Operations
Nine
Months Ended September 30, 2009 Compared to the Nine Months Ended September 30,
2008.
OVERALL
RESULTS
|
NN,
Inc.
|
||||||||||||||||
|
(In
Thousands of Dollars)
|
2009
|
2008
|
Change
|
|||||||||||||
|
Net
sales
|
$ | 181,119 | $ | 348,647 | $ | (167,528 | ) | |||||||||
|
Foreign
exchange effects
|
(9,788 | ) | ||||||||||||||
|
Volume
|
(156,750 | ) | ||||||||||||||
|
Price
|
(19 | ) | ||||||||||||||
|
Mix
|
(323 | ) | ||||||||||||||
|
Material
inflation pass-through
|
(648 | ) | ||||||||||||||
|
Cost of products sold
(exclusive of depreciation
and
amortization shown separately below)
|
169,184 | 277,526 | (108,342 | ) | ||||||||||||
|
Foreign
exchange effects
|
(9,927 | ) | ||||||||||||||
|
Volume
|
(95,072 | ) | ||||||||||||||
|
Cost
reduction
|
(6,684 | ) | ||||||||||||||
|
Mix
|
184 | |||||||||||||||
|
Inflation
|
3,157 | |||||||||||||||
|
Selling,
general, and administrative
|
19,779 | 29,952 | (10,173 | ) | ||||||||||||
|
Foreign
exchange effects
|
(1,149 | ) | ||||||||||||||
|
Reductions
in spending
|
(9,024 | ) | ||||||||||||||
|
Depreciation
and amortization
|
15,773 | 18,884 | (3,111 | ) | ||||||||||||
|
Foreign
exchange effects
|
(1,007 | ) | ||||||||||||||
|
Reduction
in expense
|
(2,104 | ) | ||||||||||||||
|
Restructuring
and impairment charges
|
4,742 | -- | 4,742 | |||||||||||||
|
Interest
expense, net
|
4,719 | 4,068 | 651 | |||||||||||||
|
Gain
on disposal of assets
|
(41 | ) | (4,153 | ) | 4,112 | |||||||||||
|
Reduction
of unamortized debt issue cost
|
604 | -- | 604 | |||||||||||||
|
Other
income, net
|
(135 | ) | (810 | ) | 675 | |||||||||||
|
Income
(loss) before provision (benefits) for
income
taxes
|
(33,506 | ) | 23,180 | (56,686 | ) | |||||||||||
|
Provision
(benefit) for income taxes
|
(1,532 | ) | 5,960 | (7,492 | ) | |||||||||||
|
Net
(loss) income
|
$ | (31,974 | ) | $ | 17,220 | $ | (49,194 | ) | ||||||||
Net Sales. The
sales levels experienced in the third quarter of 2009 were 13% higher, excluding
foreign exchange effects, to those experienced in the first two quarters of
2009. Despite the increase over the prior two quarters,
sales were still down 45% for the nine months ended September 30, 2009
versus the nine months ended September 30, 2008. The decrease
was due to the aforementioned reduction in end market demand due to the global
recession and from de-stocking in the supply chain in which we
operate.
Cost of Products Sold (exclusive of
depreciation and amortization). The majority of the decrease
was due to the same sales volume reductions mentioned above partially offset by
planned cost reduction projects, net of inflation. The cost of
products sold as a percentage of sales was 6% lower in the third quarter of 2009
versus the first half of 2009 due to better utilization of fixed cost from
higher production levels and increased levels of savings on planned cost
reduction projects. Additionally, the operational inefficiencies
related to reducing inventory levels were more muted in the third quarter of
2009 than in the first half of 2009 as the level of inventory reduction in the
current quarter was lower.
As
discussed above, the current trend of cost of products sold equaling 93% of
sales is not expected to continue. Once sales volumes return to more
historically normal levels, we expect cost of products sold to average 80% of
sales or less.
20
Selling, General and Administrative
Expenses. The majority of the reduction was from wage cost
reductions. The wage cost reductions were achieved through a
combination of salary cuts ranging from 10% to 20%, elimination of bonus
opportunities for 2009 and headcount reductions. In addition,
discretionary expenses were reduced company wide.
Depreciation and
Amortization. The devaluation of Euro denominated costs
relative to the U.S. Dollar accounted for approximately 30% of the
decline. The remainder was due to lower depreciation and amortization
from the effects of the year end 2008 impairments and accelerated depreciation
of certain intangible assets and fixed assets and due to lower spending on
capital expenditures in 2009.
Restructuring and impairment
charges. During the nine month period ended September 30,
2009, we incurred $0.8 of restructuring cost related to the closures of the
Kilkenny Plant and the Hamilton Plant and $3.9 million in restructuring charges
related to the reduction in force at our Veenendaal Plant. (See
Footnote 2 of the Notes to Consolidated Financial Statements).
Gain on disposal of
assets: The second quarter of 2008 included a gain for sale of
excess land at our Veenendaal Plant totaling $4.0 million.
Provision for income taxes.
For the nine months ended September 30, 2009, the difference between the
federal statutory tax rate of 34% and our effective tax rate of 5% was mainly
due to not recognizing the tax benefits incurred at our U.S. locations
and four of our foreign locations. We have placed valuation
allowances on these deferred tax benefits as the recoverability of these tax
benefits in the near future is in question. In addition, the
effective rate was impacted by non-U.S. based earnings taxed at lower
rates. The statutory and effective income tax rates in many of the
foreign countries in which we operate are lower than the U.S. federal rate. (See
Footnote 12 of the Notes to Consolidated Financial Statements.)
RESULTS
BY SEGMENT
METAL BEARING COMPONENTS
SEGMENT
|
(In
Thousands of Dollars)
|
Nine
months ended
September
30,
|
|||||||||||||||
|
2009
|
2008
|
Change
|
||||||||||||||
|
Net
sales
|
$ | 125,637 | $ | 265,457 | $ | (139,820 | ) | |||||||||
|
Foreign
exchange effects
|
(9,788 | ) | ||||||||||||||
|
Volume
|
(130,615 | ) | ||||||||||||||
|
Price
|
(180 | ) | ||||||||||||||
|
Mix
|
1,347 | |||||||||||||||
|
Material
inflation pass-through
|
(584 | ) | ||||||||||||||
|
Segment
net income (loss)
|
$ | (16,657 | ) | $ | 21,647 | $ | (38,304 | ) | ||||||||
The
largest sales decrease during 2009 was in our European operations of the segment
with a 52% decrease in sales compared to 2008. The U.S. operations
experienced sales reductions averaging 45% compared to 2008 and at our Asia
operation sales increased 1% as compared to 2008. Sales were down in
part due to reduced demand in the end markets served by the segment from
the global recession. Additionally, the segment’s sales were reduced
due to de-stocking within the metal bearing supply chain. The
devaluation of the Euro relative to the U.S. Dollar of 11% further negatively
impacted sales. The reductions were partially offset by favorable
price/mix impacts from selling higher priced precision ball and roller
products.
21
The
segment net loss was impacted primarily by the large reduction in sales volume
and the related production inefficiencies and under-utilization of fixed
production costs. During the third quarter of 2009, these impacts
were not as pronounced as compared to the first half of 2009 given higher levels
of savings from planned cost reduction projects and increased production
experienced during this quarter. The negative effects from the
production inefficiencies were partially offset by reductions in salaries, bonus
opportunities, travel, and other discretionary costs. Additionally,
the segment net loss was increased during 2009 by an after tax
restructuring charge of $2.9 million related to the reduction in force at our
Veenendaal Plant.
PRECISION METAL COMPONENTS
SEGMENT
|
(In
Thousands of Dollars)
|
Nine
months ended
September
30,
|
|||||||||||||||
|
2009
|
2008
|
Change
|
||||||||||||||
|
Net
sales
|
$ | 33,811 | $ | 51,453 | $ | (17,642 | ) | |||||||||
|
Volume
|
$ | (15,776 | ) | |||||||||||||
|
Mix
|
(1,764 | ) | ||||||||||||||
|
Price
|
(102 | ) | ||||||||||||||
|
Segment
net income (loss)
|
$ | (3,464 | ) | $ | 776 | $ | (4,240 | ) | ||||||||
The
majority of the decrease was due to much lower U.S. automotive and industrial
market demand experienced during 2009. In addition, sales were
negatively impacted by de-stocking within the supply chain. Finally,
the segment sales were impacted by a greater portion of lower-priced
products.
The
reduced sales volume and related production inefficiencies and under-utilization
of fixed production costs were the main causes of the segment loss in
2009. Planned cost reduction projects, net of inflation, and
reductions in selling and administration cost partially offset the volume
impacts. Additionally, the segment net loss was increased
by $1.2 million as tax benefits from losses incurred in 2009 were not recognized
due to valuation allowances being placed on the related deferred tax
assets.
PLASTIC AND RUBBER
COMPONENTS SEGMENT
|
(In
Thousands of Dollars)
|
Nine
months ended
September
30,
|
|||||||||||||||
|
2009
|
2008
|
Change
|
||||||||||||||
|
Net
sales
|
$ | 21,671 | $ | 31,737 | $ | (10,066 | ) | |||||||||
|
Volume
|
(10,358 | ) | ||||||||||||||
|
Price/Mix
|
292 | |||||||||||||||
|
Segment
net income (loss)
|
$ | (2,367 | ) | $ | 176 | $ | (2,543 | ) | ||||||||
The
volume reduction for this segment was also related to lower U.S. automotive and
industrial end market demand and lower customer orders from supply chain
de-stocking.
Segment
net loss was negatively affected by the volume decreases and related costs
from under-utilization of fixed production cost and manufacturing
inefficiencies. Additionally, the segment net loss was increased
by $0.8 million as tax benefits from losses incurred in 2009 were not recognized
due to valuation allowances being placed on the related deferred tax
assets.
22
Changes
in Financial Condition
From
December 31, 2008 to September 30, 2009, our total assets and current assets
decreased $31.3 million and $23.2 million, respectively. The
appreciation in the value of Euro denominated account balances relative to the
U.S. Dollar caused total assets and current assets to increase approximately
$6.5 million and $2.2 million, respectively, from December 31,
2008. Factoring out the foreign exchange effects, accounts receivable
was lower by $4.6 million due to decreased sales volume in the third quarter
2009 from the fourth quarter 2008 and due to timing of certain customer
payments. The net overdue receivables have fallen from approximately
12% of total accounts receivable at December 31, 2008 to approximately 7% of
total accounts receivable at September 30, 2009 due exclusively to focused
collection activity during 2009 to maximize cash flow and
liquidity. Inventories were lower by $20.2 million from planned
reductions in inventory levels in response to the reductions in sales volumes
and to maximize cash flow and liquidity. Factoring out foreign
exchange effects, property, plant and equipment decreased $11.7 million as year
to date capital spending was lower than depreciation and a building with a net
book value of $0.5 million was disposed of in the first quarter of
2009.
From
December 31, 2008 to September 30, 2009, our total liabilities decreased $3.5
million. The appreciation in the value of Euro denominated account
balances relative to the U.S. Dollar caused total liabilities to increase
approximately $2.4 million from December 31, 2008. Factoring out the
foreign exchange effects, accounts payable was down $7.7 million due to much
lower production and purchasing levels in response to the reduction in product
demand in 2009 and due to timing of payments to certain vendors. This
reduction was partially offset by the addition of the accrual for restructuring
charges at our Veneendaal plant totaling $3.9 million.
Working
capital, which consists principally of accounts receivable and inventories
offset by accounts payable and current maturities of long-term debt, was
negative $48.7 million at September 30, 2009 as compared to a positive $61.3
million at December 31, 2008. The ratio of current assets to current
liabilities deceased from 1.97:1 at December 31, 2008 to 0.68:1 at September 30,
2009. The decrease in working capital was due primarily to
reclassifying $93.6 million of previously classified long-term debt to current
liabilities. (See Note 8 of the Notes to Consolidated Financial
Statements). Excluding the current maturities of long-term debt and
cash and cash equivalents, working capital decreased by $23.3 million due
primarily to the $4.6 million decrease in accounts receivable balances
and the $20.2 million decrease in inventory levels offset by the $7.7
million decrease in accounts payable (all discussed above).
Cash flow
provided by operations year to date was $9.6 million for 2009 compared with cash
flow provided by operations of $12.0 million for 2008. The
unfavorable variance in cash flow provided by operations was due to
the large loss incurred in 2009 from the approximately 45% reduction in sales
volume. Partially offsetting this impact was the favorable effects
from reducing net working capital in 2009 versus increasing net working capital
in 2008. The working capital reductions, as discussed above, were in
response to the approximately 45% reduction in sales volume and for the purpose
of maintaining liquidity during the global recession.
Liquidity
and Capital Resources
Amounts
outstanding under our $90.0 million credit facility and our $40.0 million senior
notes as of September 30, 2009 were $65.5 million and $28.6 million,
respectively. See Note 8 of the Notes to Consolidated Financial
Statements. Effective June 30, 2009, an amendment was added to both
the revolving credit facility and the senior note agreement to adjust the
capital expenditure limit by excluding $0.9 million of capital projects funded
by customer advances and to waive a technicality related to a weekly reporting
requirement. We were in compliance with all covenants related to the
amended and restated $90,000 credit facility and the amended and restated
$40,000 senior notes as of September 30, 2009. We can provide no
assurances we will be in compliance with the covenants for the remainder of 2009
and the first quarter of 2010. The specific covenants to which we are subject
and our actual results compared to those covenants are disclosed in Note 8 of
the Notes to Consolidated Financial Statements.
The
Company has reclassified its long-term debt as a current liability as of June
30, 2009 primarily because certain of the financial covenants with the lenders
are not yet defined for the period ending June 30, 2010 and
thereafter. The credit agreements were amended in the first quarter
of 2009 with a revised set of financial covenants as described
below. At that time, due to the uncertainty in the economy and the
global recession, the lenders defined certain of the covenants (i.e., the
Capitalization Ratio, the Interest Coverage Ratio, and the Minimum EBITDA) for
periods ending June 30, 2010 and after, to be determined in the sole discretion
of the lenders, after consultation with the Company. Since the
covenant levels are not yet known, the Company cannot be assured that it will be
in compliance as of September 30, 2010. Additionally, the existing
covenant levels provide limited leeway for unfavorable financial
performance. Therefore, the debt will be shown as a current liability
until such time as the definitive covenant levels are determined at a level
consistent with our forecast. We expect covenants covering the
remainder of 2010 through March 2011 to be set during the first quarter of 2010
prior to the filing of our annual report on Form 10-K.
23
During
the first quarter of 2009, we entered into an amended and restated $90,000
revolving credit facility maturing September 2011 with Key Bank as
administrative agent. The amended agreement was entered into to
conform the covenants to our then current outlook for the next twelve months in
this difficult economic cycle. In addition to the reduction in
availability (from $135,000 to $90,000), the interest rate will be LIBOR plus an
applicable margin of 4.00%. The financial and non-financial covenants
have been amended to relax certain financial covenants and the facility is now
secured by assets of the Company in addition to pledges of stock of certain
foreign and domestic subsidiaries and guarantees of certain domestic
subsidiaries. Finally, the new agreement places greater restrictions
on our usage of cash flows including prohibiting share repurchases, dividends
and investments and/or acquisitions without the approval of credit facility
participants and until such time as we meet certain earnings and financial
covenant levels. We incurred $2,718 in debt issue costs during the
nine months ended September 30, 2009 related to the amended and restated
facility. In addition, $143 in unamortized debt issuance costs from
the original facility were eliminated during the first quarter of
2009.
Additionally,
during the first quarter of 2009, the senior note agreement was
amended. The amended agreement was entered into to conform the
covenants to our current outlook for the next twelve months in this difficult
economic cycle. The term, principal balance, and principal payment
schedule all remain the same as the original agreement. The interest
rate was increased from 4.89% to 8.50%. In addition, the financial
and non-financial covenants were amended and additional collateralization and
restrictions on usage of cash flows were added to the agreement in line with the
amended $90,000 revolving credit facility. We incurred $575 in
debt issue cost during the first quarter of 2009 related to the amended
facility. In addition, $461 in unamortized debt issuance costs from
the original facility were eliminated during the first quarter of
2009.
In
relation to entering into the amended and restated credit agreements mentioned
above, we forecasted reduced levels of revenue and cash flow based on our recent
sales levels, current economic conditions, published economic forecasts and
input from our major customers. These forecasts were used to set new
financial and operating covenants in our amended credit facilities through March
31, 2010. However, further deterioration of market conditions and sales
levels in excess of our forecasts for revenue and cash flow could result in the
Company failing to meet these covenants which could cause a material adverse
impact on our liquidity and financial position.
Even
though we have sufficient availability to borrow under our existing credit
agreements at this time, we have experienced a significant loss of revenue and
have sustained significant losses of income during the global
economic recession that began to impact the Company in the fourth quarter
of 2008 and is continuing as of the date of this report. As a
result, we have sustained a significant weakening of our financial
condition. Additionally, we are dependent on the continued provision
of financing from our revolving credit lenders and our fixed rate lender in
order to remain solvent. The lenders have set revised covenant levels
that provide little flexibility in the case that our projections are not
met (although at the date of this report we are in compliance with all
such covenants). Furthermore, our lenders have not yet set covenant
levels for quarters ending after March 31, 2010 and these covenants will be set
at the discretion of the lenders. There is a substantial risk that if
projections are not achieved, the lenders may not amend the credit agreements,
which would accelerate the due date of the loans, putting the Company in
default. We believe that it is unlikely that new lenders could be
found to replace the existing lenders in case of an uncured
default. In such situation, the Company would be technically
insolvent and would need to seek a recapitalization of the
Company. If such transaction could not be successfully completed, the
Company would most likely have to file for protection under bankruptcy laws in