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| NNBR > SEC Filings for NNBR > Form 10-Q on 10-Nov-2008 | All Recent SEC Filings |
10-Nov-2008
Quarterly Report
Risk Factors
Our risk factors are disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2007 under Item 1.A. "Risk Factors". There have been no material changes to these risk factors since December 31, 2007, except for the impact of a global recession discussed below.
The recession impacting both U.S. and Europe automotive and industrial markets could have a material adverse effect on our ability to finance our operations and implement our growth strategy.
During the last month of the three month period ended September 30, 2008, we experienced a sudden and significant reduction in customer demand in Europe driven by reductions of 20% or more in automotive end market demand. At the same time, our Plastic and Rubber Components and our Precision Metal Components Segments have continued to be negatively impacted by reductions in North American automotive demand that began in the three month period ended June 30, 2008 and worsened in the current three month period.
Also, during this same time period, the global financial markets experienced a severe credit crisis which is impacting our ability and the ability of our customers to obtain new credit.
Our company has never been affected by a recession that has impacted both of our key geographic markets of the U.S. and Europe simultaneously. Continued sudden and significant reductions in sales to our customers could materially reduce our operating results due to the profits lost on reduced sales levels plus the inability in the short term to reduce our variable and fixed cost of operations. A continued recession could have a material adverse effect on our financial condition and results of operations.
In addition, our ability to sustain our existing committed credit facilities and our ability to obtain new credit to finance our operations and growth plans could be impaired depending on our performance against established financial covenants including our level of earnings.
Results of Operations
Three Months Ended September 30, 2008 Compared to the Three Months Ended
September 30, 2007.
OVERALL RESULTS
Consolidated NN, Inc.
(In Thousands of Dollars) 2008 2007 Change
Net sales $ 104,866 $ 99,021 $ 5,845
Foreign exchange effects 5,168
Volume (2,704 )
Price 469
Mix (487 )
Material inflation pass-through 3,399
Cost of products sold (exclusive of
depreciation
and amortization shown separately
below) 83,784 80,264 3,520
Foreign exchange effects 4,220
Volume (1,134 )
Cost reduction (3,743 )
Mix 302
Inflation 3,875
Selling, general, and administrative 9,732 8,423 1,309
Foreign exchange effects 720
Increase in wage related cost 589
Depreciation and amortization 6,234 5,771 463
Foreign exchange effects 299
Additional depreciation 164
Restructuring and impairment charges -- 1,362 (1,362 )
Interest expense, net 1,259 1,496 (237 )
(Gain) loss on disposal of assets 6 (11 ) 17
Other income, net (391 ) (154 ) (237 )
Income before provision for income taxes 4,242 1,870 2,372
Provision for income taxes 1,295 1,472 (177 )
Net income $ 2,947 $ 398 $ 2,549
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Net Sales. Sales have increased year over year due to the appreciation in value of Euro denominated sales relative to the U.S. Dollar and due to sale price increases related to material inflation and general price increases. Most of the price increases were to cover raw material inflation. The remainder of the price increases were related to recovering non material inflation or related to improving profitability. Sales have decreased due to lower sales volumes to automotive customers in both the U.S. and Europe automotive markets. The lower sales values in Europe occurred primarily during the last month of the quarter
Cost of Products Sold (exclusive of depreciation and amortization). Cost of products sold increased year over year primarily due to the increase in value of Euro denominated costs relative to the U.S. Dollar and due to raw material, labor and utility cost inflation experienced during the three month period ended September 30, 2008. Offsetting these increases were favorable impacts from our Level 3 cost reduction program and other planned projects focused on reducing manufacturing cost at all locations and specifically from operating improvements at our three newest operations: Whirlaway, China, and Slovakia. Additionally, costs were lower due to decreased sales volume in U.S. and European automotive markets.
Selling, General and Administrative Expenses. The increase was primarily due to the increase in the value of Euro denominated costs relative to the U.S. Dollar. Excluding foreign exchange impacts, expenses were higher due to increased wage related cost including severance cost for a small number of employees.
Depreciation and Amortization. These costs are higher due to the increase in the value of the Euro based depreciation and amortization relative to the U.S. Dollar. Additionally, depreciation expense increased on assets placed in service at our new plants in China and Slovakia.
Interest expense. Interest expense is lower due to decreases in the base LIBOR interest rate which reduced the cost of borrowing under our variable rate credit agreement.
Restructuring and impairment charges. During the three month period ended September 30, 2007, we accrued $1.3 million for severance cost related to the Metal Bearing Components restructuring.
Provision for income taxes. The 2008 third quarter effective rate of 31% was lower than the 2007 third quarter effective rate of 79%. The tax rate of the third quarter of 2007 was impacted by the accrued severance cost of $1.4 million with only a 7% effective tax rate. The minimal tax impact was due to the valuation reserves placed on the tax benefits from the severance cost. The low effective rate for the severance cost increased the 2007 third quarter overall tax rate 37%.
RESULTS BY SEGMENT
METAL BEARING COMPONENTS SEGMENT
Three months ended
(In Thousands of Dollars) September 30,
2008 2007 Change
Net sales $ 80,707 $ 70,814 $ 9,893
Foreign exchange effects 5,168
Volume 1,037
Price 389
Mix (475 )
Material inflation pass-through 3,774
Segment net income, excluding
restructuring and impairment charges,
net of tax 5,137 3,157 1,980
Restructuring and impairment charges,
net of tax -- (1,128 ) 1,128
Segment net income $ 5,137 $ 2,029 $ 3,108
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The sales increase in the Metal Bearing Components Segment was due to the positive impacts from the rise in value of Euro based sales relative to the U.S. Dollar. Additionally, the Metal Bearing Components Segment experienced higher sales volume in North America and Asia due to new programs, market share gains, and North American industrial end market demand. Finally, sales were higher due to price increases related to passing through raw material inflation to customers and price increase related to other inflationary impacts and overall profitability.
The third quarter of 2007 segment net income included a one time unfavorable effect of $1.1 million due to severance charges that did not repeat in the third quarter of 2008. Excluding the effects of severance cost in 2007, segment net income increased due to the higher sales volume in North America and from the benefits from various cost reductions programs across all locations and improved operational results in our newest operations in China and Slovakia.
PRECISION METAL COMPONENTS SEGMENT
Three months ended
(In Thousands of Dollars) September 30,
2008 2007 Change
Net sales $ 15,166 $ 15,594 $ (428 )
Volume $ (428 )
Segment net loss $ (150 ) $ (633 ) $ 483
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Sales volume to our customers that serve the U.S. automotive market, particularly light trucks, were lower than third quarter 2007 levels.
Despite the reduced sales volume, the segment's net loss was lower due to production efficiencies resulting from cost improvement projects targeting reduction in labor and manufacturing supplies costs and from lower net interest cost.
PLASTIC AND RUBBER COMPONENTS SEGMENT
Three months ended
(In Thousands of Dollars) September 30,
2008 2007 Change
Net sales $ 8,993 $ 12,613 $ (3,620 )
Volume (3,313 )
Price/Mix (307 )
Segment net income (loss) $ (338 ) $ 567 $ (905 )
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Revenues in the Plastic and Rubber Components Segment were down from lower sales volume to customers that serve the U.S. automotive industry. The lower sales were due to a general downturn in that market. This decrease was further caused by the impact of negative price and customer mix effects.
Segment net income was negatively affected by the volume decreases in sales net of cost of goods sold. Planned cost reduction projects, net of inflation, partially offset the volume impacts.
Nine Months Ended September 30, 2008 Compared to the Nine Months Ended September 30, 2007.
OVERALL RESULTS
(In Thousands of Dollars) Consolidated NN, Inc.
2008 2007 Change
Net sales $ 348,647 $ 314,267 $ 34,380
Foreign exchange effects 22,963
Volume 7,542
Price (617 )
Mix (1,110 )
Material inflation pass-through 5,602
Cost of products sold (exclusive of
depreciation
and amortization shown separately
below) 277,526 251,274 26,252
Foreign exchange effects 19,094
Volume 7,292
Cost reduction (8,364 )
Mix 141
Inflation 8,089
Selling, general, and administrative 29,952 27,406 2,546
Foreign exchange effects 1,859
Increase in wage related cost 687
Depreciation and amortization 18,884 16,951 1,933
Foreign exchange effects 1,225
Additional depreciation 708
Restructuring and impairment charges -- 14,698 (14,698 )
Interest expense, net 4,068 4,821 (753 )
Gain on disposal of assets (4,153 ) (23 ) (4,130 )
Other income, net (810 ) (150 ) (660 )
Income (loss) before provision for
income taxes 23,180 (710 ) 23,890
Provision for income taxes 5,960 5,501 459
Net income (loss) $ 17,220 $ (6,211 ) $ 23,431
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Net Sales. Sales have increased due to the appreciation in value of Euro
denominated sales relative to the U.S. Dollar. In addition, sales were higher
due to sales volume increases primarily in our Metal Bearings Components Segment
from market share gains and strong levels of industrial end market demand
primarily in North America and in Europe to a lesser extent. Finally, sales have
increased due to price increases from passing through raw material inflation to
customers and price increases given to certain non-contractual customers
. Partially offsetting these increases were price decreases given to several
large customers in agreement with contractual terms and unfavorable product mix
to existing customers.
Cost of Products Sold (exclusive of depreciation and amortization). Cost of products sold increased due to the increase in value of Euro denominated costs relative to the U.S. Dollar and due to higher sales volumes primarily in our Metal Bearing Components Segment. In addition, raw material, labor and utility inflation experienced during the nine month period of 2008 increased from 2007 levels. Offsetting these increases were favorable impacts from our Level 3 cost reduction program and other planned projects focused on reducing manufacturing costs at all locations and from operating improvements at our three newest operations: Whirlaway, China, and Slovakia.
Selling, General and Administrative Expenses. The increase was primarily due to the increase in the value of Euro denominated costs relative to the U.S. Dollar. In addition, spending on wage related costs were higher in the third quarter of 2008 including the effects of severance related costs for certain employees.
Depreciation and Amortization. These costs are higher due to the increase in the value of the Euro based depreciation and amortization relative to the U.S. Dollar. Additionally, depreciation expense increased for assets placed in service at our new plants in China and Slovakia.
Restructuring and impairment charges. During the quarter ended June 30, 2007, we impaired certain goodwill and fixed asset balances related to the Metal Bearing Components Segment restructuring totaling $13.4 million and during the third quarter of 2007, we accrued $1.3 million of severance cost.
Interest expense. Interest expense was lower due to decreases in the base LIBOR interest rate which reduced the cost of borrowing under our variable rate credit agreement.
Gain on disposal of assets. During the three month period ended June 30, 2008, the Veenendaal, The Netherlands facility (part of the Metal Bearing Components Segment) disposed of excess land with a book value of $1.6 million for proceeds of $5.6 million and a resulting gain of $4.0 million ($3.0 million after tax).
Provision for income taxes. The nine month period ended September 30, 2008 effective rate of 26% was higher than the 2007 nine month period effective rate of negative 774%. The 2008 rate was reduced, as compared to the U.S. statutory rate, by the effect of electing to eliminate a portion of deferred tax liabilities at our Italian location under provisions of a new Italian law. This provided a $1.1 million benefit and reduced the 2008 overall tax rate 4.7 percentage points. Additionally, the gain of the sale of land, in the second quarter of 2008, was taxed at a lower rate than our traditional blended tax rate which reduced the 2008 overall tax rate 1.8 percentage points. Finally, the tax rate for the nine months ended September 30, 2008 was favorably impacted 1.5 percentage points by a reduction in certain foreign tax rates and the utilization of net operating loss carry forwards, which previously were 100% offset by valuation allowances, to offset taxable income at certain foreign locations. The tax rate of the nine months ended September 30, 2007 was impacted by the large impairment charges and severance costs with the minimal tax impact due to valuation reserves placed on the tax benefits from the impairment and severance charges and other related tax benefits which reduced the 2007 tax rate by 703 percentage points.
RESULTS BY SEGMENT
METAL BEARING COMPONENTS SEGMENT
Nine months ended
(In Thousands of Dollars) September 30,
2008 2007 Change
Net sales $ 265,457 $ 224,373 $ 41,084
Foreign exchange effects 22,964
Volume 13,831
Price (943 )
Mix (1,099 )
Material inflation pass-through 6,331
Segment net income, excluding
restructuring and impairment charges,
net of tax 21,647 12,901 8,746
Restructuring and impairment charges,
net of tax -- (14,548 ) 14,548
Segment net income (loss) $ 21,647 $ (1,647 ) $ 23,294
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The sales increase in the Metal Bearing Components Segment was due to the positive impacts from the rise in value of Euro based sales relative to the U.S. Dollar and due to higher sales volume in North America, Europe and Asia from new programs, market share gains, and strong European and North American industrial end market demand experienced prior to the last month of the current quarter. Finally, sales increased due to price increases related to passing through raw material inflation to customers and from price increases given to certain non-contractual customers. These increases were partially offset by unfavorable product and customer mix and due to contractual price decreases to certain large customers.
The 2008 segment net income was positively impacted by two non-operating one-time benefits. The first was a $3.0 million after tax gain on sale of excess land. The other was a $1.1 million tax benefit related to reducing certain deferred tax liabilities at our Italian operation under a new Italian tax law. Additionally, 2008 segment net income was favorable to 2007 segment net loss due to the $14.5 million of impairment charges, net of tax, in 2007 that did not repeat in 2008.
Factoring out the one-time non-operating benefits, segment net income increased due to the higher sales volume and from the appreciation of Euro denominated sales less Euro denominated cost. In addition, planned cost reduction initiatives at all locations, in particular at our Asia and Slovakia operations, had a positive impact, net of inflation. Offsetting these gains were the effects of price decreases given to certain customers under contractual terms and unfavorable customer and product mix impacts.
PRECISION METAL COMPONENTS SEGMENT
Nine months ended
(In Thousands of Dollars) September 30,
2008 2007 Change
Net sales $ 51,453 $ 50,730 $ 723
Volume 723
Segment net income (loss) $ 776 $ (1,093 ) $ 1,869
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The segment's net income increased due primarily to production efficiencies in labor and manufacturing supplies experienced in all three periods of 2008 through the application of our Level 3 and other cost improvement programs. In addition, the higher sales volume favorably impacted segment net income along with lower interest cost.
PLASTIC AND RUBBER COMPONENTS SEGMENT
Nine months ended
(In Thousands of Dollars) September 30,
2008 2007 Change
Net sales $ 31,737 $ 39,164 $ (7,427 )
Volume (7,011 )
Price 326
Mix (742 )
Segment net income $ 176 $ 1,686 $ (1,510 )
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Revenues in the Plastic and Rubber Components Segment were down due to lower sales volume to customers that sell products to U.S. automotive manufacturers. The lower sales were due to a general downturn in that market and due to the effects of a strike at a major U.S. automotive supplier, earlier in the year, which affected several of our customers' sales volumes. This decrease was partially offset by the impact of price increases at certain customers.
Segment net income was negatively affected by the volume decreases in sales net of cost of goods sold. Planned cost reduction projects and price increases, net of inflation, partially offset the volume impacts.
Changes in Financial Condition
From December 31, 2007 to September 30, 2008, our total assets and current assets increased $4.3 million and $12.0 million, respectively. The depreciation in the value of Euro denominated account balances relative to the U.S. Dollar caused total assets and current assets to decrease approximately $5.9 million and $3.2 million, respectively, from December 31, 2007. Factoring out the foreign exchange effects, accounts receivable was higher by $4.6 million due to increased sales volume in the third quarter of 2008 over the fourth quarter of 2007 and due to timing of certain customer payments. Inventories were higher $7.6 million due to increased production levels in the third quarter of 2008 and due to inflationary impacts of raw material. Factoring out foreign exchange effects, property, plant and equipment decreased $5.8 million as year to date capital spending has been lower than depreciation and land with a net book value of $1.6 million was disposed of in the second quarter of 2008.
From December 31, 2007 to September 30, 2008, our total liabilities and current liabilities decreased $13.0 million and $14.3 million, respectively. The depreciation in the value of Euro denominated account balances relative to the U.S. Dollar caused total liabilities and current liabilities to decrease approximately $2.0 million and $1.3 million, respectively, from December 31, 2007. Factoring out the foreign exchange effects, accounts payable was down $10.2 million due to timing of purchases from and payments to European vendors and the reduction of cash overdraft balances. In addition, current liabilities were lower due to the reduction in the current maturities of long-term debt of $5.6 million which was mostly reclassified to long- term debt.
Working capital, which consists principally of accounts receivable and
inventories offset by accounts payable, was $80.1 million at September 30, 2008
as compared to $53.8 million at December 31, 2007. The ratio of current assets
to current liabilities increased from 1.64:1 at December 31, 2007 to 2.14:1 at
September 30, 2008. The increase in working capital was due primarily to the
$4.6 million increase in accounts receivable balances, the $7.6 increase in
inventory levels and the $10.2 million decrease in accounts payable. In
addition, a $5.6 million reduction in the balance of the current portion of
long-term debt increased working capital. The majority of that reduction was
reclassified to long-term debt.
Cash flow provided by operations was $12.0 million during the first nine months of 2008 compared with cash flow provided by operations of $10.8 million during the first nine months of 2007. The increase in cash flow provided by operations is due to increased net income partially offset by higher levels of working capital.
Liquidity and Capital Resources
Amounts outstanding under our $135.0 million credit facility and our $40.0 million senior notes as of September 30, 2008 were $75.6 million and $34.3 million, respectively. See Note 8 of the Notes to Consolidated Financial Statements. We were in compliance with all covenants of our $135.0 million credit facility and our $40.0 million senior notes as of September 30, 2008. As of September 30, 2008, the Company had a maximum $59.4 million of availability under the $135.0 million revolving credit facility limited by the level of Earnings before interest, taxes, depreciation and amortization ("EBITDA") we have earned for the trailing twelve months. As of the date of this report, we have the ability to draw approximately $32.5 million of the total $59.4 million . . .
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