NNBR

Business Context and Reporting Period

Company: NN, Inc.
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2001
Business Overview: NN, Inc. is an independent manufacturer of high-quality precision steel balls, rollers, plastic injection-molded components, and bearing seals. The Company operates in three segments: Domestic Ball and Roller, Euroball (a 54% owned joint venture in Europe), and Plastics (including Industrial Molding Corporation, Delta Rubber, and NN Arte). Major customers include SKF (35% of 2001 sales) and FAG (19% of 2001 sales).

Key Financial Metrics (Year Ended Dec 31, 2001)

Material Changes vs. Prior Period

• Revenue Growth: Net sales increased 36.3% to $180.2 million, driven primarily by the inclusion of a full year of Euroball sales ($46.1 million) and 10.5 months of Delta Rubber sales ($14.0 million). This growth was partially offset by slowing demand in the Domestic Ball and Roller and Plastics segments.
• Profitability Decline: Despite revenue growth, Net Income decreased 52.3% to $4.7 million. Gross margin contracted from 28.9% to 23.6% due to sales volume deterioration in core segments and increased costs.
• Restructuring Charges: The Company incurred $2.3 million in restructuring and impairment costs in 2001 (none in 2000). This included a $1.1 million impairment charge and $0.8 million in severance costs related to the closure of the Walterboro, South Carolina facility.
• Interest Expense: Interest expense more than doubled to $4.0 million, driven by debt incurred for the Delta acquisition and Euroball operations.
• Liquidity: Working capital decreased to $17.9 million from $30.0 million, and the current ratio declined from 1.89:1 to 1.47:1.

Guidance, Outlook, Risks, and Unusual Items

• Capital Expenditures: Management plans to spend approximately $6.8 million in 2002 on equipment and process upgrades, funded by operations and credit facilities.
• Unusual Items:
  • Fire Recovery: A $3.9 million net gain on involuntary conversion was recorded in 2001 related to insurance proceeds from a 2000 fire at the Erwin facility.
  • Joint Venture Sale: The Company sold its minority interest in a Chinese joint venture (Jiangsu General Ball & Roller) for a non-cash after-tax loss of $144,000.
  • Bad Debt: A major Plastics Segment customer filed for Chapter 7 bankruptcy, resulting in $1.7 million in bad debt expense.
• Key Risks:
  • Customer Concentration: The top 10 customers accounted for 73% of sales; SKF and FAG alone represented 54% of total sales.
  • Raw Materials: Dependence on imported 52100 steel exposes the Company to tariffs and currency fluctuations. New U.S. steel tariffs adopted in March 2002 are being evaluated.
  • Put Option: Partners SKF and FAG have the right to require NN, Inc. to purchase their Euroball interests starting January 2003, which may require additional borrowing.

Investor Verification Checklist

• Customer Concentration: Verify the stability of relationships with SKF and FAG, which represent over half of total revenue.
• Margin Compression: Assess the sustainability of the 23.6% gross margin given the shift in product mix and raw material costs.
• Debt Covenants: Confirm compliance with restrictive covenants in the AmSouth and Euroball credit facilities, particularly regarding leverage and dividend restrictions.
• Goodwill Impairment: Monitor the impact of SFAS No. 142 (effective 2002) on the $39.8 million in unamortized goodwill, which will no longer be amortized but tested for impairment.
• Steel Tariffs: Evaluate the potential financial impact of new U.S. steel import tariffs on the Domestic Ball and Roller segment.