Business Context and Reporting Period
Company: NN, Inc.
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2010
Business Overview: NN, Inc. operates three segments: Metal Bearing Components (74% of sales), Plastic and Rubber Components (11% of sales), and Precision Metal Components (15% of sales). The company manufactures precision bearing components, seals, retainers, and engineered metal parts for automotive, industrial, and aerospace markets. Operations are global, with significant manufacturing in the U.S., Europe, and China.
Key Financial Metrics
| Metric | 2010 | 2009 | Change |
|---|---|---|---|
| Net Sales | $365.4 million | $259.4 million | +41% |
| Net Income (Loss) | $6.4 million | ($35.3 million) | Turnaround to Profit |
| Operating Income (Loss) | $16.2 million | ($31.0 million) | Improvement |
| Diluted EPS | $0.39 | ($2.17) | N/A |
| Cash Flow from Operations | $27.9 million | $14.8 million | +88% |
| Total Assets | $248.6 million | $242.7 million | +2% |
| Long-Term Debt | $67.6 million | $77.6 million | -13% |
| Working Capital | $32.1 million | $29.8 million | +8% |
Margins: Net income margin improved to 1.8% in 2010 from a loss of 13.6% in 2009. Operating margin improved to 4.5% from a loss of 12.0%.
Material Changes vs. Prior Period
- Revenue Recovery: Sales increased 45% excluding foreign exchange effects, driven by normalized customer ordering patterns and increased end-market demand following the 2009 recession-induced "de-stocking."
- Profitability: The company returned to profitability, reversing a $35.3 million net loss in 2009. This was primarily driven by volume leverage on fixed costs.
- Foreign Exchange Impact: A stronger U.S. Dollar negatively impacted reported sales by approximately $10.7 million and costs by $8.1 million.
- Restructuring: Restructuring and impairment charges decreased to $2.3 million in 2010 from $5.0 million in 2009. Key 2010 actions included ceasing operations at the Tempe Plant (Arizona) and eliminating senior management positions.
Guidance, Outlook, Risks, and Unusual Items
Unusual Items and Contingencies
- Eltmann Plant Bankruptcy: The company's German subsidiary, Eltmann Plant, filed for bankruptcy on January 20, 2011, due to insolvency. NN lost control of the subsidiary, which held approximately $8.5 million in assets and liabilities. NN expects to deconsolidate these accounts in Q1 2011 but faces uncertainty regarding remaining contingent liabilities.
- Tempe Plant Closure: Ceasing operations at the Tempe Plant resulted in $4.5 million in costs and charges in 2010.
- New Program Start-up Costs: The Precision Metal Components Segment incurred $3.0 million in operational inefficiencies and start-up costs related to ramping up two new multi-year sales programs.
Risk Factors
- Customer Concentration: Sales to SKF accounted for 38% of total net sales in 2010. The top ten customers accounted for 75% of sales.
- Debt Covenants: The company relies heavily on debt financing. It amended its credit facilities in late 2010 to adjust covenants to normalized measures. Failure to meet covenants could trigger default.
- Raw Materials: The company depends on a limited number of foreign sources for 52100 steel. Supply disruptions or price increases could impact margins.
- Currency Risk: Significant exposure to Euro fluctuations without a hedging program in place.
Outlook
Management expects funds from operations and borrowings to be sufficient to finance capital expenditures (planned at $23.0 million for 2011) and working capital needs through December 2011. The company plans to expand its credit facility from $75 million to $100 million to fund growth projects.
Investor Verification Checklist
- Eltmann Bankruptcy Outcome: Verify the final determination of the German bankruptcy court regarding the liquidation of Eltmann and any residual liabilities retained by NN.
- SKF Dependency: Assess the stability of the relationship with SKF, which represents over one-third of total revenue.
- Precision Metal Segment Performance: Monitor the profitability of the Precision Metal Components Segment, which reported a net loss of $8.9 million in 2010 despite sales growth, due to start-up costs and plant closures.
- Debt Covenant Compliance: Confirm continued compliance with the amended financial covenants (Interest Coverage Ratio and Capital Expenditure limits) under the new credit facility.
- Valuation Allowances: Review the status of the valuation allowance on U.S. deferred tax assets, which remains in place due to recent losses in U.S. operations.