NN, Inc. — 2011 Form 10-K Summary
Business context and reporting period
NN, Inc. manufactures precision bearing components, plastic and rubber components, and precision metal parts for automotive and industrial markets. This Form 10-K covers the fiscal year ended December 31, 2011; quarterly figures below identify the fourth quarter, not a standalone quarterly filing.
Metal Bearing Components generated 72.7% of 2011 sales, Precision Metal Components 17.0%, and Plastic and Rubber Components 10.3%. Sales were geographically diversified, with Europe contributing the largest share. SKF alone represented 37.6% of consolidated sales.
Financial performance and liquidity
| Metric | 2011 | 2010 |
|---|---|---|
| Net sales | $424.7 million | $365.4 million |
| Operating income | $29.4 million | $16.2 million |
| Operating margin | 6.9% | 4.5% |
| Net income | $20.9 million | $6.4 million |
| Diluted EPS | $1.24 | $0.39 |
| Cash from operations | $15.0 million | $27.9 million |
| Capital expenditures | $20.3 million | $15.2 million |
Sales increased 16.2%, driven by volume, currency translation, pricing, and raw-material cost pass-through. Cost of products sold excluding depreciation was 81.9% of sales, versus 81.1% in 2010. Higher costs included inflation and $5.0 million of incremental start-up inefficiencies and costs for new Precision Metal Components programs.
Cash from operations fell despite higher earnings, principally because working capital grew with sales and production. At year-end, cash was $4.5 million; current assets were $124.0 million and current liabilities $73.0 million, for a 1.70 current ratio. Working capital was $51.0 million.
Total debt was $78.1 million, including $41.0 million drawn on the revolving facility and $37.1 million in fixed-rate notes. The $100 million revolver had $48.0 million available, subject to covenants. The company reported compliance with its covenants at year-end; actual leverage was 1.68x against a maximum 2.50x. Debt due in 2014 totals approximately $49.9 million.
Material changes and fourth-quarter results
- For full-year 2011, Metal Bearing Components sales rose to $308.9 million and segment income to $30.4 million. Precision Metal Components sales increased to $72.3 million, but the segment recorded a $3.1 million loss. Plastic and Rubber Components sales rose to $43.5 million, while segment income declined to $1.9 million.
- Fourth-quarter sales were $96.3 million, essentially flat with $96.3 million in fourth-quarter 2010. Operating income increased to $5.2 million from $4.9 million; net income rose to $4.9 million from $2.1 million; diluted EPS was $0.29 versus $0.12.
- Fourth-quarter 2011 included $0.5 million of program start-up costs, a $0.8 million foreign-exchange gain on intercompany loans, and a $0.8 million tax benefit from releasing certain European deferred-tax valuation allowances.
- Cash flow from operations declined to $15.0 million from $27.9 million, while capital spending increased to $20.3 million. The company also borrowed $20 million in seven-year notes at 4.64%, using proceeds to repay revolver debt and fund growth projects; the rate on existing $17.1 million notes due in 2014 was reduced to 5.39%.
Outlook, risks, and unusual items
Management expected 2012 capital expenditures of $15–$20 million, primarily for new or expanded business, and believed operating cash flow plus available borrowing capacity would fund capital and working-capital needs through December 2012. The filing does not provide earnings or revenue guidance.
- Key risks include cyclical automotive and industrial demand, reliance on a limited customer base, and customer concentration: the top ten customers represented approximately 76% of sales. Steel sourcing is concentrated among a small number of foreign suppliers; price pass-through may not eliminate all cost or supply risk.
- Foreign-currency exposure is significant, and no currency hedges were in place at year-end. A 1 percentage-point increase in rates on variable-rate debt would raise annual interest expense by approximately $0.4 million.
- Eltmann, a German subsidiary, entered bankruptcy in January 2011 and was deconsolidated. The company stated that any residual liabilities or contingent obligations would remain uncertain until court proceedings conclude, although management did not expect further significant financial-statement effects.
- The company accrued approximately $143,000 for its estimated share of EPA remediation costs at a former waste-recycling site. It also disclosed approximately $1.7 million of unrecognized tax benefits, interest, and penalties, with timing of any payment uncertain.
- Dividends remained suspended; none were paid in 2011 or 2010. The auditor issued an unqualified opinion and reported effective internal control over financial reporting.
Important facts for investors to verify
- Whether new Precision Metal Components programs reach expected production efficiency and improve segment profitability.
- Whether working-capital investment moderates and operating cash flow supports planned capital spending.
- Compliance with financial covenants, borrowing availability, and the ability to address the substantial 2014 debt maturity.
- Continuing sales and receivables exposure to SKF and other major customers, alongside steel supply and currency risks.
- The final outcome of Eltmann bankruptcy proceedings and any change in environmental or tax contingencies.