NNBR

Business Context and Reporting Period

Company: NN, Inc.
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2009
Business Overview: NN, Inc. operates three segments: Metal Bearing Components (71% of sales), Plastic and Rubber Components (12%), and Precision Metal Components (17%). The company manufactures precision bearing components, seals, retainers, and metal parts for automotive, industrial, and aerospace markets. Operations are global, with significant exposure to Europe (46% of sales) and North America (39%).

Key Financial Metrics

Note: Cost of products sold was 90.8% of net sales in 2009, compared to 81.1% in 2008, due to volume losses and fixed cost leverage.

Material Changes vs. Prior Period

• Revenue Decline: Net sales decreased 39% year-over-year. Excluding foreign exchange effects, sales volume dropped approximately 37% due to the global recession and supply chain de-stocking in automotive and industrial sectors.
• Profitability: The company reported a net loss of $35.3 million in 2009, doubling the 2008 loss of $17.6 million. This was driven by reduced sales volume, a $7.1 million valuation allowance on U.S. deferred tax assets, and restructuring charges.
• Restructuring: Incurred $5.0 million in restructuring and impairment charges in 2009, primarily related to the closure of the Kilkenny and Hamilton plants and a workforce reduction at the Veenendaal plant (53 positions eliminated).
• Customer Concentration: Sales to SKF accounted for 36% of total net sales in 2009. The top 10 customers represented 76% of total sales.

Guidance, Outlook, Risks, and Unusual Items

Management Commentary and Outlook

Management expects a recovery in the second half of 2009 to continue into 2010, citing normalized ordering patterns and increased end-market demand. However, the company faces significant liquidity risks. In Q1 2010, credit agreements were amended to re-establish covenants through September 2011. The revolving credit facility was reduced to $85 million, and interest rates were increased (LIBOR + 4.75%).

Key Risks and Contingencies

• Solvency Risk: The filing explicitly states that if the company fails to meet revised financial covenants, it could be in default, potentially leading to technical insolvency and bankruptcy. New lenders are unlikely to be found in the event of default.
• Plant Closures: The Tempe Plant (Precision Metal Components) was announced for closure in Q1 2010, impacting 130 employees with expected costs of $2.5 million in severance and $3.0 million in accelerated depreciation.
• Foreign Subsidiary Risk: The Eltmann Plant (Germany) faces potential technical insolvency within 12-24 months due to operating losses. The company has taken steps to subordinate intercompany obligations to mitigate this.
• Environmental: The company is a Potentially Responsible Party (PRP) for a former waste recycling facility in Augusta, Georgia. The cost allocation is currently unknown.

Unusual Items

• Dividend Suspension: Quarterly dividends were suspended in Q4 2008 and remained suspended in 2009 to preserve liquidity.
• Tax Valuation Allowance: A full valuation allowance was placed on U.S. deferred tax assets ($7.1 million) due to the uncertainty of future profitability.

Investor Verification Checklist

• Covenant Compliance: Verify the company's ability to meet the strict EBITDA and leverage covenants amended in March 2010, as failure could trigger immediate default.
• Liquidity Position: Monitor cash burn rates and the utilization of the $85 million revolving credit facility against the $58.4 million outstanding balance.
• Customer Concentration: Assess the stability of the relationship with SKF (36% of sales) and the top 10 customers (76% of sales).
• Restructuring Execution: Track the completion of the Tempe Plant closure and the associated $5.5 million in expected 2010 charges.
• European Operations: Evaluate the financial health of the Eltmann Plant and the impact of Euro fluctuations on consolidated results.