NNBR

Business Context and Reporting Period

Company: NN, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 2002
Business Overview: NN, Inc. operates in three reportable segments: Domestic Ball and Roller, European operations (Euroball), and Plastics. The company manufactures precision balls, rollers, plastic injection molded products, and engineered bearing seals primarily for the bearing, automotive, and industrial markets.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Decline: Net sales decreased 6.0% ($3.0 million) primarily due to decreased demand in the Domestic Ball and Roller and Euroball segments. This was partially offset by a 35% increase in the Plastics segment driven by the full-quarter inclusion of the Delta Rubber acquisition.
• Profitability Improvement: Despite lower sales, Net Income increased 27.6% ($0.4 million). This was driven by a 14.6% reduction in depreciation and amortization due to the adoption of SFAS No. 142 (elimination of goodwill amortization) and a 48% reduction in interest expense due to lower debt levels and interest rates.
• Cost Structure: Gross margin improved to 24.7% from 24.0% due to cost savings from the closure of the Walterboro, SC facility. However, Selling, General, and Administrative (SG&A) expenses increased 12.1% due to advisory fees and strategic planning costs.
• Cash Flow: Operating cash flow decreased significantly to $1.1 million from $3.5 million, largely due to a $6.0 million increase in accounts receivable.

Guidance, Outlook, and Risks

• Accounting Changes: The company adopted SFAS No. 142 effective Jan 1, 2002, ceasing goodwill amortization. This resulted in an estimated $2.1 million annual savings in amortization expense.
• Capital Expenditures: Management plans to spend approximately $6.8 million on capital expenditures in 2002, with $0.9 million already spent. Funding is expected from operations and existing credit facilities.
• Debt and Liquidity: The company maintains a $25 million revolving credit facility and a $35 million term loan domestically, plus Euro-denominated facilities for Euroball. A potential "Put" option held by partners (FAG and SKF) in the Euroball joint venture could require the company to purchase their interest starting Jan 2003, potentially necessitating additional borrowing.
• Risk Factors:
  • Customer Concentration: The top 10 customers accounted for 73% of 2001 sales; SKF and FAG alone represented 54% of sales.
  • Raw Materials: Heavy reliance on foreign sources for 52100 steel exposes the company to price fluctuations and supply shortages.
  • Currency Risk: Significant foreign operations expose the company to exchange rate fluctuations, particularly regarding the Euro and the strength of the U.S. dollar.
• Legal Proceedings: The company is a defendant in a lawsuit involving a minority shareholder of its NN Arte business; management believes the claims are without merit.

Investor Verification Checklist

• Customer Concentration: Verify current sales mix to SKF and FAG to assess exposure to these two major clients.
• Accounts Receivable: Investigate the $6.0 million increase in receivables and its impact on working capital and future cash collections.
• Goodwill Impairment: Monitor the transitional goodwill impairment review required by SFAS No. 142, as the company holds $39.8 million in unamortized goodwill.
• Put Option Liability: Assess the potential financial impact of the Euroball partners exercising their put option in 2003.
• Restructuring Progress: Confirm the timeline and proceeds from the sale of the Walterboro, SC facility assets held for sale.