NN, Inc. — Q1 2016 Form 10-Q
Business context and period. Unaudited results cover the three months ended March 31, 2016, compared with Q1 2015. NN manufactures precision bearing components, engineered products and precision metal components through three reporting segments. The comparison is substantially affected by the 2015 acquisitions of Caprock and Precision Engineered Products (PEP), whose results were not included in Q1 2015.
Key financial results
Amounts are in millions, except per-share data.
| Metric | Q1 2016 | Q1 2015 |
|---|---|---|
| Net sales | $212.2 | $163.7 |
| Income (loss) from operations | $11.9 | $13.9 |
| Operating margin | 5.6% | 8.5% |
| Net income (loss) | $(1.3) | $6.0 |
| Diluted earnings (loss) per share | $(0.05) | $0.31 |
| Net cash from (used in) operating activities | $3.4 | $(17.4) |
| Capital expenditures | $8.0 | $8.3 |
- Sales rose $48.5 million, or about 30%. Management attributed $57.8 million of the increase to acquisitions, partially offset by foreign exchange, a plant sale, lower pricing/mix, and other changes.
- Operating income fell $2.1 million despite higher sales. Cost of products sold was $159.8 million; selling, general and administrative expense was $20.7 million; depreciation and amortization was $17.3 million. Restructuring and impairment charges were reported as $2.5 million in the statements.
- Interest expense increased to $16.4 million from $5.9 million, primarily due to the higher debt incurred in connection with acquisitions and related debt-cost amortization. The company recorded a $0.7 million income tax benefit and $1.4 million of joint-venture income.
- Cash from operations improved by $20.9 million year over year. Accounts receivable increased $20.3 million during the quarter and was a significant use of operating cash; cash and cash equivalents ended at $15.1 million.
Financial position and segments
- At March 31, 2016, total assets were $1,395.6 million, total liabilities $1,078.3 million and stockholders’ equity $317.3 million. Current assets were $295.6 million and current liabilities $141.5 million.
- Reported debt was $816.6 million, including $11.9 million of current maturities; this carrying amount is net of debt issuance costs. Separately, management stated that amounts outstanding under the term loan, notes and revolver were $840.1 million. The $100 million revolver had $79.4 million available, net of letters of credit and subject to limitations.
- Debt includes a term loan with a 4.75% LIBOR margin and $250 million of 10.25% senior notes due 2020. The company reported $32.9 million of annualized interest payments on the term loan and $25.6 million on the notes, based on quarter-end balances.
- Precision Bearing Components sales were $64.7 million versus $73.2 million, with operating income of $6.3 million versus $9.1 million. Management cited European industrial weakness, lower heavy-truck demand, delayed program launches, foreign exchange and mix.
- Autocam sales were $84.0 million versus $82.6 million, while operating income declined to $6.5 million from $7.7 million, partly due to restructuring at the Wheeling plant. Precision Engineered Products sales were $63.5 million versus $7.9 million, largely reflecting PEP; operating income was $5.4 million versus $0.2 million.
Outlook, risks and unusual items
- Management expected $40–$50 million of capital expenditures over the next 12 months, forecast positive operating cash flow and said operations and available borrowing capacity should fund debt service, capital spending and working capital needs. No earnings or revenue guidance was provided in the supplied filing text.
- The Wheeling plant closure was expected to be completed in the first half of 2016. The filing reports restructuring and impairment charges, but the amounts differ between the statement of operations ($2.5 million) and Note 14’s charge summary ($1.6 million); investors should reconcile this discrepancy.
- A Brazilian ICMS tax-credit dispute carries a possible loss range of $0–$6.0 million. Management said a loss was not probable, recorded no accrual and cited indemnification rights against former Autocam shareholders.
- Foreign-currency exposure remained material, with no currency hedges in place at quarter-end. Other stated risks include economic and industrial conditions, customer concentration, competition, capacity utilization, raw-material availability and acquisition integration.
- A $150 million interest-rate swap fixed the rate on a portion of term debt at 6.966% through December 2018. Its quarter-end net fair value was a $4.0 million liability. The filing states that $1.8 million of swap losses was expected to be reclassified from accumulated other comprehensive income to interest expense over the next 12 months, assuming no interest-rate changes.
Most important facts to verify
- Reconcile the $2.5 million restructuring and impairment expense reported in the statements with Note 14’s $1.6 million charge summary and reserve roll-forward.
- Confirm debt and interest-payment definitions: the filing reports $816.6 million of debt net of issuance costs, but $840.1 million outstanding under specified facilities.
- Assess whether operating cash flow, revolver availability and the $40–$50 million capital-spending plan are sufficient given high debt and interest costs.
- Monitor the Brazilian tax matter, the Wheeling closure and operating trends in the bearing segment, including European demand and delayed program launches.
- Separate acquisition-driven sales growth from underlying performance; the filing does not provide a directly comparable consolidated organic-growth figure.