NN, Inc. — Q2 2015 Form 10-Q
Reporting period: Three and six months ended June 30, 2015. Unaudited financial statements; amounts below are in millions of dollars except per-share data. NN manufactures components across metal bearing, precision metal, and plastic and rubber businesses.
Financial results
| Metric | Q2 2015 | Q2 2014 | H1 2015 | H1 2014 |
|---|---|---|---|---|
| Net sales | $164.9 | $106.7 | $328.6 | $209.2 |
| Income from operations | $13.6 | $8.2 | $27.5 | $16.6 |
| Operating margin | 8.2% | 7.7% | 8.4% | 7.9% |
| Net income | $7.0 | $5.2 | $13.0 | $10.4 |
| Diluted EPS | $0.36 | $0.29 | $0.67 | $0.58 |
| Operating cash flow | Not reported separately for quarter | $4.3 | $5.7 |
Q2 revenue rose 55% and H1 revenue rose 57% year over year, primarily reflecting acquisitions; foreign exchange partly offset the increase. Q2 operating income improved, but net income growth was constrained by higher interest expense. H1 net income rose despite interest expense increasing to $12.0 million from $1.1 million. H1 comprehensive loss was $0.9 million, mainly reflecting a $12.2 million currency translation loss and a $1.6 million adverse change in the interest-rate hedge.
Management’s non-GAAP adjusted net income was $7.2 million for Q2 and $14.0 million for H1, versus $6.0 million and $11.6 million, respectively, in the comparable periods. These measures exclude acquisition/integration expenses and specified intercompany currency effects and are not substitutes for GAAP results.
Balance sheet, debt and cash flow
- At June 30, cash was $21.4 million, current assets $240.7 million, and current liabilities $128.7 million. Working capital was $112.0 million, versus $105.2 million at year-end 2014.
- Total debt was $359.3 million, including $331.6 million under Term Loan B and $17.0 million under the ABL revolver. A further $40.4 million was available under the ABL, net of letters of credit and subject to borrowing-base limits. Cash less reported debt was approximately negative $337.9 million.
- H1 operating cash flow was $4.3 million; investing cash outflow was $26.1 million, including $16.2 million of capital expenditures and $9.0 million for Caprock. Financing cash inflow was $6.4 million. Cash declined $15.9 million from year-end.
- The term loan requires annual principal repayment of 5% and has no financial covenants. The ABL has a springing fixed-charge coverage covenant if availability falls below $8.0 million. Management estimated a 1 percentage-point increase in rates would increase annual interest expense by about $3.3 million.
Material developments, outlook and risks
- NN acquired Caprock, a plastic-components supplier, on May 29 for approximately $9.0 million in cash. Its results were included from the acquisition date; the purchase-price allocation remained preliminary. Earlier acquisitions, especially Autocam, also materially affect year-over-year comparability.
- Euro translation reduced H1 sales by $17.6 million and net income by $1.7 million; a further $1.0 million intercompany-loan currency loss was included in other expense. No currency hedges were in place at June 30.
- On July 1, after quarter-end, NN sold 7.59 million shares at $24 each, receiving approximately $173.1 million net. It used $148.7 million to repay Term Loan B and ABL principal and interest; the remainder was held as cash. This increased the share count and reduced debt after the reporting date.
- Management expected 2015 capital expenditures of $45–$55 million, primarily for new or expanded business, and believed operating cash flow and borrowing availability would fund capital expenditure and working-capital needs through June 2016. This is a liquidity assessment, not earnings guidance. European metal-bearing sales are historically seasonal, with slower production in August.
- A Brazilian ICMS tax-credit dispute has a possible loss range of $0–$6.0 million; management considered a loss not probable, recorded no accrual, and cited indemnification rights against former Autocam shareholders.
- A $150 million forward-starting interest-rate swap is scheduled to begin December 29, 2015, fixing the rate at 7.216% through December 31, 2018. Its June 30 net fair-value position was a $2.1 million liability.
- Disclosed risks include demand and capacity utilization, customer concentration and captive production, raw-material costs, quality, acquisition integration, foreign exchange, and debt service. Management reported disclosure controls effective and no material changes to internal control over financial reporting.
Important facts for investors to verify
- How much of reported growth and segment performance is organic versus acquisition-related, and whether acquired businesses meet expected integration and synergy targets.
- Post-offering debt, cash, interest expense and share count, including the effect of the $148.7 million debt repayment and resulting dilution.
- Cash conversion and working-capital requirements, particularly receivables growth, capital spending, and the assumptions behind management’s liquidity forecast.
- Exposure to Euro movements and variable interest rates, including the swap’s future economics and the effect of any rate changes.
- Developments in the Brazilian tax matter and the practical scope and enforceability of the stated indemnification.