NN, Inc. — Q3 2014 Form 10-Q Summary
Reporting period: Three and nine months ended September 30, 2014. Unaudited results; amounts below are in millions of dollars except per-share data. NN manufactures bearing, precision metal, plastic and rubber components.
Business context and major transactions
NN completed its acquisition of Autocam on August 29, 2014, for $256.8 million in cash and $31.7 million in NN shares, and assumed debt and capital lease obligations. Autocam’s results were consolidated beginning September 1. NN also completed acquisitions of VS, RFK and Chelsea during 2014. Purchase price allocations remained preliminary, including Autocam goodwill of $77.5 million.
Financial performance
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Net sales | $125.6 | $93.0 | $334.8 | $283.1 |
| Income from operations | $2.6 | $7.8 | $19.1 | $21.4 |
| Operating margin | 2.0% | 8.4% | 5.7% | 7.5% |
| Net income (loss) | $(3.8) | $5.1 | $6.6 | $12.7 |
| Diluted earnings (loss) per share | $(0.21) | $0.29 | $0.36 | $0.74 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $1.5 | $25.7 |
Sales rose 35% in Q3 and 18% for the first nine months, largely from acquisitions and stronger automotive demand. Reported operating income and net income declined, reflecting acquisition-related costs, higher interest expense and integration effects. Management’s non-GAAP adjusted operating income was $10.6 million for Q3 and $29.0 million for nine months; adjusted net income was $6.3 million and $17.8 million, respectively. These measures exclude specified acquisition, integration, financing and other items and are not GAAP results.
Q3 acquisition-related items included $5.7 million of acquisition costs, $2.0 million of inventory fair-value step-up in cost of sales, and $3.0 million of debt-cost write-offs and make-whole interest. Management estimated the net after-tax impact of the listed Q3 nonrecurring costs at $9.2 million. For the first nine months, it estimated the net after-tax impact at $10.4 million.
For the first nine months, gross cash generation was pressured by working-capital investment: receivables used $17.8 million and inventories used $4.5 million. Investing cash outflow was $271.8 million, including $259.5 million paid for businesses and $14.8 million of capital expenditures.
Financial position, debt and liquidity
At September 30, 2014, cash was $26.9 million, current assets $246.7 million and current liabilities $127.0 million. Total assets were $713.1 million and total liabilities $532.9 million. Working capital, as defined by the company, was $119.7 million, compared with $56.3 million at year-end 2013.
Reported total debt was $355.2 million, including $24.0 million of current maturities; the balance sheet separately reported $15.7 million of long-term capital lease obligations. The new facilities included a $350 million term loan and a $100 million asset-backed revolver. No revolver borrowings were reported; available borrowing was stated as up to $50 million after letters of credit and borrowing-base limits, with an additional $15 million of foreign borrowing-base availability expected. The term loan bears interest at the greater of 1% or three-month LIBOR plus 5%, and requires annual principal payments equal to 5% of the original balance. A springing fixed-charge coverage covenant applies to the ABL if availability falls below $8 million.
Management outlook, risks and contingencies
- Management expected 2014 capital expenditures of up to $23 million, primarily for new or expanded business, and stated that operating cash flow and borrowing availability should fund capital expenditures and working-capital needs through September 2015.
- The company expected combined NN and Autocam operating cash flow to service required debt payments. No specific revenue or earnings guidance was provided.
- Management cited acquisition integration and execution, customer concentration, automotive and industrial demand, capacity utilization, raw-material costs, quality, competition, foreign exchange and debt reduction among factors that could affect results. A 1% increase in interest rates on variable-rate borrowings would increase annual interest expense by approximately $3.5 million. No currency hedges were in place.
- Ordinary legal proceedings were not expected to have a material adverse effect; recorded loss contingencies were approximately zero at September 30. The potential impact of the German subsidiary bankruptcy remained subject to the bankruptcy court, though NN did not expect further significant financial-statement effects.
- Management reported disclosure controls were effective and no material changes in internal control over financial reporting during the quarter. The filing reported no material changes to previously disclosed risk factors.
Most important facts for investors to verify
- Whether Autocam and the other acquired businesses deliver anticipated growth, synergies and integration benefits; acquisition accounting and Autocam’s preliminary purchase-price allocation were not final.
- How much of the reported earnings decline is nonrecurring: compare GAAP results with management’s adjusted measures and review the adjustments and tax treatment.
- Debt servicing capacity, floating-rate exposure, ABL borrowing-base availability and compliance with the springing covenant as working capital and cash flow develop.
- Operating cash flow and working-capital trends, particularly receivables and inventory, following the substantial acquisition-driven expansion.
- Whether the stated cash-flow and liquidity outlook through September 2015 is supported by actual performance, and the final capital-spending level.