NN, Inc. — 2013 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2013; the filing also reports fourth-quarter results. NN manufactures precision bearing components, plastic and rubber components, and engineered precision metal components through three segments. The Metal Bearing Components segment generated 69.5% of annual sales. The company’s financial statements received an unqualified audit opinion, and the auditor reported effective internal control over financial reporting.
Financial performance and position
| Metric | FY 2013 | FY 2012 |
|---|---|---|
| Net sales | $373.2 million | $370.1 million |
| Operating income / margin | $27.8 million / 7.5% | $25.1 million / 6.7% |
| Net income / diluted EPS | $17.2 million / $1.00 | $24.3 million / $1.42 |
| Cash provided by operations | $31.8 million | $37.4 million |
| Capital expenditures | $15.3 million | $17.1 million |
| Cash at year-end | $3.0 million | $19.0 million |
| Total debt, including current portion | $36.5 million | $69.5 million |
| Current ratio | 1.81 | 2.17 |
Fourth-quarter 2013 sales were $90.1 million, operating income $6.5 million, net income $4.5 million, and diluted EPS $0.25. Fourth-quarter 2012 net income of $8.2 million included a substantial tax benefit.
Changes versus prior year
- Annual sales rose 0.8%. Higher volume and favorable euro translation were partly offset by lower pricing, product mix, and lower material-cost pass-through.
- Operating income increased 11.0%; operating margin improved to 7.5% from 6.7%. Management cited cost-reduction projects and higher volume.
- Net income declined 29.2%, primarily because 2012 included a net $7.3 million favorable tax benefit from reversing deferred-tax valuation allowances. 2013 tax expense was $8.0 million, versus a $3.9 million tax benefit in 2012.
- Metal Bearing Components sales increased to $259.5 million, while segment net income decreased to $18.5 million, partly reflecting higher tax expense. Precision Metal Components sales rose to $78.8 million and segment net income fell to $5.8 million, also affected by tax comparisons. Plastic and Rubber Components sales fell to $35.0 million and segment net income to $0.4 million, reflecting lower volumes and fixed-cost absorption.
- Debt fell by approximately $33 million, funded by cash use and operating cash generation. Cash from operations declined as receivables and inventory increased with higher sales and production; year-end inventory included more consigned finished goods and stock for expected seasonal demand.
Outlook, risks, and unusual items
- Management forecast approximately $20 million in 2014 capital expenditures, mainly for new or expanded business, and said operating cash flow and available credit were expected to fund capital and working-capital needs through December 2014. No specific revenue or earnings guidance was provided.
- At year-end, $88.5 million was available under the $100 million revolving facility, subject to covenant limits. The company reported covenant compliance; actual leverage was 0.91x against a 2.75x maximum, and interest coverage was 11.42x against a 3.00x minimum.
- Customer concentration is material: SKF accounted for 36% of 2013 sales, and the ten largest customers accounted for about 78%. The business is exposed to cyclical automotive and industrial demand, European seasonality, and foreign-exchange movements; no currency hedges were in place at year-end.
- High-quality steel is sourced from a limited supplier base, creating potential availability and cost risks, although the company generally passes material-cost fluctuations to customers. Product failure and recall exposure, competition, acquisition integration, and reliance on outsourcing trends are also identified risks.
- Routine legal matters carried approximately $0.2 million in loss contingencies. Proceedings concerning the bankrupt former German subsidiary Eltmann were not finalized; management, based on legal advice, did not expect further significant financial-statement impacts. The company also disclosed approximately $1.9 million of unrecognized tax benefits and related accrued amounts whose payment timing was uncertain.
- The 2013 dividend declared was $0.18 per share. The filing attributes the sharp difference between 2013 and 2012 net income mainly to the nonrecurring 2012 tax benefit.
Important facts for investors to verify
- Whether sales and margins can sustain improvement in Europe and other end markets, and whether the Plastic and Rubber segment can stabilize after its volume decline.
- How much of reported earnings and future performance depends on tax positions, deferred-tax-asset realization, or foreign earnings remaining indefinitely reinvested.
- Customer exposure to SKF and other major accounts, and the effects of any changes in their sourcing or production.
- Progress on working-capital management, cash generation, debt reduction, and the planned 2014 capital program.
- Developments in Eltmann bankruptcy proceedings, environmental obligations, and other contingencies.