NN, Inc. — Q1 2013 Form 10-Q
Period: Three months ended March 31, 2013; financial statements are unaudited. Unless noted, dollar amounts are in millions.
Business context and results
NN manufactures metal bearing, precision metal, and plastic and rubber components. Sales fell mainly because of lower automotive demand and production volumes in Europe and Asia, alongside North American customer inventory adjustments.
| Metric | Q1 2013 | Q1 2012 |
|---|---|---|
| Net sales | $93.8 | $104.5 |
| Income from operations | $5.6 | $9.0 |
| Net income | $2.9 | $5.9 |
| Diluted EPS | $0.17 | $0.35 |
| Operating cash flow | $(2.5) | $(1.1) |
| Capital expenditures | $3.2 | $4.1 |
Sales declined 10.3%. Cost of products sold, excluding separately reported depreciation and amortization, was $74.5 million; the resulting gross margin on that basis was approximately 20.6%, versus 20.6% in Q1 2012. Operating margin was approximately 6.0%, down from 8.6%. Lower volume reduced operating income; cost-reduction projects and cost controls partly offset that pressure. Interest expense decreased to $0.8 million from $1.2 million, while other expense rose to $0.6 million from $0.4 million.
Segment sales and net income: Metal Bearing Components $63.7 million and $4.0 million (prior year $72.1 million and $6.9 million); Precision Metal Components $20.7 million and $0.9 million (prior year $21.3 million and $1.6 million); Plastic and Rubber Components $9.4 million and $0.1 million (prior year $11.1 million and $1.0 million).
Cash, debt, and liquidity
Cash fell to $7.6 million from $19.0 million at December 31, 2012. Operating activities used $2.5 million; investing activities used $3.2 million; financing activities used $5.9 million. The company said cash at European subsidiaries was used to repay debt. Accounts receivable increased $15.2 million on the balance sheet, which management attributed largely to higher February and March sales versus November and December; days sales outstanding remained consistent with year-end.
Total debt was $63.7 million at March 31, down from $69.5 million at year-end. The $100 million revolving facility had $32.2 million drawn, and reported additional borrowing availability was $67.1 million, net of letters of credit and subject to covenant limits. The current ratio was 2.00:1, down from 2.17:1; working capital was $64.9 million versus $68.5 million. NN reported compliance with its debt covenants: interest coverage 7.87:1, fixed-charge coverage 1.20:1, and leverage 1.72:1.
Changes, outlook, risks, and unusual items
- Management expected up to $17 million of 2013 capital expenditures, primarily for new or expanded business. It said operating cash generation and credit availability should fund capital spending and working capital needs through March 2014, based on forecast positive operating cash flow for the remaining 2013 quarters.
- No specific revenue or earnings guidance was provided. Management cautioned that Q1 results are not necessarily indicative of full-year results.
- Sales decreased by $10.7 million year over year; management attributed the decline principally to lower volume, with a $10.6 million volume impact, partly offset by foreign exchange and mix. Weak European and Asian automotive markets and customer inventory adjustments were cited.
- SG&A increased $1.0 million, including $0.7 million of severance not related to an exit activity, management relocation costs, and higher consulting and recruitment fees. Management said most discrete non-FX items were not expected to recur in later 2013 quarters.
- The effective tax rate rose to 33% from 20%, in part because U.S. tax expense was recognized in 2013 after most U.S. deferred-tax valuation allowances were removed at year-end 2012; prior-year U.S. net operating losses reduced tax expense.
- NN had no currency hedges in place. Management noted foreign-exchange exposure; a 1 percentage-point increase in rates on variable-rate borrowings would raise annual interest expense by approximately $0.3 million.
- A former sales agent lawsuit seeks amounts allegedly due for post-termination sales. The company disputes the claim and does not currently expect a material adverse effect, but cannot predict the outcome. The potential residual liabilities from the German subsidiary Eltmann’s bankruptcy remain dependent on bankruptcy-court proceedings.
- On May 10, 2013, NN announced Richard D. Holder’s appointment as President and CEO, effective June 3, 2013.
Important facts for investors to verify
- Whether automotive demand, production volumes, and customer inventory trends recover, particularly in Europe and Asia.
- Whether the company generates the forecast positive operating cash flow and achieves its capital-spending and liquidity assumptions.
- Debt covenant headroom and borrowing availability as operating performance and cash balances change.
- Developments in the sales-agent lawsuit and Eltmann bankruptcy, including any liabilities retained by NN.
- Effects of the higher U.S. tax expense and unhedged currency exposure on future earnings and cash flow.