Business Context and Reporting Period
Company: NN, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2010
Business Overview: NN, Inc. operates in three segments: Metal Bearing Components, Precision Metal Components, and Plastic and Rubber Components. The company is recovering from the global economic recession that severely impacted operations in 2008 and 2009. Management reports that operating results have improved significantly in the first half of 2010 due to normalized customer ordering patterns and increased end-market demand.
Key Financial Metrics
| Metric (in thousands) | Three Months Ended June 30, 2010 |
Six Months Ended June 30, 2010 |
|---|---|---|
| Net Sales | $92,693 | $178,033 |
| Net Income (Loss) | $5,123 | $5,348 |
| Diluted EPS | $0.31 | $0.32 |
| Operating Cash Flow | N/A | $5,126 |
| Total Assets | $235,614 | $235,614 |
| Total Debt | $87,820 | $87,820 |
| Cash and Equivalents | $6,043 | $6,043 |
| Working Capital | $40,223 | $40,223 |
Note: Working Capital calculated as Current Assets ($110,903) minus Current Liabilities ($70,680).
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased 62% for the three months and 55% for the six months ended June 30, 2010, compared to the same periods in 2009. This growth is attributed to a 68% and 56% increase in sales volume, respectively, excluding foreign exchange effects.
- Profitability Turnaround: The company returned to profitability, reporting net income of $5.1 million for the quarter and $5.3 million for the six months, compared to net losses of $13.5 million and $23.0 million in the prior year periods.
- Segment Performance:
- Metal Bearing Components: The primary driver of growth, with sales up 69% (quarter) and 63% (six months). Segment net income turned positive ($8.3M and $13.3M) from significant losses in 2009.
- Precision Metal Components: Sales increased, but the segment remained unprofitable due to restructuring charges related to the Tempe Plant closure.
- Plastic and Rubber Components: Sales increased 59% (quarter) and 47% (six months), returning to profitability.
- Foreign Exchange Impact: The appreciation of the U.S. Dollar against the Euro resulted in significant foreign exchange gains ($1.8M for the quarter, $3.0M for six months) recorded in "Other income, net," which boosted net income.
Guidance, Outlook, Risks, and Unusual Items
Management Commentary and Outlook
Management expects to meet existing financial covenants based on first-half results, reducing the probability of default. However, the company forecasts capital expenditures of approximately $16.7 million for 2010 and anticipates positive cash flow from operations of $10 million to $15 million for the second half of 2010. The company must renegotiate its revolving credit facility and senior notes prior to September 2011.
Risks and Contingencies
- Covenant Compliance: While compliant as of June 30, 2010, the company cannot assure compliance with financial covenants for the remainder of 2010 through September 2011. Failure to meet these could materially impact liquidity.
- Subsidiary Insolvency Risk: The Eltmann, Germany Plant faces potential technical insolvency or illiquidity within the next 12 months. If bankruptcy is required, the company could lose assets valued at approximately $7.9 million, though it would also be released from liabilities of a similar amount.
- Environmental Liability: The company is a "Potentially Responsible Party" (PRP) in an EPA investigation regarding a former waste recycling vendor. The allocated share of remediation costs is currently unknown.
Unusual Items
- Restructuring Charges: The company incurred $1.2 million in restructuring charges for the six months ended June 30, 2010, primarily related to the closure of the Tempe, Arizona plant (impacting ~130 employees) and the Kilkenny, Ireland plant.
- Accelerated Depreciation: $1.0 million of accelerated depreciation was recorded in Q1 2010 related to assets at the closing Tempe plant.
- Share-Based Compensation: A one-time non-cash expense of $1.1 million was recognized in Q1 2010 due to the immediate vesting of shares granted to employees and directors.
Investor Verification Checklist
- Covenant Compliance: Verify the company's ability to maintain the Interest Coverage Ratio (required >0.95, actual 2.34) and Funded Indebtedness to Capitalization Ratio (required <0.61, actual 0.57) through September 2011.
- Tempe Plant Closure Costs: Monitor the total cash outflow for the Tempe plant closure, estimated at $2.5 million for 2010, to ensure it does not exceed forecasts.
- Eltmann Plant Status: Track the financial health of the Eltmann, Germany subsidiary to assess the risk of bankruptcy and potential asset write-downs.
- Debt Renewal: Confirm the terms of the renegotiation of the $85 million revolving credit facility and $40 million senior notes, which expire or require amendment by September 2011.
- Foreign Exchange Sensitivity: Assess the impact of future Euro/U.S. Dollar fluctuations on revenue and the translation of foreign subsidiary assets, as the company currently has no currency hedges in place.