Business Context and Reporting Period
Company: NN, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2008
Business Overview: NN, Inc. operates in three primary segments: Metal Bearing Components, Precision Metal Components, and Plastic and Rubber Components. The company manufactures components for industrial and automotive markets globally, with significant operations in Europe (Germany, Italy, Netherlands) and North America.
Key Financial Metrics
| Metric (in thousands) | Three Months Ended June 30, 2008 |
Three Months Ended June 30, 2007 |
Six Months Ended June 30, 2008 |
Six Months Ended June 30, 2007 |
|---|---|---|---|---|
| Net Sales | $122,240 | $107,302 | $243,781 | $215,246 |
| Gross Profit (Sales less Cost of Products Sold) |
$24,992 | $21,373 | $50,040 | $44,236 |
| Operating Income | $12,612 | $(7,173) | $21,329 | $748 |
| Net Income | $9,173 | $(10,365) | $14,273 | $(6,610) |
| Diluted EPS | $0.57 | $(0.62) | $0.89 | $(0.39) |
| Cash from Operations (Six Months) |
$6,290 | $4,023 | ||
| Cash & Equivalents (Balance Sheet) |
||||
| Total Debt (Current + Long-term) |
$110,796 | |||
| Working Capital | $76,266 |
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased 13.9% year-over-year for the quarter and 13.3% for the six-month period. Growth was driven primarily by the appreciation of the Euro against the U.S. Dollar ($10.4M impact for the quarter), higher sales volume in the Metal Bearing Components segment due to industrial demand, and price increases passed through to customers.
- Profitability Turnaround: The company reported a net income of $9.2M for the quarter compared to a net loss of $10.4M in the prior year quarter. This significant improvement is largely attributable to the absence of $13.3M in restructuring and impairment charges recorded in Q2 2007.
- One-Time Gains: Operating results for the quarter included a $4.0M pre-tax gain on the disposal of excess land in the Netherlands (Metal Bearing Components segment).
- Segment Performance:
- Metal Bearing Components: Sales up 23.6% (Q2) and 20.3% (YTD). Net income turned from a loss of $8.6M in 2007 to a profit of $10.5M in 2008.
- Plastic and Rubber Components: Sales declined 22.4% (Q2) due to weakness in the U.S. automotive market and a strike at a major supplier.
- Precision Metal Components: Sales remained relatively flat, with net income improving due to production efficiencies.
- Balance Sheet: Total assets increased to $379.5M from $350.1M at year-end 2007, largely due to foreign exchange translation effects. Current maturities of long-term debt decreased by $4.2M as portions were reclassified to long-term.
Guidance, Outlook, Risks, and Unusual Items
- Capital Expenditures: Management plans to spend approximately $18.5M on capital expenditures for 2008. $8.9M has been spent through June 30, 2008.
- Liquidity: The company has $59.4M of availability under its $135M revolving credit facility. Management believes cash flow from operations and credit facilities will be sufficient to fund working capital, CapEx, and dividends through December 2008.
- Dividends: Cash dividends of $0.08 per share were declared in Q2 2008. Total dividends paid in the first six months were $2.5M.
- Unusual Items:
- Asset Sale: A $4.0M gain on the sale of land in the Netherlands.
- Tax Benefit: A $1.1M deferred tax benefit recognized due to a new Italian tax law election.
- Restructuring (Prior Year): Q2 2007 included $13.3M in non-cash impairment charges (goodwill and fixed assets) related to European restructuring, which did not recur in 2008.
- Risks and Contingencies:
- Customer Concentration: Supply agreements with major customers SKF and Schaeffler Group expired or were expiring in mid-2008. Negotiations for new contracts were ongoing.
- Environmental: The company is a potentially responsible party in an EPA investigation regarding a former waste recycling vendor. Contributions to an escrow fund totaled $28k; potential liability beyond this is currently indeterminable.
- Foreign Exchange: Significant exposure to the Euro. No currency hedges were in place as of June 30, 2008.
Investor Verification Checklist
- Contract Renewals: Verify the status of negotiations with key customers SKF and Schaeffler Group, as their contracts expired in May/June 2008.
- Asset Sale Proceeds: Confirm the cash impact and tax treatment of the $4.0M gain on the Netherlands land sale.
- Automotive Exposure: Assess the duration of the downturn in the U.S. automotive market and the impact of supplier strikes on the Plastic and Rubber segment.
- Debt Covenants: Review compliance with the $135M credit facility and $40M senior notes covenants, particularly regarding interest coverage ratios given the variable rate exposure.
- Environmental Liability: Monitor updates on the EPA investigation regarding the former waste vendor to ensure no material liability emerges beyond the escrow contribution.