NN, Inc. — FY 2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016. Amounts below are in U.S. dollars; financial statement amounts have been converted from thousands to millions where appropriate.
Business context
NN is a global manufacturer of precision bearing components, engineered metal and plastic products, and precision-machined components. It operates through Precision Bearing Components, Precision Engineered Products (PEP), and Autocam Precision Components. Results for 2016 include a full year of PEP operations, acquired in October 2015; the company made no acquisitions in 2016.
Financial results and liquidity
| Metric | FY 2016 | FY 2015 |
|---|---|---|
| Net sales | $833.5 million | $667.3 million |
| Income from operations | $59.4 million; 7.1% margin | $26.8 million; 4.0% margin |
| Interest expense | $63.2 million | $29.9 million |
| Net income (loss) | $7.9 million | $(7.4) million |
| Net cash from operating activities | $69.3 million | $33.3 million |
| Capital expenditures | $43.8 million | $38.6 million |
- Sales rose 24.9%, but growth was chiefly acquisition-driven: the company attributed $192.2 million of the sales change to acquisitions. Other reported factors included foreign exchange of $(5.4) million, a plant sale of $(8.2) million, volume of $1.2 million, and price/material pass-through/mix of $(13.6) million.
- Gross profit before depreciation and amortization was $212.5 million, or 25.5% of sales. Operating income improved, while interest expense exceeded operating income; pretax loss was $7.3 million. A $9.3 million income tax benefit and $5.9 million of joint-venture income contributed to reported net income.
- Segment sales and operating income: Precision Bearing Components $248.5 million and $23.0 million; Precision Engineered Products $258.8 million and $34.7 million; Autocam Precision Components $326.1 million and $29.5 million. Corporate and consolidations recorded a $27.8 million operating loss.
- Year-end cash was $14.4 million; current assets were $280.6 million and current liabilities $138.6 million, leaving reported working capital of $141.9 million. Total assets were $1.36 billion and stockholders’ equity $315.2 million.
- Debt was approximately $825 million before debt issuance costs, versus $826 million cited in the risk discussion; the balance sheet reports $798.5 million net of issuance costs. Revolver availability was $104.6 million, net of letters of credit. The debt included $250 million of 10.25% senior notes due 2020 and variable-rate term and revolver borrowings. Reported long-term debt maturities include $279.8 million in 2020 and $514.8 million thereafter.
- Fourth-quarter 2016 sales were $202.0 million, operating income $12.1 million, and net income $3.1 million. Fourth-quarter 2015 sales were $183.9 million, with operating loss of $10.8 million and net loss of $25.0 million.
Changes, outlook, and material items
- Operating income improved substantially year over year, reflecting the full-year contribution of PEP and cost-reduction efforts. The PEP segment moved from an operating loss of $3.7 million in 2015 to income of $34.7 million in 2016. Bearing and Autocam segment operating income declined by $3.3 million and $2.2 million, respectively.
- Management attributed headwinds to weaker industrial demand, lower prices and product-mix effects, currency translation, and restructuring. The stronger U.S. dollar reduced reported revenue by approximately $5.4 million. No currency hedges were in place at year-end.
- Restructuring and integration charges were $10.0 million, including $4.4 million in the bearing group and $4.3 million associated with the Autocam Wheeling plant closure. The company stated ultimate restructuring costs were not yet estimable.
- Management expected capital expenditures to remain relatively consistent and forecast positive operating cash flow, stating operations and available credit were expected to cover capital spending and working capital needs for the next 12 months. It said there was no substantial doubt about its ability to continue as a going concern. The filing provides no specific revenue or earnings guidance.
- Goodwill impairment testing found no impairment, but the PEP reporting unit’s estimated fair value exceeded carrying value by only 4%; the filing identifies demand and valuation assumptions as sensitive factors.
- A Brazilian ICMS tax-credit dispute has an estimated possible loss range of $0–$6.0 million; no amount was accrued, and management expects indemnification from former Autocam owners. Other legal proceedings were described as routine and not expected to be material.
- Management and the auditor concluded internal control over financial reporting was ineffective at year-end due to material weaknesses involving staffing and controls over business-combination accounting and income taxes. The auditor nevertheless gave an unqualified opinion on the financial statements. Management began remediation, but gave no completion timetable.
Important facts for investors to verify
- How much of reported sales and operating improvement is sustainable without further acquisitions, and whether organic demand, pricing, and mix are improving.
- Debt balances, interest costs, covenant headroom, refinancing needs, and the company’s capacity to meet large 2020 and later maturities.
- Progress in remediating material weaknesses, and whether subsequent filings show effective controls and reliable tax and acquisition accounting.
- PEP goodwill valuation assumptions and impairment sensitivity, given the disclosed 4% fair-value cushion.
- Resolution and potential indemnification of the Brazilian tax matter, along with restructuring costs still to be identified.