NN, Inc. — FY2019 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2019. NN, Inc. manufactures high-precision components and assemblies for medical, automotive, electrical, aerospace and defense, and general industrial markets. Its three reporting segments are Life Sciences, Mobile Solutions, and Power Solutions.
Financial performance and liquidity
| Metric | FY2019 | FY2018 |
|---|---|---|
| Net sales | $847.5 million | $770.7 million |
| Income (loss) from operations | $9.9 million | $(179.9) million |
| Net loss | $(46.7) million | $(263.0) million |
| Loss per common share | $(1.13) | $(8.30) |
| Cash provided by operations | $49.2 million | $40.9 million |
- Revenue increased 10.0%. Acquisitions contributed $75.3 million, organic growth contributed $9.8 million, and foreign exchange reduced revenue by $8.4 million.
- Cost of sales, excluding separately reported depreciation and amortization, was 75.7% of sales versus 76.5% in 2018. Operating margin was 1.2%, compared with negative 23.3% in 2018. The improvement in operating results largely reflects the absence of 2018 goodwill impairment charges of $182.5 million.
- Net loss remained substantial; interest expense was $57.2 million. 2019 results also included $3.3 million of debt-extinguishment and debt-cost write-offs.
- Cash used in investing activities was $39.4 million and included $54.0 million of property and equipment purchases. Cash provided by financing activities was $5.3 million. Cash at year-end was $31.7 million, up from $18.0 million.
- Working capital was $163.5 million. Current assets were $303.0 million and current liabilities were $139.5 million.
- Year-end debt principal was $793.2 million, with $63.9 million of unused revolver capacity after letters of credit. The company was in covenant compliance at year-end, but leverage covenants tighten over time; management said performance must improve to maintain compliance. Most term debt matures in 2022.
Segment and period comparisons
- Life Sciences: Sales rose to $359.7 million from $248.2 million, driven by acquisitions and organic growth; operating income increased to $28.2 million.
- Mobile Solutions: Sales fell to $297.7 million from $335.0 million amid weaker automotive demand, foreign exchange effects, and program and launch timing. Operating income was $9.6 million; excluding the prior-year impairment, management reported an $8.8 million decline.
- Power Solutions: Sales were $192.1 million, modestly above 2018; operating income was $13.9 million. The prior year included a $109.1 million goodwill impairment.
- Fourth quarter: Sales were $198.6 million and net loss was $14.1 million, or $(0.35) per share. Q4 2018 sales were $199.5 million and net loss was $217.4 million, largely reflecting that year's impairment charges.
- Prior-period financial statements were revised for inventory and tax misstatements. The company said the annual and interim misstatements were not material to prior periods, but made revisions; the 2019 quarterly results shown in the filing also reflect revisions.
Outlook, significant events, and risks
- No quantified earnings or revenue guidance is provided. Management's stated priorities include organic growth, improved margins, cost reductions, efficient capital deployment, and reducing debt and leverage.
- In November 2019, the company began a strategic review of options to reduce leverage and enhance shareholder value, including cost and cash initiatives, capital structure changes, and a possible sale of part or all of the company. No transaction or completion timetable is assured.
- Cost-saving actions announced in October included streamlining facilities and SG&A, eliminating quarterly common dividends, and reducing capital spending from 2019 levels.
- In December 2019, NN issued $100 million of Series B preferred stock for $95.7 million net proceeds, used partly to repay revolver borrowings and fund amendment costs. The preferred stock accrues cumulative dividends at 10.625% annually, potentially increasing to 11.625% if required shareholder approval is not obtained. Warrants cover up to 1.5 million common shares at $12 per share.
- The credit agreement was amended in December: revolver capacity was reduced to $75 million and maturities were extended to 2022. The filing warns that failure to meet progressively tighter leverage covenants could restrict borrowing or accelerate debt, and refinancing or covenant relief is not assured.
- Coronavirus-related closures at several Chinese facilities occurred in early 2020. The company reported employees returning to work at two locations but warned that further disruption to suppliers, customers, operations, and demand could materially affect results and cash flows.
- Price and demand risks include automotive weakness, customer concentration (top ten customers represented about 52% of sales; Johnson & Johnson affiliates represented 11%), foreign exchange, tariffs and raw-material costs. A $700 million interest-rate swap fixed the LIBOR component on a portion of debt through October 2022; $700 million was hedged at year-end.
- Management and the auditor identified material weaknesses in financial reporting controls, including weaknesses in the control environment, Paragon Medical monitoring and revenue/receivables and IT controls, and inventory controls at a smaller foreign subsidiary. Certain employees intentionally failed to follow inventory controls, resulting in unsupported counts and revisions. Management concluded internal control over financial reporting and disclosure controls were not effective at year-end; remediation is ongoing.
- Contingencies include a Brazilian ICMS tax dispute with estimated possible losses of $0–$6 million and no accrual; the company says it has potential indemnification from former Autocam shareholders. A securities class action relating to the 2018 stock offering seeks unspecified damages; financial impact cannot currently be determined.
Most important facts for investors to verify
- Progress toward covenant compliance, available liquidity, and management's assumptions for operating improvement and debt service.
- Whether the strategic review produces a transaction, and the terms and effects of any sale, refinancing, or capital restructuring.
- Remediation and independent validation of the disclosed control weaknesses, particularly inventory controls and Paragon Medical processes.
- Whether automotive demand, Chinese supply-chain conditions, and customer concentration affect revenue and cash generation.
- Potential dilution, redemption provisions, and accumulating dividends attached to the preferred stock and warrants.
- Developments in the securities litigation and Brazilian tax matter, including any change to exposure or indemnification.