NN, Inc. — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015; unaudited. Financial amounts below are in millions of dollars unless otherwise stated. The quarter reflects a substantially expanded company following four acquisitions completed in 2014, including Autocam.
Financial performance
| Metric | Q1 2015 | Q1 2014 | Change / context |
|---|---|---|---|
| Net sales | $163.7 | $102.5 | +$61.2, about 60%; acquisitions contributed $62.0, partly offset by $8.3 of adverse foreign-exchange translation. |
| Income from operations | $13.9 | $8.3 | +$5.6; operating margin was about 8.5% versus 8.1%. |
| Net income | $6.0 | $5.2 | +$0.8; diluted EPS was $0.31 versus $0.29. |
| Interest expense | $5.9 | $0.6 | Increased $5.4, primarily due to debt used to fund 2014 acquisitions. |
| Other expense, net | $1.4 | $0.1 | Included $1.4 of foreign-exchange losses on intercompany loans. |
| Cash from operating activities | $(17.4) | $(1.3) | Greater working-capital investment, particularly receivables, drove the outflow. |
| Cash from investing activities | $(9.4) | $(9.5) | Q1 2015 included $8.3 of capital expenditures and $1.4 invested in the joint venture. |
| Cash from financing activities | $6.5 | $12.4 | Q1 2015 included $9.1 net long-term debt proceeds. |
Comprehensive loss was $11.9 million, reflecting $16.3 million of foreign-currency translation losses and a $1.6 million loss on the interest-rate hedge, despite net income of $6.0 million. The effective tax rate declined to 22% from 32%, mainly due to the geographic mix of earnings. Management’s non-GAAP adjusted net income was $6.9 million versus $5.6 million; the adjustment added back the after-tax intercompany foreign-exchange loss in 2015 and acquisition/integration expenses in 2014.
Segments and material changes
- Metal Bearing Components: Sales were $73.2 million versus $70.9 million; operating income was $9.1 million versus $8.8 million. Volume and acquisitions supported results, while euro translation and unfavorable price/mix weighed on them.
- Autocam Precision Components: Sales were $82.6 million versus $23.7 million and operating income was $7.7 million versus $2.6 million. The increases primarily reflect acquisitions made after Q1 2014.
- Plastic and Rubber Components: Sales were $7.9 million in both periods; operating income was $0.2 million versus $0.2 million.
- Consolidated sales growth was acquisition-led. Management also cited higher demand and volume in several markets, partly offset by euro weakness. The euro’s decline reduced Q1 2015 sales by $8.3 million and net income by $0.8 million through translation.
Financial position, debt, and liquidity
- At March 31, cash was $16.8 million, total assets $694.4 million, and total stockholders’ equity $161.3 million. Cash was down from $37.3 million at year-end 2014.
- Total debt was $358.2 million, compared with $350.2 million at December 31, 2014; this includes $335.8 million under the term loan and $12.0 million under the ABL revolver. Long-term debt, net of current maturities, was $335.0 million.
- ABL availability was $46.0 million, net of $2.2 million of letters of credit. Its springing fixed-charge coverage covenant applies if availability falls below $8.0 million; the term loan has no financial covenants.
- The term loan requires annual principal repayments of 5% ($17.5 million). Management expected operating cash flow and available borrowing to cover debt service, working capital, and investment needs through March 2016.
- Working capital, as defined by the company, was $110.9 million versus $105.2 million at year-end. Receivables rose with higher late-quarter sales; management noted slightly higher days sales outstanding for customers with extended credit terms.
Outlook, risks, and unusual items
- Management expected 2015 capital expenditures of $45–$55 million, primarily for new or expanded business. No earnings or revenue guidance was provided in the supplied filing text.
- The company had no foreign-currency hedges at quarter-end. A 1% increase in rates on outstanding variable-rate borrowings was estimated to increase annual interest expense by approximately $3.5 million. A $150 million forward-starting swap is scheduled to lock its rate at 7.216% from December 29, 2015 through December 31, 2018.
- A Brazilian ICMS tax-credit dispute carried an estimated possible loss range of $0–$6.0 million. Management considered a loss not probable, recorded no accrual, and stated that it had indemnification rights from former Autocam shareholders.
- Management cited risks including economic and industrial conditions, customer concentration and captive production, underutilized capacity, raw-material availability and pricing, quality, competition, foreign exchange, and integration and execution of growth plans. It reported no material change to previously disclosed risk factors.
- The filing says goodwill was tested annually and that no impairment indicators existed at March 31, 2015. Disclosure controls were assessed as effective, with no material change in internal control over financial reporting reported for the quarter.
Important facts for investors to verify
- How much of subsequent revenue and earnings reflects acquired businesses versus organic growth, and how acquisition integration is progressing.
- Whether receivables, cash conversion, and working-capital needs improve after the Q1 operating cash outflow.
- Debt-service capacity, ABL availability and covenant headroom, and exposure to variable interest rates.
- The continuing effects of currency movements, including translation and intercompany-loan exposure, and the timing and economics of the planned interest-rate swap.
- Developments in the Brazilian ICMS dispute and the scope and enforceability of the stated indemnification.
- Actual 2015 capital spending versus the $45–$55 million expectation and the returns from planned business expansion.