NN, Inc. — 2014 Form 10-K Summary
Business context and reporting period
For the fiscal year ended December 31, 2014; the filing also reports unaudited quarterly results. NN manufactures precision metal bearing, plastic, rubber, and metal components across three segments: Metal Bearing Components, Autocam Precision Components, and Plastic and Rubber Components.
NN completed four acquisitions in 2014: Autocam, V-S Industries, RFK, and Chelsea Grinding. Autocam, acquired in August, expanded the precision components business substantially. Management’s strategy targets doubling revenue and tripling EPS by 2018 through acquisitions, adjacent-market growth, and global expansion.
Financial performance and liquidity
| Metric | 2014 | 2013 |
|---|---|---|
| Net sales | $488.6 million | $373.2 million |
| Income from operations | $27.7 million; 5.7% of sales | $27.8 million; 7.5% of sales |
| Net income | $8.2 million | $17.2 million |
| Diluted EPS | $0.45 | $1.00 |
| Cash provided by operating activities | $30.7 million | $31.8 million |
| Cash used in investing activities | $281.6 million | $15.3 million |
| Cash at year-end | $37.3 million | $3.0 million |
| Total assets | $712.7 million | $262.4 million |
| Total debt, including current maturities | $350.2 million | $36.5 million |
Revenue increased 31%, principally from acquisitions ($100.7 million of the increase) and higher volumes, partly offset by unfavorable price, product mix, and lower raw-material cost pass-through. Cost of products sold, excluding depreciation and amortization, was 78.8% of sales versus 79.1% in 2013. Interest expense rose to $12.3 million from $2.4 million, largely reflecting acquisition financing and related refinancing costs. The 2014 effective tax rate was 44%, affected by nondeductible acquisition expenses and foreign tax-credit expirations.
2014 included $14.8 million of pretax acquisition and integration-related costs and an $0.875 million trade-name impairment. Management’s non-GAAP adjusted operating income was $39.9 million and adjusted net income was $23.5 million; these measures are not substitutes for GAAP results. Net income also included $0.8 million of income from a newly acquired joint venture.
At year-end, current assets were $242.8 million and current liabilities were $137.6 million; disclosed working capital was $105.2 million. NN had $340.0 million outstanding under its $350 million term loan and no ABL borrowings; stated ABL availability was approximately $61 million, net of letters of credit and subject to borrowing-base limits. The term loan matures in 2021 and requires 5% annual principal repayment. A springing fixed-charge coverage covenant applies to the ABL if availability falls below $8 million. 2014 capital expenditures were $27.6 million; operating cash flow less capital expenditures was approximately $3.1 million.
Material changes versus the prior comparable period
- Autocam and the other acquisitions drove most of the increase in revenue and transformed the precision components segment. Autocam contributed $80.8 million of sales from acquisition through year-end; NN included only partial-year results for the 2014 acquisitions.
- Operating income was essentially flat despite higher sales, while operating margin declined from 7.5% to 5.7%. Acquisition expenses, purchase-accounting inventory step-up, added depreciation and amortization, and higher corporate and integration costs contributed.
- Net income fell 52%, reflecting sharply higher interest expense, acquisition-related costs, and a higher tax burden. The prior year did not include comparable acquisition costs.
- Operating cash flow was near the prior-year level, but investing outflows rose substantially due mainly to $257.7 million of net cash paid for acquisitions. Financing provided $287.0 million, primarily from acquisition-related borrowing.
- Debt increased substantially following acquisition financing. Foreign-currency translation reduced other comprehensive income by $17.7 million in 2014.
- Segment sales were $278.0 million for Metal Bearing, $177.2 million for Autocam Precision Components, and $33.4 million for Plastic and Rubber. Plastic and Rubber sales declined from $35.0 million; its operating income improved to $1.2 million, primarily due to cost-improvement actions.
In the fourth quarter, sales were $153.8 million, operating income $8.6 million, net income $1.6 million, and diluted EPS $0.08. In fourth-quarter 2013, the corresponding figures were $90.1 million, $6.5 million, $4.5 million, and $0.25. Fourth-quarter 2014 results included acquisition-related costs.
Outlook, commentary, risks, and contingencies
- No specific revenue or earnings guidance is provided. Management expected 2015 capital expenditures of $45–$55 million, primarily for new or expanded business, and believed operating cash flow and available borrowing would fund 2015 needs.
- Management cited automotive-market growth, improved customer demand and market share, and continuous-improvement projects as positives. It also identified acquisition integration and realization of expected synergies as significant execution priorities.
- Major risks include cyclical automotive and industrial demand, acquisition integration and goodwill impairment, increased leverage and covenant compliance, dependence on a concentrated customer base, and reliance on limited foreign sources for high-grade steel. SKF accounted for 26% of 2014 sales; the ten largest customers accounted for approximately 66%.
- NN had no currency hedges in place at year-end. A $150 million interest-rate swap was contracted to begin in December 2015 and fix the rate at 7.216% through December 2018. A 1 percentage-point increase in rates on outstanding variable-rate borrowings would increase annual interest expense by approximately $3.4 million, based on year-end balances.
- A Brazilian subsidiary’s disputed ICMS tax-credit assessment had a possible loss range of $0–$6 million; no liability was accrued. NN stated it was entitled to indemnification from former Autocam shareholders, subject to agreement terms. Other routine legal proceedings were not considered material; recorded legal loss contingencies were $0 at year-end.
- Environmental compliance, product quality and potential recalls, customer insourcing, foreign exchange, raw-material availability and seasonality are additional disclosed risks. The company reported effective disclosure controls and internal control over financial reporting, but excluded the 2014 acquisitions from management’s and the auditor’s internal-control assessment.
Important facts for investors to verify
- Whether the acquired businesses deliver expected growth, cost savings, integration benefits, and cash generation—and how finalized purchase-accounting estimates affect future depreciation, amortization, and goodwill impairment risk.
- Debt service capacity, ABL borrowing-base availability, springing covenant headroom, and actual interest expense as rates and operating conditions change.
- Customer concentration and SKF sales exposure, together with steel sourcing continuity and the ability to pass raw-material cost changes through to customers.
- The status and outcome of the Brazilian ICMS assessment and enforceability of the stated indemnification; also monitor other tax and environmental exposures.
- Whether 2015 capital spending and operating cash-flow expectations were achieved. The filing’s reported 2015 outlook is management’s expectation, not a guarantee.