NN, Inc. — Form 10-Q Summary
Business context and reporting period
NN, Inc. filed this unaudited quarterly report for the three and nine months ended September 30, 2012. It reports three segments: Metal Bearing Components, Precision Metal Components, and Plastic and Rubber Components. Dollar amounts below are in millions unless stated otherwise.
Financial performance and liquidity
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Net sales | $86.6 | $101.1 | $289.9 | $328.4 |
| Income from operations | $5.9 | $5.8 | $23.2 | $24.3 |
| Net income | $3.1 | $4.7 | $16.1 | $16.0 |
| Basic EPS | $0.18 | $0.28 | $0.94 | $0.96 |
| Operating cash flow | Not presented by quarter | $22.7 | $3.3 |
- Q3 sales fell 14.4% year over year; net income declined 33.8%. Nine-month sales fell 11.7%, while net income was nearly unchanged.
- Income from operations was 6.8% of sales in Q3 2012 versus 5.7% in Q3 2011; for the nine-month periods, it was 8.0% versus 7.4%. These percentages are calculated from reported figures.
- Cost of products sold, excluding separately reported depreciation and amortization, implies a gross margin of approximately 21.0% in Q3 2012 versus 17.4% in Q3 2011, and 20.9% versus 18.2% for the nine-month periods.
- Nine-month operating cash flow was $22.7 million; investing activities used $10.1 million, including $12.4 million of capital expenditures, and financing activities used $3.2 million. Cash increased $9.7 million to $14.2 million.
- At September 30, cash was $14.2 million, current assets $129.8 million, and current liabilities $60.3 million; the current ratio was 2.15:1, up from 1.70:1 at year-end 2011. Working capital was $69.5 million.
- Total debt was $75.0 million, down from $78.1 million at December 31, 2011. This included $43.6 million of variable-rate revolving borrowings and $31.4 million of fixed-rate notes. Reported revolving-facility availability was $45.5 million at quarter-end.
Material changes versus prior comparable periods
- The principal sales decline was in Metal Bearing Components, reflecting lower volumes in Europe and Asia, weaker European automotive demand, customer inventory adjustments, and unfavorable translation of euro-denominated sales. Q3 segment sales declined to $58.3 million from $72.5 million; nine-month sales were $196.2 million versus $241.1 million.
- Precision Metal Components improved from a Q3 loss of $0.5 million to income of $1.6 million, and from a nine-month loss of $3.8 million to income of $5.2 million. Higher program volumes and the absence of prior-year start-up costs were key factors; 2011 included $5.5 million of ramp-up costs for new programs.
- Plastic and Rubber Components recorded Q3 income of $0.2 million versus $0.1 million and nine-month income of $2.0 million versus $1.9 million.
- Cost-reduction initiatives and lower start-up costs helped offset lower volumes and production inefficiencies. The nine-month reduction in accounts receivable supported cash generation, while accounts payable fell $12.5 million, primarily due to payment timing and lower recent raw-material spending.
- Q3 other expense was $0.8 million, compared with other income of $1.5 million in Q3 2011, mainly reflecting foreign-exchange losses on intercompany loans versus prior-year gains. Nine-month results included a $0.2 million gain on collection of a note receivable.
Outlook, management commentary, risks, and unusual items
- Management expected 2012 capital expenditures of $15–$20 million, primarily for new or expanded business, and said operating cash flow and available borrowing were expected to fund capital and working-capital needs through September 2013. Capital expenditures through September were $12.4 million.
- On October 26, 2012, after quarter-end, NN amended its revolving credit facility and fixed-rate notes. The revolver maturity was extended to October 26, 2017; its margin was reduced to LIBOR plus 1.25%–2.25%, and the rate on the outstanding portion of the $40 million fixed-rate notes was reduced from 5.39% to 4.89%. The amendment removed a prior borrowing-availability restriction; reported availability at the filing date was $55.5 million. The agreements permit dividends, acquisitions, and share repurchases subject to specified covenants.
- NN reported compliance with its covenants at September 30, 2012: interest coverage 8.21:1 against a 3.00:1 minimum; fixed-charge coverage 1.34:1 against a 1.00:1 minimum; and leverage 1.68:1 against a 2.50:1 maximum. A 1 percentage-point increase in rates on variable-rate debt was estimated to raise annual interest expense by about $0.4 million.
- The company had no currency hedges at September 30 and cited euro/US-dollar movements, European and Asian economic conditions, automotive demand, and customer inventory adjustments as relevant exposures. August seasonality affects sales at European metal-bearing operations.
- NN continued a valuation allowance of approximately $9.8 million against US net deferred tax assets. Management said continued US profitability could lead to reversal of a significant portion, excluding most foreign-tax-credit allowances, which would benefit income tax expense; timing and amount are uncertain.
- A former vendor’s EPA-tentatively-approved remediation was estimated to cost about $10 million overall; NN’s allocated share of approximately $132,000 had been paid, and management believed this was its maximum exposure under the plan. Eltmann’s German bankruptcy proceedings remained unresolved, although management did not expect further significant consolidated impact.
- Management reported no material changes to previously disclosed risk factors, and stated that disclosure controls were effective as of September 30, 2012. The filing cautions that interim results are not necessarily indicative of full-year or future results.
Important facts for investors to verify
- Whether lower European and Asian volumes and customer inventory adjustments persist, and how they affect Metal Bearing Components profitability.
- Whether cost reductions and Precision Metal Components’ improved operating performance continue as new programs mature.
- Cash-flow sustainability, accounts-payable normalization, planned capital spending, debt repayment, and covenant headroom under the amended facilities.
- Effects of foreign-exchange movements and variable interest rates, given the absence of currency hedges and the floating-rate revolver.
- Future US profitability and any resulting deferred-tax valuation-allowance reversal, plus the final outcome of the Eltmann bankruptcy proceedings.