Business Context and Reporting Period
Company: NN, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2009
Business Overview: NN, Inc. operates in three segments: Metal Bearing Components, Precision Metal Components, and Plastic and Rubber Components. The company is currently navigating a severe global economic recession that began impacting operations in late 2008, resulting in significant revenue declines and operating losses.
Key Financial Metrics
| Metric (in thousands) | Three Months Ended Sep 30, 2009 | Nine Months Ended Sep 30, 2009 |
|---|---|---|
| Net Sales | $66,110 | $181,119 |
| Cost of Products Sold | $58,981 | $169,184 |
| Gross Margin | 10.8% | 6.9% |
| Operating Income (Loss) | $(8,648) | $(28,318) |
| Net Income (Loss) | $(8,983) | $(31,974) |
| Diluted EPS | $(0.55) | $(1.97) |
| Cash and Equivalents | $11,540 | $11,540 (Balance Sheet) |
| Operating Cash Flow (9mo) | $9,550 | |
| Total Debt (Current + Long-term) | $94,034 | |
| Working Capital | $(48,684) |
Material Changes vs. Prior Period
- Revenue Decline: Net sales decreased 37% year-over-year for the three months ended September 30, 2009, and 48% for the nine-month period. The decline is attributed to reduced end-market demand and supply chain "de-stocking."
- Profitability Reversal: The company swung from a net income of $2.9 million in Q3 2008 to a net loss of $9.0 million in Q3 2009. For the nine-month period, the loss was $32.0 million compared to $17.2 million income in the prior year.
- Restructuring Costs: The company incurred $4.1 million in restructuring and impairment costs in Q3 2009 (primarily $3.9 million for a workforce reduction at the Veenendaal plant) and $4.7 million for the nine months, compared to zero in the prior year periods.
- Debt Reclassification: Total debt of $94.0 million was reclassified as a current liability due to uncertainty regarding future financial covenants with lenders.
- Inventory Reduction: Inventories decreased by $20.2 million year-to-date as the company reduced stock levels to maximize liquidity.
Outlook, Risks, and Management Commentary
- Liquidity and Solvency Risk: Management explicitly states the company is dependent on continued financing from lenders to remain solvent. There is a substantial risk that if financial projections are not met, lenders may not amend credit agreements, potentially accelerating loan due dates and forcing the company into technical insolvency or bankruptcy.
- Covenant Uncertainty: Lenders have not yet set covenant levels for quarters ending after March 31, 2010. Current covenants provide little flexibility. The company is currently in compliance but cannot guarantee future compliance.
- Dividend Suspension: Cash dividends were suspended in 2009 (previously $0.08 per share in Q3 2008) to preserve cash.
- Valuation Allowance: A $6.2 million valuation allowance was placed on U.S. deferred tax assets, eliminating tax benefits from incurred losses due to the uncertainty of future profitability.
- Operational Outlook: Sales showed a 13% sequential improvement in Q3 2009 compared to Q2, but remain significantly depressed. Management expects cost of products sold to return to ~80% of sales only when volumes normalize.
Investor Verification Checklist
- Covenant Compliance: Verify the company's ability to meet the revised financial covenants (Capitalization Ratio, Minimum EBITDA) for the remainder of 2009 and Q1 2010.
- Debt Maturity: Confirm the status of the $94.0 million debt reclassified as current and the likelihood of lenders agreeing to new terms for periods beyond March 2010.
- Restructuring Execution: Monitor the payout of the $3.9 million severance accrual at the Veenendaal plant and the impact on future operating costs.
- Revenue Recovery: Assess whether the Q3 sales improvement is a trend or a temporary fluctuation in customer ordering patterns.
- Foreign Exchange Exposure: Evaluate the impact of Euro fluctuations on future earnings, as the company has no currency hedges in place.