NN, Inc. 2015 Form 10-K Summary
Business context and reporting period
NN, Inc. is a global manufacturer of precision bearing components, engineered plastic and metal products, and precision-machined components. This annual report covers the fiscal year ended December 31, 2015; amounts below are in millions unless noted.
Major portfolio changes included the May acquisition of Caprock, the October acquisition of Precision Engineered Products (PEP) for approximately $621.2 million, and the November divestiture of Delta Rubber. PEP’s results were consolidated from October 20, 2015. NN reported three segments: Precision Bearing Components, Precision Engineered Products, and Autocam Precision Components.
Financial performance and liquidity
| Metric | 2015 | 2014 |
|---|---|---|
| Net sales | $667.3 | $488.6 |
| Income from operations | $26.8 | $27.7 |
| Operating margin | 4.0% | 5.7% |
| Net income (loss) | $(7.4) | $8.2 |
| Diluted earnings (loss) per share | $(0.35) | $0.45 |
| Cash provided by operations | $33.3 | $30.7 |
| Cash used in investing activities | $(665.8) | $(281.6) |
| Cash and cash equivalents at year-end | $15.1 | $37.3 |
| Total debt at year-end | $820.1 | $350.2 |
| Current assets / current liabilities | $280.2 / $133.4 | $242.8 / $137.6 |
Revenue increased 36.6%, primarily from acquisitions; management attributed $212.5 million of the year-over-year increase to acquisitions, while foreign-exchange effects reduced sales by $39.1 million. Reported operating income was nearly flat despite higher sales, and operating margin declined. Interest expense rose to $29.9 million from $10.9 million, and NN recorded an $18.7 million write-off of unamortized debt issuance costs. Acquisition-related and integration items also weighed on results.
Operating cash flow was $33.3 million. Capital expenditures were $38.6 million, so operating cash flow did not cover capital spending. Investing outflows included $628.3 million paid for acquisitions, net of cash received. Year-end working capital was $146.8 million. The company reported $90.9 million available under its debt agreements.
Segments and material changes
- Precision Bearing Components: sales of $261.8 million, down 5.8%; operating income of $26.3 million, down from $31.9 million. Euro weakness reduced sales, partly offset by volume growth and acquisitions.
- Precision Engineered Products: sales of $77.2 million versus $33.4 million; operating loss of $3.7 million versus income of $1.2 million. The sales increase largely reflected Caprock and PEP, while higher acquisition-related depreciation and amortization and purchase-accounting charges affected profitability.
- Autocam Precision Components: sales of $328.3 million versus $177.2 million; operating income of $31.7 million versus $15.7 million. The increase in sales was primarily acquisition-driven; restructuring costs included $2.6 million related to the Wheeling plant closure.
The 2015 results included $11.7 million of acquisition advisory and transaction costs, $7.5 million of acquisition integration and inventory step-up costs, $18.7 million of debt-issuance-cost write-offs, and $5.2 million of accelerated amortization of acquired backlog. The filing’s selected-data discussion cites $43.0 million of total acquisition-related impact before tax; the detailed results discussion totals $43.2 million. PEP contributed $40.7 million of sales and a $2.6 million net loss after acquisition, including purchase-accounting charges.
Debt, outlook, risks, and unusual items
NN financed the PEP acquisition through new secured credit facilities and 10.25% senior notes due 2020. At year-end, debt comprised approximately $562.6 million under the term loan, $6.5 million drawn on the revolver, and $244.5 million of senior notes, plus other foreign borrowings. The term loan matures in 2022; its LIBOR-based rate has a 1% floor and a 4.75% margin. A 1 percentage-point increase in rates on variable-rate borrowings would raise annual interest expense by approximately $5.6 million. A $150 million interest-rate swap fixes the rate on that notional at 6.966% through 2018.
The filing provides no specific 2016 revenue or earnings guidance. Management’s stated strategy emphasizes growth through acquisitions and adjacent markets, organic growth, and expanding its global manufacturing base. NN expected to pursue cost savings and integration synergies from PEP but cautioned that achievement, timing, and associated costs were uncertain. Its prior stated 2015 capital-spending estimate of $40–$50 million is not guidance for 2016.
Principal disclosed risks include substantial indebtedness and debt-service demands, acquisition integration and goodwill impairment, cyclical industrial and automotive demand, customer concentration (SKF represented 16% of 2015 sales; the ten largest customers represented 53%), dependence on limited foreign steel sources, currency exposure, and environmental and medical-device regulation. The stronger U.S. dollar reduced 2015 revenue by $39.1 million; NN had no currency hedges at year-end. Goodwill was $449.9 million, including $364.5 million recorded for PEP; management reported no goodwill impairment in its 2015 tests, but the PEP allocation remained preliminary. The company disclosed a Brazilian tax-credit dispute with a possible loss range of $0–$6.0 million; no amount was accrued, and management cited indemnification rights from former Autocam shareholders. Other legal proceedings were described as routine, with no loss contingencies recognized.
Fourth-quarter 2015 sales were $183.9 million, but the company recorded an operating loss of $10.8 million and net loss of $25.0 million, primarily reflecting acquisition and debt-refinancing costs. The independent auditor reported fairly presented financial statements and effective internal control over financial reporting; PEP and Caprock, acquired during 2015, were excluded from the company’s and auditor’s internal-control assessment.
Important facts for investors to verify
- Whether PEP integration, synergies, and operating performance support the substantial goodwill and intangible-asset balances.
- Debt repayment capacity, covenant headroom, refinancing needs, and sensitivity to interest rates, given $820.1 million of debt and $15.1 million of cash.
- How much future revenue growth is organic versus acquisition-driven, and whether reported margins recover after purchase-accounting and integration costs.
- Customer retention and exposure to SKF and the ten largest customers, alongside ongoing currency and raw-material risks.
- The outcome of the Brazilian tax matter and finalization of PEP’s purchase-price allocation.