NN, Inc. — Q2 2014 Form 10-Q
Business context and period. NN, Inc. reported unaudited results for the quarter and six months ended June 30, 2014. The company makes metal bearing, precision metal, and plastic and rubber components. It completed two acquisitions during the first half, expanding its businesses and contributing to reported sales.
Financial performance
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Net sales | $106.7 million | $96.3 million | $209.2 million | $190.1 million |
| Income from operations | $8.2 million | $7.9 million | $16.6 million | $13.6 million |
| Net income | $5.2 million | $4.8 million | $10.4 million | $7.6 million |
| Diluted EPS | $0.29 | $0.28 | $0.58 | $0.45 |
| Operating margin | 7.7% | 8.2% | 7.9% | 7.1% |
Cash flow and liquidity. First-half operating cash flow was $5.7 million, down from $8.8 million, chiefly because accounts receivable rose. Investing used $22.0 million, including $16.2 million for acquisitions; financing provided $19.1 million, primarily from debt. Cash was $5.8 million at June 30, versus $3.0 million at year-end 2013. Working capital was $82.7 million, and the current ratio was 2.10, up from 1.81.
Debt. Total debt was $57.5 million at June 30, 2014, up from $36.5 million at December 31, 2013; cash-adjusted debt was approximately $51.7 million. The company reported $61.6 million of availability on its $100 million revolving facility, net of letters of credit, and compliance with its debt covenants. The leverage ratio was 1.31 against a maximum of 2.75; interest coverage was 11.44 against a minimum of 3.00.
Changes and operating drivers
- Sales increased 10.8% in Q2 and 10.1% in the first half. Management attributed growth to volume, foreign exchange, market-share gains, and acquisitions; lower price/material pass-through and unfavorable mix partially offset growth.
- Metal Bearing Components sales rose to $73.0 million in Q2 from $65.9 million, and segment income increased to $5.8 million from $4.8 million. First-half segment income rose to $11.8 million from $8.9 million, supported by volume and continuous-improvement savings.
- Precision Metal Components Q2 sales increased to $25.3 million from $21.5 million, largely due to VS; segment income declined to $1.5 million from $1.8 million. First-half income increased modestly to $3.1 million from $2.9 million, as improvement gains were partly offset by VS operating losses and integration costs.
- Plastic and Rubber Components Q2 sales fell to $8.4 million from $8.9 million, while segment income rose to $0.3 million from $0.2 million. First-half sales fell to $16.3 million from $18.3 million and income edged down to $0.4 million from $0.5 million, reflecting discontinued programs and lower volumes.
- SG&A rose to $10.1 million in Q2 and $20.1 million in the first half. Acquisition-related professional fees were $0.9 million and $1.4 million, respectively; the filing also cites added VS costs and higher spending. First-half interest expense declined to $1.1 million from $1.5 million.
Acquisitions, outlook, and risks
- NN acquired 79.2% of Bosnia-based RFK on June 20 for $9.8 million cash; it expects to acquire the remaining shares. RFK contributed approximately $0.2 million of revenue and $0.02 million of net income after acquisition. Purchase accounting remained preliminary at quarter-end.
- NN acquired most of VS’s operating assets in January. Through June 30, VS contributed $5.9 million of revenue and a $0.95 million net loss, including integration costs.
- On July 21, NN announced a definitive agreement to acquire Autocam for $244.5 million cash, $25 million in stock, and assumption of $30.5 million debt. Closing was expected in Q3, subject to customary conditions and regulatory approval. NN expected more than $250 million of pro forma annual revenue contribution and planned to fund the deal with a $350 million term loan and $100 million asset-based facility.
- Management expected up to $23 million of 2014 capital expenditures, with spending weighted toward the second half, and believed operating cash flow and available borrowing would fund capital and working-capital needs through June 2015. No formal earnings guidance is stated in the provided filing text.
- Key exposures include customer concentration, industrial and automotive demand, underutilized capacity, raw-material prices, quality, competition, acquisition integration and financing, and foreign currency. No currency hedges were in place; a one-percentage-point increase in rates on variable-rate debt was estimated to add about $0.4 million of annual interest expense. European sales are seasonally slower in August.
- Management expected no further significant financial-statement impact from the bankruptcy and liquidation of its German subsidiary. Other legal proceedings were described as routine and not expected to be material; recorded legal loss contingencies were approximately zero at June 30.
Important facts for investors to verify
- Whether Autocam closed on schedule, its final purchase price and financing, and the resulting debt, covenant headroom, and integration costs.
- RFK’s finalized purchase-price allocation and completion of the planned purchase of its remaining shares.
- Whether the increase in receivables and inventory converts to cash, given lower first-half operating cash flow.
- Whether VS improves from its first-half loss and whether announced cost and continuous-improvement initiatives offset price/mix pressure.
- Updates on the German subsidiary bankruptcy and any material changes in legal contingencies or disclosed risk factors.