NN, Inc. — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014; comparisons are with Q1 2013 unless stated otherwise. Financial statement amounts below are in millions of dollars, except per-share data. The interim statements are unaudited.
Business context and results
NN manufactures metal bearing, precision metal, and plastic and rubber components. Management attributed higher sales mainly to increased automotive and European heavy-truck demand, improved customer share, and the January acquisition of VS Industries.
| Metric | Q1 2014 | Q1 2013 |
|---|---|---|
| Net sales | $102.5 | $93.8 |
| Income from operations | $8.3 | $5.6 |
| Net income | $5.2 | $2.9 |
| Diluted EPS | $0.29 | $0.17 |
| Operating cash flow | $(1.3) | $(2.5) |
| Capital expenditures | $2.2 | $3.2 |
Sales increased 9.3%; operating income rose 47.9% and net income rose 82.5%. Operating margin was approximately 8.1% versus 6.0%; net margin was approximately 5.1% versus 3.1%. Cost of products sold and depreciation and amortization together imply gross margin of approximately 17.9%, up from 15.7%. The effective tax rate was 32%, compared with 33%. Comprehensive income was $4.6 million, including a $0.6 million foreign-currency translation loss.
Segments and material changes
- Metal Bearing Components: Sales were $70.9 million, up $7.2 million; segment net income was $6.0 million, up $1.9 million. Higher volume and continuous-improvement savings supported earnings; lower price/pass-through and product mix partly offset the gains.
- Precision Metal Components: Sales were $23.7 million, up $3.0 million, including $1.8 million attributed to the VS acquisition. Segment net income was $1.6 million, up $0.6 million.
- Plastic and Rubber Components: Sales declined $1.5 million to $7.9 million as certain programs ended. Segment net income fell $0.1 million to $0.2 million, primarily due to lower volume and under-absorbed fixed costs.
- Consolidated sales growth reflected $7.8 million from volume, $1.8 million from foreign exchange, and $1.8 million from acquisitions, partly offset by $2.7 million from price, material pass-through, and mix.
Cash, liquidity, and debt
Cash was $4.5 million at March 31, versus $3.0 million at year-end. Operating activities used $1.3 million; investing activities used $9.5 million, including $7.3 million for the VS acquisition; financing activities provided $12.4 million, primarily from additional borrowings. The company reported working capital of $66.6 million and a current ratio of 1.84, compared with $56.3 million and 1.81 at December 31.
Total debt increased to $49.8 million from $36.5 million: $24.0 million drawn on a $100 million revolving facility and $25.7 million of fixed-rate notes. The filing reported $75.1 million of revolver availability, net of letters of credit and subject to covenants. NN was in compliance with its covenants at quarter-end; actual interest coverage was 12.26:1, fixed-charge coverage 1.23:1, and leverage 1.14:1. A $5.7 million fixed-rate note was scheduled to mature April 26, 2014. The filing states that management expected operating cash generation and available borrowings to fund capital expenditures and working capital through March 2015.
Acquisition, outlook, risks, and contingencies
- NN acquired the majority of VS Industries’ operating assets on January 30 for $5.6 million in cash and incurred $0.5 million in acquisition-related professional fees. VS contributed approximately $1.8 million of revenue and a $0.45 million net loss through quarter-end. Purchase-price allocation was preliminary; management expected to complete valuations and report the final allocation in Q2 2014.
- Management expected 2014 capital expenditures of up to $23 million, mostly for new or expanded business, with heavier spending in the second half. Q1 spending was $2.2 million. The filing did not provide earnings or revenue guidance.
- Foreign exchange benefited 2014 revenue and net income, but NN had no currency hedges at quarter-end. A 1 percentage-point increase in rates on variable borrowings was estimated to raise annual interest expense by approximately $0.2 million.
- Ordinary legal matters had an aggregate recorded contingency of approximately $0.2 million, which management considered adequate for probable liabilities. The ultimate effect of the German subsidiary Eltmann’s bankruptcy depended on the bankruptcy court; management did not expect further significant financial-statement impacts from its liquidation.
- Management cautioned that Q1 results are not necessarily indicative of full-year results. It cited seasonality in the Metal Bearing segment, including slower European customer production in August. The company reported no material changes to its previously disclosed risk factors.
Important facts for investors to verify
- Whether the April 2014 maturity of the $5.7 million fixed-rate note was repaid, refinanced, or otherwise addressed.
- Final VS Industries purchase-price allocation and subsequent acquired-business performance, given its Q1 net loss and preliminary valuations.
- Whether receivables and working-capital growth convert to cash, as Q1 operating cash flow remained negative.
- Progress against the planned $23 million 2014 capital-spending program and management’s stated funding outlook.
- Exposure to currency movements, variable borrowing costs, and the unresolved Eltmann bankruptcy proceedings.