NN, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2013. Unaudited; filed November 8, 2013. Amounts below are in millions of dollars, except per-share data and ratios.
Financial performance
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Net sales | $93.0 | $86.6 | $283.1 | $289.9 |
| Income from operations | $7.8 | $5.9 | $21.4 | $23.2 |
| Operating margin | 8.4% | 6.8% | 7.5% | 8.0% |
| Net income | $5.1 | $3.1 | $12.7 | $16.1 |
| Diluted EPS | $0.29 | $0.18 | $0.74 | $0.94 |
| Operating cash flow | Not reported quarterly | Not reported quarterly | $25.7 | $22.7 |
Q3 sales increased 7.4% year over year, led by volume growth, partly offset by lower price/material pass-through and unfavorable mix. Operating income rose 31.7%; net income rose 62.2%. For the first nine months, sales declined 2.3% and net income fell 21.0%. The YTD decline reflected lower volumes, particularly in European automotive and industrial markets, reduced price/material pass-through, and higher taxes. The 2013 effective tax rate was 34% YTD versus 19% in 2012, primarily because U.S. operations recognized tax expense after valuation allowances on most U.S. deferred tax assets were removed at year-end 2012.
Q3 gross margin is not separately presented in the filing; operating margins above are calculated from reported operating income and sales. Interest expense declined to $0.7 million in Q3 from $1.1 million, and to $2.1 million YTD from $3.4 million, reflecting lower borrowing rates and debt. Q3 other income was $0.3 million versus other expense of $0.8 million, mainly due to the reversal from foreign-exchange losses to gains on intercompany loans.
Liquidity, cash flow and debt
- Nine-month operating cash flow was $25.7 million; capital spending was $9.1 million; financing cash outflow was $31.0 million, primarily from debt repayments. Cash decreased $14.5 million to $4.5 million.
- Total debt fell to $38.7 million at September 30, 2013 from $69.5 million at December 31, 2012, including $5.7 million of current maturities. The company repaid $30.7 million of long-term debt during the first nine months.
- Current assets were $126.8 million and current liabilities $69.2 million; the current ratio was 1.83, down from 2.17 at year-end 2012. Working capital was $57.5 million versus $68.5 million.
- Availability under the $100 million revolving facility was $86.3 million, net of letters of credit, subject to covenants. The company reported compliance with all debt covenants; leverage was 1.05x against a 2.75x maximum, and interest coverage was 9.62x against a 3.00x minimum.
Business trends, outlook and risks
- Segments are Metal Bearing Components, Precision Metal Components, and Plastic and Rubber Components. In Q3, metal-bearing and precision-metal sales increased; plastic-and-rubber sales declined. YTD, plastic-and-rubber sales fell $5.1 million, while metal-bearing sales decreased $1.8 million and precision-metal sales were essentially flat.
- Management cited improving demand in North American and Asian automotive markets and stronger European heavy-truck demand during Q2 and Q3, but continued weakness in European automotive and industrial markets and slowing Asian economic growth. Certain lower-margin programs were being deemphasized or ended.
- Management expected 2013 capital expenditures of up to $17 million, primarily for new or expanded business, with heavier spending in the second half. It believed operating cash flow and available borrowings would fund capital and working-capital needs through September 2014.
- Foreign-currency exposure remained unhedged. A 1% increase in rates on variable-rate debt would add about $0.1 million of annual interest expense.
- Routine legal matters had estimated aggregate potential liabilities of $0–$3.0 million; $0.75 million was accrued. The German subsidiary Eltmann’s bankruptcy proceedings remained unresolved, although the trustee released NN from claims effective October 15, 2013; the company did not expect further significant financial-statement effects.
- No material changes to the risk factors in the 2012 Form 10-K were reported. Management cautioned interim results are not necessarily indicative of full-year or future results.
Key facts for investors to verify
- Whether stronger Q3 automotive and heavy-truck volumes persist, and whether European and Asian demand stabilizes.
- Whether receivables growth and lower cash balances affect working-capital needs; receivables were $65.8 million versus $51.6 million at year-end.
- Execution and returns on planned capital spending, as well as continued debt reduction and covenant headroom.
- Final outcome and any residual obligations from the Eltmann bankruptcy proceedings, and developments in accrued legal contingencies.
- Tax expense after removal of U.S. deferred-tax valuation allowances and the potential effect on year-over-year earnings comparability.