Business Context and Reporting Period
Company: NN, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 2011
Business Overview: NN, Inc. operates in three segments: Metal Bearing Components, Precision Metal Components, and Plastic and Rubber Components. The company serves automotive and industrial end markets globally.
Key Financial Metrics
| Metric | Q1 2011 | Q1 2010 |
|---|---|---|
| Net Sales | $111,307 | $85,340 |
| Net Income | $5,507 | $225 |
| Diluted EPS | $0.33 | $0.01 |
| Operating Cash Flow | ($17,714) | ($198) |
| Total Assets | $273,173 | $248,555 |
| Total Debt | $92,250 | $73,357 |
| Cash and Equivalents | $4,572 | $5,556 |
Note: All figures in thousands of dollars unless otherwise noted.
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased 30.4% year-over-year, driven primarily by volume growth (approx. $21.3M) and material inflation pass-throughs ($2.9M). Foreign exchange effects were slightly negative ($0.4M).
- Profitability Surge: Net income jumped from $225k to $5.5M. This was aided by a $209k gain from the deconsolidation of a bankrupt subsidiary and the absence of $569k in restructuring charges incurred in Q1 2010.
- Cost Structure: Cost of products sold increased 31% due to volume and inflation. However, depreciation and amortization decreased significantly ($2.1M) due to the cessation of the Tempe Plant and the elimination of fully depreciated assets.
- Cash Flow: Operating cash flow turned negative ($17.7M outflow) compared to a minimal outflow in 2010. This was primarily due to a $22.1M increase in accounts receivable driven by sales growth.
- Debt Levels: Total debt increased by $18.9M to fund working capital requirements associated with higher production volumes.
Guidance, Outlook, and Risks
- Deconsolidation of Eltmann: The company's German subsidiary, Eltmann, filed for bankruptcy on January 20, 2011. NN lost control and deconsolidated the subsidiary, resulting in a $209k gain and the removal of $5.6M in pension liabilities. Management expects no further significant financial impact from the liquidation.
- Segment Performance:
- Metal Bearing Components: Strong growth with net income of $9.8M, driven by volume and fixed cost leverage.
- Precision Metal Components: Reported a net loss of $2.2M due to $2.5M in start-up costs for new multi-year sales programs, offsetting volume gains.
- Plastic and Rubber Components: Net income of $0.8M, driven by increased U.S. automotive demand.
- Liquidity: The company has a $100M revolving credit facility with $29.9M available. Management forecasts positive cash flow for the remainder of 2011 and expects to meet capital expenditure needs ($23M planned for the year) through operations and borrowings.
- Risks:
- Foreign Exchange: Fluctuations in the Euro negatively impacted revenue and caused losses on inter-company loans ($0.9M). No currency hedges are currently in place.
- Environmental: Ongoing remediation at a former vendor site in South Carolina; liability is estimated at $143k and fully accrued.
Investor Verification Checklist
- Accounts Receivable Quality: Verify the collectability of the $84.2M receivable balance, which increased significantly due to sales volume and a 4-day increase in days sales outstanding.
- Start-up Cost Sustainability: Monitor the Precision Metal Components segment to ensure start-up costs for new programs decrease as production ramps up, as currently they are driving a segment loss.
- Debt Covenants: Confirm continued compliance with financial covenants (Interest Coverage 4.24x, Leverage 2.30x) given the increased debt load.
- Foreign Exchange Exposure: Assess the impact of Euro volatility on future earnings, given the lack of hedging instruments.
- Working Capital Needs: Evaluate if the negative operating cash flow is a temporary seasonal effect or a structural issue requiring further debt financing.