NN, Inc. — Q2 2016 Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2016. Unaudited interim results. NN manufactures precision bearing components, industrial plastic products, and precision metal components through three reportable segments. Results include the PEP and Caprock acquisitions, which were not fully reflected in the comparable 2015 periods.
Key financial results
| Metric | Q2 2016 | Q2 2015 | H1 2016 | H1 2015 |
|---|---|---|---|---|
| Net sales | $214.3 million | $164.9 million | $426.5 million | $328.6 million |
| Operating income | $16.7 million | $13.6 million | $28.6 million | $27.5 million |
| Net income | $2.0 million | $7.0 million | $0.7 million | $13.0 million |
| Diluted earnings per share | $0.07 | $0.36 | $0.03 | $0.67 |
| Operating margin | 7.8% | 8.2% | 6.7% | 8.4% |
Sales rose year over year mainly because of acquisitions; organic factors included lower volumes, pricing/product mix and foreign-exchange effects. Operating income increased in Q2 but was nearly flat for H1, while net income declined substantially as interest costs rose. Interest expense was $16.2 million in Q2 and $32.6 million in H1, versus $6.0 million and $12.0 million, respectively, a year earlier.
Cash flow, liquidity and debt: H1 operating cash flow was $11.6 million, compared with $4.3 million in H1 2015. Capital expenditures were $18.2 million; investing cash outflow was $16.4 million. Financing provided $7.0 million. Cash was $15.1 million at June 30, essentially unchanged from year-end. Current assets were $297.9 million and current liabilities $138.9 million; company-defined working capital was $159.0 million, up from $146.8 million at year-end. Reported debt was $820.8 million, net of issuance costs, plus $11.8 million of capital-lease obligations. The company reported $74.7 million of revolver availability, net of letters of credit.
For H1, the gross margin calculated as sales less cost of products sold, before depreciation and amortization, was approximately 25.8%, versus 21.5% in H1 2015. This comparison reflects acquisitions and changes in business mix and is not a reported GAAP margin measure.
Changes and segment performance
- H1 sales increased $97.9 million, with $116.3 million attributed to acquisitions, partly offset by currency, plant-sale, volume, and price/mix effects.
- Precision Bearing Components H1 sales fell to $129.9 million from $142.5 million, and operating income declined to $12.8 million from $18.5 million. Management cited industrial weakness, lower heavy-truck demand, mix, currency and restructuring.
- Autocam Precision Components H1 sales were $167.0 million versus $169.1 million; operating income fell to $14.3 million from $16.8 million. Currency and pricing weighed on sales; restructuring costs were partly offset by process-improvement savings.
- Precision Engineered Products H1 sales increased to $129.6 million from $17.0 million and operating income to $16.2 million from $0.7 million, primarily reflecting the PEP acquisition; the Delta plant sale partly offset growth.
Outlook, risks and unusual items
- No specific earnings or revenue guidance is provided. Management expected $40–$50 million of capital expenditures over the next 12 months, primarily for new or expanded business, and said operations and available borrowing should fund debt service, capex and working capital needs.
- Management identified global industrial weakness, customer concentration, capacity utilization, acquisition integration, foreign currency exposure and seasonal European production slowdowns as risks. Brexit had no material effect on the reported period, but its future impact was uncertain. No currency hedges were in place at June 30.
- Restructuring and impairment charges were $4.0 million in Q2 and $6.6 million in H1, including charges related to the Wheeling plant closure. The premises were vacated in Q2; a portion of production and assets was to be transferred to other Autocam facilities.
- An out-of-period $0.4 million compensation adjustment was included in Q2 SG&A to correct accounting for certain executive share-based awards.
- A Brazilian ICMS tax-credit dispute has a possible loss range of $0–$6.0 million; management said loss was not probable, no accrual was recorded, and it expected indemnification from former Autocam shareholders, subject to agreement limitations.
- NN reported a $150 million interest-rate swap fixing the rate on a portion of term debt at 6.966% through 2018. Management estimated a 1 percentage-point rate increase would add about $5.7 million of annual interest on the variable-rate term loan. The company also cited $25.6 million of annual interest on outstanding senior notes at 10.25%.
Important facts for investors to verify
- Whether acquired-business contributions and integration costs translate into sustained organic growth and operating profitability.
- The company’s ability to service substantial debt and interest costs while maintaining liquidity and funding planned capital expenditures.
- Underlying segment trends, especially industrial and heavy-truck demand, Brazil exposure, and the extent of restructuring savings.
- Potential outcomes of the Brazilian tax assessment and the practical scope of related indemnification.
- The impact of foreign exchange, Brexit-related uncertainty, and seasonal customer production patterns on future results.