NN, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2015. Unaudited; dollar amounts below are in millions unless stated otherwise. NN manufactures bearing, precision metal, plastic and rubber components.
Financial performance
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Revenue | $154.8 | $125.6 | $483.4 | $334.8 |
| Operating income | $10.1 | $2.6 | $37.6 | $19.1 |
| Net income (loss) | $4.6 | ($3.8) | $17.6 | $6.6 |
| Diluted EPS | $0.17 | ($0.21) | $0.86 | $0.36 |
| Operating margin | 6.5% | 2.0% | 7.8% | 5.7% |
Q3 revenue rose 23% year over year; nine-month revenue rose 44%. Much of the increase reflected acquisitions, including the fuller inclusion of Autocam and the May 2015 Caprock acquisition. On management’s acquisition-adjusted comparison, Q3 revenue also faced lower volume and unfavorable price/mix, while nine-month volume increased. Adjusted net income and adjusted EBITDA—non-GAAP measures—were $8.3 million and $25.5 million for Q3, and $22.3 million and $74.0 million for the nine months, respectively. These measures exclude specified acquisition/integration and foreign-exchange items and are not GAAP substitutes.
Interest expense was $4.6 million in Q3, down from $5.6 million, but was $16.5 million for the nine months, up from $6.7 million, principally reflecting acquisition-related borrowing. Depreciation and amortization rose to $8.6 million in Q3 and $25.7 million for nine months, largely due to acquisitions.
Cash flow, balance sheet and liquidity
- Operating cash flow was $13.3 million for the first nine months, versus $1.5 million in 2014. Capital expenditures were $26.3 million; investing cash outflow was $34.0 million. Cash increased $2.8 million to $40.1 million.
- At September 30, total debt was $206.0 million, down from $350.2 million at December 31, 2014; this excludes capital lease obligations. Cash was $40.1 million. Current maturities of long-term debt were $21.7 million.
- Current assets were $258.4 million and current liabilities $121.1 million, giving a current ratio of approximately 2.1. Management reported working capital of $137.3 million, up from $105.2 million at year-end.
- The $100 million ABL revolver had no borrowings; reported availability was $59.4 million, net of letters of credit and subject to borrowing-base limits. The $350 million Term Loan B bore LIBOR subject to a 1% floor plus a 5% margin and required 5% annual principal amortization.
Material changes, outlook and risks
- On July 1, NN issued 7.59 million shares at $24 per share, receiving approximately $173.1 million net. It used $148.7 million of proceeds to repay debt. The offering materially increased shares outstanding.
- Currency translation, principally the weaker euro, reduced nine-month sales by $24.1 million and net income by $2.2 million; the filing also cites a $1.5 million unfavorable transaction impact on euro-denominated intercompany loans. No currency hedges were in place at quarter-end. A 1% increase in rates on outstanding variable-rate borrowings was estimated to increase annual interest expense by approximately $2.0 million.
- Management expected 2015 capital expenditures of $35–$45 million and said operating cash flow and available borrowing were expected to fund capital expenditures and working capital through September 2016. This outlook was based on forecast positive cash flow and then-current credit availability.
- After quarter-end, NN acquired PEP on October 19 for $615 million in cash. Financing included $300 million of 10.25% senior notes due 2020 and new facilities comprising a $525 million term loan and $100 million revolver. PEP is not included in the reported quarter’s results; the acquisition substantially changes the company’s subsequent debt and business profile.
- NN announced closure of its Wheeling plant on November 5, with most sales and productive assets expected to move to other facilities. A preliminary restructuring charge of $4.5–$6.0 million was expected in Q4 2015; closure was expected to be completed in the first half of 2016.
- Demand weakness in China and euro depreciation pressured results. Key disclosed risks include acquisition integration and leverage, cyclical automotive/industrial demand, customer concentration, limited steel sources, foreign-exchange exposure, and execution of PEP integration. The filing reports a Brazilian ICMS tax-credit dispute with a possible loss range of $0–$6 million; no amount was accrued, and management considered a loss not probable. It cited indemnification from former Autocam shareholders, subject to agreement limitations.
Important facts for investors to verify
- Review post-PEP pro forma debt, interest burden, covenants, liquidity and debt-repayment plans; the September 30 balance sheet predates the acquisition and its financing.
- Assess how much reported growth and profit improvement came from acquisitions versus organic demand, and whether integration benefits offset acquisition costs and higher depreciation.
- Track cash conversion, capital spending, working-capital needs and actual revolver availability against management’s liquidity expectations.
- Monitor foreign-exchange effects, China demand, customer concentration and raw-material sourcing exposure.
- Confirm the final Wheeling closure costs and timing, and developments in the Brazilian tax matter and related indemnification.