NN, Inc. — 2012 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2012. The filing also provides unaudited quarterly results, including the quarter ended December 31, 2012. Unless otherwise noted, financial amounts below are in millions of dollars.
Business context
NN manufactures precision bearing components, plastic and rubber products, and precision metal components. In 2012, Metal Bearing Components represented 68.2% of sales, Precision Metal Components 20.7%, and Plastic and Rubber Components 11.1%. Sales are cyclical and geographically concentrated: 61% of consolidated sales were to customers in Europe and North America combined, and SKF accounted for 34% of total sales.
Financial performance and liquidity
| Metric | 2012 | 2011 |
|---|---|---|
| Net sales | $370.1 | $424.7 |
| Income from operations | $25.1 | $29.4 |
| Operating margin | 6.8% | 6.9% |
| Net income | $24.3 | $20.9 |
| Diluted EPS | $1.42 | $1.24 |
| Cash from operating activities | $37.4 | $15.0 |
| Capital expenditures | $17.1 | $20.3 |
- Sales fell 12.9%; operating income declined 14.8%. Net income increased 15.9%, largely reflecting a non-recurring tax benefit.
- Cost of products sold was 79.7% of sales versus 81.9% in 2011. SG&A increased to $31.6 million from $30.7 million; depreciation and amortization was $17.6 million.
- At December 31, cash was $19.0 million, current assets $127.3 million, and current liabilities $58.8 million; the current ratio was 2.17. Working capital was $68.5 million.
- Total debt was $69.5 million, comprising $38.1 million under the revolving facility and $31.4 million in fixed-rate notes. The company reported $61.2 million of additional revolver availability, subject to covenants. Stockholders’ equity was $128.6 million.
- Interest expense was $3.9 million. The company reported compliance with its debt covenants; actual leverage was 1.72 versus a maximum of 2.75, and interest coverage was 8.21 versus a minimum of 3.00.
Changes and quarterly performance
- The $54.6 million sales decline reflected lower volume ($46.0 million) and adverse currency translation ($11.7 million), partly offset by price, mix, and material-cost pass-through. Weak European demand, slower Asian growth, lower automotive demand, and customer inventory reductions weighed on the Metal Bearing Components business.
- Metal Bearing Components sales fell to $252.2 million from $308.9 million, and segment net income fell to $21.0 million from $30.4 million. Precision Metal Components sales rose to $76.7 million from $72.3 million and segment net income improved to $8.0 million from a $3.1 million loss, partly because 2011 start-up costs did not recur. Plastic and Rubber sales declined to $41.1 million from $43.5 million; reported segment net income rose to $3.0 million, including tax benefits.
- Fourth-quarter sales were $80.2 million versus $96.3 million a year earlier; operating income was $1.8 million versus $5.2 million. Fourth-quarter net income rose to $8.2 million from $4.9 million, substantially influenced by favorable tax adjustments of $7.3 million.
- Operating cash flow increased to $37.4 million, supported by working-capital movements, including collections and lower receivables as sales volumes declined. The company repaid $8.6 million of debt during the year; cash increased to $19.0 million from $4.5 million.
Outlook, risks, and unusual items
- Management expected approximately $17 million of 2013 capital expenditures, mostly for new or expanded business, and stated that forecast operating cash flow and available credit were expected to fund working capital and capital needs through December 2013. This is management’s expectation, not a guarantee.
- A net $7.3 million favorable tax benefit resulted mainly from releasing U.S. deferred-tax-asset valuation allowances; the company also recorded a $1.0 million non-cash impairment of its former Kilkenny, Ireland facility and $1.1 million of after-tax foreign-exchange losses on intercompany notes.
- Principal risks include economic and automotive/industrial cyclicality, European exposure, customer concentration (SKF at 34% of sales; top ten customers at 74%), reliance on a limited number of steel suppliers, foreign-exchange movements, and debt covenant and refinancing exposure. The company had no currency hedges in place at year-end.
- The company reported a lawsuit by a former sales agent and unresolved potential liabilities associated with the German subsidiary Eltmann’s bankruptcy. Management did not expect the lawsuit to have a material adverse effect; the ultimate Eltmann contingent obligations remained uncertain.
- CEO and Chairman Roderick Baty had announced plans to retire by the May 2013 annual meeting; the succession search was ongoing. The company paid no common-stock dividends in 2012 or 2011.
- The independent auditor issued an unqualified opinion on the financial statements and internal control over financial reporting; management and the auditor reported effective internal controls as of year-end.
Important facts for investors to verify
- How much of 2012 net income and EPS growth came from the non-recurring tax benefit, versus ongoing operating performance?
- Whether demand and customer inventory levels recover, particularly in Europe, and whether sales declines continue into 2013.
- Whether projected cash generation and $61.2 million of revolver availability remain adequate under covenant limits and planned capital spending.
- Progress on reducing reliance on SKF and other major customers, and the impact of steel sourcing, currency, and any remaining Eltmann obligations.
- Execution of the CEO succession and the expected returns from growth-related capital expenditures.