NN, Inc. — Q1 2012 Form 10-Q Summary
Reporting period: Three months ended March 31, 2012; filed May 8, 2012. Financial statements are unaudited. Unless otherwise noted, dollar amounts below are in thousands.
Business context and key financial metrics
NN manufactures metal bearing, precision metal, and plastic and rubber components. Q1 results reflect lower European demand in the Metal Bearing Components segment and higher sales from a new multi-year program in Precision Metal Components.
| Metric | Q1 2012 | Q1 2011 |
|---|---|---|
| Net sales | $104,519 | $111,307 |
| Gross profit, calculated | $21,550 | $21,008 |
| Gross margin, calculated | 20.6% | 18.9% |
| Income from operations | $9,033 | $9,217 |
| Operating margin, calculated | 8.6% | 8.3% |
| Net income | $5,909 | $5,507 |
| Basic and diluted EPS | $0.35 | $0.33 |
| Net cash used by operating activities | $1,148 | $17,714 |
| Capital expenditures | $4,079 | $3,788 |
At March 31, cash was $11,807; current assets were $139,304 and current liabilities $67,740, for a 2.06:1 current ratio. Total debt was $87,343, including $50,200 under a floating-rate revolving facility and $37,143 of fixed-rate notes. Revolver availability was $38,800, net of letters of credit and subject to covenants.
Material changes versus the prior comparable period
- Sales declined $6,788 (about 6.1%). Management attributed the decrease mainly to lower European Metal Bearing Components volumes, reflecting weaker automotive demand and customer supply-chain inventory adjustments. Foreign exchange reduced sales by $1,659; lower volume reduced them by $6,919, partly offset by price, mix, and material-cost pass-through.
- Metal Bearing Components sales fell to $72,130 from $83,782 and segment net income fell to $6,934 from $9,831. Precision Metal Components sales rose to $21,312 from $16,402, and the segment moved from a $2,208 loss to $1,639 income, aided by program ramp-up and the absence of $2,500 of prior-year start-up and inefficiency costs. Plastic and Rubber Components sales were nearly unchanged at $11,077; segment income increased to $961 from $818.
- Net income rose $402 despite lower sales. Lower cost of products sold and other expense contributed, while operating income declined $184. Other expense fell to $438 from $1,036; Q1 2012 included $700 of foreign-exchange losses on intercompany loans and $200 of gains on final settlement of a note receivable.
- Operating cash use improved to $1,148 from $17,714, primarily because the increase in receivables was smaller than in Q1 2011. Receivables nevertheless rose $9,672 from year-end, partly reflecting sales growth late in the quarter. Debt increased $9,211 from December 31, 2011.
Outlook, risks, contingencies, and unusual items
- Management expected 2012 capital expenditures of $15,000–$20,000, mainly for new or expanded business. It believed operating cash generation and credit availability would fund capital expenditures and working-capital needs through March 2013, based on forecast positive cash flow for the remainder of 2012.
- No earnings guidance was provided. Management reported compliance with debt covenants at March 31, 2012: interest coverage 7.51:1 versus a 3.00:1 minimum; fixed-charge coverage 1.30:1 versus a 1.00:1 minimum; and leverage 1.88:1 versus a 2.50:1 maximum. The fixed-charge minimum was scheduled to rise to 1.25:1 after September 30, 2012.
- NN had no currency hedges. A 1 percentage-point increase in rates on outstanding variable-rate borrowings was estimated to raise annual interest expense by about $500. The filing describes exposure to euro and other foreign-currency movements and dependence on European demand.
- The company retained an approximately $11,750 valuation allowance against U.S. net deferred tax assets. Management said continued U.S. profitability could lead to reversal of a significant portion, except approximately $3,250 related to foreign tax credits, producing a tax benefit; timing and amount depend on future results.
- Environmental remediation at a former vendor was estimated at approximately $10,000 in total, with NN’s approximately $143 share fully accrued. Eltmann’s German bankruptcy proceedings could leave undetermined liabilities or contingent obligations, although management did not expect further significant consolidated impact.
- NN received $1,945 to settle a long-term note receivable whose prior carrying value was $1,772. Q1 included a related $200 gain. The company also reported no impairment indicators for its remaining goodwill or indefinite-lived trade name asset.
Important facts for investors to verify
- Whether European customer demand and supply-chain inventory adjustments improve, and whether lower Metal Bearing Components volumes continue to pressure earnings.
- Whether the Precision Metal Components program sustains its Q1 contribution as production ramps and costs evolve.
- Cash conversion and working-capital requirements, including receivables, accounts payable, and the pace of debt growth.
- Compliance with debt covenants, the reduced revolver availability, and the higher fixed-charge coverage requirement after September 30, 2012.
- Actual 2012 capital spending and operating cash flow versus management’s forecast, and any changes in U.S. tax valuation allowances or unresolved contingencies.