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NNBR > SEC Filings for NNBR > Form 10-Q on 8-Nov-2012All Recent SEC Filings

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Form 10-Q for NN INC


8-Nov-2012

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Statements

We wish to caution readers that this report contains, and our future filings, press releases and oral statements made by our authorized representatives may contain, forward-looking statements that involve certain risks and uncertainties. Readers can identify these forward-looking statements by the use of such verbs as expects, anticipates, believes or similar verbs or conjugations of such verbs. Our actual results could differ materially from those expressed in such forward-looking statements due to important factors bearing on our business, many of which already have been discussed in this filing and in our prior filings. The differences could be caused by a number of factors or combination of factors including the risk factors discussed in "Item 1A Risk Factors" of our Annual Report on Form 10-K for the year ended December 31, 2011 which we filed with the Securities and Exchange Commission on March 15, 2012.

Results of Operations

Three Months Ended September 30, 2012 Compared to the Three Months Ended
September 30, 2011.

OVERALL RESULTS



                                                               Consolidated NN, Inc.
(In Thousands of Dollars)                       2012          2011                   Change
Net sales                                     $ 86,586      $ 101,143       $ (14,557 )
Foreign exchange effects                                                                       (4,145 )
Volume                                                                                        (11,536 )
Price/ material inflation pass-through                                                            239
Mix                                                                                               885

Cost of products sold (exclusive of
depreciation and amortization shown
separately below)                               68,426         83,575         (15,149 )
Foreign exchange effects                                                                       (3,355 )
Volume                                                                                         (8,183 )
Cost reduction projects and other cost
changes                                                                                        (4,326 )
Mix                                                                                               343
Inflation                                                                                         372

Selling, general and administrative              7,886          7,498             388
Foreign exchange effects                                                                         (247 )
Increase in spending                                                                              635

Depreciation and amortization                    4,357          4,298              59
Foreign exchange effects                                                                         (221 )
Net increase in depreciation expense                                                              280

Interest expense                                 1,061          1,169            (108 )
Gain on disposal of assets                          -             (23 )            23
Other expense (income), net                        765         (1,462 )         2,227

Income before provision for income taxes         4,091          6,088          (1,997 )
Provision for income taxes                         976          1,386            (410 )

Net income                                    $  3,115      $   4,702       $  (1,587 )

Net Sales. Net sales decreased during the third quarter of 2012 from the third quarter of 2011 due to lower sales volumes experienced primarily at the European and Asian units of our Metal Bearing Components Segment. The reductions in sales volumes were due to macro-economic issues within the European Union, slowing Asian macro-economic growth, and overall lower automotive demand in Europe. Additionally, we believe demand for our products was affected by our customers and their customers adjusting inventory levels, as our sales volume reduction was much greater than the reduction in actual end market demand within the markets we serve. Finally, sales were reduced as the strengthening of the US Dollar caused a lower translated value of Euro denominated sales. The favorable mix occurred as a portion of the reduction in sales volumes experienced were in lower priced products.


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Cost of Products Sold (exclusive of depreciation and amortization shown separately below). A large portion of the decrease was from the lower sales volumes and the related reductions in production costs at those units of the Metal Bearing Components Segment that experienced lower sales volumes, as discussed above. Additionally, the third quarter 2012 cost of products sold was lower in comparison to 2011, as the $1.0 million in start-up costs incurred during the third quarter of 2011 for new multi-year sales programs at our Precision Metal Components Segment did not repeat during 2012. The third quarter 2012 cost of products sold was further reduced by benefits from specific Level 3 continuous improvement projects undertaken during 2012. The Level 3 continuous improvement activities have been at historically high levels during 2012. Finally, cost of products sold was reduced as the strengthening of the US Dollar caused a lower translated value of Euro denominated costs.

Selling, General and Administrative. The increase in spending in selling, general and administrative expenses was primarily due to higher incentive based compensation costs and higher seasonal sales commissions.

Depreciation and Amortization. The increase was due to the carryover effects of depreciation expense generated by 2011 capital expenditures placed in service after the third quarter of 2011 and by 2012 capital expenditures placed in service.

Other expense (income), net. Included in other expense (income), net, during the three months ended September 30, 2012, was $0.7 million related to foreign exchange losses on inter-company loans. During the three months ended September 30, 2011, inter-company loans generated foreign exchange gains of $1.4 million. The gains and losses are a function of the appreciation or depreciation of the Euro versus the U.S. Dollar.

RESULTS BY SEGMENT

METAL BEARING COMPONENTS SEGMENT



                                                         Three months ended
 (In Thousands of Dollars)                                 September 30,
                                           2012         2011                Change

 Net sales                               $ 58,298     $ 72,476     $ (14,178 )
 Foreign exchange effects                                                            (4,145 )
 Volume                                                                             (11,055 )
 Mix                                                                                  1,090
 Price/Material inflation pass-through                                                  (68 )

 Net income                              $  4,503     $  6,064     $  (1,561 )

The decrease in sales during the third quarter of 2012 was driven mainly by volume reductions at our European and Asian units of this segment due largely to lower demand for our products sold into the European and Asian markets. The reductions were due to European macro-economic issues, slowing Asian macro-economic growth, much lower automotive demand in Europe and, we believe, overall reductions of inventory levels in the supply chains we serve. Additionally, sales were reduced as the strengthening of the US Dollar caused a lower translated value of Euro denominated sales. Partially offsetting the reductions were increased sales from favorable product mix. The favorable mix occurred as a portion of the reduction in sales volumes experienced were in lower priced products.

The segment net income in the third quarter of 2012 was negatively impacted by lost profits from much lower sales volumes and related production inefficiencies from lower production levels at the European and Asian units, as discussed above. Partially offsetting the volume effects were benefits from specific cost reduction projects undertaken during 2012 and overall good cost controls in the face of difficult operating environments at those units. Additionally, favorable sales mix helped offset some of negative sales volume effects.


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PRECISION METAL COMPONENTS SEGMENT



                                                   Three months ended
         (In Thousands of Dollars)                   September 30,
                                       2012         2011              Change

         Net sales                   $ 17,132     $ 17,910      $  (778 )
         Volume                                                                (729 )
         Price/mix                                                              (49 )

         Net income (loss)           $  1,649     $   (468 )    $ 2,117

The majority of the decreases in sales at this segment were due to either programs ending at certain customers or from exiting certain sales programs we felt did not meet our minimum required profitability profile. In general, the large new multi-year sales programs put in place over the course of 2011 and 2012 are now at full year sales levels and were generally at full year sales levels during the third quarter of 2011.

The segment improved from a net loss to a net income due to the elimination of $1.0 million of start-up costs on the new multi-year sales programs incurred during the third quarter of 2011. Beyond eliminating the start-up costs, this segment has improved operationally by reducing scrap, temporary labor, and expediting costs. Additionally, the effects of the volume reductions were not as unfavorable as a portion of the lost sales volumes in the quarter were less profitable product lines.

PLASTIC AND RUBBER COMPONENTS SEGMENT



                                                      Three months ended
         (In Thousands of Dollars)                       September 30,
                                             2012         2011           Change

         Net sales                         $ 11,156     $ 10,757     $ 399
         Volume                                                                  248
         Price/mix/material pass-through                                         151

         Net income                        $    245     $    117     $ 128

Sales volumes increased due to sales of seasonal items partially offset by lower sales to a large solar power customer. Segment net income increased due to the higher sales volumes, specific cost reduction projects undertaken during 2012, price increases and favorable sales mix.


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Results of Operations

Nine Months Ended September 30, 2012 Compared to the Nine Months Ended
September 30, 2011.

OVERALL RESULTS



                                                               Consolidated NN, Inc.
(In Thousands of Dollars)                      2012            2011                   Change
Net sales                                    $ 289,929       $ 328,371       $ (38,442 )
Foreign exchange effects                                                                       (11,022 )
Volume                                                                                         (31,115 )
Price                                                                                              599
Mix                                                                                              1,526
Material inflation pass-through                                                                  1,570

Cost of products sold (exclusive of
depreciation and amortization shown
separately below)                              229,243         268,530         (39,287 )
Foreign exchange effects                                                                        (8,872 )
Volume                                                                                         (21,660 )
Cost reduction projects and other cost
changes                                                                                        (12,202 )
Mix                                                                                                361
Inflation                                                                                        3,086

Selling, general and administrative             24,266          23,184           1,082
Foreign exchange effects                                                                          (587 )
Increase in spending                                                                             1,669

Depreciation and amortization                   13,203          12,624             579
Foreign exchange effects                                                                          (512 )
Net increase in depreciation expense                                                             1,091

Gain from deconsolidation of bankrupt
subsidiary                                          -             (209 )           209
Interest expense                                 3,388           3,613            (225 )
Gain on disposal of assets                          (8 )           (20 )            12
Other income, net                                  (36 )          (271 )           235

Income before provision for income taxes        19,873          20,920          (1,047 )
Provision for income taxes                       3,811           4,886          (1,075 )

Net income                                   $  16,062       $  16,034       $      28

Net Sales. Net sales decreased during the first nine months of 2012 from the first nine months of 2011 primarily due to volume reductions experienced at the European operating units of our Metal Bearing Components Segment and to a lesser extent at our U.S. unit of the segment which exports into Europe and our Asian unit of the segment. These effects were partially offset by increased sales volume at our Precision Metal Components Segment. The reduction of sales volumes in our metal bearing components segment was due in part to macro-economic issues within the European Union, slowing Asian macro-economic growth and overall lower automotive demand in Europe. Additionally, we believe demand for our products was affected by our customers and their customers adjusting inventory levels, as our sales volume reduction was much greater than the reduction in actual end market demand within the markets we serve. Finally, sales were reduced as the strengthening of the US Dollar caused a lower translated value of Euro denominated sales.

Cost of Products Sold (exclusive of depreciation and amortization shown separately below). A large portion of the decrease was from the lower sales volumes, as discussed above, and the related reductions in production costs at the units of the Metal Bearing Components Segment. Additionally, 2012 cost of products sold was lower in comparison to 2011, as the $5.5 million in start-up costs incurred during 2011 for new multi-year sales programs at our Precision Metal Components Segment did not repeat during 2012. The 2012 cost of products sold was further reduced by benefits from specific Level 3 continuous improvement projects undertaken during 2012. The Level 3 continuous improvement activities have been at historically high levels during 2012. Finally, cost of products sold was reduced as the strengthening of the US Dollar caused a lower translated value of Euro denominated costs.


Table of Contents

Selling, General and Administrative. The increase in spending in selling, general and administrative expenses was primarily due to higher incentive based compensation costs and higher seasonal sales commissions.

Depreciation and Amortization. The increase was due to the carryover effects of depreciation expense generated by 2011 capital expenditures placed in service after the first nine months of 2011 and by 2012 capital expenditures placed in service.

Other income, net. Included in other income, net, during the nine months ended September 30, 2012, was $0.3 million related to foreign exchange losses on inter-company loans. During the nine months ended September 30, 2011, inter-company loans generated foreign exchange gains of $0.3 million. The gains and losses are a function of the appreciation or depreciation of the Euro versus the U.S. Dollar. Additionally, 2012 included $0.2 million in gains realized with receipt of the final payment of a note receivable. (See Note 2 of the Notes to Condensed Consolidated Financial Statements).

RESULTS BY SEGMENT

METAL BEARING COMPONENTS SEGMENT



                                                      Nine months ended
   (In Thousands of Dollars)                            September 30,
                                       2012          2011                 Change

   Net sales                         $ 196,196     $ 241,084     $ (44,888 )
   Foreign exchange effects                                                       (11,022 )
   Volume                                                                         (36,767 )
   Price/mix                                                                        1,556
   Material inflation pass-through                                                  1,345

   Net income                        $  17,718     $  24,794     $  (7,076 )

The decrease in sales during the first nine months of 2012 was driven mainly by volume reductions at our European units of this segment and to a lesser extent at the U.S. unit exporting into Europe and our Asian unit. The reductions were due to European macro-economic issues, slowing Asian macro-economic growth, much lower automotive demand in Europe and, we believe, overall reductions of inventory levels in the supply chains we serve. Additionally, sales were reduced as the strengthening of the US Dollar caused a lower translated value of Euro denominated sales. Partially offsetting the reductions were increased sales from targeted price increases, favorable product mix and material inflation pass-through. The favorable mix occurred as a portion of the reduction in sales volumes experienced were in lower priced products.

The segment net income in the first nine months of 2012 was negatively impacted by lost profits from much lower sales volumes and related production inefficiencies from lower production levels. These reductions were driven by much lower demand for our products at our European operating units of this segment, at the U.S. unit exporting into Europe and our Asian unit, as discussed above. Partially offsetting the volume effects were benefits from specific Level 3 continuous improvement projects undertaken in the first nine months of 2012 and from good overall cost control at our European units during this very difficult operating environment. Additionally, targeted price increases and favorable sales mix help offset some of negative sales volume effects.


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PRECISION METAL COMPONENTS SEGMENT



                                                    Nine months ended
          (In Thousands of Dollars)                   September 30,
                                        2012         2011              Change

          Net sales                   $ 61,005     $ 53,846      $ 7,159
          Volume                                                               6,756
          Price/mix                                                              403

          Net income (loss)           $  5,199     $ (3,806 )    $ 9,005

The majority of the increase in sales at this segment was due to fulfilling sales orders, at the full year run rate, for a new sales program started in 2011. This new sales program had not reached the full year run rate during the first nine months of 2011.

The segment improved from a net loss to a net income due to profits from increased sales volumes and from the elimination of start-up costs on the new multi-year sales programs incurred during 2011. During the first nine months of 2011, this segment incurred $5.5 million of operational inefficiencies and additional costs related to ramping up production for new large multi-year sales programs which did not repeat during the first nine months of 2012. Beyond eliminating the start-up costs, this segment has improved operationally by reducing scrap, temporary labor, and expediting costs.

PLASTIC AND RUBBER COMPONENTS SEGMENT



                                                      Nine months ended
      (In Thousands of Dollars)                         September 30,
                                          2012         2011              Change

      Net sales                         $ 32,728     $ 33,441     $ (713 )
      Volume                                                                    (1,102 )
      Price/mix/material pass-through                                              389

      Net income                        $  2,005     $  1,853     $  152

Lower sales volumes were due to expirations of certain sales programs. Segment net income was impacted by the lower sales volumes partially offset by specific cost reduction projects undertaken during 2012, price increases and favorable sales mix.

Changes in Financial Condition

From December 31, 2011 to September 30, 2012, our total assets increased $1.6 million and our current assets increased $5.8 million. Excluding foreign exchange effects, total assets and current assets increased approximately $1.5 million and $5.7 million, respectively, from December 31, 2011.

The majority of the increase in total and current assets was due principally to the $9.7 million increase in cash from the current year net cash flow. The increase in cash was partially offset by reductions in accounts receivable, net depreciation of fixed assets and by receipt of $1.9 million for the pay-off of a note receivable.

Excluding the foreign exchange effects, accounts receivable was lower by $3.1 million due to the 5% decrease in sales volume experienced in September and August of 2012 from sales levels in December and November of 2011. The days sales outstanding at September 30, 2012 was consistent with days sales outstanding at December 31, 2011.


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Excluding the foreign exchange effects, property, plant and equipment decreased $1.4 million as year to date capital spending was $0.8 million lower than depreciation and we sold assets with a net book value of $0.4 million.

From December 31, 2011 to September 30, 2012, our total liabilities decreased $16.1 million. Excluding foreign exchange effects, total liabilities decreased approximately $16.0 million from December 31, 2011. The majority of the reduction was from a $12.5 million accounts payable decrease, excluding foreign exchange effects, driven by timing of payments to certain vendors and lower levels of spending for raw material during September and August of 2012 compared to December and November of 2011. Additionally, total liabilities decreased as a net $3.1 million in short and long-term debt was repaid from operating cash flow.

Working capital, which consists principally of accounts receivable and inventories offset by accounts payable and current maturities of long-term debt, was $69.5 million at September 30, 2012 as compared to $51.0 million at December 31, 2011. The ratio of current assets to current liabilities increased from 1.70:1 at December 31, 2011 to 2.15:1 at September 30, 2012. The increase in working capital was due primarily to the growth in cash and the reduction in accounts payable, as discussed above.

Cash provided by operations was $22.7 million for the first nine months of 2012 compared with cash provided by operations of $3.3 million for the same period in 2011. The favorable variance was principally due to a $3.1 million decrease in accounts receivables experienced during the first nine months of 2012 versus the $12.7 million increase experienced in the first nine months of 2011 driven by the lower sales volumes in 2012.

Cash used by investing activities was $10.1 million for the first nine months of 2012 compared with cash used by investing activities of $15.7 million for the same period in 2011. The decrease was primarily due to $2.4 million in lower spending on acquisitions of property plant and equipment in 2012 and receipt of $1.9 million for the pay-off of a note receivable in 2012.

Cash used by financing activities was $3.2 million for the first nine months of 2012 compared with cash provided by financing activities of $18.9 million for the same period in 2011. The decrease was primarily due to the net repayment of short-term and long-term debt in 2012 versus net borrowings of short-term and long-term debt in 2011. The net repayment of debt in 2012 was driven by the additional $19.4 million of cash provided by operations in 2012 over 2011, as discussed above.

Liquidity and Capital Resources

Amounts outstanding under our $100.0 million credit facility and our $60.0 million of fixed rate notes as of September 30, 2012 were $43.6 million (including $0.6 million under our swing line of credit) and $31.4 million, respectively. As of September 30, 2012, we can borrow up to an additional $45.5 million under the $100.0 million credit facility (including $9.4 million under our swing line of credit) subject to limitations based on existing financial covenants. The $45.5 million of availability is net of $0.9 million of outstanding letters of credit at September 30, 2012 which are considered as usage of the facility and considers the liquidity requirement, from the September 30, 2011 amendment, that the total outstanding under the revolving credit agreement shall be at least $10 million less than the total committed amount of $100 million during the period commencing September 30, 2011 and ending on September 30, 2012. With the October 26, 2012, amendment of the $100 million revolving credit facility, the $10 million limitation has been removed. Thus, as of the date of this report we now have $55.5 million in availability on our revolving credit facility.


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We were in compliance with all covenants related to the amended and restated $100.0 million credit facility and the amended and restated $60.0 million in fixed rate notes as of September 30, 2012. The specific covenants to which we are subject and the actual results achieved for the three and nine month periods ended September 30, 2012 are stated below:

                                                                             Actual
                                                                             Level
Financial Covenants                  Required Covenant Level                Achieved
. . .
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