NN, Inc. — Q1 2022 Form 10-Q
Business context and period: NN, Inc. designs and manufactures precision components for automotive, industrial, electrical, aerospace, defense, and medical markets. This unaudited filing covers the three months ended March 31, 2022, compared with Q1 2021.
Financial performance and liquidity
| Metric | Q1 2022 | Q1 2021 / prior date |
|---|---|---|
| Net sales | $128.1 million | $126.8 million; up 1% |
| Operating income (loss) | $(3.4) million | $1.0 million |
| Net loss | $(3.3) million | $(4.9) million |
| Loss per common share, basic and diluted | $(0.13) | $(0.46) |
| Interest expense | $3.4 million | $2.0 million |
| Operating cash flow | $(5.2) million | $7.9 million |
| Capital expenditures | $4.3 million | $5.5 million |
| Cash and cash equivalents | $20.6 million | $28.7 million at Dec. 31, 2021 |
| Working capital | $125.5 million | $122.3 million at Dec. 31, 2021 |
| Total debt principal | $158.8 million | $159.8 million at Dec. 31, 2021 |
Operating performance weakened despite slightly higher sales: cost of sales rose 5% to $104.6 million, while selling, general and administrative expense fell $1.1 million. Operating loss included $2.0 million of other operating expense, primarily the $1.8 million customer settlement. The filing does not provide a separately stated gross-margin figure.
Cash used in operations reflected working-capital needs, including higher receivables and inventory. The company had no ABL borrowings and reported $37.8 million of borrowing availability, net of $11.1 million in letters of credit. The $148.5 million term loan carried a 7.875% rate at quarter-end; a swap fixed the LIBOR component on $60 million through July 2024. The company reported compliance with its credit-facility requirements.
Material changes and drivers
- Sales increased $1.3 million, with pricing and foreign exchange partly offsetting lower automotive demand, largely tied to the semiconductor shortage.
- Mobile Solutions sales declined to $76.1 million from $77.8 million; operating income fell to $2.0 million from $6.1 million, reflecting lower volume, supply-chain inefficiencies, labor constraints, and prior-year favorable overhead absorption.
- Power Solutions sales grew to $52.0 million from $49.1 million, mainly from pricing; operating income declined to $0.4 million from $2.4 million, including the legal settlement and higher SG&A.
- Interest expense increased $1.4 million, primarily due to higher rates and a larger average debt balance. Other income improved by $2.9 million, principally from noncash derivative fair-value gains and favorable foreign-exchange effects.
- Q1 2021 included $2.4 million of debt-extinguishment costs and $1.7 million of swap payments and $2.0 million of swap losses, which did not recur in Q1 2022.
Outlook, risks, and unusual items
The filing provides no specific revenue or earnings guidance. Management said supply-chain and COVID-related disruptions were expected to continue during 2022. It cited inflation in labor and materials, semiconductor-related automotive volume uncertainty, labor availability, and power interruptions in China. Russia’s invasion of Ukraine and related sanctions may raise energy, transport, and raw-material costs; management specifically noted rising utility costs affecting facilities in Poland and France.
A $1.8 million settlement with a former customer was agreed on April 25, 2022, for claims predating quarter-end and recognized in Q1 results; payments are due in installments through July 2023. A market-capitalization decline triggered a long-lived-asset impairment review, but no impairment was recorded. The company recorded a $1.5 million income-tax provision despite a pretax loss, citing limits on recognizing certain tax benefits and foreign earnings-related taxes.
Series D preferred stock had a $56.3 million carrying value, including $9.7 million of accumulated unpaid and deemed dividends. It accrues 10% annual cash dividends or, if unpaid, a 12% annual increase in liquidation preference; required cash dividends begin in 2027. Remaining Brazilian tax cases could involve less than $5.0 million, inclusive of interest and penalties, if decided adversely; the company cited contractual indemnification and recorded no accrual for those open matters. The securities-offering litigation seeks unspecified damages; the company said it could not determine whether the outcome would materially affect it.
Important facts for investors to verify
- Whether pricing can offset continued material, labor, energy, and other inflation without further volume or margin deterioration.
- Automotive customer demand and the duration and effects of semiconductor and supply-chain constraints.
- Cash conversion and working-capital trends, given Q1 operating cash outflow and lower cash balances.
- Debt costs, covenant headroom, refinancing needs, and the preferred stock’s accumulating dividend and liquidation preference.
- Developments in the customer settlement, securities litigation, and Brazilian tax matters.