NN, Inc. — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022. Unaudited. Dollar amounts below are in millions unless otherwise stated.
Business context and results
NN designs and manufactures precision components and assemblies for automotive, industrial, electrical, aerospace, defense, and medical markets. Its reportable segments are Mobile Solutions and Power Solutions.
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Net sales | $125.4 | $123.2 | $253.4 | $250.0 |
| Operating loss | $(4.5) | $(1.6) | $(7.9) | $(0.6) |
| Net loss | $(8.6) | $(5.4) | $(11.9) | $(10.3) |
| Loss per common share, basic and diluted | $(0.25) | $(0.17) | $(0.38) | $(0.62) |
| Operating cash flow | Not separately provided | Not separately provided | $(2.5) | $5.9 |
Cost of sales excluding depreciation and amortization was $103.9 million in Q2 and $208.5 million for the first half. Gross profit on that basis was $21.5 million (17.1% of sales) in Q2 versus $23.4 million (19.0%) a year earlier; first-half gross profit was $45.0 million (17.7%) versus $50.5 million (20.2%). Operating margin was approximately (3.6)% in Q2 and (3.1)% for the first half, compared with (1.3)% and (0.2)%, respectively, in 2021.
Material changes and segment performance
- Sales rose 1.8% in Q2 and 1.4% year to date. Pricing to recover inflationary costs supported revenue, while Mobile Solutions demand, foreign exchange, and other volume pressures offset some gains.
- Operating results worsened despite higher sales: cost of sales increased 4.1% in Q2 and 4.5% in the first half, chiefly due to inflation. Management cited costs not fully recovered through pricing, supply-chain-related inefficiencies, uneven customer orders, and labor constraints.
- Q2 Mobile Solutions sales declined 0.7% to $73.4 million and operating income fell to $1.7 million from $2.5 million. First-half sales fell 1.5% to $149.4 million and operating income declined to $3.7 million from $8.6 million.
- Q2 Power Solutions sales grew 5.6% to $52.0 million, but operating income fell to $1.4 million from $2.9 million. First-half sales increased 5.8% to $104.1 million while operating income declined to $1.8 million from $5.3 million.
- First-half interest expense increased $1.3 million to $6.9 million, reflecting higher rates and a larger average debt balance. Favorable noncash derivative mark-to-market changes reduced other expense compared with 2021.
Cash, debt, and liquidity
- Cash was $15.2 million at June 30, 2022, down from $28.7 million at December 31, 2021. First-half operating cash use was $2.5 million; capital expenditures were $9.7 million.
- Working capital was $122.3 million, which management said was unchanged from year-end. Accounts receivable rose to $82.6 million and inventory to $84.7 million; management linked inventory growth to higher material costs and safety stock amid supply interruptions.
- Total debt principal was $159.4 million: $148.1 million under the term loan, $2.0 million under the ABL facility, and $9.3 million in international and other loans. The term loan bore 8.541% at quarter-end; a $60 million swap fixes its LIBOR component through July 2024.
- The ABL facility had $36.9 million available after $2.0 million of borrowings and $11.1 million of letters of credit. The company reported compliance with both credit facilities. Term-loan principal is due at maturity in September 2026; approximately $12.4 million of annual interest payments was indicated at quarter-end rates and swap terms.
- Series D preferred stock carrying value was $59.0 million, including $12.3 million of accumulated unpaid and deemed dividends. It accrues dividends at 10% in cash or 12% in kind if cash dividends are not paid; cash dividends are required beginning September 30, 2027.
Outlook, risks, and unusual items
- No quantified full-year financial guidance is provided in the supplied filing text. Management expected supply-chain constraints and inflation to continue during 2022.
- Management cited COVID-related disruption, China power outages, labor shortages, inflation in labor and materials, and Russia-Ukraine-related demand, supply, transportation, energy, and raw-material risks. European facilities in Poland and France were affected by rising energy costs.
- A June 30 long-lived-asset impairment review was triggered by market capitalization falling below book equity; management concluded assets were recoverable and recorded no impairment charge.
- A $1.8 million settlement of former-customer contract claims was recorded in other operating expense and is payable in installments through July 2023. A separate securities-offering settlement for $9.5 million was agreed on July 25, after quarter-end, subject to court approval; the company said its D&O insurer would cover it after the company met its $1.0 million retention through prior covered expenses.
- For remaining Brazilian ICMS tax cases, potential exposure if all were decided unfavorably was estimated below $5.0 million including interest and penalties. The company cited indemnification rights from former Autocam shareholders and did not accrue the remaining matters.
- The effective tax rate was (13.2)% in Q2 and (21.9)% for the first half, reflecting, among other factors, taxes on certain foreign earnings and limits on recognition of some loss-carryforward benefits.
Important facts for investors to verify
- Whether pricing actions can catch up with inflation and restore segment operating profitability.
- Whether supply-chain, customer-demand, China operating, labor, and European energy-cost disruptions persist or worsen.
- Cash conversion and working-capital trends, especially receivables and inventory, alongside capital spending and remaining ABL availability.
- Debt-service capacity under variable rates, covenant compliance, and the preferred stock’s accumulating dividend obligations.
- Final court approval and insurance payment of the securities settlement, and resolution or indemnification of the Brazilian tax matters.