NN, Inc. — Q2 2023 Form 10-Q Summary
Business and period: NN, Inc. designs and manufactures precision components for automotive, industrial, electrical, medical, aerospace and defense markets. This unaudited filing covers the three and six months ended June 30, 2023, compared with the same 2022 periods. Its reportable segments are Mobile Solutions and Power Solutions.
Financial results
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Net sales | $125.2 million | $125.4 million | $252.3 million | $253.4 million |
| Gross profit, before D&A | $17.5 million | $21.5 million | $36.2 million | $45.0 million |
| Gross margin, before D&A | 14.0% | 17.1% | 14.3% | 17.7% |
| Operating loss | $(4.0) million | $(4.5) million | $(11.1) million | $(7.9) million |
| Net loss | $(14.4) million | $(8.6) million | $(24.6) million | $(11.9) million |
| Basic and diluted loss per share | $(0.38) | $(0.25) | $(0.67) | $(0.38) |
Q2 operating margin was approximately (3.2)%, versus (3.6)% a year earlier; six-month operating margin was approximately (4.4)%, versus (3.1)%. Interest expense was $5.5 million in Q2 and $9.7 million for the half year. Other expense was $5.6 million in Q2 and $3.4 million year to date, principally reflecting noncash derivative mark-to-market losses.
Cash flow and liquidity: First-half operating cash flow was $8.6 million, compared with cash used of $2.5 million in 2022; capital expenditures were $12.2 million, and cash used in investing was $9.4 million. Cash increased to $14.3 million from $12.8 million at year-end. Working capital was $106.4 million, down from $112.9 million. The company had $29.7 million of available ABL borrowing capacity at June 30, including the effects of borrowings and letters of credit. It reported compliance with its credit-facility requirements.
Debt and preferred stock: Debt principal was $161.8 million, including $147.4 million under the term loan; reported long-term debt, net of current maturities and issuance costs, was $148.6 million. The term loan’s stated interest rate, including paid-in-kind interest, was 14.077% at quarter-end. Management estimated annual cash interest of approximately $17.8 million at that rate. The Series D preferred stock had a $70.9 million carrying value, including accumulated unpaid and deemed dividends; its annual dividend rate is 10% in cash or 12% if unpaid and accrued in kind, with cash dividends required beginning September 2027.
Material changes and management commentary
- Revenue was nearly flat in Q2 and down 0.4% for the first half. Higher pricing partly offset lower volume and unfavorable foreign exchange; closures at Taunton and Irvine also reduced volume.
- Cost of sales rose 3.7% in both the quarter and half year, pressuring gross margins. Management cited higher material and labor costs, inefficient production on new launches, and less favorable overhead absorption.
- SG&A declined, mainly from lower wages following headcount reductions and lower share-based compensation. Q2 operating loss narrowed modestly, but net loss widened due to higher interest and derivative expense.
- Mobile Solutions’ first-half sales grew 3.8%, but its operating result shifted from $3.7 million income to a $4.8 million loss, reflecting costs, volume and production challenges. Power Solutions sales fell 6.7%, while operating income improved to $4.3 million, aided by pricing and lower closure-related costs.
- The company closed Taunton and Irvine and three underutilized Mobile Solutions sites during the first half as part of footprint optimization. It continues to evaluate potential further consolidation or expansion.
- Management said inflation, rising interest rates, labor constraints and supply-chain disruption may persist through 2023; it noted it cannot predict input-cost or end-market effects or its ability to recover cost increases through pricing. No numerical financial guidance is provided in the filing.
Risks, contingencies and unusual items
- The term loan is floating-rate and secured by company assets, matures September 2026, and carries substantial interest expense. A one-percentage-point increase in one-month SOFR would add an estimated $1.5 million in annualized interest expense. The former $60 million interest-rate swap was terminated in Q1; its $2.5 million gain is being recognized as a reduction to interest expense through the original 2024 maturity date.
- An IRS refund receivable of $11.3 million, including accrued interest, remains under IRS review; timing of collection is uncertain.
- Brazilian ICMS tax-credit litigation could result in less than $5.0 million of cumulative liability for remaining cases, including interest and penalties. The company expects indemnification from former Autocam shareholders and has not accrued the remaining potential amount.
- The company disclosed that some deposits at FDIC-insured institutions exceed the $250,000 insurance limit, creating potential loss and liquidity exposure if an institution fails.
- Series D preferred dividends and deemed dividends reduce value attributable to common shareholders. New CEO inducement awards and warrants also create potential dilution; the filing reports 47.0 million common shares outstanding at June 30, versus 43.9 million at December 31, 2022.
Facts investors should verify
- Whether margins and Mobile Solutions’ production performance improve, and whether pricing offsets material, labor and other inflationary costs.
- Cash generation, liquidity and refinancing capacity given high floating-rate debt, paid-in-kind interest and the 2026 term-loan maturity.
- Collection timing of the $11.3 million IRS refund and the status and indemnification coverage of the Brazilian tax cases.
- The future effect of preferred-stock dividend accruals, warrants and equity awards on common-stock dilution and per-share economics.
- Progress and costs associated with facility closures and any further footprint actions; the filing does not provide a clear quantified forecast of resulting savings.