NN, Inc. — Q3 2022 Form 10-Q Summary
Business and period: NN, Inc. designs and manufactures precision components for automotive, industrial, electrical, aerospace, defense and medical markets. This unaudited quarterly report covers the three and nine months ended September 30, 2022; comparisons are to the corresponding 2021 periods.
Key financial results
Amounts are in millions of U.S. dollars, except per-share data and percentages.
| Metric | Q3 2022 | Q3 2021 | 9M 2022 | 9M 2021 |
|---|---|---|---|---|
| Net sales | $127.3 | $117.2 | $380.7 | $367.2 |
| Gross profit / margin | $19.3 / 15.1% | $18.6 / 15.9% | $64.2 / 16.9% | $69.1 / 18.8% |
| Operating loss / margin | $(2.1) / (1.7)% | $(4.6) / (3.9)% | $(10.1) / (2.6)% | $(5.2) / (1.4)% |
| Net loss | $(2.2) | $(3.4) | $(14.1) | $(13.7) |
| Basic and diluted loss per share | $(0.11) | $(0.13) | $(0.49) | $(0.75) |
| Operating cash flow | Not separately presented for quarter | $(2.7) | $5.7 |
- Revenue and operations: Q3 sales rose 8.6%, reflecting pricing and stronger Mobile Solutions demand, partly offset by $2.2 million of unfavorable foreign exchange. Nine-month sales increased 3.7%, but cost of sales rose 6.2%, pressuring gross margin.
- Segments: Q3 Mobile Solutions sales were $76.1 million and operating loss was $0.5 million; Power Solutions sales were $51.1 million and operating income was $2.6 million. For the first nine months, segment operating income fell to $3.2 million in Mobile Solutions from $8.3 million, and to $4.4 million in Power Solutions from $6.6 million.
- Cash flow and liquidity: Nine-month operating cash use was driven in part by higher receivables and inventories. Capital spending was $14.0 million. Cash was $12.6 million at September 30, down from $28.7 million at year-end 2021; working capital was $125.5 million.
- Debt and interest: Total debt principal was $162.2 million, including $147.8 million under the term loan and $6.0 million drawn on the ABL facility. ABL availability was $32.1 million after borrowings and letters of credit. The term loan carried a 9.99% rate at quarter-end; a swap fixed the LIBOR component on $60.0 million through July 2024. The company reported compliance with facility requirements and estimated annual interest payments of approximately $13.7 million at quarter-end rates.
- Preferred stock: Series D preferred stock carrying value was $61.8 million, including $15.1 million of accumulated unpaid and deemed dividends. The stock accrues dividends, and its unpaid-dividend liquidation preference grows at 12% annually under the disclosed terms.
Material changes, outlook and risks
- Q3 operating loss narrowed year over year, but nine-month operating loss widened. Higher sales and lower SG&A helped, while inflation, unfavorable overhead absorption and supply-chain-related inefficiencies weighed on results. Nine-month net loss was broadly similar to 2021 despite lower prior-year refinancing and swap charges.
- Management said inflation, higher interest rates, supply constraints, labor shortages and COVID-related disruptions—including lockdowns in China—were affecting operations and costs, and anticipated supply constraints and inflation to continue through 2022 and beyond. The company said it could not predict its ability to recover cost increases through pricing. Russia-Ukraine conflict-related volatility and foreign exchange were additional risks.
- The filing provides no numerical forward guidance. Management reported that a market-capitalization decline triggered long-lived-asset impairment analyses; assets were considered recoverable and no impairment was recorded through September 30.
- Unusual items include a $1.8 million settlement of former-customer claims, recorded in other operating expense, with payments extending through July 2023. A separate $9.5 million securities-offering settlement remained subject to court approval; the company said its insurer would pay the settlement amount after the company had met a $1.0 million retention through covered expenses. For remaining Brazilian ICMS tax cases, potential liability was estimated at less than $5.0 million, with management expecting indemnification and recording no accrual for those remaining matters.
Important facts for investors to verify
- Whether pricing actions can offset inflation and restore gross and segment operating margins.
- Working-capital conversion, inventory levels, operating cash flow and remaining ABL borrowing availability.
- Interest expense and covenant headroom as variable rates change; term-loan and preferred-stock obligations, including accrued preferred dividends.
- Status and final coverage of the securities settlement, and developments in the Brazilian tax and other legal matters.
- Effects of foreign exchange, customer demand, China disruptions, labor constraints and the Russia-Ukraine conflict on sales and production.