NN, Inc. 2022 Form 10-K Summary
Business context and reporting period
NN, Inc. (Nasdaq: NNBR) designs and manufactures precision metal and plastic components for automotive, electrical, industrial, aerospace and medical markets. Its two reporting segments are Mobile Solutions and Power Solutions. This filing covers the fiscal year ended December 31, 2022; it is an annual report, not a standalone fourth-quarter report.
Financial performance and liquidity
| Metric | 2022 | 2021 |
|---|---|---|
| Net sales | $498.7 million | $477.6 million |
| Gross profit / gross margin | $77.6 million / 15.6% | $87.6 million / 18.3% |
| Operating loss / margin | $(21.1) million / (4.2)% | $(9.0) million / (1.9)% |
| Net loss | $(26.1) million | $(13.2) million |
| Net loss per common share | $(0.83) | $(0.79) |
| Cash from operations | $7.7 million | $15.6 million |
| Capital expenditures | $18.0 million | $18.2 million |
| Cash and cash equivalents at year-end | $12.8 million | $28.7 million |
| Working capital | $112.9 million | $122.3 million |
Gross margin is calculated from reported net sales less cost of sales, excluding separately reported depreciation and amortization. Total principal debt was $157.1 million at year-end, including $147.4 million under the term loan, $1.0 million under the ABL facility and $8.7 million of international loans. A further $35.3 million was available under the ABL facility. The term loan carried a reported 11.259% LIBOR-based rate at year-end; a swap fixed the LIBOR component on $60 million through July 2024. The company reported compliance with its credit-facility requirements at December 31, 2022.
Material changes versus the prior year
- Sales rose 4.4%, mainly from higher customer pricing; lower volume and unfavorable foreign exchange partly offset the increase. Currency effects reduced revenue by $4.2 million.
- Cost of sales grew 8.0%, outpacing sales, amid inflation and unfavorable overhead absorption. Operating loss widened by $12.1 million.
- Mobile Solutions sales increased 2.7%, but the segment shifted from $9.0 million operating income to a $2.2 million operating loss. Power Solutions sales rose 7.0%, while operating income declined from $6.5 million to $3.5 million.
- Operating cash flow fell by $7.9 million, with the company citing higher net loss and increased receivables and inventory. Cash declined $15.8 million during the year.
- Preferred stock carrying value increased to $64.7 million, including $18.0 million of accumulated unpaid and deemed dividends. The Series D preferred stock accrues cash dividends at 10% annually; if unpaid, its liquidation preference increases at 12% annually.
Outlook, commentary, risks and unusual items
- Management said supply-chain constraints and inflation were expected to continue into 2023, and noted uncertainty about passing increased costs through to customers. It did not provide numerical earnings or revenue guidance in the supplied filing text.
- On March 3, 2023, after year-end, the company amended its term loan and ABL agreements. Changes included higher leverage-covenant limits, a waiver of the 2023 excess-cash-flow payment, a new quarterly domestic-liquidity covenant, increased use of customer receivables programs, and a change from LIBOR to SOFR. Term-loan interest may increase on a paid-in-kind basis depending on leverage and whether a qualifying junior equity raise is completed by June 30, 2023; the amendment also included penny warrants.
- The company planned to close several facilities during 2023 as part of footprint optimization. Its CEO and executive vice president were also scheduled to retire on March 31, 2023, subject to possible extension for transition.
- A $1.8 million settlement of a former customer’s contract claim was recorded as 2022 operating expense, with payments scheduled through July 2023. A separate $9.5 million securities-offering settlement was paid by directors’ and officers’ insurance carriers in the fourth quarter of 2022, after the company met its $1.0 million retention requirement.
- Key risks include customer concentration (the top ten accounted for approximately 48% of 2022 sales), inflation and supply disruption, labor constraints, foreign exchange, high debt and interest expense, covenant and refinancing risks, and geopolitical uncertainty. The company also disclosed a Brazilian tax-credit dispute with potential exposure below $5.0 million for remaining cases, inclusive of interest and penalties; it expects indemnification from former owners and has not accrued the remaining potential liability.
- Independent auditors issued unqualified opinions on the financial statements and internal controls; no critical audit matters were identified.
Important facts for investors to verify
- Progress and terms of any qualifying junior equity raise, including the impact on PIK interest and the new liquidity covenant.
- Current cash, operating cash flow, working-capital needs, and remaining ABL availability relative to debt service and capital spending.
- Effects of pricing actions, inflation, production volume, and overhead utilization on margins, particularly in Mobile Solutions.
- Execution, costs and customer impacts of the planned 2023 facility closures and leadership transition.
- Developments in the Brazilian tax matters and whether contractual indemnification remains available and collectible.