NN, Inc. — Q2 2021 Form 10-Q Summary
Reporting period: Three and six months ended June 30, 2021. NN, Inc. manufactures high-precision components for automotive, general industrial, electrical, aerospace, defense, and medical markets. Results cover continuing operations, principally Mobile Solutions and Power Solutions; the Life Sciences business was sold in October 2020 and is reported as discontinued operations.
Key financial results
| Metric | Q2 2021 | Q2 2020 | First half 2021 | First half 2020 |
|---|---|---|---|---|
| Net sales | $123.2 million | $78.5 million | $250.0 million | $194.7 million |
| Gross profit / margin | $23.4 million / 19.0% | $13.5 million / 17.2% | $50.5 million / 20.2% | $35.2 million / 18.1% |
| Operating loss | $1.6 million | $11.2 million | $0.6 million | $115.0 million |
| Continuing-operations net loss | $5.4 million | $17.6 million | $10.3 million | $125.6 million |
| Net loss per share | $0.17 | $0.59 | $0.62 | $6.55 |
| Operating cash flow | Not separately stated | Not separately stated | $5.9 million | $15.9 million |
Gross profit and margins are calculated from reported net sales less cost of sales. The first-half 2020 results included a $92.9 million continuing-operations goodwill impairment; the 2020 net loss also included a $144.3 million loss from discontinued operations. Q2 2020 included $4.2 million of discontinued-operations loss, versus none in Q2 2021.
Financial position and liquidity
- At June 30, 2021, cash was $31.5 million, current assets were $214.7 million, and current liabilities were $92.2 million. Working capital was $122.5 million, versus $112.0 million at year-end 2020.
- Debt principal totaled $161.8 million, including $149.6 million under the new term loan and $12.2 million of international lines and other loans. Long-term debt, net of current maturities and debt costs, was $150.7 million.
- The $50 million ABL revolver had no borrowings; $30.2 million was available after letters of credit and other reductions. The company reported compliance with credit-facility requirements.
- First-half investing cash outflow was $30.2 million, including $15.4 million of interest-rate-swap settlements, $3.9 million of Life Sciences sale adjustments, and $11.0 million of capital expenditures. Financing provided $6.9 million. Cash declined by $16.6 million during the half.
Changes and management commentary
- Q2 sales rose 57% year over year, including $42.1 million of organic growth and $2.5 million of favorable foreign-exchange effects. First-half sales rose 28%, including $53.4 million organic growth and $1.8 million favorable FX.
- Management attributed the sales recovery to stronger demand across markets affected by the pandemic, new general-industrial business, recovery in medical components, and higher precious-metals-related selling prices. Mobile Solutions and Power Solutions both reported higher sales and operating results.
- Management cited increased inventory as a deliberate response to supply-chain risks; inventories rose to $74.8 million from $62.5 million at year-end. First-half operating cash flow was lower year over year, which management attributed primarily to income-tax payments and inventory build.
- In March 2021, the company refinanced its prior credit facility with a $150 million term loan and $50 million ABL facility, and redeemed Series B preferred stock. The new term loan carried a 7.875% rate at quarter-end and matures in 2026.
- The new Series D preferred stock carries a 10% annual cash dividend, accruing whether or not paid; unpaid dividends increase liquidation preference at 12%. It was issued with warrants to purchase up to 1.9 million common shares at $0.01 per share. Preferred dividends and deemed dividends totaled $16.7 million in the first half.
Outlook, risks, and unusual items
- No numerical revenue, earnings, or cash-flow guidance is provided. Management described business recovery momentum but cautioned that COVID-19, the Delta variant, vaccination levels, and potential renewed restrictions could affect operations.
- Management highlighted automotive semiconductor shortages, supply-chain disruption and raw-material availability, labor shortages, customer concentration, and uncertain end-market demand. One customer represented 11% of sales and 11% of accounts receivable.
- On July 22, 2021, the company entered a $60 million interest-rate swap fixing the LIBOR component at 1.291% through July 2024. At June 30, the term loan’s rate was 7.875%; management estimated annual interest of approximately $11.8 million at that rate, or approximately $12.0 million with the subsequent swap under the stated assumptions.
- Q2 other expense included noncash derivative valuation losses, less favorable foreign exchange effects on intercompany borrowings, and a litigation settlement. First-half results also included $2.4 million of debt-extinguishment costs and $1.7 million of swap payments and $2.0 million of swap losses.
- The company reported a securities-offering class action seeking unspecified damages; management said it could not determine whether the outcome would materially affect the company. Remaining Brazilian tax disputes could involve less than $5 million including interest and penalties; the company expects indemnification from former owners and has not accrued the remaining potential exposure.
Important facts for investors to verify
- Whether revenue recovery and improved gross margins persist, particularly amid automotive semiconductor constraints and supply-chain interruptions.
- Whether inventory growth converts to sales and cash, given the first-half operating cash flow decline and $31.5 million ending cash balance.
- The company’s ability to service the high-cost term loan, maintain covenant compliance, and preserve access to the ABL borrowing capacity.
- The total economic cost and potential common-share dilution from Series D preferred dividends, redemption terms, and the $0.01 warrants.
- Developments in the securities litigation and Brazilian tax matters, including whether the expected indemnification is collectible.