NN, Inc. — 2020 Form 10-K Summary
Business context and reporting period
For the fiscal year ended December 31, 2020. NN designs and manufactures precision components for industrial, automotive, electrical, aerospace and defense markets. Following the October 6 sale of Life Sciences, continuing operations comprise Mobile Solutions and Power Solutions. Unless noted otherwise, financial figures below are in millions of U.S. dollars.
Financial performance, liquidity and debt
| Metric | 2020 | 2019 |
|---|---|---|
| Continuing-operations net sales | $427.5 | $489.5 |
| Gross profit, before separately reported depreciation and amortization | $83.9; 19.6% of sales | $97.0; 19.8% of sales |
| Operating loss | $(117.5) | $(17.6) |
| Loss from continuing operations | $(139.5) | $(30.7) |
| Net loss, including discontinued operations | $(100.6); $(2.68) per share | $(46.7); $(1.13) per share |
| Cash provided by operating activities | $15.5 | $49.2 |
| Cash and cash equivalents at year-end | $48.1 | $17.9 |
| Debt principal at year-end | $84.9 | $793.0 |
Net sales fell 13%, mainly from a $55.7 million organic decline attributed to pandemic-related demand reductions and $6.2 million of unfavorable foreign-exchange effects. Mobile Solutions sales declined 14% to $256.4 million and operating income fell to $5.2 million. Power Solutions sales declined 11% to $171.3 million; the segment reported an $86.0 million operating loss, including a $92.9 million goodwill impairment.
Working capital of continuing operations was $112.0 million, versus $88.0 million in 2019. Investing activities provided $719.3 million, primarily from the Life Sciences divestiture; financing activities used $714.9 million, primarily for debt repayment. Year-end revolver availability was $45.4 million after letters of credit. The filing states NN was in covenant compliance at year-end.
Material changes and unusual items
- Life Sciences was sold for a final cash purchase price of approximately $753.3 million; cash proceeds at closing were $757.2 million, with a $3.9 million payable recorded. NN prepaid $700 million on term loans and repaid the revolver. The sale produced a reported $214.9 million after-tax gain, while discontinued operations reported $38.9 million of net income for 2020.
- In addition to the $92.9 million continuing-operations goodwill impairment, NN recorded a $146.8 million Life Sciences goodwill impairment in discontinued operations before the sale. No goodwill remained at year-end.
- Interest-rate swap-related expenses were significant: $4.1 million in derivative payments and an $11.7 million loss on the swap were separately reported. Following the debt prepayment, hedge accounting was discontinued; $14.8 million of accumulated hedge losses was recognized in earnings.
- Common dividends were eliminated; none were declared in 2020. Series B preferred stock carried cumulative dividends of 10.625% annually; its year-end carrying value was $105.1 million, including accumulated dividends and deemed dividends.
Outlook, risks and contingencies
NN gave no quantified 2021 guidance. Management said 2021 operating results were likely to be adversely affected by COVID-19 and noted uncertainty around customer demand, production interruptions and supply-chain disruption. Management expected available cash, revolver capacity, lower debt service following the sale, and forecast operating cash flows to support operations and obligations for the next 12 months. The company was evaluating financing alternatives ahead of credit-facility maturities in 2022 and expected to restructure or refinance its term loans and revolver.
Key risks include pandemic-related volatility, customer concentration (top ten customers represented about 45% of 2020 sales), automotive production disruptions including semiconductor shortages, raw-material and foreign-exchange exposure, competition, and restrictive debt covenants and refinancing needs. The filing also describes a securities-offering class action and a preferred-stock-holder lawsuit related to the Life Sciences sale; NN said it intends to defend both, and could not determine whether either outcome would be material. Remaining Brazilian ICMS tax cases had a stated potential liability below $5 million if all were decided adversely; NN cited indemnification from former Autocam shareholders.
Most important facts for investors to verify
- Whether post-divestiture sales, margins and operating cash flow recover from 2020 levels, and the continuing impact of COVID-19 and automotive supply constraints.
- Current debt balances, covenant headroom, revolver availability, and the terms and timing of refinancing before 2022 maturities.
- Whether the Life Sciences earnout of up to $70 million is achieved, and any remaining sale-related obligations or indemnities.
- Potential effects of the swap, preferred-stock dividends and conversion features, and the pending litigation and tax matters.
- The filing reports unqualified financial-statement and internal-control audit opinions; verify subsequent disclosures for changes in controls, liquidity or material contingencies.