NN, Inc. — Q1 2024 Form 10-Q
Reporting period: Three months ended March 31, 2024; unaudited. NN, Inc. designs and manufactures high-precision components and assemblies through its Mobile Solutions and Power Solutions segments.
Financial performance
| Metric | Q1 2024 | Q1 2023 |
|---|---|---|
| Net sales | $121.2 million | $127.1 million |
| Gross profit, before depreciation and amortization | $20.1 million | $18.7 million |
| Gross margin, before depreciation and amortization | 16.6% | 14.7% |
| Operating loss | $4.8 million | $7.1 million |
| Operating margin | (3.9)% | (5.6)% |
| Net loss | $12.5 million | $10.2 million |
| Basic and diluted loss per share | $0.34 | $0.29 |
| Operating cash flow | $0.7 million | $0.2 million |
| Capital expenditures | $5.5 million | $5.0 million |
Cash and cash equivalents were $20.6 million at March 31, 2024, down from $21.9 million at year-end 2023. Working capital was $98.7 million, compared with $100.9 million. Total debt was $158.5 million, net of issuance costs and discounts, versus $153.3 million at December 31; cash less reported debt was approximately negative $137.9 million. The company reported $26.4 million of available ABL borrowing capacity, net of $9.9 million in letters of credit, and said it was in compliance with both credit facilities.
Changes and segment results
- Sales declined 4.6%, primarily from lower customer pricing, reduced volume at plants undergoing turnarounds, and the absence of prior-year premium pricing.
- Mobile Solutions sales fell 6.4% to $73.1 million; its operating loss improved to $2.1 million from $3.3 million, primarily on lower indirect manufacturing costs.
- Power Solutions sales declined 1.7% to $48.2 million, while operating income increased to $4.0 million from $1.7 million, reflecting lower closed-facility costs and sublease income.
- Despite improved operating results, net loss widened, reflecting higher interest expense and a $6.4 million unfavorable year-over-year change in other expense (income), net. The period also included $2.3 million of equity-method income from the 49%-owned joint venture, versus $0.3 million a year earlier.
Liquidity, debt, and unusual items
- Term loan principal was $132.5 million and carried a 14.305% rate at quarter-end, including paid-in-kind interest. Management estimated annual cash interest payments of approximately $16.3 million at the then-current rate. The term loan matures September 22, 2026; the ABL facility matures March 22, 2026.
- In March, NN received $16.9 million from the sale and leaseback of three properties and used net proceeds to repay term-loan borrowings. The transaction was accounted for as a financing obligation, not a sale; the properties remain on the balance sheet. A separate equipment transaction generated $4.9 million for ongoing operational investments and was also accounted for as a financing obligation.
- Operating cash flow was modest and capital spending exceeded it. Financing cash flow benefited from the sale-leaseback proceeds, alongside substantial debt repayments.
- A $11.7 million IRS tax-refund receivable remained under IRS review; timing of collection was uncertain.
- Series D preferred stock had a $81.5 million carrying value, including accumulated unpaid and deemed dividends. Preferred dividends accrued in the quarter totaled $3.7 million. Cash dividends are required beginning September 30, 2027; if cash dividends are not paid, the liquidation preference increases through in-kind dividends.
- Exercise of all 2021 warrants during the quarter resulted in 1.896 million common shares issued. Subsequent to quarter-end, 500,000 of the 2023 warrants were exercised cashlessly, resulting in 499,000 shares.
Outlook, risks, and contingencies
The filing provides no specific quarterly or full-year financial guidance. Management cited inflation, elevated interest rates, supply-chain and labor disruptions, geopolitical conflicts, and uncertainty about recovering cost increases through pricing. It said the conflicts had not materially affected operations as of the filing date but that future effects could not be predicted. Other disclosed risks include customer concentration, capacity utilization, raw-material costs and availability, foreign-currency exposure, and the company’s debt level and refinancing needs. Most debt is variable-rate; a one-percentage-point increase in one-month SOFR would increase annualized interest expense by approximately $1.3 million.
For remaining Brazilian ICMS tax-credit lawsuits, the company estimated potential exposure of less than $5.0 million, including interest and penalties, if all open matters were decided unfavorably. Management expects indemnification from former Autocam shareholders and recorded no liability for the remaining matters. The filing reports no material change to previously disclosed risk factors, and management concluded disclosure controls were effective as of March 31, 2024.
Important facts for investors to verify
- Whether the company can generate sufficient operating cash to fund capital expenditures, debt service, and working-capital needs.
- The sustainability of the term loan’s high interest cost, the level of paid-in-kind interest, covenant compliance, and refinancing options before facility maturities.
- The collection timing and ultimate receipt of the $11.7 million IRS refund receivable.
- Whether lower sales and plant turnaround volumes persist, and whether operational savings and Power Solutions performance can be sustained.
- The potential dilution and economic impact of outstanding warrants and the accumulating Series D preferred-stock claims.
- The outcome of the Brazilian tax cases and the enforceability and limits of the related indemnification.