NN, Inc. — Q3 2023 Form 10-Q
Business context and reporting period
NN, Inc. manufactures precision components and assemblies for automotive, industrial, electrical, medical, aerospace and defense markets. It reports Mobile Solutions and Power Solutions segments. This unaudited filing covers the quarter and nine months ended September 30, 2023; comparisons are with the corresponding 2022 periods.
Financial performance
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Net sales | $124.4m | $127.3m | $376.7m | $380.7m |
| Gross profit, before depreciation and amortization | $19.9m | $19.3m | $56.1m | $64.2m |
| Gross margin, calculated | 16.0% | 15.1% | 14.9% | 16.9% |
| Operating loss | $(2.7)m | $(2.1)m | $(13.9)m | $(10.1)m |
| Interest expense | $5.7m | $3.7m | $15.5m | $10.7m |
| Net loss | $(5.1)m | $(2.2)m | $(29.6)m | $(14.1)m |
| Basic and diluted loss per share | $(0.18) | $(0.11) | $(0.84) | $(0.49) |
| Operating cash flow | Not presented by quarter | $23.9m | $(2.7)m |
At September 30, 2023, cash was $21.8m, current assets $193.3m, current liabilities $88.5m, and working capital $104.7m. Total debt principal was $158.4m, including $147.7m under the term loan; $28.7m remained available under the ABL facility after letters of credit. The company reported $143.7m of stockholders’ equity and $74.3m of Series D preferred stock, classified as mezzanine equity.
Material changes versus prior periods
- Q3 sales decreased 2.2%; lower volume, including the effect of facility closures, was partly offset by pricing and favorable foreign exchange. Nine-month sales declined 1.0%.
- Q3 net loss widened by $2.8m. Nine-month net loss widened by $15.5m, reflecting weaker operating results, higher interest expense, and a swing in other expense from income in 2022 to expense in 2023, primarily from noncash derivative valuation changes.
- Mobile Solutions’ nine-month operating result moved from $3.2m income to a $6.1m loss, amid higher material and labor costs, lower volume and customer settlements, foreign exchange effects, and production challenges on new launches. Power Solutions’ nine-month operating income improved to $8.3m from $4.4m, despite lower sales, with facility cost reductions, pricing and sublease income contributing.
- Nine-month operating cash flow improved to $23.9m, mainly as inventory and receivables declined; cash used for capital expenditures, net of asset-sale proceeds, was $13.4m. Cash ended the period $9.0m higher than at year-end 2022.
Outlook, risks and unusual items
- The filing provides no quantified earnings or revenue guidance. Management said inflation, rising interest rates, supply and labor pressures may persist into 2024; it cannot predict the effects on end markets or its ability to recover cost increases through pricing.
- The term loan bore interest at 14.291% at quarter-end, including PIK interest; management estimated annual cash interest of approximately $18.2m at the then-current rate. The loan matures in September 2026, and the company reported compliance with its credit agreements at September 30, 2023.
- The UAW strikes affecting Detroit Three automakers could materially affect NN through customers that supply those manufacturers if production is idled for a prolonged period. Other cited risks include customer concentration, capacity utilization, raw-material and labor availability, foreign exchange, geopolitical events, and refinancing and indebtedness.
- NN closed the Taunton and Irvine Power Solutions sites and three underutilized Mobile Solutions sites during 2023, and began subleasing the Taunton and Irvine facilities. The filing notes continued evaluation of its manufacturing footprint.
- An $11.4m IRS refund receivable remained under review, with timing of receipt uncertain. Remaining Brazilian ICMS tax cases could result in cumulative exposure below $5.0m, including interest and penalties; management expects indemnification from former Autocam shareholders and has not accrued for the remaining cases.
- Series D preferred dividends accrue at 10% annually; if not paid in cash, the liquidation preference increases at 12% annually. The preferred stock carried $27.6m of accumulated unpaid and deemed dividends at quarter-end. Warrants and share-based awards also create potential dilution.
Key facts for investors to verify
- Whether Mobile Solutions can address operating losses and new-business launch challenges, and whether Power Solutions’ improved profitability can be sustained after site closures.
- Debt-service capacity and covenant headroom given the high variable borrowing rate, PIK interest and approximately $18.2m estimated annual cash interest.
- Cash conversion and liquidity sustainability, including reliance on working-capital reductions, the $11.4m IRS refund, and customer receivables-sale programs.
- Exposure to UAW-related production interruptions, customer concentration, cost inflation and supply or labor disruptions.
- Accumulating preferred-stock claims, future cash dividend obligations, and potential dilution from warrants, restricted shares and performance units.
- Resolution and potential recovery under the Brazilian tax indemnity, and the outcome of the Life Sciences sale earnout matter, which remained under review.