NN, Inc. (NNBR) — Q1 2023 Form 10-Q
Business context and reporting period
NN, Inc. designs and manufactures precision components and assemblies for automotive, general industrial, electrical, aerospace, defense, and medical markets. This unaudited report covers the three months ended March 31, 2023, compared with Q1 2022. Reportable segments are Mobile Solutions and Power Solutions.
Key financial metrics
| Metric | Q1 2023 | Q1 2022 |
|---|---|---|
| Net sales | $127.1 million | $128.1 million |
| Operating loss | $7.1 million | $3.4 million |
| Net loss | $10.2 million | $3.3 million |
| Basic and diluted loss per share | $0.29 | $0.13 |
| Cash provided by (used in) operations | $0.2 million | ($5.2 million) |
| Capital expenditures | $5.0 million | $4.3 million |
Sales less cost of sales, before depreciation and amortization, were $18.7 million, or 14.7% of sales, versus $23.5 million, or 18.3%, in Q1 2022. Operating margin was negative 5.6%, compared with negative 2.7%; net margin was negative 8.0%, compared with negative 2.6%.
At March 31, cash and cash equivalents were $10.5 million, working capital was $109.2 million, and total current liabilities were $91.3 million. Debt principal was $159.3 million, including $147.0 million under the term loan and $1.0 million under the ABL facility; $32.5 million of ABL capacity remained available. The term loan’s stated interest rate was 11.782%. NN reported compliance with both credit facilities. Preferred stock, classified as mezzanine equity, had a carrying value of $67.8 million, including accumulated unpaid and deemed dividends.
Material changes versus the prior comparable period
- Sales declined 0.8%. Reduced volume and $1.4 million of unfavorable foreign exchange effects were partly offset by customer pricing.
- Cost of sales rose 3.7%, driven chiefly by higher material and labor costs and inefficient manufacturing processes associated with product launches; prior-year overhead absorption was also more favorable.
- Interest expense increased $0.8 million, primarily due to higher rates. The share of joint-venture income fell to $0.3 million from $2.1 million; the JV reported sales of $20.6 million versus $26.5 million.
- Mobile Solutions sales increased 2.6%, but the segment shifted from $2.0 million operating income to a $3.3 million operating loss, reflecting lower volume, launch-related production challenges, and inflation not fully recovered through pricing.
- Power Solutions sales declined 5.7%, while operating income increased to $1.7 million from $0.4 million, helped by premium project pricing and the absence of a prior-year legal settlement expense.
Outlook, commentary, risks, and unusual items
- NN provided no numerical earnings or revenue guidance in the provided filing text. Management expected supply constraints and inflationary pressures to continue through 2023 and said recovery of higher input costs through pricing was uncertain.
- The company plans to close its Taunton and Irvine sites in the first half of 2023 and three Mobile Solutions sites during 2023, as part of footprint optimization and cost reduction efforts. It recognized a $0.5 million loss on equipment sales; $0.8 million of equipment was classified as held for sale.
- Management performed long-lived-asset impairment analyses after market capitalization fell below stockholders’ equity book value; it recorded no impairment charge.
- Following the March 2023 debt amendments, term-loan interest increases by paid-in-kind interest of 0.50% to 2.00% beginning in Q2, depending on leverage and whether a qualifying junior equity raise is completed by June 30, 2023. The filing estimated annual cash interest of approximately $17.2 million at the March 31 rate.
- The company terminated its $60 million interest-rate swap and received $2.5 million. The gain is to reduce interest expense through the swap’s original July 2024 maturity.
- Potential unfavorable outcomes in remaining Brazilian ICMS tax cases were estimated at less than $5.0 million including interest and penalties. NN cited indemnification from Autocam’s former shareholders and recorded no liability for the remaining matters.
- NN warned that some cash deposits may exceed FDIC insurance limits. Other stated risks include high indebtedness and interest rates, supply-chain and labor disruptions, inflation, foreign-exchange exposure, customer concentration, and geopolitical and economic uncertainty.
Investor verification priorities
- Track operating performance and cash conversion, particularly Mobile Solutions’ launch-related production issues and the effect of pricing versus inflation.
- Review debt amendments, term-loan interest and PIK terms, any qualifying equity raise, covenant compliance, and remaining borrowing availability.
- Assess cash needs against low cash on hand, planned facility closures, capital expenditures, and the ability to use receivables-sale programs.
- Monitor execution and costs of footprint optimization, equipment disposals, and any future impairment testing.
- Verify developments in the Brazilian tax litigation and the enforceability and limits of the related indemnification.