NN, Inc. — Q3 2021 Form 10-Q Summary
Business context and reporting period
For the quarter and nine months ended September 30, 2021. NN designs and manufactures precision components for automotive, industrial, electrical, aerospace, defense, and medical markets. Continuing operations comprise Mobile Solutions and Power Solutions; the Life Sciences business was sold in October 2020 and is reported as discontinued operations.
Financial performance
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Net sales | $117.2 million | $113.8 million | $367.2 million | $308.5 million |
| Operating income (loss) | $(4.6) million | $(1.5) million | $(5.2) million | $(116.5) million |
| Continuing-operations income (loss) | $(3.4) million | $1.6 million | $(13.7) million | $(124.0) million |
| Net income (loss) | $(3.4) million | $22.0 million | $(13.7) million | $(248.0) million |
| Operating cash flow | Not separately provided | Not separately provided | $5.7 million | $19.3 million |
- Q3 sales rose 3%; nine-month sales rose 19%. Nine-month growth included higher demand versus pandemic-affected 2020, favorable foreign exchange, and customer-contract pricing tied to higher precious-metal costs.
- Q3 cost of sales rose 10%, faster than sales. Gross profit before depreciation and amortization was $18.6 million, about 15.9% of sales, versus $23.7 million, or 20.8%, a year earlier. The filing cites inflation, labor and material costs, supply-chain inefficiencies, and uneven customer ordering.
- Q3 operating loss widened from $1.5 million to $4.6 million. Lower SG&A and interest expense, plus derivative-related gains, partly offset weaker operating performance. Nine-month 2020 comparisons include $92.9 million of continuing-operations goodwill impairment; 2020 net results also include Life Sciences discontinued operations.
- For the first nine months, capital expenditures were $14.6 million; operating cash flow less capital expenditures was approximately negative $8.9 million. Cash declined to $24.6 million from $48.1 million at year-end 2020.
- At September 30, 2021, total debt principal was $160.6 million, including $149.3 million under the term loan; cash was $24.6 million. Working capital was $122.4 million. The $50 million asset-based revolving facility had $36.5 million available after letters of credit; no borrowings were outstanding. NN reported compliance with its credit-facility requirements.
- Term-loan interest was 7.875% at quarter-end. A $60 million swap fixes the LIBOR component at 1.291% through July 2024. The filing estimates annual interest payments of approximately $11.9 million based on quarter-end rates and the swap.
Material changes and capital structure
- In March 2021, NN refinanced its credit facilities, issuing a $150 million term loan and a $50 million ABL facility, and redeemed all Series B preferred stock for a reported cash payment of $118.4 million.
- The replacement Series D preferred stock generated $61.8 million net proceeds and carries a 10% annual cash dividend rate; unpaid cash dividends increase its liquidation preference at 12% annually. Cash dividends are required beginning September 30, 2027. At September 30, its carrying value was $51.4 million, including accumulated unpaid and deemed dividends.
- The Series D issuance included warrants for up to 1.9 million common shares at $0.01 per share. The company reported 43.0 million common shares outstanding at September 30, 2021.
Outlook, risks, and contingencies
- The filing provides no specific financial guidance. Management said COVID-19, semiconductor shortages, supply-chain disruption, China power outages, inflation, and labor availability challenges could continue into 2022 and affect production, costs, liquidity, and results.
- Automotive demand in Q3 was pressured by the global semiconductor shortage. Management said it built inventory to mitigate supply-chain risks, contributing to lower operating cash flow.
- A single customer generated 10% of sales in both the quarter and nine-month period. Other stated risks include customer concentration, raw-material availability, debt levels and refinancing, foreign currency exposure, and general economic conditions.
- For remaining Brazilian ICMS tax-credit cases, potential liability if all decisions are unfavorable was estimated at less than $5 million including interest and penalties; management expects indemnification from former Autocam shareholders and has not accrued for the remaining matters. A securities-offering lawsuit seeks unspecified damages; the company said it cannot determine whether the outcome would materially affect it. A separate Corre Partners dispute was settled in May 2021.
- Management reported effective disclosure controls and procedures and no material changes in internal control over financial reporting during the quarter.
Investor verification priorities
- Assess whether sales growth can translate into improved margins given cost inflation, supply disruptions, and automotive production volatility.
- Review cash conversion, inventory growth, capital spending, and the company’s ability to maintain adequate liquidity.
- Verify debt-service capacity, variable-rate exposure, ABL borrowing availability, and the terms and accumulating cost of Series D preferred dividends.
- Separate continuing-operations performance from prior-year discontinued Life Sciences results and goodwill impairment when comparing periods.
- Monitor the customer concentration, litigation and tax contingencies, and the timing and financial impact of the Life Sciences sale earnout, which may be up to $70 million based on 2022 performance.