NN, Inc. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021; unaudited. NN designs and manufactures precision components for automotive, industrial, electrical, aerospace and defense, and medical markets. Results cover continuing operations, comprising Mobile Solutions and Power Solutions; the Life Sciences business was sold in October 2020 and is reported as discontinued operations.
Key financial results
| Metric | Q1 2021 | Q1 2020 |
|---|---|---|
| Net sales | $126.8 million | $116.2 million |
| Gross profit and margin | $27.1 million; 21.4% | $21.7 million; 18.7% |
| Operating income (loss) | $1.0 million | $(103.9) million |
| Loss from continuing operations | $(4.9) million | $(108.1) million |
| Net loss | $(4.9) million | $(248.2) million |
| Net loss per share | $(0.46) | $(5.96) |
| Cash from operating activities | $7.9 million | $10.2 million |
| Capital expenditures | $5.5 million | $11.3 million |
Sales increased 9% year over year, including $11.2 million of organic growth, partly offset by $0.7 million of unfavorable foreign exchange. Automotive demand recovery supported growth; precious-metal price pass-throughs also lifted reported sales. Cost of sales rose less than revenue, while SG&A declined by $1.6 million. Q1 2021 operating income was positive, but results included debt-extinguishment and interest-rate-swap charges. The prior-year comparison was heavily affected by a $92.9 million Power Solutions goodwill impairment; discontinued Life Sciences operations also recorded a $140.1 million loss in Q1 2020.
Segments and balance sheet
- Mobile Solutions: Sales were $77.8 million, up $7.9 million; operating income was $6.1 million versus $0.3 million. Higher demand and cost actions contributed to improvement.
- Power Solutions: Sales were $49.1 million, up $2.7 million; operating income was $2.4 million versus a $90.3 million loss, which included the prior-year goodwill impairment.
- Liquidity: Cash was $43.0 million at March 31, down from $48.1 million at year-end. Working capital was $124.4 million, compared with $112.0 million at year-end.
- Debt and borrowing capacity: Principal debt was $162.5 million, including a new $150.0 million term loan; the term-loan carrying amount and current maturities are reported separately on the balance sheet. The term loan bore 7.875% interest at quarter-end and matures in September 2026. The $50.0 million ABL facility had no borrowings and $32.9 million available after letters of credit. NN reported compliance with facility requirements.
- Cash flow: Investing activities used $20.9 million, including $15.4 million of interest-rate-swap settlements. Financing activities provided $9.6 million amid refinancing and preferred-stock transactions.
Material changes, outlook, and risks
- On March 22, NN refinanced its prior credit facilities with the $150.0 million term loan and a $50.0 million ABL facility. The term loan carries significant interest costs; management estimated annual interest of approximately $11.8 million at the quarter-end rate.
- NN issued $65 million of Series D perpetual preferred stock and warrants for up to 1.9 million common shares at $0.01 per share, and redeemed all Series B preferred stock. Series D dividends accrue at 10% annually; if cash dividends are not paid, the liquidation preference increases at 12%. Cash dividends are required beginning September 30, 2027. Preferred dividends and deemed dividends totaled $14.5 million in Q1 and are reflected in the common-stock EPS calculation.
- Management described continuing recovery from COVID-19 but cited uncertainty from potential infection surges, automotive semiconductor shortages, supply-chain disruptions, raw-material availability, and labor shortages. Inventory was increased to mitigate supply risks. No specific financial guidance was provided; management cautioned that quarterly results are not necessarily indicative of the full year.
- Other headwinds include weaker smart-meter demand due to a customer’s inventory adjustments and medical-component demand affected by delayed elective surgeries. One customer represented 10% of Q1 sales; a customer primarily tied to Mobile Solutions represented 10% of accounts receivable.
- Contingencies include securities-offering litigation and a dispute alleging breach of Series B preferred-stock terms; the company says it intends to defend both and cannot determine potential material impact. Remaining Brazilian ICMS tax matters could involve less than $5.0 million, including interest and penalties; management expects indemnification and has not accrued the remaining exposure. A Life Sciences sale-related tax indemnity of approximately $1.2 million was recorded. The sale also includes a potential earnout of up to $70 million based on 2022 performance.
Investor verification priorities
- Review the new term loan’s 7.875% rate, amortization, collateral, maturity, and the ABL’s borrowing-base availability and letter-of-credit usage.
- Assess the Series D preferred-stock dividend accrual, redemption terms, and potential dilution from the low-exercise-price warrants.
- Track whether automotive recovery, semiconductor shortages, supply-chain constraints, and inventory investment affect sales, margins, and operating cash flow.
- Monitor litigation, Brazilian tax proceedings and indemnification, the Life Sciences tax obligation, and any earnout proceeds.
- Distinguish ongoing operating performance from prior-year impairment effects and current-period refinancing and swap-related charges.