NN, INC. Overview
NN, Inc. is a global diversified industrial company that combines advanced engineering and production capabilities with in-depth materials science expertise to design and manufacture high-precision components and assemblies primarily for the electrical, automotive, general industrial, aerospace, defense, and medical markets. As used in this Quarterly Report, the terms "NN," the "Company," "we," "our," or "us" refer toNN, Inc. and its subsidiaries.
Forward-Looking Statements
This Quarterly Report contains forward-looking statements that are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements may discuss goals, intentions and expectations as to future trends, plans, events, results of operations or financial condition, or state other information relating toNN, Inc. , based on current beliefs of management as well as assumptions made by, and information currently available to, management. Forward-looking statements generally will be accompanied by words such as "anticipate," "believe," "could," "estimate," "expect," "forecast," "guidance," "intend," "may," "possible," "potential," "predict," "project" or other similar words, phrases or expressions. Forward-looking statements involve a number of risks and uncertainties that are outside of management's control and that may cause actual results to be materially different from such forward-looking statements. Such factors include, among others, general economic conditions and economic conditions in the industrial sector; the impacts of the COVID-19 pandemic on our financial condition, business operations and liquidity; competitive influences; risks that current customers will commence or increase captive production; risks of capacity underutilization; quality issues; material changes in the costs and availability of raw materials; economic, social, political and geopolitical instability, currency fluctuation, and other risks of doing business outside ofthe United States ; our dependence on certain major customers, some of whom are not parties to long-term agreements (and/or are terminable on short notice); the impact of acquisitions and divestitures; the level of our indebtedness; the restrictions contained in our debt agreements; our ability to obtain financing at favorable rates, if at all, and to refinance existing debt as it matures; unanticipated difficulties integrating acquisitions; new laws and governmental regulations; the impact of climate change on our operations; cyber liability or potential liability for breaches of our or our service providers' information technology systems or business operations disruptions; and other risk factors and cautionary statements listed from time-to-time in our periodic reports filed with theSecurities and Exchange Commission . We disclaim any obligation to update any such factors or to publicly announce the result of any revisions to any of the forward-looking statements included herein or therein to reflect future events or developments.
For additional information concerning such risk factors and cautionary statements, please see the sections titled "Item 1A. Risk Factors" in the 2021 Annual Report and this Quarterly Report.
Results of Operations
Factors That May Influence Results of Operations
The following paragraphs describe factors that have influenced results of
operations for the three months ended
Global COVID-19 Pandemic
Althoughthe United States and global economy continue to recover from the COVID-19 pandemic, we cannot predict when a full economic recovery will occur. The impact of new and more easily transmitted variants of COVID-19, such as the Delta and Omicron variants, cannot be predicted at this time and could depend on numerous factors, including vaccination rates among the population, the effectiveness of COVID-19 vaccines against any new variants, and the response by governmental bodies and regulators. Further surges in COVID-19 infection rates could result in the reinstatement of directives and mandates requiring businesses to again curtail or cease normal operations. The spread of COVID-19 and the responses thereto have created a disruption in the manufacturing, delivery, and overall supply chain of automobile manufacturers and suppliers, as well as disruption within the power industry. Global vehicle production decreased significantly in 2020, but production ramped back up in 2021. However, production continues to be impacted by disruptions of global supply chains, which have caused challenges in obtaining raw materials we use in the manufacture of some of our products. In addition, power shortages inChina have resulted in widespread blackouts, often without any or little notice. These blackouts caused us and other manufacturers in the region to shut down production until power was restored. Supply chain and COVID-19 related disruptions are expected to continue during 2022. Inflation triggered by the unprecedented economic impact of the COVID-19 pandemic has increased our manufacturing cost, particularly labor and materials, and is expected to continue into future periods. A worldwide semiconductor chip shortage 20
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continues to affect automotive original equipment manufacturers, causing unpredictable volumes. The rapid development and fluidity of the situation precludes any prediction as to the ultimate impact COVID-19 will have on our business, financial condition, results of operations, and cash flows, which will depend largely on future developments directly or indirectly relating to the duration and scope of the COVID-19 pandemic. While managing decreased demand in many regions across the globe, we are now operating at all of our business locations. We have implemented training and recruiting programs to address labor shortages. We are focused on the health and safety of our employees, customers, and suppliers. We have developed and implemented processes to ensure a safe environment for our employees and any visitors to our facilities, including providing personal protective equipment and establishing social distancing protocols. These processes include recommendations based on guidelines from theCenters for Disease Control and Prevention and theWorld Health Organization . The health and safety of our employees remains our top priority. While we are actively promoting vaccination among our employees, vaccination status may affect workforce availability ranging from absences for vaccinations, booster shots, and recovery from side-effects. Significant workforce availability challenges could have a material effect on our business operations, financial results, liquidity, and financial position. We have undertaken a number of permanent and temporary actions to manage the evolving situation. We continue to streamline facilities and implement cost savings initiatives. Capital expenditures and travel costs remain at relatively low levels. Three Months EndedMarch 31, 2022 compared to the Three Months EndedMarch 31, 2021 Consolidated Results Three Months Ended March 31, 2022 2021 $ Change Net sales$ 128,067 $ 126,804 $ 1,263 Organic growth$ 1,104 Foreign exchange effects 159 Cost of sales (exclusive of depreciation and amortization shown separately below) 104,578 99,688$ 4,890 Selling, general, and administrative expense 13,454 14,575 (1,121) Depreciation and amortization 11,429 11,568 (139) Other operating expense (income), net 2,026 (5) 2,031 Income (loss) from operations (3,420) 978 (4,398) Interest expense 3,439 2,024 1,415
Loss on extinguishment of debt and write-off of debt issuance costs
- 2,390 (2,390)
Derivative payments on interest rate swap - 1,717 (1,717)
Loss on interest rate swap - 2,033 (2,033)
Other income, net (2,996) (122) (2,874)Loss before benefit (provision) for income taxes and share of net income from joint venture
(3,863) (7,064) 3,201
Benefit (provision) for income taxes (1,531) 756 (2,287)
Share of net income from joint venture 2,092 1,395 697
Net loss $ (3,302) $ (4,913) $ 1,611
Net Sales . Net sales increased by $1.3 million , or 1%, during the three months
ended March 31, 2022 , compared to the three months ended March 31, 2021 ,
primarily due to increased pricing to recover certain inflationary costs and
underutilized fixed costs caused by lower-than-expected customer demand. These
increases were partially offset by decreased demand from automotive customers
due largely to the ongoing global semi-conductor shortage.
Cost of Sales. Cost of sales increased by $4.9 million , or 5%, during the three
months ended March 31, 2022 , compared to the three months ended March 31, 2021 ,
primarily due to increased material costs. In addition, the prior year cost of
sales benefited from favorable overhead absorption.
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Selling, General, and Administrative Expense. Selling, general, and administrative expense decreased by$1.1 million during the three months endedMarch 31, 2022 , compared to the three months endedMarch 31, 2021 , primarily due to lower personnel costs. Other Operating Expense (Income), Net. Other operating expense (income), net, changed unfavorably by$2.0 million primarily due to a legal settlement reached during the three months endedMarch 31, 2022 . Interest Expense. Interest expense increased by$1.4 million during the three months endedMarch 31, 2022 , compared to the three months endedMarch 31, 2021 , primarily due to higher interest rates and a larger average debt balance as a result of the credit facility and preferred stock refinance during the first quarter of 2021.
Three Months Ended
2022 2021
Interest on debt $ 3,071 $ 1,439
Interest rate swap settlements 44 -
Amortization of debt issuance costs and discount 332 405
Capitalized interest (125) (31)
Other 117 211
Total interest expense $ 3,439 $ 2,024 Loss on Extinguishment of Debt and Write-off of Debt Issuance Costs. We
recognized
Derivative Payments on Interest Rate Swap. Derivative payments on interest rate swap represent cash settlements of an interest rate swap which was terminated in the first quarter of 2021. We entered into a new interest rate swap in the third quarter of 2021, which is designated as a cash flow hedge with the impact of settlements recognized in interest expense.
Loss on Interest Rate Swap. We recognized a
Other Income, Net. Other income, net, changed favorably by$2.9 million during the three months endedMarch 31, 2022 , compared to the three months endedMarch 31, 2021 , due to noncash derivative mark-to-market gains and favorable foreign exchange effects associated with intercompany borrowings. Benefit (Provision) For Income Taxes. Our effective tax rate was (39.6)% for the three months endedMarch 31, 2022 , compared to 10.7% for the three months endedMarch 31, 2021 . The rate for the three months endedMarch 31, 2022 was unfavorably impacted by the limitation on the amount of tax benefit recorded for loss carryforwards in certain jurisdictions where we believe it is more likely than not that a portion of the future tax benefit may not be realized. Share of Net Income from Joint Venture. Share of net income from the JV increased during the three months endedMarch 31, 2022 , compared to the three months endedMarch 31, 2021 , primarily due to higher sales volume. The JV, in which we own a 49% investment, recognized net sales of$26.5 million and$23.4 million for the three months endedMarch 31, 2022 and 2021, respectively. Results by Segment MOBILE SOLUTIONS Three Months Ended March 31, 2022 2021 $ Change Net sales$ 76,070 $ 77,776 $ (1,706) Organic decline$ (1,865) Foreign exchange effects 159 Income from operations$ 1,969 $ 6,090 $ (4,121) Net sales decreased by$1.7 million during the three months endedMarch 31, 2022 , compared to the three months endedMarch 31, 2021 , primarily due to lower sales volume, partially offset by increased pricing to recover certain inflationary costs and underutilized fixed costs caused by lower-than-expected customer demand and favorable foreign exchange effects of$0.2 million . Income from operations decreased by$4.1 million during the three months endedMarch 31, 2022 , compared to the same period in the prior year primarily due to lower sales volume and variable cost inefficiencies associated with supply chain interruptions, 22
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uneven customer ordering patterns, and labor constraints caused by pandemic
interruptions. In addition, prior year income from operations benefited by
favorable overhead absorption as the result of a build up of inventory during
the three months ended
POWER SOLUTIONS
Three Months Ended March 31,
2022 2021 $ Change
Net sales $ 52,011 $ 49,075 $ 2,936
Organic growth $ 2,936
Income from operations $ 364 $ 2,432 $ (2,068) Net sales increased by
Income from operations decreased by$2.1 million during the three months endedMarch 31, 2022 compared to the same period in the prior year, primarily due to higher selling, general and administrative costs and a legal settlement reached during the three months endedMarch 31, 2022 . The increase in these expenses was partially offset by an increase in favorable overhead absorption during the first quarter of 2022.
Changes in Financial Condition from
Overview
FromDecember 31, 2021 toMarch 31, 2022 , total assets increased by$16.7 million primarily due to increases in accounts receivable and inventories during the three months endedMarch 31, 2022 . The increase in accounts receivable is due to higher sales during the current quarter compared with the fourth quarter of 2021. Inventories increased due to higher sales in the current quarter compared with the fourth quarter of 2021 and due to higher material costs. FromDecember 31, 2021 toMarch 31, 2022 , total liabilities increased by$15.4 million , primarily due to increases in accounts payable, accrued salaries and benefits and the accrual for a legal settlement reached during the first quarter of 2022. The increase in accounts payable is attributed to higher inventory balances atMarch 31, 2022 . Working capital, which consists of current assets less current liabilities, was$125.5 million as ofMarch 31, 2022 , compared to$122.3 million as ofDecember 31, 2021 . The increase in working capital was primarily due to the increase in accounts receivable and inventories discussed above, partially offset by a higher balance of accounts payable and other current liabilities.
Cash Flows
Cash used in operations was$5.2 million for the three months endedMarch 31, 2022 , compared with cash provided by operations of$7.9 million for the three months endedMarch 31, 2021 . The difference was primarily due to an increase in accounts receivable related to higher sales during the current quarter compared with the fourth quarter of 2021. Cash used in investing activities was$4.2 million for the three months endedDecember 31, 2021 , compared with cash used in investing activities of$20.9 million for the three months endedMarch 31, 2021 . The difference was primarily due to cash paid to settle the interest rate swap in the first quarter of 2021. Cash used in financing activities was$1.5 million for the three months endedDecember 31, 2021 , compared with cash provided by financing activities of$9.6 million for the three months endedMarch 31, 2021 . The difference was primarily due to the debt and preferred stock refinancing in the first quarter of 2021.
Liquidity and Capital Resources
Credit Facilities
The principal amount outstanding under our Term Loan Facility as ofMarch 31, 2022 , was$148.5 million , without regard to unamortized debt issuance costs and discount. As ofMarch 31, 2022 , we had$37.8 million available for future borrowings under the ABL Facility. This amount of borrowing capacity is net of$11.1 million of outstanding letters of credit atMarch 31, 2022 , which are considered as usage of the ABL Facility. The Term Loan Facility requires quarterly principal payments of$0.4 million with the remaining unpaid principal amount due on the final maturity date ofSeptember 22, 2026 . If one-month LIBOR is less than 1.00%, then we pay 7.875% per annum in interest. If one-month LIBOR exceeds 1.00%, then we pay the variable one-month LIBOR plus an applicable margin of 23
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6.875%. Based on the interest rate in effect at
The ABL Facility bears interest on a variable rate structure with borrowings bearing interest at one-month LIBOR plus an applicable margin of 1.75%. The interest rate in effect atMarch 31, 2022 , was 2.25%. We pay a commitment fee of 0.375% for unused capacity under the ABL Facility.
We were in compliance with all requirements under our Term Loan Facility and ABL
Facility as of
Seasonality and Fluctuation in Quarterly Results
General economic conditions impact our business and financial results, and certain businesses experience seasonal and other trends related to the industries and end markets that they serve. For example, European sales are often weaker in the summer months as customers slow production and sales to original equipment manufacturers are often stronger immediately preceding and following the launch of new products. However, as a whole, we are not materially impacted by seasonality.
Critical Accounting Estimates
Our critical accounting policies, including the assumptions and judgments
underlying them, are disclosed in the 2021 Annual Report, including those
policies as discussed in Note 1 to the Notes to Consolidated Financial
Statements included in the 2021 Annual Report. There have been no material
changes to these policies during the three months ended
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