NN(NNBR) - 2022 Q1 - Quarterly Report

PART I. FINANCIAL INFORMATION This section presents the company's unaudited condensed consolidated financial statements and management's analysis for the first quarter Item 1. Financial Statements This section presents the unaudited condensed consolidated financial statements of NN, Inc. for the three months ended March 31, 2022 and 2021, including statements of operations, balance sheets, changes in stockholders' equity, and cash flows, along with detailed notes providing further context and disclosures Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) (Unaudited) This statement provides a summary of the company's revenues, expenses, and net loss, as well as other comprehensive income (loss) for the three months ended March 31, 2022 and 2021 Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) | Metric (in thousands, except per share data) | Three Months Ended March 31, 2022 | Three Months Ended March 31, 2021 | | :------------------------------------------ | :---------------------------------- | :---------------------------------- | | Net sales | $128,067 | $126,804 | | Income (loss) from operations | $(3,420) | $978 | | Loss before benefit (provision) for income taxes and share of net income from joint venture | $(3,863) | $(7,064) | | Net loss | $(3,302) | $(4,913) | | Comprehensive income (loss) | $519 | $(5,409) | | Basic net loss per common share | $(0.13) | $(0.46) | | Diluted net loss per common share | $(0.13) | $(0.46) | Condensed Consolidated Balance Sheets (Unaudited) This statement presents the company's financial position, including assets, liabilities, and stockholders' equity, as of March 31, 2022, and December 31, 2021 Condensed Consolidated Balance Sheets | Metric (in thousands) | March 31, 2022 | December 31, 2021 | | :-------------------------------- | :------------- | :---------------- | | Total current assets | $217,307 | $196,282 | | Total assets | $595,848 | $579,101 | | Total current liabilities | $91,834 | $74,017 | | Total liabilities | $316,475 | $301,109 | | Series D perpetual preferred stock | $56,345 | $53,807 | | Total stockholders' equity | $223,028 | $224,185 | Condensed Consolidated Statements of Changes in Stockholders' Equity (Unaudited) This statement details the changes in the company's stockholders' equity for the three months ended March 31, 2022 and 2021, reflecting net loss, dividends, share-based compensation, and other comprehensive income (loss) items Changes in Stockholders' Equity (Three Months Ended March 31, 2022) | Item (in thousands) | Common Stock (Par Value) | Additional Paid-in Capital | Accumulated Deficit | Accumulated Other Comprehensive Income (Loss) | Total | | :-------------------------------------- | :----------------------- | :------------------------- | :------------------ | :-------------------------------------------- | :---- | | Balance at December 31, 2021 | $430 | $474,757 | $(219,100) | $(31,902) | $224,185 | | Net loss | — | — | $(3,302) | — | $(3,302) | | Dividends accrued for preferred stock | — | $(2,538) | — | — | $(2,538) | | Share-based compensation expense | $9 | $940 | — | — | $949 | | Foreign currency translation gain | — | — | — | $2,600 | $2,600 | | Balance at March 31, 2022 | $439 | $473,072 | $(222,402) | $(28,081) | $223,028 | Condensed Consolidated Statements of Cash Flows (Unaudited) This statement outlines the cash inflows and outflows from operating, investing, and financing activities for the three months ended March 31, 2022 and 2021 Condensed Consolidated Statements of Cash Flows | Cash Flow Activity (in thousands) | Three Months Ended March 31, 2022 | Three Months Ended March 31, 2021 | | :-------------------------------- | :-------------------------------- | :-------------------------------- | | Net cash provided by (used in) operating activities | $(5,223) | $7,884 | | Net cash used in investing activities | $(4,226) | $(20,877) | | Net cash provided by (used in) financing activities | $(1,516) | $9,628 | | Effect of exchange rate changes on cash flows | $2,936 | $(1,740) | | Net change in cash and cash equivalents | $(8,029) | $(5,105) | | Cash and cash equivalents at end of period | $20,627 | $43,033 | Notes to Condensed Consolidated Financial Statements (Unaudited) These notes provide detailed disclosures and explanations for the condensed consolidated financial statements, covering accounting policies, segment performance, specific asset and liability categories, debt, equity, revenue recognition, share-based compensation, and fair value measurements Note 1. Interim Financial Statements This note describes the company's business and the basis of presentation for the interim financial statements, including recent accounting pronouncements - NN, Inc. is a global diversified industrial company that designs and manufactures high-precision components and assemblies for automotive, general industrial, electrical, aerospace, defense, and medical markets[22] - The adoption of ASU 2020-06 (Accounting for Convertible Instruments and Contracts in an Entity's Own Equity) and ASU 2021-04 (Issuer's Accounting for Certain Modifications or Exchanges of Freestanding Equity-Classified Written Call Options) effective January 1, 2022, did not have a material impact on the consolidated financial statements[26][27] Note 2. Segment Information This note provides financial data for the company's Mobile Solutions and Power Solutions operating segments - The company operates in two reportable segments: Mobile Solutions (focused on automotive and general industrial markets) and Power Solutions (focused on electrical, general industrial, automotive, aerospace, defense, and medical markets)[29][32] Segment Net Sales and Income (Loss) from Operations (in thousands) | Segment | Three Months Ended March 31, 2022 (Net Sales) | Three Months Ended March 31, 2021 (Net Sales) | Three Months Ended March 31, 2022 (Income (Loss) from Operations) | Three Months Ended March 31, 2021 (Income (Loss) from Operations) | | :------------------------ | :-------------------------------------------- | :-------------------------------------------- | :---------------------------------------------------------------- | :---------------------------------------------------------------- | | Mobile Solutions | $76,070 | $77,776 | $1,969 | $6,090 | | Power Solutions | $52,011 | $49,075 | $364 | $2,432 | | Corporate & Consolidations | $(14) | $(47) | $(5,753) | $(7,544) | | Total | $128,067 | $126,804 | $(3,420) | $978 | Note 3. Inventories This note details the composition of inventories, including raw materials, work in process, and finished goods Inventories Breakdown (in thousands) | Inventory Type | March 31, 2022 | December 31, 2021 | | :-------------- | :------------- | :---------------- | | Raw materials | $31,108 | $27,221 | | Work in process | $28,857 | $24,960 | | Finished goods | $21,274 | $22,846 | | Total inventories | $81,239 | $75,027 | Note 4. Intangible Assets, Net This note presents the carrying values and amortization of intangible assets by segment, and discusses impairment considerations Changes in Intangible Assets, Net (in thousands) | Segment | Balance as of December 31, 2021 | Amortization (3 months ended March 31, 2022) | Balance as of March 31, 2022 | | :---------------- | :------------------------------ | :------------------------------------------- | :--------------------------- | | Mobile Solutions | $25,709 | $(838) | $24,871 | | Power Solutions | $63,009 | $(2,749) | $60,260 | | Total | $88,718 | $(3,587) | $85,131 | - Despite a decline in market capitalization below the net book value of stockholders' equity, an impairment analysis on long-lived assets as of March 31, 2022, concluded that carrying values were recoverable, and no impairment charge was recorded[34] Note 5. Investment in Joint Venture This note outlines the company's equity method investment in a Chinese joint venture and changes in its carrying value - The company holds a 49% equity method investment in Wuxi Weifu Autocam Precision Machinery Company, Ltd. (the 'JV') in Wuxi, China[35] Changes in Investment in Joint Venture (in thousands) | Item | Amount | | :---------------------------------- | :----- | | Balance as of December 31, 2021 | $34,045 | | Share of earnings | $2,092 | | Dividends paid by joint venture | $(4,026) | | Foreign currency translation gain | $66 | | Balance as of March 31, 2022 | $32,177 | Note 6. Income Taxes This note explains the effective tax rate and its components for the reporting periods, including factors impacting tax expense Effective Tax Rate | Period | Effective Tax Rate | | :------------------------------ | :----------------- | | Three Months Ended March 31, 2022 | (39.6)% | | Three Months Ended March 31, 2021 | 10.7% | - The effective tax rate for Q1 2022 was unfavorably impacted by the accrual of tax on non-permanently reinvested unremitted earnings of foreign subsidiaries, limitations on tax benefits for loss carryforwards in certain jurisdictions, and U.S. tax on foreign subsidiary earnings under the global intangible low-taxed income regime[37] Note 7. Debt This note details the company's debt structure, including the Term Loan Facility and ABL Facility, and associated interest rates Debt Balances (in thousands) | Debt Type | March 31, 2022 | December 31, 2021 | | :-------------------------------- | :------------- | :---------------- | | Term Loan Facility | $148,500 | $148,875 | | International lines of credit and other loans | $10,302 | $10,930 | | Total principal | $158,802 | $159,805 | | Long-term debt, net of current portion | $150,400 | $151,052 | - The Term Loan Facility has $148.5 million outstanding as of March 31, 2022, bearing interest at 7.875% (one-month LIBOR, subject to a 1.000% floor, plus 6.875% margin). An interest rate swap fixes $60.0 million of this at 1.291%[39][41] - The ABL Facility provides $50.0 million in revolving credit, with $37.8 million available for future borrowings as of March 31, 2022. No outstanding borrowings were present[44][45] Note 8. Leases This note provides supplemental cash flow information related to the company's finance and operating lease activities Supplemental Cash Flow Information Related to Leases (in thousands) | Item | Three Months Ended March 31, 2022 | Three Months Ended March 31, 2021 | | :---------------------------------------------- | :-------------------------------- | :-------------------------------- | | Operating cash flows used in finance leases | $80 | $57 | | Operating cash flows used in operating leases | $4,204 | $4,103 | | Financing cash flows used in finance leases | $700 | $846 | | Right-of-use assets obtained in exchange for new finance lease liabilities | $395 | $60 | | Right-of-use assets obtained in exchange for new operating lease liabilities | $1,305 | — | Note 9. Commitments and Contingencies This note discloses potential liabilities from legal matters, including tax disputes, a class action lawsuit, and a breach of contract settlement - For the Brazil ICMS Tax Matter, the cumulative potential liability in the event of unfavorable decisions on all remaining matters is estimated to be less than $5.0 million, inclusive of interest and penalties. The company expects indemnification from former shareholders of Autocam[49][50] - A class action lawsuit (Securities Offering Matter) alleging violations of the Securities Act of 1933 is ongoing; the company believes the allegations are without merit and intends to vigorously defend itself[51] - A $1.8 million settlement for breach of contract claims with a former customer was reached and recognized as an operating expense during the three months ended March 31, 2022[52] Note 10. Preferred Stock and Stockholders' Equity This note describes the Series D Perpetual Preferred Stock, its dividend terms, classification, and carrying value changes - The Series D Perpetual Preferred Stock, issued March 22, 2021, has an initial liquidation preference of $1,000 per share and earns cash dividends at 10.0% per year, or an in-kind increase in liquidation preference of 12.0% per year if not paid in cash[54] - The Series D Preferred Stock is classified as mezzanine equity due to potential redemption upon a change of control event not solely within the company's control[55] Series D Preferred Stock Carrying Value (in thousands) | Item | Three Months Ended March 31, 2022 | | :---------------------------------- | :-------------------------------- | | Beginning balance | $53,807 | | Accrual of in-kind dividends | $2,142 | | Amortization | $396 | | Ending balance | $56,345 | Note 11. Revenue from Contracts with Customers This note disaggregates net sales by geographical region and customer industry, and provides information on deferred revenue Net Sales by Geographical Region (in thousands) | Region | Three Months Ended March 31, 2022 | Three Months Ended March 31, 2021 | | :-------------------------- | :-------------------------------- | :-------------------------------- | | United States and Puerto Rico | $78,282 | $77,197 | | China | $13,796 | $15,920 | | Brazil | $11,065 | $9,860 | | Mexico | $9,805 | $8,412 | | Germany | $1,345 | $1,931 | | Poland | $1,344 | $1,184 | | Other | $12,430 | $12,300 | | Total net sales | $128,067 | $126,804 | Net Sales by Customer Industry (in thousands) | Industry | Three Months Ended March 31, 2022 | Three Months Ended March 31, 2021 | | :---------------------------- | :-------------------------------- | :-------------------------------- | | Automotive | $60,674 | $60,569 | | General Industrial | $38,140 | $39,684 | | Residential/Commercial Electrical | $17,199 | $15,354 | | Other | $12,054 | $11,197 | | Total net sales | $128,067 | $126,804 | - Deferred revenue was $0.4 million as of March 31, 2022, down from $0.5 million as of December 31, 2021. Revenue recognized from deferred revenue for Q1 2022 was $0.3 million[63] Note 12. Share-Based Compensation This note details share-based compensation expense by award type and provides information on restricted stock and performance share units Share-Based Compensation Expense (in thousands) | Award Type | Three Months Ended March 31, 2022 | Three Months Ended March 31, 2021 | | :------------------------ | :-------------------------------- | :-------------------------------- | | Stock options | $56 | $89 | | Restricted stock | $604 | $548 | | Performance share units | $289 | $249 | | Total compensation expense | $949 | $886 | - During Q1 2022, 897,000 shares of restricted stock were granted with a weighted average grant date fair value of $3.31 per share. Total unvested restricted stock at March 31, 2022, was 1,101,000 shares[69][71] - As of March 31, 2022, there were 576,000 unvested TSR Awards and 228,000 unvested ROIC Awards outstanding[79] Note 13. Accumulated Other Comprehensive Income This note presents the components of accumulated other comprehensive income (loss), including foreign currency translation and interest rate swaps Components of Accumulated Other Comprehensive Income (Loss) (in thousands) | Component | Balance at December 31, 2021 | Net Other Comprehensive Income (Loss) (Q1 2022) | Balance at March 31, 2022 | | :---------------------------- | :--------------------------- | :---------------------------------------------- | :------------------------ | | Foreign Currency Translation | $(32,016) | $2,600 | $(29,416) | | Interest rate swap | $151 | $1,547 | $1,698 | | Income taxes | $(37) | $(326) | $(363) | | Total | $(31,902) | $3,821 | $(28,081) | Note 14. Net Income (Loss) Per Common Share This note outlines the computation of basic and diluted net loss per common share, including anti-dilutive securities Net Income (Loss) Per Common Share Computation | Metric | Three Months Ended March 31, 2022 | Three Months Ended March 31, 2021 | | :---------------------------------------- | :-------------------------------- | :-------------------------------- | | Numerator for basic and diluted undistributed net loss per common share (in thousands) | $(5,840) | $(19,442) | | Weighted average common shares outstanding (in thousands) | 43,308 | 42,836 | | Shares used to calculate loss per share, basic and diluted (in thousands) | 44,594 | 42,672 | | Basic and diluted loss per common share | $(0.13) | $(0.46) | - Securities that were anti-dilutive and excluded from diluted net loss per common share calculation for Q1 2022 include 600,000 options and 1,500,000 2019 Warrants[89] Note 15. Fair Value Measurements This note describes the fair value measurements for derivative liabilities and assets, including preferred stock derivatives and interest rate swaps Derivative Liabilities Measured at Fair Value (in thousands) | Description | Fair Value as of March 31, 2022 (Level 1) | Fair Value as of March 31, 2022 (Level 3) | | :---------------------------------------- | :---------------------------------------- | :---------------------------------------- | | Derivative liability - other non-current liabilities | $5,453 | $228 | - The change in fair value of Preferred Stock derivatives resulted in a $(2,543) gain during Q1 2022, recognized in 'Other income, net'[97] - The company uses a fixed-rate interest rate swap (2021 Swap) with a notional amount of $60.0 million and a fixed rate of 1.291% to hedge variable interest rate debt, designated as a cash flow hedge[101] Interest Rate Swaps Measured at Fair Value (in thousands) | Description | Fair Value as of March 31, 2022 (Level 2) | | :---------------------------------------- | :---------------------------------------- | | Derivative asset - other current assets | $364 | | Derivative asset - other non-current assets | $1,337 | | Total | $1,701 | Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on the company's financial performance and condition for the three months ended March 31, 2022, compared to the same period in 2021, highlighting key factors influencing results, segment performance, and changes in financial condition and liquidity - Net sales increased by $1.3 million (1%) YoY, primarily due to increased pricing to recover inflationary costs, partially offset by decreased automotive demand due to the global semiconductor shortage[118] - Income (loss) from operations decreased by $4.4 million YoY to $(3.4) million, impacted by a legal settlement and increased material costs[118][119][120] - Cash used in operating activities was $5.2 million in Q1 2022, a significant change from $7.9 million provided in Q1 2021, mainly due to an increase in accounts receivable[135] - Total assets increased by $16.7 million and total liabilities increased by $15.4 million from December 31, 2021, to March 31, 2022, primarily driven by increases in accounts receivable, inventories, accounts payable, and accrued liabilities[132][133] - The Term Loan Facility had $148.5 million outstanding, and the ABL Facility had $37.8 million available for future borrowings as of March 31, 2022. The company was in compliance with all debt covenants[138][141] Item 3. Quantitative and Qualitative Disclosures About Market Risk This section details the company's exposure to financial market risks, specifically interest rate risk and foreign currency risk, and outlines the strategies and instruments used to manage these exposures - The company manages interest rate risk using a mixture of fixed and variable rate debt, and employs interest rate swap agreements, such as the 2021 Swap with a notional amount of $60.0 million at a fixed rate of 1.291%[145][146] - A one-percent increase in one-month LIBOR would result in an annualized increase of $0.5 million in interest expense on the Term Loan Facility, due to the LIBOR floor[148] - The company is exposed to foreign currency risk from operations and intercompany transactions but did not hold any foreign currency derivatives as of March 31, 2022[149] Item 4. Controls and Procedures This section confirms that the company's disclosure controls and procedures were effective as of March 31, 2022, and reports no material changes in internal control over financial reporting during the quarter - The Chief Executive Officer and Chief Financial Officer concluded that the company's disclosure controls and procedures were effective as of March 31, 2022[150] - There were no material changes in the company's internal control over financial reporting during the fiscal quarter ended March 31, 2022[151] PART II. OTHER INFORMATION This section provides updates on legal proceedings, risk factors, equity sales, and other required disclosures Item 1. Legal Proceedings This section incorporates by reference the disclosures regarding legal proceedings from Note 9 of the Condensed Consolidated Financial Statements, which include the Brazil ICMS Tax Matter, a Securities Offering Matter, and a recent breach of contract settlement - Legal proceedings, including the Brazil ICMS Tax Matter and a Securities Offering Matter, are detailed in Note 9 of the financial statements[154] Item 1A. Risk Factors This section updates the company's risk factors, specifically highlighting the potential adverse impacts of the Russia-Ukraine military conflict on international operations, financial condition, and prospects due to sanctions, supply chain disruptions, and increased energy costs - The ongoing military conflict between Russia and Ukraine poses a new risk, potentially affecting the company's international operations, financial condition, and prospects through reduced consumer demand, supply chain disruptions, and increased costs for transportation, energy, and raw materials, particularly impacting European facilities[155] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This section reports on the company's purchases of its own equity securities during the quarter, primarily for withholding shares to cover tax obligations upon the vesting of restricted stock Shares Purchased During Q1 2022 | Period | Total Number of Shares Purchased | Average Price Paid Per Share | | :------------ | :------------------------------- | :--------------------------- | | January 2022 | — | $— | | February 2022 | 9,785 | $2.98 | | March 2022 | 19,803 | $2.90 | | Total | 29,588 | $2.93 | - The shares purchased were withheld to pay for tax obligations due upon the vesting of restricted stock held by certain employees[157] Item 3. Defaults Upon Senior Securities This section states that there were no defaults upon senior securities during the reported period - There were no defaults upon senior securities[158] Item 4. Mine Safety Disclosures This section indicates that the disclosure requirements for mine safety are not applicable to the company - Mine Safety Disclosures are not applicable to the company[159] Item 5. Other Information This section states that there is no other information to report under this item - No other information is reported under this item[160] Item 6. Exhibits This section lists all exhibits filed as part of the Form 10-Q, including amendments to credit agreements, certifications, and XBRL data files - Exhibits filed include Amendment No. 1 to Term Loan Credit Agreement, Certifications of Principal Executive and Financial Officers (31.1, 31.2, 32.1, 32.2), and XBRL Instance Document and Taxonomy Extensions[161] SIGNATURES This section contains the official signatures of the company's authorized officers, certifying the accuracy and completeness of the report SIGNATURES This section contains the official signatures of the company's authorized officers, including the President, Chief Executive Officer, and Senior Vice President - Chief Financial Officer, certifying the accuracy and completeness of the report - The report is signed by Warren A. Veltman, President, Chief Executive Officer and Director, and Michael C. Felcher, Senior Vice President - Chief Financial Officer, on May 6, 2022[164]