NN(NNBR) - 2023 Q1 - Quarterly Report

PART I. FINANCIAL INFORMATION This section presents the company's unaudited financial statements, management's analysis, market risk disclosures, and internal controls for the reporting period Item 1. Financial Statements This section presents the unaudited condensed consolidated financial statements, including statements of operations, balance sheets, changes in stockholders' equity, and cash flows, along with detailed notes explaining accounting policies, segment performance, debt, equity, revenue, and fair value measurements for the three months ended March 31, 2023 - The accompanying condensed consolidated financial statements are unaudited and reflect all adjustments necessary to fairly state the company's financial position and operating results for the interim periods[22] - Certain information and footnote disclosures normally included in U.S. GAAP consolidated financial statements have been condensed or omitted[23] Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) (Unaudited) This statement details the company's revenues, expenses, and net loss, along with other comprehensive income components for the three-month periods | Metric | 3 Months Ended March 31, 2023 (in thousands) | 3 Months Ended March 31, 2022 (in thousands) | Change (YoY) | | :--------------------------------------------- | :--------------------------------------------- | :--------------------------------------------- | :------------ | | Net sales | $127,088 | $128,067 | (0.8%) | | Cost of sales | $108,421 | $104,578 | 3.7% | | Selling, general, and administrative expense | $13,165 | $13,454 | (2.1%) | | Depreciation and amortization | $11,516 | $11,429 | 0.8% | | Other operating expense, net | $1,061 | $2,026 | (47.6%) | | Loss from operations | $(7,075) | $(3,420) | (107.0%) | | Interest expense | $4,288 | $3,439 | 24.7% | | Other income, net | $(2,208) | $(2,996) | (26.3%) | | Loss before provision for income taxes and share of net income from joint venture | $(9,155) | $(3,863) | (137.0%) | | Provision for income taxes | $(1,301) | $(1,531) | (15.1%) | | Share of net income from joint venture | $281 | $2,092 | (86.6%) | | Net loss | $(10,175) | $(3,302) | (208.1%) | | Foreign currency translation gain | $1,840 | $2,600 | (29.3%) | | Interest rate swap: Change in fair value, net of tax | $(230) | $1,187 | (119.4%) | | Reclassification adjustment for losses (gains) included in net loss, net of tax | $(468) | $34 | (1476.5%) | | Other comprehensive income | $1,142 | $3,821 | (70.1%) | | Comprehensive income (loss) | $(9,033) | $519 | (1840.8%) | | Basic and diluted net loss per common share | $(0.29) | $(0.13) | (123.1%) | | Weighted average common shares outstanding | 45,309 | 44,594 | 1.6% | Condensed Consolidated Balance Sheets (Unaudited) This statement presents the company's assets, liabilities, and stockholders' equity at specific points in time | Metric | March 31, 2023 (in thousands) | December 31, 2022 (in thousands) | Change | | :-------------------------------------- | :------------------------------------ | :------------------------------------ | :----- | | Total assets | $547,273 | $546,127 | 0.2% | | Total current assets | $200,505 | $191,700 | 4.6% | | Property, plant and equipment, net | $194,513 | $197,637 | (1.6%) | | Intangible assets, net | $69,327 | $72,891 | (4.9%) | | Investment in joint venture | $32,212 | $31,802 | 1.3% | | Total liabilities | $305,057 | $295,162 | 3.4% | | Total current liabilities | $91,340 | $78,806 | 15.9% | | Long-term debt, net of current portion | $146,228 | $149,389 | (2.1%) | | Series D perpetual preferred stock | $67,752 | $64,701 | 4.7% | | Total stockholders' equity | $174,464 | $186,264 | (6.4%) | Condensed Consolidated Statements of Changes in Stockholders' Equity (Unaudited) This statement outlines the changes in the company's equity accounts, including net loss, dividends, and other comprehensive income | Metric | 3 Months Ended March 31, 2023 (in thousands) | 3 Months Ended March 31, 2022 (in thousands) | | :-------------------------------- | :--------------------------------------------- | :--------------------------------------------- | | Balance as of Dec 31, 2022/2021 | $186,264 | $224,185 | | Net loss | $(10,175) | $(3,302) | | Dividends accrued for preferred stock | $(3,051) | $(2,538) | | Share-based compensation expense | $381 | $949 | | Other comprehensive income | $1,142 | $3,821 | | Balance as of March 31, 2023/2022 | $174,464 | $223,028 | Condensed Consolidated Statements of Cash Flows (Unaudited) This statement reports the cash inflows and outflows from operating, investing, and financing activities for the period | Metric | 3 Months Ended March 31, 2023 (in thousands) | 3 Months Ended March 31, 2022 (in thousands) | | :------------------------------------------ | :--------------------------------------------- | :--------------------------------------------- | | Net cash provided by (used in) operating activities | $226 | $(5,223) | | Net cash used in investing activities | $(3,962) | $(4,226) | | Net cash provided by (used in) financing activities | $1,251 | $(1,516) | | Effect of exchange rate changes on cash flows | $222 | $2,936 | | Net change in cash and cash equivalents | $(2,263) | $(8,029) | | Cash and cash equivalents at beginning of period | $12,808 | $28,656 | | Cash and cash equivalents at end of period | $10,545 | $20,627 | Notes to Condensed Consolidated Financial Statements (Unaudited) This section provides detailed explanations and disclosures supporting the condensed consolidated financial statements Note 1. Interim Financial Statements This note outlines the company's business nature, the basis of presentation for the unaudited interim financial statements, and details on accounts receivable sales programs and assets held for sale due to strategic footprint optimization - NN, Inc. is a global diversified industrial company that designs and manufactures high-precision components and assemblies primarily for the automotive, general industrial, electrical, aerospace, defense, and medical markets[21] - The company incurred $0.2 million in fees related to the sale of receivables on a non-recourse basis during the three months ended March 31, 2023[25] - A $0.5 million loss on sales of machinery and equipment from Irvine and Taunton locations (part of Power Solutions segment) was recognized in Q1 2023, as part of a strategic shift to optimize manufacturing footprint[26] Note 2. Segment Information This note details the company's two reportable segments, Mobile Solutions and Power Solutions, and presents their financial performance, showing a slight decrease in total net sales but a significant increase in loss from operations - The company operates in two reportable segments: Mobile Solutions (automotive and general industrial) and Power Solutions (electrical, general industrial, automotive, and medical)[27] Net sales by Segment (in thousands) | Metric | 3 Months Ended March 31, 2023 (in thousands) | 3 Months Ended March 31, 2022 (in thousands) | Change (YoY) | | :-------------------------- | :--------------------------------------------- | :--------------------------------------------- | :----------- | | Net sales: | | | | | Mobile Solutions | $78,018 | $76,070 | 2.6% | | Power Solutions | $49,072 | $52,011 | (5.7%) | | Intersegment sales eliminations | $(2) | $(14) | (85.7%) | | Total | $127,088 | $128,067 | (0.8%) | | Income (loss) from operations: | | | | | Mobile Solutions | $(3,319) | $1,969 | (268.6%) | | Power Solutions | $1,747 | $364 | 380.0% | | Corporate | $(5,503) | $(5,753) | 4.3% | | Total | $(7,075) | $(3,420) | (107.0%) | Note 3. Inventories This note provides a breakdown of inventory components, showing a slight increase in total inventories from December 31, 2022, to March 31, 2023, driven by increases in work in process and finished goods, partially offset by a decrease in raw materials | Category | March 31, 2023 (in thousands) | December 31, 2022 (in thousands) | | :-------------- | :---------------------------- | :------------------------------- | | Raw materials | $31,462 | $32,146 | | Work in process | $25,433 | $24,610 | | Finished goods | $24,883 | $23,926 | | Total inventories | $81,778 | $80,682 | Note 4. Intangible Assets, Net This note presents the changes in intangible assets, net, by segment, indicating a decrease due to amortization. Despite market capitalization falling below stockholders' equity, an impairment analysis concluded no impairment charge was necessary | Segment | Balance as of December 31, 2022 (in thousands) | Amortization (in thousands) | Balance as of March 31, 2023 (in thousands) | | :---------------- | :--------------------------------------------- | :-------------------------- | :------------------------------------------ | | Mobile Solutions | $22,356 | $(839) | $21,517 | | Power Solutions | $50,535 | $(2,725) | $47,810 | | Total | $72,891 | $(3,564) | $69,327 | - No impairment charge was recorded during the three months ended March 31, 2023, despite market capitalization being less than the net book value of stockholders' equity, which triggered an impairment analysis[32] Note 5. Investment in Joint Venture This note details the company's 49% equity method investment in Wuxi Weifu Autocam Precision Machinery Company, Ltd., showing an increase in the investment's carrying value due to its share of earnings and foreign currency translation gains - The company owns a 49% equity method investment in Wuxi Weifu Autocam Precision Machinery Company, Ltd. (JV) in Wuxi, China[33] Investment in Joint Venture (in thousands) | Item | Amount (in thousands) | | :------------------------ | :-------------------- | | Balance as of December 31, 2022 | $31,802 | | Share of earnings | $281 | | Foreign currency translation gain | $129 | | Balance as of March 31, 2023 | $32,212 | Note 6. Income Taxes This note explains the company's effective tax rates for the three months ended March 31, 2023, and 2022, highlighting deviations from the U.S. federal statutory rate due to foreign subsidiary earnings and limitations on loss carryforward benefits - The effective tax rate was (14.2)% for Q1 2023, compared to (39.6)% for Q1 2022[35] - Deviations from the 21% U.S. federal statutory tax rate are primarily due to tax accrual on non-permanently reinvested unremitted earnings of foreign subsidiaries and limitations on tax benefits for loss carryforwards[35] - The effective tax rate was unfavorably impacted by the U.S. tax on foreign subsidiary earnings under the global intangible low-taxed income regime[36] Note 7. Debt This note provides details on the Term Loan Facility and ABL Facility, including recent amendments to adjust covenants and replace LIBOR with SOFR. It outlines outstanding balances, interest rates, payment terms, and confirms compliance with all debt requirements | Debt Type | March 31, 2023 (in thousands) | December 31, 2022 (in thousands) | | :------------------ | :---------------------------- | :------------------------------- | | Term Loan Facility | $147,000 | $147,375 | | ABL Facility | $1,000 | $1,000 | | International loans | $11,290 | $8,729 | | Total principal | $159,290 | $157,104 | | Long-term debt, net of current portion | $146,228 | $149,389 | - The Term Loan Facility and ABL Facility were amended on March 3, 2023, to adjust covenants and replace LIBOR with SOFR for interest rate calculations[37] - The Term Loan Facility bore interest at 11.782% as of March 31, 2023, and will include paid-in-kind (PIK) interest (0.50% to 2.00%) starting in Q2 2023. The ABL Facility had a weighted average interest rate of 6.89% as of March 31, 2023[39][43] - The company was in compliance with all requirements under both the Term Loan Facility and ABL Facility as of March 31, 2023[40][45] Note 8. Leases This note provides supplemental cash flow information related to the company's operating and finance leases, detailing cash payments for lease liabilities and the value of right-of-use assets obtained | Item | Three Months Ended March 31, 2023 (in thousands) | Three Months Ended March 31, 2022 (in thousands) | | :---------------------------------------------- | :----------------------------------------------- | :----------------------------------------------- | | Operating cash flows used in finance leases | $84 | $80 | | Operating cash flows used in operating leases | $4,056 | $4,204 | | Financing cash flows used in finance leases | $689 | $700 | | Right-of-use assets obtained in exchange for new finance lease liabilities | — | $395 | | Right-of-use assets obtained in exchange for new operating lease liabilities | $477 | $1,305 | Note 9. Commitments and Contingencies This note discusses the Brazil ICMS Tax Matter, where the company is defending against disallowed tax credits, and other routine legal matters. The company expects indemnification from former shareholders for the Brazil tax matter and does not anticipate a material loss - The company is vigorously defending against disallowed ICMS tax credits in Brazil, believing it has substantial legal and factual defenses[49] - The cumulative potential liability for the remaining open lawsuits in the Brazil ICMS Tax Matter is estimated to be less than $5.0 million, inclusive of interest and penalties, in the event of unfavorable decisions[49] - The company expects indemnification from the former shareholders of Autocam for amounts owed related to the Brazil tax matter, and therefore does not expect to incur a loss[50] Note 10. Preferred Stock and Stockholders' Equity This note details the Series D Perpetual Preferred Stock, including its classification as mezzanine equity, dividend rates (cash and in-kind), and changes in its carrying value due to accruals and amortization - The Series D Preferred Stock was issued at $1,000 per share with detachable warrants, earning cash dividends at 10.0% per year or an increase in liquidation preference by 12.0% per year if not paid[52] - The Series D Preferred Stock is classified as mezzanine equity due to features that could require redemption upon a change of control not solely within the company's control[53] Series D Perpetual Preferred Stock (in thousands) | Item | Amount (in thousands) | | :------------------------------ | :-------------------- | | Balance as of December 31, 2022 | $64,701 | | Accrual of in-kind dividends | $2,410 | | Amortization | $641 | | Balance as of March 31, 2023 | $67,752 | Note 11. Revenue from Contracts with Customers This note summarizes revenue recognition policies and presents revenue breakdowns by customer geographical region and industry for Q1 2023 and 2022, along with deferred revenue information Total Net Sales by Region (in thousands) | Region | 2023 Total Net Sales (in thousands) | 2022 Total Net Sales (in thousands) | Change (YoY) | | :------------------------ | :---------------------------------- | :---------------------------------- | :----------- | | United States and Puerto Rico | $77,426 | $78,282 | (1.1%) | | China | $14,561 | $13,796 | 5.6% | | Brazil | $11,721 | $11,065 | 5.9% | | Mexico | $7,767 | $9,805 | (20.8%) | | Germany | $1,806 | $1,345 | 34.3% | | Poland | $1,861 | $1,344 | 38.5% | | Other | $11,946 | $12,430 | (3.9%) | | Total Net Sales | $127,088 | $128,067 | (0.8%) | Total Net Sales by Industry (in thousands) | Industry | 2023 Total Net Sales (in thousands) | 2022 Total Net Sales (in thousands) | Change (YoY) | | :------------------------ | :---------------------------------- | :---------------------------------- | :----------- | | Automotive | $64,607 | $60,674 | 6.5% | | General Industrial | $34,818 | $38,140 | (8.7%) | | Residential/Commercial Electrical | $14,585 | $17,199 | (15.2%) | | Other | $13,078 | $12,054 | 8.5% | | Total Net Sales | $127,088 | $128,067 | (0.8%) | - Deferred revenue increased to $1.2 million as of March 31, 2023, from $0.7 million at December 31, 2022. $0.3 million of revenue recognized in Q1 2023 was from deferred revenue as of December 31, 2022[61] Note 12. Share-Based Compensation This note outlines the components of share-based compensation expense, which significantly decreased in Q1 2023 compared to Q1 2022, and provides the status of unvested restricted stock awards | Type of Award | 3 Months Ended March 31, 2023 (in thousands) | 3 Months Ended March 31, 2022 (in thousands) | Change (YoY) | | :---------------------- | :--------------------------------------------- | :--------------------------------------------- | :----------- | | Restricted stock | $167 | $604 | (72.3%) | | Performance share units | $200 | $289 | (30.8%) | | Stock options | $14 | $56 | (75.0%) | | Total | $381 | $949 | (59.9%) | - As of March 31, 2023, there were 396 thousand unvested restricted stock shares with a weighted average grant-date fair value of $3.55[66] Note 13. Accumulated Other Comprehensive Income This note presents the components of accumulated other comprehensive income (loss) (AOCI), including foreign currency translation and interest rate swap effects, showing a decrease in accumulated other comprehensive loss from December 31, 2022, to March 31, 2023 | Item | Foreign Currency Translation (in thousands) | Interest Rate Swap (in thousands) | Income Taxes (in thousands) | Total (in thousands) | | :-------------------------------------- | :------------------------------------------ | :-------------------------------- | :-------------------------- | :------------------- | | Balance as of December 31, 2022 | $(40,172) | $3,149 | $(97) | $(37,120) | | Other comprehensive income (loss) before reclassifications | $1,840 | $(327) | $97 | $1,610 | | Amounts reclassified from AOCI to interest expense | — | $(468) | — | $(468) | | Net other comprehensive income (loss) | $1,840 | $(795) | $97 | $1,142 | | Balance as of March 31, 2023 | $(38,332) | $2,354 | — | $(35,978) | Note 14. Net Loss Per Common Share This note details the computation of basic and diluted net loss per common share, showing an increased net loss per share in Q1 2023 compared to Q1 2022, and lists securities excluded from diluted EPS calculation due to their anti-dilutive effect Net Loss Per Common Share Calculation | Metric | 3 Months Ended March 31, 2023 | 3 Months Ended March 31, 2022 | | :------------------------------------------ | :---------------------------- | :---------------------------- | | Numerator for basic and diluted net loss per common share (in thousands) | $(13,226) | $(5,840) | | Shares used to calculate basic and diluted net loss per share (in thousands) | 45,309 | 44,594 | | Basic and diluted net loss per common share | $(0.29) | $(0.13) | Anti-dilutive Securities Excluded (in thousands) | Anti-dilutive Securities Excluded (in thousands) | 2023 | 2022 | | :----------------------------------------------- | :--- | :--- | | Options | 516 | 600 | | 2019 Warrants | 1,500 | 1,500 | | Total | 2,016 | 2,100 | Note 15. Fair Value Measurements This note explains the company's fair value measurement policies, focusing on embedded derivatives (warrants and preferred stock put feature) and the interest rate swap. It details the valuation methods and the impact of changes in fair value - Embedded derivatives include 2023 Warrants (1.0 million shares), 2021 Warrants (1.9 million shares), and a Series D Preferred Stock put feature, all with an exercise price of $0.01 per share[78][79][81] Fair Value of Embedded Derivatives (in thousands) | Item | Amount (in thousands) | | :------------------------ | :-------------------- | | Balance as of December 31, 2022 | $2,959 | | Issuances | $2,712 | | Change in fair value | $(2,009) | | Balance as of March 31, 2023 | $3,662 | - The 2021 interest rate swap, with a notional amount of $60.0 million, was terminated in Q1 2023, resulting in cash proceeds of $2.5 million. The gain will be recognized as a reduction to interest expense through July 31, 2024[87] 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, 2023, compared to the prior year. It discusses macroeconomic factors, footprint optimization initiatives, and detailed consolidated and segment-specific results, highlighting a significant increase in net loss despite a slight decrease in net sales - The company is a global diversified industrial company manufacturing high-precision components for electrical, automotive, general industrial, aerospace, defense, and medical markets[94] - Macroeconomic conditions, including inflationary cost pressures, rising interest rates, supply chain disruptions, and labor shortages, are expected to persist in 2023[98][100][102] - The company is undertaking footprint optimization by closing Taunton and Irvine sites (exiting Aerospace and Defense precision machined components) and three Mobile Solutions sites in 2023 to reduce operating costs[103] Consolidated Results (Three Months Ended March 31, in thousands) | Metric | 2023 | 2022 | $ Change | % Change | | :------------------------------------------ | :-------- | :-------- | :------- | :------- | | Net sales | $127,088 | $128,067 | $(979) | (0.8%) | | Cost of sales | $108,421 | $104,578 | $3,843 | 3.7% | | Selling, general, and administrative expense | $13,165 | $13,454 | $(289) | (2.1%) | | Other operating expense, net | $1,061 | $2,026 | $(965) | (47.6%) | | Loss from operations | $(7,075) | $(3,420) | $(3,655) | (107.0%) | | Interest expense | $4,288 | $3,439 | $849 | 24.7% | | Other income, net | $(2,208) | $(2,996) | $788 | (26.3%) | | Net loss | $(10,175) | $(3,302) | $(6,873) | (208.1%) | - Mobile Solutions net sales increased by 2.6% to $78.0 million, but income from operations changed unfavorably by $5.3 million to a loss of $(3.3) million, primarily due to lower sales volume, production challenges, and unrecovered inflationary costs[112][113] - Power Solutions net sales decreased by 5.7% to $49.1 million, but income from operations increased by $1.4 million to $1.7 million, driven by premium pricing on a customer project and a legal settlement in the prior year, partially offset by lower sales volume[114][115] - Cash provided by operations was $0.2 million for Q1 2023, a significant improvement from $5.2 million used in Q1 2022, primarily due to an increase in accounts receivable related to higher sales[119] - The company had $32.5 million available for future borrowings under the ABL Facility as of March 31, 2023, and was in compliance with all credit facility requirements[122][125] Item 3. Quantitative and Qualitative Disclosures About Market Risk This section discusses the company's exposure to financial market risks, specifically interest rate risk and foreign currency risk, and the strategies employed to mitigate these risks, including the use of debt mixtures and derivatives - The company manages interest expense using a mixture of fixed and variable rate debt and may use interest rate swap agreements to mitigate interest rate risk[130] - The 2021 interest rate swap, which fixed the LIBOR-based component on $60.0 million of variable rate debt, was terminated in Q1 2023, resulting in $2.5 million cash proceeds[131] - A one-percent increase in one-month LIBOR would result in a net increase in interest expense of $1.5 million on an annualized basis for the Term Loan Facility[132] - The company is exposed to foreign currency risk from operating cash flows and intercompany transactions but did not hold any foreign currency derivatives as of March 31, 2023[133] Item 4. Controls and Procedures This section confirms that management, including the Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of disclosure controls and procedures, concluding they were effective as of March 31, 2023. No material changes to internal control over financial reporting occurred during the quarter - Disclosure controls and procedures were evaluated and concluded to be effective as of March 31, 2023[134] - No material changes in internal control over financial reporting occurred during the fiscal quarter ended March 31, 2023[135] PART II. OTHER INFORMATION This section provides additional disclosures on legal proceedings, risk factors, equity transactions, and other required information Item 1. Legal Proceedings This section incorporates by reference the disclosures regarding legal proceedings from Note 9 of the Condensed Consolidated Financial Statements - Legal proceedings are disclosed in Note 9 of the Condensed Consolidated Financial Statements[137] Item 1A. Risk Factors This section highlights a new risk factor concerning the potential for assets held at financial institutions to exceed FDIC insurance coverage, citing recent bank failures as context for potential negative impacts on liquidity and operations - A new risk factor identifies that assets held at financial institutions may exceed FDIC insurance coverage, which could severely negatively affect operations and liquidity in the event of a bank failure[138] - Recent bank failures, such as Silicon Valley Bank and Signature Bank, underscore the potential for loss if deposits exceed insurance limits, although the company did not have funds deposited with these specific banks[138] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This section provides information on shares purchased by the company during Q1 2023, which were primarily shares withheld to cover tax obligations upon the vesting of restricted stock awards Shares Purchased (Q1 2023) | Period | Total Number of Shares Purchased | Average Price Paid Per Share | | :----------- | :------------------------------- | :--------------------------- | | January 2023 | — | $— | | February 2023 | 10,005 | $2.19 | | March 2023 | 73,721 | $1.02 | | Total | 83,726 | $1.16 | - The shares purchased were withheld to pay for tax obligations due upon the vesting of restricted stock held by certain employees under the 2019 Omnibus Plan[140] Item 3. Defaults Upon Senior Securities This section states that there were no defaults upon senior securities during the reporting period - There were no defaults upon senior securities[141] Item 4. Mine Safety Disclosures This section states that the item regarding mine safety disclosures is not applicable to the company - Mine Safety Disclosures are not applicable to the company[142] Item 5. Other Information This section indicates that there is no other information to report under this item - No other information is reported under this item[143] Item 6. Exhibits This section lists the exhibits filed with the Form 10-Q, including amended by-laws, common stock purchase warrants, and amendments to credit agreements - Key exhibits filed include Amended and Restated By-Laws, Common Stock Purchase Warrant, Amendment No. 2 to Term Loan Credit Agreement, Amendment No. 1 to Credit Agreement (ABL Facility), and Warrant Letter Agreement[144] SIGNATURES This section contains the official signatures of the company's principal executive and financial officers, certifying the accuracy and completeness of the quarterly report - The report was signed by Warren A. Veltman, President, Chief Executive Officer and Director, and Michael C. Felcher, Senior Vice President - Chief Financial Officer, on May 5, 2023[147]