UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2022March 31, 2023
OR
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☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number 000-23486
NN, Inc.
(Exact name of registrant as specified in its charter)
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Delaware | | 62-1096725 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
6210 Ardrey Kell Road, Suite 600
Charlotte, North Carolina 28277
(Address of principal executive offices, including zip code)
(980) 264-4300
(Registrant’s telephone number, including area code)
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Securities registered pursuant to Section 12(b) of the Act: |
Title of each class | | Trading symbol | | Name of each exchange on which registered |
Common Stock, par value $0.01 | | NNBR | | The Nasdaq Stock Market LLC |
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Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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Large accelerated filer | | ☐ | | Accelerated filer | | ☒ |
Non-accelerated filer | | ☐ | | Smaller reporting company | | ☒ |
| | | | Emerging growth company | | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of July 29, 2022,April 24, 2023, there were 43,884,40845,653,704 shares of the registrant’s common stock, par value $0.01 per share, outstanding.
NN, Inc.
INDEX
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Item 1. | | |
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Item 2. | | |
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Item 3. | | |
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Item 4. | | |
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Item 1. | | |
Item 1A. | | |
Item 2. | | |
Item 3. | | |
Item 4. | | |
Item 5. | | |
Item 6. | | |
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
NN, Inc.
Condensed Consolidated Statements of Operations and Comprehensive Income (Loss)
(Unaudited)
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| Three Months Ended June 30, | | Six Months Ended June 30, |
(in thousands, except per share data) | 2022 | | 2021 | | 2022 | | 2021 |
Net sales | $ | 125,362 | | | $ | 123,157 | | | $ | 253,429 | | | $ | 249,961 | |
Cost of sales (exclusive of depreciation and amortization shown separately below) | 103,889 | | | 99,797 | | | 208,467 | | | 199,485 | |
Selling, general, and administrative expense | 14,794 | | | 13,585 | | | 28,248 | | | 28,160 | |
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Depreciation and amortization | 11,340 | | | 11,687 | | | 22,769 | | | 23,255 | |
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Other operating expense (income), net | (147) | | | (324) | | | 1,879 | | | (329) | |
Loss from operations | (4,514) | | | (1,588) | | | (7,934) | | | (610) | |
Interest expense | 3,488 | | | 3,573 | | | 6,927 | | | 5,597 | |
Loss on extinguishment of debt and write-off of debt issuance costs | — | | | — | | | — | | | 2,390 | |
Derivative payments on interest rate swap | — | | | — | | | — | | | 1,717 | |
Loss on interest rate swap | — | | | — | | | — | | | 2,033 | |
Other expense (income), net | (67) | | | 1,680 | | | (3,063) | | | 1,558 | |
Loss before benefit (provision) for income taxes and share of net income from joint venture | (7,935) | | | (6,841) | | | (11,798) | | | (13,905) | |
Benefit (provision) for income taxes | (1,051) | | | 231 | | | (2,582) | | | 987 | |
Share of net income from joint venture | 419 | | | 1,219 | | | 2,511 | | | 2,614 | |
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Net loss | $ | (8,567) | | | $ | (5,391) | | | $ | (11,869) | | | $ | (10,304) | |
Other comprehensive income (loss): | | | | | | | |
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Foreign currency translation gain (loss) | $ | (8,490) | | | $ | 4,409 | | | $ | (5,890) | | | $ | 1,062 | |
Interest rate swap: | | | | | | | |
Change in fair value, net of tax | 373 | | | — | | | 1,560 | | | — | |
Reclassification adjustment for losses included in net loss, net of tax | 31 | | | — | | | 65 | | | 2,851 | |
Other comprehensive income (loss) | $ | (8,086) | | | $ | 4,409 | | | $ | (4,265) | | | $ | 3,913 | |
Comprehensive loss | $ | (16,653) | | | $ | (982) | | | $ | (16,134) | | | $ | (6,391) | |
Basic net loss per common share: | | | | | | | |
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Net loss per common share | $ | (0.25) | | | $ | (0.17) | | | $ | (0.38) | | | $ | (0.62) | |
Weighted average common shares outstanding | 44,708 | | | 44,440 | | | 44,649 | | | 43,561 | |
Diluted net loss per common share: | | | | | | | |
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Net loss per common share | $ | (0.25) | | | $ | (0.17) | | | $ | (0.38) | | | $ | (0.62) | |
Weighted average common shares outstanding | 44,708 | | | 44,440 | | | 44,649 | | | 43,561 | |
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| Three Months Ended March 31, | | |
(in thousands, except per share data) | 2023 | | 2022 | | | | |
Net sales | $ | 127,088 | | | $ | 128,067 | | | | | |
Cost of sales (exclusive of depreciation and amortization shown separately below) | 108,421 | | | 104,578 | | | | | |
Selling, general, and administrative expense | 13,165 | | | 13,454 | | | | | |
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Depreciation and amortization | 11,516 | | | 11,429 | | | | | |
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Other operating expense, net | 1,061 | | | 2,026 | | | | | |
Loss from operations | (7,075) | | | (3,420) | | | | | |
Interest expense | 4,288 | | | 3,439 | | | | | |
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Other income, net | (2,208) | | | (2,996) | | | | | |
Loss before provision for income taxes and share of net income from joint venture | (9,155) | | | (3,863) | | | | | |
Provision for income taxes | (1,301) | | | (1,531) | | | | | |
Share of net income from joint venture | 281 | | | 2,092 | | | | | |
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Net loss | $ | (10,175) | | | $ | (3,302) | | | | | |
Other comprehensive income: | | | | | | | |
Foreign currency translation gain | $ | 1,840 | | | $ | 2,600 | | | | | |
Interest rate swap: | | | | | | | |
Change in fair value, net of tax | (230) | | | 1,187 | | | | | |
Reclassification adjustment for losses (gains) included in net loss, net of tax | (468) | | | 34 | | | | | |
Other comprehensive income | $ | 1,142 | | | $ | 3,821 | | | | | |
Comprehensive income (loss) | $ | (9,033) | | | $ | 519 | | | | | |
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Basic and diluted net loss per common share | $ | (0.29) | | | $ | (0.13) | | | | | |
Weighted average common shares outstanding | 45,309 | | | 44,594 | | | | | |
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See notes to condensed consolidated financial statements (unaudited).
NN, Inc.
Condensed Consolidated Balance Sheets
(Unaudited)
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(in thousands, except per share data) | June 30, 2022 | | December 31, 2021 |
Assets | | | |
Current assets: | | | |
Cash and cash equivalents | $ | 15,186 | | | $ | 28,656 | |
Accounts receivable, net of allowances of $1,762 and $1,352 at June 30, 2022 and December 31, 2021, respectively | 82,621 | | | 71,419 | |
Inventories | 84,726 | | | 75,027 | |
Income tax receivable | 10,931 | | | 11,808 | |
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Other current assets | 13,267 | | | 9,372 | |
Total current assets | 206,731 | | | 196,282 | |
Property, plant and equipment, net of accumulated depreciation of $210,618 and $197,936 at June 30, 2022 and December 31, 2021, respectively | 202,239 | | | 209,105 | |
Operating lease right-of-use assets | 46,042 | | | 46,443 | |
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Intangible assets, net | 81,545 | | | 88,718 | |
Investment in joint venture | 30,875 | | | 34,045 | |
Deferred tax assets | 375 | | | 314 | |
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Other non-current assets | 5,350 | | | 4,194 | |
Total assets | $ | 573,157 | | | $ | 579,101 | |
Liabilities, Preferred Stock, and Stockholders’ Equity | | | |
Current liabilities: | | | |
Accounts payable | $ | 47,859 | | | $ | 36,710 | |
Accrued salaries, wages and benefits | 15,217 | | | 17,739 | |
Income tax payable | 687 | | | 2,072 | |
Current maturities of long-term debt | 3,139 | | | 3,074 | |
Current portion of operating lease liabilities | 5,103 | | | 5,704 | |
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Other current liabilities | 12,439 | | | 8,718 | |
Total current liabilities | 84,444 | | | 74,017 | |
Deferred tax liabilities | 8,141 | | | 7,456 | |
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Long-term debt, net of current portion | 151,317 | | | 151,052 | |
Operating lease liabilities, net of current portion | 50,899 | | | 51,295 | |
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Other non-current liabilities | 13,031 | | | 17,289 | |
Total liabilities | 307,832 | | | 301,109 | |
Commitments and contingencies (Note 9) | 0 | | 0 |
Series D perpetual preferred stock - $0.01 par value per share, 65 shares authorized, issued and outstanding at June 30, 2022 and December 31, 2021, respectively | 59,003 | | | 53,807 | |
Stockholders' equity: | | | |
Common stock - $0.01 par value per share, 90,000 shares authorized, 43,884 and 43,027 shares issued and outstanding at June 30, 2022 and December 31, 2021, respectively | 439 | | | 430 | |
Additional paid-in capital | 473,019 | | | 474,757 | |
Accumulated deficit | (230,969) | | | (219,100) | |
Accumulated other comprehensive loss | (36,167) | | | (31,902) | |
Total stockholders’ equity | 206,322 | | | 224,185 | |
Total liabilities, preferred stock, and stockholders’ equity | $ | 573,157 | | | $ | 579,101 | |
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(in thousands, except per share data) | March 31, 2023 | | December 31, 2022 |
Assets | | | |
Current assets: | | | |
Cash and cash equivalents | $ | 10,545 | | | $ | 12,808 | |
Accounts receivable, net of allowances of $1,572 and $1,469 at March 31, 2023 and December 31, 2022 | 80,003 | | | 74,129 | |
Inventories | 81,778 | | | 80,682 | |
Income tax receivable | 12,087 | | | 12,164 | |
Prepaid assets | 7,076 | | | 2,794 | |
Other current assets | 9,016 | | | 9,123 | |
Total current assets | 200,505 | | | 191,700 | |
Property, plant and equipment, net of accumulated depreciation of $232,086 and $225,046 at March 31, 2023 and December 31, 2022 | 194,513 | | | 197,637 | |
Operating lease right-of-use assets | 46,280 | | | 46,713 | |
Intangible assets, net | 69,327 | | | 72,891 | |
Investment in joint venture | 32,212 | | | 31,802 | |
Deferred tax assets | 102 | | | 102 | |
Other non-current assets | 4,334 | | | 5,282 | |
Total assets | $ | 547,273 | | | $ | 546,127 | |
Liabilities, Preferred Stock, and Stockholders’ Equity | | | |
Current liabilities: | | | |
Accounts payable | $ | 49,975 | | | $ | 45,871 | |
Accrued salaries, wages and benefits | 14,251 | | | 11,671 | |
Income tax payable | 560 | | | 926 | |
Current maturities of long-term debt | 6,258 | | | 3,321 | |
Current portion of operating lease liabilities | 5,008 | | | 5,294 | |
Other current liabilities | 15,288 | | | 11,723 | |
Total current liabilities | 91,340 | | | 78,806 | |
Deferred tax liabilities | 6,064 | | | 5,596 | |
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Long-term debt, net of current portion | 146,228 | | | 149,389 | |
Operating lease liabilities, net of current portion | 50,710 | | | 51,411 | |
Other non-current liabilities | 10,715 | | | 9,960 | |
Total liabilities | 305,057 | | | 295,162 | |
Commitments and contingencies (Note 9) | | | |
Series D perpetual preferred stock - $0.01 par value per share, 65 shares authorized, issued and outstanding at March 31, 2023 and December 31, 2022 | 67,752 | | | 64,701 | |
Stockholders' equity: | | | |
Common stock - $0.01 par value per share, 90,000 shares authorized, 43,772 and 43,856 shares issued and outstanding at March 31, 2023 and December 31, 2022 | 438 | | | 439 | |
Additional paid-in capital | 465,377 | | | 468,143 | |
Accumulated deficit | (255,373) | | | (245,198) | |
Accumulated other comprehensive loss | (35,978) | | | (37,120) | |
Total stockholders’ equity | 174,464 | | | 186,264 | |
Total liabilities, preferred stock, and stockholders’ equity | $ | 547,273 | | | $ | 546,127 | |
See notes to condensed consolidated financial statements (unaudited).
NN, Inc.
Condensed Consolidated Statements of Changes in Stockholders’ Equity
Three Months Ended June 30,March 31, 2023 and 2022 and 2021
(Unaudited) | | | Common Stock | | Accumulated deficit | | Accumulated other comprehensive income (loss) | | | Common Stock | | Accumulated deficit | | Accumulated other comprehensive income (loss) | |
(in thousands) | (in thousands) | Number of shares | | Par value | | Additional paid-in capital | | Total | (in thousands) | Number of shares | | Par value | | Additional paid-in capital | | Total |
Balance at March 31, 2022 | 43,890 | | | $ | 439 | | | $ | 473,072 | | | $ | (222,402) | | | $ | (28,081) | | | $ | 223,028 | | |
Balance as of December 31, 2022 | | Balance as of December 31, 2022 | 43,856 | | | $ | 439 | | | $ | 468,143 | | | $ | (245,198) | | | $ | (37,120) | | | $ | 186,264 | |
Net loss | Net loss | — | | | — | | | — | | | (8,567) | | | — | | | (8,567) | | Net loss | — | | | — | | | — | | | (10,175) | | | — | | | (10,175) | |
| Dividends accrued for preferred stock | Dividends accrued for preferred stock | — | | | — | | | (2,658) | | | — | | | — | | | (2,658) | | Dividends accrued for preferred stock | — | | | — | | | (3,051) | | | — | | | — | | | (3,051) | |
| Share-based compensation expense | Share-based compensation expense | (5) | | | — | | | 2,606 | | | — | | | — | | | 2,606 | | Share-based compensation expense | — | | | — | | | 381 | | | — | | | — | | | 381 | |
Restricted shares forgiven for taxes | Restricted shares forgiven for taxes | (1) | | | — | | | (1) | | | — | | | — | | | (1) | | Restricted shares forgiven for taxes | (84) | | | (1) | | | (96) | | | — | | | — | | | (97) | |
| Other comprehensive income | | Other comprehensive income | — | | | — | | | — | | | — | | | 1,142 | | | 1,142 | |
| Change in fair value of interest rate swap, net of tax of $98 | — | | | — | | | — | | | — | | | 373 | | | 373 | | |
Reclassification of interest rate swap settlement to net loss, net of tax of $8 | — | | | — | | | — | | | — | | | 31 | | | 31 | | |
Foreign currency translation loss | — | | | — | | | — | | | — | | | (8,490) | | | (8,490) | | |
| Balance at June 30, 2022 | 43,884 | | | $ | 439 | | | $ | 473,019 | | | $ | (230,969) | | | $ | (36,167) | | | $ | 206,322 | | |
Balance as of March 31, 2023 | | Balance as of March 31, 2023 | 43,772 | | | $ | 438 | | | $ | 465,377 | | | $ | (255,373) | | | $ | (35,978) | | | $ | 174,464 | |
| | | Common Stock | | Accumulated deficit | | Accumulated other comprehensive income (loss) | | | Common Stock | | Accumulated deficit | | Accumulated other comprehensive income (loss) | |
(in thousands) | (in thousands) | Number of shares | | Par value | | Additional paid-in capital | | Total | (in thousands) | Number of shares | | Par value | | Additional paid-in capital | | Total |
Balance at March 31, 2021 | 43,049 | | | $ | 430 | | | $ | 479,341 | | | $ | (210,788) | | | $ | (34,228) | | | $ | 234,755 | | |
Balance as of December 31, 2021 | | Balance as of December 31, 2021 | 43,027 | | | $ | 430 | | | $ | 474,757 | | | $ | (219,100) | | | $ | (31,902) | | | $ | 224,185 | |
Net loss | Net loss | — | | | — | | | — | | | (5,391) | | | — | | | (5,391) | | Net loss | — | | | — | | | — | | | (3,302) | | | — | | | (3,302) | |
| Dividends accrued for preferred stock | Dividends accrued for preferred stock | — | | | — | | | (2,211) | | | — | | | — | | | (2,211) | | Dividends accrued for preferred stock | — | | | — | | | (2,538) | | | — | | | — | | | (2,538) | |
| Shares issued for option exercises | 6 | | | — | | | 48 | | | — | | | — | | | 48 | | |
Shares issued under stock incentive plans | | Shares issued under stock incentive plans | 893 | | | 9 | | | (9) | | | — | | | — | | | — | |
Share-based compensation expense | Share-based compensation expense | (19) | | | — | | | 1,100 | | | — | | | — | | | 1,100 | | Share-based compensation expense | — | | | — | | | 949 | | | — | | | — | | | 949 | |
Restricted shares forgiven for taxes | Restricted shares forgiven for taxes | (2) | | | — | | | (18) | | | — | | | — | | | (18) | | Restricted shares forgiven for taxes | (30) | | | — | | | (87) | | | — | | | — | | | (87) | |
Change in estimate of share-based award vesting | — | | | — | | | (337) | | | — | | | — | | | (337) | | |
| Other comprehensive income | | Other comprehensive income | — | | | — | | | — | | | — | | | 3,821 | | | 3,821 | |
| Foreign currency translation gain | — | | | — | | | — | | | — | | | 4,409 | | | 4,409 | | |
| Balance at June 30, 2021 | 43,034 | | | $ | 430 | | | $ | 477,923 | | | $ | (216,179) | | | $ | (29,819) | | | $ | 232,355 | | |
Balance as of March 31, 2022 | | Balance as of March 31, 2022 | 43,890 | | | $ | 439 | | | $ | 473,072 | | | $ | (222,402) | | | $ | (28,081) | | | $ | 223,028 | |
See notes to condensed consolidated financial statements (unaudited).
NN, Inc.
Condensed Consolidated Statements of Changes in Stockholders’ Equity
Six Months Ended June 30, 2022 and 2021
(Unaudited)
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| | Common Stock | | | | Accumulated deficit | | Accumulated other comprehensive income (loss) | | |
(in thousands) | | Number of shares | | Par value | | Additional paid-in capital | | | | Total |
Balance at December 31, 2021 | | 43,027 | | | $ | 430 | | | $ | 474,757 | | | $ | (219,100) | | | $ | (31,902) | | | $ | 224,185 | |
Net loss | | — | | | — | | | | | (11,869) | | | — | | | (11,869) | |
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Dividends accrued for preferred stock | | — | | | — | | | (5,196) | | | — | | | — | | | (5,196) | |
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Share-based compensation expense | | 888 | | | 9 | | | 3,546 | | | — | | | — | | | 3,555 | |
Restricted shares forgiven for taxes | | (31) | | | — | | | (88) | | | — | | | — | | | (88) | |
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Change in fair value of interest rate swap, net of tax of $414 | | — | | | — | | | — | | | — | | | 1,560 | | | 1,560 | |
Reclassification of interest rate swap settlement to net loss, net of tax of $17 | | — | | | — | | | — | | | — | | | 65 | | | 65 | |
Foreign currency translation loss | | — | | | — | | | — | | | — | | | (5,890) | | | (5,890) | |
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Balance at June 30, 2022 | | 43,884 | | | $ | 439 | | | $ | 473,019 | | | $ | (230,969) | | | $ | (36,167) | | | $ | 206,322 | |
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| | Common Stock | | | | Accumulated deficit | | Accumulated other comprehensive income (loss) | | |
(in thousands) | | Number of shares | | Par value | | Additional paid-in capital | | | | Total |
Balance at December 31, 2020 | | 42,686 | | | $ | 427 | | | $ | 493,332 | | | $ | (205,875) | | | $ | (33,732) | | | $ | 254,152 | |
Net loss | | — | | | — | | | — | | | (10,304) | | | — | | | (10,304) | |
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Dividends accrued for preferred stock | | — | | | — | | | (16,740) | | | — | | | — | | | (16,740) | |
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Shares issued for option exercises | | 6 | | | — | | | 48 | | | — | | | — | | | 48 | |
Share-based compensation expense | | 394 | | | 4 | | | 1,982 | | | — | | | — | | | 1,986 | |
Restricted shares forgiven for taxes | | (52) | | | (1) | | | (362) | | | — | | | — | | | (363) | |
Change in estimate of share-based award vesting | | — | | | — | | | (337) | | | — | | | — | | | (337) | |
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Reclassification of interest rate swap settlement to net loss, net of tax of $861 | | — | | | — | | | — | | | — | | | 2,851 | | | 2,851 | |
Foreign currency translation gain | | — | | | — | | | — | | | — | | | 1,062 | | | 1,062 | |
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Balance at June 30, 2021 | | 43,034 | | | $ | 430 | | | $ | 477,923 | | | $ | (216,179) | | | $ | (29,819) | | | $ | 232,355 | |
See notes to condensed consolidated financial statements (unaudited).
NN, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
| | | Six Months Ended June 30, | | Three Months Ended March 31, |
(in thousands) | (in thousands) | 2022 | | 2021 | (in thousands) | 2023 | | 2022 |
Cash flows from operating activities | Cash flows from operating activities | | | | Cash flows from operating activities | | | |
Net loss | Net loss | $ | (11,869) | | | $ | (10,304) | | Net loss | $ | (10,175) | | | $ | (3,302) | |
Adjustments to reconcile net loss to net cash provided by (used in) operating activities: | Adjustments to reconcile net loss to net cash provided by (used in) operating activities: | | Adjustments to reconcile net loss to net cash provided by (used in) operating activities: | |
Depreciation and amortization | Depreciation and amortization | 22,769 | | | 23,255 | | Depreciation and amortization | 11,516 | | | 11,429 | |
Amortization of debt issuance costs and discount | | Amortization of debt issuance costs and discount | 353 | | | 332 | |
Impairments of property, plant and equipment | | Impairments of property, plant and equipment | — | | | 233 | |
| Amortization of debt issuance costs and discount | 662 | | | 718 | | |
| Loss on extinguishment of debt and write-off of debt issuance costs | — | | | 2,390 | | |
Total derivative loss (gain), net of cash settlements | Total derivative loss (gain), net of cash settlements | (3,237) | | | 3,973 | | Total derivative loss (gain), net of cash settlements | 386 | | | (2,543) | |
Share of net income from joint venture, net of cash dividends received | Share of net income from joint venture, net of cash dividends received | 1,515 | | | (2,614) | | Share of net income from joint venture, net of cash dividends received | (281) | | | 1,934 | |
Compensation expense from issuance of share-based awards | 3,555 | | | 1,649 | | |
Share-based compensation expense | | Share-based compensation expense | 381 | | | 949 | |
Deferred income taxes | Deferred income taxes | 94 | | | (3,050) | | Deferred income taxes | 480 | | | (42) | |
Other | Other | (2,763) | | | (1,154) | | Other | (287) | | | (826) | |
Changes in operating assets and liabilities: | Changes in operating assets and liabilities: | | Changes in operating assets and liabilities: | |
Accounts receivable | Accounts receivable | (13,264) | | | 2,685 | | Accounts receivable | (5,506) | | | (17,633) | |
Inventories | Inventories | (10,586) | | | (12,052) | | Inventories | (447) | | | (5,536) | |
Accounts payable | Accounts payable | 11,960 | | | 9,441 | | Accounts payable | 2,813 | | | 11,416 | |
Income taxes receivable and payable, net | Income taxes receivable and payable, net | (475) | | | (6,326) | | Income taxes receivable and payable, net | (283) | | | (631) | |
Other | Other | (905) | | | (2,713) | | Other | 1,276 | | | (1,003) | |
Net cash provided by (used in) operating activities | Net cash provided by (used in) operating activities | (2,544) | | | 5,898 | | Net cash provided by (used in) operating activities | 226 | | | (5,223) | |
Cash flows from investing activities | Cash flows from investing activities | | | | Cash flows from investing activities | | | |
Acquisition of property, plant and equipment | Acquisition of property, plant and equipment | (9,703) | | | (11,015) | | Acquisition of property, plant and equipment | (4,997) | | | (4,262) | |
Proceeds from sale of property, plant, and equipment | Proceeds from sale of property, plant, and equipment | 422 | | | 74 | | Proceeds from sale of property, plant, and equipment | 1,035 | | | 36 | |
Cash paid for post-closing adjustments on sale of business | — | | | (3,880) | | |
Cash settlements of interest rate swap | — | | | (15,420) | | |
| | Net cash used in investing activities | Net cash used in investing activities | (9,281) | | | (30,241) | | Net cash used in investing activities | (3,962) | | | (4,226) | |
Cash flows from financing activities | Cash flows from financing activities | | | | Cash flows from financing activities | | | |
Cash paid for debt issuance costs | — | | | (6,981) | | |
Dividends paid | — | | | — | | |
Proceeds from issuance of preferred stock | — | | | 61,793 | | |
Redemption of preferred stock | — | | | (122,434) | | |
Proceeds from long-term debt | Proceeds from long-term debt | 20,000 | | | 156,000 | | Proceeds from long-term debt | 17,000 | | | 8,000 | |
Repayments of long-term debt | Repayments of long-term debt | (19,482) | | | (77,442) | | Repayments of long-term debt | (17,832) | | | (8,729) | |
Repayments of short-term debt, net | — | | | (1,321) | | |
| Cash paid for debt issuance costs | | Cash paid for debt issuance costs | (55) | | | — | |
| Proceeds from short-term debt, net | | Proceeds from short-term debt, net | 2,923 | | | — | |
Other | Other | (1,528) | | | (2,685) | | Other | (785) | | | (787) | |
Net cash provided by (used in) financing activities | Net cash provided by (used in) financing activities | (1,010) | | | 6,930 | | Net cash provided by (used in) financing activities | 1,251 | | | (1,516) | |
Effect of exchange rate changes on cash flows | Effect of exchange rate changes on cash flows | (635) | | | 818 | | Effect of exchange rate changes on cash flows | 222 | | | 2,936 | |
Net change in cash and cash equivalents | Net change in cash and cash equivalents | (13,470) | | | (16,595) | | Net change in cash and cash equivalents | (2,263) | | | (8,029) | |
Cash and cash equivalents at beginning of period | Cash and cash equivalents at beginning of period | 28,656 | | | 48,138 | | Cash and cash equivalents at beginning of period | 12,808 | | | 28,656 | |
Cash and cash equivalents at end of period | Cash and cash equivalents at end of period | $ | 15,186 | | | $ | 31,543 | | Cash and cash equivalents at end of period | $ | 10,545 | | | $ | 20,627 | |
See notes to condensed consolidated financial statements (unaudited).
NN, Inc.
Notes to Condensed Consolidated Financial Statements
June 30, 2022March 31, 2023
(Unaudited)
Note 1. Interim Financial Statements
Nature of Business
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 automotive, general industrial, electrical, aerospace, defense, and medical markets. As used in this Quarterly Report on Form 10-Q (this “Quarterly Report”), the terms “NN,” the “Company,” “we,” “our,” or “us” refer to NN, Inc., and its subsidiaries.
Basis of Presentation
The accompanying condensed consolidated financial statements have not been audited. The Condensed Consolidated Balance Sheet as of December 31, 2021,2022, was derived from the audited consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 20212022 (the “2021“2022 Annual Report”), which we filed with the U.S. Securities and Exchange Commission (the “SEC”) on March 11, 2022.10, 2023. In management’s opinion, the accompanying unaudited condensed consolidated financial statements reflect all adjustments necessary to fairly state our results of operations for the three and six months ended June 30, 2022March 31, 2023 and 2021;2022; financial position as of June 30, 2022March 31, 2023 and December 31, 2021;2022; and cash flows for the sixthree months ended June 30,March 31, 2023 and 2022, and 2021, on a basis consistent with our audited consolidated financial statements. These adjustments are of a normal recurring nature and are, in the opinion of management, necessary to state fairly the Company’s financial position and operating results for the interim periods. Certain prior period amounts have been reclassified to conform to the current year’s presentation.
Certain information and footnote disclosures normally included in the consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) have been condensed or omitted from the unaudited condensed consolidated financial statements presented in this Quarterly Report. These unaudited condensed consolidated financial statements should be read in conjunction with our audited consolidated financial statements and accompanying notes included in the 20212022 Annual Report. The results for the three and six months ended June 30, 2022,March 31, 2023, are not necessarily indicative of results for the year ending December 31, 2022,2023, or any other future periods.
Except for per share data or as otherwise indicated, all U.S. dollar amounts and share counts presented in the tables in these Notes to Condensed Consolidated Financial Statements are in thousands.
Accounting Standards Recently AdoptedAccounts Receivable Sales Programs
In August 2020,We participate in programs established by our customers which allows us to sell certain receivables from that customer on a non-recourse basis to a third-party financial institution. During the FASB issued ASU 2020-06, Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity (“ASU 2020-06”), which simplifies the accounting for certain financial instruments with characteristics of liabilities and equity. Specifically, ASU 2020-06 simplifies accounting for convertible instruments by removing major separation models required under current U.S. GAAP. In addition, ASU 2020-06 removes certain settlement conditions that are required for equity contracts to qualify for the derivative scope exception, which will permit more equity contracts to qualify for the exception. Further, for the diluted earnings-per-share calculation, the new guidance requires entities to use the if-converted method for all convertible instruments and generally requires entities to include the effect of share settlement for instruments that may be settled in cash or shares, among other things. The adoption of ASU 2020-06 effective January 1, 2022 did not have a material impact on our consolidated financial statements and related disclosures.
In May 2021, the FASB issued ASU 2021-04, Issuer’s Accounting for Certain Modifications or Exchanges of Freestanding Equity-Classified Written Call Options (“ASU 2021-04”), which clarifies the accounting for modifications or exchanges of freestanding equity-classified written call options that remain equity classified after modification or exchange. Specifically, ASU 2021-04 requires the issuer to treat a modification of an equity-classified warrant as an exchange of the original warrant. The difference between the fair value of the modified warrant and the fair value of the warrant immediately before modification is then recognized as an issuance cost or discount of the related transaction. Since we do not have any equity-classified written call options that would be subject to this guidance, the adoption of ASU 2021-04 did not have any impact on our consolidated financial statements and related disclosures during the sixthree months ended June 30, 2022.March 31, 2023, we incurred fees of $0.2 million related to the sale of receivables which is recorded in the Other income, net line item on the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss).
Accounting Standards Not Yet AdoptedAssets Held For Sale
In November 2021,Due to a strategic shift to focus on growth opportunities and ongoing efforts to optimize the FASB issued ASU 2021-10, Government Assistance (Topic 832): Disclosures by Business Entities about Government Assistance (“ASU 2021-10”), which requires business entitiesCompany’s manufacturing footprint, we plan to provide certain annual disclosures when
they have received government assistancecease manufacturing operations at several facilities during 2023, including our Irvine and use a grant or contribution accounting model by analogy to other accounting guidance. Such disclosures include the nature of the transactions, significant terms and conditions, accounting policies, and affected financial statement line items. ASU 2021-10 may be applied either prospectively or retrospectively.Taunton locations. We are in the process of assessingselling machinery and equipment from these locations, which are a part of our Power Solutions segment, and recognized a $0.5 million loss on sales during the impact ASU 2021-10 may havethree months ended March 31, 2023, which is included in the Other operating expense, net line item on our annual disclosuresthe Condensed Consolidated Statements of Operations and Comprehensive Income (Loss). In addition, there is machinery and equipment with a net book value of $0.8 million which we sold in the second quarter of 2023 that is classified as held for sale as of March 31, 2023 and is included in the year ending December 31, 2022.
Other current assets line item on the Condensed Consolidated Balance Sheets.
Note 2. Segment Information
Our business is aggregated into the following 2two reportable segments:
•Mobile Solutions, which is focused on growth in the automotive and general industrial end markets; and
•Power Solutions, which is focused on growth in the electrical, general industrial, automotive, aerospace, defense, and medical end markets.
These divisions are considered our 2two operating segments as each engages in business activities for which it earns revenues and incurs expenses, discrete financial information is available for each, and this is the level at which the chief operating decision maker reviews discrete financial information for purposes of allocating resources and assessing performance.
The following tables present results of operations by reportable segment.
| | | | | | | | | | | | | | | | | | | | | | | |
| Mobile Solutions | | Power Solutions | | Corporate and Consolidations | | Total |
Three Months Ended June 30, 2022 | | | | | | | |
Net sales | $ | 73,350 | | | $ | 52,049 | | | $ | (37) | | (a) | $ | 125,362 | |
Income (loss) from operations | 1,729 | | | 1,430 | | | (7,673) | | | (4,514) | |
Interest expense | | | | | | | (3,488) | |
Other | | | | | | | 67 | |
Loss from operations before income taxes and share of net income from joint venture | | $ | (7,935) | |
Three Months Ended June 30, 2021 | | | | | | | |
Net sales | $ | 73,886 | | | $ | 49,271 | | | $ | — | | | $ | 123,157 | |
Income (loss) from operations | 2,509 | | | 2,875 | | | (6,972) | | | (1,588) | |
Interest expense | | | | | | | (3,573) | |
Other | | | | | | | (1,680) | |
Loss from operations before income taxes and share of net income from joint venture | | $ | (6,841) | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Mobile Solutions | | Power Solutions | | Corporate and Consolidations | | Total |
Six Months Ended June 30, 2022 | | | | | | | |
Net sales | $ | 149,420 | | | $ | 104,060 | | | $ | (51) | | (a) | $ | 253,429 | |
Income (loss) from operations | 3,698 | | | 1,794 | | | (13,426) | | | (7,934) | |
Interest expense | | | | | | | (6,927) | |
Other | | | | | | | 3,063 | |
Loss from operations before income taxes and share of net income from joint venture | | $ | (11,798) | |
Six Months Ended June 30, 2021 | | | | | | | |
Net sales | $ | 151,662 | | | $ | 98,346 | | | $ | (47) | | (a) | $ | 249,961 | |
Income (loss) from operations | 8,599 | | | 5,307 | | | (14,516) | | | (610) | |
Interest expense | | | | | | | (5,597) | |
Other | | | | | | | (7,698) | |
Loss from operations before income taxes and share of net income from joint venture | | $ | (13,905) | |
(a)Includes elimination of intersegment transactions occurring during the ordinary course of business.
The following table presents our financial performance by reportable segment.
| | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | |
| 2023 | | 2022 | | | | |
Net sales: | | | | | | | |
Mobile Solutions | $ | 78,018 | | | $ | 76,070 | | | | | |
Power Solutions | 49,072 | | | 52,011 | | | | | |
Intersegment sales eliminations | (2) | | | (14) | | | | | |
Total | $ | 127,088 | | | $ | 128,067 | | | | | |
Income (loss) from operations: | | | | | | | |
Mobile Solutions | $ | (3,319) | | | $ | 1,969 | | | | | |
Power Solutions | 1,747 | | | 364 | | | | | |
Corporate | (5,503) | | | (5,753) | | | | | |
Total | $ | (7,075) | | | $ | (3,420) | | | | | |
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Note 3. Inventories
Inventories are comprised of the following amounts:
| | | | | | | | | | | | | | |
| | June 30, 2022 | | December 31, 2021 |
Raw materials | | $ | 32,305 | | | $ | 27,221 | |
Work in process | | 29,653 | | | 24,960 | |
Finished goods | | 22,768 | | | 22,846 | |
Total inventories | | $ | 84,726 | | | $ | 75,027 | |
| | | | | | | | | | | | | | |
| | March 31, 2023 | | December 31, 2022 |
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
The following table shows changes in the carrying amount of intangible assets, net, by reportable segment.
| | | | | | | | | | | | | | | | | | | | |
| | Mobile Solutions | | Power Solutions | | Total |
Balance as of December 31, 2021 | | $ | 25,709 | | | $ | 63,009 | | | $ | 88,718 | |
Amortization | | (1,677) | | | (5,496) | | | (7,173) | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
Balance as of June 30, 2022 | | $ | 24,032 | | | $ | 57,513 | | | $ | 81,545 | |
| | | | | | | | | | | | | | | | | |
| Mobile Solutions | | Power Solutions | | Total |
Balance as of December 31, 2022 | $ | 22,356 | | | $ | 50,535 | | | $ | 72,891 | |
Amortization | (839) | | | (2,725) | | | (3,564) | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
Balance as of March 31, 2023 | $ | 21,517 | | | $ | 47,810 | | | $ | 69,327 | |
Intangible assets are reviewed for impairment when changes in circumstances indicate the carrying value of those assets may not be recoverable. At June 30, 2022,As of March 31, 2023, our market capitalization declined towas at a level that was less than the net book value of our stockholders’ equity. The decline in market capitalizationequity, which was deemed a triggering event that caused us to perform an impairment analysisanalyses on our long-lived assets as of June 30, 2022.assets. Based on our analysis,analyses, the carrying values of the long-lived assets were recoverable and no impairment charge was recorded during the sixthree months ended June 30, 2022.
March 31, 2023.
Note 5. Investment in Joint Venture
We own a 49% investment in Wuxi Weifu Autocam Precision Machinery Company, Ltd. (the “JV”), a joint venture located in Wuxi, China. The JV is jointly controlled and managed, and we account for it under the equity method.
The following table shows changes in our investment in the JV.
| | | | | |
Balance as of December 31, 20212022 | $ | 34,04531,802 | |
Share of earnings | 2,511281 | |
Dividends paid by joint venture | (4,026) | |
Foreign currency translation lossgain | (1,655)129 | |
Balance as of June 30, 2022March 31, 2023 | $ | 30,87532,212 | |
Note 6. Income Taxes
Our effective tax rate was (13.2)(14.2)% and (21.9)(39.6)% for the three and six months ended June 30,March 31, 2023 and 2022, respectively, and 3.4% and 7.1% for the three and six months ended June 30, 2021, respectively. The effective tax raterates for the three and six months ended June 30, 2022 differsMarch 31, 2023 differ from the U.S. federal statutory tax rate of 21% primarily due to the accrual of tax on non-permanently reinvested unremitted earnings of foreign subsidiaries and by 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. In addition, the effective tax rate was unfavorably impacted by the U.S. tax on the earnings of foreign subsidiaries under the global intangible low-taxed income regime.
Note 7. Debt
On March 22, 2021, we entered into a new $150.0 million term loan facility (the(as amended from time to time, the “Term Loan Facility”) and a new $50.0 million asset backed credit facility (the(as amended from time to time, the “ABL Facility”). On March 3, 2023, we amended the Term Loan Facility (the “Term Loan Amendment”) and ABL Facility to adjust certain covenants under the agreements, as well as to replace references to LIBOR with secured overnight finance rate (“SOFR”) for interest rate calculations. The following table presents the outstanding debt balances as of June 30, 2022 and December 31, 2021.balances.
| | | June 30, 2022 | | December 31, 2021 | | March 31, 2023 | | December 31, 2022 |
Term Loan Facility | Term Loan Facility | | $ | 148,125 | | | $ | 148,875 | | Term Loan Facility | $ | 147,000 | | | $ | 147,375 | |
ABL Facility | ABL Facility | | 2,000 | | | — | | ABL Facility | 1,000 | | | 1,000 | |
International lines of credit and other loans | | 9,306 | | | 10,930 | | |
International loans | | International loans | 11,290 | | | 8,729 | |
Total principal | Total principal | | 159,431 | | | 159,805 | | Total principal | 159,290 | | | 157,104 | |
Less-current maturities of long-term debt | Less-current maturities of long-term debt | | 3,139 | | | 3,074 | | Less-current maturities of long-term debt | 6,258 | | | 3,321 | |
Principal, net of current portion | Principal, net of current portion | | 156,292 | | | 156,731 | | Principal, net of current portion | 153,032 | | | 153,783 | |
Less-unamortized debt issuance costs and discount (1) | Less-unamortized debt issuance costs and discount (1) | | 4,975 | | | 5,679 | | Less-unamortized debt issuance costs and discount (1) | 6,804 | | | 4,394 | |
Long-term debt, net of current portion | Long-term debt, net of current portion | | $ | 151,317 | | | $ | 151,052 | | Long-term debt, net of current portion | $ | 146,228 | | | $ | 149,389 | |
(1) In addition to this amount, costs of $0.6 million and $0.7$0.6 million related to the ABL Facility were recorded in other non-current assets as of June 30, 2022March 31, 2023 and December 31, 2021,2022, respectively.
Term Loan Facility
OutstandingEffective March 31, 2023, outstanding borrowings under the Term Loan Facility bear interest at either 1) one-month, LIBOR (subjectthree-month, or six-month SOFR with a duration adjustment (“Adjusted SOFR”), subject to a 1.000% floor)floor, plus an applicable margin of 6.875%, or 2) the greater of various benchmark rates plus an applicable margin of 5.875%. At June 30, 2022,March 31, 2023, the Term Loan Facility bore interest, based on one-month LIBOR,Adjusted SOFR, at 8.541%11.782%. We have anBeginning with the second quarter of 2023, interest is increased on a paid-in-kind basis at a rate swap that changesbetween 0.50% and 2.00% (“PIK interest”), dependent on the one-month LIBOR toCompany’s leverage ratio and whether the Company completes a fixed ratequalifying junior equity raise by June 30, 2023. The PIK interest is payable on the loan maturity date of 1.291% on $60.0 million of the outstanding balance of the Term Loan Facility.September 22, 2026.
The Term Loan Facility requires quarterly principal payments of $0.4 million with the remaining unpaid principal amount due at the loan maturity date. We may be required to make additional principal payments annually that are calculated as a percentage of our excess cash flow, as defined by the lender, based on the final maturity date of September 22, 2026.our net leverage ratio. The Term Loan Facility is collateralized by all of our assets. The Term Loan Facility has a first lien on all domestic assets other than accounts receivable and inventory and has a second lien on domestic accounts receivable and inventory. On March 3, 2022, we amended our Term Loan Facility, which increases the quarterly maximum consolidated net leverage ratio. We were in compliance with all requirements under the Term Loan Facility as of June 30, 2022.March 31, 2023.
The Term Loan Facility was issued at a $3.8 million discount and we have capitalized an additional $2.8$5.3 million in new debt issuance costs. These costs are recorded as a direct reduction to the carrying amount of the associated long-term debt and amortized over the term of the debt.
We had an interest rate swap that changed the one-month LIBOR to a fixed rate of 1.291% on $60.0 million of the outstanding balance of the Term Loan Facility. During the first quarter of 2023, we terminated the interest rate swap and received cash proceeds of $2.5 million which was equal to its fair value.
ABL Facility
The ABL Facility provides for a senior secured revolving credit facility in the amount of $50.0 million, of which $30.0 million is available in the form of letters of credit and $5.0 million is available for the issuance of short-term swingline loans. The availability of credit under the ABL Facility is limited by a borrowing base calculation derived from accounts receivable and inventory held in the United States. Outstanding borrowings under the ABL Facility bear interest on a variable rate structure plus an interest rate spread that is based on the average amount of aggregate revolving commitment available. TheEffective March 3, 2023, the variable borrowing rate is either 1) LIBORAdjusted SOFR plus an applicable margin of 1.75% or 2.00%, depending on availability, or 2) the greater of the federal funds rate or prime, plus an applicable margin of 0.75% or 1.00%, depending on availability. We may elect whether to use one-month, three-month, or six-month LIBOR, subject to a 0.50% floor. Interest payments are due monthly on borrowings that utilize one-month LIBOR and quarterly on borrowings that utilize three-month or six-month LIBOR.Adjusted SOFR. At June 30, 2022,March 31, 2023, using one-month LIBORAdjusted SOFR plus a 1.75% spread,2.00% margin, the weighted average interest rate on outstanding borrowings under the ABL
Facility was 3.00%6.89%. We pay a commitment fee of 0.375% for unused capacity under the ABL Facility and a 1.875%2.125% fee on the amount of letters of credit outstanding. The final maturity date of the ABL Facility is March 22, 2026.
As of June 30, 2022,March 31, 2023, we had $2.0$1.0 million of outstanding borrowings under the ABL Facility, $11.1$10.9 million of outstanding letters of credit, and $36.9$32.5 million available for future borrowings under the ABL Facility. The ABL Facility has a first lien on domestic accounts receivable and inventory. We were in compliance with all requirements under the ABL Facility as of June 30, 2022.March 31, 2023.
Note 8. Leases
The following table contains supplemental cash flow information related to leases.
| | | Six Months Ended June 30, | | Three Months Ended March 31, |
| | 2022 | | 2021 | | 2023 | | 2022 |
Cash paid for amounts included in the measurement of lease liabilities: | Cash paid for amounts included in the measurement of lease liabilities: | | | | | Cash paid for amounts included in the measurement of lease liabilities: | | | | |
Operating cash flows used in finance leases | Operating cash flows used in finance leases | | $ | 172 | | | $ | 113 | | Operating cash flows used in finance leases | | $ | 84 | | | $ | 80 | |
Operating cash flows used in operating leases | Operating cash flows used in operating leases | | 7,543 | | | 7,221 | | Operating cash flows used in operating leases | | 4,056 | | | 4,204 | |
Financing cash flows used in finance leases | Financing cash flows used in finance leases | | 1,440 | | | 2,370 | | Financing cash flows used in finance leases | | 689 | | | 700 | |
Right-of-use assets obtained in exchange for new finance lease liabilities | Right-of-use assets obtained in exchange for new finance lease liabilities | | 395 | | | 636 | | 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 (1) | Right-of-use assets obtained in exchange for new operating lease liabilities (1) | | 2,178 | | | — | | Right-of-use assets obtained in exchange for new operating lease liabilities (1) | | 477 | | | 1,305 | |
(1) Includes new leases, renewals, and modifications.
Note 9. Commitments and Contingencies
Brazil ICMS Tax Matter
Prior to the acquisition of Autocam Corporation (“Autocam”) in 2014, Autocam’s Brazilian subsidiary (“Autocam Brazil”) received notification from the Brazilian tax authority regarding ICMS (state value added tax) tax credits claimed on intermediary materials (e.g., tooling and perishable items) used in the manufacturing process. The Brazilian tax authority notification disallowed state ICMS tax credits claimed on intermediary materials based on the argument that these items are not intrinsically related to the manufacturing processes. Autocam Brazil filed an administrative defense with the Brazilian tax authority arguing, among other matters, that it should qualify for an ICMS tax credit, contending that the intermediary materials are directly related to the manufacturing process.
We believe that we have substantial legal and factual defenses, and we plan to defend our interests in this matter vigorously. The matter encompasses several lawsuits filed with the Brazilian courts requesting declaratory actions that no tax is due or seeking a stay of execution on the collection of the tax. In 2018, we obtained a favorable decision in one of the declaratory actions for which the period for appeal has expired. We have filed actions in each court requesting dismissal of the matter based on the earlier court action. In May 2020, we received an unfavorable decision in one of the lawsuits, and as a result have recorded a liability to the Brazilian tax authorities and a receivable from the former shareholders of Autocam for the same amount. Although we anticipate a favorable resolution to the remaining matters, we can provide no assurances that we will be successful in achieving dismissal of all pending cases. The U.S. dollar amount that would be owed in the event of an unfavorable decision is subject to interest, penalties, and currency impacts and therefore is dependent on the timing of the decision. For the remaining open lawsuits, we currently believe the cumulative potential liability in the event of unfavorable decisions on all matters will be less than $5.0 million, inclusive of interest and penalties.
We are entitled to indemnification from the former shareholders of Autocam, subject to the limitations and procedures set forth in the agreement and plan of merger relating to the Autocam acquisition. Management believes the indemnification would include amounts owed for the tax, interest, and penalties related to this matter. Accordingly, we do not expect to incur a loss related to this matter even in the event of an unfavorable decision and, therefore, have not accrued an amount for the remaining matters as of June 30, 2022.
Securities Offering Matter
As previously disclosed, Erie County Employees’ Retirement System, on behalf of a purported class of plaintiffs, filed a complaint in the Supreme Court of the State of New York, County of New York against us, certain of our current and former officers and directors, and each of the underwriters involved in our public offering and sale of 14.4 million shares of our common stock pursuant to a preliminary prospectus supplement, dated September 10, 2018, a final prospectus supplement, dated September 13, 2018, and a base prospectus, dated April 19, 2017, relating to our effective shelf registration statement on Form S-3 (File No. 333-216737) (the “Offering”). The amended complaint alleges violations of Sections 11, 12(a)(2), and 15 of the Securities Act of 1933 in connection with the Offering.
On July 25, 2022, the parties filed a Stipulation of Settlement, which is subject to court approval, to settle the securities offering action. Under the terms of the Stipulation of Settlement, the Company and/or its insurance carrier will make a cash payment to the plaintiff in the amount $9.5 million (the “Settlement Amount”), in exchange for which the Company and the other named defendants will be released from all claims related to the securities offering action. As of June 30, 2022, we have previously
paid covered expenses totaling $1.0 million meeting our directors' and officers' retention requirement and therefore the Settlement Amount will be covered and paid by our directors' and officers' insurance carrier.March 31, 2023.
Other Legal Matters
On April 25, 2022, we reached an agreement to settle breach of contract claims brought by a former customer regarding the sale of products by us in 2016. Under the agreement, we will pay $1.8 million to the customer in specified installments through July 2023. The $1.8 million settlement is included in the Other operating expense (income), net line in the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss).
All other legal proceedings are of an ordinary and routine nature and are incidental to our operations. Management believes that such proceedings should not, individually or in the aggregate, have a material adverse effect on our business, financial condition, results of operations, or cash flows. In making that determination, we analyze the facts and circumstances of each case at least quarterly in consultation with our attorneys and determine a range of reasonably possible outcomes.
Note 10. Preferred Stock and Stockholders' Equity
Series D Perpetual Preferred Stock
On March 22, 2021, we completed a private placement of 65 thousand65,000 shares of newly designated Series D Perpetual Preferred Stock, with a par value of $0.01 per share (the “Series D Preferred Stock”), at a price of $1,000 per share, together with detachable warrants (the “2021 Warrants”) to purchase up to 1.9 million shares of our common stock at an exercise price of $0.01 per share. The Series D Preferred Stock has an initial liquidation preference of $1,000 per share and is redeemable at our option in cash at a redemption price equal to the liquidation preference then in effect. Series D Preferred Stock shares earn cash dividends at a rate of 10.0% per year, payable quarterly in arrears, accruing whether or not earned or declared. If no cash dividend is paid, then the liquidation preference per share effective on the dividend date increases by 12.0% per year. OnBeginning March 22, 2026, the cash dividend rate and in-kind dividend rate increase by 2.5% per year. Cash dividends are required beginning on September 30, 2027.
The Series D Preferred Stock is classified as mezzanine equity, between liabilities and stockholders’ equity, because certain features of the Series D Preferred Stock could require redemption of the Series D Preferred Stock upon a change of control event that is considered not solely within our control. For initial recognition, the Series D Preferred Stock was recognized at a discounted value, net of issuance costs and allocation to warrants and a bifurcated embedded derivative. The aggregate discount is amortized as a deemed dividend through March 22, 2026, which is the date the dividend rate begins to increase by 2.5% per year. Deemed dividends adjust retained earnings (or in the absence of retained earnings, additional paid-in capital).
In accordance with ASC 815-15, Derivatives and Hedging - Embedded Derivatives, certain features of the Series D Preferred Stock were bifurcated and accounted for as derivatives separately. Note 15 discusses the accounting for these features.
As of June 30, 2022,March 31, 2023, the carrying value of the Series D Preferred Stock shares was $59.0$67.8 million, which included $12.3$21.1 million of accumulated unpaid and deemed dividends. The following table presents the change in the Series D Preferred Stock carrying value during the sixthree months ended June 30, 2022.March 31, 2023.
| | | | | |
| Six Months Ended June 30,Balance as of December 31, 2022 |
Beginning balance | $ | 53,80764,701 | |
| |
| |
| |
Accrual of in-kind dividends | 4,3482,410 | |
Amortization | 848641 | |
| |
Ending balanceBalance as of March 31, 2023 | $ | 59,00367,752 | |
Note 11. Revenue from Contracts with Customers
Revenue is recognized when control of the good or service is transferred to the customer either at a point in time or, in limited circumstances, as our services are rendered over time. Revenue is measured as the amount of consideration we expect to receive in exchange for transferring goods or services. During the six months ended June 30, 2022, we received equipment from a
The following tables summarize revenue by customer as part of the selling price of goods transferred. This noncash consideration was recognized as revenue equal to the fair value of the equipment received.geographical region.
| | | | | | | | | | | | | | | | | | | | | | | |
Three Months Ended March 31, 2023 | Mobile Solutions | | Power Solutions | | Intersegment Sales Eliminations | | Total |
United States and Puerto Rico | $ | 37,206 | | | $ | 40,222 | | | $ | (2) | | | $ | 77,426 | |
China | 13,812 | | | 749 | | | — | | | 14,561 | |
Brazil | 11,611 | | | 110 | | | — | | | 11,721 | |
Mexico | 4,279 | | | 3,488 | | | — | | | 7,767 | |
Germany | 1,732 | | | 74 | | | — | | | 1,806 | |
Poland | 1,856 | | | 5 | | | — | | | 1,861 | |
Other | 7,522 | | | 4,424 | | | — | | | 11,946 | |
Total net sales | $ | 78,018 | | | $ | 49,072 | | | $ | (2) | | | $ | 127,088 | |
The following tables summarize revenue by customer geographical region.
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, 2022 |
| Mobile Solutions | | Power Solutions | | Intersegment Sales Eliminations | | Total |
United States and Puerto Rico | $ | 35,954 | | | $ | 40,377 | | | $ | (37) | | | $ | 76,294 | |
China | 8,764 | | | 1,233 | | | — | | | 9,997 | |
Brazil | 11,293 | | | 312 | | | — | | | 11,605 | |
Mexico | 8,087 | | | 4,358 | | | — | | | 12,445 | |
Germany | 1,121 | | | 73 | | | — | | | 1,194 | |
Poland | 1,158 | | | 1 | | | — | | | 1,159 | |
Other | 6,973 | | | 5,695 | | | — | | | 12,668 | |
Total net sales | $ | 73,350 | | | $ | 52,049 | | | $ | (37) | | | $ | 125,362 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, 2021 |
| Mobile Solutions | | Power Solutions | | Intersegment Sales Eliminations | | Total |
United States and Puerto Rico | $ | 35,284 | | | $ | 39,424 | | | $ | — | | | $ | 74,708 | |
China | 13,219 | | | 1,282 | | | — | | | 14,501 | |
Brazil | 9,985 | | | 343 | | | — | | | 10,328 | |
Mexico | 4,829 | | | 4,349 | | | — | | | 9,178 | |
Germany | 1,369 | | | 96 | | | — | | | 1,465 | |
Poland | 904 | | | 3 | | | — | | | 907 | |
Other | 8,296 | | | 3,774 | | | — | | | 12,070 | |
Total net sales | $ | 73,886 | | | $ | 49,271 | | | $ | — | | | $ | 123,157 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Six Months Ended June 30, 2022 |
| Mobile Solutions | | Power Solutions | | Intersegment Sales Eliminations | | Total |
United States and Puerto Rico | $ | 73,764 | | | $ | 80,863 | | | $ | (51) | | | $ | 154,576 | |
China | 21,316 | | | 2,477 | | | — | | | 23,793 | |
Brazil | 22,013 | | | 657 | | | — | | | 22,670 | |
Mexico | 13,151 | | | 9,099 | | | — | | | 22,250 | |
Germany | 2,404 | | | 135 | | | — | | | 2,539 | |
Poland | 2,498 | | | 5 | | | — | | | 2,503 | |
Other | 14,274 | | | 10,824 | | | — | | | 25,098 | |
Total net sales | $ | 149,420 | | | $ | 104,060 | | | $ | (51) | | | $ | 253,429 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Six Months Ended June 30, 2021 |
| Mobile Solutions | | Power Solutions | | Intersegment Sales Eliminations | | Total |
United States and Puerto Rico | $ | 72,722 | | | $ | 79,230 | | | $ | (47) | | | $ | 151,905 | |
China | 27,633 | | | 2,788 | | | — | | | 30,421 | |
Brazil | 19,653 | | | 535 | | | — | | | 20,188 | |
Mexico | 9,844 | | | 7,746 | | | — | | | 17,590 | |
Germany | 3,136 | | | 260 | | | — | | | 3,396 | |
Poland | 2,084 | | | 7 | | | — | | | 2,091 | |
Other | 16,590 | | | 7,780 | | | — | | | 24,370 | |
Total net sales | $ | 151,662 | | | $ | 98,346 | | | $ | (47) | | | $ | 249,961 | |
| | | | | | | | | | | | | | | | | | | | | | | |
Three Months Ended March 31, 2022 | Mobile Solutions | | Power Solutions | | Intersegment Sales Eliminations | | Total |
United States and Puerto Rico | $ | 37,810 | | | $ | 40,486 | | | $ | (14) | | | $ | 78,282 | |
China | 12,552 | | | 1,244 | | | — | | | 13,796 | |
Brazil | 10,720 | | | 345 | | | — | | | 11,065 | |
Mexico | 5,064 | | | 4,741 | | | — | | | 9,805 | |
Germany | 1,283 | | | 62 | | | — | | | 1,345 | |
Poland | 1,340 | | | 4 | | | — | | | 1,344 | |
Other | 7,301 | | | 5,129 | | | — | | | 12,430 | |
Total net sales | $ | 76,070 | | | $ | 52,011 | | | $ | (14) | | | $ | 128,067 | |
The following tables summarize revenue by customer industry. Our products in the automotive industry include high-precision components and assemblies for electric power steering systems, electric braking, electric motors, fuel systems, emissions control, transmissions, moldings, stampings, sensors, and electrical contacts. Our products in the general industrial industry include high-precision metal and plastic components for a variety of industrial applications including diesel industrial motors, heating and cooling systems, fluid power systems, power tools, and more. While many of the industries we serve include electrical components, our products in the residential/commercial electrical industry category in the following tables include components used in smart meters, charging stations, circuit breakers, transformers, electrical contact assemblies, precision stampings, welded contact assemblies, and specification plating and surface finishing.
| | Three Months Ended June 30, 2022 | |
| Mobile Solutions | | Power Solutions | | Intersegment Sales Eliminations | | Total | |
Three Months Ended March 31, 2023 | | Three Months Ended March 31, 2023 | Mobile Solutions | | Power Solutions | | Intersegment Sales Eliminations | | Total |
Automotive | Automotive | $ | 48,850 | | | $ | 9,728 | | | $ | — | | | $ | 58,578 | | Automotive | $ | 55,804 | | | $ | 8,803 | | | $ | — | | | $ | 64,607 | |
General Industrial | General Industrial | 20,532 | | | 16,640 | | | — | | | 37,172 | | General Industrial | 20,213 | | | 14,605 | | | — | | | 34,818 | |
Residential/Commercial Electrical | Residential/Commercial Electrical | — | | | 18,757 | | | — | | | 18,757 | | Residential/Commercial Electrical | — | | | 14,585 | | | — | | | 14,585 | |
Other | Other | 3,968 | | | 6,924 | | | (37) | | | 10,855 | | Other | 2,001 | | | 11,079 | | | (2) | | | 13,078 | |
Total net sales | Total net sales | $ | 73,350 | | | $ | 52,049 | | | $ | (37) | | | $ | 125,362 | | Total net sales | $ | 78,018 | | | $ | 49,072 | | | $ | (2) | | | $ | 127,088 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, 2021 |
| Mobile Solutions | | Power Solutions | | Intersegment Sales Eliminations | | Total |
Automotive | $ | 46,247 | | | $ | 9,657 | | | $ | — | | | $ | 55,904 | |
General Industrial | 24,449 | | | 15,057 | | | — | | | 39,506 | |
Residential/Commercial Electrical | — | | | 16,219 | | | — | | | 16,219 | |
Other | 3,190 | | | 8,338 | | | — | | | 11,528 | |
Total net sales | $ | 73,886 | | | $ | 49,271 | | | $ | — | | | $ | 123,157 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Six Months Ended June 30, 2022 |
| Mobile Solutions | | Power Solutions | | Intersegment Sales Eliminations | | Total |
Automotive | $ | 99,446 | | | $ | 19,806 | | | $ | — | | | $ | 119,252 | |
General Industrial | 42,337 | | | 32,975 | | | — | | | 75,312 | |
Residential/Commercial Electrical | — | | | 35,956 | | | — | | | 35,956 | |
Other | 7,637 | | | 15,323 | | | (51) | | | 22,909 | |
Total net sales | $ | 149,420 | | | $ | 104,060 | | | $ | (51) | | | $ | 253,429 | |
| | Six Months Ended June 30, 2021 | |
| Mobile Solutions | | Power Solutions | | Intersegment Sales Eliminations | | Total | |
Three Months Ended March 31, 2022 | | Three Months Ended March 31, 2022 | Mobile Solutions | | Power Solutions | | Intersegment Sales Eliminations | | Total |
Automotive | Automotive | $ | 96,391 | | | $ | 20,082 | | | $ | — | | | $ | 116,473 | | Automotive | $ | 50,596 | | | $ | 10,078 | | | $ | — | | | $ | 60,674 | |
General Industrial | General Industrial | 48,759 | | | 30,431 | | | — | | | 79,190 | | General Industrial | 21,805 | | | 16,335 | | | — | | | 38,140 | |
Residential/Commercial Electrical | Residential/Commercial Electrical | — | | | 31,573 | | | — | | | 31,573 | | Residential/Commercial Electrical | — | | | 17,199 | | | — | | | 17,199 | |
Other | Other | 6,512 | | | 16,260 | | | (47) | | | 22,725 | | Other | 3,669 | | | 8,399 | | | (14) | | | 12,054 | |
Total net sales | Total net sales | $ | 151,662 | | | $ | 98,346 | | | $ | (47) | | | $ | 249,961 | | Total net sales | $ | 76,070 | | | $ | 52,011 | | | $ | (14) | | | $ | 128,067 | |
Deferred Revenue
Deferred revenue relates to payments received in advance of performance under the contract and recognized as revenue as (or when) we perform under the contract. The balance of deferred revenue was $0.6$1.2 million and $0.5$0.7 million as of June 30, 2022March 31, 2023 and December 31, 2021,2022, respectively. Revenue recognized for performance obligations satisfied or partially satisfied during the sixthree months ended June 30, 2022March 31, 2023 included $0.5$0.3 million that was included in deferred revenue as of December 31, 2021.
Transaction Price Allocated to Future Performance Obligations
We are required to disclose the aggregate amount of transaction price that is allocated to performance obligations that have not yet been satisfied as of June 30, 2022,March 31, 2023, unless our contracts meet one of the practical expedients. Our contracts met the practical expedient for a performance obligation that is part of a contract that has an original expected duration of one year or less.
Note 12. Share-Based Compensation
The following table lists the components of share-based compensation expense by type of award, which is recognized in the “Selling, general, and administrative expense” line in the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss).
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
Stock options | $ | 31 | | | $ | 59 | | | $ | 87 | | | $ | 148 | |
Restricted stock | 2,158 | | | 591 | | | 2,762 | | | 1,139 | |
Performance share units | 417 | | | 450 | | | 706 | | | 699 | |
Change in estimate of share-based award vesting (1) | — | | | (337) | | | — | | | (337) | |
Share-based compensation expense | $ | 2,606 | | | $ | 763 | | | $ | 3,555 | | | $ | 1,649 | |
_______________________________
(1)Amounts reflect the decrease in share-based compensation expense based on the change in estimate of the probability of vesting of share-based awards.
Stock Options
The following table presents stock option activity for the six months ended June 30, 2022.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Number of Options (in thousands) | | Weighted- Average Exercise Price (per share) | | Weighted- Average Remaining Contractual Term | | Aggregate Intrinsic Value | |
Outstanding at January 1, 2022 | 621 | | | $ | 12.24 | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Expired | (79) | | | 9.71 | | | | | | |
Outstanding at June 30, 2022 | 542 | | | $ | 12.61 | | | 4.1 years | | $ | — | | (1) |
Exercisable at June 30, 2022 | 515 | | | $ | 12.77 | | | 3.9 years | | $ | — | | (1) |
_______________________________
(1)The aggregate intrinsic value is the sum of intrinsic values for each exercisable individual option grant. The intrinsic value is the amount by which the closing market price of our stock at June 30, 2022, was greater than the exercise price of any individual option grant.
| | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | |
| 2023 | | 2022 | | | | |
Restricted stock | $ | 167 | | | 604 | | | | | |
Performance share units | 200 | | | 289 | | | | | |
Stock options | 14 | | | $ | 56 | | | | | |
Share-based compensation expense | $ | 381 | | | $ | 949 | | | | | |
Restricted Stock
During the six months ended June 30, 2022, we granted 897,000 shares of restricted stock to non-executive directors, officers and certain other key employees under the NN, Inc. 2019 Omnibus Incentive Plan (“2019 Omnibus Plan”). The shares of restricted stock granted during the six months ended June 30, 2022, vest pro-rata generally over three years for employees and over one year for non-executive directors. We determined the fair value of the shares awarded by using the closing price of our common stock as of the date of grant. The weighted average grant date fair value of restricted stock granted in the six months ended June 30, 2022, was $3.31 per share. Total grant date fair value of restricted stock that vested in the six months ended June 30, 2022, was $2.1 million.
The following table presents the status of unvested restricted stock awards as of June 30, 2022March 31, 2023 and changes during the sixthree months then ended.
| | | | | | | | | | | |
| Nonvested Restricted Shares (in thousands) | | Weighted Average Grant-Date Fair Value (per share) |
Unvested at January 1, 2022 | 469 | | | $ | 7.28 | |
Granted | 897 | | | 3.31 | |
Vested | (291) | | | 7.05 | |
Forfeited | (9) | | | 4.73 | |
Unvested at June 30, 2022 | 1,066 | | | $ | 4.02 | |
| | | | | | | | | | | |
| Nonvested Restricted Shares | | Weighted Average Grant-Date Fair Value |
Unvested at January 1, 2023 | 1,038 | | | $ | 4.03 | |
| | | |
Vested | (642) | | | 4.33 | |
| | | |
Unvested at March 31, 2023 | 396 | | | $ | 3.55 | |
Performance Share Units
Performance Share Units (“PSUs”) are a form of long-term incentive compensation awarded to executive officers and certain other key employees designed to directly align the interests of employees to the interests of our stockholders, and to create long-term stockholder value. Some PSUs are based on total shareholder return (“TSR Awards”), and other PSUs are based on return on invested capital (“ROIC Awards”). TSR Awards granted in 2022 were made pursuant to the 2019 Omnibus Plan and a Performance Share Unit Agreement (the “2019 Omnibus Agreement”). ROIC Awards granted in 2022 were made pursuant to the NN, Inc. 2022 Omnibus Incentive Plan and a Performance Share Unit Agreement.
The TSR Awards vest, if at all, upon our achieving a specified relative total shareholder return, which will be measured against the total shareholder return of a specified index during specified performance periods as defined in the 2019 Omnibus Agreement. The ROIC Awards vest, if at all, upon our achieving a specified average return on invested capital during the performance periods. Each performance period generally begins on January 1 of the year of grant and ends 3 years later on December 31.
We recognize compensation expense over the performance period in which the performance and market conditions are measured. If the PSUs do not vest at the end of the performance periods, then the PSUs will expire automatically. Upon vesting, the PSUs will be settled by the issuance of shares of our common stock, subject to the award recipient’s continued employment. The actual number of shares of common stock to be issued to each award recipient at the end of the performance periods will be interpolated between a threshold and maximum payout amount based on actual performance results. No dividends will be paid on outstanding PSUs during the performance period; however, dividend equivalents will be paid based on dividends declared and the number of shares of common stock that are ultimately earned at the end of the performance periods.
The following table presents the goals with respect to PSUs granted in 2022.
| | | | | | | | | | | | | | | | | | | | |
| | Threshold Performance (25% of Shares) | | Target Performance (100% of Shares) | | Maximum Performance (150% of Shares) |
TSR Awards | | 25th Percentile | | 55th Percentile | | 75th Percentile |
| | | | | | |
| | | | | | |
| | | | | | |
| | Threshold Performance (50% of Shares) | | Target Performance (100% of Shares) | | Maximum Performance (150% of Shares) |
ROIC Awards | | 6.4% | | 8.6% | | 10.0% |
| | | | | | |
| | | | | | |
We estimate theTotal grant date fair value of TSR Awards usingrestricted stock that vested in the Monte Carlo simulation model, as the total shareholder return metric is considered a market condition under ASC Topic 718, Compensation – stock compensation. The grant date fair value of ROIC Awards is based on the closing price of a share of our common stock on the date of grant.
The following table presents the status of unvested PSUs as of June 30, 2022 and changes during the sixthree months then ended.
| | | | | | | | | | | | | | | | | | | | | | | |
| Nonvested TSR Awards | | Nonvested ROIC Awards |
| Shares (in thousands) | | Weighted Average Grant-Date Fair Value (per share) | | Shares (in thousands) | | Weighted Average Grant-Date Fair Value (per share) |
Nonvested at January 1, 2022 | 194 | | | $ | 9.59 | | | 228 | | | $ | 8.14 | |
Granted | 382 | | | 2.53 | | | 408 | | | 2.62 | |
| | | | | | | |
| | | | | | | |
Nonvested at June 30, 2022 | 576 | | | $ | 4.90 | | | 636 | | | $ | 4.60 | |
ended March 31, 2023, was $2.8 million.
Note 13. Accumulated Other Comprehensive Income
The following tables present the components of accumulated other comprehensive income (loss) (“AOCI”).
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Foreign Currency Translation | | Interest rate swap | | Income taxes (1) | | Total |
Balance at March 31, 2022 | | $ | (29,416) | | | $ | 1,698 | | | $ | (363) | | | $ | (28,081) | |
Other comprehensive income (loss) before reclassifications | | (8,490) | | | 471 | | | (98) | | | (8,117) | |
Amounts reclassified from AOCI to interest expense (2) | | — | | | 38 | | | (7) | | | 31 | |
| | | | | | | | |
Net other comprehensive income (loss) | | (8,490) | | | 509 | | | (105) | | | (8,086) | |
Balance at June 30, 2022 | | $ | (37,906) | | | $ | 2,207 | | | $ | (468) | | | $ | (36,167) | |
| | | | | | | | |
Balance at March 31, 2021 | | $ | (34,228) | | | $ | — | | | $ | — | | | $ | (34,228) | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Net other comprehensive income (loss) | | 4,409 | | | — | | | — | | | 4,409 | |
Balance at June 30, 2021 | | $ | (29,819) | | | $ | — | | | $ | — | | | $ | (29,819) | |
| | | Foreign Currency Translation | | Interest rate swap | | Income taxes (1) | | Total | | Foreign Currency Translation | | Interest rate swap | | Income taxes (1) | | Total |
Balance at December 31, 2021 | $ | (32,016) | | | $ | 151 | | | $ | (37) | | | $ | (31,902) | | |
Balance as of December 31, 2022 | | Balance as of December 31, 2022 | $ | (40,172) | | | $ | 3,149 | | | $ | (97) | | | $ | (37,120) | |
Other comprehensive income (loss) before reclassifications | Other comprehensive income (loss) before reclassifications | (5,890) | | | 1,974 | | | (414) | | | (4,330) | | Other comprehensive income (loss) before reclassifications | 1,840 | | | (327) | | | 97 | | | 1,610 | |
Amounts reclassified from AOCI to interest expense (2) | Amounts reclassified from AOCI to interest expense (2) | — | | | 82 | | | (17) | | | 65 | | Amounts reclassified from AOCI to interest expense (2) | — | | | (468) | | | — | | | (468) | |
| Net other comprehensive income (loss) | Net other comprehensive income (loss) | (5,890) | | | 2,056 | | | (431) | | | (4,265) | | Net other comprehensive income (loss) | 1,840 | | | (795) | | | 97 | | | 1,142 | |
Balance at June 30, 2022 | $ | (37,906) | | | $ | 2,207 | | | $ | (468) | | | $ | (36,167) | | |
Balance as of March 31, 2023 | | Balance as of March 31, 2023 | $ | (38,332) | | | $ | 2,354 | | | $ | — | | | $ | (35,978) | |
| Balance at December 31, 2020 | $ | (30,881) | | | $ | (3,712) | | | $ | 861 | | | $ | (33,732) | | |
Balance as of December 31, 2021 | | Balance as of December 31, 2021 | $ | (32,016) | | | $ | 151 | | | $ | (37) | | | $ | (31,902) | |
Other comprehensive income (loss) before reclassifications | Other comprehensive income (loss) before reclassifications | 1,062 | | | — | | | — | | | 1,062 | | Other comprehensive income (loss) before reclassifications | 2,600 | | | 1,503 | | | (316) | | | 3,787 | |
Amounts reclassified from AOCI to interest expense (2) | | Amounts reclassified from AOCI to interest expense (2) | — | | | 44 | | | (10) | | | 34 | |
| Amounts reclassified from AOCI to loss on interest rate swap (3) | — | | | 3,712 | | | (861) | | | 2,851 | | |
Net other comprehensive income (loss) | Net other comprehensive income (loss) | 1,062 | | | 3,712 | | | (861) | | | 3,913 | | Net other comprehensive income (loss) | 2,600 | | | 1,547 | | | (326) | | | 3,821 | |
Balance at June 30, 2021 | $ | (29,819) | | | $ | — | | | $ | — | | | $ | (29,819) | | |
Balance as of March 31, 2022 | | Balance as of March 31, 2022 | $ | (29,416) | | | $ | 1,698 | | | $ | (363) | | | $ | (28,081) | |
______________________
(1) Income tax effect of changes in interest rate swap.
(2) Represents interest rate swap settlements of effective hedge.
(3) Represents reclassification of derivative loss and settlements after discontinuation of hedge accounting.Note 14. Net Income (Loss) Per Common Share
In accordance with ASC 260, Earnings Per Share, a company that has participating securities is required to utilize the two-class
method for calculating earnings per share (“EPS”) unless the treasury stock method results in lower EPS. The two-class method is an allocation of earnings between the holders of common stock and a company’s participating securities. Basic EPS is calculated by dividing income or loss attributable to common stockholders by the weighted average number of shares of common stock outstanding. To calculate diluted EPS, basic EPS is further adjusted to include the effect of potentially dilutive stock options, warrants, and convertible preferred stock. Note 14. Net Loss Per Common Share
The following table summarizes the computation of basic and diluted net loss per common share.
| | | Three Months Ended June 30, | | Six Months Ended June 30, | | Three Months Ended March 31, | |
| | 2022 | | 2021 | | 2022 | | 2021 | | 2023 | | 2022 | |
Numerator: | Numerator: | | | | | | | | Numerator: | | | | |
Net loss | Net loss | $ | (8,567) | | | $ | (5,391) | | | $ | (11,869) | | | $ | (10,304) | | Net loss | $ | (10,175) | | | $ | (3,302) | | |
Less: Preferred stock cumulative dividends and deemed dividends | (2,658) | | | (2,211) | | | (5,196) | | | (16,740) | | |
Adjustment for preferred stock cumulative dividends and deemed dividends | | Adjustment for preferred stock cumulative dividends and deemed dividends | (3,051) | | | (2,538) | | |
| Numerator for basic and diluted net loss per common share | | Numerator for basic and diluted net loss per common share | $ | (13,226) | | | $ | (5,840) | | |
| Denominator: | | Denominator: | | |
Weighted average common shares outstanding | | Weighted average common shares outstanding | 43,847 | | | 43,308 | | |
Adjustment for participating securities | | Adjustment for participating securities | (742) | | | (608) | | |
Adjustment for warrants outstanding (1) | | Adjustment for warrants outstanding (1) | 2,204 | | | 1,894 | | |
| Shares used to calculate basic and diluted net loss per share | | Shares used to calculate basic and diluted net loss per share | 45,309 | | | 44,594 | | |
| Numerator for basic and diluted undistributed net loss per common share (1) | $ | (11,225) | | | $ | (7,602) | | | $ | (17,065) | | | $ | (27,044) | | |
| Denominator: | | |
Weighted average common shares outstanding | 43,885 | | | 43,067 | | | 43,599 | | | 42,952 | | |
Adjustment for unvested restricted common stock | (1,070) | | | (524) | | | (844) | | | (450) | | |
Adjustment for 2021 Warrants outstanding (2) | 1,893 | | | 1,897 | | | 1,894 | | | 1,059 | | |
Shares used to calculate net loss per share, basic and diluted | 44,708 | | | 44,440 | | | 44,649 | | | 43,561 | | |
| | Per common share net loss: | | |
| Basic and diluted net loss per common share | Basic and diluted net loss per common share | $ | (0.25) | | | $ | (0.17) | | | $ | (0.38) | | | $ | (0.62) | | Basic and diluted net loss per common share | $ | (0.29) | | | $ | (0.13) | | |
Cash dividends declared per common share | Cash dividends declared per common share | $ | — | | | $ | — | | | $ | — | | | $ | — | | Cash dividends declared per common share | $ | — | | | $ | — | | |
(1) Preferred Stock does not participate in losses.
(2) Weighted average 2021 Warrants outstandingOutstanding warrants that are exercisable at an exercise price of $0.01 per share, are included in shares outstanding for calculation of basic earnings per share because they are exercisable at an exercise price of $0.01 per share, subject to certain adjustments (see Note 15).
The following table presents securities that could be potentially dilutive in the future that were excluded from the calculation of diluted net loss per common share because they had an anti-dilutive effect.
| | | Three Months Ended June 30, | | Six Months Ended June 30, | | Three Months Ended March 31, | |
| | 2022 | | 2021 | | 2022 | | 2021 | | 2023 | | 2022 | |
Options | Options | 546 | | | 825 | | | 573 | | | 843 | | Options | 516 | | | 600 | | |
2019 Warrants | 2019 Warrants | 1,500 | | | 1,500 | | | 1,500 | | | 1,500 | | 2019 Warrants | 1,500 | | | 1,500 | | |
| | | 2,046 | | | 2,325 | | | 2,073 | | | 2,343 | | | 2,016 | | | 2,100 | | |
We have elected to allocate undistributed income to participating securities based on year-to-date results. As there was no undistributed income for the six months ended June 30, 2022, no such allocation was necessary. In addition, given the undistributed loss in the three and six months ended June 30, 2022 and 2021, options and the 2019 Warrants are considered anti-dilutive and were excluded from the calculation of diluted net loss per share. Stock options excluded from the calculations of diluted net loss per share had a per share exercise price ranging from $7.93 to $25.16 for the three months ended June 30, 2022, and $7.93 to $25.16 for three months ended June 30, 2021. Stock options excluded from the calculations of diluted net loss per share had a per share exercise price ranging from $7.93 to $25.16 for the six months ended June 30, 2022, and $7.93 to $25.16 for six months ended June 30, 2021.March 31, 2023. The 2019 Warrants excluded from the calculation of diluted net loss per share for the three and six months ended June 30, 2022 and 2021, had a per share exercise price of $11.49.
Note 15. Fair Value Measurements
Fair value is an exit price representing the expected amount that an entity would receive to sell an asset or pay to transfer a liability in an orderly transaction with market participants at the measurement date. We followed consistent methods and assumptions to estimate fair values as more fully described in the 20212022 Annual Report.
Fair value principles prioritize valuation inputs across three broad levels. Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 2 inputs are quoted prices for similar assetsEmbedded Derivatives
In accordance with ASC 815-15, Derivatives and liabilities in active markets or inputs that are observable for the asset or liability, either directly or indirectly through market corroboration, for substantially the fullHedging - Embedded Derivatives, certain features of our preferred stock and long term of the financial instrument. Level 3 inputs are unobservable inputs based on the assumptions used to measure assets and liabilities at fair value. An asset or liability’s classification within the various levels is determined based on the lowest level input that is significant to the fair value measurement.
Our financial instruments that are subject to fair value disclosure consist of cash and cash equivalents, accounts receivable, accounts payable, derivatives, and long-term debt. As of June 30, 2022, the carrying values of these financial instruments approximated fair value.
Derivative Financial Instruments
Certain featuresdebt were bifurcated and accounted for separately from the Series B Preferred Stock, which was redeemed in March 2021. The following feature was recorded as a derivative.derivatives separately.
•Warrants. In conjunction with our placement of the Series B Preferred Stock in December 2019,Term Loan Amendment, we issued detachable warrants to purchase up to 1.51.0 million shares of our commoncomment stock at an exercise price of $0.01 per share (the “2019“2023 Warrants”), which. The 2023 Warrants are exercisable, in full or in part, at any time prior to December 11, 2026, at an exercise priceMarch 3, 2033. The 2023 Warrants include anti-dilution adjustments in the event of $11.49 per share.certain future equity issuances, stock splits, stock dividends, combinations or similar events. In addition, we are obligated to issue 1.0 million warrants in the second quarter of 2023, subject to a contingency that expires June 30, 2023. The contingently issuable warrants would have the same terms and conditions as the 2023 Warrants.
Certain features were bifurcated and accounted for separately fromIn conjunction with our placement of the Series D Preferred Stock, that waswe issued onthe 2021 Warrants to purchase up to 1.9 million shares of our common stock. The 2021 Warrants are exercisable, in full or in part, at any time prior to March 22, 2021. The following features were recorded as derivatives.2027, at an
•
Change-in-control put feature.
exercise price of $0.01 per share, subject to anti-dilution adjustments in the event of certain future equity issuances, stock splits, stock dividends, combinations or similar events.
The Series D Preferred Stock includes a put feature that allows the holder to redeem the Series D Preferred Stock upon a change in control at the greater of 1) the liquidation preference plus accrued dividends or 2) 140% of the liquidation preference. The put feature is considered a redemption right at a premium and is not clearly and closely related to the debt host.
•Warrants.In conjunction with our placement of the Series DB Preferred Stock, we issued detachable warrants to purchase up to 1.91.5 million shares of our common stock.stock at an exercise price of $11.49 per share (the “2019 Warrants”). The 20212019 Warrants, are exercisable, in full or in part, at any time prior to March 22, 2027, at an exercise price of $0.01 per share,December 11, 2026 and are subject to anti-dilution adjustments in the event of certain future equitybelow market issuances, stock splits, stock dividends, combinations or similar events.
The following tables show the liabilities measured at fair value for the Preferred Stock derivatives as of June 30, 2022 and December 31, 2021.
| | | | | | | | | | | | | | | | | |
| Fair Value Measurements as of June 30, 2022 |
Description | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) |
| | | | | |
Derivative liability - other non-current liabilities | 4,788 | | | — | | | 199 | |
| | | | | |
| | | | | | | | | | | | | | | | | |
| Fair Value Measurements as of December 31, 2021 |
Description | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) |
| | | | | |
Derivative liability - other non-current liabilities | 7,771 | | | — | | | 453 | |
| | | | | |
The following table presents the change in the Preferred Stockliability balance of the embedded derivatives during the sixthree months ended June 30, 2022.March 31, 2023.
| | | | | |
| Six Months Ended June 30,Balance as of December 31, 2022 |
Beginning balance | $ | 8,2242,959 | |
Issuances | 2,712 | |
Change in fair value (1) | (3,237)(2,009) | |
| |
| |
Ending balanceBalance as of March 31, 2023 | $ | 4,9873,662 | |
(1) Changes in the fair value are recognized in the “Other expense (income),income, net” line in the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss).
The following tables show the fair values of the embedded derivatives within the fair value of the change-in-control put feature utilizes unobservable inputs based on the Company’s assessment of the probability of a change-in-control event occurring in a future period. The probability of a change-in-control event ranged from 3% to 10% as of June 30, 2022.hierarchy.
| | | | | | | | | | | | | | | | | |
| |
March 31, 2023 | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) |
| | | | | |
Derivative liability - other non-current liabilities | 3,055 | | | — | | | 607 | |
| | | | | |
| | | | | | | | | | | | | | | | | |
| |
December 31, 2022 | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) |
| | | | | |
Derivative liability - other non-current liabilities | 2,831 | | | — | | | 128 | |
| | | | | |
The fair value of the 2019 Warrants is determined using a valuation model that utilizes unobservable inputs to determine the probability that the 2019 Warrants will remain outstanding for future periods. The probabilities resulted in a weighted average term of 2.9 years as of June 30, 2022,March 31, 2023 and 3.6 years as of December 31, 2021.2022.
The fair value of the 2021 Warrants and 2023 Warrants is determined using the observable market price of a share of our common stock, less the $0.01 per share exercise price.
The fair value of the change-in-control put feature utilizes unobservable inputs based on the Company’s assessment of the probability of a change-in-control event occurring in a future period. The probability of a change-in-control event ranged from 3% to 10% as of March 31, 2023 and December 31, 2022.
Interest Rate Swaps
We manage our exposure to fluctuations in interest rates using a mix of fixed and variable rate debt. We utilize fixed-rate interest rate swap agreements to change the variable interest rate to a fixed rate on a portion of our variable rate debt.Swap
On July 22, 2021, we entered into a fixed-rate interest rate swap agreement to change the LIBOR-based component of the interest rate on a portion of our variable rate debt to a fixed rate of 1.291% (the “2021 Swap”). The 2021 Swap hashad a notional amount of $60.0 million and a maturity date of July 31, 2024. The objective of the 2021 Swap is to eliminate the variability of cash flows in interest payments on the first $60.0 million of variable rate debt attributable to changes in benchmark one-month LIBOR interest rates. The hedged risk is the interest rate risk exposure to changes in interest payments, attributable to changes in benchmark one-month LIBOR interest rates over the interest rate swap term. The changes in cash flows of the interest rate swap are expected to exactly offset changes in cash flows of the variable rate debt. We designated the 2021 Swap as a cash flow hedge at inception. Cashinception with cash settlements recognized in interest expense. During the first quarter of 2023, we terminated the 2021 Swap are recognized in interest expense.
On February 8, 2019, we entered into a $700.0and received cash proceeds of $2.5 million fixed-rate interest rate swap agreement that changedwhich was the LIBOR-based portion of the interest rate on a portion of our variable rate debt to a fixed rate of 2.4575% (the “2019 Swap”). On March 22, 2021, we terminated the 2019 Swap with a $13.7 million cash payment in connection with the extinguishment of our previously outstanding long-term variable-rate debt. The 2019 Swap was designated as a cash flow hedge at inception. However, in the fourth quarter of 2020, the 2019 Swap no longer qualified as an effective hedge, and subsequent changes in fair value of the 20192021 Swap. Since the 2021 Swap werewas an effective cash flow hedge and the forecasted interest payments remaining probable of occurring, the gain will be recognized in earnings. Amounts recognized in earnings relatedas a reduction to interest expense through the 2019 Swap are recorded in the “Loss on interest rate swap” line on the Condensed Consolidated Statementsoriginal maturity date of Operations and Comprehensive Income (Loss) except that cash settlements prior to termination are recognized in “Derivative payments on interest rate swap.” Cash settlements during 2021 are presented in investing activities on the Condensed Consolidated StatementsJuly 31, 2024.
The following table presents the effecteffects of the interest rate swapsswap on the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss).
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
Interest expense (1) | $ | 38 | | | $ | — | | | $ | 82 | | | $ | — | |
Derivative payments on interest rate swap (2) | — | | | — | | | — | | | 1,717 | |
Loss on interest rate swap (2) | — | | | — | | | — | | | 2,033 | |
| | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | |
| 2023 | | 2022 | | | | |
Interest expense (benefit) (1) | $ | (468) | | | $ | 44 | | | | | |
| | | | | | | |
| | | | | | | |
(1) Represents settlements on the interest rate swaps while the hedges are effective.
(2) Represents settlements and changes in fair value on the 2019 Swap.swap.
The following tables presenttable shows the assets and liabilities measured at fair value on a recurring basis forof the interest rate swaps as of June 30, 2022 and December 31, 2021.swap within the fair value hierarchy.
| | | | | | | | | | | | | | | | | |
| Fair Value Measurements as of June 30,December 31, 2022 |
Description | Quoted Prices in Active Markets for Identical Assets (Level (Level 1) | | Significant Other Observable Inputs (Level (Level 2) | | Significant Unobservable Inputs (Level 3) |
Derivative asset - other current assets | $ | — | | | $ | 1,0782,130 | | | $ | — | |
Derivative asset - other non-current assets | $ | — | | | 1,133$ | 1,023 | | | $ | — | |
| | | | | |
| | | | | |
Total | $ | — | | | $ | 2,211 | | | $ | — | |
| | | | | | | | | | | | | | | | | |
| Fair Value Measurements as of December 31, 2021 |
Description | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) |
| | | | | |
Derivative asset - other non-current assets | $ | — | | | $ | 284 | | | $ | — | |
Derivative liability - other current liabilities | — | | | (129) | | | — | |
| | | | | |
Total | $ | — | | | $ | 1553,153 | | | $ | — | |
The inputs for determining fair value of the interest rate swaps are classified as Level 2 inputs. Level 2 fair valueswap is based on estimates using standard pricing models. Thesecalculated through standard pricing models which use inputs which are derived from or corroborated by observable market data such as interest rate yield curves, index forward curves, discount curves, and volatility surfaces. CounterpartyThe counterparty to thisthese derivative contractcontracts is a highly rated financial institution which we believe carries only a minimal risk of nonperformance.
Fixed Rate DebtFair Value Disclosures
Our financial instruments that are subject to fair value disclosure consist of cash and cash equivalents, accounts receivable, accounts payable, and debt. As of March 31, 2023 and December 31, 2022, the carrying values of these financial instruments, except for debt, approximated fair value. The fair value of our outstanding fixed-rate debt included in the “International lineswas $156.0 million and $155.2 million, with a carrying amount of credit$152.5 million and other loans” line item within Note 7 to these Notes to Condensed Consolidated Financial Statements approximated carrying value$152.7 million, as of June 30, 2022March 31, 2023 and December 31, 2021,2022, respectively. TheseThe fair values represent Level 2 under the three-tier hierarchy described above. The carrying value of this fixed-rate debt was $9.3 millioncalculated by discounting the future cash flows to its present value using prevailing market interest rates for debt with similar creditworthiness, terms and $10.9 million as of June 30, 2022maturities and December 31, 2021, respectively.
is considered a Level 3 fair value measurement.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Management’s Discussion and Analysis of Financial Condition and Results of Operations is intended to help the reader understand the results of operations and financial condition of NN, Inc. and its consolidated subsidiaries for the three months ended March 31, 2023. The financial information as of March 31, 2023, should be read in conjunction with the consolidated financial statements for the year ended December 31, 2022, contained in our Annual Report on Form 10-K for the year ended December 31, 2022, and the Condensed Consolidated Financial Statements included in this Quarterly Report.
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 to NN, Inc. and its subsidiaries.
Forward-Looking Statements
This Quarterly Report contains forward-looking statements thatwithin the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended ( the “Exchange Act”), which are made pursuantintended to be covered by the safe harbor provisions of the Private Securities Litigation Reform Act of 1995.1995 and include this statement for purposes of complying with these safe harbor provisions. 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 to NN, Inc.,the Company, 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 pandemics, epidemics, disease outbreaks and other public health crises, including 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 of the United States; inflationary pressures and changes in the cost or availability of materials, supply chain shortages and disruptions, and the availability of labor; 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; our ability to hire or retain key personnel; 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; and cyber liability or potential liability for breaches of our or our service providers’ information technology systems or business operations disruptions;disruptions. Any forward-looking statement speaks only as of the date of this Quarterly Report, and other risk factors and cautionary statements listed from time-to-time in our periodic reports filed with the Securities and Exchange Commission. We disclaim anyCompany undertakes no obligation to publicly update or review any such factors or to publicly announce theforward-looking statement, whether as a result of any revisionsnew information, future developments or otherwise, except as required by law. New risks and uncertainties may emerge from time to any oftime, and it is not possible for the Company to predict their occurrence or how they will affect the Company. The Company qualifies all forward-looking statements included herein or therein to reflect future events or developments.by these cautionary statements.
For additional information concerning such risk factors and cautionary statements, please see the sections titled “Item 1A. Risk Factors” in the 20212022 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 sixthree months ended June 30, 2022,March 31, 2023, that management believes are important to provide an understanding of the business and results of operations or that may influence operations in the future.
GlobalMacroeconomic Conditions
We continue to monitor the ongoing impacts of current macroeconomic and geopolitical events, including changing conditions from the COVID-19 Pandemicpandemic, the ongoing Russia-Ukraine conflict, inflationary cost pressures, rising interest rates, supply chain disruptions, and labor shortages.
The COVID-19 pandemic continuesand governmental responses thereto, including COVID-19 lockdowns in China, continue to impact our business operations and our customers' and suppliers' ability to operate at normal levels. Disruptions in normal operating
levels continue to create supply chain disruptions and inflationary cost pressures within our end-markets. We anticipate that supply chain constraints and the inflationary environment, will continue during 2022.
The spread of COVID-19 and the responses thereto have created, and could continue to create, a disruption in the manufacturing, delivery, and overall supply chain of automobile manufacturers and suppliers, as well as disruption within the power industry. During the first half of 2022, production continued 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 in China 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, will continue throughout 2023.
The Russia-Ukraine conflict also continues to create volatility in global financial and current geopolitical instabilityenergy markets, creating energy and supply chain shortages, which has increased our manufacturing costs, particularly labor and materials, in 2022 and is expectedadded to continue into future periods.
We have undertaken a number of permanent and temporary actions to manage the evolving situation.inflationary pressures experienced by the global economy. We continue to streamline facilities and implement cost savings initiatives. Capital expenditures and travel costs remain at relatively low levels.
We are focusedactively work with our suppliers to minimize impacts of supply shortages on our manufacturing capabilities. Although our business has not been materially impacted by the health and safetyongoing Russia-Ukraine conflict as of the date of this filing, we cannot reasonably predict the extent to which our operations, or those of our employees, customers andor suppliers, and have 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 fromwill be impacted in the Centers for Disease Control and Prevention andfuture, or the World Health Organization. The health and safety of our employees remains our top priority. While we are actively promoting vaccination among our employees, vaccination statusways in which the conflict may affect workforce availability ranging from absences for vaccinations, booster shots, and recovery from side-effects. We have implemented training and recruiting programs to address labor shortages, but, significant workforce availability challenges could have a material effect on our business operations, financial results, liquidity, and financial position.
COVID-19 and its impacts are unprecedented and continuously evolving, and the long-term impacts toimpact our business, financial condition, results of operations and cash flowsflows.
The U.S. economy is experiencing broad and rapid inflation and rising interest rates, as well as supply issues in materials, services, and labor due to economic policy, the COVID-19 pandemic and, more recently, the Russia-Ukraine conflict. These impacts are still uncertain.likely to persist in 2023 and beyond. We cannot predict the impact on the Company’s end-markets or input costs nor the ability of the Company to recover cost increases through pricing.
Footprint Optimization
In 2022, we took specific steps to consolidate our footprint by exiting less profitable end markets and focusing our strategic growth initiatives in markets where we believe we will be able to maximize profitability. We made the decision to close our Taunton and Irvine sites, effectively exiting the Aerospace and Defense business for precision machined components, with both sites expected to close in the first half of 2023. We also expect to close three Mobile Solutions sites in 2023, which will further reduce operating costs in future years. Additionally, we plan to reduce indirect labor costs to decrease fixed manufacturing costs.
Three Months Ended June 30, 2022March 31, 2023 compared to the Three Months Ended June 30, 2021March 31, 2022
Consolidated Results
| | | Three Months Ended June 30, | | Three Months Ended March 31, |
| | 2022 | | 2021 | | $ Change | | 2023 | | 2022 | | $ Change |
Net sales | Net sales | $ | 125,362 | | | $ | 123,157 | | | $ | 2,205 | | | Net sales | $ | 127,088 | | | $ | 128,067 | | | $ | (979) | | |
Organic growth | | $ | 2,700 | | |
Foreign exchange effects | | $ | (495) | | |
| Cost of sales (exclusive of depreciation and amortization shown separately below) | Cost of sales (exclusive of depreciation and amortization shown separately below) | 103,889 | | | 99,797 | | | $ | 4,092 | | | Cost of sales (exclusive of depreciation and amortization shown separately below) | 108,421 | | | 104,578 | | | $ | 3,843 | | |
Selling, general, and administrative expense | Selling, general, and administrative expense | 14,794 | | | 13,585 | | | 1,209 | | | Selling, general, and administrative expense | 13,165 | | | 13,454 | | | (289) | | |
| Depreciation and amortization | Depreciation and amortization | 11,340 | | | 11,687 | | | (347) | | | Depreciation and amortization | 11,516 | | | 11,429 | | | 87 | | |
| Other operating income, net | (147) | | | (324) | | | 177 | | | |
Other operating expense, net | | Other operating expense, net | 1,061 | | | 2,026 | | | (965) | | |
Loss from operations | Loss from operations | (4,514) | | | (1,588) | | | (2,926) | | | Loss from operations | (7,075) | | | (3,420) | | | (3,655) | | |
Interest expense | Interest expense | 3,488 | | | 3,573 | | | (85) | | | Interest expense | 4,288 | | | 3,439 | | | 849 | | |
| Other expense (income), net | (67) | | | 1,680 | | | (1,747) | | | |
Loss before benefit (provision) for income taxes and share of net income from joint venture | (7,935) | | | (6,841) | | | (1,094) | | | |
Benefit (provision) for income taxes | (1,051) | | | 231 | | | (1,282) | | | |
Other income, net | | Other income, net | (2,208) | | | (2,996) | | | 788 | | |
Loss before provision for income taxes and share of net income from joint venture | | Loss before provision for income taxes and share of net income from joint venture | (9,155) | | | (3,863) | | | (5,292) | | |
Provision for income taxes | | Provision for income taxes | (1,301) | | | (1,531) | | | 230 | | |
Share of net income from joint venture | Share of net income from joint venture | 419 | | | 1,219 | | | (800) | | | Share of net income from joint venture | 281 | | | 2,092 | | | (1,811) | | |
| Net loss | Net loss | $ | (8,567) | | | $ | (5,391) | | | $ | (3,176) | | | Net loss | $ | (10,175) | | | $ | (3,302) | | | $ | (6,873) | | |
Net Sales. Net sales increaseddecreased by $2.2$1.0 million, or 1.8%(0.8)%, during the three months ended June 30, 2022,March 31, 2023, compared to the three months ended June 30, 2021,March 31, 2022, 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 lower demand in Mobile Solutions which was impacted by the war in Ukraine, COVID disruptions in China, continued supply chain disruptionsreduced volume and unfavorable foreign exchange effects of $0.5 million.$1.4 million, partially offset by higher customer pricing and premium pricing on a certain customer project.
Cost of Sales. Cost of sales increased by $4.1$3.8 million, or 4.1%3.7%, during the three months ended June 30, 2022,March 31, 2023, compared to the three months ended June 30, 2021,March 31, 2022, primarily due to inflationaryhigher material and labor costs due to inefficient manufacturing processes associated with product launches, partially offset by lower sales volume.volume and favorable foreign exchange effects. In addition, the prior year cost of sales benefited from favorable overhead absorption.
Selling, General, and Administrative Expense. Selling, general, and administrative expense increaseddecreased by $1.2$0.3 million during the three months ended June 30, 2022,March 31, 2023, compared to the three months ended June 30, 2021,March 31, 2022, primarily due to legal fees related to litigation, higherlower stock compensation expense andpartially offset by higher professional fees. These increases were partially offset by the reduction in severance and retention costs incurred in the prior year.
Interest Expense.Other Operating Expense, Net. InterestOther operating expense, net decreased by $0.1$1.0 million during the three months ended June 30, 2022,March 31, 2023, compared to the three months ended June 30, 2021,March 31, 2022, primarily due to a legal settlement reached during the first quarter of 2022, partially offset by losses on sales of machinery and equipment during the first quarter of 2023.
Interest Expense. Interest expense increased by $0.8 million during the three months ended March 31, 2023, compared to the three months ended March 31, 2022, primarily due to higher interest rates, partially offset by favorable interest rate swap settlements and a higher amount of interest expense that was capitalized in the current quarter compared with the secondfirst quarter of 2021.2022.
| | | Three Months Ended June 30, | | Three Months Ended March 31, |
| | 2022 | | 2021 | | 2023 | | 2022 |
Interest on debt | Interest on debt | $ | 3,109 | | | $ | 3,110 | | Interest on debt | $ | 4,619 | | | $ | 3,071 | |
Interest rate swap settlements | Interest rate swap settlements | 38 | | | — | | Interest rate swap settlements | (468) | | | 44 | |
Amortization of debt issuance costs and discount | Amortization of debt issuance costs and discount | 330 | | | 313 | | Amortization of debt issuance costs and discount | 353 | | | 332 | |
Capitalized interest | Capitalized interest | (175) | | | (80) | | Capitalized interest | (330) | | | (125) | |
Other | Other | 186 | | | 230 | | Other | 114 | | | 117 | |
Total interest expense | Total interest expense | $ | 3,488 | | | $ | 3,573 | | Total interest expense | $ | 4,288 | | | $ | 3,439 | |
Other Expense,Income, Net. Other expense (income),income, net changed favorablydecreased by $1.7$0.8 million during the three months ended June 30, 2022,March 31, 2023, compared to the three months ended June 30, 2021,March 31, 2022, due to lower noncash derivative mark-to-market gains during 2022 and the impact of a litigation settlement reachedrecognized during the secondcurrent quarter compared with the first quarter of 2021. These impacts were partially offset by unfavorable foreign exchange effects associated with intercompany borrowings.2022.
Benefit (Provision) For Income Taxes. Our effective tax rate was (13.2)(14.2)% for the three months ended June 30, 2022,March 31, 2023, compared to 3.4%(39.6)% for the three months ended June 30, 2021.March 31, 2022. The rate for the three months ended June 30, 2022March 31, 2023 was unfavorably impacted due to the accrual of tax on non-permanently reinvested unremitted earnings of foreign subsidiaries and 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. The effective tax rate was unfavorably impacted by the U.S. tax on the earnings of foreign subsidiaries under the global intangible low-taxed income regime.
Share of Net Income from Joint Venture. Share of net income from the JV decreased during the three months ended June 30, 2022,March 31, 2023, compared to the three months ended June 30, 2021,March 31, 2022, primarily due to decreased profits resulting from lower sales and inflationaryhigher operating costs in the current quarter. The JV, in which we own a 49% investment, recognized net sales of $22.9$20.6 million and $22.3$26.5 million for the three months ended June 30,March 31, 2023 and 2022, and 2021, respectively.
Results by Segment
MOBILE SOLUTIONS
| | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, |
| 2022 | | 2021 | | $ Change |
Net sales | $ | 73,350 | | | $ | 73,886 | | | $ | (536) | | |
Organic decline | | | | | | $ | (75) | |
Foreign exchange effects | | | | | | (461) | |
Income from operations | $ | 1,729 | | | $ | 2,509 | | | $ | (780) | | |
| | | | | | | | | | | | | | | | | | |
| | | | | | |
| Three Months Ended March 31, |
| 2023 | | 2022 | | $ Change |
Net sales | $ | 78,018 | | | $ | 76,070 | | | $ | 1,948 | | |
| | | | | | |
| | | | | | |
Income (loss) from operations | $ | (3,319) | | | $ | 1,969 | | | $ | (5,288) | | |
Net sales decreasedincreased by $0.5$1.9 million, or (0.7)%2.6%, during the three months ended June 30, 2022,March 31, 2023, compared to the three months ended June 30, 2021,March 31, 2022, primarily due to higher customer pricing, partially offset by lower sales of diesel components due to lower European demand which is impacted by the war in Ukraine, pandemic interruptions in China, lost sales associated with certain fuel systems reaching end of production,volume and unfavorable foreign exchange effects of $0.5$1.7 million. These unfavorable impacts were partially offset by increased pricing to recover certain inflationary costs and underutilized fixed costs caused by lower-than-expected customer demand.
Income (loss) from operations decreasedchanged unfavorably by $0.8$5.3 million during the three months ended June 30, 2022,March 31, 2023, compared to the same period in the prior year, primarily due to lower sales volume, production challenges in two facilities associated with new business launches, and inflationary costs not fully recovered in customer pricing.
POWER SOLUTIONS
| | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, |
| 2023 | | 2022 | | $ Change |
Net sales | $ | 49,072 | | | $ | 52,011 | | | $ | (2,939) | | |
| | | | | | |
| | | | | | |
Income from operations | $ | 1,747 | | | $ | 364 | | | $ | 1,383 | | |
Net sales decreased by $2.9 million, or (5.7)%, during the three months ended March 31, 2023 compared to the three months ended March 31, 2022. The decrease in sales was primarily due to lower volume, partially offset by premium pricing on a certain customer project, and variable cost inefficiencies associated with supply chain interruptions, uneven customer ordering patterns, and labor constraints caused by pandemic interruptions.favorable foreign exchange effects of $0.2 million.
POWER SOLUTIONS
| | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, |
| 2022 | | 2021 | | $ Change |
Net sales | $ | 52,049 | | | $ | 49,271 | | | $ | 2,778 | | |
Organic growth | | | | | | $ | 2,812 | |
Foreign exchange effects | | | | | | (34) | |
Income from operations | $ | 1,430 | | | $ | 2,875 | | | $ | (1,445) | | |
Net sales increased by $2.8 million, or 5.6%, during the three months ended June 30, 2022 compared to the three months ended June 30, 2021. The increase in sales was the result of increased electric component sales, which were up 15.6% compared with the second quarter of 2021, primarily due to higher customer pricing to recover inflationary costs and improved volume, offset by lower sales to automotive and aerospace and defense customers.
Income from operations decreasedincreased by $1.4 million during the three months ended June 30, 2022March 31, 2023 compared to the same period in the prior year, primarily due to inflationary costs which were not fully recovered frompremium pricing variable cost inefficiencies associated with supply chain interruptions and unevenon a certain customer ordering patterns.
Six Months Ended June 30, 2022, compared to the Six Months Ended June 30, 2021
Consolidated Results
| | | | | | | | | | | | | | | | | | | | |
| Six Months Ended June 30, |
| 2022 | | 2021 | | $ Change |
Net sales | $ | 253,429 | | | $ | 249,961 | | | $ | 3,468 | | |
Organic growth | | | | | | $ | 3,804 | |
Foreign exchange effects | | | | | | $ | (336) | |
Cost of sales (exclusive of depreciation and amortization shown separately below) | 208,467 | | | 199,485 | | | $ | 8,982 | | |
Selling, general, and administrative expense | 28,248 | | | 28,160 | | | 88 | | |
| | | | | | |
Depreciation and amortization | 22,769 | | | 23,255 | | | (486) | | |
| | | | | | |
| | | | | | |
Other operating expense (income), net | 1,879 | | | (329) | | | 2,208 | | |
Loss from operations | (7,934) | | | (610) | | | (7,324) | | |
Interest expense | 6,927 | | | 5,597 | | | 1,330 | | |
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 expense (income), net | (3,063) | | | 1,558 | | | (4,621) | | |
Loss before benefit (provision) for income taxes and share of net income from joint venture | (11,798) | | | (13,905) | | | 2,107 | | |
Benefit (provision) for income taxes | (2,582) | | | 987 | | | (3,569) | | |
Share of net income from joint venture | 2,511 | | | 2,614 | | | (103) | | |
| | | | | | |
| | | | | | |
Net loss | $ | (11,869) | | | $ | (10,304) | | | $ | (1,565) | | |
Net Sales. Net sales increased by $3.5 million, or 1.4%, during the six months ended June 30, 2022, compared to the six months ended June 30, 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 lower demand in Mobile Solutions which was impacted by the war in Ukraine, COVID disruptions in China, continued supply chain disruptions and unfavorable foreign exchange effects $0.3 million.
Cost of Sales. Cost of sales increased by $9.0 million, or 4.5%, during the six months ended June 30, 2022, compared to the six months ended June 30, 2021, primarily due to inflationary costs, partially offset by lower sales volume.
Selling, General, and Administrative Expense. Selling, general, and administrative expense increased by $0.1 million during the six months ended June 30, 2022, compared to the six months ended June 30, 2021, primarily due to legal fees related to litigation, higher stock compensation expense and higher professional fees. These increases were partially offset by the reduction in severance and retention costs incurredproject in the prior year.
Other Operating Expense (Income), Net. Other operating expense (income), net changed unfavorably by $2.2 million primarily due to2023 and a legal settlement reached during the first quarter of 2022.
Interest Expense. Interest expense increased These increases were partially offset by $1.3 million during the six months ended June 30, 2022, compared to the six months ended June 30, 2021, primarily due to higher interest rateslower sales volume and a larger average debt balance as a result of the credit facility and preferred stock refinancean unfavorable change in overhead absorption during the first quarter of 2021. | | | | | | | | | | | | | | |
| | Six Months Ended June 30, |
| | 2022 | | 2021 |
Interest on debt | | $ | 6,180 | | | $ | 4,549 | |
Interest rate swap settlements | | 82 | | | — | |
Amortization of debt issuance costs and discount | | 662 | | | 718 | |
Capitalized interest | | (300) | | | (111) | |
Other | | 303 | | | 441 | |
Total interest expense | | $ | 6,927 | | | $ | 5,597 | |
Loss on Extinguishment of Debt and Write-off of Debt Issuance Costs. We recognized $2.4 million in2023 compared to the first quarter of 2021 for the write-off of unamortized debt issuance costs associated with the credit facility that was terminated in March 2021.
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 $2.0 million loss in the first quarter of 2021 related to the termination of the previous interest rate swap in March 2021.
Other Expense (Income), Net. Other expense (income), net changed favorably by $4.6 million during the six months ended June 30, 2022, compared to the six months ended June 30, 2021, due to noncash derivative mark-to-market gains during 2022 and the impact of a litigation settlement reached during the second quarter of 2021.
Benefit (Provision) for Income Taxes. Our effective tax rate was (21.9)% for the six months ended June 30, 2022, compared to 7.1% for the six months ended June 30, 2021. The rate for the six months ended June 30, 2022 was unfavorably impacted by the accrual of tax on non-permanently reinvested unremitted earnings of foreign subsidiaries and 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. The rate for the six months ended June 30, 2021 was favorably impacted by the change in assertion and reduction in the accrual of tax on non-permanently reinvested unremitted earnings of foreign subsidiaries.
Share of Net Income from Joint Venture. Share of net income from the JV decreased during the six months ended June 30, 2022, compared to the six months ended June 30, 2021, primarily due to decreased profits resulting from inflationary costs partially offset by higher sales volume. The JV, in which we own a 49% investment, recognized net sales of $49.4 million and $45.7 million for the six months ended June 30, 2022 and 2021, respectively.
Results by Segment
MOBILE SOLUTIONS
| | | | | | | | | | | | | | | | | | | | |
| Six Months Ended June 30, |
| 2022 | | 2021 | | $ Change |
Net sales | $ | 149,420 | | | $ | 151,662 | | | $ | (2,242) | | |
Organic decline | | | | | | $ | (1,940) | |
Foreign exchange effects | | | | | | (302) | |
Income from operations | $ | 3,698 | | | $ | 8,599 | | | $ | (4,901) | | |
Net sales decreased by $2.2 million, or (1.5)%, during the six months ended June 30, 2022, compared to the six months ended June 30, 2021, primarily due to lower sales of diesel components due to lower European demand which was impacted by the war in Ukraine, pandemic interruptions in China, lost sales associated with certain fuel systems reaching end of production, and unfavorable foreign exchange effects of $0.3 million. These unfavorable impacts were partially offset by increased pricing to recover certain inflationary costs and underutilized fixed costs caused by lower-than-expected customer demand.
Income from operations decreased by $4.9 million during the six months ended June 30, 2022 compared to the same period in the prior year, primarily due to inflationary costs not fully recovered in customer pricing and variable cost inefficiencies
associated with supply chain interruptions, uneven customer ordering patterns, and labor constraints caused by pandemic interruptions.
POWER SOLUTIONS
| | | | | | | | | | | | | | | | | | | | |
| Six Months Ended June 30, |
| 2022 | | 2021 | | $ Change |
Net sales | $ | 104,060 | | | $ | 98,346 | | | $ | 5,714 | | |
Organic growth | | | | | | $ | 5,748 | |
Foreign exchange effects | | | | | | (34) | |
Income from operations | $ | 1,794 | | | $ | 5,307 | | | $ | (3,513) | | |
Net sales increased by $5.7 million, or 5.8%, during the six months ended June 30, 2022, compared to the six months ended June 30, 2021, primarily due to higher customer pricing to recover inflationary costs.
Income from operations decreased by $3.5 million during the six months ended June 30, 2022 compared to the same period in the prior year, primarily due to a $1.8 million litigation settlement to settle claims from 2016, inflationary costs which were not fully recovered from pricing, variable cost inefficiencies associated with supply chain interruptions, uneven customer ordering patterns, and labor constraints caused by pandemic interruptions.2022.
Changes in Financial Condition from December 31, 20212022 to June 30, 2022March 31, 2023
Overview
From December 31, 20212022 to June 30, 2022,March 31, 2023, total assets decreasedincreased by $5.9$1.1 million primarily due to increases in accounts receivable, inventory and prepaid assets, partially offset by normal depreciation and amortization of fixed assets lease right-of-use assets, and intangible assets. These decreases were partially offset by increases in accounts receivable and inventories during the six months ended June 30, 2022. The increase in accounts receivable is due to higher sales during the end of the current quarter compared with the end of the fourth quarter of 2021. The value of inventory increased due to higher material costs as well as higher quantities to maintain customer safety stock due to ongoing supply chain interruptions, especially in China.2022.
From December 31, 20212022 to June 30, 2022,March 31, 2023, total liabilities increased by $6.7$9.9 million, primarily due to increases in accounts payable, attributed to higher inventory balances at June 30, 2022.accrued salaries and benefits and other current liabilities.
Working capital, which consists of current assets less current liabilities, was $122.3$109.2 million as of June 30, 2022 andMarch 31, 2023, compared to $112.9 million as of December 31, 2021.2022. The balance ofdecrease in working capital remained constant as an increasewas primarily due to increases in accounts receivablepayable and inventory wasother current liabilities, partially offset by an increase in accounts payable and other current liabilities.receivable.
Cash Flows
Cash used inprovided by operations was $2.5$0.2 million for the sixthree months ended June 30, 2022,March 31, 2023, compared with cash providedused by operations of $5.9$5.2 million for the sixthree months ended June 30, 2021.March 31, 2022. 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 2021.2022.
Cash used in investing activities decreased by $0.2 million primarily due to higher expenditures for property, plant and equipment in the first quarter of 2023, partially offset by the proceeds from the sale of equipment at the Irvine facility.
Cash provided by financing activities was $9.3$1.3 million for the sixthree months ended June 30, 2022,March 31, 2023, compared with cash used in investingby financing activities of $30.2$1.5 million for the sixthree months ended June 30, 2021.March 31, 2022. The difference was primarily due to cash paid to settle the interest rate swapproceeds from new international loans for working capital needs in the first quarter of 2021.
Cash used in financing activities was $1.0 million for the six months ended June 30, 2022, compared with cash provided by financing activities of $6.9 million for the six months ended June 30, 2021. The difference was primarily due to the debt and preferred stock refinancing in the first quarter of 2021.2023.
Liquidity and Capital Resources
Credit Facilities
The principal amount outstanding under our Term Loan Facility as of June 30, 2022,March 31, 2023, was $148.1$147.0 million, without regard to unamortized debt issuance costs and discount. As of June 30, 2022,March 31, 2023, we had $36.9$32.5 million available for future borrowings under the ABL Facility. This amount of borrowing capacity is net of $2.0$1.0 million of outstanding borrowings and $11.1$10.9 million of outstanding letters of credit at June 30, 2022,March 31, 2023, 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 of September 22, 2026. OutstandingEffective March 31, 2023, outstanding borrowings under the Term Loan Facility bear interest at either 1) one-month, LIBOR (subjectthree-month, or six-month Adjusted SOFR, subject to a 1.000% floor)floor, plus an applicable margin of 6.875% or 2) the greater of various benchmark
rates plus an applicable margin of 5.875%. Beginning with the second quarter of 2023, interest is increased on a paid-in-kind basis at a rate between 0.50% and 2.00%, dependent on the Company’s leverage ratio and whether the Company completes a qualifying junior equity raise by June 30, 2023. Based on the interest rate in effect at June 30, 2022, and the fixed rate on the 2021 interest rate swap,March 31, 2023, annual cash interest payments would be approximately $12.4$17.2 million.
The ABL Facility bears interest on a variable borrowing rate structure with borrowings bearing interest at one-month LIBORbased on either 1) Adjusted SOFR plus an applicable margin of 1.75%. The interest or 2.00%, depending on availability, or 2) the greater of the federal funds rate in effect at June 30, 2022, was 3.00%.or prime, plus an applicable margin of 0.75% or 1.00%, depending on availability. 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 June 30, 2022.March 31, 2023. Both credit facilities allow for optional expansion of available borrowings, subject to certain terms and conditions.
Accounts Receivable Sales Programs
We participate in programs established by our customers which allows us to sell certain receivables from that customer on a non-recourse basis to a third-party financial institution. In exchange, we receive payment on the receivables, less a discount, sooner than under the customary credit terms we have extended to that customer. These programs allow us to improve working capital and cash flows. Our access to these programs is dependent on our customers ongoing agreements with the third-parties. Our participation in these programs is based on our specific cash needs throughout the year, the discount charged to receive payment earlier, the length of the payment terms with our customers, as well being subject to limits in our ABL Facility and Term Loan Facility agreements.
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 20212022 Annual Report, including those policies as discussed in Note 1 to the Notes to Consolidated Financial Statements included in the 20212022 Annual Report. There have been no material changes to these policies during the sixthree months ended June 30, 2022.
March 31, 2023.
Item 3.Quantitative and Qualitative Disclosures About Market Risk
We are exposed to changes in financial market conditions in the normal course of business due to use of certain financial instruments as well as transacting business in various foreign currencies. To mitigate the exposure to these market risks, we have established policies, procedures, and internal processes governing the management of financial market risks. We are exposed to changes in interest rates primarily as a result of borrowing activities.
Interest Rate Risk
Our policy is to manage interest expense using a mixture of fixed and variable rate debt. To manage this mixture of fixed and variable rate debt effectively and mitigate interest rate risk, we may use interest rate swap agreements. The nature and amount of borrowings may vary as a result of future business requirements, market conditions, and other factors.
On July 22, 2021, we entered into a fixed-rate interest rate swap agreement to change the LIBOR-based component of the interest rate on a portion$60.0 million of our variable rate debt to a fixed rate of 1.291% (the “2021 Swap”). The 2021 Swap has a notional amount of $60.0 million and a maturity date of July 31, 2024. The objective of the 2021 Swap is to eliminate the variability of cash flows in interest payments onDuring the first $60.0 millionquarter of variable rate debt attributable to changes in benchmark one-month LIBOR interest rates. The hedged risk is the interest rate risk exposure to changes in interest payments, attributable to changes in benchmark one-month LIBOR interest rates over2023, we terminated the interest rate swap term. The changes inand received cash flowsproceeds of the interest rate swap are expected$2.5 million which was equal to exactly offset changes in cash flows of the variable rate debt. We designated the 2021 Swap as a cash flow hedge at inception. Cash settlements of the 2021 Swap are recognized in interest expense.
its fair value. Refer to Note 15 in the Notes to Condensed Consolidated Financial Statements included in this Quarterly Report for further discussion about the interest rate swap.
At June 30, 2022,March 31, 2023, we had $148.1$147.0 million of principal outstanding under the Term Loan Facility without regard to capitalized debt issuance costs. A one-percent increase in one-month LIBOR would have resulted in a net increase in interest expense of $0.9$1.5 million on an annualized basis due to the fact that the Term Loan Facility is subject to a LIBOR floor of 1.00% and one-month LIBOR was below the floor as of June 30, 2022.basis.
At June 30, 2022,March 31, 2023, using one-month LIBORAdjusted SOFR plus a 1.75%2.00% spread, the interest rate on the $2.0$1.0 million of outstanding borrowings under the ABL Facility was 3.00%6.89%.
Foreign Currency Risk
Translation of our operating cash flows denominated in foreign currencies is impacted by changes in foreign exchange rates. We participate in various third party and intercompany loans, payables, and receivables denominated in currencies other than the U.S. dollar. To help reduce exposure to foreign currency fluctuation, we have incurred debt in euros in the past. From time to time, we may use foreign currency derivatives to hedge currency exposures when these exposures meet certain discretionary levels. We did not hold a position in any foreign currency derivatives as of June 30, 2022.
Item 4. Controls and Procedures
Disclosure Controls and Procedures
Under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer, we evaluated the effectiveness of disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”))Act). Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of June 30, 2022,March 31, 2023, to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting (as defined in the Exchange Act Rules 13a-15(f) and 15d-15(f)) that occurred during the fiscal quarter ended June 30, 2022,March 31, 2023, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
As disclosed in Note 9 in the Notes to Condensed Consolidated Financial Statements included in this Quarterly Report, we are engaged in certain legal proceedings, and the disclosure set forth in Note 9 relating to legal proceedings is incorporated herein by reference.
Item 1A. Risk Factors
Except as noted below, there have been no material changes to the risk factors disclosed in the 20212022 Annual Report under Item 1A, “Risk Factors.”
Our internationalWe currently, and may in the future, have assets held at financial institutions that may exceed the insurance coverage offered by the Federal Deposit Insurance Corporation (“FDIC”), and the loss of such assets could have a severe negative affect on our operations and business, financial condition, and prospects may be adversely affectedliquidity.
On March 10, 2023, Silicon Valley Bank (“SVB”) was closed by the current military conflict between RussiaCalifornia Department of Financial Protection and Ukraine, otherInnovation, which appointed the FDIC as receiver. Similarly, on March 12, 2023, Signature Bank and Silvergate Capital Corp. were each swept into receivership. A statement by the Department of the Treasury, the Federal Reserve and the FDIC stated that all depositors of SVB would have access to all of their money after only one business day of closure, including funds held in uninsured deposit accounts. Although we do not have any funds deposited with SVB or Signature Bank, we currently have our cash and cash equivalents held in deposit in accounts at certain FDIC-insured financial institutions, some of which include amounts in excess of the insurance coverage offered by the FDIC. In the future, socialwe may maintain our cash and geopolitical instability and resulting domestic and foreign economic instability.
We are exposed to the risk of changescash equivalents at financial institutions in social, geopolitical, legal, and economic conditions. The global economy has been, and may continue to be, negatively impacted by Russia’s invasion of Ukraine. As a result of Russia’s invasion of Ukraine, the United States in amounts that may be in excess of the European Union,FDIC insurance limit of $250,000. In the United Kingdom, and other G7 countries, among other countries, have imposed substantialevent of a failure of any of these financial and economic sanctions on certain industry sectors and parties in Russia. Broad restrictions on exports to Russia have also been imposed. These measures include: (i) comprehensive financial sanctions against major Russian banks; (ii) additional designations of Russian individuals with significant business interests and government connections; (iii) designations of individuals and entities involved in Russian military activities; and (iv) enhanced export controls and trade sanctions limiting Russia’s ability to import various goods. The negative impacts arising from the conflict and these sanctions and export restrictions, including those imposed by Russia, may include reduced consumer demand, supply chain disruptions and increased costs for transportation, energy, and raw materials. Although none of our operations are physically located in Russia or Ukraine, further escalation of geopolitical tensions could have a broader impact that expands into other marketsinstitutions where we do business, whichmaintain our deposits or other assets, we may adversely affect our business, financial condition, results of operations and prospects. For example, the prices of oil and other commodities have increased significantly, and, in responseincur a loss to the sanctions imposed on Russia by Western countries, Russia has reducedextent such loss exceeds the volume of natural gas it sends to European countries. As a result of of increased oil prices and Russia’s decision to reduce the volume of natural gas sold to European countries, utility costs in Europe have increased dramatically. Our facilities in Poland and France have been negatively impacted by rising energy costs,FDIC insurance limitation, which could have a material adverse effect onupon our European operationsliquidity, financial condition and our business as a whole.
results of operations.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The following table provides information about purchases we made during the quarter ended June 30, 2022.March 31, 2023.
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Period | | Total Number of Shares Purchased (1) | | Average Price Paid Per Share | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (1) | | Maximum Number (or Approximate Dollar Value) of Shares That May Yet Be Purchased Under the Plan or Programs (1) |
April 2022 | | — | | | $ | — | | | — | | | — | |
May 2022 | | — | | | — | | | — | | | — | |
June 2022 | | 671 | | | 2.85 | | | — | | | — | |
Total | | 671 | | | $ | 2.85 | | | — | | | — | |
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Period | | Total Number of Shares Purchased (1) | | Average Price Paid Per Share | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (1) | | Maximum Number (or Approximate Dollar Value) of Shares That May Yet Be Purchased Under the Plan or Programs (1) |
January 2023 | | — | | | $ | — | | | — | | | — | |
February 2023 | | 10,005 | | | 2.19 | | | — | | | — | |
March 2023 | | 73,721 | | | 1.02 | | | — | | | — | |
Total | | 83,726 | | | $ | 1.16 | | | — | | | — | |
(1)Shares were withheld to pay for tax obligations due upon the vesting of restricted stock held by certain employees granted under the 2019 Omnibus Plan. The Plan provides for the withholding of shares to satisfy tax obligations. It does not specify a maximum number of shares that can be withheld for this purpose. These shares may be deemed to be “issuer purchases” of shares that are required to be disclosed pursuant to this Item.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
None.
Item 6. Exhibits
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Exhibit Number | | Description of Exhibit |
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3.1 | | |
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4.1 | | |
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10.1 | | 2022 Omnibus Incentive Plan (incorporatedAmendment No. 2 to Term Loan Credit Agreement, dated as of March 3, 2023, by referenceand among NN, Inc., certain subsidiaries of NN, Inc., the lenders party thereto and Oaktree Fund Administration, LLC, as administrative agent (Filed as Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on March 7, 2023 and incorporated herein by reference). |
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10.2 | | Appendix AAmendment No. 1 to Credit Agreement, dated as of March 3, 2023, by and among NN, Inc.’s Definitive Proxy Statement, certain subsidiaries of NN, Inc., the lenders party thereto and JPMorgan Chase Bank, N.A., as administrative agent (Filed as Exhibit 10.2 to the Registrant’s Current Report on Schedule 14AForm 8-K filed withon March 7, 2023 and incorporated herein by reference). |
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10.3 | | |
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31.1 | | |
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31.2 | | |
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32.1 | | |
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32.2 | | |
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101.INS | | XBRL Instance Document (the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document) |
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101.SCH | | XBRL Taxonomy Extension ServiceSchema Document |
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101.CAL | | XBRL Taxonomy Extension Calculation Linkbase Document |
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101.LAB | | XBRL Taxonomy Extension Label Linkbase Document |
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101.PRE | | XBRL Taxonomy Extension Presentation Linkbase Document |
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101.DEF | | XBRL Taxonomy Extension Definition Linkbase Document |
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104 | | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101). |
SIGNATURES
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Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. |
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| NN, Inc. |
| (Registrant) |
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Date: AugustMay 5, 20222023 | /s/ Warren A. Veltman |
| Warren A. Veltman |
| President, Chief Executive Officer and Director |
| (Principal Executive Officer) |
| (Duly Authorized Officer) |
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Date: AugustMay 5, 20222023 | /s/ Michael C. Felcher |
| Michael C. Felcher |
| Senior Vice President - Chief Financial Officer |
| (Principal Financial and Accounting Officer) |
| (Duly Authorized Officer) |
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