What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-11-02 compared with 2022-08-05 · 93 added, 91 removed, 137 unchanged (57% of the section changed)

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 and nine months ended September 30, 2022.

The financial information as of September 30, 2022, should be read in conjunction with the consolidated financial statements for the year ended December 31, 2021, contained in our Annual Report on Form 10-K for the year ended December 31, 2021, and the Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q.

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.

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Factors That May Influence Results of Operations

The following paragraphs describe factors that have influenced results of operations for the six months ended June 30, 2022, that management believes are important to provide an understanding of the business and results of operations or that may influence operations in the future.

Global COVID-19 Pandemic

The COVID-19 pandemic continues to impact our business operations and our customers' and suppliers' ability to operate at normal levels.

The following paragraphs describe factors that have influenced results of operations for the nine months ended September 30, 2022, that management believes are important to provide an understanding of the business and results of operations or that may influence operations in the future.

Macroeconomic Conditions

We continue to monitor the ongoing impacts of current macroeconomic and geopolitical events, including changing conditions from the COVID-19 pandemic, the on-going Russia-Ukraine conflict, inflationary cost pressures, rising interest rates, supply chain disruptions, and labor shortages.

The COVID-19 pandemic and governmental responses thereto, including current 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 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 and current geopolitical instability has increased our manufacturing costs, particularly labor and materials, in 2022 and is expected to continue into future periods.

We have undertaken a number of permanent and temporary actions to manage the evolving situation.

We continue to streamline facilities and implement cost savings initiatives.

Capital expenditures and travel costs remain at relatively low levels.

We are focused on the health and safety of our employees, customers, and 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 from the Centers for Disease Control and Prevention and 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 status 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 to our business, financial condition, results of operations and cash flows are still uncertain.

Three Months Ended June 30, 2022 compared to the Three Months Ended June 30, 2021

anticipate that supply chain constraints and the inflationary environment, as impacted by the COVID-19 pandemic, will continue through 2022 and beyond.

The Russia-Ukraine conflict also continues to create volatility in global financial and energy markets, creating energy and supply chain shortages, adding to the inflationary pressures in the global economy.

We continue to actively work with our suppliers to minimize impacts of supply shortages on our manufacturing capabilities.

Although our business has not been materially impacted by the ongoing Russia-Ukraine conflict as of the date of this filing, it is impossible to predict the extent to which our operations, or those of our customers or suppliers, will be impacted, or the ways in which the conflict may impact our business, financial condition, results of operations and cash flows.

economy is experiencing broad and rapid inflation and rising interest rates, as well as supply issues in material, services and labor due to economic policy, the COVID-19 pandemic and, more recently, the Russia-Ukraine conflict.

These impacts are likely to persist through 2022 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.

Three Months Ended September 30, 2022 compared to the Three Months Ended September 30, 2021

Consolidated Results

Three Months Ended June 30,

Three Months Ended September 30,

2022 2021 $ Change

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Interest expense 3,746 3,578 168

Other expense (income), net (67) 1,680 (1,747)

Other income, net (1,156) (4,346) 3,190

Loss before benefit (provision) for income taxes and share of net income from joint venture (4,707) (3,844) (863)

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Net loss $ (2,215) $ (3,377) $ 1,162

Net sales increased by $2.2 million, or 1.8%, during the three months ended June 30, 2022, compared to the three 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 of $0.5 million.

Net sales increased by $10.1 million, or 8.6%, during the three months ended September 30, 2022, compared to the three months ended September 30, 2021, primarily due to increased pricing and higher demand in Mobile Solutions, partially offset by unfavorable foreign exchange effects of $2.2 million.

Cost of Sales.

Cost of sales increased by $4.1 million, or 4.1%, during the three months ended June 30, 2022, compared to the three months ended June 30, 2021, primarily due to inflationary costs, partially offset by lower sales volume.

Cost of sales increased by $9.4 million, or 9.5%, during the three months ended September 30, 2022, compared to the three months ended September 30, 2021, primarily due to inflationary costs and unfavorable overhead absorption during the quarter, partially offset by favorable foreign exchange effects.

Selling, General, and Administrative Expense.

Selling, general, and administrative expense increased by $1.2 million during the three months ended June 30, 2022, compared to the three 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 incurred in the prior year.

Selling, general, and administrative expense decreased by $2.0 million during the three months ended September 30, 2022, compared to the three months ended September 30, 2021, primarily due to lower incentive and stock compensation expense.

Other Operating Income, Net.

Other operating income, net changed unfavorably by $0.6 million during the three months ended September 30, 2022, compared to the three months ended September 30, 2021, primarily due to a gain on the sale of a facility in the third quarter of 2021.

Interest Expense.

Interest expense decreased by $0.1 million during the three months ended June 30, 2022, compared to the three months ended June 30, 2021, primarily due to a higher amount of interest expense that was capitalized in the current quarter compared with the second quarter of 2021.

Three Months Ended June 30,

Interest expense increased by $0.2 million during the three months ended September 30, 2022, compared to the three months ended September 30, 2021, 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 third quarter of 2021.

Three Months Ended September 30,

Interest on debt $ 3,639 $ 3,146

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Total interest expense $ 3,746 $ 3,578

Other Expense, Net.

Other expense (income), net changed favorably by $1.7 million during the three months ended June 30, 2022, compared to the three 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.

These impacts were partially offset by unfavorable foreign exchange effects associated with intercompany borrowings.

Other Income, Net.

Other income, net changed unfavorably by $3.2 million during the three months ended September 30, 2022, compared to the three months ended September 30, 2021, due to lower noncash derivative mark-to-market gains recognized during the current quarter compared with the third quarter of 2021.

Benefit (Provision) For Income Taxes .

Our effective tax rate was (13.2)% for the three months ended June 30, 2022, compared to 3.4% for the three months ended June 30, 2021.

The rate for the three months ended June 30, 2022 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.

Our effective tax rate was 22.7% for the three months ended September 30, 2022, compared to (9.8)% for the three months ended September 30, 2021.

The rate for the three months ended September 30, 2022 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 favorably impacted by the recording of interest income on the Company’s federal income tax refund requested as a result of the CARES act.

Share of Net Income from Joint Venture.

Share of net income from the JV decreased during the three months ended June 30, 2022, compared to the three months ended June 30, 2021, primarily due to decreased profits resulting from lower sales and inflationary costs in the current quarter.

The JV, in which we own a 49% investment, recognized net sales of $22.9 million and $22.3 million for the three months ended June 30, 2022 and 2021, respectively.

Share of net income from the JV increased during the three months ended September 30, 2022, compared to the three months ended September 30, 2021, primarily due to higher sales partially offset by higher operating costs in the current quarter.

The JV, in which we own a 49% investment, recognized net sales of $27.0 million and $22.8 million for the three months ended September 30, 2022 and 2021, respectively.

Results by Segment

MOBILE SOLUTIONS

Three Months Ended June 30,

Three Months Ended September 30,

2022 2021 $ Change

Net sales $ 76,122 $ 68,586 $ 7,536

Organic decline $ (75)

Organic growth $ 9,573

Foreign exchange effects (2,037)

Income from operations $ 1,729 $ 2,509 $ (780)

Net sales decreased by $0.5 million, or (0.7)%, during the three months ended June 30, 2022, compared to the three months ended June 30, 2021, primarily due to 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, and unfavorable foreign exchange effects of $0.5 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 $0.8 million during the three 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.

Loss from operations $ (474) $ (257) $ (217)

Net sales increased by $7.5 million, or 11.0%, during the three months ended September 30, 2022, compared to the three months ended September 30, 2021, primarily due to increased pricing and a recovery of sales that were negatively impacted by the global semi-conductor shortage in 2021.

These increases were partially offset by unfavorable foreign exchange effects of $2.0 million.

Loss from operations increased by $0.2 million during the three months ended September 30, 2022, compared to the same period in the prior year, primarily due to inflationary costs not fully recovered in customer pricing and unfavorable overhead absorption.

These decreases were partially offset by higher sales volume and lower incentive compensation expense.

POWER SOLUTIONS

Three Months Ended June 30,

Three Months Ended September 30,

2022 2021 $ Change

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Income from operations $ 2,582 $ 1,252 $ 1,330

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 decreased by $1.4 million during the three months ended June 30, 2022 compared to the same period in the prior year, primarily due to inflationary costs which were not fully recovered from pricing, variable cost inefficiencies associated with supply chain interruptions and uneven customer ordering patterns.

Six Months Ended June 30, 2022, compared to the Six Months Ended June 30, 2021

Net sales increased by $2.4 million, or 5.0%, during the three months ended September 30, 2022 compared to the three months ended September 30, 2021.

The increase in sales was primarily due to higher customer pricing and volume, partially offset by lower precious metals pass-through pricing and unfavorable foreign exchange effects.

Income from operations increased by $1.3 million during the three months ended September 30, 2022 compared to the same period in the prior year, primarily due to the increase in sales and lower incentive compensation expense and favorable mix, partially offset by a gain on the sale of a facility in the third quarter of 2021.

Nine Months Ended September 30, 2022, compared to the Nine Months Ended September 30, 2021

Consolidated Results

Six Months Ended June 30,

Nine Months Ended September 30,

2022 2021 $ Change

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Loss on interest rate swap — 2,033 (2,033)

Other expense (income), net (3,063) 1,558 (4,621)

Other income, net (4,219) (2,788) (1,431)

Loss before benefit (provision) for income taxes and share of net income from joint venture (16,505) (17,749) 1,244

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Net loss $ (14,084) $ (13,681) $ (403)

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.

Net sales increased by $13.5 million, or 3.7%, during the nine months ended September 30, 2022, compared to the nine months ended September 30, 2021, primarily due to increased pricing partially offset by lower volume and unfavorable foreign exchange effects $2.5 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.

Cost of sales increased by $18.4 million, or 6.2%, during the nine months ended September 30, 2022, compared to the nine months ended September 30, 2021, primarily due to inflationary costs and unfavorable overhead absorption, partially offset by lower sales volume and favorable foreign exchange effects.

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 incurred in the prior year.

Selling, general, and administrative expense decreased by $1.9 million during the nine months ended September 30, 2022, compared to the nine months ended September 30, 2021, primarily due to lower incentive compensation, severance and retention expense.

These decreases were partially offset by higher stock compensation expense, higher professional fees and increased travel costs.

Other Operating Expense (Income), Net.

Other operating expense (income), net changed unfavorably by $2.2 million primarily due to a legal settlement reached during the first quarter of 2022.

Other operating expense (income), net changed unfavorably by $2.8 million primarily due to a legal settlement reached during the first quarter of 2022 and the gain on the sale of a facility in the third quarter of 2021.

Interest Expense.

Interest expense increased 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 rates and a larger average debt balance as a result of the credit facility and preferred stock refinance during the first quarter of 2021.

Six Months Ended June 30,

Interest expense increased by $1.5 million during the nine months ended September 30, 2022, compared to the nine months ended September 30, 2021, primarily due to higher interest rates and a larger average debt balance as a result of the credit facility and preferred stock refinance during the first quarter of 2021.

These increases were partially offset by a higher amount of interest expense that was capitalized in 2022 compared with the prior year.

Nine Months Ended September 30,

Interest on debt $ 9,819 $ 7,695

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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.

Other Income, Net.

Other income, net changed favorably by $1.4 million during the nine months ended September 30, 2022, compared to the nine months ended September 30, 2021, primarily due to 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.

Our effective tax rate was (9.2)% for the nine months ended September 30, 2022, compared to 3.5% for the nine months ended September 30, 2021.

The rate for the nine months ended September 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 effective tax rate for the nine months ended September 30, 2022 was favorably impacted by the recording of interest income on the Company’s federal income tax refund requested as a result of the CARES act.

The rate for the nine months ended September 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.

Share of net income from the JV increased during the nine months ended September 30, 2022, compared to the nine months ended September 30, 2021, primarily due to higher sales partially offset by higher operating costs in the current quarter.

The JV, in which we own a 49% investment, recognized net sales of $76.4 million and $68.4 million for the nine months ended September 30, 2022 and 2021, respectively.

Results by Segment

MOBILE SOLUTIONS

Six Months Ended June 30,

Nine Months Ended September 30,

2022 2021 $ Change

Net sales $ 225,542 $ 220,248 $ 5,294

Organic decline $ (1,940)

Organic growth $ 7,633

Foreign exchange effects (2,339)

Income from operations $ 3,224 $ 8,342 $ (5,118)

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.

Net sales increased by $5.3 million, or 2.4%, during the nine months ended September 30, 2022, compared to the nine months ended September 30, 2021, primarily due to increased pricing, partially offset by lower sales of diesel components due to lower European demand which was impacted by the war in Ukraine, COVID-19 interruptions in China, lost sales associated with certain fuel systems reaching end of production, and unfavorable foreign exchange effects of $2.3 million.

Income from operations decreased by $5.1 million during the nine months ended September 30, 2022 compared to the same period in the prior year, primarily due to inflationary costs not fully recovered in customer pricing, unfavorable overhead absorption, and variable cost inefficiencies associated with supply chain interruptions, uneven customer ordering patterns, and labor constraints caused by pandemic interruptions.

These decreases were partially offset by lower incentive compensation expense.

POWER SOLUTIONS

Six Months Ended June 30,

Nine Months Ended September 30,

2022 2021 $ Change

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Income from operations $ 4,376 $ 6,559 $ (2,183)

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.

Changes in Financial Condition from December 31, 2021 to June 30, 2022

From December 31, 2021 to June 30, 2022, total assets decreased by $5.9 million primarily due to 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.

Net sales increased by $8.2 million, or 5.5%, during the nine months ended September 30, 2022, compared to the nine months ended September 30, 2021, primarily due to higher customer pricing partially offset by lower volume and unfavorable foreign exchange effects.

Income from operations decreased by $2.2 million during the nine months ended September 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 and the absence of a gain on the sale of a facility in the third quarter of 2021.

These decreases were partially offset by the impact of higher sales and lower incentive compensation expense.

Changes in Financial Condition from December 31, 2021 to September 30, 2022

From December 31, 2021 to September 30, 2022, total assets decreased by $21.5 million primarily due to normal depreciation and amortization of fixed assets and intangible assets.

These decreases were partially offset by increases in accounts receivable and inventories during the nine months ended September 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.

From December 31, 2021 to June 30, 2022, total liabilities increased by $6.7 million, primarily due to increases in accounts payable attributed to higher inventory balances at June 30, 2022.

Working capital, which consists of current assets less current liabilities, was $122.3 million as of June 30, 2022 and December 31, 2021.

The balance of working capital remained constant as an increase in accounts receivable and inventory was offset by an increase in accounts payable and other current liabilities.

Cash used in operations was $2.5 million for the six months ended June 30, 2022, compared with cash provided by operations of $5.9 million for the six months ended June 30, 2021.

There was no change in total liabilities from December 31, 2021 to September 30, 2022, as lower employee incentive compensation accruals and a decrease in the unrealized losses of certain derivatives were offset by an increase in accounts payable attributed to higher inventory balances at September 30, 2022 and higher borrowings on the ABL Facility.

Working capital, which consists of current assets less current liabilities, was $125.5 million as of September 30, 2022, compared to $122.3 million as of December 31, 2021.

The increase in working capital was primarily due to increases in accounts receivable and inventory, partially offset by an increase in accounts payable.

Cash used in operations was $2.7 million for the nine months ended September 30, 2022, compared with cash provided by operations of $5.7 million for the nine months ended September 30, 2021.

The difference was primarily due to an increase in accounts receivable related to higher sales during the current quarter compared with the fourth quarter of 2021.

Cash used in investing activities was $9.3 million for the six months ended June 30, 2022, compared with cash used in investing activities of $30.2 million for the six months ended June 30, 2021.

Cash used in investing activities was $13.6 million for the nine months ended September 30, 2022, compared with cash used in investing activities of $32.7 million for the nine months ended September 30, 2021.

The difference was primarily due to cash paid to settle the interest rate swap in the first quarter of 2021.

Cash used in financing activities was $1.0 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.

Cash provided by financing activities was $1.4 million for the nine months ended September 30, 2022, compared with cash provided by financing activities of $4.5 million for the nine months ended September 30, 2021.

The difference was primarily due to the debt and preferred stock refinancing in the first quarter of 2021.

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Credit Facilities

The principal amount outstanding under our Term Loan Facility as of June 30, 2022, was $148.1 million, without regard to unamortized debt issuance costs and discount.

As of June 30, 2022, we had $36.9 million available for future borrowings under the ABL Facility.

This amount of borrowing capacity is net of $2.0 million of outstanding borrowings and $11.1 million of outstanding letters of credit at June 30, 2022, which are considered as usage of the ABL Facility.

The principal amount outstanding under our Term Loan Facility as of September 30, 2022, was $147.8 million, without regard to unamortized debt issuance costs and discount.

As of September 30, 2022, we had $32.1 million available for future borrowings under the ABL Facility.

This amount of borrowing capacity is net of $6.0 million of outstanding borrowings and $11.1 million of outstanding letters of credit at September 30, 2022, which are considered as usage of the ABL Facility.

The Term Loan Facility requires quarterly principal payments of $0.4 million with the remaining unpaid principal amount due on the final maturity date of September 22, 2026.

Outstanding borrowings under the Term Loan Facility bear interest at either 1) one-month LIBOR (subject to a 1.000% floor) plus an applicable margin of 6.875% or 2) the greater of various benchmark

rates plus an applicable margin of 5.875%.

Based on the interest rate in effect at June 30, 2022, and the fixed rate on the 2021 interest rate swap, annual interest payments would be approximately $12.4 million.

Outstanding borrowings under the Term Loan Facility bear interest at either 1) one-month LIBOR (subject to a 1.000% floor) plus an applicable margin of 6.875% or 2) the greater of various benchmark rates plus an applicable margin of 5.875%.

Based on the interest rate in effect at September 30, 2022, and the fixed rate on the 2021 interest rate swap, annual interest payments would be approximately $13.7 million.

The ABL Facility bears interest on a variable rate structure with borrowings bearing interest at one-month LIBOR plus an applicable margin of 1.75%.

The interest rate in effect at June 30, 2022, was 3.00%.

The interest rate in effect at September 30, 2022, was 4.56%.

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.

We were in compliance with all requirements under our Term Loan Facility and ABL Facility as of September 30, 2022.

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

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Our critical accounting policies, including the assumptions and judgments underlying them, are disclosed in the 2021 Annual Report, including those policies as discussed in Note 1 to the Notes to Consolidated Financial Statements included in the 2021 Annual Report.

There have been no material changes to these policies during the six months ended June 30, 2022.

There have been no material changes to these policies during the nine months ended September 30, 2022.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis