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Item 2. Management’s Discussion and Analysis

2023-05-05 compared with 2022-11-02 · 72 added, 149 removed, 81 unchanged (73% of the section changed)

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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.

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.

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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Forward-Looking Statements

This Quarterly Report contains forward-looking statements that are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995.

These statements may discuss goals, intentions and expectations as to future trends, plans, events, results of operations or financial condition, or state other information relating to NN, Inc., based on current beliefs of management as well as assumptions made by, and information currently available to, management.

This Quarterly Report contains forward-looking statements within 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 intended to be covered by the safe harbor provisions of the Private Securities Litigation Reform Act of 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 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.

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Such factors include, among others, general economic conditions and economic conditions in the industrial sector;

the impacts of the COVID-19 pandemic on our financial condition, business operations and liquidity;

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;

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the impact of acquisitions and divestitures;

our ability to hire or retain key personnel;

the level of our indebtedness;

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the impact of climate change on our operations;

cyber liability or potential liability for breaches of our or our service providers’ information technology systems or business operations disruptions;

and other risk factors and cautionary statements listed from time-to-time in our periodic reports filed with the Securities and Exchange Commission.

We disclaim any obligation to update any such factors or to publicly announce the result of any revisions to any of the forward-looking statements included herein or therein to reflect future events or developments.

and cyber liability or potential liability for breaches of our or our service providers’ information technology systems or business operations disruptions.

Any forward-looking statement speaks only as of the date of this Quarterly Report, and the Company undertakes no obligation to publicly update or review any forward-looking statement, whether as a result of new information, future developments or otherwise, except as required by law.

New risks and uncertainties may emerge from time to time, 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 by these cautionary statements.

For additional information concerning such risk factors and cautionary statements, please see the sections titled “Item 1A.

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Factors That May Influence Results of Operations

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.

The following paragraphs describe factors that have influenced results of operations for the three months ended 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.

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.

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

The COVID-19 pandemic and 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, as impacted by the COVID-19 pandemic, will continue throughout 2023.

The Russia-Ukraine conflict also continues to create volatility in global financial and energy markets, creating energy and supply chain shortages, which has added to the inflationary pressures experienced by 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.

Although our business has not been materially impacted by the ongoing Russia-Ukraine conflict as of the date of this filing, we cannot reasonably predict the extent to which our operations, or those of our customers or suppliers, will be impacted in the future, 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 materials, services, and labor due to economic policy, the COVID-19 pandemic and, more recently, the Russia-Ukraine conflict.

These impacts are 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.

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

Consolidated Results

Three Months Ended September 30,

2022 2021 $ Change

Net sales $ 127,297 $ 117,244 $ 10,053

Organic growth $ 12,226

Foreign exchange effects $ (2,173)

Cost of sales (exclusive of depreciation and amortization shown separately below) 108,033 98,642 $ 9,391

Selling, general, and administrative expense 10,205 12,181 (1,976)

Depreciation and amortization 11,193 11,605 (412)

Other operating income, net (17) (572) 555

Loss from operations (2,117) (4,612) 2,495

Interest expense 3,746 3,578 168

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)

Benefit (provision) for income taxes 1,068 (375) 1,443

Share of net income from joint venture 1,424 842 582

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

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 $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 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 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

Interest rate swap settlements (146) 32

Amortization of debt issuance costs and discount 359 331

Capitalized interest (272) (89)

Other 166 158

Total interest expense $ 3,746 $ 3,578

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 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 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 September 30,

2022 2021 $ Change

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

Organic growth $ 9,573

Foreign exchange effects (2,037)

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 September 30,

2022 2021 $ Change

Net sales $ 51,124 $ 48,680 $ 2,444

Organic growth $ 2,580

Foreign exchange effects (136)

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

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

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 March 31, 2023 compared to the Three Months Ended March 31, 2022

Consolidated Results

Nine Months Ended September 30,

Three Months Ended March 31,

2023 2022 $ Change

Net sales $ 127,088 $ 128,067 $ (979)

Organic growth $ 16,030

Foreign exchange effects $ (2,509)

Cost of sales (exclusive of depreciation and amortization shown separately below) 108,421 104,578 $ 3,843

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Depreciation and amortization 11,516 11,429 87

Other operating expense (income), net 1,862 (901) 2,763

Other operating expense, net 1,061 2,026 (965)

Loss from operations (7,075) (3,420) (3,655)

Interest expense 4,288 3,439 849

Loss on extinguishment of debt and write-off of debt issuance costs — 2,390 (2,390)

Derivative payments on interest rate swap — 1,717 (1,717)

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

Other income, net (2,208) (2,996) 788

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

Benefit (provision) for income taxes (1,514) 612 (2,126)

Loss before provision for income taxes and share of net income from joint venture (9,155) (3,863) (5,292)

Provision for income taxes (1,301) (1,531) 230

Share of net income from joint venture 281 2,092 (1,811)

Net loss $ (10,175) $ (3,302) $ (6,873)

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.

Net sales decreased by $1.0 million, or (0.8)%, during the three months ended March 31, 2023, compared to the three months ended March 31, 2022, primarily due to reduced volume and unfavorable foreign exchange effects of $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 $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.

Cost of sales increased by $3.8 million, or 3.7%, during the three months ended March 31, 2023, compared to the three months ended March 31, 2022, primarily due to higher material and labor costs due to inefficient manufacturing processes associated with product launches, partially offset by lower sales 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 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 $2.8 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.

Selling, general, and administrative expense decreased by $0.3 million during the three months ended March 31, 2023, compared to the three months ended March 31, 2022, primarily due to lower stock compensation expense partially offset by higher professional fees.

Other Operating Expense, Net.

Other operating expense, net decreased by $1.0 million during the three months ended March 31, 2023, compared to the three months ended 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 $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 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 first quarter of 2022.

Three Months Ended March 31,

Interest on debt $ 4,619 $ 3,071

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Total interest expense $ 4,288 $ 3,439

Loss on Extinguishment of Debt and Write-off of Debt Issuance Costs.

We recognized $2.4 million in 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 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.

Other income, net decreased by $0.8 million during the three months ended March 31, 2023, compared to the three months ended March 31, 2022, due to lower noncash derivative mark-to-market gains recognized during the current quarter compared with the first quarter of 2022.

Benefit (Provision) For Income Taxes .

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.

Our effective tax rate was (14.2)% for the three months ended March 31, 2023, compared to (39.6)% for the three months ended March 31, 2022.

The rate for the three months ended March 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 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.

Share of net income from the JV decreased during the three months ended March 31, 2023, compared to the three months ended March 31, 2022, primarily due to lower sales and higher operating costs in the current quarter.

The JV, in which we own a 49% investment, recognized net sales of $20.6 million and $26.5 million for the three months ended March 31, 2023 and 2022, respectively.

Results by Segment

MOBILE SOLUTIONS

Nine Months Ended September 30,

Three Months Ended March 31,

2023 2022 $ Change

Net sales $ 78,018 $ 76,070 $ 1,948

Organic growth $ 7,633

Foreign exchange effects (2,339)

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

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.

Income (loss) from operations $ (3,319) $ 1,969 $ (5,288)

Net sales increased by $1.9 million, or 2.6%, during the three months ended March 31, 2023, compared to the three months ended March 31, 2022, primarily due to higher customer pricing, partially offset by lower volume and unfavorable foreign exchange effects of $1.7 million.

Income (loss) from operations changed unfavorably by $5.3 million during the three months ended 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

Nine Months Ended September 30,

Three Months Ended March 31,

2023 2022 $ Change

Net sales $ 49,072 $ 52,011 $ (2,939)

Organic growth $ 8,328

Foreign exchange effects (170)

Income from operations $ 1,747 $ 364 $ 1,383

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.

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 favorable foreign exchange effects of $0.2 million.

Income from operations increased by $1.4 million during the three months ended March 31, 2023 compared to the same period in the prior year, primarily due to premium pricing on a certain customer project in the first quarter of 2023 and a legal settlement reached during the first quarter of 2022.

These increases were partially offset by lower sales volume and an unfavorable change in overhead absorption during the first quarter of 2023 compared to the first quarter of 2022.

Changes in Financial Condition from December 31, 2022 to March 31, 2023

From December 31, 2022 to March 31, 2023, total assets increased by $1.1 million primarily due to increases in accounts receivable, inventory and prepaid assets, partially offset by normal depreciation and amortization of fixed assets and intangible assets.

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 2022.

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.

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.

From December 31, 2022 to March 31, 2023, total liabilities increased by $9.9 million, primarily due to increases in accounts payable, accrued salaries and benefits and other current liabilities.

Working capital, which consists of current assets less current liabilities, was $109.2 million as of March 31, 2023, compared to $112.9 million as of December 31, 2022.

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

Cash provided by operations was $0.2 million for the three months ended March 31, 2023, compared with cash used by operations of $5.2 million for the three months ended 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 2022.

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 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.

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 $1.3 million for the three months ended March 31, 2023, compared with cash used by financing activities of $1.5 million for the three months ended March 31, 2022.

The difference was primarily due to proceeds from new international loans for working capital needs in the first quarter of 2023.

Liquidity and Capital Resources

Credit Facilities

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 principal amount outstanding under our Term Loan Facility as of March 31, 2023, was $147.0 million, without regard to unamortized debt issuance costs and discount.

As of March 31, 2023, we had $32.5 million available for future borrowings under the ABL Facility.

This amount of borrowing capacity is net of $1.0 million of outstanding borrowings and $10.9 million of outstanding letters of credit at 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.

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 September 30, 2022, was 4.56%.

Effective March 31, 2023, outstanding borrowings under the Term Loan Facility bear interest at either 1) one-month, three-month, or six-month Adjusted SOFR, 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%.

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 March 31, 2023, annual cash interest payments would be approximately $17.2 million.

The ABL Facility bears interest on a variable borrowing rate based on either 1) Adjusted 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 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 September 30, 2022.

We were in compliance with all requirements under our Term Loan Facility and ABL Facility as of March 31, 2023.

Both credit facilities allow for optional expansion of available borrowings, subject to certain terms and conditions.

11 unchanged sentences

Our critical accounting policies, including the assumptions and judgments underlying them, are disclosed in the 2022 Annual Report, including those policies as discussed in Note 1 to the Notes to Consolidated Financial Statements included in the 2022 Annual Report.

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

There have been no material changes to these policies during the three months ended March 31, 2023.

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