What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-08-04 compared with 2023-05-05 · 118 added, 51 removed, 102 unchanged (62% 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 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.

and its consolidated subsidiaries for the three and six months ended June 30, 2023.

The financial information as of June 30, 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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Factors That May Influence Results of Operations

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.

The following paragraphs describe factors that have influenced results of operations for the six months ended June 30, 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

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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.

economy is experiencing inflationary increases 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.

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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

In 2022, we took specific steps to consolidate our footprint by identifying less profitable end markets and focusing our strategic growth initiatives in markets where we believe we will be able to maximize profitability.

During the first half of 2023, we closed our Taunton and Irvine sites from the Power Solutions group and three underutilized Mobile Solutions sites to reduce operating costs.

Additionally, we continue to evaluate our global footprint which may result in further consolidation or expansion actions to further improve our overall cost structure.

Three Months Ended June 30, 2023 compared to the Three Months Ended June 30, 2022

Consolidated Results

Three Months Ended March 31,

Three Months Ended June 30,

2023 2022 $ Change

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Depreciation and amortization 11,550 11,340 210

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

Other operating income, net (956) (147) (809)

Loss from operations (4,047) (4,514) 467

Interest expense 5,457 3,488 1,969

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

Other expense (income), net 5,641 (67) 5,708

Loss before provision for income taxes and share of net income from joint venture (15,145) (7,935) (7,210)

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Net loss $ (14,377) $ (8,567) $ (5,810)

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.

Net sales decreased by $0.2 million, or (0.1)%, during the three months ended June 30, 2023, compared to the three months ended June 30, 2022, primarily due to reduced volume and unfavorable foreign exchange effects, partially offset by higher customer pricing.

The closure of the Taunton and Irvine facilities contributed to the lower sales volume during the three months ended June 30, 2023.

Cost of Sales.

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.

Cost of sales increased by $3.8 million, or 3.7%, during the three months ended June 30, 2023, compared to the three months ended June 30, 2022, primarily due to higher material costs, partially offset by lower sales volume and lower costs associated with facility closures in the second quarter.

In addition, the prior year cost of sales benefited from higher favorable overhead absorption.

Selling, General, and Administrative Expense.

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.

Selling, general, and administrative expense decreased by $3.8 million during the three months ended June 30, 2023, compared to the three months ended June 30, 2022, primarily due to lower wages resulting from reduced headcount, lower stock compensation expense and lower professional fees.

Other Operating Income, Net.

Other operating income, net increased by $0.8 million during the three months ended June 30, 2023, compared to the three months ended June 30, 2022, primarily due gains on sales of machinery and equipment and sublease income related to the facility closures during the second 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 first quarter of 2022.

Three Months Ended March 31,

Interest expense increased by $2.0 million during the three months ended June 30, 2023, compared to the three months ended June 30, 2022, primarily due to higher interest rates and the addition of a 2.00% PIK interest rate in connection with the Term Loan Amendment.

These increases were partially offset by the recognition of gains during the quarter from the termination of the interest rate swap.

Three Months Ended June 30,

Interest on debt $ 5,609 $ 3,109

Interest rate swap settlements (468) 44

(Gain) loss recognized on interest rate swap (449) 38

Amortization of debt issuance costs and discount 527 330

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Other Income, Net.

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.

Other expense (income), net changed unfavorably by $5.7 million during the three months ended June 30, 2023, compared to the three months ended June 30, 2022, due to noncash derivative mark-to-market losses recognized during the current quarter compared to mark-to-market gains the second quarter of 2022.

Benefit (Provision) For Income Taxes .

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.

Our effective tax rate was (2.1)% for the three months ended June 30, 2023, compared to (13.2)% for the three months ended June 30, 2022.

The rate for the three months ended June 30, 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.

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Share of Net Income from Joint Venture.

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.

Share of net income from the JV increased during the three months ended June 30, 2023, compared to the three months ended June 30, 2022, primarily due to higher sales and lower operating costs, partially offset by higher depreciation and interest expense in the current quarter.

The JV, in which we own a 49% investment, recognized net sales of $24.9 million and $22.9 million for the three months ended June 30, 2023 and 2022, respectively.

Results by Segment

MOBILE SOLUTIONS

Three Months Ended March 31,

Three Months Ended June 30,

2023 2022 $ Change

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Income (loss) from operations $ (1,461) $ 1,729 $ (3,190)

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.

Net sales increased by $3.8 million, or 5.2%, during the three months ended June 30, 2023, compared to the three months ended June 30, 2022, primarily due to higher customer pricing and volume, partially offset by a customer settlement in the prior year and unfavorable foreign exchange effects.

Income (loss) from operations changed unfavorably by $3.2 million during the three months ended June 30, 2023, compared to the same period in the prior year, primarily due to a customer settlement in the prior year and production challenges in two facilities associated with new business launches.

POWER SOLUTIONS

Three Months Ended March 31,

Three Months Ended June 30,

2023 2022 $ Change

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Income from operations $ 2,583 $ 1,430 $ 1,153

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.

Net sales decreased by $4.0 million, or (7.7)%, during the three months ended June 30, 2023 compared to the three months ended June 30, 2022.

The decrease in sales was primarily due to lower volume, partially offset by higher pricing and favorable foreign exchange effects.

The closure of the Taunton and Irvine sites contributed to the lower sales volume during the three months ended June 30, 2023.

Income from operations increased by $1.2 million during the three months ended June 30, 2023 compared to the same period in the prior year, primarily due to lower costs associated with facility closures in the second quarter and higher pricing, partially offset by the impact of lower sales volume.

Six Months Ended June 30, 2023, compared to the Six Months Ended June 30, 2022

Consolidated Results

Six Months Ended June 30,

2023 2022 $ Change

Net sales $ 252,294 $ 253,429 $ (1,135)

Cost of sales (exclusive of depreciation and amortization shown separately below) 216,105 208,467 $ 7,638

Selling, general, and administrative expense 24,140 28,248 (4,108)

Depreciation and amortization 23,066 22,769 297

Other operating expense, net 105 1,879 (1,774)

Loss from operations (11,122) (7,934) (3,188)

Interest expense 9,745 6,927 2,818

Other expense (income), net 3,433 (3,063) 6,496

Loss before provision for income taxes and share of net income from joint venture (24,300) (11,798) (12,502)

Provision for income taxes (1,626) (2,582) 956

Share of net income from joint venture 1,374 2,511 (1,137)

Net loss $ (24,552) $ (11,869) $ (12,683)

Net sales decreased by $1.1 million, or (0.4)%, during the six months ended June 30, 2023, compared to the six months ended June 30, 2022, primarily due to reduced volume from the closure of the Taunton and Irvine facilities, and unfavorable foreign exchange effects of $1.7 million.

These decreases were partially offset by higher customer pricing and premium pricing on a certain customer project.

Cost of Sales.

Cost of sales increased by $7.6 million, or 3.7%, during the six months ended June 30, 2023, compared to the six months ended June 30, 2022, primarily due to higher material and labor costs due to inefficient manufacturing processes associated with product launches, and lower favorable overhead absorption.

These increases were partially offset by lower sales volume and favorable foreign exchange effects.

Selling, General, and Administrative Expense.

Selling, general, and administrative expense decreased by $4.1 million during the six months ended June 30, 2023, compared to the six months ended June 30, 2022, primarily due to lower wages resulting from reduced headcount and lower stock compensation expense.

Other Operating Expense (Income), Net.

Other operating expense, net changed favorably by $1.8 million primarily due to a legal settlement reached during the first quarter of 2022.

Interest Expense.

Interest expense increased by $2.8 million during the six months ended June 30, 2023, compared to the six months ended June 30, 2022, primarily due to higher interest rates and the addition of a 2.00% PIK interest rate in connection with the Term Loan Amendment.

These increases were partially offset by the recognition of gains from the interest rate swap and a higher amount of interest expense that was capitalized in the current quarter compared with the second quarter of 2022.

Six Months Ended June 30,

Interest on debt $ 10,228 $ 6,180

(Gain) loss recognized on interest rate swap (917) 82

Amortization of debt issuance costs and discount 880 662

Capitalized interest (710) (300)

Other 264 303

Total interest expense $ 9,745 $ 6,927

Other Expense (Income), Net.

Other expense (income), net changed unfavorably by $6.5 million during the six months ended June 30, 2023, compared to the six months ended June 30, 2022, primarily due to noncash derivative mark-to-market losses recognized during the first two quarters of 2023 compared to gains recognized during the first two quarters of 2022.

Benefit (Provision) for Income Taxes.

Our effective tax rate was (6.7)% for the six months ended June 30, 2023, compared to (21.9)% for the six months ended June 30, 2022.

The rate for the six months ended June 30, 2023 and 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.

Share of Net Income from Joint Venture.

Share of net income from the JV decreased during the six months ended June 30, 2023, compared to the six months ended June 30, 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 $45.6 million and $49.4 million for the six months ended June 30, 2023 and 2022, respectively.

Results by Segment

MOBILE SOLUTIONS

Six Months Ended June 30,

2023 2022 $ Change

Net sales $ 155,171 $ 149,420 $ 5,751

Income (loss) from operations $ (4,780) $ 3,698 $ (8,478)

Net sales increased by $5.8 million, or 3.8%, during the six months ended June 30, 2023, compared to the six months ended June 30, 2022, primarily due to higher customer pricing, partially offset by lower volume and unfavorable foreign exchange effects of $2.2 million.

Income (loss) from operations decreased by $8.5 million during the six months ended June 30, 2023 compared to the same period in the prior year, primarily due to higher material and labor costs, lower sales volume and favorable foreign exchange effects.

POWER SOLUTIONS

Six Months Ended June 30,

2023 2022 $ Change

Net sales $ 97,134 $ 104,060 $ (6,926)

Income from operations $ 4,330 $ 1,794 $ 2,536

Net sales decreased by $6.9 million, or (6.7)%, during the six months ended June 30, 2023, compared to the six months ended June 30, 2022, primarily due to lower volume from the closure of the Taunton and Irvine facilities.

These decreases were partially offset by higher customer pricing, premium pricing on a certain customer project and favorable foreign exchange effects of $0.5 million.

Income from operations increased by $2.5 million during the six months ended June 30, 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, a legal settlement reached during the first quarter of 2022 and lower costs associated with facility closures.

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

Changes in Financial Condition from December 31, 2022 to June 30, 2023

From December 31, 2022 to June 30, 2023, total assets decreased by $7.7 million primarily due to decreases in inventory, property, plant and equipment and intangible assets, partially offset by an increase in accounts receivable.

The closure of two Power Solutions facilities contributed to the decrease in inventory and property, plant and equipment.

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.

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 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.

From December 31, 2022 to June 30, 2023, total liabilities increased by $17.9 million, primarily due to increases in accounts payable, long-term debt and other non-current liabilities, partially offset by decrease in operating lease liabilities.

The increase in other non-current liabilities is primarily due to warrants issued during the first two quarters of 2023.

Working capital, which consists of current assets less current liabilities, was $106.4 million as of June 30, 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 current maturities of long-term debt, a decrease in inventory, partially offset by an increase in accounts receivable.

Cash provided by operations was $8.6 million for the six months ended June 30, 2023, compared with cash used by operations of $2.5 million for the six months ended June 30, 2022.

The difference was primarily due to a decrease in inventory during the first two quarters of 2023 compared to an increase during the first two quarters of 2022.

Cash used in investing activities increased by $0.1 million primarily due to higher expenditures for property, plant and equipment, partially offset by the proceeds from the sale of equipment at the Taunton and Irvine facilities in the first two quarters of 2023.

Cash provided by financing activities was $2.3 million for the six months ended June 30, 2023, compared with cash used by financing activities of $1.0 million for the six months ended June 30, 2022.

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

Liquidity and Capital Resources

Credit Facilities

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 principal amount outstanding under our Term Loan Facility as of June 30, 2023, was $147.4 million, without regard to unamortized debt issuance costs and discount.

As of June 30, 2023, we had $29.7 million available for future borrowings under the ABL Facility.

This amount of borrowing capacity is net of $3.0 million of outstanding borrowings and $10.9 million of outstanding letters of credit at June 30, 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.

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.

Beginning with the second quarter of 2023, interest is increased on a paid-in-kind basis at a rate between 1.00% and 2.00%, dependent on the Company’s leverage ratio.

Based on the interest rate in effect at June 30, 2023, annual cash interest payments would be approximately $17.8 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 March 31, 2023.

We were in compliance with all requirements under our Term Loan Facility and ABL Facility as of June 30, 2023.

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

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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.

Other Receivables

In 2021, we filed a refund claim with the IRS as a result of the Coronavirus Aid, Relief, and Economic Security Act.

Including interest accrued on the initial refund amount, we have a $11.3 million tax refund receivable at June 30, 2023, which is in the process of IRS review and approval.

The timing of the receipt of the refund remains uncertain.

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 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 three months ended March 31, 2023.

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