NN INC - Quarter Report: 2022 September (Form 10-Q)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
| ☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||
For the quarterly period ended September 30, 2022
OR
| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||
For the transition period from to
Commission File Number 000-23486
NN, Inc.
(Exact name of registrant as specified in its charter)
| Delaware | 62-1096725 | |||||||
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |||||||
6210 Ardrey Kell Road, Suite 600
Charlotte, North Carolina 28277
(Address of principal executive offices, including zip code)
(980) 264-4300
(Registrant’s telephone number, including area code)
| Securities registered pursuant to Section 12(b) of the Act: | ||||||||||||||
| Title of each class | Trading symbol | Name of each exchange on which registered | ||||||||||||
| Common Stock, par value $0.01 | NNBR | The Nasdaq Stock Market LLC | ||||||||||||
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ☐ | Accelerated filer | ☒ | |||||||||||||||||
| Non-accelerated filer | ☐ | Smaller reporting company | ☒ | |||||||||||||||||
| Emerging growth company | ☐ | |||||||||||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of October 26, 2022, there were 43,869,135 shares of the registrant’s common stock, par value $0.01 per share, outstanding.
NN, Inc.
INDEX
| Page | ||||||||
| Item 1. | ||||||||
| Item 2. | ||||||||
| Item 3. | ||||||||
| Item 4. | ||||||||
| Item 1. | ||||||||
| Item 1A. | ||||||||
| Item 2. | ||||||||
| Item 3. | ||||||||
| Item 4. | ||||||||
| Item 5. | ||||||||
| Item 6. | ||||||||
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
NN, Inc.
Condensed Consolidated Statements of Operations and Comprehensive Income (Loss)
(Unaudited)
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| (in thousands, except per share data) | 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||
| Net sales | $ | 127,297 | $ | 117,244 | $ | 380,726 | $ | 367,205 | |||||||||||||||
| Cost of sales (exclusive of depreciation and amortization shown separately below) | 108,033 | 98,642 | 316,500 | 298,127 | |||||||||||||||||||
| Selling, general, and administrative expense | 10,205 | 12,181 | 38,453 | 40,341 | |||||||||||||||||||
| Depreciation and amortization | 11,193 | 11,605 | 33,962 | 34,860 | |||||||||||||||||||
| Other operating expense (income), net | (17) | (572) | 1,862 | (901) | |||||||||||||||||||
| Loss from operations | (2,117) | (4,612) | (10,051) | (5,222) | |||||||||||||||||||
| Interest expense | 3,746 | 3,578 | 10,673 | 9,175 | |||||||||||||||||||
| Loss on extinguishment of debt and write-off of debt issuance costs | — | — | — | 2,390 | |||||||||||||||||||
| Derivative payments on interest rate swap | — | — | — | 1,717 | |||||||||||||||||||
| Loss on interest rate swap | — | — | — | 2,033 | |||||||||||||||||||
| Other income, net | (1,156) | (4,346) | (4,219) | (2,788) | |||||||||||||||||||
| Loss before benefit (provision) for income taxes and share of net income from joint venture | (4,707) | (3,844) | (16,505) | (17,749) | |||||||||||||||||||
| Benefit (provision) for income taxes | 1,068 | (375) | (1,514) | 612 | |||||||||||||||||||
| Share of net income from joint venture | 1,424 | 842 | 3,935 | 3,456 | |||||||||||||||||||
| Net loss | $ | (2,215) | $ | (3,377) | $ | (14,084) | $ | (13,681) | |||||||||||||||
| Other comprehensive income (loss): | |||||||||||||||||||||||
| Foreign currency translation loss | $ | (7,653) | $ | (2,612) | $ | (13,543) | $ | (1,550) | |||||||||||||||
| Interest rate swap: | |||||||||||||||||||||||
| Change in fair value, net of tax | 904 | (176) | 2,464 | (176) | |||||||||||||||||||
| Reclassification adjustment for losses (gains) included in net loss, net of tax | (116) | 22 | (51) | 2,873 | |||||||||||||||||||
| Other comprehensive income (loss) | $ | (6,865) | $ | (2,766) | $ | (11,130) | $ | 1,147 | |||||||||||||||
| Comprehensive loss | $ | (9,080) | $ | (6,143) | $ | (25,214) | $ | (12,534) | |||||||||||||||
| Basic net loss per common share: | |||||||||||||||||||||||
| Net loss per common share | $ | (0.11) | $ | (0.13) | $ | (0.49) | $ | (0.75) | |||||||||||||||
| Weighted average common shares outstanding | 44,711 | 44,455 | 44,670 | 43,862 | |||||||||||||||||||
| Diluted net loss per common share: | |||||||||||||||||||||||
| Net loss per common share | $ | (0.11) | $ | (0.13) | $ | (0.49) | $ | (0.75) | |||||||||||||||
| Weighted average common shares outstanding | 44,711 | 44,455 | 44,670 | 43,862 | |||||||||||||||||||
See notes to condensed consolidated financial statements (unaudited).
3
NN, Inc.
Condensed Consolidated Balance Sheets
(Unaudited)
| (in thousands, except per share data) | September 30, 2022 | December 31, 2021 | |||||||||
| Assets | |||||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | $ | 12,551 | $ | 28,656 | |||||||
Accounts receivable, net of allowances of $1,476 and $1,352 at September 30, 2022 and December 31, 2021, respectively | 83,496 | 71,419 | |||||||||
| Inventories | 84,172 | 75,027 | |||||||||
| Income tax receivable | 11,104 | 11,808 | |||||||||
| Other current assets | 12,768 | 9,372 | |||||||||
| Total current assets | 204,091 | 196,282 | |||||||||
Property, plant and equipment, net of accumulated depreciation of $214,254 and $197,936 at September 30, 2022 and December 31, 2021, respectively | 195,084 | 209,105 | |||||||||
| Operating lease right-of-use assets | 46,164 | 46,443 | |||||||||
| Intangible assets, net | 77,958 | 88,718 | |||||||||
| Investment in joint venture | 28,193 | 34,045 | |||||||||
| Deferred tax assets | 375 | 314 | |||||||||
| Other non-current assets | 5,750 | 4,194 | |||||||||
| Total assets | $ | 557,615 | $ | 579,101 | |||||||
| Liabilities, Preferred Stock, and Stockholders’ Equity | |||||||||||
| Current liabilities: | |||||||||||
| Accounts payable | $ | 45,107 | $ | 36,710 | |||||||
| Accrued salaries, wages and benefits | 13,024 | 17,739 | |||||||||
| Income tax payable | 902 | 2,072 | |||||||||
| Current maturities of long-term debt | 3,150 | 3,074 | |||||||||
| Current portion of operating lease liabilities | 5,033 | 5,704 | |||||||||
| Other current liabilities | 11,351 | 8,718 | |||||||||
| Total current liabilities | 78,567 | 74,017 | |||||||||
| Deferred tax liabilities | 6,408 | 7,456 | |||||||||
| Long-term debt, net of current portion | 154,351 | 151,052 | |||||||||
| Operating lease liabilities, net of current portion | 51,102 | 51,295 | |||||||||
| Other non-current liabilities | 10,635 | 17,289 | |||||||||
| Total liabilities | 301,063 | 301,109 | |||||||||
Commitments and contingencies (Note 9) | |||||||||||
Series D perpetual preferred stock - $0.01 par value per share, 65 shares authorized, issued and outstanding at September 30, 2022 and December 31, 2021, respectively | 61,786 | 53,807 | |||||||||
| Stockholders' equity: | |||||||||||
Common stock - $0.01 par value per share, 90,000 shares authorized, 43,882 and 43,027 shares issued and outstanding at September 30, 2022 and December 31, 2021, respectively | 439 | 430 | |||||||||
| Additional paid-in capital | 470,543 | 474,757 | |||||||||
| Accumulated deficit | (233,184) | (219,100) | |||||||||
| Accumulated other comprehensive loss | (43,032) | (31,902) | |||||||||
| Total stockholders’ equity | 194,766 | 224,185 | |||||||||
| Total liabilities, preferred stock, and stockholders’ equity | $ | 557,615 | $ | 579,101 | |||||||
See notes to condensed consolidated financial statements (unaudited).
4
NN, Inc.
Condensed Consolidated Statements of Changes in Stockholders’ Equity
Three Months Ended September 30, 2022 and 2021
(Unaudited)
| Common Stock | Accumulated deficit | Accumulated other comprehensive income (loss) | |||||||||||||||||||||||||||||||||
| (in thousands) | Number of shares | Par value | Additional paid-in capital | Total | |||||||||||||||||||||||||||||||
| Balance as of June 30, 2022 | 43,884 | $ | 439 | $ | 473,019 | $ | (230,969) | $ | (36,167) | $ | 206,322 | ||||||||||||||||||||||||
| Net loss | — | — | — | (2,215) | — | (2,215) | |||||||||||||||||||||||||||||
| Dividends accrued for preferred stock | — | — | (2,783) | — | — | (2,783) | |||||||||||||||||||||||||||||
| Share-based compensation expense | (2) | — | 991 | — | — | 991 | |||||||||||||||||||||||||||||
| Change in estimate of share-based award vesting | — | — | (684) | — | — | (684) | |||||||||||||||||||||||||||||
Change in fair value of interest rate swap, net of tax of $241 | — | — | — | — | 904 | 904 | |||||||||||||||||||||||||||||
Reclassification of interest rate swap settlement to net loss, net of tax of $(30) | — | — | — | — | (116) | (116) | |||||||||||||||||||||||||||||
| Foreign currency translation loss | — | — | — | — | (7,653) | (7,653) | |||||||||||||||||||||||||||||
| Balance as of September 30, 2022 | 43,882 | $ | 439 | $ | 470,543 | $ | (233,184) | $ | (43,032) | $ | 194,766 | ||||||||||||||||||||||||
| Common Stock | Accumulated deficit | Accumulated other comprehensive income (loss) | |||||||||||||||||||||||||||||||||
| (in thousands) | Number of shares | Par value | Additional paid-in capital | Total | |||||||||||||||||||||||||||||||
| Balance as of June 30, 2021 | 43,034 | $ | 430 | $ | 477,923 | $ | (216,179) | $ | (29,819) | $ | 232,355 | ||||||||||||||||||||||||
| Net loss | — | — | — | (3,377) | — | (3,377) | |||||||||||||||||||||||||||||
| Dividends accrued for preferred stock | — | — | (2,314) | — | — | (2,314) | |||||||||||||||||||||||||||||
| Share-based compensation expense | — | — | 931 | — | — | 931 | |||||||||||||||||||||||||||||
Change in fair value of interest rate swap, net of tax of $53 | — | — | — | — | (176) | (176) | |||||||||||||||||||||||||||||
Reclassification of interest rate swap settlement to net loss, net of tax of $7 | — | — | — | — | 22 | 22 | |||||||||||||||||||||||||||||
| Foreign currency translation loss | — | — | — | — | (2,612) | (2,612) | |||||||||||||||||||||||||||||
| Balance as of September 30, 2021 | 43,034 | $ | 430 | $ | 476,540 | $ | (219,556) | $ | (32,585) | $ | 224,829 | ||||||||||||||||||||||||
See notes to condensed consolidated financial statements (unaudited).
5
NN, Inc.
Condensed Consolidated Statements of Changes in Stockholders’ Equity
Nine Months Ended September 30, 2022 and 2021
(Unaudited)
| Common Stock | Accumulated deficit | Accumulated other comprehensive income (loss) | |||||||||||||||||||||||||||||||||
| (in thousands) | Number of shares | Par value | Additional paid-in capital | Total | |||||||||||||||||||||||||||||||
| Balance as of December 31, 2021 | 43,027 | $ | 430 | $ | 474,757 | $ | (219,100) | $ | (31,902) | $ | 224,185 | ||||||||||||||||||||||||
| Net loss | — | — | (14,084) | — | (14,084) | ||||||||||||||||||||||||||||||
| Dividends accrued for preferred stock | — | — | (7,979) | — | — | (7,979) | |||||||||||||||||||||||||||||
| Share-based compensation expense | 886 | 9 | 4,537 | — | — | 4,546 | |||||||||||||||||||||||||||||
| Restricted shares forgiven for taxes | (31) | — | (88) | — | — | (88) | |||||||||||||||||||||||||||||
| Change in estimate of share-based award vesting | — | — | (684) | — | — | (684) | |||||||||||||||||||||||||||||
Change in fair value of interest rate swap, net of tax of $655 | — | — | — | — | 2,464 | 2,464 | |||||||||||||||||||||||||||||
Reclassification of interest rate swap settlement to net loss, net of tax of $(13) | — | — | — | — | (51) | (51) | |||||||||||||||||||||||||||||
| Foreign currency translation loss | — | — | — | — | (13,543) | (13,543) | |||||||||||||||||||||||||||||
| Balance as of September 30, 2022 | 43,882 | $ | 439 | $ | 470,543 | $ | (233,184) | $ | (43,032) | $ | 194,766 | ||||||||||||||||||||||||
| Common Stock | Accumulated deficit | Accumulated other comprehensive income (loss) | |||||||||||||||||||||||||||||||||
| (in thousands) | Number of shares | Par value | Additional paid-in capital | Total | |||||||||||||||||||||||||||||||
| Balance as of December 31, 2020 | 42,686 | $ | 427 | $ | 493,332 | $ | (205,875) | $ | (33,732) | $ | 254,152 | ||||||||||||||||||||||||
| Net loss | — | — | — | (13,681) | — | (13,681) | |||||||||||||||||||||||||||||
| Dividends accrued for preferred stock | — | — | (19,054) | — | — | (19,054) | |||||||||||||||||||||||||||||
| Shares issued for option exercises | 6 | — | 48 | — | — | 48 | |||||||||||||||||||||||||||||
| Share-based compensation expense | 394 | 4 | 2,913 | — | — | 2,917 | |||||||||||||||||||||||||||||
| Restricted shares forgiven for taxes | (52) | (1) | (362) | — | — | (363) | |||||||||||||||||||||||||||||
| Change in estimate of share-based award vesting | — | — | (337) | — | — | (337) | |||||||||||||||||||||||||||||
Change in fair value of interest rate swap, net of tax of $53 | — | — | — | — | (176) | (176) | |||||||||||||||||||||||||||||
Reclassification of interest rate swap settlement to net loss, net of tax of $868 | — | — | — | — | 2,873 | 2,873 | |||||||||||||||||||||||||||||
| Foreign currency translation loss | — | — | — | — | (1,550) | (1,550) | |||||||||||||||||||||||||||||
| Balance as of September 30, 2021 | 43,034 | $ | 430 | $ | 476,540 | $ | (219,556) | $ | (32,585) | $ | 224,829 | ||||||||||||||||||||||||
See notes to condensed consolidated financial statements (unaudited).
6
NN, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
| Nine Months Ended September 30, | |||||||||||
| (in thousands) | 2022 | 2021 | |||||||||
| Cash flows from operating activities | |||||||||||
| Net loss | $ | (14,084) | $ | (13,681) | |||||||
| Adjustments to reconcile net loss to net cash provided by (used in) operating activities: | |||||||||||
| Depreciation and amortization | 33,962 | 34,860 | |||||||||
| Amortization of debt issuance costs and discount | 1,021 | 1,049 | |||||||||
| Loss on extinguishment of debt and write-off of debt issuance costs | — | 2,390 | |||||||||
| Total derivative gain, net of cash settlements | (4,858) | (856) | |||||||||
| Share of net income from joint venture, net of cash dividends received | 2,310 | (3,456) | |||||||||
| Compensation expense from issuance of share-based awards | 3,862 | 2,580 | |||||||||
| Deferred income taxes | (1,831) | (3,720) | |||||||||
| Other | (3,096) | (1,834) | |||||||||
| Changes in operating assets and liabilities: | |||||||||||
| Accounts receivable | (15,667) | 136 | |||||||||
| Inventories | (11,314) | (13,252) | |||||||||
| Accounts payable | 9,827 | 7,982 | |||||||||
| Income taxes receivable and payable, net | (403) | (5,171) | |||||||||
| Other | (2,400) | (1,336) | |||||||||
| Net cash provided by (used in) operating activities | (2,671) | 5,691 | |||||||||
| Cash flows from investing activities | |||||||||||
| Acquisition of property, plant and equipment | (14,011) | (14,556) | |||||||||
| Proceeds from sale of property, plant, and equipment | 460 | 1,177 | |||||||||
| Cash paid for post-closing adjustments on sale of business | — | (3,880) | |||||||||
| Cash settlements of interest rate swap | — | (15,420) | |||||||||
| Net cash used in investing activities | (13,551) | (32,679) | |||||||||
| Cash flows from financing activities | |||||||||||
| Cash paid for debt issuance costs | (136) | (7,360) | |||||||||
| Proceeds from issuance of preferred stock | — | 61,793 | |||||||||
| Redemption of preferred stock | — | (122,434) | |||||||||
| Proceeds from long-term debt | 32,000 | 166,000 | |||||||||
| Repayments of long-term debt | (28,158) | (88,058) | |||||||||
| Repayments of short-term debt, net | — | (1,563) | |||||||||
| Other | (2,265) | (3,859) | |||||||||
| Net cash provided by financing activities | 1,441 | 4,519 | |||||||||
| Effect of exchange rate changes on cash flows | (1,324) | (1,058) | |||||||||
| Net change in cash and cash equivalents | (16,105) | (23,527) | |||||||||
| Cash and cash equivalents at beginning of period | 28,656 | 48,138 | |||||||||
| Cash and cash equivalents at end of period | $ | 12,551 | $ | 24,611 | |||||||
See notes to condensed consolidated financial statements (unaudited).
7
NN, Inc.
Notes to Condensed Consolidated Financial Statements
September 30, 2022
(Unaudited)
Note 1. Interim Financial Statements
Nature of Business
NN, Inc. is a global diversified industrial company that combines advanced engineering and production capabilities with in-depth materials science expertise to design and manufacture high-precision components and assemblies primarily for the automotive, general industrial, electrical, aerospace, defense, and medical markets. As used in this Quarterly Report on Form 10-Q (this “Quarterly Report”), the terms “NN,” the “Company,” “we,” “our,” or “us” refer to NN, Inc., and its subsidiaries.
Basis of Presentation
The accompanying condensed consolidated financial statements have not been audited. The Condensed Consolidated Balance Sheet as of December 31, 2021, was derived from the audited consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2021 (the “2021 Annual Report”), which we filed with the U.S. Securities and Exchange Commission (the “SEC”) on March 11, 2022. In management’s opinion, the accompanying unaudited condensed consolidated financial statements reflect all adjustments necessary to fairly state our results of operations for the three and nine months ended September 30, 2022 and 2021; financial position as of September 30, 2022 and December 31, 2021; and cash flows for the nine months ended September 30, 2022 and 2021, on a basis consistent with our audited consolidated financial statements. These adjustments are of a normal recurring nature and are, in the opinion of management, necessary to state fairly the Company’s financial position and operating results for the interim periods. Certain prior period amounts have been reclassified to conform to the current year’s presentation.
Certain information and footnote disclosures normally included in the consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) have been condensed or omitted from the unaudited condensed consolidated financial statements presented in this Quarterly Report. These unaudited condensed consolidated financial statements should be read in conjunction with our audited consolidated financial statements and accompanying notes included in the 2021 Annual Report. The results for the three and nine months ended September 30, 2022, are not necessarily indicative of results for the year ending December 31, 2022, or any other future periods.
Except for per share data or as otherwise indicated, all U.S. dollar amounts and share counts presented in the tables in these Notes to Condensed Consolidated Financial Statements are in thousands.
Accounting Standards Recently Adopted
In August 2020, the FASB issued ASU 2020-06, Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity (“ASU 2020-06”), which simplifies the accounting for certain financial instruments with characteristics of liabilities and equity. Specifically, ASU 2020-06 simplifies accounting for convertible instruments by removing major separation models required under current U.S. GAAP. In addition, ASU 2020-06 removes certain settlement conditions that are required for equity contracts to qualify for the derivative scope exception, which will permit more equity contracts to qualify for the exception. Further, for the diluted earnings-per-share calculation, the new guidance requires entities to use the if-converted method for all convertible instruments and generally requires entities to include the effect of share settlement for instruments that may be settled in cash or shares, among other things. The adoption of ASU 2020-06 effective January 1, 2022 did not have a material impact on our consolidated financial statements and related disclosures.
In May 2021, the FASB issued ASU 2021-04, Issuer’s Accounting for Certain Modifications or Exchanges of Freestanding Equity-Classified Written Call Options (“ASU 2021-04”), which clarifies the accounting for modifications or exchanges of freestanding equity-classified written call options that remain equity classified after modification or exchange. Specifically, ASU 2021-04 requires the issuer to treat a modification of an equity-classified warrant as an exchange of the original warrant. The difference between the fair value of the modified warrant and the fair value of the warrant immediately before modification is then recognized as an issuance cost or discount of the related transaction. Since we do not have any equity-classified written call options that would be subject to this guidance, the adoption of ASU 2021-04 did not have any impact on our consolidated financial statements and related disclosures during the nine months ended September 30, 2022.
Accounting Standards Not Yet Adopted
In November 2021, the FASB issued ASU 2021-10, Government Assistance (Topic 832): Disclosures by Business Entities about Government Assistance (“ASU 2021-10”), which requires business entities to provide certain annual disclosures when
8
they have received government assistance and use a grant or contribution accounting model by analogy to other accounting guidance. Such disclosures include the nature of the transactions, significant terms and conditions, accounting policies, and affected financial statement line items. ASU 2021-10 may be applied either prospectively or retrospectively. We are in the process of assessing the impact ASU 2021-10 may have on our annual disclosures for the year ending December 31, 2022.
Note 2. Segment Information
Our business is aggregated into the following two reportable segments:
•Mobile Solutions, which is focused on growth in the automotive and general industrial end markets; and
•Power Solutions, which is focused on growth in the electrical, general industrial, automotive, aerospace, defense, and medical end markets.
These divisions are considered our two operating segments as each engages in business activities for which it earns revenues and incurs expenses, discrete financial information is available for each, and this is the level at which the chief operating decision maker reviews discrete financial information for purposes of allocating resources and assessing performance.
The following tables present results of operations by reportable segment.
| Mobile Solutions | Power Solutions | Corporate and Consolidations | Total | ||||||||||||||||||||
| Three Months Ended September 30, 2022 | |||||||||||||||||||||||
| Net sales | $ | 76,122 | $ | 51,124 | $ | 51 | (a) | $ | 127,297 | ||||||||||||||
| Income (loss) from operations | (474) | 2,582 | (4,225) | (2,117) | |||||||||||||||||||
| Interest expense | (3,746) | ||||||||||||||||||||||
| Other | 1,156 | ||||||||||||||||||||||
| Loss from operations before income taxes and share of net income from joint venture | $ | (4,707) | |||||||||||||||||||||
| Three Months Ended September 30, 2021 | |||||||||||||||||||||||
| Net sales | $ | 68,586 | $ | 48,680 | $ | (22) | (a) | $ | 117,244 | ||||||||||||||
| Income (loss) from operations | (257) | 1,252 | (5,607) | (4,612) | |||||||||||||||||||
| Interest expense | (3,578) | ||||||||||||||||||||||
| Other | 4,346 | ||||||||||||||||||||||
| Loss from operations before income taxes and share of net income from joint venture | $ | (3,844) | |||||||||||||||||||||
| Mobile Solutions | Power Solutions | Corporate and Consolidations | Total | ||||||||||||||||||||
| Nine Months Ended September 30, 2022 | |||||||||||||||||||||||
| Net sales | $ | 225,542 | $ | 155,184 | $ | — | $ | 380,726 | |||||||||||||||
| Income (loss) from operations | 3,224 | 4,376 | (17,651) | (10,051) | |||||||||||||||||||
| Interest expense | (10,673) | ||||||||||||||||||||||
| Other | 4,219 | ||||||||||||||||||||||
| Loss from operations before income taxes and share of net income from joint venture | $ | (16,505) | |||||||||||||||||||||
| Nine Months Ended September 30, 2021 | |||||||||||||||||||||||
| Net sales | $ | 220,248 | $ | 147,026 | $ | (69) | (a) | $ | 367,205 | ||||||||||||||
| Income (loss) from operations | 8,342 | 6,559 | (20,123) | (5,222) | |||||||||||||||||||
| Interest expense | (9,175) | ||||||||||||||||||||||
| Other | (3,352) | ||||||||||||||||||||||
| Loss from operations before income taxes and share of net income from joint venture | $ | (17,749) | |||||||||||||||||||||
_______________________________
(a)Includes elimination of intersegment transactions occurring during the ordinary course of business.
9
Note 3. Inventories
Inventories are comprised of the following amounts:
| September 30, 2022 | December 31, 2021 | |||||||||||||
| Raw materials | $ | 32,821 | $ | 27,221 | ||||||||||
| Work in process | 29,349 | 24,960 | ||||||||||||
| Finished goods | 22,002 | 22,846 | ||||||||||||
| Total inventories | $ | 84,172 | $ | 75,027 | ||||||||||
Note 4. Intangible Assets, Net
The following table shows changes in the carrying amount of intangible assets, net, by reportable segment.
| Mobile Solutions | Power Solutions | Total | ||||||||||||||||||
| Balance as of December 31, 2021 | $ | 25,709 | $ | 63,009 | $ | 88,718 | ||||||||||||||
| Amortization | (2,515) | (8,245) | (10,760) | |||||||||||||||||
| Balance as of September 30, 2022 | $ | 23,194 | $ | 54,764 | $ | 77,958 | ||||||||||||||
Intangible assets are reviewed for impairment when changes in circumstances indicate the carrying value of those assets may not be recoverable. As of September 30, 2022, our market capitalization remained at a level that was less than the net book value of our stockholders’ equity. The decline in our market capitalization during the nine months ended September 30, 2022 was a triggering event that caused us to perform impairment analyses on our long-lived assets. Based on our analyses, the carrying values of the long-lived assets were recoverable and no impairment charge was recorded during the nine months ended September 30, 2022.
Note 5. Investment in Joint Venture
We own a 49% investment in Wuxi Weifu Autocam Precision Machinery Company, Ltd. (the “JV”), a joint venture located in Wuxi, China. The JV is jointly controlled and managed, and we account for it under the equity method.
The following table shows changes in our investment in the JV.
| Balance as of December 31, 2021 | $ | 34,045 | |||
| Share of earnings | 3,935 | ||||
| Dividends paid by joint venture | (6,245) | ||||
| Foreign currency translation loss | (3,542) | ||||
| Balance as of September 30, 2022 | $ | 28,193 | |||
Note 6. Income Taxes
Our effective tax rate was 22.7% and (9.2)% for the three and nine months ended September 30, 2022, respectively, and (9.8)% and 3.5% for the three and nine months ended September 30, 2021, respectively. The effective tax rates for the three and nine months ended September 30, 2022 differ from the U.S. federal statutory tax rate of 21% primarily due to the accrual of tax on non-permanently reinvested unremitted earnings of foreign subsidiaries and by limitation on the amount of tax benefit recorded for loss carryforwards in certain jurisdictions where we believe it is more likely than not that a portion of the future tax benefit may not be realized. In addition, the effective tax rate was favorably impacted by the recording of interest income on the Company’s federal income tax refund requested as a result of the CARES act.
10
Note 7. Debt
On March 22, 2021, we entered into a new $150.0 million term loan facility (the “Term Loan Facility”) and a new $50.0 million asset backed credit facility (the “ABL Facility”). The following table presents debt balances as of September 30, 2022 and December 31, 2021.
| September 30, 2022 | December 31, 2021 | |||||||||||||
| Term Loan Facility | $ | 147,750 | $ | 148,875 | ||||||||||
| ABL Facility | 6,000 | — | ||||||||||||
| International lines of credit and other loans | 8,436 | 10,930 | ||||||||||||
| Total principal | 162,186 | 159,805 | ||||||||||||
| Less-current maturities of long-term debt | 3,150 | 3,074 | ||||||||||||
| Principal, net of current portion | 159,036 | 156,731 | ||||||||||||
| Less-unamortized debt issuance costs and discount (1) | 4,685 | 5,679 | ||||||||||||
| Long-term debt, net of current portion | $ | 154,351 | $ | 151,052 | ||||||||||
_______________________________
(1) In addition to this amount, costs of $0.7 million and $0.7 million related to the ABL Facility were recorded in other non-current assets as of September 30, 2022 and December 31, 2021, respectively.
Term Loan Facility
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%. At September 30, 2022, the Term Loan Facility bore interest, based on one-month LIBOR, at 9.990%. We have an interest rate swap, which expires in July 2024, that changes the one-month LIBOR to a fixed rate of 1.291% on $60.0 million of the outstanding balance of the Term Loan 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. The Term Loan Facility is collateralized by all of our assets. The Term Loan Facility has a first lien on all assets other than accounts receivable and inventory and has a second lien on accounts receivable and inventory. On March 3, 2022, we amended our Term Loan Facility, which increased the quarterly maximum consolidated net leverage ratio. We were in compliance with all requirements under the Term Loan Facility as of September 30, 2022.
The Term Loan Facility was issued at a $3.8 million discount and we capitalized an additional $2.8 million in new debt issuance costs. These costs are recorded as a direct reduction to the carrying amount of the associated long-term debt and amortized over the term of the debt.
ABL Facility
The ABL Facility provides for a senior secured revolving credit facility in the amount of $50.0 million, of which $30.0 million is available in the form of letters of credit and $5.0 million is available for the issuance of short-term swingline loans. The availability of credit under the ABL Facility is limited by a borrowing base calculation derived from accounts receivable and inventory held in the United States. Outstanding borrowings under the ABL Facility bear interest on a variable rate structure plus an interest rate spread that is based on the average amount of aggregate revolving commitment available. The variable borrowing rate is either 1) LIBOR plus an applicable margin of 1.75% or 2.00%, depending on availability, or 2) the greater of the federal funds rate or prime, plus an applicable margin of 0.75% or 1.00%, depending on availability. We may elect whether to use one-month, three-month, or six-month LIBOR, subject to a 0.50% floor. Interest payments are due monthly on borrowings that utilize one-month LIBOR and quarterly on borrowings that utilize three-month or six-month LIBOR. At September 30, 2022, using one-month LIBOR plus a 1.75% spread, the weighted average interest rate on outstanding borrowings under the ABL Facility was 4.56%. We pay a commitment fee of 0.375% for unused capacity under the ABL Facility and a 1.875% fee on the amount of letters of credit outstanding. The final maturity date of the ABL Facility is March 22, 2026.
As of September 30, 2022, we had $6.0 million of outstanding borrowings under the ABL Facility, $11.1 million of outstanding letters of credit, and $32.1 million available for future borrowings under the ABL Facility. The ABL Facility has a first lien on accounts receivable and inventory. We were in compliance with all requirements under the ABL Facility as of September 30, 2022.
11
Note 8. Leases
The following table contains supplemental cash flow information related to leases.
| Nine Months Ended September 30, | ||||||||||||||
| 2022 | 2021 | |||||||||||||
| Cash paid for amounts included in the measurement of lease liabilities: | ||||||||||||||
| Operating cash flows used in finance leases | $ | 262 | $ | 154 | ||||||||||
| Operating cash flows used in operating leases | 10,865 | 10,369 | ||||||||||||
| Financing cash flows used in finance leases | 2,177 | 3,545 | ||||||||||||
| Right-of-use assets obtained in exchange for new finance lease liabilities | 908 | 1,541 | ||||||||||||
| Right-of-use assets obtained in exchange for new operating lease liabilities (1) | 3,835 | — | ||||||||||||
_______________________________
(1) Includes new leases, renewals, and modifications.
Note 9. Commitments and Contingencies
Brazil ICMS Tax Matter
Prior to the acquisition of Autocam Corporation (“Autocam”) in 2014, Autocam’s Brazilian subsidiary (“Autocam Brazil”) received notification from the Brazilian tax authority regarding ICMS (state value added tax) tax credits claimed on intermediary materials (e.g., tooling and perishable items) used in the manufacturing process. The Brazilian tax authority notification disallowed state ICMS tax credits claimed on intermediary materials based on the argument that these items are not intrinsically related to the manufacturing processes. Autocam Brazil filed an administrative defense with the Brazilian tax authority arguing, among other matters, that it should qualify for an ICMS tax credit, contending that the intermediary materials are directly related to the manufacturing process.
We believe that we have substantial legal and factual defenses, and we plan to defend our interests in this matter vigorously. The matter encompasses several lawsuits filed with the Brazilian courts requesting declaratory actions that no tax is due or seeking a stay of execution on the collection of the tax. In 2018, we obtained a favorable decision in one of the declaratory actions for which the period for appeal has expired. We have filed actions in each court requesting dismissal of the matter based on the earlier court action. In May 2020, we received an unfavorable decision in one of the lawsuits, and as a result have recorded a liability to the Brazilian tax authorities and a receivable from the former shareholders of Autocam for the same amount. Although we anticipate a favorable resolution to the remaining matters, we can provide no assurances that we will be successful in achieving dismissal of all pending cases. The U.S. dollar amount that would be owed in the event of an unfavorable decision is subject to interest, penalties, and currency impacts and therefore is dependent on the timing of the decision. For the remaining open lawsuits, we currently believe the cumulative potential liability in the event of unfavorable decisions on all matters will be less than $5.0 million, inclusive of interest and penalties.
We are entitled to indemnification from the former shareholders of Autocam, subject to the limitations and procedures set forth in the agreement and plan of merger relating to the Autocam acquisition. Management believes the indemnification would include amounts owed for the tax, interest, and penalties related to this matter. Accordingly, we do not expect to incur a loss related to this matter even in the event of an unfavorable decision and, therefore, have not accrued an amount for the remaining matters as of September 30, 2022.
Securities Offering Matter
On November 1, 2019, Erie County Employees’ Retirement System, on behalf of a purported class of plaintiffs, filed a complaint in the Supreme Court of the State of New York, County of New York against us, certain of our current and former officers and directors, and each of the underwriters involved in our public offering and sale of 14.4 million shares of our common stock pursuant to a preliminary prospectus supplement, dated September 10, 2018, a final prospectus supplement, dated September 13, 2018, and a base prospectus, dated April 19, 2017, relating to our effective shelf registration statement on Form S-3 (File No. 333-216737) (the “Offering”). The amended complaint alleges violations of Sections 11, 12(a)(2), and 15 of the Securities Act of 1933 in connection with the Offering.
On July 25, 2022, the parties filed a Stipulation of Settlement, which is subject to court approval, to settle the securities offering action. Under the terms of the Stipulation of Settlement, the Company and/or its insurance carrier will make a cash payment to the plaintiff in the amount of $9.5 million (the “Settlement Amount”), in exchange for which the Company and the other named defendants will be released from all claims related to the securities offering action. As of September 30, 2022, we have
12
previously paid covered expenses totaling $1.0 million meeting our directors' and officers' retention requirement and therefore the Settlement Amount will be covered and paid by our directors' and officers' insurance carrier.
Other Legal Matters
On April 25, 2022, we reached an agreement to settle breach of contract claims brought by a former customer regarding the sale of products by us in 2016. Under the agreement, we are paying $1.8 million to the customer in specified installments through July 2023. The $1.8 million settlement is included in the Other operating expense (income), net line in the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss).
All other legal proceedings are of an ordinary and routine nature and are incidental to our operations. Management believes that such proceedings should not, individually or in the aggregate, have a material adverse effect on our business, financial condition, results of operations, or cash flows. In making that determination, we analyze the facts and circumstances of each case at least quarterly in consultation with our attorneys and determine a range of reasonably possible outcomes.
Note 10. Preferred Stock and Stockholders' Equity
Series D Perpetual Preferred Stock
On March 22, 2021, we completed a private placement of 65 thousand shares of newly designated Series D Perpetual Preferred Stock, with a par value of $0.01 per share (the “Series D Preferred Stock”), at a price of $1,000 per share, together with detachable warrants (the “2021 Warrants”) to purchase up to 1.9 million shares of our common stock at an exercise price of $0.01 per share. The Series D Preferred Stock has an initial liquidation preference of $1,000 per share and is redeemable at our option in cash at a redemption price equal to the liquidation preference then in effect. Series D Preferred Stock shares earn cash dividends at a rate of 10.0% per year, payable quarterly in arrears, accruing whether or not earned or declared. If no cash dividend is paid, then the liquidation preference per share effective on the dividend date increases by 12.0% per year. Beginning March 22, 2026, the cash dividend rate and in-kind dividend rate increase by 2.5% per year. Cash dividends are required beginning on September 30, 2027.
The Series D Preferred Stock is classified as mezzanine equity, between liabilities and stockholders’ equity, because certain features of the Series D Preferred Stock could require redemption of the Series D Preferred Stock upon a change of control event that is considered not solely within our control. For initial recognition, the Series D Preferred Stock was recognized at a discounted value, net of issuance costs and allocation to warrants and a bifurcated embedded derivative. The aggregate discount is amortized as a deemed dividend through March 22, 2026, which is the date the dividend rate begins to increase by 2.5% per year. Deemed dividends adjust retained earnings (or in the absence of retained earnings, additional paid-in capital).
In accordance with ASC 815-15, Derivatives and Hedging - Embedded Derivatives, certain features of the Series D Preferred Stock were bifurcated and accounted for as derivatives separately. Note 15 discusses the accounting for these features.
As of September 30, 2022, the carrying value of the Series D Preferred Stock shares was $61.8 million, which included $15.1 million of accumulated unpaid and deemed dividends. The following table presents the change in the Series D Preferred Stock carrying value during the nine months ended September 30, 2022.
| Balance as of December 31, 2021 | $ | 53,807 | |||
| Accrual of in-kind dividends | 6,620 | ||||
| Amortization | 1,359 | ||||
| Balance as of September 30, 2022 | $ | 61,786 | |||
Note 11. Revenue from Contracts with Customers
Revenue is recognized when control of the good or service is transferred to the customer either at a point in time or, in limited circumstances, as our services are rendered over time. Revenue is measured as the amount of consideration we expect to receive in exchange for transferring goods or services. During the nine months ended September 30, 2022, we received equipment from a customer as part of the selling price of goods transferred. This noncash consideration was recognized as revenue equal to the fair value of the equipment received.
13
The following tables summarize revenue by customer geographical region.
| Three Months Ended September 30, 2022 | Mobile Solutions | Power Solutions | Intersegment Sales Eliminations | Total | |||||||||||||||||||
| United States and Puerto Rico | $ | 35,419 | $ | 39,579 | $ | 51 | $ | 75,049 | |||||||||||||||
| China | 12,839 | 1,378 | — | 14,217 | |||||||||||||||||||
| Brazil | 14,109 | 137 | — | 14,246 | |||||||||||||||||||
| Mexico | 5,185 | 4,769 | — | 9,954 | |||||||||||||||||||
| Germany | 1,432 | 84 | — | 1,516 | |||||||||||||||||||
| Poland | 1,100 | 2 | — | 1,102 | |||||||||||||||||||
| Other | 6,038 | 5,175 | — | 11,213 | |||||||||||||||||||
| Total net sales | $ | 76,122 | $ | 51,124 | $ | 51 | $ | 127,297 | |||||||||||||||
| Three Months Ended September 30, 2021 | Mobile Solutions | Power Solutions | Intersegment Sales Eliminations | Total | |||||||||||||||||||
| United States and Puerto Rico | $ | 35,812 | $ | 38,313 | $ | (22) | $ | 74,103 | |||||||||||||||
| China | 10,849 | 749 | — | 11,598 | |||||||||||||||||||
| Brazil | 8,951 | 192 | — | 9,143 | |||||||||||||||||||
| Mexico | 4,981 | 4,627 | — | 9,608 | |||||||||||||||||||
| Germany | 1,080 | 159 | — | 1,239 | |||||||||||||||||||
| Poland | 698 | 3 | — | 701 | |||||||||||||||||||
| Other | 6,215 | 4,637 | — | 10,852 | |||||||||||||||||||
| Total net sales | $ | 68,586 | $ | 48,680 | $ | (22) | $ | 117,244 | |||||||||||||||
| Nine Months Ended September 30, 2022 | Mobile Solutions | Power Solutions | Intersegment Sales Eliminations | Total | |||||||||||||||||||
| United States and Puerto Rico | $ | 109,183 | $ | 120,442 | $ | — | $ | 229,625 | |||||||||||||||
| China | 34,155 | 3,855 | — | 38,010 | |||||||||||||||||||
| Brazil | 36,122 | 794 | — | 36,916 | |||||||||||||||||||
| Mexico | 18,336 | 13,868 | — | 32,204 | |||||||||||||||||||
| Germany | 3,836 | 219 | — | 4,055 | |||||||||||||||||||
| Poland | 3,598 | 7 | — | 3,605 | |||||||||||||||||||
| Other | 20,312 | 15,999 | — | 36,311 | |||||||||||||||||||
| Total net sales | $ | 225,542 | $ | 155,184 | $ | — | $ | 380,726 | |||||||||||||||
| Nine Months Ended September 30, 2021 | Mobile Solutions | Power Solutions | Intersegment Sales Eliminations | Total | |||||||||||||||||||
| United States and Puerto Rico | $ | 108,534 | $ | 117,543 | $ | (69) | $ | 226,008 | |||||||||||||||
| China | 38,482 | 3,537 | — | 42,019 | |||||||||||||||||||
| Brazil | 28,604 | 727 | — | 29,331 | |||||||||||||||||||
| Mexico | 14,825 | 12,373 | — | 27,198 | |||||||||||||||||||
| Germany | 4,216 | 419 | — | 4,635 | |||||||||||||||||||
| Poland | 2,782 | 10 | — | 2,792 | |||||||||||||||||||
| Other | 22,805 | 12,417 | — | 35,222 | |||||||||||||||||||
| Total net sales | $ | 220,248 | $ | 147,026 | $ | (69) | $ | 367,205 | |||||||||||||||
The following tables summarize revenue by customer industry. Our products in the automotive industry include high-precision components and assemblies for electric power steering systems, electric braking, electric motors, fuel systems, emissions control, transmissions, moldings, stampings, sensors, and electrical contacts. Our products in the general industrial industry
14
include high-precision metal and plastic components for a variety of industrial applications including diesel industrial motors, heating and cooling systems, fluid power systems, power tools, and more. While many of the industries we serve include electrical components, our products in the residential/commercial electrical industry category in the following tables include components used in smart meters, charging stations, circuit breakers, transformers, electrical contact assemblies, precision stampings, welded contact assemblies, and specification plating and surface finishing.
| Three Months Ended September 30, 2022 | Mobile Solutions | Power Solutions | Intersegment Sales Eliminations | Total | |||||||||||||||||||
| Automotive | $ | 51,388 | $ | 10,822 | $ | — | $ | 62,210 | |||||||||||||||
| General Industrial | 19,546 | 14,751 | — | 34,297 | |||||||||||||||||||
| Residential/Commercial Electrical | — | 17,025 | — | 17,025 | |||||||||||||||||||
| Other | 5,188 | 8,526 | 51 | 13,765 | |||||||||||||||||||
| Total net sales | $ | 76,122 | $ | 51,124 | $ | 51 | $ | 127,297 | |||||||||||||||
| Three Months Ended September 30, 2021 | Mobile Solutions | Power Solutions | Intersegment Sales Eliminations | Total | |||||||||||||||||||
| Automotive | $ | 43,486 | $ | 9,892 | $ | — | $ | 53,378 | |||||||||||||||
| General Industrial | 21,396 | 15,186 | — | 36,582 | |||||||||||||||||||
| Residential/Commercial Electrical | — | 16,078 | — | 16,078 | |||||||||||||||||||
| Other | 3,704 | 7,524 | (22) | 11,206 | |||||||||||||||||||
| Total net sales | $ | 68,586 | $ | 48,680 | $ | (22) | $ | 117,244 | |||||||||||||||
| Nine Months Ended September 30, 2022 | Mobile Solutions | Power Solutions | Intersegment Sales Eliminations | Total | |||||||||||||||||||
| Automotive | $ | 150,834 | $ | 30,628 | $ | — | $ | 181,462 | |||||||||||||||
| General Industrial | 61,883 | 47,726 | — | 109,609 | |||||||||||||||||||
| Residential/Commercial Electrical | — | 52,981 | — | 52,981 | |||||||||||||||||||
| Other | 12,825 | 23,849 | — | 36,674 | |||||||||||||||||||
| Total net sales | $ | 225,542 | $ | 155,184 | $ | — | $ | 380,726 | |||||||||||||||
| Nine Months Ended September 30, 2021 | Mobile Solutions | Power Solutions | Intersegment Sales Eliminations | Total | |||||||||||||||||||
| Automotive | $ | 139,877 | $ | 29,974 | $ | — | $ | 169,851 | |||||||||||||||
| General Industrial | 70,155 | 45,617 | — | 115,772 | |||||||||||||||||||
| Residential/Commercial Electrical | — | 47,651 | — | 47,651 | |||||||||||||||||||
| Other | 10,216 | 23,784 | (69) | 33,931 | |||||||||||||||||||
| Total net sales | $ | 220,248 | $ | 147,026 | $ | (69) | $ | 367,205 | |||||||||||||||
Deferred Revenue
Deferred revenue relates to payments received in advance of performance under the contract and recognized as revenue as (or when) we perform under the contract. The balance of deferred revenue was $0.6 million and $0.5 million as of September 30, 2022 and December 31, 2021, respectively. Revenue recognized for performance obligations satisfied or partially satisfied during the nine months ended September 30, 2022 included $0.5 million that was included in deferred revenue as of December 31, 2021.
Transaction Price Allocated to Future Performance Obligations
We are required to disclose the aggregate amount of transaction price that is allocated to performance obligations that have not yet been satisfied as of September 30, 2022, unless our contracts meet one of the practical expedients. Our contracts met the practical expedient for a performance obligation that is part of a contract that has an original expected duration of one year or less.
15
Note 12. Share-Based Compensation
The following table lists the components of share-based compensation expense by type of award, which is recognized in the “Selling, general, and administrative expense” line in the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss).
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Stock options | $ | 37 | $ | 59 | $ | 124 | $ | 207 | |||||||||||||||
| Restricted stock | 471 | 521 | 3,233 | 1,660 | |||||||||||||||||||
| Performance share units | 483 | 351 | 1,189 | 1,050 | |||||||||||||||||||
Change in estimate of share-based award vesting (1) | (684) | — | (684) | (337) | |||||||||||||||||||
| Share-based compensation expense | $ | 307 | $ | 931 | $ | 3,862 | $ | 2,580 | |||||||||||||||
_______________________________
(1)Amounts reflect the decrease in share-based compensation expense based on the change in estimate of the probability of vesting of share-based awards.
Stock Options
The following table presents stock option activity for the nine months ended September 30, 2022.
| Number of Options (in thousands) | Weighted- Average Exercise Price (per share) | Weighted- Average Remaining Contractual Term | Aggregate Intrinsic Value | |||||||||||||||||||||||
| Outstanding at January 1, 2022 | 621 | $ | 12.24 | |||||||||||||||||||||||
| Expired | (79) | 9.71 | ||||||||||||||||||||||||
| Outstanding at September 30, 2022 | 542 | $ | 12.61 | 3.6 years | $ | — | (1) | |||||||||||||||||||
| Exercisable at September 30, 2022 | 515 | $ | 12.77 | 3.4 years | $ | — | (1) | |||||||||||||||||||
_______________________________
(1)The aggregate intrinsic value is the sum of intrinsic values for each exercisable individual option grant. The intrinsic value is the amount by which the closing market price of our stock at September 30, 2022 was greater than the exercise price of any individual option grant.
Restricted Stock
During the nine months ended September 30, 2022, we granted 897 thousand shares of restricted stock to non-executive directors, officers and certain other key employees under the NN, Inc. 2019 Omnibus Incentive Plan (“2019 Omnibus Plan”). The shares of restricted stock granted during the nine months ended September 30, 2022, vest pro-rata generally over three years for employees and over one year for non-executive directors. We determined the fair value of the shares awarded by using the closing price of our common stock as of the date of grant. The weighted average grant date fair value of restricted stock granted in the nine months ended September 30, 2022, was $3.31 per share. Total grant date fair value of restricted stock that vested in the nine months ended September 30, 2022, was $2.1 million.
16
The following table presents the status of unvested restricted stock awards as of September 30, 2022 and changes during the nine months then ended.
| Nonvested Restricted Shares (in thousands) | Weighted Average Grant-Date Fair Value (per share) | ||||||||||
| Unvested at January 1, 2022 | 469 | $ | 7.28 | ||||||||
| Granted | 897 | 3.31 | |||||||||
| Vested | (291) | 7.05 | |||||||||
| Forfeited | (11) | 4.37 | |||||||||
| Unvested at September 30, 2022 | 1,064 | $ | 4.02 | ||||||||
Performance Share Units
Performance Share Units (“PSUs”) are a form of long-term incentive compensation awarded to executive officers and certain other key employees designed to directly align the interests of employees to the interests of our stockholders, and to create long-term stockholder value. Some PSUs are based on total shareholder return (“TSR Awards”), and other PSUs are based on return on invested capital (“ROIC Awards”). TSR Awards granted in 2022 were made pursuant to the 2019 Omnibus Plan and a Performance Share Unit Agreement (the “2019 Omnibus Agreement”). ROIC Awards granted in 2022 were made pursuant to the NN, Inc. 2022 Omnibus Incentive Plan and a Performance Share Unit Agreement.
The TSR Awards vest, if at all, upon our achieving a specified relative total shareholder return, which will be measured against the total shareholder return of a specified index during specified performance periods as defined in the 2019 Omnibus Agreement. The ROIC Awards vest, if at all, upon our achieving a specified average return on invested capital during the performance periods. Each performance period generally begins on January 1 of the year of grant and ends 3 years later on December 31.
We recognize compensation expense over the performance period in which the performance and market conditions are measured. If the PSUs do not vest at the end of the performance periods, then the PSUs will expire automatically. Upon vesting, the PSUs will be settled by the issuance of shares of our common stock, subject to the award recipient’s continued employment. The actual number of shares of common stock to be issued to each award recipient at the end of the performance periods will be interpolated between a threshold and maximum payout amount based on actual performance results. No dividends will be paid on outstanding PSUs during the performance period; however, dividend equivalents will be paid based on dividends declared and the number of shares of common stock that are ultimately earned at the end of the performance periods.
The following table presents the goals with respect to PSUs granted in 2022.
| Threshold Performance (25% of Shares) | Target Performance (100% of Shares) | Maximum Performance (150% of Shares) | ||||||||||||||||||
| TSR Awards | 25th Percentile | 55th Percentile | 75th Percentile | |||||||||||||||||
| Threshold Performance (50% of Shares) | Target Performance (100% of Shares) | Maximum Performance (150% of Shares) | ||||||||||||||||||
| ROIC Awards | 6.4% | 8.6% | 10.0% | |||||||||||||||||
We estimate the grant date fair value of TSR Awards using the Monte Carlo simulation model, as the total shareholder return metric is considered a market condition under ASC Topic 718, Compensation – stock compensation. The grant date fair value of ROIC Awards is based on the closing price of a share of our common stock on the date of grant.
17
The following table presents the status of unvested PSUs as of September 30, 2022 and changes during the nine months then ended.
| Nonvested TSR Awards | Nonvested ROIC Awards | ||||||||||||||||||||||
| Shares (in thousands) | Weighted Average Grant-Date Fair Value (per share) | Shares (in thousands) | Weighted Average Grant-Date Fair Value (per share) | ||||||||||||||||||||
| Nonvested at January 1, 2022 | 194 | $ | 9.59 | 228 | $ | 8.14 | |||||||||||||||||
| Granted | 382 | 2.53 | 408 | 2.62 | |||||||||||||||||||
| Nonvested at September 30, 2022 | 576 | $ | 4.90 | 636 | $ | 4.60 | |||||||||||||||||
Note 13. Accumulated Other Comprehensive Income
The following tables present the components of accumulated other comprehensive income (loss) (“AOCI”).
| Foreign Currency Translation | Interest rate swap | Income taxes (1) | Total | ||||||||||||||||||||
| Balance as of June 30, 2022 | $ | (37,906) | $ | 2,207 | $ | (468) | $ | (36,167) | |||||||||||||||
| Other comprehensive income (loss) before reclassifications | (7,653) | 1,145 | (241) | (6,749) | |||||||||||||||||||
| Amounts reclassified from AOCI to interest expense (2) | — | (146) | 30 | (116) | |||||||||||||||||||
| Net other comprehensive income (loss) | (7,653) | 999 | (211) | (6,865) | |||||||||||||||||||
| Balance as of September 30, 2022 | $ | (45,559) | $ | 3,206 | $ | (679) | $ | (43,032) | |||||||||||||||
| Balance as of June 30, 2021 | $ | (29,819) | $ | — | $ | — | $ | (29,819) | |||||||||||||||
| Other comprehensive income (loss) before reclassifications | (2,612) | (229) | 53 | (2,788) | |||||||||||||||||||
| Amounts reclassified from AOCI to interest expense (2) | — | 29 | (7) | 22 | |||||||||||||||||||
| Net other comprehensive income (loss) | (2,612) | (200) | 46 | (2,766) | |||||||||||||||||||
| Balance as of September 30, 2021 | $ | (32,431) | $ | (200) | $ | 46 | $ | (32,585) | |||||||||||||||
| Foreign Currency Translation | Interest rate swap | Income taxes (1) | Total | ||||||||||||||||||||
| Balance as of December 31, 2021 | $ | (32,016) | $ | 151 | $ | (37) | $ | (31,902) | |||||||||||||||
| Other comprehensive income (loss) before reclassifications | (13,543) | 3,119 | (655) | (11,079) | |||||||||||||||||||
| Amounts reclassified from AOCI to interest expense (2) | — | (64) | 13 | (51) | |||||||||||||||||||
| Net other comprehensive income (loss) | (13,543) | 3,055 | (642) | (11,130) | |||||||||||||||||||
| Balance as of September 30, 2022 | $ | (45,559) | $ | 3,206 | $ | (679) | $ | (43,032) | |||||||||||||||
| Balance as of December 31, 2020 | $ | (30,881) | $ | (3,712) | $ | 861 | $ | (33,732) | |||||||||||||||
| Other comprehensive income (loss) before reclassifications | (1,550) | (229) | 53 | (1,726) | |||||||||||||||||||
| Amounts reclassified from AOCI to interest expense (2) | — | 29 | (7) | 22 | |||||||||||||||||||
| Amounts reclassified from AOCI to loss on interest rate swap (3) | — | 3,712 | (861) | 2,851 | |||||||||||||||||||
| Net other comprehensive income (loss) | (1,550) | 3,512 | (815) | 1,147 | |||||||||||||||||||
| Balance as of September 30, 2021 | $ | (32,431) | $ | (200) | $ | 46 | $ | (32,585) | |||||||||||||||
______________________
18
(1) Income tax effect of changes in interest rate swap.
(2) Represents interest rate swap settlements of effective hedge.
(3) Represents reclassification of derivative loss and settlements after discontinuation of hedge accounting.
Note 14. Net Income (Loss) Per Common Share
In accordance with ASC 260, Earnings Per Share, a company that has participating securities is required to utilize the two-class method for calculating earnings per share (“EPS”) unless the treasury stock method results in lower EPS. The two-class method is an allocation of earnings between the holders of common stock and a company’s participating securities. Basic EPS is calculated by dividing income or loss attributable to common stockholders by the weighted average number of shares of common stock outstanding. To calculate diluted EPS, basic EPS is further adjusted to include the effect of potentially dilutive stock options, warrants, and convertible preferred stock.
The following table summarizes the computation of basic and diluted net loss per common share.
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Numerator: | |||||||||||||||||||||||
| Net loss | $ | (2,215) | $ | (3,377) | $ | (14,084) | $ | (13,681) | |||||||||||||||
| Less: Preferred stock cumulative dividends and deemed dividends | (2,783) | (2,314) | (7,979) | (19,054) | |||||||||||||||||||
| Numerator for basic and diluted undistributed net loss per common share (1) | $ | (4,998) | $ | (5,691) | $ | (22,063) | $ | (32,735) | |||||||||||||||
| Denominator: | |||||||||||||||||||||||
| Weighted average common shares outstanding | 43,884 | 43,034 | 43,695 | 42,980 | |||||||||||||||||||
| Adjustment for unvested restricted common stock | (1,065) | (476) | (918) | (459) | |||||||||||||||||||
| Adjustment for 2021 Warrants outstanding (2) | 1,892 | 1,897 | 1,893 | 1,341 | |||||||||||||||||||
| Shares used to calculate net loss per share, basic and diluted | 44,711 | 44,455 | 44,670 | 43,862 | |||||||||||||||||||
| Per common share net loss: | |||||||||||||||||||||||
| Basic and diluted net loss per common share | $ | (0.11) | $ | (0.13) | $ | (0.49) | $ | (0.75) | |||||||||||||||
| Cash dividends declared per common share | $ | — | $ | — | $ | — | $ | — | |||||||||||||||
_______________________________
(1) Preferred Stock does not participate in losses.
(2) Weighted average 2021 Warrants outstanding are included in shares outstanding for calculation of basic earnings per share because they are exercisable at an exercise price of $0.01 per share, subject to certain adjustments (see Note 15).
The following table presents securities that could be potentially dilutive in the future that were excluded from the calculation of diluted net loss per common share because they had an anti-dilutive effect.
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Options | 542 | 752 | 563 | 812 | |||||||||||||||||||
| 2019 Warrants | 1,500 | 1,500 | 1,500 | 1,500 | |||||||||||||||||||
| 2,042 | 2,252 | 2,063 | 2,312 | ||||||||||||||||||||
We have elected to allocate undistributed income to participating securities based on year-to-date results. As there was no undistributed income for the nine months ended September 30, 2022, no such allocation was necessary. In addition, given the undistributed loss in the three and nine months ended September 30, 2022 and 2021, options and the 2019 Warrants are considered anti-dilutive and were excluded from the calculation of diluted net loss per share. Stock options excluded from the calculations of diluted net loss per share had a per share exercise price ranging from $7.93 to $25.16 for the three months ended
19
September 30, 2022, and $7.93 to $25.16 for the three months ended September 30, 2021. Stock options excluded from the calculations of diluted net loss per share had a per share exercise price ranging from $7.93 to $25.16 for the nine months ended September 30, 2022, and $7.93 to $25.16 for nine months ended September 30, 2021. The 2019 Warrants excluded from the calculation of diluted net loss per share for the three and nine months ended September 30, 2022 and 2021, had a per share exercise price of $11.49.
Note 15. Fair Value Measurements
Fair value is an exit price representing the expected amount that an entity would receive to sell an asset or pay to transfer a liability in an orderly transaction with market participants at the measurement date. We followed consistent methods and assumptions to estimate fair values as more fully described in the 2021 Annual Report.
Fair value principles prioritize valuation inputs across three broad levels. Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 2 inputs are quoted prices for similar assets and liabilities in active markets or inputs that are observable for the asset or liability, either directly or indirectly through market corroboration, for substantially the full term of the financial instrument. Level 3 inputs are unobservable inputs based on the assumptions used to measure assets and liabilities at fair value. An asset or liability’s classification within the various levels is determined based on the lowest level input that is significant to the fair value measurement.
Our financial instruments that are subject to fair value disclosure consist of cash and cash equivalents, accounts receivable, accounts payable, derivatives, and long-term debt. As of September 30, 2022, the carrying values of these financial instruments approximated fair value.
Derivative Financial Instruments
Certain features were bifurcated and accounted for separately from the Series B Preferred Stock, which was redeemed in March 2021. The following feature was recorded as a derivative.
•Warrants. In conjunction with our placement of the Series B Preferred Stock in December 2019, we issued detachable warrants to purchase up to 1.5 million shares of our common stock (the “2019 Warrants”), which are exercisable, in full or in part, at any time prior to December 11, 2026, at an exercise price of $11.49 per share.
Certain features were bifurcated and accounted for separately from the Series D Preferred Stock that was issued on March 22, 2021. The following features were recorded as derivatives.
•Change-in-control put feature. The Series D Preferred Stock includes a put feature that allows the holder to redeem the Series D Preferred Stock upon a change in control at the greater of 1) the liquidation preference plus accrued dividends or 2) 140% of the liquidation preference. The put feature is considered a redemption right at a premium and is not clearly and closely related to the debt host.
•Warrants. In conjunction with our placement of the Series D Preferred Stock, we issued detachable warrants to purchase up to 1.9 million shares of our common stock. The 2021 Warrants are exercisable, in full or in part, at any time prior to March 22, 2027, at an exercise price of $0.01 per share, subject to anti-dilution adjustments in the event of certain future equity issuances, stock splits, stock dividends, combinations or similar events.
The following tables show the liabilities measured at fair value for the Preferred Stock derivatives as of September 30, 2022 and December 31, 2021.
| Fair Value Measurements as of September 30, 2022 | |||||||||||||||||
| Description | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | ||||||||||||||
| Derivative liability - other non-current liabilities | 3,230 | — | 136 | ||||||||||||||
| Fair Value Measurements as of December 31, 2021 | |||||||||||||||||
| Description | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | ||||||||||||||
| Derivative liability - other non-current liabilities | 7,771 | — | 453 | ||||||||||||||
20
The following table presents the change in the Preferred Stock derivatives during the nine months ended September 30, 2022.
| Balance as of December 31, 2021 | $ | 8,224 | |||
| Change in fair value (1) | (4,858) | ||||
| Balance as of September 30, 2022 | $ | 3,366 | |||
_______________________________
(1) Changes in the fair value are recognized in the “Other expense (income), net” line in the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss).
The fair value of the change-in-control put feature utilizes unobservable inputs based on the Company’s assessment of the probability of a change-in-control event occurring in a future period. The probability of a change-in-control event ranged from 3% to 10% as of September 30, 2022.
The fair value of the 2019 Warrants is determined using a valuation model that utilizes unobservable inputs to determine the probability that the 2019 Warrants will remain outstanding for future periods. The probabilities resulted in a weighted average term of 2.9 years as of September 30, 2022, and 3.6 years as of December 31, 2021.
The fair value of the 2021 Warrants is determined using the observable market price of a share of our common stock, less the $0.01 per share exercise price.
Interest Rate Swaps
We manage our exposure to fluctuations in interest rates using a mix of fixed and variable rate debt. We utilize fixed-rate interest rate swap agreements to change the variable interest rate to a fixed rate on a portion of our variable rate debt.
On July 22, 2021, we entered into a fixed-rate interest rate swap agreement to change the LIBOR-based component of the interest rate on a portion of our variable rate debt to a fixed rate of 1.291% (the “2021 Swap”). The 2021 Swap has a notional amount of $60.0 million and a maturity date of July 31, 2024. The objective of the 2021 Swap is to eliminate the variability of cash flows in interest payments on the first $60.0 million of variable rate debt attributable to changes in benchmark one-month LIBOR interest rates. The hedged risk is the interest rate risk exposure to changes in interest payments, attributable to changes in benchmark one-month LIBOR interest rates over the interest rate swap term. The changes in cash flows of the interest rate swap are expected to exactly offset changes in cash flows of the variable rate debt. We designated the 2021 Swap as a cash flow hedge at inception. Cash settlements of the 2021 Swap are recognized in interest expense.
On February 8, 2019, we entered into a $700.0 million fixed-rate interest rate swap agreement that changed the LIBOR-based portion of the interest rate on a portion of our variable rate debt to a fixed rate of 2.4575% (the “2019 Swap”). On March 22, 2021, we terminated the 2019 Swap with a $13.7 million cash payment in connection with the extinguishment of our previously outstanding long-term variable-rate debt. The 2019 Swap was designated as a cash flow hedge at inception. However, in the fourth quarter of 2020, the 2019 Swap no longer qualified as an effective hedge, and subsequent changes in fair value of the 2019 Swap were recognized in earnings. Amounts recognized in earnings related to the 2019 Swap are recorded in the “Loss on interest rate swap” line on the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) except that cash settlements prior to termination are recognized in “Derivative payments on interest rate swap.” Cash settlements during 2021 are presented in investing activities on the Condensed Consolidated Statements of Cash Flows.
The following table presents the effect of the interest rate swaps on the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss).
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Interest expense (1) | $ | (146) | $ | 29 | $ | (64) | $ | 29 | |||||||||||||||
| Derivative payments on interest rate swap (2) | — | — | — | 1,717 | |||||||||||||||||||
| Loss on interest rate swap (2) | — | — | — | 2,033 | |||||||||||||||||||
_______________________________
(1) Represents settlements on the interest rate swaps while the hedges are effective.
(2) Represents settlements and changes in fair value on the 2019 Swap.
21
The following tables present the assets and liabilities measured at fair value on a recurring basis for the interest rate swaps as of September 30, 2022 and December 31, 2021.
| Fair Value Measurements as of September 30, 2022 | |||||||||||||||||
| Description | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | ||||||||||||||
| Derivative asset - other current assets | $ | — | $ | 1,783 | $ | — | |||||||||||
| Derivative asset - other non-current assets | — | 1,427 | — | ||||||||||||||
| Total | $ | — | $ | 3,210 | $ | — | |||||||||||
| Fair Value Measurements as of December 31, 2021 | |||||||||||||||||
| Description | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | ||||||||||||||
| Derivative asset - other non-current assets | $ | — | $ | 284 | $ | — | |||||||||||
| Derivative liability - other current liabilities | — | (129) | — | ||||||||||||||
| Total | $ | — | $ | 155 | $ | — | |||||||||||
The inputs for determining fair value of the interest rate swaps are classified as Level 2 inputs. Level 2 fair value is based on estimates using standard pricing models. These standard pricing models use inputs which are derived from or corroborated by observable market data such as interest rate yield curves, index forward curves, discount curves, and volatility surfaces. Counterparty to this derivative contract is a highly rated financial institution which we believe carries only a minimal risk of nonperformance.
Fixed Rate Debt
The fair value of our outstanding fixed-rate debt included in the “International lines of credit and other loans” line item within Note 7 to these Notes to Condensed Consolidated Financial Statements approximated carrying value as of September 30, 2022 and December 31, 2021, respectively. These fair values represent Level 2 under the three-tier hierarchy described above. The carrying value of this fixed-rate debt was $8.4 million and $10.9 million as of September 30, 2022 and December 31, 2021, respectively.
22
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Management’s Discussion and Analysis of Financial Condition and Results of Operations is intended to help the reader understand the results of operations and financial condition of NN, Inc. and its consolidated subsidiaries for the three 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.
Overview
NN, Inc. is a global diversified industrial company that combines advanced engineering and production capabilities with in-depth materials science expertise to design and manufacture high-precision components and assemblies primarily for the electrical, automotive, general industrial, aerospace, defense, and medical markets. As used in this Quarterly Report, the terms “NN,” the “Company,” “we,” “our,” or “us” refer to NN, Inc. and its subsidiaries.
Forward-Looking Statements
This Quarterly Report contains forward-looking statements 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. Forward-looking statements generally will be accompanied by words such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “forecast,” “guidance,” “intend,” “may,” “possible,” “potential,” “predict,” “project” or other similar words, phrases or expressions. Forward-looking statements involve a number of risks and uncertainties that are outside of management’s control and that may cause actual results to be materially different from such forward-looking statements. Such factors include, among others, general economic conditions and economic conditions in the industrial sector; the impacts of the COVID-19 pandemic on our financial condition, business operations and liquidity; competitive influences; risks that current customers will commence or increase captive production; risks of capacity underutilization; quality issues; material changes in the costs and availability of raw materials; economic, social, political and geopolitical instability, currency fluctuation, and other risks of doing business outside of the United States; inflationary pressures and changes in the cost or availability of materials, supply chain shortages and disruptions, and the availability of labor; our dependence on certain major customers, some of whom are not parties to long-term agreements (and/or are terminable on short notice); the impact of acquisitions and divestitures; the level of our indebtedness; the restrictions contained in our debt agreements; our ability to obtain financing at favorable rates, if at all, and to refinance existing debt as it matures; unanticipated difficulties integrating acquisitions; new laws and governmental regulations; the impact of climate change on our operations; 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.
For additional information concerning such risk factors and cautionary statements, please see the sections titled “Item 1A. Risk Factors” in the 2021 Annual Report and this Quarterly Report.
Results of Operations
Factors That May Influence Results of Operations
The following paragraphs describe factors that have influenced results of operations for the 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
23
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.
The U.S. 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 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. 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.
24
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, | |||||||||||
| 2022 | 2021 | ||||||||||
| 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.
25
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
Consolidated Results
| Nine Months Ended September 30, | ||||||||||||||||||||
| 2022 | 2021 | $ Change | ||||||||||||||||||
| Net sales | $ | 380,726 | $ | 367,205 | $ | 13,521 | ||||||||||||||
| Organic growth | $ | 16,030 | ||||||||||||||||||
| Foreign exchange effects | $ | (2,509) | ||||||||||||||||||
| Cost of sales (exclusive of depreciation and amortization shown separately below) | 316,500 | 298,127 | $ | 18,373 | ||||||||||||||||
| Selling, general, and administrative expense | 38,453 | 40,341 | (1,888) | |||||||||||||||||
| Depreciation and amortization | 33,962 | 34,860 | (898) | |||||||||||||||||
| Other operating expense (income), net | 1,862 | (901) | 2,763 | |||||||||||||||||
| Loss from operations | (10,051) | (5,222) | (4,829) | |||||||||||||||||
| Interest expense | 10,673 | 9,175 | 1,498 | |||||||||||||||||
| 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 | (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 | |||||||||||||||||
| Benefit (provision) for income taxes | (1,514) | 612 | (2,126) | |||||||||||||||||
| Share of net income from joint venture | 3,935 | 3,456 | 479 | |||||||||||||||||
| Net loss | $ | (14,084) | $ | (13,681) | $ | (403) | ||||||||||||||
Net Sales. 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 $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 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.
26
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.
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, | ||||||||||||||
| 2022 | 2021 | |||||||||||||
| Interest on debt | $ | 9,819 | $ | 7,695 | ||||||||||
| Interest rate swap settlements | (64) | 32 | ||||||||||||
| Amortization of debt issuance costs and discount | 1,021 | 1,049 | ||||||||||||
| Capitalized interest | (572) | (200) | ||||||||||||
| Other | 469 | 599 | ||||||||||||
| Total interest expense | $ | 10,673 | $ | 9,175 | ||||||||||
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.
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.
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.
Results by Segment
MOBILE SOLUTIONS
| Nine Months Ended September 30, | ||||||||||||||||||||
| 2022 | 2021 | $ Change | ||||||||||||||||||
| Net sales | $ | 225,542 | $ | 220,248 | $ | 5,294 | ||||||||||||||
| 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.
27
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
| Nine Months Ended September 30, | ||||||||||||||||||||
| 2022 | 2021 | $ Change | ||||||||||||||||||
| Net sales | $ | 155,184 | $ | 147,026 | $ | 8,158 | ||||||||||||||
| Organic growth | $ | 8,328 | ||||||||||||||||||
| Foreign exchange effects | (170) | |||||||||||||||||||
| Income from operations | $ | 4,376 | $ | 6,559 | $ | (2,183) | ||||||||||||||
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
Overview
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.
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 Flows
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 $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.
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.
28
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%. 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. Both credit facilities allow for optional expansion of available borrowings, subject to certain terms and conditions.
Accounts Receivable Sales Programs
We participate in programs established by our customers which allows us to sell certain receivables from that customer on a non-recourse basis to a third-party financial institution. In exchange, we receive payment on the receivables, less a discount, sooner than under the customary credit terms we have extended to that customer. These programs allow us to improve working capital and cash flows. Our access to these programs is dependent on our customers ongoing agreements with the third-parties. Our participation in these programs is based on our specific cash needs throughout the year, the discount charged to receive payment earlier, the length of the payment terms with our customers, as well being subject to limits in our ABL Facility and Term Loan Facility agreements.
Seasonality and Fluctuation in Quarterly Results
General economic conditions impact our business and financial results, and certain businesses experience seasonal and other trends related to the industries and end markets that they serve. For example, European sales are often weaker in the summer months as customers slow production and sales to original equipment manufacturers are often stronger immediately preceding and following the launch of new products. However, as a whole, we are not materially impacted by seasonality.
Critical Accounting Estimates
Our critical accounting policies, including the assumptions and judgments underlying them, are disclosed in the 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 nine months ended September 30, 2022.
Item 3.Quantitative and Qualitative Disclosures About Market Risk
We are exposed to changes in financial market conditions in the normal course of business due to use of certain financial instruments as well as transacting business in various foreign currencies. To mitigate the exposure to these market risks, we have established policies, procedures, and internal processes governing the management of financial market risks. We are exposed to changes in interest rates primarily as a result of borrowing activities.
Interest Rate Risk
Our policy is to manage interest expense using a mixture of fixed and variable rate debt. To manage this mixture of fixed and variable rate debt effectively and mitigate interest rate risk, we may use interest rate swap agreements. The nature and amount of borrowings may vary as a result of future business requirements, market conditions, and other factors.
On July 22, 2021, we entered into a fixed-rate interest rate swap agreement to change the LIBOR-based component of the interest rate on a portion of our variable rate debt to a fixed rate of 1.291% (the “2021 Swap”). The 2021 Swap has a notional amount of $60.0 million and a maturity date of July 31, 2024. The objective of the 2021 Swap is to eliminate the variability of cash flows in interest payments on the first $60.0 million of variable rate debt attributable to changes in benchmark one-month LIBOR interest rates. The hedged risk is the interest rate risk exposure to changes in interest payments, attributable to changes in benchmark one-month LIBOR interest rates over the interest rate swap term. The changes in cash flows of the interest rate swap are expected to exactly offset changes in cash flows of the variable rate debt. We designated the 2021 Swap as a cash flow hedge at inception. Cash settlements of the 2021 Swap are recognized in interest expense.
Refer to Note 15 in the Notes to Condensed Consolidated Financial Statements included in this Quarterly Report for further discussion about the interest rate swap.
At September 30, 2022, we had $147.8 million of principal outstanding under the Term Loan Facility without regard to capitalized debt issuance costs. A one-percent increase in one-month LIBOR would have resulted in a net increase in interest expense of $0.9 million on an annualized basis.
29
At September 30, 2022, using one-month LIBOR plus a 1.75% spread, the interest rate on the $6.0 million of outstanding borrowings under the ABL Facility was 4.56%.
Foreign Currency Risk
Translation of our operating cash flows denominated in foreign currencies is impacted by changes in foreign exchange rates. We participate in various third party and intercompany loans, payables, and receivables denominated in currencies other than the U.S. dollar. To help reduce exposure to foreign currency fluctuation, we have incurred debt in euros in the past. From time to time, we may use foreign currency derivatives to hedge currency exposures when these exposures meet certain discretionary levels. We did not hold a position in any foreign currency derivatives as of September 30, 2022.
Item 4. Controls and Procedures
Disclosure Controls and Procedures
Under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer, we evaluated the effectiveness of disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)). Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of September 30, 2022, to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting (as defined in the Exchange Act Rules 13a-15(f) and 15d-15(f)) that occurred during the fiscal quarter ended September 30, 2022, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
30
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
As disclosed in Note 9 in the Notes to Condensed Consolidated Financial Statements included in this Quarterly Report, we are engaged in certain legal proceedings, and the disclosure set forth in Note 9 relating to legal proceedings is incorporated herein by reference.
Item 1A. Risk Factors
Except as noted below, there have been no material changes to the risk factors disclosed in the 2021 Annual Report under Item 1A, “Risk Factors.”
Our international operations and business, financial condition, and prospects may be adversely affected by the current military conflict between Russia and Ukraine, other future social and geopolitical instability and resulting domestic and foreign economic instability.
We are exposed to the risk of changes in social, geopolitical, legal, and economic conditions. The global economy has been, and may continue to be, negatively impacted by Russia’s invasion of Ukraine. As a result of Russia’s invasion of Ukraine, the United States, the European Union, the United Kingdom, and other G7 countries, among other countries, have imposed substantial financial and economic sanctions on certain industry sectors and parties in Russia. Broad restrictions on exports to Russia have also been imposed. These measures include: (i) comprehensive financial sanctions against major Russian banks; (ii) additional designations of Russian individuals with significant business interests and government connections; (iii) designations of individuals and entities involved in Russian military activities; and (iv) enhanced export controls and trade sanctions limiting Russia’s ability to import various goods. The negative impacts arising from the conflict and these sanctions and export restrictions, including those imposed by Russia, may include reduced consumer demand, supply chain disruptions and increased costs for transportation, energy, and raw materials. Although none of our operations are physically located in Russia or Ukraine, further escalation of geopolitical tensions could have a broader impact that expands into other markets where we do business, which may adversely affect our business, financial condition, results of operations and prospects.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
None.
31
Item 6. Exhibits
| Exhibit Number | Description of Exhibit | |||||||
| 31.1 | ||||||||
| 31.2 | ||||||||
| 32.1 | ||||||||
| 32.2 | ||||||||
| 101.INS | XBRL Instance Document | |||||||
| 101.SCH | XBRL Taxonomy Extension Service | |||||||
| 101.CAL | Taxonomy Calculation Linkbase | |||||||
| 101.LAB | XBRL Taxonomy Label Linkbase | |||||||
| 101.PRE | XBRL Presentation Linkbase Document | |||||||
| 101.DEF | XBRL Definition Linkbase Document | |||||||
| 104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101). | |||||||
32
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. | ||
| NN, Inc. | |||||
| (Registrant) | |||||
Date: November 2, 2022 | /s/ Warren A. Veltman | ||||
| Warren A. Veltman | |||||
| President, Chief Executive Officer and Director | |||||
| (Principal Executive Officer) | |||||
| (Duly Authorized Officer) | |||||
| Date: November 2, 2022 | /s/ Michael C. Felcher | ||||
| Michael C. Felcher | |||||
| Senior Vice President - Chief Financial Officer | |||||
| (Principal Financial and Accounting Officer) | |||||
| (Duly Authorized Officer) | |||||
33