NNBR: UPDATE: The company released 4th quarter and fiscal year 2022 results which showed organic revenue growth due to pricing actions and provided plan for improved cash flow generation in 2023.
NASDAQ:NNBR
READ THE FULL NNBR RESEARCH REPORT
NN Inc. (NASDAQ:NNBR) reported 4th quarter and fiscal 2022 financial results on March 9th. The company’s profitability levels continued to be hampered by inflationary pressures and supply chain issues. Total sales increased 6.9% (8.5% organically) in the 4th quarter and 4.4% (5.3% organically) for the full year.
In the 4th quarter, sales in the Power Solution segment increased 11.7% due to increased electrical component sales and higher pricing. Mobile Solutions segment revenues showed a 3.6% sales increase compared to the prior year period largely due to price actions.
Adjusted operating loss for the 4th quarter was $(3.3) million compared to adjusted operating income of $0.8 million in the 4th quarter of 2021. Adjusted EBITDA decreased to $7.8 million (6.8% margin) from $12.1 million (10.9% margin) for the same period in 2021.
Inflation continues to negatively impact the company’s operating results and management indicated that unrecovered inflationary costs totaled approximately $1.0 million in the 4th quarter. The company has held proactive pricing discussions with many of its customers in 2022 and these actions will continue into 2023. Based on pricing actions incurred over the past 2 years, the company believes the incremental sales impact to be $66 million on annual run rate basis.
In the Power Solutions segment, net sales for the 4th quarter were $50.0 million compared to $44.8 million in the 4th quarter of 2021, an increase of 11.7%. The increase in sales was primarily due to pricing actions and higher electrical component volumes. Adjusted operating income increased to $4.5 million from $2.7 million in the prior year period, largely due to cost efficiencies from improved volumes as well as previous pricing actions. The Taunton and Irvine facility closures in Q2 2023 has the potential to substantially increase operating margins in this segment. For the full 2022 fiscal year, 78.4% of segment revenues were derived from the U.S. and the rest from international markets.
In the Mobile Solutions segment, net sales for the 4th quarter of 2022 were $68.0 million compared to $65.6 million in the prior year period, an increase of 3.6%. The increase in sales was primarily due to pricing actions and volume demand, partially offset by negative foreign exchange effects. Adjusted income from operations was a loss of ($3.7) million compared to $1.5 million of adjusted income from operations in the prior year period. The decrease in operating income was primarily driven by inflationary costs not fully recovered by company pricing actions and new business launches in Mexico. For the full 2022 fiscal year, 48.0% of segment revenues were derived from the U.S. and the rest from international markets.
For the full year 2022, operating cash flow was positive at $7.7 million and capital expenditures were approximately $18.0 million. The company has ample liquidity and was able to absorb most of the cash burn with cash on hand which totaled $28.7 million at the end of 2021. Free cash flow was $6.4 million in the 4th quarter of 2022. As of year-end 2022, cash stood at $12.8 million and total debt equaled $157.1 million. Based on trailing adjusted EBITDA of $43.9 million, the company’s leverage ratio was 3.33x.
On March 3, 2023, the company amended its ABL and term loan to create additional flexibility to manage its business operations through an uncertain economic environment. The amendments increase maximum total leverage ratio covenants for the duration of the term loan beginning in 2023 which starts at 4.50x currently and drops to 3.00x in 2025. In addition, the existing cap on customer receivable financing programs has been increased from $20 million to $30 million. The amendments also introduced a quarterly domestic liquidity covenant which is a $20 million minimum. Interest under the term loan amendment is increased on a paid-in-kind basis at a rate dependent on the outstanding leverage ratio at period end or whether the company completes a qualifying preferred equity raise by June 30, 2023.
CEO Warren Veltman stated, “Our fourth-quarter results were adversely impacted by non-material inflationary cost increases, ongoing supply chain interruptions, especially in China, and product launch inefficiencies in certain North America facilities. We have taken action to address these issues through significant price increases for non-material inflation effective January 1, 2023, corrective action plans to address operating performance issues, and substantial progress on our facility consolidation initiative that will significantly improve our profitability and free cash flow beginning in 2023. Additionally, we were able to achieve our free cash flow outlook for the fourth quarter, and announced an amendment to our credit agreement that will provide additional flexibility for us to navigate what remains a challenging and uncertain operating environment.”
We do not believe the past years operational environment reflects the true earnings power of NN going forward. The company’s primary focus on growing end markets such as electric vehicles and electric grid upgrades should provide growth tailwinds for the foreseeable future. The company is already seeing results from recent sales efforts where there has been a significant pipeline expansion in these target growth markets. The company has a focused plan for cost reduction and margin improvement that should start to take hold in 2023. As inflationary and other cost pressures recede, NN should be able to produce strong double-digit cash flow growth.
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