SEC Filing - NN, Inc.

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nnbr-20220930

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


☐			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.

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NN, Inc.

INDEX


		Page
PART I. FINANCIAL INFORMATION		3

Item 1.	Financial Statements	3

	Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) (Unaudited)	3
	Condensed Consolidated Balance Sheets (Unaudited)	4
	Condensed Consolidated Statements of Changes in Stockholders’ Equity (Unaudited)	5
	Condensed Consolidated Statements of Cash Flows (Unaudited)	7
	Notes to Condensed Consolidated Financial Statements (Unaudited)	8
	Note 1. Interim Financial Statements	8
	Note 2. Segment Information	9
	Note 3. Inventories	10
	Note 4. Intangible Assets, Net	10
	Note 5. Investment in Joint Venture	10
	Note 6. Income Taxes	10
	Note 7. Debt	11
	Note 8. Leases	12
	Note 9. Commitments and Contingencies	12
	Note 10. Preferred Stock and Stockholders' Equity	13
	Note 11. Revenue from Contracts with Customers	13
	Note 12. Share-Based Compensation	16
	Note 13. Accumulated Other Comprehensive Income	18
	Note 14. Net Income (Loss) Per Common Share	19
	Note 15. Fair Value Measurements	20

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	23

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	29

Item 4.	Controls and Procedures	30

PART II. OTHER INFORMATION		31

Item 1.	Legal Proceedings	31
Item 1A.	Risk Factors	31
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	31
Item 3.	Defaults Upon Senior Securities	31
Item 4.	Mine Safety Disclosures	31
Item 5.	Other Information	31
Item 6.	Exhibits	32
SIGNATURES		33

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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).

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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).

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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).

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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).

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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).

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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

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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.

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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.

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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.

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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

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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.

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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