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Item 2. Management’s Discussion and Analysis

2024-08-07 compared with 2024-05-07 · 109 added, 50 removed, 104 unchanged (60% of the section changed)

1 unchanged sentence

Management’s Discussion and Analysis of Financial Condition and Results of Operations is intended to help the reader understand the results of operations and financial condition of NN, Inc.

and its consolidated subsidiaries for the three months ended March 31, 2024.

The financial information as of March 31, 2024, should be read in conjunction with the consolidated financial statements for the year ended December 31, 2023, contained in our 2023 Annual Report, and the Condensed Consolidated Financial Statements included in this Quarterly Report.

and its consolidated subsidiaries for the three and six months ended June 30, 2024.

The financial information as of June 30, 2024, should be read in conjunction with the consolidated financial statements for the year ended December 31, 2023, contained in our 2023 Annual Report, and the Condensed Consolidated Financial Statements included in this Quarterly Report.

NN, Inc., a Delaware corporation, is a 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 for a variety of end markets on a global basis.

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our ability to obtain financing at favorable rates, if at all, and to refinance existing debt as it matures;

our ability to secure, maintain or enforce patents or other appropriate protections for our intellectual property;

new laws and governmental regulations;

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Factors That May Influence Results of Operations

The following paragraphs describe factors that have influenced results of operations for the three months ended March 31, 2024, that management believes are important to provide an understanding of the business and results of operations or that may influence operations in the future.

The following paragraphs describe factors that have influenced results of operations for the six months ended June 30, 2024, that management believes are important to provide an understanding of the business and results of operations or that may influence operations in the future.

Macroeconomic Conditions

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Ongoing military conflicts continue to create volatility in global financial and energy markets, creating energy and supply chain shortages, which has added to the inflationary pressures experienced by the global economy.

We continue to actively work with

our suppliers to minimize impacts of supply shortages on our manufacturing capabilities.

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 these ongoing military conflicts as of the date of this filing, we cannot reasonably predict the extent to which our operations, or those of our customers or suppliers, will be impacted in the future, or the ways in which the conflicts may impact our business, financial condition, results of operations and cash flows.

economy has experienced inflationary increases and elevated interest rates, as well as supply issues in materials, services, and labor due to economic policy, the COVID-19 pandemic and military conflicts.

economy has experienced inflationary increases and elevated interest rates, as well as supply issues in materials, services, and labor due to economic policy and military conflicts.

We cannot predict the future impact on our end-markets or input costs nor our ability to recover cost increases through pricing.

Three Months Ended March 31, 2024 compared to the Three Months Ended March 31, 2023

Three Months Ended June 30, 2024 compared to the Three Months Ended June 30, 2023

Consolidated Results

Three Months Ended March 31,

Three Months Ended June 30,

2024 2023 $ Change

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Depreciation and amortization 11,761 11,550 211

Other operating expense (income), net (1,000) 1,061 (2,061)

Other operating income, net (1,390) (956) (434)

Loss from operations (2,147) (4,047) 1,900

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Other expense (income), net (3,461) 5,641 (9,102)

Loss before provision for income taxes and share of net income from joint venture (14,302) (9,155) (5,147)

Provision for income taxes (506) (1,301) 795

Loss before benefit (provision) for income taxes and share of net income from joint venture (4,559) (15,145) 10,586

Benefit (provision) for income taxes 215 (325) 540

Share of net income from joint venture 2,141 1,093 1,048

Net loss $ (2,203) $ (14,377) $ 12,174

Net sales decreased by $5.9 million, or 4.6%, during the three months ended March 31, 2024, compared to the three months ended March 31, 2023, primarily due to lower customer pricing, rationalized volume at plants undergoing turnarounds, and the absence of premium pricing received during the first quarter of 2023.

Net sales decreased by $2.2 million, or 1.8%, during the three months ended June 30, 2024, compared to the three months ended June 30, 2023, primarily due to rationalized volume at plants undergoing turnarounds and unfavorable foreign exchange effects of $1.0 million, partially offset by the net impact of contractual pricing provisions.

Cost of Sales.

Cost of sales decreased by $7.3 million, or 6.8%, during the three months ended March 31, 2024, compared to the three months ended March 31, 2023, primarily due to a reduction in indirect manufacturing costs related to actions taken in 2023 to optimize plant operations as well as the impact of lower sales volume .

Cost of sales decreased by $6.4 million, or 6.0%, during the three months ended June 30, 2024, compared to the three months ended June 30, 2023, primarily due to a reduction in indirect manufacturing costs related to actions taken in 2023 to optimize plant operations as well as the impact of lower sales volume.

Selling, General, and Administrative Expense.

Selling, general, and administrative expense increased by $0.2 million during the three months ended March 31, 2024, compared to the three months ended March 31, 2023, primarily due higher travel, marketing and stock compensation expense, partially offset by lower wages due to headcount reductions.

Selling, general, and administrative expense increased by $2.5 million during the three months ended June 30, 2024, compared to the three months ended June 30, 2023, primarily due to higher incentive compensation and stock compensation expense.

Other Operating Income, Net.

Other operating expense (income), net changed favorably by $2.1 million during the three months ended March 31, 2024, compared to the three months ended March 31, 2023, primarily due to sublease income related to the facilities that closed during the second quarter of 2023 and losses on sales of machinery and equipment during the first quarter of 2023.

Other operating income, net changed favorably by $0.4 million during the three months ended June 30, 2024, compared to the three months ended June 30, 2023, primarily due to sublease income related to the facilities that closed during the second quarter of 2023, partially offset by a reduction in gains on sales of machinery and equipment.

Interest Expense.

Interest expense increased by $1.1 million during the three months ended March 31, 2024, compared to the three months ended March 31, 2023, primarily due to higher interest rates during the current year.

Three Months Ended March 31,

Interest expense increased by $0.4 million during the three months ended June 30, 2024, compared to the three months ended June 30, 2023, primarily due to a lower amount of interest expense that was capitalized in the current quarter compared with the second quarter of 2023.

Three Months Ended June 30,

Interest on debt $ 5,679 $ 5,609

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Other Expense (Income), Net.

Other expense (income), net changed unfavorably by $6.4 million during the three months ended March 31, 2024, compared to the three months ended March 31, 2023, primarily due to higher noncash derivative mark-to-market gains recognized during the current quarter compared to the first quarter of 2023.

Other expense (income), net changed favorably by $9.1 million during the three months ended June 30, 2024, compared to the three months ended June 30, 2023, primarily due to noncash derivative mark-to-market gains recognized during the current quarter compared to losses recognized in the second quarter of 2023.

Benefit (Provision) For Income Taxes .

Our effective tax rate was (3.5)% for the three months ended March 31, 2024, compared to (14.2)% for the three months ended March 31, 2023.

The rate for the three months ended March 31, 2024 was unfavorably impacted due to the accrual of tax on non-permanently reinvested unremitted earnings of foreign subsidiaries and by the limitation on the amount of tax benefit recorded for loss carryforwards in certain jurisdictions where we believe it is more likely than not that a portion of the future tax benefit may not be realized.

The effective tax rate was unfavorably impacted by the U.S.

tax on the earnings of foreign subsidiaries under the global intangible low-taxed income regime.

Our effective tax rate was 4.7% for the three months ended June 30, 2024, compared to (2.1)% for the three months ended June 30, 2023.

The rate for the three months ended June 30, 2024 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 losses in certain jurisdictions where we believe it is more likely than not that a future tax benefit may not be realized.

The effective tax rate was favorably impacted by return to provision adjustments in certain foreign jurisdictions and an amended return in a state jurisdiction.

Share of Net Income from Joint Venture.

Share of net income from the JV increased by $2.0 million during the three months ended March 31, 2024, compared to the three months ended March 31, 2023, primarily due to higher sales partially offset by higher income tax expense in the current quarter.

The JV, in which we own a 49% investment, recognized net sales of $31.1 million and $20.6 million for the three months ended March 31, 2024 and 2023, respectively.

Share of net income from the JV increased by $1.0 million during the three months ended June 30, 2024, compared to the three months ended June 30, 2023, primarily due to higher sales partially offset by higher fixed costs.

The JV, in which we own a 49% investment, recognized net sales of $31.6 million and $24.9 million for the three months ended June 30, 2024 and 2023, respectively.

Results by Segment

MOBILE SOLUTIONS

Three Months Ended March 31,

Three Months Ended June 30,

2024 2023 $ Change

1 unchanged sentence

Loss from operations $ (1,630) $ (1,461) $ (169)

Net sales decreased by $5.0 million, or 6.4%, during the three months ended March 31, 2024, compared to the three months ended March 31, 2023, primarily due to lower volume at facilities undergoing turnarounds and contractual reduction in customer pricing, partially offset by organic growth volume and favorable foreign exchange effects.

Loss from operations decreased by $1.2 million during the three months ended March 31, 2024, compared to the same period in the prior year, primarily due to a reduction in indirect manufacturing costs related to actions taken in 2023 to optimize plant operations.

These reductions were partially offset by the impact of lower sales.

Net sales decreased by $4.3 million, or 5.6%, during the three months ended June 30, 2024, compared to the three months ended June 30, 2023, primarily due to lower volume at facilities undergoing turnarounds, contractual reduction in customer pricing and unfavorable foreign exchange effects.

Loss from operations decreased by $0.2 million during the three months ended June 30, 2024, compared to the same period in the prior year, primarily due to a reduction in indirect manufacturing costs related to actions taken in 2023 to optimize plant operations.

These reductions were partially offset by higher incentive compensation and depreciation expense.

POWER SOLUTIONS

Three Months Ended March 31,

Three Months Ended June 30,

2024 2023 $ Change

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Income from operations $ 5,320 $ 2,583 $ 2,737

Net sales decreased by $0.8 million, or 1.7%, during the three months ended March 31, 2024 compared to the three months ended March 31, 2023, primarily due to premium pricing received during the first quarter of 2023, partially offset by higher volume during the current quarter.

Income from operations increased by $2.2 million during the three months ended March 31, 2024 compared to the same period in the prior year, primarily due to lower costs associated with the facilities that closed in 2023 and sublease income earned on the closed facilities, partially offset by premium pricing received during the first quarter of 2023.

Changes in Financial Condition from December 31, 2023 to March 31, 2024

From December 31, 2023 to March 31, 2024, total assets increased by $1.9 million primarily due to increases in accounts receivable, inventory and other current assets, partially offset by decreases property, plant and equipment and intangible assets.

From December 31, 2023 to March 31, 2024, total liabilities increased by $7.1 million, primarily due to increases in accounts payable and long-term debt.

This was partially offset by a decrease in other non-current liabilities due to the exercise of warrants in the first quarter of 2024.

Working capital, which consists of current assets less current liabilities, was $98.7 million as of March 31, 2024, compared to $100.9 million as of December 31, 2023.

The decrease in working capital was primarily due to increases in accounts payable, accrued salaries and wages and current maturities of long-term debt.

This was partially offset by increases in accounts receivable and inventory.

Cash provided by operations increased by $0.5 million primarily due to an increase in accounts payable which was partially offset by increases in accounts receivable and inventory during the three months ended March 31, 2023.

Cash used in investing activities increased by $1.4 million primarily due to the proceeds from the sale of equipment at the Taunton and Irvine facilities in the first quarter of 2023.

Cash provided by financing activities increased by $2.3 million primarily due to proceeds from the sale-leaseback transactions, partially offset by higher repayments of long-term debt.

Net sales increased by $2.1 million, or 4.3%, during the three months ended June 30, 2024 compared to the three months ended June 30, 2023, primarily due to higher precious metals pass-through pricing and inflation pricing, partially offset by lower volume during the current quarter.

Income from operations increased by $2.7 million during the three months ended June 30, 2024 compared to the same period in the prior year, primarily due to the higher revenue as well as lower costs associated with the facilities that closed in 2023 and sublease income earned on those closed facilities.

Six Months Ended June 30, 2024 compared to the Six Months Ended June 30, 2023

Consolidated Results

Six Months Ended June 30,

2024 2023 $ Change

Net sales $ 244,190 $ 252,294 $ (8,104)

Cost of sales (exclusive of depreciation and amortization shown separately below) 202,343 216,105 $ (13,762)

Selling, general, and administrative expense 26,859 24,140 2,719

Depreciation and amortization 24,308 23,066 1,242

Other operating expense (income), net (2,390) 105 (2,495)

Loss from operations (6,930) (11,122) 4,192

Interest expense 11,239 9,745 1,494

Other expense, net 692 3,433 (2,741)

Loss before provision for income taxes and share of net income from joint venture (18,861) (24,300) 5,439

Provision for income taxes (291) (1,626) 1,335

Share of net income from joint venture 4,412 1,374 3,038

Net loss $ (14,740) $ (24,552) $ 9,812

Net sales decreased by $8.1 million, or 3.2%, during the six months ended June 30, 2024, compared to the six months ended June 30, 2023, primarily due to reduced volume, lower customer settlements and unfavorable foreign exchange effects of $0.9 million.

These decreases were partially offset by the net impact of contractual pricing provisions.

Cost of Sales.

Cost of sales decreased by $13.8 million, or 6.4%, during the six months ended June 30, 2024, compared to the six months ended June 30, 2023, primarily due to lower sales volume and lower labor costs associated with facility closures.

Selling, General, and Administrative Expense.

Selling, general, and administrative expense increased by $2.7 million during the six months ended June 30, 2024, compared to the six months ended June 30, 2023, primarily due to higher incentive compensation, stock compensation, travel and marketing costs.

Other Operating Expense (Income), Net.

Other operating expense (income), net changed favorably by $2.5 million primarily due to sublease income earned on closed facilities.

Interest Expense.

Interest expense increased by $1.5 million during the six months ended June 30, 2024, compared to the six months ended June 30, 2023, primarily due to higher debt balances and higher average interest rates.

Six Months Ended June 30,

Interest on debt $ 11,355 $ 10,228

Gain recognized on interest rate swap (898) (917)

Amortization of debt issuance costs and discount 1,106 880

Capitalized interest (736) (710)

Other 412 264

Total interest expense $ 11,239 $ 9,745

Other Expense, Net.

Other expense, net decreased by $2.7 million during the six months ended June 30, 2024, compared to the six months ended June 30, 2023, primarily due to noncash derivative mark-to-market gains recognized during the first two quarters of 2024 compared to losses recognized during the first two quarters of 2023.

This decrease was partially offset by unfavorable foreign exchange effects associated with intercompany borrowings.

Benefit (Provision) for Income Taxes.

Our effective tax rate was (1.5)% for the six months ended June 30, 2024, compared to (6.7)% for the six months ended June 30, 2023.

The rate for the six months ended June 30, 2024 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 losses in certain jurisdictions where we believe it is more likely than not that a future tax benefit may not be realized.

The effective tax rate was favorably impacted by return to provision adjustments in certain foreign jurisdictions and an amended return in a state jurisdiction.

Share of Net Income from Joint Venture.

Share of net income from the JV increased by $3.0 million during the six months ended June 30, 2024, compared to the six months ended June 30, 2023, primarily due to higher sales partially offset by higher

fixed costs, depreciation and interest expense.

The JV, in which we own a 49% investment, recognized net sales of $62.7 million and $45.6 million for the six months ended June 30, 2024 and 2023, respectively.

Results by Segment

MOBILE SOLUTIONS

Six Months Ended June 30,

2024 2023 $ Change

Net sales $ 145,915 $ 155,171 $ (9,256)

Loss from operations $ (3,773) $ (4,780) $ 1,007

Net sales decreased by $9.3 million, or 6.0%, during the six months ended June 30, 2024, compared to the six months ended June 30, 2023, primarily due lower volume at facilities undergoing turnarounds, contractual reduction in customer pricing and unfavorable foreign exchange effects.

Loss from operations decreased by $1.0 million during the six months ended June 30, 2024 compared to the same period in the prior year, primarily due to a reduction of indirect manufacturing costs related to actions taken in 2023 to optimize plant operations.

These decreases were partially offset by the impact of lower sales and higher depreciation expense.

POWER SOLUTIONS

Six Months Ended June 30,

2024 2023 $ Change

Net sales $ 98,389 $ 97,134 $ 1,255

Income from operations $ 9,299 $ 4,330 $ 4,969

Net sales increased by $1.3 million, or 1.3%, during the six months ended June 30, 2024, compared to the six months ended June 30, 2023, due to higher precious metals pass-through pricing and higher volumes, partially offset by premium pricing received on a certain customer project during the first quarter of 2023.

Income from operations increased by $5.0 million during the six months ended June 30, 2024 compared to the same period in the prior year, primarily due to lower costs associated with the facilities that closed in the second quarter of 2023 and sublease income earned on those closed facilities.

Changes in Financial Condition from December 31, 2023 to June 30, 2024

From December 31, 2023 to June 30, 2024, total assets decreased by $13.7 million primarily due to decreases in property, plant and equipment and intangible assets due to depreciation and amortization.

Additionally, accounts receivable, inventory and property, plant and equipment decreased due to the classification of the IMC assets as held for sale, which were offset by increases in other current and noncurrent assets.

From December 31, 2023 to June 30, 2024, total liabilities decreased by $4.6 million, primarily due to a decrease in other non-current liabilities due to the exercise of warrants in 2024, partially offset by an increase in long-term debt.

Working capital, which consists of current assets less current liabilities, was $94.4 million as of June 30, 2024, compared to $100.9 million as of December 31, 2023.

The decrease in working capital was primarily due to increases accounts payable and in the current maturities of long-term debt.

Cash used in operations was $0.6 million for the six months ended June 30, 2024, compared with cash provided by operations of $8.6 million for the six months ended June 30, 2023.

The unfavorable change was due to an increase in accounts receivable due to higher revenue in the second quarter of 2024 compared with the fourth quarter of 2023, a decrease in inventory during the first half of 2023 and an increase in accounts payable during the first half of 2023.

Cash used in investing activities decreased by $0.6 million primarily due to the lower expenditures for property, plant and equipment, partially offset by proceeds from the sale of equipment at the Taunton and Irvine facilities in the first half of 2023.

Cash provided by financing activities decreased by $0.7 million primarily due to higher repayments of long-term debt and debt issuance costs, partially offset by proceeds from the sale-leaseback transactions and proceeds from international loans in 2023.

Liquidity and Capital Resources

Credit Facilities

The principal amount outstanding under our Term Loan Facility as of March 31, 2024, was $132.5 million, without regard to unamortized debt issuance costs and discount.

As of March 31, 2024, we had $26.4 million available for future borrowings under the ABL Facility.

This amount of borrowing capacity is net of $9.9 million of outstanding letters of credit at March 31, 2024, which are considered as usage of the ABL Facility.

The principal amount outstanding under our Term Loan Facility as of June 30, 2024, was $129.4 million, without regard to unamortized debt issuance costs and discount.

As of June 30, 2024, we had $27.0 million available for future borrowings under the ABL Facility.

This amount of borrowing capacity is net of $9.9 million of outstanding letters of credit at June 30, 2024, which are considered as usage of the ABL Facility.

The Term Loan Facility requires quarterly principal payments of $0.4 million with the remaining unpaid principal amount due on the final maturity date of September 22, 2026.

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

Based on the interest rate in effect at March 31, 2024, annual cash interest payments would be approximately $16.3 million.

Based on the interest rate in effect at June 30, 2024, annual cash interest payments would be approximately $16.3 million.

The ABL Facility bears interest on a variable borrowing rate based on either:

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We pay a commitment fee of 0.375% for unused capacity under the ABL Facility.

We were in compliance with all requirements under our Term Loan Facility and ABL Facility as of March 31, 2024.

We were in compliance with all requirements under our Term Loan Facility and ABL Facility as of June 30, 2024.

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

Sale Leaseback Transactions

During the three months ended March 31, 2024, we entered into two separate sale-leaseback transactions.

During the six months ended June 30, 2024, we entered into several sale-leaseback transactions.

We received $16.9 million from the sale and leaseback of three properties, with the net proceeds used to repay a portion of the outstanding borrowings under the Term Loan Facility.

The effective interest rate of the transaction, which terminates in 20 years, is lower than the current borrowings on the Term Loan Facility.

We received $4.9 million from the sale and leaseback of equipment, with the net proceeds used for ongoing operational investments.

We received $8.3 million from the sale and leaseback of equipment, with $3.4 million of the net proceeds used to repay a portion of the outstanding borrowings under the Term Loan Facility and the balance used for ongoing operational investments.

Accounts Receivable Sales Programs

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

Including interest accrued on the initial refund amount, we have a $11.7 million tax refund receivable at March 31, 2024, which is in the process of IRS review and approval.

Including interest accrued on the initial refund amount, we have a $11.9 million tax refund receivable at June 30, 2024, which is in the process of IRS review and approval.

The timing of the receipt of the refund remains uncertain.

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Our critical accounting policies, including the assumptions and judgments underlying them, are disclosed in the 2023 Annual Report, including those policies as discussed in Note 1 to the Notes to Consolidated Financial Statements included in the 2023 Annual Report.

There have been no material changes to these policies during the three months ended March 31, 2024.

There have been no material changes to these policies during the six months ended June 30, 2024.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis