NN INC 10-Q

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, 2024. The financial information as of September 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. Overview 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. 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 within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), which are intended to be covered by the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 and include this statement for purposes of complying with these safe harbor provisions. 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 the Company, 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 pandemics, epidemics, disease outbreaks and other public health crises 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, military conflict, 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, the availability of labor and labor disruptions along the supply chain; 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, as well as expansion of end markets and product offerings; our ability to hire or retain key personnel; 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; our ability to secure, maintain or enforce patents or other appropriate protections for our intellectual property; new laws and governmental regulations; the impact of climate change on our operations; and cyber liability or potential liability for breaches of our or our service providers’ information technology systems or business operations disruptions. Any forward-looking statement speaks only as of the date of this Quarterly Report, and the Company undertakes no obligation to publicly update or review any forward-looking statement, whether as a result of new information, future developments or otherwise, except as required by law. New risks and uncertainties may emerge from time to time, and it is not possible for the Company to predict their occurrence or how they will affect the Company. The Company qualifies all forward-looking statements by these cautionary statements. For additional information concerning such risk factors and cautionary statements, please see the sections titled “Item 1A. Risk Factors” in the 2023 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, 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 We continue to monitor the ongoing impacts of current macroeconomic and geopolitical events, including changing conditions from ongoing military conflicts, inflationary cost pressures, elevated interest rates, supply chain disruptions, and labor shortages and disruptions. 20 Table of Contents 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. 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. The U.S. 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 September 30, 2024 compared to the Three Months Ended September 30, 2023 Consolidated Results Three Months Ended September 30, 2024 2023 $ Change Net sales $ 113,587 $ 124,443 $ (10,856) Cost of sales (exclusive of depreciation and amortization shown separately below) 97,131 104,543 $ (7,412) Selling, general, and administrative expense 10,257 11,693 (1,436) Depreciation and amortization 10,844 11,577 (733) Other operating income, net (895) (631) (264) Loss from operations (3,750) (2,739) (1,011) Interest expense 5,404 5,739 (335) Other income, net (5,315) (1,463) (3,852) Loss before benefit (provision) for income taxes and share of net income from joint venture (3,839) (7,015) 3,176 Benefit (provision) for income taxes (903) 245 (1,148) Share of net income from joint venture 2,185 1,713 472 Net loss $ (2,557) $ (5,057) $ 2,500 Net Sales . Net sales decreased by $10.9 million, or 8.7%, during the three months ended September 30, 2024, compared to the three months ended September 30, 2023, primarily due to the sale of our Lubbock operations, rationalized volume at plants undergoing turnarounds, a customer settlement received in 2023 and unfavorable foreign exchange effects of $1.1 million. Cost of Sales. Cost of sales decreased by $7.4 million, or 7.1%, during the three months ended September 30, 2024, compared to the three months ended September 30, 2023, primarily due to the decrease in sales. Selling, General, and Administrative Expense. Selling, general, and administrative expense decreased by $1.4 million during the three months ended September 30, 2024, compared to the three months ended September 30, 2023, primarily due to lower incentive compensation expense. Other Operating Income, Net. Other operating income, net changed favorably by $0.3 million during the three months ended September 30, 2024, compared to the three months ended September 30, 2023, primarily due the loss on sales of machinery and equipment recognized in 2023. Interest Expense. Interest expense decreased by $0.3 million during the three months ended September 30, 2024, compared to the three months ended September 30, 2023, primarily due to a reduction in the Term Loan balance due to the partial pay down of the outstanding balance with proceeds from the sale of our Lubbock operations. Three Months Ended September 30, 2024 2023 Interest on debt $ 4,990 $ 5,779 Gain recognized on interest rate swap (150) (449) Amortization of debt issuance costs and discount 612 529 Capitalized interest (224) (350) Other 176 230 Total interest expense $ 5,404 $ 5,739 21 Table of Contents Other Income, Net. Other income, net increased by $3.9 million during the three months ended September 30, 2024, compared to the three months ended September 30, 2023, primarily due to the $7.2 million gain on sale of our Lubbock operations, partially offset by noncash derivative mark-to-market loses recognized during the current quarter compared to derivative gains recognized in the third quarter of 2023. Benefit (Provision) For Income Taxes . Our effective tax rate was (23.5)% for the three months ended September 30, 2024, compared to 3.5% for the three months ended September 30, 2023. The rate for the three months ended September 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. Share of Net Income from Joint Venture. Share of net income from the JV increased by $0.5 million during the three months ended September 30, 2024, compared to the three months ended September 30, 2023, primarily due to higher sales and increased gross margins, partially offset by higher fixed costs. The JV, in which we own a 49% investment, recognized net sales of $32.4 million and $30.3 million for the three months ended September 30, 2024 and 2023, respectively. Results by Segment MOBILE SOLUTIONS Three Months Ended September 30, 2024 2023 $ Change Net sales $ 70,678 $ 78,961 $ (8,283) Loss from operations $ (1,441) $ (1,283) $ (158) Net sales decreased by $8.3 million, or 10.5%, during the three months ended September 30, 2024, compared to the three months ended September 30, 2023, primarily due to rationalized volume at plants undergoing turnarounds, contractual reduction in customer pass-through material pricing, a customer settlement received in 2023 and unfavorable foreign exchange effects of $1.0 million. Loss from operations changed unfavorably by $0.2 million during the three months ended September 30, 2024, compared to the same period in the prior year, primarily due to the lower revenue and impact of the customer settlement in the 2023, partially offset by lower depreciation expense. POWER SOLUTIONS Three Months Ended September 30, 2024 2023 $ Change Net sales $ 42,935 $ 45,484 $ (2,549) Income from operations $ 2,505 $ 3,936 $ (1,431) Net sales decreased by $2.5 million, or 5.6%, during the three months ended September 30, 2024 compared to the three months ended September 30, 2023, primarily due to the sale of our Lubbock operations, partially offset by higher precious metals pass-through pricing and pricing. Income from operations decreased by $1.4 million during the three months ended September 30, 2024 compared to the same period in the prior year, primarily due to the lower revenue resulting from the sale of the Lubbock operations and unfavorable product mix. 22 Table of Contents Nine Months Ended September 30, 2024 compared to the Nine Months Ended September 30, 2023 Consolidated Results Nine Months Ended September 30, 2024 2023 $ Change Net sales $ 357,777 $ 376,737 $ (18,960) Cost of sales (exclusive of depreciation and amortization shown separately below) 299,474 320,648 $ (21,174) Selling, general, and administrative expense 37,116 35,833 1,283 Depreciation and amortization 35,152 34,643 509 Other operating income, net (3,285) (526) (2,759) Loss from operations (10,680) (13,861) 3,181 Interest expense 16,643 15,484 1,159 Other expense (income), net (4,623) 1,970 (6,593) Loss before provision for income taxes and share of net income from joint venture (22,700) (31,315) 8,615 Provision for income taxes (1,194) (1,381) 187 Share of net income from joint venture 6,597 3,087 3,510 Net loss $ (17,297) $ (29,609) $ 12,312 Net Sales . Net sales decreased by $19.0 million, or 5.0%, during the nine months ended September 30, 2024, compared to the nine months ended September 30, 2023, primarily due to he sale of our Lubbock operations, customer settlements received in 2023, rationalized volume at plants undergoing turnarounds and unfavorable foreign exchange effects of $1.9 million. These decreases were partially offset by the net impact of contractual pass-through material pricing provisions. Cost of Sales. Cost of sales decreased by $21.2 million, or 6.6%, during the nine months ended September 30, 2024, compared to the nine months ended September 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 $1.3 million during the nine months ended September 30, 2024, compared to the nine months ended September 30, 2023, primarily due to higher travel and stock compensation expense, partially offset by lower salaries due to a reduction in headcount. Other Operating Income, Net. Other operating income, net changed favorably by $2.8 million primarily due to increased sublease income earned on closed facilities. Interest Expense. Interest expense increased by $1.2 million during the nine months ended September 30, 2024, compared to the nine months ended September 30, 2023, primarily due to higher average interest rates, a decrease in the gain recognized on interest rate swap and an increase in the amortization of debt issuance costs. Nine Months Ended September 30, 2024 2023 Interest on debt $ 16,345 $ 16,007 Gain recognized on interest rate swap (1,048) (1,366) Amortization of debt issuance costs and discount 1,718 1,409 Capitalized interest (960) (1,060) Other 588 494 Total interest expense $ 16,643 $ 15,484 Other Expense (Income), Net. Other expense (income), net changed favorably by $6.6 million during the nine months ended September 30, 2024, compared to the nine months ended September 30, 2023, primarily due to the $7.2 million gain on sale of the Lubbock operations, partially offset by unfavorable foreign exchange effects associated with intercompany borrowings. Benefit (Provision) for Income Taxes. Our effective tax rate was (5.3)% for the nine months ended September 30, 2024, compared to (4.4)% for the nine months ended September 30, 2023. The rate for the nine months ended September 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. 23 Table of Contents Share of Net Income from Joint Venture. Share of net income from the JV increased by $3.5 million during the nine months ended September 30, 2024, compared to the nine months ended September 30, 2023, primarily due to higher sales and increased margin partially offset by higher fixed costs, depreciation and interest expense. The JV, in which we own a 49% investment, recognized net sales of $95.1 million and $75.9 million for the nine months ended September 30, 2024 and 2023, respectively. Results by Segment MOBILE SOLUTIONS Nine Months Ended September 30, 2024 2023 $ Change Net sales $ 216,593 $ 234,132 $ (17,539) Loss from operations $ (5,214) $ (6,063) $ 849 Net sales decreased by $17.5 million, or 7.5%, during the nine months ended September 30, 2024, compared to the nine months ended September 30, 2023, primarily due rationalized volume at plants undergoing turnarounds, contractual reduction in customer pass-through material pricing, a customer settlement received in 2023 and unfavorable foreign exchange effects of $1.8 million. Loss from operations changed favorably by $0.8 million during the nine months ended September 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, impact of the customer settlement in the 2023 and higher depreciation expense. POWER SOLUTIONS Nine Months Ended September 30, 2024 2023 $ Change Net sales $ 141,324 $ 142,618 $ (1,294) Income from operations $ 11,804 $ 8,266 $ 3,538 Net sales decreased by $1.3 million, or 0.9%, during the nine months ended September 30, 2024, compared to the nine months ended September 30, 2023, primarily due to the sale of our Lubbock operation and premium pricing received on a certain customer project during the first quarter of 2023. These decreases were partially offset by higher precious metals pass-through pricing and higher volumes. Income from operations increased by $3.5 million during the nine months ended September 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 increased sublease income earned on those closed facilities in 2024. Changes in Financial Condition from December 31, 2023 to September 30, 2024 Overview From December 31, 2023 to September 30, 2024, total assets decreased by $27.8 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 sale of our Lubbock operations during the quarter. These decreases were partially offset by increases in our investment in a joint venture. From December 31, 2023 to September 30, 2024, total liabilities decreased by $20.8 million, primarily due to a decrease in other non-current liabilities due to the exercise of warrants in 2024 and a reduction in long-term debt due to the partial pay down of the outstanding balance with proceeds from the sale of our Lubbock operations. These decreases were partially offset by an increase in other current liabilities. Working capital, which consists of current assets less current liabilities, was $85.3 million as of September 30, 2024, compared to $100.9 million as of December 31, 2023. The decrease in working capital was primarily due to increases in the current maturities of long-term debt and an increase in other current liabilities. Cash Flows Cash provided by operations was $4.4 million for the nine months ended September 30, 2024, compared with $23.9 million for the nine months ended September 30, 2023. The decrease was due to an increase in accounts receivable, a decrease in inventory during the first half of 2023 and an increase in accounts payable during the first half of 2023. In addition, the Company received a $3.9 million dividend from the JV in the third quarter of 2023. 24 Table of Contents Cash provided by investing activities was $1.9 million for the nine months ended September 30, 2024, compared with cash used in investing activities of $13.4 million for the nine months ended September 30, 2023. The favorable change is primarily due to the $17.0 million received for the sale of the Lubbock operations during 2024. Cash used in financing activities increased by $14.4 million during the nine months ended September 30, 2024 compared to the same period in 2023, primarily due to higher repayments of long-term debt and debt issuance costs in 2024, partially offset by proceeds from the sale-leaseback transactions in 2024 and proceeds from international loans in 2023. Liquidity and Capital Resources Credit Facilities The principal amount outstanding under our Term Loan Facility as of September 30, 2024, was $114.2 million, without regard to unamortized debt issuance costs and discount. As of September 30, 2024, we had $21.9 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 September 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. We may be required to make additional principal payments annually that are calculated as a percentage of our excess cash flow, as defined by the lender, based on our net leverage ratio. Outstanding borrowings under the Term Loan Facility bear interest at either: 1) one-month, three-month, or six-month Adjusted Term SOFR, subject to a 1.00% floor, plus an applicable margin of 6.875%; or 2) the greater of various benchmark rates plus an applicable margin of 5.875%. Beginning with the second quarter of 2023, interest is increased on a paid-in-kind basis at a rate between 1.00% and 2.00%, dependent on our net leverage ratio, for the most recently reported fiscal quarter and subject to reduction upon the occurrence of certain conditions as set forth in the credit agreement governing the Term Loan Facility. Based on the interest rate in effect at September 30, 2024, annual cash interest payments would be approximately $16.9 million. The ABL Facility bears interest on a variable borrowing rate based on either: 1) Adjusted Term SOFR plus an applicable margin of 1.75% or 2.00%, depending on availability; or 2) the greater of the federal funds rate or prime, plus an applicable margin of 0.75% or 1.00%, depending on availability. We pay a commitment fee of 0.375% for unused capacity under the ABL Facility. We were in compliance with all requirements under our Term Loan Facility and ABL Facility as of September 30, 2024. Both credit facilities allow for optional expansion of available borrowings, subject to certain terms and conditions. Sale Leaseback Transactions During the nine months ended September 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 $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 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 at the same or lower interest rates as available on our ABL Facility. 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. Other Receivables In 2021, we filed a refund claim with the IRS as a result of the Coronavirus Aid, Relief, and Economic Security Act. Including interest accrued on the initial refund amount, we have a $12.1 million tax refund receivable at September 30, 2024, which is in the process of IRS review and approval. The timing of the receipt of the refund is expected in the first half of 2025. 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. 25 Table of Contents Critical Accounting Estimates Our significant accounting policies, including the assumptions and judgments underlying them, are disclosed in Note 1 of the Notes to Consolidated Financial Statements included in the 2023 Annual Report. Our most critical accounting estimates are discussed in the Management’s Discussion and Analysis of Financial Condition and Results of Operations included in the 2023 Annual Report. There have been no material changes to our significant accounting policies or critical accounting estimates during the nine months ended September 30, 2024.