NN INC

Previous wording

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.

Current wording

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 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.

Previous wording

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; 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 informati…

Excerpt shortened here; the source contains the full paragraph.

Current wording

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 underta…

Excerpt shortened here; the source contains the full paragraph.

Previous wording

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.

Current wording

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.

Previous wording

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, the COVID-19 pandemic 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.

Current wording

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.

Previous wording

Net Sales. 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.

Current wording

Net Sales. 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.

Previous wording

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 .

Current wording

Cost of Sales. 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.

Previous wording

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.

Current wording

Selling, General, and Administrative Expense. 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.

Previous wording

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.

Current wording

Other Operating Income, Net. 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.

Previous wording

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.

Current wording

Other Expense (Income), Net. 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.

Previous wording

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.

Current wording

Benefit (Provision) For Income Taxes. 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.

Previous wording

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.

Current wording

Share of Net Income from Joint Venture. 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.

Previous wording

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.

Current wording

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.

Previous wording

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.

Current wording

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.

Previous wording

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.

Current wording

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.

Previous wording

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.

Current wording

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.

Previous wording

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.

Current wording

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.

Previous wording

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.

Current wording

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.

Previous wording

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.

Current wording

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.

Previous wording

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.

Current wording

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.

Previous wording

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.

Current wording

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.

Previous wording

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.

Current wording

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.

Previous wording

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 SOFR, 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%. 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.

Current wording

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

Previous wording

During the three months ended March 31, 2024, we entered into two separate 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.

Current wording

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 $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.

Previous wording

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. The timing of the receipt of the refund remains uncertain.

Current wording

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 $11.9 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.

Previous wording

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.

Current wording

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 six months ended June 30, 2024.