NN INC

Previous wording

The following discussion should be read in conjunction with, and is qualified in its entirety by, the Consolidated Financial Statements and the Notes thereto and the Selected Financial Data included elsewhere in this Annual Report. Historical operating results and percentage relationships among any amounts included in the Consolidated Financial Statements are not necessarily indicative of trends in operating results for any future period. Unless otherwise noted herein, all amounts are in thousands, except per share numbers.

Current wording

The following discussion should be read in conjunction with, and is qualified in its entirety by, the Consolidated Financial Statements and the Notes thereto included elsewhere in this Annual Report. Historical operating results and percentage relationships among any amounts included in the Consolidated Financial Statements are not necessarily indicative of trends in operating results for any future period. Unless as otherwise noted indicated, all U.S. dollar amounts presented in tables are in thousands.

Previous wording

During 2023, the Company initiated an enterprise transformation plan to grow sales, profits, free cash flow and shareholder value. The main tenets of the Company’s transformation plan are:

Current wording

During 2024, the Company continued its enterprise transformation plan to grow sales, profits, free cash flow and shareholder value. The main tenets of the Company’s transformation plan are:

Previous wording

•Regulatory environment for United States public companies and manufacturing companies;

Current wording

•Regulatory environment for U.S. public companies and manufacturing companies;

Previous wording

We continue to monitor the ongoing impacts of current macroeconomic and geopolitical events, including changing conditions from ongoing global conflicts, inflationary cost pressures, elevated interest rates, supply chain disruptions, and labor shortages and disruptions.

Current wording

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.

Previous wording

The ongoing global 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 global 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.

Current wording

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.

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 global conflicts. While these impacts stabilized during 2023, 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

We have taken specific steps to consolidate our footprint by identifying less profitable end markets and focusing our strategic growth initiatives in markets where we believe we will be able to maximize profitability. During the first half of 2023, we closed our Taunton and Irvine sites in the Power Solutions group and three underutilized Mobile Solutions sites to reduce operating costs. Additionally, we continue to evaluate our global footprint, which may result in further consolidation or expansion actions to further improve our overall cost structure.

Current wording

We have taken specific steps to consolidate our footprint by identifying less profitable end markets and focusing our strategic growth initiatives in markets where we believe we will be able to maximize profitability. During the second half of 2024, we identified two manufacturing facilities to close due to volume rationalization which will reduce costs and improve operational efficiency. In January 2025, we ceased production activities at our Mobile Solutions plant in Juarez, Mexico. We plan to stop production activity at our Mobile Solutions plant in Dowagiac, Michigan by the end of the first quarter of 2025. Additionally, we continue to evaluate our global footprint, which may result in further consolidation actions to further improve our overall cost structure.

Previous wording

Cost of Sales. Cost of sales decreased by $1.9 million, or 0.5%, during the year ended December 31, 2023, compared to the year ended December 31, 2022, primarily due to lower sales volume associated with facility closures. These decreases were partially offset by higher material and labor costs, increased costs due to inefficient manufacturing processes associated with product launches, and unfavorable foreign exchange effects.

Current wording

Cost of Sales. Cost of sales decreased by $24.4 million, or 5.8%, during the year ended December 31, 2024, compared to the year ended December 31, 2023, primarily due to lower sales volume and lower labor costs associated with facility closures.

Previous wording

Selling, General, and Administrative Expense. Selling, general, and administrative expense decreased by $2.2 million during the year ended December 31, 2023, compared to the year ended December 31, 2022, primarily due to lower stock compensation expense and lower professional fees, partially offset by higher incentive compensation expense.

Current wording

Selling, General, and Administrative Expense. Selling, general, and administrative expense increased by $2.0 million during the year ended December 31, 2024, compared to the year ended December 31, 2023, primarily due to higher travel, stock compensation and severance expense, partially offset by lower salaries due to a reduction in headcount.

Previous wording

Other Expense (Income), Net. Other expense (income), net changed unfavorably by $15.8 million during the year ended December 31, 2023, compared to the year ended December 31, 2022, primarily due to noncash derivative mark-to-market losses recognized during 2023 compared to gains recognized during 2022.

Current wording

Other Expense (Income), Net. Other expense (income), net changed favorably by $15.3 million during the year ended December 31, 2024, compared to the year ended December 31, 2023, primarily due to the $7.2 million gain on sale of the Lubbock operations and a $10.8 million decrease in noncash derivative mark-to-market losses, partially offset by unfavorable foreign exchange effects associated with intercompany borrowings.

Previous wording

Provision for Income Taxes. Our effective tax rate was (4.3)% for the year ended December 31, 2023, compared to (5.2)% for the year ended December 31, 2022. Our effective tax rate for the year ended December 31, 2023 was unfavorably impacted by 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 for the year ended December 31, 2023 was favorably impacted by the recording of interest income on the Company’s federal income tax refund requested as a result of the Coronavirus Aid, Relief, and Economic Security Act, as well as the recording of a benefit of a pending state refund claim. Our effective tax rate for the year ended December 31, 2022 was favorably impacted by the change in assertion and reduction in the accrual of tax on non-permanently reinvested unremitted earnings of foreign subsidiaries and unfavorably impacted 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.

Current wording

Provision for Income Taxes. Our effective tax rate was (5.3)% for the year ended December 31, 2024, compared to (4.3)% for the year ended December 31, 2023. Our effective tax rate for the years ended December 31, 2024 and 2023 were unfavorably impacted by 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 for the years ended December 31, 2024 and

Previous wording

Share of Net Income from Joint Venture. Share of net income from the joint venture decreased by $0.8 million during the year ended December 31, 2023, compared to the year ended December 31, 2022, primarily due to higher fixed costs and increased depreciation and interest expense, partially offset by higher revenue. The joint venture, in which we own a 49% investment, recognized net sales of $109.6 million and $101.6 million for the year ended December 31, 2023 and 2022, respectively.

Current wording

Share of Net Income from Joint Venture. Share of net income from the joint venture increased by $3.8 million during the year ended December 31, 2024, compared to the year ended December 31, 2023, primarily due to higher sales and increased margin partially offset by higher fixed costs, depreciation and income taxes. The joint venture, in which we own a 49% investment, recognized net sales of $130.8 million and $109.6 million for the years ended December 31, 2024 and 2023, respectively.

Previous wording

Income from operations increased by $7.6 million during the year ended December 31, 2023 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, premium pricing on a certain customer project in the first quarter of 2023, a legal settlement reached during the first quarter of 2022, and sublease income earned on closed facilities. These increases were partially offset by lower sales volume.

Current wording

Income from operations increased by $2.0 million during the year ended December 31, 2024 compared to the same period in the prior year, primarily due to an increase in sublease income earned on closed facilities and lower depreciation and amortization expense due to sold or fully utilized assets.

Previous wording

From December 31, 2022 to December 31, 2023, total assets decreased by $35.2 million primarily due to decreases in accounts receivable, inventory, property, plant and equipment and intangible assets. The closure of two Power Solutions facilities contributed to the decrease in inventory and property, plant and equipment, and the decline in intangible assets is due to amortization.

Current wording

From December 31, 2023 to December 31, 2024, total assets decreased by $54.0 million primarily due to decreases in property, plant and equipment and intangible assets due to depreciation and amortization as well as the impairment of machinery and equipment at a plant that will close in 2025. Additionally, accounts receivable, inventory and property, plant and equipment decreased due to the sale of our Lubbock operations during the year. These decreases were partially offset by increases in our investment in a joint venture.

Previous wording

Working capital, which consists of current assets less current liabilities, was $100.9 million as of December 31, 2023, compared to $112.9 million as of December 31, 2022. The decrease in working capital was primarily due to a decrease in accounts receivable and inventory and increases in accrued salaries, wages and benefits.

Current wording

Working capital, which consists of current assets less current liabilities, was $83.7 million as of December 31, 2024, compared to $100.9 million as of December 31, 2023. The decrease in working capital was primarily due to decreases in accounts receivable and inventory, and an increase in accrued salaries, wages and benefits. These were partially offset by a decrease in accounts payable.

Previous wording

Cash provided by operations was $29.3 million for the year ended December 31, 2023, compared with cash provided by operations of $7.7 million for the year ended December 31, 2022. The difference was primarily due to decreases in accounts receivable and inventory during the year ended 2023 compared to increases in these balance during the corresponding period of 2022.

Current wording

Cash provided by operations was $11.1 million for the year ended December 31, 2024, compared with $29.3 million for the year ended December 31, 2023. The decline was due to decreases in accounts receivable and inventory during 2023 compared with a decrease in accounts payable during 2024. These declines were partially offset by a larger dividend received from the JV in 2024.

Previous wording

The principal amount outstanding under our term loan facility (the “Term Loan Facility”) as of December 31, 2023, was $148.1 million, without regard to unamortized debt issuance costs and discount. As of December 31, 2023, we had $26.4 million available for future borrowings under the ABL Facility. This amount of borrowing capacity is net of $10.9 million of outstanding letters of credit at December 31, 2023, which are considered as usage of the ABL Facility.

Current wording

The principal amount outstanding under our Term Loan Facility as of December 31, 2024, was $114.4 million, without regard to unamortized debt issuance costs and discount. As of December 31, 2024, we had $5.4 million outstanding borrowings under the ABL Facility and $15.0 million available for future borrowings under the ABL Facility. This amount of borrowing capacity is net of $10.4 million of outstanding letters of credit at December 31, 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, including accrued paid-in-kind interest, 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 in the second quarter of 2023, interest expense was increased on a paid-in-kind basis at a rate between 1.00% and 2.00%, dependent on the Company’s leverage ratio. Based on the interest rate in effect at December 31, 2023, annual cash interest payments would be approximately $18.3 million, with an additional $2.9 million accrued as paid-in-kind interest.

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 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 was 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 December 31, 2024, annual cash interest payments would be approximately $13.0 million, with an additional $1.1 million accrued as paid-in-kind interest.

Previous wording

The ABL Facility bears interest on a variable borrowing rate based on either 1) Adjusted 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.

Current wording

The ABL Facility bears interest on a variable borrowing rate based on either: 1) the one, three or six month SOFR plus 1.50%, plus an adjustment of 0.10% (“Term SOFR Rate”); or 2) the highest of the base commercial lending rate of the lender or various benchmark rates plus an applicable margin of 0.50% or 1.0%, depending on the benchmark. We pay a commitment fee of 0.25% for unused capacity under the ABL Facility.

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 $11.6 million tax refund receivable at December 31, 2023, 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 $12.3 million tax refund receivable at December 31, 2024, which is in the process of IRS review. The timing of the receipt of the refund is expected in the first half of 2025.