NN Inc: Form 10-Q for the period ended Mar 31, 2025

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, 2025. The financial information as of March 31, 2025, should be read in conjunction with the consolidated financial statements for the year ended December 31, 2024, contained in our 2024 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,” “growth,” “guidance,” “intend,” “may,” “will,” “possible,” “potential,” “predict,” “project,” “trajectory” 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; the potential impacts of tariffs on the U.S. economy, the economy of other countries in which we conduct operations and our industry, as well as the potential implications and ramifications of tariffs on our business and the local and global supply chains supporting the same, and our ability to mitigate any adverse impacts of such; 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; uncertainty of government policies and actions after recent U.S. elections in respect to global trade, tariffs and international trade agreements; and cyber liability or potential liability for breaches of our or our service providers’ information technology systems or business operations disruptions. The foregoing factors should not be construed as exhaustive and should be read in conjunction with the sections entitled “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our 2024 Annual Report and in this Quarterly Report. Any forward-looking statement speaks only as of the date of this Quarterly Report, and we undertake 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 us to predict their occurrence or how they will affect the Company. We qualify 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 2024 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 three months ended March 31, 2025, 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, tariffs, inflationary cost pressures, elevated interest rates, supply chain disruptions, and labor shortages and disruptions.

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, including tariffs and their potential implications and ramifications, nor our ability to recover cost increases through pricing.

Footprint Optimization

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. During the first quarter of 2025, we ceased production activities at our Mobile Solutions plants in Juarez, Mexico and Dowagiac, Michigan. Additionally, we continue to evaluate our global footprint, which may result in further consolidation actions to further improve our overall cost structure.

Three Months Ended March 31, 2025 compared to the Three Months Ended March 31, 2024

Consolidated Results

Net Sales. Net sales decreased by $15.5 million, or 12.8%, during the three months ended March 31, 2025, compared to the three months ended March 31, 2024, primarily due to the rationalization of underperforming business and plants, the sale of our Lubbock operations in 2024, lower volumes and unfavorable foreign exchange effects of $2.8 million. These decreases were partially offset by higher precious metals pass-through pricing.

Cost of Sales. Cost of sales decreased by $9.4 million, or 9.3%, during the three months ended March 31, 2025, compared to the three months ended March 31, 2024, primarily due to the decrease in sales.

Selling, General, and Administrative Expense. Selling, general, and administrative expense decreased by $2.2 million during the three months ended March 31, 2025, compared to the three months ended March 31, 2024, primarily due to lower incentive compensation expense.

Depreciation and amortization. Depreciation and amortization decreased by $3.8 million during the three months ended March 31, 2025, compared to the three months ended March 31, 2024, primarily due to impact of historical purchase accounting step-up basis becoming fully depreciated.

Other Operating Income, Net. Other operating income, net increased by $0.1 million during the three months ended March 31, 2025, compared to the three months ended March 31, 2024, primarily due to an increase in gains on sale of equipment and higher sublease income.

Interest Expense. Interest expense decreased by $0.2 million during the three months ended March 31, 2025, compared to the three months ended March 31, 2024, primarily due to lower average debt balances and lower interest rates. These reductions were partially offset by a decrease in the gain recognized on interest rate swap and an increase in the amortization of debt issuance costs and a lower amount of capitalized interest.

Other Expense (Income), Net. Other expense (income), net changed favorably by $6.3 million during the three months ended March 31, 2025, compared to the three months ended March 31, 2024, primarily due to noncash derivative mark-to-market gains recognized during the current quarter compared to derivative losses recognized in the first quarter of 2024.

Provision For Income Taxes. Our effective tax rate was (16.8)% for the three months ended March 31, 2025, compared to (3.5)% for the three months ended March 31, 2024. The rate for the three months ended March 31, 2025 was unfavorably impacted due to the accrual of tax on non-permanently reinvested unremitted earnings of foreign subsidiaries and by the limitation of 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 $0.2 million during the three months ended March 31, 2025, compared to the three months ended March 31, 2024, primarily due to higher sales. The JV, in which we own a 49% investment, recognized net sales of $32.7 million and $31.1 million for the three months ended March 31, 2025 and 2024, respectively.

Results by Segment

MOBILE SOLUTIONS

Net sales decreased by $10.8 million, or 14.8%, during the three months ended March 31, 2025, compared to the three months ended March 31, 2024, primarily due to the closure of our Juarez, Mexico plant, lower volumes and unfavorable foreign exchange effects of $1.9 million.

Loss from operations increased by $0.5 million during the three months ended March 31, 2025, compared to the same period in the prior year, primarily due to the lower revenue, partially offset by lower depreciation expense.

POWER SOLUTIONS

Net sales decreased by $4.7 million, or 9.8%, during the three months ended March 31, 2025 compared to the three months ended March 31, 2024, primarily due to the sale of our Lubbock operations in 2024, lower volumes and unfavorable foreign exchange effects of $0.8 million. These decreases were partially offset by higher precious metals pass-through pricing.

Income from operations decreased by $1.0 million during the three months ended March 31, 2025 compared to the same period in the prior year, primarily due to the lower revenues and unfavorable product mix, partially offset by lower operating costs due to the sale of the Lubbock operations in 2024.

Changes in Financial Condition from December 31, 2024 to March 31, 2025

Overview

From December 31, 2024 to March 31, 2025, total assets increased by $3.8 million primarily due to increases in accounts receivable, prepaid assets and our investment in a joint venture. These increases were partially offset by decreases in intangible assets due to amortization.

From December 31, 2024 to March 31, 2025, total liabilities increased by $6.6 million, primarily due to increases in accounts payable, other current liabilities and long-term debt. These increases were partially offset by the decrease other noncurrent liabilities due to a decrease in the fair value of outstanding warrants.

Working capital, which consists of current assets less current liabilities, was $82.9 million as of March 31, 2025, compared to $83.7 million as of December 31, 2024. The decrease in working capital was primarily due to increases in accounts payable and other current liabilities, partially offset by increases in accounts receivable and prepaid assets.

Cash Flows

Cash used in operations was $3.3 million for the three months ended March 31, 2025, compared with cash provided of $0.7 million for the three months ended March 31, 2024. The unfavorable change is primarily due to lower gross margin contributions due to lower sales, and an increase in working capital.

Cash used in investing activities decreased by $1.6 million during the three months ended March 31, 2025, compared with the same period in 2024, due to lower expenditures for property, plant and equipment.

Cash provided by financing activities decreased by $3.0 million during the three months ended March 31, 2025 compared with the same period in 2024, primarily due to proceeds from the sale-leaseback transactions in 2024, partially offset by lower repayments of long-term debt.

Liquidity and Capital Resources

Credit Facilities

The principal amount outstanding under our 2021 Term Loan Facility as of March 31, 2025, was $114.3 million, without regard to unamortized debt issuance costs and discount. As of March 31, 2025, we had $8.0 million outstanding borrowings under the ABL Facility and $18.3 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 March 31, 2025, which are considered as usage of the ABL Facility.

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.

We were in compliance with all requirements under our 2021 Term Loan Facility and ABL Facility as of March 31, 2025. Both credit facilities allow for optional expansion of available borrowings, subject to certain terms and conditions.

On April 16, 2025, we repaid all of our outstanding obligations under the 2021 Term Loan Facility with the proceeds from a new term loan arrangement that has an initial principal balance of $118.0 million. See Note 18 to the Condensed Consolidated Financial Statements.

Sale Leaseback Transactions

During 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 2021 Term Loan Facility. This financing obligation has an effective fixed interest rate of 9.715%, requires monthly payments and terminates in 2044. In addition, 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 2021 Term Loan Facility and the balance used for ongoing operational investments. These financing obligations have a weighted average effective interest rate of 10.540%, require monthly payments and have a weighted average remaining term of 3.6 years.

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 2021 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 $12.4 million tax refund receivable at March 31, 2025, which is in the process of IRS review. 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.

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 2024 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 2024 Annual Report. There have been no material changes to our significant accounting policies or critical accounting estimates during the three months ended March 31, 2025.

We are exposed to changes in financial market conditions in the normal course of business due to use of certain financial instruments as well as transacting business in various foreign currencies. To mitigate the exposure to these market risks, we have established policies, procedures, and internal processes governing the management of financial market risks. We are exposed to changes in interest rates primarily as a result of borrowing activities.

Interest Rate Risk

We are subject to interest rate risk due to our variable rate debt, which comprises a majority of our outstanding indebtedness. The nature and amount of borrowings may vary as a result of future business requirements, market conditions, and other factors. To manage interest rate risk, we have used, and may in the future use, interest rate swap agreements.

At March 31, 2025, we had $114.3 million of principal outstanding under the 2021 Term Loan Facility without regard to capitalized debt issuance costs. A one-percent increase in one-month SOFR would have resulted in a net increase in interest expense of $1.1 million on an annualized basis.

At March 31, 2025, based on a one-month Term SOFR Rate, the interest rate on outstanding borrowings under the ABL Facility was 5.92%.

Foreign Currency Risk

Translation of our operating cash flows denominated in foreign currencies is impacted by changes in foreign exchange rates. We invoice and receive payment from many of our customers in various other currencies. Additionally, we are party to third party and intercompany loans, payables, and receivables denominated in currencies other than the U.S. dollar. Various strategies to manage this risk are available to management, including producing and selling in local currencies and hedging programs. We did not hold a position in any foreign currency derivatives as of March 31, 2025.

Disclosure Controls and Procedures

Under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer, we evaluated the effectiveness of disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) of the Exchange Act). Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of March 31, 2025, to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure.

Changes in Internal Control Over Financial Reporting

There were no changes in our internal control over financial reporting (as defined in the Exchange Act Rules 13a-15(f) and 15d-15(f)) that occurred during the fiscal quarter ended March 31, 2025, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Except as noted below, there have been no material changes to the risk factors disclosed in the 2024 Annual Report under Item 1A, “Risk Factors.”

Changes in U.S. administrative policy, including the imposition of or increases in tariffs, changes to existing trade agreements and any resulting changes in international trade relations, may have an adverse effect on our business.

Changes in laws or policies governing the terms of trade, and in particular increased trade restrictions, tariffs or taxes on imports from countries where we manufacture products, such as Mexico and China, could have a material adverse effect on our business and financial results. For example, the U.S. government has recently taken actions or made proposals that are intended to address trade imbalances or trade practices, specifically with China, among other countries, which include encouraging increased production in the United States. The impact of these tariffs is subject to a number of factors, including the effective date and duration of such tariffs, changes in the amount, scope and nature of the tariffs in the future, any retaliatory responses to such actions that the target countries may take and any mitigating actions that may become available. Despite recent trade negotiations between the United States and the Mexican, Canadian and Chinese governments, given the uncertainty regarding the scope and duration of any new tariffs, as well as the potential for additional tariffs or trade barriers by the United States, Mexico, Canada, China or other countries, we can provide no assurance that any strategies we implement to mitigate the impact of such tariffs or other trade actions will be successful. A trade war or other significant changes in trade regulations could have a material adverse effect on our business, financial condition and results of operations.

If renegotiations of existing tariffs are unsuccessful or additional tariffs or trade restrictions are implemented by the United States or other countries in connection with a global trade war, the resulting escalation of trade tensions could have a material adverse effect on world trade and the global economy. Even in the absence of further tariffs or trade restrictions, the related uncertainty and the market's fear of an economic slowdown could lead to a decrease in consumer spending, and we may experience lower net sales than expected. Reduced net sales may result in reduced operating cash flows if we are not able to appropriately manage inventory levels or leverage expenses.

While the future financial impact of these actions and potential additional U.S. tariff actions and retaliatory actions by other countries remains unknown, the potential implications and ramifications of tariffs could have a material adverse effect on our financial statements in any particular reporting period.