NN(NNBR) - 2023 Q4 - Annual Report

PART I Business NN, Inc. manufactures high-precision components for global markets through Mobile and Power Solutions segments, with top ten customers accounting for 47% of 2023 net sales - NN, Inc. is a diversified industrial company with 27 facilities across North America, South America, Europe, and China, organized into two main business groups: Mobile Solutions and Power Solutions[14][15] - The top ten customers accounted for approximately 47% of net sales in 2023, with sales distributed globally: 67% in North America, 14% in Asia, 10% in South America, and 9% in Europe[26] - As of December 31, 2023, the company employed 2,926 full and part-time employees and 234 temporary workers worldwide[31] Business Segments and Products The company operates two segments: Mobile Solutions for automotive and industrial components, and Power Solutions for high-precision metal and plastic parts - Mobile Solutions: Focuses on complex, system-critical components for automotive (including electric and hybrid vehicles), general industrial, and medical end markets[16] - Power Solutions: Combines materials science with engineering to produce high-precision metal and plastic components for electrical, industrial, automotive, and medical markets[17] Competition and Raw Materials The company competes on technical competence and quality, sourcing diverse raw materials globally while generally passing cost fluctuations to customers - Competitors for Mobile Solutions include Anton Häring KG and CIE Automotive, S.A. Competitors for Power Solutions include Checon Corporation and Deringer-Ney, Inc.[39][40] - Key raw materials include various forms of steel, aluminum, precious metals, and plastics, with price volatility managed through consignment agreements for precious metals[41][42] - The company is affected by upward price pressure on raw materials like steel and supply chain disruptions, but generally passes these cost fluctuations on to customers[43] Risk Factors The company faces significant operational, financial, and compliance risks, including customer concentration, substantial debt, and international market volatility Risks Related to Our Operations Operational risks include heavy customer dependence, international market exposure, product recalls, intense competition, and cybersecurity threats - The company is heavily dependent on its ten largest customers, which accounted for approximately 47% of consolidated net sales in 2023[60] - International operations are a significant risk factor, as sales to customers outside the U.S. accounted for 40% of consolidated net sales in 2023, including risks from tariffs and political instability[62] - The company faces substantial cybersecurity risks, including data breaches from hackers, malware, and phishing attacks, which could disrupt operations and damage its reputation[70] Risks Related to Our Capitalization Capitalization risks stem from significant indebtedness, including a $148.1 million Term Loan, restrictive covenants, and foreign currency exposure - As of December 31, 2023, the outstanding principal on the Term Loan Facility was $148.1 million, with estimated annual cash interest payments of $18.3 million plus $2.9 million in paid-in-kind interest[83] - Debt agreements contain restrictive covenants that limit the company's ability to incur additional debt, pay dividends, make certain investments, and sell assets[85] - Approximately 29% of revenues are denominated in foreign currencies, exposing the company to risks from fluctuating currency values, unfavorably affecting 2023 revenue by $0.6 million[90] Cybersecurity The company maintains a robust cybersecurity framework with Board oversight, continuous monitoring, employee training, and insurance to mitigate risks - The Audit Committee of the Board of Directors has oversight for cybersecurity risks and receives updates from management at least quarterly[106] - The company's risk management strategy includes 24/7 security monitoring, continuous penetration testing by a third party, mandatory annual cybersecurity training for employees, and a cybersecurity insurance policy[107][108] Properties As of December 31, 2023, NN, Inc. operates 27 facilities across six countries, including owned and leased properties Facility Distribution by Segment (as of Dec 31, 2023) | Segment | Location | Country | Ownership | | :--- | :--- | :--- | :--- | | Mobile Solutions | Campinas, Brazil | Brazil | Leased | | | Dowagiac, Michigan | U.S.A. | Owned | | | Juarez, Mexico | Mexico | Leased | | | Kamienna Gora, Poland | Poland | Owned | | | Kentwood, Michigan (4 sites) | U.S.A. | Leased/Owned | | | Marnaz, France | France | Owned | | | Marshall, Michigan | U.S.A. | Leased | | | Sao Joao da Boa Vista, Brazil (3 sites) | Brazil | Leased | | | Wellington, Ohio | U.S.A. | Leased | | | Wuxi, China | China | Leased | | Power Solutions | Algonquin, Illinois | U.S.A. | Owned | | | Attleboro, MA (5 sites) | U.S.A. | Owned/Leased | | | Foshan City, China | China | Leased | | | Lubbock, Texas | U.S.A. | Owned | | | Mexico City, Mexico | Mexico | Owned | | | North Attleboro, MA | U.S.A. | Owned | | | Palmer, Massachusetts | U.S.A. | Leased | | Joint Venture | Wuxi, China | China | Leased | | Corporate | Charlotte, North Carolina | U.S.A | Leased | Legal Proceedings The company is involved in a Brazilian tax dispute, with potential liabilities under $5.0 million, for which it expects indemnification - The company is engaged in a legal proceeding in Brazil regarding ICMS tax credits, with potential liability for remaining open lawsuits estimated to be less than $5.0 million[294][295] - Management believes it is entitled to indemnification from the former shareholders of Autocam for this matter and does not expect to incur a loss[296] PART II Market for Registrant's Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities The company's common stock trades on Nasdaq under "NNBR", with 4,504 shares purchased in Q4 2023 for tax obligations - The company's common stock is traded on the Nasdaq under the symbol "NNBR" As of February 21, 2024, there were 3,767 beneficial owners of record[116] Issuer Purchases of Equity Securities (Q4 2023) | Period | Total Number of Shares Purchased | Average Price Paid Per Share ($) | | :--- | :--- | :--- | | October 2023 | 2,016 | $1.76 | | November 2023 | 2,488 | $2.00 | | December 2023 | — | — | | Total | 4,504 | $1.89 | Management's Discussion and Analysis of Financial Condition and Results of Operations In 2023, net sales decreased 1.9% to $489.3 million, resulting in a $50.2 million net loss due to higher interest and derivative adjustments Results of Operations (2023 vs 2022) Net sales decreased 1.9% to $489.3 million, and a $6.1 million increase in interest expense led to a $50.2 million net loss Consolidated Results of Operations ($) | Metric | 2023 | 2022 | $ Change | | :--- | :--- | :--- | :--- | | Net sales | $489,270 | $498,738 | $(9,468) | | Loss from operations | $(21,804) | $(21,092) | $(712) | | Interest expense | $21,137 | $15,041 | $6,096 | | Net loss | $(50,150) | $(26,098) | $(24,052) | - Net sales decreased by 1.9% due to reduced volume from facility closures and unfavorable foreign exchange, partially offset by higher customer pricing[136] - Interest expense increased by $6.1 million due to higher interest rates and a new 2.00% paid-in-kind interest component on the Term Loan[140] Results by Segment (2023 vs 2022) Mobile Solutions sales grew 3.3% to $303.3 million, while Power Solutions sales fell 9.4% to $185.9 million, but its operating income improved Mobile Solutions Performance ($) | Metric | 2023 | 2022 | $ Change | | :--- | :--- | :--- | :--- | | Net sales | $303,335 | $293,536 | $9,799 | | Loss from operations | $(11,749) | $(2,165) | $(9,584) | Power Solutions Performance ($) | Metric | 2023 | 2022 | $ Change | | :--- | :--- | :--- | :--- | | Net sales | $185,948 | $205,204 | $(19,256) | | Income from operations | $11,096 | $3,536 | $7,560 | Liquidity and Capital Resources Liquidity is supported by the ABL Facility and improved operating cash flow of $29.3 million, with a $16.8 million sale-leaseback expected - As of December 31, 2023, the company had $148.1 million outstanding under its Term Loan Facility and $26.4 million available under its ABL Facility[155] - Cash provided by operations was $29.3 million for 2023, a significant improvement from $7.7 million in 2022, driven by decreases in accounts receivable and inventory[152][153] - A sale-leaseback of three properties is expected to close around March 15, 2024, generating $16.8 million in net proceeds to repay a portion of the Term Loan Facility[157][358] Quantitative and Qualitative Disclosures About Market Risk The company faces interest rate risk, with a 1% SOFR increase impacting interest expense by $1.5 million, and foreign currency risk - The company is subject to interest rate risk from its variable-rate debt A 1% increase in the one-month SOFR would increase annual interest expense by $1.5 million on the Term Loan Facility[170][171] - The company is exposed to foreign currency risk from operating cash flows denominated in foreign currencies and did not hold any foreign currency derivatives as of December 31, 2023[172] Financial Statements and Supplementary Data This section presents audited consolidated financial statements for 2021-2023, with an unqualified opinion from Grant Thornton LLP Consolidated Financial Statements Consolidated financial statements show a $50.2 million net loss in 2023, with total assets decreasing and liabilities increasing Key Financial Statement Data ($) | Metric | 2023 | 2022 | | :--- | :--- | :--- | | Operations | | | | Net Sales | $489,270 | $498,738 | | Net Loss | $(50,150) | $(26,098) | | Balance Sheet (End of Period) | | | | Total Assets | $510,885 | $546,127 | | Total Liabilities | $308,084 | $295,162 | | Total Stockholders' Equity | $125,002 | $186,264 | | Cash Flows | | | | Net Cash from Operating Activities | $29,344 | $7,717 | Notes to Consolidated Financial Statements Notes detail accounting policies, segment performance, debt structure, and a $47.5 million valuation allowance against deferred tax assets Revenue by Segment (2023, $) | Segment | Net Sales | | :--- | :--- | | Mobile Solutions | $303,335 | | Power Solutions | $185,948 | | Total | $489,270 | - As of December 31, 2023, total debt was $153.3 million, primarily consisting of the Term Loan Facility, and the company was in compliance with all debt covenants[269][272] - A valuation allowance of $47.5 million has been recorded against deferred tax assets as of December 31, 2023, as management determined it is more likely than not that a portion of these assets will not be realized[305][308] Controls and Procedures Management concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2023 - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of December 31, 2023[361] - Management determined that the company's internal control over financial reporting was effective as of December 31, 2023, based on the COSO framework, and Grant Thornton LLP issued an unqualified opinion[363][364] PART III Directors, Executive Officers, and Corporate Governance Information on directors, executive officers, and corporate governance is incorporated by reference from the proxy statement - Required information for this item is incorporated by reference from the definitive proxy statement to be filed with the SEC[369] Executive Compensation Executive and director compensation details are incorporated by reference from the definitive proxy statement - Required information for this item is incorporated by reference from the definitive proxy statement to be filed with the SEC[371] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Security ownership information is incorporated by reference, with 296,000 securities outstanding under equity compensation plans Equity Compensation Plan Information (thousands, except per share data) | Plan Category | Number of securities to be issued upon exercise (thousands) | Weighted-average exercise price of outstanding options ($) | Number of securities remaining available for future issuance (thousands) | | :--- | :--- | :--- | :--- | | Equity compensation plans approved by security holders | 296 | $14.46 | 1,492 | | Equity compensation plans not approved by security holders | — | — | — | | Total | 296 | $14.46 | 1,492 | Certain Relationships and Related Transactions, and Director Independence Related party transactions and director independence information are incorporated by reference from the proxy statement - Required information for this item is incorporated by reference from the definitive proxy statement to be filed with the SEC[374][375] Principal Accountant Fees and Services Information on principal accountant fees and services is incorporated by reference from the definitive proxy statement - Required information for this item is incorporated by reference from the definitive proxy statement to be filed with the SEC[376] PART IV Exhibits and Financial Statement Schedules This section lists financial statements and a comprehensive index of all exhibits filed with the Form 10-K - This section contains the list of financial statements and schedules included in the report, as well as a detailed index of all exhibits filed[378][381] Form 10-K Summary No Form 10-K summary is provided in this report - None[386]