NNBR · Read the filing

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

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.

A detailed discussion of our results of operations and liquidity and capital resources for the year ended December 31, 2022 compared to the year ended December 31, 2021 are not included herein and can be found in Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations of our Annual Report on Form 10-K for the fiscal year ended December 31, 2022, filed with the SEC on March 10, 2023.

Overview and Management Focus

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:

•Empowered leadership team that is accountable to outcomes;

•Supplementing the team with added talent and experienced professionals;

•Investing $100 million of capex over a five year period with strategic intentions;

•Strategic footprint overlay to blend down the Company’s cost structure to lower total-cost product offerings;

•Building and converting upon a high-probability pipeline of new business opportunities that fit the Company’s capacity and forward direction;

•Deliver excellent customer service and quality in a safe and sustainable manner;

•Expand margins through a variety of contemporary approaches, but especially continuous improvement algorithms;

•Annually generate free cash flow;

•Face reality and address underperforming areas of the Company; and

•Recruit, retain and incent the best possible team of employees globally.

We are a strategic partner to a diversified and global customer base with long standing business relationships and long-running business streams. We participate in growing and attractive end markets, including global automotive parts and passenger vehicles, commercial vehicles, grid and electrical investment, and medical components.

Management generally focuses on these trends and relevant market indicators:

•Trends related to the geographic migration of competitive manufacturing, electric vehicles, and electrification;

•Costs subject to regional and global inflationary environments, including, but not limited to:

•Raw materials;

•Wages and benefits, including health care costs;

•Regulatory compliance; and

•Energy;

•Global automotive production rates;

•Global industrial growth and economics;

•Residential and non-residential construction rates;

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

•Currency and exchange rate movements and trends;

•Interest rate levels and expectations; and

•Changes in tariff regulations.

Results of Operations

Factors That May Influence Results of Operations

The following paragraphs describe factors that have influenced results of operations for the year ended December 31, 2023, that management believes are important to provide an understanding of the business and results of operations or that may influence operations in the future.

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Macroeconomic Conditions

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.

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.

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.

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 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.

Sales Concentration

During the years ended December 31, 2023, 2022 and 2021, no single customer accounted for 10% or more of consolidated net sales.

Financial Data as a Percentage of Net Sales

The following table presents the percentage of our net sales represented by statement of operations line item.

Years Ended December 31,

Selling, general, and administrative expense 9.7 % 10.0 % 10.8 %

Depreciation and amortization 9.4 % 9.5 % 9.7 %

Other operating expense (income), net (0.3) % 0.4 % (0.2) %

Loss from operations (4.5) % (4.2) % (1.9) %

Interest expense 4.3 % 3.0 % 2.7 %

Derivative payments on interest rate swap — % — % 0.4 %

Loss on interest rate swap — % — % 0.4 %

Other expense (income), net 2.2 % (1.0) % (1.1) %

Provision for income taxes (0.5) % (0.3) % 0.4 %

Share of net income from joint venture 1.2 % 1.3 % 1.3 %

Loss from continuing operations (10.2) % (5.2) % (3.0) %

Income from discontinued operations, net of tax — % — % 0.3 %

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Year Ended December 31, 2023 compared to the Year Ended December 31, 2022

Years Ended December 31,

Share of net income from joint venture 5,806 6,592 (786)

Net Sales. Net sales decreased by $9.5 million, or 1.9%, during the year ended December 31, 2023, compared to the year ended December 31, 2022, primarily due to reduced volume, including the impact from the closure of the Taunton and Irvine facilities, lower customer settlements and unfavorable foreign exchange effects of $0.6 million. These decreases were partially offset by higher customer pricing.

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.

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.

Other Operating Expense (Income), Net. Other operating expense (income), net changed favorably by $3.5 million primarily due to sublease income recognized in 2023 and a legal settlement recorded in 2022.

Interest Expense. Interest expense increased by $6.1 million during the year ended December 31, 2023, compared to the year ended December 31, 2022, primarily due to higher interest rates and the addition of a 2.00% paid-in-kind interest component on the Term Loan subsequent to the amendment in the first quarter of 2023. These increases were partially offset by the recognition of gains from the interest rate swap and a higher amount of interest expense that was capitalized in the current year compared with 2022.

Years Ended December 31,

Gain recognized on interest rate swap (1,815) (428)

Amortization of debt issuance costs and discount 1,941 1,361

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.

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

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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.

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.

Results by Segment

MOBILE SOLUTIONS

Year Ended December 31,

Net sales increased by $9.8 million, or 3.3%, during the year ended December 31, 2023, compared to the year ended December 31, 2022, primarily due to higher customer pricing, partially offset by lower volume, and lower customer settlements.

Loss from operations changed unfavorably by $9.6 million during the year ended December 31, 2023 compared to the prior year, primarily due to higher material and labor costs, lower sales volume, lower customer settlement and unfavorable foreign exchange effects. In addition, costs increased due to production challenges associated with new business launches.

POWER SOLUTIONS

Year Ended December 31,

Net sales decreased by $19.3 million, or 9.4%, during the year ended December 31, 2023, compared to the year ended December 31, 2022, primarily due to lower volumes, including the impact from the closure of the Taunton and Irvine facilities. These decreases were partially offset by higher customer pricing and premium pricing on a certain customer project.

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.

Changes in Financial Condition from December 31, 2022 to December 31, 2023

Overview

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.

From December 31, 2022 to December 31, 2023, total liabilities increased by $12.9 million, primarily due to an increase in other non-current liabilities due to fair value adjustments of outstanding warrants.

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.

Cash Flows

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

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receivable and inventory during the year ended 2023 compared to increases in these balance during the corresponding period of 2022.

Cash used in investing activities during the year ended December 31, 2023 changed minimally from the prior year as higher expenditures for property, plant and equipment was partially offset by the proceeds from the sale of equipment at the Taunton and Irvine facilities in the first half of 2023.

Cash used in financing activities was $2.9 million for the year ended December 31, 2023, compared with $5.2 million for the year ended December 31, 2022. The decrease was primarily due to an increase in international loans during 2023.

Liquidity and Capital Resources

Credit Facility

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.

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.

On March 5, 2024, we entered into a Purchase and Sale and Escrow Agreement to sell and leaseback three of our properties (the “Properties”). The sale is expected to close on or around March 15, 2024, with the buyer’s obligation to close subject to inspection, due diligence and other customary closing conditions. The aggregate purchase price for the Properties is $16.8 million, the net proceeds from which will be used to repay a portion of the outstanding borrowings under the Term Loan Facility.

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.

We were in compliance with all requirements under our Term Loan Facility and ABL Facility as of December 31, 2023. Both credit facilities allow for optional expansion of available borrowings, subject to certain terms and conditions.

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 $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.

Functional Currencies

We currently have foreign operations in Brazil, China, France, Mexico, and Poland. The local currency of each foreign facility is also its functional currency.

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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 judgment underlying them, are disclosed in Note 1 of the Notes to Consolidated Financial Statements. As disclosed in Note 1, the preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions about future events that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ significantly from those estimates. We believe that the following discussion addresses our most critical accounting estimates, which are those that are most important to the portrayal of our financial condition and results of operations and require management’s most difficult, subjective, and complex judgments.

Income Taxes

Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the consolidated financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Valuation allowances are recorded to reduce deferred tax assets when it is more likely than not that a tax benefit will not be realized. Provision has been made for income taxes on unremitted earnings of certain foreign subsidiaries as these earnings are not deemed to be permanently reinvested. We recognize income tax positions that meet the more likely than not threshold and accrue interest and potential penalties related to unrecognized income tax positions which are recorded as a component of the provision (benefit) for income taxes. We eliminate disproportionate tax effects from accumulated other comprehensive income (loss) when the circumstances upon which they are premised cease to exist.

The calculation of tax assets, liabilities, and expenses under U.S. GAAP is largely dependent on management judgment of the current and future deductibility and utilization of taxable expenses and benefits using a more likely than not threshold. Specifically, the realization of deferred tax assets and the certainty of tax positions taken are largely dependent upon management weighting the current positive and negative evidence for recording tax benefits and expenses. A significant piece of objective negative evidence evaluated is cumulative losses incurred over the three-year period ended December 31, 2023. Such objective evidence limits the ability to consider other subjective evidence, such as our projections for future earnings growth. We have recorded a U.S. deferred tax liability for foreign earnings which are not indefinitely reinvested. We treat global intangible low-taxed income (“GILTI”) as a periodic charge in the year in which it arises and therefore do not record deferred taxes for basis differences associated with GILTI.

In the event that the actual outcome from future tax consequences differs from management estimates and assumptions or management plans and positions are amended, the resulting change to the provision for income taxes could have a material impact on the consolidated results of operations and financial position.

Impairment of Long-Lived Assets

Long-lived tangible and intangible assets subject to depreciation or amortization are tested for recoverability when changes in circumstances indicate the carrying value of these assets may not be recoverable. A test for recoverability is also performed when management has committed to a plan to dispose of a reporting unit or asset group. Assets to be held and used are tested for recoverability when indications of impairment are evident. Recoverability of a long-lived tangible or intangible asset is evaluated by comparing its carrying value to the future estimated undiscounted cash flows expected to be generated by the asset or asset group. If the asset is deemed not recoverable, then the asset is considered impaired and adjusted to fair value which is then depreciated or amortized over its remaining useful life. Assets to be disposed of are recorded at the lesser of carrying value or fair value less costs of disposal. In assessing potential impairment for long-lived assets, we consider forecasted financial performance based, in large part, on management business plans and projected financial information which are subject to a high degree of management judgment and complexity. Future adverse changes in market conditions or adverse operating results of the underlying assets could result in having to record additional impairment charges not previously recognized.

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Item 7A.Quantitative and Qualitative Disclosures About Market Risk

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 December 31, 2023, we had $148.1 million of principal outstanding under the 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 $1.5 million on an annualized basis.

At December 31, 2023, using Adjusted SOFR plus a 2.00% spread, any borrowings under the ABL Facility would have been at a 7.445% interest rate.

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. To help reduce exposure to foreign currency fluctuation, we have incurred debt in euros in the past. 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 December 31, 2023.

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Item 8. Financial Statements and Supplementary Data

Index to Financial Statements

Page

Reports of Independent Registered Public Accounting Firm (PCAOB ID: 248) 31

Consolidated Statements of Operations and Comprehensive Income (Loss) 33

Consolidated Balance Sheets 34

Consolidated Statements of Cash Flows 35

Consolidated Statements of Changes in Stockholders’ Equity 37

Notes to Consolidated Financial Statements 38

Note 1. Significant Accounting Policies 38

Note 2. Discontinued Operations 41

Note 3. Segment Information 41

Note 4. Revenue from Contracts with Customers 43

Note 5. Accounts Receivable 44

Note 6. Inventories 45

Note 7. Property, Plant and Equipment 45

Note 8. Intangible Assets 45

Note 9. Investment in Joint Venture 46

Note 11. Preferred Stock 48

Note 13. Commitments and Contingencies 50

Note 14. Income Taxes 51

Note 15. Net Income (Loss) Per Common Share 54

Note 16. Share-Based Compensation 55

Note 17. Accumulated Other Comprehensive Income 57

Note 18. Fair Value Measurements 57

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and Stockholders

NN, Inc.

Opinion on internal control over financial reporting

We have audited the internal control over financial reporting of NN, Inc. (a Delaware corporation) and subsidiaries (the “Company”) as of December 31, 2023, based on criteria established in the 2013 Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2023, based on criteria established in the 2013 Internal Control—Integrated Framework issued by COSO.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the financial statements of the Company as of and for the year ended December 31, 2023, and our report dated March 12, 2024 expressed an unqualified opinion on those consolidated financial statements.

Basis for opinion

The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

Definition and limitations of internal control over financial reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/ GRANT THORNTON LLP

Charlotte, North Carolina

March 12, 2024

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and Stockholders

NN, Inc.

Opinion on the financial statements

We have audited the accompanying consolidated balance sheets of NN, Inc. (a Delaware corporation) and subsidiaries (the “Company”) as of December 31, 2023 and 2022, the related consolidated statements of operations and comprehensive income (loss), changes in stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2023, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2023 and 2022, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2023, in conformity with accounting principles generally accepted in the United States of America.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company’s internal control over financial reporting as of December 31, 2023, based on criteria established in the 2013 Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”), and our report dated March 12, 2024 expressed unqualified opinion.

Basis for opinion

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

Critical audit matters

Critical audit matters are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. We determined that there are no critical audit matters.

/s/ GRANT THORNTON LLP

We have served as the Company’s auditor since 2020.

Charlotte, North Carolina

March 12, 2024

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NN, Inc.

Consolidated Statements of Operations and Comprehensive Income (Loss)

Years Ended December 31,

Loss on extinguishment of debt and write-off of debt issuance costs — — 2,390

Derivative payments on interest rate swap — — 1,717

Loss on interest rate swap — — 2,033

Income from discontinued operations, net of tax (Note 2) — — 1,200

Other comprehensive income (loss):

Foreign currency translation gain (loss) $ 1,410 $ (8,156) $ (1,135)

Interest rate swap:

Change in fair value, net of tax (230) 3,358 59

Other comprehensive income (loss) $ (635) $ (5,218) $ 1,830

Basic and diluted net loss per common share:

Loss from continuing operations per common share $ (1.35) $ (0.83) $ (0.82)

Income from discontinued operations per common share $ — $ — $ 0.03

Basic and diluted net loss per common share $ (1.35) $ (0.83) $ (0.79)

See Notes to Consolidated Financial Statements.

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NN, Inc.

Consolidated Balance Sheets

December 31,

(in thousands, except per share data) 2023 2022

Assets

Current assets:

Liabilities, Preferred Stock, and Stockholders’ Equity

Current liabilities:

Short-term debt and current maturities of long-term debt 3,910 3,321

Current portion of operating lease liabilities 5,735 5,294

Operating lease liabilities, net of current portion 47,281 51,411

Commitments and contingencies (Note 13)

Stockholders’ equity:

Accumulated other comprehensive loss (37,755) (37,120)

Total liabilities, preferred stock, and stockholders’ equity $ 510,885 $ 546,127

See Notes to Consolidated Financial Statements.

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NN, Inc.

Consolidated Statements of Cash Flows

Years Ended December 31,

Cash flows from operating activities

Adjustments to reconcile net loss to net cash provided by operating activities:

Amortization of debt issuance costs and discount 1,941 1,361 1,381

Paid-in-kind interest 2,239 — —

Loss on extinguishment of debt and write-off of debt issuance costs — — 2,390

Total derivative loss (gain), net of cash settlements 11,933 (5,265) (3,259)

Gain on disposal of discontinued operations, net of tax — — (1,200)

Changes in operating assets and liabilities:

Income taxes receivable and payable, net (89) (1,457) (4,516)

Cash flows from investing activities

Proceeds from sale of property, plant, and equipment 2,898 460 1,418

Cash paid for post-closing adjustments on sale of business — — (3,880)

Cash settlements of interest rate swap — — (15,420)

Cash flows from financing activities

Cash paid for debt issuance costs (169) (136) (7,360)

Proceeds from issuance of preferred stock — — 61,793

Redemption of preferred stock — — (122,434)

Proceeds from (repayments of) short-term debt 3,648 — (1,563)

Net cash provided by (used in) financing activities (2,883) (5,186) 2,557

Effect of exchange rate changes on cash flows 232 (887) (1,522)

See Notes to Consolidated Financial Statements.

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NN, Inc.

Consolidated Statements of Cash Flows

Years Ended December 31,

Supplemental schedule of non-cash investing activities:

Non-cash additions to property, plant and equipment 2,743 1,266 4,438

Non-cash additions to debt issuance costs 2,712 — —

Supplemental disclosures:

See Notes to Consolidated Financial Statements.

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NN, Inc.

Consolidated Statements of Changes in Stockholders’ Equity

(in thousands) Number of shares Parvalue Total

Dividends accrued for preferred stock — — (21,478) — — (21,478)

Shares issued under stock incentive plans, net of forfeitures 387 4 (4) — — —

Share-based compensation expense — — 3,221 — — 3,221

Shares issued for option exercises 6 — 48 — — 48

Other comprehensive income — — — — 1,830 1,830

Dividends accrued for preferred stock — — (10,894) — — (10,894)

Shares issued under stock incentive plans, net of forfeitures 860 9 (9) — — —

Share-based compensation expense — — 4,377 — — 4,377

Other comprehensive loss — — — — (5,218) (5,218)

Dividends accrued for preferred stock — — (13,098) — — (13,098)

Share-based compensation expense — — 2,821 — — 2,821

Other comprehensive loss — — — — (635) (635)

See Notes to Consolidated Financial Statements.

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NN, Inc.

Notes to Consolidated Financial Statements

Note 1. Significant Accounting Policies

Nature of Business

NN, Inc. 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 the Notes to Consolidated Financial Statements, the terms the “Company,” “we,” “our,” or “us” refer to NN, Inc., and its subsidiaries. As of December 31, 2023, we had 27 facilities in North America, South America, Europe, and China.

Basis of Presentation

The accompanying consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”). Certain prior period amounts have been reclassified to conform to the current year’s presentation. Except for per share data or as otherwise indicated, all U.S. dollar amounts presented in the tables in these Notes to Consolidated Financial Statements are in thousands.

Principles of Consolidation

Our consolidated financial statements include the accounts of NN, Inc., and its wholly owned subsidiaries. We own a 49% investment in a joint venture (the “JV”) which we account for using the equity method (see Note 9). All intercompany transactions and balances have been eliminated in consolidation.

Use of Estimates in the Preparation of Consolidated Financial Statements

The preparation of consolidated financial statements in accordance with U.S. GAAP requires management to use estimates and assumptions that affect the reported amounts of certain assets and liabilities, disclosure of contingent assets and liabilities, and the reported amounts of revenues and expenses. Actual results may differ from those estimates.

Cash and Cash Equivalents

Cash and cash equivalents include cash and highly liquid investments with original maturities of three months or less. We maintain cash balances in transaction accounts with various financial institutions that are insured by the Federal Deposit Insurance Corporation. Although we maintain balances that exceed the federally insured limit, we have not experienced any losses related to these balances, and we believe credit risk to be minimal. We had $13.5 million and $12.5 million in cash and cash equivalents as of December 31, 2023 and 2022, respectively, held at foreign financial institutions.

Accounts Receivable and Allowance for Credit Losses

Trade accounts receivable are recorded at their net realizable value. We maintain allowances for estimated losses resulting from the inability of our customers to make required payments. The allowances are based on the amount that we ultimately expect to collect from our customers. We evaluate the collectability of accounts receivable based on a combination of factors including number of days receivables are past due, historical collection experience, current market conditions, and forecasted direction of economic and business environment. Accounts receivable are written off at the time a customer receivable is deemed uncollectible.

Inventories

Inventories are stated at the lower of cost or net realizable value. Cost is determined using standard costs, which approximates the average cost method. Our policy is to expense abnormal amounts of idle facility expense, freight, handling cost, and waste included in cost of products sold. In addition, we allocate fixed production overheads based on the normal production capacity of our facilities. Inventory valuations were developed using normalized production capacities for each of our manufacturing locations. The costs from excess capacity or under-utilization of fixed production overheads were expensed in the period incurred and are not included as a component of inventory.

Inventories also include tools, molds, and dies in progress that we are producing and will ultimately sell to our customers. These inventories are also carried at the lower of cost or net realizable value.

Property, Plant and Equipment

Property, plant and equipment are stated at cost less accumulated depreciation. Assets to be disposed of are stated at the lower of depreciated cost or fair market value less estimated selling costs. Expenditures for maintenance and repairs are charged to expense as incurred. Major renewals and improvements are capitalized. When a property item is retired, its cost and related accumulated depreciation are removed from the property accounts and any gain or loss is recorded in the Consolidated Statements of Operations and Comprehensive Income (Loss). We review the carrying values of long-lived assets for

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impairment whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. Property, plant and equipment also includes tools, molds, and dies used in manufacturing.

Depreciation is calculated based on historical cost using the straight-line method over the estimated useful lives of the depreciable assets. Estimated useful lives for buildings and land improvements generally range from 10 years to 40 years. Estimated useful lives for machinery and equipment generally range from 3 years to 12 years. Estimated useful lives for leasehold improvements are based on the life of the lease.

Leases

We determine whether an arrangement is a lease at inception. Lease right-of-use (“ROU”) assets represent our right to use an underlying asset for the lease term, and lease liabilities represent our obligation to make lease payments arising from the lease. Lease ROU assets and liabilities are recognized at the lease commencement date based on the present value of lease payments over the lease term. When the implicit rate is not readily determinable, we use the estimated incremental borrowing rate based on the information available at the lease commencement date in determining the present value of lease payments. The lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Amortization of lease ROU assets is recognized in expense on a straight-line basis over the lease term.

We recognize short-term leases, which have a term of twelve months or less, on a straight-line basis and do not record a related lease asset or liability for such leases. Finance lease ROU assets consist primarily of equipment used in the manufacturing process with terms of four years to eight years. Operating lease ROU assets consist of the following:

•Equipment used in the manufacturing process as well as office equipment with terms of five years; and

•Manufacturing plants and office facilities with terms of four years to 20 years.

We sublease certain leased buildings or portions of leased buildings when no longer needed for our current operational needs. Since we retain the obligation to the lessor, the underlying leases continue to be accounted for as operating leases. Sublease income is recognized on a straight-line basis over the lease term.

Impairment of Long-Lived Assets

Equity Method Investments

Our equity method investment is subject to a review for impairment if, and when, circumstances indicate that a decline in value below its carrying amount may have occurred. Examples of such circumstances include, but are not limited to, a significant deterioration in the earnings performance or business prospects of the investee; a significant adverse change in the regulatory, economic or technological environment of the investee; a significant adverse change in the general market condition of either the geographic area or the industry in which the investee operates; and recurring negative cash flows from operations. If management considers the decline to be other than temporary, we would write down the investment to its estimated fair market value.

Revenue Recognition

We generally transfer control and recognize revenue when we ship the product from our manufacturing facility to our customer at a point in time, as this is when our customer obtains the ability to direct use of, and obtain substantially all of the remaining benefits from, the product. In limited circumstances, we recognize revenue over time as services are rendered. We have elected to recognize the cost for freight and shipping when control over products has transferred to the customer as a component of cost of sales.

We use an observable price to determine the stand-alone selling price for separate performance obligations or a cost-plus-margin approach when an observable price is not available. The expected duration of our contracts is one year or less, and we have elected to apply the practical expedient that allows entities to disregard the effects of financing when the contract length is less than one year. The amount of consideration we receive and the revenue we recognize varies with volume rebates and incentives we offer to our customers. We estimate the amount of variable consideration that should be included in the transaction price utilizing the expected value method or the most likely amount method depending on the nature of the variable consideration. Variable consideration is included in the transaction price if, in our judgment, it is probable that a significant future reversal of cumulative revenue under the contract will not occur.

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We utilize the portfolio approach practical expedient to evaluate sales-related discounts on a portfolio basis to contracts with similar characteristics. The effect on our consolidated financial statements of applying the portfolio approach would not differ materially from evaluation of individual contracts.

We give our customers the right to return only defective products in exchange for functioning products or rework of the product. These transactions are evaluated and accounted for under ASC Topic 460, Guarantees, and we estimate the impact to the transaction price based on an analysis of historical experience.

Share Based Compensation

The cost of restricted stock awards, performance share units, and stock options is recognized as compensation expense over the vesting periods based on the grant date fair value, as determined under ASC Topic 718, Compensation – stock compensation. The grant-date fair value of restricted stock awards is based on the closing price of our common stock on the date of grant. We use a Monte Carlo simulation for performance share units that include a market condition. The grant-date fair value of performance share units that include performance conditions is based on the closing price of our common stock on the date of grant and compensation expense is recognized based on the estimated outcome of the performance condition. Stock options are valued using the Black Scholes financial pricing model.

Common Stock and Preferred Stock Dividends

Dividends are recorded as a reduction to retained earnings. When we have an accumulated deficit, dividends are recorded as a reduction of additional paid-in capital.

Foreign Currency Translation

Assets and liabilities of our foreign subsidiaries are translated at current exchange rates. Revenue, costs, and expenses are translated at average rates prevailing during each reporting period. Translation adjustments arising from the translation of foreign subsidiary financial statements are reported as a component of other comprehensive income (loss) and accumulated other comprehensive income (loss) within stockholders’ equity. Transactions denominated in foreign currencies, including intercompany transactions, are initially recorded at the current exchange rate at the date of the transaction. The balances are adjusted to the current exchange rate as of each balance sheet date and as of the date when the transaction is consummated. Transaction gains or losses are recognized as incurred in the “Other expense (income), net” line in the Consolidated Statements of Operations and Comprehensive Income (Loss). For the years ended December 31, 2023, 2022, and 2021, transaction gains (losses) were $0.3 million, $0.2 million, and $(0.5) million, respectively.

Net Income (Loss) Per Common Share

In accordance with ASC 260, Earnings Per Share, we allocate earnings or losses to common stockholders and participating securities using the two-class method to compute earnings per share (“EPS”) unless the treasury stock method results in a lower EPS. The two-class method is an earnings allocation formula that treats participating securities as having rights to earnings that otherwise would have been available to common stockholders. Participating securities may participate in undistributed earnings with common stock whether or not that participation is conditioned upon the occurrence of a specified event. Under the two-class method, our net income (loss) is reduced (or increased) by the amount that has been or will be distributed to our participating security holders. We have elected to allocate undistributed income to participating securities based on year-to-date results. Our participating securities, which include restricted stock awards and preferred stock, do not participate in losses.

Basic net income (loss) per common share is computed by dividing net income (loss) allocable to common shares by the weighted average number of common shares outstanding, adjusted for participating securities and certain outstanding warrants. Diluted net income (loss) per common share includes the effect of warrants and stock options unless inclusion would not be dilutive.

Income Taxes

Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the consolidated financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Valuation allowances are recorded to reduce deferred tax assets when it is more likely than not that a tax benefit will not be realized. Provision has been made for income taxes on unremitted earnings of certain foreign subsidiaries as these earnings are not deemed to be permanently reinvested. We recognize income tax positions that meet the more likely than not threshold and accrue interest and potential penalties related to unrecognized income tax positions which are recorded as a component of the provision (benefit) for income taxes. We treat global intangible low-taxed income (“GILTI”) as a periodic charge in the year in which it arises and therefore do not record deferred taxes for basis differences associated with GILTI. We eliminate disproportionate tax effects from accumulated other comprehensive income (loss) when the circumstances upon which they are premised cease to exist.

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Fair Value Measurements

Fair value principles prioritize valuation inputs across three broad levels. Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 2 inputs are quoted prices for similar assets and liabilities in active markets or inputs that are observable for the asset or liability, either directly or indirectly through market corroboration, for substantially the full term of the financial instrument. Level 3 inputs are unobservable inputs based on the assumptions used to measure assets and liabilities at fair value. An asset or liability’s classification within the various levels is determined based on the lowest level input that is significant to the fair value measurement.

Government Assistance

For the years ended December 31, 2023 and 2022, we received $0.7 million and $1.4 million, respectively, in grants and other programs from various governments outside of the U.S. These amounts were received as employment programs, rent abatements, and incentives for capital expenditures in specific locations. Amounts received were recognized as reductions to the underlying expense or capital assets.

Note 2. Discontinued Operations

In October 2020, we sold our Life Sciences business under the terms of a Stock Purchase Agreement (the “SPA”) with affiliates of American Securities LLC for $753.3 million cash. In accordance with the terms of the SPA, we agreed to indemnify the buyer for certain tax liabilities on its consolidated federal income tax return related to the Life Sciences business during the portion of the year ended December 31, 2020, prior to the change in ownership on October 6, 2020. We recognized a tax indemnification of $1.2 million during the year ended December 31, 2020 which was reversed during the year ended December 31, 2021, as the actual tax liability was determined to be $0.

Note 3. Segment Information

Our business is aggregated into the following two reportable segments.

•Mobile Solutions. Mobile Solutions is focused on growth in the automotive, general industrial, and medical end markets. We have developed an expertise in manufacturing highly complex, tight tolerance, system critical components. Our technical capabilities can be utilized in numerous applications including for use in battery electric, hybrid electric, and internal combustion engine vehicles. The group currently manufactures components on a high-volume basis for use in power steering, braking, transmissions, and gasoline fuel system applications, along with components utilized in heating, ventilation and air conditioning and diesel injection and diesel emissions treatment applications. This expertise has been gained through investment in technical capabilities, processes and systems, and allows us to provide skilled program management and product launch capabilities.

•Power Solutions. Power Solutions is focused on growth in the electrical, general industrial, automotive, and medical end markets. Within this group we combine materials science expertise with advanced engineering and production capabilities to design and manufacture a broad range of high-precision metal and plastic components, assemblies, and finished devices used in applications ranging from power control to transportation electrification. We manufacture a variety of products including electrical contacts, connectors, contact assemblies, and precision stampings for the electrical end market and high precision products for the aerospace and defense end market utilizing our extensive process technologies for optical grade plastics, thermally conductive plastics, titanium, Inconel, magnesium, and electroplating. Our medical business includes the production of a variety of tools and instruments for the orthopaedics and medical/surgical end markets.

These divisions are considered our two operating segments as each has engaged in business activities for which it earns revenues and incurs expenses, discrete financial information is available for each, and this is the level at which the chief operating decision maker reviews discrete financial information for purposes of allocating resources and assessing performance.

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The following table presents our financial performance by reportable segment.

Year Ended December 31,

Net sales:

Intersegment sales eliminations (13) (2) (79)

Income (loss) from operations:

Depreciation and amortization:

Expenditures for long-lived assets:

The following table summarizes total assets by reportable segment.

As of December 31,

_______________________________

(1) Total assets in Mobile Solutions includes $32.7 million and $31.8 million as of December 31, 2023 and 2022, respectively, related to our investment in the JV.

The following table summarizes long-lived tangible assets by country.

As of December 31,

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The following table summarizes revenue by country, based on our customers’ shipping destination.

Year Ended December 31,

Note 4. Revenue from Contracts with Customers

Revenue is recognized when control of the good or service is transferred to the customer either at a point in time or, in limited circumstances, as our services are rendered over time. Revenue is measured as the amount of consideration we expect to receive in exchange for transferring goods or services. During the year ended December 31, 2022, we received equipment from a customer as part of the selling price of goods transferred. This noncash consideration was recognized as revenue equal to the fair value of the equipment received.

The following tables summarize revenue by customer industry. Our products in the automotive industry include high-precision components and assemblies for electric power steering systems, electric braking, electric motors, fuel systems, emissions control, transmissions, moldings, stampings, sensors, and electrical contacts. Our products in the general industrial industry include high-precision metal and plastic components for a variety of industrial applications including diesel industrial motors, heating and cooling systems, fluid power systems, power tools, and more. While many of the industries we serve include electrical components, our products in the residential/commercial electrical industry category in the following tables include components used in smart meters, charging stations, circuit breakers, transformers, electrical contact assemblies, precision stampings, welded contact assemblies, specification plating, and surface finishing.

Residential/Commercial Electrical — 67,546 — 67,546

Residential/Commercial Electrical — 70,055 — 70,055

Residential/Commercial Electrical — 61,748 — 61,748

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Other Sources of Revenue

We provide pre-production activities related to engineering efforts to develop molds, dies, and machines that are owned by our customers. We may receive advance payments from customers which are deferred until satisfying our performance obligations by compliance with customer-specified milestones, recognizing revenue at a point in time. These contracts generally have an original expected duration of less than one year.

Deferred Revenue

The timing of revenue recognition, billings, and cash collections results in billed accounts receivable and customer advances and deposits (e.g. contract liability) on the Consolidated Balance Sheets. These contract liabilities are reported on the Consolidated Balance Sheets on a contract-by-contract basis at the end of each reporting period as deferred revenue, which is reported in the “Other current liabilities” line on the Consolidated Balance Sheets.

Deferred revenue relates to payments received in advance of performance under the contract and recognized as revenue as (or when) we perform under the contract. Changes in the contract liability balances during the year ended December 31, 2023, were not materially impacted by any other factors. The balance of deferred revenue was $0.4 million and $0.7 million as of December 31, 2023 and December 31, 2022, respectively. Revenue recognized for performance obligations satisfied or partially satisfied during the year ended December 31, 2023 included $0.7 million that was included in deferred revenue as of December 31, 2022.

Transaction Price Allocated to Future Performance Obligations

We are required to disclose the aggregate amount of transaction price that is allocated to performance obligations that have not yet been satisfied as of December 31, 2023, unless our contracts meet one of the practical expedients. Our contracts met the practical expedient for a performance obligation that is part of a contract that has an original expected duration of one year or less.

Costs to Obtain and Fulfill a Contract

We recognize commissions paid to internal sales personnel that are incremental to obtaining customer contracts as an expense when incurred since the amortization period is less than one year. Costs to obtain a contract are expensed as selling, general and administrative expense.

Sales, VAT, and other taxes we collect concurrent with revenue-producing activities are excluded from revenue. Incidental items that are immaterial in the context of the contract are recognized as expense.

Sales Concentration

No single customer accounted for 10% or more of consolidated net sales, during the years ended December 31, 2023, 2022, and 2021.

Note 5. Accounts Receivable

The following table presents changes in the allowance for credit losses.

Years Ended December 31,

Currency impact 7 (27) (36)

As of December 31, 2023, one customer represented greater than 10% of our consolidated accounts receivable balance.

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. During the years ended December 31, 2023 and 2022, we incurred fees of $1.1 million and $0.6 million, respectively, related to the sale of receivables which is recorded in the Other expense (income), net line item on the Consolidated Statements of Operations and Comprehensive Income (Loss).

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Note 6. Inventories

Inventories are comprised of the following amounts:

As of December 31,

Note 7. Property, Plant and Equipment

Property, plant and equipment are comprised of the following amounts:

As of December 31,

For the years ended December 31, 2023, 2022, and 2021, we recorded depreciation expense of $32.0 million, $31.4 million, and $31.8 million, respectively.

We monitor property, plant and equipment for any indicators of potential impairment. There were no impairment charges for the years ended December 31, 2023, 2022 and 2021.

Note 8. Intangible Assets

The following table shows changes in the carrying amount of intangible assets, net, by reportable segment.

Mobile Solutions Power Solutions Total

The following table shows the cost and accumulated amortization of our intangible assets as of December 31, 2023 and 2022.

Intangible assets that are fully amortized are removed and no longer represented in the gross carrying value or accumulated amortization.

The following table shows estimated future amortization expense for each of the next five years.

Year Ending December 31,

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Intangible assets are reviewed for impairment when changes in circumstances indicate the carrying value of those assets may not be recoverable. There were no impairment charges for the years ended December 31, 2023, 2022 and 2021.

Note 9. Investment in Joint Venture

We own a 49% investment in Wuxi Weifu Autocam Precision Machinery Company, Ltd., a joint venture located in Wuxi, China. The JV is jointly controlled and managed, and we account for it under the equity method, with the share of net income from the joint venture recorded in the Mobile Solutions segment.

The following table shows changes in our investment in the JV.

Share of earnings 5,806

Dividends paid by joint venture (3,938)

Foreign currency translation loss (969)

The following tables show summarized financial information of the unconsolidated JV.

Year Ended December 31,

December 31,

We recognized sales to the JV of $0, $0.1 million, and $0.4 million during the years ended December 31, 2023, 2022, and 2021, respectively.

Note 10. Debt

On March 22, 2021, we entered into a $150.0 million term loan facility (as amended from time to time, the “Term Loan Facility”) and a new $50.0 million asset backed credit facility (as amended from time to time, the “ABL Facility”). On March 3, 2023, we amended the Term Loan Facility (the “Term Loan Amendment”) and ABL Facility to adjust certain covenants under the agreements, as well as to replace references to LIBOR with secured overnight finance rate (“SOFR”) for interest rate calculations. The following table presents the outstanding debt balances.

As of December 31,

Unamortized debt issuance costs and discount (1) (5,490) (4,394)

_______________________________

(1) In addition to this amount, costs of $0.5 million and $0.6 million related to the ABL Facility were recorded in other non-current assets as of December 31, 2023 and 2022, respectively.

We capitalized interest costs of $1.3 million, $0.6 million, and $0.3 million in the years ended December 31, 2023, 2022, and 2021, respectively, related to construction in progress.

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Term Loan Facility

Effective March 31, 2023, outstanding borrowings under the Term Loan Facility bear interest at either 1) one-month, three-month, or six-month SOFR with a duration adjustment (“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 was increased on a paid-in-kind basis at a rate between 1.00% and 2.00% (“PIK interest”), dependent on the Company’s leverage ratio. The PIK interest is payable on the loan maturity date of September 22, 2026. At December 31, 2023, the Term Loan Facility bore interest, including PIK interest, based on one-month Adjusted SOFR, at 14.331%.

The Term Loan Facility requires quarterly principal payments of $0.4 million with the remaining unpaid principal amount due at the loan maturity date. 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. The Term Loan Facility is collateralized by all of our assets. The Term Loan Facility has a first lien on all domestic assets other than accounts receivable and inventory and has a second lien on domestic accounts receivable and inventory. We were in compliance with all requirements under the Term Loan Facility as of December 31, 2023.

The Term Loan Facility was issued at a $3.8 million discount and we capitalized an additional $5.4 million in new debt issuance costs. These costs are recorded as a direct reduction to the carrying amount of the associated long-term debt and amortized over the term of the debt.

We had an interest rate swap that changed the one-month LIBOR to a fixed rate of 1.291% on $60.0 million of the outstanding balance of the Term Loan Facility. During the first quarter of 2023, we terminated the interest rate swap and received cash proceeds of $2.5 million which was equal to its fair value.

ABL Facility

The ABL Facility provides for a senior secured revolving credit facility, with an original commitment amount of $50.0 million, of which a maximum of $30.0 million is available in the form of letters of credit and a maximum of $5.0 million is available for the issuance of short-term swingline loans. The availability of credit under the ABL Facility is limited by a borrowing base calculation derived from accounts receivable and inventory held in the United States. The maximum commitment amount may be increased or decreased from time to time based on the terms of conditions of the ABL Facility. Outstanding borrowings under the ABL Facility bear interest on a variable rate structure plus an interest rate spread that is based on the average amount of aggregate revolving commitment available. Effective March 3, 2023, the variable borrowing rate is 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 may elect whether to use one-month, three-month, or six-month Adjusted SOFR. At December 31, 2023, using one-month Adjusted SOFR plus a 2.00% margin, the interest rate on outstanding borrowings under the ABL Facility would have been 7.445%. We pay a commitment fee of 0.375% for unused capacity under the ABL Facility and a 2.125% fee on the amount of letters of credit outstanding. The final maturity date of the ABL Facility is March 22, 2026.

As of December 31, 2023, we had no outstanding borrowings under the ABL Facility, $10.9 million of outstanding letters of credit, and $26.4 million available for future borrowings under the ABL Facility. The ABL Facility has a first lien on domestic accounts receivable and inventory. We were in compliance with all requirements under the ABL Facility as of December 31, 2023.

Future Maturities

The following table lists aggregate maturities of debt for each of the next five years.

Debt Issuance Costs

We recognized a $2.4 million loss on extinguishment for unamortized debt issuance costs that were written off in the year ended December 31, 2021, in connection with the termination of our previous credit facility.

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Note 11. Preferred Stock

Series D Perpetual Preferred Stock

On March 22, 2021, we completed a private placement of 65,000 shares of newly designated Series D Perpetual Preferred Stock, with a par value of $0.01 per share (the “Series D Preferred Stock”), at a price of $1,000 per share, together with detachable warrants (the “2021 Warrants”) to purchase up to 1.9 million shares of our common stock at an exercise price of $0.01 per share. The Series D Preferred Stock has an initial liquidation preference of $1,000 per share and is redeemable at our option in cash at a redemption price equal to the liquidation preference then in effect. Series D Preferred Stock shares earn cash dividends at a rate of 10.0% per year, payable quarterly in arrears, accruing whether or not earned or declared. If no cash dividend is paid, then the liquidation preference per share effective on the dividend date increases by 12.0% per year. On March 22, 2026, the cash dividend rate and in-kind dividend rate increase by 2.5% per year. Cash dividends are required beginning on September 30, 2027.

The Series D Preferred Stock is classified as mezzanine equity, between liabilities and stockholders’ equity, because certain features of the Series D Preferred Stock could require redemption of the Series D Preferred Stock upon a change of control event that is considered not solely within our control. For initial recognition, the Series D Preferred Stock was recognized at a discounted value, net of issuance costs and allocation to warrants and a bifurcated embedded derivative. The aggregate discount is amortized as a deemed dividend through March 22, 2026, which is the date the dividend rate begins to increase by 2.5% per year. Deemed dividends adjust additional paid-in capital due to the absence of retained earnings.

In accordance with ASC 815-15, Derivatives and Hedging - Embedded Derivatives, certain features of the Series D Preferred Stock were bifurcated and accounted for as derivatives separately. Note 18 discusses the accounting for these features.

As of December 31, 2023, the carrying value of the Series D Preferred Stock shares was $77.8 million, which included $31.1 million of accumulated unpaid and deemed dividends. The following table presents the change in the Series D Preferred Stock carrying value.

Years Ended December 31,

Proceeds from issuance of shares, net of issuance costs — — 61,793

Fair value of 2021 Warrants issued — — (14,839)

Recognition of bifurcated embedded derivative — — (282)

Series B Convertible Preferred Stock

On December 11, 2019, we issued 100,000 shares of contingently redeemable Series B convertible preferred stock (the “Series B Preferred Stock”), together with detachable warrants (the “2019 Warrants”) to purchase up to 1.5 million shares of our common stock at an original exercise price of $12.00 per share. The Series B Preferred Stock had a liquidation preference of $1,000 per share and earned cumulative dividends at a rate of 10.625% per year, and accrued whether or not earned or declared. On March 22, 2021, we used the net cash proceeds of $61.8 million from the issuance of the Series D Preferred Stock, along with part of the proceeds from the Term Loan Facility, to redeem all of the outstanding shares of the Series B Preferred Stock. The following table presents the change in the Series B Preferred Stock carrying value for the year ended December 31, 2021.

Accrual of in-kind dividends 14,008

Amortization 335

Balance as of December 31, 2021 $ —

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Note 12. Leases

The following table presents components of lease expense:

Years Ended December 31,

Finance lease cost:

_______________________________

(1) Excludes expenses related to leases with a lease term of one month or less.

The following table presents lease-related assets and liabilities recorded on the balance sheet.

As of December 31,

Assets:

Operating lease assets Operating lease right-of-use assets $ 43,357 $ 46,713

Finance lease assets Property, plant and equipment, net 13,599 12,989

Liabilities:

Current liabilities:

Finance lease liabilities Other current liabilities 2,047 2,610

Non-current liabilities:

Finance lease liabilities Other non-current liabilities 4,488 3,828

The following table contains supplemental cash flow information related to leases.

Years Ended December 31,

Cash paid for amounts included in the measurement of lease liabilities:

Operating cash flows used in operating leases $ 8,462 $ 14,214 $ 13,434

Operating cash flows used in finance leases 345 351 213

Financing cash flows used in finance leases 1,766 3,003 4,836

_______________________________

(1) Includes new leases, renewals, and modifications.

The weighted average remaining lease term and weighted-average discount rate for operating and finance leases were as follows:

As of December 31,

Weighted-average remaining lease term - operating leases 9.2 years 10.1 years

Weighted-average remaining lease term - finance leases 3.1 years 3.1 years

Weighted-average discount rate - operating leases 7.7 % 7.5 %

Weighted-average discount rate - finance leases 5.2 % 5.3 %

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The maturities of lease liabilities as of December 31, 2023, is as follows:

Operating Leases Finance Leases

Total future minimum lease payments 72,537 7,177

Subleases

We have entered into subleases for certain leased buildings or portions of leased buildings when no longer needed for our current operational needs. The weighted-average remaining lease term of our subleases is 10.9 years. In June 2023, we began subleasing our Taunton and Irvine sites, under subleases that extend through the lease termination dates of the respective head leases. In August 2022, we began subleasing a portion of our leased corporate headquarters office space. The undiscounted cash flows to be received under operating subleases subsequent to December 31, 2023, is as follows:

Note 13. Commitments and Contingencies

Brazil ICMS Tax Matter

Prior to the acquisition of Autocam Corporation (“Autocam”) in 2014, Autocam’s Brazilian subsidiary (“Autocam Brazil”) received notification from the Brazilian tax authority regarding ICMS (state value added tax) tax credits claimed on intermediary materials (e.g., tooling and perishable items) used in the manufacturing process. The Brazilian tax authority notification disallowed state ICMS tax credits claimed on intermediary materials based on the argument that these items are not intrinsically related to the manufacturing processes. Autocam Brazil filed an administrative defense with the Brazilian tax authority arguing, among other matters, that it should qualify for an ICMS tax credit, contending that the intermediary materials are directly related to the manufacturing process.

We believe that we have substantial legal and factual defenses, and we plan to defend our interests in this matter vigorously. The matter encompasses several lawsuits filed with the Brazilian courts requesting declaratory actions that no tax is due or seeking a stay of execution on the collection of the tax. In 2018, we obtained a favorable decision in one of the declaratory actions for which the period for appeal has expired. We have filed actions in each court requesting dismissal of the matter based on the earlier court action. In May 2020, we received an unfavorable decision in one of the lawsuits, and as a result have recorded a liability to the Brazilian tax authorities and a receivable from the former shareholders of Autocam for the same amount. Although we anticipate a favorable resolution to the remaining matters, we can provide no assurances that we will be successful in achieving dismissal of all pending cases. The U.S. dollar amount that would be owed in the event of an unfavorable decision is subject to interest, penalties, and currency impacts and therefore is dependent on the timing of the decision. For the remaining open lawsuits, we currently believe the cumulative potential liability in the event of unfavorable decisions on all matters will be less than $5.0 million, inclusive of interest and penalties.

We are entitled to indemnification from the former shareholders of Autocam, subject to the limitations and procedures set forth in the agreement and plan of merger relating to the Autocam acquisition. Management believes the indemnification would include amounts owed for the tax, interest, and penalties related to this matter. Accordingly, we do not expect to incur a loss related to this matter even in the event of an unfavorable decision and, therefore, have not accrued an amount for the remaining matters as of December 31, 2023.

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Other Legal Matters

All other legal proceedings are of an ordinary and routine nature and are incidental to our operations. Management believes that such proceedings should not, individually or in the aggregate, have a material adverse effect on our business, financial condition, results of operations, or cash flows. In making that determination, we analyze the facts and circumstances of each case at least quarterly in consultation with our attorneys and determine a range of reasonably possible outcomes.

Note 14. Income Taxes

The following table summarizes the income (loss) from continuing operations before benefit (provision) for income taxes and share of net income from joint venture.

Years Ended December 31,

The following table summarizes total income tax expense (benefit) recognized in each year.

Years Ended December 31,

Current taxes:

Deferred taxes:

U.S. federal, state and foreign valuation allowance 10,449 5,376 5,538

The following table presents a reconciliation of income taxes based on the U.S. federal statutory income tax rate.

Years Ended December 31,

U.S federal statutory income tax rate 21.0 % 21.0 % 21.0 %

Change in valuation allowance, exclusive of state (16.1) % (17.5) % (20.0) %

State taxes, net of federal taxes, exclusive of tax reform (0.2) % 1.6 % 4.5 %

Non-U.S. earnings taxed at different rates 1.1 % 0.7 % 3.0 %

Global intangible low-taxed income (2.3) % (3.9) % (6.0) %

Deferred true-up (0.8) % (6.4) % — %

Research and development tax credit 0.2 % 0.3 % 1.0 %

Change in uncertain tax positions — % — % 0.7 %

Interest on CARES Act refund 1.1 % 1.8 % — %

Return to provision 0.1 % 1.3 % 0.8 %

Taxes on unremitted foreign earnings (2.4) % (3.9) % 2.0 %

Intercompany lending (1.3) % (2.7) % (5.3) %

Warrant revaluation (4.3) % 3.6 % 6.5 %

Other adjustments, net (0.4) % (1.1) % (0.4) %

Effective tax rate (4.3) % (5.2) % 7.8 %

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Our effective tax rate was (4.3)% and (5.2)% for the years ended December 31, 2023 and 2022, respectively. The effective tax rates differed from the U.S. federal statutory tax rate of 21% primarily due to the impact of our valuation allowance change during the year. Our effective tax rate for continuing operations was 7.8% for the year ended December 31, 2021, which differed from the U.S. federal statutory tax rate of 21% primarily due to the impact of our valuation allowance change during the year.

In 2021, we filed a refund claim with the IRS as a result of the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”). During the years ended December 31, 2023 and 2022, we accrued $0.6 million and $0.6 million, respectively, of interest on the CARES Act refund. 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 at December 31, 2023.

The following table summarizes the principal components of the deferred tax assets and liabilities.

As of December 31,

Deferred income tax liabilities:

Tax in excess of book depreciation $ 21,497 $ 24,045

Interest rate swap — 754

Taxes on unremitted foreign earnings 4,658 4,961

Other deferred tax liabilities 725 761

Total deferred income tax liabilities 50,509 58,168

Deferred income tax assets:

Pension and personnel accruals 1,818 1,717

Interest rate swap 251 —

Deferred income tax assets before valuation allowance 93,783 82,886

Valuation allowance on deferred tax assets (47,528) (30,212)

Net deferred income tax liabilities $ 4,254 $ 5,494

As of December 31, 2023, we had a $37.9 million U.S. federal net operating loss (“NOL”) carryover. The federal NOL has an indefinite life, but utilization within any tax year is limited to 80% of taxable income. Management has determined it is more likely than not this NOL will not be realized and has established a full valuation allowance against the deferred tax asset. As of December 31, 2023, we had $16.2 million of tax effected, state NOL carryovers, which begin to expire in 2030. Management has determined it is more likely than not these state NOL’s will not be realized and has established a full valuation allowance against these deferred tax assets. We also have $11.3 million, tax-effected, of foreign NOL carryovers at December 31, 2023. The foreign NOLs have an indefinite life; however, management believes that benefit for certain of the foreign NOLs may not be realized. Therefore, we have established a valuation allowance of $8.1 million to reduce the carrying value of the asset related to foreign NOLs to the amount that has been determined to be more likely than not realized.

We have $0.4 million and $2.9 million of U.S. federal tax credits and tax credits in foreign jurisdictions, respectively, as of December 31, 2023. We have recognized a full valuation allowance against these tax credits. In addition, we have other federal and state deferred tax assets of $2.0 million that we believe it is more likely than not will not be realized for which we have established a full valuation allowance.

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We have a U.S. federal and state deferred tax asset related to interest expense carryforwards. Management believes it is more likely than not that the benefit for this asset will not be realized. We have established a valuation allowance of $14.9 million to eliminate the carrying value of this asset.

Management assesses available positive and negative evidence to estimate whether it is more likely than not sufficient future taxable income will be generated to provide use of the existing deferred tax assets. A significant piece of objective negative evidence evaluated is cumulative losses incurred over the three-year period ended December 31, 2023. Such objective evidence limits the ability to consider other subjective evidence, such as our projections for future earnings growth. On the basis of this evaluation, as of December 31, 2023, a valuation allowance of $47.5 million has been recorded to recognize only the portion of the deferred tax asset that is more likely than not to be realized without consideration of future earnings growth.

Management believes all remaining tax assets will more likely than not be realized. However, the amount of the deferred tax asset realized will change based on future conditions, and the amount considered realizable will be adjusted if objective negative evidence in the form of cumulative losses is no longer present allowing additional weight to be given to subjective evidence such as our projections for growth.

During 2023, the valuation allowance increased by $17.3 million, primarily due to allowances recorded against U.S. federal net operating loss carryforwards, foreign net operating loss carryforwards, and carryforwards of disallowed interest expense which are subject to certain annual deduction limitations. The increase was partially offset by the release of valuation allowance in Brazil. As of December 31, 2023,Brazil had emerged from a recent history of cumulative losses and management has confidence in the operations ability to sustain profits in the future.

As a result of the deemed mandatory repatriation provisions in the U.S. Tax Cuts and Jobs Act of 2017 and subsequent recognition in income of GILTI, we do not have material basis differences related to cumulative unremitted earnings for U.S. income tax purposes. However, we continue to evaluate the impact that repatriation of foreign earnings would have on withholding and other taxes. As of December 31, 2023, we have recorded a liability of $4.7 million for the anticipated withholding taxes that would be due upon repatriation of the unremitted earnings of those subsidiaries for which management does not intend to permanently reinvest.

In 2021, the Company asserted that it was permanently reinvested in certain jurisdictions for which it previously was unable to assert permanent reinvestment. Prior to the Company’s debt refinancing in 2021, the Company had recorded a liability on all unremitted earnings. However, upon completion of the debt refinancing, the Company reevaluated repatriation plans, changed its assertion for certain jurisdictions and recorded the resulting tax benefit of $2.4 million.

We are subject to U.S. federal income tax as well as tax in several foreign jurisdictions. We are also subject to tax by various state authorities. The tax years subject to examination vary by jurisdiction. We are no longer subject to U.S. federal examination for periods before 2017. We are currently under federal examination for tax years 2017, 2018 and 2019. We regularly assess the outcomes of both ongoing and future examinations for the current or prior years to ensure our provision for income taxes is sufficient. We recognize liabilities based on estimates of whether additional taxes will be due, and we believe our reserves are adequate in relation to any potential assessments. The outcome of any one examination, some of which may conclude during the next twelve months, is not expected to have a material impact on our financial position or results of operations.

Interest and penalties related to federal, state, and foreign income tax matters are recorded as a component of the provision for income taxes in our Consolidated Statements of Operations and Comprehensive Income (Loss). Accrued interest and penalties of $0.5 million and $0.5 million are included in other non-current liabilities as of December 31, 2023 and 2022, respectively.

The following table presents a reconciliation of the beginning and ending amounts of unrecognized tax benefits, excluding interest and penalties.

Years Ended December 31,

Balance at beginning of year $ 118 $ 125 $ 247

Additions for tax positions of prior years 3 — —

Reductions for tax positions of prior years — (7) (122)

The increase to unrecognized tax benefits in 2023 is related to the foreign currency remeasurement of previously unrecognized tax benefits. As of December 31, 2023, the unrecognized tax benefits would, if recognized, impact our effective tax rate by $0.7 million, inclusive of the impact of interest and penalties. Management believes that it is reasonably possible that the amount of unrecognized income tax benefits, including interest and penalties, may not decrease during the next twelve months as no statutes are expected to lapse within the period.

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We operate under tax holidays in other countries, which are effective through December 31, 2026, and may be extended if certain additional requirements are satisfied. The tax holidays are conditional upon our meeting certain employment and investment thresholds. The tax holidays did not impact our 2023 or 2022 foreign taxes and decreased foreign taxes by $0.2 million for the year ended December 31, 2021.

Note 15. Net Income (Loss) Per Common Share

The following table summarizes the computation of basic and diluted net income (loss) per common share.

Years Ended December 31,

Numerator:

Income from discontinued operations, net of tax — — 1,200

Denominator:

Adjustment for participating securities (2,636) (951) (461)

Basic and diluted net loss per common share $ (1.35) $ (0.83) $ (0.79)

Cash dividends declared per common share $ — $ — $ —

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(1) Outstanding warrants that are exercisable at an exercise price of $0.01 per share, are included in shares outstanding for calculation of basic earnings per share (see Note 18).

The following table presents potentially dilutive securities that were excluded from the calculation of diluted net income (loss) per common share because they had an anti-dilutive effect.

Years Ended December 31,

Stock options excluded from the EPS calculations had a per share exercise price ranging from $7.93 to $25.16 for the year ended December 31, 2023. The 2019 Warrants excluded from the EPS calculations for the year ended December 31, 2023 had a per share exercise price of $11.03.

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Note 16. Share-Based Compensation

As of December 31, 2023, we have 1.5 million shares available that can be issued to employees and non-executive directors under the NN, Inc. 2022 Omnibus Incentive Plan and prior plans (collectively, the “Incentive Plans”), as options, stock appreciation rights, and other share-based awards. Shares of our common stock delivered upon exercise or vesting may consist of newly issued shares of our common stock or shares acquired in the open market.

Share-based compensation expense is recognized in the “Selling, general, and administrative expense” line in the Consolidated Statements of Operations and Comprehensive Income (Loss). The following table lists the components of share-based compensation expense by type of award.

Years Ended December 31,

Unrecognized compensation cost related to unvested awards was $7.0 million as of December 31, 2023, which will be recognized over a weighted-average period of 4.0 years.

Restricted Stock

NNBR US Equity

NNBR · 10-K · period ended 2023-12-31

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Item 7A.Quantitative and Qualitative Disclosures About Market Risk

Item 8. Financial Statements and Supplementary Data

NNBR US Equity☆

NNBR · 10-K · period ended 2023-12-31

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Item 7A.Quantitative and Qualitative Disclosures About Market Risk

Item 8. Financial Statements and Supplementary Data

NNBR US Equity