NN - Earnings Call - Q1 2020
May 8, 2020
Transcript
Operator (participant)
State and welcome to the NN Incorporated First Quarter 2020 Earnings Conference Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Mr. Mark Schuermann. Please go ahead.
Rob Brown (Senior Research Analyst)
Thank you, Operator. Good morning, everyone, and thanks for joining us. I'm Mark Sherman, Vice President, Treasurer and Investor Relations. I'd like to welcome you to NN's First Quarter 2020 Earnings Conference Call. Our presenters this morning will be President and Chief Executive Officer Warren Veltman and Tom DeByle, Senior Vice President and Chief Financial Officer. If anyone needs a copy of the press release or the supplemental presentation, please contact Abernathy McGregor at 212-371-5999. Before we begin, I'd ask that you take note of the cautionary language regarding forward-looking statements contained in today's press release, supplemental presentation, and then the risk factor section in the company's annual report on Form 10-K for the fiscal year ended December 31st, 2019, and when filed, the company's quarterly report on Form 10-Q for the three months ended March 31st, 2020.
Same language applies to comments made on today's conference call, including the Q&A session as well as the live webcast. Our presentation today will contain forward-looking statements regarding sales, margins, foreign exchange rates, cash flow, tax rate, acquisitions, synergies, cash and cost savings, future operating results, performance over worldwide markets, the impacts of the coronavirus pandemic on the company's financial condition, and other topics. These statements should be used with caution and are subject to various risks and uncertainties, many of which are outside the company's control. The presentation will also include certain non-GAAP measures as defined by SEC rules. The reconciliation of such non-GAAP measures is contained in the tables in the final section of the press release and the supplemental presentation. Warren and Tom will provide a business update and review our results, and then we will open up the line for questions.
At this time, I will turn the call over to Warren Veltman, President and CEO.
Warren Veltman (President and CEO)
Thanks, Mark, and good morning, everyone. As everyone is aware, there have been substantial changes in the world since our last conference call two months ago. At that time, the coronavirus threat had not significantly impacted our businesses outside of China, but today, all of our operating segments and geographies have been adversely impacted by the (COVID-19) pandemic. I'm proud to say that NN's employees have risen to meet one of the greatest challenges of our generation. Our employees have adapted to numerous workplace changes required to combat the spread of the coronavirus and have maintained a safe working environment for all. As a team, they continue to meet our customers' volume requirements while adhering to the high-quality standard that is the trademark of all NN facilities.
Before I start my prepared marks on the quarter, I want to express my sincere thanks for their collective efforts over the last three months. Thank you. We'll start with an overview of the first quarter on page four. Given this economic uncertainty caused by (COVID-19), we took immediate action to react to what we viewed would be a threat to the health and safety of our employees, and a substantial and potentially prolonged reduction in our sales volumes. Our plan is focused in four major areas. One, keep our employees safe. Two, meet our customer requirements. Three, flex variable costs and reduce fixed costs. Four, fortify our liquidity. From a cost containment standpoint, our operating groups are focused on reducing variable costs commensurate with our sales volume reductions. These costs would primarily include material and perishable tooling, direct labor, and outsource-related costs.
Unfortunately, to accomplish this objective, we have furloughed both direct and indirect employees where customer volumes have been dramatically reduced. We have also taken action to reduce some fixed manufacturing and SG&A expenses. I will review a summary of those actions later in the presentation. Fortifying our liquidity is of supreme importance. To that end, and prior to the end of the first quarter, we drew down $60 million under our revolving credit facility, and we held $79.2 million in cash at March 31st, 2020, including $57.2 million in the United States. We will also review other actions we are taking to retain as much liquidity as possible during the balance of 2020 later in the presentation. Moving on to financial performance in the first quarter. Our sales were $199 million for the quarter, down $13.5 million, or 6.3%, from the prior year after consideration of foreign exchange differences.
Our life sciences group reported sales of $84 million, down $2 million, or 2.3%, from a year ago. This decrease is a result of reduced customer demand within the orthopedic end market, driven by the timing of product launches and the impact of the (COVID-19) pandemic. Mobile solutions sales were $69.9 million, a year-over-year reduction of $8.2 million, primarily due to lower demand within the global automotive markets resulting from the (COVID-19) pandemic, especially during March. Our power solutions group reported sales of $46.4 million in comparison to sales of $49.7 million a year ago. Our reported EBITDA, excluding goodwill impairment for Q1, was $16.2 million, and adjusted EBITDA was $30.4 million. Adjusted EBITDA was slightly down from the first quarter a year ago due primarily to the year-over-year decline in sales, offset by fixed costs and SG&A reductions.
Our life sciences group reported EBITDA, excluding goodwill, of $17.8 million, while mobile solutions and power solutions each reported $6.2 million for the quarter. The first quarter operating loss of $245 million is primarily due to the write-off of $239.7 million of goodwill during the quarter. This action resulted in a write-off of 100% of the power solutions goodwill and $146.8 million of goodwill associated with our life sciences group. This write-off also adversely impacted our reported EPS, as we reported a loss of $5.96 per share versus a loss of $0.47 per share a year ago. Tom will discuss the accounting rationale associated with the goodwill impairment later in the presentation. Our free cash flow for the first quarter was a use of $1 million, an improvement of $15.7 million from the first quarter a year ago.
As we discussed last quarter, we expected an $8 million benefit in the first quarter due to having maintained our trade payables in a better aged position at December 31st, 2019, versus December of 2018. The remaining improvement is due to cost reductions we have implemented, lower capital expenditures, and improved working capital management. Lastly, we previously announced a strategic review where the company will evaluate a broad range of operational, financial, and strategic options with the goal of reducing leverage and enhancing shareholder value. This process is ongoing, and it is clear to us that despite the current economic environment, there continues to be a substantial number of potential buyers for high-quality assets and businesses.
As we have said before, we have a great company and really good businesses, and moreover, our organizational structure allows for good flexibility as we continue our strategic review and look to enhance shareholder value. This is the extent of our disclosure and comments regarding this process. As always, we appreciate your understanding and patience as we continue to pursue alternatives associated with this important initiative. Circling back to our overall (COVID-19) plan, page five summarizes some of the actions regarding maintaining a safe work environment for our employees. We have taken measures to enhance employee communication and education surrounding the coronavirus and employee-driven preventative actions. We have also coordinated a standard response protocol with local health officials based on CDC recommendations and are conducting daily temperature screening of on-site personnel and visitors. We're issuing appropriate personal protective equipment and performing frequent and responsive workplace cleaning and disinfection.
On page six, we have presented a summary of our efforts to further reduce costs and improve liquidity. All of these actions are in addition to our previously announced goal of improving cash flow by $32 million annually. That goal has been achieved. Given the uncertainty regarding the COVID crisis, we feel that immediate action was required to reduce additional costs and preserve our liquidity. We have already implemented cost reductions that include temporary salary reductions for all executive management team members of 20%-25% and temporary reductions for other salary personnel of 5%-15%. Other significant cost reductions include reductions in employee benefits, including the suspension of the 401(k) match and employee gain sharing programs, suspension of non-critical travel, and further streamlining of our indirect and SG&A labor costs. These new cost reductions exceed $20 million annually.
As it relates to the liquidity enhancement measures, we have reduced our capital expenditure expectation to below $35 million, with an extreme bias towards authorizing only maintenance CapEx items going forward. We also expect to benefit from certain provisions under the CARES Act. The ability to increase depreciation and interest expense deductions in 2018 and 2019, along with new carryback provisions, will allow us to carry back 2018-2019 losses back to 2017 to recover taxes paid in those years. In addition, we will be deferring the employer portion of FICA tax until 2020 and 2022. Including the cost actions, we have or are in the process of implementing actions that should provide over $45 million in cash savings from our pre-COVID business plan. Turning to slide seven, which details our first quarter-by segment.
On a consolidated basis, total revenue decreased 6.3% versus the prior year, due primarily to issues associated with the coronavirus pandemic. Our China operations for life sciences and mobile solutions were impacted throughout most of the quarter, and the mobile solutions operations in Europe and North America were adversely impacted in the latter part of the first quarter. Now I'd like to turn it over to Tom DeByle so Tom can provide a more in-depth review of our financial performance for the quarter. Tom?
Tom DeByle (SVP and CFO)
Thanks, Warren. Please turn to slide eight, which includes our first quarter results on a GAAP, non-GAAP excluding special items, and a total adjusted non-GAAP basis. We break down our adjustments into two categories. One category is special items, which are one-time unusual expenses, and the second category is transition and integration expenses the company has historically captured due to the number of acquisitions and integration activities made over the past few years. A couple of points on this slide. First, GAAP operating profit was impacted by a non-cash charge for the write-off of goodwill of $239.7 million. This was driven by a decline in our market capitalization that was less than our net book value of our shareholders' equity.
The decline in market capitalization of roughly 75% was a triggering event that caused us to perform a goodwill impairment analysis as of March 31st and a write-off of the goodwill. Second, sales were down $13.5 million or 6.3%. Historical variable margins are approximately 42%-45%. Therefore, expected operating profit decrease would be about $5.7 million-$6.1 million down. Operating profit on a non-GAAP, excluding special items, was only down year-over-year $800,000, circled on the right side of the page. This shows that the business is flexing results on lower volumes through cost cuts and managing production levels. Let's go to slide nine, which provides a bridge with more granularity between reported GAAP, non-GAAP excluding special items, and total adjusted non-GAAP. There are a few moving parts on this page that I would like to discuss.
First, let's focus our attention on the upper portion of the bridge. The tax-affected asset write-down of $3.8 million primarily related to the elimination of the lease obligation for a major portion of the corporate headquarters building. As previously mentioned, there was a non-cash charge for the impairment of goodwill of $239.7 million impacting the results. The discrete tax item of $11.9 million primarily relates to the tax rate impact of the goodwill impairment as well as the impact of the CARES Act legislation. In the prior year, the large tax-affected special items consisted of $2.1 million related to the write-off of unamortized debt issuance costs and a discrete tax item of $6 million related to the toll charge for the repatriation of foreign earnings through 2017. Now let's turn our attention to the lower section of the bridge.
In Q1 2020, the tax-affected non-operational adjustments relating to capacity and capabilities development, professional fees, and integration and transformation were down $2.4 million year-over-year. Tax-affected foreign exchange on intercompany was up $0.9 million, and the amortization of intangibles was down $0.6 million year-over-year. Turning to slide ten, net working capital at the end of the first quarter was $187.6 million compared with $199.4 million in the prior year, a decrease of $11.8 million. Working capital turns were 4.3 turns in both years. BSO improved versus prior year by 4.3 days. Inventory turns were the same in both years, and the accounts payable decreased as less inventory was brought in. Please turn to slide 11. Net debt at the end of the first quarter was $768.9 million versus $848 million in the prior year, a decrease of $79.1 million.
EBITDA measured by the credit agreement to funded debt was 4.89x versus 5.1x in the prior year. During the quarter, we drew $60 million on a revolver for liquidity purposes. Our credit agreement leverage ratio steps down from 5.25x at the end of the first quarter 2020 to 5x for the remaining quarters of calendar year 2020. Due to the uncertain economic environment related to the (COVID-19), we are in constructive discussions with our banks. They have been supportive of our efforts as we continue our strategic review process. Although we have taken tangible steps to improve our liquidity and implement cost reductions, given the uncertainty of the economic environment, our 10-Q for the first quarter will show us as a going concern. Slide 12 shows our free cash flow for the quarter.
Free cash flow showed a cash use of $1 million during the first quarter of 2020 compared with a cash use of $16.8 million in the prior year, a significant improvement. It is worth noting that the first quarter of 2020 represents the fourth consecutive quarter of positive net cash provided by operating activities, as shown on the graph. Slide 13 summarizes our capital spending, depreciation, and amortization trends. Cash capital expenditures were approximately $11.3 million in the first quarter compared with $14.1 million in the prior year. For the quarter, the company's capital spending was 5.6% of sales, down from prior year's percentage of 6.6%. The company has cut its capital spending forecast from $45 million to $35 million in response to (COVID-19). With that, I'll turn the call back to Warren.
Warren Veltman (President and CEO)
Thanks, Tom. We have presented additional information for each of our operating groups, starting with the life sciences on page 15. In spite of the year-over-year sales reduction, our life sciences group continues to perform well, as evidenced by the expansion of operating profit, EBITDA, and adjusted EBITDA as a percentage of sales. EBITDA excluding goodwill impairment was up $1.9 million over a year ago due to our continuous process improvement efforts and indirect labor and SG&A cost control activities. Our backlog is at $163 million, a $15 million increase from Q4 of 2019. In spite of this increase, we are cautious regarding future demand given the significant reductions in elective orthopedic surgeries caused by the coronavirus pandemic. Our focus in Q2 and Q3 is on flex productivity and cost control, given we expect customer demand will be significantly reduced from first quarter levels.
The mobile solutions business summary is included on page 16. As I have indicated, the mobile solutions group was hardest hit by the coronavirus pandemic during the first quarter, as sales were down 10.5% from one year ago. EBITDA declined from $10 million in Q1 2019 to $6.2 million during 2020 first quarter due to the sales reduction and operational inefficiencies experienced with the sharp volume reduction that occurred in mid-March. We expect that volumes will be substantially reduced over the next couple of quarters due to OEM shutdowns that started in mid-March and will extend to mid-May. Once up and running, production will likely remain below normal capacity for a period of time. If the Europe and North America recovery models that of China, OEMs will take up to two months to return to normalized production, assuming consumer demand returns.
Our focus in mobile solutions will be on CapEx containment, working capital management, and flex productivity. Moving on to power solutions on page 17. Power's first quarter sales decreased 6.6% year-over-year is due primarily to lower sales caused by (COVID-19) uncertainty and delayed customer approvals associated with moving production due to a facility closure. Reported EBITDA excluding goodwill impairment was negatively impacted $1.4 million due to the sales loss and sales mix. Power has been relatively resilient to the coronavirus effect. We expect that sales will be negatively impacted in Q2, as Q2 will have a full quarter of coronavirus impact. The likely effect will be less than that experienced by our mobile solutions and life sciences groups. As with other groups, our power management team will be focused on flex productivity, working capital management, and cost reductions.
Normally, I would conclude my commentary by providing guidance for the next quarter and year. However, as you are aware, due to the (COVID-19) impact, we withdrew our sales and earnings guidance for the year and do not plan to reinstate any guidance until we have a better view of how the industries in which we operate and world economies will recover. That said, I'd like to provide some additional insight on how we view the remaining portion of the year. Given its concentration in orthopedic products, our life sciences group is dependent on elective surgeries such as those for joint replacements. Elective surgeries have seen a massive reduction over the last two months and are just now starting to be performed.
As a result, we expect our life sciences group will have reduced sales from Q1 levels over the next two quarters, with a recovery recurring after that and through the first quarter of 2021. We expect the recovery for our mobile solutions group will be longer than that of life sciences. We expect that European and North American automotive OEMs will gradually ramp up their production over the next 8-10 weeks, with consumer demand being the ultimate determinant of overall production levels. Given the extreme levels of recent unemployment and uncertainty regarding economic growth, coupled with a significant purchase price of an automobile, we believe that a return to pre-COVID production levels will not happen until the second half of 2021.
As I stated previously, I believe the power solutions path will lie somewhere in the middle and will be more dependent on economic growth and improvement in consumer confidence. We believe the Q2, Q3 volume reductions will not be as severe as either life or mobile, and the recovery path will likely not be as sharp as life sciences or as long as the mobile solutions recovery path. As a reminder, my comments on market trends and revenue estimates do not represent guidance and are intended to be illustrative for illustrative purposes only, as there are many uncertainties surrounding how the (COVID-19) crisis will impact demand and revenue. That concludes our prepared remarks, and I will now turn the call back to the operator for questions.
Operator (participant)
Yes, if you'd like to ask a question on today's call, that is star 1 on your telephone keypad. We'll go to our first question from Dan Moore with CJS Securities.
Lee Jagoda (Senior Managing Director)
Hi, this is actually Lee Jagoda for Dan this morning. Good morning.
Warren Veltman (President and CEO)
Good morning.
Lee Jagoda (Senior Managing Director)
You did a pretty good job outlining the outlook for the various segments. As I look at the cost-cutting measures you've taken, how should we think about sort of levels of EBITDA, either flat EBITDA or perhaps growing EBITDA, given all the costs you've already taken out on your outlook for these segments?
Warren Veltman (President and CEO)
Yeah, I think that Dan, or not Dan, sorry. I think our EBITDA clearly is going to be dependent on where the sales volume ends up. As I indicated, it's really tough for us to provide guidance on that given how uncertain it is at this point in time. We are focused more on providing the guidance as it relates to overall sales and where we think directionally that's going to go at this point in time. I would encourage you to continue to use the rule of thumb that Tom indicated in his prepared remarks that typically when sales fluctuate, we see a fall through a variable margin, excuse me, at about 42%-45% of the sales change. We expect that to continue going forward.
I think our teams have done an extremely good job over the last couple of months of flexing our businesses consistent with the change in the sales volume.
Lee Jagoda (Senior Managing Director)
Okay. Just switching to the liquidity, can you kind of give us a view of your current level of liquidity, remind us of any near-term debt maturities, and then kind of give us a refresher on the piece of paper that you took out, I guess, late last year in that private placement and how that impacts both interest expense and liquidity needs going forward?
Warren Veltman (President and CEO)
Yeah, I'll talk about the preferred stock that we issued in the fourth quarter. One of the primary benefits of that issuance was that it didn't create any demands on our liquidity or our cash position. The interest associated with that was a PIK, and that's one of the reasons that we pursued that instrument as it gave us some flexibility from a liquidity standpoint. Tom, do you want to address some of the comments as it relates to where our cash and liquidity position is today?
Tom DeByle (SVP and CFO)
Sure. We have about $4.5 million due every quarter of principal payments. That is ongoing as we speak. Right now, Warren had mentioned how much cash we had on the balance sheet that we show at March 31st, and we have roughly $75 million of cash today. That is including overseas cash. Did that answer your question?
Lee Jagoda (Senior Managing Director)
Yeah, it does. Thank you very much.
Tom DeByle (SVP and CFO)
Thank you.
Operator (participant)
We'll go to our next question from Steve Barger with KeyBanc Capital Markets.
Steve Barger (Managing Director and Equity Research Analyst)
Hey, good morning, guys.
Warren Veltman (President and CEO)
Morning.
Hi, Steve.
Steve Barger (Managing Director and Equity Research Analyst)
I'm trying to think about the magnitude of revenue decline in mobile in QQ. We know China's restarted to some degree, but North American auto plants are going to be shut down for half the quarter, probably a slow ramp. Is down 50% a good proxy for how we should think about that revenue decline? Is that not enough, too extreme?
Warren Veltman (President and CEO)
Steve, here's the data points. Here's the data points that I'll give you as it relates to our performance in April, okay? The mobile solutions group, in comparison to the trend that we had in the first quarter, so in comparison to first quarter volumes, mobile sales in April were operating at about 45% of what we did in the first quarter. Power was at about 80%, and life was at 90%.
Steve Barger (Managing Director and Equity Research Analyst)
Got it. That's great.
Warren Veltman (President and CEO)
That gives you some sort of indication of what we've seen so far.
Steve Barger (Managing Director and Equity Research Analyst)
Right. No, that's really helpful. Thank you. If revenue is down, whatever, pick a number, $30 million-$40 million in QQ sequentially, what percentage of that revenue loss would be released from working cap? Could it be $10 million or $20 million?
Warren Veltman (President and CEO)
Yeah, when we do our modeling on that, we typically look at somewhere around 20% of the sales change we should be able to pick up in working capital. It's between 15% and 20%.
Steve Barger (Managing Director and Equity Research Analyst)
Got it. If you net out what you think happens in QQ from a revenue standpoint versus a working cap and cost action standpoint, do you burn or generate cash in QQ, and at what level?
Warren Veltman (President and CEO)
I think we've modeled out a lot of different scenarios, as you might imagine. Certainly, if we're down 30% from our plan on an overall company-wide basis, there is a cash burn, okay, before consideration of and even after consideration of some of the working capital pickups that we would get.
Steve Barger (Managing Director and Equity Research Analyst)
Is any way to frame the size of the cash burn in QQ?
Warren Veltman (President and CEO)
Yeah, I would tell you that when we look at our liquidity, we're very comfortable that with a 30% down case scenario over the next two quarters, with a slight recovery in the fourth quarter, that our liquidity will definitely hold up through the end of the year. That's not an issue for us.
Steve Barger (Managing Director and Equity Research Analyst)
Meaning you continue shipping product and meeting your interest and other obligations based on what you can see through the year.
Warren Veltman (President and CEO)
Correct.
Steve Barger (Managing Director and Equity Research Analyst)
Perfect. One last question for me on the impairment. I'm no accountant, so I'm sure I don't understand this, but my thought is that impairments typically relate to the future value of cash flows falling below the carrying cost of goodwill. Does the life science impairment inherently suggest a lack of profitability in that segment, or can you just talk through the mechanics of that?
Tom DeByle (SVP and CFO)
Sure. I'll take that one, Warren. It's all related to our market capitalization. I mean, our share price went from, let's say, at year-end, our measurement time of above $7 down to a $1.50 at March 31st. It was just clearly a function of that our market capitalization went down below our book value of our shareholder equity, and we have to do a reconciliation of that. The result is that with the market capitalization going down 75% or roughly $225 million, we have to write off goodwill. Otherwise, we'd have just such an extreme premium on our discounted cash flows out of our businesses that the market's not accepting. It's an accounting machination. I don't agree with it, but it is what it is.
Steve Barger (Managing Director and Equity Research Analyst)
That's a helpful explanation. Thanks.
Tom DeByle (SVP and CFO)
Okay. You bet.
Operator (participant)
As a reminder to ask a question on today's call, that is star 1 on your telephone keypad. We'll go next to Rob Brown with Lake Street Capital Markets.
Rob Brown (Senior Research Analyst)
Good morning.
Tom DeByle (SVP and CFO)
Hi, Rob.
Rob Brown (Senior Research Analyst)
Life sciences business in particular, obviously, it's a tough environment right now, but how much visibility do you have when things start to improve? How long does it take to sort of flow through into your business as procedures start to happen?
Warren Veltman (President and CEO)
Rob, I would tell you that we have been in constant contact with our customers on the life sciences side as it relates to their expectation for demand through the end of, let's call it, through the end of this summer. Our view is that I just gave you the statistics as it relates to April, and that business held up reasonably well in April, given the fact that there hasn't been any major elective, there hasn't been a significant amount of elective surgeries that have been done over the last six to seven weeks, right? That means our customers have still been taking product. What we're trying to gauge right now is where are their inventory levels at, and when will they dial some of that back?
They clearly believe that, in most of the data that we've looked at, there's an expectation that the recovery of elective surgeries will happen reasonably quickly. None of our customers want to be left in a situation where they don't have the inventory on hand to be ready for a surge in volume when that occurs. I think that they're probably in a reasonably good position of that at this point in time. Now they're planning their schedules for the summer. That's why when we talk about where we see the hole in the life sciences business, it's more in the late May, June, early July timeframe than right now because our customers are trying to make sure they have the inventory in place for potential future volume, and then they'll dial it back once they see how the recovery occurs.
I wish I could give you a more definitive response than that, but that's what we're seeing, and those are the conversations we're having with our customers today.
Rob Brown (Senior Research Analyst)
Great color. Thank you. I'll turn it over.
Operator (participant)
We'll go next to Yung Hwan with WellFleet Credit Partners.
Yung Hwan (Analyst)
Hey, guys. Thanks for taking the questions. I know you discussed this a little bit, so I was hoping maybe we could get a little more detail as far as how the conversations are going with the revolver lenders. Certainly, it seems like you're getting pretty close against that covenant. Maybe if you could just share any more detail on that topic as far as getting a waiver and whatnot.
Warren Veltman (President and CEO)
Tom, you want to take that one?
Tom DeByle (SVP and CFO)
Sure. We are in active discussions with our left lead bank, Truist. They are very supportive of what we are doing. We have gone through all of our cost reduction actions. We have gone through all of our liquidity. We have shared forecasts with them. We are just working together. They want to see us through the strategic alternatives. We want to get through that process too to deliver the balance sheet, as we have discussed before. It is going to be a few weeks down the road that we are going back and forth, and it has been productive.
Yung Hwan (Analyst)
Okay. As we think about these strategic alternative discussions, are those still active? It seems like this is a really tough time to pursue those opportunities. How should we think about that?
Tom DeByle (SVP and CFO)
I'll start out with that. I mean, we have three great businesses, absolute fantastic businesses. They all generate positive free cash flow. They're good businesses. They're sought-after assets. I mean, I'll let Warren comment on—he said he didn't really want to comment anymore on it, but everyone should just remember that we have great businesses that are valuable. Warren, do you want to have a comment?
Warren Veltman (President and CEO)
Yeah. I think the answer to that question is that certainly, it's a difficult time given where the debt markets are at. We've had to be creative in the way that we're talking to people, and we're trying to evaluate opportunities. I think the overriding point is that in spite of that and in spite of where the debt markets are at today, we have had what we would consider to be a reasonable amount of success, good success, in continuing on with this process. To answer your question, it is still ongoing, and we expect that it will continue. We will continue on with that process in spite of what's going on in the markets today at this point.
Yung Hwan (Analyst)
Okay. Also, just going back to fourth quarter, I remember there was some commentary about cash flow being a little bit weaker because you guys were ahead on your payables and that you expected that to benefit cash flow in 1Q, yet working capital was still negative. Did that actually flow through first quarter results?
Warren Veltman (President and CEO)
Yeah. I mean.
Tom DeByle (SVP and CFO)
Oh, go ahead, Warren.
No, go ahead, Warren. Please, please go ahead.
Warren Veltman (President and CEO)
Sorry. Unfortunately, we're not in the same room, and we can't see each other. We're trying to transition this as smooth as we can. In the fourth quarter, we did indicate that our accounts payable were in a much better position, and we expected that we would benefit from that in the first quarter, and we believe that we have. When you look at our performance in the first quarter a year ago, we had a use of cash of $16.8 million. This year, it was a use of $1 million. We're up $15.8 million versus a year ago. Certainly, the fact that we were in better shape on our payables at 12.31 contributed to that.
In addition, the fact that we've cut costs and some of the other things that we've done in the business to improve liquidity has resulted in us being in a better situation today, clearly, than we were a year ago, and actually met our expectations. If you go back to look at the guidance that we provided for the first quarter as it relates to cash generation, free cash flow, we're pretty much in the middle of the range that we provided.
Yung Hwan (Analyst)
Okay. Great. Just one more for me. On the cost savings activities, is there going to be a cash component to that number? Is there a number you can provide?
Warren Veltman (President and CEO)
The cash savings of the $20 million that we've itemized out is the cost reductions. That's all cash.
Yung Hwan (Analyst)
Yeah. I guess, is there a cash component, like a cash outlay that you're going to have to?
Warren Veltman (President and CEO)
Oh, to accomplish those?
Yung Hwan (Analyst)
Yeah.
Warren Veltman (President and CEO)
There could be some minor severance amounts. The biggest cash outlay that we had was associated with the termination of our lease on almost two full floors in Charlotte. That is already the cash number that Tom provided earlier, which was the $75 million in cash that we have on our balance sheet or that we currently have. That's after actually paying a $4.4 million termination fee to terminate the lease for the Charlotte office. That was the biggest item or hurdle that we had in order to accomplish some of our cost reduction efforts. The things that we're doing today, there's very little friction cost related to accomplishing those.
Yung Hwan (Analyst)
Great. Thanks for taking the time, guys. Good luck.
Tom DeByle (SVP and CFO)
Sure.
Warren Veltman (President and CEO)
Sure.
Operator (participant)
At this time, there are no further questions.
Warren Veltman (President and CEO)
Okay. I'd like to just thank everybody for their support and for their time this morning. Once again, a big shout-out and thank you to the employees of NN and everything that they've done for the organization over the last three months. Really appreciated not only by me, but our whole management team. Proud to be a leader of that group. Thank you again for your time today.
Operator (participant)
This does conclude today's conference. We thank you for your participation.