By Thomas Kerr, CFA
NASDAQ:NNBR
READ THE FULL NNBR RESEARCH REPORT
3rd Quarter 2024 Operating Results
On October 31, 2024, NN (NASDAQ:NNBR) reported financial results for the 3rd quarter of 2024 and updated recent business activity. The results were a little bit noisy as the company continues to rationalize its manufacturing base and reduce its North American cost structure and footprint. Nonetheless, the company generated free cash flow in the quarter and continues to garner significant business wins.
GAAP Results
Net sales decreased 8.7% to $113.6 million in the 3rd quarter of 2024 compared to net sales of $124.4 million in the 3rd quarter of 2023. This was primarily due to the sale of its Lubbock-based plastics components business and rationalized volume at plants undergoing turnarounds. In addition, a customer settlement received in 2023 that didn’t occur in 2024 and unfavorable foreign exchange effects of $1.1 million also affected sales. Excluding these items, net sales decreased 0.5%.
The operating loss was $3.8 million compared to an operating loss of $2.7 million in the 3rd quarter of 2023. This was primarily due to lower sales volume. The net loss was $2.6 million compared to a net loss of $5.1 million in the prior year. Free cash flow in the quarter was positive at $256,000.
Adjusted Results
Adjusted operating income was $1.3 million in the quarter compared to $3.6 million in the prior year. Adjusted EBITDA was $11.6 million (10.2% margin) compared to $14.5 million (11.6% margin) for the same period in 2023. The prior year adjusted EBITDA benefited by $2.5 million from a customer settlement, a favorable precious metals adjustment, and results of recently divested Lubbock operations, partially offset by rationalized business of $0.9 million. Excluding these items, adjusted EBITDA only declined $1.3 million in the 3rd quarter of 2024. On a proforma base business comparison, revenues only declined $600,000 in the 3rd quarter.
In the Power Solutions segment, net sales for the 3rd quarter of 2024 were $42.9 million compared to $45.5 million in the prior year period. Excluding the recently sold Lubbock plastic operations, prior year period sales were $39.9 million. The $3.0 million increase in base-level sales was primarily due to higher precious metals pass-through pricing and general contract pricing. Adjusted operating income was $5.2 million compared to $7.1 million in the 3rd quarter of 2023. The decrease in adjusted income from operations was primarily due to the lower revenue resulting from the sale of the Lubbock operations, as well as an unfavorable product mix. Adjusted EBITDA was $6.4 million in the 3rd quarter and $22.1 million for the 9-month YTD period. Going forward, the company is adding capacity through new equipment with expanded capabilities and focusing on new business with an emphasis on bus bars, electrical shields, connectors components, and medical components.
In the Mobile Solutions segments, net sales decreased 10.5% to $70.7 million compared to $79.0 million in the prior year period. The decrease in sales was primarily due to rationalized volume at plants undergoing turnarounds, contractual reduction in customer pass-through material pricing, a customer settlement received in 2023 that did not reoccur in 204, and unfavorable foreign exchange effects of $1.0 million. Adjusted operating income was $0.9 million compared to adjusted operating income of $1.6 million in the 3rd quarter of 2023. The decrease in adjusted income from operations was primarily due to lower revenue, partially offset by lower depreciation expense. Adjusted EBITDA was $8.9 million in the 3rd quarter and $25.6 million for the 9-month YTD period. There was strong sales growth in China driven by global tier-1 customers. China sales increased 19% in the quarter compared to the prior year period. Going forward, the company remains focused on steering, braking, vehicle control components, and high efficiency fuel injection products in this segment.
In the 3rd quarter of 2024, approximately 40% of company products sold were related to the global automotive industry, which includes 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. 30% of revenues were tied to general industrial markets and includes high-precision metal and plastic components for a variety of industrial applications such as diesel industrial motors, heating and cooling systems, fluid power systems, and power tools. 15% of sales were related to residential and commercial electric markets and includes smart meters, charging stations, circuit breakers, transformers, electrical contact assemblies, precision stampings, welded contact assemblies, specification plating, and surface finishing. The remaining 15% was related to commercial vehicles, medical markets, and other miscellaneous industries.
Balance Sheet Optimization
The company continues to delever its balance sheet through stronger EBITDA, free cash flow generation, and asset sales. The company received approximately $17.0 million in proceeds from the sale of its Lubbock plastics operations.
The company’s leverage ratio as of 9/30/24 was 2.97, an improvement from 3.20x as of 9/30/23. We expect the leverage ratio to fall further by the end of 2024. Working capital was positive $85.3 million at the end of the 3rd quarter. The company is currently in the process of refinancing its ABL and Term Loan facilities.
New Business Wins
From the 1st quarter of 2023 to the end of the 3rd quarter of 2024, the company has garnered approximately $113.0 million in new business wins. The company expects NBW’s in 2024 will be between $55-$70 million in value. These contracts are expected to produce gross margins of approximately 20% compared to historical contract gross margins in the low-teens range.
These awards include the areas of steering systems, electric motors, commercial vehicles, passenger vehicles, airbag systems, battery management, defense, and vehicle sensors. The areas for growth opportunities going forward include China EV vehicles, U.S. stamped and metalized products, select vehicle programs in global markets, and select investments in new adjacent markets including medical orthopedic products.
NN’s pipeline of new business opportunities currently is approximately $200 million in size. The company continues to evolve and strengthen its growth programs by focusing on specific product applications including electric steering systems, electrical systems, braking systems, electricity distribution, battery management, fluid management, EV charging systems and medical components.
Transformation Initiatives
The company has been making good progress on a series of strategic initiatives in order to grow sales, improve margins, and increase free cash flow generation, with the hopes of increasing shareholder value over time. Each of these initiatives are in various stages of completion (see below). These initiatives include five key components:
➢ Strengthening Leadership and Accountability
➢ Address Unprofitable Business
➢ Expand Margins
➢ Delever Debt and Improve Free Cash Flow Generation
➢ Increase Business Wins
2024 Outlook
The company maintained its full year 2024 outlook which includes:
➢ Revenue in the range of $465 million to $485 million;
➢ Adjusted EBITDA in the range of $47 million to $51 million;
➢ Free cash flow in the range of $8 million to $12 million;
➢ New business wins in the range of $50 million to $70 million; and
➢ Net leverage below 3.0x.
The company indicated in the past that seven of its facilities were collectively creating a $10 million drain on annual EBITDA. Three of those plants have reached breakeven or net profitability levels currently while the remaining four are expected to reach profitability in 2024.
The free cash flow expectations for 2024 are roughly in the range of 2023 free cash flow generation which was $11.7 million despite expected higher levels of EBITDA. In 2024, the company is not expected to experience the high levels of positive working capital that occurred in 2023. Capital expenditures in 2024 are expected to be similar to 2023 levels, in the $20 million range.
Valuation & Estimates
We believe the pace of both cost reductions and new business is accelerating and we raise our DCF-based price target to $8.00 based on an improved free cash flow profile going forward. We also believe that a successful refinancing of its current debt structure also supports this higher target price.
SUBSCRIBE TO ZACKS SMALL CAP RESEARCH to receive our articles and reports emailed directly to you each morning. Please visit our website for additional information on Zacks SCR.
DISCLOSURE: Zacks SCR has received compensation from the issuer directly, from an investment manager, or from an investor relations consulting firm, engaged by the issuer, for providing research coverage for a period of no less than one year. Research articles, as seen here, are part of the service Zacks SCR provides and Zacks SCR receives quarterly payments totaling a maximum fee of up to $40,000 annually for these services provided to or regarding the issuer. Full Disclaimer HERE.
