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Edited Transcript of NNBR earnings conference call or presentation 13-Mar-20 1:00pm GMT

Q4 2019 NN Inc Earnings Call

JOHNSON CITY Mar 17, 2020 (Thomson StreetEvents) -- Edited Transcript of NN Inc earnings conference call or presentation Friday, March 13, 2020 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Mark F. Schuermann

NN, Inc. - VP, Treasurer and IR

* Thomas D. DeByle

NN, Inc. - Senior VP & CFO

* Warren A. Veltman

NN, Inc. - President & CEO

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Conference Call Participants

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* Daniel Joseph Moore

CJS Securities, Inc. - Director of Research

* Paresh Shah;Telos Asset Management LLC;Director

* Robert Duncan Brown

Lake Street Capital Markets, LLC, Research Division - Senior Research Analyst

* Robert Stephen Barger

KeyBanc Capital Markets Inc., Research Division - MD and Equity Research Analyst

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Presentation

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Operator [1]

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Good day, and welcome to the NN, Inc. Fourth Quarter and Full Year 2019 Earnings Conference Call. Today's conference is being recorded. At this time, I would now like to turn today's conference over to Mr. Mark Schuermann, Vice President and Treasurer and Investor Relations. Please go ahead, sir.

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Mark F. Schuermann, NN, Inc. - VP, Treasurer and IR [2]

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Thank you, operator. Good morning, everyone, and thank you for joining us for the call. I'd like to welcome you to NN's Fourth Quarter and Full Year 2019 Earnings Conference Call. Our presenters this morning will be Vice President and Chief Executive Officer, Warren Veltman; also attending the call is Tom DeByle, SVP and Chief Financial Officer.

If anyone needs a copy of the press release or the supplemental presentation, please contact Abernathy MacGregor at (212) 371-5999, and they will help you with a copy.

Before we begin, I ask you to take note of the cautionary language regarding forward-looking statements contained in today's press release, supplemental presentation and in the Risk Factors section in this company's 10-K for the year ended December 31, 2018, the company's quarterly report on Form 10-Q for the 3 months ended September 30, 2019, and when filed, the company's annual report on Form 10-K for the fiscal year ended December 31, 2019.

The 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, synergy -- synergies, future operating results, performance of the worldwide markets 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 also includes certain non-GAAP measures as defined by the SEC rules. A reconciliation of such non-GAAP measures is contained in the tables in the financial section -- 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 the line for questions.

With that said, Warren, I'll turn the call over to you.

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Warren A. Veltman, NN, Inc. - President & CEO [3]

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Thanks, Mark, and good morning to everyone. I'd like to start today's call with a brief overview of the numerous actions our management team has been working on since our third quarter conference call. During that call, I indicated we were committed to establishing a capital structure that aligned with our strategic plan. In December of 2019, we completed 2 significant actions that resulted in improvements in our capital structure. First, we issued $100 million of preferred stock and utilized the proceeds from that issuance to retire all outstanding borrowings on our revolver. As a result of this action, our net debt was reduced to $757 million at December 31, 2019, from $855 million at September 30, 2019. Second, we amended our existing credit agreement to extend the maturities of both the revolving credit facility and the April 2021 Term Note B maturities. These maturities have been extended to July 2022 and October 2022, respectively.

The result of these actions are improved liquidity and enhanced flexibility from a timing perspective to evaluate and pursue options associated with our announced strategic review. We also made some significant changes to our management structure during the fourth quarter with the goal of transforming our organizational culture, improving our operational efficiency and reducing our overhead structure.

I appointed Chris Qualters to lead our Life Sciences group; and John Buchan took over responsibilities for the Power Solutions group along with his existing role as EVP of the Mobile Solutions group.

Chris has over 30 years of experience in various commercial and operational roles and his track record of excellent execution will be invaluable as we continue to grow our Life Sciences platform. Likewise, John has significant experience in leading operations and participating as a senior executive, helping shape an organization's strategic direction. John's management and operational skills are well suited to maximize the potential synergies and growth opportunities that can be realized through the combination of Power and Mobile Solutions. We have made significant progress on the cost reduction initiatives we announced in October 2019. To-date, we have eliminated $12.9 million in costs throughout the company and have identified an additional $3 million in cost reductions that are in process. I will discuss this in more detail later in the presentation.

Lastly, we 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. The strategic review remains in process subject to an ongoing evaluation of market conditions and global economic stability. We have previously indicated that we would not comment on this process unless further disclosure is necessary and consequently, we will not be commenting or speculating about the timetable or potential outcomes during this call. We appreciate your understanding and patience.

As we move on to our financial performance, you can see that our fourth quarter sales were $198.6 million, roughly flat with 2018 after consideration of foreign exchange differences. Our Life Sciences group reported sales of $88.4 million, up $8.9 million or 11% from a year ago. This increase was substantially offset by a year-over-year reduction in sales in the Mobile Solutions group of $8.2 million due to overall slowness in the auto sector and the General Motor strike, which adversely impacted most of October 2019.

Our 2019 sales totaled $847.5 million versus $770.7 million in 2018. The majority of this sales increase is attributable to the Life Sciences businesses acquired in 2018 and organic growth of $9.8 million. Our reported fourth quarter EBITDA was $19.2 million, and adjusted EBITDA was $33.2 million. Adjusted EBITDA was slightly down from the fourth quarter a year ago but in line with the guidance we had provided on the quarter. Consistent with the sales performance, EBITDA for the Life Sciences group was up $2.9 million from a year ago, while Mobile Solutions adjusted EBITDA was down $1.9 million.

The fourth quarter operating income and EPS were both improved over Q4 2018, due primarily to $182 million write-down of goodwill in the fourth quarter of 2018. GAAP EPS is a reported loss of $0.35 a share, while adjusted non-GAAP EPS is income of $0.14 per share.

Our free cash flow for the fourth quarter was $2.3 million. This resulted less than our previous expectations. Near the end of the year, we made the appropriate decision to keep our current payment terms with suppliers, instead of lengthening payment terms at year-end, as had been done in prior years. Consequently, our accounts payable are $8.4 million less at December 31, 2019, versus the previous year. This action was appropriate, given our supply base is concerned surrounding certain rating agency reports and the going concern language that was included in our third quarter Form 10-Q.

We expect to see a free cash flow benefit in our 2020 first quarter cash flow, as we will not have to use cash flows to reduce a higher year-end accounts payable balance.

Reducing working capital will continue to be a focus in 2020, as we expect to reduce inventory levels and will manage lengthy customer payment terms through cost-effective customer accounts receivable programs.

On Page 5, we have a summary of our efforts to reduce costs and improve cash flow. Our $32 million goal announced in October 2019 of improving cash flow consisted of 3 components: one, eliminating our quarterly cash dividend, thereby saving the company $12 million per year, this was done in 2019; second, reducing overall cost, including SG&A savings of $10 million per year; and third, reducing the annual spend on capital expenditures, saving another $10 million annually.

We achieved a $10 million cost reduction by eliminating $12.9 million in annual expenses, consisting primarily a $5.9 million and $4.9 million associated with personnel reductions in our corporate office and 3 operating groups, respectively. In addition, we have agreed to terminate our lease on 2/3 of our Charlotte office space, saving $1.7 million annually. We will incur $4.3 million in total cost to terminate our lease consisting of realtor fees, landlord termination costs, including $800,000 for 6 months' rent and tenant improvement incentives. We expect that this cash outlay will be split 50-50 between the first and second quarters. We are still focused on additional opportunities for cost reductions associated with professional fees, travel and potential facility consolidation synergies.

The annual reduction in capital expenditures fall slightly shy of our $10 million goal, with an $8.3 million reduction in comparison to our 2019 cash spend. As 2020 unfolds, we will continue to look for opportunities to capture the balance of this goal.

Turning to Slide 6, which details our fourth quarter revenues by segment. On a consolidated basis, total revenues decreased 0.4% for the fourth quarter versus the prior year, primarily due to foreign exchange losses. Life Sciences grew over 11%, and Power Solutions was down 3.5%, and Mobile Solutions posted 11% reduction in sales due to global economic -- automotive headwinds coupled with the GM strike. Foreign exchange continued to reduce sales as the U.S. dollar strengthened against most of our foreign currencies.

On a year-to-date basis, overall sales also grew 10% driven primarily by the acquisition of Paragon in May 2018, organic growth within Life Sciences, and to a lesser extent, sales growth in Power Solutions. Overall, organic growth was 1.3%, acquisitions accounted for 9.8% of growth and foreign exchange with a headwind of 1.1%.

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.

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Thomas D. DeByle, NN, Inc. - Senior VP & CFO [4]

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Thanks, Warren. Please turn to Slide 7, which includes our fourth quarter results on a GAAP, non-GAAP, excluding special items and a total adjusted non-GAAP basis. As I did in the prior quarter, I further break down our adjustments into 2 categories for better transparency: one category is special items, which are onetime unusual expenses; and number two, transition and integration expenses the company has historically captured due to the number of acquisition and integration activities made over the past few years.

There are 3 key points I would like to get across today. First, gross profits are improving in total dollars and as a percent of sales. The improvements in gross profit relate to the focus on higher margin, value-added programs with our customers, continuous improvement efforts, integration and managing costs based upon market conditions. Second, operating income on a non-GAAP basis, excluding special items, showed a loss of $2.2 million and was essentially flat year-over-year, considering the increase in depreciation and amortization expense of $3.5 million and approximately $2 million of management bonus reversals in Q4 of 2018 versus 2019. Note that there were no executive annual cash bonuses paid in either year. The last item is that EBITDA percent of sales circled in the column titled Non-GAAP Excluding Special Items. You can see EBITDA improved year-over-year.

Let's go to Slide 8, which provides a bridge with more granularity between reported GAAP, non-GAAP excluding special items and total adjusted non-GAAP. There are a lot of moving parts on this page, and I will try to hit the high points. First, let's focus our attention on the upper portion of the bridge. The large dollar tax-affected special items in the quarter were $0.8 million for severance and $0.5 million for write-off of debt issuance costs. In the prior year, the large tax-affected special items were $4.1 million for fixed asset impairment, $199.1 million of goodwill and JV impairment charges and $7.2 million related to divesting prior precision-bearing components segment.

Now let's turn our attention to the lower section of the bridge. In Q4 of 2019, the large dollar tax-affected nonoperational adjustments were $1.6 million for capacity and capabilities development, professional fees of $2.1 million, integration and transformation of $4.6 million and $9.9 million of amortization of intangibles and deferred financing costs.

The large dollar tax-affected nonoperational adjustments in the prior year were $2.5 million for capacity and capabilities development, $2.5 million for professional fees, integration and transformation of $4.9 million and $7.6 million of amortization of intangibles and deferred financing costs.

Please turn to Slide 9. 2019 was a year of transition, as we continue to integrate the large acquisitions made over the years. I'm not going to spend too much time on this page, however, I will point out a few things. First, sales were up 10% for the year, primarily due to partial year carryover of acquisitions and organic growth in Life Sciences. Second, similar to the fourth quarter, gross profit moved in the right direction in 2019, as our margin-focused activities, previously mentioned, read through our results.

The management bonuses were $0, as mentioned earlier in the prior year, causing a drag on the earnings in 2019 of $3.5 million year-over-year. As previously mentioned, there were no executive annual cash bonuses paid in either year.

On Page 10 is our full year bridge. Again, there are a lot of moving parts on this bridge, and I will hit the important ones. The large dollar tax-affected special items in the year were $1 million for severance, $2.6 million for write-off of debt issuance costs and $6 million for discrete tax items related to prior year divestiture of the precision-bearing components segment.

In the prior year, the large dollar tax-affected special items were $4.1 million for fixed asset impairment, $199.1 million of goodwill and JV impairment charges and $7.2 million related to divesting prior precision-bearing components segment.

Now let's turn our attention to the lower section of the bridge. In 2019, the large dollar tax-affected nonoperational adjustments were $7.3 million for capacity and capabilities development, professional fees of $3.6 million, integration and transformation of $17.5 million and $41.3 million of amortization of intangibles and deferred financing costs.

The large dollar tax-affected nonoperational adjustments in the prior year were $6.5 million of capacity and capabilities development, professional fees of $8.5 million, integration and transformation of $13.4 million and $29.9 million of amortization of intangibles and deferred financing costs. Note that the 3 categories under transition and acquisition expenses of capabilities and capacity development, professional fees, and integration and transformation are planned to come down over 50% in 2020 and be minimal in 2021. These are a key focus of management to reduce these expenses as we put the integrations behind us.

Turning to Slide 11. Net working capital at the end of the fiscal fourth quarter was $192.9 million compared with $188.7 million in the prior year, an increase of $4.3 million. Working capital turns were 4.1% versus 4.2% in the prior year. DSO improved versus prior year. Inventory turns were flat, and accounts payable days decreased. In the fourth quarter, as Warren mentioned, we made a strategic decision to pay our suppliers on time in order to maintain good relationships.

In 2020, we will focus on reducing working capital through accelerated collection efforts, productions in inventory and improved payable turns. Please turn to Slide 12. Net debt at the end of the fourth quarter was $757.6 million versus $833.4 million in the prior year, a decrease of $75.8 million. EBITDA, as measured by the credit agreement to funded debt was at 4.65x versus 4.74x in the prior year. Several positive things happened in the quarter, as Warren mentioned. We improved our financial flexibility. For the company, we issued preferred stock of $100 million and paid off our revolver, and we extended the revolver and term B loans. This allows us time to continue our efforts to delever the company.

Slide 13 shows our free cash flow for the quarter and full year. We generated free cash flow of $2.3 million for the fourth quarter 2019 compared to an adjusted free cash flow of $2.7 million in the fourth quarter of 2018.

For comparability, it is important to point out that the prior year had a $34.4 million tax refund related to the sale of the Precision Bearing Components segment. For the year, free cash flow was a negative $4.8 million, and 2018 adjusted free cash flow was a negative $57.5 million.

Looking forward, we are concentrating on improving our free cash flow by reducing working capital, cost reductions, limiting capital expenditures and improving productivity to drive bottom line results.

Slide 14 summarizes our capital spending, depreciation and amortization trends. Cash capital expenditures were approximately $12.6 million in the fourth quarter compared with $17 million in the prior year. For the quarter, the company's capital spending was 6.3% of sales, down from prior year's percentage of 8.5%. There was lower spending in Q4 2019 across all business units compared to the prior year.

On a year-to-date basis, the company spent $53.3 million or 6.3% of sales versus $64 million or 8.3% of sales in the prior year. NN anticipates spending $45 million in capital in 2020.

With that, I'll turn the call back to Warren.

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Warren A. Veltman, NN, Inc. - President & CEO [5]

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Thanks, Tom. If we go to Page 16, we presented some additional information there for our Life Sciences group. The 11% year-over-year sales increase has been driven primarily by our orthopedic and delivery system or case and tray products, yielding an improvement in margins over the prior year. Adjusted operating profit has increased to 20.2% from 19.7% for the prior year period.

Please note that 62% of the adjustments from GAAP operating income are due to intangibles amortization. We have also seen expansion of our reported and adjusted EBITDA margins. Our positive margin trend is the result of continuous process improvement, installation of automation and improved performance in our international operations.

Our backlog is $149 million, a $36 million reduction from Q3. As we discussed last quarter, we have recently launched our new sales and ops planning application that allows us to proactively interact with our customers and improve process -- and improve the process of matching product requirements with expected delivery dates.

We expected that a byproduct of a more full implementation of this application would be a reduction in the total backlog. Looking forward, our 2020 focus will be on continuous improvement, managing the impact of the coronavirus on our business and targeting growth of our MedSurg products.

We expect growth in the orthopedics segment to be modest in 2020, due to the significant 2019 product introductions that will not repeat in 2020. We expect orthopedic-related sales to expand in 2021 when the next round of new product introductions are scheduled.

The Mobile Solutions business summary is included on Page 17. Mobile sales are down 10.9% from a year ago, due primarily to sales declines in North America, due to programs moving to end of production, delays in new business launches and unfriendly tax and tariff environment and the impact of the UAW strike against General Motors, which started in mid-September and did not conclude until the end of October.

In spite of the sales reductions, reported EBITDA increased from $4.5 million after neutralizing the goodwill impairments to $7.9 million, due -- primarily due to a write-down of idle and obsolete equipment in 2018.

Adjusted EBITDA declined from $10.8 million to $8.9 million, reflecting the loss margin on the sales variance, partially offset by significant reductions in indirect labor and related benefits and bonuses. Through the end of December 2019, indirect labor, SG&A labor and related benefits were reduced by $7.3 million on an annualized basis.

We expect modest growth for this group in 2020 due to start of production of some new programs and the focus will be on margin improvement through manufacturing process improvements and additional reductions of fixed costs, including the carryover impact of some of the completed 2019 indirect labor reductions. In addition, improved free cash flow is expected from reduced capital expenditures, an improvement in working capital management, including reduced inventory levels.

Moving on to Power Solutions on Page 18. Power's fourth quarter sales decreased 3.5% year-over-year, due primarily to lower sales to customers that export to China, the direct sales on electrical products to China, both due primarily to increased Chinese tariffs. Customers have also chosen to reduce inventory levels as a reaction to these lower sales volumes.

In spite of the sales reduction, reported EBITDA was $4.8 million, an increase of $1.4 million over the 2018 fourth quarter. Adjusted EBITDA was $7 million for both fourth quarter periods, but increased to 16.1% of sales in 2019 versus 15.5% in 2018.

Margin improvement is primarily due to reductions in indirect and SG&A labor and improved manufacturing efficiencies. Several facility consolidations are underway in this group. We finalized the move of our West Coast operation into the Irvine, California facility and have readied the Fairfield, Ohio facility for closure. The construction of the Taunton facility is substantially complete, and we expect to consolidate 2 other facilities there by early in the second quarter.

We expect moderate sales growth in 2020, coming from both Electrical and Aerospace and Defense, with continued margin expansion due to optimization of our facility footprint and continuous process improvement. We also expect that we will realize cost reductions through synergies created from common leadership of the Mobile and Power groups. We expect that the Power group will continue to generate significant free cash flow due to its low capital expenditure profile.

Lastly, we have summarized our guidance for the first quarter and 2020 on Page 20. Before we discuss our guidance, it's important to review and discuss the impact that coronavirus has had and continues to have on our global operations. Our focus has been on securing the health of our employees, mitigating potential weaknesses in our supply chain and striving to meet our customers' volume requirements.

From an employee health standpoint, we have coordinated with governmental authorities to implement appropriate safety measures at our facilities, including a 14-day isolation period for Chinese employees that traveled during the Chinese New Year. We have also, where appropriate, removed any financial disincentive for an employee to miss work, thereby encouraging them to stay in home if they are sick. Within China, our operations have resumed, and currently, our staffing levels are at 92% or above. And our customers are all ordering product at less than full production levels.

We currently estimate that Chinese customers will not return to normal production -- normalized production levels until early May 2020. On the supply side, we have seen some disruption from products sourced in China and are closely monitoring the situation in Italy due to the location of certain steel suppliers. We will continue our evaluation of critical components or products necessary for our manufacturing operations versus safety stock levels and take the appropriate actions to prevent outages.

We have delivered product to our customers consistent with their requirements, albeit at reduced volumes. As a matter of fact, just this week, we received an award from a major Chinese customer, recognizing the excellent support our team has delivered since the coronavirus outbreak. We certainly will strive to continue this level of support. As of today, we have seen the outbreak disrupt our supply chain and cause our customer requirements to fluctuate. However, the overall impact of the coronavirus on our business in the global economy are highly uncertain and difficult to predict.

Therefore, the guidance included in this presentation is representative of our current knowledge, regarding our customer schedules, our ability to continue to secure appropriate materials and supplies and the ongoing attendance of our employees. It does not contemplate any long-term disruptions in European or North American economies or further disruption on the Asian continent. Our management team will continue to remain vigilant in our oversight of this ever-changing landscape. We estimate that our sales for Q1, with all of that in mind, will range from $197 million to $204 million, generating EBITDA of $27 million to $31 million. This will result in an earnings range of a $0.02 per share loss to a $0.05 per share of income. This range is below our reported Q4 earnings per share on similar sales volume due to several factors, including: one, increased interest expense due to the recent amendment to our credit facility, which represents an additional cost of approximately $0.045 per share for the quarter; two, an underabsorption of overhead costs due to a reduction in inventory as part of our focus on working capital; three, increased employee incentive compensation in Q1 2020 over Q4 2019; and four, the coronavirus impact on both the efficiency of our international operations and the financial performance of our Chinese joint venture.

Recall that the Chinese JV sales are not consolidated in our reported financial statements. And Q1 volumes for the joint venture are expected to be roughly 50% of what we saw in Q4 2019. We expect that our free cash flow will be negative $4 million on the low side and positive $5 million on the high side. This compares very favorably with the $17 million cash outflow in the first quarter of 2019. For the 2020 year, we expect sales of $825 million to $865 million, with adjusted EBITDA of $145 million to $157 million. Adjusted earnings per share are projected to be $0.53 to $0.75 per share, with free cash flow in the range of $25 million to $35 million.

That concludes our prepared remarks, and I will now turn the call back to the operator for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question will be from Daniel Moore from CJS Securities.

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Daniel Joseph Moore, CJS Securities, Inc. - Director of Research [2]

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Wanted to start with, obviously, a challenging one. You gave good color there in context around the guide. Wondering how, as you formulated it, how that's changed over the last week, if it has at all? You said it's based on your current thinking. Just wondering, if that's been adjusted relative to how the world was operating maybe 5, 10 days ago?

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Warren A. Veltman, NN, Inc. - President & CEO [3]

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Yes. Dan, obviously, it's a very fluid situation, and we have been reflecting as best we can the results of what's going on globally in our forecast. I think the last update we really received from the teams -- I mean, at some point in time, you've got to draw a line in the sand, was mid-to-late last week, so we could finalize everything and formulate our opinion. And that's the nature or the genesis of the commentary regarding no future disruptions in the North America or the European continent. It's something that, as I indicated, we're very much focused on, especially on the supply side, I mentioned Italy. We have a key supplier there that provides us some specialty steel, so we've actually ordered ahead. So we might actually take on some additional raw material and supplies inventories in the first quarter, early second quarter, as we evaluate how this thing is going to unfold because, as you know, it's changing every day.

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Daniel Joseph Moore, CJS Securities, Inc. - Director of Research [4]

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Helpful. And in the context of what's going on in China. You mentioned your customers not yet operating. Back to sort of 92% staffing, the customers not ordering at normal levels. Roughly, what percentage would you say that they are ordering at today relative to 90 -- 60, 90 days ago? And I guess, you said early May. Is that right? Is that your best guess? So just any color on how much...

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Warren A. Veltman, NN, Inc. - President & CEO [5]

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Yes. So we saw -- yes. Sorry to interrupt. So we saw -- we get schedules from our customers on the auto side, the OEMs released timing on when they expected to open their facilities back up, but it was going to take them -- the real drag there was getting all the employees back into the facilities after the Chinese New Year because if they traveled out of state, they were essentially trapped, trying to get back into the state or the province where they were working and had to go through an isolation period. So we're pretty much at full staff right now on the Life Sciences side, we're at 92% on the Mobile side in our facility there.

And I would tell you, our customers are probably taking anywhere from 50%, hence, my comment on the joint venture to maybe 75% of what we would consider normalized production volumes right now. And we expect that to improve over the next 4 weeks -- 4 to 5 weeks. And then looking at a May period where we might be back to a more normalized production levels.

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Daniel Joseph Moore, CJS Securities, Inc. - Director of Research [6]

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Perfect. Switching gears a little, Life Sciences. And you mentioned, obviously, you had a pretty big sell in -- of the [North steel] product last year. So what is the guidance contemplate for overall growth in Life Sciences this year? And maybe similar line of questions on the supply chain interruptions. Where are we now in that continuum? And how quickly does the guide expect till we get back to normal?

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Warren A. Veltman, NN, Inc. - President & CEO [7]

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Yes. On the Life Sciences side, we've seen a couple of developments there. When we talked last, we had pegged that growth in the 5% to 9% range on an overall basis. And with what we've seen in the coronavirus, I think there's a couple of other dynamics going on there. One is the coronavirus, the impact of that. Number two is some of the consolidations in the Life Sciences space have caused our customers to look harder at inventory levels. We've seen several large customers trim back some of their production needs, solely as it relates to them managing inventory levels. So as we look at that business on an overall basis now, we're actually looking at a lower growth profile, may be marginally up to flat as we look at 2020 at this point in time.

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Daniel Joseph Moore, CJS Securities, Inc. - Director of Research [8]

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Perfect. And then lastly for me, just maybe talk about any steps you would be contemplating to reduce costs and how much flexibility do you have to reduce costs further, particularly in auto and industrial, if it does become a little bit longer sustained disruption from a demand perspective?

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Warren A. Veltman, NN, Inc. - President & CEO [9]

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Yes. So if you look on the auto side in North America, we have, I think, a pretty good track record of being able to flex all the variable costs of that business with production. And one of the ways that we could do that is we typically run our facilities there on a 50-hour work week. So we can dial back 20% without any significant layoffs. It also affords us an opportunity to -- if there is any sort of health-related issues that we have and production volumes are down, it allows us to have a certain level of absenteeism on a go-forward basis. So I think that we can -- I think that we have the ability to flex on the variable side.

On the fixed side, I think that we've done a very good job on the auto mobile group, reducing some of the fixed-based cost in that business on the indirect side. We've taken that business back down to an 8% of sales range for indirect labor. The team understands that if sales contract below what we've targeted for our plan for this year that there's an expectation that they flex that indirect labor either -- even further, and I think that there's an opportunity to do that. The -- I think the best opportunity for us right now exists in some of the facility consolidation efforts that we have underway.

And in addition, we've looked very closely at how we can capture some synergies, especially on an SG&A functional side, with the combination of those 2 groups. We've already been working to kind of -- to bring the financial teams together, to bring the human resource teams together and to capture some additional cost opportunities there as well. So I think everything that we can do, we're focused on right now. It's just a matter of making sure that our processes are robust enough going forward to start taking the appropriate level of personnel reductions out as our improved processes afford us the ability to do that.

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Operator [10]

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Our next question will be from Rob Brown from Lake Street Capital Markets.

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Robert Duncan Brown, Lake Street Capital Markets, LLC, Research Division - Senior Research Analyst [11]

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The first question is in the Power Solutions business or the business overall, how much exposure do you have with the Commercial Aero market? And what sort of the program activity you're doing at this point there?

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Warren A. Veltman, NN, Inc. - President & CEO [12]

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Yes. Rob, there's a -- clearly, it's a targeted growth area for us. But when we look at that overall business, the Aerospace and Defense side, it's approximately 10% of the overall Power Solutions group. We've spent a considerable amount of resources over the last year, getting that business up and ready. You've probably heard us talk about the fact that a year or so ago -- 18 months ago, we were on 7 or 8 approved supplier list, and today, that total is like 56%. And the effort to do that was not minimal. It entails a lot of development work with customers, manufacturing prototypes, that type of things. None of that type of business early on is extremely profitable, as a matter of fact, it's not profitable at all. So we buy a lot of that at this point in time and looking to bring some programs on that are actually contributing to the bottom line. But as it relates to the total size of that business, like I said, it's about 10% of the Power Solutions group today.

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Robert Duncan Brown, Lake Street Capital Markets, LLC, Research Division - Senior Research Analyst [13]

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Okay. And then in terms of visibility on the -- or around the order flow, how much visibility do you typically get? And when you sort of see demands starting to tail off or pick up? How much sort of heads up do you get there?

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Warren A. Veltman, NN, Inc. - President & CEO [14]

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I think it really depends on the group. If you take the Mobile, as an example, typically, we would get a 12-week look forward from our customers, where 4 weeks might be firm and that the next 8 weeks are for planning-related purposes. But I would tell you, even though that is the theoretical case that everybody is operating to, it is not uncommon for our customers to 0 out their demand in a relatively short time frame.

So we're constantly watching that and trying to evaluate where our customers' inventory levels are as well to make sure that we understand where their long-term demand would be. On the Life Sciences side, we have -- we monitor very closely the backlog. And with this new supply and operations forecasting program that we put in place with our customer, it's giving us a better insight into what their expectations are, what their inventory levels are and what their expectations are from a delivery standpoint going forward. So when we look at that from a best-case scenario, we would like to have that backlog at somewhere 12 to 14 weeks out. We don't want to be able to -- we don't want to deliver -- we don't want to have lead times that long, but it would be nice to understand exactly what our customers need for a 12-week window. And that's really what we're hoping to operate to.

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Operator [15]

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Our next question will be from Steve Barger with KeyBanc Capital Markets.

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Robert Stephen Barger, KeyBanc Capital Markets Inc., Research Division - MD and Equity Research Analyst [16]

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Warren, most of the questions I get overnight were on the portfolio review. And I get that you don't want to talk about specifics or predictions. But can you tell us if there are external talks taking place or if the review is still all internal?

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Warren A. Veltman, NN, Inc. - President & CEO [17]

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Yes. So I think that -- I will tell you that we're in the process right now, Steve, I'm not trying to be coy about this, but we are -- and we are having some external conversations as well.

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Robert Stephen Barger, KeyBanc Capital Markets Inc., Research Division - MD and Equity Research Analyst [18]

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Okay. And you detailed a lot of the balance sheet and maturity progress along with some of the aggressive cost-save actions. Beyond some of the tactical things you already discussed, can you talk about how your view on NN's ability to manage through the current environment in a sustainable way has evolved?

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Warren A. Veltman, NN, Inc. - President & CEO [19]

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Yes. I mean that's a good question. I would tell you that as it relates to how we view the business and how we're gearing the management team. Our focus -- and this, I think, was pervasive throughout our commentary this morning, is very much on the cash flow side of the business. I mean we're focused on EPS, but given the uncertainty in the marketplace, we feel that our primary focus needs to be on generating cash flow and paying down debt. And that's why in the first quarter, I talked about some underabsorption of inventory and that type of thing. So we're trying to get this business down to a point where we can still be at a minimum free cash flow neutral, even if we see a 10% reduction in volume on where we're operating today, and I think the teams are geared up to do that. We've been very focused on the capital expenditure side.

And the other thing that I think that we've done is we're trying to create a better communication platform between the 3 operating groups. And by having John Buchan lead Power and Mobile together and Chris over at Life Sciences, I think that from a communication standpoint, we've significantly improved that in the business. I know that John and Chris talk frequently. I'm engaged with those guys. I'm talking to them daily. So I think that from that standpoint, there's been a significant improvement. I knew when I came into this, it was going to be a difficult situation. We have a good team here. I think that we made some substantial progress that puts the company on more sound footing going forward. And I'm pretty excited about where we're going, and that we've got a plan in place this year to pay down $25 million to $30 million of debt. Feel pretty good about that, right?

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Robert Stephen Barger, KeyBanc Capital Markets Inc., Research Division - MD and Equity Research Analyst [20]

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I think that's a great segue way into -- to my next question. Obviously, there has not been a great track record of forecasting EPS and free cash flow over the last few years. So now that you and Tom are there in the seats, can you just talk about your confidence in the line of sight to these numbers? Do you feel like this is a reasonable forecast, but still conservative enough that you can hit midpoint or better on the ranges?

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Thomas D. DeByle, NN, Inc. - Senior VP & CFO [21]

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That's our goal. That's our goal, definitely. I mean we have levers to pull, and we're focused on it. It's definitely a point where we have ways to improve our receivables, for example, on working capital, and Warren talked about inventory. There's -- once we start, we can focus more on our suppliers, consolidating our suppliers, lengthening our payable terms, stuff like that. The controllables of capital spending, really making sure that we get the payback and the IRR that we signed up for. And then, of course, ongoing cost reductions, continuous improvement because everything can be improved upon.

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Robert Stephen Barger, KeyBanc Capital Markets Inc., Research Division - MD and Equity Research Analyst [22]

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Right.

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Warren A. Veltman, NN, Inc. - President & CEO [23]

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So I agree with everything Tom said, Steve. And I would tell you that we were as diligent, I think, as we can possibly be in trying to put this range together. But I would just take you back to some of the comments, the lead into that, as it relates to the uncertainty in the environment today. So if there's stability as it relates to volumes, if automotive volumes go from 16% to 12%, I mean, obviously, that's going to impact our guidance.

We did not project anything like that, a significant disruption because of corona in North America. So we did incorporate what we've seen in the first quarter and what we expect to see in the first couple of months of the second quarter, but beyond that, it's difficult to predict where this thing is going to go at this point in time.

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Robert Stephen Barger, KeyBanc Capital Markets Inc., Research Division - MD and Equity Research Analyst [24]

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Right. No, that's really understandable. Last question for me. As you think about the growth rates on the 3 segments, talking about lower growth on Life Sciences and some CapEx for start-ups and then what's happening with Mobile, do you expect positive free cash flow in all 3 segments this year?

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Warren A. Veltman, NN, Inc. - President & CEO [25]

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Yes.

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Operator [26]

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(Operator Instructions) Our next question will come from Paresh Shah from Telos Asset Management.

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Paresh Shah;Telos Asset Management LLC;Director, [27]

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One of the things, I guess, every lender is concerned right now is the liquidity at the company. So as of today, is this something that you could discuss in terms of what is the cash on the balance sheet? And what is the availability, considering covenants and MAC clause and everything else?

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Warren A. Veltman, NN, Inc. - President & CEO [28]

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Yes. Sure. I mean we finished the year with $31 million of cash on the balance sheet and no borrowings on the revolver at December 31, 2019. And our guidance shows that our expectation is that we're going to be cash flow negative in the first quarter from $4 million and on the upside to $5 million positive. And I guess it's important to understand that in the first quarter it's typically a cash-intensive quarter for us, as we come out of what is a slower December period and we have to build our receivables balance back up, and usually, some inventory build as well. So we feel -- I would tell you, from a liquidity standpoint, I think that we feel pretty good. Tom, do you want to add something on that?

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Thomas D. DeByle, NN, Inc. - Senior VP & CFO [29]

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Well, and just the financing that we put in place with the preferred is giving us room. And -- so we feel pretty good about our liquidity. We feel good about where our cash balances are and path forward.

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Paresh Shah;Telos Asset Management LLC;Director, [30]

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So in some ways, like, if I had to estimate your liquidity today, are you saying that there is still no revolver borrowings at this point? And the cash would be in that $25 million to $30 million range.

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Thomas D. DeByle, NN, Inc. - Senior VP & CFO [31]

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We're still in a positive net cash position. Okay? Significant positive net cash position. And in North America, where we have the revolver, we're still even in a positive net cash position today. I would classify that borrowings on the revolver is minimal at this point.

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Operator [32]

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(Operator Instructions) All right. I'm showing no further questions in the queue at this time.

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Warren A. Veltman, NN, Inc. - President & CEO [33]

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Thank you, operator. With that, we'll bring the call to a close. Thank you for joining us. If you need further information, please reach out to Mark Schuermann at Investor Relations or Abernathy MacGregor. Thank you, again, and have a good weekend.

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Operator [34]

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Thank you. Ladies and gentlemen, this concludes today's teleconference. You may now disconnect.