NNBR: NN’s improved operational profile supports price target of $7.00 per share.
NASDAQ:NNBR
READ THE FULL NNBR RESEARCH REPORT
Net sales in the 4th quarter were $112.5 million, which was a decrease of 4.6% from the 4th quarter of 2022. This was primarily the result of reduced volumes from recent facility closures and partially offset by higher customer pricing and favorable foreign exchange effects.
Operating loss was ($7.9) million compared to a loss from operations of ($11.0) million in the prior year period. The decrease in loss from operations was primarily driven by facility closures and labor cost savings.
GAAP net loss was ($20.5) million compared to net loss of ($12.0) million for the same period in 2022. The increase in net loss is primarily due to a non-recurring warrant valuation expense of $10.8 million due to an increase in the stock price. Interest expense also increased $1.3 million.
Adjusted operating loss for the 4th quarter of 2023 was ($1.4) million compared to adjusted operating loss of ($3.3) million for the prior year period. Adjusted EBITDA was $10.0 million (8.9% margin), compared to $7.8 million (6.6% margin) for the same period in 2022. Adjusted net loss was ($4.9 million), or ($0.10) per diluted share, compared to adjusted net loss of ($5.8 million), or ($0.12) per diluted share, in the prior year period.
Free cash flow was a generation of cash of $1.3 million compared to a generation of cash of $6.4 million for the same period in 2022.
In the Power Solutions segment, net sales for the 4th quarter decreased 13.4% to $43.3 million. The decrease in sales was primarily due to lower volumes as a result of the closure of the Taunton and Irvine facilities as well as general industry softness in the commercial truck and auto component markets. However, profitability improved due to the facility closures (which were losing money) as well right-sizing initiatives in NN’s (NASDAQ:NNBR) labor force. Adjusted operating income in the quarter was $5.8 million compared to $4.5 million in the 4th quarter of 2022. Adjusted EBITDA increased to $6.6 million in the 4th quarter and increased to $28.3 million for the full year. The company further commented that average daily sales increased sequentially in the 4th quarter and continued to grow. The company is also adding additional sales personnel in this segment to win new awards.
In the Mobile Solutions segments, net sales for the 4th quarter of 2023 increased 1.8% to $69.2 million. The increase in sales was due to favorable pricing and foreign exchange, partially offset by lower volumes. Adjusted operating loss was ($2.3) million compared to adjusted operating loss of ($3.7) million in the 4th quarter of 2022. The improvement in the operating loss was due to cost savings related to right-sizing the workforce as well as an improved product mix. Adjusted EBITDA increased to $7.1 million in the quarter and decreased to $29.8 million for the full year from $33.7 million in 2022. The company further commented that new business wins were in line with plans and that the China business was performing better than expected. The company also stated that it is reinforcing the sales team on a global basis and that it aggressively investing in digital marketing including processes such as search engine optimization.
Full Year 2023 Results
For the full year 2023, net sales decreased $9.5 million, or 1.9%, to $489.3 million compared to $498.7 million for 2022. This was primarily due to reduced volume, including the impact from the closure of the Taunton and Irvine facilities, lower customer settlements, and unfavorable foreign exchange, partially offset by better pricing actions. GAAP operating loss increased slightly to ($21.8) million compared to ($21.1) million in 2022. On an adjusted basis, operating income for 2023 was $3.1 million compared to adjusted operating income of $1.9 million in 2022. Adjusted EBITDA for 2023 was $43.1 million (8.8% margin) compared to $43.9 million (8.8% margin) for the same period in 2022. The company generated free cash flow of $11.7 million in 2023 compared to a use of cash of $9.8 million in 2022.
In the Power Solutions segment, net sales for 2023 were $185.9 million compared to $205.2 million in 2022, a decrease of 9.4%, The decrease in sales was primarily due to lower volumes, including the impact from the closure of the Taunton and Irvine facilities, partially offset by higher pricing. Adjusted operating income for 2023 was $23.9 million compared to $20.1 million in 2022. The increase in adjusted operating income was primarily due to facility closure savings and a legal settlement reached during the 1st quarter of 2022, partially offset by lower sales volume.
In the Mobile Solutions segment, net sales for 2023 were $303.3 million compared to $293.5 million in 2022, an increase of 3.3%. The increase in sales was primarily due to higher customer pricing, partially offset by lower sales volume, and lower customer settlements. Adjusted operating loss for 2023 was ($1.3) million compared to $2.7 million of adjusted operating income in 2022. Adjusted operating income decreased due to lower sales volume, lower customer settlements and unfavorable foreign exchange effects, partially offset by cost savings and operating performance.
Balance Sheet Optimization
On March 8, 2024, the company announced it had entered into an agreement to sell and lease back three facilities for an aggregate purchase price of $16.8 million. The transactions should have no impact on EBITDA. The net proceeds from the transaction will be used to repay a portion of the outstanding balance under the company’s term loan which is expected to lower future cash interest expenses. In addition, the company has reduced its corporate headquarters footprint by approximately two-thirds through a separate sublease transaction which will also lower ongoing operating costs. The company indicated there may be other sale/leaseback opportunities, particularly in the areas of large equipment holdings.
The company’s leverage ratio at the end of 2023 was 3.20x, an improvement from 3.37x at the end of 2022. NN expects the leverage ratio to fall below 3.00x by the end of 2024.
2023 Strategic Business Wins
NN announced they had a record breaking level of new business wins in 2023 totaling $62.6 million. The company ended 2023 on a strong note as the acceleration in new business wins was a direct result of the company’s new transformational business strategy. The company was awarded over 60 programs in steering systems, electric motors, commercial vehicles, passenger vehicles, airbag systems, battery management, defense, and vehicle sensors. The awards were diversified across various end markets and include electric vehicle (EV) and hybrid vehicle applications with total wins of approximately $30 million, vehicle connector components and electrical connector shielding with total wins of approximately $15 million, and diesel parts for large equipment with total awards of approximately $9 million.
Precision components supplied by the company are proving valuable in supporting advancements in noise reduction, vibration reduction and harshness performance requirements by manufacturers. Its capabilities in precision machining, precision stamping, plating, precious metals and injection molding are accepted in the marketplace, especially with certifications such as ISO-13485, ITAR, IATF-16949, ISO-9001, NADCAP AC7108 & AC7004. These certifications and internal capabilities have allowed NN to immediately re-enter the medical business with a focused agenda on surgical instruments, handpieces and implants for orthopedic applications, among others.
NN delivers single micron tolerance with its precision machining capabilities in Swiss-style, screw, and rotary transfer machines with worm milling and gear hobbing. Its micro milling and grinding are ideal for component needs such as motor shafts, pinion and worm gears, connectors, injector and spool valve components and armatures.
The company has progressive stamping capabilities with presses from two to 330 tons and specialized knowledge in producing high and low voltage connectors, electrical contacts and contact assemblies, including EMI connector box shields, bus bars and collector plates. These components are needed in EVs, hybrid vehicles, battery storage, meters and power distribution systems.
In addition, NN uniquely has in-house gold, silver, palladium, nickel and tin plating capabilities by rack or barrel method. This gives NN a unique one-stop capability for customer’s metal component requirements.
NN’s pipeline of new business opportunities entering 2024 is approximately $580 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.
CEO Harold Bevis stated, “The NN sales team did a great job in 2023. Our sales growth goal is 5% CAGR, and this level of new business wins is consistent with our objectives and shows that the actions we have in place can deliver tremendous forward value. Coupled with our revamped approach to operational performance, the company intends for these new business wins to be additive as we increase our customer retention rates on existing business.”
We are maintaining our DCF based price target of $7.00 per share based on the company’s updated long-term goals of revenues exceeding $650 million in 2028 and obtaining adjusted EBITDA margins to the 12%-13% range. We also lower our DCF discount rate to account for the likely de-risking of the overall story.
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