NNBR: NN Inc. released 3rd quarter 2023 results which showed improved free cash flow generation and progress towards its strategic transformation initiatives.
NASDAQ:NNBR
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NN Inc. (NASDAQ:NNBR) reported 3rd quarter 2023 financial results on November 6, 2023 which showed improved profitability and free cash flow generation as well as progress towards strategic transformation initiatives. Sales decreased 2.2% to $124.4 million compared to the prior year period which was largely driven by reduced volumes and offset by price increases. On a sequential basis, sales decreased less than 1.0%.
GAAP operating loss was ($2.7) million which compares to a GAAP operating loss of ($2.1) million in the 3rd quarter of 2022. Adjusted operating income was $3.7 million, an improvement from adjusted operating income of $2.5 million the 3rd quarter of 2022. The Non-GAAP operating income eliminates amortization expense and one-time unusual items such as facility closure expenses. Adjusted EBITDA was $14.5 million (11.6% margin) compared to $11.8 million (9.3% margin) in the prior period.
In the Mobile Solutions segment, net sales for the 3rd quarter of 2023 were $79.0 million, an increase of 3.7% compared to the 3rd quarter of 2022. The increase was primarily due to higher customer pricing actions, a favorable customer settlement, favorable foreign exchange effects, and was offset by lower sales volumes. Adjusted operating income was $1.6 million compared to adjusted operating income of $0.7 million in the prior year period. Adjusted EBITDA in this segment was $9.5 million compared to $8.0 million in the 3rd quarter of 2022. The increases in segment profitability were driven by customer settlement and employee rationalization actions. The company noted that the United Auto Workers strike may create some minor headwinds in the short-term but operating performance improvements should continue into the 4th quarter.
In the Power Solution segment sales decreased 11.0% to $45.4 million compared to the prior year period, primarily due to lower sales volumes. The lower sales volumes were driven by due to two auto customers losing market share, lower industrial component sales due to lower capital spending, and aerospace and defense sales declining due to the closures of the Irvine and Taunton facilities. However, adjusted operating income increased 22.4% to $7.1 million. Adjusted EBITDA increased 16.9% to $8.3 million. The improved profitability was driven by facility closures, employee streamlining, and retroactive material cost recovery.
Consolidated free cash flow generated in the quarter was $11.3 million compared to a use of cash of ($4.4) million for the same period in 2022. Trailing 12-month free cash flow as of September 30, 2023 was $17.0 million. Improving free cash flow generation is a key point of the company’s strategic transformation plan.
Global liquidity remains strong at $50.5 million, which is comprised of $21.8 million in cash and $28.7 million in availability under its credit line. Working capital was $94.8 million and working capital turns improved to 5.3x from 4.8x in the 2nd quarter of 2023. The company’s leverage ratio decreased to 3.37x from 3.87x in the 2nd quarter of 2023 and is expected to trend down going forward as the company continues to generate strong levels of free cash flow.
The company is undergoing a series of strategic initiatives in order to grow sales, improve margins, and increase free cash flow generation that should increase shareholder value over time. These include five key components:
1. Strengthening Leadership and Accountability – The company recently hired a new COO, Tim French, and a new Chief Procurement Officer, David Harrison. Both have extensive business experience and transformation leadership.
2. Address Unprofitable Business – The company has begun the process of exiting unprofitable contracts and continues to assess the efficiency and capabilities of its global manufacturing footprint. The goal is to improve plant level EBITDA by over $10 million annually.
3. Expand Margins – The company has implemented many cost cutting measures and price increase initiatives and is rolling out a new Total Cost Productivity program on a global basis. The goal is to offset inflation and expand operating margins.
4. Institutionalize Free Cash Flow Generation – The company is refocusing its global culture around better business practices by balancing cash inflows with outflows. The company was free cash flow positive in the last two quarters and for the trailing twelve months.
5. Increase Business Wins – The company is trying balance wins between Power and Mobile Segments and within Mobile, across ICE, EV, and Hybrid vehicles. The company is aligning the sales organization between people, products and a stronger focus.
New CEO Harold Bevis stated, “In our first quarter with the newly supplemented management team, we delivered improved operating results and made significant progress against many of our strategic transformation initiatives. We’ve been intently focused on fixing and/or exiting unprofitable business, diligently managing our working capital, and implementing rigorous cost productivity and margin expansion programs across the organization. The early stages of our strategy to increase organizational commitment around our transformation strategy can be clearly seen in our strong free cash flow performance this period. I’m encouraged by the early results of these initiatives and believe there is much more to accomplish.”
We are adjusting our 4th quarter and full year 2023 EPS estimates to account for the improved margins and higher free cash flow generated in the 3rd quarter of 2023. Our 4th quarter adjusted EPS estimate is revised to ($0.05) and our full year adjusted EPS estimate is revised to ($0.25). Our adjusted EBITDA estimate is approximately $42.0 million.
We are maintaining our DCF derived valuation target of $5.00. In addition, the stock is trading below book value per share. We estimate NNBR stock is selling at approximately 66.0% of book value.
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