NN, Inc. (NASDAQ:NNBR) is a diversified industrial company that combines advanced engineering and production capabilities with in-depth materials science expertise to design and manufacture high-precision components and assemblies primarily for a variety of end markets on a global basis. The company has faced some operational challenges in recent years, but under the leadership of CEO Harold Bevis and COO Tim French, NN is making significant strides in its transformation strategy.

In the fiscal year 2023, NN reported annual revenue of $489.27 million and a net loss of $50.15 million. The company generated annual operating cash flow of $29.34 million and annual free cash flow of $8.85 million. While the top and bottom lines faced headwinds, NN's management team has been laser-focused on improving the company's operational efficiency and commercial performance.

Business Overview

NN operates in two reportable segments: Mobile Solutions and Power Solutions. The Mobile Solutions segment is focused on growth in the automotive, general industrial, and medical end markets, while the Power Solutions segment targets growth in the electrical, general industrial, automotive, and medical end markets.

The company's products in the automotive industry include 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. In the general industrial industry, NN's products include high-precision metal and plastic components for a variety of industrial applications including diesel industrial motors, heating and cooling systems, fluid power systems, power tools, and more. The residential/commercial electrical industry category includes components used in smart meters, charging stations, circuit breakers, transformers, electrical contact assemblies, precision stampings, welded contact assemblies, specification plating, and surface finishing.

Operational Improvements Drive Profitability

Under the leadership of CEO Harold Bevis and COO Tim French, NN has been laser-focused on driving operational improvements across the organization. The company had previously identified 7 unprofitable plants that were significantly impacting its bottom line and cash flows. Through aggressive actions over the past year, 3 of these plants have already returned to profitability, and the remaining 4 are making dramatic improvements.

The key to NN's operational turnaround has been a relentless focus on continuous improvement initiatives. This has included right-sizing headcount, negotiating with suppliers, leveraging global procurement power, upgrading plant managers, and combining SG&A roles where possible. Additionally, the company has had to engage with customers on basic economics to ensure profitability.

These efforts have paid off, as NN's trailing 12-month adjusted EBITDA has increased by 20% year-over-year to $46.3 million. The company's adjusted EBITDA margin has also expanded significantly, reaching 9.3% in the first quarter of 2024, up from 6.4% in the prior-year period. Importantly, NN's EBITDA per headcount has increased by 42%, demonstrating the productivity gains achieved through the transformation.

Accelerating Commercial Momentum

Alongside its operational improvements, NN has also been driving strong commercial momentum. The company has secured $80 million in new business awards over the past 8 quarters, including $17 million in the first quarter of 2024. This represents a pace that is 55% to 70% of the full-year guidance range of $120 million to $135 million in new business wins.

The key growth areas for NN include the China automotive markets, where the company is benefiting from indigenous and export opportunities, as well as the U.S. electric grid and vehicle programs in North America, South America, and Europe. The company has been selective in pursuing medical market opportunities, focusing on those that are capital-efficient and leverage its existing capabilities.

NN's commercial success is a testament to the efforts of its revamped global sales team, led by Verlin Bush. The company's new business pipeline has grown to approximately $550 million, up from $500 million at the end of 2023. Importantly, NN is being disciplined in its approach, ensuring that new business wins are accretive and leverage its existing capacity and capabilities.

Outlook

For the full year 2024, NN is guiding for net sales in the range of $495 million to $535 million, adjusted EBITDA of $48 million to $54 million, and free cash flow of $10 million to $15 million. The company has also reaffirmed its outlook for $120 million to $135 million in new business wins.

This guidance reflects NN's confidence in the steady end market demand, despite some observed weakness in North American industrial markets relative to 2023. The company expects to continue executing its aggressive growth program, ultimately driving free cash flow and profitability across several new markets and customer platforms.

Liquidity

As of March 31, 2024, NN had $20.6 million in cash and cash equivalents and $158.5 million in total debt, resulting in a net debt position of $137.9 million. The company's principal debt is its $132.5 million Term Loan Facility, which bears interest at a rate of 14.3% as of the end of the first quarter.

NN has been proactive in managing its capital structure, including the use of sale-leaseback transactions to supplement its capital expenditures. In the first quarter of 2024, the company received $16.9 million from the sale and leaseback of three properties and $4.9 million from the sale and leaseback of equipment. These transactions have allowed NN to repay a portion of its outstanding Term Loan Facility while maintaining positive free cash flow.

Looking ahead, the company remains committed to maintaining a disciplined approach to capital allocation, balancing growth investments with debt reduction and shareholder returns. NN's focus on operational improvements and commercial momentum is expected to drive further enhancements to its liquidity and capital structure over time.

Risks and Challenges

While NN has made significant progress in its transformation, the company still faces several risks and challenges. These include ongoing macroeconomic uncertainties, such as inflationary pressures, supply chain disruptions, and labor shortages, which could impact the company's end markets and operations.

Additionally, NN's reliance on a limited number of large customers, some of which are not party to long-term agreements, presents a risk. The company's ability to successfully integrate and execute on its growth initiatives, as well as its continued efforts to optimize its operational footprint, will also be critical to its long-term success.

Conclusion

NN, Inc. is a diversified industrial company that has been undergoing a significant transformation under the leadership of CEO Harold Bevis and COO Tim French. The company has made substantial progress in improving its operational efficiency through continuous improvement initiatives, which have driven a 20% increase in its trailing 12-month adjusted EBITDA.

Alongside these operational enhancements, NN has also been accelerating its commercial momentum, securing $80 million in new business awards over the past 8 quarters. The company's focus on capital-efficient growth opportunities, particularly in the China automotive and U.S. electric grid markets, has positioned it well for future success.

While NN still faces some risks and challenges, the company's guidance and outlook suggest that its transformation efforts are gaining traction. With a strengthened operational foundation and a robust commercial pipeline, NN appears well-positioned to deliver profitable growth and enhance shareholder value in the years ahead.