NNBR: Diversified manufacturer focused on end markets with high growth rates such as electric vehicles and electric grid upgrade.

By Thomas Kerr, CFA

NASDAQ:NNBR

READ THE FULL NNBR RESEARCH REPORT

NN, Inc. NNBR is a diversified industrial company that combines complex materials science expertise with advanced engineering and production capabilities to design and manufacture high-precision metal and plastic components and assemblies for a variety of customers on a global basis. The company has evolved from a traditional contract manufacturer to an advanced technology focused partner with its customers.

The company operates under two distinct segments that represent a variety of products and end customers. Mobile Solutions is focused on growth in the automotive and general industrial end markets. The company has developed an expertise in manufacturing highly complex, tight tolerance, system critical components. This segment currently manufactures components on a high-volume basis for use in vehicle power steering, braking, transmissions, and gasoline fuel system applications. In addition, manufactured components include use in heating, ventilation, and air conditioning systems as well as diesel injection and diesel emissions treatment applications.

Power Solutions is focused on growth in the electrical, general industrial, automotive, aerospace and defense markets. Within this group the company combines materials science expertise with advanced engineering and production capabilities to design and manufacture a broad range of high-precision metal and plastic components, assemblies, and finished devices used in applications ranging from power control to flight control and for military devices. In addition, under the Power Solutions segment, the company manufactures a variety of products including electrical contacts, connectors, contact assemblies, and precision stampings for the electrical end market. The company also produces high precision products for the aerospace and defense end market utilizing extensive process technologies for optical grade plastics, thermally conductive plastics, titanium, Inconel, magnesium, and electroplating.

The company is making a concerted effort to focus on sustainable growth markets, particularly in the areas of electric vehicle components and products related to upgrading the electric grid. According to a report by Emergen Research, the 5-year compound annual growth rate for electric vehicles is expected to be in the range of 16%-20% range and reach an addressable market of over $4 billion. The industry associated with the upgrade of the national electric grid infrastructure is expected to grow at annual rate of between 6%-10% and reach an addressable market of over $1 billion.

NN has a strategically placed global footprint with 69% of its manufacturing capacity located in North America, 13% in the Asia/Pacific region, and 9% in both Europe and South America. Approximately 75% of revenues are derived from North America, 12% from the Asia/Pacific region, and roughly 7% from both Europe and South America.

After a series of multiple acquisitions over the 2015-2018 time frame which were mostly financed by debt, the company realized that its overleveraged capital structure was hindering potential investment and growth opportunities. In 2020, the company sold its Life Sciences business for approximately $743 million in net proceeds. This medical related segment produced a variety of tools and instruments for the orthopedics and surgical end markets. The proceeds from this divestiture were used to repay approximately $710 million in net debt which significantly reduced leverage ratios which had been in excess of 6x prior to the sale.

In 2021, the company recapitalized its debt and equity structure in order to provide financial and operational flexibility. This involved a $150 million term loan, $65 million in preferred stock, and a $50 million asset-based lending facility. These transactions reduced the company's blended cost of equity from 15% to approximately 12%.

In 2022, we expect the company to generate $522.4 million in revenues, a 9.4% increase from 2021. We also expect the company to generated adjusted EBITDA of approximately $60.8 million and generate free cash flow of $17.0 million.

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