NNBR: UPDATE: The company released 2nd quarter earnings which were below our estimates and provided business updates and a revised outlook.

By Thomas Kerr, CFA

NASDAQ:NNBR

READ THE FULL NNBR RESEARCH REPORT

NN Inc. (NASDAQ:NNBR) reported 2nd quarter financial results on August 4th which were mostly below our expectations. Sales increased 1.8% despite the negative impacts of product disruptions and China pandemic shutdowns. There was strength in the Power Solutions segment with sales up 5.6% from the prior year primarily due to pricing actions and higher volumes in electrical components. This was partially offset by lower volumes in the automotive and aerospace end markets. In the Mobile Solutions segment, sales declined 0.7% due to lower volumes in certain end-markets such as automotive. Total revenues were $125.4 million compared to our estimate of $135.5 million.

Adjusted operating income was essentially break-even for the 2nd quarter compared to $3.2 million in the prior year period. This was due to ongoing inflationary pressures, supply chain issues, and labor shortages. In the Power Solutions segment, adjusted operating income was $4.6 million compared to $5.7 million in the prior year period. In the Mobile Solutions segment, adjusted operating income was reported at $2.6 million compared to $3.3 million in the prior year.

Inflation continues to exceed company expectations and NN believes the impact in the 2nd quarter may have been in the $3-$4 million range. The company has held pricing discussions with many of its customers recently which should be recognized in the second half of the year. The Covid-19 closures in China during the quarter negatively affected the company’s operations in that region by approximately $3.6 million in sales and $2.6 million in EBITDA.

Adjusted EPS was ($0.09) compared to our estimate of $0.01 due to the items mentioned above.

In Power Solutions, net sales for the quarter were $52.0 million compared to $49.3 million in the second quarter of 2021, an increase of 5.6% or $2.8 million. This increase was the result of increased electric component sales, which were up 15.6% year over year primarily due to higher customer pricing to recover inflationary costs and improved volume. This was offset by lower sales to automotive and aerospace / defense customers. The decrease in adjusted income from operations was primarily due to inflationary costs which were not fully recovered from price increases, variable cost inefficiencies associated with supply chain disruptions, and uneven customer ordering patterns.

In Mobile Solutions, net sales for the second quarter were $73.4 million compared to $73.9 million in the second quarter of 2021, a decrease of 0.7% or $0.5 million. The decrease in sales was primarily due to lower European demand, which was impacted by the war in Ukraine, Covid-19 pandemic interruptions in China and unfavorable foreign exchange effects totaling $0.5 million. The decrease in adjusted operating income was due to lower volumes as well as increased material and other inflationary costs which were not fully recovered from pricing actions. In addition, variable cost inefficiencies associated with supply chain disruptions and uneven customer ordering patterns negatively affected operating income.

The outlook for the Power Solutions segment remains strong. Demand for electric control panels is expected to regain its strong growth trends by the end of 2022 due to ongoing growth of end-user industries and companies investing in making operations more efficient and productive. This includes those companies involved in upgrading the national electric grid. The global market size for battery electric storage is also expected to be a strong growth driver and is estimated to increase from $10.9 billion in 2022 to $31.2 billion by 2029 at a CAGR of approximately 16.3%. Commercial, private, and industrial sectors are expected to yield the highest demand for battery energy storage systems. The rising penetration of lithium-ion batteries will also create growth opportunities. In addition, expansion of infrastructure projects, along with the growth in the transportation sector, will encourage leading companies to tap into those markets.

The outlook for Mobile Solutions segment is turning positive with light vehicle production forecasted to improve throughout the rest of the year which reflects recovering markets in China and South Asia. This forecast if somewhat tempered by ongoing supply chain issues as well as possible recessionary environments around the world. Production of light vehicles is projected to end year at 81.6 million units, down 4.5 million units from original industry forecasts in early 2022. Other industry sources have advised that the auto industry is already operating at or near recessionary levels influenced by supply chain challenges, the Russia/Ukraine conflict, and ongoing COVID-19 dynamics.

The company’s sales pipeline is developing as planned with business development teams focusing on key target markets with the expansion of products into the Electric Vehicle (EV) and Electric Grid markets remaining a priority. Another positive sign is the company’s average deal size increased from $0.9 million in Q2 2021 to $1.5 million in Q2 2022 which can be attributed to high volume sales activity in Grid Storage and EV battery systems.

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