Sunday, May 6, 2018

A current AIM Program Small Cap Equity Holding: NN, Inc. (NNBR) by: Alec Jensen. "New Life through Life Sciences"

NN, Inc. (NNBR, $21.80): “New Life through Life Sciences”

By: Alec Jensen, AIM student at Marquette University

Disclosure: The AIM Equity Fund currently holds this position. This article was written by myself, and it expresses my own opinions. I am not receiving compensation for it and I have no business relationship with any company whose stock is mentioned in this article.


NN, Inc. (NASDAQ: NNBR) designs and manufactures high-precision metal and plastic components and assemblies for various end markets across the globe. NN, Inc. has three business segments: Mobile Solutions (51% of revenue), Power Solutions (28% of revenue), and Life Sciences (21% of revenue).

• NN, Inc. recently revamped their organizational structure, gearing the company towards its new strategic plan.

• The company sold off its core business segment, Precision Bearing Components (PBC), for $375 million in cash.

• Two new acquisitions in the Life Sciences division should replace the void from the divestiture of PBC and lead to higher growth and margins.

• Debt repayment is a continuous issue for the company, especially with their history and success in acquiring companies.

Key points:

NN, Inc. has made some major changes over the past year that has reshaped and refocused the company. The company decided to create a new organizational structure (three business segments mentioned above) and relocate their headquarters to Charlotte, North Carolina in 2018. Most notably, NN had a divestiture of their largest business segment, Precision Bearing Components (PBC). The sale of this business segment, which existed since the company’s origin, resulted in the gain of $375 million in cash. Management felt that the sale of PBC was warranted and a success due to their greater ability to enter into end markets with higher margins and growth. Having stated this as their reason for the sale, NN leadership followed through and decided to acquire one company in Q1 of this year and has plans to close another acquisition in the second quarter to add to their Life Sciences segment as well.

The acquisition of Bridgemedica, LLC in February and the definitive agreement to acquire Paragon Medical, Inc. for $375 million in cash and 9.3x 2018 estimated EBITDA multiple, puts NN in position to leverage their current operating platform even more. Their Life Sciences segment operates in the medical end market, where the company expects to see around 7-9% growth. With this quick, but calculated transformation, NN, Inc. should experience significant growth in the future. Instead of being complacent, management decided to restructure the company to where they see margin improvement and better long-term success. For example, Paragon’s 2017 EBITDA was $24 million with margins at around 17%. The acquisition will be accretive to earnings and margins from day one. NN will also see a more balanced portfolio with a wider range of product offerings and a better customer mix, having no customer make up more than 8% of revenue. Given the acquisition goes as planned, the Life Sciences division is expected to make up 35% of revenue with Mobile and Power Solutions at 42% and 23% respectively.

While the Paragon Medical acquisition is in line with the company’s goals, there is still the problem of paying down debt. Throughout 2017, NN paid off some of its debt and refinanced a term loan due in 2021. Unfortunately, the company is extremely levered with over a billion dollars in debt outstanding and around $840 million due within the next 3-5 years. NN, Inc. still has time to pay off its debt, but there is a heck of a lot coming, which is definitely on management’s mind. Free cash flow will certainly improve with these acquisitions, but how the company handles this upcoming debt should be watched closely. There may be the need for convertible debt in the future to help lessen the heavy debt burden they currently have.

What has the stock done lately?

The company reported sales growth of around 35 million or 6% in 2017 and adjusted diluted EPS of $1.55 up from $1.24 in 2016. Although, the stock has not performed well recently, being down 21.01% year-to-date (YTD). With the stock currently at $21.80, it is almost at its 52 week low of $21.40. Some may see this as a buying opportunity. Others believe that NN, Inc. has some proving to do as they have plenty of debt and haven’t fully acquired Paragon Medical yet.

Past Year Performance:

NN, Inc. has experienced a decrease in the stock price of 15.50% over the past year. The stock has lagged the industrials sector as a whole, which is just about even YTD. The depreciation in share price can possibly be attributed to the sale of the PBC division, uncertainty regarding the companies they might acquire, and the issue of debt repayment.

 Source: FactSet

My Takeaway

NN, Inc. has experienced change in its core structure and made a tough, but reasonable decision to sell off their PBC business segment. The stock hasn’t performed well recently and I think that will change over the next year or so. Management knows what they are doing with these acquisitions, given their long history of them, and I believe they made the right choice with their new ones. Not many management teams are as proactive as this one in restructuring and redefining the company for the long-run. This is something that is very promising to me. NN, Inc. should experience better margins and growth with this new look, driven by the increased size of the Life Sciences segment. Given these factors, I recommend that NN, Inc. continue to be held in the AIM portfolio and monitored closely.

Source: FactSet