Q2 2025 NN Inc Earnings Call
Speaker #4: Welcome to the NN , Inc. Second Quarter 2020 earnings call . At this time , all participants are in a listen only mode .
Speaker #4: Later , we will conduct a question and answer session . I would now like to turn the call over to your host Stephen Poe Investor Relations .
Speaker #4: You may begin , sir .
Speaker #5: Thank you . Operator . Good morning , everyone , for and thanks I'm Stephen Poe with Investor Relations team , and I'd like to thank you for attending today's earnings call and business update .
So that's a strategic goal of ours is to balance our portfolio.
And on the balance sheet side, we did previously announced that we refinanced our Term Loan and we're now focused fully on reducing the cost of our Term Loan, as well as refinancing our preferred stock.
So overall, um, it was a quarter that was in line with our expectations. Just a few more comments on the key metrics if you'll turn the page. If you're following along to page 4,
Um, on the net sales side.
The automotive industry is obviously going through some turmoil globally and our year-over-year, uh, deviation was mainly with 1, large Tier 1 customer in Europe.
Uh, which caused the most of our sales shortfall over 100% actually.
But the offset it, we did. We have launched over 70 new programs year to date, and have more to go. And we're, we have a slide on that, uh, to show you here in a minute.
And on the gross margin side. How are we doing that? We're really putting in place a 1 team sour approach and sharing people across plants and across functions.
And we continue to have really good operating performance on time and complete with minimal quality problems. So that really lets us run the plant in an efficient manner and Tim's going to talk about that a little bit further.
We do have a program in place to increase our operating income and and we're on track with it and it turned in almost 5 million dollars in the quarter.
Adjusted Eva. Um, we continue to increase and we've increased here over the last 2 years and year to date. And it's really driven by a focus of our sales portfolio.
Rationalizing, undesirable business and going for more Tam of good business and continuous cost outs.
Our, our IBA de margins adjust cbda margins as a percentage of sales for almost uh, they were up a 100 basis points over prior Year. We're on track for our 5 year goal.
Working capital has been sticky for us. We've been getting our unit volumes down, but our balances are being impacted by metal price escalation. Gold, silver, steel, aluminum, copper— all of our metals were up. And that's primarily what we buy; we buy metals and make products from those metals. As a result, we have higher balances that have kept the numbers kind of sticky, even though we've become more efficient.
As a percentage of sales, we've decreased it to 20% and we have plans to further reduce it.
And we're on track for Guidance, with new business ones and have some stretch goals inside also in a couple areas.
On the next page, I just wanted to talk about our markets for a minute. We serve 5 primary markets.
Um, the passenger vehicle Market is 39% of our revenues. I mentioned overall globally. Uh, light vehicle production is flat, but there's moving Parts in the countries and amongst the OES
And a and a decent amount of cloudiness or uncertainty with the tariffs vehicle affordability, High interest rates, fading electric vehicle incentives and the emergence of China as the global exporter of choice.
Most analysts in the industry predict a continuation of a flat Market in the second half.
Um, the Trump Administration also has announced proposals to end a 16-year focus on fuel efficiencies and subsidizing EVs.
And what that has caused to happen in the industries that that this industry is that ice, internal combustion engine has resurged in prominence.
And many of the oese and tear 1's have kicked off next Generation, programs to keep up with the Joneses. So the, uh,
The idea that ice was going to fade into the sunset is now being rebalanced and and amongst the powertrain choices and that rebalancing is good for nn.
And our Outlook is consistent with the analyst outlooks for our industry.
second biggest Market is the United States GDP, linked businesses
Lasers, that kind of thing.
And it's really tight.
Tied to GDP, there was a week, first half, that was impacted by trade uncertainty.
Um, there has been a rebound in the second quarter. Analysts are unclear what the full impact of the tariffs is going to do to the economy.
Um generally speaking, it's not positive though. It's it's a mute it's muting of demand.
Our base business is GDP linked.
And we are supplementing our base business performance with our new business program.
To, to be able to offset or add to whatever the base business does.
Third, third Market is electrical grid and distribution really. Um, it's been impact of a modestly by what's been happening in the United States with primarily served that market in the United States.
Um, but if you look at some of the public filers, they're doing okay in this Arena because data centers
Are surging and strong for for everyone and and including us. So we're benefiting from that.
Our, our fourth markets, commercial vehicles.
Um on on Highway and off-highway at North American industry is down year to date and expected to be sequentially down a little bit more in the second half and the end to the first half of next year.
Freight capacities are beginning to balance. And again, the US EPA has announced proposals to stop commercial truck, greenhouse, gas, reduction, efforts.
Um, our commercial vehicle business is actually up.
Uh, in this down market and it's because we're very focused on fuel efficiency. And those are the engines that are going into the vehicle that are being bought.
And then medical equipment surgical tools that the market, we re-entered, uh, about a year and a half ago that the base Market is growing in our participation in. It really is much much higher than market growth, because we are trying to build back positions for metal parts.
Um, and have a recently added more talent to do that.
So overall, the our markets, um, are okay.
there's uncertainty in the global vehicle Market, but
we're in China and participating in in the China Resurgence, while other markets are suffering a little bit. So overall, I'd like, I'd just like you to to have a takeaway here that our markets are going through some changes, but overall are are doing okay.
On the on the next page I'm going to turn it over uh to Tim to talk about for just a minute.
Thank you, Harold. Good morning, everyone.
I'll walk you through our transformational programs and the steady improvements to the financial performance that has been the result.
1, critical area of focus in the multi-year transformation has been to grow our profits, on our existing sales, through stronger, cost reduction initiatives, resulting in an overall lift to the margin of our business. Our initial Focus was identifying sales that have historically diluted
Our profits led to the rationalization of some business operations and ultimately the closure of 200 performing facilities, duac and Wares.
This and other overhauls have resulted in a much improved fixed and variable cost structure, which will begin to have an even more pronounced effect. When our Top Line begins to meaning flow, meaningfully reflect, the continued ramp up of new business programs 1 over the trailing 2 years. When you're looking at slide 6, uh, We've provided charts on the 2 main categories that we track most closely, adjusted gross margin and adjusted. Even down margin both of which have shown consistent and steady improvement over the last 2 years.
We launched our transformation program. Mid 2023 completing that fiscal year.
With 16.3% adjusted gross margins year to date our 18.2% adjusted gross margin is an expansion of 190 basis points.
We'll continue to focus on further margin expansion as part of our longer term plan. We have an internal goal to achieve approximately, 20% gross margin which based on our current results we believe is uh, achievable
Our adjusted Dom margins have also seen meaningful improvement over the same time frame. Margins have expanded 230 basis points year-to-date and over 11%.
We expect to continue our strong. Cadence of improved margin capture in the back half of the Year particularly as we begin launching additional new business programs and enact additional cost measures at both the plant and corporate level.
We remain on track with our stated multi-year, goal of achieving 13 to 14% adjusted Evita margins, which is an increase from previously stated objectives.
On quality, which NN is known for. We've also initiated a 1 team approach across the facilities. This is the implementation of
a shared operational structure moving away from Standalone, teams were practical. This program has been instrumental as we continue to focus on cost reduction and optimization since June 2023. We reduced our staffing by more than 600 or approximately 20%. However, this is not exclusively about reduction, although we reduced by more than 700. We also strategically added approximately 80 people. In those areas, we are seeing the most growth and also increase our talent base in areas of the company such as sales and Engineering. The focus is to improve the overall strength of that
As mentioned earlier, we rationalized our operational footprint with the closure of DAG and Wares.
Manufacturing operations concluded this calendar year, with a portion of the business being redistributed to our Marshall and Wellington facilities.
These results demonstrate the early progress. We've made in improving our operations, lowering our overall cost structure and setting forth a stronger pathway for improved profitability and sustainable value creation.
With that, I'll turn it the call over to our CFO, Chris Bonner, and we'll walk you through our financial performance for the quarter.
Thank you, Tim. Good morning, everyone today. I'll be presenting information on both a gap and pro-forma basis to provide transparency into our operating results. Due to the changes such as the sale of the Levick facility last year and the exit of certain unprofitable business. We hope this presentation will be indicative of how we're making decisions to transform and and over time
So with that, I'll start on. Slide 107 a little detail. Our financial results for the second quarter. This slide shows our as reported Gap and non-adjusted numbers on the left side. We again lined out the proforma adjustments to our quarterly results in the table, in the Middle, with our quarterly ProForm results on the right side of the table.
the ProForm adjustments include last year's contribution from the levik plant, which was sold in early July 2024 rationalized sales volumes and the impacts of foreign currency translation uh year on year last year's second quarter included 5.9 million of net sales, and 0.9 million of adjusted ibida associated with the Levick plant business,
Strategically rationalized volumes of unprofitable business that totaled 5.6 million in the prior year period and about 900,000 of impacts from foreign currency translation versus last year's exchange rates on an as reported basis, net sales for the quarter were 107.9 million declining about 15.1 million versus last year's. Second quarter on a pro-forma basis accounting for the adjustments. I noted earlier net sales modestly declined 2.4% or 2
.7 million.
All right adjusted operating income for the second quarter was 4.9 million marking a strong increase of 2.8 million compared to the 2.1 million in the prior year. Second quarter on an on an adjusted. Proforma basis, operating income increased 3 million
Adjusted effort results for the quarter were $13.2 million compared to $13.4 million in the prior year period on a pro-forma basis, inclusive of the impacts outlined. Earlier, our chest increased 6.5% or $0.8 million compared to the prior year. In the second quarter, we have been able to continue driving improvements to our profitability through solid operational execution and transformational actions taken to improve our returns.
These effects were further evidence, in our just, even a margin performance as margins of 12.2% of net sales, expanded by 130 basis points on an as reported basis and by 100 basis points, inclusive of pro-forma adjustments.
I'll now turn to some discussion on our segment results. Starting in slide 8.
And our power solution segment where our business consists largely of stamped products. Net sales results for the quarter over 44.6 million down 5.5 million compared to 50.2 million in the prior year period. Primarily due to the sale of the Levick operations in 2024, lower volumes and unfavorable foreign exchange effects of about a half million dollars.
These 3 decreases were partially offset by higher precious metals passed through pricing when compared on a ProForm basis. Excluding the contribution from levik the first quarter, net sales increased 1, million or 2.3% as noted in the charts on the right.
Power Solutions, sales reflected steady, unit volumes supported by higher precious metals pricing. We expect demand in our stamp products. Business to be similar to what we've seen thus far in the first half of the year. And this is reflected in our net sales current Outlook
Of Love's contribution and some unfavorable mix on a pro forma basis, our Power Solutions, adjusted, our results, grew 0.5 million, or 5.8% compared to last year's second quarter with strengthening profitability, through effective cost controlling actions and improved margin mix.
As a function of this improved adjusted outlook, we've seen stronger margin pull-through, with quarterly adjusted margins representing 20.4% of net sales, up 70 basis points versus the prior year period.
It's also worth noting that during the quarter, we bolstered our Power Solutions, sales team, strengthening it with additional sales, Talent with industry, expertise, and thus far, we have seen immediate increase in our new business pipeline for industrial stamping. Our team is a cheap multiple new wins this year through July. A number of which have immediate launches this year, in order to support our continued progress and new business growth. We have been strategically investing our capex to continue this pace as we go forward.
And enable future, uh, further growth.
now turning to slide 9, our mobile solution segment which covers our machine products business, net sales for the second quarter worth 63.4 million for the period compared to 72.9 million in last year's, second quarter,
That sales comparisons were impacted by rationalized business, slightly lower Automotive, volume, and unfavorable foreign exchange effects of 2.2 million dollars on a ProForm basis. Net sales of 63.4 million were down 3.4 million or 5.4%, compared to preform and net sales of 67 million in last year's. Second quarter. The decline was driven strategic by strategically rationalized sales volumes and by softer than anticipated, concentrated, primarily at 1, Global Tier 1 customer.
This softness was partially offset by new program launches and ramp UPS during 2025.
Our second quarter adjusted, but on the mobile solution segment was 8.6 million up, 0.4 million from last year's, second quarter on an as reported and proforma basis. This slight year-over-year growth, reflects the impacts from rationalizing sales. That carried a negative ibida impact in 2024.
Our focus on cost out actions and the ongoing reprofiling of our sales, mix drove a notable increase in our just even a margins. Which climbed to 13.6% marking a 150 basis point increase year-over-year. The margin expands ported by the right sizing of our cost structure.
Looking ahead, our new business momentum remains strong at mid year. We secured 29 million at new new Awards across a number of individual programs, spanning Auto medical electrical Industrial and Commercial Vehicle. Our 380 million of new business pipeline. For the segment continues to reflect very solid opportunities. Going forward. Additionally, we are enhancing our commercial programs with some key developments. We're nearing the necessary certifications to manufacture medical, and medical technology products at our Kentwood Michigan Plan, which will further strengthen our ability to achieve new business and grow. As we expand in this market, we're also installing additional new Machining centers for dedicated Medical Products. Bringing our total number of dedicated medical Parts machines to approximately 60
Consistent with our strategic growth efforts. We we continuing to reinvest our cash flows into growth into this segment as well with that. I'll turn the call back over to Tim Tim Tim
Thank you, Chris.
Slide 10 highlights the success of our new business, win program and gives insight into our program launch sequence and its impact on mn's Top Line.
2025, we anticipate launching approximately 112 new programs with approximately 70 programs launched year to date.
These programs are forecasted to contribute approximately 26 million to our 2025 Top Line and an estimated 48 million in annual revenue at Peak run rate.
Our new business continues. Our new business wins continue to expand year to date. We have increased our cumulative wins to approximately 172 million
To support this growth, we have made significant capital investment globally. We've invested in dedicated equipment for medical, as well as the China Auto markets. In addition, we are actively. Relocating capacity from previously. Rationalized audible Automotive programs to meet upcoming industrial demand. In addition, the pipeline has grown to a solid 750 million. This is driven by our approximately 40 people in sales and engineering and is perfect for us to continue to drive, to our goal of 200 million in cumulative, new business wins.
With that, I'll turn the call back over to Harold.
Thank you. I wanted to point out that during the quarter. We made a a commitment to increase the amount of people that we have in the specialized areas where we're trying to grow disproportionately higher.
Sir, Tim Arrow.
Tim and I worked uh, together previously in our prior life. I I some of you might know I had a 2-year non-compete non-, higher non-solicit.
Kind of stand still that ended.
And in this quarter. Um, I behaved appropriately and hired Tim and Tim has already hit the ground running. He's brought in some new people already. He has an electrical background um and entered 8, new markets when he was at CVG and we worked together there.
He he's uh really excited to be here and brought in 2 top people with him day 1 and we had an acceptance of a engineering manager yesterday who has an electrical and medical equipment background.
So, we had in the quarter, we have a new a subsequent. We had a new CCO, a new CTO 2, new account managers with electrical backgrounds and a new account manager for medical looking for 1, additional medical and 2 account managers in the stamping business.
So, a new thing I wanted to say regarding the future for us, as it were, is that we now have a core team who understands electrical cable assemblies. We are evaluating an organic entry into that market, just as we've done for medical products. Some of you may know I was previously the CEO of an electrical harness business, so we have a core team here.
Um, and that will really help us with our forward growth objectives.
I'll now hand it over to Chris who will give an update on our Outlook and guidance,
Thank you Harold. Uh, we're reiterating our guidance, uh, for the remainder of the year, uh, on slide 12. So, net sales were still expecting in the range of 430 to 460 million.
Uh, Jesse, but uh, of 53 to 63 million. Uh, however, we are leaning toward the lower half of the range, uh, on both. Those guidance guidances new business wins again. No change. 60 to 70 million, and free cash flow of approximately 14 to 16 million. That does include the cares act refund, as well as our investment of approximately 18 to 20 million and overall capital investment.
So, it's obviously reflecting on uncertainty from some of our top customers that we're hearing in the marketplace, as well as the unstable macro and economic environment. But we are holding our guidance at this point.
With that. I'd also like to comment that we are uh, planning an investor day in December 2025 and we'll look forward to uh,
Putting out some more information on the exact date and time of that investor day.
With that, I'll turn the call back over to Harold.
Thank you and Paul operator. We're now ready to receive any questions that people may have on the phone.
Thank you, sir.
At this time, we will conduct the question and answer session. If you would like to ask a question, please press star 1 on your phone now and you will be placed into the queue in the order received once again to ask a question. Please press star 1 on your phone now.
And our first question comes from Rob Brown of Lake Street Capital.
Uh, good morning, congratulations.
The progress.
Thank you, Rob.
Uh, first time kind of the new business win, uh, activity. Uh, could you remind us again in? Kind of the incremental margin that, that, that group of of wins has over your base and and then maybe some of the highlighted, some of the verticals you were seeing. But but what sort of the kind of the impetus to some of these new winds in terms of ability to to kind of take share in those markets?
Yes, so for new business wins with. There's a few categories 1 is if we have existing open capacity
Uh, and our costs are fully covered in the plants.
And we price that to win. Um, we'll go down to 15%.
On on that type of a business. The second category is
if we don't have open equipment then that those quotes usually have to bear the brunt of an equipment charge in an ROI analysis.
And for any new Investments, we have our floor at 25% Roi.
Um, for the Investments, any exceptions to that. Um, Tim myself personally have to bless them with the teams. We've had a couple of exceptions
Um that actually did not end up being wins in the end. Um so the in terms of the win basket that we actually have
Points on the ebitda line overall.
in terms of the areas where we're trying to get after Rob, we have
It it's also in a couple buckets. If we have open capacity to serve a certain Market, we're we're trying to get more of that type of business.
And differentially, we're trying to grow faster in electrical and medical.
And we don't necessarily have a lot of open capacity.
Um, for that. And so that has led us to add equipment.
And B, very deliberate uh about our quoting and our our activities, Tim maintains a 12 quarter forward. Look at Capital
Um, that's TI Tethered to our growth program. And so to some extent um we have Capital spending boundaries around the new areas.
Okay, great. And then, um, you know, appreciate your comments and the auto market uncertainty. But but on the, um,
On the electrical market and and some of the grid and data center uh markets. You know, what do you sort of seeing there in terms of um uh growth opportunities and demand uh changes.
Yep. So we we are a big big supplier to cumins and if you're if you follow cumins at all, they have several segments of their market and 1 of them is power generation.
um, and we, we are participating in
Their good business growth that they're having which is approaching 10%.
And then on the distribution and the control side, we participate with people like Siemens Square D. Uh, circuit breaker type of contacts. And we have a product mix. That's a skewed, towards residential, the smaller type of circuitry versus the higher voltages,
So, on the residential side, it's been a little soft and home building in the United States.
um, so our
Distribution and control customers are kind of flat-ish on the on the power generation side where we directly participate in that.
um,
We have been growing.
So, um, overall, it's a growth area for our company.
Okay, thanks for the color. I'll turn it over.
Thank you.
Thank you. And our next question comes from John, Franzreb of Sogdian Company.
Uh, good morning. Good morning. Thanks for taking the questions.
Um how I guess I like to start with the guidance, you know, the first half.
Kind of suggests that, um, you need to, you know, generate better revenues in the second half than you did in the first, which I just want you to maybe bridge in light of Chris's comments about the stamp being kind of similar in the second half versus the first. What are the key drivers to make that lower end of the revenue guidance?
Yeah, so we expect our base business to perform.
consistently in the second half with the first, we're going to be benefiting though from our new business launches
And if you look at that on page 10,
That's quarterly Revenue contribution so we we will be progressively benefiting from the cumul, accumulation of the launch program. So we're counting on those programs, not getting pushed out John.
So, this is based on the dates that we have. It's possible that if people get nervous, they can push out launch dates on us. And we've had a little bit of that this year, which we commented on last time.
Um we're not counting on a rebound uh and and any markets per se or we're counting on a continuation.
Of current events, and that's pretty much what the public filers are saying. Uh, it's really an automotive comment.
Uh, given that that's a big part of our Revenue Pro profile. So we've read what GM, Ford, Tesla, BYD.
um, all these people are saying and they're expecting that the uh the difficulties are going to be just a little bit harder in the second half due to having
a full half of tariffs versus and the and the first half it was mainly the second quarter.
um, and so
We are counting on similar um base markets added to from our new program launches. So that's what it takes for us to hit the the guidance.
And, uh, we did add some commentary in the earnings release around macroeconomic events. It could be impactful to our estimates as well.
Okay, I just wanted to make sure I know what the bridge was there is going to be new product introductions.
Um, yes. To support that, it looks like there's going to be a meaningful step up in capital expenditures. We did $7.6 million in the first half, but, um, you still got $18 to $20 million. Is that all support for new programs, or is there anything else in that number?
Yep. Tell me you want to take that 1?
Sure sure uh thanks John. Uh the bulk of it is in new new business programs. It's to support the growth. Obviously, there's always going to be an element of of regular capex investment. That the vast majority of it is to support the growth.
Good understood and, um, I didn't hear any commentary maybe, um, an update on what we call the group of 5 now Tim, you know, how, how, how does, how do those? Um, facilities stand as far as profitability contribution relative to expectations, uh, they remain on track. They, um, we're, we're still dealing with some volume, uh, requirements within the Wellington facility, which was 1 of the, the group of 7. Um, 2 of them, obviously, we were part of the rationalized. So that's what makes them the group of 5 as you mentioned now, but no, they're all on track to be, uh, profitable to share.
Be a run rate profitability in Wellington by the end of the year and profitable at all the remaining ones.
Okay? And, and 1 last question, I'll get back into queue. Um, you're entering the, uh, electrical wiring systems Market. Um, is there a specific End Market that you envision that provides an opportunity for you? Um, or just dipping your toes in right now? To see, I don't know where the your competitive Advantage may be
Well.
There, there are several niches that are differentially better.
Um, we are, we are itar certified. So we're we're certified defense contractor. We're ATF certified.
um so we have some unique sort of where FDA certified we have some unique certifications here as a company, and we have not
um we're evaluating this right now and so we don't we haven't determined a launch plan yet John
Okay, I was trying to figure out. Thank you. I'll get back into you.
Thank you.
Our next question comes from Mike Crawford of B. Riley Securities.
Um, thank you. You talked about your step change and on-time delivery. Can you just go into some more specifics regarding prior performance in that regard and what you're achieving now?
Well, I'm
I'm assuming, Harold, you'd like me to take that one.
Yes, please.
Um, early on. And we've talked about this on on earlier, um, earnings calls. Uh, we were, we had read scorecards with multiple customers, uh, going back as little as 18, 18 months ago, 18 to 24 months ago.
and those are usually predicated on, um,
Less than Optimum optimal, uh, on time, delivery and in full. And it also prevents you from being awarded new business wins with if those organizations and and
Uh a compounding factor of it is increased past due backlog. So we focused extend extensively in that area, uh, over the last 18 months. Uh, reducing the backlog significantly, increasing our on-time delivery. And what it's allowed us to do is we now have green score cards with all of our customers meaning that we are, um, in a supplier in good standing and in some cases, uh, identified as a preferred supplier and that allows us to, uh, be awarded new business, which is help, which is helped open the door for our new business Quinn's program. So it's, uh, we we've addressed it, uh,
In Prior calls, but it was basic blocking and tackling, uh, focusing on on the, the issues of the day to make sure that we achieved the goals that the customer is looking for. But, uh, it's been very successful so far and now we're, we're, uh,
A supplier in good standing across the board with our customers.
Okay, thank you, then.
just regarding,
The 60 dedicated medical machines, are any of those in Kentwood just waiting certification there? And then kind of related.
Is there a way to think about potential?
Revenue per machine, including by in Market, if that makes a difference.
Medical. But there are several machines sitting in Kentwood that are waiting certification, but they are dedicated for medical. Uh, if you remember we talked about our investment in the 9-axis lathes 1 of those went to Kentwood as well. Um,
as far as identifying the equipments for the market, the equipment, the reason why we're segregating medical is, you have a different requirement as far as cutting fluids.
Um, cleanliness and and isolation from the rest of the building. As far as the remaining equipment, we don't isolate it by market. We isolate it, or we identify it by capability whether it's a milling machine or a lathe. So the all the equipment is really has got potential to supply multiple markets, uh, but segregating medical is strictly because of the 1348, requirements for the certification, the ISO 13485 certification requirements,
I'll add on to that. I think I know what your question is, Mike. We have those dedicated machines in Attleboro and Kentwood.
Um, we have a couple that arrived in the quarter, too.
They're currently going through final check offs and and machine approval. So they're not producing uh production for us yet. We run 1 shift.
The business right now is a $15 to $18 million run rate. So, a two-shift operation is normal for us. So right away, just in terms of normal, we have...
Double the amount of sales possibility there, 30 to 35 million.
Um, and then we have the two high-speed machines, which haven't started yet. So I'd say, Tim, probably $40 million of capacity right now.
Um, running 15 to 18 and we're building dedicated pipelines for those new machines.
Um, specifically targeting robotic surgery equipment.
Yeah, as far as available capacity. Yeah, the the 40 million is easily achievable with the equipment we have.
Yeah.
Okay, just two more quick ones for me. Um, one is, is there a specific time you expect to get this tax refund, and what are the...
You know, risks or probability that, that doesn't happen.
Chris has a good update for you.
Yeah, there is a good update. Um, we did get a letter and notification from the IRS that uh, our tax returns have been completed. And uh we expect that refund here in the next few weeks. Uh we did get 1 letter that confirmed 1 year, we're waiting on the second letter, so um things have actually progressed quite a bit in the past few weeks.
Great. And then finally, we got
We did get a, we did get a communication this week that for the first return, which was 6 million bucks.
We got the
The comical. The check is in the mail, uh, email. So
It's imminent. We expect it in this quarter.
Okay, great. And then final one, um,
for me is,
Uh, is there any?
Specific.
Things you need to execute on.
Given this decision to uh look at the electrical harness Market. In addition to you know, this motion towards Medical
Is the question I have to do, are you want what wearing a wondering about our capacity and Equipment Mike?
Well, I mean you're I mean, I think your, your quote is that you're evaluating an organic entry into this new market, right?
Right. So that would be the type of equipment: Comax wire strippers, wiring boards, termination equipment. It's very, very...
Um, affordable compared to the machining centers that we buy that cost a million dollars each.
Um, it would, it would be remarkably higher Roi than entering medical the medical entry.
Um, it's based upon high-end machine parts.
and um, and has
is largely requiring us to buy new.
Really good equipment to be equivalent to the competition. As we enter that market and on the harness side. The, what it's needed to be equivalent to the competition is much lower cost. We have the factory Footprints, we need
And now we do, we have a full electrical team here and, um, we, we hired it during Q3 basically so subsequent to the Q2 end.
Um, and so we we intend to do it, we're not. I can the John asked a question about what markets? Are we looking at? I can tell you we're not looking at Automotive, um, we're looking at other markets that are more nichy and will give us the returns we want.
Necessarily be itar and like data center focused.
Yeah, data center defense.
Medical.
Some off-road or commercial vehicles, low volume.
Um,
hard to make kind of products where you need a team that knows what they're doing and and we have a veteran team, we've pulled in 1 of the account managers that we just hired worked for 26 years at active.
so,
we're we're bringing in people that really know what they do, what they're doing and Engineering as well as selling so,
Um, we look forward to reporting on that progress as we make it.
All right. Thank you very much for that, Mike. We're looking at M&A.
All right. Thank you.
Thank you. And as a reminder for our audience, if you would like to ask a question, please press * and 1 on your phone now.
And our next question comes from Hans Baldo of noble Capital markets.
Hi, I'm on for Joe. Thanks for taking my question. Um so you know the press release that the m&a program has been kicked off. Can you provide a little more color on that?
Yes. Um, we are being very... I'm leading it myself personally.
Um we're being very specific with the type of Acquisitions. We're looking at we have several active processes underway.
um,
a couple of the companies were for sale and had processes and a couple of them were not for sale, but we approached them.
We are looking to advance the strategy that we're on.
So we're not looking at anything.
You know, odd or weird that hasn't been in the dialogue. We're around our company.
And we are serious about it. We the board is very focused on this too.
We are are a big goal. We have on the balance sheet is to refinance our preferred stock.
And um, we need a little bit lower leverage to do that. So we're we're been looking at areas where we have synergies.
Um, that are immediate and natural because of the commonality and redundancy between the companies.
So, synergies are important here. Um,
And we have several that make sense.
Our main Term Loan supplier partner. Excuse me is uh Marathon Capital. We've been very open and transparent with them.
and so,
It's a very active process, and we're very...
Much focused on having outcomes here.
You know, within a few quarters. So
um,
it's going to make us a bigger and stronger too, you know, the way that we feel about what we're doing here at the companies in 3 phases. The first phase is really to fix fix the core business and then that we're kind of entering that second phase of scaling up.
And, um, growing and this is going to be a nice growth year for us. If you you can see from the launching the new business program from winning business, uh, previous year,
and then the third phase is optimizing the portfolio so we're really entering that second phase of scaling up growing and refining the preferred stock and
um,
I'm spending a decent amount of my time on it and then dragging Tim into it to do the plant operations and then Chris to do the pro forma financial business models. So I can tell you that we're, it's not a casual comment. We haven't bought a company in 6 or 7 years here.
So, um, it's a new effort here at the company that we've launched.
Okay, great. Thank you very much.
Can you talk about what was driving that like timing cancellations?
Yep, we've had some push outs.
The the the automotive and the automotive Arena.
uh, so
we haven't had cancellations but we have had push outs and that's that's mainly what it is. Pushing into the beginning of 26.
Okay, great. And then lastly, you mentioned that the China operations are going well. Can you add a little bit more detail on that?
Yes we we're a a main partner to the tier 1's in China. Both the Chinese ones as well as the multinationals in the country and then we're serving byd directly.
uh, for striking and uh the China auto market is very
Uh, fluid also. And there's over capacity, really? For the amount of, of car makers that are in the country.
Uh, we're camped out with a couple of topics: what's called Coe CMS and China, tier 1's.
And byd is competing based on features.
Um, and the big feature we're talking about is rear-wheel steering.
Um, we're all wheel steering.
and so,
They are trying to win the battle not on who can have the lowest price but who has the best features best value if you will with features of their feature oriented?
And so it has caused us to bring in new equipment.
Or leasing equipment. The the guidance that Tim gave on 18 to 20 million,
Uh, it involves a decent amount of leased equipment. We can lease equipment for 7% to 8%.
Um, that is very favorable compared to our Term Loan, uh, interest rate. So, um, we're not we're not paying cash. Uh, for all of this equipment, we're leasing also and we still have lease capacity and and it continues to build back as we advertise our leases. So,
Um, leasing is a big part of that and in China specifically we can lease equipment for 3%.
So um, we're funding the growth locally either cash capex or lease capex. It's focused in on the the highest end parts that we can make, which is steering and braking.
Um so that's that business is going well, it's it grew in the quarter year-over-year uh about 6%.
And um and we won new business in the quarter, so our China business is quite healthy.
Great. That was very helpful. That's everything from from me. Thank you.
Thank you.
And our next question comes from Barry Haynes of Sage Asset Management.
Uh, thanks very much for taking the question. Um, I had a question on the new business pipeline and, uh, in terms of of what you're seeing. So, you know, we had, you know, reassuring before the Trump tariffs, and then, of course, we've had the Trump tariffs. And everybody is rethinking their supply chains and, and, uh, a lot of companies are trying to
Move things around and and some to the US. So I'm just curious, you know, if we were to
Look at your opportunity set. Now compared with, you know, 3 6 months ago, just kind of what you're seeing given all the the turmoil and supply chain worlds. Thank you. Yep, Barry. That's a good question. We originally had a page in the deck on that. Um,
And, and pulled it. We didn't know if there would be interest on it, but it is exactly what you're saying that we initially, when the Trump administration came in, kind of had a flurry of what we called tariff RFQs.
Of people just trying to get their options lined up in case they wanted to change their supply chains, not too much happened.
Uh people were eating tariffs and whatnot. We as a company, have pass through agreements commercially. So we're not being stung by that, but we have a little bit of a timing thing of of scooting it along. Uh, in the quarter. In the second quarter. For instance, we took a little bit of margin compression because we had a a decent sized customer who would not agree to the Tariff pass through until Q3. So a little bit of a timing hit.
Um but now on the rfqs, you see people are getting a little bit more.
I'm solid in their opinions about what they need to do in order to.
Uh, make the most money in this tariff environment. And there now are...
pretty decent sized rfqs that were participating in.
And then um, European customers who are trying to lower their cost of production, by moving Supply chains to China.
From Europe. So we have a decent amount of rfqs that are from in Germany.
Um, where traditionally we would have quoted on those out of our France and Poland, plants. They're saying, hey, we would like to see what it is, um, getting this from China because they don't have the Tariff barriers that are happening in the United States and then in the US,
and in Mexico,
We're seeing opportunities to bring in imported parts and make them in the U.S. or Mexico. And we can, excuse me, in the U.S. or Mexico, and we can do either.
It's lower cost to make them in Mexico.
Um, so it boils down to what the end customer wants to do. But we have quite large RFQs right now; it's helped.
It's helping bring opportunities to our prospecting, it uh especially for automotive.
Great. Thank you so much. Appreciate it.
Thank you.
And at this time, we have no further questions. I will now turn the call back over to your host for any closing remarks.
Thank you, I appreciate it. And thank you for the good Q&A that we had here today. Our companies are quite, uh, optimistic about our future. We have a decent amount of one business that's not yet launched and not included in the figures we've shown you. So we have another batch on the way that we're readying for launch in Q2 2026, and we already have a good carry-in for Q2 2026.
Um, the base markets that were in are kind of flat and nervous, uh, but we're using the opportunity to have a to, to accelerate our new business program hire. People spend a little bit more money, not a lot, mainly leasing. Um, but to accelerate the transformation plan of the company, and our transformation plan remains intact. We're not deviating from it. Um, and it's working fine for us. And we look forward to speaking about our progress. In the next call, thank you for spending some time with us this morning.
And this concludes today's conference call.
Thank you for attending.