NN Q2 2026 Earnings Call Transcript

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Provided by Quartr
August 6, 2026

Key Takeaways

  • Positive Sentiment: Second-quarter sales rose 19% and adjusted EBITDA increased 36% year over year, with adjusted EBITDA margin expanding to 13.9%. Growth and margin improvement were driven by new program launches, favorable mix, volume leverage, and prior cost reductions.
  • Positive Sentiment: NN raised its 2026 guidance to $460–$480 million in sales, $55–$65 million in adjusted EBITDA, and $80–$100 million in new business awards; management said awards had already reached $80 million through July.
  • Positive Sentiment: The company completed a $124 million refinancing that materially reduced preferred equity and lowered annual PIK interest expense by approximately $13 million. Management said the transaction should allow more value to accrue to common shareholders and provide flexibility to fund growth.
  • Positive Sentiment: NN is seeing strong momentum in data center and electric-grid components, defense electronics, and medical products. Data center wins are expected to ramp beginning in the second half, while a multiyear defense agreement could contribute $12–$15 million and new robotic-surgery orders are expanding the medical business.
  • Negative Sentiment: The growth program will require substantial investment, including roughly 50 machines already being brought online and an additional facility of about 100,000 square feet in China. Management also acknowledged rising metal costs, tariffs, working-capital needs, and the need to refinance the existing term loan.
AI Generated. May Contain Errors.
Earnings Conference Call
NN Q2 2026
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Operator

Hello, everyone. Thank you for joining us, and welcome to the NN, Inc. second quarter earnings call and webcast. After today's prepared remarks, we will host a question-and-answer session. If you would like to ask a question, please press star one to raise your hand. To withdraw your question, press star one again. I will now hand the conference over to Joseph Caminiti, Investor Relations. Joseph, please go ahead.

Joseph Caminiti
Joseph Caminiti
Investor Relations at NN

Thank you, Christine. Good morning, everyone, and thanks for joining us. I'm Joe Caminiti with NN, Inc.'s Investor Relations team, and I'd like to thank you for attending today's earnings call and business update. Last evening, we issued a press release announcing our financial results for the second quarter ended June 30th, 2026, as well as a supplemental presentation, which has been posted on the investor relations section of our website. If anyone needs a copy of the press release or the supplemental presentation, you may contact Alpha IR Group at nnvr@alpha-ir.com. Joining us today from NN management are Harold Bevis, President and Chief Executive Officer, and Chris Bohnert, Senior Vice President and Chief Financial Officer. Please turn to slide two where you'll find our forward-looking statements and disclosure information.

Joseph Caminiti
Joseph Caminiti
Investor Relations at NN

Before we begin, I'd like to ask that you take note of the cautionary language regarding forward-looking statements contained in today's press release, supplemental presentation, and in the Risk Factors section in the company's annual report on Form 10-Q for the fiscal second quarter ended June 30th, 2026. The same language applies to the comments made on today's conference call, including the Q&A session, as well as the live webcast. Our presentation today will contain forward-looking statements regarding sales, margins, inflation, supply chain constraints, foreign exchange rates, tax rates, acquisitions and divestitures, synergies, cash and cost savings, future operating results, performance of our worldwide markets, general economic conditions, and economic conditions in the industrial sector, including the potential impacts and ramifications of tariffs, the impacts of pandemics and other public health crises or military conflicts, all on the company's financial condition and other topics.

Joseph Caminiti
Joseph Caminiti
Investor Relations at NN

These statements should be used with caution and are subject to various risks and uncertainties, many of which are outside of the company's control, which may cause actual results to be materially different from such forward-looking statements. The presentation also includes certain non-GAAP measures as defined by SEC rules. A reconciliation of such non-GAAP measures is contained in the tables in the final section of the press release and the supplemental presentation. Please turn to slide three, and I will now turn the call over to our CEO, Harold Bevis. Harold?

Harold Bevis
Harold Bevis
President and CEO at NN

Thank you, Joe. Good morning, everybody. I would like to announce that we had a really good, strong second quarter. It was consistent with our first quarter. We arranged some looks here for you on Q2 in the first half, and you can see that it's pretty consistent. Our results show significant growth across the business and the first half finished ahead of our expectations. Our second quarter sales increased 19% year-over-year. Our second quarter adjusted EBITDA increased 36%. Our first half EBITDA increased 35%. In the first half, we were able to secure $65 million of new business awards. We had profitable growth achieved across both of our reporting segments.

Harold Bevis
Harold Bevis
President and CEO at NN

Subsequent to the end of the quarter, we had a significant strategic development wherein we completed and announced the retirement of $89 million of preferred stock as part of a multi-leg refinancing. Knowing that's one of the big events that we want to talk about today, I want to address it right up front with Chris. We're going to turn it over here to Chris to discuss the refinancing on the next page.

Chris Bohnert
Chris Bohnert
SVP and CFO at NN

Thank you, Harold. Good morning, everyone. I'll begin my remarks on slide four. For those of you who've been following along on our progress, you know we've been working hard in the background to improve and optimize our capital structure. We spent the last two quarters alongside our strategic advisors, comprehensively assessing the potential options available to address the preferred stock. We concluded that this was the best path to creating a capital structure that allows more of the value we have created through our transformation to accrete to common equity holders and to better position the company to capitalize on the growth we are generating through our commercial programs. As we previously announced back in July, we successfully raised $75 million of capital through a PIPE transaction, bringing multiple new investors into our investor base.

Chris Bohnert
Chris Bohnert
SVP and CFO at NN

This effectively expanded the optionality for how we could strategically address capital structure overhang, namely through the preferred equity security. Last evening, we announced that NN successfully completed a $124 million refinancing transaction to address the preferred. This is a significant strategic and financial milestone for the company, as we are largely out from under the structure that NN entered back when the company was experiencing stress in its business and financial performance. I'll take a moment to walk through the details of this multi-legged transaction. First, we utilized cash from the recent PIPE transaction to materially de-lever the company's balance sheet. We used the $70 million of cash to redeem a large portion of the outstanding preferred equity. Second, we equitized roughly $19 million of preferred into NN common stock.

Chris Bohnert
Chris Bohnert
SVP and CFO at NN

Third, remaining stub of preferred equity of approximately $35 million in total will now carry a lower PIK interest rate of 10% for one year, significantly below the previous rate of 14.5%. The remaining pref will be discounted by $5 million if we pay off or refinance it by December 31st of 2026. This successful transaction has materially de-levered NN, and annual PIK interest will be reduced by approximately $13 million. This transaction does not impact our existing term loan. We expect to have a greater degree of optionality on how we address existing other debt and the refinance of our term loan when it makes sense strategically and financially. You'll hear Harold discuss NN's five-pillar growth strategy shortly. Achieving this refinancing was a critical step in enabling the acceleration of our growth across the enterprise.

Chris Bohnert
Chris Bohnert
SVP and CFO at NN

This is a significant strategic win for the company, the value will now more comprehensively accrete to our business and our shareholder value creation. I'll spend some time walking through our financial performance for the business and its segments, beginning on slide five. Q2 net sales of $128.79 million were up $20.8 million or roughly 19% versus the prior year period, supported by growth across both segments. Q2 net sales growth is driven by the contributions from new business launches, higher precious metal pass-through pricing, volume growth, and slightly favorable FX translation. With the first half of the year, net sales of $247.2 million are up $33.6 million or 16%, demonstrating a very strong start to the year and a continuation of our momentum from the first quarter. Our Q2 adjusted gross margin dollars of $26.1 million grew $5 million or 24% versus the prior year period.

Chris Bohnert
Chris Bohnert
SVP and CFO at NN

This growth was supported by a stronger mix of sales as a function of new business launches. Across the first half of the year, adjusted gross margin dollars of $49.2 million are up $10.3 million or 26%. These results reflect a very solid adjusted gross margin of 20.3% in the second quarter and 19.9% year-to-date, each displaying meaningful expansion as margins for the quarter and year to date have grown by 80 basis points and 170 basis points respectively, compared to the respective periods a year ago. Second quarter adjusted EBITDA of $17.9 million grew by $4.7 million or 36% versus last year's second quarter. This increase was led by higher sales and improved mix and volume leverage from past cost improvement actions, partially offset by higher SG&A.

Chris Bohnert
Chris Bohnert
SVP and CFO at NN

Across the first half of 2026, total adjusted EBITDA of $32.1 million is up $8.3 million or 35% versus results of $23.1 million versus the first half of 2025. The first half growth in our profitability measure has been driven by similar drivers as noted in our quarterly results. Adjusted EBITDA growth has come with an improvement in our margins. At second quarter, adjusted EBITDA margins of 13.9% of sales expanded 170 basis points versus last year's second quarter. On a year-to-date basis, through the first two quarters of 2026, adjusted EBITDA margins of 13% are up 190 basis points versus the 11.1% in the first half of 2025. I'll turn to our segments starting on slide six.

Chris Bohnert
Chris Bohnert
SVP and CFO at NN

In our Power Solutions segment, where our business consists largely of stamped products, net sales for the quarter were $62.3 million, up 40%, compared to $44.6 million in the prior year period. This increase was driven by higher precious metal pass-through pricing and higher volumes. Across the first half of the year, Power Solutions net sales of $117.7 million grew 34% versus the first half of 2025, driven largely by the same factors impacting second quarter. Power Solutions adjusted EBITDA was $12.7 million, an increase of $3.6 million or 40% versus last year's second quarter of $9.1 million, driven by sales growth, improved mix from growth in targeted high-value end markets and contributions from ongoing cost-out initiatives. Additionally, quarterly and first half adjusted EBITDA margins were 20% of net sales, up meaningfully versus the first half of 2025.

Chris Bohnert
Chris Bohnert
SVP and CFO at NN

Our next segment, Mobile Solutions on slide seven, covers our machine products business. Net sales for the first quarter were $66.6 million compared to $63.4 million in last year's first quarter, an increase of $3.2 million or 5%. This segment has now delivered two consecutive quarters of net sales growth year-over-year. This sales growth reflected solid volumes from new program launches along with favorable foreign exchange impacts. Across the first half of the year, net sales of $129.7 million are up 3% versus $125.6 million in the first half of the prior year period. Our second quarter adjusted EBITDA in the Mobile Solutions segment was $9.8 million, up 13% versus last year's second quarter results of $8.7 million, with the segment's adjusted EBITDA margin of 14.7% expanding 100 basis points versus 13.7%.

Chris Bohnert
Chris Bohnert
SVP and CFO at NN

Adjusted EBITDA first half of the 2026 has seen a similar theme play out with $18 million at nearly 14% margin rate improving versus $16.8 million or just over 13% of sales. With that, I'll turn the call back over to Harold. Harold?

Harold Bevis
Harold Bevis
President and CEO at NN

Thank you, Chris. I appreciate it. I wanted to talk a minute about our growth program and our portfolio objectives that we have. In the second quarter, we continued advancement in that regard, automotive has now declined to about 40% of the company. Our ultimate goal is to have that be about a third, not really by shrinking, but by the other areas growing more quickly. That is in fact happening. The top three growth markets that we're focused on are listed here: data center, electric grid, defense electronics and medical products. We had decent wins on each of those three segments in the second quarter and year-to-date. Those areas now are over $150 million of our sales, about a third of the company, and we have near-term targets to increase that %.

Harold Bevis
Harold Bevis
President and CEO at NN

It obviously starts with prospecting and then bidding on new awards, and it's winning on closed opportunities. We've been winning at an above expectation rate and the highest rate that we've ever done, and our prospecting is expanding, actually. I wanted to give just some vignette updates on each one of these segments, turning to the next page, starting with just an overview of our five-pillar program. The five components are the three areas I just mentioned, plus high-value vehicle parts, where we have a curated portfolio that we attack, in the commercial vehicle, recreational vehicle, and passenger vehicle space, where we believe that it is very profitable and high return on investment for us, and it helps us push our technology, and then high-value stamping.

Harold Bevis
Harold Bevis
President and CEO at NN

We have a few niches that we're in on the stamping side as well, and we're staying close to them, many of them in the smart home area, smoke detectors, alarm systems, switches. Those are the five areas that we're focused on a go-forward basis, and that's how we've organized our sales team, our business development teams, our engineering. We're allocating our capital to those areas as well. On the next page, I want to dive down a little more deeply into data center electric grid. As seen on the prior page, it's an $80 million business already on a trailing 12-month basis with a near-term goal of $120 million. We have multiple large opportunities that we're evaluating in this space right now.

Harold Bevis
Harold Bevis
President and CEO at NN

Everyone knows that AI and data center is one of the biggest things happening in the world, and it's the biggest thing happening to our company. We are getting very large asks to us. We're a well-known precision metal part maker, and that finds itself in a lot of aspects of the data centers, especially with the liquid management, regarding the cold plates as well as the pumps, to make sure that system is good. On the top end of the system is electrical, and that also plays into our electrical business, our stampings business, and assemblies business. It's our second largest market right now behind the high-value vehicle parts, but it's closing the gap, and our goal is to have it to be our largest segment. Recent news in the quarter that we gave out via a specific press release, we had some big wins here.

Harold Bevis
Harold Bevis
President and CEO at NN

We're focused on establishing supply chain positions with the right people and the right platforms, and it's expanding. We started off in Asia. It's now expanded to Europe and into North America, and we're leveraging our assets and technical know-how to have leak-proof metal parts, and also the aesthetic qualities are quite high on these parts as well, and we know how to do that. We have many ramp-ups underway. If you had a chance to look at our 10-Q, you'll note that in note three, we expanded the look into the end markets that we serve, and you'll notice that we don't have a lot of sales showing up yet in our machine products business for grid and data center, and that the wins that we've had are primarily going to be a second half ramp-up for us, and those ramp-ups are underway.

Harold Bevis
Harold Bevis
President and CEO at NN

The third point here is we've secured significant new awards that will be ramping up into the beginning of 2027. We already have about 50 machines we're bringing online. We have about 25 in-house already. We are running out of space. Tim French is not on the call today because he's in China. He's looking at new space in the area of one of our plants, Wuxi. We'd like to just be 10 or 15 minutes away. We need about another 100,000 sq ft to accommodate the equipment that we're going to need. This business is on track with expanding opportunities. On the next page, I wanted to talk about defense and electronics for a minute. That's already at $60 million on a trailing 12-month basis. Our near-term goal there is $90 million.

Harold Bevis
Harold Bevis
President and CEO at NN

We supply critical components into weapon systems, guidance systems. We're evaluating anti-drone munitions, making the munitions themselves for shooting down drones. Recent news we announced in the quarter was that we have secured a multi-year agreement to produce parts of weapons. That alone is expected to be about another $12 million-$15 million just with that one customer. We are ramping up now. We have many new firsts associated with that. It's a multi-year project. We had a lot of advancements on surface coatings, as well as mastering high-volume titanium machining. If you don't know much about metal fabricating, titanium retains heat and swells and changes its dimensions as you're forming it. There's a lot of things that get right to be able to do high volume titanium machining, but we were able to master that after a few quarters.

Harold Bevis
Harold Bevis
President and CEO at NN

We're expanding our defense and electronics growth platform. We've won a bunch of programs over the last few years. It's an expanding area for us. We have a $75 million working pipeline. We've achieved a lot of credentials with the Department of Defense, and ITAR and other types of certifications that you need in order to compete here. We have very, very big aspiration in this area. It's not exploding in demand like data center is. It's right behind it. We're opportunity-rich in this segment as well. On the next page, I wanted to talk about medical. It's smaller than the others. It's about $15 million on a trailing 12-month basis. We have a net near-term goal of $40 million. It is coming from behind. It's taken us a while to get the credentials that we needed here.

Harold Bevis
Harold Bevis
President and CEO at NN

It's very clean manufacturing required, as you would guess. It took us a while to get the plant certifications. The parts themselves are not that hard to make. We did have some breakthroughs this year. We are approved to make surgical tips, if you will, and the ends and pieces that go into the robotic machines that do surgery. We received our initial purchase orders. We're underway with the ramp-up there in our Kentwood, Michigan plant. We have had to renovate our quality system. It's taken multi-year investment program from us. We've done it. That new business that we announced effectively will double the business itself. It's upward from there.

Harold Bevis
Harold Bevis
President and CEO at NN

Our pipeline is now about $75 million in this area also. We have a dedicated team who's found its stride. We're now evaluating the market in China, the second-largest market for robotic-assisted surgery. We have all the approvals we need to go in with the exact same customers. This business is gaining momentum for us. We have a strong team in place. We have high aspirations for our medical business. With that, in the next page, Chris gave you an overview of the really exciting and fundamental improvement we've done to our balance sheet with the refinancing, coupled with the growing business. We wanted to let you know that we're raising our guidance for this year.

Harold Bevis
Harold Bevis
President and CEO at NN

If you look at it, we raised it in the last quarter also due to our actual results. We were asked about how we think about our guidance. Really, we're letting the results flow before we're changing our outlooks. We're doing it again here. We do expect our sales to be $460 million-$480 million this year. EBITDA, $55 million-$65 million, our new business wins $80 million-$100 million. In our earnings release that we put out this morning, you'll see that through July, our new business wins are already $80 million. We increased the high end of the range there and the expectations. Those are all records for us. They're bringing along the need for talented people and also capital equipment to put in place to be able to produce at a higher level as we add to the capacity.

Harold Bevis
Harold Bevis
President and CEO at NN

That's our new guidance. We're very happy about it. As events unfold, we'll look at our guidance further as we go along through the second half of the year. With that, we'd like to turn it over and open up the webcast to a question-and-answer period.

Operator

We will now begin the question-and-answer session. Please limit yourself to one question and one follow-up. If you would like to ask further questions, kindly rejoin the queue. Reminder, if you would like to ask a question, please press star one to raise your hand. To withdraw your question, press star one again. We ask that you pick up your handset when asking a question to allow for optimum sound quality. If you are muted locally, please remember to unmute your device. Please stand by while we compile the Q&A roster. Our first question comes from the line of Rob Brown with Lake Street Capital Markets. Rob, your line is now open.

Rob Brown
Analyst at Lake Street Capital Markets

Hi. Congratulations on all the progress and great to see the steps that you've taken. Just wanted to follow up on the kind of some of the data center market. You've had some nice wins in the quarter. Could you kind of characterize the pipeline in that market? What's sort of the building pipeline? What areas are you most interested in? Just maybe the scale of the pipeline. Thank you.

Harold Bevis
Harold Bevis
President and CEO at NN

Yep. That's Christine at page 10 in the deck. Our products right now, Rob, are we're making transformer parts, busbar parts, test probes, the liquid connector parts. We've branched into the cold plate itself, plating of the cold plate. It actually is plated with a nickel kind of plating. We are looking at couplings that go into the heat pumps. The heat pump system itself, there's a lot of well-known people in that area, Danfoss, Parker, Stäubli, kind of well-known fluid management people, and all the couplings are also metal. We are looking at the stampings that are also inside that go into the racks, both up and down, and as well as the whips and cabling that controls the electricity inside of the center. We have a multi-product look at the data center ecosystem.

Harold Bevis
Harold Bevis
President and CEO at NN

Basically, we're focused in on our core markets. We're getting pulled into a few new areas of welding and brazing, and that's fine because we know how to do that. Then you have to be able to automate it. It's not a one-product story. It's a bring everything the company has to the game plan story. We have a large expanding pipeline. On this chart here at the bottom, I mentioned that we're now approaching $100 million on prospecting. Just to delineate that, we talk about pipeline figures if we've rendered an RFQ and the customer has an RFQ from us. Prospecting begins before that. We have discussions underway that are large. In our last call, someone asked, "Well, how big are you trying to get in these connectors?" We think we could do $100 million in that alone, over time.

Harold Bevis
Harold Bevis
President and CEO at NN

The real thing for us is who to partner with, what type of assets do we want to put in place, where do we want to put them? It's an evolving market for us, Rob, and it's quite fulsome. It's a big story for us.

Rob Brown
Analyst at Lake Street Capital Markets

Great. Thank you. Thanks for the color on that. Just on the kind of gross margin improvement, nice to see there. How do you sort of see it? Is it sustainable at this level, or can you continue to move that up as you change your product mix?

Harold Bevis
Harold Bevis
President and CEO at NN

Yeah, Chris, you want to take that?

Chris Bohnert
Chris Bohnert
SVP and CFO at NN

Sure. Thanks, Rob. Yeah. We've benefited in a lot of areas with our margins. As you know, Rob, we took a lot of costs out over the last eight quarters or more. We've got some good leverage based on the overall cost structure reduction. Additionally, we've got new business ramp-ups. We talked in the past quarters about those new business pieces are accretive. We are benefiting from higher precious metals pass-through as well. I think the dependencies on the improvements going forward are going to be just more new business brought on and accretive levels, dependency on precious metals, and then getting in these new business segments like medical and data center. If we keep diversifying in these other verticals, I think you'll see margins moving up. Obviously, precious metals can drag it down a little bit in the near term if prices come down.

Chris Bohnert
Chris Bohnert
SVP and CFO at NN

I think overall, we've got some tailwinds with these new verticals, and so keep an eye on those verticals and the revenue they're generating as well as new business, and I think that'll help guide the margins going forward.

Rob Brown
Analyst at Lake Street Capital Markets

Right. Thank you. I was trying to remember.

Chris Bohnert
Chris Bohnert
SVP and CFO at NN

Thank you.

Operator

Your next question comes from the line of Greg Palm with Craig-Hallum. Greg, your line is now open.

Greg Palm
Greg Palm
Analyst at Craig-Hallum

Yeah, good morning. Congrats on all the positive news and frankly, just really impressive progress. Pretty impressive stuff.

Harold Bevis
Harold Bevis
President and CEO at NN

Thank you.

Chris Bohnert
Chris Bohnert
SVP and CFO at NN

Thank you, Greg.

Greg Palm
Greg Palm
Analyst at Craig-Hallum

I'm wondering at this point, how much of that is currently flowing through the P&L? It sounds like there's actually a pretty big chunk that's still yet to come, at least on the stuff that you've announced, the liquid cooling connectors, the firearms accessories. I think you talked about that ramping up in Q3. I only ask in light of really positive first half results. I'm guessing you're just maybe building some extra conservatism in the second half guide, but maybe you can just address that as some of these newer business opportunities start to ramp up.

Harold Bevis
Harold Bevis
President and CEO at NN

Yeah. Good point. Greg, if all things being equal, if we weren't winning new business and things were just steady state, the second quarter usually is our strongest quarter. That's when we have our highest production volumes on existing contracts. The next quarter is Q3, and then Q1, and then Q4. Q4 is usually our lightest quarter, just because our customers are big, and they try to pretty up their balance sheet and inventory positions before they report their year-end results. This year's going to be a little different because we have a lot of new wins that we're ramping up in the second half, and your posit is true. The announcements we made, all three of them, medical, data center, and defense, they are not impacting the first half at all. They ramp up in the second half.

Harold Bevis
Harold Bevis
President and CEO at NN

The 50 machines to make data center parts will start to hit its stride in November. The sales outlook in November is going to go over $1 million a month, and keep building into Q1. We don't have any benefit from that right now, the same with medical and the same with defense. Through the end of July, we've won $80 million worth of business, and the majority of it is immediate ramp-up. We will benefit from that in the second half. The way we're playing it right now, Greg, is we know that Q4 is usually light, but we have offsetting wins. That's what's led us to think through our guidance and how much to increase it or not.

Harold Bevis
Harold Bevis
President and CEO at NN

You're right, that it's slightly conservative, but we don't really control our demand, so we have to get pulse signals. Our visibility is really in this quarter. We don't have pulse going into the fourth quarter yet. With the exception of data center, where basically they're saying, "We want everything you can make as soon as you can make it." We're comfortable right now with the guidance that we've given, Greg, it will have those variables playing out.

Greg Palm
Greg Palm
Analyst at Craig-Hallum

Yep. Okay, makes sense. I know you're not addressing longer term EBITDA margin guidance here today, but you just realized a 14% EBITDA margin on the quarter on revenue that's significantly lower than what your long-term target is on a quarterly basis. I don't know, maybe you could just talk about that in light of those targets, because it seems like there could be some pretty meaningful upside to that as well.

Harold Bevis
Harold Bevis
President and CEO at NN

Yeah. The business is definitely going to the next level right now. It looks sustainable. To Chris's point, we're mapping out the metal in every part of our cost structure and that sort of a thing. It's looking like we're a couple points light right now, Greg. It looks like the goal's more like 14%-16% longer term, if you're talking about the adjusted EBITDA margin. That's really going to be pulled through by a better mix. The mix of the products is going to drive that. We're still maintaining about 5 points higher on gross margins on our new wins versus the existing. That's a good point. I think in our next update, Greg, we'll give an update on the longer term goals.

Harold Bevis
Harold Bevis
President and CEO at NN

I would say right now, you're right, our longer term guidance should be more like 14%-16% on adjusted EBITDA.

Greg Palm
Greg Palm
Analyst at Craig-Hallum

Yeah, makes sense. All right, I'll leave it there. Thanks for the color.

Harold Bevis
Harold Bevis
President and CEO at NN

Thank you, Greg.

Operator

Your next question comes from the line of Joe Gomes with Noble Capital. Joe, your line is now open.

George Proost
George Proost
Analyst at Noble Capital

Hi, this is George Proost. I am filling in for Joe this morning. Congratulations on the quarter. I am curious about the manufacturing expansion you guys mentioned earlier in China and what that looks like in terms of production and a timeline to hopefully bring that online.

Harold Bevis
Harold Bevis
President and CEO at NN

Yeah. Right now we have two facilities in China that are wholly owned, what is called locally as WFOEs, Wholly Owned Foreign Entities. Then we have one JV plant. The machining plant is in Wuxi, China, which is a suburb of Shanghai. That is the plant where we have been doing all of the sampling for all of the data center customers that we are prospecting with, and it is where we have our approvals. We kind of chose that location to get our certifications, approvals, and equipment organized. We believe we can get in about 80 machines into that facility. We have already ordered 50. We are getting ready to order the next batch. As we think it through, we think that we need space for at least another 200 machines from our estimates.

Harold Bevis
Harold Bevis
President and CEO at NN

The timing is hard to understand right now because everyone is kind of in a feeding frenzy to get equipment lined up, parts lined up, parts supply. The size of the facility that we are looking for would be a facility that can accommodate another 200 machines after we have filled up our current envelope. The timing, you mentioned the timing. We need to get this done within 12 months.

George Proost
George Proost
Analyst at Noble Capital

Okay, great. Thank you. Thank you for a little background on that. A follow-up is, so what materials are the most volatile for you guys right now? Is that altering any of your sourcing decisions?

Harold Bevis
Harold Bevis
President and CEO at NN

Yeah. There's tonnage and then there's dollar value. You're probably wondering about the dollar value. The biggest dollar value of materials is precious metals, gold and silver. The biggest tonnage is steel and then copper. We have year-over-year inflation in all metals. We track it, and we also have tariffs on steel, and we track that.

Harold Bevis
Harold Bevis
President and CEO at NN

I do not believe there are any tariffs on gold or silver. We have our procurement team, and we have a chief procurement officer, and he's very knowledgeable on all the tariffs and surcharges that are underway right now, and it's a moving target. We have the right to pass through basis cost changes, and we do, and we monitor our behavior there. We seek full recovery, so we don't make money on it, but we try not to lose money on it. It impacts working capital when you have inflation. It actually makes our % go down. Greg was asking about % of EBITDA margins on a go-forward basis. They're being negatively impacted right now by having such high metal pass-through costs.

Harold Bevis
Harold Bevis
President and CEO at NN

A kind of a secret good thing here is that our % are going up even while passing through a big cost at zero. When I answered Greg's question, I was thinking through the outlook for metals over time, and they are to calm down, which will also help our %. Metals are our main raw materials at company. Yeah.

George Proost
George Proost
Analyst at Noble Capital

All right. Perfect. Thank you.

Harold Bevis
Harold Bevis
President and CEO at NN

You're welcome.

Operator

Your next question comes from the line of Barry Haimes with Sage Asset Management. Barry, your line is now open.

Barry Haimes
Analyst at Sage Asset Management

Thanks so much, and, again, congrats on all the progress. I had a couple questions on the financing. One is, could you tell us how the share count will change? Secondly, you alluded to the phase II, if you will, in terms of renegotiating the term loan. Could you talk a little bit about the progress and possible timing on that? Thank you.

Chris Bohnert
Chris Bohnert
SVP and CFO at NN

Yeah.

Harold Bevis
Harold Bevis
President and CEO at NN

Go ahead, Chris.

Chris Bohnert
Chris Bohnert
SVP and CFO at NN

Thanks for the question. The share count in the details in the docs, we swapped about 5.5 million shares for that roughly $19 million of reduction in the pref. That'll increase the overall share count. As far as the refinance of the term loan, obviously we're thinking about that. Again, lots going on in the background. We're very pleased with our relationship with Marathon right now. We're hopeful that we're able to work out some better terms based on how the business is doing.

Chris Bohnert
Chris Bohnert
SVP and CFO at NN

Nothing to announce at this point, I think with where the business is performing, the lower debt that we've been able to achieve over this transaction as well as expectations in the future, I think that will bode well for reducing rate and so forth and getting us more flexibility and being able to take control of the growth that we're seeing. That's really one thing that's very critical for us. With all this new business, we want to have a capital stack that allows for growth, gives us the flexibility to either buy or lease equipment, and get much better and more competitive rates, not only on the senior note, but on the leasing or buying of equipment. Harold and I and the team will be working on that diligently in the coming weeks and quarter. More to come on that.

Barry Haimes
Analyst at Sage Asset Management

Great. Thank you.

Chris Bohnert
Chris Bohnert
SVP and CFO at NN

Yep.

Harold Bevis
Harold Bevis
President and CEO at NN

Barry, I'll also give you a couple numbers. Right now, through this swap, we have 82.6 million shares outstanding. 82.6 million out of an authorized of 90 million, the gap there is reserved for comp plans and previously issued warrants. Right now, we've used all the available common stock that the company had access to.

Barry Haimes
Analyst at Sage Asset Management

Great. Thank you.

Harold Bevis
Harold Bevis
President and CEO at NN

You're welcome.

Operator

Your next question comes from the line of Robert Sussman with Bentley Capital. Robert, your line is now open.

Robert Sussman
Analyst at Bentley Capital

Thank you. I'm absolutely staggered listening to this call and the number of wins in the pipeline that you have. For a company your size, it's just staggering. I'd like to ask you, what is it about the company that is enabling all these wins in such diverse markets? Is there a unique skill set that you have?

Harold Bevis
Harold Bevis
President and CEO at NN

It's a good question. Most of the wins have been multi-year in nature, Robert. You know it from being a professional investor. One of the differentiators of a small company is their ability to organically grow sales. For us, if you spin back three years, the company was really focused on satisfying automotive customers, then other customers, if they called us. We kind of flipped that around and said, "Geez, what's the best use of these assets and this know-how that we have?" There are several glaring markets that you can just do a simple ChatGPT on where's the best use of these assets. We had to go hire executives that we didn't have from the industry, then we had to start prospecting and then understand what our gaps were to being able to become an approved supplier.

Harold Bevis
Harold Bevis
President and CEO at NN

Then start quoting, find your way. You don't start off low, you start off high, then kind of find where the market is. Then you start running a program. We're using Salesforce as our organizing software tool. Then you track why do you win and why do you lose. Then you try to work around those findings, and you drive to outcomes. What's happened this year is we've got some multi-year kind of marquee things that we're working on with some big people that we thought would help our credentials, and establish us as a real competitor. That helped us. So we have references now. It's fun. Another question you could say is what's big enough? What's too big? What's too small? We're definitely winning higher amount than we thought, which brings with it more working capital, more CapEx than we thought.

Harold Bevis
Harold Bevis
President and CEO at NN

We're not in trouble or anything like that, but we have to be careful on what we want to do, and we're staying disciplined about the pricing. We're running a 27% hit rate year to date on closed opportunities, 27%. That compares favorably if you research and benchmark that number. That's above industry average for a manufacturing company. We're losing over 70%, and the reason why we lose is we're being disciplined about the financials. I mentioned in the dialogue that our prospecting is expanding, and it's really due to the fact that we're getting credentials now in these targeted areas, and we're getting more looks now. We're not going to go into different areas, really. There's one other area that we're evaluating, Robert, and it's the automotive aftermarket.

Harold Bevis
Harold Bevis
President and CEO at NN

Right now, we kind of have our hands full with the markets that are performing for us.

Robert Sussman
Analyst at Bentley Capital

One follow-up. I assume that there's some lag in passing precious metal prices through. Can you tell us what that lag is? I assume there has to be some drag on profitability from that lag.

Robert Sussman
Analyst at Bentley Capital

We're allowed to true up to actual, so the show me part of this. Chris is from Missouri, so I should have probably had him answer. It's a show me deal, so if we can show that we incurred inflation to deliver their order, it's a true up. The onus is upon us to match up and be transparent with what our input costs are in the performance of producing for those POs. It's not much, Robert. It's smaller than you think because the company is pretty good at not letting that happen.

Robert Sussman
Analyst at Bentley Capital

Okay. Thank you very much. Keep up the great work.

Harold Bevis
Harold Bevis
President and CEO at NN

Thank you. Appreciate it.

Operator

Your next question comes from the line of Barry Haimes with Sage Asset Management. Barry, your line is now open.

Barry Haimes
Analyst at Sage Asset Management

Thanks. One other follow-up. Harold, on your comment you just made on the new business, obviously creating demand for machines and capital. When you're going through that exercise, what sort of ROIC target or target range do you have, in terms of saying, "Okay, this capital's worth spending on such and such a program"? Thank you.

Harold Bevis
Harold Bevis
President and CEO at NN

Yeah. The floor on gross margin is 25%, and the floor on IRR, if spending is needed, is 25%. Those are the floors. We've been averaging quite a bit above those floors. The financials are there, though, to be honest, Barry. The real decision-making is around how solid of a commitment are they willing to make to us on a multi-year basis for volume. You can see when the customer has plenty of suppliers bidding because they don't really want to make a commitment, or if you kind of have a me too value proposition. You see a lack of commitment to each other. They want to date, they don't want to get married. It's different when you can tell that you have a differentiated value that you're bringing to the table because they want to lock you out.

Harold Bevis
Harold Bevis
President and CEO at NN

We have a giant opportunity we're looking at right now with a big data center customer, and they've requested us to kind of be exclusive with them. If we do that, they'll give us this huge amount of business, but they don't want us working with others. What that means to us is, "Hey, wait a minute. We're pretty special in this space here." We're not doing that. We're more being balanced, if you will, across a set of customers versus just getting married to one customer. That's where the real play is how much do you want to do versus the commitment that they're offering. The numbers are all there, predominantly. We're lucky that we're able to be selective and kind of cherry-pick the better return programs.

Harold Bevis
Harold Bevis
President and CEO at NN

This year we've won about 100 and I think yesterday, through yesterday, it was 132 programs. We're into August now. We're launching programs we've previously won, and we're winning programs that are immediate ramp-up. I'm going to say we have well over 150 programs in ramp-up mode now, right now on this call. I'm also going to say that we probably have every single plant in some sort of a new business ramp-up. The biggest and the most exciting ones are obviously the three areas we talked about, data center, grid, defense, electronics, and medical, because it's good business, it's high growth, and it's acceptable to the stock market. We're definitely focused on those three areas with a differentiated push.

Barry Haimes
Analyst at Sage Asset Management

Great. Thanks so much.

Harold Bevis
Harold Bevis
President and CEO at NN

You're welcome.

Operator

This concludes the question-and-answer session. I will now turn the call back to Harold Bevis for closing remarks.

Harold Bevis
Harold Bevis
President and CEO at NN

Chris, let's tag team it. You want to give a summary on the balance sheet and the financials, then I'll do the business wrap up?

Chris Bohnert
Chris Bohnert
SVP and CFO at NN

Sure. Thanks, Harold. As I mentioned, we're very pleased with the strategic refinancing of the balance sheet and more to come with the senior note and so forth. Like I mentioned before, I think we've got another step to go to get the balance sheet fine-tuned for the growth that we're experiencing, we'll be working hard on that.

Harold Bevis
Harold Bevis
President and CEO at NN

Thank you, Chris. I'm sure that you've detected from our comments here and from the Q&A that our momentum has not peaked. Our momentum is building, things have traction here at the company, we're proud of the quarter. We have bigger aspirations, we look forward to reporting Q3 with you guys in 90 days. Thank you very much for calling in today. With that, we'll end the call. Christine?

Operator

This concludes today's call. Thank you for attending. You may now disconnect.

Executives
    • Joseph Caminiti
      Joseph Caminiti
      Investor Relations
    • Harold Bevis
      Harold Bevis
      President and CEO
    • Chris Bohnert
      Chris Bohnert
      SVP and CFO
Analysts
    • Rob Brown
      Analyst at Lake Street Capital Markets
    • Greg Palm
      Analyst at Craig-Hallum
    • George Proost
      Analyst at Noble Capital
    • Barry Haimes
      Analyst at Sage Asset Management
    • Robert Sussman
      Analyst at Bentley Capital
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