NN (NNBR) Q2 2026 Earnings Call Transcript

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DATE

Thursday, Aug. 6, 2026 at 9:00 a.m. ET

CALL PARTICIPANTS

• Investor Relations - Joseph Caminiti
• President and Chief Executive Officer - Harold Bevis
• Senior Vice President and Chief Financial Officer - Christopher Bohnert

TAKEAWAYS

• Net Sales -- $128.7 million, up 19.3%, reflecting new business launches, higher volumes, and higher precious metals pass-through pricing.
• Adjusted EBITDA -- $17.9 million, a 36.1% increase year over year, driven by improved sales mix and volume leverage from past cost-out initiatives.
• Adjusted EBITDA Margin -- 13.9%, representing an expansion of 170 basis points versus the prior year period.
• Adjusted Gross Margin -- 20.3%, or $26.1 million, an 80 basis point improvement driven by higher margins on new business awards.
• Power Solutions Net Sales -- $62.3 million, up 39.5% year over year, supported by growth in targeted high-value end markets and pass-through pricing.
• Mobile Solutions Net Sales -- $66.6 million, an increase of 5.0%, representing the second consecutive quarter of sales growth for the segment.
• New Business Awards -- $80 million through July 2026, consisting of over 100 programs with a concentration in data center, defense, and medical markets.
• Capital Structure Optimization -- A $124 million refinancing transaction retired $89 million in preferred stock, utilizing $70 million in cash from a $75 million PIPE transaction.
• PIK Interest Reduction -- Annual paid-in-kind interest was reduced by approximately $13 million following the retirement of high-cost preferred equity.
• Fiscal 2026 Guidance -- Management projected net sales of $460 million to $470 million and adjusted EBITDA of $55 million to $65 million for the full year.
• New Business Guidance -- Full-year award expectations were raised to a range of $80 million to $100 million, a 29% increase over 2025 results at the midpoint.
• Automotive Revenue Concentration -- 40% of total sales, down from prior levels as management targets a long-term concentration of one-third.
• Data Center/Electric Grid Revenue -- $80 million on a trailing 12-month basis, with a near-term target to reach $120 million in annual sales.
• Defense & Electronics Revenue -- $60 million on a trailing 12-month basis, with management aiming for a $90 million near-term target.
• Medical Segment Revenue -- $15 million on a trailing 12-month basis, with a near-term goal of $40 million following new robotic surgery awards.
• China Manufacturing Capacity -- 50 machines have been ordered for data center production with plans to install an additional 200 machines within 12 months.
• Defense Program Wins -- $12 million to $15 million in expected annual revenue from a multiyear agreement to produce components for weapon systems.
• Capital Allocation Thresholds -- New projects must meet a 25% minimum floor for gross margins and a 25% minimum floor for internal rate of return.
• Common Shares Outstanding -- 82.6 million shares, following the issuance of 5.5 million shares to equitize $19 million of preferred stock.
• Cash Position -- $16.5 million at the end of the second quarter, an increase of $5.1 million compared to the beginning of fiscal 2026.
• Joint Venture Income -- $2.4 million for the quarter, compared to $2.2 million in the second quarter of 2025.
• Interest Expense -- $5.7 million, relatively consistent with the $5.7 million reported in the prior year period.
• Operating Income -- $1.0 million, representing a $2.5 million improvement from the $1.5 million operating loss in the second quarter of 2025.
• Titanium Machining Mastery -- The company achieved proficiency in high-volume titanium machining after several quarters of development for defense applications.
• SG&A Expense -- $12.6 million, an increase from $12.1 million in the prior year period, reflecting investments in business development teams.

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RISKS

• CFO Bohnert noted that future margin results are subject to a "dependency on precious metals" pass-through pricing, which could create volatility if market prices fluctuate.
• CEO Bevis stated, "It impacts working capital when you have inflation," noting that rising costs for steel, gold, and silver increase the capital required to maintain inventory.
• CEO Bevis reported that the company is "running out of space" at its Wuxi, China facility and is currently searching for an additional 100,000 square feet to accommodate new machinery.

SUMMARY

NN, Inc. reported second-quarter results characterized by double-digit revenue and adjusted EBITDA growth, led by the expansion of its data center and defense segments. The company executed a comprehensive capital structure optimization, utilizing a $75 million PIPE transaction and a $124 million refinancing to retire $89 million in high-cost preferred equity. Management reported that revenue concentration in the automotive sector has declined to 40% as the company prioritizes higher-growth markets such as medical robotics and electric grids. Guidance for the full year was revised upward for net sales and adjusted EBITDA, supported by a record volume of new business awards through the first seven months of the year.

• CEO Bevis highlighted the growth potential for electrical and fluid management components, stating, "We think we could do $100 million in that alone over time," regarding data center connectors.
• Management scheduled data center production ramp-ups for the second half of the year, with certain awards expected to generate over $1 million in monthly sales starting in November.
• CFO Bohnert noted that the remaining preferred equity stub of $35 million carries a PIK interest rate of 10%, which he described as "significantly below the previous rate of 14.5%."
• The company completed a multiyear investment to renovate quality systems at its Kentwood, Michigan plant to secure approvals for robotic surgical tips.
• CEO Bevis reported that the company maintained a "27% hit rate year-to-date on closed opportunities," attributing the figure to disciplined financial requirements for new projects.
• Management identified China as the second-largest market for robotic-assisted surgery and confirmed the company is evaluating expansion with existing customers in that region.
• The company is currently managing over 150 new program ramp-ups across its global plant network, with every facility engaged in some form of new business startup.

INDUSTRY GLOSSARY

• PIK: Payment-in-kind interest, where the interest is paid by increasing the principal amount of the debt rather than in cash.
• PIPE: Private investment in public equity, involving the private sale of shares in a publicly traded company to institutional or accredited investors.
• ITAR: International Traffic in Arms Regulations, a set of U.S. government regulations that control the export and import of defense-related articles and services.
• Adjusted EBITDA: Earnings before interest, taxes, depreciation, and amortization, adjusted for one-time or non-recurring items to show underlying operating performance.
• WFOE: Wholly owned foreign entity, a common investment vehicle for mainland China-based business in which foreign investors provide the entire capital.
• RFQ: Request for quotation, a standard business process whose purpose is to invite suppliers into a bidding process to bid on specific products or services.
• Pass-through pricing: A contractual provision that allows a manufacturer to adjust the price of finished goods based on changes in the cost of raw material inputs.
• Cold plate: A metal component used in liquid cooling systems to transfer heat from electronic components to a circulating liquid coolant.
• Busbar: A rigid metallic conductor used for distributing large amounts of electrical power within data centers or industrial facilities.

Full Conference Call Transcript

Operator: Hello, everyone. Thank you for joining us, and welcome to the NN, Inc. Second Quarter Earnings Call and Webcast. [Operator Instructions] I will now hand the conference over to Joseph Caminiti, Investor Relations. Joseph, please go ahead.

Joseph Caminiti: 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 30, 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 NNBR@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 2, where you'll find our forward-looking statements and disclosure information. 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 30, 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. 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 3, and I will now turn the call over to our CEO, Harold Bevis. Harold?

Harold Bevis: 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 and 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%. In our first half EBITDA increased 35%. And in the first half, we were able to secure $65 million of new business awards. So we had profitable growth achieved across both of our reporting segments.

And then 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 upfront with Chris, and we're going to turn it over here to Chris to discuss the refinancing on the next page.

Christopher Bohnert: Thank you, Harold. Good morning, everyone. I'll begin my remarks on Slide 4. For those of you who have 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 2 quarters alongside our strategic advisers 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. 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 $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 delever 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. Third, the remaining stub of preferred equity of approximately $35 million in total will now carry a lower PIK interest rate of 10% for 1 year, significantly below the previous rate of 14.5%. Additionally, the remaining pref will be discounted by $5 million if we pay off or refinance it by December 31, 2026. This successful transaction has materially delevered NN and annual PIK interest will be reduced by approximately $13 million.

This transaction did not impact our existing term loan. However, 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 5-pillar growth strategy shortly, but achieving this refinancing was a critical step in enabling the acceleration of our growth across the enterprise. This is a significant strategic win for the company and the value will now more comprehensively accrete to our business and our shareholder value creation. Now I'll spend some time walking through our financial performance for the business and its segments, beginning on Slide 5.

Q2 net sales of $128.7 million were up $20.8 million or roughly 19% versus the prior year period, supported by growth across both segments. Further, Q2 net sales growth was driven by the contributions from new business launches, higher precious metals pass-through pricing, volume growth and slightly favorable FX translation. Over 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.

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 is led by higher sales and improved mix and volume leverage from past cost improvement actions, partially offset by higher SG&A. 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 and 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 2 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 now turn to our segments, starting on Slide 6. In our Power Solutions segment, where our business consists largely of scam 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 metals 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 2026 -- or 2025, sorry, driven largely by the same factors impacting the 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, the first quarter -- additionally, quarterly and first half adjusted EBITDA margins were 20% of net sales, up meaningfully versus the first half of 2025. Our next segment, Mobile Solutions on Slide 7 covers our Machined 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 2 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 or 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 million, expanding 100 basis points versus 13.7%.

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: 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, and automotive has now declined to about 40% of the company. Our ultimate goal is to have that be about 1/3, not really by shrinking, but by the other areas growing more quickly. And that is, in fact, happening. The top 3 growth markets that we're focused on are listed here, data center electric grid, defense electronics and medical products. We had decent wins in each of those 3 segments in the second quarter and year-to-date.

And those areas now are over $150 million of our sales, about 1/3 of the company, and we have near-term targets to increase that percentage. And it obviously starts with prospecting and then bidding on new awards and then winning on close opportunities. And we've been winning at an above expectation rate and the highest rate that we've ever done. And our prospecting is expanding actually. And 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 5-pillar program.

The 5 components are the 3 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's very profitable and high return on investment for us and it helps us push our technology and then high-value stamping. So 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.

So those are the 5 areas that we're focused on, on a go-forward basis, and that's how we've organized our sales team, our business development teams, our engineering, and we're allocating our capital to those areas as well. So 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. 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. But on the top end of the system is electrical, and that also plays into our electrical business, our stamping business and assemblies business. So 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. 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 leakproof 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 3, 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 the wins that we've had are primarily going to be a second half ramp-up for us, and those ramp-ups are underway. We were -- and the third point here is we've secured significant new awards that will be ramping up into the beginning of '27. We already have about 50 machines, we're bringing online. We have about 25 in-house already. And we are running out of space.

Tim French is not on the call today because he's in China, and he's looking at new space in the area of our -- one of our plants, Wuxi, we'd like to just be 10 or 15 minutes away. We need about another 100,000 square feet to accommodate the equipment that we're going to need. And this business is on track with expanding opportunities. On the next page, I wanted to talk about Defense & Electronics for a minute. That's already at $60 million on a trailing 12-month basis. Our near-term goal there is $90 million. We supply critical components in weapon systems, guided systems, and 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 multiyear agreement to produce parts of weapons. And that alone is expected to be about another $12 million to $15 million just with that one customer, and we are ramping up now. We have many, many new firsts associated with that. It took us -- it's a multiyear project. We had a lot of advancements on surface coatings as well as mastering high-volume titanium machining. And if you don't know much about metal fabricating, titanium retains heat and swells and changes its dimensions as you're forming it.

So 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. We're expanding our Defense & Electronics growth platform. We've won a bunch of programs over the last few years, but it's an expanding area for us. And 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 they need in order to compete here. And we have a very, very big aspiration in this area. It's not exploding in demand like data center is, but it's right behind it.

And so we're opportunity-rich in this segment as well. And then 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 near-term goal of $40 million, but it is coming from behind, and it's taken us a while to get the credentials that we needed here. 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.

But we did have some breakthroughs this year, and we are approved to make surgical tips, if you will, in the ends and pieces that go into the robotic machines to do surgery, and we received our initial purchase orders. And so we're underway with the ramp-up there in our Kentwood, Michigan plant. And we are -- we have had to renovate our quality system. It's taken a multiyear investment program from us. And we've done it. And that new business that we announced effectively will double the business itself, and it's upward from there. Our pipeline is now about $75 million in this area also.

And we have a dedicated team who's found its stride, and we're now evaluating the market in China, the second largest market for robotic-assisted surgery, and we have all the approvals we need to go in with the exact same customers. So this business is gaining momentum for us, and we have a strong team in place, and we have high aspirations for our medical business. So 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.

And if you look at it, we raised it in the last quarter also due to our actual results, and we were asked about how we think about our guidance. And really, we're letting the results flow before we're changing our outlooks, and we're doing it again here. So we do expect our sales to be $460 million to $480 million this year, our EBITDA $55 million to $65 million and our new business wins $80 million to $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. So we increased the high end of the range there and the expectations.

And those are all records for us, and 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. So that's our new guidance, and we're very happy about it. And 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: [Operator Instructions] Our first question comes from the line of Rob Brown with Lake Street Capital Markets.

Robert Brown: Congratulations on all the progress and great to see the steps that have been taken. Just wanted to follow up on the kind of start with 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? And just maybe the scale of the pipeline?

Harold Bevis: Yes. That's Christine at page 10 in the deck. So -- our products right now, Rob, we're making transformer parts, busbar parts, test probes, the liquid connector parts. We branched into the cold plate itself, plating of the cold plate, it actually is plated with a nickel kind of plating. And 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 and Stäubli kind of well-known fluid management people and all the couplings are also metal.

So we are looking at the stampings that are also inside that go into the racks, both up and down and as well as the WICs and cabling that controls the electricity inside of the center. So we have a multiproduct look at the data center ecosystem. But 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, and then you have to be able to automate it. So it's not a one-product story. It's to bring everything the company has to the game plan story.

And we have a large expanding pipeline on this chart here at the bottom, I mentioned that we're now approaching $100 million on prospecting. And just to delineate that, we talk about pipeline figures if we rendered an RFQ and it's -- and the customer has an RFQ from us. But prospecting begins before that. So we have discussions underway that are large. And in our last call, someone asked, how big are you trying to get in these connectors. And we think we could do $100 million in that alone over time.

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. So it's an evolving market for us. And it's quite fulsome. It's quite fulsome. It's a big story for us.

Robert Brown: Great. And just on the kind of the 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: Yes. Chris, do you want to take that?

Christopher Bohnert: Sure, sure. Thanks, Rob. Yes. So we've benefited in a lot of areas with our margins. We took a lot -- as you know, Rob, we took a lot of cost out over the last 8 quarters or more. So we've got some 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 at 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. But I think overall, we've got some tailwinds with these new verticals. And so keep an eye on these verticals and the revenue they're generating as well as new business, and I think that will help guide the margins going forward.

Operator: Your next question comes from the line of Greg Palm with Craig-Hallum.

Greg Palm: Congrats on all the positive news and frankly, just really impressive progress. So pretty impressive stuff. Can we maybe just start a little bit time to the last kind of answer around new business wins. And 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, it's -- I'm guessing you're just maybe building some extra conservatism in the second half guide, but maybe you can just address that as those -- some of these newer business opportunities start to ramp up.

Harold Bevis: Yes. Good point. So 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. And then the next quarter is Q3 and then Q1 and then Q4. So Q4 is usually our lightest quarter just because our customers are big and they try to free up their balance sheet and inventory positions before they report their year-end results. This year is 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 3 of them, Medical, Data Center, and Defense, they are not impacting the first half at all. So they ramp up in the second half. For instance, the 50 machines to make data center parts will start to hit stride in November. We'll have all the machines installed in and 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 and the same with Medical and the same with Defense. So through the end of July, we won $80 million worth of business. And the majority of it is immediate ramp-up.

So we will benefit from that in the second half. And so the way we're playing it right now, Greg, is we know that Q4 is usually light, but we have offsetting wins. So that's what's led us to think through our guidance and how much to increase it or not. It -- you're right that it's slightly conservative, but we don't really control our demand. So we have to get pull signals. So our visibility is really in this quarter. We don't have pulls going into the fourth quarter yet with the exception of data center, where basically they're saying we want everything to make as soon as we can make it.

But we're comfortable right now with the guidance that we've given, Greg, and it will have those variables playing out.

Greg Palm: Yes. Okay. Makes sense. And I know you're not addressing the 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. So 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: Well, we have -- the business is definitely going to the next level right now, and it looks sustainable. And to Chris' point, we're mapping out the metal and every part of our cost structure and that sort of thing. So it's looking like we're a couple of points light right now, Greg. It looks like the goal is more like 14% to 16% longer term, if you're talking about the adjusted EBITDA margin. And that's really going to be pulled through by a better mix. So the mix of the products is going to drive that. And we're still maintaining about 5 points higher on gross margins on our new wins versus the existing.

And we'll -- that's a good point. I think in our next update, Greg, we'll give an update on the longer-term goals. But I would say right now, you're right, our longer-term guidance should be more like 14% to 16% on adjusted EBITDA.

Operator: Your next question comes from the line of Joe Gomes with NOBLE Capital.

Unknown Analyst: This is George Proost. I'm filling in for Joe this morning. Congratulations on the quarter. I'm curious about the manufacturing expansion you guys mentioned earlier in China and what that looks like in terms of production and time line to hopefully bring that online?

Harold Bevis: Right now, we have 2 facilities in China that are wholly owned, what's called locally as WFOE's wholly owned foreign entities. And then we have one JV plant. And the machining plant is in Wuxi, China, which is a suburb of Shanghai. And that's the plant where we have been doing all of the sampling for all of the data center customers that we're prospecting with, and it's where we have our approvals. So 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've already ordered 50. We're 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. And 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. And so the size of the facility that we're looking for would be a facility that can accommodate another 200 machines after we have filled up our current envelope. And the timing, you mentioned the timing. We need to get this done by -- within 12 months.

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

Harold Bevis: Yes. So 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. So we have year-over-year inflation in all metals, and we track it. And we also have tariffs on steel, and we track that. I do not believe there are any tariffs on gold or silver. And so 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.

But we have the right to pass through basis cost changes, and we do, and we monitor our behavior there. And so we don't -- we see 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 percent go down. Greg was asking about percentages of EBITDA margins on a go-forward basis. They're being negatively impacted right now by having such high metal pass-through costs. So kind of a secret good thing here is that our percentages are going up even while passing through a big cost at 0.

So 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 percentages. So those are the main -- the metals are our main raw materials of company.

Operator: Your next question comes from the line of Barry Haimes with Sage Asset Management.

Barry Haimes: Congrats on all the progress. I had a couple of questions on the financing. One is, could you tell us how the share count will change? And then secondly, you alluded to the Phase 2, if you will, in terms of renegotiating the term loan. Could you talk a little bit about the progress and possible timing on that?

Christopher Bohnert: Yes. Thanks for the question. So yes, the share count in the details in the docs, but we swapped about -- well, we swapped 5.5 million shares for that roughly $19 million of reduction in the pref. So that will increase the overall share count. As far as the refinance of the term loan, I mean, obviously, we're thinking about that. Again, lots going on in the background. I'm very pleased with our relationship with Marathon right now, and we're hopeful that we're able to work out some better terms based on how the business is doing.

Nothing to announce at this point, but 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 with -- and being able to take control of the growth that we're seeing. And 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. So Harold and I and the team will be working on that diligently in the coming weeks and quarter. So more to come on that.

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

Operator: Your next question comes from the line of Robert Sussman with Bentley Capital.

Robert Sussman: I'm absolutely staggered listening to this call and the number of wins and 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: It's a good question. Most of the wins have been multiyear in nature, Robert. And you know it from being a professional investor, one of the differentiators of a small company is their ability to organically grow sales. And for us, if you spin back 3 years, the company was really focused on satisfying automotive customers and then other customers that they called us. And so we kind of flipped that around and said, geez, what's the best use of these assets and this know-how that we have. And there are several blaring markets that you just do a simple ChatGPT on where is the best use of these assets.

And so we had to go hire executives that we didn't have from the industry. And then we had to start prospecting and then understand what our gaps were to being able to become an approved supplier and then start quoting, find your way. You don't start off low, you start off high and then kind of find where the market is. And then you start running a program, and we're using salesforce.com as our organizing software tool. And then you track why do you win and why do you lose? And then you try to work around those findings and you drive to outcomes.

What's happened this year is we've had some multiyear 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 and that helped us. So we have references now. And it's fun. And another question you could say is what's big enough, what's too big, what's too small? It's -- we're definitely winning higher amount than we thought, which brings with it more working capital, more CapEx than we thought. 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.

And so 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. But the reason -- and we're losing over 70%. And the reason why we lose is we're being disciplined about the financials. So 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 starting -- we're getting more looks now. So 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.

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

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

Harold Bevis: We're allowed to true up to actuals. So the show-me part of this, Chris is from Missouri, so I should have probably had an 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. So the onus is upon us to match up and be transparent with what our input costs are and the performance of producing for those POs. So it's not much, Robert. It's smaller than you think because the company is pretty good at not letting that happen.

Operator: Your next question comes from the line of Barry Haimes with Sage Asset Management.

Barry Haimes: 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 is worth spending on the session such a program.

Harold Bevis: Yes. So the bottom -- the floors -- 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 real -- 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 multiyear basis for volume. And you really -- 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. And so you see a lack of commitment to each other.

They want to date, they don't want to get married. And so 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. And so 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. And if we do that, they'll give us this huge amount of business, but they don't want us working with others. And so 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. But that's where the real play is, is how much do you want to do versus the commitment that they're offering. The numbers are all there predominantly. And we're able -- we're lucky that we're able to be selective and kind of cherry pick the better return programs. And this year, we've won about 100 -- I think yesterday -- through yesterday, it was 132 programs. We're into August now. And 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. And I'm also going to say that we probably have every single plant and some sort of a new business ramp-up. The biggest and the most exciting ones are obviously the 3 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. So we're definitely focused on those 3 areas with a differentiated push.

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

Harold Bevis: Yes. Let's -- Chris, let's tack team. You want to give a summary on the balance sheet and the financials, and then I'll do the business wrap up.

Christopher Bohnert: Sure, sure. Thanks, Harold. Yes. So 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. So like I mentioned before, I think we really -- we've got another step to go to get the balance sheet fine-tuned for the growth that we're experiencing, and we'll be working hard on that.

Harold Bevis: Thank you, Chris. And 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 and things have traction here at the company. We're proud of the quarter, but we have bigger aspirations, and we look forward to reporting Q3 with you guys in 90 days. Thank you very much for calling in today. And with that, we'll end the call. Christine?

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

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