NN, Inc. (NNBR) Q2 2022 Earnings Report, Transcript and Summary

Hello, and welcome to the NN, Inc. Second Quarter 2022 Earnings Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Jeff Tryka from Investor Relations at NN. Please go ahead.

Thank you, MJ. Good morning, everyone, and thanks for joining us. I'm Jeff Tryka, Investor Relations contact for NN, Inc. And I'd like to thank you for attending today's business update. Yesterday afternoon, we issued a press release announcing our financial results for the second quarter ended June 30, 2022, as well as supplemental presentation, which have been posted to the Investor Relations section of our website. If anyone needs a copy of the press release or the supplemental presentation, you may contact Lambert & Co. at (315) 529-2348. Our presenters on the call this morning will be Warren Veltman, President and Chief Executive Officer; and Mike Felcher, Senior Vice President and Chief Financial Officer. Before we begin, I'd 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 of the company's annual report on Form 10-K for the fiscal year ended December 31, 2021, as well as other filings with the Securities and Exchange Commission. The same language applies to 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, input cost inflation, supply chain constraints, the impact of the automotive semiconductor chip shortage, foreign exchange rates, cash flow, tax rates, acquisitions, synergies, cash and cost savings, future operating results, performance of our worldwide markets and the impacts of the coronavirus or COVID-19 pandemic and the Russian-Ukrainian conflict on the company's financial conditions 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. 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. Reviewing the agenda for today's call, Warren will open with comments on our long-term strategic priorities, building on what we outlined at our recent Investor Day then provide an update from the second quarter. Mike will then provide a detailed update on the financial results before turning the call back over to Warren to discuss our segment results and markets as well as our outlook for 2022, which has been revised based on our current view of business and external factors influencing our results. There will be a Q&A session following the conclusion of the prepared remarks. At this time, I would like to turn the call over to Warren Veltman, President and CEO. Warren?

Thanks, Jeff, and good morning, everyone. Thank you for joining us this morning. Let me start my comments by indicating that our teams have been constructively adapting to a very challenging environment characterized by supplier interruptions, inflationary cost pressures, labor constraints and fluctuating customer volumes. That said, we are not satisfied with our second quarter results, and we need to do better. NN possesses an action-oriented culture predicated on improving every day. So I have strong faith that our teams will rise to meet the challenge presented by this current environment. As we discussed in our May 2022 Investor Day, we have positioned NN for future success through numerous actions and initiatives. If you turn to Page 4 of the presentation, we will review some of the cornerstone initiatives. We have focused our sales efforts on key growth areas. As a refresher, our strategy is focused on the megatrends shaping the future of our markets, and specifically, the transition from a carbon-based economy to a sustainable energy economy. We view this strategy as not only good for the environment, but good for our business as the opportunity of content per vehicle for NN's products on electric vehicles is expected to be approximately triple that of traditional internal combustion engine vehicles. We are targeting sales in the electrical and EV markets to represent more than 20% of NN's consolidated sales by 2025. To deliver focused and accelerated penetration in our targeted segment markets, we are investing in electrical and EV expertise as well as organizing our commercial organization around the growth segments of our strategy instead of the historically narrower objectives of NN's operating groups. By doing so, we position ourselves to more effectively differentiate NN within the segment with the full arsenal of NN's capabilities, both mobile and power, with better insight, speed and innovation to serve customers. Internally, we are adjusting elements of our compensation program to better align individual financial rewards with performance on delivery of incremental volume growth or new business wins, as we call it. I am confident these actions will accelerate growth, including securing larger programs and drive a hunter's mentality across our organization. The relationships we have with our customers are key to our long-term success. The recent supply chain and inflation challenges has made the strength of these relationships more important and critical to our success, and we are pleased with our ability to secure full material pass-through on almost all Mobile Solutions customers. Pricing discussions with customers are ongoing, and we remain focused on eliminating pass-through lag, which is detrimental in an inflationary environment. We have maintained an open dialogue with all customers and have been proactive in addressing future inflationary impacts, including securing new contracts to provide additional flexibility and inflation protection. We remain committed to continuously improving our cost structure. This is especially important given the recessionary threat over the next 12 to 18 months. We have initiatives in process to improve our adjusted EBITDA by $10 million to $12 million through a combination of cost reduction and operational efficiency improvements. The majority of this benefit will come from the optimization of our operating footprint, including the shifting of certain high-labor content programs to lower-cost facilities. We anticipate the closure of our Taunton facility, which was announced earlier this year, will improve adjusted EBITDA by $5 million annually when compared to the trailing 12-month results at the time of the announcement. We remain on schedule to close this facility by the end of 2022 and expect that we will be successful in securing a subtenant for the facility when it is vacated. We're in the process of closing three additional facilities that we expect will further improve adjusted EBITDA by another $5 million annually. We expect that these facilities will be closed by the end of Q1 2023. However, we have accelerated the closure of one facility in spite of the negative impact this action will have on 2022 free cash flow in order to achieve the benefits more quickly. We also have curtailed the hiring of indirect support functions and taken action associated with improved optimization of an indirect labor and reduced SG&A expenses. We have reduced our SG&A as a percentage of sales by over 300 basis points since 2019 and believe we can continue to gain efficiency in these areas. Our dedicated team has fostered our culture, committed to operational excellence, whether that is identifying opportunities to drive profitability or rightsizing our labor and support costs to match production volumes in real-time. We are also taking advantage of opportunities to develop and retain key talent in our manufacturing locations through a variety of creative development programs in this current tight labor environment. We will continue to leverage our unique manufacturing capabilities and comprehensive portfolio of world-class process technologies to meet the needs of our growing customer base. By actively collaborating with our customers as an extension of their teams, we can enhance manufacturability and support faster time-to-market while reducing total cost. Now if you turn to Page 6, we will review some of the accomplishments of our team during the second quarter. Compared to the prior year period, sales increased 1.8% and to $125.4 million despite ongoing supply chain interruptions and the resurgence of COVID in China. Sales in our Power Solutions business increased 5.6% from the prior year period. The increase in sales was primarily driven by higher volumes and favorable pricing in electrical components, partially offset by lower volumes in automotive and aerospace and defense. Mobile Solutions sales decreased 0.7% from the prior year period. The decrease in sales was primarily due to lower volumes as a result of the pandemic and continued supply chain interruptions due to the semiconductor chip shortage, the Russia-Ukraine conflict and other factors. Sales were also negatively impacted by FX as the dollar strengthened versus the prior year. Higher pricing offset most of the volume and FX impact during the quarter. While we continue to take actions to mitigate the impact of the ongoing supply chain and inflationary challenges, material and other nonlabor inflation continues to exceed expectations. Our ability to pass through increased material cost to customers and maintain favorable pricing was responsible for the solid sales performance in our Power Solutions business. For the quarter, unrecovered inflation impacted our second quarter results when compared to the prior year period by approximately $3 million to $4 million. Price negotiations with many of our customers continue, and in fact, approximately $1 million of pricing recoveries were concluded subsequent to the end of the second quarter and will be realized over the remainder of the year. We continue to deploy various strategies to mitigate the impact of current inflation, most of which are underway. We remain committed to prioritizing the health of our balance sheet and maintaining strong leverage ratios to support our strategic vision. Our liquidity position remained strong at $52.1 million with an EBITDA leverage ratio of 3.17x. We remain committed to our 3x leverage target ratio and expect to achieve that level by the end of 2022. We believe our current financial position offers us the ability to opportunistically pursue growth as we focus our strategy on the megatrends shaping the future of our markets. Lower operating results, along with increased investments in working capital to support operations and mitigate current supply chain challenges, resulted in free cash flow use of $2.8 million. Despite the need to maintain higher levels of working capital, including additional safety stock of inventory due to supplier interruptions and long lead times, total working capital turns remained consistent with the first quarter of 2022. On Page 7, we will review our sales pipeline and how it aligns with our longer-term growth strategy. We are pleased with the opportunities generated by our sales and business development teams. Those teams have delivered a significant pipeline expansion in target growth markets associated with the electric grid space and electric vehicles, and we are currently pursuing several opportunities to strengthen our position in each market. Additionally, we have increased the average deal size in our pipeline from $0.9 million in the prior year quarter to $1.5 million this quarter. This focused approach, along with reductions in fuel system programs by OEMs, has resulted in a decline of ICE-dependent pursuits. We are also focused on the opportunity to further expand our presence in the medical market once our noncompete provision related to the sale of the Life Sciences business expires in the fourth quarter of 2023. Turning to Page 8, we will review our new business wins. Year-to-date, through the second quarter, we have secured new business wins with peak annualized sales of approximately $23 million as our efforts of our revitalized team have begun to generate results. Of note, 44% of the new business wins achieved through the second quarter were in the electrical and EV space, highlighting our team's alignment with our long-term strategy. We are also pleased with the low capital ratio we achieved as the new business wins require incremental capital expenditures of just $2 million, allowing us a strong opportunity to improve our financial return on our existing equipment base. Now I'd like to turn the call over to Mike Felcher so he can provide a more in-depth review of our financial performance for the quarter. Mike?

Thanks, Warren. Turning to Page 9, we have summarized some of the key items for the quarter. Sales for the quarter were $125.4 million, up 1.8% from the second quarter of 2021. We continued to see improvement in our residential and commercial electric end market within our Power Solutions group, which was up 15.6% year-over-year, driving year-over-year revenue growth of 5.6% for the segment. This growth was partially offset by a 0.7% decrease in revenues in the Mobile Solutions business versus the prior year, driven by the factors Warren noted and a delay in material inflation recovery as well as unrecovered inflationary, labor and other costs. Results were further impacted by operational inefficiencies due to the ongoing supply chain disruption. We finalized the settlement with a customer in which we received modern equipment at no cost as compensation for volume shortfalls, resulting in a positive impact of $2.3 million of sales and EBITDA in the quarter. The settlement will also help us avoid future capital expenditures as this equipment is already designated for use in a new program. The resurgence of COVID-19 in China negatively impacted operations at our wholly owned and joint venture facilities weighing on second quarter results. Non-GAAP adjusted EBITDA for the second quarter was $10.9 million or 8.7% of sales, down from $13.4 million or 10.9% of sales a year ago. Our EBITDA margin was adversely impacted by continued material and labor cost inflation. Although we were able to successfully pass through the majority of inflation on material to customers through price increases, the total impact of inflation on manufacturing supplies, MRO, utilities, unrecovered material and labor amounted to approximately $3 million to $4 million during the second quarter when compared to the prior year. GAAP diluted EPS was a loss of $0.25 for the second quarter versus a loss of $0.17 per share in the second quarter of 2021. Our current quarter results reflect higher material cost inflation that was not fully recovered through pricing actions, as I just discussed. Our non-GAAP adjusted diluted EPS was a net loss of $0.09 versus breakeven in the prior period. Turning to Slide 10. Working capital remains consistent with the first quarter at 4.2 turns. Due to the prolonged impact of supply chain challenges, we continue to hold higher-than-usual levels of inventory to ensure our ability to meet customer needs, especially in China due to recent COVID outbreaks that have resulted in government-imposed shutdowns that have adversely impacted our supply logistics. While inventory levels remain elevated, we will focus on returning to more normal inventory levels as the supply chain stabilizes and when we are able to ensure our ability to continue serving our customers. Turning to Slide 11. We will - we provide a look at our continued disciplined approach that we have taken at capital expenditures over the past year. We have decreased CapEx year-to-date compared to 2021, down to $9.7 million from $11 million last year. As we look to maintain discipline on cash, we now anticipate that our full year CapEx will come in between $19 million and $21 million, a reduction of approximately $1 million from our outlook last quarter. We will continue to allocate capital expenditures disproportionately to higher-growth markets that we have identified as part of our long-term growth strategy. Slide 12 illustrates our free cash flow for the quarter. Free cash flow was a use of $2.8 million in the second quarter of 2022 compared to a free cash use of $7.5 million in the prior year. Free cash flow in the quarter was primarily driven by lower operating results, partially offset by a sequential reduction in working capital. In addition, we incurred approximately $1.1 million in cash costs for severance, litigation and facility closure costs during the quarter. Prior year free cash flow also included a $9.2 million tax payment related to the sale of Life Sciences. In order to better manage working capital and its impact on free cash flow, we will continue to take advantage of opportunities that have a short payback and are low risk, including utilizing customer programs to improve receivable terms. Please turn to Slide 13. Net debt at the end of the second quarter was $146.3 million versus $141 million in the first quarter of 2022, an increase of $5.3 million. Our net debt-to-adjusted EBITDA ratio stood at 3.17x at the end of the second quarter, an increase from 2.9x at the end of the first quarter. While this level is above our 3x target, we expect to be under that target by the end of the year. We had $52.1 million of liquidity, including cash and availability on our revolver as of June 30, which was a decrease of $6.3 million from the first quarter. Our ABL was drawn by $2 million at the end of the second quarter with undrawn availability of just under $37 million. With that, I will turn it back to Warren.

Thank you, Mike. On Page 15, we broadly outline our view of current market conditions within each of our main markets. Within the electrical space, we see the ongoing transformation of the energy and electrical equipment markets with governments and corporations around the world adopting policies, implementing incentives and allocating funds to accelerate the adoption of sustainable energy. The demand for electric control panels is expected to resume its rapid growth by the end of 2022 as companies continue to invest in operating infrastructure. Fortune Business Insights reported that the global market size for battery electric storage is estimated to rise from $10.9 billion in 2022 to $31.2 billion by 2029, which is a compounded growth rate of 16.3%. The commercial, private and industrial sectors are expected to yield the highest demand for battery electric storage, while the rising penetration of lithium-ion batteries is likely to support broader growth. Expansion of the infrastructure projects, along with the growth in the transportation sector, will encourage global leaders and new entrants to tap into these opportunities. The transition to EVs continues to gather momentum with significant OEM investment, including additional shift in their employee compensation plan designs to support EV development and commercialization. We recently saw Ford announced a significant increase in their planned investment in developing EV solutions for the broad market. While we believe the transition to EVs is inevitable, the ultimate path and time frame for the transition is uncertain. On the Mobile Solutions side, light vehicle production forecast updates for the month of July indicate recovery in China and South Asia markets, partially offset by ongoing supply chain pressures as well as deteriorating economic conditions culminating with a global sales forecast that is now flat with 2021. IHS Markit advises the auto industry is already operating at or near recessionary levels influenced by supply chain challenges, the Russia-Ukraine conflict and ongoing COVID-19 dynamics. We have presented additional information for each of our operating groups, starting with Power Solutions on Page 16. The Power Solutions generated an increase in sales of 5.6% year-over-year, primarily driven by increased electrical component sales, which were up 15.6% year-over-year and more favorable customer pricing. These positive trends were partially offset by reduced sales to automotive and aerospace and defense customers. Profitability decreased compared to the prior year period driven by inflationary costs not fully recovered through pricing actions, variable cost inefficiencies associated with supply chain interruptions, uneven customer ordering patterns and labor constraints caused by COVID-19 pandemic-related interruptions. Looking forward, the closure and consolidation of our Taunton, Massachusetts facility is proceeding on schedule and we continue to identify additional opportunities to optimize our operations and reduce costs. On Page 17, sales in our Mobile Solutions group decreased 0.7% versus the prior year period. The decrease was primarily driven by increased demand for diesel products in 2021 in advance of tightening emission standards in China compared to lower demand in 2022 due to the impact of the Russia-Ukraine conflict on European production as well as the effect of the pandemic, particularly within the China market. Similar to Power Solutions, pricing negotiations were mostly successful in recovering inflation. Negotiations with customers for unreimbursed inflationary cost increases are ongoing within a framework previously established with customers. In China, volume reductions caused primarily by COVID-related shutdowns negatively impacted both the contribution margin from our wholly owned entity and JV net income. Looking ahead, we are seeing positive trends in customer demand through the month of July. However, the reemergence of COVID in China, along with the ongoing Ukraine conflict and supply chain challenges, present risks to the current outlook. Turning to Page 18. We are updating our outlook for 2022 to reflect the considerable changes in market conditions since our last update at the Investor Day in May. Included on this slide we outline the drivers of our revised outlook. Our full year 2022 outlook now reflects the following: net sales in the range of $510 million to $525 million compared to the previous range of $515 million to $540 million, adjusted EBITDA in the range of $51 million to $57 million compared to the previous range of $57 million to $63 million and free cash flow in the range of breakeven to $5 million compared to the previous range of $14 million to $20 million. As we have disclosed when providing our original 2020 outlook, we assume no significant impact from the semiconductor chip shortage in the second half of 2022 and no significant production disruptions due to the pandemic or the Russian-Ukraine conflict, all of which have impacted us in the second quarter and are expected to continue to disrupt supply chains and OEM automotive volumes through the balance of 2022. In addition, inflation has not moderated. And although we have realized more pricing from customers than originally expected, we still have a shortfall versus the inflationary increase we are seeing in our business. Our free cash flow outlook reflects higher interest expense due to recent actions taken by the Federal Reserve and a lower dividend from our China JV due to the pandemic-related impacts. Additionally, we expect increased facility cost closures - facility closure costs due to an acceleration of the timing of certain plant closures. As a reminder, our free cash flow outlook does not include CARES Act tax refund of approximately $10 million due to uncertain timing. Additionally, we have received and evaluated financial information from the acquirer of the Life Sciences business that was sold in October 2020 and concluded a contingent payment will not be made as the minimum threshold for an earnout payment will not be met. Lastly, I am pleased with our team's focus and commitment during the second quarter. As I previously indicated, we are not satisfied with the second quarter financial results nor do they exemplify the performance-driven culture of NN. We did, however, continue to make progress to position our company for long-term success. The expansion of the pipeline and new business wins are indicators of our progress. We still have a number of challenges and uncertainties ahead of us, and we are responding by positioning NN to overcome these challenges. We are reorganizing our sales and new business development teams to better attack megatrend opportunities associated with the electric revolution in the grid and the automotive space. We are consolidating and optimizing our manufacturing footprint to better service our customers, reduce fixed costs and take advantage of more cost-effective locations. We are evaluating staffing levels and SG&A expenses throughout our organization to drive additional efficiencies. And we are focused on minimizing working capital and capital expenditures to improve free cash flow and provide a higher return on invested capital. We expect that the culmination of these activities will drive improved shareholder value. That concludes our prepared remarks, and I will now turn the call back to the operator for questions.

[Operator Instructions] Our first question comes from Rob Brown of Lake Street Capital Markets. Please go ahead.

Good morning. Want to dig in a little bit on your kind of efforts to deal with the inflationary pressures. Do you feel like you've got that sort of in the contract base now? Or as things change with inflation, do you still think there's a lag? Or how do we sort of think about the lag at this point that's in the contract base.

Yes. Rob, in most cases, just to reiterate, we have secured pricing on material at 100%. And when I say in most cases, most of the customers - significant majority of the customers within the Mobile Solutions group, that is the case. There are just a few customers where we might not have 100% recovery. But the issue is the timing of that recovery is predicated on either twice a year or each quarter meetings where we look back at what the average price of the material cost was during the quarter and then make an adjustment prospectively, okay? So there is - that's what we're calling the lag. And that has obviously created an issue for us in the second quarter where we had some unreimbursed costs that will certainly true up as we negotiate with the customer going forward. There are additional costs. We've done - I think our financial teams have done a very nice job of analyzing how we're being impacted in other areas. We've been going through and doing a part-by-part analysis as an example of MRO and other manufacturing supplies and what our year-over-year cost increase is for that. We now are approaching customers with that data and talking to them about recovery of some of those types of costs as well. And that is ongoing. So I would expect at least over the next quarter, there will still be a certain amount of lag if inflation continues to push up. It should be - I would tell you it should be less of an impact in the third quarter as we're seeing some of these cost increases slowing. We've actually seen some pricing actually go the other way, and interestingly, had some customers approach us about adjusting our pricing automatically for some of that price movement. And obviously, we said no. We'll go with the approach that we have. But it's still certainly a threat to the business. I think that we are on it as a management team. As I indicated, the pricing that we've received from customers through the first six months certainly has exceeded what our expectation was at the beginning of the year, but still has the inflation movement.

Great. That's great color. And then sort of on the EV activity or the new contract activity, you had some good progress there and there's a lot in the pipeline. It's good to see your efforts paying off there. But just wanted to get a further sense of how those efforts are seeing resonance? Are you taking kind of share in that business? Or is it just the overall markets happening and your - it kind of fits with what you do. But I presume you're taking share, but just want to get a sense of how the share gains are happening because of your offerings in that market.

Yes. So let's break it down. On the EV side, certainly, we're - I think you could characterize it as we're taking share as that business is coming to market, right? So it's an evolving situation where there's growth or opportunity for all suppliers to secure new business as the OEM production shifts from the more traditional ICE or internal combustion engine to electric vehicles. So we feel confident that we're positioned well to do that, and we're seeing that activity on various programs. On the grid side, we talked about that market and some of the growth that we're seeing there. There's opportunity - we see specifically opportunity in battery and energy storage opportunities for us when if you look at the North American concentration of that, there's very little production of batteries for battery energy storage that's being produced here in the United States. So we are pursuing several of the players that are involved in that for opportunities for us and components that we can manufacture there. So trying to grab our percentage of this year as that market evolves as well.

Next question is from Tom Kerr of Zacks Investment Research. Please go ahead.

Good morning. Can you maybe back up a little bit on the big cost issues. They call it the triple play: inflation, supply chain issues and labor shortages. Can you sort of break those down in detail? Like what is actually in there? What is the cost - where are the labor shortages? And sort of related to that, do those all show up in cost of goods sold or is some of that in SG&A?

Well, the labor shortage issue for us centers around potential disruptions that we have in our facility. And just to give you an indication, if we have an individual within a facility, within a product area that tests positive for COVID, obviously, he has to leave the facility. And then through our contract tracing, we evaluate where he potentially could have had additional contacts within our facility and then those people need to leave the building as well. And we have situations when that happens where a whole product group can have a substantial portion of their employees leave the building with very little notice, right? And our general managers then have to react to that situation by reallocating resources from other areas, trying to have people work overtime and do whatever we need to in order to replace those individuals. That's one situation. Another situation would be where we have opportunity and we have backlog in the company, and we have had that in certain instances on the electrical side, and we just don't have the number of hours available given some of these constraints in order to satisfy that demand, okay? So you couple that with supply chain interruptions where we'll have a supplier notify us, as an example, material that we were expecting to receive for whatever reason something happened within their facility, and that material now is going to get pushed two to three weeks out. So it creates a huge gap within our manufacturing operations. So again, we have to reshuffle the deck. We have to work with our customer to try and find another source of that material if possible. And if not, we have to reshuffle the deck to try and reallocate resources within the facility. And then when that material shows up, we end up working extra hours in order to replenish any inventory queues that were deleted, okay? So those are some examples of some of the struggles that not just NN, but I think most suppliers are having in this type of environment.

Yes. And I'd say in terms of relative magnitude, Tom, I'd say the unrecovered inflation is the predominant driver for the quarter. We've been operating in an environment of labor shortage and supply chain disruption for several quarters in a row. So particularly sequentially, the inflation impact is the main driver.

But in terms of actual input costs, are we talking materials, chips or everything?

From a cost standpoint, where we have - I would tell you where the majority of the unreimbursed inflationary cost for us today is - exists in areas of our business like manufacturing supplies, utilities, machine repair parts, those types of things where we've seen pretty severe inflationary pressure. If you look at some of our European operations and you follow what's going on with the Ukraine situation and the energy coming out of Russia - or not coming out of Russia today into Europe, it has skyrocketed some of the utility costs in Europe as a result. And those are the costs that we're talking - those are the types of costs that we're talking to customers today about pricing actions associated with those.

Got it. And separately, can you expand on the end market weakness just a little bit. I think you covered auto in the slides quite a bit, but maybe other color on that. And then the aerospace weakness as well.

Yes. So the aerospace sales adjustment, we've been going through a process where we're closing our Taunton facility, as an example, and we have been rationalizing some of that customer base, done a very tight analysis as it relates to a profitability by product, profitability by customer. And as we were shutting down that facility and relocating it to our Attleboro operations, we're moving business that we're confident is going to be a profitable business for us going forward. And we've also seen on the - just a general on the aerospace and defense side, that industry segment is down as it relates to overall production.

All right. Got it. A couple more here on the sort of cost structure. You mentioned the facility closures, that's the primary driver of the $10 million in EBITDA, but you also mentioned operational improvement. I guess that means going through SG&A. Are you able to give any more details on that at this time? Or do you still expect that to be $50 million more a year going forward?

Well, one of the things - within the facility moves, you have a couple of issues there, right? You have certainly just the reduction in fixed costs where we're shedding or expect to shed lease costs, facility costs, facility maintenance, utility costs, certain indirect support functions because that facility no longer exists. So those costs are coming out. In addition, some of that business is moving to facilities where our cost structure is just more favorable. So we expect that our variable margin on that business is going to accelerate. So we have incorporated that in some of our estimates. We've seen continued reduction in our SG&A-related costs. As I indicated, since 2019, there are other things that we're working on there in order to continue to pull costs out. And we're also looking at some of our other overhead or indirect functions on how we can become more efficient there. And we think there's continued opportunity for us within the facilities to pull some strings for cost reductions there.

Got it. I have a couple more quick ones, but I'll turn it back in the queue for now, but I can get back on if needed.

Yes. I think you're good, Tom. Why don't you go ahead?

Okay. Is the China facilities back to full at this point or --

That was an interesting development. We actually had in the last two or three days of the quarter, the facility had been operating through disruptions. If you follow what's gone on in Shanghai or the Greater Wuxi region, that was an area where there were outbreaks of COVID where the Chinese government was actually shutting down significant portions of that area, including the ports, which created problems for us securing material during that period of time. But we actually had a close contact in one of our facilities and the Chinese government actually shut our facilities down for two or three days at the end of the quarter and relocated all our employees to hoteling space and quarantined them for five days, then brought them back to the facilities where they were quarantined in the facilities for another five or six days. But it actually allowed us to start production back up. So I would tell you it's more normalized at this point in time, but the government has not changed its stance. I think everybody knows that they have a hard line stance as it relates to the spread of COVID. So it's something that we're watching very closely. And certainly, we're being very diligent about as it relates to our employees or any visitors to our facilities.

All right. Great. Another separate issue. I wasn't aware it was mentioned, the planned reentry into the medical market. Does that mean you're trying to create a whole another new life sciences segment at some point? Because you have medical business now, small amounts, but what can't you do until the fourth quarter of 2023?

Yes. So we have a noncompete agreement that we signed with the acquirer of our previous Life Sciences group that extends through October of 2023. And so we're not allowed to compete with the types of products that we were making in that group or call on some of those customers. But we are allowed to continue to manufacture the types of products that remain in our business, which is some medical instruments and that type of thing that we supply to a group of what can be long-term strategic customers for us. So our view is that as we get closer to the expiration of that noncompete, it's going to put us in a position that we're going to be able to revisit the opportunities available that are available to us in the medical space and pursue those opportunities. But certainly, we need to ready for that through staffing and some other related activities prior to an entry back into the market and calling on customers. And that's what we're referring to there.

Could the entry be - involve M&A, too, or more just sales-type efforts?

We think that there's opportunity to expand the nature of what we're doing and use some of the existing core competencies that we have in the business to seek out opportunities for metal machining and other similar types of applications where we already have that capability in-house.

Got it. All right. A couple more financial ones and I'm done. So based on the outlook, the revenue outlook for the year, that would imply, I think, double-digit revenue growth for Q3 and Q4. Is that - my math correct on that?

From a year-over-year basis?

Yes.

I need to look.

I have another quick one while you're looking that up. The CARES Act tax refund, is that - I mean, any issues that is delaying it? Or any other color you can give on when that can be received or --

Yes. Look, I would tell you on that, Tom, it's an extremely frustrating situation on our end. You've read in the Wall Street and other publications that the IRS callback rate on questions is 10%, okay? So we have been extremely diligent, because it's important to us, right, in following up on that. And we've actually several months ago - earlier this year, I should say, we asked our representative to Congress to get involved and find out what the status and see if we could push that along because the whole purpose of that refund was to provide companies some additional liquidity during a very difficult time associated with the pandemic. And here we are in 2022, and we still don't have it. So rest assured that we're doing everything and pulling every string that we possibly can to understand what the status of the situation is and to try and get that expedited. We've recently responded to a request from the IRS for additional information. We turned that around immediately, but we're still on hold with them as it relates to receiving no definitive date on when that's expected to be paid.

Yes. And to answer your question on sales, yes, they would have - we are expecting year-over-year double-digit growth in the second half. And reminder that Q3 and Q4 last year, particularly in automotive, were depressed given those were the periods most significantly impacted by the semiconductor situation.

This concludes our question-and-answer session. I would like to turn the conference back over to Warren Veltman, President and CEO.

Yes, I'd just like to conclude by thanking everyone for participating in our call today. We appreciate the opportunity to share our activities with the business. Wish you all a good day. Thank you for your time.

The conference has now concluded. Thank you for your participation. You may now disconnect.