NN Inc (NNBR) 2020 Q3 法說會逐字稿

Good day, and welcome to the NN Third Quarter 2020 Earnings Conference. Today's conference is being recorded. At this time, I'd like to turn the conference over to Mark Schuermann. Please go ahead, sir.

Thank you, operator. Good morning, everyone, and thanks for joining us. I'm Mark Schuermann, Vice President, Treasurer and Investor Relations. I'd like to thank you for attending today's business update. Our presenters this morning will be President and Chief Executive Officer, Warren Veltman; and Tom DeByle, Senior Vice President and Chief Financial Officer. If anyone needs a copy of the press release or the supplemental presentation, please contact Abernathy McGregor at (212) 371-5999.

Before we begin, I 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-K for the fiscal year ended December 31, 2019, and when filed, the company's quarterly report on Form 10-Q for the 3 quarters ended September 30, 2020. The 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, foreign exchange rates, cash flow, tax rates, acquisitions, synergies, cash and cost savings, future operating results, performance of our worldwide markets, the impact of the coronavirus pandemic 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 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.

At this time, I will turn the call over to Warren Veltman, President and CEO.

Thanks, Mark, and good morning, everyone. As everyone is likely aware, October 6, 2020, our strategic initiative process concluded with the sale of our Life Sciences Group for $825 million, consisting of $755 million in cash and a $70 million earn-out based on 2022 performance. Our third quarter public filings for the quarter will reflect some significant changes as a result of this sale, including treating our Life Sciences Group as a discontinued operation, including all Life Sciences assets as current assets held for sale and reporting the October debt pay down to our lenders as current maturities of long-term debt.

The closure of the Life Sciences sale is more significant than the reporting changes in our Form 10-Q filing as it represents a major transformation of NN's capital structure. And substantially reduces our risk profile, providing us a solid foundation from which to grow the business. This substantial reduction in leverage also enhances our reputation as a stable, long-term supplier and provides a more secure income stream for our employees.

Prior to the sale, we had an unsustainable capital structure where NN was leveraged at over 6x EBITDA, management had assessed that the company had substantial doubt regarding its ability to continue as a going concern, and we had to seek covenant relief from our lenders. Subsequent to this sale, we now have a more manageable capital structure with leverage below 2x EBITDA. We no longer consider NN as a going concern. And we are in compliance with the financial covenants in our credit agreement.

Additionally, the company has adequate liquidity of approximately $75 million at the end of October, including $28.5 million of Cash Holdings and the ability to borrow on an untapped revolving credit facility. Standard & Poor's has recognized this improvement by upgrading our rating 2 notches to B+, and we expect an upgrade from other rating agencies as well. Obviously, we have had a tremendous focus on improving our cash flow over the last year and placing significant reductions on capital expenditures and focusing on working capital were 2 primary areas of focus. We will continue to focus on these areas, however, our new leverage profile allows us to view the future more optimistically and pursue growth programs that fit with our growth strategy and provide the appropriate level of return for the investment.

As we move forward, we are excited about the prospect of growing the Mobile Solutions and Power Solutions Group. We have demonstrated that both groups can be profitable in a difficult economic environment and we maintain a diverse product portfolio that includes components and subassemblies for automotive, electrical, general industrial, aerospace and defense and the medical industries. The combination of Mobile and Power capabilities in our -- in the automotive and electric space are unique and strongly position us to participate and capitalize in innovative programs and the evolution from the internal combustion engines to hybrid and full electric vehicles. We expect the momentum that we have built with our aerospace and defense customers to continue and fully utilizing the capacity we have in place for these product offerings will be a focus.

Lastly, it is noteworthy that we retained within our Power Group, a medical business that manufactures specialty surgical instruments for lower volume application that complements the manufacturing expertise of our aerospace and defense business. We expect that we will continue to support and grow with these customers in the future.

Turning to Page 5. We have summarized some of the other key highlights of the quarter. Overall, our business rebounded from the significant impact that the COVID pandemic had on our second quarter results, with reported monthly sales increasing sequentially throughout the third quarter. Sales for the quarter were $113.8 million, down $5.6 million from a year ago, but up 44.9% -- excuse me, down 5.6% from a year ago, but up 44.9% from the COVID-19 impacted second quarter. The year-over-year comparison was adversely impacted by foreign currency of $2.4 million.

In spite of the lower sales volume, reported EBITDA and operating margin both outpaced the results from a year ago. EBITDA was $11.4 million or a 10% of sales, up $2.3 million from a year ago when EBITDA was 7.6% of sales. Reported operating loss was $1.5 million versus $1.8 million 1-year ago. GAAP EPS from continuing operations was a loss of $0.04 per share versus a $0.12 per share loss from a year ago.

The Q3 results were negatively impacted by a $2.1 million deferred tax asset reserve due to uncertainty associated with the utilization of certain tax attribute carryforwards. Our adjusted net income from continuing operations was $0.07 per share versus $0.08 per share in the prior period. Cash flow for the quarter, including the sold Life Sciences Group, was a negative $1.4 million, due primarily to working capital needs, driven by significant sales increases since the second quarter. Although working capital increase in monetary terms, we generated a significant increase in working capital turns over Q2. Tom will provide more detail on this in his presentation.

Page 6 of the presentation summarizes the revenue metrics for our groups. As I indicated, our consolidated sales for the third quarter were down 5.6% from a year ago. Our Power Solutions Group experienced an 8.5% year-over-year decrease in the third quarter and a 14.2% year-over-year decrease for the 9 months ended September 30. Both periods were adversely impacted by the COVID pandemic. In addition, 2020 third quarter sales were positively impacted by approximately $1.9 million due to the increase in the cost of precious metals that were directly passed through to our customers.

Mobile Solutions sales were down 3.7% in the third quarter from a year ago, due primarily to the COVID pandemic and decrease in differences in foreign exchange rates. The 2020 year-to-date results are down 21.4% from 2019 due to the effect of COVID, especially in the second quarter of 2020.

Now I'd like to turn it over to Tom DeByle, so Tom can provide a more in-depth review of our financial performance for the quarter. Tom?

Thanks, Warren. Please turn to Slide 7, which includes our third quarter results on a GAAP non-GAAP, excluding special items and a total adjusted non-GAAP basis. Despite sales shortfall, gross profit as a percent of sales was better in the -- better than the prior year on a GAAP, non-GAAP excluding special items and total adjusted non-GAAP basis. The improvements were driven by indirect labor reductions, cost controls and manufacturing efficiencies. Operating income on a GAAP basis showed a 20 basis point improvement over prior year. However, on a non-GAAP, excluding special items and a total adjusted non-GAAP basis showed a decrease of 80 basis points and 170 basis points, respectively.

EBITDA for the quarter was double digits on a reported non-GAAP excluding special items and a total adjusted non-GAAP basis. Comparing to prior year, EBITDA on a reported basis was $11.4 million or 10% of sales versus $9.1 million or 7.6% in the prior year. EBITDA, excluding special items, was $11.8 million or 10.4% of sales versus $10.7 million or 8.9% in the prior year. EBITDA on a total adjusted non-GAAP basis was $14.7 million or 12.9% of sales versus $15.9 million or 13.2% in the prior year.

Let's go to Slide 8, which provides a detailed bridge of our reported GAAP, non GAAP, excluding special items and total adjusted non-GAAP. The main takeaway on this slide is that our adjustments from our reported GAAP to the total adjusted non-GAAP are coming down. We have been working hard on eliminating these expenses. Let's look into more detail and focus our attention on the upper portion of the bridge.

There were 2 tax-affected special items in Q3 2020. Severance accounted for $0.3 million and write-off of debt issuance costs was $0.1 million. The discrete tax items for the third quarter of 2020 totaled $3.7 million and related to the Cares Act of $1.9 million, changes in estimates of foreign withholding tax of $0.7 million and $1.1 million related to the impact of the prior goodwill impairment. In the prior year's quarter, there were 3 tax-affected special items consisting of $0.3 million of asset write-down, Brazil $0.2 million and severance of $0.8 million.

Now let's turn our attention to the lower section of the bridge. In Q3 2020, the tax-affected nonoperational adjustments relating to capacity and capabilities development, professional fees and integration and transformation were down $1 million year-over-year. Tax-affected FX on intercompany increased year-over-year by $1 million and the change in value of preferred stock tax withholding increased by $0.1 million.

Turning to Slide 9. Net working capital at the end of the third quarter was $108.2 million, compared with $112.6 million in the prior year, a decrease of $4.4 million. Working capital turns were 4.2 turns versus 4.3 turns in the prior year. Sequentially, working capital turns improved over the second quarter from 3 turns to 4.2 turns, as you can see on the graph. This slide also shows working capital turns of Mobile Solutions improving year-over-year and Power Solutions falling short of prior year. Power Solution shows a decrease in accounts payable in the current year compared to the prior year. The higher accounts payable in the prior year related to the build-out of our Irvine, California plant in accounts payable in Q3 2019.

Please turn to Slide 10. Net debt at the end of the third quarter was $782.9 million versus $866.8 million in the prior year, a decrease of $83.9 million. This slide also shows pro forma net debt of $82.9 million as of October 6, after the $700 million paydown of the Term B debt. Adjusted EBITDA on a trailing 12-month basis was $42.8 million for a leverage ratio of 1.94x.

During the past year, Warren and I have been working on putting in place an appropriate capital structure. We have taken a number of measures to reduce costs and improve liquidity as we eliminated the dividend, cut capital spending and reduced fixed costs.

In November 2019, we announced exploring strategic alternatives. This was a year-long process and resulted in the sale of the Life Science business. As the slide shows, on a pro forma basis, we have used the proceeds from the sale of Life Science segment to reduce debt by $700 million. We are now in a much better financial position.

Slide 11 shows our free cash flow for the quarter, which still includes Life Sciences. Free cash flow was a use of cash of $1.4 million in the third quarter 2020 compared to a free cash flow of $17.5 million in the prior year. Year-to-date, free cash flow shows a use of cash of $1.2 million versus the use of cash of $7.1 million in the prior year.

In the fourth quarter of 2020, we will break out our free cash flow for the quarter, and it will no longer include Life Science in our earnings presentation. Slide 11 summarizes our capital spending, depreciation and amortization trends. Capital expenditures were $3.1 million or 2.8% of sales for the third quarter compared to $8.1 million or 6.8% of sales in the prior year. Year-to-date capital expenditures were $14.5 million or 4.7% of sales versus $29 million or 7.6% of sales of less than $20 million for the calendar year 2020.

With that, I'll turn the call back to Warren.

Thanks, Tom. We have presented additional information for each of our operating groups, starting with the Mobile Solutions group on Page 14. Sales for the Mobile Solutions group were off 3.7% a year ago. Our North American and Europe operations all continued to be hampered by COVID and reported sales of 86% to 93% of the prior year totals. South American sales were 112% of last year's sales in local currency, but only 82% in U.S. dollars due to the weakness of the Brazilian currency.

Those sales reductions were partially offset by sales from our China operations, which were up 128% from a year ago, which were largely unaffected by COVID during the third quarter. We saw margin improvement across the board in the third quarter. GAAP operating profit increased to 7% of sales, up 240 basis points from a year ago. And reported EBITDA was 18.6% of sales, an increase of 440 basis points from 2019 third quarter.

This margin improvement is due to improved variable margins due to operating efficiencies and fixed and selling, general and administrative cost reductions. And is in spite of the inclusion of a $1.4 million customer litigation settlement that improved last year's results. We expect to see some stability in production volumes in the fourth quarter, with sales reducing approximately 5% from Q3 due to the seasonality associated with the November and December holidays.

Our fourth quarter focus in Mobile Solutions will be on CapEx containment, working capital management and operating efficiency.

Moving on to Power Solutions on Page 15. Sales for the Power Solutions group were off 8.5% and the lost variable margin from reduced sales contributed to lower operating profit and EBITDA from a year ago. Operating profit margin dropped 440 basis points and reported EBITDA as a percentage of sales decreased by 280 basis points. The significant increase in precious metals year-over-year contributed to 140 basis point reduction in margin percentages as sales and material costs both increased by the same amount driving down margins.

Additionally, product mix from 2020 was unfavorable versus 2019, and we experienced COVID-related disturbances that impacted profitability. Fixed cost reduction efforts positively impacted margins by $1 million during the quarter. In spite of the lower year-over-year margins, we are encouraged that our Power Solutions group increased both sales and profit sequentially during the quarter.

We expect that Power's Q4 sales will be a run rate similar to Q3 2020 as we expect ongoing effects from COVID and delays for certain aerospace and defense programs. Profit margins will still be impacted by the effect of the precious metal increases. Like the Mobile Group, our corporate focus on cash flow will dictate ongoing efforts to contain capital expenditures and improve working capital turns.

Turning to Page 16. With the sale of Life Sciences complete, NN has begun a new chapter as a financially strengthened organization with 2 focused highly complementary segments. Our improved capital structure should enhance NN's ability to capitalize on the powerful synergies of our Mobile Solutions and Power Solutions businesses to drive margin improvements, continue delevering with consistent cash flow and generate long-term shareholder value.

We are encouraged by the stronger sequential growth we saw across our Mobile Solutions and Power Solutions businesses in the third quarter driven by improved customer demand across our end markets, even amidst ongoing challenges related to the pandemic.

Going forward, we remain intensely focused on streamlining our cost structure to best align with the current environment. This includes maintaining a strong discipline related to CapEx and continuing to manage our debt levels. Obviously, the COVID pandemic is still prevalent and may continue to create ongoing disruptions in our economy. We remain firmly committed to providing our employees with the safest working environment possible. I once again thank them for their efforts over the last 8 months in complying with the rigorous requirements we have implemented to keep them safe. And for safeguarding the health of their fellow employees.

We monitor the situation daily and are in regular contact with our customers regarding potential disruptions in demand caused by COVID. As we have indicated previously, given the uncertain nature of how our customers and our production facilities will be impacted by COVID, it is difficult to provide longer-term guidance for sales and earnings.

In my comments, I have provided Q4 sales expectations for each of the groups, given our current customer schedules. Certainly, our fourth quarter demand could change if the COVID pandemic continues to worsen or the Government imposes mandatory shutdowns.

That concludes our prepared remarks, and I will now turn the call back to the operator for questions.

(Operator Instructions)

And we'll take our first question from Daniel Moore with CJS Securities.

Congratulations on, obviously, the completing sale of Life Sciences. I'm going to ask more than 1 or 2 questions because I think it's really important to level set kind of where we stand today. First and foremost, Mobile Solutions and Power Solutions. Just to clarify, for Q4 Mobile Solutions, you said revenue up about 5% sequentially. And Power Solutions about -- down about 5% year-over-year. Did I get that right?

I don't know if I said sequentially. I said that the Mobile Solutions business was down year-over-year. And it was up sequentially, that is correct.

That's for Q4. I'm just looking at the outlook, I'm sorry?

For Q4, for Q4.

I want to make sure I noted the commentary correctly.

Sure. What I said was that we expect the fourth quarter for mobile solutions actually to be down from Q3, about 5%.

Okay. Okay. Got it. Because of the seasonality.

Because of seasonality. Yes.

And Mobile -- Power Solutions in the slide deck, about 95% of prior year, so down about 5% year-over-year. Is that right?

Yes, pretty -- yes, yes.

Got it. Okay. And Mobile Solutions in the quarter for Q3, turning backward, jumped 70% sequentially, nearly flat year-over-year. Any sense for how much of that jump might have been filling depleted inventories? Or do you think that's relatively consistent with end market demand?

We think there is some inventory still going on right now. If you look at the number of days of inventory in North America, it's lower than the OEMs typically would like. So given what we came out of in the second quarter, Dan, it's hard to determine whether it's filling demand or inventory. But at this point in time, given where the inventory levels are, our expectations, at least what we're seeing in the fourth quarter is that it remains pretty stable as they try and put some of those inventory days back in place.

Perfect. Okay. And can you give us a sense -- just remind us, auto, in general, either as it relates to Mobile Solutions or total revenue. What's auto as a percentage of pro forma revenue now that we've divested Life Sciences? And what's the breakdown of traditional combustion versus EV HEV?

The overall auto business, I believe, is in the neighborhood of 50% to 55% in that neighborhood of now the go-forward business. And as it relates to how much of that, as you know, the full electric side of the business today is not overly significant. So the bulk of the business that we have today still is in the (inaudible) area. Certainly, as it relates to hybrids, 20% of our -- 25% of our auto business is Electric Power Assisted Steering. So we're across the board in that area. So areas where we don't believe are going to be adversely impacted by the shift to hybrid or battery electric vehicles, we could be across all platforms. Right.

Got it. Yes. Okay. And in Power Solutions, maybe just a general breakdown of revenue between electrical, aerospace and other? And are you seeing any green shoots for electrical in particular?

Are we seeing any what?

Green shoots just signs of more significant to recovery, if you will?

Yes. I mean, as we look at the Power Solutions business, we've done a lot of market research on that over the last several months. And when we look at the compounded annual growth rate for that business with a shift to smart meters and smart grids and microgrids, we see a significant amount of upside there. The same with our aerospace and defense. I would tell you, aerospace and defense today is probably 5% or 6% of our business. But we've positioned that business to be a much bigger piece of our business. Going forward, we see some significant growth there. The medical business that I talked about is another 5% or 6% of our overall business today, and we have opportunity there as well. The rest is, as we've talked about, is primarily electrical components, either for the general -- either for the electric space, the automotive space or the general industrial space.

Perfect. And then one more for me, and I'll pass it off. But in the press release, you stated you're now intensely focused on streamlining cost structure to align with the current environment. Now that we've divested Life Sciences. Can you elaborate on that? Are there specific projects or cost reduction initiatives you have in mind, be it in corporate or within the segments? And will you be able to maybe quantify those at some point?

Sure. I would tell you internally, what we've targeted, there's opportunities across the board for us as we look at our over selling, general and administrative expenses. And we've targeted over the next, let's just call it, 6 months to take another $4.5 million to $5 million of overhead structure out of our business. And when you look at the Mobile and the Power Groups together, although those management teams, we have separate management teams for those businesses, we have over the last 9 months started to consolidate certain operations where we felt -- and I shouldn't say operations but functions where we felt that there were opportunities from a synergy standpoint to take costs out of the business, we have been doing that, and we will continue to look for those opportunities going forward.

And I would tell you, the last area that we're focused on from a potential efficiency and cost reduction standpoint is in the IT area. Our IT group has done some really positive things over the last 6 months. As it relates to restructuring our IT infrastructure, allowing us to get information more effectively and efficiently out of some of the systems, especially on the Power Solutions side. And that's an area where we think that we can add additional efficiency going forward as well.

(Operator Instructions)

Next we'll go to Steve Barger with KeyBanc Capital Markets.

It's Ken Newman on for Steve. So first, I wanted to jump back to the Mobile volumes that are coming back. I'm curious, are you seeing your customers come to you with new programs to quote? Or do you think that's going to be on hold for a while?

I think on the mobile side, we are quoting new programs. They're not typically programs right now that would impact what's going on in the fourth quarter for that matter, in the first half of next year. Typically, the line of sight for the OEMs and the Tier 1s is a little bit longer-term than that. But there is some of that definitely going on. Pulled back a little bit. I think everybody right now is focused on maintaining production. There's still some disruptions that happen. We are constantly -- not constantly, but periodically having positive cases of COVID in the plant that require areas to be shut down and disinfected. And I know that the OEMs are going through some of that same sort of -- those same types of issues. So I think the focus is on ongoing production right now and reinstituting some of the inventory levels.

Right. So when I think about that and you start to look at these new quotes, can you just talk about the gating process for the types of products and contracts that you'll accept?

Sure. I mean as we look at the strategy that we're employing on a long-term basis, our focus, especially if capital is going to be required will be on applications that we feel have a strong probability of transitioning to a hybrid vehicle or a full electric vehicle. There are some fuel systems -- certainly, there are some fuel systems programs being quoted. We look at those. We still think that the internal combustion engine has a pretty long lifespan. Again, have done a lot of work and analysis on that. But when you look at the engine development that the OEMs are doing through 2025 and the number of new engines that they're launching through that period of time, there's a substantial decrease from what we've seen historically.

But when you look at the production of fuel injectors, at least the forecast that we're working with that are independently done, through the end of 2026, 2027, there isn't a significant falloff in volume for those types of applications. But as it relates to our focus, our focus is on diversification from a long-term strategy standpoint into areas that will bridge, as I indicated, to hybrids, or provide us additional entry. When you look at batteries and connectors, in the hybrid and the full electric vehicle. We've seen some vehicles that have over 72 to 75 different connection points within the vehicle that we feel afford us a pretty good opportunity to expand our offering on the power side within some customers, frankly, that span both the Mobile and the Power groups.

That's really good color. So as I kind of look at your forward outlook for potential growth opportunities and kind of marry that with the margin you put up for Mobile this quarter. Is it reasonable to think that high single, low double-digit margins is kind of a sustainable run rate going forward?

Yes. I mean we put guidance out there then on an overall basis, we're working towards the 16% to 18% EBITDA margin by 2025. And certainly, when you look at the margins that we generated in the Mobile Group in the third quarter, that's a function of sales coming back reasonably consistently during the quarter, but also it's a function of how the business has been leaned out by that operating team over the last 8 to 10 months. They've done an excellent job on that. So we're probably -- the quarterly results were probably a little bit better than what we were expecting, frankly. And we'll put a little pressure on that team to continue to perform at that level going forward.

Right. One more for me, and then I'll jump back in line. For Power Solutions, you talked a little bit about the end markets there, but I am curious if you could give us the split between res and non-res construction? And I would be curious to hear what your customers are saying about non-res for 2021?

Yes. I think that from a residential standpoint, that's a pretty competitive environment. Most of the -- I think more of the product that we manufacture is in the smart grid with the utilities and with general industrial, that type of thing as opposed to residential. And as we look into the future, we still see some significant growth opportunities there. Some of the rates that we're looking at are in the -- in large buckets, into the 5% to 9% range that we're going to go after pretty aggressively.

(Operator Instructions)

And next, we'll go to Daniel Moore with CJS Securities.

You talked about the cost savings initiatives. Just maybe confirm kind of a good run rate for corporate expense and SG&A as we think about Q4 and beyond look prior to those cost saves?

So prior to those cost saves...

Go ahead, go ahead.

So for Q4, we're going to continue about the same run rate as we have in the third quarter for corporate. And in the coming quarters, we are looking at -- because this business was really positioned for being $1 billion, $1.5 billion structure. And so we're going to be taking some costs out to right size it to this this new remaining company of about $500 million, growing to $600 million.

Got it. And then -- go ahead, sorry.

So Warren, did you have other comments on that?

No, that's fine. I'm good.

Okay. Perfect. And then any early indications of CapEx for '21? Or will it be more platform and opportunity dependent?

Well, right now, we're forecasting about $22 million in capital spending, which, let's say, $9 million to $10 million is maintenance and the rest is growth that's already been committed prior to that. So that's kind of what we're looking at right now. .

Got it. And just to clarify one more. At this stage, our strategic alternatives generally off the table. I know we're focused on operations barring someone sort of coming to you, is it a sale of the rest of their company, not your area of focus at this stage, just wanted to kind of confirm where we are from a big picture perspective?

Yes. I think the way you summarize it is accurate. We're going forward at this point in time, running the businesses looking forward to doing that. As we had indicated previously, we still have some things that we need to look at and to accomplish with our capital structure. We have a preferred stock that's outstanding that we'd like to address in some way here. In addition, our current credit facility, including the revolver and the remaining portion of the Term Loan B come to do in October of 2022. So that's another issue that we'd like to address as well. And those will be things that we'll be looking at over the next 6 months.

And next, we will go to Steve Barger with KeyBanc Capital Markets.

Just one quick modeling question. Curious if you could just talk about expectations for quarterly interest expense since you did sell LS in October. And how we should be thinking about reductions in interest expense in '21?

So interest expense, we're modeling in at about $4 million a quarter. So it will be about $16 million a year. That's what we're modeling in. We do have a swap that's costing us about $1.3 million this quarter each month, going until December, and then it drops down to about $900,000 next year. But we're just looking at the entire capital structure right now.

Right. And then should we think that free cash flow will be positive in fourth quarter? And just any evolving thoughts around the capital structure and around the preferred as well would be great?

Well, from a cash flow standpoint, obviously, we're going to see improvement with this lower interest expense. Right now, we're not giving guidance on our cash flow at this time. So we're just going to monitor the current environment. We're moving forward. I think we'll be improving our cash flow, but I'm not going to commit that we'll be positive in our Q4.

Got it. And then as you think about opportunities for the preferred and the forward capital structure, any further commentary there?

We are going to be addressing our capital structure. As Warren kind of mentioned, let's say, before March of '21, let's say, because then there's an acceleration on the preferred up by $5 million. So we want to try to do it within the next -- by March '21, but there's no urgency right now or really even after March '21, we can still push the ball down the road because we're in a pretty good financial position.

Yes. I think that's -- Tom, that's a good point. That's a great takeaway. When you look at our leverage at 1.9, and obviously, that's without the preferred, we feel really good about where we're at, and that provides us a tremendous amount, frankly, of flexibility in an uncertain time. So we'd like to see how this COVID thing develops with the uptick in cases here over the last month.

We want to make sure that whatever we do from a structure standpoint, it provides us flexibility on the cash side going forward, in case there is a resurgence of COVID that in some way, is disruptive to our volumes and our ability to generate cash. I think we're reasonably confident that if volumes on the auto side and the power side stay relatively consistent with what we've seen here in the third quarter that we're going to be in a position to be positive free cash flow on a go-forward basis. That's how we're setting the company up. That's how we expect it to perform.

And that does conclude today's question-and-answer session. I'll now turn the call back over to Warren Veltman for any additional or closing remarks.

Well, thank you, operator. I'd like to thank everybody for participating in the call. As I said in my comments, we're very excited about the direction of the company. I think the management team is fully engaged with providing with the thought and the actions necessary to provide return to our shareholders, and we're excited to get to work in doing that. And once again, I appreciate everybody for their time, and I hope that everybody stays healthy and safe. And have a good day. Thank you.

And that does conclude today's conference. We thank you for your participation. You may now disconnect.