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Item 7. Management’s Discussion and Analysis

2021-03-15 compared with 2020-03-16 · 298 added, 172 removed, 174 unchanged (73% of the section changed)

Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion should be read in conjunction with, and is qualified in its entirety by, the Consolidated Financial Statements and the Notes thereto and Selected Financial Data included elsewhere in this Annual Report.

The following discussion should be read in conjunction with, and is qualified in its entirety by, the Consolidated Financial Statements and the Notes thereto and the Selected Financial Data included elsewhere in this Annual Report.

Historical operating results and percentage relationships among any amounts included in the Consolidated Financial Statements are not necessarily indicative of trends in operating results for any future period.

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Our strategy and management focus are based upon the following long-term objectives

Organic growth within all our segments;

• Organic growth within our segments;

• Improved operating margins

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• Capital management initiatives

• Employee safety and satisfaction

Management generally focuses on these trends and relevant market indicators

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• Global automotive production rates;

Surgery rates and U.S.

healthcare spending;

• Defense spending;

• Costs subject to the global inflationary environment, including, but not limited to:

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• Regulatory compliance;

Trends related to the geographic migration of competitive manufacturing;

• Trends related to the geographic migration of competitive manufacturing, electric vehicles, and electrification;

• Regulatory environment for United States public companies and manufacturing companies;

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Critical Accounting Policies

Our significant accounting policies, including the assumptions and judgment underlying them, are disclosed in Note 1 of the Notes to Consolidated Financial Statements .

Our critical accounting policies, including the assumptions and judgment underlying them, are disclosed in Note 1 of the Notes to Consolidated Financial Statements.

These policies have been consistently applied in all material respects and address such matters as revenue recognition, inventory valuation, and asset impairment recognition.

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We cannot assure you that actual results will not significantly differ from the estimates used in these critical accounting policies.

Business Combinations

We allocate the total purchase price of tangible and intangible assets acquired and liabilities assumed based on their estimated fair values as of the business combination date, with the excess purchase price recorded as goodwill.

The purchase price allocation process requires us to use significant estimates and assumptions, including fair value estimates, as of the business combination date.

Although we believe the assumptions and estimates we have made are reasonable and appropriate, they are based in part on historical experience and information obtained from management of the acquired company.

Our assumptions and estimates are also partially based on valuation models that incorporate projections of expected future cash flows and operating plans and are inherently uncertain.

Valuations are performed by management or third-party valuation specialists under management’s supervision.

In determining the fair value of assets acquired and liabilities assumed in business combinations, as appropriate, we may use one of the following recognized valuation methods:

the income approach (including discounted cash flows, relief from royalty and excess earnings model), the market approach, or the replacement cost approach.

Examples of significant estimates used to value certain intangible assets acquired include but are not limited to:

sales volume, pricing, and future cash flows of the business overall;

future expected cash flows from customer relationships, and other identifiable intangible assets, including future price levels, rates of increase in revenue, and appropriate attrition rate;

the acquired company’s brand and competitive position, royalty rate quantum, as well as assumptions about the period of time the acquired brand will continue to benefit the combined company’s product portfolio;

cost of capital, risk-adjusted discount rates, and income tax rates.

Different assumptions regarding projected performance and other factors associated with the acquired assets may affect the amount recorded under each type of asset and liability.

The valuations of property, plant and equipment, intangible assets, goodwill and deferred income tax liabilities depend heavily on assumptions.

Subsequent assessment could result in future impairment charges.

We refine these estimates over a measurement period not to exceed one year to reflect new information obtained surrounding facts and circumstances existing at the acquisition date.

Goodwill and Other Indefinite Lived Intangible Assets

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If the carrying value of the reporting unit including goodwill is less than fair value of the reporting unit, the goodwill is not considered impaired.

Reporting units for the purpose of goodwill impairment testing are the same as our operating segments (Life Sciences, Mobile Solutions and Power Solutions).

Based on the results of the quantitative measurement performed, which indicated a fair value in excess of carrying amount for each of our designated reporting units, we concluded there was no impairment of goodwill for the year ended December 31, 2019 .

The fair value of the Power Solutions reporting unit exceeds the carrying value by approximately 5% as of the date of our annual impairment test.

If our assessment of the relevant facts and circumstances changes, or the actual performance falls short of the expected results, impairment charges may be required.

As noted above, it was determined under a quantitative assessment that there was no impairment of goodwill in 2019 .

However, if we become aware of indicators of impairment in future periods, we may be required to perform an interim assessment for some or all of our reporting units before the next annual assessment.

Examples of such indicators may include a decrease in expected net earnings, adverse equity market conditions, a decline in current market multiples, a decline in our common stock price, a significant adverse change in legal factors or business climates, an adverse action or assessment by a regulator, unanticipated competition, strategic decisions made in response to economic or competitive conditions, or a more likely than not expectation that a reporting unit or a significant portion of a reporting unit will be sold or disposed of.

In the event of significant adverse changes of the nature described above, we may have to recognize a non-cash impairment of goodwill, which could have a material adverse effect on our consolidated financial condition and results of operations.

Based on the closing sales price of a share of our common stock as of December 31, 2019 , our market capitalization exceeded the $353.3 million net book value of our stockholders’ equity.

Subsequent to December 31, 2019 , our market capitalization declined to a level that is less than the net book value of our stockholders’ equity.

A prolonged or significant decline in market capitalization could be an indicator of possible goodwill impairment.

We will continue to monitor the market capitalization relative to net book value in subsequent periods.

Reporting units for the purpose of goodwill impairment testing are the same as our operating segments (Mobile Solutions and Power Solutions).

Based on the results of the quantitative measurement performed, which indicated a fair value less than the carrying amount for Power Solutions, we concluded there was a $92.9 million impairment of goodwill for the year ended December 31, 2020.

Income taxes are accounted for under the asset and liability method.

Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards.

Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the consolidated financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards.

Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.

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We recognize income tax positions that meet the more likely than not threshold and accrue interest and potential penalties related to unrecognized income tax positions which are recorded as a component of the provision (benefit) for income taxes.

We eliminate disproportionate tax effects from accumulated other comprehensive income (loss) when the circumstances upon which they are premised cease to exist.

The calculation of tax assets, liabilities, and expenses under U.S.

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Additionally, many of our positions are based on future estimates of taxable income and deductibility of tax positions.

Particularly, our assertion of permanent reinvestment of foreign undistributed earnings is largely based on management’s future estimates of domestic and foreign cash flows and current strategic foreign investment plans.

As of December 31, 2019 , the Company is not asserting indefinite reinvestment on unremitted earnings of certain foreign subsidiaries in China and Mexico.

We have recorded a U.S.

deferred tax liability as applicable for these subsidiaries.

All other foreign earnings continue to be considered indefinitely reinvested.

deferred tax liability for foreign earnings which are not indefinitely reinvested.

We treat global intangible low-taxed income (“GILTI”) as a periodic charge in the year in which it arises and therefore do not record deferred taxes for basis differences associated with GILTI.

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The following paragraphs describe factors that have influenced results of operations for the year ended December 31, 2020, that management believes are important to provide an understanding of the business and results of operations or that may influence operations in the future.

Prior Periods’ Financial Statement Revisions

As described in Note 2 to the consolidated financial statements, we have revised previously issued financial statements to correct immaterial misstatements.

Accordingly, this Management’s Discussion and Analysis of Financial Condition and Results of Operations reflects the effects of the revisions.

Management Structure

Our enterprise and management structure is designed to accelerate growth and further balance our portfolio by aligning our strategic assets and businesses.

Our businesses are organized into the Life Sciences, Mobile Solutions, and Power Solutions groups and are based principally on the end markets they serve.

Life Sciences is focused on growth in the medical end market, primarily in the orthopaedics and medical/surgical end markets.

Mobile Solutions is focused on growth in the general industrial and automotive end markets.

Power Solutions is focused on growth in the electrical and aerospace and defense end markets.

During 2019, our former president and chief executive officer and former chief financial officer left the Company, and we appointed a new chief executive officer and new chief financial officer.

We also appointed new executive vice presidents over each of our segments.

Capital Structure

On December 11, 2019, we issued to affiliates of existing common stockholders in a private placement 0.1 million shares of contingently redeemable Series B convertible preferred stock (“Preferred Stock”) at a price of $1,000 per share, together with detachable warrants (the “Warrants”) to purchase up to 1.5 million shares of our common stock at an exercise price of $12.00 per share.

The Preferred Stock has a liquidation preference of $1,000 per share;

is redeemable at our option in cash (or, under certain circumstances, in stock), subject to the applicable redemption premium;

is convertible into a variable number of common shares on certain terms and conditions on or after March 31, 2023;

and is subject to certain other rights and obligations.

In connection with the issuance of Preferred Stock, we entered into a registration rights agreement with the purchasers to provide certain customary demand registration rights exercisable beginning on March 31, 2021, with respect to their shares of common stock, including those underlying the Preferred Stock and Warrants, shares of Preferred Stock, and the Warrants.

Net cash proceeds of $95.7 million from the issuance of the Preferred Stock were used for debt repayment, fees associated with the amendment and extension of our credit facility, and for general corporate purposes.

Preferred Stock shares have limited voting rights and earn cumulative dividends at a rate of 10.625% per year, payable quarterly in arrears if declared, and accrue whether or not earned or declared.

If a Preferred Stock dividend is declared by the Board of Directors, then it will be paid in cash.

Additionally, holders of Preferred Stock participate in any dividends paid on shares of NN’s common stock on an as-converted basis at a fixed conversion rate.

If our common stockholders do not approve a proposal at our 2020 annual stockholder meeting to issue common stock in excess of thresholds established by certain Nasdaq stock market rules upon the exercise of Warrants or the conversion or redemption of Preferred Stock, then the annual dividend rate will immediately increase to 11.625% until such time approval is obtained.

Coronavirus Outbreak

In December 2019, a novel strain of coronavirus began to impact the population of China, where several of our manufacturing facilities are located.

In late January and early February 2020, in an effort to contain the spread of the virus and maintain the wellbeing of our employees and in accordance with governmental requirements, we closed several production facilities in China.

To date, approximately 92% of our Chinese employees at one location and 100% at another have all returned back to work, and limitations on movement in China appear to be softening.

However, the virus has now spread globally, and if the outbreak situation should continue to worsen, we could experience further supplier and customer disruption, which could have a material adverse effect on our results of operations and cash flows.

Global COVID-19 Pandemic

The COVID-19 pandemic continues to disrupt the United States and global economy, and we cannot predict when a full economic recovery will occur.

Consistent with actions taken by governmental authorities and in response to reduced customer demand, in late March 2020, we idled manufacturing operations in certain regions around the world, other than China, where manufacturing operations began to resume in March 2020.

During the year, we experienced supplier and customer disruption, which adversely affected our results of operations and cash flows in 2020.

In Europe and North America, sales began declining in the second half of March as the pandemic led to customer plant closures.

The situation grew more challenging in the second and third quarters of fiscal 2020, as customer closures affected much of our operations.

Although much of the United States and the global economies have reopened, many public health experts warn there may be additional COVID-19 surges in 2021.

Further surges in the COVID-19 infection rates could result in the reinstatement of directives and mandates requiring businesses to again curtail or cease normal operations, just as some jurisdictions rolled back reopening plans in the summer of 2020 during one of the initial COVID-19 surges.

Thus, the spread of COVID-19 and the responses thereto have created a disruption in the manufacturing, delivery, and overall supply chain of automobile manufacturers and suppliers, as well as disruption within the power industry.

Global vehicle production decreased significantly, and some vehicle manufacturers completely shut down manufacturing operations in some countries and regions, including the United States and Europe.

The rapid development and fluidity of the situation precludes any prediction as to the ultimate impact COVID-19 will have on our business, financial condition, results of operations, and cash flows, which will depend largely on future developments directly or indirectly relating to the duration and scope of the COVID-19 outbreak.

We have undertaken a number of permanent and temporary actions to manage the evolving situation, including the continuation of previously announced cost savings initiatives.

Initiatives announced in 2019:

• Streamlining facilities and reducing overall selling, general and administrative costs;

• Eliminated the quarterly dividend;

• Reduced capital expenditures;

• Issued $100 million of Preferred Stock and used net proceeds for debt repayment;

• Refinanced senior credit facilities to extend maturities and provide additional liquidity.

Additional actions taken in 2020 in response to the economic effects of the pandemic:

• In March 2020, we drew down $60 million in cash under our Senior Secured Revolver to strengthen our near-term cash position.

This debt was repaid immediately following the sale of the Life Sciences business in October 2020.

• Beginning in April 2020, executives reduced their base salaries by 20% to 25%, non-executive employee salaries were reduced by 5% to 15%.

In October 2020, these salary reductions were repaid, and salaries were reinstated to their original levels.

• The 401(k) employer match was suspended through December 2020.

• Non-employee board members deferred their cash compensation to later in the year.

• Employee merit increases were not made in 2020, bonus payouts were deferred to later in the year, and the gainsharing plan for 2020 was suspended through December 2020.

• Travel was significantly reduced beginning in the first quarter of 2020.

• In response to government orders and reduced demand, we adjusted production and work week hours, reduced or suspended non-critical discretionary spending, and furloughed personnel, many of whom are eligible to participate in government supported programs.

• Inventory levels and collection of receivables are being closely monitored.

• We entered into rent deferral arrangements with landlords of several of our leased facilities.

• As allowed by the CARES Act, we deferred payments of the employer share of U.

payroll taxes and will begin making payments in 2021 through 2022.

• In July 2020, we amended our credit agreement with Truist Bank;

JPMorgan Chase Bank, N.A.;

KeyBank National Association;

and Hometrust Bank (as amended, the “Credit Agreement”) to waive compliance with the financial leverage ratio covenant for the second and third quarters of 2020.

Further actions taken or expected in 2021:

• We expect to restructure our debt by refinancing our term loans and revolver.

• We expect to terminate our existing interest rate swap.

• We are taking advantage of other provisions of the CARES Act that could result in reduced income tax obligation and a positive impact on cash.

• We continue to focus on further general cost reduction actions.

While managing decreased demand in many regions across the globe, we are now operating at all of our business locations.

We are coordinating with our customers and suppliers to make the necessary preparations.

We are focused on the safety of our employees, customers and suppliers when re-starting.

We have developed and implemented processes to ensure a safe environment for our employees and any visitors to our facilities, including providing personal protective equipment to our employees, establishing social distancing protocols and temperature checks.

These processes include recommendations based on guidelines from the Centers for Disease Control and Prevention and the World Health Organization as well as from our experience with ramp-ups at our plants in China, the United States, Mexico, Poland, France, and Brazil.

The health and safety of our employees remains our top priority.

Discontinued Operations

In August 2020, we entered into a Stock Purchase Agreement (the “SPA”) with affiliates of American Securities LLC for the sale of our Life Sciences business for an aggregate purchase price of up to $825 million, which includes a $755 million cash base purchase price and a potential earnout payment of up to $70 million.

The cash base purchase price was subject to certain adjustments and was payable at the closing of the transaction, which occurred on October 6, 2020.

The earnout payment is subject to the performance of the Life Sciences business during the year ending December 31, 2022, measured by Adjusted EBITDA targets, as defined by the SPA.

The Life Sciences business includes facilities that are engaged in the production of a variety of components, assemblies, and instruments, such as surgical knives, bioresorbable implants, surgical staples, cases and trays, orthopaedic implants and tools, laparoscopic devices, and drug delivery devices for the orthopaedics and medical/surgical end markets.

The sale of the Life Sciences business furthers management’s strategy to improve liquidity and creates the financial flexibility to pursue key growth areas in the Mobile Solutions and Power Solutions segments.

After working capital and other closing adjustments, the final cash purchase price was approximately $753.3 million.

We received cash proceeds at closing of $757.2 million and recorded a $3.9 million payable at December 31, 2020, for the balance.

We prepaid $700.0 million in the aggregate on the Senior Secured Term Loan and the Incremental Term Loan immediately following the sale.

We also paid in full the outstanding balance on the Senior Secured Revolver.

We recognized a gain on sale of $214.9 million, net of income taxes.

Under the terms of a transition services agreement, we are providing certain support services for up to 180 days from the closing date of the sale.

In accordance with ASC 205-20, Presentation of Financial Statements - Discontinued Operations, the operating results of the Life Sciences business are classified as discontinued operations.

The presentation of discontinued operations includes revenues and expenses of the discontinued operations and will also include any gain on the disposition of the business, all net of tax, as one line item on the Consolidated Statements of Operations and Comprehensive Income (Loss).

The Consolidated Statements of Operations and Comprehensive Income (Loss) for all periods presented have been revised to reflect this presentation.

Accordingly, the results of the Life Sciences business have been excluded from continuing operations and segment results for all periods presented in the consolidated financial statements and the accompanying notes unless otherwise stated.

The Consolidated Statements of Cash Flows include cash flows of the Life Sciences business in each line item unless otherwise stated.

Our credit facility required us to use proceeds from the sale of the Life Sciences business to prepay a portion of our existing debt.

We paid $700 million in the aggregate on our term loans as described in Note 12.

The prepayment was applied to debt in accordance with the prepayment provisions of the Credit Agreement immediately after the transaction closed on October 6, 2020.

Average quarterly interest rates were multiplied by the required prepayment amounts to calculate interest expense to be reclassified to discontinued operations for all periods presented.

Write-offs of credit facility debt issuance costs were allocated to discontinued operations by multiplying the ratio of the required prepayment amounts as a percentage of total outstanding principal by the total write-off charges in each period.

See Note 2 in the Notes to Consolidated Financial Statements for more information on discontinued operations.

Goodwill Impairment

During the first quarter of 2020, our market capitalization declined to a level that was less than the net book value of our stockholders’ equity.

The decline in market capitalization was a triggering event that caused us to perform a goodwill impairment analysis as of March 31, 2020.

The goodwill impairment analysis required significant judgments to calculate the fair value for the Power Solutions reporting unit, including estimation of future cash flows, which is dependent on internal forecasts, estimation of the long-term growth rate for each operating segment, and determination of weighted average cost of capital.

Our forecasts used in the goodwill impairment analysis reflected our expectations of declines in sales resulting from COVID-19.

Significant assumptions and estimates are involved in the application of the discounted cash flow model to forecast operating cash flows, including market growth and market share, sales volumes and prices, costs to produce, discount rate, and estimated capital needs.

Management considers historical experience and all available information at the time the fair values of its reporting units are estimated.

Assumptions in estimating future cash flows are subject to a high degree of judgment and complexity.

The carrying value of the Power Solutions reporting unit exceeded the estimated fair value as of the March 31, 2020, analysis.

As a result of our analysis, we recorded an impairment loss on goodwill of $92.9 million to the “Goodwill impairment” line on the Consolidated Statements of Operations and Comprehensive Income (Loss).

See Note 8 in the Notes to Consolidated Financial Statements for more information on the impairment charge.

As of December 31, 2020, there is no remaining goodwill balance.

Financial Data as a Percentage of Net Sales

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Year Ended December 31,

2020 2019 2018

Net sales 100.0 % 100.0 % 100.0 %

Cost of sales (exclusive of depreciation and amortization shown separately below) 80.4 % 80.2 % 78.9 %

Selling, general, and administrative expense 13.6 % 14.1 % 13.9 %

Acquisition related costs excluded from selling, general and administrative expense

Depreciation and amortization 10.7 % 9.2 % 8.2 %

Goodwill impairment

Restructuring and integration expense, net — % — % 0.1 %

Other operating (income) expense, net

Income (loss) from operations

Goodwill impairment 21.7 % — % 34.8 %

Other operating expense, net 1.1 % 0.2 % 1.3 %

Loss from operations (27.5) % (3.6) % (37.2) %

Interest expense 4.4 % 2.7 % 2.2 %

Loss on extinguishment of debt and write-off of debt issuance costs — % 0.1 % — %

Other (income) expense, net

Loss before benefit for income taxes and share of net income from joint venture

Benefit for income taxes

Derivative payments on interest rate swap 1.0 % — % — %

Loss on interest rate swap 2.7 % — % — %

Other expense (income), net — % 0.2 % 0.4 %

Loss from continuing operations before benefit (provision) for income taxes and share of net income (loss) from joint venture (35.6) % (6.6) % (39.8) %

Benefit (provision) for income taxes 2.1 % (0.1) % 0.3 %

Share of net income (loss) from joint venture 0.8 % 0.3 % (2.7) %

Net income (loss)

Loss from continuing operations (32.6) % (6.3) % (42.2) %

Income (loss) from discontinued operations, net of tax 9.1 % (3.3) % (8.0) %

Net loss (23.5) % (9.5) % (50.2) %

Sales Concentration

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and foreign divisions of our ten largest customers accounted for approximately 45% of our consolidated net sales.

For the year ended December 31, 2019 , we recognized sales from a single customer of $93.1 million , or 11.0% of consolidated net sales.

Revenues from this customer are in our Life Sciences and Power Solutions groups.

The loss of all or a substantial portion of sales to these customers would cause us to lose a substantial portion of our revenue and have a corresponding negative impact on our income from operations and operating cash flows or cause us to incur additional restructuring and/or impairment costs.

We recognized sales from a single customer of $49.7 million, or 10% of consolidated net sales, during the year ended December 31, 2019, and $65.3 million, or 12% of consolidated net sales, during the year ended December 31, 2018.

Revenues from this customer are in our Mobile Solutions segment and were less than 10% of consolidated net sales during the year ended December 31, 2020.

Year Ended December 31, 2020, compared to the Year Ended December 31, 2019

Year Ended December 31,

Organic growth

2020 2019 $ Change

Net sales $ 427,534 $ 489,514 $ (61,980)

Organic decline $ (55,735)

Foreign exchange effects (6,245)

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Selling, general, and administrative expense 58,055 68,895 (10,840)

Acquisition related costs excluded from selling, general and administrative expense

Depreciation and amortization 45,680 44,896 784

Goodwill impairment

Restructuring and integration expense, net — (12) 12

Other operating (income) expense, net

Income from operations

Goodwill impairment 92,942 — 92,942

Other operating expense, net 4,720 846 3,874

Loss from operations (117,457) (17,593) (99,864)

Interest expense 18,898 13,030 5,868

Loss on extinguishment of debt and write-off of debt issuance costs 144 540 (396)

Other (income) expense, net

Loss before benefit for income taxes and share of net income from joint venture

Benefit for income taxes

Share of net income (loss) from joint venture

Net sales increase d by $76.8 million , or 10.0% , during the year ended December 31, 2019 , compared to the year ended December 31, 2018 , primarily due to $75.3 million of additional net sales attributable to businesses acquired in 2018 as well as a net increase due to organic growth of $9.8 million which was led by an increase in core volume in the Life Sciences group.

The increase in Life Sciences core volume was partially offset by lower demand within the automotive end market in Mobile Solutions group as well as unfavorable foreign exchange effects of $8.4 million in Europe, South America, and Asia.

Derivative payments on interest rate swap 4,133 — 4,133

Loss on interest rate swap 11,669 — 11,669

Other expense (income), net (213) 962 (1,175)

Loss from continuing operations before benefit (provision) for income taxes and share of net income from joint venture (152,088) (32,125) (119,963)

Benefit (provision) for income taxes 8,972 (305) 9,277

Share of net income from joint venture 3,626 1,681 1,945

Loss from continuing operations (139,490) (30,749) (108,741)

Income (loss) from discontinued operations, net of tax 38,898 (15,992) 54,890

Net loss $ (100,592) $ (46,741) $ (53,851)

Net sales decreased by $62.0 million, or 13%, during the twelve months ended December 31, 2020, compared to the twelve months ended December 31, 2019, primarily due to a decrease in organic volume of $55.7 million as a result of decreased demand due to the COVID-19 pandemic.

Unfavorable foreign exchange effects of $6.2 million also contributed to the decrease.

Cost of Sales.

Cost of sales increase d by $52.5 million , or 8.9% , during the year ended December 31, 2019 , compared to the year ended December 31, 2018 , primarily due to $51.5 million in additional cost of sales attributable to the businesses acquired in 2018 as well as an increase due to organic growth of $6.9 million .

Organic growth in cost of sales relative to net sales was impacted by the relative contribution margin impact of higher sales in the Life Sciences group and lower sales in the Mobile Solutions group.

The increase in cost of sales was partially offset by favorable foreign exchange effects of $6.0 million .

Cost of sales decreased by $48.9 million, or 12%, during the twelve months ended December 31, 2020, compared to the twelve months ended December 31, 2019, primarily due to variable costs associated with the above-referenced sales volume decline and variable and fixed cost reduction initiatives that were implemented.

Selling, General, and Administrative Expense.

Selling, general and administrative expense increase d by $9.6 million during the year ended December 31, 2019 , compared to the year ended December 31, 2018 , primarily due to businesses acquired in 2018 which collectively contributed an additional $7.4 million to selling, general and administrative expense during the year ended December 31, 2019 , as well as an increase in overall headcount and inflation in wages and benefits.

The increase was partially offset by lower costs for professional services as a result of cost savings initiatives, including integration of recent acquisitions.

Acquisition Related Costs Excluded from Selling, General and Administrative Expense.

Acquisition related costs decrease d by $5.9 million during the year ended December 31, 2019 , compared to the year ended December 31, 2018 , as there was no business acquisition activity during the year ended December 31, 2019 .

The year ended December 31, 2018 , included professional service costs incurred in connection with the 2018 business acquisitions.

Selling, general and administrative expense decreased by $10.8 million during the twelve months ended December 31, 2020, compared to the twelve months ended December 31, 2019, primarily due to cost reduction initiatives that drove decreases in personnel and travel costs.

Depreciation and Amortization.

Depreciation and amortization increase d by $20.7 million during the year ended December 31, 2019 , compared to the year ended December 31, 2018 , consistent with additions to intangible assets and property, plant and equipment, including an additional $11.8 million from businesses acquired in 2018.

The increase in depreciation and amortization includes the effects of related fair value adjustments to certain property, plant and equipment and the addition of intangible assets, principally for customer relationships and trade names.

Depreciation and amortization increased by $0.8 million during the twelve months ended December 31, 2020, compared to the twelve months ended December 31, 2019, as the full year depreciation impact of prior year capital expenditures exceeded the reduction due to lower capital expenditures in 2020.

Goodwill Impairment .

Goodwill impairment decreased by $182.5 million during the year ended December 31, 2019 , compared to the year ended December 31, 2018 , as there was no goodwill impairment recorded during the year ended December 31, 2019 .

Goodwill impairment was recorded in the year ended December 31, 2018 , as a result of the goodwill impairment charges at Mobile Solutions and Power Solutions.

Restructuring and Integration Expense.

Restructuring and integration expense decrease d by $2.1 million during the year ended December 31, 2019 , compared to the year ended December 31, 2018 , primarily due to employee severance costs incurred in connection with implementing our new enterprise and management structure as well as the acquisition of Paragon Medical, Inc.

Note 15 in the Notes to Consolidated Financial Statements provides more information regarding the effects of restructuring and integration on our operating results.

Other Operating (Income) Expense, Net .

Other operating (income) expense, net, decrease d by $5.2 million during the year ended December 31, 2019 , compared to the year ended December 31, 2018 , primarily due to a reduction in asset impairment charges.

The increase in goodwill impairment during the year ended December 31, 2020, was the result of a $92.9 million goodwill impairment charge at Power Solutions.

See Note 8 in the Notes to Consolidated Financial Statements for more information on the impairment charge.

Other Operating Expense, Net .

Other operating expense, net, changed unfavorably by $3.9 million during the year ended December 31, 2020, compared to the year ended December 31, 2019, primarily due to charges and costs associated with asset impairments and disposals and elimination of a portion of our lease obligation as a result of our decision to vacate a portion of our corporate headquarters building.

These charges were partially offset by a $0.8 million gain on the sale of a building in Fairfield, Ohio, in the year ended December 31, 2020.

Interest Expense.

Interest expense decrease d by $4.1 million during the year ended December 31, 2019 , compared to the year ended December 31, 2018 , primarily due to payoff of the $200.0 million Second Lien Facility, which was entered into in May 2018 and repaid in full in September 2018, as well as principal payments on our credit facility, partially offset by higher average interest rates and increased borrowings under the Senior Secured Revolver during 2019.

Interest expense increased by $5.9 million during the year ended December 31, 2020, compared to the year ended December 31, 2019, primarily due to an increase in settlements on the interest rate swap and an increase in the interest rate margin over one-month LIBOR on the Senior Secured Term Loan and the Incremental Term Loan as a result of amendments executed in 2019.

These increases were partially offset by a reduction in one-month LIBOR.

Interest on our Senior Secured Revolver decreased due to a low outstanding principal balance throughout most of the first quarter of 2020 after using proceeds from the Preferred Stock offering to repay the balance in December 2019.

We repaid the entire outstanding balance on the Senior Secured Revolver after the sale of the Life Sciences business.

Year Ended December 31,

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Capitalized interest (204) (1,458)

Other 780 685

Total interest expense $ 18,898 $ 13,030

Loss on Extinguishment of Debt and Write-off of Unamortized Debt Issuance Costs.

Loss on extinguishment of debt and write-off of unamortized debt issuance costs decrease d by $16.3 million during the year ended December 31, 2019 , compared to the year ended December 31, 2018 , due to a prepayment penalty and costs written off associated with the Second Lien Facility and the amendment to the existing credit facility in May 2018.

Costs written off in association with the 2019 amendments to the credit facility were lower than those associated with the Second Lien Facility.

Provision/Benefit for Income Taxes.

Derivative Payments on Interest Rate Swap.

Derivative payments on interest rate swap represent cash settlements of the interest rate swap after hedge accounting was discontinued in October 2020.

Prior to October 2020, interest rate swap settlements were recognized in interest expense.

See Note 21 in the Notes to Consolidated Financial Statements for more discussion about the interest rate swap.

Loss on Interest Rate Swap .

Loss on interest rate swap represents mark-to-market adjustments on the interest rate swap after hedge accounting was discontinued in October 2020 as well as amortization of the residual loss in accumulated other comprehensive income as monthly settlements occur.

Prior to October 2020, mark-to-market adjustments on the interest rate swap were recognized in accumulated other comprehensive income.

Other Expense (Income), Net.

Other expense (income), net, changed favorably by $1.2 million during the twelve months ended December 31, 2020, compared to the twelve months ended December 31, 2019, primarily due to more favorable foreign exchange effects associated with intercompany borrowings compared to the prior year.

Benefit (Provision) for Income Taxes .

Our effective tax rate was 5.9% for the year ended December 31, 2020, compared to (1.0)% for the year ended December 31, 2019.

The difference in rates is primarily due to the impact of the impairment of nondeductible goodwill in 2020 and the CARES Act in 2020.

Note 11 in the Notes to Consolidated Financial Statements describes the components of income taxes for each period presented.

Share of Net Income from Joint Venture.

Our share of net income from the joint venture increase d by $16.1 million primarily due to a partial impairment of the investment in the joint venture of $16.6 million during the year ended December 31, 2018 .

Refer to Note 11 to the consolidated financial statements for further discussion of the joint venture.

Our share of net income from the joint venture increased during the year ended December 31, 2020, compared to the year ended December 31, 2019, primarily due to increased sales and improved profits from expanding variable margins as a result of successful process improvement initiatives and improved product mix, and fixed cost reduction actions.

These favorable impacts were partially offset by the shutdown of manufacturing operations in China during the first quarter of 2020 due to the COVID-19 pandemic.

Income (Loss) from Discontinued Operations, Net of Tax .

The largest component of income (loss) from discontinued operations, net of tax, in 2020 was the $214.9 million gain on sale of our Life Sciences business.

Note 2 in the Notes to Consolidated Financial Statements provides details of the results of discontinued operations.

Results by Segment

LIFE SCIENCES

MOBILE SOLUTIONS

Year Ended December 31,

Organic growth

2020 2019 $ Change

Net sales $ 256,360 $ 297,749 $ (41,389)

Organic decline $ (34,849)

Foreign exchange effects (6,540)

Income from operations $ 5,228 $ 9,553 $ (4,325)

Net sales increase d by $111.6 million during the year ended December 31, 2019 , compared to the year ended December 31, 2018 , primarily due to $71.4 million of net sales attributable to the Paragon Medical and Bridgemedica acquisitions as well as a $41.4 million increase in organic growth as a result of an increase in core volume primarily within the orthopaedic and medical/surgical end markets.

These increase s were partially offset by unfavorable foreign exchange effects of $1.2 million .

Income from operations increase d by $9.0 million compared to prior year primarily due to income related to the Paragon Medical and Bridgemedica acquisitions as well as lower costs resulting from our strategic initiatives for cost savings and the

favorable impact of integration activities.

The higher income was partially offset by an increase in costs related to organic growth in the Life Sciences group.

Net sales decreased by $41.4 million during the year ended December 31, 2020, compared to the year ended December 31, 2019, primarily due to lower demand within the global automotive markets resulting from the COVID-19 pandemic, contractual price reductions, and unfavorable foreign exchange effects.

Income from operations decreased by $4.3 million compared to prior year due to lost variable margin on the above-referenced sales volume decline, partially offset by fixed cost reduction actions taken in response to the decline in sales volume.

Additionally, the twelve months ended December 31, 2019, were impacted by a $1.4 million one-time favorable litigation settlement.

POWER SOLUTIONS

Year Ended December 31,

2020 2019 $ Change

Net sales $ 171,269 $ 192,100 $ (20,831)

Organic decline $ (21,126)

Foreign exchange effects 295

Goodwill impairment $ (92,942) $ — $ (92,942)

Income (loss) from operations $ (85,983) $ 13,881 $ (99,864)

Net sales decreased by $20.8 million during the year ended December 31, 2020, compared to the year ended December 31, 2019, primarily due to lower demand in the electrical products, automotive, and oil and gas end markets resulting from the COVID-19 pandemic, partially offset by increased pass-through pricing on products utilizing precious metals.

Income (loss) from operations decreased by $99.9 million compared to prior year primarily due to a goodwill impairment loss of $92.9 million recognized in the first quarter of 2020 and lost variable margin on the above-referenced sales volume decline.

These unfavorable impacts were partially offset by fixed cost reduction actions taken in response to the decline in sales volume.

Year Ended December 31, 2019, compared to the Year Ended December 31, 2018

Year Ended December 31,

2019 2018 $ Change

Net sales $ 489,514 $ 524,194 $ (34,680)

Acquisitions $ 3,959

Organic decline (31,451)

Foreign exchange effects (7,188)

Cost of sales (exclusive of depreciation and amortization shown separately below) 392,482 413,394 (20,912)

Selling, general, and administrative expense 68,895 72,764 (3,869)

Depreciation and amortization 44,896 43,026 1,870

Restructuring and integration expense, net (12) 689 (701)

Goodwill impairment — 182,542 (182,542)

Other operating expense, net 846 6,826 (5,980)

Loss from operations (17,593) (195,047) 177,454

Interest expense 13,030 11,315 1,715

Loss on extinguishment of debt and write-off of debt issuance costs 540 — 540

Other expense, net 962 2,016 (1,054)

Loss from continuing operations before benefit (provision) for income taxes and share of net income (loss) from joint venture (32,125) (208,378) 176,253

Benefit (provision) for income taxes (305) 1,548 (1,853)

Share of net income (loss) from joint venture 1,681 (14,390) 16,071

Loss from continuing operations (30,749) (221,220) 190,471

Loss from discontinued operations, net of tax (15,992) (41,767) 25,775

Net loss $ (46,741) $ (262,987) $ 216,246

Net sales decreased by $34.7 million, or 7%, in 2019 compared to 2018, primarily due to a decrease in demand in the automotive end market and unfavorable foreign exchange effects of $7.2 million.

Cost of Sales.

Cost of sales decreased by $20.9 million, or 5%, in 2019 compared to 2018, primarily due to the relative contribution margin impact of sales in the Mobile Solutions group.

The decrease in cost of sales was partially offset by favorable foreign exchange effects of $5.2 million.

Selling, General, and Administrative Expense .

Selling, general and administrative expense decreased by $3.9 million during the year ended December 31, 2019, compared to the year ended December 31, 2018, primarily due to lower costs for professional services as a result of cost savings initiatives.

Depreciation and Amortization .

Depreciation and amortization increased by $1.9 million during the year ended December 31, 2019, compared to the year ended December 31, 2018, consistent with capital expenditure activity.

Goodwill Impairment.

Goodwill impairment decreased by $182.5 million during the year ended December 31, 2019, compared to the year ended December 31, 2018, as a result of goodwill impairment charges at Mobile Solutions and Power Solutions.

Other Operating Expense, Net .

Other operating expense, net, decreased by $6.0 million during the year ended December 31, 2019, compared to the year ended December 31, 2018, primarily due to a reduction in asset impairment charges.

Interest Expense .

Interest expense increase by $1.7 million during the year ended December 31, 2019, compared to the year ended December 31, 2018, primarily due to higher average interest rates, increased borrowings under the Senior Secured Revolver during 2019, and unfavorable interest rate swap settlements.

Year Ended December 31,

Interest on debt $ 10,971 $ 10,570

Interest rate swap settlements 1,411 —

Amortization of debt issuance costs 1,421 1,274

Capitalized interest (1,458) (1,089)

Other 685 560

Total interest expense $ 13,030 $ 11,315

Other Expense, Net.

Other expense, net, decreased during the year ended December 31, 2019, compared to the year ended December 31, 2018, primarily due to a decrease in interest income from short-term investments in 2018 and currency effects on intercompany loans.

Benefit (Provision) for Income Taxes .

Our effective tax rate from continuing operations was (1.0)% for the year ended December 31, 2019, compared to 0.7% for the year ended December 31, 2018.

Note 11 in the Notes to Consolidated Financial Statements describes the components of income taxes for each period presented.

Share of Net Income (Loss) from Joint Venture.

Our share of net income (loss) from the joint venture increased by $16.1 million during the year ended December 31, 2019, compared to the year ended December 31, 2018, primarily due to a partial impairment of the investment in the joint venture of $16.6 million during the year ended December 31, 2018.

Loss from Discontinued Operations, Net of Tax .

Loss from discontinued operations, net of tax, represents the results of operations of our Life Sciences business.

Note 2 in the Notes to Consolidated Financial Statements provides details of the results of discontinued operations.

Results by Segment

MOBILE SOLUTIONS

Year Ended December 31,

2019 2018 $ Change

Net sales $ 297,749 $ 335,037 $ (37,288)

Organic growth $ (30,305)

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Goodwill impairment $ — $ (73,442) $ 73,442

Income from operations

Net sales decrease d by $37.3 million during the year ended December 31, 2019 , compared to the year ended December 31, 2018 , primarily due to lower demand within the North American and European automotive markets, unfavorable foreign exchange effects, reduced demand for components associated with programs nearing the end of the product lifecycle, and delays in new product launches, partially offset by higher demand within the South American automotive market.

Income from operations increase d by $64.6 million compared to prior year primarily due to the $73.4 million goodwill impairment in the prior year.

Absent the effect of the goodwill impairment, income from operations decrease d by $8.8 million due to lost variable margin on the above-referenced sales volume decline and costs associated with the launch of new fuel systems business within our European operations.

These unfavorable impacts were partially offset by favorable foreign exchange effects and fixed cost reduction initiatives achieved in response to the decline in sales volume.

Income (loss) from operations $ 9,553 $ (55,079) $ 64,632

Net sales decreased by $37.3 million during the year ended December 31, 2019, compared to the year ended December 31, 2018, primarily due to lower demand within the North American and European automotive markets, unfavorable foreign exchange effects, reduced demand for components associated with programs nearing the end of the product lifecycle, and delays in new product launches, partially offset by higher demand within the South American automotive market.

Income (loss) from operations increased by $64.6 million compared to prior year primarily due to the $73.4 million goodwill impairment in the prior year.

Absent the effect of the goodwill impairment, income (loss) from operations decreased by $8.8 million due to lost variable margin on the above-referenced sales volume decline and costs associated with the launch of new fuel systems business within our European operations.

These unfavorable impacts were partially offset by favorable foreign exchange effects and fixed cost reduction initiatives implemented in response to the decline in sales volume.

POWER SOLUTIONS

Year Ended December 31,

2019 2018 $ Change

Net sales $ 192,100 $ 189,778 $ 2,322

Acquisitions $ 3,959

Organic growth (1,432)

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Goodwill impairment $ — $ 109,100 $ (109,100)

Income from operations

Net sales increase d by $2.3 million during the year ended December 31, 2019 , compared to the year ended December 31, 2018 , primarily due to $4.0 million of net sales attributable to the Technical Arts acquisition.

Income (loss) from operations $ 13,881 $ (95,115) $ 108,996

Net sales increased by $2.3 million during the year ended December 31, 2019, compared to the year ended December 31, 2018, primarily due to $4.0 million of net sales attributable to the Technical Arts business that was acquired in the third quarter of 2018.

The increase in net sales was partially offset by lower demand in the electrical products end market and unfavorable foreign exchange effects.

Income from operations increase d by $109.0 million compared to prior year due to the $109.1 million goodwill impairment in the prior year.

Income (loss) from operations increased by $109.0 million compared to prior year primarily due to the $109.1 million goodwill impairment in the prior year.

Changes in Financial Condition from December 31, 2019, to December 31, 2020

From December 31, 2018 , to December 31, 2019 , total assets increase d by $41.1 million primarily due to the initial recognition of operating lease assets as of January 1, 2019, pursuant to ASC 842.

Cash increase d by $13.7 million primarily due to residual proceeds from the issuance of Preferred Stock after paying down debt and the payment of fees associated with the amendment and extension of our credit facility.

These increases were partially offset by a decrease in intangible assets due to normal amortization.

From December 31, 2018 , to December 31, 2019 , total liabilities increase d by $14.1 million primarily due to the initial recognition of operating lease liabilities as of January 1, 2019, pursuant to ASC 842 and recognition of the fair value of the interest rate swap.

These increase s were partially offset by a reduction in outstanding borrowings under our credit facility.

Working capital, which consists principally of cash, accounts receivable, inventories, and other current assets offset by accounts payable, accrued payroll costs, current maturities of long-term debt, current portion of lease liabilities, and other current liabilities, was $163.5 million as of December 31, 2019 , compared to $151.2 million as of December 31, 2018 .

The increase in working capital was due primarily to cash proceeds from the sale of Preferred Stock after the paydown of principal outstanding on the Senior Secured Revolver.

From December 31, 2019, to December 31, 2020, total assets decreased by $917.0 million primarily due to the sale of the Life Sciences business and use of cash proceeds to pay down debt.

The $92.9 million impairment of Power Solutions goodwill in the first quarter of 2020 and normal depreciation and amortization of fixed assets and intangible assets also contributed to the decrease.

From December 31, 2019, to December 31, 2020, total liabilities decreased by $830.0 million primarily due to the prepayment of long-term debt with cash proceeds from the sale of the Life Sciences business.

Working capital of continuing operations, which consists of cash, accounts receivable, inventories, income taxes receivable, and other current assets offset by accounts payable, accrued personnel costs, income taxes payable, current maturities of long-term debt, current portion of lease liabilities, and other current liabilities, was $112.0 million as of December 31, 2020, compared to $88.0 million as of December 31, 2019.

The increase in working capital was primarily due to cash proceeds from the sale of the Life Sciences business and a reduction in the current maturities of long-term debt due to the prepayment of the Senior Secured Term Loan and the Incremental Term Loan.

Cash provided by operations was $15.5 million for the twelve months ended December 31, 2020, compared with cash provided by operations of $49.2 million for the twelve months ended December 31, 2019.

The difference was primarily due to improved gross margin which was partially offset by cash paid for taxes in 2019 compared to cash received for tax refunds in 2018.

Cash used in investing activities was $39.4 million for the twelve months ended December 31, 2019 , compared with cash used by investing activities of $461.3 million for the twelve months ended December 31, 2018 .

The decrease was primarily due to cash paid for the 2018 business acquisitions partially offset by cash received from the liquidation of a short-term investment and some fixed assets during 2019.

Cash provided by financing activities was $5.3 million for the twelve months ended December 31, 2019 , compared with cash provided by financing activities of $215.1 million for the twelve months ended December 31, 2018 .

The difference was primarily due to net proceeds of $217.3 million from the sale of common stock during the twelve months ended December 31, 2018 .

We received net proceeds of $95.7 million from the sale of Preferred Stock during the twelve months ended December 31, 2019 , which were used to repay the entire balance outstanding on our Senior Secured Revolver.

The difference was primarily due to a decrease in sales volumes and higher interest expense, partially offset by improvement in working capital.

Cash provided by investing activities was $719.3 million for the twelve months ended December 31, 2020, compared with cash used in investing activities of $39.4 million for the twelve months ended December 31, 2019.

The increase was primarily due to cash received from the sale of the Life Sciences business as well as lower capital expenditures in 2020 as part of our cash savings initiatives.

Cash received from the liquidation of the short-term investment during 2019 partially offset the decrease in capital expenditures on a year-over-year basis.

Cash used in financing activities was $714.9 million for the twelve months ended December 31, 2020, compared with cash provided by financing activities of $5.3 million for the twelve months ended December 31, 2019.

The difference was primarily due to the prepayment of debt with proceeds from the sale of the Life Sciences business.

Liquidity and Capital Resources

On October 21, 2019, we announced expense reduction and cash savings initiatives to help the Company continue to pay down its debt and support greater growth by reinvesting in its businesses.

The expense reduction and cash saving initiatives will include streamlining facilities and reducing overall selling, general and administrative costs;

On October 21, 2019, we announced expense reduction and cash savings initiatives to help pay down our debt and support greater growth by reinvesting in our businesses.

The expense reduction and cash saving initiatives include streamlining facilities and reducing overall selling, general and administrative costs;

elimination of quarterly dividend payments;

and a reduction in capital expenditures from 2019 spending levels as the Company returns to a more normalized level of capital spending after several years of higher investment.

and a reduction in capital expenditures from 2019 spending levels as we return to a more normalized level of capital spending after several years of higher investment.

As described in the “Results of Operations, Factors That May Influence Results of Operations” section of Management’s Discussion and Analysis of Financial Condition and Results of Operations, we have taken additional actions in response to the economic effects of the COVID-19 pandemic and in order to enhance our liquidity position during this difficult period.

In November 2019, we initiated a strategic review to evaluate a broad range of operational, financial, and strategic options to reduce leverage and enhance shareholder value, and we retained external advisors to assist in this effort.

The strategic options we are evaluating include further cost savings and cash generation initiatives, more efficient capital deployment, changes to our debt and equity structure to improve financial flexibility and liquidity, and the sale of part or all of NN, among others.

As discussed in Note 13 and Note 17 in the accompanying Notes to Consolidated Financial Statements in Item 8, on December 11, 2019, we issued preferred stock for net proceeds of $95.7 million and used a portion of the proceeds to repay amounts due at that time on our Senior Secured Revolver.

In December 2019 we amended our Credit Agreement which, in turn, extended the due date of our Senior Secured Revolver to July 20, 2022 , and reduced the total available borrowing amount to $75.0 million and extended our Incremental Term Loan to October 19, 2022 , matching the date of our longer-dated Senior Secured Term Loan.

The strategic options we have evaluated included further cost savings and cash generation initiatives, more efficient capital deployment, changes to our debt and equity structure to improve financial flexibility and liquidity, and the sale of part or all of NN, among others.

As discussed in Note 16 in the Notes to Consolidated Financial Statements, on December 11, 2019, we issued Series B Convertible Preferred Stock (“Preferred Stock” for net proceeds of $95.7 million and used a portion of the proceeds to repay amounts due at that time on our Senior Secured Revolver.

In December 2019, we amended our Credit Agreement which, in turn, extended the due date of our Senior Secured Revolver to July 20, 2022, reduced the total capacity under the Senior Secured Revolver to $75.0 million, and extended the due date of our Incremental Term Loan to October 19, 2022, matching the date of our longer-dated Senior Secured Term Loan.

Additionally, as part of this amendment our debt covenants were amended to establish more restrictive leverage ratios that also become more restrictive over time.

Our Consolidated Net Leverage Ratio covenant (the “financial leverage ratio covenant”) is required to be complied with on a quarterly basis at the end of each of our quarterly reporting periods.

Our Consolidated Net Leverage Ratio (the “financial leverage ratio”) covenant is required to be complied with on a quarterly basis at the end of each of our quarterly reporting periods.

Our financial leverage ratio covenant is based upon our consolidated net indebtedness at each quarter end and our trailing twelve-month Adjusted EBITDA as defined in our Credit Agreement.

In order to maintain compliance with the financial leverage ratio covenant, our operational and financial performance must continue to improve in line with our expectations.

The Company relies on cash flow generated from operations and available borrowings under its Senior Secured Revolver to fund our working capital and other operating and investing needs.

Our ability to borrow under our Senior Secured Revolver is based on our continued compliance with our financial leverage ratio covenant, as defined, which becomes more restrictive in the second quarter of 2020 and the first quarter of 2021.

If our operational and financial performance does not improve in line with our expectations, and as a result we are unable to comply with our financial ratio covenant, then the revolving credit lenders, the Senior Secured Term Loan lenders, and the Incremental Term Loan lenders could take action to cause amounts due under our credit facilities to become due and payable unless we are able to amend such covenants or otherwise refinance our debt.

Our ability to amend our covenants or refinance our debt is dependent upon several factors, and therefore there can be no assurance that we would be successful in these efforts.

If we would be unable to access future borrowings or be required to pay amounts due under our credit facilities prior to their normal maturity dates, this would have a material impact to the Company’s financial position.

We have developed a plan to mitigate the risk of noncompliance with our financial covenants, if necessary, which includes the implementation of a series of specific and identified cost reductions in both our corporate and business groups, including a reduction of our direct and indirect labor costs and benefits.

In addition, our plans also include, as deemed necessary, repatriating cash from certain overseas businesses, managing our working capital more efficiently through usage of our customers’ available supply chain finance programs and other means, and the sale or sublease of certain underutilized properties.

In July 2020, we amended our Credit Agreement to waive compliance with the financial leverage ratio covenant for the second and third quarters of 2020.

During this period, we were required to maintain minimum liquidity levels, provide certain financial and other information, and take certain other action as specified in the amendment.

Failure to maintain the required minimum liquidity levels or satisfy other requirements set forth in the amendment would allow the revolving credit lenders, the Senior Secured Term loan lenders, and the Incremental Term Loan lenders to cause amounts outstanding under our credit facility to become immediately due and payable and would have a material, adverse impact on our financial position.

In August 2020, we entered into an agreement to sell our Life Sciences business.

The sale closed on October 6, 2020, at which time we received cash proceeds of $757.2 million.

We immediately prepaid $700.0 million in the aggregate on the Senior Secured Term Loan and the Incremental Term Loan.

We also paid in full the outstanding balance on the Senior Secured Revolver.

Additionally, in August 2020, we amended our Credit Agreement to obtain the lenders’ consent to the sale of the Life Sciences business, subject to certain terms and conditions.

We rely on cash flow generated from operations and available borrowings under our Senior Secured Revolver to fund our working capital and other operating and investing needs.

Our ability to borrow under our Senior Secured Revolver is based on our continued compliance with the minimum liquidity requirements and, for periods beginning in the fourth quarter of 2020, the financial leverage ratio covenant, as defined, which became more restrictive upon the occurrence of a qualified sale transaction, which closed on October 6, 2020.

Based on available borrowing capacity of the Senior Secured Revolver, the reduction in debt service costs as a result of the debt prepayment with net proceeds from the sale of the Life Sciences business in October 2020, and cash flows expected to be generated from operations and investing activities, we anticipate that our cash and cash equivalents are sufficient to support our operations and meet our obligations, and that we will be able to maintain compliance with the existing financial leverage ratio covenant for the next twelve months from issuance of these consolidated financial statements.

As the term of our Credit Agreement ends in the second half of 2022, we are in the process of evaluating financing alternatives.

On February 8, 2019, we entered into a $700.0 million fixed-rate interest rate swap agreement that changed the LIBOR-based portion of the interest rate on a portion of our variable rate debt to a fixed rate of 2.4575%.

1 unchanged sentence

Refer to Note 21 in the Notes to Consolidated Financial Statements for further discussion about the interest rate swap.

In connection with the prepayment of debt on October 6, 2020, with proceeds from the sale of our Life Sciences business, the outstanding balance of our variable rate debt fell below the $700.0 million notional amount of the interest rate swap.

After the prepayment, a majority of the hedged forecasted transactions (i.e.

interest payments) were probable of not occurring, resulting in the recognition in earnings of $14.8 million of the hedging loss in accumulated other comprehensive income in the fourth quarter of 2020.

The remaining $2.9 million of the hedging loss in accumulated other comprehensive income will be amortized into earnings as settlements occur.

Finally, as the interest rate swap no longer qualifies as an effective hedge subsequent to October 6, 2020, changes in fair value of the interest rate swap are recognized in earnings each period.

All amounts recognized in earnings related to the interest rate swap are recorded in the “Loss on interest rate swap” line on the Consolidated Statements of Operations and Comprehensive Income (Loss) except that cash settlements were recognized in “Interest expense” prior to October 6, 2020, and in “Derivative payments on interest rate swap” after October 6, 2020.

Cash settlements are presented in operating activities on the Consolidated Statements of Cash Flows prior to October 6, 2020, and in investing activities after October 6, 2020.

Our arrangements with customers typically provide that payments are due within 30 to 60 days following the date of shipment.

11 unchanged sentences

Collectively, our Senior Secured Term Loan, Incremental Term Loan, and Senior Secured Revolver comprise our credit facility.

Total available capacity under the Senior Secured Revolver was $75.0 million as of December 31, 2019 .

Total capacity under the Senior Secured Revolver was $60.0 million as of December 31, 2020, and will decrease to $50.0 million on June 30, 2021.

The Senior Secured Revolver matures on July 20, 2022.

The credit agreement requires cash in excess of $35.0 million on the last day of each month to be used to pay down the Senior Secured Revolver.

The Senior Secured Term Loan requires quarterly principal payments of $0.1 million through October 19, 2022, with the remaining principal amount due on the maturity date.

1 unchanged sentence

If one-month LIBOR exceeds 0.75%, then we pay the variable one-month LIBOR plus an applicable margin of 5.75%.

Based on the interest rate in effect at December 31, 2019 , annual interest payments would be approximately $41.1 million in 2020 , approximately $40.2 million in 2021 , and approximately $30.6 million in 2022 .

Based on the interest rate in effect at December 31, 2020, annual interest payments would be approximately $3.1 million.

The Incremental Term Loan requires quarterly principal payments of $0.3 million through October 19, 2022, with the remaining principal amount due on the maturity date.

The Incremental Term Loan bears interest at the variable one-month LIBOR plus an applicable margin of 5.75%.

Based on the interest rate in effect at December 31, 2019 , annual interest payments would be $19.3 million in 2020 , $17.2 million in 2021 , and $13.1 million in 2022 .

Based on the interest rate in effect at December 31, 2020, annual interest payments would be approximately $1.3 million.

The Senior Secured Revolver bears interest on a variable rate structure with borrowings bearing interest at either one-month LIBOR plus an applicable margin of 4.00% or the prime lending rate plus an applicable margin of 3.00%.

We pay a commitment fee of 0.50% for unused capacity under the Senior Secured Revolver.

Our credit facility is subject to certain financial covenants based on a consolidated net leverage ratio, becoming more restrictive over time.

If our operational or financial performance does not improve in line with our expectations, we may be required to take actions to further reduce expenditures and decrease our net indebtedness to maintain compliance in future periods.

We were in compliance with all covenants under our credit facility at December 31, 2019 .

The table below sets forth our contractual obligations and commercial commitments as of December 31, 2019 :

We had no borrowings outstanding under the Senior Secured Revolver at December 31, 2020.

Total capacity under the Senior Secured Revolver was $60.0 million as of December 31, 2020, with $45.4 million available for future borrowings after reductions for outstanding letters of credit.

In July 2020, we amended our Credit Agreement to waive compliance with the financial leverage ratio covenant for the second and third quarters of 2020.

During this period, we were required to maintain minimum liquidity levels, provide certain financial and other information, and take certain other action as specified in the amendment.

We were in compliance as of December 31, 2020, with all requirements under our credit facility.

Contractual Obligations

The following table presents our contractual obligations and commercial commitments as of December 31, 2020:

Payments Due by Period

Certain Contractual Obligations

Less than 1 year

After 5 years

Certain Contractual Obligations Total Less than 1 year 1-3 years 3-5 years After 5 years

Long-term debt including current portion $ 84,862 $ 4,885 $ 73,296 $ 3,027 $ 3,654

Expected interest payments (1)

9,067 4,764 3,916 173 214

Expected derivative payments (2)

15,379 11,022 4,357 — —

Operating leases 88,196 9,348 15,855 14,470 48,523

Transition tax on deferred foreign income

Finance leases 11,469 4,442 5,472 1,345 210

1 unchanged sentence

_______________________________

Expected interest payments consists of fixed-rate debt under the interest rate swap agreement (refer to Note 22 of the Notes to Consolidated Financial Statements) and variable rate debt.

Expected interest payments under the variable rate debt are based on one-month LIBOR as of December 31, 2019 .

During the year ended December 31, 2018, we entered into a build-to-suit lease agreement that will commence upon completion of construction of the leased facility.

Base rent payments of approximately $1.8 million per year are not included in the table above and are expected to commence during the third quarter of 2020 and continue over the 15-year lease term.

(1) Expected interest payments on our variable-rate Senior Secured Term Loan and Incremental Term Loan are based on one-month LIBOR as of December 31, 2020.

(2) Expected derivative payments are estimated based on the fair value of the interest rate swap as of December 31, 2020.

We have approximately $0.8 million in unrecognized tax benefits accrued within the liabilities section of our balance sheet.

8 unchanged sentences

General economic conditions impact our business and financial results, and certain businesses experience seasonal and other trends related to the industries and end markets that they serve.

For example, European sales are often weaker in the summer months as customers slow production, medical device sales are often stronger in the fourth calendar quarter, and sales to original equipment manufacturers are often stronger immediately preceding and following the launch of new products.

For example, European sales are often weaker in the summer months as customers slow production and sales to original equipment manufacturers are often stronger immediately preceding and following the launch of new products.

However, as a whole, we are not materially impacted by seasonality.

2 unchanged sentences

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis