NN INC 10-K

Item 7. 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 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. Unless otherwise noted herein, all amounts are in thousands, except per share numbers. 20 Table of Contents Overview and Management Focus Our strategy and management focus are based upon the following long-term objectives • Organic growth within our segments; • Improved operating margins • Cost reduction • Efficient capital deployment • Reduced overall debt and debt leverage ratio improvement • Capital management initiatives • Employee safety and satisfaction Management generally focuses on these trends and relevant market indicators • Global industrial growth and economics; • Residential and non-residential construction rates; • Global automotive production rates; • Defense spending; • Costs subject to the global inflationary environment, including, but not limited to: • Raw materials; • Wages and benefits, including health care costs; • Regulatory compliance; and • Energy; • Trends related to the geographic migration of competitive manufacturing, electric vehicles, and electrification; • Regulatory environment for United States public companies and manufacturing companies; • Currency and exchange rate movements and trends; • Interest rate levels and expectations; and • Changes in tariff regulations. Management generally focuses on the following key indicators of operating performance • Sales growth; • Cost of sales; • Gross margin; • Selling, general and administrative expense; • Earnings before interest, taxes, depreciation and amortization; • Return on invested capital; • Income from operations and adjusted income from operations; • Net income and adjusted net income; • Leverage ratio • Cash flow from operations and capital spending; • Customer service reliability; • External and internal quality indicators; and • Employee development. 21 Table of Contents Critical Accounting Policies 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. Due to the estimation processes involved, management considers the following summarized accounting policies and their application to be critical to understanding our business operations, financial condition and results of operations. We cannot assure you that actual results will not significantly differ from the estimates used in these critical accounting policies. Goodwill and Other Indefinite Lived Intangible Assets Goodwill is tested for impairment on an annual basis in the fourth quarter and between annual tests if a triggering event occurs. The impairment analysis is performed at the reporting unit level. An impairment charge is calculated based on a reporting unit’s carrying amount in excess of its fair value (i.e., step 1 of the two-step impairment test). 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 (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 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 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. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Valuation allowances are recorded to reduce deferred tax assets when it is more likely than not that a tax benefit will not be realized. Provision has been made for income taxes on unremitted earnings of certain foreign subsidiaries as these earnings are not deemed to be permanently reinvested. 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. GAAP is largely dependent on management judgment of the current and future deductibility and utilization of taxable expenses and benefits using a more likely than not threshold. Specifically, the realization of deferred tax assets and the certainty of tax positions taken are largely dependent upon management weighting the current positive and negative evidence for recording tax benefits and expenses. Additionally, many of our positions are based on future estimates of taxable income and deductibility of tax positions. We have recorded a U.S. 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. In the event that the actual outcome from future tax consequences differs from management estimates and assumptions or management plans and positions are amended, the resulting change to the provision for income taxes could have a material impact on the consolidated results of operations and financial position. (See Note 1 and Note 11 of the Notes to Consolidated Financial Statements). Impairment of Long-Lived Assets Long-lived tangible and intangible assets subject to depreciation or amortization are tested for recoverability when changes in circumstances indicate the carrying value of these assets may not be recoverable. A test for recoverability is also performed when management has committed to a plan to dispose of a reporting unit or asset group. Assets to be held and used are tested for recoverability when indications of impairment are evident. Recoverability of a long-lived tangible or intangible asset is evaluated by comparing its carrying value to the future estimated undiscounted cash flows expected to be generated by the asset or asset group. If the asset is not recoverable, then the asset is considered impaired and adjusted to fair value which is then depreciated or amortized over its remaining useful life. Assets to be disposed of are recorded at the lesser of carrying value or fair value less costs of disposal. In assessing potential impairment for long-lived assets, we consider forecasted financial performance based, in large part, on management business plans and projected financial information which are subject to a high degree of management judgment and complexity. Future adverse changes in market conditions or adverse operating results of the underlying assets could result in having to record additional impairment charges not previously recognized. 22 Table of Contents Results of Operations Factors That May Influence Results of Operations 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. 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; and • 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. 23 Table of Contents • As allowed by the CARES Act, we deferred payments of the employer share of U. S. 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. 24 Table of Contents 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 The following table presents the percentage of our net sales represented by statement of operations line item. 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 % Depreciation and amortization 10.7 % 9.2 % 8.2 % Restructuring and integration expense, net — % — % 0.1 % 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 % — % 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) % 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 During 2020, sales to various U.S. and foreign divisions of our ten largest customers accounted for approximately 45% of our consolidated net sales. 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. 25 Table of Contents Year Ended December 31, 2020, compared to the Year Ended December 31, 2019 Year Ended December 31, 2020 2019 $ Change Net sales $ 427,534 $ 489,514 $ (61,980) Organic decline $ (55,735) Foreign exchange effects (6,245) Cost of sales (exclusive of depreciation and amortization shown separately below) 343,594 392,482 (48,888) Selling, general, and administrative expense 58,055 68,895 (10,840) Depreciation and amortization 45,680 44,896 784 Restructuring and integration expense, net — (12) 12 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) 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 . 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 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 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 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 . 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. 26 Table of Contents Interest Expense. 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, 2020 2019 Interest on debt $ 7,714 $ 10,971 Interest rate swap settlements 8,906 1,411 Amortization of debt issuance costs 1,702 1,421 Capitalized interest (204) (1,458) Other 780 685 Total interest expense $ 18,898 $ 13,030 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 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 MOBILE SOLUTIONS Year Ended December 31, 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 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. 27 Table of Contents 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 . 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. 28 Table of Contents 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, 2019 2018 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) Foreign exchange effects (6,983) Goodwill impairment $ — $ (73,442) $ 73,442 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. 29 Table of Contents 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) Foreign exchange effects (205) Goodwill impairment $ — $ 109,100 $ (109,100) 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 (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 Overview 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 Flows 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 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. 30 Table of Contents Liquidity and Capital Resources Overview 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 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 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 (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 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. Hedging 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%. The term of the interest rate swap is from the effective date of February 12, 2019, through the termination date of October 19, 2022, with a declining notional amount over the term of the interest rate swap. Refer to Note 21 in the Notes to Consolidated Financial Statements for further discussion about the interest rate swap. 31 Table of Contents 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. We invoice and receive payment from many of our customers in various other currencies. Additionally, we are party to various third party and intercompany loans, payables, and receivables denominated in currencies other than the U.S. dollar. As a result of these sales, loans, payables, and receivables, we are exposed to foreign exchange transaction and translation risk. Various strategies to manage this risk are available to management, including producing and selling in local currencies and hedging programs. As of December 31, 2020, no currency derivatives were in place. In addition, a strengthening of the U.S. dollar against foreign currencies could impair our ability to compete with international competitors for foreign as well as domestic sales. Credit Facility Aggregate principal amounts outstanding under our Senior Secured Term Loan, Incremental Term Loan, and Senior Secured Revolver as of December 31, 2020, were $70.4 million, without regard to unamortized debt issuance costs. As of December 31, 2020, we had unused borrowing capacity of $45.4 million under the Senior Secured Revolver, subject to certain limitations. This amount of borrowing capacity is net of $14.6 million of outstanding letters of credit at December 31, 2020, which are considered as usage of the Senior Secured Revolver. Collectively, our Senior Secured Term Loan, Incremental Term Loan, and Senior Secured Revolver comprise our credit facility. 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. If one-month LIBOR is less than 0.75%, then we pay 6.50% per annum in interest. 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, 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, 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. 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. Covenants 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. 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. 32 Table of Contents 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 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 Finance leases 11,469 4,442 5,472 1,345 210 Total contractual cash obligations $ 208,973 $ 34,461 $ 102,896 $ 19,015 $ 52,601 _______________________________ (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. We are unsure when or if at all these amounts might be paid to U.S. and/or foreign taxing authorities. Accordingly, these amounts have been excluded from the table above. (See Note 11 of the Notes to Consolidated Financial Statements). Functional Currencies We currently have foreign operations in Brazil, China, France, Mexico, and Poland. The local currency of each foreign facility is also its functional currency. Seasonality and Fluctuation in Quarterly Results 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 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. Off-Balance Sheet Arrangements We are not a party to any off-balance sheet arrangements that have, or are reasonably likely to have, a material current or future effect on our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures, or capital resources.