NN INC 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations Overview NN, Inc. is a global diversified industrial company that combines advanced engineering and production capabilities with in-depth materials science expertise to design and manufacture high-precision components and assemblies for the medical, aerospace and defense, electrical, automotive, and general industrial markets. As used in this Quarterly Report, the terms “NN,” the “Company,” “we,” “our,” or “us” refer to NN, Inc. and its subsidiaries. Forward-Looking Statements This Quarterly Report contains forward-looking statements that are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements may discuss goals, intentions and expectations as to future trends, plans, events, results of operations or financial condition, or state other information relating to NN, Inc., based on current beliefs of management as well as assumptions made by, and information currently available to, management. Forward-looking statements generally will be accompanied by words such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “forecast,” “guidance,” “intend,” “may,” “possible,” “potential,” “predict,” “project” or other similar words, phrases or expressions. Forward-looking statements involve a number of risks and uncertainties that are outside of management’s control and that may cause actual results to be materially different from such forward-looking statements. Such factors include, among others, general economic conditions and economic conditions in the industrial sector; the impacts of the COVID-19 pandemic on the Company’s financial condition, business operations and liquidity; competitive influences; risks that current customers will commence or increase captive production; risks of capacity underutilization; quality issues; availability of raw materials; currency and other risks associated with international trade; our dependence on certain major customers; the impact of acquisitions and divestitures; the level of our indebtedness; the restrictions contained in our debt agreements; our ability to obtain financing at favorable rates, if at all, and to refinance existing debt as it matures; unanticipated difficulties integrating acquisitions; new laws and governmental regulations; and other risk factors and cautionary statements listed from time-to-time in our periodic reports filed with the Securities and Exchange Commission. We disclaim any obligation to update any such factors or to publicly announce the result of any revisions to any of the forward-looking statements included herein or therein to reflect future events or developments. For additional information concerning such risk factors and cautionary statements, please see the sections titled “Item 1A. Risk Factors” in the 2019 Annual Report and this Quarterly Report. 27 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 six months ended June 30, 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 In December 2019, a novel strain of coronavirus (“COVID-19”) 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 temporarily closed our production facilities in China. On March 11, 2020, the World Health Organization characterized the outbreak of COVID-19 as a global pandemic and recommended containment and mitigation measures. 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 operations in March. We have experienced supplier and customer disruption, which has affected our results of operations and cash flows this year. 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 quarter, as customer closures have affected much of our operations and may continue for an unknown period of time. The spread of COVID-19 has created a disruption in the manufacturing, delivery and overall supply chain of automobile manufacturers and suppliers. Global vehicle production has decreased significantly, and some vehicle manufacturers have completely shut down manufacturing operations in some countries and regions, including the United States and Europe. Stay-at-home orders issued by federal, state, and local governmental authorities to combat the spread of COVID-19 have resulted in hospitals’ cancelling, deferring, or limiting elective surgeries, which has negatively impacted demand from our Life Sciences customers. Although many stay-at-home orders have been lifted, the COVID-19 pandemic continues to have a negative impact on elective surgeries and on the demand from our Life Sciences customers. . On April 6, 2020, we withdrew our previously issued full year 2020 financial guidance until the effects of the COVID-19 pandemic can be better assessed. We have undertaken a number of actions to manage the evolving situation, including the continuation of previously announced cost savings initiatives. Previously announced initiatives: • 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 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. • Beginning in April 2020, executives reduced their base salaries by 20% to 25%, non-executive employee salaries were reduced by 5% to 15%, and the 401(k) employer match was suspended. • Non-employee board members suspended their cash compensation. • Employee merit increases and bonus payouts have been deferred, and the gainsharing plan for 2020 has been suspended. • Travel was significantly reduced beginning in the first quarter. • In response to government orders and reduced demand, we have 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 have entered into rent deferral arrangements with landlords of several of our leased facilities. • As allowed by the CARES Act, we have begun to defer payments of the employer share of U. S. payroll taxes and intend to defer the payment of remaining obligations through the end of 2020 and will begin making payments in 2021 through 2022. • 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. 28 Table of Contents Next steps: • 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 are pursuing other opportunities to delay payment of fixed costs. • We continue to focus on further general cost reduction actions. While managing decreased demand in many regions across the globe, we are also preparing to restart and ramp up our businesses. 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 recent ramp-up in China. The health and safety of our employees remains our top priority. 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 each of Life Sciences and Power Solutions, 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 reflect 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. Changes in assumptions and estimates may affect the fair value of goodwill and could result in impairment charges in future periods. Management’s judgment used in the assessment of fair value is more significant under the current market conditions and economic uncertainty created by COVID-19. The carrying values of the Life Sciences and Power Solutions reporting units exceeded their estimated fair values as of the March 31, 2020, analysis. As a result of our analysis, we recorded an impairment loss on goodwill of $146.8 million and $92.9 million for Life Sciences and Power Solutions, respectively, to the “Goodwill impairment” line on the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss). Prior Periods’ Financial Statement Revision Certain prior period amounts have been revised to reflect the impact of corrections of misstatements and to correct the timing of previously recorded out-of-period adjustments. Refer to Note 1 and Note 2 in the Notes to Condensed Consolidated Financial Statements for more information. Sales Concentration We recognized sales from a single customer of $20.0 million, or 13% of consolidated net sales, during the three months ended June 30, 2020, and $23.0 million, or 10% of consolidated net sales, during the three months ended June 30, 2019. We recognized sales from this customer of $45.5 million, or 13% of consolidated net sales, during the six months ended June 30, 2020, and $45.1 million, or 10% of consolidated net sales, during the six months ended June 30, 2019. Revenues from this customer are in our Life Sciences and Power Solutions groups. 29 Table of Contents Three Months Ended June 30, 2020, compared to the Three Months Ended June 30, 2019 Three Months Ended June 30, 2020 2019 $ Change Net sales $ 150,420 $ 221,666 $ (71,246) Organic decline $ (69,943) Foreign exchange effects (1,303) Cost of sales (exclusive of depreciation and amortization shown separately below) 115,389 164,099 (48,710) Selling, general and administrative expense 20,991 26,743 (5,752) Depreciation and amortization 23,201 22,924 277 Other operating (income) expense, net (955) 388 (1,343) Income (loss) from operations (8,206) 7,512 (15,718) Interest expense 18,696 13,958 4,738 Other (income) expense, net (881) 57 (938) Loss before benefit (provision) for income taxes and share of net income (loss) from joint venture (26,021) (6,503) (19,518) Benefit (provision) for income taxes 3,346 (577) 3,923 Share of net income (loss) from joint venture 927 (203) 1,130 Net loss $ (21,748) $ (7,283) $ (14,465) Net Sales . Net sales decreased by $71.2 million, or 32%, during the three months ended June 30, 2020, compared to the three months ended June 30, 2019, primarily due to a decrease in organic volume of $69.9 million, as a result of decreased demand due to the COVID-19 pandemic and unfavorable foreign exchange effects of $1.3 million. Cost of Sales. Cost of sales decreased by $48.7 million, or 30%, during the three months ended June 30, 2020, compared to the three months ended June 30, 2019, primarily due to variable costs associated with the above-referenced sales volume decline and fixed cost savings initiatives. Selling, General and Administrative Expense. Selling, general and administrative expense decreased by $5.8 million during the three months ended June 30, 2020, compared to the three months ended June 30, 2019, primarily due to cost reduction initiatives that drove decreases in personnel costs and travel costs. Other Operating (Income) Expense, Net. Other operating (income) expense, net, changed favorably by $1.3 million primarily due to a $0.8 million gain on the sale of a building in Fairfield, Ohio, during the three months ended June 30, 2020. Interest Expense. Interest expense increased by $4.7 million during the three months ended June 30, 2020, compared to the three months ended June 30, 2019, primarily due to an increase in the interest rate on our credit facility as a result of amendments executed in 2019, settlements on the interest rate swap that were not fully offset by reductions in interest on our Senior Secured Term Loan because of the interest rate floor on the Loan, and the amortization of the associated amendment costs. Three Months Ended June 30, 2020 2019 Interest on debt $ 13,518 $ 13,067 Interest rate swap settlements 3,436 — Amortization of debt issuance costs 1,696 1,162 Capitalized interest (227) (532) Other 273 261 Total interest expense $ 18,696 $ 13,958 Other (Income) Expense, Net. Other (income) expense, net, changed favorably by $0.9 million during the three months ended June 30, 2020, compared to the three months ended June 30, 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 12.9% for the three months ended June 30, 2020, compared to (8.9)% for the three months ended June 30, 2019. The difference in rates is primarily due to the impact of the impairment of 30 Table of Contents nondeductible goodwill in 2020 and a discrete tax charge in 2019 related to final tax regulations. Note 8 in the Notes to Condensed 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 JV increased during the three months ended June 30, 2020, compared to the three months ended June 30, 2019, primarily due to improved profits resulting from higher sales, expanding variable margins as a result of successful process improvement initiatives and improved product mix, and fixed cost reduction actions. Results by Segment LIFE SCIENCES Three Months Ended June 30, 2020 2019 $ Change Net sales $ 72,399 $ 91,332 $ (18,933) Organic decline $ (18,343) Foreign exchange effects (590) Income from operations $ 4,333 $ 9,305 $ (4,972) Net sales decreased by $18.9 million during the three months ended June 30, 2020, compared to the three months ended June 30, 2019, primarily due to a decrease in organic volume of $18.3 million as a result of reduced customer demand within the orthopaedic end market driven by the decrease in demand for elective surgeries as a result of the COVID-19 pandemic and delays in new product launches. Sales for the quarter were also unfavorably impacted by the change in currency rates. Income from operations decreased by $5.0 million compared to the same period in the prior year primarily due to the variable margin on lower sales and higher depreciation expense attributable to the capital investments made during 2019 to support the business growth. These unfavorable impacts were partially offset by savings from continuous improvement initiatives and overall reductions in manufacturing and selling, general, and administrative costs resulting from significant cost savings initiatives implemented to respond to the unfavorable impacts of the COVID-19 pandemic. Lower amortization expense also contributed to income from operations due to the backlog intangible asset acquired in the Paragon acquisition that became fully amortized last year. MOBILE SOLUTIONS Three Months Ended June 30, 2020 2019 $ Change Net sales $ 41,037 $ 79,444 $ (38,407) Organic decline $ (37,120) Foreign exchange effects (1,287) Income (loss) from operations $ (4,592) $ 3,506 $ (8,098) Net sales decreased by $38.4 million during the three months ended June 30, 2020, compared to the three months ended June 30, 2019, primarily due to lower demand within global automotive markets resulting from the COVID-19 pandemic, price reductions, the impact of reduced demand for components associated with programs nearing the end of life, and unfavorable foreign exchange effects. Income from operations decreased by $8.1 million compared to the same period in the prior year primarily 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. 31 Table of Contents POWER SOLUTIONS Three Months Ended June 30, 2020 2019 $ Change Net sales $ 37,491 $ 51,393 $ (13,902) Organic decline (14,476) Foreign exchange effects 574 Income from operations $ 1,454 $ 5,682 $ (4,228) Net sales decreased by $13.9 million during the three months ended June 30, 2020, compared to the three months ended June 30, 2019, primarily due to lower demand in the electrical products, automotive, and oil and gas end markets resulting from the COVID-19 pandemic. Income from operations decreased by $4.2 million compared to the same period in the prior year primarily due to 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. Six Months Ended June 30, 2020, compared to the Six Months Ended June 30, 2019 Six Months Ended June 30, 2020 2019 $ Change Net sales $ 350,165 $ 434,922 $ (84,757) Organic decline (81,336) Foreign exchange effects (3,421) Cost of sales (exclusive of depreciation and amortization shown separately below) 267,630 326,286 (58,656) Selling, general and administrative expense 45,815 54,868 (9,053) Depreciation and amortization 46,385 46,349 36 Restructuring and integration expense, net — (12) 12 Goodwill impairment 239,699 — 239,699 Other operating (income) expense, net 4,174 236 3,938 Income (loss) from operations (253,538) 7,195 (260,733) Interest expense 35,773 27,759 8,014 Loss on extinguishment of debt and write-off of debt issuance costs — 2,699 (2,699) Other (income) expense, net 239 786 (547) Loss before benefit (provision) for income taxes and share of net income (loss) from joint venture (289,550) (24,049) (265,501) Benefit (provision) for income taxes 18,955 (2,818) 21,773 Share of net income (loss) from joint venture 656 66 590 Net loss $ (269,939) $ (26,801) $ (243,138) Net Sales . Net sales decreased by $84.8 million, or 19.5%, during the six months ended June 30, 2020, compared to the six months ended June 30, 2019, primarily due to a decrease in organic volume of $81.3 million, as a result of decreased demand due to the COVID-19 pandemic and unfavorable foreign exchange effects of $3.4 million. Cost of Sales. Cost of sales decreased by $58.7 million, or 18.0%, during the six months ended June 30, 2020, compared to the six months ended June 30, 2019, primarily due to variable costs associated with the above-referenced sales volume decline and fixed cost savings initiatives. Selling, General and Administrative Expense. Selling, general and administrative expense decreased by $9.1 million during the six months ended June 30, 2020, compared to the six months ended June 30, 2019, primarily due to cost reduction initiatives that drove decreases in personnel costs and travel costs. Goodwill Impairment. The increase in goodwill impairment in the six months ended June 30, 2020, was the result of goodwill impairment charges at Life Sciences and Power Solutions. See Note 5 in the Notes to Condensed Consolidated Financial Statements for more information on the impairment charges. 32 Table of Contents Other Operating (Income) Expense, Net. Other operating (income) expense, net, changed unfavorably by $3.9 million primarily due to charges and costs associated with asset 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 six months ended June 30, 2020. Interest Expense. Interest expense increased by $8.0 million during the six months ended June 30, 2020, compared to the six months ended June 30, 2019, primarily due to an increase in the interest rate on our credit facility as a result of amendments executed in 2019, settlements on the interest rate swap that were not fully offset by reductions in interest on our Senior Secured Term Loan because of the interest rate floor on the Loan, and the amortization of the associated amendment costs. Six Months Ended June 30, 2020 2019 Interest on debt $ 27,505 $ 26,185 Interest rate swap settlements 4,806 — Amortization of debt issuance costs 3,348 2,354 Capitalized interest (539) (1,084) Other 653 304 Total interest expense $ 35,773 $ 27,759 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 decreased by $2.7 million during the six months ended June 30, 2020, compared to the six months ended June 30, 2019, due to costs written off as a result of the March 2019 amendment to our credit facility. Other (Income) Expense, Net. Other (income) expense, net, changed favorably by $0.5 million during the six months ended June 30, 2020, compared to the six months ended June 30, 2019, primarily due to more favorable foreign exchange effects associated with intercompany borrowings compared to the prior year. Provision/Benefit for Income Taxes. Our effective tax rate was 6.6% for the six months ended June 30, 2020, compared to 11.7% for the six months ended June 30, 2019. The difference in rates is primarily due to the impact of the impairment of nondeductible goodwill in 2020 and a discrete tax charge in 2019 related to final tax regulations. Note 8 in the Notes to Condensed Consolidated Financial Statements describes the components of income taxes for each period presented. Share of Net Income from Joint Venture. Share of net income (loss) from the JV increased during the six months ended June 30, 2020, compared to the six months ended June 30, 2019, primarily due to 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 COVID-19 pandemic in the first quarter of 2020. Results by Segment LIFE SCIENCES Six Months Ended June 30, 2020 2019 $ Change Net sales $ 156,447 $ 177,340 $ (20,893) Organic decline (19,948) Foreign exchange effects (945) Goodwill impairment $ (146,757) $ — $ (146,757) Income (loss) from operations $ (136,646) $ 13,151 $ (149,797) Net sales decreased by $20.9 million during the six months ended June 30, 2020, compared to the six months ended June 30, 2019, primarily due to a decrease in organic volume of $19.9 million as a result of a reduced customer demand within the orthopaedic end market, the decrease in demand for elective surgeries as a result of the COVID-19 pandemic, and delays in product launches. Sales for the period were also unfavorably impacted by the change in currency rates. Income from operations decreased by $149.8 million compared to the same period in the prior year primarily due to a goodwill impairment loss of $146.8 million recognized in the first quarter of 2020. Lost variable margin on lower sales and higher depreciation expense attributable to the capital investments made during 2019 to support the business growth also contributed to the decrease in income from operations. These unfavorable impacts were partially offset by savings from continuous 33 Table of Contents improvement initiatives and overall reductions in manufacturing and selling, general, and administrative costs resulting from significant cost savings initiatives implemented to respond to the unfavorable impacts of the COVID-19 pandemic. Lower amortization expense also contributed to income from operations due to the backlog intangible asset acquired in the Paragon acquisition that became fully amortized last year. MOBILE SOLUTIONS Six Months Ended June 30, 2020 2019 $ Change Net sales $ 110,921 $ 157,519 $ (46,598) Organic decline $ (43,425) Foreign exchange effects (3,173) Income (loss) from operations $ (4,328) $ 6,695 $ (11,023) Net sales decreased by $46.6 million during the six months ended June 30, 2020, compared to the six months ended June 30, 2019, primarily due to lower demand within global automotive markets resulting from the COVID-19 pandemic, price reductions, the impact of reduced demand for components associated with programs nearing the end of life, and unfavorable foreign exchange effects. Income from operations decreased by $11.0 million compared to the same period in the 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. POWER SOLUTIONS Six Months Ended June 30, 2020 2019 $ Change Net sales $ 83,892 $ 101,050 $ (17,158) Organic decline (17,855) Foreign exchange effects 697 Goodwill impairment $ (92,942) $ — $ (92,942) Income (loss) from operations $ (88,880) $ 9,506 $ (98,386) Net sales decreased by $17.2 million during the six months ended June 30, 2020, compared to the six months ended June 30, 2019, primarily due to lower demand in the electrical products, automotive, and oil and gas end markets resulting from the COVID-19 pandemic. Income from operations decreased by $98.4 million compared to the same period in the 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. Changes in Financial Condition from December 31, 2019, to June 30, 2020 Overview From December 31, 2019, to June 30, 2020, total assets decreased by $246.0 million primarily due to the $239.7 million impairment of goodwill in the first quarter of 2020. Accounts receivable decreased by $25.9 million as a result of decreased sales volume and improved cash collections. These decreases were partially offset by cash reserves from the drawdown of $62.5 million on our Senior Secured Revolver during the six months ended June 30, 2020. From December 31, 2019, to June 30, 2020, total liabilities increased by $43.7 million, primarily due to the drawdown on our Senior Secured Revolver. Working capital, 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 $204.5 million as of June 30, 2020, compared to $163.5 million as of December 31, 2019. The increase in working capital was due primarily to the increase in cash resulting from the drawdown on our Senior Secured Revolver, which was partially offset by a decrease in accounts receivable. 34 Table of Contents Cash Flows Cash provided by operations was $15.9 million for the six months ended June 30, 2020, compared with cash provided by operations of $4.4 million for the six months ended June 30, 2019. The difference was primarily due to cost savings initiatives, improvements in cash collections on accounts receivable, and lower spending due to lower production volumes as a result of the COVID-19 pandemic. Cash used in investing activities was $12.5 million for the six months ended June 30, 2020, compared with cash used in investing activities of $19.8 million for the six months ended June 30, 2019. The decrease was primarily due to lower capital expenditures in 2020 as part of our cost savings initiatives. Cash received from the liquidation of the short-term investment during 2019 partially offset the decrease in capital expenditures year over year. Cash provided by financing activities was $53.4 million for the six months ended June 30, 2020, compared with cash provided by financing activities of $19.7 million for the six months ended June 30, 2019. The difference was primarily due to higher net borrowings under our credit facility during the six months ended June 30, 2020. Impairment Analysis 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 each of Life Sciences and Power Solutions, 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 reflect 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. Changes in assumptions and estimates may affect the fair value of goodwill and could result in impairment charges in future periods. Management’s judgment used in the assessment of fair value is more significant under the current market conditions and economic uncertainty created by COVID-19. The carrying values of the Life Sciences and Power Solutions reporting units exceeded their estimated fair values as of the March 31, 2020, analysis. As a result of our analysis, we recorded an impairment loss on goodwill of $146.8 million and $92.9 million for Life Sciences and Power Solutions, respectively, to the “Goodwill impairment” line on the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss). Life Sciences goodwill as of June 30, 2020, was $196.5 million. In conjunction with the goodwill impairment test performed during the first quarter of 2020, Life Sciences goodwill was impaired by $146.8 million, resulting in the carrying value of the reporting unit being equal to its fair value as of the date of the assessment. If our assessment of the relevant facts and circumstances changes, or if the actual performance falls short of expected results, an additional impairment charge will be required. An impairment of goodwill may also lead us to record an impairment of other intangible assets. The carrying value of finite-lived intangible assets for the Life Sciences group as of June 30, 2020, was $196.3 million. Liquidity and Capital Resources Overview 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 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. 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 global 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. 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, reduced the total capacity under the Senior 35 Table of Contents 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 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 are 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 due under our credit facility to become immediately due and payable and would have a material, adverse impact on our financial position. 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 the 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 become more restrictive over time and upon the occurrence of a qualified sale transaction. Based on available borrowing capacity of the Senior Secured Revolver, as well as cash flows expected to be generated from operations and investing activities, we anticipate that we may not be able to maintain compliance with the existing financial leverage ratio covenant for the next twelve months. If we are unable to comply with our financial leverage 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 facility 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 are 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 our financial position. Accordingly, we believe there is substantial doubt about our ability to continue as a going concern for the twelve-month period following the date of this Quarterly Report. 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 18 in the Notes to Condensed Consolidated Financial Statements for further discussion about the interest rate swap. 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 June 30, 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 June 30, 2020, were $837.3 million, without regard to unamortized debt issuance costs. Of this amount, $700.0 million was hedged with the interest rate swap. As of June 30, 2020, we had unused borrowing capacity of $0.7 million under the Senior Secured Revolver, subject to certain limitations. This amount of borrowing capacity is net of $11.8 million of outstanding letters of credit at June 30, 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 $75.0 million as of June 30, 2020. The Senior Secured Revolver matures on July 20, 2022. The Senior Secured Term Loan requires quarterly principal payments of $1.4 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 on the unhedged balance. If one-month LIBOR exceeds 0.75%, then we pay the variable one-month LIBOR plus an 36 Table of Contents applicable margin of 5.75% on the unhedged balance. Based on the interest rate in effect at June 30, 2020, annual interest payments on the hedged balance would be approximately $43.2 million. The Incremental Term Loan requires quarterly principal payments of approximately $2.9 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% on the unhedged balance. Based on the interest rate in effect at June 30, 2020, annual interest payments on hedged and unhedged balances would be $17.9 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%. Based on the interest rate in effect at June 30, 2020, annual interest payments would be $2.6 million. We pay a commitment fee of 0.50% for unused capacity under the Senior Secured Revolver. Covenants We had $62.5 million outstanding under the Senior Secured Revolver at June 30, 2020. Total capacity under the Senior Secured Revolver was $75.0 million as of June 30, 2020, with $0.7 million available for future borrowings after reductions for outstanding letters of credit and outstanding borrowings as of June 30, 2020. 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 are 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 due under our credit facility to become immediately due and payable and would have a material, adverse impact on our financial position. We were in compliance as of June 30, 2020, with all requirements under our credit facility. 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, 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. 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. Critical Accounting Policies Our critical accounting policies, including the assumptions and judgments underlying them, are disclosed in the 2019 Annual Report, including those policies as discussed in Note 1 to the Notes to Consolidated Financial Statements included in the 2019 Annual Report. There have been no changes to these policies during the six months ended June 30, 2020, except as discussed in Note 1 to the Notes to Condensed Consolidated Financial Statements included in this Quarterly Report. Recent Accounting Pronouncements See Note 1 in the Notes to Condensed Consolidated Financial Statements included in this Quarterly Report.