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 primarily for the aerospace and defense, electrical, automotive, medical, 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. Results of Operations Factors That May Influence Results of Operations The following paragraphs describe factors that have influenced results of operations for the nine months ended September 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 well-being 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 32 Table of Contents 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. 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. In June 2020, the National Bureau of Economic Research officially declared that the United States economy has fallen into a recession. The situation grew more challenging in the second and third quarters, as customer closures have affected much of our operations and may continue for an unknown period of time. Although much of the United States and the global economies have reopened, the COVID-19 pandemic is intensifying in many parts of the United States and the world, and many public health experts anticipate a COVID-19 surge in the coming weeks and months of fall and winter. Reinstatement of directives and mandates requiring businesses to again curtail or cease normal operations remains a possibility, just as some jurisdictions rolled back reopening plans in the summer of 2020. Further, the continuing uncertainty as to whether the federal government will address the resulting fiscal condition in both the near and long-term with measures such as additional fiscal stimulus, as well as other geopolitical issues relating to the global economic slowdown, has increased domestic and global instability. 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. 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. 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 operation 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%. These salary reductions were repaid in October 2020, and salaries were reinstated to their original levels. • The 401(k) employer match was suspended. • Non-employee board members suspended their cash compensation. • Employee merit increases and bonus payouts were 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 adjusted production and work week hours, reduced or suspended non-critical discretionary spending, and furloughed personnel, many of whom are eligible to participate in government supported programs. • Inventory levels and collection of receivables are being closely monitored. • We entered into rent deferral arrangements with landlords of several of our leased facilities. • As allowed by the CARES Act, we deferred payments of the employer share of U. 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. • 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 have begun 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 33 Table of Contents 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. 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. We received cash proceeds at closing of $757.2 million. The purchase price is subject to customary post-closing adjustments and is expected to be finalized in the first quarter of 2021. 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. 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 Condensed Consolidated Statements of Operations and Comprehensive Income (Loss). The Condensed 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 condensed consolidated financial statements and the accompanying notes unless otherwise stated. The Condensed 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 immediately following the sale. 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. We also paid in full the outstanding balance on the Senior Secured Revolver. 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. 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 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 3 in the Notes to Condensed Consolidated Financial Statements for more information. 34 Table of Contents Sales Concentration We recognized sales from a single customer of $12.2 million, or 10% of consolidated net sales, during the three months ended September 30, 2019. We recognized sales from this customer of $39.0 million, or 10% of consolidated net sales, during the nine months ended September 30, 2019. Revenues from this customer are in our Mobile Solutions segment and were less than 10% of consolidated net sales, during the nine months ended September 30, 2020. Three Months Ended September 30, 2020, compared to the Three Months Ended September 30, 2019 Three Months Ended September 30, 2020 2019 $ Change Net sales $ 113,761 $ 120,459 $ (6,698) Organic decline $ (4,308) Foreign exchange effects (2,390) Cost of sales (exclusive of depreciation and amortization shown separately below) 90,076 96,654 (6,578) Selling, general and administrative expense 13,745 15,493 (1,748) Depreciation and amortization 11,435 11,284 151 Other operating income, net (39) (1,161) 1,122 Loss from operations (1,456) (1,811) 355 Interest expense 6,873 3,805 3,068 Loss on extinguishment of debt and write-off of debt issuance costs 144 — 144 Other expense (income), net (262) 633 (895) Loss from continuing operations before benefit for income taxes and share of net income from joint venture (8,211) (6,249) (1,962) Benefit for income taxes 8,715 1,134 7,581 Share of net income from joint venture 1,136 279 857 Income (loss) from continuing operations 1,640 (4,836) 6,476 Income (loss) from discontinued operations, net of tax 20,330 (1,019) 21,349 Net income (loss) $ 21,970 $ (5,855) $ 27,825 Net Sales . Net sales decreased by $6.7 million, or 6%, during the three months ended September 30, 2020, compared to the three months ended September 30, 2019, primarily due to a decrease in organic volume of $4.3 million, as a result of decreased demand due to the COVID-19 pandemic and unfavorable foreign exchange effects of $2.4 million. Cost of Sales. Cost of sales decreased by $6.6 million, or 7%, during the three months ended September 30, 2020, compared to the three months ended September 30, 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 $1.7 million during the three months ended September 30, 2020, compared to the three months ended September 30, 2019, primarily due to cost reduction initiatives that drove decreases in personnel costs and travel costs. Other Operating Income, Net. Other operating income, net, changed unfavorably by $1.1 million primarily due to a one-time $1.4 million litigation settlement received during the three months ended September 30, 2019. Interest Expense. Interest expense increased by $3.1 million during the three months ended September 30, 2020, compared to the three months ended September 30, 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 lower one-month LIBOR in 2020 and due to a lower available capacity after the December 2019 amendment to the credit agreement. 35 Table of Contents Three Months Ended September 30, 2020 2019 Interest on debt $ 2,198 $ 3,135 Interest rate swap settlements 4,100 306 Amortization of debt issuance costs 419 372 Capitalized interest (35) (281) Other 191 273 Total interest expense $ 6,873 $ 3,805 Other Expense (Income), Net. Other expense (income), net, changed favorably by $0.9 million during the three months ended September 30, 2020, compared to the three months ended September 30, 2019, primarily due to more favorable foreign exchange effects associated with intercompany borrowings compared to the prior year. Benefit For Income Taxes. Our effective tax rate was 106.1% for the three months ended September 30, 2020, compared to 18.2% for the three months ended September 30, 2019. The difference in rates is primarily due to the impact of the impairment of nondeductible goodwill in 2020 and and a change in the estimated impact of the CARES Act. Note 9 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. Our share of net income from the joint venture increased during the three months ended September 30, 2020, compared to the three months ended September 30, 2019, primarily due to improved profits resulting from higher sales volumes, expanding variable margins as a result of successful process improvement initiatives and improved product mix, and fixed cost reduction actions. Results by Segment MOBILE SOLUTIONS Three Months Ended September 30, 2020 2019 $ Change Net sales $ 70,371 $ 73,071 $ (2,700) Organic decline $ (602) Foreign exchange effects (2,098) Income from operations $ 4,953 $ 3,423 $ 1,530 Net sales decreased by $2.7 million during the three months ended September 30, 2020, compared to the three months ended September 30, 2019, primarily due to unfavorable foreign exchange effects and lower demand within global automotive markets resulting from the COVID-19 pandemic. Income from operations increased by $1.5 million compared to the same period in the prior year as new product launches that began in the prior year begin to mature and become more profitable. Additionally, certain of the fixed cost reduction actions initiated in the first half of 2020 in response to the decline in sales volume caused by the COVID-19 pandemic remained in place during the three months ended September 30, 2020. These favorable impacts were partially offset by the prior year impact of a one-time $1.4 million favorable litigation settlement. POWER SOLUTIONS Three Months Ended September 30, 2020 2019 $ Change Net sales $ 43,415 $ 47,430 $ (4,015) Organic decline $ (3,723) Foreign exchange effects (292) Income from operations $ 1,143 $ 3,351 $ (2,208) Net sales decreased by $4.0 million during the three months ended September 30, 2020, compared to the three months ended September 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 $2.2 million compared to the same period in the prior year primarily due to lost variable margin on the above-referenced sales volume decline. Commodity prices on precious metals, particularly gold and silver, 36 Table of Contents dramatically increased during the current period, driving up materials costs and decreasing profitability of certain products. These unfavorable impacts were partially offset by fixed cost reduction actions taken in response to the decline in sales volume. Nine Months Ended September 30, 2020, compared to the Nine Months Ended September 30, 2019 Nine Months Ended September 30, 2020 2019 $ Change Net sales $ 308,506 $ 378,838 $ (70,332) Organic decline $ (65,466) Foreign exchange effects (4,866) Cost of sales (exclusive of depreciation and amortization shown separately below) 249,612 300,666 (51,054) Selling, general and administrative expense 44,178 52,994 (8,816) Depreciation and amortization 34,119 33,552 567 Restructuring and integration expense, net — (12) 12 Goodwill impairment 92,942 — 92,942 Other operating expense (income), net 4,138 (905) 5,043 Loss from operations (116,483) (7,457) (109,026) Interest expense 17,036 8,829 8,207 Loss on extinguishment of debt and write-off of debt issuance costs 144 308 (164) Other expense, net 67 863 (796) Loss from continuing operations before benefit (provision) for income taxes and share of net income from joint venture (133,730) (17,457) (116,273) Benefit (provision) for income taxes 7,935 (3,694) 11,629 Share of net income from joint venture 1,792 345 1,447 Loss from continuing operations (124,003) (20,806) (103,197) Loss from discontinued operations, net of tax (123,966) (11,850) (112,116) Net loss $ (247,969) $ (32,656) $ (215,313) Net Sales . Net sales decreased by $70.3 million, or 19%, during the nine months ended September 30, 2020, compared to the nine months ended September 30, 2019, primarily due to a decrease in organic volume of $65.5 million, as a result of decreased demand due to the COVID-19 pandemic and unfavorable foreign exchange effects of $4.9 million. Cost of Sales. Cost of sales decreased by $51.1 million, or 17%, during the nine months ended September 30, 2020, compared to the nine months ended September 30, 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 $8.8 million during the nine months ended September 30, 2020, compared to the nine months ended September 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 nine months ended September 30, 2020, was the result of a goodwill impairment charge at Power Solutions. See Note 6 in the Notes to Condensed Consolidated Financial Statements for more information on the impairment charge. Other Operating Expense (Income), Net. Other operating expense (income), net, changed unfavorably by $5.0 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 nine months ended September 30, 2020. Interest Expense. Interest expense increased by $8.2 million during the nine months ended September 30, 2020, compared to the nine months ended September 30, 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. 37 Table of Contents Nine Months Ended September 30, 2020 2019 Interest on debt $ 6,381 $ 8,047 Interest rate swap settlements 8,906 306 Amortization of debt issuance costs 1,289 1,060 Capitalized interest (170) (1,157) Other 630 573 Total interest expense $ 17,036 $ 8,829 Other Expense, Net. Other expense, net, changed favorably by $0.8 million during the nine months ended September 30, 2020, compared to the nine months ended September 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 5.9% for the nine months ended September 30, 2020, compared to (21.2)% for the nine months ended September 30, 2019. The difference in rates is primarily due to the impact of the impairment of nondeductible goodwill in 2020, the CARES Act, anticipated withholding taxes which would be due upon repatriation of the unremitted earnings of foreign subsidiaries, and the impact of losses in jurisdictions where it is more likely than not that a tax benefit will not be realized. Note 9 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 from the JV increased during the nine months ended September 30, 2020, compared to the nine months ended September 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 first quarter of 2020 due to the COVID-19 pandemic. Results by Segment MOBILE SOLUTIONS Nine Months Ended September 30, 2020 2019 $ Change Net sales $ 181,292 $ 230,590 $ (49,298) Organic decline $ (44,027) Foreign exchange effects (5,271) Income from operations $ 625 $ 10,118 $ (9,493) Net sales decreased by $49.3 million during the nine months ended September 30, 2020, compared to the nine months ended September 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 $9.5 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. Additionally, the nine months ended September 30, 2019, were impacted by a $1.4 million one-time favorable litigation settlement. POWER SOLUTIONS Nine Months Ended September 30, 2020 2019 $ Change Net sales $ 127,307 $ 148,480 $ (21,173) Organic decline $ (21,578) Foreign exchange effects 405 Goodwill impairment $ (92,942) $ — $ (92,942) Income (loss) from operations $ (87,737) $ 12,857 $ (100,594) 38 Table of Contents Net sales decreased by $21.2 million during the nine months ended September 30, 2020, compared to the nine months ended September 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 $100.6 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, lost variable margin on the above-referenced sales volume decline, and increased precious metals commodity prices. 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 September 30, 2020 Overview From December 31, 2019, to September 30, 2020, total assets decreased by $225.8 million primarily due to the $92.9 million impairment of Power Solutions goodwill in the first quarter of 2020 and an additional $146.8 million impairment of Life Sciences goodwill in the first quarter of 2020, which is included in discontinued operations. Normal depreciation and amortization of fixed assets and intangible assets also contributed to the decrease. These decreases were partially offset by cash reserves from the drawdown of $59.0 million on our Senior Secured Revolver during the nine months ended September 30, 2020. From December 31, 2019, to September 30, 2020, total liabilities increased by $32.3 million, primarily due to the drawdown on our Senior Secured Revolver. 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 $(573.7) million as of September 30, 2020, compared to $88.0 million as of December 31, 2019. The decrease in working capital was primarily due to an increase in the current portion of long-term debt that was reasonably expected to be paid with proceeds from the sale of the Life Sciences business as required by the credit agreement. This decrease was partially offset by the increase in cash resulting from the drawdown on our Senior Secured Revolver. Cash Flows Cash provided by operations was $19.3 million for the nine months ended September 30, 2020, compared with cash provided by operations of $33.6 million for the nine months ended September 30, 2019. The difference was primarily due to a decrease in sales volumes and higher interest expense. Cash used in investing activities was $17.4 million for the nine months ended September 30, 2020, compared with cash used in investing activities of $31.0 million for the nine months ended September 30, 2019. The decrease was primarily due to 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 year over year. Cash provided by financing activities was $43.9 million for the nine months ended September 30, 2020, compared with cash provided by financing activities of $6.9 million for the nine months ended September 30, 2019. The difference was primarily due to higher net borrowings under our credit facility during the nine months ended September 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 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 Condensed Consolidated Statements of Operations and Comprehensive Income (Loss). 39 Table of Contents 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 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. 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 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 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 (see Note 2). 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. 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 became more restrictive upon the occurrence of a qualified sale transaction, which occurred 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 financial statements. Accordingly, we believe that the conditions that raised substantial doubt about our ability to continue as a going concern as disclosed in our Quarterly Report for the period ended June 30, 2020, have been resolved. 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. 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 contract. After the prepayment, a portion of the hedged interest payments were no longer probable of occurring, and the hedging relationship on this portion was no longer highly effective. Therefore, part of the 40 Table of Contents interest rate swap no longer qualified for hedge accounting after the debt prepayment. After the discontinuation of hedge accounting, changes in the fair value of this portion of the swap will be recognized in earnings rather than in accumulated other comprehensive income. During the fourth quarter of 2020, the accumulated loss in accumulated other comprehensive income related to the hedged interest payments that are no longer probable of occurring will be reclassified to earnings. 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 September 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 September 30, 2020, were $829.4 million, without regard to unamortized debt issuance costs. Of this amount, $700.0 million was hedged with the interest rate swap. As of September 30, 2020, we had unused borrowing capacity of $1.4 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 September 30, 2020, which are considered as usage of the Senior Secured Revolver. On October 6, 2020, we used proceeds from the sale of the Life Sciences business to prepay $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. 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 September 30, 2020. The Senior Secured Revolver matures on July 20, 2022. 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. Among other things, the amendment reduced total capacity of the Senior Secured Revolver to $60.0 million immediately after the sale of the Life Sciences business. The capacity will decrease to $50.0 million on June 30, 2021. The amendment 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. On October 7, 2020, immediately after paying the entire outstanding balance of the Senior Secured Revolver, we had unused borrowing capacity of $45.4 million. The Senior Secured Term Loan requires quarterly principal payments through October 19, 2022, with the remaining principal amount due on the maturity date. After the sale of the Life Sciences, quarterly principal payments are $0.1 million. 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 applicable margin of 5.75%. Based on the interest rate in effect at September 30, 2020, after the $474.3 million principal payment on October 6, 2020, annual interest payments on the remaining balance would be approximately $3.1 million. The Incremental Term Loan requires quarterly principal payments through October 19, 2022, with the remaining principal amount due on the maturity date. After the sale of the Life Sciences, quarterly principal payments are $0.3 million. 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 September 30, 2020, after the $225.7 million principal payment on October 6, 2020, annual interest payments on the remaining balance 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%. Based on the interest rate in effect at September 30, 2020, annual interest payments would be approximately $2.4 million. We paid in full the outstanding Senior Secured Revolver balance on October 7, 2020. We pay a commitment fee of 0.50% for unused capacity under the Senior Secured Revolver. Covenants We had $59.0 million outstanding under the Senior Secured Revolver at September 30, 2020. Total capacity under the Senior Secured Revolver was $75.0 million as of September 30, 2020, with $1.4 million available for future borrowings after reductions for outstanding letters of credit and outstanding borrowings as of September 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, 41 Table of Contents 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. As discussed above, we amended our Credit Agreement again in August 2020 in conjunction with the planned sale of the Life Sciences business. We were in compliance as of September 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 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 nine months ended September 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.