Notes to Condensed Consolidated Financial Statements
June 30, 2021
(Unaudited)
Note 1. Interim Financial Statements
Nature of Business
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 automotive, general industrial, electrical, aerospace, defense, and medical markets. As used in this Quarterly Report on Form 10-Q (this “Quarterly Report”), the terms “NN,” the “Company,” “we,” “our,” or “us” refer to NN, Inc., and its subsidiaries.
Basis of Presentation
The accompanying condensed consolidated financial statements have not been audited. The Condensed Consolidated Balance Sheet as of December 31, 2020, was derived from the audited consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2020 (the “2020 Annual Report”), which we filed with the U.S. Securities and Exchange Commission (the “SEC”) on March 15, 2021. Historical periods presented reflect reclassifications for discontinued operations (see Note 2). In management’s opinion, the accompanying unaudited condensed consolidated financial statements reflect all adjustments necessary to fairly state our results of operations for the three and six months ended June 30, 2021 and 2020; financial position as of June 30, 2021, and December 31, 2020; and cash flows for the six months ended June 30, 2021 and 2020, on a basis consistent with our audited consolidated financial statements other than the adoption of new accounting standards (see Accounting Standards Recently Adopted section below). These adjustments are of a normal recurring nature and are, in the opinion of management, necessary to state fairly the Company’s financial position and operating results for the interim periods.
Certain information and footnote disclosures normally included in the consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) have been condensed or omitted from the interim financial statements presented in this Quarterly Report. These unaudited condensed consolidated financial statements should be read in conjunction with our audited consolidated financial statements and accompanying notes included in the 2020 Annual Report. The results for the three and six months ended June 30, 2021, are not necessarily indicative of results for the year ending December 31, 2021, or any other future periods.
Except for per share data or as otherwise indicated, all U.S. dollar amounts and share counts presented in the tables in these Notes to Condensed Consolidated Financial Statements are in thousands.
Accounting Standards Recently Adopted
In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740) - Simplifying the Accounting for Income Taxes, (“ASU 2019-12”) as part of its initiative to reduce complexity in accounting standards. ASU 2019-12 removes certain exceptions and provides simplification to specific tax items to improve consistent application. This standard was effective for us beginning January 1, 2021. The adoption of ASU 2019-12 did not have a material impact on our consolidated financial statements and related disclosures.
Accounting Standards Not Yet Adopted
In August 2020, the FASB issued ASU 2020-06, Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity, (“ASU 2020-06”) which simplifies the accounting for certain financial instruments with characteristics of liabilities and equity. Specifically, ASU 2020-06 simplifies accounting for convertible instruments by removing major separation models required under current U.S. GAAP. In addition, ASU 2020-06 removes certain settlement conditions that are required for equity contracts to qualify for the derivative scope exception, which will permit more equity contracts to qualify for the exception. Further, for the diluted earnings-per-share calculation, the new guidance requires entities to use the if-converted method for all convertible instruments and generally requires entities to include the effect of share settlement for instruments that may be settled in cash or shares, among other things. ASU 2020-06 is effective for fiscal years beginning after December 15, 2021, and interim periods within those fiscal years, with early adoption permitted. Either the full or modified retrospective adoption method is allowed. We are currently evaluating the impact on our consolidated financial statements and related disclosures.
In May 2021, the FASB issued ASU 2021-04, Issuer’s Accounting for Certain Modifications or Exchanges of Freestanding Equity-Classified Written Call Options, (“ASU 2021-04”) which clarifies the accounting for modifications or exchanges of
freestanding equity-classified written call options that remain equity classified after modification or exchange. Specifically, ASU 2021-04 requires the issuer to treat a modification of an equity-classified warrant as an exchange of the original warrant. The difference between the fair value of the modified warrant and the fair value of the warrant immediately before modification is then recognized as an issuance cost or discount of the related transaction. ASU 2021-04 is effective for fiscal years beginning after December 15, 2021, and interim periods within those fiscal years, with early adoption permitted. ASU 2021-04 should be applied prospectively to modifications or exchanges occurring after the effective date. Either the full or modified retrospective adoption method is allowed. We do not have any equity-classified written call options that would be subject to this guidance. Therefore, we do not expect any impact on our consolidated financial statements and related disclosures.
Note 2. Discontinued Operations
In October 2020, we closed on the sale of our Life Sciences business under the terms of a Stock Purchase Agreement (the “SPA”) with affiliates of American Securities LLC for $753.3 million cash. The SPA includes a potential earnout payment of up to $70 million based on the performance of the Life Sciences business during the year ending December 31, 2022, measured by Adjusted EBITDA targets, as defined by the SPA. After working capital and other closing adjustments, we received cash proceeds at closing of $757.2 million and paid $3.9 million to the buyer during the six months ended June 30, 2021, for post-closing adjustments.
Under the terms of a transition services agreement, we provided certain support services after the sale. In accordance with the terms of the SPA, we agreed to indemnify the buyer for certain tax liabilities on its consolidated federal income tax return related to the Life Sciences business during the portion of the year ended December 31, 2020, prior to the change in ownership on October 6, 2020. We estimate that the tax indemnification will result in a payment of approximately $1.2 million to the buyer during the year ending December 31, 2021, and we have recorded this estimated obligation in the “Other current liabilities” line item on the Condensed Consolidated Balance Sheets as of June 30, 2021, and December 31, 2020.
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 as well as 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 historical 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 historical periods presented in the condensed consolidated financial statements and the accompanying notes unless otherwise stated. The Condensed Consolidated Statements of Cash Flows for historical periods include cash flows of the Life Sciences business in each line item unless otherwise stated.
The following table presents the operating results of the discontinued operations.
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|
|
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|
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|
|
|
|
|
|
|
|
Three Months Ended
June 30, 2020
|
|
|
|
Six Months Ended
June 30, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
|
|
$
|
71,888
|
|
|
|
|
$
|
155,420
|
|
|
Cost of sales (exclusive of depreciation and amortization shown separately below)
|
|
|
|
50,331
|
|
|
|
|
108,094
|
|
|
Selling, general, and administrative expense
|
|
|
|
5,619
|
|
|
|
|
14,024
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
|
11,874
|
|
|
|
|
23,701
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill impairment
|
|
|
|
—
|
|
|
|
|
146,757
|
|
|
Other operating income, net
|
|
|
|
(6)
|
|
|
|
|
(3)
|
|
|
Income (loss) from operations
|
|
|
|
4,070
|
|
|
|
|
(137,153)
|
|
|
Interest expense
|
|
|
|
12,340
|
|
|
|
|
25,610
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other expense (income), net
|
|
|
|
334
|
|
|
|
|
(90)
|
|
|
Loss from discontinued operations before costs of disposal and benefit for income taxes
|
|
|
|
(8,604)
|
|
|
|
|
(162,673)
|
|
|
Benefit for income taxes
|
|
|
|
5,457
|
|
|
|
|
19,644
|
|
|
Loss from discontinued operations before costs of disposal
|
|
|
|
(3,147)
|
|
|
|
|
(143,029)
|
|
|
Costs of disposal of discontinued operations (1)
|
|
|
|
(1,099)
|
|
|
|
|
(1,358)
|
|
|
Benefit for income taxes on costs of disposal
|
|
|
|
64
|
|
|
|
|
91
|
|
|
Loss from discontinued operations, net of tax
|
|
|
|
$
|
(4,182)
|
|
|
|
|
$
|
(144,296)
|
|
_______________________________
(1)Represents incremental direct costs related to the sale of the Life Sciences business that were incurred prior to the closing of the sale.
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 carrying value of the Life Sciences reporting unit exceeded its estimated fair value as of March 31, 2020. As a result of our analysis, we recorded an impairment loss on goodwill of $146.8 million for Life Sciences. The judgments, assumptions, and estimates involved in the goodwill impairment analysis for the Life Sciences reporting unit are consistent with those discussed in Note 5.
Our previous credit facility, which was in place at the time, required us to use proceeds from the sale of the Life Sciences business to prepay a portion of our previous debt. We paid $700 million in the aggregate on our term loans immediately after the transaction closed on October 6, 2020. The prepayment was applied to debt in accordance with the prepayment provisions of the previous credit agreement which was in place at the time. Average quarterly interest rates were multiplied by the required prepayment amounts to calculate interest expense to be reclassified to discontinued operations for historical periods presented. The following table summarizes the amount of interest expense related to the previous credit facility that has been reclassified to discontinued operations.
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30, 2020
|
|
|
|
Six Months Ended
June 30, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest on debt
|
|
|
|
$
|
11,214
|
|
|
|
|
$
|
23,350
|
|
|
Amortization of debt issuance costs
|
|
|
|
1,251
|
|
|
|
|
2,477
|
|
|
Capitalized interest
|
|
|
|
(182)
|
|
|
|
|
(405)
|
|
|
Other
|
|
|
|
57
|
|
|
|
|
188
|
|
|
Total interest expense of discontinued operations
|
|
|
|
$
|
12,340
|
|
|
|
|
$
|
25,610
|
|
The following table presents the significant noncash items and cash paid for capital expenditures of discontinued operations for the historical period presented.
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|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
June 30, 2020
|
|
Depreciation and amortization
|
|
$
|
23,701
|
|
|
Goodwill impairment
|
|
146,757
|
|
|
Amortization of debt issuance costs
|
|
2,477
|
|
|
|
|
|
|
Acquisition of property, plant and equipment
|
|
6,036
|
|
|
Right-of-use assets obtained in exchange for new finance lease liabilities
|
|
696
|
|
|
Right-of-use assets obtained in exchange for new operating lease liabilities (1)
|
|
6,064
|
|
_______________________________
(1) Includes new leases, renewals, and modifications.
Note 3. Segment Information
Our business is aggregated into the following two reportable segments:
•Mobile Solutions, which is focused on growth in the automotive and general industrial end markets; and
•Power Solutions, which is focused on growth in the electrical, general industrial, automotive, aerospace, defense, and medical end markets.
These divisions are considered our two operating segments as each engages in business activities for which it earns revenues and incurs expenses, discrete financial information is available for each, and this is the level at which the chief operating decision maker reviews discrete financial information for purposes of allocating resources and assessing performance. Historically, we had a third operating segment, Life Sciences, that was focused on growth in the medical end market. See Note 2 for information regarding the sale of the Life Sciences business on October 6, 2020. The results of the Life Sciences business are classified as discontinued operations for the three and six months ended June 30, 2020, and therefore are not included in the tabular presentation below.
The following tables present results of continuing operations by reportable segment.
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|
|
|
|
|
|
|
|
|
|
|
Mobile
Solutions
|
|
Power
Solutions
|
|
Corporate
and
Consolidations
|
|
|
|
Total
|
|
Three Months Ended June 30, 2021
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
|
$
|
73,886
|
|
|
$
|
49,271
|
|
|
$
|
—
|
|
|
(a)
|
|
$
|
123,157
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
2,509
|
|
|
2,875
|
|
|
(6,972)
|
|
|
|
|
$
|
(1,588)
|
|
|
Interest expense
|
|
|
|
|
|
|
|
|
|
|
(3,573)
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
(1,680)
|
|
|
Loss from continuing operations before income taxes and share of net income from joint venture
|
|
|
|
$
|
(6,841)
|
|
|
Three Months Ended June 30, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
|
$
|
41,037
|
|
|
$
|
37,491
|
|
|
$
|
4
|
|
|
(a)
|
|
$
|
78,532
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
(4,592)
|
|
|
1,454
|
|
|
(8,039)
|
|
|
|
|
$
|
(11,177)
|
|
|
Interest expense
|
|
|
|
|
|
|
|
|
|
|
(6,356)
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
1,215
|
|
|
Loss from continuing operations before income taxes and share of net income from joint venture
|
|
|
|
$
|
(16,318)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mobile
Solutions
|
|
Power
Solutions
|
|
Corporate
and
Consolidations
|
|
|
|
Total
|
|
Six Months Ended June 30, 2021
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
|
$
|
151,662
|
|
|
$
|
98,346
|
|
|
$
|
(47)
|
|
|
(a)
|
|
$
|
249,961
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
8,599
|
|
|
5,307
|
|
|
(14,516)
|
|
|
|
|
$
|
(610)
|
|
|
Interest expense
|
|
|
|
|
|
|
|
|
|
|
(5,597)
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
(7,698)
|
|
|
Loss from continuing operations before income taxes and share of net income from joint venture
|
|
|
|
$
|
(13,905)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
|
$
|
110,921
|
|
|
$
|
83,892
|
|
|
$
|
(68)
|
|
|
(a)
|
|
$
|
194,745
|
|
|
Goodwill impairment
|
|
|
—
|
|
|
92,942
|
|
|
—
|
|
|
|
|
92,942
|
|
|
Loss from operations
|
|
|
(4,328)
|
|
|
(88,880)
|
|
|
(21,819)
|
|
|
|
|
$
|
(115,027)
|
|
|
Interest expense
|
|
|
|
|
|
|
|
|
|
|
(10,163)
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
(329)
|
|
|
Loss from continuing operations before income taxes and share of net income from joint venture
|
|
|
|
$
|
(125,519)
|
|
_______________________________
(a)Includes elimination of intersegment transactions occurring during the ordinary course of business.
As of June 30, 2021, and December 31, 2020, one customer represented 11% and 11%, respectively, of consolidated accounts receivable. Amounts due from this customer are primarily related to Mobile Solutions.
Note 4. Inventories
Inventories are comprised of the following amounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2021
|
|
December 31, 2020
|
|
Raw materials
|
|
$
|
27,456
|
|
|
$
|
22,589
|
|
|
Work in process
|
|
25,764
|
|
|
20,758
|
|
|
Finished goods
|
|
21,550
|
|
|
19,170
|
|
|
Total inventories
|
|
$
|
74,770
|
|
|
$
|
62,517
|
|
Note 5. Goodwill
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 the 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). As of June 30, 2021, and December 31, 2020, there was no remaining goodwill balance.
Note 6. Intangible Assets, Net
The following table shows changes in the carrying amount of intangible assets, net, by reportable segment.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mobile
Solutions
|
|
Power
Solutions
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2020
|
|
|
|
$
|
29,062
|
|
|
$
|
74,003
|
|
|
$
|
103,065
|
|
|
Amortization
|
|
|
|
(1,677)
|
|
|
(5,497)
|
|
|
(7,174)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of June 30, 2021
|
|
|
|
$
|
27,385
|
|
|
$
|
68,506
|
|
|
$
|
95,891
|
|
Intangible assets are tested for impairment when changes in circumstances indicate the carrying value of those assets may not be recoverable. As of June 30, 2021, and December 31, 2020, there were no indicators of impairment.
Note 7. Investment in Joint Venture
We own a 49% investment in Wuxi Weifu Autocam Precision Machinery Company, Ltd. (the “JV”), a joint venture located in Wuxi, China. The JV is jointly controlled and managed, and we account for it under the equity method.
The following table shows changes in our investment in the JV.
|
|
|
|
|
|
|
|
Balance as of December 31, 2020
|
$
|
26,983
|
|
|
Share of earnings
|
2,614
|
|
|
|
|
|
Foreign currency translation gain
|
300
|
|
|
Balance as of June 30, 2021
|
$
|
29,897
|
|
Note 8. Income Taxes
Our effective tax rate for continuing operations was 3.4% and 7.1% for the three and six months ended June 30, 2021, respectively, and (13.3)% and (0.6)% for the three and six months ended June 30, 2020, respectively. The effective tax rate for the three and six months ended June 30, 2021, differs from the U.S. federal statutory tax rate of 21% primarily due to the accrual of tax on non-permanently reinvested unremitted earnings of foreign subsidiaries and by limitation on the amount of tax benefit recorded for loss carryforwards in certain jurisdictions where we believe it is more likely than not that a portion of the future tax benefit may not be realized. In addition, the effective tax rate was unfavorably impacted by U.S. tax on the earnings of foreign subsidiaries under the global intangible low-taxed income (“GILTI”) regime.
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was enacted. The provisions of the legislation had a significant impact on our effective tax rate and income tax receivable as of and for the six months ended June 30, 2020. Under the CARES Act, NOLs arising in tax years beginning after December 31, 2017, were carried back to preceding tax years when the federal tax rate was 35% rather than the currently enacted 21%. The effective tax rate for the three and six months ended June 30, 2020, was also adversely impacted by the effect of the non-deductible goodwill impairment on the estimated annual effective tax rate and the impact of the minimum GILTI tax, partially offset by impacts from the CARES Act.
Note 9. Debt
On March 22, 2021, we entered into a new $150.0 million term loan facility (the “Term Loan Facility”) and a new $50.0 million asset backed credit facility (the “ABL Facility”). The proceeds from the Term Loan Facility were used to prepay the amounts outstanding on our previous term loans. The previous credit facility was terminated and consisted of a Senior Secured Term Loan, Incremental Term Loan, and Senior Secured Revolver. No amounts were outstanding on the Senior Secured Revolver at the time of termination.
The following table presents debt balances as of June 30, 2021, and December 31, 2020.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2021
|
|
December 31, 2020
|
|
Term Loan Facility
|
|
$
|
149,625
|
|
|
$
|
—
|
|
|
Senior Secured Term Loan
|
|
—
|
|
|
47,728
|
|
|
Incremental Term Loan
|
|
—
|
|
|
22,716
|
|
|
|
|
|
|
|
|
International lines of credit and other loans
|
|
12,171
|
|
|
14,418
|
|
|
Total principal
|
|
161,796
|
|
|
84,862
|
|
|
Less-current maturities of long-term debt
|
|
4,808
|
|
|
4,885
|
|
|
Principal, net of current portion
|
|
156,988
|
|
|
79,977
|
|
|
Less-unamortized debt issuance costs and discount (1)
|
|
6,260
|
|
|
952
|
|
|
Long-term debt, net of current portion
|
|
$
|
150,728
|
|
|
$
|
79,025
|
|
_______________________________
(1) In addition to this amount, costs of $0.8 million related to the ABL Facility were recorded in other non-current assets as of June 30, 2021, and $1.8 million related to the Senior Secured Revolver were recorded in other non-current assets as of December 31, 2020.
We capitalized interest costs of $0.1 million and less than $0.1 million in the three months ended June 30, 2021 and 2020, respectively, and $0.1 million and $0.1 million in the six months ended June 30, 2021 and 2020, respectively, related to construction in progress.
Term Loan Facility
Outstanding borrowings under the Term Loan Facility bear interest at either 1) one-month LIBOR (subject to a 1.000% floor) plus an applicable margin of 6.875% or 2) the greater of various benchmark rates plus an applicable margin of 5.875%. At June 30, 2021, the Term Loan Facility bore interest, based on one-month LIBOR, at 7.875%.
The Term Loan Facility requires quarterly principal payments of $0.4 million with the remaining unpaid principal amount due on the final maturity date of September 22, 2026. The Term Loan Facility is collateralized by all of our assets. The Term Loan Facility has a first lien on all assets other than accounts receivable and inventory and has a second lien on accounts receivable and inventory. We were in compliance with all requirements under the Term Loan Facility as of June 30, 2021.
The Term Loan Facility was issued at a $3.8 million discount. We capitalized an additional $2.8 million in new debt issuance costs related to the Term Loan Facility. Debt issuance costs and original issue discount related to the Term Loan Facility are recorded as a direct reduction to the carrying amount of the associated long-term debt and amortized over the term of the debt.
ABL Facility
The ABL Facility provides for a senior secured revolving credit facility in the amount of $50.0 million, of which $30.0 million is available in the form of letters of credit and $5.0 million is available for the issuance of short-term swingline loans. The availability of credit under the ABL Facility is limited by a borrowing base calculation derived from accounts receivable and inventory held in the United States. Outstanding borrowings under the ABL Facility bear interest on a variable rate structure plus an interest rate spread that is based on the average amount of aggregate revolving commitment available. The variable borrowing rate is either 1) LIBOR plus an applicable margin of 1.75% or 2.00%, depending on availability, or 2) the greater of the federal funds rate or prime, plus an applicable margin of 0.75% or 1.00%, depending on availability. We may elect whether to use one-month, three-month, or six-month LIBOR, subject to a 0.50% floor. Interest payments are due monthly on borrowings that utilize one-month LIBOR and quarterly on borrowings that utilize three-month or six-month LIBOR. At June 30, 2021, using one-month LIBOR plus a 1.75% spread, the weighted average interest rate on outstanding borrowings under the ABL Facility would have been 2.25% if there had been any balance outstanding. We pay a commitment fee of 0.375% for unused capacity under the ABL Facility and a 0.125% fee on the amount of letters of credit outstanding. The final maturity date of the ABL Facility is March 22, 2026.
We had no outstanding borrowings under the ABL Facility at June 30, 2021. Total capacity under the ABL Facility was $44.2 million as of June 30, 2021, of which $30.2 million was available for future borrowings after reductions for outstanding letters of credit as of June 30, 2021. The ABL Facility has a first lien on accounts receivable and inventory. We were in compliance with all requirements under the ABL Facility as of June 30, 2021.
We capitalized a total of $0.8 million in new debt issuance costs related to the ABL Facility. Costs related to the ABL Facility are recorded in other non-current assets and amortized over the term of the agreement.
Senior Secured Term Loan
Outstanding borrowings under the Senior Secured Term Loan bore interest at one-month LIBOR (subject to a 0.75% floor) plus an applicable margin of 5.75%. During 2021 until termination, the Senior Secured Term Loan bore interest at 6.50%.
Incremental Term Loan
Outstanding borrowings under the Incremental Term Loan bore interest at one-month LIBOR plus an applicable margin of 5.75%. During 2021 until termination, the Incremental Term Loan bore interest at 5.90%.
Senior Secured Revolver
Outstanding borrowings under the Senior Secured Revolver bore interest on a variable rate structure at either 1) one-month LIBOR plus an applicable margin of 4.00% or 2) the prime lending rate plus an applicable margin of 3.00%. We had no outstanding borrowings under the Senior Secured Revolver during 2021. We incurred a commitment fee of 0.50% for unused capacity under the Senior Secured Revolver until it was terminated.
Debt Issuance Costs
We recognized a $2.4 million loss on extinguishment for unamortized debt issuance costs that were written off in the six months ended June 30, 2021, in connection with the termination of our previous credit facility.
Interest Rate Swap
A portion of the proceeds from the Term Loan Facility was used to settle and terminate our fixed-rate interest rate swap agreement with a cash payment of $13.7 million during the first quarter of 2021. Refer to Note 17 for further discussion of the interest rate swap agreement. On July 22, 2021, we entered into a new interest rate swap as discussed in Note 18.
Note 10. Leases
The following table contains supplemental cash flow information related to leases of continuing operations.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
June 30,
|
|
|
|
2021
|
|
2020
|
|
Cash paid for amounts included in the measurement of lease liabilities:
|
|
|
|
|
|
Operating cash flows used in finance leases
|
|
$
|
113
|
|
|
$
|
94
|
|
|
Operating cash flows used in operating leases
|
|
7,221
|
|
|
7,312
|
|
|
Financing cash flows used in finance leases
|
|
2,370
|
|
|
936
|
|
|
Right-of-use assets obtained in exchange for new finance lease liabilities
|
|
636
|
|
|
710
|
|
|
Right-of-use assets obtained in exchange for new operating lease liabilities (1)
|
|
—
|
|
|
9,334
|
|
_______________________________
(1) Includes new leases, renewals, and modifications.
As disclosed in our 2020 Annual Report, we amended the lease of our corporate headquarters building in March 2020 to exit over half of the previously leased space and reduce annual base rent payments. The amendment was accounted for as a lease modification, and the remeasurement of the lease resulted in an $8.1 million decrease in the operating lease right-of-use (“ROU”) asset, a $10.5 million decrease in the noncurrent portion of the operating lease liability, and a $0.6 million decrease in the current portion of the operating lease liability. The $3.0 million difference between the change in the operating lease ROU asset and the operating lease liabilities was recognized in “Other operating expense (income), net,” on the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss). In connection with the discontinued use of the previously leased space, we also recognized a $4.4 million termination charge and a $2.9 million impairment charge on the associated leasehold improvements, all of which were also recognized in “Other operating expense (income), net.”
Note 11. Commitments and Contingencies
Brazil ICMS Tax Matter
Prior to the acquisition of Autocam Corporation (“Autocam”) in 2014, Autocam’s Brazilian subsidiary (“Autocam Brazil”) received notification from the Brazilian tax authority regarding ICMS (state value added tax or “VAT”) tax credits claimed on intermediary materials (e.g., tooling and perishable items) used in the manufacturing process. The Brazilian tax authority notification disallowed state ICMS tax credits claimed on intermediary materials based on the argument that these items are not intrinsically related to the manufacturing processes. Autocam Brazil filed an administrative defense with the Brazilian tax authority arguing, among other matters, that it should qualify for an ICMS tax credit, contending that the intermediary materials are directly related to the manufacturing process.
We believe that we have substantial legal and factual defenses, and we plan to defend our interests in this matter vigorously. The matter encompasses several lawsuits filed with the Brazilian courts requesting declaratory actions that no tax is due or seeking a stay of execution on the collection of the tax. In 2018, we obtained a favorable decision in one of the declaratory actions for which the period for appeal has expired. We have filed actions in each court requesting dismissal of the matter based on the earlier court action. In May 2020, we received an unfavorable decision in one of the lawsuits, and as a result have recorded a liability to the Brazilian tax authorities and a receivable from the former shareholders of Autocam for the same amount. Although we anticipate a favorable resolution to the remaining matters, we can provide no assurances that we will be successful in achieving dismissal of all pending cases. The U.S. dollar amount that would be owed in the event of an unfavorable decision is subject to interest, penalties, and currency impacts and therefore is dependent on the timing of the decision. For the remaining open lawsuits, we currently believe the cumulative potential liability in the event of unfavorable decisions on all matters will be less than $5.0 million, inclusive of interest and penalties.
We are entitled to indemnification from the former shareholders of Autocam, subject to the limitations and procedures set forth in the agreement and plan of merger relating to the Autocam acquisition. Management believes the indemnification would include amounts owed for the tax, interest, and penalties related to this matter. Accordingly, we don’t expect to incur a loss related to this matter even in the event of an unfavorable decision and, therefore, have not accrued an amount for the remaining matters as of June 30, 2021.
Securities Offering Matter
On November 1, 2019, Erie County Employees’ Retirement System, on behalf of a purported class of plaintiffs, filed a complaint in the Supreme Court of the State of New York, County of New York, against the Company, certain of the Company’s current and former officers and directors, and each of the underwriters involved in the Company’s public offering and sale of 14.4 million shares of its common stock pursuant to a preliminary prospectus supplement, dated September 10, 2018, a final prospectus supplement, dated September 13, 2018, and a base prospectus, dated April 19, 2017, relating to the Company’s effective shelf registration statement on Form S-3 (File No. 333-216737) (the “Offering”), which complaint was amended on January 24, 2020. The complaint alleges violations of Sections 11, 12(a)(2), and 15 of the Securities Act of 1933 in connection with the Offering. The plaintiffs seek to represent a class of stockholders who purchased shares of the Company’s common stock in the Offering. The complaint seeks unspecified monetary damages and other relief. The Company believes the complaint and allegations to be without merit and intends to vigorously defend itself against these actions. The Company is unable at this time to determine whether the outcome of the litigation would have a material impact on the Company’s financial position, results of operations, or cash flows.
Other Legal Matters
On October 26, 2020, Corre Opportunities Qualified Master Fund, LP, and Corre Horizon Fund, LP, (collectively, “Corre Partners”) filed a complaint in the Chancery Court of the State of Delaware against the Company. The complaint alleged that the Company’s sale of its Life Sciences business without obtaining the prior consent of the plaintiffs was a breach of the terms of the Series B Preferred Stock. On May 13, 2021, Company entered into a cooperation agreement with Corre Partners. In connection with the cooperation agreement, on May 13, 2021, the Company also entered into a settlement agreement with Corre Partners, which resolved the complaint.
All other legal proceedings are of an ordinary and routine nature and are incidental to our operations. Management believes that such proceedings should not, individually or in the aggregate, have a material adverse effect on our business, financial condition, results of operations, or cash flows. In making that determination, we analyze the facts and circumstances of each case at least quarterly in consultation with our attorneys and determine a range of reasonably possible outcomes.
Note 12. Preferred Stock and Stockholders' Equity
Series D Perpetual Preferred Stock
On March 22, 2021, we completed a private placement of 65 thousand shares of newly designated Series D Perpetual Preferred Stock, with a par value of $0.01 per share (the “Series D Preferred Stock”), at a price of $1,000 per share, together with detachable warrants (the “2021 Warrants”) to purchase up to 1.9 million shares of our common stock at an exercise price of $0.01 per share. The Series D Preferred Stock has an initial liquidation preference of $1,000 per share and is redeemable at our option in cash at a redemption price equal to the liquidation preference then in effect. Series D Preferred Stock shares earn cash dividends at a rate of 10.0% per year, payable quarterly in arrears, accruing whether or not earned or declared. If no cash dividend is paid, then the liquidation preference per share effective on the dividend date increases by 12.0% per year. On March 22, 2026, the cash dividend rate and in-kind dividend rate increase by 2.5% per year. Cash dividends are required beginning on September 30, 2027.
The Series D Preferred Stock is classified as mezzanine equity, between liabilities and stockholders’ equity, because certain features of the Series D Preferred Stock could require redemption of the Series D Preferred Stock upon a change of control event that is considered not solely within our control. For initial recognition, the Series D Preferred Stock was recognized at a discounted value, net of issuance costs and allocation to warrants and a bifurcated embedded derivative. The aggregate discount is amortized as a deemed dividend through March 22, 2026, which is the date the dividend rate begins to increase by 2.5% per year. Deemed dividends adjust retained earnings (or in the absence of retained earnings, additional paid-in capital).
In accordance with ASC 815-15, Derivatives and Hedging - Embedded Derivatives, certain features of the Series D Preferred Stock were bifurcated and accounted for as derivatives separately. Note 17 discusses the accounting for these features.
As of June 30, 2021, the carrying value of the Series D Preferred Stock shares was $49.1 million which included $2.4 million of accumulated unpaid and deemed dividends. The following table presents the change in the Series D Preferred Stock carrying value during the six months ended June 30, 2021.
|
|
|
|
|
|
|
|
|
Six Months Ended
June 30, 2021
|
|
|
|
|
Beginning balance
|
$
|
—
|
|
|
Proceeds from issuance of shares, net of issuance costs
|
61,793
|
|
|
Fair value of 2021 Warrants issued
|
(14,839)
|
|
|
Recognition of bifurcated embedded derivative
|
(282)
|
|
|
Accrual of in-kind dividends
|
2,123
|
|
|
Amortization
|
274
|
|
|
|
|
|
Ending balance
|
$
|
49,069
|
|
Net cash proceeds of $61.8 million from the issuance of the Series D Preferred Stock, along with part of the proceeds from the Term Loan Facility, were used to redeem all of the outstanding shares of the Company’s Series B Convertible Preferred Stock (the “Series B Preferred Stock”).
Series B Convertible Preferred Stock
The Series B Preferred Stock had a liquidation preference of $1,000 per share and was redeemable in cash at our option, subject to the applicable redemption premium. Series B Preferred Stock shares earned cumulative dividends at a rate of 10.625% per year, and accrued whether or not earned or declared. The Series B Preferred Stock was recognized at a discounted value, net of issuance costs and allocation to warrants and bifurcated embedded derivatives. The aggregate discount was amortized as a deemed dividend through December 31, 2023, which is the date the holders had a non-contingent conversion option into a variable number of common shares equal to the liquidation preference plus accrued and unpaid dividends. Deemed dividends adjust retained earnings (or in the absence of retained earnings, additional paid-in capital).
At redemption on March 22, 2021, the carrying value of the Series B Preferred Stock shares included $14.3 million of accumulated unpaid and deemed dividends. The following table presents the change in the Series B Preferred Stock carrying value during the six months ended June 30, 2021.
|
|
|
|
|
|
|
|
|
Six Months Ended
June 30, 2021
|
|
|
|
|
Beginning balance
|
$
|
105,086
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrual of in-kind dividends
|
14,008
|
|
|
Amortization
|
335
|
|
|
Redemption
|
(119,429)
|
|
|
Ending balance
|
$
|
—
|
|
Preferred Share Purchase Rights
On April 15, 2020, our Board of Directors authorized and declared a dividend of one preferred share purchase right for each outstanding share of common stock to shareholders of record on April 27, 2020. The rights expired on March 31, 2021.
Note 13. Revenue from Contracts with Customers
Revenue is recognized when control of the good or service is transferred to the customer either at a point in time or, in limited circumstances, as our services are rendered over time. Revenue is measured as the amount of consideration we expect to receive in exchange for transferring goods or services. The following tables summarize revenue by customer geographical region.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2021
|
|
|
|
Mobile
Solutions
|
|
Power
Solutions
|
|
Intersegment
Sales
Eliminations
|
|
Total
|
|
United States and Puerto Rico
|
|
$
|
35,284
|
|
|
$
|
39,424
|
|
|
$
|
—
|
|
|
$
|
74,708
|
|
|
China
|
|
13,219
|
|
|
1,282
|
|
|
—
|
|
|
14,501
|
|
|
Brazil
|
|
9,985
|
|
|
343
|
|
|
—
|
|
|
10,328
|
|
|
Mexico
|
|
4,829
|
|
|
4,349
|
|
|
—
|
|
|
9,178
|
|
|
Germany
|
|
1,369
|
|
|
96
|
|
|
—
|
|
|
1,465
|
|
|
Poland
|
|
904
|
|
|
3
|
|
|
—
|
|
|
907
|
|
|
Other
|
|
8,296
|
|
|
3,774
|
|
|
—
|
|
|
12,070
|
|
|
Total net sales
|
|
$
|
73,886
|
|
|
$
|
49,271
|
|
|
$
|
—
|
|
|
$
|
123,157
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2020
|
|
|
|
Mobile
Solutions
|
|
Power
Solutions
|
|
Intersegment
Sales
Eliminations
|
|
Total
|
|
United States and Puerto Rico
|
|
$
|
20,237
|
|
|
$
|
30,859
|
|
|
$
|
4
|
|
|
$
|
51,100
|
|
|
China
|
|
10,726
|
|
|
1,252
|
|
|
—
|
|
|
11,978
|
|
|
Brazil
|
|
2,132
|
|
|
63
|
|
|
—
|
|
|
2,195
|
|
|
Mexico
|
|
2,456
|
|
|
4,119
|
|
|
—
|
|
|
6,575
|
|
|
Germany
|
|
851
|
|
|
90
|
|
|
—
|
|
|
941
|
|
|
Poland
|
|
341
|
|
|
3
|
|
|
—
|
|
|
344
|
|
|
Other
|
|
4,294
|
|
|
1,105
|
|
|
—
|
|
|
5,399
|
|
|
Total net sales
|
|
$
|
41,037
|
|
|
$
|
37,491
|
|
|
$
|
4
|
|
|
$
|
78,532
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2021
|
|
|
|
Mobile
Solutions
|
|
Power
Solutions
|
|
Intersegment
Sales
Eliminations
|
|
Total
|
|
United States and Puerto Rico
|
|
$
|
72,722
|
|
|
$
|
79,230
|
|
|
$
|
(47)
|
|
|
$
|
151,905
|
|
|
China
|
|
27,633
|
|
|
2,788
|
|
|
—
|
|
|
30,421
|
|
|
Brazil
|
|
19,653
|
|
|
535
|
|
|
—
|
|
|
20,188
|
|
|
Mexico
|
|
9,844
|
|
|
7,746
|
|
|
—
|
|
|
17,590
|
|
|
Germany
|
|
3,136
|
|
|
260
|
|
|
—
|
|
|
3,396
|
|
|
Poland
|
|
2,084
|
|
|
7
|
|
|
—
|
|
|
2,091
|
|
|
Other
|
|
16,590
|
|
|
7,780
|
|
|
—
|
|
|
24,370
|
|
|
Total net sales
|
|
$
|
151,662
|
|
|
$
|
98,346
|
|
|
$
|
(47)
|
|
|
$
|
249,961
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2020
|
|
|
|
Mobile
Solutions
|
|
Power
Solutions
|
|
Intersegment
Sales
Eliminations
|
|
Total
|
|
United States and Puerto Rico
|
|
$
|
57,366
|
|
|
$
|
69,156
|
|
|
$
|
(68)
|
|
|
$
|
126,454
|
|
|
China
|
|
18,418
|
|
|
2,409
|
|
|
—
|
|
|
20,827
|
|
|
Brazil
|
|
10,715
|
|
|
193
|
|
|
—
|
|
|
10,908
|
|
|
Mexico
|
|
7,292
|
|
|
6,262
|
|
|
—
|
|
|
13,554
|
|
|
Germany
|
|
3,001
|
|
|
129
|
|
|
—
|
|
|
3,130
|
|
|
Poland
|
|
2,099
|
|
|
8
|
|
|
—
|
|
|
2,107
|
|
|
Other
|
|
12,030
|
|
|
5,735
|
|
|
—
|
|
|
17,765
|
|
|
Total net sales
|
|
$
|
110,921
|
|
|
$
|
83,892
|
|
|
$
|
(68)
|
|
|
$
|
194,745
|
|
The following tables summarize revenue by customer industry. Our products in the automotive industry include high-precision components and assemblies for fuel systems, steering systems, electric motors, transmissions, moldings, stampings, sensors, and electrical contacts. Our products in the general industrial industry include high-precision metal and plastic components for a variety of industrial applications including heating and cooling systems, fluid power systems, power tools, and more. While many of the industries we serve include electrical components, our products in the residential/commercial electrical industry category in the following tables include electrical contact assemblies, precision stampings, welded contact assemblies, and specification plating and surface finishing.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2021
|
|
|
|
Mobile
Solutions
|
|
Power
Solutions
|
|
Intersegment
Sales
Eliminations
|
|
Total
|
|
Automotive
|
|
$
|
46,247
|
|
|
$
|
12,121
|
|
|
$
|
—
|
|
|
$
|
58,368
|
|
|
General Industrial
|
|
24,449
|
|
|
13,625
|
|
|
—
|
|
|
38,074
|
|
|
Residential/Commercial Electrical
|
|
—
|
|
|
16,798
|
|
|
—
|
|
|
16,798
|
|
|
Other
|
|
3,190
|
|
|
6,727
|
|
|
—
|
|
|
9,917
|
|
|
Total net sales
|
|
$
|
73,886
|
|
|
$
|
49,271
|
|
|
$
|
—
|
|
|
$
|
123,157
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2020
|
|
|
|
Mobile
Solutions
|
|
Power
Solutions
|
|
Intersegment
Sales
Eliminations
|
|
Total
|
|
Automotive
|
|
$
|
22,511
|
|
|
$
|
6,817
|
|
|
$
|
—
|
|
|
$
|
29,328
|
|
|
General Industrial
|
|
17,178
|
|
|
11,345
|
|
|
—
|
|
|
28,523
|
|
|
Residential/Commercial Electrical
|
|
—
|
|
|
12,838
|
|
|
—
|
|
|
12,838
|
|
|
Other
|
|
1,348
|
|
|
6,491
|
|
|
4
|
|
|
7,843
|
|
|
Total net sales
|
|
$
|
41,037
|
|
|
$
|
37,491
|
|
|
$
|
4
|
|
|
$
|
78,532
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2021
|
|
|
|
Mobile
Solutions
|
|
Power
Solutions
|
|
Intersegment
Sales
Eliminations
|
|
Total
|
|
Automotive
|
|
$
|
96,391
|
|
|
$
|
25,581
|
|
|
$
|
—
|
|
|
$
|
121,972
|
|
|
General Industrial
|
|
48,759
|
|
|
27,335
|
|
|
—
|
|
|
76,094
|
|
|
Residential/Commercial Electrical
|
|
—
|
|
|
31,980
|
|
|
—
|
|
|
31,980
|
|
|
Other
|
|
6,512
|
|
|
13,450
|
|
|
(47)
|
|
|
19,915
|
|
|
Total net sales
|
|
$
|
151,662
|
|
|
$
|
98,346
|
|
|
$
|
(47)
|
|
|
$
|
249,961
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2020
|
|
|
|
Mobile
Solutions
|
|
Power
Solutions
|
|
Intersegment
Sales
Eliminations
|
|
Total
|
|
Automotive
|
|
$
|
71,585
|
|
|
$
|
19,181
|
|
|
$
|
—
|
|
|
$
|
90,766
|
|
|
General Industrial
|
|
35,157
|
|
|
23,888
|
|
|
—
|
|
|
59,045
|
|
|
Residential/Commercial Electrical
|
|
—
|
|
|
26,699
|
|
|
—
|
|
|
26,699
|
|
|
Other
|
|
4,179
|
|
|
14,124
|
|
|
(68)
|
|
|
18,235
|
|
|
Total net sales
|
|
$
|
110,921
|
|
|
$
|
83,892
|
|
|
$
|
(68)
|
|
|
$
|
194,745
|
|
Transaction Price Allocated to Future Performance Obligations
We are required to disclose the aggregate amount of transaction price that is allocated to performance obligations that have not yet been satisfied as of June 30, 2021, unless our contracts meet one of the practical expedients. Our contracts met the practical expedient for a performance obligation that is part of a contract that has an original expected duration of one year or less.
Sales Concentration
We recognized sales from a single customer of $13.2 million, or 11% and $26.2 million, or 11%, of consolidated net sales, during the three and six months ended June 30, 2021, respectively. We recognized sales from this customer of $9.2 million, or 12% of consolidated net sales, during the three months ended June 30, 2020. Revenues from this customer are primarily in our Mobile Solutions segment.
Note 14. Share-Based Compensation
Share-based compensation cost is recognized in the “Selling, general, and administrative expense” line in the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) except for $0.2 million and $0.4 million, attributable to discontinued operations for the three and six months ended June 30, 2020, respectively. The following table lists the components of share-based compensation expense by type of award.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
|
|
2021
|
|
2020
|
|
2021
|
|
2020
|
|
Stock options
|
|
$
|
59
|
|
|
$
|
140
|
|
|
$
|
148
|
|
|
$
|
321
|
|
|
Restricted stock
|
|
591
|
|
|
936
|
|
|
1,139
|
|
|
1,828
|
|
|
Performance share units
|
|
450
|
|
|
335
|
|
|
699
|
|
|
558
|
|
|
Change in estimate of share-based award vesting (1)
|
|
(337)
|
|
|
—
|
|
|
(337)
|
|
|
—
|
|
|
Share-based compensation expense
|
|
$
|
763
|
|
|
$
|
1,411
|
|
|
$
|
1,649
|
|
|
$
|
2,707
|
|
_______________________________
(1) Amounts reflect the decrease in share-based compensation expense based on the change in estimate of the probability of vesting of share-based awards.
Stock Options
The following table presents stock option activity for the six months ended June 30, 2021.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Options
(in thousands)
|
|
Weighted-
Average
Exercise
Price
(per share)
|
|
Weighted-
Average
Remaining
Contractual
Term
|
|
Aggregate
Intrinsic
Value
|
|
|
Outstanding at January 1, 2021
|
|
871
|
|
|
$
|
12.41
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
(6)
|
|
|
7.93
|
|
|
|
|
|
|
|
Forfeited or expired
|
|
(71)
|
|
|
13.81
|
|
|
|
|
|
|
|
Outstanding at June 30, 2021
|
|
794
|
|
|
$
|
12.32
|
|
|
3.6 years
|
|
$
|
—
|
|
(1)
|
|
Exercisable at June 30, 2021
|
|
698
|
|
|
$
|
12.79
|
|
|
3.0 years
|
|
$
|
—
|
|
(1)
|
_______________________________
(1)The aggregate intrinsic value is the sum of intrinsic values for each exercisable individual option grant. The intrinsic value is the amount by which the closing market price of our stock at June 30, 2021, was greater than the exercise price of any individual option grant.
Restricted Stock
During the six months ended June 30, 2021, we granted 459 thousand shares of restricted stock to non-executive directors, officers and certain other key employees. The shares of restricted stock granted during the six months ended June 30, 2021, vest pro-rata generally over three years for employees and over one year for non-executive directors. We determined the fair value of the shares awarded by using the closing price of our common stock as of the date of grant. The weighted average grant date fair value of restricted stock granted in the six months ended June 30, 2021, was $6.84 per share. Total grant date fair value of restricted stock that vested in the six months ended June 30, 2021, was $2.8 million.
The following table presents the status of unvested restricted stock awards as of June 30, 2021, and changes during the six months then ended.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonvested
Restricted
Shares
(in thousands)
|
|
Weighted
Average
Grant-Date
Fair Value
(per share)
|
|
Unvested at January 1, 2021
|
|
385
|
|
|
$
|
9.42
|
|
|
Granted
|
|
459
|
|
|
6.84
|
|
|
Vested
|
|
(303)
|
|
|
9.34
|
|
|
Forfeited
|
|
(65)
|
|
|
7.20
|
|
|
Unvested at June 30, 2021
|
|
476
|
|
|
$
|
7.28
|
|
Performance Share Units
Performance Share Units (“PSUs”) are a form of long-term incentive compensation awarded to executive officers and certain other key employees designed to directly align the interests of employees to the interests of our stockholders, and to create long-term stockholder value. PSUs granted in 2021 were made pursuant to the NN, Inc. 2019 Omnibus Incentive Plan and a Performance Share Unit Agreement (the “2019 Omnibus Agreement”). Some PSUs are based on total shareholder return (“TSR Awards”), and other PSUs are based on return on invested capital (“ROIC Awards”).
The TSR Awards vest, if at all, upon our achieving a specified relative total shareholder return, which will be measured against the total shareholder return of the S&P SmallCap 600 Index during specified performance periods as defined in the 2019 Omnibus Agreement. The ROIC Awards vest, if at all, upon our achieving a specified average return on invested capital during the performance periods. Each performance period generally begins on January 1 of the year of grant and ends 36 months later on December 31.
We recognize compensation expense over the performance period in which the performance and market conditions are measured. If the PSUs do not vest at the end of the performance periods, then the PSUs will expire automatically. Upon vesting, the PSUs will be settled by the issuance of shares of our common stock, subject to the award recipient’s continued employment. The actual number of shares of common stock to be issued to each award recipient at the end of the performance periods will be interpolated between a threshold and maximum payout amount based on actual performance results. No dividends will be paid on outstanding PSUs during the performance period; however, dividend equivalents will be paid based on dividends declared and the number of shares of common stock that are ultimately earned at the end of the performance periods.
With respect to the TSR and ROIC Awards, a participant will earn 50% of the target number of PSUs for “Threshold Performance,” 100% of the target number of PSUs for “Target Performance,” and 150% of the target number of PSUs for “Maximum Performance.” For performance levels falling between the values shown below, the percentages will be determined by interpolation.
The following table presents the goals with respect to TSR Awards and ROIC Awards granted or modified in 2021.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TSR Awards:
|
|
Threshold Performance
(50% of Shares)
|
|
Target Performance
(100% of Shares)
|
|
Maximum Performance
(150% of Shares)
|
|
2021 grants
|
|
35th Percentile
|
|
50th Percentile
|
|
75th Percentile
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ROIC Awards:
|
|
Threshold Performance
(50% of Shares)
|
|
Target Performance
(100% of Shares)
|
|
Maximum Performance
(150% of Shares)
|
|
2021 grants
|
|
6.3%
|
|
7.0%
|
|
8.6%
|
|
2020 grants (1)
|
|
6.7%
|
|
7.9%
|
|
8.7%
|
|
|
|
|
|
|
|
|
_______________________________
(1)The performance levels for 2020 grants were modified by the compensation committee of the board of directors in the first quarter of 2021 to adjust for the sale of the Life Sciences business and the ongoing effects of the COVID-19 pandemic.
We estimate the grant date fair value of TSR Awards using the Monte Carlo simulation model, as the total shareholder return metric is considered a market condition under ASC Topic 718, Compensation – stock compensation. The grant date fair value of ROIC Awards is based on the closing price of a share of our common stock on the date of grant.
The following table presents the number of PSUs granted and the grant date fair value in the period presented.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TSR Awards
|
|
ROIC Awards
|
|
Award Year
|
|
Shares
(in thousands)
|
|
Grant Date
Fair Value
(per share)
|
|
Shares
(in thousands)
|
|
Grant Date
Fair Value
(per share)
|
|
2021
|
|
142
|
|
$8.58
|
|
172
|
|
$7.20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We recognize expense for ROIC Awards based on the probable outcome of the associated performance condition. We generally recognize an expense for ROIC Awards based on the Target Performance threshold of 100% because, at the date of grant, the Target Performance is the probable level of performance achievement.
The following table presents the status of unvested PSUs as of June 30, 2021, and changes during the six months then ended.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonvested TSR Awards
|
|
Nonvested ROIC Awards
|
|
|
|
Shares
(in thousands)
|
|
Weighted
Average
Grant-Date
Fair Value
(per share)
|
|
Shares
(in thousands)
|
|
Weighted
Average
Grant-Date
Fair Value
(per share)
|
|
Nonvested at January 1, 2021
|
|
138
|
|
|
$
|
10.58
|
|
|
160
|
|
|
$
|
9.13
|
|
|
Granted
|
|
142
|
|
|
8.58
|
|
|
172
|
|
|
7.20
|
|
|
Forfeited
|
|
(61)
|
|
|
9.61
|
|
|
(71)
|
|
|
8.17
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonvested at June 30, 2021
|
|
219
|
|
|
$
|
9.55
|
|
|
261
|
|
|
$
|
8.12
|
|
Change in Vesting Estimates
During the six months ended June 30, 2021, we recognized a decrease in share-based compensation expense in continuing operations of $0.3 million in the “Selling, general, and administrative expense” line in the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) to reverse cumulative expense for restricted stock and PSU awards that were forfeited upon termination of employment and were in excess of our estimated forfeiture rate.
Note 15. Accumulated Other Comprehensive Income
The following tables present the components of accumulated other comprehensive income (“AOCI”).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign Currency Translation
|
|
Interest rate swap
|
|
Income taxes (1)
|
|
Total
|
|
Balance at March 31, 2021
|
|
$
|
(34,228)
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(34,228)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net other comprehensive income (loss)
|
|
4,409
|
|
|
—
|
|
|
—
|
|
|
4,409
|
|
|
Balance at June 30, 2021
|
|
$
|
(29,819)
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(29,819)
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2020
|
|
$
|
(49,501)
|
|
|
$
|
(25,463)
|
|
|
$
|
5,911
|
|
|
$
|
(69,053)
|
|
|
Other comprehensive income (loss) before reclassifications
|
|
994
|
|
|
(1,635)
|
|
|
380
|
|
|
(261)
|
|
|
Amounts reclassified from AOCI to interest expense (2)
|
|
—
|
|
|
3,436
|
|
|
(798)
|
|
|
2,638
|
|
|
|
|
|
|
|
|
|
|
|
|
Net other comprehensive income (loss)
|
|
994
|
|
|
1,801
|
|
|
(418)
|
|
|
2,377
|
|
|
Balance at June 30, 2020
|
|
$
|
(48,507)
|
|
|
$
|
(23,662)
|
|
|
$
|
5,493
|
|
|
$
|
(66,676)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign Currency Translation
|
|
Interest rate swap
|
|
Income taxes (1)
|
|
Total
|
|
Balance at December 31, 2020
|
|
$
|
(30,881)
|
|
|
$
|
(3,712)
|
|
|
$
|
861
|
|
|
$
|
(33,732)
|
|
|
Other comprehensive income (loss) before reclassifications
|
|
1,062
|
|
|
—
|
|
|
—
|
|
|
1,062
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts reclassified from AOCI to loss on interest rate swap (3)
|
|
—
|
|
|
3,712
|
|
|
(861)
|
|
|
2,851
|
|
|
Net current-period other comprehensive income (loss)
|
|
1,062
|
|
|
3,712
|
|
|
(861)
|
|
|
3,913
|
|
|
Balance at June 30, 2021
|
|
$
|
(29,819)
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(29,819)
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2019
|
|
$
|
(35,159)
|
|
|
$
|
(12,234)
|
|
|
$
|
2,839
|
|
|
$
|
(44,554)
|
|
|
Other comprehensive income (loss) before reclassifications
|
|
(13,348)
|
|
|
(16,234)
|
|
|
3,770
|
|
|
(25,812)
|
|
|
Amounts reclassified from AOCI to interest expense (2)
|
|
—
|
|
|
4,806
|
|
|
(1,116)
|
|
|
3,690
|
|
|
|
|
|
|
|
|
|
|
|
|
Net current-period other comprehensive income (loss)
|
|
(13,348)
|
|
|
(11,428)
|
|
|
2,654
|
|
|
(22,122)
|
|
|
Balance at June 30, 2020
|
|
$
|
(48,507)
|
|
|
$
|
(23,662)
|
|
|
$
|
5,493
|
|
|
$
|
(66,676)
|
|
_______________________
(1) Income tax effect of changes in interest rate swap.
(2) Represents settlements on the interest rate swap while the hedge was effective.
(3) Represents reclassification of derivative loss and settlements after discontinuation of hedge accounting.
Note 16. Net Income (Loss) Per Common Share
In accordance with ASC 260, Earnings Per Share, a company that has participating securities is required to utilize the two-class method for calculating earnings per share (“EPS”) unless the treasury stock method results in lower EPS. The two-class method is an allocation of earnings between the holders of common stock and a company’s participating securities. Basic EPS is calculated by dividing income or loss attributable to common stockholders by the weighted average number of shares of common stock outstanding. To calculate diluted EPS, basic EPS is further adjusted to include the effect of potentially dilutive stock options, warrants, and convertible preferred stock.
The following table summarizes the computation of basic and diluted net loss per common share.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
|
|
2021
|
|
2020
|
|
2021
|
|
2020
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations
|
|
$
|
(5,391)
|
|
|
$
|
(17,566)
|
|
|
$
|
(10,304)
|
|
|
$
|
(125,643)
|
|
|
Less: Preferred stock cumulative dividends and deemed dividends
|
|
(2,211)
|
|
|
(3,043)
|
|
|
(16,740)
|
|
|
(5,994)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator for basic and diluted loss from continuing operations per common share (1)
|
|
(7,602)
|
|
|
(20,609)
|
|
|
(27,044)
|
|
|
(131,637)
|
|
|
Loss from discontinued operations, net of tax (Note 2)
|
|
—
|
|
|
(4,182)
|
|
|
—
|
|
|
(144,296)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator for basic and diluted undistributed net loss per common share (1)
|
|
$
|
(7,602)
|
|
|
$
|
(24,791)
|
|
|
$
|
(27,044)
|
|
|
$
|
(275,933)
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
43,067
|
|
|
42,753
|
|
|
42,952
|
|
|
42,671
|
|
|
Adjustment for unvested restricted common stock
|
|
(524)
|
|
|
(556)
|
|
|
(450)
|
|
|
(517)
|
|
|
Adjustment for 2021 Warrants outstanding (2)
|
|
1,897
|
|
|
—
|
|
|
1,059
|
|
|
—
|
|
|
Shares used to calculate income (loss) per share, basic and diluted
|
|
44,440
|
|
|
42,197
|
|
|
43,561
|
|
|
42,154
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per common share net loss:
|
|
|
|
|
|
|
|
|
|
Basic loss from continuing operations per common share
|
|
$
|
(0.17)
|
|
|
$
|
(0.49)
|
|
|
$
|
(0.62)
|
|
|
$
|
(3.12)
|
|
|
Basic loss from discontinued operations per common share
|
|
—
|
|
|
(0.10)
|
|
|
—
|
|
|
(3.43)
|
|
|
Basic net loss per common share
|
|
$
|
(0.17)
|
|
|
$
|
(0.59)
|
|
|
$
|
(0.62)
|
|
|
$
|
(6.55)
|
|
|
Diluted loss from continuing operations per common share
|
|
$
|
(0.17)
|
|
|
$
|
(0.49)
|
|
|
$
|
(0.62)
|
|
|
$
|
(3.12)
|
|
|
Diluted loss from discontinued operations per common share
|
|
—
|
|
|
(0.10)
|
|
|
—
|
|
|
(3.43)
|
|
|
Diluted net loss per common share
|
|
$
|
(0.17)
|
|
|
$
|
(0.59)
|
|
|
$
|
(0.62)
|
|
|
$
|
(6.55)
|
|
|
Cash dividends declared per common share
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
_______________________________
(1) Preferred Stock does not participate in losses.
(2) Weighted average 2021 Warrants outstanding are included in shares outstanding for calculation of basic earnings per share because they are exercisable at an exercise price of $0.01 per share, subject to certain adjustments (see Note 17).
The following table presents securities that could be potentially dilutive in the future that were excluded from the calculation of diluted net loss per common share because they had an anti-dilutive effect.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
|
|
2021
|
|
2020
|
|
2021
|
|
2020
|
|
Options
|
|
825
|
|
|
890
|
|
|
843
|
|
|
890
|
|
|
2019 Warrants
|
|
1,500
|
|
|
1,500
|
|
|
1,500
|
|
|
1,500
|
|
|
Series B Preferred Stock, as-converted
|
|
—
|
|
|
25,278
|
|
|
—
|
|
|
25,278
|
|
|
|
|
2,325
|
|
|
27,668
|
|
|
2,343
|
|
|
27,668
|
|
We have elected to allocate undistributed income to participating securities based on year-to-date results. As there was no undistributed income for the three and six months ended June 30, 2021, no such allocation was necessary. In addition, given the undistributed loss from continuing operations in the three and six months ended June 30, 2021 and 2020, options and the 2019 Warrants are considered anti-dilutive and were excluded from the calculation of diluted net loss per share. Stock options excluded from the calculations of diluted net loss per share had a per share exercise price ranging from $7.93 to $25.16 for the three months ended June 30, 2021, and $7.93 to $25.16 for three months ended June 30, 2020. Stock options excluded from the
calculations of diluted net income (loss) per share had a per share exercise price ranging from $7.93 to $25.16 for the six months ended June 30, 2021, and $7.93 to $25.16 for six months ended June 30, 2020. The 2019 Warrants excluded from the calculation of diluted net loss per share for the three and six months ended June 30, 2021, had a per share exercise price of $11.49. Series B Preferred Stock excluded from the calculation of diluted net loss per share for the three and six months ended June 30, 2020, was calculated on an as-converted basis.
Note 17. Fair Value Measurements
Fair value is an exit price representing the expected amount that an entity would receive to sell an asset or pay to transfer a liability in an orderly transaction with market participants at the measurement date. We followed consistent methods and assumptions to estimate fair values as more fully described in the 2020 Annual Report.
Fair value principles prioritize valuation inputs across three broad levels. Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 2 inputs are quoted prices for similar assets and liabilities in active markets or inputs that are observable for the asset or liability, either directly or indirectly through market corroboration, for substantially the full term of the financial instrument. Level 3 inputs are unobservable inputs based on the assumptions used to measure assets and liabilities at fair value. An asset or liability’s classification within the various levels is determined based on the lowest level input that is significant to the fair value measurement.
Our financial instruments that are subject to fair value disclosure consist of cash and cash equivalents, accounts receivable, accounts payable, derivatives, and long-term debt. As of June 30, 2021, the carrying values of these financial instruments approximated fair value.
Derivative Financial Instruments
Certain features were bifurcated and accounted for separately from the Series B Preferred Stock. The following features were recorded as derivatives.
•Leverage ratio put feature. The Series B Preferred Stock included a redemption option based on a leverage ratio threshold that provided the preferred holder the option to convert the Series B Preferred Stock to a variable number of shares of common stock at a discount to the then fair value of our common stock. The conversion feature was considered a redemption right at a premium which was not clearly and closely related to the debt host. The conversion feature was terminated upon redemption of the Series B Preferred Stock in March 2021.
•Dividends withholding. The Series B Preferred Stock bore a feature that could require us to make an effective distribution to purchasers which is indexed to the tax rate of the purchasers. This distribution would be partially offset by an adjustment to the redemption price and/or conversion rate. The dividends withholding feature was not clearly and closely related to the debt host. Upon redemption of the Series B Preferred Stock in March 2021, we made a net cash distribution of $3.0 million to settle this withholding feature after effectively receiving a $1.0 million offset from the purchasers upon redemption of the Series B Preferred Stock.
•Warrants. The warrants issued with the Series B Preferred Stock (the “2019 Warrants”) are exercisable, in full or in part, at any time prior to December 11, 2026. The original exercise price was $12.00 per share, subject to anti-dilution adjustments in the event of future below market issuances, stock splits, stock dividends, combinations or similar events. The issuance of the 2021 Warrants resulted in an adjusted exercise price of $11.49 per share for the 2019 Warrants because the new warrants have an exercise price below market value.
Certain features were bifurcated and accounted for separately from the Series D Preferred Stock that was issued on March 22, 2021. The following features were recorded as derivatives.
•Change-in-control put feature. The Series D Preferred Stock includes a put feature that allows the holder to redeem the Series D Preferred Stock upon a change in control at the greater of 1) the liquidation preference plus accrued dividends or 2) 140% of the liquidation preference. The put feature is considered a redemption right at a premium and is not clearly and closely related to the debt host.
•Warrants. The 2021 Warrants are exercisable, in full or in part, at any time prior to March 22, 2027, at an exercise price of $0.01 per share, subject to anti-dilution adjustments in the event of certain future equity issuances, stock splits, stock dividends, combinations or similar events.
The following tables show the liabilities measured at fair value for the above derivatives as of June 30, 2021, and December 31, 2020.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements as of June 30, 2021
|
|
Description
|
|
Quoted Prices in Active Markets for Identical Assets (Level 1)
|
|
Significant Other Observable Inputs (Level 2)
|
|
Significant Unobservable Inputs
(Level 3)
|
|
Derivative liability - other current liabilities
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Derivative liability - other non-current liabilities
|
|
13,946
|
|
|
—
|
|
|
1,510
|
|
|
Total
|
|
$
|
13,946
|
|
|
$
|
—
|
|
|
$
|
1,510
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements as of December 31, 2020
|
|
Description
|
|
Quoted Prices in Active Markets for Identical Assets (Level 1)
|
|
Significant Other Observable Inputs (Level 2)
|
|
Significant Unobservable Inputs
(Level 3)
|
|
Derivative liability - other current liabilities
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2,453
|
|
|
Derivative liability - other non-current liabilities
|
|
—
|
|
|
—
|
|
|
664
|
|
|
Total
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
3,117
|
|
The following table presents the change in the above derivatives during the six months ended June 30, 2021.
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2021
|
|
Beginning balance
|
|
$
|
3,117
|
|
|
Issuances
|
|
15,121
|
|
|
Change in fair value (1)
|
|
223
|
|
|
Settlements
|
|
(3,005)
|
|
|
Ending balance
|
|
$
|
15,456
|
|
_______________________________
(1) Changes in the fair value are recognized in the “Other expense (income), net” line in the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss).
The fair value of the change-in-control put feature utilizes unobservable inputs based on the Company’s assessment of the probability of a change-in-control event occurring in a future period. The probability of a change-in-control event ranged from 1% to 10% as of June 30, 2021.
The leverage ratio put feature, the dividends withholding feature, and the contingent dividends feature utilized unobservable inputs based on the best information available to determine the probability of the Series B Preferred Stock remaining outstanding for future periods. These inputs included probability assessments of how long the Series B Preferred Stock would remain outstanding and whether the leverage ratio threshold would be exceeded. Inputs also included the percentage of Series B Preferred Stock held by non-U.S. resident holders and the applicable tax withholding rates for those holders. The probability of the Series B Preferred Stock remaining in future periods ranged from 3% to 2% as of December 31, 2020. The leverage ratio put feature also utilized unobservable inputs to determine the probability of the leverage ratio put being exercisable as of March 31, 2023, which ranged from 10% to 1% as of December 31, 2020. These probabilities were determined based on management’s assessment of facts and circumstances at each reporting date. An increase in these probabilities would have resulted in an increase in the derivative liability fair value. Given the Series B Preferred Stock value changed by period as a result of dividends and redemption premiums, weighted average values for these assumptions are not meaningful.
The fair value of the 2019 Warrants is determined using a valuation model that utilizes unobservable inputs to determine the probability that the 2019 Warrants will remain outstanding for future periods. The probabilities resulted in a weighted average term of 4.2 years as of June 30, 2021, and 2.4 years as of December 31, 2020.
The fair value of the 2021 Warrants is determined using the observable market price of a share of our common stock, less the $0.01 per share exercise price.
Interest Rate Swap
We manage our exposure to fluctuations in interest rates using a mix of fixed and variable rate debt. We had a 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 “interest rate swap”). On March 22, 2021, we terminated the interest rate swap agreement with a $13.7 million cash payment in connection with the extinguishment of our previously outstanding long-term variable-rate debt.
The interest rate swap was designated as a cash flow hedge at inception. However, in the fourth quarter of 2020, the interest rate swap no longer qualified as an effective hedge, and subsequent changes in fair value of the interest rate swap were recognized in earnings. Amounts recognized in earnings related to the interest rate swap are recorded in the “Loss on interest rate swap” line on the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) except that cash settlements prior to termination are recognized in “Derivative payments on interest rate swap.” Cash settlements during 2021 are presented in investing activities on the Condensed Consolidated Statements of Cash Flows. The following table presents the effect of the interest rate swap on the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
Six Months Ended June 30,
|
|
|
|
2021
|
|
2020
|
|
2021
|
|
2020
|
|
Interest expense
|
|
$
|
—
|
|
|
$
|
3,436
|
|
|
$
|
—
|
|
|
$
|
4,806
|
|
|
Derivative payments on interest rate swap
|
|
—
|
|
|
—
|
|
|
1,717
|
|
|
—
|
|
|
Loss on interest rate swap
|
|
—
|
|
|
—
|
|
|
2,033
|
|
|
—
|
|
The following table presents the liabilities measured at fair value on a recurring basis for the interest rate swap as of December 31, 2020.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements as of December 31, 2020
|
|
Description
|
|
Quoted Prices in Active Markets for Identical Assets (Level 1)
|
|
Significant Other Observable Inputs (Level 2)
|
|
Significant Unobservable Inputs
(Level 3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative liability - other current liabilities
|
|
$
|
—
|
|
|
$
|
11,022
|
|
|
$
|
—
|
|
|
Derivative liability - other non-current liabilities
|
|
—
|
|
|
4,357
|
|
|
—
|
|
|
Total
|
|
$
|
—
|
|
|
$
|
15,379
|
|
|
$
|
—
|
|
The inputs for determining fair value of the interest rate swap are classified as Level 2 inputs. Level 2 fair value is based on estimates using standard pricing models. These standard pricing models use inputs which are derived from or corroborated by observable market data such as interest rate yield curves, index forward curves, discount curves, and volatility surfaces. Counterparty to this derivative contract is a highly rated financial institution which we believe carries only a minimal risk of nonperformance.
On July 22, 2021, we entered into a new interest rate swap as discussed in Note 18.
Fixed Rate Debt
The fair value of our outstanding fixed-rate debt included in the “International lines of credit and other loans” line item within Note 9 to these Notes to Condensed Consolidated Financial Statements approximated carrying value as of June 30, 2021, and December 31, 2020, respectively. These fair values represent Level 2 under the three-tier hierarchy described above. The carrying value of this fixed-rate debt was $12.2 million and $14.4 million as of June 30, 2021 and December 31, 2020, respectively.
Note 18. Subsequent Event
Interest Rate Swap Agreement
On July 22, 2021, we entered into a new fixed-rate interest rate swap agreement to change the LIBOR-based component of the interest rate on a portion of our variable rate debt to a fixed rate of 1.291%. The interest rate swap has a notional amount of $60.0 million and a maturity date of July 31, 2024.
The objective of the interest rate swap is to eliminate the variability of cash flows in interest payments on the first $60.0 million of variable rate debt attributable to changes in benchmark one-month LIBOR interest rates. The hedged risk is the interest rate risk exposure to changes in interest payments, attributable to changes in benchmark one-month LIBOR interest rates over the interest rate swap term. The changes in cash flows of the interest rate swap are expected to exactly offset changes in cash flows of the variable rate debt. We designated the interest rate swap as a cash flow hedge at inception.