Notes to Consolidated Financial Statements
Note 1. Significant Accounting Policies
Nature of Business
NN, Inc. is a diversified industrial company that combines in-depth materials science expertise with advanced engineering and production capabilities to design and manufacture high-precision metal and plastic components and assemblies for a variety of end markets on a global basis. As used in this Annual Report on Form 10-K (this “Annual Report”), the terms “NN,” the “Company,” “we,” “our,” or “us” refer to NN, Inc., and its subsidiaries. We have 31 facilities in North America, Europe, South America, and Asia.
Basis of Presentation
The accompanying consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”). Certain prior period amounts have been reclassified to conform to the current year’s presentation. Except for per share data or as otherwise indicated, all U.S. dollar amounts presented in the tables in these Notes to Consolidated Financial Statements are in thousands.
Principles of Consolidation
Our consolidated financial statements include the accounts of NN, Inc., and its wholly owned subsidiaries. We own a 49% interest in a joint venture which we account for using the equity method (see Note 9). All intercompany transactions and balances have been eliminated in consolidation.
Use of Estimates in the Preparation of Consolidated Financial Statements
The preparation of consolidated financial statements in accordance with U.S. GAAP requires management to use estimates and assumptions that affect the reported amounts of certain assets and liabilities, disclosure of contingent assets and liabilities, and the reported amounts of revenues and expenses. Actual results may differ from those estimates.
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. We plan to adopt ASU 2020-06 effective January 1, 2022 using the modified retrospective adoption method. We do not anticipate that the adoption will have a material 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.
In November 2021, the FASB issued ASU 2021-10, Government Assistance (Topic 832): Disclosures by Business Entities about Government Assistance, (“ASU 2021-10”) which requires business entities to provide certain annual disclosures when they have received government assistance and use a grant or contribution accounting model by analogy to other accounting guidance. Such disclosures include the nature of the transactions, significant terms and conditions, accounting policies, and affected financial statement line items. ASU 2021-10 is effective for fiscal years beginning after December 15, 2021, with early adoption permitted. ASU 2021-10 may be applied either prospectively or retrospectively. We are in the process of assessing the impact ASU 2021-10 may have on our annual disclosures.
Cash and Cash Equivalents
Cash and cash equivalents include cash and highly liquid investments with original maturities of three months or less. We maintain cash balances in transaction accounts with various financial institutions that are insured by the Federal Deposit Insurance Corporation (“FDIC”). Although we maintain balances that exceed the federally insured limit, we have not experienced any losses related to these balances, and we believe credit risk to be minimal. We had approximately $17.6 million and $17.0 million in cash and cash equivalents as of December 31, 2021 and 2020, respectively, held at foreign financial institutions.
Fair Value Measurements
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.
Accounts Receivable and Allowance for Credit Losses
Trade accounts receivable are recorded at their net realizable value. We maintain allowances for estimated losses resulting from the inability of our customers to make required payments. The allowances are based on the amount that we ultimately expect to collect from our customers. We evaluate the collectability of accounts receivable based on a combination of factors including number of days receivables are past due, historical collection experience, current market conditions, and forecasted direction of economic and business environment. Accounts receivable are written off at the time a customer receivable is deemed uncollectible.
Inventories
Inventories are stated at the lower of cost or net realizable value. Cost is determined using standard costs, which approximates the average cost method. Our policy is to expense abnormal amounts of idle facility expense, freight, handling cost, and waste included in cost of products sold. In addition, we allocate fixed production overheads based on the normal production capacity of our facilities. Inventory valuations were developed using normalized production capacities for each of our manufacturing locations. The costs from excess capacity or under-utilization of fixed production overheads were expensed in the period incurred and are not included as a component of inventory.
Inventories also include tools, molds, and dies in progress that we are producing and will ultimately sell to our customers. These inventories are also carried at the lower of cost or net realizable value.
Property, Plant and Equipment
Property, plant and equipment are stated at cost less accumulated depreciation. Assets to be disposed of are stated at the lower of depreciated cost or fair market value less estimated selling costs. Expenditures for maintenance and repairs are charged to expense as incurred. Major renewals and improvements are capitalized. When a property item is retired, its cost and related accumulated depreciation are removed from the property accounts and any gain or loss is recorded in the Consolidated Statements of Operations and Comprehensive Income (Loss). We review the carrying values of long-lived assets for impairment whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. Property, plant and equipment also includes tools, molds, and dies used in manufacturing.
Depreciation is calculated based on historical cost using the straight-line method over the estimated useful lives of the depreciable assets. Estimated useful lives for buildings and land improvements generally range from 10 to 40 years. Estimated useful lives for machinery and equipment generally range from 3 to 12 years. Estimated useful lives for leasehold improvements are based on the life of the lease.
Goodwill
Goodwill was tested for impairment on an annual basis in the fourth quarter and between annual tests if a triggering event occurred. The impairment analysis was performed at the reporting unit level. As of December 31, 2021 and 2020, there was no remaining goodwill balance due to impairments recognized during the year ended December 31, 2020.
Impairment of Long-Lived Assets
Long-lived tangible and intangible assets subject to depreciation or amortization are tested for recoverability when changes in circumstances indicate the carrying value of these assets may not be recoverable. A test for recoverability is also performed when management has committed to a plan to dispose of a reporting unit or asset group. Assets to be held and used are tested for recoverability when indications of impairment are evident. Recoverability of a long-lived tangible or intangible asset is evaluated by comparing its carrying value to the future estimated undiscounted cash flows expected to be generated by the asset or asset group. If the asset is deemed not recoverable, then the asset is considered impaired and adjusted to fair value which is then depreciated or amortized over its remaining useful life. Assets to be disposed of are recorded at the lesser of carrying value or fair value less costs of disposal.
Equity Method Investments
Our equity method investment is subject to a review for impairment if, and when, circumstances indicate that a decline in value below its carrying amount may have occurred. Examples of such circumstances include, but are not limited to, a significant deterioration in the earnings performance or business prospects of the investee; a significant adverse change in the regulatory, economic or technological environment of the investee; a significant adverse change in the general market condition of either the geographic area or the industry in which the investee operates; and recurring negative cash flows from operations. If management considers the decline to be other than temporary, we would write down the investment to its estimated fair market value.
Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the consolidated financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Valuation allowances are recorded to reduce deferred tax assets when it is more likely than not that a tax benefit will not be realized. Provision has been made for income taxes on unremitted earnings of certain foreign subsidiaries as these earnings are not deemed to be permanently reinvested. We recognize income tax positions that meet the more likely than not threshold and accrue interest and potential penalties related to unrecognized income tax positions which are recorded as a component of the provision (benefit) for income taxes. We treat global intangible low-taxed income (“GILTI”) as a periodic charge in the year in which it arises and therefore do not record deferred taxes for basis differences associated with GILTI. We eliminate disproportionate tax effects from accumulated other comprehensive income (loss) when the circumstances upon which they are premised cease to exist.
Revenue Recognition
We recognize revenues 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.
Share Based Compensation
The cost of stock options, restricted stock, and performance share units is recognized as compensation expense over the vesting periods based on the grant date fair value, net of expected forfeitures. We determine grant date fair value using the Black Scholes financial pricing model for stock options and a Monte Carlo simulation for performance share units that include a market condition for vesting because these awards are not traded in open markets. We determine grant date fair value using the closing price of our common stock on the date of grant for restricted stock and performance share units that include performance conditions for vesting.
Common Stock and Preferred Stock Dividends
Dividends are recorded as a reduction to retained earnings. When we have an accumulated deficit, dividends are recorded as a reduction of additional paid-in capital.
Foreign Currency Translation
Assets and liabilities of our foreign subsidiaries are translated at current exchange rates. Revenue, costs, and expenses are translated at average rates prevailing during each reporting period. Translation adjustments arising from the translation of foreign subsidiary financial statements are reported as a component of other comprehensive income (loss) and accumulated other comprehensive income (loss) within stockholders’ equity. Transactions denominated in foreign currencies, including intercompany transactions, are initially recorded at the current exchange rate at the date of the transaction. The balances are adjusted to the current exchange rate as of each balance sheet date and as of the date when the transaction is consummated. Transaction gains or losses, excluding intercompany loan transactions, are expensed as incurred in either cost of sales or selling, general and administrative expense in the Consolidated Statements of Operations and Comprehensive Income (Loss) and were immaterial to the years ended December 31, 2021, 2020, and 2019. Transaction gains or losses on intercompany loan transactions are recognized as incurred in the “Other expense (income), net” line in the Consolidated Statements of Operations and Comprehensive Income (Loss). For the years ended December 31, 2021, 2020, and 2019, transaction gains or losses on intercompany loan transactions were $0.5 million, $0.8 million, and $0.4 million, respectively.
Net Income (Loss) Per Common Share
We are required to allocate earnings or losses for a reporting period to common stockholders and participating securities using the two-class method to compute earnings per share. The two-class method is an earnings allocation formula that treats participating securities as having rights to earnings that otherwise would have been available to common stockholders. Participating securities may participate in undistributed earnings with common stock whether or not that participation is conditioned upon the occurrence of a specified event. Under the two-class method, our net income (loss) is reduced (or increased) by the amount that has been or will be distributed to our participating security holders. Preferred shares are participating securities that participate in earnings but do not participate in losses.
Basic net income (loss) per common share is computed by dividing net income (loss) allocable to common shares by the weighted average number of common shares outstanding. Diluted net income (loss) per common share includes the effect of warrants, convertible preferred stock, stock options and the respective tax benefits unless inclusion would not be dilutive.
Note 2. Discontinued Operations
In October 2020, we sold 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 Life Sciences business included facilities that were 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 furthered management’s strategy to improve liquidity and create the financial flexibility to pursue key growth areas in the Mobile Solutions and Power Solutions segments. The SPA includes a potential earnout payment of up to $70.0 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 in 2020 and paid $3.9 million to the buyer during the year ended December 31, 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 recognized a tax indemnification of $1.2 million during the year ending December 31, 2020. During the year ended December 31, 2021, we recognized a gain on disposal of discontinued operations of $1.2 million related to the tax indemnification as the actual tax liability was determined to be $0.
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 the gain on the disposition of the business, all net of tax, as one line item on the Consolidated Statements of Operations and Comprehensive Income (Loss). The Consolidated Statements of Operations and Comprehensive Income (Loss) for all periods presented have been revised to reflect this presentation. Accordingly, the results of the Life Sciences business have been excluded from continuing operations and segment results for all periods presented in the consolidated financial statements and the accompanying notes unless otherwise stated. The Consolidated Statements of Cash Flows include cash flows of the Life Sciences business in each line item unless otherwise stated.
The following table presents the results of operations of the discontinued operations.
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| | Years Ended December 31, |
| | 2021 | | 2020 | | 2019 |
Net sales | | $ | — | | | $ | 225,255 | | | $ | 357,937 | |
Cost of sales (exclusive of depreciation and amortization shown separately below) | | — | | | 160,464 | | | 249,157 | |
Selling, general, and administrative expense | | — | | | 20,779 | | | 34,328 | |
| | | | | | |
Depreciation and amortization | | — | | | 35,731 | | | 46,950 | |
| | | | | | |
Goodwill impairment | | — | | | 146,757 | | | — | |
Other operating expense, net | | — | | | 41 | | | 20 | |
Income (loss) from operations | | — | | | (138,517) | | | 27,482 | |
Interest expense | | — | | | 48,893 | | | 44,125 | |
Loss on extinguishment of debt and write-off of debt issuance costs | | — | | | 1,388 | | | 2,753 | |
| | | | | | |
Other expense (income), net | | — | | | (322) | | | 178 | |
Loss from discontinued operations before costs of disposal and benefit for income taxes | | — | | | (188,476) | | | (19,574) | |
Benefit for income taxes | | — | | | 12,468 | | | 3,582 | |
Loss from discontinued operations before costs of disposal | | — | | | (176,008) | | | (15,992) | |
Gain on disposal of discontinued operations | | 1,200 | | | 212,319 | | | — | |
Benefit for income taxes on costs of disposal | | — | | | 2,587 | | | — | |
Income (loss) from discontinued operations, net of tax | | $ | 1,200 | | | $ | 38,898 | | | $ | (15,992) | |
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 during the year ended December 31, 2020. The judgments, assumptions, and estimates involved in the goodwill impairment analysis for the Life Sciences reporting unit are consistent with those discussed in Note 7.
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 $700.0 million in the aggregate on our term loans during the fourth quarter of 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 was reclassified to discontinued operations.
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| | | | Years Ended December 31, |
| | | | 2020 | | 2019 |
Interest on debt | | | | $ | 35,147 | | | $ | 40,996 | |
Amortization of debt issuance costs | | | | 13,990 | | | 3,368 | |
Capitalized interest and other | | | | (244) | | | (239) | |
| | | | | | |
Total interest expense of discontinued operations | | | | $ | 48,893 | | | $ | 44,125 | |
The following table presents the significant noncash items and cash paid for capital expenditures of discontinued operations for each period presented.
| | | | | | | | | | | | | | | | |
| | | | Years Ended December 31, |
| | | | 2020 | | 2019 |
Depreciation and amortization | | | | $ | 35,731 | | | $ | 46,950 | |
Goodwill impairment | | | | 146,757 | | | — | |
Amortization of debt issuance costs | | | | 13,990 | | | 3,368 | |
Loss on extinguishment of debt and write-off of debt issuance costs | | | | 1,388 | | | 2,753 | |
Acquisition of property, plant and equipment | | | | 8,416 | | | 21,834 | |
Right-of-use assets obtained in exchange for new finance lease liabilities | | | | 695 | | | 5,321 | |
Right-of-use assets obtained in exchange for new operating lease liabilities (1) | | | | 6,174 | | | 51 | |
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(1) Includes new leases, renewals, and modifications.
Note 3. Segment Information
Our business is aggregated into the following two reportable segments.
•Mobile Solutions. Mobile Solutions is focused on growth in the automotive and general industrial end markets. We have developed an expertise in manufacturing highly complex, tight tolerance, system critical components. Our technical capabilities can be utilized in numerous applications including for use in battery electric, hybrid electric, and internal combustion engine vehicles. The group currently manufactures components on a high-volume basis for use in power steering, braking, transmissions, and gasoline fuel system applications, along with components utilized in heating, ventilation and air conditioning and diesel injection and diesel emissions treatment applications. This expertise has been gained through investment in technical capabilities, processes and systems, and allows us to provide skilled program management and product launch capabilities.
•Power Solutions. Power Solutions is focused on growth in the electrical, general industrial, automotive, aerospace, defense, and medical end markets. Within this group we combine materials science expertise with advanced engineering and production capabilities to design and manufacture a broad range of high-precision metal and plastic components, assemblies, and finished devices used in applications ranging from power control to flight control and for military devices. We manufacture a variety of products including electrical contacts, connectors, contact assemblies, and precision stampings for the electrical end market and high precision products for the aerospace and defense end market utilizing our extensive process technologies for optical grade plastics, thermally conductive plastics, titanium, Inconel, magnesium, and electroplating. Our medical business includes the production of a variety of tools and instruments for the orthopaedics and medical/surgical end markets.
These divisions are considered our two operating segments as each has engaged 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.
The following tables present results of continuing operations by reportable segment.
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| | Mobile Solutions | | Power Solutions | | Corporate and Consolidations | | Total |
Year Ended December 31, 2021 | | | | | | | | |
Net sales | | $ | 285,863 | | | $ | 191,800 | | | $ | (79) | | (a) | $ | 477,584 | |
Depreciation and amortization | | 28,769 | | | 15,892 | | | 1,534 | | | 46,195 | |
| | | | | | | | |
Income (loss) from operations | | 9,039 | | | 6,493 | | | (24,536) | | | $ | (9,004) | |
Interest expense | | | | | | | | (12,664) | |
Other | | | | | | | | (774) | |
Loss from continuing operations before income taxes and share of net income from joint venture | | $ | (22,442) | |
Share of net income from joint venture | | $ | 6,261 | | | $ | — | | | $ | — | | | $ | 6,261 | |
Expenditures for long-lived assets | | 15,411 | | | 2,200 | | | 610 | | | 18,221 | |
Total assets | | 357,171 | | (b) | 184,196 | | | 37,734 | | | 579,101 | |
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| | Mobile Solutions | | Power Solutions | | Corporate and Consolidations | | Total |
Year Ended December 31, 2020 | | | | | | | | |
Net sales | | $ | 256,360 | | | $ | 171,269 | | | $ | (95) | | (a) | $ | 427,534 | |
Depreciation and amortization | | 28,298 | | | 15,730 | | | 1,652 | | | 45,680 | |
Goodwill impairment | | — | | | 92,942 | | | — | | | 92,942 | |
Income (loss) from operations | | 5,228 | | | (85,983) | | | (36,702) | | | $ | (117,457) | |
Interest expense | | | | | | | | (18,898) | |
Other | | | | | | | | (15,733) | |
Loss from continuing operations before income taxes and share of net income from joint venture | | $ | (152,088) | |
Share of net income from joint venture | | $ | 3,626 | | | $ | — | | | $ | — | | | $ | 3,626 | |
Expenditures for long-lived assets | | 12,400 | | | 2,754 | | | 203 | | | 15,357 | |
Total assets | | 370,985 | | (b) | 197,348 | | | 56,629 | | | 624,962 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Mobile Solutions | | Power Solutions | | Corporate and Consolidations | | Total |
Year Ended December 31, 2019 | | | | | | | | |
Net sales | | $ | 297,749 | | | $ | 192,100 | | | $ | (335) | | (a) | $ | 489,514 | |
Depreciation and amortization | | 27,146 | | | 15,301 | | | 2,449 | | | 44,896 | |
| | | | | | | | |
Income (loss) from operations | | 9,553 | | | 13,881 | | | (41,027) | | | $ | (17,593) | |
Interest expense | | | | | | | | (13,030) | |
Other | | | | | | | | (1,502) | |
Loss from continuing operations before income taxes and share of net income from joint venture | | $ | (32,125) | |
Share of net income from joint venture | | $ | 1,681 | | | $ | — | | | $ | — | | | $ | 1,681 | |
Expenditures for long-lived assets | | 24,969 | | | 4,457 | | | 2,743 | | | 32,169 | |
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(a) Includes eliminations of intersegment transactions which occur during the ordinary course of business.
(b) Total assets in Mobile Solutions includes $34.0 million and $27.0 million as of December 31, 2021 and 2020, respectively, related to the investment in our 49% owned joint venture (Note 9).
The following table summarizes long-lived tangible assets by geographical region.
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| | Property, Plant, and Equipment, Net As of December 31, |
| | 2021 | | 2020 |
United States | | $ | 123,442 | | | $ | 130,077 | |
Europe | | $ | 36,972 | | | $ | 40,663 | |
Asia | | 32,605 | | | 33,854 | |
Mexico | | 1,044 | | | 1,230 | |
South America | | 15,042 | | | 17,866 | |
All foreign locations | | $ | 85,663 | | | $ | 93,613 | |
Total | | $ | 209,105 | | | $ | 223,690 | |
Note 4. Accounts Receivable
Accounts receivable, net, are comprised of the following amounts:
| | | | | | | | | | | | | | |
| | As of December 31, |
| | 2021 | | 2020 |
Trade | | $ | 72,771 | | | $ | 86,659 | |
Less—allowance for credit losses | | 1,352 | | | 2,044 | |
Accounts receivable, net | | $ | 71,419 | | | $ | 84,615 | |
The following table presents changes in allowance for credit losses.
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| | Years Ended December 31, |
| | 2021 | | 2020 | | 2019 |
Balance at beginning of year | | $ | 2,044 | | | $ | 2,044 | | | $ | 2,517 | |
Additions | | 78 | | | 505 | | | 231 | |
Write-offs and other | | (734) | | | (562) | | | (692) | |
Currency impact | | (36) | | | 57 | | | (12) | |
Balance at end of year | | $ | 1,352 | | | $ | 2,044 | | | $ | 2,044 | |
As of December 31, 2021, no customer represented greater than 10% of consolidated accounts receivable. As of December 31, 2020, one customer represented 11% of consolidated accounts receivable, which is primarily related to Mobile Solutions.
Note 5. Inventories
Inventories are comprised of the following amounts:
| | | | | | | | | | | | | | |
| | As of December 31, |
| | 2021 | | 2020 |
Raw materials | | $ | 27,221 | | | $ | 22,589 | |
Work in process | | 24,960 | | | 20,758 | |
Finished goods | | 22,846 | | | 19,170 | |
Total inventories | | $ | 75,027 | | | $ | 62,517 | |
Note 6. Property, Plant and Equipment
Property, plant and equipment are comprised of the following amounts:
| | | | | | | | | | | | | | |
| | As of December 31, |
2021 | | 2020 |
| | | | |
Land and buildings | | $ | 57,991 | | | $ | 58,296 | |
Machinery and equipment | | 344,041 | | | 339,268 | |
Construction in progress | | 5,009 | | | 1,270 | |
Total | | 407,041 | | | 398,834 | |
Less: Accumulated depreciation | | 197,936 | | | 175,144 | |
Property, plant and equipment, net | | $ | 209,105 | | | $ | 223,690 | |
We monitor property, plant and equipment for any indicators of potential impairment. We recognized impairment charges of $4.1 million and $0.6 million for the years ended December 31, 2020 and 2019, respectively, related to the early retirement of identified fixed assets. There were no impairment charges for the year ended December 31, 2021. The impairment charges were recorded to the “Other operating expense (income), net,” line item on the Consolidated Statements of Operations and Comprehensive Income (Loss). The impairment charges were determined by writing the assets down to the estimated salvage value, less disposal costs.
For the years ended December 31, 2021, 2020, and 2019, we recorded depreciation expense of $31.8 million, $31.3 million, and $30.4 million, respectively.
Note 7. Goodwill
All of our net goodwill was recorded in the Power Solutions reportable segment. The following table shows changes in the carrying amount of Power Solutions goodwill.
| | | | | | | | |
Balance as of December 31, 2019 | | $ | 94,779 | |
Currency impact and other | | (1,837) | |
| | |
Impairments | | (92,942) | |
| | |
Balance as of December 31, 2020 | | $ | — | |
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| | |
| | |
During the first quarter of 2020, our market capitalization declined to a level that was less than the net book value of our stockholders’ equity. The decline in market capitalization was a triggering event that caused us to perform a goodwill impairment analysis as of March 31, 2020. The goodwill impairment analysis required significant judgments to calculate the fair value for the Power Solutions reporting unit, including estimation of future cash flows, which is dependent on internal forecasts, estimation of the long-term growth rate for each operating segment, and determination of weighted average cost of capital. Our forecasts used in the goodwill impairment analysis reflected our expectations of declines in sales resulting from COVID-19. Significant assumptions and estimates are involved in the application of the discounted cash flow model to forecast operating cash flows, including market growth and market share, sales volumes and prices, costs to produce, discount rate, and estimated capital needs. Management considers historical experience and all available information at the time the fair values of its reporting units are estimated. Assumptions in estimating future cash flows are subject to a high degree of judgment and complexity. The carrying value of the Power Solutions reporting unit exceeded the estimated fair value as of the March 31, 2020, analysis. As a result of our analysis, we recorded an impairment loss on goodwill of $92.9 million to the “Goodwill impairment” line on the Consolidated Statements of Operations and Comprehensive Income (Loss) for the year ended December 31, 2020. As of December 31, 2021 and 2020, there was no remaining goodwill balance.
Note 8. 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, 2019 | | $ | 32,416 | | | $ | 84,997 | | | $ | 117,413 | |
Amortization | | (3,354) | | | (10,994) | | | (14,348) | |
Balance as of December 31, 2020 | | 29,062 | | | 74,003 | | | 103,065 | |
Amortization | | (3,353) | | | (10,994) | | | (14,347) | |
Balance as of December 31, 2021 | | $ | 25,709 | | | $ | 63,009 | | | $ | 88,718 | |
The following table shows the cost and accumulated amortization of our intangible assets as of December 31, 2021 and 2020.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | December 31, 2021 | | December 31, 2020 |
| | Estimated Useful Life in Years | | Gross Carrying Value as of Acquisition Date | | Accumulated Amortization | | Net Carrying Value | | Gross Carrying Value as of Acquisition Date | | Accumulated Amortization | | Net Carrying Value |
Customer relationships | | 12 - 20 | | $ | 173,746 | | | $ | (87,895) | | | $ | 85,851 | | | $ | 173,746 | | | $ | (74,250) | | | $ | 99,496 | |
Trademark and trade name | | 8 - 15 | | 7,527 | | | (4,660) | | | 2,867 | | | 7,527 | | | (3,958) | | | 3,569 | |
| | | | | | | | | | | | | | |
Total identified intangible assets | | | | $ | 181,273 | | | $ | (92,555) | | | $ | 88,718 | | | $ | 181,273 | | | $ | (78,208) | | | $ | 103,065 | |
Intangible assets that are fully amortized are removed and no longer represented in the gross carrying value or accumulated amortization.
The following table shows estimated future amortization expense for the next five years and thereafter.
| | | | | |
Year Ending December 31, | |
2022 | $ | 14,347 | |
2023 | 14,262 | |
2024 | 13,919 | |
2025 | 13,919 | |
2026 | 13,919 | |
Thereafter | 18,352 | |
Total | $ | 88,718 | |
Intangible assets are reviewed for impairment when changes in circumstances indicate the carrying value of those assets may not be recoverable. At December 31, 2021, 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 an impairment analysis on our long-lived assets as of December 31, 2021. Based on our analysis, the carrying values of the long-lived assets were recoverable and no impairment charge was recorded during the year ended December 31, 2021.
Note 9. 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 | 6,261 | |
| |
| |
Foreign currency translation gain | 801 | |
| |
Balance as of December 31, 2021 | $ | 34,045 | |
The following tables show summarized financial information of the unconsolidated JV.
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2021 | | 2020 | | 2019 |
Net sales | | 94,846 | | | 68,216 | | | 58,906 | |
Cost of sales | | 77,620 | | | 56,669 | | | 52,757 | |
Income from operations | | 15,429 | | | 10,202 | | | 4,745 | |
Net income | | 12,777 | | | 7,401 | | | 3,432 | |
| | | | | | | | | | | | | | |
| | December 31, |
| | 2021 | | 2020 |
Current assets | | 65,465 | | | 50,794 | |
Noncurrent assets | | 75,222 | | | 64,635 | |
Current liabilities | | 67,206 | | | 47,905 | |
Noncurrent liabilities | | 10,006 | | | 10,279 | |
We recognized sales to the JV of $0.4 million, $0.1 million, and $0.2 million during the years ended December 31, 2021, 2020, and 2019, respectively. Amounts due to us from the JV as of December 31, 2021 were $4.4 million, which includes a $4.0 million dividend declared by the JV in 2021 and paid to us in January 2022.
Note 10. Income Taxes
The following table summarizes the loss from continuing operations before benefit (provision) for income taxes and share of net income from joint venture.
| | | | | | | | | | | | | | | | | | | | |
| | Years Ended December 31, |
| | 2021 | | 2020 | | 2019 |
United States | | $ | (35,325) | | | $ | (146,963) | | | $ | (31,760) | |
Foreign | | 12,883 | | | (5,125) | | | (365) | |
Loss from continuing operations before benefit (provision) for income taxes and share of net income from joint venture | | $ | (22,442) | | | $ | (152,088) | | | $ | (32,125) | |
The following table summarizes total income tax expense (benefit) recognized in each year.
| | | | | | | | | | | | | | | | | | | | |
| | Years Ended December 31, |
| | 2021 | | 2020 | | 2019 |
Current taxes: | | | | | | |
U.S. Federal | | $ | (19) | | | $ | (299) | | | $ | (5,948) | |
State | | (615) | | | 4,599 | | | 1,656 | |
Foreign | | 3,014 | | | 2,250 | | | 2,247 | |
Total current tax expense (benefit) | | 2,380 | | | 6,550 | | | (2,045) | |
Deferred taxes: | | | | | | |
U.S. Federal | | $ | (8,421) | | | $ | (10,368) | | | $ | (1,430) | |
State | | (1,099) | | | (5,368) | | | 3,850 | |
Foreign | | (154) | | | (1,852) | | | 522 | |
U.S. federal and foreign valuation allowance | | 5,538 | | | 2,066 | | | (592) | |
Total deferred tax expense (benefit) | | (4,136) | | | (15,522) | | | 2,350 | |
Total income tax expense (benefit) | | $ | (1,756) | | | $ | (8,972) | | | $ | 305 | |
The following table presents a reconciliation of income taxes based on the U.S. federal statutory income tax rate.
| | | | | | | | | | | | | | | | | | | | |
| | Years Ended December 31, |
| | 2021 | | 2020 | | 2019 |
U.S federal statutory income tax rate | | 21.0 | % | | 21.0 | % | | 21.0 | % |
Change in valuation allowance, exclusive of state | | (20.0) | % | | (1.3) | % | | 1.8 | % |
| | | | | | |
State taxes, net of federal taxes, exclusive of tax reform | | 4.5 | % | | 0.2 | % | | (13.6) | % |
Non-U.S. earnings taxed at different rates | | 3.0 | % | | 1.4 | % | | 3.0 | % |
| | | | | | |
GILTI | | (6.0) | % | | (0.1) | % | | — | % |
Goodwill impairment | | — | % | | (12.7) | % | | — | % |
Nondeductible asset loss | | — | % | | — | % | | (2.2) | % |
| | | | | | |
Research and development tax credit | | 2.3 | % | | 0.4 | % | | 2.2 | % |
Change in uncertain tax positions | | 0.7 | % | | 2.2 | % | | 4.3 | % |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
Impact of 2019 Treasury regulations | | — | % | | — | % | | (18.4) | % |
| | | | | | |
CARES Act | | — | % | | 2.7 | % | | — | % |
| | | | | | |
| | | | | | |
Return to provision | | 0.8 | % | | (0.5) | % | | (0.2) | % |
| | | | | | |
Taxes on unremitted foreign earnings | | 2.0 | % | | (3.9) | % | | (2.2) | % |
Restructuring gain | | — | % | | (2.6) | % | | — | % |
| | | | | | |
| | | | | | |
Intercompany lending | | (5.3) | % | | — | % | | — | % |
Warrant revaluation | | 6.5 | % | | — | % | | — | % |
Other adjustments, net | | (1.7) | % | | (0.9) | % | | 3.3 | % |
Effective tax rate | | 7.8 | % | | 5.9 | % | | (1.0) | % |
Our effective tax rate for continuing operations was 7.8% for 2021. The 2021 effective tax rate for continuing operations differs from the U.S. federal statutory tax rate of 21% primarily due to the impact of our valuation allowance change during the year.
Our effective tax rate for continuing operations was 5.9% for 2020. The 2020 effective tax rate for continuing operations differs from the U.S. federal statutory tax rate of 21% primarily due to (1) the impact of the impairment of nondeductible goodwill which is treated as a permanent difference and (2) the accrual of taxes on unremitted earnings of foreign subsidiaries which may be repatriated.
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was enacted. Among other provisions, the CARES Act allows for the carryback of certain tax losses and favorably impacts the deductibility of interest expense and depreciation. The CARES Act had a material impact on our consolidated financial statements, primarily due to a higher enacted federal rate in the carryback periods, and has been accounted for in the benefit for income taxes for the year ended December 31, 2020.
On October 6, 2020, we sold our Life Sciences business via a sale of our equity interest in Precision Engineered Products Holdings, Inc., a wholly owned U.S. domestic subsidiary. Prior to the sale, we completed tax restructuring in which Precision Engineered Products Holdings, Inc., distributed to NN, Inc., all of its asset and equity holdings related to the Power Solutions segment. The restructuring process created a deferred gain, required to be realized upon the third party equity sale, equal to the fair market value of the distributed assets over tax basis. The associated U.S. federal, state, and foreign tax impacts are reflected in the tables within this footnote.
Our effective tax rate for continuing operations was (1.0)% for 2019. The 2019 effective tax rate for continuing operations differs from the U.S. federal statutory tax rate of 21% principally due to a discrete tax charge of $6.0 million related to final tax regulations published by the Department of the Treasury and Internal Revenue Service on February 4, 2019. The tax rate was also impacted by valuation of its state tax attributes.
The following table summarizes the principal components of the deferred tax assets and liabilities.
| | | | | | | | | | | | | | |
| | As of December 31, |
| | 2021 | | 2020 |
Deferred income tax liabilities: | | | | |
Tax in excess of book depreciation | | $ | 25,732 | | | $ | 27,459 | |
| | | | |
Intangible assets | | 20,812 | | | 23,695 | |
| | | | |
| | | | |
Operating leases | | 10,473 | | | 11,149 | |
Interest rate swap | | 37 | | | — | |
Taxes on unremitted foreign earnings | | 5,630 | | | 6,601 | |
Other deferred tax liabilities | | 1,007 | | | 533 | |
Total deferred income tax liabilities | | 63,691 | | | 69,437 | |
Deferred income tax assets: | | | | |
Interest expense limitation | | 7,141 | | | 3,811 | |
Goodwill | | 24,262 | | | 25,653 | |
Inventories | | 3,368 | | | 3,224 | |
Interest rate swap | | — | | | 3,611 | |
Pension and personnel accruals | | 2,422 | | | 2,909 | |
Operating leases | | 12,834 | | | 13,209 | |
Net operating loss carryforwards | | 23,629 | | | 18,659 | |
Unrealized losses | | 2,143 | | | 1,529 | |
| | | | |
Credit carryforwards | | 3,044 | | | 3,574 | |
Accruals and reserves | | 1,435 | | | 2,399 | |
Other deferred tax assets | | 2,080 | | | 1,362 | |
Deferred income tax assets before valuation allowance | | 82,358 | | | 79,940 | |
Valuation allowance on deferred tax assets | | (25,809) | | | (21,681) | |
Total deferred income tax assets | | 56,549 | | | 58,259 | |
Net deferred income tax liabilities | | $ | 7,142 | | | $ | 11,178 | |
As of December 31, 2021, we had a $26.4 million U.S. federal net operating loss (“NOL”) carryover. The federal NOL has an indefinite life, but utilization within any tax year is limited to 80% of taxable income. Therefore, a valuation allowance of $1.3 million has been established to reduce the attribute balance to the amount expected to be utilized. As of December 31, 2021, we had $251.5 million of state NOL carryovers, which begin to expire in 2030. Management believes that certain of the state NOL carryovers will more likely than not expire prior to utilization. As such, a valuation allowance of $13.1 million (net of federal benefit) has been established to reduce the state attribute balance to the amount expected to be utilized before expiration. We also have $5.0 million, tax-effected, of foreign NOL carryovers at December 31, 2021. The foreign NOLs have an indefinite life; however, management believes that benefit for certain of the foreign NOLs may not be realized. Therefore, we have established a valuation allowance of $2.3 million to reduce the carrying value of the asset related to foreign NOLs to the amount that has been determined to be more likely than not realized.
We have $0.2 million and $2.8 million of U.S. federal tax credits and tax credits in foreign jurisdictions, respectively, as of December 31, 2021. We have recognized a valuation allowance of $2.1 million for the foreign tax credits. In addition, we have $1.0 million of state deferred tax assets for which we believe recognition is not appropriate.
We have a U.S. federal and state deferred tax asset related to currency losses on intercompany loans and interest expense carryforwards. Management believes it is more likely than not that the benefit for these assets will not be realized based on timing of expected repayment of the intercompany loans. We have established a valuation allowance of $2.1 million and $4.0 million, respectively, to eliminate the carrying value of these assets.
Management assesses available positive and negative evidence to estimate whether it is more likely than not sufficient future taxable income will be generated to provide use of the existing deferred tax assets. A significant piece of objective negative evidence evaluated is cumulative losses incurred over the three-year period ended December 31, 2021. Such objective evidence limits the ability to consider other subjective evidence, such as our projections for future earnings growth. On the basis of this evaluation, as of December 31, 2021, a valuation allowance of $25.8 million has been recorded to recognize only the portion of the deferred tax asset that is more likely than not to be realized without consideration of future earnings growth.
Management believes all remaining tax assets will more likely than not be realized. However, the amount of the deferred tax asset realized will change based on future conditions, and the amount considered realizable will be adjusted if objective negative evidence in the form of cumulative losses is no longer present allowing additional weight to be given to subjective evidence such as our projections for growth.
During 2021, the valuation allowance increased by $4.1 million, primarily due to allowances recorded against U.S. federal net operating loss carryforwards and carryforwards of disallowed interest expense which are subject to certain annual deduction limitations. The increase was partially offset by utilization of previously reserved net operating loss carryforwards in certain foreign jurisdictions.
As a result of the deemed mandatory repatriation provisions in the U.S. Tax Cuts and Jobs Act of 2017 and subsequent recognition in income of GILTI, we do not have material basis differences related to cumulative unremitted earnings for U.S. income tax purposes. However, we continue to evaluate quarterly the impact that repatriation of foreign earnings would have on withholding and other taxes. As of December 31, 2021, we have recorded a liability of $5.6 million for the anticipated withholding taxes that would be due upon repatriation of the unremitted earnings of those subsidiaries for which management does not intend to permanently reinvest all earnings.
In 2021, the Company asserted that it was permanently reinvested in certain jurisdictions for which it previously was unable to assert permanent reinvestment. Prior to the Company’s debt refinancing in 2021, the Company had recorded a liability on all unremitted earnings. However, upon completion of the debt refinancing, the Company reevaluated repatriation plans, changed its assertion for certain jurisdictions and recorded the resulting tax benefit of $2.4 million.
We are subject to U.S. federal income tax as well as tax in several foreign jurisdictions. We are also subject to tax by various state authorities. The tax years subject to examination vary by jurisdiction. We are no longer subject to U.S. federal examination for periods before 2017. We regularly assess the outcomes of both ongoing and future examinations for the current or prior years to ensure our provision for income taxes is sufficient. We recognize liabilities based on estimates of whether additional taxes will be due, and we believe our reserves are adequate in relation to any potential assessments. The outcome of any one examination, some of which may conclude during the next twelve months, is not expected to have a material impact on our financial position or results of operations.
Interest and penalties related to federal, state, and foreign income tax matters are recorded as a component of the provision for income taxes in our Consolidated Statements of Operations and Comprehensive Income (Loss). Accrued interest and penalties of $0.5 million, $0.6 million, and $1.5 million are included in other non-current liabilities as of December 31, 2021, 2020, and 2019, respectively.
The following table presents a reconciliation of the beginning and ending amounts of unrecognized tax benefits, excluding interest and penalties.
| | | | | | | | | | | | | | | | | | | | |
| | Years Ended December 31, |
| | 2021 | | 2020 | | 2019 |
Balance at beginning of year | | $ | 247 | | | $ | 2,589 | | | $ | 4,609 | |
Additions for tax positions of prior years | | — | | | 121 | | | — | |
Settlements for tax positions of prior years | | — | | | — | | | (275) | |
Reductions for tax positions of prior years | | (122) | | | (2,463) | | | (1,745) | |
Balance at end of year | | $ | 125 | | | $ | 247 | | | $ | 2,589 | |
The reduction to unrecognized tax benefits in 2021 is related to the remeasurement of previously unrecognized tax benefits. As of December 31, 2021, the unrecognized tax benefits would, if recognized, impact our effective tax rate by $0.7 million, inclusive of the impact of interest and penalties. Management believes that it is reasonably possible that the amount of unrecognized income tax benefits, including interest and penalties, may not decrease during the next twelve months as no statutes are expected to lapse within the period.
We operate under tax holidays in other countries, which are effective through December 31, 2026, and may be extended if certain additional requirements are satisfied. The tax holidays are conditional upon our meeting certain employment and investment thresholds. The impact of these tax holidays decreased foreign taxes by $0.2 million and $0.2 million for 2021 and 2020, respectively. The tax holidays had no impact on our 2019 foreign taxes.
Note 11. 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 outstanding debt balances as of December 31, 2021 and 2020.
| | | | | | | | | | | | | | |
| | As of December 31, |
| | 2021 | | 2020 |
Term Loan Facility | | $ | 148,875 | | | $ | — | |
Senior Secured Term Loan | | — | | | 47,728 | |
Incremental Term Loan | | — | | | 22,716 | |
| | | | |
International lines of credit and other loans | | 10,930 | | | 14,418 | |
Total principal | | 159,805 | | | 84,862 | |
Less-current maturities of long-term debt | | 3,074 | | | 4,885 | |
Principal, net of current portion | | 156,731 | | | 79,977 | |
Less-unamortized debt issuance costs and discount (1) | | 5,679 | | | 952 | |
Long-term debt, net of current portion | | $ | 151,052 | | | $ | 79,025 | |
_______________________________
(1) In addition to this amount, costs of $0.7 million related to the ABL Facility were recorded in other non-current assets as of December 31, 2021, and $1.8 million related to the Senior Secured Revolver are recorded in other non-current assets as of December 31, 2020.
We capitalized interest costs of $0.3 million, $0.2 million, and $1.5 million in the years ended December 31, 2021, 2020, and 2019, 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 December 31, 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 December 31, 2021. On March 3, 2022, we amended our Term Loan Facility, which increases the quarterly maximum consolidated net leverage ratio beginning with the first quarter of 2022 (see Note 20).
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 December 31, 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 1.875% fee on the amount of letters of credit outstanding. The final maturity date of the ABL Facility is March 22, 2026.
As of December 31, 2021, we had no outstanding borrowings under the ABL Facility, $11.2 million of outstanding letters of credit, and $36.0 million available for future borrowings under the ABL Facility. 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 December 31, 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 year ended December 31, 2021, in connection with the termination of our previous credit facility.
Interest Rate Swaps
On July 22, 2021, we entered into a fixed-rate interest rate swap agreement to change the LIBOR-based component of the interest rate on a portion of the Term Loan Facility 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.
A portion of the proceeds from the Term Loan Facility was used to settle and terminate our previous fixed-rate interest rate swap agreement with a cash payment of $13.7 million during the first quarter of 2021. Refer to Note 19 for further discussion of the interest rate swap agreements.
Future Maturities
The following table lists aggregate maturities of long-term debt for the next five years and thereafter.
| | | | | | | | |
Years Ending December 31, | | Aggregate Maturities Principal Amounts |
2022 | | $ | 3,074 | |
2023 | | 3,405 | |
2024 | | 3,249 | |
2025 | | 3,289 | |
2026 | | 146,788 | |
Thereafter | | — | |
Total outstanding principal | | $ | 159,805 | |
Note 12. Leases
We adopted ASC 842 on January 1, 2019, and elected the modified retrospective approach in which the new standard is applied to all leases existing at the date of adoption through a cumulative-effect adjustment of $0.1 million to accumulated deficit. As part of the adoption, we elected the package of practical expedients, the short-term lease exemption, and the practical expedient to not separate lease and non-lease components. Accordingly, we accounted for our existing operating leases as operating leases under the new standard, without reassessing (a) whether the contracts contain a lease under ASC 842, (b) whether
classification of the operating leases would be different in accordance with ASC 842, or (c) whether any unamortized initial direct costs would have met the definition of initial direct costs in ASC 842 at lease commencement.
We determine whether an arrangement is a lease at inception. Right-of-use (“ROU”) lease assets represent our right to use an underlying asset for the lease term, and lease liabilities represent our obligation to make lease payments arising from the lease. ROU lease assets and liabilities are recognized at the lease commencement date based on the present value of lease payments over the lease term. When the implicit rate is not readily determinable, we use the estimated incremental borrowing rate based on the information available at the lease commencement date in determining the present value of lease payments. The lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Amortization of ROU lease assets is recognized in expense on a straight-line basis over the lease term.
Short-term leases are leases having a term of twelve months or less. We recognize short-term leases on a straight-line basis and do not record a related lease asset or liability for such leases. Finance lease ROU assets consist primarily of equipment used in the manufacturing process with terms three years to eight years. Operating lease ROU assets consist of the following:
•Equipment used in the manufacturing process as well as office equipment with terms two years to five years; and
•Manufacturing plants and office facilities with terms three years to 20 years.
The following table presents components of lease expense:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Years Ended December 31, |
| | Financial Statement Line Item | | 2021 | | 2020 | | 2019 |
Finance lease cost: | | | | | | | | |
Amortization of right-of-use assets | | Depreciation and amortization | | $ | 1,451 | | | $ | 1,272 | | | $ | 1,229 | |
Interest expense | | Interest expense | | 213 | | | 192 | | | 226 | |
Operating lease cost | | Cost of sales and selling, general, and administrative expense | | 8,014 | | | 8,396 | | | 9,108 | |
Short-term lease cost (1) | | Cost of sales and selling, general, and administrative expense | | 655 | | | 591 | | | 479 | |
Variable lease cost (2) | | Cost of sales and selling, general, and administrative expense | | 1 | | | 1 | | | 1 | |
Total lease cost | | | | $ | 10,334 | | | $ | 10,452 | | | $ | 11,043 | |
_______________________________
(1) Excludes expenses related to leases with a lease term of one month or less.
(2) Represents changes to index-based lease payments.
The following table presents lease-related assets and liabilities recorded on the balance sheet.
| | | | | | | | | | | | | | | | | | | | |
| | | | As of December 31, |
| | Financial Statement Line Item | | 2021 | | 2020 |
Assets: | | | | | | |
Operating lease assets | | Operating lease right-of-use assets | | $ | 46,443 | | | $ | 50,264 | |
Finance lease assets | | Property, plant and equipment, net | | 13,641 | | | 14,644 | |
Total lease assets | | | | $ | 60,084 | | | $ | 64,908 | |
| | | | | | |
Liabilities: | | | | | | |
Current liabilities: | | | | | | |
Operating lease liabilities | | Current portion of operating lease liabilities | | $ | 5,704 | | | $ | 4,797 | |
Finance lease liabilities | | Other current liabilities | | 3,111 | | | 4,252 | |
Non-current liabilities: | | | | | | |
Operating lease liabilities | | Operating lease liabilities, net of current portion | | 51,295 | | | 55,053 | |
Finance lease liabilities | | Other non-current liabilities | | 5,446 | | | 6,858 | |
Total lease liabilities | | | | $ | 65,556 | | | $ | 70,960 | |
The following table contains supplemental cash flow information related to leases of continuing operations.
| | | | | | | | | | | | | | | | | | | | |
| | Years Ended December 31, |
| | 2021 | | 2020 | | 2019 |
Cash paid for amounts included in the measurement of lease liabilities: | | | | | | |
Operating cash flows used in finance leases | | $ | 213 | | | $ | 192 | | | $ | 226 | |
Operating cash flows used in operating leases | | 13,434 | | | 13,498 | | | 14,090 | |
Financing cash flows used in finance leases | | 4,836 | | | 2,018 | | | 3,156 | |
Right-of-use assets obtained in exchange for new finance lease liabilities | | $ | 2,814 | | | $ | 728 | | | $ | 5,250 | |
Right-of-use assets obtained in exchange for new operating lease liabilities (1) | | — | | | 8,682 | | | 8,457 | |
_______________________________
(1) Includes new leases, renewals, and modifications.
As of December 31, 2021, the weighted average remaining lease term and weighted-average discount rate for finance and operating leases of continuing operations were as follows:
| | | | | | | | | | | | | | | | | | | | |
| | Years Ended December 31, |
| | 2021 | | 2020 | | 2019 |
Weighted-average remaining lease term - finance leases | | 3.3 years | | 3.2 years | | 4.0 years |
Weighted-average remaining lease term - operating leases | | 11.1 years | | 11.7 years | | 11.0 years |
Weighted-average discount rate - finance leases | | 3.0 | % | | 2.2 | % | | 2.2 | % |
Weighted-average discount rate - operating leases | | 7.0 | % | | 7.0 | % | | 5.7 | % |
The maturities of lease liabilities as of December 31, 2021, is as follows:
| | | | | | | | | | | | | | |
| | Operating Leases | | Finance Leases |
2022 | | $ | 9,384 | | | $ | 3,330 | |
2023 | | 7,396 | | | 2,675 | |
2024 | | 7,300 | | | 1,517 | |
2025 | | 7,218 | | | 666 | |
2026 | | 7,144 | | | 595 | |
Thereafter | | 42,964 | | | 281 | |
Total future minimum lease payments | | 81,406 | | | 9,064 | |
Less: imputed interest | | 24,407 | | | 507 | |
Total lease liabilities | | $ | 56,999 | | | $ | 8,557 | |
In March 2020, we amended the lease of our corporate headquarters building 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 Consolidated Statements of Operations and Comprehensive Income (Loss) for the year ended December 31, 2020. 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” for the year ended December 31, 2020.
During the second quarter of 2020 and as part of our overall plan to improve liquidity during the COVID-19 pandemic, we negotiated with certain lessors to defer rent payments on leased buildings. In total, $0.5 million of operating lease payments for continuing operations were deferred over a period ranging from April 2020 to December 2020 and are being repaid over a period ranging from June 2020 through December 2022. The deferral of rent payments did not result in a substantial change in total lease payments over the individual lease terms. We elected to apply lease accounting relief announced by the FASB in April 2020 and treated these lease concessions as if they existed in the original contracts rather than applying lease modification accounting. The net impact on cash flows from operating activities on the Consolidated Statements of Cash Flows for the years ended December 31, 2021 and 2020, was $(0.2) million and $0.7 million, respectively.
Note 13. 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 December 31, 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, the 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 14. 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 19 discusses the accounting for these features.
As of December 31, 2021, the carrying value of the Series D Preferred Stock shares was $53.8 million, which included $7.1 million of accumulated unpaid and deemed dividends. The following table presents the change in the Series D Preferred Stock carrying value during the year ended December 31, 2021.
| | | | | | | | | |
| Year Ended December 31, |
| 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 | 6,222 | | | | | |
Amortization | 913 | | | | | |
| | | | | |
Ending balance | $ | 53,807 | | | | | |
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 years ended December 31, 2021, 2020 and 2019.
| | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
| 2021 | | 2020 | | 2019 |
Beginning balance | $ | 105,086 | | | $ | 93,012 | | | $ | — | |
Gross proceeds from issuance of shares | — | | | — | | | 100,000 | |
Relative fair value of Warrants issued | — | | | — | | | (1,076) | |
Recognition of bifurcated embedded derivative | — | | | — | | | (2,295) | |
Allocation of issuance costs to Preferred Stock | — | | | — | | | (4,259) | |
Accrual of in-kind dividends | 14,008 | | | 11,121 | | | 590 | |
Amortization | 335 | | | 953 | | | 52 | |
Redemption | (119,429) | | | — | | | — | |
Ending balance | $ | — | | | $ | 105,086 | | | $ | 93,012 | |
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 15. 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.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, 2021 |
| | Mobile Solutions | | Power Solutions | | Intersegment Sales Eliminations | | Total |
United States and Puerto Rico | | $ | 140,383 | | | $ | 152,931 | | | $ | (79) | | | $ | 293,235 | |
China | | 52,227 | | | 4,745 | | | — | | | 56,972 | |
Brazil | | 34,644 | | | 811 | | | — | | | 35,455 | |
Mexico | | 19,520 | | | 16,177 | | | — | | | 35,697 | |
Germany | | 5,230 | | | 546 | | | — | | | 5,776 | |
Poland | | 3,743 | | | 18 | | | — | | | 3,761 | |
Other | | 30,116 | | | 16,572 | | | — | | | 46,688 | |
Total net sales | | $ | 285,863 | | | $ | 191,800 | | | $ | (79) | | | $ | 477,584 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, 2020 |
| | Mobile Solutions | | Power Solutions | | Intersegment Sales Eliminations | | Total |
United States and Puerto Rico | | $ | 129,147 | | | $ | 139,499 | | | $ | (95) | | | $ | 268,551 | |
China | | 46,442 | | | 5,563 | | | — | | | 52,005 | |
Brazil | | 27,055 | | | 689 | | | — | | | 27,744 | |
Mexico | | 16,465 | | | 13,400 | | | — | | | 29,865 | |
Germany | | 5,846 | | | 378 | | | — | | | 6,224 | |
Poland | | 4,913 | | | 14 | | | — | | | 4,927 | |
Other | | 26,492 | | | 11,726 | | | — | | | 38,218 | |
Total net sales | | $ | 256,360 | | | $ | 171,269 | | | $ | (95) | | | $ | 427,534 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, 2019 |
| | Mobile Solutions | | Power Solutions | | Intersegment Sales Eliminations | | Total |
United States and Puerto Rico | | $ | 162,445 | | | $ | 156,945 | | | $ | (335) | | | $ | 319,055 | |
China | | 38,793 | | | 6,722 | | | — | | | 45,515 | |
Brazil | | 36,058 | | | 300 | | | — | | | 36,358 | |
Mexico | | 18,815 | | | 13,489 | | | — | | | 32,304 | |
Germany | | 6,372 | | | 65 | | | — | | | 6,437 | |
Poland | | 6,363 | | | 15 | | | — | | | 6,378 | |
Other | | 28,903 | | | 14,564 | | | — | | | 43,467 | |
Total net sales | | $ | 297,749 | | | $ | 192,100 | | | $ | (335) | | | $ | 489,514 | |
The following tables summarize revenue by customer industry for the years ended December 31, 2021 and 2020. Comparable sales data by customer industry is not available prior to 2020. Our products in the automotive industry include high-precision components and assemblies for electric power steering systems, electric braking, electric motors, fuel systems, emissions control, 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 diesel industrial motors, 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 components used in smart meters, charging stations, circuit breakers, transformers, electrical contact assemblies, precision stampings, welded contact assemblies, and specification plating and surface finishing.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, 2021 |
| | Mobile Solutions | | Power Solutions | | Intersegment Sales Eliminations | | Total |
Automotive | | $ | 182,094 | | | $ | 38,779 | | | $ | — | | | $ | 220,873 | |
General Industrial | | 90,290 | | | 60,312 | | | — | | | 150,602 | |
Residential/Commercial Electrical | | — | | | 61,748 | | | — | | | 61,748 | |
Other | | 13,479 | | | 30,961 | | | (79) | | | 44,361 | |
Total net sales | | $ | 285,863 | | | $ | 191,800 | | | $ | (79) | | | $ | 477,584 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, 2020 |
| | Mobile Solutions | | Power Solutions | | Intersegment Sales Eliminations | | Total |
Automotive | | $ | 170,389 | | | $ | 31,422 | | | $ | — | | | $ | 201,811 | |
General Industrial | | 75,610 | | | 52,714 | | | — | | | 128,324 | |
Residential/Commercial Electrical | | — | | | 58,143 | | | — | | | 58,143 | |
Other | | 10,361 | | | 28,990 | | | (95) | | | 39,256 | |
Total net sales | | $ | 256,360 | | | $ | 171,269 | | | $ | (95) | | | $ | 427,534 | |
Product Sales
We generally transfer control and recognize a sale when we ship the product from our manufacturing facility to our customer, at a point in time, as this is when our customer obtains the ability to direct use of, and obtain substantially all of the remaining benefits from, the goods. We have elected to recognize the cost for freight and shipping when control over products has transferred to the customer as a component of cost of sales.
We use an observable price to determine the stand-alone selling price for separate performance obligations or a cost-plus-margin approach when an observable price is not available. The expected duration of our contracts is one year or less, and we have elected to apply the practical expedient that allows entities to disregard the effects of financing when the contract length is less than one year. The amount of consideration we receive and the revenue we recognize varies with volume rebates and incentives we offer to our customers. We estimate the amount of variable consideration that should be included in the
transaction price utilizing the expected value method or the most likely amount method depending on the nature of the variable consideration. Variable consideration is included in the transaction price if, in our judgment, it is probable that a significant future reversal of cumulative revenue under the contract will not occur.
We utilize the portfolio approach practical expedient to evaluate sales-related discounts on a portfolio basis to contracts with similar characteristics. The effect on our consolidated financial statements of applying the portfolio approach would not differ materially from evaluation of individual contracts.
We give our customers the right to return only defective products in exchange for functioning products or rework of the product. These transactions are evaluated and accounted for under ASC Topic 460, Guarantees, and we estimate the impact to the transaction price based on an analysis of historical experience.
Other Sources of Revenue
We provide pre-production activities related to engineering efforts to develop molds, dies, and machines that are owned by our customers. We may receive advance payments from customers which are deferred until satisfying our performance obligations by compliance with customer-specified milestones, recognizing revenue at a point in time. These contracts generally have an original expected duration of less than one year.
The following table provides information about contract liabilities from contracts with customers.
| | | | | | | | |
| | Deferred Revenue |
Balance at December 31, 2020 | | $ | 766 | |
Balance at December 31, 2021 | | $ | 489 | |
The timing of revenue recognition, billings, and cash collections results in billed accounts receivable and customer advances and deposits (e.g. contract liability) on the Consolidated Balance Sheets. These contract liabilities are reported on the Consolidated Balance Sheets on a contract-by-contract basis at the end of each reporting period as deferred revenue. Deferred revenue relates to payments received in advance of performance under the contract and recognized as revenue as (or when) we perform under the contract. Changes in the contract liability balances during the year ended December 31, 2021, were not materially impacted by any other factors. Revenue recognized for the year ended December 31, 2021, from amounts included in deferred revenue at the beginning of the period for performance obligations satisfied or partially satisfied during the period was $0.8 million. Deferred revenue is reported in the “Other current liabilities” line on the Consolidated Balance Sheets.
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 December 31, 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.
Costs to Obtain and Fulfill a Contract
We recognize commissions paid to internal sales personnel that are incremental to obtaining customer contracts as an expense when incurred since the amortization period is less than one year. Costs to obtain a contract are expensed as selling, general and administrative expense.
Sales, VAT, and other taxes we collect concurrent with revenue-producing activities are excluded from revenue. Incidental items that are immaterial in the context of the contract are recognized as expense.
Sales Concentration
We recognized sales from a single customer of $49.7 million, or 10% of consolidated net sales, during the year ended December 31, 2019. Revenues from this customer are in our Mobile Solutions segment and were less than 10% of consolidated net sales during the years ended December 31, 2021 and 2020.
Note 16. Share-Based Compensation
We recognize compensation expense of all employee and non-employee director share-based compensation awards in the consolidated financial statements based upon the grant-date fair value of the awards over the requisite service or vesting period, less any expense incurred for estimated forfeitures. As of December 31, 2021, we have 2.2 million maximum shares available
that can be issued as options, stock appreciation rights, and other share-based awards. Shares of our common stock delivered upon exercise or vesting may consist of newly issued shares of our common stock or shares acquired in the open market.
Share-based compensation expense is recognized in the “Selling, general, and administrative expense” line in the Consolidated Statements of Operations and Comprehensive Income (Loss) except for $0.8 million and $0.4 million attributable to discontinued operations for the years ended December 31, 2020, and 2019, respectively. The following table lists the components of share-based compensation expense by type of award.
| | | | | | | | | | | | | | | | | | | | |
| | Years Ended December 31, |
| | 2021 | | 2020 | | 2019 |
Stock options | | $ | 253 | | | $ | 741 | | | $ | 881 | |
Restricted stock | | 2,166 | | | 3,473 | | | 1,897 | |
Performance share units | | 1,420 | | | 755 | | | 1,155 | |
Change in estimate of share-based award vesting (1) | | (623) | | | (743) | | | (1,111) | |
Share-based compensation expense | | $ | 3,216 | | | $ | 4,226 | | | $ | 2,822 | |
_______________________________
(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.
Unrecognized compensation cost related to unvested awards was $3.8 million as of December 31, 2021. We expect that cost to be recognized over a weighted-average period of 1.7 years.
Stock Options
Option awards were typically granted to key employees on an annual basis by the Compensation Committee of the Board of Directors. All options have an exercise price equal to the closing price of our stock on the date of grant. The term life of options is generally ten years with a vesting period of generally three years.
During the years ended 2020 and 2019, we granted options to purchase 159 thousand, and 210 thousand shares, respectively, to certain key employees. The weighted average grant-date fair value of the options granted during 2020 and 2019 was $4.76, and $2.77 per share, respectively. No options were granted in 2021. The fair value of our options cannot be determined by market value because they are not traded in an open market. Accordingly, we utilized the Black Scholes financial pricing model to estimate the fair value.
The following table shows the weighted average assumptions relevant to determining the fair value of stock options granted in each year.
| | | | | | | | | | | | | | | | |
| | | | 2020 | | 2019 |
Expected term | | | | 6 years | | 6 years |
Average risk-free interest rate | | | | 1.42 | % | | 2.47 | % |
Expected dividend yield | | | | — | % | | 3.53 | % |
Expected volatility | | | | 52.80 | % | | 49.53 | % |
Expected forfeiture rate | | | | — | % | | 4.00 | % |
The expected term is derived from using the simplified method of determining stock option terms as described under the SAB Topic 14, Share-based payment. The simplified method was used because sufficient historical stock option exercise experience was not available, primarily due to the transformation of the management structure over the past several years.
The average risk-free interest rate is derived from United States Department of Treasury published interest rates of daily yield curves for the same time period as the expected term.
The expected dividend yield is derived by a mathematical formula which uses the expected annual dividends over the expected term divided by the fair market value of our common stock at the grant date. The expected dividend yield for 2020 grants reflects no expected annual dividends over the expected term because we discontinued dividends in 2019.
The expected volatility rate is derived from our actual common stock historical volatility over the same time period as the expected term. The expected volatility rate is derived by a mathematical formula utilizing daily closing price data.
The expected forfeiture rate is determined from examining the historical pre-vesting forfeiture patterns of past option issuances to key employees. While the expected forfeiture rate is not an input of the Black Scholes financial pricing model for determining the fair value of the options, it is an important determinant of stock option compensation expense to be recorded.
The following table presents stock option activity for the year ended December 31, 2021.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Number of Options (in thousands) | | Weighted- Average Exercise Price (per share) | | Weighted- Average Remaining Contractual Term (years) | | Aggregate Intrinsic Value | | |
Outstanding at January 1, 2021 | | 871 | | | $ | 12.41 | | | | | | | |
| | | | | | | | | | |
Exercised | | (6) | | | 7.93 | | | | | $ | 8 | | | |
Forfeited | | (22) | | | 9.29 | | | | | | | |
Expired | | (222) | | | 13.31 | | | | | | | |
Outstanding at December 31, 2021 | | 621 | | | $ | 12.24 | | | 3.8 years | | $ | — | | | (1) |
Exercisable at December 31, 2021 | | 532 | | | $ | 12.80 | | | 3.2 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 December 31, 2021, was greater than the exercise price of any individual option grant.
Restricted Stock
During the years ended December 31, 2021, 2020, and 2019, we granted 459 thousand, 460 thousand, and 339 thousand shares of restricted stock to non-executive directors, officers, and certain other key employees. The shares of restricted stock granted during the years ended December 31, 2021, 2020, and 2019, vest pro-rata generally over three years for officers and certain other key employees and over one year for non-executive directors and certain key employees. 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 years ended December 31, 2021, 2020, and 2019, was $6.84, $9.35, and $7.74 per share, respectively. The total grant-date fair value of restricted stock that vested in the years ended December 31, 2021, 2020, and 2019, was $2.8 million, $1.9 million, and $2.9 million, respectively.
The following table presents the status of unvested restricted stock awards as of December 31, 2021, and changes during the year 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 | | (72) | | | 7.22 | |
Unvested at December 31, 2021 | | 469 | | | $ | 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 and 2020 were made pursuant to the NN, Inc. 2019 Omnibus Incentive Plan and a Performance Share Unit Agreement (the “2019 Omnibus Agreement”). PSUs granted in 2019 were made pursuant to the NN, Inc. 2016 Omnibus Incentive Plan and a Performance Share Unit Agreement (the “2016 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 and the 2016 Omnibus Agreement. The ROIC Awards will 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 the number of shares of common stock that are ultimately earned at the end of the performance periods.
With respect to the TSR 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.” With respect to the ROIC Awards, a participant will earn 35% or 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 tables present the goals with respect to TSR Awards and ROIC Awards granted in 2021, 2020, and 2019.
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TSR Awards: | | Threshold Performance (50% of Shares) | | Target Performance (100% of Shares) | | Maximum Performance (150% of Shares) |
2021 grants | | 35 | th Percentile | | 50 | th Percentile | | 75 | th Percentile |
2020 grants | | 35 | th Percentile | | 50 | th Percentile | | 75 | th Percentile |
2019 grants | | 35 | th Percentile | | 50 | th Percentile | | 75 | th Percentile |
| | | | | | | | | | | | | | | | | | | | |
ROIC Awards: | | Threshold Performance (35% or 50% of Shares)(1) | | Target Performance (100% of Shares) | | Maximum Performance (150% of Shares) |
2021 grants | | 6.3 | % | | 7.0 | % | | 8.6 | % |
2020 grants (2) | | 6.7 | % | | 7.9 | % | | 8.7 | % |
2019 grants | | 4.7 | % | | 5.8 | % | | 7.0 | % |
_______________________________
(1)Threshold performance for the 2021 grants and 2020 grants will earn 50% of the target number of PSUs. Threshold performance for the 2019 grants is 35% of the target number of PSUs.
(2)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. Threshold Performance was changed to 6.7% to earn 50% of Shares, Target Performance was changed to 7.9% to earn 100% of Shares, and Maximum Performance was changed to 8.7% to earn 150% of Shares.
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 of each award in the periods presented.
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| | 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 | |
2020 | | 139 | | | $ | 10.88 | | | 157 | | | $ | 9.44 | |
2019 | | 136 | | | $ | 9.28 | | | 174 | | | $ | 7.93 | |
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 December 31, 2021, and changes during the year then ended.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Nonvested TSR Awards | | Nonvested ROIC Awards |
| | Number of Shares (in thousands) | | Weighted Average Grant-Date Fair Value | | Number of Shares (in thousands) | | Weighted Average Grant-Date Fair Value |
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 | |
Expired | | (25) | | | 9.28 | | | (33) | | | 7.93 | |
Nonvested at December 31, 2021 | | 194 | | | $ | 9.59 | | | 228 | | | $ | 8.14 | |
None of the PSUs that were granted in 2017, 2018, and 2019 vested in 2019, 2020, and 2021, respectively, because the actual performance achieved was below the “Threshold Performance” level as defined by the grant agreements.
Change in Vesting Estimates
During the year ended December 31, 2021, we recognized a decrease in share-based compensation expense of $0.6 million in the “Selling, general, and administrative expense” line in the 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 in excess of our estimated forfeiture rate and for ROIC Awards that were granted in 2020 and are now expected to achieve threshold performance rather than the target performance level.
During the year ended December 31, 2020, we recognized a decrease in share-based compensation expense in continuing operations of $0.3 million in the “Selling, general, and administrative expense” line of the Consolidated Statements of Operations and Comprehensive Income (Loss) to reverse cumulative expense for option, restricted stock, and PSU awards that were forfeited upon termination of employment and for ROIC Awards that were granted in 2019 and are not expected to achieve Threshold Performance. In 2020 we also recognized a decrease in share-based compensation expense of $0.5 million in the “Income (loss) from discontinued operations, net of tax” line in the Consolidated Statements of Operations and Comprehensive Income (Loss) to reverse cumulative expense for option, restricted stock, and PSU awards that were forfeited upon termination of employees related to the Life Sciences business.
During the year ended December 31, 2019, we recognized a decrease in share-based compensation expense in continuing operations of $1.1 million in the “Selling, general, and administrative expense” line in the Consolidated Statements of Operations and Comprehensive Income (Loss) to reverse cumulative expense for option, restricted stock, and PSU awards that were forfeited upon termination of employment.
Note 17. Accumulated Other Comprehensive Income
The components of accumulated other comprehensive income (loss) (“AOCI”) are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Foreign Currency Translation | | Interest rate swap | | Income taxes (1) | | Total |
Balance at December 31, 2018 | | $ | (31,314) | | | $ | — | | | $ | — | | | $ | (31,314) | |
Other comprehensive income (loss) before reclassifications | | (3,845) | | | (13,645) | | | 3,166 | | | (14,324) | |
Amounts reclassified from AOCI to interest expense (2) | | — | | | 1,411 | | | (327) | | | 1,084 | |
Net other comprehensive income (loss) | | (3,845) | | | (12,234) | | | 2,839 | | | (13,240) | |
Balance at December 31, 2019 | | $ | (35,159) | | | $ | (12,234) | | | $ | 2,839 | | | $ | (44,554) | |
Other comprehensive income (loss) before reclassifications | | (1,683) | | | (16,207) | | | 3,764 | | | (14,126) | |
Amounts reclassified from AOCI to interest expense (2) | | — | | | 8,906 | | | (2,068) | | | 6,838 | |
Amounts reclassified from AOCI to loss on interest rate swap (3) | | — | | | 15,823 | | | (3,674) | | | 12,149 | |
Sale of discontinued operations | | 5,961 | | | — | | | — | | | 5,961 | |
Net current-period other comprehensive income (loss) | | 4,278 | | | 8,522 | | | (1,978) | | | 10,822 | |
Balance at December 31, 2020 | | $ | (30,881) | | | $ | (3,712) | | | $ | 861 | | | $ | (33,732) | |
Other comprehensive income (loss) before reclassifications | | (1,135) | | | 78 | | | (19) | | | (1,076) | |
Amounts reclassified from AOCI to interest expense (2) | | — | | | 73 | | | (18) | | | 55 | |
Amounts reclassified from AOCI to loss on interest rate swap (3) | | — | | | 3,712 | | | (861) | | | 2,851 | |
| | | | | | | | |
Net current-period other comprehensive income (loss) | | (1,135) | | | 3,863 | | | (898) | | | 1,830 | |
Balance at December 31, 2021 | | $ | (32,016) | | | $ | 151 | | | $ | (37) | | | $ | (31,902) | |
_______________________________
(1) Income tax effect of changes in interest rate swap.
(2) Represents interest rate swap settlements of effective hedge.
(3) Represents reclassification of derivative loss and settlements after discontinuation of hedge accounting. See Note 19 for further discussion of the interest rate swap.
Note 18. 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 income (loss) per common share.
| | | | | | | | | | | | | | | | | | | | |
| | Years Ended December 31, |
| | 2021 | | 2020 | | 2019 |
Numerator: | | | | | | |
Loss from continuing operations | | $ | (14,425) | | | $ | (139,490) | | | $ | (30,749) | |
Less: Preferred stock cumulative dividends and deemed dividends | | (21,478) | | | (12,373) | | | (642) | |
| | | | | | |
| | | | | | |
| | | | | | |
Numerator for basic and diluted loss from continuing operations per common share (1) | | (35,903) | | | (151,863) | | | (31,391) | |
Income (loss) from discontinued operations, net of tax (Note 2) | | 1,200 | | | 38,898 | | | (15,992) | |
| | | | | | |
| | | | | | |
| | | | | | |
Numerator for basic and diluted undistributed net loss per common share (1) | | $ | (34,703) | | | $ | (112,965) | | | $ | (47,383) | |
| | | | | | |
Denominator: | | | | | | |
Weighted average common shares outstanding | | 42,991 | | | 42,692 | | | 42,299 | |
Adjustment for unvested restricted common stock | | (461) | | | (493) | | | (269) | |
Adjustment for 2021 Warrants outstanding (2) | | 1,481 | | | — | | | — | |
Shares used to calculate income (loss) per share, basic and diluted | | 44,011 | | | 42,199 | | | 42,030 | |
| | | | | | |
| | | | | | |
| | | | | | |
Per common share net loss: | | | | | | |
Basic loss from continuing operations per common share | | $ | (0.82) | | | $ | (3.60) | | | $ | (0.75) | |
Basic income (loss) from discontinued operations per common share | | 0.03 | | | 0.92 | | | (0.38) | |
Basic net loss per common share | | $ | (0.79) | | | $ | (2.68) | | | $ | (1.13) | |
Diluted loss from continuing operations per common share | | $ | (0.82) | | | $ | (3.60) | | | $ | (0.75) | |
Diluted income (loss) from discontinued operations per common share | | 0.03 | | | 0.92 | | | (0.38) | |
Diluted net loss per common share | | $ | (0.79) | | | $ | (2.68) | | | $ | (1.13) | |
Cash dividends declared per common share | | $ | — | | | $ | — | | | $ | 0.21 | |
_______________________________
(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 19).
The following table presents potentially dilutive securities that were excluded from the calculation of diluted net income (loss) per common share because they had an anti-dilutive effect.
| | | | | | | | | | | | | | | | | | | | |
| | Years Ended December 31, |
| | 2021 | | 2020 | | 2019 |
Options | | 766 | | | 871 | | | 577 | |
2019 Warrants | | 1,500 | | | 1,500 | | | 1,500 | |
Series B Preferred Stock, as-converted | | — | | | 19,021 | | | 12,976 | |
| | 2,266 | | | 21,392 | | | 15,053 | |
We have elected to allocate undistributed income to participating securities based on year-to-date results. As there was no undistributed income for the years ended December 31, 2021, 2020, and 2019, no such allocation was necessary. In addition, given the undistributed loss from continuing operations in the years ended December 31, 2021, 2020, and 2019, all options and the 2019 Warrants are considered anti-dilutive and were excluded from the calculation of diluted net income (loss) per share. 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 year ended December 31, 2021 and 2020, and $8.54 to $25.16 for the year ended December 31, 2019. The 2019 Warrants excluded from the calculation of diluted net income (loss) per share for the year ended December 31, 2021 had a per share exercise price of $11.49, and for the years ended December 31, 2020 and 2019, had a per share exercise price of $12.00. Series B Preferred Stock excluded from the calculation of diluted net income (loss) per share for the years ended December 31, 2020 and 2019, was calculated on an as-converted basis.
Note 19. 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 Note 1.
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 December 31, 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. In conjunction with our placement of the Series B Preferred Stock, we issued detachable warrants to purchase up to 1.5 million shares of our common stock (the “2019 Warrants”), which 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. In conjunction with our placement of the Series D Preferred Stock, we issued detachable warrants to purchase up to 1.9 million shares of our common stock. 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 above as of December 31, 2021, and 2020.
| | | | | | | | | | | | | | | | | | | | |
| | Fair Value Measurements as of December 31, 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 non-current liabilities | | 7,771 | | | — | | | 453 | |
| | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | 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 Preferred Stock derivatives during the years ended December 31, 2021 and 2020.
| | | | | | | | | | | | | | |
| | Years Ended December 31, |
| | 2021 | | 2020 |
Beginning balance | | $ | 3,117 | | | $ | 2,295 | |
Issuances | | 15,121 | | | — | |
Change in fair value (1) | | (7,009) | | | (493) | |
Settlements | | (3,005) | | | — | |
Other (2) | | — | | | 1,315 | |
Ending balance | | $ | 8,224 | | | $ | 3,117 | |
_______________________________
(1) Changes in the fair value are recognized in the “Other expense (income), net” line in the Consolidated Statements of Operations and Comprehensive Income (Loss).
(2) In 2020, we determined that certain anti-dilution provisions of the Warrants require liability accounting; therefore, we reclassified the $1.1 million value of the Warrants recorded in Stockholders’ Equity as of December 31, 2019, to a liability during the year ended December 31, 2020.
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 December 31, 2021.
The leverage ratio put feature and the dividends withholding 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 3.6 years as of December 31, 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 Swaps
We manage our exposure to fluctuations in interest rates using a mix of fixed and variable rate debt. We utilize fixed-rate interest rate swap agreements to change the variable interest rate to a fixed rate on a portion of our variable rate debt.
On July 22, 2021, we entered into a 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 “2021 Swap”). The 2021 Swap has a notional amount of $60.0 million and a maturity date of July 31, 2024. The objective of the 2021 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 2021 Swap as a cash flow hedge at inception. Cash settlements of the 2021 Swap are recognized in interest expense.
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 “2019 Swap”). On March 22, 2021, we terminated the 2019 Swap with a $13.7 million cash payment in connection with the extinguishment of our previously outstanding long-term variable-rate debt. The 2019 Swap was designated as a cash flow hedge at inception. However, in the fourth quarter of 2020, the 2019 Swap no longer qualified as an effective hedge, and subsequent changes in fair value of the 2019 Swap were recognized in earnings. Amounts recognized in earnings related to the 2019 Swap are recorded in the “Loss on interest rate swap” line on the Consolidated Statements of Operations and Comprehensive Income (Loss) except that cash settlements prior to termination are recognized in “Derivative payments on interest rate swap.” Cash settlements during 2021 and the fourth quarter of 2020 are presented in investing activities on the Consolidated Statements of Cash Flows.
The following table presents the effect of the interest rate swaps on the Consolidated Statements of Operations and Comprehensive Income (Loss).
| | | | | | | | | | | | | | | | | | | | |
| | Years Ended December 31, |
| | 2021 | | 2020 | | 2019 |
Interest expense (1) | | $ | 73 | | | $ | 8,906 | | | $ | 1,411 | |
Derivative payments on interest rate swap (2) | | 1,717 | | | 4,133 | | | — | |
Loss on interest rate swap (2) | | 2,033 | | | 11,669 | | | — | |
_______________________________
(1) Represents settlements on the interest rate swaps while the hedges are effective.
(2) Represents settlements and changes in fair value on the 2019 Swap while the hedge was ineffective.
As of December 31, 2021 and 2020, we reported a $0.1 million gain and a $2.9 million loss, respectively, net of tax, in accumulated other comprehensive income related to the interest rate swap.
The following tables present the assets and liabilities measured at fair value on a recurring basis for the interest rate swap as of December 31, 2021 and 2020.
| | | | | | | | | | | | | | | | | | | | |
| | Fair Value Measurements as of December 31, 2021 |
Description | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) |
| | | | | | |
Derivative asset - other non-current assets | | $ | — | | | $ | 284 | | | $ | — | |
Derivative liability - other current liabilities | | — | | | (129) | | | — | |
| | | | | | |
Total | | $ | — | | | $ | 155 | | | $ | — | |
| | | | | | | | | | | | | | | | | | | | |
| | 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.
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 11 to these Notes to Consolidated Financial Statements approximated carrying value as of December 31, 2021 and 2020, respectively. These fair values represent Level 2 under the three-tier hierarchy described above. The carrying value of this fixed-rate debt was $10.9 million and $14.4 million as of December 31, 2021 and 2020, respectively.
Note 20. Subsequent Event
Debt Amendment
On March 3, 2022, we amended the Term Loan Facility to adjust certain covenants under the agreement. The amendment increases the maximum total leverage ratio for all quarters of 2022 and 2023.