Notes to Consolidated Financial Statements
December 31,
2018
,
2017
and
2016
Amounts in thousands of dollars and shares, except per share data
Note 1
. Significant Accounting Policies
Nature of Business
NN, Inc.
is a global diversified industrial company that combines advanced engineering and production capabilities with in-depth materials science expertise to design and manufacture high-precision components and assemblies for the medical, aerospace and defense, electrical, automotive, and general industrial markets. As used in this Annual Report on Form 10-K, the terms “
NN
,” the “Company,” “we,” “our,” or “us” refer to
NN, Inc.
, and its subsidiaries. We have
51
facilities in North America, Europe, South America, and China.
In January 2018, we implemented a new enterprise and management structure designed to accelerate growth and further balance our portfolio by aligning our strategic assets and businesses. Our businesses were reorganized into the Mobile Solutions, Power Solutions, and Life Sciences groups and are based principally on the end markets they serve. The Autocam Precision Components Group reported in our historical financial statements was renamed as Mobile Solutions. The Mobile Solutions group is focused on growth in the general industrial and automotive end markets. The Precision Engineered Products Group reported in our historical financial statements was bifurcated into two new groups – Power Solutions and Life Sciences. The Power Solutions group is focused on growth in the electrical and aerospace and defense end markets. The Life Sciences group is focused on growth in the medical end market.
Basis of Presentation
The accompanying consolidated financial statements are prepared in conformity 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 due to the 2018 adoption of the new Statement of Cash Flows guidance. Except for per share data or as otherwise indicated, all dollar amounts presented in the tables in these Notes to Consolidated Financial Statements are in thousands of U.S. dollars.
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 10
). All intercompany transactions and balances have been eliminated in consolidation.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity 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
Revenue Recognition.
On January 1, 2018, we adopted ASC Topic 606,
Revenue from Contracts with Customers
, (“ASC 606”). We adopted ASC 606 utilizing the modified retrospective transition method. Under this transition method, we recognized the cumulative effect of initially applying the new standard as an adjustment to the opening balance of retained earnings as of January 1, 2018, and applied the new standard beginning with the most current period presented to contracts that were not completed at the date of initial application. The adoption adjustment, which was less than
$0.1 million
, represents the net profit of certain contracts that were accounted for on a consignment basis under ASC Topic 605,
Revenue Recognition
(“ASC 605”). Under ASC 605, a sale was not recognized under these consignment contracts until the inventory was used by our customers. Under the new standard, revenue is recognized earlier because the transfer of control to our customers occurs upon shipment from our facilities as our customers have obtained the ability to direct the use of, and obtain substantially all the remaining benefits from, the asset. Comparative information has not been restated and continues to be reported under the accounting standards in effect for those periods. See
Note 16
for the required disclosures related to the impact of adopting ASC 606 and a discussion of our updated policies related to revenue recognition and accounting for costs to obtain and fulfill a customer contract.
Definition of a Business.
In January
2017
, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2017-1,
Business Combinations (Topic 805): Clarifying the Definition of a Business,
which changes the
definition of a business. The new guidance requires an entity to first evaluate whether substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or a group of similar identifiable assets. If that threshold is met, the set of assets and activities is not a business. If the threshold is not met, the entity evaluates whether the set meets the definition of a business. The new definition requires a business to include at least one substantive process and narrows the definition of outputs by more closely aligning it with how outputs are described in the new revenue recognition guidance. The new guidance was effective for us beginning on January 1,
2018
. We have applied the new definition of a business prospectively to all business combination transactions that occurred in
2018
. The new guidance has no effect on our historical financial statements.
Statement of Cash Flows.
In August
2016
, the FASB issued ASU 2016-15,
Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (a consensus of the Emerging Issues Task Force)
. This guidance provides clarification on how certain cash receipts and cash payments are presented and classified on the statement of cash flows, with focus on eight specific areas in which cash flows have, in practice, been presented inconsistently. The guidance was effective for us beginning January 1,
2018
and is required to be adopted using a retrospective approach if practicable.
The new cash flow guidance requires that cash payments for debt prepayment costs be classified as cash outflows for financing activities. We paid
$31.6 million
for debt prepayment costs in April
2017
. These debt prepayment costs were previously classified as cash used by operating activities in
2017
. Under the new guidance, these costs are reclassified to cash used by financing activities.
The new guidance also requires entities to make an accounting policy election regarding classification of distributions received from equity method investees. Existing guidance does not currently address how an entity should determine which distributions represent returns on, as opposed to returns of investment. The lack of specific guidance has resulted in diversity in practice. The two allowable approaches are the “cumulative earnings” approach and the “nature of the distribution” approach, as defined by ASU 2016-15. Upon adoption of the new guidance on January 1,
2018
, we utilized the cumulative earnings approach for classifying distributions received from our joint venture investment (see
Note 10
). This policy election is consistent with our historical accounting.
Goodwill.
In January
2017
, the FASB issued ASU 2017-4,
Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment
(“ASU 2017-4”)
,
that eliminates the requirement to calculate the implied fair value of goodwill (i.e., Step 2 of the current goodwill impairment test) to measure a goodwill impairment charge. Instead, entities will record an impairment charge based on the excess of a reporting unit’s carrying amount over its fair value (i.e., measure the charge based on the current Step 1 test). The standard is effective for us beginning with impairment tests performed on or after January 1,
2020
, with early adoption permitted. We elected to early adopt the standard for our annual goodwill impairment analysis as of October 1,
2018
, because the new guidance allowed us to simplify the process of calculating the impairment charge recognized as a result of our annual testing process in the current year. As a result of early adopting, we did not perform a step two analysis for the impairment testing, which may have resulted in a materially different result.
Accounting Standards Not Yet Adopted
Leases.
In February 2016, the FASB issued ASU 2016-2,
Leases
. ASU 2016-2 creates Topic 842,
Leases,
(“ASC 842”) in the ASC and supersedes ASC 840,
Leases.
Entities that hold numerous equipment and real estate leases, in particular those with numerous operating leases, will be most affected by the new guidance. The lease accounting standard is effective for
NN
beginning January 1, 2019, with modified retrospective adoption required and early adoption permitted. We intend to utilize the practical expedient to recognize the cumulative-effect adoption adjustment to retained earnings as of January 1, 2019, and not adjust comparative periods. The adoption of ASC 842 is expected to impact our balance sheet by adding lease-related assets and liabilities. The loan covenants in our credit facility provide for the continuation of covenant computations in accordance with U.S. GAAP prior to changes in accounting principles. Therefore, we do not expect the adoption of ASC 842 to affect our compliance. We have performed inquiries within each of our business groups and compiled information on operating and capital leases. We are using the results of these inquiries and compiled information to evaluate the impacts of the lease accounting standard on our financial position, results of operations, and related disclosures. Upon adoption, we expect that leases with terms greater than twelve months that are currently classified as operating leases and not recorded on our balance sheet will be recognized as a right-of-use asset and lease liability. We are implementing an enterprise-wide lease accounting system and are in the process of verifying data in the system that will enable us to determine the amounts of those assets and liabilities. We have reviewed all leases and are in the process of documenting our conclusions, establishing internal controls, and determining discount rates to generate the initial accounting entries upon adoption of the standard. We expect the right-of-use asset and lease liability to be between
$65.0 million
and
$95.0 million
each.
Effects of Tax Reform in Other Comprehensive Income.
In February
2018
, the FASB issued guidance related to the impacts of the U.S. Tax Cuts and Jobs Act of 2017 (“Tax Act”). Under existing U.S. GAAP, the effects of changes in tax rates and laws on
deferred tax balances are recorded as a component of income tax expense in the period in which the law was enacted. When deferred tax balances related to items originally recorded in accumulated other comprehensive income (“AOCI”) are adjusted, certain tax effects become stranded in AOCI. The FASB issued ASU 2018-2,
Income Statement – Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income,
that permits reclassification of certain income tax effects of the Tax Act from AOCI to retained earnings. The guidance also requires certain disclosures about stranded tax effects. ASU 2018-2 is effective for us on January 1,
2019
, with early adoption in any period permitted. Entities may adopt the guidance using either at the beginning of the period of adoption or retrospectively to each period in which the effect of the change in the U.S. federal corporate income tax rate in the Tax Act is recognized. We are in the process of evaluating adoption method and the effects of this new guidance on our financial statements.
Internal-Use Software.
In August
2018
, the FASB issued ASU 2018-15,
Intangibles - Goodwill and Other - Internal-Use Software: Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract (a consensus of the FASB Emerging Issues Task Force),
that provides guidance on a customer’s accounting for implementation, set-up, and other upfront costs incurred in a cloud computing arrangement that is hosted by the vendor. Under the new guidance, customers will apply the same criteria for capitalizing implementation costs as they would for an arrangement that has a software license. ASU 2018-15 is effective for us on January 1,
2020
, using either a prospective or retrospective approach and with early adoption permitted. We are in the process of evaluating the effects of this guidance on our financial statements and on cloud computing arrangements that we may enter before the required effective date.
Derivatives and Hedging.
In August 2017, the FASB issued ASU 2017-12,
Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities
, which provides new rules that expand the hedging strategies that qualify for hedge accounting. The new rules also allow additional time to complete hedge effectiveness testing and allow qualitative assessments subsequent to initial quantitative tests if there is supportable expectation that the hedge will remain highly effective. ASU 2017-12 is effective for us on January 1, 2019, with early adoption permitted. We do not expect the adoption of this guidance to have a material impact on our financial condition, results of operations, or cash flows.
Cash and Cash Equivalents
Cash and cash equivalents include cash and highly liquid investments with original maturities of
three months or less
.
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 Doubtful Accounts
Trade accounts receivable are recorded at their net realizable value. We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. The allowances are based on the number of days an individual receivable is past the invoice due date and on regular credit evaluations of our customers. In evaluating the credit worthiness of our customers, we consider numerous inputs including but not limited to the customers’ financial position, past payment history, relevant industry trends, cash flows, management capability, historical loss experience, and economic conditions and prospects. Allowances are established when customer accounts are at risk of being uncollectible. 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 betterments 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 generally range from
15
to
40
years. Estimated useful lives for machinery and equipment generally range from
3
to
12
years. We depreciate leasehold improvements and buildings under capital lease over the shorter of the leased asset’s useful life or the lease term.
Goodwill and Other Indefinite Lived Intangible Assets
Goodwill is tested for impairment on an annual basis in the fourth quarter and between annual tests if a triggering event occurs. The impairment analysis is performed at the reporting unit level. For the impairment test as of October 1,
2018
, we elected to early adopt the new goodwill accounting standard which requires us to calculate an impairment charge based on a reporting unit’s carrying amount in excess of its fair value (i.e., step 1 of the two-step impairment test). If the carrying value of the reporting unit including goodwill is less than fair value of the reporting unit, the goodwill is not considered impaired. Under the new guidance, we no longer perform step 2 of the two-step goodwill impairment test or calculate an impairment charge using an implied fair value. Based on the results of performing the first step of the impairment test, the carrying value of certain reporting units exceed the fair value at December 31, 2018. For the year ended December 31, 2018, we recorded an impairment charge of
$182.5 million
to the
Consolidated Statements of Operations and Comprehensive Income (Loss)
. See
Note 8
for further discussion on goodwill.
For the year ended, December 31,
2017
, we performed the two-step goodwill impairment test under accounting standards in effect at that time. Based on the results of performing the first step of the impairment test, the fair value of the reporting units exceeded the carrying value of the reporting units at December 31,
2017
.
Impairment of Long-Lived Assets
Long-lived tangible and intangible assets subject to depreciation or amortization are tested for recoverability when changes in circumstances indicate the carrying value of these assets may not be recoverable. A test for recoverability is also performed when management has committed to a plan to dispose of a reporting unit or asset group. Assets to be held and used are tested for recoverability when indications of impairment are evident. Recoverability of a long-lived tangible or intangible asset is evaluated by comparing its carrying value to the future estimated undiscounted cash flows expected to be generated by the asset or asset group. If the asset is not recoverable, then the asset is considered impaired and adjusted to fair value which is then depreciated or amortized over its remaining useful life. Assets to be disposed of are recorded at the lesser of carrying value or fair value less costs of disposal.
Equity Method Investments
Each of the Company’s equity method investments 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, the Company 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 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.
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 are 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. We recognize excess tax benefits in income tax expense prospectively beginning in
2017
. Excess tax benefits are presented in cash flows from operating activities in the statement of cash flows prospectively beginning in
2017
. Tax payments in respect of shares withheld for taxes are classified in cash flows from financing activities in the statement of cash flows retrospectively for all periods presented.
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 and accumulated other comprehensive income 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,
2018
,
2017
and
2016
. Transaction gains or losses on intercompany loan transactions are recognized as incurred in the “
Other (income) expense, net
” line in the
Consolidated Statements of Operations and Comprehensive Income (Loss)
.
Net Income Per Common Share
Basic net income per share reflects reported earnings divided by the weighted average shares outstanding. Diluted net income per share includes the effect of dilutive stock options and the respective tax benefits, unless inclusion would not be dilutive.
Business Combinations
We allocate the total purchase price of tangible and intangible assets acquired and liabilities assumed based on their estimated fair values as of the business combination date, with the excess purchase price recorded as goodwill. The purchase price allocation process requires us to use significant estimates and assumptions, including fair value estimates, as of the business combination date. Although we believe the assumptions and estimates we have made are reasonable and appropriate, they are based in part on historical experience and information obtained from management of the acquired company. Our assumptions and estimates are also partially based on valuation models that incorporate projections of expected future cash flows and operating plans and are inherently uncertain. Valuations are performed by management or third-party valuation specialists under management’s supervision. In determining the fair value of assets acquired and liabilities assumed in business combinations, as appropriate, we may use one of the following recognized valuation methods: the income approach (including discounted cash flows, relief from royalty and excess earnings model), the market approach, or the replacement cost approach.
Examples of significant estimates used to value certain intangible assets acquired include but are not limited to:
|
|
•
|
sales volume, pricing and future cash flows of the business overall;
|
|
|
•
|
future expected cash flows from customer relationships, and other identifiable intangible assets, including future price levels, rates of increase in revenue and appropriate attrition rate;
|
|
|
•
|
the acquired company’s brand and competitive position, royalty rate quantum, as well as assumptions about the period of time the acquired brand will continue to benefit the combined company’s product portfolio; and
|
|
|
•
|
cost of capital, risk-adjusted discount rates, and income tax rates.
|
Different assumptions regarding projected performance and other factors associated with the acquired assets may affect the amount recorded under each type of asset and liability. The valuations of property, plant and equipment, intangible assets, goodwill and deferred income tax liabilities depend heavily on assumptions. Subsequent assessment could result in future impairment charges. We refine these estimates over a measurement period not to exceed one year to reflect new information obtained surrounding facts and circumstances existing at the acquisition date.
Note 2
. Discontinued Operations
On August 17,
2017
, we completed the sale of our global precision bearing components business (the “PBC Business”) and received cash proceeds at closing of
$387.6 million
and recorded a
$0.8 million
receivable, which was received in
2018
. The PBC Business included all our facilities that were engaged in the production of precision steel balls, steel rollers, and metal retainers and automotive specialty products used primarily in the bearing industry. The sale of the PBC Business furthers management’s long-term strategy to build a diversified industrial business with a comprehensive geographic footprint in attractive high-growth market segments. The PBC Business represented all of the Precision Bearing Components Group reportable segment disclosed in our historical financial statements.
We recorded an after-tax gain on sale of
$127.7 million
, which is included in the “Income from discontinued operations, net of tax” line on the
Consolidated Statements of Operations and Comprehensive Income (Loss)
for the year ended December 31,
2017
. The gain includes the effects of reclassifying
$9.3 million
in cumulative foreign currency translation gain from accumulated comprehensive income and eliminating the non-controlling interest attributable to the PBC Business as of August 17,
2017
.
In accordance with ASC 205-20,
Presentation of Financial Statements – Discontinued Operations,
the operating results of the PBC Business are classified as discontinued operations. The presentation of discontinued operations includes revenues and expenses of the discontinued operations and gain on the disposition of the business, net of tax, as one line item on the
Consolidated Statements of Operations and Comprehensive Income (Loss)
. Accordingly, results of the PBC Business have been excluded from continuing operations and group results for all historical periods presented in the consolidated financial statements and the accompanying notes unless otherwise stated. The
Consolidated Statements of Cash Flows
for the years ended December 31,
2017
and
2016
, include cash flows of the PBC Business in each line item unless otherwise stated. We had no discontinued operations in the
year ended December 31, 2018
.
The following table summarizes the major line items included in the results of operations of the discontinued operations.
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2017
(1)
|
|
2016
|
Net sales
|
|
$
|
168,287
|
|
|
$
|
248,534
|
|
Cost of products sold (exclusive of depreciation and amortization shown separately below)
|
|
130,555
|
|
|
192,994
|
|
Selling, general and administrative expense
|
|
11,818
|
|
|
16,992
|
|
Depreciation and amortization
|
|
7,722
|
|
|
11,852
|
|
Loss on disposal of assets
|
|
—
|
|
|
27
|
|
Restructuring and integration expense
|
|
429
|
|
|
4,366
|
|
Income from operations
|
|
17,763
|
|
|
22,303
|
|
Interest expense
|
|
(181
|
)
|
|
(284
|
)
|
Other income (expense), net
|
|
(84
|
)
|
|
503
|
|
Income from discontinued operations before gain on disposal
and provision for income taxes
|
|
17,498
|
|
|
22,522
|
|
Provision for income taxes on discontinued operations
|
|
(7,461
|
)
|
|
(6,369
|
)
|
Income from discontinued operations before gain on disposal
|
|
10,037
|
|
|
16,153
|
|
Gain on disposal of discontinued operations
|
|
213,503
|
|
|
—
|
|
Provision for income taxes on gain on disposal
|
|
(85,852
|
)
|
|
—
|
|
Income from discontinued operations, net of tax
|
|
$
|
137,688
|
|
|
$
|
16,153
|
|
_________________________________
|
|
(1)
|
Includes the results of operations of the PBC Business from January 1, 2017 to the sale completion date of August 17,
2017
.
|
The following table presents the significant noncash items and cash paid for capital expenditures of discontinued operations for each period presented.
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2017
|
|
2016
|
Depreciation and amortization
|
|
$
|
7,722
|
|
|
$
|
11,852
|
|
Acquisition of property, plant and equipment
|
|
$
|
7,316
|
|
|
$
|
11,926
|
|
Note 3
. Acquisitions
Paragon Medical, Inc.
On
May 7, 2018
, we acquired
100%
of the stock of PMG Intermediate Holding Corporation, the parent company of Paragon Medical, Inc. (“Paragon Medical”) for a base purchase price of
$375.0 million
in cash, subject to certain adjustments. After working capital and other closing adjustments, the cash purchase price was approximately
$390.9 million
which included
$13.6 million
in cash acquired. During the year ended December 31,
2018
, we received
$1.4 million
additional cash from the seller to settle working capital adjustments. For accounting purposes, Paragon Medical meets the definition of a business and has been accounted for as a business combination. Paragon Medical is a medical device manufacturer which focuses on the orthopedic, case and tray, implant, and instrument markets. This acquisition continues our strategic focus to expand our Life Sciences portfolio as well as create a balanced business by diversifying our products and finished device offerings. Operating results of Paragon Medical are reported prospectively from the date of acquisition in our Life Sciences group. We have performed an assessment of the opening balance sheet which is subject to completion of our integration procedures for accounting policies. Opening balance sheet deferred taxes have been recorded based on estimates made as of the acquisition date as well as information currently available to management. As estimates are refined and additional information is received throughout the measurement period, adjustments to opening deferred taxes may be recorded with an offsetting adjustment to goodwill. We incurred new debt in connection with the Paragon Medical acquisition and subsequently repaid the new debt in full with the proceeds from the sale of shares of our common stock
as described in
Note 12
and
Note 15
.
The following table summarizes the preliminary purchase price allocation for the Paragon Medical acquisition.
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|
|
|
|
|
|
|
|
|
|
|
Fair value of assets acquired and liabilities assumed as of May 7, 2018
|
As Reported on
June 30, 2018
|
|
Subsequent Adjustments to Fair Value
|
|
As Reported on December 31, 2018
|
Cash and cash equivalents
|
$
|
13,418
|
|
|
$
|
134
|
|
|
$
|
13,552
|
|
Accounts receivable
|
22,853
|
|
|
(721
|
)
|
|
22,132
|
|
Inventories
|
23,606
|
|
|
(400
|
)
|
|
23,206
|
|
Other current assets
|
937
|
|
|
734
|
|
|
1,671
|
|
Property, plant and equipment
|
69,322
|
|
|
(5,625
|
)
|
|
63,697
|
|
Intangible assets subject to amortization
|
164,200
|
|
|
(700
|
)
|
|
163,500
|
|
Other non-current assets
|
3,304
|
|
|
(129
|
)
|
|
3,175
|
|
Goodwill
|
157,421
|
|
|
4,399
|
|
|
161,820
|
|
Total assets acquired
|
$
|
455,061
|
|
|
$
|
(2,308
|
)
|
|
$
|
452,753
|
|
Current liabilities
|
$
|
16,767
|
|
|
$
|
234
|
|
|
$
|
17,001
|
|
Deferred tax liability
|
46,713
|
|
|
(2,442
|
)
|
|
44,271
|
|
Other non-current liabilities
|
620
|
|
|
—
|
|
|
620
|
|
Total liabilities assumed
|
$
|
64,100
|
|
|
$
|
(2,208
|
)
|
|
$
|
61,892
|
|
Net assets acquired
|
$
|
390,961
|
|
|
$
|
(100
|
)
|
|
$
|
390,861
|
|
We recognized measurement period adjustments during the period in which we determined the amount of the adjustment. These adjustments primarily related to estimates of the fair value of assets acquired and liabilities assumed. Measurement period adjustments were based on facts and circumstances that existed at the date of the acquisition and, if known, would have affected the measurement of the amounts recognized at the acquisition date. As a result, we adjusted the preliminary allocation of the purchase price initially recorded.
A combination of income, market, and cost approaches was used for the valuation where appropriate, depending on the asset or liability being valued. Valuation inputs in these models and analyses considered market participant assumptions. Acquired
intangible assets are primarily customer relationships. As of
December 31, 2018
, intangible assets in connection with Paragon Medical were
$155.3 million
after post-acquisition amortization.
In connection with the Paragon Medical acquisition, we recorded goodwill, which represents the excess of the purchase price over the estimated fair value of tangible and intangible assets acquired, net of liabilities assumed. As of
December 31, 2018
, goodwill in connection with Paragon Medical was approximately
$158.7 million
after post-acquisition currency impacts. The goodwill is attributed primarily to Paragon Medical as a going concern, the assembled workforce, the fair value of expected cost synergies, and revenue growth expected from the ability to go to market as a combined life sciences business. The going concern element represents the ability to earn a higher return on the combined assembled collection of assets and businesses of Paragon Medical than if those assets and businesses were to be acquired and managed separately. Approximately
$2.8 million
of the goodwill relates to prior asset acquisitions by Paragon Medical and is expected to be deducted for tax purposes.
Property, plant and equipment acquired primarily included machinery and equipment for use in manufacturing operations. Additionally, manufacturing sites and related facilities, including leasehold improvements, were acquired. We have performed an assessment of the fair value of property, plant and equipment using both the cost approach and the market approach. The fair value assessment was supported where available by observable market data which includes consideration of obsolescence. We have performed an assessment of the fair value of intangible assets using the income approach, supported by market data, by using the relief from royalty and multi-period excess earnings methods.
We incurred approximately
$5.4 million
in acquisition related costs with respect to the Paragon Medical acquisition during the year ended December 31,
2018
. Transaction costs were expensed as incurred and are included in the “
Acquisition related costs excluded from selling, general and administrative expense
” line item in the
Consolidated Statements of Operations and Comprehensive Income (Loss)
. We expensed
$12.9 million
of financing costs related to the Paragon Medical acquisition during the year ended December 31,
2018
, which are included in the “
Loss on extinguishment of debt and write-off of debt issuance costs
” line item in the
Consolidated Statements of Operations and Comprehensive Income (Loss)
. As required by the acquisition method of accounting, acquired inventories were recorded at their estimated fair value. Beginning
May 7, 2018
, our consolidated results of operations include the results of Paragon Medical. Since the date of the acquisition, net sales of
$117.0 million
and income from operations of
$8.1 million
have been included in our consolidated financial statements.
The unaudited pro forma financial results shown in the table below for the years ended December 31,
2018
and
2017
, combine the consolidated results of NN and Paragon Medical giving effect to the Paragon Medical acquisition as if it had been completed on January 1,
2017
, the beginning of the comparable prior annual reporting period presented. The unaudited pro forma financial results do not give effect to any of our other acquisitions that occurred after January 1,
2017
, and do not include any anticipated synergies or other assumed benefits of the Paragon Medical acquisition. This unaudited pro forma financial information is presented for informational purposes only and is not indicative of future operations or results had the Paragon Medical acquisition been completed as of January 1,
2017
.
The unaudited pro forma financial results include certain adjustments for debt service costs and additional depreciation and amortization expense based upon the fair value step-up and estimated useful lives of Paragon Medical depreciable fixed assets and definite-life amortizable assets acquired. Adjustments for the year ended December 31,
2018
, include a reduction of the prepayment penalty incurred upon the extinguishment of debt (see
Note 12
) as if the debt had been outstanding since January 1,
2017
. The provision for income taxes has also been adjusted for all periods, based upon the foregoing adjustments to historical results. The impact of adopting ASC 606 has been included based on an adoption date of January 1,
2018
.
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2018
|
|
2017
|
Pro forma net sales
|
$
|
825,891
|
|
|
$
|
760,772
|
|
Pro forma income (loss) from continuing operations
|
$
|
(252,268
|
)
|
|
$
|
3,227
|
|
Pro forma net income (loss)
|
$
|
(252,268
|
)
|
|
$
|
140,915
|
|
Basic income (loss) from continuing operations per share
|
$
|
(7.96
|
)
|
|
$
|
0.12
|
|
Diluted income (loss) from continuing operations per share
|
$
|
(7.96
|
)
|
|
$
|
0.12
|
|
Unaudited pro forma results for the year ended December 31,
2017
, include
$15.0 million
of inventory fair value adjustments, financing, integration, and transaction costs, net of tax, directly attributable to the acquisition which will not have an ongoing impact.
Other Acquisitions
We made other acquisitions during the years ended December 31,
2018
and
2017
, with an aggregate cash purchase price of
$22.0 million
and
$38.7 million
, respectively. Amounts recorded for goodwill and intangible assets are disclosed in
Note 8
and
Note 9
, respectively. Some of these amounts are subject to completion of our integration procedures. We incurred approximately
$0.5 million
and
$0.3 million
in acquisition related costs with respect to other acquisitions during the years ended December 31,
2018
and
2017
, respectively. Transaction costs were expensed as incurred and are included in the “
Acquisition related costs excluded from selling, general and administrative expense
” line item in the
Consolidated Statements of Operations and Comprehensive Income (Loss)
.
DRT Medical, LLC.
On October 2,
2017
, we acquired
100%
of the membership interests of DRT Medical, LLC, which was subsequently named NN Life Sciences - Vandalia, LLC (“NN Vandalia”). For accounting purposes, NN Vandalia meets the definition of a business and has been accounted for as a business combination. NN Vandalia is a medical device company that supplies precision manufactured medical instruments and orthopedic implants. Operating results of NN Vandalia were reported prospectively in our Life Sciences group after the acquisition date. We finalized our valuation related to the assets acquired and liabilities assumed during 2018.
Bridgemedica, LLC.
On
February 22, 2018
, we completed the acquisition of
100%
of the assets of Bridgemedica, LLC (“Bridgemedica”)
. For accounting purposes, Bridgemedica meets the definition of a business and has been accounted for as a business combination. Bridgemedica is a medical device company that provides concept to supply solutions through design, development engineering and manufacturing. Operating results of Bridgemedica are reported prospectively in our Life Sciences group after the acquisition date. We have finalized our valuation related to the assets acquired and liabilities assumed.
Southern California Technical Arts, Inc.
On
August 9, 2018
, we completed the acquisition of
100%
of the capital stock of Southern California Technical Arts, Inc. (“Technical Arts”). For accounting purposes, Technical Arts meets the definition of a business and has been accounted for as a business combination. Technical Arts is an industrial machining company that manufactures tight tolerance metal components and assemblies. The acquisition of Technical Arts expands the NN presence in the aerospace and defense end market. Operating results of Technical Arts are reported prospectively in our Power Solutions group after the acquisition date. We have completed a preliminary purchase price allocation and are in the process of finalizing the fair value of assets acquired and liabilities assumed.
Note 4
. Segment Information
We determined our reportable segments under the provisions of U.S. GAAP related to disclosures about segments of an enterprise. Management has concluded that Mobile Solutions, Power Solutions, and Life Sciences each constitutes an operating segment as each engages in business activities for which it earns revenues and incurs expenses for which separate financial information is available, and this is the level at which the Chief Operating Decision Maker (“CODM”) reviews discrete financial information for purposes of allocating resources and assessing performance. As described in
Note 1
, in January
2018
, we implemented a new enterprise and management structure and reorganized our businesses into the Mobile Solutions, Power Solutions, and Life Sciences groups based principally on the end markets each group serves. In the first quarter of
2018
, we began reporting our financial results based on these new reportable segments. Prior year amounts have been restated to conform to the current year presentation.
Mobile Solutions
Mobile Solutions is focused on growth in the general industrial and automotive end markets. We have developed an expertise in manufacturing highly complex, system critical components for fuel systems, engines and transmissions, power steering systems, and electromechanical motors on a high-volume basis. This expertise has been gained through investment in technical capabilities, processes and systems, and skilled program management and product launch capabilities.
Power Solutions
Power Solutions is focused on growth in the electrical and aerospace and defense 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 markets utilizing our extensive process technologies for optical grade plastics, thermally conductive plastics, titanium, Inconel, magnesium, and electroplating.
Life Sciences
Life Sciences is focused on growth in the medical end market. Within this group we combine advanced engineering and production capabilities to design and manufacture a broad range of high-precision metal and plastic components, assemblies, and finished devices.
We manufacture a variety of components, assemblies, and instruments, such as surgical knives, bioresorbable implants, surgical staples, cases and trays, orthopedic implants and tools, laparoscopic devices, and drug delivery devices for the medical and life sciences end market.
Segment Results
The following table presents results of continuing operations for each reportable segment.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mobile
Solutions
|
|
Power
Solutions
|
|
Life
Sciences
|
|
Corporate
and
Consolidations
|
|
Total
|
Year Ended December 31, 2018
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
335,037
|
|
|
$
|
189,778
|
|
|
$
|
248,173
|
|
|
$
|
(2,331
|
)
|
(a)
|
$
|
770,657
|
|
Depreciation and amortization
|
|
$
|
26,217
|
|
|
$
|
14,753
|
|
|
$
|
28,091
|
|
|
$
|
2,067
|
|
|
$
|
71,128
|
|
Goodwill impairment
|
|
$
|
73,442
|
|
|
$
|
109,100
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
182,542
|
|
Income from operations
|
|
$
|
(54,103
|
)
|
|
$
|
(95,115
|
)
|
|
$
|
19,136
|
|
|
$
|
(48,806
|
)
|
|
$
|
(178,888
|
)
|
Interest expense
|
|
|
|
|
|
|
|
|
|
$
|
(61,243
|
)
|
Other
|
|
|
|
|
|
|
|
|
|
$
|
(20,903
|
)
|
Loss from continuing operations before benefit for income taxes and share of net income from joint venture
|
|
|
|
|
|
|
|
|
|
$
|
(261,034
|
)
|
Share of net income from joint venture
|
|
$
|
(14,390
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
$
|
(14,390
|
)
|
Expenditures for long-lived assets
|
|
$
|
36,660
|
|
|
$
|
6,459
|
|
|
$
|
14,645
|
|
|
$
|
6,272
|
|
|
$
|
64,036
|
|
Total assets
|
|
$
|
356,387
|
|
|
$
|
297,947
|
|
|
$
|
802,770
|
|
|
$
|
44,466
|
|
(b)
|
$
|
1,501,570
|
|
Year Ended December 31, 2017
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
336,852
|
|
|
$
|
186,602
|
|
|
$
|
98,329
|
|
|
$
|
(1,990
|
)
|
(a)
|
$
|
619,793
|
|
Depreciation and amortization
|
|
$
|
24,491
|
|
|
$
|
14,657
|
|
|
$
|
12,088
|
|
|
$
|
1,170
|
|
|
$
|
52,406
|
|
Income from operations
|
|
$
|
34,405
|
|
|
$
|
23,440
|
|
|
$
|
13,271
|
|
|
$
|
(38,002
|
)
|
|
$
|
33,114
|
|
Interest expense
|
|
|
|
|
|
|
|
|
|
$
|
(52,085
|
)
|
Other
|
|
|
|
|
|
|
|
|
|
$
|
(39,902
|
)
|
Loss from continuing operations before benefit for income taxes and share of net income from joint venture
|
|
|
|
|
|
|
|
|
|
$
|
(58,873
|
)
|
Share of net income from joint venture
|
|
$
|
5,211
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
$
|
5,211
|
|
Expenditures for long-lived assets
|
|
$
|
24,056
|
|
|
$
|
5,443
|
|
|
$
|
—
|
|
|
$
|
6,907
|
|
|
$
|
36,406
|
|
Total assets
|
|
$
|
428,321
|
|
|
$
|
385,558
|
|
|
$
|
353,208
|
|
|
$
|
307,916
|
|
(b)
|
$
|
1,475,003
|
|
Year Ended December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
326,138
|
|
|
$
|
180,330
|
|
|
$
|
80,057
|
|
|
$
|
(1,571
|
)
|
(a)
|
$
|
584,954
|
|
Depreciation and amortization
|
|
$
|
22,189
|
|
|
$
|
15,604
|
|
|
$
|
12,501
|
|
|
$
|
427
|
|
|
$
|
50,721
|
|
Income from operations
|
|
$
|
29,490
|
|
|
$
|
24,060
|
|
|
$
|
9,840
|
|
|
$
|
(28,611
|
)
|
|
$
|
34,779
|
|
Interest expense
|
|
|
|
|
|
|
|
|
|
$
|
(62,870
|
)
|
Other
|
|
|
|
|
|
|
|
|
|
$
|
(2,775
|
)
|
Loss from continuing operations before benefit for income taxes and share of net income from joint venture
|
|
|
|
|
|
|
|
|
|
$
|
(30,866
|
)
|
Share of net income from joint venture
|
|
$
|
5,938
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
$
|
5,938
|
|
Expenditures for long-lived assets
|
|
$
|
23,077
|
|
|
$
|
3,125
|
|
|
$
|
2,227
|
|
|
$
|
3,465
|
|
|
$
|
31,894
|
|
_______________________________
(a) Includes eliminations of intersegment transactions which occur during the ordinary course of business.
(b) Total assets in Mobile Solutions includes
$20.4 million
and
$39.8 million
as of December 31,
2018
and
2017
, respectively, related to the investment in our
49%
owned joint venture (
Note 10
).
The following table summarizes the net sales and income (loss) from operations from the Paragon Medical and NN Vandalia acquisitions in the Life Sciences group and other acquisitions in the Life Sciences and Power Solutions groups for the years ended
December 31, 2018
and
2017
.
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2018
|
|
2017
|
Net sales
|
|
|
|
|
Paragon Medical
|
|
$
|
116,998
|
|
|
$
|
—
|
|
NN Vandalia
|
|
30,668
|
|
|
6,682
|
|
Other
|
|
11,968
|
|
|
—
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
|
|
Paragon Medical
|
|
$
|
8,086
|
|
|
$
|
—
|
|
NN Vandalia
|
|
1,532
|
|
|
(458
|
)
|
Other
|
|
284
|
|
|
—
|
|
The following table summarizes long-lived tangible assets by geographical region.
|
|
|
|
|
|
|
|
|
|
|
|
Property, Plant, and Equipment, Net
As of December 31,
|
|
|
2018
|
|
2017
|
United States
|
|
$
|
235,975
|
|
|
$
|
173,269
|
|
Europe
|
|
50,143
|
|
|
25,288
|
|
Asia
|
|
42,657
|
|
|
26,078
|
|
Mexico
|
|
7,647
|
|
|
7,544
|
|
S. America
|
|
24,606
|
|
|
27,101
|
|
All foreign countries
|
|
$
|
125,053
|
|
|
$
|
86,011
|
|
Total
|
|
$
|
361,028
|
|
|
$
|
259,280
|
|
Note 5
. Accounts Receivable and Sales Concentrations
Accounts receivable, net are comprised of the following amounts:
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
2018
|
|
2017
|
Trade
|
|
$
|
135,260
|
|
|
$
|
110,165
|
|
Less—allowance for doubtful accounts
|
|
1,839
|
|
|
1,719
|
|
Accounts receivable, net
|
|
$
|
133,421
|
|
|
$
|
108,446
|
|
The following table presents activity in the allowance for doubtful accounts.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2018
|
|
2017
|
|
2016
|
Balance at beginning of year
|
|
$
|
1,719
|
|
|
$
|
1,069
|
|
|
$
|
1,055
|
|
Additions
|
|
754
|
|
|
648
|
|
|
153
|
|
Write-offs
|
|
(584
|
)
|
|
(101
|
)
|
|
(59
|
)
|
Currency impact
|
|
(50
|
)
|
|
103
|
|
|
(80
|
)
|
Balance at end of year
|
|
$
|
1,839
|
|
|
$
|
1,719
|
|
|
$
|
1,069
|
|
No
customers accounted for more than
10%
of our net sales for the years ended
December 31, 2018
and
2017
. For the year ended December 31,
2016
, sales to Robert Bosch Automotive Systems (“Bosch”) amounted to
$59.2 million
or
10%
of consolidated net sales. All revenues related to Bosch are reported in Mobile Solutions.
No
customers represented more than
10%
of accounts receivable as of December 31,
2018
or
2017
.
Note 6
. Inventories
Inventories are comprised of the following amounts:
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
2018
|
|
2017
|
Raw materials
|
|
$
|
52,930
|
|
|
$
|
37,337
|
|
Work in process
|
|
42,578
|
|
|
27,669
|
|
Finished goods
|
|
27,107
|
|
|
17,611
|
|
Inventories
|
|
$
|
122,615
|
|
|
$
|
82,617
|
|
Note 7
. Property, Plant and Equipment
Property, plant and equipment are comprised of the following amounts:
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
2018
|
|
2017
|
Land and buildings
|
|
$
|
69,455
|
|
|
$
|
54,833
|
|
Machinery and equipment
|
|
401,729
|
|
|
302,470
|
|
Construction in progress
|
|
35,122
|
|
|
14,346
|
|
Total
|
|
506,306
|
|
|
371,649
|
|
Less—accumulated depreciation
|
|
145,278
|
|
|
112,369
|
|
Property, plant and equipment, net
|
|
$
|
361,028
|
|
|
$
|
259,280
|
|
During the year ended
December 31, 2018
, we acquired
$66.0 million
in property, plant and equipment with the Paragon Medical, Bridgemedica, and Technical Arts acquisitions. During the year ended
December 31, 2017
, we acquired
$14.0 million
in property, plant and equipment with the NN Vandalia acquisition.
We monitor property, plant and equipment for any indicators of potential impairment. During 2018, we recognized an impairment charge of
$5.2 million
related to the early retirement of identified fixed assets. The impairment charge was recorded to the
Other operating (income) expense, net
line item on the
Consolidated Statements of Operations and Comprehensive Income (Loss)
. The impairment charge was determined by writing the assets down to the estimated salvage value, less disposal costs. We recorded
no
impairment charges for the years ended December 31,
2017
and
2016
.
For the years ended
December 31, 2018
,
2017
, and
2016
, we recorded depreciation expense of
$38.6 million
,
$28.9 million
, and
$24.7 million
, respectively.
Note 8
. Goodwill
The following table shows changes in the carrying amount of goodwill for the years ended December 31,
2018
, and
2017
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mobile Solutions
|
|
Power Solutions
|
|
Life Sciences
|
|
Total
|
Balance as of December 31, 2016
|
|
$
|
73,263
|
|
|
$
|
201,934
|
|
|
$
|
168,332
|
|
|
$
|
443,529
|
|
Currency impact
|
|
884
|
|
|
747
|
|
|
—
|
|
|
1,631
|
|
Goodwill acquired in acquisitions
|
|
—
|
|
|
—
|
|
|
9,452
|
|
|
9,452
|
|
Balance as of December 31, 2017
|
|
74,147
|
|
|
202,681
|
|
|
177,784
|
|
|
454,612
|
|
Currency impact and other
|
|
(705
|
)
|
|
(1,882
|
)
|
|
(3,118
|
)
|
|
(5,705
|
)
|
Goodwill acquired in acquisitions
|
|
—
|
|
|
2,657
|
|
|
165,288
|
|
|
167,945
|
|
Impairments
|
|
(73,442
|
)
|
|
(109,100
|
)
|
|
—
|
|
|
(182,542
|
)
|
Measurement period adjustments
|
|
—
|
|
|
149
|
|
|
4,993
|
|
|
5,142
|
|
Balance as of December 31, 2018
|
|
$
|
—
|
|
|
$
|
94,505
|
|
|
$
|
344,947
|
|
|
$
|
439,452
|
|
The following table shows the gross carrying amount of goodwill and accumulated impairment charges as of
December 31, 2018
and
2017
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
December 31, 2017
|
|
|
Gross Carrying Amount
|
|
Accumulated Impairment Charges
|
|
Net Book Value
|
|
Gross Carrying Amount
|
|
Accumulated Impairment Charges
|
|
Net Book Value
|
Mobile Solutions
|
|
$
|
74,147
|
|
|
$
|
(74,147
|
)
|
|
$
|
—
|
|
|
$
|
74,147
|
|
|
$
|
—
|
|
|
$
|
74,147
|
|
Power Solutions
|
|
205,405
|
|
|
(110,900
|
)
|
|
94,505
|
|
|
204,481
|
|
|
(1,800
|
)
|
|
202,681
|
|
Life Sciences
|
|
344,947
|
|
|
—
|
|
|
344,947
|
|
|
177,784
|
|
|
—
|
|
|
177,784
|
|
Total goodwill
|
|
$
|
624,499
|
|
|
$
|
(185,047
|
)
|
|
$
|
439,452
|
|
|
$
|
456,412
|
|
|
$
|
(1,800
|
)
|
|
$
|
454,612
|
|
Goodwill acquired in
2018
is related to the acquisitions as described in
Note 3
and is derived from the value of the businesses acquired. During
2018
, we recorded
$161.8 million
of goodwill related to the Paragon Medical acquisition,
$8.0 million
related to the Bridgemedica acquisition, and
$2.8 million
related to the Technical Arts acquisition. We have performed an assessment of the Paragon Medical opening balance sheet which is subject to completion of our integration procedures for accounting policies. For the Bridgemedica acquisition, we have finalized our valuation related to the assets acquired and liabilities assumed. For the Technical Arts acquisition, we have completed a preliminary purchase price allocation and are in the process of finalizing the fair value of assets acquired and liabilities assumed. The preliminary fair value of the businesses acquired was based on management business plans and future performance estimates which are subject to a high degree of management judgment and complexity. Actual results may differ from these projections and the differences may be material.
During
2018
, as a result of the changes in our organizational and management structure, goodwill was reassigned to operating segments with goodwill assigned to Power Solutions and Life Sciences using a relative fair value allocation. For the purpose of goodwill impairment testing, the operating segments (Mobile Solutions, Power Solutions, and Life Sciences) are considered reporting units and tested on a stand-alone basis. For further information on the organizational changes, see
Note 1
.
During the fourth quarter
2018
, our market capitalization declined to a level that was less than the net book value of our stockholders’ equity. We performed our annual goodwill impairment analysis as of October 1,
2018
, and elected to early adopt ASU 2017-4. The goodwill impairment analysis required significant judgments to calculate the fair value for each of Mobile Solutions, Power Solutions, and Life Sciences, 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. A number of significant assumptions and estimates are involved in the application of the discounted cash flow model to forecast operating cash flows, including market growth and market share, sales volumes and prices, costs to produce, discount rate, and estimated capital needs. Management considers historical experience and all available information at the time the fair values of its reporting units are estimated. Assumptions in estimating future cash flows are subject to a high degree of judgment and complexity. Changes in assumptions and estimates may affect the fair value of goodwill and could result in impairment charges in future periods. As a result of our analysis, the Company recorded an impairment loss on goodwill of
$73.4 million
and
$109.1 million
for Mobile Solutions and Power Solutions, respectively, to the “
Goodwill impairment
” line on the
Consolidated Statements of Operations and Comprehensive Income (Loss)
. In addition, goodwill in Power Solutions was reduced by
$1.6 million
related to adjusting deferred tax liabilities for tax deductible goodwill, which is reflected in “Currency impact and other” in the above table.
No
goodwill impairment loss was recorded at Life Sciences.
Power Solutions goodwill as of December 31,
2018
was
$94.5 million
. In conjunction with the annual goodwill impairment test during the fourth quarter of
2018
, Power Solutions goodwill was impaired by
$109.1 million
, resulting in the carrying value of the reporting unit being equal to its fair value. If our assessment of the relevant facts and circumstances change, or if the actual performance falls short of expected results, an additional impairment charge will be required. An impairment of goodwill may also lead us to record an impairment of other intangible assets. The carrying value of finite-lived intangible assets for the Power Solutions group as of December 31,
2018
, was
$96.0 million
.
Life Sciences has largely grown through acquisitions, with two acquisitions in
2018
plus another acquisition in late-2017. The Company is forecasting continued growth for the Life Sciences group; however, the fair value of the reporting unit exceeds the carrying value by approximately
3.7%
in the most recent valuation. If our assessment of the relevant facts and circumstances change, or the actual performance falls short of expected results, impairment charges may be required. Total goodwill for the Life Sciences group as of December 31, 2018 was
$344.9 million
. An impairment of goodwill may also lead us to record an impairment of other intangible assets. The carrying amount of finite-lived intangible assets for the Life Sciences group as of December 31,
2018
was
$244.4 million
.
We completed our annual goodwill impairment review during the fourth quarters of
2017
and
2016
and concluded that there were
no
indicators of impairment at the reporting units with goodwill during those periods.
Note 9
. Intangible Assets, Net
We have identified intangible assets with finite lives primarily representing customer relationships, trademarks, and trade names. In
2018
, Life Sciences added
$163.5 million
and
$5.7 million
of intangible assets related to the Paragon Medical and Bridgemedica acquisitions, respectively. In addition, in
2018
, Power Solutions added
$1.9 million
of intangible assets related to the Technical Arts acquisition. The intangible assets acquired in
2018
primarily represent customer relationships and trademarks and trade names with a weighted average estimated useful life of the acquired intangible assets of
19 years
. Refer to
Note 3
for further discussion on the
2018
acquisitions.
The following table shows the nature and preliminary weighted average estimated useful lives of intangible assets acquired during the year ended December 31,
2018
. Actual results may differ from these projections, and the differences may be material.
|
|
|
|
|
|
|
|
|
|
Gross Carrying Value as of Acquisition Date
|
|
Weighted Average Estimated Useful Life in Years
|
Customer relationships
|
|
$
|
146,800
|
|
|
20
|
Trademark and trade name
|
|
14,700
|
|
|
29
|
Other
|
|
9,613
|
|
|
1
|
Total intangible assets acquired in current year
|
|
$
|
171,113
|
|
|
19
|
As of January 1,
2018
, as a result of the changes in our organizational and management structure, intangible assets were reassigned to operating segments with intangible assets assigned to Power Solutions and Life Sciences using a relative fair value allocation. For further information on the organizational changes, see
Note 1
.
The following table shows changes in the carrying amount of intangible assets, net.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mobile Solutions
|
|
Power Solutions
|
|
Life Sciences
|
|
Total
|
Balance as of December 31, 2016
|
|
$
|
42,928
|
|
|
$
|
115,928
|
|
|
$
|
95,407
|
|
|
$
|
254,263
|
|
Amortization
|
|
(3,481
|
)
|
|
(10,898
|
)
|
|
(9,081
|
)
|
|
(23,460
|
)
|
Currency impacts
|
|
(1
|
)
|
|
—
|
|
|
—
|
|
|
(1
|
)
|
Intangible assets acquired in acquisition
|
|
—
|
|
|
—
|
|
|
6,900
|
|
|
6,900
|
|
Balance as of December 31, 2017
|
|
$
|
39,446
|
|
|
$
|
105,030
|
|
|
$
|
93,226
|
|
|
$
|
237,702
|
|
Amortization
|
|
(3,540
|
)
|
|
(10,939
|
)
|
|
(18,074
|
)
|
|
(32,553
|
)
|
Currency impacts
|
|
(14
|
)
|
|
—
|
|
|
—
|
|
|
(14
|
)
|
Intangible assets acquired in acquisitions
|
|
—
|
|
|
1,900
|
|
|
169,213
|
|
|
171,113
|
|
Measurement period adjustments
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Balance as of December 31, 2018
|
|
$
|
35,892
|
|
|
$
|
95,991
|
|
|
$
|
244,365
|
|
|
$
|
376,248
|
|
The following table shows the cost and accumulated amortization of our intangible assets as of
December 31, 2018
and
2017
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
December 31, 2017
|
|
|
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
|
|
$
|
428,830
|
|
|
$
|
(75,581
|
)
|
|
$
|
353,249
|
|
|
$
|
282,030
|
|
|
$
|
(52,408
|
)
|
|
$
|
229,622
|
|
Trademark and trade name
|
|
8 - 30
|
|
25,100
|
|
|
(4,085
|
)
|
|
21,015
|
|
|
10,460
|
|
|
(2,703
|
)
|
|
7,757
|
|
Other
|
|
1 - 5
|
|
10,641
|
|
|
(8,657
|
)
|
|
1,984
|
|
|
8,740
|
|
|
(8,417
|
)
|
|
323
|
|
Total identified intangible assets
|
|
|
|
$
|
464,571
|
|
|
$
|
(88,323
|
)
|
|
$
|
376,248
|
|
|
$
|
301,230
|
|
|
$
|
(63,528
|
)
|
|
$
|
237,702
|
|
Intangible assets that become fully amortized are removed from the accounts and are no longer represented in the gross carrying value or accumulated amortization.
The following table summarizes estimated future amortization expense for the next five years and thereafter.
|
|
|
|
|
|
|
Year Ending December 31,
|
2019
|
$
|
47,009
|
|
2020
|
45,357
|
|
2021
|
41,415
|
|
2022
|
38,464
|
|
2023
|
36,625
|
|
Thereafter
|
167,378
|
|
Total
|
$
|
376,248
|
|
Intangible assets are tested for impairment when changes in circumstances indicate the carrying value of those assets may not be recoverable. As of December 31,
2018
and
2017
, there were
no
indications of impairment.
Note 10
. 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 summarizes activity related to our investment in the JV.
|
|
|
|
|
Balance as of December 31, 2017
|
$
|
39,822
|
|
Share of earnings
|
2,543
|
|
Dividends declared and paid by joint venture
|
(2,842
|
)
|
Accretion of basis difference from purchase accounting
|
(343
|
)
|
Foreign currency translation loss
|
(2,227
|
)
|
Impairment
|
(16,589
|
)
|
Balance as of December 31, 2018
|
$
|
20,364
|
|
During the year ended December 31,
2018
, the fair value of the JV was assessed as a result of changing market conditions. Based on the results of the assessment, we determined the carrying amount of the investment exceed its estimated fair market value, and we believe this condition is other than temporary, as defined by the accounting standards. As a result, we recorded an impairment charge of
$16.6 million
against our investment in the JV. This charge is included in the line item “Share of net income from joint venture” line on the
Consolidated Statements of Operations and Comprehensive Income (Loss)
. The fair value assessment was most significantly affected by growth rates. It is reasonably possible that material deviation of future performance from the estimates used in the valuation could result in further impairment to our investment in the JV.
The following tables show selected financial data of the JV.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2018
|
|
2017
|
|
2016
|
Net sales
|
|
$
|
69,901
|
|
|
$
|
74,805
|
|
|
$
|
65,756
|
|
Cost of sales
|
|
57,596
|
|
|
57,514
|
|
|
44,530
|
|
Income from operations
|
|
6,853
|
|
|
13,659
|
|
|
16,268
|
|
Net income
|
|
4,646
|
|
|
11,442
|
|
|
13,702
|
|
We recognized sales to the JV of
$0.3 million
,
$0.2 million
, and
$0.1 million
for the years ended December 31,
2018
,
2017
, and
2016
, respectively. Amounts due to us from the JV were
$0.1 million
,
$0.1 million
, and
$0.1 million
as of December 31,
2018
,
2017
, and
2016
, respectively.
Note 11
. Income Taxes
On December 22,
2017
, the U.S. government enacted comprehensive tax legislation. The Tax Act reduced the U.S. federal corporate income tax rate from
35%
to
21%
, required companies to pay a one-time transition tax on earnings of certain foreign subsidiaries that were previously tax deferred, and created new taxes on certain foreign sourced earnings. As a result of the Tax
Act, we recognized a
$51.8 million
net tax benefit in
2017
, which included the estimate of transition tax and the remeasurement of our domestic deferred taxes from 35% to 21%.
As of December 31,
2018
, the Company considers the accounting under Staff Accounting Bulletin No. 118 for the impacts of the Tax Act to be complete. In preparing the amounts as of December 31,
2018
, the Company considered notices, revenue procedures, and proposed regulations issued by the Internal Revenue Service and authoritative accounting guidance to date. In
2018
, the Company recognized an adjustment to the
2017
net tax benefit which decreased earnings by
$0.8 million
. This adjustment was primarily related to the one-time transition tax on deferred foreign income, change in valuation of deferred tax assets associated with tax law changes, and remeasurement of deferred taxes.
On February 5,
2019
, the Department of the Treasury and Internal Revenue Service published final regulations pertaining to the transition tax enacted as part of the Tax Act. The Company is still in the process of analyzing the impact of these regulations, which were issued subsequent to the balance sheet date of December 31,
2018
. Based upon a preliminary analysis of the final regulations, we anticipate an increase to tax expense of approximately
$6.0 million
for the year ended December 31,
2019
. The Company's analysis is on-going and the adjustment will be recorded in
2019
during the period of enactment of the regulations.
Loss from continuing operations before benefit for income taxes was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2018
|
|
2017
|
|
2016
|
Loss from continuing operations before benefit for income taxes and share of net income from joint venture
|
|
|
|
|
|
|
United States
|
|
$
|
(263,499
|
)
|
|
$
|
(71,603
|
)
|
|
$
|
(39,160
|
)
|
Foreign
|
|
2,465
|
|
|
12,730
|
|
|
8,294
|
|
Total
|
|
$
|
(261,034
|
)
|
|
$
|
(58,873
|
)
|
|
$
|
(30,866
|
)
|
Total income tax benefit was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2018
|
|
2017
|
|
2016
|
Current taxes:
|
|
|
|
|
|
|
U.S. Federal
|
|
$
|
8,150
|
|
|
$
|
(47,916
|
)
|
|
$
|
(2,595
|
)
|
State
|
|
584
|
|
|
(12,226
|
)
|
|
679
|
|
Foreign
|
|
3,086
|
|
|
4,310
|
|
|
2,004
|
|
Total current tax expense (benefit)
|
|
11,820
|
|
|
(55,832
|
)
|
|
88
|
|
Deferred taxes:
|
|
|
|
|
|
|
U.S. Federal
|
|
$
|
(16,129
|
)
|
|
$
|
(25,017
|
)
|
|
$
|
(9,679
|
)
|
State
|
|
(780
|
)
|
|
3,009
|
|
|
(6,406
|
)
|
Deferred tax valuation allowance
|
|
(3,565
|
)
|
|
710
|
|
|
1,882
|
|
Foreign
|
|
(2,303
|
)
|
|
(1,896
|
)
|
|
(1,323
|
)
|
Total deferred tax benefit
|
|
(22,777
|
)
|
|
(23,194
|
)
|
|
(15,526
|
)
|
Total income tax benefit
|
|
$
|
(10,957
|
)
|
|
$
|
(79,026
|
)
|
|
$
|
(15,438
|
)
|
A reconciliation of income taxes based on the U.S. federal statutory income tax rate is summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2018
|
|
2017
|
|
2016
|
U.S federal statutory income tax rate
|
|
21.0
|
%
|
|
35.0
|
%
|
|
34.0
|
%
|
Change in valuation allowance
|
|
(0.9
|
)%
|
|
(1.2
|
)%
|
|
(6.1
|
)%
|
Foreign tax credits, exclusive of tax reform
|
|
—
|
%
|
|
(13.8
|
)%
|
|
8.2
|
%
|
State taxes, net of federal taxes, exclusive of tax reform
|
|
0.4
|
%
|
|
9.1
|
%
|
|
5.7
|
%
|
Non-U.S. earnings taxed at different rates
|
|
1.2
|
%
|
|
1.7
|
%
|
|
4.8
|
%
|
Non-deductible mergers and acquisitions costs
|
|
(0.2
|
)%
|
|
—
|
%
|
|
—
|
%
|
GILTI
|
|
(0.3
|
)%
|
|
—
|
%
|
|
—
|
%
|
Goodwill impairment
|
|
(15.5
|
)%
|
|
—
|
%
|
|
—
|
%
|
R&D Tax credit
|
|
0.3
|
%
|
|
0.3
|
%
|
|
0.9
|
%
|
Change in uncertain tax positions
|
|
0.3
|
%
|
|
(0.4
|
)%
|
|
3.2
|
%
|
Impact of Tax Reform
|
|
|
|
|
|
|
Toll Charge, net of foreign tax credit
|
|
0.6
|
%
|
|
(11.5
|
)%
|
|
—
|
%
|
Remeasurement of deferred taxes pursuant to tax reform
|
|
(0.9
|
)%
|
|
65.6
|
%
|
|
—
|
%
|
Tax Reform impact on divestiture of business segment
|
|
—
|
%
|
|
33.9
|
%
|
|
—
|
%
|
Section 199/Domestic Production Deduction
|
|
—
|
%
|
|
0.8
|
%
|
|
—
|
%
|
Divestiture of Business Segment, exclusive of tax reform
|
|
(0.9
|
)%
|
|
13.6
|
%
|
|
—
|
%
|
Return to provision
|
|
(0.8
|
)%
|
|
—
|
%
|
|
—
|
%
|
Prior period revisions
|
|
—
|
%
|
|
0.5
|
%
|
|
4.2
|
%
|
Foreign JV net income
|
|
—
|
%
|
|
—
|
%
|
|
(4.1
|
)%
|
Other adjustments, net
|
|
(0.1
|
)%
|
|
0.6
|
%
|
|
(0.8
|
)%
|
Effective tax rate
|
|
4.2
|
%
|
|
134.2
|
%
|
|
50.0
|
%
|
The
2018
effective tax rate of
4.2%
differs from the U.S. federal statutory income tax rate of
21%
due to permanent differences including the impact of the goodwill impairment, most of which is treated as a permanent difference for income tax purposes.
The
2017
effective tax rate of
134.2%
was heavily influenced by the remeasurement of our ending domestic deferred balances, an estimate of the one-time transition tax (net of foreign tax credits) on earnings of our foreign subsidiaries in accordance with the Tax Act, and the impact of the Tax Act on the divestiture of the PBC Business.
The principal components of the deferred tax assets and liabilities are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
2018
|
|
2017
|
Deferred income tax liabilities:
|
|
|
|
|
Tax in excess of book depreciation
|
|
$
|
37,425
|
|
|
$
|
34,143
|
|
Goodwill
|
|
—
|
|
|
58
|
|
Intangible assets
|
|
80,623
|
|
|
50,688
|
|
Other deferred tax liabilities
|
|
794
|
|
|
389
|
|
Total deferred income tax liabilities
|
|
118,842
|
|
|
85,278
|
|
Deferred income tax assets:
|
|
|
|
|
Interest expense limitation
|
|
9,968
|
|
|
—
|
|
Goodwill
|
|
1,441
|
|
|
2,067
|
|
Inventories
|
|
2,745
|
|
|
2,248
|
|
Pension/Personnel accruals
|
|
1,317
|
|
|
1,596
|
|
Net operating loss carry forwards
|
|
9,321
|
|
|
6,950
|
|
Foreign tax credits
|
|
5,345
|
|
|
—
|
|
Credit carry forwards
|
|
4,130
|
|
|
3,427
|
|
Accruals and reserves
|
|
1,531
|
|
|
2,015
|
|
Other deferred tax assets
|
|
4,022
|
|
|
3,019
|
|
Deferred income tax assets before Valuation Allowance
|
|
39,820
|
|
|
21,322
|
|
Valuation allowance on deferred tax assets
|
|
(14,460
|
)
|
|
(7,608
|
)
|
Total deferred income tax assets
|
|
25,360
|
|
|
13,714
|
|
Net deferred income tax liabilities
(1)
|
|
$
|
93,482
|
|
|
$
|
71,564
|
|
________________________
|
|
(1)
|
In accordance with the Tax Act, our ending domestic deferred balances have been remeasured to
21%
for the year ended December 31,
2017
.
|
During the year ended December 31,
2018
, we finalized our accounting policy decision with respect to the new GILTI tax rules and have concluded that GILTI will be treated as a periodic charge in the year in which it arises. Therefore, we will not record deferred taxes for the basis associated with GILTI earnings.
As realization of certain deferred tax assets is not assured, management believes it is more likely than not that those net deferred tax assets will be realized. However, the amount of the deferred tax assets considered realizable could be reduced based on changing conditions.
The following table summarizes our total valuation allowances:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2018
|
|
2017
|
|
2016
|
Balance at beginning of year
|
|
$
|
7,608
|
|
|
$
|
4,090
|
|
|
$
|
2,376
|
|
Additions
|
|
6,852
|
|
|
3,518
|
|
|
1,882
|
|
Recoveries
|
|
—
|
|
|
—
|
|
|
(168
|
)
|
Balance at end of year
|
|
$
|
14,460
|
|
|
$
|
7,608
|
|
|
$
|
4,090
|
|
During
2018
, the valuation allowance increased by approximately
$6.9 million
, as a result of an increase in foreign and state NOL’s and U.S. foreign tax credits.
During
2017
, the valuation allowance increased by approximately
$3.5 million
, consisting of a
$2.3 million
increase due to the uncertainty of realizing certain state NOL carryforwards, and a
$1.2 million
increase for foreign NOL’s.
During
2016
, the valuation allowance increased by approximately
$1.7 million
, consisting of a
$1.9 million
increase due to the uncertainty of realizing certain state NOL carryforwards offset by a decrease of
$0.2 million
related to the Company’s expectation that it is more likely than not that it will generate future taxable income to utilize this amount of net deferred tax assets.
A reconciliation of the beginning and ending amounts of unrecognized tax benefits, excluding interest and penalties, is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2018
|
|
2017
|
|
2016
|
Balance at beginning of year
|
|
$
|
5,655
|
|
|
$
|
4,741
|
|
|
$
|
5,724
|
|
Additions for tax positions of prior years
|
|
304
|
|
|
1,404
|
|
|
179
|
|
Reductions for tax positions of prior years
|
|
(1,350
|
)
|
|
(490
|
)
|
|
(1,162
|
)
|
Balance at end of year
|
|
$
|
4,609
|
|
|
$
|
5,655
|
|
|
$
|
4,741
|
|
As of December 31,
2018
, the
$4.6 million
of unrecognized tax benefits would, if recognized, impact our effective tax rate by
$4.0 million
. The
2018
reduction is related to expiring statutes of limitations in certain US state and foreign jurisdictions.
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)
. During
2018
, we released less than
$0.1 million
of previously accrued foreign interest and released
$0.2 million
of previously accrued U.S. interest. During
2017
, we released
$0.2 million
of previously accrued U.S. interest. During
2016
, we released less than
$0.1 million
of previously accrued foreign interest and accrued
$0.2 million
in U.S. interest.
Management believes that it is reasonably possible that the amount of unrecognized income benefits and interest may decrease during the next
twelve
months by approximately
$1.8 million
, related to the expiration of the statutes of limitations.
As of December 31,
2018
, the Company has
$101.6 million
of state NOL carryovers. The state NOL’s begin to expire in
2030
. We also have
$10.7 million
of foreign NOL carryovers at December 31,
2018
. The foreign NOL’s have an indefinite life. The Company has
$4.1 million
of tax credits in foreign jurisdictions at December 31,
2018
. The tax credits in foreign jurisdictions begin to expire in
2026
. The Company has foreign tax credit carryforwards for federal income tax purposes of
$5.3 million
at December 31,
2018
. The foreign tax credit carryforwards begin to expire in
2024
. The state NOL’s, tax credits in foreign jurisdictions, and foreign tax credits for federal income tax purposes have a full valuation allowance. These amounts are included in the valuation allowance table on the previous page.
We or our subsidiaries file income tax returns in the U.S. federal jurisdiction, and in various states and foreign jurisdictions. During the third quarter of
2017
, the Internal Revenue Service commenced an examination of the federal tax return for the pre-acquisition period of January 1,
2015
, through October 19,
2015
, for Precision Engineered Products, LLC, our wholly-owned subsidiary. The examination was completed during the 4th quarter of
2018
.
The Company is no longer subject to federal examinations by tax authorities for years before 2012. The Company is also subject to examination by various state and international tax authorities. The tax years subject to examination vary by jurisdiction. The Company regularly assesses the outcomes of both ongoing and future examinations for the current or prior years to ensure the Company’s provision for income taxes is sufficient. The Company recognizes liabilities based on estimates of whether additional taxes will be due and believes its 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 the Company’s financial position or results of operations.
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
$0.8 million
and
$0.7 million
for
2017
and
2016
, respectively. The benefit of the tax holidays on net income per share (diluted) was
$0.03
and
$0.03
for
2017
, and
2016
, respectively. The tax holidays had
no
impact on our
2018
foreign taxes.
Note 12
. Debt
Collectively, our credit facility is comprised of a term loan with a face amount of
$545.0 million
, maturing on
October 19, 2022
(the “Senior Secured Term Loan”); a term loan with a face amount of
$300.0 million
, maturing on
April 3, 2021
(the “Incremental Term Loan”); and a revolving line of credit with a face amount of
$143.0 million
, maturing on
October 19, 2020
(the “Senior Secured Revolver”). The credit facility is collateralized by all of our assets.
The following table presents outstanding debt balances as of December 31,
2018
and
2017
.
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
2018
|
|
2017
|
Senior Secured Term Loan
|
|
$
|
532,063
|
|
|
$
|
534,250
|
|
Incremental Term Loan
|
|
279,000
|
|
|
291,000
|
|
Senior Secured Revolver
|
|
38,720
|
|
|
—
|
|
International lines of credit and other loans
|
|
9,810
|
|
|
3,315
|
|
Total principal
|
|
859,593
|
|
|
828,565
|
|
Less—current maturities of long-term debt
|
|
31,280
|
|
|
17,283
|
|
Principal, net of current portion
|
|
828,313
|
|
|
811,282
|
|
Less—unamortized debt issuance costs
|
|
16,842
|
|
|
20,477
|
|
Long-term debt, net of current portion
|
|
$
|
811,471
|
|
|
$
|
790,805
|
|
We capitalized interest costs amounting to
$1.2 million
,
$1.1 million
, and
$1.6 million
in the years ended December 31,
2018
,
2017
, and
2016
, related to construction in progress.
Senior Secured Term Loan
On November 24,
2017
, we amended our existing credit facility to reduce the applicable margin on outstanding borrowings under the Senior Secured Term Loan by
50
basis points from
4.25%
to
3.75%
. Outstanding borrowings under the Senior Secured Term Loan bear interest at the greater of
0.75%
or one-month London Interbank Offered Rate (“LIBOR”) plus an applicable margin of
3.75%
. At
December 31, 2018
, the Senior Secured Term Loan bore interest of
6.25%
.
Incremental Term Loan
On November 24,
2017
, we amended our existing credit facility to reduce the applicable margin on outstanding borrowings under the Incremental Term Loan by
50
basis points from
3.75%
to
3.25%
. Outstanding borrowings under the Incremental Term Loan bear interest at one-month LIBOR plus an applicable margin of
3.25%
. At
December 31, 2018
, the Incremental Term Loan bore interest of
5.75%
, one-month LIBOR plus
3.25%
.
Second Lien Credit Agreement
On May 7,
2018
, we amended our existing credit facility (the “May
2018
amendment”) to permit the Paragon Medical acquisition, to permit the Second Lien Credit Agreement, and to amend certain covenants. In connection with the May
2018
amendment, we, certain of our subsidiaries named therein, SunTrust Bank, as Administrative Agent, SunTrust Robinson Humphrey, Inc., as Lead Arranger and Bookrunner, and the lenders named therein, entered into a Second Lien Credit Agreement (the “Second Lien Credit Agreement”) pursuant to which SunTrust Bank and the other lenders extended to us a
$200.0 million
secured second lien term loan facility (the “Second Lien Facility”). We utilized the net proceeds from the Second Lien Facility, together with cash on hand, to pay the Paragon Medical purchase price and fees and expenses related to the acquisition. The Second Lien Facility was collateralized by all of our assets and had a maturity date of
April 19, 2023
. Outstanding borrowings under the Second Lien Facility bore interest at either (i) a base rate plus an applicable margin of
7.00%
, or (ii) the greater of LIBOR or
1.00%
plus an applicable margin of
8.00%
. We paid
$16.7 million
of debt issuance costs related to the May
2018
amendment of which
$12.9 million
is included in the “
Loss on extinguishment of debt and write-off of debt issuance costs
” line on the
Consolidated Statements of Operations and Comprehensive Income (Loss)
and
$3.8 million
is capitalized as a reduction of long-term debt.
On September 18,
2018
, a significant portion of net proceeds from a registered public offering of shares of our common stock was used to voluntarily prepay in the full the
$200.0 million
outstanding principal balance. We paid a prepayment penalty of
two percent
of the outstanding principal balance, or
$4.0 million
, and wrote off
$2.6 million
of unamortized debt issuance costs to the “
Loss on extinguishment of debt and write-off of debt issuance costs
” line on the
Consolidated Statements of Operations and Comprehensive Income (Loss)
. Refer to
Note 15
for additional information regarding the registered public offering.
Senior Secured Revolver
Outstanding borrowings under the Senior Secured Revolver bear interest at one-month LIBOR plus
3.50%
. At
December 31, 2018
, the Senior Secured Revolver bore interest of
6.00%
. We pay an annual commitment fee of
0.50%
for unused capacity under the Senior Secured Revolver on a quarterly basis.
On December 26,
2018
, we amended our existing credit facility (the “December
2018
amendment”) to increase the total available capacity under the Senior Secured Revolver and to reduce the consolidated net leverage ratio, the basis for certain
financial covenants, for periods ended on or after
December 31, 2018
. The December
2018
amendment increased the total available capacity under the Senior Secured Revolver from
$100.0 million
to
$125.0 million
. We paid
$0.1 million
of debt issuance costs related to the December
2018
amendment which is capitalized as a reduction of long-term debt.
Total available capacity under the Senior Secured Revolver was
$125.0 million
as of
December 31, 2018
. Available capacity may be restored to
$143.0 million
upon the achievement of certain requirements. Our credit facility is subject to certain financial covenants based on a consolidated net leverage ratio, as defined in the credit facility agreement. The financial covenants are effective when we have outstanding borrowings under our Senior Secured Revolver on the last day of any fiscal quarter and become more restrictive over time. We had
$38.7 million
outstanding under the Senior Secured Revolver at
December 31, 2018
, and we were in compliance with all covenants under our credit facility.
International Lines of Credit and Other Loans
International lines of credit and other loans is comprised of loans with financial institutions in France, Brazil, and China (“international credit facilities”). The international credit facilities are used to fund working capital and equipment purchases for our manufacturing plants in those countries. As of
December 31, 2018
, the international credit facilities had
$9.8 million
outstanding of which
$6.8 million
is classified as “
Current maturities of long-term debt
” on the
Consolidated Balance Sheets
.
Future Maturities
The following table lists aggregate maturities of long-term debt for the next five years and thereafter.
|
|
|
|
|
|
Year Ending December 31,
|
|
Aggregate
Maturities
Principal
Amounts
|
2019
|
|
$
|
31,280
|
|
2020
|
|
50,097
|
|
2021
|
|
261,094
|
|
2022
|
|
515,157
|
|
2023
|
|
344
|
|
Thereafter
|
|
1,621
|
|
|
|
|
Total outstanding principal
|
|
$
|
859,593
|
|
Note 13
. Restructuring and Integration
The following table summarizes restructuring and integration charges for the years ended December 31,
2018
,
2017
, and
2016
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mobile
Solutions
|
|
Power
Solutions
|
|
Life
Sciences
|
|
Corporate and
Consolidations
|
|
Total
|
Year Ended December 31, 2018
|
|
|
|
|
|
|
|
|
|
|
Severance and other employee costs
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,336
|
|
|
$
|
728
|
|
|
$
|
2,064
|
|
Site closure and other associated costs
|
|
63
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
63
|
|
Total
|
|
$
|
63
|
|
|
$
|
—
|
|
|
$
|
1,336
|
|
|
$
|
728
|
|
|
$
|
2,127
|
|
Year Ended December 31, 2017
|
|
|
|
|
|
|
|
|
|
|
Severance and other employee costs
|
|
$
|
17
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
17
|
|
Site closure and other associated costs
|
|
369
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
369
|
|
Total
|
|
$
|
386
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
386
|
|
Year Ended December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
Severance and other employee costs
|
|
$
|
851
|
|
|
$
|
455
|
|
|
$
|
381
|
|
|
$
|
—
|
|
|
$
|
1,687
|
|
Site closure and other associated costs
|
|
3,488
|
|
|
263
|
|
|
220
|
|
|
—
|
|
|
3,971
|
|
Total
|
|
$
|
4,339
|
|
|
$
|
718
|
|
|
$
|
601
|
|
|
$
|
—
|
|
|
$
|
5,658
|
|
The following tables summarize restructuring and integration reserve activity for the years ended December 31,
2018
,
2017
, and
2016
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserve
Balance as of
December 31, 2017
|
|
Charges
|
|
Non-cash
Adjustments
|
|
Cash
Reductions
|
|
Reserve
Balance as of
December 31, 2018
|
Severance and other employee costs
|
|
$
|
—
|
|
|
$
|
2,064
|
|
|
$
|
—
|
|
|
$
|
(942
|
)
|
|
$
|
1,122
|
|
Site closure and other associated costs
|
|
1,099
|
|
|
63
|
|
|
(56
|
)
|
|
(1,082
|
)
|
|
24
|
|
Total
|
|
$
|
1,099
|
|
|
$
|
2,127
|
|
|
$
|
(56
|
)
|
|
$
|
(2,024
|
)
|
|
$
|
1,146
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserve
Balance as of
December 31, 2016
|
|
Charges
|
|
Non-cash
Adjustments
|
|
Cash
Reductions
|
|
Reserve
Balance as of
December 31, 2017
|
Severance and other employee costs
|
|
$
|
1,000
|
|
|
$
|
17
|
|
|
$
|
(164
|
)
|
|
$
|
(853
|
)
|
|
$
|
—
|
|
Site closure and other associated costs
|
|
1,625
|
|
|
369
|
|
|
—
|
|
|
(895
|
)
|
|
1,099
|
|
Total
|
|
$
|
2,625
|
|
|
$
|
386
|
|
|
$
|
(164
|
)
|
|
$
|
(1,748
|
)
|
|
$
|
1,099
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserve
Balance as of
December 31, 2015
|
|
Charges
|
|
Non-cash
Adjustments
|
|
Cash
Reductions
|
|
Reserve
Balance as of
December 31, 2016
|
Severance and other employee costs
|
|
$
|
887
|
|
|
$
|
1,687
|
|
|
$
|
(278
|
)
|
|
$
|
(1,296
|
)
|
|
$
|
1,000
|
|
Site closure and other associated costs
|
|
1,845
|
|
|
3,971
|
|
|
(2,142
|
)
|
|
(2,049
|
)
|
|
1,625
|
|
Total
|
|
$
|
2,732
|
|
|
$
|
5,658
|
|
|
$
|
(2,420
|
)
|
|
$
|
(3,345
|
)
|
|
$
|
2,625
|
|
In
2018
, we recognized severance and other employee costs of
$0.7 million
at corporate headquarters related to the restructuring of our former Precision Engineered Products Group to form the Power Solutions and Life Sciences groups, effective January 2,
2018
. We also recognized severance and other employee costs of
$1.3 million
in our Life Sciences group related to the post-acquisition integration of Paragon Medical into our existing business.
In
2017
, we recognized restructuring and integration expense of
$0.4 million
in our Mobile Solutions group due primarily to the closure of a plant in Wheeling, Illinois (the “Wheeling Plant”), which was a part of our integration plan after the acquisition of Autocam Corporation (“Autocam”) in
2014
.
In
2016
, we recognized restructuring and integration expense of
$4.3 million
in our Mobile Solutions segment due primarily to the closure of the Wheeling Plant. These charges consisted of
$0.8 million
of severance and other employee costs and site closure and other associated costs of
$3.5 million
. We also recognized restructuring and integration expense of
$0.7 million
and
$0.6 million
due to initiatives within our Power Solutions and Life Sciences groups, respectively, related to integration costs, rebranding, site moving costs for two plants, and other employee costs.
The amount accrued as of
December 31, 2018
, for restructuring and integration costs represents our expected obligation over the next
2.2
years primarily related to severance and other employee costs. We expect to pay
$0.7 million
within the next
twelve
months.
Note 14
. Commitments and Contingencies
Lease Payments
We have operating lease commitments for machinery, office equipment, vehicles, and manufacturing and office space which expire on varying dates. We recognized rent expense of
$12.4 million
,
$7.6 million
, and
$7.2 million
for the years ended December 31,
2018
,
2017
and
2016
, respectively.
The following table summarizes future minimum lease payments as of December 31,
2018
, under operating leases that have initial or remaining non-cancelable lease terms in excess of one year.
|
|
|
|
|
Year Ending December 31,
|
Minimum
Rental
Commitments
|
2019
|
$
|
13,337
|
|
2020
|
11,515
|
|
2021
|
10,557
|
|
2022
|
10,293
|
|
2023
|
8,752
|
|
Thereafter
|
53,945
|
|
|
|
Total minimum payments
|
$
|
108,399
|
|
Brazil ICMS Tax Matter
Prior to the acquisition of 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 process. 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 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. Although we anticipate a favorable resolution to all matters, we can provide no assurances that we will be successful in achieving dismissal of all pending cases. While we believe a loss is not probable, we estimate the range of possible losses related to this assessment is from
$0
to
$6.0 million
.
No
amount was accrued at December 31,
2018
, for this matter.
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.
All Other Legal Matters
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 15
. Equity Offering
On
September 18, 2018
, we issued
14.4 million
shares of our common stock in a public offering under our shelf registration statement at a price of
$16.00
per share. Net proceeds of
$217.3 million
were used to repay the Second Lien Facility and a portion of the Senior Secured Revolver.
Note 16
. Revenue from Contracts with Customers
We adopted ASC 606 on January 1,
2018
, using the modified retrospective transition method for all contracts not completed as of the date of adoption. The reported results for
2018
reflect the application of ASC 606 while the reported results for
2017
and
2016
were prepared under the guidance of ASC 605. The adoption of ASC 606 represents a change in accounting principle that will more closely align revenue recognition with the delivery of our goods and will provide financial statement readers with enhanced disclosures. In accordance with ASC 606, revenue is recognized when a customer obtains control of promised goods in an amount that reflects the consideration we expect to be entitled to receive in exchange for those goods. To the extent that transaction price includes variable consideration, 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 management’s judgment, it is probable that a significant future reversal of cumulative revenue under the contract will occur.
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 sales to external customers by operating segment for the years ended
December 31, 2018
,
2017
, and
2016
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2018
|
|
|
Mobile
Solutions
|
|
Power
Solutions
|
|
Life
Sciences
|
|
Intersegment Sales Eliminations
|
|
Total
|
United States
|
|
$
|
187,178
|
|
|
$
|
157,357
|
|
|
$
|
206,776
|
|
|
$
|
(2,331
|
)
|
|
$
|
548,980
|
|
China
|
|
43,610
|
|
|
5,537
|
|
|
6,130
|
|
|
—
|
|
|
55,277
|
|
Mexico
|
|
27,053
|
|
|
12,254
|
|
|
191
|
|
|
—
|
|
|
39,498
|
|
Brazil
|
|
35,314
|
|
|
215
|
|
|
29
|
|
|
—
|
|
|
35,558
|
|
Germany
|
|
5,652
|
|
|
26
|
|
|
19,870
|
|
|
—
|
|
|
25,548
|
|
Switzerland
|
|
5,006
|
|
|
54
|
|
|
6,446
|
|
|
—
|
|
|
11,506
|
|
Poland
|
|
7,010
|
|
|
13
|
|
|
8
|
|
|
—
|
|
|
7,031
|
|
Italy
|
|
5,558
|
|
|
221
|
|
|
317
|
|
|
—
|
|
|
6,096
|
|
Czech Republic
|
|
6,131
|
|
|
47
|
|
|
—
|
|
|
—
|
|
|
6,178
|
|
Netherlands
|
|
—
|
|
|
3,290
|
|
|
—
|
|
|
—
|
|
|
3,290
|
|
Other
|
|
12,525
|
|
|
10,764
|
|
|
8,406
|
|
|
—
|
|
|
31,695
|
|
Total net sales
|
|
$
|
335,037
|
|
|
$
|
189,778
|
|
|
$
|
248,173
|
|
|
$
|
(2,331
|
)
|
|
$
|
770,657
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2017
|
|
|
Mobile
Solutions
|
|
Power
Solutions
|
|
Life
Sciences
|
|
Intersegment Sales Eliminations
|
|
Total
|
United States
|
|
$
|
190,828
|
|
|
$
|
152,938
|
|
|
$
|
96,062
|
|
|
$
|
(1,990
|
)
|
|
$
|
437,838
|
|
China
|
|
45,503
|
|
|
6,481
|
|
|
267
|
|
|
—
|
|
|
52,251
|
|
Mexico
|
|
26,639
|
|
|
14,220
|
|
|
78
|
|
|
—
|
|
|
40,937
|
|
Brazil
|
|
35,425
|
|
|
185
|
|
|
—
|
|
|
—
|
|
|
35,610
|
|
Germany
|
|
5,502
|
|
|
11
|
|
|
35
|
|
|
—
|
|
|
5,548
|
|
Switzerland
|
|
5,450
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
5,450
|
|
Poland
|
|
5,183
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
5,183
|
|
Italy
|
|
5,347
|
|
|
334
|
|
|
—
|
|
|
—
|
|
|
5,681
|
|
Czech Republic
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Netherlands
|
|
—
|
|
|
2,817
|
|
|
—
|
|
|
—
|
|
|
2,817
|
|
Other
|
|
16,975
|
|
|
9,616
|
|
|
1,887
|
|
|
—
|
|
|
28,478
|
|
Total net sales
|
|
$
|
336,852
|
|
|
$
|
186,602
|
|
|
$
|
98,329
|
|
|
$
|
(1,990
|
)
|
|
$
|
619,793
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2016
|
|
|
Mobile
Solutions
|
|
Power
Solutions
|
|
Life
Sciences
|
|
Intersegment Sales Eliminations
|
|
Total
|
United States
|
|
$
|
196,217
|
|
|
$
|
134,564
|
|
|
$
|
78,707
|
|
|
$
|
(1,571
|
)
|
|
$
|
407,917
|
|
China
|
|
44,579
|
|
|
8,131
|
|
|
403
|
|
|
—
|
|
|
53,113
|
|
Mexico
|
|
24,919
|
|
|
20,944
|
|
|
—
|
|
|
—
|
|
|
45,863
|
|
Brazil
|
|
23,801
|
|
|
458
|
|
|
—
|
|
|
—
|
|
|
24,259
|
|
Germany
|
|
4,497
|
|
|
8
|
|
|
35
|
|
|
—
|
|
|
4,540
|
|
Switzerland
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Poland
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Italy
|
|
5,027
|
|
|
322
|
|
|
—
|
|
|
—
|
|
|
5,349
|
|
Czech Republic
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Netherlands
|
|
—
|
|
|
1,882
|
|
|
—
|
|
|
—
|
|
|
1,882
|
|
Other
|
|
27,098
|
|
|
14,021
|
|
|
912
|
|
|
—
|
|
|
42,031
|
|
Total net sales
|
|
$
|
326,138
|
|
|
$
|
180,330
|
|
|
$
|
80,057
|
|
|
$
|
(1,571
|
)
|
|
$
|
584,954
|
|
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 have utilized certain practical expedients allowed by the new standard. 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 financial statements of applying the portfolio approach would not differ materially from applying the new standard to 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 January 1, 2018
|
|
$
|
2,124
|
|
Balance at December 31, 2018
|
|
$
|
2,974
|
|
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, 2018
, were not materially impacted by any other factors. Revenue recognized for the year ended
December 31, 2018
, from amounts included in deferred revenue at the beginning of the period for performance obligations satisfied or partially satisfied during the year ended
December 31, 2018
, was approximately
$1.9 million
.
Transaction Price Allocated to Future Performance Obligations
ASC 606 requires that we disclose the aggregate amount of transaction price that is allocated to performance obligations that have not yet been satisfied as of
December 31, 2018
. The guidance provides certain practical expedients that limit this requirement. Our contracts meet the following practical expedient provided by ASC 606:
|
|
•
|
The performance obligation is part of a contract that has an original expected duration of one year or less.
|
Costs to Obtain and Fulfill a Contract
Prior to the adoption of ASC 606, we expensed commissions paid to internal sales representative for obtaining contracts. Under ASC 606, we adopted the practical expedient to 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. The judgments made in determining the amount of costs incurred included whether the commissions are in fact incremental and would not have occurred absent the customer contract. Costs to obtain a contract are expressed 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.
Financial Statement Impact of Adopting ASC 606
The following table presents the impact of adoption of ASC 606 on our
Consolidated Statements of Operations and Comprehensive Income (Loss)
and our
Consolidated Balance Sheets
. Differences are due to the acceleration in the recognition of revenue to the point of shipment or delivery for contracts where an unconditional obligation to purchase is present for inventory that was considered in consignment under ASC 605.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2018
|
|
As Reported
|
|
Balances Without Adoption of ASC 606
|
|
Effect of Change
|
Net sales
|
$
|
770,657
|
|
|
$
|
770,654
|
|
|
$
|
3
|
|
Cost of sales
|
588,205
|
|
|
588,202
|
|
|
3
|
|
Income (loss) from operations
|
(178,888
|
)
|
|
(178,888
|
)
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2018
|
|
As Reported
|
|
Balances Without Adoption of ASC 606
|
|
Effect of Change
|
Accounts receivable, net
|
$
|
133,421
|
|
|
$
|
132,810
|
|
|
$
|
611
|
|
Inventories
|
122,615
|
|
|
122,988
|
|
|
(373
|
)
|
Note 17
. Share-Based Compensation
We recognize compensation expense of all employee and non-employee director share-based compensation awards in the 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,
2018
, we have approximately
1.9 million
maximum shares 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
$1.0 million
and
$0.5 million
attributable to discontinued operations for the years ended December 31,
2017
and
2016
, respectively.
The following table lists the components of share-based compensation expense by type of award.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2018
|
|
2017
|
|
2016
|
Stock options
|
|
$
|
678
|
|
|
$
|
1,078
|
|
|
$
|
687
|
|
Restricted stock
|
|
1,630
|
|
|
1,968
|
|
|
2,061
|
|
Performance share units
|
|
2,076
|
|
|
2,450
|
|
|
1,187
|
|
Change in estimate of performance share vesting
(1)
|
|
(1,968
|
)
|
|
—
|
|
|
—
|
|
Share-based compensation expense
|
|
$
|
2,416
|
|
|
$
|
5,496
|
|
|
$
|
3,935
|
|
_______________________
(1) Amount reflects the decrease in share-based compensation expense of
$2.0 million
based on the change in estimate of the probability of vesting of performance share units as described in the “Performance Share Units” section of this Note.
The total tax benefit for share-based compensation cost was
$0.7 million
,
$1.6 million
, and
$0.6 million
for the years ended December 31,
2018
,
2017
, and
2016
, respectively. Unrecognized compensation cost related to unvested awards was
$4.0 million
as of December 31,
2018
. We expect that cost to be recognized over a weighted-average period of
1.8
years.
Stock Options
Option awards are typically granted to key employees on an annual basis. A single option grant is typically awarded to eligible employees each year by the Compensation Committee of the Board of Directors. The Compensation Committee occasionally awards additional individual grants to eligible employees. All employees are awarded options at an exercise price equal to the closing price of our stock on the date of grant. The term life of options is
ten
years with a vesting period of generally
three
years.
During the years ended
2018
,
2017
, and
2016
, we granted options to purchase
57,800
,
125,700
, and
167,000
shares, respectively, to certain key employees. The weighted average grant date fair value of the options granted during
2018
,
2017
, and
2016
was
$10.60
,
$11.84
, and
$5.02
per share, respectively. 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.
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
|
2016
|
Expected term
|
|
6 years
|
|
|
6 years
|
|
|
6 years
|
|
Average risk-free interest rate
|
|
2.66
|
%
|
|
2.03
|
%
|
|
1.43
|
%
|
Expected dividend yield
|
|
1.15
|
%
|
|
1.16
|
%
|
|
2.48
|
%
|
Expected volatility
|
|
47.69
|
%
|
|
56.56
|
%
|
|
59.23
|
%
|
Expected forfeiture rate
|
|
4.00
|
%
|
|
3.00
|
%
|
|
3.00
|
%
|
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.
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 volatility 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 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 summarizes stock option activity for the year ended December 31,
2018
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Options
(in thousands)
|
|
Weighted-
Average
Exercise
Price
(per share)
|
|
Weighted-
Average
Remaining
Contractual
Term (years)
|
|
Aggregate
Intrinsic
Value
|
|
|
Outstanding at January 1, 2018
|
|
746
|
|
|
$
|
14.33
|
|
|
|
|
|
|
|
Granted
|
|
58
|
|
|
24.47
|
|
|
|
|
|
|
|
Exercised
|
|
(27
|
)
|
|
10.15
|
|
|
|
|
$
|
477
|
|
|
|
Forfeited or expired
|
|
(6
|
)
|
|
22.39
|
|
|
|
|
|
|
|
Outstanding at December 31, 2018
|
|
771
|
|
|
$
|
15.17
|
|
|
5.6
|
|
$
|
—
|
|
|
(1)
|
Exercisable at December 31, 2018
|
|
625
|
|
|
$
|
13.63
|
|
|
4.9
|
|
$
|
—
|
|
|
(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,
2018
, was greater than the exercise price of any individual option grant.
|
Cash proceeds from the exercise of options in the years ended December 31,
2018
,
2017
, and
2016
totaled approximately
$0.3 million
,
$3.1 million
, and
$2.8 million
, respectively. The tax benefit recognized from stock option exercises was less than
$0.1 million
,
$0.2 million
, and less than
$0.1 million
in the years ended December 31,
2018
,
2017
, and
2016
, respectively. For the years ended December 31,
2018
,
2017
, and
2016
, proceeds from stock options are presented exclusive of tax benefits in cash flows from financing activities in the
Consolidated Statements of Cash Flows
. The total intrinsic value of options exercised during the years ended December 31,
2018
,
2017
, and
2016
was
$0.5 million
,
$3.8 million
, and
$2.9 million
, respectively.
Restricted Stock
During the years ended December 31,
2018
,
2017
, and
2016
, we granted
86,516
,
85,393
, and
152,510
restricted stock awards to non-executive directors, officers, and certain other key employees. The restricted stock granted during the years ended
2018
,
2017
, and
2016
, vest pro-rata over
three
years for officers and certain other key employees and over
one
year for non-executive directors. We determined the fair value of the shares awarded by using the closing price of our common stock as of the date of grant. The weighted average grant date fair value of restricted stock granted in the years ended December 31,
2018
,
2017
, and
2016
, was
$24.55
,
$24.29
, and
$11.39
per share, respectively. The total grant date fair value of restricted stock that vested in the years ended December 31,
2018
,
2017
, and
2016
, was
$1.8 million
,
$2.1 million
, and
$2.6 million
, respectively.
The following table summarizes unvested restricted stock award activity for the year ended December 31,
2018
.
|
|
|
|
|
|
|
|
|
|
|
Number of Unvested
Restricted
Shares
(in thousands)
|
|
Weighted
Average Grant
Date Fair
Value
|
Unvested at January 1, 2018
|
|
152
|
|
|
$
|
19.21
|
|
Granted
|
|
87
|
|
|
24.55
|
|
Vested
|
|
(93
|
)
|
|
19.69
|
|
Forfeited
|
|
—
|
|
|
—
|
|
Unvested at December 31, 2018
|
|
146
|
|
|
$
|
22.07
|
|
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
2018
and
2017
were made pursuant to the
NN, Inc.
2016 Omnibus Incentive Plan and a Performance Share Unit Agreement (the “2016 Omnibus Agreement”). PSUs granted in
2016
were made pursuant to the
NN, Inc.
2011 Stock Incentive Plan and a Performance Share Unit Agreement (the “2011 Stock 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 2016 Omnibus Agreement and the 2011 Stock 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 executive officer’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%
of the target number of PSUs for “Threshold Performance,”
100%
of the target number of PSUs for “Target Performance,” and
150%
of the target number of PSUs for “Maximum Performance.” For performance levels falling between the values shown below, the percentages will be determined by interpolation.
The following table presents the goals with respect to TSR Awards and ROIC Awards granted in
2018
,
2017
, and
2016
.
|
|
|
|
|
|
|
|
TSR Awards:
|
|
Threshold Performance
(50% of Shares)
|
|
Target Performance
(100% of Shares)
|
|
Maximum Performance
(150% of Shares)
|
2018 grants
|
|
35
|
|
50
|
|
75
|
2017 grants
|
|
35
|
|
50
|
|
75
|
2016 grants
|
|
35
|
|
50
|
|
75
|
|
|
|
|
|
|
|
|
|
|
|
ROIC Awards:
|
|
Threshold Performance
(35% of Shares)
|
|
Target Performance
(100% of Shares)
|
|
Maximum Performance
(150% of Shares)
|
2018 grants
|
|
15.5
|
%
|
|
18.0
|
%
|
|
19.5
|
%
|
2017 grants
|
|
15.0
|
%
|
|
17.5
|
%
|
|
20.0
|
%
|
2016 grants
|
|
15.5
|
%
|
|
18.0
|
%
|
|
20.5
|
%
|
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 awards granted and the grant date fair value of each award in the periods presented.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TSR Awards
|
|
ROIC Awards
|
Award Year
|
|
Number of
Shares
(in thousands)
|
|
Grant Date
Fair Value
(per share)
|
|
Number of
Shares
(in thousands)
|
|
Grant Date
Fair Value
(per share)
|
2018
|
|
55
|
|
|
$
|
24.65
|
|
|
55
|
|
|
$
|
24.55
|
|
2017
|
|
46
|
|
|
$
|
29.84
|
|
|
53
|
|
|
$
|
24.20
|
|
2016
|
|
101
|
|
|
$
|
9.38
|
|
|
101
|
|
|
$
|
11.31
|
|
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. During the year ended
2018
,
none
of the ROIC Awards that were granted in
2016
vested as the performance achieved was below the “Threshold Performance” level of
15.5%
, as defined by the grant agreement. For the year ended
December 31, 2018
, we recognized a decrease in share-based compensation expense of
$0.8 million
in the “
Selling, general and administrative expense
” line in the
Consolidated Statements of Operations and Comprehensive Income (Loss)
to reflect the change in vesting. Additionally, for the year ended
December 31, 2018
, we determined that the probability of performance achievement for ROIC Awards that were granted in
2017
and
2018
diminished to below the “Threshold Performance” level of
15.0%
and
15.5%
, respectively, as defined by the grant agreement. For the year ended
December 31, 2018
, we recognized a decrease in share-based compensation expense of
$0.8 million
and
$0.4 million
to reflect the change in estimate of the probability of vesting for the
2017
and
2018
ROIC Awards, respectively, in the “
Selling, general and administrative expense
” line in the
Consolidated Statements of Operations and Comprehensive Income (Loss)
. Related accrued dividend equivalents of
$0.1 million
were also reversed in
2018
for the
2016
,
2017
, and 2018 awards .
The following table summarizes changes in unvested PSUs during the year ended December 31,
2018
, 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, 2018
|
|
130
|
|
|
$
|
16.60
|
|
|
136
|
|
|
$
|
16.27
|
|
Granted
|
|
55
|
|
|
24.65
|
|
|
55
|
|
|
24.55
|
|
Vested
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Expired
|
|
(78
|
)
|
|
9.38
|
|
|
(77
|
)
|
|
11.31
|
|
Forfeited
|
|
(13
|
)
|
|
14.50
|
|
|
(14
|
)
|
|
14.86
|
|
Nonvested at December 31, 2018
|
|
94
|
|
|
$
|
26.84
|
|
|
100
|
|
|
$
|
24.39
|
|
No
TSR Awards or ROIC Awards vested in
2018
. The total grant date fair value of TSR Awards and ROIC Awards that vested in
2017
was
$0.9 million
and
$1.2 million
, respectively.
Note 18
. Accumulated Other Comprehensive Income
The majority of our Accumulated Other Comprehensive Income (“AOCI”) relates to foreign currency translation of our foreign subsidiary balances. During the year ended December 31,
2018
, we had other comprehensive
loss
of
$13.9 million
due to foreign currency translations. During the year ended December 31,
2017
, we had other comprehensive
income
of
$22.1 million
due to foreign currency translations. In connection with the sale of discontinued operations, we reclassified
$9.2 million
out of AOCI to discontinued operations on the
Consolidated Statements of Operations and Comprehensive Income (Loss)
in
2017
. During the year ended December 31,
2016
, we had other comprehensive
loss
of
$10.6 million
due to foreign currency translations and a net
gain
of
$1.9 million
due to change in fair value of the interest rate swap and discontinuation of hedge accounting. Amounts related to the interest rate swap were reclassified out of AOCI during
2016
upon discontinuation of hedge accounting.
Note 19
. Net Income (Loss) Per Share
The following table summarizes the computation of basic and diluted net income (loss) per share.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2018
|
|
2017
|
|
2016
|
Income (loss) from continuing operations
|
|
$
|
(264,467
|
)
|
|
$
|
25,364
|
|
|
$
|
(9,490
|
)
|
Income from discontinued operations, net of tax
|
|
—
|
|
|
137,688
|
|
|
16,153
|
|
Net income (loss)
|
|
$
|
(264,467
|
)
|
|
$
|
163,052
|
|
|
$
|
6,663
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding
|
|
31,678
|
|
|
27,433
|
|
|
27,016
|
|
Effect of dilutive stock options
|
|
—
|
|
|
322
|
|
|
—
|
|
Diluted shares outstanding
|
|
31,678
|
|
|
27,755
|
|
|
27,016
|
|
|
|
|
|
|
|
|
Basic income (loss) from continuing operations per share
|
|
$
|
(8.35
|
)
|
|
$
|
0.92
|
|
|
$
|
(0.35
|
)
|
Basic income from discontinued operations per share
|
|
—
|
|
|
5.02
|
|
|
0.60
|
|
Basic net income (loss) per share
|
|
$
|
(8.35
|
)
|
|
$
|
5.94
|
|
|
$
|
0.25
|
|
|
|
|
|
|
|
|
Diluted income (loss) from continuing operations per share
|
|
$
|
(8.35
|
)
|
|
$
|
0.91
|
|
|
$
|
(0.35
|
)
|
Diluted income from discontinued operations per share
|
|
—
|
|
|
4.96
|
|
|
0.60
|
|
Diluted net income (loss) per share
|
|
$
|
(8.35
|
)
|
|
$
|
5.87
|
|
|
$
|
0.25
|
|
Cash dividends declared per common share
|
|
$
|
0.28
|
|
|
$
|
0.28
|
|
|
$
|
0.28
|
|
The calculations of diluted income (loss) from continuing operations per share for the years ended December 31,
2018
,
2017
, and
2016
, exclude
0.4 million
,
0.4 million
, and
0.8 million
potentially dilutive stock options and restricted stock units which had the effect of being anti-dilutive. Given the loss from continuing operations in
2018
and
2016
, all options are considered anti-dilutive and were excluded from the calculation of diluted loss from continuing operations per share and diluted net
income (loss) per share. Stock options excluded from the calculations of diluted income (loss) from continuing operations per share for the years ended December 31,
2018
,
2017
, and
2016
, had a per share exercise price ranging from
$4.42
to
$25.16
in each respective year.
Note 20
. 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
.
Our financial instruments that are subject to fair value disclosure consist of cash and cash equivalents, accounts receivable, accounts payable, short-term investments, and long-term debt. As of December 31,
2018
, the carrying values of these financial instruments approximated fair value. The fair value of floating-rate debt approximates the carrying amount because the interest rates paid are based on short-term maturities. As of December 31,
2018
, we had
no
fixed-rate debt outstanding.
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.
We may manage our exposure to fluctuations in interest rates using a mix of fixed and variable rate debt. Historically, we have managed the exposure by entering into interest rate swap agreements which mitigate exposures to the risks and variability of our operating results. In
2016
, we discontinued hedge accounting for an interest rate swap that was if effect at that time. Upon discontinuation of hedge accounting, all amounts in AOCI related to the interest rate swap were reclassified to earnings, and we began accounting for the interest rate swap on a mark-to-market basis. In
2017
, we terminated the interest rate swap. As of December 31,
2018
, we had
no
interest rate swaps outstanding. On February 8, 2019, the Company entered into a fixed-rate interest swap agreement as discussed in
Note 22
to the consolidated financial statements.
Note 21
. Quarterly Results of Operations (Unaudited)
The following tables summarize the quarterly results of operations for the years ended
December 31, 2018
and
2017
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
First
Quarter
|
|
Second
Quarter
|
|
Third
Quarter
|
|
Fourth
Quarter
|
Net sales
|
|
$
|
169,148
|
|
|
$
|
196,349
|
|
|
$
|
205,683
|
|
|
$
|
199,477
|
|
Cost of sales (exclusive of depreciation and amortization)
|
|
126,444
|
|
|
148,640
|
|
|
156,408
|
|
|
156,713
|
|
Income (loss) from continuing operations
|
|
(5,983
|
)
|
|
(24,511
|
)
|
|
(13,784
|
)
|
|
(220,189
|
)
|
Net income (loss)
|
|
(5,983
|
)
|
|
(24,511
|
)
|
|
(13,784
|
)
|
|
(220,189
|
)
|
Comprehensive income (loss)
|
|
(518
|
)
|
|
(40,292
|
)
|
|
(17,977
|
)
|
|
(219,560
|
)
|
Basic income (loss) from continuing operations per share
|
|
$
|
(0.22
|
)
|
|
$
|
(0.89
|
)
|
|
$
|
(0.48
|
)
|
|
$
|
(5.25
|
)
|
Basic net income (loss) per share
|
|
$
|
(0.22
|
)
|
|
$
|
(0.89
|
)
|
|
$
|
(0.48
|
)
|
|
$
|
(5.25
|
)
|
Diluted income (loss) from continuing operations per share
|
|
$
|
(0.22
|
)
|
|
$
|
(0.89
|
)
|
|
$
|
(0.48
|
)
|
|
$
|
(5.25
|
)
|
Diluted net income (loss) per share
|
|
$
|
(0.22
|
)
|
|
$
|
(0.89
|
)
|
|
$
|
(0.48
|
)
|
|
$
|
(5.25
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
First
Quarter
|
|
Second
Quarter
|
|
Third
Quarter
|
|
Fourth
Quarter
|
Net sales
|
|
$
|
157,555
|
|
|
$
|
157,947
|
|
|
$
|
148,156
|
|
|
$
|
156,135
|
|
Cost of sales (exclusive of depreciation and amortization)
|
|
114,480
|
|
|
114,514
|
|
|
111,272
|
|
|
118,814
|
|
Income (loss) from continuing operations
|
|
1,893
|
|
|
(26,374
|
)
|
|
(3,480
|
)
|
|
53,325
|
|
Income (loss) from discontinued operations, net of tax
|
|
5,518
|
|
|
5,236
|
|
|
129,441
|
|
|
(2,507
|
)
|
Net income (loss)
|
|
7,411
|
|
|
(21,138
|
)
|
|
125,961
|
|
|
50,818
|
|
Comprehensive income (loss)
|
|
12,516
|
|
|
(11,627
|
)
|
|
123,129
|
|
|
51,885
|
|
Basic income (loss) from continuing operations per share
|
|
$
|
0.07
|
|
|
$
|
(0.96
|
)
|
|
$
|
(0.13
|
)
|
|
$
|
1.93
|
|
Basic net income (loss) per share
|
|
$
|
0.27
|
|
|
$
|
(0.77
|
)
|
|
$
|
4.57
|
|
|
$
|
1.84
|
|
Diluted income (loss) from continuing operations per share
|
|
$
|
0.07
|
|
|
$
|
(0.96
|
)
|
|
$
|
(0.13
|
)
|
|
$
|
1.91
|
|
Diluted net income (loss) per share
|
|
$
|
0.27
|
|
|
$
|
(0.77
|
)
|
|
$
|
4.57
|
|
|
$
|
1.82
|
|
Note 22
. Subsequent Event
On February 8, 2019, the Company entered into a fixed-rate interest swap agreement with a notional amount of
$700 million
to manage the Company’s exposure to interest rate risk associated with our variable rate long-term debt.