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Table of Contents

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
FORM 10-Q
 
 
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2019
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     
Commission File Number 000-23486
 
 
 
 http://api.tenkwizard.com/cgi/image?quest=1&rid=23&ipage=12896369&doc=14
NN, Inc.
(Exact name of registrant as specified in its charter)
 
 
  
Delaware
 
62-1096725
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification Number)
6210 Ardrey Kell Road
Charlotte, North Carolina 28277
(Address of principal executive offices, including zip code)
(980) 264-4300
(Registrant’s telephone number, including area code) 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes      No  ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes      No  ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
 
  
Accelerated filer
 
 
 
 
 
Non-accelerated filer
 
☐ (Do not check if a smaller reporting company)
  
Smaller reporting company
 
 
 
 
 
 
 
 
  
Emerging growth company
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act   ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ☐    No  
As of May 3, 2019, there were 42,366,961 shares of the registrant’s common stock, par value $0.01 per share, outstanding.
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Trading symbol
 
Name of each exchange on which registered
Common Stock, par value $0.01 per share
 
NNBR
 
The Nasdaq Stock Market, LLC
 

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Table of Contents

NN, Inc.
INDEX
 
 
 
 
Item 1.
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
 
 
 
Item 1.
 
 
 
Item 1A.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.


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PART I. FINANCIAL INFORMATION 
Item 1.
Financial Statements
NN, Inc.
Condensed Consolidated Statements of Operations and Comprehensive Income (Loss)
(Unaudited)
Amounts in thousands, except per share data
 
 
Three Months Ended
March 31,
 
 
2019
 
2018
Net sales
 
$
213,256

 
$
169,148

Cost of sales (exclusive of depreciation and amortization shown separately below)
 
161,269

 
126,444

Selling, general and administrative expense
 
28,125

 
22,177

Acquisition related costs excluded from selling, general and administrative expense
 

 
1,776

Depreciation and amortization
 
23,425

 
14,281

Restructuring and integration expense
 
(12
)
 
755

Other operating (income) expense, net
 
(152
)
 
22

Income from operations
 
601

 
3,693

Interest expense
 
13,801

 
11,996

Loss on extinguishment of debt and write-off of debt issuance costs
 
2,699

 

Other (income) expense, net
 
729

 
(313
)
Loss before (provision) benefit for income taxes and share of net income from joint venture
 
(16,628
)
 
(7,990
)
(Provision) benefit for income taxes
 
(2,241
)
 
1,176

Share of net income from joint venture
 
269

 
831

Net loss
 
$
(18,600
)
 
$
(5,983
)
Other comprehensive income (loss):
 
 
 
 
Change in fair value of interest rate swap, net of tax
 
(3,856
)
 

Foreign currency translation gain
 
1,262

 
5,465

Other comprehensive income (loss)
 
$
(2,594
)
 
$
5,465

Comprehensive loss
 
$
(21,194
)
 
$
(518
)
Basic net loss per share
 
 
 
 
Net loss per share
 
$
(0.44
)
 
$
(0.22
)
Weighted average shares outstanding
 
41,972

 
27,597

Diluted net loss per share
 
 
 
 
Net loss per share
 
$
(0.44
)
 
$
(0.22
)
Weighted average shares outstanding
 
41,972

 
27,597

The accompanying notes are an integral part of the Condensed Consolidated Financial Statements.

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NN, Inc.
Condensed Consolidated Balance Sheets
(Unaudited)
Amounts in thousands
 
 
 
March 31, 2019
 
December 31, 2018
Assets
 
 
 
 
Current assets:
 
 
 
 
Cash and cash equivalents
 
$
20,269

 
$
17,988

Accounts receivable, net
 
147,131

 
133,421

Inventories
 
128,922

 
122,615

Income tax receivable
 
653

 
946

Other current assets
 
17,475

 
21,901

Total current assets
 
314,450

 
296,871

Property, plant and equipment, net
 
352,923

 
361,028

Finance lease right-of-use assets
 
12,886

 

Operating lease right-of-use assets
 
68,458

 

Goodwill
 
440,169

 
439,452

Intangible assets, net
 
363,608

 
376,248

Investment in joint venture
 
21,087

 
20,364

Other non-current assets
 
7,412

 
7,607

Total assets
 
$
1,580,993

 
$
1,501,570

Liabilities and Stockholders’ Equity
 
 
 
 
Current liabilities:
 
 
 
 
Accounts payable
 
$
74,348

 
$
65,694

Accrued salaries, wages and benefits
 
27,990

 
24,636

Current maturities of long-term debt
 
33,444

 
31,280

Current portion of operating lease liability
 
7,630

 

Other current liabilities
 
21,700

 
23,420

Total current liabilities
 
165,112

 
145,030

Deferred tax liabilities
 
87,993

 
93,482

Non-current income tax payable
 
3,875

 
3,875

Long-term debt, net of current portion
 
826,274

 
811,471

Operating lease liability, net of current portion
 
66,975

 

Other non-current liabilities
 
35,855

 
29,417

Total liabilities
 
1,186,084

 
1,083,275

Commitments and contingencies (Note 12)
 

 

Stockholders’ equity:
 
 
 
 
Common stock - $0.01 par value, authorized 45,000 shares, 42,367 and 42,104 shares issued and outstanding at March 31, 2019 and December 31, 2018, respectively
 
424

 
421

Additional paid-in capital
 
512,274

 
511,545

Retained deficit
 
(83,570
)
 
(62,046
)
Accumulated other comprehensive loss
 
(34,219
)
 
(31,625
)
Total stockholders’ equity
 
394,909

 
418,295

Total liabilities and stockholders’ equity
 
$
1,580,993

 
$
1,501,570

The accompanying notes are an integral part of the Condensed Consolidated Financial Statements.

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NN, Inc.
Condensed Consolidated Statement of Changes in Stockholders’ Equity
(Unaudited)
Amounts in thousands
 
 
 
Common Stock
 
 
 
 
 
 
 
 
 
 
Number
of
shares
 
Par
value
 
Additional
paid in
capital
 
Retained
deficit
 
Accumulated other comprehensive loss
 
Total
Balance, December 31, 2018
 
42,104

 
$
421

 
$
511,545

 
$
(62,046
)
 
$
(31,625
)
 
$
418,295

Net loss
 

 

 

 
(18,600
)
 

 
(18,600
)
Cash dividends declared
 

 

 

 
(2,942
)
 

 
(2,942
)
Share-based compensation expense
 
281

 
3

 
870

 

 

 
873

Restricted shares forgiven for taxes and forfeited
 
(18
)
 

 
(141
)
 

 

 
(141
)
Change in fair value of interest rate swap, net of tax of $1,104
 

 

 

 

 
(3,856
)
 
(3,856
)
Foreign currency translation gain
 

 

 

 

 
1,262

 
1,262

Adoption of new accounting standard (Note 1)
 

 

 

 
18

 

 
18

Balance, March 31, 2019
 
42,367

 
$
424

 
$
512,274

 
$
(83,570
)
 
$
(34,219
)
 
$
394,909

 
 
Common Stock
 
 
 
 
 
 
 
 
 
 
Number
of
shares
 
Par
value
 
Additional
paid in
capital
 
Retained
earnings
 
Accumulated other comprehensive loss
 
Total
Balance, December 31, 2017
 
27,572

 
$
275

 
$
292,494

 
$
211,080

 
$
(17,745
)
 
$
486,104

Net loss
 

 

 

 
(5,983
)
 

 
(5,983
)
Cash dividends declared
 

 

 

 
(1,955
)
 

 
(1,955
)
Share-based compensation expense
 
87

 
1

 
1,255

 

 

 
1,256

Shares issued for option exercises
 
23

 

 
242

 

 

 
242

Restricted shares and performance shares forgiven for taxes and forfeited
 
(16
)
 

 
(287
)
 

 

 
(287
)
Foreign currency translation gain
 

 

 

 

 
5,465

 
5,465

Adoption of new accounting standard
 

 

 

 
17

 

 
17

Balance, March 31, 2018
 
27,666

 
$
276

 
$
293,704

 
$
203,159

 
$
(12,280
)
 
$
484,859

The accompanying notes are an integral part of the Condensed Consolidated Financial Statements.

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NN, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Amounts in thousands
 
 
Three Months Ended
March 31,
 
 
2019
 
2018
Cash flows from operating activities
 
 
 
 
Net loss
 
$
(18,600
)
 
$
(5,983
)
Adjustments to reconcile net loss to net cash provided by (used by) operating activities:
 
 
 
 
Depreciation and amortization
 
23,425

 
14,281

Amortization of debt issuance costs
 
1,191

 
1,088

Loss on extinguishment of debt and write-off of debt issuance costs
 
2,699

 

Share of net income from joint venture, net of cash dividends received
 
(269
)
 
(831
)
Compensation expense from issuance of share-based awards
 
873

 
1,256

Deferred income taxes
 
(4,373
)
 

Other
 
182

 
347

Changes in operating assets and liabilities, net of acquisitions:
 
 
 
 
Accounts receivable
 
(13,963
)
 
(9,433
)
Inventories
 
(6,302
)
 
(7,791
)
Accounts payable
 
7,236

 
(296
)
Income taxes receivable and payable, net
 
248

 
(613
)
Other
 
4,941

 
7,001

Net cash used by operating activities
 
(2,712
)
 
(974
)
Cash flows from investing activities
 
 
 
 
Acquisition of property, plant and equipment
 
(14,073
)
 
(11,860
)
Proceeds from liquidation of short-term investment
 
8,000

 

Cash paid to acquire businesses, net of cash received
 

 
(14,676
)
Cash paid for earnest money for Paragon Medical acquisition
 

 
(6,000
)
Other
 
2,394

 
(282
)
Net cash used by investing activities
 
(3,679
)
 
(32,818
)
Cash flows from financing activities
 
 
 
 
Cash paid for debt issuance or prepayment costs
 
(738
)
 

Dividends paid
 
(2,947
)
 
(1,931
)
Proceeds from long-term debt
 
19,025

 
10,000

Repayment of long-term debt
 
(7,522
)
 
(13,000
)
Proceeds from (repayments of) short-term debt, net
 
1,982

 
(52
)
Other
 
(924
)
 
(1,278
)
Net cash provided by (used by) financing activities
 
8,876

 
(6,261
)
Effect of exchange rate changes on cash flows
 
(204
)
 
562

Net change in cash and cash equivalents
 
2,281

 
(39,491
)
Cash and cash equivalents at beginning of period
 
17,988

 
224,446

Cash and cash equivalents at end of period
 
$
20,269

 
$
184,955

Supplemental schedule of non-cash operating, investing and financing activities
 
 
 
 
Non-cash additions to property, plant and equipment
 
$
4,071

 
$
2,992

The accompanying notes are an integral part of the Condensed Consolidated Financial Statements.

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NN, Inc.
Notes to Condensed Consolidated Financial Statements
March 31, 2019
(Unaudited)
Amounts in thousands, except per share data
Note 1. Interim Financial Statements
Nature of Business
NN, Inc., is a global diversified industrial company that combines advanced engineering and production capabilities with in-depth materials science expertise to design and manufacture high-precision components and assemblies for the medical, aerospace and defense, electrical, automotive, and general industrial markets. As used in this Quarterly Report on Form 10-Q, the terms “NN,” the “Company,” “we,” “our,” or “us” refer to NN, Inc., and its subsidiaries. As of March 31, 2019, we had 51 facilities in North America, Europe, South America, and China.
Basis of Presentation
The accompanying condensed consolidated financial statements have not been audited, except that the Condensed Consolidated Balance Sheet as of December 31, 2018, was derived from the audited consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2018 (the “2018 Annual Report”), which we filed with the U.S. Securities and Exchange Commission (the “SEC”), on March 18, 2019. In management’s opinion, the accompanying unaudited condensed consolidated financial statements reflect all adjustments necessary to fairly state our results of operations for the three months ended March 31, 2019 and 2018; financial position as of March 31, 2019, and December 31, 2018; and cash flows for the three months ended March 31, 2019 and 2018, on a basis consistent with our audited consolidated financial statements other than the adoption of new accounting standards, such as the new lease standard (see Note 10). These adjustments are of a normal recurring nature and are, in the opinion of management, necessary to state fairly the Company’s financial position and operating results for the interim periods.
Certain information and footnote disclosures normally included in the consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) have been condensed or omitted from the interim financial statements presented in this Quarterly Report on Form 10-Q. These unaudited condensed consolidated financial statements should be read in conjunction with our audited consolidated financial statements and accompanying notes included in the 2018 Annual Report. The results for the three months ended March 31, 2019, are not necessarily indicative of results for the year ending December 31, 2019, or any other future periods.
Except for per share data or as otherwise indicated, all U.S. dollar amounts presented in the tables in these Notes to Condensed Consolidated Financial Statements are in thousands.
Accounting Standards Recently Adopted
Leases. On January 1, 2019, we adopted Accounting Standards Codification (“ASC”) 842, Leases, which superseded ASC 840, Leases. We adopted ASC 842 utilizing the modified retrospective transition approach, therefore, historical financial information and disclosures do not reflect the new standard and will continue to be presented under the previous lease accounting guidance. Under the modified retrospective transition method, we recognized the cumulative effect of the initial adoption adjustment to the opening balance of retained deficit as of January 1, 2019. The adoption adjustment to retained deficit was less than $0.1 million. As part of the adoption of ASC 842, we elected the package of practical expedients, the short-term lease exemption, and the practical expedient to not separate lease and non-lease components. We recorded lease-related assets and liabilities to our balance sheet for leases with terms greater than twelve months that were classified as operating leases and not previously recorded on our balance sheet. See Note 10 for the required disclosures related to ASC 842.
Derivatives and Hedging. In August 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities, (“ASU 2017-12”). ASU 2017-12 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. We adopted the guidance on January 1, 2019. We have applied the new rules to 2019 hedging activities as disclosed in Note 16 to these condensed consolidated financial statements. The new guidance has no effect on our historical financial statements.
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

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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. The new guidance was effective for us on January 1, 2019. We adopted the new guidance at the beginning of the period of adoption. The new guidance had no effect on our financial statements.
Accounting Standards Not Yet Adopted
Fair Value Disclosures. In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement, that modifies fair value disclosure requirements. The new guidance could impact us by streamlining disclosures of Level 3 fair value measurements. The modified disclosures are effective for NN beginning in the first quarter of 2020, with early adoption allowed. ASU 2018-13 changes only disclosures and does not impact our financial condition, results of operations, or cash flows. We are in the process of evaluating the effects of this guidance on our fair value disclosures.
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.
Note 2. 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 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. We have performed an assessment of the opening balance sheet which is subject to completion of our internal review procedures over fair value estimates. 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.
Beginning May 7, 2018, our consolidated results of operations include the results of Paragon Medical.
The unaudited pro forma financial results shown in the table below for the three months ended March 31, 2018, 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 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. The provision for income taxes has also been adjusted for all periods, based upon the foregoing adjustments to historical results.
 
 
Three Months Ended
March 31, 2018
Pro forma net sales
 
$
209,830

Pro forma net loss
 
$
(8,077
)
Basic net loss per share
 
$
(0.29
)
Diluted net loss per share
 
$
(0.29
)

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Other Acquisitions
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 in our Life Sciences group after the acquisition date. We have finalized the purchase price allocation with no material changes to the initial allocation.
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 our presence in the aerospace and defense end market. Operating results of Technical Arts are reported 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 3. 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.
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.

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Segment Results
The following table presents results of operations for each reportable segment.
 
 
Mobile
Solutions
 
Power
Solutions
 
Life
Sciences
 
Corporate
and
Consolidations
 
 
 
Total
Three Months Ended March 31, 2019
 
 
 
 
 
 
 
 
 
 
 
 
Net sales
 
$
78,075

 
$
49,657

 
$
86,008

 
$
(484
)
 
(a)
 
$
213,256

Income (loss) from operations
 
$
4,107

 
$
3,824

 
$
3,846

 
$
(11,176
)
 
 
 
$
601

Interest expense
 
 
 
 
 
 
 
 
 
 
 
(13,801
)
Other
 
 
 
 
 
 
 
 
 
 
 
(3,428
)
Loss before provision for income taxes and share of net income from joint venture
 
 
 
 
 
 
 
 
 
 
 
$
(16,628
)
Three Months Ended March 31, 2018
 
 
 
 
 
 
 
 
 
 
 
 
Net sales
 
$
89,794

 
$
48,682

 
$
31,200

 
$
(528
)
 
(a)
 
$
169,148

Income (loss) from operations
 
$
9,785

 
$
5,233

 
$
4,204

 
$
(15,529
)
 
 
 
$
3,693

Interest expense
 
 
 
 
 
 
 
 
 
 
 
(11,996
)
Other
 
 
 
 
 
 
 
 
 
 
 
313

Loss before benefit for income taxes and share of net income from joint venture
 
 
 
 
 
 
 
 
 
 
 
$
(7,990
)
_______________________________

(a)
Includes elimination of intersegment transactions occurring during the ordinary course of business.
 
 
Total Assets as of
 
 
March 31, 2019
 
December 31, 2018
Mobile Solutions
 
$
392,100

 
$
356,387

Power Solutions
 
311,771

 
297,947

Life Sciences
 
824,891

 
802,770

Corporate and Consolidations
 
52,231

 
44,466

Total
 
$
1,580,993

 
$
1,501,570

Note 4. Inventories
Inventories are comprised of the following amounts:
 
 
March 31, 2019
 
December 31, 2018
Raw materials
 
$
55,286

 
$
52,930

Work in process
 
47,372

 
42,578

Finished goods
 
26,264

 
27,107

Total inventories
 
$
128,922

 
$
122,615

Note 5. Goodwill
The following table shows changes in the carrying amount of goodwill.
 
 
Mobile
Solutions
 
Power
Solutions
 
Life
Sciences
 
Total
Balance as of December 31, 2018
 
$

 
$
94,505

 
$
344,947

 
$
439,452

Currency impacts
 

 
198

 
519

 
717

Balance as of March 31, 2019
 
$

 
$
94,703

 
$
345,466

 
$
440,169

Based on the closing price of a share of our common stock as of March 31, 2019, our market capitalization had declined to a level that is less than the net book value of our stockholders’ equity. A prolonged or significant decline in market capitalization could be an indicator of additional goodwill impairment. We will continue to monitor our market capitalization to determine if an indicator of impairment exists in subsequent periods.

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During 2018, as a result of our annual goodwill impairment analysis performed during the fourth quarter of 2018, we recorded an impairment of $109.1 million in our Power Solutions group. After the impairment, Power Solutions reported a goodwill balance of $94.5 million at December 31, 2018. Given the carrying value of the Power Solutions reporting unit was equal to its fair value at December 31, 2018 as a result of the 2018 goodwill impairment, if actual performance of the Power Solutions reporting unit falls short of expected results, additional material impairment charges may be required. During the first quarter of 2019, we reassessed the relevant facts and circumstances and concluded there was no impairment during the period. We will continue to monitor and assess Power Solutions during 2019.
Note 6. Intangible Assets, Net
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, 2018
 
$
35,892

 
$
95,991

 
$
244,365

 
$
376,248

Amortization
 
(885
)
 
(2,748
)
 
(9,017
)
 
(12,650
)
Other
 
2

 

 
8

 
10

Balance as of March 31, 2019
 
$
35,009

 
$
93,243

 
$
235,356

 
$
363,608

Note 7. Investment in Joint Venture
We own a 49% investment in Wuxi Weifu Autocam Precision Machinery Company, Ltd. (the “JV”), a joint venture located in Wuxi, China. The JV is jointly controlled and managed, and we account for it under the equity method.
The following table summarizes activity related to our investment in the JV.
Balance as of December 31, 2018
$
20,364

Share of earnings
269

Foreign currency translation gain
454

Balance as of March 31, 2019
$
21,087

During the fourth quarter of 2018, as a result of changing market conditions, the fair value of the JV was assessed and we recorded an impairment charge of $16.6 million against our investment in the JV. The fair value assessment was most significantly affected by changes in our assessment of future growth rates. It is reasonably possible that material deviation of future performance from the estimates used in the 2018 valuation could result in further impairment to our investment in the JV in subsequent periods. There was no impairment of our investment in the JV during the three months ended March 31, 2019.
We recognized sales to the JV of less than $0.1 million and $0.1 million during the three months ended March 31, 2019 and 2018, respectively.
Note 8. Income Taxes
Our effective tax rate was (13.5)% for the three months ended March 31, 2019, and 14.7% for the three months ended March 31, 2018. Our 2019 effective tax rate differs from the U.S. federal statutory tax rate of 21% principally due to a discrete tax charge of $6.0 million related to final tax regulations published by the Department of the Treasury and Internal Revenue Service on February 4, 2019. The 2019 effective tax rate was also impacted by the minimum tax on global intangible low-tax income (“GILTI”) and earnings outside the United States, which are taxed at different rates than the U.S. federal statutory tax rate of 21%.
Our 2018 effective tax rate differed from the U.S. federal statutory tax rate of 21% due to permanent differences including GILTI and earnings outside the United States, which were taxed at different rates than the U.S. federal statutory rate of 21%.

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Note 9. 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 debt balances as of March 31, 2019, and December 31, 2018.
 
 
March 31, 2019
 
December 31, 2018
Senior Secured Term Loan
 
$
530,625

 
$
532,063

Incremental Term Loan
 
276,000

 
279,000

Senior Secured Revolver
 
56,184

 
38,720

International lines of credit and other loans
 
10,601

 
9,810

Total principal
 
873,410

 
859,593

Lesscurrent maturities of long-term debt
 
33,444

 
31,280

Principal, net of current portion
 
839,966

 
828,313

Lessunamortized debt issuance costs
 
13,692

 
16,842

Long-term debt, net of current portion
 
$
826,274

 
$
811,471

We capitalized interest costs amounting to $0.6 million and $0.2 million in the three months ended March 31, 2019 and 2018, respectively, related to construction in progress.
Senior Secured Term Loan
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 March 31, 2019, the Senior Secured Term Loan bore interest at 6.24%.
Incremental Term Loan
Outstanding borrowings under the Incremental Term Loan bear interest at one-month LIBOR plus an applicable margin of 3.25%. At March 31, 2019, the Incremental Term Loan bore interest of 5.74%.
Senior Secured Revolver
Outstanding borrowings under the Senior Secured Revolver bear interest at one-month LIBOR plus an applicable margin of 3.50%. At March 31, 2019, the Senior Secured Revolver bore interest of 5.99%. We pay an annual commitment fee of 0.50% for unused capacity under the Senior Secured Revolver on a quarterly basis.
Total available capacity under the Senior Secured Revolver was $125.0 million as of March 31, 2019. 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, become more restrictive over time, and are dependent upon our operational and financial performance. If our operational or financial performance is below our expectations, we may be required to take actions to reduce expenditures and decrease our net indebtedness to maintain compliance in future periods. We had $56.2 million outstanding under the Senior Secured Revolver at March 31, 2019, and we were in compliance with all covenants under our credit facility.
On March 15, 2019, we amended our existing credit facility (the “March 2019 amendment”) to amend the defined terms within the credit facility. We paid $0.8 million of debt issuance costs related to the March 2019 amendment which was recorded as a direct reduction to the carrying amount of the associated long-term debt. We also wrote-off $2.7 million of unamortized debt issuance costs related to the modification of the credit facility.
Derivative Instruments and Hedging Activities
In February 2019, we entered into a $700.0 million amortizing notional amount fixed-rate interest rate swap agreement to manage the interest rate risk associated with our long-term variable-rate debt until 2022. The fixed-rate interest rate swap agreement calls for us to receive interest monthly at a variable rate equal to one-month LIBOR and to pay interest monthly at a fixed rate of 2.4575%. Refer to Note 16 for further discussion of the interest rate swap agreement.
Note 10. Leases
We adopted ASC 842 on January 1, 2019, and elected the modified retrospective approach in which the new standard is applied to all leases existing at the date of adoption through a cumulative-effect adjustment of less than $0.1 million to retained deficit.

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Consequently, financial information is not updated, and the disclosures required under the new standard are not provided for periods prior to January 1, 2019.  As part of the adoption, we elected the package of practical expedients, the short-term lease exemption, and the practical expedient to not separate lease and non-lease components permitted within ASC 842. Accordingly, we accounted for our existing operating leases as operating leases under the new standard, without reassessing (a) whether the contracts contain a lease under ASC 842, (b) whether classification of the operating leases would be different in accordance with ASC 842, or (c) whether any unamortized initial direct costs would have met the definition of initial direct costs in ASC 842 at lease commencement.
We determine whether an arrangement is a lease at inception. Right-of-use (“ROU”) lease assets represent our right to use an underlying asset for the lease term, and lease obligations represent our obligation to make lease payments arising from the lease. ROU lease assets and obligations are recognized at the lease commencement date based on the present value of lease payments over the lease term. When the implicit rate is not readily determinable, we use the estimated incremental borrowing rate based on the information available at the lease commencement date in determining the present value of lease payments. The lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Amortization of ROU lease assets is recognized in expense on a straight-line basis over the lease term.
Short-term leases are leases having a term of twelve months or less. We recognize short-term leases on a straight-line basis and do not record a related lease asset or liability for such leases. Finance lease ROU assets consist of equipment used in the manufacturing process with terms between thirteen months and five years. Operating lease ROU assets consist of the following:
Equipment used in the manufacturing process as well as office equipment with terms between thirteen months and five years.
Manufacturing plants and office facilities with terms between thirteen months and 25 years.
The following table presents components of lease expense for the three months ended March 31, 2019:
 
 
Financial Statement Line Item
 
Three Months Ended
March 31, 2019
Lease cost:
 
 
 
 
Finance lease cost
 
 
 
 
Amortization of right-of-use assets
 
Depreciation and amortization
 
$
322

Interest expense
 
Interest expense
 
53

Operating lease cost
 
Cost of sales and selling, general and administrative expense
 
3,434

Short-term lease cost (1)
 
Cost of sales and selling, general and administrative expense
 
107

Total lease cost
 
 
 
$
3,916

_______________________________
(1) Excludes expenses related to leases with a lease term of one month or less.

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The following table presents the lease-related assets and liabilities recorded on the balance sheet as of March 31, 2019:
 
 
Financial Statement Line Item
 
March 31, 2019
Lease assets and liabilities:
 
 
 
 
Assets
 
 
 
 
Operating lease assets
 
Operating lease right-of-use assets
 
$
68,458

Finance lease asset
 
Finance lease right-of-use assets
 
12,886

Total lease assets
 
 
 
$
81,344

 
 
 
 
 
Liabilities
 
 
 
 
Current liabilities
 
 
 
 
Operating lease liabilities
 
Current portion of operating lease liability
 
$
7,630

Finance lease liabilities
 
Other current liabilities
 
2,401

Non-current liabilities
 
 
 
 
Operating lease liabilities
 
Operating lease liability, net of current portion
 
66,975

Finance lease liabilities
 
Other non-current liabilities
 
6,150

Total lease liabilities
 
 
 
$
83,156

The following table contains supplemental information related to leases for the three months ended March 31, 2019:
Supplemental Cash Flows Information
 
Three Months Ended
March 31, 2019
Cash paid for amounts included in the measurement of lease liabilities
 
 
Operating cash flows from finance leases
 
$
53

Operating cash flows from operating leases
 
5,288

Financing cash flows from finance leases
 
792

Right-of-use assets obtained in exchange for new operating lease liabilities
 
$
2,836

As of March 31, 2019, the weighted average remaining lease term and weighted-average discount rate for finance and operating leases was as follows:
 
 
Weighted-Average Remaining Lease Term (years)
 
Weighted-Average Discount Rate
Finance leases
 
4.1
 
2.4
%
Operating leases
 
10.5
 
8.5
%
The future minimum lease obligations with noncancelable terms in excess of twelve months as of March 31, 2019, is as follows:
 
 
Operating Leases
 
Finance Leases
2019 (1)
 
$
10,104

 
$
2,190

2020
 
11,979

 
2,033

2021
 
11,118

 
2,020

2022
 
10,812

 
1,853

2023
 
9,264

 
962

Thereafter
 
59,946

 
17

Total future minimum lease payments
 
113,223

 
9,075

Less: imputed interest
 
38,618

 
524

Total lease liabilities
 
$
74,605

 
$
8,551

(1)
For the period from April 1, 2019 to December 31, 2019.

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As of March 31, 2019, we have an additional operating lease commitment that has not yet commenced that would require us to pay a total of approximately $21.9 million base rent payments over the lease term of 15 years. This lease is expected to commence during the fourth quarter of 2019.
The following table summarizes the future minimum lease payments under operating leases with initial or non-cancelable lease terms in excess of one year prior to adoption of ASC 842 as reported in our Annual Report on Form 10-K for the year ended December 31, 2018.
Year Ending December 31,
 
 
2019
 
$
13,337

2020
 
11,515

2021
 
10,557

2022
 
10,293

2023
 
8,752

Thereafter
 
53,945

Total minimum payments
 
$
108,399

During the three months ended March 31, 2018, we recognized rent expense of $2.1 million.
Note 11. Restructuring and Integration
The following table summarizes restructuring and integration charges incurred for the three months ended March 31, 2019 and 2018.
 
 
Three Months Ended March 31, 2019
 
 
Mobile
Solutions
 
Power
Solutions
 
Life
Sciences
 
Corporate and
Consolidations
 
Total
Severance and other employee costs
 
$

 
$

 
$

 
$

 
$

Site closure and other associated costs
 
(12
)
 

 

 

 
(12
)
Total
 
$
(12
)
 
$

 
$

 
$

 
$
(12
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended March 31, 2018
 
 
Mobile
Solutions
 
Power
Solutions
 
Life
Sciences
 
Corporate and
Consolidations
 
Total
Severance and other employee costs
 
$

 
$

 
$

 
$
728

 
$
728

Site closure and other associated costs
 
27

 

 

 

 
27

Total
 
$
27

 
$

 
$

 
$
728

 
$
755

The following table summarizes restructuring and integration reserve activity for the three months ended March 31, 2019.
 
 
Reserve
Balance as of
December 31, 2018
 
Charges
 
Non-cash
Adjustments
 
Cash
Reductions
 
Reserve
Balance as of
March 31, 2019
Severance and other employee costs
 
$
1,122

 
$

 
$

 
$
(274
)
 
$
848

Site closure and other associated costs
 
24

 
(12
)
 

 
(12
)
 

Total
 
$
1,146

 
$
(12
)
 
$

 
$
(286
)
 
$
848

The amount accrued for restructuring and integration costs represents what we expect to pay over the next 1.9 years. We expect to pay $0.5 million within the next twelve months.
Note 12. Commitments and Contingencies
Brazil ICMS Tax Matter
Prior to the acquisition of Autocam Corporation in 2014 (“Autocam”), 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

15

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intrinsically related to the manufacturing processes. Autocam Brazil filed an administrative defense with the Brazilian tax authority arguing, among other matters, that it should qualify for an ICMS tax credit, contending that the intermediary materials are directly related to the manufacturing process.
We believe that we have substantial legal and factual defenses, and we plan to defend our interests in this matter vigorously. The matter encompasses several lawsuits filed with the Brazilian courts requesting declaratory actions that no tax is due or seeking a stay of execution on the collection of the tax. In 2018, we obtained a favorable decision in one of the declaratory actions for which the period for appeal has expired. We have filed actions in each court requesting dismissal of the matter based on the earlier court action. 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 March 31, 2019, 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 13. Revenue from Contracts with Customers
Revenue is recognized when control of the good or service is transferred to the customer either at a point in time or, in limited circumstances, as our services are rendered over time. Revenue is measured as the amount of consideration we expect to receive in exchange for transferring goods or services. Sales, value add, 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.
The following tables summarize sales to external customers by major source.
 
 
Three Months Ended March 31, 2019
 
 
Mobile
Solutions
 
Power
Solutions
 
Life
Sciences
 
Intersegment
Sales
Eliminations
 
Total
United States
 
$
44,457

 
$
41,115

 
$
68,343

 
$
(484
)
 
$
153,431

China
 
9,153

 
1,838

 
1,692

 

 
12,683

Mexico
 
5,378

 
2,709

 
127

 

 
8,214

Brazil
 
8,382

 
69

 

 

 
8,451

Germany
 
1,406

 
16

 
8,885

 

 
10,307

Switzerland
 
1,359

 
16

 
3,265

 

 
4,640

Poland
 
1,913

 
4

 
6

 

 
1,923

Italy
 
1,856

 
63

 
421

 

 
2,340

Czech Republic
 
1,509

 
188

 

 

 
1,697

France
 
44

 

 
1,225

 

 
1,269

Africa
 

 
1,156

 

 

 
1,156

Other
 
2,618

 
2,483

 
2,044

 

 
7,145

Total net sales
 
$
78,075

 
$
49,657

 
$
86,008

 
$
(484
)
 
$
213,256


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Table of Contents

 
 
 
Three Months Ended March 31, 2018
 
 
Mobile
Solutions
 
Power
Solutions
 
Life
Sciences
 
Intersegment
Sales
Eliminations
 
Total
United States
 
$
49,655

 
$
40,128

 
$
30,553

 
$
(528
)
 
$
119,808

China
 
11,581

 
1,485

 
126

 

 
13,192

Mexico
 
7,236

 
3,197

 
172

 

 
10,605

Brazil
 
9,885

 
50

 

 

 
9,935

Poland
 
2,052

 
14

 

 

 
2,066

Czech Republic
 
1,810

 

 

 

 
1,810

Italy
 
1,577

 
98

 

 

 
1,675

Germany
 
1,534

 
7

 
1

 

 
1,542

Switzerland
 
1,406

 

 

 

 
1,406

Netherlands
 

 
974

 

 

 
974

Other
 
3,058

 
2,729

 
348

 

 
6,135

Total net sales
 
$
89,794

 
$
48,682

 
$
31,200

 
$
(528
)
 
$
169,148

Deferred Revenue
The following table provides information about contract liabilities from contracts with customers.
 
 
 
Deferred
Revenue
Balance at January 1, 2019
 
$
2,974

Balance at March 31, 2019
 
$
2,890

Revenue recognized during the three months ended March 31, 2019, from amounts included in deferred revenue at the beginning of the period for performance obligations satisfied or partially satisfied during the period, was approximately $0.6 million.
Transaction Price Allocated to Future Performance Obligations
We are required to disclose the aggregate amount of transaction price that is allocated to performance obligations that have not yet been satisfied as of March 31, 2019, unless our contracts meet one of the practical expedients. Our contracts met the following practical expedient provided by the guidance: 
The performance obligation is part of a contract that has an original expected duration of one year or less.
Sales Concentration
During the three months ended March 31, 2019, we recognized sales from a single customer of $23.3 million, or 10.9% of consolidated net sales. Revenues from this customer are in our Life Sciences and Power Solutions groups. No customers represented more than 10% of our net sales during the three months ended March 31, 2018.
Note 14. Shared-Based Compensation
The following table lists the components of share-based compensation expense by type of award. 
 
 
Three Months Ended
March 31,
 
 
2019
 
2018
Stock options
 
$
192

 
$
205

Restricted stock
 
459

 
460

Performance share units
 
222

 
591

Share-based compensation expense
 
$
873

 
$
1,256

Stock Options

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During the three months ended March 31, 2019, we granted options to purchase 210,400 shares to certain key employees. The weighted average grant date fair value of the options granted during the three months ended March 31, 2019, was $2.77 per share. 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 2019.
 
2019
Expected term
6 years

Risk free interest rate
2.47
%
Dividend yield
3.53
%
Expected volatility
49.53
%
Expected forfeiture rate
4.00
%
The expected term is derived from using the simplified method of determining stock option terms as described under the Staff Accounting Bulletin Topic 14, Share-based payment. The simplified method was used because sufficient historical stock option exercise experience was not available, primarily due to the transformation of the management structure over the past several years.
The average risk-free interest rate is derived from United States Department of Treasury published interest rates of daily yield curves for the same time period as the expected term.
The expected dividend yield is derived by a mathematical formula which uses the expected annual dividends over the expected term divided by the fair market value of our common stock at the grant date.
The expected volatility rate is derived from our actual common stock historical volatility over the same time period as the expected term. The volatility rate is derived by mathematical formula utilizing daily closing price data.
The forfeiture rate is determined from examining the historical pre-vesting forfeiture patterns of past option issuances to key employees. While the forfeiture rate is not an input of the Black Scholes 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 three months ended March 31, 2019.
 
 
 
Number of Options
(in thousands)
 
Weighted-
Average
Exercise
Price
(per share)
 
Weighted-
Average
Remaining
Contractual
Term (years)
 
Aggregate
Intrinsic
Value
 
 
Outstanding at January 1, 2019
 
771

 
$
15.17

 
 
 
 
 
 
Granted
 
210

 
7.93

 
 
 
 
 
 
Exercised
 

 


 
 
 
$

 
 
Forfeited or expired
 
(3
)

24.41





 
 
Outstanding at March 31, 2019
 
978

 
$
13.58

 
6.3
 
$

 
(1) 
Exercisable at March 31, 2019
 
701

 
$
14.27

 
5.0
 
$

 
(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 March 31, 2019, was greater than the exercise price of any individual option grant.
Restricted Stock
During the three months ended March 31, 2019, we granted 281,065 restricted stock awards to non-executive directors, officers and certain other key employees. The shares of restricted stock granted during the three months ended March 31, 2019, 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 value of restricted stock granted in the three months ended March 31, 2019, was $7.93 per share. Total grant-date fair value of restricted stock that vested in the three months ended March 31, 2019, was $1.5 million.

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The following table summarizes the status of unvested restricted stock awards as of March 31, 2019, and changes during the three months then ended.
 
 
Nonvested
Restricted
Shares
(in thousands)
 
Weighted
Average
Grant-Date
Fair Value
(per share)
Nonvested at January 1, 2019
 
146

 
$
22.07

Granted
 
281

 
$
7.93

Vested
 
(70
)
 
$
20.92

Forfeited
 
(18
)
 
$
18.98

Nonvested at March 31, 2019
 
339

 
$
10.74

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. PSU awards granted in 2019 were made pursuant to the NN, Inc. 2016 Omnibus Incentive Plan and a Performance Share Unit Agreement (the “2016 Omnibus Agreement”). Some PSUs are based on total shareholder return (“TSR Awards”), and other PSUs are based on return on invested capital (“ROIC Awards”).
The TSR Awards vest, if at all, upon our achieving a specified relative total shareholder return, which will be measured against the total shareholder return of the S&P SmallCap 600 Index during specified performance periods as defined in the 2016 Omnibus Agreement. The ROIC Awards vest, if at all, upon our achieving a specified average return on invested capital during the performance periods. Each performance period generally begins on January 1 of the year of grant and ends 36 months later on December 31.
We recognize compensation expense over the performance period in which the performance and market conditions are measured. If the PSUs do not vest at the end of the performance periods, then the PSUs will expire automatically. Upon vesting, the PSUs will be settled by the issuance of shares of our common stock, subject to the 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 2019.
TSR Awards:
 
Threshold Performance
(50% of Shares)
 
Target Performance
(100% of Shares)
 
Maximum Performance
(150% of Shares)
2019 grants
 
35th Percentile
 
50th Percentile
 
75th Percentile
 
 
 
 
 
 
 
ROIC Awards:
 
Threshold Performance
(35% of Shares)
 
Target Performance
(100% of Shares)
 
Maximum Performance
(150% of Shares)
2019 grants (1)
 
4.7
%
 
5.8
%
 
7.0
%
(1)
For the ROIC Awards granted in 2019, the denominator of the calculation is different than in prior years, and therefore the target percentages are not comparable to historical target percentages.
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 period presented.

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Table of Contents

 
 
TSR Awards
 
ROIC Awards
Award Year
 
Shares
(in thousands)
 
Grant Date
Fair Value
(per share)
 
Shares
(in thousands)
 
Grant Date Fair
Value (per share)
2019
 
136

 
$
9.28

 
174

 
$
7.93

We recognize expense for ROIC Awards based on the probable outcome of the associated performance condition. We generally recognize an expense for ROIC Awards based on the Target Performance threshold of 100% because, at the date of grant, the Target Performance is the probable level of performance achievement.
The following table summarizes the status of unvested PSUs as of March 31, 2019, and changes during the three months then ended.
 
 
 
Nonvested TSR Awards
 
Nonvested ROIC Awards
 
 
Shares
(in thousands)
 
Weighted
Average
Grant-Date
Fair Value
(per share)
 
Shares
(in thousands)
 
Weighted
 Average
Grant-Date
Fair Value
(per share)
Nonvested at January 1, 2019
 
94

 
$
26.84

 
100

 
$
24.39

Granted
 
136

 
$
9.28

 
174

 
$
7.93

Forfeited
 

 
$

 

 
$

Nonvested at March 31, 2019
 
230

 
$
16.47

 
274

 
$
13.93

Note 15. Net Income (Loss) Per Share
 
 
Three Months Ended
March 31,
 
 
2019
 
2018
Numerator:
 
 
 
 
Net loss
 
$
(18,600
)
 
$
(5,983
)
Denominator:
 
 
 
 
Weighted average shares outstanding
 
41,972

 
27,597

Effect of dilutive stock options
 

 

Diluted shares outstanding
 
41,972

 
27,597

Per common share net loss:
 
 
 
 
Basic net loss per share
 
$
(0.44
)
 
$
(0.22
)
Diluted net loss per share
 
$
(0.44
)
 
$
(0.22
)
Cash dividends declared per share
 
$
0.07

 
$
0.07

The calculation of diluted net loss per share for the three months ended March 31, 2019 and 2018, excludes 0.7 million and 0.5 million potentially dilutive stock options, which had the effect of being anti-dilutive. Given the net loss for the three months ended March 31, 2019 and 2018, all options are considered anti-dilutive and were excluded from the calculation of diluted net loss per share.
Note 16. Fair Value Measurements
Fair value is an exit price representing the expected amount that an entity would receive to sell an asset or pay to transfer a liability in an orderly transaction with market participants at the measurement date. We followed consistent methods and assumptions to estimate fair values as more fully described in the 2018 Annual Report.
Our financial instruments that are subject to fair value disclosure consist of cash and cash equivalents, accounts receivable, accounts payable, derivatives, and long-term debt. As of March 31, 2019, 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 March 31, 2019, we had $10.6 million fixed-rate debt outstanding included in the “International lines of credit and other loans” line item within Note 9 to these Notes to Condensed Consolidated

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Financial Statements. These fair values represent Level 2 under the three-tier hierarchy described above. Due to the nature of these loans, fair value approximates book value.
Recurring 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.
We manage our exposure to fluctuations in interest rates using a mix of fixed and variable rate debt. On February 8, 2019, we entered into a $700.0 million fixed-rate interest rate swap agreement that changed the LIBOR-based portion of the interest rate on a portion of our variable rate debt to a fixed rate of 2.4575% (the “interest rate swap”). The term of the interest rate swap is from the effective date of February 12, 2019, through the termination date of October 19, 2022 (the “interest rate swap term”). The interest rate swap effectively mitigates our exposures to the risks and variability of changes in LIBOR.
The notional amount of the interest rate swap will decrease over the interest rate swap term as follows:
 
 
Notional Amount
February 12, 2019 - December 30, 2020
 
$
700,000

December 31, 2020 - December 30, 2021
 
466,667

December 31, 2021 - October 19, 2022
 
233,333

The objective of the interest rate swap is to eliminate the variability of cash flows in interest payments on the first $700.0 million of variable rate debt attributable to changes in benchmark one-month LIBOR interest rates. The hedged risk is the interest rate risk exposure to changes in interest payments, attributable to changes in benchmark one-month LIBOR interest rates over the interest rate swap term. If one-month LIBOR is greater than the minimum percentage under the Senior Secured Term Loan, the changes in cash flows of the interest rate swap are expected to exactly offset changes in cash flows of the variable rate debt. The interest rate swap is designated as a cash flow hedge.
As of March 31, 2019, we reported $3.9 million loss , net of tax, in accumulated other comprehensive income related to the interest rate swap.
The following shows the liabilities measured at fair value on a recurring basis for the interest rate swap as of March 31, 2019.
 
 
Fair Value Measurements as of March 31, 2019
Description
 
Quoted Prices in Active Markets for Identical Assets
(Level 1)
 
Significant Other Observable Inputs
(Level 2)
 
Significant Unobservable Inputs
(Level 3)
Derivative liability - other current liabilities
 
$

 
$
543

 
$

Derivative liability - other non-current liabilities
 

 
4,417

 

Total
 
$

 
$
4,960

 
$


The inputs for determining fair value of the interest rate swap are classified as Level 2 inputs. Level 2 fair value is based on estimates using standard pricing models. These standard pricing models use inputs which are derived from or corroborated by observable market data such as interest rate yield curves, index forward curves, discount curves, and volatility surfaces. Counterparty to this derivative contracts is a highly rated financial institution which we believe carries only a minimal risk of nonperformance.
As of December 31, 2018, we had no interest rate swap agreements outstanding.

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Note 17. Subsequent Event
Tennessee Shared Service Center Closure
On April 18, 2019, we announced the closure of our shared service center in Johnson City, Tennessee, effective at the end of June 2019. Closure of the Tennessee shared service center aligns with our focus on operating excellence and efficiency and is not expected to have a material impact on our financial statements.
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Overview
NN, Inc., is a global diversified industrial company that combines advanced engineering and production capabilities with in-depth materials science expertise to design and manufacture high-precision components and assemblies for the medical, aerospace and defense, electrical, automotive, and general industrial markets. As used in this Quarterly Report on Form 10-Q, the terms “NN,” the “Company,” “we,” “our,” or “us” refer to NN, Inc., and its subsidiaries. As of March 31, 2019, we had 51 facilities in North America, Europe, South America, and China.
Forward-Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking statements that are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements may discuss goals, intentions and expectations as to future trends, plans, events, results of operations or financial condition, or state other information relating to NN, Inc., based on current beliefs of management as well as assumptions made by, and information currently available to, management. Forward-looking statements generally will be accompanied by words such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “forecast,” “guidance,” “intend,” “may,” “possible,” “potential,” “predict,” “project” or other similar words, phrases or expressions. Forward-looking statements involve a number of risks and uncertainties that are outside of management’s control and that may cause actual results to be materially different from such forward-looking statements. Such factors include, among others, general economic conditions and economic conditions in the industrial sector, competitive influences, risks that current customers will commence or increase captive production, risks of capacity underutilization, quality issues, availability of raw materials, currency and other risks associated with international trade, our dependence on certain major customers, the impact of acquisitions and divestitures, unanticipated difficulties integrating acquisitions, new laws and governmental regulations, and other risk factors and cautionary statements listed from time-to-time in our periodic reports filed with the Securities and Exchange Commission. We disclaim any obligation to update any such factors or to publicly announce the result of any revisions to any of the forward-looking statements included herein or therein to reflect future events or developments.
For additional information concerning such risk factors and cautionary statements, please see the section titled “Item 1A. Risk Factors” in our 2018 Annual Report on Form 10-K for the fiscal year ended December 31, 2018, which we filed with the SEC on March 18, 2019 (the “2018 Annual Report”).
Results of Operations
Factors That May Influence Results of Operations
The following paragraphs describe factors that have influenced results of operations for the three months ended March 31, 2019, that management believes are important to provide an understanding of the business and results of operations, or that may influence operations in the future.
Management Structure
In 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. Mobile Solutions is focused on growth in the general industrial and automotive end markets. Power Solutions is focused on growth in the electrical and aerospace and defense end markets. Life Sciences is focused on growth in the medical end market.
Acquisitions
In February 2018, we acquired 100% of the assets of Bridgemedica, LLC (“Bridgemedica”). Bridgemedica is a medical device company that provides concept to supply solutions through design, development engineering, and manufacturing. Operating results of Bridgemedica are reported in our Life Sciences group.

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In May 2018, we acquired 100% of the stock of PMG Intermediate Holding Corporation, the parent company of Paragon Medical, Inc. (“Paragon Medical”). Paragon Medical is a medical device manufacturer which focuses on the orthopedic, case and tray, implant, and instrument markets. Operating results of Paragon Medical are reported in our Life Sciences group.
In August 2018, we acquired 100% of the capital stock of Southern California Technical Arts, Inc. (“Technical Arts”). Technical Arts is an industrial machining company that manufactures tight tolerance metal components and assemblies. The acquisition of Technical Arts expands our presence in the aerospace and defense end market. Operating results of Technical Arts are reported in our Power Solutions group.
Three Months Ended March 31, 2019, compared to the Three Months Ended March 31, 2018
 
 
Three Months Ended March 31,
 
 
2019
 
2018
 
$ Change
Net sales
 
$
213,256

 
$
169,148

 
$
44,108

 
Acquisitions
 
 
 
 
 
 
$
55,224

Volume
 
 
 
 
 
 
(7,999
)
Foreign exchange effects
 
 
 
 
 
 
(2,820
)
Price/mix/inflation/other
 
 
 
 
 
 
(297
)
Cost of sales (exclusive of depreciation and amortization shown separately below)
 
161,269

 
126,444

 
34,825

 
Acquisitions
 
 
 
 
 
 
$
37,862

Volume
 
 
 
 
 
 
(4,300
)
Foreign exchange effects
 
 
 
 
 
 
(2,346
)
Cost reduction projects
 
 
 
 
 
 
(3,008
)
Inflation






1,691

Mix/other
 
 
 
 
 
 
4,926

Selling, general and administrative expense
 
28,125

 
22,177

 
5,948

 
Acquisition related costs excluded from selling, general and administrative expense
 

 
1,776

 
(1,776
)
 
Depreciation and amortization
 
23,425

 
14,281

 
9,144

 
Other operating (income) expense, net
 
(152
)
 
22

 
(174
)
 
Restructuring and integration expense
 
(12
)
 
755

 
(767
)
 
Income from operations
 
601

 
3,693

 
(3,092
)
 
Interest expense
 
13,801

 
11,996

 
1,805

 
Loss on extinguishment of debt and write-off of debt issuance costs
 
2,699

 

 
2,699

 
Other (income) expense, net
 
729

 
(313
)
 
1,042

 
Loss before (provision) benefit for income taxes and share of net income from joint venture
 
(16,628
)
 
(7,990
)
 
(8,638
)
 
(Provision) benefit for income taxes
 
(2,241
)
 
1,176

 
(3,417
)
 
Share of net income from joint venture
 
269

 
831

 
(562
)
 
Net loss
 
$
(18,600
)
 
$
(5,983
)
 
$
(12,617
)
 
Net Sales. Net sales increased by $44.1 million, or 26%, in the three months ended March 31, 2019 compared to the three months ended March 31, 2018, primarily due to $55.2 million of net sales attributable to the 2018 business acquisitions. The increase in sales was partially offset by a decrease in volume of $8.0 million, primarily as a result of lower demand within the automotive end market as well as unfavorable foreign exchange effects of $2.8 million, primarily in Brazil.
Cost of Sales. Cost of sales increased by $34.8 million, or 28%, in the three months ended March 31, 2019 compared to the three months ended March 31, 2018, primarily due to $37.9 million in cost of sales attributable to the 2018 business acquisitions. The increase in cost of sales was partially offset by lower volume of $4.3 million, consistent with the decrease in sales demand. The increase in cost of sales was also partially offset by favorable foreign exchange effects of $2.3 million and $3.0 million in cost savings from production process improvement projects. Inflation and wage increases contributed $1.7 million to the increase in cost of sales.
Selling, General and Administrative Expense. Selling, general and administrative expense increased by $5.9 million during the three months ended March 31, 2019, compared to the three months ended March 31, 2018, primarily due to the 2018 business

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acquisitions which collectively contributed $5.0 million to selling, general and administrative expense during the three months ended March 31, 2019. Infrastructure and staffing costs incurred related to our strategic initiatives, including integration of recent acquisitions and a global implementation of an enterprise resource planning (“ERP”) system, also contributed to the increase. These increases were partially offset by lower costs for professional services as a result of our strategic initiatives.
Acquisition Related Costs Excluded from Selling, General and Administrative Expense. Acquisition related costs decreased during the three months ended March 31, 2019, compared to the three months ended March 31, 2018, as there was no business acquisition activity during the three months ended March 31, 2019. The three months ended March 31, 2018, included professional service costs incurred in connection with the 2018 business acquisitions.
Depreciation and Amortization. Depreciation and amortization increased during the three months ended March 31, 2019, compared to the three months ended March 31, 2018, consistent with additions to intangible assets and property, plant and equipment, including $8.9 million from the 2018 business acquisitions. The increase in depreciation and amortization includes the effects of related fair value adjustments to certain property, plant and equipment and the addition of intangible assets, principally for customer relationships and trade names.
Other Operating (Income) Expense, Net. Other operating income, net, decreased during the three months ended March 31, 2019, compared to the three months ended March 31, 2018, primarily due to a $0.2 million net gain on the sale of property, plant and equipment.
Restructuring and Integration Expense. Restructuring and integration expense decreased during the three months ended March 31, 2019, compared to the three months ended March 31, 2018, primarily due to employee severance costs incurred in connection with implementing our new enterprise and management structure in 2018. Note 11 in the Notes to Condensed Consolidated Financial Statements provides more information regarding the effects of restructuring and integration on our operating results.
Interest Expense. Interest expense increased by $1.8 million during the three months ended March 31, 2019, compared to the three months ended March 31, 2018, primarily due to an increased balance in our Senior Secured Revolver as well as a higher variable interest rate. The increase was partially offset by the fixed-rate interest rate swap entered into in February 2019, which reduced the variability in the interest expense.
 
 
Three Months Ended March 31,
 
 
2019
 
2018
Interest on debt
 
$
13,119

 
$
10,802

Amortization of debt issuance costs
 
1,191

 
1,088

Capitalized interest
 
(553
)
 
(205
)
Other
 
44

 
311

Total interest expense
 
$
13,801

 
$
11,996

Loss on Extinguishment of Debt and Write-off of Unamortized Debt Issuance Costs. Loss on extinguishment of debt and write-off of unamortized debt issuance costs increased during the three months ended March 31, 2019, compared to the three months ended March 31, 2018, due to costs written off due to the March 2019 amendment to the credit facility.
Provision/Benefit for Income Taxes. Our effective tax rate was (13.5)% for the three months ended March 31, 2019, compared to 14.7% for the three months ended March 31, 2018. Note 8 in the Notes to Condensed Consolidated Financial Statements describes the components of income taxes for each period presented.
Share of Net Income from Joint Venture. Our share of net income from a Chinese joint venture in our Mobile Solutions group decreased by $0.6 million primarily due to price and volume decreases resulting from reduced demand in the Chinese automotive market.

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Results by Segment
MOBILE SOLUTIONS
 
 
Three Months Ended March 31,
 
 
2019
 
2018
 
$ Change
Net sales
 
$
78,075

 
$
89,794

 
$
(11,719
)
 
Volume
 
 
 
 
 
 
$
(9,529
)
Foreign exchange effects
 
 
 
 
 
 
(2,642
)
Price/mix/inflation/other
 
 
 
 
 
 
452

Income from operations
 
$
4,107

 
$
9,785

 
$
(5,678
)
 
Net sales decreased during the during the three months ended March 31, 2019, compared to the three months ended March 31, 2018, primarily due to reduced demand within the North American and Chinese automotive markets, unfavorable foreign exchange effects, and the impact of reduced demand for components associated with programs nearing the end of life.
Income from operations decreased by $5.7 million compared to prior year due to lost variable margin on the above-referenced sales volume decline and costs associated with the launch of new fuel systems business within our European operations. These unfavorable impacts were partially offset by fixed cost reduction actions taken in response to the decline in sales volume.
POWER SOLUTIONS
 
 
Three Months Ended March 31,