JASON INDUSTRIES, INC. The following discussion and analysis of financial condition and results of operations of the Company should be read in conjunction with the consolidated financial statements for the years endedDecember 31, 2019 , 2018 and 2017, including the notes thereto, included elsewhere in this Annual Report on Form 10-K. The Company's actual results may not be indicative of future performance. This discussion and analysis contains forward-looking statements and involves numerous risks and uncertainties, including, but not limited to, those discussed in "Cautionary Note Regarding Forward-Looking Statements" and "Risk Factors" included in Part I, Item IA or in other parts of this Annual Report on Form 10-K. Actual results may differ materially from those contained in any forward-looking statements. This Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") contains certain financial measures, in particular EBITDA and Adjusted EBITDA, which are not presented in accordance with accounting principles generally accepted inthe United States of America ("GAAP"). These non-GAAP financial measures are being presented because management believes that they provide readers with additional insight into the Company's operational performance relative to its competitors. EBITDA and Adjusted EBITDA are key measures used by the Company to evaluate its performance. The Company does not intend for these non-GAAP financial measures to be a substitute for any GAAP financial information. Readers of this MD&A should use these non-GAAP financial measures only in conjunction with the comparable GAAP financial measures. Reconciliations of EBITDA and Adjusted EBITDA to net income, the most comparable GAAP measure, are provided in this MD&A. Fiscal Year Our fiscal year ends onDecember 31 . Throughout the year, we report our results using a fiscal calendar whereby each three month quarterly reporting period is approximately thirteen weeks in length and ends on a Friday. The exceptions are the first quarter, which begins onJanuary 1 , and the fourth quarter, which ends onDecember 31 . For 2019, our fiscal quarters were comprised of the three months endedMarch 29 ,June 28 ,September 27 andDecember 31 . In 2018, our fiscal quarters were comprised of the three months endedMarch 30 ,June 29 ,September 28 , andDecember 31 . Overview We are a global industrial manufacturing company with significant market share positions in each of our two segments: industrial and engineered components. We provide critical components and manufacturing solutions to customers across a wide range of end markets, industries and geographies through our global network of 23 manufacturing facilities and nine sales, administrative and/or warehouse facilities throughoutthe United States and 13 foreign countries. We have embedded relationships with long standing customers, superior scale and resources, and specialized capabilities to design and manufacture specialized products on which our customers rely. In the first quarter of 2019, as part a review of our organizational structure, we made certain strategic leadership changes which required a reassessment of reportable segments. Based on this evaluation, we changed how we make operating decisions, assess performance of the business, and allocate resources. As a result, we reduced the number of operating and reportable segments from four to three: industrial, engineered components and fiber solutions. The prior year disclosures have been updated to conform with the current year presentation. During the year endedDecember 31, 2019 , we determined that both the North American fiber solutions and Metalex businesses met the criteria to be classified as discontinued operations. As a result, our prior period results of operations and financial position have been recast to be presented on a continuing operations basis, except where noted. The assets and liabilities of the North American fiber solutions and Metalex businesses have been presented as held for sale for periods prior to the sale. OnAugust 30, 2019 , we completed the divestiture of our North American fiber solutions business, within the fiber solutions segment. Previously, onAugust 30, 2017 , we completed the sale of the European fiber solutions business, which did not meet the criteria for discontinued operations presentation at the time of the divestiture and the results of operations and financial position are included in continuing operations through the date of the sale. OnDecember 13, 2019 , we completed the sale of our Metalex business within the engineered components segment. OnApril 1, 2019 , we acquiredSchaffner Manufacturing Company, Inc. ("Schaffner"), which manufactures high-quality polishing and finishing products. These products are manufactured and distributed by the industrial segment. We focus on markets with long-term sustainable growth characteristics and where we are, or have the opportunity to become, the industry leader. Our industrial segment, formerly the finishing segment, focuses on the production of industrial brushes, polishing buffs and compounds, abrasives, and roller technology products that are used in a broad range of industrial and infrastructure applications. The engineered components segment, the former seating segment, designs, engineers, and manufactures seating products used in heavy industry (construction, agriculture, and material handling), turf care, and power sports applications. OnAugust 12, 2019 , we announced that our Board of Directors had engaged financial advisors to advise us as we conduct a process to evaluate strategic alternatives. This evaluation includes, but is not limited to, a potential sale, strategic 31
-------------------------------------------------------------------------------- merger, consolidation or business combination, acquisition, recapitalization, financing consisting of equity and/or debt securities, and/or a restructuring of the Company's debt, focused on maximizing the value of the Company for its stakeholders. During the years endedDecember 31, 2019 , 2018 and 2017, approximately 37%, 40% and 43%, respectively, of our sales were derived from customers outsidethe United States . As a diversified, global business, our operations are affected by worldwide, regional and industry-specific economic and political factors. Our geographic and industry diversity, as well as the wide range of our products, help mitigate the impact of industry or economic fluctuations. Given the broad range of products manufactured and industries and geographies served, management primarily uses general economic trends to predict the overall outlook for our Company. Our individual businesses monitor key competitors and customers, including, to the extent possible, their sales, to gauge relative performance and the outlook for the future. General Market Conditions and Trends; Business Performance and Outlook Demand for our products declined in 2019 when compared with 2018, with lower sales in both our industrial and engineered components segments. Demand was higher in 2018 when compared with 2017, with higher sales in both our industrial and engineered components segments. Demand in our industrial segment is largely dependent upon overall industrial production levels in the markets it serves. We believe that gross domestic product ("GDP") and industrial production levels in our served markets will grow modestly in the near term. However, if there is no growth, or if GDP or production levels do not increase or shrink, there could be reduced demand for the industrial segment's products, which would have a material negative impact on the industrial segment's net sales and/or income from continuing operations. The engineered components segment is principally impacted by demand fromU.S. -based original equipment manufacturers serving the motorcycle, lawn and turf care, construction, material handling, agricultural and power sports market segments. In recent years, power sports production and the lawn and turf care equipment market have contracted, and global construction activity has been stable. We believe that, in the near term, the lawn and turf care industry will stabilize, and the power sports, construction and agriculture equipment and motorcycle industry will soften. However, if such industries weaken more than anticipated, there could be reduced demand for the engineered components segment's products, which would have a material negative impact on the engineered components segment's net sales and/or income from continuing operations. We expect overall market conditions to remain challenging due to macro-economic uncertainties and monetary, fiscal, and trade policies of countries where we do business. While individual businesses and end markets continue to experience volatility, we expect to benefit as general economic conditions inNorth America andWestern Europe are expected to experience modest growth. Regarding economic conditions, as discussed above, we expect the following in the near term: •modest global GDP growth; •slowing global industrial production; •continued lower demand in the motorcycle industry; •slowing demand in the construction and agriculture industries; and •stabilizing demand in the lawn and turf care market. Strategic Initiatives Our strategic initiatives support an overall capital allocation strategy that focuses on decreasing leverage through maximizing earnings and operating cash flow. The Company continues to identify restructuring activities designed to expand Adjusted EBITDA margins. To achieve this target, our strategic initiatives include: Continued footprint rationalization - We serve our customers through a global network of manufacturing facilities, sales offices, warehouses and joint venture facilities throughoutthe United States and 13 foreign countries. Our geographic footprint has evolved over time with a focus on maximizing geographic coverage while optimizing costs. Over the past several years, we have closed several facilities in higher cost, mature markets and shifted production to lower cost regions such asMexico ,India andEastern Europe . We continuously evaluate our manufacturing footprint and utilization of manufacturing capacity. In recent years, we have completed or announced the consolidation of manufacturing facilities across our businesses. Reduction of fixed costs through optimization of manufacturing footprint and capacity will continue to be a driver of margin expansion and improving profitability. In 2019 in the industrial segment, we closed a manufacturing facility inJackson, Mississippi that was acquired with Schaffner, shifting production to available capacity in our other facilities. We have accelerated the consolidation of Schaffner's remaining three plants inPittsburgh, Pennsylvania andNorthville andLivonia, Michigan . In 2018, we closed theUnited Kingdom manufacturing facility in the engineered components segment. We believe that geographic proximity to existing and potential customers provides logistical efficiencies, as well as important strategic and cost advantages, and have also taken steps 32
-------------------------------------------------------------------------------- to realign our footprint. We anticipate that costs associated with any future rationalization activities, as well as the capital required for any new facilities, will be funded by existing cash balances and funds generated from operating activities. Margin Expansion - We are focused on creating operational effectiveness at each of our business segments through deployment of lean principles and implementation of continuous operational improvement initiatives. While many of these activities have focused on implementing shop floor improvements, we have also targeted our selling and administrative functions in order to reduce the cost of serving our customers. We are also focused on improving profitability through an active evaluation of customer pricing and margins and a reduction in the number of parts and product variations that are produced. While these initiatives may result in lower overall sales, they are focused on creating shareholder value through higher margins and profitability, as well as lower inventory levels and working capital requirements. Acquisitions - We use acquisitions to increase revenues with existing customers and to expand revenues to both new markets and customers. We intend to pursue acquisitions that are accretive to EBITDA (earnings before interest, income taxes, depreciation and amortization) margins post-synergies, have strategic focus that aligns with our core strategy and generate the appropriate estimated return on investment as part of our capital resource and allocation process. In 2019, we acquired Schaffner, which manufactures high-quality polishing and finishing products. These products are manufactured and distributed by the industrial segment. During the year endedDecember 31, 2019 , the industrial segment's net sales had a 6.9% positive impact from the Schaffner acquisition. Product Innovation - During the past several years, our research and development activities have placed more focus on developing new products that are of higher value to our customers with superior performance over alternative and competitive products, thereby providing customers with a better value proposition. We believe that developing new and innovative products will allow us to deepen our value-added relationships with customers, open new opportunities for revenue generation, enhance pricing power and improve margins. This strategy has been particularly effective in our engineered components segment where new cut and sew products have been developed to capitalize on industry trends. Factors that Affect Operating Results Our results of operations and financial performance are influenced by a number of factors, including the timing of new product introductions, general economic conditions and customer buying behavior. Our business is complex, with multiple segments serving a broad range of industries worldwide. We have manufacturing and sales facilities around the world, and we operate in numerous regulatory and governmental environments. Comparability of future results could be impacted by any number of unforeseen issues. Key Events In addition to the factors described above, the following strategic and operational events, which occurred during the years endedDecember 31, 2019 , 2018 and 2017, affected our results of operations: Divestitures. OnDecember 13, 2019 we completed the divestiture of the Metalex business within the engineered components segment for a net purchase price of$5.9 million . OnAugust 30, 2019 , we completed the divestiture of the North American fiber solutions business for a net purchase price of$78.6 million . OnAugust 30, 2017 , we completed the divestiture of the European operations within the fiber solutions segment located inGermany ("Acoustics Europe") for a net purchase price of$8.1 million . See Note 2, "Discontinued Operations and Divestitures" in the consolidated financial statements for further discussion. Acquisitions. OnApril 1, 2019 , we acquired Schaffner, which manufactures high-quality polishing and finishing products, for a purchase price of$11.0 million . These products are manufactured and distributed by the industrial segment. During the year endedDecember 31, 2019 , the industrial segment's net sales had a 6.9% positive impact from the Schaffner acquisition. The acquisition was accounted for as a business combination. The operating results and cash flows of Schaffner are included in the Company's consolidated financial statements fromApril 1, 2019 , the date of the acquisition. Tax Cuts and Jobs Act. OnDecember 22, 2017 , the President ofthe United States signed into law the Tax Cuts and Jobs Act (the "Tax Reform Act"). The legislation significantly changedU.S. tax law by, among other things, lowering corporate income tax rates, implementing a territorial tax system and imposing a repatriation tax on deemed repatriated earnings of foreign subsidiaries. The Tax Reform Act also added many new provisions including changes to bonus depreciation and the deductions for executive compensation and interest expense, among others. The Tax Reform Act permanently reduced theU.S. corporate income tax rate from a maximum of 35% to a flat 21% rate, effectiveJanuary 1, 2018 . See further discussion of the Tax Reform Act within "Consolidated Results of Operations" below. 33
-------------------------------------------------------------------------------- Key Financial Definitions Net sales. Net sales reflect the sales of our products net of allowances for variable consideration, including rebates, discounts and product returns. Several factors affect net sales in any period, including general economic conditions, weather conditions, the timing of acquisitions and divestitures and the purchasing habits of our customers. Cost of goods sold. Cost of goods sold includes all costs of manufacturing the products we sell. Such costs include direct and indirect materials, direct and indirect labor costs, including fringe benefits, supplies, utilities, depreciation, facility rent, insurance, pension benefits and other manufacturing related costs. The largest component of cost of goods sold is the cost of materials, which represents 46% of net sales for the year endedDecember 31, 2019 . Fluctuations in cost of goods sold are caused primarily by changes in sales levels, changes in the mix of products sold, productivity of labor, and changes in the cost of raw materials. In addition, following acquisitions, cost of goods sold will be impacted by step-ups in the value of inventories required in connection with the accounting for acquired businesses. Selling and administrative expenses. Selling and administrative expenses primarily include the cost associated with our sales and marketing, finance, human resources, administration, engineering and technical services functions. Certain corporate level administrative expenses such as payroll and benefits, incentive compensation, travel, accounting, auditing, legal, and other professional advisor fees and certain other expenses are kept within our corporate results and not allocated to our business segments. Impairment charges. As required by GAAP, when certain conditions or events occur, we recognize impairment losses to reduce the carrying value of goodwill, other intangible assets and property, plant and equipment to their estimated fair values. (Loss) gain on disposals of property, plant and equipment - net. In the ordinary course of business, we dispose of fixed assets that are no longer required in our day to day operations with the intent of generating cash from those sales. Restructuring. In the past several years, we have made changes to our worldwide manufacturing footprint to reduce our fixed cost base. These actions have resulted in employee severance and other related charges, changes in our operating cost structure, movement of manufacturing operations and product lines between facilities, exit costs for consolidation and closure of plant facilities, employee relocation and contract termination costs. It is likely that we will incur such costs in future periods as well. These operational changes and restructuring costs affect comparability between periods and segments. Interest expense-net. Interest expense-net consists of interest paid to our lenders under our worldwide credit facilities, cash paid or received on interest rate hedge contracts and amortization of deferred financing costs net of interest income earned on cash and cash equivalents. Gain on extinguishment of debt. Gain on extinguishment of debt primarily consists of gains recorded related to the repurchases of second lien term loan debt, net of the associated write-off of previously unamortized debt discount and deferred financing costs on the second lien term loans related to the extinguishment. Equity income. We maintain non-controlling interests in Asian joint ventures that are part of our industrial segment and record a proportional share in the earnings of these joint ventures as required by GAAP. The amount of equity income recorded is dependent upon the underlying financial results of the joint ventures. Loss on divestiture. OnAugust 30, 2017 , we completed the divestiture of our Acoustics Europe business. The loss on divestiture relates to the excess of the net assets of the business over the sales price less costs to sell and recognition of cumulative foreign currency translation adjustments upon closing of the divestiture. Other income-net. Other income is principally comprised of royalty income received from non-U.S. licensees, the employee benefit plan non-service cost components of net periodic benefit costs, and other non-recurring non-operational items. Tax (benefit) provision. Our tax (benefit) provision is impacted by a number of factors, including the amount of taxable earnings derived in foreign jurisdictions with tax rates that are different than theU.S. federal statutory rate, state tax rates in the jurisdictions where we do business, tax minimization planning and our ability to utilize various tax credits and net operating loss carryforwards. Income tax expense also includes the impact of provision to return adjustments, changes in valuation allowances and changes in reserve requirements for unrecognized tax benefits. In 2017, 2018 and 2019, the income tax benefit was also impacted by the provisions of the Tax Reform Act. Accretion of preferred stock dividends and redemption premium. We record accretion of preferred stock dividends to reflect cumulative dividends on our preferred stock. The redemption premium relates to the exchange of Series A Preferred Stock for common stock ofJason Industries, Inc. and represents the excess of the exchange conversion rate over the agreement conversion rate. The accretion amounts are subtracted from net loss to arrive at the net loss allocable to common shareholders for the purposes of calculating the Company's net loss per share allocable to common shareholders. 34 -------------------------------------------------------------------------------- General Factors Affecting the Results of Operations Foreign exchange. We have a significant portion of our operations outside of theU.S. As such, the results of our operations are based on currencies other than theU.S. dollar. Changes in foreign currency exchange rates influence our financial results, and therefore the ability to compare results between periods and segments. Seasonality. Our engineered components segment is subject to seasonal variation due to the markets it serves and the stocking requirements of its customers. The peak season has historically been during the period from November through May. Sales during these months are typically greater due to the shipments required to fill the inventory at retail stores and customer warehouses. There are, however, variations in the seasonal demands from year to year depending on weather, customer inventory levels, and model year changes. This seasonality and annual variations of this seasonality could impact the ability to compare results between time periods. 35
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Consolidated Results of Operations
The following table sets forth our consolidated results of operations:
Year Ended Year Ended Year Ended
(in thousands) December 31, 2019 December 31, 2018 December 31, 2017
Net sales $ 337,897 $ 367,959 $ 382,096
Cost of goods sold 263,291 277,852 295,076
Gross profit 74,606 90,107 87,020
Selling and administrative expenses 78,200 78,752 77,611
Loss (gain) on disposals of property, plant and
equipment-net 303 (1,318) (320)
Restructuring 3,954 877 2,475
Operating (loss) income (7,851) 11,796 7,254
Interest expense-net (32,978) (33,277) (32,951)
Gain on extinguishment of debt - - 2,201
Equity income 316 1,024 952
Loss on divestiture - - (8,730)
Other income-net 1,098 758 258
Loss from continuing operations before income taxes (39,415) (19,699) (31,016)
Tax provision (benefit) 4,016 (5,046) (15,614)
Net loss from continuing operations (43,431) (14,653) (15,402)
Net (loss) income from discontinued operations, net of tax (38,177)
1,493 10,929
Net loss $ (81,608) $ (13,160) $ (4,473) Less net gain (loss) attributable to noncontrolling interests
- - 5
Net loss attributable to Jason Industries $ (81,608) $ (13,160) $ (4,478)
Accretion of preferred stock dividends and
redemption premium 3,347 4,070 3,783
Net loss allocable to common shareholders of
$ (84,955) $ (17,230) $ (8,261) Total other comprehensive (loss) income$ (5,072) $ (3,383) $ 12,232 Other financial data: (1) Year Ended Year Ended Increase/(Decrease) (in thousands, except percentages) December 31, 2019 December 31, 2018 $ %
Consolidated
Net sales$ 337,897 $ 367,959 $ (30,062) (8.2)% Net loss from continuing operations (43,431) (14,653) 28,778 196.4 Net loss from continuing operations as a % of net sales 12.9 % 4.0 % 890 bps Adjusted EBITDA from continuing operations 24,818 36,661 (11,843) (32.3) Adjusted EBITDA from continuing operations as a % of net sales 7.3 % 10.0 % (270) bps Year Ended Year Ended Increase/(Decrease) (in thousands, except percentages) December 31, 2018 December 31, 2017 $ %
Consolidated
Net sales$ 367,959 $ 382,096 $ (14,137) (3.7) % Net loss from continuing operations (14,653) (15,402) (749) (4.9) Net loss from continuing operations as a % of net sales 4.0 % 4.0 % - bps Adjusted EBITDA from continuing operations 36,661 32,615 4,046 12.4 Adjusted EBITDA from continuing operations as a % of net sales 10.0 % 8.5 % 150 bps (1) Adjusted EBITDA and Adjusted EBITDA as a % of net sales are financial measures that are not presented in accordance with GAAP. See "Key Measures the Company Uses to Evaluate Its Performance" below for our definition of Adjusted EBITDA and a reconciliation of Adjusted EBITDA to net income. 36 -------------------------------------------------------------------------------- The Year EndedDecember 31, 2019 Compared with the Year EndedDecember 31, 2018 Net sales. Net sales were$337.9 million for the year endedDecember 31, 2019 , a decrease of$30.1 million , or 8.2%, compared with$368.0 million for the year endedDecember 31, 2018 , reflecting decreased net sales in the engineered components segment of$23.9 million and the industrial segment of$6.1 million . The decrease of$6.1 million includes$14.4 million of incremental net sales as a result of theApril 1, 2019 Schaffner acquisition. See "Segment Financial Data" within this Item 7, "Management's Discussion and Analysis", for further discussion on net sales for each segment. Changes in foreign currency exchange rates compared with theU.S. dollar had a net negative impact of$7.0 million on consolidated net sales during the year endedDecember 31, 2019 compared with 2018, negatively impacting the industrial segment's net sales by$7.0 million . This was due principally to the net strengthening of theU.S. dollar against the Euro during the year endedDecember 31, 2019 . Cost of goods sold. Cost of goods sold was$263.3 million for the year endedDecember 31, 2019 , compared with$277.9 million for the year endedDecember 31, 2018 . The decrease in cost of goods sold was primarily due to lower sales volumes across both segments, a$4.9 million decrease related to foreign currency exchange rates, reduced material usage and labor costs as a result of continuous improvement programs in the engineered components segment and lower headcount across both segments. The decrease was partially offset by higher manufacturing costs in the industrial segment due to the Schaffner acquisition of$10.8 million , lower material and labor efficiencies related to sales volume declines in both the engineered components and industrial segments, raw material, and wage inflation across both segments, increased healthcare costs in the industrial segment, unfavorable product mix in the engineered components segment, accelerated lease and depreciation expense of$1.3 million primarily related to planned facility consolidations in the engineered components and industrial segments and higher freight costs. Gross profit. For the reasons described above, gross profit was$74.6 million for the year endedDecember 31, 2019 , compared with$90.1 million for the year endedDecember 31, 2018 . Selling and administrative expenses. Selling and administrative expenses were$78.2 million for the year endedDecember 31, 2019 , compared with$78.8 million for the year endedDecember 31, 2018 , a decrease of$0.6 million . The decrease is primarily due to decreased incentive compensation, lower headcount across both segments, decreased corporate professional fees and a$1.5 million decrease related to foreign currency exchange rates. The decrease was partially offset by higher selling and administrative costs in the industrial segment due to the Schaffner acquisition of$2.6 million , a$0.7 million increase in transaction-related expenses primarily related to the Schaffner acquisition, the Company's strategic alternative process, and increased healthcare costs. Loss (gain) on disposals of property, plant and equipment-net. Loss on disposals of property, plant and equipment - net for the year endedDecember 31, 2019 was$0.3 million , compared to a gain of$1.3 million for the year endedDecember 31, 2018 . The loss on disposals of property, plant and equipment - net for the year endedDecember 31, 2019 includes a loss of$0.3 million on the sale of a former Schaffner building in the industrial segment. The gain on disposals of property, plant and equipment - net for the year endedDecember 31, 2018 includes a gain of$1.3 million on the sale of a building related to the closure of the engineered components segment'sU.K. facility. Restructuring. In 2019 and 2018, restructuring costs primarily include activities which align with our strategic initiatives of continued footprint rationalization and margin expansion. Such activities are typically identified by management as part of the annual strategic planning process, with priority assigned to those that maximize the financial return for the Company. In the first quarter of 2019, additional restructuring activities resulting in one-time employee termination benefits were identified upon a review of the Company's organizational structure resulting in certain strategic leadership changes as well as in response to end market decline in the industrial segment. Additionally, with the acquisition ofSchaffner Manufacturing Company, Inc. onApril 1, 2019 , further footprint rationalization activities were identified during the due diligence process which were executed upon throughout the remainder of 2019. Restructuring costs were$4.0 million for the year endedDecember 31, 2019 compared to$0.9 million for the year endedDecember 31, 2018 . During 2019, such costs included severance costs in corporate and the industrial segment related to the segment reorganization in the first quarter of 2019 and work force reductions throughout 2019 in response to declining end market demand. Other restructuring costs included plant closure and consolidation costs in the industrial segment and engineered components segments and transitional costs of moving production toU.S. facilities as a result of the closure of aU.K. facility in the engineered components segment. During 2018, such costs were primarily move costs related to the closure of aU.S. facility in the industrial segment and the closure of aU.K. facility in the engineered components segment, partially offset by a reduction in expense as a result of the statute of limitations expiring on certain unasserted employment matter claims inBrazil that were reserved within the industrial segment. 37 -------------------------------------------------------------------------------- Operating (loss) income. For the reasons described above, operating (loss) income was a loss of$7.9 million for the year endedDecember 31, 2019 , compared with income of$11.8 million for the year endedDecember 31, 2018 . Interest expense-net. Interest expense-net was$33.0 million for the year endedDecember 31, 2019 compared with$33.3 million for the year endedDecember 31, 2018 . The decrease in interest expense-net primarily relates to a decrease in outstanding long-term debt balances, partially offset by an increase in interest expense-net caused by higher variable interest rates. The effective interest rate on the Company's total outstanding indebtedness for the year endedDecember 31, 2019 was 8.3% as compared to 8.2% for the year endedDecember 31, 2018 . See "Senior Secured Credit Facilities" in the Liquidity and Capital Resources section of this MD&A for further discussion. Equity income. Equity income was$0.3 million for the year endedDecember 31, 2019 compared to$1.0 million for the year endedDecember 31, 2018 . The decrease in equity income is due to lower sales volumes in our joint ventures inChina andTaiwan . Other income-net. Other income-net was$1.1 million for the year endedDecember 31, 2019 , compared with$0.8 million for the year endedDecember 31, 2018 . Other income - net for the year endedDecember 31, 2019 includes the reclassification to earnings of foreign currency translation gains of$0.8 million for the wind down and substantial dissolution of certainU.K. entities and$0.5 million of income from transition services performed subsequent to business divestitures, partially offset by$0.3 million of transaction-related expenses related to debt financing activities and$0.2 million of employee benefit plan non-service costs. Other income - net for the year endedDecember 31, 2018 includes$0.4 million of income related to proceeds from a settlement in the engineered components segment associated with periods prior to the Company's go public business combination and$0.1 million of employee benefit plan non-service costs. Loss from continuing operations before income taxes. For the reasons described above, loss from continuing operations before income taxes was$39.4 million for the year endedDecember 31, 2019 compared with$19.7 million for the year endedDecember 31, 2018 . Tax provision (benefit). The tax provision was$4.0 million for the year endedDecember 31, 2019 , compared with a tax benefit of$5.0 million for the year endedDecember 31, 2018 . The effective tax rate for the year endedDecember 31, 2019 was a negative 10.2%, compared with 25.6% for the year endedDecember 31, 2018 . The Company's tax provision (benefit) is impacted by a number of factors, including, among others, the amount of taxable income or loss at theU.S. federal statutory rate, the amount of taxable earnings derived in foreign jurisdictions in which the majority have tax rates higher than theU.S. federal statutory rate, permanent items, state tax rates in jurisdictions where we do business and the ability to utilize various tax credits and net operating loss carry forwards to reduce income tax expense. The income tax provision (benefit) also includes the impact of provision to return adjustments, adjustments to valuation allowances and reserve requirements for unrecognized tax positions. For the years endedDecember 31, 2019 and 2018, the tax provision and tax benefit, respectively, were impacted by the enactment of the Tax Reform Act. The 2019 effective tax rate of negative 10.2% was impacted by establishing valuation allowances totaling$13.3 million for federal and state deferred tax assets primarily related to the carryforward arising from the interest deduction limitation provision included in the Tax Reform Act. The increase in valuation allowances impacted the effective tax rate by 34.2%. The 2018 effective tax rate of 25.6% differs from theU.S. federal statutory rate of 21% due primarily to the impact of state taxes and the finalization of accounting for provisions of the Tax Reform Act discussed in the paragraph below, partially offset by the impact of higher foreign tax rates when compared to the 21%U.S. federal statutory tax rate (primarily inGermany andMexico ). The Company recognized the provisional impact of the Tax Reform Act in its consolidated financial statements for the year endedDecember 31, 2017 . As a result of the reduction in theU.S. corporate income tax rate from 35% to 21% under the Tax Reform Act, the Company revalued its ending net deferred tax liabilities atDecember 31, 2017 and recognized a provisional$11.1 million tax benefit in the Company's consolidated statements of operations for the year endedDecember 31, 2017 . The Company had an estimated$54.5 million of undistributed foreign earnings and profits subject to the deemed mandatory repatriation and recognized a provisional$5.3 million of income tax expense in the Company's consolidated statements of operations for the year endedDecember 31, 2017 . During the year endedDecember 31, 2018 , the Company finalized the accounting for these items and recorded an adjustment to reduce the amount of income tax expense attributable to the deemed mandatory repatriation of foreign subsidiary earnings and profits by$0.5 million . The final adjustment required to revalue net deferred tax liabilities was immaterial. See Note 14, "Income Taxes" in the consolidated financial statements for a complete reconciliation of theU.S. statutory tax rate to the effective tax rate and more information on the Tax Reform Act and tax events in 2019 and 2018 affecting each year's respective tax rates. 38 -------------------------------------------------------------------------------- Net loss from continuing operations. For the reasons described above, net loss was$43.4 million for the year endedDecember 31, 2019 compared with$14.7 million for the year endedDecember 31, 2018 . Other comprehensive (loss) income. Other comprehensive loss was$5.1 million for the year endedDecember 31, 2019 compared with$3.4 million for the year endedDecember 31, 2018 . The increase was driven by the change in unrealized (losses) gains on cash flow hedges and an increase in employee retirement plan adjustments in 2019 compared with 2018, partially offset by a decrease in unfavorable foreign currency translation adjustments in 2019 compared to 2018. Other comprehensive loss for foreign currency translation adjustments was$3.1 million for the year endedDecember 31, 2019 compared with$4.6 million for the year endedDecember 31, 2018 . Foreign currency translation adjustments are based on fluctuations in the value of foreign currencies (primarily the Euro) against theU.S. Dollar each period. Employee retirement plan adjustments was a loss of$0.4 million for the year endedDecember 31, 2019 , compared with$0.2 million for the year endedDecember 31, 2018 . The employee retirement plan adjustments are based on actuarial valuations using aDecember 31 measurement date that include key assumptions regarding discount rates, expected returns on plan assets, retirement and mortality rates, future compensation increases, and health care cost trend rates. The employee retirement plan loss for the year endedDecember 31, 2019 primarily relates to actuarial losses recognized in the German pension plan within the industrial segment due to a decrease in the discount rate, partially offset by actuarial gains inU.S. plans within the industrial segment due to higher actual plan asset returns compared with the expected returns on plan assets. Other comprehensive loss for unrealized losses on cash flow hedges was$1.6 million for the year endedDecember 31, 2019 , compared with an other comprehensive gain of$1.3 million for the year endedDecember 31, 2018 . Gains and losses on cash flow hedges are based on the changes in current interest rates and market expectations of the timing and amount of future interest rate changes. For the year endedDecember 31, 2019 , the fair value of the hedging instruments decreased, based on actual and future expectations for short-term interest rate decreases. For the year endedDecember 31, 2018 , the fair value of the hedging instruments increased, based on actual and future expectations for interest rate increases. Adjusted EBITDA. For the year endedDecember 31, 2019 , Adjusted EBITDA was$24.8 million , or 7.3% of net sales, compared with$36.7 million , or 10.0% of net sales, for the year endedDecember 31, 2018 , a decrease of$11.8 million . The decrease reflects lower Adjusted EBITDA in the industrial segment of$8.0 million and the engineered components segment of$4.6 million , partially offset by lower corporate expenses of$0.8 million . Changes in foreign currency exchange rates compared with theU.S dollar had a negative impact of$1.0 million on consolidated Adjusted EBITDA for the year endedDecember 31, 2019 compared with the year endedDecember 31, 2018 , negatively impacting the industrial segment's Adjusted EBITDA by$1.0 million . See "Segment Financial Data" within this Item 7, "Management's Discussion and Analysis," for further discussion on Adjusted EBITDA for each segment. The Year EndedDecember 31, 2018 Compared with the Year EndedDecember 31, 2017 Net sales. Net sales were$368.0 million for the year endedDecember 31, 2018 , a decrease of$14.1 million , or 3.7%, compared with$382.1 million for the year endedDecember 31, 2017 , reflecting decreased net sales in the fiber solutions segment of$22.7 million related to the sale of the Acoustics Europe business, partially offset by increased net sales in the industrial segment of$7.4 million and in the engineered components segment of$1.2 million . Changes in foreign currency exchange rates compared with theU.S. dollar had a net positive impact of$5.2 million on consolidated net sales during the year endedDecember 31, 2018 compared with 2017, positively impacting the industrial and the engineered components segments' net sales by$4.6 million and$0.6 million , respectively.This was due principally to the net weakening of theU.S. dollar against the Euro and British Pound during the year endedDecember 31, 2018 . See "Segment Financial Data" within Item 7, "Management's Discussion and Analysis", for further discussion on net sales for each segment. Cost of goods sold. Cost of goods sold was$277.9 million for the year endedDecember 31, 2018 , compared with$295.1 million for the year endedDecember 31, 2017 . The decrease in cost of goods sold was primarily due to the sale of the Acoustics Europe business of$19.0 million in the fiber solutions segment, lower labor and material usage costs in the engineered components segment as a result of operational efficiencies, and reduced costs resulting from the Company's global cost reduction and restructuring program. The decrease was partially offset by increased cost of goods sold related to raw material inflation and higher freight costs in the industrial and engineered components segments, a$3.8 million increase related to foreign currency exchange rates and higher net sales volume in the industrial and engineered components segments. The reduced costs resulting from the Company's global cost reduction and restructuring program were due to lower manufacturing costs as a result of the closure of theRichmond, Virginia facility and the wind down of a facility inBrazil in the industrial segment. 39 -------------------------------------------------------------------------------- Gross profit. For the reasons described above, gross profit was$90.1 million for the year endedDecember 31, 2018 , compared with$87.0 million for the year endedDecember 31, 2017 . Selling and administrative expenses. Selling and administrative expenses were$78.8 million for the year endedDecember 31, 2018 , compared with$77.6 million for the year endedDecember 31, 2017 , an increase of$1.2 million . The increase is primarily due to increased share-based compensation expense of$1.3 million , a$1.1 million increase related to foreign currency exchange rates and higher headcount due to open positions in 2017 and in the industrial segment due to additional selling personnel in 2018. The increase was partially offset by reduced selling and administrative expenses in the fiber solutions segment due to the divestiture of the Acoustics Europe business of$2.5 million and decreased incentive compensation of$0.2 million . (Gain) loss on disposals of property, plant and equipment-net. Gain on disposals of property, plant and equipment - net for the year endedDecember 31, 2018 was$1.3 million , compared to$0.3 million for the year endedDecember 31, 2017 . The gain on disposals of property, plant and equipment - net for the year endedDecember 31, 2018 includes a gain of$1.3 million on the sale of a building related to the closure of the engineered components segment'sU.K. facility. The gain on disposals of property, plant and equipment - net for the year endedDecember 31, 2017 includes a gain of$0.5 million on the sale of a building related to the closure of the industrial segment'sRichmond, Virginia facility. Changes in the level of fixed asset disposals are dependent upon a number of factors, including changes in the level of asset sales, operational restructuring activities, and capital expenditure levels. Restructuring. Restructuring costs were$0.9 million for the year endedDecember 31, 2018 compared to$2.5 million for the year endedDecember 31, 2017 . During 2018 and 2017, such costs primarily relate to actions resulting from the global cost reduction and restructuring program announced onMarch 1, 2016 . During 2018, such costs were primarily related to the closure of aU.S. facility in the industrial segment and the closure of aU.K. facility in the engineered components segment, partially offset by a reduction in expense as a result of the statute of limitations expiring on certain unasserted employment matter claims inBrazil that were reserved within the industrial segment. During 2017, such costs were primarily move costs related to the consolidation of twoU.S. facilities in the industrial segment and the closure of a facility inBrazil in the industrial segment. Operating income. For the reasons described above, operating income was$11.8 million for the year endedDecember 31, 2019 , compared with$7.3 million for the year endedDecember 31, 2018 . Interest expense-net. Interest expense-net was$33.3 million for the year endedDecember 31, 2018 compared with$33.0 million for the year endedDecember 31, 2017 . The increase in interest expense-net primarily relates to higher interest rates for the year endedDecember 31, 2018 as compared to the year endedDecember 31, 2017 , partially offset by a decrease in outstanding long-term debt balances. The effective interest rate on the Company's total outstanding indebtedness for the year endedDecember 31, 2018 was 8.2% as compared to 7.6% for the year endedDecember 31, 2017 . See "Senior Secured Credit Facilities" in the Liquidity and Capital Resources section of this MD&A for further discussion. Gain on extinguishment of debt. Gain on extinguishment of debt was$2.2 million for the year endedDecember 31, 2017 and relates to the repurchase of$20.0 million of second lien term loans for$16.8 million in the second and third quarters of 2017. In connection with the repurchase, the Company wrote off$0.4 million of previously unamortized debt discount and$0.4 million of previously unamortized deferred financing costs, which were recorded as a reduction to the gain on extinguishment of debt. See "Senior Secured Credit Facilities" in the Liquidity and Capital Resources section of this MD&A for further discussion. In the fourth quarter of 2017, the Company retired$2.4 million of foreign debt with cash received from the sale of Acoustics Europe and incurred a$0.2 million prepayment fee, which was recorded as an offset to the gain on extinguishment of debt. Equity income. Equity income was$1.0 million for both the years endedDecember 31, 2018 and 2017. Loss on divestiture. Loss on divestiture was$8.7 million for the year endedDecember 31, 2017 . OnAugust 30, 2017 , the Company completed the divestiture of its Acoustics Europe business. The divestiture resulted in an$8.7 million pre-tax loss. See Note 2, " Discontinued Operations and Divestitures" in the notes to the consolidated financial statements for further information. Other income-net. Other income-net was$0.8 million for the year endedDecember 31, 2018 , compared with$0.3 million for the year endedDecember 31, 2017 . During 2018 and 2017, other income-net consisted of certain rental and royalty income streams. During 2018, other income-net also includes$0.4 million of legal settlement income related to proceeds from a supplier claim in the engineered components segment associated with periods prior to the Company's go public business combination and$0.1 million of employee benefit plan non-service costs. 40 -------------------------------------------------------------------------------- Loss from continuing operations before income taxes. For the reasons described above, loss before income taxes was$19.7 million for the year endedDecember 31, 2018 compared with$31.0 million for the year endedDecember 31, 2017 . Tax benefit. The tax benefit was$5.0 million for the year endedDecember 31, 2018 , compared with$15.6 million for the year endedDecember 31, 2017 . The effective tax rate for the year endedDecember 31, 2018 was 25.6%, compared with 50.3% for the year endedDecember 31, 2017 . The Company's tax benefit is impacted by a number of factors, including, among others, the amount of taxable income or loss at theU.S. federal statutory rate, the amount of taxable earnings derived in foreign jurisdictions in which the majority have tax rates higher than theU.S. federal statutory rate after the enactment of the Tax Reform Act, permanent items, state tax rates in jurisdictions where we do business and the ability to utilize various tax credits and net operating loss carry forwards to reduce income tax expense. The income tax benefit also includes the impact of provision to return adjustments, adjustments to valuation allowances and reserve requirements for unrecognized tax positions. For the years endedDecember 31, 2018 and 2017, the tax benefit was impacted by the enactment of the Tax Reform Act. The 2018 effective tax rate of 25.6% differs from theU.S. federal statutory rate of 21% due primarily to the impact of state taxes and the finalization of accounting for provisions of the Tax Reform Act discussed in the paragraph below, partially offset by the impact of higher foreign tax rates when compared to the 21%U.S. federal statutory tax rate (primarily inGermany andMexico ). The 2017 effective tax rate of 50.3% differs from theU.S. federal statutory rate of 35% due primarily to the provision in the Tax Reform Act that reduces theU.S. federal income tax rate to 21% from 35% effectiveJanuary 1, 2018 , state tax benefits, the impact of lower foreign tax rates when compared to the 35%U.S. federal 2017 statutory tax rate (primarily inGermany andMexico ) and the reversal of the valuation allowance on the deferred tax assets at a foreign subsidiary. These items were partially offset by the impact of the tax on the one-time deemed mandatory repatriation of undistributed foreign subsidiary earnings, change in assertion regarding permanent reeinvestment of earnings in our wholly-owned foreign subsidiaries and the vesting and forfeiture of share-based compensation for which no tax benefit will be realized. The Company recognized the provisional impact of the Tax Reform Act in its consolidated financial statements for the year endedDecember 31, 2017 . As a result of the reduction in theU.S. corporate income tax rate from 35% to 21% under the Tax Reform Act, the Company revalued its ending net deferred tax liabilities atDecember 31, 2017 and recognized a provisional$11.1 million tax benefit in the Company's consolidated statements of operations for the year endedDecember 31, 2017 . The Company had an estimated$54.5 million of undistributed foreign earnings and profits subject to the deemed mandatory repatriation and recognized a provisional$5.3 million of income tax expense in the Company's consolidated statements of operations for the year endedDecember 31, 2017 . During the year endedDecember 31, 2018 , the Company finalized the accounting for these items and recorded an adjustment to reduce the amount of income tax expense attributable to the deemed mandatory repatriation of foreign subsidiary earnings and profits by$0.5 million . The final adjustment required to revalue net deferred tax liabilities was immaterial. See Note 14, "Income Taxes" in the consolidated financial statements for a complete reconciliation of theU.S. statutory tax rate to the effective tax rate and more information on the Tax Reform Act and tax events in 2018 and 2017 affecting each year's respective tax rates. Net loss from continuing operations. For the reasons described above, net loss from continuing operations was$14.7 million for the year endedDecember 31, 2018 compared with$15.4 million for the year endedDecember 31, 2017 . Net gain attributable to noncontrolling interests. There was no net gain attributable to noncontrolling interest for the year endedDecember 31, 2018 , compared with an immaterial net gain for the year endedDecember 31, 2017 . Noncontrolling interests represented the rollover participants interest inJPHI Holdings, Inc. which was reduced to 0% as ofFebruary 23, 2017 . See Note 11, "Shareholders' (Deficit) Equity" in the consolidated financial statements for further discussion. Other comprehensive (loss) income. Other comprehensive loss was$3.4 million for the year endedDecember 31, 2018 compared with other comprehensive income of$12.2 million for the year endedDecember 31, 2017 . The decrease was driven by less favorable foreign currency translation adjustments in 2018 compared to 2017 and less favorable employee retirement plan adjustments in 2018 compared to 2017, partially offset by the change in unrealized gains (losses) on cash flow hedges. Other comprehensive loss for foreign currency translation adjustments was$4.6 million for the year endedDecember 31, 2018 compared with other comprehensive income for foreign currency translation adjustments of$10.5 million for the year endedDecember 31, 2017 . Foreign currency translation adjustments are based on fluctuations in the value of foreign currencies (primarily the Euro) against theU.S. Dollar each period. Employee retirement plan adjustments was a loss of$0.2 million for the year endedDecember 31, 2018 , compared with a gain of$0.4 million for the year endedDecember 31, 2017 . The employee retirement plan adjustments are based on actuarial valuations using aDecember 31 measurement date that include key assumptions regarding discount rates, expected returns on plan assets, retirement and mortality rates, future compensation increases, and health care cost trend rates. The employee retirement plan gain for the year endedDecember 31, 2017 primarily relates to actuarial gains recognized inU.S. 41 -------------------------------------------------------------------------------- pension and postretirement health care benefit plans within our industrial segment due to higher actual plan asset returns compared with the expected returns on plan assets and a decrease in expected future claim costs, respectively, partially offset by actuarial losses recognized in a German pension plan within our industrial segment due to an increase in future expected compensation. Other comprehensive income for unrealized gains on cash flow hedges was$1.3 million for both the year endedDecember 31, 2018 and 2017. The net change in unrealized gains on cash flow hedges is based on the changes in current interest rates and market expectations of the timing and amount of future interest rate changes. In both 2018 and 2017, the fair value of the hedging instruments increased, based on future expectations for interest rate increases. Adjusted EBITDA. For the year endedDecember 31, 2018 , Adjusted EBITDA was$36.7 million , or 10.0% of net sales, compared with$32.6 million , or 8.5% of net sales, for the year endedDecember 31, 2017 , an increase of$4.0 million . The increase reflects higher Adjusted EBITDA in engineered components segment of$3.4 million and in the industrial segment of$1.3 million , and lower corporate expenses of$1.4 million . The change in Adjusted EBITDA in the fiber solutions segment includes a$2.1 million decrease from the sale of the Acoustics Europe business. Changes in foreign currency exchange rates compared with theU.S. dollar had a positive impact of$0.7 million on Adjusted EBITDA for the year endedDecember 31, 2018 compared with the year endedDecember 31, 2017 , positively impacting the industrial and engineered components segments' Adjusted EBITDA by$0.6 million and$0.1 million , respectively. See "Segment Financial Data" within this MD&A for further discussion on Adjusted EBITDA for each segment.Key Measures the Company Uses to Evaluate Its Performance EBITDA and Adjusted EBITDA. The Company uses "Adjusted EBITDA", a non-GAAP financial measure, as the primary measure of profit or loss for the purposes of assessing the operating performance of its segments. The Company defines EBITDA as net income (loss) from continuing operations before interest expense, provision (benefit) for income taxes, depreciation and amortization. The Company defines Adjusted EBITDA as EBITDA, excluding the impact of operational restructuring charges and non-cash or non-operational losses or gains, including goodwill and long-lived asset impairment charges, gains or losses on disposal of property, plant and equipment, divestitures and extinguishment of debt, integration and other operational restructuring charges, transactional legal fees, other professional fees, purchase accounting adjustments, lease expense associated with vacated facilities and non-cash share based compensation expense. Management believes that Adjusted EBITDA provides a more clear picture of the Company's operating results by eliminating expenses and income that are not reflective of the underlying business performance. The Company uses this metric to facilitate a comparison of the Company's operating performance on a consistent basis from period to period and to analyze the factors and trends affecting its segments. The Company's internal plans, budgets and forecasts use Adjusted EBITDA as a key metric and the Company uses this measure to evaluate its operating performance and segment operating performance and to determine the level of incentive compensation paid to its employees. The Senior Secured Credit Facilities (defined in Note 9, "Debt and Hedging Instruments," and below) definition of EBITDA excludes income of partially owned affiliates, unless such earnings have been received in cash. 42 --------------------------------------------------------------------------------
Set forth below is a reconciliation of Adjusted EBITDA from continuing operations to net loss from continuing operations (unaudited):
Year Ended Year Ended Year Ended
(in thousands) December 31,
2019
$ (43,431) $ (14,653) $ (15,402) Tax provision (benefit) 4,016 (5,046) (15,614) Interest expense-net 32,978 33,277 32,951 Depreciation and amortization 22,235 21,137 21,586 EBITDA 15,798 34,715 23,521 Adjustments: Restructuring (1) 3,954 877 2,475 Transaction-related expenses (2) 1,005 - - Integration and other restructuring costs (3) 1,390 92 (569) Share-based compensation (4) 2,368 2,295 979 Loss (gain) on disposals of property, plant and equipment - net (5) 303 (1,318) (320) Gain on extinguishment of debt (6) - - (2,201) Loss on divestiture (7) - - 8,730 Total adjustments 9,020 1,946 9,094 Adjusted EBITDA$ 24,818 $ 36,661 $ 32,615 (1)Restructuring includes costs associated with exit or disposal activities as defined by GAAP related to facility consolidation, including one-time employee termination benefits, costs to close facilities and relocate employees, and costs to terminate contracts other than financing leases in 2017 and 2018 and financing and operating leases in 2019. See Note 5, "Restructuring Costs" of the accompanying consolidated financial statements for further information. (2)Transaction-related expenses primarily consist of professional fees and other expenses related to acquisitions, divestitures and financing activities. (3)In 2019, integration and other restructuring costs include accelerated lease expense of$0.6 million related to planned facility consolidations in the engineered components and industrial segments and$0.9 million of integration costs related to an acquisition in the industrial segment. This was partially offset by$0.8 million related to the reclassification to earnings of a foreign currency translation gain for the wind down and substantial dissolution of certainU.K. entities. In 2018, integration and other restructuring costs include$0.2 million for settlement costs related to a legal claim in the former Assembled Products business in the engineered components segment associated with periods prior to the Company's go public business combination,$0.1 million related to legal entity restructuring activities and$0.1 million associated with the insurance deductible related to a force majeure incident at a supplier in the engineered components segment. The supplier incident had resulted in incremental costs to maintain production throughout 2018, with such costs offset by insurance recoveries received during the third and fourth quarters of 2018. These costs were partially offset by$0.4 million of legal settlement income related to proceeds from a supplier claim in the engineered components segment associated with periods prior to the Company's go public business combination. Such costs are not included in restructuring for GAAP purposes. In 2017, integration and restructuring costs include the reversal of a liability recorded in acquisition accounting from the Company's go public business combination in 2014. (4)Represents share-based compensation expense for awards under the Company's 2014 Omnibus Incentive Plan. See Note 12, "Share-Based Compensation" of the accompanying consolidated financial statements for further information. (5)Loss (gain) on disposals of property, plant and equipment - net for the year endedDecember 31, 2019 includes a loss of$0.3 million on the sale of a building in the industrial segment. Gain on disposals of property, plant and equipment-net for the year endedDecember 31, 2018 includes a gain of$1.3 million on the sale of a building related to the closure of the engineered components segment'sU.K. facility. Gain on disposals of property, plant and equipment - net for the year endedDecember 31, 2017 includes a gain of$0.5 million on the sale of a building related to the closure of the industrial segment'sRichmond, Virginia facility. 43 -------------------------------------------------------------------------------- (6)Represents gains on extinguishment of Second Lien Term Loan debt, net of a prepayment fee to retire foreign debt in the fourth quarter of 2017. See Note 9, "Debt and Hedging Instruments" of the accompanying consolidated financial statements for further information. (7)OnAugust 30, 2017 , the Company completed the divestiture of its AcousticsEurope business. The divestiture resulted in an$8.7 million pre-tax loss. See Note 2, "Discontinued Operations and Divestitures" of the accompanying consolidated financial statements for further information. Adjusted EBITDA percentage of net sales. Adjusted EBITDA as a percentage of net sales is an important metric that the Company uses to evaluate its operational effectiveness and business segments. Segment Financial Data The table below presents the Company's net sales, Adjusted EBITDA and Adjusted EBITDA as a percentage of net sales for each of its reportable segments for the years endedDecember 31, 2019 and 2018. The Company uses Adjusted EBITDA as the primary measure of profit or loss for purposes of assessing the operating performance of its segments. See "Key Measures the Company Uses to Evaluate Its Performance" above for our definition of Adjusted EBITDA and a reconciliation of the Company's consolidated Adjusted EBITDA to Net Loss, which is the nearest GAAP measure. Year Ended Year Ended Increase/(Decrease) (in thousands, except percentages) December 31, 2019 December 31, 2018 $ % Industrial Net sales$ 201,517 $ 207,637 $ (6,120) (2.9) % Adjusted EBITDA 20,945 28,979 (8,034) (27.7) Adjusted EBITDA % of net sales 10.4 % 14.0 % (360) bps Engineered Components Net sales$ 136,380 $ 160,322 $ (23,942) (14.9) % Adjusted EBITDA 15,098 19,747 (4,649) (23.5) Adjusted EBITDA % of net sales 11.1 % 12.3 % (120) bps Corporate Adjusted EBITDA$ (11,225) $ (12,065) $ 840 7.0 % Consolidated Net sales$ 337,897 $ 367,959 $ (30,062) (8.2) % Adjusted EBITDA 24,818 36,661 (11,843) (32.3) Adjusted EBITDA % of net sales 7.3 % 10.0 % (270) bps The table below presents the Company's net sales, Adjusted EBITDA and Adjusted EBITDA as a percentage of net sales for each of its reportable segments for the years endedDecember 31, 2018 and 2017. Year Ended Year Ended Increase/(Decrease) (in thousands, except percentages) December 31, 2018 December 31, 2017 $ % Industrial Net sales$ 207,637 $ 200,284 $ 7,353 3.7 % Adjusted EBITDA 28,979 27,661 1,318 4.8 Adjusted EBITDA % of net sales 14.0 % 13.8 % 20 bps Engineered Components Net sales$ 160,322 $ 159,129 $ 1,193 0.7 % Adjusted EBITDA 19,747 16,348 3,399 20.8 Adjusted EBITDA % of net sales 12.3 % 10.3 % 200 bps Fiber Solutions Net sales $ -$ 22,683 $ (22,683) (100.0) % Adjusted EBITDA - 2,059 (2,059) (100.0) Adjusted EBITDA % of net sales - % 9.1 % - Corporate Adjusted EBITDA$ (12,065) $ (13,453) $ 1,388 10.3 % Consolidated Net sales$ 367,959 $ 382,096 $ (14,137) (3.7) % Adjusted EBITDA 36,661 32,615 4,046 12.4 Adjusted EBITDA % of net sales 10.0 % 8.5 % 150 bps 44
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Industrial Segment
Year Ended Year Ended Increase/(Decrease)
(in thousands, except percentages) December 31, 2019 December 31, 2018 $ %
Net sales $ 201,517 $ 207,637 $ (6,120) (2.9) %
Adjusted EBITDA 20,945 28,979 (8,034) (27.7)
Adjusted EBITDA % of net sales 10.4 % 14.0 % (360) bps
For the year ended December 31, 2019 , net sales were $201.5 million , a decrease
of $6.1 million , or 2.9%, compared with $207.6 million for the year ended
December 31, 2018 . For the year ended December 31, 2019 , the Schaffner
acquisition on April 1, 2019 contributed $14.4 million of incremental net sales.
Changes in exchange rates had a net negative impact of $7.0 million for the year
ended December 31, 2019 . Excluding the impact of the Schaffner acquisition and
the negative currency impact, net sales were $194.1 million , a decrease of $13.5
million or 6.5%. The $13.5 million decrease in net sales for the year ended
December 31, 2019 was primarily due to lower sales volume in industrial end
markets in Europe and the U.S. , partially offset by increased pricing.
Adjusted EBITDA for the year ended December 31, 2019 decreased $8.0 million to
$20.9 million (10.4% of net sales) from $29.0 million (14.0% of net sales) for
the year ended December 31, 2018 . For the year ended December 31, 2019 , the
Schaffner acquisition contributed $0.9 million of incremental Adjusted EBITDA.
Changes in exchange rates had a net negative impact of $1.0 million for the year
ended December 31, 2019 . Excluding the impact of the Schaffner acquisition and
the negative currency impact, Adjusted EBITDA was $21.0 million (10.8% of net
sales) for the year ended December 31, 2019 , a decrease of $8.0 million or
27.6%. The $8.0 million decrease primarily resulted from lower sales volume in
industrial end markets, lower material and labor efficiencies related to sales
volume declines, raw material and wage inflation, increased healthcare costs,
higher freight costs, unfavorable product mix and $0.7 million of lower equity
income due to lower sales volumes in our joint ventures in China and Taiwan . The
decrease was partially offset by increased sales pricing, lower head count and
decreased incentive compensation.
Year Ended Year Ended Increase/(Decrease)
(in thousands, except percentages) December 31, 2018 December 31, 2017 $ %
Net sales $ 207,637 $ 200,284 $ 7,353 3.7 %
Adjusted EBITDA 28,979 27,661 1,318 4.8
Adjusted EBITDA % of net sales 14.0 % 13.8 % 20 bps
For the year ended December 31, 2018 , net sales were $207.6 million , an increase
of $7.4 million , or 3.7%, compared with $200.3 million for the year ended
December 31, 2017 . On a constant currency basis (net positive currency impact of
$4.6 million for the year ended December 31, 2018 ), revenues increased by $2.8
million for the year ended December 31, 2018 . Excluding currency impact, the
increase in net sales for the year ended December 31, 2018 was primarily due to
increases in volume in industrial end markets globally and increased pricing,
partially offset by a $0.6 million decrease associated with the wind down of the
industrial segment's facility in Brazil and decreases in volume associated with
strategic decisions related to exiting unprofitable customers and products.
Adjusted EBITDA for the year ended December 31, 2018 increased $1.3 million to
$29.0 million (14.0% of net sales) from $27.7 million (13.8% of net sales) for
the year ended December 31, 2017 . On a constant currency basis (net positive
impact of $0.6 million for the year ended December 31, 2018 ), Adjusted EBITDA
increased $0.7 million for the year ended December 31, 2018 . Excluding currency
impact, the increase in Adjusted EBITDA for the year ended December 31, 2018 was
primarily due to increases in sales volume in industrial end markets globally,
increased pricing and decreased incentive compensation, partially offset by
increased compensation costs due to additional selling personnel in 2018
supporting commercial growth initiatives, raw material inflation, increased
freight costs and increased manufacturing costs due to operational
inefficiencies related to the Richmond, Virginia plant closure and move of
production to the Richmond, Indiana facility.
45
--------------------------------------------------------------------------------Engineered Components Segment
Year Ended Year Ended Increase/(Decrease)
(in thousands, except percentages) December 31, 2019 December 31, 2018 $ %
Net sales $ 136,380 $ 160,322 $ (23,942) (14.9) %
Adjusted EBITDA 15,098 19,747 (4,649) (23.5)
Adjusted EBITDA % of net sales 11.1 % 12.3 % (120) bps
For the year ended December 31, 2019 , net sales were $136.4 million , a decrease
of $23.9 million or 14.9%, compared with $160.3 million for the year ended
December 31, 2018 . The decrease in net sales was primarily due to lower sales
volumes due to end market declines in the construction, agriculture, power
sports, and turf care markets. The decrease in volume was partially offset by
increased pricing on core product lines.
Adjusted EBITDA decreased $4.6 million , or 23.5%, for the year ended December
31, 2019 to $15.1 million (11.1% of net sales) compared to $19.7 million (12.3%
of net sales) for the year ended December 31, 2018 . The decrease in Adjusted
EBITDA for the year ended December 31, 2019 primarily resulted from lower sales
volumes, lower material and labor efficiencies related to sales volume declines,
raw material and wage inflation, unfavorable product mix compared with the prior
period and higher freight costs. The decrease was partially offset by increased
pricing on core product lines, reduced material usage and labor costs as a
result of continuous improvement programs, lower head count and decreased
incentive compensation.
Year Ended Year Ended Increase/(Decrease)
(in thousands, except percentages) December 31, 2018 December 31, 2017 $ %
Net sales $ 160,322 $ 159,129 $ 1,193 0.7 %
Adjusted EBITDA 19,747 16,348 3,399 20.8
Adjusted EBITDA % of net sales 12.3 % 10.3 % 200 bps
For the year ended December 31, 2018 , net sales were $160.3 million , an increase
of $1.2 million or 0.7%, compared with $159.1 million for the year ended
December 31, 2017 . On a constant currency basis (net positive currency impact of
$0.6 million for the year ended December 31, 2018 ), revenues increased by $0.6
million for the year ended December 31, 2018 . The increase in net sales for the
year ended December 31, 2018 was primarily due to increases in sales volumes in
the construction and agriculture markets and improved pricing, partially offset
by a decrease in sales volume in the power sports market and lower volume in the
turf care market due to a late start to spring resulting in a shortened selling
season.
For the year ended December 31, 2018 , Adjusted EBITDA was $19.7 million (12.3%
of net sales), compared to $16.3 million (10.3% of net sales) for the year ended
December 31, 2017 . On a constant currency basis (net positive currency impact of
$0.1 million for the year ended December 31, 2018 ), Adjusted EBITDA increased by
$3.3 million for the year ended December 31, 2018 . The increase in Adjusted
EBITDA for the year ended December 31, 2018 was primarily due to improved
pricing, increased sales volume in the construction and agriculture markets and
lower material usage and labor costs from continuous improvement projects,
partially offset by decreased sales volume in the power sports and turf care
markets, increased incentive compensation, raw material inflation and higher
freight costs.
Fiber Solutions Segment
Year Ended December Increase/(Decrease)
(in thousands, except percentages) Year Ended December 31, 2018 31, 2017 $ %
Net sales $ - $ 22,683 $ (22,683) (100.0) %
Adjusted EBITDA - 2,059 (2,059) (100.0)
Adjusted EBITDA % of net sales - % 9.1 % -
For the year ended December 31, 2017 , net sales were $22.7 million and Adjusted
EBITDA was $2.1 million . On August 30, 2017 , the Company completed the
divestiture of its European fiber solutions business, which did not meet the
criteria for discontinued operations presentation at the time of the
divestiture.
46
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Corporate
Year Ended Year Ended Increase/(Decrease)
(in thousands, except percentages) December 31, 2019 December 31, 2018 $ %
Adjusted EBITDA $ (11,225) $ (12,065) $ 840 7.0 %
Corporate expense is principally comprised of compensation and benefits of the
Company's executive team and personnel responsible for treasury, finance,
insurance, legal, information technology, human resources, tax compliance and
planning and the administration of employee benefits. Corporate expense also
includes third party legal, audit, tax and other professional fees and expenses,
board of director compensation and expenses, and other corporate operating
costs.
The decrease of $0.8 million in corporate expense for the year ended December
31, 2019 primarily resulted from lower compensation costs due to lower head
count, lower third party professional fees and decreased incentive compensation,
partially offset by increased healthcare costs and wage inflation.
Year Ended Year Ended Increase/(Decrease)
(in thousands, except percentages) December 31, 2018 December 31, 2017 $ %
Adjusted EBITDA $ (12,065) $ (13,453) $ 1,388 10.3 %
The $1.4 million decrease in corporate expense in 2018 primarily resulted from
lower third party professional fees and decreased incentive compensation,
partially offset by increased compensation costs due to higher head count from
open positions in 2017.
Liquidity and Capital Resources
Background
Our primary sources of liquidity are cash generated from our operations,
available cash and borrowings under our U.S. and foreign credit facilities. As
of December 31, 2019 , we had $102.0 million of total liquidity, including $84.5
million of available cash, $10.0 million of additional borrowings available
under the Revolving Credit Facility portion of our U.S. credit agreement, and
$7.5 million available under revolving loan facilities that we maintain outside
the U.S. Included in our consolidated cash balance of $84.5 million at December
31, 2019 is cash of $13.3 million held at our non-U.S. operations. These
non-U.S. funds, with some restrictions and tax implications, are available for
repatriation as deemed necessary by us. The Revolving Credit Facility portion of
our U.S. credit agreement and foreign revolving loan facilities are available
for working capital requirements, capital expenditures and other general
corporate purposes.
In connection with the August 30, 2019 sale of the North American fiber
solutions business, we received net cash proceeds, as defined by the Senior
Secured Credit Facilities, of $62.6 million , of which $57.6 million was
remaining after permitted reinvestments as of December 31, 2019 . We intend to
continue to reinvest these net proceeds as permitted under the terms of the
Senior Secured Credit Facilities. Permitted reinvestments include capital
expenditures, repairs and maintenance and permitted acquisitions, if such
reinvestments occur within twelve months following receipt of such net cash
proceeds or within 180 days of a contractual commitment if such a commitment is
made during the twelve month period. To the extent there are net cash proceeds
that are not reinvested during the aforementioned period, a mandatory prepayment
of debt is required.
On August 12, 2019 , we announced that our Board of Directors had engaged
financial advisors to advise us as we conduct a process to evaluate strategic
alternatives. This evaluation includes, but is not limited to, a potential sale,
strategic merger, consolidation or business combination, acquisition,
recapitalization, financing consisting of equity and/or debt securities, and/or
a restructuring of the Company's debt, focused on maximizing the value of the
Company for its stakeholders.
As of December 31, 2018 , the Company had $46.7 million of available cash, $29.4
million of additional borrowings available under the revolving credit facility
portion of its U.S. credit agreement, and $8.9 million available under
short-term revolving loan facilities that the Company maintains outside the U.S.
As of December 31, 2018 , available borrowings under its U.S. revolving credit
facility were reduced by outstanding letters of credit of $4.9 million . Included
in the Company's consolidated cash balance of $46.7 million at December 31, 2018
was $22.0 million of cash held at Jason's non-U.S. operations.
We believe our existing cash on hand, expected future cash flows from operating
activities, and additional borrowings available under our U.S. and foreign
credit facilities provide sufficient resources to fund ongoing operating
requirements as well as future capital expenditures, and debt service
requirements through the next twelve months. As of December 31, 2019 , our First
Lien U.S. term loan of $284.4 million matures on June 30, 2021 , and our Second
Lien U.S. term loan of $89.9 million matures on June 30, 2022 . We will need to
refinance our debt, obtain alternative forms of financings or investments to
achieve our longer-term strategic plans. We can make no assurances we will be
able to refinance our debt, obtain alternative forms of financing or
investments. Furthermore, if economic conditions or demand for our products
deteriorates, we may experience a material adverse effect on our business,
operating results, liquidity and financial condition. In addition, the process
of exploring
47
-------------------------------------------------------------------------------- strategic alternatives may be time consuming, costly and disruptive to our business operations and if we are unable to effectively manage the process, our business, financial condition, liquidity, and results of operations could be adversely affected. Indebtedness As ofDecember 31, 2019 , our total outstanding indebtedness of$384.8 million was comprised of term loans outstanding under our Senior Secured Credit Facilities of$370.1 million (net of a debt discount of$1.7 million and deferred financing costs of$2.5 million ), various foreign bank term loans and revolving loan facilities of$13.9 million and finance lease obligations and other debt of$0.8 million . No borrowings were outstanding under theU.S. revolving credit facility portion of the Senior Secured Credit Facilities as ofDecember 31, 2019 . As ofDecember 31, 2018 , our total outstanding indebtedness of$391.8 million was comprised of term loans outstanding under our Senior Secured Credit Facilities of$375.7 million (net of a debt discount of$2.7 million and deferred financing costs of$4.1 million ), various foreign bank term loans and revolving loan facilities of$15.5 million and finance lease obligations and other debt of$0.6 million . No borrowings were outstanding under theU.S. revolving credit facility portion of the Senior Secured Credit Facilities as ofDecember 31, 2018 . We maintain various bank term loan and revolving loan facilities outside theU.S. for local operating and investing needs. Borrowings under these facilities totaled$13.9 million as ofDecember 31, 2019 , including borrowings of$13.4 million incurred by our subsidiaries inGermany , compared to$15.5 million as ofDecember 31, 2018 , including borrowings of$15.0 million incurred by our subsidiaries inGermany . The foreign debt obligations inGermany primarily relate to term loans within our industrial segment of$12.5 million atDecember 31, 2019 and$15.0 million atDecember 31, 2018 . The borrowings bear interest at fixed and variable rates ranging from 1.8% to 4.7% and are subject to repayment in varying amounts through 2025. Net leverage, defined as total indebtedness less cash divided by Adjusted EBITDA, was 12.0x and 5.1x as ofDecember 31, 2019 and 2018, respectively. The table below summarizes net leverage as ofDecember 31, 2019 and 2018: (in thousands) December 31, 2019 December 31, 2018 Current and long-term debt$ 384,750 $ 391,788 Add: Debt discounts and deferred financing costs 4,261 6,721 Add: Liabilities held for sale - long-term debt - 2,000 Less: Assets held for sale - cash and cash equivalents - (11,471) Less: Cash and cash equivalents (84,526) (46,698) Net Debt $
304,485
Adjusted EBITDA - continuing operations $ 24,818 $ 36,661 Adjusted EBITDA - discontinued operations(1) - 30,550 Acquisition Adjusted EBITDA(2) 457 - Pro Forma Adjusted EBITDA $ 25,275 $ 67,211 Net leverage 12.0x 5.1x (1) Cash and cash equivalents, long-term debt and Adjusted EBITDA related to discontinued operations are included in the calculation of net leverage as ofDecember 31, 2018 as it was prior to the completion of the divestitures. (2) Acquisition Adjusted EBITDA includes Adjusted EBITDA prior to the date of the acquisition onApril 1, 2019 . Senior Secured Credit Facilities General. OnJune 30, 2014 ,Jason Incorporated , as the borrower, entered into (i) the First Lien Credit Agreement, withJason Partners Holdings Inc. ,Jason Holdings, Inc. I, the subsidiary guarantors party thereto and the several banks and other financial institutions or entities from time to time party thereto (the "First Lien Credit Agreement") and (ii) the Second Lien Credit Agreement, dated as ofJune 30, 2014 , withJason Partners Holdings Inc. ,Jason Holdings, Inc. I, the subsidiary guarantors party thereto and the several banks and other financial institutions or entities from time to time party thereto (the "Second Lien Credit Agreement" and, together with the First Lien Credit Agreement, the "Credit Agreements").Jason Partners Holdings Inc. is wholly owned byJason Industries, Inc. whileJason Incorporated andJason Holdings, Inc. I are indirect wholly-owned subsidiaries ofJason Industries, Inc. The First Lien Credit Agreement, as amended, provides for (i) term loans in the principal amount of$310.0 million (the "First Lien Term Facility" and the loans thereunder the "First Lien Term Loans"), of which$284.4 million is outstanding as ofDecember 31, 2019 , and (ii) a revolving loan of up to$25.5 million (including revolving loans, a$10.0 million swingline loan sublimit, and a$12.5 million letter of credit sublimit) (the "Revolving Credit Facility"), in each case under the first lien 48 -------------------------------------------------------------------------------- senior secured loan facilities (the "First Lien Credit Facilities"). The Second Lien Credit Agreement provides for term loans in an aggregate principal amount of$110.0 million , of which$89.9 million is outstanding as ofDecember 31, 2019 , under the second lien senior secured term loan facility (the "Second Lien Term Facility" and the loans thereunder the "Second Lien Term Loans" and, the Second Lien Term Facility together with the First Lien Credit Facilities, the "Senior Secured Credit Facilities"). During 2019, we amended our Revolving Credit Facility to extend the maturity date toDecember 31, 2020 . The amendment reduced the borrowing capacity from$30.0 million to$25.5 million , subject to compliance with a consolidated first lien net leverage ratio as discussed in the Covenants section below. In connection with the amendment, we paid deferred financing costs of$0.3 million which have been recorded within other assets-net within the consolidated balance sheets. The Revolving Credit Facility maturesDecember 31, 2020 , the First Lien Term Loans matureJune 30, 2021 and the Second Lien Term Loans matureJune 30, 2022 . The principal amount of the First Lien Term Loans amortizes in quarterly installments equal to$0.8 million , with the balance payable at maturity. Neither the Revolving Credit Facility nor the Second Lien Term Loans amortize, however each is repayable in full at maturity. Security Interests. In connection with the Senior Secured Credit Facilities,Jason Partners Holdings Inc. ,Jason Holdings, Inc. I,Jason Incorporated and certain ofJason Incorporated's subsidiaries (the "Subsidiary Guarantors"), entered into a (i) First Lien Security Agreement (the "First Lien Security Agreement"), dated as ofJune 30, 2014 , and (ii) a Second Lien Security Agreement (the "Second Lien Security Agreement", together with the First Lien Security Agreement, the "Security Agreements"), dated as ofJune 30, 2014 . Pursuant to the Security Agreements, amounts borrowed under the Senior Secured Credit Facilities and any swap agreements and cash management arrangements provided by any lender party to the Senior Secured Credit Facilities or any of its affiliates are secured (i) with respect to the First Lien Credit Facilities, on a first priority basis and (ii) with respect to the Second Lien Term Facility, on a second priority basis, by a perfected security interest in substantially all ofJason Incorporated's ,Jason Partners Holdings Inc.'s ,Jason Holdings, Inc. I's and each Subsidiary Guarantor's tangible and intangible assets (subject to certain exceptions), includingU.S. registered intellectual property and all of the capital stock of each ofJason Incorporated's direct and indirect wholly-owned material Restricted Subsidiaries (as defined in the Credit Agreements) (limited, in the case of foreign subsidiaries, to 65% of the capital stock of first tier foreign subsidiaries). In addition, pursuant to the Credit Agreements,Jason Partners Holdings Inc. ,Jason Holdings, Inc. I and the Subsidiary Guarantors guaranteed amounts borrowed under the Senior Secured Credit Facilities. Interest Rate and Fees. At our election, the interest rate per annum applicable to the loans under the Senior Secured Credit Facilities is based on a fluctuating rate of interest determined by reference to either (i) a base rate determined by reference to the higher of (a) the administrative agent's prime rate, (b) the federal funds effective rate plus 0.50% or (c) the Eurocurrency rate applicable for an interest period of one month plus 1.00%, plus an applicable margin equal to (x) 3.50% in the case of the First Lien Term Loans, (y) 2.25% in the case of the Revolving Credit Facility or (z) 7.00% in the case of the Second Lien Term Loans or (ii) a Eurocurrency rate determined by reference to the London Interbank Offered Rate ("LIBOR"), adjusted for statutory reserve requirements, plus an applicable margin equal to (x) 4.50% in the case of the First Lien Term Loans, (y) 3.25% in the case of the Revolving Credit Facility or (z) 8.00% in the case of the Second Lien Term Loans. Borrowings under the First Lien Term Facility and Second Lien Term Facility are subject to a floor of 1.00% in the case of Eurocurrency loans. The applicable margin for loans under the Revolving Credit Facility may be subject to adjustment based uponJason Incorporated's consolidated first lien net leverage ratio. Interest Rate Hedge Contracts. To manage exposure to fluctuations in interest rates, we entered into forward interest rate swap agreements ("Swaps") in 2015 with notional values totaling$210.0 million atDecember 31, 2019 andDecember 31, 2018 . The Swaps have been designated by us as cash flow hedges, and effectively fix the variable portion of interest rates on variable rate term loan borrowings at a rate of approximately 2.08% prior to financing spreads and related fees. The Swaps had a forward start date ofDecember 30, 2016 and have an expiration date ofJune 30, 2020 . For the years endedDecember 31, 2019 , 2018, and 2017 we recognized$0.9 million of interest income,$0.2 million of interest income and$1.9 million of interest expense related to the Swaps, respectively. Based on current interest rates, the Company expects to recognize$0.3 million of interest expense related to the Swaps in 2020. The fair values of our Swaps are recorded on the consolidated balance sheets with the corresponding offset recorded as a component of accumulated other comprehensive loss. The fair value of the Swaps was a net liability of$0.3 million atDecember 31, 2019 and a net asset of$1.9 million atDecember 31, 2018 , respectively. See the amounts recorded on the consolidated balance sheets within the table below: (in thousands) December 31, 2019 December 31, 2018 Interest rate swaps: Recorded in other current assets $ - $ 1,325 Recorded in other assets - net - 542 Recorded in other current liabilities (260) - Total net asset derivatives designated as hedging instruments $ (260) $ 1,867 49
-------------------------------------------------------------------------------- Mandatory Prepayment. Subject to certain exceptions, the Senior Secured Credit Facilities are subject to mandatory prepayments in amounts equal to: (1) a percentage of the net cash proceeds from any non-ordinary course sale or other disposition of assets (including as a result of casualty or condemnation) byJason Incorporated or any of its Restricted Subsidiaries in excess of a certain amount and subject to customary reinvestment provisions and certain other exceptions; (2) 100% of the net cash proceeds from the issuance or incurrence of debt byJason Incorporated or any of its Restricted Subsidiaries (other than indebtedness permitted by the Senior Secured Credit Facilities); and (3) 75% (with step-downs to 50%, 25% and 0% based upon achievement of specified consolidated first lien net leverage ratios under the FirstLien Credit Facilities and specified consolidated total net leverage ratios under the Second Lien Term Facility) of annual excess cash flow, as defined, ofJason Incorporated and its Restricted Subsidiaries. Other than the payment of customary "breakage" costs,Jason Incorporated may voluntarily prepay outstanding loans at any time. In connection with theAugust 30, 2019 sale of the North American fiber solutions business, we received net cash proceeds, as defined by the Senior Secured Credit Facilities, of$62.6 million , of which$57.6 million was remaining after permitted reinvestments as ofDecember 31, 2019 . We intend to continue to reinvest these net proceeds as permitted under the terms of the Senior Secured Credit Facilities; therefore, no mandatory prepayment is anticipated at this time. To the extent that there are net proceeds that are not reinvested within twelve months of receipt, or within 180 days of a contractual commitment if such commitment is made during the twelve month period, a mandatory prepayment will be required. As ofDecember 31, 2019 andDecember 31, 2018 , there was no required mandatory excess cash flow prepayment under the Senior Secured Credit Facilities. InDecember 2019 , the Company made a voluntary prepayment of$5.0 million on the First Lien Term Loans, utilizing the proceeds from the sale of the Metalex business and from the sale of a facility within the industrial segment. In connection with the payment, the Company wrote off immaterial amounts of previously unamortized debt discount and deferred financing costs, which were recorded as additional interest expense. Covenants. The Senior Secured Credit Facilities contain a number of customary affirmative and negative covenants that, among other things, limit or restrict the ability ofJason Incorporated and its Restricted Subsidiaries to: incur additional indebtedness (including guarantee obligations); incur liens; engage in mergers, consolidations, liquidations and dissolutions; sell assets; pay dividends and make other payments in respect of capital stock; make acquisitions, investments, loans and advances; pay and modify the terms of certain indebtedness; engage in certain transactions with affiliates; enter into negative pledge clauses and clauses restricting subsidiary distributions; and change its line of business, in each case, subject to certain limited exceptions. To comply with these covenants,Jason Incorporated and its Restricted Subsidiaries are limited in the amount of cash that can be distributed toJason Industries, Inc. in the form of dividends, loans or other distributions. These restrictions are triggered ifJason Incorporated and its Restricted Subsidiaries do not achieve a consolidated net leverage ratio that is equal to or less than 5.25 to 1.00 on a trailing twelve-month basis calculated in accordance with the provisions of the Credit Agreements. As ofDecember 31, 2019 , the consolidated net leverage ratio forJason Incorporated and its Restricted Subsidiaries exceeded 5.25 to 1.00; therefore, it is not currently able to distribute cash toJason Industries, Inc. In addition, under the Revolving Credit Facility, if the aggregate outstanding amount of all revolving loans, swingline loans and certain letter of credit obligations exceed$10.0 million at the end of any fiscal quarter,Jason Incorporated and its Restricted Subsidiaries will be required to not exceed a consolidated first lien net leverage ratio of 4.25 to 1.00 as ofDecember 31, 2019 (which will decrease to 4.00 to 1.00 onJune 26, 2020 and thereafter). If such outstanding amounts do not exceed$10.0 million at the end of any fiscal quarter, no financial covenants are applicable. As ofDecember 31, 2019 , the consolidated first lien net leverage ratio was 7.52 to 1.00 on a pro forma trailing twelve-month basis calculated in accordance with the respective provisions of the Credit Agreements which exclude the Second Lien Term Loans from the calculation of net debt (numerator) and allow the inclusion of certain pro forma adjustments and exclusion of certain specified or nonrecurring costs and expenses in calculating Adjusted EBITDA (denominator). Because the consolidated first lien net leverage ratio atDecember 31, 2019 exceeded 4.25 to 1.00, borrowings under the Revolving Credit Facility are limited to a total of$10.0 million (which includes letters of credit in excess of$5.0 million ). AtDecember 31, 2019 , we had letters of credit outstanding of$3.6 million and had no outstanding borrowings outstanding under the Revolving Credit Facility. As ofDecember 31, 2019 , we were in compliance with the financial covenants contained in our credit agreements. Events of Default. The Senior Secured Credit Facilities contain customary events of default, including nonpayment of principal, interest, fees or other amounts; material inaccuracy of a representation or warranty when made; violation of a covenant; cross-default to material indebtedness; bankruptcy events; inability to pay debts or attachment; material unsatisfied judgments; actual or asserted invalidity of any security document; and a change of control. Failure to comply with these provisions of the Senior Secured Credit Facilities (subject to certain grace periods) could, absent a waiver or an amendment from the lenders under such agreement, restrict the availability of the Revolving Credit Facility and permit the acceleration of all outstanding borrowings under the Credit Agreements. Series A Preferred Stock Holders of the 43,950 shares of Series A Preferred Stock are entitled to receive, when, as and if declared by the Company's Board of Directors, cumulative dividends at the rate of 8.0% per annum (the dividend rate) on the$1,000 50
-------------------------------------------------------------------------------- liquidation preference per share of the Series A Preferred Stock, payable quarterly in arrears on each dividend payment date. Dividends shall be paid in cash or, at our option, in additional shares of Series A Preferred Stock or a combination thereof, and are payable onJanuary 1 ,April 1 ,July 1 , andOctober 1 of each year, commencing on the first such date after the date of the first issuance of the Series A Preferred Stock. We paid the following dividends on the Series A Preferred Stock in additional shares of Series A Preferred Stock during the year endedDecember 31, 2019 : (in thousands, except share and per share amounts) Payment Date Record Date Amount Per Share Total Dividends Paid Preferred Shares Issued January 1, 2019 November 15, 2018$20.00 $796 1 April 1, 2019 February 15, 2019$20.00 $812 1 July 1, 2019 May 15, 2019$20.00 $828 1 October 1, 2019 August 15, 2019$20.00 $845 1 OnNovember 3, 2019 , we announced a$20.00 per share dividend on our Series A Preferred Stock to be paid in additional shares of Series A Preferred Stock onJanuary 1, 2020 to holders of record onNovember 15, 2019 . As ofDecember 31, 2019 , we have recorded the 860 additional Series A Preferred Stock shares declared for the dividend of$0.9 million within preferred stock in the consolidated balance sheets.Seasonality and Working Capital We use net operating working capital ("NOWC"), a non-GAAP measure, as a percentage of the previous twelve months of net sales as a key indicator of working capital management. We define this metric as the sum of trade accounts receivable and inventories less trade accounts payable as a percentage of net sales. NOWC as a percentage of trailing twelve month net sales was 17.8% as ofDecember 31, 2019 and 15.0% as ofDecember 31, 2018 , an increase of 2.8%. The increase in NOWC as a percentage of net sales is primarily due to a$7.4 million decrease in accounts payable as a result of the timing of cash payments to vendors and higher inventory levels as a percentage of net sales, as inventory levels remained consistent with the prior year despite the sales volume decline experienced in 2019. NOWC as a percentage of trailing twelve month net sales was unfavorably impacted by approximately 0.2% as ofDecember 31, 2019 related to theApril 1, 2019 acquisition of Schaffner. The table below summarizes NOWC as ofDecember 31, 2019 and 2018: (in thousands) December 31, 2019 December 31, 2018 Accounts receivable-net 33,085 36,213 Inventories 49,943 49,475 Accounts payable (22,914) (30,421) NOWC $ 60,114 $ 55,267
The table below reconciles our NOWC from our working capital: (in thousands)
December 31, 2019 December 31, 2018
Working Capital $ 119,585 $ 110,276
Less: Cash and cash equivalents (84,526) (46,698)
Less: Other current assets (7,433) (5,582)
Less: Current assets held for sale - (58,171)
Add: Current portion long-term debt 5,800 5,687
Add: Current portion operating lease liabilities 4,275 -
Add: Accrued compensation and employee benefits 8,551 11,954
Add: Accrued interest 79 89
Add: Other current liabilities 13,783 13,161
Add: Current liabilities held for sale - 24,551
NOWC $ 60,114 $ 55,267
In overall dollar terms, our NOWC is generally lower at the end of the calendar
year due to reduced sales activity around the holiday season. NOWC generally
peaks at the end of the first quarter as we experience high seasonal demand from
certain customers, particularly those serving the power sports and turf care
markets to fill the supply chain for the spring season. There are, however,
variations in the seasonal demands from year to year depending on weather,
customer inventory levels, customer planning, and model year changes. We
historically generate approximately 51%-56% of our annual net sales in the first
half of the year.
51
-------------------------------------------------------------------------------- Short-Term and Long-Term Liquidity Requirements Our ability to make principal and interest payments on borrowings under ourU.S. and foreign credit facilities and our ability to fund planned capital expenditures will depend on our ability to generate cash in the future, which, to a certain extent, is subject to general economic, financial, competitive, regulatory and other conditions. Based on our current level of operations, we believe that our existing cash balances and expected cash flows from operations will be sufficient to meet our operating requirements for at least the next 12 months. Capital expenditures during the year endedDecember 31, 2019 were$9.6 million , or 2.8% of net sales. Capital expenditures for 2020 are expected to be approximately 6.0% to 6.5% of net sales, but could vary from that depending on business performance, growth opportunities, project activity and the amount of assets we lease instead of purchase. We finance our annual capital requirements with existing cash balances and funds generated from operations. Consolidated Statements of Cash Flows for the Years EndedDecember 31, 2019 ,December 31, 2018 , andDecember 31, 2017
Includes cash flow activities from both continuing and discontinued operations
Year Ended Year Ended December Year Ended December
(in thousands) December 31, 2019 31, 2018 31, 2017
Cash flows (used in) provided by operating
activities $ (20,800) $ 29,757 $ 30,091
Cash flows provided by (used in) investing
activities 59,086 (10,374) 715
Cash flows used in financing activities (11,822) (9,266) (24,278)
Effect of exchange rate changes on cash and cash
equivalents (107) (835) 1,498
Net increase in cash and cash equivalents 26,357 9,282 8,026
Cash and cash equivalents, beginning of period 58,169 48,887 40,861
Cash and cash equivalents, end of period $ 84,526 $ 58,169 $ 48,887
Depreciation and amortization $ 35,461 $ 42,604 $ 38,934
Capital expenditures $ 11,785 $ 13,753 $ 15,873
Cash paid during the year for interest $ 30,121 $ 30,687 $ 30,242
Cash paid during the year for income taxes, net of
refunds $ 3,440 $ 6,480 $ 6,843
Year Ended December 31, 2019 and the Year Ended December 31, 2018
Cash Flows (Used in) Provided by Operating Activities
For the year ended December 31, 2019 , cash flows used in operating activities
were $20.8 million compared to $29.8 million of cash flows provided by operating
activities for the year ended December 31, 2018 , a decrease of $50.6 million .
The decrease was primarily driven by lower operating profit across all segments,
which includes the former Metalex business, principally as a result of lower
sales volume for the year ended December 31, 2019 as compared to the year ended
December 31, 2018 . In addition, the decrease resulted from acquisition and
divestiture related transaction costs of $4.5 million , unfavorable changes in
operating working capital of $7.2 million and a lower incentive compensation
accrual as a result of lower projected attainment percentages. The decrease was
partially offset by $0.7 million of cash related to dividends received from our
joint venture during the year ended December 31, 2019 and a lower incentive
compensation accrual as a result of lower projected attainment percentages. Cash
flows (used in) provided by operating activities were also impacted by the sale
of the North American fiber solutions business, which provided twelve months of
cash flows from operating activities in 2018 compared to eight months of cash
flows from operating activities in 2019.
Cash Flows Provided by (Used in) Investing Activities
Cash flows provided by investing activities were $59.1 million for the year
ended December 31, 2019 compared to cash flows used in investing activities of
$10.4 million for the year ended December 31, 2018 . The increase in cash flows
provided by investing activities was primarily the result of $79.8 million
received from the sale of the North American fiber solutions business and the
sale of the Metalex business (before transaction costs, income taxes and certain
retained liabilities), lower capital expenditures of $2.0 million , partially
offset by cash used for the acquisition of Schaffner of $11.0 million , net of
cash acquired and lower proceeds from disposals of property, plant and equipment
of $1.4 million . The proceeds from disposals of property, plant and equipment
for the year ended December 31, 2018 were primarily due to the proceeds received
from the building sale related to the closure of the engineered component's U.K.
facility in December 2018 .
52
-------------------------------------------------------------------------------- Cash Flows Used in Financing Activities Cash flows used in financing activities were$11.8 million for the year endedDecember 31, 2019 compared with$9.3 million for the year endedDecember 31, 2018 . The increase in cash flows used in financing activities was driven by higher payments of$2.5 million on First and Second Lien term loans. Depreciation and Amortization Depreciation and amortization totaled$35.5 million for the year endedDecember 31, 2019 , compared with$42.6 million for the year endedDecember 31, 2018 . Depreciation and amortization for the year endedDecember 31, 2019 was lower than incurred by the Company in the prior year primarily due to the sale of the North American fiber solutions business onAugust 30, 2019 ,$2.3 million of accelerated intangible amortization expense recorded for a customer relationship intangible asset related to non-core smart utility meter product lines in the engineered components segment during 2018 and$1.4 million of accelerated depreciation expense related to the closure of theRichmond, Indiana facility in the fiber solutions segment in 2018, partially offset by$2.5 million of accelerated depreciation expense recorded in the engineered components segment during 2019. Capital Expenditures Capital expenditures totaled$11.8 million for the year endedDecember 31, 2019 , compared with$13.8 million for the year endedDecember 31, 2018 . The lower capital expenditures were primarily driven by a lower level of project activity in 2019 compared with 2018 and the sale of the North American fiber solutions business onAugust 30, 2019 . Cash Paid for Interest Cash paid for interest totaled$30.1 million for the year endedDecember 31, 2019 and$30.7 million for the year endedDecember 31, 2018 . The decrease in cash paid for interest primarily related to a decrease in outstanding long-term debt balances, partially offset by higher variable interest rates for 2019 as compared to 2018. Cash Paid for Income Taxes Cash paid for income taxes net of refunds totaled$3.4 million for the year endedDecember 31, 2019 and$6.5 million for the year endedDecember 31, 2018 . Year EndedDecember 31, 2018 and the Year EndedDecember 31, 2017 Cash Flows Provided by Operating Activities Cash flows provided by operating activities were$29.8 million for the year endedDecember 31, 2018 compared to$30.1 million for the year endedDecember 31, 2017 , a decrease of$0.3 million . For the year endedDecember 31, 2018 , net income exclusive of non-cash items, net operating working capital and dividends from joint ventures provided$24.9 million ,$7.2 million and$0.8 million , respectively, and changes in other assets and liability balances used$3.2 million of operating cash flow. For the year endedDecember 31, 2017 , net income exclusive of non-cash items, changes in other assets and liability balances and net operating working capital provided$26.0 million ,$2.1 million and$2.9 million of operating cash flow, respectively, and transaction fees on divestiture used$0.9 million of operating cash flows. Cash Flows (Used in) Provided by Investing Activities Cash flows used in investing activities were$10.4 million for the year endedDecember 31, 2018 compared to cash flows provided by investing activities of$0.7 million for the year endedDecember 31, 2017 . The increase in cash flows used in investing activities was primarily the result of lower proceeds from disposals of property, plant and equipment of$5.3 million and lower proceeds from divestitures of$7.9 million . The proceeds from disposals of property, plant and equipment for the year endedDecember 31, 2018 were primarily due to the proceeds received from the building sale related to the closure of the engineered components segments'U.K. facility inDecember 2018 and for the year endedDecember 31, 2017 were primarily due to the proceeds received from the building sale executed in connection with the sale leaseback of ourLibertyville, Illinois facility inApril 2017 and the sale of a building related to the closure of the industrial segment'sRichmond, Virginia facility in 2017. Lower capital expenditures of$2.1 million partially offset the increase in cash used in investing activities. Cash Flows Used in Financing Activities Cash flows used in financing activities were$9.3 million for the year endedDecember 31, 2018 compared with$24.3 million for the year endedDecember 31, 2017 . The decrease in cash flows used in financing activities was driven by lower payments of$16.2 million on First and Second Lien term loans. This was offset by net payments of other long-term debt of$3.7 million for the year endedDecember 31, 2018 as compared to$2.2 million for the year endedDecember 31, 2017 , a net increase of$1.5 million . In addition, cash flows used in financing activities decreased for value added taxes received on theU.K. building sale of$0.7 million , which will be paid out in 2019, offset by an increase from deferred financing costs of$0.6 million incurred in connection with the amendment to our Revolving Credit Facility. 53 -------------------------------------------------------------------------------- Depreciation and Amortization Depreciation and amortization totaled$42.6 million for the year endedDecember 31, 2018 , compared with$38.9 million for the year endedDecember 31, 2017 . Depreciation and amortization for the year endedDecember 31, 2018 was higher than incurred by the Company in the prior period primarily due to$2.3 million of accelerated intangible amortization expense recorded for a customer relationship intangible asset related to non-core smart utility meter product lines in the Metalex business and$1.4 million of accelerated depreciation expense related to the closure of theRichmond, Indiana facility in the North American fiber solutions business. Capital Expenditures Capital expenditures totaled$13.8 million for the year endedDecember 31, 2018 , compared with$15.9 million for the year endedDecember 31, 2017 . The lower capital expenditures were primarily driven by a lower level of project activity in 2018 compared with 2017. Cash Paid for Interest Cash paid for interest totaled$30.7 million for the year endedDecember 31, 2018 and$30.2 million for the year endedDecember 31, 2017 . The increase in cash paid for interest primarily related to higher interest rates for 2018 as compared to 2017, partially offset by a decrease in outstanding long-term debt balances. Cash Paid for Income Taxes Cash paid for income taxes net of refunds totaled$6.5 million for the year endedDecember 31, 2018 and$6.8 million for the year endedDecember 31, 2017 . Off-Balance Sheet Arrangements The Company had outstanding letters of credit totaling$3.6 million ,$4.9 million , and$6.1 million as ofDecember 31, 2019 , 2018 and 2017, respectively, the majority of which secure self-insured workers compensation liabilities. Commitments and Contractual Obligations The following table presents the Company's commitments and contractual obligations as ofDecember 31, 2019 : Payments Due by Period (in thousands) Total 2020
2021-2022 2023-2024 Thereafter
Long-term debt obligations under
$ 374,327 $ 3,100
13,942 2,284 4,779 6,177 702
Finance lease obligations (1) 742 416 220 106 -
Interest payments on long-term debt
obligations (2) 52,057 28,267 23,636 152 2
Operating lease obligations (3) 30,178 5,730 8,318 5,476 10,654
Multiemployer and UK pension obligations
(4) 2,998 839 757 757 645
Total $ 474,244 $ 40,636 $ 408,937 $ 12,668 $ 12,003
(1)Amounts represent the principal payments due under the long-term debt
obligations. Foreign debt balances are based on exchange rates as of December
31, 2019 .
(2)Amounts represent the expected cash payments of interest expense on long-term
debt obligations, including finance lease obligations, and were calculated using
interest rates in place as of December 31, 2019 and assuming that the underlying
debt obligations will be repaid in accordance with their terms. These amounts
also include projected payments related to the interest rate swaps.
(3)Operating lease obligations represent the undiscounted minimum rental
commitments under non-cancelable operating leases, including renewal options
which are deemed reasonably certain to be exercised. The imputed interest on
operating lease obligations as of December 31, 2019 is $6.8 million . Refer to
Note 10, "Leases" for additional information.
(4)Represents contributions required with respect to the former Morton
multiemployer pension plan as a result of the withdrawal from the plan, and
required contributions to certain pension plans in the U.S. and U.K. We are
unable to determine the ultimate timing of all other pension payments, and
therefore, no other payment amounts were included in the table.
54
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Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. We evaluate our
estimates on an ongoing basis, based on historical experience and on various
other assumptions that are believed to be reasonable under the circumstances.
The following policies are considered by management to be the most critical in
understanding the judgments that are involved in the preparation of our
consolidated financial statements and the uncertainties that could impact our
results of operations, financial position and cash flows. Application of these
accounting policies involves the exercise of judgment and use of assumptions as
to future uncertainties and, as a result, actual results could differ from these
estimates. Although we have listed a number of accounting policies below which
we believe to be the most critical, we also believe that all of our accounting
policies are important to the reader. Therefore, see Note 1, "Summary of
Significant Accounting Policies," of the accompanying consolidated financial
statements of the Company appearing elsewhere in this Annual Report.
Goodwill , Other Intangible Assets and Other Long-Lived Assets: Our goodwill,
other intangible assets and tangible fixed assets are held at historical cost,
net of depreciation and amortization, less any provision for impairment. Our
right-of-use operating lease assets are recorded at the present value of future
minimum lease payments, net of amortization, less any provision for impairment.
Intangible and tangible assets with determinable lives are amortized or
depreciated on a straight line basis over estimated useful lives as follows:
Intangible Assets
Goodwill No amortization
Patents Amortized over 7 years
Customer relationships Amortized over 10 to 15 yearsTrademarks and other intangible assets Amortized over 1 to 18 years Right-of-use operating lease assets Amortized over the term of the lease
Tangible Assets Land No depreciation Buildings and improvements Depreciated over 2 to 40 years Machinery and equipment Depreciated over 2 to 10 yearsGoodwill reflects the cost of an acquisition in excess of the aggregate fair value assigned to identifiable net assets acquired. As ofDecember 31, 2019 , the Company has$45.7 million of goodwill, all of which is within the industrial segment.Goodwill is assessed for impairment at least annually and as triggering events or indicators of potential impairment occur. We perform our annual impairment test in the fourth quarter of our fiscal year.Goodwill has been assigned to reporting units for purposes of impairment testing based upon the relative fair value of the asset to each reporting unit. Impairment of goodwill is measured by comparing the fair value of a reporting unit to the carrying value of the reporting unit, including goodwill. The estimated fair value represents the amount at which a reporting unit could be bought or sold in a current transaction between willing parties on an arms-length basis. In estimating the fair value, we use a discounted cash flow model, which is dependent on a number of assumptions including estimated future revenues and expenses, weighted average cost of capital, capital expenditures and other variables. We also use a market approach, in which the fair values of comparable public companies and fair values based on recent comparable transactions (when available) are used in determining an estimated fair value for each reporting unit. If the carrying amount of the reporting unit exceeds the estimated fair value of the reporting unit, an impairment loss is recognized in an amount equal to that excess, not to exceed the carrying amount of the goodwill. We performed our annual goodwill impairment test in the fourth quarter of 2019 and determined that the fair value of the industrial reporting unit, the only reporting unit with a recorded goodwill balance, exceeded the carrying value of the reporting unit by over 15%. In connection with the goodwill impairment test, we engaged a third-party valuation firm to assist management with determining the fair value estimate for the reporting unit. The fair value of the reporting unit is determined using a weighted average of an income approach primarily based on our long-term strategic plan, a market approach based on implied valuation multiples of public company peer groups for the reporting unit and a market approach based on recent comparable transactions. Each approach was generally deemed equally relevant in determining reporting unit enterprise value, and as a result, weightings of 35 percent, 30 percent and 35 percent, respectively, were used for each. This fair value determination was categorized as Level 3 in the fair value hierarchy. In connection with obtaining an independent third-party valuation, management provided certain information and assumptions that were utilized in the fair value calculation. Significant assumptions used in determining reporting unit fair 55
-------------------------------------------------------------------------------- value include forecasted cash flows, revenue growth rates, adjusted EBITDA margins, weighted average cost of capital (discount rate), assumed tax treatment of a future sale of the reporting unit, terminal growth rates, capital expenditures, sales and EBITDA multiples used in the market approach, and the weighting of the income and market approaches. A change in any of these assumptions, individually or in the aggregate, or future financial performance that is below management expectations may result in the carrying value of this reporting unit exceeding its fair value, and goodwill and amortizable intangible assets could be impaired. See Note 8, "Goodwill and Other Intangible Assets," of the accompanying consolidated financial statements for further discussion. We also review other intangible assets and tangible fixed assets for impairment when events or changes in business circumstances indicate that the carrying amount of the assets may not be fully recoverable. If such indicators are present, we perform undiscounted cash flow analyses to determine if an impairment exists. If an impairment is determined to exist, any related impairment loss is calculated based on fair value. During the third quarter of 2019, a triggering event was identified due to sustained sales and profitability declines within the Metalex business in the engineered components segment, which resulted in the Company performing an analysis to assess long-lived assets of the asset group for impairment. The estimated fair value of the long-lived assets was determined using a probability weighted approach using both discounted cash flow projections based on future financial performance and a market approach. As a result of this analysis, non-cash impairment charges of$14.9 million and$5.7 million were recorded for customer relationship and trademark intangible assets, respectively, during the third quarter of 2019. These intangible asset impairment charges are recorded as impairment charges within net loss (income) from discontinued operations, net of tax in the consolidated statements of operations. A considerable amount of management judgment and assumptions is required in performing the impairment tests, principally in determining the fair value of each reporting unit and the specifically identifiable intangible and tangible assets. While we believe our judgments and assumptions are reasonable, different assumptions could change the estimated fair values and, therefore, additional impairment charges could be required. Employee Benefit Plans: We provide a range of benefits to employees and certain former employees, including in some cases pensions and postretirement health care, though the plans are frozen to new participation. We recognize pension and post-retirement benefit income and expense and assets and obligations that are based on actuarial valuations using aDecember 31 measurement date and that include key assumptions regarding discount rates, expected returns on plan assets, retirement and mortality rates, future compensation increases, and health care cost trend rates. The approach we use to determine the annual assumptions is as follows: •Discount Rate: Our discount rate assumptions are based on the interest rate of high-quality corporate bonds, with appropriate consideration of our plans' participants' demographics and benefit payment terms. •Expected Return on Plan Assets: Our expected return on plan assets assumptions are based on our expectation of the long-term average rate of return on assets in the pension funds, which is reflective of the current and projected asset mix of the funds and considers the historical returns earned on the funds. •Compensation Increase: Our compensation increase assumptions reflect our long-term actual experience, the near-term outlook and assumed inflation. •Retirement and Mortality Rates: Our retirement and mortality rate assumptions are based primarily on actual plan experience and mortality tables. •Health Care Cost Trend Rates: Our health care cost trend rate assumptions are based primarily on actual plan experience and mortality inflation. The key assumptions utilized in the accounting for employee benefit plans require a considerable amount of management judgement. We review actuarial assumptions on an annual basis and make modifications based on current rates and trends when appropriate. As required by GAAP, the effects of the modifications are recorded as a component of other comprehensive income and are amortized over future periods. Based on information provided by independent actuaries and other relevant sources, we believe that the assumptions used are reasonable; however, changes in these assumptions could impact our financial position, results of operations or cash flows. See Note 15, "Employee Benefit Plans," of the accompanying consolidated financial statements for further discussion. Income Taxes: We are subject to income taxes inthe United States and numerous foreign jurisdictions. Significant judgment is required in determining both our key assumptions utilized in the accounting for income taxes and the recording of the worldwide provision for income taxes and the related deferred tax assets and liabilities. We assess our income tax positions and record tax liabilities for all years subject to examination based upon management's evaluation of the facts and circumstances and information available at the reporting dates. For those income tax positions where it is more-likely-than-not that a tax benefit will be sustained upon the conclusion of an examination, we have recorded the largest amount of tax benefit 56
-------------------------------------------------------------------------------- having a cumulatively greater than 50% likelihood of being realized upon ultimate settlement with the applicable taxing authority assuming that it has full knowledge of all relevant information. For those tax positions that do not meet the more-likely-than-not threshold regarding the ultimate realization of the related tax benefit, no tax benefit has been recorded in the financial statements. We recognize deferred tax assets and liabilities for the future tax consequences attributable to differences between financial statement carrying amounts of existing assets and liabilities and their respective tax bases, net operating losses, tax credits and other 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. We regularly review our deferred tax assets for recoverability and establish a valuation allowance based on historical losses, projected future taxable income and the expected timing of the reversals of existing temporary differences. As a result of this review, we have established valuation allowances against certain of our deferred tax assets relating to foreign and state net operating loss and credit carryforwards. Future tax authority rulings and changes in tax laws, changes in projected levels of taxable income and future tax planning strategies could affect the actual effective tax rate and tax balances recorded. OnDecember 22, 2017 , the President ofthe United States signed into law the Tax Reform Act. The legislation significantly changedU.S. tax law by, among other things, lowering corporate income tax rates, implementing a territorial tax system and imposing a repatriation tax on deemed repatriated earnings of foreign subsidiaries. The Tax Reform Act also added many new provisions including changes to bonus depreciation and the deductions for executive compensation and interest expense, and the requirement to include in ourU.S. federal income tax return foreign subsidiary earnings in excess of an allowable return of the foreign subsidiary's tangible assets, among others. The Tax Reform Act permanently reduced theU.S. corporate income tax rate from a maximum of 35% to a flat 21% rate, effectiveJanuary 1, 2018 . See further discussion of the Tax Reform Act within "Consolidated Results of Operations" above and Note 14, "Income Taxes," of the accompanying consolidated financial statements for further discussion. Revenue Recognition: Net sales are recognized when control of a performance obligation is transferred to the customer in an amount that reflects the consideration expected to be received in exchange for the transferred good or service. We typically satisfy our performance obligations in contracts with customers upon shipment of the goods or delivery of the services. Amounts invoiced to customers related to shipping and handling are classified as net sales, while expenses for transportation of products to customers are recorded as a component of cost of goods sold on the consolidated statement of operations. Sales, value add, and other taxes collected concurrent with revenue-producing activities are excluded from net sales. As of the contract inception date, the expected time between the completion of the performance obligation and the payment from the customer is less than a year, and as such there are no significant financing components in the consideration recognized and disclosures around unsatisfied performance obligations have been omitted. We estimate whether we will be subject to variable consideration under the terms of the contract and include our estimate of variable consideration in the transaction price based on the expected value method when it is deemed probable of being realized based on historical experience and trends. A significant amount of management judgement is required to develop the assumptions that we use to estimate the variable consideration of certain contracts. Types of variable consideration may include rebates, discounts, and product returns, among others, which are recorded as a deduction to net sales at the time when control of a performance obligation is transferred to the customer. The majority of our contracts are for the sale of goods that qualify as separate performance obligations that are distinct from other goods or services provided in the same contract. Transaction price inclusive of estimated variable consideration is allocated to separate performance obligations based on their relative standalone selling prices using observable inputs. When observable inputs are not available, we estimate stand alone selling price using cost plus a reasonable margin approach. Contracts entered into with the same customer at or near the same time are combined into a single contract if they represent a single commercial objective, if payment of consideration in one contract is dependent on performance of the other contract, or if promises in different contracts constitute a single performance obligation. For the limited contracts with multiple performance obligations, the contract's transaction price is allocated to each performance obligation using the best estimate of the standalone selling price of each distinct good or service in the contract. Performance obligations are satisfied at a point in time or over time as work progresses. Revenue from products transferred to customers at a point in time accounted for more than 99% of net sales for the year endedDecember 31, 2019 . We recognize revenue over time for certain production parts in the industrial business that are highly customized with no alternative use and for which we have an enforceable right to payment with a reasonable margin under the terms of the contract based on the output method of goods produced. Revenue from products transferred to customers over time accounted for less than 1% of net sales for the year endedDecember 31, 2019 . We provide industry standard assurance-type warranties which ensure that the manufactured products comply with agreed upon specifications with the customers and do not represent a separate performance obligation with the customer. Warranty based accruals are established under Accounting Standards Codification 460, "Guarantees," based on an evaluation of historical warranty experience and management's estimate of the level of future claims. 57 --------------------------------------------------------------------------------
New Accounting Pronouncements See Note 1, "Summary of Significant Accounting Policies," under the heading "Recently issued accounting standards," of the accompanying consolidated financial statements.
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