NN, Inc.
Annual Report
2011
The statements included in this document may be forward looking statements made pursuant to the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve a number of
risks and uncertainties that may cause actual results to be materially different from such forward-looking statements.
Such factors include, among others, general economic conditions and economic conditions in the industrial sector,
competitive influences, risks that current customers will commence or increase captive production, risks of capacity,
underutilization, quality issues, availability and price of raw materials, currency and other risks associated with
international trade, the Company’s dependence on certain major customers, and other risk factors and cautionary
statements listed from time to time in the Company’s periodic reports filed with the Securities and Exchange
Commission, including, but not limited to, the Company’s Annual Report on 10-K for the fiscal year ended December
31, 2011.
Letter to Shareholders
To our Shareholders,
For the full year of 2011, we recorded record results in revenues, earnings and EPS as we continued to
build upon the remarkable turnaround we experienced in 2010 from the global recession of the previous
year. Our restructured, leaner core Metal Bearing Components segment, which represents 73% of our
total revenues, performed well operationally and delivered good financial results. Our year could have
been better except for three factors that negatively affected our revenues and earnings. Profitability at
our Rubber and Plastics segment, notably IMC, and the Precision Metal Components segment were
disappointing. IMC remained profitable, but struggled with manufacturing inefficiencies for much of the
year. IMC and Whirlaway have both greatly improved their manufacturing results in the latter part of
the year and have good momentum heading into 2012. The third factor that negatively affected our
profitability in 2011 was the uncertainty surrounding the European economy. For the first time in recent
memory, our revenues were down in the fourth quarter compared to the historically seasonally slow
third quarter by 5%. This was all driven by the downturn in the European economy.
2011 Overview
Our net sales for the full year rose $59.3 million or 16.0% to $424.7 million as compared to $365.4
million for the same period of 2010. Approximately $34.9 million of the increase was attributable to
increased demand for our products, particularly in industrial and automotive end markets as well as new
sales programs at Whirlaway. Price increases and material pass through accounted for another $17.5
million and the net positive effect of foreign currency translation and mix issues accounted for the
remaining $6.9 million of the increase.
Reported net income for the full year of 2011 of $20.9 million, or $1.24 per diluted share included $0.9
million in net of tax non-operating foreign currency exchange gains on intercompany loans and $1.4
million in other non-operating income. Net income from normal operations for the full year of 2011 was
$18.6 million, up 68%, or $1.10 per diluted share, compared to a net income from normal operations of
$11.1 million, or $0.67 per diluted share for the full year of 2010.
2012 Outlook
With respect to 2012, we are currently forecasting revenues to be in the range of $415 million to $425
million. The midpoint of this range, $420 million, after adjusting for currency and material pass through,
represents essentially the same revenue as our 2011 recorded revenue. At this level of demand, we will
have excellent capacity utilization with enough spare capacity to capitalize on any incremental
improvements in demand. In building our 2012 forecast, we assumed good economic growth in North
America and Asia, offset by reductions in Europe, which are the results of uncertain economic conditions
that exist in our European end markets.
Although we don’t provide quarterly or annual earnings guidance, we are forecasting improvements in
operating margins, net income and EPS for 2012. This forecast is based upon three assumptions: first, a
significant profitability swing at our Whirlaway operation. Recent improved manufacturing results have
provided good, positive momentum heading into 2012. Secondly, we are forecasting good revenue
growth and improved operating efficiencies at IMC for the full year. Finally, our restructured, leaner
global Metal Bearing Components business is better structured to withstand a forecasted 5% reduction
in European demand and still contribute good levels of profitability.
During 2012 we will focus on debt reduction and the further strengthening of our balance sheet by the
end of the year. With improvements in earnings, working capital requirements and slight reductions in
capital spending, we anticipate year-end debt levels to be much lower with corresponding
improvements in leverage ratios. Our resulting debt levels and balance sheet should position our
business for continuing growth in 2013 and beyond. Even though we will slightly reduce our capital
spending in 2012, we still plan to spend approximately $20 million, including the completion of the first
phase of the expansion of our ball plant in China, which will ultimately allow a doubling of the capacity
at that plant. Additionally, we will continue to investment in the expansion of our tapered roller
capacity in the U.S. and The Netherlands.
Even though we start out 2012 with uncertainty in the economic outlook, we feel are well positioned to
deliver good earnings improvements for 2012. We are encouraged with the earnings leverage we see in
our business for the upcoming year and look forward to the execution of our operational and business
plan for the upcoming year.
Also in 2012, we are expanding and strengthening our Board. On March 22, 2012, we announced the
appointment of Robert R. Brunner to the NN, Inc. Board of Directors. Bob has spent his entire career at
Illinois Tool Works, a global, diversified, international manufacturer of highly engineered fasteners,
equipment and consumable systems and specialty products. Additionally, the Board of Directors has
nominated David L. Pugh to serve on our Board. Dave, retired in 2011, served as President and Chief
Executive Officer and Chairman of the Board of Applied Industrial Technologies, a leading distributor of
industrial products and services including bearings. We look forward to the energy, leadership and
perspective that Bob and Dave will bring to the boardroom as we continue to grow and execute our
strategy.
On a sad note, we lost a colleague and friend in Bob Aiken, who passed away on March 10, 2012. Bob
had been a member of the Board since 2003 and had served as Chair of the Audit Committee during that
time. Bob was an excellent director whose character, insight and strong leadership served our Board
and Company well for over eight years.
On behalf of the Board of Directors, we thank our customers, shareholders, employees and all
stakeholders for their continued support and their contributions during 2011 and are looking forward to
further progress and success in 2012.
Roderick R. Baty
Chairman and Chief Executive Officer
Financial Highlights
(In Thousands, Except Per Share Data)
Net sales
Cost of products sold (exclusive of
depreciation shown separately below)
Selling, general and administrative expenses
Depreciation and amortization
Impairment of goodwill
Restructuring and impairment charges,
excluding goodwill impairment
Income (loss) from operations
Net income (loss)
Normalized net income (1)
2011
2010
$ 424,691 $ 365,369
2009
$ 259,383
2008
$ 424,837
2007
$ 421,294
$ 347,622 $ 296,422
$ 30,407
$ 30,657
$ 19,195
$ 17,016
--
--
$ 235,466
$ 27,273
$ 22,186
--
$ 344,685
$ 36,068
$ 27,981
$ 30,029
$ 337,024
$ 36,473
$ 22,996
$ 10,016
--
$ 29,432
$ 20,937
$ 18,603
$ 2,289
$ 16,248
$ 6,416
$ 11,093
$ 4,977
$ (31,012)
$ (35,334)
$ (31,338)
$ 12,036
$ (21,824)
$ (17,642)
$ 10,454
$ 3,620
$ 11,236
$ (1,173)
$ 12,448
Diluted income (loss) per share:
Net income (loss)
Normalized net income (1)
Weighted average number of shares
outstanding – Diluted
$ 1.24
$ 1.10
$ 0.39
$ 0.67
$ (2.17)
$ (1.93)
$ (1.11)
$ 0.66
$ (0.07)
$ 0.74
16,953
16,570
16,268
15,895
16,749
Cash flow from operations
Acquisition of PP&E
Long-term debt, net of current portion
Shareholders’ equity
$ 14,955
$ 20,329
$ 71,629
$ 99,676
$ 27,860
$ 15,249
$ 67,643
$ 78,107
$ 14,789
$ 4,255
$ 77,558
$ 76,803
$ 27,511
$ 18,498
$ 90,172
$ 109,759
$ 21,594
$ 18,856
$ 100,193
$ 130,043
(1) Normalized net income is a non-GAAP financial measure defined for this purpose as net income (loss) excluding the net-after tax
effect of impairment of goodwill, restructuring and impairment charges excluding goodwill, foreign currency gains on intercompany
loans and certain other charges associated with restructuring activities. Management believes the exclusion of the net after-tax
effect of these charges is a more accurate measurement of the Company’s financial results. For the years 2007, 2008, 2009, 2010
and 2011, normalized net income (loss) excludes $13,621, $28,096, $3,996, $4,677 and ($2,334) respectively of these charges.
Segment Information
Metal Bearing Components Segment
Precision Steel Balls. We manufacture and sell high quality, precision steel balls in sizes ranging in diameter from
5/32 of an inch (3.969 mm) to 2 5/8 inches (66.675 mm). Our steel balls are used primarily by manufacturers of
anti-friction bearings where precise spherical, tolerance and surface finish accuracies are required Steel Rollers.
We manufacture tapered and cylindrical rollers. Rollers are an alternative rolling element used instead of balls in
anti-friction bearings that typically have heavier loading or different speed requirements. Our roller products are
used primarily for applications similar to those of our precision steel ball product line, plus certain non-bearing
applications such as hydraulic pumps and motors. Metal Retainers. We manufacture and sell precision metal
retainers for roller bearings used in a wide variety of industrial applications. Retainers are used to separate and
space the rolling elements (balls and rollers) within a fully assembled bearing.
Plastic and Rubber Components Segment
Bearing Seals. We manufacture and sell a wide range of precision bearing seals produced through a variety of
compression and injection molding processes and adhesion technologies to create rubber-to-metal bonded
bearing seals. The seals are used in applications for automotive, industrial, agricultural and mining markets.
Plastic Retainers. We manufacture and sell precision plastic retainers for ball and roller bearings used in a wide
variety of industrial applications. Retainers are used to separate and space the rolling elements (balls or rollers)
within a fully assembled bearing. Precision Plastic Components. We manufacture and sell a wide range of
specialized plastic products including automotive under-the-hood components, electronic instrument cases and
precision electronic connectors and lenses, as well as a variety of other specialized industrial and consumer parts.
Precision Metal Components Segment
Precision Metal Components. We sell a wide range of highly engineered precision metal components and
subassemblies. The precision metal components offered include highly engineered shafts, mechanical
components, fluid system components and complex precision assembled and tested parts.
Products
Metal Bearing
Components
Precision Steel Balls
Cylindrical Rollers
Tapered Rollers
Precision Stampings
Plastic & Rubber
Components
Bearing Seals
Plastic Retainers
Precision Plastic
Components
Precision Metal Components
Highly Engineered Precision
Metal Components
Fluid Control Components &
Assemblies
Shafts
Other Precision Components
Applications
Bearings
Automotive Industry
Hydraulic Motors
Oil Drilling and Mining
Bearings
Automotive Industry
Oil Drilling
Other Industries
Operations
U.S. Ball & Roller
NN Europe
NN Asia
Industrial Molding
Delta Rubber Company
HVAC
Automotive
Diesel
Fluid Power
Whirlaway
2011 Revenue
(000’s)
$308,883
$43,536
$72,272
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2011
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 0-23486
NN, INC.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
2000 Waters Edge Drive
Johnson City, Tennessee
(Address of principal executive offices)
62-1096725
(I.R.S. Employer
Identification No.)
37604
(Zip Code)
Registrant's telephone number, including area code: (423) 743-9151
Securities registered pursuant to Section 12(b) of the Act:
Title of
each class
Name of each exchange
on which registered
Common Stock, par value $.01
The NASDAQ Stock Market LLC
Securities registered pursuant to Section 12(g) of the Act:
None
(Title of class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities and
Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days. Yes No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive
Data file required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding
12 months (or for such shorter period that the registrant was required to submit and post such files). Yes No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting
company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange
Act. (Check one):
Large accelerated filer
Accelerated filer Non-accelerated filer Smaller reporting company
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes No
The aggregate market value of the voting stock held by non-affiliates of the registrant at June 30, 2011, based on the closing price on the
NASDAQ Stock Market LLC on that date was approximately $252,285,440.
The number of shares of the registrant's common stock outstanding on March 9, 2012 was 16,948,632
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement with respect to the 2011 Annual Meeting of Stockholders are incorporated by reference in Part III,
Items 10 to 14 of this Annual Report on Form 10-K as indicated herein.
Forward-Looking Statements
PART I
We wish to caution readers that this report contains, and our future filings, press releases and oral statements made by
our authorized representatives may contain, forward-looking statements that involve certain risks and uncertainties.
Readers can identify these forward-looking statements by the use of such verbs as expects, anticipates, believes or
similar verbs or conjugations of such verbs. Our actual results could differ materially from those expressed in such
forward-looking statements due to important factors bearing on our business, many of which already have been
discussed in this filing and in our prior filings. The differences could be caused by a number of factors or
combination of factors including the risk factors discussed in “Item 1A Risk Factors” of this Annual Report on Form
10-K.
Item 1.
Business Overview
NN, Inc. has three operating segments, the Metal Bearing Components Segment, the Plastic and Rubber Components
Segment, and the Precision Metal Components Segment. As used in this Annual Report on Form 10-K, the terms
“NN”, “the Company”, “we”, “our”, or “us” mean NN, Inc. and its subsidiaries.
Within the Metal Bearing Components Segment, we manufacture and supply high precision bearing components,
consisting of balls, cylindrical rollers, tapered rollers, and metal retainers, for leading bearing manufacturers on a
global basis. We are a leading independent manufacturer of precision steel bearing balls and rollers for the North
American, European and Asian markets. In 2011, Metal Bearing Components accounted for 73% of total NN, Inc.
sales. Sales of balls and rollers accounted for approximately 68% of our total net sales with 49% of sales from balls
and 19% of sales from rollers. Sales of metal bearing retainers accounted for 5% of net sales. Through a series of
acquisitions and plant expansions, we have built upon our strong core ball business and expanded our bearing
component product offering. Today, we offer one of the industry’s most complete lines of commercially available
bearing components. We emphasize engineered products that take advantage of our competencies in product design
and tight tolerance manufacturing processes. Our bearing customers use our components in fully assembled ball and
roller bearings, which serve a wide variety of industrial applications in the automotive, electrical, agricultural,
construction, machinery, and mining markets.
Within the Plastic and Rubber Components Segment, we manufacture high precision rubber seals and plastic
retainers for leading bearing manufacturers on a global basis. In addition, we manufacture specialized plastic
products including automotive components, electronic instrument cases and other molded components used in a
variety of industrial and consumer applications. Finally, we also manufacture rubber seals for use in various
automotive, industrial and mining applications. In 2011, plastic products accounted for 7% of net sales and rubber
seals accounted for 3% of net sales.
Our Precision Metal Components Segment is comprised of the Whirlaway Corporation (“Whirlaway”). Whirlaway is
a manufacturer of highly engineered, difficult to manufacture precision metal components and subassemblies for the
automotive, HVAC, fluid power and diesel engine markets. Our entry into the precision metal components market
from 2006 is part of our strategy to serve markets and customers we view as adjacent to bearing components that
utilize our core manufacturing competencies. These products accounted for 17% of net sales in 2011.
The three business segments are composed of the following manufacturing operations:
Metal Bearing Components Segment
Erwin, Tennessee Ball and Roller Plant (“Erwin Plant”)
Mountain City, Tennessee Ball Plant (“Mountain City Plant”)
Pinerolo, Italy Ball Plant (“Pinerolo Plant”)
Veenendaal, The Netherlands Roller and Stamped Metal Parts Plant (“Veenendaal Plant”)
Kysucke Nove Mesto, Slovakia Ball Plant (“Kysucke Plant”)
Kunshan, China Ball Plant (“Kunshan Plant”)
Plastic and Rubber Components Segment
Delta Rubber Company, Danielson, Connecticut Rubber Seal Plant (“Danielson Plant”)
Industrial Molding Corporation, Inc. Lubbock, Texas Plastic Injection Molding Plant (“Lubbock Plant”)
2
Precision Metal Components Segment
Whirlaway Corporation, Wellington, Ohio Metal Components Plant 1 (“Wellington Plant 1”)
Whirlaway Corporation, Wellington, Ohio Metal Components Plant 2 (“Wellington Plant 2”)
Financial information about the segments is set forth in Note 12 of the Notes to Consolidated Financial Statements.
Corporate Information
NN, originally organized in October 1980, is incorporated in Delaware. Our principal executive offices are located at
2000 Waters Edge Drive, Johnson City, Tennessee, and our telephone number is (423) 743-9151. Our website
address is www.nnbr.com. Information contained on our website is not part of this Annual Report. Our annual
report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and related amendments are
available via a link to “SEC.gov” on our website under “Investor Relations.” Additionally, all required interactive
data pursuant to Item 405 of Regulation S-T is posted on our website.
Products
Metal Bearing Components Segment
Precision Steel Balls. At our Metal Bearing Components Segment facilities (with the exception of our Veenendaal
Plant), we manufacture and sell high quality, precision steel balls in sizes ranging in diameter from 5/32 of an inch
(3.969 mm) to 2 5/8 inches (66.675 mm). We produce and sell balls in grades ranging from grade 3 to grade 1000,
according to international standards endorsed by the American Bearing Manufacturers Association. The grade
number for a ball, in addition to defining allowable dimensional variation within production batches, indicates the
degree of spherical precision of the ball; for example, grade 3 balls are manufactured to within three-millionths of an
inch of roundness. Our steel balls are used primarily by manufacturers of anti-friction bearings where precise
spherical, tolerance and surface finish accuracies are required. Sales of precision steel balls accounted for
approximately 67%, 69%, and 73% of the Metal Bearing Components Segment net sales in 2011, 2010, and 2009,
respectively.
Steel Rollers. We manufacture tapered rollers at our Veenendaal and Erwin Plants and cylindrical rollers at our
Erwin Plant. Rollers are an alternative rolling element used instead of balls in anti-friction bearings that typically
have heavier loading or different speed requirements. Our roller products are used primarily for applications similar
to those of our precision steel ball product line, plus certain non-bearing applications such as hydraulic pumps and
motors. Tapered rollers are a component in tapered roller bearings that are used in a variety of applications including
automotive gearbox applications, automotive wheel bearings and a wide variety of industrial applications. Most
cylindrical rollers are made to specific customer requirements for diameter and length and are used in a variety of
industrial applications. Tapered rollers accounted for approximately 21%, 14%, and 10% of the Metal Bearing
Components Segment net sales in 2011, 2010 and 2009, respectively. Cylindrical rollers accounted for
approximately 5%, 4% and 4% of the Metal Bearing Components Segment net sales in 2011, 2010, and 2009,
respectively.
Metal Retainers. We manufacture and sell precision metal retainers for roller bearings used in a wide variety of
industrial applications. Retainers are used to separate and space the rolling elements (rollers) within a fully
assembled bearing. We manufacture metal retainers at our Veenendaal Plant.
Plastic and Rubber Components Segment
Bearing Seals. At our Danielson Plant, we manufacture and sell a wide range of precision bearing seals produced
through a variety of compression and injection molding processes and adhesion technologies to create rubber-to-
metal bonded bearing seals. The seals are used in applications for automotive, industrial, agricultural and mining
markets.
Plastic Retainers. At our Lubbock Plant, we manufacture and sell precision plastic retainers for ball and roller
bearings used in a wide variety of industrial applications. Retainers are used to separate and space the rolling
elements (balls or rollers) within a fully assembled bearing.
3
Precision Plastic Components. At our Lubbock Plant, we also manufacture and sell a wide range of specialized
plastic products including automotive under-the-hood components, electronic instrument cases and precision
electronic connectors and lenses, as well as a variety of other specialized industrial and consumer parts.
Precision Metal Components Segment
Precision Metal Components. We sell a wide range of highly engineered precision metal components and
subassemblies. The precision metal components offered include highly engineered shafts, mechanical components,
fluid system components and complex precision assembled and tested parts. The products are used in the following
end markets: automotive, HVAC, fluid power and diesel engine.
Research and Development
The amounts spent on research and development activities by us during each of the last three fiscal years are not
material and are expensed as incurred.
Customers
Our products are supplied primarily to bearing manufacturers and automotive and industrial parts manufacturers for
use in a broad range of industrial applications, including automotive, electrical, agricultural, construction, machinery
and mining. Additionally, we supply precision metal, rubber, and plastic components to automotive and industrial
companies that are not used in bearing assemblies. We supply approximately 400 customers; however, our top ten
customers account for approximately 76% of our revenue. Sales to each of these top ten customers are made to
multiple customer locations and divisions throughout the world. Only one of these customers, AB SKF (“SKF”), had
sales levels that were over 10% of total net sales. Sales to various U.S. and foreign divisions of SKF accounted for
approximately 38% of net sales in 2011. In 2011, 40% of our products were sold to customers in North America,
46% to customers in Europe, 10% to customers in Asia and the remaining 4% to customers in South America.
We sell our products to most of our largest customers under either sales contracts or agreed upon commercial terms.
In general, we pass through material cost fluctuations when incurred to our customers in the form of changes in
selling prices. We ordinarily ship our products directly to customers within 60 days, and in some cases, during the
same calendar month, of the date on which a sales order is placed. Accordingly, we generally have an insignificant
amount of open (backlog) orders from customers at month end. At the U.S. operations of our Metal Bearing
Components Segment, we maintain a computerized, bar coded inventory management system with certain of our
major customers that enables us to determine on a day-to-day basis the amount of these components remaining in a
customer’s inventory. When such inventories fall below certain levels, additional product is automatically shipped.
During 2011, the Metal Bearing Components Segment sold products to approximately 250 customers located in 30
different countries. Approximately 87% of the net sales in 2011 were to customers outside the United States.
Approximately 61% of net sales in 2011 were to customers within Europe. Sales to our top ten customers accounted
for approximately 87% of the net sales in 2011.
During 2011, the Plastic and Rubber Components Segment sold its products to over 100 customers located
principally in North America. Approximately 15% of the Plastic and Rubber Components Segment’s net sales were
to customers outside the United States, with the majority of those sales to customers in Mexico, Canada & Asia.
Sales to the segment’s top ten customers accounted for approximately 66% of the segment’s net sales in 2011.
During 2011, the Precision Metal Components Segment sold its products to 15 customers located in four countries.
Approximately 89% of all sales were to customers located within the United States. Sales to the segment’s top ten
customers accounted for approximately 96% of the segment’s net sales in 2011.
In both the foreign and domestic markets, we principally sell our products directly to manufacturers and do not sell
significant amounts through distributors or dealers.
See Note 12 of the Notes to Consolidated Financial Statements and "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Results of Operations" for additional Segment financial information.
4
The following table presents a breakdown of our net sales for fiscal years 2011, 2010 and 2009:
(In Thousands)
2011
2010
2009
Metal Bearing Components Segment
Percentage of Total Sales
Precision Metal Components Segment
Percentage of Total Sales
Plastic and Rubber Components Segment
Percentage of Total Sales
$ 308,883 $ 271,339 $ 183,605
70.7%
72.7%
74.3%
72,272
17.0%
43,536
10.3%
54,913
15.0%
39,117
10.7%
45,003
17.4%
30,775
11.9%
Total
$ 424,691 $ 365,369 $ 259,383
Percentage of Total Sales
100%
100%
100%
The change in value of Euro denominated sales resulted in net sales increasing $11.1 million in 2011 and decreasing
$10.7 million in 2010 compared to the prior years when converted to U.S. Dollars.
Sales and Marketing
A primary emphasis of our marketing strategy is to expand key customer relationships by offering high quality, high
precision products with the value of a single supply chain partner for a wide variety of components. Due to the
technical nature of many of our products, our engineers and manufacturing management personnel also provide
technical sales support functions, while internal sales employees handle customer orders and other general sales
support activities. For the Precision Metal Components Segment and the Plastics and Rubber Components Segment,
the current sales structure consists of using a direct sale force supported by senior segment management and
engineering involvement with manufacturers’ representatives utilized to supplement our direct sales force.
Our Metal Bearing Components Segment marketing strategy focuses on increasing our outsourcing relationships with
global bearing manufacturers that maintain captive (in house) bearing component manufacturing operations. Our
marketing strategy for the Plastic and Rubber Components Segment and the Precision Metal Components Segment is
to offer custom manufactured, high quality, precision products to markets with high value-added characteristics at
competitive price levels. This strategy focuses on relationships with key customers that require the production of
technically difficult parts and assemblies, enabling us to take advantage of our strengths in custom product
development, equipment and tool design, component assembly and machining processes.
Our arrangements with both our U.S. and European customers typically provide that payments are due within 30 to
60 days following the date of shipment of goods. With respect to export customers of both our U.S. and European
businesses, payments generally are due within 60 to 120 days following the date of shipment in order to allow for
additional freight time and customs clearance. For some customers that participate in our inventory management
program, sales are recorded when the customer uses the product. See "Business -- Customers" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources."
Manufacturing Process
We have become a leading independent bearing component manufacturer through exceptional service and high
quality manufacturing processes. Because our ball and roller manufacturing processes incorporate the use of
standardized tooling, load sizes, and process technology, we are able to produce large volumes of products cost
competitively, while maintaining high quality standards.
The key to our high quality production of seals and retainers is the incorporation of customized engineering into our
manufacturing processes, metal to rubber bonding competencies and experience with a broad range of engineered
resins and custom polymers. This design process includes the testing and quality assessment of each product.
Within the precision metal components industry, we are well positioned in the market by virtue of our focus on
highly engineered, difficult to manufacture critical components, product development and component subassemblies.
5
Employees
As of December 31, 2011, we employed a total of 1,895 full-time employees and 259 full time equivalent temporary
workers. The following numbers are for full time employees only. Our Metal Bearing Components Segment
employed 285 in the U.S., 732 in Europe and 134 in China; our Plastic and Rubber Components Segment employed
279, all in the U.S.; and our Precision Metal Components Segment employed 459, all in the U.S. In addition, there
were six employees at our corporate headquarters. Of our total employment, 17% are management/staff employees
and 83% are production employees. We believe we are able to attract and retain high quality employees because of
our quality reputation, technical expertise, history of financial and operating stability, attractive employee benefit
programs, and our progressive, employee-friendly working environment. The employees at the Pinerolo and
Veenendaal Plants are unionized. We have excellent employee relations throughout NN and we have never
experienced any significant involuntary work stoppages.
Competition
The Metal Bearing Components Segment of our business is intensely competitive. Our primary domestic competitor
is Hoover Precision Products, Inc., a wholly owned U.S. subsidiary of Tsubakimoto Precision Products Co. Ltd. Our
primary foreign competitors are Amatsuji Steel Ball Manufacturing Company, Ltd. (Japan), a wholly owned division
of NSK LTD., Tsubaki Nakashima Co., LTD (Japan) and Jiangsu General Ball and Roller Co., LTD (China).
We believe that competition within the Metal Bearing Components Segment is based principally on quality, price and
the ability to consistently meet customer delivery requirements. Management believes that our competitive strengths
are our precision manufacturing capabilities, our wide product assortment, our reputation for consistent quality and
reliability, our global manufacturing footprint and the productivity of our workforce.
The markets for the Plastic and Rubber Components Segment’s products are also intensely competitive. Since the
plastic injection molding industry is currently very fragmented, we must compete with numerous companies in each
industry market segment. Many of these companies have substantially greater financial resources than we do and
many currently offer competing products nationally and internationally. Our primary competitor in the plastic bearing
retainer market is Nakanishi Manufacturing Corporation. Domestically, Nypro, Inc. and C&J Industries are among
the main competitors in the precision plastic components markets.
We believe that competition within the plastic injection molding industry is based principally on quality, price, design
capabilities and speed of responsiveness and delivery. Management believes that our competitive strengths are
product development, tool design, fabrication, and tight tolerance molding processes. With these strengths, we have
built our reputation in the marketplace as a quality producer of technically difficult products.
While intensely competitive, the markets for our rubber seal products are less fragmented than our plastic injection
molding products. The bearing seal market is comprised of approximately six major competitors that range from
small privately held companies to large global enterprises. Bearing seal manufacturers compete on design, service,
quality and price. Our primary competitors in the U.S. bearing seal market are Freudenburg-NOK, Trelleborg,
Trostel, and Uchiyama.
In the Precision Metal Components Segment market, internal production of components by our customers can impact
our business as the customers weigh the risk of outsourcing strategically critical components or producing in-house.
Our primary outside competitors are Linamar, Stanadyne, A. Berger, C&A Tool, American Turned Products,
Camcraft and Autocam. We generally win new business on the basis of technical competence and our proven track
record of successful product development.
Raw Materials
The primary raw material used in our core ball and roller business of the Metal Bearing Components Segment is
52100 Steel, which is high quality chromium steel. Our other steel requirements include metal strip, stainless steel,
and type S2 rock bit steel.
The Metal Bearing Components Segment businesses purchase substantially all of their 52100 Steel requirements
from suppliers in Europe and Japan and all of their metal strip requirements from European suppliers and traders.
The principal suppliers of 52100 Steel for our U.S. businesses are Daido Steel (Japan), Kobe Steel (Japan), Lucchini
(affiliate of Ascometal France) and Ohio Star Forge Co. The principal suppliers of 52100 Steel for our European
6
businesses are Ascometal (France), Ovako, Kobe Steel (Japan) and Daido Steel (Japan) while the principal suppliers
of metal strip are Thyssen and Theis. If any of our current suppliers were unable to supply 52100 Steel to us, we
cannot provide assurances that we would not face higher costs or production interruptions as a result of obtaining
52100 Steel from alternate sources.
We purchase steel on the basis of composition, quality, availability and price. For precision steel balls, the pricing
arrangements with our suppliers are typically subject to adjustment every three to six months in the U.S. and
contractually adjusted on an annual basis within the European locations for the base steel price and quarterly for
surcharge adjustments. In general, we do not enter into written supply agreements with suppliers or commit to
maintain minimum monthly purchases of steel except for the year to year supply arrangement between Ascometal
and the European operations of our Metal Bearing Components Segment.
Because 52100 Steel is principally produced by non-U.S. manufacturers, our operating results would be negatively
affected in the event that the U.S. or European governments impose any significant quotas, tariffs or other duties or
restrictions on the import of such steel, if the U.S. Dollar decreases in value relative to foreign currencies or if
supplies available to us would significantly decrease. The value of the U.S. Dollar factors into the steel price as the
suppliers' base currencies are the Euro and Japanese Yen.
The Metal Bearing Components Segment has historically been affected by upward price pressure on steel principally
due to general increases in global demand and due to global increased consumption of steel. In general, we pass
through material cost fluctuations to our customers in the form of changes in selling price.
For the Plastic and Rubber Components Segment, we base purchase decisions on quality, service and price.
Generally, we do not enter into written supply contracts with our suppliers or commit to maintain minimum monthly
purchases of resins, rubber compounds or metal stampings.
The primary raw materials used by the Plastic and Rubber Components Segment are engineered resins, injection
grade nylon and proprietary rubber compounds. We purchase substantially all of our resin requirements from
domestic manufacturers and suppliers. The majority of these suppliers are international companies with resin
manufacturing facilities located throughout the world. We use certified vendors to provide a custom mix of
proprietary rubber compounds. This segment also procures metal stampings from several domestic and foreign
suppliers.
The Precision Metal Components Segment produces products from a wide variety of metals in various forms from
various sources. Basic types include hot rolled steel, cold rolled steel (both carbon and alloy), stainless, extruded
aluminum, die cast aluminum, gray and ductile iron castings, hot and cold forgings and mechanical tubing. Some
material is purchased directly under contracts, some is consigned by the customer, and some is purchased directly
from the steel mills.
Patents, Trademarks and Licenses
We do not own any U.S. or foreign patents, trademarks or licenses that are material to our business. We do rely on
certain data and processes, including trade secrets and know-how, and the success of our business depends, to some
extent, on such information remaining confidential. Each executive officer is subject to a non-competition and
confidentiality agreement that seeks to protect this information. Additionally, all employees are subject to company
ethics policies that prohibit the disclosure of information critical to the operations of our business.
Seasonal Nature of Business
Historically, due to a substantial portion of sales to European customers, seasonality has been a factor for our
business in that some European customers typically reduce their production activities during the month of August.
Environmental Compliance
Our operations and products are subject to extensive federal, state and local regulatory requirements both
domestically and abroad relating to pollution control and protection of the environment. We maintain a compliance
program to assist in preventing and, if necessary, correcting environmental problems. In the Metal Bearing
Components Segment, the Kysucke Plant, the Veenendaal Plant, the Pinerolo Plant and Kunshan Plant are ISO 14000
or 14001 certified and all received the EPD (Environmental Product Declaration), except for the Veenendaal Plant’s
7
stamped metal parts business. Based on information compiled to date, management believes that our current
operations are in substantial compliance with applicable environmental laws and regulations, the violation of which
could have a material adverse effect on our business and financial condition. We have assessed conditional asset
retirement obligations and have found them to be immaterial to the consolidated financial statements. We cannot
assure that currently unknown matters, new laws and regulations, or stricter interpretations of existing laws and
regulations will not materially affect our business or operations in the future. More specifically, although we believe
that we dispose of waste in material compliance with applicable environmental laws and regulations, we cannot be
certain that we will not incur significant liabilities in the future in connection with the clean-up of waste disposal
sites. We maintain long-term environmental insurance covering the four manufacturing locations purchased with the
Whirlaway acquisition (two of which have ceased operations). We are currently a potentially responsible party of a
remedial action at a former waste recycling facility used by us. See Item 3 and Note 15 of the Notes to Consolidated
Financial Statements.
Executive Officers of the Registrant
Our executive officers are:
Name
Roderick R. Baty
Frank T. Gentry, III
James H. Dorton
Age Position
58
56
55
Chairman of the Board, Chief Executive Officer and President
Senior Vice President – Managing Director, Metal Bearing Components
Senior Vice President – Corporate Development and Chief Financial Officer,
General Manager Plastic and Rubber Components
Thomas C. Burwell
William C. Kelly, Jr.
Jeffrey H. Hodge
James R. Widders
43 Vice President – Chief Accounting Officer and Corporate Controller
53 Vice President – Chief Administrative Officer, Secretary, and Treasurer
50 Vice President – General Manager, U.S. Ball and Roller and NN Asia Divisions
55 Vice President – General Manager, Precision Metal Components Division
Set forth below is certain additional information with respect to each of our executive officers.
Roderick R. Baty was elected Chairman of the Board in September 2001 and continues to serve as Chief Executive
Officer and President. He has served as President and Chief Executive Officer since July 1997. He joined NN in
July 1995 as Vice President and Chief Financial Officer and was elected to the Board of Directors in 1995. Prior to
joining NN, Mr. Baty served as President and Chief Operating Officer of Hoover Precision Products from 1990 until
January 1995, and as Vice President and General Manager of Hoover Group from 1985 to 1990.
Frank T. Gentry, III, was appointed Vice President – Managing Director Metal Bearing Components Division in
April 2009 and promoted to Senior Vice President in May 2010. Prior to that, Mr. Gentry was Vice President –
General Manager U.S. Ball and Roller Division from August 1995. Mr. Gentry joined NN in 1981 and held various
manufacturing management positions within NN from 1981 to August 1995.
James H. Dorton joined NN as Vice President of Corporate Development and Chief Financial Officer in June 2005.
In May 2010, he was promoted to Senior Vice President. In January 2012, Mr. Dorton assumed the additional
responsibility of General Manager of the Plastic and Rubber Components Segment of NN. Prior to joining NN, Mr.
Dorton served as Executive Vice President and Chief Financial Officer of Specialty Foods Group, Inc. from 2003 to
2004, Vice President Corporate Development and Strategy and Vice President – Treasurer of Bowater Incorporated
from 1996 to 2002 and as Treasurer of Intergraph Corporation from 1989 to 1996. Mr. Dorton is a Certified Public
Accountant.
Thomas C. Burwell joined NN as Corporate Controller in September 2005. He was promoted to Vice President Chief
Accounting Officer and Corporate Controller in 2011. Prior to joining NN, Mr. Burwell held various positions at
Coats, PLC from 1997 to 2005 ultimately becoming the Vice President of Finance for the U.S. Industrial Division.
From 1992 to 1997, Mr. Burwell held various positions at the international accounting firm BDO Seidman, LLP. Mr.
Burwell is a Certified Public Accountant.
William C. Kelly, Jr. was named Vice President and Chief Administrative Officer in June 2005. In March, 2003, Mr.
Kelly was elected to serve as Chief Administrative Officer. In March 1999, he was elected Secretary of NN and still
serves in that capacity as well as that of Treasurer. In February 1995, Mr. Kelly was elected Treasurer and Assistant
Secretary. He joined NN in 1993 as Assistant Treasurer and Manager of Investor Relations. In July 1994, Mr. Kelly
was elected to serve as NN’s Chief Accounting Officer, and served in that capacity through March 2003. Prior to
8
joining NN, Mr. Kelly served from 1988 to 1993 as a Staff Accountant and as a Senior Auditor with the accounting
firm of PricewaterhouseCoopers LLP.
Jeffrey H. Hodge joined NN in 1989 and has served various roles including Operations Manager, Plant Manager and
Corporate Manager of Level 3 (Lean Enterprise, Six Sigma, TPM) from 2003 to 2009 before accepting his current
role in 2009 as Vice President and General Manager of U.S. Ball & Roller and NN Asia Divisions. Prior to joining
NN, Mr. Hodge was a member of the U.S. military from 1985 to 1989.
James R. Widders was named Vice President and General Manager of the Precision Metal Components Division on
December 15, 2010. Mr. Widders had 13 years of service at Whirlaway prior to its acquisition by NN. Prior to
joining NN, he served as Vice President and General Manager at Technifab, Inc. a manufacturer of molded foam
components for the Aerospace industry and in various management positions with GE Superabrasives, a division of
General Electric.
Item 1A. Risk Factors
The following are risk factors that affect our business, financial condition, results of operations, and cash flows,
some of which are beyond our control. These risk factors should be considered in connection with evaluating the
forward-looking statements contained in this Annual Report on Form 10-K. If any of the events described below
were to actually occur, our business, financial condition, results of operations or cash flows could be adversely
affected and results could differ materially from expected and historical results.
A large portion of our capital structure is in the form of debt. As such, we continue to heavily rely on our current
lenders as a major source of long term capital.
We are dependent on the continued provision of financing from our revolving credit lenders and our senior notes
lenders for a major portion of our capital structure. As such we must continually meet our existing financial and non-
financial covenants or risk potentially default. In the event of default, the degree to which our current lenders and/or
potential future lenders will continue to lend to us will depend in large part on our results from operations and near
term business prospects at the time of the default.
A recession impacting both U.S. and Europe on automotive and industrial markets once again could have a
material adverse effect on our ability to finance our operations and implement our growth strategy.
During the three month period ended December 31, 2008 and the year ended December 31, 2009, we experienced a
sudden and significant reduction in customer orders driven by reductions in automotive and industrial end market
demand across all our businesses. Prior to this time, our company had never been affected by a recession that had
impacted both of our key geographic markets of the U.S. and Europe simultaneously. If we are impacted by a global
recession in the future, this could have a material adverse effect on our financial condition, results of operations and
cash flows from operations and could lead to additional restructuring and/or impairment charges being incurred.
However, we believe we would be in a much better position to weather any recession or economic downturn given
the actions taken to permanently reduce our cost base including closing or ceasing operations at four former
manufacturing locations.
The demand for our products is cyclical, which could adversely impact our revenues.
The end markets for fully assembled bearings and other industrial and automotive components are cyclical and tend
to decline in response to overall declines in industrial and automotive production. As a result, the market for bearing
components and precision metal, plastic, and rubber products is also cyclical and impacted by overall levels of
industrial and automotive production. Our sales in the past have been negatively affected, and in the future will be
negatively affected, by adverse conditions in the industrial and/or automotive production sectors of the economy or
by adverse global or national economic conditions generally. Additionally, inflation in oil and the resulting higher
gasoline prices could have a negative impact on demand for our products as a result of consumer and corporate
spending reductions.
9
We depend on a very limited number of foreign sources for our primary raw material and are subject to risks of
shortages and price fluctuation.
The steel that we use to manufacture our metal bearing components is of an extremely high quality and is available
from a limited number of producers on a global basis. Due to quality constraints in the U.S. steel industry, we obtain
substantially all of the steel used in our U.S. operations of our Metal Bearing Components Segment from non-U.S.
suppliers. In addition, we obtain most of the steel used in our European operations from a single European source. If
we had to obtain steel from sources other than our current suppliers, we could face higher prices and transportation
costs, increased duties or taxes, and shortages of steel. Problems in obtaining steel, particularly 52100 chrome steel,
in the quantities that we require and on commercially reasonable terms, could increase our costs, adversely impacting
our ability to operate our business efficiently and have a material adverse effect on our revenues and operating and
financial results.
Increases in the market demand for steel can have the impact of increasing scrap surcharges we pay in procuring our
steel in the form of higher unit prices and could adversely impact the availability of steel. Our commercial terms
with key customers allow us to pass along steel price fluctuations through changing the customers’ selling prices.
We depend heavily on a relatively limited number of customers, and the loss of any major customer would have a
material adverse effect on our business.
Sales to various U.S. and foreign divisions of SKF, one of the largest bearing manufacturers in the world, accounted
for approximately 38% of consolidated net sales in 2011. No other customers accounted for more than 10% of sales.
During 2011, sales to various U.S. and foreign divisions of our ten largest customers accounted for approximately
76% of our consolidated net sales. The loss of all or a substantial portion of sales to these customers would cause us
to lose a substantial portion of our revenue and would lower our operating profit margin and cash flows from
operations.
We operate in and sell products to customers outside the U.S. and are subject to several risks related to doing
business internationally.
Because we obtain a majority of our raw materials from overseas suppliers, actively participate in overseas
manufacturing operations and sell to a large number of international customers, we face risks associated with the
following:
adverse foreign currency fluctuations;
changes in trade, monetary and fiscal policies, laws and regulations, and other activities of
governments, agencies and similar organizations;
the imposition of trade restrictions or prohibitions;
a U.S. Federal Tax code that discourages the repatriation of funds to the U.S.;
the imposition of import or other duties or taxes; and
unstable governments or legal systems in countries in which our suppliers, manufacturing
operations, and customers are located.
We do not have a hedging program in place associated with consolidating the operating results of our foreign
businesses into U.S. Dollars. An increase in the value of the U.S. Dollar and/or the Euro relative to other currencies
may adversely affect our ability to compete with our foreign-based competitors for international, as well as domestic,
sales. Also, a change in the value of the Euro relative to the U.S. Dollar can negatively impact our consolidated
financial results, which are denominated in U.S. Dollars.
In addition, due to the typical slower summer manufacturing season in Europe, we expect that revenues in the third
fiscal quarter of each year will be lower than in the other quarters of the year.
10
Failure of our product could result in a product recall.
The majority of our products go into bearings used in the automotive industry and other critical industrial
manufacturing applications. A failure of our components could lead to a product recall. If a recall were to happen as
a result of our components failing, we could bear a substantial part of the cost of correction. In addition to the cost of
fixing the parts affected by the component, a recall could result in the loss of a portion of or all of the customers’
business. To partially mitigate these risks, we carry limited product recall insurance and have invested heavily in the
TS16949 quality program.
The costs and difficulties of integrating acquired business could impede our future growth.
We cannot assure you that any future acquisition will enhance our financial performance. Acquiring companies
involves inherent risk in the areas of environmental and legal issues, information technology, cultural and regulatory
matters, product/supplier issues, and financial risk. Our ability to effectively integrate any future acquisitions will
depend on, among other things, the adequacy of our implementation plans, the ability of our management to oversee
and operate effectively the combined operations and our ability to achieve desired operating efficiencies and sales
goals. The integration of any acquired businesses might cause us to incur unforeseen costs, which would lower our
profit margin and future earnings and would prevent us from realizing the expected benefits of these acquisitions.
We may not be able to continue to make the acquisitions necessary for us to realize our future growth strategy.
Acquiring businesses that complement or expand our operations has been and continues to be an important element
of our business strategy. This strategy calls for growth through acquisitions constituting a portion of our future
growth objectives, with the remainder resulting from organic growth and increased market penetration. We cannot
assure you that we will be successful in identifying attractive acquisition candidates or completing acquisitions on
favorable terms in the future. In addition, we may borrow funds to acquire other businesses, increasing our interest
expense and debt levels. Our inability to acquire businesses, or to operate them profitably once acquired, could have
a material adverse effect on our business, financial position, results of operations and cash flows. Our borrowing
agreements limit our ability to complete acquisitions without prior approval of our lenders.
Our growth strategy depends in part on companies outsourcing critical components, and if outsourcing does not
continue, our business could be adversely affected.
Our growth strategy depends in part on major customers continuing to outsource components and expanding the
number of components being outsourced. This requires manufacturers to depart significantly from their traditional
methods of operations. If major customers do not continue to expand outsourcing efforts or determine to reduce their
use of outsourcing, our ability to grow our business could be materially adversely affected.
Our market is highly competitive and many of our competitors have significant advantages that could adversely
affect our business.
The global markets for precision bearing components, precision metal components and plastic and rubber
components are highly competitive, with a majority of production represented by the captive production operations of
large manufacturers and the balance represented by independent manufacturers. Captive manufacturers make
components for internal use and for sale to third parties. All of the captive manufacturers, and many independent
manufacturers, are significantly larger and have greater resources than we do. Our competitors are continuously
exploring and implementing improvements in technology and manufacturing processes in order to improve product
quality, and our ability to remain competitive will depend, among other things, on whether we are able to keep pace
with such quality improvements in a cost effective manner.
Our production capacity has been expanded geographically in recent years to operate in the same markets as our
customers.
We have expanded our metal bearing components production facilities and capacity over the last several years.
Historically, metal bearing component production facilities have not always operated at full capacity. Over the past
several years, we have undertaken steps to address a portion of the capacity risk including closing or ceasing
operations at certain plants and downsizing employment levels at others. As such, the risk exists that our customers
may exit the geographic markets in which our production capacity is located and/or develop vendors in lower cost
countries in which we do not have production capacity.
11
The price of our common stock may be volatile.
The market price of our common stock could be subject to significant fluctuations and may decline. Among the
factors that could affect our stock price are:
economic recession or other macro-economic factors;
our operating and financial performance and prospects;
quarterly variations in the rate of growth of our financial indicators, such as earnings (loss) per share,
net income (loss) and revenues;
changes in revenue or earnings estimates or publication of research reports by analysts;
loss of any member of our senior management team;
speculation in the press or investment community;
strategic actions by us or our competitors, such as acquisitions or restructurings;
sales of our common stock by stockholders;
general market conditions;
domestic and international economic, legal and regulatory factors unrelated to our performance;
loss of a major customer; and
ability to declare and pay a dividend.
The stock markets in general have experienced extreme volatility that has often been unrelated to the operating
performance of particular companies. These broad market fluctuations may adversely affect the trading price of our
common stock. In addition, due to the market capitalization of our stock, our stock tends to be more volatile than
large capitalization stocks that comprise the Dow Jones Industrial Average or Standard and Poor’s 500 Index.
Provisions in our charter documents and Delaware law may inhibit a takeover, which could adversely affect the
value of our common stock.
Our certificate of incorporation and bylaws, as well as Delaware corporate law, contain provisions that could delay or
prevent a change of control or changes in our management that a stockholder might consider favorable and may
prevent shareholders from receiving a takeover premium for their shares. These provisions include, for example, a
classified board of directors and the authorization of our board of directors to issue up to 5.0 million preferred shares
without a stockholder vote. In addition, our restated certificate of incorporation provides that stockholders may not
call a special meeting.
We are a Delaware corporation subject to the provisions of Section 203 of the Delaware General Corporation Law, an
anti-takeover law. Generally, this statute prohibits a publicly-held Delaware corporation from engaging in a business
combination with an interested stockholder for a period of three years after the date of the transaction in which such
person became an interested stockholder, unless the business combination is approved in a prescribed manner. A
business combination includes a merger, asset sale or other transaction resulting in a financial benefit to the
stockholder. We anticipate that the provisions of Section 203 may encourage parties interested in acquiring us to
negotiate in advance with our board of directors, because the stockholder approval requirement would be avoided if a
majority of the directors then in office approve either the business combination or the transaction that results in the
stockholder becoming an interested stockholder.
These provisions apply even if the offer may be considered beneficial by some of our stockholders. If a change of
control or change in management is delayed or prevented, the market price of our common stock could decline.
12
In addition, during 2008 we adopted a shareholder’s rights plan, which expired in December 2011, intended to deter
coercive or unfair takeover tactics and prevent an acquirer from gaining control of the company at less than fair
value. The plan gave existing shareholders the right to purchase Junior Participating Preferred Stock of the Company
once and only if the acquirer obtained 15% of our common stock.
Item 1B. Unresolved Staff Comments
None
Item 2.
Properties
The manufacturing plants for each of our segments are listed below. In addition, we lease a portion of a small office
building in Johnson City, Tennessee which serves as our corporate offices.
Metal Bearing Components Segment
Manufacturing Operation
Erwin Plant
Mountain City Plant
Kilkenny Plant (non-operating)
Pinerolo Plant
Kysucke Plant
Veenendaal Plant
Kunshan Plant Phase I
Kunshan Plant Phase II (not yet
in operation)
Country
U.S.A.
U.S.A.
Ireland
Italy
Slovakia
The Netherlands
China
China
Approximate
Sq. Feet
125,000
86,000
125,000
330,000
135,000
159,000
110,000
75,000
Owned or Leased
Owned
Owned
Owned
Owned
Owned
Owned
Leased
Leased
The Kunshan Plant leases are accounted for as a capital lease and we have an option to purchase the facilities at
various points in the future. Production at the Kilkenny Plant ceased on February 6, 2009 and was moved to other
European Metal Bearing Components operations. The Kilkenny property is being made ready for sale with any
expected sale to occur later than a year from the date of this report. As such, the property is still considered to be
held and used for which the carrying value at December 31, 2011 approximates its fair value.
Plastic and Rubber Components Segment
Manufacturing Operation
Danielson Plant
Lubbock Plant
Precision Metal Components Segment
Manufacturing Operation
Wellington Plant 1
Wellington Plant 2
Country
U.S.A.
U.S.A.
Country
U.S.A.
U.S.A.
Approximate
Sq. Feet
50,000
228,000
Owned or Leased
Owned
Owned
Approximate
Sq. Feet
86,000
132,000
Owned or Leased
Leased
Leased
The Wellington Plants are leased from a company controlled by the former owner of Whirlaway Corporation, who
was an officer of NN until September 1, 2011 (see Note 20 of the Notes to Consolidated Financial Statements).
For more information, please see "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
Item 3.
Legal Proceedings
During 2006, we received correspondence from the Environmental Protection Agency (“EPA”) requesting
information regarding a former waste recycling vendor ("AER") used by our former Walterboro, South Carolina
facility. AER, located in Augusta, Georgia, ceased operations in 2000 and EPA began investigating its facility. As a
13
result of AER’s operations, soil and groundwater became contaminated. EPA initially contacted fifty-four other
companies (“Potentially Responsible Parties” or “PRPs”) who also sent waste to AER. Most of these PRPs,
including us, have entered into a consent order with EPA to investigate and remediate the site proactively. To date,
the PRP Group has submitted a Remedial Investigation, which has been accepted by EPA. In addition, a Feasibility
Study has been tentatively approved by EPA. The costs associated with the chosen remediation are estimated to be
approximately $10 million of which our allocated share is approximately $0.1 million which has been fully accrued
for as of December 31, 2011. While there can be no assurances, we believe that the $0.1 million is the maximum
amount for which we will be liable under the tentatively accepted remediation plan.
Due to the impacts of the global economic recession and the resulting reduction in revenue and operating losses, our
wholly owned German subsidiary Kugelfertigung Eltmann GbmH (“Eltmann” or “Eltmann Plant”) sustained a
significant weakening of its financial condition. As a result, it became technically insolvent at which point it was
required to file for bankruptcy under German bankruptcy law. The filing was made in the bankruptcy court in
Germany on January 20, 2011. As of this date, NN lost the ability to control or manage Eltmann as a result of the
bankruptcy court trustee taking over effective control and day to day management of this subsidiary. As a result of
loss of control this subsidiary, NN deconsolidated the assets and liabilities of Eltmann on our Consolidated Financial
Statements effective January 20, 2011. The ultimate impact on NN of Eltmann filing for bankruptcy will depend on
the findings of the bankruptcy court. However, until such court proceedings are finalized, we will not be able to
determine what liabilities and contingent obligations, if any, might remain as the responsibility of NN. (See Note 1
of Notes to Consolidated Financial Statements).
All of our other legal proceedings are of an ordinary and routine nature and are incidental to our operations.
Management believes that such proceedings should not, individually or in the aggregate, have a material adverse
effect on our business, financial condition, results of operations, or cash flows.
Item 4. Mine Safety Disclosures
Not applicable
Part II
Item 5.
Market for the Registrant's Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities
Our common stock is traded on The NASDAQ Stock Market LLC (“NASDAQ”) under the trading symbol “NNBR.”
As of March 9, 2012, there were approximately 3,500 holders of the common stock and the closing per share stock
price as reported by NASDAQ was $8.44.
The following table sets forth the high and low closing sales prices of the common stock, as reported by NASDAQ.
We did not pay any dividends on the common stock during 2011 and 2010.
Close Price
High
Low
2011
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
2010
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
$ 18.53
19.01
16.16
9.06
$ 5.50
7.32
8.88
12.52
$ 11.81
12.62
5.05
4.71
$ 3.25
5.00
4.46
8.03
14
The following graph compares the cumulative total shareholder return on our common stock (consisting of stock
price performance and reinvested dividends) from December 31, 2006 with the cumulative total return (assuming
reinvestment of all dividends) of (i) the Value Line Machinery Index (“Machinery”) and (ii) the Standard & Poor’s
500 Stock Index, for the period December 31, 2006 through December 31, 2011. The Machinery index is an industry
index comprised of 49 companies engaged in manufacturing of machinery and machine parts, a list of which is
available from the Company. The comparison assumes $100 was invested in our common stock and in each of the
foregoing indices on December 31, 2006. We cannot assure you that the performance of the common stock will
continue in the future with the same or similar trend depicted on the graph.
Comparison of Five-Year Cumulative Total Return*
NN, Inc., Standard & Poors 500 and Value Line Machinery Index
(Performance Results Through 12/31/11)
*Cumulative total return assumes reinvestment of dividends.
NN, Inc.
Standard & Poors 500
Machinery
12/31/2007
78.07
105.49
142.51
12/31/2008
19.34
66.46
82.67
12/31/2009
33.44
84.04
130.02
12/31/2010
104.38
96.70
216.23
12/31/2011
50.68
98.74
246.13
Cumulative Return
The declaration and payment of dividends are subject to the sole discretion of our Board of Directors and depend
upon our profitability, financial condition, capital needs, credit agreement restrictions, future prospects and other
factors deemed relevant by the Board of Directors. During the fourth quarter of 2008, we suspended our historic
quarterly dividend in order to enhance our liquidity due to the global recession. As of the date of this report, no
dividend has been reinstated by our Board of Directors.
See Part III, Item 12 – “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters” of this 2011 Annual Report on Form 10-K for information required by Item 201 (d) of Regulation S-K.
15
Item 6.
Selected Financial Data
The following selected financial data has been derived from our audited financial statements. The selected financial
data should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results
of Operations” and the audited consolidated financial statements, including notes thereto.
(In Thousands, Except Per Share Data)
Year ended December 31,
Statement of Income Data:
Net sales
Cost of products sold (exclusive of
depreciation shown separately below)
Selling, general and administrative
Depreciation and amortization
(Gain) loss on disposal of assets
Impairment of goodwill
Restructuring and impairment charges,
excluding goodwill impairment
Income (loss) from operations
Interest expense
Write-off of unamortized debt issuance cost
Other income, net
Income (loss) before provision (benefit) for
income taxes
Provision (benefit) for income taxes
Net income (loss)
Basic income (loss) per share:
Net income (loss)
Diluted income (loss) per share:
Net income (loss)
Dividends declared
Weighted average number of shares
outstanding - Basic
Weighted average number of shares
outstanding – Diluted
2011
2010
2009
2008
2007
$ 424,691 $ 365,369
$ 259,383
$ 424,837
$ 421,294
347,622
30,657
17,016
(36)
--
--
29,432
4,715
--
(1,388)
296,422
30,407
19,195
808
--
2,289
16,248
6,815
130
(1,682)
235,466
27,273
22,186
493
--
4,977
(31,012)
6,359
604
(351)
344,685
36,068
27,981
(4,138)
30,029
12,036
(21,824)
5,203
--
(850)
337,024
36,473
22,996
(71)
10,016
3,620
11,236
6,373
--
(386)
26,105
5,168
$ 20,937
10,985
4,569
$ 6,416
(37,624)
(2,290)
$ (35,334)
(26,177)
(8,535)
$ (17,642)
5,249
6,422
$ (1,173)
$ 1.24
$ 0.39
$ (2.17)
$ (1.11)
$ (0.07)
$ 1.24
$ 0.39
$ (2.17)
$ (1.11)
$ (0.07)
$ 0.00
$ 0.00
$ 0.00
$ 0.24
$ 0.32
16,817
16,455
16,268
15,895
16,749
16,953
16,570
16,268
15,895
16,749
16
(In Thousands)
Balance Sheet Data:
Current assets
Current liabilities
Total assets
Long-term debt
Stockholders' equity
As of December 31,
2011
2010
2009
2008
2007
$ 124,025
$ 115,670
$ 98,283
$ 124,621
$ 138,024
73,041
83,587
68,489
63,355
84,256
259,461
248,555
242,652
284,040
350,078
71,629
67,643
99,676
78,107
77,558
76,803
90,172
100,193
109,759
130,043
During the year ended December 31, 2011, the results were impacted by certain items including $5.0 million in
additional start-up costs from new multi-year sales programs (all in our Precision Metals Components Segment) and
$0.8 million in a one-time tax benefit from removing valuation allowances on certain deferred tax assets in Europe.
See “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for more
information.
During the year ended December 31, 2010, the results were impacted by certain items including $4.5 million from
NN ceasing operations at the Tempe plant, $3.0 million in start-up costs from new multi-year sales programs (both in
our Precision Metals Components Segment) and $1.1 million in costs related to the elimination of certain senior
management positions. See “Management’s Discussion and Analysis of Financial Condition and Results of
Operations” for more information.
For the year ended December 31, 2009, the operating results were significantly impacted by the effects of the global
recession and related destocking by our customers as our sales decreased 37%, excluding foreign exchange effects,
from the year ended December 31, 2008. Additionally, we incurred $5.0 million in restructuring and impairment
charges related to two plant closures and a reduction in force at another manufacturing location. See “Management’s
Discussion and Analysis of Financial Condition and Results of Operations” for more information.
For the year ended December 31, 2008, goodwill, certain intangible assets, and certain tangible assets were subject to
impairment charges of $38,371 ($24,402 after tax). In addition, restructuring charges of $2,247 ($2,247 after tax)
and impairment charges of $1,447 ($1,447 after tax) on long lived assets were recorded related to the closure of the
Kilkenny Plant. Finally, 2008 benefited from the sale of excess land resulting in a gain of $4,018 ($2,995 after tax).
For the year ended December 31, 2007, Whirlaway added $62,662 in sales; $53,515 in cost of products sold
(exclusive of depreciation and amortization); $4,106 in selling, general and administrative expenses; $3,991 in
depreciation and amortization; $2,406 in interest expense and $852 in net loss.
Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations
The following discussion should be read in conjunction with, and is qualified in its entirety by, the Consolidated
Financial Statements and the Notes thereto and Selected Financial Data included elsewhere in this Form 10-K.
Historical operating results and percentage relationships among any amounts included in the Consolidated Financial
Statements are not necessarily indicative of trends in operating results for any future period.
Risk Factors
See Item 1A. “Risk Factors” for a discussion of risk factors that could materially impact our actual results.
17
Overview and Management Focus
Our strategy and management focus is based upon the following long-term objectives:
Growth from taking over the in-house (captive) production of components from our global customers by
providing a competitive and attractive outsourcing alternative
Organic and acquisitive growth of our precision metal components platform
Global expansion of our manufacturing base to better address the global requirements of our customers
Management generally focuses on these trends and relevant market indicators:
Global industrial growth and economics
Global automotive production rates
Costs subject to the global inflationary environment, including, but not limited to:
o Raw material
o Wages and benefits, including health care costs
o Regulatory compliance
o Energy
Raw material availability
Trends related to the geographic migration of competitive manufacturing
Regulatory environment for United States public companies
Currency and exchange rate movements and trends
Interest rate levels and expectations
Management generally focuses on the following key indicators of operating performance:
Sales growth
Cost of products sold
Selling, general and administrative expense
Net income (loss)
Cash flow from operations and capital spending
Customer service reliability
External and internal quality indicators
Employee development
18
Critical Accounting Policies
Our significant accounting policies, including the assumptions and judgment underlying them, are disclosed in Note 1
of the Notes to Consolidated Financial Statements. These policies have been consistently applied in all material
respects and address such matters as revenue recognition, inventory valuation, asset impairment recognition, and
business combination accounting. Due to the estimation processes involved, management considers the following
summarized accounting policies and their application to be critical to understanding our business operations, financial
condition and results of operations. We cannot assure you that actual results will not significantly differ from the
estimates used in these critical accounting policies.
Revenue Recognition. We recognize revenues based on the stated shipping terms with the customer when these
terms are satisfied and the risks of ownership are transferred to the customer. We have an inventory management
program for certain major Metal Bearing Components Segment customers whereby revenue is recognized when
products are used by the customer from consigned stock, rather than at the time of shipment. Under both
circumstances, revenue is recognized when persuasive evidence of an arrangement exists, delivery has occurred, the
sellers’ price is determinable and collectability is reasonably assured.
Accounts Receivable. Accounts receivable are recorded upon recognition of a sale of goods and ownership and risk
of loss is assumed by the customer. Substantially all of our accounts receivables are due primarily from the core
served markets. In establishing allowances for doubtful accounts, we perform credit evaluations of our customers,
considering numerous inputs when available including the customers’ financial position, past payment history,
relevant industry trends, cash flows, management capability, historical loss experience and economic conditions and
prospects. Accounts receivable are written off or reserves established when considered to be uncollectible or at risk
of being uncollectible. We believe that adequate allowances for doubtful accounts have been provided in the
Consolidated Financial Statements. However, it is possible that we could experience additional unexpected credit
losses.
Inventories. Inventories are stated at the lower of cost or market. Cost is determined using the first-in, first-out
method. Inventory valuations are developed using normalized production capacities for each of our manufacturing
locations. Abnormal variances from excess capacity or under-utilization of fixed production overheads are expensed
in the period incurred. Our inventories are not generally subject to obsolescence due to spoilage or expiring product
life cycles. We assess inventory obsolescence routinely and record a reserve when inventory items are deemed non
recoverable in future periods. We operate generally as a make-to-order business; however, we also stock products for
certain customers in order to meet delivery schedules. While management believes that adequate write-downs for
inventory obsolescence have been made in the Consolidated Financial Statements, we could experience additional
inventory write-downs in the future.
Goodwill and Acquired Intangibles. For new acquisitions, we use estimates, assumptions and appraisals to allocate
the purchase price to the assets acquired and to determine the amount of goodwill. These estimates are based on
market analyses and comparisons to similar assets. Annual procedures are required to be performed to assess
whether recorded goodwill is impaired. The annual tests require management to make estimates and assumptions
with regard to the future operations of its reporting units, and the expected cash flows that they will generate. These
estimates and assumptions could impact the recorded value of assets acquired in a business combination, including
goodwill, and whether or not there is any subsequent impairment of the recorded goodwill and the amount of such
impairment.
Goodwill is tested for impairment on an annual basis as of October 1 and between annual tests if a triggering event
occurs. The impairment procedures are performed at the reporting unit level for the one unit that still has goodwill.
In September 2011, the FASB issued a revised accounting standard, which is intended to reduce the cost and
complexity of the annual goodwill impairment test by providing entities an option to perform a “qualitative”
assessment to determine whether further impairment testing is necessary. Specifically, an entity has the option to first
assess qualitative factors to determine whether it is necessary to perform the current two-step test. If an entity
believes, as a result of its qualitative assessment, that it is more-likely-than-not that the fair value of a reporting unit is
less than its carrying amount, the quantitative impairment test is required. Otherwise, no further testing is required.
This standard is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after
December 15, 2011 with early adoption permitted. We are adopting this standard in the fourth quarter of 2011
concurrent with our annual impairment test. In assessing the qualitative factors, we considered the impact of the
following key factors and their effect on the reporting unit, budget to actual performance, economic, market and
industry considerations, earnings multiples and cash flow from operations. Based on this qualitative assessment
19
considering prior year results and current operating performance we determined it was more likely than not that the
fair value of the reporting unit exceeded the carrying value of the reporting unit.
If the qualitative assessment indicates it is more likely than not that the fair value is less than the carrying value, U.S.
GAAP prescribes a two-step process for testing for goodwill impairments. The first step is to determine if the
carrying value of the reporting unit with goodwill is less than the related fair value of the reporting unit. We
determine the fair value of the reporting unit through use of discounted cash flow methods and market based
multiples of earning and sales methods obtained from a grouping of comparable publicly trading companies. We
believe this methodology of valuation is consistent with how market participants would value reporting units. The
discount rate and market based multiples used are specifically developed for the units tested regarding the level of
risk and end markets served. Even though we do use other observable inputs (Level 2 inputs under the US GAAP
hierarchy) the calculation of fair value for goodwill would be most consistent with Level 3 under the US GAAP
hierarchy.
If the carrying value of the reporting unit is less than fair value of the reporting unit, the goodwill is not considered
impaired. If the carrying value is greater than fair value then the potential for impairment of goodwill exists. The
potential impairment is determined by allocating the fair value of the reporting unit among the assets and liabilities
based on a purchase price allocation methodology as if the reporting unit was acquired in a business combination.
The fair value of the goodwill is implied from this allocation and compared to the carrying value with an impairment
loss recognized if the carrying value is greater than the implied fair value.
Our indefinite lived intangible asset is accounted for similarly to goodwill. This asset is tested for impairment at least
annually by comparing the fair value to the carrying value, using the relief from royalty rate method, and if the fair
value is less than the carrying value, an impairment charge is recognized for the difference.
Income taxes. Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities
are recognized for the future tax consequences attributable to differences between the financial statement carrying
amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carry
forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income
in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
(See Note 13 of the Notes to Consolidated Financial Statements).
Impairment of Long-Lived Assets. Our long-lived assets include property, plant and equipment. The
recoverability of the long-term assets is dependent on the performance of the companies which we have acquired or
built, as well as the performance of the markets in which these companies operate. In assessing potential impairment
for these assets, we will consider these factors as well as forecasted financial performance based, in large part, on
management business plans and projected financial information which are subject to a high degree of management
judgment and complexity. Future adverse changes in market conditions or adverse operating results of the
underlying assets could result in having to record additional impairment charges not previously recognized. (See
Note 6 of the Notes to Consolidated Financial Statements).
20
Results of Operations
The following table sets forth for the periods indicated selected financial data and the percentage of our net sales
represented by each income statement line item presented.
Net sales
Cost of product sold (exclusive of depreciation shown
As a Percentage of Net Sales
Year ended December 31,
2011
2010
2009
100.0%
100.0%
100.0%
separately below)
81.9
81.1
Selling, general and administrative expenses
Depreciation and amortization
(Gain) loss on disposal of assets
Restructuring and impairment charges
Income (loss) from operations
Interest expense
7.2
4.0
0.0
0.0
6.9
1.1
8.3
5.3
0.2
0.6
4.5
1.9
Other (income) expense
Income (loss) before provision (benefit) for income
taxes
Provision (benefit) for income taxes
(0.3)
(0.5)
6.1
1.2
3.1
1.3
90.8
10.5
8.6
0.2
1.9
(12.0)
2.4
0.1
(14.5)
(0.9)
Net income (loss)
Sales Concentration
4.9%
1.8%
(13.6%)
Sales to various U.S. and foreign divisions of SKF, one of the largest bearing manufacturers in the world, accounted
for approximately 38% of consolidated net sales in 2011. During 2011, sales to various U.S. and foreign divisions of
our ten largest customers accounted for approximately 76% of our consolidated net sales. None of our other
customers individually accounted for more than 10% of our consolidated net sales for 2011. The loss of all or a
substantial portion of sales to these customers would cause us to lose a substantial portion of our revenue and have a
corresponding negative impact on our operating profit margin due to the operational leverage these customers
provide. This could lead to sales volumes not being high enough to cover our current cost structure or to provide
adequate operating cash flows or cause us to incur additional restructuring and/or impairment costs. Due to a limit on
the amount of excess bearing component production capacity in the markets we serve, we believe it would be
difficult for any of our top ten customers to take a significant portion of our business away in the short term.
21
Year Ended December 31, 2011 Compared to the Year Ended December 31, 2010.
OVERALL RESULTS
(In Thousands of Dollars)
Net sales
Foreign exchange effects
Volume
Price
Mix
Material inflation pass-through
Cost of products sold (exclusive of depreciation
shown separately below)
Foreign exchange effects
Volume
Cost reduction projects
Mix
Inflation
New sales program start-up costs and other
specific costs
Selling, general and administrative
Foreign exchange effects
Increase in spending
Severance costs incurred during 2010
Depreciation and amortization
Foreign exchange effects
Accelerated depreciation incurred during 2010
Elimination of depreciation expense on fully
depreciated assets, net of new assets placed in
service
Restructuring and impairment charges
Interest expense
(Gain)/Loss on disposal of assets
Write off of unamortized debt issue cost
Other income, net
Income before provision for income taxes
Provision for income taxes
Net income
Consolidated NN, Inc.
2011
$ 424,691
2010
$ 365,369
Change
$ 59,322
11,066
34,886
5,376
(4,157)
12,151
8,714
24,023
(9,331)
1,121
14,908
11,765
562
935
(1,247)
436
(1,000)
(1,615)
347,622
296,422
51,200
30,657
30,407
250
17,016
19,195
(2,179)
--
4,715
(36)
--
(1,388)
26,105
5,168
$ 20,937
2,289
6,815
808
130
(1,682)
10,985
4,569
(2,289)
(2,100)
(844)
(130)
294
15,120
599
$ 6,416 $ 14,521
Net Sales. Net sales increased from 2011 to 2010 due primarily to sales growth in the customer end markets we
serve. Both automotive and industrial end markets have experienced strong year over year sales growth due to the
overall macro-economic growth and higher consumer demand. Additionally, sales increased due to the appreciation
in value of Euro denominated sales. The increase in sales due to price was the result of targeted price increases to
our customers across all businesses and product lines. The increase in sales from material inflation pass-through was
due to increasing sales prices to our customers to recover actual material inflation incurred during 2011.
Cost of Products Sold (exclusive of depreciation). A large portion of the increase was due to the same sales volume
increases discussed above. Cost of products sold was impacted more so by inflation on material, labor and
manufacturing supplies in 2011 than in 2010 or 2009 due to increased global demand. Additionally, cost of products
sold increased from the appreciation in value of Euro denominated costs. Cost of products sold increased $5.0 million
due to additional production inefficiencies and incurred costs, over those levels experienced in 2010, from starting up
production on new multi-year sales programs at our Precision Metal Components Segment (discussed below).
Additionally, cost of products sold increased due to specific costs added during 2011 for incentive compensation and
compensation related costs (especially medical and workers compensation costs), and from higher levels of spending
on scheduled repairs and maintenance and for manufacturing supplies. During 2010, spending was depressed in these
areas due to the global recession. Finally, there were various one time benefits during 2010 related to labor
concessions and credits from a material supplier in Europe that did not repeat in 2011.
22
During 2011, our cost of products sold as a percentage of sales was 81.9%, which is slightly higher than our historical
range. The higher cost of products sold was due to operational inefficiencies related to the new sales program start-
ups and additional specific costs mentioned above.
Selling, General and Administrative. Selling, general and administrative expenses increased in part due to the
appreciation in value of Euro denominated costs as compared to 2010. The increase in spending in selling, general
and administrative expenses was due to the addition of incentive compensation that was not in place during 2010 and
from the addition of certain key positions at our Precision Metal Components Segment to support growth in this
business. Finally, during 2010, we incurred $1.2 million in severance costs, which did not repeat in 2011, related to
permanent administrative cost savings.
Depreciation and Amortization. A large portion of the decrease in depreciation and amortization expense was due to
the accelerated depreciation of $1.0 million during 2010 on certain fixed assets at our Tempe Plant ,which did not
repeat during 2011, and the elimination of the Tempe Plant depreciation from the 2011 expense due to ceasing
operations in August 2010. Depreciation expense was further reduced due to certain assets, which are still in use, at
our Pinerolo Plant becoming fully depreciated from the second quarter of 2010 onward. Finally, the elimination of
the Eltmann Plant depreciation due to deconsolidation of that unit and no longer incurring amortization expense on a
customer contract intangible asset after 2010 further reduced the 2011 expense. Partially offsetting these favorable
effects was the impact on depreciation of capital expenditures that were placed in service during 2011.
Interest Expense. Interest expense was lower primarily due to decreases in the interest rate spread charged on our
LIBOR credit facility and our senior notes partially offset by higher overall debt levels during 2011. These savings
were achieved under the new credit agreements entered into on December 21, 2010 and September 30, 2011.
Restructuring and impairment charges. During the year ended December 31, 2010, we incurred $2.0 million in
restructuring charges related to ceasing operations at our Tempe Plant and $0.3 million in impairment charges related
to the production equipment at our Eltmann Plant. These charges did not repeat during 2011. (See Note 2 of the
Notes to Consolidated Financial Statements).
Other income, net. Included in other income, net, during 2011, was $0.9 million related to foreign exchange gains on
inter-company loans which was lower than the $1.4 million in foreign exchange gains on inter-company loans
incurred in 2010. The gains are a function of the change in valuation of the Euro versus the U.S. Dollar.
Provision for income taxes. For the twelve months ended December 31, 2011 and 2010, the difference between the
effective tax rates of 20% and 42%, respectively, was mainly due to not recognizing tax benefits on the Tempe Plant
closure costs and other incurred losses in the U.S. due to existing deferred tax valuation allowances in 2010.
Additionally, in 2011 we recognized tax benefits related to the Eltmann deconsolidation of $0.6 million and income
tax expense was lowered by the elimination of valuation allowances on certain deferred tax assets totaling $0.8
million in Europe. (See Note 13 of the Notes to Consolidated Financial Statements).
RESULTS BY SEGMENT
METAL BEARING COMPONENTS SEGMENT
(In Thousands of Dollars)
Net sales
Foreign exchange effects
Volume
Price
Mix
Material inflation pass-through
Year ended
December 31,
2010
Change
2011
$ 308,883
$ 271,339
$ 37,544
11,066
16,664
3,451
(4,156)
10,519
Segment net income
$ 30,360
$ 24,910
$ 5,450
23
The sales volume increase in our Metal Bearings Components Segment has been in our U.S. and Asian based
businesses. Sales volumes were more robust in the first half of 2011 with the second half witnessing sales reductions
due to softening demand in Europe.
The segment net income was impacted primarily by the increase in sales volume and the related production
efficiencies and leveraging of fixed production costs. Additionally, the achieved price increases in 2011 had a
significant impact on segment net income. Finally, the segment results were favorably impacted by the
implementation of planned cost reduction projects. The 2010 segment net income included $1.2 million in after-tax
foreign exchange gains on certain inter-company loans as discussed above that were not included in 2011 segment
net income.
PRECISION METAL COMPONENTS SEGMENT
(In Thousands of Dollars)
Net sales
Volume
Price/Mix
Material inflation pass-through
Year ended
December 31,
2011
2010
Change
$ 72,272
$ 54,913
$ 17,359
15,671
1,310
378
Segment net loss
$ (3,143)
$ (8,922)
$ 5,779
The majority of the increase in sales at this segment was due to the addition of new multi-year sales programs in
2011. Partially offsetting the volume increases from the new sales programs was volume lost due to ceasing
operations at the Tempe Plant during the third quarter of 2010.
The segment net loss was lower in 2011 due to benefits from increased sales volumes and price increases during
2011. Additionally, $4.5 million in Tempe plant closure related costs that were incurred in 2010 did not repeat
during 2011. Partially offsetting these favorable effects was $5.0 million in additional operational inefficiencies and
incurred costs during 2011, over those levels experienced in 2010, related to ramping up production for new large
multi-year sales programs. During the third and fourth quarters of 2011, we achieved reductions in start-up costs on
the major sales programs from the levels experienced during the fourth quarter of 2010 and first half of 2011.
PLASTIC AND RUBBER COMPONENTS SEGMENT
(In Thousands of Dollars)
Net sales
Volume
Price/Mix
Material inflation pass-thru
Year ended
December 31,
2011
2010
Change
$ 43,536
$ 39,117
$ 4,419
2,550
615
1,254
Segment net income
$ 1,919
$ 2,504
$ (585)
The volume increase for this segment was related to increased U.S. automotive end market demand as the economy
and consumer demand has returned to more normalized levels. The majority of the increases in price are from
passing through material inflation to customers which provided minimal impact to net income.
The decrease in segment net income was from operational inefficiencies due to starting-up a new sales program
which more than offset the favorable benefit that resulted from the increase in sales volume.
24
Year Ended December 31, 2010 Compared to the Year Ended December 31, 2009.
Economic Impacts on the Twelve Month Period ended December 31, 2010.
During the year ended December 31, 2010, sales showed significant improvement from the dramatic reductions
witnessed during the year ended December 31, 2009 due to the worldwide recession. Sales increased 45% during the
year ended December 31, 2010 from year ended December 31, 2009, excluding the effects of foreign currency
exchange rates.
We believe the increase in sales that occurred during 2010 was due both to customers adopting more normalized
ordering patterns and increased demand in the end markets we serve. We believe that during 2009 demand for our
products had decreased more than actual demand in the end markets we serve. We referred to this as the “de-
stocking effect” and believed it was due to reduction in overall inventory levels throughout the supply chains we
serve. We are uncertain to what extent the change of overall stock levels within the supply chains had on 2010 sales
demand from our customers.
The 45% increase in sales volume was the main driver of the improvement in net income during the year ended
December 31, 2010. Despite the increase in sales volume during 2010, we continued to aggressively manage
employment levels, production levels, and discretionary spending in order to maximize the return on each dollar of
sales added. In addition, we have reduced fixed cost through announced plant closures and targeted reductions in
permanent positions in order to facilitate a leaner organization and to insure as global revenues improve we will be
able to leverage that improvement into increased earnings.
Unusual or Non-Recurring Costs Impacting the Twelve Month Period ended December 31, 2010.
Ceasing Operations and Severance Costs
In addressing our global cost structure, we incurred various charges during 2010 from ceasing operations at our
Tempe Plant and the elimination of various senior level positions. The impact of ceasing operations at the Tempe
Plant totaled $4.5 million in costs and charges during 2010. This was composed of $2.0 million in cash restructuring
costs and $2.5 million in charges related to reducing the book values of certain equipment and inventory that was
abandoned as part of ceasing operations and from the loss on sale of other assets. In addition to the Tempe Plant, we
incurred $1.1 million in charges related to eliminating certain senior level positions within our Company to
streamline the organization. Finally, we incurred $0.3 million in impairment charges on certain production
machinery at our Eltmann Plant which filed for bankruptcy on January 20, 2011. The total impact on the 2010 net
income of all of the above was $6.0 million pre-tax and $5.8 million after-tax.
25
OVERALL RESULTS
(In Thousands of Dollars)
Net sales
Foreign exchange effects
Volume
Price
Mix
Material inflation pass-through
Cost of products sold (exclusive of depreciation
shown separately below)
Foreign exchange effects
Volume
Cost reduction
Mix
Inflation
New sales program start-up costs and plant
closure related costs
Selling, general and administrative
Foreign exchange effects
Severance costs
Share based compensation expense
Increase in spending
Depreciation and amortization
Foreign exchange effects
Accelerated depreciation due to plant closure
Elimination of depreciation expense on fully
depreciated assets
Restructuring and impairment charges
Interest expense
Loss on disposal of assets
Write off of unamortized debt issue cost
Other income, net
Income (loss) before provision (benefit) for
income taxes
Provision (benefit) for income taxes
Net income (loss)
Consolidated NN, Inc.
2010
$ 365,369
2009
$ 259,383
Change
$ 105,986
(10,718)
115,975
550
(927)
1,106
(8,125)
73,390
(9,209)
(774)
1,991
3,683
(724)
1,247
1,101
1,510
(490)
1,000
(3,501)
296,422
235,466
60,956
30,407
27,273
3,134
19,195
22,186
(2,991)
2,289
6,815
808
130
(1,682)
4,977
6,359
493
604
(351)
(2,688)
456
315
(474)
(1,331)
10,985
4,569
48,609
(37,624)
6,859
(2,290)
$ 6,416 $ (35,334) $ 41,750
Net Sales. Net sales increased during 2010 from 2009 primarily due to higher customer demand for our products. As
discussed previously, we believe the higher sales volume in 2010 was due to both sales growth in the customer end
markets we serve and due to a shift in focus of supply chain participants from reducing inventory levels to adopting
ordering patterns based on true market demand. The negative mix effect was related mainly to timing of the recovery
as lower price automotive components rebounded more quickly during 2010 than higher priced industrial
components. The increase in sales price was due to targeted price increases to certain customers and the increase in
sales from material pass-through was to adjust selling prices for the increase in raw material costs experienced during
2010.
Cost of Products Sold (exclusive of depreciation shown separately below). The majority of the increase was due to
the same sales volume increases discussed above. Excluding volume effects, cost of products sold decreased due
mainly to the reduction in the value of Euro denominated costs relative to the U.S. Dollar and to planned cost saving
projects partially offset by increased inflation. Additionally, cost of products sold increased $3.0 million due to
production inefficiencies and additional incurred costs from starting up production on new major multi-year sales
programs at our Wellington Plants and from $0.6 million in one-time costs related to the Tempe Plant closure for the
revalue of inventory that ceased to be used and the transfer of certain production to our Wellington Plants.
We continue to aggressively manage our production costs. We were able to effectively leverage fixed manufacturing
costs, particularly fixed labor cost in Europe, during 2010 with the 45% increase in sales from 2009 (excluding
foreign currency effects).
26
During 2010, our cost of products sold as a percentage of sales was approximately 81%, which is slightly higher than
our historical range. This lower profitability was due to operational inefficiencies related to the new sales program
start-ups mentioned above. In general, as sales increase, we are better able to leverage our existing fixed cost base,
thereby reducing cost of products sold as a percentage of sales.
Selling, General and Administrative Expenses. A large portion of the increase in selling, general and administrative
expenses was from share-based compensation expense recognized during the first quarter of 2010 due to the
immediate vesting of shares granted to certain key employees and non-executive directors. Additionally, the increase
in selling, general and administrative expenses during 2010 was from increased salaries and wages expense
particularly due to eliminating the 10% to 20% reduction in salaries put in place in 2009 and reinstating incentive
compensation plans for 2010. Finally, during 2010, we incurred $1.2 million in severance cost related to permanent
administrative cost savings.
Depreciation and Amortization. Depreciation and amortization expense decreased as certain assets depreciated for a
full year during 2009 became fully depreciated during the second quarter of 2010. Additionally, depreciation
expense was lower in 2010 due to the reduction in value of Euro denominated depreciation expense. These
reductions were partially offset by accelerated depreciation of $1.0 million on certain fixed assets at our Tempe Plant
due to ceasing operations at that facility. (See Notes 2 and 6 of the Notes to Consolidated Financial Statements).
Interest Expense. Interest expense was higher due to increases in the interest rate spread charged on our LIBOR
credit facility and our senior notes. The interest rate was increased upon amending our credit facilities on March 13,
2009 and on March 5, 2010. In addition, we amortized $0.3 million more of capitalized loan costs into interest
expense due to the amendments of the loan facilities.
Restructuring and Impairment Charges. During the year ended December 31, 2010, we incurred $2.0 million in
restructuring charges related to ceasing operations at our Tempe Plant and $0.3 million in impairment charges related
to the production equipment at our Eltmann Plant. During the year ended December 31, 2009, we incurred $1.1 of
restructuring and impairment costs related to the closures of the Kilkenny Plant and the Hamilton Plant and $3.8
million in restructuring charges related to the reduction in labor force at our Veenendaal Plant. (See Note 2 of the
Notes to Consolidated Financial Statements).
Other Income, Net. The majority of the other income, net recognized during the year ended December 31, 2010,
related to foreign exchange gains at our foreign subsidiaries from U.S. Dollar denominated inter-company loans that
were put in place with the amended credit facilities in 2009. During 2010, the Dollar appreciated approximately 7%
against the Euro which lead to the generation of these gains.
Provision for Income Taxes. For the full year 2010 and 2009, the difference between the effective tax rates of 41.6%
and 6%, respectively, was mainly due to valuation allowances placed on U.S. deferred tax benefits during the second
quarter of 2009 that were still being applied to U.S. taxable losses and expense during 2010. In 2010, the main driver
was not recognizing tax benefits on the losses in the Precision Metal Components Segment from ceasing operations
at the Tempe Plant and the new sales program startups. (See Note 13 of the Notes to Consolidated Financial
Statements).
27
RESULTS BY SEGMENT
METAL BEARING COMPONENTS SEGMENT
(In Thousands of Dollars)
Net sales
Foreign exchange effects
Volume
Price
Mix
Material inflation pass-through
Year ended
December 31,
2009
Change
2010
$ 271,339
$ 183,605
$ 87,734
(10,718)
97,465
500
(927)
1,414
Segment net income (loss)
$ 24,910
$ (16,108)
$ 41,018
All three geographic regions of this segment experienced robust sales growth from 2009 levels. As discussed
previously, these volume increases were related to both increased end market demand and our customers adopting
more normalized ordering patterns. The unfavorable mix resulted as automotive end markets with generally lower
sales prices rebounded more quickly than the industrial end markets with generally higher sales prices.
The segment net income was impacted primarily by the large increase in sales volume and the related production
efficiencies and leveraging of fixed production costs. The impact of fixed costs and related leveraging of production
capacity was significant in this segment as a large portion of our installed capacity is in Western Europe, where labor
cost is not easily reduced when production volumes decrease. Additionally, the segment results were favorably
impacted by reductions in production costs from planned cost reduction projects. Finally, 2010 depreciation costs
were much lower than 2009 depreciation costs within the segment as certain assets depreciated for a full year during
2009 became fully depreciated during the second quarter of 2010.
The positive variance in segment net income for 2010 compared to 2009 was favorably impacted by certain items
totaling $4.9 million. The 2010 segment net income was favorably impacted by $1.2 million, after tax, in foreign
exchange gains on certain inter-company U.S. Dollar denominated transactions (as discussed above). In addition,
the segment net loss for 2009 was increased by $0.8 million after tax, due to restructuring charges related to the
closure of the Kilkenny Plant taken in 2009 and by $2.9 million of after tax restructuring charges related to the
reduction in force at our Veenendaal Plant incurred in 2009.
PRECISION METAL COMPONENTS SEGMENT
(In Thousands of Dollars)
Year ended
December 31,
2010
2009
Change
Net sales
Volume
$ 54,913
$ 45,003
$ 9,910
9,910
Segment net loss
$ (8,922)
$ (4,391)
$ (4,531)
The majority of the increase in sales at this segment was due to higher U.S. automotive and industrial demand in
2010 versus 2009. Additionally, 2010 sales increased from the startup of a new multi-year sales program.
Despite a 22% increase in sales from 2009, the 2010 segment net loss increased by $4.5 million from 2009. The
favorable impact to 2010 segment net loss from the increased sales volume was approximately $4.0 million.
However, the 2010 segment net loss was affected by $4.5 million in charges related to ceasing operations at the
Tempe Plant. This includes $2.0 million of severance and other associated closure costs, $1.6 million in charges
related to reducing the book values of certain equipment and inventory that ceased to be used, $0.2 million in cost
due to the start-up of production of former Tempe Plant products at the Wellington Plant, and $0.7 million from the
28
loss on sale of certain assets that ceased to be used. Additionally, the segment incurred approximately $3.0 million in
operational inefficiencies and additional costs related to ramping up production for the new multi-year sales programs
discussed above.
PLASTIC AND RUBBER COMPONENTS SEGMENT
(In Thousands of Dollars)
Net sales
Volume
Price/Mix
Year ended
December 31,
2010
2009
Change
$ 39,117
$ 30,775
$ 8,342
8,600
(258)
Segment net income (loss)
$ 2,504
$ (2,091)
$ 4,595
The volume increase for this segment was related to increased U.S. automotive end market demand.
The increase in segment net income for 2010 resulted from the 27% increase in sales and the related operational
efficiencies from higher levels of production. The volume benefits were partially offset by $0.3 million in severance
costs related to permanent administrative salary costs reduction.
Changes in Financial Condition from December 31, 2010 to December 31, 2011.
From December 31, 2010 to December 31, 2011, our total assets increased $10.9 million and our current assets
increased $8.4 million. The depreciation in the value of Euro denominated account balances, partially offset by
appreciation of Chinese Yuan account balances, relative to the U.S. Dollar caused total assets and current assets to
decrease approximately $3.0 million and $1.0 million, respectively, from December 31, 2010.
Excluding the foreign exchange effects, accounts receivable was higher by $3.9 million due primarily to the 6%
increase in sales volume in December and November of 2011 from sales levels in December and November of 2010.
Additionally, the days sales outstanding have increased 4.5 days as of December 31, 2011 due to timing of certain
customer receipts and a higher mix of export customers with extended payment terms. Partially offsetting these
increases was a $3.4 million reduction from the deconsolidation of Eltmann’s accounts receivable balances effective
January 20, 2011. Net overdue receivables were approximately 19% and 12% of total accounts receivable at
December 31, 2011 and 2010, respectively. The increase in overdue receivables in 2011 was due primarily to
payments from certain customers being received in early January 2012 rather than by December 31, 2011.
Excluding the foreign exchange effects, inventories increased by $4.6 million from December 31, 2010, primarily
from increased raw material, work in process inventory and finished goods inventory due to higher production
volumes in 2011.
Excluding the foreign exchange effects, property, plant and equipment increased $3.8 million as year to date capital
spending was $3.3 million higher than depreciation. Additionally, property, plant and equipment increased for the
$1.9 million addition of land and building acquired through a 20 year capital lease at our Kunshan Plant on October
1, 2011. This was partially offset by the deconsolidation of machinery at Eltmann with a net book value of $1.3
million effective January 20, 2011.
From December 31, 2010 to December 31, 2011, our total liabilities decreased $10.7 million. The depreciation in the
value of Euro denominated account balances, partially offset by appreciation of Chinese Yuan account balances,
relative to the U.S. Dollar caused total liabilities to decrease approximately $0.7 million from December 31, 2010.
The majority of the reduction in liabilities was due to the deconsolidation of Eltmann liabilities totaling $8.3 million
the largest of which was the Eltmann accrued pension liability totaling $5.6 million. Finally, excluding foreign
exchange effects and the effects of the Eltmann deconsolidation ($1.7 million), accounts payable decreased $5.0
million due to the timing of payments to certain vendors and from the large capital expenditures in year end 2010
accounts payable that were paid in 2011.
29
Working capital, which consists principally of accounts receivable and inventories offset by accounts payable and
current maturities of long-term debt, was $51.0 million at December 31, 2011 as compared to $32.1 million at
December 31, 2010. The ratio of current assets to current liabilities increased from 1.38:1 at December 31, 2010 to
1.70:1 at December 31, 2011. The increase in working capital was due primarily to movements in accounts
receivable, inventory, and accounts payable discussed above.
Cash flow provided by operations was $15.0 million for 2011 compared with $27.9 million for 2010. The
unfavorable variance in cash flow provided by operations was principally due to the unfavorable effect from
increasing net working capital at a much higher rate in 2011 versus in 2010. The working capital increases, as
discussed above, were due to increased sales and production volumes experienced during 2011.
Liquidity and Capital Resources
Amounts outstanding under our $100 million credit facility and our fixed rate senior notes as of December 31, 2011
were $41.0 million (including $0.8 million under our swing line of credit) and $37.1 million, respectively. As of
December 31, 2011, we can borrow up to an additional $48.0 million under the $100 million credit facility, including
$9.2 million under our swing line of credit, subject to limitations based on existing financial covenants. The $48.0
million of availability is net of $1 million of outstanding letters of credit at December 31, 2011 which are considered
as usage of the facility. The $48.0 million considers our new liquidity requirement from the September 30, 2011
amendment that the total outstanding under the revolving credit agreement shall be at least $10 million less than the
total committed amount of $100 million during the period commencing September 30, 2011 and ending on
September 30, 2012.
We were in compliance with all covenants related to the $100 million credit facility and the fixed rate senior notes
agreements as of December 31, 2011. The table below summarizes the financial covenants of the two credit
agreements as of December 31, 2011:
Financial Covenants
Required Covenant Level
Interest coverage ratio Not to be less than 3.00 to 1.00 as of the last day of any fiscal
quarter
Fixed charge coverage Not to be less than 1.00 to 1.00 as of the last day of any fiscal
Leverage ratio
Capital expenditures
quarter
Not to exceed 2.50 to 1.00 for the most recently completed four
fiscal quarters
Not to exceed 150% of Consolidated Depreciation Charges for
the immediate previous fiscal year.
Actual
Level
Achieved
6.50 to 1.00
1.30 to 1.00
1.68 to 1.00
73%
The fixed charge coverage ratio increases to “not to be less than 1.25 to 1.00 as of the last day of any fiscal quarter”
starting October 1, 2012.
On December 20, 2011, we borrowed an additional $20 million in seven-year fixed rate notes from Prudential Capital
at a rate of 4.64%. These notes, which mature on December 20, 2018, are interest-only for the first two years
followed by five equal annual principal payments. The proceeds were used to repay existing revolving credit bank
debt and to fund growth capital projects. Prudential Capital also agreed to reduce the rate on our existing $17.1
million of fixed rate notes due in 2014 from 6.50% to 5.39%.
On September 30, 2011, NN amended its $100 million revolving credit agreement agented by KeyBank and its long-
term loan agreement with Prudential Capital in order to adjust the fixed charge coverage ratio covenant to better
correlate current and expected levels of capital spending and other fixed charges with earnings before taxes, interest
and depreciation (EBITDA). The fixed charge coverage ratio was reduced from not less than 1.10 to 1.00 and not
less than 1.25 to 1.00 (for quarters ending after September 30, 2011) to not less than 1.00 to 1.00 as of the last day of
any fiscal quarter for the quarters ending September 30, 2011 through September 30, 2012. The amendments also
provide that the company will assure that the total outstanding under the revolving credit agreement shall be at least
$10 million less than the total committed amount of $100 million during the period commencing September 30, 2011
and ending on September 30, 2012.
30
On December 21, 2010, we entered into an amended and restated revolving credit facility expiring December 21,
2014 with Key Bank as administrative agent with an initial size of $75 million. The amended agreement was entered
into to adjust our financial and non-financial covenants to more normalized measures and to provide greater ability to
fund our capital investment plans. The interest rate was amended to LIBOR plus a margin of 1.5% to 3.5%
(depending on the level of the ratio of debt to EBITDA) from LIBOR plus a margin of 4.75%. The facility may be
expanded upon our request with approval of the lenders by up to $60 million, under the same terms and conditions.
On March 9, 2011, we exercised an option to increase the size of the facility from $75 million to $100 million to
allow additional flexibility and to fund potential growth projects. The loan agreement contains customary
restrictions on, among other things, additional indebtedness, liens on our assets, sales or transfers of assets,
investments, restricted payments (including payment of dividends and stock repurchases), issuance of equity
securities, and merger, acquisition and other fundamental changes in our business including a “material adverse
change” clause, which if triggered would accelerate the maturity of the debt. The facility has a $10 million swing
line feature to meet short term cash flow needs. Any borrowings under this swing line are considered short term.
Costs associated with entering into the revolving credit facility and the subsequent amendment on September 30,
2011, were capitalized and will be amortized into interest expense over the life of the facility. As of December 31,
2011 and 2010, $1.7 million and $2.1 million, respectively, of net capitalized loan origination costs were on the
balance sheet within other non-current assets.
On December 21, 2010, our senior notes agreement with Prudential Capital was also amended. The amended
agreement was entered into to adjust our financial and non-financial covenants to more normalized measures. There
were no changes to the terms or availability of credit but the interest rate was reduced from 8.50% to 6.70%. The
agreement contains customary restrictions on, among other things, additional indebtedness, liens on our assets, sales
or transfers of assets, investments, restricted payments (including payment of dividends and stock repurchases),
issuance of equity securities, and mergers, acquisitions and other fundamental changes in our business including a
“material adverse change” clause, which if triggered would accelerate the maturity of the debt. Interest is paid semi-
annually and the notes mature on April 26, 2014. We incurred costs as a result of issuing these notes and the
subsequent amendments on September 30, 2011 and December 20, 2011 which have been recorded as a component
of other non-current assets and are being amortized over the term of the notes. The unamortized balance at December
31, 2011 and 2010 was $0.3 million and $0.4 million, respectively.
Our arrangements with our domestic customers typically provide that payments are due within 30 to 60 days
following the date of our shipment of goods, while arrangements with foreign customers of our domestic business
(other than foreign customers that have entered into an inventory management program with us) generally provide
that payments are due within 60 to 120 days following the date of shipment to allow for additional transit time and
customs clearance. Under the Metal Bearing Components Segment’s inventory management program with certain
customers, payments typically are due within 30 days after the customer uses the product. Our arrangements with
European customers regarding due dates vary from 30 to 90 days following date of sale for European based
customers and 60 to 120 days from customers outside of Europe to allow for additional transit time and customs
clearance. Our sales and receivables can be influenced by seasonality due to our relative percentage of European
business coupled with many foreign customers slowing production during the month of August. For information
concerning our quarterly results of operations for the years ended December 31, 2011 and 2010, see Note 16 of the
Notes to Consolidated Financial Statements.
We invoice and receive payment from many of our customers in Euro as well as other currencies. Additionally, we
are party to various third party and intercompany loans, payables and receivables denominated in currencies other
than the U.S. Dollar. In 2011, the fluctuation of the Euro against the U.S. Dollar positively impacted sales and net
income. As a result of these sales, loans, payables and receivables, our foreign exchange transaction and translation
risk has increased. Various strategies to manage this risk are available to management including producing and
selling in local currencies and hedging programs. As of December 31, 2011, no currency hedges were in place. In
addition, a strengthening of the U.S. Dollar and/or Euro against foreign currencies could impair our ability to
compete with international competitors for foreign as well as domestic sales.
We have made planned capital expenditures totaling $20.3 million as of December 31, 2011. During 2012, we expect
to spend between $15.0 million and $20.0 million on capital expenditures, the majority of which relate to new or
expanded business. We believe that funds generated from operations and borrowings from the credit facilities will be
sufficient to finance our capital expenditures and working capital needs through December 2012. We base this
assertion on our current availability for borrowing of up to $48.0 million and our forecasted positive cash flow from
operations for the year ending December 31, 2012.
31
The table below sets forth our contractual obligations and commercial commitments as of December 31, 2011 (in
thousands):
Certain
Contractual Obligations
Long-term debt including current portion
Expected interest payments
Operating leases
Capital leases
Total contractual cash obligations
Total
$ 78,132
10,270
10,772
7,606
$ 106,780
Less than 1
year
$ 6,503
2,875
2,388
472
$ 12,238
Payments Due by Period
1-3 years
3-5 years
After 5
years
$ 55,629
4,830
3,922
944
$ 65,325
$ 8,000 $ 8,000
186
1,296
5,246
$ 14,489 $ 14,728
2,379
3,166
944
We have approximately $1.7 million in unrecognized tax benefits and related penalties and interest accrued within
the liabilities section of our balance sheet. We are unsure when or if at all these amounts might be paid to U.S. and/or
foreign taxing authorities. Accordingly, these amounts have been excluded from the table above. (See Note 13 of the
Notes to Consolidated Financial Statements).
Due to the impacts of the global economic recession and the resulting reduction in revenue and operating losses, our
wholly owned German subsidiary Kugelfertigung Eltmann GbmH (“Eltmann” or “Eltmann Plant”) sustained a
significant weakening of its financial condition. As a result, it became technically insolvent at which point it was
required to file for bankruptcy under German bankruptcy law. The filing was made in the bankruptcy court in
Germany on January 20, 2011. As of this date, NN lost the ability to control or manage Eltmann as a result of the
bankruptcy court trustee taking over effective control and day to day management of this subsidiary. As a result of
loss of control of this subsidiary, NN deconsolidated the assets and liabilities of Eltmann from our Consolidated
Financial Statements effective January 20, 2011(See Note 1 of Notes to Consolidated Financial Statements). The
ultimate impact on NN of Eltmann filing for bankruptcy will depend on the findings of the bankruptcy court.
However, until such court proceedings are finalized, we will not be able to determine what liabilities and contingent
obligations, if any, might remain as the responsibility of NN. Under advice from legal counsel, NN does not expect
any further significant impacts on our consolidated financial statements as a result of the liquidation of this
subsidiary.
Functional Currencies
We currently have operations in Slovakia, Italy and The Netherlands, all of which are Euro participating countries.
Each of our European facilities sell product to customers in many of the Euro participating countries. The Euro has
been adopted as the functional currency at all NN locations in Europe. The functional currency of NN Asia is the
Chinese Yuan.
Seasonality and Fluctuation in Quarterly Results
Our net sales historically have been seasonal in nature, due to a significant portion of our sales being to European
customers that significantly slow production during the month of August. For information concerning our quarterly
results of operations for the years ended December 31, 2011 and 2010. (See Note 16 of the Notes to Consolidated
Financial Statements).
Inflation and Changes in Prices
The cost base of our operations has been materially affected by steel inflation during recent years. Due to the ability
to pass on this steel inflation to our customers the overall financial impact has been minimized. The prices for steel,
engineered resins and other raw materials which we purchase are subject to material change. Our typical pricing
arrangements with steel suppliers are subject to adjustment every three to six months in the U.S. and annually in
Europe for base prices but quarterly for scrap surcharge adjustments. In the past, we have been able to minimize the
impact on our operations resulting from the steel price fluctuations by adjusting selling prices to our customers
periodically in the event of changes in our raw material costs.
32
Recently Issued Accounting Standards
In June 2011, the FASB issued amended accounting guidance related to presentation of comprehensive income. The
standards update is intended to help financial statement users better understand the causes of an entity’s change in
financial position and results of operation. It is effective for reporting periods beginning after December 15, 2011.
The amendments eliminate the option to present components of other comprehensive income as part of the statement
of changes in stockholders’ equity. The amendments require that all non-owner changes in stockholders’ equity be
presented either in a single continuous statement of comprehensive income or in two separate but consecutive
statements. The guidance also requires that reclassification adjustments for items that are reclassified from other
comprehensive income to net income be presented on the face of the financial statement where the components of net
income and other comprehensive income are presented. The FASB amended this guidance in December 2011 to
postpone a requirement to present items that are reclassified from other comprehensive income to net income on the
face of the financial statement where the components of net income and other comprehensive income are presented
and reinstate previous guidance related to such reclassifications. Upon adoption, we will continue to present
components of comprehensive income in our Consolidated Statements of Income (Loss) and Comprehensive Income
(Loss). We will adopt this guidance for reporting periods beginning January 1, 2012. Since this new guidance will
affect disclosure requirements only, we have concluded that it will not have a material impact on our financial
position or results of operations.
In September 2011, the FASB issued a revised accounting standard, which is intended to reduce the cost and
complexity of the annual goodwill impairment test by providing entities an option to perform a “qualitative”
assessment to determine whether further impairment testing is necessary. Specifically, an entity has the option to first
assess qualitative factors to determine whether it is necessary to perform the current two-step test. If an entity
believes, as a result of its qualitative assessment, that it is more-likely-than-not that the fair value of a reporting unit is
less than its carrying amount, the quantitative impairment test is required. Otherwise, no further testing is required.
This standard is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after
December 15, 2011 with early adoption permitted. We adopted this standard in the fourth quarter of 2011 concurrent
with our annual impairment test.
Off Balance Sheet Arrangements
We have operating lease commitments for machinery, office equipment, vehicles, manufacturing and office space
which expire on varying dates. The following is a schedule by year of future minimum lease payments as of
December 31, 2011 under operating leases that have initial or remaining non-cancelable lease terms in excess of one
year (in thousands).
Year ending December 31,
2012
2013
2014
2015
2016
Thereafter
$ 2,388
2,048
1,874
1,633
1,533
1,296
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Total minimum lease payments
$ 10,772
We are exposed to changes in financial market conditions in the normal course of our business due to our outstanding
debt balances as well as from transacting in various foreign currencies. To mitigate our exposure to these market
risks, we have established policies, procedures and internal processes governing our management of financial market
risks. We are exposed to changes in interest rates primarily as a result of our borrowing activities. At December 31,
2011, we had $37.1 million of fixed rate senior notes outstanding and $41 million outstanding under the variable rate
revolving credit facilities. At December 31, 2011, a one-percent increase in the interest rate charged on our
outstanding variable rate borrowings would result in interest expense increasing annually by approximately $0.4
million. The nature and amount of our borrowings may vary as a result of future business requirements, market
conditions and other factors.
33
Translation of our operating cash flows denominated in foreign currencies is impacted by changes in foreign
exchange rates. Our Metal Bearing Component Segment invoices and receives payment in currencies other than the
U.S. Dollar including the Euro. Additionally, we participate in various third party and intercompany loans, payables
and receivables denominated in currencies other than the U.S. Dollar. In 2011, the fluctuation of the Euro against the
U.S. Dollar positively impacted revenue and net income but decreased assets and liabilities. To help reduce exposure
to foreign currency fluctuation, we have incurred debt in Euros in the past and have, from time to time, used foreign
currency hedges to hedge currency exposures when these exposures meet certain discretionary levels. We did not use
any currency hedges in 2011, nor did we hold a position in any foreign currency hedging instruments as of December
31, 2011.
Item 8.
Financial Statements and Supplementary Data
Index to Financial Statements
Financial Statements
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets at December 31, 2011 and 2010
Consolidated Statements of Income (Loss) and Comprehensive Income (Loss)
for the years ended December 31, 2011, 2010 and 2009
Consolidated Statements of Changes in Stockholders’ Equity for the
years ended December 31, 2011, 2010 and 2009
Consolidated Statements of Cash Flows for the years ended
December 31, 2011, 2010 and 2009
Notes to Consolidated Financial Statements
Page
35
36
37
38
39
40
34
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of NN, Inc.
In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income
(loss) and comprehensive income (loss), of changes in stockholders' equity and of cash flows present fairly, in all
material respects, the financial position of NN, Inc. and its subsidiaries at December 31, 2011 and 2010, and the
results of their operations and their cash flows for each of the three years in the period ended December 31, 2011 in
conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the
Company maintained, in all material respects, effective internal control over financial reporting as of December 31,
2011, based on criteria established in Internal Control - Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO). The Company's management is responsible for
these financial statements, for maintaining effective internal control over financial reporting and for its assessment of
the effectiveness of internal control over financial reporting, included in Management's Report on Internal Control
over Financial Reporting appearing under item 9A. Our responsibility is to express opinions on these financial
statements and on the Company's internal control over financial reporting based on our integrated audits. We
conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether
the financial statements are free of material misstatement and whether effective internal control over financial
reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test
basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting
principles used and significant estimates made by management, and evaluating the overall financial statement
presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal
control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the
design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing
such other procedures as we considered necessary in the circumstances. We believe that our audits provide a
reasonable basis for our opinions.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding
the reliability of financial reporting and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal control over financial reporting includes those
policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial statements in accordance with generally
accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance
with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have
a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may
deteriorate.
/S/ PricewaterhouseCoopers LLP
Charlotte, North Carolina
March 15, 2012
35
NN, Inc.
Consolidated Balance Sheets
December 31, 2011 and 2010
(In thousands, except per share data)
Assets
Current assets:
Cash and cash equivalents
Accounts receivable, net
Inventories, net
Income tax receivable
Other current assets
Total current assets
Property, plant and equipment, net
Goodwill, net
Intangible assets, net
Non-current deferred tax assets
Other non-current assets
Total assets
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable
Accrued salaries, wages and benefits
Income taxes payable
Current maturities of long-term debt
Current portion of obligation under capital lease
Other current liabilities
Total current liabilities
Non-current deferred tax liabilities
Long-term debt, net of current portion
Accrued pension
Obligation under capital lease, net of current portion
Total liabilities
Commitments and Contingencies (Note 15)
Stockholders’ equity:
Common stock - $0.01 par value, authorized 45,000 shares,
issued and outstanding 16,949 in 2011 and 16,620 in 2010.
Additional paid-in capital
Retained earnings
Accumulated other comprehensive income
Total stockholders’ equity
Total liabilities and stockholders’ equity
2011
2010
$ 4,536
66,707
46,023
949
5,810
124,025
$ 5,556
63,331
41,882
530
4,371
115,670
120,528
8,039
900
1,062
4,907
118,488
8,396
900
238
4,863
$ 259,461 $ 248,555
$ 48,217 $ 55,549
13,548
2,560
5,714
275
5,941
83,587
11,697
1,858
6,503
472
4,294
73,041
3,810
71,629
7,705
3,600
3,954
67,643
13,438
1,826
159,785
170,448
169
55,071
27,612
16,824
99,676
167
51,863
6,675
19,402
78,107
$ 259,461 $ 248,555
See accompanying notes to consolidated financial statements
36
NN, Inc.
Consolidated Statements of Income (Loss) and Comprehensive Income (Loss)
Years ended December 31, 2011, 2010 and 2009
(In thousands, except per share data)
Net sales
Cost of products sold (exclusive of depreciation shown separately below)
Selling, general and administrative
Depreciation and amortization
(Gain) loss on disposal of assets
Restructuring and impairment charges
Income (loss) from operations
Interest expense
Write-off of unamortized debt issuance cost
Other income, net
Income (loss) before provision (benefit) for income taxes
Provision (benefit) for income taxes
Net income (loss)
Other comprehensive income (loss):
Actuarial loss recognized in change of projected benefit
obligation (net of tax of $0, $0 and $0, respectively)
Foreign currency translation gain (loss)
Comprehensive income (loss)
Basic income (loss) per share:
Net income (loss)
Weighted average shares outstanding
Diluted income (loss) per share:
Net income (loss)
Weighted average shares outstanding
2011
2010
2009
$ 424,691
347,622
30,657
17,016
(36)
--
29,432
4,715
--
(1,388)
26,105
5,168
$ 20,937
$ 365,369
296,422
30,407
19,195
808
2,289
16,248
6,815
130
(1,682)
10,985
4,569
$ 6,416
$ 259,383
235,466
27,273
22,186
493
4,977
(31,012)
6,359
604
(351)
(37,624)
(2,290)
$ (35,334)
--
(2,578)
$ 18,359
(392)
(6,726)
$ (702)
(315)
2,356
$ (33,293)
$ 1.24
16,817
$ 0.39
16,455
$ (2.17)
16,268
$ 1.24
16,953
$ 0.39
16,570
$ (2.17)
16,268
See accompanying notes to consolidated financial statements
37
NN, Inc.
Consolidated Statements of Changes in Stockholders’ Equity
Years ended December 31, 2011, 2010 and 2009
(In thousands)
Common Stock
Number
of
Shares
Par
Value
Additional
paid in
capital
Retained
Earnings
Accumulated
Other
Comprehensive
Income
Total
Balance, December 31, 2008
Net loss
Stock option expense
Actuarial loss recognized in change of
projected benefit obligation (net of tax $0)
Foreign currency translation gain
Balance, December 31, 2009
Net income
Stock option expense
Shares issued for options
Actuarial loss recognized in change of
projected benefit obligation (net of tax $0)
Stock compensation expense
Foreign currency translation loss
Balance, December 31, 2010
Net income
Stock option expense
Shares issued for options
Stock compensation expense
Foreign currency translation loss
Balance, December 31, 2011
16,268
--
--
$ 163
--
--
$ 49,524
--
337
$ 35,593
(35,334)
--
$ 24,479
--
--
$ 109,759
(35,334)
337
--
--
--
--
--
--
--
--
(315)
2,356
(315)
2,356
16,268
--
--
103
$ 163
--
--
1
$ 49,861
--
152
752
$ 259
6,416
--
--
$ 26,520
--
--
--
$ 76,803
6,416
152
753
--
249
--
16,620
--
--
254
75
--
16,949
--
3
--
$ 167
--
--
2
--
--
$ 169
--
1,098
--
$ 51,863
--
480
2,380
348
--
$ 55,071
--
--
--
(392)
--
(6,726)
(392)
1,101
(6,726)
$ 6,675
20,937
--
--
--
--
$ 27,612
$ 19,402
--
--
--
--
(2,578)
$ 16,824
$ 78,107
20,937
480
2,382
348
(2,578)
$ 99,676
See accompanying notes to consolidated financial statements
38
NN, Inc.
Consolidated Statements of Cash Flows
Years ended December 31, 2011, 2010 and 2009
(In thousands)
Cash flows from operating activities:
Net income (loss)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization
Amortization of debt issue costs
(Gain) loss on disposals of property, plant and equipment
Allowance for doubtful accounts
Compensation expense from issuance of restricted stock and incentive stock options
Deferred income tax expense (benefit)
Capitalized interest and non-cash interest
Non-cash restructuring and impairment charges
Write-off of unamortized debt issue costs
Changes in operating assets and liabilities:
Accounts receivable
Inventories
Income tax receivable
Other current assets
Other non-current assets
Accounts payable
Other liabilities
Net cash provided by operating activities
Cash flows from investing activities:
Acquisition of property, plant and equipment
Proceeds from disposals of property, plant and equipment
Cash lost in deconsolidation of Eltmann
Repayment of long-term note receivable
Net cash used by investing activities
Cash flows from financing activities:
Debt issue costs paid
Proceeds of long-term debt, net
Repayment of long-term debt, net
Proceeds (repayment) of short-term debt, net
Proceeds from issuance of stock and exercise of stock options
Other financing activity
Net cash provided by (used by) financing activities
2011
2010
2009
$ 20,937
$ 6,416
$ (35,334)
17,016
809
(36)
140
828
(968)
(210)
--
--
(7,539)
(7,079)
(419)
(1,658)
7
(4,790)
(2,083)
14,955
(20,329)
255
(979)
--
(21,053)
(453)
20,000
(16,014)
789
2,382
(66)
6,638
19,195
1,415
808
97
1,253
418
--
308
130
(15,459)
(10,253)
2,393
740
(1,403)
19,165
2,637
27,860
(15,249)
79
--
711
(14,459)
(1,395)
--
(9,914)
(3,691)
753
(57)
(14,304)
22,186
1,147
493
(119)
337
841
157
2,853
604
1,481
20,318
(631)
1,821
(355)
(2,128)
1,118
14,789
(4,255)
521
--
--
(3,734)
(3,293)
--
(12,614)
2,850
--
(51)
(13,108)
Effect of exchange rate changes on cash flows
(1,560)
(2,285)
(255)
Net change in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
(1,020)
5,556
$ 4,536
(3,188)
8,744
$ 5,556
(2,308)
11,052
$ 8,744
Supplemental schedule of non-cash investing and financing activities:
Compensation expense for stock awards, ($348 in 2011, $1,101 in 2010,and $0 in 2009 and stock
option expense ($480 in 2011, $152 in 2010, and $337 in 2009) included in stockholders’ equity
$ 828
$ 1,253
$ 337
Acquired land and building through a 20 year capital lease not included in investing activities above
$ 1,948
$ -
$ --
Reduced note payable to customer with offsetting reduction to accounts receivable
$ --
$ --
$ 361
Sale of $2,230 in property, plant and equipment for a note receivable with an aggregate carrying
value of $1,562 in 2010.
$ --
$ 668
$ --
Certain amounts were deconsolidated from the Balance Sheet of NN due to the bankruptcy of a
subsidiary on January 20, 2011 and are not reflected in the 2011 cash flow statement above (See Note 1
of Notes to Consolidated Financial Statements)
Cash paid for interest and income taxes was as follows:
Interest
Income taxes
$ 3,869
$ 6,516
$ 4,825
$ 1,419
$ 4,678
$ 353
Income tax refunds received from taxing authorities
$ 149
$ 2,393
$ 2,653
See accompanying notes to consolidated financial statements
39
NN, Inc.
Notes to Consolidated Financial Statements
December 31, 2011, 2010 and 2009
(In thousands, except per share data)
1) Summary of Significant Accounting Policies and Practices
a) Description of Business
NN, Inc. (“NN”, “the Company”, “we”, “our” or “us”) is a manufacturer of precision balls, cylindrical and
tapered rollers, bearing retainers, plastic injection molded products, precision bearing seals and precision metal
components. Our balls, rollers, retainers, and bearing seals are used primarily in the domestic and international
anti-friction bearing industry. Our plastic injection molded products are used in the bearing components,
automotive components, electronic instrument cases and other molded components used in a variety of
applications. The precision metal components products are used in the HVAC, automotive, fluid power and
diesel engine industries.
b) Cash and Cash Equivalents
The Company considers all highly liquid investments with an original maturity of three months or less as cash
equivalents.
c) Inventories
Inventories are stated at the lower of cost or market. Cost is determined using the first-in, first-out method. Our
policy is to expense abnormal amounts of idle facility expense, freight, handling cost, and waste. In addition,
we allocate fixed production overheads based on the normal production capacity of our facilities. Inventory
valuations were developed using normalized production capacities for each of our manufacturing locations and
the costs from excess capacity or under-utilization of fixed production overheads were expensed in the period
incurred and are not included as a component of inventory valuation.
Inventories also include tools, molds and dies in progress that we are producing and will ultimately sell to our
customers. This activity is principally related to our Plastic and Rubber Components and Precision Metal
Components Segments. These inventories are carried at the lower of cost or market.
d) Property, Plant and Equipment
Property, plant and equipment are stated at cost less accumulated depreciation. Assets to be disposed of are
stated at lower of depreciated cost or fair market value less estimated selling costs. Expenditures for
maintenance and repairs are charged to expense as incurred. Major renewals and betterments are capitalized.
When a property item is retired, its cost and related accumulated depreciation are removed from the property
accounts and any gain or loss is recorded in the statement of income (loss). We review the carrying values of
long-lived assets for impairment whenever events or changes in circumstances indicate the carrying amount of
an asset may not be recoverable. During the years ended December 31, 2011, 2010 and 2009, we recorded
impairment charges of $0, $308, and $235 respectively (See Notes 2 and 6 of the Notes to Consolidated
Financial Statements). Property, plant and equipment includes tools, molds and dies principally used in our
Plastic and Rubber Components and Precision Metal Components Segments that are our property.
Depreciation is provided on the straight-line method over the estimated useful lives of the depreciable assets
for financial reporting purposes. In the event we abandon and cease to use certain property, plant, and
equipment, depreciation estimates are revised and, in most cases, depreciation expense will be accelerated to
reflect the shortened useful life of the asset. During the years ended December 31, 2011, 2010 and 2009, we
recognized $0, $1,000, and $0 respectively in accelerated depreciation for property, plant and equipment that
was abandoned. (See Note 6 of the Notes to Consolidated Financial Statements).
e) Revenue Recognition
We recognize revenues based on the stated shipping terms with customers when these terms are satisfied and
the risks of ownership are transferred to the customers. We have an inventory management program for certain
Metal Bearing Components Segment customers whereby revenue is recognized when products are used by
customers from consigned stock, rather than at the time of shipment. Under both circumstances, revenue is
40
NN, Inc.
Notes to Consolidated Financial Statements
December 31, 2011, 2010 and 2009
(In thousands, except per share data)
recognized when persuasive evidence of an arrangement exists, delivery has occurred, the sellers’ price is
determinable and collectability is reasonably assured.
f) Accounts Receivable
Accounts receivable are recorded upon recognition of a sale of goods and ownership and risk of loss is
assumed by the customer. Substantially all of our accounts receivable are due primarily from the core served
markets. We experienced $140, $97, and $(119) of bad debt expense (income) during 2011, 2010 and 2009,
respectively. In establishing allowances for doubtful accounts, we perform credit evaluations of our
customers, considering numerous inputs when available including the customers’ financial position, past
payment history, relevant industry trends, cash flows, management capability, historical loss experience and
economic conditions and prospects. Accounts receivable are written off or allowances established when
considered to be uncollectible or at risk of being uncollectible, respectively.
g) Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences between the financial statement carrying
amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carry
forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be recovered or settled. The effect
on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes
the enactment date. The Consolidated Financial Statements for each of the three years in the period ended
December 31, 2011 continue to reflect full valuation allowances against the net deferred tax assets of all our
U.S. operations. Based upon the negative financial performance for our combined U.S. locations during the
years ended December 31, 2009 and 2010, we determined that there is a likelihood these locations would be
unable to generate sufficient profits in the near future to allow realization of existing deferred tax assets.
We recognize income tax positions that meet the more likely than not threshold and accrue interest and
potential penalties related to unrecognized income tax positions which are recorded as a component of the
income tax provision.
h) Net Income (Loss) Per Common Share
Basic income (loss) per share reflects reported earnings divided by the weighted average number of common
shares outstanding. Diluted income (loss) per share include the effect of dilutive stock options, unvested
restricted stock (if any) and the respective tax benefits, unless inclusion would not be dilutive.
i) Stock Based Compensation
The cost of stock options and stock awards are expensed as compensation expense over the vesting periods
based on the fair value at the grant date. (See Note 9 of the Notes to the Consolidated Financial Statements)
We use a financial pricing model, the Black Scholes model, to determine the fair value of our stock options as
our options are not traded in open markets.
We account for stock awards by recognizing compensation expense ratably over the vesting period as specified
in the award. Compensation expense to be recognized is based on the stock price at date of grant.
j) Principles of Consolidation
Our consolidated financial statements include the accounts of NN, Inc. and its subsidiaries. All of our
subsidiaries are 100% owned and all are included in the consolidated financial statements for the years end
December 31, 2011, 2010, and 2009. All significant inter-company profits, transactions, and balances have
been eliminated in consolidation.
Due to the impacts of the global economic recession and the resulting reduction in revenue and operating
losses, our wholly owned German subsidiary, Kugelfertigung Eltmann GbmH (“Eltmann” or “Eltmann Plant”),
sustained a significant weakening of its financial condition. As a result, it became insolvent at which point it
41
NN, Inc.
Notes to Consolidated Financial Statements
December 31, 2011, 2010 and 2009
(In thousands, except per share data)
was required to file for bankruptcy under German bankruptcy law. The filing was made in the bankruptcy
court in Germany on January 20, 2011. As of this date, NN lost the ability to control or manage Eltmann as a
result of the bankruptcy court trustee taking over effective control and day to day management of this
subsidiary. As a result of loss of control of this subsidiary, NN deconsolidated the assets and liabilities of
Eltmann from our Consolidated Financial Statements effective January 20, 2011.
We were informed that in early April 2011, the bankruptcy trustee sold the majority of the production assets of
Eltmann to a non-affiliated manufacturing company. It is our understanding that the remaining assets and
liabilities of Eltmann will be liquidated sometime in the future by the bankruptcy court. NN does not expect
any further significant impact on our consolidated financial statements as a result of the liquidation of this
subsidiary.
The following table summarizes the effects of the deconsolidation of Eltmann effective January 20, 2011 on
the Consolidated Balance Sheets:
Cash
Accounts receivable
Inventory
Other assets
Property, plant and equipment
Reduction of total assets
Accounts payable
Accrued salaries
Accrued pension
Accumulated other comprehensive income
Reduction of total liabilities and stockholders’ equity
$ (979)
(3,388)
(2,407)
(193)
(1,343)
$ (8,310)
(1,738)
(1,500)
(5,623)
551
$ (8,310)
Net impact from deconsolidation of bankrupt subsidiary
$ --
The deconsolidation of the amounts above were not reflected in the Consolidated Statements of Cash Flows for
the year ended December 31, 2011. The assets and liabilities of Eltmann are included in NN’s Consolidated
Financial Statements for the years ended December 31, 2010 and earlier as we had effective control of this
subsidiary.
k) Foreign Currency Translation
Assets and liabilities of our foreign subsidiaries are translated at current exchange rates, while revenue, costs
and expenses are translated at average rates prevailing during each reporting period. Translation adjustments
arising from the translation of foreign subsidiary financial statements are reported as a component of other
comprehensive income (loss) and accumulated other comprehensive income within stockholders’ equity. In
addition, transactions denominated in foreign currencies, including intercompany transactions, are initially
recorded at the current exchange rate at the date of the transaction. The balances are adjusted to the current
exchange rate as of each balance sheet date and as of the date when the transaction is consummated.
Transaction gains or losses, excluding intercompany loan transactions, are expensed in either cost of products
sold or selling, general and administrative lines in the Consolidated Statement of Income (Loss) and
Comprehensive Income (Loss) as incurred and were immaterial to the years ended December 31, 2011, 2010
and 2009. Transaction gains or losses on intercompany loan transactions are recognized in the other income,
net line in the Consolidated Statement of Income (Loss) and Comprehensive Income (Loss) as incurred.
l) Goodwill and Other Indefinite Lived Intangible Assets
We recognize the excess of the purchase price of an acquired entity over the fair value of the net identifiable
assets as goodwill. Goodwill is tested for impairment on an annual basis as of October 1 and between annual
tests if a triggering event occurs. The impairment procedures are performed at the reporting unit level for the
one unit that still has goodwill. In September 2011, the FASB issued a revised accounting standard, which is
42
NN, Inc.
Notes to Consolidated Financial Statements
December 31, 2011, 2010 and 2009
(In thousands, except per share data)
intended to reduce the cost and complexity of the annual goodwill impairment test by providing entities an
option to perform a “qualitative” assessment to determine whether further impairment testing is necessary.
Specifically, an entity has the option to first assess qualitative factors to determine whether it is necessary to
perform the current two-step test. If an entity believes, as a result of its qualitative assessment, that it is more-
likely-than-not that the fair value of a reporting unit is less than its carrying amount, the quantitative
impairment test is required. Otherwise, no further testing is required. This standard is effective for annual and
interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011 with early
adoption permitted. We are adopting this standard in the fourth quarter of 2011 concurrent with our annual
impairment test. In assessing the qualitative factors, we considered the impact of the following key factors and
their effect on the reporting unit, budget to actual performance, economic, market and industry considerations,
earnings multiples and cash flow from operations. Based on this qualitative assessment considering prior year
results and current operating performance we determined it was more likely than not that the fair value of the
reporting unit exceeded the carrying value of the reporting unit.
If the qualitative assessment indicates it is more likely than not that the fair value is less than the carrying
value, U.S. GAAP prescribes a two-step process for testing for goodwill impairments. The first step is to
determine if the carrying value of the reporting unit with goodwill is less than the related fair value of the
reporting unit. The fair value of the reporting unit is determined through use of discounted cash flow methods
and market based multiples of earning and sales methods obtained from a grouping of comparable publicly
trading companies. We believe this methodology of valuation is consistent with how market participants
would value reporting units. The discount rate and market based multiples used are specifically developed for
the units tested regarding the level of risk and end markets served. Even though we do use other observable
inputs (Level 2 inputs under the US GAAP hierarchy) the calculation of fair value for goodwill would be most
consistent with Level 3 under the US GAAP hierarchy.
If the carrying value of the reporting unit is less than fair value of the reporting unit, the goodwill is not
considered impaired. If the carrying value is greater than fair value then the potential for impairment of
goodwill exists. The potential impairment is determined by allocating the fair value of the reporting unit
among the assets and liabilities based on a purchase price allocation methodology as if the reporting unit was
acquired in a business combination. The fair value of the goodwill is implied from this allocation and
compared to the carrying value with an impairment loss recognized if the carrying value is greater than the
implied fair value.
We base our fair value estimates, in large part, on management business plans and projected financial
information which are subject to a high degree of management judgment and complexity. Actual results may
differ from these projections and the differences may be material.
Our indefinite lived intangible asset is accounted for similarly to goodwill. This asset is tested for impairment
at least annually by comparing the fair value to the carrying value, using the relief from royalty rate method,
and if the fair value is less than the carrying value, an impairment charge is recognized for the difference.
m) Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of
Long-lived tangible and intangible assets subject to amortization are tested for recoverability when changes in
circumstances indicate the carrying value of these assets may not be recoverable. A test for recoverability is
also performed when management has committed to a plan to dispose of a reporting unit or asset group.
Assets to be held and used are tested for recoverability when indications of impairment are evident.
Recoverability of a long-lived tangible and intangible asset is evaluated by comparing its carrying value to the
future estimated undiscounted cash flows expected to be generated by the asset or asset group. If the asset is
not recoverable the asset is considered impaired and adjusted to fair value which is then depreciated/amortized
over its remaining useful live. Assets to be disposed of are carried at the lesser of carrying value or fair value
less costs of disposal. (See Notes 2, 6 and 11 of the Notes to Consolidated Financial Statements).
n) Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with accounting principles generally accepted in the
United States requires management to make estimates and assumptions that affect the reported amounts of
43
NN, Inc.
Notes to Consolidated Financial Statements
December 31, 2011, 2010 and 2009
(In thousands, except per share data)
assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period. Actual results could differ from
those estimates.
o) Fair Value Measurements
On January 1, 2008, we adopted the standards of U.S. GAAP that pertains to recording financial liabilities
subject to recurring fair value measurement at the price that would be paid to transfer a liability in an orderly
transaction between market participants. However, at that time we elected not to adopt the option to use the
fair value method of accounting for our existing financial liabilities. On January 1, 2009, we began recording
all non-financial assets and liabilities (principally goodwill and long lived tangible and intangible assets)
subject to fair value measurement under the same principles. These fair value principles prioritize valuation
inputs across three broad levels. Level 1 inputs are quoted prices (unadjusted) in active markets for identical
assets or liabilities. Level 2 inputs are quoted prices for similar assets and liabilities in active markets or inputs
that are observable for the asset or liability, either directly or indirectly through market corroboration, for
substantially the full term of the financial instrument. Level 3 inputs are unobservable inputs based on the our
assumptions used to measure assets and liabilities at fair value. An asset or liability's classification within the
various levels is determined based on the lowest level input that is significant to the fair value measurement.
p) Recently Issued Accounting Standards
In June 2011, the FASB issued amended accounting guidance related to presentation of comprehensive
income. The standards update is intended to help financial statement users better understand the causes of an
entity’s change in financial position and results of operation. It is effective for reporting periods beginning
after December 15, 2011. The amendments eliminate the option to present components of other
comprehensive income as part of the statement of changes in stockholders’ equity. The amendments require
that all non-owner changes in stockholders’ equity be presented either in a single continuous statement of
comprehensive income or in two separate but consecutive statements. The guidance also requires that
reclassification adjustments for items that are reclassified from other comprehensive income to net income be
presented on the face of the financial statement where the components of net income and other comprehensive
income are presented. The FASB amended this guidance in December 2011 to postpone a requirement to
present items that are reclassified from other comprehensive income to net income on the face of the financial
statement where the components of net income and other comprehensive income are presented and reinstate
previous guidance related to such reclassifications. Upon adoption, we will continue to present components of
comprehensive income in our Consolidated Statements of Income (Loss) and Comprehensive Income (Loss).
We will adopt this guidance for reporting periods beginning January 1, 2012. Since this new guidance will
affect disclosure requirements only, we have concluded that it will not have a material impact on our financial
position or results of operations.
In September 2011, the FASB issued a revised accounting standard, which is intended to reduce the cost and
complexity of the annual goodwill impairment test by providing entities an option to perform a “qualitative”
assessment to determine whether further impairment testing is necessary. Specifically, an entity has the option
to first assess qualitative factors to determine whether it is necessary to perform the current two-step test. If an
entity believes, as a result of its qualitative assessment, that it is more-likely-than-not that the fair value of a
reporting unit is less than its carrying amount, the quantitative impairment test is required. Otherwise, no
further testing is required. This standard is effective for annual and interim goodwill impairment tests
performed for fiscal years beginning after December 15, 2011 with early adoption permitted. We adopted this
standard in the fourth quarter of 2011 concurrent with our annual impairment test as discussed above.
2) Restructuring and Impairment Charges
Below is a summary of all the impairment and restructuring charges reported in the Consolidated Statements of
Income (Loss) and Comprehensive Income (Loss) during the years ended December 31, 2011, 2010, and 2009:
44
NN, Inc.
Notes to Consolidated Financial Statements
December 31, 2011, 2010 and 2009
(In thousands, except per share data)
2011
2010
2009
Impairment of tangible assets
Restructuring charges
$ --
--
$ 308
1,981
$ 235
4,742
Restructuring and impairment charges
$ --
$ 2,289
$ 4,977
The above charges are discussed in detail below.
Restructuring Activity
During the first quarter of 2010, we announced the closure of the Tempe Plant. We ceased operations at this location
on August 31, 2010. This closure impacted approximately 130 employees. Current economic conditions coupled
with the long-term manufacturing strategy for our Whirlaway business necessitated a consolidation of our
manufacturing resources into existing facilities in Ohio. We incurred cash charges of approximately $1,518 in
severance costs during 2010. The severance costs were recognized pro-rata over the period from the announcement
date until the employees’ termination date as continued employment was a requirement to receive severance
payments. Additionally, during the year ended December 31, 2010, we incurred $506 of site closure and other
associated costs. In the first quarter of 2010, we incurred $1,000 of accelerated depreciation related to certain fixed
assets that were expected to be abandoned due to ceasing operations at the Tempe Plant. (See Note 6 of the Notes to
Consolidated Financial Statements). The majority of the fixed assets and inventory that ceased to be used were sold
on August 31, 2010 in exchange for long-term notes receivables. (See Note 4 of the Notes to Consolidated Financial
Statements).
On November 26, 2008, we announced the closure of our Kilkenny Plant. The closure was part of our long term
strategy to rationalize our European operations. The closure affected 68 employees and was substantially
completed during 2009. We incurred $70 and $763 in restructuring costs during the years ended December 31,
2010 and 2009, respectively, principally for site closure and other associated costs.
During the first quarter of 2009, we closed our Hamilton Plant. This closure affected 11 employees and $130 in
severance and other associated closure costs were incurred during the first quarter of 2009. Of this amount, $108
was for employee severance cost which was paid in the second quarter of 2009.
During the third quarter of 2009, we informed our employees of the Veenendaal Plant of our intention to begin a
reorganization of the plant’s labor force due to the economic downturn. During the year ended December 31, 2009,
we incurred severance charges of $3,849 which covered the elimination of 53 permanent positions or 17% of the
workforce at that time. The majority of the severance cost was paid out during the fourth quarter of 2009 and first
quarter of 2010. During the year ended December 31, 2010, we recognized a benefit of $113 as the total severance
related costs were less than the amount accrued.
The following table summarizes the 2010 activity related to the three restructuring programs discussed above:
Reserve
Balance at
1/01/10
Charges
Paid in 2010
Currency
Impacts
Reserve
Balance at
12/31/2010
Severance and other
employee costs
Site closure and other
associated cost
Total
$ 2,382
$ 1,405
$ (3,660)
$ (127)
$ --
--
576
(576)
--
$ 2,382
$ 1,981
$ (4,236)
$ (127)
--
$ --
45
NN, Inc.
Notes to Consolidated Financial Statements
December 31, 2011, 2010 and 2009
(In thousands, except per share data)
These restructuring costs were recorded in the Restructuring and Impairment Charges line as a component of income
(loss) from operations. The liability balance for severance and other employee costs were reported within the
Accrued salaries, wages and benefits line of the Consolidated Balance Sheets. There were no restructuring charges
incurred during the year ended December 31, 2011.
Impairments of Goodwill and Other Long-Lived Tangible and Intangible Assets
During the year ended December 31, 2009, we adjusted the fair value of the building and land of our Kilkenny Plant
to its current estimated fair value resulting in a $235 charge. This impairment charge was reported in the
Restructuring and Impairment Charges line as a component of loss from operations in 2009.
For the year ended December 31, 2010, we recorded $308 of non-cash impairment charges related to the impairment
of production machinery at the Eltmann Plant as this subsidiary was legally required to file for bankruptcy in January
2011. This impairment charge was reported in the Restructuring and Impairment Charges line as a component of
income from operations in 2010 (See Notes 1 and 15 of the Notes to Consolidated Financial Statements).
3) Accounts Receivable and Sales Concentrations
December 31,
2011
2010
Trade
Less - allowance for doubtful accounts
$ 67,145
438
$ 63,809
478
Accounts receivable, net
$ 66,707
$ 63,331
Activity in the allowance for doubtful accounts is as follows:
Description
December 31, 2011
Allowance for doubtful
accounts
December 31, 2010
Allowance for doubtful
accounts
December 31, 2009
Allowance for doubtful
accounts
Balance at
Beginning
of Year
Additions
(reductions)
Write-
offs
Currency
Impacts
Balance at
End of Year
$ 478
$ 140 $ (178)
$ (2)
$ 438
$ 473
$ 97 $ (81)
$ (11)
$ 478
$ 635
$ (119) $ (48)
$ 5
$ 473
For the years ended December 31, 2011, 2010 and 2009, sales to SKF amounted to $159,668, $139,242, and
$93,385, respectively, or 37.6%, 38.1%, and 36.0% of consolidated revenues, respectively. None of our other
customers accounted for more than 10% of our net sales in 2011, 2010 or 2009. SKF and SNR Roulements (“SNR”)
were the only customers with accounts receivable concentrations in excess of 10% in 2011 and 2010. Schaeffler
Group had accounts receivable concentrations in excess of 10% in 2010 but not for 2011. The outstanding balance as
of December 31, 2011 and 2010 for SKF was $22,572 and $18,739, respectively. The outstanding balance as of
46
NN, Inc.
Notes to Consolidated Financial Statements
December 31, 2011, 2010 and 2009
(In thousands, except per share data)
December 31, 2011 and 2010 for SNR was $6,796 and $7,059, respectively. The outstanding balance as of December
31, 2010 for Schaeffler Group was $6,768. All revenues and receivables related to SKF and Schaeffler Group are in
the Metal Bearing Components and Plastic and Rubber Components Segments. All revenues and receivables related
to SNR are in the Metal Bearing Components Segment.
4) Long Term Note Receivable
Certain property, plant and equipment of the Tempe Plant was sold on August 31, 2010, the day the Tempe Plant
ceased operations, to a newly formed company not affiliated with NN. Property, plant and equipment with a net
book value of $2,230 were sold in exchange for a promissory note with a fair value of $1,562, as of August 31, 2010,
(described below as the Tempe Fixed Asset Note).
The Tempe Fixed Asset Note had an original face value of $2,500, a 60 month term, a 7% interest rate, interest only
payments for 24 months, principal and interest payments totaling $40 per month for the next 36 months followed by a
balloon payment of $1,525. The note is secured by a first lien on approximately $1,000 of the assets and a second
lien on the remaining assets. As of December 31, 2011, the note had an estimated fair value and carrying value of
$1,772 determined using a discounted cash flow method applying market interest rates for similar types of seller
financed, partially secured promissory notes (Level 3 under the U.S. GAAP fair value hierarchy). This note is
reported within other current assets for the current portion and other non-current assets for the long-term portion
within the Consolidated Balance Sheets.
5) Inventories
Raw materials
Work in process
Finished goods
Less-inventory reserve
Inventories, net
December 31,
2011
$ 13,855
8,425
24,724
(981)
$ 46,023
2010
$ 12,882
8,837
21,467
(1,304)
$ 41,882
Inventory on consignment at customers’ sites at December 31, 2011 and 2010 was approximately $4,156 and $3,401,
respectively.
The inventory valuations above were developed using normalized production capacities for each of our
manufacturing locations. Any costs from abnormal excess capacity or under-utilization of fixed production
overheads are expensed in the period incurred and are not included as a component of inventory valuation.
6) Property, Plant and Equipment
Land owned
Land under capital lease
Buildings and improvements owned
Buildings under capital lease
Machinery and equipment
Construction in process
Less - accumulated depreciation
Estimated
Useful Life
15-40 years
20 years
3-12 years
December 31,
2011
$ 5,851
1,378
42,634
3,039
237,051
8,434
298,387
177,859
2010
$ 5,985
501
42,678
1,852
234,153
14,418
299,587
181,099
Property, plant and equipment, net
$ 120,528
$ 118,488
47
NN, Inc.
Notes to Consolidated Financial Statements
December 31, 2011, 2010 and 2009
(In thousands, except per share data)
During the first quarter of 2011, we reduced machinery and equipment by $11,102 and accumulated depreciation by
$9,759 for a net reduction in property, plant and equipment of $1,343 related to the Eltmann Plant deconsolidation.
(See Note 1 of the Notes to Consolidated Financial Statements).
During the fourth quarter of 2011, property, plant and equipment increased for the addition of land and building
totaling $1,948 acquired through a 20 year capital lease obligation at our Kunshan Plant effective October 1, 2011.
During the first quarter of 2010, we incurred $1,000 of accelerated depreciation to adjust certain assets that were to
be abandoned as a result of NN ceasing operations at the Tempe Plant to the new estimated salvage values. (See Note
2 of the Notes to Consolidated Financial Statements).
During the third quarter of 2010, we sold machinery that ceased to be used at our Tempe Plant with a net book value
of $2,230 in exchange for promissory notes receivable with a carrying value and estimated fair value of $1,562. (See
Note 4 of the Notes to Consolidated Financial Statements).
As of December 31, 2010, the asset groups of the Wellington Plants and Eltmann Plant were tested for impairment
pursuant to impairment testing relative to long-lived assets due to the losses incurred by the Wellington Plants during
2010 and the legally required bankruptcy filing on January 20, 2011 of Eltmann. The results of our analysis indicated
impairment was not warranted for the Wellington Plants. The Eltmann production machinery was reduced by $308 to
its current estimated fair value.
7) Debt
Long-term debt at December 31, 2011 and 2010 consisted of the following:
Borrowings under our $100,000 revolving credit facility bearing
interest at a floating rate equal to LIBOR (0.30% at December 31,
2011) plus an applicable margin of 3.00%, expiring December 21,
2014.
Borrowings under our $40,000 aggregate principal amount of senior
notes bearing interest at a fixed rate of 5.39% maturing on April
26, 2014. Annual principal payments of $5,714 began on April
26, 2008 and extend through the date of maturity.
Borrowings under our $20,000 aggregate principal amount of senior
notes bearing interest at a fixed rate of 4.64% maturing on
December 20, 2018. Annual principal payments of $4,000 will
begin on December 22, 2014 and extend through the date of
maturity.
Total long-term debt
Less current maturities of long-term debt
2011
2010
$ 40,989
$ 50,500
17,143
22,857
20,000
78,132
--
73,357
6,503
5,714
Long-term debt, excluding current maturities
$ 71,629
$ 67,643
On December 20, 2011, we borrowed an additional $20,000 in seven-year fixed rate notes from Prudential Capital at
a rate of 4.64%. These notes, which mature on December 20, 2018, are interest-only for the first two years followed
by five equal annual principal payments. The proceeds were used to repay existing revolving credit bank debt and to
fund growth capital projects. Prudential Capital also agreed to reduce the rate on the Company’s existing $17,143 of
fixed rate notes due in 2014 from 6.50% to 5.39%.
48
NN, Inc.
Notes to Consolidated Financial Statements
December 31, 2011, 2010 and 2009
(In thousands, except per share data)
On September 30, 2011, NN amended its $100,000 revolving credit agreement agented by KeyBank and its long-term loan
agreement with Prudential Capital in order to adjust the fixed charge coverage ratio covenant to better correlate current and
expected levels of capital spending and other fixed charges with earnings before taxes, interest and depreciation (EBITDA).
The fixed charge coverage ratio was reduced from not less than 1.10 to 1.00 and not less than 1.25 to 1.00 (for quarters
ending after September 30, 2011) to “not to be less than 1.00 to 1.00 as of the last day of any fiscal quarter” for the quarters
ending September 30, 2011 through September 30, 2012. Starting October 1, 2012, the fixed charge coverage ratio
increases to “not to be less than 1.25 to 1.00 as of the last day of any fiscal quarter”. The amendments also provide that
the company will assure that the total outstanding under the revolving credit agreement shall be at least $10,000 less than the
total committed amount of $100,000 during the period commencing September 30, 2011 and ending on September 30, 2012.
On December 21, 2010, we entered into an amended and restated revolving credit facility expiring December 21, 2014 with
Key Bank as administrative agent with an initial size of $75,000. The amended agreement was entered into to adjust our
financial and non-financial covenants to more normalized measures and to provide greater ability to fund our capital
investment plans. The interest rate was amended to LIBOR plus a margin of 1.5% to 3.5% (depending on the level of the
ratio of debt to EBITDA) from LIBOR plus a margin of 4.75%. The facility may be expanded upon our request with
approval of the lenders by up to $60,000, under the same terms and conditions. On March 9, 2011, we exercised an option
to increase the size of the facility from $75,000 to $100,000 to allow additional flexibility and to fund potential growth
projects. The loan agreement contains customary restrictions on, among other things, additional indebtedness, liens on our
assets, sales or transfers of assets, investments, restricted payments (including payment of dividends and stock repurchases),
issuance of equity securities, and merger, acquisition and other fundamental changes in our business including a “material
adverse change” clause, which if triggered would accelerate the maturity of the debt. The facility has a $10,000 swing line
feature to meet short term cash flow needs. Any borrowings under this swing line are considered short term. Costs
associated with entering into the revolving credit facility and the subsequent September 30, 2011 amendment were
capitalized and will be amortized into interest expense over the life of the facility. As of December 31, 2011 and 2010,
$1,761 and $1,978, respectively, of net capitalized loan origination costs related to the revolving credit facility were
recorded on the consolidated balance sheet within other non-current assets.
On December 21, 2010, our senior notes agreement with Prudential Capital was also amended. The amended agreement
was entered into to adjust our financial and non-financial covenants to more normalized measures. There were no changes
to the terms or availability of credit but the interest rate was reduced from 8.50% to 6.70%. The agreement contains
customary restrictions on, among other things, additional indebtedness, liens on our assets, sales or transfers of assets,
investments, restricted payments (including payment of dividends and stock repurchases), issuance of equity securities, and
mergers, acquisitions and other fundamental changes in our business including a “material adverse change” clause, which if
triggered would accelerate the maturity of the debt. Interest is paid semi-annually and the notes mature on April 26, 2014.
Annual principal payments of approximately $5,714 began on April 26, 2008 and extend through the date of maturity. We
incurred costs as a result of issuing these notes and the subsequent September 30, 2011 and December 20, 2011 amendments
which have been recorded as a component of other non-current assets and are being amortized over the term of the notes.
The unamortized balance at December 31, 2011 and 2010 was $290 and $428, respectively.
The aggregate maturities of long-term debt including current portion for each of the five years subsequent to
December 31, 2011 are as follows:
Year ending December 31,
2012
2013
2014
2015
2016
Thereafter
Total
$ 6,503
5,715
49,914
4,000
4,000
8,000
$ 78,132
On June 1, 2004, our wholly owned subsidiary, NN Asia, entered into a twenty year lease agreement with Kunshan
Tian Li Steel Structure Co. LTD for the lease of land and building (approximately 110,000 square feet) in the
49
NN, Inc.
Notes to Consolidated Financial Statements
December 31, 2011, 2010 and 2009
(In thousands, except per share data)
Kunshan Economic and Technology Development Zone, Jiangsu, The People’s Republic of China. The fair value of
the land and building were estimated to be approximately $520 and $1,930 (at current exchange rates), respectively
and undiscounted annual lease payments are approximately $287 (approximately $5,700 aggregate non-discounted
lease payments over the twenty year term). The lease is cancelable after the fifth, ninth, and fourteenth years without
payment or penalty by us. In addition, after the end of year five and each succeeding year we can buy the land for a
preset price per square meter value and the building for actual cost less depreciation.
On October 1, 2011, our wholly owned subsidiary, NN Asia, entered into a twenty year lease agreement with
Kunshan Tian Li Steel Structure Co. LTD for the lease of land and building adjacent to the current leased facility
(approximately 75,000 square feet) in the Kunshan Economic and Technology Development Zone, Jiangsu, The
People’s Republic of China. This lease was entered into to expand the production capacity of our current leased
facility. The fair value of the land and building were estimated to be approximately $854 and $1,107 (at current
exchange rates), respectively and undiscounted annual lease payments are approximately $185 (approximately $3,700
aggregate non-discounted lease payments over the twenty year term). The lease is cancelable after the fifth, ninth,
and fourteenth years without payment or penalty by us. In addition, after the end of year five and each succeeding
year we can buy the land for a preset price per square meter value and the building for actual cost less depreciation.
Below are the minimum future lease payments under both capital leases together with the present value of the net
minimum lease payments as of December 31, 2011:
Year ending December 31,
2012
2013
2014
2015
2016
Thereafter
Total minimum lease payments
Less interest included in payments above
Present value of minimum lease payments
$ 472
472
472
472
472
5,246
7,606
(3,534)
$ 4,072
8) Employee Benefit Plans
We have defined contribution 401(k) profit sharing plans covering substantially all U.S. employees. All employees
are eligible for the plans on the first day of the month following their employment date. A participant may elect to
contribute between 1% and 60% of their compensation to the plans, subject to Internal Revenue Service (“IRS”)
dollar limitations. Participants age 50 and older may defer an additional amount up to the applicable IRS Catch Up
Provision Limit. We provide a matching contribution which is determined on an individual, participating company
basis. Currently, the matching contribution for U.S. employees of the Metal Bearing Components Segment is the
greater of five hundred dollars or 50% of the first 4% of compensation contributed. The matching contributions for
the Plastic and Rubber Components Segment locations are 25% of the first 6% of compensation contributed for the
Lubbock Plant and 50% of the first 6% of compensation contributed for the Danielson Plant. The matching
contribution for Precision Metal Components Segment employees is 25% of the first 5% of compensation
contributed. All participant contributions are immediately vested at 100%. Contributions for the Metal Bearing
Components Segment were $144, $117, and $112 in 2011, 2010, and 2009, respectively. Contributions for the Plastic
and Rubber Components Segment were $94, $90, and $78 in 2011, 2010 and 2009, respectively. Contributions for
the Precision Metal Components Segment employees were $96, $75, and $12 in 2011, 2010 and 2009, respectively.
Prior to January 20, 2011, we had a defined benefit pension plan covering our Eltmann Plant. The benefits were based
on the expected years of service. The plan was unfunded. Effective January 20, 2011, the defined benefit pension
plan covering the employees at our Eltmann Plant is under control of the bankruptcy trustee and has been or will be
taken over by the German government’s pension security fund. The plan is no longer a responsibility of NN,
resulting in a reduction of accrued pension liabilities of $5,623 on January 20, 2011. We have no remaining pension
obligations under this plan. (See Note 1 of the Notes to Consolidated Financial Statements).
50
NN, Inc.
Notes to Consolidated Financial Statements
December 31, 2011, 2010 and 2009
(In thousands, except per share data)
Following is a summary of the funded status and changes in the projected benefit obligation for the Eltmann defined
benefit pension plan as of and during the years ended December 31, 2010 and 2009:
2010
$ (5,574)
--
$ (5,574)
$ (5,574)
$ 546
2010
$ 5,488
262
(174)
(394)
392
$ 5,574
2010
4.75%
0% - 1.5%
12/31/10
Reconciliation of Funded Status:
Benefit obligation
Fair value of plan assets
Funded status
Net amount recognized under accrued pension
Items not yet recognized as a component of net periodic pension cost:
Unrecognized net actuarial loss
Change in projected benefit obligation:
Benefit obligation at beginning of year
Interest cost
Benefits paid
Effect of currency translation
Actuarial loss
Benefit obligation at December 31
Weighted-average assumptions as of December 31:
Discount rate
Rate of compensation increase
Measurement date
Components of net periodic benefit cost:
Interest cost on projected benefit obligation
Amortization of net loss
Net periodic pension benefit cost
2010
2009
$ 262
--
$ 262
$ 276
--
$ 276
2010
2009
Amounts Recognized in Accumulated Other
Comprehensive Income:
Period actuarial loss
Net periodic pension cost
$ 392
$ 392
$ 315
$ 315
51
NN, Inc.
Notes to Consolidated Financial Statements
December 31, 2011, 2010 and 2009
(In thousands, except per share data)
Severance Indemnity
In accordance with Italian law, the Company has an unfunded severance plan under which all Italian employees are
entitled to receive severance indemnities (Trattamento di Fine Rapporto or “TFR”) upon termination of their
employment.
Effective January 1, 2007, the amount payable based on salary paid is remitted to a pension fund managed by a third
party. The severance indemnities paid to the pension fund accrue approximately at the rate of 1/13.5 of the gross
salaries paid during the year. The amounts accrued become payable upon termination of the individual employee, for
any reason, e.g., retirement, dismissal or reduction in work force. Employees are fully vested in TFR benefits after
their first year of service. The amounts shown in the table below represent the actual liability at December 31, 2011
and 2010 reported under accrued pension in the Consolidated Balance Sheets.
Beginning balance
Amounts accrued
Payments to employees
Payments to government managed plan
Foreign currency impacts
Ending balance
Service and Early Retirement Provisions
2011
$ (7,115)
(1,189)
318
835
229
$ (6,922)
2010
$ (8,015)
(899)
583
636
580
$ (7,115)
We have two plans that cover our Veenendaal Plant employees. One provides an award for employees who achieve
25 or 40 years of service and the other is an award for employees upon retirement. These plans are both unfunded
and the benefits are based on years of service and rate of compensation at the time the award is paid. The table below
summarizes the changes in the two plans combined for the years ended December 31, 2011 and 2010.
Beginning balance
Service cost
Interest cost
Benefits paid
Foreign currency impacts
Ending balance
9) Stock Based Compensation
2011
$ (749)
(52)
(38)
80
(24)
$ (783)
2010
$ (805)
(72)
(18)
87
59
$ (749)
We recognize compensation expense of all employee and non-employee director share-based compensation awards in
the financial statements based upon the fair value of the awards over the requisite service or vesting period, less
anticipated forfeitures. We account for stock awards by recognizing the fair value of the awarded stock at the grant
date as compensation expense over the vesting period, less anticipated forfeitures.
In the years ended December 31, 2011, 2010, and 2009, approximately $828, $1,253, and $337, respectively of
compensation expense was recognized in selling, general and administrative expense for all share-based awards. The
compensation expense recognized in the years ended December 31, 2011, 2010 and 2009 related to stock options was
$480, $152, and $337, respectively. The compensation expense related to stock awards was $348, $1,101, and $0,
respectively.
During the year ended December 31, 2011, our shareholders approved a new stock based compensation plan totaling
2,500 shares that can be issued in the form of stock options, stock appreciation rights and/or other stock based awards.
Any options issued count as the equivalent of one share under the plan. Any stock appreciation rights and/or other
stock based awards count as the equivalent one and a half shares under the new plan. As of December 31, 2011, we
have approximately 2,200 maximum shares that can be issued as options, stock appreciation rights, and/or other stock
based awards. Under our previously approved plan, we still have 67 options available for issuance.
52
NN, Inc.
Notes to Consolidated Financial Statements
December 31, 2011, 2010 and 2009
(In thousands, except per share data)
Stock Option Awards
Option awards are typically granted to non-employee directors and key employees on an annual basis. A single
option grant is typically awarded to eligible employees and non-employee directors each year if and when granted by
the Compensation Committee of the Board of Directors and occasionally individual grants are awarded to eligible
employees. All employee and non-employee directors are awarded options at an exercise price equal to the closing
price of our stock on the date of grant. The term life of options is ten years with vesting periods of generally three
years for key employees and one year for non-employee directors. The fair value of our options cannot be determined
by market value as they are not traded in an open market. Accordingly, a financial pricing model is utilized to
determine fair value. We utilize the Black Scholes model which relies on certain assumptions to estimate an option's
fair value.
During 2011, 2010 and 2009, we granted 216, 33, and 232 options, respectively, to certain key employees and non-
employee directors. The weighted average grant date fair value of the options granted during the years ended
December 31, 2011, 2010 and 2009 was $5.98, $2.64, and $0.77, respectively. Upon exercise of stock options, new
shares of our stock are issued. The weighted average assumptions relevant to determining the fair value at the dates
of grant are below:
Term
Risk free interest rate
Dividend yield
Expected volatility
Expected forfeiture rate
2011
6 years
1.72%
0.00%
42.10%
6.20%
2010
6 years
2.37%
0.00%
63.90%
6.20%
2009
6 years
1.84%
0.00%
63.90%
0.00%
The expected volatility rate is derived from actual Company common stock historical volatility over the same time
period as the expected term. The volatility rate is derived by mathematical formula utilizing daily closing price data.
The expected dividend yield is derived by mathematical formula which uses the expected Company annual dividends
over the expected term divided by the fair market value of the Company's common stock at the grant date.
The average risk-free interest rate is derived from United States Department of Treasury published interest rates of
daily yield curves for the same time period as the expected term.
The forfeiture rate is determined from examining the historical pre-vesting forfeiture patterns of past option issuances
to key employees. The forfeiture rate is estimated to be 0% for non-employee directors. While the forfeiture rate is
not an input of the Black Scholes model for determining the fair value of the options, it is an important determinant of
stock option compensation expense to be recorded.
The term is derived from using the “Simplified Method” of determining stock option terms as described under the
Securities and Exchange Commission’s Staff Accounting Bulletin 107.
53
NN, Inc.
Notes to Consolidated Financial Statements
December 31, 2011, 2010 and 2009
(In thousands, except per share data)
The following table provides a reconciliation of option activity for the year ended December 31, 2011:
Options
Outstanding at January 1, 2011
Granted
Exercised
Forfeited or expired
Outstanding at December 31, 2011
Exercisable at December 31, 2011
Weighted-
Average
Exercise
Price
$ 9.23
$ 14.05
$ 9.40
$ 8.76
$ 10.12
$ 9.71
Shares
(000’s)
1,205
216
(254)
(26)
1,141
892
Weighted-
Average
Remaining
Contractual
Term
Aggregate
Intrinsic
Value
($000)
5.6
6.7
$ 954
$ 730
(1)
(1)
(1) The intrinsic value is the amount by which the market price of our stock was greater than the exercise price of any individual option grant at
December 31, 2011.
As of December 31, 2011, there was approximately $660 of unrecognized compensation costs to be recognized over
approximately two years.
Cash proceeds from the exercise of options in the year ended December 31, 2011, 2010, and 2009 totaled
approximately $2,382, $753, and $0, respectively. For the years ended December 31, 2011, 2010 and 2009, proceeds
from stock options were presented inclusive of tax benefits of $0, $0, and $0, respectively, in the Financing Activities
section of the Consolidated Statements of Cash Flows. The total intrinsic value of options exercised during the years
ended December 31, 2011, 2010 and 2009 was $1,283, $89, and $0, respectively.
Stock Awards
During the year ended December 31, 2011 and 2010, we issued 75 and 249 shares, respectively, of our common
stock. The fair value of the shares issued was determined by using the grant date price of our common stock. The
recognized compensation expense for stock awards in the years ended December 31, 2011, 2010, and 2009 was
approximately $348, $1,101, and $0, respectively. The shares issued in 2011 vest over three years. For the 2010
grant, we incurred $1,101 of compensation expense, which was the entire fair value of the grant, at the grant date due
to the shares being fully vested at that date.
10) Goodwill, Net
As of December 31, 2011, we have recorded goodwill at only one site, the Pinerolo Plant reporting unit of the Metal
Bearing Components Segment. We completed our annual goodwill impairment review during the fourth quarters of
2011, 2010, and 2009. For the year ended December 31, 2011, we concluded that there were no indicators of
impairment at the Pinerolo Plant reporting unit.
The changes in the carrying amount of goodwill for the years ended December 31, 2011, 2010 and 2009 are as
follows:
54
NN, Inc.
Notes to Consolidated Financial Statements
December 31, 2011, 2010 and 2009
(In thousands, except per share data)
(In thousands)
Balance as of January 1, 2009
Currency impacts
Balance as of December 31, 2009
Currency impacts
Balance as of December 31, 2010
Currency impacts
Balance as of December 31, 2011
Metal Bearing
Components
Segment
$ 8,908
370
$ 9,278
(882)
$ 8,396
(357)
$ 8,039
The cumulative accumulated impairment charges included in the reported goodwill balances at December 31, 2011,
2010 and 2009 are $40,045.
11) Intangible Assets, Net
The Precision Metal Components Segment has an intangible asset not subject to amortization of $900 related to the
value of the trade names of Whirlaway. This indefinite lived intangible asset was tested for impairment pursuant to
U.S. GAAP as of December 31, 2011 and the fair value of this intangible asset exceeded its book value.
During the year ended December 31, 2010, we fully amortized our contract intangible within the Metal Bearing
Components Segment. This intangible asset was subject to amortization over approximately five years starting in
2006 and amortization expense was approximately $550 a year. For the years ended December 31, 2010 and 2009,
the amortization expense totaled $562 and $586, respectively, and accumulated amortization totaled $2,733 at
December 31, 2010.
12) Segment Information
We determined our reportable segments under the provisions of U.S. GAAP related to disclosures about segments of
an enterprise. Our three reportable segments are based on differences in product lines and are as follows:
Metal Bearing Components Segment
Erwin Plant
Mountain City Plant
Pinerolo Plant
Veenendaal Plant
Kysucke Plant
Kunshan Plant
Plastic and Rubber Components Segment
Danielson Plant
Lubbock Plant
Precision Metal Components Segment
Wellington Plant 1
Wellington Plant 2
Note: The segment information below includes the following former NN facilities. The Eltmann Plant was
deconsolidated from NN on January 20, 2011. The Tempe plant ceased operations August 31, 2010. The Hamilton
Plant was closed during the first quarter of 2009.
55
NN, Inc.
Notes to Consolidated Financial Statements
December 31, 2011, 2010 and 2009
(In thousands, except per share data)
All of the facilities in the Metal Bearing Components Segment are engaged in the production of precision steel balls,
steel rollers, and metal retainers and automotive specialty products used primarily in the bearing industry. The Plastic
and Rubber Components Segment facilities are engaged in the production of plastic retainers for bearing components,
automotive components, electronic instrument cases and other molded components used in a variety of industrial and
consumer applications and precision rubber bearing seals for the bearing, automotive, industrial, agricultural, and
aerospace markets. The Precision Metal Components Segment is engaged in the production of highly engineered
precision metal components and subassemblies including, highly engineered shafts, mechanical components, complex
precision assembled and tested parts and fluid system components for the automotive, HVAC, fluid power, and diesel
engine industries.
The accounting policies of the segments are the same as those described in the summary of significant accounting
policies. We evaluate segment performance based on segment net income (loss) after income tax expense (benefit).
We account for inter-segment sales and transfers at current market prices. We did not have any individually material
inter-segment transactions during 2011, 2010, or 2009.
Metal Bearing
Components
Segment
Precision
Metal
Components
Segment
Plastic and
Rubber
Components
Segment
Corporate and
Consolidations
Total
December 31, 2011
Net sales
Interest expense
Depreciation and amortization
Income tax expense
Segment net income (loss)
Segment assets
Expenditures for long- lived assets
December 31, 2010
Net sales
Interest expense
Depreciation and amortization
Income tax expense (benefit)
Segment net income (loss)
Segment assets
Expenditures for long- lived assets
December 31, 2009
Net sales
Interest expense
Depreciation and amortization
Income tax expense (benefit)
Segment net loss
Segment assets
Expenditures for long- lived assets
$ 308,883
214
12,295
4,785
30,360
188,872
11,791
$ 271,339
660
13,522
4,687
24,910
190,700
5,450
$ 183,605
959
17,002
(4,621)
(16,108)
190,482
3,187
$ 43,536
960
1,371
--
1,919
19,740
1,344
$ 39,117
960
1,439
--
2,504
18,871
784
$ 30,775
960
1,607
--
(2,091)
18,435
75
$ --
2,262
4
383
(8,199)
3,822
--
$ --
3,566
4
(118)
(12,076)
4,145
--
$ --
3,081
4
2,331
(12,744)
4,527
--
$ 424,691
4,715
17,016
5,168
20,937
259,461
20,329
$ 365,369
6,815
19,195
4,569
6,416
248,555
15,249
$ 259,383
6,359
22,186
(2,290)
(35,334)
242,652
4,255
$ 72,272
1,279
3,346
--
(3,143)
47,027
7,194
$ 54,913
1,629
4,230
--
(8,922)
34,839
9,015
$ 45,003
1,359
3,573
--
(4,391)
29,208
993
56
NN, Inc.
Notes to Consolidated Financial Statements
December 31, 2011, 2010 and 2009
(In thousands, except per share data)
Due to the large number of countries in which we sell our products, sales to external customers and long-lived assets
utilized by us are reported in the following geographical regions:
December 31, 2011
December 31, 2010
December 31, 2009
Property,
Plant and
Equipment,
Net
Net Sales
Property,
Plant and
Equipment,
Net
Net Sales
Property,
Plant and
Equipment,
Net
Net Sales
United States
$ 140,492
$ 46,959
$ 120,576
$ 41,906
$ 91,688
$ 40,188
Europe
Asia
Canada
Mexico
S. America
All foreign
countries
Total
13) Income Taxes
193,948
42,591
6,172
23,024
18,464
56,442
17,127
--
--
--
162,438
41,616
3,909
18,032
18,798
61,813
14,769
--
--
--
118,556
27,463
1,771
8,127
11,778
74,331
15,196
--
--
--
284,199
73,569
$ 424,691 $ 120,528
244,793
76,582
$ 365,369 $ 118,488
167,695
89,527
$ 259,383 $ 129,715
During the second quarter of 2009, based on the negative financial performance of our U.S. operations during the global
economic recession, we determined that it was more likely than not the U.S. locations would be unable to generate sufficient
profits in the near future to allow realization of existing deferred tax assets. Consequently, during the second quarter of
2009, a valuation reserve was placed on the deferred tax assets related to the U.S. operations in the amount of $5,478 that
increased to $7,136 as of December 31, 2009. The determination to place a valuation allowance on the tax benefits incurred
by our U.S. based operations was made based upon the fact that second quarter and cumulative 2009 results of these entities
were much more unfavorable than originally forecasted. Given the magnitude of the incurred and expected losses from
these entities for the remainder of 2009, we determined that it was prudent not to recognize any deferred tax benefits and
fully reserve the existing deferred tax assets at June 30, 2009.
During the year ended December 31, 2010, we continued to place a valuation allowance on all of the deferred tax assets of
our U.S. locations, based on the incurred net loss during the year ended December 31, 2010 at the U.S. Consolidated entities
due to the restructuring at the Tempe Plant and the losses from operations at the Wellington Plants.
During the year ended December 31, 2011, we continued to place a valuation allowance on all the deferred tax assets at our
U.S. locations due to the uncertainty of realization of those deferred tax assets. While our U.S. entities generated pre-tax
income of $1,633 during the year ended December 31, 2011, the substantial cumulative losses in 2009 and 2010 outweigh
the positive evidence of the 2011 taxable income. If the profitability of the U.S. entities continues and increases it is likely a
significant portion if not all of the valuation allowances (except for the valuation allowances on the foreign tax credits) will
be removed. This will result in a material credit to income taxes and net income in the period in which the valuation
allowances are removed.
Income (loss) before provision (benefit) for income taxes for the years ended December 31, 2011, 2010 and 2009 was as
follows:
57
NN, Inc.
Notes to Consolidated Financial Statements
December 31, 2011, 2010 and 2009
(In thousands, except per share data)
Year ended December 31,
2010
2009
2011
Income (loss) before provision (benefit) for
income taxes:
United States
Foreign
Total
$ 1,633
24,472
$ 26,105
$ (9,528)
20,513
$ 10,985
$ (14,671)
(22,953)
$ (37,624)
Total income tax expense (benefit) for the years ended December 31, 2011, 2010, and 2009 were as follows:
Current:
U.S. Federal
State
Non-U.S.
Total current expense (benefit)
Deferred:
U.S. Federal
State
U.S. deferred tax valuation allowance
Non-U.S.
Total deferred expense (benefit)
Year ended December 31,
2011
2010
2009
$ --
113
6,023
6,136
534
170
(704)
(968)
(968)
$ --
183
3,968
4,151
(2,732)
(160)
2,892
418
418
$ (8)
55
(3,178)
(3,131)
(4,726)
(126)
7,136
(1,443)
841
Total expense (benefit)
$ 5,168
$ 4,569
$ (2,290)
A reconciliation of taxes based on the U.S. federal statutory rate of 34% for each of the years ended December 31,
2011, 2010 and 2009 is summarized as follows:
Year ended December 31,
2010
2011
2009
Income taxes (benefit) at the federal statutory
rate
Impact of incentive stock options
Increase (decrease) in U.S. valuation allowance
Increase (decrease) in foreign valuation
allowance
State income taxes, net of federal taxes
Non-U.S. earnings taxed at different rates
Other permanent differences, net
$ 8,876
163
(704)
$ 3,735 $ (12,792)
114
7,136
52
2,892
(1,219)
75
(2,116)
93
(937)
54
(1,650)
423
1,443
(86)
1,735
160
$ 5,168
$ 4,569 $ (2,290)
58
NN, Inc.
Notes to Consolidated Financial Statements
December 31, 2011, 2010 and 2009
(In thousands, except per share data)
Included in the non-U.S. earnings taxed at different rates are the effects of recognizing current and deferred tax
benefits totaling $622 related to the Eltmann deconsolidation. These benefits related to losses for write-offs of
receivables owed by Eltmann to certain NN subsidiaries that will be deductible once Eltmann is finally liquidated in
2012 or 2013. Additionally, during the year ended December 31, 2011, we began to recognize tax expense at our
Kunshan (China) Plant and our Kysucke (Slovakia) Plant as we have fully utilized the previous net operating losses at
these foreign jurisdictions. Finally, the decrease in foreign valuation allowance was due to eliminating the valuation
allowance on deferred tax assets at our Kysucke (Slovakia) Plant.
The tax effects of the temporary differences as of December 31, 2011, 2010 and 2009 are as follows:
Deferred income tax liabilities:
Tax in excess of book depreciation
Goodwill
Allowance for bad debts
Other deferred tax liabilities
2011
Year ended December 31,
2010
2009
$ 5,099
1,821
18
341
$ 5,208
2,209
62
387
$ 7,401
1,742
46
155
Gross deferred income tax liabilities
7,279
7,866
9,344
Deferred income tax assets:
Goodwill
Inventories
Pension/Personnel accruals
Deductions for uncollectible Eltmann
receivables
Net operating loss carry forwards
Foreign tax credits
Other deferred tax assets
Gross deferred income tax assets
4,846
167
503
310
7,526
3,326
421
17,099
5,754
84
1,084
--
10,150
3,326
356
20,754
6,686
184
1,041
--
9,181
3,326
277
20,695
Valuation allowance on deferred tax
assets
(12,568)
(16,604)
(14,649)
Net deferred income tax assets
4,531
4,150
6,046
Net deferred income tax liabilities
$ 2,748
$ 3,716
$ 3,298
As realization of deferred tax assets is not assured, management has placed valuation allowances against deferred tax
assets it believes are not recoverable. For the remainder, management believes it is more likely than not that those net
deferred tax assets will be realized. However, the amount of the deferred tax assets considered realizable could be
reduced based on changing conditions. Below is a summary of the activity in the total valuation allowances during
the years ended December 31, 2011, 2010 and 2009:
Total Valuation Allowance Activity
Balance at
Beginning of
Year
Additions
Recoveries
Deconsolidation
of Eltmann
subsidiary
Balance at End
of Year
2011
2010
2009
$ 16,604
$ 14,649
$ 6,070
$ --
$ 2,892
$ 8,579
$ (1,923)
$ (937)
$ --
$ (2,113)
--
--
$ 12,568
$ 16,604
$ 14,649
59
NN, Inc.
Notes to Consolidated Financial Statements
December 31, 2011, 2010 and 2009
(In thousands, except per share data)
The net operating loss carry forwards as of December 31, 2011, are composed of net operating losses at our U.S.
operations during 2010, 2009 and 2008. The 2010 and 2009 balances of net operating losses above included $2,035
and $2,499 in 2010 and 2009, respectively, from our former Eltmann Plant which was deconsolidated on January 20,
2011. Full valuation allowances have been recorded against the U.S. companies’ net operating loss carry forwards as
of December 31, 2011, 2010 and 2009, as we believe the resulting tax benefits from these loss carry forwards are
currently not more likely than not realizable. The losses of the U.S. based entities can be carried forward 20 years.
The foreign tax credits relate to profits of certain foreign subsidiaries that were taxed as deemed dividends. These
credits represent the foreign taxes paid by these subsidiaries at higher effective rates that will be used to offset future
foreign source income. A full valuation allowance was placed against these credits as of December 31, 2008, based
on estimates of future levels of U.S. income tax and foreign source income to be generated that these credits can be
used to offset. The valuation allowance will be periodically reviewed as our estimates of future foreign source
income are revised based on actual foreign source income recognized in our tax returns and future changes in foreign
source income. As of December 31, 2011, management believes it is still not likely that we would utilize these
credits in the near future.
As of December 31, 2006, all of the Company's foreign earnings have been previously taxed in the U.S. due to the
application of IRC Sec. 956. Accordingly, no deferred taxes have been provided for undistributed earnings up to that
time. For the remainder of the foreign earnings, we expect to reinvest future earnings indefinitely in operations and
expansions outside the U.S. and do not expect such earnings to become subject to U.S. taxation in the foreseeable
future. If such earnings were distributed beyond the amount for which taxes have been provided, foreign tax credits
would substantially offset any incremental U.S. tax liability. A deferred tax liability will be recognized when we
expect we will recover these undistributed earnings in a taxable manner, such as through the receipt of dividends or
sale of the investments. As we plan to permanently reinvest foreign undistributed earnings, we have not provided for
U.S. income tax liability that would be payable if such earnings were not reinvested indefinitely.
A reconciliation of the beginning and ending amounts of unrecognized tax benefits, excluding interest and penalties
for the years ended December 31, 2011, 2010 and 2009 is as follows:
2011
2010
2009
Beginning balance
Additions for tax positions of prior years
Reductions for tax positions of prior years
Ending balance
$ 953 $ 988 $ 988
--
--
$ 988 $ 953 $ 988
--
(35)
35
--
As of December 31, 2011, the $988 of unrecognized tax benefits would, if recognized, impact the Company’s
effective tax rate.
Interest and penalties related to federal, state, and foreign income tax matters are recorded as a component of the
provision for income taxes in our statements of operations. During 2009, we accrued an additional $40 in foreign
interest and penalties resulting in an accrued balance of $740 of interest and penalties as of December 31, 2009.
During 2010, we accrued $30 in foreign interest and penalties and removed $15 in interest and penalties for closed tax
years as the previous uncertain tax accruals are no longer required. During 2011, we had a net reduction in foreign
interest and penalties of $43 as older uncertain items were eliminated and newer uncertain items added. As of
December 31, 2011, the total amount accrued for interest and penalties was $712.
The Company or its subsidiaries file income tax returns in the U.S. federal jurisdiction, and in various states and
foreign jurisdictions. With few exceptions, the Company is no longer subject to federal, state and local income tax
examinations by tax authorities for years before 2006. The Company is no longer subject to non-U.S. income tax
examinations within various European Union countries for years before 2007. We do not foresee any significant
changes to our unrecognized tax benefits within the next twelve months.
60
NN, Inc.
Notes to Consolidated Financial Statements
December 31, 2011, 2010 and 2009
(In thousands, except per share data)
14) Reconciliation of Net Income (Loss) Per Share
Year ended December 31,
2010
2009
2011
Net income (loss)
$ 20,937
$ 6,416
$ (35,334)
Weighted average shares outstanding
Effective of dilutive stock options
16,817
136
16,455
115
16,268
--
Diluted shares outstanding
16,953
16,570
16,268
Basic net income (loss) per share
$ 1.24
$ 0.39
$ (2.17)
Diluted net income (loss) per share
$ 1.24
$ 0.39
$ (2.17)
Excluded from the dilutive shares outstanding for the years ended December 31, 2011, 2010, and 2009 were 792, 962,
and 1,391 anti-dilutive options, respectively, which had per share exercise prices ranging from of $11.50 to $14.13 for
the year ended December 31, 2011, $8.09 to $12.62 for the year ended December 31, 2010, and $1.30 to $12.62 for
the year ended December 31, 2009.
15) Commitments and Contingencies
The Company has operating lease commitments for machinery, office equipment, vehicles, manufacturing and office
space which expire on varying dates. Rent expense for 2011, 2010 and 2009 was $3,181, $4,153, and $4,803,
respectively. The following is a schedule by year of future minimum lease payments as of December 31, 2011 under
operating leases that have initial or remaining non-cancelable lease terms in excess of one year.
Year ending December 31,
2012
2013
2014
2015
2016
Thereafter
$ 2,388
2,048
1,874
1,633
1,533
1,296
Total minimum lease payments
$ 10,772
During 2006, we received correspondence from the Environmental Protection Agency (“EPA”) requesting
information regarding a former waste recycling vendor ("AER") used by our former Walterboro, South Carolina
facility. AER, located in Augusta, Georgia, ceased operations in 2000 and EPA began investigating its facility. As a
result of AER’s operations, soil and groundwater became contaminated. EPA initially contacted fifty-four other
companies (“Potentially Responsible Parties” or “PRPs”) who also sent waste to AER. Most of these PRPs, including
us, have entered into a consent order with EPA to investigate and remediate the site proactively. To date, the PRP
Group has submitted a Remedial Investigation, which has been accepted by EPA. In addition, a Feasibility Study has
been tentatively approved by EPA. The costs associated with the chosen remediation are estimated to be
approximately $10,000 of which our allocated share is approximately $143 which has been fully accrued for as of
December 31, 2011. While there can be no assurances, we believe that the $143 is the maximum amount for which
we will be liable under the tentatively accepted remediation plan.
All other legal proceedings are of an ordinary and routine nature and are incidental to our operations. Management
believes that such proceedings should not, individually or in the aggregate, have a material adverse effect on our
business, financial condition, results of operations, or cash flows.
61
NN, Inc.
Notes to Consolidated Financial Statements
December 31, 2011, 2010 and 2009
(In thousands, except per share data)
Due to the impacts of the global economic recession and the resulting reduction in revenue and operating losses, our
wholly owned German subsidiary Kugelfertigung Eltmann GbmH (“Eltmann” or “Eltmann Plant”) sustained a
significant weakening of its financial condition and as a result, became technically insolvent at which point it was
required to file for bankruptcy under German bankruptcy law. The filing was made in the bankruptcy court in
Germany on January 20, 2011. As of this date, NN lost the ability to control or manage Eltmann as a result of the
bankruptcy court trustee taking over effective control and day to day management of this subsidiary. As a result of
loss of control of this subsidiary, NN deconsolidated the assets and liabilities of Eltmann from our Consolidated
Financial Statements effective January 20, 2011 (See Note 1 of Notes to Consolidated Financial Statements). The
ultimate impact on NN of Eltmann filing for bankruptcy will depend on the findings of the bankruptcy court.
However, until such court proceedings are finalized, we will not be able to determine what liabilities and contingent
obligations, if any, might remain as the responsibility of NN. Under advice from legal counsel, NN does not expect
any further significant impacts on our consolidated financial statements as a result of the liquidation of this
subsidiary.
16) Quarterly Results of Operations (Unaudited)
The following summarizes the unaudited quarterly results of operations for the years ended December 31, 2011 and
2010.
Net sales
Income from operations
Net income
Basic net income per share
Diluted net income per share
Weighted average shares
outstanding:
Basic number of shares
Effect of dilutive stock options
Year ended December 31, 2011
March 31
June 30
Sept. 30
Dec. 31
$ 111,307
9,217
5,507
0.33
0.33
$ 115,922
9,251
5,827
0.35
0.34
$ 101,143
5,795
4,702
0.28
0.28
$ 96,319
5,169
4,901
0.29
0.29
16,664
246
16,864
255
16,949
112
16,949
108
Diluted number of shares
16,910
17,119
17,061
17,057
Year ended December 31, 2010
March 31
June 30
Sept. 30
Dec. 31
Net sales
Income from operations
Net income (loss)
Basic net income (loss) per share
Diluted net income (loss) per share
$ 85,340
1,844
225
0.01
0.01
$ 92,693
6,609
5,123
0.31
0.31
$ 90,996
2,926
(1,008)
(0.06)
(0.06)
$ 96,340
4,869
2,076
0.12
0.12
Weighted average shares
outstanding:
Basic number of shares
Effect of dilutive stock options
16,309
96
16,522
111
16,526
--
Diluted number of shares
16,405
16,633
16,526
16,618
150
16,768
62
NN, Inc.
Notes to Consolidated Financial Statements
December 31, 2011, 2010 and 2009
(In thousands, except per share data)
The first quarter of 2011 was negatively impacted by $2,500 ($2,500 after tax) of start-up costs related to new large
multi-year sales programs at our Wellington Plants. Additionally, the first quarter of 2011 was favorably impacted
by gains from deconsolidating Eltmann $209 ($840 after tax). Finally, the first quarter of 2011 was unfavorably
impacted by $851 ($851 after tax) of foreign exchange losses on intercompany loans.
The second quarter of 2011 was negatively impacted by $2,000 ($2,000 after tax) of start-up costs related to new
large multi-year sales programs at our Wellington Plants. Additionally, the second quarter of 2011 was unfavorably
impacted by $304 ($304 after tax) of foreign exchange losses on intercompany loans.
The third quarter of 2011 was negatively impacted by $1,000 ($1,000 after tax) of start-up costs related to new large
multi-year sales programs at our Wellington Plants. Additionally, the third quarter of 2011 was favorably impacted
by $1,357 ($1,357 after tax) of foreign exchange gains on intercompany loans.
The fourth quarter of 2011 was negatively impacted by $500 ($500 after tax) of start-up costs related to new large
multi-year sales programs at our Wellington Plants. Additionally, the fourth quarter of 2011 was favorably
impacted by the elimination of valuation allowances of certain deferred tax assets in Europe ($770 after-tax).
Finally, the fourth quarter of 2011 was favorably impacted by $854 ($854 after tax) of foreign exchange gains on
intercompany loans.
The first quarter of 2010 was impacted by the immediate vesting of stock awards totaling $1,101 ($1,101 after tax).
Additionally, the first quarter was unfavorably impacted by $1,000 ($1,000 after tax) in accelerated depreciation and
$533 ($533 after tax) of restructuring costs both related to ceasing operations at the Tempe Plant. Finally, the first
quarter of 2010 was favorably impacted by $1,140 ($910 after tax) of foreign exchange gains on intercompany
loans.
The second quarter of 2010 was favorably impacted by $1,703 ($1,379 after tax) in foreign exchange gains on
intercompany loans. This gain was partially offset by $667 ($667 after tax) in restructuring costs related to ceasing
operations at the Tempe Plant.
The third quarter of 2010 was impacted by $2,171 ($2,171 after tax) of costs related to ceasing operations at the
Tempe Plant. Additionally the third quarter was impacted by $1,634 ($1,326 after tax) of foreign exchange losses
on intercompany loans. Finally, the third quarter was impacted by $1,023 ($1,023 after tax) of start-up costs related
to new large multi-year sales programs at our Wellington Plants.
The fourth quarter of 2010 was impacted by $2,000 ($2,000 after tax) of start-up costs related to new large multi-
year sales programs at our Wellington Plants. Additionally, the fourth quarter of 2010 was impacted by $865 ($687
after tax) in severance cost related to eliminating certain senior management positions.
17) Fair Value of Financial Instruments
We believe the fair value of financial instruments with maturities of less than a year approximate their carrying value
due to the short maturity of these instruments or in the case of our variable rate debt, due to the variable interest rates.
We elected not to measure any of our financial instruments at fair value and as such will continue to show the fair
value of our financial instruments for disclosure purposes only. The fair value of our fixed rate long-term borrowings
is calculated using significant other observable inputs (Level 2 inputs under the U.S. GAAP fair value hierarchy).
The fair value is calculated using a discounted cash flow analysis factoring in current market borrowing rates for
similar types of borrowing arrangements under our credit profile. The carrying amounts and fair values of our long-
term debt are in the table below (for disclosure purposes only):
63
NN, Inc.
Notes to Consolidated Financial Statements
December 31, 2011, 2010 and 2009
(In thousands, except per share data)
December 31, 2011
Fair
Value
Carrying
Amount
December 31, 2010
Fair
Value
Carrying
Amount
Variable rate long-term debt
Fixed rate long-term debt
$ 40,989
$ 37,143
$ 40,989
$ 37,500
$ 50,500
$ 22,857
$ 50,500
$ 22,195
18) Accumulated or Other Comprehensive Income (Loss)
The majority of our Accumulated Other Comprehensive Income balance relates to foreign currency translation of our
foreign subsidiary balances. During the year ended December 31, 2011, we have deducted from other
comprehensive income (loss) $2,578 due to foreign currency translations. During the year ended December 31,
2010, we have deducted from other comprehensive income (loss) $6,726 due to foreign currency translation. During
the year ended December 31, 2009, we have added to other comprehensive income (loss) $2,356 due to foreign
currency translation. Income taxes on the foreign currency translation adjustment in other comprehensive income
were not recognized because the earnings are intended to be indefinitely reinvested in those operations. Also
deducted from accumulated other comprehensive income as of December 31, 2010 and 2009 were actuarial losses of,
$392, net of tax and $315, net of tax, from our pension liability.
19) Related Party Transactions
With the acquisition of Whirlaway, we entered into operating leases covering two of the Whirlaway manufacturing
facilities with a company owned by the former owner of Whirlaway who was an officer of NN until September 1,
2011. The rent payments in 2011, 2010 and 2009 to this related party were $644 each year.
64
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
The Company's management, under the supervision and with the participation of the Chief Executive Officer and Chief
Financial Officer, conducted an evaluation of the effectiveness of the design and operation of the Company's disclosure
controls and procedures as defined under Rule l3a-15(e) promulgated under the Securities Exchange Act of 1934, as
amended (the "Exchange Act"). Based on this evaluation, the Chief Executive Officer and the Chief Financial Officer
concluded that the Company's disclosure controls and procedures were effective as of December 31, 2011, the end of the
period covered by this annual report on Form 10-K.
Management's Report on Internal Control Over Financial Reporting
The management of NN, Inc. is responsible for establishing and maintaining adequate internal control over financial
reporting, as such term is defined in Exchange Act Rule 13a-15(f). The Company's internal control over financial reporting
is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles. A control system, no matter
how well designed and operated, can provide only reasonable, not absolute, assurance that the control system's objectives
will be met. The design of a control system must reflect the fact that there are resource constraints, and the benefits of
controls must be considered relative to their costs. Further, because of the inherent limitations in all control systems, no
evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all
control issues and instances of fraud, if any, within the Company have been detected. The design of any system of controls
is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design
will succeed in achieving its stated goals under all potential future conditions. Management, under the supervision and with
the participation of the Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of
the Company's internal control over financial reporting based on the Internal Control- Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission ("COSO"). Based on its evaluation, management
concluded that the Company's internal control over financial reporting was effective as of December 31, 2011.
The effectiveness of our internal control over financial reporting as of December 31, 2011 has been audited by
PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which appears
under Item 8 of this annual report on Form 10-K.
Changes in Internal Control over Financial Reporting
There were no changes in the Company's internal control over financial reporting during the quarter ended December 31,
2011 that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial
reporting.
Item 9B. Other Information
None
Part III
Item 10.
Directors, Executive Officers and Corporate Governance
The information required by this item of Form 10-K concerning the Company's directors is contained in the sections entitled
"Information about the Directors" and "Beneficial Ownership of Common Stock" of the Company's definitive Proxy
Statement to be filed with the Securities and Exchange Commission within 120 days after December 31, 2011, in
accordance with General Instruction G to Form 10-K, is hereby incorporated herein by reference.
Code of Ethics. Our Code of Ethics (the “Code”) was approved by our Board on November 6, 2003. The Code is
applicable to all officers, directors and employees. The Code is posted on our website at http://www.nnbr.com. We will
satisfy any disclosure requirements under Item 10 of Form 8-K regarding an amendment to, or waiver from, any provision of
the Code with respect to our principal executive officer, principal financial officer, principal accounting officer and persons
performing similar functions by disclosing the nature of such amendment or waiver on our website or in a report on
65
Form 8-K.
Item 11.
Executive Compensation
The information required by Item 402 of Regulation S-K is contained in the sections entitled "Information about the
Directors -- Compensation of Directors" and "Executive Compensation" of the Company's definitive Proxy Statement and,
in accordance with General Instruction G to Form 10-K, is hereby incorporated herein by reference.
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
The information required by Items 201(d) and 403 of Regulation S-K is contained in the section entitled "Beneficial
Ownership of Common Stock" of the Company's definitive Proxy Statement and, in accordance with General Instruction G
to Form 10-K, is hereby incorporated herein by reference.
Information required by Item 201 (d) of Regulations S-K concerning the Company’s equity compensation plans is set forth
in the table below:
Table of Equity Compensation Plan Information
(in thousands, except per share data)
Plan Category
Number of securities to
be issued upon exercise
of outstanding options,
warrants and rights
Weighted –average exercise
price of outstanding options,
warrants and rights
Number of securities remaining
available for future issuance under
equity compensation plans
(excluding securities reflected in
column (a))
Equity
compensation
plans approved by
security holders
Equity
compensation
plans not approved
by security holders
Total
(a)
1,141
--
1,141
(b)
$10.12
--
$10.12
(c)
2,260
--
2,260
Item 13.
Certain Relationships and Related Transactions, and Director Independence
With the acquisition of Whirlaway, we entered into operating leases covering two of the Whirlaway manufacturing facilities
with a company owned by the former owner of Whirlaway, Mr. Thomas Zupan, who was an officer of NN until September
1, 2011. The rent payments in 2011, 2010 and 2009 to this related party were $0.6 million each year.
Information regarding review, approval or ratification of transactions with related persons is contained in a section entitled
“Certain Relationships and Related Transactions” of the Company’s definitive Proxy Statement and, in accordance with
General Instruction G to Form 10-K, is hereby incorporated herein by reference.
Information regarding director independence is contained in a section entitled “Information about the Directors” of the
Company’s definitive Proxy Statement and, in accordance with General Instruction G to Form 10-K, is hereby incorporated
herein by reference.
66
Item 14.
Principal Accountant Fees and Services
Information required by this item of Form 10-K concerning the Company’s accounting fees and services is contained in the
section entitled “Fees Paid to Independent Registered Public Accounting Firm” of the Company’s definitive Proxy
Statement and, in accordance with General Instruction G to Form 10-K, is hereby incorporated herein by reference.
Item 15.
Exhibits and Financial Statement Schedules
Part IV
(a) List of Documents Filed as Part of this Report
1. Financial Statements
The financial statements of the Company filed as part of this Annual Report on Form 10-K begin on the following pages
hereof:
Page
Report of Independent Registered Public Accounting Firm ...................................................................................... 35
Consolidated Balance Sheets at December 31, 2011 and 2010 .................................................................................. 36
Consolidated Statements of Income (Loss) and Comprehensive Income (Loss) for the
years ended December 31, 2011, 2010, and 2009 ...................................................................................................... 37
Consolidated Statements of Changes in Stockholders’ Equity for the
years ended December 31, 2011, 2010, and 2009 ...................................................................................................... 38
Consolidated Statements of Cash Flows for the years ended
December 31, 2011, 2010, and 2009 .......................................................................................................................... 39
Notes to Consolidated Financial Statements . ............................................................................................................ 40
2. Financial Statement Schedules
The required information is reflected in the Notes to Consolidated Financial Statements within Item 8.
3. See Index to Exhibits (attached hereto)
(b) Exhibits: See Index to Exhibits (attached hereto).
The Company will provide without charge to any person, upon the written request of such person, a copy of any of
the Exhibits to this Form 10-K.
(c) Not Applicable
67
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned, thereunto duly authorized.
By:
/S/ RODERICK R. BATY
Roderick R. Baty
Chairman of the Board,
Chief Executive Officer and President
Dated: March 15, 2012
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following
persons on behalf of the Registrant and in the capacities and on the date indicated.
Name and Signature
Title
Date
/S/ RODERICK R. BATY
Roderick R. Baty
/S/ JAMES H. DORTON
James H. Dorton
Chairman of the Board, Chief Executive
March 15, 2012
Officer and President
Senior Vice President-Corporate
March 15, 2012
Development and Chief Financial
Officer
/S/ WILLIAM C. KELLY, JR.
William C. Kelly, Jr.
Vice President-Chief Administrative
Officer, Secretary and Treasurer
March 15, 2012
/S/ THOMAS C. BURWELL, JR.
Thomas C. Burwell, Jr.
/S/ G. RONALD MORRIS
G. Ronald Morris
/S/ MICHAEL E. WERNER
Michael E. Werner
/S/ STEVEN T. WARSHAW
Steven T. Warshaw
/S/ RICHARD G. FANELLI
Richard G. Fanelli
Vice President-Chief Accounting Officer
and Corporate Controller
March 15, 2012
March 15, 2012
March 15, 2012
March 15, 2012
March 15, 2012
Director
Director
Director
Director
68
Index to Exhibits
Index to Exhibits
2.1
3.1
3.2
3.4
4.1
Asset Purchase Agreement dated April 14, 2003 among SKF Holding Maatschappij Holland B.V., SKF
B.V., NN, Inc. and NN Netherlands B.V. (incorporated by reference to Exhibit 2.1 of Form 8-K filed on
May 16, 2003)
Restated Certificate of Incorporation of the Company (incorporated by reference to Exhibit 3.1 of the
Company’s Registration Statement No. 333-89950 on Form S-3 filed June 6, 2002)
Restated By-Laws of the Company (incorporated by reference to Exhibit 3.2 of the Company’s
Registration Statement No. 333-89950 on Form S-3 filed June 6, 2002)
Amendments to the Restated By-Laws of NN, Inc. (incorporated by reference to the Company’s Form 8-K
filed December 18, 2008)
The specimen stock certificate representing the Company’s Common Stock, par value $0.01 per share
(incorporated by reference to Exhibit 4.1 of the Company’s Registration Statement No. 333-89950 on
Form S-3 filed June 6, 2002)
10.1 NN, Inc. 1994 Stock Incentive Plan*
10.2 Amendment No. 1 to the NN, Inc. 1994 Stock Incentive Plan (incorporated by reference to Exhibit 4.6 of
the Company’s Registration Statement No. 333-50934 on Form S-8 filed on November 30, 2000)*
10.3 Amendment No. 2 to the NN, Inc. 1994 Stock Incentive Plan (incorporated by reference to Exhibit 4.7 of
the Company’s Registration Statement No. 333-69588 on Form S-8 filed on September 18, 2001)*
10.4 Amendment No. 3 to NN, Inc. 1994 Stock Incentive Plan as ratified by the shareholders on May 15, 2003
amending the Plan to permit the issuance of awards under the Plan to directors of the Company
(incorporated by reference to Exhibit 10-1 of the Company's Quarterly Report on Form 10-Q filed August
14, 2003)*
10.5 NN, Inc. 2005 Stock Incentive Plan (incorporated by reference to the Company's Form S-8 filed
December 16, 2005)*
10.6 NN, Inc. 2011 Stock Incentive Plan (incorporated by reference to the Company’s Proxy Statement filed
April 6, 2011)*
10.7 Form of Indemnification Agreement (incorporated by reference to Exhibit 10.6 of the Company’s
Registration Statement No. 333-89950 on Form S-3/A filed July 15, 2002)
10.8 Form of Incentive Stock Option Agreement used in connection with the 1994 Stock Incentive Plan, 2005
Stock Incentive Plan, and 2011 Stock Incentive Plan (incorporated by reference to Exhibit 10.1 of the
Company’s Registration Statement No. 333-89950 on Form S-3/A filed July 15, 2002)*
10.9 Form of Stock Option Agreement, dated December 7, 1998, between the Company and the non-employee
directors of the Company, used in connection with the 1994 Stock Incentive Plan, 2005 Stock Incentive
Plan, and 2011 Stock Incentive Plan (incorporated by reference to Exhibit 10.15 of the Company’s Annual
Report on Form 10-K filed March 31, 1999)*
10.10 Form of Restricted Stock Grant Agreement used in connection with the 1994 Stock Incentive Plan, 2005
Stock Incentive Plan, and 2011 Stock Incentive Plan*#
10.11 Elective Deferred Compensation Plan, dated February 26, 1999 (incorporated by reference to Exhibit
10.16 of the Company’s Annual Report on Form 10-K filed March 31, 1999)*
69
10.12 Executive Employment Agreement, dated August 21, 2006, between the Company and Roderick R. Baty
(incorporated by reference to the Company's Forms 8-K filed August 24, 2006 and March 18, 2010)*
10.13 Executive Employment Agreement, dated August 21, 2006, between the Company and James H. Dorton
(incorporated by reference to the Company's Forms 8-K filed August 24, 2006 and March 18, 2010)*
10.14 Executive Employment Agreement, dated August 21, 2006, between the Company and Frank T. Gentry
(incorporated by reference to Company's Current Report on Forms 8-K filed August 24, 2006 and March
18, 2010)*
10.15 Executive Employment Agreement dated August 21, 2006, between the Company and William C. Kelly,
Jr. (incorporated by reference to the Company's Current Report on Forms 8-K filed August 24, 2006 and
March 18, 2010)*
10.16 Executive Employment Agreement dated August 21, 2006, between the Company and Jeffrey H. Hodge
(incorporated by reference to Exhibit 10.16 of the Company's Annual Report on Forms 10-K filed March
31, 2010)*
10.17 Amended and Restated Executive Employment Agreement dated September 1, 2011, between the
Company and Thomas C. Burwell, Jr.* #
10.18 Executive Employment Agreement dated July 21, 2011, between Whirlaway and James R. Widders *#
10.19 NN Euroball, ApS Shareholder Agreement dated April 6, 2000 among NN, Inc., AB SKF and FAG
Kugelfischer Georg ShaferAG (incorporated by reference to Exhibit 10.26 of the Company's Annual
Report on Form 10-K filed March 29, 2002)
10.20 Frame Supply Agreement between Euroball S.p.A., Kugelfertigung Eltmann GmbH, NN Euroball Ireland
Ltd. and Ascometal effective January 1, 2002 (We have omitted certain information from the Agreement
and filed it separately with the Securities and Exchange Commission pursuant to our request for
confidential treatment under Rule 24b-2. We have identified the omitted confidential information by the
following statement, "Confidential portions of material have been omitted and filed separately with the
Securities and Exchange Commission," as indicated throughout the document with an asterisk in brackets
([*])) (incorporated by reference to Exhibit 10.26 of the Company's Annual Report on Form 10-K filed
March 31, 2003)
10.21 Second Amended and Restated Credit Agreement among NN, Inc. as U.S. Borrower and its subsidiaries
and the Lenders named therein Key Bank National Association as lead arranger, book runner and
administrative agent, and Branch Bank and Trust Company as documentation agent and Wells Fargo
Bank, N.A. as Foreign Swing line Lender and Regions Bank as Domestic Swing line Lender dated as of
December 21, 2010 (incorporated by reference to the Company’s Current Report on Form 8-K filed
December 27, 2010).
10.22 Amendment No.1 to Second Amended and Restated Credit Agreement, dated March 9, 2011 (incorporated
by reference to the Company’s Current Report on Form 8-K filed December 22, 2011)
10.23 Amendment No.2 to Second Amended and Restated Credit Agreement, dated December 20, 2011
(incorporated by reference to the Company’s Current Report on Form 8-K filed December 22, 2011)
10.24 Third Amended and Restated Note Purchase and Shelf Agreement dated December 21, 2010 among NN,
Inc. and certain Series A Note Purchasers as defined therein (incorporated by reference to the Company’s
Current Report on Form 8-K filed December 27, 2010)
10.25 Amendment No.1 to Third Amended and Restated Note Purchase and Shelf Agreement, dated September
30, 2011 (incorporated by reference to the Company’s Current Report on Form 8-K filed December 22,
2011)
70
10.26 Amendment No.2 to Third Amended and Restated Note Purchase and Shelf Agreement, dated December
20, 2011 (incorporated by reference to the Company’s Current Report on Form 8-K filed December 22,
2011)
21.1 List of Subsidiaries of the Company#
23.1 Consent of PricewaterhouseCoopers LLP, Independent Registered Public Accounting Firm#
31.1 Certification of Chief Executive Officer pursuant to Section 302 of Sarbanes-Oxley Act#
31.2 Certification of Chief Financial Officer pursuant to Section 302 of Sarbanes-Oxley Act#
32.1 Certification of Chief Executive Officer pursuant to Section 906 of Sarbanes-Oxley Act#
32.2 Certification of Chief Financial Officer pursuant to Section 906 of Sarbanes-Oxley Act#
______________
* Management contract or compensatory plan or arrangement.
# Filed herewith
71
CERTIFICATION PURSUANT TO RULES 13a-14(a) AND 15d-14(a) UNDER THE SECURITIES EXCHANGE ACT
OF 1934, AS AMENDED
Exhibit 31.1
I, Roderick R. Baty, certify that:
1)
I have reviewed this annual report on Form 10-K of NN, Inc.;
2) Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3) Based on my knowledge, the financial statements, and other financial information included in this report, fairly present
in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the
periods presented in this report;
4) The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be
designed under our supervision, to ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in
which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to
be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance with generally accepted accounting
principles;
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by
this report based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during
the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of the annual report) that
has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial
reporting; and
5) The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control
over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or
persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and
report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant’s internal control over financial reporting.
Date: March 15, 2012
Signature:
/S/ RODERICK R. BATY
Roderick R. Baty
Chairman, Chief Executive Officer, and President
72
CERTIFICATION PURSUANT TO RULES 13a-14(a) AND 15d-14(a) UNDER THE SECURITIES EXCHANGE ACT
OF 1934, AS AMENDED
Exhibit 31.2
I, James H. Dorton, certify that:
1)
I have reviewed this annual report on Form 10-K of NN, Inc.;
2) Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3) Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly
present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and
for, the periods presented in this report.;
4) The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be
designed under our supervision, to ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in
which this report is being prepared.
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to
be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance with generally accepted accounting
principles;
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by
this report based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during
the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of the annual report) that
has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial
reporting; and
5) The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control
over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or
persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and
report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant’s internal control over financial reporting.
Date: March 15, 2012
Signature:
/S/ JAMES H. DORTON
James H. Dorton
Senior Vice President – Corporate Development and Chief Financial Officer
73
Exhibit 32.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT
TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of NN, Inc. (the “Company”) on Form 10-K for the annual period ended
December 31, 2011, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the
undersigned, in the capacity and date indicated below, hereby certifies pursuant to 18 U.S.C. §1350, as adopted pursuant to
§906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge: (1) The Report fully complies with the requirements of
Section 13(a) or 15(d) of the Securities Exchange Act of 1934 as amended; and (2) The information contained in the Report
fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date: March 15, 2012
/s/ Roderick R. Baty
Roderick R. Baty
Chairman, President and Chief Executive Officer
[A signed original of this written statement required by Section 906 has been provided to NN, Inc. and will be retained by
NN, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.]
74
CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT
TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 32.2
In connection with the Annual Report of NN, Inc. (the “Company”) on Form 10-K for the annual period ended
December 31, 2011, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the
undersigned, in the capacity and date indicated below, hereby certifies pursuant to 18 U.S.C. §1350, as adopted pursuant to
§906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge: (1) The Report fully complies with the requirements of
Section 13(a) or 15(d) of the Securities Exchange Act of 1934 as amended; and (2) The information contained in the Report
fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date: March 15, 2012
/s/ James H. Dorton
James H. Dorton
Senior Vice President – Corporate Development and Chief Financial Officer
[A signed original of this written statement required by Section 906 has been provided to NN, Inc. and will be retained by
NN, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.]
75
Directors
RODERICK R. BATY
Chairman of the Board and Chief Executive Officer
ROBERT M. AIKEN, JR. (passed away March 10, 2012)
RICHARD G. FANELLI
ROBERT E. BRUNNER
G. RONALD MORRIS
STEVEN T. WARSHAW
MICHAEL E. WERNER
Officers
RODERICK R. BATY
Chairman of the Board and Chief Executive Officer
JAMES H. DORTON
Sr. Vice President Corporate Development and Chief Financial Officer
WILLIAM C. KELLY, JR.
Vice President, Secretary, and Chief Administrative Officer
FRANK T. GENTRY III
Sr. Vice President and Managing Director – Metal Bearing Components
THOMAS C. BURWELL
Vice President, Chief Accounting Officer and Corporate Controller
JEFFERY H. HODGE
Vice President and General Manager – U.S. Ball & Roller and NN Asia
JAMES R. WIDDERS
Vice President and General Manager – Precision Metal Components
Independent
Accountants
PRICEWATERHOUSECOOPERS LLP
Charlotte, North Carolina
Legal Counsel
BAKER DONELSON BEARMAN CALDWELL & BERKOWITZ, PC
Memphis, Tennessee
Corporate Offices
2000 Waters Edge Drive, Building C, Suite12
Johnson City, Tennessee 37604
Phone (423) 743-9151 FAX (423) 743-2670
Registrar and
Transfer Agent
COMPUTERSHARE
Canton, Massachusetts
Exchange
NASDAQ National Market
Trading Symbol: NNBR
Additional
Information
If you would like additional information regarding the Company, a copy of its Form 10-K filed
with the Securities and Exchange Commission, or wish to be added to its mailing list, contact:
WILLIAM C. KELLY, JR.
NN, Inc.
2000 Waters Edge Drive, Building C, Suite. 12
Johnson City, Tennessee, 37604
Phone (423) 743-9151
NN, Inc.
2000 Waters Edge Drive
Suite 12
Johnson City, TN 37604
Phone: 423-743-9151
Fax: 423-743-2670
www.nnbr.com