NN
Annual Report 2018

Plain-text annual report

Table of Contents UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549 FORM 10-K þANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended December 31, 2018OR☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF1934For the transition period from to Commission file number 000-23486 NN, Inc.(Exact name of registrant as specified in its charter) Delaware 62-1096725(State or other jurisdiction ofincorporation or organization) (I.R.S. EmployerIdentification Number) 6210 Ardrey Kell RoadCharlotte, North Carolina 28277(Address of principal executive offices) (Zip Code)(980) 264-4300(Registrant’s telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act:Title of each class Name of each exchange on which registeredCommon Stock, par value $0.01 The Nasdaq Stock Market LLCSecurities registered pursuant to Section 12(g) of the Act:None(Title of class) Table of ContentsIndicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No þIndicate 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 þIndicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934during 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 filingrequirements for the past 90 days. Yes þ No ☐Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 ofRegulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such file). Yes þ No ☐Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and willnot 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 orany 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, a smaller reporting company, or anemerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” inRule 12b-2 of the Exchange Act.Large accelerated filer ☐ Accelerated filer þ Non-accelerated filer ☐ Smaller reporting company ☐ Emerging growth company ☐If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new orrevised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No þThe aggregate market value of the voting and non-voting common stock held by non-affiliates of the registrant was approximately $247 million as ofJune 30, 2018, the last business day of the registrant’s most recently completed second fiscal quarter, computed using the closing price of the registrant’scommon stock as quoted on the Nasdaq Stock Market LLC on that date of $18.90. Solely for purposes of making this calculation, shares of the registrant’scommon stock held by named executive officers, directors and 5% or greater stockholders of the registrant as of such date have been excluded because suchpersons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for any other purposes.As of March 8, 2019, there were 42,104,207 shares of the registrant’s common stock, par value $0.01 per share, outstanding.DOCUMENTS INCORPORATED BY REFERENCEPortions of the Proxy Statement with respect to the 2019 Annual Meeting of Stockholders are incorporated by reference in Part III, Items 10 to 14 of thisAnnual Report on Form 10-K as indicated herein. Such proxy statement will be filed with the Securities and Exchange Commission within 120 days of theregistrant’s fiscal year ended December 31, 2018. Table of ContentsNN, Inc.INDEXPART I 3 Item 1.Business3 Item 1A.Risk Factors9 Item 1B.Unresolved Staff Comments18 Item 2.Properties18 Item 3.Legal Proceedings19 Item 4.Mine Safety Disclosures20 Part II 21 Item 5.Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of EquitySecurities21 Item 6.Selected Financial Data23 Item 7.Management’s Discussion and Analysis of Financial Condition and Results of Operations24 Item 7A.Quantitative and Qualitative Disclosures About Market Risk40 Item 8.Financial Statements and Supplementary Data41 Item 9.Changes in and Disagreements with Accountants on Accounting and Financial Disclosure81 Item 9A.Controls and Procedures81 Item 9B.Other Information83 Part III 84 Item 10.Directors, Executive Officers and Corporate Governance84 Item 11.Executive Compensation84 Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters84 Item 13.Certain Relationships and Related Transactions, and Director Independence84 Item 14.Principal Accountant Fees and Services84 Part IV 85 Item 15.Exhibits, Financial Statement Schedules85 Item 16.Form 10-K Summary85 INDEX TO EXHIBITS86 SIGNATURES903Table of ContentsPART IForward-Looking StatementsThis Annual Report on Form 10-K contains forward-looking statements that are made pursuant to the safe harbor provisions of the Private SecuritiesLitigation Reform Act of 1995. These statements may discuss goals, intentions and expectations as to future trends, plans, events, results of operations orfinancial condition, or state other information relating to NN, Inc., based on current beliefs of management as well as assumptions made by, and informationcurrently available to, management. Forward-looking statements generally will be accompanied by words such as “anticipate,” “believe,” “could,”“estimate,” “expect,” “forecast,” “guidance,” “intend,” “may,” “possible,” “potential,” “predict,” “project” or other similar words, phrases or expressions.Forward-looking statements involve a number of risks and uncertainties that are outside of management’s control and that may cause actual results to bematerially different from such forward-looking statements. Such factors include, among others, general economic conditions and economic conditions in theindustrial sector, competitive influences, risks that current customers will commence or increase captive production, risks of capacity underutilization,quality issues, availability of raw materials, currency and other risks associated with international trade, our dependence on certain major customers, theimpact of acquisitions and divestitures, unanticipated difficulties integrating acquisitions and realizing anticipated cost savings and operating efficiencies,risks associated with joint ventures, new laws and governmental regulations, and other risk factors and cautionary statements listed from time to time in ourperiodic reports filed with the Securities and Exchange Commission. We disclaim any obligation to update any such factors or to publicly announce theresult of any revisions to any of the forward-looking statements included herein or therein to reflect future events or developments.Except for per share data or as otherwise noted, all dollar amounts presented in tables that follow are in thousands of U.S. dollars.Item 1.BusinessIntroductionWe are a global diversified industrial company that combines advanced engineering and production capabilities with in-depth materials science expertise todesign and manufacture high-precision solutions, components and assemblies for the medical, aerospace and defense, electrical, automotive and generalindustrial markets. We have 51 facilities in North America, Europe, South America and China.In January 2018, we implemented a new enterprise and management structure designed to accelerate growth and further balance our portfolio by aligning ourstrategic assets and businesses. Our businesses were reorganized into the Mobile Solutions, Power Solutions and Life Sciences groups and are basedprincipally on the end markets they serve. The Autocam Precision Components Group reported in our historical financial statements was renamed as MobileSolutions. Mobile Solutions is focused on growth in the general industrial and automotive end markets. The Precision Engineered Products Group reported inour historical financial statements was bifurcated into two new groups – Power Solutions and Life Sciences. Power Solutions is focused on growth in theelectrical and aerospace and defense end markets. Life Sciences is focused on growth in the medical end market. In the first quarter of 2018, we beganreporting our financial results based on these new reportable segments. Prior year amounts have been revised to conform to the current year presentation.Our business as conducted in 2018, products, and recent acquisition activity are described further below.Acquisition ActivityParagon Medical AcquisitionOn May 7, 2018, we acquired 100% of the stock of PMG Intermediate Holding Corporation, the parent company of Paragon Medical, Inc. (“ParagonMedical”) for a base purchase price of $375.0 million in cash, subject to certain adjustments. After working capital and other closing adjustments, the cashpurchase price was approximately $390.9 million which included $13.6 million in cash acquired. Paragon Medical is a medical device manufacturer whichfocuses on the orthopedic, case and tray, implant and instrument markets. This acquisition continues our strategic focus to expand our Life Sciences portfolioas well as create a balanced business by diversifying our products and finished device offerings. Operating results of Paragon Medical are reportedprospectively from the date of acquisition in our Life Sciences group.Other AcquisitionsOn February 22, 2018, we completed the acquisition of 100% of the assets of Bridgemedica, LLC (“Bridgemedica”) for $15.0 million in cash. For accountingpurposes, Bridgemedica meets the definition of a business and has been accounted for as a4Table of Contentsbusiness combination. Bridgemedica is a medical device company that provides concept to supply solutions through design, development engineering andmanufacturing. Operating results of Bridgemedica are reported prospectively in our Life Sciences group after the acquisition date.On August 9, 2018, we completed the acquisition of 100% of the capital stock of Southern California Technical Arts, Inc. (“Technical Arts”). For accountingpurposes, Technical Arts meets the definition of a business and has been accounted for as a business combination. Technical Arts is an industrial machiningcompany that manufactures tight tolerance metal components and assemblies. The acquisition of Technical Arts expands the NN presence in the aerospaceand defense end market. Operating results of Technical Arts are reported prospectively in our Power Solutions group after the acquisition date.Business Segments and ProductsMobile SolutionsMobile Solutions is focused on growth in the general industrial and automotive end markets. We manufacture a wide range of highly engineered, difficult tomanufacture, precision metal components and sub-assemblies for the automotive and general industrial end markets. We have developed an expertise inmanufacturing highly complex, system critical components for fuel systems, engines and transmissions, power steering systems and electromechanical motorson a high-volume basis. This expertise has been gained through investment in technical capabilities, processes and systems, and skilled programmanagement and product launch capabilities.Power SolutionsPower Solutions is focused on growth in the electrical and aerospace and defense end markets. Within this group we combine materials science expertise withadvanced engineering and production capabilities to design and manufacture a broad range of high-precision metal and plastic components, assemblies, andfinished devices used in applications ranging from power control to flight control and for military devices.We manufacture a variety of products including electrical contacts, connectors, contact assemblies and precision stampings for the electrical end market andhigh precision products for the aerospace and defense end markets utilizing our extensive process technologies for optical grade plastics, thermallyconductive plastics, titanium, Inconel, magnesium, and electroplating.Life SciencesLife Sciences is focused on growth in the medical end market. Within this group we combine advanced engineering and production capabilities to designand manufacture a broad range of high-precision metal and plastic components, assemblies, and finished devices.We manufacture a variety of components, assemblies, and instruments, such as surgical knives, bioresorbable implants, surgical staples, cases and trays,orthopedic implants and tools, laparoscopic devices, and drug delivery devices for the medical and life sciences end market.Competitive StrengthsHigh-precision manufacturing capabilitiesWe believe our ability to produce high-precision parts at high production volumes is among the best in the market. Our technology platform consists of highprecision machining, progressive stamping, injection molding, laser welding, material science, assembly, and design optimization. Unique specialty machinebuilding capabilities, in-house tool design and process know-how create trade secrets that enable consistent production tolerances of less than one micronwhile producing millions of parts per day. Parts are manufactured to application-specific customer design and co-design standards that are developed for aspecific use. The high-precision capabilities are part of our zero-defect design process which seeks to eliminate variability and manufacturing defectsthroughout the entire product lifecycle. We believe our production capabilities provide a competitive advantage as few other manufacturers are capable ofmeeting tolerance demands at any volume level requested by our customers. As the need for tight-tolerance precision parts, subassemblies, and devicescontinues to increase, we believe that our production capabilities will place us at the forefront of the industry. We have differentiated ourselves among ourcompetitors by providing customers engineered solutions and a broad reach and breadth of manufacturing capabilities. We believe it is for these reasons, andbecause of our proven ability to produce high-quality, precision parts and components on a cost-effective basis, that customers choose us to meet theirmanufacturing needs.Differentiated, system-critical products5Table of ContentsThe tight-tolerance and high-quality nature of our precision products is specifically suited for use in the most demanding applications that require superiorreliability. Our products are critical components to the operation and reliability of larger mechanical systems. Precision parts are difficult to manufacture andachieve premium pricing in the marketplace as the high cost of failure motivates our customers to focus on quality. Our products are developed for specificuses within critical systems and are typically designed in conjunction with the system designer. Our parts are often qualified for, or specified in, customerdesigns, reducing the ability for customers to change suppliers.Our ability to make products with tight-tolerance and extreme precision requirements enables our customers to satisfy the critical functionality andperformance requirements of their products. We are included in customer designs and deployed in critical systems that involve high cost of failureapplications and significant regulatory certification processes, including those for the Food and Drug Administration (“FDA”), Underwriters Laboratories(“UL”) and the National Aerospace and Defense Contractors Accreditation Program (“NADCAP”).Complete product lifecycle focusOur engineering expertise and deep knowledge of precision manufacturing processes adds proprietary value throughout the complete lifecycle of ourproducts. Our in-house engineering team works closely with our customers to provide parts that meet specific design specifications for a given application.The relationship with the customer begins early in the conceptual design process when we provide feedback on potential cost, manufacturability andestimated reliability of the parts. Part designs are then prototyped, tested and qualified in coordination with the customer design process before going to full-scale production. The close working relationship with our customers early in the product lifecycle helps to secure business, increase industry knowledge, anddevelop significant trade secrets. Performance verification, product troubleshooting and post-production engineering services further deepen relationshipswith our customers as well as provide additional industry knowledge that is applicable to future design programs and provide continuous manufacturingprocess improvement.Prototype products are developed for testing, and process validation procedures are instituted. In many instances, we will file for regulatory productionapproval and include the customer’s proprietary processes, further discouraging supplier changes. We will assist the customer with continuous supply chainmanagement and comprehensive customer support for the lifetime of the product and continuously seek to identify new operational efficiencies to reduce theproduct’s cost and improve its quality. Once our solution is designed into a platform, it is often embedded through the multi-year manufacturing lifecycleand has a competitive advantage in supporting subsequent platforms. As an added benefit, customers generally fund development, prototypes andmanufacturing tooling expenses. This discourages supplier changes and drives recurring revenue for us.Long-term blue-chip customer baseWe maintain relationships with hundreds of customers around the world. Our customers are typically sophisticated, engineering-driven, mechanical systemsmanufacturers with long histories of product development and reputations for quality. We have no significant retail exposure, which limits volatility andprovides enhanced sales visibility. Relationships with our top ten customers, in terms of revenue, average more than ten years. We have significant exposureto emerging markets in Asia, South America and Eastern Europe through these global customers as well as key local manufacturers. The diverse nature, sizeand reach of our customer base provides resistance to localized market and geographic fluctuations and help stabilizes overall product demand.Strategic global footprintOur 51 facilities, on four continents, are strategically located to serve our customer base and provide local service and expertise. Our global footprintprovides flexibility to locally supply identical products for global customers, reducing shipping time and expense, allowing us to match costs to revenue andto capitalize on industry localization trends. In total, we operate more than 2.7 million square feet of manufacturing space. North America constitutes thelargest portion of our manufacturing operations with facilities in the U.S. and Mexico. The North American facilities are strategically located to serve majorcustomers in the United States and Mexico. Our foreign facilities are located in regional manufacturing hubs in France, Poland, China, and Brazil, andprimarily serve global customers in those local markets. The Asian and South American facilities, we believe, have significant growth potential as localcustomer bases expand and the markets for high-precision products grow in those regions.Proven and experienced management teamOur management team has significant experience in precision manufacturing and the diversified industrial sector. Rich Holder was named Chief ExecutiveOfficer and director in 2013. Mr. Holder joined us from Eaton Corporation, where he served as President of Eaton Electrical Components Group, and brings tous a proven record of leadership, successful team building and relevant experience in both organic and acquisition growth. He has since assembled a strongmanagement team through6Table of Contentsretention of key talent, recent acquisitions, and new hires. Our management team has successfully executed and integrated into our business nine acquisitionsover the last five years, increasing revenue by more than 150% since 2013. We believe that our current management team has the necessary talent andexperience to lead our efforts with respect to our organic and acquisition growth goals.Research and Development and Product EngineeringOur research and development and product engineering efforts focus on enhancing our existing products and developing patented products, particularly inthe medical industry, that can be presented to and sold by our customers. Our Life Sciences business has developed a portfolio of patented and brandedmedical products that we manufacture for customers and that are sold through their channels. Our engineering teams focus on working closely with ourcustomers to develop engineered solutions to improve our customers’ products.CustomersOur products are supplied primarily to manufacturers for use in a broad range of industrial applications, including automotive; electrical; agricultural;construction; residential devices and equipment; medical; aerospace and defense; heating, ventilation, and air conditioning; fluid power and diesel engines.Sales to each of our top ten customers are made to multiple customer locations and divisions throughout the world. In 2018, our top ten customers accountedfor approximately 49% of our net sales. In 2018, 77% of our products were sold to customers in North America, 9% to customers in Europe, 9% customers inAsia, and the remaining 5% to customers in South America. We did not have any customer that accounted for 10% or more of total net sales.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 costfluctuations 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 many cases, during the same calendar month of the date on which a sales order is placed.Sales and MarketingA primary emphasis of our marketing strategy is to expand key customer relationships by offering high quality, high-precision, application-specific customersolutions with the value of a single supply chain partner for a wide variety of products and 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 customerorders and other general sales support activities. Our marketing strategy is to offer custom manufactured, high quality, precision products to markets withhigh value-added characteristics at competitive price levels. This strategy focuses on relationships with key customers that require the production oftechnically 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.EmployeesAs of December 31, 2018, we employed a total of 5,479 full and part-time employees and 512 temporary workers. Of our total employment, 20% aremanagement employees and 80% are production employees. The employees of the France, Brazil, and Brainin de Mexico plants are unionized. A small groupof employees at our Bridgeport, Connecticut, plant is also unionized. We believe we have a good working relationship with our employees and the unionsthat represent them.CompetitionMobile SolutionsIn the market in which Mobile Solutions operates, internal production of components by our customers can impact our business as the customers weigh therisk of outsourcing strategically critical components or producing in-house. Our primary outside competitors are Anton Häring KG, A. Berger HoldingGmbh & Co. KG, C&A Tool Engineering, Inc., American Turned Products, Inc., Camcraft, Inc., IMS Gear, and Brovedani. We believe that we generally winnew business on the basis of technical competence and our proven track record of successful product development.Power SolutionsPower Solutions operates in intensely competitive but very fragmented supply chains. We must compete with numerous companies in each industry marketsegment. Our primary competitors in the electrical market are Deringer-Ney, Inc., Doduco GmbH and Metalor Technologies International. Our primarycompetitors in the aerospace and defense market are Interplex7Table of ContentsIndustries, Inc. and Accu-Mold, LLC. We believe that competition within the electrical and aerospace and defense end markets is based principally onquality, price, design capabilities and speed of responsiveness and delivery. We believe that our competitive strengths are product development, tool design,fabrication, tight tolerance processes, and customer solutions. With these strengths, we have built our reputation in the marketplace as a quality producer oftechnically difficult products.Life SciencesLife Sciences operates in intensely competitive but very fragmented supply chains. Our primary competitors in the medical device market are Tecomet, Inc.,Lake Region Medical, Inc. and Vention Medical, Inc. . We compete against other companies depending on the type of product offered or the geographic areaserved as well as our customers with in-house manufacturing capabilities. Customers will choose manufacturers based on reputation, quality, delivery,responsiveness, breadth of capabilities, including design and engineering support, price, and relationships. We believe that our ability to assist customersthrough all phases of the product life cycle differentiates us from most of our competitors.Raw MaterialsMobile SolutionsMobile Solutions produces products from a wide variety of metals in various forms from various sources located in the North America, Europe, South Americaand Asia. Basic types include hot rolled steel, cold rolled steel (both carbon and alloy), stainless, extruded aluminum, die cast aluminum, gray and ductileiron castings, hot and cold forgings and mechanical tubing. Some material is purchased directly under contracts, some is consigned by the customer, andsome is purchased directly from the steel mills.Power SolutionsPower Solutions uses a wide variety of metals in various forms, including precious metals like gold, silver, palladium and platinum, as well asplastics. Through our diverse network of suppliers, we minimize supplier concentration risk and provide a stable supply of raw materials at competitivepricing. This group also procures resins and metal stampings from several domestic and foreign suppliers.Power Solutions bases purchase decisions on quality, service and price. Generally, we do not enter into written supply contracts with our suppliers or committo maintain minimum monthly purchases of materials. However, we carefully manage raw material price volatility, particularly with respect to preciousmetals, through the use of consignment agreements. In effect, we contract the precious metals for our own stock and buy the raw materials on the same daycustomer shipments are priced, thereby eliminating speculation.Life SciencesDue to the technically challenging requirements of our customers products, we purchase our raw materials from a limited number of suppliers. Many of theraw materials that are used in our products are subject to fluctuations in market price, particularly titanium and precious metals such as platinum. Generally,raw material prices are passed through to our customers to offset market fluctuations. Because of the lengthy process required to qualify raw materials withour customers, we cannot change suppliers easily. However, we have not experienced any significant interruptions or delays in obtaining critical rawmaterials.In each of our segments, we have historically been affected by upward price pressure on steel principally due to general increases in global demand. Ingeneral, we pass through material cost fluctuations to our customers in the form of changes in selling price.Patents, Trademarks and LicensesWe have several U.S. patents, patent applications and trademarks for various trade names. Furthermore, we intend to develop patented products that can bepresented to and sold by our customers. However, we cannot be certain that we would be able to protect and enforce our intellectual property rights againstthird parties, and if we cannot do so, we may face increased competition and diminished net sales.Furthermore, third parties may assert infringement claims against us based on their patents or other intellectual property, and we may have to pay substantialdamages and/or redesign our products if we are ultimately found to infringe. Even if such8Table of Contentsintellectual property claims against us are without merit, investigating and defending these types of lawsuits takes significant time, may be expensive andmay divert management attention from other business concerns.Additionally, we rely on certain data and processes, including trade secrets and know-how, and the success of our business depends, to some extent, on suchinformation remaining confidential. Each officer is subject to a non-competition and confidentiality agreement that seeks to protect thisinformation. Additionally, all employees are subject to company code of ethics policies that prohibit the disclosure of information critical to the operationsof our business.Seasonal Nature of BusinessGeneral economic conditions impact our business and financial results, and certain businesses experience seasonal and other trends related to the industriesand end markets that they serve. For example, European sales are often weaker in the summer months as customers slow production, medical device sales areoften stronger in the fourth calendar quarter, and sales to original equipment manufacturers are often stronger immediately preceding and following thelaunch of new products. However, as a whole, we are not materially impacted by seasonality.Environmental ComplianceOur operations and products are subject to extensive federal, state and local regulatory requirements both domestically and abroad relating to pollutioncontrol and protection of the environment. These laws and regulations govern, among other things, discharges to air or water, the generation, storage,handling, and use of automotive hazardous materials and the handling and disposal of hazardous waste generated at our facilities. Under such laws andregulations, we are required to obtain permits from governmental authorities for some of our operations. If we violate or fail to comply with these laws,regulations or permits, we could be fined or otherwise sanctioned by regulators. Under some environmental laws and regulations, we could also be heldresponsible for all the costs relating to any contamination at our past or present facilities and at third-party waste disposal sites. We maintain a complianceprogram to assist in preventing and, if necessary, correcting environmental problems.Based on information compiled to date, management believes that our current operations are in substantial compliance with applicable environmental lawsand regulations, the violation of which could have a material adverse effect on our business and financial condition. We have assessed conditional assetretirement obligations and have found them to be immaterial to our consolidated financial statements. We cannot assure that currently unknown matters, newlaws and regulations, or stricter interpretations of existing laws and regulations will not materially affect our business or operations in the future. Morespecifically, although we believe that we dispose of waste in material compliance with applicable environmental laws and regulations, we cannot be certainthat we will not incur significant liabilities in the future in connection with the clean-up of waste disposal sites.FDA ComplianceAs a manufacturer of medical devices, certain of our subsidiaries and facilities are required to register as such with the FDA. To maintain our registration, wedeploy a robust quality management system across all of our manufacturing facilities.With respect to medical and life sciences products that we are specifically developing to sell to our customers, before these devices can be marketed, we willseek to obtain a marketing clearance from the FDA under Section 510(k) of the United States Federal Food, Drug, and Cosmetic Act. The FDA typicallygrants a 510(k) clearance if the applicant can establish that the device is substantially equivalent to a predicate device. Clearance under Section 510(k)typically takes about four months from the date of submission.Executive Officers of the RegistrantOur executive officers are:Name Age PositionRichard D. Holder 56 President and Chief Executive OfficerThomas C. Burwell, Jr. 50 Senior Vice President – Chief Financial OfficerMatthew S. Heiter 58 Senior Vice President and General CounselD. Gail Nixon 48 Senior Vice President and Chief Human Resources OfficerWarren A. Veltman 57 Executive Vice President – Mobile SolutionsJ. Robert Atkinson 38 Executive Vice President – Life SciencesChristopher J. Qualters 51 Executive Vice President – Power Solutions9Table of ContentsRichard D. Holder joined us as President and Chief Executive Officer in June 2013. Prior to joining us, Mr. Holder served as President of Eaton ElectricalComponents Group of Eaton Corporation’s Electrical Sector from 2010 to 2013, Executive Vice President of the Eaton Business Systems from 2007 to 2010,Vice President and General Manager of the Power Distribution and Assemblies Division from 2004 to 2006, and Vice President Supply Chain andOperational Excellence from 2001 to 2004. Prior to joining Eaton, Mr. Holder served as Director of Aircraft & Technical Purchasing for US Airways from1999 to 2001. Prior to this position, Mr. Holder held a variety of leadership positions at Allied Signal Corporation, an aerospace, automotive and engineeringcompany, and Parker Hannifin Corporation, a global motion and control technology manufacturer. Mr. Holder serves on the board of directors of ActuantCorporation, a publicly held diversified industrial company.Thomas C. Burwell, Jr. joined us as Corporate Controller in September 2005. He was promoted to Vice President Chief Accounting Officer and CorporateController in 2011, and to Senior Vice President and Chief Financial Officer in November 2016. Prior to joining us, Mr. Burwell held various positions atCoats, PLC from 1997 to 2005 ultimately becoming the Vice President of Finance for the U.S. Industrial Division. From 1992 to 1997, Mr. Burwell heldvarious positions at the international accounting firm BDO Seidman, LLP. Mr. Burwell is a Certified Public Accountant.Matthew S. Heiter joined us as Senior Vice President and General Counsel in July 2015. Prior to joining us, Mr. Heiter was a shareholder in the law firm ofBaker, Donelson, Bearman, Caldwell and Berkowitz, PC from May 1996 to December 1999 and from July 2002 to July 2015, where he served as chairman ofthe firm’s Securities and Corporate Governance Practice Group. From January 2000 to July 2002, Mr. Heiter served as the Executive Vice President, GeneralCounsel and Secretary of Internet Pictures Corporation, a publicly traded internet technology company.D. Gail Nixon joined us in 2007 and was appointed Senior Vice President and Chief Human Resources Officer in January 2018. She previously served as ourVice President of Human Resources as well as Corporate Human Resources Manager. Ms. Nixon is a member of the Society for Human Resource Managementand World at Work and has earned her Senior Professional in Human Resources designation. From 2000-2007, she held various accounting and humanresources positions with a multi-state healthcare organization, ultimately serving as its corporate human resources director.Warren A. Veltman joined us as Senior Vice President and General Manager of our former Autocam Precision Components Group in September 2014.Mr. Veltman served as Chief Financial Officer of Autocam Corporation from 1990 and Secretary and Treasurer since 1991. In January 2018, Mr. Veltman wasappointed Executive Vice President of our Mobile Solutions business. Prior to Mr. Veltman’s service at Autocam, Mr. Veltman was an Audit Manager withDeloitte & Touche LLP.J. Robert Atkinson was appointed Executive Vice President of our Life Sciences group in January 2018. Mr. Atkinson joined us as Vice President, CorporateTreasurer and Manager of Investor Relations in April 2014 and served as our Vice President, Strategy & Investor Relations from April 2017 to December2017. Prior to joining us, Mr. Atkinson was with Regions Bank where he served as vice president and commercial relationship manager in Regions CorporateBank Group, where he was responsible for marquee corporate relationships, developing treasury management solutions, and negotiating terms and conditionsfor new and renewal credit facilities. Prior to that position, he served as Vice President of business services. Mr. Atkinson also served as a project coordinatorfor the Electrical Group of Eaton Corporation. Mr. Atkinson is a member of the Association of Financial Professions and earned his certified treasuryprofessional designation.Christopher J. Qualters was appointed Executive Vice President of the Power Solutions group in January 2018, and previously served as our Vice Presidentand Chief Commercial Officer. Mr. Qualters joined us as part of the Autocam acquisition in 2014, where he served as Vice President of sales and marketing.Prior to joining Autocam in 2008, he held several leadership positions in sales, marketing and product management at Robert Bosch. From 1990 to 2000,Mr. Qualters held the position of sales engineer at The Torrington Company, where he was responsible for anti-friction bearing solutions for the generalindustrial and automotive industries.10Table of ContentsItem 1A.Risk FactorsThe following are risk factors that affect our business, prospects, financial condition, results of operations, and cash flows, some of which are beyond ourcontrol. 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, prospects, financial condition, results of operations, or cash flows could beadversely affected, and results could differ materially from expected and historical results.Risks Related to Our OperationsWe 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.During 2018, sales to various U.S. and foreign divisions of our ten largest customers accounted for approximately 49% of our consolidated net sales. The lossof 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 profitmargin and cash flows from operations.Work stoppages or similar difficulties could significantly disrupt our operations, reduce our revenues and materially affect our earnings.A work stoppage at one or more of our facilities could have a material adverse effect on our business, prospects, financial condition, results of operations, orcash flows. Also, if one or more of our customers were to experience a work stoppage, that customer would likely halt or limit purchases of our products,which could have a material adverse effect on our business, prospects, financial condition, results of operations, or cash flows.We operate in and sell products to customers outside the U.S. and are subject to several risks related to doing business internationally.We obtain a majority of our raw materials from overseas suppliers, actively participate in overseas manufacturing operations and sell to a large number ofinternational customers. During the year ended December 31, 2018, sales to customers located outside of the U.S. accounted for approximately 29% of ourconsolidated net sales. As a result of doing business internationally, we face risks associated with the following: •changes in tariff regulations, which may make our products more costly to export or import;•changes in monetary and fiscal policies, laws and regulations, and other activities of governments, agencies and similar organizations;•recessions or marked declines specific to a particular country or region;•the potential imposition of trade restrictions or prohibitions;•the potential imposition of import tariffs or other duties or taxes;•difficulties establishing and maintaining relationships with local original equipment manufacturers, distributors and dealers;•difficulty in staffing and managing geographically diverse operations; and•unstable governments or legal systems in countries in which our suppliers, manufacturing operations, and customers are located.These and other risks may also increase the relative price of our products compared to those manufactured in other countries, thereby reducing the demand forour products in the markets in which we operate, which could have a material adverse effect on our business, prospects, financial condition, results ofoperations, or cash flows.In addition, we could be adversely affected by violations of the Foreign Corrupt Practices Act (the “FCPA”) and similar worldwide anti-bribery laws, as wellas export controls and economic sanction laws. The FCPA and similar anti-bribery laws in other jurisdictions generally prohibit companies and theirintermediaries from making improper payments to non-U.S. officials for the purpose of obtaining or retaining business. Our policies mandate compliance withthese laws. We operate in many parts of the world that have experienced governmental corruption to some degree and, in certain circumstances, strictcompliance with anti-bribery laws may conflict with local customs and practices. We cannot assure you that our internal controls and procedures will alwaysprotect us from the improper acts committed by our employees or agents. If we are found to be liable for FCPA, export control or sanction violations, wecould suffer from criminal or civil penalties or other sanctions, including loss of export privileges or authorization needed to conduct aspects of ourinternational business, which could have a material adverse effect on our business, prospects, financial condition, results of operations, or cash flows.11Table of ContentsIn addition, in June 2016, voters in the United Kingdom approved an advisory referendum to withdraw from the European Union, commonly referred to as“Brexit.” This referendum has created political and economic uncertainty, particularly in the United Kingdom and the European Union, and this uncertaintyhas persisted, and may continue to persist for years. The withdrawal could significantly disrupt the free movement of goods, services, and people between theUnited Kingdom and the European Union, and result in increased legal and regulatory complexities, as well as potential higher costs of conducting businessin Europe. The uncertainty of Brexit has led to volatility in the British pound sterling, which has continuously fluctuated as new developments regardingBrexit have been made public since the initial referendum. The United Kingdom’s Parliament voted down a transition deal between the United Kingdom andthe European Union on January 15, 2019. A continued inability of Parliament to approve a Brexit deal could result in a “hard Brexit” in which the UnitedKingdom leaves the European Union in March 29, 2019 with no deal in place. A “hard Brexit” would take immediate effect, with no transition periodestablished (i) for the United Kingdom and the European Union to establish a trading relationship or (ii) to allow businesses and individuals to prepare forpost-Brexit changes in legal and regulatory structure. The United Kingdom’s vote to exit the European Union could also result in similar referendums orvotes in other European countries in which we do business. The uncertainty surrounding the terms of the United Kingdom’s withdrawal and its consequencescould adversely impact consumer and investor confidence, and the level of consumer purchases of discretionary items and retail products, including ourproducts. Any of these effects, among others, could materially adversely affect our business, results of operations, and financial condition.In addition, the prices we pay for raw materials used in our products may be impacted by tariffs. The tariffs initiated by the U.S. government in 2018 underSection 232 of the Trade Expansion Act of 1962 resulted in increased metals prices in the United States. Any future tariffs or quotas imposed on steel andaluminum imports may increase the price of metal, which could have a material adverse effect on our business, prospects, financial condition, results ofoperations, or cash flows.Failure of our products could result in a product recall.The majority of our products are components of our customers’ products that are used in critical industrial applications. A failure of our components couldlead 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 additionto 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 customer’s business and damage ourreputation. A successful product recall claim requiring that we bear a substantial part of the cost of correction or the loss of a key customer could have amaterial adverse effect on our business, prospects, financial condition, results of operations, or cash flows.Our markets are highly competitive, and many of our competitors have significant advantages that could adversely affect our business.We face substantial competition in the sale of components, system subassemblies, and finished devices in the vertical end markets into which we sell ourproducts. Our competitors are continuously exploring and implementing improvements in technology and manufacturing processes in order to improveproduct quality, and our ability to remain competitive will depend, among other things, on whether we are able to keep pace with such quality improvementsin a cost-effective manner. Due to this competitiveness, we may not be able to increase prices for our products to cover cost increases. In many cases we facepressure from our customers to reduce prices, which could adversely affect our business, prospects, financial condition, results of operations, or cash flows. Inaddition, our customers may choose to purchase products from one of our competitors rather than pay the prices we seek for our products, which couldadversely affect our business, prospects, financial condition, results of operations, or cash flows.Any loss of key personnel and the inability to attract and retain qualified employees could have a material adverse impact on our operations.We are dependent on the continued services of key executives and personnel. The departure of our key personnel without adequate replacement couldseverely disrupt our business operations. Additionally, we need qualified managers and skilled employees with technical and manufacturing industryexperience to operate our businesses successfully. From time to time, there may be shortages of skilled labor, which may make it more difficult and expensivefor us to attract and retain qualified employees. If we are unable to attract and retain qualified individuals or our costs to do so increase significantly, ouroperations would be materially adversely affected.Damage to our reputation could harm our businesses, including our competitive position and business prospects.Our ability to attract and retain customers, supplier, investors and employees is impacted by our reputation. Harm to our reputation can arise from varioussources, including employee misconduct, security breaches, unethical behavior, litigation or12Table of Contentsregulatory outcomes. The consequences of damage to our reputation include, among other things, increasing the number of litigation claims and the size ofdamages asserted or subjecting us to enforcement actions, fines, and penalties, all of which would cause us to incur significant defense related costs andexpenses.Risks Related to Legal and Regulatory ComplianceEnvironmental, health and safety laws and regulations impose substantial costs and limitations on our operations, environmental compliance may bemore costly than we expect, and any adverse regulatory action may materially adversely affect our business.We are subject to extensive federal, state, local and foreign environmental, health and safety laws and regulations concerning matters such as air emissions,wastewater discharges, solid and hazardous waste handling and disposal and the investigation and remediation of contamination. The risks of substantialcosts, liabilities and limitations on our operations related to compliance with these laws and regulations are an inherent part of our business, and futureconditions may develop, arise or be discovered that create substantial environmental compliance or remediation liabilities and costs.Compliance with environmental, health and safety legislation and regulatory requirements may prove to be more limiting and costly than we anticipate. Todate, we have committed significant expenditures in our efforts to achieve and maintain compliance with these requirements at our facilities, and we expectthat we will continue to make significant expenditures related to such compliance in the future. From time to time, we may be subject to legal proceedingsbrought by private parties or governmental authorities with respect to environmental matters, including matters involving alleged noncompliance with orliability under environmental, health and safety laws, property damage or personal injury. New laws and regulations, including those which may relate toemissions of greenhouse gases, stricter enforcement of existing laws and regulations, the discovery of previously unknown contamination or the impositionof new clean-up requirements could require us to incur costs or become the basis for new or increased liabilities that could have a material adverse effect onour business, prospects, financial condition, results of operations, or cash flows.Our medical devices are subject to regulation by numerous government agencies, including the FDA and comparable agencies outside the U.S. To varyingdegrees, each of these agencies requires us to comply with laws and regulations governing the development, testing, manufacturing, labeling, marketing anddistribution of our medical devices. We cannot guarantee that we will be able to obtain marketing clearance for our new products or enhancements ormodifications to existing products. If such approval is obtained, it may: •take a significant amount of time;•require the expenditure of substantial resources;•involve stringent clinical and pre-clinical testing, as well as increased post-market surveillance;•involve modifications, repairs or replacements of our products; and•result in limitations on the proposed uses of our products.Both before and after a product is commercially released, we have ongoing responsibilities under FDA regulations. We are also subject to periodicinspections by the FDA to determine compliance with the FDA’s requirements, including primarily the quality system regulations and medical devicereporting regulations. The results of these inspections can include inspectional observations on FDA’s Form-483, warning letters, or other forms ofenforcement. Since 2009, the FDA has significantly increased its oversight of companies subject to its regulations, including medical device companies, byhiring new investigators and stepping up inspections of manufacturing facilities. The FDA has also significantly increased the number of warning lettersissued to companies. If the FDA were to conclude that we are not in compliance with applicable laws or regulations, or that any of our medical devices areineffective or pose an unreasonable health risk, the FDA could ban such medical devices, detain or seize adulterated or misbranded medical devices, order arecall, repair, replacement or refund of such devices, refuse to grant pending pre-market approval applications or require certificates of foreign governmentsfor exports, and/or require us to notify health professionals and others that the devices present unreasonable risks of substantial harm to the public health. TheFDA may also impose operating restrictions on a company-wide basis, enjoin and/or restrain certain conduct resulting in violations of applicable lawpertaining to medical devices, and assess civil or criminal penalties against our officers, employees, or us. The FDA may also recommend prosecution to theDepartment of Justice. Any adverse regulatory action, depending on its magnitude, may restrict us from effectively marketing and selling our products.Foreign governmental regulations have become increasingly stringent and more common, and we may become subject to more rigorous regulation by foreigngovernmental authorities in the future. Penalties for a company’s non-compliance with foreign governmental regulation could be severe, includingrevocation or suspension of a company’s business license and criminal sanctions. Any domestic or foreign governmental law or regulation imposed in thefuture may have a material adverse effect on us.13Table of ContentsChanges in U.S. tax laws could have a material adverse effect on our business, cash flow, results of operations and financial condition.Changes in U.S. tax laws, tax rulings, or interpretations of existing laws could materially affect our business, cash flow, results of operations, and financialcondition. In particular, on December 22, 2017, the U.S. government enacted comprehensive Federal tax legislation commonly referred to as the Tax Cutsand Jobs Act of 2017 (the “U.S. Tax Cuts and Jobs Act of 2017”). The U.S. Tax Cuts and Jobs Act of 2017 introduces significant changes to U.S. income taxlaw that have had a meaningful impact on our provision for income taxes. Accounting for the income tax effects of the U.S. Tax Cuts and Jobs Act of 2017requires significant judgments and estimates in the interpretation and calculations of the provisions of the U.S. Tax Cuts and Jobs Act of 2017.We have identified a material weakness in our internal control over financial reporting which could, if not remediated, result in material misstatements inour financial statements.Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) under theExchange Act. Management disclosed in its 2017 Annual Report on Form 10-K certain material weaknesses in our internal control over financial reporting.Although we were successful in remediating three of the four material weaknesses during 2018, we were unsuccessful in remediating all of them. As a result,our management concluded that we did not maintain effective internal control over financial reporting as of December 31, 2018. With the oversight of seniormanagement and the audit committee, we have begun taking steps to remediate the underlying cause of the remaining material weakness and improve ourcontrol environment. Until remediated, this material weakness could result in future errors to our financial statements.If we are unable to successfully remediate this material weakness in our internal control over financial reporting, or if we identify any additional materialweaknesses that may exist, the accuracy and timing of our financial reporting may be adversely affected. Our failure to file periodic and certain current reportswith the SEC in a timely manner, among other things, could in the future preclude or delay us from being eligible to use a short form registration statement onForm S-3 to register certain sales of our common stock by us or our stockholders and could even result in the suspension of trading of our common stock onthe Nasdaq Stock Market LLC (“Nasdaq”) and/or the revocation of our registration by the SEC. Any of these consequences may have a material adverse effecton our business and results of operations.Risks Related to Our CapitalizationOur indebtedness could adversely affect our business, prospects, financial condition, results of operations, or cash flows.As of December 31, 2018, we had approximately $859.6 million of indebtedness outstanding and an additional $76.6 million of unused borrowings underour debt agreements. Our high degree of leverage could have important consequences, including: •increasing our vulnerability to adverse economic, industry, or competitive developments;•requiring a substantial portion of our cash flows from operations to be dedicated to the payment of principal and interest on our indebtedness,therefore reducing our ability to use our cash flows to fund operations, capital expenditures, and future business opportunities;•exposing us to the risk of increased interest rates, which could cause our debt service obligations to increase significantly;•making it more difficult for us to satisfy our obligations with respect to our indebtedness, and any failure to comply with the obligations of any ofour debt instruments, including restrictive covenants and borrowing conditions, could result in an event of default under our debt agreements;•restricting us from making strategic acquisitions or causing us to make non-strategic divestitures;•limiting our ability to obtain additional financing for working capital, capital expenditures, product and service development, debt servicerequirements, acquisitions, and general corporate or other purposes; and•limiting our flexibility in planning for, or reacting to, changes in our business or market conditions and placing us at a competitive disadvantagecompared to our competitors who are less highly leveraged and who, therefore, may be able to take advantage of opportunities that our leverage mayprevent us from exploiting.If any one of these events were to occur, our business, prospects, financial condition, results of operations, or cash flows could be materially and adverselyaffected. For more information regarding our indebtedness, please see “Management’s Discussion and Analysis of Financial Condition and Results ofOperations — Liquidity and Capital Resources.”14Table of ContentsDespite our high indebtedness level, we will still be able to incur substantial additional amounts of debt, which could further exacerbate the risksassociated with our substantial indebtedness.We and our subsidiaries may be able to incur substantial additional indebtedness in the future. Although our debt agreements contain restrictions on theincurrence of additional indebtedness, these restrictions are subject to a number of significant qualifications and exceptions, and under certain circumstances,the amount of indebtedness that could be incurred in compliance with these restrictions could be substantial. If new debt is added to our and our subsidiaries’debt levels, the related risks that we now face could increase.Our debt agreements contain restrictions that will limit our flexibility in operating our business.Our debt agreements contain various incurrence covenants that limit our ability to engage in specified types of transactions. These incurrence covenants willlimit our ability to, among other things: •incur additional indebtedness or issue certain preferred equity;•pay dividends on, repurchase, or make distributions in respect of our capital stock, prepay, redeem, or repurchase certain debt or make otherrestricted payments;•make certain investments and acquisitions;•create certain liens;•enter into agreements restricting our subsidiaries’ ability to pay dividends to us;•consolidate, merge, sell or otherwise dispose of all or substantially all of our assets;•alter our existing businesses; and•enter into certain transactions with our affiliates.In addition, the incurrence covenants in our debt agreements require us to meet specified financial ratios and satisfy other financial condition tests. Ourability to meet those financial ratios and tests will depend on our ongoing financial and operating performance, which, in turn, will be subject to economicconditions and to financial, market, and competitive factors, many of which are beyond our control. A breach of any of these covenants could result in adefault under one or more of our debt agreements and permit our lenders to cease making loans to us under our credit facility (as defined below). Furthermore,if we were unable to repay the amounts due and payable under our secured debt agreements, our secured lenders could proceed against the collateral grantedto them to secure our borrowings. Such actions by the lenders could also cause cross defaults under our other debt agreements.We may not be able to generate sufficient cash to service all of our indebtedness, and we may not be able to refinance our debt obligations as they mature.Our ability to make scheduled payments on or to refinance our debt obligations depends on our financial condition and operating performance, which issubject to prevailing economic and competitive conditions and to certain financial, business and other factors beyond our control. We may not be able tomaintain a level of cash flows from operating activities sufficient to permit us to pay the principal, premium, if any, and interest on our indebtedness.We regularly review our capital structure, various financing alternatives and conditions in the debt and equity markets in order to opportunistically enhanceour capital structure. In connection therewith, we may seek to refinance or retire existing indebtedness, incur new or additional indebtedness or issue equityor equity-linked securities, in each case, depending on market and other conditions. As our debt obligations mature or if our cash flows and capital resourcesare insufficient to fund our debt service obligations, we may be forced to reduce or delay investments and capital expenditures, or to sell assets, seekadditional capital, or restructure or refinance our indebtedness. Our ability to restructure or refinance our debt will depend on the condition of the capitalmarkets and our financial condition at such time. Any refinancing of our debt could be at higher interest rates and may require us to comply with moreonerous covenants, which could further restrict our business operations. The terms of our existing or future debt instruments may restrict us from adoptingsome of these alternatives. In addition, any failure to make payments of interest and principal on our outstanding indebtedness on a timely basis would likelyresult in a reduction of our credit rating, which could harm our ability to incur additional indebtedness. These alternative measures may not be successful andmay not permit us to meet our scheduled debt service obligations.We have international operations that are subject to foreign economic uncertainties and foreign currency fluctuation.Approximately 29% of our revenues are denominated in foreign currencies, which may result in additional risk of fluctuating currency values and exchangerates and controls on currency exchange. Changes in the value of foreign currencies could increase our U.S. dollar costs for, or reduce our U.S. dollar revenuesfrom, our foreign operations. Any increased costs or15Table of Contentsreduced revenues as a result of foreign currency fluctuations could affect our profits. In 2018, the U.S. dollar strengthened compared to the Brazilian real,which unfavorably affected our revenue by $4.0 million. In contrast, a weakening of the U.S. dollar may beneficially affect our business, prospects, financialcondition, results of operations, or cash flows.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:•macro or micro-economic factors;•our operating and financial performance and prospects;•quarterly variations in the rate of growth of our financial indicators, such as earnings per share, net income 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 restructuring;•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•the declaration and payment of a dividend.The stock markets in general have experienced extreme volatility that has often been unrelated to the operating performance of particular companies. Thesebroad market fluctuations may adversely affect the trading price of our common stock. In addition, due to the market capitalization of our stock, our stocktends to be more volatile than large capitalization stocks that comprise the Dow Jones Industrial Average or Standard and Poor’s 500 Index.16Table of ContentsProvisions 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 changesin our management that a stockholder might consider favorable and may prevent shareholders from receiving a takeover premium for their shares. Theseprovisions include, for example, a classified board of directors and the authorization of our board of directors to issue up to five million preferred shareswithout a stockholder vote. In addition, our 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 statuteprohibits a publicly-held Delaware corporation from engaging in a business combination with an interested stockholder for a period of three years after thedate of the transaction in which such person became an interested stockholder, unless the business combination is approved in a prescribed manner. Abusiness combination includes a merger, asset sale or other transaction resulting in a financial benefit to the stockholder. We anticipate that the provisions ofSection 203 may encourage parties interested in acquiring us to negotiate in advance with our board of directors, because the stockholder approvalrequirement would be avoided if a majority of the directors then in office approve either the business combination or the transaction that results in thestockholder 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 isdelayed or prevented, the market price of our common stock could decline.Risks Related to Acquisitions and DivestituresAcquisitions may constitute an important part of our future growth strategy.Acquiring businesses that complement or expand our operations has been and may continue to be a key element of our business strategy. We regularlyevaluate acquisition transactions, sign non-disclosure agreements, and participate in processes with respect to acquisitions, some of which may be material tous. We cannot assure you that we will be successful in identifying attractive acquisition candidates or completing acquisitions on favorable terms in thefuture. In addition, we may borrow funds or issue equity to acquire other businesses, increasing our interest expense and debt levels or diluting our existingstockholders’ ownership interest in us. Our inability to acquire businesses, or to operate them profitably once acquired, could have a material adverse effecton our business, financial condition, results of operations, and cash flows. Our borrowing agreements limit our ability to complete acquisitions without priorapproval of our lenders. We have had difficulty with purchase accounting and other aspects related to the accounting for our acquisitions which resulted inmaterial weaknesses in our internal control over financial reporting. Although we have remediated these material weaknesses, there can be no assurances wewill not face similar issues with respect to any future acquisitions.We may not realize all of the anticipated benefits from completed acquisitions or any future strategic portfolio acquisition, or those benefits may takelonger to realize than expected.We either may not realize all of the anticipated benefits from completed acquisitions or any future strategic portfolio acquisition, or it may take longer torealize such benefits. Achieving those benefits depends on the timely, efficient and successful execution of a number of post-acquisition events, includingintegrating the acquired businesses into our existing businesses. The integration process may disrupt the businesses and, if implemented ineffectively, wouldpreclude the realization of the full anticipated benefits. The difficulties of combining the operations of acquired companies include, among others: •the diversion of management’s attention to integration matters;•difficulties in the integration of operations and systems, including, without limitation, the complexities associated with managing the expandedoperations of a significantly larger and more complex company, addressing possible differences in corporate cultures and management philosophiesand the challenge of integrating complex systems, technology, networks and other assets of each of the acquired companies;•difficulties in achieving anticipated cost savings, synergies, business opportunities and growth prospects from combining the acquired businesseswith our own;•the inability to implement effective internal controls, procedures and policies for acquired businesses as required by the Sarbanes-Oxley Act of 2002within the time periods prescribed thereby;•the exposure to potential unknown liabilities and unforeseen increased expenses or delays associated with acquired businesses;•challenges in keeping existing customers and obtaining new customers;•challenges in attracting and retaining key personnel; and17Table of Contents•the disruption of, or the loss of momentum in, ongoing operations or inconsistencies in standards, controls, procedures and policies.Many of these factors will be outside of our control and any one of them could result in increased costs, decreases in the amount of expected revenues anddiversion of management’s time and energy, which could materially impact our business, prospects, financial condition, results of operations, or cash flows.Additionally, we incurred a significant amount of debt in connection with our acquisitions in the past few years. Finally, in relation to such acquisitions, wehave significantly higher amounts of intangible assets, including goodwill. These intangible assets will be subject to impairment testing, and we could incura significant impact to our financial statements in the form of an impairment if assumptions and expectations related to our acquisitions are not realized.During the year ended December 31, 2018, we recognized a goodwill impairment charge of $182.5 million.We have and will continue to incur expenses related to our acquisitions and the integration of our acquired companies.We have and will continue to incur expenses related to our acquisitions and the integration of our acquired companies. While we have assumed that a certainlevel of expenses will be incurred, there are many factors beyond our control that could affect the total amount or the timing of the integration expenses.Moreover, many of the expenses that will be incurred are, by their nature, difficult to estimate accurately. These integration expenses may result in us takingcharges against earnings, and the amount of any future charges are uncertain at present.We may be unable to realize the anticipated cost or capital expenditure savings or may incur additional and/or unexpected costs in order to realize them.There can be no assurance that we will be able to realize the anticipated cost or capital expenditure savings from our acquisitions in the anticipated amountsor within the anticipated timeframes or at all. With respect to each acquisition, we anticipate implementing a series of cost savings initiatives that we expectto result in recurring, annual run-rate cost savings. These or any other cost or capital expenditure savings that we realize may differ materially from ourestimates. We cannot provide assurances that these anticipated savings will be achieved or that our programs and improvements will be completed asanticipated or at all. In addition, any cost savings that we realize may be offset, in whole or in part, by reductions in revenues or through increases in otherexpenses.Our projections and assumptions related to cost savings are based on our current estimates, but they involve risks, uncertainties, projections and other factorsthat may cause actual results, performance or achievements to be materially different from any future results, performance or achievements, express orimplied. Neither our independent registered public accounting firm nor any other independent auditors, have examined, compiled or performed anyprocedures with respect to these projections, nor have they expressed any opinion, or any other form of assurance on such information or their achievability.Assumptions relating to our projections involve subjective decisions and judgments with respect to, among other things, the estimated impact of certainoperational adjustments, including Six Sigma/OpEx optimization programs, product grouping and rationalization, facility rationalization and shared servicescost savings and other cost and savings adjustments, as well as future economic, competitive, industry and market conditions and future business decisions,all of which are inherently uncertain and may be beyond the control of our management.Failure to realize the expected costs savings and operating synergies related to our acquisitions could result in increased costs and have an adverse effect onour business, prospects, financial condition, results of operations, or cash flows.Our future results could suffer if we cannot effectively manage our expanded operations, which are significantly larger and more complex following ouracquisitions.As a result of our acquisitions over the past few years, the size and scope of our operations were significantly increased. Our future success depends, in part,upon our ability to manage the expanded operations, which will pose challenges for management, including challenges related to the management andmonitoring of new operations and associated increased costs and complexity. We may not have the expertise, experience and resources to pursue orsuccessfully operate all of our businesses at once. The administration of our businesses requires implementation and oversight of appropriate operations,management, compliance and financial reporting systems and controls. We may experience difficulties in effectively implementing and overseeing these andother systems. Such implementation and initial oversight will require the focused attention of our management team, including a significant commitment ofits time and resources. The need for management to focus on these matters could have a material and adverse impact on our revenues and operating results.There can be no assurance that we will be successful or that we will realize any operating efficiencies, cost savings, revenue enhancements or other benefitscurrently anticipated from our acquisitions.18Table of ContentsThe indemnification provisions of acquisition agreements by which we have acquired companies may not fully protect us and may result in unexpectedliabilities.Certain of the acquisition agreements from past acquisitions require the former owners to indemnify us against certain liabilities related to the operation ofeach of their companies before we acquired it. In most of these agreements, however, the liability of the former owners is limited in amount and duration andcertain former owners may not be able to meet their indemnification responsibilities. These indemnification provisions may not fully protect us, and as aresult we may face unexpected liabilities that adversely affect our profitability and financial position.Our participation in joint ventures could expose us to additional risks from time to time.We currently have a 49% investment in a Chinese joint venture and may participate in additional joint ventures from time to time. Our participationin joint ventures is subject to risks that may not be present with other methods of ownership, including: •our joint venture partners could have investment and financing goals that are not consistent with our objectives, including the timing, terms andstrategies for any investments, and what levels of debt to incur or carry;•we could experience an impasse on certain decisions because we do not have sole decision-making authority, which could require us to expendadditional resources on resolving such impasses or potential disputes, including litigation or arbitration;•our ability to transfer our interest in a joint venture to a third party may be restricted and the market for our interest may be limited;•our joint venture partners might become bankrupt, fail to fund their share of required capital contributions or fail to fulfill their obligations asa joint venture partner, which may require us to infuse our own capital into the venture on behalf of the partner despite other competing uses for suchcapital; and•our joint venture partners may have competing interests in our markets that could create conflict of interest issues.Any divestitures and discontinued operations could negatively impact our business and retained liabilities from businesses that we may sell couldadversely affect our financial results.As part of our portfolio management process, we review our operations for businesses which may no longer be aligned with our strategic initiatives and long-term objectives. Divestitures pose risks and challenges that could negatively impact our business, including required separation or carve-out activities andcosts, disputes with buyers or potential impairment charges. We may also dispose of a business at a price or on terms that are less than we had previouslyanticipated. After reaching an agreement with a buyer for the disposition of a business, we are also subject to satisfaction of pre-closing conditions, as well asnecessary regulatory and governmental approvals on acceptable terms, which may prevent us from completing a transaction. Dispositions may also involvecontinued financial involvement, as we may be required to retain responsibility for, or agree to indemnify buyers against contingent liabilities related tobusinesses sold, such as lawsuits, tax liabilities, lease payments, product liability claims or environmental matters. Under these types of arrangements,performance by the divested businesses or other conditions outside of our control could affect future financial results.Item 1B.Unresolved Staff CommentsNone.Item 2.PropertiesAs of December 31, 2018, we owned or leased 51 facilities in a total of seven countries, which includes a 49% equity interest in a manufacturing joint venturein China. Utilization of these sites may vary with product mix and economic, seasonal, and other business conditions. Our plants generally have sufficientcapacity for existing needs and expected near-term growth. These plants are generally well maintained, in good operating condition, and suitable andadequate for their use. The following table lists the locations of our facilities by segment.19Table of ContentsMobile Solutions Group Location General Character Country Owned or LeasedBoituvaPlantBrazilLeasedCampinasOfficeBrazilLeasedDowagiac, MichiganPlantU.S.A.OwnedJuarezPlantMexicoLeasedKamienna GoraPlantPolandOwnedKentwood, MichiganPlant 1U.S.A.LeasedKentwood, MichiganPlant 2U.S.A.LeasedKentwood, MichiganPlant 3, WarehouseU.S.A.LeasedKentwood, MichiganOfficeU.S.A.OwnedMarnazPlantFranceOwnedMarshall, MichiganPlant 1U.S.A.LeasedMarshall, MichiganPlant 2U.S.A.LeasedSao Joao da Boa VistaPlant 1BrazilLeasedSao Joao da Boa VistaPlant 2BrazilLeasedWellington, OhioPlant 1U.S.A.LeasedWellington, OhioPlant 2U.S.A.LeasedWuxiPlantChinaLeasedPower Solutions Group Location General Character Country Owned or LeasedAlgonquin, Illinois Plant U.S.A. OwnedAttleboro, Massachusetts Plant 1 U.S.A. OwnedAttleboro, Massachusetts Plant 2 U.S.A. LeasedAttleboro, Massachusetts Plant 3 U.S.A. OwnedAttleboro, Massachusetts Office U.S.A. LeasedFairfield, Ohio Plant U.S.A. OwnedFoshan City Plant China LeasedFranklin, Massachusetts Plant U.S.A. LeasedHingham, Massachusetts Plant U.S.A. LeasedIrvine, California Plant U.S.A. LeasedLubbock, Texas Plant U.S.A. Owned Mexico City Plant Mexico OwnedNorth Attleboro, Massachusetts Plant U.S.A. OwnedPalmer, Massachusetts Plant U.S.A. LeasedPlacentia, California Plant U.S.A. Leased20Table of ContentsLife Sciences Group Location General Character Country Owned or LeasedAurora, Illinois Plant U.S.A. LeasedBridgeport, Connecticut Plant 1 U.S.A. OwnedBridgeport, Connecticut Plant 2 U.S.A. OwnedChangzhou Plant China LeasedEast Providence, Rhode Island Plant U.S.A. LeasedHatfield, Pennsylvania Plant U.S.A. LeasedIndianapolis, Indiana Plant U.S.A. LeasedLausanne Office Switzerland LeasedMansfield, Massachusetts Plant U.S.A. LeasedMansfield, Massachusetts Warehouse U.S.A. LeasedPierceton, Indiana Plant U.S.A. LeasedSiechnice Plant Poland OwnedSmithfield, Utah Plant U.S.A. LeasedVandalia, Ohio Plant U.S.A. LeasedWallingford, Connecticut Plant U.S.A. LeasedWarsaw, Indiana Plant U.S.A. LeasedJoint VentureLocation General Character Country Owned or LeasedWuxi Plant China LeasedIn addition to these manufacturing plants, we lease an office building in Johnson City, Tennessee, which serves as our global shared services center, and anoffice building in Charlotte, North Carolina, which serves as our corporate headquarters.Item 3.Legal ProceedingsPrior to the Autocam acquisition, Autocam’s Brazilian subsidiary received notification from the Brazilian tax authorities regarding ICMS (State Value AddedTax or VAT) tax credits claimed on intermediary materials (tooling and perishable items) used in the manufacturing process. The Brazilian tax authoritynotification disallowed state ICMS credits claimed on intermediary materials based on the argument that these items are not intrinsically related to themanufacturing processes. Autocam Brazil filed an administrative defense with the Brazilian tax authority arguing, among other matters, that it should qualifyfor ICMS tax credit, contending that the intermediary materials are directly related to the manufacturing process. The matter encompasses several lawsuitsfiled with Brazilian courts requesting declaratory actions that no tax is due or seeking a stay of execution on the collection of the tax. In 2018, we obtained afavorable decision in one of the declaratory actions for which the period for appeal has expired. We have filed actions in each court requesting dismissal ofthe matter based on the earlier court action. Although we anticipate a favorable resolution to all matters, we can provide no assurances that we will besuccessful in achieving dismissal of all pending cases.We believe that we have substantial legal and factual defenses, and we plan to defend our interests in this matter vigorously. While we believe a loss is notprobable, we estimate the range of possible losses related to this assessment is from $0 to $6.0 million. No amount was accrued at December 31, 2018, for thismatter. There was no material change in the status of this matter during 2018.We are entitled to indemnification from the former shareholders of Autocam, subject to the limitations and procedures set forth in the agreement and plan ofmerger relating to the Autocam acquisition. Management believes the indemnification would include amounts owed for the tax, interest and penalties relatedto this matter.21Table of ContentsAll other legal proceedings are of an ordinary and routine nature and are incidental to our operations. Management believes that such proceedings shouldnot, individually or in the aggregate, have a material adverse effect on our business, financial condition, results of operations, or cash flows. In making thatdetermination, we analyze the facts and circumstances of each case at least quarterly in consultation with our attorneys and determine a range of reasonablypossible outcomes. The procedures performed include reviewing attorney and plaintiff correspondence, reviewing any filings made and discussing the factsof the case with local management and legal counsel. We have not recognized any material loss contingencies at December 31, 2018, or at December 31,2017.Item 4.Mine Safety DisclosuresNot applicable.Part II Item 5.Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity SecuritiesOur common stock is traded on Nasdaq under the trading symbol “NNBR.” As of March 8, 2019, there were approximately 8,100 beneficial owners of recordof our common stock, and the closing per share stock price as reported by Nasdaq was $9.51.The following graph and table compare the cumulative total shareholder return on our common stock with the cumulative total shareholder return of: (i) theS&P SmallCap 600 Index and (ii) a customized peer group, for the period from December 31, 2013, to December 31, 2018. The customized peer groupconsists of the following companies, which we believe are in similar lines of business: Actuant Corporation, Altra Industrial Motion Corp., Ametek Inc.,CIRCOR International, Inc., Colfax Corporation, Crane, Kaman Corporation, Park-Ohio Holdings Corp. and Worthington Industries, Inc. (collectively, the“Peer Group”). The following graph and table assume that a $100 investment was made at the close of trading on December 31, 2013, in our common stockand in the S&P SmallCap Index and the Peer Group. We cannot assure you that the performance of our common stock will continue in the future with thesame or similar trend depicted on the graph.Comparison of Five-Year Cumulative Total ReturnNN, Inc., Peer Group, and S&P SmallCap 600 Index(Performance results through 12/31/2018)22Table of Contents 2013 2014 2015 2016 2017 2018NN, Inc. $100.00 $103.10 $80.91 $98.44 $144.20 $35.74Peer Group $100.00 $89.60 $76.12 $89.29 $112.75 $92.40S&P SmallCap 600 $100.00 $105.76 $103.68 $131.21 $148.57 $135.97Source: Value Line Publishing LLCThe 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. See Part III, Item 12 – “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters” of this Annual Report on Form10-K for information required by Item 201 (d) of Regulation S-K.Item 6.Selected Financial DataThe 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” in Item 7 and the audited Consolidated Financial Statements,including the Notes thereto, in Item 8. Year Ended December 31, 2018 2017 2016 2015 2014Statement of Operations Data: Net sales $770,657 $619,793 $584,954 $405,443 $210,575Cost of sales (exclusive of depreciation andamortization) 588,205 459,080 428,843 320,632 169,263Goodwill impairment 182,542 — — — —Income (loss) from operations (178,888) 33,114 34,779 58 (3,776)Income (loss) from continuing operations (264,467) 25,364 (9,490) (24,375) (12,788)Income from discontinued operations, net of tax — 137,688 16,153 17,889 21,005Income (loss) from continuing operations per share,basic $(8.35) $0.92 $(0.35) $(1.15) $(0.71)Income (loss) from continuing operations per share,diluted $(8.35) $0.91 $(0.35) $(1.15) $(0.71)Cash dividends declared per common share $0.28 $0.28 $0.28 $0.28 $0.28 As of December 31, 2018 2017 2016 (1) 2015 (1) 2014 (1)Balance Sheet Data: Current assets $296,871 $477,280 $282,328 $283,910 $245,131Current liabilities 145,030 108,421 140,241 132,491 138,485Total assets 1,501,570 1,475,003 1,358,274 1,388,337 703,892Long-term obligations 817,549 792,499 788,953 802,011 327,759Stockholders’ equity 418,295 486,104 309,391 312,431 172,989 (1)Current assets of discontinued operations were $106.7 million, $98.9 million, and $106.3 million as of December 31, 2016, 2015, and 2014,respectively. Current liabilities of discontinued operations were $45.2 million, $44.6 million, and $54.9 million as of December 31, 2016, 2015, and2014, respectively. Total assets of discontinued operations were $210.7 million, $204.4 million, $214.3 million as of December 31, 2016, 2015, and2014, respectively.During 2018, we recognized goodwill impairment charges of $182.5 million as described in Note 8 to the consolidated financial statements and issued sharesof common stock in a public offering as described in Note 15 to the consolidated financial statements. Additionally, acquisitions made in 2018 and 2017contributed net sales and income from operations of $153.0 million and $10.4 million, respectively, for the year ended December 31, 2018, as described inNote 3 to the consolidated financial statements, .23Table of ContentsDuring 2017, we completed the sale of our global precision bearing components business (the “PBC Business”) and recorded an after-tax gain on sale of$127.7 million as described Note 2 to the consolidate financial statements. Also during 2017, we acquired DRT Medical, subsequently renamed NN LifeSciences - Vandalia, LLC (“NN Vandalia”), which contributed $30.7 million to net sales and $1.5 million to income from operations during the year endedDecember 31, 2018 and $6.7 million to net sales and $0.5 million to loss from operations during the year ended December 31, 2017 as described in Note 3 tothe consolidated financial statements.During 2016, we recognized an increase in net sales of $174.2 million and increase in income from operations of $38.5 million primarily due to theacquisition of our former Precision Engineered Products Group.During 2015, we acquired two businesses, including our former Precision Engineered Products group, which contributed $40.7 million to net sales and $5.1million to loss from operations during the year ended December 31, 2015. Also during 2015, we issued shares of common shares in a public offering with netproceeds used for repayment of principal and interest on existing debt.During 2014, we acquired several businesses including Autocam Corporation, which is now the Mobile Solutions group. For the year ended December 31,2014, the acquisitions contributed $100.7 million to net sales and $5.8 million to income from operations.Item 7.Management’s Discussion and Analysis of Financial Condition and Results of OperationsThe following discussion should be read in conjunction with, and is qualified in its entirety by, the Consolidated Financial Statements and the Notes theretoand Selected Financial Data included elsewhere in this Annual Report on Form 10-K. Historical operating results and percentage relationships among anyamounts included in the Consolidated Financial Statements are not necessarily indicative of trends in operating results for any future period. Unlessotherwise noted herein, all amounts are in thousands, except per share numbers.Overview and Management FocusOur strategy and management focus are based upon the following long-term objectives •Organic and acquisitive growth within all our segments;•Sales growth in adjacent markets•Sales growth through acquisitions; and•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;•Residential and non-residential construction rates;•Global automotive production rates;•Surgery rates and U.S. healthcare spending;•Costs subject to the global inflationary environment, including, but not limited to:•Raw materials;•Wages and benefits, including health care costs;•Regulatory compliance; and•Energy;•Trends related to the geographic migration of competitive manufacturing;•Regulatory environment for United States public companies and manufacturing companies;•Currency and exchange rate movements and trends;•Interest rate levels and expectations; and•Changes in tariff regulations.Management generally focuses on the following key indicators of operating performance •Sales growth;24Table of Contents•Cost of sales;•Selling, general and administrative expense;•Earnings before interest, taxes, depreciation and amortization;•Return on invested capital;•Income from operations and adjusted income from operations;•Net income and adjusted net income;•Cash flow from operations and capital spending;•Customer service reliability;•External and internal quality indicators; and•Employee development.Critical Accounting PoliciesOur significant accounting policies, including the assumptions and judgment underlying them, are disclosed in Note 1 of the Notes to ConsolidatedFinancial Statements. These policies have been consistently applied in all material respects and address such matters as revenue recognition, inventoryvaluation, and asset impairment recognition. Due to the estimation processes involved, management considers the following summarized accounting policiesand their application to be critical to understanding our business operations, financial condition and results of operations. We cannot assure you that actualresults will not significantly differ from the estimates used in these critical accounting policies.Business CombinationsWe allocate the total purchase price of tangible and intangible assets acquired and liabilities assumed based on their estimated fair values as of the businesscombination date, with the excess purchase price recorded as goodwill. The purchase price allocation process requires us to use significant estimates andassumptions, including fair value estimates, as of the business combination date. Although we believe the assumptions and estimates we have made arereasonable and appropriate, they are based in part on historical experience and information obtained from management of the acquired company. Ourassumptions and estimates are also partially based on valuation models that incorporate projections of expected future cash flows and operating plans and areinherently uncertain. Valuations are performed by management or third-party valuation specialists under management’s supervision. In determining the fairvalue of assets acquired and liabilities assumed in business combinations, as appropriate, we may use one of the following recognized valuation methods: theincome approach (including discounted cash flows, relief from royalty and excess earnings model), the market approach, or the replacement cost approach.Examples of significant estimates used to value certain intangible assets acquired include but are not limited to: •sales volume, pricing and future cash flows of the business overall;•future expected cash flows from customer relationships, and other identifiable intangible assets, including future price levels, rates of increase inrevenue and appropriate attrition rate;•the acquired company’s brand and competitive position, royalty rate quantum, as well as assumptions about the period of time the acquired brandwill continue to benefit the combined company’s product portfolio; and•cost of capital, risk-adjusted discount rates, and income tax rates.Different assumptions regarding projected performance and other factors associated with the acquired assets may affect the amount recorded under each typeof asset and liability. The valuations of property, plant and equipment, intangible assets, goodwill and deferred income tax liabilities depend heavily onassumptions. Subsequent assessment could result in future impairment charges. We refine these estimates over a measurement period not to exceed one yearto reflect new information obtained surrounding facts and circumstances existing at the acquisition date.Goodwill and Other Indefinite Lived Intangible AssetsGoodwill is tested for impairment on an annual basis in the fourth quarter and between annual tests if a triggering event occurs. The impairment analysis isperformed at the reporting unit level. For the impairment test as of October 1, 2018, we elected to early adopt the new goodwill accounting standard whichrequires us to calculate an impairment charge based on a reporting unit’s carrying amount in excess of its fair value (i.e., step 1 of the two-step impairmenttest). If the carrying value of the reporting unit including goodwill is less than fair value of the reporting unit, the goodwill is not considered impaired. Underthe new guidance, we no longer perform step 2 of the two-step goodwill impairment test or calculate an impairment charge using25Table of Contentsan implied fair value. Based on the results of performing the first step of the impairment test, the carrying value of certain reporting units exceed the fair valueat December 31, 2018. For the year ended December 31, 2018, we recorded an impairment charge of $182.5 million to the Consolidated Statements ofOperations and Comprehensive Income (Loss).Power Solutions goodwill as of December 31, 2018 was $94.5 million. In conjunction with the annual goodwill impairment test during the fourth quarter of2018, Power Solutions goodwill was impaired by $109.1 million, resulting in the carrying value of the reporting unit being equal to its fair value. If ourassessment of the relevant facts and circumstances change, or if the actual performance falls short of expected results, an additional impairment charge will berequired. An impairment of goodwill may also lead us to record an impairment of other intangible assets. The carrying value of finite-lived intangible assetsfor the Power Solutions group as of December 31, 2018 was $96.0 million. Life Sciences has largely grown through acquisitions, with two acquisitions in 2018 plus another acquisition in late-2017. The Company is forecastingcontinued growth for the Life Sciences group; however, the fair value of the reporting unit exceeds the carrying value by approximately 3.7% in the mostrecent valuation. If our assessment of the relevant facts and circumstances change, or the actual performance falls short of expected results, the result may leadto impairment charges. Total goodwill for the Life Sciences group as of December 31, 2018 was $344.9 million. An impairment of goodwill may also lead usto record an impairment of other intangible assets. The carrying amount of finite-lived intangible assets for the Life Sciences group as of December 31, 2018was $244.4 million. See Note 8 for further discussion on goodwill.For the year ended, December 31, 2017, we performed the two-step goodwill impairment test under accounting standards in effect at that time. Based on theresults of performing the first step of the impairment test, the fair value of the reporting units exceeded the carrying value of the reporting units atDecember 31, 2017.Income TaxesIncome taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequencesattributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating lossand tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in whichthose 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 inincome in the period that includes the enactment date. Valuation allowances are recorded to reduce deferred tax assets when it is more likely than not that atax benefit will not be realized. Provision has been made for income taxes on unremitted earnings of certain foreign subsidiaries as these earnings are notdeemed to be permanently reinvested. We recognize income tax positions that meet the more likely than not threshold and accrue interest and potentialpenalties related to unrecognized income tax positions which are recorded as a component of the provision (benefit) for income taxes.The calculation of tax assets, liabilities, and expenses under U.S. GAAP is largely dependent on management judgment of the current and future deductibilityand utilization of taxable expenses and benefits using a more likely than not threshold. Specifically, the realization of deferred tax assets and the certainty oftax positions taken are largely dependent upon management weighting the current positive and negative evidence for recording tax benefits and expenses.Additionally, many of our positions are based on future estimates of taxable income and deductibility of tax positions. Particularly, our assertion ofpermanent reinvestment of foreign undistributed earnings is largely based on management’s future estimates of domestic and foreign cash flows and currentstrategic foreign investment plans. In the event that the actual outcome from future tax consequences differs from management estimates and assumptions ormanagement plans and positions are amended, the resulting change to the provision for income taxes could have a material impact on the consolidatedresults of operations and financial position. (See Note 1 and Note 11 of the Notes to Consolidated Financial Statements).As of December 31, 2018, the Company is not asserting indefinite reinvestment on unremitted earnings of certain foreign subsidiaries in China and Mexico. We have recorded a U.S. deferred tax liability as applicable for these subsidiaries. All other foreign earnings continue to be considered indefinitelyreinvested. Impairment of Long-Lived AssetsLong-lived tangible and intangible assets subject to depreciation or amortization are tested for recoverability when changes in circumstances indicate thecarrying 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 areporting unit or asset group. Assets to be held and used are tested for recoverability when indications of impairment are evident. Recoverability of a long-lived tangible or intangible asset is evaluated by comparing its carrying value to the future estimated undiscounted cash flows expected to be generated bythe asset or asset group. If the asset is not recoverable, then the asset is considered impaired and adjusted to fair value which is then depreciated or amortizedover its remaining useful life. Assets to be disposed of are recorded at the lesser of carrying value or fair value less costs of disposal. In assessing potentialimpairment for long-lived assets, we consider forecasted financial performance based, in large part, on management business plans and projected financialinformation which are subject to a high26Table of Contentsdegree of management judgment and complexity. Future adverse changes in market conditions or adverse operating results of the underlying assets couldresult in having to record additional impairment charges not previously recognized.Critical Accounting Standards Not Yet AdoptedLeases. In February 2016, the FASB issued ASU 2016-2, Leases. ASU 2016-2 creates Topic 842, Leases, (“ASC 842”) in the ASC and supersedes ASC 840,Leases. Entities that hold numerous equipment and real estate leases, in particular those with numerous operating leases, will be most affected by the newguidance. The lease accounting standard is effective for NN beginning January 1, 2019, with modified retrospective adoption required and early adoptionpermitted. We intend to utilize the practical expedient to recognize the cumulative-effect adoption adjustment to retained earnings as of January 1, 2019, andnot adjust comparative periods. The adoption of ASC 842 is expected to impact our balance sheet by adding lease-related assets and liabilities. The loancovenants in our credit facility provide for the continuation of covenant computations in accordance with U.S. GAAP prior to changes in accountingprinciples. Therefore, we do not expect the adoption of ASC 842 to affect our compliance. We have performed inquiries within each of our business groupsand compiled information on operating and capital leases. We are using the results of these inquiries and compiled information to evaluate the impacts of thelease accounting standard on our financial position, results of operations, and related disclosures. Upon adoption, we expect that leases with terms greaterthan twelve months that are currently classified as operating leases and not recorded on our balance sheet will be recognized as a right-of-use asset and leaseliability. We are implementing an enterprise-wide lease accounting system and are in the process of verifying data in the system that will enable us todetermine the amounts of those assets and liabilities. We have reviewed all leases and are in the process of documenting our conclusions, establishinginternal controls, and determining discount rates to generate the initial accounting entries upon adoption of the standard. We expect the right-of-use assetand lease liability to be between $65.0 million and $95.0 million each.Results of OperationsFactors That May Influence Results of OperationsThe following paragraphs describe factors that have influenced results of operations for the year ended December 31, 2018, that management believes areimportant to provide an understanding of the business and results of operations, or that may influence operations in the future.Management StructureIn January 2018, we implemented a new enterprise and management structure designed to accelerate growth and further balance our portfolio by aligning ourstrategic assets and businesses. Our businesses were reorganized into the Mobile Solutions, Power Solutions, and Life Sciences groups and are basedprincipally on the end markets they serve. The Autocam Precision Components Group reported in our historical financial statements was renamed as MobileSolutions. The Mobile Solutions group is focused on growth in the general industrial and automotive end markets. The Precision Engineered Products Groupreported in our historical financial statements was bifurcated into two new groups – Power Solutions and Life Sciences. The Power Solutions group is focusedon growth in the electrical and aerospace and defense end markets. The Life Sciences group is focused on growth in the medical end market. In the firstquarter of 2018, we began reporting our financial results based on these new reportable segments. Prior year amounts have been revised to confirm to thecurrent year presentation.AcquisitionsOn May 7, 2018, we acquired 100% of the stock of PMG Intermediate Holding Corporation, the parent company of Paragon Medical for a base purchase priceof $375.0 million in cash, subject to certain adjustments. After working capital and other closing adjustments, the cash purchase price wasapproximately $390.9 million which included $13.6 million in cash acquired. During the year ended December 31, 2018, we received $1.4 millionadditional cash from the seller to settle working capital adjustments. For accounting purposes, Paragon Medical meets the definition of a business and hasbeen accounted for as a business combination. Paragon Medical is a medical device manufacturer which focuses on the orthopedic, case and tray, implant,and instrument markets. This acquisition continues our strategic focus to expand our Life Sciences portfolio as well as create a balanced business bydiversifying our products and finished device offerings. Operating results of Paragon Medical are reported prospectively from the date of acquisition in ourLife Sciences group. We have performed an assessment of the opening balance sheet which is subject to completion of our integration procedures foraccounting policies. Opening balance sheet deferred taxes have been recorded based on estimates made as of the acquisition date as well as informationcurrently available to management. As estimates are refined and additional information is received throughout the measurement period,27Table of Contentsadjustments to opening deferred taxes may be recorded with an offsetting adjustment to goodwill. We incurred new debt in connection with the ParagonMedical acquisition and subsequently repaid the new debt in full with the proceeds from the sale of shares of our common stock. In connection with theclosing of the Paragon Medical acquisition, we entered into the Second Lien Credit Agreement for the Second Lien Facility. We utilized the net proceedsfrom the Second Lien Facility, together with cash on hand, to pay the Paragon Medical purchase price and fees and expenses related to the acquisition. Wealso entered into an amendment to our existing credit facility to permit the Paragon Medical acquisition, to permit the Second Lien Credit Agreement, and toamend certain covenants (refer to Note 12 to the consolidated financial statements for additional disclosure).On September 18, 2018, we issued 14.4 million shares of our common stock in a registered public offering. Net proceeds of approximately $217.3 millionwere used to repay the Second Lien Facility and a portion of the Senior Secured Revolver.On February 22, 2018, we completed the acquisition of 100% of the assets of Bridgemedica. For accounting purposes, Bridgemedica meets the definition of abusiness and has been accounted for as a business combination. Bridgemedica is a medical device company that provides concept to supply solutionsthrough design, development engineering and manufacturing. Operating results of Bridgemedica are reported prospectively in our Life Sciences group afterthe acquisition date. We have finalized our valuation related to the assets acquired and liabilities assumed.On August 9, 2018, we completed the acquisition of 100% of the capital stock of Technical Arts. For accounting purposes, Technical Arts meets thedefinition of a business and has been accounted for as a business combination. Technical Arts is an industrial machining company that manufactures tighttolerance metal components and assemblies. The acquisition of Technical Arts expands the NN presence in the aerospace and defense end market. Operatingresults of Technical Arts are reported prospectively in our Power Solutions group after the acquisition date. We have completed a preliminary purchase priceallocation and are in the process of finalizing the fair value of assets acquired and liabilities assumed.As discussed in our 2017 Annual Report, on October 2, 2017, we completed the acquisition of NN Vandalia, a supplier of precision manufactured medicalinstruments and orthopedic implants with locations in Ohio and Pennsylvania.Discontinued OperationsOn August 17, 2017, we completed the sale of our PBC Business. The PBC Business included all our facilities that were engaged in the production ofprecision steel balls, steel rollers, and metal retainers and automotive specialty products used primarily in the bearing industry. The sale of the PBC Businessfurthers management’s long-term strategy to build a diversified industrial business with a comprehensive geographic footprint in attractive high-growthmarket segments. The PBC Business represented all of the Precision Bearing Components Group reportable segment disclosed in our historical financialstatements.In accordance with ASC 205-20, Presentation of Financial Statements – Discontinued Operations, the operating results of the PBC Business for 2017 areclassified as discontinued operations. The presentation of discontinued operations includes revenues and expenses of the discontinued operations, net of tax,as one line item on the Consolidated Statements of Operations and Comprehensive Income (Loss). All historical Consolidated Statements of Operations andComprehensive Income (Loss) presented have been revised to reflect this presentation. Accordingly, results of the PBC Business have been excluded fromcontinuing operations and group results for all periods presented in the consolidated financial statements and the accompanying notes unless otherwisestated. Refer to Note 2 in the Notes to Consolidated Financial Statements for more information.Tax ReformOn December 22, 2017, the U.S. government enacted comprehensive tax legislation. The U.S. Tax Cuts and Jobs Act of 2017 (the “Tax Act”) reduced the U.S.federal corporate income tax rate from 35% to 21%, required companies to pay a one-time transition tax on earnings of certain foreign subsidiaries that werepreviously tax deferred, and creates new taxes on certain foreign sourced earnings.We have completed our accounting for the enactment of the Tax Act incorporating assumptions made based upon our currentinterpretation of the Tax Act and relevant proposed regulations in accordance with Staff Accounting Bulletin No. 118. Wehave also accounted for impacts of the Tax Act which became effective in 2018. The amounts recorded as it relates to the TaxAct could change in the future as a result of further guidance and regulations being issued and evaluated.Financial Data as a Percentage of Net SalesThe following table sets forth for the periods indicated selected financial data and the percentage of our net sales represented by each income statement lineitem presented.28Table of Contents Year Ended December 31, 2018 2017 2016Net sales 100.0 % 100.0 % 100.0 %Cost of sales (exclusive of depreciation and amortization shown separately below) 76.3 % 74.1 % 73.3 %Selling, general and administrative expense 12.1 % 12.0 % 11.0 %Acquisition related costs excluded from selling, general and administrative expense 0.8 % 0.1 % — %Depreciation and amortization 9.2 % 8.5 % 8.7 %Other operating (income) expense, net 0.8 % 0.1 % 0.1 %Goodwill impairment 23.7 % — % — %Restructuring and integration expense, net 0.3 % 0.1 % 1.0 %Income (loss) from operations (23.2)% 5.1 % 5.9 %Interest expense 7.9 % 8.4 % 10.7 %Loss on extinguishment of debt and write-off of debt issuance costs 2.5 % 6.8 % 0.4 %Derivative payments on interest rate swap — % — % 0.1 %Derivative loss (gain) on change in interest rate swap fair value — % — % 0.4 %Other (income) expense, net 0.2 % (0.3)% (0.5)%Loss from continuing operations before benefit for income taxes and share of netincome from joint venture (33.8)% (9.8)% (5.2)%Benefit for income taxes 1.4 % 12.8 % 2.6 %Share of net income (loss) from joint venture (1.9)% 0.8 % 1.0 %Income (loss) from continuing operations (34.3)% 3.8 % (1.6)%Income from discontinued operations, net of tax (Note 2) — % 22.2 % 2.8 %Net income (loss) (34.3)% 26.0 % 1.2 % Sales ConcentrationDuring 2018, sales to various U.S. and foreign divisions of our ten largest customers accounted for approximately 49% of our consolidated net sales.However, no customers individually accounted for more than 10% of our consolidated net sales for 2018. The loss of all or a substantial portion of sales tothese customers would cause us to lose a substantial portion of our revenue and have a corresponding negative impact on our income from operations due tothe operational leverage these customers provide. This could lead to sales volumes not being high enough to cover our current cost structure or to provideadequate operating cash flows or cause us to incur additional restructuring and/or impairment costs.29Table of ContentsYear Ended December 31, 2018, compared to the Year Ended December 31, 2017 Year Ended December 31, 2018 2017 $ ChangeNet sales $770,657 $619,793 $150,864 Acquisitions $152,952Volume 7,320Foreign exchange effects (2,083)Price/mix/inflation/other (7,325)Cost of sales (exclusive of depreciation and amortization shown separatelybelow) 588,205 459,080 129,125 Acquisitions $112,774Volume 5,785Foreign exchange effects (1,438)Cost reduction projects (7,501)Inflation 9,599Mix/other 9,906Selling, general and administrative expense 93,583 74,112 19,471 Acquisition related costs excluded from selling, general and administrativeexpense 5,871 344 5,527 Depreciation and amortization 71,128 52,406 18,722 Other operating (income) expense, net 6,089 351 5,738 Goodwill impairment 182,542 — 182,542 Restructuring and integration expense, net 2,127 386 1,741 Income (loss) from operations (178,888) 33,114 (212,002) Interest expense 61,243 52,085 9,158 Loss on extinguishment of debt and write-off of debt issuance costs 19,562 42,087 (22,525) Derivative loss (gain) on change in interest rate swap fair value — (101) 101 Other (income) expense, net 1,341 (2,084) 3,425 Loss from continuing operations before benefit for income taxes and share of netincome from joint venture (261,034) (58,873) (202,161) Benefit for income taxes 10,957 79,026 (68,069) Share of net income (loss) from joint venture (14,390) 5,211 (19,601) Income (loss) from continuing operations (264,467) 25,364 (289,831) Income from discontinued operations, net of tax (Note 2) — 137,688 (137,688) Net income (loss) $(264,467) $163,052 $(427,519) Net Sales. Net sales increased by $150.9 million, or 24%, in 2018 compared to 2017, primarily due to $153.0 million of net sales attributable to the 2018acquisitions of Paragon Medical and Bridgemedica, and the fourth quarter 2017 acquisition of NN Vandalia, in our Life Sciences group and the TechnicalArts business acquired in our Power Solutions group. Higher volumes contributed another $7.3 million to the increase primarily as a result of demandimprovements within the automotive, life sciences, and electrical end markets. These increases were partially offset by unfavorable foreign exchange effectsof $2.1 million.Cost of Sales. The increase in cost of sales was primarily due to $112.8 million in cost of sales attributable to the Paragon Medical, Bridgemedica, NNVandalia, and Technical Arts acquisitions. Higher volumes also contributed $5.8 million to the increase, consistent with the increase in sales demand. Thesevolume increases were partially offset by favorable foreign exchange effects and $7.5 million in cost savings from production process improvement projects.Inflation and wage increases contributed $9.6 million to the increase in cost of sales.30Table of ContentsSelling, General and Administrative Expense. The majority of the increase in selling, general and administrative expense during the year ended December 31,2018, compared to the year ended December 31, 2017, was due to the Paragon Medical, Bridgemedica, NN Vandalia, and Technical Arts businesses whichcollectively contributed $12.5 million to selling, general and administrative expense during the year ended December 31, 2018. Infrastructure and staffingcosts incurred related to our strategic initiatives, including integration of recent acquisitions and a global implementation of an enterprise resource planning(“ERP”) systems, also contributed to the increase. These increases were partially offset by lower incentive compensation expense in 2018 as compared to2017.Acquisition Related Costs Excluded from Selling, General and Administrative. Acquisition related costs are primarily third party legal, accounting, valuationconsulting and investment banking advisory fees incurred in connection with the Life Sciences acquisitions.Depreciation and Amortization. The increase in depreciation and amortization during the year ended December 31, 2018, compared to the year endedDecember 31, 2017, was consistent with additions to intangible assets and property, plant and equipment, including $16.1 million from the Paragon Medical,Bridgemedica, NN Vandalia, and Technical Arts businesses. This additional depreciation and amortization expense includes the effects of related fair valueadjustments to certain property, plant and equipment and the addition of intangible assets, principally for customer relationships and trade names.Other Operating (Income) Expense, Net. Other net operating expense in the year ended December 31, 2018, primarily resulted from impairment charges onproperty, plant and equipment of $5.2 million and a loss on the sale of property, plant and equipment of $0.6 million partially offset by a $0.7 million changein fair value of a contingent earnout liability associated with the Bridgemedica acquisition.Goodwill Impairment. The increase in goodwill impairment in the year ended December 31, 2018 was the result of goodwill impairment charges at MobileSolutions and Power Solutions. See Note 8 in the Notes to Consolidated Financial Statements for more information on the impairment charges.Restructuring and Integration Expense. The increase in restructuring and integration expense was primarily due to employee severance costs incurred inconnection with implementing our new enterprise and management structure. Note 13 in the Notes to Consolidated Financial Statements provides moreinformation regarding the effects of restructuring and integration on our operating results.Interest Expense. Interest expense increased by $9.2 million during the year ended December 31, 2018, compared to the year ended December 31, 2017,primarily due to interest on the Second Lien Facility, which was not in place during the year ended December 31, 2017, and bore interest at a higher rate thanour existing credit facility. This increase was partially offset by the redemption of our 10.25% Senior Notes due 2020 (the “Senior Notes”) on April 3, 2017,with the proceeds of our incremental term loan of an aggregate principal amount of $300.0 million (the “Incremental Term Loan”), which bears an interestrate based on the London Interbank Offered Rate (“LIBOR”) plus an applicable margin of 3.25%, which is lower than the 10.25% fixed interest rate on theSenior Notes. Additionally, LIBOR was higher in the year ended December 31, 2018, compared to the year ended December 31, 2017. Year Ended December 31, 2018 2017Interest on debt $56,977 $47,681Amortization of debt issuance costs 4,845 4,296Interest on capital leases and other 624 1,189Capitalized interest (1,203) (1,081)Total interest expense $61,243 $52,085Loss on Extinguishment of Debt and Write-off of Unamortized Debt Issuance Costs. The decrease in the loss on extinguishment of debt and write-off ofunamortized debt issuance costs is primarily due to the $42.1 million write off in 2017 as the result of the extinguishment of the Senior Notes andmodification of our credit facility offset by the $12.9 million write off in 2018 related to the Second Lien Facility. Additionally, we paid a two percent, or$4.0 million, prepayment penalty and wrote off $2.6 million of unamortized original issue discount when we paid the Second Lien Facility in full inSeptember 2018.31Table of ContentsBenefit for Income Taxes. Our effective tax rate from continuing operations was 4.2% for the year ended December 31, 2018, compared to 134.2% for the yearended December 31, 2017. Note 11 in the Notes to Condensed Consolidated Financial Statements describes the components of income taxes for each periodpresented.Share of Net Income from Joint Venture. The impact on our earnings from a Chinese joint venture in our Mobile Solutions group decreased primarily due to apartial impairment of the investment in the joint venture of $16.6 million as well as a decrease in the Company’s share of net income from the joint venture of$3.0 million. The joint venture’s net income decreased primarily due to price and volume decreases resulting from reduced demand in the Chineseautomotive market and increased raw material costs. See Note 10 in the Notes to Consolidated Financial Statements for more information on the impairmentcharge.Results by SegmentMOBILE SOLUTIONS Year Ended December 31, 2018 2017 $ ChangeNet sales $335,037 $336,852 $(1,815) Volume $4,300Foreign exchange effects (1,327)Price/mix/inflation/other (4,788)Goodwill impairment (73,442) — (73,442) Income from operations $(54,103)$34,405 $(88,508) Net sales decreased in 2018 from 2017 due to price reductions granted to our customers and the negative impact of shifts in foreign currency exchange ratesduring 2018. These effects were substantially offset by the benefit derived from our steering systems customers increasing their market share as the industryshifts from hydraulics to electric-assist steering systems technologies. Also, as the Brazilian economy improves, demand for automotive products improvedduring 2018.Income from operations decreased by $88.5 million compared to prior year primarily due to an impairment loss on goodwill of $73.4 million, which wasrecognized in the Consolidated Statements of Operations and Comprehensive Income (Loss) during the fourth quarter of 2018. In addition, the decrease wasdue to higher start-up costs related to new product launches, lower customer pricing as noted above, and higher depreciation expense due to capitalinvestments to support new product launches. These factors were partially offset by implementation of cost savings initiatives and the beneficial impact ofhigher production volumes.POWER SOLUTIONS Year Ended December 31, 2018 2017 $ ChangeNet sales $189,778 $186,602 $3,176 Acquisitions $2,521Volume 2,893Foreign exchange effects (756)Price/mix/inflation/other (1,482)Goodwill impairment (109,100) — (109,100) Income from operations $(95,115) $23,440 $(118,555) Net sales increased in 2018 from 2017 primarily due to growth in sales to customers in the electrical products end market. Sales from the Technical Artsbusiness contributed $2.5 million to the current year.Income from operations decreased by $118.6 million primarily due to an impairment loss on goodwill of $109.1 million recognized in the ConsolidatedStatements of Operations and Comprehensive Income (Loss) during the fourth quarter of 2018 as well as a shift in product mix toward higher cost rawmaterials, such as precious metals used in power control products, and investments in the development of new products and manufacturing facilities tosupport growth in the aerospace end market.32Table of ContentsLIFE SCIENCES Year Ended December 31, 2018 2017 $ ChangeNet sales $248,173 $98,329 $149,844 Acquisitions $150,431Volume 127Foreign exchange effects —Price/mix/inflation/other (714)Goodwill impairment — — — Income from operations $19,136$13,271 $5,865 Net sales increased during the year ended December 31, 2018, from the year ended December 31, 2017, primarily due to $150.4 million of net salesattributable to the 2018 acquisitions of Paragon Medical and Bridgemedica, and a full year of activity from the 2017 acquisition of NN Vandalia, as well as a$0.1 million increase in core volume.Income from operations increased by $5.9 million primarily due to $10.7 million contributed by the Paragon Medical, Bridgemedica, and NN Vandaliaacquisitions. This increase was partially offset by $2.6 million of increased operating expenses and $1.3 million of acquisition related restructuring andintegration costs and other costs associated with establishing the Life Sciences Group.33Table of ContentsYear Ended December 31, 2017, compared to the Year Ended December 31, 2016 Year Ended December 31, 2017 2016 $ ChangeNet sales $619,793 $584,954 $34,839 Acquisitions $6,682Volume 25,944Foreign exchange effects 1,956Price/mix/inflation/other 257Cost of sales (exclusive of depreciation and amortizationshown separately below) 459,080 428,843 30,237 Acquisitions $6,204Volume 17,704Foreign exchange effects 1,796Cost reduction projects (3,150)Inflation 2,506Mix/other 5,177Selling, general and administrative expense 74,112 64,144 9,968 Acquisition related costs excluded from selling, general and administrativeexpense 344 — 344 Depreciation and amortization 52,406 50,721 1,685 Loss (gain) on disposal of assets 351 809 (458) Restructuring and integration expense 386 5,658 (5,272) Income from operations 33,114 34,779 (1,665) Interest expense 52,085 62,870 (10,785) Loss on extinguishment of debt and write-off of unamortizeddebt issuance costs 42,087 2,589 39,498 Derivative payments on interest rate swap — 609 (609) Derivative loss (gain) on change in interest rate swap fair value (101) 2,448 (2,549) Other (income) expense, net (2,084) (2,871) 787 Loss from continuing operations before benefit for income taxes and share of netincome from joint venture (58,873) (30,866) (28,007) Benefit for income taxes 79,026 15,438 63,588 Share of net income from joint venture 5,211 5,938 (727) Income (loss) from continuing operations 25,364 (9,490) 34,854 Income from discontinued operations, net of tax 137,688 16,153 121,535 Net income $163,052 $6,663 $156,389 Net Sales. Net sales increased by $34.8 million, or 6.0%, in 2017 compared to 2016 primarily due to increased volumes. The higher volumes were primarilydue to demand improvements within the life sciences end market, the automotive end market, and the general industrial end market. Additionally, sales fromthe NN Vandalia business that we acquired on October 2, 2017, contributed $6.7 million to 2017 sales. Appreciation of the Chinese renminbi and the euro inrelation to the U.S. dollar in 2017 also increased net sales year over year.Cost of Sales. The increase in cost of sales was primarily due to the increase in demand and production volumes as well as changes in product mix and start-up costs for certain new products. Cost of sales for NN Vandalia contributed $6.2 million to the 2017 increase, which includes a one-time $0.9 million impactto cost of sales related to inventory valuation as part of purchase accounting. Increases were partially offset by cost savings from production processimprovement projects.Selling, General and Administrative Expense. The increase in selling, general and administrative expense during 2017 compared to 2016 was primarily dueto infrastructure and staffing costs incurred related to our strategic initiatives, including a global implementation of an enterprise resource planning (“ERP”)system.34Table of ContentsAcquisition Related Costs Excluded from Selling, General and Administrative. Acquisition related costs are primarily third party legal, accounting, valuationconsulting, and investment banking advisory fees incurred directly related to the NN Vandalia acquisition in 2017.Depreciation and Amortization. The increase in depreciation and amortization in 2017 was primarily due to additions to property, plant and equipment. Theincrease was partially offset by a decrease of $2.5 million related to amortization in 2016 of backlog and unfavorable leasehold intangible assets acquiredwith the PEP Acquisition. These intangible assets became fully amortized in the first quarter of 2016. The NN Vandalia acquisition contributed $0.6 millionof depreciation and amortization expense to 2017. The NN Vandalia depreciation and amortization includes the related step-ups of certain property, plantand equipment to fair value and the addition of intangible assets principally for customer relationships and trade names.Restructuring and Integration Expense. The decrease in restructuring and integration expense was primarily due to limited spending on site closure costs in2017 compared to $4.3 million of cost incurred in 2016 to close a plant in Wheeling, Illinois, in our Autocam Precision Components Group.Interest Expense. Interest expense decreased by $10.8 million in 2017 due to the redemption of the Senior Notes on April 3, 2017, with the proceeds of theIncremental Term Loan, which bears a lower interest rate based on LIBOR. Further interest savings resulted from the refinancing of the Senior Secured TermLoan and Senior Secured Revolver in the third quarter of 2016 and further refinancing of the Senior Secured Term Loan and the Incremental Term Loan onNovember 24, 2017. Year Ended December 31, 2017 2016Interest on debt $47,681 $57,519Interest rate swaps settlements — 1,393Amortization of debt issuance costs 4,296 4,168Interest on capital leases and other 1,189 1,379Capitalized interest (1,081) (1,589)Total interest expense $52,085 $62,870Loss on Extinguishment of Debt and Write-off of Unamortized Debt Issuance Costs. The increase in loss on extinguishment of debt and write-off ofunamortized debt issuance costs is primarily due to the $42.1 million write off in 2017 as a result of the extinguishment of the Senior Notes and modificationand subsequent refinancing of our credit facility offset by the $2.6 million write off in 2016 related to debt restructurings that occurred during 2016.Derivative Loss (Gain) on Change in Interest Rate Swap Fair Value. During the third quarter of 2016, we chose to discontinue hedge accounting. As a result,all amounts of accumulated other comprehensive income were reclassified to earnings.Benefit for Income Taxes. Our effective tax rate from continuing operations was 134.2% in 2017 compared to 50.0% for 2016. Note 11 in the Notes toConsolidated Financial Statements describes the components of income taxes for each period presented.Income from Continuing Operations. Benefit for income taxes increased by $63.6 million primarily as a result of the U.S. Tax Cuts and Jobs Act of 2017.Income from operations of $33.1 million for 2017 was more than offset by the loss on extinguishment of debt and write-off of unamortized debt issuance costand interest expense. Also, acquisition related costs accounted for a $0.3 million reduction in income from operations as compared to 2016. The$10.8 million reduction in interest expense also contributed to income from continuing operations. Significant components of the changes in income fromoperations and interest expense were presented in the preceding paragraphs.Income from Discontinued Operations, Net of Tax. The largest component of income from discontinued operations in 2017 was the $127.7 million gain onsale of our PBC Business, net of tax. Note 2 in the Notes to Consolidated Financial Statements provides details of the results of discontinued operations.35Table of ContentsResults by SegmentMOBILE SOLUTIONS Year Ended December 31, 2017 2016 $ ChangeNet sales $336,852 $326,138 $10,714 Volume $9,963Foreign exchange effects 2,213Price/mix/inflation/other (1,462)Income from operations 34,405 29,490 4,915 Net sales increased in 2017 from 2016 due to industrial market demand improvements in the US and China and new automotive program launches in the US,China and Brazil. We are realizing the indirect benefits of our customers taking an increasing portion of market share. Also, as the Brazilian economyrebounds, demand for automotive products is increasing.The increase in net sales contributed to the increase in income from operations. Cost reduction projects resulted in savings in cost of sales of approximately$1.6 million in 2017 compared to 2016. Restructuring costs decreased by $4.0 million, primarily related to the closure of a plant in Wheeling, Illinois. Thesefactors that increased income from operations were slightly offset by start-up costs for new products and a $2.3 million increase in depreciation andamortization consistent with recent capital expenditure activity.POWER SOLUTIONS Year Ended December 31, 2017 2016 $ ChangeNet sales $186,602 $180,330 $6,272 Acquisitions $—Volume 5,759Foreign exchange effects (257)Price/mix/inflation/other 770Income from operations 23,440 24,060 (620) Net sales increased in 2017 from 2016 primarily due to the overall improvement in demand across the power solutions end market and sales to new customerswithin the aerospace and defense market. We have also benefited from the introduction of new products for the aerospace and defense end market.Income from operations decreased by $0.6 million primarily due to a shift in product mix toward higher cost raw materials and new program setup costs forcertain products sold into the aerospace and defense end market.36Table of ContentsLIFE SCIENCES Year Ended December 31, 2017 2016 $ ChangeNet sales $98,329 $80,057 $18,272 Acquisitions $6,682Volume 10,222Foreign exchange effects —Price/mix/inflation/other 1,368Income from operations 13,271 9,840 3,431 Net sales increased in 2017 from 2016 primarily due to the overall improvement in demand across the life sciences end market and increases in market sharefor certain medical devices. Sales from the NN Vandalia business acquired on October 2, 2017, contributed $6.7 million to 2017 sales.Income from operations increased by $3.4 million primarily due to the increase in sales associated with the acquisition of NN Vandalia on October 2, 2017offset by increase in operating expenses.Changes in Financial Condition from December 31, 2017, to December 31, 2018From December 31, 2017, to December 31, 2018, total assets increased by $26.6 million primarily due to assets acquired with the Paragon Medical,Bridgemedica, and Technical Arts businesses which had $475.6 million of total assets as of December 31, 2018. Paragon Medical, Bridgemedica, andTechnical Arts contributed $172.7 million to goodwill and $171.1 million to intangible assets. Overall, accounts receivable increased consistently with salesgrowth. Inventories increased as our plants satisfy customer demand. Days inventory outstanding increased by approximately 4 days as our businesses rampup manufacturing activity to meet expected customer demand on a timely basis and due to managing procurement based on market price projections.Partially offsetting these increases was a $206.5 million decrease in cash to fund the Paragon Medical and Bridgemedica acquisitions as well as impairmentof goodwill at Mobile Solutions and Power Solutions of $73.4 million and $109.1 million, respectively.From December 31, 2017, to December 31, 2018, total liabilities increased by $94.4 million, primarily related to debt used to fund operations and capitalexpenditures and deferred tax liabilities associated with Paragon Medical. Paragon Medical, Bridgemedica, and Technical Arts contributed $58.9 million tothe increase in total liabilities.Working capital, which consists principally of cash, accounts receivable, inventories, and other current assets offset by accounts payable, accrued payrollcosts, income taxes payable, current maturities of long-term debt, and other current liabilities, was $151.8 million as of December 31, 2018, compared to$368.9 million as of December 31, 2017. The decrease in working capital was due primarily to the decrease in cash used to fund acquisitions and capitalexpenditures.Cash provided by operations was $40.9 million for the year ended December 31, 2018, compared with cash used by operations of $28.2 million for the yearended December 31, 2017. The difference was primarily due to the impact of acquisition activities as well as the overpayment of income taxes associatedwith the sale of the PBC business in 2017, which was refunded to us in 2018, and higher interest payments. Additionally, cash provided by operatingactivities from discontinued operations included $14.4 million for the year ended December 31, 2017, and $17.3 million for the year ended December 31,2016. The increase was partially offset by an increase in inventory levels.Cash used by investing activities was $461.3 million for the year ended December 31, 2018, compared with cash provided by investing activities of $282.5million for the year ended December 31, 2017. The difference was primarily due to $399.0 million of cash paid for the Paragon Medical, Bridgemedica, andTechnical Arts acquisitions in 2018 compared to $371.4 million of cash received for the sale of the PBC Business in 2017. Cash used by investing activitiesfor discontinued operations was $7.1 million for the year ended December 31, 2017, and $11.8 million for the year ended December 31, 2016.Cash provided by financing activities was $215.1 million for the year ended December 31, 2018, compared with cash used by financing activities of $45.8million for the year ended December 31, 2017. The difference was primarily due to net proceeds from the sale of 14.4 million shares of our common stock onSeptember 18, 2018.37Table of ContentsLiquidity and Capital ResourcesAggregate principal amounts outstanding under our Senior Secured Term Loan, Incremental Term Loan, and Senior Secured Revolver as of December 31,2018, were $849.8 million (without regard to unamortized debt issuance costs). As of December 31, 2018, we had unused borrowing capacity of $76.6million under the Senior Secured Revolver, subject to certain limitations. This amount of availability is net of $9.7 million of outstanding letters of credit atDecember 31, 2018, which are considered as usage of the Senior Secured Revolver.Collectively, our Senior Secured Term Loan, Incremental Term Loan, and Senior Secured Revolver comprise our credit facility. Principal available under theSenior Secured Revolver was $125.0 million as of December 31, 2018. Available principal may be restored to $143.0 million upon the achievement ofcertain requirements. Our credit facility is subject to certain financial covenants based on a consolidated net leverage ratio, as defined in the credit facilityagreement. The financial covenants are effective when we have outstanding amounts drawn on our Senior Secured Revolver on the last day of any fiscalquarter and become more restrictive over time. We had a $38.7 million outstanding balance on the Senior Secured Revolver as of December 31, 2018, and wewere in compliance with all covenants under our credit facility. The Senior Secured Revolver matures on October 19, 2020.The Senior Secured Term Loan requires quarterly principal payments of $1.4 million through October 19, 2022, with the remaining principal amount due onthe maturity date. If one-month LIBOR is less than 0.75%, then we pay 4.50% per annum in interest. If one-month LIBOR exceeds 0.75%, then we pay thevariable one-month LIBOR plus an applicable margin of 3.75%. Based on the outstanding balance and interest rate in effect at December 31, 2018, annualinterest payments would have been $33.3 million.The Incremental Term Loan requires quarterly principal payments of $3.0 million through April 3, 2021, with the remaining principal amount due on thematurity date. The Incremental Term Loan bears interest at the variable one-month LIBOR plus an applicable margin of 3.25%. Based on the outstandingbalance and interest rate in effect at December 31, 2018, annual interest payments would have been $16.1 million.The Senior Secured Revolver bears interest at a rate of one-month LIBOR plus an applicable margin of 3.50%. Based on the outstanding balance and interestrate in effect at December 31, 2018, annual interest payments would have been $2.3 million. We pay a quarterly commitment fee at an annual rate of 0.50%on the Senior Secured Revolver for unused capacity.In connection with the closing of Paragon Medical on May 7, 2018, we amended our existing credit facility to permit the acquisition of Paragon Medical, topermit the addition of the Second Lien Facility, and to amend certain covenants. We entered into the $200.0 million Second Lien Facility on May 7, 2018, topartially fund the acquisition of Paragon Medical. The Second Lien Facility bore interest at a rate of one-month LIBOR plus an applicable margin of 8.00%.We voluntarily prepaid in full the $200.0 million outstanding principal balance with proceeds from the sale of shares of our common stock on September 18,2018. We paid a prepayment penalty of two percent of the outstanding balance, or $4.0 million, and wrote off $2.6 million of unamortized debt issuancecosts. We paid interest of $7.5 million for the period from May 7, 2018 through September 18, 2018.On September 18, 2018, we issued 14.4 million shares of our common stock in a registered public offering. Net proceeds of approximately $217.3 millionwere used to repay the Second Lien Facility and a portion of the Senior Secured Revolver.On February 8, 2019, the Company entered into a fixed-rate interest swap agreement. Refer to Item 7A – “Quantitative and Qualitative Disclosures AboutMarket Risk” for additional discussion.As of December 31, 2018, we had $18.0 million of cash and $76.6 million of unused borrowing capacity under our Senior Secured Revolver. We believe thatthese sources of cash and funds generated from our consolidated continuing operations will provide sufficient cash flow to service the required debt andinterest payments under our existing credit facility and to fund our operating activities, capital expenditure requirements, and dividend payments. Theabsence of cash flows from discontinued operations is not expected to significantly affect our ability to service our debt.Our arrangements with customers typically provide that payments are due within 30 to 60 days following the date of shipment. We invoice and receivepayment from many of our customers in euros 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. As a result of these sales, loans, payables, and receivables, our foreign exchangetransaction and translation risk is elevated. Various strategies to manage this risk are available to management, including producing and selling in localcurrencies and38Table of Contentshedging programs. As of December 31, 2018, no currency derivatives were in place. In addition, a strengthening of the U.S. dollar and/or euro against foreigncurrencies could impair our ability to compete with international competitors for foreign as well as domestic sales.For the next twelve months, we expect capital expenditures to remain relatively consistent with 2018 spending levels, the majority of which relate to new orexpanded business or continuous improvement programs. We believe that funds generated from continuing operations and borrowings from the SeniorSecured Revolver will be sufficient to finance capital expenditures and working capital needs through this period. We base these assertions on currentavailability for borrowing under our Senior Secured Revolver of up to $76.6 million and forecasted positive cash flow from continuing operations for thenext twelve months.The table below sets forth our contractual obligations and commercial commitments as of December 31, 2018: Payments Due by PeriodCertain Contractual Obligations Total Less than 1 year 1-3 years 3-5 years After 5 yearsLong-term debt including current portion $859,593 $31,280 $311,191 $515,501 $1,621Expected interest payments (1) 156,661 49,270 82,391 24,761 239Operating leases 108,399 13,337 22,072 19,045 53,945Transition tax on deferred foreign income 4,283 408 816 1,784 1,275Capital leases (2) 8,085 2,485 3,389 2,211 —Total contractual cash obligations $1,137,021 $96,780 $419,859 $563,302 $57,080 (1)Expected interest payments are based on the interest rate in effect as of December 31, 2018, which is a variable rate based on one-monthLIBOR.(2)During the year ended December 31, 2018, we entered into a build-to-suit lease that will commence upon completion of construction of theleased facility. Base rent payments of approximately $1.5 million per year are not included in the table above and are expected to commenceduring the third quarter of 2019 and continue over the 15-year lease term.We have approximately $4.6 million in unrecognized tax benefits and related penalties and interest accrued within the liabilities section of our balancesheet. 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 excludedfrom the table above. (See Note 11 of the Notes to Consolidated Financial Statements).Functional CurrenciesWe currently have operations in Brazil, China, France, Mexico, and Poland. The following table presents the functional currency of each of our foreignfacilities. Location Functional CurrencyBrazil RealChina RenminbiFrance EuroMexico PesoPoland ZlotySeasonality and Fluctuation in Quarterly ResultsGeneral economic conditions impact our business and financial results, and certain businesses experience seasonal and other trends related to the industriesand end markets that they serve. For example, European sales are often weaker in the summer months as customers slow production, medical device sales areoften stronger in the fourth calendar quarter, and sales to original equipment manufacturers are often stronger immediately preceding and following thelaunch of new products. However, as a whole, we are not materially impacted by seasonality.39Table of ContentsOff-Balance Sheet ArrangementsWe are not a party to any off-balance sheet arrangements that have, or are reasonably likely to have, a material current or future effect on our financialcondition, revenues or expenses, results of operations, liquidity, capital expenditures, or capital resources.Item 7A.Quantitative and Qualitative Disclosures About Market RiskWe are exposed to changes in financial market conditions in the normal course of business due to use of certain financial instruments as well as transactingbusiness in various foreign currencies. To mitigate the exposure to these market risks, we have established policies, procedures, and internal processesgoverning the management of financial market risks. We are exposed to changes in interest rates primarily as a result of borrowing activities.Interest Rate RiskVariable Rate DebtAt December 31, 2018, we had $532.1 million of principal outstanding under the variable rate Senior Secured Term Loan, without regard to debt issuancecosts. At December 31, 2018, a one-percent increase in the interest rate charged on outstanding variable rate borrowings under the Senior Secured Term Loanwould result in interest expense increasing annually by approximately $5.3 million.At December 31, 2018, we had $279.0 million of principal outstanding under the Incremental Term Loan, without regard to debt issuance costs. AtDecember 31, 2018, a one-percent increase in the interest rate charged on outstanding variable rate borrowings under the Incremental Term Loan would resultin interest expense increasing annually by approximately $2.8 million.At December 31, 2018, we had $38.7 million of principal outstanding under the Senior Secured Revolver, without regard to debt issuance costs. AtDecember 31, 2018, a one-percent increase in the interest rate charged on outstanding variable rate borrowings under the Senior Secured Revolver wouldresult in interest expense increasing annually by approximately $0.4 million.Interest Rate Swaps and Hedging ActivitiesOur policy is to manage interest expense using a mix of fixed and variable rate debt. To manage this mix effectively, we may enter into interest rate swaps toexchange the difference between fixed and variable interest amounts. The nature and amount of borrowings may vary as a result of future businessrequirements, market conditions, and other factors. As of December 31, 2018, we had no interest rate swaps.On February 8, 2019, the Company entered into a fixed-rate interest swap agreement with a notional amount of $700.0 million to manage the Company’sexposure to interest rate risk associated with our variable rate long-term debt.Foreign Currency RiskTranslation of our operating cash flows denominated in foreign currencies is impacted by changes in foreign exchange rates. We participate in various thirdparty and intercompany loans, payables, and receivables denominated in currencies other than the U.S. dollar. To help reduce exposure to foreign currencyfluctuation, we have incurred debt in euros in the past. From time to time, we may use foreign currency derivatives to hedge currency exposures when theseexposures meet certain discretionary levels. We did not hold a position in any foreign currency derivatives as of December 31, 2018.40Table of ContentsItem 8.Financial Statements and Supplementary DataIndex to Financial Statements PageReport of Independent Registered Public Accounting Firm42Consolidated Statements of Operations and Comprehensive Income (Loss)44Consolidated Balance Sheets45Consolidated Statements of Changes in Stockholders’ Equity46Consolidated Statements of Cash Flows47Notes to Consolidated Financial Statements4841Table of ContentsReport of Independent Registered Public Accounting FirmTo the Board of Directors and Stockholders of NN, Inc.Opinions on the Financial Statements and Internal Control over Financial ReportingWe have audited the accompanying consolidated balance sheets of NN, Inc. and its subsidiaries (the “Company”) as of December 31, 2018 and 2017, and therelated consolidated statements of operations and comprehensive income (loss), of changes in stockholders’ equity and of cash flows for each of the threeyears in the period ended December 31, 2018, including the related notes (collectively referred to as the “consolidated financial statements”). We also haveaudited the Company’s internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control-IntegratedFramework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).In our opinion, based on our audits and the report of other auditors with respect to the consolidated financial statements for the year ended December 31,2016, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31,2018 and 2017, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2018 in conformity withaccounting principles generally accepted in the United States of America. Also in our opinion, the Company did not maintain, in all material respects,effective internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control-Integrated Framework (2013)issued by the COSO because a material weakness in internal control over financial reporting existed as of that date as the Company did not maintain aneffective control environment due to a lack of a sufficient complement of personnel with an appropriate level of knowledge, experience and trainingcommensurate with the Company’s financial reporting requirements.A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibilitythat a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis. The material weakness referredto above is described in Management’s Report on Internal Control Over Financial Reporting appearing under Item 9A. We considered this material weaknessin determining the nature, timing, and extent of audit tests applied in our audit of the 2018 consolidated financial statements and our opinion regarding theeffectiveness of the Company’s internal control over financial reporting does not affect our opinion on those consolidated financial statements.We did not audit the financial statements of Wuxi Weifu Autocam Precision Machinery Co., Ltd., a 49% equity investment of the Company, as of and for theyear ended December 31, 2016, which is reflected in the consolidated financial statements of the Company as the share of net income from joint venture of$6,427,000 for the year ended December 31, 2016. Those statements were audited by other auditors whose report thereon has been furnished to us, and ouropinion expressed herein, insofar as it relates to the amounts included for Wuxi Weifu Autocam Precision Machinery Co., Ltd. for the year ended December31, 2016, is based solely on the report of the other auditors.Basis for OpinionsThe Company’s management is responsible for these consolidated 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 referred to above. Our responsibility isto express opinions on the Company’s consolidated financial statements and on the Company’s internal control over financial reporting based on our audits.We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to beindependent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities andExchange Commission and the PCAOB.We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonableassurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internalcontrol over financial reporting was maintained in all material respects.Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financialstatements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis,evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles usedand significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internalcontrol over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weaknessexists, and testing and evaluating the design and operating effectiveness of internal control based42Table of Contentson the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our auditsand the report of other auditors provide a reasonable basis for our opinions.As described in Management’s Report on Internal Control Over Financial Reporting, management has excluded Paragon Medical, Inc., Bridgemedica, LLC,and Southern California Technical Arts, Inc. from its assessment of internal control over financial reporting as of December 31, 2018 because they wereacquired by the Company in purchase business combinations during 2018. We have also excluded Paragon Medical, Inc., Bridgemedica, LLC, and SouthernCalifornia Technical Arts, Inc. from our audit of internal control over financial reporting. Paragon Medical, Inc., Bridgemedica, LLC, and Southern CaliforniaTechnical Arts, Inc. are wholly-owned subsidiaries whose total assets and total revenues excluded from management’s assessment and our audit of internalcontrol over financial reporting represent 9.6 percent and 16.7 percent, respectively, of the related consolidated financial statement amounts as of and for theyear ended December 31, 2018. The most significant of these entities, representing 8.9 percent of consolidated total assets and 15.2 percent of consolidatedtotal revenues is Paragon Medical, Inc.Definition and Limitations of Internal Control over Financial ReportingA company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reportingand the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal controlover financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairlyreflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permitpreparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are beingmade only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention ortimely 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 ofeffectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliancewith the policies or procedures may deteriorate./s/ PricewaterhouseCoopers LLPAtlanta, GeorgiaMarch 18, 2019We have served as the Company’s auditor since 2003.43Table of ContentsNN, Inc.Consolidated Statements of Operations and Comprehensive Income (Loss)Years Ended December 31, 2018, 2017 and 2016Amounts in thousands, except per share data 2018 2017 2016Net sales $770,657 $619,793 $584,954Cost of sales (exclusive of depreciation and amortization shown separately below) 588,205 459,080 428,843Selling, general and administrative expense 93,583 74,112 64,144Acquisition related costs excluded from selling, general and administrative expense 5,871 344 —Depreciation and amortization 71,128 52,406 50,721Other operating (income) expense, net 6,089 351 809Goodwill impairment 182,542 — —Restructuring and integration expense, net 2,127 386 5,658Income (loss) from operations (178,888) 33,114 34,779Interest expense 61,243 52,085 62,870Loss on extinguishment of debt and write-off of debt issuance costs 19,562 42,087 2,589Derivative payments on interest rate swap — — 609Derivative loss (gain) on change in interest rate swap fair value — (101) 2,448Other (income) expense, net 1,341 (2,084) (2,871)Loss from continuing operations before benefit for income taxes and share of net incomefrom joint venture (261,034) (58,873) (30,866)Benefit for income taxes 10,957 79,026 15,438Share of net income (loss) from joint venture (14,390) 5,211 5,938Income (loss) from continuing operations (264,467) 25,364 (9,490)Income from discontinued operations, net of tax (Note 2) — 137,688 16,153Net income (loss) $(264,467) $163,052 $6,663Other comprehensive income (loss): Change in fair value of interest rate swap $— $— $1,910Reclassification adjustment for discontinued operations — (9,243) —Foreign currency translation gain (loss) (13,880) 22,094 (10,623)Other comprehensive income (loss) $(13,880) $12,851 $(8,713)Comprehensive income (loss) $(278,347) $175,903 $(2,050)Basic net income (loss) per share: Income (loss) from continuing operations per share $(8.35) $0.92 $(0.35)Income from discontinued operations per share — 5.02 0.60Net income (loss) per share $(8.35) $5.94 $0.25Weighted average shares outstanding 31,678 27,433 27,016Diluted net income (loss) per share: Income (loss) from continuing operations per share $(8.35) $0.91 $(0.35)Income from discontinued operations per share — 4.96 0.60Net income (loss) per share $(8.35) $5.87 $0.25Weighted average shares outstanding 31,678 27,755 27,016See accompanying Notes to Consolidated Financial Statements.44Table of ContentsNN, Inc.Consolidated Balance SheetsDecember 31, 2018 and 2017Amounts in thousands, except per share data December 31, 2018 2017Assets Current assets: Cash and cash equivalents $17,988 $224,446Accounts receivable, net 133,421 108,446Inventories 122,615 82,617Income tax receivable 946 43,253Other current assets 21,901 18,518Total current assets 296,871 477,280Property, plant and equipment, net 361,028 259,280Goodwill 439,452 454,612Intangible assets, net 376,248 237,702Investment in joint venture 20,364 39,822Other non-current assets 7,607 6,307Total assets $1,501,570 $1,475,003Liabilities and Stockholders’ Equity Current liabilities: Accounts payable $65,694 $52,990Accrued salaries, wages and benefits 24,636 21,145Current maturities of long-term debt 31,280 17,283Other current liabilities 23,420 17,003Total current liabilities 145,030 108,421Deferred tax liabilities 93,482 71,564Non-current income tax payable 3,875 5,593Long-term debt, net of current portion 811,471 790,805Other non-current liabilities 29,417 12,516Total liabilities 1,083,275 988,899Commitments and contingencies (Note 14) Stockholders’ equity: Common stock - $0.01 par value, authorized 45,000 shares, issued and outstanding 42,104 in 2018 and27,572 in 2017 421 275Additional paid-in capital 511,545 292,494Retained (deficit) earnings (62,046) 211,080Accumulated other comprehensive income (loss) (31,625) (17,745)Total stockholders’ equity 418,295 486,104Total liabilities and stockholders’ equity $1,501,570 $1,475,003See accompanying Notes to Consolidated Financial Statements.45Table of ContentsNN, Inc.Consolidated Statements of Changes in Stockholders’ EquityYears Ended December 31, 2018, 2017 and 2016Amounts in thousands Common Stock Accumulated Numberofshares Parvalue Additionalpaid incapital Retained(deficit)earnings othercomprehensiveincome (loss) Non-controllinginterest TotalBalance, December 31, 2015 26,849 $269 $277,917 $56,096 $(21,883) $32 $312,431Net income — — — 6,663 — — 6,663Cash dividends declared — — — (7,584) — — (7,584)Share-based compensation expense 142 — 3,935 — — — 3,935Shares issued for option exercises 270 3 2,829 — — — 2,832Restricted shares and performanceshares forgiven for taxes and forfeited (12) — (173) — — — (173)Foreign currency translation loss — — — — (10,623) — (10,623)Change in fair value of interest rateswap — — — — 1,910 — 1,910Balance, December 31, 2016 27,249 $272 $284,508 $55,175 $(30,596) $32 $309,391Net income — — — 163,052 — — 163,052Cash dividends declared — — — (7,887) — — (7,887)Share-based compensation expense 85 1 5,495 — — — 5,496Shares issued for option exercises 263 2 3,108 — — — 3,110Sale of discontinued operations — — — — (9,243) (32) (9,275)Restricted shares and performanceshares forgiven for taxes and forfeited (25) — (617) — — — (617)Foreign currency translation gain — — — — 22,094 — 22,094Adoption of new accounting standard(Note 1) — — — 740 — — 740Balance, December 31, 2017 27,572 $275 $292,494 $211,080 $(17,745) $— $486,104Net loss — — — (264,467) — — (264,467)Cash dividends declared — — — (8,803) — — (8,803)Shares issued 14,375 144 217,168 — — — 217,312Share-based compensation expense 165 2 4,382 — — — 4,384Shares issued for option exercises 27 — 274 — — — 274Restricted shares and performanceshares forgiven for taxes and forfeited (35) — (805) — — — (805)Change in estimate of performanceshare vesting — — (1,968) 128 — — (1,840)Foreign currency translation loss — — — — (13,880) — (13,880)Adoption of new accounting standard(Note 1) — — — 16 — — 16Balance, December 31, 2018 42,104 $421 $511,545 $(62,046) $(31,625) $— $418,295See accompanying Notes to Consolidated Financial Statements.46Table of ContentsNN, Inc.Consolidated Statements of Cash FlowsYears Ended December 31, 2018, 2017 and 2016Amounts in thousands 2018 2017 2016Cash flows from operating activities: Net income (loss) $(264,467) $163,052 $6,663Adjustments to reconcile net income to net cash provided by (used by) operating activities: Depreciation and amortization of continuing operations 71,128 52,406 50,721Depreciation and amortization of discontinued operations — 7,722 11,852Amortization of debt issuance costs 4,845 4,296 4,168Goodwill impairment 182,542 — —Other impairments 21,825 — —Loss on extinguishment of debt and write-off of debt issuance costs 19,562 42,087 2,589Total derivative mark-to-market loss (gain), net of cash settlements — (1,483) 2,563Share of net income from joint venture, net of cash dividends received 642 (1,284) (2,232)Gain on disposal of discontinued operations, net of tax and cost to sell — (133,665) —Compensation expense from issuance of share-based awards 2,416 4,730 3,935Deferred income taxes (20,758) (23,195) (15,526)Other 1,290 100 308Changes in operating assets and liabilities, net of acquisitions: Accounts receivable (3,543) (11,374) (18,505)Inventories (16,872) (10,278) 4,377Accounts payable 2,693 4,118 7,633Income taxes receivable and payable, net 40,946 (124,389) (217)Other (1,310) (1,076) 11,023Net cash provided by (used by) operating activities 40,939 (28,233) 69,352Cash flows from investing activities: Acquisition of property, plant and equipment, net of acquisitions (64,036) (43,722) (43,820)Short term investment — (8,000) —Proceeds from sale of business, net of cash sold 838 371,436 —Cash paid to acquire businesses, net of cash received (399,009) (38,434) —Other 917 1,191 2,596Net cash provided by (used by) investing activities (461,290) 282,471 (41,224)Cash flows from financing activities: Cash paid for debt issuance or prepayment costs (20,726) (40,235) (3,952)Dividends paid (8,826) (7,695) (7,584)Proceeds from issuance of shares of common stock 217,312 — —Proceeds from long-term debt 311,841 322,000 44,000Repayment of long-term debt (290,687) (314,313) (55,000)Proceeds from (repayments of) short-term debt, net 10,305 (4,211) (456)Other (4,126) (1,382) (1,489)Net cash provided by (used by) financing activities 215,093 (45,836) (24,481)Effect of exchange rate changes on cash flows (1,200) 1,639 (4,329)Net change in cash and cash equivalents (206,458) 210,041 (682)Cash and cash equivalents at beginning of period (1) 224,446 14,405 15,087Cash and cash equivalents at end of period (1) $17,988 $224,446 $14,405Supplemental schedule of non-cash operating, investing and financing activities: Dividends accrued (reversed) for performance share units, net $(83) $192 $—Non-cash additions to property, plant and equipment $26,605 $1,436 $—Restructuring charges in other current and non-current liabilities $2,071 $222 $3,238Supplemental disclosures: Cash paid for interest $56,223 $52,083 $59,158Cash paid (received) for income taxes $(32,582) $72,294 $889 (1)Cash and cash equivalents as of December 31, 2016, and December 31, 2015, includes $8.1 million and $3.7 million, respectively, of cash and cashequivalents that was included in current assets of discontinued operations.See accompanying Notes to Consolidated Financial Statements.47Table of ContentsNN, Inc.Notes to Consolidated Financial StatementsDecember 31, 2018, 2017 and 2016Amounts in thousands of dollars and shares, except per share dataNote 1. Significant Accounting PoliciesNature of BusinessNN, Inc. is a global diversified industrial company that combines advanced engineering and production capabilities with in-depth materials science expertiseto design and manufacture high-precision components and assemblies for the medical, aerospace and defense, electrical, automotive, and general industrialmarkets. As used in this Annual Report on Form 10-K, the terms “NN,” the “Company,” “we,” “our,” or “us” refer to NN, Inc., and its subsidiaries. We have 51facilities in North America, Europe, South America, and China.In January 2018, we implemented a new enterprise and management structure designed to accelerate growth and further balance our portfolio by aligning ourstrategic assets and businesses. Our businesses were reorganized into the Mobile Solutions, Power Solutions, and Life Sciences groups and are basedprincipally on the end markets they serve. The Autocam Precision Components Group reported in our historical financial statements was renamed as MobileSolutions. The Mobile Solutions group is focused on growth in the general industrial and automotive end markets. The Precision Engineered Products Groupreported in our historical financial statements was bifurcated into two new groups – Power Solutions and Life Sciences. The Power Solutions group is focusedon growth in the electrical and aerospace and defense end markets. The Life Sciences group is focused on growth in the medical end market.Basis of PresentationThe accompanying consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States (“U.S.GAAP”). Certain prior period amounts have been reclassified to conform to the current year’s presentation due to the 2018 adoption of the new Statement ofCash Flows guidance. Except for per share data or as otherwise indicated, all dollar amounts presented in the tables in these Notes to Consolidated FinancialStatements are in thousands of U.S. dollars.Principles of ConsolidationOur consolidated financial statements include the accounts of NN, Inc., and its wholly owned subsidiaries. We own a 49% interest in a joint venture which weaccount for using the equity method (see Note 10). All intercompany transactions and balances have been eliminated in consolidation.Use of Estimates in the Preparation of Financial StatementsThe preparation of financial statements in conformity with U.S. GAAP requires management to use estimates and assumptions that affect the reported amountsof certain assets and liabilities, disclosure of contingent assets and liabilities, and the reported amounts of revenues and expenses. Actual results may differfrom those estimates.Accounting Standards Recently AdoptedRevenue Recognition. On January 1, 2018, we adopted ASC Topic 606, Revenue from Contracts with Customers, (“ASC 606”). We adopted ASC 606utilizing the modified retrospective transition method. Under this transition method, we recognized the cumulative effect of initially applying the newstandard as an adjustment to the opening balance of retained earnings as of January 1, 2018, and applied the new standard beginning with the most currentperiod presented to contracts that were not completed at the date of initial application. The adoption adjustment, which was less than $0.1 million, representsthe net profit of certain contracts that were accounted for on a consignment basis under ASC Topic 605, Revenue Recognition (“ASC 605”). Under ASC 605,a sale was not recognized under these consignment contracts until the inventory was used by our customers. Under the new standard, revenue is recognizedearlier because the transfer of control to our customers occurs upon shipment from our facilities as our customers have obtained the ability to direct the use of,and obtain substantially all the remaining benefits from, the asset. Comparative information has not been restated and continues to be reported under theaccounting standards in effect for those periods. See Note 16 for the required disclosures related to the impact of adopting ASC 606 and a discussion of ourupdated policies related to revenue recognition and accounting for costs to obtain and fulfill a customer contract.Definition of a Business. In January 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2017-1,Business Combinations (Topic 805): Clarifying the Definition of a Business, which changes the48Table of Contentsdefinition of a business. The new guidance requires an entity to first evaluate whether substantially all of the fair value of the gross assets acquired isconcentrated in a single identifiable asset or a group of similar identifiable assets. If that threshold is met, the set of assets and activities is not a business. Ifthe threshold is not met, the entity evaluates whether the set meets the definition of a business. The new definition requires a business to include at least onesubstantive process and narrows the definition of outputs by more closely aligning it with how outputs are described in the new revenue recognitionguidance. The new guidance was effective for us beginning on January 1, 2018. We have applied the new definition of a business prospectively to allbusiness combination transactions that occurred in 2018. The new guidance has no effect on our historical financial statements.Statement of Cash Flows. In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receiptsand Cash Payments (a consensus of the Emerging Issues Task Force). This guidance provides clarification on how certain cash receipts and cash paymentsare presented and classified on the statement of cash flows, with focus on eight specific areas in which cash flows have, in practice, been presentedinconsistently. The guidance was effective for us beginning January 1, 2018 and is required to be adopted using a retrospective approach if practicable.The new cash flow guidance requires that cash payments for debt prepayment costs be classified as cash outflows for financing activities. We paid $31.6million for debt prepayment costs in April 2017. These debt prepayment costs were previously classified as cash used by operating activities in 2017. Underthe new guidance, these costs are reclassified to cash used by financing activities.The new guidance also requires entities to make an accounting policy election regarding classification of distributions received from equity methodinvestees. Existing guidance does not currently address how an entity should determine which distributions represent returns on, as opposed to returns ofinvestment. The lack of specific guidance has resulted in diversity in practice. The two allowable approaches are the “cumulative earnings” approach and the“nature of the distribution” approach, as defined by ASU 2016-15. Upon adoption of the new guidance on January 1, 2018, we utilized the cumulativeearnings approach for classifying distributions received from our joint venture investment (see Note 10). This policy election is consistent with our historicalaccounting.Goodwill. In January 2017, the FASB issued ASU 2017-4, Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment(“ASU 2017-4”), that eliminates the requirement to calculate the implied fair value of goodwill (i.e., Step 2 of the current goodwill impairment test) tomeasure a goodwill impairment charge. Instead, entities will record an impairment charge based on the excess of a reporting unit’s carrying amount over itsfair value (i.e., measure the charge based on the current Step 1 test). The standard is effective for us beginning with impairment tests performed on or afterJanuary 1, 2020, with early adoption permitted. We elected to early adopt the standard for our annual goodwill impairment analysis as of October 1, 2018,because the new guidance allowed us to simplify the process of calculating the impairment charge recognized as a result of our annual testing process in thecurrent year. As a result of early adopting, we did not perform a step two analysis for the impairment testing, which may have resulted in a materially differentresult.Accounting Standards Not Yet AdoptedLeases. In February 2016, the FASB issued ASU 2016-2, Leases. ASU 2016-2 creates Topic 842, Leases, (“ASC 842”) in the ASC and supersedes ASC 840,Leases. Entities that hold numerous equipment and real estate leases, in particular those with numerous operating leases, will be most affected by the newguidance. The lease accounting standard is effective for NN beginning January 1, 2019, with modified retrospective adoption required and early adoptionpermitted. We intend to utilize the practical expedient to recognize the cumulative-effect adoption adjustment to retained earnings as of January 1, 2019, andnot adjust comparative periods. The adoption of ASC 842 is expected to impact our balance sheet by adding lease-related assets and liabilities. The loancovenants in our credit facility provide for the continuation of covenant computations in accordance with U.S. GAAP prior to changes in accountingprinciples. Therefore, we do not expect the adoption of ASC 842 to affect our compliance. We have performed inquiries within each of our business groupsand compiled information on operating and capital leases. We are using the results of these inquiries and compiled information to evaluate the impacts of thelease accounting standard on our financial position, results of operations, and related disclosures. Upon adoption, we expect that leases with terms greaterthan twelve months that are currently classified as operating leases and not recorded on our balance sheet will be recognized as a right-of-use asset and leaseliability. We are implementing an enterprise-wide lease accounting system and are in the process of verifying data in the system that will enable us todetermine the amounts of those assets and liabilities. We have reviewed all leases and are in the process of documenting our conclusions, establishinginternal controls, and determining discount rates to generate the initial accounting entries upon adoption of the standard. We expect the right-of-use assetand lease liability to be between $65.0 million and $95.0 million each.Effects of Tax Reform in Other Comprehensive Income. In February 2018, the FASB issued guidance related to the impacts of the U.S. Tax Cuts and Jobs Actof 2017 (“Tax Act”). Under existing U.S. GAAP, the effects of changes in tax rates and laws on49Table of Contentsdeferred tax balances are recorded as a component of income tax expense in the period in which the law was enacted. When deferred tax balances related toitems originally recorded in accumulated other comprehensive income (“AOCI”) are adjusted, certain tax effects become stranded in AOCI. The FASB issuedASU 2018-2, Income Statement – Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated OtherComprehensive Income, that permits reclassification of certain income tax effects of the Tax Act from AOCI to retained earnings. The guidance also requirescertain disclosures about stranded tax effects. ASU 2018-2 is effective for us on January 1, 2019, with early adoption in any period permitted. Entities mayadopt the guidance using either at the beginning of the period of adoption or retrospectively to each period in which the effect of the change in the U.S.federal corporate income tax rate in the Tax Act is recognized. We are in the process of evaluating adoption method and the effects of this new guidance onour financial statements.Internal-Use Software. In August 2018, the FASB issued ASU 2018-15, Intangibles - Goodwill and Other - Internal-Use Software: Customer’s Accountingfor Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract (a consensus of the FASB Emerging Issues Task Force),that provides guidance on a customer’s accounting for implementation, set-up, and other upfront costs incurred in a cloud computing arrangement that ishosted by the vendor. Under the new guidance, customers will apply the same criteria for capitalizing implementation costs as they would for an arrangementthat has a software license. ASU 2018-15 is effective for us on January 1, 2020, using either a prospective or retrospective approach and with early adoptionpermitted. We are in the process of evaluating the effects of this guidance on our financial statements and on cloud computing arrangements that we mayenter before the required effective date.Derivatives and Hedging. In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting forHedging Activities, which provides new rules that expand the hedging strategies that qualify for hedge accounting. The new rules also allow additional timeto complete hedge effectiveness testing and allow qualitative assessments subsequent to initial quantitative tests if there is supportable expectation that thehedge will remain highly effective. ASU 2017-12 is effective for us on January 1, 2019, with early adoption permitted. We do not expect the adoption of thisguidance to have a material impact on our financial condition, results of operations, or cash flows.Cash and Cash EquivalentsCash and cash equivalents include cash and highly liquid investments with original maturities of three months or less.Fair Value MeasurementsFair value principles prioritize valuation inputs across three broad levels. Level 1 inputs are quoted prices (unadjusted) in active markets for identical assetsor 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, eitherdirectly or indirectly through market corroboration, for substantially the full term of the financial instrument. Level 3 inputs are unobservable inputs basedon the assumptions used to measure assets and liabilities at fair value. An asset or liability’s classification within the various levels is determined based onthe lowest level input that is significant to the fair value measurement.Accounts Receivable and Allowance for Doubtful AccountsTrade accounts receivable are recorded at their net realizable value. We maintain allowances for doubtful accounts for estimated losses resulting from theinability of our customers to make required payments. The allowances are based on the number of days an individual receivable is past the invoice due dateand on regular credit evaluations of our customers. In evaluating the credit worthiness of our customers, we consider numerous inputs including but notlimited to the customers’ financial position, past payment history, relevant industry trends, cash flows, management capability, historical loss experience, andeconomic conditions and prospects. Allowances are established when customer accounts are at risk of being uncollectible. Accounts receivable are written offat the time a customer receivable is deemed uncollectible.InventoriesInventories are stated at the lower of cost or net realizable value. Cost is determined using standard costs, which approximates the average cost method. Ourpolicy is to expense abnormal amounts of idle facility expense, freight, handling cost, and waste included in cost of products sold. In addition, we allocatefixed production overheads based on the normal production capacity of our facilities. Inventory valuations were developed using normalized productioncapacities for each of our manufacturing locations. The costs from excess capacity or under-utilization of fixed production overheads were expensed in theperiod incurred and are not included as a component of inventory.Inventories also include tools, molds, and dies in progress that we are producing and will ultimately sell to our customers. These inventories are also carriedat the lower of cost or net realizable value.50Table of ContentsProperty, Plant and EquipmentProperty, plant and equipment are stated at cost less accumulated depreciation. Assets to be disposed of are stated at the lower of depreciated cost or fairmarket value less estimated selling costs. Expenditures for maintenance and repairs are charged to expense as incurred. Major renewals and betterments arecapitalized. When a property item is retired, its cost and related accumulated depreciation are removed from the property accounts and any gain or loss isrecorded in the Consolidated Statements of Operations and Comprehensive Income (Loss). We review the carrying values of long-lived assets for impairmentwhenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. Property, plant and equipment also includestools, molds, and dies used in manufacturing.Depreciation is calculated based on historical cost using the straight-line method over the estimated useful lives of the depreciable assets. Estimated usefullives for buildings generally range from 15 to 40 years. Estimated useful lives for machinery and equipment generally range from 3 to 12 years. We depreciateleasehold improvements and buildings under capital lease over the shorter of the leased asset’s useful life or the lease term.Goodwill and Other Indefinite Lived Intangible AssetsGoodwill is tested for impairment on an annual basis in the fourth quarter and between annual tests if a triggering event occurs. The impairment analysis isperformed at the reporting unit level. For the impairment test as of October 1, 2018, we elected to early adopt the new goodwill accounting standard whichrequires us to calculate an impairment charge based on a reporting unit’s carrying amount in excess of its fair value (i.e., step 1 of the two-step impairmenttest). If the carrying value of the reporting unit including goodwill is less than fair value of the reporting unit, the goodwill is not considered impaired. Underthe new guidance, we no longer perform step 2 of the two-step goodwill impairment test or calculate an impairment charge using an implied fair value. Basedon the results of performing the first step of the impairment test, the carrying value of certain reporting units exceed the fair value at December 31, 2018. Forthe year ended December 31, 2018, we recorded an impairment charge of $182.5 million to the Consolidated Statements of Operations and ComprehensiveIncome (Loss). See Note 8 for further discussion on goodwill.For the year ended, December 31, 2017, we performed the two-step goodwill impairment test under accounting standards in effect at that time. Based on theresults of performing the first step of the impairment test, the fair value of the reporting units exceeded the carrying value of the reporting units atDecember 31, 2017.Impairment of Long-Lived AssetsLong-lived tangible and intangible assets subject to depreciation or amortization are tested for recoverability when changes in circumstances indicate thecarrying 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 areporting unit or asset group. Assets to be held and used are tested for recoverability when indications of impairment are evident. Recoverability of a long-lived tangible or intangible asset is evaluated by comparing its carrying value to the future estimated undiscounted cash flows expected to be generated bythe asset or asset group. If the asset is not recoverable, then the asset is considered impaired and adjusted to fair value which is then depreciated or amortizedover its remaining useful life. Assets to be disposed of are recorded at the lesser of carrying value or fair value less costs of disposal.Equity Method InvestmentsEach of the Company’s equity method investments is subject to a review for impairment if, and when, circumstances indicate that a decline in value below itscarrying amount may have occurred. Examples of such circumstances include, but are not limited to, a significant deterioration in the earnings performanceor business prospects of the investee; a significant adverse change in the regulatory, economic or technological environment of the investee; a significantadverse change in the general market condition of either the geographic area or the industry in which the investee operates; and recurring negative cash flowsfrom operations. If management considers the decline to be other than temporary, the Company would write down the investment to its estimated fair marketvalue.Income TaxesIncome taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequencesattributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating lossand tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in whichthose 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 inincome in the period that includes the enactment date. Valuation allowances are recorded to reduce deferred tax assets when it is more likely than not that atax benefit will not be realized. Provision has been made for income taxes on unremitted earnings51Table of Contentsof certain foreign subsidiaries as these earnings are not deemed to be permanently reinvested. We recognize income tax positions that meet the more likelythan not threshold and accrue interest and potential penalties related to unrecognized income tax positions which are recorded as a component of theprovision (benefit) for income taxes.Revenue RecognitionWe recognize revenues when control of the good or service is transferred to the customer either at a point in time or, in limited circumstances, as our servicesare rendered over time. Revenue is measured as the amount of consideration we expect to receive in exchange for transferring goods or services.Share Based CompensationThe cost of stock options, restricted stock, and performance share units are recognized as compensation expense over the vesting periods based on the grantdate fair value, net of expected forfeitures. We determine grant date fair value using the Black Scholes financial pricing model for stock options and a MonteCarlo simulation for performance share units that include a market condition for vesting because these awards are not traded in open markets. We determinegrant date fair value using the closing price of our common stock on the date of grant for restricted stock and performance share units that includeperformance conditions for vesting. We recognize excess tax benefits in income tax expense prospectively beginning in 2017. Excess tax benefits arepresented in cash flows from operating activities in the statement of cash flows prospectively beginning in 2017. Tax payments in respect of shares withheldfor taxes are classified in cash flows from financing activities in the statement of cash flows retrospectively for all periods presented.Foreign Currency TranslationAssets and liabilities of our foreign subsidiaries are translated at current exchange rates. Revenue, costs, and expenses are translated at average ratesprevailing during each reporting period. Translation adjustments arising from the translation of foreign subsidiary financial statements are reported as acomponent of other comprehensive income and accumulated other comprehensive income within stockholders’ equity. Transactions denominated in foreigncurrencies, including intercompany transactions, are initially recorded at the current exchange rate at the date of the transaction. The balances are adjusted tothe current exchange rate as of each balance sheet date and as of the date when the transaction is consummated. Transaction gains or losses, excludingintercompany loan transactions, are expensed as incurred in either cost of sales or selling, general and administrative expense in the Consolidated Statementsof Operations and Comprehensive Income (Loss) and were immaterial to the years ended December 31, 2018, 2017 and 2016. Transaction gains or losses onintercompany loan transactions are recognized as incurred in the “Other (income) expense, net” line in the Consolidated Statements of Operations andComprehensive Income (Loss).Net Income Per Common ShareBasic net income per share reflects reported earnings divided by the weighted average shares outstanding. Diluted net income per share includes the effect ofdilutive stock options and the respective tax benefits, unless inclusion would not be dilutive.Business CombinationsWe allocate the total purchase price of tangible and intangible assets acquired and liabilities assumed based on their estimated fair values as of the businesscombination date, with the excess purchase price recorded as goodwill. The purchase price allocation process requires us to use significant estimates andassumptions, including fair value estimates, as of the business combination date. Although we believe the assumptions and estimates we have made arereasonable and appropriate, they are based in part on historical experience and information obtained from management of the acquired company. Ourassumptions and estimates are also partially based on valuation models that incorporate projections of expected future cash flows and operating plans and areinherently uncertain. Valuations are performed by management or third-party valuation specialists under management’s supervision. In determining the fairvalue of assets acquired and liabilities assumed in business combinations, as appropriate, we may use one of the following recognized valuation methods: theincome approach (including discounted cash flows, relief from royalty and excess earnings model), the market approach, or the replacement cost approach.Examples of significant estimates used to value certain intangible assets acquired include but are not limited to: •sales volume, pricing and future cash flows of the business overall;•future expected cash flows from customer relationships, and other identifiable intangible assets, including future price levels, rates of increase inrevenue and appropriate attrition rate;•the acquired company’s brand and competitive position, royalty rate quantum, as well as assumptions about the period of time the acquired brandwill continue to benefit the combined company’s product portfolio; and52Table of Contents•cost of capital, risk-adjusted discount rates, and income tax rates.Different assumptions regarding projected performance and other factors associated with the acquired assets may affect the amount recorded under each typeof asset and liability. The valuations of property, plant and equipment, intangible assets, goodwill and deferred income tax liabilities depend heavily onassumptions. Subsequent assessment could result in future impairment charges. We refine these estimates over a measurement period not to exceed one yearto reflect new information obtained surrounding facts and circumstances existing at the acquisition date.Note 2. Discontinued OperationsOn August 17, 2017, we completed the sale of our global precision bearing components business (the “PBC Business”) and received cash proceeds at closingof $387.6 million and recorded a $0.8 million receivable, which was received in 2018. The PBC Business included all our facilities that were engaged in theproduction of precision steel balls, steel rollers, and metal retainers and automotive specialty products used primarily in the bearing industry. The sale of thePBC Business furthers management’s long-term strategy to build a diversified industrial business with a comprehensive geographic footprint in attractivehigh-growth market segments. The PBC Business represented all of the Precision Bearing Components Group reportable segment disclosed in our historicalfinancial statements.We recorded an after-tax gain on sale of $127.7 million, which is included in the “Income from discontinued operations, net of tax” line on the ConsolidatedStatements of Operations and Comprehensive Income (Loss) for the year ended December 31, 2017. The gain includes the effects of reclassifying $9.3 millionin cumulative foreign currency translation gain from accumulated comprehensive income and eliminating the non-controlling interest attributable to thePBC Business as of August 17, 2017.In accordance with ASC 205-20, Presentation of Financial Statements – Discontinued Operations, the operating results of the PBC Business are classified asdiscontinued operations. The presentation of discontinued operations includes revenues and expenses of the discontinued operations and gain on thedisposition of the business, net of tax, as one line item on the Consolidated Statements of Operations and Comprehensive Income (Loss). Accordingly, resultsof the PBC Business have been excluded from continuing operations and group results for all historical periods presented in the consolidated financialstatements and the accompanying notes unless otherwise stated. The Consolidated Statements of Cash Flows for the years ended December 31, 2017 and2016, include cash flows of the PBC Business in each line item unless otherwise stated. We had no discontinued operations in the year ended December 31,2018.The following table summarizes the major line items included in the results of operations of the discontinued operations. Year Ended December 31, 2017 (1) 2016Net sales $168,287 $248,534Cost of products sold (exclusive of depreciation and amortization shown separately below) 130,555 192,994Selling, general and administrative expense 11,818 16,992Depreciation and amortization 7,722 11,852Loss on disposal of assets — 27Restructuring and integration expense 429 4,366Income from operations 17,763 22,303Interest expense (181) (284)Other income (expense), net (84) 503Income from discontinued operations before gain on disposaland provision for income taxes 17,498 22,522Provision for income taxes on discontinued operations (7,461) (6,369)Income from discontinued operations before gain on disposal 10,037 16,153Gain on disposal of discontinued operations 213,503 —Provision for income taxes on gain on disposal (85,852) —Income from discontinued operations, net of tax $137,688 $16,153 _________________________________(1)Includes the results of operations of the PBC Business from January 1, 2017 to the sale completion date of August 17, 2017.53Table of ContentsThe following table presents the significant noncash items and cash paid for capital expenditures of discontinued operations for each period presented. Year Ended December 31, 2017 2016Depreciation and amortization $7,722 $11,852Acquisition of property, plant and equipment $7,316 $11,926Note 3. AcquisitionsParagon Medical, Inc.On May 7, 2018, we acquired 100% of the stock of PMG Intermediate Holding Corporation, the parent company of Paragon Medical, Inc. (“ParagonMedical”) for a base purchase price of $375.0 million in cash, subject to certain adjustments. After working capital and other closing adjustments, the cashpurchase price was approximately $390.9 million which included $13.6 million in cash acquired. During the year ended December 31, 2018, we received$1.4 million additional cash from the seller to settle working capital adjustments. For accounting purposes, Paragon Medical meets the definition of abusiness and has been accounted for as a business combination. Paragon Medical is a medical device manufacturer which focuses on the orthopedic, case andtray, implant, and instrument markets. This acquisition continues our strategic focus to expand our Life Sciences portfolio as well as create a balancedbusiness by diversifying our products and finished device offerings. Operating results of Paragon Medical are reported prospectively from the date ofacquisition in our Life Sciences group. We have performed an assessment of the opening balance sheet which is subject to completion of our integrationprocedures for accounting policies. Opening balance sheet deferred taxes have been recorded based on estimates made as of the acquisition date as well asinformation currently available to management. As estimates are refined and additional information is received throughout the measurement period,adjustments to opening deferred taxes may be recorded with an offsetting adjustment to goodwill. We incurred new debt in connection with the ParagonMedical acquisition and subsequently repaid the new debt in full with the proceeds from the sale of shares of our common stock as described in Note 12 andNote 15.The following table summarizes the preliminary purchase price allocation for the Paragon Medical acquisition.Fair value of assets acquired and liabilities assumed as of May 7, 2018As Reported on June 30, 2018 Subsequent Adjustments toFair Value As Reported on December31, 2018Cash and cash equivalents$13,418 $134 $13,552Accounts receivable22,853 (721) 22,132Inventories23,606 (400) 23,206Other current assets937 734 1,671Property, plant and equipment69,322 (5,625) 63,697Intangible assets subject to amortization164,200 (700) 163,500Other non-current assets3,304 (129) 3,175Goodwill157,421 4,399 161,820Total assets acquired$455,061 $(2,308) $452,753Current liabilities$16,767 $234 $17,001Deferred tax liability46,713 (2,442) 44,271Other non-current liabilities620 — 620Total liabilities assumed$64,100 $(2,208) $61,892Net assets acquired$390,961 $(100) $390,861We recognized measurement period adjustments during the period in which we determined the amount of the adjustment. These adjustments primarily relatedto estimates of the fair value of assets acquired and liabilities assumed. Measurement period adjustments were based on facts and circumstances that existed atthe date of the acquisition and, if known, would have affected the measurement of the amounts recognized at the acquisition date. As a result, we adjusted thepreliminary allocation of the purchase price initially recorded.A combination of income, market, and cost approaches was used for the valuation where appropriate, depending on the asset or liability being valued.Valuation inputs in these models and analyses considered market participant assumptions. Acquired54Table of Contentsintangible assets are primarily customer relationships. As of December 31, 2018, intangible assets in connection with Paragon Medical were $155.3 millionafter post-acquisition amortization.In connection with the Paragon Medical acquisition, we recorded goodwill, which represents the excess of the purchase price over the estimated fair value oftangible and intangible assets acquired, net of liabilities assumed. As of December 31, 2018, goodwill in connection with Paragon Medical wasapproximately $158.7 million after post-acquisition currency impacts. The goodwill is attributed primarily to Paragon Medical as a going concern, theassembled workforce, the fair value of expected cost synergies, and revenue growth expected from the ability to go to market as a combined life sciencesbusiness. The going concern element represents the ability to earn a higher return on the combined assembled collection of assets and businesses of ParagonMedical than if those assets and businesses were to be acquired and managed separately. Approximately $2.8 million of the goodwill relates to prior assetacquisitions by Paragon Medical and is expected to be deducted for tax purposes.Property, plant and equipment acquired primarily included machinery and equipment for use in manufacturing operations. Additionally, manufacturing sitesand related facilities, including leasehold improvements, were acquired. We have performed an assessment of the fair value of property, plant and equipmentusing both the cost approach and the market approach. The fair value assessment was supported where available by observable market data which includesconsideration of obsolescence. We have performed an assessment of the fair value of intangible assets using the income approach, supported by market data,by using the relief from royalty and multi-period excess earnings methods.We incurred approximately $5.4 million in acquisition related costs with respect to the Paragon Medical acquisition during the year ended December 31,2018. Transaction costs were expensed as incurred and are included in the “Acquisition related costs excluded from selling, general and administrativeexpense” line item in the Consolidated Statements of Operations and Comprehensive Income (Loss). We expensed $12.9 million of financing costs related tothe Paragon Medical acquisition during the year ended December 31, 2018, which are included in the “Loss on extinguishment of debt and write-off of debtissuance costs” line item in the Consolidated Statements of Operations and Comprehensive Income (Loss). As required by the acquisition method ofaccounting, acquired inventories were recorded at their estimated fair value. Beginning May 7, 2018, our consolidated results of operations include theresults of Paragon Medical. Since the date of the acquisition, net sales of $117.0 million and income from operations of $8.1 million have been included inour consolidated financial statements.The unaudited pro forma financial results shown in the table below for the years ended December 31, 2018 and 2017, combine the consolidated results of NNand Paragon Medical giving effect to the Paragon Medical acquisition as if it had been completed on January 1, 2017, the beginning of the comparable priorannual reporting period presented. The unaudited pro forma financial results do not give effect to any of our other acquisitions that occurred after January 1,2017, and do not include any anticipated synergies or other assumed benefits of the Paragon Medical acquisition. This unaudited pro forma financialinformation is presented for informational purposes only and is not indicative of future operations or results had the Paragon Medical acquisition beencompleted as of January 1, 2017.The unaudited pro forma financial results include certain adjustments for debt service costs and additional depreciation and amortization expense basedupon the fair value step-up and estimated useful lives of Paragon Medical depreciable fixed assets and definite-life amortizable assets acquired. Adjustmentsfor the year ended December 31, 2018, include a reduction of the prepayment penalty incurred upon the extinguishment of debt (see Note 12) as if the debthad been outstanding since January 1, 2017. The provision for income taxes has also been adjusted for all periods, based upon the foregoing adjustments tohistorical results. The impact of adopting ASC 606 has been included based on an adoption date of January 1, 2018. Year Ended December 31, 2018 2017Pro forma net sales$825,891 $760,772Pro forma income (loss) from continuing operations$(252,268) $3,227Pro forma net income (loss)$(252,268) $140,915Basic income (loss) from continuing operations per share$(7.96) $0.12Diluted income (loss) from continuing operations per share$(7.96) $0.12Unaudited pro forma results for the year ended December 31, 2017, include $15.0 million of inventory fair value adjustments, financing, integration, andtransaction costs, net of tax, directly attributable to the acquisition which will not have an ongoing impact.55Table of ContentsOther AcquisitionsWe made other acquisitions during the years ended December 31, 2018 and 2017, with an aggregate cash purchase price of $22.0 million and $38.7 million,respectively. Amounts recorded for goodwill and intangible assets are disclosed in Note 8 and Note 9, respectively. Some of these amounts are subject tocompletion of our integration procedures. We incurred approximately $0.5 million and $0.3 million in acquisition related costs with respect to otheracquisitions during the years ended December 31, 2018 and 2017, respectively. Transaction costs were expensed as incurred and are included in the“Acquisition related costs excluded from selling, general and administrative expense” line item in the Consolidated Statements of Operations andComprehensive Income (Loss).DRT Medical, LLC. On October 2, 2017, we acquired 100% of the membership interests of DRT Medical, LLC, which was subsequently named NN LifeSciences - Vandalia, LLC (“NN Vandalia”). For accounting purposes, NN Vandalia meets the definition of a business and has been accounted for as a businesscombination. NN Vandalia is a medical device company that supplies precision manufactured medical instruments and orthopedic implants. Operatingresults of NN Vandalia were reported prospectively in our Life Sciences group after the acquisition date. We finalized our valuation related to the assetsacquired and liabilities assumed during 2018.Bridgemedica, LLC. On February 22, 2018, we completed the acquisition of 100% of the assets of Bridgemedica, LLC (“Bridgemedica”). For accountingpurposes, Bridgemedica meets the definition of a business and has been accounted for as a business combination. Bridgemedica is a medical device companythat provides concept to supply solutions through design, development engineering and manufacturing. Operating results of Bridgemedica are reportedprospectively in our Life Sciences group after the acquisition date. We have finalized our valuation related to the assets acquired and liabilities assumed.Southern California Technical Arts, Inc. On August 9, 2018, we completed the acquisition of 100% of the capital stock of Southern California TechnicalArts, Inc. (“Technical Arts”). For accounting purposes, Technical Arts meets the definition of a business and has been accounted for as a businesscombination. Technical Arts is an industrial machining company that manufactures tight tolerance metal components and assemblies. The acquisition ofTechnical Arts expands the NN presence in the aerospace and defense end market. Operating results of Technical Arts are reported prospectively in our PowerSolutions group after the acquisition date. We have completed a preliminary purchase price allocation and are in the process of finalizing the fair value ofassets acquired and liabilities assumed.Note 4. Segment InformationWe determined our reportable segments under the provisions of U.S. GAAP related to disclosures about segments of an enterprise. Management hasconcluded that Mobile Solutions, Power Solutions, and Life Sciences each constitutes an operating segment as each engages in business activities for whichit earns revenues and incurs expenses for which separate financial information is available, and this is the level at which the Chief Operating Decision Maker(“CODM”) reviews discrete financial information for purposes of allocating resources and assessing performance. As described in Note 1, in January 2018, weimplemented a new enterprise and management structure and reorganized our businesses into the Mobile Solutions, Power Solutions, and Life Sciencesgroups based principally on the end markets each group serves. In the first quarter of 2018, we began reporting our financial results based on these newreportable segments. Prior year amounts have been restated to conform to the current year presentation.Mobile SolutionsMobile Solutions is focused on growth in the general industrial and automotive end markets. We have developed an expertise in manufacturing highlycomplex, system critical components for fuel systems, engines and transmissions, power steering systems, and electromechanical motors on a high-volumebasis. This expertise has been gained through investment in technical capabilities, processes and systems, and skilled program management and productlaunch capabilities.Power SolutionsPower Solutions is focused on growth in the electrical and aerospace and defense end markets. Within this group we combine materials science expertise withadvanced engineering and production capabilities to design and manufacture a broad range of high-precision metal and plastic components, assemblies, andfinished devices used in applications ranging from power control to flight control and for military devices.We manufacture a variety of products including electrical contacts, connectors, contact assemblies, and precision stampings for the electrical end market andhigh precision products for the aerospace and defense end markets utilizing our extensive process technologies for optical grade plastics, thermallyconductive plastics, titanium, Inconel, magnesium, and electroplating.Life Sciences56Table of ContentsLife Sciences is focused on growth in the medical end market. Within this group we combine advanced engineering and production capabilities to designand manufacture a broad range of high-precision metal and plastic components, assemblies, and finished devices.We manufacture a variety of components, assemblies, and instruments, such as surgical knives, bioresorbable implants, surgical staples, cases and trays,orthopedic implants and tools, laparoscopic devices, and drug delivery devices for the medical and life sciences end market.57Table of ContentsSegment ResultsThe following table presents results of continuing operations for each reportable segment. MobileSolutions PowerSolutions LifeSciences CorporateandConsolidations TotalYear Ended December 31, 2018 Net sales $335,037 $189,778 $248,173 $(2,331)(a)$770,657Depreciation and amortization $26,217 $14,753 $28,091 $2,067 $71,128Goodwill impairment $73,442 $109,100 $— $— $182,542Income from operations $(54,103) $(95,115) $19,136 $(48,806) $(178,888)Interest expense $(61,243)Other $(20,903)Loss from continuing operations beforebenefit for income taxes and share of netincome from joint venture $(261,034)Share of net income from joint venture $(14,390) — — — $(14,390)Expenditures for long-lived assets $36,660 $6,459 $14,645 $6,272 $64,036Total assets $356,387 $297,947 $802,770 $44,466(b)$1,501,570Year Ended December 31, 2017 Net sales $336,852 $186,602 $98,329 $(1,990)(a)$619,793Depreciation and amortization $24,491 $14,657 $12,088 $1,170 $52,406Income from operations $34,405 $23,440 $13,271 $(38,002) $33,114Interest expense $(52,085)Other $(39,902)Loss from continuing operations beforebenefit for income taxes and share of netincome from joint venture $(58,873)Share of net income from joint venture $5,211 — — — $5,211Expenditures for long-lived assets $24,056 $5,443 $— $6,907 $36,406Total assets $428,321 $385,558 $353,208 $307,916(b)$1,475,003Year Ended December 31, 2016 Net sales $326,138 $180,330 $80,057 $(1,571)(a)$584,954Depreciation and amortization $22,189 $15,604 $12,501 $427 $50,721Income from operations $29,490 $24,060 $9,840 $(28,611) $34,779Interest expense $(62,870)Other $(2,775)Loss from continuing operations beforebenefit for income taxes and share of netincome from joint venture $(30,866)Share of net income from joint venture $5,938 — — — $5,938Expenditures for long-lived assets $23,077 $3,125 $2,227 $3,465 $31,894_______________________________(a) Includes eliminations of intersegment transactions which occur during the ordinary course of business.(b) Total assets in Mobile Solutions includes $20.4 million and $39.8 million as of December 31, 2018 and 2017, respectively, related to the investmentin our 49% owned joint venture (Note 10).58Table of ContentsThe following table summarizes the net sales and income (loss) from operations from the Paragon Medical and NN Vandalia acquisitions in the Life Sciencesgroup and other acquisitions in the Life Sciences and Power Solutions groups for the years ended December 31, 2018 and 2017. Year Ended December 31, 2018 2017Net sales Paragon Medical $116,998 $—NN Vandalia 30,668 6,682Other 11,968 — Income (loss) from operations Paragon Medical $8,086 $—NN Vandalia 1,532 (458)Other 284 —The following table summarizes long-lived tangible assets by geographical region. Property, Plant, and Equipment, NetAs of December 31, 2018 2017United States $235,975 $173,269Europe 50,143 25,288Asia 42,657 26,078Mexico 7,647 7,544S. America 24,606 27,101All foreign countries $125,053 $86,011Total $361,028 $259,280Note 5. Accounts Receivable and Sales ConcentrationsAccounts receivable, net are comprised of the following amounts: As of December 31, 2018 2017Trade $135,260 $110,165Less—allowance for doubtful accounts 1,839 1,719Accounts receivable, net $133,421 $108,446The following table presents activity in the allowance for doubtful accounts. Year Ended December 31, 2018 2017 2016Balance at beginning of year $1,719 $1,069 $1,055Additions 754 648 153Write-offs (584) (101) (59)Currency impact (50) 103 (80)Balance at end of year $1,839 $1,719 $1,069No customers accounted for more than 10% of our net sales for the years ended December 31, 2018 and 2017. For the year ended December 31, 2016, sales toRobert Bosch Automotive Systems (“Bosch”) amounted to $59.2 million or 10% of consolidated net sales. All revenues related to Bosch are reported inMobile Solutions. No customers represented more than 10% of accounts receivable as of December 31, 2018 or 2017.59Table of ContentsNote 6. InventoriesInventories are comprised of the following amounts: As of December 31, 2018 2017Raw materials $52,930 $37,337Work in process 42,578 27,669Finished goods 27,107 17,611Inventories $122,615 $82,617Note 7. Property, Plant and EquipmentProperty, plant and equipment are comprised of the following amounts: As of December 31,2018 2017Land and buildings $69,455 $54,833Machinery and equipment 401,729 302,470Construction in progress 35,122 14,346Total 506,306 371,649Less—accumulated depreciation 145,278 112,369Property, plant and equipment, net $361,028 $259,280During the year ended December 31, 2018, we acquired $66.0 million in property, plant and equipment with the Paragon Medical, Bridgemedica, andTechnical Arts acquisitions. During the year ended December 31, 2017, we acquired $14.0 million in property, plant and equipment with the NN Vandaliaacquisition.We monitor property, plant and equipment for any indicators of potential impairment. During 2018, we recognized an impairment charge of $5.2 millionrelated to the early retirement of identified fixed assets. The impairment charge was recorded to the Other operating (income) expense, net line item on theConsolidated Statements of Operations and Comprehensive Income (Loss). The impairment charge was determined by writing the assets down to theestimated salvage value, less disposal costs. We recorded no impairment charges for the years ended December 31, 2017 and 2016.For the years ended December 31, 2018, 2017, and 2016, we recorded depreciation expense of $38.6 million, $28.9 million, and $24.7 million, respectively.Note 8. GoodwillThe following table shows changes in the carrying amount of goodwill for the years ended December 31, 2018, and 2017. Mobile Solutions Power Solutions Life Sciences TotalBalance as of December 31, 2016 $73,263 $201,934 $168,332 $443,529Currency impact 884 747 — 1,631Goodwill acquired in acquisitions — — 9,452 9,452Balance as of December 31, 2017 74,147 202,681 177,784 454,612Currency impact and other (705) (1,882) (3,118) (5,705)Goodwill acquired in acquisitions — 2,657 165,288 167,945Impairments (73,442) (109,100) — (182,542)Measurement period adjustments — 149 4,993 5,142Balance as of December 31, 2018 $— $94,505 $344,947 $439,452The following table shows the gross carrying amount of goodwill and accumulated impairment charges as of December 31, 2018 and 2017.60Table of Contents December 31, 2018 December 31, 2017 GrossCarryingAmount AccumulatedImpairmentCharges Net BookValue GrossCarryingAmount AccumulatedImpairmentCharges Net BookValueMobile Solutions $74,147 $(74,147) $— $74,147 $— $74,147Power Solutions 205,405 (110,900) 94,505 204,481 (1,800) 202,681Life Sciences 344,947 — 344,947 177,784 — 177,784Total goodwill $624,499 $(185,047) $439,452 $456,412 $(1,800) $454,612Goodwill acquired in 2018 is related to the acquisitions as described in Note 3 and is derived from the value of the businesses acquired. During 2018, werecorded $161.8 million of goodwill related to the Paragon Medical acquisition, $8.0 million related to the Bridgemedica acquisition, and $2.8 millionrelated to the Technical Arts acquisition. We have performed an assessment of the Paragon Medical opening balance sheet which is subject to completion ofour integration procedures for accounting policies. For the Bridgemedica acquisition, we have finalized our valuation related to the assets acquired andliabilities assumed. For the Technical Arts acquisition, we have completed a preliminary purchase price allocation and are in the process of finalizing the fairvalue of assets acquired and liabilities assumed. The preliminary fair value of the businesses acquired was based on management business plans and futureperformance estimates which are subject to a high degree of management judgment and complexity. Actual results may differ from these projections and thedifferences may be material.During 2018, as a result of the changes in our organizational and management structure, goodwill was reassigned to operating segments with goodwillassigned to Power Solutions and Life Sciences using a relative fair value allocation. For the purpose of goodwill impairment testing, the operating segments(Mobile Solutions, Power Solutions, and Life Sciences) are considered reporting units and tested on a stand-alone basis. For further information on theorganizational changes, see Note 1.During the fourth quarter 2018, our market capitalization declined to a level that was less than the net book value of our stockholders’ equity. We performedour annual goodwill impairment analysis as of October 1, 2018, and elected to early adopt ASU 2017-4. The goodwill impairment analysis requiredsignificant judgments to calculate the fair value for each of Mobile Solutions, Power Solutions, and Life Sciences, including estimation of future cash flows,which is dependent on internal forecasts, estimation of the long-term growth rate for each operating segment, and determination of weighted average cost ofcapital. A number of significant assumptions and estimates are involved in the application of the discounted cash flow model to forecast operating cashflows, including market growth and market share, sales volumes and prices, costs to produce, discount rate, and estimated capital needs. Managementconsiders historical experience and all available information at the time the fair values of its reporting units are estimated. Assumptions in estimating futurecash flows are subject to a high degree of judgment and complexity. Changes in assumptions and estimates may affect the fair value of goodwill and couldresult in impairment charges in future periods. As a result of our analysis, the Company recorded an impairment loss on goodwill of $73.4 million and $109.1million for Mobile Solutions and Power Solutions, respectively, to the “Goodwill impairment” line on the Consolidated Statements of Operations andComprehensive Income (Loss). In addition, goodwill in Power Solutions was reduced by $1.6 million related to adjusting deferred tax liabilities for taxdeductible goodwill, which is reflected in “Currency impact and other” in the above table. No goodwill impairment loss was recorded at Life Sciences.Power Solutions goodwill as of December 31, 2018 was $94.5 million. In conjunction with the annual goodwill impairment test during the fourth quarter of2018, Power Solutions goodwill was impaired by $109.1 million, resulting in the carrying value of the reporting unit being equal to its fair value. If ourassessment of the relevant facts and circumstances change, or if the actual performance falls short of expected results, an additional impairment charge will berequired. An impairment of goodwill may also lead us to record an impairment of other intangible assets. The carrying value of finite-lived intangible assetsfor the Power Solutions group as of December 31, 2018, was $96.0 million. Life Sciences has largely grown through acquisitions, with two acquisitions in 2018 plus another acquisition in late-2017. The Company is forecastingcontinued growth for the Life Sciences group; however, the fair value of the reporting unit exceeds the carrying value by approximately 3.7% in the mostrecent valuation. If our assessment of the relevant facts and circumstances change, or the actual performance falls short of expected results, impairmentcharges may be required. Total goodwill for the Life Sciences group as of December 31, 2018 was $344.9 million. An impairment of goodwill may also leadus to record an impairment of other intangible assets. The carrying amount of finite-lived intangible assets for the Life Sciences group as of December 31,2018 was $244.4 million.We completed our annual goodwill impairment review during the fourth quarters of 2017 and 2016 and concluded that there were no indicators ofimpairment at the reporting units with goodwill during those periods.61Table of ContentsNote 9. Intangible Assets, NetWe have identified intangible assets with finite lives primarily representing customer relationships, trademarks, and trade names. In 2018, Life Sciencesadded $163.5 million and $5.7 million of intangible assets related to the Paragon Medical and Bridgemedica acquisitions, respectively. In addition, in 2018,Power Solutions added $1.9 million of intangible assets related to the Technical Arts acquisition. The intangible assets acquired in 2018 primarily representcustomer relationships and trademarks and trade names with a weighted average estimated useful life of the acquired intangible assets of 19 years. Refer toNote 3 for further discussion on the 2018 acquisitions.The following table shows the nature and preliminary weighted average estimated useful lives of intangible assets acquired during the year ended December31, 2018. Actual results may differ from these projections, and the differences may be material. Gross Carrying Value asof Acquisition Date Weighted AverageEstimated Useful Life inYearsCustomer relationships $146,800 20Trademark and trade name 14,700 29Other 9,613 1Total intangible assets acquired in current year $171,113 19As of January 1, 2018, as a result of the changes in our organizational and management structure, intangible assets were reassigned to operating segmentswith intangible assets assigned to Power Solutions and Life Sciences using a relative fair value allocation. For further information on the organizationalchanges, see Note 1.The following table shows changes in the carrying amount of intangible assets, net. Mobile Solutions Power Solutions Life Sciences TotalBalance as of December 31, 2016 $42,928 $115,928 $95,407 $254,263Amortization (3,481) (10,898) (9,081) (23,460)Currency impacts (1) — — (1)Intangible assets acquired in acquisition — — 6,900 6,900Balance as of December 31, 2017 $39,446 $105,030 $93,226 $237,702Amortization (3,540) (10,939) (18,074) (32,553)Currency impacts (14) — — (14)Intangible assets acquired in acquisitions — 1,900 169,213 171,113Measurement period adjustments — — — —Balance as of December 31, 2018 $35,892 $95,991 $244,365 $376,248The following table shows the cost and accumulated amortization of our intangible assets as of December 31, 2018 and 2017. December 31, 2018 December 31, 2017 Estimated UsefulLife in Years GrossCarryingValueas ofAcquisitionDate AccumulatedAmortization NetCarryingValue GrossCarryingValueas ofAcquisitionDate AccumulatedAmortization NetCarryingValueCustomer relationships 12 - 20 $428,830 $(75,581) $353,249 $282,030 $(52,408) $229,622Trademark and trade name 8 - 30 25,100 (4,085) 21,015 10,460 (2,703) 7,757Other 1 - 5 10,641 (8,657) 1,984 8,740 (8,417) 323Total identified intangible assets $464,571 $(88,323) $376,248 $301,230 $(63,528) $237,702Intangible assets that become fully amortized are removed from the accounts and are no longer represented in the gross carrying value or accumulatedamortization.62Table of ContentsThe following table summarizes estimated future amortization expense for the next five years and thereafter. Year Ending December 31,2019$47,009202045,357202141,415202238,464202336,625Thereafter167,378Total$376,248Intangible assets are tested for impairment when changes in circumstances indicate the carrying value of those assets may not be recoverable. As ofDecember 31, 2018 and 2017, there were no indications of impairment.Note 10. Investment in Joint VentureWe own a 49% investment in Wuxi Weifu Autocam Precision Machinery Company, Ltd. (the “JV”), a joint venture located in Wuxi, China. The JV is jointlycontrolled and managed, and we account for it under the equity method.The following table summarizes activity related to our investment in the JV.Balance as of December 31, 2017$39,822Share of earnings2,543Dividends declared and paid by joint venture(2,842)Accretion of basis difference from purchase accounting(343)Foreign currency translation loss(2,227)Impairment(16,589)Balance as of December 31, 2018$20,364During the year ended December 31, 2018, the fair value of the JV was assessed as a result of changing market conditions. Based on the results of theassessment, we determined the carrying amount of the investment exceed its estimated fair market value, and we believe this condition is other thantemporary, as defined by the accounting standards. As a result, we recorded an impairment charge of $16.6 million against our investment in the JV. Thischarge is included in the line item “Share of net income from joint venture” line on the Consolidated Statements of Operations and Comprehensive Income(Loss). The fair value assessment was most significantly affected by growth rates. It is reasonably possible that material deviation of future performance fromthe estimates used in the valuation could result in further impairment to our investment in the JV.The following tables show selected financial data of the JV. Year Ended December 31, 2018 2017 2016Net sales $69,901 $74,805 $65,756Cost of sales 57,596 57,514 44,530Income from operations 6,853 13,659 16,268Net income 4,646 11,442 13,702We recognized sales to the JV of $0.3 million, $0.2 million, and $0.1 million for the years ended December 31, 2018, 2017, and 2016, respectively. Amountsdue to us from the JV were $0.1 million, $0.1 million, and $0.1 million as of December 31, 2018, 2017, and 2016, respectively.Note 11. Income TaxesOn December 22, 2017, the U.S. government enacted comprehensive tax legislation. The Tax Act reduced the U.S. federal corporate income tax rate from35% to 21%, required companies to pay a one-time transition tax on earnings of certain foreign subsidiaries that were previously tax deferred, and creatednew taxes on certain foreign sourced earnings. As a result of the Tax63Table of ContentsAct, we recognized a $51.8 million net tax benefit in 2017, which included the estimate of transition tax and the remeasurement of our domestic deferredtaxes from 35% to 21%.As of December 31, 2018, the Company considers the accounting under Staff Accounting Bulletin No. 118 for the impacts of the Tax Act to be complete. Inpreparing the amounts as of December 31, 2018, the Company considered notices, revenue procedures, and proposed regulations issued by the InternalRevenue Service and authoritative accounting guidance to date. In 2018, the Company recognized an adjustment to the 2017 net tax benefit whichdecreased earnings by $0.8 million. This adjustment was primarily related to the one-time transition tax on deferred foreign income, change in valuation ofdeferred tax assets associated with tax law changes, and remeasurement of deferred taxes.On February 5, 2019, the Department of the Treasury and Internal Revenue Service published final regulations pertaining to the transition tax enacted as partof the Tax Act. The Company is still in the process of analyzing the impact of these regulations, which were issued subsequent to the balance sheet date ofDecember 31, 2018. Based upon a preliminary analysis of the final regulations, we anticipate an increase to tax expense of approximately $6.0 million forthe year ended December 31, 2019. The Company's analysis is on-going and the adjustment will be recorded in 2019 during the period of enactment of theregulations.Loss from continuing operations before benefit for income taxes was as follows: Year Ended December 31, 2018 2017 2016Loss from continuing operations before benefit for income taxes and share of netincome from joint venture United States $(263,499) $(71,603) $(39,160)Foreign 2,465 12,730 8,294Total $(261,034) $(58,873) $(30,866)Total income tax benefit was as follows: Year Ended December 31, 2018 2017 2016Current taxes: U.S. Federal $8,150 $(47,916) $(2,595)State 584 (12,226) 679Foreign 3,086 4,310 2,004Total current tax expense (benefit) 11,820 (55,832) 88Deferred taxes: U.S. Federal $(16,129) $(25,017) $(9,679)State (780) 3,009 (6,406)Deferred tax valuation allowance (3,565) 710 1,882Foreign (2,303) (1,896) (1,323)Total deferred tax benefit (22,777) (23,194) (15,526)Total income tax benefit $(10,957) $(79,026) $(15,438)A reconciliation of income taxes based on the U.S. federal statutory income tax rate is summarized as follows:64Table of Contents Year Ended December 31, 2018 2017 2016U.S federal statutory income tax rate 21.0 % 35.0 % 34.0 %Change in valuation allowance (0.9)% (1.2)% (6.1)%Foreign tax credits, exclusive of tax reform — % (13.8)% 8.2 %State taxes, net of federal taxes, exclusive of tax reform 0.4 % 9.1 % 5.7 %Non-U.S. earnings taxed at different rates 1.2 % 1.7 % 4.8 %Non-deductible mergers and acquisitions costs (0.2)% — % — %GILTI (0.3)% — % — %Goodwill impairment (15.5)% — % — %R&D Tax credit 0.3 % 0.3 % 0.9 %Change in uncertain tax positions 0.3 % (0.4)% 3.2 %Impact of Tax Reform Toll Charge, net of foreign tax credit 0.6 % (11.5)% — %Remeasurement of deferred taxes pursuant to tax reform (0.9)% 65.6 % — %Tax Reform impact on divestiture of business segment — % 33.9 % — %Section 199/Domestic Production Deduction — % 0.8 % — %Divestiture of Business Segment, exclusive of tax reform (0.9)% 13.6 % — %Return to provision (0.8)% — % — %Prior period revisions — % 0.5 % 4.2 %Foreign JV net income — % — % (4.1)%Other adjustments, net (0.1)% 0.6 % (0.8)%Effective tax rate 4.2 % 134.2 % 50.0 %The 2018 effective tax rate of 4.2% differs from the U.S. federal statutory income tax rate of 21% due to permanent differences including the impact of thegoodwill impairment, most of which is treated as a permanent difference for income tax purposes.The 2017 effective tax rate of 134.2% was heavily influenced by the remeasurement of our ending domestic deferred balances, an estimate of the one-timetransition tax (net of foreign tax credits) on earnings of our foreign subsidiaries in accordance with the Tax Act, and the impact of the Tax Act on thedivestiture of the PBC Business.65Table of ContentsThe principal components of the deferred tax assets and liabilities are as follows: As of December 31, 2018 2017Deferred income tax liabilities: Tax in excess of book depreciation $37,425 $34,143Goodwill — 58Intangible assets 80,623 50,688Other deferred tax liabilities 794 389Total deferred income tax liabilities 118,842 85,278Deferred income tax assets: Interest expense limitation 9,968 —Goodwill 1,441 2,067Inventories 2,745 2,248Pension/Personnel accruals 1,317 1,596Net operating loss carry forwards 9,321 6,950Foreign tax credits 5,345 —Credit carry forwards 4,130 3,427Accruals and reserves 1,531 2,015Other deferred tax assets 4,022 3,019Deferred income tax assets before Valuation Allowance 39,820 21,322Valuation allowance on deferred tax assets (14,460) (7,608)Total deferred income tax assets 25,360 13,714Net deferred income tax liabilities (1) $93,482 $71,564________________________(1)In accordance with the Tax Act, our ending domestic deferred balances have been remeasured to 21% for the year ended December 31, 2017.During the year ended December 31, 2018, we finalized our accounting policy decision with respect to the new GILTI tax rules and have concluded thatGILTI will be treated as a periodic charge in the year in which it arises. Therefore, we will not record deferred taxes for the basis associated with GILTIearnings.As realization of certain deferred tax assets is not assured, management believes it is more likely than not that those net deferred tax assets will be realized.However, the amount of the deferred tax assets considered realizable could be reduced based on changing conditions.The following table summarizes our total valuation allowances: Year Ended December 31, 2018 2017 2016Balance at beginning of year $7,608 $4,090 $2,376Additions 6,852 3,518 1,882Recoveries — — (168)Balance at end of year $14,460 $7,608 $4,090During 2018, the valuation allowance increased by approximately $6.9 million, as a result of an increase in foreign and state NOL’s and U.S. foreign taxcredits.During 2017, the valuation allowance increased by approximately $3.5 million, consisting of a $2.3 million increase due to the uncertainty of realizingcertain state NOL carryforwards, and a $1.2 million increase for foreign NOL’s.During 2016, the valuation allowance increased by approximately $1.7 million, consisting of a $1.9 million increase due to the uncertainty of realizingcertain state NOL carryforwards offset by a decrease of $0.2 million related to the Company’s expectation that it is more likely than not that it will generatefuture taxable income to utilize this amount of net deferred tax assets.66Table of ContentsA reconciliation of the beginning and ending amounts of unrecognized tax benefits, excluding interest and penalties, is as follows: Year Ended December 31, 2018 2017 2016Balance at beginning of year $5,655 $4,741 $5,724Additions for tax positions of prior years 304 1,404 179Reductions for tax positions of prior years (1,350) (490) (1,162)Balance at end of year $4,609 $5,655 $4,741As of December 31, 2018, the $4.6 million of unrecognized tax benefits would, if recognized, impact our effective tax rate by $4.0 million. The 2018reduction is related to expiring statutes of limitations in certain US state and foreign jurisdictions.Interest and penalties related to federal, state, and foreign income tax matters are recorded as a component of the provision for income taxes in ourConsolidated Statements of Operations and Comprehensive Income (Loss). During 2018, we released less than $0.1 million of previously accrued foreigninterest and released $0.2 million of previously accrued U.S. interest. During 2017, we released $0.2 million of previously accrued U.S. interest. During 2016,we released less than $0.1 million of previously accrued foreign interest and accrued $0.2 million in U.S. interest.Management believes that it is reasonably possible that the amount of unrecognized income benefits and interest may decrease during the next twelvemonths by approximately $1.8 million, related to the expiration of the statutes of limitations.As of December 31, 2018, the Company has $101.6 million of state NOL carryovers. The state NOL’s begin to expire in 2030. We also have $10.7 million offoreign NOL carryovers at December 31, 2018. The foreign NOL’s have an indefinite life. The Company has $4.1 million of tax credits in foreignjurisdictions at December 31, 2018. The tax credits in foreign jurisdictions begin to expire in 2026. The Company has foreign tax credit carryforwards forfederal income tax purposes of $5.3 million at December 31, 2018. The foreign tax credit carryforwards begin to expire in 2024. The state NOL’s, tax creditsin foreign jurisdictions, and foreign tax credits for federal income tax purposes have a full valuation allowance. These amounts are included in the valuationallowance table on the previous page.We or our subsidiaries file income tax returns in the U.S. federal jurisdiction, and in various states and foreign jurisdictions. During the third quarter of 2017,the Internal Revenue Service commenced an examination of the federal tax return for the pre-acquisition period of January 1, 2015, through October 19,2015, for Precision Engineered Products, LLC, our wholly-owned subsidiary. The examination was completed during the 4th quarter of 2018.The Company is no longer subject to federal examinations by tax authorities for years before 2012. The Company is also subject to examination by variousstate and international tax authorities. The tax years subject to examination vary by jurisdiction. The Company regularly assesses the outcomes of bothongoing and future examinations for the current or prior years to ensure the Company’s provision for income taxes is sufficient. The Company recognizesliabilities based on estimates of whether additional taxes will be due and believes its reserves are adequate in relation to any potential assessments. Theoutcome of any one examination, some of which may conclude during the next twelve months, is not expected to have a material impact on the Company’sfinancial position or results of operations.We operate under tax holidays in other countries, which are effective through December 31, 2026, and may be extended if certain additional requirements aresatisfied. The tax holidays are conditional upon our meeting certain employment and investment thresholds. The impact of these tax holidays decreasedforeign taxes by $0.8 million and $0.7 million for 2017 and 2016, respectively. The benefit of the tax holidays on net income per share (diluted) was $0.03and $0.03 for 2017, and 2016, respectively. The tax holidays had no impact on our 2018 foreign taxes.Note 12. DebtCollectively, our credit facility is comprised of a term loan with a face amount of $545.0 million, maturing on October 19, 2022 (the “Senior Secured TermLoan”); a term loan with a face amount of $300.0 million, maturing on April 3, 2021 (the “Incremental Term Loan”); and a revolving line of credit with a faceamount of $143.0 million, maturing on October 19, 2020 (the “Senior Secured Revolver”). The credit facility is collateralized by all of our assets.The following table presents outstanding debt balances as of December 31, 2018 and 2017.67Table of Contents As of December 31, 2018 2017Senior Secured Term Loan $532,063 $534,250Incremental Term Loan 279,000 291,000Senior Secured Revolver 38,720 —International lines of credit and other loans 9,810 3,315Total principal 859,593 828,565Less—current maturities of long-term debt 31,280 17,283Principal, net of current portion 828,313 811,282Less—unamortized debt issuance costs 16,842 20,477Long-term debt, net of current portion $811,471 $790,805We capitalized interest costs amounting to $1.2 million, $1.1 million, and $1.6 million in the years ended December 31, 2018, 2017, and 2016, related toconstruction in progress.Senior Secured Term LoanOn November 24, 2017, we amended our existing credit facility to reduce the applicable margin on outstanding borrowings under the Senior Secured TermLoan by 50 basis points from 4.25% to 3.75%. Outstanding borrowings under the Senior Secured Term Loan bear interest at the greater of 0.75% or one-month London Interbank Offered Rate (“LIBOR”) plus an applicable margin of 3.75%. At December 31, 2018, the Senior Secured Term Loan bore interest of6.25%.Incremental Term LoanOn November 24, 2017, we amended our existing credit facility to reduce the applicable margin on outstanding borrowings under the Incremental Term Loanby 50 basis points from 3.75% to 3.25%. Outstanding borrowings under the Incremental Term Loan bear interest at one-month LIBOR plus an applicablemargin of 3.25%. At December 31, 2018, the Incremental Term Loan bore interest of 5.75%, one-month LIBOR plus 3.25%.Second Lien Credit AgreementOn May 7, 2018, we amended our existing credit facility (the “May 2018 amendment”) to permit the Paragon Medical acquisition, to permit the Second LienCredit Agreement, and to amend certain covenants. In connection with the May 2018 amendment, we, certain of our subsidiaries named therein, SunTrustBank, as Administrative Agent, SunTrust Robinson Humphrey, Inc., as Lead Arranger and Bookrunner, and the lenders named therein, entered into a SecondLien Credit Agreement (the “Second Lien Credit Agreement”) pursuant to which SunTrust Bank and the other lenders extended to us a $200.0 millionsecured second lien term loan facility (the “Second Lien Facility”). We utilized the net proceeds from the Second Lien Facility, together with cash on hand,to pay the Paragon Medical purchase price and fees and expenses related to the acquisition. The Second Lien Facility was collateralized by all of our assetsand had a maturity date of April 19, 2023. Outstanding borrowings under the Second Lien Facility bore interest at either (i) a base rate plus an applicablemargin of 7.00%, or (ii) the greater of LIBOR or 1.00% plus an applicable margin of 8.00%. We paid $16.7 million of debt issuance costs related to the May2018 amendment of which $12.9 million is included in the “Loss on extinguishment of debt and write-off of debt issuance costs” line on the ConsolidatedStatements of Operations and Comprehensive Income (Loss) and $3.8 million is capitalized as a reduction of long-term debt.On September 18, 2018, a significant portion of net proceeds from a registered public offering of shares of our common stock was used to voluntarily prepayin the full the $200.0 million outstanding principal balance. We paid a prepayment penalty of two percent of the outstanding principal balance, or $4.0million, and wrote off $2.6 million of unamortized debt issuance costs to the “Loss on extinguishment of debt and write-off of debt issuance costs” line onthe Consolidated Statements of Operations and Comprehensive Income (Loss). Refer to Note 15 for additional information regarding the registered publicoffering.Senior Secured RevolverOutstanding borrowings under the Senior Secured Revolver bear interest at one-month LIBOR plus 3.50%. At December 31, 2018, the Senior SecuredRevolver bore interest of 6.00%. We pay an annual commitment fee of 0.50% for unused capacity under the Senior Secured Revolver on a quarterly basis.On December 26, 2018, we amended our existing credit facility (the “December 2018 amendment”) to increase the total available capacity under the SeniorSecured Revolver and to reduce the consolidated net leverage ratio, the basis for certain68Table of Contentsfinancial covenants, for periods ended on or after December 31, 2018. The December 2018 amendment increased the total available capacity under the SeniorSecured Revolver from $100.0 million to $125.0 million. We paid $0.1 million of debt issuance costs related to the December 2018 amendment which iscapitalized as a reduction of long-term debt.Total available capacity under the Senior Secured Revolver was $125.0 million as of December 31, 2018. Available capacity may be restored to $143.0million upon the achievement of certain requirements. Our credit facility is subject to certain financial covenants based on a consolidated net leverage ratio,as defined in the credit facility agreement. The financial covenants are effective when we have outstanding borrowings under our Senior Secured Revolver onthe last day of any fiscal quarter and become more restrictive over time. We had $38.7 million outstanding under the Senior Secured Revolver atDecember 31, 2018, and we were in compliance with all covenants under our credit facility.International Lines of Credit and Other LoansInternational lines of credit and other loans is comprised of loans with financial institutions in France, Brazil, and China (“international credit facilities”).The international credit facilities are used to fund working capital and equipment purchases for our manufacturing plants in those countries. As ofDecember 31, 2018, the international credit facilities had $9.8 million outstanding of which $6.8 million is classified as “Current maturities of long-termdebt” on the Consolidated Balance Sheets.Future MaturitiesThe following table lists aggregate maturities of long-term debt for the next five years and thereafter.Year Ending December 31, AggregateMaturitiesPrincipalAmounts2019 $31,2802020 50,0972021 261,0942022 515,1572023 344Thereafter 1,621 Total outstanding principal $859,593Note 13. Restructuring and IntegrationThe following table summarizes restructuring and integration charges for the years ended December 31, 2018, 2017, and 2016. MobileSolutions PowerSolutions LifeSciences Corporate andConsolidations TotalYear Ended December 31, 2018 Severance and other employee costs $— $— $1,336 $728 $2,064Site closure and other associated costs 63 — — — 63Total $63 $— $1,336 $728 $2,127Year Ended December 31, 2017 Severance and other employee costs $17 $— $— $— $17Site closure and other associated costs 369 — — — 369Total $386 $— $— $— $386Year Ended December 31, 2016 Severance and other employee costs $851 $455 $381 $— $1,687Site closure and other associated costs 3,488 263 220 — 3,971Total $4,339 $718 $601 $— $5,65869Table of ContentsThe following tables summarize restructuring and integration reserve activity for the years ended December 31, 2018, 2017, and 2016. ReserveBalance as ofDecember 31, 2017 Charges Non-cashAdjustments CashReductions ReserveBalance as ofDecember 31, 2018Severance and other employee costs $— $2,064 $— $(942) $1,122Site closure and other associated costs 1,099 63 (56) (1,082) 24Total $1,099 $2,127 $(56) $(2,024) $1,146 ReserveBalance as ofDecember 31, 2016 Charges Non-cashAdjustments CashReductions ReserveBalance as ofDecember 31, 2017Severance and other employee costs $1,000 $17 $(164) $(853) $—Site closure and other associated costs 1,625 369 — (895) 1,099Total $2,625 $386 $(164) $(1,748) $1,099 ReserveBalance as ofDecember 31, 2015 Charges Non-cashAdjustments CashReductions ReserveBalance as ofDecember 31, 2016Severance and other employee costs $887 $1,687 $(278) $(1,296) $1,000Site closure and other associated costs 1,845 3,971 (2,142) (2,049) 1,625Total $2,732 $5,658 $(2,420) $(3,345) $2,625In 2018, we recognized severance and other employee costs of $0.7 million at corporate headquarters related to the restructuring of our former PrecisionEngineered Products Group to form the Power Solutions and Life Sciences groups, effective January 2, 2018. We also recognized severance and otheremployee costs of $1.3 million in our Life Sciences group related to the post-acquisition integration of Paragon Medical into our existing business.In 2017, we recognized restructuring and integration expense of $0.4 million in our Mobile Solutions group due primarily to the closure of a plant inWheeling, Illinois (the “Wheeling Plant”), which was a part of our integration plan after the acquisition of Autocam Corporation (“Autocam”) in 2014.In 2016, we recognized restructuring and integration expense of $4.3 million in our Mobile Solutions segment due primarily to the closure of the WheelingPlant. These charges consisted of $0.8 million of severance and other employee costs and site closure and other associated costs of $3.5 million. We alsorecognized restructuring and integration expense of $0.7 million and $0.6 million due to initiatives within our Power Solutions and Life Sciences groups,respectively, related to integration costs, rebranding, site moving costs for two plants, and other employee costs.The amount accrued as of December 31, 2018, for restructuring and integration costs represents our expected obligation over the next 2.2 years primarilyrelated to severance and other employee costs. We expect to pay $0.7 million within the next twelve months.Note 14. Commitments and ContingenciesLease PaymentsWe have operating lease commitments for machinery, office equipment, vehicles, and manufacturing and office space which expire on varying dates. Werecognized rent expense of $12.4 million, $7.6 million, and $7.2 million for the years ended December 31, 2018, 2017 and 2016, respectively.The following table summarizes future minimum lease payments as of December 31, 2018, under operating leases that have initial or remaining non-cancelable lease terms in excess of one year.70Table of ContentsYear Ending December 31,MinimumRentalCommitments2019$13,337202011,515202110,557202210,29320238,752Thereafter53,945 Total minimum payments$108,399Brazil ICMS Tax MatterPrior to the acquisition of Autocam in 2014, Autocam’s Brazilian subsidiary (“Autocam Brazil”) received notification from the Brazilian tax authorityregarding ICMS (state value added tax or “VAT”) tax credits claimed on intermediary materials (e.g. tooling and perishable items) used in the manufacturingprocess. The Brazilian tax authority notification disallowed state ICMS tax credits claimed on intermediary materials based on the argument that these itemsare not intrinsically related to the manufacturing process. Autocam Brazil filed an administrative defense with the Brazilian tax authority arguing, amongother matters, that it should qualify for an ICMS tax credit, contending that the intermediary materials are directly related to the manufacturing process.We believe that we have substantial legal and factual defenses, and we plan to defend our interests in this matter vigorously. The matter encompasses severallawsuits filed with Brazilian courts requesting declaratory actions that no tax is due or seeking a stay of execution on the collection of the tax. In 2018, weobtained a favorable decision in one of the declaratory actions for which the period for appeal has expired. We have filed actions in each court requestingdismissal of the matter based on the earlier court action. Although we anticipate a favorable resolution to all matters, we can provide no assurances that wewill be successful in achieving dismissal of all pending cases. While we believe a loss is not probable, we estimate the range of possible losses related to thisassessment is from $0 to $6.0 million. No amount was accrued at December 31, 2018, for this matter.We are entitled to indemnification from the former shareholders of Autocam, subject to the limitations and procedures set forth in the agreement and plan ofmerger relating to the Autocam acquisition. Management believes the indemnification would include amounts owed for the tax, interest, and penaltiesrelated to this matter.All Other Legal MattersAll other legal proceedings are of an ordinary and routine nature and are incidental to our operations. Management believes that such proceedings shouldnot, individually or in the aggregate, have a material adverse effect on our business, financial condition, results of operations, or cash flows. In making thatdetermination, we analyze the facts and circumstances of each case at least quarterly in consultation with our attorneys and determine a range of reasonablypossible outcomes.Note 15. Equity OfferingOn September 18, 2018, we issued 14.4 million shares of our common stock in a public offering under our shelf registration statement at a price of $16.00 pershare. Net proceeds of $217.3 million were used to repay the Second Lien Facility and a portion of the Senior Secured Revolver.Note 16. Revenue from Contracts with CustomersWe adopted ASC 606 on January 1, 2018, using the modified retrospective transition method for all contracts not completed as of the date of adoption. Thereported results for 2018 reflect the application of ASC 606 while the reported results for 2017 and 2016 were prepared under the guidance of ASC 605. Theadoption of ASC 606 represents a change in accounting principle that will more closely align revenue recognition with the delivery of our goods and willprovide financial statement readers with enhanced disclosures. In accordance with ASC 606, revenue is recognized when a customer obtains control ofpromised goods in an amount that reflects the consideration we expect to be entitled to receive in exchange for those goods. To the extent that transactionprice includes variable consideration, we estimate the amount of variable consideration that should be included in the transaction price utilizing theexpected value method or the most likely amount method depending on the nature of the71Table of Contentsvariable consideration. Variable consideration is included in the transaction price if, in management’s judgment, it is probable that a significant futurereversal of cumulative revenue under the contract will occur.Revenue is recognized when control of the good or service is transferred to the customer either at a point in time or, in limited circumstances, as our servicesare rendered over time. Revenue is measured as the amount of consideration we expect to receive in exchange for transferring goods or services.The following tables summarize sales to external customers by operating segment for the years ended December 31, 2018, 2017, and 2016. Year Ended December 31, 2018 MobileSolutions PowerSolutions LifeSciences Intersegment SalesEliminations TotalUnited States $187,178 $157,357 $206,776 $(2,331) $548,980China 43,610 5,537 6,130 — 55,277Mexico 27,053 12,254 191 — 39,498Brazil 35,314 215 29 — 35,558Germany 5,652 26 19,870 — 25,548Switzerland 5,006 54 6,446 — 11,506Poland 7,010 13 8 — 7,031Italy 5,558 221 317 — 6,096Czech Republic 6,131 47 — — 6,178Netherlands — 3,290 — — 3,290Other 12,525 10,764 8,406 — 31,695Total net sales $335,037 $189,778 $248,173 $(2,331) $770,657 Year Ended December 31, 2017 MobileSolutions PowerSolutions LifeSciences Intersegment SalesEliminations TotalUnited States $190,828 $152,938 $96,062 $(1,990) $437,838China 45,503 6,481 267 — 52,251Mexico 26,639 14,220 78 — 40,937Brazil 35,425 185 — — 35,610Germany 5,502 11 35 — 5,548Switzerland 5,450 — — — 5,450Poland 5,183 — — — 5,183Italy 5,347 334 — — 5,681Czech Republic — — — — —Netherlands — 2,817 — — 2,817Other 16,975 9,616 1,887 — 28,478Total net sales $336,852 $186,602 $98,329 $(1,990) $619,79372Table of Contents Year Ended December 31, 2016 MobileSolutions PowerSolutions LifeSciences Intersegment SalesEliminations TotalUnited States $196,217 $134,564 $78,707 $(1,571) $407,917China 44,579 8,131 403 — 53,113Mexico 24,919 20,944 — — 45,863Brazil 23,801 458 — — 24,259Germany 4,497 8 35 — 4,540Switzerland — — — — —Poland — — — — —Italy 5,027 322 — — 5,349Czech Republic — — — — —Netherlands — 1,882 — — 1,882Other 27,098 14,021 912 — 42,031Total net sales $326,138 $180,330 $80,057 $(1,571) $584,954Product SalesWe generally transfer control and recognize a sale when we ship the product from our manufacturing facility to our customer, at a point in time, as this iswhen our customer obtains the ability to direct use of, and obtain substantially all of the remaining benefits from, the goods. We have elected to recognizethe cost for freight and shipping when control over products has transferred to the customer as a component of cost of sales.We use an observable price to determine the stand-alone selling price for separate performance obligations or a cost-plus-margin approach when anobservable price is not available. The expected duration of our contracts is one year or less, and we have elected to apply the practical expedient that allowsentities to disregard the effects of financing when the contract length is less than one year. The amount of consideration we receive and the revenue werecognize varies with volume rebates and incentives we offer to our customers. We estimate the amount of variable consideration that should be included inthe transaction price utilizing the expected value method or the most likely amount method depending on the nature of the variable consideration. Variableconsideration is included in the transaction price if, in our judgment, it is probable that a significant future reversal of cumulative revenue under the contractwill not occur.We have utilized certain practical expedients allowed by the new standard. We utilize the portfolio approach practical expedient to evaluate sales-relateddiscounts on a portfolio basis to contracts with similar characteristics. The effect on our financial statements of applying the portfolio approach would notdiffer materially from applying the new standard to individual contracts.We give our customers the right to return only defective products in exchange for functioning products or rework of the product. These transactions areevaluated and accounted for under ASC Topic 460, Guarantees, and we estimate the impact to the transaction price based on an analysis of historicalexperience.Other Sources of RevenueWe provide pre-production activities related to engineering efforts to develop molds, dies, and machines that are owned by our customers. We may receiveadvance payments from customers which are deferred until satisfying our performance obligations by compliance with customer-specified milestones,recognizing revenue at a point in time. These contracts generally have an original expected duration of less than one year.The following table provides information about contract liabilities from contracts with customers. DeferredRevenueBalance at January 1, 2018 $2,124Balance at December 31, 2018 $2,97473Table of ContentsThe timing of revenue recognition, billings, and cash collections results in billed accounts receivable and customer advances and deposits (e.g. contractliability) on the Consolidated Balance Sheets. These contract liabilities are reported on the Consolidated Balance Sheets on a contract-by-contract basis atthe end of each reporting period as deferred revenue. Deferred revenue relates to payments received in advance of performance under the contract andrecognized as revenue as (or when) we perform under the contract. Changes in the contract liability balances during the year ended December 31, 2018, werenot materially impacted by any other factors. Revenue recognized for the year ended December 31, 2018, from amounts included in deferred revenue at thebeginning of the period for performance obligations satisfied or partially satisfied during the year ended December 31, 2018, was approximately $1.9 million.Transaction Price Allocated to Future Performance ObligationsASC 606 requires that we disclose the aggregate amount of transaction price that is allocated to performance obligations that have not yet been satisfied as ofDecember 31, 2018. The guidance provides certain practical expedients that limit this requirement. Our contracts meet the following practical expedientprovided by ASC 606:•The performance obligation is part of a contract that has an original expected duration of one year or less.Costs to Obtain and Fulfill a ContractPrior to the adoption of ASC 606, we expensed commissions paid to internal sales representative for obtaining contracts. Under ASC 606, we adopted thepractical expedient to recognize commissions paid to internal sales personnel that are incremental to obtaining customer contracts as an expense whenincurred since the amortization period is less than one year. The judgments made in determining the amount of costs incurred included whether thecommissions are in fact incremental and would not have occurred absent the customer contract. Costs to obtain a contract are expressed as selling, generaland administrative expense.Sales, VAT, and other taxes we collect concurrent with revenue-producing activities are excluded from revenue. Incidental items that are immaterial in thecontext of the contract are recognized as expense.Financial Statement Impact of Adopting ASC 606The following table presents the impact of adoption of ASC 606 on our Consolidated Statements of Operations and Comprehensive Income (Loss) and ourConsolidated Balance Sheets. Differences are due to the acceleration in the recognition of revenue to the point of shipment or delivery for contracts where anunconditional obligation to purchase is present for inventory that was considered in consignment under ASC 605. Year Ended December 31, 2018 As Reported Balances WithoutAdoption of ASC 606 Effect of ChangeNet sales$770,657 $770,654 $3Cost of sales588,205 588,202 3Income (loss) from operations(178,888) (178,888) — As of December 31, 2018 As Reported Balances WithoutAdoption of ASC 606 Effect of ChangeAccounts receivable, net$133,421 $132,810 $611Inventories122,615 122,988 (373)Note 17. Share-Based CompensationWe recognize compensation expense of all employee and non-employee director share-based compensation awards in the financial statements based uponthe grant date fair value of the awards over the requisite service or vesting period, less any expense incurred for estimated forfeitures. As of December 31,2018, we have approximately 1.9 million maximum shares that can be issued as options, stock appreciation rights, and other share-based awards. Shares ofour common stock delivered upon exercise or vesting may consist of newly issued shares of our common stock or shares acquired in the open market.Share-based compensation expense is recognized in the “Selling, general and administrative expense” line in the Consolidated Statements of Operations andComprehensive Income (Loss) except for $1.0 million and $0.5 million attributable to discontinued operations for the years ended December 31, 2017 and2016, respectively.74Table of ContentsThe following table lists the components of share-based compensation expense by type of award. Year Ended December 31, 2018 2017 2016Stock options $678 $1,078 $687Restricted stock 1,630 1,968 2,061Performance share units 2,076 2,450 1,187Change in estimate of performance share vesting (1) (1,968) — —Share-based compensation expense $2,416 $5,496 $3,935_______________________(1) Amount reflects the decrease in share-based compensation expense of $2.0 million based on the change in estimate of the probability of vesting ofperformance share units as described in the “Performance Share Units” section of this Note.The total tax benefit for share-based compensation cost was $0.7 million, $1.6 million, and $0.6 million for the years ended December 31, 2018, 2017, and2016, respectively. Unrecognized compensation cost related to unvested awards was $4.0 million as of December 31, 2018. We expect that cost to berecognized over a weighted-average period of 1.8 years.Stock OptionsOption awards are typically granted to key employees on an annual basis. A single option grant is typically awarded to eligible employees each year by theCompensation Committee of the Board of Directors. The Compensation Committee occasionally awards additional individual grants to eligibleemployees. All employees are awarded options at an exercise price equal to the closing price of our stock on the date of grant. The term life of options is tenyears with a vesting period of generally three years.During the years ended 2018, 2017, and 2016, we granted options to purchase 57,800, 125,700, and 167,000 shares, respectively, to certain key employees.The weighted average grant date fair value of the options granted during 2018, 2017, and 2016 was $10.60, $11.84, and $5.02 per share, respectively. Thefair value of our options cannot be determined by market value because they are not traded in an open market. Accordingly, we utilized the Black Scholesfinancial pricing model to estimate the fair value.The following table shows the weighted average assumptions relevant to determining the fair value of stock options granted in each year. 2018 2017 2016Expected term 6 years 6 years 6 yearsAverage risk-free interest rate 2.66% 2.03% 1.43%Expected dividend yield 1.15% 1.16% 2.48%Expected volatility 47.69% 56.56% 59.23%Expected forfeiture rate 4.00% 3.00% 3.00%The expected term is derived from using the simplified method of determining stock option terms as described under the SAB Topic 14, Share-basedpayment. The simplified method was used because sufficient historical stock option exercise experience was not available.The average risk-free interest rate is derived from United States Department of Treasury published interest rates of daily yield curves for the same time periodas the expected term.The expected dividend yield is derived by a mathematical formula which uses the expected annual dividends over the expected term divided by the fairmarket value of our common stock at the grant date.The expected volatility is derived from our actual common stock historical volatility over the same time period as the expected term. The expected volatilityrate is derived by mathematical formula utilizing daily closing price data.The expected forfeiture rate is determined from examining the historical pre-vesting forfeiture patterns of past option issuances to key employees. While theexpected forfeiture rate is not an input of the Black Scholes financial pricing model for determining the fair value of the options, it is an importantdeterminant of stock option compensation expense to be recorded.75Table of ContentsThe following table summarizes stock option activity for the year ended December 31, 2018. Number of Options(in thousands) Weighted-AverageExercisePrice(per share) Weighted-AverageRemainingContractualTerm (years) AggregateIntrinsicValue Outstanding at January 1, 2018 746 $14.33 Granted 58 24.47 Exercised (27) 10.15 $477 Forfeited or expired (6) 22.39 Outstanding at December 31, 2018 771 $15.17 5.6 $— (1) Exercisable at December 31, 2018 625 $13.63 4.9 $— (1) (1)The aggregate intrinsic value is the sum of intrinsic values for each exercisable individual option grant. The intrinsic value is the amount by which theclosing market price of our stock at December 31, 2018, was greater than the exercise price of any individual option grant.Cash proceeds from the exercise of options in the years ended December 31, 2018, 2017, and 2016 totaled approximately $0.3 million, $3.1 million, and $2.8million, respectively. The tax benefit recognized from stock option exercises was less than $0.1 million, $0.2 million, and less than $0.1 million in the yearsended December 31, 2018, 2017, and 2016, respectively. For the years ended December 31, 2018, 2017, and 2016, proceeds from stock options are presentedexclusive of tax benefits in cash flows from financing activities in the Consolidated Statements of Cash Flows. The total intrinsic value of options exercisedduring the years ended December 31, 2018, 2017, and 2016 was $0.5 million, $3.8 million, and $2.9 million, respectively.Restricted StockDuring the years ended December 31, 2018, 2017, and 2016, we granted 86,516, 85,393, and 152,510 restricted stock awards to non-executive directors,officers, and certain other key employees. The restricted stock granted during the years ended 2018, 2017, and 2016, vest pro-rata over three years for officersand certain other key employees and over one year for non-executive directors. We determined the fair value of the shares awarded by using the closing priceof our common stock as of the date of grant. The weighted average grant date fair value of restricted stock granted in the years ended December 31, 2018,2017, and 2016, was $24.55, $24.29, and $11.39 per share, respectively. The total grant date fair value of restricted stock that vested in the years endedDecember 31, 2018, 2017, and 2016, was $1.8 million, $2.1 million, and $2.6 million, respectively.The following table summarizes unvested restricted stock award activity for the year ended December 31, 2018. Number of UnvestedRestrictedShares(in thousands) WeightedAverage GrantDate FairValueUnvested at January 1, 2018 152 $19.21Granted 87 24.55Vested (93) 19.69Forfeited — —Unvested at December 31, 2018 146 $22.07Performance Share UnitsPerformance Share Units (“PSUs”) are a form of long-term incentive compensation awarded to executive officers and certain other key employees designed todirectly align the interests of employees to the interests of our stockholders, and to create long-term stockholder value. PSUs granted in 2018 and 2017 weremade pursuant to the NN, Inc. 2016 Omnibus Incentive Plan and a Performance Share Unit Agreement (the “2016 Omnibus Agreement”). PSUs granted in2016 were made pursuant to the NN, Inc. 2011 Stock Incentive Plan and a Performance Share Unit Agreement (the “2011 Stock Agreement”). Some PSUs arebased on total shareholder return (“TSR Awards”), and other PSUs are based on return on invested capital (“ROIC Awards”).The TSR Awards vest, if at all, upon our achieving a specified relative total shareholder return, which will be measured against the total shareholder return ofthe S&P SmallCap 600 Index during specified performance periods as defined in the 2016 Omnibus Agreement and the 2011 Stock Agreement. The ROICAwards will vest, if at all, upon our achieving a specified76Table of Contentsaverage return on invested capital during the performance periods. Each performance period generally begins on January 1 of the year of grant and ends 36months later on December 31.We recognize compensation expense over the performance period in which the performance and market conditions are measured. If the PSUs do not vest atthe end of the performance periods, then the PSUs will expire automatically. Upon vesting, the PSUs will be settled by the issuance of shares of our commonstock, subject to the executive officer’s continued employment. The actual number of shares of common stock to be issued to each award recipient at the endof the performance periods will be interpolated between a threshold and maximum payout amount based on actual performance results. No dividends will bepaid on outstanding PSUs during the performance period; however, dividend equivalents will be paid based on the number of shares of common stock thatare ultimately earned at the end of the performance periods.With respect to the TSR Awards, a participant will earn 50% of the target number of PSUs for “Threshold Performance,” 100% of the target number of PSUsfor “Target Performance,” and 150% of the target number of PSUs for “Maximum Performance.” With respect to the ROIC Awards, a participant will earn 35%of the target number of PSUs for “Threshold Performance,” 100% of the target number of PSUs for “Target Performance,” and 150% of the target number ofPSUs for “Maximum Performance.” For performance levels falling between the values shown below, the percentages will be determined by interpolation.The following table presents the goals with respect to TSR Awards and ROIC Awards granted in 2018, 2017, and 2016.TSR Awards: Threshold Performance(50% of Shares) Target Performance(100% of Shares) Maximum Performance(150% of Shares)2018 grants 35 50 752017 grants 35 50 752016 grants 35 50 75ROIC Awards: Threshold Performance(35% of Shares) Target Performance(100% of Shares) Maximum Performance(150% of Shares)2018 grants 15.5% 18.0% 19.5%2017 grants 15.0% 17.5% 20.0%2016 grants 15.5% 18.0% 20.5%We estimate the grant date fair value of TSR Awards using the Monte Carlo simulation model, as the total shareholder return metric is considered a marketcondition under ASC Topic 718, Compensation – stock compensation. The grant date fair value of ROIC Awards is based on the closing price of a share ofour common stock on the date of grant.The following table presents the number of awards granted and the grant date fair value of each award in the periods presented. TSR Awards ROIC AwardsAward Year Number ofShares(in thousands) Grant DateFair Value(per share) Number ofShares(in thousands) Grant DateFair Value(per share)2018 55 $24.65 55 $24.552017 46 $29.84 53 $24.202016 101 $9.38 101 $11.31We recognize expense for ROIC Awards based on the probable outcome of the associated performance condition. We generally recognize an expense forROIC Awards based on the Target Performance threshold of 100% because, at the date of grant, the Target Performance is the probable level of performanceachievement. During the year ended 2018, none of the ROIC Awards that were granted in 2016 vested as the performance achieved was below the “ThresholdPerformance” level of 15.5%, as defined by the grant agreement. For the year ended December 31, 2018, we recognized a decrease in share-basedcompensation expense of $0.8 million in the “Selling, general and administrative expense” line in the Consolidated Statements of Operations andComprehensive Income (Loss) to reflect the change in vesting. Additionally, for the year ended December 31, 2018, we determined that the probability ofperformance achievement for ROIC Awards that were granted in 2017 and 2018 diminished to below the “Threshold Performance” level of 15.0% and 15.5%,respectively, as defined by the grant agreement. For the year ended December 31, 2018, we recognized a decrease in share-based compensation expense of$0.8 million and $0.4 million to reflect the change in estimate of the probability of vesting for the 2017 and 2018 ROIC Awards, respectively, in the “Selling,general and administrative expense” line in the Consolidated Statements of Operations and Comprehensive Income (Loss). Related accrued dividendequivalents of $0.1 million were also reversed in 2018 for the 2016, 2017, and 2018 awards .77Table of ContentsThe following table summarizes changes in unvested PSUs during the year ended December 31, 2018, and changes during the year then ended. Nonvested TSR Awards Nonvested ROIC Awards Number ofShares(in thousands) WeightedAverageGrant DateFair Value Number ofShares(in thousands) WeightedAverageGrant DateFair ValueNonvested at January 1, 2018 130 $16.60 136 $16.27Granted 55 24.65 55 24.55Vested — — — —Expired (78) 9.38 (77) 11.31Forfeited (13) 14.50 (14) 14.86Nonvested at December 31, 2018 94 $26.84 100 $24.39No TSR Awards or ROIC Awards vested in 2018. The total grant date fair value of TSR Awards and ROIC Awards that vested in 2017 was $0.9 million and$1.2 million, respectively. Note 18. Accumulated Other Comprehensive IncomeThe majority of our Accumulated Other Comprehensive Income (“AOCI”) relates to foreign currency translation of our foreign subsidiary balances. Duringthe year ended December 31, 2018, we had other comprehensive loss of $13.9 million due to foreign currency translations. During the year endedDecember 31, 2017, we had other comprehensive income of $22.1 million due to foreign currency translations. In connection with the sale of discontinuedoperations, we reclassified $9.2 million out of AOCI to discontinued operations on the Consolidated Statements of Operations and Comprehensive Income(Loss) in 2017. During the year ended December 31, 2016, we had other comprehensive loss of $10.6 million due to foreign currency translations and a netgain of $1.9 million due to change in fair value of the interest rate swap and discontinuation of hedge accounting. Amounts related to the interest rate swapwere reclassified out of AOCI during 2016 upon discontinuation of hedge accounting.Note 19. Net Income (Loss) Per ShareThe following table summarizes the computation of basic and diluted net income (loss) per share. Year Ended December 31, 2018 2017 2016Income (loss) from continuing operations $(264,467) $25,364 $(9,490)Income from discontinued operations, net of tax — 137,688 16,153Net income (loss) $(264,467) $163,052 $6,663 Weighted average shares outstanding 31,678 27,433 27,016Effect of dilutive stock options — 322 —Diluted shares outstanding 31,678 27,755 27,016 Basic income (loss) from continuing operations per share $(8.35) $0.92 $(0.35)Basic income from discontinued operations per share — 5.02 0.60Basic net income (loss) per share $(8.35) $5.94 $0.25 Diluted income (loss) from continuing operations per share $(8.35) $0.91 $(0.35)Diluted income from discontinued operations per share — 4.96 0.60Diluted net income (loss) per share $(8.35) $5.87 $0.25Cash dividends declared per common share $0.28 $0.28 $0.28The calculations of diluted income (loss) from continuing operations per share for the years ended December 31, 2018, 2017, and 2016, exclude 0.4 million,0.4 million, and 0.8 million potentially dilutive stock options and restricted stock units which had the effect of being anti-dilutive. Given the loss fromcontinuing operations in 2018 and 2016, all options are considered anti-dilutive and were excluded from the calculation of diluted loss from continuingoperations per share and diluted net78Table of Contentsincome (loss) per share. Stock options excluded from the calculations of diluted income (loss) from continuing operations per share for the years endedDecember 31, 2018, 2017, and 2016, had a per share exercise price ranging from $4.42 to $25.16 in each respective year.Note 20. Fair Value MeasurementsFair value is an exit price representing the expected amount that an entity would receive to sell an asset or pay to transfer a liability in an orderly transactionwith market participants at the measurement date. We followed consistent methods and assumptions to estimate fair values as more fully described in Note 1.Our financial instruments that are subject to fair value disclosure consist of cash and cash equivalents, accounts receivable, accounts payable, short-terminvestments, and long-term debt. As of December 31, 2018, the carrying values of these financial instruments approximated fair value. The fair value offloating-rate debt approximates the carrying amount because the interest rates paid are based on short-term maturities. As of December 31, 2018, we had nofixed-rate debt outstanding.Fair value principles prioritize valuation inputs across three broad levels. Level 1 inputs are quoted prices (unadjusted) in active markets for identical assetsor 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, eitherdirectly or indirectly through market corroboration, for substantially the full term of the financial instrument. Level 3 inputs are unobservable inputs basedon the assumptions used to measure assets and liabilities at fair value. An asset or liability’s classification within the various levels is determined based onthe lowest level input that is significant to the fair value measurement.We may manage our exposure to fluctuations in interest rates using a mix of fixed and variable rate debt. Historically, we have managed the exposure byentering into interest rate swap agreements which mitigate exposures to the risks and variability of our operating results. In 2016, we discontinued hedgeaccounting for an interest rate swap that was if effect at that time. Upon discontinuation of hedge accounting, all amounts in AOCI related to the interest rateswap were reclassified to earnings, and we began accounting for the interest rate swap on a mark-to-market basis. In 2017, we terminated the interest rateswap. As of December 31, 2018, we had no interest rate swaps outstanding. On February 8, 2019, the Company entered into a fixed-rate interest swapagreement as discussed in Note 22 to the consolidated financial statements.Note 21. Quarterly Results of Operations (Unaudited)The following tables summarize the quarterly results of operations for the years ended December 31, 2018 and 2017.79Table of Contents2018 FirstQuarter SecondQuarter ThirdQuarter FourthQuarterNet sales $169,148 $196,349 $205,683 $199,477Cost of sales (exclusive of depreciation and amortization) 126,444 148,640 156,408 156,713Income (loss) from continuing operations (5,983) (24,511) (13,784) (220,189)Net income (loss) (5,983) (24,511) (13,784) (220,189)Comprehensive income (loss) (518) (40,292) (17,977) (219,560)Basic income (loss) from continuing operations per share $(0.22) $(0.89) $(0.48) $(5.25)Basic net income (loss) per share $(0.22) $(0.89) $(0.48) $(5.25)Diluted income (loss) from continuing operations per share $(0.22) $(0.89) $(0.48) $(5.25)Diluted net income (loss) per share $(0.22) $(0.89) $(0.48) $(5.25)2017 FirstQuarter SecondQuarter ThirdQuarter FourthQuarterNet sales $157,555 $157,947 $148,156 $156,135Cost of sales (exclusive of depreciation and amortization) 114,480 114,514 111,272 118,814Income (loss) from continuing operations 1,893 (26,374) (3,480) 53,325Income (loss) from discontinued operations, net of tax 5,518 5,236 129,441 (2,507)Net income (loss) 7,411 (21,138) 125,961 50,818Comprehensive income (loss) 12,516 (11,627) 123,129 51,885Basic income (loss) from continuing operations per share $0.07 $(0.96) $(0.13) $1.93Basic net income (loss) per share $0.27 $(0.77) $4.57 $1.84Diluted income (loss) from continuing operations per share $0.07 $(0.96) $(0.13) $1.91Diluted net income (loss) per share $0.27 $(0.77) $4.57 $1.82Note 22. Subsequent EventOn February 8, 2019, the Company entered into a fixed-rate interest swap agreement with a notional amount of $700 million to manage the Company’sexposure to interest rate risk associated with our variable rate long-term debt.80Table of ContentsItem 9.Changes in and Disagreements with Accountants on Accounting and Financial DisclosureNone.Item 9A.Controls and ProceduresDisclosure Controls and ProceduresUnder the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer, we evaluated theeffectiveness of disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the“Exchange Act”)). Based upon that evaluation, as a result of the material weakness in internal control over financial reporting described below, our ChiefExecutive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were not effective as of December 31, 2018, to ensurethat information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported withinthe time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to management, including the ChiefExecutive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure.Management’s Report on Internal Control Over Financial ReportingThe management of NN, Inc. is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined inExchange Act Rule 13a-15(f). 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.Management, under the supervision and with the participation of the Chief Executive Officer and Chief Financial Officer, conducted an evaluation of theeffectiveness of our internal control over financial reporting as of December 31, 2018, based on the criteria described in Internal Control – IntegratedFramework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Based on the evaluation, management hasconcluded that the Company did not maintain effective internal control over financial reporting as of December 31, 2018, due to the material weaknessidentified below.A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibilitythat a material misstatement of our annual or interim financial statements would not be prevented or detected on a timely basis.We did not maintain an effective control environment due to a lack of a sufficient complement of personnel with an appropriate level of knowledge,experience and training commensurate with our financial reporting requirements. This material weakness resulted in immaterial errors to other current assets;property, plant and equipment, net; goodwill; investment in joint venture; other non-current assets; accounts payable; accrued salaries, wages and benefits;other current liabilities; deferred tax liabilities; accumulated other comprehensive income; selling, general and administrative expense; depreciation andamortization; other operating expense/income; write-off of unamortized debt issuance costs; provision/benefit for income taxes; comprehensive income/loss;and cash flows in our consolidated financial statements for the years ended December 31, 2017, 2016 and 2015. These immaterial errors also resulted in arevision to previously issued financial statements for the periods December 31, 2017 and December 31, 2016. Additionally, this material weakness couldresult in a misstatement of substantially all account balances or disclosures that would result in a material misstatement to the annual or interim consolidatedfinancial statements that would not be prevented or detected.Management has excluded from its assessment of the Company’s internal control over financial reporting as of December 31, 2018, Paragon Medical, Inc.,Bridgemedica, LLC, and Southern California Technical Arts, Inc., as each was acquired in a purchase business combination during the year ended December31, 2018. Paragon Medical, Inc. and Bridgemedica, LLC, components of our Life Sciences group, and Southern California Technical Arts, Inc., a componentof our Power Solutions group, are wholly-owned subsidiaries and accounted for combined total assets and total revenues of 9.6% and 16.7%, respectively, ofthe consolidated financial statement amounts as of and for the year ended December 31, 2018. Paragon Medical, Inc. represents 8.9% and 15.2% of therelated consolidated financial statement amounts, respectively.The effectiveness of our internal control over financial reporting as of December 31, 2018, has been audited by PricewaterhouseCoopers LLP, an independentregistered public accounting firm, as stated in their report which appears under Item 8.81Table of ContentsRemediation of Previously Identified Material WeaknessesManagement previously disclosed in our 2017 Annual Report the following control deficiencies that constituted material weaknesses in our internal controlover financial reporting:•We did not maintain effective controls over information and communication as it relates to the accounting for income taxes. Specifically, we did notimplement and reinforce an adequate process for communication and information sharing necessary to support the functioning of internal controlbetween our tax group and our corporate accounting group.This material weakness, along with the ineffective control environment material weakness discussed above, contributed to the material weaknesses describedbelow: •We did not design and maintain effective internal controls over the accounting for business combinations, which specifically included notdesigning and maintaining effective controls over the (a) accuracy, valuation, and presentation and disclosure for allocating goodwill to ourinternational businesses and (b) completeness, accuracy, and valuation of deferred income taxes recorded in connection with business combinations.•We did not design and maintain effective internal controls over the accounting for income taxes, which specifically included not designing andmaintaining controls over the completeness, accuracy, valuation, and presentation and disclosure of deferred income tax accounts, income taxprovision and related disclosures.During the second quarter of 2018, Management developed a comprehensive workplan for remediation of the material weaknesses. This workplan includedthe following:•Enhance and supplement the finance team by increasing the number of roles, reassigning responsibilities, and adding additional resources with anappropriate level of knowledge and experience in internal control over financial reporting commensurate with our financial reporting requirements.•Enhance the information and level of communication as it relates to the accounting for income taxes and the information sharing necessary tosupport the functioning of internal control between the tax group and corporate accounting.•Develop and implement enhancements to the design of our business combination key controls.•Conduct training programs on policies and procedures and effective communication related to internal controls over financial reporting.As of December 31, 2018, the remediation measures described above have been implemented and we have had sufficient time to test the operatingeffectiveness and remediate the three material weaknesses noted above and, as such, the material weaknesses identified in the Company’s internal controlover financial reporting related to information and communication; accounting for income taxes and accounting for business combinations have beenremediated.Status of Remediation Efforts for the Unremediated Material WeaknessTo ensure we have a sufficient complement of resources within our finance department, in 2018 we hired qualified personnel for critical finance roles. Afterwe integrate these professionals into our control environment, we expect that the remediation of this material weakness will be completed.Changes in Internal Control Over Financial ReportingThere were no changes in our internal control over financial reporting (as defined in the Exchange Act Rules 13a-15(f) and 15d-15(f)) that occurred duringthe quarter ended December 31, 2018, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.Item 9B.Other InformationNone.Part III Item 10.Directors, Executive Officers and Corporate Governance82Table of ContentsThe information required by this Item 10 of Form 10-K concerning our directors is contained in the sections entitled “Information about the Directors” and“Beneficial Ownership of Common Stock” of our definitive proxy statement to be filed with the Securities and Exchange Commission within 120 days afterDecember 31, 2018, in accordance with General Instruction G to Form 10-K, is hereby incorporated herein by reference.Our Code of Conduct/Ethics Statement, as amended (the “Code”), was most recently approved by our Board on August 11, 2016. The Code is applicable toall officers, directors and employees. The Code is posted on our website at www.nninc.com. Information contained on our website is not part of this AnnualReport on Form 10-K. We will satisfy any disclosure requirements under Item 5.05 of Form 8-K regarding an amendment to, or waiver from, any provision ofthe Code with respect to our principal executive officer, principal financial officer, principal accounting officer and persons performing similar functions bydisclosing the nature of such amendment or waiver on our website or in a Current Report on Form 8-K.Item 11.Executive CompensationThe information required by Item 11 of Form 10-K is contained in the sections entitled “Information about the Directors — Compensation of Directors” and“Executive Compensation” of our definitive proxy statement and, in accordance with General Instruction G to Form 10-K, is hereby incorporated herein byreference.Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder MattersThe information required by Item 12 of Form 10-K is contained in the section entitled “Beneficial Ownership of Common Stock” of our definitive proxystatement and, in accordance with General Instruction G to Form 10-K, is hereby incorporated herein by reference.Information required by Item 201(d) of Regulation S-K concerning our 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 beissued upon exercise ofoutstanding options,warrants and rights(a) Weighted-averageexercise price ofoutstanding options,warrants and rights(b) Number of securities remainingavailable for future issuance underequity compensation plans(excluding securities reflected incolumn (a))(c)Equity compensation plans approved by security holders 771 $15.17 1,893Equity compensation plans not approved by security holders — — —Total 771 $15.17 1,893Item 13.Certain Relationships and Related Transactions, and Director IndependenceInformation regarding review, approval or ratification of transactions with related persons is contained in a section entitled “Certain Relationships andRelated Transactions” of our definitive proxy statement and, in accordance with General Instruction G to Form 10-K, is hereby incorporated herein byreference.Information regarding director independence is contained in a section entitled “Information about the Directors” of our definitive proxy statement and, inaccordance with General Instruction G to Form 10-K, is hereby incorporated herein by reference.Item 14.Principal Accountant Fees and ServicesInformation required by this item of Form 10-K concerning our accounting fees and services is contained in the section entitled “Fees Paid to IndependentRegistered Public Accounting Firm” of our definitive proxy statement and, in accordance with General Instruction G to Form 10-K, is hereby incorporatedherein by reference.83Table of ContentsPart IV Item 15.Exhibits, Financial Statement Schedules(a) Documents Filed as Part of this Report1. Financial StatementsThe financial statements of NN, Inc. filed as part of this Annual Report on Form 10-K begin on the following pages hereof: PageReport of Independent Registered Public Accounting Firm42Consolidated Statements of Operations and Comprehensive Income (Loss)44Consolidated Balance Sheets45Consolidated Statements of Changes in Stockholders’ Equity46Consolidated Statements of Cash Flows47Notes to Consolidated Financial Statements482. Financial Statement SchedulesThe 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).NN, Inc. 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 Item 16.Form 10-K SummaryNone.84Table of ContentsINDEX TO EXHIBITS Incorporation by ReferenceExhibitNumber Exhibit Description Form SEC File No. Exhibit Filing Date1.1 Underwriting Agreement, dated as of September 13, 2018,by and between NN, Inc. and J.P. Morgan Securities LLC,as representative of several underwriters named inSchedule I thereto 8-K 000-23486 1.1 September 14, 20182.1 Agreement and Plan of Merger, dated as of July 18, 2014,by and among NN, Inc., PMC Global AcquisitionCorporation, Autocam Corporation, Newport GlobalAdvisors, L.P., and John C. Kennedy 8-K 000-23486 2.1 July 22, 20142.2 Stock Purchase Agreement, dated as of August 17, 2015,by and among NN, Inc., Precision Engineered ProductsHoldings, Inc. and PEP Industries, LLC 8-K 000-23486 2.1 August 18, 20152.3 Purchase Agreement, dated as of July 10, 2017, by andbetween NN, Inc. and TSUBAKI NAKASHIMA Co., Ltd. 8-K 000-23486 2.1 July 10, 20172.4 Stock Purchase Agreement, dated as of April 2, 2018, byand among NN, Inc. Precision Engineered Products LLC,Paragon Equity LLC, and PMG Intermediate HoldingCorporation 8-K 000-23486 2.1 April 3, 20183.1 Restated Certificate of Incorporation of NN, Inc. S-3 333-89950 3.1 June 6, 20023.2 Certificate of Designation of Series A Junior ParticipatingPreferred Stock of NN, Inc., as filed with the Secretary ofthe State of Delaware 8-K 000-23486 3.1 December 18, 20083.3 Amended and Restated By-Laws of NN, Inc. 8-K 000-23486 3.1 November 20, 20154.1 The specimen stock certificate representing NN, Inc.’sCommon Stock, par value $0.01 per share S-3 333-89950 4.1 June 6, 20024.2 Stockholders’ Agreement, effective as of August 29, 2014,by and between NN, Inc. and John C. Kennedy 8-K 000-23486 4.1 September 2, 20144.3 Indenture, dated as of October 19, 2015, by and amongNN, Inc., the subsidiary guarantors party thereto, and U.S.Bank National Association, as trustee 8-K 000-23486 4.1 October 20, 20154.4 Form of the NN, Inc. 10.25% Senior Notes due 2020 8-K 000-23486 10.2 October 20, 20154.5 Supplemental Indenture, dated as of October 19, 2015, byand among NN, Inc., certain direct and indirect subsidiariesof NN, Inc., as additional subsidiary guarantors, and U.S.Bank National Association, as trustee 8-K 000-23486 4.3 October 20, 201510.1* NN, Inc. 2005 Stock Incentive Plan S-8 333-130395 4.1 December 16, 200510.2* NN, Inc. 2011 Amended and Restated Stock Incentive Plan DEF14A 000-23486 Appendix A April 1, 201610.3* Form of Indemnification Agreement S-3/A 333-89950 10.6 July 15, 200210.4* Elective Deferred Compensation Plan, dated February 26,1999 10-K 000-23486 10.16 March 31, 199985Table of Contents10.6* Amended and Restated Executive EmploymentAgreement, dated September 13, 2012, by and betweenNN, Inc. and Thomas C. Burwell 8-K 000-23486 10.3 September 18, 201210.7* Amended and Restated Executive EmploymentAgreement, dated September 13, 2012, by and between theWhirlaway and James R. Widders 8-K 000-23486 10.6 September 18, 201210.8* Executive Employment Agreement, dated May 8, 2013,between NN, Inc. and Richard D. Holder 8-K 000-23486 10.1 May 10, 201310.9 Escrow Agreement, effective as of August 29, 2014, byand among NN, Inc., Newport Global Advisors, L.P., JohnC. Kennedy and Computershare Trust Company, N.A. 8-K 000-23486 10.3 September 2, 201410.10 Indemnity Agreement, effective as of August 29, 2014, byand among NN, Inc. and each of the shareholders ofAutocam Corporation identified therein 8-K 000-23486 10.4 September 2, 201410.11* Executive Employment Agreement, dated September 9,2014, between NN, Inc. and Warren A. Veltman 10-K 000-23486 10.27 March 16, 201510.14 Amended and Restated Registration Rights Agreement,dated as of June 10, 2016, by and among NN, Inc., theguarantors party thereto, SunTrust Robinson Humphrey,Inc., on behalf of itself and as representative of the initialpurchasers, Spring Capital II Subsidiary, L.P., SummitPartners Credit Fund II, L.P, Summit Partners Credit FundB-2, L.P., Summit Partners Credit Fund A-2, L.P., SummitInvestors Credit II, LLC, Summit Investors Credit II (UK),L.P. and Summit Partners Credit Offshore IntermediateFund II, L.P. 8-K 000-23486 10.1 June 10, 201610.15 Amendment and Restatement Agreement, dated as ofSeptember 30, 2016, by and among NN, Inc., certain NN,Inc. subsidiaries named therein, SunTrust Bank, KeyBankNational Association and Regions Bank 8-K 000-23486 10.1 October 3, 201610.16 Incremental Amendment to Amended and Restated CreditAgreement, dated as of October 31, 2016, among NN, Inc.,the Guarantors, HomeTrust Bank, as 2016 RevolvingCredit Increase Lender, KeyBank National Association, asan L/C Issuer, Regions Bank, as Swing Line Lender and anL/C Issuer, and SunTrust Bank, as Administrative Agentand an L/C Issuer 8-K 000-23486 10.1 November 4, 201610.17 NN, Inc. 2016 Omnibus Incentive Plan DEF14A 000-23486 Appendix A November 10, 201610.18 Form of Incentive Stock Option Agreement under the 2016Omnibus Incentive Plan 10-K 000-23486 10.18 March 16, 201710.19 Form of Nonqualified Stock Option Agreement under the2016 Omnibus Incentive Plan 10-K 000-23486 10.19 March 16, 201710.20 Form of Restricted Share Award Agreement under the 2016Omnibus Incentive Plan 10-K 000-23486 10.20 March 16, 201710.21 Form of Performance Share Unit Award Agreement underthe 2016 Omnibus Incentive Plan 10-K 000-23486 10.21 March 16, 201786Table of Contents10.23* Separation Agreement, dated as of April 1, 2017, by andbetween NN, Inc. and Matthew S. Heiter. 10-Q 000-23486 10.2 May 4, 201710.24 Amendment No. 1 to Amended and Restated CreditAgreement, dated as of April 3, 2017, by and among NN,Inc., certain NN, Inc. subsidiaries named therein, SunTrustBank, JPMorgan Chase Bank, N.A., KeyBank NationalAssociation and Regions Bank 8-K 000-23486 10.1 April 4, 201710.25 Amendment No. 2 to Amended and Restated CreditAgreement, dated as of August 15, 2017, by and amongNN, Inc., certain NN, Inc. subsidiaries named therein, andSunTrust Bank, Regions Bank, JPMorgan Chase Bank,N.A., HomeTrust Bank and Key Bank NationalAssociation, collectively, the Revolving Credit Lenders,and SunTrust Bank, as the Administrative Agent. 8-K 000-23486 10.1 August 18, 201710.26 Amendment No. 3 to Amended and Restated CreditAgreement, dated as of November 24, 2017, by and amongNN, Inc., certain NN, Inc. subsidiaries named therein,SunTrust Bank, as administrative agent, and certain lendersnamed therein. 8-K 000-23486 10.1 November 24, 201710.27* Separation Agreement and Release, dated as of January 2,2018, by and between John A. Manzi and NN, Inc. 8-K 000-23486 10.1 January 5, 201810.28 Satisfaction and Discharge of Indenture, dated April 3,2017, between NN, Inc. and U.S. Bank NationalAssociation, as trustee 8-K 000-23486 10.2 April 4, 201710.29 Commitment Letter, dated as of April 2, 2018, by andamong NN, Inc., SunTrust Bank and SunTrust RobinsonHumphrey, Inc. 8-K 000-23486 10.1 April 3, 201810.30 Amendment No. 4 to Amended and Restated CreditAgreement, dated May 7, 2018, by and among NN, Inc., theaffiliated Guarantors party thereto, SunTrust Bank,SunTrust Robinson Humphrey, Inc. and the Lenders partythereto 8-K 000-23486 10.1 May 7, 201810.31 Amendment No. 5 to Amended and Restated CreditAgreement, dated December 26, 2018, by and among NN,Inc., certain NN, Inc. subsidiaries named therein, SunTrustBank, as administrative agent and certain lenders namedtherein 8-K 000-23486 10.1 December 26, 201810.32 Cooperation Agreement dated February 25, 2019, by andamong NN, Inc., Legion Partners Asset Management, LLC,and certain persons listed therein 8-K 000-23486 10.1 February 26, 201910.33 Amendment No. 6 to Amended and Restated CreditAgreement, dated March 15, 2019, by and among NN, Inc.,certain NN, Inc. subsidiaries named therein, SunTrustBank, as administrative agent and certain lenders namedtherein 8-K 000-23486 10.1 March 18, 201921.1# List of Subsidiaries of NN, Inc. 23.1# Consent of PricewaterhouseCoopers LLP, IndependentRegistered Public Accounting Firm 87Table of Contents23.2# Consent of Deloitte Touche Tohmatsu Certified PublicAccountants LLP, Independent Registered PublicAccounting Firm 31.1# Certification of Chief Executive Officer pursuant toSection 302 of Sarbanes-Oxley Act 31.2# Certification of Chief Financial Officer pursuant toSection 302 of Sarbanes-Oxley Act 32.1## Certification of Chief Executive Officer pursuant toSection 906 of Sarbanes-Oxley Act 32.2## Certification of Chief Financial Officer pursuant toSection 906 of Sarbanes-Oxley Act 99.1# Financial Statements of Wuxi Weifu Autocam PrecisionMachinery Co., Ltd. 101.INS# XBRL Instance Document 101.SCH# XBRL Taxonomy Extension Service 101.CAL# Taxonomy Calculation Linkbase 101LAB# XBRL Taxonomy Label Linkbase 101.PRE# XBRL Presentation Linkbase Document 101.DEF# XBRL Definition Linkbase Document *Management contract or compensatory plan or arrangement.#Filed herewith##Furnished herewith88Table of ContentsSIGNATURESPursuant 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 itsbehalf by the undersigned, thereunto duly authorized. NN, Inc. By: /s/ RICHARD D. HOLDER Richard D. Holder Chief Executive Officer, President and Director Dated: March 18, 2019Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrantand in the capacities and on the dates indicated. Name and Signature Title Date /s/ RICHARD D. HOLDERRichard D. Holder Chief Executive Officer, President and Director(Principal Executive Officer) March 18, 2019 /s/ THOMAS C. BURWELL, JR.Thomas C. Burwell, Jr. Senior Vice President- Chief Financial Officer(Principal Financial Officer) March 18, 2019 /s/ MICHAEL C. FELCHERMichael C. Felcher Vice President- Chief Accounting Officer(Principal Accounting Officer) March 18, 2019 /s/ ROBERT E. BRUNNERRobert E. Brunner Non-Executive Chairman, Director March 18, 2019 /s/ WILLIAM DRIESWilliam Dries Director March 18, 2019 /s/ DAVID K. FLOYDDavid K. Floyd Director March 18, 2019 /s/ DAVID L. PUGHDavid L. Pugh Director March 18, 2019 /s/ CAREY A. SMITHCarey A. Smith Director March 18, 2019 /s/ STEVEN T. WARSHAWSteven T. Warshaw Director March 18, 201989Exhibit 21.1Subsidiaries of Registrant Subsidiaries of NN, Inc. Jurisdiction of Incorporation or OrganizationAdvanced Precision Products, Inc. DelawareAutocam (China) Automotive Components Co., Ltd. ChinaAutocam Corporation MichiganAutocam do Brasil Usinagem, Ltda. BrazilAutocam Equipment Holdings, LLC DelawareAutocam Equipment, LLC DelawareAutocam Europe, B.V. NetherlandsAutocam France, SARL FranceAutocam International, Ltd MichiganAutocam Poland Sp. z o.o. PolandAutocam South Carolina, Inc. MichiganAutocam-Pax, Inc. MichiganBoston Endo-Surgical Technologies LLC DelawareBouverat Industries, S.A.S. FranceBrainin (Foshan) Precision Engineered Products Co. Ltd. ChinaBrainin de Mexico, S.A. de C.V. MexicoBrainin-Advance Industries LLC DelawareCaprock Enclosures, LLC TexasCaprock Manufacturing, Inc. TexasConnecticut Plastics LLC DelawareGeneral Metal Finishing LLC DelawareHolmed, LLC DelawareHowesTemco, LLC DelawareIndustrial Molding Corporation TennesseeLacey Manufacturing Company, LLC DelawareMatrix I LLC DelawareNN Life Sciences Design & Development, LLC DelwawareNN Life Sciences – Vandalia, LLC OhioNN Precisions Plastics, Inc. DelawarePMC Acquisition Company, Inc. DelawarePMC USA Acquisition Company, Inc. DelawarePNC Acquisition Company Inc. DelawarePolymetallurgical LLC DelawarePrecision Engineered Products Holdings, Inc. DelawarePrecision Engineered Products LLC DelawarePrecision Metal Components Mexico SRL MexicoPremco, Inc. MassachusettsProfiles Incorporated MassachusettsTrigon International LLC DelawareTriumph LLC ArizonaWauconda Tool & Engineering LLC DelawareWhirlaway Corporation OhioExhibit 23.1CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMWe hereby consent to the incorporation by reference in the Registration Statement on Form S-8 (Nos. 333-174519, 333-130395, 333-69588, 333-50934, and333-216739) and Form S-3 (No. 333-216737) of NN, Inc. of our report dated March 18, 2019 relating to the financial statements and the effectiveness ofinternal control over financial reporting, which appears in this Form 10-K. /s/ PricewaterhouseCoopers LLPAtlanta, GeorgiaMarch 18, 2019Exhibit 23.2CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMWe consent to the incorporation by reference in the Registration Statements on Form S-8 (No. 333-174519, No. 333-130395, No. 333-69588, No. 333-50934 , No. 333-216739) and in the Registration Statement on Form S-3 (No. 333-216737) ofour report dated March 16 , 2017, relating to the financialstatements of Wuxi Weifu Autocam Prec is ion Machinery Company, Ltd. as of and for the year ended December 31, 2016, appearing in the Ann alReport on Form 10 -K ofNN, Inc. for the year ended December 31, 201 8./s/ Deloitte Touche Tohmatsu Certified Public Accountants LLP Shanghai, People's Republic of ChinaMarch 18, 2019Digital Differenceais;i.....iJJJa tt t'Exhibit 31.1CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER PURSUANT TO RULES 13a-14(a) AND 15d-14(a)UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDEDI, Richard D. Holder, 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 thestatements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by thisreport; 3)Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects thefinancial 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 inExchange 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 oursupervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us byothers 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 oursupervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements forexternal 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 theeffectiveness 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 mostrecent fiscal quarter (the registrant’s fourth fiscal quarter in the case of the annual report) that has materially affected, or is reasonablylikely 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 theregistrant’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 arereasonably 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 internalcontrol over financial reporting. Date: March 18, 2019 /s/ RICHARD D. HOLDER Richard D. Holder President, Chief Executive Officer and Director (Principal Executive Officer)Exhibit 31.2CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER PURSUANT TO RULES 13a-14(a) AND 15d-14(a)UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDEDI, Thomas C. Burwell, Jr., 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 thestatements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by thisreport; 3)Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects thefinancial 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 inExchange 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 oursupervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us byothers 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 oursupervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements forexternal 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 theeffectiveness 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 mostrecent fiscal quarter (the registrant’s fourth fiscal quarter in the case of the annual report) that has materially affected, or is reasonablylikely 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 theregistrant’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 arereasonably 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 internalcontrol over financial reporting. Date: March 18, 2019 /s/ THOMAS C. BURWELL, JR. Thomas C. Burwell, Jr. Senior Vice President – Chief Financial Officer (Principal Financial Officer)Exhibit 32.1CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER PURSUANTTO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002In connection with the Annual Report of NN, Inc. (the “Company”) on Form 10-K for the annual period ended December 31, 2018, as filed with the Securitiesand Exchange Commission on the date hereof (the “Report”), the undersigned, in the capacity and date indicated below, hereby certifies pursuant to 18U.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 ofSection 13(a) or 15(d) of the Securities Exchange Act of 1934, and (2) the information contained in the Report fairly presents, in all material respects, thefinancial condition and results of operations of the Company as of the dates and for the periods indicated. Date: March 18, 2019 /s/ RICHARD D. HOLDER Richard D. Holder President, Chief Executive Officer and Director(Principal Executive Officer)Exhibit 32.2CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER PURSUANTTO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002In connection with the Annual Report of NN, Inc. (the “Company”) on Form 10-K for the annual period ended December 31, 2018, as filed with the Securitiesand Exchange Commission on the date hereof (the “Report”), the undersigned, in the capacity and date indicated below, hereby certifies pursuant to 18U.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 ofSection 13(a) or 15(d) of the Securities Exchange Act of 1934, and (2) the information contained in the Report fairly presents, in all material respects, thefinancial condition and results of operations of the Company as of the dates and for the periods indicated. Date: March 18, 2019 /s/ THOMAS C. BURWELL, JR. Thomas C. Burwell, Jr. Senior Vice President – Chief Financial Officer(Principal Financial Officer) WUXI WEIFU AUTOCAMPRECISION MACHINERY CO., LTD.Financial Statements as of and for the Years ended December 31, 2018, 2017 and 2016  DTT(A)(17)U00010REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMTo the Board of Directors ofWuxi Weifu Autocam Precision Machinery Co., Ltd.We have audited the accompanying balance sheet of Wuxi Weifu Autocam Precision Machinery Co., Ltd. (the “Company”) as ofDecember 31, 2016, and the related statements of operations, comprehensive income, changes in equity, and cash flows for the yearended December 31, 2016. These financial statements are the responsibility of the Company’s management. Our responsibility is toexpress an opinion on these financial statements based on our audit.We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Thosestandards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free ofmaterial misstatement.The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Ouraudit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriatein the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control overfinancial reporting. According, we express no such opinion. An audit also includes examining, on a test basis, evidence supportingthe amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made bymanagement, as well as evaluating the overall financial statement presentation. We believe that our audit provide a reasonable basisfor our opinion.In our opinion, such financial statements present fairly, in all material respects, the financial position of Wuxi Weifu AutocamPrecision Machinery Co., Ltd. as of December 31, 2016 and the results of its operations and its cash flows for the year endedDecember 31, 2016, in conformity with accounting principles generally accepted in the United States of America.The accompanying balance sheet of the Company as of December 31, 2015, and the related statements of income, comprehensiveincome, stockholders’ equity, and cash flows for the year ended December 31, 2015 and for the four-month period ended December31, 2014 were not audited, reviewed or compiled by us in accordance with the standards of the Public Company AccountingOversight Board (United States) and, accordingly, we do not express an opinion on them./s/ Deloitte Touche Tohmatsu Certified Public Accountants LLP Shanghai, People’s Republic of ChinaMarch 15, 20172 WUXI WEIFU AUTOCAM PRECISION MACHINERY CO., LTD.STATEMENTS OF COMPREHENSIVE INCOME(All amounts in RMB unless otherwise stated) For the years ended December 31, 2018 2017 2016 (Unaudited) (Unaudited) Revenues Sales to third parties7,083,089.17 8,018,531.26 8,712,281.91 Sales to related parties (Notes 10(2)(a))454,613,798.92 497,078,185.84 427,627,264.21 Total revenues461,696,888.09 505,096,717.10 436,339,546.12 Costs and expenses Cost of sales(380,424,163.010) (388,344,903.960) (295,485,723.580) Selling, general and administrative expenses(11,820,051.680) (8,583,261.370) (7,324,044.280) Research and development costs (Notes 2(m))(24,185,973.110) (15,937,928.510) (25,578,659.820) Total costs and expenses(416,430,187.800) (412,866,093.840) (328,388,427.680) Operating income45,266,700.29 92,230,623.26 107,951,118.44 Interest expense(6,157,958.600) (2,192,401.050) (512,829.580) Other income and expense, net(1,063,104.150) 250,630.81 (421,921.080) Income before income taxes38,045,637.54 90,288,853.02 107,016,367.78 Income tax expense (Note 8)(7,355,576.210) (13,032,901.580) (16,090,812.870) Net income30,690,061.33 77,255,951.44 90,925,554.91 Other comprehensive income- - - Comprehensive income30,690,061.33 77,255,951.44 90,925,554.91 The accompanying notes are part of the financial statements.3 WUXI WEIFU AUTOCAM PRECISION MACHINERY CO., LTD.BALANCE SHEETS(All amounts in RMB unless otherwise stated) December 31, 2018 December 31, 2017 (Unaudited) (Unaudited)ASSETS Cash and cash equivalents12,279,695.05 38,868,952.66 Trade receivables, net of allowance for doubtful accounts5,987,699.43 4,615,411.23 Amounts due from related parties (Note 10(2)(c))147,114,947.44 122,395,160.34 Inventories (Note 3)73,047,881.98 76,012,965.65 Other current assets (Note 4)7,921,485.64 11,929,420.42 Total current assets246,351,709.54 253,821,910.30 Property, plant, and equipment, net (Note 5)309,872,532.90 216,623,150.11 Intangible assets, net (Note 6)225,028.54 56,105.94 Total non-current assets310,097,561.44 216,679,256.05 Total assets556,449,270.98 470,501,166.35 LIABILITIES Short-term borrowings (Note 7)156,928,213.94 90,000,000.00 Trade payables45,363,151.49 48,370,198.04 Amounts due to related parties (Notes 10(2)(c))3,731,264.99 4,885,213.83 Payroll payable19,661,787.94 17,171,693.24 Income taxes payable626,422.05 1,656,731.22 Other current liabilities39,068,084.56 8,037,045.34 Total current liabilities265,378,924.97 170,120,881.67 Total liabilities265,378,924.97 170,120,881.67 EQUITY Statutory capital (Note 2(o))148,146,276.97 107,278,476.97 Retained earnings142,924,069.04 193,101,807.71 Total equity291,070,346.01 300,380,284.68 Total liabilities and equity556,449,270.98 470,501,166.35 The accompanying notes are part of the financial statements.4 WUXI WEIFU AUTOCAM PRECISION MACHINERY CO., LTD.STATEMENTS OF CASH FLOWS(All amounts in RMB unless otherwise stated)For the years ended December 31, 2018 2017 2016 (Unaudited) (Unaudited) Cash flows from operating activities Net cash provided by operating activities (Note 9)63,757,178.89 77,327,849.49 92,703,479.13 Cash flows from investing activities Purchase of property, plant and equipment(117,206,108.240) (92,711,731.800) (25,352,788.800) Purchase of intangible assets(234,812.390) - (293,688.740) Proceeds from sale of property, plant and equipment4,007.70 12,444,075.93 54,400.00 Net cash used in investing activities(117,436,912.930) (80,267,655.870) (25,592,077.540) Cash flows from financing activities Proceeds from short-term bank borrowings480,034,910.49 90,000,000.00 24,091,357.10 Dividends paid(40,000,000.000) (56,513,000.000) (50,620,000.000) Repayment of short-term bank borrowings(412,985,997.130) (20,000,000.000) (24,091,357.100) Net cash from financing activities27,048,913.36 13,487,000.00 (50,620,000.000) Effect of exchange rate changes on cash and cash equivalents41,563.07 (31,205.000) 27,680.31 Net increase in cash and cash equivalents(26,589,257.610) 10,515,988.62 16,519,081.90 Cash and cash equivalents, beginning of year38,868,952.66 28,352,964.04 11,833,882.14 Cash and cash equivalents, end of year12,279,695.05 38,868,952.66 28,352,964.04 The accompanying notes are part of the financial statements.5 WUXI WEIFU AUTOCAM PRECISION MACHINERY CO., LTD.STATEMENTS OF EQUITY(All amounts in RMB unless otherwise stated) Statutory capital Retained earnings Total equity Balance at December 31, 2015 (Unaudited)107,278,476.97 132,053,301.36 239,331,778.33Net income- 90,925,554.91 90,925,554.91Dividends paid to shareholders- (50,620,000.000) (50,620,000.000)Balance at December 31, 2016107,278,476.97 172,358,856.27 279,637,333.24 Balance at December 31, 2016107,278,476.97 172,358,856.27 279,637,333.24Net income (Unaudited)- 77,255,951.44 77,255,951.44Dividends paid to shareholders (Unaudited)- (56,513,000.000) (56,513,000.000)Balance at December 31, 2017 (Unaudited)107,278,476.97 193,101,807.71 300,380,284.68 Balance at December 31, 2017 (Unaudited)107,278,476.97 193,101,807.71 300,380,284.68Net income (Unaudited)- 30,690,061.33 30,690,061.33Capital contribution (Unaudited) (Note 2(o))40,867,800.00 (40,867,800.000) -Dividends paid to shareholders (Unaudited) (Note 2(o))- (40,000,000.000) (40,000,000.000)Balance at December 31, 2018 (Unaudited)148,146,276.97 142,924,069.04 291,070,346.01The accompanying notes are part of the financial statements.6 WUXI WEIFU AUTOCAM PRECISION MACHINERY CO., LTD.NOTES TO THE FINANCIAL STATEMENTSTable of ContentsFootnote PageNote 1ORGANIZATION AND PRINCIPAL ACTIVITIES7Note 2SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES7-13Note 3INVENTORIES14Note 4OTHER CURRENT ASSETS14Note 5PROPERTY, PLANT AND EQUIPMENT, NET14Note 6INTANGIBLE ASSETS, NET15Note 7SHORT-TERM BORROWINGS15Note 8INCOME TAX16Note 9NOTES TO CASH FLOWS17Note 10RELATED PARTY TRANSACTIONS AND BALANCES18-21Note 11COMMITMENTS AND CONTINGENCIES22Note 12SUBSEQUENT EVENTS227WUXI WEIFU AUTOCAM PRECISION MACHINERY CO., LTD.December 31, 2018, 2017 and 2016Notes to The Financial Statements2.ORGANIZATION AND PRINCIPAL ACTIVITIESWuxi Weifu Autocam Precision Machinery Co., Ltd. (the "Company") was established in Wuxi, Jiangsu Province, the People's Republic ofChina (the "PRC") by Wuxi Weifu Hi-Technology Co., Ltd. and Autocam Corporation as a joint venture on August 23, 2005 with anoperating period of 20 years. The Company principally engages in researching, developing and producing precision automotive parts andcomponents and engine control system; selling self-manufactured products and providing after-sales services.These financial statements are presented in Chinese Renminbi (“RMB”), unless otherwise stated.3.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES(a)Basis of presentationThe financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America("US GAAP").As at 31 December 2018, the current liabilities of the Company exceeded the current assets by RMB 19,027,215.43. In 2018, net cashflows from operating activities of the Company amounted to RMB 63,757,178.89 (2017: RMB 77,327,849.49). The management expectthat the Company will continue making profit in 2019 and the profit distribution can be controlled by the Board of Directors based on theliquidity needs of the Company. It is expected that the future cash flows from operating activities will be sufficient to settle maturedliabilities. Therefore, the management continue to prepare the financial statements of the Company as of December 31, 2018 on goingconcern basis.(b)Use of estimatesThe financial statements are prepared in conformity with US GAAP, which require the use of estimates, judgments, and assumptions thataffect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue andexpenses in the periods presented. Management has made significant estimates in a variety of areas, including but not limited toallowance for doubtful accounts, inventories valuation, useful lives and residual values of long-lived assets and impairment for long-livedassets. The Company believes that the accounting estimates employed are appropriate and the resulting balances are reasonable;however, due to the inherent uncertainties in making estimates, actual results could differ from the original estimates, requiringadjustments to these balances in future periods.(c) Foreign currency translationThe Company's functional and reporting currency is the Renminbi ("RMB"). An entity's functional currency is the currency of the primaryeconomic environment in which it operates, normally that is the currency of the environment in which it primarily generates and expendscash. Management's judgment is essential to determine the functional currency by assessing various indicators, such as cash flows,sales price and market, expenses, financing and intercompany transactions and arrangements.Transactions denominated in currencies other than RMB are translated into RMB at the exchange rates quoted by the People's Bank ofChina prevailing at the dates of the transactions. Gains and losses resulting from foreign currency transactions are included in theStatements of Operations and Comprehensive Loss. Monetary assets and liabilities denominated in foreign currencies are translated intoRMB using the applicable exchange rates quoted by the People's Bank of China at the balance sheet date. Nonmonetary assets andliabilities are remeasured into the applicable functional currencies at historical exchange rates. All such exchange gains and losses areincluded in the Statements of Comprehensive Income.(d)Cash and cash equivalentsCash and cash equivalents consist of cash on hand and in banks.8WUXI WEIFU AUTOCAM PRECISION MACHINERY CO., LTD.December 31, 2018, 2017 and 2016Notes to The Financial Statements2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES - continued(e) Allowance of accounts receivableThe Company regularly review the creditworthiness of our customers, and generally does not require collateral or other security from thecustomers.The carrying value of accounts receivable is reduced by an allowance that reflects our best estimate of the amounts that will not becollected. We make estimations of the collectability of accounts receivable. Many factors are considered in estimating the allowance,including but not limited to reviewing delinquent accounts receivable, performing aging analyses and customer credit analyses, andanalyzing historical bad debt records and current economic trends. Additional allowance for specific doubtful accounts might be made ifour customers are unable to make payments due to their deteriorating financial conditions. The Company has no significant credit riskassociated with accounts receivable.(f)Inventories Inventories are stated at lower of cost or net realizable value. Net realizable value is the estimated selling prices in the ordinary course ofbusiness, less reasonably predictable costs of completion, disposal, and transportation. Raw materials and work-in-process are reviewedto determine if inventory quantities are in excess of forecasted usage, or if they have become obsolete. Write-downs are recorded in costof revenues in the Statements of Comprehensive Income. No inventory write-down was made in the years ended December 31, 2018, 2017and 2016.(g)Fair value measurementsA three-level valuation hierarchy, based upon observable and unobservable inputs, is used for fair value measurements. Observable inputsreflect market data obtained from independent sources, while unobservable inputs reflect market assumptions based on the best evidenceavailable. These three types of inputs create the following fair value hierarchy:•Level 1 - Quoted prices for identical instruments in active markets;•Level 2 - Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets thatare not active; and model-derived valuations whose significant inputs are observable; and•Level 3 - Instruments whose significant inputs are unobservable.Financial instruments are transferred in and/or out of Level 1, 2 or 3 at the beginning of the accounting period in which there is a change inthe valuation inputs.The Company believes the fair value of its financial instruments, principally cash and cash equivalents, accounts receivable, amount duefrom/to related parties, other current assets, short-term borrowings, accounts and notes payable, payroll payable and other currentliabilities, approximate their recorded values due to the short-term nature of the instruments or interest rates, which are comparable withcurrent rates. (h)Property, plant and equipment, net – continuedProperty, plant and equipment are recorded at cost less accumulated depreciation. Major improvements that extend the useful life ofproperty are capitalized. Expenditures for repairs and maintenance are charged to expense as incurred.The Company's depreciation method is summarized in the following table:Category Depreciation method Salvage value rate Estimated useful livesMachinery and equipment Straight-line 10% 10 yearsMotor vehicles Straight-line 10% 10 yearsOffice equipment Straight-line 10% 5 yearsLeasehold improvements Straight-line 10% 5 years9WUXI WEIFU AUTOCAM PRECISION MACHINERY CO., LTD.December 31, 2018, 2017 and 2016Notes to The Financial Statements2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES - continued(h)Property, plant and equipment, net – continuedThe Company reassesses the reasonableness of the estimates of useful lives and residual values of long-lived assets when events orchanges in circumstances indicate that the useful lives and residual values of a major asset or a major category of assets may not bereasonable. Factors that the Company considers in deciding when to perform an analysis of useful lives and residual values of long-livedassets include, but are not limited to, significant variance of a business or product line in relation to expectations, significant deviationfrom industry or economic trends, and significant changes or planned changes in the use of the assets. The analysis will be performed atthe asset or asset category with the reference to the assets’ conditions, current technologies, market, and future plan of usage and theuseful lives of major competitors.(i) Intangible assetsIntangible assets include computer software and are amortized on a straight-line basis over the expected beneficial periods, ranging fromtwo to five years. The estimated lives of intangible assets are reassessed if circumstances occur that indicate the lives have changed.(j)Impairment of long-lived assetsLong-lived assets and intangible assets subject to amortization are reviewed for impairment whenever events or changes incircumstances indicate that the carrying amount of an asset may not be recoverable. When events and circumstances warrant, theCompany evaluates the carrying value of long-lived assets to be held and used in the business. If the carrying value of a long-lived assetgroup is considered impaired, a loss is recognized based on the amount by which the carrying value exceeds the fair value for assets tobe held and used. Fair value is determined primarily using the anticipated cash flows discounted at a rate commensurate with the riskinvolved. Long-lived assets to be disposed of other than by sale are considered held for use until disposition. No impairment chargesrecognized for the years ended December 31, 2018, 2017 and 2016 respectively.(k)Revenue recognitionRevenue generated from the sale of precision automotive components and engine control system. The Company recognizes revenuewhen performance obligations under the terms of a contract are satisfied and the control of products has been transferred. For ourproducts, transfer of control occurs upon shipment or delivery.(l) Cost of revenuesCost of products consists of the purchase price of raw materials, electricity and other utilities, consumables, direct labor, overhead costs,depreciation of property, plant and equipment and inbound shipping charges, as well as inventory write-downs.(m)Research and development costsResearch and development costs are expensed when incurred. Expenditures for research activities relating to product development andimprovement are charged to expense as incurred. Such expenditures amounted to RMB 24,185,973.11, RMB 15,937,928.51 and RMB25,578,659.82 for the years ended December 31, 2018, 2017 and 2016 respectively.(n)Income taxesThe Company uses the asset and liability method in accounting for income taxes. Deferred tax assets and liabilities are recorded fortemporary differences between the tax basis of assets and liabilities and their reported amounts in the financial statements, using thestatutory tax rates in effect for the year in which the differences are expected to reverse. The effect on deferred tax assets and liabilitiesof a change in tax rates is recognized in the results of operations in the period that includes the enactment date under the law. Avaluation allowance is recorded to reduce the carrying amounts of deferred tax assets unless it is more likely than not that such asset willbe realized.10WUXI WEIFU AUTOCAM PRECISION MACHINERY CO., LTD.December 31, 2018, 2017 and 2016Notes to The Financial Statements2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES - continued(n)Income taxes – continuedThe Company recognizes a tax benefit associated with an uncertain tax position when, in management's judgment, it is more likely thannot that the position will be sustained upon examination by a taxing authority. The Company has elected to classify interest and penaltiesrelated to an uncertain tax position, if any and when required, as general and administrative expenses. During the years ended December31, 2018, 2017 and 2016, the Company did not record any interest and penalties associated with uncertain tax positions as there were nouncertain tax positions.(o)Restricted reservesPursuant to laws applicable to entities incorporated in the PRC, the Company must make appropriations from after-tax profit to a surplusreserve fund and enterprise expansion fund. The amount allocated to each of these funds is at the discretion of the Company’s board ofdirectors, who has determined that an annual appropriation of 10% of after-tax profit, after offsetting accumulated losses from prior years,is to be made to surplus reserve fund and 5% to enterprise expansion fund respectively. Moreover, the Company’s board of directors alsohas determined that the Company can cease appropriation when the surplus reserve fund and enterprise expansion fund togetheraccumulated reach 50% of the statutory capital.The reserve fund can only be used for specific purpose of offsetting future losses, enterprise expansion and not distributable as cashdividends. By the end of December 31, 2017, since the accumulated amount of surplus reserve fund and enterprise expansion fundreaches 50% of the statutory capital, there was no further appropriation made for surplus reserve fund and enterprise expansion fund. In2018, USD 6,000,000 was transferred to statutory capital from the retained earning and the registration was finished on August 30, 2018.After the increase in statutory capital, the accumulated amount of surplus reserve fund is below 50% of the statutory capital, so RMB4,603,509.20 is added to reserve fund from undistributed retained earning, which is 15% of the net profit of 2018. The total amount ofreserve fund was RMB 65,523,666.13 and RMB 60,920,156.93 as of December 31, 2018 and 2017. In addition, due to the restrictions onthe distribution of statutory capital from the Company, statutory capital of RMB 148,146,276.97 as of December 31, 2018 is consideredrestricted. As a result of these PRC laws and regulations, as of December 31, 2018, statutory capital, reserve fund and enterpriseexpansion fund, with total amount of RMB 213,669,943.10, are not available for distribution in the form of dividends, loans or advances.According to the board resolution, the registered capital was changed from RMB 107.28 million (USD 15.1 million) to RMB 148.15 million(USD 21.1 million), with an increase of RMB 40.87 million (USD 6 million). The source of funds was the undistributed profits of thecompany.According to the board resolution, the total amount of dividend for the year of 2018 was RMB 40 million (USD 5.8 million). Wuxi Weifu Hi-Technology Co., Ltd. should take dividend of RMB 20.4 million, and Autocam Corporation should take dividend of RMB 19.6 million, basedon per share proportion.(p)Concentration of credit riskFinancial instruments that potentially expose the Company to concentrations of credit risk consist primarily of cash and cash equivalentsand accounts receivable.The Company places cash and cash equivalents with financial institutions with high credit ratings and quality.The Company conducts credit evaluations of customers and generally does not require collateral or other security from the customers.11WUXI WEIFU AUTOCAM PRECISION MACHINERY CO., LTD.December 31, 2018, 2017 and 2016Notes to The Financial Statements2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES - continued(q) Accounting Standards Issued But Not Yet AdoptedIn January 2016, the Financial Accounting Standards Board (“FASB”) issued a new pronouncement Accounting Standards Update (“ASU”)2016-01 which is intended to improve the recognition and measurement of financial instruments. Under this updated standard, entitiesmust measure equity investments at fair value and recognize changes in fair value in net income. For equity investments without readilydeterminable fair values, entities have the option to either measure these investments at fair value or at cost adjust for changes inobservable prices less impairment. The updated guidance does not apply to equity method investments or investments in consolidatedsubsidiaries. The new guidance is effective for non-public companies for fiscal years beginning after December 15, 2018 (early adoptionpermitted). The Company does not expect the adoption of this guidance will have a significant effect on the Company’s financialstatements.In January 2016, the FASB issued a new pronouncement ASU 2016-13 which is intended to improve the accounting for credit losses onfinancial assets within its scope. For assets held at amortized cost basis, Topic 326 eliminates the probable initial recognition threshold incurrent GAAP and, instead, requires an entity to reflect its current estimate of all expected credit losses. The allowance for credit losses isa valuation account that is deducted from the amortized cost basis of the financial assets to present the net amount expected to becollected. For available for sale debt securities, credit losses should be measured in a manner similar to current GAAP, however Topic 326will require that credit losses be presented as an allowance rather than as a write-down. ASU 2016-13 affects entities holding financialassets and net investment in leases that are not accounted for at fair value through net income. The amendments affect loans, debtsecurities, trade receivables, net investments in leases, off balance sheet credit exposures, reinsurance receivables, and any otherfinancial assets not excluded from the scope that have the contractual right to receive cash. The new guidance is effective for non-publiccompanies for fiscal years beginning after December 15, 2018 (early adoption permitted). The Company does not expect that the adoptionof this guidance will have a significant effect on the Company’s financial statements.In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). The guidance supersedes existing guidance on accounting forleases with the main difference being that operating leases are to be recorded in the statement of financial position as right-of-use assetsand lease liabilities, initially measured at the present value of the lease payments. For operating leases with a term of 12 months or less, alessee is permitted to make an accounting policy election not to recognize lease assets and liabilities. For non-public business entities,the guidance is effective for fiscal years beginning after December 15, 2019 (early adoption permitted). In transition, entities are required torecognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach. The Company isin the process of evaluating the impact that this pronouncements on its financial statements.In August, 2016, the FASB issued a new pronouncement ASU 2016-15, which makes eight targeted changes to how cash receipts andcash payments are presented and classified in the statement of cash flows. For non-public companies, the guidance in the ASU iseffective for fiscal years beginning after December 15, 2018 (early adoption permitted). Entities must apply the guidance retrospectively toall periods presented but may apply it prospectively from the earliest date practicable if retrospective application would be impracticable.The Company does not expect the adoption of this guidance will have a significant effect on the Company’s financial statements.In August 2017, the FASB issued ASU No. 2017-12, "Derivatives and Hedging (Topic 815)". It expands and refines hedge accounting forboth nonfinancial and financial risk components and reduces complexity in fair value hedges of interest rate risk. It eliminates therequirement to separately measure and report hedge ineffectiveness and generally requires the entire change in the fair value of a hedginginstrument to be presented in the same income statement line as the hedged item. It also eases certain documentation and assessmentrequirements and modifies the accounting for components excluded from assessment of hedge effectiveness. In addition, the newguidance requires expanded disclosures as it pertains to the effect of hedging on individual income statement lines, including the effects ofcomponents excluded from the assessment of effectiveness. The guidance is effective prospectively for interim and annual periodsbeginning after December 15, 2018. Early adoption is permitted. The Company does not expect the adoption of this guidance will have asignificant effect on the Company’s financial statements.12WUXI WEIFU AUTOCAM PRECISION MACHINERY CO., LTD.December 31, 2018, 2017 and 2016Notes to The Financial Statements2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES - continued(q)Accounting Standards Issued But Not Yet Adopted – continuedIn February 2018, the FASB issued ASU No. 2018-02, "Income Statement - Reporting Comprehensive Income (Topic 220)". It allows areclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cutsand Jobs Act of 2017 ("the Tax Act"). This guidance is effective for interim and annual periods beginning after December 15, 2018, butearly adoption is permitted. The Company does not expect the adoption of this guidance will have a significant effect on the Company’sfinancial statements.In February 2018, the FASB issued ASU No. 2018-07, "Compensation - Stock Compensation (Topic 718)". It expands the scope of theemployee share-based payments guidance, which currently only includes share-based payments issued to employees, to also includeshare-based payments issued to nonemployees for goods and services. This guidance is effective for interim and annual periods beginningafter December 15, 2018. Early adoption is permitted. The Company does not expect the adoption of this guidance will have a significanteffect on the Company’s financial statements.In August 2018, the FASB issued ASU No. 2018-13, "Fair Value Measurement (Topic 820)". It removes disclosure requirements on fairvalue measurements including the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, the policyfor timing of transfers between levels, and the valuation processes for Level 3 fair value measurements. It also amends and clarifiescertain disclosures and adds new disclosure requirements including the changes in unrealized gains and losses for the period included inother comprehensive income for recurring Level 3 fair value measurements, and the range and weighted average of significantunobservable inputs used to develop Level 3 fair value measurements. This guidance is effective for interim and annual periods beginningafter December 15, 2019. An entity is permitted to early adopt any removed or modified disclosures and delay adoption of the additionaldisclosures until the effective date. The Company is in the process of evaluating the impact that this pronouncements on its financialstatements.In August 2018, the FASB issued ASU No. 2018-14, "Compensation - Retirement Benefits - Defined Benefit Plans - General (Subtopic715-20)". The new standard (i) requires the removal of disclosures that are no longer considered cost beneficial; (ii) clarifies specificrequirements of certain disclosures; (iii) adds new disclosure requirements, including the weighted average interest crediting rates for cashbalance plans and other plans with promised interest crediting rates, and reasons for significant gains and losses related to changes in thebenefit obligation. This guidance is effective for annual periods beginning after December 15, 2020 and early adoption is permitted. TheCompany is in the process of evaluating the impact that this pronouncements on its financial statements.In August 2018, the FASB issued ASU No. 2018-15, "Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40)". Itrequires implementation costs incurred by customers in cloud computing arrangements to be deferred and recognized over the term of thearrangement, if those costs would be capitalized by the customer in a software licensing arrangement under the internal-use softwareguidance (Subtopic 350-40). This guidance is effective for interim and annual periods beginning after December 15, 2019. Early adoption ispermitted. The Company is in the process of evaluating the impact that this pronouncements on its financial statements.13WUXI WEIFU AUTOCAM PRECISION MACHINERY CO., LTD.December 31, 2018, 2017 and 2016Notes to The Financial Statements2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES - continued(r)Adoption of New Accounting StandardsThe Company adopted the new accounting standard ASC 606, Revenue from Contracts with Customers and all the related amendments toall contracts using the modified retrospective method effective January 1, 2018. Revenue is recognized when performance obligationsunder the terms of a contract are satisfied, which generally occurs with the transfer of control of our products. For our products, transfer ofcontrol occurs upon shipment or delivery.Revenue is measured at the amount of consideration expected to be received in exchange for transferring the goods.The Company’s payment terms with customers are customary and vary by customer and geography but typically range from 30 to 90days. The terms of the arrangements have been evaluated and it is determined that they do not contain significant financing components.Shipping and handling fees billed to customers are included in sales, while costs of shipping and handling are included in cost of sales.The Company has elected to apply the accounting policy election available under ASC 606 and accounts for shipping and handlingactivities as a fulfillment cost, not a separate obligation.The following ASUs have also been adopted during 2018, none of which had a material impact to our financial statements or financialstatement disclosures:In November 2016, the FASB issued ASU No. 2016-18, “Statement of Cash Flows (Topic 230)”: Restricted Cash (“ASU 2016-18”), whichenhances and clarifies the guidance on the classification and presentation of restricted cash in the statement of cash flows. The newguidance is effective for non-public companies for fiscal years beginning after December 15, 2017, including interim periods within thosefiscal years. The new guidance permits early adoption. The Company adopted this guidance in during 2018 and there was no impact to thefinancial statements.In January 2017, the FASB issued ASU No. 2017-01, "Clarifying the Definition of a Business". It revises the definition of a business andprovides a framework to evaluate when an input and a substantive process are present in an acquisition to be considered a business. Thisguidance is effective for annual periods beginning after December 15, 2017. The Company adopted this guidance in during 2018 and therewas no impact to the financial statements.In March 2017, the FASB issued ASU No. 2017-07, "Improving the Presentation of Net Periodic Pension Cost and Net PeriodicPostretirement Benefit Cost". It requires disaggregating the service cost component from the other components of net benefit cost,provides explicit guidance on how to present the service cost component and the other components of net benefit cost in the incomestatement and allows only the service cost component of net benefit cost to be eligible for capitalization when applicable. This guidance iseffective for interim and annual periods beginning after December 15, 2017. During the first quarter of 2018, the Company retrospectivelyadopted the presentation of service cost separate from the other components of net benefit costs. The Company adopted this guidance induring 2018 and there was no impact to the financial statements.14WUXI WEIFU AUTOCAM PRECISION MACHINERY CO., LTD.December 31, 2018, 2017 and 2016Notes to The Financial Statements4.INVENTORIESThe following table summarizes the components of inventories. December 31, 2018 December 31, 2017 (Unaudited) (Unaudited)Raw materials52,664,690.11 49,721,651.13Work in progress10,294,912.59 12,273,357.09Finished goods10,088,279.28 14,017,957.43Total inventories73,047,881.98 76,012,965.65Management believes that no provision for decline in value of inventories needs to be provided at the year end.5.OTHER CURRENT ASSETSThe following table summarizes the components of other current assets. December 31, 2018 December 31, 2017 (Unaudited) (Unaudited)Advances to suppliers7,888,067.91 11,485,945.40Other receivables33,417.73 15,379.77Deferred tax assets- 428,095.25Total other current assets7,921,485.64 11,929,420.426.PROPERTY, PLANT AND EQUIPMENT, NETThe following table summarizes the components of property, plant and equipment. December 31, 2018 December 31, 2017 (Unaudited) (Unaudited)Machinery and equipment314,918,948.75 224,692,012.98Motor Vehicles1,480,616.61 1,480,616.61Office equipment35,059,006.98 19,955,969.99Leasehold improvements19,175,838.02 5,715,229.71Total370,634,410.36 251,843,829.29 Accumulated depreciation(146,229,178.440) (123,597,494.210)Subtotal224,405,231.92 128,246,335.08 Construction in progress85,467,300.98 88,376,815.03 Total property, plant and equipment, net309,872,532.90 216,623,150.11For the years ended December 31, 2018, 2017 and 2016, depreciation expense was RMB 24,367,018.07, RMB 22,846,049.79, and RMB20,764,534.52 of which about 99.37%, 99.65% and 99.64% were charged to cost of sales and 0.63%, 0.35% and 0.36% to selling, generaland administrative expenses for the years ended December 31, 2018, 2017, and 2016, respectively. Management believes that noimpairment needs to be provided for fixed assets at the year end.15WUXI WEIFU AUTOCAM PRECISION MACHINERY CO., LTD.December 31, 2018, 2017 and 2016Notes to The Financial Statements7.INTANGIBLE ASSETS, NETIntangible assets include computer software, summarized as follows. December 31, 2018 December 31, 2017 (Unaudited) (Unaudited)Computer software1,001,762.38 766,949.99Accumulated amortization(776,733.840) (710,844.050) Computer software, net225,028.54 56,105.94For the years ended December 31, 2018, 2017 and 2016, amortization expense was RMB 65,889.79, RMB 146,844.37 and RMB109,549.00 which was charged to general and administrative expenses for the years ended December 31, 2018 and 2017, and 2016,respectively.Estimated amortization expense for each of next five years is as follows: 2019 2020 2021 2022 2023Estimated amortization expense117,406.20 107,622.34 - - -Management believes that no impairment needs to be provided for intangible assets at the year end.8.SHORT-TERM BORROWINGS December 31, 2018 December 31, 2017 (Unaudited) (Unaudited) Unsecured156,928,213.94 90,000,000.00The credit loan was borrowed from Jiang Su Bank Wuxi Branch, Bank of China Wuxi Branch, Bank of Communications and there is noguarantee on the loan balance.The weighted average interest rates on the short-term bank borrowings were 3.84% and 4.26% for the years ended December 31, 2018and 2017 respectively.16WUXI WEIFU AUTOCAM PRECISION MACHINERY CO., LTD.December 31, 2018, 2017 and 2016Notes to The Financial Statements9.INCOME TAXThe income tax rate is 15% since the entity was regarded as high-tech company.Income tax expense is summarized as follows: For the years ended December 31, 2018 2017 2016 (Unaudited) (Unaudited) Current income tax expense6,927,480.96 13,460,996.83 16,090,812.87Deferred income tax expense428,095.25 (428,095.250) -Total income tax expense7,355,576.21 13,032,901.58 16,090,812.87A reconciliation of the provisions for income taxes with amounts determined by applying the statutory income tax rate to income beforeincome tax is as follows. For the years ended December 31, 2018 2017 2016 (Unaudited) (Unaudited) Statutory income tax rate15% 15% 15%Computed tax at the statutory tax rate5,706,845.63 13,543,327.95 16,052,455.17Effect of expenses that are not deductible indetermining taxable profit723,718.52 398,862.30 109,444.18Additional deduction of research anddevelopment expenses- (383,809.800) -Effect of expenses adjusted for prior year925,012.06 (525,478.870) (71,086.480) Income tax expense7,355,576.21 13,032,901.58 16,090,812.87Effective income tax rate19% 14% 15%17WUXI WEIFU AUTOCAM PRECISION MACHINERY CO., LTD.December 31, 2018, 2017 and 2016Notes to The Financial Statements10.NOTES TO CASH FLOWSThe reconciliation of net income to net cash provided by operating activities for the years ended December 31 was as follows (in RMBthousands): For the years ended December 31, 2018 2017 2016 (Unaudited) (Unaudited) Net income30,690,061.33 77,255,951.44 90,925,554.91 Adjustments to reconcile net income to net cashprovided by operating activities: Depreciation24,367,018.07 22,846,049.79 20,764,534.52 Disposal of property, plant and equipment759,556.23 22,166.06 34,368.23 Amortization of intangible assets65,889.79 146,844.37 109,549.00 Finance expense(41,563.070) 31,205.00 - Changes in operating assets and liabilities: Increase in amounts due from related parties(24,719,787.100) (7,175,206.780) (32,269,803.810) Decrease (increase) in other current assets4,007,934.78 (796,554.130) 567,686.30 Increase in accounts receivable(1,372,288.200) (4,301,269.790) (184,374.620) Decrease (increase) in inventories2,965,083.67 (13,708,175.040) (8,767,790.750) (Decrease) increase in amounts due to related parties(1,153,948.840) 309,654.89 4,430,903.48 (Decrease) increase in accounts payables(3,007,046.550) 4,865,325.03 14,366,956.50 (Decrease) increase in income taxes payable(1,030,309.170) (2,217,463.130) 1,052,257.51 Increase (decrease) in other current liability29,736,483.25 (821,215.030) 2,113,512.82 Increase (decrease) in payroll payable2,490,094.70 870,536.81 (439,874.960) Net cash provided by operating activities63,757,178.89 77,327,849.49 92,703,479.13 Supplemental disclosure of cash flow information: For the years ended December 31, 2018 2017 2016 (Unaudited) (Unaudited) Income taxes paid4,901,046.82 15,386,015.29 15,038,555.36Interest paid6,346,415.99 2,368,294.74 1,052,093.82Supplemental schedule of non-cash investing activities: For the years ended December 31, 2018 2017 2016 (Unaudited) (Unaudited) Payable for purchase of property, plant and equipment4,199,489.14 3,025,632.59 -18WUXI WEIFU AUTOCAM PRECISION MACHINERY CO., LTD.December 31, 2018, 2017 and 2016Notes to The Financial Statements11.RELATED PARTY TRANSACTIONS AND BALANCES(1)The relationship between the Company and related party are as follows:CompanyRelationship with the Company Wuxi Weifu Hi-Technology Co., Ltd.InvestorAutocam CorporationInvestorWeifu Mashan Pump Glib Co., Ltd.Subsidiary of Wuxi Weifu Hi-Technology Co., Ltd.United Automotive Electronic Systems Co., Ltd.Subsidiary of the investor of Wuxi Weifu Hi-Technology Co.,Ltd.Wuxi Weifu International Trade Co., Ltd.Subsidiary of Wuxi Weifu Hi-Technology Co., Ltd.Wuxi Weifu Schmidt Power System Spare Parts Co., Ltd.Subsidiary of Wuxi Weifu Hi-Technology Co., Ltd.Autocam (China) Automotive Components Co., Ltd.Subsidiary of Autocam CorporationWuxi Weifu Automotive Diesel Systems Co., Ltd.Subsidiary of Wuxi Weifu Hi-Technology Co., Ltd.Weifu Environmental Protection Cayalyst Co., Ltd.Subsidiary of Wuxi Weifu Hi-Technology Co., Ltd.Robert Bosch GmbHInvestor of Wuxi Weifu Hi-Technology Co., Ltd.(2)Significant transactions between the Company and related parties in the year:(a)Sales and purchasesSales and purchases between the Company and its related parties were as follows: For the years ended December 31, 2018 2017 2016 (Unaudited) (Unaudited) Sales: United Automotive Electronic Systems Co.,Ltd.406,899,591.79 421,862,669.90 372,986,849.62Wuxi Weifu Schmidt Power System SpareParts Co., Ltd.30,799,526.51 19,068,699.27 6,067,625.35Wuxi Weifu International Trade Co., Ltd.15,739,608.42 16,071,603.32 21,620,109.27Robert Bosch GmbH744,646.83 - -Wuxi Weifu Hi-Technology Co., Ltd.430,425.37 28,129,302.07 15,716,216.48Wuxi Weifu Automotive Diesel Systems Co.,Ltd.- 11,614,510.90 11,230,758.00Weifu Mashan Pump Glib Co., Ltd.- 331,400.38 5,705.49Total454,613,798.92 497,078,185.84 427,627,264.21 For the years ended December 31, 2018 2017 2016 (Unaudited) (Unaudited) Purchase: Wuxi Weifu International Trade Co., Ltd.20,524,515.19 39,868,723.30 41,288,742.59Wuxi Weifu Hi-Technology Co., Ltd.3,182,412.76 - 4,782,300.69Autocam Corporation1,824,323.66 1,787,550.11 964,532.27Wuxi Weifu Schmidt Power System SpareParts Co., Ltd.- 4,073,483.83 1,885,394.40Total25,531,251.61 45,729,757.24 48,920,969.9519WUXI WEIFU AUTOCAM PRECISION MACHINERY CO., LTD.December 31, 2018, 2017 and 2016Notes to The Financial Statements10. RELATED PARTY TRANSACTIONS AND BALANCES – continued(2)Significant transactions between the Company and related parties in the year-continued:(b)OthersDetails of sale of machinery to the related party were as follows: For the years ended December 31, 2018 2017 2016 (Unaudited) (Unaudited) Wuxi Weifu Hi-Technology Co., Ltd.- 12,483,952.29 -Details of purchase of machinery and software from the related party were as follows: For the years ended December 31, 2018 2017 2016 (Unaudited) (Unaudited) Wuxi Weifu Hi-Technology Co., Ltd.727,010.17 - -Autocam Corporation- 39,066.48 183,360.37 727,010.17 39,066.48 183,360.37Details of general expenses paid on behalf of related parties were as follows: For the years ended December 31, 2018 2017 2016 (Unaudited) (Unaudited) United Automotive Electronic Systems Co., Ltd. Systems Co., Ltd.12,285,081.81 - 606,256.00Autocam (China) Automotive Components Co.,Ltd.- 4,629,705.78 8,490,391.51Wuxi Weifu Schmidt Power System SpareParts Co., Ltd.- 2,998,263.07 2,564,239.25Total12,285,081.81 7,627,968.85 11,660,886.76Details of general expenses charged by related parties were as follows: For the years ended December 31, 2018 2017 2016 (Unaudited) (Unaudited) Wuxi Weifu Hi-Technology Co., Ltd.9,683,700.75 6,357,752.52 2,140,034.40Autocam Corporation1,235,376.00 1,212,408.00 900,325.37Autocam (China) Automotive Components Co.,Ltd.- - 97,747.99Total10,919,076.75 7,570,160.52 3,138,107.7620WUXI WEIFU AUTOCAM PRECISION MACHINERY CO., LTD.December 31, 2018, 2017 and 2016Notes to The Financial Statements10. RELATED PARTY TRANSACTIONS AND BALANCES - continued(2)Significant transactions between the Company and related parties in the year-continued:(c)Balances due from/to related partiesAccountsName of the related partiesDecember 31, 2018 December 31, 2017 (Unaudited) (Unaudited)Amount due from related parties -Accounts receivables Wuxi Weifu Schmidt Power System SpareParts Co., Ltd.39,895,631.85 21,250,032.21 United Automotive Electronic Systems Co.,Ltd.38,779,317.93 50,458,811.71 Wuxi Weifu International Trade Co., Ltd.3,309,978.38 2,875,539.92 Robert Bosch GmbH105,660.07 - Wuxi Weifu Hi-Technology Co., Ltd.91,063.70 3,601,362.29 Autocam (China) Automotive ComponentsCo., Ltd.- - Wuxi Weifu Automotive Diesel SystemsCo., Ltd.- - Total82,181,651.93 78,185,746.13 -Other receivables United Automotive Electronic Systems Co.,Ltd.12,285,081.81 - Autocam (China) Automotive ComponentsCo., Ltd267,487.15 298,443.30 Wuxi Weifu Schmidt Power System SpareParts Co., Ltd.- 2,998,263.07 Total12,552,568.96 3,296,706.37 -Note receivables United Automotive Electronic Systems Co.,Ltd.49,654,087.50 37,037,457.36 Wuxi Weifu Schmidt Power System SpareParts Co., Ltd.330,000.00 3,875,250.48 Total49,984,087.50 40,912,707.84 -Advances to suppliers Autocam Corporation2,396,639.05 - Total 147,114,947.44 122,395,160.3421WUXI WEIFU AUTOCAM PRECISION MACHINERY CO., LTD.December 31, 2018, 2017 and 2016Notes to The Financial Statements10. RELATED PARTY TRANSACTIONS AND BALANCES - continued(2)Significant transactions between the Company and related parties in the year - continued:(c)Balances due from/to related parties – continuedAccountsName of the related partiesDecember 31, 2018 December 31, 2017 (Unaudited) (Unaudited)Amount due to related parties -Trade payable Wuxi Weifu International Trade Co., Ltd2,855,590.77 1,675,370.87 Wuxi Weifu Hi-Technology Co., Ltd.668,925.10 28,700.00 Autocam Corporation74,599.78 142,370.42 Total3,599,115.65 1,846,441.29 -Other payables Wuxi Weifu Hi-Technology Co., Ltd.- 2,853,968.47 Total- 2,853,968.47 -Payroll payable (i) Autocam Corporation132,149.34 184,804.07 Total 3,731,264.99 4,885,213.83(i)Salaries of general manager were paid by Autocam Corporation in advance, which would be paid back to Autocam Corporationby the Company.22WUXI WEIFU AUTOCAM PRECISION MACHINERY CO., LTD.December 31, 2018, 2017 and 2016Notes to The Financial Statements12.COMMITMENTS AND CONTINGENCIESa) Operating lease commitmentsThe Company has entered into leasing arrangements relating to office premises that are classified as operating leases. Future minimumlease payments for non-cancellable operating leases as of December 31, 2018 are as follows:Year ending December 31, 2018 20195,931,774.0720205,931,774.07And after years88,821,685.96Total minimum lease payments100,685,234.10Rental expense amounted to RMB 6,528,344.13 and RMB 6,932,030.29 and RMB 3,590,854.51 for the years ended December 31, 2018,2017 and 2016. Rental expense is charged to the Statement of Comprehensive Income when incurred.b) Capital commitmentsThe capital commitment for 2018 was RMB 48,880.045.78 (2017: RMB 41,845.991.86).c) ContingenciesThe Company is not currently a party to any pending material litigation or other legal proceeding or claims.12. SUBSEQUENT EVENTSIn connection with the presentation of these financial statements, an evaluation of subsequent events was performed through March 15,2019.* * * * *23

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