NN INC - Quarter Report: 2012 September (Form 10-Q)

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

For the quarterly period ended September 30, 2012

OR

For the transition period from              to             

Commission File Number 0-23486

NN, Inc.

(Exact name of registrant as specified in its charter)

2000 Waters Edge Drive

Building C, Suite 12

Johnson City, Tennessee 37604

(Address of principal executive offices, including zip code)

(423) 743-9151

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

As of November 2, 2012, there were 17,044,132 shares of the registrant’s common stock, par value $0.01 per share, outstanding.

Table of Contents

NN, Inc.

INDEX

1

Table of Contents

PART I. FINANCIAL INFORMATION

NN, Inc.

Condensed Consolidated Statements of Comprehensive Income (Loss)

(Unaudited)

The accompanying notes are an integral part of the condensed consolidated financial statements.

2

Table of Contents

NN, Inc.

Condensed Consolidated Balance Sheets

(Unaudited)

The accompanying notes are an integral part of the condensed consolidated financial statements.

3

Table of Contents

NN, Inc.

Condensed Consolidated Statement of Changes in Stockholders’ Equity

(Unaudited)

The accompanying notes are an integral part of the condensed consolidated financial statements.

4

Table of Contents

NN, Inc.

Condensed Consolidated Statements of Cash Flows

(Unaudited)

The accompanying notes are an integral part of the condensed consolidated financial statements.

5

Table of Contents

NN, Inc.

Notes To Condensed Consolidated Financial Statements

(In Thousands, Except Per Share Data)

(unaudited)

The accompanying condensed consolidated financial statements of NN, Inc. have not been audited, except that the balance sheet at December 31, 2011 was derived from our audited consolidated financial statements. In our opinion, the financial statements reflect all adjustments necessary to fairly state the results of operations for the three and nine month periods ended September 30, 2012 and 2011, our financial position at September 30, 2012 and December 31, 2011, and the cash flows for the nine month periods ended September 30, 2012 and 2011. These adjustments are of a normal recurring nature and are, in the opinion of management, necessary for fair statement of the financial position and operating results for the interim periods. As used in this Quarterly Report on Form 10-Q, the terms “NN”, “the Company”, “we”, “our”, or “us” mean NN, Inc. and its subsidiaries.

Certain information and footnote disclosures normally included in the consolidated financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted from the interim financial statements presented in this Quarterly Report on Form 10-Q. These unaudited, condensed and consolidated financial statements should be read in conjunction with our audited consolidated financial statements and the notes thereto included in our most recent Annual Report on Form 10-K for the year ended December 31, 2011 which we filed with the Securities and Exchange Commission on March 15, 2012. The results for the three and nine month periods ended September 30, 2012 are not necessarily indicative of results for the year ending December 31, 2012 or any other future periods.

Due to the impacts of the global economic recession and the resulting reduction in revenue and increased operating losses, our wholly owned German subsidiary, Kugelfertigung Eltmann GbmH (“Eltmann” or “Eltmann Plant”), sustained a significant weakening of its financial condition. As a result, it became insolvent at which point it was required to file for bankruptcy under German bankruptcy law. The filing was made in the bankruptcy court in Germany on January 20, 2011. As of that date, NN lost the ability to control or manage Eltmann as a result of the bankruptcy court trustee taking over effective control and day to day management of this subsidiary. As a result of loss of control of this subsidiary, NN deconsolidated the assets and liabilities of Eltmann from our Consolidated Financial Statements effective January 20, 2011.

We were informed in early April 2011, that the bankruptcy trustee had sold the majority of the production assets of Eltmann to a non-affiliated manufacturing company. It is our understanding the remaining assets and liabilities of Eltmann will be liquidated sometime in the future by the bankruptcy court. NN does not expect any further significant impact on our consolidated financial statements as a result of the liquidation of this subsidiary.

The following table summarizes the effects of the deconsolidation of Eltmann originally reported in the first quarter of 2011:

6

Table of Contents

NN, Inc.

Notes To Condensed Consolidated Financial Statements

(In Thousands, Except Per Share Data)

(unaudited)

The amounts above are reflected in the comparative 2011 financial statements. During the fourth quarter of 2011, we determined it was more likely than not we would potentially owe an additional $209 in payables related to the Eltmann bankruptcy. As such, we accrued for these potential payables during the fourth quarter of 2011 and as a result have now realized a zero gain on deconsolidation.

Certain property, plant and equipment of the Tempe Plant was sold on August 31, 2010, the day the Tempe Plant ceased operations, to a newly formed company not affiliated with NN in exchange for a promissory note. This note had an original face value of $2,500, a 60 month term, a 7% interest rate, interest only payments for 24 months, principal and interest payments totaling $40 per month for the next 36 months followed by a balloon payment of $1,525. On March 31, 2012, we accepted a $1,945 cash payment to settle the note and relieved the debtor of all future liability for the note. The estimated fair value and carrying value of note prior to the payment was $1,772.

Inventories are stated at the lower of cost or market. Cost is determined using the first-in, first-out method.

Inventories are comprised of the following:

Inventories on consignment at customer locations as of September 30, 2012 and December 31, 2011 totaled $3,024 and $4,156, respectively.

The inventory valuations above were developed using normalized production capacities for each of our manufacturing locations. Any costs from abnormal excess capacity or under-utilization of fixed production overheads are expensed in the period incurred and are not included as a component of inventory valuation.

Excluded from the dilutive shares outstanding for the three and nine month periods ended September 30, 2012 were 1,201 anti-dilutive options which had exercise prices ranging from $8.86 to $14.13. There were 929 and 210 anti-dilutive options with an exercise price of $9.36 to $14.13 and $12.99 to $14.13, respectively, excluded from the dilutive shares outstanding for the three and nine month period ended September 30, 2011.

The segment information and the accounting policies of each segment are the same as those described in the notes to the consolidated financial statements entitled “Segment Information” and “Summary of Significant Accounting Policies and Practices,” respectively, included in our annual report on Form 10-K for the fiscal year ended December 31, 2011. We evaluate segment performance based on segment net income or loss. We account for inter-segment sales and transfers at current market prices. We did not have any significant inter-segment transactions during the three and nine month periods ended September 30, 2012 and 2011.

7

Table of Contents

NN, Inc.

Notes To Condensed Consolidated Financial Statements

(In Thousands, Except Per Share Data)

(unaudited)

Effective January 20, 2011, the defined benefit pension plan covering the employees at our Eltmann Plant came under the control of the bankruptcy trustee and has been or will be taken over by the German government’s pension security fund. The plan is no longer a responsibility of NN, resulting in a reduction of Accrued pension liabilities of $5,623 on January 20, 2011. We have no remaining pension obligations. (See Note 1 of the Notes to Condensed Consolidated Financial Statements).

8

Table of Contents

NN, Inc.

Notes To Condensed Consolidated Financial Statements

(In Thousands, Except Per Share Data)

(unaudited)

Severance Indemnity

In accordance with Italian law, we have an unfunded severance plan covering our Pinerolo Plant employees under which all employees at that location are entitled to receive severance indemnities upon termination of their employment. The table below summarizes the changes to the severance indemnity, included in Other non-current liabilities, for the three and nine month periods ended September 30, 2012 and 2011:

Service and Early Retirement Provisions

We have certain plans that cover our Veenendaal Plant employees. A plan provides an award for employees who achieve 25 or 40 years of service and another plan is an award for employees upon retirement. These plans are both unfunded and the benefits are based on years of service and rate of compensation at the time the award is paid. The table below summarizes the combined changes in the plans, included in Other non-current liabilities, during the three month and nine month periods ended September 30, 2012 and 2011:

In June 2011, the FASB issued amended accounting guidance related to presentation of comprehensive income. The standards update is intended to help financial statement users better understand the causes of an entity’s change in financial position and results of operation. It is effective for reporting periods beginning after December 15, 2011. We adopted this guidance during the first quarter of 2012. Since this new guidance affected disclosure requirements only, it did not have a material impact on our financial position or results of operations.

In July 2012, the FASB issued amended accounting guidance allowing companies to first assess qualitative factors to determine whether it is more-likely-than-not an indefinite-lived intangible asset is impaired. If the conclusion is more-likely-than-not the indefinite-lived intangible asset is not impaired, then further action is not required. However, if the conclusion is otherwise, a quantitative impairment test described in ASC

9

Table of Contents

NN, Inc.

Notes To Condensed Consolidated Financial Statements

(In Thousands, Except Per Share Data)

(unaudited)

Topic 350 is required. This guidance is effective for fiscal years beginning after September 15, 2012 with early adoption permitted. We plan to adopt this standard for the year ending December 31, 2012. We anticipate the adoption of this guidance will not have a material impact on our Consolidated Financial Statements.

Long-term debt and short-term debt at September 30, 2012 and December 31, 2011 consisted of the following:

On October 26, 2012, we amended our $100,000 revolving credit facility agented by KeyBank and our fixed rate notes with Prudential Capital in order to take advantage of lower interest rates, to extend the maturity of the revolving credit facility to October 26, 2017, and to remove certain restrictions on acquisitions, payments of dividends and stock repurchases. The amended interest rates on our revolving credit facility will be LIBOR plus an applicable margin of 1.25% to 2.25% (depending on the level of debt to earnings before taxes, interest and depreciation (“EBITDA”)). Prior to the October 26, 2012 amendment, the $100 million revolving credit facility interest rate was LIBOR plus a margin of 2.50% to 3.50% (depending on the level of debt to EBITDA). The interest rate on our $40,000 aggregate fixed rate notes, of which $11,429 was outstanding as of September 30, 2012, will be reduced from 5.39% to 4.89%. The amended agreements allow us to undertake acquisitions, pay dividends, and repurchase stock provided we are in compliance with specified covenants. Additionally, the minimum fixed charge coverage ratio will remain at “not to be less than 1.00 to 1.00 as of the last day of any fiscal quarter” for the full terms of the amended agreements.

On December 20, 2011, we borrowed an additional $20,000 in seven-year fixed rate notes from Prudential Capital at a rate of 4.64%. These notes, which mature on December 20, 2018, are interest-only for the first two years followed by five equal annual principal payments. The proceeds were used to repay existing revolving credit bank debt and to fund growth capital projects.

10

Table of Contents

NN, Inc.

Notes To Condensed Consolidated Financial Statements

(In Thousands, Except Per Share Data)

(unaudited)

On September 30, 2011, we amended our $100,000 revolving credit facility agented by KeyBank and our long-term loan agreement with Prudential Capital in order to adjust the fixed charge coverage ratio covenant to better correlate current and expected levels of capital spending and other fixed charges with EBITDA. For the quarters ending September 30, 2011 through September 30, 2012, the minimum fixed charge coverage ratio was reduced from “not less than 1.25 to 1.00” to “not to be less than 1.00 to 1.00 as of the last day of any fiscal quarter”. This credit agreement was further amended on October 26, 2012, as discussed above.

The $100,000 revolving credit facility may be expanded upon our request with approval of the lenders by up to $35 million, under the same terms and conditions. The loan agreement contains customary restrictions on, among other things, additional indebtedness, liens on our assets, sales or transfers of assets, investments, issuance of equity securities, and merger, acquisition and other fundamental changes in our business including a “material adverse change” clause, which if triggered would accelerate the maturity of the debt. The facility has a $10 million swing line feature to meet short term cash flow needs. Any borrowings under this swing line are considered short term. Costs associated with entering into the revolving credit facility were capitalized and will be amortized into interest expense over the life of the facility. As of September 30, 2012, $1,308 of net capitalized loan origination costs related to the revolving credit facility were recorded on the balance sheet within other non-current assets.

Our original $40,000 fixed rate notes agreement with Prudential Capital had an interest rate of 5.39% for the nine month period ended September 30, 2012. On December 20, 2011, the interest rate was reduced from 6.50% to 5.39% and then further reduced to 4.89% with the October 26, 2012, amendment. The $40,000 and $20,000 fixed rate agreements contain customary restrictions on, among other things, additional indebtedness, liens on our assets, sales or transfers of assets, investments, issuance of equity securities, and mergers, acquisitions and other fundamental changes in our business including a “material adverse change” clause, which if triggered would accelerate the maturity of the debt. We incurred costs as a result of issuing these notes which have been recorded on the balance sheet within other non-current assets and are being amortized over the term of the notes. The unamortized balance at September 30, 2012 was $181.

The changes in the carrying amount of goodwill, net for the nine month period ended September 30, 2012 are as follows:

The goodwill balance is tested for impairment on an annual basis during the fourth quarter and between annual tests if a triggering event occurs. As of September 30, 2012, there are no indications of impairment at the remaining reporting unit with a goodwill balance.

The Precision Metal Components Segment has an indefinite lived intangible asset not subject to amortization of $900 related to the value of the trade names of Whirlaway. The intangible asset balance is tested for impairment on an annual basis during the fourth quarter and between annual tests if a triggering event occurs. There are no indicators of impairment for this indefinite lived intangible asset as of September 30, 2012.

11

Table of Contents

NN, Inc.

Notes To Condensed Consolidated Financial Statements

(In Thousands, Except Per Share Data)

(unaudited)

During the three and nine month periods ended September 30, 2012 and 2011, approximately $510 and $1,394 in 2012 and $353 and $469 in 2011, respectively, of compensation expense was recognized in selling, general and administrative expense for all share-based awards. During the nine month periods ended September 30, 2012 and 2011, there were 78 share awards and 285 option awards and 75 share awards and 216 option awards, respectively, granted to non-executive directors, officers and certain other key employees.

The restricted shares granted during the nine month periods ended September 30, 2012 and 2011, vest pro-rata over three years. During the nine month periods ended September 30, 2012 and 2011, we incurred $608 and $199, respectively, in expense related to restricted stock. The fair value of the shares issued was determined by using the grant date closing price of our common stock.

We incurred $786 and $270 of stock option expense in the nine month periods ended September 30, 2012 and 2011, respectively. The fair value of our options cannot be determined by market value, as our options are not traded in an open market. Accordingly, the Black Scholes financial pricing model is utilized to estimate the fair value.

The following table provides a reconciliation of option activity for the nine month period ended September 30, 2012:

As of September 30, 2012, we continued to place a valuation allowance on all of the net deferred tax assets at our U.S. locations, the balance of which approximated $9,800 at September 30, 2012. The ongoing necessity of this valuation allowance is based on the negative financial performance of our U.S. operations during the global economic recession of 2008 and 2009 and the negative financial performance during 2010 from losses incurred at the Precision Metal Components Segment. During the nine months ended September 30, 2012, the valuation allowance on a portion of these deferred tax assets was reversed to offset tax expense, as our U.S. based units had an approximate combined pre-tax income of $7,200. While our U.S. entities have generated approximate pre-tax incomes of $7,200 and $1,650 during the nine months ended September 30, 2012 and the year ended December 31, 2011, respectively, the substantial cumulative losses in 2009 and 2010 continue to outweigh the positive evidence of the year to date 2012 and 2011 taxable income. If the profitability of the U.S. entities continues, it is likely that a significant portion of the valuation allowance (except for the majority of the valuation allowance on the foreign tax credits of approximately $3,250) will be reversed. This will result in a material benefit to income tax expense and a resulting benefit to net income in the period in which the valuation allowances are reversed.

For the nine month period ended September 30, 2012, the difference between the U.S. federal statutory tax rate of 34% and our effective tax rate of 19% was primarily due to utilization of the fully reserved net operating losses to offset U.S. based taxable income, which lowered tax expense by $2,692. Additionally, the tax rate was impacted by non-U.S. based earnings being taxed at lower rates, which reduced tax expense by $777.

12

Table of Contents

NN, Inc.

Notes To Condensed Consolidated Financial Statements

(In Thousands, Except Per Share Data)

(unaudited)

We do not foresee any significant changes to our unrecognized tax benefits within the next twelve months.

As described more fully in our Form 10-K for 2011, we continue to monitor the remediation efforts at a former waste recycling vendor used by our former Walterboro, South Carolina facility. The costs associated with the remediation, which has been tentatively approved by the EPA, are estimated to be approximately $10,000. Our allocated share is approximately $132 which has been paid in full as of September 30, 2012. While there can be no assurances, we believe that $132 is the maximum amount for which we will be liable under the tentatively accepted remediation plan.

As discussed more fully in Note 1 of the Notes to Condensed Consolidated Financial Statements, the ultimate impact on NN of Eltmann filing for bankruptcy will depend on the findings of the bankruptcy court. However, until such court proceedings are finalized, we will not be able to determine what liabilities and contingent obligations, if any, might remain as the responsibility of NN. Under advice from legal counsel, NN does not expect any further significant impacts on our consolidated financial statements as a result of the liquidation of this subsidiary.

All other legal matters are of an ordinary and routine nature and are incidental to our operations. Management believes that such proceedings should not, individually or in the aggregate, have a material adverse effect on our business or financial condition or on the results of operations.

The fair values of our fixed rate long-term borrowings are calculated by using a discounted cash flow analysis factoring in current market borrowing rates for similar types of borrowing arrangements under our credit profile. The current market borrowing rates are Level 2 inputs under the U.S. GAAP fair value hierarchy. The carrying amounts and fair values of our long-term debt are in the table below:

13

Table of Contents

Forward-Looking Statements

We wish to caution readers that this report contains, and our future filings, press releases and oral statements made by our authorized representatives may contain, forward-looking statements that involve certain risks and uncertainties. Readers can identify these forward-looking statements by the use of such verbs as expects, anticipates, believes or similar verbs or conjugations of such verbs. Our actual results could differ materially from those expressed in such forward-looking statements due to important factors bearing on our business, many of which already have been discussed in this filing and in our prior filings. The differences could be caused by a number of factors or combination of factors including the risk factors discussed in “Item 1A Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2011 which we filed with the Securities and Exchange Commission on March 15, 2012.

Results of Operations

Three Months Ended September 30, 2012 Compared to the Three Months Ended September 30, 2011.

OVERALL RESULTS

Net Sales. Net sales decreased during the third quarter of 2012 from the third quarter of 2011 due to lower sales volumes experienced primarily at the European and Asian units of our Metal Bearing Components Segment. The reductions in sales volumes were due to macro-economic issues within the European Union, slowing Asian macro-economic growth, and overall lower automotive demand in Europe. Additionally, we believe demand for our products was affected by our customers and their customers adjusting inventory levels, as our sales volume reduction was much greater than the reduction in actual end market demand within the markets we serve. Finally, sales were reduced as the strengthening of the US Dollar caused a lower translated value of Euro denominated sales. The favorable mix occurred as a portion of the reduction in sales volumes experienced were in lower priced products.

14

Table of Contents

Cost of Products Sold (exclusive of depreciation and amortization shown separately below). A large portion of the decrease was from the lower sales volumes and the related reductions in production costs at those units of the Metal Bearing Components Segment that experienced lower sales volumes, as discussed above. Additionally, the third quarter 2012 cost of products sold was lower in comparison to 2011, as the $1.0 million in start-up costs incurred during the third quarter of 2011 for new multi-year sales programs at our Precision Metal Components Segment did not repeat during 2012. The third quarter 2012 cost of products sold was further reduced by benefits from specific Level 3 continuous improvement projects undertaken during 2012. The Level 3 continuous improvement activities have been at historically high levels during 2012. Finally, cost of products sold was reduced as the strengthening of the US Dollar caused a lower translated value of Euro denominated costs.

Selling, General and Administrative. The increase in spending in selling, general and administrative expenses was primarily due to higher incentive based compensation costs and higher seasonal sales commissions.

Depreciation and Amortization. The increase was due to the carryover effects of depreciation expense generated by 2011 capital expenditures placed in service after the third quarter of 2011 and by 2012 capital expenditures placed in service.

Other expense (income), net. Included in other expense (income), net, during the three months ended September 30, 2012, was $0.7 million related to foreign exchange losses on inter-company loans. During the three months ended September 30, 2011, inter-company loans generated foreign exchange gains of $1.4 million. The gains and losses are a function of the appreciation or depreciation of the Euro versus the U.S. Dollar.

RESULTS BY SEGMENT

METAL BEARING COMPONENTS SEGMENT