NN INC - Quarter Report: 2015 September (Form 10-Q)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

For the quarterly period ended September 30, 2015

OR

For the transition period from                      to                     

Commission File Number 0-23486

NN, Inc.

(Exact name of registrant as specified in its charter)

207 Mockingbird Lane

Johnson City, Tennessee 37604

(Address of principal executive offices, including zip code)

(423) 434-8310

(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 3, 2015, there were 26,838,339 shares of the registrant’s common stock, par value $0.01 per share, outstanding.

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NN, Inc.

INDEX

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PART I. FINANCIAL INFORMATION

NN, Inc.

Condensed Consolidated Statements of Income (Loss) and Comprehensive Loss

(Unaudited)

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

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NN, Inc.

Condensed Consolidated Balance Sheets

(Unaudited)

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

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NN, Inc.

Condensed Consolidated Statement of Changes in Stockholders’ Equity

(Unaudited)

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

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NN, Inc.

Condensed Consolidated Statements of Cash Flows

(Unaudited)

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

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NN, Inc.

Notes to Condensed Consolidated Financial Statements

September 30, 2015 and 2014

(In thousands, except per share data)

Note 1. Interim Financial Statements

The accompanying condensed consolidated financial statements of NN, Inc. have not been audited, except that the condensed consolidated balance sheet at December 31, 2014 was derived from our audited consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2014, which was filed with the U.S. Securities and Exchange Commission, or SEC, on March 16, 2015. In our opinion, these financial statements reflect all adjustments necessary to fairly state the results of operations for the three and nine month periods ended September 30, 2015 and 2014, our financial position at September 30, 2015 and December 31, 2014, and the cash flows for the nine month periods ended September 30, 2015 and 2014 on a basis consistent with our audited financial statements. 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, 2014, which we filed with the SEC on March 16, 2015. The results for the three and nine month periods ended September 30, 2015 are not necessarily indicative of results for the year ending December 31, 2015 or any other future periods.

Note 2. Acquisitions

2015 Acquisition

On May 29, 2015, NN completed the acquisition of Caprock Manufacturing, Inc. and Caprock Enclosures, LLC (collectively referred to as “Caprock”) for approximately $9,000 in cash. Caprock was a privately held plastic components supplier located in Lubbock, TX. Caprock serves multiple end markets including aerospace, medical and general industrial. The acquisition provides further balancing of our end markets and represents the first step in our focused plan toward transforming our plastics business. The results of Caprock have been consolidated with NN since the date of acquisition as part of the Plastic and Rubber Components Segment. We are in the process of finalizing fair market valuations of all the net assets acquired. The preliminary purchase price allocation includes $1,452 in net working capital, $2,960 in property plant and equipment, $2,490 in intangible assets, and $2,099 in goodwill, which we expect to be fully deductible for tax purposes. The goodwill is attributable to expected cost synergies and revenue growth plus the assembled work force.

For information regarding NN’s acquisition of Precision Engineered Products Holdings, Inc. (“PEP”), which was completed on October 19, 2015, please see Note 15 of the Notes to Consolidated Financial Statements.

2014 Acquisitions

Autocam

On August 29, 2014, we completed our merger with Autocam Corporation (“Autocam”), for $256,837 in cash and $31,717 in NN stock. Additionally, we assumed $29,160 in Autocam debt and capital lease obligations. Autocam is a global leader in the engineering, manufacture and assembly of highly complex, system critical components for fuel systems, engines and transmission, power steering and electric motors. With the completion of the Autocam merger, NN became one of the top global manufacturers in the precision metal components space. Additionally, this acquisition leverages NN’s and Autocam’s complementary core strengths and values and positions our Precision Metal Components business segment to outgrow its end markets by taking advantage of global market trends in fuel efficient technologies such as gasoline direct injection systems, high-pressure diesel injection systems and variable valve timing. The funding of the cash portion of the purchase price and acquisition costs was provided primarily from borrowings, including a $350,000 term loan entered into concurrent with the acquisition of Autocam.

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NN, Inc.

Notes to Condensed Consolidated Financial Statements

September 30, 2015 and 2014

(In thousands, except per share data)

The following table summarizes the preliminary purchase price allocation for the Autocam merger at September 30, 2014, which was subsequently adjusted on our Annual Report on Form 10-K filed March 16, 2015:

The combination of income, market, and cost approaches were used for the preliminary valuation where appropriate, depending on the asset or liability being valued. Valuation inputs in these models and analyses gave consideration to market participant assumptions. Acquired intangible assets were primarily customer relationships and trade names. The final purchase price allocation was completed during our year end closing process and updated on our 2014 Annual Report on Form 10-K filed on March 16, 2015.

In connection with the acquisition of Autocam, we recorded goodwill, which represented the excess of the purchase price over the estimated preliminary fair value of tangible and intangible assets acquired, net of liabilities assumed. The goodwill was attributed primarily to Autocam as a going concern and the fair value of expected cost synergies and revenues growth from combining the NN and Autocam businesses. The going concern element represents the ability to earn a higher return on the combined assembled collection of assets and businesses of Autocam than if those assets and businesses were to be acquired and managed separately. Other relevant elements of goodwill are the benefits of access to certain markets and the assembled work force. None of the goodwill is expected to be deducted for tax purposes.

Property, plant and equipment acquired primarily included machinery and equipment for use in manufacturing operations. Additionally, a number of manufacturing sites and related facilities, land and leased manufacturing sites that include leasehold improvements were acquired. Property, plant and equipment has been preliminarily valued using the cost approach supported where available by observable market data which includes consideration of obsolescence. Intangible assets have been preliminarily valued using the relief from royalty and multi-period excess earnings methods, both forms of the income approach supported by observable market data.

Related to the acquisition of Autocam, in the third quarter and first nine months of 2014, we recognized $5,316 and $5,857, respectively, in transaction costs. During the third quarter and the first nine months of 2014, we expensed $2,974 of deferred financing costs and make whole interest payments related to the acquisition. Transaction costs were expensed as incurred and were included in the “Acquisition related costs excluded from selling, general and administrative expenses” line item and deferred financing costs were included in the interest expense line items in the Unaudited Condensed Consolidated Statements of Income (Loss) and Comprehensive Loss. As required by purchase accounting, the acquired inventories were recorded at their preliminary estimated fair value. These inventories were sold in the third quarter 2014 resulting in a one-time $1,992 increase in cost of sales. Beginning September 1, 2014, the consolidated results of operations of NN include the results of the acquired Autocam businesses.

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NN, Inc.

Notes to Condensed Consolidated Financial Statements

September 30, 2015 and 2014

(In thousands, except per share data)

The unaudited pro forma financial results for three months ended September 30, 2014 and September 30, 2013 and nine months ended September 30, 2014 and September 30, 2013 combine the consolidated results of NN and Autocam giving effect to the acquisition of Autocam as if it had been completed on January 1, 2013, the beginning of the comparable prior annual reporting period presented. The unaudited pro forma financial results presented below do not include any anticipated synergies or other expected benefits of the acquisition. This unaudited pro forma financial information is presented for informational purposes only and is not indicative of future operations or results had the acquisition been completed as of January 1, 2013.

The unaudited pro forma financial results include certain adjustments for additional depreciation and amortization expense based upon the preliminary fair value step-up and estimated useful lives of Autocam depreciable fixed assets and definite-life amortizable assets acquired in the transaction. The unaudited pro forma results also include adjustments to net interest expense and early debt extinguishment costs related to the transaction. The provision for income taxes has also been adjusted for all periods, based upon the foregoing adjustments to historical results.

The pro forma net income for the nine months ended September 30, 2013 includes certain items, such as financing, integration, and transaction costs historically recorded by NN and Autocam directly attributable to the acquisition, which will not have an ongoing impact. These items include transaction, integration, and financing related costs incurred by NN and Autocam of $8,509 and $8,933, net of tax, and $3,010 and $3,125, net of tax, respectively during third quarter and first nine months of 2014, respectively, and reported in the nine months ended September 30, 2013 pro forma net income above.

Other Acquisitions

On July 15, 2014, we acquired substantially all of the assets of Chelsea Grinding Company (“Chelsea”), a manufacturer of cylindrical rollers used primarily in the hydraulic pump industry and relocated the operations to our Erwin, Tennessee plant and integrated into our Metal Bearing Component Segment.

On June 20, 2014, we acquired 79.2% of the outstanding shares of RFK Valjcici d. d. Konjic (“RFK”) for $9,756 in cash. RFK is a manufacturer of tapered rollers with operations in Konjic, Bosnia & Herzegovina. NN acquired up to 99.7% of the shares of RFK during the third quarter of 2014 for an additional $2,528 in cash and reclassified this amount from non-controlling interest. RFK’s products, while complementary to NN’s existing roller bearing components, broadened our product offering and allowed penetration into adjacent markets. The results of the operations of RFK have been consolidated with NN since the date of acquisition as a part of the Metal Bearing Components Segment.

On January 30, 2014, we purchased the majority of the operating assets of V-S Industries, V-S Precision, LLC and V-S Precision SA de DV (collectively referred to as “VS”) from the secured creditors of V-S Industries for $5,580 in cash and assumed certain liabilities totaling $2,968. This was accounted for as a business combination. VS is a precision metal components manufacturer that supplies customers in a variety of industries including electric motors, HVAC, power tools, automotive and medical. The acquisition of VS provided us with a complementary, broader product offering and allowed penetration into adjacent markets. VS has two locations in Wheeling, Illinois and Juarez, Mexico and is included in Autocam Precision Components Segment. The results of VS have been consolidated with NN since the date of acquisition.

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NN, Inc.

Notes to Condensed Consolidated Financial Statements

September 30, 2015 and 2014

(In thousands, except per share data)

Note 3. Inventories

Inventories are comprised of the following:

Inventories on consignment at customer locations as of September 30, 2015 and December 31, 2014 totaled $3,872 and $5,857, respectively.

Inventories are stated at the lower of cost or market. Cost is determined using the average cost method. 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.

Note 4. Net Income Per Share

There were no anti-dilutive options excluded from the dilutive shares outstanding for the three and nine month periods ended September 30, 2015 and 2014. During the three month period ended September 30, 2015, we issued 7,590 shares of common stock sold in a public offering. (See Note 14 of Notes to Condensed Consolidated Financial Statements)

Note 5. Segment Information

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, 2014, which we filed with the SEC on March 16, 2015. Autocam was added to the Precision Metal Components Segment during the third quarter of 2014 and the segment was renamed the Autocam Precision Components Segment during the fourth quarter of 2014. 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, 2015 and 2014.

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NN, Inc.

Notes to Condensed Consolidated Financial Statements

September 30, 2015 and 2014

(In thousands, except per share data)

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NN, Inc.

Notes to Condensed Consolidated Financial Statements

September 30, 2015 and 2014

(In thousands, except per share data)

Note 6. Long-Term Debt and Short-Term Debt

Long-term debt and short-term debt at September 30, 2015 and December 31, 2014 consisted of the following:

Our $350,000 term loan facility, or Term Loan, may be expanded upon our request with approval of the lenders by up to $50,000 under the same terms and conditions. The Term Loan has a seven year maturity with a 5% per annum repayment. The Term Loan agreement is a covenant lite agreement with no financial covenants. The Term Loan agreement does 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 give the lenders the right to accelerate the maturity of the debt. 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, 2015, $8,092 of net capitalized loan origination costs related to the Term Loan are reflected in the Unaudited Condensed Consolidated Balance Sheet within other non-current assets.

Our $100,000 asset backed loan, or ABL, may be expanded upon our request with approval of the lenders by up to $50,000 under the same terms and conditions. The ABL has a five year maturity and has one springing financial covenant in the event our availability on the ABL is less than $8,000. The ABL contains 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 give the lenders the right to accelerate the maturity of the debt. The facility has a swing line feature to meet short term cash flow needs. Any borrowings under this swing line are considered short term. We incurred costs as a result of issuing the ABL, which have been recorded in the condensed consolidated balance sheet within other non-current assets and are being amortized over the term of the notes. The unamortized balance at September 30, 2015 was $1,132.

We believe the book values of the above credit facilities approximate their fair values given the interest rates are variable and are consistent with market rates for a company with our credit profile.

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NN, Inc.

Notes to Condensed Consolidated Financial Statements

September 30, 2015 and 2014

(In thousands, except per share data)

In connection with the acquisition of PEP and subsequent to September 30, 2015, NN entered into new credit agreement providing for new senior secured credit facilities. Proceeds from borrowings under the new senior secured credit facilities were used to fund the purchase price for PEP and to repay borrowings under our existing Term Loan and ABL facilities. (See Note 15 of Notes to Condensed Consolidated Financial Statements.)

Our French operation (acquired with Autocam) has liabilities with certain creditors subject to Safeguard protection. The liabilities are being paid annually over a 10-year period until 2019 and carry a zero percent interest rate. Amounts due as of September 30, 2015, to those creditors opting to be paid over a 10-year period totaled $2,363 and are included in current maturities of long-term debt of $304 and long-term debt, net of current portion of $2,059.

The Brazilian equipment notes represent borrowings from certain Brazilian banks to fund equipment purchases for Autocam’s Brazilian plants. These credit facilities have annual interest rates ranging from 2.5% to 9.1%.

The Chinese line of credit is a working capital line of credit with a Chinese bank bearing an annual interest rate of 4.95%.

Note 7. Goodwill, net

The changes in the carrying amount of goodwill, net for the nine month period ended September 30, 2015 are as follows:

The goodwill balances are tested for impairment on an annual basis during the fourth quarter and between annual tests if a triggering event occurs. As of September 30, 2015, there were no indications of impairment at the reporting units with goodwill balances.

Note 8. Intangible Assets, Net

With the Caprock acquisition, we acquired intangible assets with a preliminary aggregate acquired value of $2,490. The intangible assets are a customer relationship intangible asset with a preliminary estimated value of $2,430 and a trade name intangible asset with a preliminary estimated value of $60. The preliminary estimated useful lives of the intangibles are 12 years and one year, respectively. These intangible assets are subject to amortization of approximately $203 per year with year-to-date amortization expense and accumulated amortization of $88 at September 30, 2015.

Including the intangibles from the Caprock acquisition, we have gross intangible assets of $57,226 with accumulated amortization of $5,397, year-to-date amortization expense of $3,013 and annual expected amortization expense of $4,090.

Note 9. Shared-Based Compensation

During the three and nine month periods ended September 30, 2015 and 2014, approximately $1,148 and $2,919 in 2015 and $661 and $1,948 in 2014, respectively, of compensation expense was recognized in selling, general and administrative expense for all share-based awards. During the nine month period ended September 30, 2015, there were 115 restricted stock awards and 55 option awards to non-executive directors, officers and certain other key employees. Additionally, during the nine months ended September 30, 2015, there were 70 performance stock units issued. During the nine month period ended September 30, 2014, there were 97 restricted stock awards and 98 option awards to non-executive directors, officers and certain other key employees.

The restricted shares granted during the nine month period ended September 30, 2015, vest pro-rata over three years for officers and certain other key employees and over one year for non-executive directors. The restricted shares granted during

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NN, Inc.

Notes to Condensed Consolidated Financial Statements

September 30, 2015 and 2014

(In thousands, except per share data)

the nine month period ended September 30, 2014, vest pro-rata over three years. During the nine month periods ended September 30, 2015 and 2014, we incurred $1,747 and $951, 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.

The performance stock units granted during the nine month period ended September 30, 2015, will be satisfied in the form of company stock during 2018 depending on meeting certain performance and/or market conditions. We are recognizing the compensation expense over the three year period in which the performance and market conditions are measured. During the nine month periods ended September 30, 2015 and 2014, we incurred $456 and $0, respectively, in expense related to performance stock units. The fair value of the shares issued was determined by using the grant date closing price of our common stock for the units with a performance condition and a Monte Carlo valuation model was used to determine the fair value for shares that have a market condition.

We incurred $716 and $997 of stock option expense in the nine month periods ended September 30, 2015 and 2014, respectively. The fair value of our options cannot be determined by market value, because our options are not traded in an open market. Accordingly, we utilized the Black Scholes financial pricing model to estimate the fair value.

The following table provides a reconciliation of option activity for the nine month period ended September 30, 2015:

Note 10. Provision for Income Taxes

For the nine month periods ended September 30, 2015 and 2014, our effective tax rates were 21% and 40%, respectively. The difference between the U.S. federal statutory tax rate of 34% and our effective tax rates was primarily due to non-U.S. based earnings being taxed at lower rates reducing the effective rates for the nine month periods ended September 30, 2015 by 8%. The difference between the U.S. federal statutory tax rate of 34% and our effective tax rate in the first nine months of 2014 of 40% was due to the impact of non-deductible merger and acquisition expenses increasing the tax rate 12% during 2014 partially offset by non-U.S. based earnings being taxed at lower rates reducing the effective rate 6%. As of September 30, 2015, we do not foresee any significant changes to our unrecognized tax benefits within the next twelve months.

Note 11. Commitments and Contingencies

Brazil ICMS Tax Matter

Prior to our acquisition of Autocam, Autocam’s Brazilian subsidiary received notification from the Brazilian tax authorities regarding ICMS (State Value Added Tax or VAT) tax credits claimed on intermediary materials (tooling and perishable items) used in the manufacturing process. The Brazilian tax authority notification disallowed state ICMS credits claimed on intermediary materials based on the argument that these items are not intrinsically related to the manufacturing processes. Autocam Brazil filed an administrative defense with the Brazilian tax authority arguing, among other matters, that it should qualify for 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 plan to defend our interests in this matter vigorously. While we believe a loss is not probable, we estimate the range of possible loss related to this assessment is from $0 to $6,000. No amount was accrued at September 30, 2015 for this matter. There has been no change in the status of this matter from December 31, 2014 to September 30, 2015.

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NN, Inc.

Notes to Condensed Consolidated Financial Statements

September 30, 2015 and 2014

(In thousands, except per share data)

We are entitled to indemnification from the former shareholders of Autocam, subject to the limitations and procedures set forth in the agreement and plan of merger. Management believes the indemnification would include amounts owed for the tax, interest and penalties related to this matter.

All other legal proceedings are of an ordinary and routine nature and are incidental to our operations. Management believes that such proceedings should not, individually or in the aggregate, have a material adverse effect on our business, financial condition, results of operations or cash flows. In making that determination, we analyze the facts and circumstances of each case at least quarterly in consultation with our attorneys and determine a range of reasonably possible outcomes.

Note 12. Investment in Non-Consolidated Joint Venture

As part of the acquisition of Autocam, we acquired a 49% investment in a joint venture with an unrelated entity called Wuxi Weifu Autocam Precision Machinery Company, Ltd. (“JV”), a Chinese company located in Wuxi, China.

Below are the components of our JV investment balance at September 30, 2015:

Set forth below is summarized balance sheet information for the JV:

Dividends of $2,868 were declared and paid by the JV during the three months ended September 30, 2015. We had sales to the JV of $42 and $106 during the three and nine months ended September 30, 2015, respectively. Amounts due to us from the JV were $202 as of September 30, 2015. The JV had net sales in 2014 of $50,466 and net income of $9,004. In the first nine months of 2015, the JV had net sales and net income of $35,833 and $7,228, respectively.

Note 13. Interest Rate Hedging

Our 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 in which we agree to exchange the difference between fixed and variable interest amounts calculated by reference to an agreed upon notional principal amount.

On December 16, 2014, we entered into a $150,000 interest rate swap that will go into effect on December 29, 2015 (one year delayed start), at which time our interest rate will be locked at 7.216% until December 31, 2018. Prior to December 16, 2014, we did not have any existing interest rate hedges. The hedge instrument will be 100% effective and as such the mark to market gains or losses on this hedge will be included in accumulated other comprehensive income (loss) to the extent effective, and reclassified into interest expense over the term of the related debt instruments.

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NN, Inc.

Notes to Condensed Consolidated Financial Statements

September 30, 2015 and 2014

(In thousands, except per share data)

The table below summarizes the fair value measurements of the gross asset and liability of this swap as of September 30, 2015, valued on a recurring basis:

The interest rate swap derivative is classified as Level 2. Level 2 fair value is based on estimates using standard pricing models. These standard pricing models use inputs which are derived from or corroborated by observable market data such as interest rate yield curves, index forward curves, discount curves, and volatility surfaces. Counterparties to these derivative contracts are highly rated financial institutions which we believe carry only a minimal risk of nonperformance.

We have elected to present the derivative contracts on a gross basis in the Condensed Consolidated Balance Sheet included within other non-current assets and other non-current liabilities. Had we chosen to present the derivative contract on a net basis, we would have a derivative in a net liability position of $3,475 as of September 30, 2015. We do not have any cash collateral due under such agreements.

Derivatives’ Hedging Relationships

Note 14. Equity Offering

On July 1, 2015, we closed an underwritten registered public offering of common stock offered pursuant to a shelf registration statement on Form S-3 that was previously filed with, and declared effective by, the SEC. The total number of shares of common stock sold was 7,590 at a public offering price of $24.00 per share. All of the shares in the offering were sold by NN. The net proceeds to NN from the offering, after deducting underwriting discounts and commissions and offering expenses, were approximately $173,052. Of these proceeds, $148,739 was used for repayment of principal and interest on our Term Loan and ABL facilities during the three months ended September 30, 2015.

Note 15. Subsequent Events

Acquisition of PEP

On October 19, 2015, we acquired Precision Engineered Products Holdings, Inc. (“PEP”) for $615,000 in cash. The effects of this acquisition are not reflected in the financial statements presented in this Quarterly Report on Form 10-Q because the acquisition occurred subsequent to September 30, 2015. PEP is a global manufacturer of highly engineered precision

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NN, Inc.

Notes to Condensed Consolidated Financial Statements

September 30, 2015 and 2014

(In thousands, except per share data)

customized solutions serving the medical, electrical, transportation and aerospace end markets. The addition of the PEP business into our portfolio is a transformative step in creating a diversified industrial company that serves a variety of end markets and delivers consistent results through the economic cycle. PEP strengthens our technical capabilities and provides us with additional dynamic platforms to support outgrowth of our end markets. PEP’s focus on the medical, electrical, and aerospace end markets and delivery of world class precision and technology to their customers aligns perfectly with our strategic plan allowing us to develop new products and drive operational efficiency in the years to come.

Concurrent with our acquisition of PEP, we completed our previously announced private offering of $300,000 aggregate principal amount of 10.25% Senior Notes due 2020 (the “Senior Notes”), and entered into new senior secured credit facilities consisting of a $525,000 term loan credit facility with an interest rate of the greater of LIBOR or 1.0%, plus an applicable margin of 4.75% and a $100,000 revolving loan credit facility with an interest rate of the greater of LIBOR plus an applicable margin of 3.50%. We utilized the net proceeds from the Senior Notes, together with borrowings under our new term loan credit facility and cash on hand, to pay the purchase price for the PEP acquisition, to repay borrowings under our existing Term Loan and ABL facilities and to pay fees and expenses related to the foregoing during the three months ended December 31, 2015. Additional details regarding the financing of the PEP acquisition may be found in our Current Report on Form 8-K filed with the Securities and Exchange Commission on October 20, 2015.

Closure of Wheeling Plant

On November 5, 2015, we announced the closure of our Wheeling Plant, which is included in the Autocam Precision Components Segment. This closure directly relates to the integration plan developed with the Autocam acquisition in 2014. The majority of the sales and productive assets will be relocated to existing plants with the Autocam Precision Components Segment. During the fourth quarter of 2015, we plan to take a restructuring charge preliminarily estimated with a range of approximately $4,500 to $6,000. The closure is expected to be finalized during the first half of 2016.

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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. Such statements concern matters that involve risks, uncertainties and other factors which may cause the actual performance of the Company and its subsidiaries to differ materially from those expressed or implied by this discussion. All forward-looking information contained herein is provided by us pursuant to the safe harbor established under the Private Securities Litigation Reform Act of 1995 and should be evaluated in the context of these factors.

Forward-looking statements generally can be identified by the use of forward-looking terminology such as “assumptions”, “target”, “guidance”, “outlook”, “plans”, “projection”, “may”, “will”, “would”, “expect”, “intend”, “estimate”, “anticipate”, “believe”, “potential” or “continue” (or the negative or other derivatives of each of these terms) or similar terminology. Factors which could materially affect actual results include, but are not limited to: general economic conditions and economic conditions in the industrial sector, inventory levels, regulatory compliance costs and our ability to manage these costs, start-up costs for new operations, debt reduction, competitive influences, risks that current customers will commence or increase captive production, risks of capacity underutilization, quality issues, availability and price of raw materials, currency and other risks associated with international trade, our dependence on certain major customers, and the successful implementation of the global growth plan including development of new products. Similarly, statements made herein and elsewhere regarding pending or completed acquisitions are also forward-looking statements, including statements relating to the anticipated closing date of an acquisition, our ability to obtain required regulatory approvals or satisfy closing conditions, the costs of an acquisition and source(s) of financing, the future performance and prospects of an acquired business, the expected benefits of an acquisition on our future business and operations and our ability to successfully integrate recently acquired businesses.

For additional information concerning such risk factors and cautionary statements, please see the section titled “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2014, which we filed with the SEC on March 16, 2015.

Results of Operations

Factors That May Influence Results of Operations

The following is a description of factors that have influenced our three and nine months ended September 30, 2015 results of operations that we believe are important to provide an understanding of our business and results of operations.

2014 and 2015 Acquisitions

During the year ended December 31, 2014, we completed the acquisition of four companies: Autocam, RFK, VS and Chelsea. The acquisition of Autocam occurred on August 29, 2014 and as such only one month of operations was included in the three months ended September 30, 2014. We acquired Caprock on May 29, 2015 and included three month of sales and income in the three months ended September 30, 2015. We acquired PEP on October 19, 2015. Because the acquisition of PEP occurred subsequent to September 30, 2015, our results of operations for the three and nine months ended September 30, 2015 do not include any of the operations of PEP; however, we incurred significant costs and expenses in connection with the acquisition of PEP, which are included in acquisition related costs excluded from selling, general and administrative expenses.

In an effort to enhance the comparability of the current and prior year periods, we have aggregated into “acquisitions” within each financial line item comparison below for the three and nine month periods ended September 30, 2014, the impacts of the acquisitions completed in 2014 and 2015 that were not included in the comparative prior year period. The remaining changes relate to the legacy NN businesses. For more information about the 2014 acquisitions including background on the acquired companies, the purchase price allocations and pro forma information, as required, please refer to Note 2 of the Notes to Consolidated Financial Statements included in

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our Annual Report on Form 10-K for the year ended December 31, 2014 which we filed with the SEC on March 16, 2015 and Note 2 of the Notes to Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q.

Devaluation of the Euro and Brazilian Real against the U.S. Dollar

The Euro devalued against the U.S. Dollar beginning in the latter part of the third quarter of 2014 and accelerating during the fourth quarter of 2014 and into the first quarter of 2015. During these periods, the Euro to U.S. Dollar rate dropped from approximately $1.36 in mid-July 2014 to $1.08 at March 31, 2015 representing an approximate 20% decline in value. During the third quarter of 2015 the euro recovered 3.5% of its value to end at $1.12. The devaluation of the Euro significantly impacted the translation of our Euro denominated sales and costs when comparing the three and nine months ended September 30, 2015 to the three and nine months ended September 30, 2014. The Euro devaluation from translation negatively impacted the three and nine months ended September 30, 2015 sales by $6.5 million and $24.1, respectively, and net income by $0.5 million and $2.2 million, respectively. The Euro translation impact, and the translation impact of other currencies, is highlighted below as “foreign exchange effects”. In addition to the translation effects, the devaluation of the Euro impacted the value of certain intercompany loan receivables denominated in Euros that resulted in an unfavorable transactional impact to earnings of $1.5 million reported below in “Other expense, net” for the nine months ended September 30, 2015.

Additionally, the devaluation of the Brazilian Real had an impact in comparing Autocam’s sales from the one month included the three and nine months ended September 30, 2014 to the same period in 2015. The Real has devalued approximately 30% from September 2014 to September 2015 which negatively impacted sales by $1.0 million.

OVERALL RESULTS

We have provided a reconciliation of net income to adjusted net income (a non-GAAP measure used by management), income from operations to adjusted income from operations (a non-GAAP measure used by management) and net income to adjusted EBITDA (a non-GAAP measure used by management) to provide supplementary information about the impacts of acquisition related expenses and foreign exchange impacts on intercompany loans. We believe that the presentation of adjusted net income, adjusted income from operations and adjusted EBITDA provides useful information to investors in assessing our results of operations and potential future results. These measures should not be considered as an alternative to GAAP net income or income from operations. You should not consider adjusted net income, adjusted income from operations or adjusted EBITDA in isolation, or as a substitute for analysis of our results as reported under GAAP. Additionally, because adjusted net income, adjusted income from operations or adjusted EBITDA may be defined differently by other companies in our industry, our definitions may not be comparable to similarly titled measures of other companies, thereby diminishing their utility.

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Three Months Ended September 30, 2015 Compared to the Three Months Ended September 30, 2014

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Net Sales. Net sales increased during the third quarter of 2015 from the third quarter of 2014 due to sales from the acquired companies. The third quarter of 2015 included an additional two months of sales of Autocam and three months of sales of Caprock. Partially offsetting these increases was the impact of devaluation of the Euro on Euro denominated sales, as discussed above. Additionally, we experienced lower sales volumes at our operations in China and at operations that ship product into the Chinese market due to lower demand from Chinese-based automotive and industrial customers.

Cost of Products Sold (exclusive of depreciation and amortization shown separately below). Cost of products sold was primarily impacted by the addition of production costs from the companies acquired during 2014 and 2015, as discussed above. Partially offsetting these increases was the impact of the devaluation of the Euro on Euro denominated costs, as discussed above. Additionally, we incurred less production costs at those operations serving the Chinese market due to lower sales volumes in that geographical market.

Selling, General and Administrative. The majority of the increase during 2015 was due to the selling, general and administrative costs carried over from the companies acquired in 2014 and 2015.

Depreciation and amortization. The increase in 2015 was due to depreciation and amortization from the acquisitions in 2014 and 2015. This additional depreciation and amortization includes the related step-ups of certain property, plant and equipment to fair value and the addition of intangible assets principally for customer relationships and trade names related to the purchase price allocation of the new acquisitions.

Interest expense. Interest expense decreased $1.0 million due to lower overall debts level in the third quarter of 2015 as we used certain proceeds from the issuance of common stock to repay debt.

RESULTS BY SEGMENT

METAL BEARING COMPONENTS SEGMENT

Net sales decreased during the third quarter of 2015 from the third quarter of 2014 principally due to the devaluation of the Euro on Euro denominated sales, as discussed above. Additionally, we experienced lower sales volumes at our operations in China and at operations that ship product into the Chinese market due to lower demand from

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Chinese-based automotive and industrial customers.

Segment income from operations was unfavorably impacted $0.7 million due to the depreciation in value of Euro denominated income from operations relative to the U.S. Dollar and $0.3 million due to lower sales volumes at our units that service the Chinese market.

AUTOCAM PRECISION COMPONENTS SEGMENT

The increased sales in the third quarter of 2015 were due to sales added with the acquisition of Autocam. The third quarter of 2015 included an additional two months of sales at Autocam. The addition of the Autocam added $4.6 million to segment income from operations.

PLASTIC AND RUBBER COMPONENTS SEGMENT

The increase in sales and net income during the third quarter of 2015 was due primarily to the acquisition of Caprock.

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Nine Months Ended September 30, 2015 Compared to the Nine Months Ended September 30, 2014.

OVERALL RESULTS