10-Q 1 nnbr-06302019x10q.htm 10-Q
Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2019
OR

☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to
Commission File Number 000-23486

NN, Inc.
(Exact name of registrant as specified in its charter)

Delaware |  | 62-1096725
(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification Number)

6210 Ardrey Kell Road
Charlotte, North Carolina 28277
(Address of principal executive offices, including 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 |  | Trading symbol |  | Name of each exchange on which registered
Common Stock, par value $0.01 per share |  | NNBR |  | The Nasdaq Stock Market, LLC

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 ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer |  | ☐ |  | Accelerated filer |  | ☒
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 or revised 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 ☒
As of August 2, 2019, there were 42,366,961 shares of the registrant’s common stock, par value $0.01 per share, outstanding.

Table of Contents
NN, Inc.
INDEX

PART I. FINANCIAL INFORMATION | 3
Item 1. | Financial Statements | 3
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 23
Item 3. | Quantitative and Qualitative Disclosures About Market Risk | 33
Item 4. | Controls and Procedures | 33
PART II. OTHER INFORMATION | 35
Item 1. | Legal Proceedings | 35
Item 1A. | Risk Factors | 35
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 35
Item 3. | Defaults upon Senior Securities | 35
Item 4. | Mine Safety Disclosures | 35
Item 5. | Other Information | 35
Item 6. | Exhibits | 36
SIGNATURES | 37

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PART I. FINANCIAL INFORMATION

Item 1. | Financial Statements

NN, Inc.
Condensed Consolidated Statements of Operations and Comprehensive Income (Loss)
(Unaudited)
Amounts in thousands, except per share data

|  | Three Months Ended June 30, |  | Six Months Ended June 30,
|  | 2019 |  | 2018 |  | 2019 |  | 2018
Net sales |  | $ | 221,666 |  |  | $ | 196,349 |  |  | $ | 434,922 |  |  | $ | 365,497 |
Cost of sales (exclusive of depreciation and amortization shown separately below) |  | 163,513 |  |  | 148,640 |  |  | 324,782 |  |  | 275,084 |
Selling, general and administrative expense |  | 26,743 |  |  | 26,641 |  |  | 54,868 |  |  | 48,818 |
Acquisition related costs excluded from selling, general and administrative expense |  | — |  |  | 3,437 |  |  | — |  |  | 5,213 |
Depreciation and amortization |  | 22,924 |  |  | 16,258 |  |  | 46,349 |  |  | 30,539 |
Restructuring and integration expense, net |  | — |  |  | 1,591 |  |  | (12 | ) |  | 2,346 |
Other operating (income) expense, net |  | 388 |  |  | 74 |  |  | 236 |  |  | 96 |
Income (loss) from operations |  | 8,098 |  |  | (292 | ) |  | 8,699 |  |  | 3,401 |
Interest expense |  | 13,958 |  |  | 15,988 |  |  | 27,759 |  |  | 27,984 |
Loss on extinguishment of debt and write-off of debt issuance costs |  | — |  |  | 12,938 |  |  | 2,699 |  |  | 12,938 |
Other (income) expense, net |  | 57 |  |  | 1,887 |  |  | 786 |  |  | 1,574 |
Loss before (provision) benefit for income taxes and share of net income from joint venture |  | (5,917 | ) |  | (31,105 | ) |  | (22,545 | ) |  | (39,095 | )
Benefit (provision) for income taxes |  | (577 | ) |  | 5,947 |  |  | (2,818 | ) |  | 7,123 |
Share of net income (loss) from joint venture |  | (203 | ) |  | 647 |  |  | 66 |  |  | 1,478 |
Net loss |  | $ | (6,697 | ) |  | $ | (24,511 | ) |  | $ | (25,297 | ) |  | $ | (30,494 | )
Other comprehensive loss: |  |  |  |  |  |  |  |
Change in fair value of interest rate swap, net of tax |  | (6,962 | ) |  | — |  |  | (10,818 | ) |  | — |
Foreign currency translation loss |  | (1,434 | ) |  | (15,781 | ) |  | (172 | ) |  | (10,316 | )
Other comprehensive loss |  | $ | (8,396 | ) |  | $ | (15,781 | ) |  | $ | (10,990 | ) |  | $ | (10,316 | )
Comprehensive loss |  | $ | (15,093 | ) |  | $ | (40,292 | ) |  | $ | (36,287 | ) |  | $ | (40,810 | )
Basic net loss per share |  |  |  |  |  |  |  |
Net loss per share |  | $ | (0.16 | ) |  | $ | (0.89 | ) |  | $ | (0.60 | ) |  | $ | (1.10 | )
Weighted average shares outstanding |  | 42,028 |  |  | 27,696 |  |  | 42,000 |  |  | 27,632 |
Diluted net loss per share |  |  |  |  |  |  |  |
Net loss per share |  | $ | (0.16 | ) |  | $ | (0.89 | ) |  | $ | (0.60 | ) |  | $ | (1.10 | )
Weighted average shares outstanding |  | 42,028 |  |  | 27,696 |  |  | 42,000 |  |  | 27,632 |

The accompanying notes are an integral part of the Condensed Consolidated Financial Statements.
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NN, Inc.
Condensed Consolidated Balance Sheet s
(Unaudited)
Amounts in thousands

|  | June 30, 2019 |  | December 31, 2018
Assets |  |  |  |
Current assets: |  |  |  |
Cash and cash equivalents |  | $ | 22,077 |  |  | $ | 17,988 |
Accounts receivable, net |  | 151,289 |  |  | 133,421 |
Inventories |  | 128,526 |  |  | 122,615 |
Income tax receivable |  | 419 |  |  | 946 |
Other current assets |  | 16,433 |  |  | 21,901 |
Total current assets |  | 318,744 |  |  | 296,871 |
Property, plant and equipment, net |  | 368,445 |  |  | 361,028 |
Operating lease right-of-use assets |  | 65,300 |  |  | — |
Goodwill |  | 439,632 |  |  | 439,452 |
Intangible assets, net |  | 351,797 |  |  | 376,248 |
Investment in joint venture |  | 20,406 |  |  | 20,364 |
Other non-current assets |  | 7,961 |  |  | 7,607 |
Total assets |  | $ | 1,572,285 |  |  | $ | 1,501,570 |
Liabilities and Stockholders’ Equity |  |  |  |
Current liabilities: |  |  |  |
Accounts payable |  | $ | 63,500 |  |  | $ | 65,694 |
Accrued salaries, wages and benefits |  | 29,980 |  |  | 24,636 |
Current maturities of long-term debt |  | 25,115 |  |  | 31,280 |
Current portion of operating lease liabilities |  | 7,272 |  |  | — |
Other current liabilities |  | 23,472 |  |  | 23,420 |
Total current liabilities |  | 149,339 |  |  | 145,030 |
Deferred tax liabilities |  | 83,623 |  |  | 93,482 |
Non-current income tax payable |  | 3,671 |  |  | 3,875 |
Long-term debt, net of current portion |  | 850,376 |  |  | 811,471 |
Operating lease liabilities, net of current portion |  | 64,152 |  |  | — |
Other non-current liabilities |  | 43,263 |  |  | 29,417 |
Total liabilities |  | 1,194,424 |  |  | 1,083,275 |
Commitments and contingencies (Note 12) |  |  |  |
Stockholders’ equity: |  |  |  |
Common stock - $0.01 par value, authorized 90,000 shares, 42,367 and 42,104 shares issued and outstanding at June 30, 2019, and December 31, 2018, respectively |  | 424 |  |  | 421 |
Additional paid-in capital |  | 513,380 |  |  | 511,545 |
Retained deficit |  | (93,328 | ) |  | (62,046 | )
Accumulated other comprehensive loss |  | (42,615 | ) |  | (31,625 | )
Total stockholders’ equity |  | 377,861 |  |  | 418,295 |
Total liabilities and stockholders’ equity |  | $ | 1,572,285 |  |  | $ | 1,501,570 |

The accompanying notes are an integral part of the Condensed Consolidated Financial Statements.
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NN, Inc.
Condensed Consolidated Statements of Changes in Stockholders’ Equity
Three Months Ended June 30, 2019 and 2018
(Unaudited)
Amounts in thousands

|  | Common Stock |  |  |  |  |  |  |  |
|  | Number of shares |  | Par value |  | Additional paid in capital |  | Retained deficit |  | Accumulated other comprehensive loss |  | Total
Balance, March 31, 2019 |  | 42,367 |  |  | $ | 424 |  |  | $ | 512,274 |  |  | $ | (83,639 | ) |  | $ | (34,219 | ) |  | $ | 394,840 |
Net loss |  | — |  |  | — |  |  | — |  |  | (6,697 | ) |  | — |  |  | (6,697 | )
Cash dividends declared |  | — |  |  | — |  |  | — |  |  | (2,992 | ) |  | — |  |  | (2,992 | )
Share-based compensation expense |  | — |  |  | — |  |  | 1,106 |  |  | — |  |  | — |  |  | 1,106 |
Change in fair value of interest rate swap, net of tax of $1,993 |  | — |  |  | — |  |  | — |  |  | — |  |  | (6,962 | ) |  | (6,962 | )
Foreign currency translation loss |  | — |  |  | — |  |  | — |  |  | — |  |  | (1,434 | ) |  | (1,434 | )
Adoption of new accounting standard (Note 1) |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |
Balance, June 30, 2019 |  | 42,367 |  |  | $ | 424 |  |  | $ | 513,380 |  |  | $ | (93,328 | ) |  | $ | (42,615 | ) |  | $ | 377,861 |

|  | Common Stock |  |  |  |  |  |  |  |
|  | Number of shares |  | Par value |  | Additional paid in capital |  | Retained earnings |  | Accumulated other comprehensive loss |  | Total
Balance, March 31, 2018 |  | 27,666 |  |  | $ | 276 |  |  | $ | 293,704 |  |  | $ | 203,159 |  |  | $ | (12,280 | ) |  | $ | 484,859 |
Net loss |  | — |  |  | — |  |  | — |  |  | (24,511 | ) |  | — |  |  | (24,511 | )
Cash dividends declared |  | — |  |  | — |  |  | — |  |  | (1,930 | ) |  | — |  |  | (1,930 | )
Shares issued for option exercises |  | 4 |  |  | — |  |  | 32 |  |  | — |  |  | — |  |  | 32 |
Share-based compensation expense |  | 78 |  |  | 1 |  |  | 1,077 |  |  | — |  |  | — |  |  | 1,078 |
Restricted shares and performance shares forgiven for taxes and forfeited |  | (19 | ) |  | — |  |  | (433 | ) |  | — |  |  | — |  |  | (433 | )
Foreign currency translation loss |  | — |  |  | — |  |  | — |  |  | — |  |  | (15,781 | ) |  | (15,781 | )
Balance, June 30, 2018 |  | 27,729 |  |  | $ | 277 |  |  | $ | 294,380 |  |  | $ | 176,718 |  |  | $ | (28,061 | ) |  | $ | 443,314 |

The accompanying notes are an integral part of the Condensed Consolidated Financial Statements.
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NN, Inc.
Condensed Consolidated Statements of Changes in Stockholders’ Equity
Six Months Ended June 30, 2019 and 2018
(Unaudited)
Amounts in thousands

|  | Common Stock |  |  |  |  |  |  |  |
|  | Number of shares |  | Par value |  | Additional paid in capital |  | Retained deficit |  | Accumulated other comprehensive loss |  | Total
Balance, December 31, 2018 |  | 42,104 |  |  | $ | 421 |  |  | $ | 511,545 |  |  | $ | (62,046 | ) |  | $ | (31,625 | ) |  | $ | 418,295 |
Net loss |  | — |  |  | — |  |  | — |  |  | (25,297 | ) |  | — |  |  | (25,297 | )
Cash dividends declared |  | — |  |  | — |  |  | — |  |  | (5,934 | ) |  | — |  |  | (5,934 | )
Share-based compensation expense |  | 281 |  |  | 3 |  |  | 1,976 |  |  | — |  |  | — |  |  | 1,979 |
Restricted shares forgiven for taxes and forfeited |  | (18 | ) |  | — |  |  | (141 | ) |  | — |  |  | — |  |  | (141 | )
Change in fair value of interest rate swap, net of tax of $3,097 |  | — |  |  | — |  |  | — |  |  | — |  |  | (10,818 | ) |  | (10,818 | )
Foreign currency translation loss |  | — |  |  | — |  |  | — |  |  | — |  |  | (172 | ) |  | (172 | )
Adoption of new accounting standard (Note 1) |  | — |  |  | — |  |  | — |  |  | (51 | ) |  | — |  |  | (51 | )
Balance, June 30, 2019 |  | 42,367 |  |  | $ | 424 |  |  | $ | 513,380 |  |  | $ | (93,328 | ) |  | $ | (42,615 | ) |  | $ | 377,861 |

|  | Common Stock |  |  |  |  |  |  |  |
|  | Number of shares |  | Par value |  | Additional paid in capital |  | Retained earnings |  | Accumulated other comprehensive loss |  | Total
Balance, December 31, 2017 |  | 27,572 |  |  | $ | 275 |  |  | $ | 292,494 |  |  | $ | 211,080 |  |  | $ | (17,745 | ) |  | $ | 486,104 |
Net loss |  | — |  |  | — |  |  | — |  |  | (30,494 | ) |  | — |  |  | (30,494 | )
Cash dividends declared |  | — |  |  | — |  |  | — |  |  | (3,884 | ) |  | — |  |  | (3,884 | )
Shares issued for option exercises |  | 27 |  |  | — |  |  | 274 |  |  | — |  |  | — |  |  | 274 |
Share-based compensation expense |  | 165 |  |  | 2 |  |  | 2,332 |  |  | — |  |  | — |  |  | 2,334 |
Restricted shares and performance shares forgiven for taxes and forfeited |  | (35 | ) |  | — |  |  | (720 | ) |  | — |  |  | — |  |  | (720 | )
Foreign currency translation loss |  | — |  |  | — |  |  | — |  |  | — |  |  | (10,316 | ) |  | (10,316 | )
Adoption of new accounting standard |  | — |  |  | — |  |  | — |  |  | 16 |  |  | — |  |  | 16 |
Balance, June 30, 2018 |  | 27,729 |  |  | $ | 277 |  |  | $ | 294,380 |  |  | $ | 176,718 |  |  | $ | (28,061 | ) |  | $ | 443,314 |

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)
Amounts in thousands

|  | Six Months Ended June 30,
|  | 2019 |  | 2018
Cash flows from operating activities |  |  |  |
Net loss |  | $ | (25,297 | ) |  | $ | (30,494 | )
Adjustments to reconcile net loss to net cash provided by (used by) operating activities: |  |  |  |
Depreciation and amortization |  | 46,349 |  |  | 30,539 |
Amortization of debt issuance costs |  | 2,354 |  |  | 2,313 |
Loss on extinguishment of debt and write-off of debt issuance costs |  | 2,699 |  |  | 12,938 |
Share of net income from joint venture, net of cash dividends received |  | (66 | ) |  | (1,478 | )
Compensation expense from issuance of share-based awards |  | 1,979 |  |  | 2,334 |
Deferred income taxes |  | (6,762 | ) |  | (34 | )
Other |  | 540 |  |  | 214 |
Changes in operating assets and liabilities, net of acquisitions: |  |  |  |
Accounts receivable |  | (17,723 | ) |  | (17,256 | )
Inventories |  | (5,826 | ) |  | (10,742 | )
Accounts payable |  | (1,405 | ) |  | (4,653 | )
Income taxes receivable and payable, net |  | 315 |  |  | (8,695 | )
Other |  | 7,210 |  |  | 5,589 |
Net cash provided by (used by) operating activities |  | 4,367 |  |  | (19,425 | )
Cash flows from investing activities |  |  |  |
Acquisition of property, plant and equipment |  | (28,994 | ) |  | (28,888 | )
Proceeds from liquidation of short-term investment |  | 8,000 |  |  | — |
Cash paid to acquire businesses, net of cash received |  | — |  |  | (393,481 | )
Other |  | 1,223 |  |  | 625 |
Net cash used by investing activities |  | (19,771 | ) |  | (421,744 | )
Cash flows from financing activities |  |  |  |
Cash paid for debt issuance or prepayment costs |  | (967 | ) |  | (16,703 | )
Dividends paid |  | (5,913 | ) |  | (3,854 | )
Proceeds from long-term debt |  | 46,630 |  |  | 270,000 |
Repayment of long-term debt |  | (12,055 | ) |  | (16,000 | )
Proceeds from (repayments of) short-term debt, net |  | (6,218 | ) |  | 9,703 |
Other |  | (1,759 | ) |  | (2,410 | )
Net cash provided by financing activities |  | 19,718 |  |  | 240,736 |
Effect of exchange rate changes on cash flows |  | (225 | ) |  | (806 | )
Net change in cash and cash equivalents |  | 4,089 |  |  | (201,239 | )
Cash and cash equivalents at beginning of period |  | 17,988 |  |  | 224,446 |
Cash and cash equivalents at end of period |  | $ | 22,077 |  |  | $ | 23,207 |

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
June 30, 2019
(Unaudited)
Amounts in thousands, except per share data
Note 1. Interim Financial Statements
Nature of Business
NN, Inc. is a global diversified industrial company that combines advanced engineering and production capabilities with in-depth materials science expertise to design and manufacture high-precision components and assemblies for the medical, aerospace and defense, electrical, automotive, and general industrial markets. As used in this Quarterly Report on Form 10-Q (this “Quarterly Report), the terms “NN,” the “Company,” “we,” “our,” or “us” refer to NN, Inc., and its subsidiaries. As of June 30, 2019, we had 51 facilities in North America, Europe, South America, and China.
Basis of Presentation
The accompanying condensed consolidated financial statements have not been audited, except that the Condensed Consolidated Balance Sheet as of December 31, 2018, was derived from the audited consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2018 (the “2018 Annual Report”), which we filed with the U.S. Securities and Exchange Commission (the “SEC”) on March 18, 2019. In management’s opinion, the accompanying unaudited condensed consolidated financial statements reflect all adjustments necessary to fairly state our results of operations for the three and six months ended June 30, 2019 and 2018; financial position as of June 30, 2019, and December 31, 2018; and cash flows for the six months ended June 30, 2019 and 2018, on a basis consistent with our audited consolidated financial statements other than the adoption of new accounting standards, such as the new lease standard (see Note 10). These adjustments are of a normal recurring nature and are, in the opinion of management, necessary to state fairly the Company’s financial position and operating results for the interim periods.
Certain information and footnote disclosures normally included in the consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) have been condensed or omitted from the interim financial statements presented in this Quarterly Report. These unaudited condensed consolidated financial statements should be read in conjunction with our audited consolidated financial statements and accompanying notes included in the 2018 Annual Report. The results for the three and six months ended June 30, 2019, are not necessarily indicative of results for the year ending December 31, 2019, or any other future periods.
Except for per share data or as otherwise indicated, all U.S. dollar amounts presented in the tables in these Notes to Condensed Consolidated Financial Statements are in thousands.
Accounting Standards Recently Adopted
Leases. On January 1, 2019, we adopted Accounting Standards Codification (“ASC”) 842, Leases, which superseded ASC 840, Leases. We adopted ASC 842 utilizing the modified retrospective transition approach; therefore, historical financial information and disclosures do not reflect the new standard and will continue to be presented under the previous lease accounting guidance. Under the modified retrospective transition method, we recognized the cumulative effect of the initial adoption adjustment to the opening balance of retained deficit as of January 1, 2019. The adoption adjustment to retained deficit was $0.1 million. As part of the adoption of ASC 842, we elected the package of practical expedients, the short-term lease exemption, and the practical expedient to not separate lease and non-lease components. We recorded lease-related assets and liabilities to our balance sheet for leases with terms greater than twelve months that were classified as operating leases and not previously recorded on our balance sheet. See Note 10 for the required disclosures related to ASC 842.
Derivatives and Hedging. In August 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities, (“ASU 2017-12”). ASU 2017-12 provides new rules that expand the hedging strategies that qualify for hedge accounting. The new rules also allow additional time to complete hedge effectiveness testing and allow qualitative assessments subsequent to initial quantitative tests if there is a supportable expectation that the hedge will remain highly effective. We adopted the guidance on January 1, 2019. We have applied the new rules to 2019 hedging activities as disclosed in Note 16 to these condensed consolidated financial statements. The new guidance has no effect on our historical financial statements.
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 Act of 2017 (“Tax Act”). Under existing U.S. GAAP, the effects of changes in tax rates and laws on deferred 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 to items originally recorded in accumulated other comprehensive income (“AOCI”) are adjusted, certain tax effects become stranded in AOCI. The FASB issued ASU 2018-2, Income Statement – Reporting Comprehensive
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Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, that permits reclassification of certain income tax effects of the Tax Act from AOCI to retained earnings. The guidance also requires certain disclosures about stranded tax effects. The new guidance was effective for us on January 1, 2019. We adopted the new guidance at the beginning of the period of adoption. The new guidance had no effect on our financial statements.
Accounting Standards Not Yet Adopted
Fair Value Disclosures. In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement, that modifies fair value disclosure requirements. The new guidance could impact us by streamlining disclosures of Level 3 fair value measurements. The modified disclosures are effective for us beginning in the first quarter of 2020, with early adoption allowed. ASU 2018-13 changes disclosures only and does not impact our financial condition, results of operations, or cash flows. We are in the process of evaluating the effects of this guidance on our fair value disclosures.
Internal-Use Software. In August 2018, the FASB issued ASU 2018-15, Intangibles - Goodwill and Other - Internal-Use Software: Customer’s Accounting for 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 is hosted by the vendor. Under the new guidance, customers will apply the same criteria for capitalizing implementation costs as they would for an arrangement that 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 adoption permitted. We are in the process of evaluating the effects of this guidance on our financial statements.
Financial Instruments - Credit Losses. In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which modifies the measurement of expected credit losses on certain financial instruments and the timing of when such losses are recorded. ASU 2016-13 is effective for us on January 1, 2020, using a modified retrospective approach, with early adoption permitted. We are in the process of evaluating the effects of this guidance on our financial statements.
Note 2. Acquisitions
Paragon Medical, Inc.
On May 7, 2018, we acquired 100% of the stock of PMG Intermediate Holding Corporation, the parent company of Paragon Medical, Inc. (“Paragon Medical”). For accounting purposes, Paragon Medical meets the definition of a business and has been accounted for as a business combination. Paragon Medical is a medical device manufacturer that 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 by diversifying our products and finished device offerings. We have finalized the purchase price allocation and recorded measurement period adjustments to the initial allocation as disclosed in our 2018 Annual Report.
Beginning May 7, 2018, our consolidated results of operations include the results of Paragon Medical.
The unaudited pro forma financial results shown in the table below for the three and six months ended June 30, 2018, combine the consolidated results of NN and Paragon Medical giving effect to the Paragon Medical acquisition as if it had been completed on January 1, 2017. 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 financial information is presented for informational purposes only and is not indicative of future operations or results had the Paragon Medical acquisition been completed as of January 1, 2017.
The unaudited pro forma financial results include certain adjustments for debt service costs and additional depreciation and amortization expense based upon the fair value step-up and estimated useful lives of Paragon Medical depreciable fixed assets and definite-life amortizable assets acquired. The provision for income taxes has also been adjusted for all periods, based upon the foregoing adjustments to historical results.

|  | Three Months Ended June 30, 2018 |  | Six Months Ended June 30, 2018
Pro forma net sales |  | $ | 210,902 |  |  | $ | 420,731 |
Pro forma net loss |  | $ | (12,017 | ) |  | $ | (20,078 | )
Basic net loss per share |  | $ | (0.43 | ) |  | $ | (0.73 | )
Diluted net loss per share |  | $ | (0.43 | ) |  | $ | (0.73 | )

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Other Acquisitions
Bridgemedica, LLC. On February 22, 2018, we completed the acquisition of 100% of the assets of Bridgemedica, LLC (“Bridgemedica”). For accounting purposes, Bridgemedica meets the definition of a business and has been accounted for as a business combination. Bridgemedica is a medical device company that provides concept to supply solutions through design, development engineering, and manufacturing. Operating results of Bridgemedica are reported in our Life Sciences group after the acquisition date. We have finalized the purchase price allocation with no material changes to the initial allocation.
Southern California Technical Arts, Inc. On August 9, 2018, we completed the acquisition of 100% of the capital stock of Southern California Technical Arts, Inc. (“Technical Arts”). For accounting purposes, Technical Arts meets the definition of a business and has been accounted for as a business combination. Technical Arts is an industrial machining company that manufactures tight tolerance metal components and assemblies. The acquisition of Technical Arts expands our presence in the aerospace and defense end market. Operating results of Technical Arts are reported in our Power Solutions group after the acquisition date. We have completed a preliminary purchase price allocation and are in the process of finalizing the fair value of assets acquired and liabilities assumed.
Note 3. Segment Information
We determined our reportable segments under the provisions of U.S. GAAP related to disclosures about segments of an enterprise. Management has concluded that Mobile Solutions, which is focused on growth in the general industrial and automotive end markets; Power Solutions, which is focused on growth in the electrical and aerospace and defense end markets; and Life Sciences, which is focused on growth in the medical end market, constitute our operating segments. Mobile Solutions, Power Solutions, and Life Sciences are considered operating segments as each engages in business activities for which it earns revenues and incurs expenses, discrete financial information is available for each, 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.
Segment Results
The following table presents results of operations for each reportable segment.

|  | Mobile Solutions |  | Power Solutions |  | Life Sciences |  | Corporate and Consolidations |  |  |  | Total
Three Months Ended June 30, 2019 |  |  |  |  |  |  |  |  |  |  |  |
Net sales |  | $ | 79,444 |  |  | $ | 51,393 |  |  | $ | 91,332 |  |  | $ | (503 | ) |  | (a) |  | $ | 221,666 |
Income (loss) from operations |  | $ | 4,092 |  |  | $ | 5,682 |  |  | $ | 9,305 |  |  | $ | (10,981 | ) |  |  |  | $ | 8,098 |
Interest expense |  |  |  |  |  |  |  |  |  |  |  | (13,958 | )
Other |  |  |  |  |  |  |  |  |  |  |  | (57 | )
Loss before provision for income taxes and share of net income from joint venture |  |  |  |  |  |  |  |  |  |  |  | $ | (5,917 | )
Three Months Ended June 30, 2018 |  |  |  |  |  |  |  |  |  |  |  |
Net sales |  | $ | 88,079 |  |  | $ | 49,820 |  |  | $ | 59,153 |  |  | $ | (703 | ) |  | (a) |  | $ | 196,349 |
Income (loss) from operations |  | $ | 7,380 |  |  | $ | 6,000 |  |  | $ | 2,041 |  |  | $ | (15,713 | ) |  |  |  | $ | (292 | )
Interest expense |  |  |  |  |  |  |  |  |  |  |  | (15,988 | )
Other |  |  |  |  |  |  |  |  |  |  |  | (14,825 | )
Loss before benefit for income taxes and share of net income from joint venture |  |  |  |  |  |  |  |  |  |  |  | $ | (31,105 | )

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|  | Mobile Solutions |  | Power Solutions |  | Life Sciences |  | Corporate and Consolidations |  |  |  | Total
Six Months Ended June 30, 2019 |  |  |  |  |  |  |  |  |  |  |  |
Net sales |  | $ | 157,519 |  |  | $ | 101,050 |  |  | $ | 177,340 |  |  | $ | (987 | ) |  | (a) |  | $ | 434,922 |
Income (loss) from operations |  | $ | 8,199 |  |  | $ | 9,506 |  |  | $ | 13,151 |  |  | $ | (22,157 | ) |  |  |  | $ | 8,699 |
Interest expense |  |  |  |  |  |  |  |  |  |  |  | (27,759 | )
Other |  |  |  |  |  |  |  |  |  |  |  | (3,485 | )
Loss before benefit for income taxes and share of net income from joint venture |  |  |  |  |  |  |  |  |  |  |  | $ | (22,545 | )
Six Months Ended June 30, 2018 |  |  |  |  |  |  |  |  |  |  |  |
Net sales |  | $ | 177,873 |  |  | $ | 98,502 |  |  | $ | 90,353 |  |  | $ | (1,231 | ) |  | (a) |  | $ | 365,497 |
Income (loss) from operations |  | $ | 17,165 |  |  | $ | 11,233 |  |  | $ | 6,245 |  |  | $ | (31,242 | ) |  |  |  | $ | 3,401 |
Interest expense |  |  |  |  |  |  |  |  |  |  |  | (27,984 | )
Other |  |  |  |  |  |  |  |  |  |  |  | (14,512 | )
Loss before benefit for income taxes and share of net income from joint venture |  |  |  |  |  |  |  |  |  |  |  | $ | (39,095 | )

_______________________________

(a) | Includes elimination of intersegment transactions occurring during the ordinary course of business.

|  | Total Assets as of
|  | June 30, 2019 |  | December 31, 2018
Mobile Solutions |  | $ | 396,398 |  |  | $ | 356,387 |
Power Solutions |  | 309,516 |  |  | 297,947 |
Life Sciences |  | 815,626 |  |  | 802,770 |
Corporate and Consolidations |  | 50,745 |  |  | 44,466 |
Total |  | $ | 1,572,285 |  |  | $ | 1,501,570 |

Note 4. Inventories
Inventories are comprised of the following amounts:

|  | June 30, 2019 |  | December 31, 2018
Raw materials |  | $ | 53,789 |  |  | $ | 52,930 |
Work in process |  | 49,051 |  |  | 42,578 |
Finished goods |  | 25,686 |  |  | 27,107 |
Total inventories |  | $ | 128,526 |  |  | $ | 122,615 |

Note 5. Goodwill
The following table shows changes in the carrying amount of goodwill.

|  | Mobile Solutions |  | Power Solutions |  | Life Sciences |  | Total
Balance as of December 31, 2018 |  | $ | — |  |  | $ | 94,505 |  |  | $ | 344,947 |  |  | $ | 439,452 |
Currency impacts/Other |  | — |  |  | 196 |  |  | (16 | ) |  | 180 |
Balance as of June 30, 2019 |  | $ | — |  |  | $ | 94,701 |  |  | $ | 344,931 |  |  | $ | 439,632 |

Based on the closing price of a share of our common stock as of June 30, 2019, our market capitalization was in excess of the net book value of our stockholders’ equity. Subsequent to June 30, 2019, our market capitalization declined to a level less than the net book value of our stockholders’ equity. A prolonged or significant decline in market capitalization could be an indicator of additional goodwill impairment. We will continue to monitor our market capitalization to determine if an indicator of impairment exists in subsequent periods.
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During 2018, as a result of our annual goodwill impairment analysis performed during the fourth quarter of 2018, we recorded an impairment of $109.1 million in our Power Solutions group. Subsequent to the impairment, at December 31, 2018, Power Solutions reported a goodwill balance of $94.5 million. Given the carrying value of the Power Solutions group was equal to its fair value at December 31, 2018, as a result of the 2018 goodwill impairment, if actual performance of the Power Solutions group falls short of expected results, additional material impairment charges may be required. During the second quarter of 2019, we assessed for triggering events that would signify the need to perform an impairment test and concluded there were no triggering events during the period. We will continue to monitor and assess Power Solutions during 2019.
Note 6. Intangible Assets, Net
The following table shows changes in the carrying amount of intangible assets, net.

|  | Mobile Solutions |  | Power Solutions |  | Life Sciences |  | Total
Balance as of December 31, 2018 |  | $ | 35,892 |  |  | $ | 95,991 |  |  | $ | 244,365 |  |  | $ | 376,248 |
Amortization |  | (1,770 | ) |  | (5,497 | ) |  | (17,193 | ) |  | (24,460 | )
Currency impacts/Other |  | 2 |  |  | — |  |  | 7 |  |  | 9 |
Balance as of June 30, 2019 |  | $ | 34,124 |  |  | $ | 90,494 |  |  | $ | 227,179 |  |  | $ | 351,797 |

Note 7. Investment in Joint Venture
We own a 49% investment in Wuxi Weifu Autocam Precision Machinery Company, Ltd. (the “JV”), a joint venture located in Wuxi, China. The JV is jointly controlled 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, 2018 | $ | 20,364 |
Share of earnings | 66 |
Foreign currency translation gain | (24 | )
Balance as of June 30, 2019 | $ | 20,406 |

During the fourth quarter of 2018, as a result of changing market conditions, the fair value of the JV was assessed and we recorded an impairment of $16.6 million against our investment in the JV. The fair value assessment was significantly affected by changes in our assessment of future growth rates. It is reasonably possible that material deviation of future performance from the estimates used in the 2018 valuation could result in additional impairment to our investment in the JV in subsequent periods. During the second quarter of 2019, we assessed for triggering events that would signify the need to perform an impairment test and concluded there were no triggering events during the period.
We recognized sales to the JV of less than $0.1 million and $0.1 million during the three and six months ended June 30, 2019, respectively, and $0.1 million and $0.2 million for the three and six months ended June 30, 2018, respectively.
Note 8. Income Taxes
Our effective tax rate was (9.8)% and (12.5)% for the three months and six months ended June 30, 2019, respectively, and 19.1% and 18.2% for the three months and six months ended June 30, 2018, respectively. Our 2019 effective tax rate differs from the U.S. federal statutory tax rate of 21% principally due to a discrete tax charge of $6.0 million related to final tax regulations published by the Department of the Treasury and Internal Revenue Service on February 4, 2019. The 2019 effective tax rate was also impacted by the minimum tax on global intangible low-tax income (“GILTI”) and earnings outside the United States, which are taxed at different rates than the U.S. federal statutory tax rate of 21%. The effective tax rate for the three months ended June 30, 2019, was primarily impacted by changes in the full year forecast book income (loss) within each jurisdiction in which the Company operates.
Our 2018 effective tax rate differed from the U.S. federal statutory tax rate of 21% due to permanent differences including GILTI and earnings outside the United States, which were taxed at different rates than the U.S. federal statutory rate of 21%.
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Note 9. Debt
Collectively, 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 Term Loan”); 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 face amount of $110.0 million, maturing on October 19, 2020 (the “Senior Secured Revolver”). The credit facility is collateralized by all of our assets.
The following table presents debt balances as of June 30, 2019, and December 31, 2018.

|  | June 30, 2019 |  | December 31, 2018
Senior Secured Term Loan |  | $ | 529,188 |  |  | $ | 532,063 |
Incremental Term Loan |  | 273,000 |  |  | 279,000 |
Senior Secured Revolver |  | 76,382 |  |  | 38,720 |
International lines of credit and other loans |  | 9,683 |  |  | 9,810 |
Total principal |  | 888,253 |  |  | 859,593 |
Less—current maturities of long-term debt |  | 25,115 |  |  | 31,280 |
Principal, net of current portion |  | 863,138 |  |  | 828,313 |
Less—unamortized debt issuance costs |  | 12,762 |  |  | 16,842 |
Long-term debt, net of current portion |  | $ | 850,376 |  |  | $ | 811,471 |

We capitalized interest costs amounting to $0.5 million and $0.3 million in the three months ended June 30, 2019 and 2018, respectively, and $1.1 million and $0.5 million in the six months ended June 30, 2019 and 2018, respectively, related to construction in progress.
Senior Secured Term Loan
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 June 30, 2019, the Senior Secured Term Loan bore interest at 6.15%.
Incremental Term Loan
Outstanding borrowings under the Incremental Term Loan bear interest at one-month LIBOR plus an applicable margin of 3.25%. At June 30, 2019, the Incremental Term Loan bore interest of 5.65%.
Senior Secured Revolver
Outstanding borrowings under the Senior Secured Revolver bear interest on a variable rate structure with borrowings bearing interest at either one-month LIBOR plus an applicable margin of 3.50% or the prime lending rate plus an applicable margin of 2.50%. At June 30, 2019, the weighted average interest rate on outstanding borrowings under the Senior Secured Revolver was 6.02%. We pay an annual commitment fee of 0.50% for unused capacity under the Senior Secured Revolver on a quarterly basis.
On March 15, 2019, we amended our existing credit facility (the “March 2019 amendment”) to amend the defined terms within the credit facility. We paid $0.8 million of debt issuance costs related to the March 2019 amendment, which was recorded as a direct reduction to the carrying amount of the associated long-term debt. Additionally, $2.7 million of unamortized debt issuance costs related to the modification of the credit facility were written off.
On June 11, 2019, we amended our existing credit facility (the “June 2019 amendment”) to reduce the total available capacity under the Senior Secured Revolver from $125.0 million to $100.0 million, reduce the maximum capacity from $143.0 million to $110.0 million, and modify the consolidated net leverage ratio, as defined in the credit facility agreement, which is utilized for certain financial covenants. We paid $0.2 million of debt issuance costs related to the June 2019 amendment, which was recorded as a direct reduction to the carrying amount of the associated long-term debt.
We had $76.4 million outstanding under the Senior Secured Revolver at June 30, 2019. Total capacity under the Senior Secured Revolver was $100.0 million as of June 30, 2019 with $11.5 million available for future borrowings after reductions for outstanding letters of credit and outstanding borrowings as of June 30, 2019. Our credit facility is subject to certain financial covenants based on a consolidated net leverage ratio. The financial covenants are effective when we have outstanding borrowings under our Senior Secured Revolver on the last day of any fiscal quarter, become more restrictive over time, and are dependent upon our operational and financial performance. If our operational or financial performance does not improve in line with our expectations, we may be required to take actions to reduce expenditures and decrease our net indebtedness to maintain compliance in future periods. We were in compliance with all covenants under our credit facility at June 30, 2019.
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Our Senior Secured Revolver matures on October 19, 2020, which will require us to either extend the maturity date of the Senior Secured Revolver, generate sufficient cash flow through improved operational performance or other means to pay off any outstanding balance on the Senior Secured Revolver or seek additional forms of financing prior to the maturity date. Our ability to restructure or refinance our debt will depend on the condition of the capital markets and our financial condition at such time. If we are unable to extend the maturity date or refinance amounts due under our Senior Secured Revolver, or our operational performance fails to generate sufficient cash flows, we may be required to take additional actions to address our liquidity needs.
Derivative Instruments and Hedging Activities
In February 2019, we entered into a $700.0 million amortizing notional amount fixed-rate interest rate swap agreement to manage the interest rate risk associated with our long-term variable-rate debt until 2022. The fixed-rate interest rate swap agreement calls for us to receive interest monthly at a variable rate equal to one-month LIBOR and to pay interest monthly at a fixed rate of 2.4575%. Refer to Note 16 for further discussion of the interest rate swap agreement.
Note 10. Leases
We adopted ASC 842 on January 1, 2019, and elected the modified retrospective approach in which the new standard is applied to all leases existing at the date of adoption through a cumulative-effect adjustment of less than $0.1 million to retained deficit. Consequently, financial information is not updated, and the disclosures required under the new standard are not provided for periods prior to January 1, 2019. As part of the adoption, we elected the package of practical expedients, the short-term lease exemption, and the practical expedient to not separate lease and non-lease components permitted within ASC 842. Accordingly, we accounted for our existing operating leases as operating leases under the new standard, without reassessing (a) whether the contracts contain a lease under ASC 842, (b) whether classification of the operating leases would be different in accordance with ASC 842, or (c) whether any unamortized initial direct costs would have met the definition of initial direct costs in ASC 842 at lease commencement.
We determine whether an arrangement is a lease at inception. Right-of-use (“ROU”) lease assets represent our right to use an underlying asset for the lease term, and lease obligations represent our obligation to make lease payments arising from the lease. ROU lease assets and obligations are recognized at the lease commencement date based on the present value of lease payments over the lease term. When the implicit rate is not readily determinable, we use the estimated incremental borrowing rate based on the information available at the lease commencement date in determining the present value of lease payments. The lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Amortization of ROU lease assets is recognized in expense on a straight-line basis over the lease term.
Short-term leases are leases having a term of twelve months or less. We recognize short-term leases on a straight-line basis and do not record a related lease asset or liability for such leases. Finance lease ROU assets consist of equipment used in the manufacturing process with terms between thirteen months and five years. Operating lease ROU assets consist of the following:

• | Equipment used in the manufacturing process as well as office equipment with terms between thirteen months and five years; and

• | Manufacturing plants and office facilities with terms between thirteen months and 25 years.

The following table presents components of lease expense for the three and six months ended June 30, 2019:

|  | Financial Statement Line Item |  | Three Months Ended June 30, 2019 |  | Six Months Ended June 30, 2019
Lease cost: |  |  |  |  |  |
Finance lease cost |  |  |  |  |  |
Amortization of right-of-use assets |  | Depreciation and amortization |  | $ | 361 |  |  | $ | 683 |
Interest expense |  | Interest expense |  | 56 |  |  | 109 |
Operating lease cost |  | Cost of sales and selling, general and administrative expense |  | 3,398 |  |  | 6,833 |
Short-term lease cost (1) |  | Cost of sales and selling, general and administrative expense |  | 105 |  |  | 211 |
Total lease cost |  |  |  | $ | 3,920 |  |  | $ | 7,836 |

_______________________________
(1) Excludes expenses related to leases with a lease term of one month or less.
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The following table presents the lease-related assets and liabilities recorded on the balance sheet as of June 30, 2019:

|  | Financial Statement Line Item |  | June 30, 2019
Lease assets and liabilities: |  |  |  |
Assets |  |  |  |
Operating lease assets |  | Operating lease right-of-use assets |  | $ | 65,300 |
Finance lease assets |  | Property, plant and equipment, net |  | 13,534 |
Total lease assets |  |  |  | $ | 78,834 |
Liabilities |  |  |  |
Current liabilities |  |  |  |
Operating lease liabilities |  | Current portion of operating lease liabilities |  | $ | 7,272 |
Finance lease liabilities |  | Other current liabilities |  | 2,331 |
Non-current liabilities |  |  |  |
Operating lease liabilities |  | Operating lease liabilities, net of current portion |  | 64,152 |
Finance lease liabilities |  | Other non-current liabilities |  | 6,376 |
Total lease liabilities |  |  |  | $ | 80,131 |

The following table contains supplemental information related to leases for the six months ended June 30, 2019:

Supplemental Cash Flows Information |  | Six Months Ended June 30, 2019
Cash paid for amounts included in the measurement of lease liabilities |  |
Operating cash flows from finance leases |  | $ | 109 |
Operating cash flows from operating leases |  | 10,667 |
Financing cash flows from finance leases |  | 1,618 |
Right-of-use assets obtained in exchange for new operating lease liabilities |  | $ | 2,878 |

As of June 30, 2019, the weighted average remaining lease term and weighted-average discount rate for finance and operating leases was as follows:

|  | Weighted-Average Remaining Lease Term (years) |  | Weighted-Average Discount Rate
Finance leases |  | 3.9 |  | 2.4 | %
Operating leases |  | 10.1 |  | 8.2 | %

The maturities of lease liabilities in excess of twelve months as of June 30, 2019, is as follows:

|  | Operating Leases |  | Finance Leases
2019 (1) |  | $ | 6,612 |  |  | $ | 1,542 |
2020 |  | 11,885 |  |  | 2,263 |
2021 |  | 11,025 |  |  | 2,249 |
2022 |  | 10,768 |  |  | 2,030 |
2023 |  | 9,233 |  |  | 1,118 |
Thereafter |  | 57,127 |  |  | 72 |
Total future minimum lease payments |  | 106,650 |  |  | 9,274 |
Less: imputed interest |  | 35,226 |  |  | 567 |
Total lease liabilities |  | $ | 71,424 |  |  | $ | 8,707 |

(1) | For the period from July 1, 2019 to December 31, 2019.

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As of June 30, 2019, we have an additional operating lease commitment that has not yet commenced that would require us to pay a total of approximately $21.9 million base rent payments over the lease term of 15 years. This lease is expected to commence during the third quarter of 2020.
The following table summarizes the future minimum lease payments under operating leases with initial or non-cancelable lease terms in excess of one year prior to adoption of ASC 842 as reported in the 2018 Annual Report.

Year Ending December 31, |  |
2019 |  | $ | 13,337 |
2020 |  | 11,515 |
2021 |  | 10,557 |
2022 |  | 10,293 |
2023 |  | 8,752 |
Thereafter |  | 53,945 |
Total minimum payments |  | $ | 108,399 |

During the three and six months ended June 30, 2018, we recognized rent expense of $2.4 million and $4.5 million, respectively.
Note 11. Restructuring and Integration
The following tables summarize restructuring and integration charges incurred for the three months ended June 30, 2018 and the six months ended June 30, 2019 and 2018. There were no restructuring and integration charges incurred for the three months ended June 30, 2019.

|  | Three Months Ended June 30, 2018
|  | Mobile Solutions |  | Power Solutions |  | Life Sciences |  | Corporate and Consolidations |  | Total
Severance and other employee costs |  | $ | — |  |  | $ | — |  |  | $ | 1,596 |  |  | $ | — |  |  | $ | 1,596 |
Site closure and other associated costs |  | (5 | ) |  | — |  |  | — |  |  | — |  |  | (5 | )
Total |  | $ | (5 | ) |  | $ | — |  |  | $ | 1,596 |  |  | $ | — |  |  | $ | 1,591 |

|  | Six Months Ended June 30, 2019
|  | Mobile Solutions |  | Power Solutions |  | Life Sciences |  | Corporate and Consolidations |  | Total
Severance and other employee costs |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |
Site closure and other associated costs |  | (12 | ) |  | — |  |  | — |  |  | — |  |  | (12 | )
Total |  | $ | (12 | ) |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | (12 | )
|  | Six Months Ended June 30, 2018
|  | Mobile Solutions |  | Power Solutions |  | Life Sciences |  | Corporate and Consolidations |  | Total
Severance and other employee costs |  | $ | — |  |  | $ | — |  |  | $ | 1,596 |  |  | $ | 728 |  |  | $ | 2,324 |
Site closure and other associated costs |  | 22 |  |  | — |  |  | — |  |  | — |  |  | 22 |
Total |  | $ | 22 |  |  | $ | — |  |  | $ | 1,596 |  |  | $ | 728 |  |  | $ | 2,346 |

The following table summarizes restructuring and integration reserve activity for the six months ended June 30, 2019.

|  | Reserve Balance as of December 31, 2018 |  | Charges |  | Non-cash Adjustments |  | Cash Reductions |  | Reserve Balance as of June 30, 2019
Severance and other employee costs |  | $ | 1,122 |  |  | $ | — |  |  | $ | — |  |  | $ | (392 | ) |  | $ | 730 |
Site closure and other associated costs |  | 24 |  |  | (12 | ) |  | — |  |  | (12 | ) |  | — |
Total |  | $ | 1,146 |  |  | $ | (12 | ) |  | $ | — |  |  | $ | (404 | ) |  | $ | 730 |

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The amount accrued for restructuring and integration costs represents what we expect to pay over the next 1.7 years. We expect to pay $0.5 million within the next twelve months.
Note 12. Commitments and Contingencies
Brazil ICMS Tax Matter
Prior to the acquisition of Autocam Corporation in 2014 (“Autocam”), Autocam’s Brazilian subsidiary (“Autocam Brazil”) received notification from the Brazilian tax authority regarding ICMS (state value added tax or “VAT”) tax credits claimed on intermediary materials (e.g., tooling and perishable items) used in the manufacturing process. The Brazilian tax authority notification disallowed state ICMS tax 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 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 several lawsuits filed with the 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 a favorable decision in one of the declaratory actions for which the period for appeal has expired. We have filed actions in each court requesting dismissal of the matter based on the earlier court action. Although we anticipate a favorable resolution to all matters, we can provide no assurances that we will 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 this assessment is from $0 to $6.0 million. No amount was accrued at June 30, 2019, 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 of merger relating to the Autocam acquisition. Management believes the indemnification would include amounts owed for the tax, interest, and penalties related to this matter.
All Other Legal Matters
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 13. Revenue from Contracts with Customers
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 services are rendered over time. Revenue is measured as the amount of consideration we expect to receive in exchange for transferring goods or services. Sales, value add, and other taxes we collect concurrent with revenue-producing activities are excluded from revenue. Incidental items that are immaterial in the context of the contract are recognized as expense.
The following tables summarize sales to external customers by major source.

|  | Three Months Ended June 30, 2019
|  | Mobile Solutions |  | Power Solutions |  | Life Sciences |  | Intersegment Sales Eliminations |  | Total
United States |  | $ | 44,512 |  |  | $ | 40,580 |  |  | $ | 74,229 |  |  | $ | (503 | ) |  | $ | 158,818 |
China |  | 9,318 |  |  | 1,598 |  |  | 1,873 |  |  | — |  |  | 12,789 |
Germany |  | 1,316 |  |  | 21 |  |  | 8,447 |  |  | — |  |  | 9,784 |
Brazil |  | 9,636 |  |  | 80 |  |  | — |  |  | — |  |  | 9,716 |
Mexico |  | 5,066 |  |  | 4,235 |  |  | 117 |  |  | — |  |  | 9,418 |
Switzerland |  | 1,153 |  |  | 25 |  |  | 3,509 |  |  | — |  |  | 4,687 |
Other |  | 8,443 |  |  | 4,854 |  |  | 3,157 |  |  | — |  |  | 16,454 |
Total net sales |  | $ | 79,444 |  |  | $ | 51,393 |  |  | $ | 91,332 |  |  | $ | (503 | ) |  | $ | 221,666 |

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|  | Three Months Ended June 30, 2018
|  | Mobile Solutions |  | Power Solutions |  | Life Sciences |  | Intersegment Sales Eliminations |  | Total
United States |  | $ | 48,142 |  |  | $ | 41,924 |  |  | $ | 48,441 |  |  | $ | (703 | ) |  | $ | 137,804 |
China |  | 11,581 |  |  | 959 |  |  | 1,312 |  |  | — |  |  | 13,852 |
Mexico |  | 7,236 |  |  | 3,348 |  |  | 167 |  |  | — |  |  | 10,751 |
Brazil |  | 9,637 |  |  | — |  |  | 29 |  |  | — |  |  | 9,666 |
Germany |  | 1,551 |  |  | — |  |  | 3,816 |  |  | — |  |  | 5,367 |
Switzerland |  | 1,294 |  |  | 29 |  |  | 1,720 |  |  | — |  |  | 3,043 |
Other |  | 8,638 |  |  | 3,560 |  |  | 3,668 |  |  | — |  |  | 15,866 |
Total net sales |  | $ | 88,079 |  |  | $ | 49,820 |  |  | $ | 59,153 |  |  | $ | (703 | ) |  | $ | 196,349 |

|  | Six Months Ended June 30, 2019
|  | Mobile Solutions |  | Power Solutions |  | Life Sciences |  | Intersegment Sales Eliminations |  | Total
United States |  | $ | 88,969 |  |  | $ | 81,695 |  |  | $ | 142,572 |  |  | $ | (987 | ) |  | $ | 312,249 |
China |  | 18,471 |  |  | 3,436 |  |  | 3,565 |  |  | — |  |  | 25,472 |
Germany |  | 2,722 |  |  | 37 |  |  | 17,332 |  |  | — |  |  | 20,091 |
Brazil |  | 18,018 |  |  | 149 |  |  | — |  |  | — |  |  | 18,167 |
Mexico |  | 10,444 |  |  | 6,944 |  |  | 244 |  |  | — |  |  | 17,632 |
Switzerland |  | 2,512 |  |  | 41 |  |  | 6,775 |  |  | — |  |  | 9,328 |
Other |  | 16,383 |  |  | 8,748 |  |  | 6,852 |  |  | — |  |  | 31,983 |
Total net sales |  | $ | 157,519 |  |  | $ | 101,050 |  |  | $ | 177,340 |  |  | $ | (987 | ) |  | $ | 434,922 |

|  | Six Months Ended June 30, 2018
|  | Mobile Solutions |  | Power Solutions |  | Life Sciences |  | Intersegment Sales Eliminations |  | Total
United States |  | $ | 97,797 |  |  | $ | 82,052 |  |  | $ | 78,994 |  |  | $ | (1,231 | ) |  | $ | 257,612 |
China |  | 23,162 |  |  | 2,444 |  |  | 1,438 |  |  | — |  |  | 27,044 |
Mexico |  | 14,472 |  |  | 6,545 |  |  | 339 |  |  | — |  |  | 21,356 |
Brazil |  | 19,522 |  |  | 50 |  |  | 29 |  |  | — |  |  | 19,601 |
Germany |  | 3,085 |  |  | 7 |  |  | 3,817 |  |  | — |  |  | 6,909 |
Switzerland |  | 2,700 |  |  | 29 |  |  | 1,720 |  |  | — |  |  | 4,449 |
Poland |  | 3,971 |  |  | 18 |  |  | 1 |  |  | — |  |  | 3,990 |
Other |  | 13,164 |  |  | 7,357 |  |  | 4,015 |  |  | — |  |  | 24,536 |
Total net sales |  | $ | 177,873 |  |  | $ | 98,502 |  |  | $ | 90,353 |  |  | $ | (1,231 | ) |  | $ | 365,497 |

Deferred Revenue
The following table provides information about contract liabilities from contracts with customers.

|  | Deferred Revenue
Balance at January 1, 2019 |  | $ | 2,974 |
Balance at June 30, 2019 |  | $ | 2,953 |

Revenue recognized during the three and six months ended June 30, 2019, from amounts included in deferred revenue at the beginning of the period for performance obligations satisfied or partially satisfied during the period, was approximately $0.9 million and $1.6 million, respectively.
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Transaction Price Allocated to Future Performance Obligations
We are required to disclose the aggregate amount of transaction price that is allocated to performance obligations that have not yet been satisfied as of June 30, 2019, unless our contracts meet one of the practical expedients. Our contracts met the practical expedient for a performance obligation that is part of a contract that has an original expected duration of one year or less.
Sales Concentration
During the three months ended June 30, 2019, we recognized sales from a single customer of $23.0 million, or 10.4% of consolidated net sales. During the six months ended June 30, 2019, we recognized sales from a single customer of $45.1 million, or 10.4% of consolidated net sales. Revenues from this customer are in our Life Sciences and Power Solutions groups. No customers represented more than 10% of our net sales during the three and six months ended June 30, 2018.
Note 14. Shared-Based Compensation
The following table lists the components of share-based compensation expense by type of award.

|  | Three Months Ended June 30, |  | Six Months Ended June 30,
|  | 2019 |  | 2018 |  | 2019 |  | 2018
Stock options |  | $ | 169 |  |  | $ | 152 |  |  | $ | 361 |  |  | $ | 358 |
Restricted stock |  | 502 |  |  | 397 |  |  | 961 |  |  | 856 |
Performance share units |  | 435 |  |  | 529 |  |  | 657 |  |  | 1,120 |
Share-based compensation expense |  | $ | 1,106 |  |  | $ | 1,078 |  |  | $ | 1,979 |  |  | $ | 2,334 |

Stock Options
During the six months ended June 30, 2019, we granted options to purchase 210,400 shares to certain key employees. The weighted average grant date fair value of the options granted during the six months ended June 30, 2019, was $2.77 per share. The fair value of our options cannot be determined by market value because they are not traded in an open market. Accordingly, we utilized the Black Scholes financial 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 2019.

| 2019
Expected term | 6 years |
Risk free interest rate | 2.47 | %
Dividend yield | 3.53 | %
Expected volatility | 49.53 | %
Expected forfeiture rate | 4.00 | %

The expected term is derived from using the simplified method of determining stock option terms as described under the Staff Accounting Bulletin Topic 14, Share-based payment. The simplified method was used because sufficient historical stock option exercise experience was not available, primarily due to the transformation of the management structure over the past several years.
The average risk-free interest rate is derived from United States Department of Treasury published interest rates of daily yield curves for the same time period as the expected term.
The expected dividend yield is derived by a mathematical formula which uses the expected annual dividends over the expected term divided by the fair market value of our common stock at the grant date.
The expected volatility rate is derived from our actual common stock historical volatility over the same time period as the expected term. The volatility rate is derived by a mathematical formula utilizing daily closing price data.
The forfeiture rate is determined from examining the historical pre-vesting forfeiture patterns of past option issuances to key employees. While the forfeiture rate is not an input of the Black Scholes model for determining the fair value of the options, it is an important determinant of stock option compensation expense to be recorded.
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The following table summarizes stock option activity for the six months ended June 30, 2019.

|  | Number of Options (in thousands) |  | Weighted- Average Exercise Price (per share) |  | Weighted- Average Remaining Contractual Term (years) |  | Aggregate Intrinsic Value |  |
Outstanding at January 1, 2019 |  | 771 |  |  | $ | 15.17 |  |  |  |  |  |  |
Granted |  | 210 |  |  | 7.93 |  |  |  |  |  |  |
Exercised |  | — |  |  |  |  |  |  |  | $ | — |  |  |
Forfeited or expired |  | (5 | ) |  | 24.41 |  |  |  |  |  |  |
Outstanding at June 30, 2019 |  | 976 |  |  | $ | 13.56 |  |  | 6.1 |  | $ | — |  |  | (1)
Exercisable at June 30, 2019 |  | 701 |  |  | $ | 14.26 |  |  | 4.8 |  | $ | — |  |  | (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 the closing market price of our stock at June 30, 2019, was greater than the exercise price of any individual option grant.

Restricted Stock
During the six months ended June 30, 2019, we granted 281,065 restricted stock awards to non-executive directors, officers and certain other key employees. The shares of restricted stock granted during the six months ended June 30, 2019, vest pro-rata over three years for officers and 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 price of our common stock as of the date of grant. The weighted average grant date value of restricted stock granted in the six months ended June 30, 2019, was $7.93 per share. Total grant-date fair value of restricted stock that vested in the six months ended June 30, 2019, was $1.5 million.
The following table summarizes the status of unvested restricted stock awards as of June 30, 2019, and changes during the six months then ended.

|  | Nonvested Restricted Shares (in thousands) |  | Weighted Average Grant-Date Fair Value (per share)
Nonvested at January 1, 2019 |  | 146 |  |  | $ | 22.07 |
Granted |  | 281 |  |  | 7.93 |
Vested |  | (70 | ) |  | 20.92 |
Forfeited |  | (18 | ) |  | 18.98 |
Nonvested at June 30, 2019 |  | 339 |  |  | $ | 10.74 |

Performance Share Units
Performance Share Units (“PSUs”) are a form of long-term incentive compensation awarded to executive officers and certain other key employees designed to directly align the interests of employees to the interests of our stockholders, and to create long-term stockholder value. PSU awards granted in 2019 were made pursuant to the NN, Inc. 2016 Omnibus Incentive Plan and a Performance Share Unit Agreement (the “2016 Omnibus Agreement”). Some PSUs are based 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 of the S&P SmallCap 600 Index during specified performance periods as defined in the 2016 Omnibus Agreement. The ROIC Awards vest, if at all, upon our achieving a specified average return on invested capital during the performance periods. Each performance period generally begins on January 1 of the year of grant and ends 36 months 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 at the 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 common stock, 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 end of the performance periods will be interpolated between a threshold and maximum payout amount based on actual performance results. No
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dividends will be paid on outstanding PSUs during the performance period; however, dividend equivalents will be paid based on the number of shares of common stock that are 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 PSUs for “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 of PSUs 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 2019.

TSR Awards: |  | Threshold Performance (50% of Shares) |  | Target Performance (100% of Shares) |  | Maximum Performance (150% of Shares)
2019 grants |  | 35th Percentile |  | 50th Percentile |  | 75th Percentile
ROIC Awards: |  | Threshold Performance (35% of Shares) |  | Target Performance (100% of Shares) |  | Maximum Performance (150% of Shares)
2019 grants (1) |  | 4.7 | % |  | 5.8 | % |  | 7.0 | %

(1) | For the ROIC Awards granted in 2019, the denominator of the calculation is different than in prior years, and therefore the target percentages are not comparable to historical target percentages.

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 market condition under ASC Topic 718, Compensation – stock compensation. The grant date fair value of ROIC Awards is based on the closing price of a share of our 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 period presented.

|  | TSR Awards |  | ROIC Awards
Award Year |  | Shares (in thousands) |  | Grant Date Fair Value (per share) |  | Shares (in thousands) |  | Grant Date Fair Value (per share)
2019 |  | 136 |  |  | $ | 9.28 |  |  | 174 |  |  | $ | 7.93 |

We recognize expense for ROIC Awards based on the probable outcome of the associated performance condition. We generally recognize an expense for ROIC Awards based on the Target Performance threshold of 100% because, at the date of grant, the Target Performance is the probable level of performance achievement.
The following table summarizes the status of unvested PSUs as of June 30, 2019, and changes during the six months then ended.

|  | Nonvested TSR Awards |  | Nonvested ROIC Awards
|  | Shares (in thousands) |  | Weighted Average Grant-Date Fair Value (per share) |  | Shares (in thousands) |  | Weighted Average Grant-Date Fair Value (per share)
Nonvested at January 1, 2019 |  | 94 |  |  | $ | 26.84 |  |  | 100 |  |  | $ | 24.39 |
Granted |  | 136 |  |  | 9.28 |  |  | 174 |  |  | 7.93 |
Forfeited |  | — |  |  | — |  |  | — |  |  | — |
Nonvested at June 30, 2019 |  | 230 |  |  | $ | 16.47 |  |  | 274 |  |  | $ | 13.93 |

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Note 15. Net Income (Loss) Per Share

|  | Three Months Ended June 30, |  | Six Months Ended June 30,
|  | 2019 |  | 2018 |  | 2019 |  | 2018
Numerator: |  |  |  |  |  |  |  |
Net loss |  | $ | (6,697 | ) |  | $ | (24,511 | ) |  | $ | (25,297 | ) |  | $ | (30,494 | )
Denominator: |  |  |  |  |  |  |  |
Weighted average shares outstanding |  | 42,028 |  |  | 27,696 |  |  | 42,000 |  |  | 27,632 |
Effect of dilutive stock options |  | — |  |  | — |  |  | — |  |  | — |
Diluted shares outstanding |  | 42,028 |  |  | 27,696 |  |  | 42,000 |  |  | 27,632 |
Per common share net loss: |  |  |  |  |  |  |  |
Basic net loss per share |  | $ | (0.16 | ) |  | $ | (0.89 | ) |  | $ | (0.60 | ) |  | $ | (1.10 | )
Diluted net loss per share |  | $ | (0.16 | ) |  | $ | (0.89 | ) |  | $ | (0.60 | ) |  | $ | (1.10 | )
Cash dividends declared per share |  | $ | 0.07 |  |  | $ | 0.07 |  |  | $ | 0.14 |  |  | $ | 0.14 |

The calculation of diluted net loss per share for the three and six months ended June 30, 2019, excludes 0.8 million and 0.8 million, respectively, of potentially dilutive stock options, which had the effect of being anti-dilutive. The calculation of diluted net loss per share for the three and six months ended June 30, 2018, excludes 0.8 million and 0.8 million, respectively, of potentially dilutive stock options, which had the effect of being anti-dilutive. Given the net loss for the three and six months ended June 30, 2019 and 2018, all options are considered anti-dilutive and were excluded from the calculation of diluted net loss per share.
Note 16. Fair Value Measurements
Fair 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 transaction with market participants at the measurement date. We followed consistent methods and assumptions to estimate fair values as more fully described in the 2018 Annual Report.
Our financial instruments that are subject to fair value disclosure consist of cash and cash equivalents, accounts receivable, accounts payable, derivatives, and long-term debt. As of June 30, 2019, the carrying values of these financial instruments approximated fair value. The fair value of floating-rate debt approximates the carrying amount because the interest rates paid are based on short-term maturities. The fair value of our outstanding fixed-rate debt included in the “International lines of credit and other loans” line item within Note 9 to these Notes to Condensed Consolidated Financial Statements was $9.5 million and $10.4 million as of June 30, 2019 and December 31, 2018, respectively. These fair values represent Level 2 under the three-tier hierarchy described above. The book value of our outstanding fixed-rate debt included in the “International lines of credit and other loans” line item within Note 9 to these Notes to Condensed Consolidated Financial Statements was $9.4 million and $9.8 million as of June 30, 2019 and December 31, 2018, respectively.
Recurring Fair Value Measurements
Fair value principles prioritize valuation inputs across three broad levels. Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 2 inputs are quoted prices for similar assets and liabilities in active markets or inputs that are observable for the asset or liability, either directly or indirectly through market corroboration, for substantially the full term of the financial instrument. Level 3 inputs are unobservable inputs based on the assumptions used to measure assets and liabilities at fair value. An asset or liability’s classification within the various levels is determined based on the lowest level input that is significant to the fair value measurement.
We manage our exposure to fluctuations in interest rates using a mix of fixed and variable rate debt. On February 8, 2019, we entered into a $700.0 million fixed-rate interest rate swap agreement that changed the LIBOR-based portion of the interest rate on a portion of our variable rate debt to a fixed rate of 2.4575% (the “interest rate swap”). The term of the interest rate swap is from the effective date of February 12, 2019, through the termination date of October 19, 2022 (the “interest rate swap term”). The interest rate swap effectively mitigates our exposures to the risks and variability of changes in LIBOR.
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The notional amount of the interest rate swap will decrease over the interest rate swap term as follows:

|  | Notional Amount
February 12, 2019 - December 30, 2020 |  | $ | 700,000 |
December 31, 2020 - December 30, 2021 |  | 466,667 |
December 31, 2021 - October 19, 2022 |  | 233,333 |

The objective of the interest rate swap is to eliminate the variability of cash flows in interest payments on the first $700.0 million of variable rate debt attributable to changes in benchmark one-month LIBOR interest rates. The hedged risk is the interest rate risk exposure to changes in interest payments, attributable to changes in benchmark one-month LIBOR interest rates over the interest rate swap term. If one-month LIBOR is greater than the minimum percentage under the Senior Secured Term Loan, the changes in cash flows of the interest rate swap are expected to exactly offset changes in cash flows of the variable rate debt. The interest rate swap is designated as a cash flow hedge.
As of June 30, 2019, we reported a $10.8 million loss, net of tax, in accumulated other comprehensive income related to the interest rate swap.
The following shows the liabilities measured at fair value on a recurring basis for the interest rate swap as of June 30, 2019.

|  | Fair Value Measurements as of June 30, 2019
Description |  | Quoted Prices in Active Markets for Identical Assets (Level 1) |  | Significant Other Observable Inputs (Level 2) |  | Significant Unobservable Inputs (Level 3)
Derivative liability - other current liabilities |  | $ | — |  |  | $ | 4,244 |  |  | $ | — |
Derivative liability - other non-current liabilities |  | — |  |  | 9,671 |  |  | — |
Total |  | $ | — |  |  | $ | 13,915 |  |  | $ | — |

The inputs for determining fair value of the interest rate swap are classified as Level 2 inputs. 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. Counterparty to this derivative contract is a highly rated financial institution which we believe carries only a minimal risk of nonperformance.
As of December 31, 2018, we had no interest rate swap agreements or other derivative financial instruments outstanding.
Note 17. Subsequent Event
On August 8, 2019, we signed a definitive agreement to sell our former headquarters building in Johnson City, Tennessee, for net proceeds of approximately $4 million. We anticipate the closing of this sale will occur during the third quarter of 2019 and result in no material gain or loss as a result of the disposition.

Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview
NN, Inc. is a global diversified industrial company that combines advanced engineering and production capabilities with in-depth materials science expertise to design and manufacture high-precision components and assemblies for the medical, aerospace and defense, electrical, automotive, and general industrial markets. As used in this Quarterly Report, the terms “NN,” the “Company,” “we,” “our,” or “us” refer to NN, Inc. and its subsidiaries. As of June 30, 2019, we had 51 facilities in North America, Europe, South America, and China.
Forward-Looking Statements
This Quarterly Report contains forward-looking statements that are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements may discuss goals, intentions and expectations as to future trends, plans, events, results of operations or financial condition, or state other information relating to NN, Inc., based on current beliefs of management as well as assumptions made by, and information currently 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
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cause actual results to be materially different from such forward-looking statements. Such factors include, among others, general economic conditions and economic conditions in the industrial sector, competitive influences, risks that current customers will commence or increase captive production, risks of capacity underutilization, quality issues, availability of raw materials, currency and other risks associated with international trade, our dependence on certain major customers, the impact of acquisitions and divestitures, the level of our indebtedness, the restrictions contained in our debt agreements, our ability to obtain financing at favorable rates, if at all, and to refinance existing debt as it matures, unanticipated difficulties integrating acquisitions, new laws and governmental regulations, and other risk factors and cautionary statements listed from time-to-time in our periodic reports filed with the Securities and Exchange Commission. We disclaim any obligation to update any such factors or to publicly announce the result of any revisions to any of the forward-looking statements included herein or therein to reflect future events or developments.
For additional information concerning such risk factors and cautionary statements, please see the section titled “Item 1A. Risk Factors” in the 2018 Annual Report.
Results of Operations
Factors That May Influence Results of Operations
The following paragraphs describe factors that have influenced results of operations for the six months ended June 30, 2019, that management believes are important to provide an understanding of the business and results of operations, or that may influence operations in the future.
Management Structure
In 2018, we implemented a new enterprise and management structure designed to accelerate growth and further balance our portfolio by aligning our strategic assets and businesses. Our businesses were reorganized into the Mobile Solutions, Power Solutions, and Life Sciences groups and are based principally on the end markets they serve. Mobile Solutions is focused on growth in the general industrial and automotive end markets. Power Solutions is focused on growth in the electrical and aerospace and defense end markets. Life Sciences is focused on growth in the medical end market.
Acquisitions
In February 2018, we acquired 100% of the assets of Bridgemedica, LLC (“Bridgemedica”). Bridgemedica is a medical device company that provides concept to supply solutions through design, development engineering, and manufacturing. Operating results of Bridgemedica are reported in our Life Sciences group.
In May 2018, we acquired 100% of the stock of PMG Intermediate Holding Corporation, the parent company of Paragon Medical, Inc. (“Paragon Medical”). Paragon Medical is a medical device manufacturer that focuses on the orthopedic, case and tray, implant, and instrument markets. Operating results of Paragon Medical are reported in our Life Sciences group.
In August 2018, we acquired 100% of the capital stock of Southern California Technical Arts, Inc. (“Technical Arts”). Technical Arts is an industrial machining company that manufactures tight tolerance metal components and assemblies. The acquisition of Technical Arts expands our presence in the aerospace and defense end market. Operating results of Technical Arts are reported in our Power Solutions group.
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Three Months Ended June 30, 2019, compared to the Three Months Ended June 30, 2018

|  | Three Months Ended June 30,
|  | 2019 |  | 2018 |  | $ Change
Net sales |  | $ | 221,666 |  |  | $ | 196,349 |  |  | $ | 25,317 |  |
Acquisitions |  |  |  |  |  |  | $ | 19,457 |
Volume |  |  |  |  |  |  | 7,579 |
Foreign exchange effects |  |  |  |  |  |  | (2,371 | )
Price/mix/inflation/other |  |  |  |  |  |  | 652 |
Cost of sales (exclusive of depreciation and amortization shown separately below) |  | 163,513 |  |  | 148,640 |  |  | 14,873 |  |
Acquisitions |  |  |  |  |  |  | $ | 13,159 |
Volume |  |  |  |  |  |  | 6,757 |
Foreign exchange effects |  |  |  |  |  |  | (1,882 | )
Cost reduction projects |  |  |  |  |  |  | (5,637 | )
Inflation |  |  |  |  |  |  | 2,958 |
Mix/other |  |  |  |  |  |  | (482 | )
Selling, general and administrative expense |  | 26,743 |  |  | 26,641 |  |  | 102 |  |
Acquisition related costs excluded from selling, general and administrative expense |  | — |  |  | 3,437 |  |  | (3,437 | ) |
Depreciation and amortization |  | 22,924 |  |  | 16,258 |  |  | 6,666 |  |
Other operating (income) expense, net |  | 388 |  |  | 74 |  |  | 314 |  |
Restructuring and integration expense, net |  | — |  |  | 1,591 |  |  | (1,591 | ) |
Income (loss) from operations |  | 8,098 |  |  | (292 | ) |  | 8,390 |  |
Interest expense |  | 13,958 |  |  | 15,988 |  |  | (2,030 | ) |
Loss on extinguishment of debt and write-off of debt issuance costs |  | — |  |  | 12,938 |  |  | (12,938 | ) |
Other (income) expense, net |  | 57 |  |  | 1,887 |  |  | (1,830 | ) |
Loss before (provision) benefit for income taxes and share of net income from joint venture |  | (5,917 | ) |  | (31,105 | ) |  | 25,188 |  |
Benefit (provision) for income taxes |  | (577 | ) |  | 5,947 |  |  | (6,524 | ) |
Share of net income (loss) from joint venture |  | (203 | ) |  | 647 |  |  | (850 | ) |
Net loss |  | $ | (6,697 | ) |  | $ | (24,511 | ) |  | $ | 17,814 |  |

Net Sales. Net sales increase d by $25.3 million, or 13%, in the three months ended June 30, 2019, compared to the three months ended June 30, 2018, primarily due to $19.5 million of net sales attributable to the 2018 business acquisitions as well as an increase in volume of $7.6 million, as a result of an increase in core volume in the medical end market partially offset by lower demand within the automotive end market. The increase in net sales was partially offset by unfavorable foreign exchange effects of $2.4 million, primarily in Brazil and China.
Cost of Sales. Cost of sales increase d by $14.9 million, or 10%, in the three months ended June 30, 2019, compared to the three months ended June 30, 2018, primarily due to $13.2 million in cost of sales attributable to the 2018 business acquisitions. The increase in cost of sales was partially offset by favorable foreign exchange effects of $1.9 million and $5.6 million in cost savings from production process improvement projects. Material and labor inflation contributed $3.0 million to the increase in cost of sales.
Selling, General and Administrative Expense. Selling, general and administrative expense increase d by $0.1 million during the three months ended June 30, 2019, compared to the three months ended June 30, 2018, primarily due to the 2018 business acquisitions, which collectively contributed $2.2 million to selling, general and administrative expense during the three months ended June 30, 2019, as well as severance and employee-related costs associated with the closure of the Johnson City, Tennessee, shared service center in June 2019 and the chief financial officer transition. These increases were offset by lower costs for professional services as a result of our strategic initiatives, including integration of recent acquisitions.
Acquisition Related Costs Excluded from Selling, General and Administrative Expense. Acquisition related costs decrease d during the three months ended June 30, 2019, compared to the three months ended June 30, 2018, as there was no business acquisition activity during the three months ended June 30, 2019. The three months ended June 30, 2018, included professional service costs incurred in connection with the 2018 business acquisitions.
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Depreciation and Amortization. Depreciation and amortization increase d during the three months ended June 30, 2019, compared to the three months ended June 30, 2018, consistent with additions to intangible assets and property, plant and equipment, including $2.8 million from the 2018 business acquisitions. The increase in depreciation and amortization includes the effects of related fair value adjustments to certain property, plant and equipment and the addition of intangible assets, principally for customer relationships and trade names.
Restructuring and Integration Expense. Restructuring and integration expense decrease d during the three months ended June 30, 2019, compared to the three months ended June 30, 2018, primarily due to employee severance costs incurred in connection with the Paragon Medical acquisition in 2018. Note 11 in the Notes to Condensed Consolidated Financial Statements provides more information regarding the effects of restructuring and integration on our operating results.
Interest Expense. Interest expense decrease d by $2.0 million during the three months ended June 30, 2019, compared to the three months ended June 30, 2018, primarily due to the $200.0 million secured second lien term loan facility (“Second Lien Facility”), which was executed in May 2018 and repaid in full in September 2018.

|  | Three Months Ended June 30,
|  | 2019 |  | 2018
Interest on debt |  | $ | 13,067 |  |  | $ | 14,875 |
Amortization of debt issuance costs |  | 1,162 |  |  | 1,225 |
Capitalized interest |  | (532 | ) |  | (253 | )
Other |  | 261 |  |  | 141 |
Total interest expense |  | $ | 13,958 |  |  | $ | 15,988 |

Loss on Extinguishment of Debt and Write-off of Unamortized Debt Issuance Costs. Loss on extinguishment of debt and write-off of unamortized debt issuance costs decrease d during the three months ended June 30, 2019, compared to the three months ended June 30, 2018, due to costs written off associated with the Second Lien Facility and amendment to the existing credit facility in May 2018.
Other (income) expense, net. Other (income) expense, net decrease d during the three months ended June 30, 2019, compared to the three months ended June 30, 2018, primarily due to unfavorable foreign exchange effects associated with intercompany borrowings during the three months ended June 30, 2018.
Provision/Benefit for Income Taxes. Our effective tax rate was (9.8)% for the three months ended June 30, 2019, compared to 19.1% for the three months ended June 30, 2018. Note 8 in the Notes to Condensed Consolidated Financial Statements describes the components of income taxes for each period presented.
Share of Net Income from Joint Venture. Our share of net income from a Chinese joint venture in our Mobile Solutions group decrease d by $0.9 million primarily due to price and volume decreases resulting from reduced demand in the Chinese automotive market.
Results by Segment
MOBILE SOLUTIONS

|  | Three Months Ended June 30,
|  | 2019 |  | 2018 |  | $ Change
Net sales |  | $ | 79,444 |  |  | $ | 88,079 |  |  | $ | (8,635 | ) |
Volume |  |  |  |  |  |  | $ | (7,264 | )
Foreign exchange effects |  |  |  |  |  |  | (1,823 | )
Price/mix/inflation/other |  |  |  |  |  |  | 452 |
Income from operations |  | $ | 4,092 |  |  | $ | 7,380 |  |  | $ | (3,288 | ) |

Net sales decreased during the three months ended June 30, 2019, compared to the three months ended June 30, 2018, primarily due to lower demand within the North American and Chinese automotive markets, unfavorable foreign exchange effects, and the impact of reduced demand for components associated with programs nearing the end of life.
Income from operations decreased by $3.3 million compared to prior year due to lost variable margin on the above-referenced sales volume decline and costs associated with the launch of new fuel systems business within our European operations. These unfavorable impacts were partially offset by fixed cost reduction actions taken in response to the decline in sales volume.
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POWER SOLUTIONS

|  | Three Months Ended June 30,
|  | 2019 |  | 2018 |  | $ Change
Net sales |  | $ | 51,393 |  |  | $ | 49,820 |  |  | $ | 1,573 |  |
Acquisitions |  |  |  |  |  |  | $ | 1,719 |
Volume |  |  |  |  |  |  | 219 |
Foreign exchange effects |  |  |  |  |  |  | (365 | )
Income from operations |  | $ | 5,682 |  |  | $ | 6,000 |  |  | $ | (318 | ) |

Net sales increase d during the three months ended June 30, 2019, compared to the three months ended June 30, 2018, primarily due to $1.7 million of net sales attributable to the Technical Arts acquisition. The increase in net sales was partially offset by unfavorable foreign exchange effects.
Income from operations decreased by $0.3 million compared to prior year primarily due to higher selling, general and administrative expenses associated with the 2018 business group resegmentation.
LIFE SCIENCES

|  | Three Months Ended June 30,
|  | 2019 |  | 2018 |  | $ Change
Net sales |  | $ | 91,332 |  |  | $ | 59,153 |  |  | $ | 32,179 |  |
Acquisitions |  |  |  |  |  |  | $ | 17,738 |
Volume |  |  |  |  |  |  | 14,624 |
Foreign exchange effects |  |  |  |  |  |  | (183 | )
Income from operations |  | $ | 9,305 |  |  | $ | 2,041 |  |  | $ | 7,264 |  |

Net sales increased during the three months ended June 30, 2019, compared to the three months ended June 30, 2018, primarily due to $17.7 million of net sales attributable to the Paragon Medical acquisition as well as a $14.6 million increase in core volume.
Income from operations increased by $7.3 million compared to prior year primarily due to an increase in sales volume as well as the Paragon Medical acquisition.
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Six Months Ended June 30, 2019, compared to the Six Months Ended June 30, 2018

|  | Six Months Ended June 30,
|  | 2019 |  | 2018 |  | $ Change
Net sales |  | $ | 434,922 |  |  | $ | 365,497 |  |  | $ | 69,425 |  |
Acquisitions |  |  |  |  |  |  | $ | 74,705 |
Volume |  |  |  |  |  |  | (1,184 | )
Foreign exchange effects |  |  |  |  |  |  | (5,244 | )
Price/mix/inflation/other |  |  |  |  |  |  | 1,148 |
Cost of sales (exclusive of depreciation and amortization shown separately below) |  | 324,782 |  |  | 275,084 |  |  | 49,698 |  |
Acquisitions |  |  |  |  |  |  | $ | 51,024 |
Volume |  |  |  |  |  |  | 1,689 |
Foreign exchange effects |  |  |  |  |  |  | (4,286 | )
Cost reduction projects |  |  |  |  |  |  | (11,676 | )
Inflation |  |  |  |  |  |  | 5,154 |
Mix/other |  |  |  |  |  |  | 7,793 |
Selling, general and administrative expense |  | 54,868 |  |  | 48,818 |  |  | 6,050 |  |
Acquisition related costs excluded from selling, general and administrative expense |  | — |  |  | 5,213 |  |  | (5,213 | ) |
Depreciation and amortization |  | 46,349 |  |  | 30,539 |  |  | 15,810 |  |
Other operating (income) expense, net |  | 236 |  |  | 96 |  |  | 140 |  |
Restructuring and integration expense, net |  | (12 | ) |  | 2,346 |  |  | (2,358 | ) |
Income (loss) from operations |  | 8,699 |  |  | 3,401 |  |  | 5,298 |  |
Interest expense |  | 27,759 |  |  | 27,984 |  |  | (225 | ) |
Loss on extinguishment of debt and write-off of debt issuance costs |  | 2,699 |  |  | 12,938 |  |  | (10,239 | ) |
Other (income) expense, net |  | 786 |  |  | 1,574 |  |  | (788 | ) |
Loss before (provision) benefit for income taxes and share of net income from joint venture |  | (22,545 | ) |  | (39,095 | ) |  | 16,550 |  |
Benefit (provision) for income taxes |  | (2,818 | ) |  | 7,123 |  |  | (9,941 | ) |
Share of net income (loss) from joint venture |  | 66 |  |  | 1,478 |  |  | (1,412 | ) |
Net loss |  | $ | (25,297 | ) |  | $ | (30,494 | ) |  | $ | 5,197 |  |

Net Sales. Net sales increase d by $69.4 million, or 19.0%, in the six months ended June 30, 2019, compared to the six months ended June 30, 2018, primarily due to $74.7 million of net sales attributable to the 2018 business acquisitions. The increase in net sales was partially offset by a decrease in volume of $1.2 million, primarily as a result of lower demand within the automotive end market as well as unfavorable foreign exchange effects of $5.2 million, primarily in Brazil and China.
Cost of Sales. Cost of sales increase d by $49.7 million, or 18.1%, in the six months ended June 30, 2019, compared to the six months ended June 30, 2018, primarily due to $51.0 million in cost of sales attributable to the 2018 business acquisitions as well as an increase in volume of $1.7 million. The increase in cost of sales was partially offset by favorable foreign exchange effects of $4.3 million and $11.7 million in cost savings from production process improvement projects. Material and labor inflation as well as mix, primarily in our Mobile Solutions business, contributed $5.2 million and $7.5 million, respectively, to the increase in cost of sales.
Selling, General and Administrative Expense. Selling, general and administrative expense increase d by $6.1 million during the six months ended June 30, 2019, compared to the six months ended June 30, 2018, primarily due to the 2018 business acquisitions which collectively contributed $7.3 million to selling, general and administrative expense during the six months ended June 30, 2019. The increase was partially offset by lower costs for professional services as a result of our strategic initiatives, including integration of recent acquisitions.
Acquisition Related Costs Excluded from Selling, General and Administrative Expense. Acquisition related costs decrease d during the six months ended June 30, 2019, compared to the six months ended June 30, 2018, as there was no business acquisition activity during the six months ended June 30, 2019. The six months ended June 30, 2018, included professional service costs incurred in connection with the 2018 business acquisitions.
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Depreciation and Amortization. Depreciation and amortization increase d during the six months ended June 30, 2019, compared to the six months ended June 30, 2018, consistent with additions to intangible assets and property, plant and equipment, including $11.8 million from the 2018 business acquisitions. The increase in depreciation and amortization includes the effects of related fair value adjustments to certain property, plant and equipment and the addition of intangible assets, principally for customer relationships and trade names.
Restructuring and Integration Expense. Restructuring and integration expense decrease d during the six months ended June 30, 2019, compared to the six months ended June 30, 2018, primarily due to employee severance costs incurred in connection with implementing our new enterprise and management structure as well as the Paragon Medical acquisition in 2018. Note 11 in the Notes to Condensed Consolidated Financial Statements provides more information regarding the effects of restructuring and integration on our operating results.
Interest Expense. Interest expense decrease d by $0.2 million during the six months ended June 30, 2019, compared to the six months ended June 30, 2018, primarily due to the $200.0 million secured second lien term loan facility (“Second Lien Facility”), which was executed in May 2018 and repaid in full in September 2018.

|  | Six Months Ended June 30,
|  | 2019 |  | 2018
Interest on debt |  | $ | 26,185 |  |  | $ | 25,839 |
Amortization of debt issuance costs |  | 2,354 |  |  | 2,313 |
Capitalized interest |  | (1,084 | ) |  | (458 | )
Other |  | 304 |  |  | 290 |
Total interest expense |  | $ | 27,759 |  |  | $ | 27,984 |

Loss on Extinguishment of Debt and Write-off of Unamortized Debt Issuance Costs. Loss on extinguishment of debt and write-off of unamortized debt issuance costs decrease d during the six months ended June 30, 2019, compared to the six months ended June 30, 2018, due to costs written off associated with the Second Lien Facility and amendment to the existing credit facility in May 2018 offset by costs written off associated with the March 2019 amendment to the credit facility.
Other (income) expense, net. Other (income) expense, net decrease d during the six months ended June 30, 2019, compared to the six months ended June 30, 2018, primarily due to unfavorable foreign exchange effects associated with intercompany borrowings during the six months ended June 30, 2018.
Provision/Benefit for Income Taxes. Our effective tax rate was (12.5)% for the six months ended June 30, 2019, compared to 18.2% for the six months ended June 30, 2018. Note 8 in the Notes to Condensed Consolidated Financial Statements describes the components of income taxes for each period presented.
Share of Net Income from Joint Venture. Our share of net income from a Chinese joint venture in our Mobile Solutions group decrease d by $1.4 million primarily due to price and volume decreases resulting from reduced demand in the Chinese automotive market.
Results by Segment
MOBILE SOLUTIONS

|  | Six Months Ended June 30,
|  | 2019 |  | 2018 |  | $ Change
Net sales |  | $ | 157,519 |  |  | $ | 177,873 |  |  | $ | (20,354 | ) |
Volume |  |  |  |  |  |  | $ | (16,561 | )
Foreign exchange effects |  |  |  |  |  |  | (4,697 | )
Price/mix/inflation/other |  |  |  |  |  |  | 904 |
Income from operations |  | $ | 8,199 |  |  | $ | 17,165 |  |  | $ | (8,966 | ) |

Net sales decreased during the during the six months ended June 30, 2019, compared to the six months ended June 30, 2018, primarily due to lower demand within the North American and Chinese automotive markets, unfavorable foreign exchange effects, and the impact of reduced demand for components associated with programs nearing the end of life.
Income from operations decreased by $9.0 million compared to prior year due to lost variable margin on the above-referenced sales volume decline and costs associated with the launch of new fuel systems business within our European operations. These unfavorable impacts were partially offset by fixed cost reduction actions taken in response to the decline in sales volume.
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POWER SOLUTIONS

|  | Six Months Ended June 30,
|  | 2019 |  | 2018 |  | $ Change
Net sales |  | $ | 101,050 |  |  | $ | 98,502 |  |  | $ | 2,548 |  |
Acquisitions |  |  |  |  |  |  | $ | 3,331 |
Volume |  |  |  |  |  |  | (418 | )
Foreign exchange effects |  |  |  |  |  |  | (365 | )
Income from operations |  | $ | 9,506 |  |  | $ | 11,233 |  |  | $ | (1,727 | ) |

Net sales increase d during the during the six months ended June 30, 2019, compared to the six months ended June 30, 2018, primarily due to $3.3 million of net sales attributable to the Technical Arts acquisition. The increase in net sales was partially offset by lower demand in the electrical products end market.
Income from operations decreased by $1.7 million compared to prior year primarily due to higher selling, general and administrative expenses associated with the 2018 business group resegmentation and lower demand in the electrical products end market.
LIFE SCIENCES

|  | Six Months Ended June 30,
|  | 2019 |  | 2018 |  | $ Change
Net sales |  | $ | 177,340 |  |  | $ | 90,353 |  |  | $ | 86,987 |  |
Acquisitions |  |  |  |  |  |  | $ | 71,374 |
Volume |  |  |  |  |  |  | 15,795 |
Foreign exchange effects |  |  |  |  |  |  | (182 | )
Income from operations |  | $ | 13,151 |  |  | $ | 6,245 |  |  | $ | 6,906 |  |

Net sales increased during the six months ended June 30, 2019, compared to the six months ended June 30, 2018, primarily due to $71.4 million of net sales attributable to the Paragon Medical and Bridgemedica acquisitions as well as a $15.8 million increase in core volume.
Income from operations increased by $6.9 million compared to prior year primarily due to an increase in sales volume as well as the Paragon Medical and Bridgemedica acquisitions.
Changes in Financial Condition from December 31, 2018, to June 30, 2019
From December 31, 2018, to June 30, 2019, total assets increase d by $70.7 million primarily due to the initial recognition of operating lease assets as of January 1, 2019, pursuant to ASC 842. Overall, accounts receivable increase d consistently with sales growth. Inventories increase d as our plants prepare for third and fourth quarter sales. Days inventory outstanding decreased by approximately one day as our businesses met expected customer demand on a timely basis and due to managing procurement based on market price projections.
From December 31, 2018, to June 30, 2019, total liabilities increase d by $111.1 million, primarily due to the initial recognition of operating lease liabilities as of January 1, 2019, pursuant to ASC 842, an increased balance in our Senior Secured Revolver used to fund operations, and recognition of the fair value of the interest rate swap.
Working capital, which consists principally of cash, accounts receivable, inventories, and other current assets offset by accounts payable, accrued payroll costs, income taxes payable, current maturities of long-term debt, current portion of lease liabilities, and other current liabilities, was $169.4 million as of June 30, 2019, compared to $151.8 million as of December 31, 2018. The increase in working capital was due primarily to the increase in accounts receivable and inventories consistent with our sales growth and a decrease in accounts payable due a decrease in days payable outstanding offset by the initial recognition of operating lease liabilities.
Cash provided by operations was $4.4 million for the six months ended June 30, 2019, compared with cash used by operations of $19.4 million for the six months ended June 30, 2018. The difference was primarily due to higher receipts from operating revenues as a result of the increase in net sales as well as changes in net working capital during the six months ended June 30, 2019 compared to the six months ended June 30, 2018.
Cash used by investing activities was $19.8 million for the six months ended June 30, 2019, compared with cash used by investing activities of $421.7 million for the six months ended June 30, 2018. The decrease was primarily due to cash paid for
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the Paragon Medical and Bridgemedica acquisitions in 2018 partially offset by cash received from the liquidation of the short-term investment during 2019.
Cash provided by financing activities was $19.7 million for the six months ended June 30, 2019, compared with cash provided by financing activities of $240.7 million for the six months ended June 30, 2018. The difference was primarily due to proceeds from the Second Lien Facility used to partially finance the Paragon Medical acquisition in 2018.
During 2018, as a result of our annual goodwill impairment analysis performed during the fourth quarter of 2018, we recorded an impairment of $109.1 million in our Power Solutions group. Subsequent to the impairment, at December 31, 2018, Power Solutions reported a goodwill balance of $94.5 million. Given the carrying value of the Power Solutions group was equal to its fair value at December 31, 2018 as a result of the 2018 goodwill impairment, if actual performance of the Power Solutions group falls short of expected results, additional material impairment charges may be required. During the second quarter of 2019, we assessed for triggering events that would signify the need to perform an impairment test and concluded there were no triggering events during the period. We will continue to monitor and assess Power Solutions during 2019.
Based on the closing price of a share of our common stock as of June 30, 2019, our market capitalization was in excess of the net book value of our stockholders’ equity. Subsequent to June 30, 2019, our market capitalization declined to a level less than the net book value of our stockholders’ equity. A prolonged or significant decline in market capitalization could be an indicator of additional goodwill impairment. We will continue to monitor our market capitalization to determine if an indicator of impairment exists in subsequent periods.
Liquidity and Capital Resources
Overview
As of June 30, 2019, we had $22.1 million of cash and $11.5 million of unused borrowing capacity under our Senior Secured Revolver. We believe that these sources of cash and funds generated from our consolidated operations will provide sufficient cash flow to service the required debt and interest payments under our existing credit facility and to fund our operating activities, capital expenditure requirements, and dividend payments.
Our arrangements with customers typically provide that payments are due within 30 to 60 days following the date of shipment. We invoice and receive payment 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, we are exposed to foreign exchange transaction and translation risk. Various strategies to manage this risk are available to management, including producing and selling in local currencies and hedging programs. As of June 30, 2019, no currency derivatives were in place. In addition, a strengthening of the U.S. dollar and/or euro against foreign currencies could impair our ability to compete with international competitors for foreign as well as domestic sales.
For the next twelve months, we do not expect the sum of capital expenditures and assets procured under finance leases to materially change from 2018 spending levels, the majority of which relate to new or expanded business or continuous improvement programs. We believe that funds generated from continuing operations and borrowings from the Senior Secured Revolver will be sufficient to finance capital expenditures, working capital, and operational needs through this period.
In June 2016, voters in the United Kingdom approved an advisory referendum to withdraw from the European Union, commonly referred to as “Brexit.” The uncertainty surrounding the terms of the United Kingdom’s withdrawal and the timing (deadline to leave was extended to October 31, 2019), could adversely impact consumer and investor confidence, and the level of consumer purchases of discretionary items and retail products, including our products. Any of these effects, among others, could materially adversely affect our business, results of operations, and financial condition. We will continue to monitor and evaluate the potential effect Brexit has on our business, results of operations, and financial condition.
On February 8, 2019, we entered into a $700.0 million fixed-rate interest rate swap agreement (the “interest rate swap”) that changed the LIBOR-based portion of the interest rate on a portion of our variable rate debt to a fixed rate of 2.4575%. The term of the interest rate swap is from the effective date of February 12, 2019, through the termination date of October 19, 2022, with a declining notional amount over the term of the interest rate swap. Refer to Note 16 in the Notes to Condensed Consolidated Financial Statements for further discussion about the interest rate swap.
Credit Facility
Aggregate principal amounts outstanding under our Senior Secured Term Loan, Incremental Term Loan, and Senior Secured Revolver as of June 30, 2019, were $878.6 million (without regard to unamortized debt issuance costs). As of June 30, 2019, we had unused borrowing capacity of $11.5 million under the Senior Secured Revolver, subject to certain limitations. This amount of borrowing capacity is net of $12.1 million of outstanding letters of credit at June 30, 2019, which are considered as usage of the Senior Secured Revolver.
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Collectively, our Senior Secured Term Loan, Incremental Term Loan, and Senior Secured Revolver comprise our credit facility. On June 11, 2019, we amended our existing credit facility to reduce the total available capacity under the Senior Secured Revolver from $125.0 million to $100.0 million, reduce the maximum capacity from $143.0 million to $110.0 million, and modify the consolidated net leverage ratio, as defined in the credit facility agreement. Total available capacity under the Senior Secured Revolver was $100.0 million as of June 30, 2019. 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 on the 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 the variable one-month LIBOR plus an applicable margin of 3.75%. Based on the outstanding balance and interest rate in effect at June 30, 2019, annual interest payments would have been $32.6 million.
The Incremental Term Loan requires quarterly principal payments of $3.0 million through April 3, 2021, with the remaining principal amount due on the maturity date. The Incremental Term Loan bears interest at the variable one-month LIBOR plus an applicable margin of 3.25%. Based on the outstanding balance and interest rate in effect at June 30, 2019, annual interest payments would have been $15.4 million.
The Senior Secured Revolver bears interest on a variable rate structure with borrowings bearing interest at either one-month LIBOR plus an applicable margin of 3.50% or the prime lending rate plus an applicable margin of 2.50%. Based on the outstanding balance and weighted average interest rate at June 30, 2019, annual interest payments would have been $4.6 million. We pay a quarterly commitment fee at an annual rate of 0.50% on the Senior Secured Revolver for unused borrowing capacity.
Covenants
We had $76.4 million outstanding under the Senior Secured Revolver at June 30, 2019. Total capacity under the Senior Secured Revolver was $100.0 million as of June 30, 2019 with $11.5 million available for future borrowings after reductions for outstanding letters of credit and outstanding borrowings as of June 30, 2019. Our credit facility is subject to certain financial covenants based on a consolidated net leverage ratio. The financial covenants are effective when we have outstanding borrowings under our Senior Secured Revolver on the last day of any fiscal quarter, become more restrictive over time, and are dependent upon our operational and financial performance. If our operational or financial performance does not improve in line with our expectations, we may be required to take actions to reduce expenditures and decrease our net indebtedness to maintain compliance in future periods. We were in compliance with all covenants under our credit facility at June 30, 2019.
Our Senior Secured Revolver matures on October 19, 2020, which will require us to either extend the maturity date of the Senior Secured Revolver, generate sufficient cash flow through improved operational performance or other means to pay off any outstanding balance on the Senior Secured Revolver or seek additional forms of financing prior to the maturity date. Our ability to restructure or refinance our debt will depend on the condition of the capital markets and our financial condition at such time. If we are unable to extend the maturity date or refinance amounts due under our Senior Secured Revolver, or our operational performance fails to generate sufficient cash flows, we may be required to take additional actions to address our liquidity needs.
Seasonality and Fluctuation in Quarterly Results
General economic conditions impact our business and financial results, and certain businesses experience seasonal and other trends related to the industries and end markets that they serve. For example, European sales are often weaker in the summer months as customers slow production, medical device sales are often stronger in the fourth calendar quarter, and sales to original equipment manufacturers are often stronger immediately preceding and following the launch of new products. However, as a whole, we are not materially impacted by seasonality.
Off-Balance Sheet Arrangements
We 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 financial condition, revenues or expenses, results of operations, liquidity, capital expenditures, or capital resources.
Critical Accounting Policies
Our critical accounting policies, including the assumptions and judgments underlying them, are disclosed in the 2018 Annual Report, including those policies as discussed in Note 1 to the Notes to Consolidated Financial Statements included in the 2018 Annual Report. There have been no changes to these policies during the six months ended June 30, 2019, except as discussed in Note 1 to the Notes to Condensed Consolidated Financial Statements included in this Quarterly Report.
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Recent Accounting Pronouncements
See Note 1 in the Notes to Condensed Consolidated Financial Statements included in this Quarterly Report.

Item 3. | Quantitative and Qualitative Disclosures About Market Risk

We are exposed to changes in financial market conditions in the normal course of business due to use of certain financial instruments as well as transacting business in various foreign currencies. To mitigate the exposure to these market risks, we have established policies, procedures, and internal processes governing the management of financial market risks. We are exposed to changes in interest rates primarily as a result of borrowing activities.
Interest Rate Risk
Variable Rate Debt
At June 30, 2019, we had $529.2 million of principal outstanding under the variable rate Senior Secured Term Loan, without regard to debt issuance costs. At June 30, 2019, a one-percent increase in the interest rate charged on outstanding variable rate borrowings under the Senior Secured Term Loan would result in interest expense increasing annually by approximately $5.3 million.
At June 30, 2019, we had $273.0 million of principal outstanding under the Incremental Term Loan, without regard to debt issuance costs. At June 30, 2019, a one-percent increase in the interest rate charged on outstanding variable rate borrowings under the Incremental Term Loan would result in interest expense increasing annually by approximately $2.7 million.
At June 30, 2019, we had $76.4 million of principal outstanding under the Senior Secured Revolver, without regard to debt issuance costs. At June 30, 2019, a one-percent increase in the interest rate charged on outstanding variable rate borrowings under the Senior Secured Revolver would result in interest expense increasing annually by approximately $0.8 million.
Interest Rate Swaps and Hedging Activities
Our policy is to manage interest expense using a mix of fixed and variable rate debt. In February 2019, we entered into a $700.0 million fixed-rate interest rate swap agreement that changed the LIBOR-based portion of the interest rate on a portion of our variable rate debt to a fixed rate of 2.4575%. The term of the interest rate swap is from the effective date of February 12, 2019, through the termination date of October 19, 2022, with a declining notional amount over the term of the interest rate swap. Refer to Note 16 in the Notes to Condensed Consolidated Financial Statements for further discussion about the interest rate swap. The nature and amount of borrowings may vary as a result of future business requirements, market conditions, and other factors.
Foreign Currency Risk
Translation of our operating cash flows denominated in foreign currencies is impacted by changes in foreign exchange rates. We participate in various third party and intercompany loans, payables, and receivables denominated in currencies other than the U.S. dollar. To help reduce exposure to foreign currency fluctuation, we have incurred debt in euros in the past. From time to time, we may use foreign currency derivatives to hedge currency exposures when these exposures meet certain discretionary levels. We did not hold a position in any foreign currency derivatives as of June 30, 2019.

Item 4. | Controls and Procedures

Disclosure Controls and Procedures
Under the supervision and with the participation of management, including our principal executive officer and principal financial officer, we evaluated the effectiveness of disclosure controls and procedures (as defined in Rule 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 principal executive officer and principal financial officer concluded that our disclosure controls and procedures were not effective as of June 30, 2019, to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to management, including the principal executive officer and principal financial officer, as appropriate, to allow for timely decisions regarding required disclosure.
Our Chief Financial Officer resigned effective July 12, 2019, and as a result, our Chief Executive Officer is currently the acting principal financial officer.
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Previously Identified Material Weakness in Internal Control Over Financial Reporting
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that 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 and amortization; 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 a revision to previously issued financial statements for the periods December 31, 2017 and December 31, 2016. Additionally, this material weakness could result in a misstatement of substantially all account balances or disclosures that would result in a material misstatement to the annual or interim consolidated financial statements that would not be prevented or detected.
Notwithstanding the material weakness, our principal executive officer and principal financial officer concluded that our condensed consolidated financial statements in this Quarterly Report present fairly, and in all material respects, our financial position, results of operations, and cash flows for the periods presented in conformity with U.S. GAAP.
Status of Remediation Efforts for the Unremediated Material Weakness
To ensure we have a sufficient complement of resources within our finance department, we continue to hire qualified personnel for critical finance roles. After we 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 Reporting
There were no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting during the fiscal quarter ended June 30, 2019.
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PART II. OTHER INFORMATION

Item 1. | Legal Proceedings

Brazil ICMS Tax Matter
Prior to the acquisition of Autocam Corporation in 2014 (“Autocam”), Autocam’s Brazilian subsidiary (“Autocam Brazil”) received notification from the Brazilian tax authority regarding ICMS (state value added tax or “VAT”) tax credits claimed on intermediary materials (e.g., tooling and perishable items) used in the manufacturing process. The Brazilian tax authority notification disallowed state ICMS tax 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 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 several lawsuits filed with the 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 a favorable decision in one of the declaratory actions for which the period for appeal has expired. We have filed actions in each court requesting dismissal of the matter based on the earlier court action. Although we anticipate a favorable resolution to all matters, we can provide no assurances that we will 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 this assessment is from $0 to $6.0 million. No amount was accrued at June 30, 2019, 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 of merger relating to the Autocam acquisition. Management believes the indemnification would include amounts owed for the tax, interest, and penalties related to this matter.
All Other Legal Matters
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.

Item 1A. | Risk Factors

There have been no material changes to the risk factors disclosed in the 2018 Annual Report under Item 1A. “Risk Factors.”

Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 3. | Defaults upon Senior Securities

None.

Item 4. | Mine Safety Disclosures

Not applicable.

Item 5. | Other Information

None.
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Item 6. | Exhibits

Exhibit No. |  | Description
3.1 |  | Certificate of Amendment to Restated Certificate of Incorporation of NN, Inc. (Declassification) (incorporated by reference to Exhibit 3.1 to NN, Inc.’s Current Report on Form 8-K filed on May 20, 2019)
3.2 |  | Certificate of Amendment to Restated Certificate of Incorporation of NN, Inc. (Share Increase) (incorporated by reference to Exhibit 3.2 to NN, Inc.’s Current Report on Form 8-K filed on May 20, 2019)
3.3 |  | Amendment to Amended and Restated Bylaws of NN, Inc. (incorporated by reference to Exhibit 3.3 to NN, Inc.’s Current Report on Form 8-K filed on May 20, 2019)
10.1 |  | NN, Inc. 2019 Omnibus Incentive Plan (incorporated by reference to Appendix C to NN, Inc.’s Definitive Proxy Statement on Schedule 14A filed with the Securities and Exchange Commission on April 8, 2019)
10.2 |  | Amendment No. 7 to Amended and Restated Credit Agreement, dated as of June 11, 2019, by and among NN, Inc., certain NN, Inc. subsidiaries named therein, SunTrust Bank, as administrative agent, and certain lenders named therein (incorporated by reference to Exhibit 10.1 to NN, Inc.’s Current Report on Form 8-K filed on June 12, 2019)
10.3* |  | Separation Agreement and Release, dated as of July 12, 2019, by and between NN, Inc. and Thomas C. Burwell, Jr. (incorporated by reference to Exhibit 10.1 to NN, Inc.’s Current Report on Form 8-K filed on July 15, 2019)
10.4 |  | Form of Incentive Stock Option Agreement under the 2019 Omnibus Incentive Plan
10.5 |  | Form of Nonqualified Stock Option Agreement under the 2019 Omnibus Incentive Plan
10.6 |  | Form of Restricted Share Award Agreement under the 2019 Omnibus Incentive Plan
10.7 |  | Form of Performance Share Unit Award Agreement under the 2019 Omnibus Incentive Plan
31.1 |  | Certification of Principal Executive Officer and Principal Financial Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as amended.
32.1 |  | Certification of Principal Executive Officer and Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS |  | XBRL Instance Document
101.SCH |  | XBRL Taxonomy Extension Service
101.CAL |  | Taxonomy Calculation Linkbase
101.LAB |  | XBRL Taxonomy Label Linkbase
101.PRE |  | XBRL Presentation Linkbase Document
101.DEF |  | XBRL Definition Linkbase Document

* Management contract or compensatory plan or arrangement

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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

| NN, Inc.
| (Registrant)
Date: August 9, 2019 | /s/ Richard D. Holder
| Richard D. Holder
| President, Chief Executive Officer and Director
| (Principal Executive and Financial Officer)
| (Duly Authorized Officer)
Date: August 9, 2019 | /s/ Michael C. Felcher
| Michael C. Felcher
| Vice President—Chief Accounting Officer
| (Principal Accounting Officer)

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