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

FORM 10-K
 
x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 20052006
OR
¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
 
Commission file number 0-23486

NN, INC.
(Exact name of registrant as specified in its charter)
 
 Delaware
  62-1096725
 (State
(State or other jurisdiction of
 (I.R.S. Employer
 incorporation or organizationrganization)
(I.R.S. EmployerIdentification No.)
 2000 Waters Edge Drive
 
 Johnson City, Tennessee
 37604
 (Address of principal executive offices) (Zip
(Zip Code)
 
Registrant'sRegistrant’s telephone number, including area code: (423) 743-9151


Securities registered pursuant to Section 12(b) of the Act:

( Title of each class)class
 (NameName of each exchange on which registered)registered
 NoneCommon Stock, par value $.01 NoneThe NASDAQ Stock Market LLC

Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01None
(Title of class)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes ¨ No x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes ¨ No x

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant'sregistrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):  Large accelerated filer ¨Accelerated filer xNon-accelerated filer ¨
 
Large accelerated filer ¨
Accelerated filer x
Non-accelerated filer ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ¨ No x

The aggregate market value of the voting stock held by non-affiliates of the registrant at June 30, 2005,2006, based on the closing price on the NASDAQ NationalStock Market SystemLLC on that date was approximately $184,144,653.$184,144,653.

The number of shares of the registrant'sregistrant’s common stock outstanding on March 13, 200612, 2007 was 17,207,867.16,854,616.

DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement with respect to the 20062007 Annual Meeting of Stockholders are incorporated by reference in Part III of this Form 10-K.
PARTPart I
Item 1. Business Overview
 
NN, Inc. manufactures and supplies high precision bearing components, consisting of balls, cylindrical rollers, tapered rollers, seals, and plastic and metal retainers, for leading bearing manufacturers on a global basis. We are a leading independent manufacturer of precision steel bearing balls for the North American and European markets. Our core business is the manufacture and sale of high quality, precision ball and roller bearing components including steel balls and rollers .rollers.  In 2005,2006, sales of balls and rollers accounted for approximately 76%78% of the Company'sCompany’s total net sales with 56%58% and 20% of sales from balls and rollers, respectively. Sales of metal bearing retainers accounted for 6% of net sales and sales of precision molded plastic and rubber parts accounted for the remaining 18%16%. See Note 1213 of the Notes to Consolidated Financial Statements. In 1998, we began implementing a strategic plan designed to position us as a worldwide manufacturer and supplier of a broad line of bearing components and other precision plastic components. Through a series of acquisitions executed as part of that plan, we have built upon our strong core ball business and expanded our bearing component product offering. Today, we offer among the industry’s most complete line of commercially available bearing components. We emphasize engineered products that take advantage of our competencies in product design and tight tolerance manufacturing processes. Our bearing customers use our components in fully assembled ball and roller bearings, which serve a wide variety of industrial applications in the transportation, electrical, agricultural, construction, machinery, mining and aerospace markets. As used in this Annual Report on Form 10-K, the terms “NN”, “the Company”, “we”, “our”, or “us” mean NN, Inc. and its subsidiaries.
 
In the fourth quarter of 2005, we developed a new five-year strategic business plan driven by perceived slower growth in the metal bearing components market and a need to create diversification in served customers and end markets.  NN began to execute on this strategy in 2006.  As part of this new strategy, on November 30, 2006, we added a precision metal components product line through the acquisition of Whirlaway Corporation (“Whirlaway”) (see Note 2 of the Notes to Consolidated Financial Statements). Whirlaway is a high precision metal components and assemblies manufacturer that supplies customers serving the air conditioning, appliance, automotive, commercial refrigeration and diesel engine industries. This entry into the precision metal components market is part of our new strategy to serve markets and customers we view as adjacent to bearing components that utilize our core manufacturing competencies. Management views this new product line as a new segment entitled "Precision Metal Components" and has retained Whirlaway management to run the segment.
For managerial and financial analysis purposes, management views the Company’s operation in three reporting segments: the domestic ball and rollermanufacturing operations of Erwin, Tennessee and Mountain City, Tennessee, which also includes costs related to our start-up operationplant in China, and corporate office costs, (“Domestic Ball and Roller Segment”), the European facilities of Kilkenny, Ireland; Eltmann, Germany; Pinerolo, Italy; Veenendaal, The Netherlands and Kysucke Nove Mesto, Slovakia (“NN EuropeMetal Bearing Components Segment”) and, the operations of Industrial Molding Corporation (“IMC”) and The Delta Rubber Company (“Delta”) (collectively “Plastic and Rubber Components Segment”). On March 12, 2004 we changed, and beginning November 30, 2006, the nameoperations of our primary European entity from NN Euroball, ApS to NN Europe ApS. To avoid confusion between the entity and the segment, we will refer to the segment as the NN Europe Segment and the entity as NN Europe.Whirlaway (“Precision Metal Components Segment”).  Financial information about the Domestic Ball and Roller Segment, the NN Europe Segment and the Plastic and Rubber Components Segmentsegments is set forth in Note 1213 of the Notes to Consolidated Financial Statements.
 
Recent Developments
On November 30, 2006 we purchased 100% of the stock of Whirlaway Corporation from its sole shareholder for approximately $45.6 million. Whirlaway manufactures precision metal components for the automotive and industrial end markets. Whirlaway operates three manufacturing plants in Ohio and one in Arizona.
In January 2007, we entered into a two year supplier agreement with Schaeffler Group (INA) effective as of July 1, 2006 that replaced the agreement that expired on June 30, 2006.
 
In February 2006, we reached an informal agreement in principle to extend our supply agreement with AB SKF (“SKF”) until the end of 2006. The agreement would have expired on July 31, 2006. SKF is a global bearing manufacturer and our largest customer. We are currently in discussions with SKF to formally extend the agreement beyondthrough the end of 2006.2009 and expect conclusion during the first half of 2007.
 
On October 7, 2005, we entered into an agreement with SNR Roulements (“SNR”) to purchase all of SNR’s entire internal precision ball producing equipment for approximately 5.05.2 million Euros ($6.06.2 million). SNR, a division of Renault SA, France, is a global bearing manufacturer and supplier to the automotive, industrial and aerospace industries. As part of the transaction, we received a three year-year supply agreement for the present business (approximately $8.0 million) and a five yearfive-year supply agreement to provide SNR with its annual ball requirements of the former in-house production of approximately $9.0 million. The product will be supplied from NN Europe’sour European existing precision ball operations. In December 2005, we started to acquire the precision ball producing equipment of SNR, from its manufacturing facility in Annecy, France. Once complete, we will have acquired approximately 5.0 million Euros (approximately $6.0 million) of equipment and intangibles.
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During 2004, we formed a wholly owned subsidiary, NN Precision Bearing Products Company Co., Ltd, (“NN Asia)”. This subsidiary, which began production of precision balls during the fourth quarter of 2005, is located in the Kunshan Economic and Technology Development Zone, Jiangsu, The People’s Republic of China and is a component of our strategy to globally expand our manufacturing base. The costs incurred as a result of this start-up are included in our Domestic Ball and RollerMetal Bearing Components Segment during the years ended December 31, 2005 and 2004. Limited production of precision balls began at NN Asia in the fourth quarter of 2005.

On October 9, 2003, we acquired certain assets comprised of land, building and machinery and equipment of the precision ball operations of KLF - Gulickaren (“KLF”), based in Kysucke Nove Mesto, Slovakia. We paid consideration of approximately 1.7 million Euros ($2.0 million). The assets are being utilized by our wholly-owned subsidiary NN Slovakia based in Kysucke Nove Mesto, Slovakia, which began production in June 2004. The financial results of the operations are included in our NN Europe Segment.
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On May 2, 2003, we acquired the 23 percent interest in NN Europe, ApS (“NN Europe”) held by SKF. NN Europe was formed in 2000 by the Company, FAG Kugelfischer George Schaefer AG, which was subsequently acquired by Schaeffler KG (INA) , and SKF We paid approximately 13.8 million Euros ($15.6 million) for SKF’s interest in NN Europe. Following the closing of the transaction, we own 100 percent of the outstanding shares of NN Europe.
On May 2, 2003 we acquired 100 percent of the tapered roller and metal cage manufacturing operation of SKF in Veenendaal, The Netherlands. The results of Veenendaal’s operations have been included in the consolidated financial statements since that date. We paid consideration of approximately 23.0 million Euros ($25.7 million) and incurred other costs of approximately $1.0 million, for the Veenendaal net assets acquired from SKF. The Veenendaal operation manufactures rollers for tapered roller bearings and metal cages for both tapered roller and spherical roller bearings allowing us to expand our bearing component offering. The financial results of the Veenendaal operation are included in the NN Europe Segment.
 
Corporate Information
 
NN, originally organized in October 1980, is incorporated in Delaware. Our principal executive offices are located at 2000 Waters Edge Drive, Johnson City, Tennessee, and our telephone number is (423) 743-9151. Our web site address is www.nnbr.com. Information contained on our web site is not part of this Annual Report. Our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments thereto are available on our web site under “Investor Relations.”
 
Products
 
Precision Steel Balls. At our Domestic Ball and Roller Segment facilities including NN Asia and our NN EuropeMetal Bearing Components Segment facilities, we manufacture and sell high quality, precision steel balls in sizes ranging in diameter from 5/32 of an inch to 2 ½ inches. We produce and sell balls in grades ranging from grade 3 to grade 1000, according to international standards endorsed by the American Bearing Manufacturers Association. The grade number for a ball, in addition to defining allowable dimensional variation within production batches, indicates the degree of spherical precision of the ball; for example, grade 3 balls are manufactured to within three-millionths of an inch of roundness. Our steel balls are used primarily by manufacturers of anti-friction bearings where precise spherical, tolerance and surface finish accuracies are required. At our Domestic Ball and Roller Segment,the domestic locations, sales of steel balls accounted for approximately 81%80%, 86%87%, and 86% of the segment’s net sales in 2006, 2005, 2004, and 20032004 respectively. At our NN Europe Segment,the European locations, sales of steel balls accounted for approximately 65%67%, 68%65%, and 76%68% of the segment’s net sales in 2006, 2005 2004 and 2003,2004, respectively.
 
Steel Rollers. We manufacture cylindrical rollers at our Erwin, Tennessee facility. Cylindrical rollers are normally defined by the combination of diameter and length. Most cylindrical rollers are made to specific customer requirements for diameter and length, so there is very little overlap of common cylindrical rollers matching two or more customers’ needs. The Company has experienced minimal roller product returns and does not have any customer acceptance clauses. Rollers are an alternative rolling element used instead of balls in anti-friction bearings that typically have heavier loading or different speed requirements. Our roller products are used primarily for applications similar to those of our ball product lines, plus certain non-bearing applications such as hydraulic pumps and motors. Cylindrical rollers accounted for approximately 19%4%, 14%4%, and 14%3% of net sales at our domestic Ballin 2006, 2005, and Roller Segment in 2005, 2004, and 2003, respectively. We manufacture tapered rollers at our Veenendaal, The Netherlands facility. These tapered rollers are used in tapered roller bearings that are used in a variety of applications including automotive gearbox applications, automotive wheel bearings and a wide variety of industrial applications. Tapered rollers accounted for approximately 25%16%, 16% and 23%14% of net sales at our NN Europe Segment in 2006, 2005 and 2004, respectively.
 
Bearing Seals. At our Plastic and Rubber Components Segment’s Danielson, CTConnecticut facilities, we manufacture and sell a wide range of precision bearing seals produced through a variety of compression and injection molding processes and adhesion technologies to create rubber-to-metal bonded bearing seals. The seals are used in applications for automotive, industrial, agricultural, mining and aerospace markets.
 
Retainers: Retainers.We manufacture and sell precision metal and plastic retainers for ball and roller bearings used in a wide variety of industrial applications. Retainers are used to separate and space the rolling elements (balls or rollers) within a fully assembled bearing. We manufacture plastic retainers at our Lubbock, Texas facilities and metal retainers at our Veenendaal, The Netherlands facility.
 
Precision Plastic Components. Components. At our Plastic and Rubber Components Segment’s Lubbock, TXTexas facilities, we also manufacture and sell a wide range of specialized plastic products including automotive under-the-hood components, electronic instrument cases and precision electronic connectors and lenses, as well as a variety of other specialized parts.
 
Precision Metal Components.  Beginning with the purchase of Whirlaway Corporation on November 30, 2006, we began to sell a wide range of precision metal components. These components are manufactured at the three Whirlaway plants in Ohio and the plant in Arizona. The precision metal components offered include fluid control components, fluid control assemblies, shafts, and other precision metal parts. The components are used in the following end markets: automotive brake/chassis, thermal air conditioning systems, commercial refrigeration, automotive engine, diesel engine fuel systems, other automotive and industrial applications.
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Research and Development. Development. The amounts spent on research and development activities by us during each of the last three fiscal years are not material. Amounts spent are expensed as incurred.
 
Customers
 
Our bearing component products are supplied primarily to bearing manufacturers for use in a broad range of industrial applications, including transportation, electrical, agricultural, construction, machinery, mining and aerospace. We supply over 500400 customers; however, our top 10 customers account for approximately 81% of our revenue. These top 10Only two of these customers, include SKF and Schaeffler Group (INA), Timken, SNR, GKN, Iljin, Koyo, ORS, NSK and FTE.had sales levels that were 10% or greater of total net sales. In 2005, 31%2006, 30% of our products were sold to customers in North America, 58%59% to customers in Europe, and the remaining 11% to customers located throughout the rest of the world, primarily Asia. Sales to various U.S. and foreign divisions of SKF accounted for approximately 47%46% of net sales in 20052006 and sales to Schaeffler Group (INA) accounted for approximately 13%11% of net sales in 2005. Sales to various divisions of the Timken Co. accounted for approximately 6% of net sales in 2005.2006. None of our other customers accounted for more than 5%10% of our net sales in 2005.2006.
 
Certain customers have contracted to purchase all or a majority of their bearing component requirements from us, although only a few are contractually obligated to purchase any specific amounts. Certain agreements are in effect with some of our largest customers, which provide for targeted, annual price adjustments that may be offset by material cost fluctuations. We ordinarily ship our products directly to customers within 60 days, and in some cases, during the same calendar month, of the date on which a sales order is placed. Accordingly, we generally have an insignificant amount of open (backlog) orders from customers at month end. ForAt the U.S. operations of our Domestic Ball and RollerMetal Bearings Component Segment, we maintain a computerized, bar coded inventory management system with many of our major customers that enables us to determine on a day-to-day basis the amount of these components remaining in a customer’s inventory. When such inventories fall below certain levels this triggers shipment of additional product.product is automatically triggered.
 
In 2001, NN Europe entered into2006, the original six-year supply agreements for precision steel balls with SKF and Schaeffler Group (INA) providing for the purchase of NN Europe products in amounts and at prices that are subjectexpired. Prior to adjustment on an annual basis. The agreements contain provisions obligating NN Europe to maintain specified quality standards and comply with various ordering and delivery procedures, as well as other customary provisions. SKF may terminate its agreement if, among other things, NN Europe acquires or becomes acquired by a competitor of SKF.2006, Schaeffler Group (INA) may terminate its agreement if, among other things, NN Europe assigns its rights under the agreement, whether voluntarily or by operation of law. The Schaeffler Group (INA) and SKF agreements for precision steel balls expire on June 30, 2006 and July 31, 2006, respectively. Schaeffler Group (INA) has decided to in-source approximately $12 millionone third of annual businessvolume to its internal ball manufacturing facility in Germany, which will resultduring 2005 and 2006 resulted in a $12$9.0 million reduction in sales to Schaeffler Group (INA), or about 30%20% of our business with Schaeffler Group (INA). SKF has informally agreed in principle to extend our current contract until the end of December 2006. The contract negotiations forIn January 2007, we entered into a new long term supply agreementstwo-year agreement with SKF and Schaeffler Group (INA) are ongoing.effective as of July 1, 2006 providing for sales levels consistent with the indicated reduction in sales. A new multi-year formal agreement with SKF has not yet been signed. In Europe, we continue to sell to SKF under an informal agreement matching the terms of the expired agreement. A new contract is still being negotiated and expected to be finalized in the first half of 2007, the terms of which will be retroactive to January 1, 2007.
 
In 2003, Veenendaal entered into a five-year supply agreement with SKF providing for the purchase of steel rollers and metal retainers manufactured at our Veenendaal facility in amounts and at prices that are subject to adjustment on an annual basis. The agreement contains provisions obligating Veenendaal to maintain specified quality standards and comply with various ordering and delivery procedures, as well as other customary provisions. This agreement expires during 2008.
 
During 2005,2006, the Domestic Ball and RollerMetal Bearing Components Segment sold its products to more than 350 customers located in 2633 different countries. Approximately 55%88% of the Domestic Ball and Roller Segment’s net sales in 20052006 were to customers outside the United States. Approximately 71% of net sales in 2006 were to customers within Europe. Sales to the Domestic Ball & Roller Segment’s top ten customers accounted for approximately 76%88% of the segment’s net sales in 2005.2006. Sales to SKF and Schaeffler Group (INA) accounted for approximately 25%55% and 14%, respectively,13% of the segment’s net sales in 2005.
During 2005, the NN Europe Segment sold its products to 116 customers located in 28 different countries. Approximately 87% of its net sales in 2005 were to customers within Europe. Sales to the segment’s top ten customers accounted for approximately 97% of the segment’s net sales in 2005. Sales to SKF and Schaeffler Group (INA) accounted for approximately 67% and 14% of the segment’s net sales in 2005,2006, respectively. Sales to SKF and Schaeffler Group (INA) in Europe are made pursuant to the terms of supply agreements which expire in 2006 (precision steel balls) and 2008 (SKF rollers and metal retainers).agreements.
 
During 2005,2006, the Plastic and Rubber Components Segment sold its products to 7970 customers located in 1210 different countries. Approximately 19%23% of the Plastic and Rubber Components Segment net sales were to customers outside the United States. Sales to the segment’s top ten customers accounted for approximately 74%76% of the segment’s net sales in 2005, including Timken which accounted for 30% of the segments sales.2006.
 
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In both the foreign and domestic markets, the Company principally sells its products directly to manufacturers and does not sell significant amounts through distributors or dealers.
 
See Note 1213 of the Notes to Consolidated Financial Statements and "Management's“Management’s Discussion and Analysis of Financial Condition and Results of Operations -- Results of Operations"Operations” for additional segment financial information.
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The following table presents a breakdown of our net sales for fiscal years 2006, 2005 2004 and 2003:2004:
 
(In Thousands)
 
 
 
 
 
 
  
 
2005
 
2004
 
2003
 
2006
2005
2004
 
 
 
 
 
 
  
Domestic Ball and Roller Segment $66,088 $58,435 $55,437 
Metal Bearing Components Segment$272,299 $ 263,485 $ 252,365
Percentage of Total Sales  20.6% 19.2% 21.9% 82.4%82.0%83.0%
        
NN Europe Segment  197,397  193,930  147,127 
Precision Metal Components Segment 4,722 -- --
Percentage of Total Sales  61.4% 63.8% 58.0%1.4%-- --
        
Plastic and Rubber Components Segment  57,902  51,724  50,898 53,304 57,902 51,724
Percentage of Total Sales  18.0% 17.0% 20.1%16.2%18.0%17.0%
        
Total $321,387 $304,089 $253,462 $ 330,325  $ 321,387$ 304,089
        
Percentage of Total Sales  100% 100% 100%100%

The Precision Metal Components Segment contains only one month of revenue in 2006.  Based on pro-forma results, 2006 revenues would have been $77,713 or 19% of the total pro-forma sales.  (See Note 2 of the Notes to Consolidated Financial Statements)
 
Sales and Marketing
 
A primary emphasis of our marketing strategy is to expand key customer relationships by offering them high quality, high precision products with the value of a single supply chain partner for a wide variety of components. As a result, we have progressed toward integrating our sales organization on a global basis across all of our product lines. OurWithin the Metal Bearings Components Segment, our global sales organization includes eleven direct sales and fourteen customer service representatives. Due to the technical nature of many of our products, our engineers and manufacturing management personnel also provide technical sales support functions, while internal sales employees handle customer orders and other general sales support activities. For the Precision Metal Components Segment, the current sales structure consists of utilizing manufacturers’ representatives at key accounts supported by senior segment management and engineering involvement.
 
Ourbearing component marketing strategy focuses on increasing our outsourcing relationships with global bearing manufacturers that maintain captive bearing component manufacturing operations. Our marketing strategy for our other precision plastic products and precision metal components is to offer custom manufactured, high quality, precision parts to niche markets with high value-added characteristics at competitive price levels. This strategy focuses on relationships with key customers that require the production of technically difficult parts and assemblies, enabling us to take advantage of our strengths in custom product development, tool design, and precision molding and machining processes.
 
Our arrangements with our domestic customers typically provide that payments are due within 30 days following the date of shipment of goods. With respect to foreign customers of our domestic business, payments generally are due within 90 to 120 days following the date of shipment in order to allow for additional freight time and customs clearance. For customers that participate in our Domestic Ball and Roller Segment’s inventory management program, sales are recorded when the customer uses the product. See "Business“Business -- Customers"Customers” and "Management's“Management’s Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources."”
 
Manufacturing Process
 
We have become a leading independent bearing component manufacturer through exceptional service and high quality manufacturing processes and are recognized throughout the industry as a low-cost producer. Because our ball and roller manufacturing processes incorporate the use of standardized tooling, load sizes, and process technology, we are able to produce large volumes of products while maintaining high quality standards.
 
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The key to our low-cost, high quality production of seals and retainers is the incorporation of customized engineering into our manufacturing processes, metal to rubber bonding competency and experience with a broad range of engineered resins. This design process includes the testing and quality assessment of each product.
 
The precision metal components industry continues to be challenged by rapid globalization.  Our company is well positioned in the marketplace by virtue of our focus on critical components and assemblies for highly engineered mechanical systems used in various durable goods.
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Employees
 
As of December 31, 2005,2006, we employed a total of 1,7212,249 full-time employees. Our Domestic Ball and RollerMetal Bearing Components Segment employed 322282 workers in the NNU.S., 951 workers in Europe, Segment employed 955and 54 workers in China, our Plastic and Rubber Components Segment employed 436381 workers, and there were 89 employees at the Company’s corporate headquarters. Additionally on November 30, 2006, we added 572 full-time employees with the acquisition of Whirlaway. Of our total employment, 16% are management/staff employees and 84% are production employees. We believe we are able to attract and retain high quality employees because of our quality reputation, technical expertise, history of financial and operating stability, attractive employee benefit programs, and our progressive, employee-friendly working environment. The employees in the Eltmann, Germany, Pinerolo, Italy, and Veenendaal, The Netherlands plants are unionized. We have excellentstrong labor relations, and the Company has never experienced any involuntary work stoppages. We consider our relations with our employees worldwide to be excellent.
 
We are currently in negotiations with workers at our Eltmann, Germany facility for significant contract revisions including lowering wage rates and increasing hours worked per week.  We expect the negotiations to be complete in 2007.
Competition
 
The precision ball and roller and metal retainer industry is intensely competitive, and many of our competitors have greater financial resources than we do.competitive. Our primary domestic competitor is Hoover Precision Products, Inc., a wholly owned US subsidiary of Tsubakimoto Precision Products Co. Ltd. Our primary foreign competitors are Amatsuji Steel Ball Manufacturing Company, Ltd. (Japan), which has agreed to be acquired bya wholly owed division of NSK, and Tsubakimoto Precision Products Co. Ltd.Ltd (Japan) and Jingsu General Ball and Roller (China.)
 
We believe that competition within the precision ball, roller and metal retainer markets is based principally on quality, price and the ability to consistently meet customer delivery requirements. Management believes that our competitive strengths are our precision manufacturing capabilities, our wide product assortment offering capabilities, our reputation for consistent quality and reliability, and the productivity of our workforce.
 
The markets for the Plastic and Rubber Components Segment’s products are also intensely competitive. Since the plastic injection molding industry is currently very fragmented, IMC must compete with numerous companies in each of its marketing segments. Many of these companies have substantially greater financial resources than we do and many currently offer competing products nationally and internationally. IMC’s primary competitor in the plastic bearing retainer segment is Nakanishi Manufacturing Corporation. Domestically, Nypro, Inc. and Key Plastics are among the main competitors in the automotive market.
 
We believe that competition within the plastic injection molding industry is based principally on quality, price, design capabilities and speed of responsiveness and delivery. Management believes that IMC’s competitive strengths are product development, tool design, fabrication, and tight tolerance molding processes. With these strengths, IMC has built its reputation in the marketplace as a quality producer of technically difficult products.
 
While intensely competitive, the markets for Delta’s products are less fragmented than IMC’s. The bearing seal market is comprised of approximately six major competitors that range from small privately held companies to Fortune 500 global enterprises. Bearing seal manufacturers compete on design, service, quality and price. Delta’s primary competitors in the United States bearing seal market are Freudenburg-NOK, Chicago Rawhide Industries (an SKF subsidiary), Trostel, and Uchiyama.
 
In the Precision Metal Components market, internal production of components by our customers can impact our business as the customers weigh the risk of outsourcing strategically critical components or producing them in-house.  Our primary competitors are Linamar (Canada), Stanadyne, A. Berger, C&A Tool, American Turned Products, Autocam and FCMP.  We generally win new business on the basis of our technical competence and our proven track record of successful product development.
Raw Materials
 
The primary raw material used in our Domestic Ballcore ball and Roller Segment and NN Europe Segmentroller business is 52100 Steel, which is high quality chromium steel. During 2005,2006, approximately 97% and 90% of the steel used by these two segments, respectively, was 52100 Steel in rod and wire form. Our other steel requirements include metal strips, type 440C stainless steelchrome rod and wire, and type S2 rock bit steel.
 
The Domestic Ball and RollerMetal Bearing Components Segment purchaseslocations purchase substantially all of itstheir 52100 Steel requirements from foreign mills in Europe and Japan becauseand all of the lack of domestic producers of such steel in the form we require.their metal strips requirements from European mills and traders. The principal suppliers of 52100 Steel toin the Domestic Ball and Roller SegmentU.S. are Daido Steel Inc. (America), Kobe Steel America, Lucchini USA Inc. (affiliate of Ascometal France) and Ohio Star Forge Co. The NN Europe Segment purchases almost all of its 52100 Steel requirements from European mills and all of its metal strips requirements from European mills and traders. The principal supplier of 52100 Steel to the NNin Europe Segment is Ascometal France (See Note 1516 of the Notes to Consolidated Financial Statements), while the principal supplier of metal strips is Thyssen. Our other steel requirements are purchased principally from foreign steel manufacturers. There are a limited number of suppliers of the 52100 Steel that we use in our Domestic Ball and Roller and NN Europe Segments.use. We believe that if any of our current suppliers were unable to supply 52100 Steel to us, we would be able to obtain our 52100 Steel requirements from alternate sources. We are unable, however, to provide assurances that we would not face higher costs or production interruptions as a result of obtaining 52100 Steel from alternate sources.
 
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We purchase steel on the basis of price and, more significantly, composition and quality. The pricing arrangements with our suppliers are typically subject to adjustment every three to six months forin the Domestic BallU.S. and Roller Segment. Steel pricing is contractually adjusted on an annual basis within the NN Europe Segment. For the NN Europe Segment wire price, scrap surcharges are adjusted quarterly based upon market activity in the preceding quarter.European locations. In general, we do not enter into written supply agreements with suppliers or commit to maintain minimum monthly purchases of steel except for the supply arrangements between Ascometal Ovako, and NN Europeour Metal Bearing Components Segment  (see Note 1516 of the Notes to Consolidated Financial Statements). For the Domestic Ball and Roller Segment, the average price of 52100 steel increased approximately 36% in 2005.  The NN Europe Segment experienced an average price increase for 52100 steel of approximately 10% in 2005. Due to the structure of the NN Europe Segment steel purchase contracts, much of the market pressure for increased prices was postponed until 2006. For both segments the price of 52100 steel increased by 9.8% in 2004, and increased approximately 3.5% in 2003.
 
Because 52100 Steel is principally produced by foreign manufacturers, the Company'sCompany’s operating results would be negatively affected in the event that the U.S. or European governments impose any significant quotas, tariffs or other duties or restrictions on the import of such steel, if the U.S. dollar decreases in value relative to foreign currencies or if supplies available to us would significantly decrease. The relatively weak US Dollar is a factor for steel price increases in the Domestic Ball and Roller Segment since the suppliers'suppliers’ base currencies are the Euro and Japanese Yen.
 
The price of steel has risen over the last twenty-four to thirty-six months. Thestabilized during 2006. Previously our business was affected by upward price pressure has been principally due to general increases in global demand and, more recently, due to China’s increased consumption of steel. This has had the impact of increasing steel prices we paypaid in procuring our steel in the form of higher unit prices and scrap surcharges and could adversely impact the availability of steel.surcharges. Our contracts with key customers allow us to pass a majority of the steel price increases on to those customers. However, for our NN Europe Segment,European locations, material price changes in any given year are typically passed along with price adjustments in January of the following year. Starting in 2007, scrap surcharge inflation, a component of raw material cost, can be passed through quarterly. Until increases can be passed through to our customers, income from operations, net income and cash flow from operations can be adversely affected. The recent weakness of US Dollar has softened the impact to of the price increases to our customers since most of our export sales are denominated in US Dollars.
The primary raw materials used by IMC are engineered resins. Injection grade nylon is utilized in bearing retainers, gears, automotive and other industrial products. We purchase substantially all of our resin requirements from domestic manufacturers and suppliers. The majority of these suppliers are international companies with resin manufacturing facilities located throughout the world. We experienced price increases for engineered resins of approximately 10.3% in 2005, 5.3% in 2004, and price decreases of approximately 1.0% in 2003.
Delta uses certified vendors to provide a custom mix of proprietary rubber compounds. Delta also procures metal stampings from several domestic suppliers. We experienced price increases for Delta’s raw materials of approximately 7% in 2005, 10.2% in 2004, and price decreases of 2.5% in 2003.
 
For the Plastic and Rubber Components Segment, we base purchase decisions on price, quality and service. Generally, we do not enter into written supply contracts with our suppliers or commit to maintain minimum monthly purchases of resins. The pricing arrangements with our suppliers typically can be adjusted at anytime.
The primary raw materials used by IMC are engineering resins.  Injection grade nylon is utilized in bearing retainers, gears, automotive and other industrial products.  We purchase substantially all of our resin requirements from domestic manufacturers and suppliers.  The majority of these suppliers are international companies with resin manufacutring facilities located throughout the world.
Delta uses certified vendors to provide a custom mix of proprietary rubber compounds.  Delta also procures metal stampings from several domestic suppliers.
The Precision Metal Components Segment produces products from a wide variety of metals in various forms from various sources.  Basic types include HRS, CRS, (both carbon and alloy) Stainless, Extruded Aluminum, Diecast Aluminum, Gray and Ductile Iron Castings, and mechanical tubing. Some material is purchased directly under customer global contracts, some is consigned by the customer, and some is purchased directly from a mill.
 
Patents, Trademarks and Licenses
 
We do not own any U.S. or foreign patents, trademarks or licenses that are material to our business. We do rely on certain data and processes, including trade secrets and know-how, and the success of our business depends, to some extent, on such information remaining confidential. Each executive officer is subject to a non-competition and confidentiality agreement that seeks to protect this information.
 
Seasonal Nature of Business
 
Historically, due to a substantial portion of sales to European customers, seasonality has been a factor for our business in that some European customers typically reduce their production activities during the month of August.
 
7
Environmental Compliance
 
Our operations and products are subject to extensive federal, state and local regulatory requirements both domestically and abroad relating to pollution control and protection of the environment. We maintain a compliance program to assist in preventing and, if necessary, correcting environmental problems. The NN Europe segmentMetal Bearing Components Segment plants in Eltmann, Germany; Kilkenny, Ireland; and Pinerolo, Italy are ISO 14000 certified and received the EPD (Environmental Product Declaration.) The Veenendaal, The Netherlands plant is also ISO 14000 certified. Based on information compiled to date, management believes that our current operations are in substantial compliance with applicable environmental laws and regulations, the violation of which would have a material adverse effect on our business and financial condition. The Company has assessed conditional asset retirement obligations and have found them to be immaterial to the consolidated financial statements. There can be no assurance, however, that currently unknown matters, new laws and regulations, or stricter interpretations of existing laws and regulations will not materially affect our business or operations in the future. More specifically, although we believe that we dispose of wastes in material compliance with applicable environmental laws and regulations, there can be no assurance that we will not incur significant liabilities in the future in connection with the clean-up of waste disposal sites.  The Company maintains long-term environmental insurance covering the four manufacturing locations purchased with the Whirlaway acquisition.
 
7
Executive Officers of the Registrant
 
Our executive officers are:
 
Name
Age
Position
Roderick R. Baty5253Chairman of the Board, Chief Executive Officer, President and Director
Frank T. Gentry, III5051Vice President - General Manager U.S. Ball and Roller Division
Robert R. Sams4849Vice President - Sales
James H. Dorton4950Vice President - Corporate Development and Chief Financial Officer
William C. Kelly, Jr.4748Vice President - Chief Administrative Officer, Secretary, and Treasurer
Thomas W. McKown40Vice President - Managing Director of NN Asia
Nicola Trombetti4546Vice President - Managing Director of NN Europe
Thomas G. Zupan51Vice President - President of Whirlaway Corporation
David M. Gilson42Vice President - Global Marketing
James Anderson42Vice President - Plastic and Rubber Division

Set forth below is certain additional information with respect to each of our executive officers.
 
Roderick R. Baty was elected Chairman of the Board in September 2001 and continues to serve as Chief Executive Officer and President. He has served as President and Chief Executive Officer since July 1997. He joined NN in July 1995 as Vice President and Chief Financial Officer and was elected to the Board of Directors in 1995. Prior to joining NN, Mr. Baty served as President and Chief Operating Officer of Hoover Precision Products from 1990 until January 1995, and as Vice President and General Manager of Hoover Group from 1985 to 1990.
 
Frank T. Gentry, III, was appointed Vice President - General Manager U.S. Ball and Roller Division in August 1995. Mr. Gentry is responsible for the Domestic Ball and Roller Segment. Mr. Gentry joined NN in 1981 and held various manufacturing management positions within NN from 1981 to August 1995.
 
Robert R. Sams joined NN in 1996 as Plant Manager of the Mountain City, Tennessee facility. In 1997, Mr. Sams served as Managing Director of the Kilkenny facility and in 1999 was elected to the position of Vice President - Sales. Prior to joining NN, Mr. Sams held various positions with Hoover Precision Products from 1980 to 1994 and as Vice President of Production for Blum, Inc. from 1994 to 1996.
 
James H. Dorton joined NN as Vice President of Corporate Development and Chief Financial Officer in June 2005. Prior to joining NN, Mr. Dorton served as Executive Vice President and Chief Financial Officer of Specialty Foods Group, Inc. from 2003 to 2004, Vice President Corporate Development and Strategy and Vice President - Treasurer of Bowater Incorporated from 1996 to 2002 and as Treasurer of Intergraph Corporation from 1989 to 1996. Mr. Dorton is a Certified Public Accountant.
 
William C. Kelly, Jr. was named Vice President and Chief Administrative Officer in June 2005. In March, 2003, Mr. Kelly was elected to serve as Chief Administrative Officer. In March 1999 he was elected Secretary of NN and still serves in that capacity as well as that of Treasurer. In February 1995, Mr. Kelly was elected Treasurer and Assistant Secretary. He joined NN in 1993 as Assistant Treasurer and Manager of Investor Relations. In July 1994, Mr. Kelly was elected to serve as NN’s Chief Accounting Officer, and served in that capacity through March 2003. Prior to joining NN, Mr. Kelly served from 1988 to 1993 as a Staff Accountant and as a Senior Auditor with the accounting firm of PricewaterhouseCoopersPrice Waterhouse, LLP.
8
Thomas W. McKown joined NN in 2004 in the newly created position of Managing Director of NN Asia. In 2005 Mr. McKown was appointed as an Executive Officer and Corporate Vice President of NN. Prior to joining NN, Mr. McKown held various management positions within firms operating in Hong Kong, Malaysia,  China, and Taiwan.
 
Nicola Trombetti was elected NN Europe Managing Director in June 2004 and was elected a Corporate Vice President in June 2005. Prior to being named NN Europe Managing Director he was Vice President and Director of Operations, NN Europe. He joined NN in September 2000 as Pinerolo Italy Plant Manager. Prior to joining NN Europe, Mr. Trombetti was Plant Director for Tekfor - Neumaier GmbH Group, a European-based steel component manufacturer for the auto industry. From 1996 to 1999 he was Manufacturing Manager and Plant Manager for SKF Group. He also spent seven years as a manufacturing manager for Pininfarina, an Italian-based car design, engineering, development and manufacturing company.
 
8
Thomas G. Zupan co-founded Whirlaway Corporation in 1973 with his father and began his career as a toolmaker. He gained further experience in every line business function including Engineering, Production Operations, Quality Assurance, H/R, Sales, Material Control, IS, and Finance as the company grew from owner operator to professionally managed. In 1991, Mr. Zupan became CEO and sole shareholder of Whirlaway Corporation. Upon the sale of Whirlaway Corporation to NN November 30, 2006,  Mr. Zupan was appointed Vice President - President Whirlaway Corporation.
David M. Gilson joined NN in October 2006 as Vice President-Global Marketing. Prior to joining NN, Mr. Gilson held a variety of management positions for Ashland Specialty Chemical Company, a division of Ashland Inc. These positions included Business Manager, Ashland Chemical de Mexico, from 2000 until 2003, and Global Marketing Manager, from 2003 to 2006.
James O. Anderson was appointed  Vice President - Plastics and Rubber Division in October 2006.  Mr. Anderson joined NN in January 2005 and served as the General Manager of  Industrial Molding Corporation in Lubbock, Texas.  Prior to joining NN, Mr. Anderson served for six years in the U. S. Army as an artillery officer and worked in various manufacturing roles with Dana Corporation and Accuma Corporation from 1996 to 2005.
Item 1A. Risk Factors
 
Cautionary Statements for Purposes of the "Safe Harbor"“Safe Harbor” Provisions of the Private Securities Litigation Reform Act of 1995
 
The Company wishes to caution readers that this report contains, and future filings by the Company, press releases and oral statements made by the Company'sCompany’s authorized representatives may contain, forward-looking statements that involve certain risks and uncertainties. Readers can identify these forward-looking statements by the use of such verbs as expects, anticipates, believes or similar verbs or conjugations of such verbs. The Company'sCompany’s actual results could differ materially from those expressed in such forward-looking statements due to important factors bearing on the Company'sCompany’s business, many of which already have been discussed in this filing and in the Company'sCompany’s prior filings. The differences could be caused by a number of factors or combination of factors including, but not limited to, the risk factors described below.
 
You should carefully consider the following risks and uncertainties, and all other information contained in or incorporated by reference in this annual report on Form 10-K, before making an investment in our common stock. Any of the following risks could have a material adverse effect on our business, financial condition or operating results. In such case, the trading price of our common stock could decline and you may lose all or part of your investment.
 
The demand for our products is cyclical, which could adversely impact our revenues.
 
The end markets for fully assembled bearings and other industrial and automotive components are cyclical and tend to decline in response to overall declines in industrial and automotive production. As a result, the market for bearing components and precision metal products is also cyclical and impacted by overall levels of industrial and automotive production. Our sales in the past have been negatively affected, and in the future will be negatively affected, by adverse conditions in the industrial and/or automotive production sectors of the economy or by adverse global or national economic conditions generally.
 
We depend on a very limited number of foreign sources for our primary raw material and are subject to risks of shortages and price fluctuation.
 
The steel that we use to manufacture precision balls and rollers is of an extremely high quality and is available from a limited number of producers on a global basis. Due to quality constraints in the U.S. steel industry, we obtain substantially all of the steel used in our U.S. ball and roller productionoperations from overseas suppliers. In addition, we obtain most of the steel used in our European ball productionoperations from a single European source. If we had to obtain steel from sources other than our current suppliers we could face higher prices and transportation costs, increased duties or taxes, and shortages of steel. Problems in obtaining steel, and particularly 52100 chrome steel, in the quantities that we require and on commercially reasonable terms, could increase our costs, adversely impacting our ability to operate our business efficiently and have a material adverse effect on our revenues and operating and financial results.
 
Increases in the market demand for steel can have the impact of increasing scrap surcharges we pay in procuring our steel in the form of higher unit prices and could adversely impact the availability of steel. Our contracts with key customers allow us to pass a majority of the steel price increases on to those customers. However, by contract, material price changes in any given year at NN Europeour European operations are typically passed along with price adjustments in January of the following year. Until the current increases can be passed through to our customers, income from operations, net income and cash flow from operations can be adversely affected.
 
9
We depend heavily on a relatively limited number of customers, and the loss of any major customer would have a material adverse effect on our business.
 
9
Sales to various U.S. and foreign divisions of SKF, which is one of the largest bearing manufacturers in the world, accounted for approximately 47%46% of consolidated net sales in 2005,2006, and sales to Schaeffler Group (INA) accounted for approximately 13%11% of consolidated net sales in 2005. Sales to various divisions of the Timken Company accounted for approximately 6% of our net sales in 2005.2006. During 2005,2006, our ten largest customers accounted for approximately 81% of our consolidated net sales. None of ourNo other customers individually accounted for more than 5%10% of our consolidated net sales for 2005.sales. The loss of all or a substantial portion of sales to these customers would cause us to lose a substantial portion of our revenue and would lower our operating profit margin and cash flows from operations. Schaeffler Group (INA) has decided to in-source approximately $12 million of annual business to their internal ball manufacturing facility in Germany. This represents approximately 30% of the existing Schaeffler Group (INA) business. We are in the process of negotiating a long term supply agreement with Schaeffler Group (INA) for remaining business. In addition, we are in process of negotiating a new long term agreement with SKF to replace the one for precision balls that expires July 31, 2006. SKF has informally agreed in principle to carry the current agreement through to December 31, 2006.
 
We operate in and sell products to customers outside the U.S. and are subject to several related risks.
 
Because we obtain a majority of our raw materials from overseas suppliers, actively participate in overseas manufacturing operations and sell to a large number of international customers, we face risks associated with the following:
We do not have a hedging program in place associated with consolidating the operating results of our foreign businesses into U.S. dollars. An increase in the value of the U.S. dollar and/or the Euro relative to other currencies may adversely affect our ability to compete with our foreign-based competitors for international, as well as domestic, sales. Also, a decline in the value of the Euro relative to the U.S. dollar will negatively impact our consolidated financial results, which are denominated in U.S. dollars.
 
In addition, due to the typical slower summer manufacturing season in Europe, we expect that revenues in the third fiscal quarter of each year will reflect lower sales than in the other quarters of the year.
 
The costs and difficulties of integrating acquired business could impede our future growth.
 
We cannot assure you that any future acquisition will enhance our financial performance. Our ability to effectively integrate any future acquisitions will depend on, among other things, the adequacy of our implementation plans, the ability of our management to oversee and operate effectively the combined operations and our ability to achieve desired operating efficiencies and sales goals. The integration of any acquired businesses might cause us to incur unforeseen costs, which would lower our profit margin and future earnings and would prevent us from realizing the expected benefits of these acquisitions.
 
We may not be able to continue to make the acquisitions necessary for us to realize our future growth strategy.
 
Acquiring businesses that complement or expand our operations has been and continues to be an important element of our business strategy. This strategy calls for growth through acquisitions constituting the majority of our future growth objectives, with the remainder resulting from internal growth and increased market penetration. We bought our plastic bearing component business in 1999, formed NN Europe with our two largest bearing customers, SKF and Schaeffler Group (INA), in 2000 and acquired our bearing seal operations in 2001. During 2002, we purchased Schaeffler Group (INA)’s minority interest in NN Europe and during 2003 we purchased SKF’s minority interest in NN Europe and SKF’s tapered roller and metal cage manufacturing operations in Veenendaal, The Netherlands. SeeFor recent acquisitions see Note 2 of the Notes to Consolidated Financial Statements. In 2005, we entered into an agreement and started to acquire the internal precision ball equipment of SNR and a five year supply agreement to provide additional ball requirements to SNR. We cannot assure you that we will be successful in identifying attractive acquisition candidates or completing acquisitions on favorable terms in the future. In addition, we may borrow funds to acquire other businesses, increasing our interest expense and debt levels. Our inability to acquire businesses, or to operate them profitably once acquired, could have a material adverse effect on our business, financial position, results of operations and cash flows.
 
10
Our growth strategy depends in part on outsourcing, and if the industry trend toward outsourcing does not continue, our business could be adversely affected.
 
Our growth strategy depends in significant part on major bearing manufacturers continuing to outsource components, and expanding the number of components being outsourced. This requires manufacturers to depart significantly from their traditional methods of operations. If major bearing manufacturers do not continue to expand outsourcing efforts or determine to reduce their use of outsourcing, our ability to grow our business could be materially adversely affected.
 
Our market is highly competitive and many of our competitors have significant advantages that could adversely affect our business.
 
The global marketmarkets for bearing components, isprecision metal and precision plastic parts are highly competitive, with a majority of production represented by the captive production operations of certain large bearing manufacturers and the balance represented by independent manufacturers. Captive manufacturers make components for internal use and for sale to third parties. All of the captive manufacturers, and many independent manufacturers, are significantly larger and have greater resources than do we. Our competitors are continuously exploring and implementing improvements in technology and manufacturing processes in order to improve product quality, and our ability to remain competitive will depend, among other things, on whether we are able to keep pace with such quality improvements in a cost effective manner.
 
The production capacity we have added over the last several years has at times resulted in our having more capacity than we need, causing our operating costs to be higher than expected.
 
We have expanded our ball and rollermetal bearing components production facilities and capacity over the last several years. Our ball and rollermetal bearing component production facilities have not always operated at full capacity, and from time to time our results of operations have been adversely affected by the under-utilization of our production facilities. Under-utilization or inefficient utilization of our production facilities could be a risk in the future.
 
The price of our common stock may be volatile.
 
The market price of our common stock could be subject to significant fluctuations and may decline. Among the factors that could affect our stock price are:
 
11
The
The stock markets in general have experienced extreme volatility that has often been unrelated to the operating performance of particular companies. These broad market fluctuations may adversely affect the trading price of our common stock.
 
Provisions in our charter documents and Delaware law may inhibit a takeover, which could adversely affect the value of our common stock.
 
Our certificate of incorporation and bylaws, as well as Delaware corporate law, contain provisions that could delay or prevent a change of control or changes in our management that a stockholder might consider favorable and may prevent you from receiving a takeover premium for your shares. These provisions include, for example, a classified board of directors and the authorization of our board of directors to issue up to 5,000,000 preferred shares without a stockholder vote. In addition, our restated certificate of incorporation provides that stockholders may not call a special meeting.
 
We are a Delaware corporation subject to the provisions of Section 203 of the Delaware General Corporation Law, an anti-takeover law. Generally, this statute prohibits a publicly-held Delaware corporation from engaging in a business combination with an interested stockholder for a period of three years after the date of the transaction in which such person became an interested stockholder, unless the business combination is approved in a prescribed manner. A business combination includes a merger, asset sale or other transaction resulting in a financial benefit to the stockholder. We anticipate that the provisions of Section 203 may encourage parties interested in acquiring us to negotiate in advance with our board of directors, because the stockholder approval requirement would be avoided if a majority of the directors then in office approve either the business combination or the transaction that results in the stockholder becoming an interested stockholder.
 
These provisions apply even if the offer may be considered beneficial by some of our stockholders. If a change of control or change in management is delayed or prevented, the market price of our common stock could decline.
 
Item 1B. Unresolved Staff Comments
 
None
 
Item 2.  Properties
Metal Bearing Components
Properties
 
The CompanyMetal Bearing Components Segment has eight manufacturing locations around the world.  The segment has two operating domestic ball manufacturing facilities located in Erwin, Tennessee and Mountain City, Tennessee. The Erwin Tennessee facilities produce balls and rollers, and the Mountain City, Tennessee facility produces balls. Production began in1996 at the Mountain City facility. We ceased production and closed a facility in Walterboro, South Carolina in 2001, and sold the land and building assets during 2004.
The Erwin and Mountain City plants currently have approximately 125,000 and 86,40086,500 square feet of manufacturing space, respectively.  The Erwin plant is located on a 12 acre tract of land owned by the Company and the Mountain City plant is located on an eight acre tract of land owned by the Company.
 
Through NN Europe, we manufacture precision steel ballsThe Metal Bearing Components Segment has five manufacturing facilities in four manufacturing facilitiesEurope.  These are located in Kilkenny, Ireland; Eltmann, Germany; Pinerolo, Italy and Kysucke Nove Mesto, Slovakia.Slovakia and Veenendaal, The Netherlands. The facilities currently have approximately 125,000, 175,000, 330,000, 135,000, and 135,000159,000 square feet of manufacturing space, respectively.   The Kilkenny facility is located on a two acre tractAll of the facilities are owned by NN Europe,the Company, except for the Eltmann facility which is leased from Schaeffler Group (INA),.
The production facility in the People's Republic of China is leased and accounted for as a capital lease.  The Company has an option to purchase the Pinerolo facility at various points in the future.  The facility has approximately 110,000 square feet of production and office space and is located on a nine acre tract owned by NN Europe. The Kysucke facility is also owned by NN Europe.approximately 5 acres.
 
Our Veenendaal, The Netherlands operation manufactures rollers for tapered roller bearingsPlastics and metal retainers in two facilities. The facilities, owned by the Company, have approximately 107,000 and 52,000 square feet of manufacturing space, respectively.Rubber Components
 
IMC manufactures a wide range of plastic molded products through two facilities located in Lubbock, Texas. The Slaton facility, located on a six and one half acre tract of land owned by the Company, contains approximately 193,000 square feet of manufacturing, warehouse and office space. The Cedar facility is situated on a two and one half acre tract of land which is also owned by the Company and contains approximately 35,000 square feet of manufacturing and warehouse space.
 
12
Delta’s operations are located in two facilities on a 12 acre site in Danielson, Connecticut, owned by the Company. The two facilities encompass over 50,000 square feet of rubber seal manufacturing and administrative functions.
 
Precision Metal Components
12
Whirlaway operates at four locations, three in Ohio and one in Arizona. Two of the Ohio plants are in Wellington, Ohio with 86,000 square feet on 8 acres and 132,000 square feet on 10 acres. The property related to our NN Asia ball production facilityother Ohio plant is in the People’s Republic of China is leasedCincinnati area and accounted for as a capital lease. NN Asia has an option to purchase the facility at various points in the future. The facility has approximately 110,00019,000 square feet on 2 acres. The Arizona plant is in Tempe with 140,000 square feet on 8 acres. All of production and office space andthe locations are leased except for the Cincinnati location which is located on approximately 5 acres.
See "Management'sowned.  For more information, please see “Management’s Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources."”
 
Item 3. 
Legal Proceedings
 
From time to timeOn March 20, 2006, we, as well as numerous other parties, received correspondence from the CompanyEnvironmental Protection Agency (“EPA”) requesting information regarding a former waste recycling vendor previously used by us. The vendor has since ceased operations and the EPA is subject to legal actionsinvestigating the clean up of the site or sites used by the vendor. As of the date of this report, we do not know whether we have any liability related to its operations, most of whichthis vendor’s actions or estimatable range for any potential liability.
All other legal matters are of an ordinary and routine nature and are incidental to the operations of the Company. Management believes that such proceedings should not, individually or in the aggregate, have a material adverse effect on the Company'sCompany’s business or financial condition or on the results of operations.
 
Item 4. 
Submission of Matters to a Vote of Security Holders
 
No matters were submitted for a vote of stockholders during the fourth quarter of 2005.2006.
 

13
Part II
 
Item 5. 
Market for the Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
 
Since the Company’sour initial public offering in 1994, the Common Stockour common stock has been traded on the Nasdaq NationalThe NASDAQ Stock Market LLC (NASDAQ) under the trading symbol “NNBR.” Prior to such time there was no established market for the Common Stock.our common stock. As of March 13, 2006,2007, there were approximately 2,500 holders of the Common Stock. our common stock.
 
The following table sets forth the high and low closing sales prices of the Common Stock,common stock, as reported by Nasdaq,NASDAQ, and the dividends paid per share on the Common Stockcommon stock during each calendar quarter of 20052006 and 2004.2005.
 
Close Price
 
  
 
High
 
Low
 
Dividend
2006
     
First Quarter$    13.12 
$     10.77
 
 $     0.08
Second Quarter
 
13.53
 
 
11.92
 
 
0.08
 
Third Quarter
 
13.29
 
 
11.11
 
 
0.08
 
Fourth Quarter
 
12.76
 
 
10.55
 
 
0.08
 
      
2005
     
First Quarter
 
$ 13.01
 
 
$ 10.70
 
 
$ 0.08
 
Second Quarter
 
13.12
 
 
11.62
 
 
0.08
 
Third Quarter
 
13.58
 
 
11.38
 
 
0.08
 
Fourth Quarter
 
11.96
 
 
9.87
 
 
0.08
 

14
 
Close Price
  
 
High
 
Low
 
Dividend
2005
     
First Quarter$ 13.01 $ 10.70 $ 0.08
Second Quarter13.12 11.62 0.08
Third Quarter13.58 11.38 0.08
Fourth Quarter11.96 9.87 0.08
      
2004
     
First Quarter$ 13.13 $ 11.08 $ 0.08
Second Quarter12.94 11.03 0.08
Third Quarter12.00 9.40 0.08
Fourth Quarter13.21 11.06 0.08
The following graph compares the cumulative total shareholder return on our common stock (consisting of stock price performance and reinvested dividends) from December 31, 2001 with the cumulative total return (assuming reinvestment of all dividends) of (i) the Value Line Machinery Industry Stock Index ("Machinery ") and (ii) the Standard & Poor's 500 Stock Index, for the period December 31, 2001 through December 31, 2006.  The Machinery is an industry index comprised of 49 companies engaged in manufacturing of machinery and machine parts, a list of which is available from the company.  The comparison assumes $100 was invested in our common stock and in each of the foregoing indices on December 31, 2001.  We cannot assure you that the performance of the common stock will continue in the future with the same or similar trend depicted on the graph.

 
Cumulative Return
 
12/31/2002
12/31/2003
12/31/2004
12/31/2005
12/31/2006
NN, Inc.92.54119.87129.60108.73128.69
Standard & Poors 50076.6396.85105.56106.89123.54
Machinery100.09158.06196.21212.96268.82
 
The declaration and payment
15
During the fourth quarter of dividends are subject to the sole discretion2006, we repurchased 249,199 shares of the Boardour common stock at a total cost of Directors of the Company and depend upon the Company’s profitability, financial condition, capital needs, future prospects and other factors deemed relevant$2.7 million under our publicly announced $10 million repurchase plan authorized by the Board of Directors. The terms of the Company’s revolving credit facility restrict the payment of dividends by prohibiting the Company from declaring or paying any dividend if an event of default exists at the time of, or would occur as a result of, such declaration or payment. Additionally, the terms of the Company’s revolving credit facility restrict the declaration and payment of dividends in excess of certain amounts specified in the credit agreement in any fiscal year. For further description of the Company’s revolving credit facility, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources” herein.
 
During the 4th Quarter of 2005, there were not any repurchases of the Company’s stock by the Company or any “affiliated purchasers.”
Issuer Purchases of Equity Securities
 
 
 
 
Period
 
 
(a)
Total Number of Shares (or Units) Purchased
 
 
(b)
Average Price Paid per Share (or Unit) including commissions
 
(c)
Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs
(d)
Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Plans or Programs
October 1 - October 31------$7,466,064
November 1- November 30217,961$10.97217,961$5,073,962
December 1 - December 3131,238$11.1731,238$4,724,854
 
See Part III, Item 12 - "Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters" of this 2006 Annual Report on Form 10-K for information required by Item 201 (d) of regulation S-K.
Item 6.  Selected Financial Data
Selected Financial Data
 
The following selected financial data of the Company are qualified by reference to and should be read in conjunction with the consolidated financial statements and the Notes thereto included as Item 8. The data set forth below as of December 31, 2006, 2005, 2004, and 2003 and for the periods then ended has been derived from the consolidated financial statements of the Company which have been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, whose report thereon is included as part of Item 8. The data below as of December 31, 2002 and 2001 and for the periodsperiod then ended has been derived from the consolidated financial statements of the Company, which have been audited by KPMG LLP, an independent registered public accounting firm. These historical results are not necessarily indicative of the results to be expected in the future. See "Management's“Management’s Discussion and Analysis of Financial Condition and Results of Operations."”
 

 

14


(In Thousands, Except Per Share Data)
Year ended December 31,

 
2005
 
2004
 
2003
 
2002
 
2001
 
2006
2005
2004
2003
2002
Statement of Income Data:
                
Net sales $321,387 $304,089 $253,462 $192,856 $180,151 $ 330,325$ 321,387$ 304,089$ 253,462$ 192,856
Cost of products sold (exclusive of depreciation shown separately below)  248,828  240,580  195,658  144,274  137,221 257,703248,828240,580195,658144,274
Selling, general and administrative expenses  29,073 29,755 21,700 17,134 16,752 30,00829,07329,75521,70017,134
Depreciation and amortization  16,331 16,133 13,691 11,212 13,150 17,49216,33116,13313,69111,212
(Gain) loss on disposal of assets  (391) 856 (147) (25) -- (705)(391)856(147)(25)
Restructuring and impairment costs  (342) 2,398  2,490  1,277  2,312 
Restructuring and impairment costs (income)(65)(342)2,3982,4901,277
Income from operations  27,888 14,367 20,070 18,984 10,716 25,89227,88814,36720,07018,984
Interest expense  3,777 4,029 3,392 2,451 4,196 3,9833,7774,0293,3922,451
Net gain on involuntary conversion  -- -- -- -- (3,901)
Other (Income) Loss  (653) (853) 99  (462) (186)
Other (income) loss(1,048)(653)(853)99(462)
Income before provision for income taxes  24,764 11,191 16,579 16,995 10,607 22,95724,76411,19116,57916,995
Provision for income taxes  9,752 4,089 5,726 6,457 4,094 8,5229,7524,0895,7266,457
Minority interest in income of consolidated
Subsidiary
  --  --  675  2,778  1,753 ----6752,778
Income before cumulative effect of change in
accounting principle
  15,012 7,102 10,178 7,760 4,760 
       
Cumulative effect of change in accounting
principle, net of income tax benefit of $112
and related minority interest impact of $84
  --  --  --  --  98 
Net income $15,012 $7,102 $10,178 $7,760 $4,662 $  14,435$  15,012$  7,102$  10,178$   7,760
              
Basic income per share:              
Income before cumulative effect of change in
accounting principle
 $0.88 $0.42 $0.64 $0. 51 $0.31 
Cumulative effect of change in accounting
Principle
  --  --  --  --  (0.01)
Net income $0.88 $0.42 $0.64 $0. 51 $0.31 $ 0.84$ 0.88$ 0.42$ 0.64$ 0. 51
              
Diluted income per share:              
Income before cumulative effect of change in
accounting principle
 $0.87 $0.41 $0.62 $0.49 $0.31 
Cumulative effect of change in accounting
Principle
  --  --  --  --  (0.01)
Net income $0.87 $0.41 $0.62 $0.49 $0.30 $ 0.83$ 0.87$ 0.41$ 0.62$ 0.49
              
Dividends declared $0.32 $0.32 $0.32 $0.32 $0.32 $ 0.32$ 0.32$ 0.32
Weighted average number of shares
outstanding - Basic
  17,004  16,728  15,973  15,343  15,259 17,12517,00416,72815,97315,343
Weighted average number of shares
outstanding - Diluted
  17,193  17,151  16,379  15,714  15,540 17,35117,19317,15116,37915,714

 
1516
(In Thousands, Except Per Share Data)
(In Thousands, Except Per Share Data)
2006
 
2005
 
2004
 
2003
 
2002
Balance Sheet Data:
         
Current assets$ 125,864 $ 105,950 $ 108,440 $ 89,901 $ 61,412
Current liabilities74,869 64,839 74,431 64,176 40,234
Total assets342,701 269,655 288,342 267,899 195,215
Long-term debt80,711 57,900 67,510 69,752 46,135
Stockholders’ equity133,169 116,074 115,140 106,468 77,908
Year ended December 31,


  
2005
 
2004
 
2003
 
2002
 
2001
 
Balance Sheet Data:
 
 
 
 
 
 
 
 
 
 
 
Current assets $105,950 $108,440 $89,901 $61,412 $55,617 
Current liabilities  64,839  74,431  64,176  40,234  32,534 
Total assets  269,655  288,342  267,899  195,215  184,477 
Long-term debt  57,900  67,510  69,752  46,135  47,661 
Stockholders' equity  116,074  115,140  106,468  77,908  70,982 
On November 30, 2006, we purchased 100% of the stock of Whirlaway Corporation and incorporated their assets and liabilities into our consolidated financial statements. The total current assets, assets and current liabilities acquired were 19,276; 55,673; and 7,475, respectively. In addition, we incurred third party debt of $24,700 million related to the acquisition.

During 2004, we formed a wholly-owned subsidiary, NN Precision Bearing Products Company, LTD. This subsidiary, which began production of precision balls during the fourth quarter of 2005, is located in the Kunshan Economic and Technology Development Zone, Jiangsu, The People’s Republic of China.

On October 9, 2003, we acquired certain assets comprised of land, building and machinery and equipment of the precision ball operations of KLF - Gulickaren (“KLF”), based in Kysucke Nove Mesto, Slovakia.
 
On May 2, 2003, we acquired 100% of the tapered roller and metal cage manufacturing operations of SKF in Veenendaal, The Netherlands.
 
On May 2, 2003, we acquired the 23% interest in NN Europe, held by SKF. Upon consummation of this transaction, we became the sole owner of NN Europe.
 
On December 20, 2002, we completed the purchase of the 23% interest in NN Europe held by INA. As a result of this transaction, we own 77% of the shares of NN Europe.
 
Effective January 1, 2002, we adopted the provision of Statement of Financial Accounting Standards (SFAS) No. 142. SFAS No. 142 requires that goodwill and intangible assets with indefinite useful lives no longer be amortized. See Note 1 of the Notes to Consolidated Financial Statements.
 
On February 16, 2001 we completed the acquisition of all of the outstanding stock of The Delta Rubber Company.

Item 7.
Management'sManagement’s Discussion and Analysis of Financial Condition and Results of Operations
 
The following discussion should be read in conjunction with, and is qualified in its entirety by, the Consolidated Financial Statements and the Notes thereto and Selected Financial Data included elsewhere in this Form 10-K. Historical operating results and percentage relationships among any amounts included in the Consolidated Financial Statements are not necessarily indicative of trends in operating results for any future period.
 
Risk Factors
 
See Item 1A. "Risk Factors"“Risk Factors” for a discussion of risk factors that could materially impact the Company’s actual results.

16
Overview and Management Focus
 
Our strategy and management focus is based upon the following long-term objectives:

Management generally focuses on these trends and relevant market indicators: