Edgar Filing: NN INC

1) Summary of Significant Accounting Policies and Practices

(a) Description of Business

NN, Inc. (the “Company”) is a manufacturer of precision balls, cylindrical and tapered rollers, bearing retainers, plastic injection molded products, precision bearing seals and beginning December 1, 2006, precision metal components. The Company’s balls, rollers, retainers, and bearing seals are used primarily in the domestic and international anti-friction bearing industry. The Company’s plastic injection molded products are used in the bearing, automotive, instrumentation and fiber optic industries. The precision metal components products are used in automotive, diesel engine, refrigeration, and heating and cooling industries.

(b) Cash and Cash Equivalents

The Company considers all highly liquid investments with an original maturity of three months or less as cash equivalents.

Inventories are stated at the lower of cost or market. Cost is determined using the first-in, first-out method. Our policy is to expense abnormal amounts of idle facility expense, freight, handling cost, and waste. In addition, we allocate fixed production overheads based on the normal capacity of our facilities.

Inventories also include tools, molds and dies in progress that the Company is producing and will ultimately sell to its customers. This activity is principally related to our Plastic and Rubber Components and Precision Metal Components Segments. These inventories are carried at the lower of cost or market.

(d) Property, Plant and Equipment

Property, plant and equipment are stated at cost less accumulated depreciation. Assets held for sale are stated at lower of depreciated cost or fair market value less estimated selling costs. Expenditures for maintenance and repairs are charged to expense as incurred. Major renewals and betterments are capitalized. When a major property item is retired, its cost and related accumulated depreciation are removed from the property accounts and any gain or loss is recorded in the statement of income. The Company reviews the carrying values of long-lived assets for impairment whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. During the years ended December 31, 2007, 2006 and 2005, the Company recorded impairment charges of $3,320, $0 and $0, respectively (See Note 3 for further details). Property, plant and equipment includes tools, molds and dies principally used in our Plastic and Rubber Components and Precision Metal Components Segments that are the property of the Company.

Depreciation is provided principally on the straight-line method over the estimated useful lives of the depreciable assets for financial reporting purposes. Accelerated depreciation methods are used for income tax purposes. We capitalize incremental interest cost related to certain large capital expenditure projects in compliance with SFAS 34 “Capitalization of Interest Cost.” The amount capitalized is the portion of interest cost incurred during the acquisition period of these assets.

(e) Revenue Recognition

The Company recognizes revenues based on the stated shipping terms with the customer when these terms are satisfied and the risks of ownership are transferred to the customer. The Company has an inventory management program for certain Metal Bearing Components Segment customers whereby revenue is recognized when products are used by the customer from consigned stock, rather than at the time of shipment. Under both circumstances, revenue is recognized when persuasive evidence of an arrangement exists, delivery has occurred, the sellers’ price is determinable and collectability is reasonably assured.

NN, Inc.

Notes to Consolidated Financial Statements

December 31, 2007, 2006 and 2005

(In thousands, except per share data)

(f) Accounts Receivable.

Accounts receivable are recorded upon recognition of a sale of goods and ownership and risk of loss is assumed by the customer. Substantially all of the Company’s accounts receivable is due primarily from the core served markets: bearing manufacturers, automotive industry, electronics, industrial, agricultural and aerospace. The Company experienced $0.5 million, $0.3 million, and $0.3 million of bad debt expense during 2007, 2006 and 2005, respectively. In establishing allowances for doubtful accounts, the Company performs credit evaluations of its customers, considering numerous inputs when available including the customers’ financial position, past payment history, relevant industry trends, cash flows, management capability, historical loss experience and economic conditions and prospects. Accounts receivable are written off or reserves established when considered to be uncollectible or at risk of being uncollectible.

(g) Income Taxes

Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

(h) Net Income Per Common Share

Basic earnings per share reflect reported earnings divided by the weighted average number of common shares outstanding. Diluted earnings per share include the effect of dilutive stock options, unvested restricted stock, and the respective tax benefits.

(i) Stock Incentive Plan

Prior to January 1, 2006, the Company applied the intrinsic value-based method of accounting prescribed by Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations including Financial Accounting Standards Board (FASB) Interpretation No. 44, “Accounting for Certain Transactions Involving Stock Compensation (an interpretation of APB Opinion No. 25)” issued in March 2000, to account for its fixed plan stock options. Under this method, compensation expense was recorded on the date of grant only if the current market price of the underlying stock exceeded the exercise price. The Company also applied the provision of APB Opinion No. 25 to its variable stock options. For 2005, we elected to continue accounting for our stock option compensation plan using the intrinsic value based method under APB Opinion No. 25 and did not record compensation expense for stock options for the year ended December 31, 2005 except as related to stock options accounted for under the variable method of accounting and for restricted stock awards.

Effective January 1, 2006, the Company adopted SFAS 123(R) under the modified prospective method. From that date onward, the Company is accounting for new awards and awards modified under this new standard. Any options issued henceforth will be expensed based on the fair value of the options at the grant date. As of December 31, 2005, the Company did not have any unvested stock options due to an accelerated vesting program implemented in December 2005. As such, this statement only impacted the Company for its outstanding restricted stock and stock option and restricted stock awards issued subsequent to January 1, 2006. The cost of the options and restricted stock awards will be expensed as compensation expense over the vesting periods based on the fair value at the grant date. (See Note 10)

NN, Inc.

Notes to Consolidated Financial Statements

December 31, 2007, 2006 and 2005

(In thousands, except per share data)

The Company accounts for restricted stock awards by recognizing compensation expense ratably over the vesting period as specified in the award. Compensation expense to be recognized is based on the stock price at date of grant.

(j) Principles of Consolidation

The Company’s consolidated financial statements include the accounts of NN, Inc. and subsidiaries in which the Company owns more than 50% voting interest. All of the Company’s subsidiaries are 100% owned and all are included in the consolidated financial statements for the years end December 31, 2007, 2006, and 2005. All significant inter-company profits, transactions, and balances have been eliminated in consolidation.

(k) Foreign Currency Translation

Assets and liabilities of the Company’s foreign subsidiaries are translated at current exchange rates, while revenue, costs and expenses are translated at average rates prevailing during each reporting period. Translation adjustments arising from the translation of foreign subsidiary financial statements are reported as a component of other comprehensive income and accumulated other comprehensive income within shareholders’ equity.

(l) Goodwill and Other Indefinite Lived Intangible Assets

The Company recognizes the excess of the purchase price of an acquired entity over the fair value of the net identifiable assets as goodwill. Goodwill is tested for impairment on an annual basis as of October 1 and between annual tests in certain circumstances. Impairment losses are recognized whenever the implied fair value of goodwill is less than its carrying value. Goodwill is not amortized.

(m) Long Lived Intangible Assets

The Company recognizes an acquired intangible asset apart from goodwill whenever the asset arises from contractual or other legal rights, or whenever it is capable of being divided or separated from the acquired entity or sold, transferred, licensed, rented, or exchanged, whether individually or in combination with a related contract, asset or liability. An intangible asset other than goodwill is amortized over its estimated useful life unless that life is determined to be indefinite. The Company reviews the lives of intangible assets each reporting period and, if necessary, recognizes impairment losses if the carrying amount of an intangible asset is not recoverable from expected future cash flows and its carrying amount exceeds its fair value.

(n) Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of

The Company accounts for long-lived assets in accordance with the provisions of SFAS No. 144, “Accounting for the Impairment of or Disposal of Long-Lived Assets.” Assets to be held and used are tested for recoverability when indications of impairment are evident. If the reviewed carrying value of the asset is not recoverable based on estimated undiscounted cash flows related to the asset or asset group, the asset is written down to the fair value. Assets held for sale are carried at the lesser of carrying value or fair value less costs of disposal.

(o) Use of Estimates in the Preparation of Financial Statements

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

NN, Inc.

Notes to Consolidated Financial Statements

December 31, 2007, 2006 and 2005

(In thousands, except per share data)

(p) Recently Issued Accounting Standards

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (SFAS 157), which provides guidance on how to measure assets and liabilities that use fair value. SFAS 157 will apply whenever another U.S. GAAP standard requires (or permits) assets or liabilities to be measured at fair value but does not expand the use of fair value to any new circumstances. This standard also will require additional disclosures in both annual and quarterly reports. SFAS 157 will be effective for financial statements issued for fiscal years beginning after November 15, 2007. However, on December 14, 2007, the FASB issued, and on February 14, 2008 approved, FASB Staff Position FAS 157-2 (“FSP FAS 157-2”) which would delay the effective date of SFAS No. 157 for all non financial assets and non financial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). The FSP partially defers the effective date of SFAS No. 157 to fiscal years beginning after November 15, 2008. Effective for first quarter 2008, the Company plans to adopt SFAS No. 157 except as it applies to those non financial assets and liabilities as noted in FSP FAS 157-2. The Company is currently evaluating the potential impact this standard may have on our consolidated financial position and results of operations, but do not believe the impact of the adoption will have a material effect.

In February, 2007, the FASB issued SFAS No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities—Including an amendment of FASB Statement No. 115." SFAS No. 159 permits companies to choose to measure many financial instruments and certain other items at fair value at specified election dates. Upon adoption, an entity shall report unrealized gains and losses on items for which the fair value option has been elected in earnings at each subsequent reporting date. Most of the provisions apply only to entities that elect the fair value option. However, the amendment to SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities," applies to all entities with available for sale and trading securities. SFAS No. 159 will be effective as of the beginning of an entity's first fiscal year that begins after November 15, 2007. The Company is currently evaluating the effect SFAS No. 159 will have on its consolidated financial position, liquidity, or results of operations.

2) Acquisitions, Purchase of Minority Interest and New Businesses

Whirlaway Acquisition

On November 30, 2006, we purchased 100% of the common shares of Whirlaway from the sole shareholder for $24,337 in cash and a note payable, paid in 2007, to the former owner for $18,638. In addition, we incurred fees of $825 from third parties as part of the purchase. The results of Whirlaway’s operations have been consolidated with NN, Inc. since the date of acquisition.

Whirlaway is a high precision metal component and fluid control assembly manufacturer that supplies customers serving the air conditioning, appliance, automotive, commercial refrigeration, and diesel engine industries. Whirlaway produces highly engineered fluid control components and assemblies, shafts, and prismatic machined parts.

NN, Inc.

Notes to Consolidated Financial Statements

December 31, 2007, 2006 and 2005

(In thousands, except per share data)

The acquisition of Whirlaway represents a first step in our efforts to create a precision metal components platform. The acquisition provides a base from which to create a profitable precision metal components business of significant size and scale over the next several years, consistent with our strategic business plan.

The following table summarized the final fair values of assets acquired and liabilities assumed at date of acquisition.

At November 30, 2006	Preliminary Balances December 31, 2006		Adjustments during Year Ended December 31, 2007			Final Balances December 31, 2007
Current assets	$	19,276		--		$	19,276
Property, plant, and equipment		25,837		--			25,837
Other assets		128		--			128
Intangible assets subject to amortization		7,180		--			7,180
Intangible assets not subject to amortization		900		--			900
Goodwill		2,352		1,922			4,274
Total assets acquired		55,673		1,922			57,595
Current liabilities		7,475		(229	)		7,246
Other long-term liabilities		222		4,048			4,270
Long term debt		1,604		675			2,279
Total liabilities assumed		9,301		4,494			13,795
Net assets acquired		46,372		(2,572	)	$	43,800

During 2007, the following adjustments were made to the fair values of assets acquired and liabilities assumed as preliminarily reported for the year ended December 31, 2006. A deferred tax liability of $4,048 was added due to the difference in the tax and book basis of the property, plant and equipment. The long-term debt balance was increased by $676 to adjust to the discounted value at November 30, 2006. The accounts payable balance was reduced by $229 as this balance was overstated at November 30, 2006. The net assets acquired were reduced by $2,667 to eliminate a tax indemnity to the former owner that was initially recorded but subsequently determined not to be required. Finally, the net assets acquired increased by $94 for acquisition related legal fees paid subsequent to December 31, 2006. The net impact of all of these changes totaled $1,922 and increased goodwill from that originally reported.

NN, Inc.

Notes to Consolidated Financial Statements

December 31, 2007, 2006 and 2005

(In thousands, except per share data)

The intangible assets not subject to amortization are trade names that have indefinite lives. The intangible assets subject to amortization are customer relationship intangible asset of $6,900, a covenant not to compete of $150, and a lease interest favorable to market of $130. The intangible assets subject to amortization have a weighted average life of approximately 10 years. Based on the Company’s analysis, all of the goodwill and intangible assets will be deductible and amortized over 15 years for federal tax.

The following unaudited pro-forma financial information shows the revenue, net income, and earnings per share for the years ended December 31, 2006 and 2005, as though the acquisition of Whirlaway occurred at the beginning of each respective fiscal year. This pro-forma information has been adjusted for the effects of purchase accounting on the assets and liabilities acquired. These adjustments include amortization and depreciation based on allocated values of assets acquired, interest expense based on new debt incurred in acquisition, and recognizing the tax impacts of each adjustment.

	December 31, 2006		December 31, 2005
Revenues	$	403,316	$	393,249
Net income	$	15,848	$	13,529
Earnings per share basic	$	0.93	$	0.80
Earnings per share fully diluted	$	0.91	$	0.79

The pro-forma financial results of Whirlaway in 2005 were dilutive due to abnormal operational inefficiencies at Triumph from the transitioning of products from Whirlaway and the integration of production processes. The operations of Triumph and Whirlaway were profitable in 2006.

Others

On October 7, 2005, we entered into an agreement with SNR Roulements (“SNR”) to purchase all of SNR’s internal precision ball producing equipment for approximately 5,166 Euros ($6,200). As part of the agreement, we entered into a five-year supply agreement to provide SNR with its annual ball requirements of the former in-house production for approximately $9.0 million. As of December 31, 2007, we have purchased all of the equipment and intangibles related to this acquisition. Approximately $3,710 has been recorded as tangible fixed assets and approximately $2,502 has been recorded as an intangible asset and is being amortized over the life of the agreement.

During 2004, we formed a wholly-owned subsidiary, NN Precision Bearing Products Company, Ltd, (“NN Asia”). This subsidiary, which began precision ball production 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 start–up costs incurred in 2005 of approximately $1,102 were expensed as incurred.

3) Restructuring and Impairment Charges

Metal Bearing Components Segment Restructuring, Impairment and Other Cost Reduction Actions

On July 25, 2007, we announced several actions intended to improve corporate financial performance that resulted in the recognition of certain restructuring, impairment and other non-recurring charges. The most significant action is a restructuring of the European precision ball plants operations of the Metal Bearing Components Segment of the Company. As we have increased capacity at our two newest ball plants in China and Slovakia, we now need to align our capacity across our worldwide system of six ball plants, both in assets currently in service and in production assets that have been held in reserve. Earlier in July 2007, management made a decision that reducing output at four of the six ball plants would be the best financial and logistical solution to align capacity. Management believed that reducing capacity at that time would necessitate changes in employment levels resulting in certain costs and charges, as well as a reduction in cash flow from each of the plants. Since the reporting value of tangible and intangible assets must be supported by cash flow from the operations, the changes resulted in reduction in value of certain tangible and intangible assets at the affected ball plants.

NN, Inc.

Notes to Consolidated Financial Statements

December 31, 2007, 2006 and 2005

(In thousands, except per share data)

During the second quarter of 2007, we recorded approximately $13,336 ($12,624 after-tax) of non-cash impairment costs. These charges include the write-down to estimated fair market value of certain excess production equipment of $3,320 ($3,212 after tax) and the full impairment of goodwill at one European reporting unit of $10,016 ($9,412 after tax) to levels supported by projected cash flows after the restructuring. These impairments were calculated using present value of expected future cash flows methods pursuant to SFAS 142 for the goodwill and estimates of fair value pursuant to SFAS 144 for the fixed assets.

During the third quarter of 2007, we recorded approximately $1,272 ($1,196 after tax) of cash restructuring charges and approximately $90 ($66 after tax) of non-cash impairment charges related to the write-down to estimated fair value of certain excess production equipment as part of the Metal Bearings Components Segment restructuring. The $1,272 charge was for severance booked in accordance with SFAS 146, which was to be paid out upon completion of the required legal notification period which was approximately one year. The majority of the severance was for one time termination benefits of 19 production employees at our Eltmann Plant.

During the fourth quarter of 2007, the German workers counsel approached management with an unsolicited offer to increase working hours and lower wages if management would reconsider the involuntary termination order. Although management considered its notice final and irrevocable, the workers’ offer was compelling, and management agreed to consider it. Management presented the workers’ offer to the NN Board of Directors and it directed management to agree to the contract as presented. On February 13, 2008, we signed a new agreement with the German workers and rescinded the layoff order. Therefore, $1,062 ($1,062 after tax) of the severance charge related to the 19 production employees no longer meets the requirements of SFAS 146 for a restructuring accrual and was reversed in the fourth quarter of 2007.

4) Notes Receivable

Effective December 21, 2001, the Company sold its 50% ownership in NN General, LLC to its partner, General Bearing Corporation for cash of $622 and notes of $3,305. The note was due in annual installments of $200 with the balance of $2,505 due on December 21, 2006. The note was paid in full by General Bearing Corporation in December 2006. Interest income on this note of $164 and $129 was recorded during 2006 and 2005, respectively, and has been included as a component of other income in the accompanying consolidated statement of income. Payments totaling $2,669 and $329 were received during 2006 and 2005, respectively which included $2,505 and $200 of principal and $164 and $129 of interest payments, respectively.

5) Accounts Receivable and Sales Concentrations

	December 31,
	2007	2006

Trade	$ 66,978	$ 64,443
Less - allowance for doubtful accounts	1,412	1,001

Accounts receivable, net	$65,566	$63,442

Activity in the allowance for doubtful accounts is as follows:

Description	Balance at beginning of year	Additions	Write-offs	Currency Impacts		Additions due to acquisition	Balance at end of year

December 31, 2007
Allowance for doubtful accounts	$ 1,001	$ 496	$ (102)	$ 17	$ --		$ 1,412

December 31, 2006
Allowance for doubtful accounts	$ 1,119	$ 311	$ (818)	$ 10	$ 379		$ 1,001

December 31, 2005
Allowance for doubtful accounts	$ 1,734	$ 287	$ (871)	$ (31)	$ --		$ 1,119

For the years ended December 31, 2007, 2006 and 2005, sales to SKF amounted to $169,765, $150,841 and $151,175, respectively, or 40.3%, 45.6% and 47.0%, of consolidated revenues, respectively. For the years ended December 31, 2006 and 2005, sales to Schaeffler Group (INA) amounted to $37,283 and $41,399, respectively or 11.3% and 12.9% of consolidated revenues, respectively. None of the Company’s other customers accounted for more than 10% of our net sales in 2007, 2006 or 2005. SKF was the only customer with an Accounts Receivable concentration in excess of 10%. This outstanding balance as of December 31, 2007 and 2006 was $23,535 and $23,403, respectively. All revenues and receivables related to SKF and Schaeffler Group (INA) are in the Metal Bearing Components and Plastics and Rubber Components Segments.

6) Inventories

	December 31,
	2007	2006
Raw materials	$ 15,076	$ 11,828
Work in process	9,808	10,427
Finished goods	28,925	23,596
Less-inventory reserve	(1,988)	(2,313)

Inventories, net	$ 51,821	$ 43,538

Inventory on consignment at customers’ sites at December 31, 2007 and 2006 was approximately $5,702 and $4,554, respectively.

7) Property, Plant and Equipment

		December 31,
	Estimated Useful Life	2007	2006
Land owned		$ 7,975	$ 7,020
Land under capital lease		452	422
Buildings and improvements owned	15-40 years	42,976	39,072
Building under capital lease	20 years	1,671	1,564
Machinery and equipment	3-12 years	235,062	209,493
Construction in process		15,002	12,764

		303,138	270,335
Less - accumulated depreciation		142,130	113,888

Property, plant and equipment, net		$ 161,008	$ 156,447

Fixed assets at certain European operations of the Metal Bearing Components Segment were impaired as a result of the Metal Bearing Components Segment restructuring (see Note 3.) The total reduction in fixed assets from the impairment charge was $3,410 and was reported in the restructuring and impairment charges of the Consolidated Statements of Income.

On November 30, 2006, we added $25,837 in fixed assets with the purchase of Whirlaway. (See Note 2)

During January 2006, we completed the sale of excess land and two small buildings at the Pinerolo Plant with a net book value of $1,013. The proceeds from the sale were $2,804, resulting in a pre-tax gain of $1,791. In addition, the Pinerolo plant disposed of excess machinery in the first quarter of 2006 with a net book value of $1,087 resulting in a pre-tax loss of $1,062.

Long-term debt at December 31, 2007 and 2006 consisted of the following:

8) Debt

	2007	2006
Borrowings under our $135,000 revolving credit facility bearing interest at a floating rate equal to LIBOR (4.60% at December 31, 2007) plus an applicable margin of 0.60 to 0.925, expiring September 20, 2011	$ 70, 476	$ 39,466

Borrowings under our $40,000 aggregate principal amount of senior notes bearing interest at a fixed rate of 4.89% maturing on April 26, 2014. Annual principal payments of $5,714 begin on April 26, 2008 and extend through the date of maturity.	40,000	40,000

Long-term note payable with customer related to acquiring equipment from customer as part of long-term supply agreement. Note carries a 0% rate of interest. Interest on this note has been imputed at a rate of 5.41%. Note is reduced by applying a fixed amount per piece purchased by customer.	1,568	2,096
Total long-term debt	112,044	81,562

Less current maturities of long-term debt	11,851	851

Long-term debt, excluding current maturities	$ 100,193	$ 80,711

On September 21, 2006, we entered into a five-year $90,000 revolving credit facility maturing in September 2011 with Key Bank as the administrative agent. On May 30, 2007, we entered into an agreement to amend our $90,000 credit facility to increase the total commitment from $90,000 to $135,000. Other than the increase in the total commitment, the other terms of the credit facility remained substantially the same. In July 2007, we amended the $135,000 credit facility to amend the definitions of certain components of the financial covenant calculations to exclude the negative impacts of non-cash restructuring and impairment charges. We incurred $184 of costs related to these amendments which have been capitalized.

The $135,000 credit facility provides the Company the ability to borrow in U.S. Dollars at LIBOR plus an applicable margin of .60% to .925% or Euros at EURIBOR plus an applicable margin of .60% to.925%. The facility has a $10,000 swing line feature to meet short term cash flow needs. Any borrowings under this swing line are considered short term. Costs associated with entering into the revolving credit facility were capitalized and will be amortized into interest expense over the life of the facility. As of December 31, 2007, $627 of net capitalized loan origination cost was on the balance sheet within other non-current assets and the gross amount was presented in the Financing Activities section of the Statement of Cash Flows. The loan agreement contains customary financial and non-financial covenants specifying that we must maintain certain liquidity measures. The loan agreement also contains customary restrictions on, among other things, additional indebtedness, liens on our assets, sales or transfers of assets, investments, restricted payments (including payment of dividends and stock repurchases), issuance of equity securities, and merger, acquisition and other fundamental changes in the Company’s business. The credit agreement is collateralized by the pledge of stock of certain foreign and domestic subsidiaries and guarantees of certain domestic subsidiaries.

On April 26, 2004, we issued $40,000 aggregate principal amount of senior notes in a private placement. These notes bear interest at a fixed rate of 4.89% and mature on April 26, 2014. Interest is paid semi-annually. As of December 31, 2007, $40.0 million remained outstanding. Annual principal payments of approximately $5,714 begin on April 26, 2008 and extend through the date of maturity. The agreement contains customary financial and non-financial covenants. Such covenants specify that we must maintain certain liquidity measures. The agreement also contains customary restrictions on, among other things, additional indebtedness, liens on our assets, sales or transfers of assets, investments, restricted payments (including payment of dividends and stock repurchases), issuance of equity securities, and mergers, acquisitions and other fundamental changes in our business. The notes are collateralized by the pledge of stock of certain foreign subsidiaries. We incurred $845 of related costs as a result of issuing these notes which have been recorded as a component of other non-current assets and are being amortized over the term of the notes. The unamortized balance at December 31, 2007 was $535.

We believe we are in compliance with all covenants related to the $135.0 million credit facility and the $40.0 million senior notes as of December 31, 2007. The table below summarizes the various financial covenants of the two agreements:

Financial Covenants	Required Ratio	Actual Ratio
Fixed charge coverage ratio	Not less than 2.00 to 1.00	2.29 to 1.00
Funded debt to EBITDA	Not to exceed 2.50 to 1.00	2.37 to 1.00
Funded indebtedness to capitalization ratio	Not to exceed 0.55 to 1.00	0.47 to 1.00
Interest and rent expense coverage ratio	No less than 3.00 to 1.00	4.69 to 1.00
Capital expenditures	Not to exceed 150% of prior year depreciation	Capital expenditures 114% of prior year depreciation
Minimum net worth	No less than $79,500	$130,043

The aggregate maturities of long-term debt including current portion for each of the five years subsequent to December 31, 2007 are as follows:

2008	$ 11,851
2009	6,021
2010	5,714
2011	71,314
2012	5,714
Thereafter	11,430
Total	$ 112,044

On June 1, 2004, our wholly owned subsidiary, NN Asia, entered into a twenty year lease agreement with Kunshan Tian Li Steel Structure Co. LTD for the lease of land and building (approximately 110,000 square feet) in the Kunshan Economic and Technology Development Zone, Jiangsu, The People’s Republic of China. The building was newly constructed and we began usage of the leased property October 1, 2005. The agreement satisfied the requirements of a capital lease at June 1, 2004 and we recorded the lease as a capital lease in our consolidated financial statements effective October 1, 2005. The fair value of the land and building are estimated to be approximately $408 and $1,509, respectively and undiscounted annual lease payments of approximately $224 (approximately $4,482 aggregate non-discounted lease payments over the twenty year term). The lease is cancelable after the fifth, ninth, and fourteenth years without payment or penalty by the Company. In addition, after the end of year five we can buy the land for its ascribed fair value and the building for actual cost less depreciation.

Below are the minimum future lease payments under the capital lease together with the present value of the net minimum lease payments as of December 31, 2007:

9) Employee Benefit Plans

Year ended December 31
2008	$ 248
2009	248
2010	248
2011	248
2012	248
Thereafter	3,166
Total minimum lease payments	4,406
Less interest included in payments above	(2,365)
Present value of minimum lease payments at 12/31/07	$ 2,041

We have one defined contribution 401(k) profit sharing plan covering substantially all U.S. employees of the Metal Bearing Components and Plastics and Rubber Components Segments. All employees are eligible for the plan on the first day of the month following their employment date. A participant may elect to contribute between 1% and 60% of their compensation to the plan, subject to Internal Revenue Service (“IRS”) dollar limitations. Participants age 50 and older may defer an additional amount up to the applicable IRS Catch Up Provision Limit. The Company provides a matching contribution which is determined on an individual, participating company basis. Currently, the matching contribution for U.S. employees of the Metal Bearing Components Segment is the greater of five hundred dollars or 50% of the first 4% of compensation contributed. The matching contribution for IMC employees is 25% of the first 6% of compensation contributed and the matching contribution for Delta employees is 50% of the first 6% of compensation contributed. The matching contribution for Precision Metal Components Segment employees is 25% of the first 5% of compensation contributed. All participants are immediately vested at 100%. Contributions by the Company for the Metal Bearing Components Segment were $171, $146, and $139 in 2007, 2006, and 2005, respectively. Contributions by the Company for the Plastic and Rubber Components Segment were $123, $110, and $128 in 2007, 2006 and 2005, respectively. On November 30, 2006, we assumed Whirlaway's defined contribution 401(k) plan. Contributions by the Company for the Precision Metal Components Segment employees were $121 in 2007. All employees are eligible for the plan six months after joining the company and matching contributions vest over four years.

The Company has a defined benefit pension plan covering its Eltmann Plant. The benefits are based on the expected years of service. The plan is unfunded.

For the years ended December 31, 2007 and 2006, we accounted for the Eltmann plan under SFAS 158. The impact of this adoption for the year ended December 31, 2006 was to increase the Pension Liability by $491, to increase accumulated other comprehensive income by $313 (net of $178 in taxes) and increase non-current deferred tax asset by $178.

Following is a summary of the funded status and changes in the projected benefit obligation for the defined benefit pension plan during 2007 and 2006:

In determining the pension discount rate to be used for the Company’s German defined benefit plan, the Company utilizes the German Federal Reserve Bank yield curve for high quality corporate bonds with maturities that are consistent with the projected future benefit obligations of the plan

	2007	2006
Reconciliation of Funded Status:
Benefit obligation	$ (4,947)	$ (5,167)
Fair value of plan assets	--	--
Funded status	$ (4,947)	$ (5,167)

Net amount recognized under accrued pension	$ (4,947)	$ (5,167)

Items not yet recognized as a component of net periodic pension cost:
Unrecognized net actuarial (gain) loss	$ (221)		$ 618

	2007	2006
Change in projected benefit obligation:
Benefit obligation at beginning of year	$5,167	$ 5,616
Service cost	--	--
Interest cost	239	218
Benefits paid	(115)	(84)
Effect of currency translation	560	597
Curtailment gain	--	(1,147)
Actuarial gain	(904)	(33)

Benefit obligation at December 31	$ 4,947	$ 5,167

	2007	2006
Weighted-average assumptions as of December 31:
Discount rate	5.65%	4.5%
Rate of compensation increase	0% - 1.5%	0% - 1.5%
Measurement date	10/31/07	10/31/06

During the year ended December 31, 2006, the plan benefits were curtailed by not allowing new employees to join the plan and by eliminating any effects of future wage increases. The net effect was to decrease the benefit obligation and the unrecognized net loss by $1,147. The rate of compensation increase of 1.5% only applies to current retirees during the years ended December 31, 2007 and 2006.

The expected pension benefit payments for the next ten fiscal years are as follows:

	Pension Benefits
2008	125
2009	136
2010	146
2011	150
2012	184
2013-2017	1,305

The amount of actuarial gain expected to be a component of net pension cost in 2008 is $0.

	2007	2006	2005

Components of net periodic benefit cost:
Service cost	$ --	$ --	$ 110
Interest cost on projected benefit obligation	239	218	230
Amortization of net loss	6	8	11

Net periodic pension benefit cost	$ 245	$ 226	$ 351

	2007	2006	2005

Amounts Recognized in Accumulated Other Comprehensive Income:
Period actuarial (gain) loss	$ (904)	$ (33)	$ 1,026

Curtailment gain	--	1,147	--
FAS 158 adoption impact	--	(491)	--

Net periodic pension (benefit) cost	$ (904)	$ (623)	$ 1,026

We do not expect to make any contributions to the plan in 2008 or thereafter in excess of the pension benefit payments listed above.

Severance Indemnity

In accordance with Italian law, the Company has an unfunded severance plan under which all employees are entitled to receive severance indemnities (Trattamento di Fine Rapporto or “TFR”) upon termination of their employment.

Effective January 1, 2007, the amount payable based on salary paid is remitted to a pension fund managed by a third party. The severance indemnities paid to the pension fund accrue approximately at the rate of 1/13.5 of the gross salaries paid during the year. The balance remaining is for the indemnities accrued as of December 31, 2006 and is revalued applying a cost of living factor established by the Italian Government. The amounts accrued become payable upon termination of the individual employee, for any reason, e.g., retirement, dismissal or reduction in work force. Employees are fully vested in TFR benefits after their first year of service. The amounts shown in the table below represent the actual liability at December 31, 2007 and 2006 reported under accrued pension.

The following table details the changes in Italian severance indemnity for the years ended December 31, 2007 and 2006:

	2007	2006
Beginning balance	$ (8,020)	$ (6,644)
Amounts accrued	(707)	(1,036)
Payments to employees	406	320
Payments to pension funds	601	130
Foreign exchange	(831)	(790)
Ending balance	$ (8,551)	$ (8,020)

On January 1, 2006, the Company adopted SFAS No. 123(R) “Share-Based Payment.” SFAS No. 123(R) replaced SFAS No. 123 “Accounting for Stock-Based Compensation” and superseded Accounting Principles Board Opinion (“APB”) No. 25 “Accounting for Stock Issued to Employees” and amended SFAS No. 95 “Statement of Cash Flows.” Prior to adoption of SFAS No. 123(R) the Company followed the disclosure-only requirements of SFAS No. 123 and continued to account for stock compensation under the requirements of APB No. 25.

10) Stock Compensation

The Company adopted SFAS No. 123(R) using the modified prospective method that required compensation expense of all employee and non-employee director share-based compensation awards to be recognized in the financial statements based upon their fair value over the requisite service or vesting period for all new awards granted after the effective date and for all awards granted prior to the effective date of SFAS No. 123(R) that remain unvested on the effective date. Under the requirements of APB No. 25, the Company was required to recognize compensation cost only for stock option awards granted at a price lower than the market price at the date of grant. Effective with adoption of SFAS No. 123(R), compensation expense related to stock option awards is recognized in the financial statements at the fair value of the award. The Company accounts for restricted share awards by recognizing the fair value of the awarded stock at the grant date as compensation expense over the vesting period, less anticipated forfeitures.

In accordance with implementation requirements of SFAS No. 123(R) under the modified prospective method, the Company did not restate prior fiscal periods and is required to continue the same disclosure only requirements of SFAS No. 123 for comparative purposes until all periods reported are comparable on the same basis. The following table illustrates the reported net earnings for 2005 and pro-forma net earnings for 2005 including the effects of expensing stock options and the related assumptions used. During the year ended December 31, 2005 there was 267 options granted.

		Year ended December 31,
(In Thousands, Except per Share Data)		2005
Net income – as reported		$ 15,012
Stock based compensation (income) expense, net of income tax, included in net income as reported		(182)
Stock based compensation costs, net of income tax, that would have been included in net income if the fair value method had been applied		(860)
Net income –pro-forma		$ 13,970

Basic earnings per share – as reported		$ 0.88
Stock based compensation (income) expense, net of income tax, included in net income as reported		(0.01)
Stock based compensation costs, net of income tax, that would have been included in net income if the fair value method had been applied		(0.05)
Basic earnings per share – pro-forma		$ 0.82

Earnings per share-assuming dilution – as reported		$ 0.87
Stock based compensation (income) expense, net of income tax, included in net income as reported		(0.01)
Stock based compensation costs, net of income tax, that would have been included in net income if the fair value method had been applied		(0.05)
Earnings per share – assuming dilution-pro-forma		$ 0.81

In the years ended December 31, 2007 and 2006, approximately $981 and $464 of compensation expense was recognized in selling, general and administrative expense for all share-based awards. The cost recognized in the years ended December 31, 2007 and 2006 related to stock options was $670 and $181, related to restricted stock awards was $83 and $283, and related to our long-term incentive plan was $226 and $0, respectively.

Term	Vesting Period
Risk free rate	4.35% for 2005
Dividend yield	3.02% annually for 2005
Expected volatility	44.6% for 2005

Stock Option Awards

Option awards are typically granted to non-employee directors and key employees on an annual basis. A single option grant is typically awarded to eligible employees and non-employee directors each year if and when granted by the Compensation Committee of the Board of Directors and occasional individual grants are awarded to eligible employees. All employee and non-employee directors are awarded options at an exercise price equal to the closing price of the Company's stock on the date of grant. The term life of options is ten years with vesting periods of generally three years for key employees and one year for non-employee directors. The fair value of options cannot be determined by market value as our options are not traded in an open market. Accordingly, a financial pricing model is utilized to determine fair value. The Company utilizes the Black Scholes model which relies on certain assumptions to estimate an option's fair value.

During 2007 and 2006, the Company granted 192 and 172 options, respectively, to certain key employees and non-employee directors. The weighted average grant date fair value of the options granted during the years ended December 31, 2007 and 2006 was $ 4.32 and $4.30. The number of options available for future issuance under the current plan is 585. Upon exercise of stock options, new shares of the Company’s stock are issued. The weighted average assumptions relevant to determining the fair value at the dates of grant are below:

	2007	2006
Term	6 years	6 years
Risk free interest rate	4.75%	4 .90%
Dividend yield	2.66%	2.81%
Expected volatility	41.23%	43.63%
Expected forfeiture rate	6.20%, 0%	6.20%, 0%

The expected volatility rate is derived from actual Company common stock historical volatility over the same time period as the expected term. The volatility rate is derived by mathematical formula utilizing daily closing price data.

The expected dividend yield is derived by mathematical formula which uses the expected Company annual dividends over the expected term divided by the fair market value of the Company's common stock at the grant date.

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 forfeiture rate is determined from examining the historical pre-vesting forfeiture patterns of past option issuances to key employees. The forfeiture rate is estimated to be 0% for non-employee directors. 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.

The term is derived from using the “Simplified Method” of determining stock option terms as described under the Securities and Exchange Commissions Staff Accounting Bulletin 107. Prior to the adoption of SFAS 123 (R), the option term used was equal to the vesting period of 3 years.

The following table provides a reconciliation of option activity for the year ended December 31, 2007:

Options	Shares (‘000)	Weighted-Average Exercise Price	Weighted-Average Remaining Contractual Term	Aggregate Intrinsic Value ($000)
Outstanding at January 1, 2007	1,452	$ 9.81
Granted	192	12.05
Exercised	(26)	10.95
Forfeited or expired	(88)	12.37
Outstanding at December 31, 2007	1,530	$ 9.93	5.51	$ (772)
Exercisable at December 31, 2007	1,265	$ 9.52	4.69	$ (124)

(1) Intrinsic value is the amount by which the December 31, 2007 market price of the stock ($9.42) is less than the exercise price of the options outstanding at December 31, 2007.

At December 31, 2005, all outstanding options were fully vested and no compensation expense was incurred from these options. As of December 31, 2007 and 2006, there was approximately $556 and $476, respectively, of unrecognized compensation cost to be recognized over approximately two years.

Cash proceeds from the exercise of options in the year ended December 31, 2007, 2006, and 2005 totaled approximately $292, $984 and $2,806. For the years ended December 31, 2007 and 2006, proceeds from stock options were presented inclusive of tax benefits of $8 and $133, respectively, in the Financing Activities section of the Consolidated Statements of Cash Flows. The total intrinsic value of options exercised during the years ended December 31, 2007, 2006 and 2005 was $23, $421, and $1,846, respectively.

Restricted Stock Awards

In addition to stock option awards, the Company has restricted stock awards, the first grant of which was in July 2005. The Company’s policy for issuing restricted shares is similar to that described under “Stock Option Awards.” The recognized compensation costs before tax for these restricted stock awards in the years ended December 31, 2007, 2006, and 2005 were approximately $83, $283 and $206, respectively. The unrecognized compensation cost before tax for these awards at December 31, 2007, 2006 and 2005 total approximately $32, $159 and $467, respectively, to be recognized over approximately one, one, and two years, respectively. During the years ended December 31, 2007 and 2006, the Company experienced forfeiture rates of 6% and 4%, respectively, of the awards granted. Below is a summary of the status of the restricted shares as of December 31, 2007 and changes during the year ended December 31, 2007:

Non-vested Shares	Shares (‘000)	Weighted- Average Grant- Date Fair Value
Non-vested at January 1, 2007	33	$ 12.70
Granted	--	--
Vested	(15)	12.70
Forfeited	(3)	12.70
Non-vested at December 31, 2007	15	$ 12.70

On June 29, 2007, the Company granted certain directors and other key employees an award of 151,500 performance units pursuant to the NN, Inc. 2005 Incentive Plan. Each unit is equal to one share of NN common stock. The award entitles the grantee to earn in a range from 90% to 150% of the total number of units based upon achieving earnings per share and return on capital employed targets over a defined performance cycle. The value of the performance units is based on the grant date fair value of one share of NN common stock or $11.80 per unit. The performance period is fiscal years 2007, 2008 and 2009 and the shares vest on December 31, 2009. There was $226 of compensation expense recognized during the year ended December 31, 2007 related to these performance units and $905 of unrecognized compensation cost, before tax to be recognized over approximately two years.

Long-Term Incentive Plan

11) Goodwill, Net

We completed our annual goodwill impairment review during the fourth quarter of 2007, 2006, and 2005. In performing the impairment reviews for 2007, 2006, and 2005 the Company estimated the fair values of the reporting units from discounting each segments’ projected future cash flows. During the second quarter, we recorded $10,016 in impairment charges within the Metal Bearing Component Segment related to the restructuring of the Metal Bearing Segment (See Note 3 for further details). As of October 1, 2007 and 2006, the annual review dates, there was no impairment to the remaining goodwill balances as the fair values of the reporting units exceeded their carrying values of the reporting units.

The changes in the carrying amount of goodwill for the years ended December 31, 2007 and 2006 are as follows:

(In thousands)	Plastic and Rubber Components Segment	Metal Bearing Components Segment	Precision Metal Components Segment	Total

Balance as of January 1, 2006	$ 25,755	$ 15,893	$ --	$ 41,648
Goodwill acquired	--	--	2,352	2,352
Currency impacts	--	2,147	--	2,147
Balance as of December 31, 2006	$ 25,755	$ 18,040	$ 2,352	$ 46,147

Balance as of January 1, 2007	$ 25,755	$ 18,040	$ 2,352	$ 46,147
Adjustments to purchase price allocation	--	--	1,922	1,922
Impairment write down	--	(10,016)	--	(10,016)
Currency impacts	--	1,418	--	1,418
Balance as of December 31, 2007	$ 25,755	$ 9,442	$ 4,274	$ 39,471

The adjustments to purchase price allocation under the Precision Metal Components Segment related to changes made to the acquired assets and liabilities of Whirlaway during the finalization of the purchase price allocation in 2007 (See Note 2 for further details).

12) Intangible Assets, Net

The changes in the carrying amount of Intangible Assets, net for the years ended December 31, 2007 and 2006 are as follows:

Intangible assets subject to amortization, net of amortization

(In Thousands)	Precision Metal Components Segment	Metal Bearing Components Segment	Total

Balance as of January 1, 2006	$ --	$ 474	$ 474
Acquisition of intangibles	7,180	1,855	9,035
Amortization	(39)	(402)	(441)
Currency impacts	--	163	163
Balance as of December 31, 2006	$ 7,141	$ 2,090	$ 9,231

Balance as of January 1, 2007	$ 7,141	$ 2,090	$ 9,231
Acquisition of intangibles	--	173	173
Amortization	(657)	(558)	(1,215)
Currency impacts	--	190	190
Balance as of December 31, 2007	$ 6,484	$ 1,895	$ 8,379

The intangible asset within the Metal Bearing Components Segment is a contract intangible related to the SNR purchase agreement and related supply agreement (See Note 2.) This intangible asset is subject to amortization over approximately 5 years and amortization expense will approximate $500 for each of the five years. For the year ended December 31, 2007, the amortization expense totaled $558 and accumulated amortization totaled $960.

The intangible assets within the Precision Metal Components segment were acquired on November 30, 2006 with the purchase of Whirlaway (See Note 2.) The majority of the value is a customer relationship intangible with a fair value of $6,900. As of July 1, 2007, this intangible asset has an estimated useful life of 10 years and $528 of amortization expense was recorded in 2007. Prior to July 1, 2007, the useful live was estimated to be 20 years. The remaining balance is made up of a covenant not to compete of $150 and a favorable leasehold interest $130. These items are amortizable over 2 and 2.5 years, respectively, and $75 and $54 in amortization expense was recorded in 2007. The accumulated amortization related to all of these intangible assets at December 31, 2007 is $696.

In addition, as part of the Whirlaway acquisition we acquired an intangible asset not subject to amortization of $900 related to the value of the trade names of Whirlaway. This intangible asset has an indefinite life and as such is not amortized but is subject to an annual impairment test.

13) Segment Information

The Company determined its reportable segments under the provisions of SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information.” During the fourth quarter of 2006, the Company changed its operational structure and strategic focus such that the operations are now managed in three reportable segments. The core steel ball and roller business is managed as one reportable segment as the operations have become more fully inter-related and integrated. A new segment entitled “Precision Metal Components” has been established as a result of the Whirlaway acquisition. During 2006, the Company has integrated a new information system that enables the Company to report non-segment specific costs, including corporate expenses, as reconciling items from segment financial statements to the total Company financial statements. We have restated the year ended December 31, 2005 to conform to the current segment reporting.

The Company’s three reportable segments are based on differences in product lines and are as follows:

Metal Bearing Components Segment

· Erwin Plant

· Mountain City Plant

Plastic and Rubber Components Segment

· Danielson Plant

· Lubbock Plant

Precision Metal Components Segment

All of the facilities in the Metal Bearing Components Segment are engaged in the production of precision balls, rollers, and metal retainers and automotive specialty products used primarily in the bearing industry. The Plastic and Rubber Components Segment facilities are engaged in the production of plastic injection molded products for the bearing, automotive, instrumentation and fiber optic markets and precision rubber bearing seals for the bearing, automotive, industrial, agricultural, and aerospace markets. The Precision Metal Components Segment is engaged in the production of highly engineered fluid control components and assemblies, shafts, and prismatic machined parts for the air conditioning, appliance, automotive, commercial refrigeration, and diesel engine industries.

The accounting policies of the segments are the same as those described in the summary of significant accounting policies. The Company evaluates segment performance based on segment net income after income taxes. The Company accounts for inter-segment sales and transfers at current market prices. The Company did not have any individually material inter-segment transactions during 2007, 2006, or 2005.

Due to the large number of countries in which we sell our products, sales to external customers and long-lived assets utilized by us are reported in the following geographical regions:

	Metal Bearing Components Segment	Precision Metal Components Segment	Plastic and Rubber Components Segment	All Other	Total
December 31, 2007
Net sales	$ 303,059	$ 67,384	$ 50,851	$ --	$ 421,294
Interest expense	67	2,646	960	2,700	6,373
Depreciation and amortization	16,393	4,337	2,262	4	22,996
Income tax expense (benefit)	9,452	(820)	1,255	(3,465)	6,422
Segment net income (loss)	4,958	(1,450)	2,242	(6,923)	(1,173)
Segment assets	238,276	53,422	51,997	6,383	350,078
Expenditures for long- lived assets	15,634	1,541	1,681	--	18,856

December 31, 2006
Net sales	$ 272,299	$ 4,722	$ 53,304	$ --	$ 330,325
Interest expense	45	240	960	2,738	3,983
Depreciation and amortization	14,783	345	2,324	40	17,492
Income tax expense (benefit)	10,681	(336)	1,547	(3,370)	8,522
Segment net income (loss)	18,331	(598)	2,695	(5,993)	14,435
Segment assets	233,051	53,535	51,836	4,279	342,701
Expenditures for long- lived assets	18,479	30	773	--	19,282

December 31, 2005
Net sales	$ 263,485	$ --	$ 57,902	$ --	$ 321,387
Interest expense	504	--	966	2,307	3,777
Depreciation and amortization	13,850	--	2,481	--	16,331
Income tax expense (benefit)	11,546	--	975	(2,769)	9,752
Segment net income (loss)	18,725	--	1,673	(5,386)	15,012
Segment assets	207,128	--	55,741	6,786	269,655
Expenditures for long- lived assets	16,003	--	726	--	16,729

	December 31, 2007		December 31, 2006		December 31, 2005
	Sales	Long-lived assets	Sales	Long-lived assets	Sales	Long-lived assets

United States	$ 137,140	$ 51,363	$ 77,526	$ 54,617	$ 77,763	$ 31,821

Europe	215,209	97,238	194,359	94,369	185,786	81,348

Asia	31,879	12,407	24,119	7,461	19,689	5,660

Canada	5,089	--	8,028	--	8,835	--

Mexico	15,065	--	13,164	--	12,223	--

South America/Other	16,912	--	13,129	--	17,091	--

All foreign countries	284,154	109,645	252,799	101,830	243,624	87,008

Total	$ 421,294	$ 161,008	$ 330,325	$ 156,447	$ 321,387	$ 118,829

Income before provision for income taxes for the years ended December 31, 2007, 2006 and 2005 was as follows:

14) Income Taxes

	Year ended December 31,
	2007	2006	2005

Income before provision for income taxes:
United States	$ 630	$ 3,735	$ 6,227
Foreign	4,619	19,222	18,537
Total	$ 5,249	$ 22,957	$ 24,764

Total income tax expense (benefit) for the years ended December 31, 2007, 2006, and 2005 were as follows:

	Year ended December 31,
	2007	2006	2005
Current:
U.S. Federal	$ --	$ 3,035	$ 2,815
State	(18)	201	(78)
Non-U.S.	7,623	6,670	7,689
Total current expense	$ 7,605	$ 9,906	$ 10,426

Deferred:
U.S. Federal	$ 176	$ (3,388)	$ (609)
State	271	17	303
Valuation allowance	5,082	1,581	--
Non-U.S.	(6,712)	406	(368)
Total deferred expense (income)	(1,183)	(1,384)	(674)

Total expense	$ 6,422	$ 8,522	$ 9,752

A reconciliation of taxes based on the U.S. federal statutory rate of 34%, 35% and 34% for the years ended December 31, 2007, 2006, and 2005 is summarized as follows:

	Year ended December 31,
	2007	2006	2005

Income taxes at the federal statutory rate	$ 1,785	$ 8,034	$ 8,420
Lowering of U.S. effective rate from 35% to 34%	(314)	219	--
Impact of incentive stock options	228	63	--
Increase in valuation allowance	5,082	--	--
Reduction in net deferred tax liabilities in Italy due to lowering of statutory tax rates	(1,050)	--	--
State income taxes, net of federal benefit	(12)	143	225
Non-U.S. earnings taxed at different rates	390	353	1,019
Other, net	313	(290)	88

	$ 6,422	$ 8,522	$ 9,752

The tax effects of the temporary differences are as follows:

	Year ended December 31,
	2007	2006

Deferred income tax liability
Tax in excess of book depreciation	$ 13,199	$ 11,073
Goodwill	4,969	6,902
Allowance for bad debts	86	--
Other deferred tax liabilities	428	291

Gross deferred income tax liability	18,682	18,266

Deferred income tax assets
Inventories	385	508
Allowance for bad debts	--	16
Pension/Personnel accruals	986	485
Environmental provision	441	408
Net operating loss carryforwards	3,149	912
Foreign tax credits	3,244	3,423
Other deferred tax assets	125	1,077
Gross deferred income tax assets	8,330	6,829

Valuation allowance on deferred tax assets	(6,663)	(1,581)
Net deferred income tax assets	1,667	5,248

Net deferred income tax liability	$ 17,015	$ 13,018

The net operating loss carry forwards are composed of net operating losses in Germany, Slovakia, and China for which full valuation allowances have been recorded as of December 31, 2007, as it is management’s judgment that the resulting tax benefits are not realizable. According to German law, there are not any time limitations on carrying forward the $7,785 in net operating losses of our German subsidiary. Slovakian net operating losses of $41, $901, $641, $236 and $1,054 expire in 2008, 2009, 2010, 2011, and 2012, respectively. The China net operating losses of $88, $814, $2,163 and $2,037 expire in 2009, 2010, 2011, and 2012, respectively and have a effective tax rate of 0% as these losses will be applied to income during our tax holiday once profitability is achieved.

The foreign tax credits relate to profits of certain foreign subsidiaries that were taxed as deemed dividends. These credits represent the foreign taxes paid by these subsidiaries at higher effective rates that will be used to offset future foreign source income. A valuation allowance was placed against these credits based on estimates of future foreign source income to be generated that these credits can be used to offset. The valuation allowance with be periodically reviewed as our estimates of future foreign source income are amended based on actual foreign source income recognized in our tax returns and future changes in foreign source income.

As realization of deferred tax assets is not assured, management has placed valuation allowances against deferred tax assets it believes are not recoverable. For the remainder management believes it is more likely than not that those net deferred tax assets will be realized. However, the amount of the deferred tax assets considered realizable could be reduced based on changing conditions.

As of December 31, 2006, all of the Company's foreign earnings have been previously taxed in the U.S. due to the application of IRC Sec. 956. Accordingly, no deferred taxes have been provided for undistributed earnings. The Company expects to reinvest future earnings indefinitely in operations and expansions outside the U.S. and does not expect such earnings to become subject to U.S. taxation in the foreseeable future. If such earnings were distributed beyond the amount for which taxes have been provided, foreign tax credits would substantially offset any incremental U.S. tax liability. A deferred tax liability will be recognized when the Company expects that it will recover these undistributed earnings in a taxable manner, such as through the receipt of dividends or sale of the investments. It is not practicable to determine the U.S. income tax liability, if any, that would be payable if such earnings, were not reinvested indefinitely.

The Company adopted the provisions of FIN 48 on January 1, 2007. As a result of the implementation of FIN 48, the Company recognized a $600 increase in our income tax liabilities and a corresponding reduction in beginning retained earnings.

As of the date of adoption, the total unrecognized benefits were approximately $879, all of which, if recognized, would affect the effective tax rate. A reconciliation of the beginning and ending amounts of unrecognized tax benefits, excluding interest and penalties is as follows:

Balance at January 1, 2007	$ 879
Additions based on tax positions related to the current year	--
Additions for tax positions of prior years	386
Reductions for tax positions of prior years	(220)
Settlements	--
Balance at December 31, 2007	$ 1,045

As of December 31, 2007, the $1,045 of unrecognized tax benefits would, if recognized, impact the Company’s effective tax rate.

Interest and penalties related to federal, state, and foreign income tax matters are recorded as a component of the provision for income taxes in our statements of income. As of January 1, 2007, we had accrued $609 in both U.S. and foreign interest and penalties. During 2007, we accrued an additional $48 in foreign interest and penalties resulting in an accrued balance of $657of interest and penalties as of December 31, 2007.

The Company or its subsidiaries file income tax returns in the U.S. federal jurisdiction, and in various states and foreign jurisdictions. With few exceptions, the Company is no longer subject to federal, state and local income tax examinations by tax authorities for years before 2003. The Company is no longer subject to non-U.S. income tax examinations within various European Union countries for years before 2002. We do not foresee any changes to our unrecognized tax benefits within the next twelve months.

15) Reconciliation of Net Income Per Share

	Year ended December 31,
	2007	2006	2005

Net income (loss)	$ (1,173)	$ 14,435	$ 15,012

Weighted average shares outstanding	16,749	17,125	17,004
Effective of dilutive stock options	--	226	189

Dilutive shares outstanding	16,749	17,351	17,193

Basic net income per share	$ (0.07)	$ 0.84	$ 0.88

Diluted net income per share	$ (0.07)	$ 0.83	$ 0.87

Excluded from the shares outstanding for the years ended December 31, 2007, 2006, and 2005 were 821, 301 and 344 anti-dilutive options, respectively, which had an exercise prices of $11.29 to $12.62 for the year ended December 31, 2007 and $12.62 per share for the years ended December 31, 2006 and 2005. In addition in 2006, there were 172 options that were anti-dilutive due to the large amount of unrecognized compensation expense associated with these options.

16) Commitments and Contingencies

The Company has operating lease commitments for machinery, office equipment, vehicles, manufacturing and office space which expire on varying dates. Rent expense for 2007, 2006, and 2005 was $4,908, $2,617, and $2,422, respectively. The following is a schedule by year of future minimum lease payments as of December 31, 2007 under operating leases that have initial or remaining non cancelable lease terms in excess of one year.

Year ended December 31,

2008	$ 4,333
2009	3,437
2010	2,823
2011	2,420
2012	1,170
Thereafter	9,131

Total minimum lease payments	$ 23,314

The Kilkenny Plant of the Metal Bearing Components Segment has received certain grants from the Ireland government. These grants are based upon the Kilkenny Plant hiring and retention of certain employment levels by the measurement date. At December 31, 2007, actual employment levels are less than those required by certain grant covenants. The potential impact to the Company is estimated to be approximately $370. However, management believes as long as we maintain our operations in Ireland at current levels there is a remote chance this amount will ever be demanded by the Irish government. As of December 31, 2007 and 2006, the grant obligation is recorded as a component of other non-current liabilities in the amount of $374 and $405, respectively.

The Metal Bearing Components Segment has a supply contract with Ascometal France (“Ascometal”) for the purchase of steel in Europe that covers the years 2007, 2008 and 2009. The contract will automatically renew annually unless formal notice is sent by either party one year in advance. The percentage of steel purchased for European operations granted to Ascometal under the contract is 70% or approximately $53,300. The contract, among other things, stipulates that Ascometal achieve certain performance targets related to quality, reliability and service and the percentage granted can be reduced if those targets are not met by the vendor. The contract provisions include annual price adjustments based upon published indexes. In 2007, we purchased approximately $47,800 under the contract.

On March 20, 2006, we, as well as numerous other parties, received correspondence from the Environmental 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 investigating the clean up of the site or sites used by the vendor. The Company has contributed to an escrow fund along with 42 other potentially responsible parties for the purpose of investigating and addressing the environmental issues at the facility. The Company’s contribution to the account was $23. A Remedial Investigation and Risk Assessment report funded by the escrow fund was submitted to the EPA in December 2007. As of the date of this report, we do not know whether we have any liability beyond the contribution to the escrow account mentioned earlier, related to this vendor’s actions, or estimatable range for any potential liability. The Company believes its contribution to the remediation of the site, if any, would be approximately 1.083% or less of the volume of waste sent to the facility and the Company asserts that its waste was non-hazardous.

17) Quarterly Results of Operations (Unaudited)

The following summarizes the unaudited quarterly results of operations for the years ended December 31, 2007 and 2006.

	Year ended December 31, 2007
	March 31	June 30	Sept. 30	Dec. 31

Net sales	$ 107,944	$ 107,302	$ 99,021	$ 107,027
Income (loss) from operations	7,920	(7,173)	3,212	7,277
Net income (loss)	3,755	(10,365)	398	5,039
Basic net income (loss) per share	0.22	(0.62)	0.02	0.31
Dilutive net income (loss) per share	0.22	(0.62)	0.02	0.31
Weighted average shares outstanding:
Basic number of shares	16,813	16,815	16,765	16,159
Effect of dilutive stock options	220	--	139	121

Diluted number of shares	17,033	16,815	16,904	16,280

	Year ended December 31, 2006

	March 31	June 30	Sept. 30	Dec. 31

Net sales	$ 86,017	$ 83,554	$ 74,870	$ 85,884
Income from operations	8,905	7,157	4,807	5,023
Net income	5,262	3,453	2,633	3,087
Basic net income per share	0.31	0.20	0.15	0.18
Dilutive net income per share	0.30	0.20	0.15	0.18
Weighted average shares outstanding:
Basic number of shares	17,152	17,157	17,105	16,941
Effect of dilutive stock options	224	212	234	200

Diluted number of shares	17,376	17,369	17,339	17,141

In the fourth quarter of 2007, we benefited from a reduction in deferred tax liabilities of $1,050 at our Italian operations due to the Italian government enacting in December 2007 a reduction in statutory tax rates.

The third quarter of 2007 included an accrual of $1,272 ($1,196 after tax) for cash restructuring charges related to the Metal Bearing Components Segment restructuring (See Note 3). During the fourth quarter of 2007, $1,062 $(1,062 after tax) of these restructuring charges was reversed.

The second quarter of 2007 included $13,366 ($12,623 after tax) in non-cash charges within our Metal Bearing Components Segment related to impairment of goodwill and fixed assets to levels supported by projected cash flows after restructuring activity within the segment (See Note 3).

The fourth quarter of 2006 included one month of Whirlaway with sales of $4,722 and a net loss of $598 due primarily to one time purchase accounting adjustments of $385, net of tax, from increasing the inventory value from cost to fair value.

The first quarter results in 2006 include a net gain resulting from a $770 after-tax gain on the sales of excess land less a loss on disposal of excess machinery at the Pinerolo Plant.

18) Fair Value of Financial Instruments

Management believes the fair value of financial instruments approximate their carrying value due to the short maturity of these instruments or in the case of the Company’s variable rate debt, due to the variable interest rates. The fair value of the Company’s fixed rate long-term borrowings are estimated using a discounted cash flow analysis based on the Company’s current incremental borrowing rates for similar types of borrowing arrangements. The carrying amounts and fair values of the Company’s long-term debt are in the table below:

	December 31, 2007		December 31, 2006
	Carrying Amount	Fair Value	Carrying Amount	Fair Value

Variable rate long-term debt	$ 70,476	$ 70,476	$ 39,466	$ 39,466
Fixed rate long-term debt	41,568	40,222	42,096	39,941

19) Accumulated Other Comprehensive Income

At December 31, 2007 and 2006, the Company has added to accumulated other comprehensive income unrealized income due to foreign currency translation of $11,764 and $15,743. Income taxes on the foreign currency translation adjustment in other comprehensive income were not recognized because the earnings are intended to be indefinitely reinvested in those operations.

Also added to accumulated other comprehensive income as of December 31, 2007 was an actuarial gain of from our pension liability, net of tax of $656. Included in accumulated other comprehensive income as of December 31, 2006 was an adjustment to initially apply SFAS 158 and record the unrecognized actuarial net loss that has not been recognized as a component of pension income of $394, net of tax . The additional minimum liability that made up a portion of the 2005 balance was eliminated first by the plan curtailment and then eliminated under adoption of SFAS 158. (See Note 9)

20) Common Stock Repurchase

During the first quarter of 2006, the Company’s Board of Directors authorized a stock repurchase program under which the Company was authorized to repurchase up to $10 million in common stock of the Company, during the subsequent 18 months in the open market or in private transactions, in accordance with applicable laws and regulations. This amount represented approximately 5% of the Company’s outstanding stock at the date of authorization. During the year ended December 31, 2007, the Company repurchased under this program approximately 211 shares at an approximate average cost of $10.26 a share for a total of $2,166. This program expired September 13, 2007 with a total of approximately 674 shares being purchased totaling $7,441.

In August 2007, a new share repurchase program was established for a period of one year beginning on September 13, 2007, and the amount approved for purchase, from this date until the expiration of the program, was $25 million worth of shares to be purchased in the open market from time to time in accordance with applicable laws and market regulations. During the year ended December 31, 2007, the Company repurchased approximately 797 shares under this program at an average cost of $9.53 per share for a total of $7,556.

The total of all share repurchases during the year ended December 31, 2007 was approximately 1,008 shares for $9,722.

21) Related Party Transactions

With the acquisition of Whirlaway on November 30, 2006, the Company incurred a $21,305 note payable to the former shareholder of Whirlaway who is now an officer of the Company. The Company remitted $18,638 to the former sole shareholder of Whirlaway to partially repay the related party note payable. The remainder was related to a tax indemnity that was initially recorded but subsequently eliminated from the purchase price and note payable with a corresponding reduction to goodwill. Additionally, on November 30, 2006, the Company entered into operating leases covering two of the Whirlaway manufacturing facilities with a company owned by the former shareholder of Whirlaway who is now an officer of the company. The rent payments in 2007 and 2006 to this related party were $644 and $50. The total future rent payments will be $2,576 over 4 years or $644 per year.