Risk Factors

Our risk factors are disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2008 under Item 1.A. "Risk Factors." There have been no material changes to these risk factors since December 31, 2008 except for the "Potential for default on long-term debt; risk of insolvency" risk discussed below.

Potential for default on long-term debt; risk of insolvency

The Company has experienced a significant loss of revenue and has sustained significant losses of income during the global economic recession that began to impact the Company in the fourth quarter of 2008 and is continuing as of the date of this report. As a result, the Company has sustained a significant weakening of its financial condition. Additionally, the Company is dependent on the continued provision of financing from its revolving credit lenders and its fixed rate lender in order to remain solvent. The lenders have set revised covenant levels that provide little flexibility in the case that the Company's projections are not met. Furthermore, our lenders have not yet set covenant levels for the quarter ending June 30, 2010, and thereafter, and these covenants will be set at the discretion of the lenders. There is a substantial risk that if projections are not achieved, the lenders may not amend the credit agreements, which would accelerate the due date of the loans, putting the Company in default. We believe that it is unlikely that new lenders could be found to replace the existing lenders in case of an uncured default. In such situation, the Company would be technically insolvent and would need to seek a recapitalization of the Company. If such transaction could not be successfully completed, the Company would most likely have to file for protection under bankruptcy laws in the U.S. and other jurisdictions. Although management believes that fundamental business prospects for the Company are positive, there can be no assurance that the current financial projections can be met or that recapitalization could be achieved.

Economic Impacts on the three and nine month periods ended September 30, 2009

During the three month period ended September 30, 2009, sales showed some improvement from the dramatic reductions witnessed in the first two quarters of 2009 due to the worldwide recession. Sales increased 13% during the third quarter of 2009 from the second quarter of 2009, excluding the effects of exchange rates. For the three month period ended September 30, 2009, sales were down approximately 35% compared to the three month period ended September 30, 2008 and were approximately 17% lower than the sales in the fourth quarter of 2008, excluding the effects of exchange rates. During the first half of 2009, sales were down 50% from the corresponding prior year period.

We believe the increase in sales that occurred during the third quarter of 2009, from sales levels experienced in the first half of 2009, was due both to customers adopting more normalized ordering patterns and increased demand in the end markets we serve. It is unclear what portion of the increase was due to ordering patterns versus demand. We believe during 2009, demand for our products has decreased more than actual demand in the end markets we serve. We refer to this as the "de-stocking effect" and believe it is due to reduction in overall inventory levels throughout the supply chain. In most cases, we are several tiers down the supply chain from the ultimate customer. Thus, we are affected by our customers' and their customers' order patterns. We believe those companies that are higher in the supply chain have reduced production and order levels to control their inventory balances. We are not certain how long this current de-stocking process within the supply chain will last or even if, during the current quarter, it has begun to be replaced by more normalized ordering patterns. Until the excess inventory in the supply chain is removed, we believe our sales and production levels will continue to be depressed beyond any reductions in end market demand.

The reduction in sales volume was the main cause of the net losses of $9.0 million and $32.0 million, respectively, during the three and nine month periods ended September 30, 2009. In response to the sales decrease, we focused more aggressively on reducing costs and expenses. However, a significant portion of our cost structure cannot be reduced in the short term. In particular, at our manufacturing locations in Western Europe, it is very difficult to reduce employment levels in line with reductions in sales and production volumes. In these locations, we have limited production costs by scheduling the production facilities on rolling shutdowns and by temporarily allowing workers to not report to work under existing government programs. In addition to the reduction in sales volume, the net income of the three and nine month periods ended September 30, 2009 was further impacted by a $6.2 million valuation allowance placed on, and effectively eliminating, all U.S. based deferred tax assets and related current year tax benefits from incurred losses. Finally, the three and nine month periods were negatively impacted by the restructuring charge taken at out Veenendaal Plant totaling $3.9 million ($2.9 million after tax).

Results of Operations

Three Months Ended September 30, 2009 Compared to the Three Months Ended
September 30, 2008.

OVERALL RESULTS

                                                                NN, Inc.
(In Thousands of Dollars)                    2009          2008                Change
Net sales                                  $  66,110     $ 104,866     $ (38,756 )
    Foreign exchange effects                                                            (1,630 )
    Volume                                                                             (34,631 )
    Price                                                                                 (119 )
    Mix                                                                                   (957 )
    Material inflation pass-through                                                     (1,419 )

Cost of products sold (exclusive of
depreciation
 and amortization shown separately
below)                                        58,981        83,784       (24,803 )
    Foreign exchange effects                                                            (1,539 )
    Volume                                                                             (20,498 )
    Cost reduction                                                                      (2,694 )
    Mix                                                                                   (165 )
    Inflation                                                                               93

Selling, general, and administrative           6,465         9,732        (3,267 )
    Foreign exchange effects                                                              (148 )
    Reductions in spending                                                              (3,119 )

Depreciation and amortization                  5,255         6,234          (979 )
    Foreign exchange effects                                                              (152 )
    Reduction in expense                                                                  (827 )

Restructuring and impairment charges           4,070            --         4,070
Interest expense, net                          1,833         1,259           574
(Gain) loss on disposal of assets                (13 )           6           (19 )
Other income, net                                (11 )        (391 )         380
Income (loss) before provision
(benefits) for
   income taxes                              (10,470 )       4,242       (14,712 )
Provision (benefit) for income taxes          (1,487 )       1,295        (2,782 )
Net (loss) income                          $  (8,983 )   $   2,947     $ (11,930 )

Net Sales. The volume losses were due to reductions in end market demand in the markets we serve and due to a reduction in overall inventory within the supply chain as discussed above. In addition, sales were lower as the value of Euro denominated sales has decreased approximately 3% relative to the U.S. Dollar from the third quarter of 2008. Changes related to price/mix were all normal in nature although such changes had less of an impact given the depressed sales levels. The impact on sales from material pass through was negative as material prices have decreased since 2008 and these are being passed to our contractual customers.

Cost of Products Sold (exclusive of depreciation and amortization). The majority of the decreases were due to the same sales volume reductions mentioned above. In addition, the aforementioned devaluation of the Euro reduced Euro based production costs relative to the U.S. Dollar.

While many of our production costs adjust with reductions in sales and production, a portion of our production costs are fixed in nature or cannot be reduced without incurring additional significant restructuring costs. Additionally, current production levels are much lower than our capacity. Any costs from under-utilization of capacity and fixed production costs are expensed in the period incurred. The main driver of the fixed component of costs was labor cost at our Western European manufacturing locations. We actively reduced labor costs where possible considering local and national labor rules and regulations of the countries in which we operate. Production costs were further reduced by the effects of planned cost reduction projects. Despite the lower sales and production levels, we continue to achieve results from planned cost reductions at levels consistent with management expectations.

Selling, General and Administrative Expenses. The majority of the reduction in selling, general and administrative expense was from wage cost reductions. The wage cost reductions were achieved through a combination of salary cuts ranging from 10% to 20%, elimination of bonuses opportunities for 2009 and employment reductions. In addition, discretionary expenses were reduced company wide.

Depreciation and Amortization. The reduction in depreciation and amortization was due to lower depreciation and amortization from the effects of the year end 2008 impairments and accelerated depreciation of certain intangible assets and fixed assets and due to lower spending on capital expenditures in 2009.

Interest expense. Interest expense was higher due to increases in the interest rate spread charged on our LIBOR credit facility and our senior notes. The interest rate was increased upon amending our credit facilities on March 13, 2009. In addition, we are amortizing $0.3 million more of capitalized loan costs into interest expense each quarter related to the amended loan facilities.

Restructuring and impairment charges. During the three month period ended September 30, 2009, we incurred $0.1 million of restructuring cost related to the closure of the Kilkenny Plant and $3.9 million in restructuring charges related to the reduction in force at our Veenendaal Plant. (See Footnote 2 of the Notes to Consolidated Financial Statements.)

Provision for income taxes. For the three months ended September 30, 2009, the difference between the federal statutory tax rate of 34% and our effective tax rate of 14% was mainly due to not recognizing the tax benefits incurred at our U.S. locations and four of our foreign locations. We have placed valuation allowances on these deferred tax benefits as the recoverability of these tax benefits in the near future is in question. In addition, the effective rate was impacted by non-U.S. based earnings taxed at lower rates. The statutory and effective income tax rates in many of the foreign countries in which we operate are lower than the U.S. federal rate. (See Footnote 12 of the Notes to Consolidated Financial Statements.)

RESULTS BY SEGMENT

METAL BEARING COMPONENTS SEGMENT

                                                        Three months ended
   (In Thousands of Dollars)                               September 30,
                                           2009         2008               Change

   Net sales                             $ 46,681     $ 80,707     $ (34,026 )
       Foreign exchange effects                                                     (1,630 )
       Volume                                                                      (29,729 )
       Price                                                                          (185 )
       Mix                                                                          (1,012 )
       Material inflation pass-through                                              (1,470 )

   Segment net income (loss)             $ (5,189 )   $  5,137     $ (10,326 )

The U.S. and European locations of the segment experienced sales decreases of approximately 45% compared to the third quarter of 2008. Our Asia facility experienced a sales increase of 71% from the third quarter of 2008 due to the internal transfer of production and customer demand in the region. As discussed above, the segment was impacted by both lower demand in the industries we serve as well as de-stocking throughout the supply chain. The devaluation of the Euro relative to the U.S. Dollar of 3% further negatively impacted sales.

The segment net loss was impacted primarily by the large reduction in sales volume and the related production inefficiencies and under-utilization of fixed production costs. The impact of fixed costs and under-utilization of production capacity is more pronounced in this segment because a large portion of our installed capacity is in Western Europe, where it is more difficult to reduce labor costs in line with customer demand. Partially offsetting these negative effects were reductions in production costs from planned cost reduction projects and reductions in salaries, bonus opportunities, travel, and other discretionary costs. Additionally, the segment net loss was increased in 2009 by an after-tax restructuring charge of $2.9 million related to the reduction in force at our Veenendaal Plant.

PRECISION METAL COMPONENTS SEGMENT

                                                   Three months ended
         (In Thousands of Dollars)                    September 30,
                                       2009         2008              Change

         Net sales                   $ 11,014     $ 15,166     $ (4,152 )
         Volume                                                             $ (4,152 )


         Segment net loss            $ (1,106 )   $   (150 )   $   (956 )

The majority of the decrease in this segment was due to much lower U.S. automotive and industrial market demand in the third quarter of 2009. In addition, sales were negatively impacted by de-stocking within the supply chain.

The reduced sales volume and related production inefficiencies and under-utilization of fixed production costs were the main causes of the segment loss in the third quarter of 2009. Planned cost reduction projects, net of inflation, and reductions in selling and administration cost partially offset the impact of volume decreases. Additionally, the segment net loss was increased by $0.4 million as tax benefits from losses incurred in 2009 were not recognized due to valuation allowances being placed on the related deferred tax assets.

PLASTIC AND RUBBER COMPONENTS SEGMENT

                                                   Three months ended
            (In Thousands of Dollars)                 September 30,
                                         2009        2008            Change

            Net sales                   $ 8,415     $ 8,993     $ (578 )
               Volume                                                        (750 )
               Price/Mix                                                      172

Segment net loss $ (338 ) $ (338 ) $ - -

The volume reduction for this segment was also related to lower U.S. automotive and industrial end market demand; however, for this segment the third quarter of 2008 was already impacted by the global recession. Thus, the impact in the current quarter from the recession at this segment was not as large as at other segments.

The segment net loss for the third quarter of 2009 would have been lower than the third quarter of 2008 loss if tax benefits totaling $0.1 million from losses incurred in 2009 were recognized. The tax benefits were not recognized due to valuation allowances placed on the deferred tax benefits.

Nine Months Ended September 30, 2009 Compared to the Nine Months Ended September 30, 2008.

OVERALL RESULTS
                                                                 NN, Inc.
(In Thousands of Dollars)                    2009          2008                 Change
Net sales                                  $ 181,119     $ 348,647     $ (167,528 )
    Foreign exchange effects                                                              (9,788 )
    Volume                                                                              (156,750 )
    Price                                                                                    (19 )
    Mix                                                                                     (323 )
    Material inflation pass-through                                                         (648 )

Cost of products sold (exclusive of
depreciation
 and amortization shown separately
below)                                       169,184       277,526       (108,342 )
    Foreign exchange effects                                                              (9,927 )
    Volume                                                                               (95,072 )
    Cost reduction                                                                        (6,684 )
    Mix                                                                                      184
    Inflation                                                                              3,157

Selling, general, and administrative          19,779        29,952        (10,173 )
    Foreign exchange effects                                                              (1,149 )
    Reductions in spending                                                                (9,024 )

Depreciation and amortization                 15,773        18,884         (3,111 )
    Foreign exchange effects                                                              (1,007 )
    Reduction in expense                                                                  (2,104 )

Restructuring and impairment charges           4,742            --          4,742
Interest expense, net                          4,719         4,068            651
Gain on disposal of assets                       (41 )      (4,153 )        4,112
Reduction of unamortized debt issue cost         604            --            604
Other income, net                               (135 )        (810 )          675
Income (loss) before provision
(benefits) for
   income taxes                              (33,506 )      23,180        (56,686 )
Provision (benefit) for income taxes          (1,532 )       5,960         (7,492 )
Net (loss) income                          $ (31,974 )   $  17,220     $  (49,194 )

Net Sales. The sales levels experienced in the third quarter of 2009 were 13% higher, excluding foreign exchange effects, to those experienced in the first two quarters of 2009. Despite the increase over the prior two quarters, sales were still down 45% for the nine months ended September 30, 2009 versus the nine months ended September 30, 2008. The decrease was due to the aforementioned reduction in end market demand due to the global recession and from de-stocking in the supply chain in which we operate.

Cost of Products Sold (exclusive of depreciation and amortization). The majority of the decrease was due to the same sales volume reductions mentioned above partially offset by planned cost reduction projects, net of inflation. The cost of products sold as a percentage of sales was 6% lower in the third quarter of 2009 versus the first half of 2009 due to better utilization of fixed cost from higher production levels and increased levels of savings on planned cost reduction projects. Additionally, the operational inefficiencies related to reducing inventory levels were more muted in the third quarter of 2009 than in the first half of 2009 as the level of inventory reduction in the current quarter was lower.

As discussed above, the current trend of cost of products sold equaling 93% of sales is not expected to continue. Once sales volumes return to more historically normal levels, we expect cost of products sold to average 80% of sales or less.

Selling, General and Administrative Expenses. The majority of the reduction was from wage cost reductions. The wage cost reductions were achieved through a combination of salary cuts ranging from 10% to 20%, elimination of bonus opportunities for 2009 and headcount reductions. In addition, discretionary expenses were reduced company wide.

Depreciation and Amortization. The devaluation of Euro denominated costs relative to the U.S. Dollar accounted for approximately 30% of the decline. The remainder was due to lower depreciation and amortization from the effects of the year end 2008 impairments and accelerated depreciation of certain intangible assets and fixed assets and due to lower spending on capital expenditures in 2009.

Restructuring and impairment charges. During the nine month period ended September 30, 2009, we incurred $0.8 of restructuring cost related to the closures of the Kilkenny Plant and the Hamilton Plant and $3.9 million in restructuring charges related to the reduction in force at our Veenendaal Plant. (See Footnote 2 of the Notes to Consolidated Financial Statements).

Gain on disposal of assets: The second quarter of 2008 included a gain for sale of excess land at our Veenendaal Plant totaling $4.0 million.

Provision for income taxes. For the nine months ended September 30, 2009, the difference between the federal statutory tax rate of 34% and our effective tax rate of 5% was mainly due to not recognizing the tax benefits incurred at our U.S. locations and four of our foreign locations. We have placed valuation allowances on these deferred tax benefits as the recoverability of these tax benefits in the near future is in question. In addition, the effective rate was impacted by non-U.S. based earnings taxed at lower rates. The statutory and effective income tax rates in many of the foreign countries in which we operate are lower than the U.S. federal rate. (See Footnote 12 of the Notes to Consolidated Financial Statements.)

RESULTS BY SEGMENT

METAL BEARING COMPONENTS SEGMENT

                                                         Nine months ended
 (In Thousands of Dollars)                                 September 30,
                                         2009          2008                 Change

 Net sales                             $ 125,637     $ 265,457     $ (139,820 )
     Foreign exchange effects                                                         (9,788 )
     Volume                                                                         (130,615 )
     Price                                                                              (180 )
     Mix                                                                               1,347
     Material inflation pass-through                                                    (584 )

 Segment net income (loss)             $ (16,657 )   $  21,647     $  (38,304 )

The largest sales decrease during 2009 was in our European operations of the segment with a 52% decrease in sales compared to 2008. The U.S. operations experienced sales reductions averaging 45% compared to 2008 and at our Asia operation sales increased 1% as compared to 2008. Sales were down in part due to reduced demand in the end markets served by the segment from the global recession. Additionally, the segment's sales were reduced due to de-stocking within the metal bearing supply chain. The devaluation of the Euro relative to the U.S. Dollar of 11% further negatively impacted sales. The reductions were partially offset by favorable price/mix impacts from selling higher priced precision ball and roller products.

PRECISION METAL COMPONENTS SEGMENT

                                                    Nine months ended
        (In Thousands of Dollars)                     September 30,
                                      2009         2008               Change

        Net sales                   $ 33,811     $ 51,453     $ (17,642 )
           Volume                                                           $ (15,776 )
           Mix                                                                 (1,764 )
          Price                                                                  (102 )

        Segment net income (loss)   $ (3,464 )   $    776     $  (4,240 )

The majority of the decrease was due to much lower U.S. automotive and industrial market demand experienced during 2009. In addition, sales were negatively impacted by de-stocking within the supply chain. Finally, the segment sales were impacted by a greater portion of lower-priced products.

The reduced sales volume and related production inefficiencies and under-utilization of fixed production costs were the main causes of the segment loss in 2009. Planned cost reduction projects, net of inflation, and reductions in selling and administration cost partially offset the volume impacts. Additionally, the segment net loss was increased by $1.2 million as tax benefits from losses incurred in 2009 were not recognized due to valuation allowances being placed on the related deferred tax assets.

PLASTIC AND RUBBER COMPONENTS SEGMENT

                                                    Nine months ended
        (In Thousands of Dollars)                     September 30,
                                      2009         2008               Change
. . .