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NN,
Inc.
Corporate
Office
www.nnbr.com
2000 Waters Edge Drive
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Building C, Suite 12 ●
Johnson City, TN 37604
423-743-9151
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fax: 423-743-2670
February
25, 2008
Mr.
Terence O’Brien
Accounting
Branch Chief
Securities
and Exchange Commission
Division
of Corporation Finance
Mail Stop
7010
100 F
Street, N.E.
Washington,
D.C. 20549
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Re:
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NN,
Inc.
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Form
10-K for the Fiscal Year Ended December 31,
2006
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Form
10-Q for the Fiscal Quarter Ended September 30,
2007
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File
No. 000-23486
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Dear Mr.
O’Brien
On behalf of NN, Inc. (the “Company” or
the “Registrant”), this letter is intended to respond to the comments received
from the Staff of the Securities and Exchange Commission by letter dated January
14, 2008, to Mr. James H. Dorton, with respect to the above-referenced filings
of the Registrant.
The following discussion is intended to
respond to Staff comments made in the January 14, 2008 letter (the
“Letter”). The following paragraphs of this letter are numbered to
correspond to the numbers of the comments contained in the Letter.
Form 10-K for the Fiscal
Year ended December 31, 2006
General
Comment
1. We appreciate your acknowledgement
to the three bullet points signed by your outside counsel at the end of your
response letter. However, this acknowledgement should be signed by an
executive of the Company. Please resubmit your acknowledgement to the
three bullet points accordingly.
Response
1. Please see the signed
acknowledgement of this letter by James H. Dorton, Chief Financial Officer of
the Company, of the following:
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the
Registrant is responsible for the adequacy and accuracy of the disclosure
in the filings;
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staff
comments or changes to disclosure in response to staff comments do not
foreclose the Commission from taking any action with respect to the
filings; and
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the
Registrant may not assert staff comments as a defense in any proceeding
initiated by the Commission or any person under the federal securities
laws of the United States.
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16) Commitments and
Contingencies, page 60
Comment 2. We note
your response to our prior comment 6 and your disclosure in Note 16 in your Form
10-Q that on June 20, 2007, you were named as a potentially responsible party
for the potential clean up of a former waste recycling facility. We
further note your response states you had limited information regarding the
probability of the potential claim, so it is unclear how you determined that a
material loss contingency is remote. Please clarify how you made this
determination, provide us with an update of the status of the contingency, and
ensure that you expand disclosure in future filing, to include the required
disclosure of SFAS 5, SAB Topic 5: Y and SOP 94-6, as applicable.
Response
2.
As noted
to you in our previous response, at the time the Quarterly Report for the
quarter ended September 30, 2007 was filed, the Company had limited information
regarding the probability and amount of the potential claim related to the waste
recycling facility. Additionally, the Company believed then, as now,
that the possibility of a material loss is remote based upon the information
below. The amount is neither reasonably estimable nor probably,
so the company continues to believe that it would be inappropriate to establish
a contingency.
The
Company has contributed to an escrow fund along with 42 other potentially
responsible parties for the purpose of addressing the environmental issues at
the facility. The Company’s contribution to the escrow account was
approximately $22,500. The contributions by the potentially
responsible parties to the escrow account were divided equally among the
parties, with an agreement to re-allocate total contribution owed once the work
has been completed. The re-allocation of contribution owed will be
based on either or both of (1) the volume of waste sent to the facility by each
potentially responsible party, or (2) based on the toxicity of the
waste. The Company believes its contribution, if any, would be
approximately 1.083% or less of the volume of waste sent to the facility, based
on information provided to the Company by the Environmental Protection Agency
(“EPA”). The Company also asserts that its waste was non-hazardous. A
Remedial Investigation and Risk Assessment funded by the escrowed amount was
submitted to the Agency in December 2007. The EPA will review the
Report and notify the parties whether further assessment or remediation is
required. Accordingly, the Company does not believe its share of the
clean-up will be material since its contribution to the problem was
minimal. In addition, besides the 42 already recognized potentially
responsible parties, there are a number of other parties who could be named and
be required to pay a portion of the clean-up costs.
While the
process of establishing the amount of any liability and assigning any such
liability to the companies on the list of potentially responsible parties is
ongoing, and, the company continues to participate with the other named parties,
no fact has come to our attention that would allow us to determine whether we
have any liability. Based on the information listed above, we do not
believe that we have any material liability in this matter, but we do not know
when a final determination might be made.
In future
filings, the Company will update the status of the contingency and expand its
disclosure in compliance with SFAS 5, SAB Topic 5:Y and SOP 94-6, as
applicable.
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Item
11. Executive Compensation, page 64 – Incorporated by Reference from
Proxy Statement
Comment
3. Please confirm that you will
disclose your responses to prior comments 9 and 11 in future
filings.
Response
3. In future filings, Registrant
will disclose information provided in responses to prior comments 9 and 11 on
“formal compensation policies” and on “net income and other goals utilized for
bonuses.”
Form
10-Q for the quarter Ended September 30, 2007
Note
2. Restructuring and impairment Charges, page 6.
Comment
4. We have reviewed your
response to our prior comment 15, which describes your impairment testing under
SFAS 144. Please clarify the level at which you have grouped assets
for testing and tell us how you have complied with paragraphs 10 through 14 and
B44 through B47 of SFAS 144. Additionally, tell us how you estimated
the future cash flows used in your testing and how your estimates comply with
paragraphs 16-21 of SFAS 144. Please consider providing
supplementally a copy of your impairment test.
Response 4.
For the
purposes of our impairment testing of customer contract intangible assets under
SFAS 144 during the second quarter of 2007 for the customer contract intangible
assets of the Metal Bearing Components Segment and third quarter of 2007 for the
customer relationship intangible assets of the Precision Metal Components
Segment, the Registrant interpreted the asset grouping requirement of SFAS 144,
paragraph 10-14 (i.e., to group assets at the lowest level for which
identifiable cash flows are available for the assets tested) to mean the cash
flows specific to the customer base existing at the date of the acquisition of
the customer relationship intangible assets. Management reasoned that
cash flows generated by the customers for which the intangible assets were
created were largely independent from the cash flows from new customers which
might be added after the date of acquisition. Based on an analysis of
the cash flows grouped in this manner, the customer intangible assets were
impaired, and an impairment charge of $1,933,000 was taken in the second quarter
for the Metal Bearing Components Segment and an impairment charge of $5,600,000
was taken in the third quarter for the Precision Metal Components Segment (both
amounts before taxes).
Upon
further review prompted by questions from the SEC staff, management re-evaluated
the assessment of asset groups used to determine the grouping of long-lived
assets and the lowest level for which identifiable cash flows are largely
independent of the cash flows of other assets and liabilities to test for
impairment pursuant to SFAS 144. After this re-evaluation, management
determined that, in its assessment of whether the carrying value of its customer
intangible assets was recoverable, the lowest level for which identifiable cash
flows are available should have been the reporting unit level, as opposed to the
customer intangible asset level originally used in the impairment testing
because of the
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interdependency
of the customer asset with the other productive assets of the reporting unit,
i.e., the customer intangibles do not have independent cash flows separate from
the other long-lived assets (the plant & equipment used to produce parts
shipped to the customer). Upon testing the new asset groups for
recoverability, management has determined that the undiscounted cash flows over
the life of the asset group exceeded the carrying amount of the asset
group. Accordingly, the previously recorded non-cash impairment
charges related to the intangible assets were not supported and should be
reversed. We have determined that the Metal Bearing Component’s
customer contract intangible should continue to be amortized over the remainder
of its original useful life of five years and that the Precision Metal
Component’s customer relationship intangible assets should be amortized over a
remaining useful life of ten years, which has been revised from its originally
assumed life of twenty years.
The basis
of the undiscounted future cash flows used to test recoverability of the asset
groups were derived from our 2008 Business Plan and our 2009-2010 strategic
plans for the relevant two reporting units. The cash flows used
included only the future cash flows that are directly associated with use and
eventual disposition of the assets during the assets' remaining useful
life.
After
discussions between management and the Audit Committee of the Board of Directors
on February 20, 2008, management, at the direction of the Audit Committee,
concluded that the Company should restate its previously issued financial
statements for the three and six months ended June 30, 2007 and the three and
nine months ended September 30, 2007.
Management
believes that the net effect of adjustments that will be made in the restated
financial statements will be to increase net income by $1.5 million, or $0.08
per share for the three and six months ended June 30, 2007 and to
increase net income by $3.6 million, or $0.21 and $5.1 million, or $0.30
per share respectively for the three and nine months ended September 30,
2007. Total assets and total liabilities and stockholder’s equity
will increase by approximately $1.5 million for the six months ended June 30,
2007 and $5.1 million for the nine months ended September 30, 2007.
In light
of the restatement of the interim financial information, the Company’s
management and the Audit Committee of its Board of Directors has concluded that
the previously issued financial statements for the second quarter ended June 30,
2007 and the third quarter ended September 30, 2007 should no longer be relied
upon.
With
regard to internal control over financial reporting, management has concluded
that this matter resulted from a material weakness in its internal controls over
the accounting for the impairment of long-lived assets and that its disclosure
controls and procedures were ineffective as of June 30, 2007, September 30, 2007
and December 31, 2007. However, management expects that the material
weakness in internal control over financial reporting will have been fully
remediated by the inclusion of enhanced procedures surrounding these
calculations before the filing of its 2007 Annual Report on Form 10-K and the
amended and restated 10-Q reports for the second and third quarters of
2007.
The
enhanced internal control procedures actions include the addition of a key
control that specifically relates to the process of analyzing cash flows when
evaluating intangible assets, addition of a checklist to the quarterly closing
process that highlights areas of higher risk which will be reviewed with the
Audit Committee, and the formation of an enhanced Disclosure Committee made up
of the Audit
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Committee
Chair, CEO, CFO, CAO and Corporate Controller. The committee will
review the checklist mentioned above and approve all such unusual or at-risk
items, and may advise the Audit Committee to seek a third party accounting
advisor to obtain further clarification if necessary.
This
matter and the related issues involving internal control over financial
reporting were discussed in detail with our independent auditors.
The
Company will file an 8-K within the required time period informing of the
pending restatements, and will file amended Forms 10-Q for these quarters as
soon as practicable.
Comment
5. We have reviewed your
response to our prior comment 16 and note that you will, in future filings,
include additional disclosure to fulfill the disclosure requirements of SFAS 146
paragraph 20 and SAB Topic 5P4. Our prior comment requested that you
tell us the events and decisions that gave rise to the exit cost and exit plan,
and the likely effects of management’s plans on financial position, future
operating results and liquidity unless it is determined that a material effect
is not reasonably likely to occur. Therefore, we repeat our prior
comment 16.
Response
5. The Registrant is in the
process of adjusting its manufacturing footprint in Western
Europe. Management reviewed the various options related to
this issue and concluded the best option was to reduce the production volume at
our German plant and transfer production to lower cost
locations. On August 9, 2007, management presented this plan to the
NN Board of Directors. The Board agreed to this course of
action. In order to facilitate this move, 19 employees at the German
facility were identified for termination. Under German law and local
union rules, the notification period amounts to a year and the employees are
paid a year for severance. The payroll expense incurred during the
notification period will be expensed as incurred. The registrant
recorded the severance cost to be paid after the legal notification period
during the third quarter of 2007, as during this quarter management committed to
the plan of action, the plan established the employees to be affected and the
benefits to be paid, and the affected employees where notified of the planned
reductions. Accordingly, the Company recorded a $1.062 million
severance accrual pursuant to paragraphs 8 and 10 of FAS 146. In so
doing, we established that management had the authority to approve such action
and to commit to a plan of involuntary termination for the effected
employees. We listed the number of employees to be terminated,
including details as to the functions and locations of those to be terminated
and the expected completion date in a notice given to the union management and
posted in the plant. The union contract and German law specify the
benefits that the employees would receive upon termination, and such details
were available to and were well know by the affected
employees. Management believed, at that time, that the action was
irrevocable and that there was little likelihood that such action would be
withdrawn. It required an extraordinary offer by the union to entice
management to consider reversing this firm action.
During
the fourth quarter of 2007, the German workers counsel approached management
with a surprising 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. On January 24,
2008,
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management
presented the workers’ offer to the NN Board of Directors. The
consensus of the Board was that the contract should be agreed to if the final
terms were as presented. On February 13, 2008, the company signed a
new agreement with the German workers and rescinded the involuntary termination
order. After agreeing to rescind the involuntary termination
order, the severance charge no longer meets the requirements for a
restructuring accrual, and will be reversed as of the fourth quarter of 2007, as
a Type 1 Subsequent Event, refining our previous estimate based on FAS 146,
paragraph 12 and because the German works counsel proposal was received during
the fourth quarter of 2007.
To the
extent applicable to future filings, the Company will verify that disclosure
required pursuant to FAS 146 will be included.
On behalf
of the Registrant, I acknowledge that:
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the
Registrant is responsible for the adequacy and accuracy of the disclosure
in the filings;
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·
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staff
comments or changes to disclosure in response to staff comments do not
foreclose the Commission from taking any action with respect to the
filings; and
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·
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the
Registrant may not assert staff comments as a defense in any proceeding
initiated by the Commission or any person under the federal securities
laws of the United States.
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We trust
that the Registrant has been responsive to the Commission's
comments. If there are additional questions or comments, please
contact the undersigned.
Very truly yours,
/s/ James H. Dorton
James H. Dorton
Chief Financial
Officer
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