Acquisitions

Paragon Medical, Inc.

On May 7, 2018, we acquired 100% of the stock of PMG Intermediate Holding Corporation, the parent company of Paragon Medical, Inc. (“Paragon Medical”) for a base purchase price of $375.0 million in cash, subject to certain adjustments. After working capital and other closing adjustments, the cash purchase price was approximately $390.9 million which included $13.6 million in cash acquired. During the three months ended September 30, 2018, we received $1.4 million additional cash from the seller to settle working capital adjustments. For accounting purposes, Paragon Medical meets the definition of a business and has been accounted for as a business combination. Paragon Medical is a medical device manufacturer which focuses on the orthopedic, case and tray, implant and instrument markets. This acquisition continues our strategic focus to expand our Life Sciences portfolio as well as create a balanced business by diversifying our products and finished device offerings. Operating results of Paragon Medical are reported prospectively from the date of acquisition in our Life Sciences group. We have performed an assessment of the opening balance sheet which is subject to completion of our internal review procedures over fair value estimates. Opening balance sheet deferred taxes have been recorded based on estimates made as of the acquisition date as well as information currently available to management. As estimates are refined and additional information is received throughout the measurement period, adjustments to opening deferred taxes may be recorded with an offsetting adjustment to goodwill. We incurred new debt in connection with the Paragon Medical acquisition and subsequently repaid the new debt in full with the proceeds from the sale of shares of our common stock as described in Note 10.

The following table summarizes the preliminary purchase price allocation for the Paragon Medical acquisition.



Fair value of assets acquired and liabilities assumed	As Reported on June 30, 2018		Subsequent Adjustments			September 30, 2018
Cash and cash equivalents	$	13,418	$	134		$	13,552
Accounts receivable	22,853		(721		)	22,132
Inventories	23,606		(98		)	23,508
Other current assets	937		734			1,671
Property, plant and equipment	69,322		(5,625		)	63,697
Intangible assets subject to amortization	164,200		(700		)	163,500
Other non-current assets	3,304		(129		)	3,175
Goodwill	157,421		5,017			162,438
Total assets acquired	$	455,061	$	(1,388	)	$	453,673
Current liabilities	$	16,767	$	119		$	16,886
Deferred tax liability	46,713		(1,407		)	45,306
Other non-current liabilities	620		—			620
Total liabilities assumed	$	64,100	$	(1,288	)	$	62,812
Net assets acquired	$	390,961	$	(100	)	$	390,861

A combination of income, market, and cost approaches were used for the valuation where appropriate, depending on the asset or liability being valued. Valuation inputs in these models and analyses considered market participant assumptions. Acquired intangible assets are primarily customer relationships. As of September 30, 2018, intangible assets in connection with Paragon Medical were $157.6 million after post-acquisition amortization.

In connection with the Paragon Medical acquisition, we recorded goodwill, which represents the excess of the purchase price over the estimated fair value of tangible and intangible assets acquired, net of liabilities assumed. As of September 30, 2018, goodwill in connection with Paragon Medical was approximately $159.4 million after post-acquisition currency impacts. The goodwill is attributed primarily to Paragon Medical as a going concern, the assembled workforce, the fair value of expected cost synergies, and revenue growth expected from the ability to go to market as a combined life sciences business. The going concern element represents the ability to earn a higher return on the combined assembled collection of assets and businesses of Paragon Medical than if those assets and businesses were to be acquired and managed separately. Approximately $2.8 million of the goodwill relates to prior asset acquisitions by Paragon Medical and is expected to be deducted for tax purposes.

Property, plant and equipment acquired primarily included machinery and equipment for use in manufacturing operations. Additionally, manufacturing sites and related facilities, including leasehold improvements, were acquired. We have performed a preliminary assessment of the fair value of property, plant and equipment using both the cost approach and the market approach. The preliminary assessment was supported where available by observable market data which includes consideration of obsolescence. We have performed a preliminary assessment of the fair value of intangible assets using the income approach, supported by market data, by using the relief from royalty and multi-period excess earnings methods.

We incurred approximately $5.3 million in acquisition related costs with respect to the Paragon Medical acquisition during the nine months ended September 30, 2018. Transaction costs were expensed as incurred and are included in the “Acquisition related costs excluded from selling, general and administrative expense” line item in the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss). We expensed $12.9 million of financing costs related to the Paragon Medical acquisition during the nine months ended September 30, 2018, which are included in the “Loss on extinguishment of debt and write-off of debt issuance costs” line item in the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss). As required by the acquisition method of accounting, acquired inventories were recorded at their estimated fair value. Beginning May 7, 2018, our consolidated results of operations include the results of Paragon Medical. Since the date of the acquisition, net sales of $70.0 million and income from operations of $2.2 million have been included in our condensed consolidated financial statements.

The unaudited pro forma financial results shown in the table below for the three and nine months ended September 30, 2018 and 2017, combine the consolidated results of NN and Paragon Medical giving effect to the Paragon Medical acquisition as if it had been completed on January 1, 2017, the beginning of the comparable prior annual reporting period presented. The unaudited pro forma financial results do not give effect to any of our other acquisitions that occurred after January 1, 2017, and do not include any anticipated synergies or other assumed benefits of the Paragon Medical acquisition. This unaudited pro forma financial information is presented for informational purposes only and is not indicative of future operations or results had the Paragon Medical acquisition been completed as of January 1, 2017.

The unaudited pro forma financial results include certain adjustments for debt service costs and additional depreciation and amortization expense based upon the fair value step-up and estimated useful lives of Paragon Medical depreciable fixed assets and definite-life amortizable assets acquired. Adjustments for the three and nine months ended September 30, 2018, include a reduction of the prepayment penalty incurred upon the extinguishment of debt (see Note 10) as if the debt had been outstanding since January 1, 2017. The provision for income taxes has also been adjusted for all periods, based upon the foregoing adjustments to historical results. The impact of adopting ASC 606 has been included based on an adoption date of January 1, 2018.



	Three Months Ended September 30,						Nine Months Ended September 30,
	2018			2017			2018			2017
Pro forma net sales	$	205,683		$	183,424		$	626,414		$	568,270
Pro forma income (loss) from continuing operations	$	(11,830	)	$	(8,436	)	$	(31,909	)	$	(52,840	)
Pro forma net income (loss)	$	(11,830	)	$	121,005		$	(31,909	)	$	87,355
Basic income (loss) from continuing operations per share	$	(0.41	)	$	(0.31	)	$	(1.15	)	$	(1.93	)
Diluted income (loss) from continuing operations per share	$	(0.41	)	$	(0.31	)	$	(1.15	)	$	(1.93	)

Unaudited pro forma results for the nine months ended September 30, 2017, include $15.0 million of inventory fair value adjustments, financing, integration, and transaction costs, net of tax, directly attributable to the acquisition which will not have an ongoing impact. No such costs are present in the unaudited pro forma results for the three months ended September 30, 2017.

Other Acquisitions

We made other acquisitions during the nine months ended September 30, 2018, with an aggregate cash purchase price of $22.0 million. Amounts recorded for preliminary goodwill and intangible assets are disclosed in Note 6 and Note 7, respectively, and are subject to completion of our integration procedures. We incurred approximately $0.5 million in acquisition related costs with respect to other acquisitions during the nine months ended September 30, 2018. Transaction costs were expensed as incurred and are included in the “Acquisition related costs excluded from selling, general and administrative expense” line item in the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss).

Bridgemedica, LLC. On February 22, 2018, we completed the acquisition of 100% of the assets of Bridgemedica, LLC (“Bridgemedica”). For accounting purposes, Bridgemedica meets the definition of a business and has been accounted for as a business combination. Bridgemedica is a medical device company that provides concept to supply solutions through design, development engineering and manufacturing. Operating results of Bridgemedica are reported prospectively in our Life Sciences group after the acquisition date. We have finalized certain working capital adjustments and are in the process of completing the integration of the Bridgemedica business into our operations.

Southern California Technical Arts, Inc. On August 9, 2018, we completed the acquisition of 100% of the capital stock of Southern California Technical Arts, Inc. (“Technical Arts”). For accounting purposes, Technical Arts meets the definition of a business and has been accounted for as a business combination. Technical Arts is an industrial machining company that manufactures tight tolerance metal components and assemblies. The acquisition of Technical Arts expands the NN presence in the aerospace and defense end market. Operating results of Technical Arts are reported prospectively in our Power Solutions group after the acquisition date. We have completed a preliminary purchase price allocation and are in the process of finalizing the fair value of assets acquired and liabilities assumed.