| NN INC Item 1A Risk Factors Cautionary Statements for Purposes of the "e Safe Harbor "e Provisions of the Private Securities Litigation Reform Act of 1995 The Company wishes to caution readers that this report contains, and future filings by the Company, press releases and oral statements made by the Companyapstas authorized representatives may contain, forward-looking statements that involve certain risks and uncertainties |
| Readers can identify these forward-looking statements by the use of such verbs as expects, anticipates, believes or similar verbs or conjugations of such verbs |
| The Companyapstas actual results could differ materially from those expressed in such forward-looking statements due to important factors bearing on the Companyapstas business, many of which already have been discussed in this filing and in the Companyapstas prior filings |
| The differences could be caused by a number of factors or combination of factors including, but not limited to, the risk factors described below |
| You should carefully consider the following risks and uncertainties, and all other information contained in or incorporated by reference in this annual report on Form 10-K, before making an investment in our common stock |
| In such case, the trading price of our common stock could decline and you may lose all or part of your investment |
| The demand for our products is cyclical, which could adversely impact our revenues |
| The end markets for fully assembled bearings are cyclical and tend to decline in response to overall declines in industrial and automotive production |
| As a result, the market for bearing components is also cyclical and impacted by overall levels of industrial and automotive production |
| Our sales in the past have been negatively affected, and in the future will be negatively affected, by adverse conditions in the industrial and/or automotive production sectors of the economy or by adverse global or national economic conditions generally |
| We depend on a very limited number of foreign sources for our primary raw material and are subject to risks of shortages and price fluctuation |
| The steel that we use to manufacture precision balls and rollers is of an extremely high quality and is available from a limited number of producers on a global basis |
| Due to quality constraints in the US steel industry, we obtain substantially all of the steel used in our US ball and roller production from overseas suppliers |
| In addition, we obtain most of the steel used in our European ball production from a single European source |
| If we had to obtain steel from sources other than our current suppliers we could face higher prices and transportation costs, increased duties or taxes, and shortages of steel |
| Problems in obtaining steel, and particularly 52100 chrome steel, in the quantities that we require and on commercially reasonable terms, could increase our costs, adversely impacting our ability to operate our business efficiently and have a material adverse effect on our revenues and operating and financial results |
| Increases in the market demand for steel can have the impact of increasing scrap surcharges we pay in procuring our steel in the form of higher unit prices and could adversely impact the availability of steel |
| Our contracts with key customers allow us to pass a majority of the steel price increases on to those customers |
| However, by contract, material price changes in any given year at NN Europe are typically passed along with price adjustments in January of the following year |
| Until the current increases can be passed through to our customers, income from operations, net income and cash flow from operations can be adversely affected |
| We depend heavily on a relatively limited number of customers, and the loss of any major customer would have a material adverse effect on our business |
| 9 _________________________________________________________________ Sales to various US and foreign divisions of SKF, which is one of the largest bearing manufacturers in the world, accounted for approximately 47prca of consolidated net sales in 2005, and sales to Schaeffler Group (INA) accounted for approximately 13prca of consolidated net sales in 2005 |
| During 2005, our ten largest customers accounted for approximately 81prca of our consolidated net sales |
| None of our other customers individually accounted for more than 5prca of our consolidated net sales for 2005 |
| The loss of all or a substantial portion of sales to these customers would cause us to lose a substantial portion of our revenue and would lower our operating profit margin and cash flows from operations |
| Schaeffler Group (INA) has decided to in-source approximately dlra12 million of annual business to their internal ball manufacturing facility in Germany |
| This represents approximately 30prca of the existing Schaeffler Group (INA) business |
| We are in the process of negotiating a long term supply agreement with Schaeffler Group (INA) for remaining business |
| In addition, we are in process of negotiating a new long term agreement with SKF to replace the one for precision balls that expires July 31, 2006 |
| SKF has informally agreed in principle to carry the current agreement through to December 31, 2006 |
| We operate in and sell products to customers outside the US and are subject to several related risks |
| Because we obtain a majority of our raw materials from overseas suppliers, actively participate in overseas manufacturing operations and sell to a large number of international customers, we face risks associated with the following: · adverse foreign currency fluctuations; · changes in trade, monetary and fiscal policies, laws and regulations, and other activities of governments, agencies and similar organizations; · the imposition of trade restrictions or prohibitions; · high tax rates that discourage the repatriation of funds to the US; · the imposition of import or other duties or taxes; and · unstable governments or legal systems in countries in which our suppliers, manufacturing operations, and customers are located |
| We do not have a hedging program in place associated with consolidating the operating results of our foreign businesses into US dollars |
| An increase in the value of the US dollar and/or the Euro relative to other currencies may adversely affect our ability to compete with our foreign-based competitors for international, as well as domestic, sales |
| Also, a decline in the value of the Euro relative to the US dollar will negatively impact our consolidated financial results, which are denominated in US dollars |
| In addition, due to the typical slower summer manufacturing season in Europe, we expect that revenues in the third fiscal quarter of each year will reflect lower sales than in the other quarters of the year |
| The costs and difficulties of integrating acquired business could impede our future growth |
| We cannot assure you that any future acquisition will enhance our financial performance |
| Our ability to effectively integrate any future acquisitions will depend on, among other things, the adequacy of our implementation plans, the ability of our management to oversee and operate effectively the combined operations and our ability to achieve desired operating efficiencies and sales goals |
| The integration of any acquired businesses might cause us to incur unforeseen costs, which would lower our profit margin and future earnings and would prevent us from realizing the expected benefits of these acquisitions |
| We may not be able to continue to make the acquisitions necessary for us to realize our future growth strategy |
| Acquiring businesses that complement or expand our operations has been and continues to be an important element of our business strategy |
| This strategy calls for growth through acquisitions constituting the majority of our future growth objectives, with the remainder resulting from internal growth and increased market penetration |
| We bought our plastic bearing component business in 1999, formed NN Europe with our two largest bearing customers, SKF and Schaeffler Group (INA), in 2000 and acquired our bearing seal operations in 2001 |
| During 2002, we purchased Schaeffler Group (INA)’s minority interest in NN Europe and during 2003 we purchased SKF’s minority interest in NN Europe and SKF’s tapered roller and metal cage manufacturing operations in Veenendaal, The Netherlands |
| See Note 2 of the Notes to Consolidated Financial Statements |
| In 2005, we entered into an agreement and started to acquire the internal precision ball equipment of SNR and a five year supply agreement to provide additional ball requirements to SNR We cannot assure you that we will be successful in identifying attractive acquisition candidates or completing acquisitions on favorable terms in the future |
| In addition, we may borrow funds to acquire other businesses, increasing our interest expense and debt levels |
| Our inability to acquire businesses, or to operate them profitably once acquired, could have a material adverse effect on our business, financial position, results of operations and cash flows |
| 10 _________________________________________________________________ Our growth strategy depends in part on outsourcing, and if the industry trend toward outsourcing does not continue, our business could be adversely affected |
| Our growth strategy depends in significant part on major bearing manufacturers continuing to outsource components, and expanding the number of components being outsourced |
| This requires manufacturers to depart significantly from their traditional methods of operations |
| If major bearing manufacturers do not continue to expand outsourcing efforts or determine to reduce their use of outsourcing, our ability to grow our business could be materially adversely affected |
| Our market is highly competitive and many of our competitors have significant advantages that could adversely affect our business |
| The global market for bearing components is highly competitive, with a majority of production represented by the captive production operations of certain large bearing manufacturers and the balance represented by independent manufacturers |
| Captive manufacturers make components for internal use and for sale to third parties |
| All of the captive manufacturers, and many independent manufacturers, are significantly larger and have greater resources than do we |
| Our competitors are continuously exploring and implementing improvements in technology and manufacturing processes in order to improve product quality, and our ability to remain competitive will depend, among other things, on whether we are able to keep pace with such quality improvements in a cost effective manner |
| The production capacity we have added over the last several years has at times resulted in our having more capacity than we need, causing our operating costs to be higher than expected |
| We have expanded our ball and roller production facilities and capacity over the last several years |
| Our ball and roller production facilities have not always operated at full capacity and from time to time our results of operations have been adversely affected by the under-utilization of our production facilities |
| Under-utilization or inefficient utilization of our production facilities could be a risk in the future |
| The price of our common stock may be volatile |
| The market price of our common stock could be subject to significant fluctuations and may decline |
| Among the factors that could affect our stock price are: · our operating and financial performance and prospects; · quarterly variations in the rate of growth of our financial indicators, such as earnings per share, net income and revenues; · changes in revenue or earnings estimates or publication of research reports by analysts; · loss of any member of our senior management team; · speculation in the press or investment community; · strategic actions by us or our competitors, such as acquisitions or restructurings; · sales of our common stock by stockholders; · general market conditions; · domestic and international economic, legal and regulatory factors unrelated to our performance; and · loss of a major customer |
| 11 _________________________________________________________________ The stock markets in general have experienced extreme volatility that has often been unrelated to the operating performance of particular companies |
| These broad market fluctuations may adversely affect the trading price of our common stock |
| Provisions in our charter documents and Delaware law may inhibit a takeover, which could adversely affect the value of our common stock |
| Our certificate of incorporation and bylaws, as well as Delaware corporate law, contain provisions that could delay or prevent a change of control or changes in our management that a stockholder might consider favorable and may prevent you from receiving a takeover premium for your shares |
| These provisions include, for example, a classified board of directors and the authorization of our board of directors to issue up to 5cmam000cmam000 preferred shares without a stockholder vote |
| In addition, our restated certificate of incorporation provides that stockholders may not call a special meeting |
| We are a Delaware corporation subject to the provisions of Section 203 of the Delaware General Corporation Law, an anti-takeover law |
| Generally, this statute prohibits a publicly-held Delaware corporation from engaging in a business combination with an interested stockholder for a period of three years after the date of the transaction in which such person became an interested stockholder, unless the business combination is approved in a prescribed manner |
| A business combination includes a merger, asset sale or other transaction resulting in a financial benefit to the stockholder |
| We anticipate that the provisions of Section 203 may encourage parties interested in acquiring us to negotiate in advance with our board of directors, because the stockholder approval requirement would be avoided if a majority of the directors then in office approve either the business combination or the transaction that results in the stockholder becoming an interested stockholder |
| These provisions apply even if the offer may be considered beneficial by some of our stockholders |
| If a change of control or change in management is delayed or prevented, the market price of our common stock could decline |