| AFTERMARKET TECHNOLOGY CORP ITEM 1A RISK FACTORS We believe that the following are the material risks currently facing our business, but additional risks we are not presently aware of or that we currently believe are immaterial may also impair our business operations |
| Our financial condition, results of operations or stock price could be materially adversely affected by these risks |
| Readers should also refer to the other information included in this Annual Report, including our consolidated financial statements and related notes thereto |
| We rely on a few major customers for a significant majority of our business and the loss of any of those customers, significant changes in prices or other terms with any of our major customers, or changes to our customers’ warranty policies, could reduce our net income and operating results |
| A few customers account for a significant majority of our net sales each year |
| In 2005, we had four customers that individually accounted for more than 10prca of our net sales |
| Cingular (including sales to the former AT&T Wireless) accounted for 28dtta3prca, 22dtta3prca and 17dtta2prca of our net sales during 2005, 2004 and 2003, respectively, Ford accounted for 23dtta1prca, 29dtta6prca and 38dtta6prca of our net sales for 2005, 2004 and 2003, respectively, Honda accounted for 18dtta3prca, 19dtta4prca and 7dtta5prca of our net sales during 2005, 2004 and 2003, respectively, and DaimlerChrysler accounted for 14dtta6prca, 14dtta7prca and 20dtta6prca of our net sales in 2005, 2004 and 2003, respectively |
| If we lose any of these customers, or if any of them reduces or cancels a significant order, our net sales and operating results could decrease significantly |
| Our significant OEM customers generally require that their dealers using remanufactured products for warranty application use only products from approved suppliers |
| Although we are a factory approved supplier of our customers, they generally are not obligated to continue to purchase our products and may switch some or all of their business to other suppliers in the future and we may not be able to maintain or increase our sales to them |
| Most of our contracts or arrangements with our customers are terminable by the customer subject to a notice period that ranges from 90 days or less to 180 days |
| Pursuant to such an arrangement, in 2004 General Motors elected to resource all our remanufactured transmission production to one of our competitors |
| In addition, we periodically renegotiate the prices and other terms of our products with our customers |
| Because of the short termination periods and periodic price negotiations, we cannot give any assurances of the stability of the demand or prices for our products and, therefore, our revenue streams |
| Significant demand or price fluctuations could materially affect our business |
| 9 _________________________________________________________________ [50]Table of Contents Since Cingularapstas acquisition of AT&T Wireless, we have been working with Cingular as they rationalize their supply chain |
| This resulted in the loss in 2004 of the accessory packaging services that we previously provided to AT&T Wireless but has also resulted in the expansion of our core logistics services with Cingular |
| This process will continue and could result in further gains and/or losses of business with Cingular |
| Loss of a significant customer could also result in us incurring asset impairment charges and exit costs associated with the closure of the plant that serviced that customer |
| In connection with the loss of the General Motors transmission business in 2004, we recorded goodwill and other asset impairment charges totaling dlra26dtta4 million and incurred dlra3dtta4 million of exit costs to close the Gastonia, North Carolina facility where we had produced units for General Motors |
| Additionally, our customers may vary their policies that determine when their dealers may use remanufactured products for warranty applications, which could reduce the demand for our products |
| Our results, most recently in 2005, have been adversely affected by certain customers changing the policies that govern their dealer warranty repair-versus-replace decisions, which have resulted in dealers repairing more transmissions and consequently replacing fewer transmissions with remanufactured units |
| Interruptions or delays in obtaining transmission cores and component parts could impair our business |
| In our remanufacturing operations, we obtain used transmissions, engines and related components, commonly known as cores, which are sorted and either placed into immediate production or stored until needed |
| The majority of the cores we remanufacture are obtained from OEMs |
| Our ability to obtain cores of the types and in the quantities we require is critical to our ability to meet demand and expand production |
| With the increasing acceptance in the aftermarket of remanufactured assemblies, the demand for cores has increased |
| We have periodically experienced situations in which the inability to obtain sufficient cores has limited our ability to accept orders |
| We may experience core shortages in the future |
| In addition, from time to time, we experience shortages of components manufactured by our OEM customers that we require for our transmission remanufacturing process |
| If we experience such shortages for an extended period of time, it could have a material adverse effect on our business and negatively impact our competitive position |
| Our financial results are affected by transmission failure rates, which are outside our control |
| Our quarterly and annual operating results are affected by transmission failure rates, and a drop in these rates could adversely affect sales or profitability or lead to variability of our operating results |
| Generally, if transmissions last longer, there will be less demand for our remanufactured transmissions |
| Transmission failure rates could drop due to a number of factors outside our control, including: • consumers retaining automobiles for shorter periods, which could occur in periods of economic growth or stability; • transmission designs that result in greater reliability; • consumers driving fewer miles per year due to high gasoline prices; and • mild weather |
| 10 _________________________________________________________________ [51]Table of Contents Our financial results are affected by our customers &apos policies, which are outside our control |
| Our financial results are also affected by the policies of our OEM customers |
| Changes to our key OEM customers’ policies that could materially affect our business include: • guidelines that affect dealer decisions to rebuild units at the dealer rather than install remanufactured transmissions; • shortened warranty periods that could reduce the demand for our products; • reductions in the amount of inventory our OEM customers elect to retain; • longer time periods before remanufactured transmissions are introduced for use with a particular automobile; and • pricing strategies |
| Our Logistics Business is dependent on the strength of Cingular Wireless |
| Cingular Wireless, which accounted for 81dtta5prca of our Logistics segment net sales for 2005, operates in a highly competitive technology market |
| The number of cell phones sold by Cingular, whether to new subscribers or as replacement phones to existing subscribers, is dependent on its ability to keep pace with technological advancements and to provide service programs and prices that are attractive to current and potential customers |
| Our Logistics net sales to Cingular are substantially related to the number of phones sold by Cingular |
| Consequently, any material decrease in phones sold by Cingular will materially and adversely affect our Logistics net sales |
| We may incur material liabilities under various federal, state, local and foreign environmental laws |
| We are subject to various evolving federal, state, local and foreign environmental laws and regulations governing, among other things, emissions to air, discharge to waters and the generation, handling, storage, transportation, treatment and disposal of a variety of hazardous and non-hazardous substances and wastes |
| These laws and regulations provide for substantial fines and criminal sanctions for violations and impose liability for the costs of cleaning up, and the damages resulting from, past spills, disposals or other releases of hazardous substances |
| In connection with our acquisition activity, we have conducted certain investigations of facilities we have acquired and their compliance with applicable environmental laws |
| Similarly, in the course of lease terminations, we have generally conducted investigations into potential environmental impacts resulting from our operations |
| These investigations revealed various environmental matters and conditions that could expose us to liability or which have required us to undertake compliance-related improvements or remedial activities |
| Any liability we may have under environmental laws could materially affect our business |
| Substantial competition could reduce our market share and significantly harm our financial performance |
| While we believe that our business is well positioned to compete in our two primary market segments, transmission remanufacturing and logistics, our industry segments are highly competitive |
| We may not be successful in competing against other companies, some of which are larger than us and have greater financial and other resources available to them than we do |
| Increased competition could require us to reduce prices or take other actions that may have an adverse effect on our operating results |
| 11 _________________________________________________________________ [52]Table of Contents Our stock price is volatile, and investors may not be able to recover their investment if our stock price declines |
| The trading price of our common stock has been volatile and can be expected to be affected by factors such as: • quarterly variations in our results of operations, which may be impacted by, among other things, price renegotiations with, or loss of, our customers; • quarterly variations in the results of operations or stock prices of comparable companies; • announcements of new products or services offered by us or our competitors; • changes in earnings estimates or buy/sell recommendations by financial analysts; • the stock price performance of our customers; and • general market conditions or market conditions specific to particular industries |
| Our future operating results may fluctuate significantly |
| We may experience significant variations in our future quarterly results of operations |
| These fluctuations may result from many factors, including the condition of our industry in general and shifts in demand and pricing for our products |
| Our operating results are also highly dependent on our level of gross profit as a percentage of net sales |
| Our gross profit percentage fluctuates due to numerous factors, some of which may be outside of our control |
| These factors include: • pricing strategies; • changes to our customers’ warranty policies; • changes in product costs from vendors; • the risk of some of the items in our inventory becoming obsolete; • the availability and quality of cores; • the relative mix of products sold during the period; and • general market and competitive conditions |
| Results of operations in any period, therefore, should not be considered indicative of the results to be expected for any future period |
| Our success depends on our ability to retain our senior management and to attract and retain key personnel |
| Our success depends to a significant extent on the efforts and abilities of our senior management team |
| We have various programs in place to motivate, reward and retain our management team, including bonus and stock incentive plans |
| Our success and plans for future growth will also depend on our ability to hire, train and retain skilled workers in all areas of our business |
| We currently do not have key executive insurance relating to our senior management team |
| 12 _________________________________________________________________ [53]Table of Contents We cannot predict the impact of unionization efforts or labor shortages on our business |
| From time to time, labor unions have indicated their interest in organizing a portion of our workforce |
| Given that our OEM customers are in the highly unionized automotive industry, our business is likely to continue to attract the attention of union organizers |
| While these efforts have not been successful to date except in the case of our former Mahwah, New Jersey facility (which we closed in December 2003), we cannot give any assurance that we will not experience additional union activity in the future |
| Any union organization activity, if successful, could result in increased labor costs and, even if unsuccessful, could result in a temporary disruption of our production capabilities and a distraction to our management |
| Additionally, we need qualified managers and a number of skilled employees with technical experience in order to operate our business successfully |
| From time to time, there may be a shortage of skilled labor, which may make it more difficult and expensive for us to attract and retain qualified employees |
| If we are unable to attract and retain qualified individuals or our costs to do so increase significantly, our operations would be materially adversely affected |
| We are subject to risks associated with future acquisitions |
| An element of our growth strategy is the acquisition and integration of complementary businesses in order to broaden product offerings, capture market share and improve profitability |
| We will not be able to acquire other businesses if we cannot identify suitable acquisition opportunities, obtain financing on acceptable terms or reach mutually agreeable terms with acquisition candidates |
| The negotiation of potential acquisitions as well as the integration of an acquired business could require us to incur significant costs and cause diversion of our managementapstas time and resources |
| Future acquisitions by us could result in: • dilutive issuances of equity securities; • reductions in our operating results; • incurrence of debt and contingent liabilities; • future impairment of goodwill and other intangibles; and • other acquisition-related expenses |
| The businesses we acquire in the future may not achieve sales and profitability that justify our investment |
| In addition, to the extent that consolidation becomes more prevalent in our industry, the prices for suitable acquisition candidates may increase to unacceptable levels and limit our growth |
| We may encounter problems in integrating the operations of companies that we acquire |
| We may encounter difficulties in integrating any businesses we acquire with our operations |
| The success of these transactions depends on our ability to: • retain key management members and technical personnel of acquired companies; • successfully merge corporate cultures and operational and financial systems; and • realize sale and cost reduction synergies |
| 13 _________________________________________________________________ [54]Table of Contents Furthermore, we may not realize the benefits we anticipated when we entered into these transactions |
| In addition, after we have completed an acquisition, our management must be able to assume significantly greater responsibilities, and this in turn may cause them to divert their attention from our existing operations |
| Any of the foregoing could have a material adverse effect on our business and results of operations |
| Our level of indebtedness and the terms of our indebtedness could adversely affect our business and liquidity position |
| As of December 31, 2005, our outstanding indebtedness was dlra90dtta8 million, and we had cash and cash equivalents on hand of dlra45dtta5 million |
| We expect that our indebtedness may increase substantially from time to time in the future for various reasons, including fluctuations in operating results, capital expenditures and possible acquisitions |
| Our consolidated indebtedness level could materially affect our business because: • a portion of our cash flow from operations must be dedicated to interest payments on our indebtedness and is not available for other purposes, which amount would increase if prevailing interest rates rise; • it may materially limit or impair our ability to obtain financing in the future; • it may reduce our flexibility to respond to changing business and economic conditions or take advantage of business opportunities that may arise; and • our ability to pay dividends is limited |
| In addition, our credit facility requires us to meet specified financial ratios and limits our ability to enter into various transactions |
| If we default on any of our indebtedness, or if we are unable to obtain necessary liquidity, our business could be adversely affected |
| Our certificate of incorporation contains provisions that may hinder or prevent a change in control of our company |
| Provisions of our certificate of incorporation could make it more difficult for a third party to obtain control of us, even if such a change in control would benefit our stockholders |
| Our Board of Directors can issue preferred stock without stockholder approval |
| The rights of common stockholders could be adversely affected by the rights of holders of preferred stock that we issue in the future |
| These provisions could discourage a third party from obtaining control of us |
| Such provisions may also impede a transaction in which our stockholders could receive a premium over then current market prices and our stockholders &apos ability to approve transactions that they consider in their best interests |