| ARTESYN TECHNOLOGIES INC Item 1A Risk Factors The following discussion should be read in conjunction with our December 30, 2005 Consolidated Financial Statements and related notes |
| With the exception of historical information, the matters discussed below may include “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 that involves risks and uncertainties |
| Forward-looking statements typically use words or phrases such as “estimate,” “plans,” “projects,” “anticipates,” “continuing,” “ongoing,” “expects,” “believes,” or words of similar import |
| We caution readers that a number of important factors, as well as factors discussed in our other reports filed with the SEC, could affect our actual results and cause them to differ materially from those expressed in the forward-looking statements |
| Forward-looking statements included in this Annual Report on Form 10-K are made only as of the date hereof, based on information available as of the date hereof, and subject to applicable law to the contrary, we assume no obligation to update any forward looking-statements |
| 7 _________________________________________________________________ Risks Associated with Our Pending Merger with Emerson On February 1, 2006, we entered into an Agreement and Plan of Merger with Emerson |
| Upon consummation of the merger, each share of Artesyn common stock issued and outstanding will be automatically converted into the right to receive dlra11dtta00 in cash and Artesyn will become a wholly-owned subsidiary of Emerson |
| Failure to complete the merger with Emerson could materially and adversely affect our results of operations and our stock price |
| Consummation of the merger is subject to certain conditions, including antitrust approvals in the United States (for which early termination of the waiting period required under the HSR Act has been granted as of March 3, 2006) and Germany, approval of the merger by Artesyn shareholders, the absence of a material adverse effect on the business of Artesyn and its subsidiaries, taken as a whole, and a limited number of other closing conditions |
| We cannot provide assurance that these conditions will be satisfied or waived, that the necessary approvals will be obtained, or that we will be able to successfully consummate the merger as currently contemplated under the merger agreement or at all |
| If the merger is not consummated: • the market price of our common stock may decline to the extent that the current market price includes a market assumption that the merger will be completed; • we will remain liable for significant transaction costs, including legal, accounting, financial advisory and other costs relating to the merger; • we may experience a negative reaction to the termination of the merger from our customers, suppliers, distributors or partners which may adversely impact our future operating results; and • under some circumstances, we may have to pay a termination fee to Emerson in the amount of dlra15 million and reimburse Emerson for its expenses incurred in connection with the transaction, up to dlra2dtta5 million |
| The occurrence of any of these events individually or in combination could have a material adverse effect on our results of operations and our stock price |
| In addition, if the merger agreement is terminated and our Board of Directors seeks another merger or business combination, we may not be able to find a party willing to pay a price equivalent to or more attractive than the price Emerson has agreed to pay |
| Obtaining required approvals and satisfying closing conditions relating to the merger or other developments may delay or prevent completion of the merger |
| Completion of the merger with Emerson is conditioned upon, among other things, the expiration or termination of any required waiting periods under the HSR Act (for which early termination of the required waiting period has been granted as of March 3, 2006), as well as under comparable laws in Germany |
| The requirement for these governmental approvals could delay the completion of the merger for a significant period of time |
| No assurance can be given that these approvals will be obtained or that the required conditions to closing will be satisfied |
| In connection with the granting of these consents and authorizations, governmental authorities may impose conditions on completion of the merger or require changes to the terms of the merger and the merger agreement |
| Such conditions or changes may not be acceptable to the party or if agreed to by the parties, may jeopardize or delay completion of the merger or may reduce the anticipated benefits of the merger |
| Customer, supplier, distributor and partner uncertainty about the merger or general effects of the merger on our customer, supplier, distributor and partner relationships may have an adverse effect on our operating results, whether or not the merger is completed |
| Some of our existing or potential customers may, in response to the announcement, pendency or consummation of the merger, delay or defer their purchases of our products |
| In addition, customers and prospective customers may choose not to award us new design programs for future products or to reduce or eliminate purchases of our current products because of uncertainty about the new 8 _________________________________________________________________ combined company’s ability to provide products in a satisfactory manner |
| In many instances, we and Emerson serve the same customers, and some of these customers are likely to decide that it is desirable to have additional or different suppliers, as is the practice in our industry, thereby reducing the new combined company’s total share of the market |
| Furthermore, Emerson’s and our respective suppliers, distributors and partners may have concerns regarding uncertainty about their future relationship with the combined company and may seek to modify or terminate existing agreements or reduce or limit their relationship with us or with Emerson until or after the merger is completed |
| As a result, revenues that may have ordinarily been received by us or Emerson may be delayed or not earned at all, product development schedules may be adversely impacted, costs of components may increase and/or cost reductions that would ordinarily have been achieved might be delayed or not achieved at all, whether or not the merger is completed |
| Diversion of management attention to the merger and employee uncertainty regarding the merger could adversely affect our business, financial condition and operating results |
| The merger has required, and will continue to require, a significant amount of time and attention from our management, with attention to closing matters and transition planning for the merger expected to place a significant burden on our management and our internal resources until the merger is completed |
| The diversion of management attention away from normal operational matters and any difficulties encountered in satisfying closing conditions or the transition planning process could harm our business, financial condition and operating results |
| In addition, as a result of the merger, current and prospective employees may experience uncertainty about their future roles within the new combined company |
| This uncertainty may adversely affect our ability to retain or recruit key management, sales, marketing and technical personnel |
| Any failure to retain key personnel could have an adverse effect on us prior to the consummation of the merger or on the business of the new combined company after completion of the merger |
| If the merger is not consummated, we may need to make significant changes in our operations or corporate structure |
| If the merger with Emerson is not approved by our shareholders or does not close for any other reason, including the reasons listed above, we may decide to pursue alternative strategic actions which could result in a fundamental change to our operational and/or corporate structure |
| It is uncertain whether one or more of these changes in our operations or corporate structure would provide more or less value to our shareholders than the pending merger |
| A class action lawsuit that seeks to prevent the merger has been filed |
| On March 2, 2006, Samco Partners, an entity alleging to be an Artesyn shareholder, filed a purported class action complaint in the Circuit Court of the Fifteenth Judicial Circuit in Palm Beach County, Florida against Artesyn, substantially all of our directors and Emerson challenging the proposed merger |
| The complaint alleges that our directors breached their fiduciary duties in connection with the approval of the merger, that the defendants did not fully and fairly disclose certain material information with respect to the approval of the merger in our preliminary proxy statement filed with the SEC on February 23, 2006 and that Emerson aided and abetted our directors in their alleged breaches of fiduciary duty |
| The complaint seeks injunctive relief against the consummation of the merger or, alternatively, to rescind it |
| It also seeks an award of damages for the alleged wrongs asserted in the complaint |
| The lawsuit is in its preliminary stages |
| We believe that the lawsuit is without merit and intend to defend it vigorously |
| If we are not successful in defending this lawsuit, the completion of the merger could be jeopardized or materially delayed and such a result could have a material adverse effect on our business, operating results and financial condition |
| Risks Associated with Our Business Our future profitability depends on our ability to successfully develop and market our products in a volatile, competitive industry characterized by rapidly changing prices, technologies and customer demand |
| The markets for our products are characterized by rapidly changing technologies, changing customer demands, evolving industry standards, frequent new product introductions and, in some cases, short product life cycles |
| The development of new, technically advanced products is a complex and uncertain process requiring high levels of innovation and investment, as well as an accurate anticipation of technological and market trends |
| To respond to the needs of our customers in the communications industry, we must continuously develop new and more advanced products at lower prices |
| We are making significant investments in next generation technologies, but there can be no assurance that these investments will lead to additional revenue and profitability |
| Our inability to properly assess developments in the communications industry or to anticipate the needs of our customers could cause us to lose business with our current customers and prevent us from obtaining new customers |
| Additionally, because our products are 9 _________________________________________________________________ incorporated into our customers’ products as components or sub-systems, our future profitability depends on the success of our customers’ products and the health of the communications industry in general |
| Price erosion due to competition could have a material effect on our profitability |
| We operate in an industry where quality, reliability, stability, product capability and other factors influence our customers’ decisions to purchase our products |
| Because of the highly competitive nature of our industry, the price of our products is also a major factor, and it could become a more important factor the more competitive our industry becomes |
| The competitive nature of our industry could result in price reductions, reduced profit margins and loss of market share, each of which would adversely affect our business, operating results and financial condition |
| Our strategies to manage the competition include, but are not limited to, maintaining an appropriate level of investment in research and development and sustaining and expanding relationships with our customers in the high-growth sectors of our industry; however, there can be no assurance that such strategies will be effective |
| We face risks by having most of our manufacturing capacity concentrated in our China facility |
| The closure of our facility in Hungary in 2005 will further concentrate the manufacturing capacity of our Power Conversion segment to our low-cost facility in China |
| The cost structure of the facility and its relationship to our customers’ expectations for the price of our products makes our future success dependent on the ability to efficiently utilize our China manufacturing location |
| International operations, however, are subject to inherent risks, including unexpected changes in regulatory requirements and tariffs, interruptions in air or sea transportation, political or economic changes, difficulties in staffing and managing foreign operations, foreign currency exchange rates and potentially adverse tax consequences, any or all of which could adversely affect our ability to manufacture our products and deliver those products to our customers |
| We face risks associated with outsourcing the manufacturing of our products |
| We have outsourced the manufacturing of products previously produced in our facility in Hungary to a third party global EMS provider |
| Less than 10prca of our total products will be manufactured by this EMS provider, however, our reliance on this outsourcing arrangement exposes us to a number of risks outside of our immediate control, including the potential absence of adequate capacity, the unavailability of or interruptions in access to certain process technologies and reduced control over delivery schedules, manufacturing yields and costs |
| In the event that the EMS provider is unable or unwilling to continue to manufacture our products in required volumes, we will need to identify and qualify an acceptable additional or alternative outsourcing arrangement, which could result in production delays |
| No assurance can be given that any such source would become available to us or that any such source would be in a position to satisfy our needs and the needs of our customers on a timely basis, if at all |
| Any significant interruption in the supply of our products manufactured under this outsourcing arrangement could result in the delay of shipment of products to our customers, which in turn could have a material adverse effect on our results of operations and customer relationships |
| We rely on significant relationships with a small number of customers and the loss of any of those customers or significant reductions in their purchases of our products could adversely affect our revenue and operating results |
| Our ten largest customers accounted for 71prca of our total sales for the 2005 fiscal year, with sales to Dell Computer and Nortel accounting for approximately 13prca and 10prca of our total 2005 sales, respectively |
| The telecommunications industry has recently experienced a consolidation of both US and non-US companies, as evidenced by the recent merger of AT&T Wireless and Cingular |
| As a result of continued consolidation, it is possible that in fiscal 2006 and subsequent years an even greater percentage of our revenues will be attributable to fewer customers than in the past years |
| While we are “designed in” to and derive revenue from several distinct products with each customer, we do not have long-term contracts with customers and decisions by a small number of our customers to defer their purchasing decisions or to purchase products elsewhere could have a material adverse effect on our business, operating results and financial condition |
| In addition, if we were to experience an unanticipated catastrophic quality issue (ie, a product or design failure), or even a less than catastrophic but significant issue, with one of our customers (especially one of our two largest customers) that threatened our relationship with that customer, the competitive nature of our industry could allow that customer to terminate its relationship with us and move its business to one of our competitors |
| As mentioned above, a majority of our largest customers customarily dual source their major programs, meaning that they purchase comparable products or components from two sources to ensure a reliable supply of component parts for their products |
| If we were to experience supply or quality issues on a dual sourced program, the customer could choose to move a greater percent of their orders to the secondary source without significant disruption to their supply chain but with potentially material adverse effects to us |
| 10 _________________________________________________________________ If demand for our products were to increase, we could face production capacity constraints |
| Our current manufacturing capabilities are in line with the level of production we expect over the near term |
| If demand were to increase drastically from our expectations, we would be forced to add additional production capacity on very short notice |
| If our capacity constraints keep us from fulfilling customers’ orders, it could have a material adverse effect on our results from operations and customer relationships |
| We face risks associated with the sale of our products in foreign locations |
| International sales have been, and are expected to continue to be, an important component of our total sales |
| In 2005, international sales, based on selling location, represented 48prca of our total sales |
| Because our customers do business in international locations, our future success is dependent on our continued growth and our ability to administer our sales operations in foreign markets |
| The success and profitability of our international operations is subject to inherent risks, including unexpected changes in regulatory requirements and tariffs, increased import duties, interruptions in air or sea transportation, political or economic changes, difficulties in managing foreign operations, longer payment cycles, problems in collecting accounts receivable, foreign currency exchange rates and potentially adverse tax consequences, any or all of which could adversely affect our operations |
| Our future profitability may be adversely affected by a disruption in our supply chain |
| As a result of the custom nature of certain of our manufactured products, components used in the manufacture of our products are currently obtained from a limited number of suppliers, and a small percentage of components are purchased from a single vendor |
| Should any of our suppliers have significant issues in designing or manufacturing our components in accordance with quality specifications or related regulations, there could be a disruption in our supply chain while we resolve the issues or transition to a different vendor |
| A change in suppliers, which could take several months to properly transition, could cause a delay in manufacturing, additional manufacturing costs and a possible loss of sales that could adversely affect our future operating results and financial position |
| With an asset-based credit facility, we face risks associated with fluctuating credit availability |
| The amount available for borrowing under our senior credit facility is calculated as a percentage of our domestic accounts receivable and inventory that meet certain criteria as set forth in the credit agreement, minus reserves as determined by our lender |
| Our lender maintains the right to change the advance rates and eligibility criteria for our domestic accounts receivable and inventory and the discretion to change or institute new reserves against our availability |
| Accordingly, the amount available for borrowing under our senior credit facility may be reduced due to the reduction in the amount of our eligible assets resulting from changing market conditions, and the application of or changes to eligibility criteria, as well as the reduction of advance rates and/or the increase or change in reserve amounts, which may be imposed at the discretion of our lender |
| These factors could have the result of reducing the amount we may borrow under the facility at a time when we have a need to borrow additional amounts or requiring repayments under the facility at a time when we do not have adequate cash flow to make such repayments or when such repayments may not be in our best interest due to the economic climate and/or our financial condition at that time |
| These consequences could negatively impact our liquidity and such impact could be material |
| As of December 30, 2005, however, there were no amounts outstanding under our asset-based revolving credit facility |
| The provisions of our credit agreement could affect our ability to enter into certain transactions |
| Our senior credit facility may restrict our ability to enter into certain corporate transactions (including, among other things, the disposition of assets, making certain capital expenditures and forming or acquiring subsidiaries) unless we obtain the prior written consent of Bank of America |
| Because we cannot guarantee that Bank of America will, in all circumstances, provide consent for the specific purposes for which we intend, our ability to enter into certain corporate transactions, to the extent that we may require capital in addition to our cash and investments on hand, may be prohibited or delayed |
| Market consolidation could create companies that are larger and have greater resources than us |
| Our principal competitors include Acbel Polytech (Taiwan), Delta Electronics (Taiwan and Thailand), Emerson, Lite-On (Taiwan), Motorola and Tyco International |
| If our merger with Emerson does not close and two or more of our competitors consolidate, the combined companies would likely create entities with increased market share, customer bases, proprietary technology, marketing 11 _________________________________________________________________ expertise and sales forces and would likely have increased purchasing leverage for acquiring raw materials |
| Such a development may create stronger competitors, which could adversely affect our ability to compete in the markets we serve |
| We face, and might in the future face, intellectual property infringement claims that might be costly to resolve |
| We have, from time to time, received, and may in the future receive, communications from third parties asserting that our products or technology infringe on a third party’s patent or other intellectual property rights |
| Such claims have resulted in litigation in the past, and could result in litigation in the future |
| If we do not prevail in any such litigation, our business may be adversely affected, depending on the technology at issue |
| In addition, our industry is characterized by uncertain and conflicting intellectual property claims and, in some instances, vigorous protection and pursuit of intellectual property rights or positions, which have on occasion resulted in protracted and expensive litigation |
| We cannot make the assurance that intellectual property claims will not be made against us in the future or that we will not be prohibited from using our technologies subject to any such claims or that we will not be required to obtain licenses and make corresponding royalty payments |
| In addition, the necessary management attention to, and legal costs associated with, litigation could have a material adverse effect on our business, operating results and financial condition |
| Our future success could depend on the protection of our intellectual property; costs associated with enforcing our intellectual property rights could adversely affect our operating results |
| We generally rely on patents and trade secret laws to establish and maintain proprietary rights in some of our technology and products |
| While we have been issued a number of patents and other patent applications are currently pending, there can be no assurance that any of the patents will not be challenged, invalidated or circumvented, or that any rights granted under these patents will, in fact, provide us with competitive advantages |
| In addition, there can be no assurance that patents will be issued from pending applications, or that claims on future patents will be broad enough to protect our technology |
| Also, the laws of some foreign countries may not protect our proprietary rights to the same extent as the laws of the United States |
| Litigation may be necessary to enforce our patents and other intellectual property rights, to protect our trade secrets, to determine the validity and scope of the proprietary rights of others or to defend against claims of infringement or invalidity |
| Litigation could result in substantial costs and diversion of resources and could have a significant adverse effect on our operating results |
| Our future profitability may be adversely affected by a change in governmental regulation |
| Our operations are subject to laws, regulations, government policies and product certification requirements worldwide |
| Changes in such laws, regulations, policies or requirements in the United States or in other countries in which we operate or sell our products could result in the need to modify products and could affect the demand for our products, which may involve substantial costs or delays in sales and could have an adverse effect on our future operating results |
| For example, in January 2003 the European Union issued Directive 2002/95/EC of the European Parliament and of the Council, which restricts the use of certain hazardous substances in electrical and electronic equipment |
| This legislation will be effective beginning July 1, 2006 |
| In addition, several of our customers that operate in the regions not affected by this regulation have nevertheless chosen to comply with its provisions to reduce the hazardous impacts on the environment |
| In order to comply with this legislation, we have identified alternative materials and manufacturing processes that have successfully passed our qualification and reliability testing |
| While we expect to be fully compliant with this legislation within the required timeline, failure to achieve compliance could negatively impact our revenue |
| We rely on certain key personnel and a loss of such personnel could adversely affect our business |
| If we lose one or more members of senior management, or if we cannot attract and retain qualified management or technical personnel, our operating results could be adversely affected |
| Our capacity to develop and implement new technology depends on our ability to employ personnel with highly technical skills |
| Competition for such qualified technical personnel is intense due to the relatively limited number of engineers available |
| Increased leverage as a result of the issuance of our convertible debt may harm our financial condition and results of operations |
| At December 30, 2005, we had dlra90 million of outstanding debt as reflected on our consolidated balance sheet included in Item 8 of this Annual Report on Form 10-K If our merger with Emerson is not completed, we may incur additional indebtedness in the future and the terms of the outstanding convertible notes do not restrict our future issuance of indebtedness |
| Our level of indebtedness will have several important effects on our future operations, including, without limitation: 12 _________________________________________________________________ • a portion of our cash flow from operations will be dedicated to the payment of interest required with respect to outstanding indebtedness; • increases in our outstanding indebtedness and leverage will increase our vulnerability to adverse changes in general economic and industry conditions, as well as to competitive pressure; and • depending on the levels of our outstanding debt, our ability to obtain additional financing for working capital, capital expenditures and general corporate and other purposes may be limited |
| Our ability to make payments of principal and interest on our indebtedness depends upon our future performance, which will be subject to the success of the marketing of our products, general economic conditions, industry cycles and financial, business and other factors affecting our operations, many of which are beyond our control |
| If we are not able to generate sufficient cash flow from operations in the future to service our debt, we may be required, among other things: • to seek additional financing in the debt or equity markets; • to refinance or restructure all or a portion of our indebtedness, including our outstanding convertible notes; or • to sell selected assets |
| Such measures might not be sufficient to enable us to service our debt |
| In addition, any such financing, refinancing or sale of assets might not be available on economically favorable terms |
| Our shareholders will be diluted if we issue shares subject to options, warrants, convertible notes and payment of matching contributions under our 401(k) plan |
| As of December 30, 2005, we had reserved the following shares of our common stock for issuance: • 1cmam550cmam000 shares issuable upon exercise of outstanding warrants held by Finestar International Ltd |
| (“Finestar”), which are subject to anti-dilution provisions that provide for adjustments to the exercise price of the warrants for issuances of additional securities below a certain price; • 4cmam897cmam000 shares issuable pursuant to stock options outstanding; • 1cmam796cmam000 shares available for future grant under our stock based compensation plans; • 11cmam161cmam000 shares issuable upon conversion of 5dtta5prca Convertible Senior Subordinated notes issued in August 2003; and • 494cmam000 shares for the purpose of making matching contributions under our 401(k) plan |
| If we do not complete our merger with Emerson, the issuances of some or all of this reserved common stock would dilute our existing shareholders |