| BTU INTERNATIONAL INC ITEM 1A RISK FACTORS Risks Relating to Our Business We are subject to cyclical downturns in the electronics and semiconductor industries |
| Recent favorable financial trends in our business may not be sustained |
| Our business depends predominantly on the capital expenditures of electronics and semiconductor manufacturers, which in turn depend on current and anticipated market demand for printed circuit boards and integrated circuits and the products that use them |
| The electronics and semiconductor industries have historically been cyclical and have experienced periodic downturns that have had a material adverse effect on the demand for electronic and semiconductor processing equipment, including equipment that we manufacture and market |
| During periods of declining demand, we may have difficulty aligning our costs with prevailing market conditions, as well as motivating and retaining key employees |
| In particular, our inventory levels during periods of reduced demand may be higher than optimal, and we may be required to make inventory valuation adjustments in future periods |
| During periods of rapid growth, on the other hand, we may fail to acquire and/or develop sufficient manufacturing capacity to meet customer demand, and we may fail to hire and assimilate a sufficient number of qualified people |
| Our business may be adversely affected if we fail to respond to rapidly changing industry cycles in a timely and effective manner |
| We have shifted a significant and growing portion of our production capacity to a new and expanding manufacturing facility in Shanghai, China |
| We may encounter manufacturing problems associated with managing these operations |
| In 2004, we began manufacturing and material sourcing operations in a facility in Shanghai, China |
| The volume of our products produced in China recently reached approximately a quarter of our total production and we expect this portion to continue to increase substantially in 2006 |
| The successful operation of our facility in China is important to our ability to remain profitable and competitive |
| We may encounter difficulty with the management, technical and administrative organization requirements of doing business in China |
| If we are not successful in managing our operation in China, our business and profitability will be adversely affected |
| During 2005, we began construction of additional facilities in China, and we will need to execute this expansion successfully to realize the benefit of our China operations in 2006 and beyond |
| 8 _________________________________________________________________ [62]Table of Contents In the past year, we have substantially improved our global supply chain and reduced our material costs |
| Failure to maintain these cost reductions would negatively affect our profit margins |
| In the past year, we have substantially improved our global supply chain and reduced our materials costs |
| These efforts have resulted in a major improvement in gross margins in our Pyramax product line |
| While continuous improvement in the supply chain is a key strategic imperative, we may not be successful in achieving our cost reduction goals, in which case further increases in our gross margins would not be achieved |
| If our costs increase, our gross margin gains will erode |
| This could be caused by foreign exchange trends, supplier cost increases, increase in fuel costs and other factors |
| Sales of our products to the energy generation markets are subject to substantial risks |
| The developing fuel cell sector of the energy markets is in an early stage of product development, without any guarantees of commercial success |
| There is considerable risk that this technology may not succeed and our sales to this market may not develop |
| We have only recently expanded our product offerings to the fuel cell sector of the energy market |
| Given our limited experience in this segment of the energy generation market, we may encounter problems growing this part of our business |
| Solar Energy |
| The solar energy sector is dependent upon continuation of governmental subsidies that may not continue and the supply of materials that may be constrained |
| A decline in these subsidies would reduce our ability to grow our business in this market segment |
| The solar energy sector also depends on the availability of raw materials such as silicon |
| Nuclear Energy |
| The market for nuclear fuel pellets used in power generation is dependent upon further growth in nuclear power production |
| Consequently, without growth in the production of nuclear power, our opportunities to grow in this area will be limited |
| In addition, we may need export licenses to supply this type of equipment to several countries |
| If we are unable to increase sales and reduce costs, our profitability may be affected negatively |
| Although we generated net income of dlra4dtta6 million in 2005, we had generated net losses in each of the previous four fiscal years |
| Our increased net income was due mainly to a combination of a 21dtta5prca increase in net sales and an increase in gross margin from 24dtta0prca to 35dtta9prca, resulting in an 81dtta4prca increase in gross profit |
| We attribute this increase in gross profit primarily to reduced costs resulting from better procurement management in the US and our global sourcing of materials, as well as manufacturing efficiencies achieved with the transition of a portion of our production to China |
| We may not experience comparable cost reductions in future periods |
| Because we compete, in part, based on our reputation for high quality, a malfunction or other problem with any of our products could undermine our ability to increase or maintain our revenues |
| In addition, our reported net income will be negatively impacted when we begin to expense stock options pursuant to Statement of Financial Accounting Standards (SFAS) Nodtta 123 (revised 2004), “Share-Based Payment,” (SFAS Nodtta 123(R)) which will increase our reported operating expenses |
| We expect to recognize the effects of SFAS Nodtta 123(R) in our financial statements beginning in the first quarter of 2006 |
| Our future success will depend on our ability to effectively develop and market our products against those of our competitors |
| The industry in which we compete is extremely competitive |
| Some of our competitors have substantially greater financial, engineering, manufacturing and customer support capabilities and offer more extensive product offerings |
| If customers prefer products offered by our competitors, we will have difficulty maintaining or increasing our revenue |
| Our principal competitors for solder reflow systems are Vitronics-Soltec, Heller, Furakawa, ERSA, Rehm and Electrovert |
| Our principal competitors for advanced 9 _________________________________________________________________ [63]Table of Contents semiconductor packaging are Sikama, SEMIgear and Heller |
| Our systems for the energy generation markets and other applications compete primarily against products offered by SierraTherm, Centrotherm and Harper |
| We expect our competitors to continue to improve the design and performance of their current products and to introduce new products with improved performance capabilities |
| Our failure to introduce new products in a timely manner, or the introduction by our competitors of products with perceived or actual advantages, could result in reduced sales of, or lower margins on, our products |
| In future years, we expect to face increased competition based on price, particularly from companies in Asia |
| If we are unable to reduce the costs of our products or introduce new lower cost products, we may lose sales to these competitors |
| Our international sales and operations are subject to the economic, political, legal and business environments of the countries in which we do business, and our failure to operate successfully or adapt to changes in these environments could cause our international sales and operations to be limited or disrupted |
| Our international sales accounted for 83dtta8prca of our consolidated revenue for 2005 |
| We expect to continue to generate a significant percentage of our revenue outside the United States for the foreseeable future |
| In addition, we have direct investments in a number of subsidiaries outside of the US, primarily in Asia and Europe |
| Our international operations could be limited or disrupted, and the value of our direct investments may be diminished, by any of the following: • fluctuations in currency exchange rates; • the imposition of governmental controls; • import and export license requirements; • political instability; • difficulties enforcing contractual and intellectual property rights; • terrorist activities and armed conflict; • restrictions on direct investments by foreign entities and trade restrictions; • changes in tax laws and tariffs; • costs and difficulties in staffing and managing international operations; and • longer payment cycles |
| Additionally, we are subject to the Foreign Corrupt Practices Act, which may place us at a competitive disadvantage to foreign companies that are not subject to similar regulations |
| We recognize foreign currency gains or losses arising from our operations in the period in which we incur those gains or losses |
| As a result, currency fluctuations among the US dollar and the currencies in which we do business have caused foreign currency transaction gains and losses in the past and will likely do so in the future |
| Because of the number of currencies involved, the variability of currency exposures and the potential volatility of currency exchange rates, we may suffer foreign currency transaction losses in the future due to the effect of exchange rate fluctuations |
| A majority of our revenue is generated from sales in the Asia Pacific region |
| Our operations are particularly vulnerable to instability in this region and competition from organizations based in this region |
| During 2005, 52dtta6prca of our revenue was generated from sales in the Asia Pacific region |
| Political or economic instability in any of the major Asia Pacific economies may adversely impact the demand for capital equipment, including equipment of the type we manufacture and market |
| In addition, we face competition from a number of suppliers based in the Asia Pacific region that have certain advantages over 10 _________________________________________________________________ [64]Table of Contents US suppliers, including us |
| These advantages include, among other things, proximity to customers, favorable tariffs and affiliation with significantly larger organizations |
| In addition, changes in the amount or price of electronics produced in the Asia Pacific region could negatively impact spending by our customers |
| Our business systems to manage our Chinese operations are still being developed |
| Our supply chain management process in China is manual in nature which limits our global material visibility |
| Although we are evaluating, upgrading and implementing new enterprise resource planning and material resource planning systems, we may not be successful in doing so |
| As our Chinese operations grow, the risks associated with a lack of advanced enterprise resource planning and material resource planning systems increase and could disrupt our business |
| Our primary computer business system in the US is outdated |
| A significant malfunction could disrupt our business operations |
| Our US manufacturing business system is at the end of its life, potentially posing a risk to the operation of our business |
| Some of the computer system’s hardware and software have limited support, which could result in an interruption in business activities |
| Solutions to address these risks are being developed but may not be successful |
| Even if our current system does not malfunction, it may not be sufficient to continue to support our operations |
| Some of the requirements of Sarbanes-Oxley affect us as a small company disproportionately, and we may not be able to comply in a timely manner despite substantial effort and expense |
| The Sarbanes-Oxley Act of 2002 imposed many new requirements on public companies, the most significant of which involves the documentation, testing and reporting of the effectiveness of our internal control over financial reporting |
| Although we are not required to be in compliance until our annual report for the year ended December 2006, we have already begun documenting and testing our internal controls in a way that we have never before been required to do |
| We expect this effort will involve substantial time and expense |
| In part because we limited the resources we devoted to this effort when we were recently incurring losses, we cannot be sure that we will be able to complete the task in a timely manner or that our internal controls will meet the standards that are currently required |
| In connection with our efforts to date, we have reviewed various significant control deficiencies identified by our registered public accounting firm |
| These deficiencies include, among other things, a computer accounting system that does not meet our current and future needs, the lack of a well defined and documented disaster recovery system and the need to improve and update the documentation of our policies, procedures, and related internal controls surrounding our accounting and financial reporting functions |
| Although we are not yet required to report on our assessment of the effectiveness of our internal control over financial reporting, and provide the required auditor attestation, until at least the end of the next fiscal year, there is a reasonable likelihood that our registered public accounting firm will inform us of one or more material weaknesses before we complete our compliance and remediation efforts |
| We are working to address the issues raised by these control deficiencies, but we may not be successful in remediating them within the required time frame |
| If we fail to maintain positive relationships with key personnel, we may be unable to successfully grow our business |
| Our future operating results depend substantially upon the continued service of our key personnel, some of whom are not bound by employment or non-competition agreements |
| Our future operating results also depend in significant part upon our ability to attract and retain qualified management, manufacturing, technical, engineering, marketing, sales and support personnel |
| Competition for qualified personnel, particularly those with technical skills, is intense, and we may fail to attract and retain qualified personnel |
| Our business, financial condition and results of operations could be materially adversely affected by the 11 _________________________________________________________________ [65]Table of Contents loss of any of our key employees, by the failure of any key employee to perform in his or her current position, or by our inability to attract and retain skilled employees |
| Failure of critical suppliers to deliver sufficient quantities of parts in a timely and cost-effective manner would adversely impact our operations |
| We use numerous vendors to supply components for the manufacture of our products |
| We do not use multiple qualified suppliers for all of our parts |
| Some key parts may only be available from a single supplier |
| Accordingly, we may experience problems in obtaining adequate and reliable quantities of various components |
| In addition, suppliers may cease manufacturing certain components that are difficult to replace without significant reengineering of our products |
| Our results of operations will be materially adversely impacted if we are unable to obtain adequate supplies of components in a timely and cost effective manner |
| The occurrence of natural disasters in the Asia Pacific region may adversely impact our operations and sales |
| We have an expanding engineering and manufacturing facility in China, and the majority of our sales are made to destinations in the Asia Pacific region |
| This region is known for being vulnerable to natural disasters and other risks, such as earthquakes, floods and avian (bird) flu, which at times have disrupted the local economies |
| A significant earthquake or health crisis could materially affect our operating results |
| We are not insured for most losses and business interruptions of this kind, and we do not have redundant, multiple site capacity in the event of a natural disaster |
| Provisions in our organizational documents could prevent or frustrate attempts by stockholders to replace our current management and could make acquisitions more difficult |
| Our certificate of incorporation and by-laws contain provisions that could make it more difficult for a third party to acquire us without the consent of our board of directors |
| Our certificate of incorporation provides that our stockholders may not take action by written consent |
| This provision may have the effect of preventing or hindering attempts by our stockholders to replace our current management |
| Furthermore, Delaware law prohibits a corporation from engaging in a business combination with any holder of 15prca or more of its capital stock until the holder has held the stock for three years unless, among other possibilities, the corporation’s board of directors approves the transaction |
| Our board of directors may use this provision to prevent changes in our management |
| Also, our board of directors may adopt additional anti-takeover measures in the future |
| Our officers and directors may be able to block proposals for a change in control |
| Paul J van der Wansem, our chairman and chief executive officer, beneficially owns approximately 17dtta5prca of our outstanding common stock as of December 31, 2005 |
| Due to this concentration of ownership, Mr |
| van der Wansem may be able to prevail on all matters requiring a stockholder vote, including: • the election of directors; • the amendment of our organizational documents; or • the approval of a merger, sale of assets, or other major corporate transaction |