| EMS TECHNOLOGIES INC ITEM 1A Risk Factors We believe the risks and uncertainties described below are the most significant risks we face |
| If any of the following risks actually materialize, our business could be harmed |
| Additional risks and uncertainties not presently known to us, or that we currently consider immaterial, may also impair our operations or results |
| In all of those cases, the trading price of our common stock could decline, and investors could lose all or part of their investments |
| Risks Related to Our Business In addition to general economic conditions, both domestic and foreign, which can change unexpectedly and generally affect US businesses with worldwide operations, we are subject to a number of risks and uncertainties that are specific to us or the businesses we operate: Decisions by our customers about the timing and scope of major programs can have a significant effect on our net sales and earnings Major commercial communications infrastructure programs, such as PCS/cellular systems for large urban areas, and large defense programs are important sources of our current and anticipated future net sales |
| Customer decisions as to the nature and timing of these programs can have a significant effect on us, particularly in our EMS Wireless and Defense & Space Systems divisions, and can create volatility in our net sales and earnings |
| If any of our customers were to delay the implementation of, or significantly reduce the scope of, one of these programs, our net sales and earnings would decline |
| If our commercial customers fail to find adequate funding for major potential programs, or our government customers do not receive necessary funding approvals, our net sales would decline |
| To proceed with major programs, our customers typically must obtain substantial amounts of capital, from either governmental or private sources |
| The availability of this capital is directly affected by political developments and by conditions in the private capital markets |
| If adequate funds are not available to our targeted customers for these programs, our expected net sales may be adversely affected |
| Large defense programs are often funded in multiple phases, requiring periodic further funding approvals, which may be withheld for a variety of political, budgetary or technical reasons |
| Such multi-year programs can also be terminated or modified by the government in ways adverse to us and, in many cases, with limited notice and without penalty |
| These developments would reduce our net sales below the levels we would otherwise expect |
| If we cannot continue to rapidly develop, manufacture and market innovative products and services that meet customer requirements for performance and reliability, we may incur development costs that we cannot recover and our net sales and earnings will suffer |
| The process of developing new wireless communications products is complex and uncertain, and failure to anticipate customers’ changing needs and emerging technological trends accurately or to develop or obtain appropriate intellectual property could significantly harm our results of operations |
| In many instances we must make long-term investments and commit significant resources before knowing whether our investments will eventually result in products that the market will accept |
| If our new products are not accepted by the market, our net sales and earnings will decline |
| Competing technology could be superior to ours, and could cause customer orders and net sales to decline |
| The markets in which we compete are very sensitive to technological advances |
| As a result, technological developments by competitors can cause our products to be less desirable to customers, or even to become obsolete |
| Those developments could cause our customer orders and net sales to decline |
| 14 of 81 _________________________________________________________________ [57]Table of Contents Our competitors’ marketing and pricing strategies could make their products more attractive than ours |
| This could cause reductions in customer orders or company profits |
| We operate in highly competitive technology markets, and some of our competitors have substantially greater resources and facilities than we do |
| As a result, our competition may be able to pursue aggressive marketing strategies, such as significant price discounting |
| These competitive activities could cause our customers to purchase our competitors’ products rather than ours, or cause us to increase marketing expenditures or reduce prices, in any such case, causing a reduction of net sales and earnings below expected levels |
| Slow public acceptance of new communications systems could limit purchases by our customers |
| Construction and expansion of new communications systems depend on public demand for the new services |
| As a result, growth rates in our net sales from wireless infrastructure products and proposed high-speed satellite communications systems are likely to be heavily affected by the timing and extent of public willingness to buy mobile and/or broadband communications services |
| If public acceptance of the new systems does not develop as expected, our customers are unlikely to place the level of orders we expect, and our net sales and earnings would also fall short of expectations |
| We may encounter technical problems or contractual uncertainties, which can cause delays, added costs, lost sales, and liability to customers |
| From time to time we have encountered technical difficulties that have caused delays and additional costs in our technology development efforts |
| We are particularly exposed to this risk in new product development efforts, and in fixed-price contracts on technically advanced programs in our Defense & Space Systems unit that require novel approaches and solutions |
| In these cases, the additional costs that we incur are not covered by revenue commitments from our customers, and therefore reduce our earnings |
| In addition, technical difficulties can cause us to miss expected delivery dates for new product offerings, which could cause customer orders to fall short of expectations |
| Some of our products perform mission-critical functions in space applications |
| If we experience technical problems and are unable to adhere to a customer’s schedule, the customer could experience costly launch delays or re-procurements from other vendors |
| The customer may then be contractually entitled to substantial financial damages from us |
| The customer would also be entitled to cancel future deliveries, which would reduce our future revenues and could make it impossible for us to recover our design, tooling or inventory costs, or our remaining commitments to third-party suppliers |
| Due to technological uncertainties in new or unproven applications of technology, our contracts may be broadly defined in its early stages, with a structure to accommodate future changes in the scope of work or contract value as technical development progresses |
| In such cases, management must evaluate these contract uncertainties and estimate the future expected levels of scope of work and likely contract value changes to determine the appropriate level of revenue associated with costs incurred |
| Actual changes may vary from expected changes, resulting in a reduction of net sales and earnings recognized in future periods |
| Our transitions to new product offerings can be costly and disruptive, and could adversely affect our net sales or profitability |
| Because our businesses involve constant efforts to improve existing technology, we regularly introduce new generations of products |
| During these transitions, customers may reduce purchases of older equipment more rapidly than we expect, or may choose not to migrate to our new products, which could result in lower net sales and excessive inventories |
| In addition, product transitions create uncertainty about both production costs and customer acceptance |
| These potential problems are generally more severe if our product introduction schedule is delayed by technical development issues |
| These problems could cause our net sales or profitability to be less than expected |
| 15 of 81 _________________________________________________________________ [58]Table of Contents Our products may inadvertently infringe third party patents, which could create substantial liability to our customers or the third-party patent owners |
| As we regularly develop and introduce new technology, we face risks that our new products or manufacturing techniques may infringe valid patents held or currently being processed by others |
| The earliest that the US Patent Office publishes patents is 18 months after their initial filing, and exceptions exist so that some applications are not published before they issue as patents |
| Thus, we may be unaware of a pending patent until well after we have introduced an infringing product |
| In addition, questions of whether a particular product infringes a particular patent can involve significant uncertainty |
| As a result of these factors, third-party patents may require us to redesign our products and to incur both added expense and delays that interfere with marketing plans |
| We may also be required to make significant expenditures from time to time to defend or pay damages or royalties on infringement claims, or to respond to customer indemnification claims relating to third-party patents |
| Such costs could reduce our earnings |
| If our customers are combined through merger or acquisition, their combined purchases of our products may decline or they may increase their price concession demands, adversely affecting our net sales or earnings |
| The telecommunications service provider industry has undergone, and continues to undergo, a significant reduction in the number of service providers due to industry consolidation |
| Some of these providers are end-users of products sold by our EMS Wireless division |
| Business combinations, such as mergers, often lead the combined entity to reduce the number of suppliers it uses |
| If our customers are combined, they may also demand greater price concessions from their suppliers, which increasingly include the use of reverse auctions |
| Those actions could cause declines in our net sales and earnings |
| We may not be successful in protecting our intellectual property |
| Our unique intellectual property is a critical resource in our efforts to produce and market technically advanced products |
| We primarily seek to protect our intellectual property, including product designs and manufacturing processes, through patents and as trade secrets |
| If we are unable to obtain enforceable patents on certain technologies, or if information we protect as trade secrets becomes known to our competitors, then competitors may be able to copy or otherwise appropriate our technology, we would lose competitive advantages, and our net sales and operating income could decline |
| In any event, litigation to enforce our intellectual property rights could result in substantial costs and diversion of resources that could have a material adverse effect on our operations regardless of the outcome of the litigation |
| We may also enter into transactions in countries where intellectual property laws are not well developed and legal protection of our rights may be ineffective |
| For the year ended December 31, 2005, we identified two material weaknesses and several significant deficiencies in our internal control over financial reporting |
| If we fail to maintain effective internal control over financial reporting, we may not be able to provide timely and accurate financial statements |
| This could cause investors to lose confidence in our reported financial results and have a negative effect on the trading price of our securities |
| We have taken steps to correct identified deficiencies in our internal control over financial reporting |
| However, we cannot be certain that we will not identify any material weaknesses in the future |
| If a material weakness were to be identified with respect to our internal control over financial reporting, we would not be able to conclude that our internal control over financial reporting was effective |
| This could result in the inability of our independent registered public accounting firm to deliver an unqualified report, or any report, on our internal control over financial reporting |
| Ineffective internal control over financial reporting also could result in a misstatement of our operating results or prevent us from meeting our reporting obligations under the federal securities laws, which could cause investors to lose confidence in our reported financial information and have a negative effect on the trading price of our securities |
| Our success depends on our ability to attract and retain a highly skilled workforce |
| Because our products and programs are technically sophisticated, we must attract and retain employees with advanced technical and program-management skills |
| Many of our senior management personnel also possess advance knowledge of the business in which we operate and are otherwise important to our success |
| Other 16 of 81 _________________________________________________________________ [59]Table of Contents employers also often recruit persons with these skills, both generally and in focused engineering fields |
| If we are unable to attract skilled employees and senior management, our performance obligations to our customers could be affected and our net sales could decline |
| The future success of our business strategies and operations could depend on effective succession plans as senior management members reach retirement |
| Certain of our senior managers, including our Chief Executive Officer, have reached or are approaching typical retirement age |
| Effective transition to their successors will be important to the future success of our business strategies and operations |
| Our Board of Directors is responsible for developing succession plans for senior management of the Company, including our Chief Executive Officer |
| The Board has retained an executive search firm to assist in the identification and evaluation of potential candidates for Chief Executive Officer |
| No fixed schedule is in effect for any such transition, and we expect that our Chief Executive Officer will continue to serve in his current capacity until a suitable successor is appointed |
| We depend on highly skilled suppliers, who may become unavailable or fail to achieve desired levels of technical performance |
| In addition to our requirements for basic materials and electronic components, our advanced technological products often require sophisticated subsystems supplied or cooperatively developed by third parties |
| To meet those requirements, our suppliers must have specialized expertise, production skills and economies of scale, and in some cases there are only a limited number of qualified potential suppliers |
| Our ability to perform according to contract requirements, or to introduce new products on the desired schedule, can be heavily dependent on our ability to identify and engage appropriate suppliers, and on the effectiveness of those suppliers in meeting our development and delivery objectives |
| If these highly skilled suppliers are unavailable when needed, or fail to perform as expected, our ability to meet our performance obligations to our customers could be affected and our net sales and earnings could decline |
| Changes in regulations that limit the availability of radio frequency licenses or otherwise result in increased expenses could cause our net sales or earnings to decline |
| Many of our products are incorporated into wireless communications systems that are regulated in the US by the Federal Communications Commission and internationally by other government agencies |
| Changes in government regulations could reduce the growth potential of our markets by limiting either the access to or availability of frequency spectrum |
| In addition, other changes in government regulations could make the competitive environment more difficult by increasing costs or inhibiting our customers’ efforts to develop or introduce new technologies and products |
| Also, changes in government regulations could substantially increase the difficulty and cost of compliance with government regulations for both our customers and us |
| All of these factors could result in reductions in our net sales and earnings |
| The export license process for space products has become uncertain, increasing the chance that we may not obtain required export licenses in a timely or cost-effective manner |
| Our products for use on commercial satellites are included on the US Munitions List of the US International Traffic in Arms Regulations and are subject to State Department licensing requirements |
| The licensing process for our products for use on commercial satellite and many of our other products is time-consuming, and political considerations can increase the time and difficulty of obtaining licenses for export of technically advanced products |
| The license process may prevent particular sales, and generally has created schedule uncertainties that encourage foreign customers, such as those in Western Europe, to develop internal or other foreign sources rather than use US suppliers |
| If we are unable to obtain required export licenses when we expect them or at the costs we expect, our net sales and earnings could be adversely affected |
| 17 of 81 _________________________________________________________________ [60]Table of Contents Export controls on space technology restrict our ability to hold technical discussions with foreign customers, suppliers and internal engineering resources, which reduces our ability to obtain sales from foreign customers or to perform contracts with the desired level of efficiency or profitability |
| As a result, we are restricted in our ability to hold technical discussions between US personnel and current or prospective non-US customers or suppliers, between Canadian personnel and current or prospective US customers or suppliers, and between US employees and our Canadian or other non-US employees |
| These restrictions reduce our ability to win cross-border space work, to utilize cross-border supply sources, to deploy technical expertise in the most effective manner, and to pursue cooperative development programs involving our US and Canadian space facilities |
| Economic or political conditions in other countries could cause our net sales or earnings to decline |
| International sales significantly affect our financial performance |
| Approximately dlra81 million, dlra88 million and dlra86 million, or 26dtta0prca, 35dtta8prca and 35dtta2prca of our net sales for 2005, 2004, and 2003, respectively, were derived from customers residing outside of the US Adverse economic conditions in our customers’ countries, mainly in Western Europe, Latin America and the Pacific Rim, have affected us in the past, and could adversely affect future international revenues in all of our businesses, especially from our wireless local-area network and PCS/cellular infrastructure businesses |
| Unfavorable currency exchange rate movements can adversely affect the marketability of our products by increasing the local-currency cost |
| In addition to these economic factors directly related to our markets, there are risks and uncertainties inherent in doing business internationally that could have an adverse effect on us, such as potential adverse effects of political instability or changes in governments, of changes in foreign income tax laws, and of restrictions on funds transfers by us or our customers, as well as of unfavorable changes in laws and regulations governing a broad range of business concerns, including proprietary rights, legal liability, and employee relations |
| All of these factors could cause significant harm to our net sales or earnings |
| Our net sales of wireless communications could be affected by public health concerns |
| Among the factors that could affect the growth of markets for new wireless communications systems is the potential concern about alleged health risks relating to radio frequency (“RF”) emissions |
| Media reports and some studies have suggested that RF emissions from wireless handsets and cell sites may be associated with various health problems, including cancer, and may interfere with electronic medical devices, including hearing aids and pacemakers |
| In addition, lawsuits have been filed against participants in the wireless industry alleging various adverse health consequences as a result of wireless equipment emissions |
| Additional studies of RF emissions are ongoing |
| Consumers may be discouraged from purchasing new wireless services if consumers’ health concerns over RF emissions increase |
| In addition, concerns over RF emissions could lead to increased regulation by government authorities to introduce further restrictions on the location and operation of wireless-related hardware, or could result in wireless companies being held liable for costs or damages associated with these concerns |
| If our wireless customers were to become subject to increased governmental regulation or liable for significant damages in connection with these lawsuits, our net sales and earnings could be adversely affected |
| Unfavorable currency exchange rate movements could result in foreign exchange losses and cause our earnings to decline |
| We have international operations, and we can use forward currency contracts to reduce – but not entirely eliminate – the earnings risk from holding certain assets and liabilities in different currencies |
| Our SATCOM division derives a major portion of its sales from agreements with US customers in US dollars; a stronger Canadian dollar would increase our costs relative to our US net sales, and we are unlikely to recover these increased costs through higher US-dollar prices due to competitive conditions |
| 18 of 81 _________________________________________________________________ [61]Table of Contents Our net sales in certain markets depend on the availability and performance of other companies with which we have marketing relationships |
| With respect to some applications, including mobile satellite communications, we are seeking to develop marketing relationships with other companies that have, for example, specialized software and established customer service systems |
| In other markets, such as wireless local-area networks, a major element of our distribution channels is a network of value-added retailers and independent distributors |
| In foreign markets for many of our products we are often dependent on successful working relationships with local distributors and other business personnel |
| If we are unable to identify and structure effective relationships with other companies that are able to market our products, our net sales could fail to grow in the ways we expect |
| Customer orders in backlog may not result in sales |
| Our order backlog represents firm orders for products and services |
| However, our customers may cancel or defer orders for products and services, in most cases without penalty |
| Cancellation or deferral of an order in our Defense & Space Systems business typically involves penalties and termination charges for costs incurred to date, but these termination penalties would still be considerably less than what we would have expected to earn if the order could have been completed |
| We make management decisions based on our backlog, including hiring of personnel, purchasing of materials, and other matters that may increase our production capabilities and costs whether or not the backlog is converted into revenue |
| Cancellations, delays or reductions of orders could adversely affect our results of operations and financial condition |
| Our products typically carry warranties, and the costs to us to repair or replace defective products could exceed the amounts we have experienced historically |
| Most of our products carry warranties of between one and three years; however, we have some products with warranties of up to 10 years, and we depend on our reputation for reliability and customer service in our competition for sales |
| If our products are returned for repair or replacement under warranty or otherwise under circumstances in which we assume responsibility, we can incur significant costs that may be in excess of the reserves that we have established based on our historical warranty cost levels, which would reduce our earnings |
| For example, during 2005, we incurred unexpected costs to replace a non-functioning component of our remotely controllable electrical downtilt antennas |
| Changes in our consolidated effective income tax rate and the related effect on our results can be difficult to predict |
| We earn taxable income in various tax jurisdictions around the world |
| The rate of income tax that we pay in each jurisdiction can vary significantly, due to differing income tax rates and benefits that may be available in some jurisdictions and not in others |
| In particular, our earnings in Canada are subject to very low income taxes due to the substantial pool of research-related tax incentives that we have accumulated |
| As a result, our overall effective income tax rate depends upon the relative annual income that we expect to earn in each of the tax jurisdictions where we do business |
| As a result, even though our expectations for consolidated earnings before taxes could remain unchanged, our income tax expenses and net earnings may still increase or decrease, depending upon changes in the jurisdictions in which we expect to have earnings |
| Our business and revenue growth could be limited by our inability to obtain additional financing |
| Our current cash and available credit facilities may not be sufficient enough to finance significant synergistic acquisitions to complement our technical and product capabilities |
| Although the proceeds of our recent public stock offering, and of our recent sales of discontinued operations, have provided us with substantially greater flexibility in funding growth efforts and moderately-sized acquisitions, we may continue to need other sources of financing to support any large acquisitions that we believe would contribute to our growth and profitability |
| We may not be able to secure sufficient additional credit or other financing, on acceptable terms, to take advantage of major growth opportunities of this nature |
| 19 of 81 _________________________________________________________________ [62]Table of Contents We may not effectively manage possible future growth, which could result in reduced earnings |
| Historically, we have experienced broad fluctuations in demand for our products and services |
| These changes in demand have depended on many factors and have been difficult to predict |
| In recent years, there has been a general growth trend in certain of our businesses, as well as increasing complexity in the technologies and applications involved |
| These changes in our businesses place significant demands on both our management personnel and our management systems for information, planning and control |
| If we are to achieve further strong growth on a profitable basis, our management must identify and exploit potential market opportunities for our products and technologies, while continuing to manage our current businesses effectively |
| Furthermore, our management systems must support the changes to our operations resulting from our business growth |
| If our management and management systems fail to meet these challenges our business and prospects will be adversely affected |
| We may make acquisitions and investments that could adversely affect our business |
| To support growth, we have made and may continue to make acquisitions of and investments in businesses, products and technologies that could complement or expand our businesses |
| However, if we should be unable to successfully negotiate with a potential acquisition candidate, finance the acquisition, or effectively integrate the acquired businesses, products or technologies into our existing business and products, our net sales and earnings could be adversely affected |
| Furthermore, to complete future acquisitions, we may issue equity securities, incur debt, assume contingent liabilities or the risk of unknown liabilities, and may incur amortization expenses and write-downs of acquired assets as a result of future acquisitions, which could cause our earnings to decline |
| Risks Related to our Common Stock In addition to risks and uncertainties related to our operations, there are investment risks that could adversely affect the return to an investor in our common stock, and also could adversely affect our ability to raise capital for financing future operations |
| Our quarterly results are volatile and difficult to predict |
| If our quarterly performance results fall short of market expectations, the market value of our shares is likely to decline |
| The quarterly net sales and earnings contributions of some of our business units are heavily dependent on customer orders or product shipments in the final weeks or days of the quarter |
| Due to some of the risks related to our business discussed above, it can be difficult for us to predict the timing of receipt of major customer orders, and we are unable to control timing decisions made by our customers |
| This can create volatility in quarterly results, and hinders our ability to determine before the end of each quarter whether quarterly earnings will in fact meet prevailing expectations |
| The market price for our shares is likely to be adversely affected by quarterly earnings results that are below analyst and market expectations |
| Our share price may fluctuate significantly, and an investor may not be able to sell our shares at a price that would yield a favorable return on investment |
| The market price of our stock will fluctuate in the future, and such fluctuations could be substantial |
| Price fluctuations may occur in response to a variety of factors, including: • actual or anticipated operating results, • the limited average trading volume and public float for our stock, which means that orders from a relatively few investors can significantly impact the price of our stock, independently of our operating results, • announcements of technological innovations, new products or new contracts by us, our customers, our competitors or our customers’ competitors, • government regulatory action, 20 of 81 _________________________________________________________________ [63]Table of Contents • developments with respect to wireless and satellite communications, and • general market conditions |
| In addition, the stock market has from time to time experienced significant price and volume fluctuations that have particularly affected the market prices for the stocks of technology companies, and that have been unrelated to the operating performance of particular companies |
| Future sales of our common stock may cause our stock price to decline |
| Our outstanding shares are freely tradable without restriction or further registration, and shares reserved for issuance upon exercise of stock options will also be freely tradable upon issuance, in each case unless held by affiliates |
| Sales of substantial amounts of common stock by our shareholders, including those who have acquired a significant number of shares in connection with business acquisitions or private investments, or even the potential for such sales, may depress the market price of our common stock and could impair our ability to raise capital through the sale of our equity securities |
| Provisions in our governing documents and law could prevent or delay a change of control not supported by our Board of Directors |
| Our shareholder rights plan and provisions of our amended and restated articles of incorporation and amended bylaws could make it more difficult for a third party to acquire us |
| These documents include provisions that: • allow our shareholders the right to acquire common stock from us at discounted prices in the event a person acquires 20prca or more of our common stock or announces an attempt to do so without our Board of Directors’ prior consent; • authorize the issuance of up to 10cmam000cmam000 shares of “blank check” preferred stock by our Board of Directors without shareholder approval, which stock could have terms that could discourage or thwart a takeover attempt; • limit who may call a special meeting of shareholders; • require unanimous written consent for shareholder action without a meeting; • establish advance notice requirements for nominations for election to the Board of Directors or for proposing matters that can be acted upon at shareholder meetings; • adopt the fair price requirements and rules regarding business combinations with interested shareholders set forth in Article 11, Parts 2 and 3 of the Georgia Business Corporation Code; and • require approval by the holders of at least 75prca of the outstanding common stock to amend any of the foregoing provisions |