| GENERAL CABLE CORP /DE/ Item 1A Risk Factors Unless the context indicates otherwise, all references to “we”, “us”, “our” in this Item 1A “Risk Factors” refer to the Company |
| We are subject to a number of risks listed below, which could have a material adverse effect on our financial condition, results of operations and value of our securities |
| Certain statements in the 2005 Annual Report on Form 10-K including, without limitation, statements regarding future financial results and performance, plans and objectives, capital expenditures and our or management’s beliefs, expectations or opinions, are forward-looking statements, and as such, we desire to take advantage of the “safe harbor” which is afforded such statements under the Private Securities Litigation Reform Act of 1995 |
| Our forward-looking statements should be read in conjunction with our comments on Page 22 of this report under the heading, “Disclosure Regarding Forward-Looking Statements |
| ” Actual results may differ materially from those statements as a result of factors, risks and uncertainties over which we have no control |
| Such factors include, but are not limited to, the risks and uncertainties discussed below |
| • Our net sales, net income and growth depend largely on the economic strength of the geographic markets that we serve, and if these markets become weaker, we could suffer decreased sales and net income |
| Many of our customers use our products as components in their own products or in projects undertaken for their customers |
| Our ability to sell our products is largely dependent on general economic conditions, including how much our customers and end-users spend on information technology, new construction and building, maintaining or reconfiguring their communications network, industrial manufacturing assets and power transmission and distribution infrastructures |
| In the early 2000’s, many companies significantly reduced their capital equipment and information technology budgets, and construction activity that necessitates the building or modification of communication networks and power transmission and distribution infrastructures slowed considerably as a result of a weakening of the US and foreign economies |
| As a result, our net sales and financial results declined significantly in those years |
| Beginning in 2004 and continuing throughout 2005, we have seen an improvement in these markets; however, if they were to weaken, we could suffer decreased sales and net income |
| • The markets for our products are highly competitive, and if we fail to invest in product development, productivity improvements and customer service and support, the sale of our products could be adversely affected |
| The markets for copper, aluminum and fiber optic wire and cable products are highly competitive, and some of our competitors may have greater financial resources than ours |
| We compete with at least one major competitor with respect to each of our business segments |
| Many of our products are made to common specifications and therefore may be fungible with competitors’ products |
| Accordingly, we are subject to competition in many markets on the basis of price, delivery time, customer service and our ability to meet specific customer needs |
| We believe that competitors will continue to improve the design and performance of their products and to introduce new products with competitive price and performance characteristics |
| We expect that we will be required to continue to invest in product development, productivity improvements and customer service and support in order to compete in our markets |
| Furthermore, an increase in imports of products competitive with our products could adversely affect our sales |
| • Our business is subject to the economic, political and other risks of maintaining facilities and selling products in foreign countries |
| During the year ended December 31, 2005, approximately 34prca of our sales and approximately 48prca of our assets were in markets outside North America |
| Our operations outside North America generated approximately dlra75dtta6 million of our cash flows from operations and the North American operations generated dlra45dtta4 million of cash flows from operations during this period |
| Our financial results may be adversely affected by significant fluctuations in the value of the US dollar against foreign currencies or by the enactment of exchange controls or foreign governmental or regulatory restrictions on the transfer of funds |
| In addition, negative tax consequences relating to repatriating certain foreign currencies, particularly cash generated by our operations in Spain, may adversely affect our cash flows |
| Furthermore, our foreign operations are subject to 12 _________________________________________________________________ [69]Table of Contents risks inherent in maintaining operations abroad, such as economic and political destabilization, international conflicts, restrictive actions by foreign governments, nationalizations, changes in regulatory requirements, the difficulty of effectively managing diverse global operations, adverse foreign tax laws and the threat posed by potential international disease pandemics in countries that do not have the resources necessary to deal with such outbreaks |
| • Changes in industry standards and regulatory requirements may adversely affect our business |
| As a manufacturer and distributor of wire and cable products, we are subject to a number of industry standard-setting authorities, such as Underwriters Laboratories, the Telecommunications Industry Association, the Electronics Industries Association and the Canadian Standards Association |
| In addition, many of our products are subject to the requirements of federal, state and local or foreign regulatory authorities |
| Changes in the standards and requirements imposed by such authorities could have an adverse effect on us |
| In the event that we are unable to meet any such standards when adopted, our business could be adversely affected |
| In addition, changes in the legislative environment could affect the growth and other aspects of important markets served by us |
| In September 2005, President George W Bush signed into law the Energy Policy Act of 2005 |
| This law was enacted to establish a comprehensive, long-range national energy policy |
| Among other things, it provides tax credits and other incentives for the production of traditional sources of energy, as well as alternative energy sources, such as wind, wave, tidal and geothermal power generation systems |
| Although we are studying the impact that this legislation may have on us and our financial results, we cannot presently predict this impact |
| We also cannot predict the impact, either positive or negative, that changes in laws or industry standards that may be adopted in the future could have on our financial results, cash flows or financial position |
| • Advancing technologies, such as fiber optic and wireless technologies, may make some of our products less competitive |
| Technological developments could have a material adverse effect on our business |
| For example, a significant decrease in the cost and complexity of installation of fiber optic systems or an increase in the cost of copper-based systems could make fiber optic systems superior on a price performance basis to copper systems and may have a material adverse effect on our business |
| While we do manufacture and sell fiber optic cables, any erosion of our sales of copper cables due to increased market demand for fiber optic cables would most likely not be offset by an increase in sales of our fiber optic cables |
| Also, advancing wireless technologies, as they relate to network and communications systems, may represent an alternative to certain copper cables we manufacture and reduce customer demand for premise wiring |
| Traditional telephone companies are facing increasing competition within their respective territories from, among others, voice over Internet protocol, or “VoIP,” providers and wireless carriers |
| Wireless communications depend heavily on a fiber optic backbone and do not depend as much on copper-based systems |
| An increase in the acceptance and use of VoIP and wireless technology, or introduction of new wireless or fiber-optic based technologies, may have a material adverse effect on the marketability of the our products and our profitability |
| If wireless technology were to significantly erode the markets for copper-based systems, our sales of copper premise cables could face downward pressure |
| • Volatility in the price of copper and other raw materials, as well as fuel and energy, could adversely affect our businesses |
| The costs of copper and aluminum, the most significant raw materials we use, have been subject to considerable volatility over the years |
| Volatility in the price of copper, aluminum, polyethylene, petrochemicals, and other raw materials, as well as fuel, natural gas and energy, will in turn lead to significant fluctuations in our cost of sales |
| Additionally, sharp increases in the price of copper can also reduce demand if customers decide to defer their purchases of copper wire and cable products or seek to purchase substitute products |
| Moreover, we do not engage in activities to hedge the underlying value of our copper and aluminum inventory |
| Although we attempt to reflect copper and other raw material price changes in the selling price of our products, there is no assurance that we can do so successfully or at all in the future |
| • Interruptions of supplies from our key suppliers may affect our results of operations and financial performance |
| Interruptions of supplies from our key suppliers, including as a result of such natural catastrophes as Hurricanes Katrina and Rita, could disrupt production or impact our ability to increase production and sales |
| During 2003, our copper rod mill plant produced approximately 62prca of the copper rod used in our North American operations, and two suppliers provided an aggregate of approximately 68prca of our North American copper purchases |
| During the second quarter of 2004, our rod mill facility ceased operations |
| All copper rod used in our North American operations is now externally sourced; our largest 13 _________________________________________________________________ [70]Table of Contents supplier of copper rod accounted for approximately 66prca of our North American purchases in 2005 |
| Any unanticipated problems with our copper rod suppliers could have a material adverse effect on our business |
| Additionally, we use a limited number of sources for most of the other raw materials that we do not produce |
| We do not have long-term or volume purchase agreements with most of our suppliers, and may have limited options in the short-term for alternative supply if these suppliers fail to continue the supply of material or components for any reason, including their business failure, inability to obtain raw materials or financial difficulties |
| Moreover, identifying and accessing alternative sources may increase our costs |
| • Failure to negotiate extensions of our labor agreements as they expire may result in a disruption of our operations |
| As of December 31, 2005, approximately 60prca of our employees were represented by various labor unions |
| During the five calendar years ended December 31, 2005 we have experienced only three strikes, which were settled on satisfactory terms |
| The only strike that occurred in 2005 was at our Lincoln, Rhode Island manufacturing facility, and it lasted approximately two weeks |
| This strike did not have a significant impact on our financial results for the first fiscal quarter of 2005 |
| We are party to labor agreements with unions that represent employees at many of our operational facilities |
| Labor agreements expired at three facilities in 2005 and were successfully renegotiated |
| Labor agreements are to expire at one facility in 2006 |
| We cannot predict what issues may be raised by the collective bargaining units representing our employees and, if raised, whether negotiations concerning such issues will be successfully concluded |
| A protracted work stoppage could result in a disruption of our operations which could adversely affect our ability to deliver certain products and our financial results |
| • Our inability to continue to achieve productivity improvements may result in increased costs |
| Part of our business strategy is to increase our profitability by lowering costs through improving our processes and productivity |
| In the event we are unable to continue to implement measures improving our manufacturing techniques and processes, we may not achieve desired efficiency or productivity levels and our manufacturing costs may increase |
| In addition, productivity increases are related in part to factory utilization rates |
| Our decreased utilization rates over the past few years have adversely impacted productivity |
| However, we have experienced an increase in utilization rates in 2005 |
| • We are substantially dependent upon distributors and retailers for non-exclusive sales of our products and they could cease purchasing our products at any time |
| During 2004 and 2005, approximately 38prca and 39prca, respectively, of our domestic net sales were made to independent distributors and three and four, respectively, of our ten largest customers were distributors |
| Distributors accounted for a substantial portion of sales of our communications products and industrial & specialty products |
| During 2004 and 2005, approximately 13prca and 11prca, respectively, of our domestic net sales were to retailers, and the two largest retailers, The Home Depot and AutoZone, accounted for approximately 3prca and 2prca, respectively, of our worldwide net sales in 2005 and 2004 |
| These distributors and retailers are not contractually obligated to carry our product lines exclusively or for any period of time |
| Therefore, these distributors and retailers may purchase products that compete with our products or cease purchasing our products at any time |
| The loss of one or more large distributors or retailers could have a material adverse effect on our ability to bring our products to end users and on our results of operations |
| Moreover, a downturn in the business of one or more large distributors or retailers could adversely affect our sales and could create significant credit exposure |
| • We face pricing pressures in each of our markets that could adversely affect our results of operations and financial performance |
| We face pricing pressures in each of our markets as a result of significant competition or over-capacity, and price levels for most of our products declined from 2002 through early 2004 |
| While we will work toward reducing our costs to respond to the pricing pressures that may continue, we may not be able to achieve proportionate reductions in costs |
| As a result of over-capacity and economic and industry downturn in the communications and industrial markets in particular, pricing pressures increased in 2002 and 2003, and continued into 2004 |
| While we generally have been successful in raising prices to recover increased raw material costs since the second quarter of 2004, pricing pressures continued throughout 2005, and are expected for the foreseeable future |
| Further declines in prices, without offsetting cost reductions, would adversely affect our financial results |
| • If either of our uncommitted accounts payable or accounts receivable financing arrangements for our European operations is cancelled, our liquidity will be negatively impacted |
| 14 _________________________________________________________________ [71]Table of Contents Our European operations participate in arrangements with several European financial institutions that provide extended accounts payable terms to us |
| In general, the arrangements provide for accounts payable terms of up to 180 days |
| As of December 31, 2005, the arrangements had a maximum availability limit of the equivalent of approximately dlra136dtta2 million, of which approximately dlra112dtta4 million was drawn |
| We do not have firm commitments from these European financial institutions requiring them to continue to extend credit and they may decline to advance additional funding |
| We also have an approximate dlra37dtta8 million Euro-denominated uncommitted facility in Europe, which allows us to sell at a discount, with limited recourse, a portion of our accounts receivable to a financial institution |
| As of December 31, 2005, this accounts receivable facility was not drawn upon |
| We do not have a firm commitment from this institution to purchase our accounts receivable |
| Should the availability under these arrangements be reduced or terminated, we would be required to negotiate longer payment terms with our suppliers or repay the outstanding obligations with our suppliers under these arrangements over 180 days and seek alternative financing arrangements which could increase our interest expense |
| We cannot assure you that such longer payment terms or alternate financing will be available on favorable terms or at all |
| Failure to obtain alternative financing arrangements in such case would negatively impact our liquidity |
| • We may be required to take additional charges in connection with plant closures and in connection with our inventory accounting practices |
| During 2004, we closed two industrial manufacturing locations, refocused operations at another industrial manufacturing location and ceased operations at our copper rod mill |
| We incurred net charges of dlra7dtta4 million (dlra4dtta7 million of which were cash) in 2004 related to the industrial manufacturing plants and a net gain of dlra0dtta3 million related to the rod mill, all of which are now completely closed |
| In 2005, we closed our telecommunications manufacturing plant located in Bonham, Texas |
| At that time, we also closed our fiber optic military and premise cable manufacturing plant located in Dayville, Connecticut, and relocated production from this plant to our acquired facility in Franklin, Massachusetts, which produces copper as well as some fiber optic communications products |
| The total cost of these closures was approximately dlra19dtta1 million (of which approximately dlra7dtta5 million were cash payments) |
| Total costs recorded during 2005 with respect to these closures were dlra18dtta6 million (of which approximately dlra7dtta5 million were cash payments), including a $(0dtta5) million gain from the sale of a previously closed manufacturing plant |
| We continuously evaluate our ability to more efficiently utilize existing manufacturing capacity which may require additional future charges |
| As a result of volatile copper prices, the replacement cost of our copper inventory exceeded its historic LIFO cost by approximately dlra38 million and dlra13 million at December 31, 2004 and 2003, respectively and by approximately dlra107 million at December 31, 2005 |
| If we are not able to recover the LIFO value of our inventory at a profit in some future period when replacement costs were lower than the LIFO value of the inventory, we would be required to take a charge to recognize on our income statement all or a portion of the higher LIFO value of the inventory |
| During 2003, we recorded a dlra0dtta5 million charge for the liquidation of LIFO inventory in North America as we significantly reduced our inventory levels |
| During 2004, we increased inventory quantities and therefore there was not a liquidation of LIFO inventory impact in this period |
| During 2005, we reduced our copper inventory quantities in North America which resulted in a dlra1dtta1 million gain since LIFO inventory quantities were reduced in a period when replacement costs where higher than the LIFO value of the inventory |
| If LIFO inventory quantities are reduced in a future period when replacement costs exceed the LIFO value of the inventory, we would experience an increase in reported earnings |
| Conversely, if LIFO inventory quantities are reduced in a future period when replacement costs are lower than the LIFO value of the inventory, we would experience a decline in reported earnings |
| • We are subject to certain asbestos litigation and unexpected judgments or settlements that could have a material adverse effect on our financial results |
| There are approximately 9cmam300 pending non-maritime asbestos cases involving our subsidiaries |
| The majority of these cases involve plaintiffs alleging exposure to asbestos-containing cable manufactured by our predecessors |
| In addition to our subsidiaries, numerous other wire and cable manufacturers have been named as defendants in these cases |
| Our subsidiaries have also been named, along with numerous other product manufacturers, as defendants in approximately 33cmam300 suits in which plaintiffs alleged that they suffered an asbestos-related injury while working in the maritime industry |
| These cases are referred to as MARDOC cases and are currently managed under the supervision of the US District Court for the Eastern District of Pennsylvania |
| On May 1, 1996, the District Court ordered that all pending MARDOC cases be administratively dismissed without prejudice and the cases cannot be reinstated, except in certain circumstances involving specific proof of injury |
| We cannot assure you that any judgments or settlements of the pending non-maritime and/or MARDOC asbestos cases or any cases which may be filed in the future will not have a material adverse effect on our financial results, cash flows or financial position |
| Moreover, certain of our insurers, such as the insurers discussed as part of a settlement agreement in 15 _________________________________________________________________ [72]Table of Contents |