| In the normal course of business, the Company is routinely subjected to a variety of risks |
| In addition to the market risk associated with interest rate and currency movements on outstanding debt and non-US dollar-denominated assets and liabilities, other examples of risk include collectibility of receivables, volatility of the financial markets and their effect on pension plans, and global economic and political conditions |
| Cyclical industry and economic conditions may adversely affect the Company’s businesses |
| The Company’s businesses are subject to general economic slowdowns and cyclical conditions in the industries served |
| In particular, · The Company’s Mill Services business may be adversely impacted by slowdowns in steel mill production, excess capacity, consolidation or bankruptcy of steel producers or a reversal or slowing of current outsourcing trends in the steel industry; · The Company’s Access Services business may be adversely impacted by slowdowns in non-residential construction and annual industrial and building maintenance cycles; -7- _________________________________________________________________ · The railway track maintenance business may be adversely impacted by developments in the railroad industry that lead to lower capital spending or reduced maintenance spending; · The industrial abrasives and roofing granules business may be adversely impacted by reduced home resales or economic conditions that slow the rate of residential roof replacement, or by slowdowns in the industrial and infrastructure refurbishment industries; · The industrial grating business may be adversely impacted by slowdowns in non-residential construction and industrial production; · The Air-X-Changers business is affected by cyclical conditions present in the natural gas industry |
| A high demand for natural gas is currently creating increased demand for the Company’s air-cooled heat exchangers |
| However, a slowdown in natural gas production could adversely affect the Air-X-Changers business; and · The Company’s Gas Technologies business may be adversely impacted by reduced industrial production and lower demand for industrial gases, slowdowns in demand for medical cylinders, valves and consumer barbecue grills, or lower demand for natural gas vehicles |
| The Company’s defined benefit pension expense is directly affected by the equity and bond markets and a downward trend in those markets could adversely impact the Company’s future earnings |
| An upward trend in the equity and bond markets could positively affect the Company’s future earnings |
| In addition to the economic issues that directly affect the Company’s businesses, changes in the performance of equity and bond markets, particularly in the United Kingdom and the United States, impact actuarial assumptions used in determining annual pension expense, pension liabilities and the valuation of the assets in the Company’s defined benefit pension plans |
| The downturn in financial markets during 2000, 2001 and 2002 negatively impacted the Company’s pension expense and the accounting for pension assets and liabilities |
| This resulted in an increase in pre-tax defined benefit pension expense from continuing operations of approximately dlra20dtta8 million for calendar year 2002 compared with 2001 and dlra17dtta7 million for calendar year 2003 compared with 2002 |
| The upturn in certain financial markets beginning in 2003 and certain plan design changes (discussed below) contributed to a decrease in pre-tax defined benefit pension expense from continuing operations of approximately dlra3dtta8 million for 2005 compared with 2004, and approximately dlra5dtta4 million for 2004 compared with 2003 |
| An upward trend in capital markets would likely result in a decrease in future unfunded obligations and pension expense |
| This could also result in an increase to Stockholders’ Equity and a decrease in the Company’s statutory funding requirements |
| If the financial markets deteriorate, it would most likely have a negative impact on the Company’s pension expense and the accounting for pension assets and liabilities |
| This could result in a decrease to Stockholders’ Equity and an increase in the Company’s statutory funding requirements |
| In response to the adverse market conditions, during 2002 and 2003 the Company conducted a comprehensive global review of its pension plans in order to formulate a plan to make its long-term pension costs more predictable and affordable |
| The Company implemented design changes for most of these plans during 2003 |
| The principal change involved converting future pension benefits for many of the Company’s non-union employees in both the UK and US from defined benefit plans to defined contribution plans as of January 1, 2004 |
| This conversion is expected to make the Company’s pension expense more predictable and affordable and less sensitive to changes in the financial markets |
| The Company’s pension committee continues to evaluate alternative strategies to further reduce overall pension expense including the on-going evaluation of investment fund managers’ performance; the balancing of plan assets and liabilities; the risk assessment of all multi-employer pension plans; the possible merger of certain plans; the consideration of incremental cash contributions to certain plans; and other changes that are likely to reduce future pension expense volatility and minimize risk |
| The Company’s global presence subjects it to a variety of risks arising from doing business internationally |
| The Company operates in 45 countries, including the United States |
| The Company’s global footprint exposes it to a variety of risks that may adversely affect results of operations, cash flows or financial position |
| These include the following: · periodic economic downturns in the countries in which the Company does business; · fluctuations in currency exchange rates; -8- _________________________________________________________________ · customs matters and changes in trade policy or tariff regulations; · imposition of or increases in currency exchange controls and hard currency shortages; · changes in regulatory requirements in the countries in which the Company does business; · higher tax rates and potentially adverse tax consequences including restrictions on repatriating earnings, adverse tax withholding requirements and "e double taxation &apos &apos ; · longer payment cycles and difficulty in collecting accounts receivable; · complications in complying with a variety of international laws and regulations; · political, economic and social instability, civil unrest and armed hostilities in the countries in which the Company does business; · inflation rates in the countries in which the Company does business; · laws in various international jurisdictions that limit the right and ability of subsidiaries to pay dividends and remit earnings to affiliated companies unless specified conditions are met; and‚ · uncertainties arising from local business practices, cultural considerations and international political and trade tensions |
| If the Company is unable to successfully manage the risks associated with its global business, the Company’s financial condition, cash flows and results of operations may be negatively affected |
| The Company has operations in several countries in the Middle East, including Bahrain, Egypt, Saudi Arabia, United Arab Emirates and Qatar, which are geographically close to Iraq and other countries with a continued high risk of armed hostilities |
| During 2005, 2004 and 2003, these countries contributed approximately dlra32dtta7 million, dlra25dtta5 million and dlra16dtta4 million, respectively, to the Company’s operating income |
| Additionally, the Company has operations in and sales to countries that have encountered outbreaks of communicable diseases (eg, Acquired Immune Deficiency Syndrome (AIDS) and others) |
| Should such outbreaks worsen or spread to other countries, the Company may be negatively impacted through reduced sales to and within those countries and other countries impacted by such diseases |
| Exchange rate fluctuations may adversely impact the Company’s business |
| Fluctuations in foreign exchange rates between the US dollar and the approximately 40 other currencies in which the Company conducts business may adversely impact the Company’s operating income and income from continuing operations in any given fiscal period |
| Approximately 58prca of the Company’s sales and approximately 67prca and 69prca of the Company’s operating income from continuing operations for the years ended December 31, 2005 and 2004, respectively, were derived from operations outside the United States |
| More specifically, during both 2005 and 2004, approximately 20prca and 21prca, respectively, of the Company’s revenues were derived from operations in the UK Additionally, approximately 18prca and 17prca of the Company’s revenues were derived from operations with the euro as their functional currency during 2005 and 2004, respectively |
| Given the structure of the Company’s revenues and expenses, an increase in the value of the US dollar relative to the foreign currencies in which the Company earns its revenues generally has a negative impact on operating income, whereas a decrease in the value of the US dollar tends to have the opposite effect |
| The Company’s principal foreign currency exposures are to the British pound sterling and the euro, and the exposure to these currencies, as well as other foreign currencies, is expected to increase in 2006 due to the fourth quarter acquisitions of Hunnebeck and the Northern Hemisphere mill services operations of Brambles Industrial Services (“BISNH”) |
| -9- _________________________________________________________________ Compared with the corresponding period in 2004, the average values of major currencies changed as follows in relation to the US dollar during 2005, impacting the Company’s sales and income: • British pound sterling Weakened by 1prca • euro Neutral • South African rand Neutral • Brazilian real Strengthened by 17prca • Australian dollar Strengthened by 3prca Compared with exchange rates at December 31, 2004, the values of major currencies changed as follows as of December 31, 2005: • British pound sterling Weakened by 10prca • euro Weakened by 13prca • South African rand Weakened by 11prca • Brazilian real Strengthened by 14prca • Australian dollar Weakened by 6prca The Company’s foreign currency exposures increase the risk of income statement, balance sheet and cash flow volatility |
| If the above currencies change materially in relation to the US dollar, the Company’s financial position, results of operations, or cash flows may be materially affected |
| To illustrate the effect of foreign currency exchange rate changes in certain key markets of the Company, in 2005, revenues would have been approximately 1prca or dlra14dtta8 million less and operating income would have been approximately 1prca or dlra2dtta8 million less if the average exchange rates for 2004 were utilized |
| A similar comparison for 2004 would have decreased revenues approximately 4prca or dlra108dtta9 million, while operating income would have been approximately 4prca or dlra8dtta1 million less if the average exchange rates for 2004 would have remained the same as 2003 |
| If the US dollar weakens in relation to the euro and British pound sterling, the Company would expect to see a positive impact on future sales and income from continuing operations as a result of foreign currency translation |
| Currency changes result in assets and liabilities denominated in local currencies being translated into US dollars at different amounts than at the prior period end |
| These currency changes resulted in decreased net assets of dlra54dtta4 million at December 31, 2005 when compared with December 31, 2004, and increased net assets of dlra46dtta2 million at December 31, 2004 when compared with December 31, 2003 |
| The Company seeks to reduce exposures to foreign currency transaction fluctuations through the use of forward exchange contracts |
| At December 31, 2005, the notional amount of these contracts was dlra157dtta9 million, and over 90prca of these contracts will mature within the first quarter of 2006 |
| The Company does not hold or issue financial instruments for trading purposes, and it is the Companyapstas policy to prohibit the use of derivatives for speculative purposes |
| Although the Company engages in foreign currency forward exchange contracts and other hedging strategies to mitigate foreign exchange risk, hedging strategies may not be successful or may fail to offset the risk |
| In addition, competitive conditions in the Company’s manufacturing businesses may limit the Company’s ability to increase product prices in the face of adverse currency movements |
| Sales of products manufactured in the United States for the domestic and export markets may be affected by the value of the US dollar relative to other currencies |
| Any long-term strengthening of the US dollar could depress demand for these products and reduce sales and may cause translation gains or losses due to the revaluation of accounts payable, accounts receivable and other asset and liability accounts |
| Conversely, any long-term weakening of the US dollar could improve demand for these products and increase sales and may cause translation gains or losses due to the revaluation of accounts payable, accounts receivable and other asset and liability accounts |
| Negative economic conditions may adversely impact the ability of the Company’s customers to meet their obligations to the Company on a timely basis and impact the valuation of the Company’s assets |
| If a downturn in the economy occurs, it may adversely impact the ability of the Company’s customers to meet their obligations to the Company on a timely basis and could result in bankruptcy filings by them |
| If customers are unable to meet their obligations on a timely basis, it could adversely impact the realizability of receivables, the valuation of inventories and the valuation of long-lived assets across the Company’s businesses, as well as negatively affect the forecasts used in performing the Company’s goodwill impairment testing under SFAS Nodtta 142, "e Goodwill and Other Intangible Assets” (SFAS 142) |
| If management determines that goodwill or other assets are impaired or that inventories -10- _________________________________________________________________ or receivables cannot be realized at recorded amounts, the Company will be required to record a write-down in the period of determination, which will reduce net income for that period |
| Additionally, the risk remains that certain Mill Services customers may file for bankruptcy protection, be acquired or consolidate in the future, which could have an adverse impact on the Company’s income and cash flows |
| The potential financial impact of this risk has increased with the Company’s acquisition of BISNH in December 2005 |
| Conversely, such consolidation may provide additional service opportunities for the Company |
| A negative outcome on personal injury claims against the Company may adversely impact results of operations and financial condition |
| The Company has been named as one of many defendants (approximately 90 or more in most cases) in legal actions alleging personal injury from exposure to airborne asbestos |
| In their suits, the plaintiffs have named as defendants many manufacturers, distributors and repairers of numerous types of equipment or products that may involve asbestos |
| Most of these complaints contain a standard claim for damages of dlra20 million or more against the named defendants |
| If the Company was found to be liable in any of these actions and the liability was to exceed the Company’s insurance coverage, results of operations, cash flows and financial condition could be adversely affected |
| For more information concerning this litigation, see Note 10, Commitments and Contingencies, to the Consolidated Financial Statements under Part II, Item 8, "e Financial Statements and Supplementary Data |
| ” The Company may lose customers or be required to reduce prices as a result of competition |
| The industries in which the Company operates are highly competitive |
| · The Company’s Mill Services business is sustained mainly through contract renewals |
| Historically, the Company’s contract renewal rate has averaged approximately 95prca |
| If the Company is unable to renew its contracts at the historical rates or renewals are at reduced prices, revenue may decline |
| · The Company’s Access Services business rents and sells equipment and provides erection and dismantling services to principally the non-residential construction and industrial plant maintenance markets |
| Contracts are awarded based upon the Company’s engineering capabilities, product availability, safety record, and the ability to competitively price its rentals and services |
| Commencing in 2000, due to economic downturns in their home markets, certain international competitors exported significant quantities of rental equipment to the markets the Company serves, particularly the US This resulted in an oversupply of certain equipment and a consequential reduction in product and rental pricing in the markets receiving the excess equipment |
| The effect of these actions was mitigated, to some extent, in 2005 due to a buoyant US non-residential construction market |
| However, if the Company is unable to consistently provide high-quality products and services at competitive prices, it may lose customers or operating margins may decline due to reduced selling prices |
| · The Company’s manufacturing businesses compete with companies that manufacture similar products both internationally and domestically |
| Certain international competitors export their products into the United States and sell them at lower prices due to lower labor costs and government subsidies for exports |
| Such practices may limit the prices the Company can charge for its products and services |
| Additionally, unfavorable foreign exchange rates can adversely impact the Company’s ability to match the prices charged by international competitors |
| If the Company is unable to match the prices charged by international competitors, it may lose customers |
| The Company’s strategy to overcome this competition includes continuous process improvement and cost reduction programs, international customer focus and the diversification, streamlining and consolidation of operations |
| Increased customer concentration and credit risk in the Mill Services Segment may adversely affect the Company’s future earnings and cash flows |
| Concentrations of credit risk with respect to accounts receivable are generally limited due to the Company’s large number of customers and their dispersion across different industries and geographies |
| However, the Company’s Mill Services Segment has several large customers throughout the world with significant accounts receivable balances |
| In December 2005, the Company acquired BISNH This acquisition has increased the Company’s corresponding concentration of credit risk to customers in the steel industry |
| Additionally, further consolidation in the global steel industry is possible |
| Should transactions occur involving some of the steel industry’s larger companies, which are customers of the Company, it would result in an increase in concentration of credit risk for the Company |
| If a large customer were to experience financial difficulty, or file for bankruptcy protection, it could adversely impact the Company’s income, cash flows and asset valuations |
| As part of its credit risk management practices, the Company is developing strategies to mitigate this increased concentration of credit risk |
| -11- _________________________________________________________________ Increases in energy prices could increase the Company’s operating costs and reduce its profitability |
| Worldwide political and economic conditions, extreme weather conditions, among other factors, may result in an increase in the volatility of energy costs, both on a macro basis and for the Company specifically |
| In 2005, 2004 and 2003, energy costs have approximated 3dtta6prca, 3dtta5prca and 3dtta5prca of the Company’s revenue, respectively |
| To the extent that such costs cannot be passed to customers in the future, operating income and results of operations may be adversely affected |
| Increases or decreases in purchase prices or availability of steel or other materials and commodities may affect the Company’s profitability |
| The profitability of the Company’s manufactured products are affected by changing purchase prices of steel and other materials and commodities |
| Beginning in 2004, the price paid for steel and certain other commodities increased significantly compared with prior years |
| In 2005, the cost increases moderated for certain commodities |
| However, if steel or other material costs associated with the Company’s manufactured products increase and the costs cannot be passed on to the Company’s customers, operating income would be adversely affected |
| Additionally, decreased availability of steel or other materials, such as carbon fiber used to manufacture filament-wound composite cylinders, could affect the Company’s ability to produce manufactured products in a timely manner |
| If the Company cannot obtain the necessary raw materials for its manufactured products, then revenues, operating income and cash flows will be adversely affected |
| The Company is subject to various environmental laws and the success of existing or future environmental claims against it could adversely affect the Company’s results of operations and cash flows |
| The Company’s operations are subject to various federal, state, local and international laws, regulations and ordinances relating to the protection of health, safety and the environment, including those governing discharges to air and water, handling and disposal practices for solid and hazardous wastes, the remediation of contaminated sites and the maintenance of a safe work place |
| These laws impose penalties, fines and other sanctions for non-compliance and liability for response costs, property damages and personal injury resulting from past and current spills, disposals or other releases of, or exposure to, hazardous materials |
| The Company could incur substantial costs as a result of non-compliance with or liability for remediation or other costs or damages under these laws |
| The Company may be subject to more stringent environmental laws in the future, and compliance with more stringent environmental requirements may require the Company to make material expenditures or subject it to liabilities that the Company currently does not anticipate |
| The Company is currently involved in a number of environmental remediation investigations and clean-ups and, along with other companies, has been identified as a "e potentially responsible party &apos &apos for certain waste disposal sites under the federal "e Superfund &apos &apos law |
| At several sites, the Company is currently conducting environmental remediation, and it is probable that the Company will agree to make payments toward funding certain other of these remediation activities |
| It also is possible that some of these matters will be decided unfavorably to the Company and that other sites requiring remediation will be identified |
| Each of these matters is subject to various uncertainties and financial exposure is dependent upon such factors as the continuing evolution of environmental laws and regulatory requirements, the availability and application of technology, the allocation of cost among potentially responsible parties, the years of remedial activity required and the remediation methods selected |
| The Company has evaluated its potential liability and the Consolidated Balance Sheets at December 31, 2005 and 2004 includes an accrual of dlra2dtta8 million and dlra2dtta7 million, respectively, for environmental matters |
| The amounts charged against pre-tax earnings related to environmental matters totaled dlra1dtta5 million, dlra2dtta1 million and dlra1dtta4 million for the years ended December 31, 2005, 2004 and 2003, respectively |
| The liability for future remediation costs is evaluated on a quarterly basis |
| Actual costs to be incurred at identified sites in future periods may be greater than the estimates, given inherent uncertainties in evaluating environmental exposures |
| Restrictions imposed by the Company’s credit facilities and outstanding notes may limit the Company’s ability to obtain additional financing or to pursue business opportunities |
| The Company’s credit facilities and certain notes payable agreements contain a covenant requiring a maximum debt to capital ratio of 60prca |
| In addition, certain notes payable agreements also contain a covenant requiring a minimum net worth of dlra475 million |
| These covenants limit the amount of debt the Company may incur, which could limit its ability to obtain additional financing or to pursue business opportunities |
| In addition, the Company’s ability to comply with these ratios may be affected by events beyond its control |
| A breach of any of these covenants or the inability to comply with the required financial ratios could result in a default under these credit facilities |
| In the event of any default under these credit facilities, the lenders under those facilities could elect to declare all borrowings outstanding, together with accrued and unpaid interest and other fees, to be due and payable, which would cause an event of default under the notes |
| This could, in turn, trigger an event of default under the cross-default provisions of the Company’s other outstanding indebtedness |
| At December 31, 2005, the Company was in compliance with these covenants with a debt to capital ratio -12- _________________________________________________________________ of 50dtta4prca, and a net worth of dlra993dtta9 million |
| The Company had dlra347dtta6 million in outstanding indebtedness containing these covenants at December 31, 2005 |
| Higher than expected claims under insurance policies, under which the Company retains a portion of the risk, could adversely impact results of operations and cash flows |
| The Company retains a significant portion of the risk for property, workers &apos compensation, UK employers’ liability, automobile, general and product liability losses |
| Reserves have been recorded which reflect the undiscounted estimated liabilities for ultimate losses including claims incurred but not reported |
| Inherent in these estimates are assumptions that are based on the Company’s history of claims and losses, a detailed analysis of existing claims with respect to potential value, and current legal and legislative trends |
| At December 31, 2005 and 2004, the Company had recorded liabilities of dlra102dtta3 million and dlra77dtta4 million, respectively, related to both asserted and unasserted insurance claims |
| Included in the balance at December 31, 2005 were dlra25dtta2 million of recognized liabilities covered by insurance carriers |
| There were no such liabilities recognized as of December 31, 2004 since there were no probable claim amounts in excess of the Company’s deductible limits |
| If actual claims are higher than those projected by management, an increase to the Company’s insurance reserves may be required and would be recorded as a charge to income in the period the need for the change was determined |
| Conversely, if actual claims are lower than those projected by management, a decrease to the Company’s insurance reserves may be required and would be recorded as a reduction to expense in the period the need for the change was determined |
| The seasonality of the Company’s business may cause its quarterly results to fluctuate |
| The Company has historically generated the majority of its cash flows in the third and fourth quarters (periods ending September 30 and December 31) |
| This is a direct result of normally higher sales and income during the latter part of the year, as the Company’s business tends to follow seasonal patterns |
| If the Company is unable to successfully manage the cash flow and other effects of seasonality on the business, its financial condition and results of operations may be negatively affected |
| The Company’s historical revenue patterns and net cash provided by operating activities are included in Part I, Item 1, “Business |
| ” The Companyapstas cash flows and earnings are subject to changes in interest rates |
| The Company’s total debt as of December 31, 2005 was dlra1dtta0 billion |
| Of this amount, approximately 49dtta5prca had variable rates of interest and 50dtta5prca had fixed rates of interest |
| The weighted average interest rate of total debt was approximately 5dtta3prca |
| The future financial impact on the Company associated with the above risks cannot be estimated |