| PRINTRONIX INC Item 1A Risk Factors This Annual Report on Form 10-K contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 |
| These forward-looking statements are based upon management’s current expectations concerning future activities or events and their potential impact upon the company |
| Past financial performance may not be a reliable indicator of future performance, and historical trends should not be used to forecast results or trends in future periods |
| We can offer no assurance that future activities or events affecting the company will be those anticipated by management |
| In addition, any of the following risks and uncertainties could adversely affect the business, financial results or financial condition and cause the actual results to differ from those expressed or implied in the forward-looking statements in this document |
| Other risks and uncertainties also could affect the business |
| Although we reassess material trends and uncertainties affecting the consolidated results of operations and financial condition in connection with the preparation of the quarterly and annual reports, we do not intend to review or revise, in light of future events, any particular forward-looking statement contained in this document |
| The information contained below should be carefully considered when reviewing any forward-looking statements contained in this document |
| We Operate in an Industry Influenced by Worldwide Capital Spending |
| The products are used for mission-critical applications in industrial settings such as manufacturing plants and distribution centers and also in information technology and back office operations |
| The revenue is impacted by the 14 _________________________________________________________________ [71]Table of Contents worldwide level of spending for capital expenditures related to manufacturing plant expansion or refurbishment |
| In addition, revenue is impacted by level of activity in the worldwide supply-chain processes |
| We Operate in an Industry Affected by Competing Technologies |
| The industrial printing market utilizes varying technologies including line matrix, direct thermal and thermal transfer, laser, inkjet, serial and band printing technologies |
| Across all technologies, the printers are characterized as high-, medium-or low-end depending upon their range of features, including functionality and durability |
| Products made by Printronix utilize line matrix, thermal transfer (high-end) and high-end fanfold laser printing technologies |
| We cannot offer assurance that we can successfully develop the needed products and compete against current competitors or future competitors for mid-range thermal and laser printers that are used in industrial environments |
| Even if we are able to maintain or increase market share for a product, line matrix in particular, revenue could still decline as the market for the product matures |
| We Operate in an Industry Characterized by Technological Change and Evolving Industry Standards |
| The printing-solutions industry is extremely competitive and is characterized by technological change, frequent new product development, periodic product obsolescence, evolving industry standards, particularly for RFID, changing information technologies and evolving distribution channels |
| We must adapt quickly to changing technological, application and solutions needs, and the introduction of new technologies and products offering improved features and functionality |
| We could incur substantial cost to keep pace with the technological changes, and may not be able to adapt to these changes |
| Although we believe that Printronix currently competes favorably with respect to these characteristics, this may change in the future |
| Future success largely depends upon our ability to continuously develop new products with the quality levels customers demand, and to develop new services and solutions for evolving IT infrastructure needs |
| Printronix spends a greater amount on research and development than the industry average because we believe that providing innovative products and solutions is important to future operations |
| In spite of our efforts, we may fail to develop new products in a timely manner |
| Additionally, the new products we develop may not achieve market acceptance or may not be manufactured at competitive costs or in sufficient volumes |
| If we cannot proportionately decrease the cost structure in a timely manner in response to competitive pressures, the consolidated results of operations could be affected |
| We cannot guarantee the success of the research and development efforts |
| Any delay in the development, production or marketing of a new RFID product could result in not being first to market, which could harm our competitive position |
| We must adapt quickly to changes mandated by the RFID industry standard setting group, EPC Global, and customers to maintain market share |
| The failure to enhance the existing products, services and solutions or to develop and introduce new products, services and solutions that meet changing customer requirements and evolving technological standards would adversely impact the ability to sell products |
| We Operate in a Highly Competitive Market |
| The market for medium- and high-speed computer printers, printer/encoders and related post-sale supplies is highly competitive, subject to change, and is likely to become even more competitive |
| Printronix competes directly with several companies of various sizes, including some of the largest businesses in the United States and Japan |
| The competitors include privately held companies, publicly held companies and subsidiaries of multinational corporations |
| Some of the competitors may enter into strategic business relationships with other companies |
| We cannot offer assurance that we can successfully compete against current or future competitors |
| Some competitors have significantly greater financial, technical, manufacturing, sales, marketing and other resources than Printronix and have achieved greater name recognition for their products and technologies |
| We may not be able to successfully increase our market penetration or the overall share of the printer market in the face of such competition |
| 15 _________________________________________________________________ [72]Table of Contents Increased competition may result in price reductions, increased sales incentive offerings, lower gross margins, and loss of market share and could require increased investment in inventory, research and development, sales expenses, marketing programs and expenditures to expand channels to market |
| Competitors may offer products with superior market acceptance, superior price or superior performance |
| Printronix may be adversely affected if we are unable to maintain current product cost reductions, or achieve future product cost reductions, including warranty costs |
| Customers may defer their purchasing decisions in anticipation of the introduction of new products or the actual introduction of new products by the company or its competitors |
| If we fail to address the competitive challenges, there could be a material adverse effect upon the business, consolidated results of operations and financial condition |
| We cannot guarantee to successfully compete against competitors in the RFID market, nor can we provide assurances that Printronix will be successful in maintaining our market leadership or improving our market share |
| While we believe the interest in RFID remains high, we can offer no assurance that the speed of RFID deployment will increase |
| Standards for the emerging EPC RFID market are beginning to formulate |
| EPCglobal^TM has issued a Generation 2 (“Gen2”) standard and products are beginning to come to market in accordance with this standard |
| Although Printronix has taken an early leadership role in introducing a Gen2 printer with an EPC certified Gen2 RFID encoder, we cannot guarantee to successfully comply with all aspects of these evolving EPC standards |
| While we continue to focus intently on RFID technology leadership, we also cannot guarantee that we will continue to develop such products or that we will address user needs effectively in an industry characterized by rapid technological change |
| We have entered into several key strategic alliances with the leaders in RFID labels, software and integration services |
| We cannot guarantee that these strategic alliances will be continued or successful |
| We Rely on Resellers to Sell Our Products and Services |
| Printronix uses a variety of distribution channels, including OEMs and distributors, to market our products |
| Printronix may be adversely impacted by any conflicts that could arise between and among the sales channels |
| We believe that our future success depends upon the ability to provide industrial-strength printing solutions to a broader customer base and to maintain good relationships with the major OEMs and distributors |
| We believe that continued purchase of the products by OEMs is dependent upon many factors, including OEMs’ desire to use outside suppliers rather than investing the capital resources necessary to develop their own products or their decision to end-of-life products that have low sales volume |
| Our dependence upon a small number of major resellers exposes us to numerous risks, including: • loss of channel and the ability to bring new products to market; • concentration of credit risk, including disruption in distribution should the resellers’ financial condition deteriorate; • reduced visibility to end user demand and pricing issues which makes forecasting more difficult; • resellers leveraging their buying power to change the terms of pricing, payment and product delivery schedules; and • direct competition should a reseller decide to manufacture printers internally or source printers from a competitor |
| We cannot guarantee that resellers will not reduce, delay or eliminate purchases from us, which could have a material adverse effect upon the business, consolidated results of operations and financial condition |
| We rely upon a 16 _________________________________________________________________ [73]Table of Contents few resellers for a significant amount of the revenue |
| In fiscal years 2006 and 2005, sales to the largest OEM reseller, IBM, represented 22dtta5 percent and 21dtta5 percent of net sales, respectively, and sales to the second largest reseller represented 7dtta3 percent and 7dtta9 percent of net sales, respectively |
| The loss of any one of these resellers would have a material adverse effect upon the business, consolidated results of operations and financial condition |
| We Operate in an Environment of Unpredictable Demand |
| We rely upon our ability to successfully manage the worldwide inventory supply-chain and inventory levels to support uncertain demand in a cost-effective manner |
| The sales to resellers are made under purchase orders that typically have short delivery requirements |
| Although we receive periodic order forecasts from the major reseller, they have no obligation to purchase the forecasted amounts and may cancel orders, change delivery schedules or change the mix of products ordered with minimal notice |
| Significant increases in demand could result in inventory shortages, higher costs to obtain expedited materials and components, higher costs to expedite shipment to the customers, and/or lost revenue opportunities |
| Significant decreases in demand could result in increased inventory levels, higher production costs, higher material and component procurement costs and reduced profitability |
| The quarterly sales patterns have historically reflected a slightly higher than normal level of sales in the last few weeks of each quarter, making forecasting more difficult |
| In addition, seasonality in sales also affects the business to some degree |
| Typically sales are low in the EMEA region during the summer months as the region generally takes extended holidays |
| Sales are also typically higher in the third fiscal quarter, which ends in December, as many of the customers are on a calendar fiscal year |
| We cannot guarantee that these trends will continue or be supplanted by similar factors |
| For fiscal years 2006, 2005, and 2004, international revenue (excluding United States sales) accounted for approximately 53dtta6 percent, 55dtta1 percent, and 51dtta6 percent, respectively, of the net sales |
| We expect that international revenue will continue to grow and account for a significant percentage of the revenue for the foreseeable future |
| The products are sold in approximately eighty countries around the world, which subjects us to risks that may be unique to a particular country, but also to risk factors that may affect the global economy |
| The products are manufactured using raw materials and components that are acquired from sources around the world |
| We use a large number of suppliers and regularly evaluate the availability of potential alternate suppliers should circumstances change with existing suppliers |
| Printronix relies on a single or limited number of sources for certain raw materials and components, although we attempt to have alternate sources where possible |
| Printronix internally develops most of the software used in its printer products |
| Certain software is purchased from suppliers through royalty agreements |
| If we were to experience a sudden loss of availability of purchased raw materials and components or purchased software, we are unable to guarantee that we could quickly obtain the needed items from alternate sources |
| The ability to ship the products in desired quantities and in a timely, cost-effective manner could be adversely affected, thus affecting the business, consolidated results of operations and financial condition |
| We rely heavily upon the international facilities to maintain appropriate inventory levels, manufacture products, and complete configuration of printers in a timely and cost-efficient manner |
| Should we fail to successfully predict demand, we may not have sufficient inventory levels available to address customer requirements, or may need to use costly distribution methods, such as air freighting, to meet sales requirements |
| There are many risks associated with international customers, suppliers and operations, including, but not limited to, the following: • compliance with multiple and potentially conflicting regulations, including export requirements, tariffs, import duties, health and safety requirements and other barriers; 17 _________________________________________________________________ [74]Table of Contents • fluctuations in freight and duty costs and disruptions at important geographic points of exit and entry; • differences in intellectual property protections; • differences in technology standards or customer requirements; • the possibility of defective parts from suppliers; • difficulties associated with repatriating cash generated or held abroad in a tax-efficient manner and changes in tax laws; • currency fluctuations and restrictions on currency movements; • economic instability, including inflation, recession and interest rate fluctuations; • longer accounts receivable cycles and financial instability; • local labor regulations; • trade protection measures and regulations; • risk of loss of the international assets due to political or economic instability; • political or civil turmoil; • war or conflict abroad or in the United States; • natural disasters, such as earthquakes, floods, tsunamis and typhoons; • consequences resulting from armed military conflict; • terrorist attacks or other armed hostilities abroad or in the United States; and • outbreaks of infectious disease such as avian flu, Severe Acute Respiratory Syndrome (SARS) or other public health issues |
| Printronix is substantially self-insured for losses and business interruptions stemming from terrorist attacks, armed conflicts, war, power shortages and natural disasters |
| California and other parts of the United States have experienced major power shortages and blackouts and could experience them in the future, which could disrupt the business or that of the suppliers or customers |
| The corporate headquarters and research and development activities are located in California, near known earthquake faults |
| It is impossible to predict any ultimate impact on business, but consolidated results of operations and financial condition could suffer in the event of a major earthquake |
| Printronix operates in many countries with differing and sometimes conflicting income tax requirements |
| The company’s effective tax rate could be adversely affected by: • overlapping or differing tax laws; • changes in the mix of earnings in countries with differing income tax rates and • unfavorable outcomes of future audits by taxing authorities in various jurisdictions |
| In particular, the realization of deferred tax assets, which are predominately in the United States, depends on the ability to generate future taxable income in the United States |
| Failure to manage the risks posed by our international customers, suppliers and operations could have a material adverse effect upon the business, consolidated results of operations and financial condition |
| Environmental Laws and Regulations and Unforeseen Costs Could Impact the Future Earnings |
| Printronix could incur substantial costs, including clean up costs, fines, sanctions, property damage claims and personal injury claims, if we were to violate or become liable under environmental laws or if the products become non-compliant with environmental laws |
| 18 _________________________________________________________________ [75]Table of Contents We face increasing complexity in the product design and procurement operations due to new and upcoming environmental regulations under various federal, state, and international laws, including the restrictions imposed in the European Union (the Restriction of Hazardous Substance Directive “RoHS,” which places restrictions on lead and certain other substances in electronics, and the European Union Waste Electrical and Electronic Equipment Directive “WEEE,” which makes producers of electrical goods, including computers and printers, responsible for collection, recycling, treatment and disposal of recovered products), and other similar legislation, including similar legislation currently proposed for China |
| There is substantial complexity associated with compliance with these new regulations and the costs of implementation are not easily quantifiable |
| The ability to attract and to retain key, highly qualified personnel, both technical and managerial, is critical to Printronix’s success |
| Developing, manufacturing and marketing the products is a complex process and requires significant expertise to meet customers’ specifications |
| Competition for personnel, particularly qualified engineers and employees with expertise in RFID applications, is keen |
| The loss of a significant number of key personnel, as well as the failure to recruit and train additional key personnel in a timely manner could have a material adverse effect upon the business, consolidated results of operations and financial condition |
| In the future, Printronix will be required to record a charge to earnings for employee stock option grants |
| As a result, we may incur increased compensation costs and may need to change the equity compensation structure, and find it difficult to attract, retain and motivate employees, all of which could impact the business |
| Intellectual Property is Important to Our Success |
| A third party may assert that Printronix, or customers indemnified by us, violate their intellectual property |
| A third party claiming infringement also may obtain an injunction or other equitable relief, which effectively could block the distribution or sale of allegedly infringing products |
| The departure of any of the key management and technical personnel, or breach of non-disclosure obligations, or the failure to achieve the intellectual property objectives may have a material adverse effect upon the business, consolidated results of operations and financial condition |
| Also as new technologies emerge, such as RFID, standards are also developing and the intellectual property rights of parties involved in their development can be uncertain |
| Printronix relies upon patents to protect intellectual property |
| We execute confidentiality and non-disclosure agreements as needed and limit access to, and distribution of, the proprietary information; however, we cannot guarantee that the efforts to protect the intellectual property will be successful |
| The ability to compete successfully and to achieve future revenue growth depends, in part, upon the ability to protect the proprietary technology and to operate without infringing upon the rights of others |
| Such infringement claims, whether or not valid, could result in substantial costs, diversion of management’s attention and resources from the ongoing business |
| Claims of intellectual property infringement also might require us to redesign products, enter into costly settlement or licensing agreements or pay costly damage awards |
| Even if we have an agreement to indemnify us against such costs, the indemnifying party may be unable to uphold its contractual agreement to us |
| Our Stock Price is Volatile |
| The stock price has fluctuated and we expect that it will continue to do so |
| Many factors can influence the stock price, including but not limited to: • the announcement of new products or innovations by Printronix or competitors; • changes in the levels of quarterly revenue or net income; 19 _________________________________________________________________ [76]Table of Contents • failure to successfully execute planned cost reductions could result in product costs and expenses that are greater than expected; and • speculation in the press or investment community about the company, in particular as it relates to RFID Investors should not rely on recent trends to predict future stock prices, consolidated financial condition, or results of operations or cash flows |