| SUNTRON CORP ITEM 1A RISK FACTORS An investment in our common stock involves a high degree of risk |
| You should carefully consider the factors described below, in addition to those discussed elsewhere in this report, in analyzing an investment in our common stock |
| If any of the events described below occur, our business, financial condition, and results of operations could likely deteriorate, the trading price of our common stock could fall, and you could lose all or part of the money you paid for our common stock |
| In addition, the following factors could cause our actual results to differ materially from those projected in our forward-looking statements, whether made in this Form 10-K, our annual or quarterly reports to stockholders, future press releases, other SEC filings, or orally, whether in presentations, responses to questions, or otherwise |
| See “Statement Regarding Forward-Looking Statements |
| ” Our level of indebtedness could adversely affect our financial viability, and the restrictions imposed by the terms of our debt instruments may severely limit our ability to plan for or respond to changes in our business |
| As of December 31, 2005, we had outstanding bank debt of approximately dlra47dtta0 million |
| In addition, subject to the restrictions under our debt agreements, we may incur significant additional indebtedness from time to time to finance capital expenditures, business acquisitions, or for other purposes |
| Significant levels of debt could have negative consequences |
| For example, it could: • require us to dedicate a substantial portion of our cash flow from operations to service interest and principal repayment requirements, limiting the availability of cash for other purposes; • increase our vulnerability to adverse general economic conditions by making it more difficult to borrow additional funds to maintain our operations if our revenues decrease; • limit our ability to attract new customers if we do not have sufficient liquidity to meet working capital needs; and • hinder our flexibility in planning for, or reacting to, changes in our business and industry if we are unable to borrow additional funds to upgrade our equipment or facilities |
| We may need additional capital in the future and it may not be available on acceptable terms, or at all |
| We may need to raise additional funds for the following purposes: • to fund working capital requirements for future growth that we may experience; • to enhance or expand the range of services we offer; • to increase our promotional and marketing activities; or • to respond to competitive pressures or perceived opportunities, such as investment, acquisition, and international expansion activities |
| If such funds are not available when required or on acceptable terms, our business and financial results could deteriorate |
| We experience significant volatility in our net sales, which leads to significant operating inefficiencies and the potential for significant charges |
| Over the past five years, our net sales have fluctuated from a low of dlra74dtta8 million in the second quarter of 2003 to a high of dlra197dtta9 million in the first quarter of 2001 |
| During periods of rapidly declining net sales, we generally take actions to eliminate variable and fixed costs, which often results in significant restructuring charges |
| When our net sales decline significantly, it is difficult to operate our plants profitably because it is not possible to eliminate most of our fixed costs |
| If we believe that the decline in sales is unlikely to be followed by a rapid recovery, we may determine that there are significant benefits to reducing our cost structure by closing plants and transferring existing business to other plants that are also operating below optimal capacity levels |
| However, there can be no assurance that customers impacted by a restructuring will agree to transition their business to another Suntron location |
| In order to realize the long-term benefits of these actions, we usually incur substantial charges for impairment of assets, lease exit costs, and the payment of severance and retention benefits to affected employees |
| In addition to the up-front costs associated with these actions, the transition of inventory and manufacturing services to a different facility can result in: 1) quality and delivery issues that may have an adverse impact in retaining customers that are affected by the plant closure and 2) ramp-up costs and manufacturing inefficiencies that could impact our gross profit levels |
| Our results of operations could also be materially and adversely affected by our 5 _________________________________________________________________ [58]Table of Contents inability to timely sell or sublet closed facilities on expected terms, or otherwise achieve the expected benefits of our restructuring activities |
| During periods of rapidly increasing net sales, we often experience inefficiencies related to hiring and training workers, as well as incremental costs incurred to expedite the purchase and delivery of raw materials and overtime costs related to our workforce |
| Periods of rapid growth tend to stress our resources and we may not have sufficient capacity to meet our customers’ delivery requirements |
| Significant increases in net sales are typically accompanied by corresponding increases in inventories and receivables that must be financed with borrowings under our revolving credit agreement |
| We are dependent upon the highly competitive electronics industry, and excess capacity or decreased demand for products produced by this industry could result in increased price competition as well as a decrease in our gross margins and unit volume sales |
| Our business is heavily dependent on the EMS industry, which is extremely competitive and includes hundreds of companies |
| The contract manufacturing services we provide are available from many independent sources, and we compete with numerous domestic and foreign EMS firms, including Benchmark Electronics, Inc |
| ; Jabil Circuit, Inc |
| ; Pemstar, Inc |
| ; Plexus Corp |
| Many of such competitors are more established in the industry and have greater financial, manufacturing, or marketing resources than we do |
| We may be operating at a cost disadvantage as compared to our competitors that have greater direct buying power from component suppliers, distributors, and raw material suppliers and have lower cost structures |
| In addition, many of our competitors have a broader geographic presence, including manufacturing facilities in Asia, Europe, and South America |
| We believe that the principal competitive factors in our targeted market are quality, reliability, the ability to meet delivery schedules, technological sophistication, geographic location, and price |
| We also face competition from our current and potential customers, who are continually evaluating the relative merits of internal manufacturing versus contract manufacturing for various products |
| As stated above, the price of our services is often one of many factors that may be considered by prospective customers in awarding new business |
| We believe existing and prospective customers are placing greater emphasis on contract manufacturers that can offer manufacturing services in low cost regions of the world, such as certain countries in Asia |
| Accordingly, in situations where the price of our services is a primary driver in prospective customers’ decision to award new business, we currently believe we may have a competitive disadvantage in these circumstances |
| Our net sales are generated from the aerospace and defense, industrial, semiconductor capital equipment, networking and telecommunications, and medical sectors of the EMS industry, which is characterized by intense competition and significant fluctuations in product demand |
| Furthermore, these sectors are subject to economic cycles and have experienced in the past, and are likely to experience in the future, recessionary economic cycles |
| A recession or any other event leading to excess capacity or a downturn in these sectors of the EMS industry typically results in intensified price competition as well as a decrease in our unit volume sales and our gross margins |
| We are dependent upon a small number of customers for a large portion of our net sales, and a decline in sales to major customers could harm our results of operations |
| A small number of customers are responsible for a significant portion of our net sales |
| For the years ended December 31, 2004 and 2005, Honeywell accounted for 21prca and 25prca, respectively, of our net sales |
| Our customer concentration could increase or decrease depending on future customer requirements, which will depend in large part on business conditions in the market sectors in which our customers participate |
| The loss of one or more major customers or a decline in sales to our major customers could significantly harm our business and results of operations |
| If we are not able to expand our customer base, we will continue to depend upon a small number of customers for a significant percentage of our sales |
| There can be no assurance that current customers will not terminate their manufacturing arrangements with us or significantly change, reduce, or delay the amount of manufacturing services ordered from us |
| 6 _________________________________________________________________ [59]Table of Contents In addition, we generate significant accounts receivable in connection with providing manufacturing services to our customers |
| If one or more of our significant customers were to become insolvent or were otherwise unable to pay for our services, our results of operations could deteriorate substantially |
| Our financial condition could suffer if we fail to obtain a sufficient award in pending litigation |
| In December 2004 and February 2005, we filed lawsuits in Texas and California that seek, through the enforcement of contractual provisions or based upon tort theories, to recover in excess of dlra20 million of costs incurred for excess and obsolete inventories; additional charges for carrying costs, warehousing costs, cancellation charges, and employee termination costs; plus punitive damages, interest and legal fees |
| Although we are vigorously pursuing our claims, this litigation is in a very early stage and we cannot predict the outcome |
| If we are not able to obtain a sufficient award to recover the carrying value of these inventories, our business, operating results, and financial condition could be adversely impacted |
| Our customers may cancel their orders, change production quantities, or delay production |
| We generally do not obtain firm, long-term purchase commitments from our customers, and we expect to continue to experience reduced lead-times for customer orders |
| Customers may cancel their orders, change production quantities, or delay production for a number of reasons |
| Cancellations, reductions, or delays by a significant customer or by a group of customers could seriously harm our results of operations |
| When customer orders are changed or cancelled, we may be forced to hold excess inventories and incur carrying costs as a result of delays, cancellations, or reductions in orders or poor forecasting by our key customers |
| In addition, we make significant decisions, including determining the levels of business that we seek and accept, production schedules, component procurement commitments, personnel needs, and other resource requirements based on estimates of customer production requirements |
| The short-term nature of our customers’ commitments to us, combined with the possibility of rapid changes in demand for their products, reduces our ability to accurately estimate future customer orders |
| In addition, because many of our costs and operating expenses are relatively fixed, a reduction in customer demand generally harms our operating results |
| If we are unable to respond to rapid technological change and process development, we may not be able to compete effectively |
| The market for our products and services is characterized by rapidly changing technology and continual implementation of new production processes |
| The future success of our business will depend in large part upon our ability to maintain and enhance our technological capabilities, to develop and market products that meet changing customer needs, and to successfully anticipate or respond to technological changes on a cost-effective and timely basis |
| We expect that the investment necessary to maintain our technological position will increase as customers make demands for products and services requiring more advanced technology on a quicker turnaround basis |
| In addition, the EMS industry could encounter competition from new or revised manufacturing and production technologies that render existing manufacturing and production technology less competitive or obsolete |
| We may not be able to respond effectively to the technological requirements of the changing market |
| If we need new technologies and equipment to remain competitive, the development, acquisition and implementation of those technologies may require us to make significant capital investments |
| Operating in foreign countries exposes us to increased risks that could adversely affect our results of operations |
| We have had operations in Mexico since 1999 and we may in the future expand into other foreign countries |
| Because of the scope of our international operations, we are subject to the following risks, which could adversely impact our results of operations: • economic or political instability; • transportation delays and interruptions; • increased employee turnover and labor unrest; • incompatibility of systems and equipment used in foreign operations; 7 _________________________________________________________________ [60]Table of Contents • foreign currency exposure; • difficulties in staffing and managing foreign personnel and diverse cultures; and • less developed infrastructures |
| In addition, changes in policies by the United States or foreign governments could negatively affect our operating results due to increased duties, increased regulatory requirements, higher taxation, currency conversion limitations, restrictions on the transfer of funds, the imposition of or increase in tariffs, and limitations on imports or exports |
| Also, we could be adversely affected if our host countries revise their policies away from encouraging foreign investment or foreign trade, including tax holidays |
| If we are unsuccessful in managing future opportunities for growth, our results of operations could be harmed |
| Our future results of operations will be affected by our ability to successfully manage future opportunities for growth |
| Rapid growth, such as that experienced for 2004, is likely to place a significant strain on our managerial, operational, financial, and other resources |
| If this growth continues, it may require us to implement additional management information systems, to further develop our operating, administrative, financial, and accounting systems and controls and to maintain close coordination among our accounting, finance, sales and marketing, and customer service and support departments |
| In addition, we may be required to retain additional personnel to adequately support our growth |
| If we cannot effectively manage periods of rapid growth in our operations, we may not be able to continue to grow, or we may grow at a slower pace |
| Any failure to successfully manage growth and to develop financial controls and accounting and operating systems or to add and retain personnel that adequately support growth could harm our business and financial results |
| Our results of operations are affected by a variety of factors, which could cause our results of operations to fail to meet expectations |
| We have experienced large variations in our quarterly results of operations, and we may continue to experience significant fluctuations from quarter to quarter |
| Our results of operations are affected by a number of factors, including: • timing of orders from and shipments to major customers; • mix of products ordered by major customers; • volume of orders as related to our capacity at individual locations; • pricing and other competitive pressures; • component shortages, which could cause us to be unable to meet customer delivery schedules; • our ability to minimize excess and obsolete inventory exposure; • our ability to manage the risks associated with uncollectible accounts receivable; • our ability to manage effectively inventory and fixed asset levels; and • timing and level of goodwill and other long-lived asset impairments |
| We are dependent on limited and sole source suppliers for electronic components and may experience component shortages, which could cause us to delay shipments to customers |
| We are dependent on certain suppliers, including limited and sole source suppliers, to provide critical electronic components and other materials for our operations |
| At various times, there have been shortages of some of the electronic components we use, and suppliers of some components have lacked sufficient capacity to meet the demand for these components |
| For example, from time to time, some components we use, including semiconductors, capacitors, and resistors, have been subject to shortages, and suppliers have been forced to allocate available quantities among their customers |
| Such shortages have disrupted our operations in the past, which resulted in incomplete or late shipments of products to our customers |
| Our inability to obtain any needed components during future periods of allocations could cause delays in shipments to our customers |
| The inability to make scheduled shipments could in turn cause us to experience a shortfall in revenue |
| Component shortages may also increase our cost of goods sold due to premium charges we may pay to purchase components in short supply |
| Accordingly, even though component shortages have not had a lasting negative impact on our business, component shortages could harm our results of operations for a particular fiscal period due to the resulting revenue shortfall or cost increases and could also damage customer relationships over a longer-term period |
| 8 _________________________________________________________________ [61]Table of Contents We depend on our key personnel and may have difficulty attracting and retaining skilled employees |
| Our future success will depend to a significant degree upon the continued contributions of our key management, marketing, technical, financial, accounting, and operational personnel |
| The loss of the services of one or more key employees could have a material adverse effect on our results of operations |
| We also believe that our future success will depend in large part upon our ability to attract and retain additional highly skilled managerial and technical resources |
| Competition for such personnel is intense |
| There can be no assurance that we will be successful in attracting and retaining such personnel |
| In addition, recent and potential future facility shutdowns and workforce reductions may have a negative impact on employee recruiting and retention |
| Our manufacturing processes depend on the collective EMS industry experience of our employees |
| If these employees were to leave and take this knowledge with them, our manufacturing processes may suffer and we may not be able to compete effectively |
| We have no patent or trade secret protection for our manufacturing processes and we generally do not enter into non-compete agreements with our employees |
| We rely on the collective experience of our employees to ensure that we continuously evaluate and adopt new technologies in our industry |
| Although we are not dependent on any one employee or a small number of employees, if a significant number of employees involved in our business were to leave our employment and we are not able to replace these people with new employees with comparable experience, our results of operations may deteriorate |
| As a result, we may not be able to continue to compete effectively |
| Our failure to comply with the requirements of environmental laws could result in fines and revocation of permits necessary to our manufacturing processes |
| Our operations are regulated under a number of federal, state, and foreign environmental and safety laws and regulations that govern, among other things, the discharge of hazardous materials into the air and water, as well as the handling, storage, and disposal of such materials |
| These laws and regulations include the Clean Air Act; the Clean Water Act; the Resource Conservation and Recovery Act; and the Comprehensive Environmental Response, Compensation, and Liability Act; as well as analogous state and foreign laws |
| Compliance with these environmental laws is a major consideration for us because our manufacturing processes use and generate materials classified as hazardous, such as ammoniacal etching solutions, copper, and nickel |
| In addition, because we use hazardous materials and generate hazardous wastes in our manufacturing processes, we may be subject to potential financial liability for costs associated with the investigation and remediation of our own sites or sites at which we have arranged for the disposal of hazardous wastes, if such sites become contaminated |
| Even if we fully comply with applicable environmental laws and are not directly at fault for the contamination, we may still be liable |
| The wastes we generate include spent ammoniacal etching solutions, solder stripping solutions, and hydrochloric acid solutions containing palladium; waste water that contains heavy metals, acids, cleaners, and conditioners; and filter cake from equipment used for on-site waste treatment |
| We have not incurred significant costs related to compliance with environmental laws and regulations, and we believe that our operations comply with all applicable environmental laws |
| However, any material violations of environmental laws by us could subject us to revocation of our effluent discharge and other environmental permits |
| Any such revocations could require us to cease or limit production at one or more of our facilities |
| Even if we ultimately prevail, environmental lawsuits against us could be time consuming and costly to defend |
| Environmental laws could also become more stringent over time, imposing greater compliance costs and increasing risks and penalties associated with violation |
| We operate in environmentally sensitive locations and are subject to potentially conflicting and changing regulatory agendas of political, business, and environmental groups |
| Changes or restrictions on discharge limits; emissions levels; or material storage, handling, or disposal might require a high level of unplanned capital investment or relocation |
| It is possible that environmental compliance costs and penalties from new or existing regulations may harm our business, financial condition, and results of operations |
| We may be subject to risks associated with acquisitions, and these risks could harm our results of operations |
| We completed two business combinations in 2002 and one each in 2003 and 2004, and we anticipate that we will seek to identify and acquire additional suitable businesses in the EMS industry |
| The long-term success of recent business combinations will depend on our ability to unite the business strategies, human resources, and information technology systems of previously separate companies |
| The difficulties of combining operations include 9 _________________________________________________________________ [62]Table of Contents the necessity of coordinating geographically separated organizations and integrating personnel with diverse business backgrounds |
| Combining management resources could result in changes affecting all employees and operations |
| Differences in management approach and corporate culture may strain employee relations |
| Future business combinations could cause certain customers to either seek alternative sources of product supply or service, or delay or change orders for products due to uncertainty over the integration of the two companies or the strategic position of the combined company |
| Acquisitions of companies and businesses and expansion of operations involve certain risks, including the following: • the business fails to achieve anticipated revenue and profit expectations; • the potential inability to successfully integrate acquired operations and businesses or to realize anticipated synergies, economies of scale, or other value; • diversion of management’s attention; • difficulties in scaling up production and coordinating management of operations at new sites; • the possible need to restructure, modify, or terminate customer relationships of the acquired business; • loss of key employees of acquired operations; and • the potential liabilities of the acquired businesses |
| Accordingly, we may experience problems in integrating the operations associated with any future acquisition |
| We therefore cannot provide assurance that any future acquisition will result in a positive contribution to our results of operations |
| In particular, the successful combination with any businesses we acquire will require substantial effort from each company, including the integration and coordination of sales and marketing efforts |
| The diversion of the attention of management and any difficulties encountered in the transition process, including the interruption of, or a loss of momentum in, the activities of any business acquired, problems associated with integration of management information and reporting systems, and delays in implementation of consolidation plans, could harm our ability to realize the anticipated benefits of any future acquisition |
| In addition, future acquisitions may result in dilutive issuances of equity securities, the incurrence of additional debt, significant inventory write-offs, and the creation of goodwill or other intangible assets that could result in increased impairment or amortization expense |
| Failure to maintain an effective system of internal controls in accordance with Section 404 of the Sarbanes-Oxley Act could inhibit our ability to accurately report our financial results and have a material adverse impact on our business and stock price |
| Effective internal controls are necessary for us to provide reliable financial reports |
| We have in the past discovered, and may in the future discover, areas of our internal controls that need improvement |
| We have commenced documentation of our internal control procedures in order to satisfy the requirements of Section 404 of the Sarbanes-Oxley Act of 2002, which requires annual management assessments of the effectiveness of our internal control over financial reporting |
| Effective December 31, 2007, we will be required to provide a report that contains an assessment by management of the effectiveness of our internal control over financial reporting |
| In addition, our independent registered public accounting firm must attest to and report on both management’s assessment as to whether we maintained effective internal control over financial reporting and on the effectiveness of our internal control over financial reporting |
| During the course of our testing we may identify deficiencies which we may not be able to remediate in time to meet the December 31, 2007 deadline imposed by the Sarbanes-Oxley Act of 2002 for compliance with the requirements of Section 404 |
| Our stock is traded on the Nasdaq SmallCap Market and if we are unable to sustain compliance with their listing requirements this could adversely impact our ability to use the capital markets to raise additional capital and our stockholders may be unable to efficiently sell their shares of our common stock |
| During 2005 we were unable to comply with Nasdaq’s requirements for continued listing on the Nasdaq National Market |
| We applied to transfer the listing of our common stock to the Nasdaq SmallCap Market and our 10 _________________________________________________________________ [63]Table of Contents stock is currently being traded on the Nasdaq SmallCap Market |
| There can be no assurance that we will continue to meet the listing requirements of the Nasdaq SmallCap market, including the requirement to maintain a minimum bid price of dlra1dtta00 per share |
| If we are unable to sustain compliance with their listing requirements this could adversely impact our ability to use the capital markets to raise additional capital and our stockholders may be unable to efficiently sell their shares of our common stock |
| Our stock price may be volatile, and our stock is thinly traded, which could cause investors to lose all or part of their investments in our common stock |
| The stock market may experience volatility that has often been unrelated to the operating performance of any particular company or companies |
| If market sector or industry-based fluctuations continue, our stock price could decline regardless of our actual operating performance, and investors could lose a substantial part of their investments |
| Moreover, if an active public market for our stock is not sustained in the future, it may be difficult to resell our stock |
| Since March 2002 when Suntron shares began trading, the average number of shares of our common stock that traded on the Nasdaq National and SmallCap markets has been approximately 8cmam000 shares per day compared to 27cmam415cmam221 issued and outstanding shares as of December 31, 2005 |
| When trading volumes are this low, a relatively small buy or sell order can result in a large percentage change in the trading price of our common stock, which may be unrelated to changes in our stock price that are associated with our operating performance |
| The market price of our common stock will likely fluctuate in response to a number of factors, including the following: • announcements about the financial performance and prospects of the industries and customers we serve; • announcements about the financial performance of our competitors in the EMS industry; • the timing of announcements by us or our competitors of significant contracts or acquisitions; • failure to meet the performance estimates of securities analysts; • changes in estimates of our results of operations by securities analysts; and • general stock market conditions |
| Our major stockholder controls us and our stock price could be influenced by actions taken by this stockholder |
| Additionally, this stockholder could prevent a change of control or other business combination, or could effect a “short form” merger without the approval of other stockholders |
| Thayer-Blum owns approximately 90prca of our common stock, and six of our ten directors are representatives of Thayer-Blum |
| The interests of Thayer-Blum may not always coincide with those of our other stockholders, particularly if Thayer-Blum decides to sell its controlling interest |
| In addition, Thayer-Blum will have sufficient voting power (without the approval of Suntron’s other stockholders) to elect the entire Board of Directors of Suntron and, in general, to determine the outcome of various matters submitted to stockholders for approval, including fundamental corporate transactions |
| Thayer-Blum could cause us to take actions that we would not consider absent Thayer-Blum’s influence, or could delay, deter, or prevent a change of control or other business combination that might otherwise be beneficial to our other stockholders |
| In addition, Thayer-Blum could contribute its Suntron stock to a subsidiary corporation that, as a 90prca stockholder, then would have the ability under Delaware law to merge with or into Suntron without the approval of the other Suntron stockholders |
| In the event of such a “short-form” merger, Suntron stockholders would have the right to assert appraisal/dissenters’ rights to receive cash in the amount of the fair market value of their shares in lieu of the consideration they would have otherwise received from the transaction |