| Risk Factors 8 Item 1a Risk Factors Factors That May Affect Our Future Results (Cautionary Statements for Purposes of the "e Safe Harbor "e Provisions of the Private Securities Litigation Reform Act of 1995) Our disclosures and analysis in this report contain forward-looking statements |
| Forward-looking statements reflect our current expectations of future events or future financial performance |
| You can identify these statements by the fact that they do not relate strictly to historical or current facts |
| These forward-looking statements are based on our current plans and expectations |
| Any or all of our forward-looking statements in this report may prove to be incorrect |
| They may be affected by inaccurate assumptions we might make or by risks and uncertainties which are either unknown or not fully known or understood |
| Accordingly, actual outcomes and results may differ materially from what is expressed or forecasted in this report |
| We sometimes provide forecasts of future financial performance |
| The risks and uncertainties described under "e Risk Factors "e as well as other risks identified from time to time in other Securities and Exchange Commission reports, registration statements and public announcements, among others, should be considered in evaluating our prospects for the future |
| We undertake no obligation to release updates or revisions to any forward-looking statement, whether as a result of new information, future events or otherwise |
| 8 Cyclical changes in the markets we serve could result in a significant decrease in demand for our products and reduce our profitability |
| Our components are used in various products for the electronic and electrical equipment markets |
| These markets are highly cyclical |
| The demand for our components reflects the demand for products in the electronic and electrical equipment markets generally |
| A contraction in demand would result in a decrease in sales of our products, as our customers: o may cancel many existing orders; o may introduce fewer new products; and o may decrease their inventory levels |
| A decrease in demand for our products would have a significant adverse effect on our operating results and profitability |
| Accordingly, we may experience volatility in both our revenues and profits |
| Reduced prices for our products may adversely affect our profit margins if we are unable to reduce our costs of production |
| The average selling prices for our products tend to decrease over their life cycle |
| In addition, foreign currency movements and the need to retain market share increase the pressure on our customers to seek lower prices from their suppliers |
| To maintain our margins and remain profitable, we must continue to meet our customers &apos design needs while reducing costs through efficient raw material procurement and process and product improvements |
| Our profit margins will suffer if we are unable to reduce our costs of production as sales prices decline |
| An inability to adequately respond to changes in technology or customer needs may decrease our sales |
| Pulse operates in an industry characterized by rapid change caused by the frequent emergence of new technologies |
| Generally, we expect life cycles for our products in the electronic components industry to be relatively short |
| This requires us to anticipate and respond rapidly to changes in industry standards and customer needs and to develop and introduce new and enhanced products on a timely and cost effective basis |
| Our engineering and development teams place a priority on working closely with our customers to design innovative products and improve our manufacturing processes |
| Our inability to react to changes in technology or customer needs quickly and efficiently may decrease our sales, thus reducing profitability |
| If our inventories become obsolete, our future performance and operating results will be adversely affected |
| The life cycles of our products depend heavily upon the life cycles of the end products into which our products are designed |
| Many of Pulseapstas products have very short life cycles which are measured in quarters |
| Products with short life cycles require us to closely manage our production and inventory levels |
| Inventory may become obsolete because of adverse changes in end market demand |
| During market slowdowns, this may result in significant charges for inventory write-offs |
| Our future operating results may be adversely affected by material levels of obsolete or excess inventories |
| An inability to capitalize on our recent or future acquisitions may adversely affect our business |
| We have completed several acquisitions in recent years |
| We continually seek acquisitions to grow our business |
| We may fail to derive significant benefits from our acquisitions |
| In addition, if we fail to achieve sufficient financial performance from an acquisition, goodwill and other intangibles could become impaired, resulting in our recognition of a loss |
| In 2004, we recorded an aggregate intangible impairment charge of dlra18dtta5 million related to Pulse |
| The success of any of our acquisitions depends on our ability to: o successfully integrate or consolidate acquired operations into our existing businesses; o develop or modify the financial reporting and information systems of the acquired entity to ensure overall financial integrity and adequacy of internal control procedures; o identify and take advantage of cost reduction opportunities; and o further penetrate the markets for the product capabilities acquired |
| 9 Integration of acquisitions may take longer than we expect and may never be achieved to the extent originally anticipated |
| This could result in lower than anticipated business growth or higher than anticipated costs |
| In addition, acquisitions may: o cause a disruption in our ongoing business; o distract our managers; o unduly burden our other resources; and o result in an inability to maintain our historical standards, procedures and controls, which may result in non-compliance with external laws and regulations |
| Integration of acquisitions into the acquiring segment may limit the ability of investors to track the performance of individual acquisitions and to analyze trends in our operating results |
| Our historical practice has been to rapidly integrate acquisitions into the existing business of the acquiring segment and to report financial performance on the segment level |
| As a result of this practice, we do not separately track the stand-alone performance of acquisitions after the date of the transaction |
| Consequently, investors cannot quantify the financial performance and success of any individual acquisition or the financial performance and success of a particular segment excluding the impact of acquisitions |
| In addition, our practice of rapidly integrating acquisitions into the financial performance of each segment may limit the ability of investors to analyze any trends in our operating results over time |
| An inability to identify additional acquisition opportunities may slow our future growth |
| We intend to continue to identify and consummate additional acquisitions to further diversify our business and to penetrate important markets |
| Even if we identify promising acquisition candidates, the timing, price, structure and success of future acquisitions are uncertain |
| An inability to consummate attractive acquisitions may reduce our growth rate and our ability to penetrate new markets |
| If our customers terminate their existing agreements, or do not enter into new agreements or submit additional purchase orders for our products, our business will suffer |
| In addition, to the extent we have agreements in place with our customers, most of these agreements are either short term in nature or provide our customers with the ability to terminate the arrangement with little or no prior notice |
| Such agreements typically do not provide us with any material recourse in the event of non-renewal or early termination |
| We will lose business and our revenues will decrease if a significant number of customers: o do not submit additional purchase orders; o do not enter into new agreements with us; or o elect to terminate their relationship with us |
| If we do not effectively manage our business in the face of fluctuations in the size of our organization, our business may be disrupted |
| We have grown over the last ten years, both organically and as a result of acquisitions |
| However, we significantly reduce or expand our workforce and facilities in response to rapid changes in demand for our products due to prevailing global market conditions |
| These rapid fluctuations place strains on our resources and systems |
| If we do not effectively manage our resources and systems, our businesses may be adversely affected |
| Uncertainty in demand for our products may result in increased costs of production, an inability to service our customers, or higher inventory levels which may adversely affect our results of operations and financial condition |
| We have very little visibility into our customers &apos purchasing patterns and are highly dependent on our customers &apos forecasts |
| These forecasts are non-binding and often highly unreliable |
| Given the fluctuation in growth rates and cyclical demand for our products, as well as our reliance on often-imprecise customer forecasts, it is difficult to accurately manage our production schedule, equipment and personnel needs and our raw material and working capital requirements |
| Our failure to effectively manage these issues may result in: o production delays; 10 o increased costs of production; o excessive inventory levels and reduced financial liquidity; o an inability to make timely deliveries; and o a decrease in profits |
| A decrease in availability or increase in cost of our key raw materials could adversely affect our profit margins |
| We use several types of raw materials in the manufacturing of our products, including: o precious metals such as silver; o other base metals such as copper and brass; and o ferrite cores |
| From time to time, we may be unable to obtain these raw materials in sufficient quantities or in a timely manner to meet the demand for our products |
| The lack of availability or a delay in obtaining any of the raw materials used in our products could adversely affect our manufacturing costs and profit margins |
| In addition, if the price of our raw materials increases significantly over a short period of time, customers may be unwilling to bear the increased price for our products and we may be forced to sell our products containing these materials at prices that reduce our profit margins |
| Some of our raw materials, such as precious metals, are considered commodities and are subject to price volatility |
| We attempt to limit our exposure to fluctuations in the cost of precious materials, including silver, by holding the majority of our precious metal inventory through leasing or consignment arrangements with our suppliers |
| We then typically purchase the precious metal from our supplier at the current market price on the day after delivery to our customer and pass this cost on to our customer |
| In addition, leasing and consignment costs have historically been substantially below the costs to borrow funds to purchase the precious metals |
| We currently have four consignment or leasing agreements related to precious metals, all of which generally have one year terms with varying maturity dates, but can be terminated by either party with 30 days &apos prior notice |
| Our results of operations and liquidity will be negatively impacted if: o we are unable to enter into new leasing or consignment arrangements with similarly favorable terms after our existing agreements terminate, or o our leasing or consignment fees increase significantly in a short period of time and we are unable to recover these increased costs through higher sale prices |
| Fees charged by the consignor are driven by interest rates and the market price of the consigned material |
| The market price of the consigned material is determined by the supply of, and the demand for, the material |
| Consignment fees may increase if interest rates or the price of the consigned material increase |
| Competition may result in lower prices for our products and reduced sales |
| Both Pulse and AMI Doduco frequently encounter strong competition within individual product lines from various competitors throughout the world |
| We compete principally on the basis of: o product quality and reliability; o global design and manufacturing capabilities; o breadth of product line; o customer service; o price; and o on-time delivery |
| Our inability to successfully compete on any or all of the above factors may result in reduced sales |
| Our backlog is not an accurate measure of future revenues and is subject to customer cancellation |
| While our backlog consists of firm accepted orders with an express release date generally scheduled within nine months of the order, many of the orders that comprise our backlog may be canceled by customers without penalty |
| It is widely known that customers in the electronics industry have on occasion double and triple-ordered components from multiple sources to ensure timely delivery when quoted lead time is particularly long |
| In addition, customers often cancel orders when business is weak and inventories are excessive |
| Although backlog should not be 11 relied on as an indicator of our future revenues, our results of operations could be adversely impacted if customers cancel a material portion of orders in our backlog |
| Fluctuations in foreign currency exchange rates may adversely affect our operating results |
| We manufacture and sell our products in various regions of the world and export and import these products to and from a large number of countries |
| Fluctuations in exchange rates could negatively impact our cost of production and sales that, in turn, could decrease our operating results and cash flow |
| In addition, if the functional currency of our manufacturing costs strengthened compared to the functional currency of our competitors manufacturing costs, our products may get more costly than our competitors |
| Although we engage in limited hedging transactions, including foreign currency contracts, to reduce our transaction and economic exposure to foreign currency fluctuations, these measures may not eliminate or substantially reduce our risk in the future |
| Our international operations subject us to the risks of unfavorable political, regulatory, labor and tax conditions in other countries |
| We manufacture and assemble most of our products in locations outside the United States, including the Peoples &apos Republic of China, or PRC, Hungary, Turkey, and Tunisia and a majority of our revenues are derived from sales to customers outside the United States |
| Our future operations and earnings may be adversely affected by the risks related to, or any other problems arising from, operating in international markets |
| Risks inherent in doing business internationally may include: o economic and political instability; o expropriation and nationalization; o trade restrictions; o capital and exchange control programs; o transportation delays; o foreign currency fluctuations; and o unexpected changes in the laws and policies of the United States or of the countries in which we manufacture and sell our products |
| Pulse has substantially all of its manufacturing operations in the PRC, except for LK and ERA Our presence in the PRC has enabled Pulse to maintain lower manufacturing costs and to adjust our work force to demand levels for our products |
| Although the PRC has a large and growing economy, the potential economic, political, legal and labor developments entail uncertainties and risks |
| For example, in May 2005 the local government in the PRC increased wages in the southern coastal provinces of the PRC by 17prca |
| While the PRC has been receptive to foreign investment, we cannot be certain that its current policies will continue indefinitely into the future |
| In the event of any changes that adversely affect our ability to conduct our operations within the PRC, our businesses may suffer |
| We also have manufacturing operations in Turkey and Tunisia, which are subject to unique risks, including earthquakes and those associated with Middle East geo-political events |
| We have benefited over recent years from favorable tax treatment as a result of our international operations |
| We operate in countries where we realize favorable income tax treatment relative to the US statutory rate |
| We have also been granted special tax incentives commonly known as tax holidays in countries such as the PRC, Hungary, and Turkey |
| This favorable situation could change if these countries were to increase rates or revoke the special tax incentives, or if we discontinue our manufacturing operations in any of these countries and do not replace the operations with operations in other locations with favorable tax incentives |
| Accordingly, in the event of changes in laws and regulations affecting our international operations, we may not be able to continue to take advantage of similar benefits in the future |
| Shifting our operations between regions may entail considerable expense |
| In the past we have shifted our operations from one region to another in order to maximize manufacturing and operational efficiency |
| We may close one or more additional factories in the future |
| This could entail significant one-time earnings charges to account for severance, equipment write-offs or write-downs and moving expenses, as well as certain adverse tax consequences including the loss of specialized tax incentives |
| In addition, as we implement transfers of our operations we may experience disruptions, including strikes or other types of labor unrest resulting from layoffs or termination of employees |
| 12 Liquidity requirements could necessitate movements of existing cash balances which may be subject to restrictions or cause unfavorable tax and earnings consequences |
| A significant portion of our cash is held offshore by our international subsidiaries and is predominantly denominated in US dollars |
| While we intend to use a significant amount of the cash held overseas to fund our international operations and growth, if we encounter a significant domestic need for liquidity, such as paying dividends, that we cannot fulfill through borrowings, equity offerings, or other internal or external sources, we may experience unfavorable tax and earnings consequences if this cash is transferred to the United States |
| These adverse consequences would occur if the transfer of cash into the United States is taxed and no offsetting foreign tax credit is available to offset the US tax liability, resulting in lower earnings |
| In addition, we may be prohibited from transferring cash from the PRC With the exception of approximately dlra16dtta2 million of retained earnings as of December 30, 2005 in primarily the PRC that are restricted in accordance with the PRC Foreign Investment Enterprises Law, substantially all retained earnings are free from legal or contractual restrictions |
| The PRC Foreign Investment Enterprise Law restricts 10prca of our net earnings in the PRC, up to a maximum amount equal to 50prca of the total capital we have invested in the PRC We have not experienced any significant liquidity restrictions in any country in which we operate and none are presently foreseen |
| However, foreign exchange ceilings imposed by local governments and the sometimes-lengthy approval processes which some foreign governments require for international cash transfers may delay our internal cash movements from time to time |
| In October 2004, the American Jobs Creation Act of 2004 ( "e AJCA "e ) was signed into law |
| The AJCA contains a series of provisions, several of which are pertinent to us |
| The AJCA creates a temporary incentive for US multi-national corporations to repatriate accumulated income abroad by providing an 85prca dividends received deduction for certain dividends from controlled foreign corporations |
| Based on this legislation and 2005 guidance by the Department of Treasury, we repatriated dlra52 million of foreign earnings |
| A charge of dlra7dtta3 million related to the repatriation is included in income taxes (from continuing operations) in the accompanying Consolidated Statements of Operations |
| Prior to the passage of the AJCA, the undistributed earnings of our foreign subsidiaries, with the exception of approximately dlra40 million, were considered to be indefinitely reinvested, and in accordance with APB Opinion Nodtta 23 ( "e APB 23 "e ), Accounting for Income Taxes - Special Areas, no provision for US federal or state income taxes had been provided on these undistributed earnings |
| The remaining offshore earnings, with the exception of approximately dlra40 million, are intended to be indefinitely invested abroad and no provision for US federal or state income taxes has been provided in accordance with APB 23 |
| Losing the services of our executive officers or our other highly qualified and experienced employees could adversely affect our business |
| Our success depends upon the continued contributions of our executive officers and management, many of whom have many years of experience and would be extremely difficult to replace |
| We must also attract and maintain experienced and highly skilled engineering, sales and marketing and managerial personnel |
| Competition for qualified personnel is intense in our industries, and we may not be successful in hiring and retaining these people |
| If we lose the services of our executive officers or cannot attract and retain other qualified personnel, our businesses could be adversely affected |
| Public health epidemics (such as flu strains, or severe acute respiratory syndrome) or other natural disasters (such as earthquakes or fires) may disrupt operations in affected regions and affect operating results |
| Pulse maintains extensive manufacturing operations in the PRC, Turkey and Tunisia, as do many of our customers and suppliers |
| A sustained interruption of our manufacturing operations, or those of our customers or suppliers, as a result of complications from severe acute respiratory syndrome or another public health epidemic or other natural disasters, could have a material adverse effect on our business and results of operations |
| Costs associated with precious metals may not be recoverable |
| AMI Doduco uses silver, as well as other precious metals, in manufacturing some of its electrical contacts, contact materials and contact subassemblies |
| Historically, we have leased or held these materials through consignment arrangements with our suppliers |
| Leasing and consignment costs have typically been below the costs to borrow funds to purchase the metals, and more importantly, these arrangements eliminate the effects of fluctuations in the market price of owned precious metal and enable us to minimize our inventories |
| AMI Doducoapstas terms of sale generally allow us to charge customers for precious metal content based on market value of precious metal on the day after shipment to the customer |
| Thus far we have been successful in managing the costs associated with our precious metals |
| While limited amounts are purchased for use in production, the majority of our precious metal inventory continues to be leased or held on consignment |
| If our leasing/consignment fees increase significantly in a short period of time, and we are unable to recover these increased costs through higher sale prices, a negative impact on our 13 results of operations and liquidity may result |
| Leasing/consignment fee increases are caused by increases in interest rates or volatility in the price of the consigned material |
| The unavailability of insurance against certain business risks may adversely affect our future operating results |
| As part of our comprehensive risk management program, we purchase insurance coverage against certain business risks |
| If any of our insurance carriers discontinues an insurance policy or significantly reduces available coverage or increases in the deductibles and we cannot find another insurance carrier to write comparable coverage, we may be subject to uninsured losses which may adversely affect our operating results |
| Environmental liability and compliance obligations may affect our operations and results |
| Our manufacturing operations are subject to a variety of environmental laws and regulations as well as internal programs and policies governing: o air emissions; o wastewater discharges; o the storage, use, handling, disposal and remediation of hazardous substances, wastes and chemicals; and o employee health and safety |
| If violations of environmental laws should occur, we could be held liable for damages, penalties, fines and remedial actions |
| Our operations and results could be adversely affected by any material obligations arising from existing laws, as well as any required material modifications arising from new regulations that may be enacted in the future |
| We may also be held liable for past disposal of hazardous substances generated by our business or businesses we acquire |
| In addition, it is possible that we may be held liable for contamination discovered at our present or former facilities |
| We are aware of contamination at two locations |
| In Sinsheim, Germany, there is a shallow groundwater and soil contamination that is naturally decreasing over time |
| The German environmental authorities have not required corrective action to date |
| In addition, property in Leesburg, Indiana, which was acquired with our acquisition of GTI in 1998, is the subject of a 1994 Corrective Action Order to GTI by the Indiana Department of Environmental Management (IDEM) |
| Although we sold the property in early 2005, we retained the responsibility for existing environmental issues at the site |
| The order requires us to investigate and take corrective actions |
| Substantially all of the corrective actions relating to impacted soil have been taken and IDEM has issued us "e no further action "e letters for most of the remediated areas |
| We expect a final "e no further action "e letter on this area upon IDEMapstas final review of our closure report |
| We anticipate making additional environmental expenditures in the future to continue our environmental studies, analysis and remediation activities with respect to this site |
| Based on current knowledge, we do not believe that any future expenses or liabilities associated with environmental remediation will have a material impact on our operations or our consolidated financial position, liquidity or operating results; however, we may be subject to additional costs and liabilities if the scope of the contamination or the cost of remediation exceeds our current expectations |