| BUCYRUS INTERNATIONAL INC ITEM 1A RISK FACTORS An investment in the Company’s Class A common stock involves a number of risks and uncertainties |
| The Company’s business, prospects, financial condition, results of operations and cash flows could be materially and adversely affected by the following risks, or other risks and uncertainties that the Company has not yet identified or that it currently considers to be immaterial |
| In that event, the trading price of the Company’s Class A common stock could decline, and you could lose part or all of your investment |
| Risks Related to the Company’s Business A material disruption to the Company’s manufacturing plant in Wisconsin could adversely affect its ability to generate revenue The Company produces most of its equipment and aftermarket parts at its manufacturing plant in South Milwaukee, Wisconsin |
| If operations at this facility were to be disrupted as a result of equipment failures, natural disasters, work stoppages, power outages or other reasons, the Company’s business and results of operations could be adversely affected |
| Interruptions in production would increase costs and reduce sales |
| The Company’s facilities are 13 _________________________________________________________________ also subject to the risk of catastrophic loss due to fires, explosions or adverse weather conditions |
| Any interruption in production capability could require the Company to make large capital expenditures to remedy the situation, which could negatively affect its profitability and cash flows |
| The Company maintains property damage insurance which it believes to be adequate to provide for reconstruction of its facilities and equipment, as well as business interruption insurance to mitigate losses resulting from any production interruption or shutdown caused by an insured loss |
| However, any recovery under this insurance policy may not offset the lost sales or increased costs that may be experienced during the disruption of operations |
| Lost sales may not be recoverable under the policy and longer-term business disruptions could result in a loss of customers |
| If this were to occur, future sales levels, and therefore profitability, could be adversely affected |
| The Company’s production capacity may not be sufficient to meet customer demand The ongoing recovery of the world economy, as well as in the Company’s sales, has extensively used the Company’s available production capacity as well as the production capacity in many industries upon which it is dependent |
| The Company’s backlog of firm orders was dlra658dtta6 million at December 31, 2005 compared to dlra436dtta3 million at December 31, 2004 |
| The Company’s forecast for 2006 assumes continued good world economic growth, as well as continued growth of its sales |
| The Company has begun a multi-phase expansion program at its South Milwaukee facility that will substantially increase its production capacity |
| However, the Company’s production capacity may not be expanded soon enough, or to a sufficient extent, to satisfy customer demand for its products, which could adversely affect future sales levels and Company profitability |
| If the Company is unable to purchase component parts or raw materials from key suppliers, or the prices of component parts or raw materials rise prohibitively, the Company’s business and results of operations may be materially adversely affected The Company purchases all of its AC drives and certain other electrical parts from Siemens |
| The loss of Siemens, the Company’s only sole source supplier, could have a material adverse effect on its business |
| The Company also purchases track links, castings and forgings from suppliers with whom it has had long-standing relationships |
| Although these are not sole source suppliers, the loss of these suppliers could affect the Company’s ability to maintain or lower costs |
| If the Company had to develop alternative sources of supply, the ability to supply parts to its customers when needed could be impaired, business could be lost and margins could be reduced |
| In addition, the Company uses substantial quantities of wide-plate steel in its production processes |
| There have been significant recent increases in steel prices |
| If the Company is unable to recover price increases for raw materials it will experience reduced margins |
| Any significant future delays in obtaining production inputs and other supplies could harm the Company’s business and results of operations |
| In addition, there recently has been consolidation within the steelmaking industry, which could impede its ability to rely on competitive balance and long-standing business relationships to procure steel on economical terms and in a timely manner |
| The Company is reliant on significant customers The Company’s business is dependent on securing and maintaining customers by promptly delivering reliable, high-performance products |
| The Company does not consider itself 14 _________________________________________________________________ to be dependent upon any single customer; however, on an annual basis a single customer may account for a large percentage of sales, particularly OEM machine sales |
| In 2005, 2004 and 2003, BHP Billiton, the Company’s single largest customer, accounted for approximately 14prca, 12prca and 17prca, respectively, of its sales |
| The products that the Company may sell to any particular customer depend on the size of that customer’s capital expenditure budget devoted to surface mining plans in a particular year and on the results of competitive bids for major projects |
| Additionally, the Company’s top five customers in each of 2005, 2004 and 2003 collectively accounted for approximately 38prca, 36prca and 43prca, respectively, of its sales |
| The trend reflects the recent consolidation of the mining industry |
| In addition, key sectors of the surface mining industry are dominated by a few enterprises, some of whom are the Company’s customers |
| While the Company is not dependent on any one customer, the loss of one or more of its significant customers could, at least on a short-term basis, have an adverse effect on results of operations |
| Labor disruptions could adversely affect operations As of December 31, 2005, approximately 360 of the Company’s employees at its South Milwaukee and Memphis facilities were unionized |
| The five and one-half year contract with the United Steel Workers of America representing hourly workers at its South Milwaukee facility and the three-year contract with the International Brotherhood of Teamsters, Chauffeurs, Warehousemen and Helpers of America representing workers at its Memphis, Tennessee warehouse facility expire in April 2010 and September 2008, respectively |
| Although the Company believes that its relations with employees are good, a dispute between the Company and its employees could disrupt its operations |
| Certain of the Company’s mine site operations and production and other facilities are located in areas of high union concentration or in nations with laws favorable to unionization, and, as a result, such operations and facilities are susceptible to union organizing activity |
| In addition, the workforces of many of its suppliers and its transportation providers are unionized |
| If they are disrupted by labor issues, delivery of parts and materials to the Company could be reduced or delayed |
| Many of the Company’s customers have unionized work forces, and work stoppages experienced by its customers could cause the Company to lose sales or incur increased costs |
| The Company may be adversely affected by environmental and safety regulations or concerns The Company is subject to environmental and occupational safety and health laws and regulations in the United States and other countries |
| Environmental requirements are complex, change frequently and have tended to become more stringent over time |
| The Company cannot assure its complete historical or future compliance with all of these requirements |
| The Company may also incur material costs and liabilities in connection with these requirements in excess of amounts reserved |
| In addition, increased environmental regulation of the mining industry in North America and overseas could increase costs to the Company or to its customers and adversely affect the sales of its products and future operating earnings |
| These requirements may change in the future in a manner that could have a material adverse effect on its business, results of operations and financial condition |
| The Company has made and will continue to make capital and other expenditures to comply with environmental requirements |
| 15 _________________________________________________________________ The Company must attract and retain skilled labor in order to maintain and grow its business The Company’s ability to operate profitably and expand its operations depends in part on its ability to attract and retain skilled manufacturing workers, equipment operators, engineers and other technical personnel |
| Demand for these workers is currently high and the supply is limited, particularly in the case of skilled and experienced engineers and machinists |
| As a result, the Company’s growth may be limited by the scarcity of skilled labor |
| Even if the Company is able to attract and retain employees, competition for them may increase total compensation costs |
| Additionally, a significant increase in the wages paid by competing employers could result in a reduction in its skilled labor force, increases in the rates of wages the Company must pay or both |
| If compensation costs increase or the Company cannot attract and retain skilled labor, operating earnings would be reduced and production capacity and growth potential would be impaired |
| The Company is subject to risks of doing business in foreign countries, including emerging markets The Company derives the majority of its sales from foreign markets where it has substantial operations |
| During 2005, the Company generated dlra428dtta8 million, or approximately 75prca, of its sales outside the United States |
| A significant portion of this business is conducted in emerging markets located in Asia, Africa and South America |
| Changes in political, regulatory or economic conditions have the potential to adversely affect the Company’s international operations and its financial results |
| These factors principally include: • trade protection measures and price controls; • trade sanctions and embargos; • import or export licensing requirements; • economic downturns, civil disturbances or political instability; • nationalization and expropriation; and • potentially burdensome taxation |
| In addition, many of the nations in which the Company operates have developing legal and economic systems, adding a level of uncertainty to its operations in those countries relative to those that would be expected domestically |
| The above factors, and related unpredictability, could place the value of the Company’s operations and business relationships in overseas markets at risk |
| The Company is subject to risks related to conducting business in foreign currencies The Company’s Australian, Canadian, South African, Brazilian, Chilean and British aftermarket parts sales are denominated in the currencies of those nations, and the majority of its service sales are denominated in these and other local currencies |
| Although a portion of the expenses of providing overseas services are denominated in local currencies, the cost of goods associated with overseas sales are generally incurred in United States dollars |
| As a result, an increase in the value of the United States dollar relative to these nations’ currencies would decrease the United States dollar equivalent of aftermarket sales earned abroad without decreasing the United States dollar value of a portion of the expenses associated with overseas sales |
| The Company does not hedge currency exposures related to its aftermarket business, 16 _________________________________________________________________ which is naturally hedged only in part through the incurrence of part of the associated labor, operating expenses and ancillary costs in local currencies |
| Currency controls, devaluations, trade restrictions and other disruptions in currency convertibility and in the market for currency exchange could limit the Company’s ability to convert revenues earned abroad into United States dollars in a timely way |
| This could adversely affect its ability to service its United States dollar indebtedness, fund its United States dollar costs, finance capital expenditures and pay dividends on its common stock |
| The loss of key executives or other key personnel could adversely affect the Company’s business The Company’s success substantially depends upon its ability to attract and retain qualified employees and upon the ability of senior management and other key employees to implement its business strategy and maintain and grow customer and supplier relationships |
| The Company believes there are only a limited number of available qualified executives in its industry |
| Although the Company is not aware of any planned departures, it relies substantially upon the services of Timothy W Sullivan |
| The loss of his services or the services of other members of the Company’s management team or the inability to attract and retain other talented personnel could impede the further implementation of its business strategy, which could have a material adverse effect on its business |
| The Company does not currently maintain key man life insurance policies for any of its employees |
| In addition, competition for qualified employees among companies that rely heavily on engineering and technology is intense, and the loss of qualified employees or an inability to attract, retain and motivate additional highly skilled employees required for the operation and expansion of its business could have a materially adverse affect on its business |
| The Company may have to apply significant cash to meet its unfunded pension obligations, and these obligations are subject to increase Substantially all of the Company’s United States employees participate in its defined benefit pension plan |
| At December 31, 2005, the Company’s unfunded pension liability totaled approximately dlra40 million |
| Declines in interest rates or the market values of the securities held by the plans, or other adverse changes, could materially increase the under funded status of its plans and affect the level and timing of required cash contributions in 2006 and after |
| The Company’s continued success depends in part on the ability to protect intellectual property The Company’s future success depends in part upon the ability to protect intellectual property |
| The Company relies principally on nondisclosure agreements and other contractual arrangements and trade secret law and, to a lesser extent, trademark and patent law, to protect its intellectual property, including jointly developed intellectual property |
| However, these measures could prove inadequate to protect intellectual property from infringement by others or to prevent misappropriation of its proprietary rights |
| In addition, the laws and enforcement mechanisms of some foreign countries do not protect proprietary rights to the same extent as do United States laws |
| The Company’s inability to protect its proprietary information and enforce intellectual property rights through infringement or other enforcement proceedings could have a material adverse effect on its business, financial condition and results of operations |
| 17 _________________________________________________________________ The Company is, and may be in the future, subject to product liability and other suits related to past and current activities The sale and servicing of complex, large scale machinery used in a variety of locations and climates, and integrating a variety of manufactured and purchased components entails an inherent risk of suit and liability relating to the operation and performance of the machinery and the health and safety of the workers who operate and come into contact with the machinery |
| The Company maintains product liability and other insurance to cover claims of this nature |
| The Company’s policies, however, are subject to deductibles and recovery limitations as well as limitations on contingencies covered |
| Suits against the Company could be resolved in a manner that materially and adversely affects its financial condition, and the Company could be subject to future material product liability or other tort or contractual suits |
| The Company has been named as a defendant in multiple suits asserting claims related to exposure to asbestos and other substances The Company has been named as a co-defendant as of December 31, 2005, in approximately 309 personal injury liability cases alleging damages caused by exposure to asbestos and other substances |
| The Company has secured the dismissal and resolution of a number of previous claims alleging similar fact patterns |
| The particular circumstances of many of these cases are difficult to assess because the claims allege exposure to a variety of substances from various sources over varying historical periods and assert the culpability of multiple defendants |
| The Company has insurance coverage, subject to various deductible and other coverage limitations, for the historical periods during which the pending claims of which the Company is aware allege exposure |
| It is possible that claims could be brought with respect to subsequent periods or that insurance coverage in respect of periods for which coverage was obtained will not be adequate to satisfy adverse judgments and other claim resolutions |
| If these suits are resolved in an adverse manner the Company’s financial position could be adversely affected |
| In addition, the Company could be named as a defendant in future suits alleging damages due to exposure to asbestos and other substances |
| Risks Relating to the Company’s Industry The Company operates in a highly competitive industry The Company operates in a highly competitive industry |
| In the aftermarket, the Company competes with numerous will-fitters |
| The Company’s only global competitor in electric mining shovels and draglines is the P&H division of Joy Global Inc, although for certain applications its electric mining shovels may also compete against hydraulic shovels made by other manufacturers |
| In the market for rotary blasthole drills, the Company’s primary competitors are the P&H division of Joy Global Inc |
| and Atlas Copco AB, which recently acquired a drilling equipment business from Ingersoll-Rand Company Limited |
| Certain of the Company’s competitors may be larger or have greater financial resources |
| In China and Russia, the Company also faces some limited competition from regional and domestic equipment manufacturers |
| Methods of competition are diverse and include price, customer relationships, lead times, operating costs, product productivity, design and performance, reliability, service, delivery and other commercial factors |
| If the Company cannot compete effectively with existing or future competitors, its operating results could be materially adversely affected |
| 18 _________________________________________________________________ The industries the Company serves are subject to significant cyclical fluctuations Because the Company’s customers’ purchasing patterns are affected by a variety of factors beyond its control, its sales and operating results may fluctuate significantly from period to period |
| Given the large sales price of the Company’s machinery, one or a limited number of machines may account for a substantial portion of sales in any particular period |
| Although the Company recognizes sales on a percentage-of-completion basis for new machines, the timing of one or a small number of contracts in any particular period may nevertheless affect operating results |
| In addition, sales and gross profit may fluctuate depending upon the size and the requirements of the particular contracts entered into in that period |
| The sale of new machines is cyclical in nature and sensitive to changes in general economic conditions, including fluctuations in market prices for copper, coal, oil, iron ore and other minerals as well as alternatives to these minerals |
| Many factors affect the supply and demand for minerals and oil and thus may affect the Company’s sale of products and services, including: • the level of production; • the levels of mineral inventories; • commodities prices; • the expected cost of developing new reserves; • the cost of conducting surface mining operations; • the level of surface mining activity; • worldwide economic activity; • substitution of new or competing inputs and mining methods; • national government political requirements; • environmental regulation; and • tax policies |
| If demand for mining services or surface mining equipment utilization rates decrease significantly, then demand for the Company’s products and services will decrease |
| As a result of this cyclicality, the Company has experienced, and in the future could experience, extended periods of reduced sales and margins |
| Regulations affecting the mining industry or electric utilities may reduce demand for the Company’s products and services The Company’s principal customers are surface mining companies |
| Many of these customers supply coal as a power generating source for the production of electricity in the United States and other industrialized regions |
| The operations of these mining companies are geographically diverse and are subject to or affected by a wide array of regulations in the jurisdictions where they operate, including those with a direct impact on mining activities and those indirectly affecting their businesses, such as applicable environmental laws and an array of regulations governing the operation of electric utilities |
| As a result of changes in regulations and laws relating to the operation of mines, the Company’s customers’ mining operations could be disrupted or curtailed by governmental authorities |
| The high cost of compliance with mining and environmental regulations may also induce customers to discontinue or limit their mining operations, and may discourage companies from developing new mines |
| Additionally, government regulation of electric utilities may adversely impact the demand for coal to the extent that such regulations cause electric utilities to select alternative energy sources and technologies as a source of electric power |
| Initiatives to regulate mercury emissions, and initiatives targeting acid rain or greenhouse gas emissions, could significantly depress coal consumption in Western economies |