| FISHER SCIENTIFIC INTERNATIONAL INC Item 1A Risk Factors Our business is subject to a number of important risks and uncertainties |
| You should carefully consider the risk factors below as well as all the other information we have included in this Form 10-K 11 _________________________________________________________________ [66]Table of Contents Our growth strategy to acquire new businesses may not be successful and the integration of future acquisitions may be difficult and disruptive to our ongoing operations |
| Acquisitions are an important part of our growth strategy |
| Since 1991, we have acquired more than 40 businesses and we routinely review additional potential acquisition opportunities |
| Despite our successful record in integrating the companies we have acquired, certain risks exist, including the potential for: • management’s attention being diverted to the integration of the acquired businesses; • difficulties in integrating the operations and systems of the acquired businesses and in realizing operating synergies; and • difficulties in assimilating and retaining employees and customers of the acquired companies |
| None of these difficulties has historically been material, but if they were to be in the future, we may be unable to implement a portion of our growth strategy |
| In addition, we compete with other companies to acquire suitable acquisition targets and may not be able to acquire certain targets that we seek |
| Also, certain of the businesses we have acquired may not generate the cash flow and earnings or yield other benefits that we anticipated at the time of their acquisition |
| If we are unable to successfully complete and integrate strategic acquisitions in a timely manner, the acquisition may adversely affect our profitability |
| In addition, if we are unable to hire and retain key management personnel, we may not be able to execute our acquisition strategy |
| Our results of operations depend on our customers’ research and development efforts; these efforts and the spending on them are beyond our control, and our results of operations may be adversely affected if our customers do not continue expending sufficient resources on these activities |
| A significant number of our customers include entities active in scientific or technological research in the scientific research and clinical laboratory markets in the United States and internationally |
| Research and development budgets and activities have a large effect on the demand for our products and services |
| Our customers determine their research and development budgets based on several factors, including the need to develop new products, government funding, competition and the general availability of resources |
| In addition, as we continue to expand our international operations, the research and development spending levels in other markets will become increasingly important to us |
| Although we expect continued increases in scientific and technology-related research and development spending in the United States and worldwide, such spending may decrease or become subject to cyclical swings |
| Because we compete directly with certain of our largest customers and product suppliers, our results of operations could be adversely affected in the short term if these customers or suppliers abruptly discontinue or significantly modify their relationship with us |
| Our largest customer in the scientific products and services segment and our largest customer in the healthcare products and services segment are also significant competitors |
| Our business may be harmed in the short term if our competitive relationship in the marketplace with these customers results in a discontinuation of their purchases from us |
| In addition, we manufacture products that compete directly with products that we source from third-party suppliers |
| We also source competitive products from multiple suppliers |
| Our business could be adversely affected in the short term if any of our large third-party suppliers abruptly discontinues selling products to us |
| We may incur impairment charges on our goodwill and intangible assets with indefinite lives that would reduce our earnings |
| We are subject to Statement of Financial Accounting Standards (SFAS) Nodtta 142, “Goodwill and Other Intangible Assets,”(“SFAS 142”) which requires that goodwill and intangible assets that have an indefinite useful life be tested at least annually for impairment |
| Goodwill and other intangible assets with indefinite lives must also be tested for impairment between the annual tests if an event occurs, such as a downturn in our business or the loss of a significant customer, that would more likely than not reduce the fair value of the asset below its carrying amount |
| As of December 31, 2005, goodwill and other intangible assets with indefinite lives 12 _________________________________________________________________ [67]Table of Contents represented approximately 57prca of our total assets |
| If we determine that there has been an impairment, our financial results for the relevant period will be reduced by the amount of the impairment, net of income tax effects, if any |
| We rely heavily on manufacturing operations to produce the products we sell, and our business could be adversely affected by disruptions of our manufacturing operations |
| We rely upon our manufacturing operations to produce many of the products we sell |
| Any significant disruption of those operations for any reason, such as strikes or other labor unrest, power interruptions, fire, or other events beyond our control could adversely affect our sales and customer relationships and therefore adversely affect our business |
| Although most of our raw materials are available from a number of potential suppliers, our operations also depend upon our ability to obtain raw materials at reasonable prices |
| If we are unable to obtain the materials we need at a reasonable price, we may not be able to produce certain of our products or we may not be able to produce certain of these products at a marketable price, which could have an adverse effect on our results of operations |
| We have implemented, and will continue to implement, various cost-savings initiatives that may not achieve the anticipated results |
| We have implemented and approved a number of programs designed to reduce costs |
| We also expect that we will continue to identify opportunities for operational efficiencies and implement programs designed to achieve these efficiencies |
| Such programs will require, among other things, the consolidation and integration of facilities, functions, systems, and procedures, all of which present significant management challenges |
| There can be no assurance that such actions will be accomplished as rapidly as anticipated or that the full extent of expected cost reductions will be achieved |
| During 2005, most of our cost savings initiatives related to the integration of Apogent businesses |
| The integration of Apogent and the associated cost savings programs proceeded as planned during 2005 |
| Our indebtedness could adversely affect our financial health and prevent us from fulfilling our financial obligations |
| As of December 31, 2005, we had total indebtedness of dlra2cmam210dtta1 million |
| In addition, as of December 31, 2005, we had the ability to incur an additional aggregate amount of dlra988dtta5 million of indebtedness under our existing accounts receivable securitization facility and revolving credit facility |
| Further borrowing under those facilities or incurring any other additional indebtedness would increase our leverage and our risks |
| Our debt agreements permit us to incur or guarantee additional indebtedness, subject to limitations set forth in those agreements |
| Our indebtedness could negatively affect our operations in a number of ways including: • increasing our vulnerability to generally adverse economic and industry conditions; • reducing the availability of our cash flows to fund working capital, capital expenditures, research and development efforts, program investment efforts and other general corporate needs; • limiting our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate; • exposing us to the risk of increased interest rates because some of our debt has variable interest rates; and • limiting our ability to borrow additional funds |
| Any default under the agreements governing our credit facility or our other outstanding indebtedness and the remedies sought by the holders of such indebtedness could make us unable to pay principal and interest on our outstanding indebtedness |
| 13 _________________________________________________________________ [68]Table of Contents In addition, we will be required to repay the indebtedness under our various debt agreements as that indebtedness matures |
| We may not have sufficient funds or we may be unable to arrange for additional financing to pay these amounts when they become due |
| ” Because we rely heavily on third-party package-delivery services, a significant disruption in these services or significant increases in prices may disrupt our ability to ship products, increase our costs and lower our profitability |
| We ship a significant portion of our products to our customers through independent package delivery companies, such as UPS and Federal Express in the US and DHL in Europe |
| We also maintain a small fleet of vehicles dedicated to the delivery of our products and ship our products through other carriers, including national and regional trucking firms, overnight carrier services and the US Postal Service |
| If UPS or another third-party package-delivery provider experiences a major work stoppage (as UPS did in 1997), preventing our products from being delivered in a timely fashion or causing us to incur additional shipping costs we could not pass on to our customers, our costs could increase and our relationships with certain of our customers could be adversely affected |
| In addition, if UPS or our other third-party package-delivery providers increase prices, and we are not able to find comparable alternatives or make adjustments in our delivery network, our profitability could be adversely affected |
| We are subject to regulation by various federal, state and foreign agencies that require us to comply with a wide variety of regulations, including those regarding the manufacture of products, the shipping of our products and environmental matters |
| Some of our operations are subject to regulation by the US Food and Drug Administration and similar international agencies |
| These regulations govern a wide variety of product activities, from design and development to labeling, manufacturing, promotion, sales and distribution |
| If we fail to comply with the US Food and Drug Administration’s regulations or those of similar international agencies, we may have to recall products and cease their manufacture and distribution, which would increase our costs and reduce our revenues |
| We are subject to federal, state, local and international laws and regulations that govern the handling, transportation, manufacture, use or sale of substances that are or could be classified as toxic or hazardous substances |
| Some risk of environmental damage is inherent in our operations and the products we manufacture, sell or distribute |
| This requires us to devote significant resources to maintain compliance with applicable environmental laws and regulations, including the establishment of reserves to address potential environmental costs, and manage environmental risks |
| If we lose our key personnel, our business could be adversely affected |
| We depend heavily on the services of our senior management, including Paul M Montrone, our Chairman of the Board and Chief Executive Officer, and Paul M Meister, our Vice Chairman of the Board, both of whom are important to our acquisition and earnings-growth strategy |
| We believe our future success will depend upon the continued services of our senior management |
| Our business could be adversely affected by the loss of any member of our senior management, including Mr |
| Montrone or Mr |
| We do not maintain key-man life insurance in respect of Mr |
| We are subject to economic, political and other risks associated with our significant international sales and operations, which could adversely affect our business |
| We conduct international operations through a variety of wholly owned subsidiaries, majority-owned subsidiaries, joint ventures, equity investments and agents located in North and South America, Europe, the Far East, the Middle East and Africa |
| A significant portion of the revenues of our international operations is generated in Europe |
| Expansion of these activities could increase the risks associated with our international operations |
| Sales outside the United States were approximately 25prca and 24prca of total sales in 2005 and 2004, 14 _________________________________________________________________ [69]Table of Contents respectively |
| We anticipate that sales from international operations will continue to represent a growing portion of our revenues |
| In addition, many of our manufacturing facilities, employees and suppliers are located outside the United States |
| Our sales and earnings could be adversely affected by a variety of factors resulting from our international operations, including: • changes in the political or economic conditions in a country or region, particularly in developing or emerging markets; • future fluctuations in exchange rates; • trade-protection measures and import-or export-licensing requirements; • differing tax laws and changes in those laws; • difficulty in staffing and managing widespread operations; and • differing regulatory requirements and changes in those requirements |
| We may be unable to adjust to rapid changes in the healthcare industry, some of which could adversely affect our business |
| The healthcare industry has undergone significant changes in an effort to reduce costs |
| These changes include: • development of large and sophisticated groups purchasing medical and surgical supplies; • wider implementation of managed care; • legislative healthcare reform; • consolidation of pharmaceutical companies; • increased outsourcing of certain activities, including to low-cost offshore locations; and • consolidation of distributors of pharmaceutical, medical and surgical supplies |
| We expect the healthcare industry to continue to change significantly in the future |
| Some of these potential changes, such as a reduction in governmental support of healthcare services or adverse changes in legislation or regulations governing the delivery or pricing of healthcare services or mandated benefits, may cause healthcare-industry participants to purchase fewer of our products and services or to reduce the prices they are willing to pay for our products or services |
| We may incur unexpected costs from increases in fuel and raw material prices, which could reduce our earnings and cash flow |
| During 2005, we experienced price increases in fuel and raw materials, including petroleum-based resins |
| We were able to minimize the impact of these price increases through higher prices to customers and various cost-saving measures |
| While we will continue to implement such initiatives to minimize the impact of future price increases, our earnings and cash flows could be adversely affected in the event these measures were insufficient to cover our costs |
| For further discussion regarding our commodity risks refer to “Item 7A — Quantitative and Qualitative Disclosures About Market Risk — Commodity Risk Management |
| ” If we experience a significant disruption in our information technology systems or if we fail to implement new systems and software successfully, our business could be adversely affected |
| We depend on the information systems throughout our Company to manufacture products, process orders, manage inventory, process shipments to customers and respond to customer inquiries |
| If we were to experience a prolonged disruption in the information technology systems that involve our interactions with 15 _________________________________________________________________ [70]Table of Contents customers and suppliers, it could result in the loss of sales and customers, which could adversely affect our business |
| Exchange rate fluctuations may adversely affect our business |
| Since we are a multinational corporation that sells products and sources products in many different countries, changes in exchange rates could adversely affect our cash flows and results of operations |
| Our businesses occasionally invoice third-party customers or are invoiced for product purchases in currencies other than the one in which they primarily do business (the “functional currency”) |
| Movements in the invoiced currency relative to the functional currency result in foreign currency transaction gains and losses, which could adversely affect our cash flows and our results of operations |
| Furthermore, reported sales and purchases made in non-US currencies by our international businesses, when translated into US dollars for financial reporting purposes, fluctuate due to exchange rate movement |
| Due to the number of currencies involved, the variability of currency exposures and the potential volatility of currency exchange rates, we cannot predict the effects of exchange-rate fluctuations upon future operating results |
| For further discussion regarding our currency risks refer to “Item 7A — Quantitative and Qualitative Disclosures About Market Risk — Currency Risk Management |