Harris Teeter 2007 Annual Report Download - page 10

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new start-up operations. The process of combining these acquisitions with A&E’s existing businesses involves
risks. A&E will face challenges in consolidating functions, integrating organizations, procedures, operations
and product lines in a timely and efficient manner and retaining key personnel. Failure to successfully
manage and integrate acquisitions, joint ventures or new start-up businesses could lead to the potential loss
of customers, the potential loss of employees who may be vital to the new operations, the potential loss of
business opportunities or other adverse consequences that could affect A&E’s financial condition and results of
operations. Even if integration occurs successfully, failure of future acquisitions to achieve levels of anticipated
sales growth, profitability or productivity may adversely impact A&E’s financial condition and results of
operations. Additionally, expansions involving foreign markets may present other complexities that may require
additional attention from members of management. The diversion of management attention and any difficulties
encountered in the transition and integration process could have a material adverse effect on A&E’s revenues,
level of expenses and operating results.
A&E Has Substantial International Operations
In fiscal 2007, approximately 54% of A&E’s net sales and a large portion of A&E’s production occurred
outside the United States, primarily in Europe, Latin America and Asia. A&E’s corporate strategy includes
the expansion and growth of its international business on a worldwide basis. As a result, A&E’s operations are
subject to various political, economic and other uncertainties, including risks of restrictive taxation policies,
changing political conditions and governmental regulations. A&E’s foreign operations also subjects A&E to the
risks inherent in currency translations. A&E’s global operations make it impossible to eliminate completely all
foreign currency translation risks and its impact on A&E’s financial results.
A&E Has Raw Material Price Volatility
The significant price volatility of many of A&E’s raw materials may result in increased production costs,
which A&E may not be able to pass on to its customers. A significant portion of the raw materials A&E uses
in manufacturing thread and technical textiles are petroleum-based. The prices for petroleum and petroleum-
related products are volatile. While A&E at times in the past has been able to increase product prices due to
raw material increases, A&E generally is not able to immediately raise product prices and may be unable to
completely pass on underlying cost increases to its customers. Additional raw material and energy cost increases
that A&E is not able to fully pass on to customers or the loss of a large number of customers to competitors as
a result of price increases could have a material adverse effect on its business, financial condition, results of
operations or cash flows.
Other Risks
Our Self-Insurance Reserves are Subject to Variability and Unpredictable External Factors
As discussed in more detail below in “Management’s Discussion and Analysis of Financial Condition and
Results of Operations—Critical Accounting Policies—Self-insurance Reserves for Workers’ Compensation,
Healthcare and General Liability,” the Company is primarily self-insured for most U.S. workers’ compensation
claims, healthcare claims and general liability and automotive liability losses. Accordingly, the Company
determines the estimated reserve required for claims in each accounting period, which requires that management
determine estimates of the costs of claims incurred and accrue for such expenses in the period in which the claims
are incurred. The liabilities that have been recorded for these claims represent our best estimate of the ultimate
obligations for reported claims plus those incurred but not reported. Changes in legal trends and interpretations,
variability in inflation rates, changes in the nature and method of claims settlement, benefit level changes due
to changes in applicable laws, and changes in discount rates could all affect ultimate settlements of claims or
the assumptions underlying our liability estimates, which could cause a material change for our self-insurance
liability reserves and impact earnings.