Risk Factors

Risks Relating to the Company and the Home Textile Industry

The home textiles industry is highly competitive and Springs Global‘s success depends on its ability to compete effectively.

The global home textile industry is highly competitive. We compete with large and vertically integrated textile manufactures, as well as with a variety of smaller companies specializing in specific market segments, or niche markets. Our competitors include both Brazilian and foreign companies, some of which have easy access to significant financial resources. The primary competitive factors in the textile industry include price, recognized brands, product design and differentiation, quality, production and finishing flexibility, supply chain capacities, timely deliveries and customer services. To the extend one or more of our competitors takes the lead in respect of any of these competitive factors, our slaes and profits may decrease.

Imports of foreign-made home textiles pose significant competition to us and other manufactures as well. Many foreign textiles manufacturers enjoy substantially lower labor costs than Brazilian, Argentine and US manufactures, while enjoying other competitive advantages, such as lower interest rates and more favorable exchange rates against the US dollar, the Peso and the Real, in addition to trade barriers in their favor. We may be unable to compete efficiently with imported foreign-made home textiles. In addition, unfavorable import protection in our markets or trade barriers provided to foreign manufactures could render our products less competitive, which would affect our sales and results of operations.

Fluctuations in the prices of cotton and other raw materials or shortages of supply could reduce our profitability

Cotton prices are affected by economic conditions and by cotton demand generally prevailing in the world market, thus leading to price volatility depending on the market variable at the time. The market price of cotton may significantly affect the availability of cotton and increase our production costs, which could reduce our profitability.

As cotton is and agricultural product, supply levels and product quality are subject to climate conditions. Any material shortage or interruption in supply, variations in the quality of cotton due to unfavorable climate conditions, infestations of any other factor leading to increases in the price of cotton could reduce our profitability if we are unable to pass cost increases on to our customers.

We also use significant quantities of polyester to manufacture our products. The price of polyester is influenced by demand, production capacity and manufacturing costs, the prices of oil and cotton prices, and the cost of polymers used in the production of polyester. Any significant or prolonged shortage in the supply of these petrochemicals could significantly reduce the availability of polyester, while causing significant increases in the demand for cotton. These circumstances could reduce the availability of cotton and result in increases in the market prices of cotton and polyester. Any of these events could reduce our profitability, if we are unable to pass our costs to our customers.

Fluctuations in the exchange rates of the Brazilian real against the US dollar or the currencies of countries in which we operate or will operate may affect our overall financial performance.

Our results of operations are affected by exchange fluctuations of the Brazilian real, which is the currency in which we prepare our financial statements, against the US dollar and other currencies of countries in which we do business.

In addition, our revenues and profit margins from exports are affected by fluctuations of the Brazilian real against the US dollar. Appreciations of the Brazilian real against the US dollar reduce our foreign currency revenues from exports after the conversion into Brazilian currency. Conversely, decreases in the exchange rates resulting from devaluations of the Brazilian real operate in our favor, as the foreign currency revenues translate into a greater amount of Brazilian reais.

Additionally, devaluations of the Brazilian real relative to the US dollar may result in additional inflationary pressures in Brazil due to general increases in the price of imported products and services, requiring recessive government policies to curb demand. Moreover, devaluations of the Brazilian real could weaken investor confidence in Brazil and reduce the market price of our shares. Appreciation of the Brazilian real against the US dollar, in turn, may lead to a deterioration of the country’s current account and balance of payments, and may reduce export-driven growth.

While we report our results in Brazilian reais, a substantial portion of our sales and operating costs are linked to the US dollar. As a result, exchange rate fluctuations between these two currencies may affect our results of operations. Similar circumstances relating to exchange rate fluctuations may affect the business operations of our subsidiaries located in countries other than Brazil and the United States.

Our international operations are subject to a variety of political, economic and other uncertainties that may adversely affect our results of operations, including restrictive taxation or other government regulations and as a result of foreign currency fluctuations.

Our operations are subject to various political, economic and other uncertainties, including force majeure, risks relating to restrictive taxation policies and other restrictions to international commerce, such as changing political conditions and government regulations. In addition, a portion of our net sales is in currencies other than the Brazilian real or the US dollar, so we are subject to risks intrinsic to foreign exchange. Because of the scope and volume of our global operations, it is impossible to completely eliminate or avert the risks associated with foreign exchange which may affect our financia conditions and results of operations.

Loss of our senior management team, or our inability to attract and retain qualified senior management personnel, may materially affect our business.

Our business strategy and management depend to a great extent on the commitment and skills of our senior management team. Any replacement of members of our senior management team would represent a difficulty in the short term. There can be no assurance that we will successfully attract and retain qualified senior management personnel. None of the members of our senior management team are subject to non-compete agreements.

We could incur substantial costs as a result of violations of environmental and other laws.

Our operations are subject to a variety of environmental and occupational health and safety laws and regulations, including those governing discharges into the air and water, the management and disposal of solid and hazardous substances and waste, and contamination cleanup. Violations of these requirements or the absence of permits required for our operations could result in substantial penalty fines, claims for property damages or personal injuries, and other penalties. We may also be held liable if a determination were to be made of a contamination on land we own or may have owned, or on sites on which we operate, or may have operated in the past, in which event we could be required to remedy such contamination, in addition to being subject to other penalties. Some environmental laws, including the US Federal superfund law and other similar laws, could hold liable for the entire cost of cleanup any current or former site owner or parties responsible for discharging waste, regardless of ownership at the time of contamination or the lawfulness of the original activity. While to date our costs for such liabilities and environmental compliance obligations have not been material, enactment of more stringent environmental requirements or the discovery of previously unknown contamination could have a material adverse effect on our business, financial condition and results of operations.

Should we fail to successfully identify fashion trends and introduce successfully new products, we could lose market position, which would negatively affect our financial performance.

Demand for many of our products depends on our ability to identify customer preferences for fabric designs, colors and styles at an early stage. Our inability to identify fashion trends successfully and in a timely manner so we can supply products and fabrics consistent with those trends could diminish acceptance or our products by customers and decrease our profitability as a result of reduced sales.

In most markets in which we compete, offerings of new products and product and product line extensions are frequent. Should we be unable to identify emerging consumer and technological trends, while maintaining and improving the competitiveness of our products and offering these products globally, we could lose market position, which would materially and adversely affect our business, financial condition and results of operations. Continued product development and marketing efforts present risks intrinsic to the development of the new products and line extensions, including development delays, failure to achieve the anticipated degree of market acceptance and increased product development costs.

A suspension or a change in the conditions of tax incentives we currently enjoy may adversely affect our business.

We enjoy certain Brazilian Federal tax incentives and certain state and municipal tax incentives in the Brazilian states of Minas Gerais, Rio Grande do Norte and ParaĆ­ba. In order to continue to enjoy these incentives we are required to fulfill conditions set out in the relevant Federal, state and municipal legislation. The principal Federal tax incentive consists of a 75% reduction in our corporate income tax. The principal state tax incentives we enjoy consist of reductions, rebates, credits or deferrals of taxes and charges related to the Tax on Circulation of Goods and Provision of Services, or ICMS. Moreover, the principal municipal tax incentives we enjoy consist of exemptions from payment of the Urban Building and Land Tax, or IPTU, and other municipal taxes. If these tax incentives are cancelled, their conditions change, or if they are no longer available in the future, our business and results of operations would be adversely affected.

We may be liable for certain contingencies and liabilities of CTNM and Springs Industries

In January 2006, in consideration for share issued by us, CTNM and the shareholders of Springs Industries contributed to us all of the share capital of Coteminas and Springs US, respectively. In connection with the formation of Coteminas and Springs US, Coteminas and Springs US assumed assets and liabilities of Coteminas’ and Springs Industries’ respective home textile businesses, and CTNM and /Springs Industries retained the remainder of their respective assets and liabilities. In addition, Coteminas agreed to indemnify CTNM with respect to liabilities assumed by it and Springs US agreed to indemnify Springs Industries with respect to liabilities arising from assets and liabilities assumed by it. CTNM and Springs Industries also agreed to reciprocal indemnities of Coteminas and Springs US, respectively, with respect to the respective assets and liabilities retained by CTNM and Springs Industries. Risks relating to these transactions include the possibility that Coteminas and Springs US will be required to indemnify CTNM and Springs Industries with respect to claims to assets and liabilities assumed by Coteminas and Springs US, and the possibility that, notwithstanding the retention of such assets and liabilities retained by CTNM and Springs Industries if indemnification were unavailable.

Risks Relating to Brazil

The Brazilian government has exercised, and continues to exercise, significant influence over the Brazilian economy. This influence, as well as Brazilian political and economic conditions could adversely affect our business and the market price of our shares.

The Brazilian government frequently intervenes in the Brazilian economy and occasionally makes significant changes in policy and regulations. The Brazilian government’s actions to control inflation and other regulations and policies have often involved, among other measures, price and salary controls, currency devaluations, capital control, limits on imports and other actions.

Actions taken by the Brazilian government relating to the Brazilian economy may significantly affect Brazilian companies and other entities, including us, as well as the market conditions and the market price of Brazilian securities, including our shares. Our business, financial condition and results of operations, as well as the market price of our shares may be adversely and materially affected by changes in policy or regulations involving of affecting factors such as:

  • Inflation;
  • Monetary and interest rate policies;
  • Foreign exchang
  • e controls;
  • Liquidity of domestic capital and financial markets;
  • Price control policies;
  • Tax policies; and
  • Other political, diplomatic, social and economic developments in or affecting Brazil.

A reduction in the volume of foreign investments in Brazil could affect the Brazilian balance of payments and negatively affect Brazilian economic conditions, leading to increases in interest rates and in the cost of financing.

Uncertainty over whether the Brazilian government would implement changes in policy or regulation affecting these or other factors in the future may contribute to economic uncertainty in Brazil and heightened volatility in the Brazilian securities markets and securities issued abroad by Brazilian companies.

These and other developments in the Brazilian economy and economic policy may adversely affect us and the market price of our shares.

Political instability may adversely affect us and the price of our shares.

Historically, the domestic political climate has influenced the performance of the Brazilian economy. In the past, political crises have affected the confidence of investors and the public in general, which resulted in economic slowdown and adversely affected the market price of securities of Brazilian issuers.

Brazil has, from time to time, faced serious political crises. Accusations of corruption may result in government officials leaving office, which could weaken the government, hamper planned economic reforms and result in economic slowdown or lead to economic and political instability. We cannot predict the consequences and effects of anu such accusations on the Brazilian economic conditions, or the extent to which their effects could adversely affect our business and financial condition.

Inflation and government actions to curb inflation may significantly contribute to economic uncertainty in Brazil, which may adversely affect our business and the market price of our shares.

Inflation, in conjunction with the Brazilian government’s measures to control it and speculation about such measures, has had a negative effect on the Brazilian economy in the past. Future Brazilian government actions, including increases in interest rates, intervention in the foreign exchange market and actions to adjust or fix the value of the real, may trigger increases in inflation rates. If Brazil experiences high inflation in the future, we may not be able to readjust the prices we charge to compensate for the effects of inflation on our cost structure. Inflationary pressures may also affect our ability to access foreign financial markets, and government policies to curb inflation could adversely affect our business and the market price of our shares.

Economic and market conditions in other countries, especially emerging market conditions, may adversely affect the Brazilian economy, our business and the market price of our shares.

The Brazilian economy, the capital markets and Brazilian companies are affected to varying degrees by economic and market conditions locally and in other countries, including emerging market countries, as well as by investors’ reactions to developments in these other countries. The offer of credit to Brazilian companies is influenced by the economic and market conditions prevailing in Brazil and, to a certain extent, in other countries.

Developments and the conditions prevailing in other emerging market countries have in the past significantly affected the availability of credit and resulted in considerable currency substitution and decrease in the volume of foreign investments in Brazil.

There can be no assurance that future developments in emerging market countries, and government measures these countries may adopt would not adversely affect the offer of credit in the local and international markets or the existing economic conditions, thereby negatively affecting Brazilian economy, our business and results of operations.