What changed in this filing

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Item 1A. Risk Factors

2022-08-04 compared with 2022-05-05 · 48 added, 33 removed, 602 unchanged (12% of the section changed)

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• our business, financial condition and results of operations have been and may continue to be adversely affected by global public health epidemics or pandemics, including the ongoing COVID-19 pandemic;

• the impact of the risks associated with international geopolitical conflicts, including escalating tensions between Taiwan and China, and the Russian invasion of Ukraine on the global economy, energy supplies and raw materials are uncertain, but may prove to negatively impact our business and operations;

• our dependency on a limited number of suppliers for materials, product parts, and vehicle chassis could lead to an increase in material costs, disruptions in our supply chain, or reputational costs;

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• growth in our sales and the mix of domestic versus export shipments from Taiwan could cause additional foreign tax credits to not be realizable, potentially reducing our income and adversely affecting our cash flows;

• because of the current inflation affecting the economy and the Federal Reserve's interest rate increases in response, we may be harmed in the future;

Risks Related to Our Indebtedness and Liquidity

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and the effect of the COVID-19 pandemic on short- and long-term general economic conditions.

The impact of the Russian invasion of Ukraine on the global economy, energy supplies and raw materials is uncertain, but may prove to negatively impact our business and operations.

The short and long-term implications of Russia’s invasion of Ukraine are difficult to predict at this time.

We continue to monitor any adverse impact that the outbreak of war in Ukraine and the subsequent institution of sanctions against Russia by the United States and several European and Asian countries may have on the global economy in general, on our business and operations and on the businesses and operations of our suppliers and customers.

For example, a prolonged conflict may result in increased inflation, escalating energy prices and constrained availability, and thus increasing costs, of raw materials.

To the extent the war in Ukraine may adversely affect our business, it may also have the effect of heightening many of the other risks described in our risk factors, such as those relating to data security, supply chain, volatility in prices of inputs, and market conditions, any of which could negatively affect our business and financial condition.

The impact of the risks associated with international geopolitical conflicts, including escalating tensions between Taiwan and China, and the Russian invasion of Ukraine on the global economy, energy supplies and raw materials are uncertain, but may prove to negatively impact our business and operations.

In recent years, diplomatic and trade relationships between the U.S.

government and China have become increasingly frayed and the threat of a takeover of Taiwan by China has increased.

Since our bike suspension manufacturing occurs in Taiwan, our business, our operations and our supply chain could be materially and adversely impacted by political, economic or other actions from China, or changes in China-Taiwan relations that impact Taiwan and its economy.

In addition, we continue to monitor any adverse impact that the outbreak of war in Ukraine and the subsequent institution of sanctions against Russia by the United States and several European and Asian countries may have on the global economy in general, on our business and operations and on the businesses and operations of our suppliers and customers.

For example, a prolonged conflict may result in ongoing increased inflation, escalating energy prices and constrained availability, and thus increasing costs, of raw materials.

To the extent that increased political tensions between China and Taiwan or the war in Ukraine may adversely affect our business, it may also have the effect of heightening many of the other risks described in our risk factors, such as those relating to data security, supply chain, volatility in prices of inputs, and market conditions, any of which could negatively affect our business and financial condition.

We depend on a limited number of suppliers for our materials and component parts for some of our products, and the loss of any of these suppliers or an increase in cost of raw materials could harm our business.

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and countries in Europe.

These areas have historically experienced recessions, disruptions in banking and/or financial systems, economic weakness and uncertainty, and there appears to be an increasing risk of recessions or inflationary economic impacts primarily due to the global COVID-19 pandemic, the Russian invasion of Ukraine, escalating energy costs, global supply chain disruptions and other economic changes.

In addition, our products are recreational in nature and are generally discretionary purchases by consumers.

Consumers are usually more willing to make discretionary purchases during periods of favorable general economic conditions and high consumer confidence.

Discretionary spending may also be affected by many other factors, including interest rates, the availability of consumer credit, taxes and consumer confidence in future economic conditions.

Discretionary spending may also be affected by many other factors, including interest rates, gas prices, the availability of consumer credit, taxes and consumer confidence in future economic conditions.

During periods of unfavorable economic conditions, or periods when other negative market factors exist, consumer discretionary spending is typically reduced, which in turn could reduce our product sales and have a negative effect on our business, financial condition or results of operations.

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• product recalls;

• high-profile component failures (such as a component failure during a race on a mountain bike ridden by an athlete that we sponsor);

• high-profile component failures (such as a component failure during a race on a mountain bike ridden by one of our sponsored athletes);

• negative publicity regarding our brands or our sponsored athletes, which could be amplified on social media;

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Such market growth includes the creation of new classes of vehicles that can benefit from our products, such as trucks that are up-fitted with products to enhance their off-road capability, and our ability to create products for these vehicles.

Additionally, with our acquisitions of SCA Performance, Tuscany, Outside Van, and Shock Therapy, a growing portion of our sales are expected to be generated from providing up-fitting solutions.

Additionally, with our acquisitions of SCA Performance, Tuscany, and Outside Van, a growing portion of our sales are expected to be generated from providing up-fitting solutions.

In the event these markets stop expanding or contract due to economic factors, changes in consumer preferences or other reasons, or we are unsuccessful in creating new products for these markets or other competitors successfully enter into these markets, we may fail to achieve future growth or our sales could decrease, and our business, financial condition or results of operations could be negatively affected.

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A disruption in the operations of our facilities, or delays in our planned expansion of certain facilities, could have a negative effect on our business, financial condition or results of operations.

We recently completed the construction of the Gainesville, Georgia facility to diversify our manufacturing platform and provide additional long-term capacity to support growth in our Powered Vehicles Group.

The Hall County Facility is being used for manufacturing, warehousing, distribution and office space.

In the first quarter of 2022, we completed the transition of our Watsonville, California facility and relocation of our powered vehicles suspension manufacturing to the Hall County Facility.

As a result, we have incurred, and may to continue to incur, costs associated with some duplication of facilities, equipment and personnel, the amount of which could vary materially from our projections.

Unforeseen difficulties in our Georgia expansion project and future expansion projects, whatever the cause, could have a material adverse effect on our business, customer relationships, financial condition, operating results, cash flow, and liquidity.

We completed the construction of the Gainesville Facility in Hall County Georgia, in the fourth quarter of 2021 to diversify our manufacturing platform and provide additional long-term capacity to support growth in our Powered Vehicles Group.

The Gainesville Facility is being used for manufacturing, warehousing, distribution and office space.

In the first quarter of 2022, we completed the transition of our Watsonville, California facility and relocation of our powered vehicles suspension manufacturing to the Gainesville Facility.

As a result, we have incurred, and may continue to incur, costs associated with some duplication of facilities, equipment and personnel, the amount of which could vary materially from our projections.

Unforeseen difficulties in future expansion projects, whatever the cause, could have a material adverse effect on our business, customer relationships, financial condition, operating results, cash flow, and liquidity.

Equipment failures, delays in deliveries or catastrophic loss at any of our facilities could lead to production or service disruptions, curtailments or shutdowns.

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We do not control the activities of these employees or seaports and we could suffer supply chain disruptions due to any disputes, capacity shortages, slowdowns or shutdowns that may occur, as was experienced in February 2015, in relation to certain West Coast ports.

While the West Coast ports labor agreement has been extended until July 2022, the 2015 strike lasted longer than we forecasted, and any similar labor dispute in the future could potentially have a negative effect on both our financial condition and results of operations.

The 2015 strike lasted longer than we forecasted, and any similar labor dispute in the future could potentially have a negative effect on both our financial condition and results of operations.

Furthermore, the ongoing COVID-19 pandemic has only increased uncertainty for global supply chains, as port congestion and shipping container shortages have become exacerbated, which could adversely affect our operating results.

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Foreign currency fluctuations could in the future have an adverse effect on our business, financial condition or results of operations.

government policy, including any additional interest rate increases by the Federal Reserve, may impact the exchange rate between the U.S.

dollar and foreign currencies.

We sell our products inside and outside of the U.S.

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• difficulty in transporting materials internationally, including labor disputes at West Coast ports, which handle a large amount of our products;

• political, economic, or other actions from China or changes in China-Taiwan relations could impact Taiwan and its economy, and may adversely affect our operations in Taiwan, our customers, and our supply chain;

• geopolitical regional conflicts, including the impact of the Russian invasion of Ukraine on the global economy, energy supplies and raw materials, terrorist activity, political unrest, civil strife, acts of war and other political uncertainty;

• political, economic, or other actions from China could impact Taiwan and its economy, and may adversely affect our operations in Taiwan, our customers, and our supply chain;

• increased difficulty in protecting our intellectual property rights and trade secrets;

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• increased difficulty in ensuring compliance by employees, agents and contractors with our policies as well as with the laws of multiple jurisdictions, including but not limited to the U.S.

Foreign Corrupt Practices Act, local international environmental, health and safety laws, and increasingly complex regulations relating to the conduct of international commerce;

Foreign Corrupt Practices Act, local and international environmental, health and safety laws, and increasingly complex regulations relating to the conduct of international commerce;

• increased difficulty in controlling and monitoring foreign operations from the U.S., including increased difficulty in identifying and recruiting qualified personnel for our foreign operations;

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We have encountered product liability claims in the past and carry product liability insurance to help protect us against the costs of such claims, although our insurance may not be sufficient to cover all losses.

Any losses that we may suffer from any product liability claims, and the effect that any product liability litigation may have upon the reputation and marketability of our products, may have a negative impact on our business, financial condition or results of operations.

Any losses that we may suffer from product liability claims, and the effect that any product liability litigation may have upon the reputation and marketability of our products, may have a negative impact on our business, financial condition or results of operations.

We are subject to certain risks in our manufacturing and in the testing of our products.

As of April 1, 2022, we employed approximately 4,200 employees worldwide, a large percentage of which work at our manufacturing facilities.

As of July 1, 2022, we employed approximately 4,200 employees worldwide, a large percentage of which work at our manufacturing facilities.

Our business involves complex manufacturing processes that can be inherently dangerous.

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We do not inspect or audit compliance of our suppliers, OEMs, customers or partners with these laws or practices, and we do not require our suppliers, OEMs, customers or partners to comply with a formal code of conduct.

Any conduct or actions that our suppliers could take could reduce demand for our products, harm our ability to meet demand or harm our reputation, brand image, business, financial condition or results of operations.

Any conduct or actions that our suppliers take could reduce demand for our products, harm our ability to meet demand or harm our reputation, brand image, business, financial condition or results of operations.

We may incur higher employee costs in the future.

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In 2015, we began the process of implementing a global enterprise resource planning system ("ERP").

The pilot phase of the new ERP was completed in fiscal year 2016 and additional phases were completed in 2018, 2019, and 2021.

The pilot phase of the new ERP was completed in fiscal year 2016, and additional phases were completed in 2018 through 2021.

The implementation is substantially complete.

ERP implementations are complex and time-consuming projects that involve substantial expenditures on system software and implementation activities.

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It also provides a new private right of action for data breaches.

The CCPA has been amended several times, including by the California Privacy Rights Act (the "CPRA"), a California ballot initiative that passed in November 2020, and takes effect in most material aspects starting on January 1, 2023, which, among other things, significantly modifies the CCPA, including by expanding consumers' rights with respect to certain personal information and creating a new state agency to oversee implementation and enforcement efforts.

The CCPA has been amended several times, including by the California Privacy Rights Act ("CPRA"), a California ballot initiative that passed in November 2020, and takes effect in most material aspects starting on January 1, 2023, which, among other things, significantly modifies the CCPA, including by expanding consumers' rights with respect to certain personal information and creating a new state agency to oversee implementation and enforcement efforts.

Failure to meet GDPR, CCPA and CPRA requirements could result in financial penalties.

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The failure of any of the information technology systems to perform as anticipated could disrupt our business and could result in transaction errors, processing inefficiencies and the loss of sales and customers, which could materially adversely affect our business, financial condition, or results of operations.

Because of the current inflation affecting the economy and the Federal Reserve's interest rate increases in response, we may be harmed in the future.

We believe inflation, and actions taken by the Federal Reserve in response, currently pose a risk to us in a number of ways.

Specifically, the Federal Reserve increased benchmark interest rates in March 2022 and June 2022 and has indicated its intention to continue to raise benchmark interest rates throughout 2022 in an effort to curb the upward inflationary pressure on the cost of goods and services across the U.S.

The raw materials and other supplies we use to produce our products have experienced increasing prices during recent periods as a result of inflation.

In response, we have increased the prices we charge customers for our products.

While these price adjustments have not caused a reduction in sales thus far, continued increases in inflation rates may result in a reduction of customers or sales volumes.

Additionally, as the Federal Reserve begins to increase interest rates, the result could be a recession which would slow demand for our products and hinder our sales growth, or cause sales to decline in future periods.

As of the date of this Quarterly Report, we cannot predict how extensive the inflation or the effects of the Federal Reserve's responses thereto will be, its duration or the ultimate impact on us.

RISKS RELATED TO OUR INDEBTEDNESS AND LIQUIDITY

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In the future, we and our subsidiaries may be able to incur substantial additional debt from amendments to the 2022 Credit Facility, additional lending sources subject to the restrictions contained in the 2022 Credit Facility, or because of certain debt instruments we may issue.

As of April 5, 2022, we had $475.0 million of indebtedness, and $175.0 million in revolving credit available to borrow under the 2022 Credit Facility.

As of July 1, 2022, we had $410.0 million of indebtedness, and $225.0 million in revolving credit available to borrow under the 2022 Credit Facility.

Our ability to borrow under the 2022 Credit Facility fluctuates from time to time due to, among other factors, our borrowings under the 2022 Credit Facility.

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Any such increases in the interest rate or increases of our borrowings under the 2022 Credit Facility will increase our interest expense.

Interest rates in the U.S.

have been increasing from recent historically low levels, and any increase in these rates would increase our interest expense and reduce our funds available for operations and other purposes.

The Federal Reserve increased benchmark interest rates in March 2022 and June 2022 and has indicated its intention to continue to raise benchmark interest rates throughout 2022 in an effort to curb the upward inflationary pressure on the cost of goods and services across the U.S.

Increases in these rates increase our interest expense and reduce our funds available for operations and other purposes.

Although from time to time we may enter into agreements to hedge a portion of our interest rate exposure, such as the interest rate swap entered into in April 2022, these agreements may be costly and may not protect against all interest rate fluctuations.

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Refer to Note 10- Derivatives and Hedging for additional information regarding the interest rate swap arrangement.

As of April 5, 2022, we had $475.0 million of indebtedness outstanding under the 2022 Credit Facility.

Based on the $375.0 million of variable interest rate indebtedness that was outstanding under the 2022 Credit Facility as of April 5, 2022, after giving effect to our interest rate swap, a hypothetical 100 basis point increase or decrease in the interest rate would have resulted in an approximately $0.9 million increase or decrease in interest expense for the three months ended April 1, 2022, respectively.

As of July 1, 2022, we had $410.0 million of indebtedness outstanding under the 2022 Credit Facility.

Based on the $310.0 million of variable interest rate indebtedness that was outstanding under the 2022 Credit Facility as of July 1, 2022, after giving effect to our interest rate swap, a hypothetical 100 basis point increase or decrease in the interest rate would have resulted in an approximately $0.8 million increase or decrease in interest expense for the three months ended July 1, 2022, respectively.

We may incur losses on interest rate swap and hedging arrangements.

We may periodically enter into agreements to reduce the risks associated with increases in interest rates, such as our 2021 Swap Agreement and 2022 Swap Agreement.

We may periodically enter into agreements to reduce the risks associated with increases in interest rates, such as our 2022 Swap Agreement.

Although these agreements may partially protect against rising interest rates, they also may reduce the benefits to us if interest rates decline.

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Failure to comply with applicable regulations could result in fines, increased expenses to modify our products and harm to our reputation, all of which could have an adverse effect on our business, financial condition or results of operations.

Moreover, certain of our product offerings require us to comply with the rules and regulations of various standards of standard-setting organizations, such as the CPSC, the NHTSA, and the European Committee for Standardization ("CEN").

Failure to comply with the requirements of such organizations could result in the loss of certain customer contracts, fines and penalties, or both, which could have an adverse effect on our business, financial condition or results of operations.

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Future issuances and sales of our shares, or the perception that such sales may occur, could cause our stock price to decline.

The issuance of additional shares of our common stock, such as the follow-on offering of 2.8 million shares of common stock that we completed in June 2020, could dilute the ownership interest of our common stockholders and could depress the market price of shares of our common stock.

Our Amended and Restated Certificate of Incorporation authorizes us to issue 90,000,000 shares of common stock, 42,148,734 of which shares were outstanding as of April 1, 2022.

The issuance of additional shares of our common stock, such as the follow-on offering of approximately 2.8 million shares of common stock that we completed in June 2020, could dilute the ownership interest of our common stockholders and could depress the market price of shares of our common stock.

Our Amended and Restated Certificate of Incorporation authorizes us to issue 90,000,000 shares of common stock, 42,262,731 of which shares were outstanding as of July 1, 2022.

In the future, we may issue additional shares of common stock or other equity or debt securities convertible into common stock in connection with financings, acquisitions, registration statements or otherwise.

After our IPO in 2013, we filed a registration statement under the Securities Act to register shares of our common stock that we may issue under our equity plans.

After our IPO in 2013 and, more recently, in May 2022, we filed registration statements under the Securities Act to register shares of our common stock that we may issue under our equity plans.

As a result, all such shares can be freely sold in the public market upon issuance, subject to any vesting or contractual lock-up agreements.

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Failure of our internal controls over financial reporting could adversely affect our business and financial results.

Our management is responsible for establishing and maintaining effective internal control over financial reporting under Section 404 of the Sarbanes-Oxley Act of 2002, as amended (the "Sarbanes-Oxley Act").

Our management is responsible for establishing and maintaining effective internal control over financial reporting under Section 404 of the Sarbanes-Oxley Act of 2002, as amended.

Internal control over financial reporting is a process to provide reasonable assurance regarding the reliability of financial reporting for external purposes in accordance with GAAP.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 1A. Risk Factors