What changed in this filing

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Item 1A. Risk Factors

2023-01-24 compared with 2022-01-25 · 49 added, 27 removed, 141 unchanged (35% of the section changed)

Risk Factors 

As a global manufacturer of adhesives, sealants and other specialty chemical products, we operate in a business environment that is subject to various risks and uncertainties.

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Strategic and Operational Risks

The COVID-19 pandemic has affected and will continue to affect our operations and financial results.

In December 2019, a novel strain of coronavirus (“COVID-19”) was reported to have surfaced in Wuhan, China, which became a global pandemic.

Throughout fiscal year 2021, the COVID-19 pandemic continued to have a significant disruptive impact on global economies, supply chains and industrial production.

We have effectively managed our global operations throughout the pandemic, implementing rigorous protocols focused on the health and safety of our employees and ensuring business continuity across our supplier, manufacturing and distribution networks.

These actions enabled us to meet our customers’

increased demands for adhesive solutions, effectively allocate our resources and manage expenses, and deliver strong financial results, while maintaining a safe workplace for employees.

Concerns remain that there could be a prolonged resurgence of cases triggering additional government mandated lockdowns or similar restrictions, for example due to the emergence of new variants against which existing vaccines are not as effective or which may be more easily transmitted.

Due to the evolving and highly uncertain nature of the pandemic, it is currently not possible to estimate any additional direct or indirect impacts this outbreak may have on our business.

Any disruption of the manufacturing of our products, commerce and related activity caused by the COVID-19 pandemic, including ongoing labor shortages and supply chain constraints, could materially and adversely affect our results of operations and financial condition.

Our business and operations have been, and may in the future, be adversely affected by epidemics, pandemics, outbreaks of disease and other adverse public health developments, including COVID-19.

Epidemics, pandemics, outbreaks of novel diseases and other adverse public health developments in countries and states where we operate may arise at any time.

Such developments, including the COVID-19 pandemic, have had, and in the future may have, an adverse effect on our business, financial condition and results of operations.

These effects include a potentially negative impact on the availability of our key personnel, labor shortages and increased turnover, temporary closures of our facilities or facilities of our business partners, customers, suppliers, third-party service providers or other vendors, and interruption of domestic and global supply chains, distribution channels and liquidity and capital or financial markets.

In particular, restrictions on or disruptions of transportation, port closures or increased border controls or closures, or other impacts on domestic and global supply chains or distribution channels, could increase our costs for raw materials and commodity costs, increase demand for raw materials and commodities from competing purchasers, limit our ability to meet customer demand or otherwise have a material adverse effect on our business, financial condition and results of operations or cash flows.

Precautionary measures that we may take in the future intended to limit the impact of any epidemic, pandemic, disease outbreak or other public health development, may result in additional costs.

In addition, such epidemics, pandemics, disease outbreaks or other public health developments may adversely affect economies and financial markets throughout the world, such as the effect that COVID-19 has had on world economies and financial markets, which may affect our ability to obtain additional financing for our businesses and demand for our products and services.

The extent to which COVID-19 or other pandemics will impact our business and our financial results in the future will depend on future developments, which are highly uncertain and cannot be predicted.

Such developments may include ongoing spread of the virus, disease severity, outbreak duration, extent of any reoccurrence of the coronavirus or any evolutions or mutations of the virus, and availability, administration and effectiveness of vaccines and development of therapeutic treatments that can restore consumer and business economic confidence.

As a result, it is not possible to predict the overall future impact of COVID-19 on our business, liquidity, capital resources and financial results.

Increases in prices and declines in the availability of raw materials 

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Failure to protect this intellectual property could negatively affect our future performance and growth.

Our operations may present health and safety risks.

Notwithstanding our emphasis on the safety of our employees and contractors and the precautions we take related to health and safety, we may be unable to avoid safety incidents relating to our operations that result in injuries or deaths.

Certain safety incidents may result in legal or regulatory action that could result in increased expenses or reputational damage.

We maintain workers' compensation insurance to address the risk of incurring material liabilities for injuries or deaths, but there can be no assurance that the insurance coverage will be adequate or will continue to be available on terms acceptable to us, or at all, which could result in material liabilities to us for any injuries or deaths.

Changes to federal, state and local employee health and safety regulations, and legislative, regulatory or societal responses to safety incidents may result in heightened regulations or public scrutiny that may increase our compliance costs or result in reputational damage.

A failure in our information technology systems could negatively impact our business. 

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Interruptions of our computer systems could disrupt our business, for example by leading to plant downtime and/or power outages, and could result in the loss of business and cause us to incur additional expense.

Information technology security threats are increasing in frequency and sophistication.

Our information technology systems could be breached by unauthorized outside parties or misused by employees or other insiders intent on extracting sensitive information, corrupting information or disrupting business processes.

Such unauthorized access and a failure to effectively recover from breaches could compromise confidential information, disrupt our business, harm our reputation, result in the loss of assets including trade secrets and other intellectual property, customer confidence and business, result in regulatory proceedings and legal claims, and have a negative impact on our financial results.

We are in the process of implementing a global Enterprise Resource Planning (“ERP”) system that we refer to as Project ONE, which will upgrade and standardize our information system.

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Failure or abandonment of any part of the ERP system could result in a write-off of part or all of the costs that have been capitalized on the project.

We are at risk of cyber-attacks or other security breaches that could compromise sensitive business information, undermine our ability to operate effectively and expose us to liability, which could cause our business and reputation to suffer.

Increasingly, companies are subject to a wide variety of attacks on their networks on an ongoing basis.

In addition to traditional computer “hackers , ”

malicious code (such as viruses and worms), phishing attempts, employee theft or misuse, and denial of service attacks, sophisticated nation-state and nation-state supported actors engage in intrusions and attacks (including advanced persistent threat intrusions) and add to the risks to internal networks, cloud deployed enterprise and customer-facing environments and the information they store and process.

Despite significant efforts to create security barriers to such threats, it is virtually impossible for us to entirely mitigate these risks.

We, and our third-party software and service providers, may face security threats and attacks from a variety of sources. 

As part of our business, we store our data, including intellectual property, and certain data about our employees, customers and vendors in our information technology systems.

Our security measures may be breached as a result of third-party action, including intentional misconduct by computer hackers, employee error, malfeasance or otherwise.

Third parties may attempt to fraudulently induce employees or customers into disclosing sensitive information such as usernames, passwords, or other information to gain access to our customers' data or our data, including our intellectual property and other confidential business information, or our information technology systems. In addition, given their size and complexity, our information systems could be vulnerable to service interruptions or to security breaches from inadvertent or intentional actions by our employees, third-party vendors and/or business partners, or from cyber-attacks by malicious third parties attempting to gain unauthorized access to our products, systems or confidential information. 

If a third party gained unauthorized access to our data, including any data regarding our employees, customers or vendors, the security breach could expose us to risks.

Such unauthorized access and a failure to effectively recover from breaches could compromise confidential information, disrupt our business, harm our reputation, result in the loss of customer confidence, business and assets (including trade secrets and other intellectual property), result in regulatory proceedings and legal claims, and have a negative impact on our financial results.

Risks associated with acquisitions could have an adverse effect on us and the inability to execute organizational restructuring may affect our results.

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Future acquisitions could result in additional debt and other liabilities, and increased interest expense, restructuring charges and amortization expense related to intangible assets.

Our growth strategy depends in part on our ability to further penetrate markets outside the United States, where there is the potential for significant economic and political disruptions.

Our operations in these markets may be subject to greater risks than those faced by our operations in the United States, including political and economic instability, project delay or abandonment due to unanticipated government actions, inadequate investment in infrastructure, undeveloped property rights and legal systems, unfamiliar regulatory environments, relationships with local partners, language and cultural differences and increased difficulty recruiting, training and retaining qualified employees.

In addition, our profitability is dependent on our ability to drive sustainable productivity improvements such as cost savings through organizational restructuring.

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Our global operations expose us to trade and economic sanctions and other restrictions imposed by the U.S., the EU and other governments and organizations.

Departments of Justice, Commerce, State and Treasury and other federal agencies and authorities have a broad range of civil and criminal penalties they may seek to impose against corporations and individuals for violations of economic sanctions laws, export control laws, the FCPA and other federal statutes and regulations, including those established by the OFAC.

Under these laws and regulations, as well as other anti-corruption laws, anti-money-laundering laws, export control laws, customs laws, sanctions laws and other laws governing our operations, various government agencies may require export licenses, may seek to impose modifications to business practices, including cessation of business activities in sanctioned countries or with sanctioned persons or entities and modifications to compliance programs, which may increase compliance costs, and may subject us to fines, penalties and other sanctions.

Departments of Justice, Commerce, State, Homeland Security, and Treasury and other federal agencies and authorities have a broad range of civil and criminal penalties they may seek to impose against corporations and individuals for violations of economic sanctions laws, export control laws, the FCPA and other federal statutes and regulations, including those established by the OFAC.

Under these laws and regulations, as well as other anti-corruption laws, anti-money-laundering laws, export control laws, customs laws, sanctions laws and other laws governing our operations, various government agencies may require export licenses, may seek to impose modifications to business practices, including cessation of business activities in sanctioned countries or with sanctioned persons or entities and modifications to compliance programs, including import restrictions, which may increase compliance costs, and may subject us to fines, penalties and other sanctions.

A violation of these laws, regulations, policies or procedures could adversely impact our business, results of operations and financial condition.

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limit our flexibility to plan for and adjust to changing business and market conditions in the industries in which we operate and increase our vulnerability to general adverse economic and industry conditions;

require us to dedicate a substantial portion of our cash flow to make interest and principal payments on our debt, thereby limiting the availability of our cash flow to fund future acquisitions, working capital, business activities, and other general corporate requirements;

limit our ability to obtain additional financing for working capital, to fund growth or for general corporate purposes, even when necessary to maintain adequate liquidity, particularly if any ratings assigned to our debt securities by rating organizations were revised downward;

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Most of our term loan agreements contain a stated minimum value for LIBOR.

On July 27, 2017, the United Kingdom’s Financial Conduct Authority, which regulates the entity that calculates LIBOR, announced that LIBOR should be phased out by the end of 2021.

On July 27, 2017, the United Kingdom’s Financial Conduct Authority, which regulates the entity that calculates LIBOR, announced that LIBOR was to be phased out by the end of 2021.

Subsequently, on March 5, 2021, LIBOR’s administrator announced that publication of overnight, one-month, three-month, six-month and 12-month U.S.

dollar LIBOR would cease immediately following publication of such interest rates on June 30, 2023, and that publication of all other currency and tenor variants would cease immediately following publication on December 31, 2021.

Federal Reserve, in conjunction with the Alternative Reference Rates Committee, a steering committee comprised of large U.S.

financial institutions and other market participants, is considering replacing U.S.

dollar LIBOR with a new index calculated by short-term repurchase agreements, backed by Treasury securities (“SOFR”).

Whether or not SOFR attains market traction as a LIBOR replacement tool remains in question.

SOFR is observed and backward looking, which stands in contrast with LIBOR under the current methodology, which can be an estimated forward-looking rate and relies, to some degree, on the expert judgment of submitting panel members.

Given that SOFR is a secured rate backed by government securities, it will be a rate that does not take into account bank credit risk (as is the case with LIBOR).

The SOFR rate is therefore likely to be lower than LIBOR rates and is less likely to correlate with the funding costs of financial institutions.

If LIBOR ceases to exist prior to the maturity of our contracts, we will be required to substitute an index such as the Prime Rate or renegotiate our credit agreements that utilize LIBOR as the reference rate, and substitute an index to replace LIBOR with the new standard that is established.

If we borrow under the Prime Rate, we will see increased borrowing costs until the agreements are amended or renegotiated to incorporate the new SOFR borrowing rate or another substitute index.

In December 2022, the FASB released an exposure draft that proposes deferring the sunset date of Financial Accounting Standards Board (“FASB”) Accounting Standard Codification (“ASC”) Topic 848, Reference Rate Reform , which provides optional relief for contract modifications that are related to reference rate reform, from December 31, 2022 to December 31, 2024. 

Federal Reserve has selected the Secured Overnight Funding Rate ("SOFR") as the preferred alternate rate to LIBOR.

We are planning for this transition and will amend any agreements to accommodate the SOFR rate where required. While our term loan is calculated using LIBOR as its underlying rate, our revolver has transitioned to now using SOFR as its underlying rate.

We continue to evaluate the potential impact of the transition to the SOFR rate, which remains subject to uncertainty.

Macroeconomic Risks

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dollar and other currencies could potentially result in increases or decreases in net revenue, cost of raw materials and earnings and may adversely affect the value of our assets outside the United States.

In 2021, the change in foreign currencies positively impacted our net revenue by approximately $64.0 million.

In 2021, we spent approximately $1.8 billion for raw materials worldwide of which approximately $996.7 million was purchased outside the United States.

In 2022, the change in foreign currencies negatively impacted our net revenue by approximately $191.7 million.

In 2022, we spent approximately $2.2 billion for raw materials worldwide of which approximately $1.2 billion was purchased outside the United States.

Based on 2022 financial results, a hypothetical one percent change in our cost of sales due to foreign currency rate changes would have resulted in a change in net income of approximately $10.5 million or $0.19 per diluted share.

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If these customers do not have sufficient access to the financial markets, demand for our products may decline.

The military conflict between  

Russia  

and Ukraine, and the global response to it, could adversely impact our revenues, gross margins and financial results.

government and other nations have imposed significant restrictions on most companies’

ability to do business in Russia as a result of the military conflict between Russia and Ukraine.

Increases in energy demand and supply disruptions caused by the Russia and Ukraine conflict have resulted in significantly higher energy prices, particularly in Europe.

It is not possible to predict the broader or longer-term consequences of this conflict, which could include further sanctions, embargoes, regional instability, energy shortages, geopolitical shifts and adverse effects on macroeconomic conditions, security conditions, currency exchange rates and financial markets.

Such geo-political instability and uncertainty could have a negative impact on our ability to sell to, ship products to, collect payments from, and support customers in certain regions based on trade restrictions, embargoes and export control law restrictions, and logistics restrictions including closures of air space, and could increase the costs, risks and adverse impacts from these new challenges.

We may also be the subject of increased cyber-attacks. 

While Russia does not constitute a material portion of our business, a significant escalation or expansion of economic disruption or the conflict's current scope could have a material adverse effect on our results of operations.

Catastrophic events could disrupt our operations or the operations of our suppliers or customers, having a negative impact on our financial results.

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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-K

Item 1A. Risk Factors