What changed in this filing

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Item 1A. Risk Factors

2021-05-27 compared with 2020-05-29 · 94 added, 81 removed, 130 unchanged (57% of the section changed)

RISK FACTORS .

In the ordinary course of our business, we face various market, operational, strategic, and financial risks.

These risks could have an impact on our business, financial condition, and results of operations.

Our most significant risks are set forth below and elsewhere in this Annual Report on Form 10-K.

Our Enterprise Risk Management process seeks to identify and address significant risks.

In the ordinary course of our business, we face various market, operational, strategic, financial and general risks.

These risks could have a material impact on our business, financial condition, and results of operations.

Please consider each of the risks described below, along with other information contained in this Annual Report on Form 10-K, when making any investment decisions with respect to our securities.

Our Enterprise Risk Management process seeks to identify and address material risks.

We believe that risk-taking is an inherent aspect of operating a global business and, in particular, one focused on growth and cost-competitiveness.

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The spread of COVID-19 and the resulting work and travel restrictions, including international border closings, have disrupted, and may continue to disrupt, global supply chains and have negatively impacted the global economy.

As a result of this pandemic, we have experienced significant impacts on our operations.

We suspended production at many of our manufacturing facilities around the world due to customer shutdowns or local government requirements.

Although the temporarily-closed facilities have since reopened, we are operating many facilities at reduced capacity levels in response to decreased customer orders.

Beginning largely in April 2020 and in an effort to mitigate the negative impacts of COVID-19, we have taken actions, including, but not limited to, production staffing adjustments, furloughs, shortened work weeks, and temporary salary reductions at all levels of our organization.

As a result of this pandemic, we experienced significant impacts on our operations.

Local government requirements or customer shutdowns caused us to suspend production at many of our manufacturing facilities around the world in March and April 2020.

All of the temporarily-closed facilities reopened in the first or second quarter of fiscal 2021 and have generally returned to more normal production levels.

However, since reopening, production at certain of our manufacturing facilities has been negatively affected at times by employee absences related to COVID-19.

Our business operations could be further affected if any of our key management or leadership personnel are incapacitated or if a significant portion of our workforce is unable to work effectively due to illness, quarantines, government actions or similar pandemic-related impediments.

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(ii) short- or long-term disruptions in our supply chain and our ability to deliver products to our customers;

(iii) deterioration in the markets that we or our customers operate in, which may result in lower sales or a lack in the ability to pay;

(iii) deterioration in the markets that we or our customers operate in, which may result in lower sales or a lack in the ability of our customers to pay us;

and (iv) significant volatility or negative pressure in the financial markets, which could adversely affect our access to capital and/or financing.

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If we are unable to avoid price reductions for our customers, or if we are unable to offset price reductions through improved operating efficiencies and manufacturing processes, sourcing alternatives, technology enhancements and other cost reduction initiatives, our results of operations could be adversely affected.

Fluctuations in costs of materials (including aluminum, copper, steel and stainless steel (nickel), other raw materials, purchased component inventory and energy) could place significant pressure on our results of operations.

Increases in the costs of raw materials and other purchased component inventory, which may be impacted by a variety of factors, including changes in trade laws and tariffs, could have a significant adverse effect on our results of operations.

We have sought to alleviate this risk by including provisions within our long-term customer contracts which allow us to adjust customer prices, on a prospective basis, based upon increases and decreases in the cost of key raw materials.

Fluctuations in costs of materials, including aluminum, copper, steel and stainless steel (nickel), other raw materials and purchased components, could place significant pressure on our results of operations.

Increases in the costs of raw materials and other purchased components, which may be impacted by a variety of factors, including changes in trade laws, tariffs and inflation, could have a significant adverse effect on our results of operations.

In the short-term, our ability to adjust for cost increases is limited when prices are fixed for current orders.

In these cases, if we are not able to recover such cost increases through price increases to our customers, such cost increases will have an adverse effect on our results of operations.

With regard to our longer-term sales programs, we have sought to reduce the risk of cost increases by including provisions within our customer contracts, where possible, which provide for adjustments to customer prices, on a prospective basis, based upon increases and decreases in the cost of key raw materials.

However, where these contract provisions are applicable, there can often be a three-month to one-year lag until the time of the price adjustment.

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In some cases, it can take several months or longer to find a supplier due to qualification requirements.

However, strong demand, the potential effects of trade laws and tariffs, capacity constraints, financial instability, public health crises, such as pandemics and epidemics, including the COVID-19 pandemic, or other circumstances experienced by our suppliers could result in shortages or delays in their supply of product to us, or a significant price increase resulting in our need to resource.

If we were to experience a significant or prolonged shortage of critical components or materials from any of our suppliers and could not procure the components or materials from other sources, we would be unable to meet our production schedules and we would miss product delivery dates, which would adversely affect our sales, results of operations and customer relationships.

However, strong demand, the potential effects of trade laws and tariffs, capacity constraints, financial instability, public health crises, such as pandemics and epidemics, including the ongoing COVID-19 pandemic, or other circumstances experienced by our suppliers could result in shortages or delays in their supply of product to us, or a significant price increase resulting in our need to resource.

For example, the COVID-19 pandemic and other factors have contributed to a global shortage of semiconductor chips, which has negatively impacted automotive and other markets, and in turn, order levels for certain products we provide to our automotive customers.

In addition, recent storms in Texas intensified already-constrained resin supply and, as a result, we experienced delays due to our suppliers’ inability to procure critical materials used in the production of certain of our products.

If such shortages continue or worsen, or if we were to experience significant or prolonged shortages of any critical components or materials from our suppliers and could not procure the components or materials from other sources, we would be unable to meet our production schedules and we would miss product delivery dates, which would adversely affect our sales, results of operations and customer relationships.

Our net sales and profitability could be adversely affected from business losses or declines with major customers.

Deterioration of a business relationship with a major customer could cause our sales and profitability to suffer.

Generally speaking, this risk is highest in our vehicular businesses, where a large portion of sales are attributable to a relatively small number of customers.

We principally compete for new vehicular business both during the initial development of new models and upon the redesign of existing models by our major customers.

New model development generally begins two to five years prior to marketing such models to the public.

The failure to obtain new business on new models or to retain or increase business on redesigned existing models could adversely affect our business and financial results.

In certain of our businesses, a large portion of sales are attributable to a relatively small number of customers.

In our vehicular businesses, the failure to obtain new business on new models or to retain or increase business on redesigned existing models could adversely affect our business and financial results.

In addition, as a result of the relatively long lead times required for many of our complex vehicular components, it may be difficult in the short term for us to obtain new sales to replace any unexpected decline in sales of existing products.

We may incur significant expense in preparing to meet anticipated customer requirements that may not be recovered.

The loss of a major customer, the loss of business with respect to one or more of the vehicle models that use our vehicular products, or a significant decline in the production levels of such vehicles could have an adverse effect on our business, results of operations and financial condition.

Our CIS segment includes significant sales generated from a single global technology customer (more than 10 percent of CIS segment sales) with which we are party to confidentiality agreements.

Sales to this customer have historically fluctuated significantly from one quarter or fiscal year to the next.

While we expect to be able to manage troughs and take advantage of peaks in these sales levels, to the extent we are unable to predict and mitigate lower sales levels or respond in a timely fashion to higher sales levels, the results of operations for the CIS segment could be adversely affected.

We are dependent upon the health of the customers and markets we serve.

We are highly susceptible to unfavorable trends or disruptions in the markets we serve, as our customers’ sales and production levels are affected by general economic conditions, including access to credit, the price of fuel and electricity, employment levels and trends, interest rates, labor relations issues, regulatory requirements, government-imposed restrictions relating to health crises or other unusual events, trade agreements and other market factors, as well as by customer-specific issues.

Any significant decline in production levels for current and future customers could result in asset impairment charges and a reduction in our sales, thereby adversely impacting our results of operations and financial condition.

The loss of a major customer in any of our businesses, the loss of business with respect to one or more of the vehicle models that use our vehicular products, or a significant decline in the production levels of such vehicles could have an adverse effect on our business, results of operations and financial condition.

Continual customer pressure to absorb costs adversely affects our profitability.

Customers often request that we pay for design, engineering and tooling costs that are incurred prior to the start of production and recover these costs through amortization in the piece price of the product.

Vehicular customers often request that we pay for design, engineering and tooling costs that are incurred prior to the start of production and recover these costs through amortization in the piece price of the product.

Some of these costs cannot be capitalized, which adversely affects our profitability until the programs for which they have been incurred are launched.

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Increased competition could adversely affect our business and our results of operations.

Exposure to Foreign Currencies

As a global company, we are subject to foreign currency rate fluctuations, which affect our financial results.

Although our financial results are reported in U.S.

dollars, a significant portion of our sales and operating costs are realized in foreign currencies.

Our sales and profitability are affected by movements of the U.S.

dollar against foreign currencies in which we generate sales and incur expenses.

To the extent that we are unable to match sales in foreign currencies with costs paid in the same currency, exchange rate fluctuations in any such currency could have an adverse effect on our financial results.

During times of a strengthening U.S.

dollar, our reported sales and earnings from our international operations will be lower because the applicable local currency will be translated into fewer U.S.

In certain instances, currency rate fluctuations may create pricing pressure relative to competitors quoting in different currencies, which could result in our products becoming less competitive.

Significant long-term fluctuations in relative currency values could have an adverse effect on our results of operations and financial condition.

OPERATIONAL RISKS

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In fiscal 2021, 58 percent of our sales were generated from non-U.S.

Consequently, our global operations are subject to complex international laws and regulations and numerous risks and uncertainties, including changes in monetary and fiscal policies, including those related to tax and trade, cross-border trade restrictions or prohibitions, import or other charges or taxes, fluctuations in foreign currency exchange and interest rates, changing economic conditions, public health crises, including the ongoing COVID-19 pandemic, unreliable intellectual property protection and legal systems, insufficient infrastructures, social unrest, political instability and disputes (including, for example, the uncertainty related to the withdrawal of the United Kingdom from the European Union, commonly referred to as “Brexit”), incompatible business practices, and international terrorism.

Consequently, our global operations are subject to complex international laws and regulations and numerous risks and uncertainties, including changes in monetary and fiscal policies, including those related to tax and trade, cross-border trade restrictions or prohibitions, import or other charges or taxes, fluctuations in foreign currency exchange and interest rates, inflation, changing economic conditions, public health crises, including the ongoing COVID-19 pandemic, unreliable intellectual property protection and legal systems, insufficient infrastructures, social unrest, political instability and disputes (including, for example, the continuing uncertainty related to the withdrawal of the United Kingdom from the European Union, commonly referred to as “Brexit”), incompatible business practices, and international terrorism.

Changes in policies or laws governing the terms of foreign trade, and in particular increased trade restrictions, tariffs or taxes on imports from countries where we either manufacture products, such as Mexico, or buy raw materials, such as China, could have a material adverse effect on our results of operations.

In addition, compliance with multiple and often conflicting laws and regulations of various countries is burdensome and expensive.

In addition, compliance with multiple and often conflicting laws and regulations of various countries can be challenging and expensive.

Embargoes or sanctions imposed by the U.S.

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We may be unable to maintain competitive cost structures within our business.

We have engaged in various restructuring activities in our VTS, CIS and BHVAC segments in order to optimize our manufacturing footprint and cost structure.

These restructuring activities have included targeted headcount reductions that support our objective of reducing operational and SG&A cost structures and the consolidation and/or closure of manufacturing facilities in North America and Europe.

In recent years, we have engaged in various restructuring activities in our CIS, HDE and Automotive segments in order to optimize our manufacturing footprint and cost structure.

In addition, we continue to focus on reducing costs for materials and services through targeted adjustments and negotiations with our supply base.

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We design technologically advanced products, and the processes required to produce these products can be difficult and complex.

We commit significant time and financial resources to ensure the successful launch of new products and programs.

Due to our high level of launch activity, particularly within our VTS segment, we must appropriately manage these launches and deploy our operational and administrative resources to take advantage of the resulting increase in our business.

We spend significant time and financial resources to ensure the successful launch of new products and programs.

Due to our high level of launch activity, particularly within our HDE segment, we must appropriately manage these launches and deploy our operational and administrative resources to take advantage of the resulting increase in our business.

If we do not successfully launch new products and programs, we may lose market share or damage relationships with our customers, which could negatively affect our business.

In addition, any failure in our manufacturing strategy for these new products or programs could result in operating inefficiencies or asset impairment charges, which could adversely affect our results of operations.

Reliance upon Technology Advantage

If we cannot differentiate ourselves from our competitors with our technology, our existing and potential customers may seek lower prices and our sales and earnings may be adversely affected.

Price, quality, delivery, technological innovation, and application engineering development are the primary elements of competition in our markets.

If we fail to keep pace with technological changes and cannot differentiate ourselves from our competitors with our technology or fail to provide high quality, innovative products and services that both meet or exceed customer expectations and address their ever-evolving needs, we may experience price erosion, lower sales, and lower profit margins.

Significant technological developments by our competitors or others also could adversely affect our business and results of operations.

Developments or assertions by or against us relating to intellectual property rights could adversely affect our business.

We own significant intellectual property, including a large number of patents, trademarks, copyrights and trade secrets.

Our intellectual property plays an important role in maintaining our competitive position in a number of the markets we serve.

As we expand our operations in jurisdictions where the enforcement of intellectual property rights is less robust, the risk of others duplicating our proprietary technologies increases, despite our efforts to protect them.

Developments or assertions by or against us relating to intellectual property rights could adversely affect our business and results of operations.

Information Technology (IT) Systems

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In the event our products fail to perform as expected, we are exposed to warranty and product liability claims and may be required to participate in a recall or other field campaign of such products.

Many of our vehicular customers offer extended warranty protection for their vehicles and put pressure on their supply base to extend warranty coverage as well.

Many of our vehicular customers offer extended warranty protection for their vehicles and require their supply base to extend warranty coverage as well.

If our customers demand higher warranty-related cost recoveries, or if our products fail to perform as expected, it could have a material adverse impact on our results of operations and financial condition.

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If any such proceeding has a negative result, it could adversely affect our business, results of operations, financial condition and reputation.

Attracting and Retaining Talent

Our continued success is dependent on being able to attract, develop and retain qualified personnel.

Our ability to sustain and grow our business requires us to hire, develop, and retain skilled and diverse personnel in managerial, leadership and administrative functions.

We depend significantly on the engagement of our employees and their skills, experience and industry knowledge to support our objectives and initiatives.

Difficulty attracting, developing, and retaining qualified personnel, particularly in light of tightening global labor markets, could adversely affect our business and results of operations.

STRATEGIC RISKS

Strategic Business Evaluation

The optimization of our VTS segment’s future profitability depends, in part, upon the success of our evaluation of strategic alternatives for our automotive business.

We previously announced our evaluation of strategic alternatives for our automotive business within our VTS segment.

While we have paused this process in light of the COVD-19 pandemic, we are committed to exiting this business in a manner that is in the best interest of our shareholders and will resume the process when economic conditions improve.

It is possible that our exit strategy may ultimately include a combination of both selling and winding-down or closing portions of the automotive business.

While we have spent considerable resources working towards the separation of the automotive business and preparing for a potential sale, there can be no assurance that the evaluation will result in a consummated transaction.

If our evaluation process does not result in the successful consummation of a strategic alternative, or if we are otherwise unable through such consummation to realize our goal for the automotive business, we may not be able to optimize the profitability of our VTS segment, which could adversely affect our results of operations and financial condition.

Business Exit Strategy

The optimization of our company’s future profitability depends, in part, upon the success of our evaluation of strategic alternatives for our Automotive segment’s business operations.

We previously disclosed our evaluation of strategic alternatives for the businesses within our Automotive segment.

As of March 31, 2021, we classified the liquid- and air-cooled automotive businesses within the Automotive segment as held for sale on our consolidated balance sheet.

The sale of the air-cooled automotive business to Schmid Metall GmbH closed on April 30, 2021.

The sale of the liquid-cooled automotive business to Dana Incorporated is subject to the receipt of governmental and third-party approvals and satisfaction of other closing conditions.

There can be no assurance that the pending sale will be consummated.

We are also evaluating strategic alternatives for the other Automotive segment business operations and are committed to exiting this business in a manner that is in the best interest of our shareholders.

It is possible that our exit strategy may ultimately include winding-down or closing the remaining business operations within the Automotive segment.

If our evaluation process does not result in the successful consummation of strategic alternatives, or if we are otherwise unable through such consummation to realize our goals for the Automotive segment, we may not be able to optimize our future profitability, which could adversely affect our results of operations and financial condition.

Growth Strategies

Inability to identify and execute on growth opportunities may adversely impact our business and operating results.

We expect to continue to pursue acquisitions in “industrial” markets.

There can be no assurance we will be able to identify attractive acquisition targets and/or organic growth opportunities.

If we are unable to successfully complete such transactions and execute on organic opportunities in the future, our growth may be limited.

We are pursuing growth, through both organic and inorganic opportunities.

Under our new CEO’s leadership, we are implementing a new strategy, which we refer to as our “80/20 strategy,” to examine our businesses using data analytics in order to focus our resources on products and markets with the highest growth and best returns.

In addition, we will continue to review our business portfolio and pursue acquisitions to accelerate growth.

If we are unable to successfully implement the 80/20 strategy, we may not achieve the financial or operational successes anticipated.

In addition, there can be no assurance we will be able to identify attractive acquisition targets and/or organic growth opportunities.

If we are unable to successfully complete acquisitions and execute on organic opportunities in the future, our growth may be limited.

In addition, future acquisitions will require integration of operations, sales and marketing, information technology, finance, and administrative functions.

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Our indebtedness may limit our use of cash flow to support operating, development and investment activities, and failure to comply with our debt covenants could adversely affect our liquidity and financial results.

As of March 31, 2020, we had total outstanding indebtedness of $482 million.

As of March 31, 2021, we had total outstanding indebtedness of $340 million, of which $5 million was classified as held for sale on our consolidated balance sheet.

Our indebtedness and related debt service obligations (i) require that significant cash flow from operations be used for principal and interest payments, which reduces the funds we have available for other business purposes;

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Our credit and Senior Note agreements contain financial covenants that, among other things, require us to maintain a minimum interest coverage ratio and impose a maximum leverage ratio.

Although we recently amended these agreements to provide additional flexibility in light of risks and uncertainties resulting from the COVID-19 pandemic, our failure to comply with debt covenants could result in an event of default, which, if not cured or waived, could result in us being required to repay these borrowings before their due date.

Failure to comply with debt covenants could result in an event of default, which, if not cured or waived, could result in us being required to repay these borrowings before their due date.

If we are forced to refinance these borrowings on less favorable terms, our results of operations and financial condition could be adversely affected by increased costs and interest rates.

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The United Kingdom’s Financial Conduct Authority announced that after 2021 it would no longer persuade or compel panel banks to submit the rates required to calculate LIBOR.

Currently, there is no definitive information or consensus regarding the future utilization of LIBOR or alternative reference rates.

On November 30, 2020, the ICE Benchmark Administration, the administrator of LIBOR, announced a consultation on the extension of most tenors of USD LIBOR until June 2023.

The proposed extension would not apply to the rate’s other denominations, including the euro.

Meanwhile, U.S.

banking regulators have advised that most USD LIBOR originations should end no later than 2021 and it is expected that LIBOR may be replaced with the Secured Overnight Financing Rate (“SOFR”), a new index calculated on a daily basis by reference to short-term repurchase agreements for U.S.

Treasury securities.

It is currently uncertain whether SOFR or other alternative reference rates will attain market acceptance as replacements for LIBOR.

As a result, it is not possible to predict the effect of these changes, other reforms, or the establishment of alternative reference rates.

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Our funding policy is to contribute annually, at a minimum, the amount necessary on an actuarial basis to provide for benefits in accordance with applicable laws and regulations.

Our domestic plans have an unfunded liability totaling $98 million.

Our domestic plans have an unfunded liability totaling $41 million as of March 31, 2021.

During fiscal 2022, we anticipate making funding contributions totaling $13 million related to these domestic plans.

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Our balance sheet includes goodwill and intangible assets totaling $271 million at March 31, 2021.

We perform goodwill impairment tests annually, as of March 31, or more frequently if appropriate.

We perform goodwill impairment tests annually, as of March 31, or more frequently if business events or other conditions exist that require a more frequent evaluation.

In addition, we review intangible assets for impairment whenever business conditions or other events indicate that the assets may be impaired.

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We may be subject to additional income tax expense or become subject to additional tax exposure.

As of March 31, 2020, our net deferred tax assets totaled $97 million.

These deferred tax assets include, among others, net operating loss carryforwards and tax credit carryforwards that may be used in certain tax jurisdictions to offset future taxable income and reduce income taxes payable.

Each quarter, we determine the probability that the deferred tax assets will be realized.

This determination involves judgement and the use of significant estimates and assumptions, including expectations of future taxable income and tax planning strategies.

Future events or circumstances, such as lower taxable income or unfavorable changes in the financial outlook of our operations in certain jurisdictions, could require us to establish further valuation allowances, which could have a material adverse effect on our results of operations and financial condition.

In addition, the subjectivity of or changes in tax laws and regulations in jurisdictions where we have significant operations could materially affect our results of operations and financial condition.

The subjectivity of or changes in tax laws and regulations in jurisdictions where we have significant operations could materially affect our results of operations and financial condition.

We are also subject to tax audits in each jurisdiction in which we operate.

Unfavorable or unexpected outcomes from one or more tax audits could adversely affect our results of operations and financial condition.

President Biden recently unveiled a new infrastructure plan, which includes a proposal to increase the federal corporate tax rate from 21 percent to 28 percent as part of a package of tax reforms to help fund the spending proposals in the plan.

The proposed infrastructure plan is in the early stages of the legislative process but is expected to proceed this year due to the Democratic Party’s majority in both houses of Congress.

If adopted as proposed, the increase of the corporate tax rate would adversely affect our results of operations in future periods.

In addition, as of March 31, 2021, our net deferred tax assets totaled $19 million.

Each quarter, we evaluate the probability that our deferred tax assets will be realized and determine whether valuation allowances or adjustments thereto are needed.

This determination involves judgement and the use of significant estimates and assumptions, including expectations of future taxable income and tax planning strategies.

GENERAL RISKS

Customers and Markets

We are dependent upon the health of the customers and markets we serve.

Exposure to Foreign Currencies

As a global company, we are subject to foreign currency rate fluctuations, which affect our financial results.

Although our financial results are reported in U.S.

dollars, a significant portion of our sales and operating costs are realized in foreign currencies.

Our sales and profitability are affected by movements of the U.S.

dollar against foreign currencies in which we generate sales and incur expenses.

During times of a strengthening U.S.

dollar, our reported sales and earnings from our international operations will be lower because the applicable local currency will be translated into fewer U.S.

In certain instances, currency rate fluctuations may create pricing pressure relative to competitors quoting in different currencies, which could result in our products becoming less competitive.

Significant long-term fluctuations in relative currency values could have an adverse effect on our results of operations and financial condition.

Reliance upon Technology Advantage

If we cannot differentiate ourselves from our competitors with our technology, our existing and potential customers may seek lower prices and our sales and earnings may be adversely affected.

Price, quality, delivery, technological innovation, and application engineering development are the primary elements of competition in our markets.

Significant technological developments by our competitors or others also could adversely affect our business and results of operations.

Developments or assertions by or against us relating to intellectual property rights could adversely affect our business.

We own and license significant intellectual property, including a large number of patents, trademarks, copyrights and trade secrets.

Our intellectual property plays an important role in maintaining our competitive position in a number of the markets we serve.

As we maintain or expand our operations in jurisdictions where the enforcement of intellectual property rights is less robust, the risk of others duplicating our proprietary technologies increases, despite our efforts to protect them.

Developments or assertions by or against us relating to intellectual property rights could adversely affect our business and results of operations.

Attracting and Retaining Talent

Our continued success is dependent on being able to attract, develop and retain qualified personnel.

Our ability to sustain and grow our business requires us to hire, develop, and retain skilled and diverse personnel in managerial, leadership and administrative functions.

We depend significantly on the engagement of our employees and their skills, experience and industry knowledge to support our objectives and initiatives.

Difficulty attracting, developing, and retaining qualified personnel, particularly in light of tight global labor markets, could adversely affect our business and results of operations.

UNRESOLVED STAFF COMMENTS.

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