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Item 1A. Risk Factors

2021-06-14 compared with 2020-06-15 · 185 added, 255 removed, 68 unchanged (87% of the section changed)

While we believe the risk factors described below are all the material risks currently facing our business, additional risks we are not presently aware of or that we currently believe are immaterial may also impair our business operations.

financial condition or results of operations could be materially and adversely impacted by these risks, and the trading price of our common stock could be adversely impacted by any of these risks.

In assessing these risks, you should also refer to the

other information included in or incorporated by reference into this Form 10-K, including our consolidated financial statements and related notes thereto appearing elsewhere or incorporated by reference in this Form 10-K.

Our business, results of operations, and financial condition could be materially adversely affected by the effects of widespread public health crises, including the novel coronavirus (“COVID-19”)

pandemic, that are beyond our control.

The outbreak of COVID-19 in countries in which we operate, including the U.S., Mexico, Canada, Singapore, Malaysia, China, and India, could have a material adverse effect on our business, results of operations and financial condition.

the duration and severity of the pandemic may vary depending on the characteristics of the virus and the public health response;

therefore, the nature and extent of its impact on our business and operations may be uncertain and beyond our control.

April 2020, we experienced a softening in customer demand for our products and our sales could continue to decrease as a result of a decrease in customer demand for our products as a result of the COVID-19 pandemic, as well as a deterioration of

general economic conditions, including a possible national or global recession, and we can provide no assurance that any decrease in sales will be offset by increased sales in the future.

We have taken actions to reduce production volumes and implement

cost reduction and cash preservation initiatives, including reductions in capital expenditures and employee layoffs and furloughs and may be required to do more so in the future, which could negatively impact our future growth and ability to take

advantage of potential opportunities.

In the countries in which we operate, national, state and local governments have implemented a variety of measures in response to the COVID-19 pandemic, including the declaration of states of emergency, restricting people from gathering in groups or

interacting within a certain physical distance (i.e., social distancing), restricting or limiting the operations of businesses deemed to be non-essential, and imposing travel restrictions on individuals, including restrictions requiring individuals to

stay at their place of residence except to perform certain activities deemed to be essential.

Although certain states have issued executive orders requiring all workers to remain at home, unless their work is critical, essential or life-sustaining,

automotive repair and the related supply and distribution of parts have been classified as critical, essential or life-sustaining businesses exempted from these government shutdowns, in the United States and Canada.

Therefore, the vast majority of our

customers are currently open for business.

In turn, all our major facilities in the United States and Canada have remained open and operating to date, with modified staffing in certain locations where appropriate.

Although we have been able to continue

to perform with certain modifications, we can provide no assurances that we will be able to continue to operate in the future without disruption, as a result of new or modifications to existing governmental measures in response to the COVID-19

Our other international locations have incurred various levels of restrictions.

In particular, the Mexican government implemented certain measures in March through May 2020 that resulted in a reduction in productivity, as well as the temporary

closure of all of our manufacturing and distribution facilities in Tijuana, Mexico, in mid-April 2020.

We have also suffered closures of manufacturing, remanufacturing, and distribution facilities in China, Malaysia, Singapore and India.

filing of this Report, although all of our facilities are operational, any restrictions or limitations on our ability to perform such operations in the future without disruption, such as temporary closures, as a result of governmental measures in

response to the pandemic could have a material adverse effect on our business, results of operations and financial condition.

The COVID-19 pandemic could cause material disruption to our business and operations as a result of worker absenteeism due to illness or other factors, and the implementation of various exposure-reducing and infection prevention measures, such as

cleaning and disinfecting measures, social distancing, staggered work shifts and reduced operations and production volumes.

Depending on the extent and duration of these disruptions, and their effects on our operations, our costs could increase,

including our costs to address the health and safety of our employees, our ability to remanufacture and distribute product to satisfy demand for our products could be adversely impacted and, as a result, our business, financial condition and results of

operations could be materially adversely affected.

Furthermore, the COVID-19 pandemic also adversely affects the business, operations and financial condition of our customers, suppliers and other supply chain partners as a result of the governmental measures described above, disruptions to their

business and operations for reasons similar to those described above, and their ability to manage and mitigate the adverse effects of these and other risks unique to their business and operations that may arise as a result of the pandemic.

our suppliers may not have the materials, capacity, or capability to manufacture our products or components according to our schedule and specifications.

If our suppliers’ operations are impacted, we may need to seek alternate suppliers, which may be

more expensive, may not be available or may result in delays in shipments to us and subsequently to our customers, each of which would affect our results of operations.

The duration of the disruption to our customers and to our supply chain, and

related financial impact to us, cannot be estimated at this time.

Should such disruption continue for an extended period of time, the impact could have a material adverse effect on our business, results of operations and financial condition.

We rely on a few large customers for a majority of our business, and the loss of any of these customers, significant changes in the

prices, marketing allowances or other important terms provided to any of these customers or adverse developments with respect to

the financial condition of these customers could reduce our net income and operating results.

Our financial condition or results of operations could be materially and adversely impacted by these risks, and the trading price of our common stock could be adversely impacted by any of these risks.

In assessing these risks, you should also refer to the other information included in or incorporated by reference into this Form 10-K, including our consolidated financial statements and related notes thereto appearing elsewhere or incorporated by reference in this Form 10-K.

Risks Related to the COVID-19 Pandemic

The current pandemic from the outbreak of COVID-19 could have a material impact on our results of operations and financial condition, and the continuation of this pandemic, further outbreaks of COVID-19, or any future outbreak of other highly infectious diseases or public health emergencies could have a similar or worse impact.

The outbreak of the COVID-19 pandemic has led to adverse impacts on the U.S.

and global economies and created uncertainty regarding the potential effects on our employees, supply chain, operations, and customer demand.

The COVID-19 pandemic could impact our operations and the operations of our customers, suppliers, and vendors because of quarantines, facility closures, travel, and logistics restrictions.

The extent to which the COVID-19 pandemic impacts us will depend on numerous factors and future developments, which are highly uncertain and cannot be predicted, including, but not limited to:

(i) the severity of the virus, (ii) the occurrence and duration of additional spikes, (iii) the effects of the pandemic on customers, suppliers, and vendors, (iv) the remedial actions and stimulus measures adopted by local, state and federal governments, (v) the availability and acceptance of vaccines, and (vi) the extent to which normal economic and operating conditions can resume.

Even after the COVID-19 pandemic has subsided, we may continue to experience adverse impacts to our business because of an economic recession or depression that has occurred or may occur in the future.

We could experience adverse impacts from COVID-19 in a number of ways, including, but not limited to, the following which have occurred to some extent during this fiscal year:

supply chain delays or stoppages due to shipping delays (cargo ship, train and truck shortages as well as staffing shortages) resulting in increased freight costs, closed supplier facilities or distribution centers, reduced workforces, scarcity of raw materials and scrutiny or embargoing of goods produced in infected areas;

reduced and/or deferred consumer demand for our products as a result of the economic downturn, during the COVID-19 pandemic;

change in demand for or availability of our products as a result of our customers modifying their restocking, fulfillment, or shipping practices;

increased raw material, and other input costs resulting from market volatility;

increased working capital needs and/or an increase in trade accounts receivable write-offs as a result of increased financial pressures on our suppliers or customers;

fluctuations in foreign currency exchange rates or interest rates resulting from market uncertainties.

At this time, we are unable to predict accurately the impact the COVID-19 pandemic will have on our business and financial condition, in the future.

Risks Related to Our Business and Industry

We rely on a few large customers for a majority of our business, and the loss of any of these customers, significant changes in the prices, marketing allowances or other important terms provided to any of these customers or adverse developments with respect to the financial condition of these customers could reduce our net income and operating results.

Our net sales are concentrated among a small number of large customers.

Sales to our three largest customers in the aggregate represented 87%, and sales to our largest customer represented 42% of our net sales during fiscal 2021.

ongoing pressure from our major customers to offer lower prices, extended payment terms, increased marketing and other allowances and other terms more favorable to these customers because our sales to these customers are concentrated, and the market in

which we operate is very competitive.

These customer demands have put continued pressure on our operating margins and profitability, resulted in periodic contract renegotiation to provide more favorable prices and terms to these customers and

significantly increased our working capital needs.

We are under ongoing pressure from our major customers to offer lower prices, extended payment terms, increased marketing and other allowances and other terms more favorable to these customers because our sales to these customers are concentrated, and the market in which we operate is very competitive.

In addition, this customer concentration leaves us vulnerable to any adverse change in the financial condition of these customers.

Changes in terms with, significant allowances for and collections from

these customers could affect our operating results and cash flows.

Changes in terms with, significant allowances for and collections from these customers could affect our operating results and cash flows.

The loss of or a significant decline in sales to any of these customers could adversely affect our business, results of operations, and financial condition.

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Our industry is highly competitive, and our success depends on our ability to compete with suppliers of automotive aftermarket products, some of which may have substantially greater financial, marketing and other resources than we do.

The automotive

aftermarket industry is highly competitive, and our success depends on our ability to compete with domestic and international suppliers of automotive aftermarket products.

Due to the diversity of our product offering, we compete with several large and

medium-sized companies, including BBB Industries and Cardone Industries for hard parts, and AVL, Horiba, Siemens, and FEV for diagnostic equipment and a large number of smaller regional and specialty companies and numerous category specific

The automotive aftermarket industry is highly competitive, and our success depends on our ability to compete with domestic and international suppliers of automotive aftermarket products.

Due to the diversity of our product offering, we compete with several large and medium-sized companies, including BBB Industries and Cardone Industries for hard parts, and AVL and Horiba for test solutions and diagnostic equipment and a large number of smaller regional and specialty companies and numerous category specific competitors.

In addition, we face competition from original equipment manufacturers, which, through their automotive dealerships, supply many of the same types of replacement parts we sell.

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In addition, other overseas competitors, particularly those located in China, are increasing their operations and could become a significant competitive force in the future.

Increased competition could put additional pressure on us to reduce prices

or take other actions, which may have an adverse effect on our operating results.

Increased competition could put additional pressure on us to reduce prices or take other actions, which may have an adverse effect on our operating results.

We may also lose significant customers or lines of business to competitors.

If we do not respond appropriately, the evolution of the automotive industry could adversely affect our business.

The automotive industry is increasingly focused on the development of hybrid and electric vehicles and of advanced driver assistance technologies, with the goal of developing and introducing a commercially-viable, fully-automated driving experience.

There has also been an increase in consumer preferences for mobility on demand services, such as car and ride sharing, as opposed to automobile ownership, which may result in a long-term reduction in the number of vehicles per capita.

In addition, some industry participants are exploring transportation through alternatives to automobiles.

These evolving areas have also attracted increased competition from entrants outside the traditional automotive industry.

If we do not continue to innovate and develop, or acquire, new and compelling products that capitalize upon new technologies, such as D&V Electronics, in response to consumer preferences, this could have an adverse impact on our results of operations.

Work stoppages, production shutdowns and similar events could significantly disrupt our business.

Because the automotive industry relies heavily on just-in-time delivery of components during the assembly and manufacture of vehicles, a work stoppage or production shutdown at one or more of our manufacturing and assembly facilities could have adverse effects on our business.

During fiscal 2021, we experienced multiple shutdowns at our production facilities in Mexico, Canada and Asia due to the COVID-19 pandemic, but none had a material effect on production or sales.

Due to production issues, sales were deferred in some cases.

Similarly, if one or more of our customers were to experience a work stoppage or production shutdown, that customer would likely halt or limit purchases of our products, which could result in the shutdown of the related manufacturing facilities.

A significant disruption in the supply of key components due to a work stoppage or production shutdown at one of our suppliers or any other supplier could have the same consequences and, accordingly, have an adverse effect on our financial results.

Unfavorable economic conditions may adversely affect our business.

Adverse changes in economic conditions, including inflation, recession, increased fuel prices, tariffs, and unemployment levels, availability of consumer credit, taxation or instability in the financial markets or credit markets may either lower

demand for our products or increase our operational costs, or both.

In addition, elections and other changes in the political landscape could have similar effects.

Such conditions may also materially impact our customers, suppliers and other parties

with whom we do business.

Such conditions may also materially impact our customers, suppliers and other parties with whom we do business.

Our revenue will be adversely affected if demand for our products declines.

The impact of unfavorable economic conditions may also impair the ability of our customers to pay for products they have purchased.

reserves for doubtful accounts and write-offs of accounts receivables may increase and failure to collect a significant portion of amounts due on those receivables could have a material adverse effect upon our business, financial condition and results

of operations.

Our offshore remanufacturing and logistic activities expose us to increased political and economic risks and place a greater burden on

management to achieve quality standards.

Our overseas operations, especially our operations in Mexico, increase our exposure to political, criminal or economic instability in the host countries and to currency fluctuations.

Risks are inherent in international operations, including:

exchange controls and currency restrictions;

currency fluctuations and devaluations;

changes in local economic conditions;

repatriation restrictions (including the imposition or increase of withholding and other taxes on remittances and other payments by foreign subsidiaries);

global sovereign uncertainty and hyperinflation in certain foreign countries;

laws and regulations relating to export and import restrictions;

exposure to government actions;

increased required employment related costs;

exposure to local political or social unrest including resultant acts of war, terrorism or similar events.

These and other factors may have a material adverse effect on our offshore activities and on our business, results of operations and financial condition.

Our overall success as a business depends substantially upon our ability to manage our foreign

We may not continue to succeed in developing and implementing policies and strategies that are effective in each location where we do business, and failure to do so could materially and adversely impact our business, results of operations,

and financial condition.

As a result, reserves for doubtful accounts and write-offs of accounts receivables may increase and failure to collect a significant portion of amounts due on those receivables could have a material adverse effect upon our business, results of operations, and financial condition.

Interruptions or delays in obtaining component parts could impair our business and adversely affect our operating results.

In our remanufacturing processes, we obtain Used Cores, primarily through the core exchange program with our customers, and component parts from third-party manufacturers.

We generally purchase up to 20% of our Used Cores from core brokers.

In our remanufacturing processes, we obtain Used Cores, primarily through the core exchange programs with our customers, and component parts from third-party manufacturers.

To supplement Used Cores received from our customers we purchase Used Cores from core brokers.

Historically, the Used Core returned from customers together with purchases from core brokers have provided us with an adequate supply of Used Cores.

If there was a significant disruption in the supply of Used Cores, whether as a result of increased

Used Core acquisitions by existing or new competitors or otherwise, our operating activities could be materially and adversely impacted.

In addition, a number of the other components used in the remanufacturing process are available from a very limited

number of suppliers.

If there was a significant disruption in the supply of Used Cores, whether as a result of increased Used Core acquisitions by existing or new competitors or otherwise, our operating activities could be materially and adversely impacted.

In addition, a number of the other components used in the remanufacturing process are available from a very limited number of suppliers.

We are, as a result, vulnerable to any disruption in component supply, and any meaningful disruption in this supply would materially and adversely impact our operating results.

Increases in the market prices of key component raw materials could increase the cost of our products and negatively impact our

profitability.

In light of the continuous pressure on pricing which we have experienced from our large customers, we may not be able to recoup the higher costs of our products due to changes in the prices of raw materials, particularly aluminum and copper.

are unable to recover a substantial portion of our raw materials from Used Cores returned to us by our customers through the core exchange program, the prices of Used Cores that we purchase may reflect the impact of changes in the cost of raw

However, we are unable to determine what adverse impact, if any, sustained raw material price increases may have on our product costs or profitability.

Increases in the market prices of key component raw materials could increase the cost of our products and negatively impact our profitability.

If we are unable to recover a substantial portion of our raw materials from Used Cores returned to us by our customers through the core exchange programs, the prices of Used Cores that we purchase may reflect the impact of changes in the cost of raw materials.

Sustained raw material price increases has had a non-material impact on our product costs and profitability to date, but we are unable to determine the overall impact, in the future, at this time.

Our financial results are affected by automotive parts failure rates that are outside of our control.

Our operating results are affected over the long term by automotive parts failure rates.

These failure rates are impacted by a number of factors outside of our control, including product designs that have resulted in greater reliability, the number

of miles driven by consumers, and the average age of vehicles on the road.

These failure rates are impacted by a number of factors outside of our control, including product designs that have resulted in greater reliability, the number of miles driven by consumers, and the average age of vehicles on the road.

A reduction in the failure rates of automotive parts would adversely affect our sales and profitability.

Our operating results may continue to fluctuate significantly.

We have experienced significant variations in our annual and quarterly results of operations.

These fluctuations have resulted from many factors, including shifts in the demand and pricing for our products, general economic conditions, including

changes in prevailing interest rates, and the introduction of new products.

Our gross profit percentage fluctuates due to numerous factors, some of which are outside of our control.

These factors include the timing and level of marketing allowances

provided to our customers, actual sales during the relevant period, pricing strategies, the mix of products sold during a reporting period, and general market and competitive conditions.

We also incur allowances, accruals, charges and other expenses

that differ from period to period based on changes in our business, which causes our operating income to fluctuate.

Our lenders may not waive future defaults under our credit agreements.

Our credit agreement with our lenders contains certain financial and other covenants.

If we fail to meet any of these covenants in the future, there is no assurance that our lenders will waive any such defaults.

If obtained, any such waiver may

impose significant costs or covenants on us.

Unfavorable currency exchange rate fluctuations could adversely affect us.

We are exposed to market risk from material movements in foreign exchange rates between the U.S.

dollar and the currencies of the foreign countries in which we operate.

In fiscal 2020, approximately 21% of our total expenses were in currencies other

than the U.S.

As a result of our extensive operations in Mexico, our primary risk relates to changes in the rates between the U.S.

dollar and the Mexican peso.

To mitigate this currency risk, we enter into forward foreign exchange contracts to

exchange U.S.

dollars for Mexican pesos.

We also enter into forward foreign exchange contracts to exchange U.S.

dollars for Chinese yuan in order to mitigate risk related to our purchases and payments to our Chinese vendors.

The extent to which we use

forward foreign exchange contracts is periodically reviewed in light of our estimate of market conditions and the terms and length of anticipated requirements.

The use of derivative financial instruments allows us to reduce our exposure to the risk

that the eventual net cash outflow resulting from funding the expenses of the foreign operations will be materially affected by changes in the exchange rates.

We do not engage in currency speculation or hold or issue financial instruments for trading

These contracts generally expire in a year or less.

Any change in the fair value of foreign exchange contracts is accounted for as an increase or decrease to general and administrative expenses in current period earnings.

We recorded a

non-cash loss of $6,491,000 due to the change in the fair value of the forward foreign currency exchange contracts in general and administrative expenses during fiscal 2020.

In addition, we recorded a loss of $11,710,000 in connection with the

remeasurement of foreign currency-denominated lease liabilities during fiscal 2020.

We may continue to make strategic acquisitions of other companies or businesses and these acquisitions introduce significant risks and

uncertainties, including risks related to integrating the acquired businesses and achieving benefits from the acquisitions.

In order to position ourselves to take advantage of growth opportunities, we have made, and may continue to make, strategic acquisitions that involve significant risks and uncertainties.

These risks and uncertainties include:

the difficulty in integrating newly-acquired businesses and operations in an efficient and effective manner;

the challenges in achieving strategic objectives, cost savings and other benefits from acquisitions;

the potential loss of key employees of the acquired businesses;

the risk of diverting the attention of senior management from our operations;

risks associated with integrating financial reporting and internal control systems;

difficulties in expanding information technology systems and other business processes to accommodate the acquired businesses;

future impairments of any goodwill of an acquired business.

We may also incur significant expenses to pursue and consummate acquisitions.

Any of the foregoing, or a combination of them, could cause us to incur additional expenses and materially and adversely impact our business, financial condition, results

of operations, or liquidity.

Our reliance on foreign suppliers for some of the automotive parts we sell to our customers or included in our products presents risks to our business .

A significant portion of automotive parts and components we use in our remanufacturing process are imported from suppliers located outside the U.S., including various countries in Asia.

As a result, we are subject to

various risks of doing business in foreign markets and importing products from abroad, such as:

A significant portion of automotive parts and components we use in our remanufacturing process are imported from suppliers located outside the U.S., including China and other countries in Asia.

As a result, we are subject to various risks of doing business in foreign markets and importing products from abroad, such as the following, which we have experienced in the last fiscal year:

significant delays in the delivery of cargo due to port security considerations;

imposition of duties, taxes, tariffs or other charges on imports;

imposition of new legislation relating to import quotas or other restrictions that may limit the quantity of our product that may be imported into the U.S.

from countries or regions where we do business;

financial or political instability in any of the countries in which our product is manufactured;

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disruption of imports by labor disputes or strikes and local business practices;

natural disasters, disease epidemics and health related concerns, which could result in closed factories, reduced workforces, scarcity of raw materials and scrutiny or embargoing of goods produced in infected areas;

It is also possible, in the future, that we may experience the following risks related to doing business in foreign markets and importing products from abroad, such as the following:

imposition of new legislation relating to import quotas or other restrictions that may limit the quantity of our product that may be imported into the U.S.

from countries or regions where we do business;

political or military conflict involving the U.S., which could cause a delay in the transportation of our products and an increase in transportation costs;

heightened terrorism security concerns, which could subject imported goods to additional, more frequent or more thorough inspections, leading to delays in deliveries or impoundment of goods for extended periods;

inability of our non-U.S.

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our ability to enforce any agreements with our foreign suppliers.

Any of the foregoing factors, or a combination of them, could increase the cost or reduce the supply of products available to us and materially and adversely impact our business, financial condition, results of

operations or liquidity.

will not experience operational difficulties with such manufacturers, such as reductions in the availability of production capacity, errors in complying with merchandise specifications, insufficient quality controls and failure to meet production

deadlines or increases in manufacturing costs.

In addition, because we depend on independent third parties to manufacture a significant portion of our wheel hub, brake calipers, brake master cylinders, and other purchased finished goods, we cannot be certain that we will not experience operational difficulties with such manufacturers, such as reductions in the availability of production capacity, errors in complying with merchandise specifications, insufficient quality controls and failure to meet production deadlines or increases in manufacturing costs.

An increase in the cost or a disruption in the flow of our imported products may significantly decrease our sales and profits.

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A disruption in the shipping or cost of such merchandise may significantly decrease our sales and profits.

if imported merchandise becomes more expensive or unavailable, the transition to alternative sources may not occur in time to meet our demands.

Merchandise from alternative sources may also be of lesser quality and more expensive than those we

currently import.

In addition, if imported merchandise becomes more expensive or unavailable, the transition to alternative sources may not occur in time to meet our demands.

Merchandise from alternative sources may also be of lesser quality and more expensive than those we currently import.

Risks associated with our reliance on imported merchandise include disruptions in the shipping and importation or increase in the costs of imported products.

For example, common risks may be:

For example, common risks include:

raw material shortages;

work stoppages;

strikes and political unrest;

problems with oceanic shipping, including shipping container shortages;

increased customs inspections of import shipments or other factors causing delays in shipments;

increases in shipping rates, all of which we experienced.

As well as the following common risks, which we may experience in the future:

work stoppages;

strikes and political unrest;

economic crises;

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import quotas and other trade sanctions.

increases in shipping rates.

Products manufactured overseas and imported into the U.S.

and other countries are subject to import restrictions and duties, which could delay their delivery or increase their cost.

Following an audit in

fiscal 2019, the U.S.

Following an audit in fiscal 2019, the U.S.

Customs and Border Protection stated that it believed that we owed additional duties of approximately $17 million from 2011 through mid-2018 relating to products that we imported from Mexico.

We do not believe that this amount is

correct and believe that we have numerous defenses and intend to dispute this amount vigorously.

We do not believe that this amount is correct and believe that we have numerous defenses and are disputing this amount vigorously.

We cannot assure you that the U.S.

Customs and Border Protection will agree or that we will not need to accrue or pay additional amounts in the future.

Our operating results may continue to fluctuate significantly.

We have experienced significant variations in our annual and quarterly results of operations.

These fluctuations have resulted from many factors, including shifts in the demand and pricing for our products, general economic conditions, including changes in prevailing interest rates, and the introduction of new products.

Our gross profit percentage fluctuates due to numerous factors, some of which are outside of our control.

These factors include the timing and level of marketing allowances provided to our customers, actual sales during the relevant period, pricing strategies, the mix of products sold during a reporting period, and general market and competitive conditions.

We also incur allowances, accruals, charges and other expenses that differ from period to period based on changes in our business, which causes our operating income to fluctuate.

Regulations related to conflict minerals could adversely impact our business.

The Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”) contains provisions to improve transparency and accountability concerning the supply of certain minerals, known as “conflict minerals”, originating from the Democratic Republic of Congo (“DRC”) and adjoining countries.

These rules could adversely affect the sourcing, supply, and pricing of materials used in our products, as the number of suppliers who provide conflict-free minerals may be limited.

We may also suffer reputational harm if we determine that certain of our products contain minerals not determined to be conflict-free or if we are unable to modify our products to avoid the use of such materials.

We may also face challenges in satisfying customers who may require that our products be certified as containing conflict-free minerals.

The products we manufacture or contract to manufacture contain small quantities of Tin and Gold.

We manufacture or contract to manufacture one product with small quantities of Tantalum.

For the reporting year ending December 31, 2020, we increased the number of our first tier suppliers surveyed to include our undercar and brake product lines, as well as our subsidiaries.

This inquiry yielded 289 smelters, refiners, or metal processing facilities for these minerals that are, or could be, in our supply chain.

Of these, 68% were validated as conflict-free, per publicly available information on the Conflict Free Sourcing Initiative website.

We have not been able to ascertain the conflict-free status of the remaining smelters or refiners.

Our strategy for managing risks associated with conflict minerals in products includes continuing to encourage our suppliers to engage in conflict-free sourcing and obtaining data from our suppliers that is more applicable to the products we purchase.

We continue to monitor progress on industry efforts to ascertain whether some facilities that suppliers identified are actually smelters.

We do not believe conflict minerals pose risk to our operations.

We are a member of the Automobile Industry Action Group (AIAG) and support their efforts in the conflict minerals area.

Natural disasters or other disruptions in our business in California and Baja California, Mexico could increase our operating expenses or cause us to lose revenues.

A substantial portion of our operations are located in California and Baja California, Mexico, including our headquarters, remanufacturing and warehouse facilities.

Any natural disaster, such as an earthquake, or other damage to our facilities from weather, fire or other events could cause us to lose inventory, delay delivery of orders to customers, incur additional repair-related expenses, disrupt our operations or otherwise harm our business.

These events could also disrupt our information systems, which would harm our ability to manage our operations worldwide and compile and report financial information.

As a result, we could incur additional expenses or liabilities or lose revenues, which could exceed any insurance coverage and would adversely affect our financial condition and results of operations.

Our past material weakness, and any future failure to maintain effective internal control over financial reporting, may affect our ability to accurately report our financial results and could materially and adversely affect the market price of our common stock.

Under the Sarbanes-Oxley Act, we must maintain effective disclosure controls and procedures and internal control over financial reporting, which requires significant resources and management oversight.

Effective internal and disclosure controls are necessary for us to provide reliable financial reports and effectively prevent fraud and to operate successfully as a public company.

If we cannot provide reliable financial reports or prevent fraud, our reputation and operating results would be harmed.

We cannot assure you that our internal control over financial reporting will be effective in the future or that other material weakness will not be discovered in the future.

Any failure to maintain effective controls or timely effect any necessary improvement of our internal and disclosure controls could harm operating results or cause us to fail to meet our reporting obligations, which could affect our ability to remain listed with the NASDAQ Global Select Market or subject us to adverse regulatory consequences.

Ineffective internal and disclosure controls could also cause investors to lose confidence in our reported financial information, which would likely have a negative effect on the trading price of our stock.

Risks Related to Our Overseas Operations

Our offshore remanufacturing and logistic activities expose us to increased political and economic risks and place a greater burden on management to achieve quality standards.

Our overseas operations, especially our operations in Mexico, increase our exposure to political, criminal or economic instability in the host countries and to currency fluctuations.

Risks are inherent in international operations, including:

exchange controls and currency restrictions;

currency fluctuations and devaluations;

changes in local economic conditions;

repatriation restrictions (including the imposition or increase of withholding and other taxes on remittances and other payments by foreign subsidiaries);

global sovereign uncertainty and hyperinflation in certain foreign countries;

laws and regulations relating to export and import restrictions;

exposure to government actions;

increased required employment related costs;

exposure to local political or social unrest including resultant acts of war, terrorism or similar events.

These and other factors may have a material adverse effect on our offshore activities and on our business, results of operations and financial condition.

Our overall success as a business depends substantially upon our ability to manage our foreign operations.

Unfavorable currency exchange rate fluctuations could adversely affect us.

We are exposed to market risk from material movements in foreign exchange rates between the U.S.

dollar and the currencies of the foreign countries in which we operate.

In fiscal 2021, approximately 23% of our total expenses were in currencies other than the U.S.

As a result of our extensive operations in Mexico, our primary risk relates to changes in the rates between the U.S.

dollar and the Mexican peso.

To mitigate this currency risk, we enter into forward foreign exchange contracts to exchange U.S.

dollars for Mexican pesos.

We also enter into forward foreign exchange contracts to exchange U.S.

dollars for Chinese yuan in order to mitigate risk related to our purchases and payments to our Chinese vendors.

The extent to which we use forward foreign exchange contracts is periodically reviewed in light of our estimate of market conditions and the terms and length of anticipated requirements.

The use of derivative financial instruments allows us to reduce our exposure to the risk that the eventual net cash outflow resulting from funding the expenses of the foreign operations will be materially affected by changes in the exchange rates.

We do not engage in currency speculation or hold or issue financial instruments for trading purposes.

These contracts generally expire in a year or less.

Any change in the fair value of foreign exchange contracts is accounted for as an increase or decrease to “foreign exchange impact of lease liabilities and forward contracts” in the consolidated statements of operations.

We recorded a non-cash gain of $7,713,000 and a non-cash loss of $6,491,000 due to the change in the fair value of the forward foreign currency exchange contracts during fiscal 2021 and 2020, respectively.

In addition, we recorded a gain of $9,893,000 and a loss of $11,710,000 in connection with the remeasurement of foreign currency-denominated lease liabilities during fiscal 2021 and 2020, respectively.

Changes in trade policy and other factors beyond our control could materially adversely affect our business.

A significant portion of our inventory is manufactured in and distributed from Mexico.

In November 2018, the U.S., Mexico and Canada signed the United States-Mexico-Canada Agreement (the “USMCA”), which is designed to

overhaul and update the North American Free Trade Agreement.

The USMCA has been be ratified by the respective legislatures of each of the three countries.

Congress approved the USMCA in the United States-Mexico-Canada Agreement Implementation Act in

January 2020 (the “Act”), and the President signed the Act into law.

Trade Representative has notified Congress it plans to bring the agreement into force on July 1, 2020.

While USMCA has been enacted, there are still steps that must be taken

by the parties to complete the “entry into force” process.

The former presidential administration advocated for greater restrictions on international trade generally, including with respect to the North American Free Trade Agreement (“NAFTA”) and the World Trade Organization (the “WTO”).

In December 2019, the United States, Mexico and Canada signed the amended United States-Mexico-Canada Agreement (the “USMCA”), which replaced NAFTA.

In July 2020, the U.S.

notified the United Nations of its intention to withdraw from the WTO.

While the current presidential administration has rejoined the WTO, it remains difficult to predict what affect the USMCA, the WTO or other trade agreements and organizations will have on our business.

were to withdraw from or materially modify any other international trade agreements to which it is a party or if the U.S.

imposes significant additional tariffs on imports from China or other restrictions, it could have an adverse impact on our business.

Possible new tariffs that might be imposed by the United States government could have a material adverse effect on our results of operations.

government has placed tariffs on certain goods imported from China and may impose new tariffs on goods imported from China and other countries, including products that we import.

In retaliation, China has responded by imposing tariffs on a

wide range of products imported from the U.S.

In retaliation, China has responded by imposing tariffs on a wide range of products imported from the U.S.

and by adjusting the value of its currency.

If renegotiations of existing tariffs are unsuccessful or additional tariffs or trade restrictions are implemented by the U.S.

or other countries in connection

with a global trade war, the resulting escalation of trade tensions could have a material adverse effect on world trade and the global economy.

Even in the absence of further tariffs or trade restrictions, the related uncertainty and the market's fear

of an economic slowdown could lead to a decrease in consumer spending and we may experience lower net sales than expected.

Reduced net sales may result in reduced operating cash flows if we are not able to appropriately manage inventory levels or

leverage expenses.

If our technology and telecommunications systems were to fail, or we were not able to successfully anticipate, invest in or adopt technological advances in our industry, it could have an adverse effect

on our operations.

or other countries in connection with a global trade war, the resulting escalation of trade tensions could have a material adverse effect on world trade and the global economy.

Even in the absence of further tariffs or trade restrictions, the related uncertainty and the market's fear of an economic slowdown could lead to a decrease in consumer spending and we may experience lower net sales than expected.

Reduced net sales may result in reduced operating cash flows if we are not able to appropriately manage inventory levels or leverage expenses.

Risks Related to Our Indebtedness

Our debt can impact our operating results and cash flows and limit our operations.

As of March 31, 2021, we had $104,464,000 of debt outstanding, most of which is at variable interest rates.

Fluctuations in those rates could impact our operating results and cash flows.

In addition, our credit facility has covenants that limit aspects of our operations.

We may also incur additional debt in the future, which could further increase our leverage, reduce our cash flow or further restrict our business.

Our lenders may not waive future defaults under our credit agreements.

Our credit agreement with our lenders contains certain financial and other covenants.

If we fail to meet any of these covenants in the future, there is no assurance that our lenders will waive any such defaults.

If obtained, any such waiver may impose significant costs or covenants on us.

Risks Related to Owning Our Stock

Our stock price may be volatile and could decline substantially.

Our stock price has fluctuated in the past and may decline substantially in the future as a result of developments in our business, the volatile nature of the stock market, and other factors beyond our control.

Our stock price and the stock market generally has, from time to time, experienced extreme price and volume fluctuations.

Many factors may cause the market price for our common stock to decline, including:

(i) our operating results failing to meet the expectations of securities analysts or investors in any period, (ii) downward revisions in securities analysts’ estimates, (iii) market perceptions concerning our future earnings prospects, (iv) public or private sales of a substantial number of shares of our common stock, (v) adverse changes in general market conditions or economic trends, and (vi) market shocks generally or in our industry, such as what has recently occurred in connection with COVID-19.

General Risk Factors

We may continue to make strategic acquisitions of other companies or businesses and these acquisitions introduce significant risks and uncertainties, including risks related to integrating the acquired businesses and achieving benefits from the acquisitions.

In order to position ourselves to take advantage of growth opportunities, we have made, and may continue to make, strategic acquisitions that involve significant risks and uncertainties.

These risks and uncertainties include:

the difficulty in integrating newly-acquired businesses and operations in an efficient and effective manner;

the challenges in achieving strategic objectives, cost savings and other benefits from acquisitions;

the potential loss of key employees of the acquired businesses;

the risk of diverting the attention of senior management from our operations;

risks associated with integrating financial reporting and internal control systems;

difficulties in expanding information technology systems and other business processes to accommodate the acquired businesses;

future impairments of any goodwill of an acquired business.

We may also incur significant expenses to pursue and consummate acquisitions.

Any of the foregoing, or a combination of them, could cause us to incur additional expenses and materially and adversely impact our business, financial condition, results of operations, or liquidity.

We rely on computer and telecommunications systems to communicate with our customers and vendors and manage our business.

The temporary or permanent loss of our computer and telecommunications equipment and software systems, through casualty,

operating malfunction, software virus or service provider failure, could disrupt our operations.

The temporary or permanent loss of our computer and telecommunications equipment and software systems, through casualty, operating malfunction, software virus or service provider failure, could disrupt our operations.

In addition, our future growth may require additional investment in our systems to keep up with technological advances in our industry.

If we are not able

to invest in or adopt changes to our systems, or such upgrades take longer or cost more than anticipated, our business, financial condition and operating results may be adversely affected.

If we are not able to invest in or adopt changes to our systems, or such upgrades take longer or cost more than anticipated, our business, financial condition and operating results may be adversely affected.

Cyber-attacks or other breaches of information technology security could adversely impact our business and operations.

The incidence of cyber-attacks and other breaches of information technology security have increased worldwide during the COVID-19 pandemic.

Cyber-attacks or other breaches of network or information technology security may cause equipment failure or disruption to our operations.

Such attacks, which include the use of malware, computer viruses and other means for disruption or

unauthorized access, on companies have increased in frequency, scope and potential harm in recent years.

While, to the best of our knowledge, we have not been subject to cyber-attacks or to other cyber incidents which, individually or in the aggregate,

have been material to our operations or financial conditions, the preventive actions we take to reduce the risk of cyber incidents and protect our information technology and networks may be insufficient to repel a major cyber-attack in the future.

the extent that any disruption or security breach results in a loss or damage to our data or unauthorized disclosure of confidential information, it could cause significant damage to our reputation, affect our relationship with our customers, suppliers

and employees, and lead to claims against us and ultimately harm our business.

Such attacks, which include the use of malware, computer viruses and other means for disruption or unauthorized access, on companies have increased in frequency, scope and potential harm in recent years.

While, to the best of our knowledge, we have not been subject to cyber-attacks or to other cyber incidents which, individually or in the aggregate, have been material to our operations or financial conditions, the preventive actions we take to reduce the risk of cyber incidents and protect our information technology and networks may be insufficient to repel a major cyber-attack in the future.

To the extent that any disruption or security breach results in a loss or damage to our data or unauthorized disclosure of confidential information, it could cause significant damage to our reputation, affect our relationship with our customers, suppliers and employees, and lead to claims against us and ultimately harm our business.

Additionally, we may be required to incur significant costs to protect against damage caused by these disruptions or security breaches in the future.

While we maintain

specific cyber insurance coverage, which may apply in the event of various breach scenarios, the amount of coverage may not be adequate in any particular case.

Furthermore, because cyber threat scenarios are inherently difficult to predict and can take

many forms, some breaches may not be covered under our cyber insurance coverage.

Regulations related to conflict minerals could adversely impact our business.

Republic of Congo (“DRC”) and adjoining countries.

These rules could adversely affect the sourcing, supply, and pricing of materials used in our products, as the number of suppliers who provide conflict-free minerals may be limited.

We may also suffer

reputational harm if we determine that certain of our products contain minerals not determined to be conflict-free or if we are unable to modify our products to avoid the use of such materials.

We may also face challenges in satisfying customers who

may require that our products be certified as containing conflict-free minerals.

The products we manufacture or contract to manufacture contain small quantities of Tin and Gold.

We manufacture or contract to manufacture one product with small quantities of Tantalum.

For the reporting year ending December 31, 2019, 100% of

applicable suppliers responded to our request for information on sourcing of their “conflict minerals.” This inquiry yielded 195 smelters, refiners, or metal processing facilities for these minerals that are, or could be, in our supply chain.

97% were validated as conflict-free, per publicly available information on the Conflict Free Sourcing Initiative website.

For the majority of the remaining entities reported to us, there is insufficient data for the industry to determine the source of

materials for their smelters.

We continue to monitor progress on industry efforts to ascertain whether some facilities that suppliers identified are actually smelters.

We do not believe conflict minerals pose risk to our operations.

We are a member of the Automobile

Industry Action Group (AIAG) and support their efforts in the conflict minerals area.

Natural disasters or other disruptions in our business in California and Baja California, Mexico could increase our operating expenses or cause us to lose revenues.

A substantial portion of our operations are located in California and Baja California, Mexico, including our headquarters, remanufacturing and warehouse facilities.

Any natural disaster, such as an earthquake, or other damage to our facilities from

weather, fire or other events could cause us to lose inventory, delay delivery of orders to customers, incur additional repair-related expenses, disrupt our operations or otherwise harm our business.

These events could also disrupt our information

systems, which would harm our ability to manage our operations worldwide and compile and report financial information.

As a result, we could incur additional expenses or liabilities or lose revenues, which could exceed any insurance coverage and would

adversely affect our financial condition and results of operations.

Weakness in conditions in the global credit markets and macroeconomic factors could adversely affect our financial condition and results

of operations.

While we maintain specific cyber insurance coverage, which may apply in the event of various breach scenarios, the amount of coverage may not be adequate in any particular case.

Furthermore, because cyber threat scenarios are inherently difficult to predict and can take many forms, some breaches may not be covered under our cyber insurance coverage.

Weakness in conditions in the global credit markets and macroeconomic factors could adversely affect our financial condition and results of operations.

Any weakness in the credit markets could result in significant constraints on liquidity and availability of borrowing terms from lenders and accounts payable terms with vendors.

Modest economic growth in most major industrial countries in the world

and uncertain prospects for continued growth threaten to cause tightening of the credit markets, more stringent lending standards and terms, and higher interest rates.

The persistence of these conditions could have a material adverse effect on our

borrowings and the availability, terms and cost of such borrowings.

Modest economic growth in most major industrial countries in the world and uncertain prospects for continued growth threaten to cause tightening of the credit markets, more stringent lending standards and terms, and higher interest rates.

The persistence of these conditions could have a material adverse effect on our borrowings and the availability, terms and cost of such borrowings.

In addition, deterioration in the U.S.

economy could materially and adversely impact our operating results.

Our stock price may be volatile and could decline substantially.

Our stock price may decline substantially as a result of developments in our business, the volatile nature of the stock market, and other factors beyond our control.

Our stock price and the stock market generally has, from time to time, experienced

extreme price and volume fluctuations.

Many factors may cause the market price for our common stock to decline, including:

(i) our operating results failing to meet the expectations of securities analysts or investors in any period, (ii) downward

revisions in securities analysts’ estimates, (iii) market perceptions concerning our future earnings prospects, (iv) public or private sales of a substantial number of shares of our common stock, (v) adverse changes in general market conditions or

economic trends, and (vi) market shocks generally or in our industry, such as what has recently occurred in connection with COVID-19.

and adversely affect the market price of our common stock.

Effective internal

and disclosure controls are necessary for us to provide reliable financial reports and effectively prevent fraud and to operate successfully as a public company.

If we cannot provide reliable financial reports or prevent fraud, our reputation and

operating results would be harmed.

As part of our ongoing monitoring of internal controls, we determined that we had a material weakness in our internal controls as of March 31, 2019 and developed a plan to remediate such weakness, which we completed

as of this filing.

We cannot assure you that our internal control over financial reporting will be effective in the future or that other material weakness will not be discovered in the future.

Any failure to maintain effective controls or timely effect

any necessary improvement of our internal and disclosure controls could harm operating results or cause us to fail to meet our reporting obligations, which could affect our ability to remain listed with the NASDAQ Global Select Market or subject us to

adverse regulatory consequences.

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