What changed in this filing

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Item 1A. Risk Factors

2023-06-14 compared with 2022-06-14 · 112 added, 98 removed, 252 unchanged (45% of the section changed)

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Several conditions have 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.

These conditions impact our operations and the operations of our customers, suppliers, and

vendors because of quarantines, facility closures, travel, logistics restrictions and supply chain issues.

The extent to which these conditions impact us will depend on numerous factors and future developments, which are highly uncertain and

cannot be predicted, including, but not limited to:

(i) general economic and growth conditions, (ii) the impact of inflation on our expenses, (iii) the effects of the Russia/Ukraine conflict on international trade, customers, suppliers, and

vendors, (iv) public health crises, such as the COVID-19 pandemic, (v) actions and stimulus measures adopted by local, state and federal governments, and (vi) the extent to which normal economic and operating conditions can resume.

of these conditions subside, 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, as well as the lingering effects on logistics, supply chain

and the social norms of society.

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

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

conditions impact our operations and the operations of our customers, suppliers, and vendors because of quarantines, facility closures, travel, logistics restrictions and supply chain issues.

The extent to

which these conditions impact us will depend on numerous factors and future developments, which are highly uncertain and cannot be predicted, including, but not limited to:

(i) general economic and growth conditions, (ii) the impact of inflation

on our expenses, (iii) the effects of the Russia/Ukraine conflict on international trade, customers, suppliers, and vendors, (iv) public health crises, such as the COVID-19 pandemic, and (v) the extent to which we return to “normal” economic and

operating conditions or the economy stabilizes to a “new normal.” Even if some of these conditions subside, 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, as well as the lingering effects on logistics, supply chain and the social norms of society.

We could experience adverse impacts from these conditions 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;

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

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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.

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.

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.

In addition, we also get pressure from our suppliers to pay them faster and our customers to pay us slower, which could impact our cash flows.

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

have purchased.

results of operations, and financial condition.

In addition, we also get pressure from our suppliers to pay them faster and our customers to pay us slower, which impacts our cash flows.

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.

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 85%, and sales to our largest customer represented 38% of our net sales during fiscal 2022.

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.

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.

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.

Sales to our three largest customers in the aggregate represented 84%, and sales to our largest

customer represented 37% of our net sales during fiscal 2023.

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.

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.

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.

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

We regularly review our accounts receivable and allowance for credit losses by considering factors such as historical experience, credit quality and age of the accounts

receivable, and the current economic conditions that may affect a customer’s ability to pay such amounts owed to us.

The majority of our sales are to leading automotive aftermarket parts suppliers.

We participate in trade accounts receivable

discount programs with our major customers.

If the creditworthiness of any of our customers was downgraded, we could be adversely affected, in that we may be subjected to higher interest rates on the use of these discount programs or we could be

forced to wait longer for payment.

Should our customers experience significant cash flow problems, our financial position and results of operations could be materially and adversely affected, and the maximum amount of loss that would be incurred

would be the outstanding receivable balance, Used Cores expected to be returned by customers, and the value of the Remanufactured Cores held at customers’ locations.

We maintain an allowance for credit losses that, in our opinion, provides for an

adequate reserve to cover losses that may be incurred.

However we cannot assure you that our losses will not exceed our reserve for the reasons and risks above.

Changes in terms with, significant allowances for, and collections from these customers

could affect our operating results and cash flows.

Failure to compete effectively could reduce our market share and significantly harm our financial performance.

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continue to innovate and develop, or acquire, new and compelling products that capitalize upon new technologies in response to consumer preferences, it could have an adverse impact on our results of operations.

These changes may also reduce demand

for our products for combustion engine vehicles.

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

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adverse effects on our business.

During fiscal 2022, our production capacity at our Malaysian facility was impacted due to local government mandated restrictions in connection with the ongoing COVID-19 pandemic.

Due to this reduction in production

capacity, we were required to outsource certain finished goods purchases to meet demand, which resulted in incremental tariffs.

Similarly, if one or more of our customers were to experience a work stoppage, that customer would likely halt or limit

purchases of our products.

We have also experienced significant disruptions in the supply of several key components from Asia due to work stoppages, production shutdowns, government closures, and other supply chain issues at many of our suppliers,

leading to an adverse effect on our financial results.

Similarly, if one or more of our customers were to experience a work stoppage, that customer would likely halt or limit purchases of our products.

We have also experienced significant disruptions in the supply of

several key components from Asia due to work stoppages, production shutdowns, government closures, and other supply chain issues at many of our suppliers, leading to an adverse effect on our financial results.

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

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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.

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, including, but not limited to,

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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 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 reduction in the failure rates of automotive parts would reduce the demand for our products and thus adversely affect our sales and profitability.

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 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:

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 and over-crowding considerations;

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suppliers to obtain adequate credit or access liquidity to finance their operations;

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.

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

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:

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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

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

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.

or liquidity.

In addition, because we depend on independent third parties to manufacture a significant portion of our wheel hub, brake-related products, and other purchased finished goods, we cannot be certain that we will not

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

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.

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.

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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.

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 are disputing this amount vigorously.

We cannot assure you that

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

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

We are subject to various

lawsuits and claims.

In addition, government agencies and self-regulatory organizations have the ability to conduct periodic examinations of and administrative proceedings regarding our business.

Our operating results may continue to fluctuate significantly.

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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.

Our 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.

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.

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.

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 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.

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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 loss of $316,000 and a non-cash gain of $7,713,000 due to the change in the fair value of the forward foreign currency exchange contracts during fiscal 2022 and

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 $2,776,000 and a non-cash loss of $316,000 due to the change in the fair value of the forward foreign currency exchange contracts during fiscal 2023 and 2022,

respectively.

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

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

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

notified the United Nations of its intention to withdraw from the

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.

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

As of March 31, 2022, we had $171,694,000 of debt outstanding, most of which is at variable interest rates.

As of March 31, 2023, we had $158,325,000 of debt outstanding under our credit facility, which is at variable interest rates.

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

In particular, interest rates have been rising recently,

which increases our interest expense.

In particular, interest rates have been

rising recently, which increases our interest expense.

The weighted average interest on our debt was 8.12% at March 31, 2023 compared to 3.12% at March 31, 2022.

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.

In addition, on March 31, 2023, we issued and sold $32,000,000 in aggregate principal amount of 10.0% convertible notes due in 2029 (the “Convertible Notes”).

The issuance of shares of our common stock upon conversion of the Convertible Notes

may dilute the ownership interests of existing stockholders and reduce our per share results of operations.

Any sales in the public market of our common stock issuable upon such conversion could adversely affect prevailing market prices of our

common stock.

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.

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

to cure them.

If we obtained a waiver, it may impose significant costs or covenants on us.

In addition, as the capital markets get more volatile, it may become more difficult to obtain such waivers or refinance our debt.

Weakness in conditions in the global credit markets and macroeconomic factors , including interest rates, could adversely affect our financial condition and

results of operations.

The banking industry and global credit markets also experience difficulties from time to time, and issues involving our lenders could impact our deposits, the availability, terms and cost of borrowings or our ability to refinance our debt.

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.

These issues could also result in more stringent lending standards and

terms and higher interest rates.

In addition, we are exposed to changes in interest rates primarily as a result of our borrowing and receivable discount programs, which have interest costs that vary with interest rate movements.

Any limitations on

our ability to fund our operations could have a material adverse effect on our business, financial condition and ability to grow.

Risks Related to Owning Our Stock

Our stock price may be volatile and could decline substantially.

Our stock price is 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.

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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.

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.

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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.

In addition, deterioration in the U.S.

economy could materially and adversely impact our operating results.

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