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Item 1A. Risk Factors

2021-03-15 compared with 2020-03-16 · 48 added, 86 removed, 207 unchanged (39% of the section changed)

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Risks Related to Our Operations

The COVID-19 pandemic and mitigation efforts to control the spread of the disease have and are expected to continue to materially impact our business, and our financial condition, results of operations and cash flows could be materially adversely affected by factors relating to COVID-19.

The COVID-19 pandemic has created significant volatility in the global economy and led to significant reduced market and economic activity and employment and has disrupted, and may continue to disrupt, the end markets we serve.

The spread of COVID-19 has created a disruption in the manufacturing, delivery and overall supply chain of automobile manufacturers and suppliers.

Global vehicle production has decreased, and as a result, we have modified our production schedules and have experienced, and may continue to experience, delays in the production and distribution of our products and the loss of sales to our customers.

During the pandemic, our production volumes may be volatile, and we will be required to modify our production environment to ensure the health and safety of our workers.

Additionally, if the global economic effects caused by the pandemic continue or increase, overall customer demand may continue to decrease, which could have a material and adverse effect on our business, results of operations, and financial condition.

COVID-19 vaccines have received emergency use authorization from the United States government, but vaccine distribution has been slower than public officials hoped.

Many jurisdictions continue to enforce orders restricting businesses’ normal operations, and reinstatement of broader “stay-at-home” directives and mandates remains a possibility.

Additionally, the federal emergency supplemental unemployment benefit is scheduled to expire in March 2021.

In addition, if a significant portion of our workforce or our customers’ workforces are affected by COVID-19 either directly or due to government closures or otherwise, associated work stoppages or facility closures would halt or delay production.

The full extent of the future effects of the pandemic on us, our customers, our supply chain, and our business cannot be assessed at this time, although we expect our 2021 results of operations are likely to be adversely affected.

Our business, results of operations and financial condition could continue to be affected even after the pandemic subsides.

In addition to the risks specifically described above, the impact of COVID-19 is likely to heighten other risks disclosed below.

We depend heavily on a relatively limited number of customers, and the loss of any major customer would have a material adverse effect on our business.

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A work stoppage at one or more of our facilities could have a material adverse effect on our business, prospects, financial condition, results of operations, or cash flows.

Also, if one or more of our customers were to experience a work stoppage, that customer would likely halt or limit purchases of our products, which could have a material adverse effect on our business, prospects, financial condition, results of operations, or cash flows.

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

For example, increased demand for semiconductor chips in 2020, due in part to the COVID-19 pandemic and an increased use of laptop computers, 5G phones, gaming systems and other IT equipment that use these chips, has resulted in a severe shortage of chips in early 2021.

These same chips are used in automobiles in a variety of parts and information and entertainment systems.

As a result, various automotive manufacturers have been forced to delay or stall new vehicle production.

If efforts to address the chip shortage by the industry and the U.S government are unsuccessful, there may be further delays in new vehicle production, which could have a material adverse effect on our business, prospects, financial condition, results of operations, or cash flows.

We have a complex network of suppliers, owned and leased manufacturing locations, co-manufacturing locations, distribution networks, and information systems that support our ability to consistently provide our products to our customers.

Factors that are hard to predict or beyond our control, such as weather, raw material shortages, natural disasters, fires or explosions, political unrest, terrorism, generalized labor unrest, or health pandemics, such as the new coronavirus that originated in China, could damage or disrupt our operations or our customers’, suppliers’, co-manufacturers’ or distributors’ operations.

Factors that are hard to predict or beyond our control, such as weather, raw material shortages, natural disasters, fires or explosions, political unrest, terrorism, generalized labor unrest, or health pandemics, such as COVID-19, could damage or disrupt our operations or our customers’, suppliers’, co-manufacturers’ or distributors’ operations.

These disruptions may require additional resources to restore our supply chain or distribution network.

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Any of these events could materially and adversely affect our product sales, financial condition, and operating results.

In addition, our business could be adversely affected by the effects of health epidemics, particularly in regions where we have significant operations or concentrations of customers or suppliers.

For example, several of our customers and suppliers are located in cities throughout China, and our plant in France relies on suppliers located in Italy.

As a result, we could be adversely affected by health epidemics in China and other affected regions, including the recent outbreak of a novel coronavirus first identified in Wuhan, China, which has subsequently spread around the globe.

Consequences of the coronavirus outbreak have included disruptions or restrictions on our ability to travel and temporary closures of our Chinese facilities and the facilities of our customers and suppliers in China and other affected regions.

Our operating results could be adversely affected to the extent that the coronavirus outbreak harms the Chinese and global economies in general.

Any disruption of our customers or suppliers may also materially adversely affect our business and operating results.

In addition, the coronavirus outbreak could evolve into a worldwide health crisis that could adversely affect the economies and financial markets of many countries, resulting in an economic downturn that could affect demand for our products and materially adversely affect our business, operating results, and financial condition.

We operate in and sell products to customers outside the U.S.

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We obtain a majority of our raw materials from overseas suppliers, actively participate in overseas manufacturing operations and sell to a large number of international customers.

During the year ended December 31, 2019 , sales to customers located outside of the U.S.

During the year ended December 31, 2020, sales to customers located

outside of the U.S.

accounted for approximately 37% of our consolidated net sales.

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If we are unable to attract and retain qualified individuals or our costs to do so increase significantly, our operations would be materially adversely affected.

Damage to our reputation could harm our businesses, including our competitive position and business prospects.

Our ability to attract and retain customers, supplier, investors, and employees is impacted by our reputation.

Harm to our reputation can arise from various sources, including employee misconduct, security breaches, unethical behavior, litigation or

regulatory outcomes.

The consequences of damage to our reputation include, among other things, increasing the number of litigation claims and the size of damages asserted or subjecting us to enforcement actions, fines, and penalties, all of which would cause us to incur significant defense related costs and expenses.

Our strategic review is subject to various risks and uncertainties, may not result in any completed transaction and could disrupt or negatively adversely affect our business.

In November 2019, we initiated a strategic review to evaluate a broad range of operational, financial and strategic options to reduce leverage and enhance shareholder value, and we retained external advisors to assist in this effort.

The strategic options we are evaluating include further cost savings and cash generation initiatives, capital allocation opportunities, and the sale of part or all of NN, among others.

There is no finite timetable for completion of the review, and we can provide no assurance that we will pursue or complete any action or transaction in connection with the review.

While the review is ongoing, we are exposed to various risks and uncertainties, including, without limitation, the diversion of management’s attention to the review;

potential difficulty in retaining and attracting key employees during the review process;

foreseen and unforeseen costs and expenses associated with the review and any transaction resulting therefrom;

exposure to potential litigation in connection with the review process or any transaction resulting therefrom;

speculation regarding any developments related to the review and perceived uncertainties related to our future;

and potential negative reactions from the financial markets if we do not complete one or more transactions as a result of the review.

Any of these factors could have a material adverse effect on our business, financial condition, results of operations, cash flows and/or the price of our common stock.

Risks Related to Legal and Regulatory Compliance

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Since 2009, the FDA has significantly increased its oversight of companies subject to its regulations, including medical device companies, by hiring new investigators and stepping up inspections of manufacturing facilities.

The FDA has also significantly increased the number of warning letters

issued to companies.

The FDA has also significantly increased the number of warning letters issued to companies.

If the FDA were to conclude that we are not in compliance with applicable laws or regulations, or that any of our medical devices are ineffective or pose an unreasonable health risk, the FDA could ban such medical devices, detain or seize adulterated or misbranded medical devices, order a recall, repair, replacement or refund of such devices, refuse to grant pending pre-market approval applications or require certificates of foreign governments for exports, and/or require us to notify health professionals and others that the devices present unreasonable risks of substantial harm to the public health.

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Any domestic or foreign governmental law or regulation imposed in the future may have a material adverse effect on us.

Changes in U.S.

tax laws could have a material adverse effect on our business, cash flow, results of operations, and financial condition.

Changes in U.S.

tax laws, tax rulings, or interpretations of existing laws could materially affect our business, cash flow, results of operations, and financial condition.

In particular, on December 22, 2017, the U.S.

government enacted comprehensive Federal tax legislation commonly referred to as the Tax Cuts and Jobs Act of 2017 (the “U.S.

Tax Cuts and Jobs Act of 2017”).

Tax Cuts and Jobs Act of 2017 introduces significant changes to U.S.

income tax law that have had a meaningful impact on our provision for income taxes.

Accounting for the income tax effects of the U.S.

Tax Cuts and Jobs Act of 2017 requires significant judgments and estimates in the interpretation and calculations of the provisions of the U.S.

Tax Cuts and Jobs Act of 2017.

We have identified material weaknesses in our internal control over financial reporting which could, if not remediated, result in material misstatements in our financial statements.

Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) under the Exchange Act.

As disclosed in Item 9A, management identified certain material weaknesses in our internal control over financial reporting during 2019 that remained unremediated as of December 31, 2019.

Although we undertook efforts in the current year to remediate the material weakness previously reported in our annual filings related to the control environment, we were unsuccessful in fully remediating such material weakness.

Because of the material weaknesses identified, our management concluded that we did not maintain effective internal control over financial reporting as of December 31, 2019.

With the oversight of senior management and the audit committee, we have begun taking steps to remediate the underlying cause of the material weaknesses and improve the design of controls.

Until remediated, these material weaknesses could result in future misstatements to our financial statements.

While we expect to take the measures necessary to address the underlying causes of these material weaknesses, we cannot at this time estimate how long it will take, and our efforts may not prove to be successful in remediating these material weaknesses.

While we have not incurred and do not expect to incur material expenses specifically related to the remediation of these material weaknesses, actual expenses may exceed our current estimates and overall costs of compiling the system and processing documentation necessary to assess the effectiveness of our internal control over financial reporting may be material.

If we are unable to successfully remediate these material weaknesses in our internal control over financial reporting, or if we identify any additional material weaknesses that may exist, the accuracy and timing of our financial reporting may be adversely affected.

Our failure to file periodic and certain current reports with the SEC in a timely manner, among other things, could in the future preclude or delay us from being eligible to use a short form registration statement on Form S-3 to register certain sales of our common stock by us or our stockholders and could even result in the suspension of trading of our common stock on the Nasdaq Stock Market LLC (“Nasdaq”) and/or the revocation of our registration by the SEC.

Any of these consequences may have a material adverse effect on our business and results of operations.

Risks Related to Our Capitalization

Our indebtedness could adversely affect our business, prospects, financial condition, results of operations, or cash flows.

As of December 31, 2019 , we had approximately $793.2 million of indebtedness outstanding and an additional $63.9 million of unused borrowings under our debt agreements.

Our high degree of leverage could have important consequences, including:

As of December 31, 2020, we had approximately $84.9 million of indebtedness outstanding and an additional $45.4 million of unused borrowing capacity under our debt agreements.

Our debt obligations could have important consequences, including:

• increasing our vulnerability to adverse economic, industry, or competitive developments;

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For more information regarding our indebtedness, please see “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources.”

Despite our high indebtedness level, we will still be able to incur substantial additional amounts of debt, which could further exacerbate the risks associated with our substantial indebtedness.

Despite our indebtedness level, we may still be able to incur substantial additional amounts of debt, which could further exacerbate the risks associated with our substantial indebtedness.

We and our subsidiaries may be able to incur substantial additional indebtedness in the future.

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• enter into certain transactions with our affiliates.

In addition, the incurrence covenants in our debt agreements require us to meet specified financial ratios and satisfy other financial condition tests.

Our ability to meet those financial ratios and tests will depend on our ongoing financial and operating performance, which, in turn, will be subject to economic conditions and to financial, market, and competitive factors, many of which are beyond our control.

In addition, the covenants in our debt agreements require us to meet specified financial ratios and satisfy other financial condition tests.

Our ability to meet those financial ratios and tests will depend on our ongoing financial and operating

performance, which, in turn, will be subject to economic conditions and to financial, market, and competitive factors, many of which are beyond our control.

A breach of any of these covenants could result in a default under one or more of our debt agreements and permit our lenders to cease making loans to us under our credit facility (as defined below) or to accelerate the maturity date of the indebtedness incurred thereunder.

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These broad market fluctuations may adversely affect the trading price of our common stock.

In addition, due to the market capitalization of our stock, our stock tends to be more volatile than large capitalization stocks that comprise the Dow Jones Industrial Average or Standard and Poor’s 500 Index.

due to the market capitalization of our stock, our stock tends to be more volatile than large capitalization stocks that comprise the Dow Jones Industrial Average or Standard and Poor’s 500 Index.

Provisions in our charter documents and Delaware law may inhibit a takeover, which could adversely affect the value of our common stock.

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A business combination includes a merger, asset sale or other transaction resulting in a financial benefit to the stockholder.

We anticipate that the provisions of

Section 203 may encourage parties interested in acquiring us to negotiate in advance with our board of directors, because the stockholder approval requirement would be avoided if a majority of the directors then in office approve either the business combination or the transaction that results in the stockholder becoming an interested stockholder.

We anticipate that the provisions of Section 203 may encourage parties interested in acquiring us to negotiate in advance with our board of directors, because the stockholder approval requirement would be avoided if a majority of the directors then in office approve either the business combination or the transaction that results in the stockholder becoming an interested stockholder.

These provisions apply even if the offer may be considered beneficial by some of our stockholders.

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Additionally, we incurred a significant amount of debt in connection with our acquisitions in the past few years.

Finally, in relation to such acquisitions, we have significantly higher amounts of intangible assets, including goodwill.

Finally, in relation to such acquisitions, we have significantly higher amounts of intangible assets.

These intangible assets will be subject to impairment testing, and we could incur a significant impact to our financial statements in the form of an impairment if assumptions and expectations related to our acquisitions are not realized.

We have and will continue to incur expenses related to our acquisitions and the integration of our acquired companies.

While we have assumed that a certain level of expenses will be incurred, there are many factors beyond our control that could affect the total amount or the timing of the integration expenses.

Moreover, many of the expenses that will be incurred are, by their

nature, difficult to estimate accurately.

These integration expenses may result in us taking charges against earnings, and the amount of any future charges are uncertain at present.

We may be unable to realize the anticipated cost or capital expenditure savings or may incur additional and/or unexpected costs in order to realize them.

There can be no assurance that we will be able to realize the anticipated cost or capital expenditure savings from our acquisitions in the anticipated amounts or within the anticipated timeframes or at all.

With respect to each acquisition, we anticipate implementing a series of cost savings initiatives that we expect to result in recurring, annual run-rate cost savings.

These or any other cost or capital expenditure savings that we realize may differ materially from our estimates.

We cannot provide assurances that these anticipated savings will be achieved or that our programs and improvements will be completed as anticipated or at all.

In addition, any cost savings that we realize may be offset, in whole or in part, by reductions in revenues or through increases in other expenses.

Our projections and assumptions related to cost savings are based on our current estimates, but they involve risks, uncertainties, projections, and other factors that may cause actual results, performance, or achievements to be materially different from any future results, performance, or achievements, express or implied.

Neither our independent registered public accounting firm nor any other independent auditors, have examined, compiled or performed any procedures with respect to these projections, nor have they expressed any opinion, or any other form of assurance on such information or their achievability.

Assumptions relating to our projections involve subjective decisions and judgments with respect to, among other things, the estimated impact of certain operational adjustments, including Six Sigma/OpEx optimization programs, product grouping and rationalization, facility rationalization and shared services cost savings, and other cost and savings adjustments, as well as future economic, competitive, industry and market conditions and future business decisions, all of which are inherently uncertain and may be beyond the control of our management.

Failure to realize the expected costs savings and operating synergies related to our acquisitions could result in increased costs and have an adverse effect on our business, prospects, financial condition, results of operations, or cash flows.

Our future results could suffer if we cannot effectively manage our expanded operations, which are significantly larger and more complex following our acquisitions.

As a result of our acquisitions over the past few years, the size and scope of our operations were significantly increased.

Our future success depends, in part, upon our ability to manage the expanded operations, which will pose challenges for management, including challenges related to the management and monitoring of new operations and associated increased costs and complexity.

We may not have the expertise, experience and resources to pursue or successfully operate all of our businesses at once.

The administration of our businesses requires implementation and oversight of appropriate operations, management, compliance and financial reporting systems and controls.

We may experience difficulties in effectively implementing and overseeing these and other systems.

Such implementation and initial oversight will require the focused attention of our management team, including a significant commitment of its time and resources.

The need for management to focus on these matters could have a material and adverse impact on our revenues and operating results.

There can be no assurance that we will be successful or that we will realize any operating efficiencies, cost savings, revenue enhancements or other benefits currently anticipated from our acquisitions.

The indemnification provisions of acquisition agreements by which we have acquired companies may not fully protect us and may result in unexpected liabilities.

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Under these types of arrangements, performance by the divested businesses or other conditions outside of our control could affect future financial results.

General Risk Factors

Damage to our reputation could harm our business, including our competitive position and business prospects.

Our ability to attract and retain customers, suppliers, investors, and employees is impacted by our reputation.

Harm to our reputation can arise from various sources, including employee misconduct, security breaches, unethical behavior, litigation, or regulatory outcomes.

Changes in U.S.

tax laws could have a material adverse effect on our business, cash flow, results of operations, and financial condition.

Changes in U.S.

tax laws, tax rulings, or interpretations of existing laws could materially affect our business, cash flow, results of operations, and financial condition.

In particular, on December 22, 2017, the U.S.

government enacted comprehensive Federal tax legislation commonly referred to as the Tax Cuts and Jobs Act of 2017 (the “U.S.

Tax Cuts and Jobs Act of 2017”).

Tax Cuts and Jobs Act of 2017 introduces significant changes to U.S.

income tax law that have a meaningful impact on our provision for income taxes.

Accounting for the income tax effects of the U.S.

Tax Cuts and Jobs Act of 2017 requires significant judgments and estimates in the interpretation and calculations of the provisions of the U.S.

Tax Cuts and Jobs Act of 2017.

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