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Item 1A. Risk Factors

2022-03-16 compared with 2021-03-05 · 63 added, 44 removed, 181 unchanged (37% of the section changed)

The following are certain risk factors that could affect our business, results of operations and financial condition.

These risks are not the only ones we face.

The following risk factors set forth below and elsewhere in this Form 10-K could materially and adversely affect our business, results of operations and financial condition.

These risks are not the only ones we may face.

Although the risks are organized by headings, and each risk is discussed separately, many are interrelated.

You should not interpret the disclosure of any risk factor to imply that the risk has not already materialized.

If any of the following risks occur, our business, results of operations or financial condition could be adversely affected.

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Our business, results of operations and cash flows have been and are expected to continue to be adversely affected by COVID-19.

The novel strain of the coronavirus identified in China in late 2019 and now affecting the global community has impacted and is expected to continue to impact our operations, and the full nature and extent of the impact is highly uncertain and may be beyond our control.

Among other things, uncertainties relating to the COVID-19 pandemic include the duration of the outbreak, the severity of the virus, and the actions, or perception of actions that may be taken, to contain or treat its impact, by governments and others, including declarations of states of emergency, business closures, manufacturing restrictions and a prolonged period of travel, commercial and/or other similar restrictions and limitations.

As a result of COVID-19 and the measures implemented that are designed to contain its spread, our customers have been and could continue to be negatively impacted as a result of disruption in demand, which has negatively impacted our sales and had a material adverse effect on our business, results of operations and financial condition.

Similarly, as a result of COVID-19 and measures implemented that are designed to contain its spread, our suppliers may not have the materials, capacity, or capability to enable the manufacture of our products according to our schedule and specifications.

Because of impacts to suppliers' operations, 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 COVID-19 pandemic has also disrupted our internal operations, including by heightening the risk that a significant portion of our workforce will suffer illness or otherwise not be permitted or be unable to work and exposing us to cyber and other risks associated with a large number of our employees working remotely.

Certain of our facilities have experienced temporary work disruptions as a result of the COVID-19 pandemic, and we cannot predict whether these will continue or our facilities will experience more significant or frequent disruptions in the future.

Furthermore, we may need to reduce our workforce as a result of declines in our business caused by the COVID-19 pandemic, and any such reduction would cause us to incur costs.

Moreover, there can be no assurance that we would be able to rehire our workforce in the event our business experiences a subsequent recovery.

The impact of the COVID-19 pandemic continues to evolve and its duration and ultimate 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 more severe adverse effect on our business, results of operations and financial

Additionally, weaker economic conditions generally could result in impairment in value of our tangible or intangible assets, or our ability to raise additional capital, if needed.

We have continued to closely monitor the impact of the COVID-19 pandemic on our business, including how it has impacted our customers, employees, supply chain and distribution network.

The scope and duration of the pandemic continue to be uncertain, and evolving factors such as the level and timing of vaccine distribution across the world and the extent of any resurgences of the virus or emergence of new variants could impact the stability of the economic recovery and growth.

The COVID-19 pandemic could continue to negatively impact our business, results of operations, financial position or cash flows in a number of ways, including but not limited to:

• disruptions in our supply chain due to the global semiconductor micro-chip shortage, logistics issues, labor disruptions and our ability to obtain raw materials, among other factors;

• increases in raw material and freight costs;

• labor shortages;

• disruptions to our facilities, including shutdowns or slowdowns as a result of facility closures, reductions in operating hours and labor shortages;

• the inability of a significant portion of our workforce to work as a result of illness or government restrictions;

• exposure to cybersecurity threats and other risks associated with a large number of our employees working remotely;

• the need to reduce our workforce as a result of declines in our business caused by the COVID-19 pandemic, which has caused us, and may continue to cause us, to incur significant expenses.

The extent to which our business, results of operations, financial position or cash flows may ultimately be adversely impact by the COVID-19 pandemic will depend largely on these future developments, which are highly uncertain and cannot be accurately predicted.

The impact of the COVID-19 pandemic may also exacerbate other risks discussed below, any of which could have a material effect on us.

The COVID-19 pandemic continues to change rapidly and additional impacts may arise that we are not aware of currently.

Risks Relating to Economic Conditions

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We sell products to customers in industries that experience cyclicality (expectancy of recurring periods of economic growth and slowdown) in demand for products and may experience substantial increases and decreases in business volume throughout economic cycles.

Industries we serve, including the automotive and vehicle parts, heavy-duty truck, industrial equipment, steel, rail, oil and gas, electrical distribution and controls, aerospace and defense, recreational equipment, HVAC, electrical components, appliance and semiconductor equipment industries, are affected by consumer spending, general economic conditions and the impact of international trade.

A downturn in any of the industries we serve could have a material adverse effect on our financial condition, liquidity and results of operations.

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Any of the foregoing effects could have a material adverse effect on our business, results of operations and financial condition.

Inflation may continue to have a significant effect on labor and raw material costs, which could continue to result in material adverse effects on our business and operating results.

Given recent inflationary trends and forecasts for rising inflation rates in the future, we expect further raw material price increases and higher labor costs, which may continue to adversely affect our business and operating results, particularly in the Assembly Components segment.

Risks Relating to Our Business and Operations

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Demand for certain of our products is affected by, among other things, the relative strength or weakness of the automotive and heavy-duty truck industries.

The domestic automotive and heavy-duty truck industries are highly cyclical and may be adversely affected by international competition.

In addition, the automotive and heavy-duty truck industries are

significantly unionized and subject to work slowdowns and stoppages resulting from labor disputes.

The global semiconductor micro-chip shortage, in particular, could continue to adversely affect a significant portion of our sales to our automotive and heavy-duty truck customers.

The domestic automotive and heavy-duty truck industries are also highly cyclical and may be adversely affected by international competition.

In addition, the automotive and heavy-duty truck industries are significantly unionized and subject to work slowdowns and stoppages resulting from labor disputes.

We derived 34% and 8% of our net sales during the year ended December 31, 2021 from the automotive and heavy-duty truck industries, respectively.

The loss of a portion of business to any of our major automotive or heavy-duty truck customers could have a material adverse effect on our financial condition, cash flow and results of operations.

The loss of a portion of business to any of our major automotive or heavy-duty truck customers could continue to have a material adverse effect on our financial condition, cash flow and results of operations.

We cannot assure you that we will maintain or improve our relationships in these industries or that we will continue to supply these customers at current levels.

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Failure by third-party suppliers to comply with these and other requirements could have a material adverse effect on our financial condition, liquidity and results of operations.

The raw materials used in our production processes and by our suppliers of component parts are subject to price and supply fluctuations that could increase our costs of production and adversely affect our results of operations.

Our supply of raw materials for our Assembly Components and Engineered Products businesses could be interrupted for a variety of reasons, including availability and pricing.

Prices for raw materials necessary for production have fluctuated significantly in the past and significant increases could adversely affect our results of operations and profit margins.

The raw materials used in our production processes and by our suppliers of component parts are subject to price and supply fluctuations that could continue to increase our costs of production and adversely affect our results of operations.

Our supply of raw materials for our Assembly Components and Engineered Products businesses could continue to be interrupted for a variety of reasons, including supply chain constraints and price increases, raw material price inflation, supplier delays that increase lead times and higher freight costs, among other factors, may continue to have an adverse effect on our results of operations and profit margins.

While we generally attempt to pass along increased raw materials prices to our customers in the form of price increases, there may be a time delay between the increased raw materials prices and our ability to increase the price of our products, or we may be unable to increase the prices of our products due various factors.

Our suppliers of component parts, particularly in our Supply Technologies business, may significantly and quickly increase their prices in response to increases in costs of the raw materials, such as steel, that they use to manufacture our component parts.

Our suppliers of component parts, particularly in our Supply Technologies business, may continue to significantly and quickly increase their prices in response to increases in costs of the raw materials, such as steel, that they use to manufacture our component parts.

We may not be able to increase our prices commensurate with our increased costs.

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Any such operational disruptions and/or misappropriation of information, whether in systems we maintain or are maintained by others, could have a material adverse effect on our business.

In addition, any such damage, compromise or breach to our systems or those of our vendors, could result in a violation of privacy and other laws, and expose us to significant legal and financial liability.

In addition, any such

damage, compromise or breach to our systems or those of our vendors, could result in a violation of privacy and other laws, and expose us to significant legal and financial liability.

Operating problems in our business may materially adversely affect our financial condition and results of operations.

We are subject to the usual hazards associated with manufacturing and the related storage and transportation of raw materials, products and waste, including explosions, fires, leaks, discharges, inclement weather, natural disasters, mechanical failure, unscheduled downtime and transportation interruption or calamities.

The occurrence of material operating problems at

our facilities may have a material adverse effect on our operations as a whole, both during and after the period of operational difficulties.

We are subject to the usual hazards associated with manufacturing and the related storage and transportation of raw materials, products and waste, including explosions, fires, leaks, discharges, inclement weather (including that caused by climate change), natural disasters, mechanical failure, unscheduled downtime and transportation interruption or calamities.

The occurrence of material operating problems at our facilities may have a material adverse effect on our operations as a whole, both during and after the period of operational difficulties.

We have a significant amount of goodwill, and any future goodwill impairment charges could adversely impact our results of operations.

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We have recorded goodwill impairment charges in the past, and such charges materially impacted our historical results of operations.

Based on our 2020 annual impairment test, we determined that the fair value of our Forged and Machined Products Group (“FMPG”) reporting unit, which is included in our Engineered Products segment, exceeded its carrying value by 10% as of the October 1, 2020 testing date.

As such, we concluded that the goodwill of this reporting unit of $8.7 million was not impaired as of that date.

This reporting unit was negatively impacted by the COVID-19 pandemic throughout 2020, and while we believe that the current assumptions and estimates used in our goodwill testing are reasonable, supportable and appropriate, there can be no assurance that such assumptions and estimates will prove to be accurate predictions of future performance.

Based on our 2021 annual impairment test, we determined that the fair value of our Aluminum Products reporting unit, which is included in our Assembly Components segment, did not exceed its carrying value as of the October 1, 2021 testing date.

As such, we concluded that the goodwill of this reporting unit of $4.6 million was fully impaired as of that date.

For additional information, see Note 6, Goodwill, to the consolidated financial statements included elsewhere herein.

Our business and operating results may be adversely affected by natural disasters, other catastrophic events or public health issues, all of which are beyond our control.

While we have taken precautions to prevent production and service interruptions at our global facilities, severe weather conditions such as hurricanes, tornadoes, and earthquakes;

While we have taken precautions to prevent production and service interruptions at our global facilities, severe weather conditions and other conditions, including those that may be caused by climate change, such as hurricanes, tornadoes, and earthquakes;

other natural disasters;

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If the unionized workers were to engage in a strike, work stoppage or other slowdown, or other employees were to become unionized, we could experience a significant disruption of our operations and higher ongoing labor costs, which could have a material adverse effect on our business, financial condition and results of operations.

Labor shortages could continue to adversely affect our business, results of operations and financial condition.

Labor shortages leading to higher labor costs, production inefficiencies and plant downtime have had and could continue to have an adverse effect on our business, results of operations and financial condition.

In addition, we have seen a decline in the skilled labor applicant pool since the start of the COVID-19 pandemic and increased competition for skilled labor.

In addition, labor disturbances affecting our customers could continue to impact our sales to certain key customers, particularly in the automotive and heavy-duty truck industries, which could continue to have an adverse effect on our business, results of operations and financial condition.

The loss of key executives could adversely impact us.

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• potentially adverse tax consequences.

On January 31, 2020, the United Kingdom (“UK”) exited the European Union (“EU”).

The long-term effects of Brexit will depend on any agreements the UK makes to retain access to EU markets.

Given the lack of comparable precedent, it is unclear what financial, trade and legal implications the withdrawal of the UK from the EU will have and how such withdrawal will affect us.

It is possible that the withdrawal could, among other things, affect the legal and regulatory environments to which our businesses are subject, impact trade between the UK and the EU through potential restrictions on the free movement of goods and labor between the UK and the EU, create economic and political uncertainty in the region, and create other impediments to our ability to transact within and between the UK and EU.

On January 31, 2020, the United Kingdom (“UK”) exited (“Brexit”) the European Union (“EU”).

The transition period post-Brexit expired on December 31, 2020, and the UK and the EU entered into a free trade agreement that now governs the UK’s relationship with the EU.

While the UK and the EU can generally continue to trade with each other without the imposition of tariffs for imports and exports, there are new customs requirements that require additional documentation and data, and there are also new controls on the movement and reporting of goods.

Although we have not experienced any material disruption in our business as a result of Brexit, we do not know the extent to which Brexit and the free trade agreement will ultimately impact the business and regulatory environment in the UK, the rest of the EU or other countries, although it is possible there will be tighter controls and administrative requirements for imports and exports between the UK and the EU or other countries, as well as increased regulatory complexities.

Any of these factors could adversely impact customer demand, our relationships with customers and suppliers and our results of operations.

We are also exposed to risks relating to U.S.

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Changes in tax policy, trade regulations or trade agreements, such as the disallowance of tax deductions on imported merchandise or the imposition of new tariffs on imported products, could have a material adverse effect on our business and results of operations.

Our international sales and operations are also sensitive to changes in foreign national priorities, as well as to political and economic instability.

For example, our business in the European Union or elsewhere may be impacted by an escalation of tensions between Russia and Ukraine and any economic or trade sanctions enacted to condemn or counteract any Russian aggression towards or invasion of Ukraine.

Any such conflict may also impact our ability to secure raw materials and exacerbate the supply chain disruption we have experienced and further limit our ability to secure certain raw materials or services.

Further military action or cyberattacks by Russia to counteract any sanctions may have an impact on demand for our goods and services and adversely impact our results of operation.

Our success as a global business will depend, in part, upon our ability to succeed in differing legal, regulatory, economic, social and political conditions by developing, implementing and maintaining policies and strategies that are effective in each location where we do business.

In addition, we could be adversely affected by violations of the FCPA and similar worldwide anti-bribery laws.

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Any increase in these costs, or unanticipated liabilities arising from, among other things, discovery of previously unknown conditions or more aggressive enforcement actions, could adversely affect our results of operations, and there is no assurance that they will not exceed our reserves or have a material adverse effect on our financial condition.

We may be exposed to certain regulatory and financial risks related to climate change.

Growing concerns about climate change may result in the imposition of additional regulations or restrictions to which we may become subject.

A number of governments or governmental bodies have introduced or are contemplating regulatory changes in response to climate change, including regulating greenhouse gas emissions.

The outcome of new legislation or regulation in the U.S.

and other jurisdictions in which we operate may result in new or additional requirements, additional charges to fund energy efficiency activities, and fees or restrictions on certain activities.

Compliance with these climate change initiatives may also result in additional costs to us, including, among other things, increased production costs, additional taxes, reduced emission allowances or additional restrictions on production or operations.

Any adopted future climate change regulations could also negatively impact our ability to compete with companies situated in areas not subject to such limitations.

Even without such regulation, increased public awareness and adverse publicity about potential impacts on climate change emanating from us or our industry could harm us.

We may not be able to recover the cost of compliance with new or more stringent laws and regulations, which could adversely affect our results of operations, financial position or cash flows.

Risks Relating to Our Debt

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As of December 31, 2021, we were in compliance with our debt service coverage ratio covenant and other covenants contained in our revolving credit facility.

While we expect to remain in compliance throughout 2021, declines in demand in the

automotive industry and in sales volumes could adversely impact our ability to remain in compliance with certain of these financial covenants.

While we expect to remain in compliance throughout 2022, declines in demand in the automotive industry and in sales volumes could adversely impact our ability to remain in compliance with certain of these financial covenants.

Additionally, to the extent our customers are adversely affected by a decline in the economy in general, they may not be able to pay their accounts payable to us on a timely basis or at all, which would make the accounts receivable ineligible for purposes of the revolving credit facility and could reduce our borrowing base and our ability to borrow.

Uncertainty relating to the calculation of London Interbank Offered Rate (“LIBOR”) and other reference rates and their potential discontinuance may adversely affect interest expense related to our outstanding debt, including amounts borrowed under our revolving credit facility.

National and international regulators and law enforcement agencies have conducted investigations into a number of rates or indices, which are deemed to be “reference rates.” Actions by such regulators and law enforcement agencies may result in changes to the manner in which certain reference rates are determined, their discontinuance, or the establishment of alternative reference rates.

In particular, on July 27, 2017, the Chief Executive of the U.K.

Financial Conduct Authority, which regulates LIBOR, announced that it will no longer persuade or compel banks to submit rates for the calculation of LIBOR after 2021.

Such announcement indicates that the continuation of LIBOR on the current basis cannot and will not be guaranteed after 2021.

As such, it appears highly likely that LIBOR will be discontinued or modified by the end of 2021.

At this time, it is not possible to predict the effect that these developments, any discontinuance, modification or other reforms to LIBOR or any other reference rate, or the establishment of alternative reference rates, may have on LIBOR or other benchmarks, including LIBOR-based borrowings under our revolving credit facility.

The expected phase out of LIBOR could impact the interest rates paid on our variable rate indebtedness and could cause our interest expense to increase.

A portion of our borrowing capacity bears interest at a variable rate based on LIBOR.

The ICE Benchmark Administration Limited (“ICE”) ceased calculating and publishing certain USD LIBOR tenors on December 31, 2021.

ICE has also announced that it will cease calculating and publishing all USD LIBOR tenors on June 30, 2023.

At this time, it is not possible to predict the effect that any discontinuance, modification or other reforms to LIBOR or any other reference rate, or the establishment of alternative reference rates, may have on LIBOR or other benchmarks, including LIBOR-based borrowings under our revolving credit facility.

Furthermore, the use of alternative reference rates or other reforms could cause the market value of, the applicable interest rate on and the amount of interest paid on our benchmark-based borrowings to be materially different than expected and could materially adversely impact our ability to refinance such borrowings or raise future indebtedness on a cost effective basis.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 1A. Risk Factors