What changed in this filing

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Item 1A. Risk Factors

2021-02-24 compared with 2020-02-20 · 41 added, 22 removed, 175 unchanged (26% of the section changed)

5 unchanged sentences

We depend on a limited number of key customers, and the loss of any such customer, or a significant reduction in purchases by such customer, could have a material adverse effect on our business, financial condition and results of operations .

Our five largest individual customers accounted for approximately 69% of our consolidated net sales in 2019, and approximately 70% of our consolidated net sales in 2018 and 2017.

During 2019, O’Reilly, Advance, NAPA, and AutoZone accounted for 22%, 16%, 15% and 11% of our consolidated net sales, respectively.

Our five largest individual customers accounted for approximately 68% of our consolidated net sales in 2020, approximately 69% of our consolidated net sales in 2019, and approximately 70% of our consolidated net sales in 2018.

During 2020, O’Reilly, NAPA, Advance and AutoZone accounted for 26%, 15%, 14% and 11% of our consolidated net sales, respectively.

The loss of one or more of these customers or, a significant reduction in purchases of our products from any one of them, could have a materially adverse impact on our business, financial condition and results of operations.

In addition, any consolidation among our key customers may further increase our customer concentration risk.

In December 2020, a large retail customer informed us of its decision to pursue a private brand strategy for its engine management product line.

This customer has historically purchased $140 million of engine management products annually from us.

We anticipate that sales to this customer will continue through the first quarter of 2021.

In light of this development, we plan to take the necessary steps to reduce costs.

Also, we do not typically enter into long-term agreements with any of our customers.

Instead, we enter into a number of purchase order commitments with our customers, based on their current or projected needs.

We have in the past, and may in the future, lose customers or lose a particular product line of a customer due to the highly competitive conditions in the automotive aftermarket industry, including pricing pressures, consolidation of customers, customer initiatives to buy direct from foreign suppliers or other business considerations.

A decision by any significant customer, whether motivated by competitive conditions, financial difficulties or otherwise, to materially decrease the amount of products purchased from us, to change their manner of doing business with us, or to stop doing business with us, including a decision to source products directly from a low cost region such as Asia, could have a material adverse effect on our business, financial condition and results of operations.

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In the Engine Management Segment, we compete with:

ACDelco, Delphi Technologies PLC, Denso Corporation, Continental AG, Hitachi, Ltd., Motorcraft, Robert Bosch GmbH, Visteon Corporation, NGK Spark Plug Co., LTD., Dorman Products, Inc.

ACDelco, Aptive Plc, Denso Corporation, Continental AG, Hitachi, Ltd., Motorcraft, Robert Bosch GmbH, Visteon Corporation, NGK Spark Plug Co., LTD., Dorman Products, Inc.

and several privately-owned companies primarily importing products from Asia.

In the Temperature Control Segment, we compete with:

ACDelco, MAHLE GmbH, Behr Hella Service GmbH, Denso Corporation, Motorcraft, Sanden International, Inc., Continental AG, Dorman Products, Inc., and several privately-owned companies.

ACDelco, MAHLE GmbH, Denso Corporation, Motorcraft, Sanden International (U.S.A.), Inc., Continental AG, Dorman Products, Inc., and several privately-owned companies.

In addition, automobile manufacturers supply many of the replacement parts we sell.

20 unchanged sentences

In addition to this seasonality, the demand for our Temperature Control products during the second and third quarters of the year may vary significantly with the summer weather and customer inventories.

For example, a warm summer, as we experienced in 2018, may increase the demand for our temperature control products, while a mild summer, as we experienced in 2017, may lessen such demand.

Ordinarily, a warm summer, as we experienced in 2020, would increase the demand for our temperature control products, while a somewhat mild summer, as we experienced in 2019, may lessen such demand.

As a result of this seasonality and variability in demand of our Temperature Control products, our working capital requirements peak near the end of the second quarter, as the inventory build-up of air conditioning products is converted to sales and payments on the receivables associated with such sales have yet to be received.

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At December 31, 2020, approximately 1,560 cases were outstanding for which we may be responsible for any related liabilities.

Since inception in September 2001 through December 31, 2019, the amounts paid for settled claims are approximately $30.9 million.

During 2018, we were a defendant in an asbestos liability case in California, in which we were found liable for $7.6 million in compensatory damages.

We are pursuing all rights of appeal of this case.

A substantial increase in the number of new claims, or increased settlement payments, or awards of asbestos-related damages, as well as additional findings in the California case, could have a material adverse effect on our business, financial condition and results of operations.

Since inception in September 2001 through December 31, 2020, the amounts paid for settled claims and awards of asbestos-related damages, including interest, were approximately $48.3 million.

A substantial increase in the number of new claims, or increased settlement payments, or awards of asbestos-related damages, could have a material adverse effect on our business, financial condition and results of operations.

In accordance with our policy to perform an annual actuarial evaluation in the third quarter of each year, and whenever events or changes in circumstances indicate that additional provisions may be necessary, an actuarial study was performed as of August 31, 2020.

Based upon the results of the August 31, 2019 actuarial study, we increased our asbestos liability to $52 million, the low end of the range, and recorded an incremental pre-tax provision of $9.7 million in earnings (loss) from discontinued operations in the accompanying statement of operations.

The results of the August 31, 2019 study included an estimate of our undiscounted liability for settlement payments and awards of asbestos-related damages, excluding legal costs and any potential recovery from insurance carriers ranging from $52 million to $90.6 million for the period through 2064.

Future legal costs, which are expensed as incurred and reported in earnings (loss) from discontinued operations in the accompanying statement of operations, are estimated, according to the study, to range from $50.6 million to $85.2 million.

Additionally, in December 2020, an updated actuarial study was performed to reflect events that occurred in the fourth quarter of 2020.

Based upon the results of the actuarial studies performed in 2020, we increased our asbestos liability to the low end of the range, and recorded an incremental pre-tax provision of $25.7 million in earnings (loss) from discontinued operations in the accompanying statement of operations.

The results of the updated study included an estimate of our undiscounted liability for settlement payments and awards of asbestos-related damages, excluding legal costs and any potential recovery from insurance carriers, ranging from $63 million to $99.1 million for the period through 2065.

Future legal costs, which are expensed as incurred and reported in earnings (loss) from discontinued operations in the accompanying statement of operations, are estimated, according to the updated study, to range from $48.7 million to $95.4 million.

Given the uncertainties associated with projecting asbestos-related matters into the future and other factors outside our control, we cannot give any assurance that significant increases in the number of claims filed against us will not occur, that awards of asbestos-related damages or settlement awards will not exceed the amount we have in reserve, or that additional provisions will not be required.

6 unchanged sentences

We may not be able to achieve the benefits that we expect from our cost savings initiatives.

We expect to realize cost savings as a result of various recently completed initiatives, including the closing of our Grapevine, Texas facility;

the closing of our recently acquired wire set assembly operation in Nogales, Mexico;

the closing of our Orlando, Florida facility;

and the moving of production to our domestic and international facilities in Mexico and Poland.

We expect to realize cost savings as a result of various cost reduction measures implemented in response to the impact of the COVID-19 pandemic on our business and the loss of a large retail customer in the engine management product line, and several recently completed initiatives, including the plant rationalization programs implemented in February 2016 and January 2017.

Due to factors outside our control, such as the adoption or modification of domestic and foreign laws, regulations or policies, we may not be able to achieve the level of benefits that we expect to realize in these initiatives, or we may not be able to realize these benefits within the time frames we currently expect.

8 unchanged sentences

Our operations would be materially and adversely affected if we are unable to purchase raw materials, manufactured components or equipment from our suppliers.

Because we purchase various types of raw materials, finished goods, equipment, and component parts from suppliers, we may be materially and adversely affected by the failure of those suppliers to perform as expected.

This non-performance may consist of delivery delays or failures caused by production issues or delivery of non-conforming products.

Our suppliers’ ability to supply products to us is also subject to a number of risks, including the availability and cost of raw materials, the destruction of their facilities, or work stoppages, or other limitations on their business operations, which could be caused by any number of factors, such as labor disruptions, financial distress, severe weather conditions and natural disasters, social unrest, economic and political instability, and public health crises, including the occurrence of a contagious disease or illness, such as the novel coronavirus, war, terrorism or other catastrophic events.

Because we purchase various types of raw materials, finished goods, equipment, and component parts from suppliers as part of a global supply chain, we may be materially and adversely affected by the failure of those suppliers to perform as expected.

Supplier non-performance may consist of delivery delays or failures caused by production issues or delivery of non-conforming products.

Our suppliers’ ability to supply products to us is also subject to a number of risks, including the availability and cost of raw materials, the destruction of their facilities, or work stoppages, or other limitations on their business operations, which could be caused by any number of factors, such as labor disruptions, financial distress, severe weather conditions and natural disasters, social unrest, economic and political instability, and public health crises, including the occurrence of a contagious disease or illness, such as the COVID-19 pandemic, war, terrorism or other catastrophic events.

In addition, our failure to promptly pay, or order sufficient quantities of inventory from our suppliers may increase the cost of products we purchase or may lead to suppliers refusing to sell products to us at all.

3 unchanged sentences

We also routinely use our information technology systems to send, receive, store, access and use sensitive data relating to our Company and its employees, customers, suppliers, and business partners, including intellectual property, proprietary business information, and other sensitive materials.

Additionally, we rely on our information technology systems to enable many of our employees to work remotely as a result of new policies and practices enacted by us in response to the COVID-19 pandemic.

Our information technology systems have been subject to cyber threats, including attempts to hack into our network and computer viruses.

18 unchanged sentences

Any significant increase in our indebtedness could increase our vulnerability to general adverse economic and industry conditions and limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate.

Availability under our revolving credit facility is based on a formula of eligible accounts receivable, eligible drafts presented to financial institutions under our supply chain financing arrangements and eligible inventory.

The loss of business of one or more of our key customers or, a significant reduction in purchases of our products from any one of them, could adversely impact availability under our revolving credit facility.

Based upon our availability under the revolving credit agreement at December 31, 2020, the pending loss of business as a result of a large retail customer's decision to pursue a private brand strategy will not significantly impact our availability and/or liquidity as we enter into 2021.

In addition, we have granted the lenders under our revolving credit facility a first priority security interest in substantially all of our assets, including accounts receivable, inventory and certain fixed assets, and those of certain of our subsidiaries.

27 unchanged sentences

Risks Related to External Factors

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 global outbreak of the novel coronavirus (COVID-19) pandemic has created significant volatility, uncertainty and economic disruption in many countries in which we operate, including the United States, Mexico, Canada, Poland, the U.K.

and China, and could have a material adverse effect on our business, results of operations and financial condition.

Ultimately, 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.

Customer demand for our products and customer preferences regarding product mix and distribution channels could be impacted as a result of the COVID-19 pandemic, and significant uncertainty exists with respect to the potential future impact of the pandemic as well as a deterioration of general economic conditions, including high unemployment and a possible national or global recession.

If customer demand were to decrease in future periods, or if customer preferences regarding product mix and distribution channels were to change, we may be required to adjust and reduce production volumes and implement cost reduction and cash preservation initiatives, including potential reductions in capital expenditures and employee furloughs, which could have a material adverse impact on our business, results of operations and financial condition.

In certain countries in which we operate, national, state and local governments implemented a variety of measures in response to the COVID-19 pandemic, including by declaring 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.

In certain jurisdictions, these governmental measures have been eased through planned, phased in “re-openings;” however, in other jurisdictions, re-opening plans have been subsequently paused or reversed in response to an increase in the number of new COVID-19 cases.

Although we have been able to continue to perform, with certain modifications, all of the material operations at all of our principal facilities, we can provide no assurances that we will be able to continue to perform such operations in the future without disruption, such as temporary closures, as a result of new or modifications to existing governmental measures in response to the COVID-19 pandemic.

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 disruptions 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 facility modifications, updated policies for high risk employees, work-from-home allowances, cleaning and disinfecting measures, social distancing, staggered work shifts and reduced operations and production volumes.

We have had to temporarily suspend operations to clean and disinfect areas within our facilities where employees, who later tested positive or exhibited symptoms of COVID-19 performed work.

Depending on the extent and duration of these disruptions, and their effects on our business and operations, our costs could increase, including our costs to address the health and safety of our employees, our ability to manufacture 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 could have a material adverse effect on 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.

We conduct our manufacturing and distribution operations on a worldwide basis and are subject to risks associated with doing business outside the United States.

10 unchanged sentences

trade policy, particularly as it relates to China, have resulted in the assessment of increased tariffs on goods that we import into the United States, and have caused uncertainty about the future of free trade generally.

We benefit from free trade agreements, such as the North American Free Trade Agreement (NAFTA) and its successor agreement, the U.S.-Mexico-Canada Agreement (USMCA).

The repeal or modification of NAFTA or the USMCA or further increases to tariffs on goods imported into the United States could increase our costs to source materials, component parts and finished goods from other countries.

We benefit from free trade agreements, such as the U.S.-Mexico-Canada Agreement (USMCA).

The repeal or modification of the USMCA or further increases to tariffs on goods imported into the United States could increase our costs to source materials, component parts and finished goods from other countries.

The likelihood of such occurrences and their potential effect on us is unpredictable and may vary from country to country.

24 unchanged sentences

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