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Item 1A. Risk Factors

2021-02-12 compared with 2020-02-11 · 179 added, 203 removed, 240 unchanged (61% of the section changed)

The following are important factors that could cause actual results or events to differ materially from those contained in any forward-looking statements made by us or on our behalf.

Investors should carefully consider these risks and all other information in this Report before investing in our securities.

The risks and uncertainties described below are not the only ones we face.

Our business is also subject to general risks that affect many other companies.

Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also impair our business, operations, liquidity, and financial condition.

Many of the risks listed below are, and will be, exacerbated by the COVID-19 pandemic and any worsening of the economic environment.

If actions taken by management to limit, monitor or control enterprise risk exposures are not successful, our business and consolidated financial statements could be materially adversely affected.

In such case, the trading price of our common stock and debt securities could decline and investors may lose all or part of their investment.

Business and Operational Risks

We are subject to various risks related to public health crises, including the COVID-19 pandemic, which have had, and may in the future have, material and adverse impacts on our business, financial condition, liquidity and results of operations.

Any outbreaks of contagious diseases and other adverse public health developments in countries where we operate could have a material and adverse impact on our business, financial condition, liquidity and results of operations.

For example, the COVID-19 pandemic has caused widespread disruptions to our business in fiscal year 2020.

During the first quarter of 2020, these disruptions were primarily limited to our manufacturing operations in China, portions of which were closed during the end of January and first half of February due to government mandates.

As the virus spread to the rest of the world beginning in March, all of our other operations outside of China also were impacted.

These impacts have continued to varying degrees throughout fiscal year 2020, as regions have had varying levels of success mitigating the impacts of the virus, resulting in varying degrees of reopening.

As of December 31, 2020, we were still experiencing disruptions, which include, depending on the specific location, partial shutdowns of our facilities as mandated by government decree, government actions limiting our ability to adjust certain costs, significant travel restrictions, “work-from-home” orders, limited availability of our workforce,

supplier constraints, supply-chain interruptions, logistics challenges and limitations, and reduced demand from certain customers.

In addition, in these challenging and dynamic circumstances, we are working to protect our employees, maintain business continuity and sustain our operations, including ensuring the safety and protection of our people who work in our plants and distribution centers across the world, many of whom support the manufacturing and delivery of products deemed part of the critical infrastructure or essential businesses by the applicable local or country governments.

The extent to which the COVID-19 pandemic will continue to impact our business and financial results going forward will be dependent on future developments such as the length and severity of the crisis, the potential resurgence of the crisis, future government actions in response to the crisis and the overall impact of the COVID-19 pandemic on the global economy and capital markets, among many other factors, all of which remain highly uncertain and unpredictable.

In addition, the COVID-19 pandemic increases the likelihood and potential severity of other risks discussed elsewhere in this Item 1A, "Risk Factors." These include, but are not limited to, the following:

• A protracted economic downturn could negatively affect the financial condition of the industries and customers we serve, which may result in an increase in bankruptcies or insolvencies, a delay in payments, and decreased sales.

• A scarcity of resources or other hardships caused by the COVID-19 pandemic may result in increased nationalism, protectionism and political tensions which may cause governments and/or other entities to take actions that may have a significant negative impact on the ability of us, our suppliers, and our customers to conduct business.

• The impact of the COVID-19 pandemic may cause us to further restructure our business or divest some of our businesses or product lines in the future, which may have a material adverse effect on our results of operations, financial condition, and cash flows.

• To mitigate the spread of COVID-19, we have transitioned a significant subset of our employee population to a remote work environment, which may exacerbate various cybersecurity risks to our business, including an increased demand for information technology ("IT") resources, an increased risk of phishing and other cybersecurity attacks, and an increased risk of unauthorized dissemination of sensitive personal information or proprietary or confidential information.

• The COVID-19 pandemic has disrupted the supply chain, and we may experience increased difficulties in obtaining a consistent supply of materials at stable pricing levels.

• If the financial performance of our businesses were to decline significantly as a result of the COVID-19 pandemic, we could incur a material non-cash charge to our income statement for the impairment of goodwill and other intangible assets.

• The continued global spread of COVID-19 has led to disruption and volatility in the global capital markets, which may increase the cost of, and adversely impact access to, capital.

• If the financial performance of our businesses were to decline significantly for an extended period of time as a result of the COVID-19 pandemic, we may face challenges to comply with the covenants contained in our credit arrangements.

Our business is subject to numerous global risks, including regulatory, political, economic, governmental, and military concerns and instability.

Our business, including our employees, customers, and suppliers, are located throughout the world.

As a result, we are exposed to numerous global, regional, and local risks that could decrease revenue and/or increase expenses, and therefore decrease our profitability, including, without limitation:

trade regulations, including customs, import, and export matters;

tariffs, trade barriers, and disputes, including recent disputes between the United States (the "U.S.") and China;

We employ approximately 92% of our workforce outside of the U.S.

Our customers are located throughout the world, and we have many manufacturing, administrative, and sales facilities outside of the U.S.

Our subsidiaries located outside of the U.S.

generated approximately 64% of our net revenue in fiscal year 2020, with approximately 21% in China, and we expect sales from non-U.S.

markets to continue to represent a significant portion of our total net revenue.

International sales and operations are subject to changes in local government regulations and policies, including those related to tariffs and trade barriers, investments, taxation, exchange controls, and repatriation of earnings.

As a result, we are exposed to numerous global, regional, and local risks that could decrease revenue and/or increase expenses, and therefore decrease our profitability.

Such risks may result from instability in economic or political conditions, inflation, recession, and/or actual or anticipated military or political conflicts, and include, without limitation:

trade regulations, including customs, import, and export matters, tariffs, trade barriers, and disputes;

local employment costs, regulations, and conditions;

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natural disasters;

instability in economic or political conditions, inflation, recession, actual or anticipated military or political conflicts, and potential impact due to the upcoming exit of the United Kingdom (the "U.K.") from the European Union (the "EU");

impact of each of the foregoing on our business operations, manufacturing, and supply chain.

The U.K.'s withdrawal from the EU ("Brexit") was completed on January 31, 2020, opening a standstill transition period that is currently set to last until December 31, 2020.

During this transition period, the U.K.'s trading relationship with the EU will remain unchanged, allowing time to agree and implement a new future trading relationship.

An extension of the transition period of up to two years is possible, but the current political environment in the U.K.

suggests that an extension is not likely to be negotiated.

In addition to uncertainty regarding the timing of the transition, there is substantial uncertainty about the final agreements that will be reached by the U.K.

and the EU during the transition period on topics such as financial laws and regulations, tax and free trade agreements, immigration laws, and employment laws.

instability in economic or political conditions, inflation, recession, actual or anticipated military or political conflicts, and potential impact due to the upcoming withdrawal of the United Kingdom (the "U.K.") from the EU ("Brexit");

and the impact of each of the foregoing on our business operations, manufacturing, and supply chain.

In addition, other risks are inherent in our non-U.S.

operations, including the potential for changes in socio-economic conditions and/or monetary and fiscal policies, intellectual property protection difficulties and disputes, the settlement of legal disputes through certain foreign legal systems, the collection of receivables, exposure to possible expropriation or other government actions, unsettled political conditions, and possible terrorist attacks.

These and other factors may have a material adverse effect on our non-U.S.

operations and, therefore, on our business and results of operations.

Brexit was completed on January 31, 2020.

On December 24, 2020, the EU and the U.K.

reached an agreement on their future trading relationship, the Trade and Cooperation Agreement.

We are incorporated in the U.K., and we have significant operations and a substantial workforce therein and therefore enjoy certain benefits based on the U.K.’s membership in the EU.

The lack of clarity about the future trading agreements between the U.K.

and the EU creates uncertainty for us, as the outcome of these negotiations may affect our business and operations.

The terms of the Trade and Cooperation Agreement, particularly those around financial laws and regulations, tax and free trade agreements, immigration laws, and employment laws, may impact our business and operations.

Additionally, there is a risk that other countries may decide to leave the EU.

The uncertainty surrounding Brexit not only potentially affects our business in the U.K.

and the EU, but may have a material adverse effect on global economic conditions and the stability of global financial markets, which in turn could have a material adverse effect on our business, financial condition, and results of operations.

In addition, we have sizable operations in China, including two principal manufacturing sites.

Approximately 17% of our net revenue in fiscal year 2019 was generated in China.

Despite the progress made on reaching the Trade and Cooperation Agreement, there is still uncertainty surrounding Brexit, not only related to the potential affects of our business in the U.K.

and the EU, but also on global economic conditions and the stability of global financial markets, which in turn could have a material adverse effect on our business, financial condition, and results of operations.

We have sizable operations in China, including two principal manufacturing sites.

Economic and political conditions in China have been and may continue to be volatile and uncertain, especially as the U.S.

and China continue to discuss and have differences in trade policies.

As discussed in Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," included elsewhere in this Annual Report on Form 10-K (this "Report"), increased tariff costs have increased our cost of revenue as a percentage of net revenue in fiscal year 2019.

As discussed in the MD&A, increased tariff costs have increased our cost of revenue as a percentage of net revenue in fiscal year 2020.

In addition, the legal and regulatory system in China is still developing and is subject to change.

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We are dependent on market dynamics to sell our products, and our operating results could be adversely affected by cyclical and reduced demand in these markets.

Periodic downturns in our customers’ industries could significantly reduce

demand for certain of our products, which could have a material adverse effect on our results of operations, financial condition, and cash flows.

Periodic downturns in our customers’ industries could significantly reduce demand for certain of our products, which could have a material adverse effect on our results of operations, financial condition, and cash flows.

Much of our business depends on, and is directly affected by, the global automobile industry.

Sales in our automotive end markets accounted for approximately 58% of our total net revenue in fiscal year 2020.

As discussed in Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," included elsewhere in this Report, demand in the automotive end market we serve has declined 5.6% from the prior year.

We are partially offsetting this market decline with content growth, but there can be no assurance that this will continue.

As discussed in the MD&A, demand in the automotive end market we serve has declined from the prior year.

Continued declines in demand such as discussed above, and other adverse developments like those we have seen in past years in the automotive industry, including but not limited to customer bankruptcies and increased demands on us for lower prices, could have adverse effects on our results of operations and could impact our liquidity and our ability to meet restrictive debt covenants.

In addition, these same conditions could adversely impact certain of our vendors’ financial solvency, resulting in potential liabilities or additional costs to us to ensure uninterrupted supply to our customers.

Continued pricing and other pressures from our customers may adversely affect our business.

Many of our customers, including automotive manufacturers and other industrial and commercial original equipment manufacturers ("OEMs"), demand annual price reductions.

If we are not able to offset continued price reductions through improved operating efficiencies and reduced expenditures, these price reductions may have a material adverse effect on our results of operations and cash flows.

In addition, our customers occasionally require engineering, design, or production changes.

In some circumstances, we may be unable to cover the costs of these changes with price increases.

Further, as our customers grow larger, they may increasingly require us to provide them with our products on an exclusive basis, which could limit sales, cause an increase in the number of products we must carry and, consequently, increase our inventory levels and working capital requirements.

Certain of our customers, particularly in the automotive industry, are increasingly requiring their suppliers to agree to their standard purchasing terms without deviation as a condition to engage in future business transactions, many of which are increasing warranty requirements.

As a result, we may find it difficult to enter into agreements with such customers on terms that are commercially reasonable to us.

In addition, these same conditions could

adversely impact certain of our vendors’ financial solvency, resulting in potential liabilities or additional costs to us to ensure uninterrupted supply to our customers.

We may incur material losses and costs as a result of product liability, warranty, and recall claims that may be brought against us.

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Our costs associated with product liability, warranty, and recall claims could be material.

We are dependent on market acceptance of our new product introductions and product innovations for future revenue.

We are dependent on market acceptance of our new product introductions and product innovations for future revenue and we may not realize all of the revenue or achieve anticipated gross margins from products subject to existing awards or for which we are currently engaged in development.

Substantially all markets in which we operate are impacted by technological change or change in consumer tastes and preferences, which are rapid in certain markets.

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and to customize products to meet customer requirements driven by such change.

There are numerous risks inherent in these processes, including the risk that we will be unable to anticipate the direction of technological change or that we will be unable to develop and market profitable new products and applications before our competitors or in time to satisfy customer demands.

There are numerous risks inherent in these processes, including the risk that we will be unable to anticipate the direction of technological change;

that we will be unable to develop and market profitable new products and applications before our competitors or in time to satisfy customer demands;

the possibility that investment of significant time and resources will not be successful;

the possibility that the marketplace does not accept our products or services;

that we are unable to retain customers that adopt our new products or services;

and the risk of additional liabilities associated with these efforts.

Our ability to generate revenue from products pending customer awards is subject to a number of important risks and uncertainties, many of which are beyond our control, including the number of products our customers will actually produce, as well as the timing of such production.

Many of our customer agreements provide for the supply of a certain share of the customer’s requirements for a particular application or platform, rather than for a specific quantity of products.

In some cases, we have no remedy if a customer chooses to purchase less than we expect.

In cases where customers do make minimum volume commitments to us, our remedy for their failure to meet those minimum volumes may be limited to increased pricing on those products that the customer does purchase from us or renegotiating other contract terms.

There is no assurance that such price increases or new terms will offset a shortfall in expected revenue.

In addition, some of our customers may have the right to discontinue a program or replace us with another supplier under certain circumstances.

As a result, products for which we are currently incurring development expenses may not be manufactured by our customers at all, or may be manufactured in smaller amounts than currently anticipated.

Therefore, our anticipated future revenue from products relating to existing customer awards or product development relationships may not result in firm orders from customers for the originally contracted amount.

We also incur capital expenditures and other costs and price our products based on estimated production volumes.

If actual production volumes were significantly lower than estimated, our anticipated revenue and gross margin from those new products would be adversely affected.

We cannot predict the ultimate demand for our customers’ products, nor can we predict the extent to which we would be able to pass through unanticipated per-unit cost increases to our customers.

Increasing costs for, or limitations on the supply of or access to, manufactured components and raw materials may adversely affect our business and results of operations.

We use a broad range of manufactured components, subassemblies, and raw materials in the manufacture of our products, including those containing certain commodities, resins, and rare earth metals, which may experience significant volatility in their price and availability.

We have entered into hedge arrangements for certain metals used in our products in an attempt to minimize commodity pricing volatility and may continue to do so from time to time in the future.

We use a broad range of manufactured components, subassemblies, and raw materials in the manufacture of our products in both our Performance Sensing and Sensing Solutions segments, including those containing certain commodities, resins, and rare earth metals, which may experience significant volatility in their price and availability due to, among other things, new laws or regulations, including the impact of tariffs, trade barriers, and disputes, and global economic or political events including government actions, labor strikes, suppliers' allocations to other purchasers, interruptions in production by suppliers, changes in foreign currency exchange rates, and prevailing price levels.

It is generally difficult to pass increased prices for manufactured components and raw materials through to our customers in the form of price increases.

Therefore, a significant increase in the price or a decrease in the availability of these items could materially increase our operating costs and materially and adversely affect our business and results of operations.

We have entered into hedge arrangements for certain metals used in

our products in an attempt to minimize commodity pricing volatility and may continue to do so from time to time in the future.

Such hedges might not be economically successful.

In addition, these hedges do not qualify as accounting hedges in accordance with U.S.

accepted accounting principles.

generally accepted accounting principles.

Accordingly, the change in fair value of these hedges is recognized in earnings immediately, which could cause volatility in our results of operations from quarter to quarter.

Refer to Note 19, "Derivative Instruments and Hedging Activities," of our audited consolidated financial statements and accompanying notes thereto (our "Financial Statements") included elsewhere in this Report for additional information related to accounting for hedges of commodity prices, and Item 7A, "Quantitative and Qualitative Disclosures About Market Risk," included elsewhere in this Report, for an analysis of the sensitivity on pretax earnings of changes in the forward prices on these hedges.

The price and availability of raw materials and manufactured components may be subject to change due to, among other things, new laws or regulations, including the impact of tariffs, trade barriers, and disputes, and global economic or political events including government actions, labor strikes, suppliers' allocations to other purchasers, interruptions in production by suppliers, changes in foreign currency exchange rates, and prevailing price levels.

It is generally difficult to pass increased prices for manufactured components and raw materials through to our customers in the form of price increases.

In connection with the implementation of our corporate strategies, we face risks associated with the acquisition or disposition of businesses, the entry into new lines of business, the integration of acquired businesses, and the growth and development of these businesses.

In pursuing our corporate strategy, we often acquire other businesses or dispose of or exit businesses we currently own.

The success of this strategy is dependent upon our ability to identify appropriate acquisition and disposition targets, negotiate transactions on favorable terms, complete transactions and, in the case of acquisitions, successfully integrate them into our existing businesses.

If a proposed transaction is not consummated, the time and resources spent pursuing it could adversely result in missed opportunities to locate and acquire other businesses.

If acquisitions are made, there can be no assurance that we will realize the anticipated benefits of such acquisitions, including, but not limited to, revenue growth, operational efficiencies, or expected synergies.

If we dispose of or otherwise exit certain businesses, we may incur significant write-offs, including those related to goodwill and other intangible assets, and face other risks, including difficulties in the separation of operations, services, products, and personnel;

the diversion of management's attention from other business concerns;

the disruption of our business;

and the potential loss of key employees.

There can be no assurance that we will be successful in addressing these or any other significant risks encountered.

The automotive industry supply chain is currently facing a global shortage of semiconductors, the technology used to make microchips, resulting in paused production on certain vehicles and increased costs to procure microchips.

As discussed in the MD&A, we believe this shortage will have an adverse impact on our operating costs in fiscal year 2021.

If the impacts of this shortage are more severe than we expect, it could result in further deterioration of our results, potentially for a longer period than currently anticipated.

In connection with the implementation of our corporate strategies, we face risks associated with the acquisition of businesses, the integration of acquired businesses, and the growth and development of these businesses.

In pursuing our corporate strategy, we often acquire other businesses.

The success of this strategy is dependent upon our ability to identify appropriate acquisition targets, negotiate transactions on favorable terms, complete transactions, and successfully integrate them into our existing businesses.

There can be no assurance that we will realize the anticipated synergies or cost savings related to acquisitions, including, but not limited to, revenue growth and operational efficiencies, or that they will be achieved in our estimated timeframe.

We may not be able to successfully integrate and streamline overlapping functions from future acquisitions, and integration may be more costly to accomplish than we expect.

In addition, we could encounter difficulties in managing our combined company due to its increased size and scope.

Subject to the terms of our indebtedness, we may finance future acquisitions with cash from operations, additional indebtedness, and/or by issuing additional equity securities.

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The availability of debt to finance future acquisitions may be restricted, and our ability to make future acquisitions may be limited.

There can be no assurance that any anticipated synergies or cost savings related to acquisitions will be achieved or that they will be achieved in our estimated time frame.

We may not be able to successfully integrate and streamline overlapping functions from future acquisitions, and integration may be more costly to accomplish than we expect.

In addition, we could encounter difficulties in managing our combined company due to its increased size and scope.

We also may seek to restructure our business in the future by disposing of certain assets or by consolidating operations.

There can be no assurance that any restructuring of our business will not adversely affect our financial condition, leverage, or results of operations.

In addition, any significant restructuring of our business will require significant managerial attention, which may be diverted from our other operations.

Further, from time to time, either through acquisitions or internal development, we enter new lines of business or offer new products and services within existing lines of business.

These new lines of business or new products and services present us with additional risks, particularly in instances where the markets are not fully developed.

Such risks include the investment of significant time and resources;

the possibility that these efforts will be not be successful;

the possibility that the marketplace does not accept our products or services or that we are unable to retain customers that adopt our new products or services;

and the risk of additional liabilities associated with these efforts.

Refer to separate risk factor for additional information on risks related to our level of indebtedness.

In addition, many of the businesses that we acquire and develop will likely have significantly smaller scales of operations prior to the implementation of our growth strategy.

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Other risks include developing knowledge of and experience in the new business, integrating the acquired business into our systems and culture, recruiting professionals, and developing and capitalizing on new relationships with experienced market participants.

External factors, such as compliance with new or revised regulations, competitive alternatives, and shifting market preferences may also

impact the successful implementation of a new line of business.

External factors, such as compliance with new or revised regulations, competitive alternatives, and shifting market preferences may also impact the successful implementation of a new line of business.

Failure to manage these risks in the acquisition or development of new businesses could materially and adversely affect our business, results of operations, and financial condition.

Restructuring our business or divesting some of our businesses or product lines in the future may have a material adverse effect on our results of operations, financial condition, and cash flows.

We continue to evaluate the strategic fit of specific businesses and products that may result in additional divestitures.

In pursuing our corporate strategy, we continue to evaluate the strategic fit of specific businesses and products and occasionally dispose of or exit businesses and products.

The success of this strategy is dependent upon our ability to identify appropriate disposition targets, negotiate transactions on favorable terms, and complete transactions.

Any divestitures may result in significant write-offs, including those related to goodwill and other intangible assets, which could have a material adverse effect on our results of operations and financial condition.

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In addition, any significant restructuring of our business will require significant managerial attention, which may be diverted from our other operations.

Natural disasters or other disasters outside of our control could cause significant business interruptions resulting in harm to our business operations and financial condition.

Our operations and those of our suppliers and customers, and the supply chains that support their operations, may potentially suffer interruptions caused by natural disasters such as earthquakes, tsunamis, hurricanes, typhoons, or floods;

or other disasters such as fires, explosions, disease, and acts of terrorism or war that are outside of our control, including government reactions due to such disasters.

If a business interruption occurs and we are unsuccessful in our continuing efforts to minimize the impact of these events, our business, results of operations, financial condition, and/or cash flows could be materially adversely affected.

In addition, the ongoing coronavirus outbreak emanating from China at the beginning of 2020 has resulted in increased travel restrictions and extended shutdown of certain businesses in the region.

These or any further political or governmental developments or health concerns in China or other countries in which we operate could result in social, economic and labor instability.

These uncertainties could have a material adverse effect on the continuity of our business and our results of operations and financial condition.

Labor disruptions or increased labor costs could adversely affect our business.

As of December 31, 2019 , we had approximately 21,050 employees, of whom approximately 8% were located in the U.S.

As of December 31, 2019 , approximately 115 of our employees were covered by collective bargaining agreements.

In addition, in various countries, local law requires our participation in works councils.

Labor disruptions or increased labor costs have had, and may in the future have, adverse impacts on our business.

A material labor disruption or work stoppage at one or more of our manufacturing or business facilities could have a material adverse effect on our business.

In addition, work stoppages occur relatively frequently in the industries in which many of our customers operate, such as the automotive industry.

If one or more of our larger customers were to experience a material work stoppage for any reason, that customer may halt or limit the purchase of our products.

If one or more of our larger customers were to experience a material

work stoppage for any reason, that customer may halt or limit the purchase of our products.

This could cause us to reduce production levels or shut down production facilities relating to those products, which could have a material adverse effect on our business, results of operations, and/or financial condition.

We operate in markets that are highly competitive and competitive pressures could require us to lower our prices or result in reduced demand for our products.

We operate in markets that are highly competitive, and we compete on the basis of product performance in mission-critical operating environments, quality, service, reliability, and/or commercial competitiveness across the industries and end markets we serve.

We operate in markets that are highly competitive, and we compete on the basis of product performance in mission-critical operating environments, quality, service, reliability, manufacturing footprint, and commercial competitiveness across the industries and end markets we serve.

A significant element of our competitive strategy is to design and manufacture high-quality products that meet the needs of our customers at a commercially competitive price, particularly in markets where low-cost, country-based suppliers, primarily in China with respect to the Sensing Solutions segment, have entered the markets or increased their per-unit sales in these markets by delivering products at low cost to local OEMs.

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Many of our customers also rely on us as their sole source of supply for many of the products that we have historically sold to them.

These customers may choose to develop relationships with additional suppliers or elect to produce some or all of these products internally, primarily to reduce risk of delivery interruptions or as a means of extracting price reductions from us.

Certain of our customers currently have, or may develop in the future, the capability to internally produce

the products that we sell to them and may compete with us with respect to those and other products and with respect to other customers.

Competitive pressures such as these, and others, could affect prices or customer demand for our products, negatively impacting our profit margins and/or resulting in a loss of market share.

We may not realize all of the revenue or achieve anticipated gross margins from products subject to existing purchase orders or for which we are currently engaged in development.