What changed in this filing

/stocks — the workspaceLOADING

Item 1A. Risk Factors

2020-08-26 compared with 2019-08-29 · 59 added, 35 removed, 102 unchanged (48% of the section changed)

11 unchanged sentences

dollar or euro, could have an adverse effect on the Company’s profitability and financial condition.

While the long-term impacts of the United Kingdom’s vote to exit the European Union (commonly known as “Brexit”) are currently unknown, any resulting unfavorable currency impact to the euro could have an adverse effect on the Company’s profitability and financial condition.

Certain of the Company’s products are directly or indirectly used in oil exploration and oil drilling, and are thus dependent upon the strength of those markets and oil prices.

While the long-term impacts of the United Kingdom’s exit from the European Union (commonly known as “Brexit”) remain uncertain, any resulting unfavorable currency impact to the euro could have an adverse effect on the Company’s profitability and financial condition.

The Company expects to be adversely affected by the economic disruptions caused by the global coronavirus pandemic.

In March 2020, the World Health Organization (“WHO”) declared that a new strain of coronavirus that originated in Wuhan, China, and has rapidly spread around the world (“COVID-19 outbreak’) is a pandemic that poses significant risk to the international community.

This outbreak contributed to shelter-in-place policies, unexpected factory closures, supply chain disruptions, and market volatility causing substantial declines in market capitalization, and occurring in the midst of an already challenging economic environment in some of our markets, most notably the oil and gas market.

As a result of the outbreak, starting in March 2020 and intermittently through June 30, 2020, the Company suspended or reduced its operations, in whole or in part, in many of its locations.

The Company’s businesses operate in market segments impacted by the COVID-19 outbreak.

Operating during a global pandemic has exposed the Company to a number of material risks, including diminished demand for our products and our customers’ products, suspensions in the operations of our manufacturing facilities, maintenance of appropriate labor levels, our ability to ship products to our customers, interruptions in our supply chains and distribution systems, access to capital and potential increases to the cost of capital, collection of trade receivables in accordance with their terms and potential further impairment of long-lived assets;

all of which, in the aggregate, have had an adverse effect on the Company’s business, financial condition, results of operations and cash flows.

The depth and duration of the pandemic is unknown.

Management continues to actively monitor the global situation and its effect on financial condition, liquidity, operations, suppliers, industry and workforce.

We are unable to estimate the full extent or nature of the impact of COVID-19 at this time.

Many of the Company’s products are directly or indirectly used in oil exploration and oil drilling, and the recent unprecedented drastic drop in oil prices is expected to have an adverse impact to the Company’s business.

In recent years the Company has seen significant variations in the sales of its products that are used in oil and energy related markets.

1 unchanged sentence

Significant decreases in oil prices and reduced demand for oil and capital investment in the oil and energy markets adversely affect the sales of these products and the Company’s profitability.

The cyclical nature of the global oil and gas market presents the ongoing possibility of a severe cutback in demand, which would create a significant adverse effect on the sales of these products and ultimately on the Company’s profitability.

The recent unprecedented drop in oil prices, as well as the cyclical nature of the global oil and gas market, presents the high probability of a severe cutback in demand for our products, which would create a severe adverse effect on the sales of these products and ultimately on the Company’s profitability.

Many of the Company’s product markets are cyclical in nature or are otherwise sensitive to volatile or variable factors.

15 unchanged sentences

However, if material prices were to continue to increase at a rate that could not be recouped through product pricing, it could potentially have an adverse effect on the Company’s future profitability.

The current United States administration has signaled support for implementing, and in some instances, has already proposed or taken action with respect to, major changes to certain trade policies, such as the imposition of additional tariffs on imported products and the withdrawal from or renegotiation of certain trade agreements, including the North American Free Trade Agreement.

In response to such actions, certain countries have imposed retaliatory actions against the United States.

5 unchanged sentences

If the Company were to lose business with any key customers, the Company’s business would be adversely affected.

Although there were no customers that accounted for 10% or more of consolidated net sales in fiscal 2019, deterioration of a business relationship with one or more of the Company’s significant customers would cause its sales and profitability to be adversely affected.

Although there was only one customer that accounted for 10% or more of consolidated net sales in fiscal 2020, deterioration of a business relationship with one or more of the Company’s significant customers would cause its sales and profitability to be adversely affected.

The termination of relationships with the Company’s suppliers, or the inability of such suppliers to perform, could disrupt its business and have an adverse effect on its ability to manufacture and deliver products.

3 unchanged sentences

A significant design, manufacturing or supplier quality issue could result in recalls or other actions by the Company that could adversely affect profitability.

As a manufacturer of highly engineered products, the performance, reliability and productivity of the Company’s products is one of its competitive advantages.

As a manufacturer of highly engineered products, the performance, reliability and productivity of the Company’s products are some of its competitive advantages.

While the Company prides itself on putting in place procedures to ensure the quality and performance of its products and suppliers, a significant quality or product issue, whether due to design, performance, manufacturing or supplier quality issue, could lead to warranty actions, scrapping of raw materials, finished goods or returned products, the deterioration in a customer relationship, or other action that could adversely affect warranty and quality costs, future sales and profitability.

5 unchanged sentences

currency exchange rate fluctuations

export and import duties, changes to import and export regulations, and restrictions on the transfer of funds

export and import duties, changes to import and export regulations, and restrictions on the transfer of funds, including dividends

problems with the transportation or delivery of its products

issues arising from cultural or language differences

potential labor unrest

potential social and labor unrest as well as public health and political crises

longer payment cycles and greater difficulty in collecting accounts receivables

1 unchanged sentence

changes in tax law

compliance with the Foreign Corrupt Practices Act

These factors could adversely affect the Company’s business, results of operations or financial condition.

1 unchanged sentence

The majority of the Company’s manufacturing, based on fiscal 2020 sales, came from its facilities in Racine, Wisconsin.

If operations at these facilities were to be disrupted as a result of significant equipment failures, natural disasters, power outages, fires, explosions, adverse weather conditions or other reasons, the Company’s business and results of operations could be adversely affected.

If operations at these facilities were to be disrupted as a result of significant equipment failures, natural disasters, power outages, fires, explosions, adverse weather conditions, labor force disruptions or other reasons, the Company’s business and results of operations could be adversely affected.

Interruptions in production would increase costs and reduce sales.

4 unchanged sentences

If this were to occur, future sales levels and costs of doing business, and therefore profitability, could be adversely affected.

Any failure to meet debt obligations and maintain adequate asset-based borrowing capacity could adversely affect the Company’s business and financial condition.

A relocation of part of the Company’s manufacturing facilities from Racine, WI to Lufkin, TX could adversely affect its business, financial condition and results of operations .

Effective with the finalization of a lease agreement with the city of Lufkin, Texas on July 31, 2020, the Company will begin the transfer of inventories and certain manufacturing assets and its manufacturing process for its Industrial products line to Lufkin, Texas.

The costs of building out and relocating a production facility could be significant.

This relocation may pose significant risks, which could include the risks that:

we may be unable to integrate successfully the relocated manufacturing operations;

we may be unable to coordinate management and integrate and retain employees of the relocated manufacturing operations;

we may face difficulties in implementing and maintaining consistent standards, controls, procedures, policies and information systems;

we may fail to realize anticipated synergies, economies of scale or other anticipated benefits, or to maintain operating margins;

potential strains on our personnel, systems and resources, and diversion of attention from other priorities;

any unforeseen or contingent liabilities of the relocated manufacturing operations.

The Company entered into a new credit agreement in June 2018 and significantly increased its indebtedness.

The ability to service the requirements of the new debt depends on the ability to generate cash and/or refinance its indebtedness as it becomes due, and depends on many factors, some of which are beyond the Company’s contro l.

The Company entered into a new credit agreement on June 29, 2018.

The Company’s ability to make payments on its indebtedness, including those under the new credit agreement, and to fund planned capital expenditures, research and development efforts and other corporate expenses depends on the Company’s future operating performance and on economic, financial, competitive, legislative, regulatory and other factors.

Many of these factors are beyond its control.

The Company cannot assure that its business will generate sufficient cash flow from operations, or operating improvements will be realized or that future borrowings will be available to it in an amount sufficient to enable it to repay its indebtedness or to fund its other operating requirements.

Significant delays in its planned capital expenditures may materially and adversely affect the Company’s future revenue prospects.

Any failure to meet debt obligations and financial covenants, and maintain adequate asset-based borrowing capacity could adversely affect the Company’s business and financial condition.

The Company’s five-year revolving credit facility entered into on June 29, 2018 is secured by certain personal property assets such as accounts receivable, inventory, and machinery and equipment.

Under this agreement, the Company’s borrowing capacity is based on the eligible balances of these assets and it is required to maintain sufficient borrowing base at all times to secure its outstanding borrowings.

As of June 30, 2019, the Company had a borrowing capacity that exceeded its outstanding loan balance (see Note I, Debt, of the notes to the consolidated financial statements).

The Company is also required to comply with a minimum Debt to EBITDA ratio and/ or a minimum EBITDA.

As of June 30, 2020, the Company had a borrowing capacity that exceeded its outstanding loan balance (see Note H, Debt, of the notes to the consolidated financial statements).

It has also complied with financial covenants, after successfully negotiating and amending portions of the credit agreement with the bank.

Based on its annual financial plan, the Company believes that it will generate sufficient cash flow levels throughout fiscal 2021 in order to maintain compliance with this borrowing base.

2 unchanged sentences

Failure to obtain relief from covenant violations or to obtain alternative financing, if necessary, would have a material adverse impact on the Company.

The Company may not be entitled to forgiveness of its recently received Paycheck Protection Program Loan (“PPP loan”), and its application for the PPP loan could in the future be determined to have been impermissible.

On April 17, 2020 the Company received proceeds of $8,200 from a loan under the PPP of the CARES Act, which it has used to retain current employees, maintain payroll and make lease and utility payments.

The PPP loan matures on April 17, 2022 if not forgiven and bears annual interest at a rate of 1.0%.

The Company has accounted for the full proceeds as a loan, and has not given accounting consideration of the potential forgiveness in its June 30, 2020 financial statements.

Under the terms of the CARES Act, PPP loan recipients must meet certain eligibility criteria.

Due to the size of the PPP loan, it is subject to review by regulators.

The Company can be granted forgiveness for all or a portion of loans granted under the PPP.

Such forgiveness will be determined by the bank, subject to limitations, based on the use of loan proceeds for payment of payroll costs and any payments of mortgage interest, rent, and utilities.

The Company has considered the requirements of the PPP Loan and believes it is within the eligibility threshold.

It has used the loan proceeds in accordance with PPP loan forgiveness requirements.

However, no assurance is provided that the Company will obtain forgiveness for any portion of the PPP Loan.

Further, if despite the Company’s actions and certification that it satisfied all eligibility requirements for the PPP loan, it is later determined that it violated applicable laws or was otherwise ineligible to receive the PPP loan, it may be required to repay the PPP loan in its entirety in a lump sum or be subject to additional penalties, which could result in adverse publicity and damage to the Company’s reputation.

If these events were to transpire, they could have a material adverse effect on the Company’s business, results of operations and financial condition.

The Company has made certain assumptions relating to the acquisition of Veth Propulsion in its forecasts that may prove to be materially inaccurate.

The integration of Veth Propulsion into the Company’s business processes is ongoing.

The integration of Veth Propulsion into the Company’s business processes continues.

While the integration is currently proceeding as planned, the Company has made certain longer term assumptions relating to the forecast level of synergies and associated costs of the acquisition of Veth Propulsion that may be inaccurate based on the information that was available to the Company or as a result of the failure to realize the expected benefits of the acquisition, higher than expected integration costs, unknown liabilities and global economic and business conditions that may adversely affect the combined company following the completion of the acquisition.

The combination of the businesses will require significant management attention, and the Company may incur significant additional integration costs because of integration difficulties and other challenges.

As part of the acquisition of Veth Propulsion, the Company entered into a new credit agreement and significantly increased its indebtedness.

Many of these factors are beyond its control.

Significant delays in its planned capital expenditures may materially and adversely affect the Company’s future revenue prospects.

As a result of the acquisition of Veth Propulsion, the Company recorded a significant amount of goodwill and other intangible assets, but it may never fully realize the full value of these assets.

The accounting for the acquisition, including the purchase price allocation has been completed.

The Company recorded a significant amount of goodwill and identifiable intangible assets, including customer relationships, trademarks and developed technologies.

The Company tests goodwill and intangible assets with indefinite useful lives for possible impairment annually during the fourth quarter of each fiscal year or more frequently if events or changes in circumstances indicate that the asset might be impaired.

Amortizable intangible assets are periodically reviewed for possible impairment whenever there is evidence that events or changes in circumstances indicate that the carrying value may not be recoverable.

Impairment may result from, among other things, (i) a decrease in its expected net earnings;

(ii) adverse equity market conditions;

(iii) a decline in current market multiples;

(iv) a decline in its common stock price;

(v) a significant adverse change in legal factors or business climates;

(vi) an adverse action or assessment by a regulator;

(vii) heightened competition;

(viii) strategic decisions made in response to economic or competitive conditions;

or (ix) a more-likely-than-not expectation that a reporting unit or a significant portion of a reporting unit will be sold or disposed of.

In the event that it determines that events or circumstances exist that indicate that the carrying value of goodwill or identifiable intangible assets may no longer be recoverable, it might have to recognize a non-cash impairment of goodwill or other identifiable intangible assets, which could have a material adverse effect on the Company’s consolidated financial condition or results of operations.

The Company recorded significant non-cash goodwill impairment charge s in fiscal 201 7 and 2016 .

The Company carries goodwill in the amount of $26.0 million as of June 30, 2019, of which $23.4 million is newly-acquired from the Veth Propulsion acquisition this year.

T he Company carries a significant amount of intangible assets, but it may never fully realize the full value of these assets.

The Company recorded signif icant non-cash goodwill impairment charges in the third quarter of fiscal 2020, as well as in prior fiscal years .

As part of the acquisition of Veth Propulsion in July 2018, the Company recorded goodwill of about $24.0 million and intangible assets in the amount of $26.5 million.

In the third quarter of fiscal 2020, due to its assessment of the adverse economic consequences of the COVID-19 outbreak and the negative trends in its markets as explained in Note E, Goodwill and Other Intangibles, the Company recorded significant impairment charges in the amount of $27.6 million, writing off all the goodwill in its books, as well as writing down some intangibles and other assets.

In fiscal 2017 and 2016, when the Company’s markets were significantly adversely affected by the global oil and gas decline, it recorded significant impairment charges related to two of its prior acquisitions.

27 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