Item 1A. Risk Factors
Investors should carefully consider the risks, uncertainties, and other factors described below, as well as other disclosures in this report, including Management’s Discussion and Analysis of Financial Condition and Results of Operations, because they could have a material adverse effect on our business, financial condition, operating results, cash flows, and growth prospects. These risks are not the only risks we face. Our business operations could also be affected by additional factors that are not presently known to us or that we currently consider to be immaterial. No priority or significance is intended by, nor should be attached to, the order in which the risk factors appear.
General Business and Industry Risks
The Company is vulnerable to the potential difficulties associated with the increase in the complexity of our business . We have expanded operations and customer offerings over the last several years both organically and through acquisitions. This has caused increased complexities in the business. We believe our future success depends in part on our ability to manage our growth and increased complexities of our business. The following factors could present difficulties to us:
• Managing our distribution channel partners and end-user customers;
• Managing our contract manufacturing and supply chain;
• Manufacturing an increased number of products;
• Developing and managing custom offerings;
• Managing parties to whom we have outsourced portions of our business operations;
• Managing administrative and operational burdens;
• Managing stakeholder interests including customer, investor and employee social responsibility matters;
• Maintaining and improving information technology infrastructure to support growth and to manage cybersecurity threats;
• Managing the integration of acquisitions;
• Managing logistical challenges common to complex, expansive international operations;
• Managing impacts of government shutdowns or disruptions, including any adverse effects due to limited government funding and services, such as import and export clearance, regulatory approvals or visa processing;
• Managing our organizational structure and workforce challenges, and ensuring a cohesive company culture among our employees;
• Managing the cost of labor including any union organizing efforts and our responses to such efforts; and
• Attracting, developing and retaining individuals with the requisite technical expertise to develop new technologies and introduce new offerings.
Geopolitical turmoil, including regional conflicts, terrorism and war could result in market instability, which could negatively impact our business results. We are a global company with international operations, and we sell our offerings in countries throughout the world. The war between Russia and Ukraine, conflicts in the Middle East region, the risk of increased tensions between China and Taiwan, and other instances of geopolitical turmoil could limit our ability to sell our offerings, and could have an adverse impact on our business and results of operations. For instance, on March 5, 2022, we suspended our business operations in Russia. While this suspension has not had, and is not expected to have, a material impact on our operating results, it is not possible to predict the broader or long-term consequences of the war between Russia and Ukraine, which may include further sanctions, embargoes, regional instability, geopolitical shifts and adverse effects on macroeconomic conditions, cybersecurity conditions, currency exchange rates, financial markets and energy markets.
Geopolitical turmoil and uncertainty could have a negative impact on our ability to sell and ship our offerings, collect payments from and support customers in certain regions, and could increase the costs, risks and adverse impacts from supply chain and logistics challenges. In addition, geopolitical turmoil could result in: increased energy costs, which could increase the cost of manufacturing, selling and delivering our offerings; inflation, which has resulted in increases in the cost of manufacturing, reduced customer purchasing power, increased price pressures, and reduced or cancelled orders; increased risk of cybersecurity attacks; and market instability, any of which could adversely impact our financial results.
Inability to consummate future acquisitions at appropriate prices could negatively impact our growth rate and stock price. Our ability to expand revenues, earnings, and cash flow may be affected in part by our ability to identify and successfully acquire and integrate businesses at appropriate prices and to realize anticipated synergies. Acquisitions can be difficult to identify and consummate due to competition among prospective buyers and the need to satisfy applicable closing conditions and obtain antitrust and other regulatory approval on acceptable terms. Macroeconomic factors, such as rising inflation and interest rates, capital market volatility, etc., could negatively influence our future acquisition opportunities.
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The Company could encounter difficulties in any acquisition it undertakes, including unanticipated integration problems and business disruption. Acquisitions could also dilute stockholder value and adversely affect operating results. An acquisition may present business issues which are new to us. The process of integrating any acquired business, technology, product, service, software, or solution into our operations or offerings may result in unforeseen operating difficulties and expenditures. Integration of an acquired company also may consume considerable management time and attention, which could otherwise be available for ongoing operations and the further development of our existing business. These and other factors may result in benefits of an acquisition not being fully realized.
Acquisitions also may involve a number of risks, including, but not limited to:
• Difficulties and uncertainties in retaining the customers, distributors, vendors, or other business relationships from the acquired entities;
• The loss of key employees of acquired entities;
• Disruptions in our business due to difficulties integrating and reorganizing operations, offerings, systems, networks, supply chains, technologies and personnel;
• The ability of acquired entities to fulfill their customers’ obligations;
• The inheritance of known, and the discovery of unknown, issues or liabilities;
• Pre-closing and post-closing acquisition-related earnings charges could adversely impact operating results and cash flows in any given period, and the impact may be substantially different from period to period;
• The failure of acquired entities to meet or exceed expected operating results or cash flows could result in impairment of goodwill or intangible assets acquired;
• The ability to implement internal controls and accounting systems necessary to be compliant with requirements applicable to public companies subject to SEC reporting, which could result in misstated financial reports; and
• Future acquisitions could result in changes such as potentially dilutive issuances of equity securities and the incurrence of debt and contingent liabilities.
On September 30, 2025, the Company acquired Elo Holdings, Inc. (“Elo”) for a purchase price of approximately $1.3 billion, a transaction that is significant in size, representing approximately 9% of the Company’s market capitalization on such date. This acquisition substantially increased the Company’s goodwill and other intangible assets, which could become impaired and result in material non-cash charges if we fail to achieve the expected operating results and cash flows. The Company may not be able to successfully integrate Elo's business operations and personnel and to realize the anticipated growth opportunities and cost synergies, and the integration process may divert management's attention from other business priorities. Failure to successfully manage these and other risks associated with this acquisition, including those outlined above, may have a material adverse effect on our business and operating results.
The Company may not be able to continue to develop offerings to address user needs effectively. To be successful, we must adapt to rapidly changing technological and application needs by continually improving our offerings, as well as introducing new offerings to address user demands.
The Company’s industry is impacted by:
• Evolving industry standards;
• Frequent new offering introductions;
• Evolving distribution channels;
• Increasing demand for customized offerings;
• Changing customer demands; and
• Changing security protocols.
Future success will depend on our ability to effectively and economically adapt in this evolving environment. We could incur substantial costs if we must modify our business to adapt to these changes, and may even be unable to adapt to these changes.
The Company participates in a competitive industry, which may become more competitive. Competitors may be able to respond more quickly to new or emerging technology and changes in customer requirements. The markets that we serve are rapidly evolving and highly competitive. Some of our offerings are in direct competition with similar or alternative offerings provided by our competitors. In addition, we often compete with local competitors that may have a substantial advantage in attracting customers in their countries due to more established branding in that country, greater knowledge with respect to the tastes and preferences of customers residing in that country or their focus on a single market. Because of the potential for consolidation in any market, such competitors may become larger, and increased size could permit them to operate in wider geographic areas. To remain competitive, we believe we must continue to effectively and economically:
• Identify and evolve with customer needs, emerging technologies, and industry trends;
• Monitor disruptive technologies and business models;
• Innovate, develop and timely commercialize new technologies and offerings;
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• Competitively price our offerings;
• Offer superior customer service;
• Provide offerings of high quality and reliability;
• Provide dependable and efficient distribution networks; and
• Attract, retain and develop employees with technical expertise and an understanding of our industry and customer needs.
We cannot assure that we will be able to compete successfully against current or future competitors or technologies. Current or future competitors are likely to continue to develop and introduce new and enhanced offerings that could cause a decline in market acceptance of our offerings, or result in the loss of major customers. Increased competition in our industry may result in price reductions, lower gross profit margins, and loss of market share, and could require increased spending on research and development, sales and marketing, and customer support. In addition, we may not be able to effectively anticipate and react to new entrants in the marketplace competing with our offerings. Further, as we expand into markets beyond our core offerings, we may face well established competitors, placing us at a disadvantage in a new competitive landscape. Some competitors may make strategic acquisitions or establish cooperative relationships with suppliers or companies that produce complementary offerings, which may create additional pressures on our competitive position in the marketplace. An inability to compete successfully could have an adverse effect on our business and results of operations.
Operational Risks
The Company has substantial operations and sells a significant portion of our offerings outside of the U.S. and purchases important components, including final offerings, from suppliers located outside the U.S., many of whom with operations concentrated in China. Shipments to non-U.S. customers are expected to continue to account for a material portion of Net sales. We also expect to continue the use of third-party contract manufacturing services with non-U.S. production and assembly operations for our offerings.
Risks associated with operations, sales, and purchases include:
• Fluctuating foreign currency rates could restrict sales, increase costs of purchasing, and affect collection of receivables outside of the U.S.;
• Volatility in foreign credit markets may affect the financial well-being of our customers and suppliers;
• Violations of anti-corruption laws, including the Foreign Corrupt Practices Act and the U.K. Bribery Act, could result in large fines and penalties;
• Geopolitical turmoil, including popular uprisings, regional conflicts, terrorism and war could limit or prohibit our ability to transfer certain technologies, to sell our offerings, and could result in additional closure of facilities in sanctioned countries (e.g., the ongoing military conflicts between Russia and Ukraine and in the Middle East region, and changes in China-Taiwan and U.S.-China relations);
• Adverse changes in, or uncertainty of, local business laws or practices, including the following:
• Imposition of burdensome trade policies, including tariffs, quotas, taxes, trade barriers, or capital flow restrictions;
• Restrictions on the export or import of technology may reduce or eliminate the ability to sell in, or purchase from, certain markets;
• Political and economic instability and uncertainty may reduce demand for our offerings or put our assets at risk;
• Limited intellectual property protection in certain countries may limit recourse against infringement on our offerings or may cause us to refrain from selling in certain geographic territories;
• Staffing may be difficult including higher than anticipated turnover;
• A government-controlled exchange rate and limitations on the convertibility of currencies, including the Chinese Yuan;
• Transportation delays and customs related delays may affect production and distribution of our offerings;
• Difficulty in effectively managing and overseeing operations that are distant and remote from corporate headquarters; and
• Integration and enforcement of laws vary significantly among jurisdictions and may change over time.
Third parties may allege that the Company or our suppliers infringe upon their intellectual property rights. Periodically, third parties claim that we or our suppliers infringe upon their intellectual property rights. As we continue to expand our business and incorporate new technologies into our offerings, these types of claims may increase. Any of these claims, with or without merit, could result in costly litigation and divert the attention of key personnel. To the extent a violation of a third-party’s patent or other intellectual property right is established, we may be prevented from operating our business as planned and we may be required to pay costly judgments or settlements, enter into costly licensing arrangements or use a non-infringing method to accomplish our business objectives, any of which could have a negative impact on our operating margins. See Item 3, Legal Proceedings for additional information regarding current patent litigation.
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The inability to protect intellectual property could harm our reputation, and our competitive position may be materially damaged. Our intellectual property is valuable and provides us with certain competitive advantages. We use copyrights, patents, trademarks, trade secrets, confidentiality provisions and contracts to protect these proprietary rights. Despite these precautions, third parties may be able to copy or reproduce aspects of our intellectual property and our offerings or, without authorization, to misappropriate and use information we regard as trade secrets. Additionally, the laws of certain countries do not protect intellectual property rights to the same extent as the laws of the U.S., and we might not be able to protect our intellectual property adequately against unauthorized third-party use in certain jurisdictions. Additionally, the intellectual property rights we are able to obtain may not be sufficient to provide us with a competitive advantage and may be successfully challenged, invalidated, circumvented, or infringed. In any infringement litigation that the Company may undertake to protect our intellectual property, any award of monetary damages may be unlikely or very difficult to obtain, and any such award we may receive may not be commercially valuable. Furthermore, efforts to enforce or protect our proprietary rights may be ineffective and could result in the invalidation or narrowing of the scope of our intellectual property and may cause us to incur substantial litigation costs. Because of the substantial amount of discovery required in connection with intellectual property litigation, there is a risk that some of the Company’s confidential information could be compromised by disclosure during this type of litigation.
Certain of our offerings rely on intellectual property, technologies, software, and content developed by, or licensed from, third parties. Certain of our offerings rely on intellectual property developed by, or licensed from, third parties, and we may not be able to maintain our relationships with such third parties or enter into similar relationships in the future on reasonable terms or at all. For example, certain of our devices are dependent on third parties’ continued development and support of operating systems and software application ecosystem infrastructures, and on such third parties’ approval of our implementations of their operating systems and associated applications. If such parties chose to, or became required to, cease continued development or support of such operating systems or to otherwise restrict our access to such operating systems, we would be required to change our strategy for such devices. Our financial results could be negatively impacted by a resulting shift away from the operating systems we currently use and the associated applications ecosystem could be costly and difficult. A strategy shift could increase the burden of development on the Company and potentially create a gap in our portfolio for a period of time, which could competitively disadvantage us.
Emerging issues related to the development and use of artificial intelligence (“AI”) could give rise to legal or regulatory action, damage our reputation or otherwise materially harm our business. Our development and use of AI technology, including generative AI, in our offerings and operations remains in the early phases. While we aim to develop and use AI responsibly and have implemented certain governance programs to attempt to mitigate ethical and legal issues presented by its development and use, we may ultimately be unsuccessful in identifying or resolving such issues before they arise. If we develop AI technologies for our offerings, or use AI technology to support our internal operations, that are controversial because of their actual or perceived impact on human rights, privacy, employment, or other social, economic or political issues, we may experience reputational harm or employee attrition.
AI technologies can be complex, rapidly evolving, and expensive to develop and use. Flaws in AI technologies that we develop might lead to decreased market acceptance with regard to certain of our offerings. AI technologies that we use to support our operations may carry inherent risks related to: data privacy and security, such as the intended or unintended transmission of personal data or of proprietary or sensitive information; copyright, such as the incorporation of third-party copyrighted materials into large language models; data quality and bias, such as the use of inaccurate, incomplete, outdated, or biased information; and challenges implementing and maintaining AI tools, such as the complications arising from integrating such tools with existing systems and practices, and from reliance on third-party AI vendors.
We also face competition from other companies that are developing their own AI technologies. Other companies may develop AI technologies that are similar or superior to our technologies or are more cost-effective to develop and deploy.
Moreover, AI technology is subject to rapidly evolving domestic and international laws and regulations, which could impose significant costs and obligations on the company. For example, in 2024 the European Artificial Intelligence Act (EU) 2024/1689 went into force and established requirements and obligations for developers and deployers of AI systems. Other emerging legal frameworks may pertain to data privacy, data protection, and the ethical use of AI, as well as clarifying intellectual property considerations. We may not always be able to anticipate how to respond to such legal frameworks, and our obligation to comply with them could entail significant costs, negatively affect our business, or limit our ability to develop and use AI technology.
Cybersecurity incidents could disrupt our business operations. We rely on information technology systems throughout the Company to keep financial records, process orders, manage inventory, coordinate shipments to distributors and customers, maintain confidential and proprietary information, and other technical activities, and operate other critical functions such as internet connectivity, network communications, and email. In addition to Company-owned systems, the Company also stores confidential and proprietary information through cloud-based services that are hosted by third parties where we have less influence over security protocols. Like many companies, we continually strive to meet industry information security standards relevant to our business. We periodically perform vulnerability assessments, remediate vulnerabilities, review log/access, perform system maintenance, manage network perimeter protection, implement and manage disaster recovery testing, and
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provide periodic educational sessions to our employees to foster awareness of schemes to access sensitive information. Despite our implementation of a variety of security controls and measures, as well as those of our third-party vendors, there is no assurance that such actions will be sufficient to prevent a cybersecurity incident. Further, as cybersecurity threats continue to rapidly evolve and become increasingly more difficult to detect and defend against, our current security controls and measures may not be effective in preventing cybersecurity incidents and we may not have the capabilities to detect and remediate certain vulnerabilities, which may allow unremediated vulnerabilities to persist over long periods of time. Accordingly, we may fail to remediate such vulnerabilities in time to prevent a cybersecurity incident. A cybersecurity incident could include an attempt to gain unauthorized access to digital systems for purposes of misappropriating assets or sensitive information, corrupting data, or causing operational disruption. Phishing and other types of attempts to obtain unauthorized information or access are often sophisticated and difficult to detect or defeat.
Cybersecurity incidents can take a variety of forms including unintentional events as well as deliberate attacks by individuals, groups and sophisticated organizations, such as state sponsored organizations or nation-state actors. We rely on third-party vendors for certain services, which may require them to access our employee and/or customer data. While our Third-Party Risk Management (TPRM) program is designed to assess and mitigate these risks, a failure of such a vendor's security controls could lead to unauthorized data access or misuse. Any such cybersecurity incident or misuse of our employees’ or customers’ data may lead to a material disruption of our core business systems, the loss or corruption of confidential business information, and/or the disclosure of personal data that in each case could result in an adverse business impact as well as possible damage to our brand. This could also lead to a public disclosure or theft of private intellectual property and a possible loss of customer confidence. In addition, any failure on the part of one of our contract manufacturers, distributors or resellers to maintain the security of its systems or data, including via the penetration of their network security or ransomware, could result in business disruption to us and damage to our reputation.
While we have experienced and expect to continue to experience cybersecurity threats and incidents, there have been no material incidents incurred to-date at the Company. However, new technologies and systems being installed with the intent of advancing capabilities and processing efficiencies may introduce new vulnerabilities which could outpace the Company’s ability to properly identify, assess and address such vulnerabilities. Further, new business models that rely heavily on global digitization, use of the cloud, big data, mobile and social media could expose the Company to even more cybersecurity threats and incidents. If our core business operations, or that of one of our third-party vendors, were to be breached, this could affect the confidentiality, integrity, and availability of our systems and data. Any failure on our part, or by our third-party vendors, to maintain the security of data we are required to protect, including via the penetration of our network security and the misappropriation of confidential and proprietary information, could result in: business disruption; damage to our reputation; financial obligations to third parties; fines, penalties, regulatory proceedings; private litigation with potentially large costs; deterioration in our suppliers’, distributors’, and customers’ confidence in us; as well as other competitive disadvantages. Such failures to maintain the security of data could have a material adverse effect on our business, financial condition, and results of operations. Although we maintain insurance related to cybersecurity risks, there can be no assurance that our insurance will cover the particular cybersecurity incident at issue or that such coverage will be sufficient. While we continue to perform security due diligence, there is always the possibility of a significant breach.
Cybersecurity incidents affecting our systems or our customers’ systems may negatively impact our business. Our offerings are used in customer environments and have the possibility of being subject to a cybersecurity incident. Our customers may use certain of our products, solutions and services to transmit and/or process personal data and other sensitive information, and a cybersecurity incident could result in disclosure of confidential information or disrupt the availability of the customer’s data and systems. Further, our customers may fail to adopt adequate security controls and measures, or may fail to timely update products and solutions deployed in their environment to install or enable security patches, which may result in cybersecurity vulnerabilities or incidents. The market perception of the effectiveness of our offerings and our reputation could also be harmed as a result of any actual or perceived cybersecurity breach that occurs in our network or in the network of a customer using our offerings, regardless of whether the breach is attributable to our offerings, the systems of other vendors, or to actions of malicious parties. It is possible that such a breach, or a perceived breach, could result in: delays in, or loss of market acceptance of, our products, solutions or services; diversion of our resources; injury to our reputation; theft or misuse of our intellectual property or other assets; increased service and warranty expenses; and payment of damages. To date, we have had no material incidents related to the security of our offerings. Additionally, strategic customers may negotiate specific controls and we may incur additional costs to comply with such customer-specific controls.
Defects, errors, or bugs in our offerings, or in third-party components or software included in our offerings, could result in liability, reputational harm, and significant costs. Our products may contain actual or apparent design or manufacturing defects, not only in our own designed products but also in components of our products provided by third-party suppliers. Our software, third-party software included in our offerings, or servers and infrastructure upon which our offerings rely may contain undetected defects, errors, or bugs. We have been and may continue to be subject to product liability claims, including for property or economic damages or personal injury, where damages arose from our products as a result of actual or apparent design or manufacturing defects. Although we have not suffered significant harm from any defects, errors, or bugs in our offerings, we may discover significant defects, errors, or bugs in the future that we may not be able to correct or to correct in a timely manner. We seek to limit these risks through insurance protection, product design, manufacturing quality control
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processes, product testing, and contractual indemnification from suppliers. However, given the growing size of our installed base and the number of applications in which our offerings are used, any future actual or alleged design or manufacturing defects, errors, or bugs may result in: product recalls; delays in, or loss of market acceptance of, our offerings; inability to deliver our offerings; diversion of resources; injury to our reputation; increased service, warranty, and legal costs; and payment of damages. Any of these events may have a material adverse effect on our financial results.
Our business success depends on our ability to attract, retain, develop and motivate key personnel. Our business and results of operations could be adversely affected by increased competition for highly skilled employees, higher employee turnover, or increased compensation and benefit costs. The future success of the Company is substantially dependent on the continued services and contributions of key personnel, including senior management and other highly skilled employees. The experience, industry knowledge, and skill sets of our employees materially benefit our operations and performance, and the ability to attract, retain, develop, and motivate highly skilled employees is important to our long-term success. Skilled employees in our industry are in high demand and competition for their experience and skill sets is intense. The incentives and benefits we have available to attract, retain, and motivate employees may become less effective as employees seek new or different opportunities based on factors such as compensation, benefits, mobility, and flexibility that are different from what we offer. Although we strive to be an employer of choice, we may not be able to continue to successfully attract, retain, develop, or motivate key personnel in the future. Any disruption in the services of key personnel, including those resulting from succession planning challenges, may have a material adverse effect on our business and results of operations.
A natural or man-made disaster, or a widespread public health issue, may have a material impact on our global operations, our customers and our vendors, which could adversely impact our business results and financial condition. Natural and man-made disasters, and widespread public health issues including pandemics, may occur in the future and the Company is not able to predict to what extent or duration any such disruptions will have on our ability to maintain ordinary business operations.
The Company’s facilities and operations are subject to catastrophic loss due to fire, flood, civil unrest, terrorism, or other natural or man-made disasters. If any of our facilities were to experience a catastrophic loss, it could disrupt our operations, delay production, shipments and revenue, and result in large expenses to repair or replace the facility. A widespread public health issue could lead to global supply chain challenges, which could adversely impact our ability to procure certain components and could impact our ability to manufacture products and cause delays in delivery of our offerings to our customers. Health orders and safety protocols could further impact our on-site operations and our ability to manufacture, ship or deliver to customers. For example, in the event of another global pandemic like COVID-19, periodic spikes in widespread infection rates, and local outbreaks on our sites or our supplier, customer or vendor sites in spite of safety measures or vaccinations, could cause disruptions to our operations or those of our suppliers, customers, or vendors.
Following a disruption to our business, the Company could require substantial recovery time, experience significant expenditures to resume operations, and lose significant sales. If such a disruption were to occur, we could breach agreements, our reputation could be harmed, and our business and operating results could be adversely affected. The consequences of a natural and man-made disaster, or a widespread public health issue, could have a material impact on our global operations, our employees, our customers and our vendors, which could adversely impact our business results, operations, revenue, growth and overall financial condition.
Large, multi-year, and fixed-price contracts may expose the Company to risks that could lead to losses and adversely affect our business. We enter into large, multi-year contracts with our customers, some of which are on a fixed-price basis, that could subject us to financial risks if we fail to properly estimate our costs. Because many of these contracts involve new technologies and applications, require us to engage subcontractors, and span multiple years, our initial cost estimates are subject to unforeseen events. These events, which include technological difficulties, fluctuations in the price of raw materials, challenges with our subcontractors or suppliers, and significant increases in inflation, may cause cost overruns and result in such contracts becoming less favorable or even unprofitable. In addition to risks related to cost estimation, these contracts may expose the Company to other challenges including technological risks, when contracts involve new technology, and cybersecurity risks, especially in offerings or managed services contracts that process personal data. Furthermore, the recovery of front-loaded costs incurred on long-term managed services and software-based offerings contracts is dependent on the continued viability of our customers. The insolvency of a customer could result in collectability risk of outstanding trade receivables, and/or a loss of anticipated future revenue attributable to that program or offering. Such contracts’ financial, technological, and cybersecurity risks could have an adverse impact on the Company’s profitability and financial results.
We utilize the services of subcontractors to perform under many of our contracts, and the inability of our subcontractors to perform in a timely and compliant manner could negatively impact our performance obligations as the prime contractor. We engage subcontractors on many of our contracts and our use of subcontractors has and may continue to increase as we expand our global business. Our subcontractors may further subcontract performance and may supply third-party products and software. We may have disputes with our subcontractors, including disputes regarding the quality and timeliness of work performed by a subcontractor and the functionality, warranty and indemnities of products, software, and services supplied by a subcontractor. We are not always successful in passing along customer requirements to our subcontractors, and thus in some
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cases may be required to absorb contractual risks from our customers without corresponding back-to-back coverage from our subcontractors. Our subcontractors may not be able to acquire or maintain the quality of the materials, components, subsystems, and services they supply, or secure preferred warranty and indemnity coverage from their suppliers, which might result in greater product returns, service problems, warranty claims and costs, and regulatory compliance issues and could harm our business, financial condition, and results of operations.
We have outsourced portions of certain business operations, such as repair, distribution, engineering services, and information technology services and may outsource additional business operations, which limits our control over these business operations and exposes us to additional risk as a result of the actions of our outsource partners. We are not able to directly control certain business operations that we outsource. Our outsource partners may not prioritize our business over that of their other customers and they may not meet our desired level of service, cost reductions, or other metrics. As many of our outsource partners operate outside of the U.S., our outsourcing activity exposes us to information security vulnerabilities and increases our global risks. In addition, we are exposed to the financial viability of our outsource partners. Once a business activity is outsourced, we may be contractually prohibited from, or may not practically be able to, bring such activity back within the Company or move it to another outsource partner. Further, from time-to-time we have, and in certain instances will continue to, transition our outsourced operations to new outsource partners and/or to different geographies. Such transition activities between new or existing outsource partners or across different geographies, as well as insourcing activities, could result in additional cost, time and management attention in order to effectively manage the transition, which could negatively impact our financial results.
We rely on our channel partner network to sell many of our offerings, and failure of channel partners to effectively bring our offerings to market may negatively affect our results of operations and financial results. In addition to our own sales force, we provide our offerings through our global channel partner network of distributors, VARs, ISVs, direct marketers, and OEMs who may also market other offerings that compete with ours. Failure of one or more of these channel partners to effectively promote our offerings could affect our ability to bring offerings to market and have a negative impact on our results of operations. Changes to our channel program may cause some of our channel partners to exit the program due to modifications to the program structure, which may reduce our ability to bring offerings to market and could have a negative impact on our results of operations.
Our channel partners could also face additional costs or credit concerns resulting from an uncertain economic environment that would cause such parties to reduce purchases of our offerings, thereby causing a negative impact on our financial results. Some of our channel partners are smaller and more likely to be impacted by a significant decrease in available credit that could result from a weakness in the financial markets. If credit pressures or other financial difficulties result in insolvency for channel partners and we are unable to successfully transition end-customers to purchase our offerings from other channel partners or from us directly, it may cause, and in some cases has caused, a negative impact on our financial results.
Final assembly of certain of our hardware products is performed by third party electronics manufacturers, including EMSs and JDMs. We may be dependent on such electronics manufacturers as a sole-source of supply for the manufacture of such products. A failure by such electronics manufacturers to provide manufacturing services to us as we require, or any disruption in such manufacturing services up to and including a catastrophic shut-down, may adversely affect our business results. Because we rely on these electronics manufacturers to manufacture certain of our hardware products, we may incur increased business continuity risks. We are not able to exercise direct control over the assembly or related operations of certain of our products. If these electronics manufacturers experience business difficulties or fail to meet our manufacturing needs, then we may be unable to satisfy customer demand, lose sales, and be unable to maintain customer relationships. Longer production lead times may result in shortages of certain products and inadequate inventories during periods of unanticipated higher demand. Without such electronics manufacturers continuing to manufacture our products, we may have no other means of final assembly of certain of our products until we are able to secure the manufacturing capability at another facility or develop an alternative manufacturing facility. This transition could be costly and time consuming. We have taken actions to diversify, and may take additional actions to diversify in the future, our product sourcing footprint. Such actions have resulted and may again result in additional costs.
Failure of our suppliers, subcontractors, outsource partners, channel partners, and electronics manufacturers to use acceptable legal or ethical business practices could negatively impact our business. We require our suppliers, subcontractors, outsource partners, channel partners, and electronics manufacturers to operate in compliance with applicable laws, rules, and regulations, including those regarding working conditions, employment practices, environmental compliance, anti-corruption, and trademark and copyright licensing. However, we do not control these parties’ labor and other business practices. If one of these parties violates labor or other laws, or implements labor or other business practices that are regarded as unethical, negligent, or reckless, operations could be disrupted, the shipment of finished products to us could be interrupted, orders could be canceled, relationships could be terminated, and our reputation could be damaged. If one of our suppliers or subcontractors fails to procure necessary license rights to trademarks, copyrights, or patents, legal action could be taken against the Company that could impact the salability of our offerings, and expose us to financial obligations to a third party. In some cases, our outsource partners’ actions may result in our being found to be in violation of laws or regulations, such as import or export regulations. Any of these events could have a negative impact on our sales and results of operations.
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Our future operating results depend on our ability to purchase a sufficient amount of materials, parts, and components, as well as services and software to meet the demands of customers. We source some of our components from sole-source suppliers. Any disruption to our suppliers or significant increase in the price of supplies, inclusive of transportation costs, or change in customer demand could have a negative impact on our results of operations. Our ability to meet customers’ demands depends, in part, on our ability to obtain in a timely manner an adequate delivery of quality materials, parts, and components, as well as services and software from our suppliers, and our ability to deliver offerings to our customers. In addition, certain supplies are available only from a single source or limited sources and we may not be able to diversify sources in a timely manner. If demand for our offerings increases from our current expectations or if suppliers are unable or unwilling to meet our demand for other reasons, including as a result of natural disasters, public health issues, severe weather conditions, or financial issues, we could experience an interruption in supplies or a significant increase in the price of supplies that could have a negative impact on our business. We have experienced shortages in the past that have negatively impacted our results of operations and may experience such shortages in the future. At times we have and may continue to execute multi-year purchase commitments with suppliers that contain minimum spend thresholds, which we are obligated to fulfill even if customer demand declines, and may require that we purchase inventory that exceeds our forecasted demand. In addition, volatility in customer demand, offering availability, and transport costs, may result in increased operating input costs, elevated inventory levels, as well as inventory-related losses. Also, credit constraints at our suppliers could cause us to accelerate payment of accounts payable by us, impacting our cash flow.
In addition, our current contracts with certain suppliers may be canceled or not extended by such suppliers and, therefore, not afford us with sufficient protection against a reduction or interruption in supplies. Moreover, in the event any of these suppliers breach their contracts with us, our legal remedies associated with such a breach may be insufficient to compensate us for any damages we may suffer.
Our order backlog may not be a reliable indicator of our future operating results. Our order backlog may be fulfilled several quarters following receipt of a purchase order, either due to customer schedules or delays caused by supply chain constraints, which may negatively impact our ability to convert our order backlog into revenue.
If we experience a significant disruption in our IT systems, our business, reputation, and operating results could be adversely affected. Our business processes depend on our IT systems, and the IT systems and processes of third parties to provide offerings, maintain financial records, retain sensitive data such as intellectual property, proprietary business information, and data related to customers, suppliers, and business partners, process orders, manage inventory, process shipments to customers and operate other critical functions. Disruptions to our IT systems from system failures, shutdowns, implementation of new operational systems or software or upgrades to existing systems and software, and other events, including disruptions at our cloud computing, server, systems, and other third-party IT service providers, could interfere with our operations, interrupt order processing and shipments, damage customer and business partner relationships, and negatively impact our reputation. Any such event could have a material adverse effect on our business, reputation, operating results and financial condition, and no assurance can be given that our efforts to reduce the risk of such events will be successful.
Financial and Market Risks
The impact of trade policy changes in the United States and corresponding actions by other countries in which the Company does business could adversely affect our financial performance. The Company currently imports a significant percentage of our offerings into the U.S., and international trade disputes and increased tariffs between the U.S. and other countries in which the Company does business, including China, could negatively impact the Company’s financial performance. Certain of our suppliers and other entities with whom we do business have operations concentrated in China and other non-U.S. countries. Their ability to supply materials to us, purchase our offerings, or otherwise work with us is affected by their ability to do business in such non-U.S. countries. If the U.S.’s relationship with other countries results in additional trade disputes, trade protection measures, retaliatory actions, tariffs and increased barriers, policies that favor domestic industries, or increased import or export licensing requirements or restrictions, then our operations may be adversely affected due to such changes in the economic and political ecosystem in which our suppliers and other entities with whom we do business operate. Although the Company has taken actions to diversify its product sourcing footprint, these efforts may not be sufficient to mitigate negative impacts on the Company’s financial performance resulting from certain changes to trade policies.
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Our exposure to foreign exchange rate fluctuations on cross-border transactions and the translation of local currency results into U.S. dollars could negatively impact our results of operations. We provide our offerings globally, and higher volatility and fluctuations in foreign exchange rates could have a significant impact on our reported consolidated results of operations, financial condition and cash flows, which are presented in U.S. dollars. Accordingly, significant changes in foreign exchange rates, particularly the Euro, British Pound Sterling and Czech Koruna, has had in the past, and could continue to, cause fluctuations in the reported results of our businesses’ operations that could negatively affect our results of operations. Additionally, the strengthening of certain currencies such as the U.S. dollar potentially exposes us to competitive threats from lower-cost producers in other countries. Further, our sales are translated into U.S. dollars for reporting purposes, and the strengthening of the U.S. dollar has in the past, and could continue to, result in unfavorable translation effects as the results of non-U.S. locations are translated into U.S. dollars. From time to time, we may use derivative financial instruments, including foreign currency exchange contracts, to manage foreign exchange rate risks. However, our hedging strategies may be ineffective, may not offset any or more than a portion of the adverse financial impact resulting from foreign exchange rate variations, or may result in losses.
Taxing authority challenges may lead to tax payments exceeding current reserves. We are subject to, and may become subject to, ongoing tax examinations in various jurisdictions. As a result, we may record incremental tax expense based on expected outcomes of such matters. In addition, we may adjust previously reported tax reserves based on expected results of these examinations. Such adjustments could result in an increase or decrease to the Company’s effective tax rate and cash flows. Future changes in tax law in various jurisdictions around the world and income tax holidays could have a material impact on our effective tax rate, foreign rate differential, future income tax expense, and cash flows.
Forecasting our estimated annual effective tax rate is complex and subject to uncertainty, and there may be material differences between our forecasted and actual tax rates. Forecasts of our income tax position and effective tax rate are complex, subject to uncertainty and periodic updates because our income tax position for each year combines the effects of a mix of profits earned and losses incurred by us in various tax jurisdictions with a broad range of income tax rates, as well as changes in the valuation of deferred tax assets and liabilities, the impact of various accounting rules and changes to these rules, the results of examinations by various tax authorities, and the impact of any acquisition, business combination, disposition or other reorganization, or financing transaction.
As a multinational corporation, we conduct our business in many countries and are subject to taxation in many jurisdictions. The taxation of our business is subject to the application of multiple, and sometimes conflicting, tax laws and regulations, as well as multinational tax conventions. Many countries have recently adopted, or are considering the adoption of, revisions to their respective tax laws based on the on-going reports issued by the Organization for Economic Co-operation and Development (“OECD”)/G20 Base Erosion and Profit Shifting (“BEPS”) Project, which could materially impact our tax liability due to our organizational structure and significant operations outside of the U.S. Our effective tax rate is highly dependent upon the geographic distribution of our worldwide earnings or losses resulting from our structure and operating model, the tax regulations and tax holidays in each geographic region, and the availability of tax credits and carry-forwards. The application of tax laws and regulations is subject to legal and factual interpretation, judgment, and uncertainty. Tax laws themselves are subject to change as a result of changes in fiscal policy, changes in legislation, and the evolution of regulations and court rulings. Consequently, taxing authorities may impose tax assessments or judgments against us that could materially impact our tax liability and/or our effective income tax rate.
Economic conditions and financial market disruptions may adversely affect our business and results of operations . Adverse economic conditions or reduced and/or changes in the timing and amount of information technology spending may negatively impact our business. General disruption of financial markets and a related general economic downturn or uncertainty could adversely affect our business and financial condition through a reduction in demand for our offerings by our customers. If a downturn were severe enough, it could require further impairment testing and write-downs of goodwill and other intangible assets. Cost reduction actions have been and may be necessary in the future resulting in restructuring charges as well as changes in staffing levels which may strain our resources. If there is a downturn in the markets in which our customers operate, orders from customers in such markets may decline, be delayed or be cancelled. A tightening of financial credit or an increase in the cost of borrowing could adversely affect our customers, suppliers, outsourced manufacturers, and channel partners (e.g., distributors and resellers) from obtaining adequate credit for the financing of significant purchases. An economic downturn could also result in a decrease in or cancellation of orders for our offerings; negatively impacting the ability to collect accounts receivable on a timely basis; result in additional reserves for uncollectible accounts receivable; and require additional reserves for inventory obsolescence.
It is important that we are able to obtain many different types of insurance, and if we are not able to obtain insurance or exhaust our coverage, we may be forced to retain the risk. We have many types of insurance coverage and are also self-insured for some risks and obligations. Our third-party insurance coverage varies from time to time in both type and amount depending on availability, cost and our decisions with respect to risk retention. Economic conditions and uncertainties in global markets may adversely affect the cost and other terms upon which we are able to obtain third-party insurance. In addition, our third-party insurance policies are subject to deductibles, policy limits, and exclusions that result in our retention of a level of risk on a self-insurance basis. Further, certain types of coverages may be difficult or expensive to obtain. We self-insure against certain
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business risks and expenses where we believe we can adequately self-insure against the anticipated exposure and risk or where insurance is either not deemed cost-effective or is not available. If the amount of our third-party insurance coverage is not available or adequate to cover all claims or liabilities, or to the extent we have elected to self-insure, we may be forced to bear substantial costs from an accident, incident, or claim. Losses not covered by insurance could be substantial and unpredictable and could adversely affect our financial condition and results of operations.
Our indebtedness could adversely affect our business. Our indebtedness could have important consequences, including the following:
• We may experience difficulty in satisfying our obligations with respect to our existing indebtedness or future indebtedness;
• Our ability to obtain additional financing for working capital, capital expenditures, acquisitions, or general corporate purposes may be impaired;
• We may be unable to create liens on certain assets to secure debt;
• Our subsidiary guarantors may not have sufficient assets or cash flow to allow them to guarantee new debt and existing debt;
• We may be at a competitive disadvantage with reduced flexibility in planning for, or responding to, changing conditions in the industry, including increased competition; and
• We may be more vulnerable to economic downturns and adverse developments in the business.
Any or all of the above events or factors could have an adverse effect on our results of operations and financial condition. The risks that we face based on our outstanding indebtedness may intensify if we incur additional indebtedness or financing obligations in the future.
We expect to fund our expenses and to pay the principal and interest on our indebtedness from cash flow from operations. Our ability to meet our expenses and to pay principal and interest on our indebtedness when due depends on our future performance and ability to collect cash from our customers, which will be affected by financial, business, economic, and other factors. We will not be able to control many of these factors, such as economic conditions in the markets where we operate and pressure from competitors.
If our business does not generate sufficient cash flows from operations or if future borrowings are not available to us in an amount sufficient to enable us to pay our indebtedness or to fund our other liquidity needs, we may need to refinance all or a portion of our indebtedness on or before the maturity thereof, sell assets, reduce or delay capital investments, or seek to raise additional capital, any of which could have a material adverse effect on our operations. In addition, we may not be able to effect any of these actions, if necessary, on commercially reasonable terms or at all. Our ability to restructure or refinance our indebtedness will depend on the condition of the capital and debt markets and our financial condition at such time. Any refinancing of our indebtedness could be at higher interest rates and may require us to comply with more onerous covenants, which could further restrict business operations. The terms of anticipated or future debt instruments may limit or prevent us from taking any of these actions.
If there were an event of default under any of the agreements relating to our outstanding indebtedness, the holders of the defaulted debt could cause all amounts outstanding with respect to that debt to be due and payable immediately. We cannot assure you that our assets or cash flow would be sufficient to fully repay borrowings under our outstanding debt instruments if accelerated upon an event of default. Further, if we are unable to repay, refinance or restructure our indebtedness under our secured debt, the holders of such debt could proceed against the collateral securing that indebtedness. In addition, any event of default or declaration of acceleration under one debt instrument could also result in an event of default under one or more of our other debt instruments. As a result, any default by us on our indebtedness could have a material adverse effect on our business and could impact our ability to satisfy the obligations in respect of our indebtedness. In addition, an event of default would likely result in a reduction of our credit rating, which could harm our ability to access additional capital on commercially reasonable terms or at all.
Our use of derivative financial instruments to reduce interest rate risk may result in added volatility in our operating results . We do not hold or issue derivative financial instruments for trading purposes. However, we have utilized, and in the future may utilize, derivative financial instruments to reduce interest rate risk associated with our indebtedness. From time to time, we have entered into forward interest rate swap agreements to manage variable interest rate risk and effectively convert a portion of our indebtedness into a fixed rate loan. Under generally accepted accounting principles, changes in the fair values of such swap contracts would be reflected in our Consolidated Statements of Operations as a component of “Interest expense, net” if not hedged. Accordingly, the associated impact on our quarterly operating results would be directly related to changes in prevailing interest rates, and we would have a non-cash gain on such swaps if interest rates increase and vice versa in the event of an interest rates decrease. Consequently, if we enter into forward interest rate swap agreements to manage variable interest rate risk, such swaps could introduce additional volatility to our operating results.
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Legal and Regulatory Risks
We could be adversely impacted by changes in accounting standards and subjective assumptions, estimates, and judgments by management related to complex accounting matters. Generally accepted accounting principles and related accounting pronouncements, implementation guidelines, and interpretations with regard to a wide range of matters that are relevant to our businesses, including, but not limited to, revenue recognition, business acquisition purchase price allocations, impairment of goodwill and other intangible assets, inventories, tax matters, and litigation and other contingent liabilities are highly complex and involve many subjective assumptions, estimates, and judgments. Changes in these rules or their interpretation or changes in underlying assumptions, estimates, or judgments could significantly change our reported or expected financial performance or financial condition. New accounting guidance may also require systems and other changes that could increase our operating costs and/or change our financial statements.
Laws and regulations relating to the handling of personal data may result in increased costs, legal claims, or fines against the Company. As part of our operations, the Company collects, uses, stores, and transfers personal data of third parties, employees and limited customer data in and across various jurisdictions. Laws and regulations relating to the handling of such personal data may result in increased costs, legal claims, or fines against the Company. Existing laws and emerging regulations may be inconsistent across jurisdictions and are subject to evolving and differing (sometimes conflicting) interpretations. Government officials, regulators and privacy advocates are increasingly scrutinizing how companies collect, process, use, store, share and transmit personal data, which may result in new interpretations of existing laws that impact our business. Compliance with these laws may require us to, among other things, make changes in services, business practices, or internal systems that may result in increased costs, lower revenue, reduced efficiency, or greater difficulty in competing with foreign-based firms. Further, there is no assurance that we will be able to meet additional requirements that may be imposed on the transfer of personal data without incurring expenses. We may experience reluctance or refusal by customers to purchase or continue to use our offerings due to concerns regarding their data protection obligations. Our actual or perceived failure to comply with applicable laws and regulations or other obligations to which we may be subject, or to protect personal data from unauthorized access, use, or other processing, may subject the Company to enforcement actions and regulatory investigations, claims, legal proceedings or other actions, reputational harm and loss of goodwill, any of which could have a material adverse effect on our operations, financial performance, and business.
The unfavorable outcome of any pending or future litigation, arbitration, or administrative action could have a material adverse effect on our financial condition or results of operations. From time to time we are a party to litigation, arbitration, or administrative actions. Our financial results and reputation could be negatively impacted by unfavorable outcomes to any pending or future litigation or administrative actions, including those related to the Foreign Corrupt Practices Act, the U.K. Bribery Act, or other anti-corruption laws. There can be no assurances as to the favorable outcome of any litigation or administrative proceedings. In addition, it can be very costly to defend litigation or administrative proceedings and these costs could negatively impact our financial results.
We are subject to a wide range of product regulatory and safety, consumer, worker safety, and environmental laws. Our operations and the products we manufacture and/or sell are subject to a wide range of product regulatory and safety, consumer, worker safety, and environmental laws and regulations. Compliance with such existing or future laws and regulations could subject us to future costs or liabilities, impact our production capabilities, constrict our ability to sell, expand or acquire facilities, restrict what offerings we can provide, and generally impact our financial performance. Some of these laws are environmental and relate to the use, disposal, remediation, emission and discharge of, and exposure to hazardous substances. These laws often impose liability and can require parties to fund remedial studies or actions regardless of fault. We continue to incur disposal costs and have ongoing remediation obligations. Environmental laws have tended to become more stringent over time and any new obligations under these laws could have a negative impact on our operations or financial performance.
Laws focused on the energy efficiency of electronic products and accessories; recycling of both electronic products and packaging; reducing or eliminating certain hazardous substances in electronic products and accessories; and the transportation of batteries continue to expand significantly. Laws pertaining to accessibility features of electronic products, standardization of connectors and power supplies, the transportation of lithium-ion batteries, and other aspects are also proliferating. There are also demanding and rapidly changing laws around the globe related to issues such as product safety, radio interference, radio frequency radiation exposure, medical-related functionality, and consumer and social mandates pertaining to use of wireless or electronic equipment. These laws, and changes to these laws, could have a substantial impact on whether we can provide certain offerings, and on what capabilities and characteristics our offerings can or must include.
These laws impact our products and negatively affect our ability to manufacture and sell products competitively. We expect these trends to continue. In addition, we anticipate that we will see increased demand to meet voluntary criteria related to reduction or elimination of certain constituents from our offerings, increasing energy efficiency, and providing additional accessibility.
Increased public awareness and worldwide focus on environmental and climate change issues has led to legislative and regulatory efforts to limit greenhouse gas emissions, and may result in more international, federal or regional requirements or
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industry standards to reduce or mitigate global warming. Environmental, Social, and Governance (“ESG”) requirements and other increased regulation of climate change concerns could subject us to additional costs and restrictions and require us to make certain changes to our manufacturing practices and/or product designs, which could negatively impact our business, results of operations, financial condition and competitive position.
From time to time, we create and publish voluntary disclosures regarding ESG matters. Identification, assessment, and disclosure of such matters is complex. Many of the statements in such voluntary disclosures are based on our expectations and assumptions, which may require substantial discretion and forecasts about costs and future circumstances. However, if our ESG practices or business portfolio do not meet evolving investor or other stakeholder expectations and standards, then our reputation, our ability to attract or retain employees and our attractiveness as an investment, supplier, business partner, or acquiror could be negatively impacted. In addition, certain ESG matters are becoming less “voluntary” as regulators propose and adopt regulations regarding ESG matters, including, but not limited to climate change-related matters. As we are subject to increased regulatory requirements, we could experience increased compliance-related costs and risks, including potential enforcement and litigation. Such ESG matters may also impact our suppliers and customers, which may compound or cause new impacts on our business, financial condition or results of operations.
We are dependent on the availability and use of certain bands within the radio frequency spectrum; our offerings may be subject to harmful interference from new or modified spectrum uses. The global demand for wireless communications has grown exponentially, and spurred competition for access among various networks and users. In response, regulators in various jurisdictions are reassessing spectrum allocations among users and considering whether to change the allocation of, or require sharing of, certain spectrum bands. Certain of our offerings are dependent on the use of licensed and unlicensed radio frequency spectrum for wireless voice, data, and video communications. The utility and reliability of such offerings may be adversely affected by the reallocation of radio frequency bands, other modifications of the permitted uses of relevant frequency bands, and interference from other services and equipment operating either in-band or in adjacent frequency bands, which may cause adverse impacts on our offerings and reduce demand for such offerings. Further, regulatory changes may necessitate modifications to certain of our offerings so they can continue to operate as expected.
