August 10, 2022
Staff Comments: Inflation & Supply Chain Pressures
In the course of his recent blog about Staff comments on the war in Ukraine, Dave also noted that the Staff has been seeking additional disclosure on inflation & supply chain issues. Yesterday, Olga Usvyatsky tipped us off via Twitter that the SEC released a number of comment letters addressing those topics. Most of the comments focused on disclosure in the Risk Factors & MD&A sections of the filings. Here are excerpts from some of those letters that should give you a flavor of the general nature of the Staff’s comments:
“We note your risk factor indicating that inflation could affect your margin performance and financial results. Please update this risk factor if recent inflationary pressures have materially impacted your operations. In this regard, identify the types of inflationary pressures you are facing and how your business has been affected.”
“We note your discussion here and on page 26 of your April 3, 2022 Form 10-Q related to inflation that it could affect your prices, demand for your products, your profit margins. We further note your disclosure that your test and industrial automation businesses will be impacted by supply constraints, which are in turn impacted by inflation. Please update this risk factor in future filings if recent inflationary pressures have materially impacted your operations. In this regard, identify the types of inflationary pressures you are facing and how your business has been affected.”
“We note your risk factor here and throughout the filing related to supply constraints. We further note from your Form 8-K dated April 27, 2022 that you continue to encounter material constraints in most product areas and that you provide wider than normal Q2 guidance range reflects those supply challenges. Specify in future filings and in more detail whether these challenges have materially impacted your results of operations or capital resources and quantify, to the extent possible, how your sales, profits, and/or liquidity have been impacted.”
“Please consider including disclosures in future filings to discuss known trends or uncertainties resulting from mitigation efforts undertaken, if any, from your supply chain disruptions. Explain whether any mitigation efforts introduce new material risks, including those related to product quality, reliability, or regulatory approval of products.”
“Please discuss in future filings whether supply chain disruptions or inflation have materially affected your outlook or business goals. Specify whether these challenges have materially impacted your results of operations or capital resources and quantify, to the extent possible, how your sales, profits, and/or liquidity have been impacted. Revise also to discuss in future filings any known trends or uncertainties resulting from mitigation efforts undertaken, if any. Explain whether any mitigation efforts introduce new material risks, including those related to product quality, reliability, or regulatory approval of products.”
A few common themes emerge from these comments. First, the Staff is focusing the need to keep risk factor disclosure up to date, and companies would be well advised to consider whether updates are necessary in order to avoid falling into the hypothetical risk factor trap. Second, the Staff wants more detail in disclosures about how a company’s business is being affected by inflation or supply chain disruptions. Finally, MD&A disclosure about these issues needs to address not only their current impact, but also any “known trends or uncertainties” that may result from them or from the company’s mitigation efforts.
– John Jenkins