FY2021 10-K Document - FINAL 11 15 21 - Flipbook - Page 12
Table of Contents
MARKET CONDITION RISKS
The markets we serve are cyclical and sensitive to domestic and foreign economic conditions and events,
which may cause our operating results to fluctuate. The markets we serve are sensitive to fluctuations in general
business cycles, global pandemics, domestic and foreign governmental tariffs, trade and monetary policies and
economic conditions and events, and are facing varying levels of pressure from the COVID-19 pandemic. The
COVID-19 pandemic drastically reduced air traffic as travel restrictions and social distancing measures were
implemented to help control the spread of the virus. The reduced air traffic applied financial pressures on airlines,
who, in order to preserve cash and liquidity, dramatically reduced flight hours and delayed the purchases of new
aircraft. Although U.S. domestic air travel has increased during 2021, international travel has not yet begun to recover
at the same pace. Given the uncertain length of this pandemic and associated restrictions to travel long distances, the
commercial market may shift away from wide-body aircraft. Furthermore, as companies and employees become
accustomed to working remotely, business travel and the associated flight hours may not reach the pre-pandemic
levels. We believe The Boeing Company, or Boeing, and Airbus may continue to directionally match their wide-body
aircraft production rates with the reduced international air traffic volume, which has lowered their demand for our flight
control systems. Other factors influencing our business, including our defense and our space programs, are largely
contingent on U.S. Department of Defense investment funding, which can fluctuate. Our industrial product demand
depends upon several factors including levels of capital investment, the pace of product innovations and technology
upgrades, changing economic conditions, and the current and forecasted price of oil and natural gas. If the global
pandemic and related economic uncertainties deteriorate, our operations could be negatively impacted through
declines in our sales, profitability and cash flows as a result of lower orders, payment delays and price pressures for
our products.
We depend heavily on government contracts that may not be fully funded or may be terminated, and the
failure to receive funding or the termination of one or more of these contracts could reduce our sales and
increase our costs. Sales to the U.S. Government and its prime contractors and subcontractors represent a
significant portion of our business. In 2021, sales under U.S. Government contracts represented 44% of our total
sales, primarily within Aircraft Controls and Space and Defense Controls. Sales to foreign governments represented
8% of our total sales. Funding for government programs can be structured into a series of individual contracts and
depend on annual congressional appropriations, which are cyclical. At times when there are perceived threats to
national security, U.S. Defense spending can increase; at other times, defense spending can decrease. Future levels
of defense spending beyond 2021 are uncertain and subject to congressional debate and spending prioritization. Any
reduction in future Department of Defense spending levels could adversely impact our sales, operating profit and our
cash flow. We have resources applied to specific government contracts and if any of those contracts are rescheduled
or terminated, we may incur substantial costs redeploying those resources.
The loss of The Boeing Company or Lockheed Martin as a customer or a significant reduction in sales to
either company could adversely impact our operating results. We provide Boeing with controls for both military
and commercial applications, as well as controls for space and defense applications, which totaled 12% of our 2021
sales. We provide Lockheed Martin similar products for military, space and defense applications, which totaled 12% of
our 2021 sales. Sales to Boeing's commercial airplane group are generally made under long-term supply agreements.
Boeing operates in a competitive environment and continues to evaluate the size, scope and cost of their supplier
base. We have seen lower commercial aircraft orders from Boeing, as they match their commercial production rates to
the reduced global air traffic volume due to the COVID-19 pandemic. As a portion of our sales to Boeing and
Lockheed Martin is tied to varying levels of government defense spending, a reduction in future Department of
Defense spending levels could adversely impact our sales, operating profit and cash flow. Furthermore, a loss of
Boeing or Lockheed Martin as a customer could reduce our sales and earnings.
We may not realize the full amounts reflected in our backlog as revenue, which could adversely affect our
future revenue and growth prospects. As of October 2, 2021, our total backlog was $4.8 billion, which represents
confirmed orders we believe will be recognized as revenue. There is no assurance that our customers will purchase
all the orders represented in our backlog. A significant portion of our backlog relates to commercial aircraft programs.
During the ongoing COVID-19 pandemic, we believe Boeing and Airbus will continue to directionally match their widebody aircraft production rates with the reduced international air traffic volume, which has lowered their demand for our
flight control systems and may cause us to never realize the full amounts included in our commercial backlog. Also,
given the uncertain nature of our contracts with the U.S. Government and other foreign governments, in part due to
governments' abilities to modify, curtail or terminate major programs, we may not realize the full revenue value of the
orders included in our backlog. If this occurs, our future revenue and growth prospects may be adversely affected.
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