FY2021 10-K Document - FINAL 11 15 21 - Flipbook - Page 14
Table of Contents
FINANCIAL RISKS
We make estimates in accounting for over-time contracts, and changes in these estimates may have
significant impacts on our earnings. We have over-time contracts with some of our customers, predominantly in
our aerospace and defense markets. We recognize revenue using an input method that uses costs incurred to date to
measure progress toward completion ("cost-to-cost"). Changes in these required estimates could have a material
adverse effect on sales and profits. Any adjustments are recognized in the period in which the change becomes
known using the cumulative catch-up method of accounting. For contracts with anticipated losses at completion, we
establish a provision for the entire amount of the estimated remaining loss and charge it against income in the period
in which the loss becomes known and can be reasonably estimated. Amounts representing performance incentives,
penalties, contract claims or impacts of scope change negotiations are considered in estimating revenues, costs and
profits when they can be reliably estimated and realization is considered probable. Due to the substantial judgments
involved with this process, our actual results could differ materially or could be settled unfavorably from our estimates.
See Note 2, Revenue from Contracts with Customers in Part II of this Form 10-K.
We enter into fixed-price contracts, which could subject us to losses if we have cost overruns. In 2021, fixedprice contracts represented 88% of our sales that were accounted for using the cost-to-cost method. On fixed-price
contracts, we agree to perform the scope of work specified in the contract for a predetermined price. Depending on
the fixed price negotiated, these contracts may provide us with an opportunity to achieve higher profits based on the
relationship between our total contract costs and the contract's fixed price. However, we bear the risk that increased
or unexpected costs may reduce our profit or cause us to incur a loss on the contract, which would reduce our net
earnings. Although we closely monitor all programs and continuously seek opportunities, in coordination with our
customers and suppliers, to mitigate future material impacts on profitability resulting from programs where we expect
cost increases for labor or material, we may be unsuccessful and our net earnings may be reduced. Contract loss
reserves are most commonly associated with fixed-price contracts that involve the design and development of
innovative control systems to meet the customer's specifications.
Our indebtedness and restrictive covenants under our credit facilities could limit our operational and
financial flexibility. We have incurred significant indebtedness and may incur additional debt as we invest in
operations, research and development, capital expenditures and acquisitions in a measured and balanced way. Our
ability to make interest and scheduled principal payments and operate within our covenants could be adversely
impacted by changes in the availability, terms and cost of capital, changes in interest rates or changes in our credit
ratings or our outlook. These changes could increase our cost of debt, limiting our ability to meet operational and
capital needs, delaying our reactions to changes in market conditions and pursuing acquisition opportunities, thereby
placing us at a competitive disadvantage.
The transition away from the use of the London interbank offered rate ("LIBOR") settings as an interest rate
benchmark may negatively impact our debt agreements and financial position, results of operations and
liquidity. On March 5, 2021, the United Kingdom’s Financial Conduct Authority published the dates that the use of
LIBOR as an index for commercial loans will be phased out. Foreign currency indices, including the British pound, the
Euro, and Swiss franc, along with the U.S. dollar 1-week and 2-month settings will cease after December 31, 2021.
Also, after June 30, 2023, the remaining U.S. dollar settings will cease. Our most significant exposure to LIBOR
relates to our revolving domestically held credit facility and securitization facility, which may be negatively impacted by
renegotiated terms and costs of indebtedness associated with the latter of these transition dates. In addition, the
overall financial markets may be disrupted as a result of the replacement of LIBOR, which could have an adverse
effect on our cost of capital and our financial position. We continue to monitor the LIBOR transition and will work to
minimize any impact.
Significant changes in discount rates, rates of return on pension assets, mortality tables and other factors
could adversely affect our earnings and equity and increase our pension funding requirements. Pension costs
and obligations are determined using actual results as well as actuarial valuations that involve several assumptions.
The most critical assumptions are the discount rate, the long-term expected return on assets and mortality tables.
Other assumptions include salary increases and retirement age. Some of these assumptions, such as the discount
rate and return on pension assets, are reflective of economic conditions and largely out of our control. Despite our
largest pension plan being fully funded, changes in the pension assumptions could adversely affect our earnings,
equity and funding requirements.
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