FY2021 10-K Document - FINAL 11 15 21 - Flipbook - Page 37
Table of Contents
ECONOMIC CONDITIONS AND MARKET TRENDS
We operate within the aerospace and defense and industrial markets. Our businesses continue to face varying levels
of pressure from the COVID-19 pandemic.
Our defense and aerospace businesses represented 69% of our 2021 sales. These businesses have faced, and will
continue to face, modest supply chain and production level risks as a result of the COVID-19 pandemic. Conversely,
they are more directly affected by program funding levels, which have remained relatively stable. Our commercial
aircraft market, which represented less than 15% of our 2021 sales, continues to face the greatest pressure due to
dramatic reductions in air travel throughout the past year and a half. While domestic travel has recently started to
show signs of recovery, international travel remains muted.
Within our industrial markets, which represented 31% of our 2021 sales, we have seen recent signs of recovery within
industrial automation; however, as the demand is starting to rebuild, we are now experiencing pressure within our
material supply chains and direct labor inefficiencies. Additionally, our simulation and test and energy markets
continue to face demand challenges from the macroeconomic slowdown and reduced capital investments. Our
medical business, which represented less than 10% of our 2021 sales, experienced a surge in demand for our
medical applications essential in the fight against the pandemic. As this surge in demand wanes, we expect a return to
normal growth rates in the future.
A common factor throughout our markets is the continuing demand for technologically advanced products.
Aerospace and Defense
Within aerospace and defense, we serve three end markets: defense, commercial aircraft and space.
The defense market is dependent on military spending for development and production programs, which to-date, have
not been impacted by the COVID-19 pandemic. We have a growing development program order book for future
generation aircraft and hypersonic missiles, and we strive to embed our technologies within these high-performance
military programs of the future. Aircraft production programs are typically long-term in nature, offering predicable
capacity needs and future revenues. We maintain positions on numerous high priority programs, including the
Lockheed Martin F-35 Lightning II, FA-18E/F Super Hornet and V-22 Osprey. The large installed base of our products
leads to attractive aftermarket sales and service opportunities. The tactical and strategic missile, missile defense and
defense controls markets are dependent on many of the same market conditions as military aircraft, including overall
military spending and program funding levels. 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
are uncertain, subject to presidential and congressional debate and could be reduced to offset the various COVID-19
pandemic relief payments.
The commercial OEM aircraft market has depended on a number of factors, including both the last decade's
increasing global demand for air travel and increasing fuel prices. Both factors contributed to the demand for new,
more fuel-efficient aircraft with lower operating costs that lead to large production backlogs for Boeing and Airbus.
However, the impact of the COVID-19 pandemic has 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 has applied
financial pressures on airlines, and in order to preserve cash and liquidity, have dramatically reduced flight hours and
delayed the purchases of new aircraft. Although U.S. domestic air travel has recently increased during the second half
of 2021, international travel has not yet begun to recover. 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-crisis levels. As such, we believe Boeing and Airbus will continue to directionally match their
wide-body aircraft production rates with the reduced air traffic volume, which has lowered their demand for our flight
control systems. We believe the commercial OEM market's recovery will be heavily dependent on the return to preCOVID-19 air traffic activity levels and therefore will face pressures for a prolonged period of time.
The commercial aftermarket is driven by usage and age of the existing aircraft fleet for passenger and cargo aircraft,
which drives the need for maintenance and repairs. Given the dramatic reductions in flight hours and the airlines' cash
preservation measures due to the impacts of COVID-19, we believe the demand volume for our maintenance services
and spare parts will be reduced. Also, with fewer expected new aircraft deliveries, we would see lower future initial
provisioning and spares sales. However, as domestic and eventually international travel begin to recover, we expect a
faster recovery in this market as compared to the commercial OEM market.
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