What changed in this filing

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Item 1A. Risk Factors

2022-03-04 compared with 2021-03-01 · 114 added, 46 removed, 207 unchanged (44% of the section changed)

Covid-19 Pandemic Risks

The COVID-19 pandemic has adversely affected and is expected to continue to pose risks to our business, results of operations, financial condition and cash flows, and other epidemics or outbreaks of infectious diseases may have a similar impact.

Our business, financial results, and prospects are dependent on global aerospace demand.

The continuing effects of the COVID-19 pandemic have had and are expected to continue to have a significant negative impact on aerospace demand, our business and our industry, including any potential impacts of vaccination requirements.

Other epidemics or outbreaks of infectious diseases may have a similar impact.

As previously disclosed, we face risks related to outbreaks of infectious diseases, including the ongoing COVID-19 pandemic.

The COVID-19 coronavirus pandemic has caused significant volatility in financial markets, including the market price of our stock, and the aerospace industry, which has raised the prospect of an extended global recession.

In response to COVID-19, national and local governments around the world have instituted certain measures, including travel bans, prohibitions or limits on group events and gatherings, shutdowns of certain businesses, curfews, shelter-in-place orders and recommendations to practice social distancing.

Our operations have been deemed essential under applicable law, but there is no guarantee this will continue.

We follow the COVID-19 guidelines from the CDC concerning the health and safety of our personnel, these measures have resulted in attenuating activity and, in some cases, required temporary closures of certain of our facilities, among other impacts.

The duration of these measures is unknown, may be extended and additional measures, including facility closures, may be imposed.

Among the potential effects of COVID-19 and other similar outbreaks on the Company include, but are not limited to, the following:

• Reduced consumer and investor confidence, instability in the credit and financial markets, volatile corporate profits, and reduced business and consumer spending, which may adversely affect our results of operations by reducing our sales, margins and/or net income as a result of a slowdown in customer orders or order cancellations.

In addition, volatility in the financial markets could increase the cost of capital and/or limit its availability.

• Economic uncertainty as a result of COVID-19 is expected to cause continued difficulty for our customers, suppliers and the Company to accurately forecast and plan future business activities.

• Aircraft manufacturers have experienced a disruption in production and demand as customers defer delivery of new aircraft, resulting in slowed or halted production at facilities throughout the world.

Commercial airlines have experienced a significant reduction in air traffic.

Commercial airlines and other manufacturers have focused on conserving cash to preserve liquidity, which has had a negative impact on airframe and aftermarket sales.

• The potential to weaken the financial position of some of our customers.

If circumstances surrounding our customers’ financial capabilities were to deteriorate, asset write-downs or write-offs could negatively affect our operating results and, if large, could have a material adverse effect on our business, financial condition, results of operations and cash flow.

• Disruption of our supply chain.

Our third-party manufacturers, suppliers, third-party distributors, sub-contractors and customers have been and may be disrupted by worker absenteeism, quarantines and restrictions on their employees’ ability to work, office and factory closures, disruptions to ports and other shipping infrastructure, border closures, or other travel or health-related restrictions.

Depending on the magnitude of such effects on our manufacturing or the operations of our suppliers, third-party distributors, or sub-contractors, our supply chain, manufacturing and product shipments could be delayed, which could adversely affect our business, operations, and customer relationships.

• The need to incur additional restructuring charges to optimize our cost structure if a recovery in the aerospace market occurs slower than anticipated.

The COVID-19 coronavirus pandemic has caused significant volatility in financial markets, including the market price of our stock, and the aerospace industry.

The continuing effects of the COVID-19 pandemic have had and are expected to continue to have a significant negative impact on aviation demand, our business, our supply chain and our industry, including any potential impacts of vaccination requirements.

The extent to which the pandemic will continue to negatively affect our business and results of operations will depend on many changing factors and developments including, without limitation, the following:

• the severity, extent, and duration of the pandemic including emerging variants of the virus, its impact on the aircraft industry and aviation and related aftermarket demand, and any additional production suspensions or reductions relating to the pandemic;

• the effectiveness of vaccines and treatments against emerging variant strains of COVID-19 and over the long-term;

• continued travel restrictions and bans, bans on public gatherings, and closures of non-essential businesses;

• any potential impacts of vaccination requirements and the ability to retain and recruit the workforce required to meet production requirements;

• economic stimulus efforts;

• economic recessions resulting from the pandemic;

• any inability of significant portions of our workforce to work effectively, including because of illness, remote work, quarantines, social distancing, government actions, or other restrictions in connection with the COVID-19 pandemic;

• potential lawsuits or regulatory actions due to COVID-19 spread in the workplace;

• our ability to maintain our compliance practices and procedures, financial reporting processes and related controls, and manage the complex accounting issues presented by the COVID-19 pandemic;

• the impact on the Company’s vendors and outsourced business processes and their process and controls documentation;

• potential failure or reduced capacity of third parties on which the Company relies, including suppliers, lenders, and other business partners, to meet the Company’s obligations and needs;

• the impact of the pandemic on the financial position of our customers;

• the impact of the pandemic on the availability and cost of materials;

• the impact on our contracts with our customers and suppliers, including force majeure provisions;

• the impact on the financial markets, including volatility in the financial markets;

• the availability and cost of credit to the Company;

• the impact of government health and protection policies on future air traffic demand.

Several of these effects have already occurred and any or all of these items may occur or recur, which could have a material adverse effect on our business, financial condition, results of operations and cash flows.

While the Company has taken action to reduce costs, increase liquidity and strengthen its financial position in light of the COVID-19 pandemic, there can be no assurance that our actions will mitigate the impact of the pandemic on our business.

We expect that the COVID-19 pandemic will continue to have a significant negative impact on our business for the duration of the pandemic and for an indeterminate time thereafter until demand grows closer to 2019 levels and supply chain challenges abate.

Our business improvement depends on OEM production of aircraft at sufficient levels, which depends upon the public’s willingness to use aircraft travel, the success of vaccination programs across the globe, sufficient OEM demand and orders (without suspension) from airlines, and the ability of airlines to weather the crisis and expand.

Further, we expect that the pandemic recovery time for wide-body aircraft may be longer than for narrow-body aircraft due to reduced traveler demand and lower volumes of international travel.

If the pandemic worsens or there is significant uncertainty on the commercial aerospace industry’s recovery, we may find it difficult to obtain additional financing and/or fund our operations and meet our debt repayment obligations.

Recognizing the unprecedented nature, scale and uncertainty associated with this global health crisis, the duration and extent of the on-going impacts cannot be reasonably estimated at this time.

The loss of Boeing or Panasonic as major customers or a significant reduction in business with either of those customers would reduce our sales and earnings.

In 2020, we had a concentration of sales to Boeing and Panasonic representing approximately 9.5% and 11.1% of our sales, respectively.

The loss of either of these customers or a significant reduction in business with them would significantly reduce our sales and earnings.

In 2021, we had a concentration of sales to Boeing representing approximately 10.0% of our sales.

In 2020 and 2019, we also had a concentration of sales to Panasonic in excess of 10% of sales in those years.

The loss of these customers or a significant reduction in business with them would significantly reduce our sales and earnings.

In October 2018 and March of 2019, two commercial aircraft accidents led to the grounding by the Federal Aviation Administration and other regulators of the Boeing 737 MAX aircraft, on which we have significant content, and which represented our largest OEM production program before the pandemic.

The grounding of the Boeing 737 MAX, which started in March of 2019, has caused the production rate of that aircraft to be lower than expected in fiscal year 2019 and 2020.

The grounding of the Boeing 737 MAX, which started in March of 2019, caused the production rate of that aircraft to be lower than expected in fiscal year 2019 and 2020.

The 737 MAX grounding affected our business both because of the production pause, impacting our line-fit content, and because it left many of our airline customers short of capacity, particularly in 2019 but continuing into 2020, which made them reluctant to take other aircraft out of service to install the types of retrofit products they buy from us.

Although the 737 MAX was re-certified in the United States in November 2020 and in Europe in January 2021, if production rates do not materialize as anticipated, our Aerospace segment sales could be significantly impacted in the near or long-term, which could have a material adverse effect on our business, financial condition, results of operations, and cash flows.

Even as deliveries of the 737 MAX program resumes, demand for the aircraft could be lower than was expected prior to the initial grounding of the aircraft due to the continuing effects of the COVID-19 pandemic.

Even as deliveries of the 737 MAX program resume, demand for the aircraft could be lower than was expected prior to the initial grounding of the aircraft due to the continuing effects of the COVID-19 pandemic.

The markets we serve are cyclical and sensitive to domestic and foreign economic conditions and events, which may cause our operating results to fluctuate.

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As is customary for our business, we purchase inventory and invest in specific capital equipment to support our production requirements generally based on delivery schedules provided by our customer.

If a program or aircraft is not successful, we may have to write-off all or a part of the inventory, accounts receivable and capital equipment related to the program.

If a program or aircraft is not successful, we may have to write-off all or

a part of the inventory, accounts receivable and capital equipment related to the program.

A write-off of these assets could result in a significant reduction of earnings and cause covenant violations relating to our debt agreements.

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Growth by acquisition involves risks that could adversely affect our financial condition and operating results, including:

• diversion of management time and attention from our core business;

• the potential exposure to unanticipated liabilities;

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• the potential loss of key employees, suppliers or customers of acquired businesses;

• diversion of management time and attention from our core business.

In addition, any acquisition, once successfully integrated, could negatively impact our financial performance if it does not perform as planned, does not increase earnings, or does not prove otherwise to be beneficial to us.

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Our competitors may develop technologies and products that are more effective than those we develop or that render our technology and products obsolete or uncompetitive.

Furthermore, our products could become unmarketable if

new industry standards emerge.

Furthermore, our products could become unmarketable if new industry standards emerge.

We may have to modify our products significantly in the future to remain competitive, and new products we introduce may not be accepted by our customers.

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This litigation could result in significant costs and divert our management’s focus away from operations.

Refer to the risk factor related to pending patent infringement litigation above and Note 19 to the consolidated financial statements in Item 8 for further discussion.

If our subcontractors or suppliers fail to perform their contractual obligations, our prime contract performance and our ability to obtain future business could be materially and adversely impacted.

Refer to the risk factor related to pending patent infringement litigation below and Note 19 to the consolidated financial statements in Item 8 of this report for further discussion.

If critical components or raw materials used to manufacture our products or used in our development programs become scarce or unavailable, then we may incur delays in manufacturing and delivery of our products and in completing our development programs, which has damaged, and could continue to damage, our business, results of operations and financial condition.

Due to increased demand across a range of industries, the global supply chain for certain critical components or raw materials used in the manufacture of our products and used in our development programs has experienced significant strain in recent periods.

Particularly, the market for electronic components is experiencing increased demand, creating substantial uncertainty regarding our suppliers’ continued production of key components for our products.

The COVID-19 pandemic has also contributed to and exacerbated this strain.

This constrained supply environment has adversely

affected, and could further affect, availability, lead times and cost of components, and could impact our ability to complete development programs, respond to accelerated or quick-turn delivery requests from customers, or meet customer demand and product delivery dates for our end customers where we cannot timely secure adequate supply of these components.

Moreover, if any of our suppliers become financially unstable, or otherwise unable or unwilling to provide us with raw materials or components, then we may have to find new suppliers.

It may take several months to locate alternative suppliers, if required, or to redesign our products to accommodate components from different suppliers.

We may experience significant delays in manufacturing and shipping our products to customers and incur additional development, manufacturing and other costs to establish alternative sources of supply if we lose any of these sources or are required to redesign our products.

We cannot predict if we will be able to obtain replacement components within the time frames that we require at an acceptable cost, if at all.

In an effort to mitigate these risks, in some cases, we have incurred higher costs to secure available inventory, or have extended or placed non-cancellable purchase commitments with suppliers, which introduces inventory risk if our forecasts and assumptions prove inaccurate.

While we may attempt to recover the increased costs through price increases to our customers, we may be unable to mitigate the effect on our results of operations.

We have also multi-sourced and pre-ordered components and raw materials inventory in some cases in an effort to reduce the impact of the adverse supply chain conditions we have experienced.

Despite our attempts to mitigate the impact on our business, these constrained supply conditions are expected to adversely impact our costs of goods sold, including our ability to continue to reduce the cost to produce our products in a manner consistent with prior periods.

In addition, some suppliers have indicated that, as a result of current shortages, they intend to cease manufacture of certain components used in our products.

Limits on manufacturing availability or capacity or delays in production or delivery of components or raw materials due to COVID-related restrictions could further delay or inhibit our ability to obtain supply of components and produce finished goods.

There can be no assurance that the impacts of the pandemic on the supply chain will not continue, or worsen, in the future.

These supply chain constraints and their related challenges could result in shortages, increased material costs or use of cash, engineering design changes, and delays in new product introductions, each of which could adversely impact our growth, gross margin and financial results.

These types of negative financial impacts on our business may become more acute as supply chain pressures increase.

Our financial results could be adversely impacted by the escalation of labor and benefit costs.

Consistent with the experience of other employers, our labor, medical and workers’ compensation costs have increased substantially in recent years and are expected to continue to rise.

If this trend continues, the cost of labor and to provide healthcare and other benefits to our employees could increase, adversely impacting profitability.

As the labor market recovers from the effects of the COVID-19 pandemic, competition for employees has escalated which has increased costs associated with attracting and retaining employees.

We cannot be certain that we will be able to maintain an adequately skilled labor force necessary to operate efficiently or that our labor costs will not increase as a result of a shortage in the availability of skilled employees.

Changes to healthcare regulations involving the Patient Protection and Affordable Care Act may also increase the cost of providing such benefits to our employees.

We cannot predict the ultimate content, timing, or effect of any healthcare reform legislation or the impact of potential legislation or related proposals and policies on our results.

Any significant increases in the costs attributable to our self-insured health and workers’ compensation plans could adversely impact our business, results of operations, financial condition and cash flows.

Government vaccine mandates could result in workforce attrition for us and our suppliers which could adversely affect our operations and supply chain.

On September 9, 2021, President Biden issued an executive order requiring all employers with U.S.

Government contracts to ensure that their U.S.-based employees, contractors, and subcontractors, that work in affected facilities or work on or in support of U.S.

Government contracts are fully vaccinated.

The deadline for vaccination was initially December 8, 2021, but the White House announced on November 4, 2021 that the deadline would be extended to January 4, 2022.

The executive order includes on-site and remote U.S.-based employees, contractors and subcontractors and permits only limited exceptions for medical and religious reasons.

Substantially all of our subsidiaries are either directly subject to the executive order, or will be required to comply with the executive order via flowdown from our affected customers.

It is currently not possible to predict with certainty the impact the executive order will have on our workforce, or on our suppliers who may also be impacted.

Government contractor, and as a supplier to customers who are U.S.

Government contractors, we took steps to comply with the executive order mandating COVID-19 vaccines across our U.S.-based workforce, contractors and subcontractors that service or support our U.S.

Government contracts, and who do not qualify for medical or religious exemptions, to be fully vaccinated by January 4, 2022, until it was enjoined by a federal court in December 2021.

The vaccine mandate currently remains enjoined and the Government has announced that it will take no efforts to enforce it, absent further notice from the contracting agency, where the place of performance is a U.S.

state or an excluded outlying area.

If the vaccine mandate is revived, the Company will resume efforts to work with employees who have not yet either submitted proof of vaccination or requested an accommodation.

Additional vaccine mandates may be announced in jurisdictions in which our businesses operate.

Implementation of these requirements may result in attrition, including attrition of critically skilled labor, and difficulty securing future labor needs, which could have a material adverse effect on our business, financial condition, and

results of operations.

Further, implementation of these requirements by our suppliers may result in workforce attrition at our suppliers, which may result in disruption to our supply chain which, in turn, may have a negative impact on our revenues and results of operations by impacting ability to acquire certain raw materials and components used in the manufacture of our products and in our development programs.

If our subcontractors fail to perform their contractual obligations, our prime contract performance and our ability to obtain future business could be materially and adversely impacted.

Many of our contracts involve subcontracts with other companies upon which we rely to perform a portion of the services we must provide to our customers.

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A default termination could expose us to liability and substantially impair our ability to compete for future contracts and orders.

In addition, a delay in our ability to obtain components and equipment parts from our suppliers may affect our ability to meet our customers’ needs and may have an adverse effect upon our profitability.

Some of our contracts contain late delivery penalties .

Failure to deliver in a timely manner due to supplier problems, development schedule slides, manufacturing difficulties, or similar schedule-related events could have a material adverse effect on our business.

No significant penalties have been incurred to date.

Our results of operations are affected by our fixed-price contracts, which could subject us to losses in the event that we have cost overruns.

For the year ended December 31, 2020, fixed-price contracts represented almost all of the Company’s

For the year ended December 31, 2021, fixed-price contracts represented almost all of the Company’s sales.

On fixed-price contracts, we agree to perform the scope of work specified in the contract for a predetermined price.

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• We may be more leveraged than some of our competitors, which may result in a competitive disadvantage.

Our inability to refinance our existing long-term debt maturing in 2023 on terms that are favorable to us may materially and adversely impact our operations and future growth and expansion initiatives.

Our credit facility, of which $163.0 million is outstanding as of December 31, 2021, is currently scheduled to mature in 2023.

While we expect to be able to refinance, replace or extend the maturity date of our credit facility before it matures, we cannot be sure that we will be able to obtain such debt refinancing on commercially reasonable terms or at all.

The extent to which we will be able to effect such refinancing, replacement or maturity extension on terms that are favorable to us or at all is dependent on a number of highly uncertain factors, including then-prevailing credit and other market conditions, economic conditions, particularly in the aerospace and defense markets, disruptions or volatility caused by factors such as COVID-19, regional conflicts, inflation, and supply chain disruptions.

In addition, rising interest rates could limit our ability to refinance our existing credit facility when it matures or cause us to pay higher interest rates upon refinancing.

As the Company’s long-term debt approaches maturity, if the Company is unable to refinance, replace or extend the maturity on its credit facility, the Company’s liquidity, results of operations, and financial condition could be materially adversely impacted.

Furthermore, certain covenants and other terms of our existing credit facility impose significant restrictions on our operational flexibility.

In connection with debt refinancing, our ability to negotiate more favorable and flexible covenants and terms, including financial covenants, is highly uncertain.

An inability to complete our debt refinancing on terms that are more favorable to us than the covenants and terms in effect under our existing credit facility could materially and adversely impact our business, operations and future growth and expansion initiatives.

In particular, if the covenants and terms under our refinanced indebtedness were to remain unchanged as compared to those under our current credit facility, we may be required to take certain operational measures or decline to pursue certain growth initiatives in order to maintain compliance with these restrictive covenants and terms, which could materially and adversely affect our business, results of operations and financial condition.

A write-off of all or part of our goodwill or other intangible assets could adversely affect our operating results and net worth.

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In 2019, we recorded goodwill and intangible asset impairment charges of $1.6 million and $6.2 million related to our AeroSat antenna business, respectively.

We had no such impairment charges during 2021.

Our goodwill and other intangible assets may increase in the future since our strategy includes growing through acquisitions.

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The potential phase out of LIBOR may negatively impact our debt agreements and financial position, results of operations and liquidity .

On July 27, 2017, the UK’s Financial Conduct Authority announced that it intends to phase out LIBOR by the end of 2021.

The administrator of LIBOR has announced it will consult on its intention to cease the publication of the one week and two month USD LIBOR settings immediately following the LIBOR publication on December 31, 2021, and the remaining USD LIBOR settings immediately following the LIBOR publication on June 30, 2023.

Extending the publication of certain USD LIBOR tenors until June 30, 2023 would allow most legacy USD LIBOR contracts to mature before LIBOR experiences disruptions.

However, it is unclear whether different benchmark rates used to price indebtedness will develop.

If LIBOR ceases to exist, we may need to renegotiate our debt agreements that extend beyond 2021 that utilize LIBOR as a factor in determining the interest rate, which may negatively impact the terms of such indebtedness.

In addition, the overall financial markets may be disrupted as a result of the phase out or replacement of LIBOR.

Disruption in the financial markets could have an adverse effect on our financial position, results of operations, and liquidity.

On July 27, 2017, the Financial Conduct Authority (the authority that regulates LIBOR) announced that it intends to stop compelling banks to submit rates for the calculation of LIBOR after 2021 and it is unclear whether new methods of calculating LIBOR will be established.

If LIBOR ceases to exist after 2021, a comparable or successor reference rate as approved by the Administrative Agent under the Credit Agreement will apply or such other reference rate as may be agreed by the Company and the lenders under the Credit Agreement.

Prior to its amendment on March 1, 2022, the interest rate under our Amended Credit Facility was calculated using LIBOR.

In conjunction with the amendment, our Amended Credit Facility is now based on the Secured Overnight Financing Rate (“SOFR”), rather than LIBOR.

However, that agreement

expires in May 2023 and it is unclear at this time whether different benchmark rates used to price indebtedness will develop.

We cannot predict the impact that an alternative benchmark rate may have on the terms of our future indebtedness or interest cost.

However, an increase in our cost of borrowing could result in an adverse effect on our financial position, results of operations, and liquidity.

Our future operating results could be impacted by estimates used to calculate impairment losses on long-lived assets.

The preparation of financial statements in conformity with U.S.

generally accepted accounting principles requires management to make significant and subjective estimates and assumptions that may affect the reported amounts of long-lived assets in the financial statements.

generally accepted accounting principles requires management to make significant and subjective estimates and assumptions that may affect the reported amounts of tangible and intangible long-lived assets in the financial statements.

These estimates are integral in the determination of whether a potential non-cash impairment loss exists as well as the calculation of that loss.

Actual future results could differ from those estimates.

As discussed in Note 23 to the consolidated financial statements in Item 8, we recorded a long-lived asset impairment charge of approximately $0.7 million and $9.5 million in the years ending December 31, 2020 and 2019, respectively.

As discussed in Note 23 to the consolidated financial statements in Item 8 of this report, we recorded a long-lived asset impairment charge of approximately $0.7 million and $9.5 million in the years ending December 31, 2020 and 2019, respectively.

We had no such impairment charges in 2021.

Changes in discount rates and other estimates could affect our future earnings and equity.

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The most critical assumption is the discount rate.

Other assumptions include mortality, salary increases and retirement age.

Other assumptions include mortality, salary levels and retirement age.

The discount rate assumptions are based on current market conditions and are outside of our control.

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If these actions are decided adversely against the Company, the associated damages could result in a material adverse effect on our results of operations or financial condition.

Refer to Note 19 of our consolidated financial statements in Item 8 for discussion on this and other legal proceedings.

Refer to Note 19 of our consolidated financial statements in Item 8 of this report for discussion on this and other legal proceedings.

Other than these proceedings, we are not party to any significant pending legal proceedings that management believes will result in a material adverse effect on our results of operations or financial condition.

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If we are unable to comply with those requirements with respect to a significant quantity of our products, our sales in Europe would be restricted.

Doing business internationally also subjects us to numerous U.S.

Doing business internationally also subjects us to numerous

and foreign laws and regulations, including regulations relating to import-export control, technology transfer restrictions, foreign corrupt practices and anti-boycott provisions.

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If we fail to meet expectations of securities analysts or investors due to fluctuations in our sales or operating results, our stock price could decline significantly.

Our sales and earnings may fluctuate from quarter to quarter due to a number of factors, including delays or cancellations of programs and the impacts of the ongoing COVID-19 pandemic.

Our sales and earnings may fluctuate from quarter to quarter due to a number of factors, including delays or cancellations of programs and the impacts of the ongoing COVID-19 pandemic on revenues and costs.

It is likely that in some future quarters our operating results may fall below the expectations of securities analysts or investors.

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In addition, the stock market in general, and the market prices for companies in the aerospace and defense industry in particular, have experienced significant price and volume fluctuations that often have been unrelated to the operating performance of the companies affected by these fluctuations.

These broad market fluctuations may adversely affect the market price of our

common stock, regardless of our operating performance.

These broad market fluctuations may adversely affect the market price of our common stock, regardless of our operating performance.

Global health crises, such as the current COVID-19 pandemic, with the breadth of its impact worldwide, and particularly on the aerospace industry, could also cause significant volatility in the market price.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 1A. Risk Factors