General Dynamics 2013 Annual Report Download - page 17

including general economic conditions, the availability of credit and
trends in capital goods markets. In addition, if customers default on
existing contracts and the contracts are not replaced, the group’s
anticipated revenues and profitability could be materially reduced as a
result.
Earnings and margins depend on our ability to perform on
our contracts. When agreeing to contractual terms, our management
team makes assumptions and projections about future conditions or
events. The accounting for our contracts and programs requires
assumptions and estimates about these conditions and events. These
projections and estimates assess:
•the productivity and availability of labor,
•the complexity of the work to be performed,
•the cost and availability of materials and components, and
•schedule requirements.
If there is a significant change in one or more of these
circumstances or estimates, or if the risks under our contracts are not
managed adequately, the profitability of contracts could be adversely
affected. This could affect earnings and margins materially.
Earnings and margins depend in part on subcontractor and
vendor performance. We rely on other companies to provide
materials, components and subsystems for our products.
Subcontractors also perform some of the services that we provide to
our customers. We depend on these subcontractors and vendors to
meet our contractual obligations in full compliance with customer
requirements. We manage our supplier base carefully to avoid
customer problems. However, we sometimes rely on only one or two
sources of supply that, if disrupted, could have an adverse effect on
our ability to meet our customer commitments. Our ability to perform
our obligations may be adversely affected if one or more of these
suppliers is unable to provide the agreed-upon supplies or perform the
agreed-upon services in a timely and cost-effective manner.
International sales and operations are subject to different
risks that may be associated with doing business in foreign
countries. In some countries there is increased chance for economic,
legal or political changes, and procurement procedures may be less
robust or mature, which may complicate the contracting process. Our
international business may be sensitive to changes in a foreign
government’s budgets, leadership and national priorities. International
transactions can involve increased financial and legal risks arising from
foreign exchange-rate variability and differing legal systems. Our
international business is subject to U.S. and foreign laws and
regulations, including laws and regulations relating to import-export
controls, technology transfers, the Foreign Corrupt Practices Act and
certain other anti-corruption laws, and the International Traffic in Arms
Regulations (ITAR). An unfavorable event or trend in any one or more of
these factors or a failure to comply with U.S. or foreign laws could result
in administrative, civil or criminal liabilities, including suspension or
debarment from government contracts or suspension of our export
privileges and could materially adversely affect revenues and earnings
associated with our international business.
In addition, some international government customers require
contractors to enter into letters of credit, performance or surety bonds,
bank guarantees and other similar financial arrangements. We may also
be required to agree to specific in-country purchases, manufacturing
agreements or financial support arrangements, known as offsets, that
require us to satisfy certain requirements or face penalties. Offset
requirements may extend over several years and require us to establish
joint ventures with local companies. If we do not satisfy these financial or
offset requirements, our future revenues and earnings may be materially
adversely affected.
Our future success depends, in part, on our ability to develop
new products and technologies and maintain a qualified
workforce to meet the needs of our customers. Many of the
products and services we provide involve sophisticated technologies and
engineering, with related complex manufacturing and system integration
processes. Our customers’ requirements change and evolve regularly.
Accordingly, our future performance depends, in part, on our ability to
continue to develop, manufacture and provide innovative products and
services and bring those offerings to market quickly at cost-effective
prices. Because of the highly specialized nature of our business, we
must hire and retain the skilled and qualified personnel necessary to
perform the services required by our customers. If we are unable to
develop new products that meet customers’ changing needs or
successfully attract and retain qualified personnel, our future revenues
and earnings may be materially adversely affected.
We have made and expect to continue to make investments,
including acquisitions and joint ventures, that involve risks and
uncertainties. When evaluating potential mergers and acquisitions, we
make judgments regarding the value of business opportunities,
technologies and other assets and the risks and costs of potential
liabilities based on information available to us at the time of the
transaction. Whether we realize the anticipated benefits from these
transactions depends on multiple factors, including our integration of the
businesses involved, the performance of the underlying products,
capabilities or technologies, market conditions following the acquisition
and acquired liabilities, including some that may not have been identified
prior to the acquisition. These factors could materially adversely affect
our financial results.
Changes in business conditions may cause goodwill and other
intangible assets to become impaired. Goodwill represents the
purchase price paid in excess of the fair value of net tangible and
General Dynamics Annual Report 2013 13