E-Z-GO 2013 Annual Report Download - page 23

Textron Inc. Annual Report • 2013 10
Government where we retain ownership of, and consequently the risk of loss on, aircraft and equipment supplied to perform under
these contracts. Termination of these contracts for convenience or default could materially and adversely impact our results of
operations. On contracts for which we are teamed with others and are not the prime contractor, the U.S. Government could
terminate a prime contract under which we are a subcontractor, irrespective of the quality of our products and services as a
subcontractor. In addition, in the event that the U.S. Government is unable to make timely payments, failure to continue contract
performance places the contractor at risk of termination for default. Any such event could result in a material adverse effect on our
cash flows, results of operations and financial condition.
As a U.S. Government contractor, we are subject to procurement rules and regulations as well as changes in the Department of
Defense (DoD) acquisition practices.
We must comply with and are affected by laws and regulations relating to the formation, administration and performance of U.S.
Government contracts. These laws and regulations, among other things, require certification and disclosure of all cost and pricing
data in connection with contract negotiation, define allowable and unallowable costs and otherwise govern our right to
reimbursement under certain cost-based U.S. Government contracts, and restrict the use and dissemination of classified
information and the exportation of certain products and technical data. Our U.S. Government contracts contain provisions that
allow the U.S. Government to unilaterally suspend or debar us from receiving new contracts for a period of time, reduce the value
of existing contracts, issue modifications to a contract, and control and potentially prohibit the export of our products, services and
associated materials. A number of our U.S. Government contracts contain provisions that require us to make disclosure to the
Inspector General of the agency that is our customer if we have credible evidence that we have violated U.S. criminal laws
involving fraud, conflict of interest, or bribery; the U.S. civil False Claims Act; or received a significant overpayment under a U.S.
Government contract. Failure to properly and timely make disclosures under these provisions may result in a termination for
default or cause, suspension and/or debarment, and potential fines.
In addition, the DoD’s “Better Buying Power Initiative,” which provides guidance for its acquisition workforce to obtain greater
efficiency and productivity in defense spending, significantly affects the contracting environment in which we do business with
our DoD customers and could have a significant impact on current programs, as well as new business opportunities. Changes to the
DoD acquisition system and contracting models could affect whether and, if so, how we pursue certain opportunities and the terms
under which we are able to do so.
As a U.S. Government contractor, our businesses and systems are subject to audit and review by the Defense Contract Audit
Agency (DCAA) and the Defense Contract Management Agency (DCMA).
We operate in a highly regulated environment and are routinely audited and reviewed by the U.S. Government and its agencies
such as DCAA and DCMA. These agencies review our performance under contracts, our cost structure and our compliance with
laws and regulations applicable to U.S. Government contractors. The systems that are subject to review include, but are not limited
to, our accounting, estimating, material management and accounting, earned value management, purchasing and government
property systems. If an audit uncovers improper or illegal activities we may be subject to civil and criminal penalties and
administrative sanctions that may include the termination of our contracts, forfeiture of profits, suspension of payments, fines, and,
under certain circumstances, suspension or debarment from future contracts for a period of time. Whether or not illegal activities
are alleged, the U.S. Government also has the ability to decrease or withhold certain payments when it deems systems subject to its
review to be inadequate. These laws and regulations affect how we conduct business with our customers and, in some instances,
impose added costs on our business.
Cost overruns on U.S. Government contracts could subject us to losses or adversely affect our future business.
Under fixed-price contracts, as a general rule, we receive a fixed price irrespective of the actual costs we incur, and, consequently,
any costs in excess of the fixed price are absorbed by us. Changes in underlying assumptions, circumstances or estimates used in
developing the pricing for such contracts may adversely affect our results of operations. Under time and materials contracts, we are
paid for labor at negotiated hourly billing rates and for certain expenses. Under cost-reimbursement contracts that are subject to a
contract-ceiling amount, we are reimbursed for allowable costs and paid a fee, which may be fixed or performance based,
however, if our costs exceed the contract ceiling or are not allowable under the provisions of the contract or applicable regulations,
we may not be able to obtain reimbursement for all such costs. Under each type of contract, if we are unable to control costs
incurred in performing under the contract, our cash flows, results of operations and financial condition could be adversely affected.
Cost overruns also may adversely affect our ability to sustain existing programs and obtain future contract awards.
Weak demand for our aircraft products may continue to adversely affect our financial results.
Continued worldwide economic softness has adversely impacted the business jet market in recent years. As a result, we have
experienced continued weak demand for our fixed-wing aircraft, particularly our business jets. Soft demand for our jets could
persist and could continue to adversely impact the pricing of new jets and the valuation of pre-owned jets, which comprise a
significant portion of our inventory. A prolonged weakness in the markets for our aircraft products could adversely impact our
results of operations and our future prospects.