Lockheed Martin 2013 Annual Report Download - page 21

The U.S. Government is currently pursuing and implementing policies that could negatively impact our profitability.
Changes in procurement policy favoring more incentive-based fee arrangements, different award fee criteria, or government
contract negotiation offers that indicate what our costs should be may affect the predictability of our profit rates. Our
customers are subject to pressures that may result in a change in contract types referenced above earlier in a program’s
maturity than is traditional. An example of this is the use of fixed-price incentive-fee contracts for recent LRIP contracts on
the F-35 program while the development contract is being performed concurrently. Our customers may also pursue non-
traditional contract provisions in negotiation of contracts. For example, changes resulting from the F-35 development
contract may need to be implemented on the production contracts, a concept referred to as concurrency, which may require
us to pay for a portion of the concurrency costs. Other examples include, but are not limited to, the U.S. Government in
certain circumstances requiring that bid and proposal costs be included in general and administrative costs, rather than
charged directly to contracts, and the U.S. Government enacting legislation that will decrease the level of allowable
employee compensation, which will reduce our operating profit.
Other policies could negatively impact our working capital and cash flow. For example, the government has expressed a
preference for requiring progress payments rather than performance based payments on new fixed-price contracts, which if
implemented, delays our ability to recover a significant amount of costs incurred on a contract and thus affects the timing of
our cash flows.
Increased competition and bid protests in a budget-constrained environment may make it more difficult to maintain
our financial performance.
We are facing increased competition, particularly in information technology and cyber security at our Information
Systems & Global Solutions business segment, from non-traditional competitors outside of the aerospace and defense
industry, in addition to our customers determining to source work internally rather than hiring a contractor. At the same time,
our customers are facing budget constraints, trying to do more with less by cutting costs, identifying more affordable
solutions, and reducing product development cycles. In international sales, we face substantial competition from both
domestic manufacturers and foreign manufacturers whose governments sometimes provide research and development
assistance, marketing subsidies, and other assistance for their products. Additionally, our competitors are also focusing on
increasing their international sales to partially mitigate the effect of reduced U.S. Government budgets. To remain
competitive, we consistently must provide superior performance, advanced technology solutions, and service at an affordable
cost and with the agility that our customers require to satisfy their mission objectives.
As a leader in defense and global security, we have a large number of programs for which we are the incumbent
contractor. A substantial portion of our business is awarded through competitive bidding. The U.S. Government increasingly
has relied upon competitive contract award types, including indefinite-delivery, indefinite-quantity, GSA Schedule, and other
multi-award contracts, which has the potential to create pricing pressure and increase our cost by requiring that we submit
multiple bids and proposals. In addition, multi-award contracts require that we make sustained efforts to obtain task orders
under the contract. The competitive bidding process entails substantial costs and managerial time to prepare bids and
proposals for contracts that may not be awarded to us or may be split among competitors. Following award, we may
encounter significant expenses, delays, contract modifications, or bid protests from unsuccessful bidders on new program
awards. Bid protests could result in significant expenses to us, contract modifications or even loss of the contract award.
Even where a bid protest does not result in the loss of a contract award, the resolution can extend the time until the contract
activity can begin and, therefore, delay our recognizing sales.
We are the prime contractor on most of our contracts and if our subcontractors, suppliers, or teaming agreement or
venture partners fail to perform their obligations, our performance and our ability to win future business could be
harmed.
For most of our contracts we rely on other companies to provide materials, major components, and products, and to
perform a portion of the services that we provide to our customers. Such arrangements may involve subcontracts, teaming
arrangements, ventures, or supply agreements with other companies upon which we rely (contracting parties). There is a risk
that we may have disputes with our contracting parties, including disputes regarding the quality and timeliness of work
performed, the workshare provided to that party, customer concerns about the other party’s performance, our failure to
extend existing task orders or issue new task orders, or our hiring of the personnel of a subcontractor, teammate, or venture
partner, or vice versa. In addition, changes in the economic environment, including defense budgets and constraints on
available financing, may adversely affect the financial stability of our contracting parties and their ability to meet their
performance requirements or to provide needed supplies on a timely basis. A failure by one or more of our contracting parties
to provide the agreed-upon supplies or perform the agreed-upon services on a timely basis may affect our ability to perform
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