Lockheed Martin 2015 Annual Report Download - page 22

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. An example of customer budget pressures includes the U.S. Government
requiring that bid and proposal costs be included in general and administrative costs, rather than charged directly to contracts
in certain circumstances.
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 and customer relationships.
We are facing increased competition, particularly in information technology at our IS&GS business segment and
cybersecurity at our MST business segment, from non-traditional competitors outside of the aerospace and defense industry.
At the same time, our customers are facing budget constraints, trying to do more with less by cutting costs, identifying more
affordable solutions, performing certain work internally rather than hiring a contractor, and reducing product development
cycles. We have also experienced increased market pressures in our services businesses due to the fragmentation of large
contracts into multiple smaller contracts that are awarded primarily on the basis of price. It is critical we maintain strong
customer relationships and seek to understand the priorities of their requirements in this price competitive environment.
In international sales, we face substantial competition from both U.S. manufacturers and international 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 maintain strong customer
relationships and 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.
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. Unsuccessful bidders are more frequently protesting in the hope of being awarded a subcontract for a portion of the
work in return for withdrawing the protest. 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, as a result, delay our recognizing sales. We also may not be
successful in our efforts to protest or challenge any bids for contracts that were not awarded to us and we could incur
significant time and expense in such efforts.
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 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, for whatever reason, 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 our obligations and require that we transition the work to other companies. Contracting party
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