Raytheon 2006 Annual Report Download - page 46

technologies, we may experience unforeseen technological difficulties and cost overruns. If our initial estimates are
incorrect, we can lose money on these contracts. In addition, some of our contracts have provisions relating to cost
controls and audit rights, and if we fail to meet the terms specified in those contracts then we may not realize their full
benefits. Lower earnings caused by cost overruns and cost controls would have a negative impact on our results of
operations.
Our business could be adversely affected by a negative audit by the U.S. government.
As a government contractor, we are subject to routine audits and investigations by U.S. government agencies such as the
Defense Contract Audit Agency (DCAA). These agencies review a contractor’s performance under its contracts, cost
structure and compliance with applicable laws, regulations and standards. The DCAA also reviews the adequacy of and a
contractor’s compliance with its internal control systems and policies, including the contractor’s purchasing, property,
estimating, compensation and management information systems. Any costs found to be improperly allocated to a specific
contract will not be reimbursed or must be refunded if already reimbursed. If an audit uncovers improper or illegal activities,
we may be subject to civil and criminal penalties and administrative sanctions, which may include termination of contracts,
forfeiture of profits, suspension of payments, fines and suspension or prohibition from doing business with the U.S.
government. In addition, we could suffer serious reputational harm if allegations of impropriety were made against us.
As a U.S. government contractor, we are subject to a number of procurement rules and regulations.
Government contractors must also comply with specific procurement regulations and other requirements. These
requirements, although customary in government contracts, increase our performance and compliance costs. If these
requirements change, our costs of complying with them could increase and reduce our margins. In addition, failure to
comply with these regulations and requirements could result in reductions of the value of contracts, contract
modifications or termination, and the assessment of penalties and fines, which could negatively impact our results of
operations and financial condition. Our failure to comply with these regulations and requirements could also lead to
suspension or debarment, for cause, from government contracting or subcontracting for a period of time. Among the
causes for debarment are violations of various statutes, including those related to procurement integrity, export control,
government security regulations, employment practices, protection of the environment, accuracy of records and the
recording of costs, and foreign corruption. The termination of a government contract or relationship as a result of any of
these acts could have a negative impact on our results of operations and financial condition and could have a negative
impact on our reputation and ability to procure other government contracts in the future.
We depend on component availability, subcontractor performance and our key suppliers to manufacture and deliver our
products and services.
We are dependent upon the delivery of materials by suppliers and the assembly of major components and subsystems by
subcontractors used in our products in a timely and satisfactory manner and in full compliance with applicable terms and
conditions. With respect to most of our business, we must comply with specific procurement requirements, which may,
in effect, limit the suppliers and subcontractors we may utilize. In some instances, we are dependent on sole-source
suppliers. If any of these suppliers or subcontractors fails to meet our needs, we may not have readily available
alternatives. While we enter into long-term or volume purchase agreements with certain suppliers and take other actions
to ensure the availability of needed materials, components and subsystems, we cannot be sure that such items will be
available in the quantities we require, if at all. If we experience a material supplier or subcontractor problem, our ability
to satisfactorily and timely complete our customer obligations could be negatively impacted which could result in
reduced sales, termination of contracts and damage to our reputation and relationships with our customers. We could
also incur additional costs in addressing such a problem. Any of these events could have a negative impact on our results
of operations and financial condition.
We use estimates in accounting for many of our programs and changes in our estimates could adversely affect our future
financial results.
Contract accounting requires judgment relative to assessing risks, including risks associated with customer directed delays
and reductions in scheduled deliveries, unfavorable resolutions of claims and contractual matters, judgments associated
with estimating contract revenues and costs, and assumptions for schedule and technical issues. Due to the size and
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