Raytheon 2007 Annual Report Download - page 47

We believe that, in order to remain competitive in the future, we will need to continue to invest significant financial
resources to develop new and adapt or modify our existing offerings and technologies, including through internal
research and development, acquisitions and joint ventures or other teaming arrangements. These expenditures could
divert our attention and resources from other projects, and we cannot be sure that these expenditures will ultimately lead
to the timely development of new offerings and technologies. Due to the design complexity of our products, we may in
the future experience delays in completing the development and introduction of new products. Any delays could result in
increased costs of development or deflect resources from other projects. In addition, there can be no assurance that the
market for our offerings will develop or continue to expand as we currently anticipate. The failure of our technology to
gain market acceptance could significantly reduce our revenues and harm our business. Furthermore, we cannot be sure
that our competitors will not develop competing technologies which gain market acceptance in advance of our products.
The possibility that our competitors might develop new technology or offerings might cause our existing technology and
offerings to become obsolete. If we fail in our new product development efforts or our products or services fail to achieve
market acceptance more rapidly than our competitors, our ability to procure new contracts could be negatively impacted,
which would negatively impact our results of operations and financial condition.
We enter into fixed-price contracts which could subject us to losses in the event that we have cost overruns.
A significant portion of our contracts are entered into on a fixed-price basis. This allows us to benefit from cost savings,
but we carry the burden of cost overruns. Because many of our contracts involve advanced designs and innovative
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.
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