Raytheon 2011 Annual Report Download - page 25

17
unforeseen technological difficulties and cost overruns. Under both types of contracts, if we are unable to control costs or if
our initial cost 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, 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 or investigatory finding by the U.S. Government.
As a government contractor, we are subject to audits and investigations by U.S. Government agencies including the Defense
Contract Audit Agency (DCAA), the Defense Contract Management Agency, the Inspector General of the DoD and other
departments and agencies, the Government Accountability Office, the Department of Justice (DoJ) and Congressional
Committees. 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 or investigation 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.
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 by suppliers of materials and the assembly by subcontractors of major components and
subsystems used in our products in a timely and satisfactory manner and in full compliance with applicable terms and conditions.
Some products require relatively scarce raw materials. We are generally subject to 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. In addition, some of our suppliers or subcontractors may be impacted by the recent global
financial crisis, which could impair their ability to meet their obligations to us. 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 nature of many
of our contracts, the estimation of total revenues and cost at completion is complicated and subject to many variables. For
example, we must make assumptions regarding the length of time to complete the contract because costs also include expected
increases in wages and prices for materials; consider whether the intent of entering into multiple contracts was effectively to
enter into a single project in order to determine whether such contracts should be combined or segmented; consider incentives
or penalties related to performance on contracts in estimating sales and profit rates, and record them when there is sufficient
information for us to assess anticipated performance; and use estimates of award fees in estimating sales and profit rates based
on actual and anticipated awards. Because of the significance of the judgments and estimation processes described above, it
is likely that materially different amounts could be recorded if we used different assumptions or if the underlying circumstances
were to change. Changes in underlying assumptions, circumstances or estimates may adversely affect our future results of
operations and financial condition.