Raytheon 2014 Annual Report Download - page 25

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Competition within our markets may reduce our revenues and market share.
We operate in highly competitive markets and our competitors may have more extensive or more specialized engineering,
manufacturing and marketing capabilities than we do in some areas. We anticipate increasing competition in our core markets
as a result of continued defense industry consolidation, including cross-border consolidation of competition, which has enabled
companies to enhance their competitive position and ability to compete against us. We are also facing heightened competition
in our domestic and international markets from foreign and multinational firms. In addition, as discussed in more detail above,
increased pressure to limit U.S. defense spending and changes in the U.S. Government procurement environment may limit
certain future market opportunities. For example, the DoD increasingly is committed to awarding contracts through competitive
bidding and relying on competitive contract award types. Additionally, some customers, including the DoD, are increasingly
turning to commercial contractors, rather than traditional defense contractors, for information technology and other support
work. If we are unable to continue to compete successfully against our current or future competitors, we may experience
declines in revenues and market share which could negatively impact our results of operations, financial condition or liquidity.
In addition, due to the current competitive environment, we continue to see an increase in bid protests from unsuccessful
bidders on new program awards. Generally, a bid protest will delay the start of contract activities, delay earnings, and could
result in the award decision being overturned, requiring a re-bid of the contract.
We enter into fixed-price and other contracts which could subject us to losses in the event that we experience cost growth
that cannot be billed to customers.
Generally, our customer contracts are either fixed-priced or cost reimbursable contracts. Under fixed-priced contracts, which
represent approximately 60% of our backlog, we receive a fixed price irrespective of the actual costs we incur and, consequently,
we carry the burden of any cost overruns. Due to their nature, fixed-priced contracts inherently have more risk than cost
reimbursable contracts, particularly fixed-price development contracts where the costs to complete the development stage of
the program can be highly variable, uncertain and difficult to estimate. Under cost reimbursable contracts, subject to a contract-
ceiling amount in certain cases, we are reimbursed for allowable costs and paid a fee, which may be fixed or performance
based. If our costs exceed the contract ceiling and are not authorized by the customer or are not allowable under the contract
or applicable regulations, we may not be able to obtain reimbursement for all such costs and our fees may be reduced or
eliminated. Because many of our contracts involve advanced designs and innovative technologies, we may experience
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 DCAA,
the DCMA, the Inspector General of the DoD and other departments and agencies, the Government Accountability Office,
the Department of Justice (DoJ) and Congressional Committees. From time to time, these and other agencies investigate or
conduct audits to determine whether a contractor’s operations are being conducted in accordance with applicable requirements.
The DCAA and DCMA also review the adequacy of and a contractor's compliance with its internal control systems and policies,
including the contractor's accounting, purchasing, property, estimating, earned value management and material management
accounting systems. Our final allowable incurred costs for each year are also subject to audit and have from time to time
resulted in disputes between us and the U.S. Government. In addition, the DoJ has, from time to time, convened grand juries
to investigate possible irregularities by us. 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.