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Item 1A.
Risk Factors
You should consider carefully each of the following risks and all of the other information in this Annual Report on Form 10-K
and the documents incorporated by reference herein. If any of the following risks and uncertainties develops into actual events, our
business, financial condition or results of operations could be materially adversely affected.
Risks Related to Our Business
Changes in the U.S. federal government budgetary priorities and global market conditions that are beyond our control may
have a material adverse effect on us.
We depend on the U.S. government for a significant portion of our revenues. Competing demands for federal funds could
pressure all areas of spending, which will impact the U.S. government budget. Cost cutting, efficiency initiatives, reprioritization and
other affordability analysis by the U.S. government and changes in budgetary priorities could adversely impact our Government
Segment. Although governments worldwide, including the U.S. government, have initiated sweeping economic plans, we are unable
to predict the impact, severity, and duration of these economic events, which could have a material effect on our business, financial
position, results of operations or cash flows.
We rely on particular levels of U.S. government spending on our communication solutions and our backlog depends in a large
part on continued funding by the U.S. government for the programs in which we are involved. These spending levels are not generally
correlated with any specific economic cycle, but rather follow the cycle of general public policy and political support for this type of
spending. Moreover, although our contracts often contemplate that our services will be performed over a period of several years, the
Executive Branch must propose and Congress must approve funds for a given program each government fiscal year and may
significantly change - increase, reduce or eliminate - funding for a program. A decrease in DoD and/or Homeland Security
expenditures, the elimination or curtailment of a material program in which we are involved, or changes in payment patterns of our
customers as a result of changes in U.S. government spending, could have a material adverse effect on our operating results, financial
condition, and/or cash flows.
There remains therefore a significant level of uncertainty and lack of detail available to predict specific future government
spending on the solutions that we offer. While we are unable to predict the exact impact on our Government Segment, these factors,
could in the aggregate have material adverse operational and financial consequences, depending on how the cuts are allocated across
the federal government budget.
Agencies of the U.S. government have special rights unlike other customers, exposing us to additional risks that could have a
material adverse effect on us.
Sales to various agencies of the U.S. government accounted for approximately 32% of our 2013 revenue, all of which was
reported as Government Segment revenue. Our ability to earn revenue from sales to the U.S. government can be affected by numerous
factors outside of our control, including:
x
The U.S. government may terminate its contracts it with us. All of the contracts we have with the U.S. government are, by
their terms, subject to termination by the U.S. government either for its convenience or in the event of a default by us. In the
event of termination of a contract by the U.S. government, we may have little or no recourse.
x
The U.S. government may audit and review our costs and performance on their contracts, as well as our accounting and
general practices. The costs and prices under these contracts may be subject to adjustment based upon the results of any
audits. Future audits that result in the increase in our costs may adversely affect our business, financial position, results of
operations or cash flows.
Most of our Government contracts are on a fixed price basis which could negatively impact our profitability.
Fixed-price contracts inherently have more risk than flexibly priced contracts. Our operating margin is adversely affected when
contract costs that cannot be billed to customers are incurred. While management uses its best judgment to estimate costs associated
with fixed-price contracts, future events could result in either upward or downward adjustments to those estimates which could
negatively impact our profitability. The increase in contract costs can occur if estimates to complete increase or if initial estimates
used for calculating the contract cost were incorrect. The cost estimation process requires significant judgment and expertise. Reasons
for cost growth may include unavailability and productivity of labor, the nature and complexity of the work to be performed, the effect
of change orders, the availability of materials, interruptions in our supply chain, the effect of any delays in performance, availability
and timing of funding from the customer, natural disasters, and the inability to recover any claims included in the estimates to
complete. A significant change in cost estimates on one or more programs could have a material effect on our consolidated financial
position or results of operations.
