5. Ability to perform in key contracts
A&D players are typically involved in multimillion-dollar contracts and have huge backlogs. New development programs involve complex design and new technologies which are, in many cases, untested or unproven. As a result, A&D players can experience technological challenges and other performance hindrances resulting in delays, setbacks, cost overruns and product failures.
Failure to deliver major programs on time as well as adhering to quality and technical standards within budget, in case of both fixed price and cost performance contracts, might lead to negative consequences such as termination of orders, imposition of penalties and loss of orders.
6. Compliance with a wide range of regulations and restrictions
As the customer base for A&D companies include government customers and defense agencies, they have to operate in a highly regulated environment. This subjects A&D companies to added scrutiny around corruption and bribery.
A&D players are also subject to risks associated with changes in accounting and revenue recognition standards. For instance, under Accounting Standards Codification Topic 606, A&D players would need to recognize revenue at a single point in time for contracts that don't qualify for revenue recognition over time.
7. Capacity to innovate
Some of the technologies that A&D players use in their manufacturing and other business processes are decades old. Future performance depends on factors such as the ability to:
- Recognize the emerging trends in technology and identify additional uses for existing technology
- Develop, design, manufacture and bring innovative offerings to market at cost-effective prices
- Enhance product designs for export that comply with regulations of the export destinations
8. Failure to realize the benefits of M&As and partnerships
While evaluating new M&A transactions, companies are required to take decisions regarding the value of business opportunities, technologies, other assets and cost of potential liabilities. Poor M&A decisions might result into overvaluation of the acquired business, failure in achieving synergies, inability to retain talent, and financial challenges.
Many defense companies need to form JVs in developing countries as part of their offset obligations. In some arrangements, the global players need to transfer some technology know-hows to their local partners, which carries the risks of IP violations and copyright infringements.