Lockheed Martin 1999 Annual Report Download - page 30

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Lockheed Martin Corporation
Also as more fully described in Note 16 to the Notes
to Consolidated Financial Statements, the Corporation is
continuing to pursue recovery of a significant portion of the
unanticipated costs incurred in connection with the $180
million fixed price contract with the U.S. Department of
Energy (DOE) for the remediation of waste found in Pit 9.
The Corporation has been unsuccessful to date in reaching
any agreements with the DOE on cost recovery or other
contract restructuring matters. In 1998, the management
contractor for the project, a wholly-owned subsidiary of the
Corporation, at the DOE’s direction, terminated the Pit 9
contract for default. At the same time, the Corporation
filed a lawsuit seeking to overturn the default termination.
Subsequently, the Corporation took actions to raise the
status of its request for equitable adjustment to a formal
claim. Also in 1998, the management contractor, again at
the DOE’s direction, filed suit against the Corporation seek-
ing recovery of approximately $54 million previously paid
to the Corporation under the Pit 9 contract. The Corpora-
tion is defending this action in which discovery has been
pending since August 2, 1999. On October 1, 1999, the
U.S. Court of Federal Claims stayed the DOE’s motion to
dismiss the Corporation’s lawsuit, finding that the Court has
jurisdiction. The Court ordered discovery to commence and
gave leave to the DOE to convert its motion to dismiss to
a motion for summary judgment if supported by discovery.
The Corporation continues to assert its position in the liti-
gation while continuing its efforts to resolve the dispute
through non-litigation means.
Other Matters
The Corporation’s primary exposure to market risk relates
to interest rates and foreign currency exchange rates.
Financial instruments held by the Corporation which are
subject to interest rate risk principally include variable
rate commercial paper and fixed rate long-term debt. The
Corporation’s long-term debt obligations are generally not
callable until maturity. The Corporation may use interest
rate swaps to manage its exposure to fluctuations in interest
rates; however, there were no such agreements outstanding
at December 31, 1999. Based on its portfolio of variable
rate short-term debt and fixed rate long-term debt outstand-
ing at December 31, 1999, the Corporation’s exposure to
interest rate risk is not material.
The Corporation uses forward exchange contracts to
manage its exposure to fluctuations in foreign exchange
rates. These contracts are designated as qualifying hedges
of firm commitments or specific anticipated transactions,
and related gains and losses on the contracts are recog-
nized in income when the hedged transaction occurs. At
December 31, 1999, the amounts of forward exchange
contracts outstanding, as well as the amounts of gains and
losses recorded during the year, were not material. Based
on the above, the Corporation’s exposure to foreign cur-
rency exchange risk is not material. The Corporation
does not hold or issue derivative financial instruments
for trading purposes.
As described more fully in Note 1 of the Notes to
Consolidated Financial Statements, the Corporation
does not intend to adopt Statement of Financial Accounting
Standards (SFAS) No. 133, “Accounting for Derivative
Instruments and Hedging Activities,” prior to the current
required date of January 1, 2001. The Statement will
require the recognition of all derivatives as either assets or
liabilities in the Consolidated Balance Sheet, and the peri-
odic measurement of those instruments at fair value. The
classification of gains and losses resulting from changes in
the fair values of derivatives is dependent on the intended
use of the derivative and its resulting designation. In gen-
eral, these provisions of the Statement could result in a
greater degree of income statement volatility than current
accounting practice. The Corporation is continuing its
process of analyzing and assessing the impact that the
adoption of SFAS No. 133 is expected to have on its con-
solidated results of operations, cash flows and financial
position, but has not yet reached any conclusions.