Lockheed Martin 2004 Annual Report Download - page 24

indemnification may not be available for homeland security
purposes. While we maintain insurance for some business risks,
it is not possible to obtain coverage to protect against all oper-
ational risks and liabilities. We do plan to seek, and in certain
cases have obtained, limitation of such potential liabilities
related to the sale and use of our homeland security products
and services through qualification by the Department of
Homeland Security under the “SAFETY Act” provisions of the
Homeland Security Act of 2002. During 2004, we received
SAFETY Act approvals for two such activities. In the event we
were to provide homeland security-related products and services
to a customer without such qualification, we would not be
afforded the benefit of the SAFETY Act’s cap on tort liability
or U.S. Government indemnification. Other risks unique to the
civil government markets may include development of compet-
ing products, technological feasibility and product obsolescence.
We provide products and services to NASA, including the
Space Shuttle program, mainly through our Space Systems and
Information & Technology Services business segments. We also
have a 50% equity interest in United Space Alliance, LLC
which provides ground processing and other operational services
to the Space Shuttle program. We are committed to securing
return to flight of the Space Shuttle in 2005. We expect to com-
pete for NASA programs related to the new Space Exploration
Vision announced by the President and funded by Congress for
fiscal year 2005.
We have entered into various joint venture, teaming and
other business arrangements to help support our portfolio of
products and services in many of our lines of business, includ-
ing commercial space. Some of these business arrangements
include foreign partners. The conduct of international business
introduces other risks into our operations, including changing
economic conditions, fluctuations in relative currency values,
regulation by foreign countries and the potential for unantici-
pated cost increases resulting from the possible deterioration of
political relations.
The nature of our international business also makes us sub-
ject to the export control regulations of the U.S. Department of
State and the Department of Commerce. If these regulations are
violated, it could result in monetary penalties and denial of
export privileges. We are currently unaware of any violations of
export control regulations which are reasonably likely to have a
material adverse effect on our business or our results of opera-
tions, cash flows or financial position.
CRITICAL ACCOUNTING POLICIES
Contract Accounting / Revenue Recognition
A large part of our business is derived from long-term contracts
for development, production and service activities which we
account for consistent with the American Institute of Certified
Public Accountants’ (AICPA) audit and accounting guide,
Audits of Federal Government Contractors, the AICPA’s
Statement of Position 81-1, Accounting for Performance of
Construction-Type and Certain Production-Type Contracts, and
other relevant revenue recognition accounting literature. We
consider the nature of these contracts and the types of products
and services provided when we determine the proper account-
ing for a particular contract.
Generally, we record long-term, fixed-price contracts on
a percentage of completion basis using units-of-delivery as
the basis to measure progress toward completing the contract
and recognizing sales. For example, we use this method of
revenue recognition on our C-130J tactical transport aircraft
program, Atlas and Proton launch vehicle programs, and
Multiple Launch Rocket System program. For certain other
long-term, fixed-price contracts that, along with other factors,
require us to deliver minimal quantities over a longer period
of time or to perform a substantial level of development effort
in comparison to the total value of the contract, sales are
recorded when we achieve performance milestones or using
the cost-to-cost method to measure progress toward comple-
tion. Under the cost-to-cost method of accounting, we recog-
nize sales based on the ratio of costs incurred to our estimate
of total costs at completion. As examples, we use this method-
ology for our F/A-22 Raptor program and the AEGIS
Weapon System program. In some instances, long-term pro-
duction programs may require a significant level of develop-
ment and/or a low level of initial production units in their
early phases, but will ultimately require delivery of increased
quantities in later, full rate production stages. In those cases,
the revenue recognition methodology may change from the
cost-to-cost method to the units-of-delivery method after con-
sidering, among other factors, program and production stability.
As we incur costs under cost-reimbursement-type contracts,
we record sales. Cost-reimbursement-type contracts include
time and materials and other level-of-effort-type contracts.
Examples of this type of revenue recognition include the F-35
Joint Strike Fighter system development and demonstration
(SDD) program and the THAAD missile defense program.
Lockheed Martin Corporation
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
December 31, 2004
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