Lockheed Martin 2007 Annual Report Download - page 64

We have entered into standby letter of credit agreements and other arrangements with financial institutions and
customers mainly relating to advances received from customers and/or the guarantee of future performance on some of our
contracts. In some cases, we may also guarantee the contractual performance of third parties. At December 31, 2007, we had
outstanding letters of credit, surety bonds and guarantees, as follows:
Commitment Expiration By Period
(In millions)
Total
Commitment
Less Than
1 Year (a)
1-3
Years (a)
3-5
Years (a)
After
5 Years
Standby letters of credit $2,873 $2,651 $169 $ 45 $ 8
Surety bonds 423 378 45 — —
Guarantees 32 1 30 1 —
Total commitments $3,328 $3,030 $244 $ 46 $ 8
(a) Approximately $2,299 million, $36 million and $23 million of standby letters of credit in the “Less Than 1 Year,” “1-3 Year,” and
“3-5 Year” periods, and approximately $44 million and $3 million of surety bonds in the “Less Than 1 Year” and “1-3 Year” periods,
are expected to renew for additional periods until completion of the contractual obligation.
Included in the table above is approximately $375 million representing letter of credit and surety bond amounts for
which related obligations or liabilities are also recorded on the Balance Sheet, either as reductions of Inventories, as
Customer advances and amounts in excess of costs incurred, or as Other liabilities. Approximately $2.0 billion of the standby
letters of credit in the table above were issued to secure advance payments received under an F-16 contract from an
international customer. These letters of credit are available for draw down in the event of our nonperformance, and the
amount available will be reduced as certain events occur throughout the period of performance in accordance with the
contract terms. Similar to the letters of credit for the F-16 contract, other letters of credit and surety bonds are available for
draw down in the event of our nonperformance.
Under the agreement to sell our ownership interests in LKEI and ILS (see Note 2), we will continue to be responsible to
refund customer advances to certain customers if launch services are not provided and ILS does not refund the advance. We
expect to recognize the $67 million deferred net gain on the transaction when our responsibility to refund the advances
expires, which we currently believe will be in 2008 based on the expected Proton launch schedule, which is subject to
change. The amount we could be required to pay is expected to increase over time due to the payment of additional advances
by the customers to ILS related to the specific launches we have guaranteed, and will be reduced by the occurrence of those
launches. At December 31, 2007, the total amount that could be payable under the guarantees, approximating the total
contract value of the guaranteed launches, was $174 million. That amount may be partially mitigated by approximately $57
million of cash we retained that, absent any requirements to make payments under the guarantees, will be paid to the buyer
over time as the launches occur. Through December 31, 2007, Proton launch services provided through ILS were provided
according to contract terms.
Quantitative and Qualitative Disclosure of Market Risk
Our main exposure to market risk relates to interest rates and foreign currency exchange rates. Our financial instruments
that are subject to interest rate risk principally include fixed-rate and floating-rate long-term debt. At December 31, 2007, we
had an agreement in place to swap variable interest rates on our $1.0 billion of convertible debentures based on LIBOR for a
fixed interest rate through August 15, 2008. With this swap agreement, our Long-term debt portfolio effectively bears
interest at fixed rates. We have designated the agreement as a cash flow hedge of the forecasted LIBOR-based variable
interest payments. Based on our evaluation at the inception of the hedging agreement and in subsequent periods, we expect
the hedging relationship to be highly effective in achieving the offsetting cash flows attributable to the hedged variable
interest payments, resulting in a fixed net interest expense reported on the Statement of Earnings. We determined that the
hedging relationship remained highly effective at December 31, 2007. The fair value of the interest rate swap agreement is
adjusted at each Balance Sheet date, with a corresponding adjustment to Other comprehensive income (loss). At
December 31, 2007, the fair value of the interest rate swap agreement was not material.
We use forward foreign exchange contracts to manage our exposure to fluctuations in foreign currency exchange rates,
and generally do so in ways that qualify for hedge accounting treatment. These exchange contracts hedge the fluctuations in
cash flows associated with firm commitments or specific anticipated transactions contracted in foreign currencies, or hedge
the exposure to rate changes affecting foreign currency denominated assets or liabilities. Related gains and losses on these
contracts, to the extent they are effective hedges, are recognized in income at the same time the hedged transaction is
recognized or when the hedged asset or liability is adjusted. To the extent the hedges are ineffective, gains and losses on the
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