Lockheed Martin 2010 Annual Report Download - page 46

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In addition, we, Boeing, and ULA have cross-indemnifications in place with ULA related to financial support arrangements
(e.g., letters of credit, surety bonds, or foreign exchange contracts) and guarantees by us and Boeing of the performance and financial
obligations of ULA under certain launch service contracts. We believe ULA will be able to fully perform its obligations, as it has done
through December 31, 2010, and that it will not be necessary to make payments under the cross-indemnities.
We have entered into standby letters of credit, surety bonds, and third-party guarantees with financial institutions and other third
parties primarily relating to advances received from customers and/or the guarantee of future performance on certain of our contracts.
In some cases, we may guarantee the contractual performance of third parties such as joint venture partners. At December 31, 2010,
we had the following outstanding letters of credit, surety bonds, and guarantees:
Commitment Expiration By Period
(In millions)
Total
Commitment
Less Than
1 Year (a)
Years
2 and 3 (a)
Years
4 and 5 (a)
After
5 Years (a)
Standby letters of credit
$ 2,742
$ 2,388
$ 194
$ 130
$ 30
Surety bonds
403
398
5
—
—
Guarantees
1,030
1
59
180
790
Total commitments
$ 4,175
$ 2,787
$ 258
$ 310
$ 820
(a) Approximately $2,190 million, $40 million, $6 million, and $3 million of standby letters of credit in the “Less Than 1 Year,”
“Years 2 and 3,” “Years 4 and 5,” and “After 5 Years” periods, and approximately $40 million of surety bonds in the “Less Than
1 Year” period, are expected to renew for additional periods until completion of the contractual obligation.
Included in the table above is approximately $267 million representing letter of credit 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 $1.8 billion of the standby letters of credit 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.
Approximately 85% of the $1.0 billion in third-party guarantees outstanding at December 31, 2010 related to guarantees of the
contractual performance of joint ventures to which we are a party. This amount represents our estimate of the maximum amount we
would expect to incur upon the contractual non-performance of our joint venture partners. We evaluate the reputation, technical
capabilities, and credit quality of potential joint venture partners. In addition, we generally have cross-indemnities in place that may
enable us to recover amounts that may be paid on behalf of a joint venture partner. We believe our current joint venture partners will
be able to perform their obligations, as they have done through December 31, 2010, and that it will not be necessary to make payments
under the guarantees.
Critical Accounting Policies
Contract Accounting / Sales Recognition
Approximately 80% of our net sales are derived from long-term contracts for design, development, and production activities
(also referred to as DD&P contracts) which we account for under the percentage-of-completion (POC) accounting model. The POC
model requires that significant estimates and assumptions be made in accounting for the contracts. Our remaining net sales are derived
from contracts to provide other services that are not associated with design, development, or production activities which we account
for under the services accounting model. We consider the nature of our contracts and the types of products and services provided when
we determine the accounting method for a particular contract. Most of our long-term contracts are denominated in U.S. dollars,
including contracts for sales of military products and services to foreign governments conducted through the U.S. Government. We
record sales for both DD&P activities and services under cost-reimbursable, fixed-price, and time-and-materials contracts.
Contract Types
Cost-reimbursable contracts
Cost-reimbursable contracts, which accounted for about 60% of our total net sales over the last three years, provide for the
payment of allowable costs incurred during performance of the contract plus a fee, up to a ceiling based on the amount that has been
funded. We generate revenue under two general types of cost-reimbursable contracts: cost-plus-award-fee/incentive fee (which
represent a substantial majority of our cost-reimbursable contracts) and cost-plus-fixed-fee contracts.