Lockheed Martin 2011 Annual Report Download - page 56

Goodwill
Our goodwill at December 31, 2011 and 2010 amounted to $10.1 billion and $9.6 billion. We review goodwill for
impairment on an annual basis and whenever events or changes in circumstances indicate the carrying value of goodwill may
not be recoverable. Such events or circumstances could include significant changes in the business climate of our industry,
operating performance indicators, competition, or sale or disposal of a portion of a reporting unit. The assessment is
performed at the reporting unit level. Our annual testing date is October 1.
Performing the goodwill impairment test requires judgment, including how we define reporting units and determine
their fair value. We consider a component of our business to be a reporting unit if it constitutes a business for which discrete
financial information is available and management regularly reviews the operating results of that component. We estimate
the fair value of each reporting unit using a combination of a discounted cash flow (DCF) analysis and market-based
valuation methodologies. Determining fair value requires the exercise of significant judgments, including judgments about
appropriate discount rates, perpetual growth rates, relevant comparable company earnings multiples and the amount and
timing of expected future cash flows. The cash flows employed in the DCF analyses are based on our best estimate of future
sales and operating costs, based primarily on existing firm orders, expected future orders, contracts with suppliers, labor
agreements, and general market conditions. The discount rate applied to our forecasts of future cash flows is based on our
estimated weighted average cost of capital. In assessing the reasonableness of our determined fair values, we evaluate our
results against other value indicators such as comparable company public trading values, research analyst estimates and
values observed in market transactions. Changes in these estimates and assumptions could materially affect the determination
of fair value and/or goodwill impairment for each reporting unit.
We evaluate goodwill for impairment by comparing the estimated fair value of a reporting unit to its carrying value,
including goodwill. If the carrying value exceeds the estimated fair value, we measure impairment by comparing the derived
fair value of goodwill to its carrying value, and any impairment determined is recorded in the current period.
We completed our assessment of goodwill as of October 1, 2011 and determined that the estimated fair value of each
reporting unit exceeded its corresponding carrying amount and, as such, no impairment existed at that date. Changes in
estimates and assumptions we make in conducting our goodwill assessment could affect the estimated fair value of one or
more of our reporting units and could result in a goodwill impairment charge in a future period. However, we currently do
not believe that any of our reporting units are at risk of failing a goodwill impairment test in the near term, as their fair values
are significantly greater than their carrying values.
Recent Accounting Pronouncements
The Financial Accounting Standards Board (FASB) has issued new accounting standards that are not effective until after
December 31, 2011. For additional information, see the “Recent accounting pronouncements” section within Note 1 to the
accompanying consolidated financial statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We maintain active relationships with a broad and diverse group of domestic and international financial institutions. We
believe that they provide us with sufficient access to the general and trade credit we require to conduct business. We continue
to closely monitor the financial market environment and actively manage counterparty exposure to minimize the potential
impact from adverse developments with any single credit provider while ensuring availability of, and access to, sufficient
credit resources.
Our main exposure to market risk relates to interest rates, foreign currency exchange rates, and market prices on certain
equity securities. Our financial instruments that are subject to interest rate risk principally include fixed-rate long-term debt.
At December 31, 2011, the estimated fair value of our long-term debt instruments was approximately $7.8 billion, compared
with a carrying value of $7.0 billion, excluding unamortized discounts of $506 million. A 10% change in the level of interest
rates would not have a material impact on the fair value of our long-term debt outstanding at December 31, 2011.
We use derivative financial instruments to manage our exposure to fluctuations in foreign currency exchange rates and
interest rates. Foreign currency exchange contracts are entered into to manage the exchange rate risk of forecasted foreign
currency denominated cash receipts and cash payments. The majority of our foreign currency exchange contracts are designated
as cash flow hedges. We also use derivative financial instruments to manage our exposure to changes in interest rates. Our
financial instruments that are subject to interest rate risk principally include fixed-rate, long-term debt. Our interest rate swap
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