Lockheed Martin 2003 Annual Report Download - page 23

including technological uncertainties and obsolescence, and having
to depend on Congressional appropriation and allotment of funds
each year. Many of our programs involve the development and
application of state-of-the-art technologies aimed at achieving chal-
lenging goals. As a result, setbacks, delays, cost growth and product
failures can occur.
In addition to our defense businesses, we also provide products
and services to most civil government customers, as well as to
commercial customers. We provide products and services to gov-
ernment agencies such as the Department of Homeland Security,
the U.S. Postal Service, the Patent and Trademark Office, the
Federal Aviation Administration, NASA, the U.S. Coast Guard and
the Transportation Security Administration. Although our lines of
business in civil government and commercial markets are not
dependent on defense budgets, they share many of the same risks as
our defense businesses, as well as other risks unique to their partic-
ular marketplaces. Although indemnification by the U.S.
Government may be available in some instances for our defense
businesses, U.S. Government indemnification may not be available
to cover potential claims or liabilities resulting from a failure of
technologies developed and deployed for homeland security pur-
poses. While we maintain insurance for some business risks, it is not
possible to obtain coverage to protect against all operational risks
and liabilities. We do plan to seek limitation of such potential lia-
bilities 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. 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 and commercial markets
may include development of competing 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. Work for
NASA accounted for approximately 5% of our consolidated net
sales in 2003. We also have a 50% equity interest in United Space
Alliance, LLC which provides ground processing and other opera-
tional services to the Space Shuttle program. We worked with
NASA and others in the independent investigation of the tragic acci-
dent in February 2003 involving the Space Shuttle Columbia. The
investigation is now completed. We do not expect that the effects of
this accident will have a material impact on our results of opera-
tions, financial position or cash flows. We expect to compete for
NASA programs related to the new Space Exploration Initiative
announced by the President, which includes development of
human-rated space launch and transportation systems over the next
15 years, replacing the current space shuttle architecture.
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, including commercial
space. Some of these business arrangements include foreign part-
ners. The conduct of international business introduces other risks
into our operations, including changing economic conditions, fluc-
tuations in relative currency values, regulation by foreign countries
and the potential for unanticipated 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 operations, 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 No. 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 accounting for a particular contract.
Generally, we record long-term fixed-price contracts on a per-
centage of completion basis using units-of-delivery as the basis to
measure progress toward completing the contract and recognizing
revenue. 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
Lockheed Martin Corporation
21