Lockheed Martin 2005 Annual Report Download - page 24

   
As฀discussed฀above,฀commercial฀satellite฀sales฀have฀con-
tinued฀to฀experience฀pricing฀pressures฀due฀to฀excess฀capacity.฀
However,฀in฀the฀past฀two฀years,฀we฀have฀received฀six฀commer-
cial฀satellite฀orders฀and฀are฀in฀active฀discussions฀for฀additional฀
satellite฀ orders.฀ In฀ addition฀ to฀ commercial฀ activity,฀ we฀ also฀
received฀ new฀ orders฀ for฀ government฀ satellites฀ in฀ 2004฀ and฀
2005,฀including฀those฀under฀ the฀ MUOS฀program฀ and฀ certain฀
classified฀activities.฀

As฀a฀government฀contractor,฀we฀are฀subject฀to฀U.S.฀Government฀
oversight.฀The฀government฀may฀ask฀about฀and฀investigate฀our฀
business฀ practices฀ and฀ audit฀ our฀ compliance฀ with฀ applicable฀
rules฀and฀regulations.฀Depending฀on฀the฀results฀of฀those฀audits฀
and฀investigations,฀the฀government฀could฀make฀claims฀against฀
us.฀Under฀government฀procurement฀regulations฀and฀practices,฀
an฀indictment฀of฀a฀government฀contractor฀could฀result฀in฀that฀
contractor฀being฀ fined฀and฀suspended฀from฀being฀ able฀to฀ bid฀
on,฀ or฀ be฀ awarded,฀ new฀ government฀ contracts฀ for฀ a฀ period฀ of฀
time.฀ A฀ conviction฀ could฀ result฀ in฀ debarment฀ for฀ a฀ specific฀
period฀ of฀ time.฀ Similar฀ government฀ oversight฀ exists฀ in฀ most฀
other฀countries฀where฀we฀conduct฀business.฀Although฀we฀cannot฀
predict฀the฀outcome฀of฀these฀types฀of฀investigations฀and฀inqui-
ries฀with฀certainty,฀based฀on฀current฀facts,฀we฀do฀not฀believe฀that฀
any฀of฀the฀claims,฀audits฀or฀investigations฀pending฀against฀us฀are฀
likely฀to฀have฀a฀material฀adverse฀effect฀on฀our฀business฀or฀our฀
results฀of฀operations,฀cash฀flows฀or฀financial฀position.
We฀are฀exposed฀to฀risks฀associated฀with฀U.S.฀Government฀
contracting,฀including฀technological฀uncertainties,฀dependence฀
on฀fewer฀manufacturing฀suppliers฀and฀obsolescence,฀as฀well฀as฀
Congressional฀appropriation฀and฀allotment฀of฀funds฀each฀year.฀
Many฀ of฀ our฀ programs฀ involve฀ the฀ development฀ and฀ applica-
tion฀ of฀ state-of-the-art฀ technologies฀ aimed฀ at฀ achieving฀ chal-
lenging฀ goals.฀ As฀ a฀ result,฀ setbacks,฀ delays,฀ cost฀ growth฀ and฀
product฀failures฀can฀occur.
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.฀Some฀
of฀these฀ business฀arrangements฀include฀foreign฀partners.฀ 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฀
subject฀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.


A฀ large฀ part฀ of฀ our฀ business฀ is฀ derived฀ from฀ long-term฀ con-
tracts฀for฀design,฀development฀and฀production฀activities฀which฀
we฀ account฀ for฀ consistent฀ with฀ the฀ American฀ Institute฀ of฀
Certified฀ Public฀ Accountants’฀ (AICPA)฀ audit฀ and฀ accounting฀
guide,฀ Audits฀ of฀ Federal฀ Government฀ Contractors,฀ and฀ the฀
AICPA’s฀ Statement฀ of฀ Position฀ 81-1,฀ Accounting฀ for฀
Performance฀ of฀ Construction-Type฀ and฀ Certain฀ Production-
Type฀Contracts.฀We฀also฀enter฀into฀contracts฀to฀provide฀other฀
services฀ that฀ are฀ not฀ associated฀ with฀ design,฀ development฀ or฀
production฀activities.฀We฀account฀for฀those฀contracts฀in฀accor-
dance฀ with฀ the฀ Securities฀ and฀ Exchange฀ Commission’s฀ Staff฀
Accounting฀ Bulletin฀ (SAB)฀ No.฀ 104,฀ Revenue฀ Recognition,฀
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฀method฀for฀a฀particular฀contract.
Accounting฀for฀Design,฀Development฀฀
and฀Production฀Contracts
Generally,฀ we฀ record฀ long-term,฀ fixed-price฀ design,฀ develop-
ment฀and฀production฀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฀development฀
and฀production฀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฀compari-
son฀to฀the฀total฀value฀of฀the฀contract,฀sales฀are฀recorded฀when฀
we฀ achieve฀ performance฀ milestones฀ or฀ using฀ the฀ cost-to-cost฀฀
Lockheed฀Martin฀Corporation
MANAGEMENT’S฀DISCUSSION฀AND฀ANALYSIS฀OF฀
FINANCIAL฀CONDITION฀AND฀RESULTS฀OF฀OPERATIONS
December฀31,฀2005