Lockheed Martin 2005 Annual Report Download - page 25

   
Lockheed฀Martin฀Corporation
method฀ to฀ measure฀ progress฀ toward฀ completion.฀ Under฀ the฀
cost-to-cost฀ method฀ of฀ accounting,฀ we฀ recognize฀ sales฀ based฀
on฀the฀ratio฀of฀costs฀incurred฀to฀our฀estimate฀of฀total฀costs฀at฀
completion.฀ As฀ examples,฀ we฀ use฀ this฀ methodology฀ for฀ our฀
F-22฀ Raptor฀ program฀ and฀ the฀ AEGIS฀ Weapon฀ System฀ pro-
gram.฀In฀some฀instances,฀long-term฀production฀programs฀may฀
require฀a฀significant฀level฀ of฀development฀and/or฀a฀low฀level฀
of฀initial฀production฀units฀in฀their฀early฀phases,฀but฀will฀ulti-
mately฀ require฀ delivery฀ of฀ increased฀ quantities฀ in฀ later,฀ full฀
rate฀production฀stages.฀In฀those฀cases,฀the฀revenue฀recognition฀
methodology฀may฀change฀from฀the฀cost-to-cost฀method฀to฀the฀
units-of-delivery฀ method฀ after฀ considering,฀ among฀ other฀
factors,฀program฀ and฀ production฀ stability.฀ As฀we฀incur฀ costs฀
under฀ cost-reimbursement-type฀ contracts,฀ we฀ record฀ sales.฀
Cost-reimbursement-type฀ contracts฀ include฀ time฀ and฀ materi-
als฀and฀other฀level-of-effort-type฀ contracts.฀Examples฀of฀this฀
type฀ of฀ revenue฀ recognition฀ include฀ the฀ F-35฀ Joint฀ Strike฀
Fighter฀ system฀ development฀ and฀ demonstration฀ (SDD)฀ pro-
gram฀and฀the฀THAAD฀missile฀defense฀program.฀Most฀of฀our฀
long-term฀ contracts฀are฀ denominated฀in฀U.S.฀ dollars,฀ includ-
ing฀ contracts฀ for฀ sales฀ of฀ military฀ products฀ and฀ services฀ to฀
foreign฀governments฀conducted฀through฀the฀U.S.฀Government฀
(i.e.,฀foreign฀military฀sales).฀
As฀a฀general฀rule,฀we฀recognize฀sales฀and฀profits฀earlier฀in฀
a฀production฀cycle฀when฀we฀use฀the฀cost-to-cost฀and฀milestone฀
methods฀ of฀ percentage฀ of฀ completion฀ accounting฀ than฀ when฀
we฀ use฀ the฀ units-of-delivery฀ method.฀ In฀ addition,฀ our฀ profits฀
and฀ margins฀ may฀ vary฀ materially฀ depending฀ on฀ the฀ types฀ of฀
long-term฀ contracts฀ undertaken,฀ the฀ costs฀ incurred฀ in฀ their฀
performance,฀ the฀ achievement฀ of฀ other฀ performance฀ objec-
tives,฀and฀the฀stage฀of฀performance฀at฀which฀the฀right฀to฀receive฀
fees,฀ particularly฀ under฀ incentive฀ and฀ award฀ fee฀ contracts,฀ is฀
finally฀determined.฀
Incentives฀ and฀ award฀ fees฀ related฀ to฀ performance฀ on฀
design,฀development฀and฀production฀contracts,฀which฀are฀gener-
ally฀awarded฀at฀the฀discretion฀of฀the฀customer,฀as฀well฀as฀penal-
ties฀related฀to฀contract฀performance,฀are฀considered฀in฀estimating฀
sales฀ and฀ profit฀ rates.฀ Estimates฀ of฀ award฀ fees฀ are฀ based฀ on฀
actual฀awards฀and฀anticipated฀performance.฀Incentive฀provisions฀
which฀ increase฀ or฀ decrease฀ earnings฀ based฀ solely฀ on฀ a฀ single฀
significant฀ event฀ are฀ generally฀ not฀ recognized฀ until฀ the฀ event฀
occurs.฀Such฀incentives฀and฀penalties฀are฀recorded฀when฀there฀is฀
sufficient฀information฀for฀us฀to฀assess฀anticipated฀performance.฀
Accounting฀for฀design,฀development฀and฀production฀con-
tracts฀requires฀judgment฀relative฀to฀assessing฀risks,฀estimating฀
contract฀ revenues฀ and฀ costs,฀ and฀ making฀ assumptions฀ for฀
schedule฀ and฀ technical฀ issues.฀ Due฀ to฀ the฀ size฀ and฀ nature฀ of฀
the฀work฀required฀to฀be฀performed฀on฀many฀of฀our฀contracts,฀
the฀estimation฀of฀total฀revenue฀and฀cost฀at฀completion฀is฀com-
plicated฀and฀subject฀to฀many฀variables.฀Contract฀costs฀include฀
material,฀labor฀and฀subcontracting฀costs,฀as฀well฀as฀an฀alloca-
tion฀of฀indirect฀costs.฀Assumptions฀have฀to฀be฀made฀regarding฀
labor฀productivity฀and฀availability,฀the฀complexity฀of฀the฀work฀
to฀ be฀ performed,฀ the฀ availability฀ of฀ materials,฀ the฀ length฀ of฀
time฀to฀complete฀the฀contract฀(to฀estimate฀increases฀in฀wages฀
and฀ prices฀ for฀ materials),฀ and฀ the฀ availability฀ and฀ timing฀ of฀
funding฀from฀the฀customer.฀For฀contract฀change฀orders,฀claims฀
or฀similar฀items,฀we฀apply฀judgment฀in฀estimating฀the฀amounts฀
and฀assessing฀the฀potential฀for฀realization.฀These฀amounts฀are฀
only฀included฀in฀contract฀value฀when฀they฀can฀be฀reliably฀esti-
mated฀ and฀ realization฀ is฀ considered฀ probable.฀ We฀ have฀
accounting฀policies฀in฀place฀to฀address฀these฀as฀well฀as฀other฀
contractual฀ and฀ business฀ arrangements฀ to฀ properly฀ account฀
for฀long-term฀contracts.฀
Products฀ and฀ services฀ provided฀ under฀ long-term฀ design,฀
development฀and฀production฀contracts฀make฀up฀the฀majority฀of฀
our฀business.฀Therefore,฀the฀amounts฀we฀record฀in฀our฀finan-
cial฀ statements฀ using฀ contract฀ accounting฀ methods฀ and฀ cost฀
accounting฀standards฀are฀material.฀Because฀of฀the฀significance฀
of฀ the฀ judgments฀ and฀ estimation฀ processes,฀ it฀ is฀ likely฀ that฀
materially฀different฀amounts฀could฀be฀recorded฀if฀we฀used฀dif-
ferent฀assumptions฀or฀if฀the฀underlying฀circumstances฀were฀to฀
change.฀For฀example,฀if฀underlying฀assumptions฀were฀to฀change฀
such฀ that฀ our฀ estimated฀ profit฀ at฀ completion฀ for฀ all฀ design,฀
development฀and฀production฀contracts฀was฀higher฀or฀lower฀by฀
1%,฀our฀ net฀earnings฀would฀increase฀or฀decrease฀by฀approxi-
mately฀$190฀million.฀When฀adjustments฀in฀estimated฀contract฀
revenues฀ or฀ costs฀ are฀ required,฀ any฀ changes฀ from฀ prior฀ esti-
mates฀are฀included฀in฀earnings฀in฀the฀current฀period.฀
Accounting฀for฀Other฀Services฀Contracts
Revenue฀under฀contracts฀for฀services฀other฀than฀those฀associ-
ated฀with฀design,฀development฀or฀production฀activities฀is฀gen-
erally฀ recognized฀ either฀ as฀ services฀ are฀ performed฀ or฀ when฀
earned,฀depending฀on฀the฀contract.฀This฀methodology฀is฀mainly฀
used฀ by฀ our฀ Information฀ &฀ Technology฀ Services฀ segment.฀฀