Lockheed Martin 2005 Annual Report Download - page 40

   
five฀years.฀The฀amounts฀ultimately฀applied฀against฀our฀offset฀
agreements฀ are฀ based฀ on฀ negotiations฀ with฀ the฀ customer฀ and฀
generally฀require฀cash฀outlays฀that฀represent฀only฀a฀fraction฀of฀
the฀original฀amount฀in฀the฀offset฀agreement.฀At฀December฀31,฀
2005,฀we฀had฀outstanding฀offset฀agreements฀totaling฀$8.4฀bil-
lion,฀primarily฀related฀to฀our฀Aeronautics฀segment,฀that฀extend฀
through฀ 2015.฀ To฀ the฀ extent฀ we฀ have฀ entered฀ into฀ purchase฀
obligations฀at฀December฀31,฀2005฀that฀also฀satisfy฀offset฀agree-
ments,฀those฀amounts฀are฀included฀in฀the฀preceding฀table.
We฀have฀entered฀into฀standby฀letter฀of฀credit฀agreements฀
and฀other฀arrangements฀with฀financial฀institutions฀and฀custom-
ers฀mainly฀relating฀to฀advances฀received฀from฀customers฀and/or฀
the฀guarantee฀of฀future฀performance฀on฀some฀of฀our฀contracts.฀
At฀ December฀ 31,฀ 2005,฀ we฀ had฀ outstanding฀ letters฀ of฀ credit,฀
surety฀bonds฀and฀guarantees,฀as฀follows:
Commitment฀Expiration฀By฀Period
(In฀millions)
Total฀
Commitment
Less฀
Than฀฀
1฀Year(a)
1–3฀฀
Years(a)
3–5฀฀
Years
After฀
5฀
Years
Standby฀letters฀฀
฀ of฀credit $2,630 $2,425 $171 $18 $16
Surety฀bonds 434 79 352 3 —
Guarantees 2 1 1 — —฀
Total฀commitments $3,066 $2,505 $524 $21 $16
(a)฀ ฀Approximately฀ $2,262฀ million฀ and฀ $49฀ million฀ of฀ standby฀ letters฀ of฀ credit฀ in฀ the฀
“Less฀Than฀1฀Year”฀and฀“1-3฀Year”฀periods,฀respectively,฀and฀approximately฀$38฀
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฀$200฀million฀
representing฀letter฀of฀credit฀and฀surety฀bond฀amounts฀for฀which฀
related฀ obligations฀ or฀ liabilities฀ are฀ also฀ recorded฀ in฀ the฀ bal-
ance฀ sheet,฀ either฀ as฀ reductions฀ of฀ inventories,฀ as฀ customer฀
advances฀and฀amounts฀in฀excess฀of฀costs฀incurred,฀or฀as฀other฀
liabilities.฀ Approximately฀ $2฀ billion฀ of฀ the฀ standby฀ letters฀ of฀
credit฀ in฀ the฀ table฀ above฀ were฀ to฀ secure฀ advance฀ payments฀
received฀ under฀ an฀ F-16฀ contract฀ from฀ an฀ international฀ cus-
tomer.฀ 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.
At฀ December฀ 31,฀ 2005,฀ we฀ had฀ no฀ material฀ off-balance฀
sheet฀arrangements฀as฀those฀arrangements฀are฀defined฀by฀the฀
Securities฀and฀Exchange฀Commission฀(SEC).฀


Our฀main฀exposure฀to฀market฀risk฀relates฀to฀interest฀rates฀and฀
foreign฀ currency฀ exchange฀ rates.฀ Our฀ financial฀ instruments฀
that฀are฀subject฀to฀interest฀rate฀ risk฀principally฀include฀fixed-
rate฀and฀floating฀rate฀long-term฀debt.฀If฀interest฀rates฀were฀to฀
change฀by฀plus฀or฀minus฀1%,฀interest฀expense฀would฀increase฀
or฀decrease฀by฀approximately฀$10฀million฀related฀to฀our฀float-
ing฀ rate฀ debt.฀ The฀ estimated฀ fair฀ values฀ of฀ the฀ Corporation’s฀
long-term฀debt฀instruments฀at฀December฀31,฀2005฀aggregated฀
approximately฀$6.2฀billion,฀compared฀with฀a฀carrying฀amount฀
of฀approximately฀ $5.0฀billion.฀The฀majority฀ of฀ our฀long-term฀
debt฀obligations฀are฀not฀callable฀until฀maturity.฀We฀have฀used฀
interest฀rate฀swaps฀in฀the฀past฀to฀manage฀our฀exposure฀to฀fixed฀
and฀variable฀interest฀rates;฀however,฀at฀year-end฀2005,฀we฀had฀
no฀such฀agreements฀in฀place.
We฀use฀forward฀foreign฀exchange฀contracts฀to฀manage฀our฀
exposure฀ to฀ fluctuations฀ in฀ foreign฀ currency฀ exchange฀ rates,฀
and฀do฀so฀in฀ways฀that฀qualify฀for฀hedge฀accounting฀treatment.฀
These฀exchange฀contracts฀hedge฀the฀fluctuations฀in฀cash฀flows฀
associated฀ with฀ firm฀ commitments฀ or฀ specific฀ anticipated฀
transactions฀ contracted฀ in฀ foreign฀ currencies,฀ or฀ hedge฀ the฀
exposure฀ to฀ rate฀ changes฀ affecting฀ foreign฀ currency฀ denomi-
nated฀ assets฀ or฀ liabilities.฀ Related฀ gains฀ and฀ losses฀ on฀ these฀
contracts,฀ to฀ the฀ extent฀ they฀ are฀ effective฀ hedges,฀ are฀ recog-
nized฀ in฀ income฀ at฀ the฀ same฀ time฀ the฀ hedged฀ transaction฀ is฀
recognized฀ or฀ when฀the฀ hedged฀asset฀ or฀liability฀is฀adjusted.฀
To฀the฀extent฀ the฀hedges฀are฀ineffective,฀gains฀and฀losses฀on฀
the฀ contracts฀ are฀ recognized฀ in฀ the฀ current฀ period.฀ At฀
December฀31,฀2005,฀the฀fair฀value฀of฀forward฀exchange฀con-
tracts฀outstanding,฀as฀well฀as฀the฀amounts฀of฀gains฀and฀losses฀
recorded฀ during฀ the฀year฀then฀ ended,฀were฀ not฀material.฀ We฀
do฀not฀hold฀or฀issue฀derivative฀financial฀instruments฀for฀trad-
ing฀or฀speculative฀purposes.

In฀ December฀ 2004,฀ the฀ FASB฀ issued฀ FAS฀ 123(R),฀ Share-
Based฀Payments,฀which฀will฀impact฀our฀net฀earnings฀and฀earn-
ings฀per฀share฀and฀change฀the฀classification฀of฀certain฀elements฀
of฀ the฀ statement฀ of฀ cash฀ flows.฀ FAS฀ 123(R)฀ requires฀ stock฀
options฀and฀other฀share-based฀payments฀made฀to฀employees฀to฀
be฀accounted฀for฀as฀compensation฀expense฀and฀recorded฀at฀fair฀
Lockheed฀Martin฀Corporation
MANAGEMENT’S฀DISCUSSION฀AND฀ANALYSIS฀OF฀
FINANCIAL฀CONDITION฀AND฀RESULTS฀OF฀OPERATIONS
December฀31,฀2005