Lockheed Martin 2007 Annual Report Download - page 28

Government could provide indemnification under applicable law, but elects not to do so. While we maintain insurance for
some business risks, it is not possible to obtain coverage to protect against all operational risks and liabilities. We generally
seek, and in certain cases have obtained, limitation of such potential liabilities 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. SAFETY Act qualification is less useful in mitigating potential liability for
international applications of our homeland security products and services. Where we are unable to secure indemnification or
qualification under the SAFETY Act or choose not to do so, we may nevertheless elect to provide the product or service
when we think the related risks are manageable or when emergency conditions relative to national security make
qualification impracticable. Our assumptions or judgment may prove to be inaccurate.
Substantial claims resulting from an accident, failure of our product or service, other incident or liability arising from
our products and services in excess of any indemnity and our insurance coverage (or for which indemnity or insurance is not
available or was not obtained) could harm our financial condition, cash flows and operating results. Any accident, failure,
incident or liability, even if fully indemnified or insured, could negatively affect our reputation among our customers and the
public, thereby making it more difficult for us to compete effectively, and could significantly impact the cost and availability
of adequate insurance in the future.
Our earnings and margins may vary based on the mix of our contracts and programs.
At December 31, 2007, our backlog included both cost reimbursable and fixed-price contracts. Cost reimbursable
contracts generally have lower profit margins than fixed-price contracts. Production contracts are mainly fixed-price
contracts, and developmental contracts are generally cost reimbursable contracts. Our earnings and margins may vary
materially depending on the types of long-term government contracts undertaken, the nature of the products produced or
services performed under those contracts, the costs incurred in performing the work, the achievement of other performance
objectives and the stage of performance at which the right to receive fees, particularly under incentive and award fee
contracts, is finally determined.
Under fixed-price contracts, we receive a fixed price irrespective of the actual costs we incur and, consequently, any
costs in excess of the fixed price are absorbed by us. Under time and materials contracts, we are paid for labor at negotiated
hourly billing rates and for certain expenses. Under cost reimbursable contracts, subject to a contract-ceiling amount in
certain cases, we are reimbursed for allowable costs and paid a fee, which may be fixed or performance based. However, if
our costs exceed the contract ceiling or are not allowable under the provisions of the contract or applicable regulations, we
may not be able to obtain reimbursement for all such costs and may have our fees reduced or eliminated. The failure to
perform to customer expectations and contract requirements can result in reduced fees and may affect our financial
performance for the affected period. Under each type of contract, if we are unable to control costs we incur in performing
under the contract, our financial condition and operating results could be materially adversely affected. Cost over-runs or the
failure to perform on existing programs also may adversely affect our ability to sustain existing programs and obtain future
contract awards.
If our subcontractors or suppliers fail to perform their contractual obligations, our prime contract performance and
our ability to obtain future business could be materially and adversely impacted.
Many of our contracts involve subcontracts with other companies upon which we rely to perform a portion of the
services that we must provide to our customers. There is a risk that we may have disputes with our subcontractors, including
disputes regarding the quality and timeliness of work performed by the subcontractor, the workshare provided to the
subcontractor, customer concerns about the subcontract, our failure to extend existing task orders or issue new task orders
under a subcontract, or our hiring of the personnel of a subcontractor or vice versa. A failure by one or more of our
subcontractors to satisfactorily provide on a timely basis the agreed-upon supplies or perform the agreed-upon services may
materially and adversely impact our ability to perform our obligations as the prime contractor. Subcontractor performance
deficiencies could result in a customer terminating our contract for default. A default termination could expose us to liability
and have a material adverse effect on our ability to compete for future contracts and orders. In addition, a delay in our ability
to obtain components and equipment parts from our suppliers may affect our ability to meet our customers’ needs and may
have an adverse effect upon our profitability.
We use estimates in accounting for many of our programs. Changes in our estimates could affect our future financial
results.
Contract accounting requires judgment relative to assessing risks, estimating contract sales and costs, and making
assumptions for schedule and technical issues. Due to the size and nature of many of our contracts, the estimation of total
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