Lockheed Martin 2007 Annual Report Download - page 29

sales and cost at completion is complicated and subject to many variables. For example, assumptions have to be made
regarding the length of time to complete the contract because costs also include expected increases in wages and prices for
materials. Similarly, assumptions have to be made regarding the future impacts of efficiency initiatives and cost reduction
efforts. Incentives or penalties related to performance on contracts are considered in estimating sales and profit rates, and are
recorded when there is sufficient information for us to assess anticipated performance. Estimates of award and incentive fees
are also used in estimating sales and profit rates based on actual and anticipated awards.
Because of the significance of the judgments and estimation processes described above, it is likely that materially
different amounts could be recorded if we used different assumptions or if the underlying circumstances were to change.
Changes in underlying assumptions, circumstances or estimates may adversely affect future period financial performance.
For additional information on accounting policies and internal controls we have in place for recognizing sales and profits, see
our discussion under Management’s Discussion and Analysis – “Critical Accounting Policies – Contract Accounting/
Revenue Recognition” beginning on page 37 and “Controls and Procedures” beginning on page 57, and Note 1 – Significant
Accounting Policies beginning on page 66 of this Form 10-K.
New accounting standards could result in changes to our methods of quantifying and recording accounting
transactions, and could affect our financial results and financial position.
Changes to U.S. generally accepted accounting principles (GAAP) arise from new and revised standards, interpretations
and other guidance issued by the Financial Accounting Standards Board, the SEC, and others. In addition, the U.S.
Government may issue new or revised Cost Accounting Standards or Cost Principles. The effects of such changes may
include prescribing an accounting method where none had been previously specified, prescribing a single acceptable method
of accounting from among several acceptable methods that currently exist, or revoking the acceptability of a current method
and replacing it with an entirely different method, among others. Such changes could result in unanticipated effects on our
results of operations, financial position and other financial measures.
The level of returns on pension and postretirement plan assets, changes in interest rates and other factors could affect
our earnings in future periods.
Our earnings may be positively or negatively impacted by the amount of expense we record for our employee benefit
plans. This is particularly true with expense for our pension plans. GAAP requires that we calculate expense for the plans
using actuarial valuations. These valuations are based on assumptions that we make relating to financial market and other
economic conditions. Changes in key economic indicators can result in changes in the assumptions we use. The key year-end
assumptions used to estimate pension expense for the following year are the discount rate, the expected long-term rate of
return on plan assets and the rate of increase in future compensation levels. Our pension expense can also be affected by
legislation and other government regulatory actions. For a discussion regarding how our financial statements can be affected
by pension plan accounting policies, see Management’s Discussion and Analysis – “Critical Accounting Policies –
Postretirement Benefit Plans” beginning on page 38 of this Form 10-K.
International sales and suppliers may pose potentially greater risks.
Our international business may pose greater risks than our domestic business due to the greater potential for changes in
foreign economic and political environments. In return, these greater risks are often accompanied by the potential to earn
higher profits than from our domestic business. Our international business is also highly sensitive to changes in foreign
national priorities and government budgets. Sales of military products are affected by defense budgets (both in the U.S. and
abroad) and U.S. foreign policy.
Sales of our products and services internationally are subject to U.S. and local government regulations and procurement
policies and practices including regulations relating to import-export control. Violations of export control rules could result
in suspension of our ability to export items from one or more business units or the entire corporation. Depending on the
scope of the suspension, this could have a material effect on our ability to perform certain international contracts. There are
also U.S. and international regulations relating to investments, exchange controls and repatriation of earnings, as well as
varying currency, political and economic risks. Our contracts, however, generally are denominated in U.S. dollars. We also
frequently team with international subcontractors and suppliers, and are exposed to similar risks.
In international sales, we face substantial competition from both domestic manufacturers and foreign manufacturers,
whose governments sometimes provide research and development assistance, marketing subsidies and other assistance for
their products.
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