Lockheed Martin 2007 Annual Report Download - page 63

Purchase obligations related to operating activities include agreements and requirements contracts that give the supplier
recourse to us for cancellation or nonperformance under the contract or contain terms that would subject us to liquidated
damages. Such agreements and contracts may, for example, be related to direct materials, obligations to subcontractors and
outsourcing arrangements. Total purchase obligations in the preceding table include approximately $25 billion related to
contractual commitments entered into as a result of contracts we have with our U.S. Government customers. However, the
U.S. Government would generally be required to pay us for any costs we incur relative to these commitments if they were to
terminate the related contracts “for convenience” pursuant to the FAR. For example, if we had commitments to purchase
goods and services that were entered into as a result of a specific contract we received from our U.S. Government customer
and the customer terminated the contract for its convenience, any amounts we would be required to pay to settle the related
commitments, as well as amounts previously incurred, would generally be reimbursed by the customer. This would also be
true in cases where we perform subcontract work for a prime contractor under a U.S. Government contract. The termination
for convenience language may also be included in contracts with foreign, state and local governments. We also have
contracts with customers that do not include termination for convenience provisions, including contracts with commercial
customers.
Purchase obligations in the preceding table for capital expenditures generally include amounts for facilities and
equipment at several of our locations, related to customer contracts.
We also may enter into industrial participation agreements, sometimes referred to as offset agreements, as a condition to
obtaining orders for our products and services from certain customers in foreign countries. These agreements are designed to
enhance the social and economic environment of the foreign country by requiring the contractor to promote investment in the
country. Offset agreements may be satisfied through activities that do not require us to use cash, including transferring
technology, providing manufacturing and other consulting support to in-country projects, and the purchase by third parties
(e.g., our vendors) of supplies from in-country vendors. These agreements may also be satisfied through our use of cash for
such activities as purchasing supplies from in-country vendors, providing financial support for in-country projects, and
building or leasing facilities for in-country operations. We do not commit to offset agreements until orders for our products
or services are definitive. Offset programs generally extend over several years and may provide for penalties in the event we
fail to perform in accordance with offset requirements. We have not been required to pay any such penalties. 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, 2007, we had
outstanding offset agreements totaling $8.9 billion, primarily related to our Aeronautics segment, that extend through 2020.
To the extent we have entered into purchase obligations at December 31, 2007 that also satisfy offset agreements, those
amounts are included in the preceding table.
In connection with the formation of ULA, we and Boeing each committed to provide up to $25 million in additional
capital contributions and $200 million in other financial support to ULA, as required. The non-capital financial support was
required to be made in the form of a revolving credit facility between us and ULA or guarantees of ULA financing with third
parties, in either case, to the extent necessary for ULA to meet its working capital needs. We agreed to provide this support
for at least five years from December 1, 2006, the closing date of the transaction, and would expect to fund our requirements
with cash on hand. To satisfy our non-capital financial support commitment, we and Boeing have put into place a revolving
credit agreement with ULA. At December 31, 2007, we had made $3 million in payments under our capital contribution
commitment, and no amounts have been drawn on the revolving credit agreement. In addition, both we and Boeing have
cross-indemnified each other related to certain financial support arrangements (e.g., letters of credit, surety bonds or foreign
exchange contracts provided by either party) and guarantees by us and Boeing of the performance and financial obligations
of ULA under certain of its launch service contracts. We believe ULA will be able to fully perform its obligations, as it has
done through December 31, 2007, and that it will not be necessary to make payments under the cross-indemnities.
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