Lockheed Martin 2007 Annual Report Download - page 75

Receivables – Receivables include amounts billed and currently due from customers, and unbilled costs and accrued
profits primarily related to revenues on long-term contracts that have been recognized for accounting purposes but not yet
billed to customers. As we recognize those revenues, we reflect appropriate amounts of Customer advances, performance-
based payments and progress payments as an offset to the related receivables balance.
Inventories – We record Inventories at the lower of cost or estimated net realizable value. Costs on long-term contracts
and programs in progress represent recoverable costs incurred for production or contract-specific facilities and equipment,
allocable operating overhead, advances to suppliers and, in the case of contracts with the U.S. Government, research and
development and general and administrative expenses. Pursuant to contract provisions, agencies of the U.S. Government and
certain other customers have title to, or a security interest in, Inventories related to such contracts as a result of advances,
performance-based payments and progress payments. We reflect those advances and payments as an offset against the related
inventory balances. We expense general and administrative expenses related to products and services provided essentially
under commercial terms and conditions as incurred. We usually determine the costs of other product and supply inventories
by the first-in first-out or average cost methods.
Property, plant and equipment – We include Property, plant and equipment on our Balance Sheet principally at cost.
We provide for depreciation and amortization on plant and equipment generally using accelerated methods during the first
half of the estimated useful lives of the assets, and the straight-line method thereafter. The estimated useful lives of our plant
and equipment generally range from 10 to 40 years for buildings and five to 15 years for machinery and equipment.
Goodwill – We evaluate Goodwill for potential impairment on an annual basis by comparing the fair value of a
reporting unit, using a discounted cash flow methodology, to its carrying value including Goodwill recorded by the reporting
unit. We generally define reporting units at the business segment level or one level below the business segment. If the
carrying value exceeds the fair value, we measure impairment by comparing the derived fair value of Goodwill to its carrying
value, and any impairment determined is recorded in the current period.
Purchased intangibles, net – We amortize intangible assets acquired as part of business combinations over their
estimated useful lives unless their useful lives are determined to be indefinite. For certain business combinations, the
amounts we record related to Purchased intangibles are determined from independent valuations. Our Purchased intangibles
primarily relate to contracts and programs acquired and customer relationships which are amortized over periods of 15 years
or less, and trade names which have indefinite lives. We included Purchased intangibles on our consolidated Balance Sheet
net of accumulated amortization of $2,105 million and $1,952 million at December 31, 2007 and 2006. Less than 10% of the
unamortized balance of Purchased intangibles at December 31, 2007 is composed of intangibles with indefinite lives.
Amortization expense related to these intangible assets was $153 million, $164 million, and $150 million for the years ended
December 31, 2007, 2006 and 2005, and we estimate amortization expense will be $116 million in 2008, $95 million in
2009, $90 million in 2010, $80 million in 2011 and $25 million in 2012.
Customer advances and amounts in excess of cost incurred – We receive advances, performance-based payments
and progress payments from customers that may exceed costs incurred on certain contracts, including contracts with agencies
of the U.S. Government. We classify such advances, other than those reflected as a reduction of Receivables or Inventories as
discussed above, as Current liabilities.
Environmental matters – We record a liability for environmental matters when it is probable that a liability has been
incurred and the amount can be reasonably estimated. The amount of liability recorded is generally based on our best
estimate of the costs to be incurred for remediation at a particular site within a range of estimates for that site. We do not
discount liabilities unless the amount and timing of future cash payments are fixed or reliably determinable. We expect to
include a substantial portion of environmental costs in Net sales and Cost of sales pursuant to U.S. Government agreement or
regulation. At the time a liability is recorded for future environmental costs, we record an asset for estimated future recovery
considered probable through the pricing of products and services to agencies of the U.S. Government. We include the portion
of those costs expected to be allocated to commercial business or that is determined to be unallowable for pricing under U.S.
Government contracts in Cost of sales at the time the liability is established.
Sales and earnings – We record sales and anticipated profits under long-term fixed-price design, development and
production contracts on a percentage of completion basis, generally using units-of-delivery as the basis to measure progress
toward completing the contract and recognizing revenue. We include estimated contract profits in earnings in proportion to
recorded sales. We record sales under certain long-term fixed-price development and production contracts which, among
other factors, provide for the delivery of minimal quantities or require a substantial level of development effort in relation to
total contract value, upon achievement of performance milestones or using the cost-to-cost method of accounting where sales
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