Lockheed Martin 2013 Annual Report Download - page 22

our obligations and require that we transition the work to other companies. Contracting party performance deficiencies may
affect our operating results and could result in a customer terminating our contract for default. A default termination could
expose us to liability and affect our ability to compete for future contracts and orders. Additionally, our efforts to increase the
efficiency of our operations and improve the affordability of our products and services could negatively impact our ability to
attract and retain suppliers.
International sales may pose different risks.
In 2013, 17% of our net sales were from international customers. We have a strategy to grow international sales over the
next several years, inclusive of sales of F-35 aircraft to our international partners and other countries. International sales are
subject to numerous political and economic factors, regulatory requirements, significant competition, and other risks
associated with doing business in foreign countries. Our exposure to such risks may increase if our international sales grow
as we anticipate.
Our international business is conducted through foreign military sales (FMS) contracted through the U.S. Government or
direct commercial sales (DCS) with international customers. In 2013, approximately half of our sales to international
customers were FMS while the other half were DCS. These transaction types differ as FMS transactions represent sales by
the U.S. Government to international governments and our contract with the U.S. Government is subject to FAR. By contrast,
DCS transactions represent sales by us directly to another government or international customer. All sales to international
customers are subject to U.S. and foreign laws and regulations, including, without limitation, regulations relating to import-
export control, technology transfer restrictions, taxation, repatriation of earnings, exchange controls, the Foreign Corrupt
Practices Act and other anti-corruption laws, and the anti-boycott provisions of the U.S. Export Administration Act. We
frequently team with international subcontractors and suppliers who are also exposed to similar risks. While we have
stringent policies in place to comply with such laws and regulations, failure by us, our employees, or others working on our
behalf to comply with these laws and regulations could result in administrative, civil, or criminal liabilities, including
suspension, proposed debarment, or debarment from bidding for or performing government contracts or suspension of our
export privileges, which could have a material adverse effect on us.
While international sales, whether contracted as FMS or DCS, present risks that are different, and potentially greater,
than those encountered in our domestic business, DCS with international customers may impose even greater risks as such
transactions involve commercial relationships with parties with whom we have less familiarity and where there may be
significant cultural differences. Additionally, international procurement rules and regulations, contract laws and regulations,
and contractual terms differ from those in the U.S., are less familiar to us, may be interpreted differently by foreign courts,
are officially documented in the local language and, therefore, potentially subject to errors in translation, and frequently have
terms less favorable to us than the FAR. Export and import, tax, and currency risk may also be increased for DCS with
international customers. While these risks are potentially greater than those encountered in our domestic business, our profit
margins are typically higher on DCS with international customers.
Our international business is highly sensitive to changes in regulations, political environments, or security risks that may
affect our ability to conduct business outside of the U.S., including those regarding investment, procurement, taxation, and
repatriation of earnings. Our international business may also be impacted by changes in foreign national priorities and
government budgets and may be further impacted by global economic conditions and fluctuations in foreign currency
exchange rates. Sales of military products are also affected by defense budgets and U.S. foreign policy. Additionally, the
timing of orders from our international customers can be less predictable than for our domestic customers and may lead to
fluctuations in the amount reported each year for our international sales.
In conjunction with defense procurements, some international customers require contractors to provide additional
incentives or to comply with industrial cooperation regulations, including entering into industrial cooperation agreements,
sometimes referred to as offset agreements. Offset agreements may require in-country purchases, technology transfers, local
manufacturing support, and financial support projects as an incentive, or as a condition to a contract award. In some
countries, these offset agreements may require the establishment of a venture with a local company, which must control the
venture. In these and other situations, Lockheed Martin could be liable for violations of law for actions taken by these entities
such as laws related to anti-corruption, import and export, anti-boycott restrictions, or local laws with which we are not
familiar. Offset agreements generally extend over several years and may provide for penalties in the event we fail to perform
in accordance with the offset requirements which are typically subjective and can be outside our control.
Our business involves significant risks and uncertainties that may not be covered by indemnity or insurance.
A significant portion of our business relates to designing, developing, and manufacturing advanced defense and
technology products and systems. New technologies may be untested or unproven. Failure of some of these products and
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