Lockheed Martin 2013 Annual Report Download - page 23

services could result in extensive loss of life or property damage. Accordingly, we also may incur liabilities that are unique to
our products and services, including combat and air mobility aircraft, missile and space systems, command and control
systems, air traffic control management systems, cyber security, homeland security, and training programs. In some, but not
all circumstances, we may be entitled to certain legal protections or indemnifications from our customers, either through U.S.
Government indemnifications under Public Law 85-804, qualification of our products and services by the Department of
Homeland Security under the SAFETY Act provisions of the Homeland Security Act of 2002, contractual provisions, or
otherwise. We endeavor to obtain insurance coverage from established insurance carriers to cover these risks and liabilities.
The amount of insurance coverage that we maintain may not be adequate to cover all claims or liabilities, existing coverage
may be cancelled while we remain exposed to the risk, and it is not possible to obtain insurance to protect against all
operational risks and liabilities. For example, we are limited in the amount of insurance we can obtain to cover certain natural
hazards such as earthquakes, and we have significant operations in geographic areas prone to this risk, such as Sunnyvale,
California. Even if insurance coverage is available, we may not be able to obtain it at a price or on terms acceptable to us.
Additionally, disputes with insurance carriers over coverage terms or the insolvency of one or more of our insurance carriers
may significantly affect the amount or timing of our cash flows.
Substantial costs resulting from an accident, failure of or defect in our products or services, natural catastrophe, or other
incident, or liability arising from our products and services in excess of any legal protection, indemnity and our insurance
coverage (or for which indemnity or insurance is not available or not obtained) could adversely impact our financial
condition, cash flows, or operating results. Any accident or failure of or defect in our products or services, even if fully
indemnified or insured, could negatively affect our reputation among our customers and the public, and make it more
difficult for us to compete effectively. It also could affect the cost and availability of adequate insurance in the future.
Pension funding and costs are dependent on several economic assumptions which if changed may cause our future
earnings and cash flow to fluctuate significantly as well as affect the affordability of our products and services.
Many of our employees are covered by defined benefit pension plans, and we provide certain health care and life
insurance benefits to eligible retirees. The impact of these plans on our U.S. generally accepted accounting principles
(GAAP) earnings may be volatile in that the amount of expense we record for our postretirement benefit plans may
materially change from year to year because those calculations are sensitive to funding levels as well as changes in several
key economic assumptions, including interest rates, rates of return on plan assets, and other actuarial assumptions including
participant mortality estimates, expected rates of increase in future compensation levels and employee turnover. Changes in
these factors also affect our plan funding, cash flow, and stockholders’ equity. In addition, the funding of our plans and
recovery of costs on our contracts, as described below, may also be subject to changes caused by legislative or regulatory
actions.
With regard to cash flow, in the past few years we have made substantial cash contributions to our plans in excess of the
amounts required by the Employee Retirement Income Security Act of 1974 (ERISA), as amended by the Pension Protection
Act of 2006 (PPA). We generally are able to recover these contributions related to our plans as allowable costs on our U.S.
Government contracts, including FMS, but there is a lag between when we contribute cash to our plans under pension
funding rules and recover it under U.S. Government Cost Accounting Standards (CAS). Effective February 2012, the CAS
rules were revised to harmonize the measurement and period assignment of the pension cost allocable to government
contracts with the PPA (CAS Harmonization). In 2013, the cost impact of CAS Harmonization started being phased in with
the goal of better aligning the CAS cost and ERISA funding requirements being fully achieved in 2017.
For more information on how these factors could impact earnings, financial position, cash flow and stockholders’ equity,
see “Critical Accounting Policies – Postretirement Benefit Plans” in Management’s Discussion and Analysis of Financial
Conditions and Results of Operations and “Note 10 – Postretirement Plans” of our consolidated financial statements.
If we fail to manage acquisitions, divestitures, and other transactions successfully, our financial results, business, and
future prospects could be harmed.
In pursuing our business strategy, we routinely conduct discussions, evaluate targets, and enter into agreements
regarding possible acquisitions, divestitures, ventures, and equity investments. We seek to identify acquisition or investment
opportunities that will expand or complement our existing products and services, or customer base, at attractive valuations.
We often compete with others for the same opportunities. To be successful, we must conduct due diligence to identify
valuation issues and potential loss contingencies, negotiate transaction terms, complete and close complex transactions,
integrate acquired companies and employees, and realize anticipated operating synergies efficiently and effectively.
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