Lockheed Martin 2013 Annual Report Download - page 54

not commit to offset agreements until orders for our products or services are definitive. The amounts ultimately applied
against our offset agreements are based on negotiations with the customer and typically require cash outlays that represent
only a fraction of the original amount in the offset agreement. At December 31, 2013, the remaining obligations under our
outstanding offset agreements totaled $9.9 billion, which primarily relate to our Aeronautics, MFC, and MST business
segments, some of which extend through 2027. To the extent we have entered into purchase obligations at
December 31, 2013 that also satisfy offset agreements, those amounts are included in the preceding table. Offset programs
usually extend over several years and may provide for penalties, estimated at approximately $1.0 billion at
December 31, 2013, in the event we fail to perform in accordance with offset requirements. While historically we have not
been required to pay material penalties, resolution of offset requirements are often the result of negotiations and subjective
judgments.
In connection with our 50% ownership interest of ULA, we and The Boeing Company (Boeing) have each received
distributions totaling $527 million (since ULA’s formation in December 2006) which are subject to agreements between us,
Boeing, and ULA, whereby, if ULA does not have sufficient cash resources or credit capacity to make required payments
under the inventory supply agreement it has with Boeing, both we and Boeing would provide to ULA, in the form of an
additional capital contribution, the level of funding required for ULA to make those payments. Any such capital
contributions would not exceed the amount of the distributions subject to the agreements. Based on current expectations of
ULA’s cash flow needs, we currently believe that ULA should have sufficient operating cash flows and credit capacity,
including access to its $560 million revolving credit agreement from third-party financial institutions, to meet its obligations
such that we would not be required to make a contribution under these agreements.
In addition, both we and Boeing have cross-indemnified each other for guarantees by us and Boeing of the performance
and financial obligations of ULA under certain launch service contracts. We believe ULA will be able to fully perform its
obligations, as it has done through December 31, 2013, and that it will not be necessary to make payments under the cross-
indemnities or guarantees.
We have entered into standby letters of credit, surety bonds, and third-party guarantees with financial institutions and
other third parties primarily relating to advances received from customers and the guarantee of future performance on certain
contracts. Letters of credit and surety bonds generally are available for draw down in the event we do not perform. In some
cases, we may guarantee the contractual performance of third parties such as venture partners. At December 31, 2013, we
had the following outstanding letters of credit, surety bonds, and third-party guarantees (in millions):
Commitment Expiration By Period
Total
Commitment
Less Than
1 Year
Years
2 and 3
Years
4 and 5
After
5 Years
Standby letters of credit (a) $1,313 $ 964 $231 $101 $ 17
Surety bonds 358 358 — — —
Guarantees 696 6 192 — 498
Total commitments $2,367 $1,328 $423 $101 $515
(a) Approximately $760 million of standby letters of credit in the “Less Than 1 Year” category are expected to renew for additional
periods until completion of the contractual obligation.
At December 31, 2013, third-party guarantees totaled $696 million, of which approximately 90% related to guarantees
of contractual performance of ventures to which we currently are or previously were a party. This amount represents our
estimate of the maximum amount we would expect to incur upon the contractual non-performance of the venture partners. In
addition, we generally have cross-indemnities in place that may enable us to recover amounts that may be paid on behalf of a
venture partner. We believe our current and former venture partners will be able to perform their obligations, as they have
done through December 31, 2013, and that it will not be necessary to make payments under the guarantees. In determining
our exposures, we evaluate the reputation, technical capabilities, and credit quality of our current and former venture
partners.
Critical Accounting Policies
Contract Accounting / Sales Recognition
Substantially all of our net sales are accounted for using the percentage-of-completion method, which requires that
significant estimates and assumptions be made in accounting for the contracts. Our remaining net sales are derived from
contracts to provide services to non-U.S. Government customers, which we account for under the services accounting model.
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