Lockheed Martin 2013 Annual Report Download - page 72

We initially test goodwill for impairment by comparing the fair value of each reporting unit with its carrying amount,
including goodwill. If the fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is not
impaired. If the carrying amount of a reporting unit exceeds its fair value, we compare the implied value of the reporting
unit’s goodwill with the carrying amount of its goodwill. The implied value of the reporting unit’s goodwill is calculated by
creating a hypothetical balance sheet as if the reporting unit had just been acquired. This balance sheet contains all assets and
liabilities recorded at fair value (including any assumed intangible assets that may not have any corresponding carrying
amount in our balance sheet). The implied value of the reporting unit’s goodwill is calculated by subtracting the fair value of
the net assets from the fair value of the reporting unit. If the carrying amount of the reporting unit’s goodwill exceeds the
implied value of that goodwill, an impairment loss is recognized in an amount equal to that excess.
We estimate the fair value of each reporting unit using a combination of a discounted cash flow (DCF) analysis and
market-based valuation methodologies such as comparable public trading values and values observed in market transactions.
Determining fair value requires the exercise of significant judgments, including judgments about the amount and timing of
expected future cash flows, discount rates, perpetual growth rates, and relevant comparable company earnings multiples and
transaction multiples. The cash flows employed in the DCF analyses are based on our best estimate of future sales and
operating costs, based primarily on existing firm orders, expected future orders, contracts with suppliers, labor agreements,
and general market conditions; changes in working capital; most recent long-term business plans in place at the time of our
testing date; and recent operating performance. The discount rates utilized in the DCF analysis are based on the respective
reporting unit’s weighted average cost of capital, which takes into account the relative weights of each component of capital
structure (equity and debt) and represents the expected cost of new capital, adjusted as appropriate to consider the risk
inherent in future cash flows of the respective reporting unit.
In the fourth quarter of 2013, we performed our annual goodwill impairment test for each of our reporting units. The
results of these tests indicated that the estimated fair values of our reporting units exceeded their carrying amounts, with the
exception of our Technical Services reporting unit within our Missiles and Fire Control (MFC) business segment. During the
fourth quarter of 2013, the continuing impact of defense budget reductions and related competitive pressures on the
Technical Services business, which typically has smaller customer contracts of a shorter duration, adversely impacted the fair
value of this reporting unit. As a result, we compared the implied value of that reporting unit’s goodwill with the carrying
amount of its goodwill, and since the carrying amount exceeded the implied value, we recorded a non-cash impairment
charge of $195 million, net of state tax benefits, in the fourth quarter of 2013 equal to that differential. This charge reduced
our net earnings by $176 million ($.54 per share).
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.
Postretirement benefit plans – Many of our employees are covered by defined benefit pension plans, and we provide
certain health care and life insurance benefits to eligible retirees (collectively, postretirement benefit plans). GAAP requires
that the amounts we record related to our postretirement benefit plans be computed, based on service to date, using actuarial
valuations that are based in part on certain key economic assumptions we make, including the discount rate, the expected
long-term rate of return on plan assets, and other actuarial assumptions including participant mortality estimates, the
expected rates of increase in future compensation levels, health care cost trend rates, and employee turnover, each as
appropriate based on the nature of the plans. We recognize on a plan-by-plan basis the funded status of our postretirement
benefit plans under GAAP as either an asset recorded within other noncurrent assets or a liability recorded within noncurrent
liabilities on our Balance Sheets. There is a corresponding non-cash adjustment to accumulated other comprehensive loss, net
of tax benefits recorded as deferred tax assets, in stockholders’ equity. The GAAP funded status is measured as the difference
between the fair value of the plan’s assets and the benefit obligation of the plan. The funded status under the Employee
Retirement Income Security Act of 1974 (ERISA), as amended by the Pension Protection Act of 2006 (PPA), is calculated on
a different basis than under GAAP.
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 based on our estimate of the costs
to be incurred for remediation at a particular site. We do not discount the recorded liabilities, as the amount and timing of
future cash payments are not fixed or cannot be reliably determined. Our environmental liabilities are recorded on our
Balance Sheets within other liabilities, both current and noncurrent. We expect to include a substantial portion of
environmental costs in our net sales and cost of sales in future periods pursuant to U.S. Government agreement or regulation.
At the time a liability is recorded for future environmental costs, we record a receivable for estimated future recovery
considered probable through the pricing of products and services to agencies of the U.S. Government, regardless of the
64