Lockheed Martin 2013 Annual Report Download - page 73

contract form (e.g., cost-reimbursable, fixed-price). We continuously evaluate the recoverability of our environmental
receivables by assessing, among other factors, U.S. Government regulations, our U.S. Government business base and
contract mix, and our history of receiving reimbursement of such costs. We include the portion of those environmental costs
expected to be allocated to our non-U.S. Government contracts, or that is determined to be unallowable for pricing under
U.S. Government contracts, in our cost of sales at the time the liability is established. Our environmental receivables are
recorded on our Balance Sheets within other assets, both current and noncurrent. We project costs and recovery of costs over
approximately 20 years.
Investments in marketable securities – Investments in marketable securities consist of debt and equity securities and
are classified as trading securities. As of December 31, 2013 and 2012, the fair value of our trading securities totaled
$1.0 billion and $874 million and was included in other noncurrent assets on our Balance Sheets. Our trading securities are
held in a separate trust, which includes investments to fund our deferred compensation plan liabilities. Net gains on trading
securities in 2013, 2012, and 2011 were $64 million, $67 million, and $40 million. Gains and losses on these investments are
included in other unallocated costs within cost of sales on our Statements of Earnings in order to align the classification of
changes in the market value of investments held for the plan with changes in the value of the corresponding plan liabilities.
Equity method investments – Investments where we have the ability to exercise significant influence, but do not
control, are accounted for under the equity method of accounting and are included in other noncurrent assets on our Balance
Sheets. Significant influence typically exists if we have a 20% to 50% ownership interest in the investee. Under this method
of accounting, our share of the net earnings or losses of the investee is included in operating profit in other income, net on
our Statements of Earnings since the activities of the investee are closely aligned with the operations of the business segment
holding the investment. We evaluate our equity method investments for impairment whenever events or changes in
circumstances indicate that the carrying amounts of such investments may be impaired. If a decline in the value of an equity
method investment is determined to be other than temporary, a loss is recorded in earnings in the current period. As of
December 31, 2013 and 2012, our equity method investments totaled $914 million and $749 million, which primarily are
composed of our Space Systems business segment’s investment in United Launch Alliance (ULA), as further described in
Note 13, and our Aeronautics business segment’s investment in the Advanced Military Maintenance, Repair and Overhaul
Center venture. Our share of net earnings related to our equity method investees was $321 million in 2013, $277 million in
2012, and $332 million in 2011, of which approximately $300 million, $265 million, and $285 million related to our Space
Systems business segment.
Derivative financial instruments – We use derivative instruments principally to reduce our exposure to market risks from
changes in foreign currency exchange rates and interest rates. We do not enter into or hold derivative instruments for speculative
trading purposes. We transact business globally and are subject to risks associated with changing foreign currency exchange
rates. We enter into foreign currency hedges such as forward and option contracts that change in value as foreign currency
exchange rates change. These contracts hedge forecasted foreign currency transactions in order to mitigate fluctuations in our
earnings and cash flows associated with changes in foreign currency exchange rates. We designate foreign currency hedges as
cash flow hedges. We also are exposed to the impact of interest rate changes primarily through our borrowing activities. For
fixed rate borrowings, we may use variable interest rate swaps, effectively converting fixed rate borrowings to variable rate
borrowings in order to reduce the amount of interest paid. These swaps are designated as fair value hedges. For variable rate
borrowings, we may use fixed interest rate swaps, effectively converting variable rate borrowings to fixed rate borrowings in
order to mitigate the impact of interest rate changes on earnings. These swaps are designated as cash flow hedges. We may also
enter into derivative instruments that are not designated as hedges and do not qualify for hedge accounting, which are intended
to mitigate certain economic exposures.
We record derivatives at their fair value. The classification of gains and losses resulting from changes in the fair values of
derivatives is dependent on our intended use of the derivative and its resulting designation. Adjustments to reflect changes in fair
values of derivatives attributable to the effective portion of hedges are either reflected in earnings and largely offset by
corresponding adjustments to the hedged items, or reflected net of income taxes in accumulated other comprehensive loss until the
hedged transaction is recognized in earnings. Changes in the fair value of the derivatives that are attributable to the ineffective
portion of the hedges, or of derivatives that are not considered to be highly effective hedges, if any, are immediately recognized in
earnings. The aggregate notional amount of our outstanding foreign currency hedges at December 31, 2013 and 2012 was
$1.0 billion and $1.3 billion. The aggregate notional amount of our outstanding interest rate swaps at December 31, 2013 and 2012
was $1.2 billion and $503 million. Derivative instruments did not have a material impact on net earnings and comprehensive
income during 2013, 2012, and 2011. Substantially all of our derivatives are designated for hedge accounting. See Note 15 for more
information on the fair value measurements related to our derivative instruments.
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