Lockheed Martin 2015 Annual Report Download - page 23

performance deficiencies may affect our operating results and could result in a customer terminating our contract for default
or convenience. 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 2015, 21% of our total 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 increased as a result of our acquisition of
Sikorsky and may further 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
by direct commercial sales (DCS) with international customers. In 2015, approximately 62% of our sales to international
customers were FMS and about 38% 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 directly to another international government or commercial customer. All sales to
international customers are subject to U.S. and foreign laws and regulations, including, without limitation, regulations
relating to anti-corruption, 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. 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, debarment from bidding for or performing government contracts, or suspension of
our export privileges, which could have a material adverse effect on us. We frequently team with international subcontractors
and suppliers who are also exposed to similar risks.
While international sales, whether contracted as FMS or DCS, present risks that are different and potentially greater than
those encountered in our U.S. business, DCS with international customers may impose even greater risks. DCS 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. and are less familiar to us. International regulations may be interpreted by
foreign courts less bound by precedent and with more discretion; these interpretations frequently have terms less favorable to
us than the FAR. Export and import, tax and currency risk also may be increased for DCS with international customers.
While these risks are potentially greater than those encountered in our U.S. business, the pricing of our products and services
is commensurate with the risk profile 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 also may be impacted by changes in foreign national priorities, foreign
government budgets, global economic conditions, and fluctuations in foreign currency exchange rates. Our acquisition of
Sikorsky is expected to increase our international sales further exposing us to the risks of international business. 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 U.S. 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 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,
investments in foreign joint ventures 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. The costs to satisfy our offset obligations are included in the estimates of our total costs to complete the contract
and may impact our profitability and cash flows. The ability to recover investments that we make is generally dependent
upon the successful operation of ventures that we do not control and may involve products and services that are dissimilar to
our business activities. In these and other situations, we could be liable for violations of law for actions taken by these
entities such as laws related to anti-corruption, import and export, and anti-boycott restrictions. 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.
15