Lockheed Martin 2015 Annual Report Download - page 26

a timely manner or at all, or that such approvals will not contain adverse conditions. We also have no assurance that we will
be able to realize the intended benefits and tax treatment of the transaction or that the new combined company will perform
as expected. The announcement and pendency of the transaction could also cause disruptions in our and Leidos’ business,
including potential adverse reactions or changes to business relationships and competitive responses to the transaction. The
transaction will also require significant amounts of time and effort which could divert management’s attention from
operating and growing our business. Any of the foregoing could adversely affect our business, financial condition and results
of operations. Declines in our sales, earnings and cash flows could also result in future asset impairments (including
goodwill). Additionally, the former IS&GS programs we moved to our other business segments and retained could
experience increased pricing pressures which could have a negative impact on operating margins and impact our ability to
win future renewals.
In addition, as part of the transaction with Leidos, it is contemplated that immediately prior to the transaction, the
IS&GS business would enter into third-party financing in an aggregate principal amount of approximately $1.8 billion to
finance the $1.8 billion special cash payment and the payment of certain fees and expenses. The IS&GS business (through a
subsidiary created for the transaction) has entered into a commitment letter (the “Commitment Letter”) with certain financial
institutions to provide this financing through $710 million of Term Loan A facilities and a $1.13 billion Term Loan B
facility. Under the terms of the Commitment Letter, if the closing does not occur by July 26, 2016, the lenders (in
consultation with us) could require the IS&GS business subsidiary to borrow up to the full amount of the Term Loan B
facility in advance of the closing of the transaction (the “Loan Demand”) and deposit the proceeds of such borrowing in
escrow to secure such loan, which would increase our total outstanding debt for the period from the date the Loan Demand is
exercised until closing of the transaction. If the closing of the transaction were not to occur and our agreement with Leidos
was terminated, we would cause the IS&GS business to repay any amounts borrowed and would be entitled to
reimbursement for financing costs from Leidos under the term of our agreement with Leidos.
Our business involves significant risks and uncertainties that may not be covered by indemnity or insurance.
A significant portion of our business relates to designing, developing and manufacturing advanced defense and
technology products and systems. New technologies may be untested or unproven. Failure of some of these products and
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, cybersecurity, 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 or the Price-Anderson Act, 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. 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, 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 longevity (also known as mortality), employee turnover, as well as the timing of cash funding. Changes in these
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