Lockheed Martin 2015 Annual Report Download - page 58

We have accessed the capital markets opportunistically as we did in February 2015 when we issued $2.25 billion of
long-term debt and as needed as we did in November 2015 when we issued $7.0 billion of long-term debt in connection with
our acquisition of Sikorsky. We also used a combination of short-term debt financing, commercial paper and available cash
to fund the Sikorsky acquisition, as discussed in “Capital Structure, Resources and Other” and “Note 10 – Debt” of our
consolidated financial statements. We expect our cash from operations will continue to be sufficient to support our operations
and anticipated capital expenditures for the foreseeable future. However, we expect to continue to issue commercial paper
backed by our revolving credit facility to manage the timing of our cash flows. We expect to receive a tax-free special cash
payment of approximately $1.8 billion as a result of the anticipated divestiture of our IS&GS business segment in the third or
fourth quarter of 2016 that we intend to use to repay debt, pay dividends or repurchase stock, although the timing and closing
of the transaction are uncertain and subject to obtaining Leidos stockholder and regulatory approvals and receipt of opinions
of tax counsel. As described in the “Capital Structure, Resources and Other” section below, we have financing resources
available to fund potential cash outflows that are less predictable or more discretionary, should they occur. We also have
access to credit markets, if needed, for liquidity or general corporate purposes, including, but not limited to, our revolving
credit facility or the ability to issue commercial paper, and letters of credit to support customer advance payments and for
other trade finance purposes such as guaranteeing our performance on particular contracts.
Cash received from customers, either from the payment of invoices for work performed or for advances in excess of
costs incurred, is our primary source of cash. We generally do not begin work on contracts until funding is appropriated by
the customer. However, we may determine to fund customer programs ourselves pending government appropriations and are
doing so with increased frequency. If we incur costs in excess of funds obligated on the contract, we may be at risk for
reimbursement of the excess costs.
Billing timetables and payment terms on our contracts vary based on a number of factors, including the contract type.
We generally bill and collect cash more frequently under cost-reimbursable and time-and-materials contracts, which together
represent approximately half of the sales we recorded in 2015, as we are authorized to bill as the costs are incurred or work is
performed. A number of our fixed-price contracts may provide for performance-based payments, which allow us to bill and
collect cash as we perform on the contract. The amount of performance-based payments and the related milestones are
encompassed in the negotiation of each contract. The timing of such payments may differ from our incurrence of costs
related to our contract performance, thereby affecting our cash flows.
The U.S. Government has indicated that it would consider progress payments as the baseline for negotiating payment
terms on fixed-price contracts, rather than performance-based payments. In contrast to negotiated performance-based
payment terms, progress payment provisions correspond to a percentage of the amount of costs incurred during the
performance of the contract. While the total amount of cash collected on a contract is the same, performance-based payments
have had a more favorable impact on the timing of our cash flows. In addition, our cash flows may be affected if the U.S.
Government decides to withhold payments on our billings. While the impact of withholding payments delays the receipt of
cash, the cumulative amount of cash collected during the life of the contract will not vary.
The majority of our capital expenditures for 2015 and those planned for 2016 are for equipment, facilities infrastructure
and information technology. Expenditures for equipment and facilities infrastructure are generally incurred to support new
and existing programs across all of our business segments. For example, we have projects underway in our Aeronautics
business segment for facilities and equipment to support higher production of the F-35 combat aircraft. In addition, we have
projects underway to modernize certain of our facilities, inclusive of our efforts to consolidate and reduce leased facilities.
We also incur capital expenditures for information technology to support programs and general enterprise information
technology infrastructure, inclusive of costs for the development or purchase of internal-use software.
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