Lockheed Martin 2015 Annual Report Download - page 64

venture partner. We believe our current and former venture partners will be able to perform their obligations, as they have
done through December 31, 2015, and that it will not be necessary to make payments under the guarantees. In determining
our exposures, we evaluate the reputation, technical capabilities and credit quality of our current and former venture partners.
Critical Accounting Policies
Contract Accounting / Sales Recognition
Substantially all of our net sales are accounted for using the percentage-of-completion method, which requires that
significant estimates and assumptions be made in accounting for the contracts. Our remaining net sales are derived from
contracts to provide services to non-U.S. Government customers, which we account for under a services accounting model.
We evaluate new or significantly modified contracts with customers other than the U.S. Government, to the extent the
contracts include multiple elements, to determine if the individual deliverables should be accounted for as separate units of
accounting. When we determine that accounting for the deliverables as separate units is appropriate, we allocate the contract
value to the deliverables based on their relative estimated selling prices. The contracts or contract modifications we evaluate
for multiple elements typically are long-term in nature and include the provision of both products and services. Based on the
nature of our business, we generally account for components of such contracts using the percentage-of-completion
accounting model or the services accounting model, as appropriate.
We classify net sales as products or services on our Statements of Earnings based on the predominant attributes of the
underlying contract. Most of our long-term contracts are denominated in U.S. dollars, including contracts for sales of military
products and services to international governments contracted through the U.S. Government. We record sales for both
products and services under cost-reimbursable, fixed-price and time-and-materials contracts.
Contract Types
Cost-reimbursable contracts
Cost-reimbursable contracts, which accounted for about 43%, 40%, and 45% of our total net sales in 2015, 2014, and
2013, provide for the payment of allowable costs incurred during performance of the contract plus a fee, up to a ceiling based
on the amount that has been funded. We generate revenue under two general types of cost-reimbursable contracts: cost-plus-
award-fee/incentive-fee contracts, which represent a substantial majority of our cost-reimbursable contracts; and cost-plus-
fixed-fee contracts.
Cost-plus-award-fee contracts provide for an award fee that varies within specified limits based on the customer’s
assessment of our performance against a predetermined set of criteria, such as targets based on cost, quality, technical and
schedule criteria. Cost-plus-incentive-fee contracts provide for reimbursement of costs plus a fee which is adjusted by a
formula based on the relationship of total allowable costs to total target costs (incentive based on cost) or reimbursement of
costs plus an incentive to exceed stated performance targets (incentive based on performance). The fixed fee in a cost-plus-
fixed-fee contract is negotiated at the inception of the contract and that fixed fee does not vary with actual costs.
Fixed-price and other contracts
Under fixed-price contracts, which accounted for about 54%, 55%, and 50% of our total net sales in 2015, 2014, and
2013, we agree to perform the specified work for a pre-determined price. To the extent our actual costs vary from the
estimates upon which the price was negotiated, we will generate more or less profit or could incur a loss. Some fixed-price
contracts have a performance-based component under which we may earn incentive payments or incur financial penalties
based on our performance.
Under time-and-materials contracts, which accounted for about 3% of our total net sales in 2015 and 5% of our total net
sales in 2014 and 2013, we are paid a fixed hourly rate for each direct labor hour expended and we are reimbursed for
allowable material costs and allowable out-of-pocket expenses. To the extent our actual direct labor and associated costs vary
in relation to the fixed hourly billing rates provided in the contract, we will generate more or less profit or could incur a loss.
Percentage-of-Completion Method
We record net sales and an estimated profit on a percentage-of-completion basis for cost-reimbursable and fixed-price
contracts for product and services contracts with the U.S. Government.
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