Lockheed Martin 2015 Annual Report Download - page 85

future cash payments are not fixed or cannot be reliably determined. Our environmental liabilities are recorded on our
Balance Sheets within other liabilities, both current and noncurrent. We expect to include a substantial portion of
environmental costs in our net sales and cost of sales in future periods pursuant to U.S. Government agreement or regulation.
At the time a liability is recorded for future environmental costs, we record a receivable for estimated future recovery
considered probable through the pricing of products and services to agencies of the U.S. Government, regardless of the
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 not be recoverable 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, 2015 and 2014, the fair value of our trading securities totaled
$1.1 billion and $1.1 billion 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 losses on trading
securities in 2015 were $11 million and net gains on trading securities in 2014 and 2013 were $65 million and $64 million.
Gains and losses on these investments are included in other unallocated, net 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, 2015 and 2014, our equity method investments totaled $1.3 billion and $971 million, which primarily are
composed of our Space Systems business segment’s investment in United Launch Alliance (ULA), as further described in
Note 14, and our Aeronautics and MST business segments’ investments in Advanced Military Maintenance, Repair and
Overhaul Center. Our share of net earnings related to our equity method investees was $343 million in 2015, $342 million in
2014 and $321 million in 2013, of which approximately $245 million, $280 million and $300 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 also may 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 interest rate swaps at December 31,
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