Lockheed Martin Case Study

Lockheed Martin Corp. is an aerospace and global security company with international and domestic customers (United States). More than 79% of Lockheed Martin’s contracts and sales are to the U.S. government in the form of prime contractor or a subcontractor. With the recent economic hardships in the U.S., Lockheed Martin faces uncertainty of the reliability of sales to its largest customer. With the immense reliance of the United State’s government for revenue, along with the possibility of discontinuance or cutbacks on contracts from the U.S., Lockheed Martin’s industry is fairly elastic.
The largest selling segment is claimed by the Aeronautic Business consisting of 32% net sales in 2014. The Information Systems and Global Solutions, Missiles
and Fire Control, and Space Systems individually each generated approximately 17-18% total sales. The nature of Lockheed Martin’s business is heavily regulated, requiring constant compliance with laws and regulations. Lack of compliance could damage Lockheed Martin’s business and reputation. The diverse range of products available hedges against the risks of budget cuts having a long-term impact. Depending on the segment, budget cuts affect Lockheed Martin’s health in different proportions. Reduction of sales in the Aeronautic Business sector presents the largest negative impact.
Lockheed Martin’s profitability is variable based on the number of contracts, ability to deliver, government regulations, and the ability to limit costs.
The complexity of contracts offered presents another complication. Contracts differ with regards to receiving payment, including just a few of the options: Cost-reimbursable, fixed-price, incentive-fee, etc. This further complicates Lockheed Martin’s business. The complexity of the various contract types present a reporting challenge, estimation error, and overall risk of material misstatement.
Significant risks and uncertainties lie in designing and developing defense and technology and covering pension liabilities. Failure of new technologies is possible, but some can even cause death that may not be covered with insurance. An ever changing financial liability, pensions are hypersensitive to market changes. Litigation poses another threat possibly resulting in fines, penalties, etc. Operating cycles are mostly long-term alongside numerous contract types, further complicating the recognition of payments. Lockheed Martin accounts for most of their contracts based on the percentage-of-completion method based on the progress of a product and an estimation of the profit when
sold.