Introduction
Lockheed Martin ended 2025 with $22.9 billion of debt principal, carried at $21.7 billion net of discounts and issuance costs. Its annual report described a much larger set of commitments that did not appear there as liabilities: $82.8 billion of purchase obligations to suppliers and subcontractors, $3.1 billion of standby letters of credit, $483 million of surety bonds and $150 million of guarantees, mostly of the contractual performance of joint ventures. None of these is a hidden debt in the sense the phrase usually implies; most are ordinary features of a defense contractor's business. But together they are the obligations a banker needs to find in the notes, because the balance sheet alone will not show them.
The term off-balance-sheet became notorious after Enron, whose collapse in 2001 revealed debts parked in unconsolidated entities. The rules have tightened since: guarantees must now be recognized, most leases came onto the balance sheet under Accounting Standards Codification (ASC) 842, and variable interest entities must be consolidated by the party that controls them. What remains off the balance sheet is mostly disclosed rather than hidden, but it still takes reading to find.
What Sits Off the Balance Sheet
Off-balance-sheet is a label, not an accounting category: it covers any arrangement where a company's economic exposure exceeds what its balance sheet recognizes, because the obligation is not yet a liability or because it sits in an unconsolidated entity.
- Off-balance-sheet arrangement
A commitment, guarantee or interest in another entity that can create a material obligation, or support the obligations of others, without being recognized in full as a liability on the company's balance sheet. Common examples are purchase commitments, guarantees, letters of credit, retained interests in transferred assets and investments in unconsolidated entities.
The categories differ in how much of the exposure reaches the balance sheet. A guarantee is recognized in part from the start, a letter of credit only once it is drawn, and a joint venture's borrowings not at all. The table sets out each one and where a filing reports it.
| Arrangement | Balance sheet treatment | Where to find it |
|---|---|---|
| Purchase obligations and take-or-pay contracts | Nothing until goods or services are received | Commitments note; management's discussion and analysis (MD&A) |
| Guarantees of others' obligations | Small stand-ready liability at inception, plus an expected or probable loss | Guarantees or contingencies note |
| Standby letters of credit and surety bonds | Nothing unless drawn | Liquidity discussion; debt or commitments note |
| Joint ventures under the equity method | Net investment only; the venture's debt is excluded | Equity method investments note |
| Transferred receivables and securitizations | Removed if the transfer is a sale | Transfers or financing note |
| Supplier finance programs | Payables stay as payables, with program disclosures | Accounts payable or supplier finance note |
Leases, once the largest category, are now recognized on the balance sheet, as described in lease accounting under ASC 842. Supplier finance and factoring, which can make a company's payables or receivables look different from their economics, are covered in supplier finance and factoring.
Guarantees Under ASC 460
When a company guarantees another party's debt or performance, it takes on two obligations: a stand-ready obligation to perform if the triggering event occurs, and a contingent obligation to pay if it actually does. ASC 460 requires the guarantor to recognize a liability at inception for the fair value of the stand-ready obligation, typically about the fee it receives or would receive for the guarantee, even when payment is unlikely. The contingent obligation is recognized separately. For a financial guarantee, such as a guarantee of another party's loan, it is a liability for expected credit losses under the current expected credit loss (CECL) model of ASC 326, booked from inception; for performance and other guarantees, it follows the loss contingency rules covered in contingencies and litigation reserves and is recorded only when a loss becomes probable and estimable, as Deloitte's guide to the initial recognition of guarantees explains.
That gap is why the disclosures matter. Guarantors must disclose the nature of each guarantee, its term, the maximum potential amount of future payments and the carrying amount of any liability, along with any recourse or collateral. Some guarantees are outside the recognition rules, such as product warranties, which follow the contingency model, and a parent's guarantee of its own subsidiary's debt, which disappears in consolidation, but most still require disclosure. Lockheed reports that most of its $150 million of guarantees relate to the performance of current or former joint ventures, and that cross-indemnities from its partners may let it recover amounts it pays.
Indemnities After a Divestiture
Selling a business often leaves obligations behind. Sellers commonly indemnify buyers for taxes, environmental conditions or litigation arising before the sale, and may remain guarantors of contracts or leases the buyer has taken over until the counterparty releases them. These indemnities are guarantees too: they are recognized at fair value when the sale closes, often reducing the gain on sale, and disclosed afterwards. Lockheed's guarantee figures include performance obligations of businesses it has divested, where contracts were novated to buyers but its guarantee remained. For an acquirer of a company that has made many divestitures, the trail of indemnities can be a meaningful contingent exposure.
Commitments and Purchase Obligations
A contract to buy goods or services in the future is generally not a liability until the company receives them; until then, it is a commitment. A take-or-pay contract, which requires payment whether or not the buyer takes delivery, behaves much like debt, and rating agencies sometimes treat large ones that way. ASC 440 requires disclosure of such unconditional purchase obligations when they are noncancelable and were negotiated as part of financing the supplier's facilities, including the fixed payments due in each of the next five years.
Context matters. Of Lockheed's $82.8 billion of operating purchase obligations, about $75.5 billion related to contracts with the US government, which would generally have to reimburse its costs if it terminated the contracts for convenience, as its 2025 annual report explains. The headline number is large, but the risk sits largely with its customer. In 2020 the Securities and Exchange Commission (SEC) removed the required MD&A table of contractual obligations and the separate off-balance-sheet section; companies must instead discuss material cash requirements from known obligations and address off-balance-sheet arrangements within MD&A as a whole, as its adopting release (Release 33-10890) sets out. Some companies, like Lockheed, still provide the table.
Letters of Credit and Surety Bonds
Standby letters of credit and surety bonds are promises by a bank or insurer to pay a third party if the company fails to perform, backed by the company's obligation to reimburse them. They are not liabilities unless drawn. They matter for liquidity, because they consume borrowing capacity and can multiply in a downturn.
Unconsolidated Entities and Transferred Assets
A company that owns part of a joint venture accounted for under the equity method records only its net investment; the venture's own debt does not appear on the company's balance sheet, even if the company is economically exposed to it. Lockheed's equity method investments, mainly its stake in the United Launch Alliance joint venture, are carried at about $0.65 billion. The mechanics of the equity method are covered in equity method income on the three statements.
Entities designed so that the company controls them through contracts rather than voting shares, variable interest entities, must be consolidated by their primary beneficiary, a rule tightened after Enron, covered in variable interest entities. Receivables sold to a securitization vehicle or a bank are removed from the balance sheet if the transfer qualifies as a sale under ASC 860 and the buyer is not consolidated, but the company may retain interests or recourse that keep part of the risk.
Not every commitment is a liability in disguise. The skill is distinguishing ordinary operating commitments, such as purchase orders for inventory, from arrangements that shift financing off the balance sheet, such as guarantees of a partner's borrowing or take-or-pay contracts far above expected volumes. The notes provide the information for that judgment; the balance sheet does not.
