Lockheed Martin 2007 Annual Report Download - page 48

agreements exist, but do not quantify the extent and timing of our obligation. Environmental cleanup activities usually cover
several years, which makes estimating the costs more judgmental due to, for example, changing remediation technologies. To
determine the costs related to cleanup sites, we have to assess the extent of contamination, the appropriate technology to be
used to accomplish the remediation, and evolving regulatory environmental standards. We consider these factors in our
estimates of the timing and amount of any future costs that may be required for remediation actions, which generally results
in the calculation of a range of estimates for a particular environmental site. We record a liability for the amount within the
range which we determine to be our best estimate of the cost of remediation or, in cases where no amount within the range is
better than another, we record an amount at the low end of the range. We review the estimates periodically and make
adjustments to reflect changes in facts and circumstances. Given the required level of judgment and estimation, it is likely
that materially different amounts could be recorded if different assumptions were used or if circumstances were to change
(e.g., a change in environmental standards).
If we are ultimately found to have liability at those sites where we have been designated a PRP, we expect that the
actual costs of remediation will be shared with other liable PRPs. Generally, PRPs that are ultimately determined to be
responsible parties are strictly liable for site cleanup and usually agree among themselves to share, on an allocated basis, the
costs and expenses for investigation and remediation of hazardous materials. Under existing environmental laws, responsible
parties are jointly and severally liable and, therefore, we are potentially liable for the full cost of funding such remediation. In
the unlikely event that we were required to fund the entire cost of such remediation, the statutory framework provides that we
may pursue rights of contribution from the other PRPs. The amounts we record do not reflect the fact that we may recover
some of the environmental costs we have incurred through insurance or from other PRPs, which we are required to pursue by
agreement and U.S. Government regulation.
Under agreements reached with the U.S. Government, most of the amounts we spend for groundwater treatment and soil
remediation are allocated to our operations as general and administrative costs. Under existing government regulations, these
and other environmental expenditures relating to our U.S. Government business, after deducting any recoveries received
from insurance or other PRPs, are allowable in establishing prices of our products and services. As a result, a substantial
amount of the expenditures we incur are being included in our Net sales and Cost of sales according to U.S. Government
agreement or regulation.
At the end of 2007, the total amount of liabilities recorded on our Balance Sheet for environmental matters was $572
million. About 40% of the liability relates to former operating sites in Redlands and Burbank, California, mainly for
remediation of soil and groundwater contamination. The remainder of the liability relates to other properties (including
current operating facilities and certain facilities operated in prior years) for which our obligation is probable and the financial
exposure can be reasonably estimated. We have recorded assets totaling $480 million at December 31, 2007 for the portion
of environmental costs that are probable of future recovery in pricing of our products and services to agencies of the U.S.
Government. The amount that is expected to be allocated to our commercial businesses has been expensed through Cost of
sales. Any recoveries we receive from other PRPs or insurance would reduce the allocated amounts included in our future
U.S. Government Net sales and Cost of sales.
Goodwill Impairment
In accordance with FAS 142, Goodwill and Other Intangible Assets, we review Goodwill for impairment on an annual
basis and whenever events or changes in circumstances indicate the carrying value of Goodwill may not be recoverable. Such
events or circumstances could include significant changes in the business climate of our industry, operating performance
indicators, competition, or sale or disposal of a portion of a reporting unit. The assessment is performed at the reporting unit
level which we generally define as the business segment level or one level below the business segment. Our annual testing
date is October 1.
Performing the Goodwill impairment test requires judgment, including the identification of reporting units and the
determination of the fair value of each reporting unit. We estimate the fair value of each reporting unit using a discounted
cash flow methodology which requires significant judgment, including estimation of future cash flows. Forecasts of future
cash flows are based on our best estimate of future sales and operating costs, based primarily on existing firm orders,
expected future orders, contracts with suppliers, labor agreements, general market conditions and the determination of our
weighted average cost of capital. Changes in these estimates and assumptions could materially affect the determination of
fair value and/or Goodwill impairment for each reporting unit.
We evaluate Goodwill for impairment by comparing the fair value of a reporting unit to its carrying value, including
Goodwill. If the carrying value exceeds the fair value, we measure impairment by comparing the derived fair value of
Goodwill to its carrying value, and any impairment determined is recorded in the current period.
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