Lockheed Martin 2010 Annual Report Download - page 50

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CAS rules are a major factor we consider in determining our total pension funding and govern the extent to which our pension
costs are allocable to and recoverable under contracts with the U.S. Government. Funded amounts are recovered over time through the
pricing of our products and services on U.S. Government contracts, and are recognized in our net sales. The amount of funding
required under CAS for our qualified defined benefit pension plans for 2010, and therefore the amount included in our segments’
operating results for the year, was $988 million. For 2011, we expect the funding required under CAS will be about $900 million.
Additional funding requirements computed under the Internal Revenue Code (IRC) rules, as well as discretionary payments, are
considered to be prepayments under the CAS rules to the extent the amounts exceed CAS funding requirements.
As noted above, the results of operations of our segments include pension expense only as determined and funded in accordance
with CAS rules. The FAS/CAS pension adjustment represents the difference between pension expense calculated in accordance with
GAAP and pension costs calculated and funded in accordance with CAS. Because our 2011 FAS pension expense is estimated to be
$1,825 million and our 2011 CAS pension expense is expected to be $900 million, we estimate that the 2011 FAS/CAS pension
adjustment will be $925 million, compared to $454 million in 2010. The FAS/CAS pension adjustment is included in unallocated
Corporate income (expense), net for purposes of our segment reporting.
In 2010, 2009, and 2008, we made discretionary contributions of $2,240 million, $1,482 million, and $109 million related to our
qualified defined benefit pension plans. We expect to make contributions of $1.3 billion related to those plans in 2011. We also may
review options for further contributions in 2011.
Our inability to allocate the accelerated funding required under the Pension Protection Act in the pricing of our products and
services on U.S. Government contracts in the period during which the funding is required will have the effect of increasing the amount
of the FAS/CAS pension expense that is charged to earnings in 2011 and negatively affecting our cash from operations. We anticipate
recovering approximately $900 million as CAS cost during 2011 as compared to our estimated funding of $1.3 billion, with the
remainder being recoverable in future years.
Environmental Matters
We are a party to various agreements, proceedings, and potential proceedings for environmental cleanup issues, including
matters at various sites where we have been designated a potentially responsible party (PRP) by the EPA or by a state agency. At the
end of 2010, the total amount of liabilities recorded on our Balance Sheet for environmental matters was $935 million. We have
recorded assets totaling $810 million at December 31, 2010 for the portion of environmental costs that are probable of future recovery
in pricing of our products and services for agencies of the U.S. Government, as discussed below. The amount that is expected to be
allocated to our non-U.S. Government contracts or that is determined to be unallowable for pricing under U.S. Government contracts
has been expensed through cost of sales.
We enter into agreements (e.g., administrative orders, consent decrees) that document the extent and timing of our
environmental remediation obligation. We also are involved in remediation activities at environmental sites where formal agreements
either do not exist or do not quantify the extent and timing of our obligation. Environmental cleanup activities usually span many
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, effects on natural resources, the appropriate technology to
be used to accomplish the remediation, and evolving regulatory environmental standards.
We perform quarterly reviews of environmental remediation sites and record liabilities and assets in the period it becomes
probable that a liability has been incurred and the amounts can be reasonably estimated (see the discussion under “Environmental
Matters” in Notes 1 and 14 to the financial statements). We consider the above factors in our quarterly 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 when it becomes probable that a liability has been incurred for the
amount within the range that 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, an amount at the low end of the range. We do not discount the recorded liabilities, as the amount and
timing of future cash payments are not fixed or cannot be reliably determined. 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 or a change in our estimate of the extent of contamination).
In January 2011, both the EPA and the California Office of Environmental Health Hazard Assessment announced plans to
regulate two chemicals, perchlorate and hexavalent chromium, to a level that is expected to be substantially lower than the existing
standard established in California. The rulemaking process is a lengthy one and may take one or more years to complete. If a
substantially lower standard is adopted, we would expect a material increase in our estimates for remediation at several existing sites.
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, most of the expenditures we incur are
included in our net sales and cost of sales according to U.S. Government agreement or regulation.
As disclosed above, we may record changes in the amount of environmental remediation liabilities as a result of our quarterly
reviews of the status of our environmental remediation sites, which would result in a change to the corresponding environmental asset