Lockheed Martin 2002 Annual Report Download - page 25

THIRTY-TWO
Lockheed Martin Corporation
MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
December 31, 2002
Environmental Liabilities
We record financial statement accruals for environmental mat-
ters in the period that it becomes probable that a liability has
been incurred and the amounts can be reasonably estimated
(see the discussion under “Environmental matters” in Note 1
to the financial statements). Judgment is required when we
develop assumptions and estimate costs expected to be
incurred for environmental remediation activities due to, along
with other factors, difficulties in assessing the extent of envi-
ronmental remediation to be performed, complex environmen-
tal regulations and remediation technologies, and agreements
between potentially responsible parties (PRPs) to share in the
cost of remediation as discussed below.
We enter into agreements (e.g., administrative orders,
consent decrees) which document the extent of our obligation.
These agreements usually cover several years which makes esti-
mating the costs more judgmental due, for example, to changing
remediation technologies. To determine total costs at clean-up
sites, we have to assess the appropriate technology to be used
to accomplish the remediation, as well as continually 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 remedial actions. Given the level of
judgment and estimation which has to occur as described
above, 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).
Under agreements reached with the U.S. Government in
1990 and 2000, some of the amounts we spend for groundwater
treatment and soil remediation are allocated to our operations
as general and administrative costs. Under existing govern-
ment regulations, these and other environmental expenditures
relating to our U.S. Government businesses, after deducting
any recoveries 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 sales and cost of sales according to U.S.
Government agreement or regulation.
At the end of 2002 and 2001, the total amount of liabili-
ties recorded on our balance sheet for environmental matters
was $445 million and $300 million, respectively. We have
recorded an asset for the portion of environmental costs that
are probable of future recovery in pricing of our products and
services for U.S. Government businesses. The amount that is
expected to be allocated to our commercial businesses has
been expensed through cost of sales. The amounts we record
do not reflect the fact that we may recover some of the envi-
ronmental costs we have incurred through insurance or from
other PRPs, which we are pursuing as required by agreement
and U.S. Government regulation. Any recoveries we receive
would reduce the allocated amounts included in our future
U.S. Government sales and cost of sales.
EXIT FROM THE GLOBAL TELECOMMUNICATIONS
SERVICES BUSINESS
In December 2001, we announced that we would exit our
global telecommunications services business as a result of
continuing overcapacity in the telecommunications industry
and weakening business and economic conditions in Latin
America. We also decided in the fourth quarter of 2001 not to
provide further funding to Astrolink International, LLC
(Astrolink) and, mainly due to Astrolink’s inability to obtain
additional funding from other sources, wrote off our invest-
ment in Astrolink. We recorded unusual charges, net of state
income tax benefits, of approximately $2.0 billion in the fourth
quarter of 2001 related to these actions. The charges reduced
net earnings by about $1.7 billion ($3.98 per diluted share).
The global telecommunications services businesses
included the operations of COMSAT Corporation. We com-
pleted our merger with COMSAT Corporation in August 2000.
The operations of COMSAT were included in the results of
our operations since August 1, 2000. The total purchase price
for COMSAT was approximately $2.6 billion. The COMSAT
transaction was accounted for using the purchase method of
accounting, where the purchase price was allocated to assets
acquired and liabilities assumed based on their fair values.
These allocations included adjustments totaling approximately
$2.1 billion to record investments in equity securities (i.e.,
Intelsat, Inmarsat and New Skies) at fair value, and goodwill.
The global telecommunications businesses that we
retained included the Systems & Technology line of business
and the COMSAT General telecommunications business unit,
which were realigned with the Space Systems segment, and
Enterprise Solutions-U.S., which was realigned with the
Technology Services segment. The equity investments
retained, including Intelsat, Inmarsat and New Skies, ACeS