Lockheed Martin 2003 Annual Report Download - page 26

The FAS/CAS pension adjustment represents the difference
between pension expense or income calculated in accordance with
FAS 87 and pension costs calculated and funded in accordance with
CAS. Since the CAS expense is recovered through the pricing of
our products and services on U.S. Government contracts, and there-
fore recognized in a particular segment’s net sales, the results of
operations of our segments only include pension expense as deter-
mined and funded in accordance with CAS rules. Accordingly, the
FAS/CAS adjustment is an amount included in the reconciliation of
total segment operating profit to consolidated operating profit
under GAAP. See the discussion of “Unallocated Corporate
(Expense) Income, Net” under “Discussion of Business Segments.”
The Medicare Prescription Drug, Improvement and
Modernization Act of 2003 (the Act) was signed into law by the
President in December 2003. Historically, Medicare has not provid-
ed prescription drug benefits. Under the new law, Medicare will
provide a prescription drug benefit beginning in 2006. The Act also
provides for a federal subsidy to eligible sponsors of retiree health
care benefits. At this point, there is a lack of clarity regarding how
some of the key provisions of the Act will be applied and adminis-
tered, and how it will impact the prescription drug benefits that we
provide our retirees. In addition, specific authoritative guidance on
the accounting for the federal subsidy is still pending and that guid-
ance, when issued, could require a change to previously reported
information. In recognition of these uncertainties, the Financial
Accounting Standards Board decided to allow companies to defer
recognition of the impact of the new law on the benefit obligations
they provide their retirees, which we have elected to do.
Accordingly, the accumulated post-retirement benefit obligation
(APBO) for our retiree health care benefits, as well as the net peri-
odic post-retirement benefit cost, included in our financial state-
ments and the accompanying notes do not reflect the effects of the
Act. It is expected that any such change would result in some reduc-
tion to the APBO and the net periodic post-retirement benefits cost.
Environmental Matters
We are a party to various agreements, proceedings and potential
proceedings for environmental clean-up issues, including matters at
various sites where we have been designated a potentially responsi-
ble party (PRP) by the Environmental Protection Agency or by a
state agency. We record financial statement accruals for environ-
mental matters in the period that it becomes probable that a
liability has been incurred and the amounts can be reasonably esti-
mated (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 envi-
ronmental remediation activities due to, along with other factors,
difficulties in assessing the extent of environmental remediation to
be performed, complex environmental regulations and remediation
technologies, and agreements between 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 and timing of our obligation. We
are also involved in remediation activities at environmental sites
where formal agreements exist but do not quantify the extent and tim-
ing of our obligation. Environmental clean-up 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 clean-up sites, we have to assess the extent of con-
tamination, the appropriate technology to be used to accomplish the
remediation and continually evolving regulatory environmental stan-
dards. We consider these factors in our estimates of the timing and
amount of any future costs that may be required for remediation
actions. In cases where a date to complete activities at a particular
environmental site cannot be estimated by reference to agreements or
otherwise, we project costs over a reasonable time frame not to
exceed 20 years. Given the level of judgment and estimation which
has to occur, 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 clean-up and usually agree among themselves to
share, on an allocated basis, the costs and expenses for investigation
and remediation of hazardous materials. Under existing environ-
mental laws, however, 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, some of
the amounts we spend for groundwater treatment and soil
Lockheed Martin Corporation
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
December 31, 2003
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