Lockheed Martin 2005 Annual Report Download - page 28

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flows฀for฀a฀few฀years฀beginning฀in฀2007.฀Absent฀other฀changes,฀
the฀subsequent฀annual฀funding฀requirements฀would฀be฀expected฀
to฀decline฀in฀recognition฀of฀the฀accelerated฀contributions.฀

We฀are฀a฀party฀to฀various฀agreements,฀proceedings฀and฀poten-
tial฀ 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.฀ 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฀
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฀
environmental฀remediation฀to฀be฀performed,฀complex฀environ-
mental฀ regulations฀ and฀ remediation฀ technologies,฀ cost฀ allow-
ability฀ issues฀ 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฀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฀ con-
tamination,฀ the฀ appropriate฀ technology฀ to฀ be฀ used฀ to฀ accom-
plish฀ the฀ remediation฀ and฀ 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฀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฀proj-
ect฀costs฀over฀an฀appropriate฀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฀responsi-
ble฀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฀mate-
rials.฀ 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,฀
some฀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฀estab-
lishing฀prices฀of฀our฀products฀and฀services.฀As฀a฀result,฀a฀sub-
stantial฀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฀2005,฀the฀total฀amount฀of฀liabilities฀recorded฀
on฀our฀balance฀sheet฀for฀environmental฀matters฀was฀$464฀mil-
lion.฀ About฀ 60%฀ of฀ the฀ liability฀ relates฀ to฀ sites฀ in฀ Redlands,฀
Burbank฀ and฀ Glendale,฀ California,฀ and฀ in฀ Great฀ Neck,฀ New฀
York,฀mainly฀for฀remediation฀of฀soil฀and฀groundwater฀contam-
ination.฀The฀remainder฀of฀the฀liability฀relates฀to฀other฀proper-
ties฀(including฀current฀operating฀facilities฀and฀certain฀facilities฀
operated฀ in฀ prior฀ years)฀ for฀ which฀ our฀ obligation฀ is฀ probable฀
and฀the฀financial฀exposure฀can฀be฀estimated.฀We฀have฀recorded฀
assets฀totaling฀$353฀million฀at฀December฀31,฀2005฀for฀the฀por-
tion฀of฀environmental฀costs฀that฀are฀probable฀of฀future฀recov-
ery฀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.฀Any฀recoveries฀we฀receive฀from฀other฀PRPs฀or฀insurance฀
would฀ reduce฀ the฀ allocated฀ amounts฀ included฀ in฀ our฀ future฀
U.S.฀Government฀sales฀and฀cost฀of฀sales.
Lockheed฀Martin฀Corporation
MANAGEMENT’S฀DISCUSSION฀AND฀ANALYSIS฀OF฀
FINANCIAL฀CONDITION฀AND฀RESULTS฀OF฀OPERATIONS
December฀31,฀2005