Lockheed Martin 2011 Annual Report Download - page 55

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 receivables 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 13 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 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).
Both the EPA and the California Office of Environmental Health Hazard Assessment announced plans in January 2011
to regulate two chemicals, perchlorate and hexavalent chromium, to levels in drinking water that are expected to be
substantially lower than the existing public health goals or standards 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 environmental 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,
regardless of the contract form (e.g. cost-reimbursable, fixed price). We continually evaluate the recoverability of our
environmental receivables by assessing, among other factors, U.S. Government regulations, our U.S. Government business
base and contract mix, and our history of receiving reimbursement of such costs.
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 receivable and a charge to earnings. For example, if we were to determine that the liabilities should be
increased by $100 million, the corresponding receivables would be increased by approximately $87 million, with the
remainder recorded as a charge to earnings. This allocation is determined annually, based upon our existing and projected
business activities with the U.S. Government.
We cannot reasonably determine the extent of our financial exposure at all environmental sites with which we are
involved. There are a number of former operating facilities we are monitoring or investigating for potential future
remediation. In some cases, although a loss may be probable, it is not possible at this time to reasonably estimate the amount
of any obligation for remediation activities because of uncertainties (e.g., assessing the extent of the contamination). During
any particular quarter, such uncertainties may be resolved to allow us to estimate and recognize the initial liability to
remediate a particular former operating site. The amount of the liability could be material. Upon recognition of the liability, a
portion will be recognized as a receivable with the remainder charged to operations.
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. 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 cost recovery or 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.
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