Lockheed Martin 2013 Annual Report Download - page 59

The CAS Board published its revised pension accounting rules (CAS Harmonization) with an effective date of
February 27, 2012 to better align the recovery of pension contributions, including prepayment credits, on U.S. Government
contracts with the accelerated funding requirements of the PPA. The CAS Harmonization rules increased our CAS cost
beginning in 2013. There is a transition period during which the cost impact of the new rules is phased in, with the full
impact occurring in 2017. We expect the incremental impact of CAS Harmonization will increase successively over years
2014 through 2017. Based upon current assumptions which may change, we expect that the increase in 2014 CAS costs
caused by CAS Harmonization should be in excess of the pension expense we record under GAAP (FAS pension expense).
Accordingly, we expect our FAS/CAS pension adjustment, discussed further in the “Business Segment Results of
Operations” section above, will increase earnings in 2014 as mentioned below rather than decrease earnings as it has the past
few years.
Trends
Our CAS recoveries are expected to exceed our cash contributions in 2014 and for several years thereafter, as we utilize
the $9.6 billion prepayment credits under the CAS rules. In 2014, we anticipate recovering $1.6 billion as CAS cost on our
contracts and expect to make contributions of $1.0 billion related to our qualified defined benefit pension plans, which would
increase our cash flow from operations. We expect our required contributions to continue to be temporarily lowered in 2014
and 2015 as a result of MAP-21.
We expect that our 2014 FAS pension expense will be $1.3 billion, which is less than our 2013 FAS pension expense of
$1.9 billion, primarily due to the increase in the discount rate. Also, we expect FAS/CAS pension income in 2014 of about
$345 million, as compared to FAS/CAS pension expense of $482 million in 2013, primarily due to the increase in the
discount rate and higher CAS costs due to recoveries. We expect our 2014 earnings per share to be higher than in 2013,
primarily due to our expected FAS/CAS pension income in 2014.
Mortality assumptions, as published by the IRS, are used to estimate the life expectancy of plan participants during
which they are expected to receive benefit payments. Actuarial studies are currently being conducted that indicate life
expectancies are longer and would have the resultant impact of increasing the amount of benefit payments to plan
participants. The pension obligation recognized at December 31, 2013 and the amounts estimated for 2014 pension expense,
CAS cost, and funding do not reflect the impact of these actuarial studies as such studies have not yet been finalized. The
new mortality assumptions, which we expect to adopt at our next measurement date, currently are expected to increase the
amount of our pension obligation and decrease our net earnings. We also expect to incorporate the new mortality
assumptions into our annual incremental pension funding requirements pursuant to ERISA no earlier than 2016.
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 U.S.
Environmental Protection Agency (EPA) or by a state agency. At December 31, 2013 and 2012, the total amount of liabilities
recorded on our Balance Sheet for environmental matters was $997 million and $950 million. We have recorded receivables
totaling $863 million and $821 million at December 31, 2013 and 2012 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 project costs and recovery of costs
over approximately 20 years.
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 “Note 1 – Significant Accounting Policies” and “Note 13 – Legal Proceedings, Commitments,
and Contingencies” to our consolidated 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 activities, which 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
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