Lockheed Martin 2013 Annual Report Download - page 60

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).
California and the U.S. EPA are each evaluating the need to regulate hexavalent chromium in drinking water, distinct
from the current standards which regulate total chromium. In 2011, California’s health risk agency announced a non-
enforceable public health goal for hexavalent chromium which California’s regulatory agency must consider when
promulgating an enforceable drinking water standard, which it is expected to do by late 2014. The goal calls for levels
significantly below levels encompassed within the current total chromium standard. In August 2013, California’s regulatory
agency proposed a draft drinking water standard for hexavalent chromium closer to levels encompassed within the current
standard. We expect that environmental groups will continue to seek a standard closer to the non-enforceable public health
goal and we cannot predict the outcome of California’s regulatory proceedings. In addition, California is also reevaluating its
existing drinking water standard with respect to a second contaminant, perchlorate, and the U.S. EPA is also considering
whether to regulate that contaminant in drinking water. With respect to either contaminant, if substantially lower standards
are adopted, in either California or at the federal level, we expect a material increase in our estimates for environmental
liabilities and the related assets for the portion of the increased costs that are probable of future recovery in the pricing of our
products and services for the U.S. Government. The amount that would be allocable to our non-U.S. Government contracts or
that is determined to be unallowable for pricing under U.S. Government contracts would be expensed, which may have a
material effect on our earnings in any particular interim reporting period.
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 reasonably cannot 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, allowing 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 earnings.
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.
Goodwill
Our goodwill balances were $10.3 billion and $10.4 billion at December 31, 2013 and 2012. We test goodwill for
impairment at least annually in the fourth quarter and test more frequently upon the occurrence of certain events or
significant changes in circumstances that indicate goodwill may be impaired. Such events or changes in circumstances may
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