Lockheed Martin 2015 Annual Report Download - page 27

factors, including actual returns on plan assets, may also affect our plan funding, cash flow and stockholders’ equity. In
addition, the funding of our plans and recovery of costs on our contracts, as described below, also may be subject to changes
caused by legislative or regulatory actions. We have taken certain actions over the last few years to mitigate the volatility the
plans may have on our cash flows and earnings, including amendments made in June 2014 to certain of our qualified and
nonqualified defined benefit pension plans for non-union employees to freeze future retirement benefits. However, the
impact of these actions on our cash flow and earnings may be less than anticipated or may be offset by other factors such as
changes in actuarial assumptions and plan asset investment returns.
With regard to cash flow, we have made substantial cash contributions to our plans in excess of the amounts required by
the Employee Retirement Income Security Act of 1974 (ERISA), as amended by the Pension Protection Act of 2006 (PPA).
We generally are able to recover these contributions related to our plans as allowable costs on our U.S. Government
contracts, including FMS, but there is a lag between when we contribute cash to our plans under pension funding rules and
recover it under U.S. Government Cost Accounting Standards (CAS). Effective February 2012, the CAS rules were revised
to harmonize the measurement and period assignment of the pension cost allocable to government contracts with the PPA
(CAS Harmonization). In 2013, the cost impact of CAS Harmonization started being phased in with the goal of better
aligning the CAS pension cost and ERISA funding requirements being fully achieved in 2017. The enactment of the
Highway and Transportation Funding Act of 2014 and Bipartisan Budget Act of 2015 increased the interest rate assumption
used to determine our CAS pension costs, which has the effect of lowering the recovery of pension contributions during the
affected periods as it decreases our CAS pension costs.
For more information on how these factors could impact earnings, financial position, cash flow and stockholders’ equity,
see “Critical Accounting Policies – Postretirement Benefit Plans” in Management’s Discussion and Analysis of Financial
Conditions and Results of Operations and “Note 11 – Postretirement Plans” of our consolidated financial statements.
Environmental costs could affect our future earnings as well as the affordability of our products and services.
Our operations are subject to and affected by a variety of federal, state, local and foreign environmental protection laws
and regulations. We are involved in environmental responses at some of our facilities, former facilities, and at third-party
sites not owned by us where we have been designated a potentially responsible party. In addition, we could be affected by
future regulations imposed or claims asserted in response to concerns over climate change, other aspects of the environment
or natural resources. We have an ongoing comprehensive sustainability program to reduce the effects of our operations on the
environment.
We manage various government-owned facilities on behalf of the government. At such facilities, environmental
compliance and remediation costs historically have been the responsibility of the government, and we have relied, and
continue to rely with respect to past practices, upon government funding to pay such costs. Although the government remains
responsible for capital and operating costs associated with environmental compliance, responsibility for fines and penalties
associated with environmental noncompliance typically is borne by either the government or the contractor, depending on the
contract and the relevant facts. Some environmental laws include criminal provisions. An environmental law conviction
could affect our ability to be awarded future, or perform existing, U.S. Government contracts.
We have incurred and will continue to incur liabilities under various federal, state, local and foreign statutes for
environmental protection and remediation. The extent of our financial exposure cannot in all cases be reasonably estimated at
this time. Among the variables management must assess in evaluating costs associated with these cases and remediation sites
generally are the status of site assessment, extent of the contamination, impacts on natural resources, changing cost estimates,
evolution of technologies used to remediate the site, and continually evolving governmental environmental standards and
cost allowability issues. For information regarding these matters, including current estimates of the amounts that we believe
are required for remediation or cleanup to the extent probable and estimable, see “Critical Accounting Policies –
Environmental Matters” in Management’s Discussion and Analysis of Financial Condition and Results of Operations and
“Note 14 – Legal Proceedings, Commitments and Contingencies” of our consolidated financial statements.
We are involved in a number of legal proceedings. We cannot predict the outcome of litigation and other
contingencies with certainty.
Our business may be adversely affected by the outcome of legal proceedings and other contingencies that cannot be
predicted with certainty. As required by GAAP, we estimate loss contingencies and establish reserves based on our
assessment of contingencies where liability is deemed probable and reasonably estimable in light of the facts and
circumstances known to us at a particular point in time. Subsequent developments in legal proceedings may affect our
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