Lockheed Martin 2015 Annual Report Download - page 69

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 governmental 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 14 – 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
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).
On July 1, 2014, a regulation became effective in California setting the maximum level of the contaminant hexavalent
chromium in drinking water at 10 parts per billion (ppb). In May 2014, the California Manufacturers and Technology
Association filed a suit alleging the 10 ppb threshold is lower than is required to protect public health and thus imposes
unjustified costs on the regulated community. We cannot predict the outcome of this suit or whether other challenges may be
advanced by the regulated community or environmental groups which had sought a significantly higher and lower standard,
respectively. If the new standard remains at 10 ppb, it will not have a material impact on our existing remediation costs in
California. In addition, California is reevaluating its existing drinking water standard with respect to a second contaminant,
perchlorate, and the U.S. Environmental Protection Agency (U.S. EPA) is also considering whether to regulate perchlorate
and hexavalent chromium in drinking water. In February 2016, the Natural Resources Defense Council filed suit in federal
court in New York against the U.S. EPA to compel the U.S. EPA to set an enforceable drinking water standard for
perchlorate. If substantially lower standards are adopted, in either California or at the federal level, for perchlorate or, if the
U.S. EPA were to adopt a standard for hexavalent chromium lower than 10 ppb, 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 not be recoverable 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 which may have a material effect in any
particular interim reporting period.
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