| LEGAL PROCEEDINGS AND CONTINGENCIES | NOTE 8 – LEGAL PROCEEDINGS AND CONTINGENCIES
We are a party to or have property subject to litigation and other
proceedings that arise in the ordinary course of our business,
including matters arising under provisions relating to the
protection of the environment and are subject to contingencies
related to certain businesses we previously owned. These types of
matters could result in fines, penalties, compensatory or treble
damages or non-monetary sanctions or relief. We believe the
probability is remote that the outcome of each of these matters,
including the legal proceedings described below, will have a
material adverse effect on the Corporation as a whole,
notwithstanding that the unfavorable resolution of any matter may
have a material effect on our net earnings in any particular
interim reporting period. Among the factors that we consider in
this assessment are the nature of existing legal proceedings and
claims, the asserted or possible damages or loss contingency (if
estimable), the progress of the case, existing law and precedent,
the opinions or views of legal counsel and other advisers, our
experience in similar cases and the experience of other companies,
the facts available to us at the time of assessment and how we
intend to respond to the proceeding or claim. Our assessment of
these factors may change as individual proceedings or claims
progress.
Although we cannot predict the outcome of legal or other
proceedings with certainty, where there is at least a reasonable
possibility that a loss may have been incurred, GAAP requires us to
disclose an estimate of the reasonably possible loss or range of
loss or make a statement that such an estimate cannot be made. We
follow a thorough process in which we seek to estimate the
reasonably possible loss or range of loss, and only if we are
unable to make such an estimate do we conclude and disclose that an
estimate cannot be made. Accordingly, unless otherwise indicated
below in our discussion of legal proceedings, a reasonably possible
loss or range of loss associated with any individual legal
proceeding cannot be estimated.
Legal Proceedings
When we acquired Sikorsky, we assumed responsibility for a civil
False Claims Act lawsuit filed by the U.S. Government in October
2014 in the U.S. District Court for the Eastern District of
Wisconsin. The Government’s complaint asserts numerous claims
for violations of the False Claims Act, breach of contract, and
unjust enrichment. The Government alleges that Sikorsky and two of
its wholly-owned subsidiaries, Derco Aerospace (Derco) and Sikorsky
Support Services, Inc. (SSSI), violated the civil False Claims Act
in connection with a contract the U.S. Navy awarded to SSSI in June
2006 to support the Navy’s T-34 and T-44 fixed-wing turboprop
training aircraft. SSSI subcontracted with Derco primarily to
procure and manage spare parts for the training aircraft. The
Government alleges that SSSI overbilled the Navy because Derco
added profit and overhead costs to the price of the spare parts
Derco procured and then sold to SSSI. The Government also contends
that SSSI submitted false Certificates of Final Indirect Costs in
the years 2006 through 2012.
In a late April 2015 court filing, the Government disclosed that it
seeks damages of approximately $45 million, subject to trebling,
plus statutory penalties of approximately $13 million, all totaling
approximately $148 million. We believe that we have legal and
factual defenses to the Government’s claims. Although we
continue to evaluate our liability and exposure, we do not
currently believe it probable that we will incur a material loss.
If, contrary to our expectations, the Government prevails in this
matter and proves damages at the high end of the range sought and
is successful in having these trebled, the outcome could have an
adverse effect on our results of operations in the period in which
a liability is recognized and on our cash flows for the period in
which damages are paid.
The U.S. Department of Justice (DOJ) informed us on
February 4, 2016, that it has closed the related criminal
investigation with no action against the corporate entities or
individuals. Sikorsky and its subsidiaries cooperated fully with
the investigation since learning about it in a July 13, 2015,
letter from DOJ.
On April 24, 2009, we filed a declaratory judgment action
against the New York Metropolitan Transportation Authority and its
Capital Construction Company (collectively, the MTA) asking the
U.S. District Court for the Southern District of New York to find
that the MTA is in material breach of our agreement based on the
MTA’s failure to provide access to sites where work must be
performed and the customer-furnished equipment necessary to
complete the contract. The MTA filed an answer and counterclaim
alleging that we breached the contract and subsequently terminated
the contract for alleged default. The primary damages sought by the
MTA are the cost to complete the contract and potential
re-procurement costs. While we are unable to estimate the cost of
another contractor completing the contract and the costs of
re-procurement, we note that our contract with the MTA had a total
value of $323 million, of which $241 million was paid to us, and
that the MTA is seeking damages of approximately $190 million. We
dispute the MTA’s allegations and are defending against them.
Additionally, following an investigation, our sureties on a
performance bond related to this matter, who were represented by
independent counsel, concluded that the MTA’s termination of
the contract was improper. Finally, our declaratory judgment action
was later amended to include claims for monetary damages against
the MTA of approximately $95 million. This matter was taken under
submission by the District Court in December 2014, after a
five-week bench trial and the filing of post-trial pleadings by the
parties. We expect a decision in 2016.
We have settled two previously disclosed lawsuits, United States ex
rel. Natural Resources Defense Council, et al., v. Lockheed Martin
Corporation, et al., and United States ex rel. John D. Tillson v.
Lockheed Martin Energy Systems, Inc., et al. The relators filed the
lawsuits in 1999 under the civil qui tam provisions of the False
Claims Act in the U.S. District Court for the Western District of
Kentucky, and DOJ filed complaints in partial intervention on
August 28, 2003. Pursuant to the terms of the settlement
agreement executed by all parties on February 26, 2016, we paid $5
million, of which $4 million was allocated to the False Claims
Act allegations and assessed against all Defendants, including the
Corporation and its predecessor, Martin Marietta Corporation;
wholly-owned subsidiary Lockheed Martin Energy Systems, Inc., and
its predecessor, Martin Marietta Energy Systems, Inc.; and
wholly-owned subsidiary Lockheed Martin Utility Services, Inc., and
its predecessor Martin Marietta Utility Services, Inc.; $500,000
was allocated to Resource Conservation and Recovery Act (RCRA)
civil penalties assessed against Lockheed Martin Energy Systems,
Inc.; and $500,000 was allocated to RCRA civil penalties assessed
against Lockheed Martin Utility Services, Inc. We believe we had
substantial defenses to all of the allegations but settled the
cases to avoid the costs of further litigation of this matter,
which was ongoing for more than sixteen years. We admitted to no
liability or wrongdoing in resolving the matter.
Environmental Matters
We are involved in environmental proceedings and potential
proceedings relating to soil, sediment and groundwater
contamination, disposal of hazardous waste and other environmental
matters at several of our current or former facilities or at
third-party sites where we have been designated as a potentially
responsible party (PRP). A substantial portion of environmental
costs will be included in our net sales and cost of sales in future
periods pursuant to U.S. Government regulations. At the time a
liability is recorded for future environmental costs, we record a
receivable for estimated future recovery considered probable
through the pricing of products and services to agencies of the
U.S. Government, regardless of the contract form (e.g.,
cost-reimbursable, fixed-price). We continuously 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. We include the portion of those
environmental costs expected to be allocated to our non-U.S.
Government contracts, or that is determined to not be recoverable
under U.S. Government contracts, in our cost of sales at the
time the liability is established.
At March 27, 2016 and December 31, 2015, the aggregate
amount of liabilities recorded relative to environmental matters
was $991 million and $1.0 billion, most of which are recorded in
other noncurrent liabilities on our Balance Sheets. We have
recorded receivables totaling $849 million and $858 million at
March 27, 2016 and December 31, 2015, most of which are
recorded in other noncurrent assets on our Balance Sheets, for the
estimated future recovery of these costs, as we consider the
recovery probable based on the factors previously mentioned. We
project costs and recovery of costs over approximately 20
years.
We also are pursuing claims for recovery of costs incurred or
contribution to site cleanup costs against other PRPs, including
the U.S. Government, and are conducting remediation activities
under various consent decrees and orders relating to soil,
groundwater, sediment or surface water contamination at certain
sites of former or current operations. Under an agreement related
to our Burbank and Glendale, California, sites, the U.S. Government
reimburses us an amount equal to approximately 50% of expenditures
for certain remediation activities in its capacity as a PRP under
the Comprehensive Environmental Response, Compensation and
Liability Act (CERCLA).
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 a substantially lower standard is 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.
Letters of Credit, Surety Bonds and Third-Party
Guarantees
We have entered into standby letters of credit, surety bonds and
third-party guarantees with financial institutions and other third
parties primarily relating to advances received from customers and
the guarantee of future performance on certain contracts. Letters
of credit and surety bonds generally are available for draw down in
the event we do not perform. In some cases, we may guarantee the
contractual performance of third parties such as venture partners.
We had total outstanding letters of credit, surety bonds and
third-party guarantees aggregating $3.7 billion and $3.8 billion at
March 27, 2016 and December 31, 2015. Third-party
guarantees do not include guarantees of subsidiaries and other
consolidated entities.
At March 27, 2016 and December 31, 2015, third-party
guarantees totaled $669 million and $678 million, of which
approximately 79% related to guarantees of contractual performance
of ventures to which we currently are or previously were a party.
This amount represents our estimate of the maximum amount we would
expect to incur upon the contractual non-performance of the venture
partners. In addition, we generally
have cross-indemnities in place that may enable us to
recover amounts that may be paid on behalf of a venture partner. We
believe our current and former venture partners will be able to
perform their obligations, as they have done through March 27,
2016, and that it will not be necessary to make payments under the
third-party guarantees. In determining our exposures, we evaluate
the reputation, performance on contractual obligations, technical
capabilities and credit quality of our current and former venture
partners. There were no material amounts recorded in our financial
statements related to third-party guarantees.
United Launch Alliance
In connection with our 50% ownership interest of ULA, we and The
Boeing Company (Boeing) are required to provide ULA an additional
capital contribution if ULA is unable to make required payments
under its inventory supply agreement with Boeing. As of
March 27, 2016, ULA’s total remaining obligation to
Boeing under the inventory supply agreement was $120 million. The
parties have agreed to defer the remaining payment obligation, as
it is more than offset by other commitments to ULA. Accordingly, we
do not expect to be required to make a capital contribution to ULA
under this agreement.
In addition, both we and Boeing have cross-indemnified each other
for guarantees by us and Boeing of the performance and financial
obligations of ULA under certain launch service contracts. We
believe ULA will be able to fully perform its obligations, as it
has done through March 27, 2016, and that it will not be
necessary to make payments under the cross-indemnities or
guarantees. |
