Lockheed Martin 2011 Annual Report Download - page 53

contracts for specific matters. For example, most of the environmental costs we incur for environmental remediation related
to sites operated in prior years are allocated to our current operations as general and administrative costs under FAR
provisions and supporting advance agreements reached with the U.S. Government.
We closely monitor compliance with, and the consistent application of, our critical accounting policies related to
contract accounting. Costs incurred and allocated to contracts are reviewed for compliance with U.S. Government regulations
by our personnel, and are subject to audit by the Defense Contract Audit Agency.
Postretirement Benefit Plans
Many of our employees are covered by defined benefit pension plans, and we provide certain health care and life
insurance benefits to eligible retirees (collectively, postretirement benefit plans – see Note 10). The impact of these plans and
benefits on our GAAP earnings may be volatile in that the amount of expense we record for our postretirement benefit plans
may materially change from year to year because those calculations are sensitive to changes in several key economic
assumptions, including interest rates and rates of return on plan assets, and workforce demographics. We recognize on a
plan-by-plan basis the funded status of our postretirement benefit plans under GAAP as either an asset or liability on our
Balance Sheets, with a corresponding adjustment to accumulated other comprehensive income (loss), net of tax, in
stockholders’ equity. The GAAP funded status is measured as the difference between the fair value of the plan’s assets and
the benefit obligation of the plan.
The funding of our pension plans is determined in accordance with the Employee Retirement Income Security Act of
1974 (ERISA), as amended by the Pension Protection Act of 2006 (PPA). Our goal has been to fund the pension plans to a
level of at least 80%, as determined by the PPA. The U.S. Government Cost Accounting Standards (CAS) govern the extent
to which our pension costs are allocable to and recoverable under contracts with the U.S. Government, including FMS.
Different actuarial valuations are used for GAAP, ERISA and CAS resulting in three different measurements of the funded
status of our plans.
Actuarial Assumptions
GAAP requires that the amounts we record related to our plans be computed using actuarial valuations. The primary
year-end assumptions used to estimate postretirement benefit plan expense for the following calendar year are the discount
rate and the expected long-term rate of return on plan assets for all postretirement benefit plans; the rates of increase in future
compensation levels for the participants in our defined benefit pension plans; and the health care cost trend rates for our
retiree medical plans. The discount rate we select impacts both the calculation of the benefit obligation at the end of the year
and the calculation of net postretirement benefit plan cost in the subsequent year. The difference between the long-term rate
of return on plan assets assumption we select and the actual return on plan assets in any given year affects both the funded
status of our benefit plans and the calculation of net postretirement benefit plan cost in subsequent years. When reassessing
these assumptions each year we consider past and current market conditions, and make judgments about future market trends.
We also have to consider factors such as the timing and amounts of expected contributions to the plans and benefit payments
to plan participants.
We selected 4.75% as the discount rate for calculating our benefit obligations at December 31, 2011 related to our
defined benefit pension plans, compared to 5.5% at the end of 2010 and 5.875% at the end of 2009. We selected 4.50% as the
discount rate for calculating our benefit obligations at December 31, 2011 related to our retiree medical plans, compared to
5.5% at the end of 2010 and 5.875% at the end of 2009. We evaluate several data points in order to arrive at an appropriate
discount rate, including results from cash flow models, quoted rates from long-term bond indices, and changes in long-term
bond rates over the past year. As part of our evaluation, we calculate the approximate average yields on securities that were
selected to match our projected postretirement benefit plan cash flows. Our postretirement benefit plan cash flows are input
into actuarial models that include data for corporate bonds rated AA or better.
We concluded that 8.0% was a reasonable estimate for the expected long-term rate of return on plan assets assumption
at December 31, 2011, as compared to 8.5% used in prior years. The expected long-term rate of return assumption was
adjusted downward due to the impact sovereign debt among developed countries may have on the rate of economic growth.
The long-term rate of return assumption represents the expected average rate of earnings on the funds invested, or to be
invested, to provide for the benefits included in the plan obligation. This assumption is based on several factors including
historical market index returns, the anticipated long-term allocation of plan assets, the historical return data for the trust
funds, plan expenses, and the potential to outperform market index returns. The actual return in any specific year likely will
differ from the assumption, but the average expected return over a long-term future horizon should be approximately equal to
the assumption. As a result, changes in this assumption are less frequent than changes in the discount rate.
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