Lockheed Martin 2011 Annual Report Download - page 54

Our stockholders’ equity has been reduced by $11.2 billion from the annual year-end measurement of the funded status
of our postretirement benefit plans, inclusive of the December 31, 2011 adjustment of $2.9 billion. These noncash, after-tax
amounts primarily represent net actuarial losses resulting from declines in discount rates and differences between actual
experience and our actuarial assumptions, which will be amortized to expense in future periods. During 2011, $666 million
of these amounts was recognized as a component of our postretirement benefit plans expense and $812 million is expected to
be recognized as expense in 2012.
We expect that our 2012 pension expense will increase to $1.9 billion as compared with 2011 pension expense of
$1.8 billion, primarily due to an increase in the amortization of net actuarial gains and losses caused by the decrease in the
discount rate mentioned above.
The discount rate assumption we select at the end of each year is based on our best estimates and judgment. A
reasonably possible change of plus or minus 25 basis points in the 4.75% discount rate assumption at December 31, 2011,
with all other assumptions held constant, would have decreased or increased the amount of the qualified pension benefit
obligation we recorded at the end of 2011 by approximately $1.3 billion, which would have resulted in an after-tax increase
or decrease in stockholders’ equity at the end of the year of approximately $850 million. If the 4.75% discount rate at
December 31, 2011 that was used to compute the expected 2012 expense for our qualified defined benefit pension plans had
been 25 basis points higher or lower, with all other assumptions held constant, the amount of expense projected for 2012
would be lower or higher by approximately $125 million.
Funding Considerations
The PPA became applicable to us and other large U.S. defense contractors beginning in 2011 and had the effect of
accelerating the required amount of annual pension plan contributions. We made contributions related to our qualified
defined benefit pension plans of $2.3 billion in 2011, $2.2 billion in 2010, and $1.5 billion in 2009. We recovered
$899 million in 2011, $988 million in 2010 and $580 million in 2009 as CAS costs. Amounts funded under CAS are
recovered over time through the pricing of our products and services on U.S. Government contracts, including FMS, and are
recognized in our cost of sales and net sales. Amounts contributed in excess of the CAS funding requirements, over
$3.0 billion, are considered to be prepayment credits under the CAS rules.
We expect to make contributions of $1.1 billion related to our qualified defined benefit pension plans in 2012 and
anticipate recovering $1.1 billion as CAS cost in 2012 which is consistent with our anticipated contributions. We may review
options for further contributions in 2012.
The CAS Board published its revised pension accounting rules (CAS Harmonization) with an effective date of
February 27, 2012 to better align the recovery of pension contributions, including prepayment credits, on U.S. Government
contracts with the accelerated funding requirements of the PPA. The CAS Harmonization rules will increase our CAS cost
beginning in 2013. There is a transition period during which the cost impact of the new rules will be phased in, with the full
impact occurring in 2017. While we expect our 2013 CAS costs to be higher than our estimate for 2012 of $1.1 billion, the
estimated incremental impact of CAS Harmonization in 2013 will be a very modest cost increase, with much larger increases
occurring successively in years 2014 through 2017.
Based upon current assumptions which may change, the increase in CAS costs caused by CAS Harmonization should
result in increased earnings a few years from now, as our CAS costs should be in excess of the pension expense we record
under GAAP. Accordingly, our non-cash FAS/CAS pension adjustment, discussed further in the “Discussion of Business
Segments” section above, should eventually increase earnings rather than decrease earnings as it has the past few years. In
addition, the increase in CAS costs should eventually cause our CAS costs to be greater than our pension contributions as we
recover the prepayment credits, which should increase our cash flow from operations.
Environmental Matters
We are a party to various agreements, proceedings, and potential proceedings for environmental cleanup issues,
including matters at various sites where we have been designated a potentially responsible party (PRP) by the EPA or by a
state agency. At the end of 2011, the total amount of liabilities recorded on our Balance Sheet for environmental matters was
$932 million. We have recorded receivables totaling $808 million at December 31, 2011 for the portion of environmental
costs that are probable of future recovery in pricing of our products and services for agencies of the U.S. Government, as
discussed below. The amount that is expected to be allocated to our non-U.S. Government contracts or that is determined to
be unallowable for pricing under U.S. Government contracts has been expensed through cost of sales. We project costs and
recovery of costs over approximately twenty years.
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