Lockheed Martin 2013 Annual Report Download - page 58

participants in our defined benefit pension plans; and the health care cost trend rates for our retiree medical plans. The
assumptions we make impact 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 determined that 4.75% was an appropriate discount rate for calculating our benefit obligations at December 31, 2013
related to our defined benefit pension plans, compared to 4.00% at the end of 2012 and 4.75% at the end of 2011. We
selected 4.50% as the discount rate for calculating our benefit obligations at December 31, 2013 related to our retiree medical
plans, compared to 3.75% at the end of 2012 and 4.50% at the end of 2011. 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
corporate bonds rated AA or better that were selected to match our projected postretirement benefit plan cash flows.
We determined that 8.00% was a reasonable estimate for the expected long-term rate of return on plan assets assumption
at December 31, 2013, consistent with the rate used at December 31, 2012 and 2011. 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.
Our stockholders’ equity has been reduced cumulatively by $9.6 billion from the annual year-end measurements of the
funded status of postretirement benefit plans, net of the December 31, 2013 measurement which increased equity by
$2.9 billion primarily as a result of the increase in the discount rate for calculating our benefit obligations. The cumulative
non-cash, after-tax reduction primarily represents net actuarial losses resulting from declines in discount rates from 6.375%
at the end of 2007 to 4.75% at the end of 2013 and investment losses incurred during 2008, which will be amortized to
expense over the average future service period of employees expected to receive benefits under the plans of approximately
10 years. During 2013, $1.0 billion of these amounts was recognized as a component of postretirement benefit plans expense
and $700 million is expected to be recognized as expense in 2014.
The discount rate and long-term rate of return on plan assets assumptions we select at the end of each year are based on
our best estimates and judgment. A change of plus or minus 25 basis points in the 4.75% discount rate assumption at
December 31, 2013, 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 2013 by approximately $1.5 billion, which would result in an after-tax
increase or decrease in stockholders’ equity at the end of the year of approximately $1.0 billion. If the 4.75% discount rate at
December 31, 2013 that was used to compute the expected 2014 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 2014
would be lower or higher by approximately $130 million. If the 8.00% expected long-term rate of return on plan assets
assumption at December 31, 2013 that was used to compute the expected 2014 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 2014 would be lower or higher by approximately $85 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 $2.25 billion in 2013, $3.6 billion in 2012, and $2.3 billion in 2011, inclusive of amounts in
excess of our required contributions. Under CAS, amounts funded 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.
We recovered $1.5 billion in 2013, $1.1 billion in 2012 and $899 million in 2011 as CAS costs. Amounts contributed in
excess of the CAS funding requirements are considered to be prepayment credits under the CAS rules. As of
December 31, 2013, our prepayment credits were approximately $9.6 billion, inclusive of interest. Pursuant to the CAS
Harmonization rules, the prepayment balance will increase or decrease based on our actual investment returns on plan assets.
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