Lockheed Martin 2015 Annual Report Download - page 68

July 2012, the U.S. Government passed the Moving Ahead for Progress in the 21st Century Act of 2012 (MAP-21), which
included a provision that changed the methodology for calculating the interest rate assumption used in determining the
minimum funding requirements under the PPA. As a result of MAP-21 there was an increase in the interest rate assumption,
which in turn lowered the minimum funding requirements. The impact of MAP-21 decreased each year and was scheduled to
phase out by 2016. On August 8, 2014, the Highway and Transportation Funding Act of 2014 (HATFA) was enacted; and on
November 2, 2015, the Bipartisan Budget Act of 2015; which extend the methodology put in place by MAP-21 to calculate
the interest rate assumption so that the impact will begin to decrease in 2021 and phase out by 2024. This has the effect of
lowering our minimum funding requirements during the affected periods from what they otherwise would have been had the
legislation not been enacted. The ERISA funded status of our qualified defined benefit pension plans was about 90% and
92% as of December 31, 2015 and 2014. The GAAP funded status of our qualified defined benefit pension plans was about
73% and 76% funded at December 31, 2015 and 2014.
Contributions to our defined benefit pension plans 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. CAS govern the
extent to which our pension costs are allocable to and recoverable under contracts with the U.S. Government, including FMS.
We recovered $1.6 billion in 2015 and $1.5 billion in both 2014 and 2013 as CAS pension costs. Effective February 27,
2012, CAS rules were revised to better align the recovery of pension costs, including prepayment credits, on U.S.
Government contracts with the minimum funding requirements of the PPA (referred to as CAS Harmonization). Specifically,
CAS Harmonization shortened the amortization period for allocating gains and losses to U.S. Government contracts from 15
to 10 years and requires the use of an interest rate to determine CAS pension cost consistent with the interest rate used to
determine minimum pension funding requirements under the PPA. While the change in the amortization period was
applicable beginning in 2013, there is a transition period for the impact of the change in the CAS liability measurement due
to the revised interest rate that will be phased in with the full impact occurring in 2017. We expect the incremental impact of
CAS Harmonization will increase successively through 2017, primarily due to the liability measurement transition period
included in the amended rule. The enactment of the HATFA and Bipartisan Budget Act of 2015 also increased the interest
rate assumption used to determine our CAS pension costs, which has the effect of lowering the recovery of pension
contributions during the affected periods as it decreases our CAS pension costs.
Pension cost recoveries under CAS occur in different periods from when pension contributions are made under the PPA.
Amounts contributed in excess of the CAS pension costs recovered under U.S. Government contracts are considered to be
prepayment credits under the CAS rules. As of December 31, 2015, our prepayment credits were approximately $9.0 billion
as compared to $10.8 billion at December 31, 2014. The prepayment balance will increase or decrease based on our actual
investment return on plan assets.
Trends
We do not plan to make contributions to our heritage pension plans in 2016 or 2017 because none are required using
current assumptions, including anticipated investment returns on plan assets. However, we do plan to make contributions of
approximately $25 million in 2016 and about $35 million in 2017 to our new Sikorsky bargained qualified defined benefit
pension plan. We anticipate recovering approximately $2.0 billion of CAS pension cost in 2016 with a higher CAS recovery
projected in 2017. Since the annual amount of CAS cost is more than our planned cash funding in each of these years, we
will recover a portion of the $9.0 billion of prepayment credits existing at December 31, 2015.
We expect our 2016 FAS pension expense to be $1.0 billion, which is comparable to our 2015 FAS pension expense of
$1.1 billion. Also, we expect FAS/CAS pension income in 2016 of about $975 million, as compared to FAS/CAS pension
income of $471 million in 2015, primarily due to higher CAS pension costs due to CAS Harmonization.
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). At December 31, 2015 and
2014, the total amount of liabilities recorded on our Balance Sheet for environmental matters was $1.0 billion and
$965 million. We have recorded receivables totaling $858 million and $836 million at December 31, 2015 and 2014 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 not be recoverable under U.S. Government contracts has been expensed through cost of sales. We
project costs and recovery of costs over approximately 20 years. Our acquisition of Sikorsky included certain environmental
remediation liabilities that are among those recorded on our Balance Sheet, along with the related receivables for probable
future recovery. These amounts did not materially impact our consolidated financial statements.
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