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Author: EthylMercaptan Big red star, 1000 posts Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 3916  
Subject: Pension Liabilities on the Balance Sheet Date: 5/1/2014 10:18 PM
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If this is the just the unfunded portion, are there any disclosure reports as to how the funded portion is structured and what it is invested in?

The company in particular that I am looking at is Lockheed Martin(LMT). This is from their latest 10-K. I highlighted a few items that I thought interesting or just confused the #### out of me.

C2H5SH





Postretirement Benefit Plans

Overview

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). In recent years, we have taken certain actions to mitigate the effect of our defined benefit pension plans on our financial results, including no longer offering a defined benefit pension plan to non-union represented employees hired after December 2005. Over the last few years, we have negotiated similar changes with various labor organizations such that new union represented employees do not participate in our defined benefit pension plans. We have also made substantial cash contributions over the years to our defined benefit pension plans including $2.25 billion in 2013, $3.6 billion in 2012, and $2.3 billion in 2011. Notwithstanding these actions, the impact of these plans and benefits on our earnings may be volatile in that the amount of expense we record and the funded status for our postretirement benefit plans may materially change from year to year because those calculations are sensitive to funding levels as well as changes in several key economic assumptions, including interest rates, rates of return on plan assets, and other actuarial assumptions including participant mortality estimates, expected rates of increase in future compensation levels, and employee turnover, as well as the timing of cash funding.

We recognize on a plan-by-plan basis the funded status of our postretirement benefit plans under GAAP as either an asset or a liability on our Balance Sheets. There is a corresponding non-cash adjustment to accumulated other comprehensive loss, net of tax benefits recorded as deferred tax assets, 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 GAAP benefit obligation represents the present value of the future benefits to be paid to plan participants based on past service. The present value is calculated using a discount rate that is determined at the end of each year. Historically low interest rates over the last few years have significantly increased our benefit obligation. This has contributed to a lower funded status of our defined benefit pension plans as determined by GAAP but has been partially mitigated by a rise in interest rates during 2013.

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. This ERISA funded status is calculated on a different basis than under GAAP. The ERISA liability does not reflect anticipated future pay increases for plan participants as required under GAAP and is currently measured using a higher discount rate than for GAAP, primarily due to The Moving Ahead for Progress in the 21st Century Act of 2012 (MAP-21) which provides temporary funding relief due to the historically low interest rate environment. By way of contrast, under ERISA our plans are about 90% funded at December 31, 2013 and 2012, while for GAAP our defined benefit pension plans are about 78% and 67% funded at December 31, 2013 and 2012. CAS govern the extent to which our pension costs are allocable to and recoverable under contracts with the U.S. Government, including FMS.

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 determine the funded status and estimate postretirement benefit plan expense for the following calendar year are the discount rate, the expected long-term rate of return on plan assets, employee turnover, and participant mortality estimates for all postretirement benefit plans; the expected rates of increase in future compensation levels for the



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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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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 increased our CAS cost beginning in 2013. There is a transition period during which the cost impact of the new rules is phased in, with the full impact occurring in 2017. We expect the incremental impact of CAS Harmonization will increase successively over years 2014 through 2017. Based upon current assumptions which may change, we expect that the increase in 2014 CAS costs caused by CAS Harmonization should be in excess of the pension expense we record under GAAP (FAS pension expense). Accordingly, we expect our FAS/CAS pension adjustment, discussed further in the “Business Segment Results of Operations” section above, will increase earnings in 2014 as mentioned below rather than decrease earnings as it has the past few years.

Trends

Our CAS recoveries are expected to exceed our cash contributions in 2014 and for several years thereafter, as we utilize the $9.6 billion prepayment credits under the CAS rules. In 2014, we anticipate recovering $1.6 billion as CAS cost on our contracts and expect to make contributions of $1.0 billion related to our qualified defined benefit pension plans, which would increase our cash flow from operations. We expect our required contributions to continue to be temporarily lowered in 2014 and 2015 as a result of MAP-21.

We expect that our 2014 FAS pension expense will be $1.3 billion, which is less than our 2013 FAS pension expense of $1.9 billion, primarily due to the increase in the discount rate. Also, we expect FAS/CAS pension income in 2014 of about $345 million, as compared to FAS/CAS pension expense of $482 million in 2013, primarily due to the increase in the discount rate and higher CAS costs due to recoveries. We expect our 2014 earnings per share to be higher than in 2013, primarily due to our expected FAS/CAS pension income in 2014.

Mortality assumptions, as published by the IRS, are used to estimate the life expectancy of plan participants during which they are expected to receive benefit payments. Actuarial studies are currently being conducted that indicate life expectancies are longer and would have the resultant impact of increasing the amount of benefit payments to plan participants. The pension obligation recognized at December 31, 2013 and the amounts estimated for 2014 pension expense, CAS cost, and funding do not reflect the impact of these actuarial studies as such studies have not yet been finalized. The new mortality assumptions, which we expect to adopt at our next measurement date, currently are expected to increase the amount of our pension obligation and decrease our net earnings. We also expect to incorporate the new mortality assumptions into our annual incremental pension funding requirements pursuant to ERISA no earlier than 2016.
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