Pensions and Other Employee Benefits

12 Months Ended

Dec. 31, 2011

Pensions and Other Employee Benefits [Abstract]

Pensions and Other Employee Benefits

20. Pensions and Other Employee Benefits

The Company maintains multiple pension plans, both contributory and non-contributory, covering employees at certain locations. Eligibility for participation in these plans varies and benefits are generally based on the participant’s compensation and/or years of service. The Company’s funding policy is generally to contribute in accordance with cost accounting standards that affect government contractors, subject to the Internal Revenue Code and regulations thereon. Plan assets are invested primarily in listed stocks, mutual funds, corporate bonds, U.S. Government obligations and U.S. Government agency obligations.

The Company also provides postretirement medical and life insurance benefits for retired employees and dependents at certain locations. Participants are eligible for these benefits when they retire from active service and meet the eligibility requirements for the Company’s pension plans. These benefits are funded primarily on a pay-as-you-go basis with the retiree generally paying a portion of the cost through contributions, deductibles and coinsurance provisions.

In accordance with accounting standards for employee pension and postretirement benefits, the Company recognizes the unfunded status of its pension and postretirement benefit plans in the consolidated financial statements and measures its pension and postretirement benefit plan assets and benefit obligations as of December 31.

The following table summarizes changes in the benefit obligations, the plan assets and funded status for all of the Company’s pension and postretirement benefit plans, as well as the aggregate balance sheet impact.

	Pension Plans						Postretirement     Benefit Plans
	2011			2010			2011			2010
	(in millions)
Change in benefit obligation:
Benefit obligation at the beginning of the year	$	2,365		$	1,964		$	203		$	188
Service cost		106			99			5			4
Interest cost		128			122			10			11
Plan participants’ contributions		3			3			3			4
Amendments		—			(33	)		—			—
Actuarial loss		174			284			9			9
Foreign currency exchange rate changes		(8	)		9			(1	)		2
Curtailments, settlements and special termination benefits		(1	)		—			—			(1	)
Benefits paid		(88	)		(83	)		(13	)		(14	)
Benefit obligation at the end of the year	$	2,679		$	2,365		$	216		$	203
Change in plan assets:
Fair value of plan assets at the beginning of the year	$	1,585		$	1,304		$	39		$	33
Actual return on plan assets		41			163			1			3
Employer contributions		176			186			12			13
Plan participants’ contributions		3			3			3			4
Foreign currency exchange rate changes		(5	)		12			—			—
Benefits paid		(88	)		(83	)		(13	)		(14	)
Fair value of plan assets at the end of the year	$	1,712		$	1,585		$	42		$	39
Funded status at the end of the year	$	(967	)	$	(780	)	$	(174	)	$	(164	)
Amounts recognized in the consolidated balance sheets consist of:
Non-current assets	$	7		$	9		$	—		$	—
Current liabilities		(3	)		(2	)		(8	)		(8	)
Non-current liabilities		(971	)		(787	)		(166	)		(156	)
	$	(967	)	$	(780	)	$	(174	)	$	(164	)

The table below summarizes the net loss and prior service cost balances at December 31, in the accumulated other comprehensive loss account, before related tax effects, for all of the Company’s pension and postretirement benefit plans.

	Pension Plans						Postretirement     Benefit Plans
	2011			2010			2011			2010
	(in millions)
Net loss	$	929		$	712		$	25		$	16
Prior service (credit) cost		(11	)		(12	)		(8	)		(11	)
Total amount recognized	$	918		$	700		$	17		$	5

The aggregate accumulated benefit obligation (ABO) for all of the Company’s pension plans was $2,298 million at December 31, 2011 and $2,004 million at December 31, 2010. The table below presents information for the pension plans with an ABO in excess of the fair value of plan assets at December 31, 2011 and 2010.

	Pension Plans
	2011		2010
	(in millions)
Projected benefit obligation	$	2,656	$	2,216
Accumulated benefit obligation		2,280		1,875
Fair value of plan assets		1,686		1,441

The table below summarizes the weighted average assumptions used to determine the benefit obligations for the Company’s pension and postretirement plans disclosed at December 31, 2011 and 2010.

	Pension Plans						Postretirement Benefit Plans
	2011			2010			2011			2010
Benefit obligations:
Discount rate		5.02	%(1)		5.57	%(1)		4.71	%(2)		5.40	%(2)
Rate of compensation increase		4.06	%(3 )		4.50	%		4.09	%(3)		4.50	%

⁽¹⁾  The weighted average discount rate assumptions used at December 31, 2011 and 2010 were comprised of separate assumptions determined by country of 5.1% and 5.6% for the U.S. based plans, 4.4% and 5.4% for the Canadian based plans and 5.1% and 5.4% for the German based plans.

⁽²⁾  The weighted average discount rate assumption used at December 31, 2011 and 2010 were comprised of separate assumptions determined by country of 4.8% and 5.4% for the U.S. based plans and 4.3% and 5.4% for the Canadian based plans.

⁽³⁾  The weighted average rate of compensation increase assumptions used at December 31, 2011 were comprised of separate assumptions determined by country of 4.0% for the U.S. based plans and 4.5% for the Canadian based plans.

The following table summarizes the components of net periodic benefit cost for the Company’s pension and postretirement benefit plans for the years ended December 31, 2011, 2010 and 2009.

	Pension Plans									Postretirement Benefit Plans
	2011			2010			2009			2011			2010			2009
	(in millions)
Components of net periodic benefit cost:
Service cost	$	106		$	99		$	93		$	5		$	4		$	4
Interest cost		128			122			112			10			11			11
Expected return on plan assets		(139	)		(112	)		(91	)		(2	)		(2	)		(2	)
Amortization of prior service costs (credits)		1			3			4			(3	)		(3	)		(2	)
Amortization of net loss (gain)		49			40			53			1			1			(3	)
Curtailment or settlement loss (gain)		—			2			2			—			(2	)		—
Net periodic benefit cost	$	145		$	154		$	173		$	11		$	9		$	8

The following table summarizes the other changes in plan assets and benefit obligations recognized in other comprehensive income for the Company’s pension and postretirement benefit plans for the years ended December 31, 2011, 2010 and 2009.

	Pension Plans									Postretirement Benefit Plans
	2011			2010			2009			2011			2010			2009
	(in millions)
Other changes in plan assets and benefit obligations recognized in other comprehensive income:
Net loss	$	266		$	234		$	(50	)	$	10		$	8		$	18
Prior service (credit) cost		2			(33	)		7			—			2			(5	)
Amortization of net loss		(49	)		(40	)		(53	)		(1	)		(1	)		3
Amortization of prior service (cost) credit		(1	)		(3	)		(4	)		3			3			2
Total recognized in other comprehensive income		218			158			(100	)		12			12			18
Total recognized in net periodic benefit cost and other comprehensive income	$	363		$	312		$	73		$	23		$	21		$	26

The following table summarizes the amounts expected to be amortized from accumulated other comprehensive (loss) income and recognized as components of net periodic benefit costs during 2012.

	Pension Plans		Postretirement Benefit Plans			Total
	(in millions)
Net loss	$	69	$	2		$	71
Prior service cost (credit)		1		(2	)		(1	)
	$	70	$	—		$	70

The table below summarizes the weighted average assumptions used to determine the net periodic benefit cost for the years ended December 31, 2011, 2010 and 2009.

	Pension Plans									Postretirement Benefit Plans
	2011			2010			2009			2011			2010			2009
	(in millions)
Net periodic benefit cost:
Discount rate		5.57	%(1)		6.26	%(1)		6.49	%(1)		5.40	%(3)		5.94	%(3)		6.74	%(3)
Expected long-term return on plan assets		8.57	%(2)		8.55	%(2)		8.54	%(2)		6.20	%		6.20	%		6.18	%
Rate of compensation increase		4.50	%		4.50	%		4.50	%		4.50	%		4.50	%		4.50	%

⁽¹⁾  The weighted average discount rate assumptions used for the years ended December 31, 2011, 2010 and 2009 were comprised of separate assumptions determined by country of 5.6%, 6.3% and 6.4% for the U.S. based plans, 5.4%, 6.1% and 7.4% for the Canadian based plans and 5.4%, 5.8%, and 6.2% for the German based plans, respectively.

⁽²⁾  The weighted average expected long-term return on plan assets assumptions used for the years ended December 31, 2011, 2010 and 2009 were comprised of separate assumptions determined by country of 8.75% for the U.S. based plans and 7.5% for the Canadian based plans.

⁽³⁾  The weighted average discount rate assumptions used for the years ended December 31, 2011, 2010 and 2009 were comprised of separate assumptions determined by country of 5.4%, 5.9% and 6.6% for the U.S. based plans and 5.4%, 6.1% and 7.4% for the Canadian based plans, respectively.

The expected long-term return on plan assets assumption represents the average rate that the Company expects to earn over the long-term on the assets of the Company’s benefit plans, including those from dividends, interest income and capital appreciation. The assumption has been determined based on expectations regarding future long-term rates of return for the plans’ investment portfolio, with consideration given to the allocation of investments by asset class and historical rates of return for each individual asset class.

The annual increase in cost of benefits (health care cost trend rate) is assumed to be an average of 9.0% in 2012 and is assumed to gradually decrease to a rate of 5.0% in 2020 and thereafter. Assumed health care cost trend rates have a significant effect on amounts reported for postretirement medical benefit plans. A one percentage point change in the assumed health care cost trend rates would have the following effects:

	1 percentage point
	Increase		Decrease
	(in millions)
Effect on total service and interest cost	$	1	$	(1	)
Effect on postretirement benefit obligations		10		(10	)

Plan Assets. The Company’s Benefit Plan Committee (Committee) has the responsibility to formulate the investment policies and strategies for the plans’ assets. The Committee structures the investment of plan assets to achieve the following goals: (1) maximize the plans’ long-term rate of return on assets for an acceptable level of risk; and (2) limit the volatility of investment returns and consequent impact on the plans’ assets. In the pursuit of these goals, the Committee has formulated the following investment policies and objectives: (1) invest assets of the plans in a manner consistent with the fiduciary standards of the Employee Retirement Income Security Act of 1974 (ERISA); (2) preserve the plans’ assets; (3) maintain sufficient liquidity to fund benefit payments and pay plan expenses; (4) evaluate the performance of investment managers; and (5) achieve, on average, a minimum total rate of return equal to the established benchmarks for each asset category.

The Committee retains a professional investment consultant to advise the Committee and help ensure that the above policies and strategies are met. The Committee does not actively manage the day to day operations and selection process of individual securities and investments, as it retains the professional services of qualified investment management organizations to fulfill those tasks. Qualified investment management organizations are evaluated on several criteria for selection, with a focus on the investment management organizations’ demonstrated capability to achieve results that will meet or exceed the investment objectives they have been assigned and conform to the policies established by the Committee. While the investment management organizations have investment discretion over the assets placed under their management, the Committee provides each investment manager with specific investment guidelines relevant to its asset class.

The Committee has established the allowable range that the plans’ assets may be invested in for each major asset category. In addition, the Committee has established guidelines regarding diversification within asset categories to limit risk and exposure to a single or limited number of securities. The investments of the plans’ include a diversified portfolio of both equity and fixed income investments. Equity investments are further diversified across U.S. and non-U.S. stocks, small to large capitalization stocks, and growth and value stocks. Fixed income assets are diversified across U.S. and non-U.S. issuers, corporate and governmental issuers, and credit quality. The plan also invests in real estate through publicly traded real estate securities. Derivatives may be used only for hedging purposes or to create synthetic long positions. The plans are prohibited from directly owning commodities, unregistered securities, restricted stock, private placements, or interest in oil, gas, mineral exploration, or other development programs. Further, short selling or utilizing margin buying for investment purposes is prohibited.

The table below presents the allowable range for each major category of the plans’ assets at December 31, 2011, as well as the Company’s pension plan and postretirement benefit plan weighted-average asset allocations at December 31, 2011 and 2010, by asset category.

	U.S.							Canada
Asset Category	Range	2011			2010			Range	2011			2010
Domestic equity (1)	30%-60%		49	%		48	%	15%-30%		17	%		21	%
International equity (2)	10%-20%		11			12		20%-50%		42			38
Fixed income securities	20%-40%		31			29		25%-55%		37			36
Real estate securities	0%-15%		7			6		—		—			—
Other, primarily cash and cash equivalents	0%-15%		2			5		0%-15%		4			5
Total			100	%		100	%			100	%		100	%

⁽¹⁾  Domestic equities for Canadian plans refers to equities of Canadian companies.

⁽²⁾  International equities for Canadian plans includes equities of U.S. companies.

The Committee regularly monitors the investment of the plans’ assets to ensure that the actual investment allocation remains within the established range. The Committee also regularly measures and monitors investment risk through ongoing performance reporting and investment manager reviews. Investment manager reviews include assessing the managers’ performance versus the appropriate benchmark index both in the short and long-term period, performance versus peers, and an examination of risk the managers assumed in order to achieve rates of return.

The table below presents the fair value of the Company’s pension plans’ assets at December 31, 2011 and 2010, by asset category segregated by level within the fair value hierarchy, as described below.

	U.S. Pension Plans’ Assets										Canadian Pension Plans’ Assets
	Fair Value Measured at December 31, 2011										Fair Value Measured at December 31, 2011
Asset Category	Level 1			Level 2			Level 3		Total		Level 1		Level 2			Level 3		Total
	(in millions)
Equity securities (1):
U.S. Equity		712			—			—		712		29		11			—		40
International Equity		65			100			—		165		90		19			—		109
Fixed Income —
Investment Grade		188	(2)		186	(3)		—		374		—		93	(3)		—		93
Fixed Income —
High Yield (4)		—			86			—		86		—		—			—		—
Real Estate Investment Trusts (5)		100			—			—		100		—		—			—		—
Other(6)		—			23			—		23		5		5			—		10
Total	$	1,065		$	395		$	—	$	1,460	$	124	$	128		$	—	$	252
	U.S. Plans’ Assets										Canadian Plans’ Assets
	Fair Value Measured at December 31, 2010										Fair Value Measured at December 31, 2010
Asset Category	Level 1			Level 2			Level 3		Total		Level 1		Level 2			Level 3		Total
	(in millions)
Equity securities (1):
U.S. Equity		642			—			—		642		32		11			—		43
International Equity		50			113			—		163		35		71			—		106
Fixed Income —
Investment Grade		154	(2)		153	(3)		—		307		—		92	(3)		—		92
Fixed Income —
High Yield (4)		—			82			—		82		—		—			—		—
Real Estate Investment Trusts (5)		78			—			—		78		—		—			—		—
Other(6)		—			61			—		61		4		7			—		11
Total	$	924		$	409		$	—	$	1,333	$	71	$	181		$	—	$	252

⁽¹⁾  Equity securities consist of investments in common stock of U.S. and foreign companies. The fair value of equity securities is based on quoted market prices available in active markets at the close of a trading day, primarily the New York Stock Exchange (NYSE), National Association of Securities Dealers Automated Quotations (NASDAQ), and various foreign exchanges. The Level 2 investment balance is derived from pooled equity funds offered by registered investment companies.

⁽²⁾  Approximately 50% in both 2011 and in 2010 of U.S. plan assets invested in fixed income — investment grade securities consist of a mutual fund offered by a registered investment company. The mutual fund invests in investment grade fixed income securities, mortgaged-backed securities, U.S. treasury and agency bonds and corporate bonds. This fund is classified by the Company as a Level 1 measurement within the fair value hierarchy as the mutual fund trades on an active market and daily, quoted prices are available.

⁽³⁾  The remaining 50% in both 2011 and 2010 of U.S. plan assets invested in fixed income — investment grade securities, as well as the Canadian plan assets invested in fixed income — investment grade securities is derived from pooled bond funds offered by registered investment companies. As these funds do not trade in an active market, the fair value is based on net asset values (NAVs) calculated by fund managers based on yields currently available on comparable bonds of issuers with similar credit ratings, quoted prices of similar bonds in an active market, or cash flows based on observable inputs.

⁽⁴⁾  Fixed income — high yield consists of investments in corporate high-yield bonds from various industries. The fair values of these investments are based on yields currently available on comparable bonds of issuers with similar credit ratings, quoted prices of similar bonds in an active market, or cash flows based on observable inputs.

⁽⁵⁾  Real Estate Investment Trusts (REITs) consist of securities that trade on the major exchanges and invest directly in real estate, either through properties or mortgages.

⁽⁶⁾  Other consists primarily of (i) short term investments maintained in a commingled trust or pooled fund, which primarily invests in short term, high quality money market securities such as government obligations, commercial paper, time deposits and certificates of deposit, which are classified as Level 2, and (ii) cash, which is classified as Level 1.

The table below presents the fair value of the Company’s postretirement benefit plans’ assets at December 31, 2011 and 2010, by asset category segregated by level within the fair value hierarchy, as described below.

	Postretirement Benefit Plans’ Assets
	Fair Value Measured at December 31, 2011										Fair Value Measured at December 31, 2010
Asset Category	Level 1			Level 2			Level 3		Total		Level 1			Level 2			Level 3		Total
	(in millions)
Equity securities (1):
U.S. Equity		24			—			—		24		22			—			—		22
International Equity		1			1			—		2		1			1			—		2
Fixed Income —
Investment Grade		11	(2)		2	(3)		—		13		10	(2)		2	(3)		—		12
Fixed Income —
High Yield (4)		—			1			—		1		—			1			—		1
Real Estate Investment
Trusts (5)		1			—			—		1		1			—			—		1
Other(6)		—			1			—		1		—			1			—		1
Total	$	37		$	5		$	—	$	42	$	34		$	5		$	—	$	39

⁽¹⁾  Equity securities consist of investments in common stock of U.S. and foreign companies. The fair value of equity securities is based on quoted market prices available in active markets at the close of a trading day, primarily the NYSE, NASDAQ, and various foreign exchanges. The Level 2 investment balance is derived from a pooled equity fund offered by a registered investment company.

⁽²⁾  Approximately 85% in 2011 and 83% in 2010 of the postretirement benefit plan assets invested in fixed income — investment grade securities consist of a mutual fund offered by a registered investment company. The mutual fund invests in investment grade fixed income securities, mortgaged-backed securities, U.S. treasury and agency bonds and corporate bonds. This fund is classified by the Company as a Level 1 measurement within the fair value hierarchy as the mutual fund trades on an active market and daily, quoted prices are available.

⁽³⁾  The remaining 15% in 2011 and 17% in 2010 of the postretirement benefit plan assets invested in fixed income — investment grade securities is derived from a pooled bond fund offered by a registered investment company, which does not trade in an active market. The fair value is based on NAV’s calculated by the fund manager based on yields currently available on comparable bonds of issuers with similar credit ratings, quoted prices of similar bonds in an active market, or cash flows based on observable inputs.

⁽⁴⁾  Fixed income — high yield consists of investments in corporate high-yield bonds from various industries. The fair values of these investments are based on yields currently available on comparable bonds of issuers with similar credit ratings, quoted prices of similar bonds in an active market, or cash flows based on observable inputs.

⁽⁵⁾  Real Estate Investment Trusts (REITs) consist of securities that trade on the major exchanges and invest directly in real estate, either through properties or mortgages.

⁽⁶⁾  Other consists primarily of short term investments maintained in a commingled trust or pooled fund, which primarily invests in short term, high quality money market securities such as government obligations, commercial paper, time deposits and certificates of deposit.

Contributions. For the year ending December 31, 2012, the Company currently expects to contribute approximately $173 million to its pension plans and approximately $13 million to its postretirement benefit plans. 

Multi-employer Benefit Plans. Certain of the Company’s businesses participate in multi-employer defined benefit pension plans. The Company makes cash contributions to these plans under the terms of collective-bargaining agreements that cover its union employees based on a fixed rate per hour of service worked by the covered employees. The risks of participating in these multi-employer plans are different from single-employer plans in the following aspects: (1) assets contributed to the multi-employer plan by one employer may be used to provide benefits to employees of other participating employers, (2) if a participating employer stops contributing to the plan, the unfunded obligations of the plan may be borne by the remaining participating employers and (3) if the Company chooses to stop participating in some of its multi-employer plans, the Company may be required to pay those plans an amount based on the underfunded status of the plan, referred to as a withdrawal liability.

Under these plans, the Company contributed cash and recorded expenses for each of its individually significant plans and all of its other plans in aggregate as noted in the table below.

Pension Fund	EIN/Pension Plan Number		Pension Protection Act Zone Status (1)				FIP/RP( 2) Status  Pending/ Implemented		Contributions by L-3 Communications								Surcharge Imposed		Expiration Date of Collective-Bargaining Agreement
			2011		2010				2011			2010			2009
IAM National Pension Fund		51-6031295/002		Green		Green		No	$	19	(3 )	$	17	(4 )	$	15		No		1/30/2012 to 12/1/2014	(5 )
Other Pension Funds( 6)										—			—			—
						Total contributions			$	19		$	17		$	15

^{(1 )} A zone status rating of green indicates the plan is at least 80% funded. The funding status of the IAM National Pension Fund was impacted by a market value investment loss for the plan year ended December 31, 2008, which amortization was extended over five years.

⁽²⁾ Funding improvement plan or rehabilitation plan.

^{(3 )} At the date the audited financial statements for the Company were issued, Form 5500 for the plan year ending December 31, 2011 was not available.

^{(4 )} Represents 5% of total plan contributions, based on Form 5500.

^{(5 )} The Company is a party to multiple bargaining agreements for multiple projects that require contributions into the IAM National Pension Fund. The most significant of these agreements expires April 27, 2014 covering multiple programs in the Company’s AM&M reportable segment and represents 80% of 2011 contributions.

^{(6 )} Consists of three pension funds in which the Company’s contributions are individually and in the aggregate insignificant.

Estimated Future Benefit Payments. The following table presents expected pension and postretirement benefit payments and expected postretirement subsidies due to the Medicare Prescription Drug Improvement and Modernization Act of 2003, which reflect expected future service, as appropriate.

			Postretirement Benefits
	Pension Benefits		Benefit Payments		Subsidy Receipts
	(in millions)
2012	$	102		12		1
2013		99		13		1
2014		110		13		1
2015		119		14		1
2016		128		14		1
Years 2017-2021		809		83		5

Employee Savings Plans. Under its various employee savings plans, the Company matches the contributions of participating employees up to a designated level. The extent of the match, vesting terms and the form of the matching contributions vary among the plans. Under these plans, the Company’s matching contributions in L-3 Holdings’ common stock and cash were $137 million for 2011, $147 million for 2010 and $143 million for 2009.