XML 75 R20.htm IDEA: XBRL DOCUMENT v3.19.3.a.u2
Postretirement Benefit Plans
 12 Months Ended
Dec. 31, 2019
Retirement Benefits [Abstract]  
Postretirement Benefit Plans Postretirement Benefit Plans
Defined Benefit Pension Plans and Retiree Medical and Life Insurance Plans
Many of our employees are covered by qualified defined benefit pension plans and we provide certain health care and life insurance benefits to eligible retirees (collectively, postretirement benefit plans). We also sponsor nonqualified defined benefit pension plans to provide for benefits in excess of qualified plan limits. Non-union employees hired after December 31, 2005 do not participate in our qualified defined benefit pension plans, but are eligible to participate in a qualified defined contribution plan in addition to our other retirement savings plans. They also have the ability to participate in our retiree medical plans, but we do not subsidize the cost of their participation in those plans as we do with employees hired before January 1, 2006. 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 completed the final step of the previously announced planned freeze of our qualified and nonqualified defined benefit pension plans for salaried employees effective January 1, 2020. The freeze took effect in two stages. Effective January 1, 2016, the pay-based component of the formula used to determine retirement benefits was frozen. Effective January 1, 2020, the service-based component of the formula was frozen. As a result of these changes, the qualified defined benefit pension plans for salaried employees are fully frozen effective January 1, 2020. With the freeze complete, the majority of our salaried employees participate in an enhanced defined contribution retirement savings plan.
We have made contributions to trusts established to pay future benefits to eligible retirees and dependents, including Voluntary Employees’ Beneficiary Association trusts and 401(h) accounts, the assets of which will be used to pay expenses of certain retiree medical plans. We use December 31 as the measurement date. Benefit obligations as of the end of each year reflect assumptions in effect as of those dates. Net periodic benefit cost is based on assumptions in effect at the end of the respective preceding year.
The rules related to accounting for postretirement benefit plans under GAAP require us to recognize on a plan-by-plan basis the funded status of our postretirement benefit plans as either an asset or a liability on our consolidated balance sheets. The funded status is measured as the difference between the fair value of the plan’s assets and the benefit obligation of the plan.
The net periodic benefit cost recognized for our qualified defined benefit pension plans and our retiree medical and life insurance plans each year included the following (in millions):
 
 
Qualified Defined
Benefit Pension Plans (a)
 
 
Retiree Medical and
Life Insurance Plans
 
 
2019

 
2018

 
2017

 
 
2019

 
2018

 
2017

Service cost
 
$
516

 
$
630

 
$
635

 
 
$
14

 
$
19

 
$
19

Interest cost
 
1,806

 
1,740

 
1,835

 
 
97

 
91

 
103

Expected return on plan assets
 
(2,300
)
 
(2,395
)
 
(2,249
)
 
 
(110
)
 
(135
)
 
(128
)
Recognized net actuarial losses
 
1,404

 
1,777

 
1,506

 
 
2

 
5

 
19

Amortization of net prior service (credit) cost
 
(333
)
 
(321
)
 
(355
)
 
 
42

 
15

 
15

Total net periodic benefit cost
 
$
1,093

 
$
1,431

 
$
1,372

 
 
$
45

 
$
(5
)
 
$
28

(a) 
Total net periodic benefit cost associated with our qualified defined benefit plans represents pension expense calculated in accordance with GAAP (FAS pension expense). We are required to calculate pension expense in accordance with both GAAP and CAS rules, each of which results in a different calculated amount of pension expense. The CAS pension cost is recovered through the pricing of our products and services on U.S. Government contracts and, therefore, is recognized in net sales and cost of sales for products and services. We include the difference between FAS pension service cost and CAS pension cost, referred to as the FAS/CAS operating adjustment, as a component of other unallocated, net on our consolidated statements of earnings (see Note 4 – Information on Business Segments).

The following table provides a reconciliation of benefit obligations, plan assets and unfunded status related to our qualified defined benefit pension plans and our retiree medical and life insurance plans (in millions):
 
 
Qualified Defined 
Benefit Pension Plans
 
 
Retiree Medical and
Life Insurance Plans
 
 
2019

 
2018

 
 
2019

 
2018

Change in benefit obligation
 
 
 
 
 
 
 
 
 
Beginning balance
 
$
43,305

 
$
48,686

 
 
$
2,348

 
$
2,602

Service cost
 
516

 
630

 
 
14

 
19

Interest cost
 
1,806

 
1,740

 
 
97

 
91

Benefits paid
 
(2,294
)
 
(2,379
)
 
 
(229
)
 
(224
)
Settlements
 
(1,933
)
 
(1,821
)
 
 
—

 
—

Actuarial losses (gains)
 
6,403

 
(3,281
)
 
 
(1
)
 
(311
)
Changes in longevity assumptions
 
860

 
(162
)
 
 
(70
)
 
(8
)
Plan amendments and curtailments (a)
 
11

 
(108
)
 
 
(6
)
 
101

Medicare Part D subsidy
 
—

 
—

 
 
2

 
9

Participants’ contributions
 
—

 
—

 
 
71

 
69

Ending balance
 
$
48,674

 
$
43,305

 
 
$
2,226

 
$
2,348

Change in plan assets
 
 
 
 
 
 
 
 
 
Beginning balance at fair value
 
$
32,002

 
$
33,095

 
 
$
1,644

 
$
1,883

Actual return on plan assets
 
6,667

 
(1,893
)
 
 
342

 
(94
)
Benefits paid
 
(2,294
)
 
(2,379
)
 
 
(229
)
 
(224
)
Settlements
 
(1,933
)
 
(1,821
)
 
 
—

 
—

Company contributions
 
1,000

 
5,000

 
 
59

 
1

Medicare Part D subsidy
 
—

 
—

 
 
2

 
9

Participants’ contributions
 
—

 
—

 
 
71

 
69

Ending balance at fair value
 
$
35,442

 
$
32,002

 
 
$
1,889

 
$
1,644

Unfunded status of the plans
 
$
(13,232
)
 
$
(11,303
)
 
 
$
(337
)
 
$
(704
)

(a) 
The 2018 qualified defined benefit pension plan includes a $119 million curtailment gain.

In December 2019, Lockheed Martin, through its master retirement trust, purchased an irrevocable group annuity contract from an insurance company (referred to as a buy-out contract) for $1.9 billion to transfer $1.9 billion of our outstanding defined benefit pension obligations related to certain U.S. retirees and beneficiaries. The group annuity contract was purchased using assets from the pension trust. As a result of this transaction, we were relieved of all responsibility for these pension obligations and the insurance company is now required to pay and administer the retirement benefits owed to approximately 20,000 U.S. retirees and
beneficiaries, with no change to the amount, timing or form of monthly retirement benefit payments. Although the transaction was treated as a settlement for accounting purposes, we did not recognize a loss on the settlement in earnings associated with the transaction because total settlements during 2019 for the affected pension plans were less than the plans’ service and interest cost in 2019. Accordingly, the transaction had no impact on our 2019 FAS pension expense or CAS pension cost, and the difference of approximately $45 million between the amount paid to the insurance company and the amount of the pension obligations settled was recognized in other comprehensive income and will be amortized to FAS pension expense in future periods.
Also, during December 2018, Lockheed Martin, through its master retirement trust, purchased two contracts from insurance companies for $2.6 billion related to our outstanding defined benefit pension obligations. One of the contracts we purchased was a buy-out contract, which relieved us of all responsibility for the pension obligations related to approximately 32,000 U.S. retirees and beneficiaries. The second contract was structured as a buy-in contract (that will reimburse the pension plan for all future benefit payments related to defined benefit obligations for approximately 9,000 U.S retirees and beneficiaries). The buy-in contract is accounted for at fair value as an investment of the trust.
The following table provides amounts recognized on our consolidated balance sheets related to our qualified defined benefit pension plans and our retiree medical and life insurance plans (in millions):
 
 
Qualified Defined 
Benefit Pension Plans
 
 
Retiree Medical and
Life Insurance Plans
 
 
2019

 
2018

 
 
2019

 
2018

Prepaid pension asset
 
$
2

 
$
107

 
 
$
—

 
$
—

Accrued postretirement benefit liabilities
 
(13,234
)
 
(11,410
)
 
 
(337
)
 
(704
)
Accumulated other comprehensive loss (pre-tax) related to:
 
 
 
 
 
 
 
 
 
Net actuarial losses
 
20,609

 
19,117

 
 
(69
)
 
236

Prior service (credit) cost
 
(1,586
)
 
(1,931
)
 
 
120

 
167

Total (a)
 
$
19,023

 
$
17,186

 
 
$
51

 
$
403

(a) 
Accumulated other comprehensive loss related to postretirement benefit plans, after-tax, of $15.5 billion and $14.3 billion at December 31, 2019 and 2018 (see “Note 12 – Stockholders’ Equity”) includes $19.0 billion ($15.0 billion, net of tax) and $17.2 billion ($13.5 billion, net of tax) for qualified defined benefit pension plans, $51 million ($39 million, net of tax) and $403 million ($316 million, net of tax) for retiree medical and life insurance plans and $667 million ($527 million, net of tax) and $542 million ($428 million, net of tax) for other plans.
The accumulated benefit obligation (ABO) for all qualified defined benefit pension plans was $48.6 billion and $43.3 billion at December 31, 2019 and 2018. The ABO represents benefits accrued without assuming future compensation increases to plan participants and is approximately equal to our projected benefit obligation. Plans where ABO was less than plan assets represent prepaid pension assets, which are included on our consolidated balance sheets in other noncurrent assets. Plans where ABO was in excess of plan assets represent accrued pension liabilities, which are included on our consolidated balance sheets.
We also sponsor nonqualified defined benefit plans to provide benefits in excess of qualified plan limits. The aggregate liabilities for these plans at December 31, 2019 and 2018 were $1.4 billion and $1.2 billion, which also represent the plans’ unfunded status. We have set aside certain assets totaling $657 million and $425 million as of December 31, 2019 and 2018 in a separate trust which we expect to be used to pay obligations under our nonqualified defined benefit plans. In accordance with GAAP, those assets may not be used to offset the amount of the benefit obligation similar to the postretirement benefit plans in the table above. The unrecognized net actuarial losses at December 31, 2019 and 2018 were $641 million and $505 million. The unrecognized prior service credit at December 31, 2019 and 2018 were $34 million and $48 million. The expense associated with these plans totaled $108 million in 2019, $123 million in 2018 and $126 million in 2017. We also sponsor a small number of other postemployment plans and foreign benefit plans. The aggregate liability for the other postemployment plans was $42 million and $46 million as of December 31, 2019 and 2018. The expense for the other postemployment plans, as well as the liability and expense associated with the foreign benefit plans, was not material to our results of operations, financial position or cash flows. The actuarial assumptions used to determine the benefit obligations and expense associated with our nonqualified defined benefit plans and postemployment plans are similar to those assumptions used to determine the benefit obligations and expense related to our qualified defined benefit pension plans and retiree medical and life insurance plans as described below.
The following table provides the amounts recognized in other comprehensive income (loss) related to postretirement benefit plans, net of tax, for the years ended December 31, 2019, 2018 and 2017 (in millions):
 
 
Incurred but Not Yet
Recognized in Net
Periodic Benefit Cost
 
 
Recognition of
Previously
Deferred Amounts
 
 
2019

 
2018

 
2017

 
 
2019

 
2018

 
2017

 
 
Gains (losses)
 
 
(Gains) losses
Actuarial gains and losses
 
 
 
 
 
 
 
 
 
 
 
Qualified defined benefit pension plans
 
$
(2,283
)
 
$
(570
)
 
$
(1,172
)
 
 
$
1,104

 
$
1,396

 
$
974

Retiree medical and life insurance plans
 
238

 
71

 
77

 
 
2

 
4

 
12

Other plans
 
(133
)
 
83

 
(66
)
 
 
42

 
55

 
44

 
 
(2,178
)
 
(416
)
 
(1,161
)
 
 
1,148

 
1,455

 
1,030

 
 
Credit (cost)
 
 
(Credit) cost
Net prior service credit and cost
 
 
 
 
 
 
 
 
 
 
 
Qualified defined benefit pension plans
 
(8
)
 
(6
)
 
(219
)
 
 
(263
)
 
(255
)
 
(229
)
Retiree medical and life insurance plans
 
4

 
(79
)
 
—

 
 
33

 
12

 
10

Other plans
 
—

 
—

 
—

 
 
(10
)
 
(10
)
 
(9
)
 
 
(4
)
 
(85
)
 
(219
)
 
 
(240
)
 
(253
)
 
(228
)
 
 
$
(2,182
)
 
$
(501
)
 
$
(1,380
)
 
 
$
908

 
$
1,202

 
$
802


We expect that approximately $559 million, or about $441 million net of tax, of actuarial losses and net prior service credit related to postretirement benefit plans included in accumulated other comprehensive loss at the end of 2019 to be recognized in net periodic benefit cost during 2020. Of this amount, $507 million, or $399 million net of tax, relates to our qualified defined benefit plans and is included in our expected 2020 pension income of $115 million.
Actuarial Assumptions
The actuarial assumptions used to determine the benefit obligations at December 31 of each year and to determine the net periodic benefit cost for each subsequent year, were as follows:
 
 
Qualified Defined Benefit
Pension Plans
 
 
Retiree Medical and
Life Insurance Plans
 
 
2019

 
2018

 
2017

 
 
2019

 
2018

 
2017

Weighted average discount rate
 
3.250
%
 
4.250
%
 
3.625
%
 
 
3.250
%
 
4.250
%
 
3.625
%
Expected long-term rate of return on assets
 
7.00
%
 
7.00
%
 
7.50
%
 
 
7.00
%
 
7.00
%
 
7.50
%
Health care trend rate assumed for next year
 
 
 
 
 
 
 
 
8.00
%
 
8.25
%
 
8.50
%
Ultimate health care trend rate
 
 
 
 
 
 
 
 
4.50
%
 
5.00
%
 
5.00
%
Year that the ultimate health care trend rate is reached
 
 
 
 
 
 
 
 
2034

 
2032

 
2032


The decrease in the discount rate from December 31, 2018 to December 31, 2019 resulted in an increase in the projected benefit obligations of our qualified defined benefit pension plans of approximately $5.8 billion at December 31, 2019. The increase in the discount rate from December 31, 2017 to December 31, 2018 resulted in a decrease in the projected benefit obligations of our qualified defined benefit pension plans of approximately $3.5 billion at December 31, 2018.
In October 2019, the Society of Actuaries published revised longevity assumptions that refined its prior studies. We used the revised assumptions in our December 31, 2019 re-measurement of benefit obligation. We reflected a longevity basis specific to the demographics of the underlying population (e.g., the nature of the work), versus the prior basis which was blended for all types of work, resulting in an approximate $860 million increase in the projected benefit obligations of our qualified defined benefit pension plans.
The long-term rate of return assumption represents the expected long-term rate of earnings on the funds invested, or to be invested, to provide for the benefits included in the benefit obligations. That 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 investment return for our qualified defined benefit
plans during 2019 of $6.7 billion based on an actual rate of approximately 21% improved plan assets more than the $2.3 billion expected return based on our 7.00% long-term rate of return assumption.
Plan Assets
Investment policies and strategies – Lockheed Martin Investment Management Company (LMIMCo), our wholly-owned subsidiary, has the fiduciary responsibility for making investment decisions related to the assets of our postretirement benefit plans. LMIMCo’s investment objectives for the assets of these plans are (1) to minimize the net present value of expected funding contributions; (2) to ensure there is a high probability that each plan meets or exceeds our actuarial long-term rate of return assumptions; and (3) to diversify assets to minimize the risk of large losses. The nature and duration of benefit obligations, along with assumptions concerning asset class returns and return correlations, are considered when determining an appropriate asset allocation to achieve the investment objectives. Investment policies and strategies governing the assets of the plans are designed to achieve investment objectives within prudent risk parameters. Risk management practices include the use of external investment managers; the maintenance of a portfolio diversified by asset class, investment approach and security holdings; and the maintenance of sufficient liquidity to meet benefit obligations as they come due.
LMIMCo’s investment policies require that asset allocations of postretirement benefit plans be maintained within the following approximate ranges:
Asset Class
Asset Allocation
Ranges
Cash and cash equivalents
0-20%
Equity
15-65%
Fixed income
10-60%
Alternative investments:
 
Private equity funds
0-15%
Real estate funds
0-10%
Hedge funds
0-20%
Commodities
0-15%

Fair value measurements – The rules related to accounting for postretirement benefit plans under GAAP require certain fair value disclosures related to postretirement benefit plan assets, even though those assets are not separately presented on our consolidated balance sheets. The following table presents the fair value of the assets (in millions) of our qualified defined benefit pension plans and retiree medical and life insurance plans by asset category and their level within the fair value hierarchy, which has three levels based on the uncertainty of the inputs used to determine fair value. Level 1 refers to fair values determined based on quoted prices in active markets for identical assets, Level 2 refers to fair values estimated using significant other observable inputs and Level 3 includes fair values estimated using significant unobservable inputs. Certain other investments are measured at their Net Asset Value (NAV) per share and do not have readily determined values and are thus not subject to leveling in the fair value hierarchy. The NAV is the total value of the fund divided by the number of the fund’s shares outstanding. We recognize transfers between levels of the fair value hierarchy as of the date of the change in circumstances that causes the transfer.
 
December 31, 2019
 
 
December 31, 2018
 
Total

 
Level 1

 
Level 2

 
Level 3

 
 
Total

 
Level 1

 
Level 2

 
Level 3

Investments measured at fair value
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents (a)
$
1,961

 
$
1,961

 
$
—

 
$
—

 
 
$
1,727

 
$
1,727

 
$
—

 
$
—

Equity (a):

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. equity securities
7,189

 
7,182

 
—

 
7

 
 
3,936

 
3,927

 
3

 
6

International equity securities
7,244

 
7,217

 
23

 
4

 
 
5,406

 
5,400

 
—

 
6

Commingled equity funds
1,933

 
582

 
1,351

 
—

 
 
3,587

 
1,436

 
2,151

 
—

Fixed income (a):

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Corporate debt securities
5,208

 
—

 
5,206

 
2

 
 
4,890

 
—

 
4,888

 
2

U.S. Government securities
2,260

 
—

 
2,260

 
—

 
 
3,399

 
—

 
3,399

 
—

U.S. Government-sponsored enterprise securities
530

 
—

 
530

 
—

 
 
571

 
—

 
571

 
—

Other fixed income investments (b)
3,134

 
35

 
2,135

 
964

 
 
2,926

 
—

 
1,988

 
938

Total
$
29,459

 
$
16,977

 
$
11,505

 
$
977

 
 
$
26,442

 
$
12,490

 
$
13,000

 
$
952

Investments measured at NAV (c)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commingled equity funds
181

 
 
 
 
 
 
 
 
144

 
 
 
 
 
 
Other fixed income investments
32

 
 
 
 
 
 
 
 
29

 
 
 
 
 
 
Private equity funds
4,019

 
 
 
 
 
 
 
 
4,014

 
 
 
 
 
 
Real estate funds
2,493

 
 
 
 
 
 
 
 
2,117

 
 
 
 
 
 
Hedge funds
1,069

 
 
 
 
 
 
 
 
828

 
 
 
 
 
 
Total investments measured at NAV
7,794

 
 
 
 
 
 
 
 
7,132

 
 
 
 
 
 
Receivables, net
78

 
 
 
 
 
 
 
 
72

 
 
 
 
 
 
Total
$
37,331

 
 
 
 
 
 
 
 
$
33,646

 
 
 
 
 
 
(a) 
Cash and cash equivalents, equity securities and fixed income securities included derivative assets and liabilities whose fair values were not material as of December 31, 2019 and 2018. LMIMCo’s investment policies restrict the use of derivatives to either establish long or short exposures for purposes consistent with applicable investment mandate guidelines or to hedge risks to the extent of a plan’s current exposure to such risks. Most derivative transactions are settled on a daily basis.
(b) 
Level 3 investments include $857 million at December 31, 2019 and $810 million at December 31, 2018 related to the buy-in contract discussed above.
(c) 
Certain investments that are valued using the NAV per share (or its equivalent) as a practical expedient have not been classified in the fair value hierarchy and are included in the table to permit reconciliation of the fair value hierarchy to the aggregate postretirement benefit plan assets.
As of December 31, 2019 and 2018, the assets associated with our foreign defined benefit pension plans were not material and have not been included in the table above. Changes in the fair value of plan assets categorized as Level 3 during 2019 and 2018 were insignificant.
Valuation techniques – Cash equivalents are mostly comprised of short-term money-market instruments and are valued at cost, which approximates fair value.
U.S. equity securities and international equity securities categorized as Level 1 are traded on active national and international exchanges and are valued at their closing prices on the last trading day of the year. For U.S. equity securities and international equity securities not traded on an active exchange, or if the closing price is not available, the trustee obtains indicative quotes from a pricing vendor, broker or investment manager. These securities are categorized as Level 2 if the custodian obtains corroborated
quotes from a pricing vendor or categorized as Level 3 if the custodian obtains uncorroborated quotes from a broker or investment manager.
Commingled equity funds categorized as Level 1 are traded on active national and international exchanges and are valued at their closing prices on the last trading day of the year. For commingled equity funds not traded on an active exchange, or if the closing price is not available, the trustee obtains indicative quotes from a pricing vendor, broker or investment manager. These securities are categorized as Level 2 if the custodian obtains corroborated quotes from a pricing vendor.
Fixed income investments categorized as Level 2 are valued by the trustee using pricing models that use verifiable observable market data (e.g., interest rates and yield curves observable at commonly quoted intervals and credit spreads), bids provided by brokers or dealers or quoted prices of securities with similar characteristics. Fixed income investments are categorized as Level 3 when valuations using observable inputs are unavailable. The trustee typically obtains pricing based on indicative quotes or bid evaluations from vendors, brokers or the investment manager. In addition, certain other fixed income investments categorized as Level 3 are valued using a discounted cash flow approach. Significant inputs include projected annuity payments and the discount rate applied to those payments.
Certain commingled equity funds, consisting of equity mutual funds, are valued using the NAV. The NAV valuations are based on the underlying investments and typically redeemable within 90 days.
Private equity funds consist of partnership and co-investment funds. The NAV is based on valuation models of the underlying securities, which includes unobservable inputs that cannot be corroborated using verifiable observable market data. These funds typically have redemption periods between eight and 12 years.
Real estate funds consist of partnerships, most of which are closed-end funds, for which the NAV is based on valuation models and periodic appraisals. These funds typically have redemption periods between eight and 10 years.
Hedge funds consist of direct hedge funds for which the NAV is generally based on the valuation of the underlying investments. Redemptions in hedge funds are based on the specific terms of each fund, and generally range from a minimum of one month to several months.
Contributions and Expected Benefit Payments
The funding of our qualified defined benefit pension plans is determined in accordance with ERISA, as amended by the PPA, and in a manner consistent with CAS and Internal Revenue Code rules. We made contributions to our qualified defined benefit pension plans of $1.0 billion in 2019 and $5.0 billion in 2018, including required and discretionary contributions. As a result of these contributions, we do not expect to make contributions to our qualified defined benefit pension plans in 2020.
The following table presents estimated future benefit payments, which reflect expected future employee service, as of December 31, 2019 (in millions):
 
 
2020

 
2021

 
2022

 
2023

 
2024

 
2025 – 2029 

Qualified defined benefit pension plans
 
$
2,300

 
$
2,360

 
$
2,450

 
$
2,530

 
$
2,600

 
$
13,540

Retiree medical and life insurance plans
 
160

 
160

 
160

 
160

 
150

 
700


Defined Contribution Plans
We maintain a number of defined contribution plans, most with 401(k) features, that cover substantially all of our employees. Under the provisions of our 401(k) plans, we match most employees’ eligible contributions at rates specified in the plan documents. Our 401(k) contributions are comprised of (i) company match, the majority of which was funded using our common stock, and (ii) company contributions. Total 401(k) contributions were $741 million in 2019, $658 million in 2018 and $613 million in 2017. Our defined contribution plans held approximately 31.9 million and 33.3 million shares of our common stock as of December 31, 2019 and 2018.