Notes to Financial Statements
1. Description of the Plan
The following description of
the Lockheed Martin Corporation Operations Support Savings Plan (the Plan) provides only general information about the Plan’s provisions. Participants should refer to the Plan document and Summary Plan Description for a more complete
description of the Plan’s provisions.
General
The Plan is a defined contribution plan covering all full-time employees and eligible part-time employees of certain business units of Lockheed Martin
Corporation (Lockheed Martin or the Corporation). Employees in participating business units who are scheduled to work 20 hours or more per week are immediately eligible to participate in the Plan. Employees scheduled to work less than 20 hours per
week become eligible to participate on the date they complete a year of service, as defined in the Plan, or the date the contract or subsidiary with respect to which they are employed becomes covered by the Plan.
Certain salaried employees stopped participating in the Plan and began participating in the Lockheed Martin Corporation Salaried Savings Plan (SSP). In 2011,
most of these employees had their account balances in the Plan transferred to the SSP. Account balances of these employees with outstanding loans in the Plan were not transferred; however, these account balances are subject to transfer to the SSP
when the loans are repaid. During 2016, assets of the Plan in the amount of $5,801,000 were transferred to the SSP.
On August 16, 2016, the
Corporation divested its Information Systems & Global Solutions (IS&GS) business segment, which merged with a subsidiary of Leidos Holdings, Inc. As of the date of divestiture, employees of the IS&GS business segment were no longer
contributing in the Plan.
The Plan includes an Employee Stock Ownership Plan (ESOP) feature. Cash dividends paid on Lockheed Martin common stock in both
the Employee Stock Ownership Plan Fund (ESOP Fund) and the Lockheed Martin Stock Fund are automatically reinvested in those funds, unless the participant elects to receive the dividend directly as taxable income.
The assets of the Plan, excluding receivables, are held and invested on a commingled basis in the Lockheed Martin Corporation Defined Contribution Plans
Master Trust (the Master Trust) under an agreement between Lockheed Martin and State Street Bank and Trust Company (the Trustee). The record keeper is Voya. Lockheed Martin is the Plan Sponsor and the Plan Administrator.
Contributions
The Plan allows participants to make
contributions on a
before-tax,
after-tax,
or Roth 401(k) basis. Each year, participants can make contributions of up to 25% of the employee’s eligible compensation,
subject to regulatory limitations. If automatically enrolled, a participant’s contribution is set at 3% of their eligible compensation in
before-tax
contributions. The Plan has an auto-escalation feature
whereby contributions for those automatically enrolled are increased 1% each year, up to 6% unless changed by the participant. The Plan permits
catch-up
contributions for participants age 50 or older as
permitted by the provisions of the Economic Growth and Tax Relief Reconciliation Act of 2001. The Corporation may provide a contribution of up to 6% of participant’s base salary, depending on the participant’s business unit and/or the
contract on which the participant works. Additionally, the Corporation may make a discretionary contribution on behalf of each participant in an amount determined based upon the profitability of the particular contract on which the participant
works. The amount of this contribution is determined annually by the Corporation. Participants are immediately vested in all employer contributions.
Participant and employer contributions may be invested in one or more of the available investment funds at the participant’s election. Participants may
change the investment mix of their account balance up to 12 times during a calendar year. In addition, the participant will always be provided at least one trading opportunity each calendar quarter regardless of the number of prior investment trades
they placed for the year. The participant will have one final opportunity to transfer all or part of their account balance to the Stable Value Fund during the fourth quarter of each year. Amounts that are transferred out of the Stable Value Fund
must remain invested in a Core or Target Date Fund for at least 90 days before they are eligible to be transferred into the Government Short Term Fund, the Treasury Inflation-Protected Securities (TIPS) Fund, or the Self-Directed Brokerage Account
(SDBA). Participants may make an unlimited number of transfers out of the Lockheed Martin Stock Fund or the ESOP Fund.
An option available to
participants is the SDBA, whereby a participant may elect to invest up to 75% of the participant’s transferable account balance in stocks, mutual funds, bonds, or other investments offered by the Plan at the participant’s direction. A
participant’s initial transfer to the SDBA must be at least $3,000, and subsequent transfers must be at least $1,000. No distributions, withdrawals, or loans may be made directly from the assets in the SDBA.
4
Participant Accounts
Each participant’s account is credited with the participant’s contributions, the employer’s matching and discretionary contributions, and the
respective investment earnings or losses, less expenses, of the individual funds in which the account is invested.
Notes Receivable from Participants
Each participant may borrow from their total account balance a minimum of $500 and up to a maximum amount equal to the lesser of 50% of their account
balance or $50,000 (minus their highest outstanding loan balance from the past 12 months, if any). The loans are secured by the balance in the participant’s account and bear interest of 1% over a published prime rate. Principal and interest are
paid ratably through weekly payroll deductions. Notes receivable from participants are measured at their unpaid principal balance plus any accrued but unpaid interest.
Payment of Benefits
On termination of service due to
death, disability or retirement, a participant or beneficiary may elect to receive his or her account balance through a number of payout options. A participant is entitled to the account balance at the time his or her employment with the Corporation
ends.
Plan Termination
Although it has not
expressed any intent to do so, the Board of Directors of Lockheed Martin has the right to amend, suspend or terminate the Plan at any time, subject to the provisions of the Employee Retirement Income Security Act of 1974 (ERISA) and the terms of
collective bargaining agreements. In the event of Plan termination, participants will receive a payment equal to the total value of their accounts.
2.
Summary of Significant Accounting Policies
Basis of Accounting
The financial statements of the Plan are prepared on the accrual basis of accounting. Certain amounts in the prior year have been reclassified to conform to
the current year presentation.
Use of Estimates
The
preparation of financial statements in conformity with U.S. generally accepted accounting principles (GAAP) requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and changes therein, and
disclosure of contingent assets and liabilities. Actual results could differ from those estimates.
Payment of Benefits
Benefits are recorded when paid.
Risks and Uncertainties
The Plan, through the Master Trust, invests in various investment securities. Investment securities are exposed to various risks such as interest
rate, market, and credit risks. Due to the level of risk associated with certain investment securities, it is at least reasonably possible that changes in the values of investment securities will occur in the near term and that such changes could
materially affect participants’ account balances and the amounts reported in the Statements of Net Assets Available for Benefits.
Investment
Valuation and Income Recognition
Investments in the Master Trust are primarily reported at fair value. Fair value is the price that would have
been received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fully benefit-responsive investment contracts are reported at contract value. Contract value is the
relevant measurement attributable to fully benefit-responsive investment contracts because it is the amount participants would receive if they were to initiate permitted transactions under the terms of the Plan. The contract value represents
contributions plus earnings, less participant withdrawals and administrative expenses. See Note 3 for discussion of fair value measurements and fully benefit-responsive investment contracts.
Purchases and sales of securities in the Master Trust are recorded on a trade-date basis. Interest income is recorded on the accrual basis. Dividends are
recorded on the
ex-dividend
date. Gains and losses on investments bought and sold as well as held during the year are included in interest in net investment gain from the Master Trust on the Statement of
Changes in Net Assets Available for Benefits. Interest income on notes receivable from participants is recorded on the accrual basis.
5
Administrative Expenses
Direct administrative expenses are paid by the Master Trust and generally allocated to the Plan proportionally based on the Plan’s interest in the Master
Trust’s net assets or directly if specifically related to the Plan. Certain indirect administrative expenses are paid by the Corporation and are excluded from these financial statements. Expenses paid by the Plan are shown on the Statement of
Changes in Net Assets Available for Benefits.
Recent Accounting Pronouncements
In February 2017, the Financial Accounting Standards Board (FASB) issued Accounting Standard Update
2017-06,
which
clarifies the presentation and disclosure requirements for an employee benefit plan’s interest in a master trust. The new standard requires a plan’s interests in master trust balances and activities to be presented on the face of the
Plan’s financial statements as a single line item for each interest in a master trust. The new standard also requires the disclosure of the master trust’s investments by general type and the dollar amount of the plan’s interest in
each type; and the disclosure of the master trust’s other assets and liabilities on a gross basis and the dollar amount of the plan’s interest in each balance. An adoption of the new standard will eliminate the requirement to disclose the
Plan’s overall percentage interest in the trust and the health and welfare plans’ requirement to disclose 401(h) investment account information, in which such information will be disclosed in the defined benefit plan. The standard is
effective for the Plan beginning on January 1, 2019, with early adoption permitted. The Plan management is currently evaluating the impact of the standard on the financial statements and related disclosures.
In July 2015, the FASB issued ASU
2015-12,
a three-part standard that simplifies employee benefit plan reporting. Part
I of the standard eliminates the requirement to measure and present fully benefit-responsive investment contracts at fair value within the statements of net assets available for benefits and related disclosures and also eliminates the requirement to
reconcile contract value to fair value, when these measures differ. Under the new standard, fully benefit-responsive investment contracts are measured, presented and disclosed only at contract value. Part II of the standard requires investments be
grouped by general type and eliminates the requirement to disclose the net appreciation or depreciation for investments by general type and Part III provides for a measurement-date practical expedient. The standard was effective for the Plan
beginning on January 1, 2016, with early adoption permitted for any of the three parts of the standard without adopting the other parts. The Plan early adopted Part I of the standard for Plan Year 2015. The Plan adopted Part II of the standard
on January 1, 2016 and reflected the provisions of Part II for all periods presented in these financial statements. The measurement date practical expedient provided by Part III of the standard is not applicable as the Plan’s year end
coincides with the end of the reporting year in which investments are measured.
3. Master Trust
General
The Plan’s interest in the Master Trust is
stated at the value of the underlying net assets in the Master Trust. The realized and unrealized gains and losses and investment income of the Master Trust are allocated among the participating plans included therein proportionally based on each
plan’s earnings, which include unrealized gains and losses, investment income and plan expenses. The Plan’s interest in the Master Trust’s net assets as of December 31, 2016 and 2015 was 1.0% and 1.13%, respectively.
The Plan, through the Master Trust, invests in a Stable Value Fund which holds synthetic guaranteed investment contracts (synthetic GICs) that are fully
benefit-responsive and managed separate accounts. A synthetic GIC, also known as a wrap contract, is an investment contract issued by an insurance company or other financial institution paired with an underlying investment or investments, usually a
portfolio of high quality fixed income securities. These investment contracts provide that realized and unrealized gains and losses on the underlying investments are amortized over the duration of the underlying investments through adjustments to
the future interest-crediting rates. The primary factors affecting the future interest-crediting rates of the wrap contracts include the level of market interest rates, the amount and timing of participant contributions, transfers, and withdrawals
into or out of the wrap contracts, the investment returns generated by the investments that back the wrap contracts, and the duration of the underlying investments covered by the wrap contracts. The future interest-crediting rates may not be less
than 0% and are adjusted monthly or quarterly based on the yield to maturity of the underlying investments, a market value to contract value ratio of the underlying investments, and the durations of the underlying investments. The contracts are
fully benefit-responsive, which guarantees that all qualified participant withdrawals will occur at contract value.
In certain circumstances, the amount
withdrawn from the contract would be payable at fair value rather than at contract value. These events include termination of the Plan, a material adverse change to the provisions of the Plan, a withdrawal from a wrap contract in order to switch to
a different investment provider, or adoption of a successor plan that does not meet the wrap contract issuer’s underwriting criteria for issuance of a duplicate wrap contract. The Plan Administrator does not believe that the occurrence of any
of
6
these events is probable. Also, the following events would permit the contract issuers to terminate the contracts prior to their scheduled maturity date: the Plan’s loss of its qualified
status, uncured material breaches of responsibilities, or material and adverse changes to the provisions of the Plan. If one of these events were to occur, the contract issuer could terminate the contract at the fair value of the underlying
investments.
The Master Trust invests in a Short-Term Investment Fund or Government Short-Term Investment Fund, consisting of U.S. Treasury
obligations and commercial paper, which is used as a temporary investment to hold contributions from the day the cash is transferred from the Corporation to the Trustee until the day the cash is invested in a particular fund. The related earnings
from the Short-Term Investment Fund or Government Short-Term Investment Fund are used to pay certain expenses related to participant accounts.
In order
to provide appropriate liquidity to meet ongoing daily cash outflow requirements for the Lockheed Martin stock funds and the other investment funds that are investment alternatives for the Plan that are beneficiaries of the Master Trust, the Master
Trust may be able to receive advances from the Stable Value Fund or the Corporation. The Stable Value Fund may make an advance only after considering its own liquidity needs. Any investment fund that receives an advance will compensate the Stable
Value Fund for income lost due to any such advance by paying interest on such advance. The interest is compounded daily based on an annual rate equal to the interest crediting rate to the Short-Term Investment Fund or the Government Short-Term
Investment Fund portion of the Stable Value Fund, as appropriate. The Lockheed Martin stock funds may borrow, without interest, up to $200,000,000 from the Corporation, as evidenced by a promissory note, which requires repayment within three
business days after the advance. As of December 31, 2016 and 2015, there were no such advances payable to the Corporation. Occasionally, the Master Trust account invests in derivative financial instruments for liquidity or asset allocation
purposes. At December 31, 2016 and 2015, there were no material investments in derivatives.
Fair Value of Assets
The accounting standard for fair value measurements defines fair value, establishes a market-based framework or hierarchy for measuring fair value, and
requires disclosures regarding fair value measurements. The standard is applicable whenever assets and liabilities are measured and included in the financial statements at fair value.
The fair value hierarchy established in the standard prioritizes the inputs used in valuation techniques into three levels as follows:
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•
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Level 1 – Quoted prices in active markets for identical assets and liabilities;
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•
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Level 2 – Observable inputs, other than Level 1 prices, such as quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in inactive markets, and amounts
derived from valuation models where all significant inputs are observable in active markets; and
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•
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Level 3 – Unobservable inputs where valuation models are supported by little or no market activity that one or more significant inputs are unobservable and require us to develop relevant assumptions.
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7
The following table presents the fair value of the assets in the Master Trust by asset category and their level
within the fair value hierarchy as of December 31, 2016 (in thousands):
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Level 1
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Level 2
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Total
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Cash and cash equivalents and short term investment fund
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$
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41,465
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$
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615,886
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$
|
657,351
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Common and preferred stocks
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2,461,975
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—
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2,461,975
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Common stocks—Lockheed Martin
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9,214,947
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—
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9,214,947
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Common collective trusts
(a)
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—
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15,554,182
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15,554,182
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Registered investment companies (Mutual funds)
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315,511
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—
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315,511
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Corporate debt securities
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—
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197,223
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197,223
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U.S. Government securities
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—
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772,040
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|
772,040
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Other investments
(b)
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—
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320,555
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320,555
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Self-directed brokerage account
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828,545
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—
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828,545
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Total investment assets at fair value
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$
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12,862,443
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$
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17,459,886
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$
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30,322,329
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Payables, net
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(65,674
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)
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Fully benefit-responsive investment contracts at contract value
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3,576,465
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Total net assets
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$
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33,833,120
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Interest and dividend income earned by the Master Trust for the year ended December 31, 2016 was $387,400,000. The net
appreciation and depreciation for the year ended December 31, 2016 was $2,766,409,000.
The following table presents the fair value of the assets in
the Master Trust by asset category and their level within the fair value hierarchy as of December 31, 2015 (in thousands):
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Level 1
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Level 2
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Total
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Cash and cash equivalents and short term investment fund
(c)
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$
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36,553
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$
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488,581
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$
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525,134
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Common and preferred stocks
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2,565,316
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—
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2,565,316
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Common stocks—Lockheed Martin
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8,684,776
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—
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8,684,776
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Common collective trusts
(a)
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—
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13,552,858
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13,552,858
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Registered investment companies (Mutual funds)
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1,211,075
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—
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1,211,075
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Corporate debt securities
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—
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91,246
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91,246
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U.S. Government securities
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—
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869,084
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869,084
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Other investments
(b)
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—
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738,869
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738,869
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Self-directed brokerage account
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741,850
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22,459
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764,309
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Total investment assets at fair value
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$
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13,239,570
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$
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15,763,097
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$
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29,002,667
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Payables, net
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(4,967
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)
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Fully benefit-responsive investment contracts at contract value
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2,950,480
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Total net assets
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$
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31,948,180
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(a)
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Common Collective Trusts, have been measured at fair value using the net asset value per share (or its equivalent) and not as a practical expedient which accordingly
is classified in the fair value hierarchy.
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(b)
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Includes securities issued by government-sponsored entities, collateralized mortgage obligations, municipals, auto loan receivables, asset-backed securities, foreign
government securities, credit card receivables, and repurchase agreements.
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8
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(c)
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The Corporation corrected the 2015 classification of $948,176,000 of cash and cash equivalents and short term investment fund. Approximately $638,291,000 and
$309,885,000 were reclassified into the asset categories of other investments and U.S. government securities, respectively. These amounts were also reclassified from Level 1 to Level 2 based on the valuation techniques used to value the
assets. Additionally, $488,581,000 in cash and cash equivalents and short term investments fund was reclassified from Level 1 to Level 2 based on the valuation techniques used to value the assets. This 2015 reclassification was due to
management’s
re-evaluation
of the nature of the investments and does not impact the 2015 financial statements or the total plan assets previously reported rather just the presentation of the components of
total plan assets in the table above.
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The Master Trust recognizes transfers between levels of the fair value hierarchy as of the date of
the change in circumstances that causes the transfer. During 2016, there were no transfers between Levels 1 and 2.
Valuation Techniques
Cash equivalents and short term investment fund categorized as Level 1 are mostly comprised of short-term money-market instruments and are valued at cost,
which approximates fair value. Cash equivalents and short term investment fund categorized as Level 2 are short-term government securities consisting of U.S. treasuries and U.S. agency issues.
Common and preferred stocks 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.
Common collective trusts (CCT) and registered investment companies (e.g., mutual funds, ETFs, etc.) are investment
vehicles valued using the Net Asset Value (NAV) provided by the fund managers. The NAV is the total value of the fund divided by the number of shares outstanding and is based on the fair value of underlying investments held by the CCTs. Registered
investment companies are traded at their NAV, determined and published daily, and are categorized as Level 1. Common collective trusts are traded at their NAV, determined daily or monthly depending on the CCT. CCTs are categorized as
Level 2 because the NAVs, although readily determinable, are not published on an active exchange nor publicly available.
Corporate debt securities,
U.S. Government securities and other 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), bids provided by brokers or dealers, or quoted prices of securities with similar characteristics. The Trustee obtains pricing based on indicative quotes or bid evaluations from vendors, brokers or the investment manager. Other
investments include securities issued by government-sponsored entities, collateralized mortgage obligations, municipals, auto loan receivables, asset-backed securities, foreign government securities, credit card receivables, and repurchase
agreements.
Self-directed brokerage account (SDBA) investments categorized as Level 1 are primarily cash equivalents, common stock, and mutual
funds. SDBA investments categorized as Level 2 are primarily corporate debt and other fixed income.
The methods described above may produce a fair
value calculation that may not be indicative of net realizable value or reflective of future fair values. Furthermore, while management believes its valuation methods are appropriate and consistent with other market participants, the use of
different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different fair value measurement at the reporting date.
4.
Parties-in-Interest
Transactions
The Plan makes certain investments through the Master Trust, which are considered to be
party-in-interest
transactions for which a statutory exemption from the prohibited transaction regulation exists. The Master Trust held 36,868,637 and 39,994,362 shares
of the Corporation’s common stock as of December 31, 2016 and 2015, respectively. Dividends earned by the Master Trust on the Corporation’s common stock were $276,593,000 for the year ended December 31, 2016. The Master Trust
invests in certain investments that are sponsored by State Street Bank, the Trustee. These investments include the following: Government Short-Term Fund, S&P 500 Indexed Equity Fund, Small
Mid-Cap
Indexed
Equity Fund, and MSCI EAFE Indexed Equity Fund.
The Master Trust owed the Corporation $1,100,000 as of December 31, 2016 and 2015, for certain
expenses paid by the Corporation in providing services to the Plan and certain other plans.
In addition, notes receivable from participants are
considered to be
party-in-interest
transactions for which a statutory exemption from the prohibited transaction regulation exists.
5. Income Tax Status
The Internal Revenue Service (IRS)
has determined and informed the Corporation by letter dated October 23, 2013 that the Plan is designed in accordance with applicable sections of the Internal Revenue Code (IRC) and, therefore, the related trust is exempt from taxation. The Plan
has been amended since issuance of the determination letter. However, the Plan Administrator and the Corporation’s counsel believe that the current design and operations of the Plan are in compliance with the applicable provisions of the IRC.
9
GAAP requires plan management to evaluate tax positions taken by the Plan to determine whether the Plan has taken
any uncertain positions that more likely than not would not be sustained upon examination by the IRS. The Plan Administrator has analyzed the tax positions taken by the Plan, and has concluded that as of December 31, 2016, there are no
uncertain positions taken or expected to be taken that would require recognition of a liability or asset or disclosure in the financial statements. The Plan is subject to routine audits by taxing jurisdictions, but no tax audits are in progress. The
Plan Administrator believes the Plan is no longer subject to income tax examinations for years prior to 2013.
6. Reconciliation of Financial
Statements to Form 5500
The accompanying financial statements present fully benefit-responsive investment contracts at contract value. The Form
5500 requires fully benefit-responsive investment contracts to be reported at fair value. Therefore, net assets available for plan benefits as of December 31, 2016 and 2015 on the financial statements are $47,000 and $170,000, respectively,
less than the amounts reported on the Form 5500 due to the adjustment from fair value to contract value for fully benefit-responsive investment contracts.
Interest in net investment gain of Master Trust reported in the financial statements is $264,000 greater than the amount reported on Form 5500 for the year
ended December 31, 2016. Administrative expenses reported in the financial statements are $358,000 greater than the amounts reported on Form 5500 and interest income on notes receivable from participants reported in the financial statements is
$217,000 greater than the amounts reported on Form 5500 for the year ended December 31, 2016. These differences arose from the classification of certain administrative expenses and interest income on notes receivable from participants, which
are included in the net investment gain in the Master Trust for Form 5500 reporting purposes. Interest in the net investment gain in the Master Trust reported in the financial statements also differed from the related amount per the Form 5500 as a
result of the adjustment from fair value to contract value for fully benefit-responsive investment contracts.
10