Notes to Financial Statements
1. Description of Plan
The following description of the
Sandia Corporation Savings and Income Plan (the Plan) provides only general information about the Plans provisions. Participants should refer to the Plan document and Summary Plan Description for a more complete description of the Plans
provisions.
General
The Plan is a defined
contribution plan covering the majority of employees of Sandia Corporation (the Corporation) who have attained age 21. The Corporation is a wholly-owned subsidiary of Lockheed Martin Corporation (Lockheed Martin). The Plan is subject to the
provisions of the Employee Retirement Income Security Act of 1974 (ERISA).
Fidelity Management Trust Company (FMTC) serves as the trustee of the Plan,
and Fidelity Investments Institutional Operations Company, Inc. (FIIOC) serves as the record-keeper of the Plan. The Corporation is the Plan Sponsor and the Employee Benefits Committee of the Corporation is the Plan Administrator.
Contributions
Annually, participants may contribute from
2% to 25% of their eligible earnings, as defined in the Plan document, in 1% increments, on a
pre-tax,
Roth and after-tax basis. The total allotment of
pre-tax,
Roth and
after-tax basic and supplemental contributions cannot exceed the maximum amount permitted under the Internal Revenue Code.
In addition, each payroll
period the Corporation contributes 66
2
/
3
% of the sum of each participants
pretax, Roth and after-tax basic contribution up to 6% of eligible earnings. The Plan allows participants aged 50 or older to make catch-up contributions as permitted by the provisions of the Economic Growth and Tax Relief Reconciliation Act of
2001.
Nonunion employees hired on or after January 1, 2009 are eligible for Enhanced Contributions, which are contributions made by the Corporation
in the amount of 6% of eligible earnings per pay period until 15 years of service and then 7% is contributed thereafter. Office and Professional Employees International Union members hired on or after July 1, 2009, and Metal Trades Council
members and Security Police Association members hired on or after July 1, 2010 are also eligible for Enhanced Contributions.
Participant Accounts
Each participants account is credited with the participants and the employers contributions and the respective investment earnings
or losses, less expenses, of the individual funds in which the account is invested.
Benefit Payments
The Plan provides for the payment of benefits upon termination, death, or retirement based on the balance in the participants vested account. Lump-sum,
annual payment, or monthly payment elections may be made. Hardship and in-service withdrawals are also permitted, if certain conditions are met.
Vesting
All participants are immediately vested in their
contributions, the Corporation match and actual earnings thereon. Enhanced Contributions are 100% vested after the completion of 3 years of vesting service.
Forfeited Accounts
At December 31, 2015 and 2014,
forfeited nonvested accounts totaled $50,000 and $81,000, respectively. These accounts will be used to reduce future employer contributions, Enhanced Contributions, and/or pay administrative expenses of the Plan. In 2015, employer contributions were
reduced by $271,000 from forfeited nonvested accounts.
Notes Receivable from Participants
Participants may borrow from their accounts a minimum of $1,000 up to a maximum of the lesser of $50,000 less the highest loan balance in the past 12 months or
50% of their vested account balance. Loan terms range from 12 months to 56 months. The loans are secured by the balance in the participants account and bear interest at the prime rate at the date of the loan. Principal and interest are paid
ratably through payroll deductions. A maximum of two loans are permitted at one time. Notes receivable from participants are measured at their unpaid principal balance plus any accrued but unpaid interest.
4
Sandia Corporation Savings and Income Plan
Notes to Financial Statements (continued)
Plan Termination
While it has not expressed any intent to
do so, the Corporation may terminate the Plan at any time upon submission of written notice to the investment custodian, subject to the provisions of ERISA and any applicable collective bargaining agreements. In the event of the Plans
termination, participants will receive a payment equal to the total vested and unvested 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 prior year amounts 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 that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
Payment of Benefits
Benefits are recorded when
paid.
Risks and Uncertainties
The Plan 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
are reported at fair value, with the exception of fully benefit-responsive investment contracts, which are reported at contract 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. Contract value is the relevant measurement attributable to fully benefit-responsive 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 contracts.
Purchases and sales of investments are recorded on a trade-date basis. Interest income is recorded on the accrual basis. Dividends
are recorded on the ex-dividend date. Net appreciation includes gains and losses on investments bought and sold as well as held during the year. Interest income on notes receivable from participants is recorded on the accrual basis.
Administrative Expenses
The Corporation pays
substantially all administrative expenses of the Plan, except for investment-related and record-keeping expenses, which are paid by the Plan. Expenses paid by the Plan are shown on the Statement of Changes in Net Assets Available for Benefits,
and expenses paid by the Corporation are excluded from these financial statements.
Recent Accounting Pronouncements
In May 2015, the Financial Accounting Standards Board (FASB) issued a new standard that eliminates the current requirement to categorize within the fair value
hierarchy investments with fair values measured at net asset value (NAV) using the practical expedient in Accounting Standards Codification (ASC) 820 Fair Value Measurement. The new standard will require entities to disclose the fair
values of such investments as a reconciling item between the balance sheet amounts and the amounts reported in the fair value hierarchy table. Entities will be required to continue to disclose information describing the nature and risks of the
investments measured using the NAV practical expedient. The standard is effective for the Plan beginning on January 1, 2016, with early adoption permitted. We adopted the standard on January 1, 2016 and are currently evaluating the expected impact
of the standard on the financial statements and related disclosures for Plan Year 2016.
5
Sandia Corporation Savings and Income Plan
Notes to Financial Statements (continued)
In July 2015, the FASB issued a new 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 simplifies plan investment disclosures and Part III provides for a
measurement-date practical expedient. The standard is effective for the Plan beginning on January 1, 2016. Plans may early adopt any of the three parts of the standard without adopting the other parts. The Plan early adopted Parts I and II of the
standard in 2015 and reflected the provisions of Parts I and II for all periods presented in these financial statements. As of December 31, 2014, fully benefit-responsive investment contracts previously reported at a fair value of $531,448,000, with
a corresponding adjustment of $9,506,000 to reconcile to contract value, have been reclassified and reported at the $521,942,000 contract value in the statement of net assets available for benefits. The measurement date practical expedient provided
by Part III of the standard is not applicable as the Plans year end coincides with the end of the reporting year in which investments are measured.
3. Investments
General
The Plan invests in an interest income fund that holds synthetic guaranteed investment contracts (GICs) that are fully
benefit-responsive
with insurance companies and other financial institutions. Since the synthetic GICs are fully benefit-responsive, contract value is the most relevant measurement attribute for that portion
of net assets available for benefits attributable to synthetic GICs. Participants may ordinarily direct the withdrawal or transfer of all or a portion of their investment at contract value. There are no reserves against the contract value for
credit risk of the contract issuer or otherwise.
A synthetic GIC is a wrap contract paired with an underlying investment or investments, usually a
portfolio of high-quality, intermediate term fixed income securities. A synthetic GIC credits a stated interest rate for a specified period of time. Investment gains and losses are amortized over the expected duration of the underlying investments
through the calculation of the interest rate applicable to the Plan on a prospective basis. Synthetic GICs provide for a variable crediting rate and the issuer of the wrap contract provides assurance that future adjustments to the crediting rate
cannot result in a crediting rate less than zero. The crediting rate is primarily based on the current yield-to-maturity of the covered investments, plus or minus amortization of the difference between the fair value and contract value of the
covered investments over the duration of the covered investments at the time of computation. The crediting rate is most impacted by the change in the annual effective yield-to-maturity of the underlying securities, but is also affected by the
differential between the contract value and the fair value of the covered investments. This difference is amortized over the duration of the covered investments. Depending on the change in duration from reset period to reset period, the magnitude of
the impact to the crediting rate of the contract to market difference is heightened or lessened. The crediting rate is adjusted monthly.
Certain events
limit the ability of the Plan to transact at contract value. Upon the occurrence of certain events, such as the Plans failure to maintain its tax qualified status, the fair value of the investment in the synthetic GICs (if lower than its book
value) may be repaid. No such events are currently known to have occurred, nor are any such events contemplated as probable by management of the Plan.
Under certain circumstances investment contracts may be terminated. Settlement upon termination will be at contract value unless the terms of the contract
were not met or other events as described above trigger payment at fair value.
The Plan owns the investments underlying the synthetic GICs, which consist
primarily of U.S. government securities, corporate debt obligations, and mortgage-backed and other asset-backed securities. As of December 31, 2015 and 2014, the fair values of the wrap contracts were not material.
Primarily as a result of the Plans investment in certain common/collective trusts, the Plans assets may be invested from time to time in
derivative financial instruments. These financial instruments are generally used for liquidity purposes. The Plans exposure to derivatives is limited to its investment in these common/collective trusts. At December 31, 2015 and 2014, the
Plans financial exposure related to derivatives was not material.
6
Sandia Corporation Savings and Income Plan
Notes to Financial Statements (continued)
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 expands disclosures about 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 the valuation
techniques into three levels as follows:
Level 1 Quoted prices in active markets for identical assets and liabilities;
Level 2 Observable inputs other than Level 1 prices, such as quoted prices for similar instruments, 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
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.
The following table presents the fair value of the assets in the Plan by asset category and their level within the fair value hierarchy as of
December 31, 2015 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Total
|
|
Company Common Stock Fund
|
|
$
|
139,924
|
|
|
$
|
|
|
|
$
|
139,924
|
|
Mutual funds:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. equities
|
|
|
177,465
|
|
|
|
|
|
|
|
177,465
|
|
International equities
|
|
|
57,357
|
|
|
|
|
|
|
|
57,357
|
|
U.S. bonds
|
|
|
186
|
|
|
|
|
|
|
|
186
|
|
Common/collective trusts
|
|
|
|
|
|
|
2,053,006
|
|
|
|
2,053,006
|
|
Managed separate accounts
|
|
|
102,027
|
|
|
|
|
|
|
|
102,027
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment assets at fair value
|
|
$
|
476,959
|
|
|
$
|
2,053,006
|
|
|
$
|
2,529,965
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Receivables, net
|
|
|
|
|
|
|
|
|
|
|
30,323
|
|
Fully benefit-responsive investment contracts at contract value
|
|
|
|
|
|
|
|
|
|
|
522,558
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net assets
|
|
|
|
|
|
|
|
|
|
$
|
3,082,846
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7
Sandia Corporation Savings and Income Plan
Notes to Financial Statements (continued)
The following table presents the fair value of the assets in the Plan by asset category and their level within the fair value hierarchy as of December 31,
2014 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Total
|
|
Company Common Stock Fund
|
|
$
|
116,357
|
|
|
$
|
|
|
|
$
|
116,357
|
|
Mutual funds:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. equities
|
|
|
193,914
|
|
|
|
|
|
|
|
193,914
|
|
International equities
|
|
|
62,817
|
|
|
|
|
|
|
|
62,817
|
|
U.S. bonds
|
|
|
788
|
|
|
|
|
|
|
|
788
|
|
Common/collective trusts
|
|
|
|
|
|
|
1,968,282
|
|
|
|
1,968,282
|
|
Managed separate accounts
|
|
|
103,490
|
|
|
|
|
|
|
|
103,490
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment assets at fair value
|
|
$
|
477,366
|
|
|
$
|
1,968,282
|
|
|
$
|
2,445,648
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Receivables, net
|
|
|
|
|
|
|
|
|
|
|
29,055
|
|
Fully benefit-responsive investment contracts at contract value
|
|
|
|
|
|
|
|
|
|
|
521,942
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net assets
|
|
|
|
|
|
|
|
|
|
$
|
2,996,645
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In accordance with the adoption of a new accounting standard in 2015, certain amounts in the prior year have been reclassified
to conform to the current year presentation. As a result, fully benefit-responsive investment contracts are now presented in aggregate at contract value in the table above, whereas in the prior year these assets were allocated to asset
categories at fair value, with a separate adjustment from fair value to contract value presented (See Note 2).
There are no financial assets or
liabilities categorized as Level 3 in the Plan as of December 31, 2015 or December 31, 2014. During 2015, the Plan had no financial assets or liabilities that were transferred between Levels 1 and 2.
Valuation Techniques
The fair value of the Company
Common Stock Fund, which consists primarily of Lockheed Martin common stock, is the combined fair value of the underlying common stock and short-term cash position of the fund. The fair value of the common stock portion of the fund is based on the
closing price of the common stock on its primary exchange. The short-term cash portion of the fund is recorded at cost, which approximates fair value.
Mutual funds are valued at the net asset value of shares held by the Plan at year-end reported on the active market on which the individual securities are
traded. Common/collective trusts and managed separate accounts are valued at the net asset value of units or shares held by the Plan at year-end; the net asset value for these investments is corroborated by observable market data
(e.g., purchases or sales activity). Units in common/collective trusts may be redeemed on a daily basis.
The valuation 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 following
transactions are considered to be party-in-interest transactions for which a statutory exemption from the prohibited transaction regulations exist:
The
Plan held 631,516 and 591,639 shares of Lockheed Martin common stock within the Company Common Stock Fund as of December 31, 2015 and 2014, respectively. Dividends earned by the Plan on Lockheed Martin common stock were $3,732,224 for the year
ended December 31, 2015.
8
Sandia Corporation Savings and Income Plan
Notes to Financial Statements (continued)
The Plan paid $1,599,903 in expenses to FMTC, the trustee and FIIOC, the record-keeper, for the year ended December 31, 2015. Certain plan investments are
managed by affiliates of the Plans trustee.
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 Plan has received a determination letter from the Internal Revenue Service (IRS) dated March 13, 2014, stating that the Plan is qualified under
Section 401(a) of the Internal Revenue Code (the Code) and, therefore, is exempt from taxation.
GAAP requires plan management to evaluate uncertain
tax positions taken by the Plan. The financial statement effects of a tax position are recognized when the position is more likely than not, based on the technical merits, to 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, 2015, there are no uncertain positions taken or expected to be taken. The Plan has recognized no interest or penalties related to uncertain tax positions.
The Plan is subject to routine audits by taxing jurisdictions. The plan administrator believes it is no longer subject to federal tax examinations for years prior to 2012.
The plan has been amended since issuance of the determination letter. However, the plan administrator and the Corporations counsel believe that the
current design and operations of the Plan are in compliance with applicable provisions of the Code.
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 and total additions to net assets available for plan benefits on the Form 5500 exceeded the related amounts on the financial
statements by $4,980,000 and $9,506,000 as of December 31, 2015 and 2014, due to the differences between fair value and contract value for fully benefit-responsive investment contracts.
9