Lockheed Martin 1996 Annual Report Download - page 73

Lockheed Martin Corporation
sufficient information to assess anticipated contract performance.
Incentive provisions which increase or decrease earnings based
solely on a single significant event are generally not recognized
until the event occurs.
When adjustments in contract value or estimated costs are
determined, any changes from prior estimates are reflected in earn-
ings in the current period. Anticipated losses on contracts or pro-
grams in progress are charged to earnings when identified.
Research and development and similar costs —
Corporation-sponsored research and development costs primarily
include research and development and bid and proposal effort
related to government products and services. Except for certain
arrangements described below, these costs are generally included
as part of the general and administrative costs that are allocated
among all contracts and programs in progress under U.S.
Government contractual arrangements. Corporation-sponsored
product development costs not otherwise allocable are charged to
expense when incurred. Under certain arrangements in which a
customer shares in product development costs, the Corporation's
portion of such unreimbursed costs is expensed as incurred.
Customer-sponsored research and development costs incurred pur-
suant to contracts are accounted for as contract costs.
Derivative financial instruments — The Corporation
uses derivative financial instruments to manage its exposure to
fluctuations in interest rates and foreign exchange rates. The
Corporation designates its interest rate swap agreements as hedges
of specific debt instruments and recognizes the interest differen-
tials as adjustments to interest expense over the terms of the related
debt obligations. Forward exchange contracts are also designated
as qualifying hedges of firm commitments or specific anticipated
transactions. Gains and losses on these contracts are recognized in
income when the hedged transactions occur. At December 31,
1996, the amounts of forward exchange contracts outstanding, as
well as the amounts of gains and losses recorded during the year,
were not material. The Corporation does not hold or issue financial
instruments for trading purposes.
Earnings per common share — Earnings per common
share were based on the weighted average number of common
shares outstanding during the year. Earnings per common share,
assuming no dilution, were computed based on net earnings less the
dividend requirement for preferred stock. The weighted average
number of common shares outstanding, assuming no dilution,
was approximately 189.1 million in 1996, 189.3 million in 1995 and
187.0 million in 1994.
Earnings per common share, assuming full dilution, were
computed assuming that the average number of common shares
was increased by the conversion of preferred stock. The weighted
average number of common shares outstanding, assuming full dilu-
tion, was approximately 223.0 million in 1996, 223.2 million in
1995 and 218.3 million in 1994.
Accounting Changes — Effective January 1, 1996, the
Corporation adopted Statement of Financial Accounting Standards
(SFAS) No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of." SFAS No. 121
requires that certain long-lived assets to be held and used be
reviewed for impairment whenever events or changes in circum-
stances indicate that the carrying amount of an asset may not be
recoverable. Additionally, SFAS No. 121 requires that certain long-
lived assets to be disposed of be reported at the lower of carrying
amount or fair value less costs to sell. The impact of the adoption of
this standard was not material to the Corporation's consolidated
earnings or financial position.
Also in 1996, the Corporation adopted SFAS No. 123,
"Accounting for Stock-Based Compensation." SFAS No. 123 allows
companies to continue to measure compensation cost for stock-
based employee compensation plans using the intrinsic value
method of accounting as prescribed in Accounting Principles
Board (APB) Opinion No. 25, "Accounting for Stock Issued to
Employees," and related interpretations. The Corporation has
elected to continue its APB Opinion No. 25 accounting treatment
for stock-based compensation, and has adopted the provisions of
SFAS No. 123 requiring disclosure of the pro forma effect on net
earnings and earnings per share as if compensation cost had been
recognized based upon the estimated fair value at the date of grant
for options awarded.
The Corporation elected to adopt, effective January 1, 1994,
the American Institute of Certified Public Accountants Statement
of Position (SOP) No. 93-6, "Employers' Accounting for Employee
Stock Ownership Plans," to account for its Employee Stock Owner-
ship Plans (ESOPs). SOP No. 93-6 requires that unallocated com-
mon shares held by an ESOP trust be considered outstanding for
voting and other Corporate purposes, but excluded from weighted
average outstanding shares in calculating earnings per share.
Adoption of this accounting method resulted in a cumulative effect
adjustment which reduced net earnings for 1994 by $37 million, or
$.17 per common share assuming full dilution. For 1996, 1995 and
1994, the weighted average unallocated ESOP shares excluded in
calculating earnings per share totalled approximately 9.1 million,
10.3 million and 11.5 million common shares, respectively.
Note 2 — Business Combination
with Loral Corporation
On January 7, 1996, the Corporation and its wholly-owned sub-
sidiary, LAC Acquisition Corporation (LAC), entered into an
Agreement and Plan of Merger (the Loral Merger Agreement) with
Loral Corporation (Loral) pursuant to which LAC agreed to pur-
chase all of the issued and outstanding shares of common stock of
Loral (together with the associated preferred stock purchase rights)
for an aggregate consideration of $38 per share in cash (the Tender
Offer). The Tender Offer was made as part of a series of transac-
tions that resulted in (i) the distribution to stockholders of Loral
immediately prior to the consummation of the Tender Offer of
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