Lockheed Martin 2001 Annual Report Download - page 34

Lockheed Martin Annual Report >>> 41
Lockheed Martin Corporation
(Continued)
Other Matters
The Corporation’s primary exposure to market risk
relates to interest rates and, to a lesser extent, foreign cur-
rency exchange rates. The Corporation’s financial instru-
ments which are subject to interest rate risk principally
include commercial paper and fixed rate long-term debt.
At December 31, 2001, the Corporation had no commer-
cial paper outstanding. The Corporation’s long-term debt
obligations are generally not callable until maturity. The
Corporation uses interest rate swaps to manage its expo-
sure to fixed and variable interest rates. At year-end 2001,
the Corporation had such instruments in place to swap
fixed interest rates on approximately $670 million of its
long-term debt for variable interest rates based on LIBOR.
The interest rate swap agreements are designated as effec-
tive hedges of the fair value of the underlying fixed rate
debt instruments (see the discussion under the caption
“Derivative financial instruments” in “Note 1—Significant
Accounting Policies”). At December 31, 2001, the fair val-
ues of interest rate swap agreements outstanding were not
material. The amounts of gains and losses from changes in
the fair values of the swap agreements were entirely offset
by those from changes in the fair value of the associated
debt obligations. The interest rate swaps create a market
exposure to changes in the LIBOR rate. To the extent that
the LIBOR index upon which the swaps are based increases
by 1%, the Corporation’s interest expense would increase
by $6.7 million on a pretax basis. A decline in the LIBOR
index of 1% would lower interest expense by a like amount.
Changes in swap rates would affect the market value of the
agreements, but such changes in value would be offset by
changes in value of the underlying debt obligations. A 1%
rise in swap rates from those prevailing at December 31,
2001 would result in a decrease in market value of approxi-
mately $12 million. A 1% decline would increase the market
value by a like amount. In January 2002, the Corporation
entered into additional interest rate swap agreements to
swap fixed interest rates for variable rates on approxi-
mately $250 million of its long-term debt.
The Corporation uses forward exchange contracts to
manage its exposure to fluctuations in foreign exchange
rates. These contracts are designated as qualifying hedges
of the cash flows associated with firm commitments or
specific anticipated transactions, and related gains and
losses on the contracts are recognized in income when the
hedged transaction occurs. Effective January 1, 2001, the
Corporation began accounting for these contracts under
the provisions of SFAS No. 133, “Accounting for Derivative
Instruments and Hedging Activities,” as amended. At
December 31, 2001, the fair value of forward exchange
contracts outstanding, as well as the amounts of gains and
losses recorded during the year then ended, were not mate-
rial. The Corporation does not hold or issue derivative
financial instruments for trading purposes.
The Corporation adopted SFAS No. 142, “Accounting
for Goodwill and Other Intangible Assets,” as of January 1,
2002. Among other things, the Statement prohibits the
amortization of goodwill and sets forth a new methodology
for periodically assessing and, if warranted, recording
impairment of goodwill. In connection with the impairment
provisions of the new rules, the Corporation has completed
the initial step of the goodwill impairment test and has con-
cluded that no adjustment to the balance of goodwill at the
date of adoption is required. In addition, the Corporation
reassessed the estimated remaining useful lives of other
intangible assets as part of its adoption of the Statement.
As a result of that review, the estimated useful life of the
intangible asset related to the F-16 fighter aircraft program
has been extended. This change is expected to decrease
annual amortization expense associated with that intangi-
ble asset by approximately $30 million on a pretax basis.
If the Statement had been adopted at the beginning of 2001,
the extension of the estimated useful life of that intangible
asset and the absence of goodwill amortization would
have increased earnings from continuing operations before
extraordinary item by approximately $240 million
($0.55 per diluted share).