Lockheed Martin 2001 Annual Report Download - page 43

Lockheed Martin Corporation
December 31, 2001
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 pursuant to contracts are
accounted for as contract costs.
Impairment of certain long-lived assets—Generally, the car-
rying values of long-lived assets other than goodwill are
reviewed for impairment if events or changes in the facts
and circumstances indicate that their carrying values may
not be recoverable. Any impairment determined is recorded
in the current period and is measured by comparing the
fair value of the related asset to its carrying value.
Derivative financial instruments—The Corporation sometimes
uses derivative financial instruments to manage its exposure
to fluctuations in interest rates and foreign exchange rates.
Effective January 1, 2001, the Corporation began to account
for derivative financial instruments in accordance with SFAS
No. 133, “Accounting for Derivative Instruments and Hedging
Activities.” The effect of adopting SFAS No. 133 was not
material to the Corporation’s consolidated results of opera-
tions, cash flows or financial position. Under SFAS No.
133, all derivatives are recorded as either assets or liabili-
ties in the consolidated balance sheet, and periodically
adjusted to fair value. The classification of gains and losses
resulting from changes in the fair values of derivatives is
dependent on the intended use of the derivative and its
resulting designation. Adjustments to reflect changes in fair
values of derivatives that are not considered highly effective
hedges are reflected in earnings. Adjustments to reflect
changes in fair values of derivatives that are considered
highly effective hedges are either reflected in earnings and
largely offset by corresponding adjustments related to the
fair values of the hedged items, or reflected in other com-
prehensive income until the hedged transaction matures
and the entire transaction is recognized in earnings. The
change in fair value of the ineffective portion of a hedge is
immediately recognized in earnings.
Interest rate swap agreements are designated as effec-
tive hedges of the fair value of certain existing fixed rate
debt instruments. Forward currency exchange contracts are
designated as qualifying hedges of cash flows associated
with firm commitments or specific anticipated transactions.
At December 31, 2001, the fair values of interest rate
swap agreements and forward currency 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 derivative financial instruments for
trading purposes.
Stock-based compensation—The Corporation measures
compensation cost for stock-based compensation plans
using the intrinsic value method of accounting as prescribed
in Accounting Principles Board Opinion No. 25, “Accounting
for Stock Issued to Employees,” and related interpretations.
The Corporation has adopted those provisions of SFAS No.
123, “Accounting for Stock-Based Compensation,” which
require disclosure of the pro forma effects 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.
Comprehensive income—Comprehensive income (loss) for
the Corporation consists primarily of net earnings (loss),
after-tax foreign currency translation adjustments, after-tax
unrealized gains and losses related to hedging activities
and available-for-sale securities, and the after-tax impact
of additional minimum pension liabilities. Income taxes
related to components of other comprehensive income are
generally recorded based on an effective tax rate of 39
percent. At December 31, 2001, 2000 and 1999, the
accumulated balances of other comprehensive income related
to foreign currency translation adjustments were not mate-
rial and, at December 31, 2001, the accumulated balance
related to net unrealized gains and losses from hedging
activities was not material. For the year ended December
31, 2001, other comprehensive income included a net
unrealized gain of $23 million primarily related to the
Corporation’s investments in Loral Space & Communications,
Ltd. (Loral Space) and New Skies Satellites, N.V. (New
Skies), a reclassification adjustment of $151 million related
to the realization of the loss in value of its investment in
Loral Space in the third quarter of 2001, and an additional
minimum pension liability of $33 million related to certain
of the Corporation’s defined benefit pension plans. Other
comprehensive loss in 2000 consisted primarily of a $129
million unrealized loss related to the decline in value of the
Corporation’s investment in Loral Space.
New accounting pronouncements—The Corporation
adopted SFAS No. 142, “Accounting for Goodwill and
Other Intangible Assets,” as of January 1, 2002. Among
Lockheed Martin Annual Report >>> 50