Lockheed Martin 2004 Annual Report Download - page 39

Included in the table above is approximately $420 million
representing letter of credit and surety bond amounts for which
related obligations or liabilities are also recorded in the balance
sheet, either as reductions of inventories, as customer advances
and amounts in excess of costs incurred, or as other liabilities.
Approximately $2 billion of the standby letters of credit in the
table above were to secure advance payments received under an
F-16 contract from an international customer. These letters of
credit are available for draw down in the event of our nonperfor-
mance, and the amount available will be reduced as certain events
occur throughout the period of performance in accordance with
the contract terms. Similar to the letters of credit for the
F-16 contract, other letters of credit and surety bonds are avail-
able for draw down in the event of our nonperformance.
QUANTITATIVE AND QUALITATIVE DISCLOSURE
OF MARKET RISK
Our main exposure to market risk relates to interest rates and, to
a lesser extent, foreign currency exchange rates. Our financial
instruments that are subject to interest rate risk principally
include fixed-rate and floating rate long-term debt. The esti-
mated fair values of the Corporation’s long-term debt instru-
ments at December 31, 2004, aggregated approximately $6.3
billion, compared with a carrying amount of approximately $5.1
billion. The majority of our long-term debt obligations are not
callable until maturity. We sometimes use interest rate swaps to
manage our exposure to fixed and variable interest rates; how-
ever, at year-end 2004, we had no such agreements in place.
We use forward foreign exchange contracts to manage our
exposure to fluctuations in foreign currency exchange rates, and
do so in ways that qualify for hedge accounting treatment. These
exchange contracts hedge the fluctuations in cash flows associated
with firm commitments or specific anticipated transactions con-
tracted in foreign currencies, or hedge the exposure to rate
changes affecting foreign currency denominated assets or liabili-
ties. Related gains and losses on these contracts, to the extent they
are effective hedges, are recognized in income at the same time as
the hedged transaction is recognized or when the hedged asset or
liability is adjusted. To the extent the hedges are ineffective, gains
and losses on the contracts are recognized currently. At December
31, 2004, the fair value of forward exchange contracts outstand-
ing, as well as the amounts of gains and losses recorded during the
year then ended, were not material. We do not hold or issue deriv-
ative financial instruments for trading or speculative purposes.
RECENT ACCOUNTING PRONOUNCEMENTS
In December 2004, the Financial Accounting Standards Board
(FASB) issued FAS 123(R), Share-Based Payments, that, upon
implementation, will impact our net earnings and earnings per
share, and change the classification of certain elements of the
statement of cash flows. FAS 123(R) requires stock options and
other share-based payments made to employees to be accounted
for as compensation expense and recorded at fair value, and to
reflect the related tax benefit received upon exercise of the
options in the statement of cash flows as a financing activity
inflow rather than an adjustment of operating activity as cur-
rently presented. Consistent with the provisions of the new stan-
dard, we intend to adopt FAS 123(R) in the third quarter of
2005, and to implement it on a prospective basis. Information
about the fair value of stock options under the Black-Scholes
model and its pro forma impact on our net earnings and earn-
ings per share for the year ended December 31, 2004 can be
found in Note 1 to the financial statements, and we expect the
impact of implementing the new standard using this model will
be a reduction in earnings per share of approximately $0.10 to
$0.20 on a full year basis. However, a number of technical
implementation issues are yet to be resolved, including the
selection and use of an appropriate valuation model, and the
ultimate impact of adopting FAS 123(R) is not yet known.
In May 2004, the FASB issued FASB Staff Position (FSP)
106-2, Accounting and Disclosure Requirements Related to the
Medicare Prescription Drug, Improvement and Modernization
Act of 2003. This FSP provides specific authoritative guidance
on the accounting for the federal subsidy to eligible sponsors of
retiree health care benefits provided under this law. Using this
guidance, the Corporation calculated a reduction in its accumu-
lated post-retirement benefit obligation at December 31, 2004
of $295 million from the effects of the new law and, after appli-
cation of government contracting regulations, doesn’t anticipate
a material impact on net earnings from the reduction in net peri-
odic post-retirement benefits cost in 2005.
CONTROLS AND PROCEDURES
We maintain disclosure controls and procedures, including
internal control over financial reporting, that are designed to
ensure that information required to be disclosed in our periodic
filings with the Securities and Exchange Commission (SEC) is
reported within the time periods specified in the SEC’s rules
and forms, and to provide reasonable assurance that assets are
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Lockheed Martin Corporation