Lockheed Martin 2004 Annual Report Download - page 51

ments relative to independent research and development and
bid and proposal activities of $962 million in 2004, $903 mil-
lion in 2003 and $830 million in 2002. Costs incurred under
customer-sponsored research and development programs pur-
suant to contracts are accounted for as sales and cost of sales
under the contract.
Restructuring activities — Under existing U.S. Government
regulations, certain costs incurred for consolidation or restruc-
turing activities that can be demonstrated to result in savings in
excess of the cost to implement those actions can be deferred
and amortized for government contracting purposes and
included as allowable costs in future pricing of the Corporation’s
products and services. Included in other assets in the consoli-
dated balance sheet at December 31, 2004 and 2003 is $95 mil-
lion and $155 million, respectively, of deferred costs related to
various consolidation actions.
Impairment of certain long-lived assets — Generally, the carry-
ing values of long-lived assets other than goodwill are reviewed
for impairment if events or changes in the facts and circum-
stances indicate that their carrying values may not be recover-
able. Any impairment determined is recorded in the current
period and is measured by comparing the fair value based on esti-
mated future cash flows of the related asset to its carrying value.
Derivative financial instruments — The Corporation some-
times uses derivative financial instruments to manage its expo-
sure to fluctuations in interest rates and foreign exchange rates.
Derivatives are recorded as either other current assets or liabil-
ities 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 val-
ues of derivatives that are considered highly effective hedges
are either reflected in earnings and largely offset by correspon-
ding adjustments related to the fair values of the hedged items,
or reflected in other comprehensive 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 effective
hedges of the fair value of certain existing fixed rate debt
instruments. Forward currency exchange contracts qualify as
hedges of the fluctuations in cash flows associated with firm
commitments or specific anticipated transactions contracted in
foreign currencies, or as hedges of the exposure to rate changes
affecting foreign currency denominated assets or liabilities. At
December 31, 2004, there were no interest rate swap agree-
ments outstanding, and the fair value of forward currency
exchange contracts outstanding, as well as the related amounts
of gains and losses recorded during the year, were not material.
The Corporation does not hold or issue derivative financial
instruments for trading or speculative purposes.
Stock-based compensation — The Corporation measures com-
pensation cost for stock-based compensation plans using the
intrinsic value method of accounting as prescribed in
Accounting Principles Board Opinion 25, Accounting for Stock
Issued to Employees, and related interpretations, for the years
presented. The Corporation has adopted those provisions of
FAS 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 fair value-based method at the date of grant for
options awarded.
Lockheed Martin Corporation
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