Lockheed Martin 2004 Annual Report Download - page 52

Lockheed Martin Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004
50
For purposes of pro forma disclosures, the options’ esti-
mated fair values are amortized to expense over the options’
vesting periods (see Note 11). The Corporation’s pro forma
information follows:
(In millions, except per share data) 2004 2003 2002
NET EARNINGS:
As reported $1,266 $1,053 $ 500
Fair value-based compensation
cost, net of taxes (48) (61) (67)
Pro forma net earnings $1,218 $ 992 $ 433
EARNINGS PER BASIC SHARE:
As reported $ 2.86 $ 2.36 $1.13
Pro forma $ 2.75 $ 2.22 $0.97
EARNINGS PER DILUTED SHARE:
As reported $ 2.83 $ 2.34 $1.11
Pro forma $ 2.72 $ 2.20 $0.96
The fair value for these options was estimated at the date
of grant using the Black-Scholes option pricing model with the
following weighted average assumptions:
2004 2003 2002
Risk-free interest rate 3.19% 2.91% 4.24%
Dividend yield 1.50% 1.00% 1.00%
Volatility factors related to expected
price of Lockheed Martin stock 0.365 0.387 0.376
Expected option life 5 years 5 years 5 years
The weighted average fair value of each option granted
during 2004, 2003 and 2002 was $15.76, $17.78 and $18.23,
respectively.
In December 2004, the Financial Accounting Standards
Board (FASB) issued FAS 123(R), Share-Based Payments, that,
upon implementation, will impact the Corporation’s net earn-
ings 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 currently presented. Consistent with the
provisions of the new standard, the Corporation intends 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 earnings per share for the year
ended December 31, 2004 can be found in the table above.
Income taxes — The Corporation periodically assesses its tax fil-
ing exposures related to periods that are open to examination.
Based on the latest available information, the Corporation
reflects in its consolidated financial statements its best estimate
of the tax liability and interest for those exposures where it is
probable that an adjustment will be sustained. The IRS recently
closed its examination of the Corporation’s tax returns through
December 31, 2002. The IRS plans to commence its examination
of the Corporation’s 2003 and 2004 Federal tax returns in 2005.
Comprehensive income — Comprehensive income (loss) for the
Corporation consists primarily of net earnings (loss) and the
after-tax impact of: adjustments to the minimum pension liabil-
ity, reclassification adjustments related to available-for-sale
investments, and other activities related to hedging activities
and foreign currency translation. Income taxes related to com-
ponents of other comprehensive income are generally recorded
based on a tax rate, including the effects of federal and state
taxes, of 37%.
The accumulated balance of $(1,532) million of other com-
prehensive income (loss) at December 31, 2004 primarily con-
sists of the minimum pension liability of $(1,524) million.
Recent accounting pronouncements — FAS 123(R), Share-
Based Payments, was released by the FASB in December 2004.
The Corporation plans to adopt this new standard prospectively
in third quarter 2005. A brief description of FAS 123(R) appears
in the stock-based compensation section within this note.