Lockheed Martin 2008 Annual Report Download - page 96

As we repurchase our common shares, we reduce common stock for the $1 of par value of the shares repurchased, with
the remainder of the purchase price over par value recorded as a reduction of additional paid-in capital. Due to the volume of
repurchases made under our share repurchase program, additional paid-in capital was reduced to zero, with the remainder of
the excess of purchase price over par value of $2,106 million and $471 million recorded as a reduction of retained earnings in
2008 and 2007.
Note 12 – Stock-Based Compensation
Effective January 1, 2006, we adopted FAS 123(R) and the related SEC rules included in SAB 107, on a modified
prospective basis. During the years ended December 31, 2008, 2007 and 2006, we recorded non-cash compensation cost
related to stock options and restricted stock totaling $155 million, $149 million and $111 million, which is included in our
Statement of Earnings within cost of sales. The net impact to earnings for the respective years was $100 million ($0.24 per
share), $96 million ($0.22 per share) and $70 million ($0.16 per share).
Stock-Based Compensation Plans
We had two stock-based compensation plans in place at December 31, 2008: the Lockheed Martin Amended and
Restated 2003 Incentive Performance Award Plan (the Award Plan) and the Lockheed Martin Directors Equity Plan (the
Directors Plan). Under the Award Plan, we have the right to grant key employees stock-based incentive awards, including
options to purchase common stock, stock appreciation rights, restricted stock, or stock units. Employees also may receive
cash-based incentive awards. We evaluate the types and mix of stock-based incentive awards on an ongoing basis and may
vary the mix based on our overall strategy regarding compensation.
Under the Award Plan, the exercise price of options to purchase common stock may not be less than 100% of the market
value of our stock on the date of grant. No award of stock options may become fully vested prior to the second anniversary of
the grant, and no portion of a stock option grant may become vested in less than one year (except for 1.5 million stock
options that are specifically exempted from vesting restrictions). The minimum vesting period for restricted stock or stock
units payable in stock is three years. Award agreements may provide for shorter vesting periods or vesting following
termination of employment in the case of death, disability, divestiture, retirement, change of control, or layoff. The Award
Plan does not impose any minimum vesting periods on other types of awards. The maximum term of a stock option or any
other award is 10 years.
We generally recognize compensation cost for stock options ratably over the three-year vesting period for active,
non-retirement eligible employees. For active, retirement-eligible employees (i.e., those who have attained age 55 with five
years of service), we generally recognize expense over the initial one-year vesting period. When an option holder becomes
retirement eligible, we accelerate the recognition of any expense not previously recognized for options held for at least one
year. We use the Black-Scholes option pricing model to estimate the fair value of stock options. We record restricted stock
awards (RSAs) and restricted stock units (RSUs) issued under the Award Plan based on the market value of our common
stock on the date of the award. We recognize the related compensation expense over the vesting period. Employees who are
granted RSAs receive the restricted shares and the related cash dividends. They may vote their shares, but may not sell or
transfer shares prior to vesting. The RSAs generally vest over three to five years from the grant date. Employees who are
granted RSUs also receive dividend-equivalent cash payments; however, the shares are not issued and the employees have no
voting rights until the RSUs vest, generally three years from the date of the award. Otherwise, the accounting treatment for
RSUs is similar to the accounting for RSAs.
Under the Directors Plan, directors receive approximately 50% of their annual compensation in the form of equity-based
compensation. Each director may elect to receive his or her compensation in the form of stock units which track investment
returns to changes in value of our common stock with dividends reinvested, options to purchase common stock, or a
combination of the two. Under the Directors Plan, options to purchase common stock have an exercise price of not less than
100% of the market value of the underlying stock on the date of grant. Stock options and stock units issued under the
Directors Plan vest on the first anniversary of the grant, except in certain circumstances. The maximum term of a stock
option is 10 years.
Our stockholders have approved the Award Plan and the Directors Plan, as well as the number of shares of our common
stock authorized for issuance under these plans. At December 31, 2008, inclusive of the shares reserved for outstanding stock
options and RSUs, we had 39 million shares reserved for issuance under our stock option and award plans, of which
10.6 million shares were authorized in 2008. At December 31, 2008, 18 million of the shares reserved for issuance remained
available for grant under the plans. We issue new shares upon the exercise of stock options or when restrictions on RSUs
have been satisfied.
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