Lockheed Martin 2003 Annual Report Download - page 51

Lockheed Martin Corporation
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Derivative financial instruments — The Corporation sometimes
uses derivative financial instruments to manage its exposure to
fluctuations in interest rates and foreign exchange rates. The
Corporation accounts for derivative financial instruments in
accordance with FAS 133, “Accounting for Derivative
Instruments and Hedging Activities,” as amended. Under FAS
133, all derivatives are recorded as either assets or liabilities 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 high-
ly 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 large-
ly offset by corresponding 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 ineffec-
tive 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 are desig-
nated as qualifying hedges of cash flows associated with firm
commitments or specific anticipated transactions. At December
31, 2003, 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 com-
pensation 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 FAS 123,
“Accounting for Stock-Based Compensation,” as amended,
which require disclosure of the pro forma effects on net earnings
and earnings per share as if compensation cost had been recog-
nized based upon the fair value-based method at the date of
grant for options awarded.
For purposes of pro forma disclosures, the options’ esti-
mated fair values are amortized to expense over the options’
vesting periods (see Note 12). The Corporation’s pro forma
information follows:
(In millions, except per share data) 2003 2002 2001
NET EARNINGS (LOSS):
As reported $ 1,053 $500 $ (1,046)
Fair value-based compensation
cost, net of taxes (61) (67) (49)
Pro forma net earnings (loss) $ 992 $433 $ (1,095)
EARNINGS (LOSS) PER BASIC SHARE:
As reported $ 2.36 $1.13 $ (2.45)
Pro forma $ 2.22 $0.97 $ (2.56)
EARNINGS (LOSS) PER DILUTED SHARE:
As reported $ 2.34 $1.11 $ (2.42)
Pro forma $ 2.20 $0.96 $ (2.53)
Comprehensive income — Comprehensive income (loss) for the
Corporation consists primarily of net earnings (loss) and the
after-tax impact of: the additional minimum pension liability,
unrealized gains and losses related to available-for-sale invest-
ments, 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 an effective tax rate, including the effects of federal
and state taxes, of 37%.
The accumulated balances of the components of other
comprehensive income (loss) at December 31, 2003 are as fol-
lows: minimum pension liability — $(1,239) million; net unre-
alized gains from available-for-sale investments — $44 million;
and other activities — $(9) million.
Recent accounting pronouncements — In December 2003, the
Financial Accounting Standards Board issued a Staff Position
that allows companies to defer recognition of the impact that
the Medicare Prescription Drug, Improvement and
Modernization Act of 2003 (the Act) might have on the benefit
obligations they provide their retirees, pending the issuance of
specific guidance on the accounting for the federal subsidy
introduced by the Act which, when issued, could require a
change to previously reported information. The Corporation
elected to defer recognition of the impact of the Act; according-
ly, the accumulated post-retirement benefit obligation (APBO)
for its retiree health care benefits, as well as the net periodic