Lockheed Martin 2005 Annual Report Download - page 53

   
Lockheed฀Martin฀Corporation
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,฀ 2005฀ and฀ 2004฀ is฀ $65฀
million฀and฀$95฀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฀
estimated฀future฀cash฀flows฀of฀the฀related฀asset฀to฀its฀carrying฀
value.
Derivative฀financial฀instruments—The฀Corporation฀sometimes฀
uses฀derivative฀financial฀ instruments฀ to฀manage฀its฀exposure฀
to฀ fluctuations฀ in฀ foreign฀ exchange฀ rates฀ and฀ interest฀ rates.฀
The฀ Corporation฀ does฀ not฀ hold฀ or฀ issue฀ derivative฀ financial฀
instruments฀ for฀ trading฀ or฀ speculative฀ purposes.฀ Derivatives฀
are฀recorded฀as฀either฀other฀current฀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฀ highly฀ 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฀largely฀ offset฀by฀correspond-
ing฀adjustments฀related฀to฀the฀fair฀values฀of฀the฀hedged฀items,฀
or฀reflected฀net฀of฀income฀taxes฀in฀accumulated฀other฀compre-
hensive฀income฀(loss)฀until฀the฀hedged฀transaction฀occurs฀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,฀2005,฀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.฀
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,฀ which฀ require฀
disclosure฀of฀the฀pro฀forma฀effects฀on฀net฀earnings฀and฀earn-
ings฀ per฀ share฀ as฀ if฀ compensation฀ cost฀ had฀ been฀ recognized฀
based฀upon฀the฀fair฀value-based฀method฀at฀the฀date฀of฀grant฀for฀
options฀ awarded.฀ The฀ fair฀ value฀ information฀ included฀ in฀ the฀
table฀below฀was฀estimated฀at฀ the฀date฀ of฀grant฀of฀the฀options฀
using฀the฀Black-Scholes฀option฀pricing฀model.
Upon฀ retirement,฀ the฀ Corporation’s฀ stock฀ option฀ award฀
agreements฀allow฀employees฀to฀retain฀all฀stock฀option฀awards฀
held฀through฀the฀initial฀vesting฀date฀prior฀to฀retirement,฀and฀to฀
continue฀vesting฀in฀the฀award฀as฀if฀their฀employment฀had฀con-
tinued.฀ Effective฀ January฀ 2005,฀ the฀ Corporation฀ recognizes฀
fair฀value-based,฀ pro฀ forma฀compensation฀expense฀for฀active,฀
retirement-eligible฀employees฀over฀the฀one-year฀initial฀vesting฀
period,฀and฀for฀active,฀non-retirement-eligible฀employees,฀over฀
the฀ original฀ three-year฀ vesting฀ periods฀ of฀ the฀ award.฀ Prior฀ to฀
2005,฀the฀Corporation฀recognized฀fair฀value-based,฀pro฀forma฀
compensation฀expense฀over฀the฀original฀vesting฀periods฀of฀each฀
award฀for฀all฀employees,฀including฀those฀eligible฀to฀retire.
The฀pro฀forma฀disclosures฀for฀the฀year฀ended฀December฀31,฀
2005฀set฀forth฀below฀include฀$33฀million฀($0.08฀per฀share)฀as฀
an฀inception-to-date฀adjustment฀of฀fair฀value-based,฀pro฀forma฀
compensation฀expense฀recognized฀in฀the฀first฀quarter฀of฀2005฀
related฀ to฀ retirement฀ eligible฀ employees฀ with฀ outstanding฀ and฀
unvested฀2004฀and฀2003฀stock฀option฀awards,฀to฀reflect฀the฀ser-
vice฀period฀as฀one฀year฀rather฀than฀the฀original฀vesting฀period.