Lockheed Martin 2005 Annual Report Download - page 54

   
Lockheed฀Martin฀Corporation
NOTES฀TO฀CONSOLIDATED฀FINANCIAL฀STATEMENTS
December฀31,฀2005
The฀ Corporation’s฀ reported฀ and฀ pro฀ forma฀ earnings฀ per฀
share฀information฀follows:
(In฀millions,฀except฀per฀share฀data)  2004 2003

As฀reported  $฀1,266 $฀1,053
Fair฀value-based฀compensation฀cost,฀฀
฀ net฀of฀taxes
฀Fair฀value-based,฀pro฀forma฀฀
฀ compensation฀expense  (48) (61)
Inception-to-date฀adjustment  — —
฀ ฀ Pro฀forma฀net฀earnings  $฀1,218 $฀ 992

As฀reported   $฀ 2.86 $฀ 2.36
฀Fair฀value-based,฀pro฀forma฀฀
฀ compensation฀expense  (0.11) (0.14)
Inception-to-date฀adjustment  — —
฀ ฀ Pro฀forma   $฀ 2.75 $฀ 2.22

As฀reported   $฀ 2.83 $฀ 2.34
฀Fair฀value-based,฀pro฀forma฀฀
฀ compensation฀expense  (0.11) (0.14)
Inception-to-date฀adjustment  — —
฀ ฀ Pro฀forma   $฀ 2.72 $฀ 2.20
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
Risk-free฀interest฀rate  3.19% 2.91%
Dividend฀yield  1.50% 1.00%
Volatility฀factors฀related฀฀
฀ to฀expected฀price฀of฀฀
฀ Lockheed฀Martin฀stock  0.365 0.387
Expected฀option฀life  5฀years 5฀years
The฀ weighted฀ average฀ fair฀ value฀ of฀ each฀ option฀ granted฀
during฀ 2005,฀ 2004฀ and฀ 2003฀ was฀ $14.16,฀ $15.76฀ and฀ $17.78,฀
respectively.
Effective฀January฀ 1,฀2006,฀the฀ Corporation฀adopted฀ FAS฀
123(R),฀ Share-Based฀ Payments,฀ and฀ related฀ Securities฀ and฀
Exchange฀ Commission฀ rules฀ included฀ in฀ Staff฀ Accounting฀
Bulletin฀ No.฀ 107,฀ on฀ a฀ modified฀ prospective฀ basis.฀ The฀ stan-
dard฀ requires฀ stock฀ options฀ and฀ other฀ share-based฀ payments฀
made฀ to฀ employees฀ to฀ be฀ accounted฀ for฀ as฀ compensation฀
expense฀ and฀ recorded฀ at฀ fair฀ value,฀ and฀ requires฀ the฀ related฀
excess฀tax฀benefit฀received฀upon฀exercise฀of฀the฀options,฀if฀any,฀
to฀ be฀ reflected฀ in฀ the฀ statement฀ of฀ cash฀ flows฀ as฀ a฀ financing฀
activity฀ rather฀ than฀ an฀ operating฀ activity฀ as฀ currently฀ pre-
sented.฀The฀Corporation฀will฀continue฀to฀use฀the฀Black-Scholes฀
option฀pricing฀model฀to฀estimate฀the฀fair฀value฀of฀stock฀options฀
granted฀subsequent฀to฀the฀date฀of฀adoption฀of฀FAS฀123(R).฀
The฀ Lockheed฀ Martin฀ Amended฀ and฀ Restated฀ 2003฀
Incentive฀ Performance฀ Award฀ Plan฀ provides฀ for฀ the฀ grant฀ of฀
various฀ types฀ of฀ stock-based฀ incentive฀ awards,฀ including฀
options฀to฀purchase฀common฀stock,฀stock฀appreciation฀rights,฀
restricted฀ stock฀and฀stock฀units.฀The฀ types฀and฀mix฀ of฀stock-
based฀incentive฀awards฀are฀evaluated฀on฀an฀ongoing฀basis฀and฀
may฀ vary฀ based฀ on฀ management’s฀ overall฀ strategy฀ regarding฀
compensation,฀including฀consideration฀of฀the฀impact฀of฀expens-
ing฀stock฀option฀awards฀on฀the฀Corporation’s฀results฀of฀opera-
tions฀ subsequent฀ to฀ the฀ adoption฀ of฀ FAS฀ 123(R).฀ Based฀ on฀
current฀analyses฀and฀information,฀the฀Corporation฀expects฀that฀
the฀combination฀of฀expensing฀stock฀options฀upon฀adoption฀of฀
FAS฀123(R)฀in฀2006฀and฀grants฀of฀restricted฀stock฀units฀will฀
result฀in฀additional฀ expense,฀net฀of฀state฀income฀tax฀benefits,฀
totaling฀ approximately฀ $100฀ million฀ (or฀ a฀ reduction฀ in฀ net฀
earnings฀per฀share฀of฀$0.15)฀on฀a฀full฀year฀basis.฀
Income฀ taxes—The฀ Corporation฀ periodically฀ assesses฀ its฀ tax฀
filing฀exposures฀ related฀to฀periods฀that฀are฀open฀to฀ examina-
tion.฀Based฀on฀the฀latest฀available฀information,฀the฀Corporation฀
reflects฀ in฀ its฀ consolidated฀ financial฀ statements฀ its฀ best฀ esti-
mate฀of฀the฀tax฀liability฀and฀interest฀for฀those฀exposures฀where฀
it฀is฀probable฀that฀an฀adjustment฀will฀be฀sustained.฀In฀2004,฀
the฀ IRS฀ closed฀ its฀ examination฀ of฀ the฀ Corporation’s฀ tax฀
returns฀through฀December฀31,฀2002.฀The฀IRS฀commenced฀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฀ and฀ the฀ after-
tax฀ impact฀of:฀adjustments฀ to฀ the฀ minimum฀pension฀liability,฀
adjustments฀related฀to฀available-for-sale฀investments,฀and฀other฀
activities฀ related฀ to฀ hedging฀ activities฀ and฀ foreign฀ currency฀
translation.฀Income฀taxes฀related฀to฀components฀of฀other฀com-
prehensive฀income฀are฀generally฀recorded฀based฀on฀a฀tax฀rate,฀
including฀the฀effects฀of฀federal฀and฀state฀taxes,฀of฀37%.฀