Compute and Interpret Liquidity, Solvency and Coverage Ratios Balance sheets and income statements for Lockheed Martin Corporation follow. Refer to these financial statements to answer the requirements. Consolidated Statements of Earnings Year Ended December 31 (In millions) 2012 2011 2010 Net sales Products $ 37,817 $ 36,925 $ 36,380 Services 9,365 9,574 9,291 Total net sales 47,182 46,499 45,671 Cost of sales Products (33,495) (32,968) (32,539) Services (8,383) (8,514) (8,382) Severance and other charges (48) (136) (220) Other unallocated costs (1,060) (1,137) (686) Total cost of sales (42,986) (42,755) (41,827) Gross Profit 4,196 3,744 3,844 Other income, net 238 276 261 Operating profit 4,434 4,020 4,105 Interest expense (383) (354) (345) Other non-operating income (expense), net 21 (35) 18 Earnings before taxes 4,072 3,631 3,778 Income tax expense (1,327) (964) (1,164) Net earnings from continuing operations 2,745 2,667 2,614 Net (loss) earnings from discontinued operations -- (12) 264 Net earnings $ 2,745 $ 2,655 $ 2,878 Consolidated Balance Sheets December 31 (in millions, except par value) 2012 2011 Assets Current Assets Cash and cash equivalents $ 1,898 $ 3,582 Receivables, net 6,563 6,064 Inventories, net 2,937 2,481 Deferred income taxes 1,269 1,339 Other current assets 1,188 628 Total current assets 13,855 14,094 Property, plant and equipment, net 4,675 4,611 Goodwill 10,370 10,148 Deferred income taxes 4,809 4,388 Other noncurrent assets 4,948 4,667 Total assets $ 38,657 $ 37,908 Liabilities and stockholders' equity Current Liabilities Accounts payable $ 2,038 $ 2,269 Customer advances and amounts in excess of costs incurred 6,503 6,399 Salaries, benefits and payroll taxes 1,649 1,664 Current maturities of long-term debt 150 -- Other current liabilities 1,815 1,798 Total current liabilities 12,155 12,130 Long-term debt 6,158 6,460 Accrued pension liabilities 15,278 13,502 Other post-retirement benefit liabilities 1,220 1,274 Other noncurrent liabilities 3,807 3,541 Total Liabilities 38,618 36,907 Stockholders' equity Common stock, $1 par value per share 321 321 Additional paid-in capital -- -- Retained earnings 13,211 11,937 Accumulated other comprehensive loss (13,493) (11,257) Total stockholders' equity 39 1,001 Total liabilities and stockholders' equity $ 38,657 $ 37,908 Consolidated Statement of Cash Flows Year Ended December 31 (in millions) 2012 2011 2010 Operating Activities Net earnings $ 2,745 $ 2,655 $ 2,878 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization 988 1,008 480 Stock-based compensation 167 157 129 Deferred income taxes 930 (2) 467 Severance and other charges 48 136 Reduction in tax expense from resolution of certain tax matter -- (89) (258) Tax expense related to Medicare Part D reimbursement -- -- (94) Net adjustments related to discontinued operations -- (16) 330 Changes in operating assets and liabilities: Receivables, net (460) (363) 3 Inventories, net (422) (74) (207) Accounts payable (236) 609 (364) Customer advances and amounts in excess of costs incurred 57 502 706 Post-retirement benefit plans (1,883) (393) (1,027) Income taxes (535) 304 70 Other, net 162 (181) 21 Net cash provided by operating activities 1,561 4,253 3,801 Investing Activities Capital expenditures (942) (987) (1,074) Acquisition of business/investments in affiliated (304) (649) (148) Net proceeds from sale of EIG -- -- 798 Net cash provided by (used for) short-term investment transactions -- 510 (171) Other,net 24 313 22 Net cash used for investing activities (1,222) (813) (573) Financing Activities Repurchases of common stock (990) (2,465) (2,420) Proceeds from stock option exercises 440 116 59 Dividends paid (1,352) (1,095) (969) Premium paid on debt exchange (225) -- -- Issuance of long-term debt, net of related costs -- 1,980 -- Repayments of long-term debt -- (632) -- Other, net (104) (23) (28) Net cash used for financing activities (2,023) (2,119) (3,358) Net change in cash and cash equivalents (1,684) 1,321 (130) Cash and cash equivalents at beginning of year 3,582 2,261 2,391 Cash and cash equivalents at end of year $ 1,898 $ 3,582 $ 2,261 (a) Compute Lockheed Martin's current ratio and quick ratio for 2012 and 2011. (Round your answers to two decimal places.) 2012 current ratio = Answer 2011 current ratio = Answer 2012 quick ratio = Answer 2011 quick ratio = Answer Which of the following best describes the company's current ratio and quick ratio for 2012 and 2011? The current ratio has increased while the quick ratio has decreased in the period from 2011 to 2012, which suggests the company has a shortage of liquid assets. Both the current and quick ratios have slightly decreased from 2011 to 2012 however, the company is fairly liquid. Both the current and quick ratios have slightly increased from 2011 to 2012, meaning the company is fairly liquid. The current ratio has decreased while the quick ratio has increased from 2011 to 2012, which suggests the company has a shortage of current assets. (b) Compute total liabilities-to-equity ratios and total debt-to-equity ratios for 2012 and 2011. (Round your answers to two decimal places.) 2012 total liabilities-to-stockholders' equity = Answer 990.2 2011 total liabilities-to-stockholders' equity = Answer 36.87 2012 total debt-to-equity = Answer 2011 total debt-to-equity = Answer Which of the following best describes the company's total liabilities-to-equity ratios and total debt-to-equity ratios for 2012 and 2011? The total liabilities-to-equity ratio has decreased while the total debt-to-equity ratio has increased in the period from 2011 to 2012, which suggests the company has decreased the use of short-term debt financing. The total liabilities-to-equity ratio has increased while the total debt-to-equity ratio has decreased in the period from 2011 to 2012, which suggests the company has increased the use of short-term debt financing. Both the total liabilities-to-equity and total debt-to-equity ratios have increased from 2011 to 2012. These increases suggest that the company is less solvent. Both the total liabilities-to-equity and total debt-to-equity ratios have decreased from 2011 to 2012. The difference between these two measures reveals that any solvency concerns would be for the short run. (c) Compute times interest earned ratio, cash from operations to total debt ratio, and free operating cash flow to total debt ratios. (Round your answers to two decimal places.) 2012 times interest earned = Answer 2011 times interest earned = Answer 2012 cash from operations to total debt = Answer 2011 cash from operations to total debt = Answer 2012 free operating cash flow to total debt = Answer 2011 free operating cash flow to total debt = Answer Which of the following describes the company's times interest earned, cash from operations to total debt, and free operating cash flow to total debt ratios for 2012 and 2011? (Select all that apply) Answer Lockheed Martin's free operating cash flow to total debt ratio decreased over the year 2012 due to decreased cash flow from operations. Answer Lockheed Martin's times interest earned decreased during 2012, due to both a decrease in profitability and an increase in interest expense. Answer Lockheed Martin's cash from operations to total debt ratio decreased over the year 2012 due to decreased cash flow from operations. Answer Lockheed Martin's times interest earned increased during 2012, due to both an increase in profitability. (d) Summarize your findings in a conclusion about the company's credit risk. Do you have any concerns about the company's ability to meet its debt obligations? Lockheed Martin's total debt-to-equity is very low, thus increasing any immediate solvency concerns. The company's ability to meet its debt requirements will depend on increasing short-term debt. Lockheed Martin's quick ratio is very low, thus increasing immediate solvency concerns. The company's ability to meet its debt requirements will depend on liquidating inventories for emergency cash. Lockheed Martin's times interest earned ratio is high, thus lessening any immediate solvency concerns. The company's ability to meet its debt requirements will depend on its continued profitability. Lockheed Martin's total liabilities-to-equity is high, thus lessening any immediate solvency concerns. The company's ability to meet its debt requirements will depend on its use of equity financing.