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.

Income Statement

Year Ended December 31 (In millions) 2005 2004 2003

Net sales

Products $ 31,518 $ 30,202 $ 27,290

Service 5,695 5,324 4,534

37,213 35,526 31,824

Cost of sales

Products 28,800 27,879 25,306

Service 5,073 4,765 4,099

Unallocated coporate costs 803 914 443

34,676 33,558 29,848

2,537 1,968 1,976

Other income (expenses), net 449 121 43

Operating profit 2,986 2,089 2,019

Interest expense 370 425 487

Earnings before taxes 2,616 1,664 1,532

Income tax expense 791 398 479

Net earnings $ 1,825 $ 1,266 $ 1,053

Balance Sheet

December 31 (In millions) 2005 2004

Assets

Cash and cash equivalents $ 2,244 $ 1,060

Short-term investments 429 396

Receivables 4,579 4,094

Inventories 1,921 1,864

Deferred income taxes 861 982

Other current assets 495 557

Total current assets 10,529 8,953

Property, plant and equipment, net 3,924 3,599

Investments in equity securities 196 812

Goodwill 8,447 7,892

Purchased intangibles, net 560 672

Prepaid pension asset 1,360 1,030

Other assets 2,728 2,596

Total assets $ 27,744 $ 25,554

Liabilities and stockholders' equity

Accounts payable $ 1,998 $ 1,726

Customer advances and amounts in excess of costs incurred 4,331 4,028

Salaries, benefits and payroll taxes 1,475 1,346

Current maturities of long-term debt 202 15

Other current liabilities 1,422 1,451

Total current liabilities 9,428 8,566

Long-term debt 4,784 5,104

Accrued pension liabilities 2,097 1,660

Other postretirement benefit liabilities 1,277 1,236

Other liabilities 2,291 1,967

Stockholders' equity

Common stock, $1 par value per share 432 438

Additional paid-in capital 1,724 2,223

Retained earnings 7,278 5,915

Accumulated other comprehensive loss (1,553) (1,532)

Other (14) (23)

Total stockholders' equity 7,867 7,021

Total liabilities and stockholders' equity $ 27,744 $ 25,554

Consolidated Statement of Cash Flows

Year Ended December 31 (In millions) 2005 2004 2003

Operating Activities

Net earnings $ 1,825 $ 1,266 $ 1,053

Adjustments to reconcile net earnings to net cash provided by operating activities

Depreciation and amortization 555 511 480

Amortization of purchased intangibles 150 145 129

Deferred federal income taxes 24 (58) 467

Changes in operating assets and liabilities:

Receivables (390) (87) (258)

Inventories (39) 519 (94)

Accounts payable 239 288 330

Customer advances and amounts in excess of costs incurred 296 (228) (285)

Other 534 568 (13)

Net cash provided by operating activities 3,194 2,924 1,809

Investing Activities

Expenditures for property, plant and equipment (865) (769) (687)

Acquisition of business/investments in affiliated companies (564) (91) (821)

Proceeds from divestiture of businesses/Investments in affiliated companies 935 279 234

Purchase of short-term investments, net (33) (156) (240)

Other 28 29 53

Net cash used for investing activities (499) (708) (1,461)

Financing Activities

repayment of long-term debt (133) (1,089) (2,202)

Issuances of long-term debt -- -- 1,000

Long-term debt repayment and issuance costs (12) (163) (175)

Issuances of common stock 406 164 44

Repurchases of common stock (1,310) (673) (482)

Common stock dividends (462) (405) (261)

Net cash used for financing activities (1,511) (2,166) (2,076)

Net increase (decrease) in cash and cash equivalents 1,184 50 (1,728)

Cash and cash equivalents at beginning of year 1,060 1,010 2,738

Cash and cash equivalents at end of year $ 2,244 $ 1,060 $ 1,010

(a) Compute Lockheed Martin's current ratio and quick ratio for 2005 and 2004. (Round your answers to two decimal places.)

2005 current ratio = Answer

2004 current ratio = Answer

2005 quick ratio = Answer

2004 quick ratio = Answer

Which of the following best describes the company's current ratio and quick ratio for 2005 and 2004?

The current ratio has increased while the quick ratio has decreased in the period from 2004 to 2005, which suggests the company has a shortage of liquid assets.

Both the current and quick ratios have decreased from 2004 to 2005. The company is fairly illiquid.

Both the current and quick ratios have increased from 2004 to 2005. The company is fairly liquid.

The current ratio has decreased while the quick ratio has increased in the period from 2004 to 2005, which suggests the company has a shortage of current assets.

(b) Compute total liabilities-to-equity ratios and total debt-to-equity ratios for 2005 and 2004. (Round your answers to two decimal places.)

2005 total liabilities-to-stockholders' equity = Answer

2004 total liabilities-to-stockholders' equity = Answer

2005 total debt-to-equity = Answer

2004 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 2005 and 2004?

The total liabilities-to-equity ratio has decreased while the total debt-to-equity ratio has increased in the period from 2004 to 2005, 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 2004 to 2005, 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 2004 to 2005. These increases suggest that the company is less solvent.

Both the total liabilities-to-equity and total debt-to-equity ratios have decreased from 2004 to 2005. 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.)

2005 times interest earned = Answer

2004 times interest earned = Answer

2005 cash from operations to total debt = Answer

2004 cash from operations to total debt = Answer

2005 free operating cash flow to total debt = Answer

2004 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 2005 and 2004? (Select all that apply)

Answer Lockheed Martin's free operating cash flow to total debt ratio increased slightly over the year 2005 due to increased cash flow from operations and decreased levels of debt.

Answer Lockheed Martin's times interest earned decreased significantly during 2005, due to both a decrease in profitability and an increase in interest expense.

Answer Lockheed Martin's cash from operations to total debt ratio increased slightly over the year 2005 due to increased cash flow from operations and decreased levels of debt.

Answer Lockheed Martin's times interest earned increased significantly during 2005, due to both an increase in profitability and a decrease in interest expense.

(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.