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 4534 37,213 35,526 31,824 Cost of sales Products 27,892 27,667 25,306 Service 5,073 4,765 4,099 Unallocated coporate costs 803 914 443 33,768 33,346 29,848 3,445 2,180 1,976 Other income (expenses), net (449) (121) 43 Operating profit 2.996 2,059 2,019 Interest expense 370 425 487 Earnings before taxes 2,626 1,634 1.532 Income tax expense 801 368 479 $ $ $ Net earnings 1,825 1,266 1.053 Balance Sheet December 31 (In millions) 2005 2004 Assets $ 2,484 429 $ 1,100 396 4,094 1,864 982 4.579 1.921 861 495 557 Cash and cash equivalents Short-term investments Receivables Inventories Deferred income taxes Other current assets Total current assets Property, plant and equipment, net Investments in equity securities Goodwill Purchased intangibles, net Prepaid pension asset Other assets 10.769 3.924 196 8.993 3.599 812 8,447 560 7,892 672 1,360 1,030 2.728 2.596 $ $ 27.984 25,594 Total assets Liabilities and stockholders' equity $ $ 1.998 4.331 1,726 4,028 1,475 1,346 202 15 Accounts payable Customer advances and amounts in excess of costs incurred Salaries, benefits and payroll taxes Current maturities of long-term debt Other current liabilities Total current liabilities Long-term debt Accrued pension liabilities Other postretirement benefit liabilities Other liabilities Stockholders' equity Common stock, $1 par value per share Additional paid-in capital Retained earnings Accumulated other comprehensive loss Other Total stockholders' equity 1,422 9,428 4,784 2.217 1,277 2,411 1,451 8,566 5,224 1,580 1,236 1.967 432 438 1.724 2.223 7.278 5.915 (1.553) (1.532) (14) (23) 7,867 7,021 $ $ 27,984 25,594 Total liabilities and stockholders' equity Consolidated Statement of Cash Flows Year Ended December 31 (In millions) 2005 2004 2003 Operating Activities $ 1,825 $ 1.266 S 1,053 555 511 480 150 145 129 467 24 (58) (390) (39) 239 (87) 519 288 (258) (94) 330 296 534 (228) 568 2.924 (285) (13) 1,809 3,194 Net earnings Adjustments to reconcile net earnings to net cash provided by operating activities Depreciation and amortization Amortization of purchased intangibles Deferred federal income taxes Changes in operating assets and liabilities: Receivables Inventories Accounts payable Customer advances and amounts in excess of costs incurred Other Net cash provided by operating activities Investing Activities Expenditures for property, plant and equipment Acquisition of business/investments in affiliated companies Proceeds from divestiture of businesses/Investments in affiliated companies Purchase of short-term investments, net Other Net cash used for investing activities Financing Activities repayment of long-term debt Issuances of long-term debt Long-term debt repayment and issuance costs Issuances of common stock Repurchases of common stock Common stock dividends Net cash used for financing activities Net increase (decrease) in cash and cash equivalents Cash and cash equivalents at beginning of year (865) (244) 935 (769) (91) 279 (687) (821) 234 (33) 28 (179) (156) (240) 29 53 (708) (1,461) (175 (253) (1,049) (2,202) 1,000 (12) (163) (175) 406 164 44 (1.310) (673) (482) (462) (405) (261) (1,631) (2.126) (2.076) 1,384 90 (1.728) 1,100 1,010 2.738 $ $ S 2,484 1,100 1,010 Cash and cash equivalents at end of year (a) Compute Lockheed Martin's current ratio and quick ratio for 2005 and 2004. (Round your answers to two decimal places.) 2005 current ratio = 0 2004 current ratio = 0 2005 quick ratio = 0 2004 quick ratio = 0 Which of the following best describes the company's current ratio and quick ratio for 2005 and 2004? OBoth the current and quick ratios have increased from 2004 to 2005. The company is fairly liquid. OThe 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. OBoth the current and quick ratios have decreased from 2004 to 2005. The company is fairly illiquid. OThe 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 = 0 2004 total liabilities-to-stockholders' equity 0 2005 total debt-to-equity = 0 2004 total debt-to-equity = 0 Which of the following best describes the company's total liabilities-to-equity ratios and total debt-to-equity ratios for 2005 and 2004? OThe 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. OBoth 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. OThe 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. (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 = 0 2004 times interest earned = 0 2005 cash from operations to total debt = 0 2004 cash from operations to total debt = 0 2005 free operating cash flow to total debt = 0 2004 free operating cash flow to total debt = 0 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 20047 (Select all that apply) 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. 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. Lockheed Martin's times interest earned increased significantly during 2005, due to both an increase in profitability and a decrease in interest expense. Lockheed Martin's times interest earned decreased significantly during 2005, due to both a decrease in profitability and an increase 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? OLockheed 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. OLockheed 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. OLockheed 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. OLockheed 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