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 Net sales $ $ Products 31,518 30,202 Service 5,695 5,324 37,213 35,526 Cost of sales Products 27,932 27,637 Service 5,073 4,765 Unallocated coporate costs 803 914 33,808 33,316 3,405 2,210 Other income (expenses), net (449) (121) Operating profit 2,956 2,089 Interest expense 370 425 Earnings before taxes 2,586 1,664 Income tax expense 761 368 $ Net earnings 1,825 1,296 $ Balance Sheet December 31 (In millions) Assets 2005 2004 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 $ $ 2,124 1,080 429 396 4,579 4,094 1,921 1,864 861 982 495 557 10,409 8,973 3,924 3,599 196 812 8,447 7,892 560 672 1,360 1,030 2.728 2,596 $ $ 27,624 25,574 Total assets Liabilities and stockholders' equity $ $ 1,998 1,726 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 4,331 4,028 1,475 1,346 202 15 1,422 1,451 9,428 8.566 4,944 1,617 thor noctrotiromont honfit liabilition 1777 10 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 4,944 5,184 Accrued pension liabilities 1,617 1,760 Other postretirement benefit liabilities 1,277 1,236 Other liabilities 2,491 1,807 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 27,624 25,574 Consolidated Statement of Cash Flows Year Ended December 31 (In millions) 2005 2004 Operating Activities $ $ Net earnings 1,825 1,266 Adjustments to reconcile net earnings to net cash provided by operating activities Depreciation and amortization 555 511 Amortization of purchased intangibles 150 145 Deferred federal income taxes 24 (58) Changes in operating assets and liabilities: Receivables (390) (87) Inventories (39) 519 Accounts payable 239 288 Customer advances and amounts in excess of costs incurred 296 (228) Other 534 568 Net cash provided by operating activities 3,194 2,924 Investing Activities Expenditures for property, plant and equipment (865) (769) Acquisition of business/investments in affiliated companies (784) (91) Proceeds from divestiture of businesses/Investments in affiliated companies 935 Purchase of short-term investments, (33) (156) net To =7 (784) (91) 935 279 (33) (156) 28 29 (719) (708) (53) (1,069) 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 Cash and cash equivalents at end of year (12) (163) 406 164 (1,310) (673) (462) (405) (1,431) (2,146) 1,044 70 1,080 1,010 $ $ 2,124 1,080 (a) Compute Lockheed Martin's current ratio and quick ratio for 2005 and 2004. (Round your answers to two decimal places.) 2005 current ratio = 2004 current ratio = 2005 quick ratio = 2004 quick ratio = 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. OBoth the current and quick ratios have increased from 2004 to 2005. The company is Which of the following best describes the company's current ratio and quick ratio for 2005 and 2004? 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 increased from 2004 to 2005. The company is fairly liquid. OBoth the current and quick ratios have decreased from 2004 to 2005. The company is fairly illiquid. 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 = 2004 total liabilities-to-stockholders' equity = 2005 total debt-to-equity = 2004 total debt-to-equity = 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 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. 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. 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. OBoth 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 = 2004 times interest earned = 2005 cash from operations to total debt = 2004 cash from operations to total debt = 2005 free operating cash flow to total debt = 2004 free operating cash flow to total debt = 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) Lockheed Martin's times interest earned decreased significantly during 2005, due to both a decrease in profitability and an increase in interest expense. 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. (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 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 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 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