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Part III: BONUS Applied Case Assignment (Chapters 10 and 11)

This applied case is OPTIONAL. You do NOT need to complete this assignment. However, if you choose to complete this assignment and submit it along with Applied Case Assignment #7 by the appropriate due date, it will be graded as a BONUS case assignment. Your grade on the BONUS case assignment will replace one of your earlier case assignment grades, if it improves your overall score.

Lockheed Martin Corporation (NYSE: LMT; Bethesda, MD) describes itself as "a global security and aerospace company principally engaged in the research, design, development, manufacture, integration and sustainment of advanced technology systems, products and services," with its principal customers being agencies of the U.S. Government. On the next two pages are Lockheed Martin's Consolidated Statements of Earnings, Comprehensive Income, and Balance Sheets, along with the Long-Term Debt footnote, excerpted from the its 2014 10-K. (You will not need to supplement with outside sources of company data in order to answer the questions.)

1. What is the principal or face value of Lockheed Martin's long-term debt?

2. (a) To what covenant(s) is Lockheed Martin subject under the terms of their revolving credit facility?

(b) How is the covenant ratio described differently from what we might compute as part of the ROE decomposition?

3. The footnote states that "In April 2013, [Lockheed Martin] repaid $150 million of long-term notes with a fixed interest rate of 7.38% due to their scheduled maturities." At the time of repayment, did the net carrying value of these long-term notes reflect at a premium, a discount, or par value? Explain.

4. Has Lockheed Martin's solvency improved or deteriorated in 2014 relative to 2013? Explain your response, and identify the primary cause for that change.

Consolidated Statements of Earnings (in millions, exceptper share data) Year: Ended December 31, 2014 2013 201 2. Net sales Products 8 36,093 S 35,691 5 37,817 Services 9,507 9,667 9,365 Total net sales 45,600 45,3 58 47,182 Coat of nice Products (31,965) (3 1,346) (33,495) Services (8,393) (8,588) (8,383) Goodwill impairment charges (119) (195) Severance charges (201) (48) Other unallocated, net 132 (841) (1,060) Total cost of sales 40 45 4] 171 42 986 Gross prot 5,255 4,187 4,196 Other income net 337 318 238 Operating prot 5,592 4,505 4,434 Interest expense (340) (350) (383) Other non-operating income, net 6 21 Earnings from continuing operations before income taxes 5,258 4,155 4,072 Income tax ex ense (1,644 (1,205 1,327) Net earnings lion: continuing operations 3,614 2,950 2,745 Net earnings from discontinued operations 31 7 Net ea a 5 3,614 8 2,981 8 2,745 Earnings per common share Basic Continuing operations 5 11.41 $ 9.19 S 8.48 Discontinued operations .10 Basic earnings per common share 3 11.41 S 9.29 S 8.48 Diluted Continuing operations S 11.21 S 9.04 S 8.36 Discontinued operations .09 Diluted earnings per common share 5 11.21 S 9.] 3 S 8.36 The accompanying notes are an integral part of these consolidated nancial statements. Net earnings Lockheed Martin Corporation Consolidated Statements of Comprehensive Income (in million) Years Ended December 3| , 2014 2013 2012 5 3.614 $ 2,931 s 2,145 Other comprehensive (Ioss)incon1e. net of tax Poslretirement benet plans Net other comprehensive (loss) income recognized during the period, net of tax benet (expense) of S 1 .5 billion in 201 4, so .5) billion in 2013 and $1.3 billion in 2012 (2,870) 2,868 (3,204) Amounts reclassied from accumulated other comprehensive loss, net of tax expense of$386 million in 2014. $555 million in 2013 and $469 million in 2012 706 1.0l5 858 Other, net (105) 9 l 10 Other co rehensive oas income net of tax 2 69 3 892 .236 Comprehensive income 5 1,345 $ 6,873 S 509 Lockheed Martin Corporation Consolirllted Balance Sheets (in mllllons, except par value) December 312 201 It 20 I3 Ansell Current assets Cash and cash equivaienta 3 1.446 3 2,617 Receivables, net 5,884 5,834 Inventories, net 1,882 2.977 Deferred in come taxes 1,451 1,088 Other woe-m assets 666 813 Total current assets 12,319 13,329 Pmpertymlant and equipment, net 4,755 4,706 Goodwill 10,861 10,343 Ibned income taxes 4,013 2,850 Other noncurtent assets 5,114 4,955 Total assets 3 37,073 3 36,138 Liabilities Ind stockholders' equity Current liabilities Accounts payable 5 1,570 S 1,3 97 Customer advances and amounts in excess of costs incurred 5,790 6,349 Salaries, benets and payroll taxes 1,826 1,809 Other mount liabilities 1 26 1,565 Total current liabilities 1 l ,l 1 2 I 1,120 Accrued pension liabilities 1 1,413 9,361 Other postreliremeot benet liabilities 1.101 902 Long-term debt, net 6,169 6,152 Other noncun'ent liabilities 3 77 3,735 Total liabilities 33,673 31,270 Stockholders' equity Common stock, $1 parvalue perabare 314 319 Additional paid-in capital Retained earnings 14,956 14,200 Accumulated other call-tare hen sive loss 51 1&70! 19,601 g Total stockholders' Quit}; 3,400 4,913 Total liabilities and stockholders' eguitx S 37,073 3 36,188 The accompanying notes are an integral part of these consolidated nancial statements. Note 8 - Debt Our long-term debt consisted of the following (in millions): 2014 2013 Notes with rates lion: 2.13% to 6.15%, due 2016 to 2042 $5,642 $5,642 Notes with rates from 7.00% to 7.75%. due 2016 to 2036 916 916 Other debt 403 476 Total longtemt debt 7,041 7,034 Less: unmnortized discounts (on) (882) Total long-teen debt, net 86,169 $6,152 I Annuno am; I'm -_e-_.nl i...\" .- _-... ('l E L:Il:.-._ m..nln1_- am.\"- and\"... ".hL n m._.l.'.u.o.. n\"Ln'ln n-l' n-_nn-._.ln onlnnnal A..- A-J_- l'l { In August 2014, we entered into a new $1.5 billion revolving credit facility with a syndicate of banks and concurrently terminated our existing $1.5 billion revolving credit fiicility which was scheduled to expire in August 2016. The new credit facility expires August 2019 and we may request and the banks may grant, at their discretion, an increase to the new credit facility of up to an additional $500 million. The credit facility also include: a suhlimit ofup to $300 million available for the issuance of letters of credit. There were no borrowings outstanding under the new facility through December 31, 2014. Borrowings under the new credit facility would be unsecured and bear interest at rates based, at our'option, on a Eurodollar Rate or a Base Rate, as dened in the new credit rcility. Each bank's obligation to make loans under the credit facility is subject to, among other things, our compliance with various representations, warranties and covenants, including covenants limiting our ability and certain of our subsidiaries' ability to encumber assets and a covenant not to exceed a maximum leverage ratio, as dened in the credit facility. The leverage ratio covenant excludes the adjustments recognized in stockholders' equity related to postretirement benet plans. As of December 31, 2014, we were in compliance with all covenants contained in the credit facility, as well as in our debt agreements. We have agreements in place with nancial institutions to provide for the issuance of commercial paper. There were no commercial paper borrowings outstanding during 2014 or 2013. If we were to issue commercial paper, the borrowings would be supported by the credit facility. In April 2013, we repaid $150 million of long-term notes with a xed interest rate of7.38% due to their scheduled maturities. During the next ve years, we have scheduled long-term debt maturities of $952 million due in 2016 and $900 million due in 2019. Interest payments were $326 million in 2014, $340 million in 2013 and $378 million in 2012. All of our existing unsecured and unsubordinated indebtedness rank equally in right of payment