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 Martins 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 Martins long-term debt?
2. (a) To what covenant(s) is Lockheed Martin subject under the terms of their revolving credit facility? 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. Has Lockheed Martins solvency improved or deteriorated in 2014 relative to 2013? Explain your response, and identify the primary cause for that change.
EXCERPTS FROM LOCKHEED MARTIN CORPORATION'S 2014 10K Lockheed Martin Corporation Consolidated Statements of Earnings (in millions, except per share data) Years Ended December 31 2014 2013 2012 Net sales Products ices S 36,093 9,507 45,600 S 35,691 9,667 45,358 S37,817 9,365 47,182 Total net sales Cost of sales (31,965) (8.393) (33,495) (8,383) Products Services Goodwill impairment charges Severance charges Other unallocated, net (31,346) (8,588) (195) (201) 132 (40.345 5.255 337 5,592 (1,060) 42,986 4,196 238 4,434 (383) 21 4,072 1,327 2,745 41,171 4,187 Total cost of sales Gross proft Other income, net Operating profit Interest expense Other non-operating income, net Earnings from continuing operations before income taxes Income tax expense Net earnings from continuing operations Net eanings from discontinued Net earnings 4,505 (340) (350) 6 5,258 1,644 3,614 4,155 1,205 2,950 ons S 3,614 2,981 S 2,745 Earnings per common share Basic Continuing operations Discontinued operations S 11.41 S 11.41 S 11.21 S 11.21 $ 9.19 $ 8.48 Basic eamings per Diluted common share Continuing operations Discontinued operations 9.04 09 $ 8.36 Diluted eamings per common share Lockheed Martin Corporation Consolidated Balance Sheets in millions, except par value) December 31 2014 2013 Assets Current assets 2,617 5,834 2,977 1,088 813 13,329 4,706 10,348 2,850 4,955 S 36,188 Cash and cash equivalents Receivables, net Inventories, net Deferred income taxes Other current assets S 1,446 5,884 2,882 1,451 Total current assets Property, plant and equipment, net Goodwill Deferred income taxes Other noncurrent assets 12,329 4.755 10,862 4,013 5,114 S 37,073 Total assets Liabilities and stockholders' equity Current liabilities Accounts payable Customer advances and amounts in excess of costs incurred Salaries, benefits and payroll taxes Other current liabilities $ 1,570 5,790 1,826 1,926 11,112 S 1,397 6,349 1,809 1,565 11,120 Total current liabilities Accrued pension liabilities Other postretirement benefit liabilities Long-term debt, net Other noncurrent liabilities 11,413 1,102 6,169 3,877 33,673 9,361 902 6,152 3,735 31,270 Total liabilities Stockholders' equity Common stock, S1 par value per share Additional paid-in capital Retained earnings Accumulated other comprehensive loss 314 14,956 11,870 3.400 37,073 14,200 9,601 4,918 36,188 Total stockholders' equity Total liabilities and stockholders itv Note 8 -Debt Our long-tem debt consisted of the following (in millions): 2013 S5,642 916 476 7,034 882 S6,152 2014 Notes with rates from 2.13% to 6.15%, due 2016 to 2042 Notes with rates from 7.00% to 7.75%, due 2016 to 2036 Other debt Total long-term debt 916 483 7,041 872 S6,169 Less: unamortized discounts Total long-term debt, net In August 2014, we entered into a new S1.5 billion revolving credit facility with a syndicate of banks and concurrently terminated our existing $1.5 billion revolving credit facility 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 includes a sublimit of up 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 defined in the new credit facility. Each bank's obligation to make loans under the credit faclity 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 defined in the credit facility. The leverage ratio covenant excludes the adjustments recognized in stockholders equity related to postretirement benefit plans. As of December31,2014, 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 financial 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 fixed interest rate of 7.38% due to their scheduled maturities. During the next five 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 S378 million in 2012. All of our existing unsecured and unsubordinated indebtedness rank equally in right of payment EXCERPTS FROM LOCKHEED MARTIN CORPORATION'S 2014 10K Lockheed Martin Corporation Consolidated Statements of Earnings (in millions, except per share data) Years Ended December 31 2014 2013 2012 Net sales Products ices S 36,093 9,507 45,600 S 35,691 9,667 45,358 S37,817 9,365 47,182 Total net sales Cost of sales (31,965) (8.393) (33,495) (8,383) Products Services Goodwill impairment charges Severance charges Other unallocated, net (31,346) (8,588) (195) (201) 132 (40.345 5.255 337 5,592 (1,060) 42,986 4,196 238 4,434 (383) 21 4,072 1,327 2,745 41,171 4,187 Total cost of sales Gross proft Other income, net Operating profit Interest expense Other non-operating income, net Earnings from continuing operations before income taxes Income tax expense Net earnings from continuing operations Net eanings from discontinued Net earnings 4,505 (340) (350) 6 5,258 1,644 3,614 4,155 1,205 2,950 ons S 3,614 2,981 S 2,745 Earnings per common share Basic Continuing operations Discontinued operations S 11.41 S 11.41 S 11.21 S 11.21 $ 9.19 $ 8.48 Basic eamings per Diluted common share Continuing operations Discontinued operations 9.04 09 $ 8.36 Diluted eamings per common share Lockheed Martin Corporation Consolidated Balance Sheets in millions, except par value) December 31 2014 2013 Assets Current assets 2,617 5,834 2,977 1,088 813 13,329 4,706 10,348 2,850 4,955 S 36,188 Cash and cash equivalents Receivables, net Inventories, net Deferred income taxes Other current assets S 1,446 5,884 2,882 1,451 Total current assets Property, plant and equipment, net Goodwill Deferred income taxes Other noncurrent assets 12,329 4.755 10,862 4,013 5,114 S 37,073 Total assets Liabilities and stockholders' equity Current liabilities Accounts payable Customer advances and amounts in excess of costs incurred Salaries, benefits and payroll taxes Other current liabilities $ 1,570 5,790 1,826 1,926 11,112 S 1,397 6,349 1,809 1,565 11,120 Total current liabilities Accrued pension liabilities Other postretirement benefit liabilities Long-term debt, net Other noncurrent liabilities 11,413 1,102 6,169 3,877 33,673 9,361 902 6,152 3,735 31,270 Total liabilities Stockholders' equity Common stock, S1 par value per share Additional paid-in capital Retained earnings Accumulated other comprehensive loss 314 14,956 11,870 3.400 37,073 14,200 9,601 4,918 36,188 Total stockholders' equity Total liabilities and stockholders itv Note 8 -Debt Our long-tem debt consisted of the following (in millions): 2013 S5,642 916 476 7,034 882 S6,152 2014 Notes with rates from 2.13% to 6.15%, due 2016 to 2042 Notes with rates from 7.00% to 7.75%, due 2016 to 2036 Other debt Total long-term debt 916 483 7,041 872 S6,169 Less: unamortized discounts Total long-term debt, net In August 2014, we entered into a new S1.5 billion revolving credit facility with a syndicate of banks and concurrently terminated our existing $1.5 billion revolving credit facility 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 includes a sublimit of up 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 defined in the new credit facility. Each bank's obligation to make loans under the credit faclity 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 defined in the credit facility. The leverage ratio covenant excludes the adjustments recognized in stockholders equity related to postretirement benefit plans. As of December31,2014, 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 financial 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 fixed interest rate of 7.38% due to their scheduled maturities. During the next five 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 S378 million in 2012. All of our existing unsecured and unsubordinated indebtedness rank equally in right of payment
