In: Finance
Compute and Interpret the Z-score
Balance sheets and income statements for Lockheed Martin
Corporation follow. Refer to these financial statements to answer
the requirements.
Consolidated Statements of Earnings | |||
---|---|---|---|
Year Ended December 31 (In millions) | 2016 | 2015 | |
Net sales | |||
Products | $ 40,365 | $ 34,868 | |
Services | 6,883 | 5,668 | |
Total net sales | 47,248 | 40,536 | |
Cost of sales | |||
Products | (36,616) | (31,091) | |
Services | (6,040) | (4,824) | |
Severance and other charges | (80) | (82) | |
Other unallocated costs | 550 | (47) | |
Total cost of sales | (42,186) | (36,044) | |
Gross Profit | 5,062 | 4,492 | |
Other income, net | 487 | 220 | |
Operating profit | 5,549 | 4,712 | |
Interest expense | (663) | (443) | |
Other non-operating income (expense), net | - | 30 | |
Earnings before taxes | 4,886 | 4,299 | |
Income tax expense | (1,133) | (1,173) | |
Net earnings from continuing operations | 3,753 | 3,126 | |
Net (loss) earnings from discontinued operations | 1,549 | 479 | |
Net earnings | $ 5,302 | $ 3,605 |
Consolidated Balance Sheets | ||
---|---|---|
December 31 (in millions, except par value) | 2016 | 2015 |
Assets | ||
Current Assets | ||
Cash and cash equivalents | $ 1,837 | $ 1,090 |
Receivables, net | 8,202 | 7,254 |
Inventories, net | 4,670 | 4,819 |
Other current assets | 399 | 441 |
Assets of discontinued operations | - | 969 |
Total current assets | 15,108 | 14,573 |
Property, plant and equipment, net | 5,549 | 5,389 |
Goodwill | 10,764 | 10,695 |
Intangible assets, net | 4,093 | 4,022 |
Deferred income taxes | 6,625 | 6,068 |
Other noncurrent assets | 5,667 | 5,396 |
Assets of discontinued operations | - | 3,161 |
Total assets | $ 47,806 | $ 49,304 |
Liabilities and stockholders' equity | ||
Current Liabilities | ||
Accounts payable | $ 1,653 | $ 1,745 |
Customer advances and amounts in excess of costs incurred | 6,776 | 6,703 |
Salaries, benefits and payroll taxes | 1,764 | 1,707 |
Current maturities of long-term debt | - | 956 |
Other current liabilities | 2,349 | 1,859 |
Liabilities of discontinued operations | - | 948 |
Total current liabilities | 12,542 | 13,918 |
Long-term debt | 14,282 | 14,305 |
Accrued pension liabilities | 13,855 | 11,807 |
Other post-retirement benefit liabilities | 862 | 1,070 |
Other noncurrent liabilities | 4,659 | 4,902 |
Liabilities of discontinued operations | - | 205 |
Total Liabilities | 46,200 | 46,207 |
Stockholders' equity | ||
Common stock, $1 par value per share | 289 | 303 |
Additional paid-in capital | -- | -- |
Retained earnings | 13,324 | 14,238 |
Accumulated other comprehensive loss | (12,102) | (11,444) |
Total stockholders' equity | 1,511 | 3,097 |
Noncontrolling interests in subsidiary | 95 | - |
Total equity | 1,606 | 3,097 |
Total liabilities and stockholders' equity | $ 47,806 | $ 49,304 |
Consolidated Statement of Cash Flows | |||
---|---|---|---|
Year Ended December 31 (in millions) | 2016 | 2015 | |
Operating Activities | |||
Net earnings | $ 5,302 | $ 3,605 | |
Adjustments to reconcile net earnings to net cash provided by operating activities: | |||
Depreciation and amortization | 1,215 | 1,026 | |
Stock-based compensation | 149 | 138 | |
Deferred income taxes | (152) | (445) | |
Severancecharges | 99 | 102 | |
Gain on divestiture of IS&GS business | (1,242) | - | |
Gain on step acquisition of AWE | (104) | - | |
Changes in operating assets and liabilities: | |||
Receivables, net | (811) | (256) | |
Inventories, net | (46) | (398) | |
Accounts payable | (188) | (160) | |
Customer advances and amounts in excess of costs incurred | 3 | (32) | |
Post-retirement benefit plans | 1,028 | 1,068 | |
Income taxes | 146 | (48) | |
Other, net | (210) | 501 | |
Net cash provided by operating activities | 5,189 | 5,101 | |
Investing Activities | |||
Capital expenditures | (1,063) | (939) | |
Acquisition of business/investments in affiliated | - | (9,003) | |
Other, net | 78 | 208 | |
Net cash used for investing activities | (985) | (9,734) | |
Financing Activities | |||
Special cash payment from divestiture of IS&GS businessk | 1,800 | - | |
Repurchases of common stock | (2,096) | (3,071) | |
Proceeds from stock option exercises | 106 | 174 | |
Dividends paid | (2,048) | (1,932) | |
Proceeds from the issuance of long-term debt | - | 9,101 | |
Repayments of long-term debt | (952) | - | |
Proceeds from borrowings under revolving credit facilities | - | 6,000 | |
Repayments from borrowings under revolving credit facilities | - | (6,000) | |
Other, net | (267) | 5 | |
Net cash (used for) financing activities | (3,457) | 4,277 | |
Net change in cash and cash equivalents | 747 | (356) | |
Cash and cash equivalents at beginning of year | 1,090 | 1,446 | |
Cash and cash equivalents at end of year | $ 1,837 | $ 1,090 |
As of December 31, there were the approximate shares
outstanding:
2016 - 289 million
2015 - 303 million
As of December 31, the company's stock closed at the following
values:
2016 - $249.94
2015 - $219.80
(a) Compute and compare the Altman Z-scores for both years. (Do
not round until your final answer; then round your answers to two
decimal places.)
2016 Z-score = Answer
2015 Z-score = Answer
Which of the following explain the trend in the Z-scores from 2015
to 2016? (Select all that apply.)
Answeryesno
Lockheed improved its working capital by decreasing its current
liabilities.
Answeryesno
Lockheed decreased its liquidity due to an increase in retained
earnings.
Answeryesno
Lockheed improved its earnings before interest and taxes by
increasing its total net sales.
Answeryesno
The market value of Lockheed's equity improved over the
year.
(b) Which of the following statements best describes the company's
Altman Z-scores?
Both the Altman Z-scores are above 3.00 which indicate the company has a very low probability of bankruptcy.
Both the Altman Z-scores are below 1.80 which indicate the company has a very high probability of bankruptcy.
The Altman Z-scores have increased from 2015 to 2016 which indicates the company's bankruptcy risk has decreased.
The Altman Z-scores have decreased from 2015 to 2016 which indicates the company's bankruptcy risk has increased.
a)
Altman z score = 1.2*A + 1.4*B + 3.3*C + 0.6*D +1.0*E
A = Working capital / Total assets
B = Retained earnings / Total assets
C = Earnings before interest and taxes / total assets
D = Market value of equity / total liablities
E = Sales / total assets
A = 2566 / 47806 = 0.05
Working capital = total current assets - total current liablities = 15108 - 12542 = 2566
B =3254/ 47806 = 0.07
Retained earnings = Net income - dividends paid = 5302-2048 = 3254
C = 5549 / 47806 = 0.12
D = 72232.7 / 47806 = 1.51
Market value of equity = Number of shares* market price = 289*249.94 = 72232.7
E =47248 / 47806 = 0.99
Altman z score (2016) = 1.2*0.05 + 1.4*0.07 + 3.3*0.12 + 0.6*1.51 +1.0*0.99 = 2.45
A = 655 / 49304 = 0.013
Working capital = total current assets - total current liablities = 14573-13918 = 655
B =1773/ 49304 = 0.036
Retained earnings = Net income - dividends paid = 3705-1932 =1773
C = 4742 / 49304 = 0.1
EBIT = Operating profit +other non operating income =4712 +30 =4742
D = 54730.2 / 49304 = 1.11
Market value of equity = Number of shares* market price= 249*219.8 = 54730.2
E =40536 / 49304 = 0.82
Altman z score (2016) = 1.2*0.013 + 1.4*0.036 + 3.3*0.1 + 0.6*1.11 +1.0*0.82 = 1.882
b)
The Altman Zscore has increased over the year from 1.882 to 2.45 , indicating company's bankrupcy risk has decreased.