In: Accounting
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) | |
Severance charges | 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.
2016 | 2015 | |
Current assets | 15,108 | 14,573 |
Less : current liability | 12,542 | 13,918 |
Working capital | 2,566 | 655 |
Divided by : Total assets | 47,806 | 49,304 |
WC/ TA | 0.053675 | 0.013285 |
Retained earnings | 13,324 | 14,238 |
Divided by : Total assets | 47,806 | 49,304 |
RE/ TA | 0.27871 | 0.28878 |
EBIT (Earnings before interest and tax) | 5,549 | 4,712 |
Divided by : Total assets | 47,806 | 49,304 |
EBIT/ TA | 0.116073 | 0.09557 |
Number of share | 289 | 303 |
Multiply: Market price per share | 249.94 | 219.8 |
Market value of equity | 72232.66 | 66599.4 |
Divided by : Total Liabilities | 46,200 | 46,207 |
MVE/TL | 1.563477 | 1.441327 |
Sales | 47,248 | 40,536 |
Divided by : Total assets | 47,806 | 49,304 |
Sales/ TA | 0.988328 | 0.822165 |
Z score
Altman Z-scores = 1.2A + 1.4B + 3.3C + 0.6D + 0.99E |
where |
A = WC/ TA |
B = RE/ TA |
C = EBIT/ TA |
D = MVE/TL |
E = Sales/ TA |
Calculation
For year 2016 | |||
results | Multiply by: Weight | Product | |
WC/ TA | 0.053675 | 1.2 | 0.06441 |
RE/ TA | 0.27871 | 1.4 | 0.390194 |
EBIT/ TA | 0.116073 | 3.3 | 0.383042 |
MVE/TL | 1.563477 | 0.6 | 0.938086 |
Sales/ TA | 0.988328 | 0.99 | 0.978445 |
Altman Z-scores for Year 2016 | 2.75 | ||
For year 2015 | |||
results | Multiply by: Weight | Product | |
WC/ TA | 0.013285 | 1.2 | 0.015942 |
RE/ TA | 0.28878 | 1.4 | 0.404292 |
EBIT/ TA | 0.09557 | 3.3 | 0.315382 |
MVE/TL | 1.441327 | 0.6 | 0.864796 |
Sales/ TA | 0.822165 | 0.99 | 0.813943 |
Altman Z-scores for Year 2015 | 2.41 |
Analysis
Which of the following explain the trend in the Z-scores from 2015 to 2016? | |||
Answer | remarks | ||
Lockheed improved its working capital by decreasing its current liabilities. | Yes | Improved working capital from $ 655 millions to $ 2566 millions | |
Lockheed decreased its liquidity due to an increase in retained earnings. | No | Liquidity improved due to increase in working capital | |
Lockheed improved its earnings before interest and taxes by increasing its total net sales. | Yes | Improved EBIT from $ 4712 millions to $ 5549 millions | |
The market value of Lockheed's equity improved over the year. | Yes | Improved Market value of equity |
Which of the following statements best describes the company's Altman Z-scores? |
The Altman Z-scores have increased from 2015 to 2016 which indicates the company's bankruptcy risk has decreased. |
Z score increased from 2.41 to 2.75 in year 2016. |