Question

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.

Answer 1

a. The formula to calculate Z-score is as follows:

Z-score = 1.2A + 1.4B + 3.3C + 0.6D + 1.0E

where:

A = Working capital / Total Assets

B = Retained Earnings / Total assets

C = Earning before interest and taxes / Total Assets

D = Sales / Total Assets

Weight	Ratio	2016	2015
1.2	A = Working Capital / Total Assets	(15108 - 12542) / 47806	0.06	(14,573 - 13,918) / 49,304	0.02
1.4	B = Retained Earnings / Total Assets	13324 / 47806	0.39	14,238 / 49,304	0.40
3.3	C = Earning before Interests and taxes / Total Assets	5549/47806	0.38	4712/ 49304	0.32
0.6	D = Market Value of Equity / Book Value of Total Liabilities	(289 X 249.94) / 46,200	0.94	(303 X 219.80) / 46,207	0.86
1	E = Sales / Total Assets	47,248 / 47,806	0.99	40,536 / 49,304	0.82
			2.76		2.42

A slight upward shift in Z-score is there for 2016. Lockheed's earnings and working capital both improved over the year as well as its market value of equity.

b. The financial health of the company improved slightly, though it still remains in the grey area of interpretation for Altman's Z-score.

The Altman Z-score have increased from 2015 to 2016 which indicates the company's bankruptcy risk has decreased.