Deciphering Financial Statements (Lockheed Martin Corporation)
Lockheed Martin Corporation is a well known producer of advanced aircraft, missiles, and space hardware. Lockheed Martin is most famous for its super secret research and development division, nicknamed the “Skunk Works.” Among the high tech aircraft developed at the Skunk Works are the SR 71 Blackbird spy plane and the F 117A Stealth fighter. The consolidated statement of cash flows from Lockheed Martin’s 2004 annual report is reproduced on page 277.
When investors and analysts use the term cash flow, they can mean a variety of things.
Some common definitions of cash flow are as follows:
(a) Net income + Depreciation
(b) Cash flow from operating activities
(c) Cash flow from operating activities + Cash paid for interest + Cash paid for income taxes
(d) Cash flow from operating activities Capital expenditures Dividends
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Lockheed Martin Corporation |
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Year ended December 31, |
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(in millions) |
2004 |
2003 |
2002 |
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Operating Activities |
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Earnings from continuing operations |
$1,266 |
$1,053 |
$533 |
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Adjustments to reconcile earnings (loss) from continuing |
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operations to net cash provided by operating activities: |
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Depreciation and amortization |
511 |
480 |
433 |
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Amortization of purchased intangible assets |
145 |
129 |
125 |
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Deferred federal income taxes |
(58) |
467 |
(463) |
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Write down of investments and other charges |
151 |
42 |
1,127 |
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Loss from discontinued operations |
— |
— |
(33) |
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Changes in operating assets and liabilities: |
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|
|
|
Receivables |
(87) |
(258) |
394 |
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Inventories |
519 |
(94) |
585 |
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Accounts payable |
288 |
330 |
(317) |
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Customer advances and amounts in excess of costs incurred |
(228) |
(285) |
(460) |
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Income taxes |
(63) |
(16) |
44 |
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Other |
480 |
(39) |
320 |
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Net cash provided by operating activities |
2,924 |
1,809 |
2,288 |
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Investing Activities |
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|
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Expenditures for property, plant, and equipment |
(769) |
(687) |
(662) |
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Proceeds from divestiture of businesses/investments |
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|
|
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in affiliated companies |
279 |
234 |
134 |
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Purchase of short term investments, net |
(156) |
(240) |
— |
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Acquisition of businesses/investments in affiliated companies |
(91) |
(821) |
(104) |
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Other |
29 |
53 |
93 |
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Net cash used for investing activities |
(708) |
(1,461) |
(539) |
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Financing Activities |
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|
|
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Repayments of long term debt |
(1,089) |
(2,202) |
(110) |
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Issuances of long term debt |
— |
1,000 |
— |
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Long term debt repayment and issuance costs |
(163) |
(175) |
— |
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Issuances of common stock |
164 |
44 |
436 |
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Repurchases of common stock |
(673) |
(482) |
(50) |
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Common stock dividends |
(405) |
(261) |
(199) |
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Net cash (used for) provided by financing activities |
(2,166 |
(2,076) |
77 |
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Net (decrease) increase in cash and cash equivalents |
50 |
(1,728) |
1,826 |
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Cash and cash equivalents at beginning of year |
1,010 |
2,738 |
912 |
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Cash and cash equivalents at end of year |
$1,060 |
$1,010 |
$2,738 |
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Supplemental Disclosure Information |
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Cash paid during the year for: |
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Interest |
$420 |
$519 |
$586 |
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Taxes |
363 |
170 |
55 |
Instructions:
1. Using the data from Lockheed’s statement of cash flows, compute values for the four measures of cash flow defined above for 2002, 2003, and 2004. Use earnings from continuing operations as net income. For capital expenditures, use expenditures for property, plant, and equipment.
2. One of the definitions (a) through (d) is sometimes given the title free cash flow because it indicates the amount of discretionary cash generated by a business. Free cash flow is thought of as the amount of cash that an owner can remove from a business without harming its long term potential. Which of these four definitions do you think applies to free cash flow? Explain.
3. A leveraged buyout (LBO) is the purchase of a company using borrowed money. The idea behind an LBO is to borrow the money, buy the company, and then repay the loan using the cash flow generated by the purchased company. Which of the four definitions of cash flow do you think would be particularly useful to someone considering an LBO? Explain.