FINANCIAL COMPARISON
BETWEEN
THE BOEING COMPANY
AND
LOCKHEED MARTIN
Keith L. Hohl
EMGT 452
Semester Project
14 December 1999
Table of Contents
1.Introduction/Study Objective
- Boeing Financial Statement and Analysis
2.1.Background and Product Lines
2.2.Consolidated Balance and Income Statements
2.3.Divisional Financial Statements
2.4.Ratio and Trend Analysis
- Lockheed Martin Financial Statement and Analysis
3.1.Background and Product Lines
3.2.Consolidated Balance and Income Statements
3.3.Divisional Financial Statements
3.4.Ratio and Trend Analysis
- Financial Comparison between the Two Companies
4.1.Consolidated Comparisons
4.2.Military Aircraft and Space Divisions Comparisons
- Summary/Conclusions
- Bibliography
- List of Tables
- List of Figures
List of Tables
T-1: Consolidated Financial Balance Sheet-The Boeing Company
T-2: Consolidated Income Statement-The Boeing Company
T-3: Divisional Financial Summary-The Boeing Company
T-4: Consolidated Financial Ratio Analysis-The Boeing Company
T-5: Consolidated Financial Balance Sheet-Lockheed Martin
T-6: Consolidated Income Statement- Lockheed Martin
T-7: Divisional Financial Summary- Lockheed Martin
T-8: Consolidated Financial Ratio Analysis- Lockheed Martin
List of Figures
F-1: Total Assets Divisional Trend Analysis-The Boeing Company
F-2: Sales Divisional Trend Analysis-The Boeing Company
F-3: Net Earnings Divisional Trend Analysis-The Boeing Company
F-4: Net Capital Expenditures Divisional Trend Analysis-The Boeing Company
F-5: Total Liabilities Divisional Trend Analysis-The Boeing Company
F-6: Research and Development Divisional Trend Analysis-The Boeing Company
F-7: Liquidity Ratio Trend Analysis-The Boeing Company
F-8: Asset Management Ratio Trend Analysis-The Boeing Company
F-9: Total Assets Divisional Trend Analysis- Lockheed Martin
F-10: Sales Divisional Trend Analysis- Lockheed Martin
F-11: Net Earnings Divisional Trend Analysis-Lockheed Martin
F-12: Net Capital Expenditures Divisional Trend Analysis- Lockheed Martin
F-13: Liquidity Ratio Trend Analysis- Lockheed Martin
F-14: Asset Management Ratio Trend Analysis- Lockheed Martin
F-15: Consolidated Total Assets Financial Comparison
F-16: Consolidated Sales Financial Comparison
F-17: Consolidated Net Earnings Financial Comparison
F-18: Consolidated Earnings from Operations Financial Comparison
F-19: Consolidated Earnings per Share Financial Comparison
F-20: Consolidated Return on Assets (ROA) Financial Comparison
F-21: Consolidated Return on Equity (ROE) Financial Comparison
F-22: Consolidated Profit Margin Financial Comparison
F-23: Consolidated Inventories Financial Comparison
F-24: Consolidated Current Ratio Liquidity Financial Comparison
F-25: Consolidated Quick Ratio Liquidity Financial Comparison
F-26: Consolidated Inventory Turnover -Asset Management Ratio Financial Comparison
F-27: Consolidated Fixed Asset –Asset Management Ratio Financial Comparison
F-28: Consolidated Total Asset –Asset Management Ratio Financial Comparison
F-29: Consolidated Day Sales Outstanding -Asset Management Ratio Financial Comparison
F-30: Consolidated Debt Ratio-Debt Management Ratio Financial Comparison
F-31: Consolidated Times Interest Earned Ratio-Debt Management Financial Comparison
F-32: Divisional Sales-Military Aircraft & Space Financial Comparison
F-33: Divisional EBIT- Military Aircraft & Space Financial Comparison
F-34: Divisional Total Assets- Military Aircraft & Space Financial Comparison
F-35: Divisional Net Capital Expenditures- Military Aircraft & Space Financial Comparison
- Introduction/Objective
This study will financially compare The Boeing Company and the Lockheed Martin Corporation by using ratio analysis of the 1998 Balance and Income statements of each company. The study will determine each company’s current consolidated and divisional financial position. The Military Aircraft and Space Divisions will be financially compared between The Boeing Company (Boeing) and Lockheed Martin (LM).
- Boeing Financial Statement and Analysis
2.1 Background and Product Lines
The Boeing Company is the largest manufacturer of commercial jetliners and Military aircraft in the world. The Boeing Company is divided into the following divisions; (1) The Commercial Airplane Group, (2). The Military Aircraft and Missile Group, (3). Space and Communications Group, and (4). The Customer and Commercial Financing Group. Each group is responsible for certain Products and the resulting financial performance.
The Commercial Airplane group product line includes the following products: 737, 747, 757, 767,777, 717, MD-11, MD-80, and MD-90 jetliners. Chances are very good that in one’s recent travels that you were passenger in one of these Boeing jets.
The Military Aircraft and Missiles Product lines includes the following: F18C/D and F18E/F Hornet, F15E Eagle, AV8B Harrier II Plus, T45 Goshawk, C-17 Globemaster III, V-22 Osprey, CH-47 Chinook Helicopter, RAH-66 Comanche, AH-64D Apache Longbow, Slam-ER Missile and JDAM missile. The product lines show the extent in which the Military Aircraft and Missiles provide for the Nation’s defense.
The Space and Communications Group Product lines includes the following: Space Shuttle, Delta II rockets, Delta III rockets, Delta IV rockets, International Space Station, NMD Interceptor, 767 AWACS, Airborne Laser, Sea Launch, and Global Positioning System. Space and communication is the division in which has the highest growth potential for Boeing.
2.2 Consolidated Divisional Financial Statements
Table T-1 shows the Boeing Company Consolidated Financial Balance Sheet for 1996-1998 and the recent 1999 third Quarter Earnings Report. The Balance sheet takes into the account for the mergers and acquisitions of The Rockwell Aerospace and Defense Company in Dec 1996 and McDonnell Douglas Corporation in August 1997. The Balance sheet provides a snapshot of the Boeing Company at a point of time. Throughout the remainder of this report, analysis will be based upon time ending 31 December 1998 since 1999 Third Quarter comparison data from the Lockheed Martin Corporation could not be found.
The overall total assets not including the third Qtr Earnings report shows that the total assets are decreasing since its peak in 1997. It shows that approximately 44% of the 1998 total assets are the classified under the Current assets. Current assets less inventories are the most liquid of all the assets. The current assets are decreasing over the three-year time period.
The current liabilities are also decreasing over the three-year time period in which current liabilities account for 37% of the total liabilities. The long- term debt is also decreasing over the three year time period accounting for just 16% of the total liabilities.
TableT-2 shows the Boeing Company Consolidated Income Statement for 1996 –1998 and the recent 1999 third Quarter Earnings Report. The “bottom line,” Earning per share at a disappointing $1.16 for 1998. The income statement shows that even though Sales are increasing, the cost of operations are increasing more than the sales causing the Earnings per share to be decrease.
2.3Divisional Financial Statements
Table T-3 shows the Boeing Company’s Divisions and selected financial data. The financial data includes Total Assets, Total Liabilities, Sales, Net Earnings, Depreciation, Research and Development, Net Capital Expenditures and Contractual backlog. However, due to lack of data availability from the Lockheed Martin corporation, the Divisional Summary comparison will only be performed on Total Assets, Sales, Earnings before Income and Taxes (EBIT) and Net Capital Expenditures.
34% of the total assets are allocated to the Commercial Aircraft division while 18% of the total assets are allocated to the Military Aircraft and Space Divisions as shown in figure F-1.
The Commercial Aircraft division and Military Aircraft and Space divisions accounted for 63% and 35% respectively of the total company Sales as shown in Figure F-2. This is very important correlation to be used later on this report during ratio analysis.
In 1998, the Military Aircraft and Space Divisions contributed approximately 137% to the overall Net earnings as shown in figure F-3. Even though the Commercial Aircraft division has the majority of Sales, the Commercial Aircraft division only contributed 6% to the overall net earnings. This glaring statistic shows the Military Aircraft and Space Divisions are basically supporting the entire corporation. This could be one of the major reasons why the Boeing Corporation sought out and acquired Rockwell and McDonnell Douglas Corporations since the majority of these two corporations business was Military and Space applications.
For Net Capital Expenditures, The Commercial Aircraft and Military Aircraft and Space contributed to 48% and 30% respectively to Net Capital expenditure as shown in figure F-4. Since Sales and Cost of operations are high for the Commercial Aircraft division, it is not surprising that this division is spending approximately half of the capital expenditures.
Figure F-5 and F-6 show the Divisional Total Liabilities and Research and Development Trend analysis respectively. For 1998, the Commercial Aircraft Division claimed 54% of the available funding even though its Sales and Cost of operations are increasing. So the question is the 54% of the funding being spend on new products in lieu of reducing costs of operations? From the limited data available, it seems to me that the funding is being used with new product development in conjunction with Sales in lieu of cost reduction product enhancements.
2.4 Ratio and Trend Analysis
Table T-4 shows the consolidated financial ratios summary. Liquidity, Asset Management, Debt Management, and Profitability ratios were generated, analyzed, and compared to similar industry averages. Each of the main ratios was graphed and brief explanation accompanied each graph.
Liquidity ratios basically define how, in this case, the Boeing Company can meet its Short -Term obligations. The Asset Management ratio shows how effectively the firm manages its assets. The Debt Management ratios show how a firm uses debt financing. And finally, the Profitability ratios shows how effective are the firms operations. The profitability ratio is a summation of the effects of the Liquidity, Asset Management, and Debt management ratios.
Table T-4 shows each individual ratio, the ratio definition, the 1999 industry average, and how Boeing Company performed during the three- year period. Note the last entry of Table T-4 deals with the Beta coefficient. The Beta coefficient for the Boeing Company is 1.10. The Beta coefficient is market risk of the stock. So with a Beta coefficient of 1.10, The Boeing Company stock is 10% more risky than the average risk stock (the average risk stock has a Beta coefficient of 1.00)
Figure F-7 shows the Liquidity Ratio Trend analysis. The liquidity ratio includes the Current Ratio and the Quick ratios. Both ratios are lower than the industry average. For the Boeing Company, the graph shows that the Boeing Company would have to liquidate its inventory in order to payoff its current liabilities. Inventories are the least liquid of all assets. In order to payoff it creditors in full, the Boeing Company could liquidate its current assets at 61% of book value.
Figure F-8 shows the Asset Management Ratio Trend Analysis. The Asset Management ratios include the Inventory Turnover, Total Asset Turnover, and Fixed Asset Turnover Ratios. The inventory Turnover ratio is higher than the Industry average that shows that the inventory sold out and restocked 6.73 times a year. Since Sales is at an all-time high for the Boeing Company, this could mean that there is shortage of inventory in order to keep up with the Sales.
The Fixed Asset Turnover Ratio is slightly lower than the industry average. Compared to other industry, The Boeing Company is not effectively utilizing its plant and equipment. This could be result of the Rockwell and McDonnell Douglas mergers/acquisitions. In my opinion, it will take some time for Boeing to utilize it assets from the merger since the Boeing Company is located in twenty-seven states. The Boeing Company has great potential here to reduce its plant and equipment assets and to utilize existing assets to the fullest.
The Total Asset Turnover Ratio is higher than the industry average. This is probably due to the Commercial Aircraft division producing such large volume of Sales compared to the total asset investment.
Not include in the Asset Management Ratio Trend analysis graph but is included in the Asset Management ratios analysis is The Day Sales Outstanding ratio. This ratio evaluates account receivables payments. For the Boeing Company, Payments are being received 2.5 times quicker than the industry average at short 21 days. This high rate could be the result of large number of Commercial aircraft being produced. Data was not available to look at the individual divisions.
The Debt Management Ratios are not graphed. The Debt Management Ratios include the Debt and Times Interest Earned ratios. The Debt ratio identifies how Boeing is financed. Boeing is slighter higher than the industry average. Creditors have financed 66% of the total financing. From this ratio, Creditors may make it costly for Boeing to borrow additional funds without raising more equity capital. However from Table T-1, long-term debt over the last three years has been declining.
The Times Interest Earned ratio of the Debt Management ratios is Boeing’s ability to pay interest. Boeing has sufficient funds to meet annual interest costs even if operating income declines.
The Profitability Ratios include Profit Margin, Return on Assets (ROA), Return on Equity (ROE) and Basic Earning Power. Profit Margins and ROA are low but improving over the three- year period. This is a result of cost of operations too high, insufficient use of existing plant and equipment, and long and short-term debts are too high. Boeing needs to find ways to improve in these areas in order to obtain respectable Profit Margins and ROA. Evidently from the mergers and acquisitions, Boeing is beginning to take advantage of its merged assets and becoming to utilize and consolidate its operations. This is also relevant that the general total employment has been reduced by more than seven thousand people by the end of 1998.
The Basic Earning Power profitability Ratio measures Boeing’s earning power of its assets, before the influence of taxes and financing. It is used for comparing firms with different tax situations and financial leverage. In this case, Boeing will be compared to Lockheed Martin later in this report.
The Return on Equity (ROE) is much higher than ROA and much higher than the industry average. Boeing used its debt effectively so that net income is increasing while Common Equity is decreasing.
- Lockheed Martin Financial Statement and Analysis
3.1Background and Product Lines
The Lockheed Martin (LM) Corporation is divided into the following major divisions: (1) Space Strategic Missiles, (2). Electronics, (3). Aeronautics, (4). Information and Services, and (5) Energy and other. Each division is responsible for certain products and the resulting financial performance.
The Space and Strategic Missile Group product line includes Atlas and Trident Ballistic Missile systems, Trident Launch vehicles, Space Shuttle, and Reusable Launch vehicles.
The Electronics Group product lines includes AEGIS Weapon Systems, LANTIRN Targeting systems, LOCAAS smart munitions system, and LOSAT Weapon system
The Aeronautics group product lines include F16 Falcon, F22 Raptor, F-117A, and C-130 Hercules Military aircraft
The Information and Services Group provide products and services for NASA, US Army, Immigration and Naturalization Services (INS) and US Strategic Command.
The Energy and Other Group provide products and services for US Department of Energy.
3.2Consolidated Balance and Income Statements
Table T-5 shows LM Consolidated Financial Balance sheet for 1996-1998. The balance sheet takes into the for the mergers and acquisitions of Loral Electronics Corporation in April 1996, Martin Marietta Corporation in March 1995, and General Dynamics Fort Worth Division and GE Aerospace in 1993.
The overall total assets show that there has been no significant movement over the last three years. It shows that approximately 37% of the 1998 total assets are classified under current assets. Again current assets are remaining fairly constant over the three- year period.
The current liabilities are increasing over the three-year period in which current liabilities account for 36% of the total liabilities. Long term debt is decreasing over the three- year period accounting for 31% of the total liabilities.
Table T-6 shows LM Consolidated Income statement for 1996-1998 and the recent 1999 third quarter Earnings Report. The bottom line Earnings per share is $2.66 for 1998. The income statement shows that even though Sales were decreasing compared to 1997 peak, the cost of operations decreased causing the Earnings per share to increase.
3.3 Divisional Financial Statements
Table T-7 shows LM’s divisions and Selected financial data. The financial data includes Total Assets, Sales, Earnings before Income and Taxes (EBIT) and Net Capital Expenditures.