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 €œSkunk 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

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.

Lockheed Martin Corporation CONSOLIDATED STATEMENT OF CASH FLOWS Year ended December 31 (in millions) 2003 2002 Operating Activities Earnings from continuing operations. Adjustments to reconcile earnings (loss) from continuing $1,266 $1,053 533 operations to net cash provided by operating activities: 433 125 145 Amortization of purchased intangible assets Deferred federal income taxes 129 467 (463) 1.127 Write-down of investments and other charges Loss from discontinued operations 151 (33) Changes in operating assets and liabilities: (258) 519 Accounts payable Customer advances and amounts in excess of costs incurred. Income taxes 330 (285) (16) (39) 1,809 (317) (460) (228) (63) Net cash provided by operating activities Investing Activities Expenditures for property plant, and equipment. Proceeds from divestiture of businesses/investments 2,924 (769) (687) (662) in affiliated companies Purchase of short-term investments, net Acquisition of businesses/investments in affiliated companies 234 (240) (821) 134 (156) (91) (104) 93 (539) Net cash used for investing activities Financing Activities Repayments of long-term debt Issuances of long-term debt Long-term debt repayment and issuance costs Issuances of common stock Repurchases of common Common stock dividends (708)(146 (1,089) (2.202) 1,000 (110) (175) 164 436 stock (482) Net cash (used for) provided by financing activities Net (decrease) increase in cash and cash equivalents Cash and cash equivalents at beginning of year (2.166 (2076) (1.728) 2,738 $1,010 1,826 2 Cash and cash equivalents at end of year. $1,060 $2,738 Cash paid during the year for: $420 363 $ 519 170 S 586