June 8 - Fitch Ratings has affirmed Lockheed Martin Corporation's
(LMT) 'A-/F2' long- and short-term ratings .Fitch has also revised LMT's Rating
Outlook to Negative from Stable. These ratings cover approximately $7 billion of
debt. See the full rating list at the end of this release.
Fitch's Outlook revision to Negative reflects:
--The combined risks to LMT's credit profile from pressure on U.S. government
--Cash contributions to fund the $13.3 billion pension deficit; and
--LMT's cash deployment strategy.
Although LMT's current credit metrics are adequate for the existing ratings,
Fitch's projected cash flow metrics weaken in scenarios incorporating expected
defense spending plans. LMT's debt levels have climbed $2.8 billion in the past
three years, with more than half the increase coming in 2011. This has weakened
the cushion at LMT's current rating. Fitch believes the ongoing labor strike,
mainly at LMT's Ft. Worth facility, could affect financial results if it
persists for an extended time period. However, it appears to have had little
impact so far.
LMT's ratings are supported by:
--Its position as a leading defense contractor;
--Strong liquidity; and
--U.S. government budget deficits and their impact on defense spending after
fiscal year (FY) 2012, including the potential for an additional $500 billion of
reductions to the DOD budget starting in January;
--The large pension deficit and its impact on cash flows;
--A shareholder-focused cash deployment strategy; and
--Some modest program concentration.
The F-35 Joint Strike Fighter will likely be a long-term credit positive for
LMT, but near term uncertainty about its schedule and costs is a concern.
Fitch may revise LMT's Outlook to Stable in the event of better than expected
DOD spending trends, especially for LMT's main programs. Other factors that may
drive an Outlook revision to Stable include cost cutting actions or changes in
cash deployment strategies to offset weaker defense spending, or better than
forecast cash flows. Conversely, Fitch may downgrade LMT's ratings in the event
of sharp declines in US DOD spending that affect some of LMT's key programs.
Other potential downgrade risks include execution problems on key programs, or
more aggressive cash deployment actions.
LMT's liquidity as of March 25, 2012 was $5 billion, consisting of $1.5 billion
of credit facility availability (expiring in August 2016) and $3.5 billion in
cash and cash equivalents. Debt increased by approximately $2.8 billion in the
past three years, or nearly 70%, including $1.4 billion in 2011. LMT has a
favorable debt maturity schedule through 2015, with only $150 million maturing
in April of 2013.
LMT's leverage (gross debt-to-EBITDA) for the latest 12 months period
(LTM)ending March 25, 2012, was 1.3 times (x) compared to 1.0x and 1.0x in 2010
and 2009, respectively. Interest coverage was 15.0x in the LTM compared to 15.4x
in 2010 and 17.5x in 2009. EBITDA margin was 11.6% in the LTM, flat versus 2010.
Fitch believes margins could trend lower in the next few years excluding pension
primarily due to growth on the F-35 program as it progresses through development
and low rate initial production phases.
LMT again generated very strong cash from operations (CFO) in 2011 ($6.5 billion
before $2.3 billion of pension contributions, 14.1% of revenues), up solidly
from 2010 ($6 billion before $2.2 billion of discretionary pension
contributions, 13.2% of revenues). The strong cash performance in 2011 was
partly aided by beneficial working capital movements which should reverse in
2012. Free cash flow (CFO less capital expenditures and dividends) was $2.2
billion in 2011, up from $1.8 billion in 2010. Fitch expects free cash flow will
decline over the next several years due to higher capital expenditures and
working capital to support growing programs, dividend increases, and continued
LMT's goal is to return at least 50% of free cash flow (CFO less capex) to
shareholders. However, dividends and share repurchases have exceeded FCF in each
of the past three years. LMT bought back approximately $7 billion of stock since
the start of 2009. Dividends are now well over $1 billion annually as a result
of steady increases, including a 33% hike in late 2011. Fitch's ratings
incorporate expectations for continued share repurchases. However, amounts could
be lower than the $2.5 billion spent in 2011. Fitch expects pension
contributions and dividends to be LMT's priority uses of cash in the coming
Fitch views pension contributions to continue to be a significant use of cash
for LMT over the next several years. LMT has one of the largest underfunded
pension positions in Fitch's corporate portfolio, standing at $13.3 billion as
of the end of 2011. LMT's pension plans are 67% funded based on a projected
benefit obligation of $40.6 billion (calculated on a GAAP basis). According to
LMT, the pension plans were over 80% funded on an ERISA basis.
After $2.3 billion of pension contributions in 2011, LMT forecasts that it will
make $1.1 billion of contributions in 2012 and $2.1 billion in 2013. Partially
mitigating the impact of the pension situation is LMT's healthy cash flow before
pension contributions. Another mitigant is the fact that some pension costs are
allowable costs in government contracts. Pension reimbursement could total $1.1
billion in 2012 and $1.4 billion in 2013.
U.S. government spending trends are key drivers of LMT's financial performance
given that the company generates most of its revenues (82% in 2011) from the
U.S. government. The bulk (61%) comes from the Department of Defense (DoD).
U.S. defense spending has been on an upward trend for more than a decade, but
the FY2012 and FY2013 budgets represent a turning point, with spending beginning
to turn down in FY2013, even excluding war spending, although from very high
levels. The FY2012 DOD base budget is up less than one percent compared to
FY2011. The requested base budget for FY2013 is down 1% to $525 billion.
FY2013 modernization spending (procurement plus R&D), the most relevant part of
the budget for defense contractors, is down 4%, the third consecutive annual
decline by Fitch's calculations. The overhang of potential automatic cuts
beginning in early 2013 related to the 'sequestration' situation, as well as the
presidential election, add to the uncertainty faced by defense contractors in
the current environment. The U.S. defense outlook will be uncertain and volatile
over the next one to two years. Program details will be needed to evaluate the
full effect on LMT's credit profile.
LMT's largest program, the F-35 Joint Strike Fighter, accounted for 13% of LMT's
revenues in 2011. The program is in the midst of a significant growth period,
with probable double-digit annual growth rates over the next several years.
However, the program has undergone three restructurings in as many years because
of cost growth, work scope changes, and delays. The main challenge for the
program is the concurrent development and production.
Despite the restructurings, the program remains the DOD's largest. Fitch views
the program as a credit positive for LMT going forward from a revenue
perspective. The DOD requested $9.2 billion in the FY2013 budget. The program
remains under tremendous scrutiny because of schedule changes and cost
increases. Fitch believes the main risks to the program are LMT's margins and
the ultimate size of the program given fiscal pressures in the US and other
Fitch has affirmed the following ratings for LMT and revised the Rating Outlook
to Negative from Stable:
--Long-term IDR 'A-';
--Senior unsecured debt 'A-';
--Bank facility 'A-';
--Short-term IDR 'F2';
--Commercial paper programs 'F2'.
Additional information is available at 'www.fitchratings.com'. The ratings above
were solicited by, or on behalf of, the issuer, and therefore, Fitch has been
compensated for the provision of the ratings.
Applicable Criteria and Related Research:
--'2012 Outlook: Global Aerospace and Defense' (Dec. 20, 2011);
--'U.S. Defense: Rising Pressure on Credit Profiles' (Nov. 30, 2011);
--'Corporate Rating Methodology' (Aug. 12, 2011);
--'Rating Aerospace and Defense Companies: Sector Credit Factors' (June 10,
Applicable Criteria and Related Research:
Corporate Rating Methodology
Rating Aerospace and Defence Companies
2012 Outlook: Global Aerospace and Defense
U.S. Defense: Rising Pressure on Credit Profiles