NEW YORK--(BUSINESS WIRE)--Lockheed Martin Corporation (LMT) weathered the overhang of sequestration and posted better than expected second quarter earnings Tuesday. Fitch Ratings believes that LMT has the ability to maintain its current credit profile if sequestration continues beyond 2013. This is based on our analysis that assumes LMT successfully reduces costs in line with revenue declines, continues to grow its international and adjacent area sales and does not increase leverage through cash deployment actions. Our projections of LMT's financial metrics in this sequestration scenario will still be consistent with a weak 'A-' rating.
Despite a 4% decline in net sales, LMT's 2Q13 operating margins rose 140 bps to 11.4%, and the company reported net profits of $859 million, up from $781 million during the same period last year. LMT also raised its 2013 profit and cash flow guidance but warned that sequestration measures could still pressure results. U.S. government spending trends are key drivers of its financial performance given that the company generates most of its revenues from the U.S. government, with the bulk coming from the Department of Defense (DoD).
LMT still faces several headwinds: high U.S. government budget deficits; continued uncertainty in the DoD spending outlook, including with regard to sequestration, which is expected to reduce the proposed fiscal 2014 DoD budget by approximately 10% (unless averted by legislative efforts); the large pension deficit and its impact on cash flows beyond 2016; a cash deployment strategy focused on returning the majority of free cash flow to shareholders; some modest program concentration; and execution on a few programs.
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 remains a concern, in addition to concerns about the commitment of several international partners to the program.
That said, Fitch does not anticipate an upgrade in LMT's ratings because of the current uncertainty in the defense spending outlook, the company's large pension deficit and Fitch's expectation that higher than expected cash flows would likely be deployed to shareholders. Lockheed's 'A-' rating was affirmed and Rating Outlook revised to Stable from Negative on June 7.
Additional information is available on www.fitchratings.com.
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