NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed Lockheed Martin Corporation's (LMT) ratings as follows:
--Issuer Default Rating (IDR) at 'A-';
--Senior unsecured debt at 'A-';
--Bank facility at 'A-';
--Short-term IDR at 'F2';
--Commercial paper programs at 'F2'.
The Rating Outlook is Stable. The ratings cover approximately $5.5 billion of outstanding debt.
LMT's ratings are supported by the company's competitive position in the defense sector; strong liquidity and cash flow; solid credit metrics for the ratings; large backlog; and solid growth prospects for several large programs. Concerns include the large pension deficit; F-35 program restructuring and related cost growth; a cash deployment strategy focused on returning at least 50% of free cash flow to shareholders; and some modest program concentration. High levels of defense spending currently support LMT's ratings, but Fitch has concerns about U.S. government budget deficits and their potential impact on defense spending after fiscal year (FY) 2012. Defense spending trends will be a key driver of LMT's credit profile, although Fitch believes that modest declines in defense spending would not necessarily lead to negative rating actions given LMT's current credit metrics and liquidity position.
The company's liquidity as of March 27, 2011 was $5.4 billion, consisting of $1.5 billion of credit facility availability (expiring in June 2012) and $3.9 billion in cash and short-term investments. Debt increased approximately $1.4 billion in the past two years as a result of a debt issuance and a debt exchange. The company has no debt maturities in 2011 and 2012, and the next material debt maturities are $650 million in 2013.
LMT's leverage (gross debt-to-EBITDA) for the latest 12 month period (LTM) ending March 27, 2011, was 1.1 times (x) compared to 1.1x and 1.0x in 2010 and 2009, respectively, and interest coverage was 14.8x in the LTM compared to 15x in 2010. EBITDA margin dipped to 11% in the LTM compared to 11.3% in 2010, mainly due to higher non-cash pension expense. Over the next few years margins could trend lower excluding pension primarily due to growth on the F-35 program as it progresses through development and low rate initial production phases.
U.S. government spending trends are key drivers of LMT's financial performance given that the company generates most of its revenues (84% in 2010) from the U.S. government, with the bulk (60%) coming from the Department of Defense (DoD). Spending in the base DOD budget in fiscal years 2011 and 2012 will likely continue to rise, so the outlook for LMT's defense operations is still favorable in the near term.
Beyond fiscal 2012, Fitch believes cuts are a risk given the U.S.'s deficit situation, as illustrated by the deficit reduction plan which President Barack Obama announced in April. This plan proposes $400 billion of national security cuts through 2023. Because of the projected growth over that period in existing plans, nominal defense spending would still rise modestly over the plan period, but defense spending would likely dip approximately 5% after being adjusted for inflation. Fitch notes that spending under this plan would still be robust, but the details of spending in specific accounts remain to be determined.
Fitch sees several main risks with respect to the U.S. defense sector's credit quality: the potential that the out years in the budget come under more pressure than the current debate indicates; cash deployment actions to offset lower revenue growth or possible revenue declines; margin pressures from tougher contract terms; and the chance that some of the planned efficiency savings are used to reduce the budget rather than to fund weapons accounts. International defense sales could offset some of the risks in the US, but fiscal pressures in some other countries and a crowded market could pressure LMT's projected overseas growth rates. International revenues accounted for 15% of LMT's revenues in 2010, and the company's goal is to have approximately 20% international revenues over the next few years.
LMT's largest program, the F-35 Joint Strike Fighter, accounted for 12% of the company's revenues in 2010, and 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 two restructurings in as many years because of cost growth, work scope changes, and delays. One of the program's three variants was placed on two-year probation, and there have been calls from some critics to reduce the overall number of planned deliveries in favor of less expensive, proven aircraft. 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 partner nations.
LMT generated very strong cash from operations (CFO) in 2010 ($5.8 billion before $2.2 billion of discretionary pension contributions, 12.7% of revenues) and 2009 ($4.7 billion before $1.5 billion of discretionary pension contributions, 10.3% of revenues). LMT's strong cash performance continued in the first quarter of 2011, with CFO of $1.7 billion, aided by a $250 million tax refund. In the next several years free cash flow will likely be negatively affected by higher capital expenditures to support growing programs, dividend increases, and continued pension contributions.
LMT's cash deployment over the past several years has been focused on share repurchases and dividends, which is consistent with LMT's strategy of returning at least 50% of free cash flow (cash from operations less capital expenditures) to shareholders. Fitch's ratings incorporate expectations for continued share repurchases, but amounts could be lower than the $2.42 billion spent in 2010 if discretionary pension contributions and acquisition opportunities are emphasized by LMT. Dividends will likely continue to rise and capex is projected to increase, with both reaching $1 billion or more annually.
Pension contributions will continue to be a significant use of cash over the next several years, in Fitch's view. At the end of 2010, LMT's underfunded pension liability was $10.4 billion, leaving the company's pension plans 71% funded based on a projected benefit obligation of $35.8 billion (calculated on a GAAP basis). According to LMT, the pension plans were over 80% funded on an ERISA bases. After $2.24 billion of discretionary pension contributions in 2010, LMT forecasts that it will make $1.3 billion of contributions in 2011, partly offset by approximately $900 million of pension reimbursement from its government contracts. Fitch's ratings incorporate expectations for cash pension contributions that are higher than LMT's forecasts over the next several years.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 16, 2010);
--'Rating Aerospace and Defense Companies: Sector Credit Factors' (June 10, 2010);
-- '2011 Outlook: Global Aerospace and Defense' ( Jan. 24, 2011);
-- 'U.S. Defense Budget Review: Fiscal 2012 Request and Credit Outlook' (Feb. 23, 2011).
Applicable Criteria and Related Research:
Corporate Rating Methodology
Rating Aerospace and Defence Companies
2011 Outlook: Global Aerospace and Defense
U.S. Defense Budget Review -- Fiscal 2012 Request and Credit Outlook
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