Fitch Affirms Lockheed Martin's Ratings at 'A-'; Outlook Stable
NEW YORK -- June 6, 2014
Fitch Ratings has affirmed the ratings for Lockheed Martin Corporation (LMT)
at 'A-/F2'. The Rating Outlook is Stable. The ratings cover approximately $7
billion of debt. A full list of ratings follows at the end of this press
LMT's ratings are supported by the company's position as a leading defense
contractor; solid liquidity and cash generation; financial flexibility;
increasing international sales; support for LMT's programs in the proposed
fiscal 2015 DoD budget; successful cost reduction efforts; and a large
Concerns include continued uncertainty in the DoD spending outlook, including
with regard to sequestration after FY2015; a cash deployment strategy focused
on returning the majority of free cash flow to shareholders; rising
competitive pressures in parts of the space sector; the large pension deficit;
and some modest program concentration.
Fitch believes 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, in addition to concerns about the commitment of several international
partners to the program. The program accounts for 16% of LMT's revenues and
The Stable Outlook is based on Fitch's analysis that LMT has the ability to
maintain its current credit profile if sequestration continues beyond FY2015.
This analysis assumes that LMT continues reducing costs in line with revenue
declines, continues to grow its international and adjacent area sales, and
does not increase leverage through cash deployment actions. Fitch's
projections of LMT's financial metrics in this sequestration scenario will
still be consistent with a weak 'A-' rating.
KEY RATING DRIVERS
LMT's performance in the past year supports the ratings and outlook, with
LMT's overall financial performance in 2013 exceeding Fitch's expectations.
Despite an uncertain DOD spending environment which drove sales down 4%, LMT's
performance included higher margins, good cash generation, an improved pension
position, and solid orders. While the DOD environment remains difficult, there
is more clarity through FY2015 than there was a year ago. The company also
continues to grow its international backlog, providing some offsetting growth
for DOD revenue declines.
LMT has proactively reduced costs over the past five years in response to
defense spending pressures, helping margins rise in the face of revenue
pressures. LMT has significantly reduced its headcount over these years from
146,000 to 115,000, and this will continue during 2014. The company has also
reduced its facility footprint, eliminating approximately 7.2 million square
feet since 2008; an additional 2.5 million square feet in reductions is still
to come. The supply chain has also been the source of savings.
In 2013 segment operating margins rose 90 bps to 12.7%, and EBITDA margins
rose 145 bps to 13.4%. In addition to cost reductions, pension expense and
income have also helped margins. Fitch expects a continuation of rising
margins over the next two years. LMT's leverage (gross debt-to-EBITDA) for the
latest 12 months period (LTM)ending March 31, 2014, was 1.1x compared to 1.2x
and 1.3x in 2013 and 2012.
The company's liquidity as of March 30, 2014 was $4.8 billion, consisting of
$1.5 billion of credit facility availability (expiring in Aug 2016) and $3.3
billion in cash and equivalents. As of March 30, 2014, LMT held $425 million
of its cash at its foreign subsidiaries, and it estimated the cash taxes due
upon repatriation would not be significant. The company's debt maturity
profile is favorable with no debt maturities until 2016 when $951 million of
notes become due.
LMT again generated strong cash from operations (CFO) in 2013 ($6.8 billion
before $2.25 billion of pension contributions, or 15% of revenues), and CFO
was very strong in the first quarter of 2014 ($2.1 billion). Free cash flow
(CFO less capital expenditures and dividends) was $2.2 billion in 2013. Fitch
expects FCF will be fairly steady in the next few years, with higher net
pension recoveries offsetting higher capex and dividends.
LMT's cash deployment 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 at or below
FCF levels. Dividends now exceed $1.5 billion annually, and Fitch expects
these to rise at double digit rates. LMT will likely continue to pursue
acquisitions as a part of its overall business strategy, but Fitch expects
these to be manageable within LMT's cash resources. If LMT were to pursue a
larger acquisition, Fitch expects the company would reduce share repurchases.
LMT had a large pension deficit of $9.2 billion at the end of 2013, but it was
down significantly from the $15.1 billion deficit in 2012. The pension plans
are 78% funded on a GAAP basis (up from 67% funded at the end of 2012) and 90%
funded on an ERISA basis. LMT anticipates making $1 billion of voluntary
contributions in 2014, and Fitch expects this rate will continue for several
years. Given government reimbursement of some pension costs, overall pension
cash flows should be positive for the next several years as a result of past
contributions by LMT. LMT had approximately $9.6 billion of prepayment credits
as of the end of 2013.
LMT generated 82% of its 2013 revenues from the U.S. government, including 61%
from the DoD. As a result, defense spending is a key driver of LMT's financial
performance and credit quality. This revenue concentration is a risk, and it
will remain high although international sales may become a larger part of
overall sales. The risk is somewhat offset by the company's program
diversification, large backlog, and length of program contracts. The strategic
importance of F-35 program for the US and its allies remains a long-term
strength of the company.
U.S. defense spending is projected to remain stable during fiscal 2014 and
2015 at the fiscal 2013 level driven by the Bipartisan Budget Act of 2013
which became law in late 2013.
Despite stabilization of the U.S. military spending budget, Fitch expects 2014
to be another challenging year for U.S. defense contractors. The sequestration
cuts implemented in 2013 should have a negative effect on most defense
contractors for the next several years because of the lag between
appropriations and outlays and Fitch expects revenues of most defense
companies will decline in fiscal 2014.
Lockheed Martin plans to mitigate the impact of sequestration and U.S.
budgetary pressures by increasing its international sales. LMT is looking to
grow international sales to at least 20% of its portfolio in the next several
years. The expected international sales growth over the next several years
should be driven by strong orders for existing products and the growth of
F-35. In 2013 International sales totaled about $7.8 billion, or 17% of sales.
Plans for growth are supported by the international order backlog, which
accounts for 25% of LMT's overall backlog. Aircraft and missiles account for
the majority of existing non-US sales, and Fitch expects this will continue
with the growth of the F-35 and demand for missile defense systems.
Adjacent business areas are another potential source of growth. Energy,
commercial cyber security, commercial satellites, commercial aircraft
services, and sea-based products are focus adjacent areas for the company.
Fitch may consider negative rating actions in the event of sharper than
expected declines in US DOD spending that affect some of LMT's key programs,
execution problems on key programs (especially the F-35), unsuccessful
attempts to reduce costs in line with revenue reductions, lower than expected
international revenue growth, or debt-funded cash deployment actions.
Sustained FFO Adjusted Leverage above 2.5x (taking into account discretionary
pension contributions) could lead to a negative rating action.
Fitch does not an anticipate an upgrade in LMT's ratings because of the
current uncertainty in the defense spending outlook, Fitch's expectation that
higher than expected cash flows would likely be deployed to shareholders, and
the company's large pension deficit.
Fitch affirms LMT's 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.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology - Including Short-Term Ratings and Parent and
Subsidiary Linkage' (May 28, 2014);
--'2014 Outlook: Global Aerospace and Defense' (Dec. 12, 2013).
Applicable Criteria and Related Research:
Corporate Rating Methodology - Including Short-Term Ratings and Parent and
2014 Outlook: Global Aerospace and Defense (Commercial Aerospace Flies Higher,
Defense in a Stalemate)
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Craig D. Fraser
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
David Petu, CFA
Media Relations, New York
Brian Bertsch, +1 212-908-0549
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