OREANDA-NEWS. Fitch Ratings expects to rate Lockheed Martin Corporation's (LMT) proposed senior unsecured notes 'A-'. The company plans to issue up to \$2 billion of notes with various long-term maturities. The notes will rank equally with the company's existing senior unsecured notes, and the proceeds will be used for general corporate purposes, which could include repayment of existing debt.

The Rating Outlook is Stable. These ratings cover approximately \$7 billion of existing debt, or up to \$9 billion including today's issuance. See the full rating list at the end of this release.

LMT's ratings are supported by the company's position as a leading defense contractor; solid cash generation and liquidity; financial flexibility; increasing international sales; support for LMT's programs in the DoD budget; successful cost reduction efforts; and a large backlog.

Concerns include a cash deployment strategy focused on returning almost all free cash flow to shareholders over the next several years; continued uncertainty in the DoD spending outlook; rising competitive pressures in parts of the space sector; the large pension deficit (\$11.2 billion at the end of 2014); and some modest program concentration.

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 has proactively reduced costs over the past five years in response to defense spending pressures. LMT has significantly reduced its headcount over these years, and the company has also reduced its facility footprint. The supply chain has also been the source of savings.

In 2014 segment operating margins slipped 40 bps to 12.3%, but EBITDA margins rose 2.3 points to 14.8%. A more favorable pension impact and lower charges were the main drivers of the EBITDA margin improvement. Fitch expects a continuation of rising margins in 2015.

LMT's leverage (gross debt-to-EBITDA) for 2014 was 1.0 times (x) compared to 1.2x in 2013. Adjusted debt to EBITDAR was 1.3x in 2014 versus 1.5x in 2013. Pro forma for today's debt issuance, Fitch estimates that leverage and adjusted leverage will be approximately 1.3x and 1.6x.

The company's liquidity at the end of 2014 was \$2.95 billion, consisting of \$1.5 billion of credit facility availability (expiring in Aug 2016) and \$1.45 billion in cash and equivalents. At the end of 2014, LMT held approximately \$500 million of its cash at its foreign subsidiaries, and it estimated the cash taxes due upon repatriation would not be significant. The company's next material debt maturities come in 2016 when \$952 million of notes become due.

LMT again generated strong cash from operations (CFO) in 2014 (\$5.9 billion before \$2 billion of discretionary pension contributions, or 13% of revenues). Free cash flow (CFO less capital expenditures and dividends) was \$1.3 billion in 2014, or \$3.3 billion before the pension contributions. Fitch expects FCF will be fairly steady in the next few years, with higher net pension recoveries offsetting higher capex, taxes, and dividends.

LMT's cash deployment has been focused on share repurchases and dividends, and this should continue over the next several years. Share repurchases exceeded FCF in 2014 (including pension contributions), but Fitch's ratings incorporate expectations for continued share repurchases at or below FCF levels in 2015. Dividends are now nearly \$1.8 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 \$11.2 billion at the end of 2014. LMT does not have required contributions in 2015, and it does not intend to make discretionary contributions in 2015 through 2017.

Fitch believes the F-35 Joint Strike Fighter will likely be a long-term credit positive for LMT, but schedule and costs remain potential concerns, in addition to concerns about the commitment of several international partners to the program. The program accounts for 17% of LMT's revenues and rising.

LMT generated 79% of its 2014 revenues from the U.S. government, including 59% 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.

U.S. defense spending is projected to remain stable during fiscal 2015 at the fiscal 2013 and fiscal 2014 level driven by the Bipartisan Budget Act of 2013 which became law in late 2013. Base defense budgets could begin rising again in fiscal 2016 even if sequestration remains in place. However, Fitch still considers the spending outlook uncertain, including within the different elements of the overall defense budget.

Lockheed Martin plans to mitigate the impact of U.S. budgetary pressures by increasing its international sales. LMT is looking to grow international sales to at least 25% of its portfolio in the next several years, compared to 20% of sales in 2014. Plans for growth are supported by the international order backlog, which accounts for 25% of LMT's overall backlog.

KEY ASSUMPTIONS

Fitch's key assumptions within our rating case for the issuer include:

--Sequestration continues in fiscal 2016 and beyond;
--EBITDA margins will continue to rise in 2015;
--FCF will be fairly steady in the next few years, with higher net pension recoveries offsetting higher capex, taxes, and dividends;
--Dividends will continue to rise at double digit rates and share repurchases will continue at or below FCF levels in 2015;
--The company will reduce share repurchases if it undertakes a sizable acquisition.

RATING SENSITIVITIES

Fitch may consider negative rating actions in the event of sharper than expected declines in U.S. DOD spending that affect some of LMT's key programs, execution problems on key programs (especially the F-35), debt-funded cash deployment actions, unsuccessful attempts to reduce costs in line with revenue reductions, or lower than expected international revenue growth. Sustained FFO Adjusted Leverage above 2.5x could lead to a negative rating action.

Fitch does not anticipate an upgrade in LMT's ratings because of the expectation that most FCF will be deployed to shareholders, the continued uncertainty in the defense spending outlook, and the company's large pension deficit.

Fitch currently rates LMT as follows:

--Issuer Default Rating (IDR) 'A-';
--Senior unsecured debt 'A-';
--Bank facility 'A-';
--Short-term IDR 'F2';
--Commercial paper programs 'F2'.

The Rating Outlook is Stable.