Fitch Rates Lockheed Martin's Exchange Notes 'A-'; Outlook Negative (excerpt)
(Source: Fitch Ratings; issued Dec 14, 2012)
NEW YORK --- Fitch Ratings has assigned an 'A-' rating to Lockheed Martin Corporation's planned issuance of approximately $1.3 billion of 4.07% senior unsecured notes due 2042.

The new notes, along with approximately $225 million in cash, will be issued in exchange for approximately $1.2 billion of existing notes maturing from 2023 to 2040 that are subject to the recently expired exchange offer. The Rating Outlook is Negative.

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Sequestration is a large threat in the near term, but Fitch's base case is that it will be avoided. However, DOD spending reductions are likely to be a part of any deal that avoids Sequestration, and there is also the possibility that only a temporary resolution is put into place.

LMT's largest program, the F-35 Joint Strike Fighter, accounted for 13% of the company's revenues in 2011, 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 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, and is still probably 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 partner nations. Given the large number of likely orders from the U.S. and key international partners, the recent announcement by Canada that it is re-evaluating its F-35 purchase plans is not a credit issue at this time.

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