DCR Lowers Lockheed Martin's Debt Ratings; Outlook Remains Negative
CHICAGO --- Duff & Phelps Credit Rating Co. (DCR) has lowered the senior unsecured debt rating of Lockheed Martin Corporation from 'BBB+' (Triple-B-Plus) to 'BBB-' (Triple-B-Minus) and its commercial paper and extendible commercial notes from 'D-2' (D-Two) to 'D-3' (D-Three).
The rating action follows the announcement of further reductions in the earnings outlook for 2000 and 2001. The company recently announced that net per share expectations for 2000 have been reduced from $2.15 to $1.00 and that free cash flow after capital expenditures, which was originally targeted to approximate $900 million, is anticipated to be less than $500 million. This follows the company's previous announcement in June 1999 of a substantially diminished earnings and cash flow outlook for 1999-2000.
Key factors in the reduced outlook are deteriorating market conditions for launch systems and commercial satellites and lower production rates on the C130J transport aircraft. Against the background of the diminished earnings outlook, quantitative credit measures are expected to remain at lower levels for the foreseeable future.
The rating outlook remains negative. DCR recognizes that Lockheed Martin has undertaken management and organizational changes designed to refocus the company on its core aerospace, defense and technology operations with the potential for improved mission success and stronger financial controls and operating margins. However, concerns remain about the ability of the company to fully execute its business plan in light of the diminished outlook and increased competition in key markets.
Management indicates a continued commitment to generate excess cash for debt reduction. Eight non-core businesses have been identified as divestiture candidates, with a potential value of more than $1 billion. Nevertheless, the timing and proceeds of planned divestitures remain uncertain and no near-term improvements in credit measures are anticipated.
Future rating action will monitor management's ability to generate excess cash for debt reduction through enhanced profitability of core operations and divestitures. Management's plan is to apply excess cash flow to debt reduction until Lockheed Martin returns to its longer-term objective of a 40- 50 percent debt to invested capital ratio. As of September 30, 1999, Lockheed Martin had funded debt of approximately $12 billion or 66 percent of invested capital.
With 1998 sales of $26 billion, Lockheed Martin remains the leading DOD, DOE and NASA contractor, the latter largely through a joint venture. Despite the operating shortfalls of 1999-2001 and currently high financial leverage, the company has a sizable backlog, and the outlook for defense spending is improving. Other positives for the company include excellent technical skills and a broad program base.
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DCR Lowers Lockheed Martin's Debt Ratings; Outlook Remains Negative
