Fitch Expects to Rate Lockheed Martin's New Notes 'A-'; Outlook Stable

Fitch Ratings expects to assign an 'A-' rating to the Lockheed Martin Corporation's (LMT) new senior notes due 2019 and 2039. Proceeds will be used for general corporate purposes. LMT's existing ratings are 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. The ratings cover approximately $4.1 billion of existing outstanding debt.

LMT's ratings are supported by the company's position as a leading defense contractor; high levels of defense spending; strong cash flow and liquidity; solid credit metrics for the ratings; large backlog; and solid growth prospects for several large programs. Concerns include U.S. government budget deficits and their potential impact on defense spending after fiscal year (FY) 2010; the large pension deficit, which could reduce cash flow in future years; a cash deployment strategy focused on share repurchases and dividend increases; some modest program concentration; the possibility of higher acquisition spending; and execution on a few programs.

The company's liquidity as of Sept. 27, 2009 was $4 billion, consisting of $1.5 billion of credit facility availability (expiring in 2012) and $2.7 billion in cash and short-term investments, less $242 million of current debt maturities. Debt reduction of $600 million in 2008 and $242 million later this year will be more than offset by the debt added in the transactions announced today. The company has immaterial debt maturities in 2010 through 2012.

LMT generated strong cash from operations (CFO) in 2008 ($4.4 billion, 10.3% of revenues) and 2007 ($4.2 billion, 10.1% of revenues). LMT's strong cash performance continued in the first three quarters of 2009, with CFO of $3.8 billion compared to $3.4 million in the similar period in 2008. Fitch believes that free cash flow could trend down after 2009 because of higher required pension contributions. Free cash flow will also likely be negatively affected by higher capital expenditures to support growing programs, as well as higher dividends.

At the end of 2008, LMT's pension liability rose to $11.9 billion from $879 million in 2007, leaving the company's pension plans only 61% funded based on a benefit obligation of $30.4 billion. The underfunded position worsened in 2008 due to negative returns (-28%) and a lower discount rate (6.125% vs. 6.375%). The company has no required contributions in 2009, but it intends to contribute at least $1 billion later this year. Planned contributions for 2010 are $1.4 billion. Based on LMT's current estimates, the net pension contributions after cost recoveries on government contracts should be approximately $400 million in both 2009 and 2010. Fitch's ratings incorporate expectations for higher cash pension contributions over the next several years. Fitch estimates that LMT has the liquidity and cash flow to meet higher required pension contributions, but the company's financial strength would be reduced.

LMT's leverage (debt-to-EBITDA) for the latest 12-month (LTM) period ending Sept. 27, 2009, was 0.8 times (x) compared to 0.7x in 2008, and interest coverage improved to 17.1x in the LTM period from 16.6x in 2008. EBITDA margin fell to 11.6% in the LTM period from 13.2% in 2008 largely due to pension expense. Fitch expects 2009 margins to decline because of an approximate $600 million swing in pension expense. Furthermore, over the next few years margins could trend lower even excluding pension due to growth in the Information Systems & Global Services (ISGS) segment and some large programs such as the F-35 and Orion.

LMT's credit quality continues to be supported by large U.S. defense budgets. U.S. defense spending trends are key drivers of LMT's financial performance given that the company generates most of its revenues (58% in 2008) from the U.S. Department of Defense (DOD). Spending in fiscal years 2009 and 2010 will continue to rise, so the outlook for LMT's defense operations is still favorable in the near term. The company has some concentration in its larger programs, mainly aircraft. LMT's largest program, the F-35 Joint Strike Fighter, is approaching 10% of revenues, and the program is poised to begin a period of significant growth, with potential compound annual growth rates of 20% or more over the next five or six years.

Fitch believes that FY2010 is probably the peak in core U.S. defense budgets, and there are several risks to monitor in FY2011 and beyond. These include the Obama Administration's first full budget in FY2011, the Quadrennial Defense Review, and the large projected federal budget deficits in FY2009-FY2011. In addition to spending levels, some other changes proposed by the new administration could have a detrimental impact on LMT and other defense contractors, including acquisition reform and the 'insourcing' of services previously contracted out by the DOD.

LMT's cash deployment is currently 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, although at lower amounts than the $2.9 billion spent in 2008. LMT will likely continue to pursue acquisitions as a part of its overall business strategy but Fitch is less concerned now about the possibility of large, debt-funded transactions.

Additional information is available at ' www.fitchratings.com'.

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