S&P confirms DRS, off watch, rates notes B, loan BB-

Standard & Poor's confirmed DRS Technologies Inc.'s ratings including its $338.6 million senior secured credit facility at BB-, removed it from CreditWatch negative and assigned a B rating to its planned $200 million senior subordinated notes due 2013 and a BB- rating to its planned $150 million five-year revolving credit facility due 2008. The outlook is stable.

S&P said the confirmation reflects the weaker, but still appropriate for the rating, financial profile of DRS due to the additional debt taken on for the acquisition of IDT, offset somewhat by improved product and customer diversification.

The acquisition will improve DRS' product and program diversity, as well as expand its business with the U.S. Air Force and the intelligence community, S&P noted. Revenues for the combined company are expected to be around $1.2 billion in fiscal 2005 (ending March 30, 2005). The transaction is subject to regulatory and IDT shareholder approval and is expected to close by the end of 2003.

The incremental debt used to finance the acquisition will result in a moderately weaker financial profile, S&P said. Debt to capital will increase to around 55% from under 40% in 2003 and debt to EBITDA will increase to slightly above 4x in 2004 from 3x.

Operating margins are expected to improve slightly due to better profitability at IDT, further enhanced by cost savings due to the merger. Funds from operations to debt will also decline, to the 15% to 20% range from over 30% in 2003. Still, overall credit protection measures should be appropriate for current ratings, S&P said.

S&P confirms RJ Reynolds

Standard & Poor's confirmed RJ Reynolds Tobacco Holdings Inc. including its senior unsecured debt at BB+ and the BB rating on debt issues not guaranteed by RJR's material operating subsidiaries. The outlook is negative.

S&P said the confirmation follows the company's announcement that it will record a $340 million restructuring charge in the third quarter of 2003 as part of a new plan to refocus its brands and reduce its costs.

The charge, though primarily taken for workforce reduction that includes an elimination of about 2,600 full-time jobs, or about 40% of that workforce, also includes non-cash charges such as pension and post-retirement expense. Aggregate restructuring and impairment charges, including $55 million taken in the second quarter of 2003, are expected to total $425 million by 2004.

The new plan is expected to result in improved profitability and a more rational cost structure, S&P said. As a result of cost savings already achieved or in process, the company has revised its operating income forecast (excluding charges) for 2003 upwards to the $575 million-$625 million range from its earlier forecast of $525 million-$550 million. In addition, RJR expects annualized savings of about $800 million to $1 billion as a result of the new plan, of which approximately $300 million will be realized in 2003.

S&P said it had anticipated a significant charge in the third quarter and had already factored this into its negative outlook for the company.

However, S&P said it remains concerned about RJR's ability to implement the announced changes to its business plan quickly enough to stem further erosion of volume and operating profit. Due to the ongoing review of the cost structure, RJR could incur additional charges in 2003 and 2004. Any further significant charges could result in a downgrade.

S&P says Integrated Electrical unchanged

Standard & Poor's said Integrated Electrical Services Inc.'s ratings are unchanged including its corporate credit at BB with a stable outlook in response to reduced earnings per share and free cash flow guidance, at 44 cents-48 cents and $30 million-$35 million from 53 cents-60 cents and $30 million-$40 million for fiscal 2003 ending Sept. 30.

The earnings shortfall is largely due to delays in starting a large project with the Navy and a couple of healthcare projects, S&P noted.

S&P said it currently views these delays as a timing event, as these projects are expected to strengthen earnings in Integrated Electric's fiscal 2004 first quarter ending Dec. 31, 2003. Liquidity remains satisfactory, with $36 million of cash on hand at June 30, 2003, the expectation for up to $6 million in free cash flow in the Sept. 30 quarter, and an unused $125 million bank credit facility.

Nonetheless, the current rating and outlook incorporate little room for deviation with the firm's business plan, S&P said, adding that it is also anticipating that Integrated Electrical's profitability will strengthen in 2004, as market conditions strengthen and because the company may look to refinance its $248 million of outstanding subordinated bonds with lower-cost debt and excess cash on hand. Both of these items could strengthen the credit profile toward S&P's expectations of debt to EBITDA in the 3x-3.5x range and funds from operations to total debt around 20%.

S&P cuts Winn-Dixie

Standard & Poor's downgraded Winn-Dixie Stores Inc. including cutting its $100 million 364-day revolving credit facility due 2004 and $200 million revolving credit facility due 2006 to BB+ from BBB- and $300 million 8.875% senior unsecured notes due 2008 to BB from BB+. The outlook is negative.

S&P said the downgrade is based on substantially lower expectations for earnings and the potential for violation of bank covenants for the first quarter ending September 2003.

Winn-Dixie will need to invest substantially in better pricing in fiscal 2004, which will likely reduce the operating margin, already below the industry average, S&P noted.

Based on the company's current projections of operating results for the first quarter of fiscal 2004, it will not be in compliance with certain bank covenants. The company is working with its banks and expects to obtain an amendment before the end of the first fiscal quarter. S&P said it believes that this is achievable. The company expects only $6 million of EBIT in the first quarter, compared with $70 million in the prior-year period, but anticipates that its strategy of lowering prices will result in sales gains and expense leveraging in the final three quarters of the year.

Management's willingness to repay funded debt from discretionary cash flow has mitigated a decline in credit measures, S&P added. The company repaid $234 million in bank debt in fiscal 2003 and funded debt now totals only about $340 million. Nevertheless, Winn-Dixie's $2.5 billion in operating lease equivalents resulted in total debt to EBITDA of about 4.0x at the end of fiscal 2003, an increase over 2002's 3.7x level. EBITDA covered interest expense by 2.5x for fiscal 2003. These measures are expected to deteriorate modestly in fiscal 2004.

Fitch keeps R.J. Reynolds on watch

Fitch Ratings said R.J. Reynolds Tobacco Holdings, Inc.'s ratings incorporate the announced restructuring charge. Fitch rates R.J. Reynolds' guaranteed notes and bank credit facility at BB+ and senior notes BB. The ratings remain on Rating Watch Negative.

The comprehensive restructuring plan R.J. Reynolds outlined targets a $1 billion reduction in its cost structure by year-end 2005, of which about $300 million will be realized in 2003, Fitch noted. R.J. Reynolds will record a $340 million pretax ($205 million after tax) restructuring charge in the third quarter of 2003. The cash portion of this charge is $225 million, including $215 million for employee severance costs and $10 million for professional fees. The aggregate restructuring and impairment charges through 2004 are expected to be about $425 million pretax.

Overall, Fitch said it views this restructuring positively. Widespread changes to R.J. Reynolds' strategies and cost structure are necessary to stem volume and margin declines and improve the company's competitive position in the intensely aggressive promotional environment in which it operates.

In addition to competition from other premium brands, R.J. Reynolds has also been negatively impacted by smaller manufacturers with lower cost structures and low priced products.

Fitch said it will monitor R.J. Reynolds' progress at achieving improved margins and profitability while stabilizing or growing market share. Of concern is the execution risk of implementing such large scale and broadly encompassing changes, including the elimination of 40% of R.J. Reynolds' workforce and the refocus of its brand strategies.

The Rating Watch Negative status will remain until it is determined whether the company's Turner 'lights' cigarettes class action case in Illinois will be stayed throughout the appeal of Philip Morris USA's 'lights' case, Fitch said.

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