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Rating Action:

MOODY'S CONFIRMS DEBT RATINGS OF HONEYWELL INTERNATIONAL, INC. (SR. AT A2); CHANGES RATING OUTLOOK TO NEGATIVE

12 Oct 2001
MOODY'S CONFIRMS DEBT RATINGS OF HONEYWELL INTERNATIONAL, INC. (SR. AT A2); CHANGES RATING OUTLOOK TO NEGATIVE

Approximately $6.5 Billion of Debt Securities and Bank Facilities Affected.

New York, October 12, 2001 -- Moody's Investors Service confirmed the A2 long-term and Prime-1 short-term debt ratings of Honeywell International, Inc. (HON), but changed the ratings outlook to negative.

The confirmation of HON's ratings reflects Moody's expectation that the company's operating performance will improve in the near-to-intermediate-term, even in this difficult economic environment, as a result of management's aggressive restructuring actions, which are designed to reduce costs by about $1 billion through year 2002. Moody's also incorporated in this action the anticipation that proceeds from asset sales and working capital reductions will be used to reduce debt and improve the company's debt protection measures. In addition, the rating agency noted that the company's potential for healthy long-term operating and cash flow performance is augmented by its leading market positions in key market segments, good product and geographic diversification, a strong management team and a healthy balance sheet.

However, the negative rating outlook reflects Moody's concerns about the deteriorating conditions in most of HON's end markets. The rating agency noted that if weaknesses in the company's end markets persist, the restructuring program notwithstanding, HON may be unable to materially improve its profitability and cash flows, and reduce debt. Moody's also noted that there is some uncertainty related to the succession of the current CEO, which is scheduled for the mid 2002, and the vision and the strategy of the new CEO.

This rating action concludes the review for possible downgrade that began on July 3, 2001 as a result of the announcement that the European Commission formally blocked General Electric Corporation's (GE) planned acquisition of Honeywell.

Ratings confirmed with negative outlook are:

Honeywell International Inc. -- its A2 long-term issuer rating; it's A2 senior debt rating; its Prime-1 short-term debt rating; its Prime-1 rating on its extendible commercial notes; and (P)A2 and (P)Baa1 rating on its shelf registration for senior unsecured and preferred stock, respectively.

Honeywell, Inc. -- its A2 senior unsecured debt rating.

Honeywell Finance B. V. - its A2 senior debt rating for MTNs; its (P)A2 rating on its shelf registration for senior securities, including medium term notes, guaranteed by Honeywell Inc.

Honeywell Canada Limited -- its A2 senior debt rating for MTNs; its (P)A2 rating on its shelf registration for senior securities, including medium term notes, guaranteed by Honeywell Inc.

Honeywell Europe S.A. - its Prime-1 short-term debt rating, guaranteed by Honeywell Inc.

Honeywell Finance Public Limited Company -- its Prime-1 short-term debt rating, guaranteed by Honeywell Inc.

After focusing on the aborted acquisition by GE for nine months, HON's management faces the challenge of restoring operating efficiency and rebuilding its momentum. In addition, the company is facing a cyclical downturn in many of its businesses. Its revenues fell 2.8% in the first half of 2001 as a result of a weakening economy, and its segment profits declined 21% due to pronounced weakness in some of its business segments, cost inefficiencies, and high energy and raw material costs. This downturn will be exacerbated by the events that occurred on September 11, especially in its core aerospace business.

In addition to weaknesses in several of its businesses, the outlook for the company's aerospace business has deteriorated materially as a result of the September 11 attacks which led to reduction of capacity by about 20% by several major airlines due to the lower air traffic demands. This will lead to delays and/or the cancellation of new aircraft orders, the elimination of some routes, and the grounding of older aircraft. Moody's noted that due to the negative effects this will have on the aerospace segment's civil OEM and aftermarket business, the near-to-intermediate-term outlook for the business is therefore negative. However, Moody's notes that some offset may occur, over the intermediate-term, due to the company's growing defense business, its continuing market penetration, renewed interest in business jet travel, and the increasing need for enhanced safety systems, whereby the company announced that it expects an incremental $500-$700 million of revenues over the next five years. Moody's noted that after a protracted period of weakness, the long-term outlook for this business is positive, as airline traffic is expected to resume its strong growth over the next twenty years. Furthermore, the company's defense business is expected to benefit from increased aftermarket business due to expected increases in military air traffic, and subsequent need for spares, and due to expected moderate growth in defense budgets, worldwide.

The company's automation and control segment saw a 1% decline in revenues during the first six months of 2001 due to lower sales in home and building control products and services and industrial controls. This was somewhat offset by growth in fire and security products. Segment earnings were affected by continuing pricing pressures and a high cost structure. Moody's expects the automation business to remain under significant pressure as industrial spending continues to suffer.

In Specialty Materials, sales have declined 14% year-to-date mainly due to declines in electronic materials. Operating margins were affected by the lower sales, as well as higher energy and raw material costs. The electronics business will remain depressed as the electronics industry is expected to remain weak.

Lastly, the Power and Transportation segment saw a 4% decrease in revenues, led by double-digit growth in turbochargers, offset by significantly lower sales of truck brakes, friction materials and automotive consumer products. Operating margins were down in this segment due to the continued weakness in the North American automotive end market. This business will also remain under pressure, as strength in turbochargers may not be able to offset challenges in other transportation sectors.

Moody's believes that management's restructuring actions, which are expected to deliver over $1 billion in pre-tax cost savings through 2002, have a reasonable probability to be successful. These restructuring actions include a reduction in workforce totaling more than 18,000 people in all segments, six-sigma and digitalization initiatives, and a comprehensive review of its business portfolio with a potential to exit units that do not offer a prospect for adequate returns over the intermediate-term.

Moody's, however, cautioned that if improvements in the company's operating and cash flow performance, as well on its balance sheet, do not materialize, then there would be downward pressure on the company's ratings.

Honeywell's alternate liquidity is supported by $1.2 billion of cash on its balance sheet, and its historically strong cash flow generation; but the company has also been acquisitive. However, the company has a restructuring program in place that is designed to improve its operating performance and cash flows, and management's focus is on reducing its debt in the near-to-intermediate-term. The company has $400 million of long-term debt maturing in 2002, and about $1.3 billion of commercial paper currently outstanding. Its commercial paper program is fully backed by $2 billion in bank credit facilities, including a $1.0 billion multi-year facility that expires in 2004, and a $1.0 billion 364-day facility that matures in November 2001. These facilities contain a MAC clause that is enforceable on the effective date only, and does not pertain to future borrowings. In addition, the facilities do not include any material financial covenants. There is currently no debt outstanding under these facilities.

Honeywell International, Inc., headquartered in Morristown, New Jersey, is a diversified company serving primarily the aerospace, home and building, automotive, chemicals, fibers, plastics, and advanced materials markets.

New York
Michael J. Mulvaney
Managing Director
Corporate Finance
Moody's Investors Service
JOURNALISTS: (215) 967-6233
SUBSCRIBERS: (215) 967-6233

New York
Tassos Philippakos
Senior Vice President
Corporate Finance
Moody's Investors Service
JOURNALISTS: (215) 967-6233
SUBSCRIBERS: (215) 967-6233

No Related Data.
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