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DCR Reaffirms UNOVA, Inc.'s Rating of 'BBB+'

21 August 1998

DCR Reaffirms UNOVA, Inc.'s Rating of 'BBB+'

    CHICAGO, Ill., Aug. 21 -- Duff & Phelps Credit rating Co.
(DCR) has reaffirmed UNOVA Inc.'s senior notes rating of 'BBB+'
(Triple-B-Plus).  Debt securities affected by this action include
$100 million 6.875 percent senior notes due 2005 and $100 million
7.00 percent senior notes due 2008.
    The reaffirmation follows the company`s announcement that is has reached a
definitive agreement to acquire Cincinnati Milacron's machine tool
operations (Cincinnati Machine) for approximately $178 million in cash.
During the trailing 12 months ended June 30, 1998, this unit, which will
become a part of UNA's industrial automation systems (IAS) business segment,
produced more than $500 million of revenue and approximately $19 million in
operating income.
    Rating support is provided by UNA;s leading market positions in the
fragmented IAS and automated data systems (ADS) industries, a focused business
strategy and management's moderate financial policies.  Offsetting these
factors are the currently inadequate, but improving, operating margins in the
ADS segment as the unit completes the integration of 1997 acquisitions, the
risks associated with rapid technological change in the ADS industry and the
company's sensitivity to economic conditions, particularly as they relate to
automotive capital spending cycles.
    Although a lower margin and more cyclical business than UNA's existing
operations, the Cincinnati Machine acquisition will strengthen UNA's worldwide
position in industrial manufacturing systems and machine tools.  In
particular, the combination will advance its geographic reach in Europe and
broaden its customer base in aerospace and general metalworking, whereas its
existing operations are primarily driven by automotive capital spending
cycles.  Also, the acquisition provides superior distribution and
opportunities to leverage certain UNA products into the Cincinnati Machine
machine tool distribution channels.  As a result, in addition to economies of
scale, the acquisition should provide revenue synergies under UNA's ownership.
    This transaction, which is expected to close in October, closely follows
the July purchase of R&B Machine Tool (R&B), a $60 million maker of special
machining systems, and the June acquisition of the Transportation Systems
Group of Amtech (TSG).  The purchase of R&B strengthens UNA's presence in the
smaller engine and chassis parts market. The acquisition of TSG enhances the
company's position in the rapidly growing radio frequency identification
technology tag and equipment market.
    DCR notes that these acquisitions will, in the aggregate, add nearly
$300 million of debt to UNA`s balance sheet, weakening the company's credit
measures to levels that are not commensurate with the existing rating and
reducing financial flexibility.  In particular, pro forma debt-to-capital at
June 30, 1998, will approximate 50 percent, above management`s targeted 30 to
40 percent range, pro forma debt/EBITDA is approximately 3.5 times, while
EBITDA/interest declines to roughly 5 times (from nearly 6 times in the first
half of 1998).  However, the reaffirmation assumes that the company moves
quickly to refinance the short-term bank debt incurred to finance the proposed
acquisition with a hybrid equity security, reducing balance sheet leverage to
approximately 40 percent and bringing debt/EBITDA below 2.5 times by yearend.
    The current robust business conditions in the company's IAS business
segment (strong bookings have resulted in a 75 percent backlog increase this
year) and the improving profitability of the ADS business segment, which
experienced sales and operating income gains of 35 percent and 122 percent,
respectively, in the first half of 1998 due to internal growth and integration
benefits from 1997 acquisitions, provide rating support.
However, continued improvement in the company`s operating results is essential
to maintain the rating.  In addition, any further significant debt-financed
acquisitions in the near term could result in a downgrade.
    An industrial technologies company with revenue anticipated to exceed
$2.4 billion in 1999, UNA is a global market leader in the design and
installation of sophisticated manufacturing systems for the automotive, truck
and diesel engine industries and in automated data collection, mobile
computing and wireless networking products.