Federal Signal Corp.'s $300M CP Prog Affd 'F1' by Fitch IBCA
4 August 1999
Federal Signal Corp.'s $300M CP Prog Affd 'F1' by Fitch IBCA
NEW YORK--Aug. 3, 1999--Federal Signal Corp.'s $300 million 'F1' rated commercial paper program is affirmed by Fitch IBCA. The commercial paper program is fully supported by committed bank credit lines of $335 million, 60% of which consists of 364-day renewable lines, and the remainder a five-year revolver, which matures on June 15, 2004.The rating reflects Federal Signal's solid market positions in various niche markets, which underpin generally stable margins and solid cash flow generation. The company has achieved earnings before interest, taxes, depreciation, and amortization (EBITDA) margins of approximately 12.3% and net free cash flow (EBITDA less capital expenditures, interest, taxes, and working capital) reached $56 million for the trailing 12 months ended June 30, 1999. The company's extensive dealer network, broad product offerings, and diversified customer base have supported these market positions, and should continue to do so. Strategies to achieve this include enhancing its competitive position through a combination of new product offerings, bringing existing products to new market segments, and selective small- to medium-sized acquisitions in related business lines.
Primary credit concerns arise from the company's weakening credit protection measurements, which arise from debt-financed acquisitions, and the maturity of Federal Signal's major end markets. As well, production and equipment shortage problems in the vehicle unit depressed revenues and operating margins in this segment throughout 1998. During 1998 Federal Signal acquired nine companies for approximately $64 million, and its active acquisition program in recent years has led to an increase in leverage. Since 1994, manufacturing debt increased from $60 million to $193 million at June 30, 1999. With this higher debt, combined with lower-than-expected returns from some acquisitions, credit protection measures for the manufacturing activities have declined. Total debt to EBITDA rose from 0.7x at year-end 1994 to 1.5x at June 30, 1999. Over the same period, EBITDA interest coverage fell from 10.9x to 6.2x.
Federal Signal uses leasing as a sales tool for its vehicle and sign businesses, and almost half of the company's consolidated debt is associated with the leasing portfolio. Asset quality is considered strong and leverage is moderate at 87% debt/assets. Because these assets can easily be securitized, Fitch IBCA considers these activities as neutral to the overall rating.
Looking ahead, Fitch IBCA expects the company to improve margins, as volume growth continues and acquisitions contribute more meaningfully to earnings. To the extent that rising cash flow reverses the erosion in credit protection measures, the current 'F1' rating should be sustainable.
Federal Signal, headquartered in Oak Brook, IL, is a specialty capital goods producer organized into five operating segments: environmental products, fire rescue, safety products, sign, and tool. Major products include safety and signaling equipment, parking control systems, rescue vehicles, street sweepers, signs, and cutting tools. Approximately 17% of the company's sales are to foreign markets, mainly Europe, with the remainder serving the industrial, commercial, and municipal markets in the U.S. Total revenues for the 12 months ended June 30, 1999 were $1.04 billion, with net income of $59 million.