Fitch Ratings Affs Federal Signal's 'F2' Commercial Paper Rtg.

Business Editors

CHICAGO--(BUSINESS WIRE)--Aug. 15, 2002

Fitch Ratings has affirmed Federal Signal Corporation's commercial paper rating at 'F2'. At June 30, 2002, $206 million of commercial paper was outstanding, backed by bank facilities totaling $300 million.

Earlier today, Federal Signal announced it had reached separate agreements to acquire Wittke Inc. and Leach Company. The acquisitions serve as Federal Signal's entry into the refuse vehicle business in which it will have an estimated 20%-25% market share in North America. As part of Federal Signal's Environmental Products group, refuse vehicles will provide an opportunity to leverage Federal Signal's extensive dealer network by broadening its product selection and extend the distribution channels available to the Wittke and Leach product lines. The acquisitions come at a time when Federal Signal faces negative trends in sales and operating margins; however, manufacturing leverage will increase only slightly as nearly half of the acquisition cost is being funded by equity, with the remainder being funded by new and assumed debt.

The rating incorporates Federal Signal's broad product offerings and favorable market positions, diverse customer base and extensive dealer network. The rating also considers a continuing trend of lower margins since 2000, largely attributable to weak industrial markets, and the effect of prior acquisitions which, since 1997, have been funded largely by debt. Integration risk pertaining to Wittke and Leach is considered modest and integration costs are not expected to be substantial relative to Federal Signal's overall cash flow. The refuse vehicle business will remain a separate operation with any integration issues limited primarily between Wittke and Leach. Coordinating the two refuse acquisitions, together with realizing the sales increases at Wittke from its contract with Waste Management, represent operating risks from the acquisitions. While not major concerns, these issues will need to be addressed successfully by Federal Signal to assure that sufficient cash flow is generated by the acquired companies to help reduce Federal Signal's overall leverage.

Despite poor results in the first half of 2002, the outlook for the Fire Rescue group is favorable based on a high backlog and support for demand from municipalities provided by increased funding from FEMA for fire apparatus equipment. Federal Signal's other segments, however, are experiencing a more challenging environment, resulting in continued low capacity utilization and potentially limiting the company's flexibility with regard to making further debt-funded acquisitions, not currently anticipated, or to reduce debt. Manufacturing debt/EBITDA has been higher than historical levels, at 2.7 times (x) for the 12 months ended June 30, 2002, and Manufacturing debt/capital of 41.5% remains above management's long-term target range of 40% or below. Fitch's estimated pro forma Mfg. debt/EBITDA as of June 30, 2002, including the effect of the acquisitions, would be 2.9x.

Federal Signal uses a mix of commercial paper and private placement debt to fund its lease portfolio and manufacturing requirements. The proportion of commercial paper is slightly below half of total debt, with $300 million of bank facilities providing adequate liquidity, and any issuance of additional long-term debt to replace commercial paper used to fund the Wittke/Leach acquisitions would maintain this balance. While the lease portfolio is conservatively managed and is a neutral factor in the rating, FSS is reducing its exposure to commercial customers by outsourcing financing, a step that will reduce funding requirements for the portfolio only modestly as it has typically had a high proportion of lower-risk municipal leases.

Improvement in the company's credit profile could be delayed by depressed sales and margins until conditions pick up in Federal Signal's industrial end-markets. Over the long term, a gradual reduction in the dividend payout ratio toward the company's stated goal of 35% (vs. an actual rate of 74% in 2001) could lead to stronger credit protection measures, although a return to the levels that existed prior to 1998 appears unlikely.