On Monday, Federal Signal Corporation (NYSE:FSS), a provider of environmental and safety solutions, announced the acquisition of Standard Equipment Company, a specialty maintenance and infrastructure equipment distributor based in Elmhurst, Illinois. The initial purchase price is $38.8 million, with an additional contingent earnout payment of $4.8 million.
The acquisition is expected to add approximately $5 million to $6 million of annualized EBITDA before any synergies, based on an EBITDA multiple of 7 to 8 times. With $48.6 million in cash at the end of the second quarter, the purchase was likely made with cash on hand. Analysts believe that the deal will be nominally accretive to Federal Signal's earnings per share (EPS) in the fourth quarter of 2024 and will contribute about $0.05 to EPS in 2025.
The transaction is also projected to increase Federal Signal's leverage ratio by 0.1 turns, with the company still expected to end the year with a leverage ratio well below 0.5 times, assuming no further mergers and acquisitions (M&A) activity. The acquisition signifies Federal Signal's re-entry into the M&A market after an approximately 18-month break.
Unlike previous acquisitions, this deal did not result from the underperformance of an existing dealer but was an opportunistic move to incorporate a successful dealer. This acquisition will enhance Federal Signal's aftermarket presence, add a vital geographic region to its owned distribution network, and provide opportunities to cross-sell Federal Signal equipment.
With the expansion of its number of integration teams, Federal Signal is poised for additional M&A activity in the coming quarters, focusing on new products in existing categories and market adjacencies.
In other recent news, Federal Signal Corporation has made significant strides in its operational and financial performance. The company recently completed the acquisition of Standard Equipment Company, a move that is expected to strengthen its aftermarket services and expand its geographic reach. The acquisition, which involved an upfront payment of $38.8 million with a potential earn-out of up to $4.8 million, is part of Federal Signal's strategic initiative to grow its aftermarket operations.
The corporation also announced a robust performance for the second quarter of 2024, with consolidated net sales reaching a record $490 million, marking an 11% increase from the previous year. Moreover, Federal Signal's operating income and adjusted EBITDA saw significant growth, rising by 37% to $81.1 million and 29% to $97.7 million respectively. Both the Environmental Solutions Group and the Safety and Security Systems Group reported substantial sales growth.
These recent developments indicate a promising future for Federal Signal Corporation. Despite expectations of lower margins in the second half of the year due to fewer production days and additional rental fleet investments, the company remains optimistic about its long-term prospects, particularly in the aftermarket business and through strategic acquisitions.
InvestingPro Insights
Federal Signal Corporation's recent acquisition of Standard Equipment Company aligns well with its strong financial position and growth trajectory. According to InvestingPro data, Federal Signal has a market capitalization of $5.6 billion and has demonstrated impressive revenue growth of 15.6% over the last twelve months as of Q2 2024. This growth is complemented by a healthy operating income margin of 14.42%, indicating efficient operations.
InvestingPro Tips highlight Federal Signal's financial strength and shareholder-friendly policies. The company has maintained dividend payments for 11 consecutive years, with a current dividend yield of 0.52% and a notable dividend growth of 20% over the last twelve months. This consistent dividend policy, coupled with the company's profitability over the last twelve months, suggests a stable financial foundation for pursuing strategic acquisitions like Standard Equipment Company.
The acquisition's potential to be accretive to earnings aligns with Federal Signal's current P/E ratio of 27.63, which investors may find reasonable given the company's growth prospects. Additionally, the InvestingPro Tip noting that six analysts have revised their earnings upwards for the upcoming period indicates positive market sentiment, which could be further bolstered by this strategic move.
For investors seeking more comprehensive analysis, InvestingPro offers 7 additional tips for Federal Signal, providing deeper insights into the company's financial health and market position.
This article was generated with the support of AI and reviewed by an editor. For more information see our T&C.