MOODY'S ASSIGNS (P)Baa1 TO SHELF REGISTRATION AND Baa1 TO REVOLVING CREDIT FACILITY OF UNIVERSAL FOODS CORPORATION
Moody's Investors Service has assigned a (P)Baa1 rating to Universal Foods Corporation's (UFC) $300 million shelf registration of senior unsecured debt and a Baa1 rating to UFC's $70 million revolving credit facility. The ratings reflect the company's strong market positions in most of its core product categories; geographic and customer diversification; and high technological capabilities. However, the ratings also reflect the competitive nature and limited growth opportunities of the business segments in which UFC operates.
The rating outlook is stable, and UFC is strongly-positioned within the rating category. Over the long-term, a demonstrated success in expanding the market positions of its core business segments, broadening its customer base, and maintaining its high level of debtholder protection could put upward pressure on the rating.
UFC has leading market positions in a variety of its core businesses. With a number-one worldwide synthetic color market share, UFC's color business is the company's most profitable division. Introductions of new proprietary colors and integration of strategic acquisitions will be the likely drivers of growth in operating income. The color business accounts for about 22% of company sales. With a leading North American market share in bakers' yeast, the yeast division is a low-margin business, but still a stable cash flow generator. The segment's margins are improving from efficiency gains associated with its cream yeast product, which allows for bulk deliveries to bakeries. The yeast business accounts for about 18% of company sales. With the third-largest U.S. market share, the company's dehydrated vegetable segment is a relatively high-margin business. Highly-efficient operating facilities allow UFC to be more profitable than its dehydration industry peers. The dehydration business accounts for about 16% of company sales. With small industry market shares in most product categories except U.S. beverages, the company's flavor segment is a lower margin business. However, currently, the company is benefiting from efficiencies associated with the integration of UFC's bioproducts division, as well as a renewed focus upon capturing higher-margin strategic accounts. The flavor business is the company's largest segment with 39% of sales.
UFC's segment diversification, with revenues being generated by these four core segments, provides protection against large swings in operating performance. The company's ability to generate stable cash flow is further enhanced by a diversity both in customer base and by geography. Although UFC does serve some larger strategic food processors and other customers, there is little concentration of revenue among particular customers. However, a further broadening of the company's customer base to include more large, strategic customer accounts could have favorable margin impacts. Currently, about one-third of revenue is generated outside the U.S., and this percentage is likely to grow, largely through acquisitions.
Superior technological capabilities provide cost and product advantages. The company has consistently invested in state-of-the-art production facilities and has enjoyed favorable returns from these investments. For instance, UFC's color division is becoming less of a commodity business as high technological investments have allowed the company to increase its production of higher-margin proprietary synthetic and natural colors. In the yeast business, the cream yeast product is providing service advantages, as well as distribution efficiencies.
Despite UFC's strong cash flow generating capabilities and success in improving margins, the company operates in relatively mature and highly competitive segments. Fewer SKU introductions by food processors, further limits top-line growth opportunities. Strategic acquisitions will be an important driver of earnings growth. UFC's ability to expand geographically and into new product areas through acquisitions, while maintaining adequate financial flexibility, will be a key rating factor going forward.
Despite a small increase in long-term debt following a few small acquisitions in fiscal 1997 and 1998, the company has debtholder protection measures which remain solidly supportive of the Baa1 rating. The company's retained cash flow-to-debt ratio is strong, at about 30%, and interest coverage remains close to 6 times. Given the likelihood the company will make debt-financed strategic acquisitions to obtain new technologies or greater geographical coverage, debtholder protection measure will likely remain near their current levels.
The Baa1 rating on the company's $70 million revolving credit facility, which matures August 22, 2003, reflects it seniority and pari passu status with other senior unsecured obligations. The agreement includes financial covenants related to UFC's current ratio, coverage, and leverage measures.
Universal Foods, with headquarters in Milwaukee, Wisconsin, is a producer and marketer of flavors, colors, bioproducts, yeast, and dehydrated vegetables. Revenue for the fiscal year ended September 30, 1998, was about $857 million.
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