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E-ONE And ALF And Business-Speak

Issue 8 and Volume 13.

E-ONE and American LaFrance – the two apparatus manufacturers whose financial difficulties have been news this year – are undergoing substantial changes, both announced the same week in mid-July.

American LaFrance is closing down fire truck production at its new Charleston, S. C., area plant that opened just a year ago. Future apparatus will be built at the ALF plant in Hamburg, N.Y., and at its aerial ladder factory in Ephrata, Pa.

E-ONE management, employees and its entire dealer network welcomed the news that it would be sold by the end of August to American Industrial Partners (AIP), a New York City investment company. Federal Signal Corporation, E-ONE’s parent company, had put the fire truck maker on the block in January. Its future is now more certain and certainly more optimistic.

American Industrial Partners has agreed to a partnership arrangement with senior E-ONE management people who will have the opportunity to purchase a significant portion of the new company.

E-ONE CEO Peter Guile says they look forward to starting off debt free, with a strong balance sheet and a solid cash position. This should go a long way to reassuring customers and dealers that E-ONE is on an upward swing, he said. Guile added that sales this year are up considerably. That’s probably attributable to the new models introduced over the last 18 months as well as addition of several new dealers.

Guile told us that he has been working with an AIP transition team for several weeks and he feels they have demonstrated that they are the right partners to take over the business.

Last year’s aborted plan to have E-ONE build a new manufacturing plant at the Ocala, Fla., airport industrial park with $27 million in public financing has not been revived, despite local speculation. Guile said the main mission is to concentrate on building fire apparatus profitably.

American Industrial Partners, founded 19 years ago, does have a sound track record of turning companies around. It has produced strong returns on its investments, usually through buying under-performing companies and leading them to success over a six-to-eight-year period. AIP’s strategy calls for it to then sell the company or take it public with a stock offering.

Purchasing E-ONE for $20 million is considered a “steal” by most everyone who analyzes the deal. The local tax assessors put a value of $18 million on the property, plant and machinery alone. The purchase price represents only 10 percent of annual sales, not very much by any standard of measure.

Of course E-ONE lost nearly $25 million last year, so AIP has a big job ahead. But the company did sell more than 600 fire trucks, and it is among the highest quality apparatus makers, as well as being near the top in volume.

In the last couple of years E-ONE dropped from second to third in overall sales – behind Pierce and Rosenbauer – but it is still more than 200 trucks ahead of its next closest competitor.

In the early ’90s E-ONE was in its pinnacle production years turning out about 1,000 trucks annually. Then the decline began with a series of top management changes that resembled a game of musical chairs. The company has had six presidents over the last eight years.

Federal Signal’s management just didn’t understand the custom fire apparatus business. They went from expanding the business and production facilities by purchasing Saulsbury Fire Apparatus of New York, which had a modern plant turning out premium quality stainless steel body apparatus, to consolidating production in fewer locations with less people.

The Bean Counters

So they ended up closing the Saulsbury plant and terminating a highly trained workforce because, as one wag put it, “the bean counters decided it was too expensive to cut the grass” on the two acres of a beautifully landscaped location alongside Interstate 81.

But it became worse when quality and delivery problems plagued the company in the early 2000s. The downhill slide was only slowed in the past couple of years as quality came back to its former high level and delivery times dropped back to under nine months.

The future indeed looks bright. American Industrial Partners knows what it is doing as evidenced by inviting E-ONE management to buy into the business and as exemplified by its track record.

AIP’s Track Record

AIP raises investment money in dedicated “funds” and then goes looking for companies that need revitalization. The objective for each individual fund is to earn far greater returns for investors than might be had by placing their money in a stock and bond portfolio.

Founded in 1989, AIP was in the market for a major industrial company purchase for its Fund IV when along came Federal Signal peddling E-ONE. The deal has been in negotiations for five months.

The way AIP produces high returns starts by reevaluating everything a company it owns is doing, setting new goals, and then providing a team of management experts along with the money to achieve those goals. A team of AIP manufacturing turnaround specialists will work alongside E-ONE managers who will run the company day to day. The idea is to never let local management lose sight of the big picture.

In contrast, as Federal Signal’s top management changed over the years, the new people coming in didn’t have a clue as to what the big picture was supposed to look like. To them, custom fire apparatus sales, marketing and manufacturing was all a big puzzle; but somebody had taken the puzzle apart and put all the pieces back in the box.

A classic example of how AIP maximizes value for investors can be seen by looking at its seven-year ownership of Bucyrus International Corp. Bucyrus was purchased by AIP Fund II for $186.3 million in 1997 and then sold to the public by stock offerings in 2004 that generated $362 million, of which $130 million went to increase the Bucyrus capital base.

Bucyrus International, founded in 1880 and known since WWII primarily as Bucyrus-Erie Corp., is the country’s largest manufacturer of giant earth moving and open pit mining equipment.

Additional Investment

From 1904 through 1907 Bucyrus provided 77 huge steam shovels to dig the Panama Canal, a job finally completed in 1914. A contemporary photograph shows President Theodore Roosevelt overseeing the project while standing on a 77-ton Bucyrus shovel with a bucket that could lift five cubic yards in one scoop.

Following several acquisitions and mergers with other companies, Bucyrus was having its problems in 1997 when AIP scooped it up, so to speak.

AIP invested an additional $75.6 million to reduce the company’s outstanding debt, but the turnaround wasn’t easy. (You have to learn “business-speak” to really understand.)

Facilities Rationalization

According to a published “Case History” about AIP’s overhaul of Bucyrus, during the first five years following the acquisition, the investment company: “Consolidated the industry by purchasing a competitor, increased Bucyrus’ installed base and aftermarket revenue opportunity, then reduced costs through facilities rationalizations while it re-engineered and revitalized the existing product line and installed state-of-the-art ERP systems.”

Of course we all know that facilities rationalization means “eliminating operational redundancy that creates inefficiencies that negatively impact productivity, manufacturing costs and profitability.”

And an ERP system involves “Enterprise Resource Planning, a process by which a manufacturer manages and integrates the important parts of its business through a management information system that coordinates areas such as planning, purchasing, inventory, sales, marketing, finance, and human resources.”

And, in the case with E-ONE, hopefully it sells quality fire trucks at a profit at the same time. If the Bucyrus model is any indication, it will.

Entrepreneurs like Chris Ferrara in Louisiana – who founded Ferrara Fire Apparatus – and Harold Boer in South Dakota – who built a one-man operation into Central States, which is a partner in Rosenbauer America, now the country’s second largest fire apparatus maker – understand how to build fire trucks, one unique unit at a time, to specs the local chief feels are needed and deliver them on time and without defects.

Chris and Harold probably never heard of “facilities rationalization and Enterprise Resource Planning.” They just know how to make a profit and keep customers happy. For an operation with AIP’s experience, that shouldn’t be too difficult, just so long as they remember that every custom fire truck is a one-off project just like a NASCAR racer. It even has a number on the side, and its owners and drivers will be sticklers for quality and details. (I think we’ve said that before!)

If AIP “gets it” the way Ferrara and Boer, and the Sutphen and Smeal families do – along with a myriad of smaller custom manufacturers like Toyne, Alexis, SVI, Hackney and many others – then things will be definitely looking up at E-ONE.

At American LaFrance, it is another story. ALF has had “business-speak” people running the show since last October. But one stumbling block after another has led to a decision to stop building fire apparatus at the less-than-a-year old plant in South Carolina, even though their current order backlog is “in excess of 200,” according to CEO Bill Hinz.

Hinz also told us that they don’t expect the fire truck production moves to their Hamburg, N.Y., and Ephrata, Pa., facilities will be completed (and operational) until October or November. He maintains that the owner, Lynn Tilton, head of the Patriarch Partners investment firm of New York, is committed to turning the company around. At press time, Hinz predicted ALF would emerge from its bankruptcy status before August.

Ms. Tilton is on record with the bankruptcy court as pledging $40 million in new money to save the company after losses totaling more than $100 million in the two years leading up to the bankruptcy filing.

Now – in view of E-ONE selling for just $20 million – Ms. Tilton must be reflecting that for less than half what she pledged to revive American LaFrance, she could have bought a company that builds more than twice as many fire trucks a year, that owns real estate worth $18 million and that could have expanded operations overnight by moving new work into her 440,000-square-foot South Carolina plant.

It doesn’t take knowledge of “business speak” to understand the comparison, nor to appreciate that there may be a surplus of large-scale fire apparatus manufacturing capacity in the United States.

Closing down fire truck production at the new ALF plant might make way for other uses and reduce overall fire truck production capacity, but it won’t do much to increase the nationwide market share for American LaFrance – or speed up delivery times.

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