Federal Signal Corporation — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019. Unaudited results; comparisons are with the corresponding 2018 periods. Federal Signal manufactures environmental maintenance vehicles and equipment, and safety, security and communication products, through Environmental Solutions and Safety and Security Systems.
Financial performance
| Metric | Q2 2019 | Q2 2018 | First half 2019 | First half 2018 |
|---|---|---|---|---|
| Net sales | $324.3 million | $291.0 million | $598.1 million | $540.7 million |
| Gross profit / margin | $89.0 million / 27.4% | $79.2 million / 27.2% | $159.3 million / 26.6% | $141.1 million / 26.1% |
| Operating income / margin | $46.3 million / 14.3% | $38.1 million / 13.1% | $72.1 million / 12.1% | $57.7 million / 10.7% |
| Net income | $32.8 million | $26.9 million | $50.3 million | $39.8 million |
| Diluted EPS | $0.54 | $0.44 | $0.82 | $0.65 |
| Operating cash flow | Not separately reported for quarter | Not separately reported for quarter | $25.8 million | $37.8 million |
- Q2 sales rose 11% and operating income rose 22%; first-half sales increased 11% and operating income increased $14.4 million. Management attributed gains mainly to higher Environmental Solutions volumes and improved operating leverage, with pricing and favorable mix also supporting margins.
- Environmental Solutions drove growth: Q2 sales increased 15% to $267.2 million and operating income rose to $44.8 million. Safety and Security Systems Q2 sales slipped 1% to $57.1 million, though operating income increased to $9.5 million, reflecting pricing, mix and lower expenses.
- Q2 orders increased 11% to $308.0 million, led by Environmental Solutions; first-half orders were essentially flat at $607.0 million. Backlog was $347.7 million at June 30, up 8% year over year.
- First-half operating cash flow fell $12.0 million despite higher earnings, principally due to working-capital needs, incentive compensation and tax payments, and rental-fleet investment. Capital expenditures were $9.4 million; net cash decreased by $1.2 million to $38.6 million.
Balance sheet, debt and liquidity
- At June 30, cash and equivalents were $38.6 million; current assets were $367.6 million and current liabilities were $166.0 million. Long-term borrowings and finance lease obligations totaled $209.4 million, including current amounts; total liabilities were $515.6 million and stockholders’ equity was $580.1 million.
- Under the credit agreement in force at quarter-end, $208.8 million was drawn, $11.3 million of letters of credit were outstanding and net borrowing availability was $179.9 million. The company reported compliance with financial covenants.
- On July 30, 2019, after quarter-end, the company refinanced with a $500 million revolving facility maturing July 2024, with improved pricing and terms stated by management. The agreement permits up to $250 million of additional commitments or term loans subject to lender approval and includes financial covenants and restrictions on certain payments.
- Operating lease adoption on January 1, 2019 added lease assets and liabilities to the balance sheet. Management said adoption did not materially affect results or cash flows and did not affect liquidity or covenant compliance.
Outlook, developments and risks
- Management expects a full-year effective tax rate of 25%–26%. It forecast 2019 capital expenditures of $15–$20 million excluding the Vactor plant expansion, for which investment could reach $25 million. No broader revenue or earnings guidance is provided in the filing text.
- On July 1, 2019, the company acquired substantially all assets and operations of Mark Rite Lines Equipment Company for initial cash consideration of $49.8 million, subject to adjustments, with up to $15.5 million of contingent consideration. Management expects the business to expand product offerings and market access; purchase accounting was preliminary.
- The company expected to pay approximately C$17.6 million (about $13.4 million) in Q3 to settle JJE contingent consideration and substantially all of a related deferred payment. The JJE contingent consideration liability was $7.6 million at June 30; settlement timing and amounts should be distinguished from the separate MRL earn-out.
- Material litigation includes firefighter hearing-loss claims alleging siren-related injury. A settlement framework covers eligible claimants in several jurisdictions; the company had accrued an estimated liability and said any incremental loss was not expected to be material, while noting the estimate could change. Other claims and contingencies are described; management said their known outcomes were not expected to materially adversely affect results or financial condition.
- Costs rose with volume and higher material costs in Environmental Solutions. Safety and Security orders and backlog declined; Q2 public-safety orders were affected by delays following a major vehicle manufacturer’s model changeover. Foreign currency translation was also unfavorable in parts of that segment.
- Operations are seasonal: equipment sales are generally lower in Q1, while rental income and parts sales tend to be stronger in Q2 and Q3. The filing reports no significant change in market-risk exposure and no material change in risk factors, except for a new three-year collective bargaining agreement effective April 2019.
Most important facts to verify
- Whether Environmental Solutions’ sales and backlog growth persist, and whether first-half orders that were flat convert into revenue.
- Whether operating cash flow improves as working-capital demands and rental-fleet investment evolve.
- Actual funding, leverage and covenant headroom following the MRL acquisition and under the new credit agreement.
- Final MRL purchase-price adjustments, earn-out exposure and integration performance; separately, the timing and final cost of JJE payments.
- Developments in hearing-loss litigation, settlement participation and adequacy of recorded reserves.
- Progress and total spending on the Vactor expansion, alongside the stated capital-expenditure outlook and tax-rate range.