Federal Signal Corporation — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; unaudited. Federal Signal manufactures environmental and infrastructure vehicles and equipment, and safety, security and signaling products. Its reportable segments are Environmental Solutions and Safety and Security Systems.
Financial performance
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Net sales | $273.8 million | $249.7 million |
| Gross profit / gross margin | $70.3 million / 25.7% | $61.9 million / 24.8% |
| Operating income / operating margin | $25.8 million / 9.4% | $19.6 million / 7.8% |
| Income before taxes | $23.4 million | $17.0 million |
| Net income | $17.5 million | $12.9 million |
| Diluted EPS | $0.29 | $0.21 |
| Operating cash flow | $(8.8) million | $10.3 million |
- Sales increased 10%, while operating income rose 32% and net income rose $4.6 million. Management attributed improved profitability principally to higher sales volumes and operating leverage, pricing actions, and favorable mix.
- Environmental Solutions sales increased 12% to $219.5 million; operating income rose to $25.7 million from $20.6 million. Safety and Security Systems sales increased 2% to $54.3 million; operating income rose to $8.7 million from $6.1 million.
- Interest expense fell $0.5 million to $2.0 million, largely on lower average debt. The effective tax rate increased to 25.2% from 24.1%.
- Operating cash flow declined year over year, reflecting seasonal working-capital needs, incentive compensation and tax payments, and rental-fleet investment. Investing cash flow was $(4.5) million, including $4.5 million in capital expenditures. Financing cash flow was $(1.4) million.
- Cash and equivalents were $22.7 million at March 31, down from $37.4 million at year-end. Long-term borrowings and finance lease obligations totaled $216.8 million, including current portions; $216.2 million was drawn on the revolving credit agreement. Net borrowing availability was $172.5 million. The company reported compliance with its financial covenants.
- Current assets were $340.2 million and current liabilities were $163.5 million. Inventories increased to $169.0 million from $157.3 million at year-end.
Changes, demand and operating trends
- Total orders decreased 9% to $299.0 million. Environmental Solutions orders declined 11% to $243.7 million, compared with a particularly strong prior-year quarter that included an estimated $25 million of accelerated sewer-cleaner and vacuum-truck orders. Safety and Security Systems orders were essentially flat at $55.3 million.
- Backlog increased 8% year over year to $363.5 million, largely reflecting Environmental Solutions demand for sewer cleaners and vacuum trucks in the second half of 2018.
- U.S. municipal and governmental orders fell 10%, and U.S. industrial orders fell 16%; non-U.S. orders increased 7%. Foreign currency translation adversely affected certain Safety and Security Systems results.
- First-quarter equipment sales are typically lower because of seasonal buying, delivery and weather patterns; rental income and parts sales generally increase in the second and third quarters.
Outlook, risks and notable items
- The filing provides no specific full-year revenue or earnings guidance. Management said existing cash, operating cash flow and credit availability should be sufficient for expected needs absent significant unanticipated cash demands.
- The company expects to invest up to $25 million in an expansion of its Vactor Manufacturing facility. 2019 capital expenditures, excluding that expansion, are expected to be $15 million to $20 million.
- Federal Signal adopted the new lease accounting standard on January 1, 2019, recognizing operating lease right-of-use assets and liabilities. Adoption did not materially affect results, cash flows, liquidity or covenant compliance. It also eliminated recognition of about $1.9 million of annual deferred sale-leaseback gain in future operating results.
- Firefighter hearing-loss litigation remains a material ongoing contingency. A settlement framework covering eligible firefighters in several jurisdictions generally provides for $700 per eligible claimant with a filed lawsuit and $300 per eligible claimant without one; eligibility and participation remained under review. The company recorded an estimated liability, but the filing does not state its amount. Management said any incremental loss above the accrual was not expected to be material, while noting uncertainty in the litigation.
- Other contingencies include product warranties, equipment repurchase guarantees and claims from discontinued operations. The company reported $19.1 million of outstanding letters of credit and bonds and said the likelihood of a call was remote. A specific Environmental Solutions warranty estimate could change, but management did not expect a material adverse effect.
- Foreign cash totaled $15.4 million and is generally intended to remain invested in foreign operations; repatriation could result in additional U.S. tax expense. Management reported no significant change in market-risk exposure.
Important facts for investors to verify
- Whether order trends improve, especially in U.S. municipal and industrial markets, and whether the $363.5 million backlog converts to sales as expected.
- The cause and persistence of negative first-quarter operating cash flow, including working-capital and rental-fleet investment needs.
- Funding and timing for the Vactor expansion, alongside the stated 2019 capital expenditure range.
- The final participation, cost and resolution of the firefighter hearing-loss settlement framework, and whether the recorded liability remains adequate.
- Revolving-credit availability, covenant compliance and debt levels as seasonal cash needs and investment spending continue.