Federal Signal Corporation — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; unaudited. Federal Signal manufactures environmental vehicles and equipment and safety, security, and communications products. Its reportable segments are Environmental Solutions and Safety and Security Systems. Results may be seasonally weaker in the first quarter.
Financial performance and liquidity
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Net sales | $177.8 million | $172.8 million | +3% |
| Gross profit / gross margin | $43.6 million / 24.5% | $47.4 million / 27.4% | Margin down 2.9 percentage points |
| Operating income / operating margin | $11.3 million / 6.4% | $16.1 million / 9.3% | Income down 30% |
| Income from continuing operations | $7.2 million | $10.4 million | Down $3.2 million |
| Net income | $7.3 million | $13.6 million | Down $6.3 million |
| Diluted EPS from continuing operations | $0.12 | $0.17 | Down $0.05 |
| Cash from operating activities | $13.7 million | $(5.4) million | Improved $19.1 million |
Cash and equivalents were $56.8 million at quarter-end, versus $50.7 million at December 31, 2016. Total debt, including capital leases, was $64.5 million; cash less total debt was approximately $(7.7) million. The $325 million revolving credit facility had $243.0 million of net availability, and the Company reported compliance with its financial covenants. Current assets were $273.4 million and current liabilities $90.9 million.
Capital expenditures were $1.1 million in the quarter. Management expects 2017 capital expenditures of $10 million to $15 million. The declared quarterly dividend was $0.07 per share. No shares were repurchased in Q1.
Material changes and segment results
- Environmental Solutions: Sales rose 11% to $127.8 million, substantially reflecting $23.3 million of incremental sales from the June 2016 JJE acquisition. Segment operating income fell $6.2 million to $10.3 million; margin declined to 8.1% from 14.3%. Management cited unfavorable sales mix, lower operating leverage, acquisition-related costs, purchase-accounting expense, and $2.7 million of additional depreciation and amortization, largely on acquired rental equipment.
- Safety and Security Systems: Sales declined 13% to $50.0 million, mainly due to lower public-safety and outdoor-warning-system sales. Operating income increased $1.5 million to $6.4 million, with margin improving to 12.8%, helped by lower labor and other costs and reduced restructuring charges.
- Orders and backlog: Orders increased 58% to $214.6 million, led by Environmental Solutions, including stronger Canadian, sewer-cleaner, and street-sweeper orders. Backlog rose 28% year over year to $174.0 million. Safety and Security Systems backlog declined to $18.6 million from $34.1 million.
- Cash flow and earnings comparison: Operating cash flow improved from a prior-year use of cash, partly due to better receivables collections, extended payables, and lower incentive-compensation payments; management described some working-capital effects as timing-related. Q1 2016 net income included a $3.2 million after-tax gain from discontinued operations and disposal, primarily the Fire Rescue Group sale. Q1 2017 recorded only $0.1 million of such gain.
Outlook, risks, and unusual items
- Management said existing cash, operating cash flow, and available credit were expected to fund operations, investment, dividends, debt needs, and potential strategic acquisitions absent significant unanticipated cash demands. The filing provides no specific sales or earnings guidance.
- Management noted that Q1 is generally a lower-sales period because of seasonality. Results for the quarter are not necessarily indicative of full-year results.
- Hearing-loss litigation involving alleged siren-related injuries remains ongoing. In February 2017, an Illinois court dismissed cases involving 1,770 out-of-state firefighters; claims may be refiled elsewhere. On April 18, 2017, after quarter-end, a Pennsylvania court granted a motion to bifurcate a Pittsburgh trial; the Company sought clarification and planned to appeal any bifurcation order. Management said it intended to defend the claims and could not estimate losses for many matters.
- Outstanding letters of credit and bid/performance bonds totaled $21.1 million; the Company considered calls remote. JJE equipment repurchase arrangements had maximum potential payments of $4.1 million, partly mitigated by the value of recovered equipment. A $5.4 million JJE contingent-consideration liability was recorded, with a maximum payout of approximately $7.5 million.
- Discontinued-operation liabilities include environmental remediation reserves of $0.6 million and estimated product-liability obligations of $1.8 million. Management did not expect the remediation costs to be material. The Company settled its Latvian commercial dispute liability during Q1 2017.
- The Company is preparing for revenue standard adoption on January 1, 2018 and expects to use the modified-retrospective method; its impact was still under evaluation. No material changes to risk factors or market-risk exposure were reported.
Important facts for investors to verify
- Whether Environmental Solutions can improve margins as acquisition-related costs, acquired-equipment depreciation, and unfavorable product mix affect results.
- How much of the sharp order and backlog growth converts to sales, particularly given JJE’s contribution and the timing-sensitive nature of orders.
- Whether Q1 working-capital benefits persist and whether operating cash flow covers planned capital spending, dividends, and pension contributions.
- Developments in the hearing-loss litigation, including class/trial rulings, appeals, insurance reimbursements, and any potential exposure not presently estimable.
- Credit-facility covenant headroom, the JJE contingent-consideration and repurchase obligations, and any material effects from adopting new accounting standards.