Federal Signal Corporation — Q3 2014 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2014. Federal Signal manufactures environmental equipment and vehicles, safety and security systems, and fire-rescue aerial platforms. Figures are in U.S. dollars; financial statement amounts are in millions except per-share data.
Financial performance
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Net sales | $219.3 | $209.3 | $654.1 | $631.7 |
| Gross profit / margin | $58.4 / 26.6% | $50.5 / 24.1% | $164.1 / 25.1% | $149.1 / 23.6% |
| Operating income / margin | $24.9 / 11.4% | $18.8 / 9.0% | $61.6 / 9.4% | $49.1 / 7.8% |
| Income from continuing operations | $15.2 | $16.8 | $39.8 | $133.5 |
| Net income | $15.4 | $16.0 | $39.9 | $132.9 |
| Diluted EPS, continuing operations | $0.24 | $0.26 | $0.62 | $2.12 |
- Quarterly sales rose 5%; operating income increased 32%. Nine-month sales rose 4% and operating income increased 25%. Improved Environmental Solutions volumes, operating leverage and Safety and Security Systems performance drove the operating gains.
- Q3 pretax income increased to $23.7 million from $17.3 million, but continuing-operations income declined as tax expense rose to $8.5 million from $0.5 million. Nine-month 2013 results included a $102.4 million deferred-tax valuation-allowance release; this largely explains the sharp year-over-year drop in reported 2014 net income.
- Environmental Solutions was the main growth driver: Q3 sales were up 19% and operating income up 78%; nine-month sales increased 12% and operating income 47%. Safety and Security Systems also improved. Fire Rescue sales declined 34% in Q3 and 20% for the nine months, with operating losses in both 2014 periods.
- Orders increased 14% in Q3 and 19% year to date. Backlog was $352.8 million at September 30, up 15% from year-end 2013 and 23% from September 2013.
Cash, debt and liquidity
- Nine-month operating cash flow was $44.3 million, including $44.6 million from continuing operations, compared with $32.2 million and $37.3 million, respectively, in 2013. Capital expenditures were $13.3 million.
- Cash and equivalents were $29.1 million at September 30, 2014, versus $23.8 million at December 31, 2013; $16.7 million was held by foreign subsidiaries.
- Total borrowings and capital lease obligations were $68.6 million, down from $92.1 million at year-end. There were no revolver borrowings; $123.8 million remained available under the domestic revolving facility after letters of credit. The company reported compliance with debt covenants.
- Trailing-12-month adjusted EBITDA was $98.0 million and total debt to adjusted EBITDA was 0.7x, versus $76.1 million and 1.7x, respectively, a year earlier.
- The company paid $3.8 million in dividends and repurchased $6.7 million of shares during the first nine months. In November, the board authorized an additional $75 million repurchase program, supplementing the existing $15 million authorization.
Outlook, commentary and risks
- Management expected a full-year effective tax rate of approximately 32%–33% and 2014 capital expenditures of approximately $20 million. It said available cash, operating cash flow and borrowing capacity should meet operating and capital needs.
- Management expected deferred Fire Rescue shipments to ship largely in Q4 2014. The group faced supplier constraints for chassis and specialty cylinders, lower volumes, unfavorable mix and inefficiencies associated with facility investments. Backlog growth partly reflects deferred shipments.
- Management estimated that a 10% U.S. dollar appreciation would reduce full-year sales by less than 2% and operating income by approximately 1%. It also noted cyclical end markets, competition, supplier and labor disruptions, pension funding, regulatory costs, and potential product-liability and warranty claims.
- Contingencies include firefighter hearing-loss litigation, with plaintiffs indicating they may again seek class certification, and a Latvian commercial dispute. No liability was accrued for the Latvian judgment; if the appeal is unsuccessful or partly unsuccessful, the company estimated a possible charge of zero to approximately $5 million. Environmental remediation reserves for the former Pearland facility were $1.3 million; management did not expect a material adverse impact.
- The company may release all or part of its valuation allowance on certain Spanish deferred tax assets within the next twelve months if improved results support realization. A buyer also claimed the remaining $0.8 million general-indemnity escrow from the FSTech sale; the company was investigating the claim.
Important facts for investors to verify
- Whether deferred Fire Rescue shipments were completed and supplier constraints and manufacturing inefficiencies improved after quarter-end.
- Whether stronger orders and backlog converted to sales and cash flow, particularly in Environmental Solutions, and whether municipal demand persists.
- The basis for the 32%–33% tax-rate expectation and any changes to deferred-tax-asset valuation allowances, especially in Spain.
- Developments in the hearing-loss litigation, Latvian appeal and FSTech escrow claim, including any resulting accruals or cash exposure.
- Use of the expanded share-repurchase authorization and the effect of repurchases and dividends on liquidity, debt and covenant headroom.