Federal Signal Corporation — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015; financial statements are unaudited. Federal Signal manufactures environmental equipment and vehicles, safety and security systems, and aerial fire-rescue platforms, reported in Environmental Solutions, Safety and Security Systems, and Fire Rescue segments.
Financial performance
| Metric | Q1 2015 | Q1 2014 |
|---|---|---|
| Net sales | $221.6 million | $200.2 million |
| Gross profit / gross margin | $59.2 million / 26.7% | $46.8 million / 23.4% |
| Operating income / operating margin | $24.8 million / 11.2% | $12.8 million / 6.4% |
| Income from continuing operations | $14.9 million | $7.6 million |
| Net income | $14.9 million | $7.4 million |
| Diluted EPS from continuing operations | $0.23 | $0.12 |
| Continuing operating cash flow | $3.4 million | $(7.0) million |
| Capital expenditures | $2.8 million | $4.2 million |
Sales rose 11%, while operating income increased 94%. Management attributed stronger profitability mainly to higher Environmental Solutions volumes, improved production leverage, favorable product mix, and efficiency gains; Safety and Security Systems and Fire Rescue also improved operating results. Interest expense declined $0.4 million to $0.6 million, while other expense was $0.9 million, largely reflecting realized foreign-currency losses. The effective tax rate was 36.1%, compared with 35.6%.
Segments, orders, and backlog
- Environmental Solutions: Sales increased 16% to $140.2 million; operating income rose to $23.9 million from $15.2 million. Orders fell $7.9 million to $106.3 million, with softer U.S. vacuum-truck, sewer-cleaner, and street-sweeper orders partly offset by higher non-U.S. orders.
- Safety and Security Systems: Sales increased to $56.3 million from $55.0 million; operating income rose to $6.6 million from $4.3 million. Orders declined $8.3 million to $57.7 million, primarily reflecting timing of large prior-year orders.
- Fire Rescue: Sales edged up to $25.1 million; the segment recorded $0.3 million of operating income versus a $0.8 million loss. Orders fell 57% to $22.0 million, partly because large prior-year orders did not recur and the company reduced low-margin order intake.
Total orders declined 20% to $186.0 million. Backlog was $284.6 million at March 31, down 13% from December 31, 2014 and 16% from March 31, 2014. The year-over-year decline was concentrated in Fire Rescue, whose backlog fell $43.4 million to $63.0 million.
Financial condition and capital allocation
Cash and cash equivalents were $23.0 million, down from $30.4 million at year-end; $14.3 million was held by foreign subsidiaries and generally considered permanently reinvested. Total debt, including current borrowings and capital leases, was $52.9 million. The company had $126.0 million available under its domestic revolver after letters of credit and $2.8 million drawn on non-U.S. lines. It reported compliance with debt covenants. Trailing-twelve-month total debt to adjusted EBITDA was 0.4x, versus 1.0x a year earlier.
Current assets were $291.6 million and current liabilities $136.4 million. Cash flow from operations improved year over year, although working-capital changes used $22.9 million. Financing outflows included $3.8 million in dividends, $3.6 million in share repurchases, and $2.6 million for employee tax withholding on vested performance units. The company declared a quarterly dividend of $0.06 per share. It expects 2015 capital expenditures of $15 million to $20 million and pension contributions of up to $7.8 million to U.S. plans and $1.2 million to non-U.S. plans.
Outlook, risks, and contingencies
The filing provides no specific revenue or earnings guidance. Management said the first quarter is typically seasonally weaker and cautioned that interim results are not necessarily indicative of full-year results. It cited weaker oil and gas markets as a drag on industrial vacuum-truck demand, and noted that Fire Rescue orders can fluctuate significantly. Foreign-currency movements affected sales, orders, and comprehensive income; foreign-currency translation reduced other comprehensive income by $11.9 million in Q1.
Material contingencies include firefighter hearing-loss product litigation, including renewed efforts to certify plaintiff classes; the company intends to oppose certification and defend the claims. A Latvian commercial dispute remains on appeal with no liability accrued; an unfavorable outcome could result in a charge ranging from zero to approximately $5 million. The company also retains discontinued-business environmental and product-liability obligations, including a $1.3 million Pearland remediation reserve. Management stated that known claims are not expected to have a material adverse effect, while acknowledging outcomes could differ. Other stated risks include cyclical end markets, foreign exchange, customer financing availability, debt covenants, product liability and warranty claims, pension costs, and acquisition and execution risks.
The company reported no material changes to its previously disclosed risk factors, no significant change in market-risk exposure, and effective disclosure controls as of March 31, 2015.
Important facts for investors to verify
- Whether the marked decline in total orders and backlog persists, especially in Fire Rescue and U.S. industrial markets.
- How much Q1 margin improvement reflects sustainable productivity, pricing, and mix versus shipment timing and higher volumes.
- Cash conversion and working-capital needs, alongside planned capital expenditures and pension contributions.
- Developments in firefighter litigation, the Latvian appeal, and any resulting reserve or cash exposure.
- Foreign-currency effects, foreign cash availability and repatriation tax implications, and continued compliance with debt covenants.