Federal Signal Corporation — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014. Federal Signal manufactures environmental vehicles and equipment, safety and security systems, and fire-rescue aerial platforms. Results are seasonally lower in the first quarter; management also cited severe North American weather that disrupted operations and delayed or reduced some customer demand.
Financial performance
- Revenue: Net sales were $200.2 million, up $0.4 million from $199.8 million. Gross profit was $46.8 million in both periods. Operating income increased to $12.8 million from $12.1 million; operating margin rose to 6.4% from 6.1%.
- Earnings: Income from continuing operations was $7.6 million, or $0.12 per diluted share, versus a $1.1 million loss, or $0.02 loss per share. Net income was $7.4 million versus a $0.6 million net loss. The comparison benefited from $8.7 million of prior-year debt-settlement charges and $3.5 million lower interest expense; higher tax expense partly offset the improvement.
- Cash flow: Continuing operations used $7.0 million of cash, compared with $13.2 million used a year earlier. Working-capital changes used $22.4 million. Capital expenditures were $4.2 million. Cash declined $7.8 million during the quarter to $16.0 million.
- Liquidity and debt: Total debt was $88.1 million, including $6.1 million of short-term borrowings; debt was $92.1 million at year-end 2013. The company had $113.6 million available under its $150 million revolving facility after letters of credit, plus $7.8 million of availability on non-U.S. credit lines. It reported compliance with debt covenants. Trailing-twelve-month debt/adjusted EBITDA was 1.0x, versus 2.4x.
- Balance sheet: Total assets were $651.6 million and shareholders’ equity was $360.6 million at March 31. Current assets were $271.1 million and current liabilities $141.9 million. Inventories increased to $121.4 million from $109.8 million at year-end.
Material changes and segment trends
- Environmental Solutions: Sales rose $9.0 million to $120.7 million; operating income increased to $15.2 million from $12.7 million. Management attributed growth and margin improvement to higher vacuum-truck shipments, throughput and favorable mix.
- Safety and Security Systems: Sales fell $3.5 million to $55.0 million and operating income declined to $4.3 million from $5.5 million. Prior-year outdoor-warning-system orders were not repeated; the quarter’s margin was also affected by lower volume and mix.
- Fire Rescue: Sales declined $5.1 million to $24.5 million, and the segment recorded a $0.8 million operating loss versus $0.7 million income. Some significant shipments were deferred to Q2. Orders nevertheless increased 52% to $51.5 million.
- Orders and backlog: Orders increased 21% to $231.7 million. Backlog was $338.0 million, up from $307.5 million a year earlier and $305.8 million at December 31, 2013.
Outlook, risks and unusual items
- Management expected 2014 capital expenditures of $15 million to $20 million and said operating cash flow and available borrowing capacity should be sufficient for operating and capital needs. No full-year revenue or earnings guidance was provided.
- Management cited weather disruption, seasonal demand patterns, and delayed Fire Rescue shipments. It noted continued cost-reduction reviews and estimated that about $0.4 million of additional 2014 restructuring charges may be recognized.
- The effective tax rate was 35.6%, versus negative 22.2% in Q1 2013. The increase reflected recognition of tax expense on domestic earnings after release of most U.S. deferred-tax valuation allowances in 2013; some state and foreign valuation allowances remain.
- Contingencies include firefighter hearing-loss lawsuits involving the company’s sirens, environmental remediation at a former facility, and product-liability obligations from discontinued businesses. The filing says outcomes of some claims cannot be reasonably estimated; the company believes known matters are not expected to have a material adverse effect, while acknowledging unfavorable developments could affect results, financial position or liquidity.
- A $7.0 million escrow release related to the 2012 FSTech sale provided investing cash. The buyer asserted a claim against the remaining $0.8 million general-indemnification escrow, which the company was investigating.
- After quarter-end, the board reinstated a quarterly dividend of $0.03 per share and authorized up to $15 million in share repurchases. A credit-facility amendment was also executed, primarily to facilitate repurchases; financial covenant requirements were unchanged.
Important facts for investors to verify
- Whether the higher order intake and backlog convert to shipments and revenue, particularly the Fire Rescue shipments deferred to Q2.
- Whether working-capital needs, especially inventory and receivables, continue to consume operating cash.
- The sustainability of earnings and the assumptions supporting realization of deferred tax assets.
- Developments in siren litigation, environmental remediation, and the disputed escrow claim.
- Compliance with credit covenants and the funding and execution of the announced dividend and repurchase program.