Federal Signal Corporation — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020. Federal Signal manufactures environmental and infrastructure equipment and safety, security and communications products. Results were materially affected by COVID-19 disruptions.
Financial results
| Metric | Q2 2020 | Q2 2019 | First half 2020 | First half 2019 |
|---|---|---|---|---|
| Net sales | $270.1 million | $324.3 million | $556.2 million | $598.1 million |
| Gross profit / margin | $70.3 million / 26.0% | $89.0 million / 27.4% | $145.1 million / 26.1% | $159.3 million / 26.6% |
| Operating income / margin | $31.3 million / 11.6% | $46.3 million / 14.3% | $63.6 million / 11.4% | $72.1 million / 12.1% |
| Net income | $21.4 million | $32.8 million | $44.8 million | $50.3 million |
| Diluted EPS | $0.35 | $0.54 | $0.73 | $0.82 |
| Operating cash flow | Not separately reported | Not separately reported | $65.0 million | $25.8 million |
- Q2 revenue fell 17% year over year; operating income declined 32% and net income declined $11.4 million. First-half revenue fell 7%, operating income 12%, and net income $5.5 million.
- Environmental Solutions drove most of the downturn: Q2 sales fell 20% to $214.2 million and operating income fell to $28.6 million from $44.8 million. Safety and Security Systems Q2 sales eased 2% to $55.9 million, while operating income rose to $10.4 million from $9.5 million.
- Q2 gross margin contracted 1.4 percentage points, mainly due to lower volumes, unfavorable mix and weaker operating leverage in Environmental Solutions. SEG&A fell in dollars, but rose to 13.8% of sales from 12.9% as revenue declined.
Liquidity, debt and capital allocation
- Cash and equivalents were $73.6 million at June 30, 2020, versus $31.6 million at year-end 2019. Long-term borrowings and finance lease obligations totaled $244.6 million, up from $220.5 million. Revolver availability was $244.9 million; the company was compliant with its financial covenants.
- First-half operating cash flow of $65.0 million benefited from working-capital timing, liquidity-preservation actions, lower rental fleet investment and deferred tax and payroll payments. Cash used in investing was $21.2 million, including $16.3 million in capital expenditures and $6.2 million for the PWE acquisition. Financing used $1.5 million; the company borrowed a net $27.7 million under its revolving facility.
- Dividends paid were $9.7 million in the first half. The company repurchased $13.5 million of shares in the first half, but suspended repurchases during Q2 amid COVID-related uncertainty.
Changes, outlook and risks
- Orders fell 35% in Q2 to $201.3 million; first-half orders fell 17% to $505.2 million. Backlog was $332.7 million at June 30, down 4% from a year earlier. Environmental Solutions backlog declined to $302.7 million; Safety and Security Systems backlog increased to $30.0 million.
- Management reported sequential improvement in average weekly order intake in May and June as restrictions eased, but said the pandemic’s duration and financial impact could not be reliably forecast. The company cited reduced customer access and equipment deliveries, lower labor availability, temporary supplier shutdowns and production inefficiencies.
- Management expects a full-year effective tax rate of approximately 25% and 2020 capital expenditures of $30–$35 million; actual spending may vary with pandemic conditions and liquidity. No earnings or revenue guidance was provided in the supplied filing text.
- COVID-19 cost actions included temporary leadership and board pay reductions, rollback of most domestic merit increases, furloughs of approximately 400 employees, permanent workforce reductions affecting approximately 200 employees, and reduced discretionary spending. A $1.3 million restructuring charge was recorded in Q2.
- Other notable items: a $2.5 million estimated charge for withdrawal from a multi-employer pension plan; a $3.5 million interest-rate swap liability; and an estimated liability for the firefighter hearing-loss settlement framework. Management said any incremental loss above the amount accrued for that settlement was not expected to be material, while noting that legal outcomes can be uncertain.
- Other risks include pandemic-related demand, supply-chain, staffing, production, customer-budget and liquidity pressures; potential covenant impacts in a severe downturn; and repurchase obligations that could increase if customers default. The company deferred approximately $3.3 million of federal income taxes and $2.3 million of payroll taxes to later periods under available relief provisions.
Investor verification priorities
- Track orders, backlog conversion and customer demand, especially in Environmental Solutions, and whether the May–June order improvement continued.
- Assess the durability of margins and cash flow, including the effects of production utilization, inventory, working-capital timing and deferred payments.
- Monitor borrowings, revolver availability and covenant headroom as pandemic-related conditions evolve.
- Review the final purchase-price allocation for the PWE acquisition, the accrued firefighter settlement estimate, and the $2.5 million pension withdrawal liability.
- Compare actual capital expenditures and tax rate with management’s stated ranges, and monitor workforce and cost-reduction impacts on operations.