Federal Signal Corporation — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021; comparisons are with Q1 2020 unless noted. Federal Signal manufactures environmental and infrastructure vehicles and equipment, and safety, security and communications products, with two reportable segments: Environmental Solutions and Safety and Security Systems.
Financial performance
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Net sales | $278.8 million | $286.1 million | Down $7.3 million (3%) |
| Gross profit / margin | $68.8 million / 24.7% | $74.8 million / 26.1% | Down $6.0 million; margin down 1.4 points |
| Operating income / margin | $27.8 million / 10.0% | $32.3 million / 11.3% | Down $4.5 million; margin down 1.3 points |
| Net income | $22.2 million | $23.4 million | Down $1.2 million |
| Diluted EPS | $0.36 | $0.38 | Down $0.02 |
| Operating cash flow | $26.0 million | $5.2 million | Up $20.8 million |
| Capital expenditures | $4.3 million | $9.5 million | Down $5.2 million |
Lower operating income reflected reduced gross profit, partly offset by lower selling, engineering, general and administrative expenses. The largest segment operating-income decline was in Environmental Solutions; corporate expenses rose $2.0 million, primarily due to higher post-employment expenses. Interest expense fell $0.4 million, while other income improved by $0.7 million. The effective tax rate was 18.4%, versus 23.5%, including $1.1 million more excess tax benefits from stock compensation than in the prior-year quarter.
Segments, orders and backlog
- Environmental Solutions: Sales were $228.1 million, down 2%; operating income was $27.1 million, down $2.3 million, and operating margin was 11.9% versus 12.6%. Lower safe-digging truck sales were partly offset by higher sewer-cleaner and aftermarket sales. Orders rose 37% to $324.2 million. Backlog was $379.3 million, versus $358.4 million a year earlier.
- Safety and Security Systems: Sales were $50.7 million, down 5%; operating income was $7.2 million, down $0.2 million, while operating margin increased to 14.2% from 13.9%. Orders fell 10% to $59.9 million. Backlog was $30.2 million, versus $42.4 million a year earlier.
- Consolidated demand: Orders increased 26% to $384.1 million. Backlog was $409.5 million, up $8.7 million year over year and $106 million (35%) from December 31, 2020.
Cash, debt and liquidity
Cash and cash equivalents were $54.8 million at March 31, 2021, down from $81.7 million at year-end. Operating cash flow improved mainly because of working-capital timing, lower rental-fleet investment and lower tax payments. Investing activities used $56.4 million, including the OSW acquisition; financing activities provided $4.0 million.
Long-term borrowings and finance lease obligations totaled $222.6 million, including the current portion, compared with $210.0 million at year-end. The company had $220.1 million drawn under its $500 million revolving credit agreement, $10.3 million of undrawn letters of credit and $269.6 million of net borrowing availability. It reported compliance with its financial covenants. The company stated that cash, operating cash flow and available borrowing capacity should fund expected needs absent significant unanticipated demands.
Acquisition, outlook and risks
- Federal Signal acquired OSW Equipment & Repair on February 17 for initial cash consideration of approximately $53.5 million, funded with cash and revolver borrowings. OSW contributed $7.1 million of post-acquisition sales and $0.4 million of operating income. Purchase-price allocations remain preliminary; final closing adjustments were expected before the end of Q3 2021.
- Management expected a full-year effective tax rate of approximately 24% and 2021 capital expenditures of $20 million to $25 million. No revenue or earnings forecast was provided in the supplied filing text.
- Management cited seasonal first-quarter weakness in equipment sales and weather-related production disruptions that reduced Environmental Solutions overhead absorption. It continued to describe the COVID-19 pandemic’s effects as uncertain and not reliably forecastable, with potentially material effects on results, financial condition or cash flow.
- Hearing-loss litigation involving alleged siren-related injuries remains a contingency. The company had accrued an estimated potential settlement liability and said any incremental loss was not expected to be material, while noting that adverse unexpected developments could affect results, financial condition or cash flow. Other claims and guarantees are also discussed; the company considered calls on outstanding letters of credit and bonds remote.
- Disclosure controls were assessed as effective. Management had not yet fully assessed OSW’s internal control over financial reporting.
Key facts for investors to verify
- Whether rising orders and backlog convert into shipments and sales, particularly given the declines in Safety and Security Systems orders and backlog.
- Whether Environmental Solutions margins recover from lower operating leverage, unfavorable overhead absorption and weather-related production disruption.
- Final OSW purchase-price allocation and closing adjustments, and the acquisition’s subsequent contribution to revenue, earnings and debt.
- Cash generation, working-capital trends, borrowing levels and continued compliance with credit-agreement covenants.
- Developments in the hearing-loss settlement process, COVID-19 impacts, and the expected full-year tax rate and capital spending.