Federal Signal Corporation — Q1 2020 Form 10-Q
Business context and reporting period: Unaudited results for the three months ended March 31, 2020, compared with Q1 2019. Federal Signal manufactures environmental and infrastructure equipment and safety, security and communication products, and reports through Environmental Solutions and Safety and Security Systems.
Financial results and liquidity
- Sales: $286.1 million, up 4% from $273.8 million. Environmental Solutions sales rose 6% to $233.0 million; Safety and Security Systems sales declined 2% to $53.1 million.
- Profitability: Gross profit was $74.8 million, up 6%; gross margin improved to 26.1% from 25.7%. Operating income increased 25% to $32.3 million, and operating margin rose to 11.3% from 9.4%. Net income was $23.4 million versus $17.5 million; diluted EPS was $0.38 versus $0.29.
- Drivers: Environmental Solutions operating income increased $3.7 million, supported by higher sales, improved operating leverage, pricing and mix. Safety and Security operating income fell $1.3 million. Corporate expenses declined $4.1 million.
- Cash flow: Operating activities provided $5.2 million, compared with $8.8 million used in Q1 2019. Investing activities used $8.4 million, including $9.5 million of capital expenditures. Financing activities provided $41.4 million, including net revolving-credit borrowings of $63.6 million. Cash increased to $69.4 million from $31.6 million at year-end.
- Debt and liquidity: Long-term borrowings and finance lease obligations totaled $278.9 million, up from $220.5 million at December 31, 2019. The company had $210.6 million of unused borrowing availability under its $500 million revolving facility, after $11.2 million of undrawn letters of credit, and was in compliance with its financial covenants.
- Other metrics: Orders increased 2% to $303.9 million; backlog reached a record $400.8 million, up 10% year over year. The effective tax rate was 23.5%, compared with 25.2%.
Material changes versus Q1 2019
- Environmental Solutions growth drove higher consolidated sales and profit; Safety and Security sales and operating income declined.
- Operating cash flow improved from an outflow to an inflow, while capital expenditures rose to $9.5 million from $4.5 million, partly for Vactor and Rugby plant expansions.
- Revolving-credit borrowings increased, with management citing the decision to bolster short-term cash amid COVID-19 uncertainty.
- Q1 included $13.5 million of stock repurchases versus $1.0 million a year earlier. Repurchases were subsequently suspended because of COVID-19 uncertainty.
Outlook, commentary and risks
- Management said COVID-19 had limited Q1 impact but expected a more significant effect in Q2. Temporary closures, reduced labor availability, supplier shutdowns and customers’ inability to accept deliveries were affecting operations and productivity. The timing of backlog conversion could be delayed, and the pandemic’s financial impact could be material; management said it could not reliably forecast that impact.
- Management cited the essential-infrastructure and public-safety role of its businesses, a record backlog and available liquidity as strengths, while also implementing cost controls and managing capital prudently.
- Expected 2020 capital expenditures were $25 million to $30 million, reflecting delays to some non-essential spending; actual spending could vary with the pandemic and liquidity needs. Management expected a full-year effective tax rate of 25% to 26%. No specific earnings or sales guidance was provided.
- The board declared a quarterly dividend of $0.08 per share in April. Executive officers and directors also agreed to temporary compensation reductions for ten weeks beginning around April 16, 2020.
- Contingencies include hearing-loss litigation involving firefighters. A global settlement framework covered potentially eligible claimants; the company had accrued an estimated liability, and said any incremental loss was not expected to be material. The filing also describes other product-liability and legal claims, for which outcomes or loss ranges may not be estimable.
Important facts for investors to verify
- Whether COVID-19-related staffing, supplier, customer-delivery and facility constraints materially delay production, shipments or conversion of the $400.8 million backlog.
- Subsequent orders and demand trends, particularly the decline in Environmental Solutions orders and the strength in Safety and Security orders.
- Cash generation, revolving-credit usage, borrowing availability and continued covenant compliance as the pandemic evolves.
- Progress and final cost of the firefighter hearing-loss settlement, including the number of eligible claimants and adequacy of the accrual.
- Whether planned capital expenditures, the stated tax-rate range and the dividend remain appropriate as operating conditions change.