Federal Signal Corporation — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016. Unaudited results. Financial results below are for continuing operations unless stated otherwise; the Bronto Fire Rescue business is presented as discontinued operations following its January 29, 2016 sale.
Key financial results
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Net sales | $172.8 million | $196.5 million | Down $23.7 million, or 12% |
| Gross profit / gross margin | $47.4 million / 27.4% | $54.9 million / 27.9% | Gross profit down $7.5 million |
| Operating income / margin | $16.1 million / 9.3% | $24.5 million / 12.5% | Down $8.4 million, or 34% |
| Income from continuing operations | $10.4 million | $14.4 million | Down $4.0 million |
| Net income | $13.6 million | $14.9 million | Down $1.3 million |
| Diluted EPS, continuing operations | $0.17 | $0.22 | Down $0.05 |
| Operating cash flow | $(5.4) million | $3.3 million | Cash used versus cash provided |
Q1 2016 net income included a $3.2 million after-tax gain from discontinued operations and disposal, compared with $0.5 million in Q1 2015. The 2016 amount included a $4.0 million net gain on the Bronto disposal, partly offset by the business’s pre-sale operating loss and a $1.5 million charge related to the Latvian dispute.
Segments, orders, and backlog
- Environmental Solutions: Sales fell 18% to $115.4 million; operating income declined 31% to $16.5 million and margin fell to 14.3% from 17.0%. Lower vacuum-truck and street-sweeper sales reflected weak oil-and-gas demand and fewer municipal fleet orders.
- Safety and Security Systems: Sales rose 2% to $57.4 million, but operating income fell to $4.9 million from $6.6 million and margin declined to 8.5% from 11.7%. Higher public-safety sales were offset by industrial-market softness, unfavorable mix, and $1.2 million of restructuring expense.
- Total orders declined 17% to $135.7 million. Backlog was $135.5 million, down 21% from December 31, 2015 and 39% from March 31, 2015.
Cash, debt, and liquidity
- Cash and cash equivalents were $77.3 million at quarter-end, versus $76.0 million at year-end 2015; $12.9 million was held by foreign subsidiaries.
- Continuing operating activities used $6.7 million, compared with $0.8 million generated in Q1 2015. The filing attributes the change largely to lower earnings and notes that first-quarter working-capital needs and annual incentive payments affect cash flow.
- Continuing investing activities used $8.7 million, including $6.2 million for Westech and $2.0 million of capital expenditures. Bronto sale proceeds generated $82.3 million of discontinued investing cash flow.
- The company repaid the remaining $43.4 million term loan and ended the quarter with $0.6 million of total borrowings and capital lease obligations. Its debt-to-adjusted-EBITDA ratio was reported as 0.0, versus 0.4 a year earlier.
- A new $325 million revolving credit facility matures January 27, 2021. At March 31, $19.2 million was committed to letters of credit and $305.8 million remained available. The company reported compliance with its financial covenants.
- Financing activities used $67.0 million, including the debt repayment, $16.3 million of share repurchases, and $4.3 million of dividends.
Material developments, outlook, and risks
- Federal Signal completed the sale of Bronto for initial cash proceeds of approximately $82.3 million; a further $6.0 million receivable for purchase-price adjustments was recorded at quarter-end.
- It acquired Westech Vac Systems for approximately $6.2 million, adding Canadian vacuum-truck products and markets. The purchase-price allocation remained preliminary.
- The company agreed to acquire Joe Johnson Equipment for initial consideration of approximately $79 million, plus deferred consideration of C$8 million and a contingent earn-out of up to C$10 million. Closing was expected by the end of Q2 2016.
- Management forecast 2016 capital expenditures of $10 million to $15 million. The filing provides no specific earnings or revenue guidance.
- Management cited ongoing softness in oil-and-gas and coal markets, lower Environmental Solutions demand, reduced orders, and seasonal factors that typically weigh on first-quarter sales. Foreign currency movements and customer financing availability are also identified risks.
- Contingencies include firefighter hearing-loss litigation, the Latvian commercial dispute involving the divested Bronto business, and environmental and product-liability obligations from discontinued operations. The company stated that it intends to defend the litigation; outcomes and potential losses may be uncertain.
Important facts for investors to verify
- Whether orders and backlog stabilize, particularly for vacuum trucks, sewer cleaners, and street sweepers, and whether oil-and-gas and municipal demand improves.
- Whether lower sales volumes continue to pressure operating margins and cash generation.
- Completion and final economics of the Joe Johnson Equipment acquisition, including deferred and contingent payments, and the finalized Westech purchase-price allocation.
- Receipt of the remaining Bronto sale proceeds and further developments, potential appeals, or liabilities in the Latvian dispute.
- Progress and potential exposure from firefighter litigation and other retained discontinued-operation liabilities.
- Liquidity and covenant capacity after acquisitions, dividends, and repurchases; the credit agreement restricts certain payments, subject to leverage and other conditions.