Federal Signal Corporation — Q3 2015 Form 10-Q
Reporting period: Three and nine months ended September 30, 2015. Unaudited results; amounts in U.S. dollars. Federal Signal manufactures environmental vehicles and equipment, safety and security systems, and aerial fire-rescue platforms.
Financial performance
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Net sales | $205.8m | $219.3m | $658.2m | $654.1m |
| Gross profit / margin | $59.6m / 29.0% | $58.4m / 26.6% | $184.5m / 28.0% | $164.1m / 25.1% |
| Operating income / margin | $25.9m / 12.6% | $24.9m / 11.4% | $79.9m / 12.1% | $61.6m / 9.4% |
| Continuing-operations income | $16.4m | $15.2m | $49.6m | $39.8m |
| Net income | $18.8m | $15.4m | $52.0m | $39.9m |
| Diluted EPS, continuing operations | $0.26 | $0.24 | $0.78 | $0.62 |
Cash flow and liquidity: Nine-month cash provided by continuing operating activities was $68.4m, versus $44.6m; capital expenditures were $8.7m, versus $13.3m. Cash increased to $66.2m from $30.4m at year-end 2014. Current assets were $312.8m and current liabilities $129.4m. Continuing financing activities used $27.0m, including $11.3m of dividends, $10.6m of share repurchases and $2.9m of scheduled term-loan repayments.
Debt: Total borrowings and capital lease obligations were $47.0m, down from $50.2m at December 31, 2014; the term loan was $46.3m and there were no revolving-credit borrowings. Revolver availability was $126.6m after $23.4m of letters of credit. The company reported compliance with all debt covenants. Trailing-twelve-month debt to adjusted EBITDA was 0.4x, versus 0.7x a year earlier.
Changes and operating trends
- Q3 sales fell 6%, mainly from lower Environmental Solutions shipments and weaker Safety and Security Systems industrial sales, including exposure to oil and gas markets. Foreign exchange reduced quarterly sales by $5.1m.
- Nine-month sales edged up 1% despite an $18.8m adverse currency impact. Environmental Solutions sales grew $15.8m, led by street sweepers; Fire Rescue and Safety and Security Systems reported lower sales in dollars, substantially reflecting currency effects and weaker industrial demand.
- Nine-month operating income rose 30%, driven largely by improved volume and operating leverage in Environmental Solutions, improved margins, and lower interest expense. The nine-month effective tax rate increased to 35.5% from 31.6%; the prior-year rate benefited from a $1.5m tax benefit related mainly to an IRS audit.
- Orders declined 9% in Q3 and 15% year to date. Backlog was $267.7m at September 30, down 18% from year-end 2014 and 24% from September 2014. Management cited weaker U.S. municipal fleet orders, softness in oil and gas markets, and fewer prior-year large orders; shorter lead times after capacity improvements also reduced advance orders.
- Q3 net income included a $4.0m receipt of remaining FSTech sale escrow, recorded as a $2.4m after-tax gain from discontinued operations and disposal. No escrow remained at quarter-end.
Outlook, risks and contingencies
- No earnings or revenue guidance was provided. Management expected 2015 capital expenditures of $12m to $15m and anticipated similar restructuring charges in Q4 as Finnish manufacturing headcount reductions were completed.
- Management said cash, operating cash flow, and available borrowing capacity should fund operating, capital and financial needs. The company declared a subsequent quarterly dividend of $0.07 per share, payable December 8, 2015, subject to the facility’s dividend restrictions.
- Key business risks include cyclical municipal, industrial, governmental and commercial markets; continued weakness in oil and gas and coal; foreign-currency movements; competitive pressures; and lower orders/backlog. The filing notes the usual seasonality of lower first-quarter sales.
- Firefighter hearing-loss litigation remained active, including attempts to certify classes and cases proceeding in several jurisdictions. The company said it would defend the claims; outcomes and potential losses cannot generally be estimated. A Pittsburgh trial was scheduled for January 2016.
- A Latvian commercial judgment against the Bronto subsidiary was under appeal, with a Supreme Court hearing scheduled for April 2016. No liability was accrued; if the appeal is unsuccessful or only partly successful, the company estimated a potential charge of zero to approximately $5m.
- Environmental remediation and discontinued-business product-liability obligations remained recorded. The company stated that the Pearland remediation reserve was not expected to have a material adverse effect, while noting the estimate could change.
Important facts for investors to verify
- Whether order and backlog declines, particularly in Environmental Solutions, stabilize or deepen, and whether oil and gas demand remains weak.
- How much reported margin improvement is repeatable versus attributable to the Safety and Security Systems order-cancellation recovery and favorable mix, pricing, productivity and currency effects.
- The outcome and potential financial exposure from hearing-loss litigation and the Latvian appeal, including any developments in class certification.
- Cash conversion, pension funding needs, and continued capacity for dividends and repurchases under debt covenants; foreign-held cash was $20.6m and repatriation could create additional U.S. tax expense.
- Execution of planned Finnish restructuring and the expected 2015 capital expenditure range of $12m to $15m.