Federal Signal Corporation — Q2 2015 Form 10-Q
Business and period: The company manufactures environmental vehicles and equipment, safety and security systems, and aerial fire-rescue platforms. This unaudited quarterly report covers the three and six months ended June 30, 2015; comparisons are with the corresponding 2014 periods.
Financial performance
| Metric | Q2 2015 | Q2 2014 | First half 2015 | First half 2014 |
|---|---|---|---|---|
| Net sales | $230.8 million | $234.6 million | $452.4 million | $434.8 million |
| Gross profit | $65.7 million | $58.9 million | $124.9 million | $105.7 million |
| Operating income | $29.2 million | $23.9 million | $54.0 million | $36.7 million |
| Operating margin | 12.7% | 10.2% | 11.9% | 8.4% |
| Net income | $18.3 million | $17.1 million | $33.2 million | $24.5 million |
| Diluted EPS | $0.29 | $0.27 | $0.52 | $0.39 |
- Q2 sales declined 2%, while first-half sales increased 4%. Foreign-currency translation reduced sales by $7.8 million in Q2 and $13.8 million in the first half.
- Gross margin improved to 28.5% in Q2 from 25.1%, and to 27.6% for the first half from 24.3%. Management attributed gains chiefly to Environmental Solutions volume, mix, productivity, and capacity utilization improvements.
- Income tax expense was $10.2 million in Q2 and $18.6 million in the first half. Effective tax rates rose to 35.8% and 35.9%, respectively, partly because 2014 benefited from a $1.5 million tax benefit associated primarily with completion of an IRS audit.
- Continuing operating cash flow was $27.5 million for the first half, versus $23.7 million a year earlier. Capital expenditures were $5.6 million, compared with $9.4 million. Cash increased to $35.9 million from $30.4 million at year-end.
- Total debt, including current maturities and capital leases, was $48.6 million, down from $50.2 million at year-end. The company had no revolver borrowings and $126 million of net availability under its $150 million revolver; it reported compliance with debt covenants. Trailing-twelve-month debt to adjusted EBITDA was 0.4x, versus 0.8x a year earlier.
- Current assets were $306.7 million and current liabilities were $131.8 million. Cash dividends declared were $0.06 per share per quarter in Q2, twice the $0.03 quarterly dividend in 2014.
Changes, orders, and segments
- Total orders fell 16% in Q2 to $213.5 million and 18% in the first half to $399.5 million. Backlog was $269.1 million at June 30, down 18% from year-end and 24% from June 30, 2014.
- Environmental Solutions: Sales rose 5% in Q2 and 10% in the first half; operating income increased to $29.2 million and $53.1 million, respectively. Orders fell 25% in Q2 and 17% in the first half, reflecting fewer large municipal fleet orders and oil-and-gas market softness.
- Safety and Security Systems: Sales declined 4% in Q2 and 1% in the first half. First-half operating income increased to $13.9 million from $11.8 million; backlog was slightly higher year over year.
- Fire Rescue: Sales declined 26% in Q2 and 14% in the first half, largely due to currency effects and lower shipments. The segment returned to nominal operating income in Q2 and reported $0.3 million for the first half, but first-half orders fell 34% and backlog declined 30% year over year.
Outlook, risks, and unusual items
- Management expected 2015 capital expenditures of $15–$20 million and stated that cash, operating cash flow, and borrowing availability should be sufficient for operating needs and commitments. No full-year earnings or revenue guidance is stated in the provided filing text.
- Management cited weaker oil-and-gas demand, fewer repeat fleet orders, reduced first-half orders, and currency movements as pressures. Backlog contraction and Fire Rescue order volatility warrant attention; the company also noted shorter lead times following Environmental Solutions capacity improvements.
- Q2 and first-half results included $0.4 million of restructuring expense for a voluntary reduction-in-force at the U.K. coal-mining business. The company repurchased $5.0 million of shares in the first half and paid $7.5 million in dividends.
- Hearing-loss litigation involving firefighters continued, including renewed proposed class-certification efforts. The company said it would contest certification and defend the claims. A Latvian commercial dispute remained on appeal with no liability accrued; an unsuccessful or partially unsuccessful appeal could result in a charge ranging from zero to approximately $5 million.
- Other ongoing exposures include product warranties, environmental remediation reserves of $1.2 million for a discontinued Texas facility, and ordinary-course claims. The filing says the outstanding letters of credit and bonds totaled $35.0 million and that the likelihood of a call was considered remote. The company also reported $4.0 million remaining in escrow from the FSTech divestiture, subject to possible future receipt.
- Management reported effective disclosure controls as of June 30, 2015, no material changes in internal control over financial reporting during the quarter, and no material changes to the previously disclosed risk factors.
Important facts for investors to verify
- Whether declining orders and backlog convert into sustained lower sales, particularly in Environmental Solutions and Fire Rescue.
- How oil-and-gas market weakness, large-order timing, and foreign exchange affect future demand, margins, and reported results.
- Whether margin gains from productivity, favorable mix, and capacity improvements continue as volumes and mix change.
- The sustainability of cash generation, dividend and repurchase activity, pension funding needs, and compliance with credit-facility covenants.
- Developments in firefighter litigation and the Latvian appeal, including any potential financial exposure or insurance recovery.