Federal Signal Corporation — Q2 2014 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2014. Federal Signal manufactures environmental vehicles and equipment, safety and security systems, and aerial platforms for fire rescue and industrial use. Amounts below are U.S. dollars in millions, except per-share data.
Financial performance
| Metric | Q2 2014 | Q2 2013 | H1 2014 | H1 2013 |
|---|---|---|---|---|
| Net sales | $234.6 | $222.6 | $434.8 | $422.4 |
| Gross profit / margin | $58.9 / 25.1% | $51.8 / 23.3% | $105.7 / 24.3% | $98.6 / 23.3% |
| Operating income / margin | $23.9 / 10.2% | $18.2 / 8.2% | $36.7 / 8.4% | $30.3 / 7.2% |
| Income before taxes | $22.7 | $16.4 | $34.5 | $15.5 |
| Net income | $17.1 | $117.5 | $24.5 | $116.9 |
| Diluted EPS from continuing operations | $0.27 | $1.87 | $0.39 | $1.86 |
Revenue rose 5% in Q2 and 3% in H1. Operating income increased 31% in Q2 and 21% in H1, chiefly on higher Environmental Solutions volume, improved production leverage and margins, and lower interest expense. Net income comparisons are heavily distorted by a $102.4 million tax benefit recognized in Q2 2013 following release of a valuation allowance on most U.S. deferred tax assets. 2014 included ordinary tax expense; the effective tax rates were 25.1% for Q2 and 28.7% for H1.
Segments and operating indicators
- Environmental Solutions: Q2 sales increased 8% to $139.2 and operating income rose to $23.1 from $15.8. H1 sales increased 8% to $259.9 and operating income rose to $38.3 from $28.5. Stronger street sweeper, sewer cleaner and vacuum truck demand supported results.
- Safety and Security Systems: Q2 sales increased to $61.3 from $56.8 and operating income to $7.5 from $3.6. H1 sales were nearly flat at $116.3; operating income improved to $11.8 from $9.1. Prior-year results were affected by U.S. ERP implementation disruption.
- Fire Rescue: Q2 sales declined to $34.1 from $37.5 and the segment recorded a $0.3 operating loss versus $3.4 income. H1 sales fell to $58.6 from $67.1 and the operating loss was $1.1 versus $4.1 income. Supplier constraints, deferred shipments, manufacturing inefficiencies and unfavorable mix weighed on results.
- Total orders increased 21% in both Q2 and H1. Backlog was $356.0 at June 30, up 21% year over year and 16% from December 31, 2013; the filing attributes growth particularly to street sweeper and Fire Rescue orders and deferred shipments.
Cash flow, debt and liquidity
- H1 cash provided by operating activities was $23.4, including $23.7 from continuing operations, compared with $5.9 and $10.9, respectively, in H1 2013. Capital expenditures were $9.4. The company also received $7.0 from the FSTech escrow.
- Cash and equivalents were $24.2 at June 30, versus $23.8 at year-end; $12.7 was held by foreign subsidiaries and generally considered permanently reinvested.
- Total debt was $75.5, down from $92.1 at year-end; the company reported a trailing-12-month debt-to-adjusted-EBITDA ratio of 0.8, versus 2.1 a year earlier. The $150.0 revolving facility had no cash drawn, $26.4 of letters of credit and $123.6 of net borrowing availability. Non-U.S. lines had $5.0 drawn against $13.8 of capacity. The company reported compliance with debt covenants.
- Current assets were $281.7 and current liabilities $149.5. H1 financing cash use was $20.9, including $20.0 net repayment of revolving borrowings, $3.3 of share repurchases and $1.9 of dividends paid.
Outlook, risks and notable items
- No earnings or revenue guidance was provided. Management expected 2014 capital expenditures of $15–$20 and said cash, operating cash flow and available borrowing capacity should meet operating and capital needs, absent significant unanticipated demands.
- Management cited first-half order growth and a larger backlog, but Fire Rescue deliveries were deferred to the second half of 2014 because of operational challenges and supplier constraints. North American adverse weather also affected first-half operations.
- The board reinstated a quarterly dividend of $0.03 per share; a further $0.03 dividend was declared for payment in September 2014. A share repurchase program of up to $15.0 was authorized; $3.3 had been spent by June 30.
- Latvian dispute: A trial court ruled against the Bronto subsidiary in a commercial dispute. The company had not accrued a liability, believed an appeal was more likely than not to succeed, and estimated an unsuccessful or partially successful appeal could lead to a charge ranging from zero to approximately $5.
- Hearing-loss litigation: On June 25, 2014, an Illinois appellate panel reversed a trial court class-certification order in Chicago firefighter litigation. Other Pennsylvania cases remain; trials for 11 Philadelphia plaintiffs were scheduled for December 2014 and January 2015. The company intends to defend the claims.
- Other exposures include $49.7 of outstanding letters of credit and bid/performance bonds, which management said were unlikely to be called; environmental remediation reserves of $1.3 for a former facility; and continuing product-liability obligations from discontinued operations. The buyer of FSTech claimed the remaining $0.8 general-indemnification escrow balance.
Key investor verification points
- Separate underlying earnings improvement from the prior-year $102.4 tax benefit when comparing net income and EPS.
- Track Fire Rescue execution, supplier availability, deferred shipments, margins and whether backlog converts to sales as expected.
- Assess whether order and backlog growth—especially municipal street sweeper demand—continues and is supported by shipment capacity.
- Monitor cash conversion, working-capital movements, debt reduction, covenant headroom, and planned capital expenditures, dividends and repurchases.
- Follow the Latvian appeal and potential exposure, hearing-loss cases, and the unresolved FSTech escrow claim.