Federal Signal Corporation (FSS) — Q3 2020 Form 10-Q
Business context and period. The company manufactures infrastructure and maintenance vehicles and equipment, and safety, security and communications products. It reports Environmental Solutions and Safety and Security Systems segments. This unaudited filing covers the quarter and nine months ended September 30, 2020, compared with the corresponding 2019 periods.
Financial results
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Net sales | $279.8m | $308.8m | $836.0m | $906.9m |
| Gross profit / margin | $72.6m / 25.9% | $82.0m / 26.6% | $217.7m / 26.0% | $241.3m / 26.6% |
| Operating income / margin | $34.0m / 12.2% | $38.6m / 12.5% | $97.6m / 11.7% | $110.7m / 12.2% |
| Net income | $25.3m | $28.4m | $70.1m | $78.7m |
| Diluted EPS | $0.41 | $0.46 | $1.14 | $1.28 |
| Orders | $265.8m | $328.8m | $771.0m | $935.8m |
Cash flow and liquidity. Operating cash flow for the nine months was $79.6m, versus $58.6m in 2019; capital expenditures were $24.3m. Cash and equivalents were $66.2m at September 30, 2020, up from $31.6m at year-end 2019. Long-term borrowings and finance lease obligations totaled $238.9m, including $238.2m drawn on the revolving credit agreement. The company reported $250.6m of remaining borrowing availability and compliance with its debt covenants.
Other financial measures. The effective tax rate was 23.1% for Q3 and 23.0% for the nine-month period. Backlog was $319.7m, down 13% from $366.9m at September 30, 2019. Dividends paid totaled $14.5m in the first nine months; share repurchases totaled $13.7m.
Changes versus prior periods
- Q3 sales fell 9% year over year; nine-month sales fell 8%. Q3 net income declined $3.1m and nine-month net income declined $8.6m.
- Environmental Solutions sales declined 9% in Q3 and 8% year to date; Safety and Security Systems sales declined 11% and 5%, respectively. Lower equipment volumes were the main pressure, with some products and international sales partly offsetting declines.
- Q3 gross margin decreased 0.7 percentage points and operating margin decreased 0.3 points. Nine-month operating margin declined 0.5 points. Lower volume and, in Safety and Security, unfavorable sales mix weighed on gross margins.
- Total Q3 orders were down 19% year over year, but increased $64.5m, or 32%, compared with Q2 2020. Backlog was down year over year.
- Operating cash flow improved year over year, primarily reflecting working-capital timing and liquidity-preservation actions, lower rental-fleet investment, and certain deferred payments; increased pension contributions partly offset the improvement.
Outlook, commentary, risks and unusual items
- COVID-19: Operations remained substantially operational as an essential-business supplier, but labor absences, supplier disruptions, customer delivery constraints and reduced sales activity affected results. Management said the pandemic’s eventual financial impact could be material and could not be reliably forecast. The company implemented temporary pay reductions, furloughs, workforce reductions and discretionary spending controls.
- Management reported sequential Q3 order improvement as travel and equipment demonstrations resumed. However, production and conversion of the $319.7m backlog could be delayed by labor availability, supply interruptions, weaker demand or restrictions. No earnings or sales guidance was provided in the supplied filing text.
- The company expected 2020 capital expenditures of $30m–$35m and a full-year effective tax rate of approximately 24%.
- Nine-month other expense included a $2.5m charge related to withdrawal from a multi-employer pension plan; an estimated $2.4m liability was recorded. Restructuring expense was $1.3m year to date.
- A $6.2m acquisition of certain Public Works Equipment and Supply assets and operations closed in June; purchase accounting remained preliminary. The company also recorded a $3.4m liability for its interest-rate swap at quarter-end.
- Contingencies: The company faces ongoing firefighter hearing-loss litigation. It had accrued an estimated liability under a settlement framework; it said a possible additional loss was not expected to be material. Other claims and guarantees are discussed in the filing; management generally did not expect currently known matters to have a material adverse effect, while noting unfavorable developments could affect results, financial condition or cash flow.
Key facts for investors to verify
- Whether COVID-related demand, labor and supply-chain disruptions continue to affect orders, production, margins and backlog conversion.
- Whether the sequential order recovery is sustained, particularly in Environmental Solutions, and how backlog changes after quarter-end.
- Cash generation, working-capital trends, borrowing needs and covenant headroom relative to the $238.2m revolver draw and $250.6m availability.
- Progress and final cost of the hearing-loss settlement process, pension withdrawal liability and other legal contingencies.
- Actual full-year capital spending and tax rate versus management’s stated expectations.