Federal Signal Corporation — Q2 2016 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2016. Federal Signal makes environmental vehicles and equipment and safety, security, and communications products. Results include two operating segments: Environmental Solutions and Safety and Security Systems. The Fire Rescue Group was sold in January 2016 and is reported as discontinued operations.
Key financial results
| Metric | Q2 2016 | Q2 2015 | First half 2016 | First half 2015 |
|---|---|---|---|---|
| Net sales | $172.3 million | $205.4 million | $345.1 million | $401.9 million |
| Gross profit | $45.0 million | $60.7 million | $92.4 million | $115.6 million |
| Gross margin | 26.1% | 29.6% | 26.8% | 28.8% |
| Operating income | $14.3 million | $29.2 million | $30.4 million | $53.7 million |
| Operating margin | 8.3% | 14.2% | 8.8% | 13.4% |
| Income from continuing operations | $9.4 million | $18.2 million | $19.8 million | $32.6 million |
| Net income, including discontinued operations | $9.1 million | $18.3 million | $22.7 million | $33.2 million |
| Diluted EPS from continuing operations | $0.15 | $0.29 | $0.32 | $0.51 |
- Q2 sales declined 16%; lower vacuum-truck and street-sweeper sales were the principal drag. First-half sales declined 14%.
- Q2 operating income fell 51%, mainly due to lower Environmental Solutions volume. First-half operating income fell 43%.
- Environmental Solutions Q2 sales fell 19% and operating income fell $14.3 million year over year. Safety and Security Systems Q2 sales fell 10%; industrial-market weakness was partly offset by domestic public-safety sales.
- Q2 orders rose 7% to $187.3 million, substantially reflecting JJE-acquired orders. First-half orders fell 5% to $323.0 million. Backlog was $149.8 million, down $41.1 million year over year, but up $14.3 million from Q1 2016.
Cash flow, debt and liquidity
- First-half cash from continuing operations was $3.9 million versus $30.8 million in 2015; total operating cash flow was $5.2 million versus $27.4 million. Management attributed the continuing-operations decline mainly to lower earnings and an approximately $11 million noncash settlement of receivables related to JJE.
- Continuing investing activities used $106.7 million, including $96.6 million for JJE and $6.0 million for Westech. Total investing activities used $18.7 million after $88.0 million of proceeds from discontinued operations, principally the Bronto sale.
- Cash and equivalents were $38.7 million at June 30, 2016, down from $76.0 million at year-end 2015. Total debt and capital lease obligations were $66.9 million, including $65.8 million drawn on the revolving facility.
- The $325 million revolving credit facility matures in 2021. Net borrowing availability, after letters of credit, was $239.7 million. The company reported compliance with its financial covenants; trailing-12-month debt to adjusted EBITDA was 0.7x.
- First-half financing included $33.1 million of share repurchases, $8.6 million of dividends, and repayment of $43.4 million of prior term-loan debt. Quarterly dividend was $0.07 per share.
Material developments, outlook and risks
- Federal Signal acquired JJE on June 3 for initial cash consideration of approximately $96.6 million. The purchase-price allocation was preliminary; additional consideration includes a deferred payment and an earn-out tied to financial targets. JJE contributed $10.6 million of post-acquisition sales and $0.9 million of operating income through June 30. Westech was acquired in January for approximately $6.0 million.
- The company completed the Bronto sale for initial proceeds of approximately $82.3 million and received a further $5.7 million working-capital adjustment. First-half discontinued-operations gain was $2.9 million, including a $1.5 million charge related to the Latvian commercial dispute.
- Management expected 2016 capital expenditures of $10 million to $15 million and up to $2.0 million of additional restructuring charges during the remainder of 2016. No specific revenue or earnings guidance was provided in the filing. Management said available cash, operating cash flow and revolver capacity were expected to fund operations and planned uses.
- Management cited softness in oil and gas markets, used-equipment competition, fewer prior-year fleet orders, and weaker industrial demand as factors affecting sales, orders and backlog. A 10% U.S.-dollar appreciation was estimated to reduce full-year sales and operating income by less than 1%.
- Contingencies include ongoing firefighter hearing-loss litigation, for which the company said it cannot estimate losses for many claims; the Latvian dispute and potential further appeal; product warranties; and repurchase guarantees inherited with JJE. The company stated that currently outstanding letters of credit and bonds were unlikely to be called and that known claims were not expected to have a material adverse effect, while noting unexpected developments could be material.
- The company’s disclosure controls were deemed effective. Management had not yet fully assessed JJE’s internal controls over financial reporting.
Important facts for investors to verify
- Whether Environmental Solutions sales, margins, orders and backlog recover from weakness in vacuum trucks, street sweepers and industrial markets.
- JJE’s finalized purchase accounting, integration costs, performance, earn-out exposure and contribution to orders and backlog.
- Cash generation after the acquisition, revolving-credit borrowings, covenant headroom and the sustainability of repurchases and dividends.
- Developments in firefighter litigation and the Latvian dispute, including any change in estimated exposure or insurance recoveries.
- Progress on restructuring and whether the announced 2016 capital-spending range and additional restructuring charges remain current.