Federal Signal Corporation — Q1 2012 Form 10-Q
Reporting period: Three months ended March 31, 2012; comparisons are with Q1 2011 unless otherwise noted. Federal Signal manufactures safety, security and communications products, environmental vehicles and equipment, fire-rescue platforms, and transportation and public-safety technology. It serves municipal, government, industrial and commercial customers worldwide.
Financial performance
| Metric | Q1 2012 | Q1 2011 |
|---|---|---|
| Net sales | $224.6 million | $173.6 million |
| Gross profit / margin | $56.1 million / 25.0% | $41.5 million / 23.9% |
| Operating income (loss) / margin | $7.1 million / 3.2% | $(1.0) million / (0.6)% |
| Continuing-operations loss | $(0.6) million | $(5.3) million |
| Net loss / diluted loss per share | $(0.5) million / $(0.01) | $(5.3) million / $(0.08) |
| Operating cash flow | $3.3 million | $(18.2) million |
| Capital expenditures | $3.5 million | $4.3 million |
Revenue rose 29%, while gross profit increased 35%. Higher sales volume and improved product mix supported operating results; gross margin improved, particularly on U.S. street-sweeper sales. Q1 operating cash flow less capital expenditures was approximately negative $0.2 million. Cash and cash equivalents were $13.4 million at March 31, up from $9.5 million at year-end; restricted cash of $2.1 million was pledged for letters of credit.
Material changes and segment results
- Environmental Solutions: Sales rose to $108.0 million from $76.4 million; operating income increased to $12.0 million from $0.9 million. Management cited stronger industrial markets, higher sweeper and sewer-cleaner shipments, favorable mix and pricing, and the absence of prior-year ERP deployment costs.
- Fire Rescue: Sales increased 50% to $31.8 million, but operating income remained $0.8 million and margin fell to 2.5% from 3.8%, primarily due to unfavorable product mix.
- Safety and Security Systems: Sales rose to $56.3 million from $52.7 million. Operating income declined to $4.6 million from $5.2 million, including a $0.9 million restructuring charge.
- Federal Signal Technologies: Sales increased to $28.5 million from $23.3 million, partly due to a longer-term project and large shipments. Operating loss narrowed to $2.8 million from $3.5 million.
- Orders increased 16% to $242.8 million. Backlog was $454.7 million, up $28.6 million from December 31, 2011.
Debt, liquidity and capital resources
In February 2012, the company refinanced its prior credit facility and private-placement notes with a five-year, $215 million secured term loan and a $100 million asset-based revolving credit facility (with potential capacity increases subject to conditions). At March 31, total borrowings were approximately $235.6 million, compared with approximately $222.1 million at year-end, based on reported short- and long-term borrowings. The term loan bears substantially higher interest margins—9%–10% over the base rate or 10%–11% over LIBOR—than the ABL facility; management attributed the $2.6 million increase in quarterly interest expense partly to higher rates under the new financing.
The ABL borrowing base was $76.4 million; after $17.2 million drawn and $30.8 million of outstanding letters of credit, net availability was $28.4 million. The company reported compliance with debt covenants at quarter-end. Covenants include minimum liquidity and coverage requirements and maximum leverage and capital expenditures. Term-loan installments begin in March 2013. The company paid $6.2 million of new debt-financing fees in the quarter and recorded $1.6 million of debt-settlement costs, including $1.0 million of make-whole interest and a $0.6 million write-off of prior financing costs.
Outlook, risks and contingencies
- Management expected 2012 capital expenditures of approximately $16 million; the term loan limits capital expenditures to $20 million. Management stated that operating cash flow and borrowing capacity should be adequate for operating and capital needs.
- The company expected 2012 pension contributions of up to $11.2 million to U.S. plans and approximately $1.5 million to non-U.S. plans.
- No dividend was declared in Q1. Term-loan restrictions permit dividends only if no default exists and specified fixed-charge and leverage tests are met.
- Management noted that certain businesses are seasonal, with lower sales typically in the first calendar quarter. It also cautioned that interim results are not necessarily indicative of full-year results and identified cyclical markets, customer financing availability, debt covenants, competition, pension funding, litigation, environmental compliance and product-liability exposure among relevant risks.
- The company had $32.5 million of standby letters of credit outstanding. A Pearland, Texas site assessment indicated remediation was probable; the related reserve was $2.1 million, and management did not expect the costs to materially harm results, financial position or liquidity. Product-liability claims include firefighter hearing-loss litigation; a class was certified for certain issues in Cook County, and the company appealed. A trial was scheduled for October 2012. Neology patent litigation was also pending, with a preliminary-injunction hearing scheduled for May 2012. The filing reports 12 additional Philadelphia firefighter cases filed in April 2012.
- Domestic operating losses generated effectively no recorded tax benefit because of valuation allowances. Unrecognized tax benefits were $4.3 million; the company expected these to decrease by $1.6 million over the next 12 months.
Important facts for investors to verify
- Whether elevated term-loan interest costs and refinancing-related fees will continue to constrain earnings and cash generation.
- Whether the $28.4 million of net ABL availability, cash balance and covenant headroom are sufficient under the borrowing-base and liquidity requirements.
- Whether Q1 order growth and the $454.7 million backlog convert into profitable shipments, particularly in Environmental Solutions and Federal Signal Technologies.
- Developments in firefighter litigation, the Neology patent case and Pearland environmental remediation, including any changes to reserves or insurance recoveries.
- Actual 2012 capital expenditures and pension contributions, and whether tax valuation allowances or unrecognized tax benefits change.