Federal Signal Corporation — Q2 2022 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2022. Financial statements are unaudited. Federal Signal manufactures environmental and infrastructure vehicles and equipment, and safety, security and communications systems, with aftermarket parts, service and rentals. Its reportable segments are Environmental Solutions and Safety and Security Systems.
Financial performance
| Metric | Q2 2022 | Q2 2021 | H1 2022 | H1 2021 |
|---|---|---|---|---|
| Net sales | $366.7 million | $334.7 million | $696.9 million | $613.5 million |
| Gross profit | $89.8 million | $81.6 million | $165.5 million | $150.4 million |
| Gross margin | 24.5% | 24.4% | 23.7% | 24.5% |
| Operating income / margin | $46.2 million / 12.6% | $38.5 million / 11.5% | $74.7 million / 10.7% | $66.3 million / 10.8% |
| Net income | $33.5 million | $29.7 million | $54.0 million | $51.9 million |
| Diluted EPS | $0.55 | $0.48 | $0.88 | $0.84 |
Cash flow and investment: H1 operating cash flow was $22.4 million, down from $39.3 million. Investing activities used $46.0 million, including $41.5 million of property and equipment purchases; this included $27.8 million to acquire the University Park manufacturing facility and $13.7 million of other capital expenditures. Financing activities provided $14.9 million, including $44.1 million of net revolving-credit borrowings; dividends paid were $10.9 million and share repurchases were $16.1 million.
Liquidity and debt: At June 30, cash was $31.2 million, versus $40.5 million at year-end 2021. Long-term borrowings and finance lease obligations totaled $326.8 million, compared with $282.8 million at year-end; $324.5 million was drawn under the credit agreement. The company reported $165.7 million of borrowing availability and compliance with its leverage and interest-coverage covenants. Current assets were $479.9 million and current liabilities $179.7 million.
Changes and operating trends
- Sales increased 10% in Q2 and 14% in H1. Growth reflected pricing, acquisition effects and higher volumes; U.S. sales rose substantially, while Environmental Solutions’ non-U.S. sales fell, including lower refuse-truck shipments. Safety and Security Systems sales also increased.
- Orders were $413 million in Q2 and $866 million in H1, up 15% and 16%, respectively. Backlog reached $795 million, 82% above June 2021. Environmental Solutions accounted for $733.5 million of backlog and Safety and Security Systems for $61.5 million.
- Q2 operating margin improved year over year, but H1 margin edged down. Environmental Solutions’ H1 operating margin declined to 11.4% from 12.9%, reflecting cost pressures and operating inefficiencies; Safety and Security Systems’ H1 margin improved to 15.6% from 14.4%.
- Higher materials, freight and labor-related production inefficiencies pressured costs. Pricing actions and favorable product mix partly offset these effects. H1 interest expense rose $1.0 million, primarily due to higher interest rates and average debt levels. The H1 effective tax rate increased to 25.2% from 20.0%, partly reflecting reduced excess tax benefits from stock-based compensation.
Outlook, risks and notable items
- Management cited strong demand but continued supply-chain disruption, including shortages of chassis, hydraulics, raw materials and purchased components, as constraints on production and deliveries. Strategic inventory purchases and price increases were among the mitigation measures. Management cautioned that further disruption or a pandemic resurgence could impair service, pricing recovery and margins.
- Management expected a full-year effective tax rate of approximately 25%. Excluding the University Park facility purchase, expected 2022 capital expenditures were $25 million to $30 million. Management said cash, operating cash flow and available credit were expected to meet operating, capital and financial needs; no earnings guidance was provided in the filing text.
- Q2 acquisition and integration-related benefits included a $1.9 million favorable settlement of a post-closing adjustment dispute related to the 2021 OSW acquisition.
- Hearing-loss litigation includes a settlement agreement covering eligible firefighters; the company issued a $0.2 million payment in July 2022 for eligible plaintiffs who submitted releases. For a separate multijurisdictional settlement framework, the company had recorded an estimated liability; the amount is not clearly stated in the filing text. Management said any incremental loss was not expected to be material, while noting that unfavorable developments could affect results, financial condition or cash flow.
- Outstanding letters of credit and bid/performance bonds totaled $34.1 million; management considered the likelihood of a call remote. The company stated there were no material changes to its risk factors or contractual obligations during the period.
Important facts for investors to verify
- Whether record orders and backlog can convert to shipments and revenue given component shortages, labor constraints and delivery capacity.
- Whether pricing actions can offset persistent material, freight and labor costs, particularly in Environmental Solutions, where H1 margin declined.
- Working-capital requirements and cash conversion: H1 operating cash flow declined despite higher earnings, alongside inventory and receivables growth.
- Debt, interest-rate exposure and remaining credit availability; the company had $324.5 million drawn and $165.7 million available at quarter-end.
- Developments in hearing-loss litigation and settlement eligibility, as well as any future change in estimated exposure.