Federal Signal Corporation — Q2 2021 Form 10-Q
Business context and reporting period. Federal Signal manufactures environmental and specialty vehicles and equipment, and safety, security and communication systems. This unaudited report covers the quarter and six months ended June 30, 2021, compared with the same 2020 periods. The company reports Environmental Solutions and Safety and Security Systems segments. Results include OSW Equipment & Repair from its February 17, 2021 acquisition date.
Financial performance and position
| Metric | Q2 2021 | Q2 2020 | First half 2021 | First half 2020 |
|---|---|---|---|---|
| Net sales | $334.7 million | $270.1 million | $613.5 million | $556.2 million |
| Gross profit | $81.6 million | $70.3 million | $150.4 million | $145.1 million |
| Gross margin | 24.4% | 26.0% | 24.5% | 26.1% |
| Operating income | $38.5 million | $31.3 million | $66.3 million | $63.6 million |
| Operating margin | 11.5% | 11.6% | 10.8% | 11.4% |
| Net income | $29.7 million | $21.4 million | $51.9 million | $44.8 million |
| Diluted EPS | $0.48 | $0.35 | $0.84 | $0.73 |
- Q2 revenue rose 24%; first-half revenue rose 10%. Growth was concentrated in Environmental Solutions, while Safety and Security Systems sales declined 4% in both periods.
- Q2 operating income increased 23%, while first-half operating income increased 4%. Despite sales growth, consolidated gross and operating margins were lower year over year, reflecting higher material and freight costs, mix, and other segment pressures.
- Environmental Solutions Q2 sales increased 31% and operating income increased 35%; its first-half sales and operating income rose 14% and 13%, respectively. Safety and Security Systems operating income fell 25% in Q2 and 16% in the first half.
- Orders were $360.5 million in Q2, up 79%, and $744.6 million in the first half, up 47%. June 30 backlog was $436.8 million, up $104.1 million, or 31%, from a year earlier.
- First-half operating cash flow was $39.3 million, versus $65.0 million in 2020. Investing activities used $61.3 million, including $53.5 million for OSW; financing activities used $5.0 million. Cash declined to $54.5 million from $81.7 million at year-end 2020.
- At June 30, borrowings and finance lease obligations totaled $223.6 million, including $221.3 million drawn under the revolving credit agreement. The company reported $268.4 million of borrowing availability and compliance with its financial covenants. The facility has a $500 million commitment and $10.3 million of undrawn letters of credit.
- Current assets were $428.2 million and current liabilities were $170.9 million. Stockholders’ equity was $746.0 million.
Material changes and unusual items
- The February acquisition of OSW had preliminary consideration of approximately $53.5 million, funded with existing cash and credit-facility borrowings. OSW contributed $17.6 million in net sales and $0.3 million in operating income from acquisition through June 30. Purchase-price allocation remains preliminary; the filing says final closing adjustments were expected before year-end.
- Higher material costs and unfavorable currency translation increased Environmental Solutions’ cost of sales. Management said pricing actions and a more favorable sales mix partly offset cost pressures in Q2.
- First-half operating cash flow was lower partly because of higher tax payments, working-capital timing, increased rental fleet investment and higher pension contributions. The 2020 comparison benefited from tax-payment deferrals under the CARES Act.
- Other income in 2021 compared with other expense in 2020, principally reflecting lower multi-employer pension withdrawal charges. The company recorded a $0.3 million liability after withdrawing from its remaining multi-employer plan in Q2.
Outlook, risks and contingencies
- Management estimated a full-year effective tax rate of approximately 23% and expected 2021 capital expenditures of $20 million to $25 million. The filing provides no specific revenue or earnings guidance.
- Management said the financial and operating effects of COVID-19, including emerging variants, remained uncertain and could be material. It also highlighted exposure to higher material costs and supply-chain effects.
- The company has ongoing siren-related hearing-loss litigation. It has recognized an estimated liability for a global settlement process; a loss above the accrual is reasonably possible, though management did not expect the incremental loss to be material. The filing does not state the accrued amount.
- Outstanding letters of credit and bid and performance bonds totaled $34.4 million; management considered calls remote. Potential equipment repurchase payments were $3.3 million, and future lease payments guaranteed under certain arrangements were approximately $1.9 million.
- Disclosure controls were deemed effective as of June 30, 2021. Management had not yet fully assessed OSW’s internal control over financial reporting.
Key facts for investors to verify
- Whether strong order growth and backlog convert to sales, and whether the margin declines stabilize as material and freight costs evolve.
- The finalized OSW purchase-price allocation, closing adjustments, integration results and contribution to future segment performance.
- Cash generation and working-capital requirements, particularly given lower first-half operating cash flow and acquisition-related borrowing.
- The progress and final cost of the hearing-loss settlement, including whether the recorded liability remains adequate.
- Whether COVID-19, supply-chain conditions and the expected tax rate and capital spending track management’s stated outlook.