Federal Signal Corporation — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013; filed May 6, 2013. Federal Signal makes environmental vehicles and equipment, safety and security systems, and fire-rescue aerial platforms. Prior-year results were recast to present FSTech as discontinued operations.
Financial performance and position
| Metric | Q1 2013 | Q1 2012 |
|---|---|---|
| Net sales | $199.8 million | $196.1 million |
| Gross profit | $46.8 million | $45.3 million |
| Operating income / margin | $12.1 million / 6.1% | $10.3 million / 5.3% |
| Continuing operations income (loss) | $(1.1) million | $3.1 million |
| Net income (loss) | $(0.6) million | $(1.1) million |
| Diluted loss per share | $(0.01) | $(0.02) |
| Operating cash flow | $(14.9) million | $2.6 million |
- Sales rose $3.7 million, while operating income increased $1.8 million. The operating improvement reflected higher gross margins and the absence of $0.9 million of prior-year restructuring charges.
- Continuing-operations results fell despite better operations and lower interest expense, primarily because the company recorded $8.7 million of debt settlement charges: a $4.2 million prepayment penalty and a $4.5 million write-off of old financing costs.
- Q1 2013 included a $0.5 million gain related primarily to the FSTech disposal; Q1 2012 included a $4.2 million loss from discontinued operations and disposal. This helped net loss improve year over year.
- Operating cash flow weakened to $(14.9) million, including $(13.2) million from continuing operations. Management attributed the decline chiefly to working-capital needs, including higher receivables, lower payables, and annual incentive bonus payments. Capital expenditures were $4.4 million.
- Cash was $12.8 million at March 31, down from $29.7 million at year-end. Total debt and capital lease obligations were $160.6 million. The trailing-12-month debt-to-EBITDA ratio was 2.4x, versus 4.4x a year earlier.
- Current assets were $268.9 million and current liabilities $141.7 million at March 31. The company had $84.0 million drawn on its $150.0 million revolver and $28.9 million in letters of credit, leaving $37.1 million of net revolver availability. It reported compliance with debt covenants.
Material changes and operating trends
- Orders declined 14% to $192.2 million; backlog was $307.5 million, down from $325.0 million a year earlier and $318.4 million at December 31, 2012. Management cited weaker demand in several markets, including Asia Pacific and Mexico, and completion of a large warning-system order.
- Environmental Solutions sales rose to $111.7 million and operating income to $12.7 million, but orders fell 18% to $101.4 million. Higher U.S. sewer-cleaner shipments were partly offset by weaker international demand.
- Safety and Security Systems sales increased to $58.5 million and operating income to $5.5 million; orders decreased 8% to $56.9 million. The profit comparison benefited from the absence of prior-year restructuring charges and lower legal expenses.
- Fire Rescue sales declined to $29.6 million and operating income to $0.7 million; orders fell 8% to $33.9 million. Lower volume and unfavorable mix were partly offset by manufacturing efficiencies and pricing.
- Cash and cash equivalents declined by $16.9 million during the quarter. Total comprehensive loss was $3.6 million, including $5.7 million of unfavorable foreign-currency translation, partly offset by pension-related gains.
Outlook, financing, risks and contingencies
- No specific sales or earnings guidance is provided. Management expected 2013 capital expenditures of approximately $15 million and stated that operating cash flow and borrowing capacity should meet operating, capital, and financial commitments. The company cautioned that Q1 results are not necessarily indicative of full-year results and noted seasonal patterns that typically make Q1 sales lower.
- On March 13, 2013, the company refinanced prior facilities with a five-year, $225 million senior secured facility: a $75 million term loan and a $150 million revolver. It also entered a $75 million interest-rate swap to fix the rate on that portion of variable-rate debt. Term-loan amortization begins June 30, 2013; maturity is March 13, 2018.
- The new facility includes leverage and fixed-charge covenants. Dividends and other restricted payments are conditional, including a pro forma leverage ratio below 3.25x and continued covenant compliance. Interest rates are variable on unhedged borrowings, creating rate exposure.
- Material litigation includes firefighter hearing-loss claims involving the company’s sirens. A trial-court class-certification order was appealed; the appellate court accepted review on April 23, 2013, staying class proceedings pending its decision. The company also reported new Pennsylvania firefighter cases filed in April and May 2013.
- Neology patent litigation concerning RFID products continued, including an ITC investigation opened in March 2013. 3M assumed the defense of the related lawsuits following its purchase of FSTech; sale proceeds include an $8.0 million escrow receivable subject to indemnification and release conditions.
- Discontinued-operation liabilities included $1.8 million for environmental remediation and $4.0 million for estimated product-liability obligations at March 31. The company said Pearland remediation costs were not expected to have a material adverse effect, but estimates may change. It also noted that some legal claims cannot be reasonably estimated.
- Other disclosed risks include cyclical end markets, government policy and financing conditions, competition, customer demand, supply disruptions, pension funding, product liability and warranty claims, environmental and safety regulation, and the ability to realize tax assets. Management reported no material change in the risk factors from its 2012 Form 10-K.
Important facts for investors to verify
- Whether order intake and backlog stabilize after the 14% order decline, especially in Environmental Solutions and international markets.
- Whether working-capital outflows reverse and cash generation supports planned capital spending and debt service.
- Actual interest expense and covenant headroom under the new credit facility, including revolver availability and the effect of the interest-rate swap.
- Resolution and potential financial impact of the siren litigation, Neology proceedings, and discontinued-operation indemnity and escrow obligations.
- Whether the stated $15 million capital expenditure estimate and management’s liquidity expectations remain consistent with subsequent results.