Federal Signal (FSS) - 2020 Q2 - Quarterly Report

PART I. FINANCIAL INFORMATION Financial Statements (Unaudited) Presents unaudited condensed consolidated financial statements for Q2 and H1 2020, including operations, balance sheets, cash flows, and equity, with explanatory notes Condensed Consolidated Statements of Operations Highlights (in millions) | Metric | Q2 2020 | Q2 2019 | YTD 2020 | YTD 2019 | | :--- | :--- | :--- | :--- | :--- | | Net sales | $270.1 | $324.3 | $556.2 | $598.1 | | Gross profit | $70.3 | $89.0 | $145.1 | $159.3 | | Operating income | $31.3 | $46.3 | $63.6 | $72.1 | | Net income | $21.4 | $32.8 | $44.8 | $50.3 | | Diluted EPS | $0.35 | $0.54 | $0.73 | $0.82 | Condensed Consolidated Balance Sheet Highlights (in millions) | Metric | June 30, 2020 | Dec 31, 2019 | | :--- | :--- | :--- | | Cash and cash equivalents | $73.6 | $31.6 | | Total current assets | $406.8 | $360.7 | | Total assets | $1,211.2 | $1,165.5 | | Total current liabilities | $160.7 | $160.2 | | Total liabilities | $555.8 | $523.9 | | Total stockholders' equity | $655.4 | $641.6 | Condensed Consolidated Statements of Cash Flows Highlights (in millions) | Metric | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :--- | :--- | :--- | | Net cash provided by operating activities | $65.0 | $25.8 | | Net cash used for investing activities | $(21.2) | $(9.4) | | Net cash used for financing activities | $(1.5) | $(15.4) | Note 2 – Acquisitions Details the June 2020 acquisition of Public Works Equipment and Supply (PWE) assets, part of Environmental Solutions Group, deemed immaterial - The company acquired PWE for cash consideration of $6.2 million, which resulted in the recognition of $2.5 million in goodwill, deductible for tax purposes[35][36] Note 3 – Revenue Recognition Disaggregates net sales by geographic region and product line for two segments, highlighting US dominance and Environmental Solutions as primary driver Net Sales by Segment (YTD 2020 vs YTD 2019, in millions) | Segment | YTD 2020 | YTD 2019 | | :--- | :--- | :--- | | Environmental Solutions | $447.2 | $486.7 | | Safety and Security Systems | $109.0 | $111.4 | | Total net sales | $556.2 | $598.1 | Note 5 – Debt Outlines the company's debt structure, primarily 2019 Credit Agreement borrowings, with compliance and significant availability as of June 30, 2020 - As of June 30, 2020, the company had $243.9 million drawn under its 2019 Credit Agreement, with $244.9 million of availability for borrowings[48] - The company entered into a new interest rate swap (the "2019 Swap") in October 2019 with a notional amount of $75.0 million to fix the interest rate on a portion of its variable-rate debt, maturing in July 2024[50] Note 6 – Income Taxes Reports decreased income tax expense for Q2 and H1 2020 due to lower pre-tax income and stock compensation benefits, with CARES Act deferrals Effective Tax Rate Comparison | Period | 2020 | 2019 | | :--- | :--- | :--- | | Three Months Ended June 30 | 22.2% | 26.1% | | Six Months Ended June 30 | 22.9% | 25.8% | - Under the CARES Act, the company deferred approximately $3.3 million of federal income tax payments from Q2 2020 to Q3 2020[56] Note 8 – Commitments and Contingencies Details financial commitments, warranty liabilities, and legal proceedings, notably a 2019 global settlement for firefighter hearing loss claims - The company has outstanding performance and financial standby letters of credit and bonds totaling $26.6 million as of June 30, 2020[62] - A global settlement agreement was executed on November 4, 2019, to resolve hearing loss claims from approximately 3,700 firefighters in most jurisdictions. The company has recognized an estimated liability for the potential settlement amount[94] Note 10 – Stockholders' Equity Covers changes in stockholders' equity, including dividend declarations and stock repurchases, with Q2 2020 repurchases suspended due to COVID-19 - The Board of Directors declared a quarterly cash dividend of $0.08 per common share in both Q1 and Q2 2020[109][110] - In the first six months of 2020, the company repurchased 490,990 shares for $13.5 million. However, no shares were repurchased in Q2 2020 as the program was temporarily suspended due to economic uncertainty from the COVID-19 pandemic[114] Note 11 – Segment Information Breaks down net sales and operating income for Environmental Solutions and Safety and Security segments, noting decline in the former and stability in the latter Segment Performance (Q2 2020 vs Q2 2019, in millions) | Metric | Environmental Solutions | Safety and Security Systems | | :--- | :--- | :--- | | Net Sales Q2 2020 | $214.2 | $55.9 | | Net Sales Q2 2019 | $267.2 | $57.1 | | Operating Income Q2 2020 | $28.6 | $10.4 | | Operating Income Q2 2019 | $44.8 | $9.5 | Management's Discussion and Analysis of Financial Condition and Results of Operations Analyzes Q2 and H1 2020 financial performance, focusing on COVID-19's impact on sales, orders, and profitability, especially in Environmental Solutions, alongside cost-saving and liquidity - The COVID-19 pandemic significantly impacted Q2 2020 results, leading to a 17% decrease in net sales and a 32% decrease in operating income compared to Q2 2019[146][148] - Total orders in Q2 2020 were $201.3 million, a decrease of 35% from the prior-year quarter, reflecting weakened demand due to the pandemic[153] - The company implemented several cost-saving actions, including temporary salary reductions for leadership, furloughs for approximately 400 employees, and limited discretionary spending[146] - Despite operational challenges, the company maintained a strong financial position with $73.6 million in cash and $244.9 million of borrowing availability as of June 30, 2020[144] Environmental Solutions Segment Analysis Environmental Solutions Group saw Q2 net sales fall 20% to $214.2 million and operating income drop, with orders declining 38% due to pandemic impact Environmental Solutions Q2 Performance (in millions) | Metric | Q2 2020 | Q2 2019 | Change | | :--- | :--- | :--- | :--- | | Net sales | $214.2 | $267.2 | $(53.0) | | Operating income | $28.6 | $44.8 | $(16.2) | | Total orders | $157.7 | $253.2 | $(95.5) | - The sales decrease was driven by lower shipments of safe-digging trucks ($21.2 million), sewer cleaners ($12.5 million), and street sweepers ($6.9 million), partially offset by a $13.2 million increase from the MRL acquisition[176] Safety and Security Systems Segment Analysis Safety and Security Systems Group showed resilience with Q2 net sales down 2% to $55.9 million, operating income up 9% due to cost savings Safety and Security Systems Q2 Performance (in millions) | Metric | Q2 2020 | Q2 2019 | Change | | :--- | :--- | :--- | :--- | | Net sales | $55.9 | $57.1 | $(1.2) | | Operating income | $10.4 | $9.5 | $0.9 | | Total orders | $43.6 | $54.8 | $(11.2) | - The increase in operating income was primarily due to a $1.9 million reduction in SEG&A expenses resulting from cost-saving actions[190][191] Financial Condition, Liquidity and Capital Resources Company maintained strong liquidity, with H1 2020 operating cash flow improving to $65.0 million due to working capital and CARES Act deferrals - The year-over-year improvement in operating cash flow was driven by working capital timing, lower rental fleet investment, and deferrals of $3.3 million in federal income tax and $2.3 million in payroll tax payments under the CARES Act[202] - In H1 2020, the company borrowed a net $27.7 million on its revolving credit facility to bolster its cash position amid COVID-19 uncertainty[204] Quantitative and Qualitative Disclosures About Market Risk No significant changes in market risk exposure were reported for the six months ended June 30, 2020, compared to the 2019 10-K Controls and Procedures Management concluded disclosure controls and procedures were effective as of June 30, 2020, with no material changes to internal control - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of the end of the period covered by this report[210] PART II. OTHER INFORMATION Risk Factors Updates risk factors, emphasizing the highly uncertain and potentially material adverse impact of the COVID-19 pandemic on business and financial results - The COVID-19 pandemic is identified as a material risk factor with a highly uncertain and potentially material adverse impact on the company's business, financial condition, and operating results[216] - Key uncertainties include the pandemic's duration, government responses, effects on customers and suppliers, the ability to maintain production capacity, and volatility in product demand[217] Unregistered Sales of Equity Securities and Use of Proceeds Reports on stock repurchase activity, noting no Q2 2020 repurchases and $90.7 million remaining under authorized programs Stock Repurchase Activity (Q2 2020) | Period | Total Number of Shares Purchased | Average Price Paid Per Share | | :--- | :--- | :--- | | April 2020 | — | $ — | | May 2020 | — | $ — | | June 2020 | — | $ — | - As of June 2020, the maximum dollar value of shares that may yet be purchased under the company's plans is $90,724,309[218] Exhibits Lists exhibits filed with Form 10-Q, including Sarbanes-Oxley certifications, Q2 financial results press release, and earnings call presentation