Federal Signal (FSS) - 2020 Q3 - Quarterly Report

PART I. FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) Presents unaudited consolidated financial statements and detailed notes on accounting policies, debt, and segment data Condensed Consolidated Statements of Operations The company experienced a decline in net sales and net income for both the three and nine months ended September 30, 2020, compared to the prior year, primarily due to lower sales volumes across both segments | Metric | 3 Months Ended Sep 30, 2020 (in millions) | 3 Months Ended Sep 30, 2019 (in millions) | 9 Months Ended Sep 30, 2020 (in millions) | 9 Months Ended Sep 30, 2019 (in millions) | | :----- | :---------------------------------------- | :---------------------------------------- | :---------------------------------------- | :---------------------------------------- | | Net sales | $279.8 | $308.8 | $836.0 | $906.9 | | Gross profit | $72.6 | $82.0 | $217.7 | $241.3 | | Operating income | $34.0 | $38.6 | $97.6 | $110.7 | | Net income | $25.3 | $28.4 | $70.1 | $78.7 | | Basic EPS | $0.42 | $0.47 | $1.16 | $1.31 | | Diluted EPS | $0.41 | $0.46 | $1.14 | $1.28 | Condensed Consolidated Statements of Comprehensive Income Comprehensive income for the three months ended September 30, 2020, increased to $30.1 million from $25.8 million in the prior year, primarily due to a positive change in foreign currency translation adjustment | Metric | 3 Months Ended Sep 30, 2020 (in millions) | 3 Months Ended Sep 30, 2019 (in millions) | 9 Months Ended Sep 30, 2020 (in millions) | 9 Months Ended Sep 30, 2019 (in millions) | | :----- | :---------------------------------------- | :---------------------------------------- | :---------------------------------------- | :---------------------------------------- | | Net income | $25.3 | $28.4 | $70.1 | $78.7 | | Change in foreign currency translation adjustment | $4.4 | $(3.8) | $(0.5) | $(3.0) | | Total other comprehensive income (loss) | $4.8 | $(2.6) | $(0.8) | $(1.5) | | Comprehensive income | $30.1 | $25.8 | $69.3 | $77.2 | Condensed Consolidated Balance Sheets As of September 30, 2020, total assets increased to $1,224.7 million from $1,165.5 million at December 31, 2019, driven by increases in cash, receivables, and inventories | Metric | Sep 30, 2020 (in millions) | Dec 31, 2019 (in millions) | | :----- | :------------------------- | :------------------------- | | Cash and cash equivalents | $66.2 | $31.6 | | Accounts receivable, net | $145.0 | $134.2 | | Inventories | $196.6 | $182.9 | | Total current assets | $417.7 | $360.7 | | Total assets | $1,224.7 | $1,165.5 | | Total current liabilities | $158.6 | $160.2 | | Long-term borrowings and finance lease obligations | $238.7 | $220.3 | | Total liabilities | $544.9 | $523.9 | | Total stockholders' equity | $679.8 | $641.6 | Condensed Consolidated Statements of Cash Flows Net cash provided by operating activities significantly increased to $79.6 million for the nine months ended September 30, 2020, from $58.6 million in the prior year, primarily due to working capital management and CARES Act deferrals | Metric | 9 Months Ended Sep 30, 2020 (in millions) | 9 Months Ended Sep 30, 2019 (in millions) | | :----- | :---------------------------------------- | :---------------------------------------- | | Net cash provided by operating activities | $79.6 | $58.6 | | Net cash used for investing activities | $(29.2) | $(70.3) | | Net cash (used for) provided by financing activities | $(16.0) | $10.5 | | Increase (decrease) in cash and cash equivalents | $34.6 | $(1.5) | | Cash and cash equivalents at end of period | $66.2 | $35.9 | Condensed Consolidated Statements of Stockholders' Equity Stockholders' equity increased to $679.8 million as of September 30, 2020, from $641.6 million at January 1, 2020, driven by net income and stock-based compensation, partially offset by cash dividends and treasury stock repurchases | Metric | Balance at Jan 1, 2020 (in millions) | Balance at Sep 30, 2020 (in millions) | | :----- | :----------------------------------- | :------------------------------------ | | Common Stock | $66.9 | $67.8 | | Capital in Excess of Par Value | $228.6 | $237.4 | | Retained Earnings | $528.2 | $583.8 | | Treasury Stock | $(93.0) | $(119.3) | | Accumulated Other Comprehensive Loss | $(89.1) | $(89.9) | | Total Stockholders' Equity | $641.6 | $679.8 | Notes to Condensed Consolidated Financial Statements Details accounting policies, acquisitions, revenue, debt, taxes, pensions, commitments, contingencies, and segment data Note 1 – Summary of Significant Accounting Policies This note outlines the company's organizational structure, reportable segments, basis of financial statement presentation, and recent accounting pronouncements - The Company operates in two reportable segments: Environmental Solutions Group and Safety and Security Systems Group, which share technology, marketing, distribution, and product application characteristics[24] - The Company adopted ASU 2016-13 (Credit Losses) and ASU 2018-13 (Fair Value Measurement) effective January 1, 2020, neither of which had a material impact on its consolidated financial statements[28][29] - The Company early adopted ASU 2020-04 (Reference Rate Reform) effective January 1, 2020, and expects to apply its expedients to existing and new LIBOR-referencing transactions through December 31, 2022, without material impact[32] Note 2 – Acquisitions On June 12, 2020, the Company acquired certain assets and operations of Public Works Equipment and Supply, Inc. (PWE) for $6.2 million in cash, resulting in $2.5 million of goodwill - On June 12, 2020, Federal Signal Corporation acquired Public Works Equipment and Supply, Inc. (PWE) for $6.2 million cash, including inventory and fixed assets[36] - The PWE acquisition resulted in $2.5 million of goodwill, which is tax-deductible, and its financial impact was not material to the Company's net sales, results of operations, or total assets[37][38] Note 3 – Revenue Recognition Net sales decreased across all geographic regions and major product lines for both the three and nine months ended September 30, 2020, compared to the prior year, with the Environmental Solutions segment seeing the largest decline | Metric | 3 Months Ended Sep 30, 2020 (in millions) | 3 Months Ended Sep 30, 2019 (in millions) | 9 Months Ended Sep 30, 2020 (in millions) | 9 Months Ended Sep 30, 2019 (in millions) | | :----- | :---------------------------------------- | :---------------------------------------- | :---------------------------------------- | :---------------------------------------- | | Total net sales | $279.8 | $308.8 | $836.0 | $906.9 | | U.S. sales | $219.1 | $252.6 | $650.7 | $705.6 | | Canada sales | $41.6 | $35.6 | $113.4 | $131.2 | | Europe/Other sales | $19.1 | $20.6 | $71.9 | $70.1 | | Environmental Solutions (Vehicles and equipment) | $179.1 | $198.3 | $531.1 | $585.7 | | Safety and Security Systems (Public safety and security equipment) | $29.5 | $31.6 | $97.6 | $98.6 | - Contract liabilities, primarily customer deposits, were $14.7 million as of September 30, 2020, up from $13.9 million at December 31, 2019, and are generally recognized as net sales within three to six months[42] Note 4 – Inventories Total inventories increased to $196.6 million as of September 30, 2020, from $182.9 million at December 31, 2019, primarily driven by an increase in finished goods | Component | Sep 30, 2020 (in millions) | Dec 31, 2019 (in millions) | | :-------- | :------------------------- | :------------------------- | | Finished goods | $99.8 | $86.8 | | Raw materials | $79.5 | $79.5 | | Work in process | $17.3 | $16.6 | | Total inventories | $196.6 | $182.9 | Note 5 – Debt The Company's total long-term borrowings and finance lease obligations increased to $238.9 million as of September 30, 2020, from $220.5 million at December 31, 2019, primarily under the 2019 Credit Agreement | Metric | Sep 30, 2020 (in millions) | Dec 31, 2019 (in millions) | | :----- | :------------------------- | :------------------------- | | 2019 Credit Agreement | $238.2 | $219.9 | | Finance lease obligations | $0.7 | $0.6 | | Total long-term borrowings and finance lease obligations | $238.9 | $220.5 | - The Company was in compliance with all net leverage ratio and interest coverage ratio financial covenants under the 2019 Credit Agreement as of September 30, 2020[48] - The Company entered into a $75.0 million interest rate swap (2019 Swap) on October 2, 2019, designated as a cash flow hedge, with a maturity date of July 30, 2024, to fix a portion of its variable-rate debt[51] Note 6 – Income Taxes Income tax expense decreased for both the three and nine months ended September 30, 2020, compared to the prior year, primarily due to lower pre-tax income and increased excess tax benefits from stock compensation | Metric | 3 Months Ended Sep 30, 2020 (in millions) | 3 Months Ended Sep 30, 2019 (in millions) | 9 Months Ended Sep 30, 2020 (in millions) | 9 Months Ended Sep 30, 2019 (in millions) | | :----- | :---------------------------------------- | :---------------------------------------- | :---------------------------------------- | :---------------------------------------- | | Income tax expense | $7.6 | $7.9 | $20.9 | $25.4 | | Effective tax rate | 23.1% | 21.8% | 23.0% | 24.4% | - The Company deferred approximately $3.3 million of federal income tax payments from Q2 to Q3 2020, as permitted by the CARES Act, which had limited applicability otherwise[57] Note 7 – Pension and Other Post-Employment Plans Net periodic pension expense for the U.S. benefit plan was $0.4 million for the three months ended September 30, 2020, and $0.6 million for the nine months, with the Company contributing $5.0 million to its U.S. plan and $1.0 million to its non-U.S. plan | Metric | 3 Months Ended Sep 30, 2020 (in millions) | 3 Months Ended Sep 30, 2019 (in millions) | 9 Months Ended Sep 30, 2020 (in millions) | 9 Months Ended Sep 30, 2019 (in millions) | | :----- | :---------------------------------------- | :---------------------------------------- | :---------------------------------------- | :---------------------------------------- | | U.S. Benefit Plan Net periodic pension (benefit) expense | $0.4 | $(0.2) | $0.6 | $0.6 | | Non-U.S. Benefit Plan Net periodic pension (benefit) expense | $(0.1) | $0.0 | $(0.1) | $0.2 | - The Company contributed $5.0 million to its U.S. defined benefit plan and $1.0 million to its non-U.S. defined benefit plan during the nine months ended September 30, 2020[60] - An estimated liability of $2.4 million was recorded for the Company's withdrawal from the Sheet Metal Workers' National Pension Fund in Q2 2020[61] Note 8 – Commitments and Contingencies The Company has various financial commitments, including $28.1 million in outstanding letters of credit and performance bonds, potential repurchase obligations of $3.9 million, and product warranty liabilities of $10.1 million - The Company had $28.1 million in outstanding performance and financial standby letters of credit and bid/performance bonds as of September 30, 2020[62] - The maximum potential cash payments for equipment repurchase guarantees was $3.9 million as of September 30, 2020[63] | Metric | 2020 (in millions) | 2019 (in millions) | | :----- | :----------------- | :----------------- | | Warranty liabilities at January 1 | $11.2 | $9.8 | | Provisions to expense | $5.2 | $4.9 | | Payments | $(6.3) | $(4.8) | | Warranty liabilities at September 30 | $10.1 | $10.1 | - The Company finalized a global settlement agreement in November 2019 (Framework Agreement) to resolve hearing loss claims for approximately 3,700 firefighters in various jurisdictions (excluding Cook County and one NYC case), with payments of $700 per filed lawsuit and $300 per unfiled claim, subject to eligibility[95] Note 9 – Earnings Per Share Diluted EPS for the three months ended September 30, 2020, was $0.41, down from $0.46 in the prior year, and for the nine months, it was $1.14, down from $1.28 | Metric | 3 Months Ended Sep 30, 2020 | 3 Months Ended Sep 30, 2019 | 9 Months Ended Sep 30, 2020 | 9 Months Ended Sep 30, 2019 | | :----- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Basic EPS | $0.42 | $0.47 | $1.16 | $1.31 | | Diluted EPS | $0.41 | $0.46 | $1.14 | $1.28 | | Weighted average shares outstanding – Diluted (in millions) | 61.3 | 61.4 | 61.5 | 61.3 | - Options to purchase 0.5 million shares of common stock were anti-dilutive and excluded from diluted EPS calculations for both the three and nine months ended September 30, 2020[107] Note 10 – Stockholders' Equity The Board declared quarterly cash dividends of $0.08 per common share for Q1, Q2, and Q3 2020, totaling $14.5 million for the nine months, and the Company repurchased 498,217 shares for $13.7 million - The Board declared quarterly cash dividends of $0.08 per common share for Q1, Q2, and Q3 2020, totaling $14.5 million for the nine months ended September 30, 2020[109][110] - The Company repurchased 498,217 shares for $13.7 million during the nine months ended September 30, 2020, under its stock repurchase programs, which include a $75.0 million authorization from November 2014 and an additional $75.0 million from March 2020[112][115] | Component of Accumulated Other Comprehensive Loss (in millions) | Balance at Jan 1, 2020 | Balance at Sep 30, 2020 | | :------------------------------------------------------------ | :--------------------- | :---------------------- | | Actuarial Losses | $(80.4) | $(77.5) | | Prior Service Costs | $(2.4) | $(2.3) | | Foreign Currency Translation | $(7.1) | $(7.6) | | Unrealized Gain (Loss) on Interest Rate Swaps | $0.8 | $(2.5) | | Total | $(89.1) | $(89.9) | Note 11 – Segment Information Both the Environmental Solutions Group and Safety and Security Systems Group experienced decreases in net sales and operating income for the three and nine months ended September 30, 2020, compared to the prior year | Metric (in millions) | 3 Months Ended Sep 30, 2020 | 3 Months Ended Sep 30, 2019 | 9 Months Ended Sep 30, 2020 | 9 Months Ended Sep 30, 2019 | | :------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Net sales: | | | | | | Environmental Solutions | $231.0 | $254.0 | $678.2 | $740.7 | | Safety and Security Systems | $48.8 | $54.8 | $157.8 | $166.2 | | Operating income (loss): | | | | | | Environmental Solutions | $33.0 | $35.9 | $91.0 | $106.4 | | Safety and Security Systems | $7.4 | $8.6 | $25.2 | $26.8 | | Metric (in millions) | As of Sep 30, 2020 | As of Dec 31, 2019 | | :------------------- | :----------------- | :----------------- | | Total assets: | | | | Environmental Solutions | $940.9 | $908.1 | | Safety and Security Systems | $226.5 | $222.6 | | Corporate and eliminations | $57.0 | $34.5 | | Total assets | $1,224.7 | $1,165.5 | Note 12 – Fair Value Measurements The Company uses a three-level fair value hierarchy for its assets and liabilities, classifying cash equivalents as Level 1, interest rate swaps as Level 2, and contingent consideration liabilities as Level 3 - The Company classifies cash equivalents as Level 1, interest rate swaps as Level 2, and contingent consideration liabilities as Level 3 in its fair value hierarchy[127][128][130] | (in millions) | Level 1 | Level 2 | Level 3 | Total | | :------------ | :------ | :------ | :------ | :---- | | Assets: | | | | | | Cash equivalents | $34.4 | $— | $— | $34.4 | | Liabilities: | | | | | | Contingent consideration | $— | $— | $4.4 | $4.4 | | Interest rate swap | $— | $3.4 | $— | $3.4 | - The contingent consideration liability for the MRL acquisition, valued using an income approach with unobservable inputs, was $4.4 million as of September 30, 2020[129][130][131] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management's analysis of financial performance, liquidity, and capital resources, including COVID-19 impacts Executive Summary Federal Signal Corporation is a global manufacturer and supplier of vehicles and equipment for maintenance and infrastructure (Environmental Solutions Group) and safety, security, and communication equipment (Safety and Security Systems Group) - Federal Signal Corporation is a leading global manufacturer and supplier for maintenance and infrastructure (Environmental Solutions Group) and safety, security, and communication equipment (Safety and Security Systems Group)[138][139] - The Company provides a comprehensive aftermarket offering including parts, service, repair, equipment rentals, and training, operating 15 principal manufacturing facilities in five countries[138] COVID-19 Update The Company's businesses are deemed essential, allowing most operations to continue despite the COVID-19 pandemic, with proactive measures taken for employee safety and cost savings - The Company's businesses are considered essential, allowing facilities to remain substantially operational despite COVID-19, with a primary focus on employee safety through PPE, social distancing, and enhanced cleaning[141] - Labor availability issues and supply chain disruptions impacted production in Q2 and Q3, but procurement teams mitigated risks by securing safety stock and identifying alternate suppliers[142] - Sales and marketing activities improved in Q3 as government restrictions eased, leading to a $64.5 million (32%) sequential increase in orders compared to Q2[143] - The Company implemented cost-saving actions including temporary salary reductions, furloughs, permanent reductions in force, and limited discretionary spending to mitigate financial impacts[148] Operating Results (Consolidated) Consolidated net sales decreased by 9% for the three months and 8% for the nine months ended September 30, 2020, primarily due to lower sales volumes in both segments, leading to declines in operating income, net income, and diluted EPS | Metric | 3 Months Ended Sep 30, 2020 (in millions) | 3 Months Ended Sep 30, 2019 (in millions) | Change (in millions) | 9 Months Ended Sep 30, 2020 (in millions) | 9 Months Ended Sep 30, 2019 (in millions) | Change (in millions) | | :----- | :---------------------------------------- | :---------------------------------------- | :------------------- | :---------------------------------------- | :---------------------------------------- | :------------------- | | Net sales | $279.8 | $308.8 | $(29.0) | $836.0 | $906.9 | $(70.9) | | Operating income | $34.0 | $38.6 | $(4.6) | $97.6 | $110.7 | $(13.1) | | Net income | $25.3 | $28.4 | $(3.1) | $70.1 | $78.7 | $(8.6) | | Diluted EPS | $0.41 | $0.46 | $(0.05) | $1.14 | $1.28 | $(0.14) | | Total orders | $265.8 | $328.8 | $(63.0) | $771.0 | $935.8 | $(164.8) | | Backlog | $319.7 | $366.9 | $(47.2) | $319.7 | $366.9 | $(47.2) | - Consolidated operating margin for the three months ended September 30, 2020, was 12.2% (down 0.3% YoY) and for the nine months was 11.7% (down 0.5% YoY)[149][150] Net sales (MD&A Analysis) Net sales decreased by $29.0 million (9%) for the three months and $70.9 million (8%) for the nine months ended September 30, 2020, primarily due to lower sales volumes in both segments - Environmental Solutions Group net sales decreased by $23.0 million (9%) in Q3 2020, primarily due to reduced shipments of industrial vacuum loaders ($10.4M), road-marking equipment ($6.1M), street sweepers ($5.1M), dump truck bodies ($2.9M), and waterblasting equipment ($2.3M)[158] - Safety and Security Systems Group net sales decreased by $6.0 million (11%) in Q3 2020, mainly due to lower sales of industrial signaling equipment and public safety equipment[158] - For the nine months, Environmental Solutions Group net sales decreased by $62.5 million (8%), with significant declines in safe-digging trucks ($18.2M), industrial vacuum loaders ($13.8M), and street sweepers ($10.7M), partially offset by a $15.1 million increase from MRL acquisition-related road-marking equipment[159] Cost of sales (MD&A Analysis) Cost of sales decreased by $19.6 million (9%) for the three months and $47.3 million (7%) for the nine months ended September 30, 2020, primarily reflecting lower sales volumes across both segments - Cost of sales decreased by $19.6 million (9%) in Q3 2020, with Environmental Solutions Group down $17.6 million (9%) and Safety and Security Systems Group down $2.0 million (6%), both primarily due to lower sales volumes[160] - For the nine months, cost of sales decreased by $47.3 million (7%), with Environmental Solutions Group down $44.8 million (8%) due to lower sales volumes and favorable foreign currency, partially offset by MRL acquisition costs[161] Gross profit (MD&A Analysis) Gross profit decreased by $9.4 million (11%) for the three months and $23.6 million (10%) for the nine months ended September 30, 2020, with gross margin declining due to lower sales volumes and unfavorable sales mix - Gross profit decreased by $9.4 million (11%) in Q3 2020, with Environmental Solutions Group down $5.4 million and Safety and Security Systems Group down $4.0 million[163] - Gross margin for Q3 2020 was 25.9% (down from 26.6%) and for the nine months was 26.0% (down from 26.6%), primarily due to lower sales volumes and unfavorable sales mix in the Safety and Security Systems Group[163][164] Selling, engineering, general and administrative expenses (MD&A Analysis) SEG&A expenses decreased by $4.6 million (11%) for the three months and $10.7 million (8%) for the nine months ended September 30, 2020, largely due to cost-saving actions implemented in response to the COVID-19 pandemic - SEG&A expenses decreased by $4.6 million (11%) in Q3 2020, driven by reductions in both Safety and Security Systems Group ($2.8M) and Environmental Solutions Group ($2.5M), partially offset by a $0.7 million increase in Corporate SEG&A[165] - For the nine months, SEG&A expenses decreased by $10.7 million (8%), primarily due to cost-saving actions related to COVID-19, with reductions across Safety and Security Systems Group, Corporate, and Environmental Solutions Group[166] Operating income (MD&A Analysis) Operating income decreased by $4.6 million (12%) for the three months and $13.1 million (12%) for the nine months ended September 30, 2020, reflecting reduced gross profit across both segments, partially offset by lower corporate expenses for the nine-month period - Operating income decreased by $4.6 million (12%) in Q3 2020, with Environmental Solutions Group down $2.9 million and Safety and Security Systems Group down $1.2 million, and a $0.5 million increase in Corporate expenses[167] - For the nine months, operating income decreased by $13.1 million (12%), driven by reductions in Environmental Solutions Group ($15.4M) and Safety and Security Systems Group ($1.6M), partially offset by a $3.9 million decrease in Corporate expenses[168] Interest expense (MD&A Analysis) Interest expense decreased by $0.9 million for the three months and $1.6 million for the nine months ended September 30, 2020, primarily due to lower interest rates compared to the prior year - Interest expense decreased by $0.9 million in Q3 2020 and $1.6 million for the nine months, largely due to lower interest rates[169] Other (income) expense, net (MD&A Analysis) The Company recognized $0.1 million in other income for the three months ended September 30, 2020, compared to $0.2 million in other expense in the prior year, while for the nine months, other expense increased to $2.1 million due to a multi-employer pension plan withdrawal - Other income of $0.1 million was realized in Q3 2020, a $0.3 million improvement from the prior-year quarter's $0.2 million expense[170] - For the nine months, other expense totaled $2.1 million, an increase of $1.6 million from the prior year, primarily due to a $2.5 million charge related to a multi-employer pension plan withdrawal[170] Income tax expense (MD&A Analysis) Income tax expense decreased by $0.3 million for the three months and $4.5 million for the nine months ended September 30, 2020, mainly due to lower pre-tax income and increased excess tax benefits from stock compensation - Income tax expense decreased by $0.3 million in Q3 2020 and $4.5 million for the nine months, primarily due to lower pre-tax income and $0.7 million (Q3) and $2.3 million (9M) more excess tax benefits from stock compensation[171][172] - The effective tax rate for Q3 2020 was 23.1% (vs. 21.8% in prior year, which included a $0.6M audit benefit) and for the nine months was 23.0% (vs. 24.4%)[171][172] Net income (MD&A Analysis) Net income decreased by $3.1 million for the three months and $8.6 million for the nine months ended September 30, 2020, primarily driven by reduced operating income and increased other expenses (for the nine-month period), partially offset by lower interest and income tax expenses - Net income decreased by $3.1 million in Q3 2020, primarily due to reduced operating income, partially offset by lower interest expense and increased other income[173] - For the nine months, net income decreased by $8.6 million, mainly due to reduced operating income and increased other expense, partially offset by lower interest and income tax expenses[174] Environmental Solutions Group (Segment Results) The Environmental Solutions Group experienced a decline in total orders and net sales for both the three and nine months ended September 30, 2020, primarily due to reduced demand for various equipment types in the U.S. and unfavorable foreign currency impacts | Metric (in millions) | 3 Months Ended Sep 30, 2020 | 3 Months Ended Sep 30, 2019 | Change | 9 Months Ended Sep 30, 2020 | 9 Months Ended Sep 30, 2019 | Change | | :------------------- | :-------------------------- | :-------------------------- | :----- | :-------------------------- | :-------------------------- | :----- | | Net sales | $231.0 | $254.0 | $(23.0) | $678.2 | $740.7 | $(62.5) | | Operating income | $33.0 | $35.9 | $(2.9) | $91.0 | $106.4 | $(15.4) | | Operating margin | 14.3% | 14.1% | 0.2% | 13.4% | 14.4% | (1.0)% | | Total orders | $220.0 | $270.2 | $(50.2) | $615.2 | $767.1 | $(151.9) | | Backlog | $292.6 | $337.8 | $(45.2) | $292.6 | $337.8 | $(45.2) | - U.S. orders for Environmental Solutions decreased by $66.3 million (30%) in Q3 2020, driven by reductions in street sweepers ($20.6M), road-marking equipment ($17.1M), sewer cleaners ($14.9M), and safe-digging trucks ($9.4M)[176] - For the nine months, U.S. orders decreased by $140.7 million (23%), with significant declines in safe-digging trucks ($45.2M), sewer cleaners ($40.9M), and street sweepers ($25.1M)[181] - Non-U.S. sales increased by $6.6 million (18%) in Q3 2020, primarily due to a $6.3 million increase in aftermarket demand, largely from higher used equipment sales[177] Safety and Security Systems Group (Segment Results) The Safety and Security Systems Group experienced decreases in total orders, net sales, and operating income for both the three and nine months ended September 30, 2020, with gross margin declining due to unfavorable sales mix | Metric (in millions) | 3 Months Ended Sep 30, 2020 | 3 Months Ended Sep 30, 2019 | Change | 9 Months Ended Sep 30, 2020 | 9 Months Ended Sep 30, 2019 | Change | | :------------------- | :-------------------------- | :-------------------------- | :----- | :-------------------------- | :-------------------------- | :----- | | Net sales | $48.8 | $54.8 | $(6.0) | $157.8 | $166.2 | $(8.4) | | Operating income | $7.4 | $8.6 | $(1.2) | $25.2 | $26.8 | $(1.6) | | Operating margin | 15.2% | 15.7% | (0.5)% | 16.0% | 16.1% | (0.1)% | | Total orders | $45.8 | $58.6 | $(12.8) | $155.8 | $168.7 | $(12.9) | | Backlog | $27.1 | $29.1 | $(2.0) | $27.1 | $29.1 | $(2.0) | - U.S. orders for Safety and Security Systems decreased by $7.9 million in Q3 2020, primarily due to reductions in public safety equipment ($3.7M), warning systems ($2.3M), and industrial signaling equipment ($1.9M)[188] - Gross margin for Q3 2020 was 36.7% (down from 40.0%) and for the nine months was 37.7% (down from 39.4%), primarily due to unfavorable sales mix[190][195] - SEG&A expenses decreased by $2.8 million (21%) in Q3 2020 and $4.6 million (12%) for the nine months, largely due to COVID-19 cost-saving actions[191][196] Corporate Expenses (MD&A) Corporate operating expenses increased by $0.5 million to $6.4 million in the three months ended September 30, 2020, due to higher post-employment expenses, but decreased by $3.9 million to $18.6 million for the nine months due to COVID-19 cost-saving actions - Corporate operating expenses increased to $6.4 million in Q3 2020 (from $5.9M), primarily due to higher post-employment expenses[198] - For the nine months, corporate operating expenses decreased by $3.9 million to $18.6 million, mainly due to reductions in post-employment expenses, incentive-based compensation, and employee costs from COVID-19 cost-saving actions[199] Seasonality of Company's Business The Company's business experiences seasonal influences, typically with lower equipment sales in Q1 and higher rental income and parts sales in Q2 and Q3, though COVID-19 may alter these trends - The Company typically experiences lower equipment sales in Q1 and higher rental income and parts sales in Q2 and Q3 due to seasonal factors and weather conditions impacting North American maintenance activities[200] - The COVID-19 pandemic may cause the Company's 2020 results to deviate from typical seasonal trends[200] Financial Condition, Liquidity and Capital Resources The Company maintains a strong liquidity position with $66.2 million in cash and cash equivalents and $250.6 million available under its revolving credit facility as of September 30, 2020 - As of September 30, 2020, the Company had $66.2 million in cash and cash equivalents and $250.6 million available for borrowings under its $500 million revolving credit facility[201][202] - Net cash provided by operating activities increased to $79.6 million for the nine months ended September 30, 2020 (from $58.6M in prior year), driven by working capital timing, lower rental fleet investment, and CARES Act deferrals ($4.8M payroll tax)[203] - Net cash used for investing activities decreased to $29.2 million (from $70.3M in prior year), with capital expenditures at $24.3 million and $6.2 million paid for the PWE acquisition[204] - Net cash used for financing activities was $16.0 million (vs. $10.5M provided in prior year), including $14.5 million in cash dividends, $13.7 million in share repurchases, and $9.0 million for stock-based compensation tax withholdings[205] - The Company anticipates 2020 capital expenditures to be in the range of $30 million to $35 million[206] Contractual Obligations and Off-Balance Sheet Arrangements There have been no material changes to the Company's contractual obligations and off-balance sheet arrangements during the nine months ended September 30, 2020 - No material changes occurred in the Company's contractual obligations and off-balance sheet arrangements during the nine months ended September 30, 2020[207] Item 3. Quantitative and Qualitative Disclosures About Market Risk There have been no significant changes in the Company's exposure to market risk during the nine months ended September 30, 2020 - No significant changes in market risk exposure occurred during the nine months ended September 30, 2020[209] Item 4. Controls and Procedures The Company's management concluded that its disclosure controls and procedures were effective as of September 30, 2020, with no material changes in internal control over financial reporting - The Company's disclosure controls and procedures were evaluated and deemed effective as of September 30, 2020, by management, including the CEO and CFO[210] - No material changes in internal control over financial reporting occurred during the three months ended September 30, 2020[211] PART II. OTHER INFORMATION Item 1. Legal Proceedings The information regarding legal proceedings is incorporated by reference from Note 8 – Commitments and Contingencies in Part I of this Form 10-Q - Legal proceedings information is incorporated by reference from Note 8 – Commitments and Contingencies[214] Item 1A. Risk Factors There have been no material changes to the Company's risk factors from its 2019 Form 10-K, except for the significant and highly uncertain adverse impact of the COVID-19 pandemic on its business, financial condition, and operating results - No material changes to risk factors from the 2019 Form 10-K, except for the highly uncertain and potentially material adverse impact of the COVID-19 pandemic[215][216] - The COVID-19 pandemic's impact depends on factors like its duration, governmental actions (e.g., restrictions, mandates), effects on customers and supply chain, labor availability, demand volatility, and financial market stability[216] - The COVID-19 pandemic may heighten many existing risks described in the Company's 2019 Annual Report on Form 10-K[217] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds During July 2020, the Company repurchased 7,227 shares of common stock for $0.2 million at an average price of $27.71 per share under its publicly announced stock repurchase programs | Period | Total Number of Shares Purchased | Average Price Paid Per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Maximum Dollar Value of Shares That May Yet Be Purchased Under the Plans or Programs | | :----- | :------------------------------- | :--------------------------- | :------------------------------------------------------------------------------- | :-------------------------------------------------------------------------------- | | July 2020 | 7,227 | $27.71 | 7,227 | $90,524,049 | | August 2020 | — | — | — | $90,524,049 | | September 2020 | — | — | — | $90,524,049 | - The Company has two active stock repurchase programs, authorized in November 2014 and March 2020, each for up to $75.0 million of common stock[218][219] Item 3. Defaults Upon Senior Securities The Company reported no defaults upon senior securities - No defaults upon senior securities were reported[220] Item 4. Mine Safety Disclosures This item is not applicable to the Company - Mine Safety Disclosures are not applicable to the Company[221] Item 5. Other Information On October 29, 2020, the Company issued a press release announcing its Q3 2020 financial results and posted earnings call presentation slides on its website, which are attached as Exhibits 99.1 and 99.2 to this Form 10-Q - The Company issued a press release and posted earnings call presentation slides on October 29, 2020, announcing Q3 2020 financial results, attached as Exhibits 99.1 and 99.2[222] Item 6. Exhibits This section lists the exhibits filed with the Form 10-Q, including certifications, financial results press release, earnings call presentation slides, and XBRL interactive data files - Exhibits include CEO and CFO certifications (31.1, 31.2, 32.1, 32.2), the Q3 2020 financial results press release (99.1), earnings call presentation slides (99.2), and various XBRL taxonomy documents (101.INS, 101.SCH, 101.CAL, 101.DEF, 101.LAB, 101.PRE, 104)[225] SIGNATURE SIGNATURE The report was signed on October 29, 2020, by Ian A. Hudson, Senior Vice President and Chief Financial Officer of Federal Signal Corporation - The report was signed by Ian A. Hudson, Senior Vice President and Chief Financial Officer, on October 29, 2020[228]