Federal Signal (FSS) - 2022 Q3 - Quarterly Report

PART I. FINANCIAL INFORMATION This section presents the company's unaudited condensed consolidated financial statements and management's discussion and analysis for the period Financial Statements (Unaudited) Presents unaudited condensed consolidated financial statements, highlighting increased net sales, inventories, and long-term debt Condensed Consolidated Statements of Operations Highlights (Q3 & Nine Months 2022 vs 2021, in millions, except EPS) | Metric | Q3 2022 | Q3 2021 | 9 Months 2022 | 9 Months 2021 | | :--- | :--- | :--- | :--- | :--- | | Net sales | $346.4 | $298.3 | $1,043.3 | $911.8 | | Operating income | $39.5 | $34.3 | $114.2 | $100.6 | | Net income | $31.8 | $29.2 | $85.8 | $81.1 | | Diluted EPS | $0.52 | $0.47 | $1.40 | $1.31 | Condensed Consolidated Balance Sheet Highlights (in millions) | Metric | Sept 30, 2022 | Dec 31, 2021 | | :--- | :--- | :--- | | Total current assets | $510.8 | $431.0 | | Total assets | $1,465.1 | $1,366.1 | | Total current liabilities | $181.4 | $170.4 | | Total liabilities | $637.1 | $582.1 | | Total stockholders' equity | $828.0 | $784.0 | Condensed Consolidated Statements of Cash Flows Highlights (Nine Months Ended, in millions) | Metric | Sept 30, 2022 | Sept 30, 2021 | | :--- | :--- | :--- | | Net cash provided by operating activities | $32.4 | $55.1 | | Net cash used for investing activities | $(50.1) | $(64.5) | | Net cash provided by financing activities | $14.4 | $16.4 | Note 1 – Summary of Significant Accounting Policies Outlines accounting policies, confirming U.S. GAAP adherence and early adoption of ASU No. 2021-08 - The Company early adopted ASU No. 2021-08, Business Combinations (Topic 805), effective January 1, 2022, which will be applied prospectively to future business combinations[28] - The Company's business is divided into two reportable segments: Environmental Solutions Group and Safety and Security Systems Group[24] Note 2 - Acquisitions Details Ground Force acquisition's final purchase price allocation, including $15.4 million in goodwill Ground Force Acquisition Purchase Price Allocation (in millions) | Item | Value | | :--- | :--- | | Purchase price | $43.1 | | Net assets acquired | $27.7 | | Goodwill | $15.4 | Note 3 – Revenue Recognition Disaggregates net sales by geographic region and product line, showing growth driven by U.S. and Environmental Solutions Net Sales by Geographic Region (in millions) | Region | 9 Months 2022 | 9 Months 2021 | | :--- | :--- | :--- | | U.S. | $840.1 | $692.5 | | Canada | $131.2 | $151.6 | | Europe/Other | $72.0 | $67.7 | | Total | $1,043.3 | $911.8 | Net Sales by Major Product Line (in millions) | Product Line | 9 Months 2022 | 9 Months 2021 | | :--- | :--- | :--- | | Environmental Solutions | $865.3 | $758.5 | | Vehicles and equipment | $668.0 | $578.2 | | Parts | $130.0 | $112.7 | | Safety and Security Systems | $178.0 | $153.3 | Note 4 – Inventories Breaks down inventory components, showing a significant increase to $287.5 million, primarily in raw materials Components of Inventories (in millions) | Component | Sept 30, 2022 | Dec 31, 2021 | | :--- | :--- | :--- | | Finished goods | $97.3 | $87.9 | | Raw materials | $152.8 | $116.4 | | Work in process | $37.4 | $24.8 | | Total inventories | $287.5 | $229.1 | Note 5 – Debt Details debt structure, compliance with covenants, and subsequent entry into a new, larger credit agreement - As of September 30, 2022, the company had $329.5 million drawn on its credit facility and was in compliance with all financial covenants[47][48] - On October 21, 2022, the company entered into a new Third Amended and Restated Credit Agreement (the "2022 Credit Agreement"), which amends and restates the 2019 Credit Agreement[49] Note 6 – Income Taxes Explains income tax expense components, noting effective tax rates of 13.4% for Q3 and 21.2% for nine months - The effective tax rate for Q3 2022 was 13.4%, influenced by a $2.7 million tax benefit from releasing a valuation allowance against foreign tax credits and a $1.1 million benefit from a similar release in the U.K[55] - The effective tax rate for the nine months ended September 30, 2022, was 21.2%, compared to 17.6% in the prior-year period[56] Note 7 – Pensions Summarizes net periodic pension expense (benefit), reporting a $0.4 million benefit for the nine months Net Periodic Pension Expense (Benefit) (in millions) | Period | U.S. Plan | Non-U.S. Plan | | :--- | :--- | :--- | | Three Months Ended Sep 30, 2022 | $(0.2) | $— | | Nine Months Ended Sep 30, 2022 | $(0.2) | $(0.2) | Note 8 – Commitments and Contingencies Details financial commitments, product warranties, and significant legal proceedings, notably ongoing hearing loss litigation - As of September 30, 2022, the company had outstanding performance and financial standby letters of credit and bonds aggregating to $36.5 million[60] - In July 2022, the company issued a $0.2 million settlement payment to resolve claims of approximately 462 firefighters in the Cook County hearing loss litigation[77] - A global settlement agreement was executed on November 4, 2019, to resolve hearing loss claims in multiple jurisdictions, and the company has recognized an estimated liability for the potential settlement amount[101][102] Note 9 – Earnings Per Share Reconciles net income to basic and diluted EPS, showing diluted EPS of $0.52 for Q3 2022 Earnings Per Share Reconciliation (Q3 2022, in millions, except per share data) | Metric | Value | | :--- | :--- | | Net income | $31.8 | | Weighted average shares outstanding – Diluted | 61.0 | | Diluted EPS | $0.52 | Note 10 – Stockholders' Equity Covers changes in stockholders' equity, including $0.09 quarterly dividends and $16.1 million in stock repurchases - The Board of Directors declared quarterly cash dividends of $0.09 per common share during 2022[111][112] - During the nine months ended September 30, 2022, the company repurchased 472,381 shares for a total of $16.1 million; no shares were repurchased in Q3 2022[117] Note 11 – Segment Information Presents financial data for two segments, with Environmental Solutions as the larger contributor to sales and income Segment Performance (Nine Months Ended Sep 30, 2022, in millions) | Segment | Net Sales | Operating Income | Total Assets (as of Sep 30) | | :--- | :--- | :--- | :--- | | Environmental Solutions | $865.3 | $99.8 | $1,163.3 | | Safety and Security Systems | $178.0 | $28.7 | $264.7 | Note 12 – Fair Value Measurements Describes fair value measurement methodology, classifying interest rate swaps as Level 2 and contingent liabilities as Level 3 - The company has contingent consideration liabilities of $2.7 million as of September 30, 2022, related to the MRL and Deist acquisitions, classified as Level 3 fair value measurements[133][136] Note 13 - Subsequent Events Discloses significant post-period events, including the TowHaul acquisition and a new $800 million credit facility - On October 3, 2022, the Company acquired TowHaul Corporation for an initial purchase price of $43.3 million[138] - On October 21, 2022, the Company entered into a new $800 million credit agreement, consisting of a $675 million revolving credit facility and a $125 million term loan[141][142] Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses financial performance, highlighting record backlog, supply chain impacts, and a subsequent debt refinancing - Customer demand reached unprecedented levels, resulting in a record backlog of $824 million as of September 30, 2022[154] - Global supply chain disruptions and cost inflation for raw materials and components continued to impact production levels and profitability, though these were partially mitigated by price increases[155] Consolidated Results Highlights (Q3 2022 vs Q3 2021, in millions) | Metric | Q3 2022 | Q3 2021 | Change | | :--- | :--- | :--- | :--- | | Net sales | $346.4 | $298.3 | +16% | | Operating income | $39.5 | $34.3 | +15% | | Total orders | $382.1 | $350.4 | +9% | Results of Operations Provides detailed income statement analysis, showing 16% net sales growth and 15% operating income growth in Q3 2022 - Q3 2022 net sales increased by $48.1 million (16%) year-over-year, driven by a $35.7 million increase in Environmental Solutions and a $12.4 million increase in Safety and Security Systems[170] - Gross profit margin for Q3 2022 was 23.9%, a slight improvement from 23.8% in Q3 2021, as pricing actions and favorable mix offset margin pressure[174] - Interest expense increased by $1.6 million in Q3 2022 compared to the prior year, due to higher average debt levels and rising interest rates[180] Environmental Solutions Environmental Solutions Group reported 14% net sales growth, but operating margin decreased to 11.9% due to cost inflation Environmental Solutions Performance (Q3 2022 vs Q3 2021, in millions) | Metric | Q3 2022 | Q3 2021 | Change | | :--- | :--- | :--- | :--- | | Net sales | $284.8 | $249.1 | +14% | | Operating income | $33.9 | $30.8 | +10% | | Operating margin | 11.9% | 12.4% | -0.5% | | Total orders | $321.4 | $292.1 | +10% | Safety and Security Systems Safety and Security Systems Group achieved 25% net sales growth and 38% operating income growth in Q3 2022 Safety and Security Systems Performance (Q3 2022 vs Q3 2021, in millions) | Metric | Q3 2022 | Q3 2021 | Change | | :--- | :--- | :--- | :--- | | Net sales | $61.6 | $49.2 | +25% | | Operating income | $10.5 | $7.6 | +38% | | Operating margin | 17.0% | 15.4% | +1.6% | | Total orders | $60.7 | $58.3 | +4% | Financial Condition, Liquidity and Capital Resources Details liquidity and capital management, noting decreased operating cash flow and a new $800 million credit facility - Net cash from operating activities decreased to $32.4 million in the first nine months of 2022 from $55.1 million in 2021, primarily due to strategic increases in accounts receivable and inventory[214] - Capital expenditures for the first nine months of 2022 totaled $45.6 million, which included $27.8 million for the purchase of its University Park, Illinois manufacturing facility[215] - In October 2022, the company entered into a new credit agreement, increasing its revolving credit facility to $675 million and adding a $125 million term loan[218] Quantitative and Qualitative Disclosures About Market Risk Reports no significant changes in market risk exposure during the nine months ended September 30, 2022 - There have been no significant changes in the Company's exposure to market risk during the nine months ended September 30, 2022[223] Controls and Procedures CEO and CFO concluded that disclosure controls and procedures were effective as of September 30, 2022 - The Company's Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures were effective as of September 30, 2022[224] PART II. OTHER INFORMATION This section provides additional information, including legal proceedings, risk factors, equity sales, and exhibits Legal Proceedings Incorporates by reference detailed discussion of legal matters, primarily ongoing hearing loss litigation - Information regarding legal proceedings is incorporated by reference from Note 8 – Commitments and Contingencies to the condensed consolidated financial statements[228] Risk Factors Reports no material changes to risk factors from the Annual Report on Form 10-K - There have been no material changes in the Company's risk factors as described in the Annual Report on Form 10-K for the year ended December 31, 2021[229] Unregistered Sales of Equity Securities and Use of Proceeds Summarizes stock repurchase activity, noting no repurchases in Q3 2022 and $59.1 million remaining Stock Repurchase Activity (Q3 2022) | Period | Total Shares Purchased | Average Price Paid Per Share | | :--- | :--- | :--- | | July 2022 | — | $— | | August 2022 | — | $— | | September 2022 | — | $— | - As of October 1, 2022, the maximum dollar value of shares that may yet be purchased under the plan was $59,052,829[230] Defaults Upon Senior Securities Reports no defaults upon senior securities during the period - None[231] Mine Safety Disclosures This item is reported as not applicable to the company - Not applicable[232] Other Information Notes the issuance of a press release and presentation slides announcing Q3 2022 financial results - On November 3, 2022, the Company issued a press release (Exhibit 99.1) and earnings presentation (Exhibit 99.2) announcing its Q3 2022 financial results[233] Exhibits Lists exhibits filed with the Form 10-Q, including credit agreement and CEO/CFO certifications - Key exhibits filed include the Third Amended and Restated Credit Agreement dated October 21, 2022, and CEO/CFO certifications[237]