Federal Signal (FSS) - 2023 Q1 - Quarterly Report

Forward-Looking Statements The report contains forward-looking statements about future performance, strategy, and objectives, subject to material risks and uncertainties - This Form 10-Q contains forward-looking statements regarding the Company's future financial performance, business strategy, plans, goals, and objectives, which are subject to risks and uncertainties that may cause actual results to differ materially[7][8] Additional Information The Company files various reports with the SEC, including 10-K, 10-Q, and 8-K, available on its website and the SEC's website - The Company files Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and other reports with the SEC, making them available free of charge on its website and the SEC's website[9] PART I. FINANCIAL INFORMATION This section presents the Company's unaudited condensed consolidated financial statements and management's discussion and analysis Item 1. Financial Statements (Unaudited) This section presents Federal Signal Corporation's unaudited condensed consolidated financial statements, including key statements and detailed notes on accounting policies and financial position Condensed Consolidated Statements of Operations This statement provides a summary of the Company's revenues, expenses, and net income for the reported periods Condensed Consolidated Statements of Operations | Metric (in millions, except per share) | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | | :----------------------------------- | :-------------------------------- | :-------------------------------- | | Net sales | $385.5 | $330.2 | | Gross profit | $95.8 | $75.7 | | Operating income | $39.5 | $28.5 | | Income before income taxes | $34.7 | $27.6 | | Net income | $27.4 | $20.5 | | Basic EPS | $0.45 | $0.34 | | Diluted EPS | $0.45 | $0.33 | Condensed Consolidated Statements of Comprehensive Income This statement presents the Company's net income and other comprehensive income components, leading to total comprehensive income Condensed Consolidated Statements of Comprehensive Income | Metric (in millions) | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | | :------------------- | :-------------------------------- | :-------------------------------- | | Net income | $27.4 | $20.5 | | Total other comprehensive income | $0.6 | $1.5 | | Comprehensive income | $28.0 | $22.0 | Condensed Consolidated Balance Sheets This statement details the Company's assets, liabilities, and stockholders' equity at specific points in time Condensed Consolidated Balance Sheets | Metric (in millions) | March 31, 2023 | December 31, 2022 | | :------------------- | :------------- | :---------------- | | Total current assets | $566.3 | $531.4 | | Total assets | $1,584.3 | $1,524.3 | | Total current liabilities | $203.1 | $180.5 | | Total liabilities | $702.3 | $663.4 | | Total stockholders' equity | $882.0 | $860.9 | Condensed Consolidated Statements of Cash Flows This statement summarizes the cash inflows and outflows from operating, investing, and financing activities Condensed Consolidated Statements of Cash Flows | Metric (in millions) | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | | :------------------- | :-------------------------------- | :-------------------------------- | | Net cash provided by operating activities | $7.1 | $7.0 | | Net cash used for investing activities | $(19.4) | $(34.3) | | Net cash provided by financing activities | $3.1 | $26.1 | | Decrease in cash and cash equivalents | $(9.1) | $(1.3) | | Cash and cash equivalents at end of period | $38.4 | $39.2 | Condensed Consolidated Statements of Stockholders' Equity This statement outlines changes in the Company's equity accounts, including common stock, retained earnings, and treasury stock Condensed Consolidated Statements of Stockholders' Equity | Metric (in millions) | Balance at January 1, 2023 | Balance at March 31, 2023 | | :------------------- | :------------------------- | :------------------------ | | Common Stock | $69.5 | $69.7 | | Capital in Excess of Par Value | $271.8 | $274.7 | | Retained Earnings | $782.2 | $804.1 | | Treasury Stock | $(178.6) | $(183.1) | | Accumulated Other Comprehensive Loss | $(84.0) | $(83.4) | | Total Stockholders' Equity | $860.9 | $882.0 | - Net income for the three months ended March 31, 2023, contributed $27.4 million to retained earnings[20] Notes to Condensed Consolidated Financial Statements These notes provide detailed explanations and additional information supporting the condensed consolidated financial statements Note 1 – Summary of Significant Accounting Policies This note describes the Company's key accounting principles and the basis of financial statement preparation - The Company's products and services are divided into two reportable segments: Environmental Solutions Group and Safety and Security Systems Group[24] - The unaudited condensed consolidated financial statements are prepared in accordance with U.S. GAAP, with no new accounting pronouncements or changes to significant accounting policies expected to have a material impact[25][28][30] Note 2 – Acquisitions This note details recent business acquisitions, including purchase price and financial impact - On January 3, 2023, the Company acquired Blasters, Inc. for an initial cash consideration of $13.4 million, plus a contingent earn-out of up to $8.0 million, to bolster its position in specialized vehicles for maintenance and infrastructure markets[31][33] Acquisition Details | Acquisition Details (in millions) | Amount | | :------------------------------ | :----- | | Purchase price, inclusive of preliminary closing adjustments | $13.4 | | Estimated fair value of additional consideration | $4.0 | | Total consideration | $17.4 | | Goodwill recognized | $4.5 | - Blasters generated $5.9 million in net sales and $0.6 million in operating income for the period between the acquisition date and March 31, 2023, and its results are included in the Environmental Solutions Group[32][39] Note 3 – Revenue Recognition This note provides a breakdown of net sales by geographic region and major product line Net Sales by Geographic Region and Major Product Line | Metric (in millions) | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | | :----------------------------------- | :-------------------------------- | :-------------------------------- | | Geographic Region: | | | | U.S. | $309.1 | $264.4 | | Canada | $43.9 | $42.3 | | Europe/Other | $32.5 | $23.5 | | Major Product Line: | | | | Environmental Solutions - Vehicles and equipment | $245.3 | $217.4 | | Environmental Solutions - Parts | $54.8 | $40.8 | | Environmental Solutions - Rental income | $11.0 | $9.7 | | Safety and Security Systems - Public safety and security equipment | $40.2 | $36.1 | | Safety and Security Systems - Industrial signaling equipment | $18.6 | $14.2 | | Safety and Security Systems - Warning systems | $7.9 | $5.7 | | Total net sales | $385.5 | $330.2 | - Contract liabilities (customer deposits) were $29.8 million as of March 31, 2023, up from $28.9 million at December 31, 2022, and are generally recognized as net sales within three to six months[44] Note 4 – Inventories This note presents the composition of the Company's inventory, including finished goods, raw materials, and work in process Inventory Components | Inventory Component (in millions) | March 31, 2023 | December 31, 2022 | | :------------------------------ | :------------- | :---------------- | | Finished goods | $107.0 | $97.5 | | Raw materials | $175.0 | $164.3 | | Work in process | $35.6 | $30.9 | | Total inventories | $317.6 | $292.7 | Note 5 – Debt This note details the Company's borrowings, finance lease obligations, and compliance with debt covenants Debt Components | Debt Component (in millions) | March 31, 2023 | December 31, 2022 | | :--------------------------- | :------------- | :---------------- | | 2022 Credit Agreement | $373.6 | $361.0 | | Finance lease obligations | $1.9 | $2.0 | | Total borrowings and finance lease obligations | $375.5 | $363.0 | - The Company was in compliance with all net leverage ratio and interest coverage ratio financial covenants under the 2022 Credit Agreement as of March 31, 2023[50] - Net availability for borrowings under the 2022 Credit Agreement was $415.2 million as of March 31, 2023[51] - The Company uses an interest rate swap with a notional amount of $75.0 million, designated as a cash flow hedge, to fix the floating interest rate component on a portion of its variable-rate debt[52] Note 6 – Goodwill and Other Intangible Assets This note provides information on the Company's goodwill and other intangible assets, including changes from acquisitions Goodwill and Other Intangible Assets | Metric (in millions) | March 31, 2023 | January 1, 2023 | | :------------------- | :------------- | :-------------- | | Goodwill | $458.4 | $453.4 | | Acquisitions (Goodwill) | $4.5 | N/A | | Total intangible assets, net | $212.8 | $208.2 | - Goodwill increased by $4.5 million due to the Blasters acquisition, allocated to the Environmental Solutions Group[38][58] - Amortization expense for the three months ended March 31, 2023, was $3.6 million, up from $3.3 million in the prior-year quarter[60] Note 7 – Income Taxes This note presents the Company's income tax expense and effective tax rate, with explanations for period-over-period changes Income Tax Expense and Effective Tax Rate | Metric | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | | :----- | :-------------------------------- | :-------------------------------- | | Income tax expense (in millions) | $7.3 | $7.1 | | Effective tax rate | 21.0% | 25.7% | - The lower effective tax rate in Q1 2023 was primarily due to a $0.9 million increase in excess tax benefits from stock-based compensation and a $0.5 million benefit from changes in tax reserves[63] Note 8 – Pensions This note details the net periodic pension benefit or expense for the Company's U.S. and non-U.S. plans Net Periodic Pension (Benefit) Expense | Metric (in millions) | Q1 2023 (U.S. Benefit Plan) | Q1 2022 (U.S. Benefit Plan) | Q1 2023 (Non-U.S. Benefit Plan) | Q1 2022 (Non-U.S. Benefit Plan) | | :------------------- | :-------------------------- | :-------------------------- | :------------------------------ | :------------------------------ | | Net periodic pension (benefit) expense | $(0.1) | $(0.1) | $0.1 | $(0.1) | Note 9 – Commitments and Contingencies This note outlines the Company's outstanding commitments, guarantees, warranty liabilities, and legal proceedings - The Company had $30.5 million in outstanding performance and financial standby letters of credit and bid/performance bonds as of March 31, 2023[66] - The maximum potential cash payments for equipment repurchase guarantees amounted to $1.9 million as of March 31, 2023[67] Warranty Liabilities | Warranty Liabilities (in millions) | March 31, 2023 | March 31, 2022 | | :------------------------------- | :------------- | :------------- | | Balance at January 1 | $9.3 | $9.7 | | Provisions to expense | $1.8 | $1.4 | | Payments | $(2.0) | $(1.8) | | Balance at March 31 | $9.2 | $9.3 | - The Company is involved in hearing loss litigation, with a global settlement agreement finalized in November 2019 for approximately 2,160 firefighters in various jurisdictions (excluding Cook and Lackawanna Counties)[108] - Under the global settlement, the Company would pay $700 per eligible firefighter who filed a lawsuit and $300 per eligible claimant who has not yet filed, provided they meet specific hearing loss criteria[108] - An estimated liability for the potential settlement amount has been recognized, and the incremental loss is not expected to be material[110] Note 10 – Earnings Per Share This note provides the calculation of basic and diluted earnings per share for the reported periods Earnings Per Share Calculation | Metric (in millions, except per share) | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | | :----------------------------------- | :-------------------------------- | :-------------------------------- | | Net income | $27.4 | $20.5 | | Weighted average shares outstanding – Basic | 60.7 | 60.7 | | Dilutive effect of common stock equivalents | 0.6 | 0.7 | | Weighted average shares outstanding – Diluted | 61.3 | 61.4 | | Basic EPS | $0.45 | $0.34 | | Diluted EPS | $0.45 | $0.33 | Note 11 – Stockholders' Equity This note details changes in stockholders' equity, including dividends and share repurchase activities - The Board declared a quarterly cash dividend of $0.09 per common share ($5.5 million total) for Q1 2023, and a $0.10 dividend for Q2 2023[116] - No shares were repurchased under the $75.0 million stock repurchase program during the three months ended March 31, 2023, compared to $13.6 million in repurchases in the prior-year quarter[117][118] Accumulated Other Comprehensive Loss | Accumulated Other Comprehensive Loss (in millions) | Balance at January 1, 2023 | Balance at March 31, 2023 | | :----------------------------------------------- | :------------------------- | :------------------------ | | Total | $(84.0) | $(83.4) | Note 12 – Segment Information This note provides financial data for the Company's Environmental Solutions and Safety and Security Systems segments Segment Performance | Metric (in millions) | Q1 2023 (Environmental Solutions) | Q1 2022 (Environmental Solutions) | Q1 2023 (Safety and Security Systems) | Q1 2022 (Safety and Security Systems) | | :------------------- | :-------------------------------- | :-------------------------------- | :------------------------------------ | :------------------------------------ | | Net sales | $318.8 | $274.2 | $66.7 | $56.0 | | Operating income | $37.6 | $26.8 | $12.1 | $7.9 | | Operating margin | 11.8% | 9.8% | 18.1% | 14.1% | | Total assets (March 31, 2023) | $1,265.5 | N/A | $283.3 | N/A | Note 13 – Fair Value Measurements This note describes the Company's fair value hierarchy and measurements for financial assets and liabilities - The Company uses a three-level fair value hierarchy: Level 1 for cash equivalents, Level 2 for interest rate swaps, and Level 3 for contingent consideration liabilities due to unobservable inputs[127][128][131] Fair Value Measurements | Fair Value Measurement (in millions) | Level 1 | Level 2 | Level 3 | Total | | :--------------------------------- | :------ | :------ | :------ | :---- | | Assets: | | | | | | Cash equivalents | $16.3 | — | — | $16.3 | | Liabilities: | | | | | | Contingent consideration | — | — | $6.0 | $6.0 | | Interest rate swaps | — | $0.8 | — | $0.8 | - Contingent consideration liability increased to $6.0 million at March 31, 2023, from $2.7 million at January 1, 2023, primarily due to the Blasters acquisition[134] Note 14 – Subsequent Events This note discloses significant events that occurred after the balance sheet date but before the financial statements were issued - On April 3, 2023, the Company acquired Trackless Vehicles Limited for an initial purchase price of C$54.0 million (approximately $40.0 million), plus a contingent earn-out of up to C$6.0 million (approximately $4.4 million)[135] - Trackless is a leading Canadian manufacturer of multi-purpose, off-road municipal tractors and attachments, expected to be included within the Environmental Solutions Group[136][137] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on the Company's financial performance, condition, and liquidity for the three months ended March 31, 2023, highlighting key operating results, segment-specific performance, corporate expenses, seasonality, and capital resources Executive Summary This summary provides an overview of the Company's business, key financial highlights, and operational performance - Federal Signal Corporation is a leading global manufacturer and supplier of specialized vehicles and equipment for maintenance and infrastructure, and public safety equipment, operating in two reportable segments[140][141] Key Financial Highlights | Metric (in millions) | Q1 2023 | Q1 2022 | Change ($) | Change (%) | | :------------------- | :------ | :------ | :--------- | :--------- | | Net sales | $385.5 | $330.2 | $55.3 | 16.7% | | Operating income | $39.5 | $28.5 | $11.0 | 38.6% | | Total orders | $474.7 | $452.6 | $22.1 | 4.9% | | Backlog | $967.6 | $751.2 | $216.4 | 28.8% | Operating Results (Consolidated) This section analyzes the Company's consolidated net sales, gross profit, operating income, and net income for the period Consolidated Operating Results | Metric (in millions, except per share) | Q1 2023 | Q1 2022 | Change ($) | Change (%) | | :----------------------------------- | :------ | :------ | :--------- | :--------- | | Net sales | $385.5 | $330.2 | $55.3 | 16.7% | | Cost of sales | $289.7 | $254.5 | $35.2 | 13.8% | | Gross profit | $95.8 | $75.7 | $20.1 | 26.6% | | Gross profit margin | 24.9% | 22.9% | 2.0 pp | | | SEG&A expenses | $52.0 | $43.6 | $8.4 | 19.3% | | Operating income | $39.5 | $28.5 | $11.0 | 38.6% | | Operating margin | 10.2% | 8.6% | 1.6 pp | | | Interest expense | $4.7 | $1.3 | $3.4 | 261.5% | | Income before income taxes | $34.7 | $27.6 | $7.1 | 25.7% | | Income tax expense | $7.3 | $7.1 | $0.2 | 2.8% | | Net income | $27.4 | $20.5 | $6.9 | 33.7% | | Diluted earnings per share | $0.45 | $0.33 | $0.12 | 36.4% | Environmental Solutions Group Analysis This section provides a detailed analysis of the Environmental Solutions Group's sales, operating income, and backlog performance Environmental Solutions Group Performance | Metric (in millions) | Q1 2023 | Q1 2022 | Change ($) | Change (%) | | :------------------- | :------ | :------ | :--------- | :--------- | | Net sales | $318.8 | $274.2 | $44.6 | 16.3% | | Operating income | $37.6 | $26.8 | $10.8 | 40.3% | | Operating margin | 11.8% | 9.8% | 2.0 pp | | | Total orders | $395.8 | $387.6 | $8.2 | 2.1% | | Backlog | $901.8 | $690.1 | $211.7 | 30.7% | - U.S. sales increased by $37.0 million, driven by sewer cleaners, street sweepers, safe-digging trucks, and aftermarket revenues, while non-U.S. sales increased by $7.6 million, primarily from aftermarket revenues and metal extraction support equipment[161] - Gross profit margin improved to 22.0% (from 20.2%) due to improved operating leverage from higher sales volumes, pricing actions, and a more favorable sales mix, partially offset by higher material costs[162] Safety and Security Systems Group Analysis This section provides a detailed analysis of the Safety and Security Systems Group's sales, operating income, and backlog performance Safety and Security Systems Group Performance | Metric (in millions) | Q1 2023 | Q1 2022 | Change ($) | Change (%) | | :------------------- | :------ | :------ | :--------- | :--------- | | Net sales | $66.7 | $56.0 | $10.7 | 19.1% | | Operating income | $12.1 | $7.9 | $4.2 | 53.2% | | Operating margin | 18.1% | 14.1% | 4.0 pp | | | Total orders | $78.9 | $65.0 | $13.9 | 21.4% | | Backlog | $65.8 | $61.1 | $4.7 | 7.7% | - Non-U.S. orders increased by $12.9 million, largely due to an $11.6 million improvement in public safety equipment orders, including a large fleet order from a customer in Mexico[166] - Gross profit margin improved to 38.4% (from 36.1%) due to improved operating leverage from higher sales volumes and benefits from pricing actions[168] Corporate Expenses This section discusses the trends and changes in the Company's corporate operating expenses Corporate Operating Expenses | Metric (in millions) | Q1 2023 | Q1 2022 | Change ($) | Change (%) | | :------------------- | :------ | :------ | :--------- | :--------- | | Corporate operating expenses | $10.2 | $6.2 | $4.0 | 64.5% | - The increase in corporate operating expenses was primarily due to higher post-retirement and incentive-based compensation expenses[171] Seasonality of Company's Business This section describes the typical seasonal patterns affecting the Company's equipment sales, rental income, and parts sales - The Company's business is subject to seasonal factors, typically experiencing lower equipment sales in the first calendar quarter and higher rental income and parts sales in the second and third quarters[172] Financial Condition, Liquidity and Capital Resources This section assesses the Company's cash position, operating cash flow, investing activities, and financing activities - The Company believes its existing cash balances, cash flow from operations, and available borrowings under its credit facility will be sufficient to meet its operating needs, capital needs, and financial commitments[173][179] Cash and Cash Equivalents | Metric (in millions) | March 31, 2023 | December 31, 2022 | | :------------------- | :------------- | :---------------- | | Cash and cash equivalents | $38.4 | $47.5 | - Net cash provided by operating activities was $7.1 million in Q1 2023, consistent with the prior-year period[175] - Net cash used for investing activities was $19.4 million in Q1 2023, including $13.4 million for the Blasters acquisition[176] - Net cash provided by financing activities was $3.1 million in Q1 2023, including $12.6 million in increased debt borrowings[177] - Capital expenditures for 2023 are anticipated to be in the range of $25 million to $30 million[178] Contractual Obligations and Off-Balance Sheet Arrangements This section discusses any material changes to the Company's contractual obligations and off-balance sheet arrangements - There have been no material changes in the Company's contractual obligations and off-balance sheet arrangements during the three months ended March 31, 2023, as described in the 2022 Form 10-K[180] Item 3. Quantitative and Qualitative Disclosures About Market Risk This section states that there were no significant changes in the Company's exposure to market risk during the first quarter of 2023 - No significant changes in the Company's exposure to market risk occurred during the three months ended March 31, 2023[181] Item 4. Controls and Procedures Management concluded the Company's disclosure controls were effective as of March 31, 2023, with no material changes to internal control identified, except for the unassessed Blasters acquisition - The Company's Chief Executive Officer and Chief Financial Officer concluded that disclosure controls and procedures were effective as of March 31, 2023[182] - Management has not yet fully assessed the internal control over financial reporting for the recently acquired Blasters, but no other material changes in internal control were identified[183] PART II. OTHER INFORMATION This section provides additional information not covered in the financial statements, including legal proceedings, risk factors, and exhibits Item 1. Legal Proceedings This section incorporates by reference the detailed information on legal proceedings from Note 9 – Commitments and Contingencies in Part I of this Form 10-Q - Information on legal proceedings is incorporated by reference from Note 9 – Commitments and Contingencies[186] Item 1A. Risk Factors No material changes were reported in the Company's risk factors during the first quarter of 2023, as previously described in its Annual Report on Form 10-K for the year ended December 31, 2022 - There have been no material changes in the Company's risk factors as described in its Annual Report on Form 10-K for the year ended December 31, 2022[187] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The Company did not repurchase any shares under its stock repurchase program during the three months ended March 31, 2023, with the maximum dollar value of shares remaining available for purchase at $59,052,829 Stock Repurchase Program Activity | 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 | | :----- | :------------------------------- | :--------------------------- | :----------------------------------------------------------------------------- | :--------------------------------------------------------------------------------- | | January 2023 | — | $— | — | $59,052,829 | | February 2023 | — | $— | — | $59,052,829 | | March 2023 | — | $— | — | $59,052,829 | - No shares were repurchased under the stock repurchase program during the three months ended March 31, 2023[188] Item 3. Defaults Upon Senior Securities The Company reported no defaults upon senior securities during the period - No defaults upon senior securities were reported[189] Item 4. Mine Safety Disclosures This item is not applicable to the Company - Mine Safety Disclosures are not applicable to the Company[190] Item 5. Other Information The Company issued a press release and posted earnings call presentation slides on May 2, 2023, announcing its financial results for the first quarter of 2023, which are filed as Exhibits 99.1 and 99.2 - The Company issued a press release and posted earnings call presentation slides on May 2, 2023, announcing Q1 2023 financial results, filed as Exhibits 99.1 and 99.2[191] Item 6. Exhibits This section lists all exhibits filed with the Form 10-Q, including corporate governance documents, CEO and CFO certifications, and various XBRL interactive data files - Exhibits include Restated Certificate of Incorporation, Amended and Restated By-laws, CEO and CFO Certifications (Sections 302 and 906), First Quarter Financial Results Press Release (99.1), First Quarter Earnings Call Presentation Slides (99.2), and various XBRL documents[193]