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FSS > SEC Filings for FSS > Form 10-Q on 9-Nov-2012All Recent SEC Filings

Show all filings for FEDERAL SIGNAL CORP /DE/ | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for FEDERAL SIGNAL CORP /DE/


9-Nov-2012

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") is designed to provide information that is supplemental to, and shall be read together with, the condensed consolidated financial statements and the accompanying notes contained in this Form 10-Q and the Annual Report on Form 10-K for the year ended December 31, 2011. Information in MD&A is intended to assist the reader in obtaining an understanding of the condensed consolidated financial statements, information about the Company's business segments and how the results of those segments impact the Company's results of operations and financial condition as a whole, and how certain accounting principles affect the Company's condensed consolidated financial statements. The Company's results for interim periods are not necessarily indicative of annual operating results.

Executive Summary

The Company is a leading global manufacturer and supplier of (i) safety, security and communication equipment, (ii) street sweepers, sewer cleaners and other environmental vehicles and equipment, and (iii) vehicle-mounted, aerial platforms for fire fighting, rescue, electric utility and industrial uses. We also are a designer and supplier of technology-based products and services for the public safety market. In addition, we sell parts and tooling, and provide service, repair, equipment rentals and training as part of a comprehensive offering to our customer base. We operate 13 manufacturing facilities in six countries around the world and provide our products and integrated solutions to municipal, governmental, industrial and commercial customers in approximately 100 countries in all regions of the world.


Table of Contents

Results of Operations

The following information summarizes our consolidated statements of operations
and illustrates the key financial indicators used to assess our consolidated
financial results:



                                             Three months ended September 30,                Nine months ended September 30,
($ in millions, except per share data)      2012              2011         Change          2012              2011         Change
Net sales                                $    185.0        $    167.8      $  17.2      $    585.5        $    493.7      $  91.8
Cost of sales                                 139.4             131.3          8.1           445.4             384.0         61.4

Gross profit                                   45.6              36.5          9.1           140.1             109.7         30.4
Selling, engineering, general and
administrative                                 33.2              28.0          5.2           100.8              88.0         12.8
Restructuring charge                             -                 -            -              0.8                -           0.8

Operating income                               12.4               8.5          3.9            38.5              21.7         16.8
Interest expense                                5.2               4.5          0.7            15.7              11.9          3.8
Debt settlement charges                         1.9                -           1.9             3.5                -           3.5
Other (income) expense, net                    (0.1 )             0.5         (0.6 )           0.2               0.4         (0.2 )

Income before income taxes                      5.4               3.5          1.9            19.1               9.4          9.7
Income tax expense                             (1.0 )            (0.2 )       (0.8 )          (1.9 )            (2.8 )        0.9

Income from continuing operations               4.4               3.3          1.1            17.2               6.6         10.6
Loss from discontinued operations and
disposal, net of tax                          (19.1 )            (0.9 )      (18.2 )         (49.4 )            (5.6 )      (43.8 )

Net (loss) income                        $    (14.7 )      $      2.4      $ (17.1 )    $    (32.2 )      $      1.0      $ (33.2 )

Other data:
Operating margin                                6.7 %             5.1 %        1.6 %           6.6 %             4.4 %        2.2 %
Earnings per share - continuing
operations                               $     0.07        $     0.05      $  0.02      $     0.28        $     0.11      $  0.17
Orders                                   $    187.7        $    194.9      $  (7.2 )    $    618.3        $    592.0      $  26.3
Depreciation and amortization            $      3.0        $      3.1      $  (0.1 )    $      9.6        $      9.6      $    -

Net Sales

Net sales increased $17.2 million and $91.8 million for the three and nine months ended September 30, 2012, respectively, compared to the respective prior-year periods, primarily as a result of increased shipments across most segments, favorable product mix and minor price increases, partially offset by lower export sales to certain Asian customers and unfavorable currency impacts.

Cost of Sales

Cost of sales increased $8.1 million and $61.4 million for the three and nine months ended September 30, 2012, respectively, compared to the respective prior-year periods, primarily as a result of increased sales volume, offset by favorable product mix and currency impacts. Net sales increased 10% and 19% for the three and nine months ended September 30, 2012 over the prior-year periods, while cost of sales increased 6% and 16%, respectively, compared to the respective prior year periods.

Gross Profit

Gross profit increased $9.1 million and $30.4 million for the three and nine months ended September 30, 2012, respectively, compared to the respective prior-year periods as a result of increased sales volume and an overall favorable change in product mix.

Restructuring Charges

During the nine months ended September 30, 2012, the Company recorded expenses of $0.8 million primarily related to severance costs in the Safety and Security Systems Group. No restructuring charges were incurred during 2011.

Operating Income

Operating income increased $3.9 million and $16.8 million in the three and nine months ended September 30, 2012, respectively, compared to the respective prior-year periods. The increase in operating income was primarily a result of higher sales volume and an overall favorable change in product mix.


Table of Contents

Interest Expense

Interest expense increased $0.7 million and $3.8 million for the three and nine months ended September 30, 2012, respectively, compared to the respective prior year periods, primarily due to an increase in interest rates on the Company's debt financing agreements entered into in February 2012, partially offset by interest expense allocated to discontinued operations of $1.7 million and $4.8 million for the three and nine months ended September 30, 2012.

Debt Settlement Charges

In the first quarter of 2012, the Company recorded $1.6 million of charges related to the termination of its prior debt agreements. On September 4, 2012, the Company expensed $1.9 million of deferred debt issuance costs related to the $75.0 million prepayment of the outstanding principal for the Term Loan and ABL Facility. The year-to-date charges totaled $3.5 million and included $1.0 million of make-whole interest payments and a write-off of deferred financing costs of $2.5 million.

Effective Tax Rate

The Company recognized an income tax provision of $1.0 million and $0.2 million for the three months ended September 30, 2012 and 2011, respectively. For the nine months ended September 30, 2012 and 2011, the Company recognized an income tax provision of $1.9 million and $2.8 million, respectively. The income tax provision for the three and nine months ended September 30, 2012 and 2011 primarily relates to tax expense at non-U.S. operations that are not in a cumulative loss position. Due to the Company's recent domestic cumulative losses for book purposes and the uncertainty of the realization of certain deferred tax assets, the Company continues to adjust its valuation allowance as the deferred tax assets increase or decrease, resulting in effectively no recorded tax benefit for domestic operating losses. The Company's effective tax rate was 19% and 6% for the three months ended September 30, 2012 and 2011, respectively. For the nine months ended September 30, 2012 and 2011, the Company's effective tax rate was 10% and 30%, respectively.

The Company's unrecognized tax benefits were $4.1 million at September 30, 2012 and $4.3 million at December 31, 2011, of which $4.0 million and $ 4.2 million at September 30, 2012 and December 21, 2011, respectively, are tax benefits that, if recognized, would reduce the annual effective tax rate. The Company expects the unrecognized tax benefits to decrease by $1.4 million over the next twelve months. The Company's continuing practice is to recognize interest and penalties related to income tax matters in income tax expense.

Income from Continuing Operations

Income from continuing operations increased $1.1 million and $10.6 million for the three and nine months ended September 30, 2012, respectively, compared to the respective prior-year periods as a result of improved operating income, partially offset by higher interest expense and debt settlement charges.

Discontinued Operations and Disposal

Loss from discontinued operations and disposal, net of tax was $19.1 million and $0.9 million for the three months ended September 30, 2012 and 2011, respectively, and $49.4 million and $5.6 million for the nine months ended September 30, 2012 and 2011, respectively. For further discussion of the loss from discontinued operations and disposals, see Note 12 of the condensed consolidated financial statements contained under Item I of Part I of this Form 10-Q.

Orders and Backlog

Orders increased $26.3 million or 4% for the nine months ended September 30, 2012 and were $187.7 million and $194.9 million for the three months ended September 30, 2012 and 2011, respectively. In the three months ended September 30, 2012, U.S. orders increased $3.4 million or 3% and non-U.S. orders decreased $10.6 million or 13% compared to the prior-year periods. In the nine months ended September 30, 2012, U.S. orders increased $30.3 million or 9%, and non-U.S. orders decreased $4.0 million or 2%, compared to the prior-year periods.

U.S. municipal and governmental orders increased $14.0 million, or 26%, in the three months ended September 30, 2012 compared to the prior-year period, resulting from order increases of $6.3 million for street sweepers, $6.0 million for sewer cleaners, and $1.7 million for municipal products within the Safety and Security Systems Group. U.S. municipal and governmental orders increased 17%, or $29.8 million, for the nine months ended September 30, 2012. U.S. municipal and governmental orders in the Safety and Security Systems and Environmental Solutions Groups improved $12.8 million and $17.0 million, respectively, for the nine months ended September 30, 2012.


Table of Contents

U.S. industrial orders decreased 19% or $10.6 million in the three months ended September 30, 2012 compared to the prior-year period, resulting from order decreases within the Environment Solutions Group of $12.1 million, partially offset by modest order increases of $1.0 million and $0.5 million, respectively, for the Safety and Security Systems and Fire Rescue Groups. For the nine months ended September 30, 2012, U.S. industrial orders increased $0.5 million, or 0.3%. Orders in the Safety and Security Systems and Fire Rescue Groups improved $3.9 million and $2.0 million, respectively, largely offset by decreases in the Environmental Solutions Group of $5.4 million. The decrease in the nine-month period within the Environmental Solutions Group was primarily due to a decline in vacuum truck orders compared to the prior year.

For the three months ended September 30, 2012 and 2011 respectively, the Fire Rescue and Safety and Security Systems Groups had decreases in non-U.S. orders of $7.8 million and $3.1 million, respectively, while demand in the Environmental Solutions Group increased $0.3 million. For the nine months ended September 30, 2012 and 2011 respectively, the Fire Rescue Group had increases in orders of $1.5 million, the Safety and Security Systems Group had decreased orders of $5.5 million, and orders within the Environmental Solutions Group were flat compared to the prior-year period.

Backlog was $325.9 million at September 30, 2012, which was $30.7 million higher than at December 31, 2011.

Safety and Security Systems

The following table summarizes the Safety and Security Systems Group's operating
results as of and for the three and nine-month periods ended September 30, 2012
and 2011, respectively:



                                          Three months ended September 30,                Nine months ended September 30,
($ in millions)                         2012               2011         Change          2012              2011         Change
Orders                               $     57.1         $     57.4      $  (0.3 )    $    182.1        $    170.9      $  11.2
Backlog                                    38.7               27.8         10.9            38.7              27.8         10.9
Net sales                                  57.8               52.0          5.8           173.2             161.0         12.2
Operating income                            7.8                4.4          3.4            18.7              15.9          2.8
Operating margin                           13.5 %              8.5 %        5.0 %          10.8 %             9.9 %        0.9 %
Depreciation and amortization        $      1.0         $      1.1      $  (0.1 )    $      3.2        $      3.3      $  (0.1 )

Orders of $57.1 million in the third quarter decreased $0.3 million compared to the same quarter in 2011. U.S. orders increased $2.8 million due to improved municipal spending in the police, fire and outdoor warning markets and improvement in the industrial market. Non-U.S. orders declined $3.1 million primarily due to a $2.1 million order cancellation and weak demand in the European and export markets. Orders increased $11.2 million or 7% for the nine months ended September 30, 2012 compared to the respective prior-year period. U.S. orders increased $16.7 million, primarily as a result of increased municipal and governmental spending and strong industrial demand. Non-U.S. orders decreased $5.5 million, driven primarily by weak demand in European and Asian markets.

Net sales increased $5.8 million for the three months ended September 30, 2012 compared to the respective prior-year period. Higher industrial sales of $4.0 million, improved domestic municipal shipments of $2.3 million, market share gains in the police market of $1.9 million and higher mining product sales of $1.1 million were partially offset by lower exports of $2.0 million and exchange rate impacts of 2.5% of sales. Net sales increased $12.2 million or 8% for the nine months ended September 30, 2012 compared to the respective prior-year period. U.S. sales grew by $4.0 million due to market share gains in police and fire markets, $2.6 million due to increased warning system shipments, $1.4 million due to strong industrial sales, and minor price increases. International sales were lower by $4.2 million due to lower export sales to certain Asian customers and unfavorable currency impacts of approximately 2.0% of sales.

Cost of sales increased $1.9 million and $5.0 million for the three and nine months ended September 30, 2012 compared to the respective prior-year periods. The increases were at a lower percentage of sales rate than the increase in sales due to higher absorption of fixed overhead costs, higher growth rates in higher margin industrial divisions and product lines, and material cost reductions on certain electrical components, as well as a 2% favorable exchange rate impact. In addition, cost of sales was unfavorably impacted by $0.6 million and $2.0 million higher charges for inventory obsolescence reserves for the three and nine months ended September 30, 2012, respectively, partially offset by $0.4 million lower warranty provisions in the third quarter of 2012 compared to the prior year.

Operating income increased $3.4 million for the three months ended September 30, 2012 compared to the respective prior-year period, primarily due to higher sales volumes as well as higher gross profit, which more than offset higher operating expenses to support the higher sales levels. Operating income increased $2.8 million for the nine months ended September 30, 2012 compared to the respective prior-year period due to higher sales of $12.2 million, slight price increases in several divisions, and lower warranty expense of $0.4 million and the other reductions in cost of sales noted above, which were partially offset by higher charges for inventory reserves of $2.0 million. Improvements in gross margin were partially offset by higher operating expenses to support higher sales levels. In addition, the Safety and Security Systems Group recorded $0.9 million of restructuring charges in the nine months ended September 30 2012, while no restructuring charges were recorded during the respective prior year period.


Table of Contents

Fire Rescue

The following table summarizes the Fire Rescue Group's operating results as of
and for the three and nine-month periods ended September 30, 2012 and 2011,
respectively:



                                          Three months ended September 30,                Nine months ended September 30,
($ in millions)                         2012              2011          Change          2012              2011         Change
Orders                               $      34.7        $    42.0       $  (7.3 )    $    112.3        $    108.8      $   3.5
Backlog                                    101.3             95.7           5.6           101.3              95.7          5.6
Net sales                                   25.6             22.2           3.4            90.7              68.1         22.6
Operating income                             1.9              0.2           1.7             4.4               1.7          2.7
Operating margin                             7.4 %            0.9 %         6.5 %           4.9 %             2.5 %        2.4 %
Depreciation and amortization        $       0.6        $     0.7       $  (0.1 )    $      1.9        $      1.9      $    -

Orders of $34.7 million in the third quarter decreased $7.3 million compared to the same quarter in 2011. The decrease is due to a decline in the average order size for fire-lift products from customers in Asia compared to the prior year, when chassis orders were steadily on the rise. Orders increased $3.5 million for the nine months ended September 30, 2012 compared to the respective prior-year period, primarily as result of strong demand for fire-lift products in Asia and strong demand for industrial and rental products in Australia.

Net sales increased $3.4 million and $22.6 million for the three and nine months ended September 30, 2012 compared to the respective prior-year periods. For the three months ended September 30, 2012, net sales increased $4.8 million as a result of increased Asian and Australian business together with some increased shipments to European markets, and $1.6 million of higher pricing attributable to sales commissions, partially offset by unfavorable currency impacts of $3.2 million. The strong backlog and improvements in manufacturing processes also contributed to the growth in sales. Year-to-date, net sales increased $22.6 million, primarily due to sales volumes of $24.5 million, higher pricing attributable to sales commissions of $3.3 million, and a favorable product mix of $4.3 million, partially offset by unfavorable currency impacts of $9.4 million.

Cost of sales increased $0.3 million and $16.9 million for the three and nine months ended September 30, 2012 compared to the respective prior-year periods. For the three months ended September 30, 2012, the cost of sales increase was primarily due to increased sales volume of $3.8 million, offset by operational improvement and product mix impacts of $1.1 million, and currency impacts of $2.4 million. Year-to-date, the cost of sales increase was primarily due to increased sales volume of $19.3 million and product mix of $5.0 million, partially offset by currency impacts of $7.4 million.

Operating income increased $1.7 million and $2.7 million for the three and nine months ended September 30, 2012, compared to the respective prior-year periods. For the three months ended September 30, 2012, operating income increased due to higher sales volumes of $1.0 million, and improved product mix into higher margin products of $1.4 million, partially offset by higher Selling, General, and Administrative ("SG&A") expenses of $0.5 million and unfavorable currency impacts of $0.2 million. For the nine months ended September 30, 2012, compared to the respective prior-year period, operating income increased primarily due to higher sales volumes of $5.3 million, partially offset by higher SG&A expenses of $1.5 million, unfavorable product mix of $0.7 million, and unfavorable currency impacts of $0.5 million.

Environmental Solutions

The following table summarizes the Environmental Solutions Group's operating
results as of and for the three and nine-month periods ended September 30, 2012
and 2011, respectively:



                                          Three months ended September 30,                Nine months ended September 30,
($ in millions)                         2012              2011          Change          2012              2011         Change
Orders                               $     95.9        $     95.5       $   0.4      $    323.9        $    312.3      $  11.6
Backlog                                   185.9             130.3          55.6           185.9             130.3         55.6
Net sales                                 101.6              93.6           8.0           321.6             264.6         57.0
Operating income                            9.3               7.7           1.6            33.8              17.8         16.0
Operating margin                            9.2 %             8.2 %         1.0 %          10.5 %             6.7 %        3.8 %
Depreciation and amortization        $      1.3        $      1.3       $    -       $      3.9        $      3.8      $   0.1

Orders increased $0.4 million for the three months ended September 30, 2012 compared to the respective prior-year period. U.S. orders increased $0.1 million from the prior-year period primarily due to increases in sewer cleaners of $6.1 million, sweepers of $6.0 million, and waterblasters of $0.8 million, partially offset by declines in vacuum trucks of $12.5 million. Non-U.S. orders increased $0.3 million from the prior-year period due to market increases in Canada and Asia, partially offset by declines in Mexico and Europe.


Table of Contents

Year-to-date orders of $323.9 million were up from the previous year by $11.6 million, or 4%. U.S. orders were up 4%, or $11.6 million, primarily as a result of increases in orders for municipal sewer cleaners of $13.8 million, waterblasters of $5.8 million, and sweepers of $2.0 million, partially offset by declines in industrial orders of $11.2 million. Non-U.S. orders remained flat at $63.9 million compared to the prior year.

Net sales increased $8.0 million and $57.0 million for the three and nine months ended September 30, 2012 compared to the respective prior-year periods. U.S. sales increased $3.0 million for the three months primarily resulting from municipal sewer cleaner shipments, which is consistent with the increased order volume. Non-U.S. sales for the three months were up $5.0 million due to strength in Canada, partially offset by declines in Europe and Mexico. U.S. sales for the nine months were up $44.7 million due to increases across all product lines. Non-U.S. sales for the nine months were up $12.3 million resulting from large backlogs, despite flat non-U.S. orders.

Cost of sales increased $6.0 million and $39.5 million for the three and nine months ended September 30, 2012 compared to the respective prior-year periods. Nine-month cost of sales increased 18% over the respective prior-year period, while nine-month sales increased 22%, indicating favorable product mix (more sewer cleaners versus street sweepers).

Operating income increased $1.6 million and $16.0 million for the three and nine months ended September 30, 2012, compared to the respective prior-year periods. Operating income increases are a result of higher gross margins of $2.0 million and $17.5 million, respectively, partially offset by increased SG&A expenses of $0.4 million and $1.5 million, respectively. The increase in SG&A expenses relates to additional commission expenses associated with increased orders.

Corporate Expenses

Corporate expenses were $6.6 million and $3.8 million for the three months ended September 30, 2012 and 2011, respectively. The increase primarily was due to higher incentive compensation expense of $1.1 million in 2012 and a $1.3 million reduction in an insurance reserve associated with carrier paid claims in 2011.

Corporate expenses were $18.4 million and $13.8 million for the nine months ended September 30, 2012 and 2011, respectively. The increase primarily was due to higher incentive compensation expense of $2.8 million and a $1.3 million reduction in an insurance reserve associated with carrier-paid claims in 2011.

Corporate expenses included depreciation and amortization expense of $0.1 million and $0.6 million for the three and nine months ended September 30, 2012, respectively, and $0.0 million and $0.6 million for the comparable periods in 2011, respectively.

Seasonality of Company's Business

Certain of the Company's businesses are susceptible to the influences of seasonal buying or delivery patterns. The Company tends to have lower sales in the first calendar quarter compared to other quarters as a result of these influences.

Financial Position, Liquidity and Capital Resources

The Company utilizes its operating cash flow and available borrowings under its Term Loan and ABL Facility for the working capital needs of its operations, capital expenditures, strategic acquisitions of companies operating in markets related to those already served, pension contributions, debt repayments, share repurchases and dividends.

The following table summarizes the Company's cash flows for the nine-month periods ended September 30, 2012 and 2011:

                                                              Nine months ended
                                                                September 30,
   ($ in millions)                                            2012          2011
   Net cash (used for) provided by operating activities     $    (2.3 )    $   0.8
   Purchases of properties and equipment                         (9.2 )      (10.6 )
   Proceeds from sales of properties, plant and equipment         1.3          1.2
   Increase in restricted cash                                   (1.5 )         -
   Proceeds from sale of FSTech Group                            82.1           -
. . .
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