Federal Signal Corp (FSS) 2016 Q1 法說會逐字稿

Good day and welcome to the Federal Signal first-quarter call. Today's conference is being recorded. At this time, I would like to turn the call over to Mr. Brian Cooper, Senior Vice President and Chief Financial Officer. Please go ahead.

Good morning and welcome to Federal Signal's first-quarter 2016 conference call. I am Brian Cooper, the Company's Chief Financial Officer. Joining me on this call are Jennifer Sherman, our President and Chief Executive Officer, and Dennis Martin, our Executive Chairman.

We will refer to some presentation slides today, as well as to the earnings news release which we issued this morning. The slides can be followed online by going to our website, federalsignal.com, clicking on the investor call icon, and signing into the webcast. We have also posted the slide presentation and the news release under the investor tab on our website.

Before we begin, I would like to remind you that some of our comments made today may contain forward-looking statements that are subject to the Safe Harbor language found in today's news release and in Federal Signal's filings with the Securities and Exchange Commission. These documents are available on our website.

Our presentation also contains some measures that are not in accordance with US generally accepted accounting principles. In our news release and filings, we reconcile these non-GAAP measures to GAAP measures. In addition, we will file our Form 10-Q today.

I'm going to start today by addressing our financial results. Jennifer will then provide her perspective on our performance, current market conditions, and our outlook for the remainder of 2016. After our prepared comments, Dennis, Jennifer, and I will address your questions.

Our consolidated first-quarter financial results are provided in today's earnings news release. Please note that the historical and current-year information presented in the release exclude the results of the fire rescue group, which was discontinued in connection with the sale of the Bronto Skylift business that was completed in January this year.

Overall, our first-quarter results were in line with our expectations. Consolidated net sales for the quarter were $173 million, down 12% compared to the prior-year period, and operating income of $16.1 million was down from $24.5 million last year. This quarter's reported operating income included $1.2 million of restructuring charges and $0.5 million of acquisition and integration related expenses. Excluding these costs, consolidated operating margin was 10.3%, compared to 12.5% a year ago.

Income from continuing operations was $10.4 million for the first quarter, compared to $14.4 million last year. That translates to GAAP EPS of $0.17 per share, which compares to $0.22 per share last year. On an adjusted basis, EPS for the first quarter of this year was $0.19, which again compares to $0.22 per share last year.

We continued to see softness in orders during the first quarter, with orders of $133 million down 17% compared to the prior-year period. This reduction is primarily associated with the ongoing softness in industrial markets. On these lower orders, our consolidated backlog of $136 million decreased 21% from the end of 2015.

Importantly, our financial condition is extremely strong. Following the sale of Bronto, we are now essentially debt free, which facilitates investments, such as our acquisition of Joe Johnson Equipment, as well as cash returns to shareholders in the form of dividends and share repurchases.

As you can see in our group results, the lower demand from industrial markets that we began to see in 2015 has translated into reduced operating results in Q1 of this year, especially when compared to a very strong Q1 last year. Sales at ESG were down 18% versus last year, primarily due to a significant decrease in shipments of vacuum trucks.

On this lower sales volume, operating income dropped to $16.5 million. ESG's operating margin for the quarter was still a respectable 14.3%, but was down when compared to a near record 17% a year ago. Orders at ESG were down 22% year over year. Jennifer will talk about some of the contributing market factors in her remarks.

At SSG, sales were up 2% compared to last year's quarter, reflecting improved sales into global public safety markets, partially offset by lower sales of industrial products as a result of impacts from oil and gas markets.

Our public safety businesses delivered improvements in operating margin and operating income for the quarter. SSG's operating income for the quarter included $1.2 million of restructuring charges associated with the completion of a plan to right-size and reduce costs in part of the business. Excluding the effects of those restructuring charges, operating income for the group was $6.1 million, compared to $6.6 million last year, and operating margin was 10.6%, compared to 11.7% in Q1 last year.

Orders at SSG were down 9%, mainly due to lower orders for industrial products from international markets. As we have noted previously, most of SSG's business normally operates with relatively low backlog.

Corporate operating expenses of $5.3 million were down from $6 million a year ago.

Turning now to the consolidated income statement, with the reduction in year-over-year sales we saw a parallel decrease in gross profit. Consolidated gross margin of 27.4% for the quarter was down slightly from 27.9% last year. Selling, engineering, general, and administrative expenses, $29.6 million, were down 3% compared to the prior-year quarter.

During the current-year quarter, we also incurred $0.5 million of acquisition and integration expenses in connection with our Westech and Joe Johnson Equipment transactions. Those costs primarily consisted of legal and professional service fees. In addition, we recognized the $1.2 million of restructuring charges at SSG that I just mentioned. All of these factors roll into the Company's $16.1 million first-quarter operating income.

In Q1 of this year, we also reported other income of $0.7 million, compared to other expense of $1.2 million a year ago. Both amounts largely result -- largely relate to foreign currency transactions.

Other items affecting the quarterly results include a $0.2 million reduction in interest expense resulting from our lower level of debt and $0.3 million of debt settlement charges following the completion of our debt refinancing near the end of January. These charges represent the write-off of deferred financing fees.

Tax expense for the quarter was down as a result of our lower income, with an effective tax rate for the quarter of 35.4%, which was slightly lower than the 36.6% in Q1 last year. Our full-year effective tax rate for 2016 is currently expected to be about 36%. From a cash perspective, we are projecting a cash tax rate of between 15% and 20%. The difference between our effective tax rate and our cash tax rate relates to the use of deferred tax assets to reduce our tax payments. These assets primarily consist of net operating loss carryforwards and tax credit carryforwards.

On a overall GAAP basis, we therefore earned $0.17 per share from continuing operations in Q1, compared with $0.22 per share in Q1 last year.

During the quarter, we also recognized income of approximately $3.2 million from discontinued operations, which primarily related to our gain on the sale of Bronto.

To facilitate earnings comparisons, we typically adjust our GAAP earnings per share for unusual items recorded in the current or prior-year quarters. In the current-year quarter, we made adjustments to GAAP earnings per share that exclude acquisition and integrated related expenses and the restructuring and debt settlement charges that I just discussed. On this basis, our adjusted earnings from continuing operations for the first quarter were $0.19 per share, compared with $0.22 per share in Q1 last year when no adjustments were made to GAAP earnings per share.

Looking at the balance sheet and cash flow, the first quarter of each year is typically a period in which our businesses add net working capital and this year was no exception. We used $6.7 million of cash for continuing operations, compared to the generation of $0.8 million of cash from operations during Q1 last year.

As I mentioned earlier, we also completed the sale of our Bronto Skylift business in January of this year, receiving initial proceeds of $82 million. We expect to receive additional sales proceeds of about $6 million in the second quarter.

In addition, we executed a new five-year, $325 million revolving credit facility, replacing the $225 million credit facility that was previously in place.

During the quarter, we fully paid down the $43.4 million of term loan debt outstanding under our former credit facility. As a result, we ended the quarter with $77 million of cash and our only debt item outstanding was $0.6 million of capital lease obligations.

We are obviously in an extremely strong financial position. At this point, we have significant flexibility to invest in organic growth, pursue acquisition opportunities, and return value to shareholders. On that score, we paid a dividend of $0.07 per share during the first quarter, amounting to $4.3 million, and we recently announced a similar dividend for the second quarter.

We also increased the level of our share repurchases during the quarter, spending $16.3 million to buy back approximately 1.3 million shares at an average price of $12.64. We typically approach share repurchases opportunistically and this repurchase activity significantly exceeded the $10.6 million of share repurchases in all of 2015. We had about $53 million remaining under our share repurchase authorization as of March 31.

That concludes my comments and I would like to turn the call over to Jennifer.

Thank you, Brian. I would like to start by providing some color on the first quarter.

As Brian said, our results for the quarter met our expectations and they reflect a tale of two markets. Our municipal markets, which constitute about 60% of our revenues, remain solid. I am particularly pleased with the growth and improving profitability of our US and European public safety systems businesses. These are part of our safety and security systems group that provides light bars, sirens, and related products to municipal customers in the police, fire, and heavy-duty markets.

Two years ago, we began a significant new product development effort that has resulted in us introducing several new products. We're starting to see the benefits of this work and we are continuing to gain market share. Notably, we had some significant wins from our competitors in this quarter in Miami, Nashville, and Albuquerque.

We also continue to see opportunities primarily in the western United States with our initiative to upfit police vehicles. This key area of focus in recent years gives us control over more of the car content and supports our efforts to expand our related product offerings. We recently received a nice boost to these efforts when Federal Signal, in conjunction with our distributor, achieved the Ford Quality Vehicle Modifier certification for upfitting police vehicles.

Results on the municipal side held up well in the environmental solutions group, too, especially when compared to a strong Q1 last year.

On the other hand, our industrial markets continue to suffer hangover effects from the downturn in the oil and gas markets and we continue to see the impact within the environmental solutions group of an influx of used equipment at drastically reduced prices from entities that are experiencing financial difficulty. Low sales price and depressed rental rates for this type of equipment have reduced demand in rental and other adjacent industrial markets for the new equipment that we sell.

As a result, incoming industrial order activity has remained low, with the biggest effects occurring in our vacuum truck line. We're uncertain how long the influx of used equipment may continue affecting our demand, but are laying our plans to manage the softness that may persist well into 2017. We are sizing our business activity to match demand and have taken actions to reduce our costs, including early retirement, reductions in force, expense control, and pursuing cost savings on direct material.

While we are focused on cost management, we are maintaining investments in topline growth in key opportunities for the future of the business. These investments include sales resources and the development of additional new products, like an improved street sweeper design. We're also working on a line of new Jetstream accessory products and have introduced our new Tier IV compliant street sweepers ahead of many of our competitors.

In addition, we are moving forward with new offerings for the utility market. We have a dedicated and focused team working on the launch of a line of tools for hydro excavation work and our ParaDIGm purpose-built vacuum truck design for that market. The ParaDIGm will go into production in the third quarter, and while we expect it will take time to earn an expanded position in this market, we are encouraged by the initial level of interest in this product.

Our balance sheet is stronger than ever, which helps us to navigate through our near-term market challenges, continue our needed investments, and return value to shareholders. In the first quarter, we returned over $20 million of value to shareholders in the form of cash dividends and opportunistic share repurchases. This is our highest cash return to investors in a single quarter in almost 15 years.

We also continue to pursue acquisitions as we look to achieve our goal of adding $250 million of incremental revenue from acquisitions within three years. During the quarter, we completed our acquisition of Westech, which is a small business that brings us technology on key products, a strong brand reputation, and a solid parts and service business.

I also want to spend a few minutes on the more significant Joe Johnson Equipment acquisition. Joe Johnson is a strong municipal equipment distributor that operates in four areas of business, starting with new equipment sales. Although about 90% of their new equipment sales are to municipal customers, we plan to use their platform to boost our industrial sales in Canada.

They have a strong parts and service business that nicely complements Federal Signal's existing industrial platform in the United States. We also aim to leverage their equipment rentals and used equipment businesses. Rentals and used equipment are additional offerings that will allow us to serve additional customers in both industrial and municipal markets, helping us reach more of the market for Federal Signal equipment.

We believe there are significant opportunities in all these areas. Our team is working closely with the Joe Johnson team on integration plans as we move toward closing of the transaction and we're making great progress. As we previously said, we anticipate the transaction to close during the second quarter.

Looking further down the road, we continue to seek additional acquisition opportunities. Joe Johnson is a great fit and a step along the path to our $250 million goal. Like Joe Johnson, future acquisitions will also need to meet our acquisition criteria and are likely to include businesses with recurring revenue or product lines that leverage our channels or production capability.

With that, I would like to move to our earnings outlook. Two months ago, we laid out our expectations that adjusted earnings per share for 2016 would fall in a range between $0.70 and $0.80. First-quarter earnings met our expectations. We continue to benefit from relatively steady municipal markets and we remain confident in our businesses and markets for the long term.

However, our recent [industrial] order levels continue to be disappointing and the extended turmoil in oil and gas and related industrial markets makes it more challenging to assess a trajectory for the second half of the year.

Our first quarter is likely to represent a higher percentage of our annual earnings this year than last year.

At this point in time, we believe our adjusted earnings per share for the year will be in our previously indicated range of $0.70 to $0.80.

Before we move to questions, I would like to call attention to our annual report video that recaps our key accomplishments in 2015 and our goals for 2016. We previewed this video at our annual meeting of shareholders last week. It is posted on our website under the investor tab.

With that, I think we are ready to open the line for questions. Operator?

(Operator Instructions). Steve Barger, KeyBanc Capital Markets.

First, I want to go to the guidance. You said this will be a higher percentage in 1Q of the full year, which makes sense, given the range. But what are the risks to the high end? Is it really the industrial business remaining a laggard or is it operational risks?

It is really orders in our industrial businesses.

Can you help us think about if orders stay low and you start to see the revenue headwinds, what would the negative leverage be there? I think you put up a 23% decremental in 1Q. Can you maintain that?

You know, I think it really depends on the market conditions. We are undertaking a number of cost-savings initiatives. We will continue to monitor those going forward.

Steve, if we don't act, the negative leverage is well above our gross margin. We are acting, so we are keeping our costs in line and we will continue to monitor that. But that's what we're trying to manage through.

Understood. In terms of thinking about working capital, normally when revenue comes down, industrial companies release some working cap. Is that your expectation for this year?

Not so much. I think we -- first of all, we are not expecting the topline to fall off that much. We are planning to make some investments in our inventory in order to capture some additional sales opportunities, so we're looking at that, and we expect working capital has been pretty efficient over the last couple of years, so we would expect it to stay more or less in line this year.

You know, I would add in the last downturn we cut a lot of our sales resources and our new product development resources, and we are committed to maintaining those investments, particularly around revenue-generating activities for the future.

Got it. Is there -- I may have missed this, is there a cash cost that you expect for restructuring this year?

In the first quarter, we had a charge of $1.2 million, and we will continue to monitor our businesses as needed for additional opportunities with respect to reductions in force, if we need to. We are also exploring voluntary layoffs and expense control.

And that is an all-cash restructuring charge in the first quarter.

The -- yes. But you're not necessarily forecasting a specific number for the remainder of the year?

We aren't, and we are partly -- we are trying to manage to what comes. So depending on where orders go, we will manage up and down in our businesses and that may lead to some other actions, but we are not projecting a specific number.

Okay. And Jennifer, you talked --

It's all reflected in our guidance.

Got it. Okay. Jennifer, you talked a little bit about this, but can you discuss inquiry levels in the ESG segment on the muni side, on the industrial side? Basically, just what are your dealers telling you as they have moved through 2Q so far?

With respect to the municipal side, ESG, the orders are maintaining relatively steady. We were with our dealers at a large tradeshow at the end of February and the outlook was solid.

On the industrial side, it is more uncertain. There has been a number of large auctions, so there has been this influx of used equipment into the market, and it's very difficult to understand when it is going to work its way through the market because a number of our competitors, a number of the end users, are having financial difficulties related to oil and gas, and we are continuing to see selloffs of that equipment at reduced prices.

The other thing I would add in the municipal market, as we have talked about in the past, is the orders tend to depend on the large fleet orders, so we're monitoring those closely.

And when you think about some of the new products, or for hydro excavating I think you mentioned specifically, how do you think about revenue potential there? What is the size of the market opportunity for that?

You know, we have set as a goal on the SSG side of the business a 30% goal of new product introductions from the last three years. On the ESG side of the business, the product life cycles are much longer, although we have a similar goal.

So we are at the very beginning with respect to our initiatives in the utility market. We are just going into production for our ParaDIGm vehicle in July of this year and we think it is going to take some time.

We are encouraged by the initial response, but I guess it is we are in the first inning right now.

How did you arrive at the 30% number? Is that based on a market study where you feel that you have a slate of opportunities and that is what you can handle or is that something that is more internally generated where you are trying to drive demand?

It is really internally generated in terms of driving demand going forward.

And I guess to that same thought, can you describe pricing in the market right now on the muni side and the industrial side? Are you seeing competitors stay rational?

On the municipal side, yes. On the industrial side, some of the auctions that I talked about previously, particularly in those areas that have strong oil and gas end markets, we have seen dramatically reduced prices.

And those are affecting some of our product lines, not necessarily all of them, and that's mostly ESG.

Right. Okay, I will get back in line and see if anybody else has a question.

(Operator Instructions). Steve Barger, KeyBanc Capital Markets.

Are there synergy opportunities between Joe Johnson and Westech via broader distribution or shared services? Have you thought about benefits related to that beyond just the revenue?

Yes, we have looked at consolidation of facilities, although it is relatively small, and we have also -- an important driver is to be able to use the Joe Johnson platform to drive additional sales of Westech equipment.

But more broadly, I think, Steve, the opportunities are with other parts of Federal Signal, so we have opportunities to expand our sales of industrial products. Westech is just one of those and that's one of the things we're looking forward to. A lot of the synergies with respect to Joe Johnson are really revenue synergies.

Right.

There are fewer on the cost side.

And Jennifer, in your comments you mentioned recurring revenue and ability to leverage the channel as acquisition metrics. Are there other specific goals or requirements you have when you are reviewing a deal?

Absolutely. We are looking at what is core in terms of both our manufacturing capabilities. We have talked previously about channel. We have talked about having acceptable IRR is important. And then, we also talk about management bandwidth, so timing of acquisitions and when we pursue those acquisitions is something that we monitor closely.

We are pleased thus far with the integration efforts that have occurred regarding Joe Johnson, but, as you know, it takes a lot of work.

Right, so I guess to the bandwidth point, is there -- do you feel like you wouldn't be able to do another fairly large acquisition at this point until that is more fully integrated or are you limited -- or, I should say, are you not limited right now in terms of being able to do another deal?

You know, I think that -- depending on the opportunity, we do have bandwidth, particularly on our SSG side, and we're actively in the market looking at opportunities and we feel like we have got a strong team that we can put in place.

Are you -- as you review your pipeline, do you have more opportunities on the ESG or the SSG side?

You know, it's equally split.

Yes, I would say it's pretty balanced, Steve.

And I have asked this in the past, but it is probably worth a review. Can you tell us what the size range of the deals that are active on your desk are, in terms of revenue?

You know, they really vary. Typically, they can be small, like the Westech acquisition, so there are some product lines, tuck-in type opportunities that we are taking a look at, and there are some larger deals. But when we say larger deals, we are looking at deals under $100 million in revenue.

Typically, yes.

Understood. Okay, I think that's all I have today.

(Operator Instructions). And we have no further questions in the queue at this time.

Okay, thank you. In closing, I would like to reiterate that we are confident in the long-term prospects for our businesses and our markets.

We are excited about our pending Joe Johnson Equipment acquisition and look forward to welcoming their team to the Federal Signal family. With the acquisition, we aim to provide even better service to our customers and to growing with new products. All of this depends on the continued support of our stockholders, employees, distributors, dealers, and customers, and we thank them all. Thank you very much for joining us today.

That does conclude today's conference. Thank you for your participation.