Federal Signal Corporation Reports Operating Income Up 22% and Affirms Full-Year Outlook

FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)

Three Months Ended
 June 30,

Six Months Ended
 June 30,

(in millions, except per share data)

2015

2014

2015

2014

Net sales

$

230.8

$

234.6

$

452.4

$

434.8

Cost of sales

165.1

175.7

327.5

329.1

Gross profit

65.7

58.9

124.9

105.7

Selling, engineering, general and administrative expenses

36.1

34.9

70.5

69.1

Restructuring

0.4

0.1

0.4

(0.1)

Operating income

29.2

23.9

54.0

36.7

Interest expense

0.6

0.9

1.2

1.9

Other expense, net

0.1

0.3

1.0

0.3

Income before income taxes

28.5

22.7

51.8

34.5

Income tax expense

(10.2)

(5.7)

(18.6)

(9.9)

Income from continuing operations

18.3

17.0

33.2

24.6

Gain (loss) from discontinued operations and disposal, net of tax

—

0.1

—

(0.1)

Net income

$

18.3

$

17.1

$

33.2

$

24.5

Basic earnings per share:

Earnings from continuing operations

$

0.29

$

0.27

$

0.53

$

0.39

Gain (loss) from discontinued operations and disposal, net of tax

—

—

—

—

Net earnings per share

$

0.29

$

0.27

$

0.53

$

0.39

Diluted earnings per share:

Earnings from continuing operations

$

0.29

$

0.27

$

0.52

$

0.39

Gain (loss) from discontinued operations and disposal, net of tax

—

—

—

—

Net earnings per share

$

0.29

$

0.27

$

0.52

$

0.39

Weighted average common shares outstanding:

Basic

62.6

62.8

62.5

62.8

Diluted

63.6

63.8

63.5

63.8

Cash dividends declared per common share

$

0.06

$

0.03

$

0.12

$

0.03

FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

June 30,
 2015

December 31,
 2014

(in millions, except per share data)

(Unaudited)

ASSETS

Current assets:

Cash and cash equivalents

$

35.9

$

30.4

Accounts receivable, net of allowances for doubtful accounts of $1.6 and $1.3, respectively

119.8

107.6

Inventories

120.1

121.0

Prepaid expenses

10.7

8.8

Deferred tax assets

12.3

18.8

Other current assets

7.2

2.8

Current assets of discontinued operations

0.7

1.1

Total current assets

306.7

290.5

Properties and equipment, net of accumulated depreciation of $128.9 and $124.6, respectively

68.2

69.5

Goodwill

262.4

266.3

Deferred tax assets

16.7

25.3

Deferred charges and other assets

3.7

4.0

Long-term assets of discontinued operations

3.0

3.1

Total assets

$

660.7

$

658.7

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:

Current portion of long-term borrowings and capital lease obligations

$

6.2

$

6.2

Accounts payable

49.4

50.7

Customer deposits

11.6

12.1

Deferred revenue

7.8

2.9

Accrued liabilities:

Compensation and withholding taxes

22.2

28.2

Other current liabilities

33.0

37.3

Current liabilities of discontinued operations

1.6

1.7

Total current liabilities

131.8

139.1

Long-term borrowings and capital lease obligations

42.4

44.0

Long-term pension and other postretirement benefit liabilities

58.4

63.5

Deferred gain

13.6

14.6

Other long-term liabilities

21.6

20.9

Long-term liabilities of discontinued operations

4.9

5.0

Total liabilities

272.7

287.1

Stockholders' equity:

Common stock, $1 par value per share, 90.0 shares authorized, 64.7 and 64.2 shares issued, respectively

64.7

64.2

Capital in excess of par value

190.2

187.0

Retained earnings

252.7

227.0

Treasury stock, at cost, 2.2 and 1.7 shares, respectively

(35.0)

(27.1)

Accumulated other comprehensive loss

(84.6)

(79.5)

Total stockholders' equity

388.0

371.6

Total liabilities and stockholders' equity

$

660.7

$

658.7

FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

Six Months Ended
 June 30,

(in millions)

2015

2014

Operating activities:

Net income

$

33.2

$

24.5

Adjustments to reconcile net income to net cash provided by operating activities:

Loss from discontinued operations and disposal

—

0.1

Depreciation and amortization

7.7

7.3

Deferred financing costs

0.2

0.2

Deferred gain

(1.0)

(1.0)

Stock-based compensation expense

3.1

2.8

Excess tax benefit from stock-based compensation

(0.3)

—

Pension expense, net of funding

(2.2)

(2.4)

Provision for doubtful accounts

0.5

0.1

Deferred income taxes

14.6

12.0

Changes in operating assets and liabilities, net of effects of discontinued operations

(28.3)

(19.9)

Net cash provided by continuing operating activities

27.5

23.7

Net cash used for discontinued operating activities

(0.1)

(0.3)

Net cash provided by operating activities

27.4

23.4

Investing activities:

Purchases of properties and equipment

(5.6)

(9.4)

Proceeds from sales of properties and equipment

0.1

0.1

Proceeds from sale of FSTech Group

—

7.0

Net cash used for continuing investing activities

(5.5)

(2.3)

Financing activities:

Decrease in revolving lines of credit, net

—

(20.0)

Increase in short-term borrowings, net

—

5.0

Payments on long-term borrowings

(1.4)

(1.4)

Purchases of treasury stock

(5.0)

(3.3)

Redemptions of common stock to satisfy withholding taxes related to stock-based compensation

(2.9)

—

Cash dividends paid to stockholders

(7.5)

(1.9)

Proceeds from stock-based compensation activity

0.4

1.1

Excess tax benefit from stock-based compensation

0.3

—

Other, net

(0.3)

(0.4)

Net cash used for continuing financing activities

(16.4)

(20.9)

Effects of foreign exchange rate changes on cash and cash equivalents

—

0.2

Increase in cash and cash equivalents

5.5

0.4

Cash and cash equivalents at beginning of period

30.4

23.8

Cash and cash equivalents at end of period

$

35.9

$

24.2

FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
GROUP RESULTS (Unaudited)

Environmental Solutions

The following table summarizes the Environmental Solutions Group's operating results as of and for the three and six months ended June 30, 2015 and 2014:

Three Months Ended June 30,

Six Months Ended June 30,

($ in millions)

2015

2014

Change

2015

2014

Net sales

$

146.6

$

139.2

$

7.4

$

286.8

$

259.9

$

26.9

Operating income

29.2

23.1

6.1

53.1

38.3

14.8

Operating data:

Operating margin

19.9

%

16.6

%

3.3

%

18.5

%

14.7

%

3.8

%

Total orders

$

114.2

$

152.0

$

(37.8)

$

220.5

$

266.2

$

(45.7)

Backlog

152.0

205.6

(53.6)

152.0

205.6

(53.6)

Depreciation and amortization

2.0

1.6

0.4

3.8

3.2

0.6

Safety and Security Systems

The following table summarizes the Safety and Security Systems Group's operating results as of and for the three and six months ended June 30, 2015 and 2014:

Three Months Ended June 30,

Six Months Ended June 30,

($ in millions)

2015

2014

Change

2015

2014

Change

Net sales

$

58.8

$

61.3

$

(2.5)

$

115.1

$

116.3

$

(1.2)

Operating income

7.3

7.5

(0.2)

13.9

11.8

2.1

Operating data:

Operating margin

12.4

%

12.2

%

0.2

%

12.1

%

10.1

%

2.0

%

Total orders

$

60.4

$

61.0

$

(0.6)

$

118.1

$

127.0

$

(8.9)

Backlog

38.9

38.4

0.5

38.9

38.4

0.5

Depreciation and amortization

1.2

1.1

0.1

2.3

2.2

0.1

Fire Rescue

The following table summarizes the Fire Rescue Group's operating results as of and for the three and six months ended June 30, 2015 and 2014:

Three Months Ended June 30,

Six Months Ended June 30,

($ in millions)

2015

2014

Change

2015

2014

Change

Net sales

$

25.4

$

34.1

$

(8.7)

$

50.5

$

58.6

$

(8.1)

Operating income (loss)

0.0

(0.3)

0.3

0.3

(1.1)

1.4

Operating data:

Operating margin

0.0

%

(0.9)%

0.9

%

0.6

%

(1.9)%

2.5

%

Total orders

$

38.9

$

40.4

$

(1.5)

$

60.9

$

91.9

$

(31.0)

Backlog

78.2

112.0

(33.8)

78.2

112.0

(33.8)

Depreciation and amortization

0.7

0.9

(0.2)

1.5

1.7

(0.2)

Corporate Expenses

Corporate operating expenses were $7.3 million and $6.4 million for the three months ended June 30, 2015 and 2014, respectively. The increase was primarily associated with higher fees for professional services.

SEC REGULATION G NON-GAAP RECONCILIATION

The financial measures presented below are unaudited and are not in accordance with U.S. generally accepted accounting principles ("GAAP"). The non-GAAP financial information presented herein should be considered supplemental to, and not a substitute for, or superior to, financial measures calculated in accordance with GAAP.  The Company has provided this supplemental information to investors, analysts, and other interested parties to enable them to perform additional analyses of operating results, to illustrate the results of operations giving effect to the non-GAAP adjustments shown in the reconciliations below, and to provide an additional measure of performance which management considers in operating the business.

Adjusted net income and earnings per share from continuing operations ("EPS"):

The Company believes that modifying its 2015 and 2014 adjusted net income and diluted EPS provides an additional measure which is representative of the Company's underlying performance and improves the comparability of results across reporting periods.  Adjusted net income and adjusted EPS for the three and six months ended June 30, 2015 and 2014 excludes the impact of restructuring activity.

Three Months Ended
 June 30,

Six Months Ended
 June 30,

(in millions)

2015

2014

2015

2014

Income from continuing operations

18.3

17.0

33.2

24.6

Add:

Income tax expense

10.2

5.7

18.6

9.9

Income before income taxes

28.5

22.7

51.8

34.5

Add (less):

Restructuring

0.4

0.1

0.4

(0.1)

Adjusted income before income taxes

28.9

22.8

52.2

34.4

Adjusted income tax expense ^(a)

(10.3)

(5.7)

(18.7)

(9.8)

Adjusted net income from continuing operations

$

18.6

$

17.1

$

33.5

$

24.6

Three Months Ended
 June 30,

Six Months Ended
 June 30,

(dollars per diluted share)

2015

2014

2015

2014

EPS, as reported

$

0.29

$

0.27

$

0.52

$

0.39

Add:

Income tax expense

0.15

0.09

0.29

0.15

Income before income taxes

0.44

0.36

0.81

0.54

Add (less):

Restructuring

0.01

—

0.01

—

Adjusted income before income taxes

0.45

0.36

0.82

0.54

Adjusted income tax expense ^(a)

(0.16)

(0.09)

(0.29)

(0.15)

Adjusted EPS

0.29

0.27

0.53

0.39

Adjusted income tax expense for the three and six months ended June 30, 2015 and 2014 was recomputed after excluding the impact of restructuring activity.

Total debt to adjusted EBITDA ratio:

The Company uses the ratio of total debt to adjusted EBITDA as one measure of its long-term financial stability. The Company uses the ratio to calibrate the magnitude of its debt and its debt capacity against adjusted EBITDA, which is used as an operating performance measure. We believe that investors use a version of this ratio in a similar manner.  In addition, financial institutions (including the Company's lenders) use the ratio in connection with debt agreements to set pricing and covenant limitations. For these reasons, the Company believes that the ratio is a meaningful metric to investors in evaluating the Company's long term financial performance and stability. The Company's calculation methodology consists of dividing total debt by the trailing 12-month total of income from continuing operations before interest expense, debt settlement charges, other expense, income tax benefit/expense, and depreciation and amortization. Other companies may use different methods to calculate total debt to EBITDA. The following table summarizes the Company's ratio of total debt to adjusted EBITDA, and reconciles income from continuing operations to adjusted EBITDA:

Trailing Twelve
 Months Ending
 June 30,

($ in millions)

2015

2014

Total debt

$

48.6

$

75.5

Income from continuing operations

71.6

68.1

Add:

Interest expense

3.1

4.5

Other expense, net

2.2

0.5

Income tax expense (benefit)

33.0

3.9

Depreciation and amortization

15.4

14.6

Adjusted EBITDA

$

125.3

$

91.6

Total debt to adjusted EBITDA ratio

0.4

0.8