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Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
___________________________________
FORM
10-Q
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended
September 30, 2023
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from
to
Commission file number:
1-6003
_____________________________________________
FEDERAL SIGNAL CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 36-1063330
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
1415 West 22nd Street
,
Oak Brook
,
Illinois
(Address of principal executive offices)
60523
(Zip code)
(
630
)
954-2000
(Registrant's telephone number, including area code)
_____________________________________________
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Trading Symbol(s) Name of each exchange on which registered
Common Stock, par value $1.00 per share FSS New York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes
No
Indicate by check mark whether the registrant has submitted electronically
every Interactive Data File required to be submitted pursuant to Rule 405 of
Regulation S-T ((s)232.405 of this chapter) during the preceding 12 months (or
for such shorter period that the registrant was required to submit such files).
Yes
No
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, a smaller reporting company, or an
emerging growth company. See the definitions of "large accelerated filer,"
"accelerated filer," "smaller reporting company," and "emerging growth
company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer Accelerated filer
Non-accelerated filer Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the
registrant has elected not to use the extended transition period
for complying with any new or revised financial accounting
standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined
in Rule 12b-2 of the Exchange Act). Yes
No
As of October 31, 2023, the number of shares outstanding of the registrant's
common stock was
60,928,813
.
-------------------------------------------------------------------------------
Table of Contents
FEDERAL SIGNAL CORPORATION
TABLE OF CONTENTS
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited) 2
Condensed Consolidated Statements of Operations for the 2
Three and Nine Months Ended September 30, 2023 and 2022
Condensed Consolidated Statements of Comprehensive Income for 3
the Three and Nine Months Ended September 30, 2023 and 2022
Condensed Consolidated Balance Sheets as of 4
September 30, 2023 and December 31, 2022
Condensed Consolidated Statements of Cash Flows for 5
the Nine Months Ended September 30, 2023 and 2022
Condensed Consolidated Statements of Stockholders' Equity for 6
the Three and Nine Months Ended September 30, 2023 and 2022
Notes to Condensed Consolidated 8
Financial Statements
Note 1 - Summary of Significant 8
Accounting Policies
Note 2 9
-
Acquisitions
Note 3 - Revenue Recognition 13
Note 4 - Inventories 13
Note 5 - Debt 14
Note 6 15
-
Goodwill and Other Intangible Assets
Note 7 - Income Taxes 16
Note 8 - Pensions 16
Note 9 - Commitments and Contingencies 17
Note 10 - Earnings Per Share 20
Note 11 - Stockholders' Equity 20
Note 12 - Segment Information 23
Note 13 - Fair Value Measurements 23
Item 2. Management's Discussion and Analysis of 26
Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative 35
Disclosures About Market Risk
Item 4. Controls and Procedures 35
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 36
Item 1A. Risk Factors 36
Item 2. Unregistered Sales of Equity 36
Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities 36
Item 4. Mine Safety Disclosures 36
Item 5. Other Information 36
Item 6. Exhibits 37
SIGNATURE 38
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Table of Contents
FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q ("Form 10-Q") is being filed by Federal
Signal Corporation and its subsidiaries (referred to collectively as the
"Company," "we," "our" or "us" herein, unless the context otherwise indicates)
with the United States ("U.S.") Securities and Exchange Commission (the
"SEC"), and includes comments made by management that may contain words such
as "may," "will," "believe," "expect," "anticipate," "intend," "plan,"
"project," "estimate" and "objective" or similar terminology, or the negative
thereof, concerning the Company's future financial performance, business
strategy, plans, goals and objectives. These expressions are intended to
identify forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933, as amended (the "Securities Act"), Section 21E of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and the
Private Securities Litigation Reform Act of 1995. Forward-looking statements
include information concerning the Company's possible or assumed future
performance or results of operations and are not guarantees. While these
statements are based on assumptions and judgments that management has made in
light of industry experience as well as perceptions of historical trends,
current conditions, expected future developments and other factors believed to
be appropriate under the circumstances, they are subject to risks,
uncertainties and other factors that may cause the Company's actual results,
performance or achievements to be materially different.
These risks and uncertainties, some of which are beyond the Company's control,
include the risk factors described under Part I, Item 1A,
Risk Factors
, of the Company's Annual Report on Form 10-K for the year ended December 31,
2022, which was filed with the SEC on March 1, 2023. These factors may not
constitute all factors that could cause actual results to differ materially
from those discussed in any forward-looking statement. The Company operates in
a continually changing business environment and new factors emerge from time
to time, including, for example, the ongoing coronavirus pandemic and the
government response to the pandemic. The Company cannot predict such factors,
nor can it assess the impact, if any, of such factors on its results of
operations, financial condition or cash flow. Accordingly, forward-looking
statements should not be relied upon as a predictor of actual results. The
Company disclaims any responsibility to update any forward-looking statement
provided in this Form 10-Q.
ADDITIONAL INFORMATION
The Company is subject to the reporting and information requirements of the
Exchange Act and, as a result, is obligated to file Annual Reports on Form
10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and other
reports and information with the SEC, as well as amendments to those reports.
The Company makes these filings available free of charge through our website at
www.federalsignal.com
as soon as reasonably practicable after such materials are filed with, or
furnished to, the SEC. Information on our website does not constitute part of
this Form 10-Q. In addition, the SEC maintains a website at
www.sec.gov
that contains reports, proxy and information statements, and other information
regarding issuers that file electronically.
1
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Table of Contents
PART I. FINANCIAL INFORMATION
Item 1.
Financial Statements (Unaudited).
FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
(in millions, except per share data) 2023 2022 2023 2022
Net sales $ 446.4 $ 346.4 $ 1,274.3 $ 1,043.3
Cost of sales 328.7 263.6 943.5 795.0
Gross profit 117.7 82.8 330.8 248.3
Selling, engineering, general and administrative expenses 50.6 39.8 156.0 125.5
Amortization expense 3.9 3.1 11.4 9.6
Acquisition and integration-related expenses (benefits) 0.7 0.4 2.0 (
1.0
)
Operating income 62.5 39.5 161.4 114.2
Interest expense, net 5.1 2.7 15.4 5.9
Other expense (income), net 0.3 0.1 1.5 (
0.6
)
Income before income taxes 57.1 36.7 144.5 108.9
Income tax expense 13.8 4.9 33.5 23.1
Net income $ 43.3 $ 31.8 $ 111.0 $ 85.8
Earnings per share:
Basic $ 0.71 $ 0.53 $ 1.83 $ 1.42
Diluted 0.71 0.52 1.81 1.40
Weighted average common shares outstanding:
Basic 60.8 60.4 60.7 60.5
Diluted 61.4 61.0 61.4 61.1
See notes to condensed consolidated financial statements.
2
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Table of Contents
FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
(in millions) 2023 2022 2023 2022
Net $ 43.3 $ 31.8 $ 111.0 $ 85.8
income
Other comprehensive
income (loss):
Change in foreign currency ( ( ( (
translation adjustment 5.1 11.9 0.4 22.1
) ) ) )
Change in unrecognized net actuarial loss and prior service cost 0.9 1.8 0.8 4.9
related to pension benefit plans, net of income tax expense of $
0.3
, $
0.3
, $
0.3
and $
0.8
,
respectively
Change in unrealized gain or loss on interest rate 0.1 1.1 ( 3.4
swaps, net of income tax expense (benefit) of $ 0.2
0.0 )
, $
0.4
, $(
0.1
) and $
1.2
,
respectively
Total other comprehensive ( ( 0.2 (
(loss) income 4.1 9.0 13.8
) ) )
Comprehensive $ 39.2 $ 22.8 $ 111.2 $ 72.0
income
See notes to condensed consolidated financial statements.
3
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Table of Contents
FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
September 30, December 31,
2023 2022
(in millions, except per share data) (Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 41.0 $ 47.5
Accounts receivable, net of allowances for doubtful accounts of $ 213.3 173.8
2.4
and $
2.5
, respectively
Inventories 330.1 292.7
Prepaid expenses and other current assets 19.3 17.4
Total current assets 603.7 531.4
Properties and equipment, net of accumulated depreciation of $ 188.3 179.3
169.9
and $
156.4
, respectively
Rental equipment, net of accumulated depreciation of $ 130.3 109.1
51.1
and $
45.4
, respectively
Operating lease right-of-use assets 23.7 24.7
Goodwill 473.6 453.4
Intangible assets, net of accumulated amortization of $ 212.2 208.2
66.8
and $
55.4
, respectively
Deferred tax assets 12.1 8.8
Other long-term assets 10.7 9.4
Total assets $ 1,654.6 $ 1,524.3
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term borrowings and finance lease obligations $ 3.9 $ 1.5
Accounts payable 82.4 72.4
Customer deposits 27.6 25.4
Accrued liabilities:
Compensation and withholding taxes 34.5 31.1
Current operating lease liabilities 7.4 6.9
Other current liabilities 46.8 43.2
Total current liabilities 202.6 180.5
Long-term borrowings and finance lease obligations 362.0 361.5
Long-term operating lease liabilities 17.0 18.5
Long-term pension and other postretirement benefit liabilities 38.8 38.9
Deferred tax liabilities 56.7 51.0
Other long-term liabilities 21.6 13.0
Total liabilities 698.7 663.4
Stockholders' equity:
Common stock, $ 69.9 69.5
1
par value per share,
90.0
shares authorized,
69.9
and
69.5
shares issued, respectively
Capital in excess of par value 284.7 271.8
Retained earnings 875.5 782.2
Treasury stock, at cost, ( (
9.0 190.4 178.6
and ) )
8.8
shares, respectively
Accumulated other comprehensive loss ( (
83.8 84.0
) )
Total stockholders' equity 955.9 860.9
Total liabilities and stockholders' equity $ 1,654.6 $ 1,524.3
See notes to condensed consolidated financial statements.
4
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Table of Contents
FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Nine Months Ended
September 30,
(in millions) 2023 2022
Operating activities:
Net income $ 111.0 $ 85.8
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 45.1 40.7
Stock-based compensation expense 8.9 7.5
Changes in fair value of contingent consideration ( -
0.2
)
Amortization of interest rate swap settlement gain ( -
1.8
)
Deferred income taxes 2.0 0.3
Changes in operating assets and liabilities ( (
74.0 101.9
) )
Net cash provided by operating activities 91.0 32.4
Investing activities:
Purchases of properties and equipment ( (
21.4 45.6
) )
Payments for acquisition-related activity, net of cash acquired ( (
55.1 6.6
) )
Other, net 0.8 2.1
Net cash used for investing activities ( (
75.7 50.1
) )
Financing activities:
Increase in revolving lines of credit, net 4.6 49.9
Purchases of treasury stock ( (
4.3 16.1
) )
Redemptions of common stock to satisfy withholding taxes related to stock-based compensation ( (
5.6 3.0
) )
Payments for acquisition-related activity ( -
0.5
)
Cash dividends paid to stockholders ( (
17.7 16.4
) )
Proceeds from stock-based compensation activity 2.3 0.1
Other, net - (
0.1
)
Net cash (used for) provided by financing activities ( 14.4
21.2
)
Effects of foreign exchange rate changes on cash and cash equivalents ( (
0.6 1.7
) )
Decrease in cash and cash equivalents ( (
6.5 5.0
) )
Cash and cash equivalents at beginning of year 47.5 40.5
Cash and cash equivalents at end of period $ 41.0 $ 35.5
See notes to condensed consolidated financial statements.
5
-------------------------------------------------------------------------------
Table of Contents
FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Unaudited)
Three Months Ended September 30, 2023
(in millions) Common Capital in Retained Treasury Accumulated Total
Stock Excess of Earnings Stock Other
Par Comprehensive
Value Loss
Balance at July 1, 2023 $ 69.9 $ 280.9 $ 838.3 $ ( $ ( $ 923.9
185.5 79.7
) )
Net income 43.3 43.3
Total other comprehensive loss ( (
4.1 4.1
) )
Cash dividends declared ($ ( (
0.10 6.1 6.1
per share) ) )
Stock-based payments:
Stock-based compensation 3.1 3.1
Stock option exercises and other - 0.7 ( 0.1
0.6
)
Stock repurchase program ( (
4.3 4.3
) )
Balance at September 30, 2023 $ 69.9 $ 284.7 $ 875.5 $ ( $ ( $ 955.9
190.4 83.8
) )
Three Months Ended September 30, 2022
(in millions) Common Capital in Retained Treasury Accumulated Total
Stock Excess of Earnings Stock Other
Par Comprehensive
Value Loss
Balance at July 1, 2022 $ 69.2 $ 262.4 $ 726.7 $ ( $ ( $ 809.1
170.2 79.0
) )
Net income 31.8 31.8
Total other comprehensive loss ( (
9.0 9.0
) )
Cash dividends declared ($ ( (
0.09 5.5 5.5
per share) ) )
Stock-based payments:
Stock-based compensation 2.1 2.1
Stock option exercises and other - 0.6 ( (
1.1 0.5
) )
Balance at September 30, 2022 $ 69.2 $ 265.1 $ 753.0 $ ( $ ( $ 828.0
171.3 88.0
) )
Nine Months Ended September 30, 2023
(in millions) Common Capital in Retained Treasury Accumulated Total
Stock Excess of Earnings Stock Other
Par Comprehensive
Value Loss
Balance at January 1, 2023 $ 69.5 $ 271.8 $ 782.2 $ ( $ ( $ 860.9
178.6 84.0
) )
Net income 111.0 111.0
Total other comprehensive income 0.2 0.2
Cash dividends declared ($ ( (
0.29 17.7 17.7
per share) ) )
Stock-based payments:
Stock-based compensation 8.2 8.2
Stock option exercises and other 0.3 4.8 ( 0.9
4.2
)
Performance share unit transactions 0.1 ( ( (
0.1 3.3 3.3
) ) )
Stock repurchase program ( (
4.3 4.3
) )
Balance at September 30, 2023 $ 69.9 $ 284.7 $ 875.5 $ ( $ ( $ 955.9
190.4 83.8
) )
6
-------------------------------------------------------------------------------
Table of Contents
Nine Months Ended September 30, 2022
(in millions) Common Capital in Retained Treasury Accumulated Total
Stock Excess of Earnings Stock Other
Par Comprehensive
Value Loss
Balance at January 1, 2022 $ 68.9 $ 256.7 $ 683.6 $ ( $ ( $ 784.0
151.0 74.2
) )
Net income 85.8 85.8
Total other comprehensive loss ( (
13.8 13.8
) )
Cash dividends declared ($ ( (
0.27 16.4 16.4
per share) ) )
Stock-based payments:
Stock-based compensation 6.8 6.8
Stock option exercises and other 0.2 1.7 ( (
2.9 1.0
) )
Performance share unit transactions 0.1 ( ( (
0.1 1.3 1.3
) ) )
Stock repurchase program ( (
16.1 16.1
) )
Balance at September 30, 2022 $ 69.2 $ 265.1 $ 753.0 $ ( $ ( $ 828.0
171.3 88.0
) )
7
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Table of Contents
FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 -
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Description of the Business
Federal Signal Corporation was founded in 1901 and was reincorporated as a
Delaware corporation in 1969. References herein to the "Company," "we," "our"
or "us" refer collectively to Federal Signal Corporation and its subsidiaries.
Products manufactured and services rendered by the Company are divided into
two
reportable segments: Environmental Solutions Group and Safety and Security
Systems Group. The individual operating businesses are organized as such
because they share certain characteristics, including technology, marketing,
distribution and product application, which create long-term synergies. These
segments are discussed in Note 12 - Segment Information.
Basis of Presentation and Consolidation
The accompanying unaudited condensed consolidated financial statements
represent the consolidation of Federal Signal Corporation and its subsidiaries
included herein and have been prepared by the Company pursuant to the rules
and regulations of the United States ("U.S.") Securities and Exchange
Commission (the "SEC"). Certain information and footnote disclosures normally
included in financial statements prepared in accordance with U.S. generally
accepted accounting principles ("GAAP") have been condensed or omitted
pursuant to such rules and regulations, although the Company believes that the
disclosures presented herein are adequate to ensure the information presented
is not misleading. Except as otherwise noted, these condensed consolidated
financial statements have been prepared in accordance with the Company's
accounting policies described in the Company's Annual Report on Form 10-K for
the year ended December 31, 2022, and should be read in conjunction with those
consolidated financial statements and the notes thereto.
These condensed consolidated financial statements include all normal and
recurring adjustments that we considered necessary to present a fair statement
of our results of operations, financial condition and cash flow. Intercompany
balances and transactions have been eliminated in consolidation.
The results reported in these condensed consolidated financial statements
should not be regarded as necessarily indicative of results that may be
expected for the entire year, which may differ materially due to, among other
things, the risk factors described under Part I, Item 1A,
Risk Factors
, of the Company's Annual Report on Form 10-K for the year ended December 31,
2022, which was filed with the SEC on March 1, 2023. While we label our
quarterly information using a calendar convention whereby our first, second
and third quarters are labeled as ending on March 31, June 30 and September
30, respectively, it is our longstanding practice to establish interim
quarterly closing dates based on a 13-week period ending on a Saturday, with
our fiscal year ending on December 31. The effects of this practice are not
material and exist only within a reporting year.
Recent Accounting Pronouncements and Accounting Changes
There are no new accounting pronouncements issued, but not yet adopted, that
are expected to have a material impact on the Company's results of operations,
financial position or cash flow.
Use of Estimates
The preparation of consolidated financial statements in conformity with U.S.
GAAP requires management to make estimates and assumptions that affect (i) the
reported amounts of assets and liabilities, (ii) the disclosure of contingent
assets and liabilities at the date of the consolidated financial statements
and (iii) the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Significant Accounting Policies
There have been no changes to the Company's significant accounting policies as
disclosed in the Company's Annual Report on Form 10-K for the year ended
December 31, 2022.
8
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Table of Contents
FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(Unaudited)
NOTE 2 -
ACQUISITIONS
Acquisitions Completed in 2023
Acquisition of Trackless
On April 3, 2023, the Company completed the acquisition of substantially all
the assets and operations of Trackless Vehicles Limited and Trackless Vehicles
Asset Corp, including the wholly-owned subsidiary Work Equipment Ltd.
(collectively, "Trackless"), a leading Canadian manufacturer of off-road,
multi-purpose tractors and attachments. The Company expects that the Trackless
acquisition will further bolster its position as an industry leading
diversified industrial manufacturer of specialized vehicles for maintenance
and infrastructure markets with leading brands of premium, value-adding
products, and a strong supporting aftermarket platform.
The assets and liabilities of Trackless have been consolidated into the
Company's Condensed Consolidated Balance Sheet as of September 30, 2023, and
the post-acquisition results of operations have been included in the Condensed
Consolidated Statements of Operations, within the Environmental Solutions
Group.
The initial cash consideration paid by the Company to acquire Trackless was C$
56.3
million (approximately $
41.9
million), inclusive of certain closing adjustments, of which C$
1.0
million (approximately $
0.7
million) was received in the three months ended September 30, 2023. In
addition, there is a contingent earn-out payment of up to C$
6.0
million (approximately $
4.5
million), based upon the achievement of certain financial targets over a
specified performance period. The purchase price was funded through existing
cash and borrowings under the Company's credit agreement.
The acquisition is being accounted for in accordance with Accounting Standards
Codification ("ASC") 805,
Business Combinations
. Accordingly, the total purchase price has been allocated on a preliminary
basis to assets acquired and liabilities assumed in connection with the
acquisition based on their estimated fair values as of the completion of the
acquisition. A single estimate of fair value results from a complex series of
judgments about future events and uncertainties and relies heavily on
estimates and assumptions. The Company's judgments used to determine the
estimated fair value assigned to each class of assets acquired and liabilities
assumed, as well as asset lives, can materially impact the Company's results
of operations. The Company's purchase price allocation as of September 30,
2023 reflects various provisional estimates that were based on the information
that was available as of the acquisition date and the filing date of this Form
10-Q. The Company believes that information provides a reasonable basis for
estimating the fair values of assets acquired and liabilities assumed;
however, the determination of those fair values is not yet finalized. Thus,
the preliminary measurements of fair value set forth in the table below are
subject to change during the measurement period as valuations are finalized.
The Company expects to finalize the valuation and complete the purchase price
allocation as soon as practicable.
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FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(Unaudited)
The following table summarizes the preliminary fair value of assets acquired
and liabilities assumed as of the acquisition date:
(in millions)
Purchase price, inclusive of closing adjustments $ 41.9
Estimated fair value of additional consideration 4.5
(a)
Total consideration 46.4
Accounts receivable 4.7
Inventories 14.3
Prepaid expenses and other current assets 0.1
Rental equipment 1.6
Properties and equipment 4.4
Customer relationships 10.5
(b)
Trade names 2.8
(c)
Other intangible assets 1.3
Accounts payable (
1.5
)
Accrued liabilities (
0.5
)
Net assets acquired 37.7
Goodwill $ 8.7
(d)
(a) Represents the preliminary estimated fair value of the contingent
earn-out payment as of the acquisition date, which is included in Other
long-term liabilities on the Condensed Consolidated Balance Sheets. See Note
13 - Fair Value Measurements for discussion of the methodology used to
determine the fair value of the contingent earn-out payment.
(b) Represents the preliminary fair value assigned to customer
relationships, which are considered to be definite-lived intangible assets,
with a preliminary estimated useful life of approximately
12
years.
(c) Represents the preliminary fair value assigned to trade names, which
are considered to be indefinite-lived intangible assets.
(d) Goodwill, which is primarily tax-deductible, has been allocated to the
Environmental Solutions Group on the basis that the synergies identified will
primarily benefit this segment.
In the period between the April 3, 2023 closing date and September 30, 2023,
Trackless generated $
19.6
million of net sales and $
4.3
million of operating income, before elimination of intercompany transactions.
Acquisition of Blasters
On January 3, 2023, the Company completed the acquisition of substantially all
the assets and operations of Blasters, Inc. and Blasters Technologies, LLC
(collectively, "Blasters"), a leading U.S. manufacturer of truck-mounted
waterblasting equipment. The Company expects that the Blasters acquisition
will further bolster its position as an industry leading diversified
industrial manufacturer of specialized vehicles for maintenance and
infrastructure markets with leading brands of premium, value-adding products,
and a strong supporting aftermarket platform.
The assets and liabilities of Blasters have been consolidated into the
Company's Condensed Consolidated Balance Sheet as of September 30, 2023, and
the post-acquisition results of operations have been included in the Condensed
Consolidated Statements of Operations, within the Environmental Solutions
Group.
The initial cash consideration paid by the Company to acquire Blasters was $
13.0
million, inclusive of certain closing adjustments, of which $
0.2
million was received in October 2023. In addition, there is a contingent
earn-out payment of up to $
8.0
million, based upon the achievement of certain financial targets over a
specified performance period. The purchase price was funded through existing
cash and borrowings under the Company's credit agreement.
The acquisition is being accounted for in accordance with ASC 805,
Business Combinations
. The Company's purchase price allocation as of September 30, 2023 reflects
various provisional estimates that were based on the information that was
available as of the acquisition date and the filing date of this Form 10-Q.
The Company believes that information provides a reasonable basis for
estimating the fair values of assets acquired and liabilities assumed;
however, the determination of those fair values is not yet finalized. Thus,
the preliminary measurements of fair value set forth in the table below are
subject to change during the measurement period as valuations are finalized.
The Company expects to finalize the valuation and complete the purchase price
allocation as soon as practicable.
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FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(Unaudited)
The following table summarizes the preliminary fair value of assets acquired
and liabilities assumed as of the acquisition date:
(in millions)
Purchase price, inclusive of closing adjustments $ 13.0
Estimated fair value of additional consideration 4.0
(a)
Total consideration 17.0
Accounts receivable 0.7
Inventories 4.6
Prepaid expenses and other current assets 0.1
Properties and equipment 1.1
Operating lease right-of-use assets 1.1
(b)
Customer relationships 5.3
(c)
Trade names 2.6
(d)
Other intangible assets 0.3
Operating lease liabilities (
(b) 1.1
)
Accounts payable (
0.9
)
Accrued liabilities (
0.5
)
Customer deposits (
0.5
)
Finance lease obligations (
0.1
)
Net assets acquired 12.7
Goodwill $ 4.3
(e)
(a) Represents the preliminary estimated fair value of the contingent
earn-out payment as of the acquisition date, of which $
1.0
million is included in Other current liabilities and $
3.0
million is included in Other long-term liabilities on the Condensed
Consolidated Balance Sheets. See Note 13 - Fair Value Measurements for
discussion of the methodology used to determine the fair value of the
contingent earn-out payment.
(b) In connection with the acquisition, the Company entered into a lease
agreement for the Blasters facility, which is owned by affiliates of the
sellers. The related-party lease contains a market-based annual rent of $
0.2
million, an initial lease term of
five
years, and options to renew.
(c) Represents the preliminary fair value assigned to customer
relationships, which are considered to be definite-lived intangible assets,
with a preliminary estimated useful life of approximately
12
years.
(d) Represents the preliminary fair value assigned to trade names, which
are considered to be indefinite-lived intangible assets.
(e) Goodwill, which is tax-deductible, has been allocated to the
Environmental Solutions Group on the basis that the synergies identified will
primarily benefit this segment.
In the period between the January 3, 2023 closing date and September 30, 2023,
Blasters generated $
14.4
million of net sales and $
1.0
million of operating income.
The 2023 acquisitions of Trackless and Blasters would not have been material
to the Company's net sales or results of operations for the three and nine
months ended September 30, 2022, either individually or in the aggregate.
Accordingly, the Company's consolidated results do not differ materially from
historical performance as a result of the acquisitions, and therefore,
unaudited pro-forma results are not presented.
Acquisitions Completed in 2022
On October 3, 2022, the Company completed the acquisition of substantially all
the assets and operations of TowHaul
Corporation ("TowHaul"). TowHaul is a leading manufacturer of off-road towing
and hauling equipment. The TowHaul acquisition bolstered the Company's
position as an industry leading diversified industrial manufacturer of
specialized vehicles for maintenance and infrastructure markets with leading
brands of premium, value-adding products, and a strong supporting aftermarket
platform.
The cash consideration paid by the Company to acquire TowHaul was $
43.3
million, which was funded through existing cash and borrowings under the
Company's credit facility.
During the nine months ended September 30, 2023, the Company recognized
measurement period adjustments, which primarily resulted from obtaining a
third-party valuation of acquired intangible assets, that resulted in a $
7.5
million increase to the
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FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(Unaudited)
carrying value of Goodwill from the $
12.9
million previously recorded as of December 31, 2022, with a corresponding
reduction in the carrying value of acquired intangible assets. The measurement
period adjustments did not have a material impact on the Company's Condensed
Consolidated Statements of Operations for the three and nine months ended
September 30, 2023. As of September 30, 2023, the Company's purchase price
allocation for the TowHaul acquisition is considered to be final.
The following table summarizes the fair value of assets acquired and
liabilities assumed as of the acquisition date:
(in millions)
Purchase price, inclusive of closing adjustments $ 43.3
Total consideration 43.3
Accounts receivable 1.5
Inventories 4.7
Properties and equipment 6.1
Customer relationships 6.9
(a)
Trade names 5.7
(b)
Other intangible assets 1.0
Accounts payable (
0.1
)
Accrued liabilities (
0.5
)
Customer deposits (
2.4
)
Net assets acquired 22.9
Goodwill $ 20.4
(c)
(a) Represents the fair value assigned to customer relationships, which are
considered to be definite-lived intangible assets, with an estimated useful
life of
6
years.
(b) Represents the fair value assigned to trade names, which are considered
to be indefinite-lived intangible assets.
(c) Goodwill, which is tax-deductible, has been allocated to the
Environmental Solutions Group on the basis that the synergies identified will
primarily benefit this segment.
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FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(Unaudited)
NOTE 3 -
REVENUE RECOGNITION
The following table presents the Company's Net sales disaggregated by
geographic region, based on the location of the end customer, and by major
product line:
Three Months Ended Nine Months Ended
September 30, September 30,
(in millions) 2023 2022 2023 2022
Geographic Region:
U.S. $ 340.0 $ 275.9 $ 988.0 $ 840.1
Canada 67.1 44.9 180.4 131.2
Europe/Other 39.3 25.6 105.9 72.0
Total net sales $ 446.4 $ 346.4 $ 1,274.3 $ 1,043.3
Major Product Line:
Environmental Solutions
Vehicles and equipment $ 290.5 $ 214.8 $ 820.8 $ 668.0
(a)
Parts 53.8 44.1 168.2 130.0
Rental income 13.8 14.4 41.7 40.2
(b)
Other 14.9 11.5 34.1 27.1
(c)
Total 373.0 284.8 1,064.8 865.3
Safety and Security Systems
Public safety and security equipment 44.2 36.3 126.8 109.9
Industrial signaling equipment 17.8 16.7 55.1 46.0
Warning systems 11.4 8.6 27.6 22.1
Total 73.4 61.6 209.5 178.0
Total net sales $ 446.4 $ 346.4 $ 1,274.3 $ 1,043.3
(a)
Includes net sales from the sale of new and used vehicles and equipment,
including sales of rental equipment.
(b)
Represents income from vehicle and equipment lease arrangements with customers.
(c)
Primarily includes revenues from services, such as maintenance and repair
work, and the sale of extended warranty contracts.
Contract Balances
The Company recognizes contract liabilities when cash payments, such as
customer deposits, are received in advance of the Company's satisfaction of
the related performance obligations.
Contract liabilities are recognized as Net sales when the related performance
obligations are satisfied, which generally occurs within three to six months
of the cash receipt.
Contract liability balances are not materially impacted by any other factors.
The Company's contract liabilities were $
30.9
million and $
28.9
million as of
September 30, 2023
and December 31, 2022, respectively.
Contract assets, such as unbilled receivables, were not material as of any of
the periods presented herein.
NOTE 4 -
INVENTORIES
The following table summarizes the components of Inventories:
(in millions) September 30, December 31,
2023 2022
Finished goods $ 121.4 $ 97.5
Raw materials 172.3 164.3
Work in process 36.4 30.9
Total inventories $ 330.1 $ 292.7
(a)
(a) Amounts at September 30, 2023 include inventories acquired in the
acquisitions of Blasters and Trackless - See Note 2 - Acquisitions.
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FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(Unaudited)
NOTE 5 -
DEBT
The following table summarizes the components of Long-term borrowings and
finance lease obligations:
(in millions) September 30, December 31, 2022
2023
2022 Credit Agreement $ 364.2 $ 361.0
(a)
Finance lease obligations 1.7 2.0
Total borrowings and finance lease obligations, including current portion 365.9 363.0
Less: Current borrowings 3.1 0.8
Less: Current finance lease obligations 0.8 0.7
Total long-term borrowings and finance lease obligations $ 362.0 $ 361.5
(a)
Defined as the Third Amended and Restated Credit Agreement, dated October 21,
2022, as amended.
As more fully described within Note 13 - Fair Value Measurements, the Company
uses a three-level fair value hierarchy that prioritizes the inputs used to
measure fair value. The fair value of the Company's borrowings and finance
lease obligations is based on interest rates that we believe are currently
available to us for issuance of debt with similar terms and remaining
maturities (Level 2 input). The carrying amounts of the Company's borrowings
and finance lease obligations approximate their fair values as of September
30, 2023 and December 31, 2022.
The 2022 Credit Agreement is a senior secured credit facility which provides
the Company and certain of its foreign subsidiaries access to an aggregate
principal amount of $
800
million, consisting of (i) a revolving credit facility in an amount up to $
675
million (the "Revolver") and (ii) a term loan facility in an amount up to $
125
million. The 2022 Credit Agreement matures on October 21, 2027.
Borrowings under the 2022 Credit Agreement bear interest, at the Company's
option, at a base rate or an Adjusted Term Secured Overnight Financing Rate
("SOFR"), Adjusted Eurocurrency Rate or Adjusted Daily Simple SONIA Rate (as
each is defined in the 2022 Credit Agreement), plus, in each case, an
applicable margin. The applicable margin ranges from
zero
to
0.75
% for base rate borrowings and
1.00
% to
1.75
% for Adjusted Term SOFR, Adjusted Eurocurrency Rate or Adjusted Daily Simple
SONIA Rate borrowings. The Company must also pay a commitment fee to the
lenders ranging between
0.10
% to
0.25
% per annum on the unused portion of the Revolver along with other standard
fees. Applicable margin, issuance fees and other customary expenses are
payable on outstanding letters of credit.
The Company is subject to certain net leverage ratio and interest coverage
ratio financial covenants under the 2022 Credit Agreement that are measured at
each fiscal quarter-end. The Company was in compliance with all such covenants
as of September 30, 2023.
As of September 30, 2023, there was $
364.2
million of cash drawn and $
11.2
million of undrawn letters of credit under the 2022 Credit Agreement, with $
424.6
million of net availability for borrowings. As of December 31, 2022, there was $
361.0
million cash drawn and $
11.2
million of undrawn letters of credit under the 2022 Credit Agreement, with $
427.8
million of net availability for borrowings.
The following table summarizes the gross borrowings and gross payments under
the Company's credit facilities:
Nine Months Ended
September 30,
(in millions) 2023 2022
Gross borrowings $ 134.3 $ 85.7
Gross payments 129.7 35.8
Interest Rate Swaps
On October 21, 2022, the Company entered into an interest rate swap (the "2022
Swap") with a notional amount of $
75.0
million, as a means of fixing the floating interest rate component on $
75.0
million of its variable-rate debt. The 2022 Swap is designated as a cash flow
hedge, with an original maturity date of October 31, 2025.
On July 11, 2023, the Company entered into an additional interest rate swap
(the "2023 Swap") with a notional amount of $
75.0
million, as a means of fixing the floating interest rate component on $
75.0
million of its variable-rate debt. The 2023 Swap is designated as a cash flow
hedge, with an original maturity date of August 1, 2025.
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FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(Unaudited)
As a result of the application of hedge accounting treatment, all unrealized
gains and losses related to the derivative instruments are recorded in
Accumulated other comprehensive loss and are reclassified into operations in
the same period in which the hedged transaction affects earnings. Hedge
effectiveness is assessed quarterly. The Company does not use derivative
instruments for trading or speculative purposes.
The fair value of the Company's interest rate swaps is derived from a
discounted cash flow analysis based on the terms of the contract and the
interest rate curve (Level 2 inputs) and measured on a recurring basis in our
Condensed Consolidated Balance Sheets.
At September 30, 2023 and December 31, 2022, the fair value of the Company's
interest rate swaps was an asset of $
1.2
million and a liability of $
0.3
million, which were included in Other long-term assets and Other long-term
liabilities on the Condensed Consolidated Balance Sheets, respectively. During
the three and nine months ended September 30, 2023, unrealized pre-tax gains
of $
0.6
million and $
1.5
million, respectively, were recorded in Accumulated other comprehensive loss.
During the three and nine months ended September 30, 2022, unrealized pre-tax
gains $
1.6
million and $
4.7
million, respectively, were recorded in Accumulated other comprehensive loss.
No ineffectiveness was recorded in either period.
In connection with entering into the 2022 Credit Agreement in October 2022,
the Company terminated an interest rate swap initially entered into in 2019,
receiving proceeds of $
4.3
million upon settlement. The settlement gain was recorded in Accumulated other
comprehensive loss and is being amortized into earnings ratably through the
original maturity date of July 30, 2024. During the three and nine months
ended September 30, 2023, the Company recognized non-cash settlement gains of $
0.6
million and $
1.8
million, respectively, as a component of Interest expense, net on the
Condensed Consolidated Statements of Operations. At September 30, 2023 and
December 31, 2022, an unrealized settlement gain of $
2.0
million and $
3.8
million, respectively, was included in Accumulated other comprehensive loss on
the Condensed Consolidated Balance Sheets.
NOTE 6 -
GOODWILL AND OTHER INTANGIBLE ASSETS
The following table summarizes the carrying amount of goodwill, and the
changes in the carrying amount of goodwill in the nine months ended September
30, 2023, by segment:
(in millions) Environmental Safety & Security Total
Solutions Systems
Balance at January 1, 2023 $ 343.8 $ 109.6 $ 453.4
Acquisitions, including measurement period adjustments 20.5 - 20.5
Translation adjustments - ( (
0.3 0.3
) )
Balance at September 30, 2023 $ 364.3 $ 109.3 $ 473.6
The following table summarizes the gross carrying amount and accumulated
amortization of intangible assets for each major class of intangible assets:
September 30, 2023 December 31, 2022
(in Gross Accumulated Net Gross Accumulated Net
millions) Carrying Amortization Carrying Carrying Amortization Carrying
Value Value Value Value
Definite-lived
intangible
assets:
Customer $ 162.3 $ ( $ 99.6 $ 153.7 $ ( $ 101.7
relationships 62.7 52.0
(a) ) )
Other 8.2 ( 4.1 5.7 ( 2.3
(a) 4.1 3.4
) )
Total 170.5 ( 103.7 159.4 ( 104.0
definite-lived 66.8 55.4
intangible ) )
assets
Indefinite-lived
intangible
assets:
Trade 104.2 - 104.2 99.9 - 99.9
names
Other 4.3 - 4.3 4.3 - 4.3
Total 108.5 - 108.5 104.2 - 104.2
indefinite-lived
intangible
assets
Total $ 279.0 $ ( $ 212.2 $ 263.6 $ ( $ 208.2
intangible 66.8 55.4
assets ) )
(a) Average useful life of customer relationships and other definite-lived
intangible assets are estimated to be approximately
12
years and
6
years, respectively. The average useful life across all definite-lived
intangible assets is estimated to be approximately
11
years.
The table above includes preliminary estimates of the fair value and useful
lives of certain definite and indefinite-lived
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FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(Unaudited)
intangible assets related to the acquisitions of Trackless and Blasters, which
were completed during the second quarter of 2023, and the first quarter of
2023, respectively. As further described in Note 2 - Acquisitions, the
preliminary measurements of fair value included in the table above are subject
to change during the measurement period as the applicable third-party
valuations are finalized.
Amortization expense for the three months ended September 30, 2023 and 2022
was $
3.9
million and $
3.1
million, respectively. Amortization expense for the nine months ended
September 30, 2023 and 2022 was $
11.4
million and $
9.6
million, respectively.
The Company currently estimates that aggregate amortization expense will be
approximately $
3.9
million for the remainder of 2023, $
15.5
million in 2024, $
15.5
million in 2025, $
15.3
million in 2026, $
14.4
million in 2027, and $
39.1
million thereafter. Actual amounts of amortization may differ from estimated
amounts due to changes in foreign currency rates, measurement period
adjustments for the Trackless and Blasters acquisitions, impairment of
intangible assets and other events.
NOTE 7 -
INCOME TAXES
The Company recognized income tax expense of $
13.8
million and $
4.9
million for the three months ended September 30, 2023 and 2022, respectively.
The increase in tax expense in the current-year quarter was largely due to
higher pre-tax income levels and the non-recurrence of certain discrete tax
benefits recognized in the prior-year quarter. During the three months ended
September 30, 2022, the Company recognized a $
2.7
million tax benefit from the release of a valuation allowance that had
previously been recorded against deferred tax assets associated with foreign
tax credits in the U.S., and a $
1.1
million tax benefit associated with the release of a valuation allowance in
the U.K. Including these items, the Company's effective tax rate for the three
months ended September 30, 2023 was
24.2
%, compared to
13.4
% in the prior-year quarter.
For the nine months ended September 30, 2023 and 2022, the Company recognized
income tax expense of $
33.5
million and $
23.1
million, respectively. The increase in tax expense in the current-year period
was largely due to higher pre-tax income levels and the non-recurrence of the
discrete tax benefits recognized in the prior-year quarter, partially offset
by a $
1.7
million increase in excess tax benefits associated with stock-based
compensation activity and a $
0.6
million benefit associated with changes in tax reserves. Including these
items, the Company's effective tax rate for the nine months ended September
30, 2023 was
23.2
%, compared to
21.2
% in the prior-year period.
During the nine months ended September 30, 2023, the Company filed amended
U.S. federal income tax returns for the 2015 through 2018 tax years to claim a
worthless stock deduction. As of September 30, 2023, the aggregate refund
claim associated with the worthless stock deduction was $
13.4
million, including interest of $
1.6
million, and the Company recognized an offsetting increase to its liability
for unrecognized tax benefits.
NOTE 8 -
PENSIONS
The following table summarizes the components of Net periodic pension expense
(benefit):
U.S. Benefit Plan Non-U.S. Benefit Plan
Three Months Nine Months Three Months Nine Months
Ended Ended Ended Ended
September 30, September 30, September 30, September 30,
(in 2023 2022 2023 2022 2023 2022 2023 2022
millions)
Service $ - $ - $ - $ - $ 0.1 $ 0.1 $ 0.1 $ 0.1
cost
Interest 1.6 1.2 4.6 3.3 0.3 0.2 1.1 0.6
cost
Amortization of 0.4 0.6 1.0 1.7 0.2 0.2 0.7 0.5
actuarial loss
Amortization of - - - - 0.1 - 0.1 0.1
prior service cost
Expected return ( ( ( ( ( ( ( (
on plan assets 1.9 1.7 5.7 5.2 0.6 0.5 1.6 1.5
) ) ) ) ) ) ) )
Net periodic pension $ 0.1 $ 0.1 $ ( $ ( $ 0.1 $ - $ 0.4 $ (
expense (benefit) 0.1 0.2 0.2
) ) )
The items that comprise Net periodic pension expense (benefit), other than
service cost, are included as a component of Other expense (income), net on
the Condensed Consolidated Statements of Operations.
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FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(Unaudited)
NOTE 9 -
COMMITMENTS AND CONTINGENCIES
Financial Commitments
The Company provides indemnifications and other guarantees in the ordinary
course of business, the terms of which range in duration and often are not
explicitly defined. Specifically, the Company is occasionally required to
provide letters of credit and bid and performance bonds to various customers,
principally to act as security for retention levels related to casualty
insurance policies and to guarantee the performance of subsidiaries that
engage in export and domestic transactions. At September 30, 2023, the Company
had outstanding performance and financial standby letters of credit, as well
as outstanding bid and performance bonds, aggregating to $
25.6
million. If any such letters of credit or bonds are called, the Company would
be obligated to reimburse the issuer of the letter of credit or bond. The
Company believes the likelihood of any currently outstanding letter of credit
or bond being called is remote.
The Company has transactions involving the sale of equipment to certain of its
customers which include (i) guarantees to repurchase the equipment for a fixed
price at a future date and (ii) guarantees to repurchase the equipment from
the third-party lender in the event of default by the customer. As of
September 30, 2023, both the single year and maximum potential cash payments
the Company could be required to make to repurchase equipment under these
agreements amounted to $
1.4
million. The Company's risk under these repurchase arrangements would be
partially mitigated by the value of the products repurchased as part of the
transaction. Historical cash requirements and losses associated with these
obligations have not been significant but could increase if customer defaults
exceed current expectations.
The Company has certain lease agreements for facilities owned by affiliates
which include provisions requiring the Company to guarantee any remaining
lease payments in the event of default. As of September 30, 2023, the total
amount of future payments guaranteed under these agreements was approximately $
0.9
million. The Company believes the likelihood of defaulting on these leases is
remote.
Product Warranties
The Company issues product performance warranties to customers with the sale
of its products. The specific terms and conditions of these warranties vary
depending upon the product sold and country in which the Company does
business, with warranty periods generally ranging from
one
to
five years
. The Company estimates the costs that may be incurred under its basic limited
warranty and records a liability in the amount of such costs at the time the
sale of the related product is recognized. Factors that affect the Company's
warranty liability include (i) the number of units under warranty, (ii)
historical and anticipated rates of warranty claims and (iii) costs per claim.
The Company periodically assesses the adequacy of its recorded warranty
liabilities and adjusts the amounts as necessary.
The following table summarizes the changes in the Company's warranty
liabilities during the nine months ended September 30, 2023 and 2022:
(in millions) 2023 2022
Balance at January 1 $ 9.3 $ 9.7
Provisions to expense 5.7 5.3
Acquisitions 0.1 -
Payments ( (
5.8 5.9
) )
Balance at September 30 $ 9.3 $ 9.1
Legal Proceedings
The Company is subject to various claims, including pending and possible legal
actions for product liability and other damages, and other matters arising in
the ordinary course of the Company's business. On a quarterly basis, the
Company reviews uninsured material legal claims against the Company and
accrues for the costs of such claims as appropriate in the exercise of
management's best judgment and experience. However, due to a lack of factual
information available to the Company about a claim, or the procedural stage of
a claim, it may not be possible for the Company to reasonably assess either
the probability of a favorable or unfavorable outcome of the claim or to
reasonably estimate the amount of loss should there be an unfavorable outcome.
Therefore, for many claims, the Company cannot reasonably estimate a range of
loss.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(Unaudited)
The Company believes, based on current knowledge and after consultation with
counsel, that the outcome of such claims and actions will not have a material
adverse effect on the Company's results of operations or financial condition.
However, in the event of unexpected future developments, it is possible that
the ultimate resolution of such matters, if unfavorable, could have a material
adverse effect on the Company's results of operations, financial condition or
cash flow.
Hearing Loss Litigation
The Company has been sued for monetary damages by firefighters claiming that
exposure to the Company's sirens impaired their hearing and the sirens are
therefore defective. Between 1999 and 2013,
40
cases were filed on behalf of a total of
2,816
plaintiffs in the Circuit Court of Cook County, Illinois. The trial of the first
27
of these plaintiffs' claims occurred in 2008, whereby a Cook County jury
returned a unanimous verdict in favor of the Company. In 2009, a trial was
held on behalf of
nine
Chicago firefighter plaintiffs and concluded with a verdict for the plaintiffs
in varying amounts totaling $
0.4
million. Following appeals, the Company satisfied the judgments, resulting in
the final dismissal of the cases. A third consolidated trial involving
eight
Chicago firefighter plaintiffs occurred in November 2011. The jury returned a
unanimous verdict in favor of the Company. Thereafter, the trial court
scheduled a fourth consolidated trial involving
three
firefighter plaintiffs. Prior to trial, the claims of
two
of the firefighter plaintiffs were dismissed, and on December 17, 2012, the
jury entered a complete defense verdict for the Company. On December 20, 2021,
the parties executed a settlement agreement to resolve claims of approximately
462
firefighters still involved in the litigation, agreeing to pay a lump sum of $
0.2
million based upon an assessment of firefighters who met minimal bilateral
hearing loss standards. The estimated settlement amount was accrued by the
Company. The settlement agreement did not require the payment of any attorney
fees by the Company and provided that plaintiffs' attorney would withdraw from
representing firefighters who did not agree to the settlement. In July 2022,
the Company issued the settlement payment for eligible plaintiffs who
submitted a release. The claims of all other eligible plaintiffs were
dismissed for want of prosecution on August 5, 2022.
The Company also filed motions to dismiss cases involving firefighters who
worked for fire departments located outside of Illinois based on improper
venue. On February 24, 2017, the Circuit Court of Cook County dismissed the
cases of
1,770
such firefighter plaintiffs. In 2017, the Company entered into a global
settlement agreement (the "2017 Settlement Agreement") with two attorneys who
represented approximately
1,090
of these plaintiffs offering to pay $
700
per plaintiff to settle these cases, and
717
plaintiffs accepted this offer as a final settlement. The 2017 Settlement
Agreement did not require the payment of any attorney fees by the Company. The
attorneys representing these plaintiffs agreed to withdraw from representing
plaintiffs who did not respond to the settlement offer. It is the Company's
position that the non-settling plaintiffs who failed to timely refile their
cases are barred from doing so by the statute of limitations.
The Company was also sued on this issue outside of the Cook County, Illinois
venue. Between 2007 and 2009, lawsuits involving
71
plaintiffs were filed in the Court of Common Pleas, Philadelphia County,
Pennsylvania.
Three
of these cases were dismissed pursuant to pretrial motions,
one
case was voluntarily dismissed, and others were settled for nominal sums.
Three trials were held in these cases. In the first trial, a jury returned a
verdict for the plaintiff, finding that the Company's siren was not
defectively designed but that the Company negligently constructed the siren.
The jury awarded damages in an amount less than $
0.1
million. In 2010, a jury returned a defense verdict for the Company as to the
claims of
nine
plaintiffs. In a third trial, the jury returned a defense verdict for the
Company as to the claims of
nine
plaintiffs. Following the defense verdicts in the last
two
Philadelphia trials, in order to avoid the inconvenience, uncertainty and
distraction of the lawsuits, the Company entered into a global settlement
agreement (the "2010 Settlement Agreement") on behalf of
1,125
claimants (the "Claimants"). The 2010 Settlement Agreement provided that the
Company pay a total amount of $
3.8
million to settle the claims (including the costs, fees and other expenses of
the law firm in connection with its representation of the Claimants), subject
to certain terms, conditions and procedures set forth in the 2010 Settlement
Agreement. On April 22, 2011, the Company confirmed that the terms and
conditions of the 2010 Settlement Agreement had been met and made an adjusted
payment of $
3.6
million to conclude the settlement. The amount was based upon the Company's
receipt of
1,069
signed releases provided by Claimants. The Company generally denies the
allegations made in the lawsuits and denies that its products caused any
injuries to the Claimants.
From 2007 through 2009, firefighters also brought hearing loss claims against
the Company in New Jersey, Missouri, Maryland and Kings County, New York, all
of which were dismissed prior to trial.
In 2012,
20
new cases were filed in Philadelphia on behalf of
20
Philadelphia firefighters against various defendants in addition to the Company.
Five
of these cases were dismissed. The first trial involving these cases occurred
in December 2014 and involved
three
firefighter plaintiffs. The jury returned a verdict in favor of the Company.
Following the trial, the parties agreed to settle cases involving
seven
firefighter plaintiffs for nominal amounts.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(Unaudited)
In January 2015, plaintiffs' attorneys filed
two
new complaints in Philadelphia on behalf of approximately
70
additional firefighter plaintiffs.
One
of the complaints, which involved
11
firefighter plaintiffs from the District of Columbia, was removed to federal
court in the Eastern District of Pennsylvania. Plaintiffs voluntarily
dismissed all claims in that case on May 31, 2016. The Company thereafter
moved to recover fees and costs in this case, asserting that plaintiffs'
counsel failed to properly investigate the claims prior to filing suit. The
Court granted the motion, awarding $
0.1
million to the Company, and the United States Court of Appeals for the Third
Circuit affirmed the decision awarding fees and costs to the Company. The
Court granted the Company's motion to dismiss the remaining out-of-state
firefighters. In 2015, another
nine
new cases involving a total of
193
firefighters were filed in Philadelphia. The court dismissed all claims filed
by out-of-state firefighters, a decision affirmed by the appellate court.
In 2016 and 2017, plaintiffs filed new cases involving a total of
155
Philadelphia firefighters in Philadelphia state court, and the cases were
transferred to the mass tort program in Philadelphia for pretrial purposes. In
November 2017, a trial involving
one
Philadelphia firefighter occurred, and the jury returned a verdict in favor of
the Company.
In 2014, an action was brought in the Court of Common Pleas of Erie County,
Pennsylvania on behalf of
61
firefighters against various defendants in addition to the Company. Also in
2014,
20
lawsuits involving a total of
193
Buffalo Fire Department firefighters were filed in the Supreme Court of the
State of New York, Erie County. In 2015, the Company was served with a
complaint filed in Union County, New Jersey state court, involving
34
New Jersey firefighters. In 2016,
nine
cases were filed in Suffolk County, Massachusetts state court, naming the
Company as a defendant. These cases involved
194
firefighters who lived and worked in the Boston area. In 2017, plaintiffs'
attorneys filed additional hearing loss cases in Florida. Prior to a dismissal
of these cases pursuant to the Tolling Agreement discussed below, there was a
total of
1084
firefighters involved in these cases.
In 2013, cases were filed in Allegheny County, Pennsylvania on behalf of
247
plaintiff firefighters from Pittsburgh and against various defendants
including the Company. In 2016, cases were filed against an additional
19
Pittsburgh firefighters. After the Company filed pretrial motions, the Court
dismissed claims of
55
Pittsburgh firefighter plaintiffs. Prior to the first scheduled trial, the
Court granted the Company's motion for summary judgment and dismissed all
claims asserted by plaintiff firefighters involved in this trial. Following an
appeal by the plaintiff firefighters, the appellate court affirmed this
dismissal. A jury rendered a verdict in favor of the Company in 2017.
In 2017,
five
cases involving
70
firefighter plaintiffs were filed in Lackawanna County, Pennsylvania.
A second trial involving Pittsburgh firefighters began in 2018. At the outset
of this trial, plaintiffs' attorneys, who represent all firefighters who filed
cases in Allegheny County, Philadelphia, Buffalo, New Jersey, Massachusetts,
and Florida requested that the Company consider settlement of various cases.
In March 2018, the parties agreed in principle on a framework (the "Settlement
Framework") to resolve hearing loss claims and cases in all jurisdictions
involved in the hearing loss litigation except Cook County, Illinois and
Lackawanna County, Pennsylvania and a case involving
one
firefighter in New York City, cases being handled by different attorneys. The
Company later settled the cases in Lackawanna County and settled the case
involving
one
firefighter in New York City for nominal amounts.
In order to minimize the parties' respective legal costs and expenses during
this settlement process, on July 5, 2018, the parties entered into a tolling
agreement (the "Tolling Agreement"). Pursuant to the Tolling Agreement,
counsel for the settling firefighters agreed to dismiss the pending lawsuits
in all jurisdictions except for the Allegheny County (Pittsburgh),
Pennsylvania cases, and the Company agreed to a tolling of any statute of
limitations applicable to the dismissed cases. The Tolling Agreement continued
in place until the parties executed a global settlement agreement (the "2019
Settlement Agreement") on November 4, 2019. After execution of the 2019
Settlement Agreement, the Allegheny County (Pittsburgh) cases were dismissed.
Pursuant to the Settlement Framework, the Company would pay $
700
to each firefighter who filed a lawsuit and is eligible to be part of the
settlement and $
300
to each firefighter who has not yet filed a case and is eligible to be part of
the settlement. To be eligible for settlement, among other things,
firefighters must provide proof that they have high frequency noise-induced
hearing loss. There are approximately
2,160
firefighters whose claims may be considered as part of this settlement,
including approximately
921
firefighters who have ongoing filed lawsuits. The Settlement Framework was
finalized in the 2019 Settlement Agreement. The 2019 Settlement Agreement
requires plaintiffs' attorneys to withdraw from representing firefighters who
elect not to participate in the settlement and does not include the payment of
any attorney fees by the Company. Pursuant to the 2019 Settlement Agreement,
the parties are now in the process of determining how many of the approximately
2,160
firefighters will be eligible to participate in the settlement.
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FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(Unaudited)
As of September 30, 2023, the Company has recognized an estimated liability
for the potential settlement amount under the Settlement Framework. While it
is reasonably possible that the ultimate resolution of this matter may result
in a loss in excess of the amount accrued, the incremental loss is not
expected to be material.
NOTE 10 -
EARNINGS PER SHARE
The Company computes earnings per share ("EPS") in accordance with ASC 260,
Earnings per Share
, which requires that non-vested restricted stock containing non-forfeitable
dividend rights should be treated as participating securities pursuant to the
two-class method. Under the two-class method, net income is reduced by the
amount of dividends declared in the period for common stock and participating
securities. The remaining undistributed earnings are then allocated to common
stock and participating securities as if all of the net income for the period
had been distributed. The amounts of distributed and undistributed earnings
allocated to participating securities for the three and nine months ended
September 30, 2023 and 2022 were insignificant and did not materially impact
the calculation of basic or diluted EPS.
Basic EPS is computed by dividing income available to common stockholders by
the weighted average number of shares of common stock and non-vested
restricted stock awards outstanding for the period.
Diluted EPS is computed using the weighted average number of shares of common
stock and non-vested restricted stock awards outstanding for the year, plus
the effect of dilutive potential common shares outstanding during the period.
The dilutive effect of common stock equivalents is determined using the more
dilutive of the two-class method or alternative methods. The Company uses the
treasury stock method to determine the potentially dilutive impact of our
employee stock options and restricted stock units, and the contingently
issuable method for our performance-based restricted stock unit awards.
For both the three and nine months ended September 30, 2023, options to purchase
0.1
million shares of the Company's common stock had an anti-dilutive effect on
EPS, and accordingly, were excluded from the calculation of diluted EPS. For
both the three and nine months ended September 30, 2022, options to purchase
0.3
million shares of the Company's common stock had an anti-dilutive effect on
EPS, and accordingly, were excluded from the calculation of diluted EPS.
The following table reconciles Net income to basic and diluted EPS:
Three Months Ended Nine Months Ended
September 30, September 30,
(in millions, except per share data) 2023 2022 2023 2022
Net income $ 43.3 $ 31.8 $ 111.0 $ 85.8
Weighted average shares outstanding - Basic 60.8 60.4 60.7 60.5
Dilutive effect of common stock equivalents 0.6 0.6 0.7 0.6
Weighted average shares outstanding - Diluted 61.4 61.0 61.4 61.1
Earnings per share:
Basic $ 0.71 $ 0.53 $ 1.83 $ 1.42
Diluted 0.71 0.52 1.81 1.40
NOTE 11 -
STOCKHOLDERS' EQUITY
Dividends
On February 14, 2023, the Company's Board of Directors (the "Board") declared
a quarterly cash dividend of $
0.09
per common share. The dividend totaled $
5.5
million and was distributed on March 31, 2023 to stockholders of record at the
close of business on March 17, 2023.
On April 25, 2023, the Board declared a quarterly cash dividend of $
0.10
per common share. The dividend totaled $
6.1
million and was distributed on June 2, 2023 to stockholders of record at the
close of business on May 19, 2023.
On July 24, 2023, the Board declared a quarterly cash dividend of $
0.10
per common share. The dividend totaled $
6.1
million and was distributed on September 1, 2023 to stockholders of record at
the close of business on August 18, 2023.
During the three and nine months ended September 30, 2022, dividends of $
5.5
million and $
16.4
million, respectively, were paid to stockholders.
On October 24, 2023, the Board declared a quarterly cash dividend of $
0.10
per common share payable on December 1, 2023 to
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(Unaudited)
stockholders of record at the close of business on November 17, 2023.
Stock Repurchase Program
In March 2020, the Board authorized a stock repurchase program of up to $
75.0
million of the Company's common stock, with the remaining authorization under
our previously described repurchase program adopted in 2014 being subject to
the March 2020 program. The stock repurchase program is intended primarily to
facilitate purchases of Company stock as a means to provide cash returns to
stockholders, enhance stockholder returns and manage the Company's capital
structure. Under its stock repurchase program, the Company is authorized to
repurchase, from time to time, shares of its outstanding common stock. Stock
repurchases by the Company are subject to market conditions and other factors
and may be commenced, suspended or discontinued at any time.
During the three and nine months ended September 30, 2023, the Company
repurchased
72,468
shares for a total of $
4.3
million under its stock repurchase programs.
No
shares were repurchased during the three months ended September 30, 2022.
During the nine months ended September 30, 2022, the Company repurchased
472,381
shares for a total of $
16.1
million.
Accumulated Other Comprehensive Loss
The following tables summarize the changes in each component of Accumulated
other comprehensive loss, net of tax in the three months ended September 30,
2023 and 2022:
(in millions) Actuarial Prior Service Foreign Interest Total
(a) Losses Costs Currency Rate Swaps
Translation
Balance at $ ( $ ( $ ( $ 2.3 $ (
July 1, 2023 68.7 2.0 11.3 79.7
) ) ) )
Other comprehensive income 0.3 - ( 0.8 (
(loss) before reclassifications 5.1 4.0
) )
Amounts reclassified from accumulated 0.5 0.1 - ( (
other comprehensive loss 0.7 0.1
) )
Net current-period other 0.8 0.1 ( 0.1 (
comprehensive income (loss) 5.1 4.1
) )
Balance at $ ( $ ( $ ( $ 2.4 $ (
September 30, 2023 67.9 1.9 16.4 83.8
) ) ) )
(in millions) Actuarial Prior Service Foreign Interest Total
(a) Losses Costs Currency Rate Swaps
Translation
Balance at $ ( $ ( $ ( $ 1.8 $ (
July 1, 2022 65.1 2.1 13.6 79.0
) ) ) )
Other comprehensive income 1.0 0.2 ( 1.0 (
(loss) before reclassifications 11.9 9.7
) )
Amounts reclassified from accumulated 0.6 - - 0.1 0.7
other comprehensive loss
Net current-period other 1.6 0.2 ( 1.1 (
comprehensive income (loss) 11.9 9.0
) )
Balance at $ ( $ ( $ ( $ 2.9 $ (
September 30, 2022 63.5 1.9 25.5 88.0
) ) ) )
(a) Amounts in parentheses indicate losses.
The following tables summarize the changes in each component of Accumulated
other comprehensive loss, net of tax in the nine months ended September 30,
2023 and 2022:
(in millions) Actuarial Prior Service Foreign Interest Total
(a) Losses Costs Currency Rate Swaps
Translation
Balance at $ ( $ ( $ ( $ 2.6 $ (
January 1, 2023 68.6 2.0 16.0 84.0
) ) ) )
Other comprehensive (loss) ( - ( 1.5 0.5
income before reclassifications 0.6 0.4
) )
Amounts reclassified from accumulated 1.3 0.1 - ( (
other comprehensive loss 1.7 0.3
) )
Net current-period other 0.7 0.1 ( ( 0.2
comprehensive income (loss) 0.4 0.2
) )
Balance at $ ( $ ( $ ( $ 2.4 $ (
September 30, 2023 67.9 1.9 16.4 83.8
) ) ) )
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(Unaudited)
(in millions) Actuarial Prior Service Foreign Interest Total
(a) Losses Costs Currency Rate Swaps
Translation
Balance at $ ( $ ( $ ( $ ( $ (
January 1, 2022 67.9 2.4 3.4 0.5 74.2
) ) ) ) )
Other comprehensive income 2.8 0.4 ( 3.0 (
(loss) before reclassifications 22.1 15.9
) )
Amounts reclassified from accumulated 1.6 0.1 - 0.4 2.1
other comprehensive loss
Net current-period other 4.4 0.5 ( 3.4 (
comprehensive income (loss) 22.1 13.8
) )
Balance at $ ( $ ( $ ( $ 2.9 $ (
September 30, 2022 63.5 1.9 25.5 88.0
) ) ) )
(a) Amounts in parentheses indicate losses.
The following table summarizes the amounts reclassified from Accumulated other
comprehensive loss, net of tax, in the three months ended September 30, 2023
and 2022 and the affected line item in the Condensed Consolidated Statements
of Operations:
Details about Accumulated Other Amount Reclassified from Accumulated Affected Line Item in Condensed
Comprehensive Loss Components Other Comprehensive Loss Consolidated Statements of Operations
2023 2022
(in millions)
(a)
Amortization of actuarial losses $ ( $ ( Other expense
of defined benefit pension plans 0.6 0.8 (income), net
) )
Amortization of prior service costs ( - Other expense
of defined benefit pension plans 0.1 (income), net
)
Interest 0.9 ( Interest
rate swaps 0.2 expense, net
)
Total 0.2 (
before tax 1.0
)
Income tax ( 0.3 Income tax
(expense) benefit 0.1 expense
)
Total reclassifications for $ 0.1 $ (
the period, net of tax 0.7
)
(a) Amounts in parentheses indicate losses.
The following table summarizes the amounts reclassified from Accumulated other
comprehensive loss, net of tax, in the nine months ended September 30, 2023
and 2022 and the affected line item in the Condensed Consolidated Statements
of Operations:
Details about Accumulated Other Amount Reclassified from Accumulated Affected Line Item in Condensed
Comprehensive Loss Components Other Comprehensive Loss Consolidated Statements of Operations
2023 2022
(in millions)
(a)
Amortization of actuarial losses $ ( $ ( Other expense
of defined benefit pension plans 1.7 2.2 (income), net
) )
Amortization of prior service costs ( ( Other expense
of defined benefit pension plans 0.1 0.1 (income), net
) )
Interest 2.3 ( Interest
rate swaps 0.5 expense, net
)
Total 0.5 (
before tax 2.8
)
Income tax ( 0.7 Income tax
(expense) benefit 0.2 expense
)
Total reclassifications for $ 0.3 $ (
the period, net of tax 2.1
)
(a) Amounts in parentheses indicate losses.
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FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(Unaudited)
NOTE 12 -
SEGMENT INFORMATION
The Company has
two
reportable segments: the Environmental Solutions Group and the Safety and
Security Systems Group. Business units are organized under each reportable
segment because they share certain characteristics, such as technology,
marketing, distribution and product application, which create long-term
synergies.
The following tables summarize the Company's operations by segment, including
Net sales, Operating income (loss), and Total assets:
Three Months Ended Nine Months Ended
September 30, September 30,
(in millions) 2023 2022 2023 2022
Net sales:
Environmental Solutions $ 373.0 $ 284.8 $ 1,064.8 $ 865.3
Safety and Security Systems 73.4 61.6 209.5 178.0
Total net sales $ 446.4 $ 346.4 $ 1,274.3 $ 1,043.3
Operating income (loss):
Environmental Solutions $ 57.2 $ 33.9 $ 151.0 $ 99.8
Safety and Security Systems 13.7 10.5 39.9 28.7
Corporate and eliminations ( ( ( (
8.4 4.9 29.5 14.3
) ) ) )
Total operating income 62.5 39.5 161.4 114.2
Interest expense, net 5.1 2.7 15.4 5.9
Other expense (income), net 0.3 0.1 1.5 (
0.6
)
Income before income taxes $ 57.1 $ 36.7 $ 144.5 $ 108.9
(in millions) September 30, 2023 December 31, 2022
Total assets:
Environmental Solutions $ 1,342.4 $ 1,206.4
Safety and Security Systems 282.8 279.3
Corporate and eliminations 29.4 38.6
Total assets $ 1,654.6 $ 1,524.3
NOTE 13 -
FAIR VALUE MEASUREMENTS
The Company uses a three-level fair value hierarchy that prioritizes the
inputs used to measure fair value. This hierarchy maximizes the use of
observable inputs and minimizes the use of unobservable inputs. Observable
inputs are developed based on market data obtained from independent sources,
while unobservable inputs reflect the Company's assumptions about valuation
based on the best information available in the circumstances. The three levels
of inputs are classified as follows:
.
Level 1 - quoted prices in active markets for identical assets or liabilities;
.
Level 2 - observable inputs, other than quoted prices included in Level 1,
such as quoted prices for markets that are not active, or other inputs that
are observable or can be corroborated by observable market data; and
.
Level 3 - unobservable inputs that are supported by little or no market
activity and that are significant to the fair value of the assets or
liabilities, including certain pricing models, discounted cash flow
methodologies and similar techniques that use significant unobservable inputs.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(Unaudited)
In determining fair value, the Company uses various valuation approaches
within the fair value measurement framework. The valuation methodologies used
for the Company's assets and liabilities measured at fair value and their
classification in the valuation hierarchy are summarized below.
Cash Equivalents
Cash equivalents primarily consist of time-based deposits and interest-bearing
instruments with maturities of three months or less. The Company classified
cash equivalents as Level 1 due to the short-term nature of these instruments
and measured the fair value based on quoted prices in active markets for
identical assets.
Interest Rate Swaps
As described in Note 5 - Debt, the Company may, from time to time, execute
interest rate swaps as a means of fixing the floating interest rate component
on a portion of its floating-rate debt. The Company classifies its interest
rate swaps as Level 2 due to the use of a discounted cash flow model based on
the terms of the contract and the interest rate curve (Level 2 inputs) to
calculate the fair value of the swaps.
Contingent Consideration
At September 30, 2023, the Company had contingent obligations to transfer up
to $
7.5
million, $
8.0
million, and C$
6.0
million (approximately $
4.5
million), to the former owners of Deist Industries, Inc. and certain of its
affiliates (collectively, "Deist"), Blasters, and Trackless, respectively, if
specified financial results are met over future reporting periods (i.e., an
earn-out). The Deist, Blasters, and Trackless acquisitions were completed on
December 30, 2021, January 3, 2023, and April 3, 2023, respectively. The Deist
and Trackless contingent earn-out payments, if earned, would be due to be paid
following the third anniversary of the closing date. The Blasters contingent
earn-out payments, if earned, would be due to paid annually, in each of the
three years following the anniversary of the closing date. During the nine
months ended September 30, 2023, the Company paid $
0.5
million to settle the contingent consideration obligation due to the former
owners of Mark Rite Lines Equipment Company, Inc. ("MRL"), which was acquired
on July 1, 2019.
Liabilities for contingent consideration are measured at fair value each
reporting period, with the acquisition-date fair value included as part of the
consideration transferred. Subsequent changes in fair value are included as a
component of Acquisition and integration-related expenses (benefits) on the
Condensed Consolidated Statements of Operations.
The Company uses an income approach to value the contingent consideration
liability based on the present value of risk-adjusted future cash flows under
either a scenario-based or option-pricing method, as appropriate. Due to the
lack of relevant observable market data over fair value inputs, such as
prospective financial information or probabilities of future events as of
September 30, 2023, the Company has classified the contingent consideration
liability within Level 3 of the fair value hierarchy outlined in ASC 820,
Fair Value Measurements
. As further described in Note 2 - Acquisitions, the Company has recognized a
preliminary estimate of the fair value of the Blasters and Trackless
contingent consideration liabilities as of the applicable acquisition date.
Such preliminary estimates are subject to change during the measurement period
as the applicable third-party valuations are finalized.
The following table summarizes the Company's assets and liabilities that are
measured at fair value on a recurring basis as of September 30, 2023:
Fair Value Measurement at Reporting Date Using
(in millions) Level 1 Level 2 Level 3 Total
Assets:
Cash equivalents $ 7.4 $ - $ - $ 7.4
Interest rate swaps - 1.2 - 1.2
Liabilities:
Contingent consideration - - 10.4 10.4
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(Unaudited)
The following table provides a roll-forward of the fair value of recurring
Level 3 fair value measurements in the three months ended September 30, 2023
and 2022:
(in millions) 2023 2022
Contingent consideration liability, at July 1 $ 10.5 ` $ 2.7
Foreign currency translation ( -
0.1
)
Contingent consideration liability, at September 30 $ 10.4 $ 2.7
The following table provides a roll-forward of the fair value of recurring
Level 3 fair value measurements in the nine months ended September 30, 2023
and 2022:
(in millions) 2023 2022
Contingent consideration liability, at January 1 $ 2.7 $ 2.7
Issuance of contingent consideration in connection with acquisitions 8.5 -
Settlements of contingent consideration liabilities ( -
0.5
)
Foreign currency translation ( -
0.1
)
Total gains included in earnings ( -
(a) 0.2
)
Contingent consideration liability, at September 30 $ 10.4 $ 2.7
(a) Included as a component of acquisition and integration-related expenses
on the Condensed Consolidated Statements of Operations.
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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 should be read together with, the condensed consolidated financial
statements and the accompanying notes contained in this Form 10-Q, as well as
Federal Signal Corporation's Annual Report on Form 10-K for the year ended
December 31, 2022. References herein to the "Company," "we," "our," or "us"
refer collectively to Federal Signal Corporation and its subsidiaries.
Information in MD&A is intended to assist the reader in obtaining an
understanding of (i) the condensed consolidated financial statements, (ii) 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 (iii)
how certain accounting principles affect the Company's condensed consolidated
financial statements. The Company's results for interim periods should not be
regarded as necessarily indicative of results that may be expected for the
entire year, which may differ materially due to, among other things, the risk
factors described under Part I, Item 1A,
Risk Factors
, of the Company's Annual Report on Form 10-K for the year ended December 31,
2022, which was filed with the SEC on March 1, 2023.
Executive Summary
The Company is a leading global manufacturer and supplier of (i) vehicles and
equipment for maintenance and infrastructure end-markets, including sewer
cleaners, industrial vacuum loaders, vacuum- and hydro-excavation trucks
(collectively, "safe-digging trucks"), street sweepers, waterblasting
equipment, road-marking and line-removal equipment, dump truck bodies,
trailers, metal extraction support equipment and multi-purpose tractors, and
(ii) public safety equipment, such as vehicle lightbars and sirens, industrial
signaling equipment, public warning systems and general alarm/public address
systems. In addition, we engage in the sale of parts, service and repair,
equipment rentals and training as part of a comprehensive aftermarket offering
to our customer base. We operate 23 principal manufacturing facilities in five
countries and provide products and integrated solutions to municipal,
governmental, industrial and commercial customers in all regions of the world.
As described in Note 12 - Segment Information to the accompanying condensed
consolidated financial statements, the Company's business units are organized
in two reportable segments: the Environmental Solutions Group and the Safety
and Security Systems Group.
Operating Results
Net sales for the three months ended September 30, 2023 increased by $100.0
million, or 29%, compared to the prior-year quarter, primarily due to higher
sales volumes, inclusive of the effects of acquisitions, pricing actions and
increased chassis sales. Our Environmental Solutions Group reported a net
sales increase of $88.2 million, or 31%, primarily due to increases in sales
of sewer cleaners, street sweepers, refuse trucks, metal extraction support
equipment, safe-digging trucks and industrial vacuum loaders of $18.1 million,
$11.1 million, $10.1 million, $6.6 million, $6.5 million and $6.3 million,
respectively. In addition, aftermarket revenues improved by $15.8 million.
Within our Safety and Security Systems Group, net sales increased by $11.8
million, or 19%, primarily due to improvements in sales of public safety
equipment and warning systems of $7.1 million and $2.8 million, respectively.
Net sales for the nine months ended September 30, 2023 increased by $231.0
million, or 22%, compared to the prior-year period, primarily due to higher
sales volumes, inclusive of the effects of acquisitions, pricing actions and
increased chassis sales. Our Environmental Solutions Group reported a net
sales increase of $199.5 million, or 23%, primarily due to increases in sales
of sewer cleaners, street sweepers, refuse trucks, metal extraction support
equipment, multi-purpose tractors, industrial vacuum loaders and safe-digging
trucks of $39.2 million, $27.8 million, $26.1 million, $19.8 million, $14.3
million, $11.7 million and $9.8 million, respectively. In addition,
aftermarket revenues improved by $47.2 million. Within our Safety and Security
Systems Group, net sales increased by $31.5 million, or 18%, primarily due to
improvements in sales of public safety equipment and industrial signaling
equipment of $16.3 million and $10.2 million, respectively.
Operating income for the three months ended September 30, 2023 increased by
$23.0 million, or 58%, compared to the prior-year quarter, primarily driven by
a $34.9 million improvement in gross profit, partially offset by a $10.8
million increase in Selling, Engineering, General and Administrative ("SEG&A")
expenses, a $0.8 million increase in amortization expense, and a $0.3 million
increase in acquisition and integration-related expenses. Consolidated
operating margin for the three months ended September 30, 2023 was 14.0%,
compared to 11.4% in the prior-year quarter.
Operating income for the nine months ended September 30, 2023 increased by
$47.2 million, or 41%, compared to the prior-year period, primarily driven by
a $82.5 million improvement in gross profit, partially offset by a $30.5
million increase in SEG&A expenses, a $3.0 million increase in acquisition and
integration-related expenses, and a $1.8 million increase in amortization
expense. Consolidated operating margin for the nine months ended September 30,
2023 was 12.7%, compared to 10.9% in the prior-year period.
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Income before income taxes for the three months ended September 30, 2023
increased by $20.4 million, or 56%, compared to the prior-year quarter. The
increase resulted from the higher operating income, partially offset by a $2.4
million increase in interest expense and a $0.2 million increase in other
expense.
Income before income taxes for the nine months ended September 30, 2023
increased by $35.6 million, or 33%, compared to the prior-year period. The
increase resulted from the higher operating income, partially offset by a $9.5
million increase in interest expense and a $2.1 million increase in other
expense.
Net income for the three months ended September 30, 2023 increased by $11.5
million compared to the prior-year quarter, largely due to the aforementioned
increase in income before taxes, partially offset by a $8.9 million increase
in income tax expense. The effective tax rate for the three months ended
September 30, 2023 was 24.2%, compared to 13.4% in the prior-year quarter.
Net income for the nine months ended September 30, 2023 increased by $25.2
million compared to the prior-year period, largely due to the aforementioned
increase in income before taxes, partially offset by a $10.4 million increase
in income tax expense. The effective tax rate for the nine months ended
September 30, 2023 was 23.2%, compared to 21.2% in the prior-year period. We
currently expect our full-year effective tax rate to be approximately 24%,
excluding additional discrete items.
Total orders for the three months ended September 30, 2023 were $450 million,
an increase of $68 million, or 18%, as compared to the prior-year quarter. Our
Environmental Solutions Group reported total orders of $375 million in the
three months ended September 30, 2023, an increase of $53 million, or 17% in
comparison to the prior-year quarter. Orders in the three months ended
September 30, 2023 within our Safety and Security Systems Group were $75
million, an increase of $15 million, or 24%, compared to the prior-year
quarter.
Total orders for the nine months ended September 30, 2023 were $1.41 billion,
an increase of $157 million, or 13%, as compared to the prior-year period. Our
Environmental Solutions Group reported total orders of $1.18 billion in the
nine months ended September 30, 2023, an increase of $119 million, or 11% in
comparison to the prior-year period. Orders in the nine months ended September
30, 2023 within our Safety and Security Systems Group were $226 million, an
increase of $39 million, or 21%, compared to the prior-year period.
Our consolidated backlog at September 30, 2023 was $1.01 billion, an increase
of $182 million, or 22%, compared to the prior-year quarter.
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Results of Operations
The following table summarizes our Condensed Consolidated Statements of
Operations and illustrates the key financial indicators used to assess our
consolidated financial results:
Three Months Ended September 30, Nine Months Ended September 30,
($ in millions, 2023 2022 Change 2023 2022 Change
except
per share
data)
Net $ 446.4 $ 346.4 $ 100.0 $ 1,274.3 $ 1,043.3 $ 231.0
sales
Cost of 328.7 263.6 65.1 943.5 795.0 148.5
sales
Gross 117.7 82.8 34.9 330.8 248.3 82.5
profit
Selling, 50.6 39.8 10.8 156.0 125.5 30.5
engineering, general
and administrative
expenses
Amortization 3.9 3.1 0.8 11.4 9.6 1.8
expense
Acquisition and 0.7 0.4 0.3 2.0 (1.0) 3.0
integration-related
expenses
(benefits)
Operating 62.5 39.5 23.0 161.4 114.2 47.2
income
Interest 5.1 2.7 2.4 15.4 5.9 9.5
expense,
net
Other 0.3 0.1 0.2 1.5 (0.6) 2.1
expense
(income),
net
Income 57.1 36.7 20.4 144.5 108.9 35.6
before
income
taxes
Income 13.8 4.9 8.9 33.5 23.1 10.4
tax
expense
Net $ 43.3 $ 31.8 $ 11.5 $ 111.0 $ 85.8 $ 25.2
income
Operating
data:
Operating 14.0 % 11.4 % 2.6 % 12.7 % 10.9 % 1.8 %
margin
Diluted $ 0.71 $ 0.52 $ 0.19 $ 1.81 $ 1.40 $ 0.41
earnings
per
share
Total 450.2 382.1 68.1 1,405.1 1,248.0 157.1
orders
Backlog 1,005.8 824.1 181.7 1,005.8 824.1 181.7
Depreciation 15.3 13.6 1.7 45.1 40.7 4.4
and
amortization
Net sales
Net sales for the three months ended September 30, 2023 increased by $100.0
million, or 29%, compared to the prior-year quarter, primarily due to higher
sales volumes, inclusive of the effects of acquisitions, pricing actions and
increased chassis sales. The Environmental Solutions Group reported a net
sales increase of $88.2 million, or 31%, primarily due to increases in sales
of sewer cleaners, street sweepers, refuse trucks, metal extraction support
equipment, safe-digging trucks and industrial vacuum loaders of $18.1 million,
$11.1 million, $10.1 million, $6.6 million, $6.5 million and $6.3 million,
respectively. In addition, aftermarket revenues improved by $15.8 million.
Within the Safety and Security Systems Group, net sales increased by $11.8
million, or 19%, primarily due to improvements in sales of public safety
equipment and warning systems of $7.1 million and $2.8 million, respectively.
Net sales for the nine months ended September 30, 2023 increased by $231.0
million, or 22%, compared to the prior-year period, primarily due to higher
sales volumes, inclusive of the effects of acquisitions, pricing actions and
increased chassis sales. The Environmental Solutions Group reported a net
sales increase of $199.5 million, or 23%, primarily due to increases in sales
of sewer cleaners, street sweepers, refuse trucks, metal extraction support
equipment, multi-purpose tractors, industrial vacuum loaders and safe-digging
trucks of $39.2 million, $27.8 million, $26.1 million, $19.8 million, $14.3
million, $11.7 million and $9.8 million, respectively. In addition,
aftermarket revenues improved by $47.2 million. Within the Safety and Security
Systems Group, net sales increased by $31.5 million, or 18%, primarily due to
improvements in sales of public safety equipment and industrial signaling
equipment of $16.3 million and $10.2 million, respectively.
Cost of sales
Cost of sales increased by $65.1 million, or 25%, for the three months ended
September 30, 2023 compared to the prior-year quarter, largely due to an
increase of $58.2 million, or 26%, within the Environmental Solutions Group,
primarily related to higher sales volumes, inclusive of the effects of
acquisitions, and increased chassis costs. Within the Safety and Security
Systems Group, cost of sales increased by $6.9 million, or 18%, primarily
related to higher sales volumes.
Cost of sales increased by $148.5 million, or 19%, for the nine months ended
September 30, 2023 compared to the prior-year period, largely due to an
increase of $132.4 million, or 19%, within the Environmental Solutions Group,
primarily related to
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higher sales volumes, inclusive of the effects of acquisitions, and increased
chassis costs. Within the Safety and Security Systems Group, cost of sales
increased by $16.1 million, or 14%, primarily related to higher sales volumes.
Gross profit
Gross profit increased by $34.9 million, or 42%, for the three months ended
September 30, 2023 compared to the prior-year quarter, primarily due to a
$30.0 million improvement within the Environmental Solutions Group and a $4.9
million increase within the Safety and Security Systems Group. Gross profit as
a percentage of revenues ("gross profit margin") for the three months ended
September 30, 2023 was 26.4%, compared to 23.9% in the prior-year quarter,
primarily due to improvements within the Environmental Solutions Group and the
Safety and Security Systems Group of 310 basis points and 70 basis points,
respectively.
Gross profit increased by $82.5 million, or 33%, for the nine months ended
September 30, 2023 compared to the prior-year period, primarily due to a $67.1
million improvement within the Environmental Solutions Group and a $15.4
million increase within the Safety and Security Systems Group. Gross profit as
a percentage of revenues ("gross profit margin") for the nine months ended
September 30, 2023 was 26.0%, compared to 23.8% in the prior-year period,
primarily due to improvements within the Environmental Solutions Group and the
Safety and Security Systems Group of 230 basis points and 180 basis points,
respectively.
SEG&A expenses
SEG&A expenses for the three months ended September 30, 2023 increased by
$10.8 million, or 27%, compared to the prior-year quarter, primarily due to
increases of $5.5 million and $1.7 million within the Environmental Solutions
Group and the Safety and Security Systems Group, respectively, in addition to
a $3.6 million increase in Corporate SEG&A expenses. As a percentage of net
sales, SEG&A expenses were 11.3% in the current-year quarter, compared to
11.5% in the prior-year quarter.
SEG&A expenses for the nine months ended September 30, 2023 increased by $30.5
million, or 24%, compared to the prior-year quarter, primarily due to
increases of $13.1 million and $4.2 million within the Environmental Solutions
Group and the Safety and Security Systems Group, respectively, in addition to
a $13.2 million increase in Corporate SEG&A expenses. As a percentage of net
sales, SEG&A expenses were 12.2% in the current-year period, compared to 12.0%
in the prior-year period.
Operating income
Operating income for the three months ended September 30, 2023 increased by
$23.0 million, or 58%, compared to the prior-year quarter, primarily driven by
the $34.9 million improvement in gross profit, partially offset by the $10.8
million increase in SEG&A expenses, a $0.8 million increase in amortization
expense, and a $0.3 million increase in acquisition and integration-related
expenses. Consolidated operating margin for the three months ended September
30, 2023 was 14.0%, compared to 11.4% in the prior-year quarter.
Operating income for the nine months ended September 30, 2023 increased by
$47.2 million, or 41%, compared to the prior-year period, primarily driven by
the $82.5 million improvement in gross profit, partially offset by the $30.5
million increase in SEG&A expenses, a $3.0 million increase in acquisition and
integration-related expenses, and a $1.8 million increase in amortization
expense. Consolidated operating margin for the nine months ended September 30,
2023 was 12.7%, compared to 10.9% in the prior-year period.
Interest expense, net
Interest expense, net, for the three and nine months ended September 30, 2023
increased by $2.4 million and $9.5 million, respectively, compared to the
corresponding periods of the prior year, largely due to an increase in average
debt levels and higher interest rates.
Other expense (income), net
Other expense, net, for the three months ended September 30, 2023 increased by
$0.2 million, compared to the prior-year quarter, primarily due to higher
foreign currency transaction losses.
Other expense, net, for the nine months ended September 30, 2023 increased by
$2.1 million, compared to the prior-year period, primarily due to an $0.8
million increase in estimated environmental remediation costs associated with
a business discontinued in 2009, a $0.7 million increase in net periodic
pension expense and higher foreign currency transaction losses.
Income tax expense
The Company recognized income tax expense of $13.8 million and $4.9 million
for the three months ended September 30, 2023
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and 2022, respectively. The increase in tax expense in the current-year
quarter was largely due to higher pre-tax income levels and the non-recurrence
of the discrete tax benefits recognized in the prior-year quarter. During the
three months ended September 30, 2022, the Company recognized a $2.7 million
tax benefit from the release of a valuation allowance that had previously been
recorded against deferred tax assets associated with foreign tax credits in
the U.S., and a $1.1 million tax benefit associated with the release of a
valuation allowance in the U.K. Including these items, the Company's effective
tax rate for the three months ended September 30, 2023 was 24.2%, compared to
13.4% in the prior-year quarter.
For the nine months ended September 30, 2023 and 2022, the Company recognized
income tax expense of $33.5 million and $23.1 million, respectively. The
increase in tax expense in the current-year period was largely due to higher
pre-tax income levels and the non-recurrence of the discrete tax benefits
recognized in the prior-year quarter, partially offset by a $1.7 million
increase in excess tax benefits associated with stock-based compensation
activity and a $0.6 million benefit associated with changes in tax reserves.
Including these items, the Company's effective tax rate for the nine months
ended September 30, 2023 was 23.2%, compared to 21.2% in the prior-year period.
Net income
Net income for the three months ended September 30, 2023 increased by $11.5
million compared to the prior-year quarter, largely due to the aforementioned
improvement in operating income, partially offset by the $2.4 million increase
in interest expense, a $8.9 million increase in income tax expense and the
$0.2 million decrease in other income.
Net income for the nine months ended September 30, 2023 increased by $25.2
million compared to the prior-year quarter, largely due to the aforementioned
improvement in operating income, partially offset by the $9.5 million increase
in interest expense, a $10.4 million increase in income tax expense and the
$2.1 million decrease in other income.
Environmental Solutions
The following table summarizes the Environmental Solutions Group's operating
results as of and for the three and nine months ended September 30, 2023 and
2022:
Three Months Ended September 30, Nine Months Ended September 30,
($ in millions) 2023 2022 Change 2023 2022 Change
Net sales $ 373.0 $ 284.8 $ 88.2 $ 1,064.8 $ 865.3 $ 199.5
Operating income 57.2 33.9 23.3 151.0 99.8 51.2
Operating data:
Operating margin 15.3 % 11.9 % 3.4 % 14.2 % 11.5 % 2.7 %
Total orders $ 374.8 $ 321.4 $ 53.4 $ 1,179.2 $ 1,060.7 $ 118.5
Backlog 938.6 764.6 174.0 938.6 764.6 174.0
Depreciation and amortization 14.3 12.5 1.8 41.8 37.5 4.3
Three months ended September 30, 2023 vs. three months ended September 30, 2022
Total orders for the three months ended September 30, 2023 increased by $53.4
million, or 17%, compared to the prior-year quarter. U.S. orders increased by
$39.0 million, primarily due to improvements in orders for sewer cleaners,
dump truck bodies, industrial vacuum loaders and safe-digging trucks of $9.7
million, $8.7 million, $7.6 million and $4.5 million, respectively.
Additionally, aftermarket demand increased by $9.0 million. Partially
offsetting these improvements was a $3.3 million reduction in orders for
street sweepers. Non-U.S. orders increased by $14.4 million, largely due to a
$7.8 million increase in aftermarket demand, as well as improvements in orders
for sewer cleaners, safe-digging trucks and metal extraction support equipment
of $4.4 million, $4.0 million and $3.2 million, respectively. Partially
offsetting these improvements was a $5.9 million reduction in orders for
refuse trucks.
N
et sales for the three months ended September 30, 2023 increased by $88.2
million, or 31%, compared to the prior-year quarter, primarily due to higher
sales volumes, inclusive of the effects of acquisitions, pricing actions and
increased chassis sales. For the three months ended September 30, 2023, U.S.
sales increased by $61.7 million, largely due to increases in sales of sewer
cleaners, street sweepers, safe-digging trucks, industrial vacuum loaders and
road-marking and line-removal equipment of $14.4 million, $11.3 million, $6.4
million, $6.3 million and $4.1 million, respectively. Additionally,
aftermarket revenues increased by $11.4 million. Non-U.S. sales increased by
$26.5 million, largely due to a $4.4 million increase in aftermarket revenues,
and increases in sales of refuse trucks, metal extraction support equipment
and multi-purpose tractors of $8.2 million, $6.5 million and $4.6 million,
respectively.
Cost of sales for the three months ended September 30, 2023 increased by $58.2
million, or 26%, compared to the prior-year quarter, primarily related to
higher sales volumes, inclusive of the effects of acquisitions, and increased
chassis costs. Gross
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profit margin for the three months ended September 30, 2023 was 24.2%,
compared to 21.1% in the prior-year quarter, with the improvement primarily
attributable to improved operating leverage from higher sales volumes and
benefits from pricing actions, partially offset by an increase in lower margin
chassis sales.
SEG&A expenses for the three months ended September 30, 2023 increased by $5.5
million, or 24%, compared to the prior-year quarter, primarily due to
additional costs from acquired businesses, as well as increases in sales
commissions and incentive-based compensation expenses. As a percentage of net
sales, SEG&A expenses were 7.6% in the current-year quarter, down from 8.1% in
the prior-year quarter.
Operating income for the three months ended September 30, 2023 increased by
$23.3 million, or 69%, compared to the prior-year quarter, largely due to a
$30.0 million improvement in gross profit, partially offset by the $5.5
million increase in SEG&A expenses, a $0.8 million increase in amortization
expense, and a $0.4 million increase in acquisition and integration-related
costs.
Nine months ended September 30, 2023 vs. nine months ended September 30, 2022
Total orders for the nine months ended September 30, 2023 increased by $118.5
million, or 11%, compared to the prior-year period. U.S. orders increased by
$64.7 million, primarily due to improvements in orders for street sweepers,
road-marking and line-removal equipment, safe-digging trucks, multi-purpose
tractors and sewer cleaners of $18.5 million, $11.5 million, $11.1 million,
$9.8 million and $9.2 million, respectively. Additionally, aftermarket demand
increased by $23.9 million. Partially offsetting these improvements was a
$26.6 million reduction in orders for trailers. Non-U.S. orders increased by
$53.8 million, primarily due to improvements in orders for refuse trucks,
metal extraction support equipment, multi-purpose tractors and sewer cleaners
of $24.4 million, $18.7 million, $4.9 million and $4.3 million, respectively.
Additionally, aftermarket demand increased by $14.8 million. Partially
offsetting these improvements was a $7.8 million reduction in street sweeper
orders and a $7.4 million unfavorable foreign currency translation impact.
N
et sales for the nine months ended September 30, 2023 increased by $199.5
million, or 23%, compared to the prior-year period, primarily due to higher
sales volumes, inclusive of the effects of acquisitions, pricing actions and
increased chassis sales. For the nine months ended September 30, 2023, U.S.
sales increased by $132.6 million, largely due to increases in sales of sewer
cleaners, street sweepers, industrial vacuum loaders and safe-digging trucks
of $33.1 million, $27.0 million, $11.7 million and $10.6 million,
respectively, as well as a $28.9 million improvement in aftermarket revenues.
Non-U.S. sales increased by $66.9 million, largely due to a $18.3 million
improvement in aftermarket revenues and increases in sales of refuse trucks,
metal extraction support equipment, multi-purpose tractors and sewer cleaners
of $18.8 million, $18.4 million, $7.7 million and $6.1 million, respectively.
Partially offsetting these improvements was a $6.2 million unfavorable foreign
currency translation impact.
Cost of sales for the nine months ended September 30, 2023 increased by $132.4
million, or 19%, compared to the prior-year period, primarily related to
higher sales volumes, inclusive of the effects of acquisitions, and increased
chassis costs, partially offset by a $6.0 million favorable foreign currency
translation impact. Gross profit margin for the nine months ended September
30, 2023 was 23.4%, compared to 21.1% in the prior-year period, with the
improvement primarily attributable to improved operating leverage from higher
sales volumes and benefits from pricing actions, partially offset by an
increase in lower margin chassis sales.
SEG&A expenses for the nine months ended September 30, 2023 increased by $13.1
million, or 18%, compared to the prior-year period, primarily due to
additional costs from acquired businesses, as well as increases in sales
commissions and incentive-based compensation expenses. As a percentage of net
sales, SEG&A expenses were 8.1% in the current-year period, down from 8.4% in
the prior-year period.
Operating income for the nine months ended September 30, 2023 increased by
$51.2 million, or 51%, compared to the prior-year period, largely due to a
$67.1 million improvement in gross profit, partially offset by the $13.1
million increase in SEG&A expenses, a $1.8 million increase in amortization
expense, and a $1.0 million increase in acquisition and integration-related
costs.
Backlog was $939 million at September 30, 2023, compared to $765 million at
September 30, 2022.
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Safety and Security Systems
The following table summarizes the Safety and Security Systems Group's
operating results as of and for the three and nine months ended September 30,
2023 and 2022:
Three Months Ended September 30, Nine Months Ended September 30,
($ in millions) 2023 2022 Change 2023 2022 Change
Net sales $ 73.4 $ 61.6 $ 11.8 $ 209.5 $ 178.0 $ 31.5
Operating income 13.7 10.5 3.2 39.9 28.7 11.2
Operating data:
Operating margin 18.7 % 17.0 % 1.7 % 19.0 % 16.1 % 2.9 %
Total orders $ 75.4 $ 60.7 $ 14.7 $ 225.9 $ 187.3 $ 38.6
Backlog 67.2 59.5 7.7 67.2 59.5 7.7
Depreciation and amortization 0.9 1.0 (0.1) 3.1 3.1 -
Three months ended September 30, 2023 vs. three months ended September 30, 2022
Total orders for the three months ended September 30, 2023 increased by $14.7
million, or 24%, compared to the prior-year quarter. U.S. orders increased by
$9.5 million, primarily due to a $9.1 million improvement in orders for public
safety equipment. Non-U.S. orders increased by $5.2 million, primarily due to
improvements in orders for public safety equipment and industrial signaling
equipment of $3.1 million and $1.7 million, respectively.
Net sales for the three months ended September 30, 2023 increased by $11.8
million, or 19%, compared to the prior-year quarter, inclusive of the effects
of higher sales volumes and pricing actions.
U.S. sales increased by $2.3 million, driven by improvements in sales of
public safety equipment and warning systems of $1.3 million and $1.0 million,
respectively. Non-U.S. sales increased by $9.5 million, largely due to
improvements in sales of public safety equipment and warning systems of $5.8
million and $1.8 million, respectively.
Cost of sales for the three months ended September 30, 2023 increased by $6.9
million, or 18%, compared to the prior-year quarter, primarily related to
higher sales volumes. Gross profit margin for the three months ended September
30, 2023 was 37.6%, compared to 36.9% in the prior-year quarter, with the
improvement primarily attributable to improved operating leverage from higher
sales volumes, benefits from pricing actions and lower freight costs.
SEG&A expenses for the three months ended September 30, 2023 increased by $1.7
million, or 14%, compared to the prior-year quarter, primarily due to higher
sales commissions and incentive-based compensation expense. As a percentage of
net sales, SEG&A expenses decreased from 19.8% in the prior-year quarter, to
18.9% in the current-year quarter.
Operating income for the three months ended September 30, 2023 increased by
$3.2 million, or 30%, compared to the prior-year quarter, primarily due to a
$4.9 million improvement in gross profit, partially offset by the $1.7 million
increase in SEG&A expenses.
Nine months ended September 30, 2023 vs. nine months ended September 30, 2022
Total orders for the nine months ended September 30, 2023 increased by $38.6
million, or 21%, compared with the prior-year period. U.S. orders increased by
$16.0 million, primarily due to improvements in orders for public safety
equipment and warning systems of $11.7 million and $2.6 million, respectively.
Non-U.S. orders increased by $22.6 million, primarily due to a $19.9 million
improvement in orders for public safety equipment, inclusive of a large fleet
order from a customer in Mexico.
Net sales for the nine months ended September 30, 2023 increased by $31.5
million, or 18%, compared to the prior-year period, inclusive of the effects
of higher sales volumes and pricing actions.
U.S. sales increased by $15.2 million, driven by improvements in sales of
public safety equipment, industrial signaling equipment and warning systems of
$7.0 million, $4.4 million and $3.8 million, respectively. Non-U.S. sales
increased by $16.3 million, largely due to improvements in sales of public
safety equipment and industrial signaling equipment of $9.3 million and $5.8
million, respectively.
Cost of sales for the nine months ended September 30, 2023 increased by $16.1
million, or 14%, compared to the prior-year period, primarily related to
higher sales volumes. Gross profit margin for the nine months ended September
30, 2023 was 38.9%, compared to 37.1% in the prior-year period, with the
improvement primarily attributable to improved operating leverage from higher
sales volumes, benefits from pricing actions and lower freight costs.
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SEG&A expenses for the nine months ended September 30, 2023 increased by $4.2
million, or 11%, compared to the prior-year period, primarily due to higher
sales commissions and incentive-based compensation expense. As a percentage of
net sales, SEG&A expenses decreased from 21.0% in the prior-year period, to
19.8% in the current-year period.
Operating income for the nine months ended September 30, 2023 increased by
$11.2 million, or 39%, compared to the prior-year period, primarily due to a
$15.4 million improvement in gross profit, partially offset by the $4.2
million increase in SEG&A expenses.
Backlog was $67 million at September 30, 2023, compared to $60 million at
September 30, 2022.
Corporate Expenses
Corporate operating expenses for the three months ended September 30, 2023
were $8.4 million, compared to $4.9 million in the prior-year quarter, with
the increase primarily due to increases in stock compensation, incentive-based
compensation and medical costs.
Corporate operating expenses for the nine months ended September 30, 2023 were
$29.5 million, compared to $14.3 million in the prior-year period, with the
increase primarily due to higher post-retirement expenses, increases in
medical, incentive-based compensation, stock compensation and information
technology costs, as well as a $2.0 million increase in acquisition-related
expenses. During the nine months ended September 30, 2022, the Company
received a favorable settlement of $1.9 million in a post-closing adjustment
dispute associated with the 2021 acquisition of OSW Equipment & Repair, LLC.
The related benefit was included as a component of Acquisition and
integration-related expenses (benefits) on the Condensed Consolidated
Statements of Operations.
Seasonality of Company's Business
Certain of the Company's businesses are susceptible to the influences of
seasonal factors, including buying patterns, delivery patterns and
productivity influences from holiday periods and weather. In general, the
Company tends to have lower equipment sales in the first calendar quarter of
each year compared to other quarters as a result of these factors. In
addition, rental income and parts sales are generally higher in the second and
third quarters of the year, because many of the Company's products are used
for maintenance activities in North America, where usage is typically lower
during periods of harsher weather conditions.
33
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Financial Condition, Liquidity and Capital Resources
The Company uses its cash flow from operations to fund growth and to make
capital investments that sustain its operations, reduce costs, or both. Beyond
these uses, remaining cash is used to pay down debt, repurchase shares, fund
dividend payments and make pension contributions. The Company may also choose
to invest in the acquisition of businesses. In the absence of significant
unanticipated cash demands, we believe that the Company's existing cash
balances, cash flow from operations and borrowings available under the
Company's credit facility will provide funds sufficient for these purposes. As
of September 30, 2023, there was $364.2 million of cash drawn and $11.2
million of undrawn letters of credit under the 2022 Credit Agreement, with
$424.6 million of availability for borrowings. The net cash flows associated
with the Company's rental equipment transactions are included in cash flow
from operating activities.
The Company's cash and cash equivalents totaled $41.0 million and $47.5
million as of September 30, 2023 and December 31, 2022, respectively. As of
September 30, 2023, $21.4 million of cash and cash equivalents was held by
foreign subsidiaries. Cash and cash equivalents held by subsidiaries outside
the U.S. typically are held in the currency of the country in which it is
located. The Company uses this cash to fund the operating activities of its
foreign subsidiaries and for further investment in foreign operations.
Generally, the Company has considered such cash to be permanently reinvested
in its foreign operations and the Company's current plans do not demonstrate a
need to repatriate such cash to fund U.S. operations. However, in the event
that these funds are needed to fund U.S. operations or to satisfy U.S.
obligations, they generally could be repatriated. The repatriation of these
funds may cause the Company to incur additional U.S. income tax expense,
dependent on income tax laws and other circumstances at the time any such
amounts are repatriated.
Net cash of $91.0 million was provided by operating activities in the nine
months ended September 30, 2023, compared to $32.4 million in the prior-year
period, with the year-over-year increase primarily due to working capital
improvements and higher net income, partially offset by increased rental fleet
investments to support strong demand for rentals and used equipment and higher
tax payments.
Net cash of $75.7 million was used for investing activities in the nine months
ended September 30, 2023, compared to $50.1 million in the prior-year period.
During the nine months ended September 30, 2023, the Company made initial
payments of $41.9 million and $13.2 million to acquire Trackless and Blasters,
respectively, and funded $21.4 million of capital expenditures. During the
nine months ended September 30, 2022, the Company completed the purchase of
its University Park, Illinois manufacturing facility for $27.8 million, funded
$17.8 million of other capital expenditures, paid $4.3 million to acquire
certain distribution rights from dealers, and paid $1.6 million to fund a
post-closing adjustment related to the Deist acquisition.
Net cash of $21.2 million was used for financing activities in the nine months
ended September 30, 2023, whereas in the prior-year period, net cash of $14.4
million was provided by financing activities. In the nine months ended
September 30, 2023, the Company increased debt borrowings by $4.6 million,
funded cash dividends and share repurchases of $17.7 million and $4.3 million,
respectively, and redeemed $5.6 million of stock in order to remit funds to
tax authorities to satisfy employees' tax withholdings following the vesting
of stock-based compensation and the exercise of stock options. During the nine
months ended September 30, 2023, the Company also paid $0.5 million to settle
the contingent consideration obligation due to the former owners of MRL, and
received $2.3 million from stock option exercises. In the nine months ended
September 30, 2022, the Company increased debt borrowings by $49.9 million,
funded cash dividends and share repurchases of $16.4 million and $16.1
million, respectively, and redeemed $3.0 million of stock in order to remit
funds to tax authorities to satisfy employees' tax withholdings following the
vesting of stock-based compensation and the exercise of stock options.
The Company is subject to certain net leverage ratio and interest coverage
ratio financial covenants under the 2022 Credit Agreement that are measured at
each fiscal quarter-end. The Company was in compliance with all such covenants
as of September 30, 2023.
The Company anticipates that capital expenditures for 2023 will be in the
range of $27 million to $30 million.
The Company believes that its financial resources and major sources of
liquidity, including cash flow from operations and increased borrowing
capacity, will be adequate to meet its operating needs, capital needs and
financial commitments.
Contractual Obligations and Off-Balance Sheet Arrangements
During the nine months ended September 30, 2023, there have been no material
changes in the Company's contractual obligations and off-balance sheet
arrangements as described in Item 7,
Management's Discussion and Analysis of Financial Condition and Results of
Operations
, of the Company's Annual Report on Form 10-K for the year ended December 31,
2022.
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Item 3.
Quantitative and Qualitative Disclosures about Market Risk.
See Item 7A,
Quantitative and Qualitative Disclosures about Market Risk
, of the Company's Annual Report on Form 10-K for the year ended December 31,
2022. During the nine months ended September 30, 2023, there have been no
significant changes in our exposure to market risk.
Item 4.
Controls and Procedures.
As required by Rule 13a-15 under the Exchange Act, the Company's management,
with the participation of the Company's Chief Executive Officer and Chief
Financial Officer, evaluated the effectiveness of the design and operation of
the Company's disclosure controls and procedures (as defined in Rule 13a-15(e)
or Rule 15d-15(e) under the Exchange Act) as of September 30, 2023. Based on
that evaluation, 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, 2023.
As a matter of practice, the Company's management continues to review and
document internal control and procedures for financial reporting. From time to
time, the Company may make changes aimed at enhancing the effectiveness of the
controls and ensuring that the systems evolve with the business. SEC guidance
permits management to omit an assessment of internal control over financial
reporting for an acquired business from management's assessment of internal
control over financial reporting for a period not to exceed one year from the
date of the acquisition. During the nine months ended September 30, 2023, the
Company completed the acquisitions of Trackless and Blasters. As of September
30, 2023, management has not yet fully assessed Trackless' or Blasters'
internal control over financial reporting. Excluding the acquisitions of
Trackless and Blasters, there were no changes in the Company's internal
control over financial reporting that have materially affected, or are
reasonably likely to materially affect, the Company's internal control over
financial reporting during the nine months ended September 30, 2023.
35
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Table of Contents
PART II. OTHER INFORMATION
Item 1.
Legal Proceedings.
The information set forth under the heading "Legal Proceedings" in Note 9 -
Commitments and Contingencies to the accompanying condensed consolidated
financial statements as included in Part I of this Form 10-Q is incorporated
herein by reference.
Item 1A.
Risk Factors.
There have been no material changes in the Company's risk factors as described
in Item 1A,
Risk Factors
, of the Company's Annual Report on Form 10-K for the year ended December 31,
2022.
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds.
The following table provides a summary of the Company's repurchase activity
for its common stock during the three months ended September 30, 2023:
Period Total Average Price Total Number of Shares Maximum Dollar Value
Number of Paid Per Share Purchased as Part of Shares That May Yet
Shares of Publicly Announced Be Purchased Under the
Purchased Plans or Programs Plans or Programs (a)
July 2023 - $ - - $ 59,052,829
(7/2/23
-
8/5/23)
August 24,474 59.5166 24,474 57,596,219
2023
(8/6/23 -
9/2/23)
September 47,994 58.2742 47,994 54,799,407
2023
(9/3/23 -
9/30/23)
(a) In March 2020, the Board authorized a stock repurchase program of up to
$75.0 million of the Company's common stock, with the remaining authorization
under our previously described repurchase program adopted in 2014 being
subject to the March 2020 program.
Item 3.
Defaults upon Senior Securities.
None.
Item 4.
Mine Safety Disclosures.
Not applicable.
Item 5.
Other Information.
On November 2, 2023, the Company issued a press release announcing its
financial results for the three and nine months ended September 30, 2023. The
presentation slides for the third quarter 2023 earnings call were also posted
on the Company's website at that time. The full text of the third quarter
financial results press release and earnings presentation are attached hereto
as Exhibits 99.1 and 99.2, respectively, to this Form 10-Q.
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Table of Contents
Item 6.
Exhibits.
3.1 Restated Certificate of Incorporation of the Company. Incorporated by
reference to Exhibit 3.1 to the Company's Form 8-K filed April 30, 2010.
3.2 Amended and Restated By-laws of the Company. Incorporated by reference
to Exhibit 3.1 to the Company's Form 8-K filed October 24, 2023.
10.1* Employment Letter dated as of September 1, 2023,
by and between the Company and Felix Boeschen.
31.1 CEO Certification under Section
302 of the Sarbanes-Oxley Act.
31.2 CFO Certification under Section
302 of the Sarbanes-Oxley Act.
32.1 CEO Certification of Periodic Report under
Section 906 of the Sarbanes-Oxley Act.
32.2 CFO Certification of Periodic Report under
Section 906 of the Sarbanes-Oxley Act.
99.1 Third Quarter Financial Results Press
Release, Dated November 2, 2023.
99.2 Third Quarter Earnings
Call Presentation Slides.
101.INS XBRL Instance Document (the instance document does not appear in the Interactive
Data File because its XBRL tags are embedded within the Inline XBRL document).
101.SCH Inline XBRL Taxonomy
Extension Schema Document.
101.CAL Inline XBRL Taxonomy
Calculation Linkbase Document.
101.DEF Inline XBRL Taxonomy Extension
Definition Linkbase Document.
101.LAB Inline XBRL Taxonomy
Label Linkbase Document.
101.PRE Inline XBRL Taxonomy
Presentation Linkbase Document.
104 Cover Page Interactive Data File (formatted
as inline XBRL and contained in Exhibit 101).
*Management contract or compensatory plan or arrangement required to be filed
as an exhibit pursuant to Item 15(a)(3) of Form 10-K.
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Table of Contents
SIGNATURE
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
Federal Signal Corporation
Date: November 2, 2023 /s/ Ian A. Hudson
Ian A. Hudson
Senior Vice President and Chief Financial Officer
(Principal Financial Officer)
38
September 1, 2023 By E-Mail Mr. Felix Boeschen Re: Offer of Employment Dear
Felix: On behalf of Federal Signal Corporation ("Company" or "Federal
Signal"), it is with great pleasure that I present you with the following
offer of employment in the position of Vice President, Corporate Strategy and
Investor Relations, reporting to Jennifer Sherman, Federal Signal's President
and CEO. We are delighted to welcome you to our executive leadership team. The
precise terms of our offer are as follows: 1) Start Date: We would like you to
begin your employment as soon as possible, on a date to be mutually agreed
upon. 2) Base Salary: Your annual rate of base salary will be $325,000 per
year, less taxes and withholdings, and will be paid on a semi- monthly basis,
unless a more frequent pay period is required by applicable state law. As
determined in the discretion of the Company and subject to budget and
performance, you will be considered for an annual merit-based salary increase
in March of 2024. 3) Annual Cash Incentive Bonus: In 2023, provided you agreed
to the enclosed Terms of Employment Agreement, and that your Start Date is on
or before September 30, 2023, you will be eligible to earn an annual cash
incentive bonus through Federal Signal's Short-Term Incentive Bonus Plan
("STIP") in accordance with its terms. Your bonus at target level of
performance will be 40% of your base salary and your maximum bonus payout will
be 80% of your base salary. For 2023, your bonus will be prorated based on
your start date. Should your Start Date be on or after October 1, 2023, you
will first become eligible for STIP in 2024. The STIP is designed to reward
and motivate outstanding performance and is currently based on achievement of
annual company/business unit and individual objectives. For 2023, company/
business unit objectives (pre-tax income and EBITDA margin) will account for
80% and individual objectives will account for 20% of the bonus opportunity,
respectively. Both the weighting and the applicable objectives are determined
at the discretion of the Compensation and Benefits Committee ("CBC") of
Federal Signal's Board of Directors in or around February of each performance
year. In addition to satisfying company/business unit and individual
objectives, you must be employed by the Company on the date bonuses are paid
in order to earn a bonus. Bonus payments are subject to the approval of the
CBC and Federal Signal's Board of Directors and generally occur in March
following the calendar year to which the bonus applies. Your eligibility for
and participation in the STIP in subsequent calendar years will be
communicated to you in writing when such determinations are made by Federal
Signal in its discretion. 4) Long-Term Equity Incentives: a) In 2024, you may
be eligible to receive a long-term equity incentive award with an aggregate
target grant date value of $160,000 as part of Federal Signal's annual grant
cycle, subject to the discretion of the CBC. As currently structured for your
role, 50% of these awards are comprised of Performance Share Units ("PSUs"),
25% are comprised of Non- Qualified Stock Options ("NQSOs"), and 25% are
comprised of RSAs. PSUs currently vest over a three-year period and are
subject to meeting certain performance criteria over the same three-year
period, which may result in performance
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Mr. Felix Boeschen September 1, 2023 Page 2 shares being earned anywhere
between 0% and 240% of target. NQSOs vest ratably over a three-year period and
restricted stock cliff vests at the end of a three-year period. Any such
awards, the amount of such awards, and the terms and conditions applicable to
such awards, will be made and announced, if at all, at the discretion of
Federal Signal in connection with its annual grant cycle. This offer letter
does not promise or guarantee a long-term incentive award in 2024 or in
subsequent years. b) To receive these awards, you must enter into Award
Agreements which contain the precise terms and conditions of such awards.
Award Agreements will be presented to you as soon as administratively feasible
after the grant date and include post-employment restrictions, including but
not limited to non-competition and non-solicitation commitments. 5) Stock
Ownership Guidelines/ Insider Trading: Based on your position, you are subject
to Federal Signal's stock ownership guidelines ("SOGs"). Generally speaking,
this means that, in order to trade in Federal Signal stock, you must attain
and at all times thereafter maintain equity in Federal Signal's common stock
valued at two (2) times your base salary. There is no time limit within which
you must achieve target ownership under the SOGs. Additional stock holding
requirements are imposed by the SOGs. In addition, your ability to trade in
Federal Signal stock is regulated by its Insider Trading Policy and applicable
law. Copies of Federal Signal's SOGs and Insider Trading Policy are enclosed
with this letter. You must obtain pre-approval from the Company's General
Counsel/Chief Compliance Officer prior to all transactions in Federal Signal
stock. 6) Car Allowance: You will receive a monthly car allowance in the
amount of $750 per month in accordance with Company policies and procedures.
7) Relocation: The Company will reimburse you for reasonable relocation costs
covered by our program, up to $50,000, including buy-out of your current lease
if you are unable to sublet. Documentation of all expenses submitted is
required prior to reimbursement. Relocation assistance is subject to the
following repayment obligation should you terminate your employment within two
(2) years of your Start Date: Termination Date Relocation Repayment Due 1-12
months 100% 13-16 months 65% 17-20 months 50% 20-24 months 25% 25+ months 0%
By accepting this offer of employment, you authorize Federal Signal to deduct
any amount you owe from your final compensation. 8) Paid Time Off: a.
Vacation. Vacation time is based upon the calendar year. You will accrue paid
vacation at the rate of 1.67 days for each month worked up to a maximum
accrual of twenty (20) vacation days each calendar year for your use in that
same calendar year. Vacation time may be taken before it is earned, subject to
your supervisor's approval and your agreement to re-pay the Company should
your employment end with a negative vacation balance. Accrued but unused
vacation does not carry-over, is forfeited, and is not compensable. The
Company encourages you to use all of your vacation time. Vacation entitlement
and accrual rates are subject to adjustment and modification at the discretion
of the Company. b. Holidays. The Company recognizes eight (8) published paid
holidays, subject to change in the Company's discretion.
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Mr. Felix Boeschen September 1, 2023 Page 3 c. Personal Days. You are entitled
to one (1) paid personal day for your use in 2023. In subsequent years, you
will be eligible for three (3) personal days or such other amount as
determined by then-applicable Company policy. Unused personal days at the
conclusion of the calendar year do not carry-over, are forfeited, and are not
compensable. 9) Benefits: Subject to individual plan requirements, you are
eligible to participate in Federal Signal's group health and welfare benefit
programs on the first day of the month after your start date. Coverage options
are outlined in the enclosed Benefits Summary Sheet. With the exception of the
Federal Signal Corporation Retirement Savings Plan (in which you will be
auto-enrolled as soon as administratively feasible following your date of
hire), you must enroll within thirty (30) days of your date of hire in all
benefit plans available to you or you waive coverage until the next open
enrollment period. Participants in the Retirement Savings Plan may defer up to
40% of eligible pay, up to the annual deferral or compensation limit. The
Company matches your first 3% deferral at 100% and 50% of the next 2%, with a
maximum match of 4%, including both pre-tax and Roth after-tax contributions.
Additionally, the Company makes an additional service-based contribution,
based on your years of service with the Company. You may also be eligible to
participate in the non-qualified Federal Signal Corporation Savings
Restoration Plan ("SRP") beginning in 2024. Participation in the SRP allows
you to continue to make pre-tax deferrals and receive Company contributions
after you have reached one or both of the annual 401k maximums. Benefit plans
may be discontinued or modified at the discretion of Federal Signal. The terms
of applicable benefit plan documents control the terms of your eligibility in
the event of any discrepancy between the plan documents and any other
materials. 10) Executive Change-in-Control Severance Agreement: Subject to BOD
approval, you are being offered the opportunity to enter into the enclosed
Tier II Executive Change-in-Control Severance Agreement ("CIC Agreement") with
the Company. To accept this opportunity, you must return a signed CIC
Agreement along with a signed copy of this offer letter. This offer is for
at-will employment. This means that either you or the Company may choose to
end the employment relationship at any time with or without cause, for any
lawful reason or for no reason. This offer is not, nor shall it be construed
to be, a guarantee or promise of employment for any specified or set period.
This offer of employment, together with the grant of equity awards, STIP
participation, and other consideration herein provided, is expressly
conditioned upon you signing and adhering to the enclosed Terms of Employment
Agreement which includes post- employment restrictions and obligations owed by
you to Federal Signal and its affiliates. Felix, we hope you will accept this
offer and look forward to working with you. To accept this offer, please sign
and return to me this offer letter and the Terms of Employment Agreement on or
before a date to be mutually agreed upon. If not accepted by you on or before
that date, this offer shall be considered withdrawn. Best regards, /s/ Shirley
S. Paulson Vice President, Human Resources Enclosures: Terms of Employment
Agreement, Insider Trading Policy, Stock Ownership Guidelines, CIC Agreement
cc: Jennifer L. Sherman
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Mr. Felix Boeschen September 1, 2023 Page 4 Acceptance: I accept the offer set
forth above. I further represent and warrant that there were no promises or
guarantees made to me that are not contained in this offer letter. Felix
Boeschen Date /s/ Felix Boeschen
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EXHIBIT 31.1
CEO Certification under Section 302 of the Sarbanes-Oxley Act
I, Jennifer L. Sherman, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Federal Signal
Corporation;
2. Based on my knowledge, this report does not contain any untrue statement
of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements and other financial
information included in this report, fairly present in all material respects
the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over
financial reporting (as defined in Exchange Act Rules 13a-15(f) and
15d-15(f)), for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being
prepared;
(b) Designed such internal control over financial reporting, or caused such
internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the
period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's most
recent fiscal quarter (the registrant's fourth fiscal quarter in the case of
an annual report) that has materially affected, or is reasonably likely to
materially affect, the registrant's internal control over financial reporting;
and
5. The registrant's other certifying officer(s) and I have disclosed, based
on our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of the registrant's board of
directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant's ability to record, process,
summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal control
over financial reporting.
Date: November 2, 2023
/s/ Jennifer L. Sherman
Jennifer L. Sherman
President and Chief Executive Officer
(Principal Executive Officer)
EXHIBIT 31.2
CFO Certification under Section 302 of the Sarbanes-Oxley Act
I, Ian A. Hudson, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Federal Signal
Corporation;
2. Based on my knowledge, this report does not contain any untrue statement
of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements and other financial
information included in this report, fairly present in all material respects
the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over
financial reporting (as defined in Exchange Act Rules 13a-15(f) and
15d-15(f)), for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being
prepared;
(b) Designed such internal control over financial reporting, or caused such
internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the
period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's most
recent fiscal quarter (the registrant's fourth fiscal quarter in the case of
an annual report) that has materially affected, or is reasonably likely to
materially affect, the registrant's internal control over financial reporting;
and
5. The registrant's other certifying officer(s) and I have disclosed, based
on our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of the registrant's board of
directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant's ability to record, process,
summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal control
over financial reporting.
Date: November 2, 2023
/s/ Ian A. Hudson
Ian A. Hudson
Senior Vice President and Chief Financial Officer
(Principal Financial Officer)
EXHIBIT 32.1
CERTIFICATION PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
(18 U.S.C. SECTION 1350)
In connection with the Quarterly Report of Federal Signal Corporation (the
"Company") on Form 10-Q for the period ended September 30, 2023 as filed with
the Securities and Exchange Commission on the date hereof (the "Report"), I,
Jennifer L. Sherman, President and Chief Executive Officer of the Company,
certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C.
Section 1350, that:
(1) The Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934, as amended (15 U.S.C. 78m or 78o
(d)); and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of the
Company.
Date: November 2, 2023
/s/ Jennifer L. Sherman
Jennifer L. Sherman
President and Chief Executive Officer
(
Principal Executive Officer)
This certification accompanies the Report pursuant to (s) 906 of the
Sarbanes-Oxley Act of 2002 and shall not be deemed filed by the Company for
purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or
otherwise subject to the liability of that section. This certification shall
also not be deemed to be incorporated by reference into any filing under the
Securities Act of 1933, as amended, or the Securities Exchange act of 1934, as
amended, except to the extent that the Company specifically incorporates it by
reference.
EXHIBIT 32.2
CERTIFICATION PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
(18 U.S.C. SECTION 1350)
In connection with the Quarterly Report of Federal Signal Corporation (the
"Company") on Form 10-Q for the period ended September 30, 2023 as filed with
the Securities and Exchange Commission on the date hereof (the "Report"), I,
Ian A. Hudson, Senior Vice President and Chief Financial Officer of the
Company, certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,
18 U.S.C. Section 1350, that:
(1) The Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934, as amended (15 U.S.C. 78m or 78o
(d)); and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of the
Company.
Date: November 2, 2023
/s/ Ian A. Hudson
Ian A. Hudson
Senior Vice President and Chief Financial Officer
(Principal Financial Officer)
This certification accompanies the Report pursuant to (s) 906 of the
Sarbanes-Oxley Act of 2002 and shall not be deemed filed by the Company for
purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or
otherwise subject to the liability of that section. This certification shall
also not be deemed to be incorporated by reference into any filing under the
Securities Act of 1933, as amended, or the Securities Exchange act of 1934, as
amended, except to the extent that the Company specifically incorporates it by
reference.
EXHIBIT 99.1
FOR IMMEDIATE RELEASE
Federal Signal Reports Third Quarter Results with 29% Net Sales Growth and 58%
Increase in Operating Income; Raises Full-Year Outlook and EBITDA Margin
Targets
Oak Brook, Illinois,
November 2, 2023 - Federal Signal Corporation (NYSE:FSS) (the "Company"), a
leader in environmental and safety solutions, today reported results for the
third quarter ended September 30, 2023.
Third Quarter Highlights
.
Record net sales of $446 million, up $100 million, or 29%, from last year;
organic growth of $80 million, or 23%
.
Operating income of $62.5 million, up $23.0 million, or 58%, from last year
.
GAAP EPS of $0.71, up $0.19, or 37%, from last year
.
Record adjusted EPS of $0.71, up $0.18, or 34%, from last year
.
Orders of $450 million, up $68 million, or 18%, from last year
.
Backlog of $1.01 billion, up $182 million, or 22%, from last year
.
Operating cash flow of $48 million, up $38 million, or 380%, from last year
.
Raises 2023 adjusted EPS* outlook to a new range of $2.44 to $2.52, from the
prior range of $2.30 to $2.46
.
Increases low end of 2023 net sales outlook range by $30 million; new range of
$1.68 billion to $1.72 billion
.
Raises Consolidated EBITDA margin target to a new range of 14% to 20%, from
the previous range of 12% to 16%
.
Raises EBITDA margin target for the Environmental Solutions Group to a new
range of 17% to 22%, from the previous range of 15% to 18%
Consolidated net sales for the third quarter were $446 million, the highest
quarterly net sales in the Company's history, and an increase of $100 million,
or 29%, compared to the prior-year quarter. Net income for the third quarter
was $43.3 million, or $0.71 per diluted share, compared to $31.8 million, or
$0.52 per diluted share, in the prior-year quarter.
The Company also reported adjusted net income for the third quarter of $43.8
million, or $0.71 per diluted share, compared to $32.2 million, or $0.53 per
diluted share, in the prior-year quarter. The Company is reporting adjusted
results to facilitate comparisons of underlying performance on a year-over-year
basis. A reconciliation of these and other non-GAAP measures is provided at
the conclusion of this news release.
Double-Digit Improvement in Net Sales and Earnings in Record-Setting Quarter;
Increasing EBITDA Margin Targets for the Environmental Solutions Group and the
Company
"In another quarter of outstanding performance by our businesses, we reported
new Company records for quarterly net sales and adjusted EPS, a 220-basis
point year-over-year increase in adjusted EBITDA margin, an 18% increase in
orders, and significant improvement in cash generation," commented Jennifer L.
Sherman, President and Chief Executive Officer. "Within our Environmental
Solutions Group, an improving supply chain supported higher production levels,
and with increased sales volumes, contributions from recent acquisitions,
robust aftermarket demand, and strong price realization, we were able to
deliver a 31% year-over-year net sales increase and a 300-basis point
improvement in adjusted EBITDA margin. Our Safety and Security Systems Group
also delivered another impressive quarter, with double-digit top line growth
and an adjusted EBITDA margin of approximately 20%. With its consistently
strong performance over the last several quarters, we are increasing the
EBITDA margin target for our Environmental Solutions Group to a new range of
17% to 22%, from the previous range of 15% to 18%. At the same time, we are
increasing our consolidated EBITDA margin target to a new range of 14% to 20%,
from the previous range of 12% to 16%."
In the Environmental Solutions Group, net sales for the third quarter were
$373 million, up $88 million, or 31%, compared to the prior-year quarter. In
the Safety and Security Systems Group, net sales were $73 million, up $12
million, or 19%, compared to the prior-year quarter.
1
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Consolidated operating income for the third quarter was $62.5 million, up
$23.0 million, or 58%, compared to the prior-year quarter. Consolidated
operating margin for the third quarter was 14.0%, up from 11.4% in the
prior-year quarter.
Consolidated adjusted earnings before interest, tax, depreciation and
amortization ("adjusted EBITDA") for the third quarter was $78.5 million, up
$25.0 million, or 47%, compared to the prior-year quarter, and consolidated
adjusted EBITDA margin was 17.6%, up from 15.4% in the prior-year quarter.
In the Environmental Solutions Group, adjusted EBITDA for the third quarter
was $72.0 million, up $25.5 million, or 55%, compared to the prior-year
quarter, and its adjusted EBITDA margin was 19.3%, up from 16.3% last year. In
the Safety and Security Systems Group, adjusted EBITDA for the third quarter
was $14.6 million, up $3.1 million, or 27%, compared to the prior-year
quarter, and its adjusted EBITDA margin was 19.9%, up from 18.7% last year.
Consolidated orders for the third quarter were $450 million, up $68 million,
or 18%, compared to the prior-year quarter. With the strong momentum in
customer demand, consolidated backlog at September 30, 2023 was $1.01 billion,
an increase of $182 million, or 22%, from last year.
Increased Operating Cash Flow Further Strengthens Financial Position,
Providing Flexibility to Fund Growth Opportunities and Cash Returns to
Stockholders
Operating cash flow during the third quarter was $48 million, an increase of
$38 million, or 380%, from the prior-year quarter. Cash generated from
operations in the first nine months of this year totaled $91 million, an
increase of $59 million, or 181%, compared to the prior-year period.
At September 30, 2023, consolidated debt was $366 million, total cash and cash
equivalents were $41 million and the Company had $425 million of availability
for borrowings under its credit facility.
"Our operating cash flow generation this quarter was outstanding, enabling us
to pay down approximately $40 million of debt during the quarter," said
Sherman. "So far this year, our operating cash flow has increased by 181%
compared to last year, further strengthening our financial position, and
providing significant flexibility to invest in organic growth initiatives,
pursue additional strategic acquisitions, and fund cash returns to
stockholders through dividends and opportunistic share repurchases."
The Company funded dividends of $6.1 million during the third quarter,
reflecting a dividend of $0.10 per share, and recently announced a similar
dividend that will be payable in the fourth quarter of 2023. The Company also
funded stock repurchases of $4.3 million during the third quarter.
Outlook
"Demand for our products and our aftermarket offerings remains exceptionally
high," noted Sherman. "We continue to successfully execute against our
strategic initiatives, and with our third quarter performance, our current
backlog and improving supply chain conditions, we are raising our full-year
adjusted EPS* outlook to a new range of $2.44 to $2.52, from the prior range
of $2.30 to $2.46. We are also increasing the low end of our full-year net
sales outlook range by $30 million, establishing a new range of $1.68 billion
to $1.72 billion."
CONFERENCE CALL
Federal Signal will host its third quarter conference call on Thursday,
November 2, 2023 at 10:00 a.m. Eastern Time. The call will last approximately
one hour. The call may be accessed over the internet through Federal Signal's
website at
www.federalsignal.com
or by dialing phone number 1-833-816-1432 and entering the pin number
10183590. A replay will be available on Federal Signal's website shortly after
the call.
About Federal Signal
Federal Signal Corporation (NYSE: FSS) builds and delivers equipment of
unmatched quality that moves material, cleans infrastructure, and protects the
communities where we work and live. Founded in 1901, Federal Signal is a
leading global designer, manufacturer and supplier of products and total
solutions that serve municipal, governmental, industrial and commercial
customers. Headquartered in Oak Brook, Ill., with manufacturing facilities
worldwide, the Company operates two groups: Environmental Solutions and Safety
and Security Systems. For more information on Federal Signal, visit:
www.federalsignal.com
.
"Safe Harbor" Statement under the Private Securities Litigation Reform Act of
1995
This release contains unaudited financial information and various
forward-looking statements as of the date hereof and we undertake no
obligation to update these forward-looking statements regardless of new
developments or otherwise. Statements in this release that are not historical
are forward-looking statements. Such statements are subject to various risks
and uncertainties that could cause actual results to vary materially from
those stated. Such risks and uncertainties include but are not limited to:
direct and indirect impacts of the coronavirus pandemic and the associated
government response, risks and adverse economic
2
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effects associated with emerging geopolitical conflicts, product and price
competition, supply chain disruptions, work stoppages, availability and
pricing of raw materials, cybersecurity risks, risks associated with
acquisitions such as integration of operations and achieving anticipated
revenue and cost benefits, foreign currency exchange rate changes, interest
rate changes, increased legal expenses and litigation results, legal and
regulatory developments and other risks and uncertainties described in filings
with the Securities and Exchange Commission.
Contact:
Ian Hudson, Chief Financial Officer, +1-630-954-2000,
ihudson@federalsignal.com
* Adjusted earnings per share ("EPS") is a non-GAAP measure, which includes
certain adjustments to reported GAAP net income and diluted EPS. In the nine
months ended September 30, 2023, we made adjustments to exclude the impact of
acquisition and integration-related expenses (benefits) and environmental
remediation costs of a discontinued operation. In prior years, we have also
made adjustments to exclude the impact of debt settlement charges and certain
other unusual or non-recurring items. Should any similar items occur in the
remainder of 2023, we would expect to exclude them from the determination of
adjusted EPS. However, because of the underlying uncertainty in quantifying
amounts which may not yet be known, a reconciliation of our Adjusted EPS
outlook to the most applicable GAAP measure is excluded based on the
unreasonable efforts exception in Item 10(e)(1)(i)(B).
3
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FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
Three Months Ended September 30, Nine Months Ended September 30,
(in millions, except 2023 2022 2023 2022
per share data)
Net $ 446.4 $ 346.4 $ 1,274.3 $ 1,043.3
sales
Cost of 328.7 263.6 943.5 795.0
sales
Gross 117.7 82.8 330.8 248.3
profit
Selling, engineering, general 50.6 39.8 156.0 125.5
and administrative expenses
Amortization 3.9 3.1 11.4 9.6
expense
Acquisition and integration-related 0.7 0.4 2.0 (1.0)
expenses (benefits)
Operating 62.5 39.5 161.4 114.2
income
Interest 5.1 2.7 15.4 5.9
expense, net
Other expense 0.3 0.1 1.5 (0.6)
(income), net
Income before 57.1 36.7 144.5 108.9
income taxes
Income tax 13.8 4.9 33.5 23.1
expense
Net $ 43.3 $ 31.8 $ 111.0 $ 85.8
income
Earnings
per share:
Basic $ 0.71 $ 0.53 $ 1.83 $ 1.42
Diluted $ 0.71 $ 0.52 $ 1.81 $ 1.40
Weighted average common
shares outstanding:
Basic 60.8 60.4 60.7 60.5
Diluted 61.4 61.0 61.4 61.1
Cash dividends declared $ 0.10 $ 0.09 $ 0.29 $ 0.27
per common share
Operating data:
Operating 14.0 % 11.4 % 12.7 % 10.9 %
margin
Adjusted $ 78.5 $ 53.5 $ 208.5 $ 153.9
EBITDA
Adjusted 17.6 % 15.4 % 16.4 % 14.8 %
EBITDA margin
Total $ 450.2 $ 382.1 $ 1,405.1 $ 1,248.0
orders
Backlog 1,005.8 824.1 1,005.8 824.1
Depreciation and 15.3 13.6 45.1 40.7
amortization
4
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FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
September 30, December 31,
2023 2022
(in millions, except (Unaudited)
per share data)
ASSETS
Current assets:
Cash and cash $ 41.0 $ 47.5
equivalents
Accounts receivable, net of allowances for 213.3 173.8
doubtful accounts of $2.4 and $2.5, respectively
Inventories 330.1 292.7
Prepaid expenses and 19.3 17.4
other current assets
Total current assets 603.7 531.4
Properties and equipment, net of accumulated 188.3 179.3
depreciation of $169.9 and $156.4, respectively
Rental equipment, net of accumulated 130.3 109.1
depreciation of $51.1 and $45.4, respectively
Operating lease 23.7 24.7
right-of-use assets
Goodwill 473.6 453.4
Intangible assets, net of accumulated 212.2 208.2
amortization of $66.8 and $55.4, respectively
Deferred tax assets 12.1 8.8
Other long-term assets 10.7 9.4
Total assets $ 1,654.6 $ 1,524.3
LIABILITIES AND
STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term borrowings $ 3.9 $ 1.5
and finance lease obligations
Accounts payable 82.4 72.4
Customer deposits 27.6 25.4
Accrued liabilities:
Compensation and 34.5 31.1
withholding taxes
Current operating 7.4 6.9
lease liabilities
Other current 46.8 43.2
liabilities
Total current 202.6 180.5
liabilities
Long-term borrowings and 362.0 361.5
finance lease obligations
Long-term operating 17.0 18.5
lease liabilities
Long-term pension and other 38.8 38.9
postretirement benefit liabilities
Deferred tax 56.7 51.0
liabilities
Other long-term 21.6 13.0
liabilities
Total liabilities 698.7 663.4
Stockholders' equity:
Common stock, $1 par value per share, 90.0 shares 69.9 69.5
authorized, 69.9 and 69.5 shares issued, respectively
Capital in excess 284.7 271.8
of par value
Retained earnings 875.5 782.2
Treasury stock, at cost, 9.0 (190.4) (178.6)
and 8.8 shares, respectively
Accumulated other (83.8) (84.0)
comprehensive loss
Total stockholders' 955.9 860.9
equity
Total liabilities and $ 1,654.6 $ 1,524.3
stockholders' equity
5
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FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Nine Months Ended
September 30,
(in millions) 2023 2022
Operating activities:
Net income $ 111.0 $ 85.8
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 45.1 40.7
Stock-based compensation expense 8.9 7.5
Changes in fair value of contingent consideration (0.2) -
Amortization of interest rate swap settlement gain (1.8) -
Deferred income taxes 2.0 0.3
Changes in operating assets and liabilities (74.0) (101.9)
Net cash provided by operating activities 91.0 32.4
Investing activities:
Purchases of properties and equipment (21.4) (45.6)
Payments for acquisition-related activity, net of cash acquired (55.1) (6.6)
Other, net 0.8 2.1
Net cash used for investing activities (75.7) (50.1)
Financing activities:
Increase in revolving lines of credit, net 4.6 49.9
Purchases of treasury stock (4.3) (16.1)
Redemptions of common stock to satisfy withholding taxes related to stock-based compensation (5.6) (3.0)
Payments for acquisition-related activity (0.5) -
Cash dividends paid to stockholders (17.7) (16.4)
Proceeds from stock-based compensation activity 2.3 0.1
Other, net - (0.1)
Net cash (used for) provided by financing activities (21.2) 14.4
Effects of foreign exchange rate changes on cash and cash equivalents (0.6) (1.7)
Decrease in cash and cash equivalents (6.5) (5.0)
Cash and cash equivalents at beginning of year 47.5 40.5
Cash and cash equivalents at end of period $ 41.0 $ 35.5
6
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FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
GROUP RESULTS (Unaudited)
The following tables summarize group operating results as of and for the three
and nine months ended September 30, 2023 and 2022:
Environmental Solutions Group
Three Months Ended September 30, Nine Months Ended September 30,
($ in millions) 2023 2022 Change 2023 2022 Change
Net sales $ 373.0 $ 284.8 $ 88.2 $ 1,064.8 $ 865.3 $ 199.5
Operating income 57.2 33.9 23.3 151.0 99.8 51.2
Adjusted EBITDA 72.0 46.5 25.5 193.9 137.4 56.5
Operating data:
Operating margin 15.3 % 11.9 % 3.4 % 14.2 % 11.5 % 2.7 %
Adjusted EBITDA margin 19.3 % 16.3 % 3.0 % 18.2 % 15.9 % 2.3 %
Total orders $ 374.8 $ 321.4 $ 53.4 $ 1,179.2 $ 1,060.7 $ 118.5
Backlog 938.6 764.6 174.0 938.6 764.6 174.0
Depreciation and amortization 14.3 12.5 1.8 41.8 37.5 4.3
Safety and Security Systems Group
Three Months Ended September 30, Nine Months Ended September 30,
($ in millions) 2023 2022 Change 2023 2022 Change
Net sales $ 73.4 $ 61.6 $ 11.8 $ 209.5 $ 178.0 $ 31.5
Operating income 13.7 10.5 3.2 39.9 28.7 11.2
Adjusted EBITDA 14.6 11.5 3.1 43.0 31.8 11.2
Operating data:
Operating margin 18.7 % 17.0 % 1.7 % 19.0 % 16.1 % 2.9 %
Adjusted EBITDA margin 19.9 % 18.7 % 1.2 % 20.5 % 17.9 % 2.6 %
Total orders $ 75.4 $ 60.7 $ 14.7 $ 225.9 $ 187.3 $ 38.6
Backlog 67.2 59.5 7.7 67.2 59.5 7.7
Depreciation and amortization 0.9 1.0 (0.1) 3.1 3.1 -
Corporate Expenses
Corporate operating expenses were $8.4 million and $4.9 million for the three
months ended September 30, 2023 and 2022, respectively. For the nine months
ended September 30, 2023 and 2022, corporate operating expenses were $29.5
million and $14.3 million, respectively.
7
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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 ("EPS"):
The Company believes that modifying its 2023 and 2022 net income and diluted
EPS provides additional measures which are representative of the Company's
underlying performance and improves the comparability of results across
reporting periods. During the three and nine months ended September 30, 2023
and 2022 adjustments were made to reported GAAP net income and diluted EPS to
exclude the impact of acquisition and integration-related expenses (benefits)
and environmental remediation costs of a discontinued operation, where
applicable.
Three Months Ended September 30, Nine Months Ended September 30,
(in millions) 2023 2022 2023 2022
Net income, $ 43.3 $ 31.8 $ 111.0 $ 85.8
as reported
Add:
Income tax 13.8 4.9 33.5 23.1
expense
Income before 57.1 36.7 144.5 108.9
income taxes
Add:
Acquisition and integration-related 0.7 0.4 2.0 (1.0)
expenses (benefits)
Environmental remediation costs - - 0.8 -
of a discontinued operation
(a)
Adjusted income 57.8 37.1 147.3 107.9
before income taxes
Adjusted income (14.0) (4.9) (34.2) (22.8)
tax expense
(b)
Adjusted $ 43.8 $ 32.2 $ 113.1 $ 85.1
net income
Three Months Ended September 30, Nine Months Ended September 30,
(dollars per 2023 2022 2023 2022
diluted share)
EPS, as $ 0.71 $ 0.52 $ 1.81 $ 1.40
reported
Add:
Income tax 0.22 0.08 0.55 0.38
expense
Income before 0.93 0.60 2.36 1.78
income taxes
Add:
Acquisition and integration-related 0.01 0.01 0.03 (0.02)
expenses (benefits)
Environmental remediation costs - - 0.01 -
of a discontinued operation
(a)
Adjusted income 0.94 0.61 2.40 1.76
before income taxes
Adjusted income (0.23) (0.08) (0.56) (0.37)
tax expense
(b)
Adjusted $ 0.71 $ 0.53 $ 1.84 $ 1.39
EPS
(a) Environmental remediation costs of a discontinued operation in the nine
months ended September 30, 2023 relate to estimated environmental clean up
costs at a facility associated with a business that was discontinued in 2009.
Such charges are included as a component of Other expense (income), net on the
Condensed Consolidated Statements of Operations.
(b) Adjusted income tax expense for the three and nine months ended
September 30, 2023 and 2022 was recomputed after excluding the impact of
acquisition and integration-related expenses (benefits) and environmental
remediation costs of a discontinued operation, where applicable.
Adjusted EBITDA and Adjusted EBITDA Margin:
The Company uses adjusted EBITDA and the ratio of adjusted EBITDA to net sales
("adjusted EBITDA margin"), at both the consolidated and segment level, as
additional measures which are representative of its underlying performance and
to improve the comparability of results across reporting periods. We believe
that investors use versions of these metrics in a similar
8
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manner. For these reasons, the Company believes that adjusted EBITDA and
adjusted EBITDA margin, at both the consolidated and segment level, are
meaningful metrics to investors in evaluating the Company's underlying
financial performance.
Consolidated adjusted EBITDA is a non-GAAP measure that represents the total
of net income, interest expense, acquisition and integration-related expenses
(benefits), other income/expense, income tax expense, and depreciation and
amortization expense, as applicable. Consolidated adjusted EBITDA margin is a
non-GAAP measure that represents the total of net income, interest expense,
acquisition and integration-related expenses (benefits), other income/expense,
income tax expense, and depreciation and amortization expense, as applicable,
divided by net sales for the applicable period(s).
Segment adjusted EBITDA is a non-GAAP measure that represents the total of
segment operating income, acquisition and integration-related expenses and
depreciation and amortization expense, as applicable. Segment adjusted EBITDA
margin is a non-GAAP measure that represents the total of segment operating
income, acquisition and integration-related expenses and depreciation and
amortization expense, as applicable, divided by net sales for the applicable
period(s). Segment operating income includes all revenues, costs and expenses
directly related to the segment involved. In determining segment income,
neither corporate nor interest expenses are included. Segment depreciation and
amortization expense relates to those assets, both tangible and intangible,
that are utilized by the respective segment.
Other companies may use different methods to calculate adjusted EBITDA and
adjusted EBITDA margin.
Consolidated
The following table summarizes the Company's consolidated adjusted EBITDA and
adjusted EBITDA margin and reconciles net income to consolidated adjusted
EBITDA for the three and nine months ended September 30, 2023 and 2022:
Three Months Ended September 30, Nine Months Ended September 30,
($ in millions) 2023 2022 2023 2022
Net $ 43.3 $ 31.8 $ 111.0 $ 85.8
income
Add:
Interest 5.1 2.7 15.4 5.9
expense, net
Acquisition and integration-related 0.7 0.4 2.0 (1.0)
expenses (benefits)
Other expense 0.3 0.1 1.5 (0.6)
(income), net
Income tax 13.8 4.9 33.5 23.1
expense
Depreciation and 15.3 13.6 45.1 40.7
amortization
Consolidated $ 78.5 $ 53.5 $ 208.5 $ 153.9
adjusted EBITDA
Net $ 446.4 $ 346.4 $ 1,274.3 $ 1,043.3
sales
Consolidated adjusted 17.6 % 15.4 % 16.4 % 14.8 %
EBITDA margin
9
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Environmental Solutions Group
The following table summarizes the Environmental Solutions Group's adjusted
EBITDA and adjusted EBITDA margin and reconciles operating income to adjusted
EBITDA for the three and nine months ended September 30, 2023 and 2022:
Three Months Ended September 30, Nine Months Ended September 30,
($ in millions) 2023 2022 2023 2022
Operating income $ 57.2 $ 33.9 $ 151.0 $ 99.8
Add:
Acquisition and integration-related expenses 0.5 0.1 1.1 0.1
Depreciation and amortization 14.3 12.5 41.8 37.5
Adjusted EBITDA $ 72.0 $ 46.5 $ 193.9 $ 137.4
Net sales $ 373.0 $ 284.8 $ 1,064.8 $ 865.3
Adjusted EBITDA margin 19.3 % 16.3 % 18.2 % 15.9 %
Safety and Security Systems Group
The following table summarizes the Safety and Security Systems Group's
adjusted EBITDA and adjusted EBITDA margin and reconciles operating income to
adjusted EBITDA for the three and nine months ended September 30, 2023 and
2022:
Three Months Ended September 30, Nine Months Ended September 30,
($ in millions) 2023 2022 2023 2022
Operating income $ 13.7 $ 10.5 $ 39.9 $ 28.7
Add:
Depreciation and amortization 0.9 1.0 3.1 3.1
Adjusted EBITDA $ 14.6 $ 11.5 $ 43.0 $ 31.8
Net sales $ 73.4 $ 61.6 $ 209.5 $ 178.0
Adjusted EBITDA margin 19.9 % 18.7 % 20.5 % 17.9 %
10
Jennifer Sherman, President & Chief Executive Officer Ian Hudson, SVP, Chief
Financial Officer Felix Boeschen, VP, Corporate Strategy & Investor Relations
Federal Signal Q3 2023 Earnings Call November 2, 2023
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Safe Harbor This presentation contains unaudited financial information and
various forward-looking statements as of the date hereof and we undertake no
obligation to update these forward- looking statements regardless of new
developments or otherwise. Statements in this presentation that are not
historical are forward-looking statements. Such statements are subject to
various risks and uncertainties that could cause actual results to vary
materially from those stated. Such risks and uncertainties include but are not
limited to: direct and indirect impacts of the coronavirus pandemic and the
associated government response, risks and adverse economic effects associated
with emerging geopolitical conflicts, product and price competition, supply
chain disruptions, work stoppages, availability and pricing of raw materials,
cybersecurity risks, risks associated with acquisitions such as integration of
operations and achieving anticipated revenue and cost benefits, foreign
currency exchange rate changes, interest rate changes, increased legal
expenses and litigation results, legal and regulatory developments and other
risks and uncertainties described in filings with the Securities and Exchange
Commission (SEC). This presentation also contains references to certain
non-GAAP financial information. Such items are reconciled herein, in our
earnings news release provided as of the date of this presentation or in other
investor materials filed with the SEC. 2
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Q3 Highlights * 3* Comparisons versus Q3 of 2022 . Record net sales of $446
M, up $100 M, or 29% . Organic growth of $80 M, or 23% . Operating income of
$62.5 M, up $23.0 M, or 58% . Adjusted EBITDA of $78.5 M, up $25.0 M, or 47% .
Adjusted EBITDA margin of 17.6%, compared to 15.4% . GAAP EPS of $0.71, up
$0.19, or 37% . Record adjusted EPS of $0.71, up $0.18, or 34% . Orders of
$450 M, up $68 M, or 18% . Backlog of $1.01 B, up $182 M, or 22%
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4 Group and Corporate Results $ millions, except % Q3 2023 Q3 2022 % Change
ESG Orders 374.8 321.4 17% Sales 373.0 284.8 31% Operating income 57.2 33.9
69% Operating margin 15.3% 11.9% Adjusted EBITDA 72.0 46.5 55% Adjusted EBITDA
margin 19.3% 16.3% SSG Orders 75.4 60.7 24% Sales 73.4 61.6 19% Operating
income 13.7 10.5 30% Operating margin 18.7% 17.0% Adjusted EBITDA 14.6 11.5
27% Adjusted EBITDA margin 19.9% 18.7% Corporate expenses 8.4 4.9 71%
Consolidated Orders 450.2 382.1 18% Sales 446.4 346.4 29% Operating income
62.5 39.5 58% Operating margin 14.0% 11.4% Adjusted EBITDA 78.5 53.5 47%
Adjusted EBITDA margin 17.6% 15.4%
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Consolidated Statement of Operations 5 $ millions, except % and per share Q3
2023 Q3 2022 $ Change % Change Net sales 446.4$ 346.4$ 100.0$ 29% Gross profit
117.7 82.8 34.9 42% SEG&A expenses 50.6 39.8 10.8 27% Amortization expense 3.9
3.1 0.8 26% Acquisition and integration related expenses 0.7 0.4 0.3 75%
Operating income 62.5 39.5 23.0 58% Interest expense 5.1 2.7 2.4 89% Other
expense, net 0.3 0.1 0.2 200% Income tax expense 13.8 4.9 8.9 182% Net income
43.3 31.8 11.5 36% Diluted EPS 0.71$ 0.52$ 0.19$ 37% Diluted adjusted EPS
0.71$ 0.53$ 0.18$ 34% Gross Margin 26.4% 23.9% SEG&A expenses as a % of net
sales 11.3% 11.5% Effective tax rate 24.2% 13.4%
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6 Adjusted Earnings per Share ($ in millions) 2023 2022 2023 2022 Net income,
as reported 43.3$ 31.8$ 111.0$ 85.8$ Add: Income tax expense 13.8 4.9 33.5
23.1 Income before income taxes 57.1 36.7 144.5 108.9 Add: Acquisition and
integration-related expenses (benefits) 0.7 0.4 2.0 (1.0) Environmental
remediation costs of a discontinued operation (1) - - 0.8 - Adjusted income
before income taxes 57.8 37.1 147.3 107.9 Adjusted income tax expense (2)
(14.0) (4.9) (34.2) (22.8) Adjusted net income 43.8$ 32.2$ 113.1$ 85.1$
Diluted EPS, as reported 0.71$ 0.52$ 1.81$ 1.40$ Adjusted diluted EPS 0.71$
0.53$ 1.84$ 1.39$ Three Months Ended September 30, Nine Months Ended September
30, (2) Adjusted income tax expense for the three and nine months ended
September 30, 2023 and 2022 w as recomputed after excluding the impact of
acquisition and integration-related expenses (benefits) and environmental
remediation costs of a discontinued operation, w here applicable. (1)
Environmental remediation costs of a discontinued operation in the nine months
ended September 30, 2023 relate to estimated environmental clean up costs at a
facility associated w ith a business that w as discontinued in 2009. Such
charges are included as a component of Other expense, net on the Condensed
Consolidated Statements of Operations.
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7 Financial Strength and Flexibility * * Dollar amounts as of, or for the
quarter ending 9/30/2023, unless otherwise noted ** Net debt is a non-GAAP
measure and is computed as total debt of $365.9 M, less total cash and cash
equivalents of $41.0 M . Cash and cash equivalents of $41 M . Net debt of
~$325 M ** . In October 2022, executed a five-year, $800 M revolving credit
facility, with opportunity to increase further by the greater of (i) $400 M or
(ii) 100% of TTM consolidated EBITDA, subject to lenders approval . ~$425 M of
availability under revolving credit facility . Net debt leverage remains low .
Compliant with all covenants with significant headroom Strong capital
structure . Generated ~$48 M of cash from operations in Q3 2023, up ~$38 M vs.
Q3 2022 . YTD operating cash flow of ~$91 M, up 181% vs. prior year . Paid
down ~$40 M of debt during Q3 . Anticipating cap ex of $27 M-$30 M in 2023,
including investments in our plants to add capacity and gain efficiencies
through automation . Completed Blasters, Inc. acquisition in January 2023 for
initial sum of ~$13 M . Completed Trackless Vehicles acquisition in April 2023
for initial sum of ~$42 M . Paid $6.1 M for dividends, reflecting a dividend
of $0.10 per share; recently declared similar dividend for Q4 2023 . During
Q3, paid $4.3 M to repurchase ~72k shares (average price of $58.69); ~$55 M of
authorization remaining under current share repurchase program (~2% of market
cap) Healthy cash flow and access to cash facilitate organic growth
investment, M&A and cash returns to stockholders
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CEO Remarks - Q3 Performance 8 . Impressive execution by both groups
contributed to another record-setting quarter . Environmental Solutions Group
highlights: YoY net sales growth of 31% 300-basis point improvement in
adjusted EBITDA margin Production output continues to improve with combined
Q3 production at our two largest facilities up 19% YoY . Safety and Security
Systems Group highlights: YoY net sales growth of 19% 120-basis point
improvement in adjusted EBITDA margin . Generated significant cash from
operations in the quarter with cash conversion of ~110%* * Computed as net
cash provided by operating activities/net income
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CEO Remarks - Market Conditions 9 . Demand for our products and aftermarket
offerings remains exceptionally high, as evidenced by Q3 orders of $450 M, up
18% YoY . Backlog remains unchanged from Q2 2023 at ~$1.01 B (up 22% YoY) .
Order strength broad based across public funded & industrial end-markets .
Public funding for infrastructure investments continues to fuel strong demand
American Rescue Plan Act Infrastructure Investment and Jobs Act Inflation
Reduction Act . Strategic growth strategy is working Safe Digging order
strength (+33% YoY) Aftermarket revenue +19% YoY Active M&A pipeline On
track to realize $3M+ in synergies between Ground Force & TowHaul in FY23 .
New product development focus remains Booked several EV sweeper orders in Q3
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(U S$ in m ill io ns ) Adjusted EBITDA1 Adjusted EBITDA Margin1 . Initially
launched EBITDA margin targets for groups and Company overall in 2017
consistent with multi-year growth strategy . Margin targets intended to be
annual, through-the-cycle targets . Since 2017, we have consistently operated
within, or above, 12-16% consolidated target range, including during the
pandemic . Historical EBITDA margin performance places FSS in top tier of
specialty vehicle peers 1) Non-GAAP Measures. See Appendix for additional
information, including reconciliation to GAAP measures. CEO Remarks -
Historical Margin Performance 10
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. As we look ahead and consistent with the execution of our key strategic
objectives of (i) operational excellence, (ii) organic growth initiatives, and
(iii) value-added M&A, we are today raising our EBITDA margin targets for ESG
and the Company overall . Introducing new Consolidated EBITDA Margin Target:
14 - 20% (increased from 12-16%) . Introducing new ESG EBITDA Margin Target:
17 - 22% (increased from 15-18%) . SSG EBITDA Margin Target: 17 - 21%
(previously increased from 15-18% in Q1 2023) . Margin targets intended to be
annual, through-the-cycle targets CEO Remarks - Increasing Margin Targets .
Codification of Federal Signal operating system . 80/20 philosophies . Lean
initiatives Operational Excellence Organic Growth Initiatives ValueAdded M&A .
Benefits from recent facility/capacity investments . Aftermarket growth . Safe
Digging growth . New Product Development . Accretive M&A; focused on niche
market- leading companies . Generate synergies by leveraging existing
distribution & manufacturing capabilities 11
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Raising 2023 Outlook Raising Full-Year Adjusted EPS* Outlook to a new range of
$2.44 to $2.52, from the previous range of $2.30 to $2.46 Would represent
highest EPS in Company's history and YoY growth of 24%-29%, despite aggregate
headwind of ~$0.20 from higher interest expense and increase in effective tax
rate 12 Also raising low end of full-year net sales outlook by $30 M,
establishing new range of $1.68 B to $1.72 B Represents YoY growth of 17% -
20% vs. $1.43 B in 2022 Double-digit improvement in pre-tax earnings
Depreciation and amortization expense of ~$60 M - $62 M Capital expenditures
of $27 M to $30 M Interest expense of ~$20-21 M; YoY EPS headwind of ~$0.13
Key Assumptions Effective tax rate of ~24%, excluding additional discrete
items; YoY EPS headwind of ~$0.07 ~61-62 M weighted average shares
outstanding No significant deterioration in current supply chain environment;
assumes continued supply chain improvement in Q4 2023, with steady flow of
customer-provided chassis No significant increase in current input costs
*Adjusted earnings per share ("EPS") is a non-GAAP measure, which includes
certain adjustments to reported GAAP net income and diluted EPS. In the nine
months ended September 30, 2023, we made adjustments to exclude the impact of
acquisition and integration-related expenses (benefits) and environmental
remediation costs of a discontinued operation. In prior years, we have also
made adjustments to exclude the impact of debt settlement charges and certain
other unusual or non-recurring items. Should any similar items occur in the
remainder of 2023, we would expect to exclude them from the determination of
adjusted EPS. However, because of the underlying uncertainty in quantifying
amounts which may not yet be known, a reconciliation of our Adjusted EPS
outlook to the most applicable GAAP measure is excluded based on the
unreasonable efforts exception in Item 10(e)(1)(i)(B).
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Federal Signal Q3 2023 Earnings Call 13 Q&A November 2, 2023 Jennifer Sherman,
President & Chief Executive Officer Ian Hudson, SVP, Chief Financial Officer
Felix Boeschen, VP, Corporate Strategy & Investor Relations
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Investor Information Stock Ticker - NYSE:FSS Company website: federalsignal.com/
investors HEADQUARTERS 1415 West 22nd Street, Suite 1100 Oak Brook, IL 60523
INVESTOR RELATIONS 630-954-2000 Felix Boeschen VP, Corporate Strategy and
Investor Relations fboeschen@federalsignal.com 14
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Federal Signal Q3 2023 Earnings Call 15 Appendix
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Consolidated Adjusted EBITDA (Q3 2023 vs. Q3 2022) 16 $ millions, except % Q3
2023 Q3 2022 Net income 43.3$ 31.8$ Add: Interest expense 5.1 2.7 Acquisition
and integration-related expenses 0.7 0.4 Other expense, net 0.3 0.1 Income tax
expense 13.8 4.9 Depreciation and amortization 15.3 13.6 Consolidated adjusted
EBITDA 78.5$ 53.5$ Net Sales 446.4$ 346.4$ Consolidated adjusted EBITDA margin
17.6% 15.4%
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Segment Adjusted EBITDA (Q3 2023 vs. Q3 2022) 17 ESG $ millions, except % Q3
2023 Q3 2022 Operating Income 57.2$ 33.9$ Add: Acquisition and integration-relat
ed expenses 0.5 0.1 Depreciation and amortization 14.3 12.5 Adjusted EBITDA
72.0$ 46.5$ Net Sales 373.0$ 284.8$ Adjusted EBITDA margin 19.3% 16.3% SSG $
millions, except % Q3 2023 Q3 2022 Operating Income 13.7$ 10.5$ Add:
Depreciation and amortization 0.9 1.0 Adjusted EBITDA 14.6$ 11.5$ Net Sales
73.4$ 61.6$ Adjusted EBITDA margin 19.9% 18.7%
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Consolidated Adjusted EBITDA (20162023 LTM) 18 LTM ($ in millions) 2016 2017
2018 2019 2020 2021 2022 Q3 2023 Net income 39.4 60.5$ 93.7$ 108.4$ 96.1$
100.6$ 120.4$ 145.6$ Add (less): Interest expense 1.9 7.3 9.3 7.9 5.7 4.5 10.3
19.8 Pension settlement charges - 6.1 - - - 10.3 - - Hearing loss settlement
charges - 1.5 0.4 - - - - - Acquisition and integration-related expenses
(benefits) 1.4 2.7 1.5 2.5 2.1 (2.1) (0.5) 2.5 Coronavirus-related expenses -
- - - 2.3 1.2 - - Restructuring 1.7 0.6 - - 1.3 - - - Executive severance
costs - 0.7 - - - - - - Debt settlement charges - - - - - 0.1 0.1 Purchase
accounting effects (a) 3.6 4.4 0.7 0.2 0.3 0.3 - - Other (income) expense, net
1.8 (0.8) 0.6 0.6 1.1 (1.7) (0.5) 1.6 Income tax expense 17.4 0.5 17.9 30.2
28.5 17.0 30.5 40.9 Depreciation and amortization 19.1 30.0 36.4 41.5 44.8
50.4 54.7 59.1 Deferred gain recognition (b) (1.9) (2.0) (1.9) - - - - -
Adjusted EBITDA 84.7$ 111.5$ 158.6$ 191.3$ 182.2$ 180.5$ 215.0$ 269.6$ Net
Sales 707.9$ 898.5$ 1,089.5$ 1,221.3$ 1,130.8$ 1,213.2$ 1,434.8$ 1,665.8$
Adjusted EBITDA Margin 12.0% 12.4% 14.6% 15.7% 16.1% 14.9% 15.0% 16.2% (a)
Excludes purchase accounting effects reflected in depreciation and
amortization of $0.3 M, $0.4 M, $0.5 M, $0.6 M, $0.4 M and $0.4 M for 2016,
2017, 2018, 2019, 2020 and 2021, respectively. (b) Adjustment to exclude
recognition of deferred gain associated with historical sale lease-back
transactions. Effective 2019, the Company no longer recognizes the gain due to
the adoption of new lease accounting standard.
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NonGAAP Measures . Adjusted net income and earnings per share ("EPS") - The
Company believes that modifying its 2023 and 2022 net income and diluted EPS
provides additional measures which are representative of the Company's
underlying performance and improves the comparability of results between
reporting periods. During the three and nine months ended September 30, 2023
and 2022, adjustments were made to reported GAAP net income and diluted EPS to
exclude the impact of acquisition and integration-related expenses (benefits),
and environmental remediation costs of a discontinued operation, where
applicable. . Adjusted EBITDA and adjusted EBITDA margin - The Company uses
adjusted EBITDA and the ratio of adjusted EBITDA to net sales ("adjusted
EBITDA margin"), at both the consolidated and segment level, as additional
measures which are representative of its underlying performance and to improve
the comparability of results across reporting periods. We believe that
investors use versions of these metrics in a similar manner. For these
reasons, the Company believes that adjusted EBITDA and adjusted EBITDA margin,
at both the consolidated and segment level, are meaningful metrics to
investors in evaluating the Company's underlying financial performance. Other
companies may use different methods to calculate adjusted EBITDA and adjusted
EBITDA margin. . Consolidated adjusted EBITDA is a non-GAAP measure that
represents the total of net income, interest expense, pension settlement
charges, hearing loss settlement charges, acquisition and integration-related
expenses (benefits), coronavirus- related expenses, restructuring activity,
executive severance costs, debt settlement charges, purchase accounting
effects, other income/expense, income tax expense, and depreciation and
amortization expense, as applicable. Consolidated adjusted EBITDA margin is a
non-GAAP measure that represents the total of net income, interest expense,
pension settlement charges, hearing loss settlement charges, acquisition and
integration-related expenses (benefits), coronavirus- related expenses,
restructuring activity, executive severance costs, debt settlement charges,
purchase accounting effects, other income/expense, income tax expense, and
depreciation and amortization expense, as applicable, divided by net sales for
the applicable period(s). . Segment adjusted EBITDA is a non-GAAP measure that
represents the total of segment operating income, acquisition and
integration-related expenses (benefits), and depreciation and amortization
expense, as applicable. Segment adjusted EBITDA margin is a non-GAAP measure
that represents the total of segment operating income, acquisition and
integration-related expenses (benefits), and depreciation and amortization
expense, as applicable, divided by net sales for the applicable period(s).
Segment operating income includes all revenues, costs and expenses directly
related to the segment involved. In determining segment income, neither
corporate nor interest expenses are included. Segment depreciation and
amortization expense relates to those assets, both tangible and intangible,
that are utilized by the respective segment. 19
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