FSS
#Thank you.
Good morning and welcome to Federal Signal's third-quarter 2015 conference call.
I'm <UNK> <UNK>, the Company's Chief Financial Officer.
Also on this call with me are <UNK> <UNK>, President and Chief Executive Officer, and <UNK> <UNK>, our Chief Operating Officer.
We'll refer to some presentation slides today, as well as to the news release which we issued this morning.
The slides can be followed online by going to our website, federalsignal.com, clicking on the Investor Call icon, and signing into the webcast.
We've also posted the slide presentation and the news release under the Investors tab on our website.
Before we begin, I'd like to remind you that some of our comments made today may contain forward-looking statements that are subject to the Safe Harbor language found in today's news release and in Federal Signal's filings with the Securities and Exchange Commission.
These documents are available on our website.
Our presentation also contains some measures that are not in accordance with US generally accepted accounting principles.
In our news release and filings, we reconcile these non-GAAP measures to GAAP measures.
In addition, we will file our Form 10-Q today.
<UNK> is going to begin by discussing some of the highlights for the quarter.
I will then go into some detail on the numbers, and <UNK> will wrap things up with some additional perspective on the quarter and thoughts on our full-year outlook.
I'd now like to turn the call over to <UNK>.
Thanks, <UNK>.
We are pleased to be talking about another strong quarter for Federal Signal that exceeded our expectations.
I'd like to review some of the highlights.
We had outstanding operating results in the quarter.
I was particularly pleased with our operating margin, which was up 120 basis points against last year's quarter and reflected improvement in all three of our business groups.
Our sustained strong margins reflect significant efficiencies from our 8020 and our lean efforts, our flexible manufacturing and our targeted investments in production facilities.
They also reflect continued pricing discipline and cost control, including quick reaction to changes in volumes across the product line.
What was most pleasing was that we were able to deliver these results, despite headwinds faced by many industrial companies.
And although orders have been lower, our third-quarter backlog was healthy and essentially unchanged from the second-quarter level.
In addition to our impressive margin performance, operating cash flow for the quarter was outstanding at $41 million, almost double the Q3 cash flow a year ago.
Our strong operating performance, cash generation, and lack of debt at this time obviously give us excellent flexibility to fund growth initiatives and return value to shareholders.
During the third quarter, we paid a quarterly dividend of $3.8 million, and we recently announced a 17% increase in our dividend by declaring a fourth-quarter dividend of $0.07 per share.
We also increased our repurchases during this quarter.
In today's release, we raised our earnings outlook for the year to a range of $1.00 to $1.04 per share, which represents an increase of 8% to 12% over our adjusted earnings-per-share for 2014.
With that finished in 2015, Federal Signal would surpass results for many industrial companies.
As we begin the plan for next year, we'll continue to aggressively work toward mitigating the adverse currency effects, oil and gas headwinds and software industrial demand that we do expect to continue into 2016.
You can see from our financial performance how effectively our operations have managed their businesses for profitability and growth.
There are contributions from 8020 and other operating efficiencies, as well as from product mix, price and some reduced material costs.
We are working to carry that momentum forward, and we will also continue to pursue strategic acquisitions using the disciplined process that we have previously described.
Now I'll turn things over to <UNK>.
Thanks, <UNK>.
<UNK> has hit many of the highlights which makes my job easier.
Starting with the top line, consolidated net sales were $206 million for the quarter, down 6% compared to the prior year quarter.
Excluding foreign currency translation effects, consolidated net sales were down 4%.
Operating income was $25.9 million, up 4% versus last year, and third-quarter consolidated operating margin was 12.6%.
This is almost unchanged from our record margin in the second quarter and is much higher than the 11.4% from a year ago.
Income from continuing operations was $16.4 million for the third quarter, up 8% compared to the prior year.
That translates to EPS of $0.26 per share, which is up 8% compared to $0.24 per share last year.
There are no material adjustments to our non-GAAP results in either period.
Operating cash flow for the quarter was $40.9 million, nearly doubling the Q3 cash flow last year.
We delivered this cash flow on the strength of our earnings, even as we continue to invest in our businesses and fund operating expenses and working capital to support our growth initiatives.
As <UNK> has alluded to in his remarks, orders continue to be soft and were 9% lower than last year.
At $268 million, our backlog was down from $353 million a year ago, but was about even with our second-quarter level.
As you can see in our group results, all three of our business groups reported improved operating margin versus Q3 last year.
Foreign currency translation reduced third-quarter orders and sales in our fire rescue group and to a lesser extent in our safety and security systems group.
Although our top line was affected, foreign currency changes have had no material impact on our bottom line.
The impact on third-quarter consolidated operating income was less than 2%.
Environmental Solutions Group reported a net sales decrease of $11.1 million or 8% versus last year due to reduced sales of domestic vacuum trucks and sewer cleaners.
Like the lower sales, ESG operating income matched the prior year quarter, and operating margin was 17.5%, up from 16.0% last year.
Orders were down 23% for ESG when compared to exceptionally high levels a year ago.
The prior year included several large municipal fleet orders, street sweepers and sewer cleaners.
Recent demand for vacuum trucks has been hurt by the significant downturn in oil and gas markets.
With our expanded capacity and shorter lead times, we continue to see fewer advanced stocking orders, which also contributes to a lower backlog.
At our Safety and Security Systems Group, sales were down 5% compared to last year's quarter, primarily due to unfavorable foreign currency translation effects.
On a constant currency basis, sales were down about 2%.
Operating income of $9.3 million was down slightly, while operating margin improved to 16.4% compared to 15.7% in Q3 last year.
The improvement in SSG's operating margin was primarily due to a recovery against a large order cancellation during the quarter that we previously anticipated would come in the fourth quarter.
Orders at SSG were down 4% compared to third quarter last year.
As we have noted previously, it is normal for most of SSG's businesses to operate with relatively low backlog.
In the Fire Rescue Group, net sales were $0.6 million higher than the prior year quarter, despite a $3.4 million unfavorable foreign currency translation impact.
In local currency, net sales were up 20%.
FRG reported operating income of $0.7 million for the quarter versus an operating loss of $0.2 million last year.
FRG's operating results for the third quarter also included $0.3 million of restructuring expense associated with headcount reductions intended to reduce ongoing operating costs.
In addition, FRG's third-quarter orders in local currency were up an impressive 94% compared to the third quarter of last year, primarily on the strength of order flow from the Asia-Pacific and the Middle East.
We expect Bronto's performance to improve significantly in 2016.
Corporate operating expenses of $5.6 million were down slightly compared to $5.8 million a year ago.
From a consolidated perspective, we reported a 2% improvement in gross profit and a gross margin of 28.9% for the quarter, which compares to 26.6% last year.
Selling, engineering, general and administrative expenses were $33.4 million or in line with the prior year quarter, and we saw nominal increasing costs associated with restructuring activities.
All of these factors roll into the Company's $25.9 million of third-quarter operating income.
We also reported a $0.4 million reduction in interest expense, which is associated with lower debt levels.
Tax expense for the quarter was up $0.2 million with an effective tax rate for the quarter of 34.7%, which was lower than the 35.9% reported in Q3 of last year.
We are trending toward a full-year effective tax rate for 2015 of about 35%.
From a cash perspective, we are projecting a cash tax rate of approximately 10%.
The difference between our effective tax rate and our cash tax rate relates to the use of deferred tax assets to reduce our tax payments.
These assets primarily consist of net operating loss carryforwards and tax credit carryforwards.
On an overall basis, we, therefore, earned $0.26 per share from continuing operations in Q3 compared with $0.24 per share in Q3 last year.
The balance sheet remains extremely strong, and with our robust cash flow, it continues improving.
Operating cash flow was $41 million for the third quarter and is up $24 million or 53% for the first nine months of the year.
Total debt was $47 million, down from $69 million a year earlier.
Cash on hand at the end of the third quarter exceeded total debt by $19 million.
We used some of our cash flow to pay a quarterly dividend of $3.8 million.
We also funded $5.6 million of share repurchases during the quarter, bringing our year-to-date share repurchases to $10.6 million.
We have approximately $69 million remaining under our share repurchase authorization.
That concludes my comments, and I'd like to turn the call over to <UNK>.
I mean as we look at the fourth quarter, we have ---+ we are coming out of a couple very strong quarters.
Several of our businesses are going to be able to perform well, but some of them are going to not be able to maintain those margins.
So we are ---+ there's a mix in our business as always.
All of them have done an exceptional job of delivering on margin, and they are continuing to do that.
Sure.
If you recall, Walt, last year in April of last year, so 2014, we implemented the new production lines and the plant that backed there.
And that reduced the stocking order requirement for our customers, our dealers.
And so the run rate in the last quarter and going into this quarter really, as you pointed out, reflects that study book to bill without the need for eight month leadtimes.
We are down to three to four months.
In some cases, we are actually shipping out of stock in other cases.
So that one impact is gone, so the run rate is pretty consistent.
The oil and gas, you recall, dropped off right after the first of the year for everybody.
So, the run rate of oil and gas in the fourth quarter was still pretty good last year.
But again in this last quarter and in the next quarter and going into next year, we see that that likely would be a consistent level of operation until oil and gas kind of picks back up.
So on the industrial side, I think as we move into utility a little bit more and we see a steady-state of business due to short leadtimes and oil and gas, we feel like that's a consistent run rate, at least in the near-term.
We also have visibility on some nice large orders coming late in the year next year for some of the international markets.
So like everything else, you'll see a mix.
On the municipal side on ESG, there have been fewer, you know, mega orders I'll call it for municipalities.
There's been good and consistent municipality business on ESG this year, which we think is going to be consistent and consistent going into next year.
But the big fleets we saw in 2014 we saw fleet purchase this year that were slightly smaller.
That's all.
So we see consistency, I guess, in what we are looking at going into the next year on the order base.
Yes, let me talk about that.
That has been a fun project for us.
The closeness our team reached with the users and we went back out again this summer with a couple of prototypes and we got even deeper experience with the customers and we're tweaking that, but we are in the planning stages of bringing up a production line for that.
And while we're not ready to forecast a number for next year, we're going to take the same approach that we did with the hydro excavators last year by introducing a new line for a fully engineered assembly product off the line.
So we expect good things from that next year in 2016, probably coming with product really being launched in the end of the first quarter, maybe into the first or the second quarter.
The thing about that product line, too, though, is that it also goes along with our hydro excavators.
So we'll be going to the market with really two families of product, a smaller more versatile product that we've been talking about, as well as the big vacuum trucks.
I think what we have said and what we do believe is that that business is capable of running in the 8% to 10% operating income range and that we are beginning to see the effects of the production changes.
We talked this year just recently about some of the structural changes we've made in overhead with people.
So I think the backlog is going to be strong going into next year and that I think during the year we will achieve that 8% to 10% run rate for certain quarters, and that business, as you know, things get delayed from quarter to quarter, month to month, and some months it still might be in the low single digits.
But I think that 8% to 10% in the long run for that business is achievable.
And we've invested to do it, and we have new management and leadership there, and we think we can get it done.
And Walt, the range of size and revenue, we've looked at things from $8 million or $9 million all the way up to $100 million to $200 million.
Again, <UNK> pointed out the need to be close to our core.
We really are dedicated to that.
We want to stay close to our manufacturing competencies, and we've seen lots of good opportunities.
You asked where did these opportunities come from.
We've had many presented by bankers, but we've also had many that our business units have identified as they are relationships that have existed within the marketplace, either with the supplier or with our customers, and some of these have been referred.
So it's a nice mix.
We like the closeness to the core, and we like what we think it will do for the long run.
And as <UNK> said, we would expect to have ---+ we would expect to have one or two close sometime early in the year next year.
Yes, you know, that's a good question.
And I can tell you that at our board meetings, we review every business with our Board of Directors for the ---+ if they still apply, if they are still close to the core, and whether we would keep or sell, and obviously being a public company until we decide we're going to sell something, we really couldn't explain any deeper what our thoughts might be.
Thanks so much.
In closing, I would like to conclude by saying that we are excited about our progress and the opportunities that are in front of us.
We're proud of the hard work of our employees and achieving our outstanding third-quarter results.
We do appreciate the continued support of our stockholders, our employees, all of our distributors, dealers, and customers, and without them, we wouldn't be successful and we thank them all.
Again, thank you for joining our call today, and we look forward to talking to you in the next quarter.
Goodbye.
