Federal Signal Q2 2016 Earnings Call July 28, 2016 · 2018-04-09 · Federal Signal Q2 2016 Earnings Call July 28, 2016 Jennifer Sherman, President & Chief Executive Officer Ian Hudson,

Federal Signal Q2 2016 Earnings Call July 28, 2016

Jennifer Sherman, President & Chief Executive Officer

Ian Hudson, VP, Corporate Controller

Svetlana Vinokur, VP, Treasurer and Corporate Development

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: economic conditions in various regions, product and price competition, supplier and raw material prices, 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. This presentation also contains references to certain non-GAAP financial information. Such items are reconciled herein and in our earnings news release provided as of the date of this presentation.

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Q2 Highlights *

• Net sales of $172 M, down 16%

• Operating income of $14.3 M, compared to $29.2 M

Q2 2016 includes $0.4 M of acquisition related costs

• Operating margin of 8.3%, down from 14.2%

• GAAP EPS of $0.15, compared to $0.29

• Adjusted EPS of $0.17, compared to $0.29

• Orders of $187 M, up 7%

• Backlog of $150 M, up 11% from Q1 of 2016

• Completed the acquisition of Joe Johnson Equipment in Q2

• Returned over $21 M of value to shareholders in Q2

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* Comparisons versus Q2 of 2015, unless otherwise noted

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Group and Corporate Results

$ millions, except % Q2 2016 Q2 2015 % Change

ESG Orders 135.3 114.2 18%

Sales 119.4 146.6 -19%

Operating income 14.9 29.2 -49%Operating margin 12.5% 19.9%

SSG Orders 52.0 60.4 -14%

Sales 52.9 58.8 -10%

Operating income 6.6 7.3 -10%Operating margin 12.5% 12.4%

Corporate expenses 7.2 7.3 -1%

Consolidated Orders 187.3 174.6 7%

Sales 172.3 205.4 -16%

Operating income 14.3 29.2 -51%Operating margin 8.3% 14.2%

Income from Continuing Operations

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$ millions, except % and per share Q2 2016 Q2 2015 $ Change % Change

Net sales 172.3 205.4 (33.1) -16%

Gross profit 45.0 60.7 (15.7) -26%

SEG&A expenses 30.3 31.1 (0.8) -3%

Acquisition and integration related expenses 0.4 - 0.4 NM

Restructuring - 0.4 (0.4) NM

Operating income 14.3 29.2 (14.9) -51%

Interest expense 0.4 0.6 (0.2) -33%

Other (income) expense, net (0.3) - (0.3) NM

Income tax expense 4.8 10.4 (5.6) -54%

Income from continuing operations 9.4 18.2 (8.8) -48%

Diluted earnings per share from

continuing operations $0.15 $0.29 ($0.14) -48%

Diluted adjusted earnings per share from

continuing operations $0.17 $0.29 ($0.12) -41%

Gross Margin 26.1% 29.6%

Effective tax rate 33.8% 36.4%

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Adjusted Earnings per Share

($ in millions)

2016 2015 2016 2015

Income from continuing operations 9.4$ 18.2$ 19.8$ 32.6$

Add:

Income tax expense 4.8 10.4 10.5 18.7

Income before income taxes 14.2 28.6 30.3 51.3

Add:

Restructuring - 0.4 1.2 0.4

Acquisition and integration related expenses 0.4 - 0.9 -

Purchase accounting effects (1) 0.5 - 0.5 -

Debt settlement charges - - 0.3 -

Adjusted income before income taxes 15.1 29.0 33.2 51.7

Adjusted income tax expense (2) (3) (5.0) (10.5) (11.5) (18.8)

Adjusted net income from continuing operations 10.1$ 18.5$ 21.7$ 32.9$

Diluted EPS from continuing operations 0.15$ 0.29$ 0.32$ 0.51$

Adjusted diluted EPS from continuing operations 0.17$ 0.29$ 0.35$ 0.52$

(2) Adjusted income tax expense for the three and six months ended June 30, 2016 w as recomputed after excluding the impact of restructuring

activity, acquisition and integration related expenses and purchase accounting effects.

(3) Adjusted income tax expense for the three and six months ended June 30, 2015 w as recomputed after excluding the impact of restructuring

activity.

Three Months Ended June 30, Six Months Ended June 30,

(1) Purchase accounting effects relate to adjustments to exclude the step-up in the valuation of JJE inventory that w as sold subsequent to the

acquisition in the three and six months ended June 30, 2016, as w ell as to exclude the depreciation of the step-up in the valuation of the rental f leet

acquired.

• Generated $10.6 M of cash from continuing operations, compared to $30 M in prior-year quarter

Operating cash flow is lower as a result of the non-cash settlement of receivables due from JJE as of acquisition date ($11.4 M)

• Completed acquisition of Joe Johnson Equipment in Q2 for initial purchase price of $96.6 M

Funded in part by cash and in part by borrowings against revolver

• $65.8 M of debt outstanding at the end of Q2; $38.7 M of cash

• ~$240 M of availability under revolver at the end of Q2

• Paid $4.3 M for dividends; recently declared $0.07 per share dividend for Q3

• Funded share repurchases of $16.8 M in Q2 2016

YTD repurchases of $33.1 M, compared to $10.6 M for full-year 2015

Aggregate remaining authorization $36 M (~ 5% of market capitalization)

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Financial Strength and Flexibility *

* Dollar amounts as of or for the period ending 6/30/2016

• Municipal markets remain solid, with total reported orders up Largely driven by JJE acquisition, but ESG orders up even

after excluding JJE acquisition impact on orders • Adjusted ESG orders up ~36% vs. Q1 of 2016 • Adjusted ESG orders up ~6% vs. Q2 of 2015

• Industrial markets continue to be impacted by oil and gas softness

• Continued focus on cost management

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CEO Remarks

Q2 2016 Q2 2015 Q1 2016

Change Q2 2016

vs. Q2 2015

Change Q2 2016

vs. Q1 2016

ESG orders, as reported 135.3$ 114.2$ 83.2$ 18.5% 62.6%

Less: Elimination of JJE orders pre-acquisition (1) (26.5)$ (11.1)$ (3.0)$

Adjusted ESG orders 108.8$ 103.1$ 80.2$ 5.5% 35.7%

SSG orders, as reported 52.0$ 60.4$ 52.5$ -13.9% -1.0%

Adjusted total orders 160.8$ 163.5$ 132.7$ -1.7% 21.2%

Add: Elimination of JJE orders pre-acquisition (1) 26.5$ 11.1$ 3.0$

Total orders, as reported 187.3$ 174.6$ 135.7$ 7.3% 38.0%

(1) Includes elimination of "acquired" orders

• Investments in sales resources

• New Product Development (“NPD”): Improved street sweeper design

New Jetstream accessory products

New Tier IV compliant sweepers

Industrial Systems product redesign

Additional engineering resources being recruited for a number of other NPD initiatives

• New Offerings for the Utility Market ParaDIGm purpose-built vacuum truck

Air tools for non-destructive digging

• Completed JJE acquisition in Q2

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Top-line Growth Initiatives

Joe Johnson Equipment (“JJE”)

Significantly expands our industrial footprint from 13 to 25 service centers throughout Canada and US

Expands our share of after-market activity

Allows capture of additional customer base

Attractive margin profile

Product offering to capture more market and respond to competition

Solid rental platform that we can leverage across North America, complementing existing Jetstream rentals

Strong municipal equipment distributor Leverage existing channel to increase industrial

coverage for our Jetstream, Guzzler and Westech products

JJE should benefit from new Canadian focus on infrastructure spend

10 * Estimated % of JJE revenues based on unaudited financial statements prepared in accordance with ASPE.

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Profit Deferral Impact Resulting from JJE Acquisition

• As noted on prior calls, the JJE acquisition is likely to result in changes in the timing of revenue and profit recognition that should normalize over a period of about three years

• This temporary deferral of profit results from units transferred to JJE that have either (i) not been sold through to end customers or (ii) been placed in the rental fleet

Previously ESG would recognize revenue (and profit) in both cases when the units were shipped to JJE

Now, under common ownership, those intercompany sales do not result in immediate profit recognition

• For units transferred to JJE for subsequent sale to end customers, profit not recognized until units sold through (short-term profit deferral)

• For units transferred to JJE for placement in the rental fleet, profit effectively replaced by rental income and the profit on sale as a used piece of equipment (longer-term profit deferral)

2016 Outlook

Adjusted EPS outlook range of $0.65 to $0.75

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• Adjusted from previous outlook range of $0.70 to $0.80

• New range includes:

• Temporary JJE-related revenue and profit deferral, which could reduce our 2016

adjusted EPS outlook by up to $0.05

• Temporary profit deferral should normalize over a period of about three

years

• Continued softness in industrial markets, which has weighed on our orders and

revenue outlook during the first half of the year

• No meaningful recovery assumed in the second half of the year

• Softness in industrial markets offset by:

• Healthy municipal demand

• Cost reduction initiatives

• Sales of new products

Federal Signal Q2 2016 Earnings Call

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Q&A

July 28, 2016

Jennifer Sherman, President & Chief Executive Officer Ian Hudson, VP, Corporate Controller

Svetlana Vinokur, VP, Treasurer and Corporate Development

Investor Information

Stock Ticker - NYSE:FSS

Company website: federalsignal.com/investors

HEADQUARTERS

1415 West 22nd Street, Suite 1100 Oak Brook, IL 60523

INVESTOR RELATIONS CONTACTS

630-954-2000

Brian Cooper

SVP, Chief Financial Officer

[email protected]

Svetlana Vinokur

VP, Treasurer and Corporate Development

[email protected]

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