Federal Signal Corporation

Thank you for standing by. This is the conference operator. Welcome to the Federal Signal Corporation third quarter 2021 earnings conference call. As a reminder, all participants are in listen-only mode and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. To join the question queue, you may press star then one on your telephone keypad. Should you need assistance during the conference call, you may signal an operator by pressing star and zero. I would like now to turn the conference over to Mr. Ian Hudson, Chief Financial Officer. Please go ahead.

Good morning. Third quarter conference call.

I'm Ian Hudson, the company's Chief Financial Officer. Also with me on the call today is Jennifer Sherman, our President and Chief Executive Officer. We'll refer to some presentation slides today, as well as to the earnings news release which we issued this morning. The slides can be followed online by going to our website, federalstignal.com, clicking on the investor call icon, and signing into the webcast. We've also posted the slide presentation and the earnings release under the investor 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 Signals 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 U.S. generally accepted accounting principles. In our earnings release and filings, we reconcile these non-GAAP measures to GAAP measures. In addition, we will file our Form 10-Q later today. I'm going to begin today by providing some detail on our third quarter results before turning the call over to Jennifer to provide an update on our performance, current market conditions, recent acquisition activity, and our outlook for the remainder of the year. After our prepared comments, Jennifer and I will address your questions. Our consolidated third quarter financial results are provided in today's earnings release. In summary, our businesses were able to deliver meaningful year-over-year improvement in net sales and earnings and an adjusted EBITDA margin at the high end of our target range, despite the effects of higher material costs and widespread supply chain disruption. Consolidated net sales for the quarter were $298 million, up $19 million, or 7% compared to last year. Consolidated operating income for the quarter was $34.3 million, up $300,000, or 1% compared to last year. Consolidated adjusted EBITDA for the quarter was $47.4 million, up $1.5 million, or 3% compared to last year. That translates to a margin of 15.9% in Q3 this year, compared to 16.4% last year. Net income for the quarter was $29.2 million, up $3.9 million, or 15% from last year. That equates the GAAP earnings for the quarter of 47 cents per share of 15% from 41 cents per share last year. On an adjusted basis, EPS for the quarter was 48 cents per share, an improvement of 14% compared to 42 cents per share last year. Both our GAAP EPS and adjusted EPS for the third quarter of this year included benefits from a tax planning strategy executed during the quarter. which resulted in approximately $3.3 million more in discrete tax benefits being recognized in Q3 this year compared to Q3 of last year. In the aggregate, these higher tax benefits represented approximately 5 cents of our year-over-year EPS improvement. Order intake for the quarter was again outstanding, with orders of $350 million representing an increase of $85 million or 32% compared to last year. Consolidated backlog at the end of the quarter set another new company record of $487 million. That represents an increase of $183 million or 60% from the end of last year. In terms of our group results, ESG's net sales for the quarter were $249 million up $18 million or 8% compared to last year. ESG's operating income for the quarter was $30.8 million compared to $33 million last year. ESG's adjusted EBITDA for the quarter was $42.7 million compared to $43.9 million last year. That translates to an adjusted EBITDA margin of 17.1% in Q3 this year compared to 19% last year. ESG reported total orders of $292 million in Q3 this year, an improvement of $72 million, or 33% compared to last year. SSG's net sales for the quarter were $49 million this year, up 1% compared to last year. SSG's operating income for the quarter was $7.6 million, up from $7.4 million last year, while its adjusted EBITDA for the quarter was $8.5 million, up from $8.2 million last year. That translates to an adjusted EBITDA margin for the quarter of 17.3% of 50 basis points from last year. SSG's orders for the quarter were $58 million, up $13 million, or 27% compared to last year. Corporate operating expenses for the quarter were $4.1 million, compared to $6.4 million last year. Turning now to the consolidated income statement, where despite the year-over-year sales increase, gross profit decreased by $1.7 million. Consolidated gross margin for the quarter was 23.8% compared to 25.9% last year. With steel and other commodity costs continuing to increase and chassis constraints delaying certain shipments out of our backlog, we experienced a slightly higher unfavorable price-cost headwind of around $5 million during the quarter, about $2 million higher than we had previously anticipated. With the various pricing actions we have taken, including repricing of our backlog at a number of businesses, we are expecting to see improvement beginning in the fourth quarter with more price realization expected as our backlog turns. As a percentage of sales, our selling, engineering, general, and administrative expenses for the quarter were down 160 basis points from Q3 last year. Other items affecting the quarterly results include a $200,000 increase in acquisition-related expenses, a $200,000 increase in other income, and a $100,000 reduction in interest expense. Tax expense for the quarter decreased by $3.3 million, largely due to the recognition of the tax planning benefits that I just mentioned. Our effective tax rate for the quarter was 12.8% compared to 23.1% last year. At this time, we expect our full-year effective tax rate to be approximately 18%. On an overall GAAP basis, we therefore earned $0.47 per share in Q3 this year compared with $0.41 per share in Q3 last year. To facilitate earnings comparisons, we typically adjust our GAAP earnings per share for unusual items recorded in the current or prior year quarters. In the current year quarters, we made adjustments to GAAP earnings per share to exclude acquisition-related expenses and purchase On this basis, our adjusted earnings for the quarter were $0.48 per share compared with $0.42 per share last year. Looking now at cash flow, where we generated $16 million of cash from operations during the quarter of 8% from Q3 last year. That brings the year-to-date operating cash generation to $55 million. Towards the end of the quarter, we increased our borrowings in anticipation of the ground force acquisition which we completed in early October for an initial payment of $43 million. We ended the quarter with $164 million of net debt and availability under our credit facility of $240 million. Our current net debt leverage ratio remains low. With our financial position remaining strong, we have significant flexibility to pursue strategic acquisitions, invest in organic growth initiatives, and return cash to stockholders through dividends and opportunistic share repurchases. On that note, we paid dividends of $5.5 million during the quarter, reflecting a dividend of $0.09 per share, and we recently announced a similar dividend for the fourth quarter. We also funded share repurchases of $3.2 million during the quarter at an average price of $38.44. That concludes my comments, and I would now like to turn the call over to Jennifer.