Federal Signal Corporation

Good morning and welcome to the Federal Signal Corporation 2023 Third Quarter Earnings Conference Call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing star then zero on your telephone keypad. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star then 2. Please note, this event is being recorded. I would now like to turn the conference over to Felix Boshin, Vice President, Corporate Strategy and Investor Relations. Please go ahead.

Good morning and welcome to Federal Signals' third quarter 2023 conference call. I'm Felix Boshin, the company's Vice President of Corporate Strategy and Investor Relations. Also with me on the call today is Jennifer Sherman, our President and Chief Executive Officer, and Ian Hudson, our Chief Financial Officer. We will 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, federalsignal.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. Ian is 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, updated margin targets, and our outlook for the remainder of the year. After our prepared comments, we will open the lines up for questions. With that, I would now like to turn the call over to Ian.

Thank you, Felix. Our consolidated third quarter financial results are provided in today's earnings release. In summary, our third quarter results were outstanding, and we reported new company records for quarterly net sales and adjusted EPS, a 220 basis point year-over-year increase in EBITDA margin, an 18% increase in orders, and significant improvement in cash generation, with cash conversion of 110%. Consolidated net sales for the quarter were $446 million, a quarterly record and an increase of $100 million, or 29% compared to last year. Organic revenue growth for the quarter was $80 million, or 23%. Consolidated operating income for the quarter was $62.5 million, up $23 million, or 58% compared to last year. Consolidated adjusted EBITDA for the quarter was was $78.5 million, up $25 million, or 47% compared to last year. That translates to a margin of 17.6% in Q3 this year, up from 15.4% last year. Net income for the quarter was $43.3 million, up $11.5 million, or 36% from last year. That equates to GAAP EPS for the quarter of 71 cents per share, up 19 cents per share, or 37% from last year. On an adjusted basis, EPS for the quarter was 71 cents per share, an improvement of 18 cents per share, or 34% compared to last year. Order intake for the quarter was again strong, with orders of $450 million, representing an increase of $68 million, or 18% compared to Q3 last year. Backlog at the end of the quarter was again slightly in excess of the $1 billion mark and an increase of $182 million or 22% compared to Q3 last year. In terms of our group results, ESG's net sales for the quarter were $373 million, an increase of $88 million or 31% compared to last year. ESG's operating income for the quarter was $57.2 million, up $23.3 million, or 69% compared to last year. ESG's adjusted EBITDA for the quarter was $72 million, up $25.5 million, or 55% compared to last year. That translates to an adjusted EBITDA margin of 19.3% in Q3 this year, up 300 basis points from Q3 last year. ESG reported total orders of $375 million in Q3 this year, an improvement of $53 million, or 17% compared to last year. SSG's net sales for the quarter were $73 million this year, up $12 million, or 19% compared to last year. SSG's operating income for the quarter was $13.7 million, up $3.2 million, or 30% from last year. SSG's adjusted EBITDA for the quarter was $14.6 million, up $3.1 million, or 27% from last year. The adjusted EBITDA margin for SSG for the quarter was 19.9%, up 120 basis points from Q3 last year. Orders for the quarter were $75 million, up $15 million, or 24% compared to last year. Corporate operating expenses for the quarter were $8.4 million compared to $4.9 million last year. Turning now to the consolidated income statement, where the increase in sales contributed to a $34.9 million improvement in gross profit. Consolidated gross margin for the quarter was 26.4% of 250 basis points compared to last year. As a percentage of sales, our selling, engineering, general, and administrative expenses for the quarter were down 20 basis points from Q3 last year. Other items affecting the quarterly results include an $800,000 increase in amortization expense, a $300,000 increase in acquisition-related expenses, a $200,000 increase in other expense, and a $2.4 million increase in interest expense. Tax expense for the quarter was $13.8 million compared to $4.9 million last year, with the increase primarily due to higher pre-tax income levels and the recognition of fewer discrete tax benefits in the current year quarter compared to the prior year. Our effective tax rate for the quarter was 24.2% compared to 13.4% last year. At this time, we expect our full-year effective tax rate to be approximately 24%, excluding any additional discrete items. On an overall GAAP basis, we therefore earned 71 cents per share in Q3 this year, compared with 52 cents 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 quarters. In the current year quarter, we made adjustments to GAAP earnings per share to exclude acquisition-related expenses. On this basis, our adjusted earnings for the quarter were 71 cents per share, compared with 53 cents per share last year. Looking now at cash flow, we generated $48 million of cash from operations during the quarter, an increase of $38 million from last year, with the increase primarily due to working capital improvements and higher net income. That brings our year-to-date operating cash generation to $91 million, an increase of 181% compared to the first nine months of last year. With the improved cash flow, we paid down approximately $40 million of debt during Q3, ending the quarter with $325 million of net debt and availability under our credit facility of $425 million. Our current net debt leverage remains low. With our financial position remaining strong, we have significant flexibility to invest in organic growth initiatives pursue strategic acquisitions, and return cash to stockholders through dividends and opportunistic share repurchases. On that note, we paid dividends of $6.1 million during the quarter, reflecting a dividend of $0.10 per share, and we recently announced a similar dividend for the fourth quarter. We also funded $4.3 million of share repurchases during the quarter. That concludes my comments, and I would now like to turn the call over to Jennifer.