Federal Signal earnings beat expectations, but shares drop

By Yemeng Yang

The fourth-quarter profit of Federal Signal Corp., the Oak Brook, Ill.-based public safety products manufacturer, beat Wall Street’s expectation, but shares dropped as the company expressed caution about the first quarter of 2017.

Federal Signal reported Tuesday net income from continuing operations of $12.1 million, or 20 cents per diluted share, down 30 percent from $17.4 million, or 27 cents per diluted share, a year earlier. The result beat analysts’ estimate of $8.8 million, or 15 cents per diluted share.

The company said the decline mostly resulted from industrial end market headwinds throughout 2016. Softness in oil and gas impacted its hydro-excavation products and signaling business.

Revenue of Federal Signal in the fourth quarter decreased 6 percent to $176.1 million from $186.4 million a year ago. It missed analysts’ estimate of $189.7 million.

Orders decreased 8 percent to $165.3 million in the fourth quarter from $179.3 million.

Federal Signal’s orders have been impacted by industrial end market headwinds since 2015. (Yemeng Yang/MEDILL)

For the full year 2016, Federal Signal generated revenue of $707.9 million, down 8 percent from the prior year. Full year earnings from continuing operations came to $39.4 million, or 64 cents per diluted share, compared with $65.8 million, or $1.04 per diluted share, a year earlier.

Full-year orders decreased 2 percent to $674.4 million from a year ago. Year-end backlog was $137 million, down 8 percent from $149 million at the third quarter 2016.

“It is clear that 2016 was a challenging year,” said Jennifer Sherman, chief executive officer of Federal Signal, during the conference call. “Sales were down significantly and the lower volume especially for some of our higher margin equipment, including hydro-excavators, created negative operating leverage.”

The company is optimistic about the full year 2017 based on the increasing confidence of the distributors that the management talked to recently.

“As they look into 2017, many of them are expecting year-over-year improvement,” said Sherman. “With that, we expect adjusted earnings per share for the year to be between 70 cents and 78 cents.”

“With a solid market share position backed by a strong balance sheet and healthy cash flow characteristics, we believe the company is well positioned to achieve its long-term financial goals,” wrote Marco Rodriguez, an analyst at Stonegate Capital Markets Inc., in a research note earlier.

Despite a relatively bright outlook for this year, the company anticipated a slow start to 2017 as a result of a less favorable backlog and stronger seasonal effects than a year ago.

Earnings in the first quarter of 2017 are expected to be between 14 percent and 16 percent of annual earnings.

Analysts identified other risks, such as U.S. government and municipal and economic risks, as the municipal market represents 60 percent of Federal Signal’s revenue.

“The company’s businesses depend heavily upon U.S. Government and municipal groups for sales,” wrote Walter Liptak, an analyst at Seaport Global Securities LLC, in a research note. “Due to the volatility of the current economic climate, customers may face financial difficulties that could result in lower sales, reduced cash flows and delayed operation.”

Shares of Federal Signal closed Tuesday at $14.88, down 53 cents or 3.44 percent.

Photo at top: Fire and police departments are the principal buyers of Federal Signal Corp.’s signaling and alarm products. (Yemeng Yang/MEDILL)