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Text: I am Ian Hudson, the Company's Chief Financial Officer.
Also with me on the call today is Jennifer Sherman, our President and Chief Executive Officer.
These documents are available on our website.
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.
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 to GAAP earnings for the quarter of $0.47 per share, up 15% from $0.41 per share last year.
On an adjusted basis, earnings per share for the quarter was $0.48 per share, an improvement of 14% compared to $0.42 per share last year.
Both our GAAP earnings per share and adjusted earnings per share 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 $0.05 of our year over year earnings per share 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%, up 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 our unusual items recorded in the current or prior year quarters.
In the current year quarter, we made adjustments to GAAP earnings per share to exclude acquisition related expenses and purchase [Technical Issues] 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, up 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.
Our teams again delivered growth in both the top and bottom line, while achieving an adjusted EBITDA margin toward the high end of our target range despite well documented widespread supply chain disruption and a very challenging commodity cost environment.
We entered the quarter with delivery commitment dates from our chassis suppliers that positioned us well to satisfy our sales and delivery expectations for the second half of the year.
However, as the quarter progressed, we began to experience significant delays in delivery dates from most of our chassis OEM partners with deliveries pushed out weeks or months with little notice.
In many circumstances, we received a week's notice of the delay.
Beyond chassis, we are experiencing some other supply chain tightness ranging from pumps to electronic components, but for the most part, we have to date been able to navigate through the difficulty, but it remains a challenging situation.
Chassis delivery delays are significantly disrupting our production schedules and hampering our ability to maximize production efficiencies and deliver products to our customers.
The team has worked tirelessly to mitigate the impact of this short term disruption by continuously adjusting production schedules in an effort to satisfy record customer demand, but we are not operating at our usual level of efficiency.
While the teams have performed admirably, we estimate the delays in chassis deliveries and various other part shortages along with the constant production schedule adjustments caused an adverse top line impact of approximately $30 million during the quarter.
Importantly, none of these orders are lost or canceled, but the shipment timing out of our backlog has been pushed out to reflect the revised chassis delivery dates.
As we did last year with the pandemic, so far this year our businesses have been able to navigate through a variety of supply chain related issues and deliver an EBITDA margin of almost 16% demonstrating that as a company we are more resilient than in the past, and we continue to believe that at this level of margin performance we would rank within the top decile of our specialty vehicle peers.
Performance at these levels during turbulent times is both a real testament to the efforts of our teams and the successful diversification of our revenue streams and end market exposures that has taken place over the last several years through a combination of organic growth initiatives and M&A.
As it was in Q2, our aftermarkets business was again an area of strength, providing a favorable shift in mix during a seasonally strong third quarter.
Overall, our aftermarket revenues in Q3 this year were up $12 million or 18% over last year, growing to represent a higher share of ESG's revenues for the quarter at around 30%.
Rental activity and demand for used equipment continues to be strong with rental income in Q3 up 29% year over year and used equipment sales exceeding $10 million for the third successive quarter.
As we approach the winter months, we expect that rental activity may be seasonally down in comparison to the peak periods of Q2 and Q3, but we expect used equipment demand to remain strong given the current tightness in the supply chain and longer lead time.
Demand for our product offering continues to be as strong as ever as demonstrated by our outstanding third quarter order intake of $350 million, contributing to another record backlog, reflecting strength across our end markets.
This settlement has been widely shared by our customers and dealer partners and seems to be further solidified by the economic stimulus package, which passed earlier this year.
In that package, approximately $350 billion was earmarked for state, local, and territorial governments for a variety of purposes including the maintenance of essential infrastructure such as sewer systems and streets.
As a provider of equipment used for these essential services like store cleaning and street sweeping, we stand to benefit meaningfully from any additional aid that may be provided to state and local sources for these purposes.
Conversations with our dealer channels suggest that the first $175 billion tranche has started to be distributed by the treasury in May with the second tranche expected next year.
This is supported by the ongoing strength of U.S. municipal orders, which were up 50% for both the quarter and year to date period with notably strong demand for street sweepers and sewer cleaners.
In fact, so far this year, our U.S. municipal orders for street sweepers are up $46 million or 84% over last year, while sewer cleaner orders are up $45 million or 64% over the same period.
We are also seeing strong municipal demand within SSG with most of its order improvement this quarter resulting from higher demand for public safety equipment in both domestic and international markets.
Within our industrial end market, we've also seen a 50% year over year improvement in domestic orders.
The improvement has been almost across the board, but notably for our TRUVAC safe digging trucks and for our Guzzler industrial vacuum motors, which collectively were up $45 million or 87% year over year.
Simply put, supply chains cannot keep pace with the momentum in demand that we are currently seeing in almost all of our end markets.
I would now like to spend a minute on our acquisition of Ground Force Worldwide, which we completed in early October.
Ground Force is headquartered in Post Falls, Idaho, and is a leading manufacturer of specialty material handling vehicles that support the extraction of metals with its current product portfolio, including fuel and lube trucks, water trucks, dump bodies, and rock spreaders.
Ground Force also supports the recurring aftermarket needs of its customers through parts and service offerings.
The acquisition further bolsters our position as an industry leading, diversified industrial manufacturer of specialty vehicles for maintenance and infrastructure markets with leading brands of premium, value adding products, and a strong supporting aftermarket platform.
Over the last 12 months, Ground Force generated revenues of approximately $34 million with an EBITDA margin within our group target range.
The acquisition augments our current materials' hauling portfolio by adding a range of specialty vehicles that support the extraction of metals, demand for which is expected to benefit from vehicle electrification and other green initiatives.
The transaction is also expected to provide opportunity for long term value creation through operational improvement and organic growth initiatives while also providing a platform for further acquisitions in this space.
Although it has only been one month, we are encouraged by the strong order demand that Ground Force has seen for its products.
Deist is the parent company of Switch-N-Go and Bucks Fabricating, both of which are located in Pennsylvania.
Like Ground Force to MRL, this was another proprietary deal underlying our strong reputation in the industry.
Through its Switch-N-Go business, Deist designs, manufactures and sells interchangeable truck body systems for Class three to seven vehicles in the work truck industry.
Depending on the application, this interchangeable system allows for the use of multiple bodies on a single chassis, helping customers to optimize their asset utilization and providing the potential to reduce their carbon input, footprint.
Bucks designs, manufactures, and sells a full line of waste hauling products including front, rear loading containers and specialty roll off containers.
Over the last 12 months, Deist has generated revenues of approximately $41 million with a double-digit EBITDA margin.
The Deist acquisition represents another attractive product line extension and expands our presence into new end markets such as tree care and waste hauling.
With many common partners within our existing distribution channels, the acquisition creates an attractive opportunity to develop and deliver innovative new products and solutions to our customers and optimize the distribution of our products.
We expect that both acquisitions will be accretive within the first year.
The acquisitions reiterate our expectation that M&A will continue to contribute meaningfully to our future growth.
Turning now to our outlook for the rest of the year.
We continue to see strong momentum in our markets as evidenced by the 50% improvement in both U.S. municipal and industrial orders so far this year.
With a record backlog, demand for our products is outpacing the current capacity of our supply chain.
When we raised our guidance last quarter, we assumed no significant delays in deliveries from our chassis suppliers.
However, during the quarter, such delays were more prevalent than we had anticipated causing increased disruption to our production schedules.
We expect that the volatile supply chain environment will continue for the rest of the year, and therefore, we are adjusting our full year adjusted earnings per share outlook to a new range of $1.68 to $1.78.
The size of our range is reflective of the highly volatile environment in which we are currently operating, but performance at that level would represent the company's second best year ever in terms of EPS.
Our new outlook range also excludes the impact of a one-time non-cash pre-tax pension settlement charge of approximately $11 million, which we expect to incur in the fourth quarter in connection with the defined benefit pension annuitization project.
We remain encouraged by the long-term opportunities for all of our businesses, which would be further bolstered by the infrastructure legislation recently passed by Congress.
We are already starting to see the benefits from the economic stimulus packages, which started to be made available to municipalities earlier this year.
And we also expect the Infrastructure Bill, with $550 billion in new spending, we could see capital equipment demand increase to support infrastructure investments in areas such as roads, bridges, electrification, broadband, clean energy and water, and public transportation buildup.
We are a leading manufacturer of specialty infrastructure and maintenance equipment and anticipate increased demand for the majority of our product offerings including equipment sales and rentals of dump trucks and trailers, safe digging trucks, road marking equipment, sewer cleaners, and street sweepers while also benefiting our new acquisitions, Ground Force and Deist.
With our recent capacity expansions, we are well positioned to respond once the current supply chain constraints improve.
Over the last several years, we have transformed our end market exposure and implemented a revenue diversification strategy that has enabled us to adjust as needed to market conditions.
With an ongoing focus on 80-20 principle, Federal Signal has become a more resilient business delivering a consistent level of EBITDA margin above many of our peers.
As Ian noted in his comments, our financial position and liquidity are strong, enabling us to pursue strategic acquisitions like Ground Gorce and Deist.
Our current M&A pipeline continues to be very active.
While we continue to make progress on our vehicle electrification road map and we'll soon be initiating customer trials and demonstrations of our hybrid three wheel Pelican Sweeper.
We have also solidified an agreement with a development partner for the hybrid system integrated into our plug-in, hybrid Broom Bear.
Our electrification road map also includes all electric versions of our truck mounted sweepers, and we are collaborating with more than one chassis OEM on designs that will provide uncompromised performance for our customers.
We anticipate field trials to begin in 2022.
Our ongoing commitment to environmental, social, and governance initiatives also position us well in the communities in which we operate and is a differentiating factor in our ability to attract labor at most of our facilities.
Recently, we took a survey, and in our three largest facilities, which comprise almost half of our U.S. hourly workforce, we currently have approximately 20 hourly job openings out of almost 1,000 positions.
On that note, we recently issued our second annual Sustainability Report, which highlights many of our accomplishments in this area including our project 85 initiatives to increase vaccination rates across the organization.
Although we continue to make progress on this initiative, we still are experiencing some COVID-related disruptions at certain facilities.

user
compname reports q3 adjusted earnings per share $0.48.
compname reports third quarter results including 32% increase in orders and record backlog; signs definitive agreement to acquire deist industries, inc..
q3 adjusted earnings per share $0.48.
q3 gaap earnings per share $0.47.
q3 sales rose 7 percent to $298 million.
sees fy adjusted earnings per share $1.68 to $1.78.

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