Federal Signal Corporation — FY2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020. This is an annual filing, not a standalone fourth-quarter report; the supplied filing text does not provide a clear set of Q4 revenue or earnings figures. Federal Signal designs and supplies environmental and infrastructure-maintenance equipment, and public-safety and security systems, with aftermarket parts, service and rentals. Its reportable segments are Environmental Solutions and Safety and Security Systems.
Financial performance and liquidity
| Metric | FY2020 | FY2019 | Change |
|---|---|---|---|
| Net sales | $1,130.8 million | $1,221.3 million | Down 7% |
| Gross profit / gross margin | $293.6 million / 26.0% | $322.8 million / 26.4% | Profit down 9%; margin down 0.4 percentage points |
| Operating income / margin | $131.4 million / 11.6% | $147.1 million / 12.0% | Income down 11% |
| Income from continuing operations | $96.1 million | $108.4 million | Down 11% |
| Net income / diluted continuing-operations EPS | $96.2 million / $1.56 | $108.5 million / $1.76 | Net income down $12.3 million |
| Adjusted EBITDA / margin | $182.2 million / 16.1% | $191.3 million / 15.7% | EBITDA down 5%; margin up 0.4 points |
| Cash from continuing operating activities | $136.3 million | $103.4 million | Up 32% |
Cash and cash equivalents were $81.7 million at year-end, versus $31.6 million a year earlier. Long-term borrowings and finance lease obligations totaled $210.0 million, including $209.4 million drawn under the revolving facility. The $500 million facility had $280.3 million of net borrowing availability; the company was compliant with its financial covenants. The weighted-average borrowing rate was 1.7%. The current ratio was approximately 2.7, based on reported current assets and liabilities.
Capital expenditures were $29.7 million. The company paid $19.4 million in dividends and repurchased $13.7 million of shares. Its defined-benefit pension plans were approximately 84% funded in aggregate at year-end, with funding status affected by lower discount rates.
Changes versus FY2019
- Sales declined $90.5 million, with lower shipments across many Environmental Solutions products and lower Safety and Security Systems sales. Environmental Solutions sales fell 8%; Safety and Security Systems sales fell 6%.
- Total orders declined 17% to $1,047.1 million, and year-end backlog fell 21% to $303.9 million. Management reported sequential order improvement: Q3 orders rose $65 million, or 32%, from Q2; Q4 orders rose $10 million, or 4%, from Q3.
- Lower sales reduced gross profit and operating income. Cost controls and lower selling, engineering, general and administrative expenses partly offset the decline. Safety and Security gross margin fell 2.2 percentage points, primarily due to unfavorable mix.
- Operating cash flow increased by $32.9 million, in part from working-capital timing, lower rental-fleet investment and deferred payroll taxes under the CARES Act. Cash generation therefore includes timing-related factors.
Outlook, risks and unusual items
- Management said the pandemic’s effects on demand, operations, supply chains and customer budgets remained uncertain and could be material; it did not provide a dependable earnings forecast. Facilities remained substantially operational, but labor absences, temporary supplier shutdowns and restrictions on sales activity disrupted operations during the year.
- Management expected substantially completing the December 2020 backlog during 2021, subject to production capacity, labor availability, demand and supply-chain conditions. Planned 2021 capital expenditures were $20 million to $25 million.
- Cost actions included temporary leadership and director fee reductions, rollback of most domestic salaried merit increases, furloughs of approximately 400 employees, permanent workforce reductions affecting approximately 200 employees, and constrained discretionary spending.
- In February 2021, after year-end, the company acquired OSW Equipment & Repair for an initial $52.5 million in cash, funded with cash and revolver borrowings. The purchase price allocation was not yet complete.
- FY2020 included $1.3 million of restructuring charges, $2.3 million of coronavirus-related expenses excluded from adjusted EBITDA, and a $2.3 million charge for withdrawal from a multi-employer pension plan. The withdrawal liability was settled during the year.
- Firefighter hearing-loss litigation remains a contingency. The company recorded an estimated liability for a global settlement framework covering eligible claimants; it said any incremental loss above the accrual was not expected to be material. Other claims could nevertheless have an adverse effect if resolved unfavorably.
- Other key risks include municipal and industrial cyclicality, competitive pricing, supply and chassis availability, dealer financing, foreign exchange and international exposure, debt covenant compliance, pension assumptions, product liability and warranty claims, cybersecurity, and potential goodwill or intangible-asset impairment. No goodwill or indefinite-lived intangible impairment was recorded in 2020.
- Auditors issued unqualified opinions on the financial statements and internal controls. Goodwill valuation for one reporting unit was identified as a critical audit matter; management reported no impairment.
Investor facts to verify
- Whether order intake and backlog recover, and how quickly the $303.9 million backlog converts into shipments and cash.
- How much of the 2020 operating-cash-flow increase reflects sustainable operating performance versus working-capital, rental-fleet and CARES Act timing effects.
- Post-OSW acquisition debt, liquidity, integration progress and purchase accounting once disclosed.
- The adequacy of the hearing-loss litigation accrual and any developments in other legal or warranty matters.
- Progress toward 2021 capital spending plans and the effect of ongoing pandemic, labor and supply-chain disruptions.