Federal Signal Corporation (NYSE: FSS) — 2019 Form 10-K
Business context and reporting period
Fiscal year ended December 31, 2019; comparisons are primarily with fiscal 2018. Federal Signal manufactures environmental and infrastructure equipment, including sewer cleaners, sweepers and excavation trucks, and safety and security systems. It also provides parts, service, rentals and training. Its two reportable segments are Environmental Solutions and Safety and Security Systems.
Financial performance and liquidity
| Metric | 2019 | 2018 |
|---|---|---|
| Net sales | $1,221.3 million | $1,089.5 million |
| Operating income / margin | $147.1 million / 12.0% | $121.5 million / 11.2% |
| Income from continuing operations | $108.4 million | $93.7 million |
| Diluted EPS from continuing operations | $1.76 | $1.53 |
| Adjusted EBITDA / margin (non-GAAP) | $191.3 million / 15.7% | $158.6 million / 14.6% |
| Cash from continuing operating activities | $103.4 million | $92.8 million |
| Total orders / year-end backlog | $1,269.0 million / $386.9 million | $1,173.2 million / $337.7 million |
- Sales grew 12% year over year, including approximately 8% organic growth. Gross margin improved to 26.4% from 25.9%.
- Environmental Solutions sales rose 15% to $992.9 million; operating income increased 23% to $139.4 million, with a 14.0% margin. Safety and Security Systems sales edged up 1% to $228.4 million; operating income grew 13% to $38.6 million, with a 16.9% margin.
- Cash and cash equivalents were $31.6 million at year-end, versus $37.4 million. Current assets were $360.7 million and current liabilities $160.2 million.
- Total debt was $220.5 million, versus $210.1 million. The $500 million revolving facility had $268.9 million of net availability after borrowings and letters of credit; the company reported compliance with its covenants. Weighted-average interest on long-term borrowings was 2.7%.
- Capital expenditures were $35.4 million, up from $14.1 million, largely reflecting Vactor facility expansion. The company paid $19.3 million in dividends and repurchased $1.0 million of shares.
Material changes and unusual items
- The July 2019 acquisition of Mark Rite Lines Equipment Company (MRL) added road-marking and line-removal equipment. MRL contributed $39.7 million of second-half sales and $3.6 million of operating income. The purchase price was approximately $49 million, with a contingent earn-out valued at $4.1 million at year-end, subject to a maximum payment of $15.5 million.
- Backlog increased 15%, primarily on strong demand for sewer cleaners and safe-digging trucks, and higher orders for road-marking equipment and refuse trucks. Management expected substantially all year-end backlog to be produced during 2020.
- The effective tax rate rose to 21.8% from 16.0%, primarily because the prior-year $8.6 million tax-planning benefit did not recur, partly offset by a $0.8 million state valuation-allowance benefit. Acquisition and integration expenses were $2.5 million.
- Adoption of lease accounting rules added operating lease right-of-use assets and liabilities to the balance sheet. It also moved the remaining deferred sale-leaseback gain, net of tax, to opening retained earnings; the change eliminated about $1.9 million of annual gain recognition from earnings.
Outlook, risks and contingencies
- No specific revenue or earnings guidance is provided in the filing. Management expected 2020 capital expenditures of $30 million to $35 million, including plant expansions, and said cash flow and borrowing capacity should support operating, capital and financial needs.
- Management cited growth initiatives, manufacturing efficiency and cost improvement, product development, and potential strategic acquisitions as priorities. Demand is exposed to municipal budgets, the U.S. economic cycle, customer and dealer financing, competition and pricing pressure.
- Other identified risks include material and component availability and cost, foreign exchange and trade conditions, cybersecurity, labor disruption, acquisitions, pension funding, and possible impairment of goodwill or intangible assets. Approximately 78% of 2019 sales were in the U.S.; a hypothetical 10% U.S. dollar appreciation was estimated to reduce annual sales by about 2% and operating income by about 1%.
- Firefighters have brought hearing-loss lawsuits alleging siren-related injury. A global settlement framework was finalized in November 2019, with eligibility and participation still being determined. The company accrued an estimated settlement liability; it said a reasonably possible additional loss was not expected to be material. The filing also describes other product-liability claims and a small environmental remediation reserve for a discontinued business.
Important facts for investors to verify
- How much of sales, order growth and backlog reflects organic demand versus MRL and other acquisitions.
- Whether backlog converts to shipments and cash as expected, particularly in municipal and industrial markets.
- Cash generation after elevated capital spending, acquisition payments, dividends and pension contributions.
- Debt covenant headroom, refinancing exposure at the facility’s 2024 maturity, and the effect of interest-rate or foreign-exchange changes.
- The final cost and scope of the firefighter hearing-loss settlement, and any changes in product-liability or warranty estimates.
- Assumptions underlying goodwill valuations and the earnings impact of the higher tax rate and non-GAAP adjustments.