Federal Signal Corporation — FY 2012 Form 10-K
Reporting period: Fiscal year ended December 31, 2012. This is an annual report; fourth-quarter figures are included where relevant. Federal Signal manufactures safety and security systems, aerial platforms, street sweepers, vacuum trucks and waterblasting equipment. Its continuing operations comprise Safety and Security Systems, Fire Rescue and Environmental Solutions. The company completed the sale of its Federal Signal Technologies (FSTech) Group in September 2012 and reports it as discontinued operations.
Financial performance and liquidity
| Metric | 2012 | 2011 |
|---|---|---|
| Net sales | $803.2 million | $688.7 million |
| Gross profit / gross margin | $189.8 million / 23.6% | $155.4 million / 22.6% |
| Operating income / operating margin | $51.5 million / 6.4% | $33.2 million / 4.8% |
| Continuing-operations income | $22.0 million | $13.1 million |
| Net loss, including discontinued operations | $(27.5) million | $(14.2) million |
| Operating cash flow | $23.2 million | $3.8 million |
| Capital expenditures | $13.0 million | $13.5 million |
| Total debt / cash | $157.8 million / $29.7 million | $222.2 million / $9.5 million |
Sales rose 17%, primarily on higher shipment volumes across all continuing segments. Gross margin improved with higher volume and favorable product mix. Operating income increased 55%; interest expense rose to $21.4 million from $16.4 million, and 2012 included $3.5 million of debt-settlement charges and $1.4 million of restructuring costs. Diluted continuing-operations EPS was $0.35, versus $0.21; net loss per share was $(0.44), versus $(0.23).
Orders were $826.3 million, down 0.6%, while year-end backlog increased to $318.4 million from $295.2 million; most of the backlog was expected to be completed in 2013. Environmental Solutions led continuing-segment sales and operating-income growth: sales of $427.8 million and operating income of $42.0 million. Safety and Security Systems reported $240.3 million sales and $27.9 million operating income; Fire Rescue reported $135.1 million and $8.9 million, respectively.
Reported operating cash flow includes $49.2 million from continuing operations and a $26.0 million use in discontinued operations. The $82.1 million of cash received at the FSTech sale closing supported debt repayments; additional proceeds were held in escrow. Net debt (debt less cash) was $128.1 million, down from $212.7 million. Year-end ABL borrowing availability, net of borrowings and letters of credit, was $25.7 million. The company reported compliance with debt covenants at year-end.
Material changes and unusual items
- FSTech was sold for $110.0 million, subject to working-capital adjustments. Federal Signal recorded a $34.7 million disposal loss; total 2012 discontinued-operations loss was $49.5 million. Escrowed proceeds and indemnification obligations could affect the final disposal result.
- On March 13, 2013, the company entered a new $225 million senior secured facility: a $75 million term loan and a $150 million revolving facility, both with five-year terms. The refinancing repaid prior facilities; the company expected $8.7 million of first-quarter 2013 termination charges, including a $4.1 million prepayment premium.
- Fourth-quarter 2012 sales were $217.7 million, continuing-operations income was $4.9 million and net income was $4.8 million. Full-year net loss reflects discontinued operations despite improved continuing results.
- Domestic deferred tax assets remain subject to a substantial valuation allowance; the allowance was $131.8 million at year-end. The reported 2012 effective tax rate was 15.1%, but the company recorded no tax benefit for domestic operating losses.
Outlook, risks and contingencies
Management forecast 2013 capital expenditures of approximately $15 million and stated that cash flow and borrowing capacity should meet operating and capital needs. No specific revenue or earnings guidance is provided. Management cited cyclical municipal, governmental and industrial demand, customer access to financing, international and currency exposure, competition, supplier availability, restructuring and impairment risks, and pension funding as material uncertainties.
The company had no reserve for potential losses from firefighter hearing-loss litigation. A $0.4 million verdict against the company had been affirmed on appeal; the company planned further review, and a class-certification order and trial were pending. Other legal claims, including Neology patent suits, and escrowed sale proceeds create contingencies. The company also retained environmental-remediation and product-liability obligations from discontinued businesses; the Pearland site reserve was $1.8 million and was not expected by management to be material.
Defined-benefit pension plans were approximately 69% funded, and the company expected 2013 contributions of up to $9.1 million in total. Goodwill was $272.3 million, approximately 44% of total assets; continuing-operation goodwill impairment tests found no impairment in 2012. Auditors issued unqualified opinions on the financial statements and internal controls.
Important facts for investors to verify
- Whether continuing-segment demand, margins and backlog convert into revenue and cash in 2013, particularly given flat total orders and weaker U.S. industrial/commercial orders.
- The terms, borrowing levels, covenant headroom and ongoing costs of the March 2013 refinancing, including the expected $8.7 million charge.
- The final FSTech escrow recoveries, indemnification claims and any resulting change to the disposal loss.
- Developments in firefighter litigation and other legal matters, for which potential losses may be difficult to estimate and no hearing-loss reserve was recorded.
- Cash-flow quality, inventory growth, pension funding needs and the realizability of deferred tax assets subject to valuation allowances.