Federal Signal Corporation — FY2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017. The filing also presents unaudited fourth-quarter results. Federal Signal designs and supplies environmental maintenance and infrastructure vehicles and equipment, and safety, security and communications systems. Its two reportable segments are Environmental Solutions and Safety and Security Systems.
Financial performance and liquidity
| Metric | FY2017 | FY2016 |
|---|---|---|
| Net sales | $898.5 million | $707.9 million |
| Gross profit / gross margin | $221.2 million / 24.6% | $183.1 million / 25.9% |
| Operating income / margin | $67.1 million / 7.5% | $57.7 million / 8.2% |
| Income from continuing operations | $60.5 million | $39.4 million |
| Net income | $61.6 million | $43.8 million |
| Diluted EPS from continuing operations | $1.00 | $0.64 |
| Adjusted EBITDA and margin (non-GAAP) | $113.1 million / 12.6% | $83.5 million / 11.8% |
| Cash from continuing operating activities | $73.5 million | $26.7 million |
- Sales rose 27%; higher acquisition-related revenue and stronger Environmental Solutions sales drove growth. Environmental Solutions sales increased 41% to $692.6 million. Safety and Security Systems sales fell 5% to $205.9 million.
- Operating income improved 16%, but operating margin declined 0.7 percentage points; gross margin also declined. Increased depreciation and amortization, acquisition-related costs and corporate charges weighed on margins.
- FY2017 income tax expense was $0.5 million, and the effective tax rate was 0.8%, versus 30.6% in 2016. The 2017 result included a $23.0 million deferred-tax benefit from remeasuring U.S. deferred tax balances after the Tax Cuts and Jobs Act; management reported a $20.2 million net benefit from special tax items overall.
- At year-end, cash was $37.5 million, total debt was $277.7 million, and net availability under the $400 million revolving facility was $105.9 million. The company reported compliance with its debt covenants. Debt was predominantly due in 2021; the weighted-average borrowing rate was 3.25%.
- Continuing investing activities used $277.1 million, including $269.2 million paid for TBEI. Capital expenditures were $8.0 million. The company paid $16.8 million in dividends.
- Fourth-quarter net sales were $247.6 million and net income was $30.4 million; continuing-operations income was $29.3 million. The quarter included a substantial tax benefit related primarily to the 2017 Tax Act.
Material changes versus prior periods
- Federal Signal acquired TBEI on June 2, 2017, for total consideration of $268.8 million after working-capital and other post-closing adjustments. TBEI contributed $109.4 million in sales and $6.2 million in operating income after acquisition. The purchase materially increased goodwill and intangible assets.
- The company’s 2016 acquisition of JJE contributed a full year of activity in 2017, versus seven months in 2016. Acquisitions materially affected sales, orders, depreciation and amortization, and comparability.
- Total orders increased 51% to $1,018.0 million; year-end backlog rose 88% to $257.5 million. The filing attributes backlog growth to stronger demand and acquisitions, including $42.5 million of TBEI backlog.
- Debt increased substantially to fund TBEI, though management said it repaid approximately $34 million of net borrowings after the acquisition through year-end.
Outlook, commentary, risks and unusual items
- Management targets profitable revenue above $1 billion by 2020 and expects the TBEI acquisition to support growth and broaden end-market exposure. It forecast a 2018 effective tax rate of 26%–27% and capital expenditures of $15–$20 million. No specific 2018 revenue or earnings guidance is provided in the supplied filing text.
- Management cited disciplined growth, manufacturing efficiency, invested-capital productivity and customer diversification as priorities, including continued “80/20” cost initiatives and investment in new products.
- Key risks include dependence on U.S. municipal and governmental spending, cyclicality in industrial markets, acquisition integration and leverage, competition and margin pressure, supplier availability and input costs, foreign exchange and international risks, pension funding, cyber threats, and product-liability and warranty exposure.
- Firefighter hearing-loss litigation remains a material contingency. The company entered a settlement offer of $700 per plaintiff accepted by 717 plaintiffs; additional cases remain pending. It recorded $1.5 million of hearing-loss settlement charges in 2017 and stated that any incremental loss beyond the accrued amount could not be reasonably estimated. Management intends to defend the claims.
- Other unusual items included a $6.1 million pension settlement charge following lump-sum payments to pension participants, restructuring and acquisition expenses, and a $1.1 million gain from discontinued operations and disposal. The Pearland environmental remediation reserve was $0.5 million; management did not expect it to materially affect results, financial position or cash flow.
- Auditors issued unqualified opinions on the financial statements and internal control. The internal-control assessment excluded TBEI, whose sales and assets each represented approximately 12% of consolidated amounts.
Investor verification priorities
- Assess underlying earnings and the sustainability of growth apart from the one-time tax benefit and acquired revenue; reconcile GAAP results to adjusted EBITDA.
- Verify TBEI and JJE integration, realized synergies, margins, cash generation and acquisition-related amortization against management’s expectations.
- Review debt reduction, facility availability, interest-rate exposure and covenant headroom following the TBEI-funded borrowing.
- Track order conversion and backlog quality, especially the contribution from acquisitions versus organic demand.
- Monitor the status, insurance recoveries, accrual adequacy and potential exposure from firefighter hearing-loss litigation, as well as pension funding and other contingencies.
- Confirm final tax effects of the 2017 Tax Act and the actual 2018 effective tax rate; the filing describes 2017 tax estimates as provisional.