Federal Signal Corporation (NYSE: FSS) — 2015 Form 10-K
Reporting period: Fiscal year ended December 31, 2015. The filing also reports fourth-quarter results; amounts below are in U.S. dollars. Prior periods have been recast to show the Fire Rescue Group as discontinued operations.
Business context
Federal Signal makes environmental equipment—including street sweepers, sewer cleaners and vacuum trucks—and safety, security and communications systems. Its continuing businesses are Environmental Solutions and Safety and Security Systems. Approximately 75% of 2015 net sales were in the U.S. The company completed the sale of its Bronto Fire Rescue business after year-end, on January 29, 2016.
Financial results and liquidity
| Metric | 2015 | 2014 |
|---|---|---|
| Net sales | $768.0 million | $779.1 million |
| Gross profit / gross margin | $225.6 million / 29.4% | $208.7 million / 26.8% |
| Operating income / operating margin | $103.2 million / 13.4% | $88.7 million / 11.4% |
| Income from continuing operations | $65.8 million | $59.7 million |
| Net income | $63.5 million | $63.7 million |
| Diluted EPS from continuing operations | $1.04 | $0.94 |
| Continuing operating cash flow | $91.1 million | $81.1 million |
| Capital expenditures | $9.6 million | $13.7 million |
| Total debt / debt-to-adjusted-EBITDA | $44.1 million / 0.4x | $50.2 million / 0.5x |
Cash and cash equivalents of continuing operations were $76.0 million at year-end, versus $24.1 million a year earlier; cash exceeded total debt by $31.9 million. The company reported no year-end borrowings on its revolving facility and $130.8 million of net availability under the then-current facility. The January 2016 credit agreement replaced it with a $325 million revolving facility maturing in 2021. The company subsequently repaid the remaining $43.4 million of principal on its prior term loan.
Fourth-quarter 2015 net sales were $186.4 million, continuing-operations income was $17.4 million, and net income was $11.5 million; diluted EPS was $0.18. In fourth-quarter 2014, the respective figures were $209.1 million, $19.9 million, $23.8 million and $0.37.
Material changes versus 2014
- Annual sales decreased 1%, while operating income increased 16% and operating margin expanded 2.0 percentage points. Management attributed the margin improvement primarily to productivity, facility utilization, pricing and favorable product mix.
- Environmental Solutions sales were nearly flat at $534.1 million, but operating income rose to $96.9 million from $81.9 million. Safety and Security Systems sales fell to $233.9 million from $242.5 million; operating income was nearly unchanged at $32.3 million.
- Total orders declined 15% to $686.1 million, and year-end backlog fell 33% to $171.3 million. Environmental Solutions orders decreased 19%; the largest pressure was a $66.1 million decline in vacuum-truck orders amid oil-and-gas market weakness. U.S. municipal and governmental orders declined 11%, principally reflecting fewer large fleet orders.
- Interest expense fell 36% to $2.3 million as debt declined. The effective tax rate increased to 34.1% from 28.4%; 2015 included a net $1.4 million special tax benefit, while 2014 included tax benefits that did not recur.
- Net income was broadly unchanged despite improved continuing operations, partly because discontinued operations recorded a $2.3 million loss in 2015 versus a $4.0 million gain in 2014. The 2015 discontinued-operations result included tax expense related to the Bronto sale.
Outlook, management commentary and notable items
- Management cited cost reduction and manufacturing-efficiency initiatives, disciplined growth, improved return on invested capital and diversification toward industrial customers as priorities. It gave no specific revenue or earnings forecast in the supplied filing text.
- Management expected 2016 capital expenditures of $10 million to $15 million and stated that cash, operating cash flow and available borrowing capacity should meet operating, capital and financial commitments.
- The Bronto sale generated initial proceeds of approximately $83 million; approximately $4 million of remaining consideration was expected after working-capital and net-debt adjustments. Management anticipated a modest disposal gain.
- Federal Signal acquired Canadian vacuum-truck maker Westech in January 2016 for initial consideration of approximately $5.8 million, subject to adjustment. In February 2016 it announced a definitive agreement to acquire JJE for initial consideration of approximately $79 million, plus deferred and contingent payments; closing was expected by the end of the second quarter of 2016.
- The company reinstated dividends in 2014 and paid $15.6 million in 2015. The board declared a further $0.07-per-share quarterly dividend in February 2016. Dividends and buybacks are subject to credit-agreement restrictions and covenant compliance.
- Key risks include cyclical municipal and industrial demand, oil-and-gas weakness, foreign exchange and political exposure, competition and margin pressure, supplier availability, dealer financing, labor relations, pension funding, cybersecurity, and restrictive debt covenants.
- Firefighter hearing-loss lawsuits remain outstanding. The company intends to defend them and has not recorded a reserve for potential losses; adverse outcomes beyond insurance recoveries could result in charges. A Latvian commercial dispute involving Bronto was under appeal; the company estimated a possible charge of zero to approximately $2.5 million after its agreed sharing arrangement with the buyer.
- The U.S. and non-U.S. defined-benefit plans were underfunded by $46.2 million and $1.4 million, respectively, at year-end. Management disclosed a 79% funded status for the plans and expected 2016 contributions of up to $6.3 million in total.
Important facts for investors to verify
- Whether orders and backlog stabilize after the 2015 declines, particularly for vacuum trucks and municipal fleet products.
- Whether stronger operating margins and cash generation persist despite lower sales and industrial-market weakness.
- The final Bronto sale adjustments and disposal accounting, and the status and purchase accounting of Westech and the proposed JJE acquisition.
- Developments in firefighter hearing-loss litigation and the Latvian dispute, including any change in potential exposure or insurance recovery.
- Compliance with the new credit facility’s leverage, interest-coverage and restricted-payment covenants, and the cash impact of acquisitions, pension contributions, dividends and repurchases.
- Management’s assumptions supporting deferred tax assets, pension funding estimates and goodwill valuations. The filing reported no continuing-operations goodwill impairment in 2015.