Federal Signal Corporation — FY2011 Form 10-K
Reporting period: Fiscal year ended December 31, 2011; the filing also reports fourth-quarter results. Dollar amounts are in millions unless stated otherwise. The company designs and manufactures safety and security systems, fire-rescue aerial platforms, environmental vehicles and equipment, and intelligent-transportation technologies, serving public-sector, industrial and commercial customers.
Financial performance and position
| Metric | FY2011 | FY2010 |
|---|---|---|
| Net sales | $795.6 | $726.5 |
| Gross profit / gross margin | $195.0 / 24.5% | $184.2 / 25.4% |
| Operating income (loss) / margin | $3.3 / 0.4% | ($76.9) / (10.6%) |
| Continuing-operations net income (loss) | ($14.4) | ($160.7) |
| Net income (loss) | ($14.2) | ($175.7) |
| Diluted EPS, continuing operations | ($0.23) | ($2.79) |
| Cash from operating activities | $6.3 | $31.2 |
| Capital expenditures | $15.7 | $12.8 |
- Sales increased 9.5%, primarily from higher industrial vacuum-truck and sewer-cleaner shipments and a full year of Sirit and VESystems sales. Gross margin declined 0.9 percentage points.
- FY2011 operating income included $20.6 of FSTech goodwill and intangible-asset impairment charges; fourth-quarter impairments were $14.8 for goodwill and $7.4 for trade names. The goodwill charge remained an estimate pending a detailed analysis expected in Q1 2012; the filing says any adjustment could be material.
- Year-end cash was $9.5, down from $62.1. Working capital was $126.8 and the current ratio was 1.9. Operating cash flow fell to $6.3, primarily reflecting cash used for working capital, including receivables.
- Year-end net debt was $212.8, or 55% of total capitalization, versus $200.3, or 48%, in 2010. Shareholders’ equity declined to $174.7 from $220.9.
- Fourth-quarter sales were $223.3; continuing-operations loss was $16.8 and net loss was $16.6. The quarter included the $22.2 impairment charges.
Segments and changes versus prior period
- Environmental Solutions: Sales rose 15% to $357.8; operating income increased to $24.5 from $17.9. Orders increased 40%, supported by vacuum trucks, sewer cleaners and sweepers.
- Safety and Security Systems: Sales rose 3% to $221.4, but operating income fell to $21.5 from $23.7 amid higher selling costs, commissions and legal expenses.
- Fire Rescue: Sales were nearly flat at $109.5, while operating income declined to $6.6 from $9.4 due to lower volume and unfavorable mix. Orders rose 36%, led by Asian and Australian demand.
- Federal Signal Technologies: Sales increased 14% to $106.9, but the segment recorded a $29.5 operating loss, including $20.6 of impairments. Orders rose to $182.0, including a roughly $68 three-year back-office and operations contract.
- Company-wide orders increased 36.5% to $1,013.4 and backlog nearly doubled to $426.1 from $216.8. Backlog includes multi-year FSTech contracts and is not equivalent to near-term revenue.
- Net loss improved substantially from 2010, when results included $78.9 of goodwill and intangible impairments, an $85.0 domestic deferred-tax valuation allowance and $15.0 of discontinued-operations losses. FY2011 still produced a net loss.
Liquidity, outlook, risks and unusual items
- On February 22, 2012, after year-end, the company refinanced existing debt with a five-year $215 term loan and a $100 asset-based revolving facility, with potential additional revolver availability of up to $25 subject to conditions. The term loan carries stated margins of 9%–11%, depending on rate option; the facilities include financial covenants and collateral requirements.
- Management expected 2012 capital expenditures of approximately $16, subject to a $20 covenant limit, and stated that operating cash flow and borrowing capacity should meet operating and capital needs. No specific earnings or sales guidance is provided in the filing text.
- Dividends were not declared in 2011. Under the new financing agreement, dividends are conditional on no default, a fixed-charge ratio of at least 1.50 and a leverage ratio below 2.00. The company also reported a prior dividend restriction under its amended debt agreements.
- Material risks include cyclical municipal and industrial demand, reliance on customer financing, competition and margin pressure, supply interruptions, foreign-exchange exposure, restrictive debt covenants, pension funding, impairment risk and the ability to realize deferred tax assets. U.S. defined-benefit plans were approximately 68% funded; expected 2012 contributions were up to $11.2 for U.S. plans and $1.5 for non-U.S. plans.
- Contingencies include firefighter hearing-loss litigation: a $3.6 settlement payment was made in 2011 for certain claims, but a class was certified for specified issues in March 2012, with trial scheduled for September 2012. The company says it is considering an appeal and has not recorded a reserve for potential losses from this litigation. A separate patent-infringement case by Neology seeks relief concerning RFID products; a preliminary-injunction hearing was scheduled for May 2012.
- The former Pauluhn facility in Pearland, Texas may require environmental remediation. The recorded reserve was $2.2 at year-end; the estimated remediation range was $1.6–$2.6, and management did not expect a material effect on results, financial position or liquidity.
- Tax valuation allowances totaled $122.9 at year-end, including $13.6 added in 2011; the company recorded no tax benefit for domestic operating losses. A change in estimates or taxable-income outlook could affect future tax expense.
- Revenue-recognition standards adopted in 2011 increased reported revenue by $4.2 and cost of sales by $1.5. The independent auditor gave unqualified opinions on the financial statements and internal control over financial reporting.
Important facts for investors to verify
- Whether FSTech’s impairment estimate changed after the detailed Q1 2012 valuation, and whether further impairments were recorded.
- Actual 2012 cash generation, working-capital trends and revolver availability, alongside compliance with the new facilities’ covenants and liquidity requirements.
- Progress in converting the $426.1 backlog—especially the large multi-year FSTech contract—into recognized revenue and cash collections.
- Developments and potential exposure in the firefighter litigation and Neology patent case, including insurance recoveries and any required accruals.
- Whether pension contributions, environmental remediation costs, or deferred-tax valuation allowances changed materially after year-end.