Federal Signal Corporation — 2018 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2018. The filing also reports fourth-quarter results; it is an annual report, not a standalone quarterly filing. Federal Signal designs and supplies environmental maintenance vehicles and equipment, and safety, security and communications products, through its Environmental Solutions and Safety and Security Systems groups.
Financial performance and position
| Metric | 2018 | 2017 | Change / context |
|---|---|---|---|
| Net sales | $1,089.5 million | $898.5 million | Up 21%; organic growth approximately 12% |
| Gross profit / margin | $282.1 million / 25.9% | $221.2 million / 24.6% | Margin improved 1.3 percentage points |
| Operating income / margin | $121.5 million / 11.2% | $73.6 million / 8.2% | Income up 65%; margin up 3.0 points |
| Continuing-operations income | $93.7 million | $60.5 million | Up 55% |
| Net income | $94.0 million | $61.6 million | Includes $0.3 million gain from discontinued operations |
| Diluted EPS, continuing operations | $1.53 | $1.00 | Up 53% |
| Adjusted EBITDA / margin | $160.5 million / 14.7% | $113.5 million / 12.6% | Non-GAAP; EBITDA up 41% |
| Continuing operating cash flow | $92.8 million | $73.5 million | Up 26% |
| Capital expenditures | $14.1 million | $8.0 million | Excludes announced future Vactor expansion spending |
| Cash and total debt | $37.4 million / $210.1 million | $37.5 million / $277.7 million | Debt reduced by $62.1 million during 2018 |
At year-end, total assets were $1,023.8 million and stockholders’ equity was $530.1 million. The company had $209.4 million drawn on its $400 million revolving facility, $11.3 million of undrawn letters of credit and $179.3 million of net borrowing availability. The weighted-average interest rate on long-term borrowings was 3.3%; approximately $209.6 million of borrowings mature in 2021. The company reported compliance with its credit covenants.
Fourth-quarter 2018 net sales were $279.4 million, versus $247.6 million in fourth-quarter 2017. Continuing-operations income was $32.2 million versus $29.3 million; diluted continuing-operations EPS was $0.53 versus $0.48. Fourth-quarter 2018 continuing income included an $8.6 million tax-planning benefit.
Segments, orders and year-over-year changes
- Environmental Solutions: Sales were $863.5 million, up 25%; operating income was $113.0 million, up 56%, and operating margin was 13.1% versus 10.5%. Growth reflected organic demand for vacuum trucks and sewer cleaners, aftermarket sales and a full year of TBEI results versus seven months in 2017.
- Safety and Security Systems: Sales were $226.0 million, up 10%; operating income was $34.1 million, up 26%, and operating margin was 15.1% versus 13.1%. Higher global public-safety sales contributed to growth.
- Orders and backlog: Total orders rose 15% to $1,173.2 million. Year-end backlog increased 31% to $337.7 million, primarily on demand for vacuum trucks, sewer cleaners and street sweepers; management expected substantially all of that backlog to be completed during 2019.
- Cash deployment: Operating cash flow funded $62.1 million of net debt repayment, $18.7 million of dividends, $1.2 million of share repurchases and $14.1 million of capital expenditures.
Outlook, risks and unusual items
- The filing provides no specific 2019 revenue or earnings guidance. Management cited continued investment in organic growth, product development, manufacturing efficiency and potential strategic acquisitions. It planned up to $25 million for the Vactor facility expansion and forecast $15–$20 million of 2019 capital expenditures excluding that project.
- Tax results are not directly comparable: 2017 included a $23.0 million tax benefit from U.S. tax-rate remeasurement, while 2018 included an $8.6 million benefit from a Spanish tax-planning strategy. The effective tax rate was 16.0% in 2018 versus 0.8% in 2017.
- Revenue adoption of Topic 606 reduced reported 2018 sales and cost of sales by $15.3 million each, with no gross-profit impact. The filing says adoption had no material overall impact on financial position, results or cash flows.
- Risks include dependence on U.S. economic and municipal spending (about 78% of sales), industrial cyclicality, competition and pricing pressure, tariffs and foreign-exchange exposure, supply availability and costs, dealer financing, cyber threats, and debt covenant restrictions. A 10% U.S. dollar appreciation was estimated to reduce annual sales by about 2% and operating income by about 1%.
- Firefighter hearing-loss litigation remains a material matter to monitor. The company recorded an estimated liability for a proposed settlement framework covering eligible claimants; it said a possible incremental loss was not expected to be material. A class-certification hearing in the Cook County matter was scheduled for March 2019. Pension plans were approximately 79% funded overall, and pension funding costs can change with asset returns and discount rates.
- Other items include a $2.6 million increase in the non-U.S. pension obligation related to a U.K. court ruling, and a $0.4 million environmental remediation reserve for a discontinued Texas facility. The auditor gave an unqualified opinion on the financial statements and internal controls; management also concluded disclosure controls were effective.
Investor verification priorities
- Confirm how much of order and backlog growth is organic versus acquisition-related, and whether the backlog converts to sales and cash as expected in 2019.
- Track margin durability against higher material costs, pricing, product mix and continued manufacturing-efficiency initiatives.
- Review the litigation settlement’s claimant eligibility, final cost, insurance recoveries and any remaining claims not covered by the framework.
- Monitor debt repayment, 2021 maturity refinancing or repayment plans, revolver availability, covenant headroom and planned Vactor expansion spending.
- Assess the sustainability of earnings and cash flow after removing the 2018 tax-planning benefit and considering pension funding, working-capital needs and acquisition effects.