Federal Signal Corporation — FY2013 Form 10-K
Reporting period: Fiscal year ended December 31, 2013; comparative figures are for FY2012 unless noted. Federal Signal designs and manufactures environmental vehicles and equipment, safety and security systems, and aerial platforms for fire and rescue, serving municipal, governmental, industrial and commercial customers worldwide.
Financial performance
| Metric | FY2013 | FY2012 |
|---|---|---|
| Net sales | $851.3 million | $803.2 million |
| Gross profit / margin | $205.1 million / 24.1% | $189.8 million / 23.6% |
| Operating income / margin | $70.6 million / 8.3% | $51.5 million / 6.4% |
| Income from continuing operations | $160.2 million | $22.0 million |
| Net income (loss) | $160.0 million | ($27.5 million) |
| Diluted EPS from continuing operations | $2.53 | $0.35 |
| Cash provided by continuing operating activities | $80.3 million | $49.2 million |
| Capital expenditures | $17.0 million | $13.0 million |
| Total debt at year-end | $92.1 million | $157.8 million |
| Cash at year-end | $23.8 million | $29.7 million |
Revenue rose 6%, and operating income increased 37%. Environmental Solutions led growth: sales increased 11% to $474.0 million and operating income rose 39% to $58.2 million. Safety and Security Systems sales were nearly flat at $238.9 million, while operating income fell to $26.1 million from $27.9 million. Fire Rescue sales rose 2% to $138.4 million; operating income was essentially unchanged at $9.0 million.
Net income was heavily affected by a $107.2 million income tax benefit, including release of valuation allowances on deferred tax assets. The company reported a $102.4 million release related to U.S. deferred tax assets, plus other valuation-allowance releases and tax adjustments. This benefit was largely an accounting benefit, not operating cash generation. Continuing-operations income before tax was $53.0 million. The company also recorded $8.7 million in debt-settlement charges related to refinancing.
Liquidity, debt and capital
Continuing-operations operating cash flow increased by $31.1 million, supported by higher earnings and lower working capital. Debt declined $65.7 million year over year; debt to adjusted EBITDA improved to 1.1x from 2.4x. The March 2013 refinancing established a five-year, $225 million senior secured facility, comprising a $75 million term loan and $150 million revolving facility. At year-end, $20.0 million was drawn on the revolver, $26.4 million of letters of credit were outstanding, and reported net borrowing availability was $103.6 million. The weighted average interest rate on long-term borrowings, including the swap, was 2.75%; interest expense decreased 59% to $8.8 million. The company was in compliance with debt covenants at year-end.
Cash and cash equivalents were $23.8 million, of which $19.2 million was held by foreign subsidiaries. No dividends were declared in 2013 or 2012. Management expected 2014 capital expenditures of $15 million to $20 million and considered cash flow and borrowing capacity adequate for operating and capital needs.
Changes versus the prior year
- Orders rose 1% to $836.8 million, while year-end backlog declined 4% to $305.8 million. Management attributed the backlog decline in part to higher production clearing earlier long-lead sewer-cleaner orders and to timing and lower demand in some international markets.
- U.S. industrial and commercial orders increased 8.6%; U.S. municipal and governmental orders increased 1.7%; non-U.S. orders decreased 4.0%.
- Environmental Solutions benefited from higher shipment volumes, increased capacity and improved pricing. Safety and Security Systems results were pressured by costs and inefficiencies from a U.S. ERP implementation, lower fixed-cost absorption and weaker international demand. Fire Rescue sales benefited from currency and product mix, partly offset by lower unit volumes.
- Cash from continuing operations increased, while debt and interest expense fell following the refinancing and debt repayments. Discontinued-operations loss narrowed to $0.2 million from $49.5 million, primarily because the FSTech business had been sold in 2012.
Outlook, risks and unusual items
Management emphasized organic growth, customer diversification, manufacturing efficiency and capacity investment, particularly in Environmental Solutions. It did not provide quantified revenue or earnings guidance in the supplied filing text. The company cited cyclical municipal, governmental and industrial demand; foreign economic, political and currency exposure; competitive and pricing pressure; customer financing availability; supplier and dealer disruptions; labor, pension and regulatory costs; and restrictive debt covenants as risks.
Material contingencies and estimates include firefighter hearing-loss litigation involving Federal Signal sirens; the company said it would defend the claims and had not recorded a reserve for potential losses. A 2013 warranty accrual of $0.8 million related to a specific matter; total warranty liabilities were $8.4 million. Environmental remediation reserves for the former Pearland, Texas facility were $1.4 million. The company reported goodwill of $273.8 million, about 42% of total assets, and no goodwill impairment in continuing operations in 2013. Its U.S. defined-benefit pension plan was underfunded by $29.9 million; expected 2014 contributions were up to $8.8 million for U.S. plans and $1.3 million for non-U.S. plans.
Key facts for investors to verify
- How much of FY2013 earnings and EPS reflects the deferred-tax valuation-allowance release, and what sustainable earnings look like excluding that benefit.
- Whether operating cash flow, margins and order trends can be maintained as the company works through lower backlog and uneven segment demand.
- Whether ERP implementation costs and disruptions in Safety and Security Systems ease, and whether international orders recover.
- Debt-facility covenant headroom, revolver availability and the company’s ability to meet scheduled debt and pension funding obligations.
- Potential outcomes and financial exposure from siren litigation, warranty matters, environmental remediation and remaining discontinued-operation obligations.