Federal Signal (FSS) - 2020 Q4 - Annual Report

PART I Business Federal Signal Corporation operates two segments: Environmental Solutions and Safety and Security Systems, manufacturing specialized vehicles and warning systems, with a 2020 backlog of $304 million - The company's business is divided into two reportable segments: the Environmental Solutions Group and the Safety and Security Systems Group[18] Order Backlog (as of Dec 31) | Year | Backlog (in millions) | | :--- | :--- | | 2020 | $304 | | 2019 | $387 | - As of December 31, 2020, the company employed approximately 3,500 people across five countries, with about 54% of the total workforce being U.S. hourly workers[33] - The company highlights its commitment to diversity, noting that two of its seven directors are female, and its CEO is female, placing it in the top 5% of Russell 3000 Index companies; 50% of its executive officers are female[35][36] Risk Factors The company faces significant risks from U.S. economic dependence, the COVID-19 pandemic, international operations, and product liability claims - In 2020, approximately 77% of net sales were generated in the U.S., making the company's financial results highly subject to U.S. economic conditions and municipal government spending[57] - The COVID-19 pandemic presents significant and unpredictable risks, including potential disruptions to operations, supply chains, customer demand, and the financial health of dealers and municipal customers[58][59] - International operations, which accounted for approximately 23% of net sales in 2020, expose the company to risks from foreign laws, political instability, tariffs, and currency fluctuations[61] - The company faces exposure to product liability claims, including lawsuits from firefighters claiming hearing impairment from sirens; while insured, a significant adverse judgment could materially impact financial results[84] - As of December 31, 2020, goodwill and intangible assets represented 33% and 13% of total consolidated assets, respectively, with impairment posing a negative financial impact[86] Unresolved Staff Comments The company reports no unresolved staff comments - None[87] Properties As of December 31, 2020, the company operates 15 manufacturing plants globally, totaling 2.8 million square feet, with 48% owned and 52% leased - The company utilizes 15 principal manufacturing plants: 11 in the U.S., two in Europe, one in Canada, and one in South Africa[88] Facility Space Breakdown (as of Dec 31, 2020) | Category | Square Feet (millions) | Ownership Status | | :--- | :--- | :--- | | Manufacturing | ~1.9 | 48% Owned | | Sales, Service, Warehousing, Office | ~0.9 | 52% Leased | | Total | ~2.8 | | Legal Proceedings Information regarding the company's legal proceedings is incorporated by reference from Note 13 to the consolidated financial statements - Details on legal proceedings are provided in Note 13 of the consolidated financial statements[90] Mine Safety Disclosures This item is not applicable to the company - Not applicable[91] PART II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's common stock trades on NYSE under "FSS", with two active stock repurchase programs totaling $90.5 million available, and its five-year cumulative return outperformed key indices - The company's common stock is traded on the NYSE under the symbol "FSS"[93] - The Board of Directors authorized two stock repurchase programs: one for up to $75.0 million in November 2014 and an additional one for up to $75.0 million in March 2020; as of Q4 2020, $90.5 million was available for future repurchases[97][98] Five-Year Cumulative Total Return Comparison (Base $100) | Index | 2015 | 2016 | 2017 | 2018 | 2019 | 2020 | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Federal Signal Corp. | $100.00 | $100.52 | $131.48 | $131.98 | $216.33 | $224.93 | | Russell 2000 | $100.00 | $121.31 | $139.08 | $123.76 | $155.35 | $186.36 | | S&P Midcap 400 | $100.00 | $120.74 | $140.35 | $124.80 | $157.49 | $179.00 | | S&P Industrials | $100.00 | $118.86 | $143.86 | $124.74 | $161.38 | $179.23 | Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses 2020 financial performance, highlighting COVID-19 impacts, cost-saving measures, strong adjusted EBITDA margin, increased operating cash flow, and robust liquidity COVID-19 Update and 2020 Performance The company managed COVID-19 impacts with safety measures and cost-saving actions, achieving strong 2020 financial performance and maintaining robust liquidity - In response to the pandemic, the company implemented cost-saving actions including temporary salary reductions for leadership, furloughs for approximately 400 employees, and permanent reductions impacting about 200 employees[110][112] Key Financial Highlights for FY 2020 | Metric | Value (in millions) | | :--- | :--- | | Operating Income | $131.4 | | Income from Continuing Operations | $96.1 | | Adjusted EBITDA* | $182.2 | | Adjusted EBITDA Margin* | 16.1% | | Cash Flow from Operations | $136.3 (+32% YoY) | - The company ended 2020 with a strong liquidity position, holding $82 million in cash and having $280 million of availability under its revolving credit facility[110][113] Results of Operations Consolidated net sales decreased 7% to $1,130.8 million in 2020, with operating income down 11% to $131.4 million, reflecting declines in both segments despite an improved adjusted EBITDA margin Consolidated Results of Operations (FY 2020 vs. FY 2019) | Metric | 2020 | 2019 | Change | | :--- | :--- | :--- | :--- | | Net Sales | $1,130.8M | $1,221.3M | -7% | | Gross Profit | $293.6M | $322.8M | -9% | | Operating Income | $131.4M | $147.1M | -11% | | Income from Cont. Ops. | $96.1M | $108.4M | -11% | | Diluted EPS - Cont. Ops. | $1.56 | $1.76 | -$0.20 | | Adjusted EBITDA | $182.2M | $191.3M | -5% | | Adjusted EBITDA Margin | 16.1% | 15.7% | +0.4% | - The Environmental Solutions Group's net sales decreased by $77.1 million (8%) and operating income decreased by $15.1 million (11%) in 2020 compared to 2019[119][131][137] - The Safety and Security Systems Group's net sales decreased by $13.4 million (6%) and operating income decreased by $3.1 million (8%) in 2020 compared to 2019[120][138][143] Financial Condition, Liquidity and Capital Resources The company's liquidity strengthened in 2020, with cash increasing to $81.7 million and operating cash flow rising 32% to $136.3 million, supported by a $500 million revolving credit facility Cash and Cash Equivalents (Year-End) | Year | Amount (in millions) | | :--- | :--- | | 2020 | $81.7 | | 2019 | $31.6 | | 2018 | $37.4 | - Net cash provided by continuing operating activities increased by $32.9 million (32%) to $136.3 million in 2020, primarily due to favorable working capital changes and deferral of $7.3 million in payroll taxes under the CARES Act[149] - The company has a $500 million revolving credit facility (2019 Credit Agreement) maturing in 2024; as of December 31, 2020, $209.4 million was drawn, with $280.3 million of net availability[154][160] - Anticipated capital expenditures for 2021 are projected to be in the range of $20 million to $25 million[163] Critical Accounting Policies and Estimates Management's critical accounting policies involve significant estimates for goodwill and indefinite-lived intangible asset impairment tests, revenue recognition, and income tax valuation allowances, with no impairments found in 2020 - The annual goodwill impairment test was performed as of October 31, 2020; a quantitative test on one reporting unit indicated its fair value exceeded its carrying value by approximately 50%, and qualitative tests on other units concluded impairment was not likely[173][182] - Indefinite-lived intangible assets, primarily trade names, were tested for impairment in 2020; a quantitative test on one asset showed its fair value exceeded carrying value by approximately 70%, and qualitative tests on others showed no likely impairment[184][187] - Revenue is generally recognized at a point in time when control of products or services transfers to the customer, which for most product sales occurs at the time of shipment[190] - The company maintains a valuation allowance against deferred tax assets when it is more likely than not that they will not be realized; as of December 31, 2020, the total valuation allowance was $8.8 million[195][197] Quantitative and Qualitative Disclosures about Market Risk The company is exposed to market risks from interest rate and foreign exchange rate changes, with a 1% variable rate change impacting interest expense by $1.3 million - A hypothetical 1% increase or decrease in variable interest rates on the company's total debt would change annual interest expense by approximately $1.3 million[201] - A hypothetical 10% appreciation of the U.S. dollar against other currencies is estimated to reduce full-year net sales by approximately 2% and operating income by approximately 1%[202] Financial Statements and Supplementary Data This section presents the company's audited consolidated financial statements for 2020, 2019, and 2018, along with Deloitte & Touche LLP's report, covering balance sheets, income statements, cash flows, and detailed notes Consolidated Balance Sheet Data (as of Dec 31) | (in millions) | 2020 | 2019 | | :--- | :--- | :--- | | Total Assets | $1,208.8 | $1,165.5 | | Total Current Assets | $405.5 | $360.7 | | Goodwill | $394.2 | $388.8 | | Total Liabilities | $506.7 | $523.9 | | Total Current Liabilities | $148.4 | $160.2 | | Long-term Borrowings | $209.8 | $220.3 | | Total Stockholders' Equity | $702.1 | $641.6 | Consolidated Cash Flow Summary | (in millions) | 2020 | 2019 | 2018 | | :--- | :--- | :--- | :--- | | Net Cash from Operating Activities | $136.2 | $103.1 | $92.8 | | Net Cash for Investing Activities | $(34.4) | $(84.4) | $(11.0) | | Net Cash for Financing Activities | $(53.4) | $(24.6) | $(81.2) | | Increase (Decrease) in Cash | $50.1 | $(5.8) | $(0.1) | - The independent auditor, Deloitte & Touche LLP, identified the valuation of goodwill for one reporting unit as a critical audit matter due to the significant and sensitive assumptions used in the quantitative assessment[214][217] Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The company reports no changes in or disagreements with its accountants on accounting and financial disclosure - None[471] Controls and Procedures As of December 31, 2020, the CEO and CFO concluded disclosure controls and internal control over financial reporting were effective, with no material changes in the most recent quarter - Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were effective as of December 31, 2020[473] - Management assessed internal control over financial reporting as effective as of December 31, 2020, based on the COSO framework (2013)[474] Other Information The company issued a press release and presentation slides on February 25, 2021, announcing Q4 and full-year 2020 financial results, filed as exhibits to this Form 10-K - On February 25, 2021, the company issued a press release and presentation slides for its Q4 and full-year 2020 financial results, which are filed as exhibits 99.1 and 99.2[477] PART III Directors, Executive Officers and Corporate Governance Information regarding the company's directors, executive officers, and corporate governance practices is incorporated by reference from the 2021 proxy statement - Information for this section is incorporated by reference from the company's 2021 definitive proxy statement[480][481] Executive Compensation Detailed information regarding executive compensation is incorporated by reference from the company's 2021 definitive proxy statement - Information for this section is incorporated by reference from the company's 2021 definitive proxy statement[483] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information regarding security ownership and equity compensation plans is incorporated by reference from the company's 2021 definitive proxy statement - Information for this section is incorporated by reference from the company's 2021 definitive proxy statement[484] Certain Relationships and Related Transactions, and Director Independence Information regarding related party transactions and director independence is incorporated by reference from the company's 2021 definitive proxy statement - Information for this section is incorporated by reference from the company's 2021 definitive proxy statement[485] Principal Accountant Fees and Services Information regarding fees paid to and services provided by the principal accountant is incorporated by reference from the company's 2021 definitive proxy statement - Information for this section is incorporated by reference from the company's 2021 definitive proxy statement[485] PART IV Exhibits, Financial Statement Schedules This section lists the financial statements, financial statement schedules, and exhibits filed as part of the Form 10-K, including consolidated financial statements and an index of all exhibits - This section incorporates the consolidated financial statements from Item 8 and includes Schedule II — Valuation and Qualifying Accounts[487] - An index of all filed exhibits is provided, including governance documents, material contracts, and Sarbanes-Oxley certifications[488][497] Form 10-K Summary The company indicates that no Form 10-K summary is provided - None[489]