Federal Signal (FSS) - 2023 Q4 - Annual Report

Part I Business Federal Signal Corporation designs and supplies integrated solutions for municipal and industrial customers through its Environmental and Safety segments - The company operates through two main segments: Environmental Solutions Group (ESG) and Safety and Security Systems Group (SSG)[19] - In 2023, the company completed the acquisitions of Trackless Vehicles Limited and Blasters, Inc., expanding its product portfolio[21] - As of December 31, 2023, the company employed approximately 4,500 people, with 54% being U.S. hourly employees[36] Business Segments The Environmental Solutions Group produces maintenance vehicles while the Safety and Security Systems Group provides public warning systems - The Environmental Solutions Group is a leading manufacturer of street sweepers, sewer cleaners, industrial vacuum loaders, and other specialty vehicles under brands like Elgin, Vactor, Guzzler, and TRUVAC[22] - The Safety and Security Systems Group supplies comprehensive systems for community alerting, emergency vehicles, and industrial communications, with products including lightbars, sirens, and public warning systems[23] Marketing and Distribution The company utilizes a multi-channel approach, including dealer networks and direct sales, to reach its municipal and industrial customers - The Environmental Solutions Group uses both dealer networks and direct sales channels, with the dealer network being a key competitive advantage[24][25] - The Safety and Security Systems Group sells through a multi-channel approach including wholesalers, distributors, and direct sales to a variety of customers[26] Customers and Backlog The company has a diversified customer base and saw its total order backlog increase to $1.03 billion in 2023 Order Backlog Comparison | Metric | Dec 31, 2023 | Dec 31, 2022 | | :--- | :--- | :--- | | Total Backlog | $1.03 billion | $879 million | - No single customer represented 10% or more of net sales in the three years ending December 31, 2023[27] Human Capital Management The company emphasizes an inclusive culture, employee development, and workplace safety for its 4,500 employees - The company is led by a female CEO, and 50% of its executive officers are female, which is significantly above the Russell 3000 Index average[41] - Employees receive over 10 hours of job training per year on average, with some business units averaging nearly 80 hours per year[45] - The company is committed to human rights, aligning with UN principles, and has published a formal human rights policy[38] Risk Factors The company faces macroeconomic, operational, and legal risks, including supply chain disruptions and product liability claims - The company is heavily dependent on the U.S. economy and municipal government spending, which accounted for approximately 78% of net sales in 2023[62] - Supply chain disruptions continue to pose a risk, with ongoing shortages and extended lead times for key components like chassis and electronics, which could limit production[72] - The company is exposed to product liability claims, including lawsuits from firefighters alleging hearing impairment from sirens[91] - Goodwill and intangible assets represent a significant portion of total assets (29% and 13% respectively as of Dec 31, 2023), and impairment could negatively affect financial results[93] Unresolved Staff Comments The company reports no unresolved staff comments from the SEC - None[95] Cybersecurity The company maintains a comprehensive cybersecurity program overseen by the Audit Committee and has experienced no material incidents to date - The company's cybersecurity risk management program is based on standards including the National Institute of Standards and Technology (NIST) Cybersecurity Framework[98] - The Board of Directors has delegated oversight of cybersecurity risk management to the Audit Committee, which receives regular reports from the CIO and CISO[101] Properties The company operates 23 principal manufacturing plants totaling 3.7 million square feet, of which 63% is owned Property Overview (as of Dec 31, 2023) | Metric | Value | | :--- | :--- | | Principal Manufacturing Plants | 23 | | Total Square Footage | ~3.7 million sq ft | | - Manufacturing | ~2.5 million sq ft | | - Sales, Service, Office | ~1.2 million sq ft | | Ownership Status | 63% Owned, 37% Leased | Legal Proceedings Information regarding legal proceedings is detailed in Note 13 of the consolidated financial statements - This section incorporates by reference the information in Note 13 – Legal Proceedings[105] Mine Safety Disclosures This item is not applicable to the company - Not applicable[106] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's stock trades on the NYSE under "FSS" and $53.5 million remains authorized for share repurchases - The company's common stock is listed on the NYSE under the symbol "FSS"[108] - As of December 31, 2023, $53.5 million remained authorized for share repurchases under the plan established in March 2020[112] Q4 2023 Equity Repurchases | Period | Shares Purchased | Average Price Paid Per Share | | :--- | :--- | :--- | | October 2023 | 21,083 | $59.5008 | | November 2023 | — | — | | December 2023 | — | — | Management's Discussion and Analysis of Financial Condition and Results of Operations The company achieved record financial results in 2023, with significant growth in sales, income, and operating cash flow - The company executed its M&A strategy with the acquisitions of Blasters and Trackless, marking 11 acquisitions since 2016[124] 2023 Financial Highlights (YoY) | Metric | 2023 Value | % Change YoY | | :--- | :--- | :--- | | Orders | $1.87 billion | +11% | | Net Sales | $1.72 billion | +20% | | Operating Income | $224.5 million | +40% | | Net Income | $157.4 million | +31% | | Adjusted EBITDA | $286.0 million | +33% | | Operating Cash Flow | $194 million | +171% | Results of Operations Net sales grew 20% to $1.72 billion in 2023, driving a 40% increase in operating income and margin expansion to 13.0% Consolidated Results of Operations (in millions) | Metric | 2023 | 2022 | 2021 | | :--- | :--- | :--- | :--- | | Net Sales | $1,722.7 | $1,434.8 | $1,213.2 | | Gross Profit | $450.2 | $344.9 | $288.7 | | Operating Income | $224.5 | $160.8 | $130.7 | | Net Income | $157.4 | $120.4 | $100.6 | | Diluted EPS | $2.56 | $1.97 | $1.63 | Adjusted EBITDA Reconciliation (in millions) | Metric | 2023 | 2022 | 2021 | | :--- | :--- | :--- | :--- | | Net Income | $157.4 | $120.4 | $100.6 | | Adjustments | $128.6 | $94.6 | $79.9 | | Adjusted EBITDA | $286.0 | $215.0 | $180.5 | | Adjusted EBITDA Margin | 16.6% | 15.0% | 14.9% | Segment Analysis Both segments reported strong growth, with the Environmental Solutions Group's operating income up 45% and the Safety and Security Group's up 34% Environmental Solutions Group Performance (in millions) | Metric | 2023 | 2022 | % Change | | :--- | :--- | :--- | :--- | | Net Sales | $1,437.9 | $1,190.6 | +21% | | Operating Income | $209.2 | $144.5 | +45% | | Operating Margin | 14.5% | 12.1% | +2.4 p.p. | | Total Orders | $1,578.0 | $1,444.2 | +9% | Safety and Security Systems Group Performance (in millions) | Metric | 2023 | 2022 | % Change | | :--- | :--- | :--- | :--- | | Net Sales | $284.8 | $244.2 | +17% | | Operating Income | $54.8 | $40.8 | +34% | | Operating Margin | 19.2% | 16.7% | +2.5 p.p. | | Total Orders | $292.1 | $248.0 | +18% | Financial Condition, Liquidity and Capital Resources Liquidity strengthened with operating cash flow rising to $194.4 million and net borrowing availability of $492.7 million at year-end - The company entered into a new $800 million senior secured credit facility in October 2022, consisting of a $675 million revolver and a $125 million term loan, maturing in 2027[163] - As of December 31, 2023, the company had $492.7 million of net availability for borrowings under its credit facility[169] - Capital expenditures for 2024 are anticipated to be in the range of $35 million to $40 million[172] Cash Flow Summary (in millions) | Cash Flow Activity | 2023 | 2022 | 2021 | | :--- | :--- | :--- | :--- | | Net Cash from Operating Activities | $194.4 | $71.8 | $101.8 | | Net Cash for Investing Activities | ($83.7) | ($99.7) | ($168.7) | | Net Cash (for)/from Financing Activities | ($97.9) | $35.5 | $26.4 | Critical Accounting Policies and Estimates The company's critical estimates relate to goodwill and intangible assets, for which no impairment was recognized in 2023 - Goodwill is tested for impairment annually at the reporting unit level using qualitative or quantitative assessments[183][184] - The 2023 annual impairment test resulted in no impairment charges for goodwill or indefinite-lived intangible assets[193][199] - For the reporting unit tested quantitatively in 2023, its fair value exceeded its carrying value by more than 20%[192] Quantitative and Qualitative Disclosures about Market Risk The company manages interest rate and foreign exchange risks using derivatives and natural hedges - The company had two interest rate swaps with an aggregate notional amount of $150.0 million to fix the interest rate on a portion of its variable-rate debt[202] - A hypothetical 1% increase or decrease in variable interest rates would change annual interest expense by approximately $1.5 million[202] - A hypothetical 10% appreciation of the U.S. dollar against other currencies would reduce full-year net sales by approximately 2% and operating income by approximately 1%[203] Financial Statements and Supplementary Data This section contains the consolidated financial statements and the independent auditor's report from Deloitte & Touche LLP Report of Independent Registered Public Accounting Firm Deloitte & Touche LLP issued an unqualified opinion on the financial statements and internal controls, identifying goodwill valuation as a critical audit matter - The auditor, Deloitte & Touche LLP, issued an unqualified opinion on both the financial statements and the internal control over financial reporting[209][220] - The audit identified the valuation of goodwill for one specific reporting unit as a Critical Audit Matter, citing the high degree of judgment required for assumptions related to projected sales, EBITDA, and market multiples[216] - The audit of internal controls excluded the recently acquired Trackless, which constituted 2% of total assets and 1% of net sales for 2023[222] Notes to Consolidated Financial Statements The notes detail key financial events, including acquisitions, debt facilities, tax matters, and legal contingencies - Note 2 details the 2023 acquisitions of Trackless for C$56.3M plus a contingent earn-out, and Blasters for $13.0M plus a contingent earn-out[296][304] - Note 13 discusses the ongoing hearing loss litigation; the company has entered into settlement frameworks to resolve a majority of claims and has recognized an estimated liability for the potential settlement amount[441][444] - Note 10 reveals the company filed amended tax returns for 2015-2018 to claim a worthless stock deduction, resulting in a refund claim of $13.6 million, which was fully reserved as an unrecognized tax benefit at year-end 2023 but approved for payment in Q1 2024[395] Net Sales by Segment (in millions) | Segment | 2023 | 2022 | 2021 | | :--- | :--- | :--- | :--- | | Environmental Solutions | $1,437.9 | $1,190.6 | $1,004.0 | | Safety and Security Systems | $284.8 | $244.2 | $209.2 | | Total Net Sales | $1,722.7 | $1,434.8 | $1,213.2 | Controls and Procedures Management concluded that the company's disclosure controls and internal control over financial reporting were effective as of year-end 2023 - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of December 31, 2023[505] - Management concluded that the company's internal control over financial reporting was effective as of December 31, 2023, based on the COSO framework (2013)[506] - The 2023 acquisition of Trackless was excluded from management's assessment of internal controls over financial reporting[507] Part III Directors, Executive Officers and Corporate Governance Information regarding directors, officers, and governance is incorporated by reference from the 2024 proxy statement - This section incorporates information by reference from the company's 2024 definitive proxy statement[513][514][515] Executive Compensation Information regarding executive compensation is incorporated by reference from the 2024 proxy statement - This section incorporates information by reference from the company's 2024 definitive proxy statement[516] 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 2024 proxy statement - This section incorporates information by reference from the company's 2024 definitive proxy statement[517] Certain Relationships and Related Transactions, and Director Independence Information regarding related party transactions and director independence is incorporated by reference from the 2024 proxy statement - This section incorporates information by reference from the company's 2024 definitive proxy statement[518] Principal Accounting Fees and Services Information regarding accountant fees and services is incorporated by reference from the 2024 proxy statement - This section incorporates information by reference from the company's 2024 definitive proxy statement[518] Part IV Exhibits, Financial Statement Schedules This section lists the financial statements and exhibits filed with the report - The consolidated financial statements are contained under Item 8 of this Form 10-K[520] - All financial statement schedules have been omitted because they are not required or are inapplicable[520] Form 10-K Summary No Form 10-K summary is provided - None[522]