FEDERAL SIGNAL CORP /DE/ (FSS) FY 2024 MD&A
This page reproduces the company's own Item 7 MD&A text from the linked SEC filing. It is filer text, not grepcent analysis, scoring, or investment advice.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Objective
Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is designed to provide information that is supplemental to, and shall be read together with, the consolidated financial statements and the accompanying notes included in Item 8, Financial Statements and Supplementary Data, in this Form 10-K. Information in MD&A is intended to provide an analysis of our financial condition and results of operations from management’s perspective and assist the reader in obtaining an understanding of (i) the consolidated financial statements, (ii) the Company’s business segments and how the results of those segments impact the Company’s results of operations and financial condition as a whole, and (iii) how certain accounting principles affect the Company’s consolidated financial statements, and to provide discussion of material events and uncertainties known to management that are reasonably likely to cause reported financial information not to be indicative of future operating results or future financial condition.
See below for discussion and analysis of our financial condition and results of operations for the year ended December 31, 2024 compared to the year ended December 31, 2023. See Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, in our Annual Report on Form 10-K for the year ended December 31, 2023, filed with the SEC on February 27, 2024, for a detailed discussion of our financial condition and results of operations for the year ended December 31, 2023 compared to the year ended December 31, 2022.
Executive Summary
The Company is a leading global manufacturer and supplier of (i) vehicles and equipment for maintenance and infrastructure end-markets, including sewer cleaners, industrial vacuum loaders, safe-digging trucks, street sweepers, waterblasting equipment, road-marking and line-removal equipment, dump truck bodies, trailers, metal extraction support equipment, and multi-purpose maintenance vehicles, and (ii) public safety equipment, such as vehicle lightbars and sirens, industrial signaling equipment, public warning systems, and general alarm/public address systems. In addition, we engage in the sale of parts, service and repair, equipment rentals, and training as part of a comprehensive aftermarket offering to our customer base. We operate 23 manufacturing facilities in five countries and provide products and integrated solutions to municipal, governmental, industrial, and commercial customers in all regions of the world.
As described in Note 17 – Segment Information in Item 8, Financial Statements and Supplementary Data, in this Form 10-K the Company’s business units are organized in two reportable segments: the Environmental Solutions Group and the Safety and Security Systems Group.
Operating and Financial Performance in 2024
Conditions in our end markets remained strong throughout 2024, with robust demand for our products and services. We continued to execute against our organic growth initiatives, and with contributions from our recent value-added acquisitions and additional efficiency gains resulting from the application of our eighty-twenty initiatives, we were able to sustain a high level of financial performance. As the year progressed, we saw improvement in supply chain conditions, which facilitated increased production levels at several of our facilities, and despite some supply chain-related operational inefficiencies early in the year, we were able to deliver record financial results for our stockholders, with 8% net sales growth, double-digit earnings improvement, expansion of margins, and significant improvement in cash flow generation.
Included among the Company’s highlights in 2024 were the following:
•Net sales for the year ended December 31, 2024 were $1.86 billion, the highest level in our history, and an increase of $139 million, or 8% from last year.
•Operating income for the year ended December 31, 2024 was $281.4 million, an increase of $56.9 million, or 25%, from last year.
•Operating margin for the year ended December 31, 2024 was 15.1%, compared to 13.0% in the prior year.
•Net income for the year ended December 31, 2024 was $216.3 million, an increase of $58.9 million, or 37%, from last year.
•Adjusted EBITDA* for the year ended December 31, 2024 was $350.6 million, an increase of $64.6 million, or 23%, from last year.
•Adjusted EBITDA margin* for the year ended December 31, 2024 was 18.8%, up from 16.6% last year.
•Orders for the year were $1.85 billion, the second highest annual orders reported in the Company’s history, contributing to a backlog of $997 million at December 31, 2024.
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•Net cash provided by operating activities for the year ended December 31, 2024 was $231 million, an increase of $37 million, or 19%, from last year.
•With our strong balance sheet, positive operating cash flow, and capacity under our credit facility, we are well positioned to continue to invest in internal growth initiatives, pursue strategic acquisitions, and consider ways to return value to stockholders, as we did during 2024:
◦Our capital expenditures in 2024 were approximately $41 million and included a number of strategic investments in new machinery and equipment aimed at gaining operating efficiencies and expanding capacity at certain production facilities.
◦We continue to invest in new product development and anticipate that these efforts will provide additional opportunities to further diversify our customer base, penetrate new end-markets, and/or gain access to new geographic regions.
◦We continued to execute on our disciplined M&A strategy with the acquisition of Standard. We have now completed 12 acquisitions since 2016.
◦We demonstrated our commitment to returning value to our stockholders by paying cash dividends of $29.3 million and spending $6.7 million to repurchase shares of our common stock under our authorized repurchase program.
*The Company uses adjusted earnings before interest, tax, depreciation, and amortization (“adjusted EBITDA”) and the ratio of adjusted EBITDA to net sales (“adjusted EBITDA margin”) as additional measures to assist it in comparing its performance on a consistent basis for purposes of business decision making by removing the impact of certain items that management believes are not representative of its underlying performance and to improve the comparability of results across reporting periods. Refer to the Results of Operations section for further discussion regarding these non-GAAP metrics and a reconciliation of each to the most comparable GAAP measure for each of the periods presented.
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Results of Operations
The following table summarizes our Consolidated Statements of Operations as of, and for the years ended December 31, 2024 and December 31, 2023, and illustrates the key financial indicators used to assess our consolidated financial results:
| For the Years Ended December 31, | Change | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (in millions of dollars, except per share data) | 2024 | 2023 | 2024 vs. 2023 | |||||||||
| Net sales | $ | 1,861.5 | $ | 1,722.7 | $ | 138.8 | ||||||
| Cost of sales | 1,328.5 | 1,272.5 | 56.0 | |||||||||
| Gross profit | 533.0 | 450.2 | 82.8 | |||||||||
| Selling, engineering, general and administrative expenses | 234.0 | 210.1 | 23.9 | |||||||||
| Amortization expense | 15.0 | 15.2 | (0.2) | |||||||||
| Acquisition and integration-related expenses, net | 2.6 | 0.4 | 2.2 | |||||||||
| Operating income | 281.4 | 224.5 | 56.9 | |||||||||
| Interest expense, net | 12.5 | 19.7 | (7.2) | |||||||||
| Pension settlement charges | 3.8 | — | 3.8 | |||||||||
| Other expense, net | 1.2 | 1.8 | (0.6) | |||||||||
| Income before income taxes | 263.9 | 203.0 | 60.9 | |||||||||
| Income tax expense | 47.6 | 45.6 | 2.0 | |||||||||
| Net income | $ | 216.3 | $ | 157.4 | $ | 58.9 | ||||||
| Other data: | ||||||||||||
| Operating margin | 15.1 | % | 13.0 | % | 2.1 | % | ||||||
| Adjusted EBITDA (a) | $ | 350.6 | $ | 286.0 | $ | 64.6 | ||||||
| Adjusted EBITDA margin (a) | 18.8 | % | 16.6 | % | 2.2 | % | ||||||
| Diluted earnings per share | $ | 3.50 | $ | 2.56 | $ | 0.94 | ||||||
| Total orders | 1,847.8 | 1,870.1 | (22.3) | |||||||||
| Backlog | 997.1 | 1,025.1 | (28.0) | |||||||||
| Depreciation and amortization | 65.3 | 60.4 | 4.9 |
(a)The Company uses adjusted EBITDA and adjusted EBITDA margin as additional measures to assist it in comparing its performance on a consistent basis for purposes of business decision making by removing the impact of certain items that management believes are not representative of its underlying performance and to improve the comparability of results across reporting periods. The Company believes that investors use versions of these metrics in a similar manner. For these reasons, the Company believes that adjusted EBITDA and adjusted EBITDA margin are meaningful metrics to investors in evaluating the Company’s underlying financial performance. Adjusted EBITDA is a non-GAAP measure that represents the total of net income, interest expense, net, pension settlement charges, acquisition and integration-related expenses, net, purchase accounting effects, other expense, net, income tax expense, and depreciation and amortization expense, where applicable. Adjusted EBITDA margin is a non-GAAP measure that represents the total of net income, interest expense, net, pension settlement charges, acquisition and integration-related expenses, net, purchase accounting effects, other expense, net, income tax expense, and depreciation and amortization expense, where applicable, divided by net sales for the applicable period(s). Other companies may use different methods to calculate adjusted EBITDA and adjusted EBITDA margin.
Year ended December 31, 2024 vs. year ended December 31, 2023
Net sales
Net sales for the year ended December 31, 2024 increased by $138.8 million, or 8%, compared to the prior year, primarily due to higher sales volumes, inclusive of the effects of acquisitions, and pricing actions, partially offset by a $11.6 million reduction in chassis sales. The Environmental Solutions Group reported a net sales increase of $119.2 million, or 8%, primarily due to a $18.9 million improvement in aftermarket revenues and increases in sales of dump truck bodies of $36.5 million, sewer cleaners of $23.1 million, road-marking and line-removal equipment of $14.1 million, street sweepers of $13.1 million, industrial vacuum loaders of $10.5 million, refuse trucks of $7.2 million, multi-purpose maintenance vehicles of $6.8 million, metal extraction support equipment of $4.3 million, and hoists of $2.7 million. Partially offsetting these improvements were reductions in sales of trailers of $13.4 million and safe-digging trucks of $9.1 million, as well as a $3.3 million unfavorable foreign currency translation impact. Within the Safety and Security Systems Group, net sales increased by $19.6 million, or 7%, primarily due to improvements in sales of public safety equipment of $19.5 million and warning systems of $2.6 million, partially offset by a $2.6 million reduction in sales of industrial signaling equipment.
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Cost of sales
For the year ended December 31, 2024, cost of sales increased by $56.0 million, or 4%, compared to the prior year, largely due to an increase of $53.4 million, or 5%, within the Environmental Solutions Group, primarily related to increased sales volumes, inclusive of the effects of acquisitions, and a $4.6 million increase in depreciation expense, partially offset by a $3.6 million favorable foreign currency translation impact and reduced chassis costs of $10.7 million. Within the Safety and Security Systems Group, cost of sales increased by $2.6 million, or 1%, primarily related to higher sales volumes, partially offset by favorable product mix and lower material costs.
Gross profit
For the year ended December 31, 2024, gross profit increased by $82.8 million, or 18%, compared to the prior year, primarily due to a $65.8 million improvement within the Environmental Solutions Group and a $17.0 million increase within the Safety and Security Systems Group. Gross profit as a percentage of net sales (“gross profit margin”) for the year ended December 31, 2024 was 28.6%, compared to 26.1% in the prior year, primarily driven by a 240 basis point improvement within the Environmental Solutions Group and a 310 basis point improvement within the Safety and Security Systems Group.
Selling, engineering, general and administrative (“SEG&A”) expenses
For the year ended December 31, 2024, SEG&A expenses increased by $23.9 million, or 11%, compared to the prior year, primarily due to increases of $13.9 million in the Environmental Solutions Group, $7.4 million in the Safety and Security Systems Group, and $2.6 million in Corporate. As a percentage of net sales, SEG&A expenses were 12.6% in the current year, compared to 12.2% in the prior year.
Operating income
Operating income for the year ended December 31, 2024 increased by $56.9 million, or 25%, compared to the prior year, largely due to the $82.8 million improvement in gross profit and a $0.2 million reduction in amortization expense, partially offset by the $23.9 million increase in SEG&A expenses and a $2.2 million increase in acquisition and integration-related costs. Consolidated operating margin for the year ended December 31, 2024 was 15.1%, compared to 13.0% in the prior year.
Interest expense, net
Interest expense, net for the year ended December 31, 2024 decreased by $7.2 million, or 37%, compared to the prior year, largely due to reductions in average debt levels.
Pension settlement charges
During the year ended December 31, 2024, the Company announced a limited-time voluntary lump-sum pension offering to
eligible participants of its U.S. defined benefit plan. In 2024, the Company paid a total of $6.8 million in lump-sum benefit payments, using assets of the plan. As total settlement payments during the year ended December 31, 2024 exceeded the sum of the service and interest cost, the Company was required to remeasure the liabilities of the benefit plans and recognized a pension settlement charge of $3.8 million. For further discussion, see Note 11 – Pension and Other Post-Retirement Plans in Item 8, Financial Statements and Supplementary Data.
Other expense, net
For the year ended December 31, 2024, Other expense, net, decreased by $0.6 million compared to the prior year, primarily due to the non-recurrence of an $0.8 million environmental remediation charge recorded in the prior-year period associated with a business discontinued in 2009, partially offset by higher net periodic pension expense.
Income tax expense
During the year ended December 31, 2023, the Company filed amended U.S. federal income tax returns for the 2015 through 2018 tax years to claim a worthless stock deduction. As of December 31, 2023, the amended tax returns were under examination by the applicable tax authorities and recovery of the refund claim was not considered more-likely-than-not. Accordingly, the aggregate refund claim of $13.6 million, including interest of $1.8 million, was recorded as an income tax receivable as of December 31, 2023, fully offset by a corresponding liability for unrecognized tax benefits.
During the year ended December 31, 2024, the tax authorities notified the Company that the amended tax returns had been approved, at which point receipt of the refund claim was considered more-likely-than-not. As a result, the Company released the associated liability for unrecognized tax benefits and recognized a $13.0 million discrete tax benefit for the refund claim, net
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of taxes on the associated interest, during the year ended December 31, 2024. Following the receipt of the U.S. federal income tax refund during the second quarter of 2024, the Company began amending applicable state tax returns to reflect the worthless stock deduction, resulting in the recognition of additional discrete state tax benefits aggregating to $2.9 million during the year ended December 31, 2024.
The Company recognized income tax expense of $47.6 million for the year ended December 31, 2024, compared to $45.6 million for the year ended December 31, 2023. The increase in income tax expense in 2024 was primarily due to higher earnings, partially offset by the aforementioned discrete tax benefits, which aggregated to $15.9 million, and the recognition of $5.1 million in excess tax benefits associated with stock-based compensation activity. Including these items, the Company’s effective tax rate for the year ended December 31, 2024 was 18.0%, compared to 22.5% in 2023. The Company’s income tax expense and effective tax rate for the year ended December 31, 2023 also included the effects of the recognition of $3.9 million in excess tax benefits associated with stock-based compensation activity. For further discussion, see Note 10 – Income Taxes in Item 8, Financial Statements and Supplementary Data.
Net income
Net income for the year ended December 31, 2024 increased by $58.9 million, or 37%, compared to the prior year, largely due to the increased operating income and the reductions in interest expense, net, and other expense, net, partially offset by the $3.8 million pension settlement charge and a $2.0 million increase in income tax expense.
Adjusted EBITDA
Adjusted EBITDA for the year ended December 31, 2024 was $350.6 million, compared to $286.0 million in the prior year. Adjusted EBITDA margin for the year ended December 31, 2024 was 18.8%, compared to 16.6% in the prior year.
The following table summarizes the Company’s adjusted EBITDA and adjusted EBITDA margin and reconciles net income to adjusted EBITDA for the years ended December 31, 2024 and December 31, 2023:
| For the Years Ended December 31, | ||||||
|---|---|---|---|---|---|---|
| (in millions of dollars) | 2024 | 2023 | ||||
| Net income | $ | 216.3 | $ | 157.4 | ||
| Add: | ||||||
| Interest expense, net | 12.5 | 19.7 | ||||
| Pension settlement charges | 3.8 | — | ||||
| Acquisition and integration-related expenses, net | 2.8 | 0.4 | ||||
| Purchase accounting effects (a) | 1.1 | 0.7 | ||||
| Other expense, net | 1.2 | 1.8 | ||||
| Income tax expense | 47.6 | 45.6 | ||||
| Depreciation and amortization | 65.3 | 60.4 | ||||
| Adjusted EBITDA | $ | 350.6 | $ | 286.0 | ||
| Net sales | $ | 1,861.5 | $ | 1,722.7 | ||
| Adjusted EBITDA margin | 18.8 | % | 16.6 | % |
(a)Purchase accounting effects represent the step-up in the valuation of equipment acquired in recent business combinations that was sold during the periods presented. Excludes purchase accounting expense effects included within depreciation and amortization of $0.2 million for the year ended December 31, 2024.
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Environmental Solutions
The following table summarizes the Environmental Solutions Group’s operating results as of, and for the years ended, December 31, 2024 and December 31, 2023:
| For the Years Ended December 31, | Change | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (in millions of dollars) | 2024 | 2023 | 2024 vs. 2023 | |||||||||
| Net sales | $ | 1,557.1 | $ | 1,437.9 | $ | 119.2 | ||||||
| Operating income | 261.2 | 209.2 | 52.0 | |||||||||
| Other data: | ||||||||||||
| Operating margin | 16.8 | % | 14.5 | % | 2.3 | % | ||||||
| Total orders | $ | 1,541.6 | $ | 1,578.0 | $ | (36.4) | ||||||
| Backlog | 939.7 | 966.5 | (26.8) | |||||||||
| Depreciation and amortization | 60.9 | 56.0 | 4.9 |
Year ended December 31, 2024 vs. year ended December 31, 2023
Total orders decreased by $36.4 million, or 2%, for the year ended December 31, 2024, including the effects of lower chassis orders of $23.5 million. U.S. orders decreased by $60.2 million, or 5%, primarily due to reductions in orders for street sweepers of $81.4 million, safe-digging trucks of $39.1 million, sewer cleaners of $23.2 million, multi-purpose maintenance vehicles of $5.0 million, and metal extraction support equipment of $2.7 million. Partially offsetting these reductions were improvements in orders of dump truck bodies of $48.3 million, aftermarket offerings of $11.8 million, road-marking and line-removal equipment of $7.7 million, waterblasting equipment of $4.5 million, trailers of $3.1 million, and industrial vacuum loaders of $2.7 million. Non-U.S. orders increased by $23.8 million, or 8%, primarily due to improvements in orders for refuse trucks of $17.0 million, street sweepers of $5.5 million, multi-purpose maintenance vehicles of $5.0 million, dump truck bodies of $2.8 million, and metal extraction support equipment of $2.7 million. Additionally, non-U.S. aftermarket orders increased by $7.6 million. Partially offsetting these improvements were reductions in orders for sewer cleaners of $8.8 million, safe-digging trucks of $4.8 million, industrial vacuum loaders of $1.7 million, and waterblasting equipment of $1.1 million, as well as a $3.3 million unfavorable foreign currency translation impact.
Net sales increased by $119.2 million, or 8%, for the year ended December 31, 2024, primarily due to higher sales volumes, inclusive of the effects of acquisitions and pricing actions, partially offset by lower chassis sales of $11.6 million. U.S. sales increased by $102.7 million, or 9%, largely due to a $12.9 million increase in aftermarket revenues and increases in sales of dump truck bodies of $31.9 million, sewer cleaners of $21.3 million, street sweepers of $12.0 million, industrial vacuum loaders of $10.5 million, road-marking and line-removal equipment of $10.1 million, refuse trucks of $8.0 million, metal extraction support equipment of $3.1 million, and hoists of $2.8 million. Partially offsetting these improvements were reductions in shipments of trailers of $13.4 million and safe-digging trucks of $7.7 million. Non-U.S. sales increased by $16.5 million, or 6%, largely due to a $6.0 million improvement in aftermarket revenues and increases in sales of multi-purpose maintenance vehicles of $4.9 million, dump truck bodies of $4.6 million, road-marking and line removal equipment of $4.0 million, sewer cleaners of $1.8 million, and metal extraction support equipment of $1.2 million. Partially offsetting these improvements were reductions in shipments of waterblasting equipment of $2.0 million and safe-digging trucks of $1.4 million, as well as a $3.3 million unfavorable foreign currency translation impact.
Cost of sales increased by $53.4 million, or 5%, for the year ended December 31, 2024, primarily related to increased sales volumes, inclusive of the effects of acquisitions, and a $4.6 million increase in depreciation expense, partially offset by a $3.6 million favorable foreign currency translation impact and reduced chassis costs of $10.7 million. Including these factors, gross profit margin for the year ended December 31, 2024 was 26.0%, compared to 23.6% in the prior year, with the improvement primarily attributable to improved operating leverage from higher sales volumes, benefits from pricing actions, and a reduction in lower margin chassis sales.
SEG&A expenses increased by $13.9 million, or 12%, for the year ended December 31, 2024, primarily due to additional costs from acquired businesses, as well as increases in sales commissions and incentive-based compensation expense. As a percentage of net sales, SEG&A expenses were 8.2% in the current year, compared to 7.9% in the prior year.
Operating income increased by $52.0 million, or 25%, for the year ended December 31, 2024, largely due to a $65.8 million increase in gross profit and a $0.2 million reduction in amortization expense, partially offset by the $13.9 million increase in SEG&A expenses and a $0.1 million increase in acquisition-related costs.
Backlog was $940 million at December 31, 2024, compared to $967 million at December 31, 2023.
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Safety and Security Systems
The following table summarizes the Safety and Security Systems Group’s operating results as of, and for the years ended, December 31, 2024 and December 31, 2023:
| For the Years Ended December 31, | Change | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (in millions of dollars) | 2024 | 2023 | 2024 vs. 2023 | |||||||||
| Net sales | $ | 304.4 | $ | 284.8 | $ | 19.6 | ||||||
| Operating income | 64.4 | 54.8 | 9.6 | |||||||||
| Other data: | ||||||||||||
| Operating margin | 21.2 | % | 19.2 | % | 2.0 | % | ||||||
| Total orders | $ | 306.2 | $ | 292.1 | $ | 14.1 | ||||||
| Backlog | 57.4 | 58.6 | (1.2) | |||||||||
| Depreciation and amortization | 3.9 | 4.2 | (0.3) |
Year ended December 31, 2024 vs. year ended December 31, 2023
Total orders increased by $14.1 million, or 5%, for the year ended December 31, 2024. U.S. orders increased by $28.3 million, or 16%, compared to the prior year, driven by improvements in orders for public safety equipment of $22.9 million and industrial signaling equipment of $5.9 million, partially offset by a $0.5 million reduction in orders of warning systems. Non-U.S. orders decreased by $14.2 million, or 12%, primarily due to a $16.6 million reduction in orders for public safety equipment in comparison to the prior-year period, which included large fleet orders from customers in Mexico and Europe, as well as a $2.5 million reduction in orders for industrial signaling equipment. Partially offsetting these reductions was a $4.9 million improvement in orders for warning systems.
Net sales increased by $19.6 million, or 7%, for the year ended December 31, 2024, inclusive of the effects of higher sales volumes and pricing actions. U.S. sales increased by $28.9 million, or 16%, driven by improvements in sales of public safety equipment of $24.4 million, industrial signaling equipment of $2.4 million, and warning systems of $2.1 million. Non-U.S. sales decreased by $9.3 million, or 8%, largely due to reductions in industrial signaling equipment of $5.0 million and public safety equipment of $4.9 million, partially offset by a $0.5 million improvement in sales of warning systems.
Cost of sales increased by $2.6 million, or 1%, for the year ended December 31, 2024, primarily related to higher sales volumes, partially offset by favorable product mix and lower material costs. Gross profit margin for the year ended December 31, 2024 was 42.0%, compared to 38.9% in the prior year, with the increase primarily attributable to improved operating leverage from higher sales volumes, favorable sales mix, lower material costs, and benefits from pricing actions.
SEG&A expenses increased by $7.4 million for the year ended December 31, 2024, primarily due to higher sales commissions and incentive-based compensation expense. As a percentage of net sales, SEG&A expenses were 20.9% in the current year, compared with 19.7% in the prior year.
Operating income increased by $9.6 million, or 18%, for the year ended December 31, 2024, primarily due to a $17.0 million increase in gross profit, partially offset by the $7.4 million increase in SEG&A expenses.
Backlog was $57 million at December 31, 2024, compared to $59 million at December 31, 2023.
Corporate Expense
Corporate operating expenses were $44.2 million in 2024 and $39.5 million in 2023.
For the year ended December 31, 2024, corporate operating expenses increased by $4.7 million compared to the prior year, primarily due to a $2.1 million increase in acquisition-related expenses, including the impact of the non-recurrence of a $2.1 million benefit recognized in 2023 associated with a reduction in the estimated fair value of contingent consideration, as well as higher stock compensation, incentive-based compensation, and information technology costs in the current year. Partially offsetting these increases were lower post-retirement expenses and the recognition of a $1.8 million gain associated with an insurance recovery in 2024.
The Company’s hearing loss litigation has historically been managed by the Company’s legal staff resident at the corporate office and not by management at either segment. In accordance with Accounting Standards Codification (“ASC”) 280, Segment Reporting, which provides that segment reporting should follow the management of the item and that certain expenses may be
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corporate expenses, these legal expenses (which are not part of the normal operating activities of any of our reportable segments) are reported and managed as corporate expenses.
Financial Condition, Liquidity and Capital Resources
The Company uses its cash flow from operations to fund growth and to make capital investments that sustain its operations, reduce costs, or both. Beyond these uses, remaining cash is used to pay down debt, repurchase shares, fund dividend payments, and make pension contributions. The Company may also choose to invest in the acquisition of businesses. In the absence of significant unanticipated cash demands, we believe that the Company’s existing cash balances, cash flow from operations, and borrowings available under the 2022 Credit Agreement will provide funds sufficient for these purposes. The net cash flows associated with the Company’s rental equipment transactions are included in cash flows from operating activities.
The Company’s cash and cash equivalents totaled $91.1 million as of December 31, 2024 and $61.0 million as of December 31, 2023. As of December 31, 2024, $22.6 million of cash and cash equivalents was held by foreign subsidiaries. Cash and cash equivalents held by subsidiaries outside the U.S. typically are held in the currency of the country in which it is located. The Company uses this cash to fund the operating activities of its foreign subsidiaries and for further investment in foreign operations. Generally, the Company has considered such cash to be indefinitely reinvested in its foreign operations and the Company’s current plans do not demonstrate a need to repatriate such cash to fund U.S. operations. However, in the event that these funds were needed to fund U.S. operations or to satisfy U.S. obligations, they generally could be repatriated. The repatriation of these funds may cause the Company to incur additional U.S. income tax expense and withholding taxes, as applicable, dependent on income tax laws and other circumstances at the time any such amounts were repatriated.
Net cash provided by operating activities totaled $231.3 million in 2024 and $194.4 million in 2023. The increase in cash generated by operating activities in 2024 compared to the prior year was primarily due to working capital improvements and higher net income, partially offset by increased rental fleet investments to support demand for rentals and used equipment and higher income tax payments, incentive-based compensation payments, and pension contributions.
Net cash used for investing activities totaled $78.9 million in 2024 and $83.7 million in 2023. In both years, cash was used to fund the purchase of properties and equipment, with capital expenditures of $40.6 million in 2024 and $30.3 million in 2023. During 2024, the Company completed the acquisition of Standard for initial consideration of $39.7 million. During 2023, the Company made payments of $41.9 million to acquire Trackless Vehicles Limited, Trackless Vehicles Asset Corp, and the wholly-owned subsidiary Work Equipment Ltd. (collectively, “Trackless”) and $13.0 million to acquire Blasters, Inc. and Blasters Technologies, LLC (collectively, “Blasters”) .
Net cash used for financing activities was $121.0 million in 2024 and $97.9 million in 2023. In 2024, the Company paid down $76.5 million of borrowings under its revolving credit facility and $3.9 million under its term loan facility, funded cash dividends of $29.3 million and share repurchases of $6.7 million, and redeemed $6.1 million of common stock in order to remit funds to tax authorities to satisfy employees’ tax withholdings following the vesting of stock-based compensation and the exercise of stock options. The Company also received $2.0 million from stock option exercises in 2024. In 2023, the Company paid down $64.1 million of borrowings under its revolving credit facility and $0.8 million under its term loan facility, funded cash dividends of $23.8 million and share repurchases of $5.5 million, and redeemed $7.0 million of common stock in order to remit funds to tax authorities to satisfy employees’ tax withholdings following the vesting of stock-based compensation and the exercise of stock options. The Company also received $3.9 million from stock option exercises in 2023.
On October 21, 2022, the Company entered into the 2022 Credit Agreement, by and among the Company and certain of its foreign subsidiaries (collectively, the “Borrowers”), Wells Fargo Bank, National Association, as administrative agent, swingline lender, and issuing lender, PNC Bank, National Association and Truist Bank as syndication agents, and the other lenders and parties signatory thereto.
On May 16, 2024, the Company entered into the First Amendment to the 2022 Credit Agreement. The amendment was largely administrative in nature, including certain language to address ongoing reference rate reform. There were no changes to the term or the Company’s borrowing capacity under the 2022 Credit Agreement.
The 2022 Credit Agreement is a senior secured credit facility which provides the Borrowers access to an aggregate original principal amount of up to $800 million, consisting of (i) a revolving credit facility in an amount up to $675 million (the “Revolver”) and (ii) a term loan facility in an original amount of up to $125 million. The Revolver provides for borrowings in the form of loans or letters of credit up to the aggregate availability under the facility, with a sub-limit of $100 million for letters of credit. Borrowings can be made in denominations of U.S. dollars, Canadian dollars, euros, or British pounds (with borrowings in non-U.S. currencies subject to a sublimit of $300 million). In addition, the Company may expand its borrowing capacity under the 2022 Credit Agreement by up to the greater of (i) $400 million and (ii) 100% of Consolidated EBITDA for the applicable four-quarter period preceding such expansion notice, subject to the approval of the applicable lenders providing
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such additional borrowings in the form of increases to their revolving facility commitment, or funding of incremental term loans. Borrowings under the 2022 Credit Agreement may be used for working capital and general corporate purposes, including acquisitions. The 2022 Credit Agreement matures on October 21, 2027.
The Company’s material domestic subsidiaries provide guarantees for all obligations of the Borrowers under the 2022 Credit Agreement, which is secured by a first priority security interest in (i) all existing or hereafter acquired domestic property and assets of the Company and material domestic subsidiaries, (ii) the stock or other equity interests in each of the material domestic subsidiaries, and (iii) 65% of outstanding voting capital stock of certain first-tier foreign subsidiaries, subject to certain exclusions.
Borrowings under the 2022 Credit Agreement bear interest, at the Company’s option, at a base rate or an Adjusted Eurocurrency Rate (as defined in the 2022 Credit Agreement) in the case of borrowings in euros or an adjusted RFR (as defined in the 2022 Credit Agreement) in the case of borrowings in U.S. dollars, Canadian dollars, and British pound sterling, plus, in each case, an applicable margin. The applicable margin ranges from zero to 0.75% for base rate borrowings and 1.00% to 1.75% for Adjusted Eurocurrency Rate and RFR borrowings. The Company must also pay a commitment fee to the lenders ranging between 0.10% to 0.25% per annum on the unused portion of the Revolver along with other standard fees. Applicable margin, issuance fees, and other customary expenses are payable on outstanding letters of credit.
The Company is subject to certain net leverage ratio and interest coverage ratio financial covenants under the 2022 Credit Agreement that are to be measured at each fiscal quarter-end. The Company was in compliance with all such covenants as of December 31, 2024. The 2022 Credit Agreement also includes certain “covenant holiday” periods, which allow for the temporary increase of the minimum net leverage ratio following the completion of a permitted acquisition, or a series of acquisitions, when the aggregate consideration over a period of twelve months exceeds $75 million. In addition, the 2022 Credit Agreement includes customary negative covenants, subject to certain exceptions, restricting or limiting the Company’s and its subsidiaries’ ability to, among other things: (i) make non-ordinary course dispositions of assets; (ii) make certain fundamental business changes, such as mergers, consolidations, or any similar combination; (iii) make restricted payments, including dividends and stock repurchases; (iv) incur indebtedness; (v) make certain loans and investments; (vi) create liens; (vii) transact with affiliates; (viii) enter into certain sale/leaseback transactions; (ix) make negative pledges; and (x) modify subordinated debt documents.
Under the 2022 Credit Agreement, restricted payments, including dividends and stock repurchases, shall be permitted if (i) the Company’s leverage ratio is less than or equal to 3.25x; (ii) the Company is in compliance with all other financial covenants; and (iii) there are no existing defaults under the 2022 Credit Agreement. If its leverage ratio is more than 3.25x, the Company is still permitted to fund (1) up to $35 million of dividend payments and stock repurchases annually; and (2) additional incremental other cash payments up to the greater of $65 million or 5% of consolidated total assets for the term of the 2022 Credit Agreement.
The 2022 Credit Agreement contains customary events of default. If an event of default occurs and is continuing, the Borrowers may be required immediately to repay all amounts outstanding under the 2022 Credit Agreement and the commitments from the lenders may be terminated.
The 2022 Credit Agreement amended and restated the Second Amended and Restated Credit Agreement (as amended, the “2019 Credit Agreement”), which provided the Company with a $500 million revolving credit facility.
As of December 31, 2024, there was $90.6 million of cash drawn on the Revolver, $120.3 million outstanding under the term loan facility, and $10.1 million of undrawn letters of credit under the 2022 Credit Agreement, with $574.3 million of net availability for borrowings.
The following table summarizes the gross borrowings and gross payments under the Company’s revolving credit facilities:
| For the Years Ended December 31, | ||||||
|---|---|---|---|---|---|---|
| (in millions of dollars) | 2024 | 2023 | ||||
| Gross borrowings | $ | 18.0 | $ | 134.3 | ||
| Gross payments | 94.5 | 198.4 |
Aggregate maturities of long-term borrowings and finance lease obligations are $19.4 million in 2025, $10.5 million in 2026, and $193.8 million in 2027, and $0.1 million in 2028. The weighted average interest rate on long-term borrowings was 5.3% at December 31, 2024.
The Company paid interest of $15.3 million in 2024, $22.8 million in 2023, and $9.4 million in 2022.
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The Company paid income taxes of $62.4 million in 2024, $46.2 million in 2023, and $26.9 million in 2022.
The Company paid cash dividends to stockholders of $29.3 million in 2024, $23.8 million in 2023, and $21.8 million in 2022. Additionally, on February 21, 2025, the Board declared a quarterly cash dividend of $0.14 per common share payable on March 27, 2025 to stockholders of record at the close of business on March 14, 2025. The declaration of dividends is subject to the discretion of the Board and depends on various factors that our Board deems relevant to its analysis and decision making, including our net income, financial condition, and cash requirements.
The Company anticipates that capital expenditures for 2025 will be in the range of $40 million to $50 million. The Company believes that its financial resources and major sources of liquidity, including cash flow from operations and borrowing capacity, will be adequate to meet its operating needs, capital needs, and financial commitments.
Contractual Obligations and Off-Balance Sheet Arrangements
The following table summarizes the Company’s contractual obligations and payments due by period as of December 31, 2024:
| Payments Due by Period | ||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (in millions of dollars) | Total | Less than 1 Year | 2-3 Years | 4-5 Years | More than 5 Years | |||||||||||||
| Long-term debt | $ | 210.9 | $ | 7.0 | $ | 203.9 | $ | — | $ | — | ||||||||
| Interest payments on long-term debt (a) | 29.9 | 11.0 | 18.9 | — | — | |||||||||||||
| Operating lease obligations (b) | 31.9 | 8.2 | 12.2 | 7.8 | 3.7 | |||||||||||||
| Finance lease obligations | 12.9 | 12.4 | 0.4 | 0.1 | — | |||||||||||||
| Purchase obligations (c) | 353.2 | 336.5 | 14.5 | 2.2 | — | |||||||||||||
| Pension contributions (d) | 3.6 | 3.6 | — | — | — | |||||||||||||
| Contingent earn-out payments (e) | 4.8 | 4.2 | 0.6 | — | — | |||||||||||||
| Total contractual obligations (f) | $ | 647.2 | $ | 382.9 | $ | 250.5 | $ | 10.1 | $ | 3.7 |
(a) Amounts represent estimated contractual interest payments on outstanding long-term debt.
(b) Amounts include contractual obligations associated with lease arrangements with an initial term of twelve months or less, which are not recorded on the Consolidated Balance Sheets. For further discussion, see Note 4 – Leases in Item 8, Financial Statements and Supplementary Data.
(c) Purchase obligations primarily relate to commercial chassis and other contracts in the ordinary course of business.
(d) The Company expects to contribute up to $3.6 million to the U.S. defined benefit pension plan in 2025. Contributions to the non-U.S. defined benefit pension plan in 2025 are expected to be insignificant. Future contributions to the plans will be based on such factors as (i) annual service cost, (ii) the financial return on plan assets, (iii) interest rate movements that affect discount rates applied to plan liabilities, and (iv) the value of benefit payments made. Due to the high degree of uncertainty regarding the potential future cash outflows associated with these plans, the Company is unable to provide a reasonably reliable estimate of the amounts and periods in which any additional liabilities might be paid beyond 2025.
(e) Represents the fair value of the contingent earn-out payments associated with acquisitions. For further discussion, see Note 2 – Acquisitions and Note 18 - Fair Value Measurements in Item 8, Financial Statements and Supplementary Data.
(f) As of December 31, 2024, the Company had a liability of approximately $1.2 million for unrecognized tax benefits, including penalties and interest. For further discussion, see Note 10 – Income Taxes in Item 8, Financial Statements and Supplementary Data. Due to the uncertainties related to these tax matters, the Company generally cannot make a reasonably reliable estimate of the period of cash settlement for this liability. As such, the potential future cash outflows are not included in the table above.
The following table summarizes the Company’s off-balance sheet arrangements and the notional amount by expiration period as of December 31, 2024:
| Notional Amount by Expiration Period | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (in millions of dollars) | Total | Less than 1 Year | 2-3 Years | 4-5 Years | ||||||||||
| Financial standby letters of credit (a) | $ | 10.1 | $ | 10.1 | $ | — | $ | — | ||||||
| Performance and bid bonds (b) | 15.5 | 15.4 | 0.1 | — | ||||||||||
| Repurchase obligations (c) | 2.2 | 0.6 | 0.2 | 1.4 | ||||||||||
| Total off-balance sheet arrangements | $ | 27.8 | $ | 26.1 | $ | 0.3 | $ | 1.4 |
(a) Financial standby letters of credit largely relate to casualty insurance policies for the Company’s workers’ compensation, automobile, general liability and product liability policies.
(b) Performance and bid bonds primarily relate to guarantees of performance of certain subsidiaries that engage in transactions with domestic and foreign customers.
(c) Relates to certain transactions that the Company has entered into involving the sale of equipment to certain of its customers which included (i) guarantees to repurchase the equipment for a fixed price at a future date and (ii) guarantees to repurchase the equipment from the third-party lender in the event of default by the customer. For further discussion, see Note 12 – Commitments and Contingencies in Item 8, Financial Statements and Supplementary Data.
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Critical Accounting Policies and Estimates
The preparation of consolidated financial statements in conformity with U.S. generally accepted accounting principles (“GAAP”) requires management to make estimates and assumptions that affect (i) the reported amounts of assets and liabilities, (ii) disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and (iii) the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The Company considers the following policies to be the most critical in understanding the judgments that are involved in the preparation of the Company’s consolidated financial statements and the uncertainties that could impact the Company’s financial condition, results of operations, or cash flow.
Goodwill
Goodwill represents the excess of the cost of an acquired business over the amounts assigned to its net assets. Goodwill is not amortized but is tested for impairment at a reporting unit level on an annual basis or more frequently if indicators of impairment exist. The Company performed its annual goodwill impairment test as of October 31, 2024.
In testing the goodwill of its reporting units for potential impairment, the Company applies either a qualitative or quantitative test, in accordance with ASC 350, Intangibles – Goodwill and Other.
A qualitative approach may be applied when the Company concludes that it is not “more likely than not” that the fair value of a reporting unit is less than its carrying value. In conducting a qualitative assessment, the Company analyzes a variety of events or factors that may influence the fair value of the reporting unit, including, but not limited to: the results of prior quantitative assessments performed; changes in the carrying amount; actual and projected financial performance; relevant market data for both the Company and its guideline comparable companies; industry outlook; and macroeconomic conditions. Significant judgment is used to evaluate the totality of these events and factors to make the determination of whether it is more likely than not that the fair value of the reporting unit is less than its carrying value. In this situation, the Company would not be required to perform the quantitative impairment test described below.
A quantitative approach is performed by comparing the fair value of a reporting unit with its carrying amount. If the fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is not impaired, and no impairment charge is required. If the carrying amount of a reporting unit exceeds its fair value, this difference is recorded as an impairment charge not to exceed the carrying amount of goodwill. The Company generally determines the fair value of its reporting units using both the income and market approaches.
Under the income approach, the key assumptions include projected sales and earnings before interest, income taxes, depreciation, and amortization (“EBITDA”). These assumptions are determined by management utilizing our internal operating plan, including growth rates for revenues and margin assumptions. An additional key assumption under this approach is the discount rate, which is determined by reviewing current risk-free rates of capital and current market interest rates and by evaluating the risk premium relevant to the reporting unit. If the Company’s assumptions relative to growth rates were to change, the fair value calculation may change, which could result in impairment.
Under the market approach, the Company estimates fair value using marketplace fair value data from within a comparable industry grouping of publicly traded companies and from pricing multiples implied from sales of companies similar to the Company’s reporting units. The Company’s selection of comparable guideline companies is a key assumption underlying the market approach. Similar to the income approach discussed above, sales, cost of sales, operating expenses, EBITDA and their respective growth rates are also key assumptions utilized. The market prices of the Company’s common stock and other guideline companies are additional key inputs. If these market prices increase, the estimated market value would increase. Conversely, if market prices decrease, the estimated market value would decrease.
The results of these two methods are weighted based upon management’s evaluation of the relevance of the two approaches.
Although the Company believes its estimates of fair value are reasonable, actual financial results could differ from estimated financial results due to the inherent uncertainty involved in making such estimates. Changes in assumptions concerning future financial results or other underlying assumptions could have a significant impact on either the fair value of the reporting units, the amount of any goodwill impairment charge, or both. The Company also compares the sum of the estimated fair values of its reporting units to the overall fair value of the Company implied by its market capitalization. This comparison provides an indication that, in total, assumptions and estimates are reasonable. Future declines in the overall market value of the Company may also result in a conclusion that the fair value of one or more reporting units has declined below its carrying value.
In 2024, the Company performed a combination of qualitative and quantitative impairment tests to assess the goodwill of its reporting units for potential impairment. For one reporting unit, a quantitative impairment test was performed, using a combination of the income and market approaches to determine the fair value of its reporting unit. The valuation was prepared
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by a third-party valuation specialist. One measure of the sensitivity of assumptions used in the impairment analysis is the amount by which the reporting unit “passed” (fair value exceeds the carrying value). The fair value of the reporting unit exceeded its carrying value by more than 30%. Therefore, no impairment was recognized. For its other reporting units, the Company applied the qualitative approach and concluded that it was not “more likely than not” that the fair value of the reporting units was less than their carrying values. Accordingly, further quantitative testing was not required to be performed.
The Company had no goodwill impairments in 2024, 2023, or 2022. For all reporting units, a 10% decrease in the estimated fair value would have had no effect on the carrying value of goodwill at the annual measurement date in 2024. However, adverse changes to the Company’s business environment and future cash flow could cause us to record impairment charges in future periods, which could be material.
See Note 8 – Goodwill and Other Intangible Assets in Item 8, Financial Statements and Supplementary Data, for a summary of the Company’s goodwill by segment.
Indefinite-lived Intangible Assets
An intangible asset determined to have an indefinite useful life is not amortized. Indefinite-lived intangible assets are tested for impairment on an annual basis at October 31, or more frequently if an event occurs or circumstances change that indicate the fair value of an indefinite-lived intangible asset could be below its carrying amount. The Company’s indefinite-lived intangible assets include trade names associated with acquisitions.
In testing the indefinite-lived intangibles assets for potential impairment, the Company applies either a qualitative test, or a quantitative test, in accordance with ASC 350, Intangibles — Goodwill and Other. A qualitative approach may be applied when the Company concludes that it is not “more likely than not” that the fair value of the indefinite-lived intangible assets is less than their carrying value. A quantitative impairment test consists of comparing the fair value of the indefinite-lived intangible asset with its carrying amount. An impairment loss would be recognized for the carrying amount in excess of its fair value.
Significant judgment is applied when evaluating whether an intangible asset has an indefinite useful life and in testing for impairment. The Company primarily uses the relief from royalty model to estimate the fair value of the indefinite-lived intangible assets. The relief from royalty model requires management to make a number of business and valuation assumptions including future revenue growth and royalty rates.
In 2024, the Company performed a combination of qualitative and quantitative impairment tests over its indefinite-lived intangible assets. The fair value of the indefinite-lived intangible asset that was quantitatively tested for impairment exceeded its carrying value by approximately 45%, and, therefore, no impairment was recognized. This valuation was prepared by a third-party valuation specialist. Further, the Company concluded that it was not “more likely than not” that the fair value of indefinite-lived intangible assets that were qualitatively tested for impairment were less than the carrying amounts. Accordingly, further quantitative testing was not required to be performed.
The Company had no indefinite-lived intangible asset impairments in 2024, 2023, or 2022. Although the Company believes its estimates of fair value are reasonable, actual financial results could differ from estimated financial results due to the inherent uncertainty involved in making such estimates. The use of alternative estimates and assumptions could increase or decrease the estimated fair value of the assets and potentially result in different impacts to the Company’s results of operations. Actual results may differ from the Company’s estimates.
See Note 8 – Goodwill and Other Intangible Assets in Item 8, Financial Statements and Supplementary Data, for a summary of the Company’s indefinite-lived intangible assets.
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