SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
|☑||ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934|
For the fiscal year ended December 31, 2020
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 1-6003
FEDERAL SIGNAL CORPORATION
(Exact name of registrant as specified in its charter)
|(State or other jurisdiction of incorporation or organization)||(I.R.S. Employer Identification No.)|
1415 West 22nd Street, Oak Brook, Illinois
(Address of principal executive offices)
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
|Title of each class||Trading Symbol(s)||Name of each exchange on which registered|
|Common Stock, par value $1.00 per share||FSS||New York Stock Exchange|
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☑ No ☐
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☑
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☑ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or shorter period that the registrant was required to submit such files). Yes ☑ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
|Large accelerated filer|
|Non-accelerated filer||☐||Smaller reporting company||☐|
|Emerging growth company||☐|
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☑
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☑
As of June 30, 2020, the aggregate market value of voting stock held by non-affiliates was $1,763,701,955. For purposes of the foregoing calculation only, executive officers and directors of the registrant have been deemed to be affiliates.
As of January 31, 2021, the number of shares outstanding of the registrant’s common stock was 60,538,158.
Documents Incorporated By Reference
Portions of the registrant’s definitive proxy statement for the 2021 Annual Meeting of Stockholders are incorporated by reference in Part III.
FEDERAL SIGNAL CORPORATION
TABLE OF CONTENTS
This Annual Report on Form 10-K (“Form 10-K”) is being filed by Federal Signal Corporation and its subsidiaries (referred to collectively as the “Company,” “we,” “our” or “us” herein, unless the context otherwise indicates) with the United States (“U.S.”) Securities and Exchange Commission (the “SEC”), and includes comments made by management that may contain words such as “may,” “will,” “believe,” “expect,” “anticipate,” “intend,” “plan,” “project,” “estimate” and “objective” or similar terminology, or the negative thereof, concerning the Company’s future financial performance, business strategy, plans, goals and objectives. These expressions are intended to identify forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and the Private Securities Litigation Reform Act of 1995. Forward-looking statements include information concerning the Company’s possible or assumed future performance or results of operations and are not guarantees. While these statements are based on assumptions and judgments that management has made in light of industry experience as well as perceptions of historical trends, current conditions, expected future developments and other factors believed to be appropriate under the circumstances, they are subject to risks, uncertainties and other factors that may cause the Company’s actual results, performance or achievements to be materially different.
These risks and uncertainties, some of which are beyond the Company’s control, include, but are not limited to, the risk factors described under Item 1A, Risk Factors as set forth in Part I, as well as those discussed elsewhere in this Form 10-K and in our subsequently filed documents, as applicable. These factors may not constitute all factors that could cause actual results to differ materially from those discussed in any forward-looking statement. The Company operates in a continually changing business environment and new factors emerge from time to time including, for example, the ongoing coronavirus (“COVID-19”) pandemic and the governmental responses to the pandemic. The Company cannot predict such factors, nor can it assess the impact, if any, of such factors on its results of operations, financial condition or cash flow. Accordingly, forward-looking statements should not be relied upon as a predictor of actual results. The Company disclaims any responsibility to update any forward-looking statement provided in this Form 10-K.
The Company is subject to the reporting and information requirements of the Exchange Act and, as a result, is obligated to file Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and other reports and information with the SEC, as well as amendments to those reports. The Company makes these filings available free of charge through our website at www.federalsignal.com as soon as reasonably practicable after such materials are filed with, or furnished to, the SEC. Information on our website does not constitute part of this Form 10-K. In addition, the SEC maintains a website at www.sec.gov that contains reports, proxy and information statements and other information regarding issuers that file electronically.
Item 1. Business.
Federal Signal Corporation, founded in 1901, was reincorporated as a Delaware corporation in 1969. The Company designs, manufactures and supplies a suite of products and integrated solutions for municipal, governmental, industrial and commercial customers. The Company’s portfolio of products that it manufactures includes sewer cleaners, industrial vacuum loaders, vacuum- and hydro-excavation trucks (collectively, “safe-digging” trucks), street sweepers, road-marking and line-removal equipment, waterblasting equipment, dump truck bodies, trailers, and safety and security systems, including technology-based products and solutions for the public safety market. In addition, the Company engages in the sale of parts, service and repair, equipment rentals and training as part of a comprehensive aftermarket offering to its customers. The Company operates 15 principal manufacturing facilities in five countries and provides products and integrated solutions to customers in all regions of the world.
Narrative Description of Business
Products manufactured and supplied, and services rendered, by the Company are divided into two reportable segments: the Environmental Solutions Group and the Safety and Security Systems Group. The individual operating businesses are organized as such because they share certain characteristics, including technology, marketing, distribution and product application, which create long-term synergies. Corporate contains those items that are not included in the Company’s reportable segments.
Financial information concerning the Company’s two reportable segments for each of the three years in the period ended December 31, 2020, is included in Note 17 – Segment Information to the accompanying consolidated financial statements and is incorporated herein by reference.
Environmental Solutions Group
The Company’s Environmental Solutions Group is a leading manufacturer and supplier of a full range of street sweepers, sewer cleaners, industrial vacuum loaders, safe-digging trucks, high-performance waterblasting equipment, road-marking and line-removal equipment, dump truck bodies, and trailers. The Group manufactures vehicles and equipment in the U.S. and Canada that are sold under the Elgin®, Vactor®, Guzzler®, TRUVAC®, WestechTM, Jetstream®, Mark Rite Lines, Ox Bodies®, Crysteel®, J-Craft®, Duraclass®, Rugby®, and Travis® brand names. The Group’s product offerings also include certain products manufactured by other companies, such as refuse and recycling collection vehicles, camera systems, ice resurfacing equipment and snow-removal equipment. Products are sold to both municipal and industrial customers either through a dealer network or direct sales to service customers generally depending on the type and geographic location of the customer. In addition to vehicle and equipment sales, the Group also engages in the sale of parts, service and repair, equipment rentals and training as part of a comprehensive aftermarket offering to its current and potential customers through its service centers located across North America.
Under the Elgin brand name, the Company sells a leading U.S. brand of street sweepers primarily designed for large-scale cleaning of curbed streets, parking lots and other paved surfaces utilizing mechanical sweeping, vacuum and recirculating air technology. Vactor is a leading manufacturer of equipment solutions for cleaning and maintaining sewers and catch basins. Under the TRUVAC brand name, introduced in 2019, the Company manufactures a range of premium vacuum- and hydro-excavation trucks designed to satisfy the safe-digging requirements of businesses or organizations that locate and verify underground utility lines and pipes. Guzzler is a leader in industrial vacuum loaders used to manage industrial waste or recover and recycle valuable raw materials. Westech is a manufacturer of high-quality, rugged vacuum-excavation trucks. Jetstream manufactures high-pressure waterblasting equipment and accessories for commercial and industrial cleaning and maintenance operations. Mark Rite Lines Equipment Company, Inc. (“MRL”), is a U.S. manufacturer of truck-mounted and ride-on road-marking and line-removal equipment. The Company manufactures and sells dump truck bodies and trailers under the Ox Bodies, Crysteel, J-Craft, Duraclass, Rugby and Travis brand names.
Safety and Security Systems Group
The Company’s Safety and Security Systems Group is a leading manufacturer and supplier of comprehensive systems and products that law enforcement, fire rescue, emergency medical services, campuses, military facilities and industrial sites use to protect people and property. Offerings include systems for community alerting, emergency vehicles, first responder interoperable communications and industrial communications. Specific products include public safety equipment, such as vehicle lightbars and sirens, industrial signaling equipment, public warning systems and general alarm/public address systems. Products are sold under the Federal SignalTM, Federal Signal VAMA®, and Victor® brand names. The Group operates manufacturing facilities in the U.S., Europe and South Africa.
Marketing and Distribution
Depending primarily on the type and geographic location of the end-customer, the Environmental Solutions Group uses either a dealer network or direct sales to serve customers. The 2017 acquisition of Truck Bodies and Equipment International (“TBEI”) increased the number of dealers within the Company’s network and also added additional direct sales resources. The dealer network serves both municipal and industrial end-markets. Within municipal markets, the majority of the Company’s dealers operate exclusively in their assigned territory. In conjunction with selling vehicles to end-customers, dealer representatives demonstrate vehicle functionality and capability and provide vehicle service. In addition to selling products manufactured by the Company, certain of our businesses distribute and re-sell products manufactured by other companies. The Company believes its regional, national and global dealer networks for vehicles is a distinguishing factor from its competitors. The Company has an ownership interest in certain dealers.
The Environmental Solutions Group’s direct sales channel concentrates primarily on the industrial, utility and construction market segments. To support current and potential customers in these market segments, the Group also engages in the sale of parts, service and repair, equipment rentals and training through its service centers located across North America.
The Safety and Security Systems Group sells to industrial customers through wholesalers and distributors who are supported by Company sales personnel or independent manufacturer representatives. Products are also sold to municipal and governmental customers through active independent distributors, as well as through original equipment manufacturers and the direct sales force. The Company sells comprehensive integrated warning and interoperable communications through a combination of the direct sales force and independent distributors. International sales are made through independent foreign distributors or on a direct basis.
Customers and Backlog
No single customer accounted for 10% or more of the Company’s net sales in any year within the three-year period ended December 31, 2020.
The Company’s backlog totaled $304 million at December 31, 2020, compared to $387 million at December 31, 2019. Backlogs vary by group due to the nature of the Company’s products and the buying patterns of its customers. The Environmental Solutions Group typically experiences an average backlog of approximately three to six months of shipments. The Safety and Security Systems Group typically experiences an average backlog of approximately two months of shipments. Production of the Company’s December 31, 2020 backlog is expected to be substantially completed during 2021.
The Company purchases a wide variety of raw materials from around the world for use in the manufacture of its products, although the majority of current purchases are from North American sources. To minimize risks relating to availability, price and quality of key products and components, the Company is party to numerous strategic supplier arrangements. Although certain materials are obtained from either a single-source supplier or a limited number of suppliers, the Company has generally identified alternative sources to minimize the interruption of its business in the event of supply disruptions.
Components critical to the production of the Company’s vehicles, such as engines, are purchased from a select number of suppliers. The Company also purchases raw and fabricated steel, as well as commercial chassis, from multiple sources. In addition, we may incorporate chassis provided directly by our customers in our production process. Certain of our businesses also rely on the availability of equipment supplied by others to meet customer demand.
While there are risks and uncertainties with respect to the supply of certain raw materials and components that could impact price, quality and availability in sufficient quantities, the Company believes it has adequate supplies and sources of availability of the raw materials and components necessary to meet its needs.
Within the Environmental Solutions Group, Elgin is recognized as a market leader among domestic sweeper competitors and differentiates itself primarily on product performance. The Vactor, TRUVAC and Guzzler brands each maintain a leading domestic position in their respective marketplaces by enhancing product performance with leading technology and application flexibility. Jetstream is a market leader in the in-plant cleaning segment of the U.S. waterblast industry, competing on product performance, rapid delivery and solutions services. Joe Johnson Equipment, Inc. with Joe Johnson Equipment (USA), Inc., (collectively, “JJE”), is a leading Canadian-based distributor of maintenance equipment for municipal and industrial markets. TBEI includes a portfolio of regional dump truck body and trailer brands with market leadership positions in distinct geographies and product categories, differentiating itself with its broad regional distribution network, focus on customer responsiveness and operational expertise. MRL is a market-leading manufacturer of road-marking and line-removal equipment.
Within specific product categories and domestic markets, the businesses within the Safety and Security Systems Group are among the market leaders. This Group’s international market position varies from leader to ancillary participant depending on the geographic region and product line. Generally, competition is intense within all of this Group’s product lines and purchase decisions are made based on price, features, reputation, performance and service, often within competitive bidding situations.
Patents and Trademarks
The Company owns a number of patents and possesses rights under others to which it attaches importance, but it does not believe that its business as a whole is materially dependent upon any such patents or rights. The Company also owns a number of trademarks, including those listed within the “Narrative Description of Business” section above. We believe these trademarks are important in connection with the identification of our products and associated goodwill with customers, but no material part of the Company’s business is dependent on our trademarks.
Human Capital Management
As of December 31, 2020, the Company employed approximately 3,500 people in its businesses located in five countries, with the Company’s U.S. hourly workers accounting for approximately 54% of its total workforce. As of December 31, 2020, approximately 16% of the Company’s U.S. hourly workers were represented by unions. The Company believes that its labor relations with its employees are good.
The Company believes that its employees are key to its ability to deliver exceptional products and services to its customers. The Company applies a holistic total rewards strategy, designed to recruit, motivate, and retain talented employees at all levels of the organization, and offer competitive, market-based compensation programs, and attractive benefit packages.
Diversity and Inclusion
The Company is committed to promoting and supporting diversity. The Company believes that behaving inclusively is the right thing to do. The Company also believes that hearing different voices, and seeking different perspectives and ideas, leads to better results. The Company strives to promote diversity on its Board of Directors and in leadership roles throughout the Company. Currently, two of the Company’s seven directors are female, placing the Company ahead of the 20% average for companies in the Russell 3000 Index.
Of the companies in the Russell 3000 Index, approximately 5% have a female Chief Executive Officer (“CEO”), and we are proud to be among that group. In addition, 50% of the Company’s current executive officers are female, including our President and CEO, Vice President and Corporate Controller and Vice President, Treasury and Corporate Development.
The Company’s commitment to diversity throughout the organization is further evidenced by its policies related to various aspects of employment, including, but not limited to, recruiting, selecting, hiring, employment placement, job assignment, compensation, access to benefits, selection for training, use of facilities, and participation in Company-sponsored employee activities.
Employee Training and Development
The Company believes that identifying and developing the next generation of business leaders is important to its long-term success, and is proud to support its employees in furthering their education with tuition reimbursement plans and training.
The Company provides extensive training to employees within its facilities, ranging from topics such as workplace safety and anti-fraud training, to advanced instruction in lean manufacturing principles and inside sales training programs. On average, the Company’s employees each receive more than 10 hours of job training per year, with some employees of certain business units each averaging nearly 80 hours of training per year.
Through its Tuition Assistance Program, the Company also aims to assist and encourage employees to expand their knowledge, skills, and job effectiveness by continuing their education at local accredited institutions of higher learning. Certain of the Company’s businesses also partner with nearby universities, from time to time, to offer courses and programs directly related to the employee’s growth in the business.
The Company is committed to the communities in which it operates, and to developing a strong pipeline from which it can recruit new talent. Many of the Company’s businesses from time to time support their local high schools with cooperative learning extension programs at their manufacturing plants, hosting in-person or virtual tours of our facilities, and providing scholarships and “signing-day” offers to high school seniors.
The Company’s employees also donate time and expertise through volunteering and mentorship programs, and work with local colleges on training programs to teach valuable technical skills that can be applied in the workplace. These programs attempt to help the Company’s next generation, and others, understand what career paths may be available to them and to explore future job opportunities with the Company.
The Company considers the safety of its employees a significant focus and strives to have zero workplace injuries. The Company has established an enterprise-wide Safety Council, which includes representatives from several of our manufacturing facilities. The Safety Council meets regularly to collaborate and implement safety improvement measures, focusing on continuous improvement initiatives, and the reduction of incident frequency.
In February 2020, in response to the onset of the COVID-19 pandemic, the Company established a cross-functional task force to monitor ongoing developments, implement mitigation plans, and centrally coordinate its response. In addition to the centralized COVID-19 response team, local response teams were established at every business unit. Management team update calls were held daily to communicate issues related to safety and risk mitigation, and to share COVID-related best practices, and other policy issues. This platform allowed management to rapidly disseminate evolving guidance from federal, state, and local health departments, at the same time promoting a consistent, iterative response.
In response to the COVID-19 pandemic, the Company was proactive in procuring personal protective equipment and sanitizing supplies for its facilities. The Company also implemented a series of enhanced health and safety measures across the organization, such as reconfiguring work spaces and staggering manufacturing shifts to allow for social distancing, introducing temperature screening protocols, enhancing facility cleaning, limiting non-essential travel and restricting the number of visitors to our facilities. Further, the Company established remote working arrangements, where possible, supported by the use of virtual meeting capabilities.
In the interests of employee safety, the Company modified its employee attendance policies and provided employees with additional paid time off in order to encourage those who were sick, had health concerns, or were otherwise adversely impacted by the pandemic, to remain at home. The Company also partnered with a third-party to provide self-administered, at-home COVID test kits to its employees at no cost, and deployed surveillance testing to reduce the probability of spreading the virus within its facilities. We continue to monitor the impact of the COVID-19 pandemic on our business and employees and will implement or modify our policies to adapt to changing circumstances arising from this pandemic.
Governmental Regulation of the Environment
As part of its ongoing commitment to environmental, social and governance initiatives, the Company endeavors to establish environmentally-friendly policies and objectives, and believes that these actions are also consistent with cost-effective operating practices. With the application of these policies, the Company believes it complies with federal, state and local provisions that have been enacted or adopted regulating the discharge of materials into the environment, or otherwise relating to the protection of the environment. Capital expenditures in 2020 attributable to compliance with such laws were not material. The Company also believes that the overall impact of compliance with environmental regulations will not have a material adverse effect on our financial position, results of operations or cash flow.
Certain of the Company’s businesses are susceptible to the influences of seasonal factors, including buying patterns, delivery patterns and productivity influences from holiday periods and weather. In general, the Company tends to have lower equipment sales in the first calendar quarter of each year compared to other quarters as a result of these factors. In addition, rental income and parts sales are generally higher in the second and third quarters of the year, because many of the Company’s products are used for maintenance activities in North America, where usage is typically lower during periods of harsher weather conditions.
Executive Officers of the Registrant
The following is a list of the Company’s executive officers, including their ages, business experience and positions as of February 1, 2021:
Jennifer L. Sherman, age 56, was appointed President and CEO effective January 1, 2016. Ms. Sherman was also appointed to the Board of Directors effective January 1, 2016. Since joining the Company in 1994, Ms. Sherman has served in various roles of increasing responsibility, most recently as Senior Vice President and Chief Operating Officer from April 2014 to December 31, 2015. Ms. Sherman also previously served as Senior Vice President, Chief Administrative Officer, General Counsel and Secretary from 2010 to April 2014, Senior Vice President, Human Resources, General Counsel and Secretary from 2008 to 2010, and Vice President, General Counsel and Secretary from 2004 to 2008.
Daniel A. DuPré, age 64, was appointed Vice President, General Counsel and Secretary in November 2015. Mr. DuPré joined the Company in 2006, most recently serving as its Deputy General Counsel. Mr. DuPré previously held senior legal positions at Sears Holdings Corporation, Bank One Corporation, and Brunswick Corporation and served as an Assistant United States Attorney for the Northern District of Illinois.
Lauren B. Elting, age 39, was appointed Vice President and Corporate Controller in May 2018. Prior to joining the Company in January 2017, Ms. Elting worked at Ernst & Young, LLP from 2004 to 2016, most recently as Senior Audit Manager.
Ian A. Hudson, age 44, was appointed Senior Vice President and Chief Financial Officer in October 2017. Mr. Hudson joined the Company in August 2013 as Vice President and Corporate Controller. Prior to joining the Company, Mr. Hudson served as Director of Accounting – Latin America and Asia Pacific at Groupon, Inc. from June 2012 to August 2013. Prior to that role, Mr. Hudson worked at Ernst & Young, LLP from 1998 to 2012, most recently as Senior Audit Manager.
Svetlana Vinokur, age 41, was appointed Vice President, Treasurer and Corporate Development in April 2015. Prior to joining the Company, Ms. Vinokur worked as Assistant Treasurer at Illinois Tool Works Inc. Prior to that role, Ms. Vinokur served as Finance Head of M&A Strategy at Mead Johnson Nutrition Company and as a senior associate for Robert W. Baird & Company’s Consumer and Industrial Investment Banking group. Ms. Vinokur started her career at Ford Motor Company, serving in various finance roles.
Mark D. Weber, age 63, was appointed Senior Vice President and Chief Operating Officer in January 2018, upon rejoining the Company after four years at Supreme Industries, Inc. (“Supreme”). Mr. Weber joined Supreme in May 2013 as President and Chief Executive Officer, serving in that capacity up to the sale of Supreme to Wabash National Corporation, which was completed in September 2017. Prior to joining Supreme, Mr. Weber worked for 17 years as an executive within the Company’s Environmental Solutions Group, including a decade as Group President.
These officers hold office until the next annual meeting of the Board of Directors following their election and until their successors have been elected and qualified.
There are no family relationships among any of the foregoing executive officers.
Item 1A. Risk Factors.
We may occasionally make forward-looking statements and estimates such as forecasts and projections of our future performance or statements of our plans and objectives. These forward-looking statements may be contained in, but are not limited to, filings with the SEC, including this Form 10-K, press releases made by us and oral statements made by our officers. Actual results could differ materially from those contained in such forward-looking statements. Important factors that could cause our actual results to differ from those contained in such forward-looking statements include, but are not limited to, the risks described below. Many of such risks and uncertainties may be exacerbated by the COVID-19 pandemic and any worsening of the global business and economic environment that may result.
Macroeconomic and Industry Risks
Our financial results are subject to U.S. economic uncertainty.
In 2020, we generated approximately 77% of our net sales in the U.S. Our ability to be profitable depends heavily on varying conditions in the U.S. governmental and municipal markets, as well as the overall U.S. economy. The industrial markets in which we compete are subject to considerable cyclicality, and move in response to cycles in the overall business environment. Many of our customers are municipal government agencies, and as a result, we are dependent on municipal government spending. Spending by our municipal customers can be affected by federal, state and local political circumstances, budgetary constraints, changing priorities, actual or potential government shutdowns and other factors. The U.S. government and municipalities depend heavily on tax revenues as a source of spending and accordingly, there is a historical correlation that suggests a lag of one to two years between the condition of the U.S. economy and our sales to the U.S. government and municipalities. Therefore, downturns in the U.S. economy are likely to result in decreases in demand for our products. During previous economic downturns, we experienced decreases in sales and profitability, and we expect our business to remain subject to similar economic fluctuations in the future. In addition, the extent of any potential changes to policies and regulations under the new U.S. administration, and how any such changes may impact the Company’s operations, is currently uncertain.
The extent to which the COVID-19 pandemic will adversely impact our business, financial condition and operating results is highly uncertain and cannot be predicted but could be material.
The COVID-19 pandemic has created significant worldwide volatility, uncertainty and disruption. In particular, the COVID-19 pandemic and the governmental responses to the pandemic have resulted in a substantial curtailment of business activities, a significant number of business closures, slowdowns, suspensions or delays of production and commercial activity, and weakened economic conditions, both in the United States and many foreign countries. As such, the COVID-19 pandemic has directly and indirectly adversely impacted the Company and such adverse impact will likely continue. However, the extent to which the COVID-19 pandemic will ultimately adversely impact the Company’s business, financial condition and operating results, which could be material, will depend on numerous evolving factors that are highly uncertain, rapidly changing and cannot be predicted at this time, including:
•the duration and scope of the COVID-19 pandemic;
•governmental, business and individual actions that have been, continue to be and may in the future be taken in response to the COVID-19 pandemic, including business and travel restrictions, “stay-at-home” and “shelter-in-place” directives, quarantines, and slowdowns, suspensions or delays of commercial activity;
•the effect of the COVID-19 pandemic and the government response on our dealers, distributors and other channel partners and customers, including their ability to remain open, continue to sell and service our products, pay for the products purchased from us and obtain vehicle chassis, to the extent that they source such components directly;
•the effect of the COVID-19 pandemic and the governmental response on the budgets of our municipal customers;
•our ability to continue to run our operations as an essential business during the COVID-19 pandemic and/or to maintain our normal production capacity, in light of the potential for adverse impacts associated with decreased labor availability, the temporary suspension of production activity mandated or otherwise made necessary by governmental authorities, weakened demand, supply chain disruptions, or other production delays;
•significant reductions or volatility in demand for one or more of our products or services;
•the effect of the COVID-19 pandemic on our suppliers and our ability to obtain commodities, components and parts, on a timely basis through our supply chain and at previously anticipated costs;
•logistics costs and challenges, including availability of transportation and at previously anticipated costs;
•costs incurred as a result of necessary actions and preparedness plans to help ensure the health and safety of our employees and continued operations, including remote working accommodations, enhanced cleaning processes, protocols designed to implement appropriate social distancing practices, and/or adoption of additional wage and benefit programs to assist employees;
•potential future restructuring, impairment and other charges;
•availability of employees, their ability to conduct work away from normal working locations and/or under revised work environment protocols and the general willingness of employees to come to and perform work;
•the impact of the COVID-19 pandemic on the financial and credit markets and economic activity generally;
•our ability to access lending, capital markets, and other sources of liquidity when needed on reasonable terms or at all;
•our ability to comply with the financial covenants in our debt agreements if a material economic downturn as a result of the COVID-19 pandemic results in substantially increased indebtedness and/or lower earnings; and
•the exacerbation of negative impacts resulting from the occurrence of a global or national recession, depression or other sustained adverse market event as a result of the COVID-19 pandemic.
We have international operations that are subject to compliance with domestic and foreign laws and regulations, economic and political uncertainties and foreign currency rate fluctuations.
Our business is subject to fluctuations in demand and changing international economic, legal and political conditions that are beyond our control. In 2020, approximately 23% of our net sales were to customers outside the U.S. and we expect a significant portion of our revenues to come from international sales in the foreseeable future. Operating in the international marketplace exposes us to a number of risks, including the need to comply with U.S. and foreign laws and regulations applicable to our foreign operations, such as the Foreign Corrupt Practices Act, the United Kingdom (“U.K.”) Bribery Act and their counterparts in other foreign jurisdictions in which we operate, restrictive domestic and international trade regulations, and changes in these laws, regulations and policies by the U.S. and foreign governments. In addition, we may be exposed to risks associated with actual or threatened imposition of tariffs or trade barriers on our products or materials incorporated into our products, actual or threatened trade disputes, including so-called “trade wars,” political and economic instability in the jurisdictions in which we operate, foreign receivables collection risk, local labor market conditions, and, in some cases, international hostilities. The costs of compliance with these various laws, regulations and policies can be significant and penalties for non-compliance could significantly impact our business.
To the extent that our international operations are affected by adverse foreign economic or political conditions, we may experience disruptions and losses that could have a material impact on our financial position, results of operations or cash flow. To mitigate the risk of foreign receivables collection, we may obtain letters of credit from international customers to satisfy concerns regarding the collectability of amounts billed to customers.
Some of our contracts are denominated in foreign currencies, which may expose us to risks of fluctuating currency values and exchange rates, hard currency shortages and controls on currency exchange. Changes in the value of foreign currencies over the long term could increase our U.S. dollar costs for, or reduce our U.S. dollar revenues from, our foreign operations. Any increased costs or reduced revenues as a result of foreign currency fluctuations could adversely affect our results of operations.
The execution of our growth strategy is dependent upon the continued availability of credit and third-party financing arrangements for our customers.
Economic downturns result in tighter credit markets, which could adversely affect our customers’ ability to secure financing or to secure financing at favorable terms or interest rates necessary to proceed or continue with purchases of our products and services. Our customers’ or potential customers’ inability to secure financing for projects could result in the delay, cancellation or downsizing of new purchases or the suspension of purchases already under contract, which could cause a decline in the demand for our products and services and negatively impact our financial position, results of operations or cash flow.
We operate in highly competitive markets.
The markets in which we operate are highly competitive. Many of our competitors have significantly greater financial resources than we do. The intensity of this competition, which is expected to continue, can result in price discounting and margin pressures throughout the industry and may adversely affect our ability to increase or maintain prices for our products. In addition, certain of our competitors may have lower overall labor or material costs. In some cases, our contracts with municipal and other governmental customers are awarded and renewed through competitive bidding. We may not be successful in obtaining or renewing these contracts, which could have an adverse effect on our financial condition, results of operations or cash flow.
Strategic and Operational Risks
Failure to keep pace with technological developments may adversely affect our operations.
We are engaged in an industry that will be affected by future technological developments. The introduction of products or processes utilizing new technologies could render our existing products or processes obsolete or unmarketable. Our success will depend upon our ability to develop and introduce on a timely and cost-effective basis new products, applications and processes
that keep pace with technological developments and address increasingly sophisticated customer requirements. We may not be successful in identifying, developing and marketing new products, applications and processes and product or process enhancements. We may experience difficulties that could delay or prevent the successful development, introduction and marketing of product or process enhancements or new products, applications or processes. Our products, applications or processes may not adequately meet the requirements of the marketplace and achieve market acceptance. Our financial condition, results of operations or cash flow could be materially and adversely affected if we were to incur delays in developing new products, applications or processes or product or process enhancements, or if our products do not gain market acceptance.
Our efforts to develop new products and services or enhance existing products and services involve substantial research, development and marketing expenses, and the resulting new or enhanced products or services may not generate sufficient revenues to justify the expense.
We place a high priority on developing new products and services, as well as enhancing our existing products and services. As a result of these efforts, we may be required to expend substantial research, development and marketing resources, and the time and expense required to develop a new product or service or enhance an existing product or service are difficult to predict. We may not succeed in developing, introducing or marketing new products or services or product or service enhancements. In addition, we cannot be certain that any new or enhanced product or service will generate sufficient revenue to justify the expense and resources devoted to the related product diversification effort.
Our business may be adversely affected if we are unable to renew our leases upon their expiration.
We lease from third parties approximately 52% of the square footage of the facilities utilized in our operations, including with respect to certain of our manufacturing plants and our sales, service, warehousing and office locations. If we are unable to renew the existing leases on terms acceptable to us, we may be forced to relocate the affected operations. Alternatively, we may decide to relocate operations. Relocation could result in material disruptions to our business (including potential changes to our workforce if the new location does not allow for our existing workforce to service it) and our incurrence of significant capital and other expenses, which in turn could have an adverse effect on our financial condition, results of operations or cash flow.
We could incur restructuring and impairment charges as we continue to evaluate opportunities to restructure our business and rationalize our manufacturing operations in an effort to optimize our cost structure.
We continue to evaluate opportunities to restructure our business and rationalize our manufacturing operations in an effort to optimize our cost structure. These actions could result in significant charges that could adversely affect our financial condition and results of operations. Future actions could result in restructuring and related charges, including but not limited to impairments, employee termination costs and charges for pension and other postretirement contractual benefits and pension curtailments that could be significant and could have an adverse effect on our financial condition, results of operations or cash flow.
The inability to obtain raw materials, component parts and/or finished goods in a timely and cost-effective manner would adversely affect our ability to manufacture and market our products.
We purchase from suppliers raw materials, component parts and finished goods to be used in the manufacturing and sale of our products. In addition, we may incorporate vehicle chassis provided directly by our customers in our production process. Although the vast majority of our raw materials and component parts are sourced domestically, certain of our suppliers are based overseas, and certain of our domestic suppliers may source subcomponents from overseas. Outbreaks of communicable diseases have been known to occur in certain of these international regions, resulting in public health crises. Changes in our relationships with suppliers, shortages in availability of materials, production delays, regulatory restrictions, public health crises, or other supply chain disruptions, whether due to our suppliers or customers, could have a material adverse effect on our ability to timely manufacture and market products. Increases in the costs of purchased raw materials, component parts or finished goods could result in manufacturing interruptions, delays, inefficiencies or our inability to market products. In addition, our profit margins would decrease if prices of purchased raw materials, component parts or finished goods increase and we are unable to pass on those increases to our customers.
Disruptions within our dealer network or the inability of our dealers to secure adequate access to capital could adversely affect our business.
We rely on national and global dealer networks to market certain of our products and services. As a result, our business with respect to these products and services is influenced by our ability to manage new and existing relationships with dealers. While we have relatively low turnover of dealers, from time to time, we or a dealer may choose to terminate the relationship as a result of difficulties that our dealers experience in operating their businesses due to economic conditions or other factors. While we do not believe our business is dependent on any single dealer, a disruption in our dealer network, or with a significant dealer, or
within a specific market, could have an adverse impact on our business within the affected market. In addition, our dealers require adequate liquidity to finance their operations, including purchases of our products. Dealers are subject to numerous risks and uncertainties that could unfavorably affect their liquidity positions, including, among other things, continued access to adequate financing sources on a timely basis on reasonable terms. These sources of financing are vital to our ability to sell products through our dealer network. Deterioration in the liquidity or credit worthiness of our dealers could have a significant adverse effect on our business. From time to time, we may provide financing assistance to dealers or consider taking ownership positions. The loss or termination of a significant dealer, or a significant number of dealers, could cause difficulties in marketing and distributing our products and have an adverse effect on our business, financial condition, results of operations or cash flow.
We may be unsuccessful in our future acquisitions, if any, which may have an adverse effect on our business.
Our long-term strategy includes exploring acquisitions of companies or businesses to facilitate our growth, enhance our global market position and broaden our product offerings. Such acquisitions may help us expand into adjacent markets, add complementary products and services or allow us to leverage our distribution channels. In connection with this strategy, we could face certain risks and uncertainties in addition to those we face in the day-to-day operations of our business. We also may be unable to identify suitable targets for acquisition or to make acquisitions at favorable prices. If we identify a suitable acquisition candidate, our ability to successfully implement the acquisition would depend on a variety of factors, including our ability to obtain financing on acceptable terms. In addition, our acquisition activities could be disrupted by overtures from competitors for the targeted companies, governmental regulation and rapid developments in our industry that decrease the value of a potential target’s products or services.
Acquisitions involve risks, including those associated with the following:
•integrating the operations, financial reporting, disparate systems and processes and personnel of acquired companies;
•managing geographically dispersed operations;
•diverting management’s attention from other business concerns;
•changing the competitive landscape, including disrupting existing sales channels or markets;
•entering markets or lines of business in which we have either limited or no direct experience; and
•losing key employees, customers and strategic partners of acquired companies.
We also may not achieve anticipated revenue and cost benefits associated with our acquisitions. Acquisitions may not be accretive to our earnings and may negatively impact our results of operations as a result of, among other things, the incurrence of debt, acquisition costs, impairment of goodwill and amortization of other intangible assets. In addition, future acquisitions could result in dilutive issuances of equity securities.
Businesses acquired by us may have liabilities that are not known to us.
We may assume liabilities in connection with the acquisition of businesses. There may be liabilities that we fail or are unable to discover in the course of performing due diligence investigations on the acquired businesses, or that may be more material than we discovered. In these circumstances, we cannot assure that our rights to indemnification will be sufficient in amount, scope or duration to fully offset the possible liabilities associated with the businesses or property acquired. Further, these liabilities could result in unexpected legal or regulatory exposure, unexpected increases in taxes or other adverse effects on our business. Any such liabilities, individually or in the aggregate, could have a material adverse effect on our financial condition, results of operations or cash flow.
We are subject to a number of restrictive debt covenants.
Our credit facility contains certain restrictive debt covenants and customary events of default. Our ability to comply with these restrictive covenants may be affected by the other factors described in this “Risk Factors” section, as well as other factors outside of our control. Failure to comply with one or more of these restrictive covenants may result in an event of default which, if not cured by us or waived by our lenders, allows our lenders to declare all amounts outstanding as due and payable. Such an acceleration of the maturity of our indebtedness may cause us to incur substantial costs and may prevent or limit us from engaging in transactions that benefit us, including responding to changing business and economic conditions and taking advantage of attractive business opportunities.
Human Capital and Labor Risks
Our ability to operate effectively could be impaired if we fail to attract and retain key personnel.
Our ability to operate our businesses and implement our strategies depends in part on the efforts of our executive officers and other key employees. In addition, our future success will depend on, among other factors, our ability to attract and retain qualified personnel. The loss of the services of any key employee or the failure to attract or retain other qualified personnel could have a material adverse effect on our business or business prospects.
Our business may be adversely impacted by work stoppages and other labor relations matters.
As a portion of our workforce is unionized, we are subject to risk of work stoppages and other labor relations matters. As of December 31, 2020, approximately 16% of our U.S. hourly workers were represented by labor unions and were covered by collective bargaining agreements with various unions. Any strikes, threats of strikes or other organized disruptions in connection with the negotiation of new labor agreements or other negotiations could materially adversely affect our business as well as impair our ability to implement further measures to reduce costs and improve production efficiencies. In addition, the stoppage of work for a prolonged period of time at one, or several, of our principal manufacturing facilities, due to public health concerns, or any other reason, could materially adversely affect our business.
Our pension funding requirements and expenses are affected by certain factors outside of our control, including the performance of plan assets, the discount rate used to value liabilities, actuarial assumptions and experience and legal and regulatory changes.
Our funding obligations and pension expense for our defined benefit pension plans are driven by the performance of assets set aside in trusts for these plans, the discount rate used to value the plans’ liabilities, actuarial assumptions and experience and legal and regulatory funding requirements. Changes in these factors could have an adverse impact on our financial condition, results of operations or cash flow. In addition, a portion of our pension plan assets are invested in equity securities, which can experience significant declines if financial markets weaken. The level of the funding of our defined benefit pension plan liabilities was approximately 84% as of December 31, 2020. Funding of the Company’s U.S. defined benefit pension plan is determined in accordance with guidelines set forth in the Employee Retirement Income Security Act. The current year funding status was impacted by a lower discount rate than in the prior year. Our future pension expenses and funding requirements could increase significantly due to the effect of adverse changes in the discount rate, asset values or the estimated expected return on plan assets. In addition, we could become legally required to make increased cash contributions to the pension plans, and these contributions could be material and negatively affect our cash flow.
Data Security and Intellectual Property Risks
Increased information technology security threats and more sophisticated cyber-attacks pose a risk to our systems, networks, products and operations.
We have observed a global increase in information technology security threats and more sophisticated cyber-attacks. Our business could be impacted by such disruptions, which in turn could pose a risk to the security of our systems and networks and the confidentiality, accessibility and integrity of information stored and transmitted on those systems and networks. We have adopted measures to address cyber-attacks and mitigate potential risks to our systems from these information technology-related disruptions. However, given the unpredictability of the timing, nature and scope of such disruptions, our systems and networks remain potentially vulnerable to attacks. Depending on their nature and scope, such attacks could potentially lead to the compromising of confidential information, misuse of our systems and networks, manipulation and destruction of data, misappropriation of assets or production stoppages and supply shortages, which in turn could adversely affect our reputation, financial condition, results of operations or cash flow.
Infringement of, or an inability to protect, our intellectual property rights could adversely affect our business.
We rely on a combination of patents, trademarks, copyrights, nondisclosure agreements, information technology security systems, physical security and other measures to protect our proprietary intellectual property and the intellectual property of certain customers and suppliers. However, we cannot be certain that our efforts to protect these intellectual property rights will be sufficient. Intellectual property protection is subject to applicable laws in various jurisdictions where interpretations and protections differ or can be unpredictable and costly to enforce. Further, our ability to protect our intellectual property rights may be limited in certain foreign jurisdictions that do not have, or do not enforce, strong intellectual property rights. Any failure to protect or enforce our intellectual property rights could have a material adverse effect on our competitive position, financial condition, results of operations or cash flow.
Legal and Financial Risks
We may incur material losses and costs as a result of lawsuits or claims that may be brought against us which are related to product liability, warranty, product recalls, intellectual property, client service interruptions or other matters.
We are exposed to product liability and warranty claims in the normal course of business in the event that our products actually or allegedly fail to perform as expected, or the use of our products results, or is alleged to result, in bodily injury and/or property damage. For example, we have been sued by firefighters seeking damages claiming that exposure to our sirens has impaired their hearing and that the sirens are, therefore, defective. In addition, we are subject to other claims and litigation from time to time, as further described in the accompanying notes to our consolidated financial statements. We could experience material product liability or warranty costs in the future and incur significant costs to defend ourselves against these claims. While we carry insurance and maintain reserves for product liability claims, our insurance coverage may be inadequate if such claims do arise, and any defense costs and liability not covered by insurance could have a material adverse impact on our financial condition, results of operations or cash flow. A future claim could involve the imposition of punitive damages, the award of which, pursuant to state laws, may not be covered by insurance. In addition, warranty and certain other claims are not typically covered by insurance. Any product liability or warranty issues may adversely impact our reputation as a manufacturer of high-quality, safe products and may have a material adverse effect on our business.
The costs associated with complying with environmental and safety regulations could lower our margins.
We, like other manufacturers, continue to face heavy governmental regulation of our products, especially in the areas of the environment and employee health and safety. Complying with environmental and safety requirements has added and will continue to add to the cost of our products, and could increase the capital required to support our business. While we believe that we are in compliance in all material respects with these laws and regulations, we may be adversely impacted by costs, liabilities or claims with respect to our operations under existing laws or those that may be adopted. These requirements are complex, change frequently and have tended to become more stringent over time. Therefore, we could incur substantial costs, including cleanup costs, fines and civil or criminal sanctions as a result of violation of, or liabilities under, environmental laws and safety regulations. Further, climate change regulations at the federal, state or local level or in international jurisdictions could require us to limit emissions, change our manufacturing processes or product offerings, or undertake other activities which may require us to incur additional expense. These requirements may increase the cost of our products, which may diminish demand for those products. In addition, uneven application of environmental or safety regulations could place our products at a cost or features disadvantage, which could reduce our revenues and profitability.
An impairment in the carrying value of goodwill, intangible assets or long-lived assets could negatively affect our financial position and results of operations.
As of December 31, 2020, goodwill and intangible assets represented 33% and 13% of total consolidated assets, respectively. Rental equipment and properties and equipment are long-lived assets, which also represented more than 5% of our total consolidated assets as of December 31, 2020. Goodwill and indefinite-lived intangible assets are tested for impairment annually, or more frequently if indicators of impairment exist. Definite-lived intangible assets and long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. In evaluating the potential for impairment of goodwill, intangible assets and long-lived assets, we make assumptions regarding future operating performance, business trends, competition and market and general economic conditions. Such analyses further require us to make certain assumptions about our sales, operating margins, growth rates and discount rates. There are inherent uncertainties related to these factors. An impairment charge may result from, among other things, a significant decline in operating results, adverse market conditions, unfavorable changes in applicable laws or regulations, or a variety of other factors. Our total consolidated assets and results of operations for the applicable period could be materially adversely affected if any such charge is recorded.
Item 1B. Unresolved Staff Comments.
Item 2. Properties.
As of December 31, 2020, the Company utilized 11 principal manufacturing plants located throughout the U.S., as well as two in Europe, one in Canada and one in South Africa. The Company also leases facilities within the U.S., Europe and Canada from which we provide sales, service and/or equipment rentals. As of December 31, 2020, the Company devoted approximately 1.9 million square feet to manufacturing and 0.9 million square feet to sales, service, warehousing and office space. Of the total square footage, approximately 81% is devoted to the Environmental Solutions Group and 19% to the Safety and Security Systems Group. Approximately 48% of the total square footage is owned by the Company with the remaining 52% being leased. Owned facilities are subject to liens under the Company’s Second Amended and Restated Credit Agreement dated July 30, 2019 (the “2019 Credit Agreement”).
The Company believes its properties, and related machinery and equipment, are well-maintained, suitable and adequate for their intended purposes. In the aggregate, these facilities are of sufficient capacity for the Company’s current business needs. However, the Company may make additional investments in certain facilities in the future in response to increased demand for the Company’s products.
Item 3. Legal Proceedings.
The information concerning the Company’s legal proceedings included in Note 13 – Legal Proceedings to the accompanying consolidated financial statements is incorporated herein by reference.
Item 4. Mine Safety Disclosures.
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
The Company’s common stock is listed and traded on the New York Stock Exchange under the symbol “FSS”.
As of January 31, 2021, there were 1,489 holders of record of the Company’s common stock.
Securities Authorized for Issuance under Equity Compensation
Information concerning the Company’s equity compensation plans is included under Item 12 of Part III of this Form 10-K.
Recent Sales of Unregistered Securities
There were no sales of unregistered securities by the Company during the year ended December 31, 2020.
Purchases of Equity Securities
The following table provides a summary of the Company’s repurchase activity for its common stock during the three months ended December 31, 2020:
|Period||Total Number of Shares Purchased||Average Price Paid Per Share|
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs
Maximum Dollar Value of Shares That May Yet Be Purchased Under the Plans or Programs (a) (b)
|October 2020 (9/27/20 - 10/31/20)||— ||— ||— ||$||90,524,049 |
|November 2020 (11/1/20 - 11/28/20)||— ||— ||— ||90,524,049 |
|December 2020 (11/29/20 - 12/31/20)||— ||— ||— ||90,524,049 |
(a) In November 2014, the Company’s Board of Directors (the “Board”) authorized a stock repurchase program of up to $75.0 million of the Company’s common stock.
(b) In March 2020, the Board authorized an additional stock repurchase program of up to $75.0 million of the Company’s common stock. This program supplements the November 2014 stock repurchase program, which remains in effect.
The following graph compares the cumulative five-year total return to stockholders of the Company’s common stock relative to the cumulative total returns of the Russell 2000 index, the S&P Midcap 400 index and the S&P Industrials index. The graph assumes that the value of the investment in the Company’s common stock, and in each index, was $100 on December 31, 2015 and assumes reinvestment of all dividends through December 31, 2020.
Copyright© 2021 Russell Investment Group. All rights reserved.
Copyright© 2021 Standard & Poor’s, a division of S&P Global. All rights reserved.
|As of December 31,|
|Federal Signal Corporation||$||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 |
The stock price performance included in this graph is not necessarily indicative of future stock price performance. Notwithstanding anything set forth in any of our previous filings under the Securities Act or the Exchange Act, which might be incorporated into future filings in whole or part, including this Form 10-K, the preceding performance graph shall not be deemed incorporated by reference into any such filings.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
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 contained in this Form 10-K. Information in MD&A is intended to 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.
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 and trailers 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 15 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 to the accompanying consolidated financial statements, the Company’s business units are organized in two reportable segments: the Environmental Solutions Group and the Safety and Security Systems Group.
We continue to closely monitor the impact of the COVID-19 pandemic on all aspects of our business, including how it is affecting our employees, customers, supply chain and distribution network. In February 2020, we established a cross-functional task force to monitor ongoing developments, implement mitigation plans and centrally coordinate our response to the pandemic.
Generally, our businesses are considered to be essential in supporting critical infrastructure needs and public safety. While certain of our operations have been affected by temporary facility closures, either due to government-issued mandates or other concerns related to COVID-19, our facilities have remained substantially operational to date. Given that, our primary focus has been on the safety and well-being of our employees. We were, and continue to be, proactive in procuring personal protective equipment and sanitizing supplies for our facilities. We also implemented a series of enhanced health and safety measures across the organization, such as reconfiguring work spaces and staggering manufacturing shifts to allow for social distancing, introducing temperature screening protocols, enhancing facility cleaning, limiting non-essential travel and restricting the number of visitors to our facilities. Further, we established remote working arrangements, where possible, supported by the use of virtual meeting capabilities. As many of the government-mandated stay-at-home orders were lifted throughout the course of the second quarter, the majority of our telecommuting employees have gradually returned to the workplace, following our enhanced safety protocols. We also modified our employee attendance policies and provided employees with additional paid time off in order to encourage those who were sick, had health concerns, or were otherwise adversely impacted by the pandemic, to remain at home.
As a result of the combination of these factors and the enactment of the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), we experienced a decrease in labor availability at several of our facilities during the second quarter. While labor availability improved during the third and fourth quarters, we continued to experience labor-related disruptions, including several COVID-19-related quarantine absences. This resulted in a variety of challenges in running our operations efficiently, and we adjusted our production schedules, accordingly. We saw similar issues within our supply chain, with certain suppliers temporarily shut down. Our procurement teams have worked diligently with our key suppliers to effectively secure safety stock and manage inventory levels and, in some circumstances, have identified alternate suppliers and in-sourcing opportunities in order to mitigate the impact of supply-chain disruptions on production.
The government-mandated stay-at-home orders and travel and visitor restrictions significantly impacted the Company’s sales and marketing activities during the second quarter, with limited ability to attend trade shows and conduct equipment demonstrations and in-person sales meetings. In addition, certain customers were unable to take delivery of equipment given travel restrictions and the limited personnel that they had available. These factors significantly impacted order intake and operating results during the second quarter. However, as the second quarter progressed, many of the government-mandated restrictions that were imposed in states across the U.S. started to ease, albeit at different times, and at different levels. With business-related travel steadily increasing during the third and fourth quarters, our sales teams and dealer partners have been able to increase the amount of equipment demonstrations. That has helped contribute to sequential order improvement, with our
third quarter orders up $65 million, or 32%, compared to the second quarter, and our fourth quarter orders up $10 million, or 4%, compared to the third quarter.
The timing of production and realization of our backlog, which totaled $304 million as of December 31, 2020, may be delayed or otherwise negatively impacted by our ability to continue to run our operations as an essential business during the COVID-19 pandemic and/or to return to our normal production capacity, faced with the ongoing potential for adverse impacts associated with decreased labor availability, the temporary suspension of production activity mandated or otherwise made necessary by governmental authorities, weakened demand, supply chain disruptions, or other production delays. Such factors have adversely affected the comparability of our operating and financial results for the year ended December 31, 2020 with the corresponding prior year, and may continue to impact comparability in subsequent years. We are responding accordingly and taking steps to manage through these challenging times, including implementing measures to reduce costs and manage our capital prudently. At the same time, we are maintaining our focus on our eighty-twenty improvement initiatives.
In an effort to mitigate the impact of these pandemic-related operational challenges, we implemented the following cost-saving actions:
•Temporary salary reductions ranging from 20% to 25% during the second quarter for approximately 60 members of the Company’s enterprise leadership team, including executive officers;
•Temporary reduction in Board of Directors fees ranging from 22.5% to 25% during the second quarter;
•Roll-back of 2020 merit-based salary increases for most domestic salaried employees, effective in the third quarter;
•Temporary furloughs of approximately 400 employees, primarily within the second quarter;
•Permanent reductions in force impacting approximately 200 employees; and
•Limited discretionary spending, primarily within Selling, engineering, general and administrative (“SEG&A”) expenses, including travel and entertainment expenses.
We are continuing to approach the uncertainty and challenges with resolve and from a position of strength given our current financial position. As of December 31, 2020, we had $82 million of cash and cash equivalents and $280 million of availability for borrowings under our five-year revolving credit facility, which we executed in July 2019.
However, the overall magnitude of the impact of the pandemic on our operating and financial results remains uncertain and will largely depend on the duration of the pandemic and the measures implemented in response, as well as the effect on our customers and suppliers. Given these factors, we are unable to reliably forecast the effect that the pandemic will have on our financial condition, results of operations or cash flows, which could be material.
Operating and Financial Performance in 2020
Despite the challenges created by the pandemic, the Company was able to sustain a high level of financial performance and make progress against several long-term objectives in 2020. Included among the Company’s highlights in 2020 were the following:
•For the year ended December 31, 2020, we reported operating income and income from continuing operations of $131.4 million and $96.1 million, respectively.
•On a consolidated basis, we reported adjusted EBITDA* of $182.2 million for the year ended December 31, 2020, which translated to an adjusted EBITDA margin* of 16.1%. That return was above the high end of our target range, and represented a 40-basis point year-over-year improvement.
•Cash flow from continuing operating activities for the year ended December 31, 2020 was $136.3 million, an increase of $32.9 million, or 32%, over the prior year.
•With the increased operating cash flow, we ended the year with $82 million of cash and $280 million of availability for borrowings under our $500 million credit facility, which was executed in July 2019. The five-year facility can be increased by an additional $250 million for acquisitions.
•With our strong balance sheet, positive operating cash flow, and capacity under our revolving 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 2020:
◦Our capital expenditure for 2020 was approximately $30 million, as we continued to make strategic investments for the future by purchasing new machinery and equipment aimed at gaining operating efficiencies, and expanding capacity at several of our production facilities, including our locations in Streator, Illinois, Rugby, North Dakota, Lake Crystal, Minnesota, and Billings, Montana.
◦We have also continued to invest in new product development and are encouraged that these efforts will provide additional opportunities to further diversify our customer base, penetrate new end-markets or gain access to new geographic regions.
◦In June, we completed the acquisition of certain assets and operations of Public Works Equipment and Supply, Inc. (“PWE”), a distributor of maintenance and infrastructure equipment covering North Carolina, South Carolina and parts of Tennessee. The acquisition added a third location to our current footprint in this population-dense region which we anticipate will allow us to better serve our customers and accelerate the growth of our aftermarket business.
◦We demonstrated our commitment to returning value to stockholders by paying cash dividends of $19.4 million, and spending $13.7 million repurchasing shares under our authorized repurchase program.
•Our eighty-twenty improvement initiatives remain a critical part of our culture and we continue to focus on reducing product costs and improving manufacturing efficiencies across all our businesses.
•To highlight our ongoing focus on operating in a socially responsible and sustainable manner, we published our inaugural annual Sustainability Report in October 2020.
*The Company uses adjusted earnings before interest, tax, depreciation and amortization (“adjusted EBITDA”) and the ratio of adjusted EBITDA to net sales (“adjusted EBITDA margin”) as additional measures which are representative of its underlying performance and to improve the comparability of results across reporting periods. Refer to the Results of Operations section for further discussion regarding these non-GAAP metrics and a reconciliation of each to the most comparable GAAP measure for each of the periods presented.
Results of Operations
The following table summarizes our Consolidated Statements of Operations as of, and for the years ended, December 31, 2020, 2019 and 2018, and illustrates the key financial indicators used to assess our consolidated financial results:
|For the Years Ended December 31,||Change|
|($ in millions, except per share data)||2020||2019||2018||2020 vs. 2019||2019 vs. 2018|
|Net sales||$||1,130.8 ||$||1,221.3 ||$||1,089.5 ||$||(90.5)||$||131.8 |
|Cost of sales||837.2 ||898.5 ||807.4 ||(61.3)||91.1 |
|Gross profit||293.6 ||322.8 ||282.1 ||(29.2)||40.7 |
|Selling, engineering, general and administrative expenses||158.8 ||173.2 ||159.1 ||(14.4)||14.1 |
|Acquisition and integration-related expenses||2.1 ||2.5 ||1.5 ||(0.4)||1.0 |
|Restructuring||1.3 ||— ||— ||1.3 ||— |
|Operating income||131.4 ||147.1 ||121.5 ||(15.7)||25.6 |
|Interest expense||5.7 ||7.9 ||9.3 ||(2.2)||(1.4)|
|Other expense, net||1.1 ||0.6 ||0.6 ||0.5 ||— |
|Income before income taxes||124.6 ||138.6 ||111.6 ||(14.0)||27.0 |
|Income tax expense||28.5 ||30.2 ||17.9 ||(1.7)||12.3 |
|Income from continuing operations||96.1 ||108.4 ||93.7 ||(12.3)||14.7 |
|Gain from discontinued operations and disposal, net of tax||0.1 ||0.1 ||0.3 ||— ||(0.2)|
|Net income||$||96.2 ||$||108.5 ||$||94.0 ||$||(12.3)||$||14.5 |
|Operating margin||11.6 ||%||12.0 ||%||11.2 ||%||(0.4)||%||0.8 ||%|
Adjusted EBITDA (a)
|$||182.2 ||$||191.3 ||$||158.6 ||$||(9.1)||$||32.7 |
Adjusted EBITDA margin (a)
|16.1 ||%||15.7 ||%||14.6 ||%||0.4 ||%||1.1 ||%|
|Diluted earnings per share — Continuing operations||$||1.56 ||$||1.76 ||$||1.53 ||$||(0.20)||$||0.23 |
|Total orders||1,047.1 ||1,269.0 ||1,173.2 ||(221.9)||95.8 |
|Backlog||303.9 ||386.9 ||337.7 ||(83.0)||49.2 |
|Depreciation and amortization||44.8 ||41.5 ||36.4 ||3.3 ||5.1 |
(a)The Company uses adjusted EBITDA and adjusted EBITDA margin as additional measures which are representative of its underlying performance and to improve the comparability of results across reporting periods. We believe 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 income from continuing operations, interest expense, hearing loss settlement charges, acquisition and integration-related expenses, restructuring activity, coronavirus-related expenses, purchase accounting effects, other income/expense, income tax expense, depreciation and amortization expense and the impact of adoption of a new lease accounting standard, where applicable. Adjusted EBITDA margin is a non-GAAP measure that represents the total of income from continuing operations, interest expense, hearing loss settlement charges, acquisition and integration-related expenses, restructuring activity, coronavirus-related expenses, purchase accounting effects, other income/expense, income tax expense, depreciation and amortization expense and the impact of adoption of a new lease accounting standard, 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.
A discussion of changes in the Company’s financial condition and results of operations during the year ended December 31, 2019 compared to the year ended December 31, 2018 has been omitted from this Annual Report on Form 10-K, but may be found under the heading “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the Company’s Annual Report on Form 10-K the year ended December 31, 2019, filed with the SEC on February 27, 2020.
Year ended December 31, 2020 vs. year ended December 31, 2019
Net sales for the year ended December 31, 2020 decreased by $90.5 million, or 7%, compared to the prior year. Within the Environmental Solutions Group, net sales decreased by $77.1 million, or 8%, largely due to decreases in shipments of safe-digging trucks, industrial vacuum loaders, sweepers, dump bodies, waterblasting equipment, sewer cleaners, trailers and snow removal equipment of $26.4 million, $22.0 million, $20.7 million, $7.8 million, $7.5 million, $6.7 million, $4.7 million and $3.2 million, respectively. Partially offsetting these reductions was an increase in shipments of road-marking and line removal equipment and refuse equipment of $12.4 million and $8.0 million, respectively. Within the Safety and Security Systems
Group, net sales decreased by $13.4 million, or 6%, primarily due to reductions in sales of industrial signaling equipment, warning systems and public safety equipment of $7.9 million, $4.0 million and $1.7 million, respectively.
Cost of sales
For the year ended December 31, 2020, cost of sales decreased by $61.3 million, or 7%, compared to the prior year, largely due to a decrease of $58.0 million, or 8%, within the Environmental Solutions Group, primarily attributable to lower sales volumes and a favorable foreign currency translation impact of $1.4 million, partially offset by the recognition of additional cost of sales from the MRL acquisition. Within the Safety and Security Systems Group, cost of sales decreased by $3.3 million, or 2%, largely due to lower sales volumes.
For the year ended December 31, 2020, gross profit decreased by $29.2 million, or 9%, compared to the prior year, primarily due to reductions of $19.1 million and $10.1 million within the Environmental Solutions Group and the Safety and Security Systems Group, respectively. Gross margin for the year ended December 31, 2020 was 26.0%, compared to 26.4% in the prior year, primarily driven by reductions within the Safety and Security Group and Environmental Solutions Group of 220 basis points and 10 basis points, respectively.
Selling, engineering, general and administrative (“SEG&A”) expenses
For the year ended December 31, 2020, SEG&A expenses decreased by $14.4 million, or 8%, primarily due to reductions in SEG&A expenses within the Safety and Security Systems Group, the Environmental Solutions Group and Corporate of $7.3 million, $3.9 million and $3.2 million, respectively. As a percentage of net sales, SEG&A expenses decreased from 14.2% in the prior year, to 14.0% in the current year.
Operating income for the year ended December 31, 2020 decreased by $15.7 million, or 11%, compared to the prior year, primarily driven by reductions of $15.1 million and $3.1 million within the Environmental Solutions Group and Safety and Security Systems Group, respectively, partially offset by a $2.5 million decrease in Corporate expenses. Consolidated operating margin for the year ended December 31, 2020 was 11.6%, compared to 12.0% in the prior year.
Interest expense for the year ended December 31, 2020 decreased by $2.2 million, or 28%, compared to the prior year, largely due to lower interest rates in comparison to the prior year.
Other expense, net
For the year ended December 31, 2020, Other expense, net, totaled $1.1 million of expense, largely due to the recognition of a $2.3 million charge associated with the withdrawal from a multi-employer pension plan, partially offset by $0.5 million of net periodic pension benefit and $0.4 million of foreign currency transaction gains. For the year ended December 31, 2019, Other expense, net, totaled $0.6 million of expense, largely due to $0.9 million of net periodic pension expense.
Income tax expense
The Company recognized income tax expense of $28.5 million for the year ended December 31, 2020, compared to $30.2 million for the year ended December 31, 2019. The reduction in income tax expense in the current year was primarily due to lower earnings and a $1.9 million increase in excess tax benefits from stock compensation activity, partially offset by the non-recurrence of a $0.8 million tax benefit from the release of state deferred tax valuation allowance recognized in the prior year. The Company’s effective tax rate for the year ended December 31, 2020 was 22.9%, compared to 21.8% in 2019. For further discussion, see Note 10 – Income Taxes to the accompanying consolidated financial statements.
Income from continuing operations
Income from continuing operations for the year ended December 31, 2020 decreased by $12.3 million, or 11%, compared to the prior year, largely due to the aforementioned reduction in operating income and the $0.5 million increase in other expense, partially offset by the $2.2 million reduction in interest expense, and the $1.7 million decrease in income tax expense.
Adjusted EBITDA for the year ended December 31, 2020 decreased by $9.1 million, or 5%, compared to the prior year. Adjusted EBITDA margin for the year ended December 31, 2020 was 16.1%, up from 15.7% in the prior year.
The following table summarizes the Company’s adjusted EBITDA and adjusted EBITDA margin and reconciles income from continuing operations to adjusted EBITDA for each of the three years in the period ended December 31, 2020:
|For the Years Ended December 31,|
|($ in millions)||2020||2019||2018|
|Income from continuing operations||$||96.1 ||$||108.4 ||$||93.7 |
|Interest expense||5.7 ||7.9 ||9.3 |
|Hearing loss settlement charges||— ||— ||0.4 |
|Acquisition and integration-related expenses||2.1 ||2.5 ||1.5 |
|Restructuring||1.3 ||— ||— |
Coronavirus-related expenses (a)
|2.3 ||— ||— |
Purchase accounting effects (b)
|0.3 ||0.2 ||0.7 |
|Other expense, net||1.1 ||0.6 ||0.6 |
|Income tax expense||28.5 ||30.2 ||17.9 |
|Depreciation and amortization||44.8 ||41.5 ||36.4 |
Deferred gain recognition (c)
|— ||— ||(1.9)|
|Adjusted EBITDA||$||182.2 ||$||191.3 ||$||158.6 |
|Net sales||$||1,130.8 ||$||1,221.3 ||$||1,089.5 |
|Adjusted EBITDA margin||16.1 ||%||15.7 ||%||14.6 ||%|
(a)Coronavirus-related expenses relate to direct expenses incurred in connection with the Company's response to the coronavirus pandemic, that are incremental to, and separable from, normal operations. Such expenses primarily relate to incremental paid time off provided to employees and costs incurred to implement enhanced workplace safety protocols.
(b)Purchase accounting effects represent the step-up in the valuation of equipment acquired in recent business combinations that was sold during the periods presented.
(c)Adjustment to exclude recognition of a deferred gain associated with historical sale lease-back transactions. Effective with the adoption of the new lease accounting standard in 2019, recognition of this gain was eliminated.
The following table summarizes the Environmental Solutions Group’s operating results as of, and for the years ended, December 31, 2020, 2019 and 2018:
|For the Years Ended December 31,||Change|
|($ in millions)||2020||2019||2018||2020 vs. 2019||2019 vs. 2018|
|Net sales||$||915.8 ||$||992.9 ||$||863.5 ||$||(77.1)||$||129.4 |
|Operating income||124.3 ||139.4 ||113.0 ||(15.1)||26.4 |
|Operating margin||13.6 ||%||14.0 ||%||13.1 ||%||(0.4)||%||0.9 ||%|
|Total orders||$||840.0 ||$||1,038.0 ||$||945.8 ||$||(198.0)||$||92.2 |
|Backlog||282.5 ||357.6 ||310.3 ||(75.1)||47.3 |
|Depreciation and amortization||41.3 ||38.1 ||32.6 ||3.2 ||5.5 |
Year ended December 31, 2020 vs. year ended December 31, 2019
Total orders decreased by $198.0 million, or 19%, for the year ended December 31, 2020. U.S. orders decreased by $181.1 million, or 22%, primarily due to reductions in orders for safe-digging trucks, sewer cleaners, street sweepers, industrial vacuum loaders and dump truck bodies of $59.2 million, $59.0 million, $29.8 million, $27.0 million and $9.6 million, respectively. Partially offsetting these reductions was a $9.1 million increase in orders for trailers. Non-U.S. orders decreased by $16.9 million, or 9%, primarily due to decreases in orders for safe-digging trucks, sewer cleaners and street sweepers of $9.3
million, $9.3 million and $9.2 million, respectively, and an unfavorable foreign currency translation impact of $1.3 million. Partially offsetting these reductions was a $12.2 million increase in orders for refuse trucks.
Net sales decreased by $77.1 million, or 8%, for the year ended December 31, 2020. U.S. sales decreased by $65.5 million, or 8%, primarily due to decreases in shipments of industrial vacuum loaders, safe-digging trucks, sweepers, dump truck bodies, waterblasting equipment and trailers of $21.4 million, $18.1 million, $17.8 million, $7.4 million, $6.2 million and $4.7 million, respectively. In addition, aftermarkets revenues decreased by $2.5 million. Partially offsetting these reductions was a $10.8 increase in shipments of road-marking and line removal-equipment. Non-U.S. sales decreased by $11.6 million, or 6%, primarily due to decreases in shipments of safe-digging trucks, sewer cleaners, sweepers and snow-removal equipment of $8.3 million, $6.8 million, $2.9 million and $2.2 million, respectively, as well as a $1.5 million unfavorable foreign currency translation impact. Partially offsetting these reductions was an $8.0 million increase in sales of refuse trucks, and a $3.8 million improvement in aftermarket revenues.
Cost of sales decreased by $58.0 million, or 8%, for the year ended December 31, 2020, primarily attributable to lower sales volumes and a $1.4 million favorable foreign currency translation impact, partially offset by the recognition of additional cost of sales from the MRL acquisition. Gross margin for the year ended December 31, 2020 was 23.3%, compared to 23.4% in the prior year, primarily due to a reduction in operating leverage with lower sales volumes.
SEG&A expenses decreased by $3.9 million, or 4%, for the year ended December 31, 2020, primarily due to cost saving actions implemented in response to the COVID-19 pandemic, partially offset by the addition of expenses of businesses acquired in the prior year, and a $0.8 million increase in amortization expense. As a percentage of net sales, SEG&A expenses were 9.6% in the current year, compared to 9.3% in the prior year.
Operating income decreased by $15.1 million, or 11%, for the year ended December 31, 2020, largely due to a $19.1 million reduction in gross profit and the recognition of $0.7 million of restructuring charges, partially offset by decreases in SEG&A expenses and acquisition-related costs of $3.9 million and $0.8 million, respectively.
Backlog was $282.5 million at December 31, 2020, compared to $357.6 million at December 31, 2019.
Safety and Security Systems
The following table summarizes the Safety and Security Systems Group’s operating results as of, and for the years ended, December 31, 2020, 2019 and 2018:
|For the Years Ended December 31,||Change|
|($ in millions)||2020||2019||2018||2020 vs. 2019||2019 vs. 2018|
|Net sales||$||215.0 ||$||228.4 ||$||226.0 ||$||(13.4)||$||2.4 |
|Operating income||35.5 ||38.6 ||34.1 ||(3.1)||4.5 |
|Operating margin||16.5 ||%||16.9 ||%||15.1 ||%||(0.4)||%||1.8 ||%|
|Total orders||$||207.1 ||$||231.0 ||$||227.4 ||$||(23.9)||$||3.6 |
|Backlog||21.4 ||29.3 ||27.4 ||(7.9)||1.9 |
|Depreciation and amortization||3.4 ||3.3 ||3.7 ||0.1 ||(0.4)|
Year ended December 31, 2020 vs. year ended December 31, 2019
Total orders decreased by $23.9 million, or 10%, for the year ended December 31, 2020. U.S. orders decreased by $15.4 million, or 11%, compared to the prior year, primarily due to reductions in orders for industrial signaling equipment, public safety equipment and warning systems of $7.8 million, $5.6 million and $2.0 million, respectively. Non-U.S. orders decreased by $8.5 million, or 10%, primarily due to reductions in orders for public safety equipment and industrial signaling equipment of $7.3 million and $2.5 million, respectively, partially offset by a $1.6 million improvement in orders for warning systems.
Net sales decreased by $13.4 million, or 6%, for the year ended December 31, 2020. U.S. sales decreased by $15.0 million, or 10%, primarily driven by reductions in sales of public safety equipment, industrial signaling equipment and warning systems of $7.1 million, $6.1 million and $1.8 million, respectively. Non-U.S. sales increased by $1.6 million, or 2%, largely due to a $5.4 million increase in sales of public safety equipment, partially offset by reductions in sales of warning systems and industrial signaling equipment of $2.2 million and $1.8 million, respectively.
Cost of sales decreased by $3.3 million, or 2%, for the year ended December 31, 2020, primarily related to lower sales volumes. Gross margin for the year ended December 31, 2020 was 37.3%, compared to 39.5% in the prior year, with the decrease primarily attributable to unfavorable sales mix.
SEG&A expenses decreased by $7.3 million, or 14%, for the year ended December 31, 2020, primarily as a result of cost-saving actions implemented in response to the COVID-19 pandemic, as well as reductions in incentive-based compensation expense. As a percentage of net sales, SEG&A expenses decreased to 20.6% in the current year, from 22.6% in the prior year.
Operating income decreased by $3.1 million, or 8%, for the year ended December 31, 2020, largely due to a $10.1 million reduction in gross profit and restructuring charges of $0.3 million, partially offset by the $7.3 million reduction in SEG&A expenses.
Backlog was $21.4 million at December 31, 2020, compared to $29.3 million at December 31, 2019.
Corporate operating expenses were $28.4 million, $30.9 million and $25.6 million for the years ended December 31, 2020, 2019 and 2018, respectively.
For the year ended December 31, 2020, corporate operating expenses decreased by $2.5 million, primarily due to reductions in incentive-based compensation expense and other employee-related costs, including the effects of cost-saving actions implemented in response to the COVID-19 pandemic, partially offset by a $0.4 million increase in acquisition and integration-related expenses.
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 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 2019 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 flow from operating activities.
The Company’s cash and cash equivalents totaled $81.7 million, $31.6 million and $37.4 million as of December 31, 2020, 2019 and 2018, respectively. As of December 31, 2020, $24.6 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 permanently 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, dependent on income tax laws and other circumstances at the time any such amounts were repatriated.
Net cash provided by continuing operating activities totaled $136.3 million, $103.4 million and $92.8 million in 2020, 2019 and 2018, respectively. The $32.9 million, or 32%, increase in cash generated by continuing operating activities in 2020 compared to the prior year was primarily due to working capital timing differences, lower rental fleet investment, a $3.4 million reduction in income tax payments, deferral of $7.3 million of payroll tax payments, which are expected to be paid over the next two years, in accordance with the provisions of the CARES Act, lower incentive compensation payments, and a $3.1 million improvement resulting from reduced acquisition-related activity. Partially offsetting these improvements was a $7.1 million increase in pension-related payments.
Net cash used for investing activities totaled $34.4 million, $84.4 million and $11.0 million in 2020, 2019 and 2018, respectively. In each of the years presented, cash was used to fund the purchase of properties and equipment, with $29.7 million, $35.4 million and $14.1 million of capital expenditures in 2020, 2019 and 2018, respectively. Capital expenditures in 2020 and 2019 were higher due to the expansion of a number of the Company’s production facilities. In addition, as discussed
in Note 2 – Acquisitions, in 2020 the Company paid $6.2 million to acquire certain assets and operations of PWE and received $0.8 million as part of the finalization of certain post-closing adjustments in connection with the acquisition of MRL, which it acquired in 2019 for an initial $49.6 million, net of cash acquired. In 2018, the Company received an adjustment for working capital and other post-closing items in the amount of $3.0 million relating to the TBEI acquisition, which was completed in 2017.
Net cash used for financing activities totaled $53.4 million, $24.6 million and $81.2 million in 2020, 2019 and 2018, respectively. In 2020, the Company paid down $11.8 million of net borrowings under its revolving credit facility, funded cash dividends and share repurchases of $19.4 million and $13.7 million, respectively, and redeemed $9.1 million of 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. In 2019, the Company’s net borrowings increased by $7.4 million, primarily related to the funding of the acquisition of MRL. In addition, the Company funded payments of $10.3 million relating to acquisitions completed in 2016, paid cash dividends of $19.3 million, incurred $1.0 million of debt refinancing costs, repurchased $1.0 million of treasury stock, and redeemed $2.1 million of stock in order to remit funds to tax authorities to satisfy employees’ minimum tax withholdings following the vesting of stock-based compensation. In 2018, the Company repaid $62.1 million of net borrowings, funded cash dividends of $18.7 million, and repurchased $1.2 million of treasury stock.
On July 30, 2019, the Company entered into the 2019 Credit Agreement, by and among the Company (the “U.S. Borrower”) and certain of its foreign subsidiaries (collectively, the “Borrowers”), Wells Fargo Bank, National Association, as administrative agent, swingline lender and issuing lender, JPMorgan Chase Bank, N.A. as syndication agent, and the other lenders and parties signatory thereto.
The 2019 Credit Agreement is a $500 million revolving credit facility, maturing on July 30, 2024, that 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 $75 million for letters of credit. The 2019 Credit Agreement allows for the Borrowers to borrow in denominations of U.S. Dollars, Canadian Dollars, Euros or British Pounds (with borrowings in non-U.S. currencies subject to a sublimit of $200 million). In addition, the Company may cause the commitments to increase by up to an additional $250 million, subject to the approval of the applicable lenders providing such additional financing. Borrowings under the 2019 Credit Agreement may be used for working capital and general corporate purposes, including acquisitions.
The Company’s material domestic subsidiaries provide guarantees for all obligations of the Borrowers under the 2019 Credit Agreement, which is secured by a first priority security interest in (i) all existing or hereafter acquired domestic property and assets of the U.S. Borrower 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 2019 Credit Agreement bear interest, at the Company’s option, at a base rate or a LIBOR rate, 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 LIBOR 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 $500 million revolving credit facility along with other standard fees. Letter of credit fees are payable on outstanding letters of credit in an amount equal to the applicable LIBOR margin plus other customary fees.
The Company is subject to certain net leverage ratio and interest coverage ratio financial covenants under the 2019 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, 2020. The 2019 Credit Agreement also includes a series of “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 2019 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 sale/leaseback transactions; (ix) make negative pledges; and (x) modify subordinated debt documents.
Under the 2019 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 3.25; (ii) the Company is in compliance with all other financial covenants; and (iii) there are no existing defaults under the 2019 Credit Agreement. If its leverage ratio is more than 3.25, the Company is still permitted to fund (i) up to $35 million of dividend payments and stock repurchases; and (ii) an incremental $50 million of other cash payments.
The 2019 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 2019 Credit Agreement and the commitments from the lenders may be terminated.
In connection with the execution of the 2019 Credit Agreement during the year ended December 31, 2019, the Company incurred $1.0 million of debt issuance costs. Such fees have been deferred and are being amortized over the five-year term.
As of December 31, 2020, there was $209.4 million of cash drawn and $10.3 million of undrawn letters of credit under the 2019 Credit Agreement, with $280.3 million of net availability for borrowings.
The following table summarizes the gross borrowings and gross payments under the Company’s revolving credit facilities:
|For the Years Ended December 31,|
|Gross borrowings||$||82.6 ||$||84.0 ||$||8.0 |
|Gross payments||94.4 ||76.6 ||70.1 |
Aggregate maturities of total borrowings due amount to approximately $0.2 million in 2021, $0.2 million in 2022, $0.1 million in 2023, and $209.5 million in 2024. The weighted average interest rate on long-term borrowings was 1.7% at December 31, 2020.
The Company paid interest of $5.4 million in 2020, $7.8 million in 2019 and $8.7 million in 2018.
The Company paid income taxes of $22.3 million in 2020, $25.7 million in 2019 and $21.6 million in 2018.
Cash dividends of $19.4 million, $19.3 million and $18.7 million were declared and paid to stockholders in 2020, 2019 and 2018, respectively.
The Company anticipates that capital expenditures for 2021, including investments associated with certain ongoing plant expansions, will be in the range of $20 million to $25 million. The Company believes that its financial resources and major sources of liquidity, including cash flow from operations and borrowing capacity, will be adequate to meet its operating needs, capital needs and financial commitments.
Contractual Obligations and Off-Balance Sheet Arrangements
The following table summarizes the Company’s contractual obligations and payments due by period as of December 31, 2020:
| ||Payments Due by Period|
|(in millions)||Total||Less than|
|2-3 Years||4-5 Years||More than|
|Long-term debt||$||209.4 ||$||— ||$||— ||$||209.4 ||$||— |
Interest payments on long-term debt (a)
|14.5 ||3.5 ||7.3 ||3.7 ||— |
Operating lease obligations (b)
|25.2 ||9.1 ||12.8 ||2.4 ||0.9 |
|Finance lease obligations||0.6 ||0.2 ||0.3 ||0.1 ||— |
Purchase obligations (c)
|125.8 ||123.9 ||1.8 ||0.1 ||— |
Pension contributions (d)
|5.7 ||5.7 ||— ||— ||— |
Contingent earn-out payment (e)
|4.2 ||— ||4.2 ||— ||— |
Total contractual obligations (f)
|$||385.4 ||$||142.4 ||$||26.4 ||$||215.7 ||$||0.9 |
(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 to the accompanying consolidated financial statements.
(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 $4.3 million to the U.S. benefit plan and up to $1.4 million to the non-U.S. benefit plan in 2021, which represent the minimum required contributions. 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.
(e) Represents the fair value of the contingent earn-out payment associated with the acquisition of MRL. For further discussion, see Note 2 – Acquisitions to the accompanying consolidated financial statements.
(f) As of December 31, 2020, the Company had a liability of approximately $1.2 million for unrecognized tax benefits. For further discussion, see Note 10 – Income Taxes to the accompanying consolidated financial statements. Due to the uncertainties related to these tax matters, the Company generally cannot
make a reasonably reliable estimate of the period of cash settlement for this liability. As such, the potential future cash outflows are not included in the table above. We do not expect any significant change to our unrecognized tax benefits as a result of potential expiration of statute of limitations and settlements with tax authorities.
The following table summarizes the Company’s off-balance sheet arrangements and the notional amount by expiration period as of December 31, 2020:
| ||Notional Amount by Expiration Period|
|(in millions)||Total ||Less than|
|2-3 Years||4-5 Years|
Financial standby letters of credit (a)
|$||9.8 ||$||9.8 ||$||— ||$||— |
Performance standby letters of credit (a)
|0.5 ||0.5 ||— ||— |
Performance and bid bonds (b)
|14.9 ||14.7 ||0.2 ||— |
Repurchase obligations (c)
|4.1 ||1.4 ||1.2 ||1.5 |
|Total off-balance sheet arrangements||$||29.3 ||$||26.4 ||$||1.4 ||$||1.5 |
(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. Performance standby letters of credit primarily represent guarantees of performance of certain subsidiaries that engage in transactions with foreign customers.
(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 to the accompanying consolidated financial statements.
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 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, 2020.
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, cost of sales, operating expenses 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 operating expenses 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 2020, 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 the reporting unit. The valuation was prepared
by a third-party valuation specialist. One measure of the sensitivity of assumptions used in the impairment analysis is the amount by which each reporting unit “passed” (fair value exceeds the carrying value). The fair value of the reporting unit exceeded its carrying value by approximately 50%, and, therefore, no impairment was recognized. For its other reporting units, the Company applied the qualitative approach to assess the goodwill of its reporting units for potential impairment and concluded that it was not “more likely than not” that the fair value of the Company’s reporting units were less than their carrying values. Accordingly, further quantitative testing was not required to be performed.
The Company had no goodwill impairments in 2020, 2019 or 2018. 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 2020. 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 to the accompanying consolidated financial statements 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 year-end, 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 primarily with the MRL, TBEI and JJE acquisitions that were completed in 2019, 2017 and 2016, respectively.
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 are 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 2020, 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 70%, 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 2020, 2019 or 2018. 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 to the accompanying consolidated financial statements for a summary of the Company’s indefinite-lived intangible assets.
Revenue is recognized when performance obligations under the terms of a contract with the customer are satisfied; generally this occurs at a point in time, with the transfer of control of the Company’s products or services to customers. For most of the Company’s product sales, these criteria are met at the time the product is shipped; however, occasionally control passes later or earlier than shipment due to customer contract or letter of credit terms. In circumstances where credit is extended, payment terms generally range from 30 to 120 days and customer deposits may be required.
Revenue is measured as the amount of consideration the Company expects to be entitled to in exchange for transferring products or providing services. Expected returns and allowances are estimated and recognized based primarily on an analysis of historical experience, with Net sales presented net of such returns and allowances.
The Company enters into sales arrangements that may provide for multiple performance obligations to a customer. These arrangements may include software and non-software components that function together to deliver the products’ essential functionality. The Company identifies all performance obligations that are to be delivered separately under the sales arrangement and allocates revenue to each performance obligation based on its relative standalone selling price. The Company uses an observable price to determine the standalone selling price or a cost plus margin approach when one is not available. In general, performance obligations include hardware, integration and installation services. The allocated revenue for each performance obligation is recognized as such performance obligations are satisfied.
Net sales include sales of products and billed freight related to product sales. Freight has not historically comprised a material component of Net sales. The Company has elected to account for such shipping and handling activities as a fulfillment cost and not as a separate performance obligation. Taxes collected from customers and remitted to governmental authorities are recorded on a net basis and are excluded from Net sales.
We estimate our income taxes in each of the taxing jurisdictions in which we operate. This involves estimating actual current tax expense together with assessing any temporary differences resulting from the different treatment of certain items, such as the timing for recognizing expenses, for tax and accounting purposes. These differences may result in deferred tax assets or liabilities, which are included in our Consolidated Balance Sheets. We are required to assess the likelihood that deferred tax assets, which include net operating loss and foreign tax credit carryforwards and deductible temporary differences, will be realizable in future years.
Future realization of deferred tax assets depends on the existence of sufficient taxable income in future periods. Possible sources of taxable income include taxable income in carryback periods, the future reversal of existing taxable temporary differences recorded as a deferred tax liability, tax-planning strategies that generate future income or gains in excess of anticipated losses in the carryforward period and projected future taxable income. If, based upon all available evidence, both positive and negative, it is more likely than not such deferred tax assets will not be realized, a valuation allowance is recorded. Significant weight is given to positive and negative evidence that is objectively verifiable. A company’s three-year cumulative loss position is significant negative evidence in considering whether deferred tax assets are realizable and the accounting guidance restricts the amount of reliance the Company can place on projected taxable income to support the recovery of the deferred tax assets.
We continually evaluate the need to maintain a valuation allowance for deferred tax assets based on our assessment of whether it is more likely than not that deferred tax benefits will be realized through the generation of future taxable income. Appropriate consideration is given to all available evidence, both positive and negative, in assessing the need for a valuation allowance. A high degree of judgment is required to determine if, and the extent that, valuation allowances should be recorded against deferred tax assets.
At December 31, 2020, the total valuation allowance recorded against the Company’s deferred tax assets was $8.8 million, comprised of a $4.2 million valuation allowance recorded against state net operating loss carryforwards, a $3.1 million valuation allowance recorded against U.S. foreign tax credits, a $1.3 million valuation allowance recorded against foreign net deferred tax assets, and a $0.2 million valuation allowance recorded against other deferred tax assets.
For further discussion related to valuation allowances and other tax matters, refer to Note 10 – Income Taxes to the accompanying consolidated financial statements.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk.
The Company is subject to market risk associated with changes in interest rates and foreign exchange rates. To mitigate this risk, the Company may utilize derivative financial instruments, including interest rate swaps and foreign currency forward contracts. The Company does not hold or issue derivative financial instruments for trading or speculative purposes and is not party to leveraged derivatives contracts.
Interest Rate Risk
The Company has certain debt instruments which subject it to market risk associated with movements in interest rates. The fair value of the Company’s total debt obligations held at December 31, 2020 was $210.0 million. From time to time, the Company may enter into interest rate swaps as a means of fixing the floating interest rate component on its variable-rate debt. At December 31, 2020, the Company had one interest rate swap outstanding. That swap had a notional amount of $75.0 million, and fixed the floating interest rate component on $75.0 million of the Company’s variable-rate debt. See Note 9 – Debt to the accompanying consolidated financial statements for a description of the Company’s debt agreements and interest rate swaps that were in place during 2020. A hypothetical 1% increase or decrease in variable interest rates on the Company’s total debt obligations as of December 31, 2020 would increase or decrease annual interest expense by approximately $1.3 million.
Foreign Exchange Rate Risk
Although the majority of the Company’s sales, expenses and cash flow are transacted in U.S. dollars, the Company has exposure to changes in foreign exchange rates, primarily the Canadian Dollar, Euro and British pound. The impact of currency movements on the Company’s financial results is largely mitigated by natural hedges in its operations. The Canadian operations of JJE primarily conduct business in Canadian dollars. Almost all other sales of product from the U.S. to other parts of the world are denominated in U.S. dollars. Sales from and within other currency zones are predominantly transacted in the currency of the country sourcing the product or service. Approximately 77% of the Company’s net sales are conducted within the U.S. and are transacted in U.S. dollars. The Company estimates that a 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%.
The Company may also have foreign currency exposures related to buying and selling in currencies other than the local currency in which it operates and to certain balance sheet positions. If such transactional or balance sheet exposures are material, the Company may enter into matching foreign currency forward contracts from time to time to protect against variability in exchange rates.
Item 8. Financial Statements and Supplementary Data.
FEDERAL SIGNAL CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of Federal Signal Corporation
Oak Brook, Illinois
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Federal Signal Corporation and subsidiaries (the “Company”) as of December 31, 2020 and 2019, the related consolidated statements of operations, comprehensive income, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2020, and the related notes and the financial statement schedule listed in the Index at Part IV, Item 15 (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2020, in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 25, 2021, expressed an unqualified opinion on the Company's internal control over financial reporting.
Adoption of Topic 842, Leases
The Company changed its method of accounting for leases in the year ended December 31, 2019, due to adoption of Accounting Standards Update (“ASU”) No. 2016-02, Leases (“Topic 842”) and ASU No. 2018-11, Leases (Topic 842): Targeted Improvements using the alternative transition method outlined in ASU No. 2018-11, Leases (Topic 842): Targeted Improvements which permits application of the new guidance at the beginning of the period of adoption.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Goodwill - Refer to Notes 1 and 8 to the financial statements
Critical Audit Matter Description
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.
A quantitative approach is performed by comparing the fair value of a reporting unit with its carrying amount (“quantitative assessment”).
For reporting units evaluated for impairment using the quantitative assessment, the Company determines the fair value of each reporting unit using both the income approach and the market approach. The income approach requires management to make a number of business and valuation assumptions for each reporting unit including annual assumptions of projected sales, cost of sales, operating expenses, earnings before interest, income taxes, depreciation, and amortization (“EBITDA”) and discount rates. The market approach requires management to estimate fair value using marketplace fair value data derived from a comparable industry grouping of publicly traded companies and from pricing multiples implied from sales of companies similar to the Company’s reporting units (“market multiples”). The Company’s goodwill balance was $394.2 million as of December 31, 2020. No impairment was recognized in 2020.
We identified the valuation of goodwill for one of the Company’s reporting units as a critical audit matter due to the reporting unit’s historical performance as compared to projections and because the determination of reporting unit fair value was based on significant assumptions that are sensitive to changes and are affected by expected future market and economic conditions. Auditing management’s judgments used in the quantitative assessment regarding significant assumptions related to projected sales, cost of sales, operating expenses, and EBITDA (“forecasts”) as well as the selection of multiples applied to management’s projected sales and EBITDA estimates for this reporting unit required a high degree of auditor judgment and an increased extent of effort, including the need to involve our fair value specialists.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to the Company’s forecasts and the selection of market multiples for this reporting unit included the following, among others:
•We tested the design and operating effectiveness of controls over the annual goodwill impairment assessment, including those over the forecasts and the market multiples.
•We evaluated management’s ability to accurately forecast projected sales, cost of sales, operating expenses and EBITDA by comparing actual results to management’s historical forecasts.
•We evaluated the reasonableness of management’s forecasts by comparing the forecasts to:
◦Internal communications to management and the Board of Directors.
◦Comparing the forecasts to historical results, third-party economic research, industry performance, and peer company performance.
◦Actual results from the October 31, 2020, annual measurement date to December 31, 2020.
•We performed sensitivity analyses to evaluate the risk of impairment if key assumptions are changed.
•With the assistance of our fair value specialists, we evaluated the reasonableness of the (1) valuation methodology and (2) market multiples by performing certain procedures, that included:
◦Evaluating whether the fair value models being used are appropriate considering the Company’s circumstances and valuation premise identified.
◦Evaluating the market multiples by considering (1) the selected comparable industry grouping of publicly traded companies, (2) the selected sales of companies similar to the Company’s reporting unit, and (3) the adjustments made for differences in growth prospects and risk profiles between the reporting unit and the comparable industry grouping of publicly traded companies.
◦Testing the underlying source information and mathematical accuracy of the calculations.
/s/ Deloitte & Touche LLP
February 25, 2021
We have served as the Company’s auditor since 2013.
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of Federal Signal Corporation
Oak Brook, Illinois
Opinion on Internal Control over Financial Reporting
We have audited the internal control over financial reporting of Federal Signal Corporation and subsidiaries (the “Company”) as of December 31, 2020, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control — Integrated Framework (2013) issued by COSO.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the financial statements, as of and for the year ended December 31, 2020, of the Company and our report dated February 25, 2021 expressed an unqualified opinion on those financial statements.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Deloitte & Touche LLP
February 25, 2021
FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
| ||For the Years Ended December 31,|
|(in millions, except per share data)||2020||2019||2018|
|Net sales||$||1,130.8 ||$||1,221.3 ||$||1,089.5 |
|Cost of sales||837.2 ||898.5 ||807.4 |
|Gross profit||293.6 ||322.8 ||282.1 |
|Selling, engineering, general and administrative expenses||158.8 ||173.2 ||159.1 |
|Acquisition and integration-related expenses||2.1 ||2.5 ||1.5 |
|Restructuring||1.3 ||— ||— |
|Operating income||131.4 ||147.1 ||121.5 |
|Interest expense||5.7 ||7.9 ||9.3 |
|Other expense, net||1.1 ||0.6 ||0.6 |
|Income before income taxes||124.6 ||138.6 ||111.6 |
|Income tax expense||28.5 ||30.2 ||17.9 |
|Income from continuing operations||96.1 ||108.4 ||93.7 |
|Gain from discontinued operations and disposal, net of tax||0.1 ||0.1 ||0.3 |
|Net income||$||96.2 ||$||108.5 ||$||94.0 |
|Basic earnings per share:|
|Earnings from continuing operations||$||1.59 ||$||1.80 ||$||1.56 |
|Earnings from discontinued operations and disposal, net of tax||0.00 ||0.00 ||0.01 |
|Net earnings per share||$||1.59 ||$||1.80 ||$||1.57 |
|Diluted earnings per share:|
|Earnings from continuing operations||$||1.56 ||$||1.76 ||$||1.53 |
|Earnings from discontinued operations and disposal, net of tax||0.00 ||0.00 ||0.01 |
|Net earnings per share||$||1.56 ||$||1.76 ||$||1.54 |
|Weighted average shares outstanding:|
|Basic||60.3 ||60.2 ||59.9 |
|Diluted||61.7 ||61.6 ||61.2 |
See notes to consolidated financial statements.
FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
| ||For the Years Ended December 31,|
|Net income||$||96.2 ||$||108.5 ||$||94.0 |
|Other comprehensive income (loss):|
|Change in foreign currency translation adjustment||8.4 ||1.8 ||(6.4)|
Change in unrecognized net actuarial loss and prior service cost related to pension benefit plans, net of income tax (benefit) expense of $(2.2), $1.9 and $(0.6), respectively
Change in unrealized net gain on derivatives, net of income tax (benefit) expense of $(1.0), $(0.3) and $0.1, respectively
|Total other comprehensive (loss) income||(2.6)||8.2 ||(9.8)|
|Comprehensive income||$||93.6 ||$||116.7 ||$||84.2 |
See notes to consolidated financial statements.
FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
| ||As of December 31,|
|(in millions, except per share data)||2020||2019|
|Cash and cash equivalents||$||81.7 ||$||31.6 |
Accounts receivable, net of allowances for doubtful accounts of $2.9 and $2.4, respectively
|127.0 ||134.2 |
|Inventories||185.0 ||182.9 |
|Prepaid expenses and other current assets||11.8 ||12.0 |
|Total current assets||405.5 ||360.7 |
|Properties and equipment, net||106.9 ||91.9 |
|Rental equipment, net||113.3 ||115.4 |
|Operating lease right-of-use assets||21.9 ||27.6 |
|Goodwill||394.2 ||388.8 |
|Intangible assets, net||153.5 ||162.9 |
|Deferred tax assets||9.5 ||10.0 |
|Deferred charges and other long-term assets||3.8 ||7.9 |
|Long-term assets of discontinued operations||0.2 ||0.3 |
|Total assets||$||1,208.8 ||$||1,165.5 |
|LIABILITIES AND STOCKHOLDERS’ EQUITY|
|Current portion of long-term borrowings and finance lease obligations||$||0.2 ||$||0.2 |
|Accounts payable||51.6 ||65.0 |
|Customer deposits||13.3 ||11.5 |
|Compensation and withholding taxes||30.3 ||31.1 |
|Current operating lease liabilities||8.2 ||8.2 |
|Other current liabilities||44.7 ||44.0 |
|Current liabilities of discontinued operations||0.1 ||0.2 |
|Total current liabilities||148.4 ||160.2 |
|Long-term borrowings and finance lease obligations||209.8 ||220.3 |
|Long-term operating lease liabilities||15.5 ||21.6 |
|Long-term pension and other post-retirement benefit liabilities||54.0 ||50.9 |
|Deferred tax liabilities||53.7 ||52.7 |
|Other long-term liabilities||24.5 ||17.3 |
|Long-term liabilities of discontinued operations||0.8 ||0.9 |
|Total liabilities||506.7 ||523.9 |
Common stock, $1 par value per share, 90.0 shares authorized, 67.8 and 66.9 shares issued, respectively
|67.8 ||66.9 |
|Capital in excess of par value||240.8 ||228.6 |
|Retained earnings||605.0 ||528.2 |
Treasury stock, at cost, 7.3 and 6.4 shares, respectively
|Accumulated other comprehensive loss||(91.7)||(89.1)|
|Total stockholders’ equity||702.1 ||641.6 |
|Total liabilities and stockholders’ equity||$||1,208.8 ||$||1,165.5 |
See notes to consolidated financial statements.
FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
| ||For the Years Ended December 31,|