10-K 1 fss10k20171231.htm FORM 10-K. Document

 
UNITED STATES 
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
___________________________________ 
FORM 10-K
(Mark One)
þ
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2017
OR
¨
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
fsslogo_cover-123114a04.jpg
FEDERAL SIGNAL CORPORATION
(Exact name of registrant as specified in its charter)
Delaware
 
36-1063330
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
 
 
1415 West 22nd Street,
Oak Brook, Illinois
 
60523
(Address of principal executive offices)
 
(Zip Code)
Registrant’s telephone number, including area code (630) 954-2000
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
 
Name of Each Exchange on Which Registered
Common Stock, par value $1.00 per share
 
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  þ
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  þ
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  þ        No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted 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 and post such files).    Yes  þ        No  ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.    þ 
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
þ
 
Accelerated filer
¨
 
 
Non-accelerated filer
¨
 
Smaller reporting company
¨
(Do not check if a 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 is a shell company (as defined in Rule 12b-2 of the Act).    Yes  ¨        No  þ
As of June 30, 2017, the aggregate market value of voting stock held by non-affiliates was $1,015,057,931. For purposes of the foregoing calculation only, executive officers and directors of the registrant have been deemed to be affiliates.
As of January 31, 2018, the number of shares outstanding of the registrant’s common stock was 59,999,955.
Documents Incorporated By Reference
Portions of the registrant’s definitive proxy statement for the 2018 Annual Meeting of Stockholders to be held on May 1, 2018 are incorporated by reference in Part III.
 



FEDERAL SIGNAL CORPORATION
TABLE OF CONTENTS
PART I
Page
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
PART II
 
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
PART III
 
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
PART IV
 
Item 15.
Item 16.



FORWARD-LOOKING STATEMENTS
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. 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. 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.
ADDITIONAL INFORMATION
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. All materials that we file with, or furnish to, the SEC may also be read or copied at the SEC’s Public Reference Room at 100 F Street, N.E., Room 1580, Washington, D.C. 20549. Information on the operation of the Public Reference Room can be obtained by calling the SEC at 1-800-SEC-0330.

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PART I
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, vacuum trucks, street sweepers, waterblasters, dump truck bodies, trailers, and safety and security systems, including technology-based products and solutions for the public safety market. Following the acquisition of substantially all of the assets and operations of Joe Johnson Equipment, Inc. and Joe Johnson Equipment (USA), Inc. (collectively, “JJE”) in 2016, the Company also distributes and re-sells products manufactured by other companies, which include refuse and recycling collection vehicles, camera systems, ice resurfacing equipment and snow-removal equipment. In addition, we sell parts and provide service, repair, equipment rentals and training as part of a comprehensive offering to our customers. Federal Signal Corporation and its subsidiaries operate 14 principal manufacturing facilities in five countries around the world and provide 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 major operating 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 our operating segments.
Financial information concerning the Company’s two operating segments for each of the three years in the period ended December 31, 2017, is included in Note 15 – Segment Information to the accompanying consolidated financial statements and is incorporated herein by reference. Information regarding the Company’s discontinued operations is included in Note 18 – Discontinued Operations to the accompanying consolidated financial statements and is incorporated herein by reference.
Environmental Solutions Group
Our Environmental Solutions Group is a leading manufacturer and supplier of a full range of street sweeper vehicles, sewer cleaner and vacuum loader trucks, hydro-excavation trucks and high-performance waterblasting equipment. The Group manufactures vehicles and equipment in the U.S. and Canada that are sold under the Elgin®, Vactor®, Guzzler®, WestechTM and Jetstream® brand names. 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. The acquisition of JJE extends the Environmental Solutions Group’s existing sales channel and increases the number of service centers through which its parts, service and rental offerings can be provided to current and potential customers. The acquisition of JJE also broadens the Environmental Solutions Group’s product offerings to include other products, such as refuse and recycling collection vehicles, camera systems, ice resurfacing equipment and snow-removal equipment.
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 vacuum trucks used to maintain sewer lines, catch basins and storm sewers, as well as hydro-excavation trucks to meet the need for safe and non-destructive excavation. 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 trucks. Jetstream manufactures high pressure waterblast equipment and accessories for commercial and industrial cleaning and maintenance operations.
In addition to equipment sales, the Group engages in the sale of parts, service and repair, equipment rentals and training as part of a complete offering to its customers under the FS SolutionsSM brand.
In addition, as discussed in Note 2 – Acquisitions, on June 2, 2017, the Company completed the acquisition of all of the outstanding shares of capital stock of GenNx/TBEI Intermediate Co., a Delaware corporation (collectively with its subsidiaries, “TBEI”). TBEI is a leading U.S. manufacturer of dump truck bodies and trailers serving maintenance and infrastructure end-markets. Products are sold to both municipal and industrial customers under the Ox Bodies®, Crysteel®, J-Craft®, Duraclass®, Rugby® and Travis® brand names, either through a dealer network or direct sales to service customers generally depending on the type and geographic location of the customer. The Company expects that the acquisition will enable it to strengthen the Environmental Solutions Group’s market position as a specialty vehicle manufacturer in maintenance and infrastructure end-markets, leveraging its expertise in building chassis-based vehicles.

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Safety and Security Systems Group
Our 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 campus and community alerting, emergency vehicles, first responder interoperable communications and industrial communications, as well as municipal networked security. Specific products include vehicle lightbars and sirens, public warning sirens, general alarm systems, public address systems and public safety software. 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, including JJE, or direct sales to serve customers. The acquisition of TBEI increased the number of dealers within our network and also added additional direct sales resources. The dealer network serves both municipal and industrial end markets. Within municipal markets, the majority of our 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, JJE is a distributor of 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 Environmental Solutions Group’s direct sales channel concentrates on the industrial, utility and construction market segments, and the FS Solutions centers provide post-sale service, ancillary parts and equipment rentals. The acquisition of JJE increased the number of service centers through which its parts, service and rental offerings can be provided to current and potential customers.
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, 2017. Of the $1,018.0 million total orders reported in 2017, approximately 35% were from U.S. municipal and governmental customers, 42% were from U.S. commercial and industrial customers and 23% were from non-U.S. customers.
During 2017, the Company’s U.S. municipal and governmental orders increased by 18% compared to 2016 levels, driven by improved orders for street sweepers and sewer cleaners, as well as additional orders for dump truck bodies following the acquisition of TBEI. During 2016, the Company’s U.S. municipal and governmental orders decreased by 6% compared to 2015, driven by declines in orders of street sweepers and outdoor warning systems.
During 2017, the Company’s U.S. commercial and industrial orders increased by 140% from 2016 levels, largely attributable to improved orders for sewer cleaners and vacuum trucks, the addition of orders following the TBEI acquisition, the effects of a full year of JJE orders in 2017 compared to seven months of activity in 2016, and increased orders from industrial markets within the Safety and Security Systems Group. During 2016, the Company’s U.S. commercial and industrial orders were essentially unchanged in comparison to 2015 levels, with orders as a result of new product offerings, such as rental equipment and refuse and recycling vehicles, resulting from the JJE acquisition, being largely offset by reduced orders of waterblasting equipment, vacuum trucks and used equipment within the Environmental Solutions Group, as well as lower orders from U.S. industrial markets within the Safety and Security Systems Group.
During 2017, the Company’s non-U.S. orders increased by 21% from 2016, largely due to a $35.6 million increase within the Environmental Solutions Group, reflecting increased Canadian orders following the acquisition of JJE in June of 2016. Within the Safety and Security Systems Group, non-U.S. orders increased by $5.2 million, driven by improved orders in industrial and coal markets, partially offset by reduced orders from international public safety markets. This compared to an increase of 4% in non-U.S orders in 2016 versus 2015, largely due to a substantial increase in Canadian orders, which reflected orders acquired in, and received subsequent to, the JJE acquisition, partially offset by declines in orders of vacuum trucks and sewer cleaners and a $8.5 million decrease in orders for street sweepers and waterblasting equipment in the Middle East. Within the Safety and Security Systems Group, there was a decrease in orders from overseas industrial markets, including international oil, gas and coal markets, as well as reduced orders from international public safety markets.

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Of the Company’s non-U.S. orders received in 2017, approximately 65% were from Canada, 18% were from Europe and less than 10% were from any other particular region. Non-U.S. municipal and governmental markets are similar to the U.S. municipal and governmental markets in that they are largely dependent on tax revenues to support spending and orders may be subject to budgetary cycles and public-entity bid procedures.
The Company’s backlog totaled $257.5 million at December 31, 2017 compared to $137.0 million at December 31, 2016. The increase of $120.5 million, or 88%, was attributable to both organic growth, with higher demand for vacuum trucks, sewer cleaners and street sweepers, and the effects of the TBEI acquisition, whose backlog at December 31, 2017 was $42.5 million. Backlogs vary by group due to the nature of the Company’s products and the buying patterns of its customers. TBEI’s product lines typically experience average lead times ranging from one to three months. Following the acquisition of TBEI, the Environmental Solutions Group’s weighted average backlog is expected to range from 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, 2017 backlog is expected to be substantially completed during 2018.
Suppliers
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. As a distributor of equipment manufactured by other companies, JJE relies 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.
Competition
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 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. JJE is a leading Canadian-based distributor of maintenance equipment for municipal and industrial markets. TBEI includes a portfolio of regional 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.
Within specific product categories and domestic markets, the businesses within the Safety and Security Systems Group are among the market leaders. The 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 the Group’s product lines and purchase decisions are made based on price, features, reputation, performance and service, often within competitive bidding situations.
Research and Development
The Company invests in research to support the development of new products and the enhancement of existing products and services. The Company believes this investment is important to maintain or enhance its leadership position in key markets. Expenditures for research and development by the Company were $13.0 million in 2017, $13.4 million in 2016 and $14.0 million in 2015, and were reported within Selling, engineering, general and administrative (“SEG&A”) expenses on the Consolidated Statement of Operations.
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

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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.
Employees
The Company employed approximately 3,100 people in its businesses at December 31, 2017, with the Company’s U.S. hourly workers accounting for approximately 52% of its total workforce. Approximately 18% of the Company’s U.S. hourly workers were represented by unions at December 31, 2017. We believe that our labor relations with our employees are good.
Governmental Regulation of the Environment
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. The Company endeavors to establish environmentally-friendly policies and objectives, and believes that these actions are also consistent with cost-effective operating practices. Capital expenditures in 2017 attributable to compliance with such laws were not material. The Company 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.
In May 2012, the Company sold a facility in Pearland, Texas. The facility was previously used by the Company’s discontinued Pauluhn business, which manufactured marine, offshore and industrial lighting products. It is probable that the site will require remediation and as such, as of December 31, 2017 and 2016, $0.5 million and $0.6 million, respectively, of reserves related to the environmental remediation of the Pearland facility have been included in liabilities of discontinued operations on the Consolidated Balance Sheets. The Company’s estimate may change as more information becomes available; however, the costs are not expected to have a material adverse effect on the Company’s results of operations, financial position or cash flow.
Seasonality
Certain of the Company businesses are susceptible to the influences of seasonal buying or delivery patterns. The Company tends to have lower sales in the first quarter compared to other quarters as a result of these influences.
Executive Officers of the Registrant
The following is a list of the Company’s executive officers, their ages, business experience and positions as of February 1, 2018:
Jennifer L. Sherman, age 53, was appointed President and Chief Executive Officer 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.
Julie A. Cook, age 56, was appointed Vice President, Human Resources in September 2012. Ms. Cook served as Johnson Controls, Inc.’s Director of Human Resources, Building Efficiency Programs and then Vice President of Human Resources, Global Manufacturing, Supply Chain and Communications, from 2010 through 2012. Ms. Cook previously served as the Company’s Environmental Solutions Group Vice President of Human Resources with responsibility for Corporate Human Resources from 2008 through 2010. Ms. Cook was Group Vice President of Human Resources for the Environmental Solutions Group from 2001 to 2007.
Daniel A. DuPré, age 61, 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.
Robert E. Fines, age 59, was appointed Vice President and General Manager of TBEI in June 2017, following the Company’s acquisition of TBEI, where Mr. Fines had served as Chief Executive Officer since 2008. Prior to joining TBEI, Mr. Fines held senior management positions at Kirtland Capital, Avery Dennison and GE Plastics.
Ian A. Hudson, age 41, 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.

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Svetlana Vinokur, age 38, 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 60, 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.
Our financial results are subject to U.S. economic uncertainty.
In 2017, we generated approximately 75% 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, 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 impact of the enactment of the Tax Cuts and Jobs Act of 2017 (the “2017 Tax Act”) on the U.S. economy is currently uncertain. Changes in federal, state and local tax revenues which may result from the 2017 Tax Act may have an impact on demand for our products.
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 2017, approximately 25% 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, including the imposition of tariffs and trade barriers on our products, changes in these laws, regulations and policies by the U.S. and foreign governments, 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 which 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.

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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.
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.
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.
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.
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.
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.
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, 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

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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 warranty or product liability 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.
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.
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, 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.
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. Changes in our relationships with suppliers, shortages or production delays, whether due to our suppliers or customers, regulatory restrictions or work stoppages by the employees of our suppliers or the chassis suppliers for our customers could have a material adverse effect on our ability to timely manufacture and market products. In addition, 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.

8


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.
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. 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. 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.
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, 2017, approximately 18% of our U.S. hourly workers were represented by labor unions and were covered by collective bargaining agreements with various unions. Many of these agreements include provisions that limit our ability to realize cost savings. 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.
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 80% as of December 31, 2017. 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 (“ERISA”). 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.
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. 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.

9


An impairment in the carrying value of goodwill or intangible assets could negatively affect our financial position and results of operations.
As of December 31, 2017, goodwill and intangible assets, net, represented 38% and 15% of total consolidated assets, respectively. Goodwill and intangible assets are initially recorded at fair value on the date of an acquisition. We review goodwill and indefinite-lived intangible assets for impairment annually, or more frequently if impairment indicators arise. Definite-lived intangible assets are amortized over the estimated useful lives and are subject to an impairment assessment if impairment indicators arise. In evaluating the potential for impairment of goodwill and intangible 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.
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 from the sellers of the acquired businesses to us 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.
Item 1B.    Unresolved Staff Comments.
None.
Item 2.    Properties.
As of December 31, 2017, the Company utilized ten 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, 2017, the Company devoted approximately 1.6 million square feet to manufacturing and 0.7 million square feet to sales, service, warehousing and office space. Of the total square footage, approximately 77% is devoted to the Environmental Solutions Group and 23% to the Safety and Security

10


Systems Group. Approximately 42% of the total square footage is owned by the Company with the remaining 58% being leased. Owned facilities are subject to lien under the Company’s Amended and Restated Credit Agreement dated January 27, 2016 (as amended on June 2, 2017, the “Amended 2016 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.
Item 3.    Legal Proceedings.
The information concerning the Company’s legal proceedings included in Note 11 – Legal Proceedings to the accompanying consolidated financial statements is incorporated herein by reference.
Item 4. Mine Safety Disclosures.
Not applicable.
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Market Information
The Company’s common stock is listed and traded on the New York Stock Exchange (“NYSE”) under the symbol “FSS”. The following table presents a summary of the high and low market price per share of our common stock for each quarter of 2017 and 2016:
 
2017
 
2016
 
High
 
Low
 
High
 
Low
1st Quarter
$
16.23

 
$
13.45

 
$
15.64

 
$
11.16

2nd Quarter
17.56

 
13.07

 
14.11

 
12.07

3rd Quarter
21.40

 
17.13

 
13.99

 
12.29

4th Quarter
23.64

 
19.19

 
16.65

 
11.68

Holders
As of January 31, 2018, there were 1,597 holders of record of the Company’s common stock.
Dividends
During 2017, 2016 and 2015, the Company declared and paid dividends totaling $16.8 million, $16.9 million and $15.6 million, respectively. On February 19, 2018, the Company’s Board of Directors (the “Board”) declared a quarterly cash dividend of $0.07 per common share payable on March 19, 2018 to holders of record at the close of business on March 5, 2018
The payment of future dividends is at the discretion of the Board and will depend, among other things, upon future earnings and cash flow, capital requirements, the Company’s general financial condition, general business conditions and other factors, including compliance with restrictive debt covenants as described below.
Under the terms of the Company’s Amended 2016 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 2.50, (ii) the Company is in compliance with all other financial covenants and (iii) there are no existing defaults under the Amended 2016 Credit Agreement. If the leverage ratio is more than 2.50, the Company is still permitted to fund (i) up to $30.0 million of dividend payments, (ii) stock repurchases sufficient to offset dilution created by the issuance of equity as compensation to its officers, directors, employees and consultants and (iii) an incremental $30.0 million of other cash payments. For further discussion, see Note 7 – Debt to the accompanying consolidated financial statements.
The Company is able to declare dividends at current levels under the restricted payment guidelines set forth above.
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.

11


Recent Sales of Unregistered Securities
There were no sales of unregistered securities by the Company during the year ended December 31, 2017.
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, 2017:
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)
October 2017 (10/1/17 - 11/4/17)
 

 
$

 

 
$
31,395,802

November 2017 (11/5/17 - 12/2/17)
 

 

 

 
31,395,802

December 2017 (12/3/17 - 12/31/17)
 

 

 

 
31,395,802

(a)
On November 4, 2014, the Board authorized a stock repurchase program of up to $75.0 million of the Company’s common stock.

12


Performance Graph
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, 2012 and assumes reinvestment of all dividends through December 31, 2017.
chart-2d9d61877580550186a.jpg
Copyright© 2018 Russell Investment Group. All rights reserved.
Copyright© 2018 Standard & Poor’s, a division of S&P Global. All rights reserved.

 
As of December 31,
 
2012
 
2013
 
2014
 
2015
 
2016
 
2017
Federal Signal Corporation
$
100.00

 
$
192.51

 
$
204.13

 
$
213.00

 
$
214.11

 
$
280.05

Russell 2000
100.00

 
138.82

 
145.62

 
139.19

 
168.85

 
193.58

S&P Midcap 400
100.00

 
133.50

 
146.54

 
143.35

 
173.08

 
201.20

S&P Industrials
100.00

 
140.68

 
154.50

 
150.59

 
178.99

 
216.64

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 6.    Selected Financial Data.
The following table summarizes selected financial information of the Company as of, and for each of the five years in the period ended, December 31, 2017:

13


 
For the Years Ended December 31,
($ in millions, except per share data)
2017
 
2016
 
2015
 
2014
 
2013
Results of Operations:
 
 
 
 
 
 
 
 
 
Net sales
$
898.5

 
$
707.9

 
$
768.0

 
$
779.1

 
$
712.9

Operating income (a) (b) (c) (e)
67.1

 
57.7

 
103.2

 
88.7

 
61.6

 
 
 
 
 
 
 
 
 
 
Income from continuing operations (a) (b) (c) (d) (e)
60.5

 
39.4

 
65.8

 
59.7

 
152.5

Gain (loss) from discontinued operations and disposal, net of tax
1.1

 
4.4

 
(2.3
)
 
4.0

 
7.5

Net income (a) (b) (c) (d) (e)
$
61.6

 
$
43.8

 
$
63.5

 
$
63.7

 
$
160.0

Financial Position:
 
 
 
 
 
 
 
 
 
Capital expenditures
$
8.0

 
$
6.1

 
$
9.6

 
$
13.7

 
$
11.6

Depreciation and amortization
30.0

 
19.1

 
12.3

 
11.5

 
11.0

Total assets
992.3

 
643.2

 
666.5

 
658.7

 
644.8

Total debt (f)
277.7

 
64.0

 
44.1

 
50.2

 
92.1

Common Stock Data:
 
 
 
 
 
 
 
 
 
Diluted earnings per share — continuing operations
$
1.00

 
$
0.64

 
$
1.04

 
$
0.94

 
$
2.41

Cash dividends per common share
0.28

 
0.28

 
0.25

 
0.09

 

Weighted average shares outstanding — diluted (in millions)
60.4

 
61.2

 
63.4

 
63.6

 
63.2

Performance Measures:
 
 
 
 
 
 
 
 
 
Operating margin
7.5
%
 
8.2
%
 
13.4
%
 
11.4
%
 
8.6
%
Adjusted EBITDA (g)
$
113.1

 
$
83.5

 
$
115.9

 
$
100.2

 
$
73.3

Adjusted EBITDA margin (g)
12.6
%
 
11.8
%
 
15.1
%
 
12.9
%
 
10.3
%
Other Data:
 
 
 
 
 
 
 
 
 
Total orders
$
1,018.0

 
$
674.4

 
$
686.1

 
$
807.4

 
$
706.0

Backlog
257.5

 
137.0

 
171.3

 
254.7

 
226.5

(a)
2017 operating income includes acquisition and integration-related expenses, restructuring charges and pension settlement charges of $2.7 million, $0.6 million and $6.1 million, respectively. 2017 income from continuing operations includes the effects of the acquisition and integration-related expenses, restructuring charges and pension settlement charges, as well as a $20.2 million net benefit from special tax items, primarily represented by the Company’s preliminary estimate of the impact of the 2017 Tax Act, including the effect of the reduction in the corporate tax rate in the U.S.
(b)
2016 operating income includes acquisition and integration-related expenses and restructuring charges of $1.4 million and $1.7 million, respectively. 2016 income from continuing operations includes the effects of the acquisition and integration-related expenses and restructuring charges and also $0.3 million of debt settlement charges, and a $2.2 million net benefit resulting from changes in deferred tax valuation allowances in Canada and the U.K.
(c)
2015 operating income includes restructuring charges of $0.4 million. 2015 income from continuing operations includes the effects of the restructuring charges, as well as a $1.4 million net benefit from special tax items, comprised of a $4.2 million net tax benefit associated with tax planning strategies, offset by a $2.4 million adjustment of deferred tax assets and $0.4 million of expense associated with a change in the enacted tax rate in the U.K.
(d)
2014 income from continuing operations includes the effects of a $3.5 million release of valuation allowance that was previously recorded against the Company’s foreign deferred tax assets.
(e)
2013 operating income includes restructuring charges of $0.7 million. 2013 income from continuing operations includes the effects of the restructuring charges, as well as $8.7 million of debt settlement charges and a $116.2 million release of valuation allowance previously recorded against net deferred tax assets in the U.S. In 2013, the Company also executed a tax planning strategy that resulted in the release of an additional $6.7 million of valuation allowance that was previously recorded against the Company’s foreign tax credits, which would have begun to expire in 2015.
(f)
Includes short-term borrowings, the current portion of long-term borrowings and capital lease obligations of $0.3 million, $0.5 million, $0.4 million, $6.2 million and $7.4 million, respectively.

14


(g)
The Company uses 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. 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. Consolidated adjusted EBITDA is a non-GAAP measure that represents the total of income from continuing operations, interest expense, pension settlement charges, hearing loss settlement charges, debt settlement charges, acquisition and integration-related expenses, restructuring activity, executive severance costs, purchase accounting effects, other income/expense, income tax expense, and depreciation and amortization expense. Consolidated adjusted EBITDA margin is a non-GAAP measure that represents the total of income from continuing operations, interest expense, pension settlement charges, debt settlement charges, acquisition and integration-related expenses, restructuring activity, executive severance costs, purchase accounting effects, other income/expense, income tax expense, and depreciation and amortization expense divided by net sales for the applicable period(s). Other companies may use different methods to calculate adjusted EBITDA and adjusted EBITDA margin. The following table summarizes the Company’s consolidated adjusted EBITDA and adjusted EBITDA margin and reconciles income from continuing operations to consolidated adjusted EBITDA for each of the five years in the period ended December 31, 2017:
 
For the Years Ended December 31,
($ in millions)
2017
 
2016
 
2015
 
2014
 
2013
Income from continuing operations
$
60.5

 
$
39.4

 
$
65.8

 
$
59.7

 
$
152.5

Add:
 
 
 
 
 
 
 
 
 
Interest expense
7.3

 
1.9

 
2.3

 
3.6

 
8.9

Pension settlement charges
6.1

 

 

 

 

Hearing loss settlement charges
1.5

 

 

 

 

Debt settlement charges

 
0.3

 

 

 
8.7

Acquisition and integration-related expenses
2.7

 
1.4

 

 

 

Restructuring
0.6

 
1.7

 
0.4

 

 
0.7

Executive severance costs
0.7

 

 

 

 

Purchase accounting effects *
4.4

 
3.6

 

 

 

Other (income) expense, net
(1.2
)
 
(1.3
)
 
1.0

 
1.7

 
0.1

Income tax expense (benefit)
0.5

 
17.4

 
34.1

 
23.7

 
(108.6
)
Depreciation and amortization
30.0

 
19.1

 
12.3

 
11.5

 
11.0

Adjusted EBITDA
$
113.1

 
$
83.5

 
$
115.9

 
$
100.2

 
$
73.3

 
 
 
 
 
 
 
 
 
 
Net sales
$
898.5

 
$
707.9

 
$
768.0

 
$
779.1

 
$
712.9

 
 
 
 
 
 
 
 
 
 
Adjusted EBITDA margin
12.6
%
 
11.8
%
 
15.1
%
 
12.9
%
 
10.3
%
*Excludes purchase accounting effects reflected in depreciation and amortization of $0.4 million and $0.3 million for the years ended December 31, 2017 and 2016, respectively.
The selected financial data set forth above should be read in conjunction with the Company’s consolidated financial statements, including the notes thereto, and management’s discussion and analysis of financial condition and results of operations, included under Item 8 of Part II of this Form 10-K and Item 7 of Part II of this Form 10-K, respectively.

15


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.
Executive Summary
The Company is a leading global manufacturer and supplier of (i) vehicles and equipment for maintenance and infrastructure end-markets, including sewer cleaners, vacuum trucks, street sweepers, dump truck bodies and trailers and (ii) safety, security and communication equipment, such as lights, sirens and warning systems. Following the acquisition of JJE in 2016, the Company also distributes and re-sells products manufactured by other companies, which include refuse and recycling collection vehicles, camera systems, ice resurfacing equipment and snow-removal equipment. In addition, we sell parts and provide service, repair, equipment rentals and training as part of a comprehensive offering to our customer base. We operate 14 manufacturing facilities in five countries around the world and provide products and integrated solutions to municipal, governmental, industrial and commercial customers in all regions of the world.
As described in Note 15 – Segment Information to the accompanying consolidated financial statements, the Company’s business units are organized and managed in two operating segments: the Environmental Solutions Group and the Safety and Security Systems Group.
During 2017, the Company continued to focus on executing against its key long-term objectives, including the following:
Creating disciplined growth;
Improving manufacturing efficiencies and costs;
Leveraging invested capital; and
Diversifying our customer base.
Highlights of the Company’s achievements against these objectives in 2017 include the following:
On June 2, 2017, we completed the acquisition of TBEI, a leading U.S. manufacturer of dump truck bodies and trailers serving maintenance and infrastructure end-markets.
The combination of TBEI with the businesses in our Environmental Solutions Group, creates a single platform providing municipal and industrial customers with a complete suite of maintenance and infrastructure equipment and supporting solutions. This platform will expand our leadership position in these markets and will provide a springboard for future organic growth and mergers and acquisitions.
The TBEI acquisition also diversifies our current end markets through an expanded focus on infrastructure, construction, waste, rendering and other industrial end markets.
The acquisition of TBEI is expected to accelerate our goal of profitably growing our revenues in excess of $1 billion by 2020.
Our consolidated adjusted EBITDA margin for 2017 was 12.6%, within our target range, and up from 11.8% in 2016.
We have continued to focus on new product development and are encouraged that these efforts will provide additional opportunities to further diversify our customer base. In particular, we are pleased with the market reaction to our new hydro-excavator vehicle designed for utility markets.
“80/20” efficiency initiatives remain a critical part of our culture and we continue to focus on reducing product costs and improving manufacturing efficiencies across all of our businesses.
With $73.5 million of cash being generated from continuing operations during 2017, we have been able to pay down $34 million of debt since the completion of the TBEI acquisition in June 2017 and return $16.8 million to stockholders in the form of cash dividends.
With our strong balance sheet and positive operating cash flow, we are well positioned to invest in internal growth initiatives, pursue strategic acquisitions and consider ways to return value to stockholders.
Our financial results in 2017 reflected improved performance in many areas, driven by both organic growth and benefits from our recent acquisitions.
Net sales increased by $190.6 million, or 27%, for the year ended December 31, 2017, compared to the prior year. Within our Environmental Solutions Group, net sales increased by $201.9 million, or 41%, largely due to the addition of $109.4 million of net sales from the TBEI acquisition, approximately $54.7 million of incremental net sales resulting from the prior-year JJE acquisition, including increases in rental income and sales of used equipment, and improved domestic sales of sewer cleaners

16


and vacuum trucks. In our Safety and Security Systems Group, net sales decreased by $11.3 million, or 5%, primarily due to lower sales into global public safety markets and decreased sales of outdoor warning systems.
Operating income for the year ended December 31, 2017 increased by $9.4 million, or 16%, to $67.1 million, primarily driven by a $18.3 million operating income improvement within our Environmental Solutions Group, associated with increased sales volumes, a $6.2 million operating income contribution from TBEI and the effects of including a full year of operating income from JJE in 2017, compared to only seven months in the prior year. TBEI’s operating income contribution in the current-year period included the effects of amortization expense on intangible assets acquired, which, coupled with the increased JJE activity, contributed to an increase in our Environmental Solutions Group’s depreciation and amortization expense of $11.2 million. In addition, there was a $0.8 million increase in purchase accounting expense effects and a $0.5 million increase in acquisition-related costs in the current year. Within our Safety and Security Systems Group, operating income in the year ended December 31, 2017 was unchanged from the prior year at $27.0 million, with reductions in SEG&A expenses and restructuring expenses of $0.6 million and $1.1 million, respectively, offsetting a $1.7 million decrease in gross profit. In addition to the $2.0 million increase in SEG&A expenses, corporate expenses in the year ended December 31, 2017 also included a $6.1 million pension settlement charge, a $0.8 million increase in acquisition-related expenses and higher expenses associated with hearing loss litigation. Consolidated operating margin for the year ended December 31, 2017, inclusive of the incremental depreciation and amortization, purchase accounting expense effects, pension and hearing loss settlement charges and acquisition costs, was 7.5%, compared to 8.2% in the prior year.
Income before income taxes for the year ended December 31, 2017 increased by $4.2 million as compared to the prior year, primarily due to the $9.4 million improvement in operating income and the absence of $0.3 million in debt settlement charges in connection with our prior-year debt refinancing, partially offset by a $5.4 million increase in interest expense, associated with higher average debt levels following the acquisition of TBEI, and a $0.1 million reduction in other income.
Net income from continuing operations for the year ended December 31, 2017 included the effects of a $16.9 million decrease in income tax expense, largely due to the recognition of a $20.2 million net tax benefit, primarily represented by our preliminary estimate of the impact of the 2017 Tax Act, partially offset by additional tax expense associated with higher pre-tax income levels. Our effective tax rate for the year ended December 31, 2017 was 0.8%, compared to an effective tax rate of 30.6% in 2016. The 2017 effective rate included the aforementioned impacts resulting from the 2017 Tax Act. The effective tax rate for 2016 included a $2.2 million net benefit from Canadian and U.K. valuation allowance changes. We expect that our effective tax rate in 2018 will be in the range of 26% to 27%, based on our current interpretations of the provisions of the 2017 Tax Act.
Total orders for the year ended December 31, 2017 were $1,018.0 million, an increase of $343.6 million, or 51%, compared to the prior year. Our Environmental Solutions Group reported total orders of $806.3 million in 2017, an increase of $331.5 million, or 70%, compared to the prior year. The improvement was driven by organic order growth of approximately $121.1 million, or 33%, primarily represented by improved orders for sewer cleaners, street sweepers and vacuum trucks, the effects of the TBEI acquisition, which added $151.9 million in orders, and a net increase in orders of $58.5 million related to the inclusion of JJE orders for a full year in 2017 versus seven months in 2016. Within our Safety and Security Systems Group, orders increased by $12.1 million compared to the prior year, primarily driven by improvements in orders of industrial products, public safety products and outdoor warning systems.
Our consolidated backlog at December 31, 2017 was $257.5 million, up $120.5 million, or 88%, from $137.0 million at December 31, 2016.

17


Results of Operations
The following table summarizes our Consolidated Statements of Operations 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)
2017
 
2016
 
2015
 
2017 vs. 2016
 
2016 vs. 2015
Net sales
$
898.5

 
$
707.9

 
$
768.0

 
$
190.6

 
$
(60.1
)
Cost of sales
677.3

 
524.8

 
542.4

 
152.5

 
(17.6
)
Gross profit
221.2

 
183.1

 
225.6

 
38.1

 
(42.5
)
Selling, engineering, general and administrative expenses
144.7

 
122.3

 
122.0

 
22.4

 
0.3

Acquisition and integration-related expenses
2.7

 
1.4

 

 
1.3

 
1.4

Pension settlement charges
6.1

 

 

 
6.1

 

Restructuring
0.6

 
1.7

 
0.4

 
(1.1
)
 
1.3

Operating income
67.1

 
57.7

 
103.2

 
9.4

 
(45.5
)
Interest expense
7.3

 
1.9

 
2.3

 
5.4

 
(0.4
)
Debt settlement charges

 
0.3

 

 
(0.3
)
 
0.3

Other (income) expense, net
(1.2
)
 
(1.3
)
 
1.0

 
0.1

 
(2.3
)
Income before income taxes
61.0

 
56.8

 
99.9

 
4.2

 
(43.1
)
Income tax expense
0.5

 
17.4

 
34.1

 
(16.9
)
 
(16.7
)
Income from continuing operations
60.5

 
39.4

 
65.8

 
21.1

 
(26.4
)
Gain (loss) from discontinued operations and disposal, net of tax
1.1

 
4.4

 
(2.3
)
 
(3.3
)
 
6.7

Net income
$
61.6

 
$
43.8

 
$
63.5

 
$
17.8

 
$
(19.7
)
Other data:
 
 
 
 
 
 
 
 
 
Operating margin
7.5
%
 
8.2
%
 
13.4
%
 
(0.7
)%
 
(5.2
)%
Adjusted EBITDA (a)
$
113.1

 
$
83.5

 
$
115.9

 
$
29.6

 
$
(32.4
)
Adjusted EBITDA margin (a)
12.6
%
 
11.8
%
 
15.1
%
 
0.8
 %
 
(3.3
)%
Diluted earnings per share — Continuing operations
$
1.00

 
$
0.64

 
$
1.04

 
$
0.36

 
$
(0.40
)
Total orders
1,018.0

 
674.4

 
686.1

 
343.6

 
(11.7
)
Backlog
257.5

 
137.0

 
171.3

 
120.5

 
(34.3
)
Depreciation & amortization
30.0

 
19.1

 
12.3

 
10.9

 
6.8

(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. Refer to Item 6. Selected Financial Data 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.
Year ended December 31, 2017 vs. year ended December 31, 2016
Net sales
Net sales increased by $190.6 million, or 27%, for the year ended December 31, 2017, compared to the prior year. Within the Environmental Solutions Group, net sales increased by $201.9 million, or 41%, largely due to the addition of $109.4 million of net sales from the TBEI acquisition, approximately $54.7 million of incremental net sales resulting from the prior-year JJE acquisition, including increases in rental income and sales of used equipment, and improved domestic sales of sewer cleaners and vacuum trucks. In the Safety and Security Systems Group, net sales decreased by $11.3 million, or 5%, primarily due to lower sales into global public safety markets and decreased sales of outdoor warning systems.
Cost of sales
For the year ended December 31, 2017, cost of sales increased by $152.5 million, or 29%, compared to the prior year, largely due to an increase of $162.1 million, or 42%, within the Environmental Solutions Group, primarily driven by increased sales volumes, additional cost of sales from the TBEI acquisition and the effects of a full year of JJE activity in the current-year period compared with seven months last year, recognition of approximately $0.8 million more expense associated with purchase accounting effects and a $6.5 million increase in depreciation expense, largely resulting from depreciation on rental equipment acquired in the JJE transaction. This increase was partially offset by a decrease in cost of sales of $9.6 million, or

18


7%, within the Safety and Security Systems Group, largely driven by lower sales volumes and the impact of material and labor cost reduction initiatives.
Gross profit
For the year ended December 31, 2017, gross profit increased by $38.1 million, or 21%, compared to the prior year, primarily due to a $39.8 million improvement in the Environmental Solutions Group, partially offset by a $1.7 million reduction within the Safety and Security Systems Group. Gross margin for the year ended December 31, 2017 was 24.6%, compared to 25.9% in the prior year, largely due to incremental depreciation expense and purchase accounting expense effects, partially offset by gross margin improvement within the Safety and Security Systems Group related to the savings associated with material and labor cost reduction initiatives.
Selling, engineering, general and administrative expenses
For the year ended December 31, 2017, SEG&A expenses increased by $22.4 million, or 18%, primarily represented by a $21.0 million increase within the Environmental Solutions Group, largely the result of the addition of expenses of businesses acquired in the current and prior year, a $4.7 million increase in amortization expense and strategic investments in our sales force to support our organic growth initiatives. SEG&A expenses with the Safety and Security Systems Group decreased by $0.6 million in comparison to the prior year, while Corporate SEG&A expenses increased by $2.0 million, primarily driven by the recognition of $0.7 million in executive severance costs, increased legal expenses associated with hearing loss litigation and higher employee incentive compensation costs, partially offset by lower pension expenses.
Operating income
Operating income for the year ended December 31, 2017 increased by $9.4 million, or 16%, to $67.1 million, primarily driven by a $18.3 million operating income improvement within the Environmental Solutions Group, associated with increased sales volumes, a $6.2 million operating income contribution from TBEI and the effects of including a full year of operating income from JJE in 2017, compared to only seven months in the prior year. TBEI’s operating income contribution in the current-year period included the effects of amortization expense on intangible assets acquired, which, coupled with the increased JJE activity, contributed to an increase in the Environmental Solutions Group’s depreciation and amortization expense of $11.2 million. In addition, there was a $0.8 million increase in purchase accounting expense effects and a $0.5 million increase in acquisition-related costs in the current year. Within the Safety and Security Systems Group, operating income in the year ended December 31, 2017 was unchanged from the prior year at $27.0 million, with reductions in SEG&A expenses and restructuring expenses of $0.6 million and $1.1 million, respectively, offsetting a $1.7 million decrease in gross profit. In addition to the $2.0 million increase in SEG&A expenses, corporate expenses in the year ended December 31, 2017 also included a $6.1 million pension settlement charge, a $0.8 million increase in acquisition-related expenses and higher expenses associated with hearing loss litigation. Consolidated operating margin for the year ended December 31, 2017, inclusive of the incremental depreciation and amortization, purchase accounting expense effects, pension and hearing loss settlement charges and acquisition costs, was 7.5%, compared to 8.2% in the prior year.
Interest expense
Interest expense for the year ended December 31, 2017 increased by $5.4 million, or 284%, compared to the prior year, largely due to higher average debt levels following the acquisition of TBEI. For further discussion, see Note 7 – Debt to the accompanying consolidated financial statements.
Other (income) expense, net
For the year ended December 31, 2017, other (income) expense, net, totaled $1.2 million of income, largely due to foreign currency transaction gains, whereas for the year ended December 31, 2016, $1.3 million of income was reported, largely related to a gain on the settlement of a foreign currency forward contract and interest income on a loan provided to a customer.
Income tax expense
The Company recognized income tax expense of $0.5 million for the year ended December 31, 2017, compared to $17.4 million for the year ended December 31, 2016. The decrease in expense was primarily due to the recognition of a $23.0 million net tax benefit associated with the revaluation of the Company’s net deferred tax liabilities in the U.S. following the reduction of the federal corporate tax rate included in the 2017 Tax Act, partially offset by a $2.2 million net increase in valuation allowance, inclusive of a $3.0 million valuation allowance recorded against the Company’s foreign tax credits as a result of the enactment of the 2017 Tax Act, the recognition of $0.6 million of additional tax expense associated with a change in the state tax rate in Illinois, and additional taxes resulting from higher pre-tax earnings. The Company’s effective tax rate for the year

19


ended December 31, 2017 was 0.8%, compared to 30.6% in 2016. The 2017 effective tax rate included the aforementioned impacts resulting from the 2017 Tax Act. The effective tax rate for 2016 included a $2.2 million net benefit from Canadian and U.K. valuation allowance changes. The Company expects that its effective tax rate in 2018 will be within the range of 26% to 27%, based on its current interpretations of the provisions of the 2017 Tax Act. For further discussion, see Note 8 – Income Taxes to the accompanying consolidated financial statements.
Income from continuing operations
Income from continuing operations was $60.5 million for the year ended December 31, 2017, compared with $39.4 million in the prior year, largely due to the improved operating income, the $16.9 million reduction in income tax expense and the absence of $0.3 million in debt settlement charges in connection with the Company’s prior-year debt refinancing, partially offset by the $5.4 million increase in interest expense, associated with higher average debt levels following the acquisition of TBEI, and the $0.1 million reduction in other income.
Gain (loss) from discontinued operations and disposal, net of tax
For the year ended December 31, 2017, the Company recorded a net gain from discontinued operations and disposal of $1.1 million, primarily due to an adjustment of foreign tax credits associated with the sale of the Fire Rescue Group and adjustments of estimated product liability obligations of previously discontinued businesses, resulting from updated actuarial valuations.
For the year ended December 31, 2016, the Company recorded a net gain from discontinued operations and disposal of $4.4 million, primarily driven by the $4.2 million net gain on disposal of the Fire Rescue Group, which was discontinued in 2015, partially offset by the $0.6 million net loss that the Fire Rescue Group realized in its 2016 operations up to the January 29, 2016 sale completion date. The net gain on disposal includes a $1.3 million charge to recognize a liability in connection with a Latvian commercial dispute. Also contributing to the net gain in 2016 was a reduction in uncertain tax position reserves of approximately $1.0 million, as well as adjustments of estimated product liability obligations of previously discontinued businesses, resulting from updated actuarial valuations.
For further discussion of the loss from discontinued operations and disposals, see Note 18 – Discontinued Operations to the accompanying consolidated financial statements.
Year ended December 31, 2016 vs. year ended December 31, 2015
Net sales
Net sales decreased by $60.1 million, or 8%, for the year ended December 31, 2016 compared to the prior year, largely due to a $43.4 million net sales decrease within the Environmental Solutions Group, resulting from lower sales of vacuum trucks and street sweepers in the U.S, as well as fewer international shipments of street sweepers and sewer cleaners. Partially offsetting these reductions were $65.5 million of incremental net sales resulting from the JJE acquisition. In the Safety and Security Systems Group, net sales decreased by $16.7 million, primarily due to lower sales into global industrial markets, partially offset by improved global sales of outdoor warning systems and higher sales into domestic public safety markets.
Cost of sales
For the year ended December 31, 2016, cost of sales decreased by $17.6 million, or 3%, compared to the prior year, largely due to a decrease of $7.0 million, or 2%, within the Environmental Solutions Group. The reduction was primarily driven by lower sales of vacuum trucks and street sweepers in the U.S, as well as fewer international shipments of street sweepers and sewer cleaners, partially offset by unfavorable mix effects, a $6.9 million increase in depreciation expense, largely associated with the acquisition of the JJE rental fleet, and the recognition of approximately $3.9 million of expense associated with purchase accounting effects resulting from current-year acquisitions. Within the Safety and Security Systems Group, cost of sales decreased by $10.6 million, or 7%, largely driven by lower sales volume.
Gross profit
For the year ended December 31, 2016, gross profit decreased by $42.5 million, or 19%, consisting of reductions within the Environmental Solutions Group and the Safety and Security Systems Group of $36.4 million and $6.1 million, respectively. Gross margin for the year ended December 31, 2016 decreased to 25.9%, from 29.4% in the prior year, largely due to reduced operating leverage due to lower sales volumes, unfavorable sales mix, with fewer sales into industrial markets and a higher concentration of sales of products manufactured by other companies, which tend to carry lower margins, as well as purchase accounting expense effects, within the Environmental Solutions Group.

20


Selling, engineering, general and administrative expenses
SEG&A expenses increased by $0.3 million for the year ended December 31, 2016 compared to the prior year. The addition of expenses of businesses acquired in the current year contributed to a $5.9 million increase within the Environmental Solutions Group. This increase was partially offset by reductions in SEG&A expenses of $3.5 million and $2.1 million within Corporate and the Safety and Security Systems Group, respectively. The decrease within the Safety and Security Systems Group was largely due to lower employee costs, inclusive of the effects of previously implemented restructuring activities and cost reduction initiatives, whereas the reduction in Corporate SEG&A expenses was primarily due to lower employee incentive and stock compensation costs.
Operating income
Operating income for the year ended December 31, 2016 decreased by $45.5 million, or 44%, to $57.7 million, primarily driven by a $42.8 million reduction within the Environmental Solutions Group, associated with negative operating leverage resulting from lower sales volumes, unfavorable sales mix effects, with fewer sales into industrial markets and a higher percentage of sales of products manufactured by other companies, which tend to carry a lower margin, as well as additional operating expenses incurred in support of current-year acquisitions, the inclusion of $3.9 million of expense relating to purchase accounting effects of current-year acquisitions and $0.5 million of acquisition-related expenses. Also contributing to the lower operating income in the current-year quarter was a $5.3 million decrease in operating income within the Safety and Security Systems Group, inclusive of a $1.3 million increase in restructuring expenses. Partially offsetting the operating income reductions in each of our groups was a $2.6 million reduction in Corporate operating expenses, in spite of a $0.9 million increase in expenses associated with acquisition and integration-related activity. Consolidated operating margin for the year ended December 31, 2016, inclusive of the aforementioned purchase accounting effects, restructuring charges and acquisition costs, was 8.2%, down from 13.4% in the prior year.
Interest expense
Interest expense for the year ended December 31, 2016 decreased by $0.4 million, or 17%, compared to the prior year, largely due to reductions in the average debt levels in the respective periods. For further discussion, see Note 7 – Debt to the accompanying consolidated financial statements.
Other (income) expense, net
For the year ended December 31, 2016, other (income) expense, net, totaled $1.3 million of income, largely related to a gain on the settlement of a foreign currency forward contract and interest income on a loan provided to a customer, whereas for the year ended December 31, 2015, $1.0 million of expense was reported, represented primarily by realized losses from foreign currency transactions.
Income tax expense
The Company recognized income tax expense of $17.4 million for the year ended December 31, 2016, compared to $34.1 million for the year ended December 31, 2015. The decrease in tax expense in the current year was primarily due to lower pre-tax income levels and an aggregate net benefit of $2.2 million resulting from changes in deferred tax valuation allowances. The Company’s effective tax rate for the year ended December 31, 2016 was 30.6%, compared to 34.1% in 2015. The effective tax rate for 2016 included the $2.2 million net benefit from the valuation allowance changes, whereas the prior-year rate included certain tax benefits that did not recur in 2016. For further discussion, see Note 8 – Income Taxes to the accompanying consolidated financial statements.
Income from continuing operations
Income from continuing operations was $39.4 million for the year ended December 31, 2016, compared with $65.8 million in the prior year. The $26.4 million decrease was largely due to the reduced operating income, as well as a $0.3 million write-off of deferred financing fees, partially offset by decreases in income tax and interest expense of $16.7 million and $0.4 million, respectively, as well as the $2.3 million favorable change in other (income) expense, net, described above.

21


Gain (loss) from discontinued operations and disposal, net of tax
For the year ended December 31, 2016, the Company recorded a net gain from discontinued operations and disposal of $4.4 million, primarily driven by the $4.2 million net gain on disposal of the Fire Rescue Group, which was discontinued in 2015, partially offset by the $0.6 million net loss that the Fire Rescue Group realized in its 2016 operations up to the January 29, 2016 sale completion date. The net gain on disposal includes a $1.3 million charge to recognize a liability in connection with a Latvian commercial dispute. Also contributing to the net gain in 2016 was a reduction in uncertain tax position reserves of approximately $1.0 million, as well as adjustments of estimated product liability obligations of previously discontinued businesses, resulting from updated actuarial valuations.
In the year ended December 31, 2015, the Company recorded a net loss from discontinued operations and disposal of $2.3 million. The net loss was primarily driven by tax expense associated with recording a net deferred tax liability of $6.3 million, partially offset by net income generated by the Fire Rescue Group, and the receipt of $4.0 million from the escrow associated with the 2012 sale of the Company’s former Federal Signal Technologies Group (“FSTech”).
Orders & Backlog
($ in millions)
2017
 
2016
 
2015
Total orders
$
1,018.0

 
$
674.4

 
$
686.1

Change in orders year-over-year
50.9
%
 
(1.7
)%
 
(15.0
)%
Change in U.S. municipal and government orders year-over-year
18.3
%
 
(5.8
)%
 
(10.9
)%
Change in U.S. industrial and commercial orders year-over-year
139.6
%
 
0.3
 %
 
(30.2
)%
Change in non-U.S. orders year-over-year
21.2
%
 
3.5
 %
 
(3.0
)%
Backlog
$
257.5

 
$
137.0

 
$
171.3

Change in backlog year-over-year
88.0
%
 
(20.0
)%
 
(32.7
)%
On the date of acquisition, JJE had a backlog of orders from its end customers of $43.3 million. These acquired orders were included in total orders reported for the year ended December 31, 2016.
On the date of acquisition, TBEI had a backlog of orders from its end customers of $44.8 million. These acquired orders were included in total orders reported for the year ended December 31, 2017.
Year ended December 31, 2017 vs. year ended December 31, 2016
Total orders for the year ended December 31, 2017 were $1,018.0 million, an increase of $343.6 million, or 51%, compared to the prior year. The Environmental Solutions Group reported total orders of $806.3 million in 2017, an increase of $331.5 million, or 70%, compared to the prior year. The improvement was driven by organic order growth of approximately $121.1 million, or 33%, primarily represented by improved orders for sewer cleaners, street sweepers and vacuum trucks, the effects of the TBEI acquisition, which added $151.9 million in orders, and a net increase in orders of $58.5 million related to the inclusion of JJE orders for a full year in 2017 versus seven months in 2016. Within the Safety and Security Systems Group, orders increased by $12.1 million compared to the prior year, primarily driven by improvements in orders of industrial products, public safety products and outdoor warning systems.
U.S. municipal and governmental orders increased by $55.8 million, or 18%, primarily due to a $56.0 million improvement within the Environmental Solutions Group, largely represented by increases in orders for street sweepers and sewer cleaners of $24.0 million and $20.4 million, respectively, and a $13.9 million increase in orders for dump truck bodies following the acquisition of TBEI. This improvement was partially offset by a $0.2 million reduction in municipal orders within the Safety and Security Systems Group.
U.S. industrial and commercial orders increased by $247.0 million, or 140%, largely driven by a $239.9 million increase within the Environmental Solutions Group, primarily related to improvements in orders for vacuum trucks and sewer cleaners of $50.4 million and $29.2 million, respectively, the acquisition of TBEI, which contributed $138.0 million, and the effects of the inclusion of JJE orders for a full year in 2017 versus seven months in 2016. Within the Safety and Security Systems Group, industrial orders were up $7.1 million, due to increased orders of outdoor warning systems, public safety products and industrial products of $4.0 million, $2.5 million and $0.6 million, respectively.
Non-U.S. orders increased by $40.8 million, or 21%, largely due to a $35.6 million increase within the Environmental Solutions Group, reflecting increased Canadian orders following the acquisition of JJE in June of 2016. Orders within the Safety and Security Systems Group increased by $5.2 million, driven by improved orders in industrial and coal markets, partially offset by reduced orders from international public safety markets.

22


Year ended December 31, 2016 vs. year ended December 31, 2015
For the year ended December 31, 2016, total orders of $674.4 million decreased by $11.7 million, or 2%, compared to the prior year, largely due to a $37.3 million decrease in orders within the Safety and Security Systems Group, primarily driven by a $26.7 million reduction in orders from global industrial markets, reflective of reduced demand from oil and gas markets. The decrease in orders within the Safety and Security Systems Group was offset by a $25.6 million improvement within the Environmental Solutions Group, which reported a significant increase in orders from Canada, largely due to the acquisition of $36.4 million of net orders in connection with the JJE acquisition, as well as orders received by JJE subsequent to the acquisition. That improvement was partially offset by lower domestic orders for street sweepers, waterblasting equipment and vacuum trucks, as well as reduced international orders for street sweepers and waterblasting equipment.
U.S. municipal and governmental orders decreased by 6%, primarily due to a decline in orders of street sweepers and outdoor warning systems of $16.2 million and $4.2 million, respectively. Street sweeper orders from our municipal markets decreased largely due to fewer fleet orders as compared with the prior year.
U.S. industrial and commercial orders were essentially flat, with a $4.9 million increase within the Environmental Solutions Group being largely offset by a $4.4 million decrease within the Safety and Security Systems Group. Improved domestic industrial orders within the Environmental Solutions Group, reflective of the addition of new product offerings acquired in connection with the JJE acquisition, including orders for rental equipment and refuse and recycling vehicles, were partially offset by lower orders of waterblasting equipment, vacuum trucks and used equipment. The decrease in orders within the Safety and Security Systems Group was primarily due to lower orders from U.S. industrial markets.
Non-U.S. orders increased by 4%, primarily due to a $31.9 million improvement within the Environmental Solutions Group that was largely offset by a $25.5 million decline in orders within the Safety and Security Systems Group. Within the Environmental Solutions Group, a substantial increase in Canadian orders was reflective of orders acquired in, and received subsequent to, the JJE acquisition, largely offset by declines in orders of vacuum trucks and sewer cleaners and a $8.5 million decrease in orders for street sweepers and waterblasting equipment in the Middle East. Within the Safety and Security Systems Group, the decrease was primarily due to lower orders from industrial markets, including international oil, gas and coal markets, as well as reduced orders from international public safety markets.
Backlog
Backlog was $257.5 million at December 31, 2017 as compared to $137.0 million at December 31, 2016. The increase of $120.5 million, or 88%, was primarily due to a $114.5 million increase in backlog within the Environmental Solutions Group, largely due to the TBEI acquisition, whose backlog at December 31, 2017 was $42.5 million, and higher demand for vacuum trucks, sewer cleaners and street sweepers in the U.S. In addition, backlog within the Safety and Security Systems Group improved by $6.0 million, primarily due increased orders for outdoor warnings systems, as well as the timing of large police orders within public safety markets.
Environmental Solutions
The following table summarizes the Environmental Solutions Group’s operating results as of and for the years ended December 31, 2017, 2016 and 2015:
 
For the Years Ended December 31,
 
Change
($ in millions)
2017
 
2016
 
2015
 
2017 vs. 2016
 
2016 vs. 2015
Net sales
$
692.6

 
$
490.7

 
$
534.1

 
$
201.9

 
$
(43.4
)
Operating income
72.4

 
54.1

 
96.9

 
18.3

 
(42.8
)
Other data:
 
 
 
 
 
 
 
 
 
Operating margin
10.5
%
 
11.0
%
 
18.1
%
 
(0.5
)%
 
(7.1
)%
Total orders
$
806.3

 
$
474.8

 
$
449.2

 
$
331.5

 
$
25.6

Backlog
231.1

 
116.6

 
133.4

 
114.5

 
(16.8
)
Depreciation and amortization
25.7

 
14.5

 
7.3

 
11.2

 
7.2

Year ended December 31, 2017 vs. year ended December 31, 2016
Total orders increased by $331.5 million, or 70%, for the year ended December 31, 2017. U.S. orders increased by $295.9 million, largely due to improvements in orders for sewer cleaners, vacuum trucks and street sweepers of $49.7 million, $43.1 million and $32.5 million, respectively, as well as the impact of the TBEI acquisition, which contributed $151.9 million of orders. Street sweeper and sewer cleaner order improvements were primarily driven by increased demand within municipal and

23


industrial markets, while the increase in vacuum truck orders was associated with improved conditions in industrial markets in comparison to the prior year, when there was a higher amount of used equipment in some of our end markets. The improvement in vacuum truck orders was also reflective of our strategic initiative to expand into the utility market, and the replenishment of customer rental fleets. Non-U.S. orders increased by $35.6 million, primarily attributed to the acquisition of JJE, completed in June last year.
Net sales increased by $201.9 million, or 41%, for the year ended December 31, 2017. U.S. sales increased by $166.7 million, or 45%, primarily due to the current-year acquisition of TBEI which contributed $109.0 million of sales, and increases in shipments of vacuum trucks, sewer cleaners and waterblasting equipment of $21.1 million, $10.7 million and $3.9 million, respectively. In addition, rental income and sales of used equipment improved by $5.5 million and $7.5 million, respectively, largely due to the current year including a full year of JJE activity compared with seven months last year. Partially offsetting these improvements was a $2.0 million decrease in street sweeper sales. Non-U.S. sales increased by $35.2 million, or 30%, primarily due to the effects of the additional JJE activity in the current year, including increases in rental income and sales of used equipment of $7.6 million and $1.8 million, respectively.
Cost of sales increased by $162.1 million, or 42%, for the year ended December 31, 2017, primarily attributable to higher sales volumes, additional cost of sales from the TBEI acquisition and the effects of a full year of JJE activity in the current year, recognition of approximately $0.8 million more expense associated with purchase accounting effects and a $6.5 million increase in depreciation expense, largely resulting from depreciation on rental equipment acquired in the JJE transaction. Gross margin decreased to 20.8% from 21.2% in the prior year, largely due to the aforementioned incremental depreciation and purchase accounting expense effects.
SEG&A expenses increased by $21.0 million, or 42%, for the year ended December 31, 2017, largely due to the addition of expenses of businesses acquired in the current and prior year, a $4.7 million increase in amortization expense and strategic investments in our sales force to support our organic growth initiatives.
Operating income for the year ended December 31, 2017 increased by $18.3 million, or 34%, largely due to the $39.8 million increase in gross profit, partially offset by the $21.0 million increase in SEG&A expenses and a $0.5 million increase in acquisition and integration-related expenses.
Backlog was $231.1 million at December 31, 2017, up 98% compared to $116.6 million at December 31, 2016. The increase is primarily due to the contribution of $42.5 million of backlog from TBEI, as well as the effects of improved demand for sewer cleaners, vacuum trucks, and street sweepers in the U.S.
Year ended December 31, 2016 vs. year ended December 31, 2015
Total orders increased by $25.6 million, or 6%, for the year ended December 31, 2016. U.S. orders decreased by $6.3 million, largely due to decreased orders for street sweepers, waterblasting equipment and vacuum trucks of $18.4 million, $3.8 million and $3.0 million, respectively. Partially offsetting these decreases were improvements in orders of rental equipment, refuse trucks and sewer cleaners of $7.7 million, $7.0 million and $4.6 million, respectively, which largely resulted from the JJE acquisition. Street sweeper orders from our municipal markets decreased primarily due to fewer fleet orders when compared with the prior year, while the reduction in orders for waterblasting equipment and vacuum trucks is reflective of softness in oil and gas markets. Non-U.S. orders increased by $31.9 million for the year ended December 31, 2016, driven by a $40.4 million net increase in orders from Canada, largely resulting from the orders acquired in connection with the JJE acquisition and the receipt of post-acquisition orders of new product lines, including refuse trucks, snow removal and rental equipment. This improvement was net of a combined $20.4 million decrease in Canadian orders for vacuum trucks and sewer cleaners. Orders in the Middle East also declined by $8.5 million, due to lower orders for street sweepers and waterblasting equipment.
Net sales decreased by $43.4 million, or 8%, for the year ended December 31, 2016. U.S. sales decreased by $64.8 million, or 15%, primarily due to reductions in sales of vacuum trucks, street sweepers and waterblasting equipment of $47.0 million, $25.3 million and $5.8 million, respectively. Partially offsetting these reductions was a $6.2 million increase in sales of refuse and recycling vehicles and a $4.6 million improvement in equipment rental revenue, largely resulting from the JJE acquisition, as well as a $4.5 million increase in sewer cleaner sales. Non-U.S. sales increased by $21.4 million, or 22%, for the year ended December 31, 2016 primarily due to a $35.0 million increase in Canadian sales, largely resulting from the effects of the JJE acquisition, which included incremental sales of newly-acquired product lines and a $6.0 million increase in equipment rental revenue. Partially offsetting the sales improvement in Canada were reductions in sales of street sweepers and sewer cleaners in the Middle East and Mexico of $7.9 million and $1.9 million, respectively.
Cost of sales decreased by $7.0 million, or 2%, for the year ended December 31, 2016, primarily driven by lower sales of vacuum trucks and street sweepers in the U.S, as well as fewer international shipments of street sweepers and sewer cleaners, partially offset by unfavorable mix effects, a $6.9 million increase in depreciation expense, largely associated with the

24


acquisition of the JJE rental fleet, and the recognition of approximately $3.9 million of expense associated with purchase accounting effects resulting from current-year acquisitions. The additional expense reflects the recognition of higher cost of sales associated with sales of acquired equipment, which were increased to fair value in connection with the JJE acquisition. Gross margin decreased to 21.2% from 26.3% in the prior year, largely due to reduced operating leverage due to lower sales volumes, unfavorable sales mix, with fewer sales into industrial markets and a higher concentration of sales of products manufactured by other companies, which tend to carry lower margins, as well as purchase accounting expense effects.
SEG&A expenses increased by $5.9 million, or 14%, for the year ended December 31, 2016, largely due the addition of $6.8 million of SEG&A expenses from current-year acquisitions, as well as a $1.8 million increase in product liability and workers’ compensation expenses. Partially offsetting these increases were decreased sales commissions on lower volumes, and benefits associated with cost reduction initiatives.
Operating income decreased by $42.8 million, or 44%, for the year ended December 31, 2016, largely due to a $36.4 million decrease in gross profit, inclusive of the aforementioned purchase accounting expense effects, the $5.9 million increase in SEG&A expenses and the inclusion of $0.5 million of acquisition and integration related expenses.
Backlog was $116.6 million at December 31, 2016 compared to $133.4 million at December 31, 2015. The reduction reflects lower backlog for street sweepers, as a result of higher levels of fleet orders in the prior year, and vacuum trucks. The lower backlog for vacuum trucks reflects the direct effects of soft oil and gas markets and the impact of used equipment reducing demand for new equipment in adjacent industrial markets. These decreases were partially offset by the addition of the backlog acquired in connection with the JJE acquisition, as well as post-acquisition order activity at JJE.
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, 2017, 2016 and 2015:
 
For the Years Ended December 31,
 
Change
($ in millions)
2017
 
2016
 
2015
 
2017 vs. 2016
 
2016 vs. 2015
Net sales
$
205.9

 
$
217.2

 
$
233.9

 
$
(11.3
)
 
$
(16.7
)
Operating income
27.0

 
27.0

 
32.3

 

 
(5.3
)
Other data:
 
 
 
 
 
 
 
 
 
Operating margin
13.1
%
 
12.4
%
 
13.8
%
 
0.7
%
 
(1.4
)%
Total orders
$
211.7

 
$
199.6

 
$
236.9

 
$
12.1

 
$
(37.3
)
Backlog
26.4

 
20.4

 
37.9

 
6.0

 
(17.5
)
Depreciation and amortization
4.1

 
4.4

 
4.8

 
(0.3
)
 
(0.4
)
Year ended December 31, 2017 vs. year ended December 31, 2016
Total orders increased by $12.1 million or 6%, for the year ended December 31, 2017. In the aggregate, U.S. orders increased by $6.9 million compared to the prior year, driven by increases in orders of outdoor warning systems, public safety products and industrial products of $3.4 million, $2.9 million and $0.6 million, respectively. Non-US orders increased by $5.2 million, largely due to a $6.8 million increase in orders from international industrial markets, including oil and gas and coal markets, partially offset by a $1.6 million decrease in orders of international public safety products.
Net sales decreased by $11.3 million, or 5%, for the year ended December 31, 2017. U.S. sales decreased by approximately $4.4 million, primarily due to decreased sales of public safety products and outdoor warning systems of $3.0 million and $3.3 million, respectively. The reduction in sales of both public safety products and outdoor warnings systems was primarily attributable to fewer large orders when compared to the prior year. Partially offsetting these decreases was a $1.9 million improvement in sales of industrial products. Non-U.S. sales decreased by $6.9 million, primarily driven by a $5.8 million reduction in sales into international public safety markets and a $2.4 million decrease in sales of outdoor warning systems. Partially offsetting these decreases was a $1.3 million improvement in sales of industrial products into international industrial markets, including oil and gas and coal markets.
Cost of sales decreased by $9.6 million, or 7%, for the year ended December 31, 2017, largely due to the effects of lower sales volumes, as well as the effects of material cost reduction initiatives implemented in the current and prior year. These actions contributed to an improved gross margin for the year ended December 31, 2017 of 37.5%, compared to 36.3% in the prior year.

25


SEG&A expenses for the year ended December 31, 2017 were $0.6 million lower than the prior year, with savings realized from prior year restructuring activities being partially offset by strategic investments in support of new product development and other growth initiatives.
Operating income for the year ended December 31, 2017 of $27.0 million was unchanged from the prior year, where reductions in SEG&A expenses and restructuring expenses of $0.6 million and $1.1 million, respectively, offset a $1.7 million decrease in gross profit.
Backlog was $26.4 million at December 31, 2017 compared to $20.4 million at December 31, 2016. The increase was primarily due to increased orders for outdoor warnings systems, as well as large police orders within public safety markets that were received in the fourth quarter of 2017.
Year ended December 31, 2016 vs. year ended December 31, 2015
Total orders decreased by $37.3 million or 16%, for the year ended December 31, 2016. In the aggregate, U.S. orders were down $11.8 million compared to the prior year, driven by decreases in orders of industrial products and outdoor warning systems of $7.4 million and $4.2 million, respectively. The decrease in industrial orders is largely reflective of lower demand from domestic oil and gas markets. Non-U.S. orders decreased by $25.5 million, or 27%, primarily due to a $19.3 million decrease in orders from industrial markets, including international oil, gas and coal markets, as well as a $9.4 million reduction in orders from international public safety markets in comparison to the prior year, which included significant orders from customers in Europe and Asia that did not repeat in the current year. Partially offsetting these decreases was a $3.4 million improvement in international orders for outdoor warning systems, largely due to significant orders received from the Middle East.
Net sales decreased by $16.7 million, or 7%, for the year ended December 31, 2016. U.S. sales increased by $2.0 million, driven by an $8.1 million improvement in sales into public safety markets, inclusive of a number of large sales to major municipalities, combined with a $2.0 million increase in sales of domestic outdoor warning systems. Partially offsetting these increases was an $8.2 million reduction in sales into industrial markets. Non-U.S. sales decreased by $18.7 million, or 20%, primarily due to a $17.8 million reduction in sales into international industrial markets, primarily associated with ongoing softness in global oil and gas markets, as well as the absence of a $1.8 million order cancellation fee received in the prior year. In addition, sales into international public safety markets decreased by $4.6 million, largely due to lower sales into Central and South America. Partially offsetting these decreases was a $3.7 million improvement in international sales of outdoor warning products, driven by increased sales into the Middle East.
Cost of sales decreased by $10.6 million, or 7%, for the year ended December 31, 2016, largely due to an $8.7 million decrease associated with lower sales volumes, and the effects of cost reduction initiatives. Partially offsetting these decreases was an unfavorable sales mix impact of $1.1 million associated with lower sales of products into industrial markets. Gross margin for the year ended December 31, 2016 of 36.3% remained unchanged from the prior year. The unfavorable sales mix effects and the inclusion of the aforementioned order cancellation fee in the prior year were fully offset by the savings associated with previously implemented restructuring activities and cost reduction initiatives.
SEG&A expenses for the year ended December 31, 2016 were $2.1 million lower than the prior year, largely due to lower employee costs, inclusive of the effects of previously implemented restructuring activities and cost reduction initiatives.
Operating income decreased by $5.3 million for the year ended December 31, 2016, largely due to a $6.1 million decrease in gross profit. The $2.1 million reduction in SEG&A expenses was partially offset by a $1.3 million increase in restructuring charges, which represented higher severance costs incurred in connection with the execution of a cost reduction plan in the U.S. during the year.
Backlog was $20.4 million at December 31, 2016 compared to $37.9 million at December 31, 2015. The decrease was driven by increased shipments of outdoor warning systems that exceeded incoming orders, lower domestic and international orders of industrial products, as well as reduced orders from overseas public safety markets.
Corporate Expense
Corporate operating expenses were $32.3 million, $23.4 million and $26.0 million for the years ended December 31, 2017, 2016 and 2015, respectively.
For the year ended December 31, 2017, corporate operating expenses increased by $8.9 million, primarily driven by a $6.1 million pension settlement charge, a $0.8 million increase in acquisition and integration-related expenses associated with the

26


TBEI acquisition, the recognition of $0.7 million in executive severance costs, increased legal expenses associated with hearing loss litigation and higher employee incentive compensation costs, partially offset by lower pension expenses.
For the year ended December 31, 2016, corporate operating expenses decreased by $2.6 million, largely due to lower employee incentive and stock compensation costs, partially offset by a $0.9 million increase in professional service and legal fees incurred in connection with acquisition and integration-related activity.
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 operating segments) are reported and managed as corporate expenses.
Financial Condition, Liquidity and Capital Resources
The Company used 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 Amended 2016 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. Subsequent to the acquisition of JJE, net cash flows from rental equipment transactions may become more significant, and as such, cash flow from operating activities may not be directly comparable with amounts reported in periods prior to the acquisition.
The Company’s cash and cash equivalents totaled $37.5 million, $50.7 million and $76.0 million as of December 31, 2017, 2016 and 2015, respectively. As of December 31, 2017, $20.2 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. This cash is used to fund the operating activities of our foreign subsidiaries and for further investment in foreign operations. Historically, we considered such cash to be permanently reinvested in our foreign operations and our 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 have caused us to incur additional U.S. income tax expense, dependent on income tax laws and other circumstances at the time any such amounts were repatriated.
The 2017 Tax Act provides a one-time “transition tax” on untaxed post-1986 accumulated earnings and profits (“E&P”) of a company’s controlled foreign corporations (“CFC”) determined as of November 2, 2017 or December 31, 2017 (whichever date on which there is more deferred E&P). As disclosed in Note 8 - Income Taxes, the Company’s accumulated undistributed earnings of foreign subsidiaries aggregated to an overall E&P deficit. Therefore, the Company estimates that no transition tax will be payable under the provisions of the 2017 Tax Act. As with other tax calculations surrounding the 2017 Tax Act, the Company’s estimate of its transition tax liability as of December 31, 2017 is provisional due to complexities inherent in the computations that it expects to be addressed in whole, or in part, by regulations issued during 2018. As of December 31, 2017, the Company continues to assert that its undistributed earnings of certain foreign subsidiaries are indefinitely reinvested. The Company will continue to evaluate its U.S. and foreign cash needs and, as circumstances change, may change its assertion related to all or a portion of its undistributed foreign earnings.
Net cash provided by continuing operating activities totaled $73.5 million, $26.7 million and $91.1 million in 2017, 2016 and 2015, respectively. The increase in cash generated by continuing operating activities in 2017 compared to 2016 was largely the result of higher earnings and benefits from reductions in primary working capital in comparison to the same period of the prior year. We began 2017 with higher total primary working capital levels (defined as accounts receivable and inventories, net, less accounts payable and customer deposits, excluding primary working capital acquired during the year) than when entering the prior year, partly due to the acquisition of JJE, whose inventory levels at any point in time can fluctuate based on demand given the distribution model, as well as the advanced purchase of inventory to meet anticipated production requirements. Partially offsetting this improvement was a $5.5 million year-over-year increase in interest payments. The operating cash flow in the prior-year period was also lower by approximately $11 million as a result of the non-cash settlement, in connection with the acquisition, of accounts receivable due from JJE.
Net cash used for continuing investing activities totaled $277.1 million, $103.0 million and $11.5 million in 2017, 2016 and 2015, respectively. In each of the years presented, cash was used to fund the purchase of properties and equipment, with $8.0 million, $6.1 million and $9.6 million of capital expenditures in 2017, 2016 and 2015, respectively. As discussed in Note 2 – Acquisitions, in 2017, the Company paid $269.2 million to acquire TBEI. In 2016, the Company paid $96.6 million to acquire

27


substantially all the assets and operations of JJE, and also used $6.0 million to acquire Westech. In addition, during 2016, the Company received $6.0 million from a customer as full repayment of a loan that was originally provided in the fourth quarter of 2015. During 2015, the Company also received $4.0 million from the escrow associated with the FSTech divestiture. Net cash provided by discontinued investing activities totaled $86.2 million in 2016, which represented the net proceeds from the sale of Bronto.
Net cash of $190.7 million was provided by continuing financing activities in 2017, compared with a net cash usage of $37.1 million and $33.0 million in 2016 and 2015, respectively. In 2017, in connection with the funding of the acquisition of TBEI, the Company borrowed $243.0 million against its revolving credit facility. Between the TBEI acquisition date and the end of 2017, approximately $34 million of net borrowings were repaid. In addition, the Company funded cash dividends of $16.8 million and redeemed $2.9 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 2016, the Company borrowed $64.8 million against its revolving credit facility, funded cash dividends of $16.9 million, repurchased $37.8 million of treasury stock, and redeemed $2.7 million of stock in order to remit funds to tax authorities to satisfy employees’ minimum tax withholdings following the vesting of stock-based compensation. The Company also paid the remaining $43.4 million of term loan debt outstanding under the Company’s March 13, 2013 Credit Agreement (the “2013 Credit Agreement”) and spent $1.1 million on fees in connection with its debt refinancing. In 2015, the Company funded cash dividends of $15.6 million, repurchased $10.6 million of treasury stock, and redeemed $3.2 million of stock in order to remit funds to tax authorities to satisfy employees’ minimum tax withholdings following the vesting of stock-based compensation. The Company also paid $5.8 million in scheduled term loan repayments. Offsetting these financing cash outflows were $1.0 million of proceeds from stock option exercises and a $1.6 million excess tax benefit, representing the difference between stock-based compensation expense deductible for income tax and recognized for financial reporting purposes.
On January 27, 2016, the Company entered into an Amended and Restated Credit Agreement (the “2016 Credit Agreement”), by and among the Company and certain of its foreign subsidiaries (collectively, the “Borrowers”), Wells Fargo Bank, National Association, as administrative agent, swingline lender and issuing lender, JPMorgan Chase Bank, N.A. as syndication agent, KeyBank National Association, as documentation agent, Wells Fargo Securities, LLC and J.P. Morgan Securities LLC, as joint lead arrangers and joint bookrunners, and the other lenders and parties signatory thereto.
The 2016 Credit Agreement provided for a $325.0 million revolving credit facility, maturing on January 27, 2021, with borrowings in the form of loans or letters of credit up to the aggregate availability under the facility, with a sub-limit of $50.0 million for letters of credit. In addition, the 2016 Credit Agreement includes an accordion feature, whereby the Company may cause the commitments to increase by up to an additional $75.0 million, subject to the approval of the applicable lenders providing such additional financing. 
On June 2, 2017, in anticipation of the TBEI acquisition, the Company executed an amendment to the 2016 Credit Agreement (as amended, the “Amended 2016 Credit Agreement”), which included provisions to exercise this accordion feature, thereby increasing the borrowing capacity under the Amended 2016 Credit Agreement to $400.0 million.
The Amended 2016 Credit Agreement allows for the Borrowers to borrow in denominations of U.S. Dollars, Canadian Dollars (up to a maximum of C$100.0 million) or Euros (up to a maximum of €20.0 million). Borrowings under the Amended 2016 Credit Agreement may be used for working capital and general corporate purposes, including permitted acquisitions.
The Company’s domestic subsidiaries provide guarantees for all obligations of the Borrowers under the Amended 2016 Credit Agreement, which is secured by a first priority security interest in all now or hereafter acquired domestic property and assets and the stock or other equity interests in each of the domestic subsidiaries and 65% of the outstanding voting capital stock of certain first-tier foreign subsidiaries, subject to certain exclusions.
Borrowings under the Amended 2016 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 0.00% to 1.25% for base rate borrowings and 1.00% to 2.25% for LIBOR borrowings. The Company must also pay a commitment fee to the lenders ranging between 0.15% to 0.30% per annum on the unused portion of the $400.0 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 leverage ratio and interest coverage ratio financial covenants under the Amended 2016 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, 2017. Although it has not been triggered by the Company, the Amended 2016 Credit Agreement also includes a “covenant holiday” period, which allows for the temporary increase of the minimum leverage ratio following the completion of a permitted acquisition, or a series of permitted acquisitions, when the total consideration exceeds a specified threshold. In addition, the Amended 2016 Credit Agreement includes customary negative covenants, subject to certain

28


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 merge, consolidate or enter into 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 Amended 2016 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 2.50, (ii) the Company is in compliance with all other financial covenants and (iii) there are no existing defaults under the Amended 2016 Credit Agreement. If its leverage ratio is more than 2.50, the Company is still permitted to fund (i) up to $30.0 million of dividend payments, (ii) stock repurchases sufficient to offset dilution created by the issuance of equity as compensation to its officer, directors, employees and consultants and (iii) an incremental $30.0 million of other cash payments.
The Amended 2016 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 Amended 2016 Credit Agreement and the commitments from the lenders may be terminated.
In connection with its debt refinancing in the year ended December 31, 2016, the Company repaid the remaining $43.4 million of principal outstanding under the 2013 Credit Agreement and wrote off approximately $0.3 million of unamortized deferred financing fees associated with the 2013 Credit Agreement. The Company incurred $1.1 million of debt issuance costs in connection with the execution of the 2016 Credit Agreement. Such fees have been deferred and are being amortized over the five-year term.
As of December 31, 2017, there was $277.0 million of cash drawn and $17.1 million of undrawn letters of credit under the Amended 2016 Credit Agreement, with $105.9 million of net availability for borrowings. As of December 31, 2017, there was no cash drawn against the Company’s non-U.S. lines of credit which provide for borrowings up to $0.2 million.
For the year ended December 31, 2017, gross borrowings and gross payments under the 2016 Credit Agreement and the Amended 2016 Credit Agreement were $262.7 million and $53.6 million, respectively. For the year ended December 31, 2016, gross borrowings and gross payments under the 2016 Credit Agreement were $69.8 million and $5.0 million, respectively. For the year ended December 31, 2015, there were no gross borrowings or gross payments under the Company’s domestic revolving credit facility portion of the 2013 Credit Agreement.
Aggregate maturities of total borrowings due amount to approximately $0.3 million in 2018, $0.2 million in 2019, $0.1 million in 2020 and $277.1 million in 2021. The weighted average interest rate on long-term borrowings was 3.25% at December 31, 2017.
The Company paid interest of $6.6 million in 2017, $1.1 million in 2016 and $1.9 million in 2015.
The Company paid income taxes of $13.9 million in 2017, $13.3 million in 2016 and $9.6 million in 2015.
Cash dividends of $16.8 million, $16.9 million and $15.6 million were declared and paid to stockholders in 2017, 2016 and 2015, respectively.
The Company anticipates that capital expenditures for 2018 will be in the range of $15 million to $20 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.

29


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, 2017:
 
Payments Due by Period
(in millions)
Total
 
Less than
1 Year
 
2-3 Years
 
4-5 Years
 
More than
5 Years
Long-term debt
$
277.0

 
$

 
$

 
$
277.0

 
$

Interest payments on long-term debt (a)
28.1

 
9.1

 
18.3

 
0.7

 

Operating lease obligations
37.2

 
8.4

 
14.0

 
11.3

 
3.5

Capital lease obligations
0.7

 
0.3

 
0.3

 
0.1

 

Purchase obligations (b)
117.6

 
113.1

 
4.4

 
0.1

 

Pension contributions (c)
6.5

 
6.5

 

 

 

Contingent earn-out payment and deferred payment (d)
12.3

 

 
12.3

 

 

Total contractual obligations (e)
$
479.4

 
$
137.4

 
$
49.3

 
$
289.2

 
$
3.5

(a)
Amounts represent estimated contractual interest payments on outstanding long-term debt.
(b)
Purchase obligations primarily relate to commercial chassis and other contracts in the ordinary course of business.
(c)
The Company expects to contribute up to $5.1 million to the U.S. benefit plan and up to $1.4 million to the non-U.S. benefit plan in 2018, which represents the minimum required contribution. 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.
(d)
Represents the fair value of the contingent earn-out payment and deferred payment associated with the acquisition of JJE. For further discussion, see Note 2 – Acquisitions to the accompanying consolidated financial statements.
(e)
As of December 31, 2017, the Company had a liability of approximately $1.9 million for unrecognized tax benefits. For further discussion, see Note 8 – 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, 2017:
 
Notional Amount by Expiration Period
(in millions)
Total  
 
Less than
1 Year
 
2-3 Years
 
4-5 Years
Financial standby letters of credit (a)
$
16.0

 
$
16.0

 
$

 
$

Performance standby letters of credit (a)
1.1

 
1.1

 

 

Performance and bid bonds (b)
4.2

 
4.0


0.1

 
0.1

Repurchase obligations (c)
6.4

 
5.1

 
1.0

 
0.3

Total off-balance sheet arrangements
$
27.7

 
$
26.2

 
$
1.1

 
$
0.4

(a) 
Financial standby letters of credit largely relate to casualty insurance policies for the Company’s workers’ compensation, automobile, general liability and product liability policies. 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 10 – 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.

30


Goodwill
Goodwill represents the excess of the cost of an acquired business over the amounts assigned to its net assets. Goodwill is not amortized but is tested for impairment at a reporting unit level on an annual basis or when an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. The Company performed its annual goodwill impairment test as of October 31, 2017.
In testing the goodwill of its reporting units for potential impairment, the Company applies either a qualitative test, or a two-step quantitative test, in accordance with ASC 350, Intangibles Goodwill and Other.
A qualitative approach is 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 this situation, the Company would not be required to perform the two-step impairment test described below. Management applied the qualitative approach to assess the goodwill of its reporting units for potential impairment in 2017 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.
The first step in the quantitative two-step approach is used to identify potential impairment, by comparing the fair value of a reporting unit with its carrying amount, including goodwill. If the fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is not impaired and the second step of the impairment test is unnecessary. If the carrying amount of a reporting unit exceeds its fair value, the second step of the goodwill impairment test is performed to measure the amount of impairment loss, if any. The second step compares the implied fair value of reporting unit goodwill with the carrying amount of that goodwill. If the carrying amount of reporting unit goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to that excess. The Company generally determines the fair value of its reporting units using two valuation methods: the “Income Approach — Discounted Cash Flow Analysis” method, and the “Market Approach — Guideline Public Company Method.”
Under the “Income Approach — Discounted Cash Flow Analysis” method, the key assumptions consider projected sales, cost of sales and operating expenses. These assumptions were 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 business segment. If our assumptions relative to growth rates were to change, our fair value calculation may change, which could result in impairment.
Under the “Market Approach — Guideline Public Company Method,” the Company identified several publicly traded companies, which we believe have sufficiently relevant similarities to our businesses. For these companies, the Company used market values to calculate the mean ratio of invested capital to revenues and invested capital to EBITDA. Similar to the income approach discussed above, sales, cost of sales, operating expenses and their respective growth rates are 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. 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.
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 first-step of the two-step goodwill impairment test. The fair value of the reporting units that were tested for impairment under the two-step approach in the most recent quantitative analysis performed in 2016 significantly exceeded their carrying values. Relatively small changes in the Company’s key assumptions would not have resulted in any of these reporting units failing the first step of the two-step test.
The Company had no goodwill impairments for its continuing operations in 2017, 2016 or 2015. 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 6 – Goodwill and Other Intangible Assets to the accompanying consolidated financial statements for a summary of the Company’s goodwill by segment.
On January 1, 2018, the Company adopted Accounting Standards Update (“ASU”) No. 2017-04, Intangibles Goodwill and Other (Topic 350), Simplifying the Test for Goodwill Impairment, which eliminates the second step of the two-step quantitative

31


approach for testing goodwill for potential impairment. See Note 19 - New Accounting Pronouncements (Issued But Not Yet Adopted) to the accompanying consolidated financial statements for further discussion.
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 TBEI and JJE acquisitions that were completed in 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 is applied when the Company concludes that it is not “more likely than not” that the fair value of the indefinite-lived intangibles 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. In 2017 and 2016, the Company applied a qualitative approach. Based on the proximity of the relevant acquisition dates to the annual impairment test dates and the post-acquisition performance of the businesses compared to the related valuation assumptions, the Company concluded that it was not “more likely than not” that the fair value of indefinite-lived intangible assets were less than the carrying amounts.
Significant judgment is applied when evaluating whether an intangible asset has an indefinite useful life. In addition, for indefinite-lived intangible assets, significant judgment is applied in testing for impairment. This judgment includes developing cash flow projections, selecting appropriate discount rates, identifying relevant market comparables, and incorporating general economic and market conditions.
The Company had no indefinite-lived intangible asset impairments for its continuing operations in 2017 or 2016. 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 6 – Goodwill and Other Intangible Assets to the accompanying consolidated financial statements for a summary of the Company’s indefinite-lived intangible assets.
Workers’ Compensation and Product Liability Reserves
Due to the nature of the Company’s manufacturing and products, the Company is subject to workers’ compensation and product liability claims in the ordinary course of business. The Company carries insurance against such claims but is self-funded for a portion thereof, with various retention and excess coverage thresholds. After a claim is filed, an initial liability is estimated, if any is expected, to resolve the claim. This liability is periodically updated as more claim facts become known. The establishment and update of liabilities for unpaid claims, including claims incurred but not reported, is based on the assessment by the Company’s claim administrator of each claim and an independent actuarial valuation of the nature and severity of total claims, as well as management’s estimate. The Company utilizes a third-party claims administrator to pay claims, track and evaluate actual claims experience and ensure consistency in the data used in the actuarial valuation. The amount and timing of cash payments relating to these claims are considered to be reliably determinable given the nature of the claims and historical claim volumes to support the actuarial assumptions and judgments used to derive the expected loss payment patterns. As such, the reserves recorded are discounted using a risk-free rate that matches the average duration of the claims. Management believes that the reserve established at December 31, 2017 appropriately reflects the Company’s risk exposure. The Company has not established a reserve for potential losses resulting from firefighter hearing loss litigation, with the exception of certain estimated losses that have been recognized related to settlement discussions (see Note 11 – Legal Proceedings to the accompanying consolidated financial statements). If the Company is not successful in its defense after exhausting all appellate options, it will record a charge for such claims, to the extent they exceed insurance recoveries, at the appropriate time.
Pensions
The Company sponsors one domestic and one foreign defined benefit pension plan. Key assumptions used in the accounting for these employee benefit plans in each of the three years in the period ended December 31, 2017 included the discount rate, expected long-term rate of return on plan assets, estimates of future mortality of plan participants and the rate of increase in employee compensation levels. A change in any of these assumptions would have had an effect on net periodic pension expense.

32


The following table summarizes the impact of a 25 basis point change in the discount rate on the Company’s projected benefit obligation:
 
Assumption Change:
(in millions)
25 Basis Point Increase
 
25 Basis Point Decrease
Projected benefit obligation
$
(7.2
)
 
$
7.5

A 25 basis point increase or decrease in the discount rate would have an insignificant effect on the net periodic pension expense recognized in 2017. The weighted-average discount rate used to measure pension liabilities and costs is selected using a hypothetical portfolio of high quality bonds that would provide the necessary cash flow to match the projected benefit payments of the plans. The discount rate represents the rate at which our benefit obligations could effectively be settled as of the year-end measurement date. The weighted-average discount rate used to measure pension liabilities decreased from 2016 to 2017. For further discussion, see Note 9 – Pensions to the accompanying consolidated financial statements.
The Company’s net periodic pension expense is also sensitive to changes in the expected long-term rate of return on plan assets. The expected long-term rate of return on plan assets is based on historical and expected returns for the asset classes in which the plans are invested. The expected asset return assumption is based upon a long-term view; therefore, we do not expect to see significant changes from year to year based on positive or negative actual performance in a single year. A 25 basis point decrease or increase in the expected long-term rate of return on plan assets would have increased or decreased the net periodic pension expense recognized in 2017 by $0.5 million.
The Company references the most recent mortality tables and scales published by the Society of Actuaries in determining its estimate of future mortality.
As discussed further in Note 9 – Pensions to the accompanying consolidated financial statements, benefits associated with salary increases within the U.S. benefit plan ceased at the end of 2016, at which point all existing defined benefit plans became fully frozen. As a result, salary increases no longer impact net periodic pension expense.
Revenue Recognition
Net sales consist primarily of revenue from the sale of equipment, environmental vehicles, parts, service and maintenance contracts.
The Company recognizes revenue for products when (i) persuasive evidence of an arrangement exists, (ii) delivery has occurred, (iii) the sales price is fixed or determinable and (iv) collection is reasonably assured. A product is considered delivered to the customer once it has been shipped and title and risk of loss have been transferred. For most of the Company’s product sales, these criteria are met at the time the product is shipped; however, occasionally title passes later or earlier than shipment due to customer contracts or letter of credit terms. If, at the outset of an arrangement, the Company determines the arrangement fee is not, or is presumed not to be, fixed or determinable, revenue is deferred and subsequently recognized as amounts become due and payable and all other criteria for revenue recognition have been met.
The Company enters into sales arrangements that may provide for multiple deliverables 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 goods and/or services that are to be delivered separately under the sales arrangement and allocates revenue to each deliverable based on relative fair values. Fair values are generally established using reliable third-party objective evidence, or management’s best estimate of selling price, including prices charged when sold separately by the Company. In general, revenues are separated between hardware, integration and installation services. The allocated revenue for each deliverable is then recognized using appropriate revenue recognition methods.
On January 1, 2018, the Company adopted ASC 606, Revenue from Contracts with Customers, as amended, and created by ASU 2014-09, Revenue from Contracts with Customers. See Note 19 - New Accounting Pronouncements (Issued But Not Yet Adopted) to the accompanying consolidated financial statements for further discussion regarding the impact of the adoption on the Company’s revenue recognition accounting policies.

33


Income Taxes
Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying values of existing assets and liabilities and their respective tax bases. Deferred tax assets are also recorded with respect to net operating losses and other tax attribute carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the years in which temporary differences are expected to be recovered or settled. Valuation allowances are established when it is more likely than not that deferred tax assets will not be realized. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the income of the period that includes the enactment date.
In the fourth quarter of 2017, the 2017 Tax Act was enacted. Among its provisions, the 2017 Tax Act reduces the U.S. federal corporate tax rate from 35% to 21% (effective in 2018), requires companies to pay a one-time transition tax on earnings of certain foreign subsidiaries that were previously tax deferred and creates new taxes on certain foreign sourced earnings. As discussed in Note 1 - Summary of Significant Accounting Policies, the consolidated financial statements for the year ended December 31, 2017 include the Company’s provisional estimates of the impact of the 2017 Tax Act, in accordance with SAB 118. The Company expects to adjust the provisional amounts throughout the measurement period as the Company’s calculations are refined and additional interpretive guidance becomes available.
The Company accounts for income taxes in accordance with ASC 740, Income Taxes, which requires that the effect of a change in tax rates on deferred tax assets and liabilities be recognized in the period the tax rate change was enacted. As a result of the 2017 Tax Act being signed into law on December 22, 2017, the Company remeasured its U.S. deferred tax assets and liabilities at the lower rate, recording a net tax benefit of $23.0 million as a component of Income tax expense on the Consolidated Statement of Operations for the year ended December 31, 2017.
The 2017 Tax Act also provides a one-time “transition tax” on untaxed post-1986 accumulated E&P of a CFC determined as of November 2, 2017 or December 31, 2017 (whichever date on which there is more deferred E&P). Cash and cash equivalents are taxed at an effective rate of 15.5% and earnings in excess of the cash position are taxed at an effective rate of 8%. The 2017 Tax Act permits the netting of positive earnings of one CFC against deficits of others. At both November 2, 2017 and December 31, 2017, the accumulated undistributed earnings of the Company’s foreign subsidiaries aggregate to an overall E&P deficit. Therefore, the Company estimates that no transition tax will be payable under the provisions of the 2017 Tax Act. As with other tax calculations surrounding the 2017 Tax Act, the Company’s estimate of its transition tax liability as of December 31, 2017 is provisional due to complexities inherent in the computations that it expects to be addressed in whole, or in part, by regulations issued during 2018. As of December 31, 2017, the Company continues to assert that its undistributed earnings of certain foreign subsidiaries are indefinitely reinvested.
As a result of the 2017 Tax Act, a $3.0 million valuation allowance was recorded against the Company’s foreign tax credits. The 2017 Tax Act moves the U.S. from a worldwide system of taxation to a territorial system and changes the rules that enable taxpayers to generate foreign source income related to export sales. Consequently, at this time, the Company does not believe that it is “more likely than not” that it can utilize its existing foreign tax credits within the applicable carryforward period. The Company will continue to evaluate this conclusion throughout the measurement period as additional interpretive guidance is issued.
The Company does not believe at this time that it will be subject to either the Base Erosion and Anti-Abuse (“BEAT”) tax or the Global Intangible Low-Taxed Income (“GILTI”) tax that were enacted pursuant to the 2017 Tax Act and that are effective beginning January 1, 2018. Accordingly, the Company has not yet selected an accounting policy with respect to GILTI.  The Company will continue to evaluate this conclusion throughout the measurement period as additional interpretive guidance is issued.
The guidance on accounting for income taxes provides important factors in determining whether a deferred tax asset will be realized, including whether there has been sufficient taxable income in recent years and whether sufficient income can reasonably be expected in future years in order to utilize the deferred tax asset. A high degree of judgment is required to determine if, and the extent that, valuation allowances should be recorded against deferred tax assets. A valuation allowance is required to be established or maintained when, based on currently available information and other factors, it is more likely than not that all or a portion of a deferred tax asset will not be realized.
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.

34


During the year ended December 31, 2017, the Company determined that $0.8 million of valuation allowance, previously recorded against state deferred tax assets, could be released primarily as a result of future taxable income expected to be generated in certain states following the TBEI acquisition.
At December 31, 2017, the total valuation allowance recorded against the Company’s deferred tax assets was $10.6 million, comprised of a $6.3 million valuation allowance recorded against state net operating loss carryforwards, a $1.3 million valuation allowance recorded against foreign net deferred tax assets, inclusive of a $1.0 million valuation allowance against net deferred tax assets in the U.K., and the $3.0 million valuation allowance recorded against the Company’s foreign tax credits as a result of the 2017 Tax Act, as discussed above. For further discussion, see Note 8 – Income Taxes to the accompanying consolidated financial statements.
We believe that our approach to the associated estimates and judgments applied to our tax positions as described herein is reasonable; however, actual results could differ and we may be exposed to increases or decreases in income taxes that could be material.
Accounting for uncertainty in income taxes addresses the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the consolidated financial statements. We recognize the tax benefit from an uncertain tax position if it is more likely than not that the tax position will be sustained on examination by taxing authorities, based on the technical merits of the position. The tax benefits recognized in the consolidated financial statements from such a position are measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement.
The guidance on accounting for uncertainty in income taxes also outlines de-recognition and classification, and requires companies to elect and disclose their method of reporting interest and penalties on income taxes. We recognize interest and penalties related to uncertain tax positions as part of income tax expense.
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
Our debt instruments subject us to market risk associated with movements in interest rates. The fair value of the Company’s total debt obligations held at December 31, 2017 was $277.7 million. On June 2, 2017, the Company entered into an interest rate swap with a notional amount of $150.0 million, as a means of fixing the floating interest rate component on $150.0 million of its variable-rate debt. See Note 7 – Debt to the accompanying consolidated financial statements for a description of our debt agreements. A hypothetical 100 basis point increase or decrease in variable interest rates in 2017 would increase or decrease annual interest expense by approximately $1.3 million, based on current debt levels.
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 our financial results is largely mitigated by natural hedges in our 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 75% of our total sales are conducted within the U.S. and are transacted in U.S. dollars. Management 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.

35


Item 8.    Financial Statements and Supplementary Data.
FEDERAL SIGNAL CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
 
Page

36


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, 2017 and 2016, and 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, 2017, and the related notes and the schedule listed in the Index at Item 15 (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2017 and 2016, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2017, 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, 2017, 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 28, 2018, expressed an unqualified opinion on the Company's internal control over financial reporting.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated 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 consolidated 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 consolidated 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 consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.

/s/ Deloitte & Touche LLP
Chicago, Illinois
February 28, 2018



We have served as the Company’s auditor since 2013.

37


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, 2017, 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, 2017, 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 consolidated financial statements, as of and for the year ended December 31, 2017, of the Company and our report dated February 28, 2018 expressed an unqualified opinion on those financial statements.
As described in Management’s Annual Report on Internal Control Over Financial Reporting, management excluded from its assessment the effectiveness of internal control over financial reporting for GenNx/TBEI Intermediate Co. (“TBEI”), which was acquired on June 2, 2017. TBEI’s net sales and total assets (excluding TBEI goodwill and intangible assets which were integrated into the Company’s control environment) each represent approximately 12% of the consolidated financial statement amounts as of and for the year ended December 31, 2017. Accordingly, our audit did not include the internal control over financial reporting at TBEI.
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 the effectiveness of the internal control over financial reporting 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
Chicago, Illinois
February 28, 2018

38


FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
 
For the Years Ended December 31,
(in millions, except per share data)
2017
 
2016
 
2015
Net sales
$
898.5

 
$
707.9

 
$
768.0

Cost of sales
677.3

 
524.8

 
542.4

Gross profit
221.2

 
183.1

 
225.6

Selling, engineering, general and administrative expenses
144.7

 
122.3

 
122.0

Acquisition and integration-related expenses
2.7

 
1.4

 

Pension settlement charges
6.1

 

 

Restructuring
0.6

 
1.7

 
0.4

Operating income
67.1

 
57.7

 
103.2

Interest expense
7.3

 
1.9

 
2.3

Debt settlement charges

 
0.3

 

Other (income) expense, net
(1.2
)
 
(1.3
)
 
1.0

Income before income taxes
61.0

 
56.8

 
99.9

Income tax expense
0.5

 
17.4

 
34.1

Income from continuing operations
60.5

 
39.4

 
65.8

Gain (loss) from discontinued operations and disposal, net of income tax (benefit) expense of $(0.8), $3.4 and $8.3, respectively
1.1

 
4.4

 
(2.3
)
Net income
$
61.6

 
$
43.8

 
$
63.5

Basic earnings per share:
 
 
 
 
 
Earnings from continuing operations
$
1.01

 
$
0.65

 
$
1.06

Earnings (loss) from discontinued operations and disposal, net of tax
0.02

 
0.07

 
(0.04
)
Net earnings per share
$
1.03

 
$
0.72

 
$
1.02

Diluted earnings per share:
 
 
 
 
 
Earnings from continuing operations
$
1.00

 
$
0.64

 
$
1.04

Earnings (loss) from discontinued operations and disposal, net of tax
0.02

 
0.07

 
(0.04
)
Net earnings per share
$
1.02

 
$
0.71

 
$
1.00

Weighted average shares outstanding:
 
 
 
 
 
Basic
59.7

 
60.4

 
62.2

Diluted
60.4

 
61.2

 
63.4

Cash dividends declared per common share
$
0.28

 
$
0.28

 
$
0.25

See notes to consolidated financial statements.


39


FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
 
For the Years Ended December 31,
(in millions)
2017
 
2016
 
2015
Net income
$
61.6

 
$
43.8

 
$
63.5

Other comprehensive income (loss):

 

 

Change in foreign currency translation adjustment
10.5

 
0.3

 
(13.5
)
Change in unrecognized net actuarial losses related to pension benefit plans, net of income tax expense (benefit) of $1.3, $(2.1) and $1.6, respectively
3.6

 
(3.4
)
 
4.2

Change in unrealized net gain on derivatives, net of income tax expense (benefit) of $0.6, $(0.1) and $0.0, respectively
1.0

 
(0.1
)
 

Total other comprehensive income (loss)
15.1

 
(3.2
)
 
(9.3
)
Comprehensive income
$
76.7

 
$
40.6

 
$
54.2

See notes to consolidated financial statements.


40


FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
 
As of December 31,
(in millions, except per share data)
2017
 
2016
ASSETS



Current assets:



Cash and cash equivalents
$
37.5


$
50.7

Accounts receivable, net of allowances for doubtful accounts of $1.1 and $0.8, respectively
118.2


81.3

Inventories
137.2


120.1

Prepaid expenses and other current assets
10.9


7.5

Total current assets
303.8


259.6

Properties and equipment, net
60.1


42.9

Rental equipment, net
87.2


80.8

Goodwill
377.3


236.5

Intangible assets, net
151.8


10.2

Deferred tax assets
6.2


8.2

Deferred charges and other long-term assets
5.4


3.9

Long-term assets of discontinued operations
0.5


1.1

Total assets
$
992.3


$
643.2

LIABILITIES AND STOCKHOLDERS’ EQUITY



Current liabilities:



Current portion of long-term borrowings and capital lease obligations
$
0.3


$
0.5

Accounts payable
51.5


35.3

Customer deposits
6.5


4.5

Accrued liabilities:



Compensation and withholding taxes
22.2


13.8

Other current liabilities
36.1


28.7

Current liabilities of discontinued operations
0.5


2.1

Total current liabilities
117.1


84.9

Long-term borrowings and capital lease obligations
277.4


63.5

Long-term pension and other post-retirement benefit liabilities
56.6


61.1

Deferred gain
8.7


10.7

Deferred tax liabilities
45.4



Other long-term liabilities
28.2


26.9

Long-term liabilities of discontinued operations
1.5


2.0

Total liabilities
534.9


249.1

Stockholders’ equity:



Common stock, $1 par value per share, 90.0 shares authorized, 66.1 and 65.4 shares issued, respectively
66.1


65.4

Capital in excess of par value
207.7


200.3

Retained earnings
346.6


301.8

Treasury stock, at cost, 6.1 and 5.8 shares, respectively
(86.1
)

(81.4
)
Accumulated other comprehensive loss
(76.9
)

(92.0
)
Total stockholders’ equity
457.4


394.1

Total liabilities and stockholders’ equity
$
992.3


$
643.2


See notes to consolidated financial statements.
41


FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
 
For the Years Ended December 31,
(in millions)
2017
 
2016
 
2015
Operating activities:
 
 
 
 
 
Net income
$
61.6

 
$
43.8

 
$
63.5

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
 
Net (gain) loss on discontinued operations and disposal
(1.1
)
 
(4.4
)
 
2.3

Depreciation and amortization
30.0

 
19.1

 
12.3

Deferred financing costs
0.3

 
0.6

 
0.4

Deferred gain
(2.0
)
 
(1.9
)
 
(1.9
)
Stock-based compensation expense
4.6

 
4.8

 
6.8

Excess tax benefit from stock-based compensation

 

 
(1.6
)
Pension settlement charges
6.1

 

 

Pension expense, net of funding
(5.2
)
 
(3.7
)
 
(3.8
)
Changes in fair value of contingent consideration and deferred payment
1.0

 
0.5

 

Deferred income taxes, including change in valuation allowance
(14.9
)
 
7.9

 
25.9

Changes in operating assets and liabilities, net of effects of discontinued operations:
 
 
 
 
 
Accounts receivable
(11.1
)
 
(8.0
)
 
(0.3
)
Inventories
9.4

 
(2.3
)
 
(3.3
)
Rental equipment
(15.7
)
 
(6.9
)
 

Prepaid expenses and other current assets
3.9

 
1.6

 
1.0

Accounts payable
(5.2
)
 
(13.9
)
 
(3.1
)
Accrued liabilities
8.0

 
(7.4
)
 
(7.2
)
Income taxes
1.6

 
(4.4
)
 
(1.5
)
Other
2.2

 
1.3

 
1.6

Net cash provided by continuing operating activities
73.5

 
26.7

 
91.1

Net cash (used for) provided by discontinued operating activities
(0.7
)
 
(2.0
)
 
6.1

Net cash provided by operating activities
72.8

 
24.7

 
97.2

Investing activities:
 
 
 
 
 
Purchases of properties and equipment
(8.0
)
 
(6.1
)
 
(9.6
)
Payments for acquisitions, net of cash acquired
(269.2
)
 
(102.6
)
 

Proceeds from escrow receivable