UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
___________________________________
FORM 10-K
(Mark One)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the fiscal year ended December 31, 2019
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
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
(Address of principal executive offices)
(Zip Code)
(630 ) 954-2000
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☑ No ☐
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☑
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☑ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or shorter period that the registrant was required to submit and post such files). Yes ☑ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | ☑ | Accelerated filer | ☐ | ||
Non-accelerated filer | ☐ | Smaller reporting company | |||
Emerging growth company | |||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐ | |||||
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☑
As of June 30, 2019, the aggregate market value of voting stock held by non-affiliates was $1,587,687,375 . For purposes of the foregoing calculation only, executive officers and directors of the registrant have been deemed to be affiliates.
As of January 31, 2020, the number of shares outstanding of the registrant’s common stock was 60,582,953 .
Documents Incorporated By Reference
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.
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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, industrial vacuum loaders, vacuum- and hydro-excavation trucks (collectively, “safe-digging” trucks), street sweepers, road-marking and line-removal equipment, waterblasting equipment, dump truck bodies, trailers, and safety and security systems, including technology-based products and solutions for the public safety market. In addition, the Company engages in the sale of parts, service and repair, equipment rentals and training as part of a comprehensive aftermarket offering to its customers. The Company operates 15 principal manufacturing facilities in five countries and provides products and integrated solutions to customers in all regions of the world.
Narrative Description of Business
Products manufactured and supplied, and services rendered, by the Company are divided into two reportable segments: the Environmental Solutions Group and the Safety and Security Systems Group. The individual operating businesses are organized as such because they share certain characteristics, including technology, marketing, distribution and product application, which create long-term synergies. Corporate contains those items that are not included in the Company’s reportable segments.
Financial information concerning the Company’s two reportable segments for each of the three years in the period ended December 31, 2019, is included in Note 17 – 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 19 – Discontinued Operations to the accompanying consolidated financial statements and is incorporated herein by reference.
Environmental Solutions Group
The Company’s Environmental Solutions Group is a leading manufacturer and supplier of a full range of street sweepers, sewer cleaners, industrial vacuum loaders, safe-digging trucks, high-performance waterblasting equipment, dump truck bodies and trailers. The Group manufactures vehicles and equipment in the U.S. and Canada that are sold under the Elgin®, Vactor®, Guzzler®, TRUVACTM, WestechTM, Jetstream®, Ox Bodies®, Crysteel®, J-Craft®, Duraclass®, Rugby® and Travis® 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 substantially all of the assets and operations of Joe Johnson Equipment, Inc. and Joe Johnson Equipment (USA), Inc. (collectively, “JJE”) in 2016 extended the Environmental Solutions Group’s existing sales channel and increased 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 broadened 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. In addition to vehicle and equipment sales, the Group also engages in the sale of parts, service and repair, equipment rentals and training as part of a complete offering to its current and potential customers through its service centers located across North America.
Under the Elgin brand name, the Company sells a leading U.S. brand of street sweepers primarily designed for large-scale cleaning of curbed streets, parking lots and other paved surfaces utilizing mechanical sweeping, vacuum and recirculating air technology. Vactor is a leading manufacturer of equipment solutions for cleaning and maintaining sewers and catch basins. Under the TRUVAC brand name, introduced in 2019, the Company manufactures a range of premium vacuum- and hydro-excavation trucks designed to satisfy the safe-digging requirements of businesses or organizations that locate and verify underground utility lines and pipes. Guzzler is a leader in industrial vacuum loaders used to manage industrial waste or recover and recycle valuable raw materials. Westech is a manufacturer of high-quality, rugged vacuum-excavation trucks. Jetstream manufactures high-pressure waterblasting equipment and accessories for commercial and industrial cleaning and maintenance operations. The Company manufactures and sells dump truck bodies and trailers under the Ox Bodies, Crysteel, J-Craft, Duraclass, Rugby and Travis brand names.
In addition, as discussed in Note 2 – Acquisitions, on July 1, 2019, the Company completed the acquisition of substantially all of the assets and operations of Mark Rite Lines Equipment Company, Inc. (“MRL”), a U.S. manufacturer of truck-mounted and ride-on road-marking and line-removal equipment, including its wholly-owned subsidiary HighMark Traffic Services, Inc. The Company expects that MRL will provide an efficient entry into a new line of product offerings and access to new markets, and 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
The Company’s Safety and Security Systems Group is a leading manufacturer and supplier of comprehensive systems and products that law enforcement, fire rescue, emergency medical services, campuses, military facilities and industrial sites use to protect people and property. Offerings include systems for community alerting, emergency vehicles, first responder interoperable communications and industrial communications. Specific products include public safety equipment, such as vehicle lightbars and sirens, industrial signaling equipment, public warning systems and general alarm/public address systems. Products are sold under the Federal SignalTM, Federal Signal VAMA® and Victor® brand names. The Group operates manufacturing facilities in the U.S., Europe and South Africa.
Marketing and Distribution
Depending primarily on the type and geographic location of the end-customer, the Environmental Solutions Group uses either a dealer network, including JJE, or direct sales to serve customers. The 2017 acquisition of Truck Bodies and Equipment International (“TBEI”) increased the number of dealers within the Company’s network and also added additional direct sales resources. The dealer network serves both municipal and industrial end-markets. Within municipal markets, the majority of the Company’s dealers operate exclusively in their assigned territory. In conjunction with selling vehicles to end-customers, dealer representatives demonstrate vehicle functionality and capability and provide vehicle service. In addition to selling products manufactured by the Company, JJE distributes and re-sells 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 primarily on the industrial, utility and construction market segments, and the service 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, 2019. Of the $1,269.0 million total orders reported in 2019, approximately 34% were from U.S. municipal and governmental customers, 44% were from U.S. commercial and industrial customers and 22% were from non-U.S. customers.
The Company’s backlog totaled $386.9 million at December 31, 2019 compared to $337.7 million at December 31, 2018. The increase of $49.2 million, or 15%, was primarily due to continued strong demand for sewer cleaners and safe-digging trucks, as well as higher orders for road-marking and line-removal equipment and refuse trucks. Backlogs vary by group due to the nature of the Company’s products and the buying patterns of its customers. The Environmental Solutions Group typically experiences an average backlog of approximately three to six months of shipments. The Safety and Security Systems Group typically experiences an average backlog of approximately two months of shipments. Production of the Company’s December 31, 2019 backlog is expected to be substantially completed during 2020.
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.
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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, TRUVAC and Guzzler brands each maintain a leading domestic position in their respective marketplaces by enhancing product performance with leading technology and application flexibility. Jetstream is a market leader in the in-plant cleaning segment of the U.S. waterblast industry, competing on product performance, rapid delivery and solutions services. 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. MRL is a market-leading manufacturer of road-marking and line-removal equipment.
Within specific product categories and domestic markets, the businesses within the Safety and Security Systems Group are among the market leaders. 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.
Patents and Trademarks
The Company owns a number of patents and possesses rights under others to which it attaches importance, but it does not believe that its business as a whole is materially dependent upon any such patents or rights. The Company also owns a number of trademarks, including those listed within the “Narrative Description of Business” section above. We believe these trademarks are important in connection with the identification of our products and associated goodwill with customers, but no material part of the Company’s business is dependent on our trademarks.
Employees
The Company employed approximately 3,600 people in its businesses at December 31, 2019, with the Company’s U.S. hourly workers accounting for approximately 54% of its total workforce. Approximately 15% of the Company’s U.S. hourly workers were represented by unions at December 31, 2019. The Company believes that its labor relations with its employees are good.
Governmental Regulation of the Environment
As part of its ongoing commitment to environmental, social and governance initiatives, the Company endeavors to establish environmentally-friendly policies and objectives, and believes that these actions are also consistent with cost-effective operating practices. With the application of these policies, the Company believes it complies with federal, state and local provisions that have been enacted or adopted regulating the discharge of materials into the environment, or otherwise relating to the protection of the environment. Capital expenditures in 2019 attributable to compliance with such laws were not material. The Company also believes that the overall impact of compliance with environmental regulations will not have a material adverse effect on our financial position, results of operations or cash flow.
Seasonality
Certain of the Company’s businesses are susceptible to the influences of seasonal factors, including buying patterns, delivery patterns and productivity influences from holiday periods and weather. In general, the Company tends to have lower equipment sales in the first calendar quarter of each year compared to other quarters as a result of these factors. In addition, rental income and parts sales are generally higher in the second and third quarters of the year, because many of the Company’s products are used for maintenance activities in North America, where usage is typically lower during periods of harsher weather conditions.
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Executive Officers of the Registrant
The following is a list of the Company’s executive officers, including their ages, business experience and positions as of February 1, 2020:
Jennifer L. Sherman, age 55, 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.
Daniel A. DuPré, age 63, was appointed Vice President, General Counsel and Secretary in November 2015. Mr. DuPré joined the Company in 2006, most recently serving as its Deputy General Counsel. Mr. DuPré previously held senior legal positions at Sears Holdings Corporation, Bank One Corporation, and Brunswick Corporation and served as an Assistant United States Attorney for the Northern District of Illinois.
Lauren B. Elting, age 38, was appointed Vice President and Corporate Controller in May 2018. Prior to joining the Company in January 2017, Ms. Elting worked at Ernst & Young LLP from 2004 to 2016, most recently as Senior Audit Manager.
Robert E. Fines, age 61, 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 43, was appointed Senior Vice President and Chief Financial Officer in October 2017. Mr. Hudson joined the Company in August 2013 as Vice President and Corporate Controller. Prior to joining the Company, Mr. Hudson served as Director of Accounting – Latin America and Asia Pacific at Groupon, Inc. from June 2012 to August 2013. Prior to that role, Mr. Hudson worked at Ernst & Young, LLP from 1998 to 2012, most recently as Senior Audit Manager.
Svetlana Vinokur, age 40, 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 62, 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.
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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 2019, we generated approximately 78% of our net sales in the U.S. Our ability to be profitable depends heavily on varying conditions in the U.S. governmental and municipal markets, as well as the overall U.S. economy. The industrial markets in which we compete are subject to considerable cyclicality, and move in response to cycles in the overall business environment. Many of our customers are municipal government agencies, and as a result, we are dependent on municipal government spending. Spending by our municipal customers can be affected by federal, state and local political circumstances, budgetary constraints, changing priorities, actual or potential government shutdowns and other factors. The U.S. government and municipalities depend heavily on tax revenues as a source of spending and accordingly, there is a historical correlation that suggests a lag of one to two years between the condition of the U.S. economy and our sales to the U.S. government and municipalities. Therefore, downturns in the U.S. economy are likely to result in decreases in demand for our products. During previous economic downturns, we experienced decreases in sales and profitability, and we expect our business to remain subject to similar economic fluctuations in the future.
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 2019, approximately 22% of our net sales were to customers outside the U.S. and we expect a significant portion of our revenues to come from international sales in the foreseeable future. Operating in the international marketplace exposes us to a number of risks, including the need to comply with U.S. and foreign laws and regulations applicable to our foreign operations, such as the Foreign Corrupt Practices Act, the United Kingdom (“U.K.”) Bribery Act and their counterparts in other foreign jurisdictions in which we operate, restrictive domestic and international trade regulations, and changes in these laws, regulations and policies by the U.S. and foreign governments. In addition, we may be exposed to risks associated with actual or threatened imposition of tariffs or trade barriers on our products or materials incorporated into our products, actual or threatened trade disputes, including so-called “trade wars,” political and economic instability in the jurisdictions in which we operate, foreign receivables collection risk, local labor market conditions, and, in some cases, international hostilities. The costs of compliance with these various laws, regulations and policies can be significant and penalties for non-compliance could significantly impact our business.
To the extent that our international operations are affected by adverse foreign economic or political conditions, we may experience disruptions and losses that could have a material impact on our financial position, results of operations or cash flow. To mitigate the risk of foreign receivables collection, we may obtain letters of credit from international customers to satisfy concerns regarding the collectability of amounts billed to customers.
Some of our contracts are denominated in foreign currencies, which may expose us to risks of fluctuating currency values and exchange rates, hard currency shortages and controls on currency exchange. Changes in the value of foreign currencies over the long term could increase our U.S. dollar costs for, or reduce our U.S. dollar revenues from, our foreign operations. Any increased costs or reduced revenues as a result of foreign currency fluctuations could adversely affect our results of operations.
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.
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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.
Our business may be adversely affected if we are unable to renew our leases upon their expiration.
We lease from third parties approximately 58% of the square footage of the facilities utilized in our operations, including with respect to certain of our manufacturing plants and our sales, service, warehousing and office locations. If we are unable to renew the existing leases on terms acceptable to us, we may be forced to relocate the affected operations. Alternatively, we may decide to relocate operations. Relocation could result in material disruptions to our business (including potential changes to our workforce if the new location does not allow for our existing workforce to service it) and our incurrence of significant capital and other expenses, which in turn could have an adverse effect on our financial condition, results of operations or cash flow.
We could incur restructuring and impairment charges as we continue to evaluate opportunities to restructure our business and rationalize our manufacturing operations in an effort to optimize our cost structure.
We continue to evaluate opportunities to restructure our business and rationalize our manufacturing operations in an effort to optimize our cost structure. These actions could result in significant charges that could adversely affect our financial condition and results of operations. Future actions could result in restructuring and related charges, including but not limited to impairments, employee termination costs and charges for pension and other postretirement contractual benefits and pension curtailments that could be significant and could have an adverse effect on our financial condition, results of operations or cash flow.
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, intellectual property, client service interruptions or other matters.
We are exposed to product liability and warranty claims in the normal course of business in the event that our products actually or allegedly fail to perform as expected, or the use of our products results, or is alleged to result, in bodily injury and/or property damage. For example, we have been sued by firefighters seeking damages claiming that exposure to our sirens has impaired their hearing and that the sirens are, therefore, defective. In addition, we are subject to other claims and litigation from time to time, as further described in the accompanying notes to our consolidated financial statements. We could experience material product liability or warranty costs in the future and incur significant costs to defend ourselves against these claims. While we carry insurance and maintain reserves for product liability claims, our insurance coverage may be inadequate if such claims do arise, and any defense costs and liability not covered by insurance could have a material adverse impact on our financial condition, results of operations or cash flow. A future claim could involve the imposition of punitive damages, the
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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 or production stoppages and supply shortages, which in turn could adversely affect our reputation, financial condition, results of operations or cash flow.
Infringement of, or an inability to protect, our intellectual property rights could adversely affect our business.
We rely on a combination of patents, trademarks, copyrights, nondisclosure agreements, information technology security systems, physical security and other measures to protect our proprietary intellectual property and the intellectual property of certain customers and suppliers. However, we cannot be certain that our efforts to protect these intellectual property rights will be sufficient. Intellectual property protection is subject to applicable laws in various jurisdictions where interpretations and protections differ or can be unpredictable and costly to enforce. Further, our ability to protect our intellectual property rights may be limited in certain foreign jurisdictions that do not have, or do not enforce, strong intellectual property rights. Any failure to protect or enforce our intellectual property rights could have a material adverse effect on our competitive position, financial condition, results of operations or cash flow.
The inability to obtain raw materials, component parts and/or finished goods in a timely and cost-effective manner would adversely affect our ability to manufacture and market our products.
We purchase from suppliers raw materials, component parts and finished goods to be used in the manufacturing and sale of our products. In addition, we may incorporate vehicle chassis provided directly by our customers in our production process. Although the vast majority of our raw materials and component parts are sourced domestically, certain of our suppliers are based overseas, and certain of our domestic suppliers may source subcomponents from overseas. Outbreaks of communicable diseases have been known to occur in certain of these international regions, resulting in public health crises. Changes in our relationships with suppliers, shortages in availability of materials, production delays, regulatory restrictions, public health crises, or other supply chain disruptions, whether due to our suppliers or customers, could have a material adverse effect on our ability to timely manufacture and market products. Increases in the costs of purchased raw materials, component parts or finished goods could result in manufacturing interruptions, delays, inefficiencies or our inability to market products. In addition, our profit margins would decrease if prices of purchased raw materials, component parts or finished goods increase and we are unable to pass on those increases to our customers.
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. As a result, our business with respect to these products and services is influenced by our ability to manage new and existing relationships with dealers. While we have relatively low turnover of dealers, from time to time, we or a dealer may choose to terminate the relationship as a result of difficulties that our dealers experience in operating their businesses due to economic conditions or other factors. While we do not believe our business is dependent on any single dealer, a disruption in our dealer network, or with a significant dealer, or within a specific market, could have an adverse impact on our business within the affected market. In addition, our dealers require adequate liquidity to finance their operations, including purchases of our products. Dealers are subject to numerous risks and uncertainties that could unfavorably affect their liquidity positions, including, among other things, continued access to adequate financing sources on a timely basis on reasonable terms. These sources of financing are vital to our ability to sell products through our dealer network. Deterioration in the liquidity or credit worthiness of our dealers could have a significant adverse effect on our business. From time to time, we may provide financing assistance to dealers or consider taking ownership positions. The loss or termination of a significant dealer, or a significant number of dealers, could cause difficulties in marketing and distributing our products and have an adverse effect on our business, financial condition, results of operations or cash flow.
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, 2019, approximately 15% of our U.S. hourly workers were represented by labor unions and were covered by collective bargaining agreements with various unions. Any strikes, threats of strikes or other organized disruptions in connection with the negotiation of new labor agreements or other negotiations could materially adversely affect our business as well as impair our ability to implement further measures to reduce costs and improve production efficiencies. In addition, the stoppage of work for a prolonged period of time at one, or several, of our principal manufacturing facilities, due to public health concerns, or any other reason, could materially adversely affect our business.
Our pension funding requirements and expenses are affected by certain factors outside of our control, including the performance of plan assets, the discount rate used to value liabilities, actuarial assumptions and experience and legal and regulatory changes.
Our funding obligations and pension expense for our defined benefit pension plans are driven by the performance of assets set aside in trusts for these plans, the discount rate used to value the plans’ liabilities, actuarial assumptions and experience and legal and regulatory funding requirements. Changes in these factors could have an adverse impact on our financial condition, results of operations or cash flow. In addition, a portion of our pension plan assets are invested in equity securities, which can experience significant declines if financial markets weaken. The level of the funding of our defined benefit pension plan liabilities was approximately 84% as of December 31, 2019. Funding of the Company’s U.S. defined benefit pension plan is determined in accordance with guidelines set forth in the Employee Retirement Income Security Act. The current year funding status was impacted by a lower discount rate than in the prior year. Our future pension expenses and funding requirements could increase significantly due to the effect of adverse changes in the discount rate, asset values or the estimated expected return on plan assets. In addition, we could become legally required to make increased cash contributions to the pension plans, and these contributions could be material and negatively affect our cash flow.
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
9
products. In addition, uneven application of environmental or safety regulations could place our products at a cost or features disadvantage, which could reduce our revenues and profitability.
An impairment in the carrying value of goodwill, intangible assets or long-lived assets could negatively affect our financial position and results of operations.
As of December 31, 2019, goodwill and intangible assets represented 33% and 14% of total consolidated assets, respectively. Rental equipment and properties and equipment are long-lived assets, which also represented more than 5% of our total consolidated assets as of December 31, 2019. Goodwill and indefinite-lived intangible assets are tested for impairment annually, or more frequently if indicators of impairment exist. Definite-lived intangible assets and long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. In evaluating the potential for impairment of goodwill, intangible assets and long-lived assets, we make assumptions regarding future operating performance, business trends, competition and market and general economic conditions. Such analyses further require us to make certain assumptions about our sales, operating margins, growth rates and discount rates. There are inherent uncertainties related to these factors. An impairment charge may result from, among other things, a significant decline in operating results, adverse market conditions, unfavorable changes in applicable laws or regulations, or a variety of other factors. Our total consolidated assets and results of operations for the applicable period could be materially adversely affected if any such charge is recorded.
We may be unsuccessful in our future acquisitions, if any, which may have an adverse effect on our business.
Our long-term strategy includes exploring acquisitions of companies or businesses to facilitate our growth, enhance our global market position and broaden our product offerings. Such acquisitions may help us expand into adjacent markets, add complementary products and services or allow us to leverage our distribution channels. In connection with this strategy, we could face certain risks and uncertainties in addition to those we face in the day-to-day operations of our business. We also may be unable to identify suitable targets for acquisition or to make acquisitions at favorable prices. If we identify a suitable acquisition candidate, our ability to successfully implement the acquisition would depend on a variety of factors, including our ability to obtain financing on acceptable terms. In addition, our acquisition activities could be disrupted by overtures from competitors for the targeted companies, governmental regulation and rapid developments in our industry that decrease the value of a potential target’s products or services.
Acquisitions involve risks, including those associated with the following:
• | integrating the operations, financial reporting, disparate systems and processes and personnel of acquired companies; |
• | managing geographically dispersed operations; |
• | diverting management’s attention from other business concerns; |
• | changing the competitive landscape, including disrupting existing sales channels or markets; |
• | entering markets or lines of business in which we have either limited or no direct experience; and |
• | losing key employees, customers and strategic partners of acquired companies. |
We also may not achieve anticipated revenue and cost benefits associated with our acquisitions. Acquisitions may not be accretive to our earnings and may negatively impact our results of operations as a result of, among other things, the incurrence of debt, acquisition costs, impairment of goodwill and amortization of other intangible assets. In addition, future acquisitions could result in dilutive issuances of equity securities.
Businesses acquired by us may have liabilities that are not known to us.
We may assume liabilities in connection with the acquisition of businesses. There may be liabilities that we fail or are unable to discover in the course of performing due diligence investigations on the acquired businesses, or that may be more material than we discovered. In these circumstances, we cannot assure that our rights to indemnification will be sufficient in amount, scope or duration to fully offset the possible liabilities associated with the businesses or property acquired. Further, these liabilities could result in unexpected legal or regulatory exposure, unexpected increases in taxes or other adverse effects on our business. Any such liabilities, individually or in the aggregate, could have a material adverse effect on our financial condition, results of operations or cash flow.
Item 1B. Unresolved Staff Comments.
None.
10
Item 2. Properties.
As of December 31, 2019, the Company utilized 11 principal manufacturing plants located throughout the U.S., as well as two in Europe, one in Canada and one in South Africa. The Company also leases facilities within the U.S., Europe and Canada from which we provide sales, service and/or equipment rentals. As of December 31, 2019, the Company devoted approximately 1.9 million square feet to manufacturing and 0.9 million square feet to sales, service, warehousing and office space. Of the total square footage, approximately 81% is devoted to the Environmental Solutions Group and 19% to the Safety and Security Systems Group. Approximately 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 Second Amended and Restated Credit Agreement dated July 30, 2019 (the “2019 Credit Agreement”).
The Company believes its properties, and related machinery and equipment, are well-maintained, suitable and adequate for their intended purposes. In the aggregate, these facilities are of sufficient capacity for the Company’s current business needs. However, the Company may make additional investments in certain facilities in the future in response to increased demand for the Company’s products.
Item 3. Legal Proceedings.
The information concerning the Company’s legal proceedings included in Note 13 – Legal Proceedings to the accompanying consolidated financial statements is incorporated herein by reference.
Item 4. Mine Safety Disclosures.
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”.
Holders
As of January 31, 2020, there were 1,513 holders of record of the Company’s common stock.
Securities Authorized for Issuance under Equity Compensation
Information concerning the Company’s equity compensation plans is included under Item 12 of Part III of this Form 10-K.
Recent Sales of Unregistered Securities
There were no sales of unregistered securities by the Company during the year ended December 31, 2019.
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, 2019:
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 2019 (9/29/19 - 11/2/19) | — | — | — | $ | 29,198,155 | ||||||||
November 2019 (11/3/19 - 11/30/19) | — | — | — | 29,198,155 | |||||||||
December 2019 (12/1/19 - 12/31/19) | — | — | — | 29,198,155 | |||||||||
(a) | On November 4, 2014, the Board authorized a stock repurchase program of up to $75.0 million of the Company’s common stock. |
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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, 2014 and assumes reinvestment of all dividends through December 31, 2019.
Copyright© 2020 Russell Investment Group. All rights reserved.
Copyright© 2020 Standard & Poor’s, a division of S&P Global. All rights reserved.
As of December 31, | |||||||||||||||||||||||
2014 | 2015 | 2016 | 2017 | 2018 | 2019 | ||||||||||||||||||
Federal Signal Corporation | $ | 100.00 | $ | 104.34 | $ | 104.89 | $ | 137.19 | $ | 137.72 | $ | 225.72 | |||||||||||
Russell 2000 | 100.00 | 95.59 | 115.95 | 132.94 | 118.30 | 148.49 | |||||||||||||||||
S&P Midcap 400 | 100.00 | 97.82 | 118.11 | 137.30 | 122.08 | 154.07 | |||||||||||||||||
S&P Industrials | 100.00 | 97.47 | 115.85 | 140.22 | 121.58 | 157.29 | |||||||||||||||||
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.
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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, 2019:
For the Years Ended December 31, | |||||||||||||||||||
($ in millions, except per share data) | 2019 | 2018 | 2017 | 2016 | 2015 | ||||||||||||||
Results of Operations: | |||||||||||||||||||
Net sales | $ | 1,221.3 | $ | 1,089.5 | $ | 898.5 | $ | 707.9 | $ | 768.0 | |||||||||
Operating income (a) (b) (c) (d) (e) | 147.1 | 121.5 | 73.6 | 60.8 | 107.4 | ||||||||||||||
Income from continuing operations (a) (b) (c) (d) (e) | 108.4 | 93.7 | 60.5 | 39.4 | 65.8 | ||||||||||||||
Gain (loss) from discontinued operations and disposal, net of tax | 0.1 | 0.3 | 1.1 | 4.4 | (2.3 | ) | |||||||||||||
Net income (a) (b) (c) (d) (e) | $ | 108.5 | $ | 94.0 | $ | 61.6 | $ | 43.8 | $ | 63.5 | |||||||||
Financial Position: | |||||||||||||||||||
Capital expenditures | $ | 35.4 | $ | 14.1 | $ | 8.0 | $ | 6.1 | $ | 9.6 | |||||||||
Depreciation and amortization | 41.5 | 36.4 | 30.0 | 19.1 | 12.3 | ||||||||||||||
Total assets | 1,165.5 | 1,023.8 | 992.3 | 643.2 | 666.5 | ||||||||||||||
Total debt (f) | 220.5 | 210.1 | 277.7 | 64.0 | 44.1 | ||||||||||||||
Common Stock Data: | |||||||||||||||||||
Diluted earnings per share — continuing operations | $ | 1.76 | $ | 1.53 | $ | 1.00 | $ | 0.64 | $ | 1.04 | |||||||||
Cash dividends per common share | 0.32 | 0.31 | 0.28 | 0.28 | 0.25 | ||||||||||||||
Weighted average shares outstanding — diluted (in millions) | 61.6 | 61.2 | 60.4 | 61.2 | 63.4 | ||||||||||||||
Performance Measures: | |||||||||||||||||||
Operating margin | 12.0 | % | 11.2 | % | 8.2 | % | 8.6 | % | 14.0 | % | |||||||||
Adjusted EBITDA (g) | $ | 191.3 | $ | 158.6 | $ | 111.5 | $ | 84.7 | $ | 118.2 | |||||||||
Adjusted EBITDA margin (g) | 15.7 | % | 14.6 | % | 12.4 | % | 12.0 | % | 15.4 | % | |||||||||
Other Data: | |||||||||||||||||||
Total orders | $ | 1,269.0 | $ | 1,173.2 | $ | 1,018.0 | $ | 674.4 | $ | 686.1 | |||||||||
Backlog | 386.9 | 337.7 | 257.5 | 137.0 | 171.3 | ||||||||||||||
(a) | 2019 operating income includes acquisition and integration-related expenses of $2.5 million. 2019 income from continuing operations includes the after-tax effects of the acquisition and integration-related expenses, as well as a $0.8 million benefit from changes in state deferred tax valuation allowances. |
(b) | 2018 operating income includes acquisition and integration-related expenses of $1.5 million. 2018 income from continuing operations includes the after-tax effects of the acquisition and integration-related expenses, as well as an $8.6 million net benefit associated with tax planning strategies. |
(c) | 2017 operating income includes acquisition and integration-related expenses and restructuring charges of $2.7 million and $0.6 million, respectively. 2017 income from continuing operations includes the after-tax effects of the acquisition and integration-related expenses, restructuring charges and pension settlement charges of $6.1 million, 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 Tax Cuts and Jobs Act of 2017 (the “2017 Tax Act”), including the effect of the reduction in the corporate tax rate in the U.S. |
(d) | 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 after-tax 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. |
(e) | 2015 operating income includes restructuring charges of $0.4 million. 2015 income from continuing operations includes the after-tax 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. |
(f) | Includes short-term borrowings, the current portion of long-term borrowings and finance lease obligations of $0.2 million, $0.2 million, $0.3 million, $0.5 million and $0.4 million, respectively. |
13
(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, 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 divided by net sales for the applicable period(s). Other companies may use different methods to calculate adjusted EBITDA and adjusted EBITDA margin. Effective January 1, 2019, the Company adopted the new lease accounting standard, which resulted in a change to the Company’s recognition of the deferred gain associated with historical sale lease-back transactions. Prior to 2019, the deferred gain, which initially totaled $29.0 million, was being recognized through the Consolidated Statement of Operations on a straight-line basis over the 15-year lease term. As a result, approximately $1.9 million of the deferred gain had been recognized each year since 2008. Effective in 2019, the Company no longer recognizes any portion of the gain through the Consolidated Statement of Operations, and recognized the remaining deferred gain balance, net of the related deferred tax asset, as a cumulative effect adjustment to opening retained earnings. To facilitate comparisons with prior periods, the Company has revised its previously-issued adjusted EBITDA and adjusted EBITDA margin to exclude the recognition of this deferred gain. The following table summarizes the Company’s consolidated adjusted EBITDA and adjusted EBITDA margin and reconciles income from continuing operations to consolidated adjusted EBITDA for each of the five years in the period ended December 31, 2019: |
For the Years Ended December 31, | |||||||||||||||||||
($ in millions) | 2019 | 2018 | 2017 | 2016 | 2015 | ||||||||||||||
Income from continuing operations | $ | 108.4 | $ | 93.7 | $ | 60.5 | $ | 39.4 | $ | 65.8 | |||||||||
Add: | |||||||||||||||||||
Interest expense | 7.9 | 9.3 | 7.3 | 1.9 | 2.3 | ||||||||||||||
Pension settlement charges | — | — | 6.1 | — | — | ||||||||||||||
Hearing loss settlement charges | — | 0.4 | 1.5 | — | — | ||||||||||||||
Debt settlement charges | — | — | — | 0.3 | — | ||||||||||||||
Acquisition and integration-related expenses | 2.5 | 1.5 | 2.7 | 1.4 | — | ||||||||||||||
Restructuring | — | — | 0.6 | 1.7 | 0.4 | ||||||||||||||
Executive severance costs | — | — | 0.7 | — | — | ||||||||||||||
Purchase accounting effects (a) | 0.2 | 0.7 | 4.4 | 3.6 | — | ||||||||||||||
Other expense (income), net | 0.6 | 0.6 | (0.8 | ) | 1.8 | 5.2 | |||||||||||||
Income tax expense | 30.2 | 17.9 | 0.5 | 17.4 | 34.1 | ||||||||||||||
Depreciation and amortization | 41.5 | 36.4 | 30.0 | 19.1 | 12.3 | ||||||||||||||
Adjusted EBITDA | $ | 191.3 | $ | 160.5 | $ | 113.5 | $ | 86.6 | $ | 120.1 | |||||||||
Less: Deferred gain recognition (b) | — | (1.9 | ) | (2.0 | ) | (1.9 | ) | (1.9 | ) | ||||||||||
Adjusted EBITDA, as revised | $ | 191.3 | $ | 158.6 | $ | 111.5 | $ | 84.7 | $ | 118.2 | |||||||||
Net sales | $ | 1,221.3 | $ | 1,089.5 | $ | 898.5 | $ | 707.9 | $ | 768.0 | |||||||||
Adjusted EBITDA margin | 15.7 | % | 14.7 | % | 12.6 | % | 12.2 | % | 15.6 | % | |||||||||
Adjusted EBITDA margin, as revised | 15.7 | % | 14.6 | % | 12.4 | % | 12.0 | % | 15.4 | % | |||||||||
(a) | Purchase accounting effects represent the step-up in the valuation of equipment acquired in recent business combinations that was sold during the periods presented within. |
(b) | Adjustment to exclude recognition of deferred gain associated with historical sale lease-back transactions. Effective in 2019, the Company will no longer recognize the gain due to the adoption of new lease accounting standard. See Note 4 – Leases for additional information. |
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.
14
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, industrial vacuum loaders, safe-digging trucks, street sweepers, waterblasting equipment, road-marking and line-removal equipment, dump truck bodies and trailers and (ii) public safety equipment, such as vehicle lightbars and sirens, industrial signaling equipment, public warning systems and general alarm/public address systems. In addition, we engage in the sale of parts, service and repair, equipment rentals and training as part of a comprehensive aftermarket offering to our customer base. We operate 15 manufacturing facilities in five countries and provide products and integrated solutions to municipal, governmental, industrial and commercial customers in all regions of the world.
As described in Note 17 – Segment Information to the accompanying consolidated financial statements, the Company’s business units are organized in two reportable segments: the Environmental Solutions Group and the Safety and Security Systems Group.
During 2019, 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 achievement against these objectives in 2019 include the following:
• | On July 1, 2019, we completed the acquisition of MRL, a leading U.S. manufacturer of truck-mounted and ride-on road-marking and line-removal equipment. The combination of MRL with the businesses in our Environmental Solutions Group, extends our platform providing municipal and industrial customers with a complete suite of maintenance and infrastructure equipment and supporting solutions. |
• | On a consolidated basis, we reported a 110-basis point year-over-year improvement in our adjusted EBITDA* margin, delivering returns towards the high end of our target range. |
• | Both our Environmental Solutions Group and our Safety and Security Systems Group reported improvement in net sales and earnings, delivering adjusted EBITDA margins* at or above the high end of our target ranges. |
• | 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, penetrate new end-markets or gain access to new geographic regions. |
• | Our eighty-twenty improvement (“ETI”) initiatives remain a critical part of our culture and we continue to focus on reducing product costs and improving manufacturing efficiencies across all our businesses. |
• | On July 30, 2019, we refinanced our credit agreement, increasing our revolving credit facility to $500 million, with the potential to increase the facility by an additional $250 million for acquisitions. The new five-year facility also includes improved pricing and more favorable terms compared to the prior agreement. |
• | With our strong balance sheet, positive operating cash flow and increased capacity under our new revolving credit facility, we are well positioned to continue to invest in internal growth initiatives, pursue strategic acquisitions and consider ways to return value to stockholders. |
• | During the year, we announced the expansion of our Vactor production facility in Streator, Illinois. We are making good progress on the building construction and our efforts to hire up to 90 new employees at the facility. |
• | During the year, we demonstrated our commitment to returning value to stockholders by paying cash dividends of $19.3 million in 2019, increased from $18.7 million in 2018, and spending $1.0 million repurchasing shares under our authorized repurchase program. |
15
Our consolidated financial results in 2019 reflected year-over-year improvement in many areas, driven by both organic growth initiatives and benefits from our recent acquisitions:
• | Net sales for the year ended December 31, 2019 increased by $131.8 million, or 12%, to $1,221.3 million, with organic sales growth of approximately 8%. |
• | Operating income for the year ended December 31, 2019 increased by $25.6 million, or 21%, to $147.1 million. |
• | Adjusted EBITDA* for the year ended December 31, 2019 was $191.3 million, up $32.7 million, or 21%, and our adjusted EBITDA margin* for the year ended December 31, 2019 was 15.7%, up from 14.6% in 2018. |
• | Income from continuing operations for the year ended December 31, 2019 was $108.4 million, up $14.7 million, or 16%, from $93.7 million in the prior year. This equated to diluted earnings per share of $1.76, up 15% from $1.53 per share last year. |
• | Cash flow from continuing operating activities for the year ended December 31, 2019 was $103.4 million, an increase of $10.6 million, or 11%. |
• | Total orders for the year ended December 31, 2019 were $1,269.0 million, an increase of $95.8 million, or 8%. |
• | Our consolidated backlog at December 31, 2019 was $386.9 million, up $49.2 million, or 15%, from $337.7 million at December 31, 2018. |
* The Company uses adjusted EBITDA and adjusted EBITDA margin as additional measures which are representative of its underlying performance and to improve the comparability of results across reporting periods. Refer to Item 6. Selected Financial Data for further discussion regarding these non-GAAP metrics and a reconciliation of each to the most comparable GAAP measure for each of the periods presented.
16
Results of Operations
The following table summarizes our Consolidated Statements of Operations as of, and for the years ended, December 31, 2019, 2018 and 2017, and illustrates the key financial indicators used to assess our consolidated financial results:
For the Years Ended December 31, | Change | ||||||||||||||||||
($ in millions, except per share data) | 2019 | 2018 | 2017 | 2019 vs. 2018 | 2018 vs. 2017 | ||||||||||||||
Net sales | $ | 1,221.3 | $ | 1,089.5 | $ | 898.5 | $ | 131.8 | $ | 191.0 | |||||||||
Cost of sales | 898.5 | 807.4 | 677.3 | 91.1 | 130.1 | ||||||||||||||
Gross profit | 322.8 | 282.1 | 221.2 | 40.7 | 60.9 | ||||||||||||||
Selling, engineering, general and administrative expenses | 173.2 | 159.1 | 144.3 | 14.1 | 14.8 | ||||||||||||||
Acquisition and integration-related expenses | 2.5 | 1.5 | 2.7 | 1.0 | (1.2 | ) | |||||||||||||
Restructuring | — | — | 0.6 | — | (0.6 | ) | |||||||||||||
Operating income | 147.1 | 121.5 | 73.6 | 25.6 | 47.9 | ||||||||||||||
Interest expense | 7.9 | 9.3 | 7.3 | (1.4 | ) | 2.0 | |||||||||||||
Pension settlement charges | — | — | 6.1 | — | (6.1 | ) | |||||||||||||
Other expense (income), net | 0.6 | 0.6 | (0.8 | ) | — | 1.4 | |||||||||||||
Income before income taxes | 138.6 | 111.6 | 61.0 | 27.0 | 50.6 | ||||||||||||||
Income tax expense | 30.2 | 17.9 | 0.5 | 12.3 | 17.4 | ||||||||||||||
Income from continuing operations | 108.4 | 93.7 | 60.5 | 14.7 | 33.2 | ||||||||||||||
Gain from discontinued operations and disposal, net of tax | 0.1 | 0.3 | 1.1 | (0.2 | ) | (0.8 | ) | ||||||||||||
Net income | $ | 108.5 | $ | 94.0 | $ | 61.6 | $ | 14.5 | $ | 32.4 | |||||||||
Other data: | |||||||||||||||||||
Operating margin | 12.0 | % | 11.2 | % | 8.2 | % | 0.8 | % | 3.0 | % | |||||||||
Adjusted EBITDA (a) | $ | 191.3 | $ | 158.6 | $ | 111.5 | $ | 32.7 | $ | 47.1 | |||||||||
Adjusted EBITDA margin (a) | 15.7 | % | 14.6 | % | 12.4 | % | 1.1 | % | 2.2 | % | |||||||||
Diluted earnings per share — Continuing operations | $ | 1.76 | $ | 1.53 | $ | 1.00 | $ | 0.23 | $ | 0.53 | |||||||||
Total orders | 1,269.0 | 1,173.2 | 1,018.0 | 95.8 | 155.2 | ||||||||||||||
Backlog | 386.9 | 337.7 | 257.5 | 49.2 | 80.2 | ||||||||||||||
Depreciation & amortization | 41.5 | 36.4 | 30.0 | 5.1 | 6.4 | ||||||||||||||
(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, 2019 vs. year ended December 31, 2018
Net sales
Net sales increased by $131.8 million, or 12%, for the year ended December 31, 2019, compared to the prior year. Within the Environmental Solutions Group, net sales increased by $129.4 million, or 15%, primarily due to a $39.7 million contribution from MRL, and increases in shipments of safe-digging trucks, street sweepers, and dump truck bodies of $38.1 million, $18.0 million, and $11.9 million, respectively. In addition, aftermarket revenues increased by $15.9 million, represented by higher rental income and improved parts and service sales. Within the Safety and Security Systems Group, net sales increased by $2.4 million, or 1%, primarily due to improvements in industrial signaling equipment and public safety products of $6.6 million and $1.4 million, respectively, partially offset by a $2.7 million reduction in sales of warning systems and an unfavorable foreign currency translation impact of $2.9 million.
Cost of sales
For the year ended December 31, 2019, cost of sales increased by $91.1 million, or 11%, compared to the prior year, largely due to an increase of $94.6 million, or 14%, within the Environmental Solutions Group, primarily attributable to increased sales volumes, additional cost of sales from the MRL acquisition, higher material costs, and a $4.6 million increase in depreciation expense, partially offset by a $0.4 million reduction in purchase accounting expenses. This increase was partially offset by a
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decrease in cost of sales of $3.5 million, or 2%, within the Safety and Security Systems Group, largely due to favorable sales mix and a favorable foreign currency translation impact of $2.1 million, partially offset by higher sales volumes.
Gross profit
For the year ended December 31, 2019, gross profit increased by $40.7 million, or 14%, compared to the prior year, primarily due to improvements of $34.8 million and $5.9 million within the Environmental Solutions Group and the Safety and Security Systems Group, respectively. Gross margin for the year ended December 31, 2019 was 26.4%, compared to 25.9% in the prior year, primarily driven by improvements within the Safety and Security Group and Environmental Solutions Group of 220 basis points and 50 basis points, respectively. Margin improvements were primarily attributable to improved operating leverage, benefits from pricing actions and favorable sales mix.
Selling, engineering, general and administrative expenses
For the year ended December 31, 2019, selling, engineering, general and administrative (“SEG&A”) expenses increased by $14.1 million, or 9%, primarily due to increases within the Environmental Solutions Group and the Safety and Security Systems Group of $8.2 million and $1.4 million, respectively. In addition, Corporate SEG&A expenses increased by $4.5 million. As a percentage of net sales, SEG&A expenses decreased from 14.6% in the prior year, to 14.2% in the current year.
Operating income
Operating income for the year ended December 31, 2019 increased by $25.6 million, or 21%, to $147.1 million, compared to the prior year. Within the Environmental Solutions Group, operating income for the year ended December 31, 2019 increased by $26.4 million, or 23%, largely due to higher sales volumes and improved operating leverage, as well as a $3.6 million contribution from MRL. Within the Safety and Security Systems Group, operating income for the year ended December 31, 2019 increased by $4.5 million, or 13%, largely due to benefits from pricing actions and improved sales mix, while Corporate expenses increased by $5.3 million. Consolidated operating margin for the year ended December 31, 2019 was 12.0%, compared to 11.2% in the prior year.
Interest expense
Interest expense for the year ended December 31, 2019 decreased by $1.4 million, or 15%, compared to the prior year, largely due to lower average debt levels and the effects of a reduction in the Company’s interest rate resulting from the refinancing of its revolving credit facility.
Other expense (income), net
For the year ended December 31, 2019, Other expense (income), net, totaled $0.6 million of expense, largely due to the recognition of $0.9 million of net periodic pension expense. For the year ended December 31, 2018, Other expense (income), net, totaled $0.6 million of expense, largely due to $0.4 million of net periodic pension expense and foreign currency transaction losses.
Income tax expense
The Company recognized income tax expense of $30.2 million for the year ended December 31, 2019, compared to $17.9 million for the year ended December 31, 2018. The increase in income tax expense in the current year was primarily due to higher earnings and the non-recurrence of an $8.6 million tax planning benefit which was recognized in the prior year, partially offset by the recognition of a $0.8 million tax benefit from the release of state deferred tax valuation allowance, and a $0.8 million increase in excess tax benefits from stock compensation activity. The Company’s effective tax rate for the year ended December 31, 2019 was 21.8%, compared to 16.0% in 2018. For further discussion, see Note 10 – Income Taxes to the accompanying consolidated financial statements.
Income from continuing operations
Income from continuing operations was $108.4 million for the year ended December 31, 2019, up $14.7 million, or 16%, compared to the prior year, largely due to the improved operating income and the $1.4 million reduction in interest expense, partially offset by the $12.3 million increase in income tax expense.
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Year ended December 31, 2018 vs. year ended December 31, 2017
Net sales
Net sales for the year ended December 31, 2018 increased by $191.0 million, or 21%, compared to the year ended December 31, 2017. Within the Environmental Solutions Group, net sales increased by $170.9 million, or 25%, largely due to $98.1 million of incremental net sales resulting from the 2017 acquisition of TBEI and organic sales growth of $72.8 million, or 12%. The organic growth was primarily due to improved shipments of vacuum trucks and sewer cleaners, in addition to higher aftermarket revenues, represented by increases in rental income, parts and services revenues and sales of used equipment. These improvements included benefits from pricing actions and were partially offset by lower sales of products manufactured by other companies, such as refuse trucks. In the Safety and Security Systems Group, net sales increased by $20.1 million, or 10%, primarily due to higher sales into global public safety markets and improved international sales of outdoor warning systems.
Cost of sales
For the year ended December 31, 2018, cost of sales increased by $130.1 million, or 19%, compared to the year ended December 31, 2017, largely due to an increase of $117.1 million, or 21%, within the Environmental Solutions Group, primarily driven by increased sales volumes, the effects of a full-year of TBEI activity in 2018 compared with seven months in 2017, higher material costs and a $3.7 million increase in depreciation expense, partially offset by a $3.7 million reduction in purchase accounting expenses. Within the Safety and Security Systems Group, cost of sales increased by $13.0 million, or 10%, largely driven by higher sales volumes and unfavorable foreign currency translation effects.
Gross profit
For the year ended December 31, 2018, gross profit increased by $60.9 million, or 28%, compared to the year ended December 31, 2017, primarily due to improvements of $53.8 million and $7.1 million within the Environmental Solutions Group and the Safety and Security Systems Group, respectively. Gross margin for the year ended December 31, 2018 was 25.9%, compared to 24.6% for the year ended December 31, 2017, primarily driven by a 210 basis point gross margin improvement within the Environmental Solutions Group, associated with improved operating leverage, benefits from actions taken in response to higher commodity costs, favorable sales mix and the reduction in purchase accounting expenses, described above, partially offset by the higher depreciation expense.
Selling, engineering, general and administrative expenses
For the year ended December 31, 2018, SEG&A expenses increased by $14.8 million, or 10%, primarily represented by a $13.2 million increase within the Environmental Solutions Group, largely the result of the addition of expenses of associated with the TBEI acquisition, including an increase in amortization expense of $3.2 million. SEG&A expenses within the Safety and Security Systems Group increased by $0.6 million, primarily due to higher expenses associated with new product development and other growth initiatives, while corporate SEG&A expenses increased by $1.0 million. As a percentage of net sales, SEG&A expenses decreased from 16.1% in the year ended December 31, 2017, to 14.6% in the year ended December 31, 2018.
Operating income
Operating income for the year ended December 31, 2018 increased by $47.9 million, or 65%, to $121.5 million, compared to the year ended December 31, 2017. Within the Environmental Solutions Group, operating income for the year ended December 31, 2018 increased by $40.6 million, or 56%, with higher sales volumes, improved operating leverage and an incremental operating income contribution of $9.5 million from TBEI, associated with including a full-year of activity in 2018, compared to only seven months in 2017. TBEI’s operating income contribution in 2018 included the effects of amortization expense on intangible assets acquired, which contributed to an increase in depreciation and amortization expense of $6.9 million. Within the Safety and Security Systems Group, operating income for the year ended December 31, 2018 increased by $7.1 million, or 26%, while corporate expenses decreased by $0.2 million, primarily driven by a $1.2 million decrease in acquisition and integration-related expenses, reductions in hearing loss litigation and post-employment expenses and the absence of $0.7 million in executive severance costs, partially offset by higher employee incentive and stock compensation costs. Consolidated operating margin for the year ended December 31, 2018 was 11.2%, compared to 8.2% in the year ended December 31, 2017.
Interest expense
Interest expense for the year ended December 31, 2018 increased by $2.0 million, or 27%, compared to the year ended December 31, 2017, largely due to higher average debt levels following the acquisition of TBEI in June 2017.
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Other expense (income), net
For the year ended December 31, 2018, Other expense (income), net, totaled $0.6 million of expense, largely due to foreign currency transaction losses and $0.4 million of net periodic pension expense. For the year ended December 31, 2017, $0.8 million of income was reported, largely due to foreign currency transaction gains, which were partially offset by $0.4 million of net periodic pension expense.
Income tax expense
The Company recognized income tax expense of $17.9 million for the year ended December 31, 2018, compared to $0.5 million for the year ended December 31, 2017. The increase in income tax expense was primarily due to higher earnings, and the impact of certain special tax items in the year ended December 31, 2017, which did not repeat in 2018. In addition, during the year ended December 31, 2018, the Company recognized a tax benefit of $8.6 million associated with the completion of a tax planning strategy in Spain, which is expected to reduce cash tax payments in that jurisdiction over the next several years. Tax expense for the year ended December 31, 2017 was lower than in 2018, largely 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. This benefit was 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 ended December 31, 2018 was 16.0%, compared to 0.8% in 2017. The 2018 effective tax rate included the effects of the benefit from the tax planning strategy, whereas the 2017 effective tax rate included the aforementioned impacts resulting from the 2017 Tax Act.
Income from continuing operations
Income from continuing operations was $93.7 million for the year ended December 31, 2018, compared with $60.5 million in the year ended December 31, 2017, largely due to the improved operating income and the absence of $6.1 million in pension settlement charges incurred in the year ended December 31, 2017, partially offset by the $17.4 million increase in income tax expense, the $2.0 million increase in interest expense and the $1.4 million reduction in other income.
Gain from discontinued operations and disposal, net of tax
In the year ended December 31, 2018, the Company recorded a net gain from discontinued operations and disposal of $0.3 million, primarily due to adjustments of estimated product liability obligations of previously discontinued businesses, resulting from updated actuarial valuations.
In the year ended December 31, 2017, the Company recorded a net gain from discontinued operations and disposal of $1.1 million, primarily due to an adjustment of foreign tax credits associated with the sale of the Fire Rescue Group and adjustments of estimated product liability obligations of previously discontinued businesses, resulting from updated actuarial valuations.
Orders & Backlog
($ in millions) | 2019 | 2018 | 2017 | ||||||||
Total orders | $ | 1,269.0 | $ | 1,173.2 | $ | 1,018.0 | |||||
Change in orders year-over-year | 8.2 | % | 15.2 | % | 50.9 | % | |||||
Change in U.S. municipal and government orders year-over-year | 1.4 | % | 3.5 | % | 18.3 | % | |||||
Change in U.S. industrial and commercial orders year-over-year | 11.0 | % | 28.5 | % | 139.6 | % | |||||
Change in non-U.S. orders year-over-year | 13.9 | % | 8.4 | % | 21.2 | % | |||||
Backlog | $ | 386.9 | $ | 337.7 | $ | 257.5 | |||||
Change in backlog year-over-year | 14.6 | % | 31.1 | % | 88.0 | % | |||||
On the date of acquisition, MRL had a backlog of orders from its customers of $26.7 million. These acquired orders were included in total orders reported for the year ended December 31, 2019.
On the date of acquisition, TBEI had a backlog of orders from its customers of $44.8 million. These acquired orders were included in total orders reported for the year ended December 31, 2017.
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Year ended December 31, 2019 vs. year ended December 31, 2018
Total orders for the year ended December 31, 2019 were $1,269.0 million, an increase of $95.8 million, or 8%, compared to the prior year. The Environmental Solutions Group reported total orders of $1,038.0 million in 2019, an increase of $92.2 million, or 10%, compared to the prior year. The improvement was driven by incremental orders of $56.8 million related to the acquisition of MRL and organic growth of $35.4 million, or 4%, which was largely the result of improved orders for safe-digging trucks, refuse trucks, and dump truck bodies, as well as higher aftermarket demand, partially offset by reductions in orders for industrial vacuum loaders and trailers. Within the Safety and Security Systems Group, orders increased by $3.6 million, or 2%, compared to the prior year, primarily driven by improvements in orders for industrial signaling equipment.
U.S. municipal and governmental orders increased by $6.0 million, or 1%, due to a $8.1 million improvement within the Environmental Solutions Group, primarily due to the acquisition of MRL, which contributed $15.9 million of orders, a $4.6 million improvement in orders for dump truck bodies, and a $2.0 million increase in aftermarket demand. These improvements were partially offset by decreases in orders for sewer cleaners and street sweepers of $7.6 million and $7.1 million, respectively. Within the Safety and Security Systems Group, there was a $2.1 million order reduction, mainly due to a $4.9 million decrease in orders for public safety products, partially offset by a $2.8 million improvement in orders for warning systems.
U.S. industrial and commercial orders increased by $54.7 million, or 11%, largely driven by a $52.5 million increase within the Environmental Solutions Group, primarily related to the acquisition of MRL, which contributed $39.0 million of orders. In addition, aftermarket demand increased by $8.1 million, and orders for safe-digging trucks and sewer cleaners improved by $17.7 million and $7.4 million, respectively. These increases were partially offset by reductions in orders for industrial vacuum loaders, trailers, street sweepers, and dump truck bodies of $8.7 million, $5.6 million, $2.4 million, and $1.4 million, respectively. Within the Safety and Security Systems Group, industrial orders increased by $2.2 million, largely due to increases in orders for public safety products and industrial signaling equipment of $2.7 million and $0.8 million, respectively, partially offset by a $1.3 million decrease in orders for warning systems.
Non-U.S. orders increased by $35.1 million, or 14%, largely due to a $31.6 million increase within the Environmental Solutions Group, primarily due to increases in orders for refuse trucks, safe-digging trucks, and street sweepers of $14.3 million, $11.6 million and $7.7 million, respectively. In addition, the acquisition of MRL contributed $1.9 million of orders, and aftermarket demand increased by $5.1 million. Partially offsetting these improvements were reductions in orders for industrial vacuum loaders, snow removal trucks, and sewer cleaners of $5.7 million, $2.0 million, and $1.7 million, respectively. Orders within the Safety and Security Systems Group increased by $3.5 million, largely due to improvements in orders for industrial signaling equipment and public safety products of $5.9 million and $5.3 million, respectively, partially offset by a $4.7 million reduction in orders for warning systems and an unfavorable foreign currency translation impact of $3.0 million.
Year ended December 31, 2018 vs. year ended December 31, 2017
Total orders for the year ended December 31, 2018 were $1,173.2 million, an increase of $155.2 million, or 15%, compared to the year ended December 31, 2017. The Environmental Solutions Group reported total orders of $945.8 million in 2018, an increase of $139.5 million, or 17%, compared to the year ended December 31, 2017. The improvement was driven by incremental orders of $66.2 million related to the inclusion of TBEI orders for a full year in 2018 versus seven months in 2017, and organic order growth of approximately $73.3 million, or 11%. The organic growth was largely the result of improved orders for vacuum trucks, sewer cleaners, street sweepers and waterblasting equipment, as well as higher aftermarket demand, representing increased orders for parts, service, used and rental equipment. These improvements were partially offset by a reduction in refuse truck orders. Within the Safety and Security Systems Group, orders increased by $15.7 million compared to the year ended December 31, 2017, primarily driven by a $14.9 million improvement in global orders for public safety products.
U.S. municipal and governmental orders increased by $12.2 million, or 3%, primarily due to a $14.8 million improvement within the Environmental Solutions Group, primarily driven by a $13.1 million improvement in orders for sewer cleaners and higher aftermarket demand. This improvement was partially offset by a $2.6 million reduction in municipal orders within the Safety and Security Systems Group, driven by a decrease in orders for outdoor warning systems of $6.8 million, partially offset by an increase in orders for public safety products of $4.2 million.
U.S. industrial and commercial orders increased by $123.5 million, or 29%, largely driven by a $116.9 million increase within the Environmental Solutions Group, primarily related to a $48.3 million improvement in orders for vacuum trucks and an incremental $67.0 million of orders from a full year of TBEI activity in 2018. In addition, aftermarket orders increased by $4.8 million. These increases were partially offset by a $3.5 million reduction in street sweeper orders. Within the Safety and
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Security Systems Group, industrial orders increased by $6.6 million due to increases in orders for outdoor warning systems, industrial products and public safety products of $3.8 million, $1.6 million and $1.2 million, respectively.
Non-U.S. orders increased by $19.5 million, or 8%, largely due to a $7.8 million increase within the Environmental Solutions Group, primarily due to improvements in orders for vacuum trucks, sewer cleaners, street sweepers, and waterblasting equipment of $11.3 million, $6.8 million, $4.4 million and $2.1 million, respectively. In addition, aftermarket orders improved by $7.3 million. Partially offsetting these improvements was a $23.0 million decrease in refuse truck orders. Orders within the Safety and Security Systems Group increased by $11.7 million, largely due to a $9.5 million increase in orders for public safety products.
Backlog
Backlog was $386.9 million at December 31, 2019 as compared to $337.7 million at December 31, 2018. The increase of $49.2 million, or 15%, was primarily due to a $47.3 million increase in backlog within the Environmental Solutions Group, primarily due to continued strong demand for sewer cleaners and safe-digging trucks, as well as higher orders for road-marking and line-removal equipment and refuse trucks. In addition, backlog within the Safety and Security Systems Group improved by $1.9 million, primarily due to increased international orders for public safety products.
Environmental Solutions
The following table summarizes the Environmental Solutions Group’s operating results as of, and for the years ended, December 31, 2019, 2018 and 2017:
For the Years Ended December 31, | Change | ||||||||||||||||||
($ in millions) | 2019 | 2018 | 2017 | 2019 vs. 2018 | 2018 vs. 2017 | ||||||||||||||
Net sales | $ | 992.9 | $ | 863.5 | $ | 692.6 | $ | 129.4 | $ | 170.9 | |||||||||
Operating income | 139.4 | 113.0 | 72.4 | 26.4 | 40.6 | ||||||||||||||
Other data: | |||||||||||||||||||
Operating margin | 14.0 | % | 13.1 | % | 10.5 | % | 0.9 | % | 2.6 | % | |||||||||
Total orders | $ | 1,038.0 | $ | 945.8 | $ | 806.3 | $ | 92.2 | $ | 139.5 | |||||||||
Backlog | 357.6 | 310.3 | 231.1 | 47.3 | 79.2 | ||||||||||||||
Depreciation and amortization | 38.1 | 32.6 | 25.7 | 5.5 | 6.9 | ||||||||||||||
Year ended December 31, 2019 vs. year ended December 31, 2018
Total orders increased by $92.2 million, or 10%, for the year ended December 31, 2019. U.S. orders increased by $60.6 million, or 8%, primarily due to the acquisition of MRL which contributed $54.9 million of orders, as well as increases in orders for safe-digging trucks and dump truck bodies of $17.8 million and $3.2 million, respectively. Additionally, aftermarket orders improved by $10.1 million. Partially offsetting these improvements were reductions in orders for street sweepers, industrial vacuum loaders, and trailers of $9.5 million, $8.7 million, and $5.6 million, respectively. Non-U.S. orders increased by $31.6 million, or 19%, primarily due to increases in orders for refuse trucks, safe-digging trucks, and street sweepers of $14.3 million, $11.6 million and $7.7 million, respectively. In addition, the acquisition of MRL contributed $1.9 million of orders, and aftermarket demand increased by $5.1 million. Partially offsetting these improvements were reductions in orders for industrial vacuum loaders, snow removal trucks, and sewer cleaners of $5.7 million, $2.0 million, and $1.7 million, respectively.
Net sales increased by $129.4 million, or 15%, for the year ended December 31, 2019. U.S. sales increased by $103.9 million, or 15%, primarily due to a $38.8 million contribution from MRL, and increases in sales of safe-digging trucks, dump truck bodies, street sweepers, waterblasting equipment, and sewer cleaners of $29.1 million, $12.3 million, $10.1 million, $4.2 million, and $3.6 million, respectively. In addition, aftermarket revenues increased by $10.4 million, represented by higher rental income and improved parts and service sales. Partially offsetting these increases was a $5.2 million reduction in sales of trailers. Non-U.S. sales increased by $25.5 million, or 16%, primarily due to increases in sales of safe-digging trucks, street sweepers, and sewer cleaners of $9.0 million, $7.9 million, and $6.4 million, respectively. In addition, the MRL acquisition contributed $0.9 million of incremental sales and aftermarket revenues increased by $5.5 million. Partially offsetting these increases were reductions in shipments of snow removal trucks and waterblasting equipment of $2.6 million and $1.9 million, respectively.
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Cost of sales increased by $94.6 million, or 14%, for the year ended December 31, 2019, primarily attributable to increased sales volumes, additional cost of sales from the MRL acquisition, higher material costs, and a $4.6 million increase in depreciation expense, partially offset by a $0.4 million reduction in purchase accounting expenses. Gross margin improved to 23.4% from 22.9% in the prior-year period, primarily due to improved operating leverage, benefits from pricing actions, and favorable sales mix.
SEG&A expenses increased by $8.2 million, or 10%, for the year ended December 31, 2019, largely due to the addition of expenses of businesses acquired in the current year, higher employee-related costs and a $0.8 million increase in amortization expense. As a percentage of net sales, SEG&A expenses decreased from 9.7% in the prior year, to 9.3% in the current year.
Operating income for the year ended December 31, 2019 increased by $26.4 million, or 23%, largely due to a $34.8 million increase in gross profit, partially offset by the $8.2 million increase in SEG&A expenses and a $0.2 million increase in acquisition-related expenses.
Backlog was $357.6 million at December 31, 2019, up 15% compared to $310.3 million at December 31, 2018. The increase is primarily due to continued strong demand for sewer cleaners and safe-digging trucks, as well as higher orders for road-marking and line-removal equipment and refuse trucks.
Year ended December 31, 2018 vs. year ended December 31, 2017
Total orders increased by $139.5 million, or 17%, for the year ended December 31, 2018. U.S. orders increased by $131.7 million, largely due to the 2017 acquisition of TBEI, which contributed an increase in orders of $64.4 million in a full-year in 2018. The organic growth in the U.S. of $67.3 million was largely driven by improvements in orders for vacuum trucks and sewer cleaners of $49.6 million and $12.4 million, respectively. In addition, aftermarket demand, representing orders for parts, service, used and rental equipment, improved by $9.3 million. Non-U.S. orders increased by $7.8 million, primarily due to improvements in orders for vacuum trucks, sewer cleaners, street sweepers, and waterblasting equipment of $11.3 million, $6.8 million, $4.4 million and $2.1 million, respectively. In addition, aftermarket orders improved by $7.3 million. Partially offsetting these improvements was a $23.0 million decrease in refuse truck orders.
Net sales increased by $170.9 million, or 25%, for the year ended December 31, 2018. U.S. sales increased by $167.4 million, or 31%, primarily due to the inclusion of five more months of TBEI results in 2018, accounting for $97.0 million of the sales increase, as well as increases in shipments of vacuum trucks and sewer cleaners of $37.9 million and $28.8 million, respectively. In addition, aftermarket revenues improved by $3.4 million, primarily represented by increased parts and service revenues and rental income. Non-U.S. sales increased by $3.5 million, or 2%, primarily due to a $12.4 million improvement in aftermarket revenue, represented by higher parts and service revenues, rental income and used equipment sales, as well as a $6.6 million increase in vacuum truck shipments. The acquisition of TBEI also contributed $1.1 million of incremental sales. Partially offsetting these improvements was a $16.1 million reduction in sales of products manufactured by other companies, such as refuse trucks.
Cost of sales increased by $117.1 million, or 21%, for the year ended December 31, 2018, primarily attributable to increased sales volumes, the effects of a full year of TBEI activity in 2018 compared with seven months in 2017, higher material costs and a $3.7 million increase in depreciation expense, partially offset by a $3.7 million reduction in purchase accounting expenses. Gross margin for the year ended December 31, 2018 increased to 22.9% from 20.8% in 2017, primarily due to improved operating leverage, benefits from pricing actions taken in response to higher commodity costs, favorable sales mix and the reduction in purchase accounting expenses, partially offset by the higher depreciation expense.
SEG&A expenses increased by $13.2 million, or 19%, for the year ended December 31, 2018, largely due to the addition of expenses associated with the TBEI acquisition, including an increase in amortization expense of $3.2 million. As a percentage of net sales, SEG&A expenses decreased from 10.2% in the year ended December 31, 2017, to 9.7% in the year ended December 31, 2018.
Operating income for the year ended December 31, 2018 increased by $40.6 million, or 56%, largely due to a $53.8 million increase in gross profit, partially offset by the $13.2 million increase in SEG&A expenses.
Backlog was $310.3 million at December 31, 2018, up 34% compared to $231.1 million at December 31, 2017. The increase is primarily due to the effects of improved demand for vacuum trucks, sewer cleaners and street sweepers in the U.S.
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Safety and Security Systems
The following table summarizes the Safety and Security Systems Group’s operating results as of, and for the years ended, December 31, 2019, 2018 and 2017:
For the Years Ended December 31, | Change | ||||||||||||||||||
($ in millions) | 2019 | 2018 | 2017 | 2019 vs. 2018 | 2018 vs. 2017 | ||||||||||||||
Net sales | $ | 228.4 | $ | 226.0 | $ | 205.9 | $ | 2.4 | $ | 20.1 | |||||||||
Operating income | 38.6 | 34.1 | 27.0 | 4.5 | 7.1 | ||||||||||||||
Other data: | |||||||||||||||||||
Operating margin | 16.9 | % | 15.1 | % | 13.1 | % | 1.8 | % | 2.0 | % | |||||||||
Total orders | $ | 231.0 | $ | 227.4 | $ | 211.7 | $ | 3.6 | $ | 15.7 | |||||||||
Backlog | 29.3 | 27.4 | 26.4 | 1.9 | 1.0 | ||||||||||||||
Depreciation and amortization | 3.3 | 3.7 | 4.1 | (0.4 | ) | (0.4 | ) | ||||||||||||
Year ended December 31, 2019 vs. year ended December 31, 2018
Total orders increased by $3.6 million or 2%, for the year ended December 31, 2019. U.S. orders increased by $0.1 million compared to the prior year, primarily driven by improvements in orders for warning systems and industrial signaling equipment of $1.5 million and $0.8 million, respectively, partially offset by a $2.2 million decrease in orders for public safety products. Non-U.S. orders increased by $3.5 million, or 4%, largely due to improvements in orders for industrial signaling equipment and public safety products of $5.9 million and $5.3 million, respectively, partially offset by a $4.7 million reduction in orders for warning systems and an unfavorable foreign currency translation impact of $3.0 million.
Net sales increased by $2.4 million, or 1%, for the year ended December 31, 2019. U.S. sales increased by $0.9 million, or 1%, primarily due to improvements in sales of industrial signaling equipment and warning systems of $1.4 million and $1.0 million, respectively, partially offset by a $1.5 million reduction in sales of public safety products. Non-U.S. sales increased by $1.5 million, or 2%, primarily due to improvements in sales of industrial signaling equipment and public safety products of $5.2 million and $2.9 million, respectively, which were partially offset by a $3.7 million reduction in sales of warning systems and an unfavorable foreign currency translation impact of $2.9 million.
Cost of sales decreased by $3.5 million, or 2%, for the year ended December 31, 2019, largely due to favorable sales mix and a favorable foreign currency translation impact of $2.1 million, partially offset by higher sales volumes. Gross margin for the year ended December 31, 2019 improved to 39.5%, compared to 37.3% in the prior year, primarily due to benefits from pricing actions and improved sales mix in comparison to the prior year.
SEG&A expenses for the year ended December 31, 2019 were $1.4 million, or 3%, higher than the prior year, primarily due to increased expenses associated with new product development and other growth initiatives. As a percentage of net sales, SEG&A expenses were 22.6% in the current year, compared to 22.2% in the prior year.
Operating income for the year ended December 31, 2019 increased by $4.5 million, or 13%, largely due to a $5.9 million increase in gross profit, partially offset by the $1.4 million increase in SEG&A expenses.
Backlog was $29.3 million at December 31, 2019 compared to $27.4 million at December 31, 2018. The increase was primarily due to increased international orders for public safety products.
Year ended December 31, 2018 vs. year ended December 31, 2017
Total orders increased by $15.7 million or 7%, for the year ended December 31, 2018. In the aggregate, U.S. orders increased by $4.0 million, or 3%, compared to the year ended December 31, 2017, driven by increases in orders for public safety products and industrial products of $5.4 million and $1.6 million, respectively. These increases were partially offset by a $3.0 million reduction in orders for outdoor warning systems. Non-U.S. orders increased by $11.7 million, or 16%, largely due to a $9.5 million increase in orders for public safety products, a $2.1 million favorable foreign currency translation impact, and a $0.6 million increase in orders for outdoor warnings systems, partially offset by a $0.5 million reduction in orders for industrial products.
Net sales increased by $20.1 million, or 10%, for the year ended December 31, 2018. U.S. sales increased by approximately $5.8 million, primarily due to increases in sales of public safety and industrial products of $8.1 million and $0.4 million, respectively. Partially offsetting these increases was a $2.7 million reduction in sales of outdoor warning products. Non-U.S.
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sales increased by $14.3 million, primarily driven by increases in sales of public safety products and outdoor warning systems of $7.5 million and $5.1 million, respectively, as well as a $1.7 million favorable foreign currency translation impact.
Cost of sales increased by $13.0 million, or 10%, for the year ended December 31, 2018, largely due to higher sales volumes and an unfavorable foreign currency translation impact of $1.3 million. Gross margin for the year ended December 31, 2018 was 37.3%, compared to 37.5% in the year ended December 31, 2017.
SEG&A expenses for the year ended December 31, 2018 were $0.6 million, or 1%, higher than the year ended December 31, 2017, primarily due to increased expenses associated with new product development and other growth initiatives. As a percentage of net sales, SEG&A expenses decreased from 24.1% in the year ended December 31, 2017, to 22.2% in the year ended December 31, 2018.
Operating income for the year ended December 31, 2018 increased by $7.1 million, or 26%, largely due to a $7.1 million increase in gross profit and a $0.6 million reduction in restructuring charges, partially offset by the $0.6 million increase in SEG&A expenses.
Backlog was $27.4 million at December 31, 2018 compared to $26.4 million at December 31, 2017. The increase was primarily due to increased orders for public safety products.
Corporate Expense
Corporate operating expenses were $30.9 million, $25.6 million and $25.8 million for the years ended December 31, 2019, 2018 and 2017, respectively.
For the year ended December 31, 2019, corporate operating expenses increased by $5.3 million, primarily driven by higher post-employment expenses, employee-related costs and information technology investments. In addition, acquisition-related expenses increased by $0.8 million, primarily due to the acquisition of MRL.
For the year ended December 31, 2018, corporate operating expenses decreased by $0.2 million, primarily driven by a $1.2 million decrease in acquisition and integration-related expenses, reductions in hearing loss litigation and post-employment expenses and the absence of $0.7 million in executive severance costs, partially offset by higher employee incentive and stock compensation costs.
The Company’s hearing loss litigation has historically been managed by the Company’s legal staff resident at the corporate office and not by management at either segment. In accordance with Accounting Standards Codification (“ASC”) 280, Segment Reporting, which provides that segment reporting should follow the management of the item and that certain expenses may be corporate expenses, these legal expenses (which are not part of the normal operating activities of any of our reportable segments) are reported and managed as corporate expenses.
Financial Condition, Liquidity and Capital Resources
The Company uses its cash flow from operations to fund growth and to make capital investments that sustain its operations, reduce costs, or both. Beyond these uses, remaining cash is used to pay down debt, repurchase shares, fund dividend payments and make pension contributions. The Company may also choose to invest in the acquisition of businesses. In the absence of significant unanticipated cash demands, we believe that the Company’s existing cash balances, cash flow from operations and borrowings available under the 2019 Credit Agreement will provide funds sufficient for these purposes. The net cash flows associated with the Company’s rental equipment transactions are included in cash flow from operating activities.
The Company’s cash and cash equivalents totaled $31.6 million, $37.4 million and $37.5 million as of December 31, 2019, 2018 and 2017, respectively. As of December 31, 2019, $13.8 million of cash and cash equivalents was held by foreign subsidiaries. Cash and cash equivalents held by subsidiaries outside the U.S. typically are held in the currency of the country in which it is located. The Company uses this cash to fund the operating activities of its foreign subsidiaries and for further investment in foreign operations. Generally, the Company has considered such cash to be permanently reinvested in its foreign operations and the Company’s current plans do not demonstrate a need to repatriate such cash to fund U.S. operations. However, in the event that these funds were needed to fund U.S. operations or to satisfy U.S. obligations, they generally could be repatriated. The repatriation of these funds may cause the Company to incur additional U.S. income tax expense, dependent on income tax laws and other circumstances at the time any such amounts were repatriated.
Net cash provided by continuing operating activities totaled $103.4 million, $92.8 million and $73.5 million in 2019, 2018 and 2017, respectively. The $10.6 million, or 11%, increase in cash generated by continuing operating activities in 2019 compared to the prior year was primarily due to higher earnings and a $7.0 million reduction in pension contributions. These improvements were partially offset by a $4.1 million increase in income tax payments, a $3.1 million increase in acquisition-
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related activity, investments in working capital and rental fleet, as well as higher incentive compensation payments in comparison to the prior year.
Net cash used for continuing investing activities totaled $84.4 million, $11.0 million and $277.1 million in 2019, 2018 and 2017, respectively. In each of the years presented, cash was used to fund the purchase of properties and equipment, with $35.4 million, $14.1 million and $8.0 million of capital expenditures in 2019, 2018 and 2017, respectively. The increase in capital expenditures in 2019 was largely related to the expansion of the primary production facility of the Company’s Vactor Manufacturing, Inc. subsidiary. In addition, as discussed in Note 2 – Acquisitions, in 2019 the Company paid an initial $49.6 million to acquire MRL, net of cash acquired. In 2018, the Company received an adjustment for working capital and other post-closing items in the amount of $3.0 million relating to the TBEI acquisition, which was completed in 2017 for an initial payment of $269.2 million.
In 2019, net cash of $24.6 million was used for continuing financing activities, compared with $81.2 million in 2018. In 2019, the Company’s net borrowings under its revolving credit facility increased by $7.4 million, primarily related to the funding of the acquisition of MRL. In addition, the Company funded payments of $10.3 million relating to acquisitions completed in 2016, paid cash dividends of $19.3 million, incurred $1.0 million of debt refinancing costs, repurchased $1.0 million of treasury stock and redeemed $2.1 million of stock in order to remit funds to tax authorities to satisfy employees’ minimum tax withholdings following the vesting of stock-based compensation. In 2018, the Company repaid $62.1 million of borrowings under its revolving credit facility, funded cash dividends of $18.7 million and repurchased $1.2 million of treasury stock. 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.
On July 30, 2019, the Company entered into the 2019 Credit Agreement, by and among the Company (the “U.S. Borrower”) and certain of its foreign subsidiaries (collectively, the “Borrowers”), Wells Fargo Bank, National Association, as administrative agent, swingline lender and issuing lender, JPMorgan Chase Bank, N.A. as syndication agent, and the other lenders and parties signatory thereto.
The 2019 Credit Agreement is a $500 million revolving credit facility, maturing on July 30, 2024, that provides for borrowings in the form of loans or letters of credit up to the aggregate availability under the facility, with a sub-limit of $75 million for letters of credit. The 2019 Credit Agreement allows for the Borrowers to borrow in denominations of U.S. Dollars, Canadian Dollars, Euros or British Pounds (with borrowings in non-U.S. currencies subject to a sublimit of $200 million). In addition, the Company may cause the commitments to increase by up to an additional $250 million, subject to the approval of the applicable lenders providing such additional financing. Borrowings under the 2019 Credit Agreement may be used for working capital and general corporate purposes, including acquisitions.
The Company’s material domestic subsidiaries provide guarantees for all obligations of the Borrowers under the 2019 Credit Agreement, which is secured by a first priority security interest in (i) all existing or hereafter acquired domestic property and assets of the U.S. Borrower and material domestic subsidiaries, (ii) the stock or other equity interests in each of the material domestic subsidiaries and (iii) 65% of outstanding voting capital stock of certain first-tier foreign subsidiaries, subject to certain exclusions.
Borrowings under the 2019 Credit Agreement bear interest, at the Company’s option, at a base rate or a LIBOR rate, plus, in each case, an applicable margin. The applicable margin ranges from zero to 0.75% for base rate borrowings and 1.00% to 1.75% for LIBOR borrowings. The Company must also pay a commitment fee to the lenders ranging between 0.10% to 0.25% per annum on the unused portion of the $500 million revolving credit facility along with other standard fees. Letter of credit fees are payable on outstanding letters of credit in an amount equal to the applicable LIBOR margin plus other customary fees.
The Company is subject to certain net leverage ratio and interest coverage ratio financial covenants under the 2019 Credit Agreement that are to be measured at each fiscal quarter-end. The Company was in compliance with all such covenants as of December 31, 2019. The 2019 Credit Agreement also includes a series of “covenant holiday” periods, which allow for the temporary increase of the minimum net leverage ratio following the completion of a permitted acquisition, or a series of acquisitions, when the aggregate consideration over a period of twelve months exceeds $75 million. In addition, the 2019 Credit Agreement includes customary negative covenants, subject to certain exceptions, restricting or limiting the Company’s and its subsidiaries’ ability to, among other things: (i) make non-ordinary course dispositions of assets; (ii) make certain fundamental business changes, such as mergers, consolidations or any similar combination; (iii) make restricted payments, including dividends and stock repurchases; (iv) incur indebtedness; (v) make certain loans and investments; (vi) create liens;
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(vii) transact with affiliates; (viii) enter into sale/leaseback transactions; (ix) make negative pledges; and (x) modify subordinated debt documents.
Under the 2019 Credit Agreement, restricted payments, including dividends and stock repurchases, shall be permitted if (i) the Company’s leverage ratio is less than or equal to 3.25; (ii) the Company is in compliance with all other financial covenants; and (iii) there are no existing defaults under the 2019 Credit Agreement. If its leverage ratio is more than 3.25, the Company is still permitted to fund (i) up to $35 million of dividend payments and stock repurchases; and (ii) an incremental $50 million of other cash payments.
The 2019 Credit Agreement contains customary events of default. If an event of default occurs and is continuing, the Borrowers may be required immediately to repay all amounts outstanding under the 2019 Credit Agreement and the commitments from the lenders may be terminated.
The 2019 Credit Agreement amended and restated the Company’s Amended 2016 Credit Agreement, which provided the Company with a $400 million revolving credit facility.