Federal Signal (FSS) 10-K2019 FY Annual report

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.

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.

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.

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.

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.

The Company purchases a wide variety of raw materials from around the world for use in the manufacture of its products, although the majority of current purchases are from North American sources. To minimize risks relating to availability, price and quality of key products and components, the Company is party to numerous strategic supplier arrangements. Although certain materials are obtained from either a single-source supplier or a limited number of suppliers, the Company has generally identified alternative sources to minimize the interruption of its business in the event of supply disruptions.

Components critical to the production of the Company’s vehicles, such as engines, are purchased from a select number of suppliers. The Company also purchases raw and fabricated steel, as well as commercial chassis, from multiple sources. In addition, we may incorporate chassis provided directly by our customers in our production process. As a distributor of equipment manufactured by other companies, JJE relies on the availability of equipment supplied by others to meet customer demand.

While there are risks and uncertainties with respect to the supply of certain raw materials and components that could impact price, quality and availability in sufficient quantities, the Company believes it has adequate supplies and sources of availability of the raw materials and components necessary to meet its needs.

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.

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.

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.

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.

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.

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.

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.

Economic downturns result in tighter credit markets, which could adversely affect our customers’ ability to secure financing or to secure financing at favorable terms or interest rates necessary to proceed or continue with purchases of our products and services. Our customers’ or potential customers’ inability to secure financing for projects could result in the delay, cancellation or downsizing of new purchases or the suspension of purchases already under contract, which could cause a decline in the demand for our products and services and negatively impact our financial position, results of operations or cash flow.

We place a high priority on developing new products and services, as well as enhancing our existing products and services. As a result of these efforts, we may be required to expend substantial research, development and marketing resources, and the time and expense required to develop a new product or service or enhance an existing product or service are difficult to predict. We may not succeed in developing, introducing or marketing new products or services or product or service enhancements. In addition, we cannot be certain that any new or enhanced product or service will generate sufficient revenue to justify the expense and resources devoted to the related product diversification effort.

We 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 continue to evaluate opportunities to restructure our business and rationalize our manufacturing operations in an effort to optimize our cost structure. These actions could result in significant charges that could adversely affect our financial condition and results of operations. Future actions could result in restructuring and related charges, including but not limited to impairments, employee termination costs and charges for pension and other postretirement contractual benefits and pension curtailments that could be significant and could have an adverse effect on our financial condition, results of operations or cash flow.

The 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 are exposed to product liability and warranty claims in the normal course of business in the event that our products actually or allegedly fail to perform as expected, or the use of our products results, or is alleged to result, in bodily injury and/or property damage. For example, we have been sued by firefighters seeking damages claiming that exposure to our sirens has impaired their hearing and that the sirens are, therefore, defective. In addition, we are subject to other claims and litigation from time to time, as further described in the accompanying notes to our consolidated financial statements. We could experience material product liability or warranty costs in the future and incur significant costs to defend ourselves against these claims. While we carry insurance and maintain reserves for product liability claims, our insurance coverage may be inadequate if such claims do arise, and any defense costs and liability not covered by insurance could have a material adverse impact on our financial condition, results of operations or cash flow. A future claim could involve the imposition of punitive damages, the

award of which, pursuant to state laws, may not be covered by insurance. In addition, warranty and certain other claims are not typically covered by insurance. Any product liability or warranty issues may adversely impact our reputation as a manufacturer of high-quality, safe products and may have a material adverse effect on our business.

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.

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.

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.

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.

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 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.

We, like other manufacturers, continue to face heavy governmental regulation of our products, especially in the areas of the environment and employee health and safety. Complying with environmental and safety requirements has added and will continue to add to the cost of our products, and could increase the capital required to support our business. While we believe that we are in compliance in all material respects with these laws and regulations, we may be adversely impacted by costs, liabilities or claims with respect to our operations under existing laws or those that may be adopted. These requirements are complex, change frequently and have tended to become more stringent over time. Therefore, we could incur substantial costs, including cleanup costs, fines and civil or criminal sanctions as a result of violation of, or liabilities under, environmental laws and safety regulations. These requirements may increase the cost of our products, which may diminish demand for those

products. In addition, uneven application of environmental or safety regulations could place our products at a cost or features disadvantage, which could reduce our revenues and profitability.

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:

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.

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.

None.

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.

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.

Not applicable.

The Company’s common stock is listed and traded on the New York Stock Exchange (“NYSE”) under the symbol “FSS”.

As of January 31, 2020, there were 1,513 holders of record of the Company’s common stock.

Information concerning the Company’s equity compensation plans is included under Item 12 of Part III of this Form 10-K.

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:

Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is designed to provide information that is supplemental to, and shall be read together with, the consolidated financial statements and the accompanying notes contained in this Form 10-K. Information in MD&A is intended to assist the reader in obtaining an understanding of (i) the consolidated financial statements, (ii) the Company’s business segments and how the results of those segments impact the Company’s results of operations and financial condition as a whole and (iii) how certain accounting principles affect the Company’s consolidated financial statements.

The Company is a leading global manufacturer and supplier of (i) vehicles and equipment for maintenance and infrastructure end-markets, including sewer cleaners, industrial vacuum loaders, safe-digging trucks, street sweepers, waterblasting equipment, road-marking and line-removal equipment, dump truck bodies and trailers and (ii) public safety equipment, such as vehicle lightbars and sirens, industrial signaling equipment, public warning systems and general alarm/public address systems. In addition, we engage in the sale of parts, service and repair, equipment rentals and training as part of a comprehensive aftermarket offering to our customer base. We operate 15 manufacturing facilities in five countries and provide products and integrated solutions to municipal, governmental, industrial and commercial customers in all regions of the world.

During 2019, the Company continued to focus on executing against its key long-term objectives, including the following:

* 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.

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:

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.

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

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.

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.

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 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 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.

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 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.

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.

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.

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.

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 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 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.

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 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.

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.

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.

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

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.

The following table summarizes the Environmental Solutions Group’s operating results as of, and for the years ended, December 31, 2019, 2018 and 2017:

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:

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 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-

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;

(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.

The following table summarizes the gross borrowings and gross payments under the Company’s revolving credit facilities:

The Company paid income taxes of $25.7 million in 2019, $21.6 million in 2018 and $13.9 million in 2017.

The following table summarizes the Company’s contractual obligations and payments due by period as of December 31, 2019:

The preparation of consolidated financial statements in conformity with U.S. generally accepted accounting principles (“GAAP”) requires management to make estimates and assumptions that affect (i) the reported amounts of assets and liabilities, (ii) disclosure of contingent assets and liabilities at the date of the consolidated financial statements and (iii) the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The Company considers the following policies to be the most critical in understanding the judgments that are involved in the preparation of the Company’s consolidated financial statements and the uncertainties that could impact the Company’s financial condition, results of operations or cash flow.

Goodwill represents the excess of the cost of an acquired business over the amounts assigned to its net assets. Goodwill is not amortized but is tested for impairment at a reporting unit level on an annual basis or more frequently if indicators of impairment exist. The Company performed its annual goodwill impairment test as of October 31, 2019.

A qualitative approach may be applied when the Company concludes that it is not “more likely than not” that the fair value of a reporting unit is less than its carrying value. In this situation, the Company would not be required to perform the quantitative impairment test described below.

A quantitative approach is performed by comparing the fair value of a reporting unit with its carrying amount. If the fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is not impaired and no impairment charge is required. If the carrying amount of a reporting unit exceeds its fair value, this difference is recorded as an impairment charge not to exceed the carrying amount of goodwill. The Company generally determines the fair value of its reporting units using both the income and market approaches.

Under the income approach, the key assumptions include projected sales, cost of sales and operating expenses. These assumptions are determined by management utilizing our internal operating plan, including growth rates for revenues and operating expenses and margin assumptions. An additional key assumption under this approach is the discount rate, which is determined by reviewing current risk-free rates of capital and current market interest rates and by evaluating the risk premium relevant to the reporting unit. If the Company’s assumptions relative to growth rates were to change, the fair value calculation may change, which could result in impairment.

Under the market approach, the Company estimates fair value using marketplace fair value data from within a comparable industry grouping. Similar to the income approach discussed above, sales, cost of sales, operating expenses and their respective growth rates are key assumptions utilized. The market prices of the Company’s common stock and other guideline companies are additional key inputs. If these market prices increase, the estimated market value would increase. Conversely, if market prices decrease, the estimated market value would decrease.

The results of these two methods are weighted based upon management’s evaluation of the relevance of the two approaches.

Although the Company believes its estimates of fair value are reasonable, actual financial results could differ from estimated financial results due to the inherent uncertainty involved in making such estimates. Changes in assumptions concerning future financial results or other underlying assumptions could have a significant impact on either the fair value of the reporting units, the amount of any goodwill impairment charge, or both. The Company also compares the sum of the estimated fair values of its reporting units to the overall fair value of the Company implied by its market capitalization. This comparison provides an indication that, in total, assumptions and estimates are reasonable. Future declines in the overall market value of the Company may also result in a conclusion that the fair value of one or more reporting units has declined below its carrying value.

Management applied the qualitative approach to assess the goodwill of its reporting units for potential impairment in 2018 and 2017 and concluded that it was not “more likely than not” that the fair value of the Company’s reporting units were less than their carrying values. Accordingly, further quantitative testing was not required to be performed.

Significant judgment is applied when evaluating whether an intangible asset has an indefinite useful life and in testing for impairment. The Company primarily uses the relief from royalty model to estimate the fair value of the indefinite-lived intangible assets. The relief from royalty model requires management to make a number of business and valuation assumptions including future revenue growth and royalty rates.

In 2019, the Company performed a combination of qualitative and quantitative impairment tests over its indefinite-lived intangible assets. The fair value of the indefinite-lived intangible assets that were quantitatively tested for impairment significantly exceeded their carrying value, and, therefore, no impairment was recognized. This valuation was prepared by a third-party valuation specialist. Further, the Company concluded that it was not “more likely than not” that the fair value of indefinite-lived intangible assets that were qualitatively tested for impairment were less than the carrying amounts. Accordingly, further quantitative testing was not required to be performed.

The Company applied the qualitative approach to assess its indefinite-lived intangible assets for impairment in 2018 and 2017 and concluded that it was not “more likely than not” that the fair value of indefinite-lived intangible assets were less than the carrying amounts. Accordingly, further quantitative testing was not required to be performed.

Revenue is measured as the amount of consideration the Company expects to be entitled to in exchange for transferring products or providing services. Expected returns and allowances are estimated and recognized based primarily on an analysis of historical experience, with Net sales presented net of such returns and allowances.

The Company enters into sales arrangements that may provide for multiple performance obligations to a customer. These arrangements may include software and non-software components that function together to deliver the products’ essential functionality. The Company identifies all performance obligations that are to be delivered separately under the sales arrangement and allocates revenue to each performance obligation based on its relative standalone selling price. The Company

uses an observable price to determine the standalone selling price or a cost plus margin approach when one is not available. In general, performance obligations include hardware, integration and installation services. The allocated revenue for each performance obligation is recognized as such performance obligations are satisfied.

Net sales include sales of products and billed freight related to product sales. Freight has not historically comprised a material component of Net sales. The Company has elected to account for such shipping and handling activities as a fulfillment cost and not as a separate performance obligation. Taxes collected from customers and remitted to governmental authorities are recorded on a net basis and are excluded from Net sales.

We estimate our income taxes in each of the taxing jurisdictions in which we operate. This involves estimating actual current tax expense together with assessing any temporary differences resulting from the different treatment of certain items, such as the timing for recognizing expenses, for tax and accounting purposes. These differences may result in deferred tax assets or liabilities, which are included in our Consolidated Balance Sheets. We are required to assess the likelihood that deferred tax assets, which include net operating loss and foreign tax credit carryforwards and deductible temporary differences, will be realizable in future years.

During the year ended December 31, 2019, the Company determined that $0.8 million of valuation allowance, previously recorded against state deferred tax assets, could be released primarily as a result of an increase to future taxable income expected to be generated in certain states. At December 31, 2019, the total valuation allowance recorded against the Company’s deferred tax assets was $8.2 million, comprised of a $4.2 million valuation allowance recorded against state net operating loss carryforwards, a $0.9 million valuation allowance recorded against foreign net deferred tax assets, and a $3.1 million valuation allowance recorded against the Company’s foreign tax credits.

For further discussion related to valuation allowances and other tax matters, refer to Note 10 – Income Taxes to the accompanying consolidated financial statements.

The Company is subject to market risk associated with changes in interest rates and foreign exchange rates. To mitigate this risk, the Company may utilize derivative financial instruments, including interest rate swaps and foreign currency forward contracts. The Company does not hold or issue derivative financial instruments for trading or speculative purposes and is not party to leveraged derivatives contracts.

The Company has certain debt instruments which subject it to market risk associated with movements in interest rates. The fair value of the Company’s total debt obligations held at December 31, 2019 was $220.5 million. From time to time, the Company may enter into interest rate swaps as a means of fixing the floating interest rate component on its variable-rate debt. At December 31, 2019, the Company had one interest rate swap outstanding. That swap had a notional amount of $75.0 million, and fixed the floating interest rate component on $75.0 million of the Company’s variable-rate debt. See Note 9 – Debt to the accompanying consolidated financial statements for a description of the Company’s debt agreements and interest rate swaps that were in place during 2019. A hypothetical 1% increase or decrease in variable interest rates on the Company’s total debt obligations as of December 31, 2019 would increase or decrease annual interest expense by approximately $1.5 million.

Although the majority of the Company’s sales, expenses and cash flow are transacted in U.S. dollars, the Company has exposure to changes in foreign exchange rates, primarily the Canadian Dollar, Euro and British pound. The impact of currency movements on the Company’s financial results is largely mitigated by natural hedges in its operations. The Canadian operations of JJE primarily conduct business in Canadian dollars. Almost all other sales of product from the U.S. to other parts of the world are denominated in U.S. dollars. Sales from and within other currency zones are predominantly transacted in the currency of the country sourcing the product or service. Approximately 78% of the Company’s net sales are conducted within the U.S. and are transacted in U.S. dollars. Management estimates that a 10% appreciation of the U.S. dollar against other currencies would reduce full-year net sales by approximately 2% and operating income by approximately 1%.

The Company may also have foreign currency exposures related to buying and selling in currencies other than the local currency in which it operates and to certain balance sheet positions. If such transactional or balance sheet exposures are material, the Company may enter into matching foreign currency forward contracts from time to time to protect against variability in exchange rates.

Chicago, Illinois

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

Chicago, Illinois

See notes to consolidated financial statements.

See notes to consolidated financial statements.

See notes to consolidated financial statements.

See notes to consolidated financial statements.

See notes to consolidated financial statements.

Federal Signal Corporation was founded in 1901 and was reincorporated as a Delaware corporation in 1969. References herein to the “Company,” “we,” “our” or “us” refer collectively to Federal Signal Corporation and its subsidiaries.

Products manufactured and services rendered by the Company are divided into 2 reportable segments: Environmental Solutions Group and 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.

The Company’s fiscal year ends on December 31. All references to 2019, 2018 and 2017 relate to the fiscal year unless otherwise indicated.

The accompanying consolidated financial statements represent the consolidation of Federal Signal Corporation and its subsidiaries and have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) and in accordance with United States (“U.S.”) generally accepted accounting principles (“GAAP”).

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 Consolidated Balance Sheet as of December 31, 2019 includes fair values assigned to the assets acquired and liabilities assumed in connection with the acquisition, whereas the Consolidated Statements of Operations for the year ended December 31, 2019 include the post-acquisition operating results of MRL.

Intercompany balances and transactions have been eliminated in consolidation. In addition, certain prior year amounts have been reclassified to conform to current year presentation.

Assets and liabilities of non-U.S. subsidiaries, other than those whose functional currency is the U.S. dollar, are translated at current exchange rates with the related translation adjustments reported in stockholders’ equity as a component of Accumulated other comprehensive loss. Accounts within the Consolidated Statements of Operations are translated at the average exchange rate during the period. Non-monetary assets and liabilities are translated at historical exchange rates.

The Company incurs foreign currency transaction gains or losses, related to transactions that are denominated in a currency other than the functional currency, which are recognized in the Consolidated Statements of Operations as a component of Other expense (income), net. For the years ended December 31, 2019 and 2017, the Company incurred foreign currency transaction gains of $0.1 million and $1.3 million, respectively, and in the year ended December 31, 2018, the Company realized foreign currency transaction losses of $0.4 million.

The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect (i) the reported amounts of assets and liabilities, (ii) the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and (iii) the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

The Company considers all highly liquid investments with a maturity of three months or less, when purchased, to be cash equivalents. The carrying amount of cash and cash equivalents approximates fair value because of the short-term maturity and highly liquid nature of these instruments.

The Company carries accounts receivable at the face amount less an allowance for doubtful accounts for estimated losses as a result of a customer’s inability to make required payments. Management evaluates the aging of the accounts receivable balances, the financial condition of its customers, historical trends and the time outstanding of specific balances to estimate the amount of accounts receivables that may not be collected in the future and records the appropriate provision.

The Company’s inventories are valued at the lower of cost and net realizable value. Cost is determined using the first-in, first-out method. Included in the cost of inventories are raw materials, direct wages and associated production costs.

Properties and equipment are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable.

The Company enters into lease agreements with customers related to the rental of certain equipment. All of these leasing agreements are classified as operating leases and are for periods generally not to exceed five years. In accounting for these leases, the cost of the equipment purchased or manufactured by the Company is recorded as an asset and is depreciated over its estimated useful life. Rental income is recognized ratably over the term of the underlying leases.

Rental equipment is depreciated to an estimated residual value on a straight-line basis over the estimated useful lives of the assets and is reviewed for potential impairment whenever an event occurs or circumstances change that indicate the carrying amount of an asset may not be recoverable. If circumstances require a long-lived asset or asset group to be tested for possible impairment, the Company first compares non-discounted cash flows expected to be generated by that asset group to its carrying amount. If the carrying amount of the long-lived asset or asset group is not recoverable on a non-discounted cash flow basis, an impairment is recognized to the extent that the carrying amount exceeds fair value. Fair value is determined through various valuation techniques including discounted cash flow models, quoted market values and third-party independent appraisals, as considered necessary.

Rental equipment includes certain equipment that is manufactured by the Company and subsequently transferred to the rental fleet, as well as equipment purchased from third-party manufacturers, for the purpose of renting to end-customers. The related cash flow activity associated with these transactions is reflected within operating activities on the Consolidated Statements of Cash Flows.

Goodwill represents the excess of the cost of an acquired business over the amounts assigned to its net assets. Goodwill is not amortized but is tested for impairment at a reporting unit level on an annual basis or more frequently if indicators of impairment exist. The Company performed its annual goodwill impairment test as of October 31, 2019.

A qualitative approach may be applied when the Company concludes that it is not “more likely than not” that the fair value of a reporting unit is less than its carrying value. In this situation, the Company would not be required to perform the quantitative impairment test described below.

A quantitative approach is performed by comparing the fair value of a reporting unit with its carrying amount. If the fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is not impaired and no impairment charge is required. If the carrying amount of a reporting unit exceeds its fair value, this difference is recorded as an impairment charge not to exceed the carrying amount of goodwill. The Company generally determines the fair value of its reporting units using both the income and market approaches.

Under the income approach, the key assumptions include projected sales, cost of sales, operating expenses and the discount rate. Under the market approach, the Company estimates fair value using marketplace fair value data from within a comparable industry grouping. The results of these two methods are weighted based upon management’s evaluation of the relevance of the two approaches.

Management applied the quantitative approach to assess the goodwill of its reporting units for potential impairment in 2019 and used a combination of the income and market approaches to determine the fair value of its reporting units. The fair values of the Company’s reporting units exceeded their carrying values by more than 20%, and, therefore, 0 impairment was recognized in 2019.

Management applied the qualitative approach to assess the goodwill of its reporting units for potential impairment in 2018 and 2017 and concluded that it was not “more likely than not” that the fair value of the Company’s reporting units were less than their carrying values. Accordingly, further quantitative testing was not required to be performed.

In 2019, the Company performed a combination of qualitative and quantitative impairment tests over its indefinite-lived intangible assets. The fair value of the indefinite-lived intangible assets that were quantitatively tested for impairment significantly exceeded their carrying value, and, therefore, 0 impairment was recognized. Further, the Company concluded that it was not “more likely than not” that the fair value of indefinite-lived intangible assets that were qualitatively tested for impairment were less than the carrying amounts. Accordingly, further quantitative testing was not required to be performed.

The Company applied the qualitative approach to assess its indefinite-lived intangible assets for impairment in 2018 and 2017 and concluded that it was not “more likely than not” that the fair value of indefinite-lived intangible assets were less than the carrying amounts. Accordingly, further quantitative testing was not required to be performed.