NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
1
— SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Description of the Business
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
two
major operating 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. As discussed in Note
15
– Segment Information, the Company’s reportable segments are consistent with its operating segments.
Our fiscal year ends on December 31. All references to
2016
,
2015
and
2014
relate to the fiscal year unless otherwise indicated.
Basis of Presentation and Consolidation
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
18
– Discontinued Operations, on January 29, 2016, the Company completed the sale of its Bronto Skylift
®
business (“Bronto”) that represented its Fire Rescue Group. The consolidated financial statements for all periods presented have been recast to present the operating results of previously divested or exited businesses as discontinued operations, including the Fire Rescue Group. See Note
18
– Discontinued Operations for further details.
In addition, as discussed in Note
2
– Acquisitions, on
June 3, 2016
, the Company completed the acquisition of substantially all of the assets and operations of Joe Johnson Equipment, Inc. and Joe Johnson Equipment (USA), Inc. (collectively, “JJE”), a Canadian-based distributor of maintenance equipment for municipal and industrial markets. The Consolidated Balance Sheet as of
December 31, 2016
includes fair values assigned to the assets acquired and liabilities assumed in connection with the acquisition, whereas the Consolidated Statements of Operations and Cash Flows for
the year ended December 31, 2016
include the post-acquisition operating results of JJE.
Intercompany balances and transactions have been eliminated in consolidation. In addition, certain prior year amounts have been reclassified to conform to the current year presentation. These include adjustments to present the Fire Rescue Group as a discontinued operation, as well as certain reclassifications made to prior-year balance sheet information to conform to the current-year presentation, after giving effect to the JJE acquisition.
New Accounting Standards Adopted in
2016
In April 2015, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) No. 2015-03,
Interest – Imputation of Interest (Subtopic 835-30), Simplifying the Presentation of Debt Issuance Costs
, which requires that debt issuance costs be presented in the balance sheets as a direct deduction from the carrying amount of the related debt liability. The new requirement is effective for fiscal years beginning on or after December 15, 2015, and for interim periods within those fiscal years. Retrospective presentation is required for all comparable periods presented. The Company’s adoption of this guidance on January 1, 2016 did not have a material impact on its consolidated financial statements.
In July 2015, the FASB issued ASU No. 2015-15,
Interest – Imputation of Interest (Subtopic 855-30), Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements
, which presents the SEC staff’s opinion, in response to ASU No. 2015-03, that debt issuance costs associated with line-of-credit arrangements may be deferred, presented as an asset, and subsequently amortized ratably over the respective term, regardless of whether there are any outstanding borrowings on the line-of-credit arrangement. The effective date of this guidance, and the expected impact upon adoption, is consistent with that discussed above with respect to ASU No. 2015-03. The Company’s adoption of this guidance on January 1, 2016 did not have a material impact on its consolidated financial statements.
In March 2016, the FASB issued ASU No. 2016-09,
Compensation – Stock Compensation (Topic 718), Improvements to Employee Share-Based Payment Accounting
(“ASU 2016-09”).
The updated guidance simplifies and changes how companies account for certain aspects of share-based payment awards to employees, including accounting for income taxes, forfeitures,
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and statutory tax withholding requirements, as well as classification of certain items in the statement of cash flows. Adoption of ASU 2016-09 is required for fiscal reporting periods beginning after December 15, 2016, including interim reporting periods within those fiscal years with early adoption being permitted. During 2016, the Company elected to early adopt ASU 2016-09, with an effective date of January 1, 2016. The impact of adoption was not material to the consolidated financial statements for
the year ended December 31, 2016
, nor to any quarterly period within
the year ended December 31, 2016
.
Non-U.S. Operations
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.
Relating to transactions that are denominated in a currency other than the functional currency, the Company incurs foreign currency transaction gains or losses, which are recognized in the Consolidated Statement of Operations as incurred.
For the years ended December 31, 2016, 2015 and 2014
, the Company incurred foreign currency transaction losses, included in other (income) expense, net in the Consolidated Statements of Operations, of
$0.1 million
,
$1.5 million
and
$1.7 million
, respectively.
Use of Estimates
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.
Cash Equivalents
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.
Accounts Receivable
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.
Inventories
The Company’s inventories are valued at the lower of cost or market. 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
Properties and equipment are stated at cost, net of depreciation. Depreciation is recorded using the straight-line method over the estimated useful lives of the assets. Useful lives generally range from
eight
to
40
years for buildings and
three
to
15
years for machinery and equipment. Leasehold improvements are depreciated
over the shorter of the remaining life of the lease or the useful life of the improvement
. Depreciation expense is primarily included as a component of Cost of sales on the Consolidated Statements of Operations, with depreciation expense associated with certain assets used for administrative purposes being presented within Selling, engineering, general and administrative (“SEG&A”) expenses. Depreciation expense, which includes depreciation on rental equipment, was
$18.9 million
,
$12.0 million
and
$11.4 million
in the
years ended December 31, 2016, 2015 and 2014
, respectively.
Properties and equipment are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable.
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Rental Equipment
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
Goodwill represents the excess of the cost of an acquired business over the amounts assigned to its net assets. Goodwill is not amortized but is tested for impairment at a reporting unit level on an annual basis or when an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. The Company performed its annual goodwill impairment test as of
October 31, 2016
.
In testing the goodwill of its reporting units for potential impairment, the Company applies either a qualitative test, or a two-step quantitative test, in accordance with Accounting Standards Codification (“ASC”) 350,
Intangibles
—
Goodwill and Other
. Management used a combination of the qualitative and quantitative approaches to assess the goodwill of its reporting units for potential impairment in
2016
.
A qualitative approach is applied when the Company concludes that it is not “more likely than not” that the fair value of a reporting unit is less than its carrying value. In this situation, the Company would not be required to perform the two-step impairment test described below.
The first step in the quantitative two-step approach is used to identify potential impairment, by comparing the fair value of a reporting unit with its carrying amount, including goodwill. If the fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is not impaired and the second step of the impairment test is unnecessary. If the carrying amount of a reporting unit exceeds its fair value, the second step of the goodwill impairment test is performed to measure the amount of impairment loss, if any. The second step compares the implied fair value of reporting unit goodwill with the carrying amount of that goodwill. If the carrying amount of reporting unit goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to that excess. The Company generally determines the fair value of its reporting units using two valuation methods: the “Income Approach — Discounted Cash Flow Analysis” method, and the “Market Approach — Guideline Public Company Method.”
Under the “Income Approach — Discounted Cash Flow Analysis” method, the key assumptions consider projected sales, cost of sales and operating expenses. These assumptions were determined by management utilizing our internal operating plan, including growth rates for revenues and operating expenses and margin assumptions. An additional key assumption under this approach is the discount rate, which is determined by reviewing current risk-free rates of capital and current market interest rates and by evaluating the risk premium relevant to the business segment. If our assumptions relative to growth rates were to change, our fair value calculation may change, which could result in impairment.
Under the “Market Approach — Guideline Public Company Method,” the Company identified several publicly traded companies, which we believe have sufficiently relevant similarities to our businesses. For these companies, the Company used market values to calculate the mean ratio of invested capital to revenues and invested capital to EBITDA. Similar to the income approach discussed above, sales, cost of sales, operating expenses and their respective growth rates are key assumptions utilized. The market prices of the Company’s common stock and other guideline companies are additional key inputs. If these
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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. Management used a combination of the income and market approaches to determine the fair value of certain reporting units in
2016
. The fair value of the reporting units that were tested for impairment under the two-step approach in the
2016
analysis exceeded their carrying values.
The Company had no goodwill impairments for its continuing operations in
2016
,
2015
or
2014
. See Note
6
– Goodwill and Other Intangible Assets for a summary of the Company’s goodwill by segment.
Intangible Assets
Definite-lived intangible assets are amortized on a straight-line basis over the estimated useful lives and are tested for impairment if indicators exist in a manner similar to that described above for
Rental Equipment
.
Indefinite-lived intangible assets are tested for impairment on an annual basis at year-end, or more frequently if an event occurs or circumstances change that indicate the fair value of an indefinite-lived intangible asset could be below its carrying amount. The impairment test consists of comparing the fair value of the indefinite-lived intangible asset with its carrying amount. An impairment loss would be recognized for the carrying amount in excess of its fair value.
Warranty
Sales of many of the Company’s products carry express warranties based on terms that are generally accepted in the Company’s marketplaces. The Company records provisions for estimated warranty, which are included within Cost of sales, at the time of sale based on historical experience. The Company periodically adjusts these provisions to reflect actual experience. Infrequently, a material warranty issue can arise which is beyond the scope of the Company’s historical experience. The Company records costs related to these issues as they become probable and estimable.
The Company also sells optional extended warranty contracts that extend coverage beyond the initial term of the express warranty period. At the time of sale, revenue related to the extended warranty contract is deferred and recognized as income over the life of the contract. As of
December 31, 2016
and
2015
, deferred revenue associated with extended warranty contracts was
$2.6 million
and
$2.6 million
, respectively, and was included within Other current liabilities and Other long-term liabilities on the Consolidated Balance Sheets. Costs under extended warranty contracts are expensed as incurred.
Workers’ Compensation and Product Liability Reserves
Due to the nature of the Company’s manufacturing and products, the Company is subject to claims for workers’ compensation and product liability in the normal course of business. The Company is self-funded for a portion of these claims. The Company establishes a reserve using a third-party actuary for any known outstanding matters, including a reserve for claims incurred but not yet reported. The amount and timing of cash payments relating to these claims are considered to be reliably determinable given the nature of the claims and historical claim volumes to support the actuarial assumptions and judgments used to derive the expected loss payment patterns. As such, the reserves recorded are discounted using a risk-free rate that matches the average duration of the claims.
The Company has not established a reserve for potential losses resulting from the firefighter hearing loss litigation (see Note
11
– Legal Proceedings). If the Company is not successful in its defense after exhausting all appellate options, it would record a charge for such claims, to the extent they exceed insurance recoveries, when the related losses become probable and estimable.
Pensions
The Company sponsors domestic and foreign defined benefit pension plans. Key assumptions used in the accounting for these employee benefit plans include the discount rate, expected long-term rate of return on plan assets and estimates of future mortality of plan participants.
The weighted-average discount rate used to measure pension liabilities and costs is selected using a hypothetical portfolio of high-quality bonds that would provide the necessary cash flow to match the projected benefit payments of the plans. The discount rate represents the rate at which our benefit obligations could effectively be settled as of the year-end measurement date. The weighted-average discount rate used to measure pension liabilities decreased from
2015
to
2016
. See Note
9
– Pensions for further discussion.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)
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The expected long-term rate of return on plan assets is based on historical and expected returns for the asset classes in which the plans are invested.
The Company references the most recent mortality tables and scales published by the Society of Actuaries in determining its estimate of future mortality.
Revenue Recognition
Net sales consist primarily of revenue from the sale of equipment, environmental vehicles, parts, service and maintenance contracts.
The Company recognizes revenue for products when (i) persuasive evidence of an arrangement exists, (ii) delivery has occurred, (iii) the sales price is fixed or determinable and (iv) collection is reasonably assured. A product is considered delivered to the customer once it has been shipped, and title and risk of loss have been transferred. For most of the Company’s product sales, these criteria are met at the time the product is shipped; however, occasionally title passes later or earlier than shipment due to customer contracts or letter of credit terms. If at the outset of an arrangement the Company determines the arrangement fee is not, or is presumed not to be, fixed or determinable, revenue is deferred and subsequently recognized as amounts become due and payable and all other criteria for revenue recognition have been met. Taxes collected from customers and remitted to governmental authorities are recorded on a net basis and are excluded from revenue.
The Company enters into sales arrangements that may provide for multiple deliverables to a customer. These arrangements may include software and non-software components that function together to deliver the products’ essential functionality. The Company identifies all goods and/or services that are to be delivered separately under the sales arrangement and allocates revenue to each deliverable based on relative fair values. Fair values are generally established using reliable third-party objective evidence, or management’s best estimate of selling price, including prices charged when sold separately by the Company. In general, revenues are separated between hardware, integration and installation services. The allocated revenue for each deliverable is then recognized using appropriate revenue recognition methods.
Net sales are presented net of returns and allowances. Returns and allowances are calculated and recorded as a percentage of revenue based upon historical returns. Net sales include sales of products and billed freight related to product sales. Freight has not historically comprised a material component of Net sales.
Product Shipping Costs
Product shipping costs are expensed as incurred and are included within Cost of sales.
Research and Development
The Company invests in research to support development of new products and the enhancement of existing products and services. Expenditures for research and development by the Company were
$13.4 million
in
2016
,
$14.0 million
in
2015
and
$13.1 million
in
2014
, and are included within SEG&A expenses.
Stock-Based Compensation Plans
The Company has various stock-based compensation plans, described more fully in Note
13
– Stock-Based Compensation. Stock-based compensation expense is recorded net of estimated forfeitures in the Company’s Consolidated Statements of Operations. The Company estimates the forfeiture rate based on historical forfeitures of equity awards and adjusts the rate to reflect changes in facts and circumstances, if any. The Company revises its estimated forfeiture rate if actual forfeitures differ from its initial estimates. The adoption of ASU 2016-09 did not change the Company’s historical practice of estimating forfeitures.
Income Taxes
We file a consolidated U.S. federal income tax return for Federal Signal Corporation and its eligible domestic subsidiaries. Our non-U.S. subsidiaries file income tax returns in their respective local jurisdictions. We account for income taxes under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and tax benefit carryforwards. Deferred tax assets and liabilities at the end of each period are determined using enacted tax rates expected to apply to taxable income in the period in which the deferred tax liability or asset is expected to be settled or realized.
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FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)
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A valuation allowance is established or maintained when, based on currently available information and other factors, it is more likely than not that all or a portion of a deferred tax asset will not be realized.
Accounting standards on accounting for uncertainty in income taxes address the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the consolidated financial statements. Under the guidance on accounting for uncertainty in income taxes, we may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by taxing authorities, based on the technical merits of the position. The tax benefits recognized in the consolidated financial statements from such a position are measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. The guidance on accounting for uncertainty in income taxes also outlines de-recognition and classification, as well as interest and penalties on income taxes.
Litigation Contingencies
The Company is subject to various claims, including pending and possible legal actions for product liability and other damages, and other matters arising in the ordinary course of the Company’s business. The Company believes, based on current knowledge and after consultation with counsel, that the outcome of such claims and actions in the aggregate will not have an adverse effect on the Company’s financial position or results of operations. However, in the event of unexpected future developments, it is possible that the ultimate resolution of such matters, if unfavorable, could have a material adverse effect on the Company’s results of operations. Professional legal fees are expensed when incurred. We accrue for contingent losses when such losses are probable and reasonably estimable. In the event that estimates or assumptions of contingent losses are different from actual results, adjustments are made in subsequent periods to reflect more current information.
NOTE
2
– ACQUISITIONS
Acquisition of Westech Vac Systems Ltd.
On
January 5, 2016
, the Company completed the acquisition of
100%
of the stock of Westech Vac Systems, Ltd. (“Westech”), a Canadian manufacturer of high-quality, rugged vacuum trucks, from Advance Engineered Products Ltd. The Company expects that Westech will provide an efficient entry into a new line of product offerings and access to new markets. The acquisition closed on
January 5, 2016
, and the assets and liabilities of Westech have been consolidated into the Consolidated Balance Sheet since that date, while the post-acquisition results of operations have been included in the Consolidated Statements of Operations, within the Environmental Solutions Group.
Cash consideration paid by the Company to acquire Westech was approximately
$6.0 million
. The assets acquired and liabilities assumed in the Westech acquisition have been measured at their fair values at the acquisition date, resulting in an assignment of
$1.9 million
to goodwill, which is deductible for tax purposes, and
$1.4 million
to intangible assets. As of
December 31, 2016
, the Company’s purchase price allocation is considered to be final.
The acquisition was not, and would not have been, material to the Company’s results of operations, financial condition or cash flow during any period presented. Accordingly, the Company’s consolidated results from operations do not differ materially from historical performance as a result of the acquisition, and therefore, pro-forma results are not presented.
Acquisition of JJE
On
June 3, 2016
, the Company completed the acquisition of substantially all of the assets and operations of JJE, a Canadian-based distributor of maintenance equipment for municipal and industrial markets. The Company expects that JJE will facilitate sales of its existing products into new markets, expand the Company’s product and service offerings and increase the Company’s footprint across North America. The acquisition closed on
June 3, 2016
, and the assets and liabilities of JJE have been consolidated into the Consolidated Balance Sheet since that date, while the post-acquisition results of operations have been included in the Consolidated Statements of Operations, within the Environmental Solutions Group.
The initial cash consideration paid by the Company to acquire JJE was approximately
$96.6 million
, inclusive of a payment of a working capital adjustment. In addition, there is a deferred payment of C
$8.0 million
(approximately
$6.0 million
) and a contingent earn-out payment of up to C
$10.0 million
(approximately
$7.4 million
). The earn-out payment is contingent upon the achievement of certain financial targets and objectives. The deferred payment, and any contingent earn-out payment, are due to be paid after the third anniversary of the closing date.
The acquisition is being accounted for in accordance with ASC 805,
Business Combinations
. Accordingly, the total purchase price has been allocated to assets acquired and liabilities assumed in connection with the acquisition based on their estimated
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fair values as of the completion of the acquisition. A single estimate of fair value results from a complex series of judgments about future events and uncertainties and relies heavily on estimates and assumptions. The Company’s judgments used to determine the estimated fair value assigned to each class of assets acquired and liabilities assumed, as well as asset lives, can materially impact the Company’s results of operations. As of
December 31, 2016
, the Company’s purchase price allocation is considered to be final.
The following table summarizes the fair value of assets acquired and liabilities assumed as of the acquisition date:
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(in millions)
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Purchase price, inclusive of working capital adjustment
(a)
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$
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96.6
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Estimated fair value of additional consideration
(b)
|
10.3
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Settlement of pre-existing contractual relationship
(c)
|
11.4
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Total consideration
|
118.3
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Accounts receivable
|
12.1
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Inventories
|
28.7
|
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|
Prepaid expenses and other current assets
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0.8
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Rental equipment
(d)
|
75.9
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Properties and equipment
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2.0
|
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Intangible assets
(e)
|
8.4
|
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Capital lease obligations
|
(0.5
|
)
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Accounts payable
(c)
|
(11.5
|
)
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Customer deposits
|
(0.8
|
)
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Accrued liabilities
|
(2.0
|
)
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Net assets acquired
|
113.1
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|
Goodwill
(f)
|
$
|
5.2
|
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(a)
|
The initial purchase price was funded with existing cash on hand and borrowings under the Company’s revolving credit facility.
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(b)
|
Includes estimated fair value of contingent earn-out payment (
$4.9 million
) and the deferred payment (
$5.4 million
) as of the acquisition date. Included as a component of
Other long-term liabilities
on the Consolidated Balance Sheet. See Note
17
– Fair Value Measurements for discussion of the methodology used to determine the fair value of the contingent earn-out payment.
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(c)
|
Represents the non-cash settlement of accounts receivable due from JJE to the Company as of the acquisition date. Corresponding amount payable by JJE to the Company is not included in accounts payable assumed in the table above, and the amount was settled at fair value with no impact on the Consolidated Statement of Operations.
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(d)
|
Consists primarily of street sweepers, sewer cleaners, vacuum trucks and other maintenance equipment. Fair value was determined using a combination of a market-based approach and a cost-based approach. The specific valuation technique depended upon the nature of the asset or availability of relevant information. Under the market-based approach, an analysis of market conditions and transactions comparable to the subject asset being valued was performed, and fair value was determined where reliable and available data on comparable sales could be found. In this context, fair value was determined by comparing recent sales of similar assets and adjusting these comparable sales based on factors such as age, condition and type of sale. Under the cost-based approach, the current replacement cost for the assets was calculated, using the direct method of the cost approach. In determining fair value under the cost approach, adjustments were made for physical, functional and economic factors affecting utility and value as they might apply.
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(e)
|
Represents the fair value assigned to the JJE trade name, which is considered to be an indefinite-lived intangible asset.
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(f)
|
The majority of goodwill, which is primarily attributable to synergies expected to result from combining JJE’s operations with the Company’s operations, is expected to be deductible for tax purposes.
|
Under ASC 805-10, acquisition-related costs (i.e., advisory, legal, valuation and other professional fees) are not included as a component of consideration transferred, but are accounted for as expenses in the periods in which the costs are incurred. The Company incurred
$0.9 million
of acquisition-related costs in
the year ended December 31, 2016
, which have been recorded in
Acquisition and integration-related expenses
on the Consolidated Statement of Operations.
As further explained in Note
17
– Fair Value Measurements, in
the year ended December 31, 2016
, the Company recognized expenses of
$0.4 million
associated with the change in the fair value of the contingent consideration liability. In addition, in
the year ended December 31, 2016
, the Company recognized expenses of
$0.1 million
in relation to the accretion of the discount on the deferred payment obligation. These expenses have been included as a component of
Acquisition and integration-related expenses
on the Consolidated Statement of Operations.
In the period between the
June 3, 2016
closing date and
December 31, 2016
, on a stand-alone basis, JJE generated
$87.2 million
of net sales and
$1.9 million
of operating income, after recognizing expenses of
$3.8 million
and
$0.5 million
relating
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)
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to purchase accounting and acquisition-related effects, respectively. The Company has included the operating results of JJE within the Environmental Solutions Group in its condensed consolidated financial statements since the closing date.
In connection with the acquisition of JJE, the Company entered into lease agreements for
two
facilities owned by affiliates of the sellers of JJE. Both agreements include an annual rent that is considered to be market-based, and are for an initial lease term of
five years
, with options to renew. In
the year ended December 31, 2016
, total rent paid under these agreements to the former shareholders of JJE, some of whom are now employees of the Company, was approximately
$0.2 million
. In addition, during the period between the
June 3, 2016
closing date and
December 31, 2016
, the Company’s Environmental Solutions Group recorded net sales of
$1.7 million
relating to products sold to Ingenieria Y Servicios Orbitec SPA, an entity which is majority-owned by affiliates of the sellers of JJE.
The Company’s net sales to JJE prior to the acquisition were
$21.6 million
and
$54.8 million
for the years ended
December 31, 2016
and
2015
, respectively.
The Company has not presented unaudited pro forma combined results of operations of the Company and JJE
for the year ended December 31, 2016
and
2015
, because it is considered impracticable to do so, primarily because of the revenue and profit deferral impacts associated with the Company’s historical sales to JJE. Under common ownership, the timing of revenue and profit recognition will change, in that revenue and profit will no longer be recognized on sales from the Company to JJE when delivery has occurred, and all other revenue recognition criteria have been satisfied, as was the case prior to the acquisition. Quantification of the revenue and profit deferral impacts of such historical sales and reflecting pro forma combined results assuming the transaction occurred on January 1, 2016 and 2015 with any reasonable level of accuracy is considered impracticable as it would require significant estimates, including estimating the mix of such historical sales (i.e. sales of units to JJE that were subsequently sold to end customers, sales of units to JJE that were not yet sold through to end customers or sales of units to JJE that were placed in the rental fleet), as well as estimating the timing and amounts of any of JJE’s subsequent sale or rental activity.
NOTE
3
— INVENTORIES
The following table summarizes the components of inventories:
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
2016
|
|
2015
|
|
Finished goods
|
$
|
77.6
|
|
|
$
|
45.2
|
|
|
Raw materials
|
35.3
|
|
|
35.3
|
|
|
Work in process
|
7.2
|
|
|
6.7
|
|
|
Total inventories
|
$
|
120.1
|
|
|
$
|
87.2
|
|
NOTE
4
— PROPERTIES AND EQUIPMENT, NET
The following table summarizes the components of properties and equipment, net:
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
2016
|
|
2015
|
|
Land
|
$
|
0.2
|
|
|
$
|
0.2
|
|
|
Buildings and improvements
|
26.0
|
|
|
24.7
|
|
|
Machinery and equipment
|
118.0
|
|
|
120.3
|
|
|
Total property and equipment, at cost
|
144.2
|
|
|
145.2
|
|
|
Less: Accumulated depreciation
|
101.3
|
|
|
100.2
|
|
|
Properties and equipment, net
|
$
|
42.9
|
|
|
$
|
45.0
|
|
In July 2008, the Company entered into sale-leaseback transactions for its Elgin and University Park, Illinois plant locations. Net proceeds received were
$35.8 million
, resulting in a deferred gain of
$29.0 million
. The deferred gain is being amortized over the
15
-year life of the respective leases. The deferred gain balance was
$12.6 million
and
$14.5 million
at
December 31, 2016
and
2015
, respectively. Of these amounts,
$1.9 million
and
$1.9 million
, was included within Other current liabilities on the Consolidated Balance Sheets at
December 31, 2016
and
2015
, respectively.
The Company leases certain facilities and equipment under operating leases, some of which contain options to renew. Total rental expense on all operating leases was
$8.3 million
in
2016
,
$7.2 million
in
2015
and
$6.6 million
in
2014
. Sublease income and contingent rentals relating to operating leases were insignificant. At
December 31, 2016
, minimum future rental
|
|
|
|
|
|
|
|
|
|
|
FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)
|
commitments under operating leases having non-cancelable lease terms in excess of one year aggregated
$40.8 million
and were payable as follows:
$8.2 million
in
2017
,
$7.4 million
in
2018
,
$6.1 million
in
2019
,
$5.6 million
in
2020
,
$5.1 million
in
2021
and
$8.4 million
thereafter.
NOTE
5
— RENTAL EQUIPMENT, NET
The following table summarizes the components of rental equipment, net:
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
2016
|
|
2015
|
|
Rental equipment
|
90.5
|
|
|
10.5
|
|
|
Less: Accumulated depreciation
|
9.7
|
|
|
2.6
|
|
|
Rental equipment, net
|
$
|
80.8
|
|
|
$
|
7.9
|
|
Rental income associated with the Company’s equipment rental activity, which is included as a component of Net sales on the Consolidated Statements of Operations, totaled
$18.4 million
and
$8.2 million
for the year ended December 31, 2016
and
2015
, respectively.
NOTE
6
— GOODWILL AND OTHER INTANGIBLE ASSETS
The following table summarizes the carrying amount of goodwill by segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
Environmental
Solutions
|
|
Safety & Security
Systems
|
|
Total
|
|
Balance at December 31, 2014
|
$
|
120.4
|
|
|
$
|
114.8
|
|
|
$
|
235.2
|
|
|
Translation adjustments
|
—
|
|
|
(3.6
|
)
|
|
(3.6
|
)
|
|
Balance at December 31, 2015
|
120.4
|
|
|
111.2
|
|
|
231.6
|
|
|
Acquisitions
|
7.1
|
|
|
—
|
|
|
7.1
|
|
|
Translation adjustments
|
(0.3
|
)
|
|
(1.9
|
)
|
|
(2.2
|
)
|
|
Balance at December 31, 2016
|
$
|
127.2
|
|
|
$
|
109.3
|
|
|
$
|
236.5
|
|
The following table summarizes the gross carrying amount and accumulated amortization of intangible assets for each major class of intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
December 31, 2015
|
|
(in millions)
|
Gross Carrying Value
|
|
Accumulated Amortization
|
|
Net Carrying Value
|
|
Gross Carrying Value
|
|
Accumulated Amortization
|
|
Net Carrying Value
|
|
Definite-lived intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships
(a)
|
$
|
0.8
|
|
|
$
|
(0.1
|
)
|
|
$
|
0.7
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Other
(a)
|
1.1
|
|
|
(0.4
|
)
|
|
0.7
|
|
|
0.6
|
|
|
(0.4
|
)
|
|
0.2
|
|
|
Total definite-lived intangible assets
|
1.9
|
|
|
(0.5
|
)
|
|
1.4
|
|
|
0.6
|
|
|
(0.4
|
)
|
|
0.2
|
|
|
Indefinite-lived intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade names
|
8.8
|
|
|
—
|
|
|
8.8
|
|
|
|
|
|
—
|
|
|
—
|
|
|
Total indefinite-lived intangible assets
|
8.8
|
|
|
—
|
|
|
8.8
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Total intangible assets
|
$
|
10.7
|
|
|
$
|
(0.5
|
)
|
|
$
|
10.2
|
|
|
$
|
0.6
|
|
|
$
|
(0.4
|
)
|
|
$
|
0.2
|
|
|
|
|
|
(a)
|
Average useful life of customer relationships and other definite-lived intangible assets is estimated at
10 years
.
|
Amortization expense
for the years ended
December 31, 2016
,
2015
and
2014
was immaterial. The Company currently estimates that aggregate amortization expense will not exceed
$0.2 million
in any future year.
|
|
|
|
|
|
|
|
|
|
|
FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)
|
NOTE
7
— DEBT
The following table summarizes the components of long-term debt and capital lease obligations:
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
2016
|
|
2015
|
|
2016 Credit Agreement:
|
|
|
|
|
Revolving Credit Facility
|
$
|
63.2
|
|
|
$
|
—
|
|
|
2013 Credit Agreement:
|
|
|
|
|
Term Loan
|
—
|
|
|
43.4
|
|
|
Capital lease obligations
|
0.8
|
|
|
0.7
|
|
|
Total long-term borrowings and capital lease obligations, including current portion
|
64.0
|
|
|
44.1
|
|
|
Less: Current capital lease obligations
|
0.5
|
|
|
0.4
|
|
|
Total long-term borrowings and capital lease obligations
|
$
|
63.5
|
|
|
$
|
43.7
|
|
As more fully described within Note
17
– Fair Value Measurements, the Company uses a three-level fair value hierarchy that prioritizes the inputs used to measure fair value. The fair value of long-term debt is based on interest rates that we believe are currently available to us for issuance of debt with similar terms and remaining maturities (Level 2 input).
The following table summarizes the carrying amounts and fair values of the Company’s financial instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
(in millions)
|
Notional
Amount
|
|
Fair
Value
|
|
Notional
Amount
|
|
Fair
Value
|
|
Long-term debt
(a)
|
$
|
64.0
|
|
|
$
|
64.0
|
|
|
$
|
44.1
|
|
|
$
|
44.1
|
|
|
|
|
|
(a)
|
Long-term debt includes current portions of long-term debt and current portions of capital lease obligations of
$0.5 million
and
$0.4 million
as of
December 31, 2016
and
2015
, respectively.
|
On January 27, 2016, the Company entered into an Amended and Restated Credit Agreement (the “2016 Credit Agreement”), by and among the Company and certain of its foreign subsidiaries (collectively, the “Borrowers”), Wells Fargo Bank, National Association, as administrative agent, swingline lender and issuing lender, JPMorgan Chase Bank, N.A. as syndication agent, KeyBank National Association, as documentation agent, Wells Fargo Securities, LLC and J.P. Morgan Securities LLC, as joint lead arrangers and joint bookrunners, and the other lenders and parties signatory thereto.
The 2016 Credit Agreement is a
$325.0 million
revolving credit facility, maturing on January 27, 2021, 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
$50.0 million
for letters of credit. The 2016 Credit Agreement allows for the Borrowers to borrow in denominations of U.S. Dollars, Canadian Dollars (up to a maximum of C
$85.0 million
) or Euros (up to a maximum of €
20.0 million
). In addition, the Company may cause the commitments to increase by up to an additional
$75.0 million
, subject to the approval of the applicable lenders providing such additional financing. Borrowings under the 2016 Credit Agreement may be used for working capital and general corporate purposes, including permitted acquisitions.
The Company’s domestic subsidiaries provide guarantees for all obligations of the Borrowers under the 2016 Credit Agreement, which is secured by a first priority security interest in all now or hereafter acquired domestic property and assets and the stock or other equity interests in each of the domestic subsidiaries and
65%
of the outstanding voting capital stock of certain first-tier foreign subsidiaries, subject to certain exclusions.
Borrowings under the 2016 Credit Agreement bear interest, at the Company’s option, at a base rate or a LIBOR rate, plus, in each case, an applicable margin. The applicable margin ranges from
0.00%
to
1.25%
for base rate borrowings and
1.00%
to
2.25%
for LIBOR borrowings. The Company must also pay a commitment fee to the lenders ranging between
0.15%
to
0.30%
per annum on the unused portion of the
$325.0 million
revolving credit facility along with other standard fees. Letter of credit fees are payable on outstanding letters of credit in an amount equal to the applicable LIBOR margin plus other customary fees.
The Company is subject to certain leverage ratio and interest coverage ratio financial covenants under the 2016 Credit Agreement that are to be measured at each fiscal quarter-end. The Company was in compliance with all such covenants as of
December 31, 2016
. The 2016 Credit Agreement also includes a “covenant holiday” period, which allows for the temporary increase of the minimum leverage ratio following the completion of a permitted acquisition, or a series of permitted acquisitions, when the total consideration exceeds a specified threshold. In addition, the 2016 Credit Agreement includes
|
|
|
|
|
|
|
|
|
|
|
FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)
|
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 merge, consolidate or enter into any similar combination, (iii) make restricted payments, including dividends and stock repurchases, (iv) incur indebtedness, (v) make certain loans and investments, (vi) create liens, (vii) transact with affiliates, (viii) enter into sale/leaseback transactions, (ix) make negative pledges and (x) modify subordinated debt documents.
Under the 2016 Credit Agreement, restricted payments, including dividends and stock repurchases, shall be permitted if (i) the Company’s leverage ratio is less than or equal to
2.50
, (ii) the Company is in compliance with all other financial covenants and (iii) there are no existing defaults under the 2016 Credit Agreement. If its leverage ratio is more than
2.50
, the Company is still permitted to fund (i) up to
$30.0 million
of dividend payments, (ii) stock repurchases sufficient to offset dilution created by the issuance of equity as compensation to its officer, directors, employees and consultants and (iii) an incremental
$30.0 million
of other cash payments.
The 2016 Credit Agreement contains customary events of default. If an event of default occurs and is continuing, the Borrowers may be required immediately to repay all amounts outstanding under the 2016 Credit Agreement and the commitments from the lenders may be terminated.
The 2016 Credit Agreement amended and restated the Company’s March 13, 2013 Credit Agreement (the “2013 Credit Agreement”), which provided the Company with a
$225.0 million
senior secured credit facility comprised of a
five
-year fully funded term loan of
$75.0 million
and a
five
-year
$150.0 million
revolving credit facility.
Under the terms of the 2013 Credit Agreement, the Company was required to make quarterly installment payments against the
$75.0 million
term loan, with any remaining balance due on the maturity date of March 13, 2018. As a result of executing the 2016 Credit Agreement subsequent to
December 31, 2015
, but prior to the issuance of the financial statements for the year then ended, the
$6.9 million
current portion of term loan debt outstanding as of
December 31, 2015
was reflected as a component of long-term borrowings and capital lease obligations on the Consolidated Balance Sheets. Under the 2013 Credit Agreement, the Company was allowed to prepay the term loan in whole or in part prior to maturity without premium or penalty. In
2014
, the Company made a voluntary term loan prepayment of
$15.0 million
. In the first quarter of
2016
, the Company repaid the remaining
$43.4 million
of principal outstanding under the 2013 Credit Agreement.
In the first quarter of
2016
, approximately
$0.3 million
of unamortized deferred financing fees associated with the 2013 Credit Agreement were written off in connection with executing the 2016 Credit Agreement. The Company incurred
$1.1 million
of debt issuance costs in connection with the execution of the 2016 Credit Agreement. Such fees have been deferred and are being amortized over the
five
-year term.
As of
December 31, 2016
, there was
$63.2 million
of cash drawn and
$18.0 million
of undrawn letters of credit under the 2016 Credit Agreement, with
$243.8 million
of net availability for borrowings. As of
December 31, 2016
, there was
no
cash drawn against the Company’s non-U.S. lines of credit which provide for borrowings up to
$0.1 million
.
For
the year ended December 31, 2016
, gross borrowings and gross payments under the 2016 Credit Agreement were
$69.8 million
and
$5.0 million
, respectively. For
the year ended December 31, 2015
, there were
no
gross borrowings or gross payments under the Company’s domestic revolving credit facility portion of the 2013 Credit Agreement. For
the year ended December 31, 2014
, gross borrowings and gross payments under the Company’s domestic revolving credit facility portion of the 2013 Credit Agreement were
$6.5 million
and
$26.5 million
, respectively.
Aggregate maturities of total borrowings amount to approximately
$0.5 million
in
2017
,
$0.2 million
in
2018
,
$0.1 million
in
2019
,
less than $0.1 million
in
2020
and
$63.2 million
in 2021. The weighted average interest rate on long-term borrowings was
1.9%
at
December 31, 2016
.
The Company paid interest of
$1.1 million
in
2016
,
$1.9 million
in
2015
and
$3.0 million
in
2014
.
|
|
|
|
|
|
|
|
|
|
|
FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)
|
NOTE
8
— INCOME TAXES
The following table summarizes the income tax expense (benefit) from continuing operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
2016
|
|
2015
|
|
2014
|
|
Current:
|
|
|
|
|
|
|
Federal
|
$
|
7.0
|
|
|
$
|
6.6
|
|
|
$
|
3.0
|
|
|
Foreign
|
0.6
|
|
|
—
|
|
|
0.3
|
|
|
State and local
|
2.0
|
|
|
1.8
|
|
|
1.3
|
|
|
Total current tax expense
|
9.6
|
|
|
8.4
|
|
|
4.6
|
|
|
Deferred:
|
|
|
|
|
|
|
Federal
|
8.4
|
|
|
25.4
|
|
|
17.8
|
|
|
Foreign
|
(0.7
|
)
|
|
(2.0
|
)
|
|
(3.0
|
)
|
|
State and local
|
0.1
|
|
|
2.3
|
|
|
4.3
|
|
|
Total deferred tax expense
|
7.8
|
|
|
25.7
|
|
|
19.1
|
|
|
Total income tax expense
|
$
|
17.4
|
|
|
$
|
34.1
|
|
|
$
|
23.7
|
|
The following table summarizes the differences between the statutory federal income tax rate and the effective income tax rate from continuing operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
|
Statutory federal income tax rate
|
35.0
|
%
|
|
35.0
|
%
|
|
35.0
|
%
|
|
State income taxes, net of federal tax benefit
|
3.6
|
|
|
3.3
|
|
|
3.7
|
|
|
Valuation allowance
|
(3.7
|
)
|
|
1.7
|
|
|
(4.5
|
)
|
|
Domestic production deduction
|
(2.4
|
)
|
|
(2.2
|
)
|
|
(2.1
|
)
|
|
Tax planning benefits, excluding valuation allowance effects
|
—
|
|
|
(6.0
|
)
|
|
—
|
|
|
Tax reserves
|
(1.0
|
)
|
|
0.2
|
|
|
(1.2
|
)
|
|
Tax credits
|
(0.8
|
)
|
|
1.9
|
|
|
(0.6
|
)
|
|
Foreign tax rate effects
|
0.8
|
|
|
0.5
|
|
|
(2.0
|
)
|
|
Other, net
|
(0.9
|
)
|
|
(0.3
|
)
|
|
0.1
|
|
|
Effective income tax rate
|
30.6
|
%
|
|
34.1
|
%
|
|
28.4
|
%
|
The following table summarizes income from continuing operations before taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
2016
|
|
2015
|
|
2014
|
|
U.S.
|
$
|
57.7
|
|
|
$
|
96.4
|
|
|
$
|
78.2
|
|
|
Non-U.S.
|
(0.9
|
)
|
|
3.5
|
|
|
5.2
|
|
|
Income from continuing operations before taxes
|
$
|
56.8
|
|
|
$
|
99.9
|
|
|
$
|
83.4
|
|
ASC Topic 740
,
Income Taxes
, requires that the future realization of deferred tax assets depends on the existence of sufficient taxable income in future periods. Possible sources of taxable income include taxable income in carryback periods, the future reversal of existing taxable temporary differences recorded as a deferred tax liability, tax-planning strategies that generate future income or gains in excess of anticipated losses in the carryforward period and projected future taxable income. If, based upon all available evidence, both positive and negative, it is more likely than not such deferred tax assets will not be realized, a valuation allowance is recorded. Significant weight is given to positive and negative evidence that is objectively verifiable. A company’s three-year cumulative loss position is significant negative evidence in considering whether deferred tax assets are realizable and the accounting guidance restricts the amount of reliance the Company can place on projected taxable income to support the recovery of the deferred tax assets.
We continually evaluate the need to maintain a valuation allowance for deferred tax assets based on our assessment of whether it is more likely than not that deferred tax benefits will be realized through the generation of future taxable income. Appropriate consideration is given to all available evidence, both positive and negative, in assessing the need for a valuation allowance.
During the fourth quarter of
2016
, the Company determined that
$3.5 million
of valuation allowance, previously recorded against deferred tax assets in Canada, could be released. These assets primarily relate to Canadian net operating loss
|
|
|
|
|
|
|
|
|
|
|
FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)
|
carryforwards that were largely generated by the Company’s former North American refuse truck body business, which was discontinued in 2005. As of
December 31, 2015
, these deferred tax assets, and the corresponding full valuation allowance, were included within
Long-term assets of discontinued operations
on the Consolidated Balance Sheet.
The Company has not had any material operations in Canada for a number of years. The current-year acquisitions of JJE and, to a lesser extent, Westech, expand the Company’s footprint in Canada, and the Company now has operations in that jurisdiction. The Company was in a three-year cumulative loss position in Canada as of
December 31, 2016
, primarily because of the aggregate year-to-date operating losses of the current-year acquisitions. The current-year operating losses largely result from the recognition of higher cost of sales associated with sales of acquired equipment, which were increased to fair value in connection with purchase accounting for the acquisition of JJE. While these purchase accounting expense effects are expected to continue for several quarters, the impact on future quarterly operating results is expected to be less significant than during
2016
. Absent these expenses, which are not considered indicative of the Company’s ongoing operations in Canada, the Company would have been in a cumulative three-year income position. Furthermore, management believes that future projections support the realization of the deferred tax assets before the net operating loss carryforwards begin to expire in
2025
. Based on its evaluation, management concluded that there was sufficient positive evidence to support the future realization of the Canadian deferred tax assets, such that the valuation allowance could be released in the fourth quarter of 2016.
In addition, during the fourth quarter of
2016
, the Company determined that a valuation allowance of
$1.3 million
should be recorded against its net deferred tax assets in the United Kingdom (“U.K.”), which include deferred tax assets on the actuarial losses of its U.K. defined benefit plan. The Company’s U.K. operations have been adversely impacted in recent years by ongoing softness in global coal markets. The Company reached its conclusion after considering current market conditions, as well as the cumulative three-year loss position as of
December 31, 2016
.
The Company recognized income tax expense of
$17.4 million
for the year ended
December 31, 2016
, compared to
$34.1 million
for the year ended December 31, 2015
. The decrease in tax expense in the current year was primarily due to lower pre-tax income levels and an aggregate net benefit of
$2.2 million
resulting from the aforementioned valuation allowance changes. The Company’s effective tax rate for the year ended
December 31, 2016
was
30.6%
, compared to
34.1%
in
2015
. The effective tax rate for
2016
included the
$2.2 million
net benefit from the valuation allowance changes, whereas the prior-year rate included certain tax benefits, described further below, that did not recur in
2016
.
The Company recognized income tax expense of
$34.1 million
for the year ended
December 31, 2015
, compared to
$23.7 million
for the year ended December 31, 2014
. The Company’s effective tax rate for the year ended
December 31, 2015
was
34.1%
, compared to
28.4%
in
2014
. The increase in tax expense in
2015
compared to
2014
was primarily due to higher pre-tax income levels and the absence of certain tax benefits in
2014
that did not recur in
2015
, described further below. The Company’s effective tax rate for the year ended
December 31, 2015
was favorably impacted by a
$4.2 million
net tax benefit associated with tax planning strategies, partially 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. The Company’s effective tax rate for the year ended
December 31, 2014
was favorably impacted by a
$3.5 million
release of valuation allowance previously recorded against deferred tax assets in Spain, a
$1.0 million
net reduction in unrecognized tax benefits and a benefit of
$0.4 million
related to the decrease in foreign deferred tax liabilities resulting from a change in the enacted Spanish tax rate.
|
|
|
|
|
|
|
|
|
|
|
FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)
|
The following table summarizes deferred income tax assets and liabilities of the Company’s continuing operations:
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
2016
|
|
2015
|
|
Deferred tax assets:
|
|
|
|
|
Depreciation and amortization
|
$
|
11.2
|
|
|
$
|
10.9
|
|
|
Accrued expenses
|
25.9
|
|
|
27.6
|
|
|
Net operating loss, alternative minimum tax, research and development and foreign tax credit carryforwards
|
22.6
|
|
|
29.1
|
|
|
Definite lived intangibles
|
1.2
|
|
|
1.4
|
|
|
Pension benefits
|
32.9
|
|
|
33.5
|
|
|
Other
|
0.1
|
|
|
—
|
|
|
Gross deferred tax assets
|
93.9
|
|
|
102.5
|
|
|
Valuation allowance
|
(7.7
|
)
|
|
(5.9
|
)
|
|
Total deferred tax assets
|
86.2
|
|
|
96.6
|
|
|
Deferred tax liabilities:
|
|
|
|
|
Depreciation and amortization
|
(10.5
|
)
|
|
(6.6
|
)
|
|
Expenses capitalized for book
|
(1.4
|
)
|
|
(2.0
|
)
|
|
Pension benefits
|
(14.5
|
)
|
|
(14.7
|
)
|
|
Indefinite lived intangibles
|
(51.1
|
)
|
|
(52.6
|
)
|
|
Other
|
(0.2
|
)
|
|
(0.1
|
)
|
|
Gross deferred tax liabilities
|
(77.7
|
)
|
|
(76.0
|
)
|
|
Net deferred tax assets
|
$
|
8.5
|
|
|
$
|
20.6
|
|
The deferred tax asset for tax loss and tax credit carryforwards at
December 31, 2016
includes federal net operating loss carryforwards of
$3.0 million
, which begin to expire in
2027
, state net operating loss carryforwards of
$6.8 million
, which will begin to expire in
2017
, and foreign net operating loss carryforwards of
$9.2 million
, which will begin to expire in
2025
. The deferred tax asset for tax credit carryforwards includes U.S. research tax credit carryforwards of
$1.1 million
, which will begin to expire in
2019
, U.S. foreign tax credits of
$1.5 million
, which will begin to expire in
2023
, and U.S. alternative minimum tax credit carryforwards of
$1.0 million
with
no
expiration.
The deferred tax asset for tax loss and tax credit carryforwards at
December 31, 2015
, included federal net operating loss carryforwards of
$4.0 million
, state net operating loss carryforwards of
$6.8 million
, foreign net operating loss carryforwards of
$5.2 million
, U.S. research tax credit carryforwards of
$1.5 million
, U.S. foreign tax credits of
$8.3 million
, and U.S. alternative minimum tax credit carryforwards of
$3.3 million
.
In addition to a
$1.9 million
valuation allowance recorded against foreign net deferred tax assets, inclusive of the
$1.3 million
valuation allowance recorded in the U.K. during the year ended
December 31, 2016
, we continue to maintain a valuation allowance on certain state deferred tax assets that we believe, on a more likely than not basis, will not be realized. At
December 31, 2016
, the valuation allowance recorded against state net operating loss carryforwards totaled
$5.8 million
.
The
$86.2 million
of deferred tax assets at
December 31, 2016
, for which no valuation allowance is recorded, is anticipated to be realized through future taxable income or the future reversal of existing taxable temporary differences recorded as deferred tax liabilities at
December 31, 2016
. Should the Company determine that it would not be able to realize its remaining deferred tax assets in the future, an adjustment to the valuation allowance would be recorded in the period such determination is made.
Federal and state income taxes have not been provided on accumulated undistributed earnings of certain foreign subsidiaries aggregating approximately
$28.9 million
and
$28.0 million
at
December 31, 2016
and
2015
, respectively, as such undistributed earnings are considered to be indefinitely reinvested in the business. The determination of the amount of the unrecognized deferred tax liability related to the undistributed earnings is not practicable.
|
|
|
|
|
|
|
|
|
|
|
FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)
|
The following table summarizes the activity related to the Company’s unrecognized tax benefits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
2016
|
|
2015
|
|
2014
|
|
Balance at January 1
|
$
|
2.2
|
|
|
$
|
2.0
|
|
|
$
|
3.9
|
|
|
Increases related to current year tax
|
0.1
|
|
|
0.3
|
|
|
0.4
|
|
|
Increases from prior period positions
|
—
|
|
|
—
|
|
|
0.3
|
|
|
Decreases from prior period positions
|
—
|
|
|
—
|
|
|
(0.1
|
)
|
|
Decreases due to lapse of statute of limitations
|
(0.5
|
)
|
|
(0.1
|
)
|
|
(2.4
|
)
|
|
Foreign currency translation
|
—
|
|
|
—
|
|
|
(0.1
|
)
|
|
Balance at December 31
|
$
|
1.8
|
|
|
$
|
2.2
|
|
|
$
|
2.0
|
|
The Company’s continuing practice is to recognize interest and penalties related to income tax matters in income tax expense. At
December 31, 2016
and
2015
, accruals for interest and penalties amounting to
$0.6 million
and
$0.8 million
, respectively, are included in the Consolidated Balance Sheets but are not included in the table above. At
December 31, 2016
and
2015
, reserves for unrecognized tax benefits, including interest and penalties, of
$2.1 million
and
$2.5 million
, respectively, were included within Other long-term liabilities on the Consolidated Balance Sheets. At
December 31, 2016
and
2015
, unrecognized tax benefits of
$0.3 million
and
$0.5 million
, respectively, were included as a reduction of Deferred tax assets on the Consolidated Balance Sheets.
All of the unrecognized tax benefits of
$1.8 million
at
December 31, 2016
would impact our annual effective tax rate, if recognized. We do not expect any significant change to our unrecognized tax benefits as a result of potential expiration of statute of limitations and settlements with tax authorities.
We file U.S., state and foreign income tax returns in jurisdictions with varying statutes of limitations. The
2014
through
2015
tax years generally remain subject to examination by federal tax authorities, whereas the
2012
through
2015
tax years generally remain subject to examination by most state tax authorities. In significant foreign jurisdictions, the tax years from
2012
through
2015
generally remain subject to examination by their respective tax authorities.
The Company paid income taxes of
$13.3 million
in
2016
,
$9.6 million
in
2015
and
$7.2 million
in
2014
.
NOTE
9
— PENSIONS
The Company and its subsidiaries sponsor two defined benefit pension plans covering certain salaried and hourly employees. These plans have been closed to new participants for a number of years. Benefits under these plans are primarily based on final average compensation and years of service as defined within the provisions of the individual plans. As a result of plan amendments, the latest of which was in 2008, the only new benefits that were being accrued through the end of
2016
were salary increases for a limited group of participants. Those benefits ceased at the end of
2016
, at which point all existing plans became fully frozen.
The Company also participates in multi-employer pension plans that provide defined benefits to employees under U.S. collective bargaining agreements. None of these plans are considered individually significant to the Company. Contributions to these plans totaled
$0.1 million
,
$0.2 million
and
$0.2 million
for
2016
,
2015
and
2014
, respectively.
|
|
|
|
|
|
|
|
|
|
|
FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)
|
The following table summarizes net periodic pension expense for U.S. and non-U.S. benefit plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Benefit Plan
|
|
Non-U.S. Benefit Plan
|
|
(in millions)
|
2016
|
|
2015
|
|
2014
|
|
2016
|
|
2015
|
|
2014
|
|
Company-sponsored plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
0.2
|
|
|
$
|
0.2
|
|
|
$
|
0.2
|
|
|
Interest cost
|
7.8
|
|
|
7.6
|
|
|
7.9
|
|
|
1.8
|
|
|
2.1
|
|
|
2.6
|
|
|
Expected return on plan assets
|
(10.3
|
)
|
|
(10.3
|
)
|
|
(9.1
|
)
|
|
(2.4
|
)
|
|
(2.7
|
)
|
|
(3.6
|
)
|
|
Amortization of actuarial loss
|
5.6
|
|
|
6.8
|
|
|
5.1
|
|
|
0.6
|
|
|
0.7
|
|
|
0.4
|
|
|
Total Company-sponsored plans
|
3.1
|
|
|
4.1
|
|
|
3.9
|
|
|
0.2
|
|
|
0.3
|
|
|
(0.4
|
)
|
|
Multi-employer plans
|
0.1
|
|
|
0.2
|
|
|
0.2
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Net periodic pension expense
|
$
|
3.2
|
|
|
$
|
4.3
|
|
|
$
|
4.1
|
|
|
$
|
0.2
|
|
|
$
|
0.3
|
|
|
$
|
(0.4
|
)
|
The following table summarizes the weighted-average assumptions used in determining pension costs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Benefit Plan
|
|
Non-U.S. Benefit Plan
|
|
|
2016
|
|
2015
|
|
2014
|
|
2016
|
|
2015
|
|
2014
|
|
Discount rate
|
4.6
|
%
|
|
4.2
|
%
|
|
5.1
|
%
|
|
3.7
|
%
|
|
3.5
|
%
|
|
4.5
|
%
|
|
Rate of increase in compensation levels
|
—
|
|
|
3.5
|
%
|
|
3.5
|
%
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Expected long-term rate of return on plan assets
|
7.5
|
%
|
|
7.8
|
%
|
|
7.6
|
%
|
|
4.9
|
%
|
|
4.7
|
%
|
|
5.9
|
%
|
The following table summarizes the changes in the projected benefit obligation and plan assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Benefit Plan
|
|
Non-U.S. Benefit Plan
|
|
(in millions)
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
Benefit obligation, beginning of year
|
$
|
174.3
|
|
|
$
|
186.3
|
|
|
$
|
55.7
|
|
|
$
|
62.7
|
|
|
Service cost
|
—
|
|
|
—
|
|
|
0.2
|
|
|
0.2
|
|
|
Interest cost
|
7.8
|
|
|
7.6
|
|
|
1.8
|
|
|
2.1
|
|
|
Actuarial loss (gain)
|
7.7
|
|
|
(10.0
|
)
|
|
7.8
|
|
|
(2.5
|
)
|
|
Benefits and expenses paid
|
(9.2
|
)
|
|
(9.6
|
)
|
|
(4.2
|
)
|
|
(3.5
|
)
|
|
Foreign currency translation
|
—
|
|
|
—
|
|
|
(9.6
|
)
|
|
(3.3
|
)
|
|
Benefit obligation, end of year
|
$
|
180.6
|
|
|
$
|
174.3
|
|
|
$
|
51.7
|
|
|
$
|
55.7
|
|
|
Accumulated benefit obligation, end of year
|
$
|
180.6
|
|
|
$
|
173.5
|
|
|
$
|
51.7
|
|
|
$
|
55.7
|
|
The following table summarizes the weighted-average assumptions used in determining benefit obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Benefit Plan
|
|
Non-U.S. Benefit Plan
|
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
Discount rate
|
4.3
|
%
|
|
4.6
|
%
|
|
2.6
|
%
|
|
3.7
|
%
|
|
Rate of increase in compensation levels
|
—
|
|
|
3.5
|
%
|
|
—
|
|
|
—
|
|
The following summarizes the changes in the fair value of plan assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Benefit Plan
|
|
Non-U.S. Benefit Plan
|
|
(in millions)
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
Fair value of plan assets, beginning of year
|
$
|
128.1
|
|
|
$
|
134.0
|
|
|
$
|
54.3
|
|
|
$
|
59.0
|
|
|
Actual return on plan assets
(a)
|
6.6
|
|
|
(3.3
|
)
|
|
6.2
|
|
|
0.8
|
|
|
Company contribution
|
5.6
|
|
|
7.0
|
|
|
1.3
|
|
|
1.1
|
|
|
Benefits and expenses paid
|
(9.2
|
)
|
|
(9.6
|
)
|
|
(4.2
|
)
|
|
(3.5
|
)
|
|
Foreign currency translation
|
—
|
|
|
—
|
|
|
(9.1
|
)
|
|
(3.1
|
)
|
|
Fair value of plan assets, end of year
|
$
|
131.1
|
|
|
$
|
128.1
|
|
|
$
|
48.5
|
|
|
$
|
54.3
|
|
|
|
|
|
(a)
|
Actual return on plan assets of the U.S. benefit plan for the years ended
December 31, 2016
and
2015
, was net of fees, commissions and other expenses paid from plan assets of
$1.9 million
and
$1.5 million
, respectively.
|
|
|
|
|
|
|
|
|
|
|
|
FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)
|
As more fully described within Note
17
– Fair Value Measurements, the Company uses a three-level fair value hierarchy that prioritizes the inputs used to measure fair value.
Following is a description of the valuation methodologies used for assets measured at fair value for the U.S. benefit plan:
|
|
|
|
•
|
Cash and cash equivalents are comprised of cash on deposit and a money market fund, that invests principally in short-term instruments. The money-market fund is valued at the net asset value (“NAV”) of the shares in the fund.
|
|
|
|
|
•
|
Equity investments represent domestic and foreign securities, including common stock, which are publicly traded on active exchanges and are valued based on quoted market prices. Certain equity securities, which are valued using a model that takes the underlying security’s
“
best
”
price, divides it by the applicable exchange rate and multiplies the result by a depository receipt factor, are categorized within Level 2 of the fair value hierarchy.
|
|
|
|
|
•
|
Fixed income investments include corporate bonds, asset-backed securities and treasury bonds. Corporate bonds are valued using pricing models that include bids provided by brokers or dealers, benchmark yields, base spreads and reported trades. Asset-backed securities are valued using models with readily observable data as inputs. Treasury bonds are valued based on quoted market prices in active markets.
|
|
|
|
|
•
|
Mutual funds are valued at the NAV, based on quoted market prices in active markets, of shares held by the plan at year end.
|
|
|
|
|
•
|
Real estate investments include public real estate investment trusts (“REIT”) and exchange traded REIT funds, which are publicly traded on active exchanges and are valued based on quoted market prices.
|
Following is a description of the valuation methodologies used for assets measured at fair value for the non-U.S. benefit plan:
|
|
|
|
•
|
Equity investments represent domestic and foreign securities, which are publicly traded on active exchanges and are valued based on quoted market prices. The inputs used to value certain other non-U.S. investments in equity securities both in the U.K. and other overseas markets are based on observable market information consistent with Level 2 of the fair value hierarchy inputs.
|
|
|
|
|
•
|
Fixed income investments include treasury securities, which are valued based on quoted market prices in active markets, and corporate bonds which are either valued based on quoted market prices in active markets or other readily observable market data.
|
The methods described above may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. Furthermore, while the Company believes its valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different fair value measurement at the reporting date.
|
|
|
|
|
|
|
|
|
|
|
FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)
|
The following summarizes the Company’s pension assets in a three-tier fair value hierarchy for its benefit plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U. S. Benefit Plan
|
|
|
2016
|
|
2015
|
|
(in millions)
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
Cash and cash equivalents
|
$
|
5.7
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
5.7
|
|
|
$
|
6.8
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
6.8
|
|
|
Equity securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Large Cap
|
36.4
|
|
|
0.1
|
|
|
—
|
|
|
36.5
|
|
|
37.7
|
|
|
0.1
|
|
|
—
|
|
|
37.8
|
|
|
U.S. Small and Mid Cap
|
16.9
|
|
|
—
|
|
|
—
|
|
|
16.9
|
|
|
18.0
|
|
|
—
|
|
|
—
|
|
|
18.0
|
|
|
Developed international
|
8.6
|
|
|
7.7
|
|
|
—
|
|
|
16.3
|
|
|
12.8
|
|
|
6.9
|
|
|
—
|
|
|
19.7
|
|
|
Emerging markets
|
11.9
|
|
|
0.5
|
|
|
—
|
|
|
12.4
|
|
|
6.9
|
|
|
—
|
|
|
—
|
|
|
6.9
|
|
|
Fixed income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government securities
|
7.1
|
|
|
—
|
|
|
—
|
|
|
7.1
|
|
|
2.7
|
|
|
0.3
|
|
|
—
|
|
|
3.0
|
|
|
Asset-backed securities
|
—
|
|
|
9.9
|
|
|
—
|
|
|
9.9
|
|
|
—
|
|
|
7.7
|
|
|
—
|
|
|
7.7
|
|
|
Corporate bonds
|
—
|
|
|
14.9
|
|
|
—
|
|
|
14.9
|
|
|
—
|
|
|
13.1
|
|
|
—
|
|
|
13.1
|
|
|
Mutual funds
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
0.7
|
|
|
—
|
|
|
—
|
|
|
0.7
|
|
|
Other investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mutual funds
|
5.6
|
|
|
—
|
|
|
—
|
|
|
5.6
|
|
|
10.5
|
|
|
—
|
|
|
—
|
|
|
10.5
|
|
|
Real estate
|
5.4
|
|
|
—
|
|
|
—
|
|
|
5.4
|
|
|
4.0
|
|
|
—
|
|
|
—
|
|
|
4.0
|
|
|
Total assets at fair value
(a)
|
$
|
97.6
|
|
|
$
|
33.1
|
|
|
$
|
—
|
|
|
$
|
130.7
|
|
|
$
|
100.1
|
|
|
$
|
28.1
|
|
|
$
|
—
|
|
|
$
|
128.2
|
|
|
|
|
|
(a)
|
Total assets at fair value in the table above exclude a net receivable of
$0.4 million
and a net payable of
$0.1 million
at
December 31, 2016
and
2015
, respectively.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-U. S. Benefit Plan
|
|
|
2016
|
|
2015
|
|
(in millions)
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
Cash
|
$
|
0.4
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
0.4
|
|
|
$
|
9.2
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
9.2
|
|
|
Equity securities
|
—
|
|
|
41.9
|
|
|
—
|
|
|
41.9
|
|
|
5.3
|
|
|
34.8
|
|
|
—
|
|
|
40.1
|
|
|
Fixed income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government securities
|
1.3
|
|
|
—
|
|
|
—
|
|
|
1.3
|
|
|
2.7
|
|
|
—
|
|
|
—
|
|
|
2.7
|
|
|
Corporate bonds
|
2.6
|
|
|
2.3
|
|
|
—
|
|
|
4.9
|
|
|
1.5
|
|
|
0.8
|
|
|
—
|
|
|
2.3
|
|
|
Total assets at fair value
|
$
|
4.3
|
|
|
$
|
44.2
|
|
|
$
|
—
|
|
|
$
|
48.5
|
|
|
$
|
18.7
|
|
|
$
|
35.6
|
|
|
$
|
—
|
|
|
$
|
54.3
|
|
The Company maintains a structured derisking investment strategy for the U.S. pension plan to improve alignment of assets and liabilities that includes: (i) maintaining a diversified portfolio that can provide a near-term weighted-average target return of approximately
7.1%
or more, (ii) maintaining liquidity to meet obligations and (iii) prudently managing administrative and management costs. The target asset allocations for the U.S. pension plan are (i) between
45%
and
75%
equity securities, (ii) between
15%
and
40%
fixed income securities and (iii) between
0%
and
20%
in other investments, with the remainder represented by cash and cash equivalents. Other investments may include real estate investments and mutual funds investing in real estate, commodities or hedge funds.
Plan assets for the non-U.S. benefit plans consist principally of a diversified portfolio of equity securities, U.K. government securities, corporate bonds and debt securities. The target asset allocations for the non-U.S. benefit plan assets are between
70%
and
80%
equity securities and between
20%
and
30%
debt securities.
During the year ended
December 31, 2015
, the Company repurchased all of the remaining
0.2 million
shares of its common stock from its U.S. benefit plan for a total cost of
$3.6 million
. The repurchases were made under authorized stock repurchase programs further outlined in Note
14
– Stockholders’ Equity. Dividends paid on the Company’s common stock held in the U.S. benefit plan did not exceed
$0.1 million
in each of the years ended
December 31, 2015
and
2014
.
|
|
|
|
|
|
|
|
|
|
|
FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)
|
The following summarizes the funded status of the Company-sponsored plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Benefit Plan
|
|
Non-U.S. Benefit Plan
|
|
(in millions)
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
Fair value of plan assets, end of year
|
$
|
131.1
|
|
|
$
|
128.1
|
|
|
$
|
48.5
|
|
|
$
|
54.3
|
|
|
Benefit obligation, end of year
|
180.6
|
|
|
174.3
|
|
|
51.7
|
|
|
55.7
|
|
|
Funded status, end of year
|
$
|
(49.5
|
)
|
|
$
|
(46.2
|
)
|
|
$
|
(3.2
|
)
|
|
$
|
(1.4
|
)
|
The following summarizes the amounts recognized within our Consolidated Balance Sheets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Benefit Plan
|
|
Non-U.S. Benefit Plan
|
|
(in millions)
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
Amounts recognized in Total liabilities include:
|
|
|
|
|
|
|
|
|
Long-term pension and other post-retirement benefit liabilities
|
$
|
49.5
|
|
|
$
|
46.2
|
|
|
$
|
3.2
|
|
|
$
|
1.4
|
|
|
Net liability recorded
|
$
|
49.5
|
|
|
$
|
46.2
|
|
|
$
|
3.2
|
|
|
$
|
1.4
|
|
|
Amounts recognized in Accumulated other comprehensive loss include:
|
|
|
|
|
|
|
|
|
Net actuarial loss
|
$
|
84.1
|
|
|
$
|
78.2
|
|
|
$
|
18.8
|
|
|
$
|
18.7
|
|
|
Net amount recognized, pre-tax
|
$
|
84.1
|
|
|
$
|
78.2
|
|
|
$
|
18.8
|
|
|
$
|
18.7
|
|
As a result of the U.S. benefit plan becoming fully frozen at the end of
2016
, all plan participants are now considered to be inactive. Effective in
2017
, the actuarial loss associated with the U.S. benefit plan that is included in Accumulated other comprehensive loss will be amortized into net periodic benefit cost over the remaining average life expectancy of plan participants, as opposed to over the remaining average service period. The same methodology has previously been applied to the U.K. benefit plan, which has been fully frozen for a number of years. The Company expects
$3.2 million
of the net actuarial loss to be amortized from Accumulated other comprehensive loss into net periodic benefit cost in
2017
.
The Company expects to contribute up to
$5.0 million
to the U.S. benefit plan and up to
$1.3 million
to the non-U.S. benefit plan in
2017
. Future contributions to the plans will be based on such factors as annual service cost, the financial return on plan assets, interest rate movements that affect discount rates applied to plan liabilities and the value of benefit payments made.
The following summarizes the benefits expected to be paid under the Company’s defined benefit plans in each of the next five years, and in aggregate for the five years thereafter:
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
U.S. Benefit Plan
|
|
Non-U.S. Benefit Plan
|
|
2017
|
$
|
9.0
|
|
|
$
|
2.4
|
|
|
2018
|
9.0
|
|
|
2.5
|
|
|
2019
|
9.1
|
|
|
2.6
|
|
|
2020
|
9.7
|
|
|
2.7
|
|
|
2021
|
10.1
|
|
|
2.8
|
|
|
2022-2026
|
55.4
|
|
|
15.7
|
|
The Company also sponsors a defined contribution retirement plan covering a majority of its employees. Participation is via automatic enrollment and employees may elect to opt out of the plan. Company contributions to the plan are based on employee age and years of service, as well as the percentage of employee contributions. The cost of these plans was
$6.9 million
in
2016
,
$7.5 million
in
2015
and
$7.1 million
in
2014
.
Prior to September 30, 2003, the Company also provided medical benefits to certain eligible retired employees. These benefits are funded when the claims are incurred. Participants generally became eligible for these benefits at age
60
after completing at least
15
years of service. The plan provided for the payment of specified percentages of medical expenses reduced by any deductible and payments made by other primary group coverage and government programs. Effective September 30, 2003, the Company amended the retiree medical plan and effectively canceled coverage for all eligible active employees except for retirees and a limited group that qualified under a formula based on age and years of service. Accumulated post-retirement benefit liabilities of
$0.4 million
and
$0.5 million
at
December 31, 2016
and
2015
, respectively, were fully accrued. The net periodic post-retirement benefit costs have not been significant during the three-year period ended
December 31, 2016
.
|
|
|
|
|
|
|
|
|
|
|
FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)
|
NOTE
10
— COMMITMENTS AND CONTINGENCIES
Financial Commitments
The Company provides indemnifications and other guarantees in the ordinary course of business, the terms of which range in duration and often are not explicitly defined. Specifically, the Company is occasionally required to provide letters of credit and bid and performance bonds to various customers, principally to act as security for retention levels related to casualty insurance policies and to guarantee the performance of subsidiaries that engage in export and domestic transactions. At
December 31, 2016
, the Company had outstanding performance and financial standby letters of credit, as well as outstanding bid and performance bonds, aggregating
$21.5 million
. If any such letters of credit or bonds are called, the Company would be obligated to reimburse the issuer of the letter of credit or bond. The Company believes the likelihood of any currently outstanding letter of credit or bond being called is remote.
In addition, prior to the
June 3, 2016
acquisition date, JJE entered into certain transactions involving the sale of equipment to certain of its customers which included (i) guarantees to repurchase the equipment for a fixed price at a future date and (ii) guarantees to repurchase the equipment from the third-party lender in the event of default by the customer. As of
December 31, 2016
, the single year and maximum potential cash payments the Company could be required to make to repurchase equipment under these agreements were
$1.6 million
and
$3.4 million
, respectively. The Company’s risk under these repurchase arrangements would be partially mitigated by the value of the products repurchased as part of the transaction. In addition, the former owners of JJE have agreed to reimburse the Company for certain losses incurred resulting from the requirement to repurchase any such equipment. Any such reimbursement could be withheld from the C
$8.0 million
deferred payment to be made on the third anniversary of the acquisition date. In the preliminary purchase price allocation, described further in Note
2
– Acquisitions, the Company has included an immaterial accrual for potential losses related to the repurchase exposures associated with JJE’s historical practices. The Company’s repurchase accrual represents the expected losses that could result from obligations to repurchase products, after giving effect to proceeds anticipated to be received from the resale of those products to alternative customers, as well as to the reimbursement of any losses incurred. The Company has recorded its estimated net liability associated with losses from these guarantee and repurchase obligations on its Consolidated Balance Sheets based on historical experience and current facts and circumstances. Historical cash requirements and losses associated with these obligations have not been significant, but could increase if customer defaults exceed current expectations.
For certain independent Environmental Solutions Group dealers that purchase products financed by a third-party lender (the “Lender”), the Company had also previously provided a limited repurchase agreement to the Lender. In the event of a default by the applicable dealer and ultimate repossession of the underlying products by the Lender, the Company would have been obligated to repurchase those products from the Lender. The arrangement was subject to a maximum repurchase amount and the Company’s repurchase obligation was generally limited to products purchased by the dealer, and financed by the Lender, for a period of one year. The Company’s risk under the repurchase arrangement would be partially mitigated by the value of the products repurchased under the agreement. The Company and the Lender executed an amendment to the agreement which removed the Company’s repurchase obligation effective
January 1, 2016
, such that, as of
December 31, 2016
, the Company no longer has any repurchase obligation under the agreement.
Product Warranties
The Company issues product performance warranties to customers with the sale of its products. The specific terms and conditions of these warranties vary depending upon the product sold and country in which the Company does business, with warranty periods generally ranging from
one
to
five
years. The Company estimates the costs that may be incurred under its basic limited warranty and records a liability in the amount of such costs at the time the sale of the related product is recognized. Factors that affect the Company’s warranty liability include (i) the number of units under warranty from time to time, (ii) historical and anticipated rates of warranty claims and (iii) costs per claim. The Company periodically assesses the adequacy of its recorded warranty liabilities and adjusts the amounts as necessary.
The following table summarizes the changes in the Company’s warranty liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
2016
|
|
2015
|
|
Balance at January 1
|
$
|
7.4
|
|
|
$
|
7.7
|
|
|
Provisions to expense
|
5.5
|
|
|
5.9
|
|
|
Actual costs incurred
|
(6.5
|
)
|
|
(6.2
|
)
|
|
Balance at December 31
|
$
|
6.4
|
|
|
$
|
7.4
|
|
|
|
|
|
|
|
|
|
|
|
|
FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)
|
Environmental Liabilities
Reserves of
$0.6 million
and
$0.9 million
related to the environmental remediation of the Pearland, Texas facility are included in liabilities of discontinued operations on the Consolidated Balance Sheets at
December 31, 2016
and
2015
, respectively. The facility was previously used by the Company’s discontinued Pauluhn business and manufactured marine, offshore and industrial lighting products. The Company sold the facility in May 2012 and it is probable that the site will require remediation. The recorded reserves are based on an undiscounted estimate of the range of costs to remediate the site, depending upon the remediation approach and other factors. The Company’s estimate may change in the near term as more information becomes available; however, the costs are not expected to have a material adverse effect on the Company’s results of operations, financial position or cash flow.
NOTE
11
— LEGAL PROCEEDINGS
The Company is subject to various claims, including pending and possible legal actions for product liability and other damages, and other matters arising in the ordinary course of the Company’s business. On a quarterly basis, the Company reviews uninsured material legal claims against the Company and accrues for the costs of such claims as appropriate in the exercise of management’s best judgment and experience. However, due to a lack of factual information available to the Company about a claim, or the procedural stage of a claim, it may not be possible for the Company to reasonably assess either the probability of a favorable or unfavorable outcome of the claim or to reasonably estimate the amount of loss should there be an unfavorable outcome. Therefore, for many claims, the Company cannot reasonably estimate a range of loss.
The Company believes, based on current knowledge and after consultation with counsel, that the outcome of such claims and actions will not have a material adverse effect on the Company’s results of operations or financial condition. However, in the event of unexpected future developments, it is possible that the ultimate resolution of such matters, if unfavorable, could have a material adverse effect on the Company’s results of operations, financial condition or cash flow.
Hearing Loss Litigation
The Company has been sued for monetary damages by firefighters who claim that exposure to the Company’s sirens has impaired their hearing and that the sirens are therefore defective. There were
33
cases filed during the period of 1999 through 2004, involving a total of
2,443
plaintiffs, in the Circuit Court of Cook County, Illinois. These cases involved more than
1,800
firefighter plaintiffs from locations outside of Chicago. In 2009,
six
additional cases were filed in Cook County, involving
299
Pennsylvania firefighter plaintiffs. During 2013, another case was filed in Cook County involving
74
Pennsylvania firefighter plaintiffs.
The trial of the first
27
of these plaintiffs’ claims occurred in 2008, whereby a Cook County jury returned a unanimous verdict in favor of the Company.
An additional
40
Chicago firefighter plaintiffs were selected for trial in 2009. Plaintiffs’ counsel later moved to reduce the number of plaintiffs from
40
to
nine
. The trial for these
nine
plaintiffs concluded with a verdict against the Company and for the plaintiffs in varying amounts totaling
$0.4 million
. The Company appealed this verdict. On September 13, 2012, the Illinois Appellate Court rejected this appeal. The Company thereafter filed a petition for rehearing with the Illinois Appellate Court, which was denied on February 7, 2013. The Company sought further review by filing a petition for leave to appeal with the Illinois Supreme Court on March 14, 2013. On May 29, 2013, the Illinois Supreme Court issued a summary order declining to accept review of this case. On July 1, 2013, the Company satisfied the judgments entered for these plaintiffs, which has resulted in final dismissal of these cases.
A third consolidated trial involving
eight
Chicago firefighter plaintiffs occurred during November 2011. The jury returned a unanimous verdict in favor of the Company at the conclusion of this trial.
Following this trial, on March 12, 2012 the trial court entered an order certifying a class of the remaining Chicago Fire Department firefighter plaintiffs for trial on the sole issue of whether the Company’s sirens were defective and unreasonably dangerous. The Company petitioned the Illinois Appellate Court for interlocutory appeal of this ruling. On May 17, 2012, the Illinois Appellate Court accepted the Company’s petition. On June 8, 2012, plaintiffs moved to dismiss the appeal, agreeing with the Company that the trial court had erred in certifying a class action trial in this matter. Pursuant to plaintiffs’ motion, the Illinois Appellate Court reversed the trial court’s certification order.
|
|
|
|
|
|
|
|
|
|
|
FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)
|
Thereafter, the trial court scheduled a fourth consolidated trial involving
three
firefighter plaintiffs, which began in December 2012. Prior to the start of this trial, the claims of
two
of the
three
firefighter plaintiffs were dismissed. On December 17, 2012, the jury entered a complete defense verdict for the Company.
Following this defense verdict, plaintiffs again moved to certify a class of Chicago Fire Department plaintiffs for trial on the sole issue of whether the Company’s sirens were defective and unreasonably dangerous. Over the Company’s objection, the trial court granted plaintiffs’ motion for class certification on March 11, 2013 and scheduled a class action trial to begin on June 10, 2013. The Company filed a petition for review with the Illinois Appellate Court on March 29, 2013 seeking reversal of the class certification order.
On June 25, 2014, a unanimous three-judge panel of the First District Illinois Appellate Court issued its opinion reversing the class certification order of the trial court. Specifically, the Appellate Court determined that the trial court’s ruling failed to satisfy the class-action requirements that the common issues of the firefighters’ claims predominate over the individual issues and that there is an adequate representative for the class. During a status hearing on October 8, 2014, plaintiffs represented to the Court that they would again seek to certify a class of firefighters on the issue of whether the Company’s sirens were defective and unreasonably dangerous. On January 12, 2015, plaintiffs filed motions to amend their complaints to add class action allegations with respect to Chicago firefighter plaintiffs as well as the approximately
1,800
firefighter plaintiffs from locations outside of Chicago. On March 11, 2015, the trial court granted plaintiff’s motions to amend their complaints. Plaintiffs have indicated that they will now file motions to certify classes in these cases. On April 24, 2015, the cases were transferred to Cook County chancery court, which will decide all class certification issues. The Company intends to continue its objections to any attempt at certification. The Company has also filed motions to dismiss cases involving firefighters who worked for fire departments located outside of the state of Illinois based on improper venue. On February 24, 2017, the Circuit Court of Cook County entered orders dismissing the cases of
1,770
such firefighter plaintiffs from the jurisdiction of the state of Illinois.
The Company has also been sued on this issue outside of the Cook County, Illinois venue. Many of these cases have involved lawsuits filed by a single attorney in the Court of Common Pleas, Philadelphia County, Pennsylvania. During 2007 and through 2009, this attorney filed a total of
71
lawsuits involving
71
plaintiffs in this jurisdiction.
Three
of these cases were dismissed pursuant to pretrial motions filed by the Company. Another case was voluntarily dismissed. Prior to trial in
four
cases, the Company paid nominal sums to obtain dismissals.
Three
trials occurred in Philadelphia involving these cases filed in 2007 through 2009. The first trial involving one of these plaintiffs occurred in 2010, when the jury returned a verdict for the plaintiff. In particular, the jury found that the Company’s siren was not defectively designed, but that the Company negligently constructed the siren. The jury awarded damages in the amount of
$0.1 million
, which was subsequently reduced to
$0.08 million
. The Company appealed this verdict. Another trial, involving
nine
Philadelphia firefighter plaintiffs, also occurred in 2010 when the jury returned a defense verdict for the Company as to all claims and all plaintiffs involved in that trial. The third trial, also involving
nine
Philadelphia firefighter plaintiffs, was completed during 2010 when the jury returned a defense verdict for the Company as to all claims and all plaintiffs involved in that trial.
Following defense verdicts in the last
two
Philadelphia trials, the Company negotiated settlements with respect to all remaining filed cases in Philadelphia at that time, as well as other firefighter claimants represented by the attorney who filed the Philadelphia cases. On January 4, 2011, the Company entered into a Global Settlement Agreement (the “Settlement Agreement”) with the law firm of the attorney representing the Philadelphia claimants, on behalf of
1,125
claimants the firm represented (the “Claimants”) and who had asserted product claims against the Company (the “Claims”).
Three hundred eight
of the Claimants had lawsuits pending against the Company in Cook County, Illinois.
The Settlement Agreement, as amended, provided that the Company pay a total amount of
$3.8 million
(the “Settlement Payment”) to settle the Claims (including the costs, fees and other expenses of the law firm in connection with its representation of the Claimants), subject to certain terms, conditions and procedures set forth in the Settlement Agreement. In order for the Company to be required to make the Settlement Payment: (i) each Claimant who agreed to settle his or her claims had to sign a release acceptable to the Company (a “Release”), (ii) each Claimant who agreed to the settlement and who was a plaintiff in a lawsuit, had to dismiss his or her lawsuit with prejudice, (iii) by April 29, 2011, at least
93%
of the Claimants identified in the Settlement Agreement must have agreed to settle their claims and provide a signed Release to the Company and (iv) the law firm had to withdraw from representing any Claimants who did not agree to the settlement, including those who filed lawsuits. If the conditions to the settlement were met, but less than
100%
of the Claimants agreed to settle their Claims and sign a Release, the Settlement Payment would be reduced by the percentage of Claimants who did not agree to the settlement.
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FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)
|
On April 22, 2011, the Company confirmed that the terms and conditions of the Settlement Agreement had been met and made a payment of
$3.6 million
to conclude the settlement. The amount was based upon the Company’s receipt of
1,069
signed releases provided by Claimants, which was
95.02%
of all Claimants identified in the Settlement Agreement.
The Company generally denies the allegations made in the claims and lawsuits by the Claimants and denies that its products caused any injuries to the Claimants. Nonetheless, the Company entered into the Settlement Agreement for the purpose of minimizing its expenses, including legal fees, and avoiding the inconvenience, uncertainty and distraction of the claims and lawsuits.
During April through October 2012,
20
new cases were filed in the Court of Common Pleas, Philadelphia County, Pennsylvania. These cases were filed on behalf of
20
Philadelphia firefighters and involve various defendants in addition to the Company.
Five
of these cases were subsequently dismissed. The first trial involving these 2012 Philadelphia cases occurred during December 2014 and involved
three
firefighter plaintiffs. The jury returned a verdict in favor of the Company. Following this trial, all of the parties agreed to settle cases involving
seven
firefighter plaintiffs set for trial during January 2015 for nominal amounts per plaintiff. In January 2015, plaintiffs’ attorneys filed
two
new complaints in the Court of Common Pleas, Philadelphia, Pennsylvania on behalf of approximately
70
additional firefighter plaintiffs. The vast majority of the firefighters identified in these complaints are located outside of Pennsylvania. One of the complaints in these cases, which involves
11
firefighter plaintiffs from the District of Columbia, was removed to federal court in the Eastern District of Pennsylvania. Plaintiffs voluntarily dismissed all claims in this case on May 31, 2016. The Company has moved to recover various fees and costs in this case, asserting that plaintiffs’ counsel failed to properly investigate these claims prior to filing suit. With respect to claims of other out-of-state firefighters involved in these two cases, the Company moved to dismiss these claims as improperly filed in Pennsylvania. The Court granted this motion and dismissed these claims on November 5, 2015. During August through December 2015, another
nine
new cases were filed in the Court of Common Pleas, Philadelphia County, Pennsylvania. These cases involve a total of
193
firefighters, most of whom are located outside of Pennsylvania. The Company again moved to dismiss all claims filed by out-of-state firefighters in these cases as improperly filed in Pennsylvania. On May 24, 2016, the Court granted this motion and dismissed these claims. Plaintiffs have filed a notice of appeal regarding this decision. On May 13, 2016,
four
new cases were filed in Philadelphia state court, involving a total of
55
Philadelphia firefighters who live in Pennsylvania. During August 2016, the Company settled a case involving
four
Philadelphia firefighters that had been set for trial in Philadelphia state court during September 2016.
During April through July 2013, additional cases were filed in Allegheny County, Pennsylvania. These cases involve
247
plaintiff firefighters from Pittsburgh and various defendants, including the Company. During May 2016,
two
additional cases were filed against the Company in Allegheny County involving
19
Pittsburgh firefighters. After the Company filed pretrial motions, the Court dismissed claims of
55
Pittsburgh firefighter plaintiffs. The Court scheduled the first trials of these Pittsburgh firefighters to occur in May, September and November 2016. On April 14, 2016, the Court granted the Company’s motion for summary judgment regarding strict liability claims asserted by all plaintiff firefighters involved in the first trial scheduled for May 2016. Subsequently, the Court also dismissed all remaining negligence claims asserted by these firefighters. The next trial involving
six
Pittsburgh firefighters started on November 7, 2016. Shortly after this trial began, plaintiffs’ counsel moved for a mistrial because a key witness suddenly became unavailable. The Court granted this motion and rescheduled this trial for March 6, 2017. During January 2017, plaintiffs also moved to consolidate and bifurcate trials involving Pittsburgh firefighters. In particular, plaintiffs seek one trial involving liability issues which will apply to all Pittsburgh firefighters who have filed suit against the Company. The Company intends to oppose this motion. During March 2014, an action also was brought in the Court of Common Pleas of Erie County, Pennsylvania on behalf of
61
firefighters. This case likewise involves various defendants in addition to the Company. After the Company filed pretrial motions,
33
Erie County firefighter plaintiffs voluntarily dismissed their claims.
On September 17, 2014,
20
lawsuits, involving a total of
193
Buffalo Fire Department firefighters, were filed in the Supreme Court of the State of New York, Erie County. Several product manufacturers, including the Company, have been named as defendants in these cases. All of the cases filed in Erie County, New York have been removed to federal court in the Western District of New York. During February 2015, a lawsuit involving
one
New York City firefighter plaintiff was filed in the Supreme Court of the State of New York, New York County. The plaintiff named the Company as well as several other parties as defendants. That case has been transferred to federal court in the Northern District of New York. Plaintiffs agreed to voluntarily dismiss this case during May 2016. The Company also is aware that a lawsuit involving
eight
New York City firefighters was filed in New York County, New York, on April 24, 2015. The Company has not yet been served in that case. During November 2015 through January 2016,
28
new cases involving a total of
227
firefighters were filed in various counties in the New York City area. During December 2016, an additional case, involved
11
New York firefighters, was filed in New York County state court. A total of
451
firefighters are currently involved in cases filed in the state of New York.
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FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)
|
During November 2015, the Company was served with a complaint filed in Union County, New Jersey state court, involving
34
New Jersey firefighters. This case has been transferred to federal court in the District of New Jersey. During the period from January through May 2016,
eight
additional cases were filed in various New Jersey state courts. Most of the firefighters in these cases reside in New Jersey and work or worked at New Jersey fire departments. During December 2016, a case involving one New Jersey firefighter was filed in the United States District Court of New Jersey. A total of
105
firefighters are currently involved in cases filed in New Jersey.
During May through October 2016,
nine
cases were filed in Suffolk County, Massachusetts state court, naming the Company as a defendant. These cases involve
194
firefighters who lived and worked in the Boston area.
From 2007 through 2009, firefighters also brought hearing loss claims against the Company in New Jersey, Missouri, Maryland and Kings County, New York. All of those cases, however, were dismissed prior to trial, including
four
cases in the Supreme Court of Kings County, New York that were dismissed upon the Company’s motion in 2008. On appeal, the New York appellate court affirmed the trial court’s dismissal of these cases. Plaintiffs’ attorneys have threatened to file additional lawsuits. The Company intends to vigorously defend all of these lawsuits, if filed.
The Company’s ongoing negotiations with its insurer, CNA, over insurance coverage on these claims have resulted in reimbursements of a portion of the Company’s defense costs. These reimbursements are recorded as a reduction of corporate operating expenses. For the
years ended December 31, 2016, 2015 and 2014
, the Company recorded reimbursements from CNA of
$0.2 million
,
$0.3 million
, and
$0.3 million
, respectively, related to legal costs, respectively.
Latvian Commercial Dispute
On June 12, 2014, a Latvian trial court issued a summary ruling against the Company’s former Bronto subsidiary in a lawsuit relating to a commercial dispute. The dispute involves a transaction for the 2008 sale of
three
Bronto units that were purchased by a financing company for lease to a Latvian fire department. The lessor and the Latvian fire department sought to rescind the contract after delivery, despite the fact that an independent third party, selected by the lessor, had certified that the vehicles satisfied the terms of the contract. The adverse judgment required Bronto to refund the purchase price and pay interest and attorneys’ fees. The trial court denied the lessor’s claim against Bronto for alleged damages relating to lost lease income.
Believing that the claims against Bronto were invalid and that Bronto fully satisfied the terms of the subject contract, on July 10, 2014, the Company filed an appeal with the Civil Chamber of the Supreme Court of Latvia seeking a reversal of the trial court’s ruling.
At
December 31, 2015
, the Company had not accrued any liability within its consolidated financial statements for this lawsuit. In evaluating whether a charge to record a reserve was previously necessary, the Company analyzed all of the available information, including the legal reasoning applied by the judge of the trial court in reaching its decision. Based on the Company’s analysis, and consultations with external counsel, the Company assessed the likelihood of a successful appeal to be more likely than not and therefore did not believe that a probable loss had been incurred.
In connection with the sale of Bronto to Morita Holdings Corporation (“Morita”), discussed further in Note
18
– Discontinued Operations, the Company and Morita agreed that the Company would remain in control of negotiations and proceedings relating to the appeal and fund the legal costs associated therewith. The Company also agreed to compensate Morita for
50%
of any liability resulting from a final and non-appealable decision of a court of competent jurisdiction, net of any actual income tax benefit to Bronto as a result of the judgment, and less
50%
of legal fees incurred by the Company, relating to the defense of this matter, subsequent to the
January 29, 2016
closing date of the sale.
In April 2016, the Civil Chamber of the Supreme Court of Latvia heard the Company’s appeal and upheld the trial court’s ruling against Bronto. As the Company’s appeal of the trial judgment was unsuccessful, a charge of
$1.3 million
was recorded as a component of
Gain (loss) from discontinued operations and disposal, net of tax
in
the year ended December 31, 2016
, to reflect the Company’s share of the liability. The Company has decided not to further appeal the Supreme Court’s ruling and expects to settle the aforementioned liability with Morita during the first quarter of 2017.
NOTE
12
— EARNINGS PER SHARE
The Company computes earnings per share (“EPS”) in accordance with ASC 260,
Earnings per Share
, which requires that non-vested restricted stock containing non-forfeitable dividend rights should be treated as participating securities pursuant to the two-class method. Under the two-class method, net income is reduced by the amount of dividends declared in the period for common stock and participating securities. The remaining undistributed earnings are then allocated to common stock and
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FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)
|
participating securities as if all of the net income for the period had been distributed. The amounts of distributed and undistributed earnings allocated to participating securities for the
years ended December 31, 2016, 2015 and 2014
were insignificant and did not materially impact the calculation of basic or diluted EPS.
Basic EPS is computed by dividing income or loss available to common stockholders by the weighted average number of shares of common stock outstanding for the year.
Diluted EPS is computed using the weighted average number of shares of common stock and non-vested restricted stock awards outstanding for the year, plus the effect of dilutive potential common shares outstanding during the year. The dilutive effect of common stock equivalents is determined using the more dilutive of the two-class method or alternative methods. We use the treasury stock method to determine the potentially dilutive impact of our employee stock options and restricted stock units, and the contingently issuable method for our performance-based restricted stock unit awards.
For the years ended December 31, 2016, 2015 and 2014
, options to purchase
1.3 million
,
0.8 million
and
0.5 million
shares of the Company’s common stock, respectively, had an anti-dilutive effect on EPS, and accordingly, are excluded from the calculation of diluted EPS.
The following table reconciles net income to basic and diluted EPS:
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions, except per share data)
|
2016
|
|
2015
|
|
2014
|
|
Income from continuing operations
|
$
|
39.4
|
|
|
$
|
65.8
|
|
|
$
|
59.7
|
|
|
Gain (loss) from discontinued operations and disposal, net of tax
|
4.4
|
|
|
(2.3
|
)
|
|
4.0
|
|
|
Net income
|
$
|
43.8
|
|
|
$
|
63.5
|
|
|
$
|
63.7
|
|
|
Weighted average shares outstanding — Basic
|
60.4
|
|
|
62.2
|
|
|
62.7
|
|
|
Dilutive effect of common stock equivalents
|
0.8
|
|
|
1.2
|
|
|
0.9
|
|
|
Weighted average shares outstanding — Diluted
|
61.2
|
|
|
63.4
|
|
|
63.6
|
|
|
Basic earnings per share:
|
|
|
|
|
|
|
Earnings from continuing operations
|
$
|
0.65
|
|
|
$
|
1.06
|
|
|
$
|
0.95
|
|
|
Earnings (loss) from discontinued operations and disposal, net of tax
|
0.07
|
|
|
(0.04
|
)
|
|
0.06
|
|
|
Net earnings per share
|
$
|
0.72
|
|
|
$
|
1.02
|
|
|
$
|
1.01
|
|
|
Diluted earnings per share:
|
|
|
|
|
|
|
Earnings from continuing operations
|
$
|
0.64
|
|
|
$
|
1.04
|
|
|
$
|
0.94
|
|
|
Earnings (loss) from discontinued operations and disposal, net of tax
|
0.07
|
|
|
(0.04
|
)
|
|
0.06
|
|
|
Net earnings per share
|
$
|
0.71
|
|
|
$
|
1.00
|
|
|
$
|
1.00
|
|
NOTE
13
— STOCK-BASED COMPENSATION
The Company’s stock compensation plan, approved by the Company’s stockholders and administered by the Compensation and Benefits Committee of the Board of Directors of the Company (the “CBC”), provides for the grant of incentive stock options, restricted stock and other stock-based awards or units to key employees and directors. The plan authorizes the grant of up to
7.8 million
shares or units through
April 2025
. At
December 31, 2016
, approximately
5.6 million
shares were available for future issuance under the plan.
The total compensation expense related to all grants awarded under the plan was
$4.8 million
,
$6.7 million
and
$6.1 million
, for the years ended
December 31, 2016
,
2015
and
2014
, respectively. The related income tax benefits recognized in earnings were
$2.2 million
,
$2.2 million
and
$1.6 million
for the years ended
December 31, 2016
,
2015
and
2014
, respectively.
Stock Options
Stock options vest ratably (i.e. one-third annually) over the
three years
from the date of the grant. The cost of stock options, based on their fair value at the date of grant, is charged to expense over the respective vesting periods. Stock options normally become exercisable at a rate of one-third annually and in full on the third anniversary date. Under the plan, all options and rights must be exercised within ten years from date of grant. At the Company’s discretion, vested stock option holders are permitted to elect an alternative settlement method in lieu of purchasing common stock at the option price. The alternative settlement method permits the employee to receive, without payment to the Company, cash, shares of common stock or a combination thereof equal to the excess of market value of common stock over the option purchase price. The Company has
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FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)
|
historically settled all such options in common stock and intends to continue to do so. Stock options do not have voting or dividend rights until such time that the options are exercised and shares have been issued.
The weighted average fair value of options granted during
2016
,
2015
and
2014
was
$4.25
,
$6.12
and
$7.16
, respectively.
The fair value of each option grant was estimated using the Black-Scholes option pricing model with the following weighted average assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
|
Dividend yield
|
2.2
|
%
|
|
1.5
|
%
|
|
0.8
|
%
|
|
Expected volatility
|
43
|
%
|
|
46
|
%
|
|
57
|
%
|
|
Risk free interest rate
|
1.3
|
%
|
|
1.5
|
%
|
|
1.9
|
%
|
|
Weighted average expected option life in years
|
5.8
|
|
|
5.7
|
|
|
5.8
|
|
The expected life of options represents the weighted average period of time that options granted are expected to be outstanding giving consideration to vesting schedules and the Company’s historical exercise patterns. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of the grant for periods corresponding with the expected life of the options. Expected volatility is based on historical volatility of the Company’s common stock. Dividend yields are based on historical dividend payments.
The following summarizes stock option activity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Option Shares
|
|
Weighted Average Exercise Price
|
|
(in millions)
|
2016
|
|
2015
|
|
2014
|
|
2016
|
|
2015
|
|
2014
|
|
Outstanding, at beginning of year
|
2.1
|
|
|
2.0
|
|
|
2.1
|
|
|
$
|
10.29
|
|
|
$
|
9.28
|
|
|
$
|
8.63
|
|
|
Granted
|
0.7
|
|
|
0.3
|
|
|
0.3
|
|
|
12.69
|
|
|
16.08
|
|
|
14.36
|
|
|
Exercised
|
(0.1
|
)
|
|
(0.1
|
)
|
|
(0.3
|
)
|
|
8.39
|
|
|
7.34
|
|
|
7.49
|
|
|
Canceled or expired
|
(0.1
|
)
|
|
(0.1
|
)
|
|
(0.1
|
)
|
|
15.77
|
|
|
14.69
|
|
|
14.33
|
|
|
Outstanding, at end of year
|
2.6
|
|
|
2.1
|
|
|
2.0
|
|
|
$
|
10.71
|
|
|
$
|
10.29
|
|
|
$
|
9.28
|
|
|
Exercisable, at end of year
|
1.6
|
|
|
1.4
|
|
|
1.2
|
|
|
$
|
8.96
|
|
|
$
|
8.47
|
|
|
$
|
8.64
|
|
At
December 31, 2016
, options that have vested and are expected to vest totaled
2.5 million
shares, with a weighted average exercise price of
$10.54
, and represent the sum of
1.6 million
vested (or exercisable) options and
0.9 million
options that are expected to vest. Options that are expected to vest are derived by applying the pre-vesting forfeiture rate assumption against outstanding, unvested options as of
December 31, 2016
.
The following table summarizes information for stock options outstanding as of
December 31, 2016
under all plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
Options Exercisable
|
|
Range of Exercise Prices
|
Shares
|
|
Weighted Average
Remaining Life
|
|
Weighted Average
Exercise Price
|
|
Shares
|
|
Weighted Average
Exercise Price
|
|
|
(in millions)
|
|
(in years)
|
|
|
|
(in millions)
|
|
|
|
$5.01 — $10.00
|
1.1
|
|
|
5.0
|
|
$
|
6.70
|
|
|
1.1
|
|
|
$
|
6.70
|
|
|
10.01 — 15.00
|
1.1
|
|
|
7.8
|
|
12.88
|
|
|
0.3
|
|
|
12.89
|
|
|
15.01 — 20.00
|
0.4
|
|
|
7.0
|
|
16.09
|
|
|
0.2
|
|
|
16.10
|
|
|
|
2.6
|
|
|
6.5
|
|
$
|
10.71
|
|
|
1.6
|
|
|
$
|
8.96
|
|
The aggregate intrinsic value of stock options outstanding and exercisable at
December 31, 2016
was
$12.9 million
and
$10.8 million
, respectively. The total intrinsic value of stock options exercised was
$0.4 million
,
$0.8 million
and
$2.0 million
for the years ended
December 31, 2016
,
2015
and
2014
, respectively. The related tax benefits were
$0.1 million
,
$0.2 million
and
$0.8 million
for the years ended
December 31, 2016
,
2015
and
2014
, respectively. Cash received from the exercise of stock options was
$0.5 million
,
$1.0 million
and
$2.6 million
for the years ended
December 31, 2016
,
2015
and
2014
, respectively.
The total compensation expense related to all stock option compensation plans was $
2.1 million
, $
2.0 million
and $
1.7 million
for the years ended
December 31, 2016
,
2015
and
2014
, respectively. As of
December 31, 2016
, there was
$2.8 million
of total unrecognized compensation cost related to stock options that is expected to be recognized over the weighted-average period of approximately
1.9
years.
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|
|
|
|
|
|
|
|
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|
FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)
|
Restricted Stock
Restricted stock awards and restricted stock units are granted to employees at no cost. Restricted stock primarily cliff vests at the third anniversary from the date of grant, provided the recipient is still employed by the Company on the vesting date. The cost of restricted stock, based on the fair market value of the underlying shares determined using the closing market price on the date of grant, is charged to expense over the respective vesting periods. Shares associated with non-vested restricted stock awards have the same voting rights as the Company’s common stock and have non-forfeitable rights to dividends. Shares associated with non-vested restricted stock units do not have voting or dividend rights.
The following table summarizes restricted stock activity for the year ended
December 31, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Restricted Shares
|
|
Weighted Average
Price per Share
|
|
|
(in millions)
|
|
|
|
Outstanding and non-vested, at December 31, 2015
|
0.2
|
|
|
$
|
12.70
|
|
|
Granted
|
0.1
|
|
|
13.16
|
|
|
Vested
|
(0.1
|
)
|
|
11.10
|
|
|
Forfeited
|
—
|
|
|
13.87
|
|
|
Outstanding and non-vested, at December 31, 2016
|
0.2
|
|
|
$
|
14.03
|
|
The total grant-date fair value of restricted stock that vested in the years ended
December 31, 2016
,
2015
and
2014
was
$1.3 million
,
$1.3 million
and
$0.6 million
, respectively.
The total compensation expense related to all restricted stock compensation plans was
$1.2 million
,
$1.2 million
and
$1.0 million
for the years ended
December 31, 2016
,
2015
and
2014
, respectively. As of
December 31, 2016
, there was
$0.8 million
of total unrecognized compensation cost related to restricted stock that is expected to be recognized over the weighted-average period of approximately
1.9
years.
Performance Awards
In each of the three years in the period ended
December 31, 2016
, the Company granted performance-based restricted stock unit awards (“PSUs”) to certain executives and other non-executive officers. Performance targets associated with PSUs are set annually and approved by the CBC. At the Company’s discretion, actual payment of the awards earned shall be in cash or in common stock of the Company, or in a combination of both. The Company intends to settle all such awards by issuing shares of its common stock. The number of shares of common stock that the Company may issue in connection with these PSUs can range from
0%
to
200%
of target, depending upon achievement against the performance targets. Shares associated with non-vested PSUs do not have voting or dividend rights until issuance. The Company assesses the probability of vesting, based on expected achievement against these performance targets, on a quarterly basis.
The cost of PSUs, based on their fair market value determined using the closing market price on the date of grant, is charged to expense over the respective vesting periods, which is the
three
-year period ended December 31, 2016 for the 2014 grants, the
three
-year period ended December 31, 2017 for the 2015 grants and the
three
-year period ended December 31, 2018 for the 2016 grants.
The PSUs granted in 2016 have a
three
-year performance period ending December 31, 2018, in which the Company must achieve a certain cumulative EPS from continuing operations and a certain average return on invested capital (“ROIC”), which are performance conditions per ASC 718. If earned, these shares would vest on December 31, 2018.
The PSUs granted in 2015 have a
three
-year performance period ending December 31, 2017, in which the Company must achieve a certain cumulative EPS from continuing operations and a certain average ROIC. If earned, these shares would vest on December 31, 2017.
The PSUs granted in 2014 had a
two
-year performance period ending December 31, 2015, in which a certain cumulative EPS from continuing operations and a certain average ROIC was targeted, followed by a
one
-year service requirement. The EPS and ROIC thresholds during the
two
-year performance period were achieved at the maximum level, and
200%
of the target shares were earned. The PSUs granted in 2014 became fully vested on December 31, 2016. The underlying shares were issued to participants in the first quarter of 2017.
|
|
|
|
|
|
|
|
|
|
|
FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)
|
The total grant-date fair value of PSUs that vested in the years ended
December 31, 2016
,
2015
and
2014
was
$3.7 million
,
$3.7 million
and
$2.5 million
, respectively.
Compensation expense included in the Consolidated Statements of Operations for the PSUs in the years ended
December 31, 2016
,
2015
and
2014
was
$1.5 million
,
$3.5 million
and
$3.4 million
, respectively. As of
December 31, 2016
, there was
$1.1 million
of total unrecognized compensation cost related to PSUs that is expected to be recognized over the weighted-average period of approximately
2.0
years.
The following table summarizes PSU activity for the year ended
December 31, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
Number of PSUs
|
|
Weighted Average Price per Share
|
|
|
(in millions)
|
|
|
|
Outstanding and non-vested, at December 31, 2015
|
0.3
|
|
|
$
|
15.28
|
|
|
Granted
(a)
|
0.4
|
|
|
13.33
|
|
|
Vested
|
(0.3
|
)
|
|
14.46
|
|
|
Forfeited
|
—
|
|
|
15.47
|
|
|
Outstanding and non-vested, at December 31, 2016
|
0.4
|
|
|
$
|
13.91
|
|
|
|
|
|
(a)
|
Includes
0.1 million
PSUs, representing the effect of the PSUs granted in 2014 being earned at
200%
of target. The PSUs granted in 2014 vested on December 31, 2016.
|
Excess Tax Benefits
For income tax purposes, stock-based compensation expense is deductible in the year of exercise or vesting based on the intrinsic value of the award on the date of exercise or vesting. For financial reporting purposes, stock-based compensation expense is based upon grant-date fair value and amortized over the vesting period. Excess tax benefits represent the excess tax deduction received by the Company resulting from the difference between the stock-based compensation expense deductible for income tax purposes and the stock-based compensation expense recognized for financial reporting purposes.
Prior to the adoption of ASU 2016-09 on January 1, 2016, excess tax benefits were recorded to Capital in excess of par value on the Consolidated Statements of Stockholders’ Equity. Excess tax benefits for the years ended
December 31, 2015
and
2014
were
$1.6 million
and
$2.2 million
, respectively. Subsequent to the adoption of ASU 2016-09, excess tax benefits are recorded as a component of Income tax expense on the Consolidated Statements of Operations.
Prior to the adoption of ASU 2016-09, excess tax benefits were presented as a cash outflow from operating activities and as a cash inflow from financing activities on the Consolidated Statements of Cash Flows. ASU 2016-09 requires excess tax benefits from share-based compensation to be included as a component of cash flow from operating activities on the Consolidated Statements of Cash Flow rather than as a component of cash flow from financing activities. As permitted by ASU 2016-09, the Company has applied this change prospectively during the year ended
December 31, 2016
and prior periods have not been adjusted to conform to the current-year presentation.
NOTE
14
— STOCKHOLDERS’ EQUITY
The Company’s Board of Directors (the “Board”) has the authority to issue
90.0 million
shares of common stock at a par value of
$1
per share. The holders of common stock (i) may receive dividends subject to all of the rights of the holders of preference stock, (ii) shall be entitled to share ratably upon any liquidation of the Company in the assets of the Company, if any, remaining after payment in full to the holders of preference stock and (iii) receive one vote for each common share held and shall vote together share for share with the holders of voting shares of preference stock as one class for the election of directors and for all other purposes. The Company had
65.4 million
and
64.8 million
common shares issued as of
December 31, 2016
and
2015
, respectively. Of those amounts,
59.6 million
and
62.2 million
common shares were outstanding as of
December 31, 2016
and
2015
, respectively.
The Board is also authorized to provide for the issuance of
0.8 million
shares of preference stock at a par value of
$1
per share. The authority of the Board includes, but is not limited to, the determination of the dividend rate, voting rights, conversion and redemption features and liquidation preferences. The Company has not designated or issued any preference stock as of
December 31, 2016
.
|
|
|
|
|
|
|
|
|
|
|
FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)
|
Dividends
In
2014
, the Board reinstated the Company’s quarterly cash dividend. In the aggregate, the Company declared and paid dividends totaling
$16.9 million
,
$15.6 million
and
$5.6 million
during
2016
,
2015
and
2014
, respectively.
On February 17, 2017, the Board declared a quarterly cash dividend of
$0.07
per common share payable on March 31, 2017 to holders of record at the close of business on March 10, 2017.
Stock Repurchase Program
In April 2014, the Board authorized a stock repurchase program (the “April 2014 program”) of up to
$15.0 million
of the Company’s common stock. The April 2014 program was intended primarily to facilitate a reduction in the investment in Company stock within the Company’s U.S. defined benefit pension plan portfolio and to reduce dilution resulting from issuances of stock under the Company’s employee equity incentive programs. During the year ended
December 31, 2014
, the Company repurchased
696,263
shares for a total of
$10.3 million
under the April 2014 program.
In November 2014, the Board authorized an additional stock repurchase program (the “November 2014 program”) of up to
$75.0 million
of the Company’s common stock. The November 2014 program is intended primarily to facilitate opportunistic purchases of Company stock as a means to provide cash returns to stockholders, enhance stockholder returns and manage the Company’s capital structure.
During the year ended
December 31, 2015
, the Company repurchased
724,792
shares for a total of
$10.6 million
under the authorized stock repurchase programs. During the second quarter of
2015
, cumulative stock repurchases under the April 2014 program reached the maximum authorized level of
$15.0 million
. No additional stock repurchases will be made under that program.
During the year ended
December 31, 2016
, the Company repurchased
2,961,007
shares for a total of
$37.8 million
under the November 2014 program.
Under its stock repurchase programs, the Company is authorized to repurchase, from time to time, shares of its outstanding common stock in the open market or through privately negotiated transactions. Stock repurchases by the Company are subject to market conditions and other factors and may be commenced, suspended or discontinued at any time.
Accumulated Other Comprehensive Loss
The following tables summarize the changes in each component of Accumulated other comprehensive loss, net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
(a)
|
Actuarial Losses
(b)
|
|
Foreign
Currency Translation
(c)
|
|
Unrealized
Gain on
Derivatives
|
|
Total
|
|
Balance at January 1, 2016
|
$
|
(75.6
|
)
|
|
$
|
(13.3
|
)
|
|
$
|
0.1
|
|
|
$
|
(88.8
|
)
|
|
Other comprehensive loss before reclassifications
|
(7.8
|
)
|
|
(7.1
|
)
|
|
—
|
|
|
(14.9
|
)
|
|
Amounts reclassified from accumulated other comprehensive loss
|
4.4
|
|
|
7.4
|
|
|
(0.1
|
)
|
|
11.7
|
|
|
Net current-period other comprehensive (loss) income
|
(3.4
|
)
|
|
0.3
|
|
|
(0.1
|
)
|
|
(3.2
|
)
|
|
Balance at December 31, 2016
|
$
|
(79.0
|
)
|
|
$
|
(13.0
|
)
|
|
$
|
—
|
|
|
$
|
(92.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
(a)
|
Actuarial Losses
|
|
Foreign
Currency Translation
|
|
Unrealized
Gain on
Derivatives
|
|
Total
|
|
Balance at January 1, 2015
|
$
|
(79.8
|
)
|
|
$
|
0.2
|
|
|
$
|
0.1
|
|
|
$
|
(79.5
|
)
|
|
Other comprehensive loss before reclassifications
|
(0.6
|
)
|
|
(13.5
|
)
|
|
—
|
|
|
(14.1
|
)
|
|
Amounts reclassified from accumulated other comprehensive loss
|
4.8
|
|
|
—
|
|
|
—
|
|
|
4.8
|
|
|
Net current-period other comprehensive income (loss)
|
4.2
|
|
|
(13.5
|
)
|
|
—
|
|
|
(9.3
|
)
|
|
Balance at December 31, 2015
|
$
|
(75.6
|
)
|
|
$
|
(13.3
|
)
|
|
$
|
0.1
|
|
|
$
|
(88.8
|
)
|
|
|
|
|
(a)
|
Amounts in parenthesis indicate debits.
|
|
|
|
|
|
|
|
|
|
|
|
FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)
|
|
|
|
|
(b)
|
In connection with the sale of Bronto, the Company recognized an actuarial loss of
$0.4 million
attributable to Bronto’s defined benefit plan. The loss was included in
Gain (loss) from discontinued operations and disposal
for
the year ended December 31, 2016
.
|
|
|
|
|
(c)
|
The Company recognized a foreign currency translation loss of
$7.4 million
in
the year ended December 31, 2016
, in connection with the sale of Bronto. The recognition of the translation loss, which represented the cumulative translation effects attributable to the Fire Rescue Group, was included in
Gain (loss) from discontinued operations and disposal
for
the year ended December 31, 2016
.
|
The following table summarizes the amount of actuarial losses reclassified from Accumulated other comprehensive loss, net of tax, and the affected line item in the Consolidated Statements of Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Details about Accumulated Other Comprehensive Loss Components
|
|
Amount Reclassified from Accumulated Other Comprehensive Loss
|
|
Affected Line Item in Consolidated Statements of Operations
(a)
|
|
|
2016
|
|
2015
|
|
|
|
|
(in millions)
(b)
|
|
|
|
Amortization of actuarial losses of defined benefit pension plans
|
|
$
|
(6.2
|
)
|
|
$
|
(7.5
|
)
|
|
(c)
|
|
Amortization of actuarial gains of retiree medical plans
|
|
—
|
|
|
0.1
|
|
|
SEG&A expenses
|
|
Total before tax
|
|
(6.2
|
)
|
|
(7.4
|
)
|
|
|
|
Income tax benefit
|
|
2.2
|
|
|
2.6
|
|
|
Income tax expense
|
|
Total reclassifications for the period, net of tax
|
|
$
|
(4.0
|
)
|
|
$
|
(4.8
|
)
|
|
|
|
|
|
|
(a)
|
Continuing operations only.
|
|
|
|
|
(b)
|
Amount in parenthesis indicate debits to profit/loss.
|
|
|
|
|
(c)
|
The actuarial loss components of
Accumulated other comprehensive loss
are included in the computation of net periodic pension cost for the period, as disclosed in Note
9
– Pensions.
|
NOTE
15
— SEGMENT INFORMATION
The Company has
two
operating segments, and the Company’s reportable segments are consistent with those operating segments. Business units are organized under each segment because they share certain characteristics, such as technology, marketing, distribution and product application, which create long-term synergies. The principal activities of the Company’s operating segments are as follows:
Environmental Solutions
— Our Environmental Solutions Group is a leading manufacturer and supplier of a full range of street sweeper vehicles, sewer cleaner and vacuum loader trucks, hydro-excavation trucks and high-performance waterblasting equipment. The Group manufactures vehicles and equipment in the U.S. and Canada that are sold under the Elgin
®
, Vactor
®
, Guzzler
®
, Westech
TM
and Jetstream
®
brand names. Products are sold to both municipal and industrial customers either through a dealer network or direct sales to service customers generally depending on the type and geographic location of the customer. The acquisition of JJE extends the Environmental Solutions Group’s existing sales channel and increases the number of service centers through which its parts, service and rental offerings can be provided to current and potential customers. The acquisition also broadens the Environmental Solutions Group’s product offerings to include other products, such as refuse and recycling collection vehicles, camera systems, ice-making equipment and snow-removal equipment.
Safety and Security Systems
— Our Safety and Security Systems Group is a leading manufacturer and supplier of comprehensive systems and products that law enforcement, fire rescue, emergency medical services, campuses, military facilities and industrial sites use to protect people and property. Offerings include systems for campus and community alerting, emergency vehicles, first responder interoperable communications and industrial communications, as well as command and municipal networked security. Specific products include vehicle lightbars and sirens, public warning sirens, general alarm systems, public address systems and public safety software. Products are sold under the Federal Signal
TM
, Federal Signal VAMA
®
and Victor
®
brand names. The Group operates manufacturing facilities in the U.S., Europe and South Africa.
Corporate contains those items that are not included in our operating segments.
Net sales by operating segment reflect sales of products and services to external customers, as reported in the Company’s Consolidated Statements of Operations. Intersegment sales are insignificant. The Company evaluates performance based on operating income of the respective segment. Operating income includes all revenues, costs and expenses directly related to the segment involved. In determining operating segment income, neither corporate nor interest expenses are included. Operating segment depreciation expense, identifiable assets and capital expenditures relate to those assets that are utilized by the respective operating segment. Corporate assets consist principally of cash and cash equivalents, deferred tax assets and fixed
|
|
|
|
|
|
|
|
|
|
|
FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)
|
assets. The accounting policies of each operating segment are the same as those described in Note
1
– Summary of Significant Accounting Policies.
Revenues attributed to customers located outside of the U.S. aggregated
$197.7 million
in
2016
,
$191.2 million
in
2015
and
$198.5 million
in
2014
, of which sales exported from the U.S. aggregated
$88.0 million
,
$146.2 million
and
$152.5 million
, respectively.
As discussed in Note
2
– Acquisitions, the assets and liabilities of JJE and Westech have been consolidated into the Consolidated Balance Sheet as of
December 31, 2016
, while the post-acquisition results of operations have been included in the Consolidated Statements of Operations subsequent to their respective closing dates in
2016
. JJE and Westech are included within the Environmental Solutions Group.
The following tables summarize the Company’s continuing operations by segment, including net sales, operating income, depreciation and amortization, total assets and capital expenditures:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
2016
|
|
2015
|
|
2014
|
|
Net sales:
|
|
|
|
|
|
|
Environmental Solutions
|
$
|
490.7
|
|
|
$
|
534.1
|
|
|
$
|
536.6
|
|
|
Safety and Security Systems
|
217.2
|
|
|
233.9
|
|
|
242.5
|
|
|
Total net sales
|
$
|
707.9
|
|
|
$
|
768.0
|
|
|
$
|
779.1
|
|
|
Operating income:
|
|
|
|
|
|
|
Environmental Solutions
|
$
|
54.1
|
|
|
$
|
96.9
|
|
|
$
|
81.9
|
|
|
Safety and Security Systems
|
27.0
|
|
|
32.3
|
|
|
32.1
|
|
|
Corporate and eliminations
|
(23.4
|
)
|
|
(26.0
|
)
|
|
(25.3
|
)
|
|
Total operating income
|
57.7
|
|
|
103.2
|
|
|
88.7
|
|
|
Interest expense
|
1.9
|
|
|
2.3
|
|
|
3.6
|
|
|
Debt settlement charges
|
0.3
|
|
|
—
|
|
|
—
|
|
|
Other (income) expense, net
|
(1.3
|
)
|
|
1.0
|
|
|
1.7
|
|
|
Income before income taxes
|
$
|
56.8
|
|
|
$
|
99.9
|
|
|
$
|
83.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
2016
|
|
2015
|
|
2014
|
|
Depreciation and amortization:
|
|
|
|
|
|
|
Environmental Solutions
|
$
|
14.5
|
|
|
$
|
7.3
|
|
|
$
|
6.8
|
|
|
Safety and Security Systems
|
4.4
|
|
|
4.8
|
|
|
4.5
|
|
|
Corporate
|
0.2
|
|
|
0.2
|
|
|
0.2
|
|
|
Total depreciation and amortization
|
$
|
19.1
|
|
|
$
|
12.3
|
|
|
$
|
11.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
2016
|
|
2015
|
|
2014
|
|
Total assets:
|
|
|
|
|
|
|
Environmental Solutions
|
$
|
393.3
|
|
|
$
|
250.6
|
|
|
$
|
254.2
|
|
|
Safety and Security Systems
|
200.1
|
|
|
209.6
|
|
|
208.3
|
|
|
Corporate and eliminations
|
48.7
|
|
|
99.2
|
|
|
69.0
|
|
|
Total assets of continuing operations
|
642.1
|
|
|
559.4
|
|
|
531.5
|
|
|
Total assets of discontinued operations
|
1.1
|
|
|
107.1
|
|
|
127.2
|
|
|
Total assets
|
$
|
643.2
|
|
|
$
|
666.5
|
|
|
$
|
658.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
2016
|
|
2015
|
|
2014
|
|
Capital expenditures:
|
|
|
|
|
|
|
Environmental Solutions
|
$
|
3.7
|
|
|
$
|
4.5
|
|
|
$
|
6.2
|
|
|
Safety and Security Systems
|
1.8
|
|
|
3.9
|
|
|
6.3
|
|
|
Corporate
|
0.6
|
|
|
1.2
|
|
|
1.2
|
|
|
Total capital expenditures
|
$
|
6.1
|
|
|
$
|
9.6
|
|
|
$
|
13.7
|
|
|
|
|
|
|
|
|
|
|
|
|
FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)
|
The following table summarizes net sales by geographic region based on the location of the end customer:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
2016
|
|
2015
|
|
2014
|
|
Net sales:
|
|
|
|
|
|
|
U.S.
|
$
|
510.2
|
|
|
$
|
576.8
|
|
|
$
|
580.6
|
|
|
Canada
|
111.5
|
|
|
75.9
|
|
|
67.1
|
|
|
Europe/Other
|
86.2
|
|
|
115.3
|
|
|
131.4
|
|
|
Total net sales
|
$
|
707.9
|
|
|
$
|
768.0
|
|
|
$
|
779.1
|
|
The following table summarizes long-lived assets (excluding deferred tax and intangible assets) by geographic region based on the location of the Company’s subsidiaries:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
2016
|
|
2015
|
|
2014
|
|
Long-lived assets (excluding deferred tax and intangible assets):
|
|
|
|
|
|
|
U.S.
|
$
|
78.7
|
|
|
$
|
53.3
|
|
|
$
|
53.5
|
|
|
Canada
|
46.1
|
|
|
—
|
|
|
—
|
|
|
Europe
|
2.5
|
|
|
2.6
|
|
|
2.5
|
|
|
Other
|
0.3
|
|
|
0.3
|
|
|
0.4
|
|
|
Total long-lived assets
|
$
|
127.6
|
|
|
$
|
56.2
|
|
|
$
|
56.4
|
|
NOTE
16
– RESTRUCTURING
The Company continues to review its businesses for opportunities to reduce operating expenses and focus on executing its strategy based on core competencies and cost efficiencies.
During the year ended
December 31, 2016
, the Company recorded expenses of
$1.7 million
related to severance costs incurred in connection with the completion of a cost reduction plan within the Safety and Security Systems Group.
During
the year ended December 31, 2015
, the Company recorded expenses of
$0.4 million
related to severance costs incurred in connection with the completion of a voluntary reduction-in-force within the Safety and Security Systems Group.
The following tables summarize the changes in the Company’s restructuring reserves, which are included within other current liabilities on the Company’s Consolidated Balance Sheets:
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
Balance at January 1
|
$
|
—
|
|
|
$
|
—
|
|
|
Charge to expense
|
1.7
|
|
|
0.4
|
|
|
Cash payments
|
(1.3
|
)
|
|
(0.4
|
)
|
|
Balance at December 31
|
$
|
0.4
|
|
|
$
|
—
|
|
NOTE
17
— FAIR VALUE MEASUREMENTS
The Company uses a three-level fair value hierarchy that prioritizes the inputs used to measure fair value. This hierarchy maximizes the use of observable inputs and minimizes the use of unobservable inputs. Observable inputs are developed based on market data obtained from independent sources, while unobservable inputs reflect the Company’s assumptions about valuation based on the best information available in the circumstances. The three levels of inputs are classified as follows:
|
|
|
|
•
|
Level 1 — quoted prices in active markets for identical assets or liabilities;
|
|
|
|
|
•
|
Level 2 — observable inputs, other than quoted prices included in Level 1, such as quoted prices for markets that are not active, or other inputs that are observable or can be corroborated by observable market data; and
|
|
|
|
|
•
|
Level 3 — unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities, including certain pricing models, discounted cash flow methodologies and similar techniques that use significant unobservable inputs.
|
|
|
|
|
|
|
|
|
|
|
|
FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)
|
In determining fair value, the Company uses various valuation approaches within the fair value measurement framework. The valuation methodologies used for the Company’s assets and liabilities measured at fair value and their classification in the valuation hierarchy are summarized below:
Cash Equivalents
Cash equivalents primarily consist of time-based deposits and interest-bearing instruments with maturities of three months or less. The Company classified cash equivalents as Level 1 due to the short-term nature of these instruments and measured the fair value based on quoted prices in active markets for identical assets.
Contingent Consideration
The Company has a contingent obligation to transfer cash to the former owners of JJE if specified financial results are met over future reporting periods (i.e., an earn-out). Liabilities for contingent consideration are measured at fair value each reporting period, with the acquisition-date fair value included as part of the consideration transferred. Subsequent changes in fair value are recorded as a component of
Acquisition and integration-related expenses
on the Consolidated Statements of Operations.
The Company uses an income approach to value the contingent consideration obligation based on future financial performance, which is determined based on the present value of expected future cash flows. Due to the lack of relevant observable market data over fair value inputs, the Company has classified the contingent consideration liability within Level 3 of the fair value hierarchy outlined in ASC 820,
Fair Value Measurements
. Increases in the expected payout under a contingent consideration arrangement contribute to increases in the fair value of the related liability. Conversely, decreases in the expected payout under a contingent consideration arrangement contribute to decreases in the fair value of the related liability. Changes in assumptions could have an impact on the fair value of the contingent consideration, which has a maximum payout of C
$10.0 million
(approximately
$7.4 million
).
The following tables summarize the Company’s assets and liabilities that are measured at fair value on a recurring basis as of
December 31, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurement at Reporting Date Using
|
|
(in millions)
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
Assets:
|
|
|
|
|
|
|
|
|
Cash equivalents
|
$
|
30.6
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
30.6
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
Contingent consideration
|
—
|
|
|
—
|
|
|
5.1
|
|
|
5.1
|
|
The following table provides a roll-forward of the fair value of recurring Level 3 fair value measurements for the year ended
December 31, 2016
:
|
|
|
|
|
|
|
|
(in millions)
|
Year Ended December 31, 2016
|
|
Contingent consideration liability, at beginning of period
|
$
|
—
|
|
|
Issuance of contingent consideration in connection with acquisitions
|
4.9
|
|
|
Settlements of contingent consideration liabilities
|
—
|
|
|
Foreign currency translation
|
(0.2
|
)
|
|
Total losses (gains) included in earnings
(a)
|
0.4
|
|
|
Contingent consideration liability, at end of period
|
$
|
5.1
|
|
|
|
|
|
(a)
|
Changes in the fair value of contingent consideration liabilities are included as a component of Acquisition and integration-related expenses within the Consolidated Statements of Operations.
|
NOTE
18
— DISCONTINUED OPERATIONS
In the year ended
December 31, 2016
, the Company recorded a net gain from discontinued operations and disposal of
$4.4 million
, primarily driven by the
$4.2 million
net gain on disposal of the Fire Rescue Group, which was discontinued in
2015
, partially offset by the
$0.6 million
net loss that the Fire Rescue Group realized in its
2016
operations up to the
January 29, 2016
sale completion date. The net gain on disposal includes a
$1.3 million
charge to recognize a liability in connection with a Latvian commercial dispute. Also contributing to the net gain in
2016
was a reduction in uncertain tax position reserves of
|
|
|
|
|
|
|
|
|
|
|
FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)
|
approximately
$1.0 million
, as well as adjustments of estimated product liability obligations of previously discontinued businesses, resulting from updated actuarial valuations.
In the year ended
December 31, 2015
, the Company recorded a net loss from discontinued operations and disposal of
$2.3 million
. The net loss was primarily driven by tax expense associated with recording a net deferred tax liability of
$6.3 million
, partially offset by net income generated by the Fire Rescue Group, and the receipt of
$4.0 million
from the escrow associated with the 2012 sale of the Company’s former Federal Signal Technologies Group (“FSTech”).
In the year ended
December 31, 2014
, the Company recorded a net gain from discontinued operations and disposal of
$4.0 million
. The net gain was primarily driven by net income generated by the Fire Rescue Group, as well as adjustments of estimated product liability obligations of previously discontinued businesses, resulting from updated actuarial valuations.
The activity of the Company’s discontinued operations in each of the years ended
December 31, 2016
,
2015
and
2014
is described further below:
FSTech
In connection with the sale of FSTech in 2012,
$22.0 million
was placed into escrow as security for indemnification obligations provided by the Company pursuant to the sale agreement. A significant portion of the escrow identified for general indemnification obligations was held for a period of
18 months
following the sale date with the remaining general escrow funds to be held for
36 months
following the sale date.
In
2014
, the Company received
$7.4 million
from the escrow identified for general indemnification obligations. In
2015
, the Company received the remaining general escrow funds of
$4.0 million
and recorded this income as a component of
Gain (loss) from discontinued operations and disposal, net of tax
expense of
$1.5 million
, within its Consolidated Statement of Operations
for the year ended December 31, 2015
. There are no amounts remaining in escrow as of
December 31, 2016
.
Fire Rescue Group
On
January 29, 2016
, the Company completed the sale of Bronto to Morita, initially receiving proceeds of €
76.0 million
in cash at closing (approximately
$82.3 million
), with an additional €
5.1 million
in cash (approximately
$5.7 million
) being received in connection with the payment of the final working capital and net debt adjustments in the second quarter of
2016
.
Prior to sale, Bronto was the only remaining operation in the Company’s Fire Rescue Group, which was previously identified as an operating segment of the Company as defined under ASC 280. Upon completion of the transaction, the Company will no longer operate the Fire Rescue Group, which the Company considers a significant strategic shift in the Company’s operations, and as such, the Fire Rescue Group is being presented as a discontinued operation in the Company’s consolidated financial statements.
Under the terms of the sale, the Company and Morita agreed that the Company will remain in control of negotiations and proceedings relating to the appeal of the ruling issued in the Latvian commercial dispute, discussed further in Note
10
– Commitments and Contingencies, and also fund the legal costs associated therewith. The Company also agreed to compensate Morita for
50%
of any liability resulting from a final and non-appealable decision of a court of competent jurisdiction, net of any actual income tax benefit to Bronto as a result of the judgment, and less
50%
of legal fees incurred by the Company between the
January 29, 2016
date of sale and the date of receiving such non-appealable decision. The Company’s appeal of the initial judgment, heard in April 2016, was unsuccessful, and a charge of
$1.3 million
was recorded as a component of
Gain (loss) from discontinued operations and disposal, net of tax
in
the year ended December 31, 2016
to reflect the Company’s share of the liability. The Company has decided not to further appeal the Supreme Court’s ruling and expects to settle the aforementioned liability with Morita during the first quarter of 2017.
On
December 16, 2015
, the Company entered into a foreign currency forward contract with a notional contract value of €
76.0 million
to mitigate its foreign exchange exposure related to the receipt of the euro-denominated sales proceeds. Prior to its settlement on
January 29, 2016
, the derivative was being marked-to-market, with related gains or losses reported in the Company’s Consolidated Statement of Operations. The forward contract had a fair value of
$0.9 million
on settlement, and a gain of
$0.3 million
was recorded as a component of Other (income) expense, net in the Consolidated Statement of Operations for
the year ended December 31, 2016
. The forward contract had a fair value of
$0.6 million
at
December 31, 2015
. An asset of
$0.6 million
was included as a component of Prepaid expenses and other current assets on the Consolidated Balance Sheet as of
December 31, 2015
. The fair value of the forward contract was determined using readily available pricing sources for comparable instruments (Level 2 input).
|
|
|
|
|
|
|
|
|
|
|
FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)
|
In accordance with ASC 740, a tax liability should be recognized for the excess of the financial reporting basis over the tax basis (or the tax benefit when the tax basis exceeds the financial reporting basis) of an investment in a subsidiary (outside basis difference) when it is apparent that the temporary differences will reverse in the foreseeable future. In connection with presenting the Fire Rescue Group as a discontinued operation as of
December 31, 2015
, the Company was required to re-evaluate its position related to the recognition of a deferred tax asset or liability for the outside basis differences of the Bronto entities being sold to Morita. In prior years, deferred taxes for such outside basis differences had not been recognized, either because of the Company’s assertion of permanent reinvestment, or because recognition was not required applying one of the exceptions provided for in ASC 740. Due to the pending sale, these exceptions no longer applied at
December 31, 2015
, as the outside basis differences were expected to reverse in the foreseeable future. As a result, a net deferred tax liability of
$6.3 million
was recorded as a component of long-term liabilities of discontinued operations on the Condensed Consolidated Balance Sheets as of
December 31, 2015
. Upon completion of the sale in the first quarter of
2016
, this net deferred tax liability was recognized as a component of the tax expense on the gain on disposal.
After recognition of the accumulated foreign currency translation loss attributable to the Fire Rescue Group, as described in Note
14
– Stockholders’ Equity, the actuarial losses described in Note
9
– Pensions, the
$1.3 million
liability recorded in connection with the Latvian commercial dispute, as well as
$4.6 million
of net income tax expense, the Company recognized a net gain of
$4.2 million
on disposal of the Fire Rescue Group upon completion of the sale in
the year ended December 31, 2016
.
The following table presents the operating results of the Company’s discontinued Fire Rescue Group for each of the three years in the period ended
December 31, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
2016
(a)
|
|
2015
|
|
2014
|
|
Net sales
|
$
|
4.2
|
|
|
$
|
100.0
|
|
|
$
|
139.4
|
|
|
Cost of sales
|
3.9
|
|
|
80.8
|
|
|
114.8
|
|
|
Gross profit
|
0.3
|
|
|
19.2
|
|
|
24.6
|
|
|
Selling, engineering, general and administrative expenses
|
1.1
|
|
|
17.1
|
|
|
20.7
|
|
|
Restructuring
|
—
|
|
|
0.8
|
|
|
—
|
|
|
Operating (loss) income
|
(0.8
|
)
|
|
1.3
|
|
|
3.9
|
|
|
Interest expense, net
|
—
|
|
|
—
|
|
|
0.2
|
|
|
Other income, net
|
—
|
|
|
(0.2
|
)
|
|
(0.2
|
)
|
|
(Loss) income before income taxes
|
(0.8
|
)
|
|
1.5
|
|
|
3.9
|
|
|
Income tax (benefit) expense
|
(0.2
|
)
|
|
0.3
|
|
|
0.6
|
|
|
Net (loss) income from operations
|
$
|
(0.6
|
)
|
|
$
|
1.2
|
|
|
$
|
3.3
|
|
|
|
|
|
(a)
|
Only includes activity in the period up to the completion of the sale on
January 29, 2016
.
|
|
|
|
|
|
|
|
|
|
|
|
FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)
|
Assets and liabilities of discontinued operations
The following table presents the assets and liabilities of the Company’s discontinued operations, which include the Fire Rescue Group, as well as other operations discontinued in prior periods, as of
December 31, 2016
and
2015
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
(in millions)
|
Fire Rescue
|
|
Other
|
|
Total
|
|
Fire Rescue
|
|
Other
|
|
Total
|
|
Cash and cash equivalents
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
5.0
|
|
|
$
|
—
|
|
|
$
|
5.0
|
|
|
Accounts receivable, net
|
—
|
|
|
—
|
|
|
—
|
|
|
15.5
|
|
|
—
|
|
|
15.5
|
|
|
Inventories
|
—
|
|
|
—
|
|
|
—
|
|
|
40.4
|
|
|
—
|
|
|
40.4
|
|
|
Prepaid expenses
|
—
|
|
|
—
|
|
|
—
|
|
|
2.7
|
|
|
—
|
|
|
2.7
|
|
|
Other current assets
|
—
|
|
|
—
|
|
|
—
|
|
|
0.2
|
|
|
—
|
|
|
0.2
|
|
|
Current assets of discontinued operations
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
63.8
|
|
|
$
|
—
|
|
|
$
|
63.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Properties and equipment, net
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
13.4
|
|
|
$
|
—
|
|
|
$
|
13.4
|
|
|
Goodwill
|
—
|
|
|
—
|
|
|
—
|
|
|
28.3
|
|
|
—
|
|
|
28.3
|
|
|
Deferred tax assets
|
—
|
|
|
1.1
|
|
|
1.1
|
|
|
—
|
|
|
1.6
|
|
|
1.6
|
|
|
Long-term assets of discontinued operations
|
$
|
—
|
|
|
$
|
1.1
|
|
|
$
|
1.1
|
|
|
$
|
41.7
|
|
|
$
|
1.6
|
|
|
$
|
43.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
7.3
|
|
|
$
|
—
|
|
|
$
|
7.3
|
|
|
Customer deposits
|
—
|
|
|
—
|
|
|
—
|
|
|
10.6
|
|
|
—
|
|
|
10.6
|
|
|
Accrued liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation and withholding taxes
|
—
|
|
|
—
|
|
|
—
|
|
|
4.3
|
|
|
—
|
|
|
4.3
|
|
|
Other current liabilities
|
1.3
|
|
|
0.8
|
|
|
2.1
|
|
|
4.0
|
|
|
2.4
|
|
|
6.4
|
|
|
Current liabilities of discontinued operations
|
$
|
1.3
|
|
|
$
|
0.8
|
|
|
$
|
2.1
|
|
|
$
|
26.2
|
|
|
$
|
2.4
|
|
|
$
|
28.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term pension and other post-retirement benefit liabilities
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
0.7
|
|
|
$
|
—
|
|
|
$
|
0.7
|
|
|
Other long-term liabilities
|
—
|
|
|
2.0
|
|
|
2.0
|
|
|
5.5
|
|
|
9.1
|
|
|
14.6
|
|
|
Long-term liabilities of discontinued operations
|
$
|
—
|
|
|
$
|
2.0
|
|
|
$
|
2.0
|
|
|
$
|
6.2
|
|
|
$
|
9.1
|
|
|
$
|
15.3
|
|
The Company retains certain liabilities for other operations discontinued in prior periods, primarily for environmental remediation and product liability. Included in liabilities of discontinued operations at
December 31, 2016
and
2015
is
$0.6 million
and
$0.9 million
, respectively, related to environmental remediation at the Pearland, Texas facility, and
$1.8 million
and
$2.3 million
, respectively, relating to estimated product liability obligations of the discontinued North American refuse truck body business.
NOTE
19
— NEW ACCOUNTING PRONOUNCEMENTS (ISSUED BUT NOT YET ADOPTED)
In May 2014, the FASB issued ASU No. 2014-09,
Revenue from Contracts with Customers (Topic 606)
(“ASU 2014-09”), which supersedes the revenue recognition requirements in ASC 605,
Revenue Recognition
. This ASU is based on the principle that revenue is recognized to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The ASU also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments, and assets recognized from costs incurred to obtain or fulfill a contract. The ASU allows either a “full retrospective” adoption, in which the standard is applied to all periods presented in the financial statements, or a “modified retrospective” adoption, in which the guidance is applied retrospectively only to the most current period presented in the financial statements, with the cumulative effect of initially applying the new standard being recognized as an adjustment to the opening balance of retained earnings at the date of initial application. As originally proposed, this guidance was effective for annual reporting periods beginning on or after December 15, 2016, including interim periods within that reporting period, and early adoption was not permitted. In August 2015, the FASB issued ASU No. 2015-14,
Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date
(“ASU 2015-14”), which deferred the effective date of the new revenue recognition requirements to annual reporting periods beginning on or after December 15, 2017, including interim periods within that reporting period. Under ASU 2015-14, companies are permitted to adopt the guidance early, but no earlier than the original effective date outlined in ASU 2014-09. The FASB has issued a number of amendments to ASU
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FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)
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2014-09 that are are intended to address implementation issues that were raised by stakeholders and provide additional practical expedients to reduce the cost and complexity of applying the new revenue standard. These amendments have the same effective date as ASU 2014-09.
The new revenue standard will be effective for the Company beginning January 1, 2018 and we expect to apply the “modified retrospective” method of adoption. The Company is continuing to evaluate the impact that the adoption of this guidance will have on its consolidated financial statements. In preparation for the adoption of the new standard, the Company has established a project management team responsible for analyzing the impact of ASU 2014-09, and the related amendments, across all revenue streams. The project management team is currently reviewing current accounting policies and practices, including a representative sample of contracts with customers, to identify potential differences that would result from applying the requirements under the new standard.
In February 2016, the FASB issued ASU No. 2016-02,
Leases (Topic 842)
(“ASU 2016-02”), which requires
organizations that are lessees in operating leases to recognize right-of-use assets and lease liabilities on the balance sheet and requires disclosure of key qualitative and quantitative information about leasing agreements by both lessors and lessees. For a lease to meet the requirements for accounting under a sale-leaseback transaction, it must meet the criteria for a sale in ASC 606,
Revenue from Contracts with Customers
. Entities are required to recognize and measure operating leases at the beginning of the earliest period presented using a modified retrospective approach. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. The Company is currently evaluating the impact that the adoption of this guidance will have on its consolidated financial statements.
In August 2016, the FASB issued ASU No. 2016-15,
Statement of Cash Flows (Topic 230), Classification of Certain Cash Receipts and Payments
, which provides additional guidance on the financial statement presentation of certain activities in the statement of cash flows. The activities addressed by this guidance that may be relevant to the Company include cash payments for debt prepayment or debt extinguishment costs, contingent consideration payments made after a business combination, proceeds from the settlement of insurance claims and proceeds from the settlement of corporate-owned life insurance policies, and the application of the predominance principle. The amendments in this ASU are effective for fiscal years beginning after December 15, 2017 and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. An entity that elects early adoption must adopt all of the amendments in the same period. The amendments should be applied using a retrospective transition method to each period presented. If this approach is impracticable, the amendments would be applied prospectively as of the earliest date practicable. The Company has concluded that the adoption of this guidance will not have a material impact on the Company’s historical cash flow presentation.
No other new accounting pronouncements issued or effective during
2016
have had or are expected to have a material impact on the Company’s results of operations, financial position or cash flow. For discussion of new accounting pronouncements adopted during
2016
, see Note
1
– Summary of Significant Accounting Policies.
NOTE
20
— SELECTED QUARTERLY DATA (UNAUDITED)
The Company reports its interim quarterly periods on a 13-week basis ending on a Saturday with the fiscal year ending on December 31. The effects of this practice exist only within a reporting year. For ease of presentation, the Company uses “March 31,” “June 30,” “September 30” and “December 31” to refer to its results of operations for the quarterly periods then ended. In
2016
, the Company’s interim quarterly periods ended April 2, July 2, October 1 and December 31. In
2015
, the Company’s interim quarterly periods ended March 28, June 27, September 26 and December 31.
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FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)
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The following table summarizes the quarterly results of operations, including earnings per share:
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2016
(a)
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(in millions, except per share data)
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March 31
(b)
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June 30
(c)
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September 30
(d)
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December 31
(e)
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Net sales
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$
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172.8
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$
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172.3
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$
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186.7
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$
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176.1
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Gross profit
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47.4
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45.0
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45.3
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45.4
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Income from continuing operations
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10.4
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9.4
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7.5
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12.1
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Gain (loss) from discontinued operations and disposal, net
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3.2
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(0.3
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)
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1.0
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0.5
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Net income
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$
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13.6
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$
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9.1
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$
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8.5
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$
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12.6
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Diluted earnings per share:
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Earnings from continuing operations
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$
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0.17
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$
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0.15
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$
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0.12
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$
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0.20
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Earnings (loss) from discontinued operations
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0.05
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(0.00)
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0.02
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0.01
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Net earnings per share
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$
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0.22
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$
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0.15
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$
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0.14
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$
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0.21
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(a)
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The adoption of ASU 2016-09 in the fourth quarter of 2016 did not impact the previously-reported quarterly results for 2016.
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(b)
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Income from continuing operations includes acquisition and integration-related expenses, restructuring charges and debt settlement charges of
$0.5 million
,
$1.2 million
and
$0.3 million
, respectively.
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(c)
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Income from continuing operations includes purchase accounting expenses and acquisition and integration-related expenses of
$0.5 million
and
$0.4 million
, respectively.
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(d)
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Income from continuing operations includes purchase accounting expenses, acquisition and integration-related expenses and restructuring charges of
$2.5 million
,
$0.3 million
and
$0.4 million
, respectively.
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(e)
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Income from continuing operations includes purchase accounting expenses, acquisition and integration-related expenses and restructuring charges of
$0.9 million
,
$0.2 million
and
$0.1 million
, respectively, as well as a
$2.2 million
net benefit resulting from changes in deferred tax valuation allowances in Canada and the U.K.
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2015
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(in millions, except per share data)
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March 31
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June 30
(a)
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September 30
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December 31
(b)
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Net sales
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$
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196.5
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$
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205.4
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$
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179.7
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$
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186.4
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Gross profit
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54.9
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60.7
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54.7
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55.3
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Income from continuing operations
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14.4
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18.2
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15.8
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17.4
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Gain (loss) from discontinued operations and disposal, net
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0.5
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0.1
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3.0
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(5.9
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)
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Net income
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$
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14.9
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$
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18.3
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$
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18.8
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$
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11.5
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Diluted earnings per share:
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Earnings from continuing operations
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$
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0.22
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$
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0.29
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$
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0.25
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$
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0.27
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Earnings (loss) from discontinued operations
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0.01
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0.00
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0.05
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(0.09
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Net earnings per share
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$
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0.23
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$
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0.29
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$
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0.30
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$
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0.18
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(a)
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Income from continuing operations includes restructuring charges of
$0.4 million
.
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(b)
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Income from continuing operations includes 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. Gain (loss) from discontinued operations and disposal, net includes tax expense of
$6.3 million
associated with recognizing a net deferred tax liability for the outside basis differences of entities being sold as part of the sale of Bronto.
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