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
2017
,
2016
and
2015
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
2
– Acquisitions, on
June 2, 2017
, the Company completed the acquisition of all of the outstanding shares of capital stock of GenNx/TBEI Intermediate Co., a Delaware corporation (collectively with its subsidiaries, “TBEI”). TBEI is a leading U.S. manufacturer of dump truck bodies and trailers serving maintenance and infrastructure end-markets. The Consolidated Balance Sheet as of
December 31, 2017
includes fair values assigned to the assets acquired and liabilities assumed in connection with the acquisition, whereas the Consolidated Statements of Operations for
the year ended December 31, 2017
include the post-acquisition operating results of TBEI.
As discussed in Note
8
– Income Taxes, the Tax Cuts and Jobs Act (the “2017 Tax Act”) was enacted on December 22, 2017. The SEC staff has issued Staff Accounting Bulletin No. 118 (“SAB 118”) to provide guidance on the accounting for the tax impact of the 2017 Tax Act. Under SAB 118, a company that has not completed its accounting for the effects of the 2017 Tax Act by its financial reporting deadline may report provisional amounts based on reasonable estimates for items for which the accounting is incomplete. Those amounts will be subject to adjustment during a measurement period of up to one year. The consolidated financial statements for
the year ended December 31, 2017
include the Company’s provisional estimates of the impact of the 2017 Tax Act, in accordance with SAB 118.
Intercompany balances and transactions have been eliminated in consolidation. In addition, certain prior year amounts have been reclassified to conform to current year presentation.
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 Statements of Operations as a component of
Other (income) expense, net
. For
the year ended December 31, 2017
, the Company realized foreign currency transaction gains of
$1.3 million
, whereas in the years ended
December 31, 2016
and
2015
, the Company incurred foreign currency transaction losses of
$0.1 million
and
$1.5 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.
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FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)
|
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
$25.2 million
,
$18.9 million
and
$12.0 million
in the
years ended December 31, 2017, 2016 and 2015
, respectively.
Properties and equipment are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable.
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, 2017
.
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FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)
|
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
.
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 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 qualitative approach to assess the goodwill of its reporting units for potential impairment in
2017
. The Company concluded that it was not “more likely than not” that the fair value of its reporting units were less than their carrying values.
The Company had no goodwill impairments for its continuing operations in
2017
,
2016
or
2015
. See Note
6
– Goodwill and Other Intangible Assets for a summary of the Company’s goodwill by segment.
On January 1, 2018, the Company adopted Accounting Standards Update (“ASU”) No. 2017-04,
Intangibles
–
Goodwill and Other (Topic 350), Simplifying the Test for Goodwill Impairment
, which eliminates the second step of the two-step quantitative approach for testing goodwill for potential impairment. See Note
19
- New Accounting Pronouncements (Issued But Not Yet Adopted) for further discussion.
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. In testing the indefinite-lived intangibles assets for potential impairment, the Company applies either a qualitative test, or a quantitative test, in accordance with ASC 350,
Intangibles
—
Goodwill and Other
. A qualitative approach is applied when the Company concludes that it is not “more likely than not” that the fair value of the indefinite-lived intangibles are less than their carrying value. A quantitative impairment test consists of comparing the fair value of the indefinite-lived intangible asset with its carrying amount. An impairment loss would be recognized for the carrying amount in excess of its fair value.
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FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)
|
Management used a qualitative approach to assess its indefinite-lived intangible assets for potential impairment in 2017 and 2016. The Company concluded that it was not “more likely than not” that the fair value of indefinite-lived intangible assets were less than their carrying values.
The Company had no indefinite-lived intangible asset impairments for its continuing operations in
2017
or
2016
. See Note
6
– Goodwill and Other Intangible Assets for a summary of the Company’s intangible assets.
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, 2017
and
2016
, deferred revenue associated with extended warranty contracts was
$2.9 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, with the exception of certain estimated losses that have been recognized related to settlement discussions (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
2016
to
2017
. See Note
9
– Pensions for further discussion.
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.
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FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)
|
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.
On January 1, 2018, the Company adopted ASC 606,
Revenue from Contracts with Customers
, as amended, and created by ASU 2014-09,
Revenue from Contracts with Customers
. See Note
19
- New Accounting Pronouncements (Issued But Not Yet Adopted) for further discussion regarding the impact of the adoption on the Company’s revenue recognition accounting policies.
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
$13.0 million
in
2017
,
$13.4 million
in
2016
and
$14.0 million
in
2015
, 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.
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. 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.
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FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)
|
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.
As discussed in Note
8
– Income Taxes, the consolidated financial statements for the year ended
December 31, 2017
include the Company’s provisional estimates of the impact of the 2017 Tax Act, in accordance with SAB 118. The Company expects to adjust the provisional amounts throughout the measurement period as the Company’s calculations are refined and additional interpretive guidance becomes available.
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 TBEI
On
June 2, 2017
, the Company completed the acquisition of all of the outstanding shares of capital stock of TBEI. TBEI is a leading U.S. manufacturer of dump truck bodies and trailers serving maintenance and infrastructure end markets. The Company expects that the acquisition of TBEI will enable it to strengthen its market position as a specialty vehicle manufacturer in maintenance and infrastructure markets, leverage its expertise in building chassis-based vehicles and balance the mix of revenues it generates from municipal and industrial markets. As the acquisition closed on
June 2, 2017
, the assets and liabilities of TBEI have been consolidated into the Consolidated Balance Sheet as of
December 31, 2017
, while the post-acquisition results of operations have been included in the Consolidated Statements of Operations, within the Environmental Solutions Group.
The Company initially paid
$271.8 million
to acquire TBEI, inclusive of cash acquired. The purchase price was subsequently reduced by an adjustment for working capital and other post-closing items in the amount of
$3.0 million
, which was included as a component of
Prepaid expenses and other current assets
on the Consolidated Balance Sheet as of
December 31, 2017
, and was received in the first quarter of
2018
.
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 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, 2017
, 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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FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)
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(in millions)
|
|
Purchase price, inclusive of adjustment for working capital and other post-closing items
(a)
|
$
|
268.8
|
|
Total consideration
|
268.8
|
|
|
|
Cash
|
2.6
|
|
Accounts receivable
|
23.7
|
|
Inventories
|
24.3
|
|
Prepaid expenses and other current assets
|
2.6
|
|
Rental equipment
|
0.7
|
|
Properties and equipment
|
20.6
|
|
Customer relationships
(b)
|
90.0
|
|
Trade names
(c)
|
54.0
|
|
Other intangible assets
|
1.7
|
|
Accounts payable
|
(18.7
|
)
|
Accrued liabilities
|
(7.3
|
)
|
Deferred tax liabilities
|
(61.4
|
)
|
Net assets acquired
|
$
|
132.8
|
|
|
|
Goodwill
(d)
|
$
|
136.0
|
|
|
|
(a)
|
$243.0 million
of the purchase price was funded through borrowings under the Company’s revolving credit facility, with the remainder being funded with existing cash on hand. The purchase price includes an adjustment for working capital and other post-closing items of
$3.0 million
that the Company received in the first quarter of
2018
.
|
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(b)
|
Represents the fair value assigned to customer relationships, which are considered to be definite-lived intangible assets, with an estimated useful life of approximately
12 years
.
|
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(c)
|
Represents the fair value assigned to trade names, which are considered to be indefinite-lived intangible assets.
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(d)
|
Goodwill, which is not deductible for tax purposes, has been allocated to the Environmental Solutions Group on the basis that the synergies identified will primarily benefit this segment.
|
In the period between the
June 2, 2017
closing date and
December 31, 2017
, TBEI generated
$109.4 million
of net sales and
$6.2 million
of operating income, which included the impact of purchase accounting expense effects and incremental depreciation and amortization expense on the acquired assets. The Company has included the operating results of TBEI within the Environmental Solutions Group in its consolidated financial statements since the closing date.
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. Primarily due to the TBEI acquisition, the Company incurred
$1.7 million
of acquisition-related costs in
the year ended December 31, 2017
, which have been recorded in
Acquisition and integration-related expenses
on the Consolidated Statement of Operations.
In
the year ended December 31, 2016
, the Company incurred
$0.9 million
of acquisition and integration-related costs in connection with acquisitions completed in the prior year.
Unaudited Pro Forma Financial Information
The following table presents the unaudited pro forma combined results of operations of the Company and TBEI for the years ended
December 31, 2017
and
2016
, after giving effect to certain pro forma adjustments including: (i) elimination of the costs recognized related to the step-up in fair value of TBEI’s inventory that will not have a continuing impact, (ii) amortization of acquired intangible assets, (iii) the impact of certain fair value adjustments such as depreciation on the acquired property, plant and equipment, (iv) interest expense for historical long-term debt of TBEI that was repaid and interest expense on additional borrowings by the Company to fund the acquisition and (v) elimination of non-recurring acquisition and integration-related expenses. The unaudited pro forma statement of operations of the Company assuming this transaction occurred at January 1, 2016 is as follows:
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FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)
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For the Year Ended December 31,
|
(in millions, except per share data)
|
2017
|
|
2016
|
Net sales
|
$
|
987.6
|
|
|
$
|
913.2
|
|
Income from continuing operations
|
68.1
|
|
|
49.4
|
|
Diluted earnings from continuing operations (per share)
|
$
|
1.13
|
|
|
$
|
0.81
|
|
The unaudited pro forma financial information is presented for informational purposes only and is not intended to represent or be indicative of the consolidated results of operations of the Company that would have been reported had the acquisition been completed as of the beginning of the periods presented, and should not be taken as being representative of the future consolidated results of operations of the Company.
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
$6.4 million
) and a contingent earn-out payment of up to C
$10.0 million
(approximately
$8.0 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 following table summarizes the fair value of assets acquired and liabilities assumed as of the acquisition date:
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|
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|
(in millions)
|
|
Purchase price, inclusive of working capital adjustment
(a)
|
$
|
96.6
|
|
Estimated fair value of additional consideration
(b)
|
10.3
|
|
Settlement of pre-existing contractual relationship
(c)
|
11.4
|
|
Total consideration
|
118.3
|
|
|
|
Accounts receivable
|
12.1
|
|
Inventories
|
28.7
|
|
Prepaid expenses and other current assets
|
0.8
|
|
Rental equipment
(d)
|
75.9
|
|
Properties and equipment
|
2.0
|
|
Intangible assets
(e)
|
8.4
|
|
Capital lease obligations
|
(0.5
|
)
|
Accounts payable
(c)
|
(11.5
|
)
|
Customer deposits
|
(0.8
|
)
|
Accrued liabilities
|
(2.0
|
)
|
Net assets acquired
|
113.1
|
|
|
|
Goodwill
(f)
|
$
|
5.2
|
|
|
|
|
|
|
|
|
FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)
|
|
|
(a)
|
The initial purchase price was funded with existing cash on hand and borrowings under the Company’s revolving credit facility.
|
|
|
(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.
|
|
|
(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.
|
|
|
(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.
|
|
|
(e)
|
Represents the fair value assigned to the JJE trade name, which is considered to be an indefinite-lived intangible asset.
|
|
|
(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.
|
As further explained in Note
17
– Fair Value Measurements, in the years ended
December 31, 2017
and
2016
, the Company recognized expenses of
$0.8 million
and
$0.4 million
, respectively, associated with the change in the fair value of the contingent consideration liability. In addition, in the years ended
December 31, 2017
and
2016
, the Company recognized expenses of
$0.2 million
and
$0.1 million
, respectively, 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 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. Total rent paid under these agreements to the former shareholders of JJE, some of whom are now employees of the Company, was approximately
$0.4 million
and
$0.2 million
during the years ended
December 31, 2017
and
2016
, respectively. In addition, during the years ended
December 31, 2017
and
2016
, the Company’s Environmental Solutions Group recorded net sales of
$0.7 million
and
$1.7 million
, respectively, relating to products sold to Ingenieria Y Servicios Orbitec SPA, an entity which is majority-owned by affiliates of the sellers of JJE.
NOTE
3
— INVENTORIES
The following table summarizes the components of inventories:
|
|
|
|
|
|
|
|
|
(in millions)
|
2017
|
|
2016
|
Finished goods
|
$
|
74.3
|
|
|
$
|
77.6
|
|
Raw materials
|
52.6
|
|
|
35.3
|
|
Work in process
|
10.3
|
|
|
7.2
|
|
Total inventories
(a)
|
$
|
137.2
|
|
|
$
|
120.1
|
|
|
|
(a)
|
Amounts at
December 31, 2017
include inventories acquired in the TBEI acquisition - see Note
2
– Acquisitions.
|
|
|
|
|
|
|
|
FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)
|
NOTE
4
— PROPERTIES AND EQUIPMENT, NET
The following table summarizes the components of properties and equipment, net:
|
|
|
|
|
|
|
|
|
(in millions)
|
2017
|
|
2016
|
Land
|
$
|
3.7
|
|
|
$
|
0.2
|
|
Buildings and improvements
|
34.7
|
|
|
26.0
|
|
Machinery and equipment
|
130.6
|
|
|
118.0
|
|
Total property and equipment, at cost
|
169.0
|
|
|
144.2
|
|
Less: Accumulated depreciation
|
108.9
|
|
|
101.3
|
|
Properties and equipment, net
(a)
|
$
|
60.1
|
|
|
$
|
42.9
|
|
|
|
(a)
|
Amounts at
December 31, 2017
include properties and equipment acquired in the TBEI acquisition - see Note
2
– Acquisitions.
|
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
$10.6 million
and
$12.6 million
at
December 31, 2017
and
2016
, respectively. Of these amounts,
$1.9 million
and
$1.9 million
, were included within
Other current liabilities
on the Consolidated Balance Sheets at
December 31, 2017
and
2016
, 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
$8.5 million
in
2017
,
$8.3 million
in
2016
and
$7.2 million
in
2015
. Sublease income and contingent rentals relating to operating leases were insignificant. At
December 31, 2017
, minimum future rental commitments under operating leases having non-cancelable lease terms in excess of one year aggregated
$37.2 million
and were payable as follows:
$8.4 million
in
2018
,
$7.3 million
in
2019
,
$6.7 million
in
2020
,
$6.0 million
in
2021
,
$5.3 million
in
2022
and
$3.5 million
thereafter.
NOTE
5
— RENTAL EQUIPMENT, NET
The following table summarizes the components of rental equipment, net:
|
|
|
|
|
|
|
|
|
(in millions)
|
2017
|
|
2016
|
Rental equipment
|
$
|
107.2
|
|
|
$
|
90.5
|
|
Less: Accumulated depreciation
|
20.0
|
|
|
9.7
|
|
Rental equipment, net
|
$
|
87.2
|
|
|
$
|
80.8
|
|
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
$31.6 million
in
2017
,
$18.4 million
in
2016
and
$8.2 million
in
2015
.
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, 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
|
|
Acquisitions
|
136.0
|
|
|
—
|
|
|
136.0
|
|
Translation adjustments
|
0.4
|
|
|
4.4
|
|
|
4.8
|
|
Balance at December 31, 2017
|
$
|
263.6
|
|
|
$
|
113.7
|
|
|
$
|
377.3
|
|
The following table summarizes the gross carrying amount and accumulated amortization of intangible assets for each major class of intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
December 31, 2016
|
(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)
|
$
|
90.9
|
|
|
$
|
(4.6
|
)
|
|
$
|
86.3
|
|
|
$
|
0.8
|
|
|
$
|
(0.1
|
)
|
|
$
|
0.7
|
|
Other
(a)
|
2.9
|
|
|
(0.9
|
)
|
|
2.0
|
|
|
1.1
|
|
|
(0.4
|
)
|
|
0.7
|
|
Total definite-lived intangible assets
|
93.8
|
|
|
(5.5
|
)
|
|
88.3
|
|
|
1.9
|
|
|
(0.5
|
)
|
|
1.4
|
|
Indefinite-lived intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
Trade names
|
63.5
|
|
|
—
|
|
|
63.5
|
|
|
8.8
|
|
|
—
|
|
|
8.8
|
|
Total indefinite-lived intangible assets
|
63.5
|
|
|
—
|
|
|
63.5
|
|
|
8.8
|
|
|
—
|
|
|
8.8
|
|
Total intangible assets
(b)
|
$
|
157.3
|
|
|
$
|
(5.5
|
)
|
|
$
|
151.8
|
|
|
$
|
10.7
|
|
|
$
|
(0.5
|
)
|
|
$
|
10.2
|
|
|
|
(a)
|
Average useful life of customer relationships and other definite-lived intangible assets are estimated to be approximately
12 years
and
6 years
, respectively. The average useful life across all definite-lived intangible assets is estimated to be approximately
12 years
.
|
|
|
(b)
|
Amounts at
December 31, 2017
include intangible assets acquired in the TBEI acquisition - see Note
2
– Acquisitions.
|
Amortization expense
for the year ended
December 31, 2017
was
$4.8 million
.
Amortization expense
for the years ended
December 31, 2016
and
2015
was immaterial.
The Company currently estimates that aggregate amortization expense will be approximately
$8.0 million
in
2018
,
$8.0 million
in
2019
,
$8.0 million
in
2020
,
$8.0 million
in
2021
,
$7.7 million
in
2022
and
$48.6 million
thereafter. Actual amounts of amortization may differ from estimated amounts due to additional intangible asset acquisitions, changes in foreign currency rates, impairment of intangible assets and other events.
NOTE
7
— DEBT
The following table summarizes the components of long-term debt and capital lease obligations:
|
|
|
|
|
|
|
|
|
(in millions)
|
2017
|
|
2016
|
Amended 2016 Credit Agreement:
|
|
|
|
Revolving credit facility
|
$
|
277.0
|
|
|
$
|
63.2
|
|
Capital lease obligations
|
0.7
|
|
|
0.8
|
|
Total long-term borrowings and capital lease obligations, including current portion
|
277.7
|
|
|
64.0
|
|
Less: Current capital lease obligations
|
0.3
|
|
|
0.5
|
|
Total long-term borrowings and capital lease obligations
|
$
|
277.4
|
|
|
$
|
63.5
|
|
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
(in millions)
|
Notional
Amount
|
|
Fair
Value
|
|
Notional
Amount
|
|
Fair
Value
|
Long-term debt
(a)
|
$
|
277.7
|
|
|
$
|
277.7
|
|
|
$
|
64.0
|
|
|
$
|
64.0
|
|
|
|
(a)
|
Long-term debt includes current portions of long-term debt and current portions of capital lease obligations of
$0.3 million
and
$0.5 million
as of
December 31, 2017
and
2016
, 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.
|
|
|
|
|
|
|
FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)
|
The 2016 Credit Agreement provided for a
$325.0 million
revolving credit facility, maturing on
January 27, 2021
, with borrowings in the form of loans or letters of credit up to the aggregate availability under the facility, with a sub-limit of
$50.0 million
for letters of credit. In addition, the 2016 Credit Agreement includes an accordion feature, whereby the Company may cause the commitments to increase by up to an additional
$75.0 million
, subject to the approval of the applicable lenders providing such additional financing.
On
June 2, 2017
, in anticipation of the TBEI acquisition, the Company executed an amendment to the 2016 Credit Agreement (the “Amended 2016 Credit Agreement”), which included provisions to exercise this accordion feature, thereby increasing the borrowing capacity under the Amended 2016 Credit Agreement to
$400.0 million
.
The Amended 2016 Credit Agreement allows for the Borrowers to borrow in denominations of U.S. Dollars, Canadian Dollars (up to a maximum of C
$100.0 million
) or Euros (up to a maximum of €
20.0 million
). Borrowings under the Amended 2016 Credit Agreement may be used for working capital and general corporate purposes, including permitted acquisitions.
The Company’s domestic subsidiaries provide guarantees for all obligations of the Borrowers under the Amended 2016 Credit Agreement, which is secured by a first priority security interest in all now or hereafter acquired domestic property and assets and the stock or other equity interests in each of the domestic subsidiaries and
65%
of the outstanding voting capital stock of certain first-tier foreign subsidiaries, subject to certain exclusions.
Borrowings under the Amended 2016 Credit Agreement bear interest, at the Company’s option, at a base rate or a LIBOR rate, plus, in each case, an applicable margin. The applicable margin ranges from
0.00%
to
1.25%
for base rate borrowings and
1.00%
to
2.25%
for LIBOR borrowings. The Company must also pay a commitment fee to the lenders ranging between
0.15%
to
0.30%
per annum on the unused portion of the
$400.0 million
revolving credit facility along with other standard fees. Letter of credit fees are payable on outstanding letters of credit in an amount equal to the applicable LIBOR margin plus other customary fees.
The Company is subject to certain leverage ratio and interest coverage ratio financial covenants under the Amended 2016 Credit Agreement that are to be measured at each fiscal quarter-end. The Company was in compliance with all such covenants as of
December 31, 2017
. Although it has not been triggered by the Company, the Amended 2016 Credit Agreement also includes a “covenant holiday” period, which allows for the temporary increase of the minimum leverage ratio following the completion of a permitted acquisition, or a series of permitted acquisitions, when the total consideration exceeds a specified threshold. In addition, the Amended 2016 Credit Agreement includes customary negative covenants, subject to certain exceptions, restricting or limiting the Company’s and its subsidiaries’ ability to, among other things: (i) make non-ordinary course dispositions of assets, (ii) make certain fundamental business changes, such as merge, consolidate or enter into any similar combination, (iii) make restricted payments, including dividends and stock repurchases, (iv) incur indebtedness, (v) make certain loans and investments, (vi) create liens, (vii) transact with affiliates, (viii) enter into sale/leaseback transactions, (ix) make negative pledges and (x) modify subordinated debt documents.
Under the Amended 2016 Credit Agreement, restricted payments, including dividends and stock repurchases, shall be permitted if (i) the Company’s leverage ratio is less than or equal to
2.50
, (ii) the Company is in compliance with all other financial covenants and (iii) there are no existing defaults under the Amended 2016 Credit Agreement. If its leverage ratio is more than
2.50
, the Company is still permitted to fund (i) up to
$30.0 million
of dividend payments, (ii) stock repurchases sufficient to offset dilution created by the issuance of equity as compensation to its officer, directors, employees and consultants and (iii) an incremental
$30.0 million
of other cash payments.
The Amended 2016 Credit Agreement contains customary events of default. If an event of default occurs and is continuing, the Borrowers may be required immediately to repay all amounts outstanding under the Amended 2016 Credit Agreement and the commitments from the lenders may be terminated.
In connection with its debt refinancing in
the year ended December 31, 2016
, the Company repaid the remaining
$43.4 million
of principal outstanding under the Company’s March 13, 2013 Credit Agreement (the “2013 Credit Agreement”) and wrote off approximately
$0.3 million
of unamortized deferred financing fees associated with the 2013 Credit Agreement. The Company incurred
$1.1 million
of debt issuance costs in connection with the execution of the 2016 Credit Agreement. Such fees have been deferred and are being amortized over the
five
-year term.
As of
December 31, 2017
, there was
$277.0 million
of cash drawn and
$17.1 million
of undrawn letters of credit under the Amended 2016 Credit Agreement, with
$105.9 million
of net availability for borrowings. As of
December 31, 2017
, there was
no
cash drawn against the Company’s non-U.S. lines of credit which provide for borrowings up to
$0.2 million
.
|
|
|
|
|
|
|
FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)
|
For
the year ended December 31, 2017
, gross borrowings and gross payments under the 2016 Credit Agreement and the Amended 2016 Credit Agreement were
$262.7 million
and
$53.6 million
, respectively. For
the year ended December 31, 2016
, gross borrowings and gross payments under the 2016 Credit Agreement were
$69.8 million
and
$5.0 million
, respectively. For
the year ended December 31, 2015
, there were
no
gross borrowings or gross payments under the Company’s domestic revolving credit facility portion of the 2013 Credit Agreement.
Aggregate maturities of total borrowings due amount to approximately
$0.3 million
in
2018
,
$0.2 million
in
2019
,
$0.1 million
in
2020
and
$277.1 million
in
2021
. The weighted average interest rate on long-term borrowings was
3.25%
at
December 31, 2017
.
The Company paid interest of
$6.6 million
in
2017
,
$1.1 million
in
2016
and
$1.9 million
in
2015
.
Interest Rate Swap
On
June 2, 2017
, the Company entered into an interest rate swap (the “Swap”) with a notional amount of
$150.0 million
, as a means of fixing the floating interest rate component on
$150.0 million
of its variable-rate debt. The Swap is designated as a cash flow hedge, with a termination date of
June 2, 2020
. As a result of the application of hedge accounting treatment, all unrealized gains and losses related to the derivative instrument are recorded in
Accumulated other comprehensive loss
and are reclassified into operations in the same period in which the hedged transaction affects earnings. Hedge effectiveness is tested quarterly. We do not use derivative instruments for trading or speculative purposes.
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 the Swap is derived from a discounted cash flow analysis based on the terms of the contract and the interest rate curve (Level 2 inputs) and measured on a recurring basis in our Consolidated Balance Sheet. At
December 31, 2017
, the fair value of the Swap, included in
Deferred charges and other assets
on the Consolidated Balance Sheets, was
$1.6 million
and no ineffectiveness was recorded. During
the year ended December 31, 2017
, an unrealized pre-tax gain of
$1.6 million
was recorded in
Accumulated other comprehensive loss
.
|
|
|
|
|
|
|
FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)
|
NOTE
8
— INCOME TAXES
The following table summarizes the income tax expense from continuing operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
2017
|
|
2016
|
|
2015
|
Current:
|
|
|
|
|
|
Federal
|
$
|
12.0
|
|
|
$
|
7.0
|
|
|
$
|
6.6
|
|
Foreign
|
0.8
|
|
|
0.6
|
|
|
—
|
|
State and local
|
2.9
|
|
|
2.0
|
|
|
1.8
|
|
Total current tax expense
|
15.7
|
|
|
9.6
|
|
|
8.4
|
|
Deferred:
|
|
|
|
|
|
Federal
|
(15.7
|
)
|
|
8.4
|
|
|
25.4
|
|
Foreign
|
0.8
|
|
|
(0.7
|
)
|
|
(2.0
|
)
|
State and local
|
(0.3
|
)
|
|
0.1
|
|
|
2.3
|
|
Total deferred tax (benefit) expense
|
(15.2
|
)
|
|
7.8
|
|
|
25.7
|
|
Total income tax expense
|
$
|
0.5
|
|
|
$
|
17.4
|
|
|
$
|
34.1
|
|
The following table summarizes the differences between the statutory federal income tax rate and the effective income tax rate from continuing operations:
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
2015
|
Statutory federal income tax rate
|
35.0
|
%
|
|
35.0
|
%
|
|
35.0
|
%
|
State income taxes, net of federal tax benefit
|
4.3
|
|
|
3.6
|
|
|
3.3
|
|
Remeasurement of deferred taxes, associated with 2017 Tax Act
|
(37.6
|
)
|
|
—
|
|
|
—
|
|
Valuation allowance
|
3.6
|
|
|
(3.7
|
)
|
|
1.7
|
|
Domestic production deduction
|
(2.3
|
)
|
|
(2.4
|
)
|
|
(2.2
|
)
|
Tax planning benefits, excluding valuation allowance effects
|
—
|
|
|
—
|
|
|
(6.0
|
)
|
Tax reserves
|
0.1
|
|
|
(1.0
|
)
|
|
0.2
|
|
Tax credits
|
(0.9
|
)
|
|
(0.8
|
)
|
|
1.9
|
|
Foreign tax rate effects
|
(0.5
|
)
|
|
0.8
|
|
|
0.5
|
|
Other, net
|
(0.9
|
)
|
|
(0.9
|
)
|
|
(0.3
|
)
|
Effective income tax rate
|
0.8
|
%
|
|
30.6
|
%
|
|
34.1
|
%
|
The following table summarizes income before income taxes from continuing operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
2017
|
|
2016
|
|
2015
|
U.S.
|
$
|
55.7
|
|
|
$
|
57.7
|
|
|
$
|
96.4
|
|
Non-U.S.
|
5.3
|
|
|
(0.9
|
)
|
|
3.5
|
|
Income before income taxes
|
$
|
61.0
|
|
|
$
|
56.8
|
|
|
$
|
99.9
|
|
Summary
The Company recognized income tax expense of
$0.5 million
for the year ended
December 31, 2017
, compared to
$17.4 million
for the year ended December 31, 2016
. The decrease in expense was primarily due to the recognition of a
$23.0 million
net tax benefit associated with the revaluation of the Company’s net deferred tax liabilities in the U.S. following the reduction of the federal corporate tax rate included in the 2017 Tax Act. This decrease was partially offset by a
$2.2 million
net increase in valuation allowance, inclusive of a
$3.0 million
valuation allowance recorded against the Company’s foreign tax credits as a result of the enactment of the 2017 Tax Act, the recognition of
$0.6 million
of additional tax expense associated with a change in the state tax rate in Illinois, and additional taxes resulting from higher pre-tax earnings. The Company’s effective tax rate for the year ended
December 31, 2017
was
0.8%
, compared to
30.6%
in
2016
. The 2017 effective tax rate included the aforementioned impacts resulting from the 2017 Tax Act. The effective tax rate for
2016
included a
$2.2 million
net benefit from valuation allowance changes, consisting of a
$3.5 million
benefit associated with the release of valuation allowance in Canada, offset by
$1.3 million
of expense recognized in connection with establishing a valuation allowance against net deferred tax assets in the U.K.
|
|
|
|
|
|
|
FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)
|
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 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 2015 rate included certain tax benefits, including 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 rate in the U.K. that did not recur in
2016
.
The Company paid income taxes of
$13.9 million
in
2017
,
$13.3 million
in
2016
and
$9.6 million
in
2015
.
Impact of the 2017 Tax Act
In the fourth quarter of 2017, the 2017 Tax Act was enacted. Among its provisions, the 2017 Tax Act reduces the U.S. federal corporate tax rate from
35%
to
21%
(effective in 2018), requires companies to pay a one-time transition tax on earnings of certain foreign subsidiaries that were previously tax deferred and creates new taxes on certain foreign sourced earnings. As discussed in Note
1
- Summary of Significant Accounting Policies, the consolidated financial statements for the year ended December 31, 2017 include the Company’s provisional estimates of the impact of the 2017 Tax Act, in accordance with SAB 118. The Company expects to adjust the provisional amounts throughout the measurement period as the Company’s calculations are refined and additional interpretive guidance becomes available.
The Company accounts for income taxes in accordance with ASC 740
,
Income Taxes
, which requires that the effect of a change in tax rates on deferred tax assets and liabilities be recognized in the period the tax rate change was enacted. As a result of the 2017 Tax Act being signed into law on December 22, 2017, the Company remeasured its U.S. deferred tax assets and liabilities at the lower rate, recording a net tax benefit of
$23.0 million
as a component of
Income tax expense
on the Consolidated Statement of Operations for the year ended
December 31, 2017
.
The 2017 Tax Act also provides a one-time “transition tax” on untaxed post-1986 accumulated earnings and profits (“E&P”) of a company’s controlled foreign corporations (“CFC”) determined as of November 2, 2017 or
December 31, 2017
(whichever date on which there is more deferred E&P). Cash and cash equivalents are taxed at an effective rate of
15.5%
and earnings in excess of the cash position are taxed at an effective rate of
8%
. The 2017 Tax Act permits the netting of positive earnings of one CFC against deficits of others. At both November 2, 2017 and
December 31, 2017
, the accumulated undistributed earnings of the Company’s foreign subsidiaries aggregate to an overall E&P deficit. Therefore, the Company estimates that no transition tax will be payable under the provisions of the 2017 Tax Act. As with other tax calculations surrounding the 2017 Tax Act, the Company’s estimate of its transition tax liability as of
December 31, 2017
is provisional due to complexities inherent in the computations that it expects to be addressed in whole, or in part, by regulations issued during 2018. As of
December 31, 2017
, the Company continues to assert that its undistributed earnings of certain foreign subsidiaries are indefinitely reinvested.
As a result of the 2017 Tax Act, a
$3.0 million
valuation allowance was recorded against the Company’s foreign tax credits. The 2017 Tax Act moves the U.S. from a worldwide system of taxation to a territorial system and changes the rules that enable taxpayers to generate foreign source income related to export sales. Consequently, at this time, the Company does not believe that it is “more likely than not” that it can utilize its existing foreign tax credits within the applicable carryforward period. The Company will continue to evaluate this conclusion throughout the measurement period as additional interpretive guidance is issued.
The Company does not believe at this time that it will be subject to either the Base Erosion and Anti-Abuse (“BEAT”) tax or the Global Intangible Low-Taxed Income (“GILTI”) tax that were enacted pursuant to the 2017 Tax Act and that are effective beginning January 1, 2018. Accordingly, the Company has not yet selected an accounting policy with respect to GILTI. The Company will continue to evaluate this conclusion throughout the measurement period as additional interpretive guidance is issued.
|
|
|
|
|
|
|
FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)
|
Deferred Taxes
The following table summarizes deferred income tax assets and liabilities of the Company’s continuing operations:
|
|
|
|
|
|
|
|
|
(in millions)
|
2017
|
|
2016
|
Deferred tax assets:
|
|
|
|
Property, plant and equipment
|
$
|
1.7
|
|
|
$
|
1.7
|
|
Accrued expenses
|
24.0
|
|
|
31.8
|
|
Stock based compensation
|
2.6
|
|
|
3.6
|
|
Net operating loss, research and development and foreign tax credit carryforwards
|
22.6
|
|
|
22.6
|
|
Goodwill and intangibles
|
0.4
|
|
|
1.2
|
|
Pension benefits
|
22.7
|
|
|
32.9
|
|
Other
|
0.8
|
|
|
0.1
|
|
Gross deferred tax assets
|
74.8
|
|
|
93.9
|
|
Valuation allowance
|
(10.6
|
)
|
|
(7.7
|
)
|
Total deferred tax assets
|
64.2
|
|
|
86.2
|
|
Deferred tax liabilities:
|
|
|
|
Property, plant and equipment
|
(11.3
|
)
|
|
(10.5
|
)
|
Pension benefits
|
(13.5
|
)
|
|
(14.5
|
)
|
Goodwill and intangibles
|
(77.1
|
)
|
|
(51.1
|
)
|
Other
|
(1.2
|
)
|
|
(1.6
|
)
|
Gross deferred tax liabilities
|
(103.1
|
)
|
|
(77.7
|
)
|
Net deferred tax (liabilities) assets
|
$
|
(38.9
|
)
|
|
$
|
8.5
|
|
The deferred tax asset for tax loss carryforwards at
December 31, 2017
includes federal net operating loss carryforwards of
$1.1 million
, which will begin to expire in
2027
, state net operating loss carryforwards of
$8.3 million
, which will begin to expire in
2018
, and foreign net operating loss carryforwards of
$9.1 million
, which will begin to expire in
2025
. The deferred tax asset for tax credit carryforwards at
December 31, 2017
includes U.S. research tax credit carryforwards of
$1.1 million
, which will begin to expire in
2019
and U.S. foreign tax credits of
$3.0 million
, which will begin to expire in
2023
.
The deferred tax asset for tax loss and tax credit carryforwards at
December 31, 2016
, included federal net operating loss carryforwards of
$3.0 million
, state net operating loss carryforwards of
$6.8 million
, foreign net operating loss carryforwards of
$9.2 million
, U.S. research tax credit carryforwards of
$1.1 million
, U.S. foreign tax credits of
$1.5 million
, and U.S. alternative minimum tax credit carryforwards of
$1.0 million
.
The
$64.2 million
of deferred tax assets at
December 31, 2017
, 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, 2017
. 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.
Valuation Allowances
ASC 740
,
Income Taxes
, also 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.
|
|
|
|
|
|
|
FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)
|
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 year ended
December 31, 2017
, the Company determined that
$0.8 million
of valuation allowance, previously recorded against state deferred tax assets, could be released primarily as a result of future taxable income expected to be generated in certain states following the TBEI acquisition.
At
December 31, 2017
, the total valuation allowance recorded against the Company’s deferred tax assets was
$10.6 million
, comprised of a
$6.3 million
valuation allowance recorded against state net operating loss carryforwards, a
$1.3 million
valuation allowance recorded against foreign net deferred tax assets, inclusive of a
$1.0 million
valuation allowance against net deferred tax assets in the U.K., and the
$3.0 million
valuation allowance recorded against the Company’s foreign tax credits as a result of the 2017 Tax Act, discussed above.
Unrecognized Tax Benefits
The following table summarizes the activity related to the Company’s unrecognized tax benefits:
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
2017
|
|
2016
|
|
2015
|
Balance at January 1
|
$
|
1.8
|
|
|
$
|
2.2
|
|
|
$
|
2.0
|
|
Increases related to current year tax
|
0.2
|
|
|
0.1
|
|
|
0.3
|
|
Decreases due to lapse of statute of limitations
|
(0.1
|
)
|
|
(0.5
|
)
|
|
(0.1
|
)
|
Balance at December 31
|
$
|
1.9
|
|
|
$
|
1.8
|
|
|
$
|
2.2
|
|
The Company’s continuing practice is to recognize interest and penalties related to income tax matters in income tax expense. At
December 31, 2017
and
2016
, accruals for interest and penalties amounting to
$0.6 million
and
$0.6 million
, respectively, are included in the Consolidated Balance Sheets but are not included in the table above. At
December 31, 2017
and
2016
, reserves for unrecognized tax benefits, including interest and penalties, of
$2.2 million
and
$2.1 million
, respectively, were included within
Other long-term liabilities
on the Consolidated Balance Sheets. At
December 31, 2017
, unrecognized tax benefits of
$0.3 million
were included as a component of
Deferred tax liabilities
on the Consolidated Balance Sheet. At
December 31, 2016
, unrecognized tax benefits of
$0.3 million
were included as a reduction of
Deferred tax assets
on the Consolidated Balance Sheet.
All of the unrecognized tax benefits of
$1.9 million
and
$1.8 million
at
December 31, 2017
and
2016
, respectively, 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 or settlements with tax authorities within the next twelve months.
Status of Tax Returns
We file U.S., state and foreign income tax returns in jurisdictions with varying statutes of limitations. The
2014
through
2016
tax years generally remain subject to examination by federal tax authorities, whereas the
2013
through
2016
tax years generally remain subject to examination by most state tax authorities. In significant foreign jurisdictions, the tax years from
2013
through
2016
generally remain subject to examination by their respective tax authorities.
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.
In September 2017, the Company executed an amendment to its U.S. defined benefit pension plan, which enabled the Company to announce a limited-time voluntary lump-sum pension offering to eligible, terminated, vested plan participants. In connection with the offering,
516
individuals elected to receive a lump-sum settlement payment. In the aggregate, the Company paid a total of
$13.7 million
in lump-sum benefit payments during
the year ended December 31, 2017
, using assets of the plan. As total benefit payments during
the year ended December 31, 2017
exceeded the sum of the service and interest cost, the Company
|
|
|
|
|
|
|
FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)
|
was required to measure the liabilities of the benefit plans and recognize a settlement charge of
$6.1 million
, in accordance with ASC 715,
Compensation - Retirement Benefits.
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)
|
2017
|
|
2016
|
|
2015
|
|
2017
|
|
2016
|
|
2015
|
Company-sponsored plans:
|
|
|
|
|
|
|
|
|
|
|
|
Service cost
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
0.2
|
|
|
$
|
0.2
|
|
|
$
|
0.2
|
|
Interest cost
|
7.6
|
|
|
7.8
|
|
|
7.6
|
|
|
1.4
|
|
|
1.8
|
|
|
2.1
|
|
Expected return on plan assets
|
(9.6
|
)
|
|
(10.3
|
)
|
|
(10.3
|
)
|
|
(2.1
|
)
|
|
(2.4
|
)
|
|
(2.7
|
)
|
Amortization of actuarial loss
|
2.5
|
|
|
5.6
|
|
|
6.8
|
|
|
0.6
|
|
|
0.6
|
|
|
0.7
|
|
Settlement charge recognized
|
6.1
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total Company-sponsored plans
|
6.6
|
|
|
3.1
|
|
|
4.1
|
|
|
0.1
|
|
|
0.2
|
|
|
0.3
|
|
Multi-employer plans
|
0.2
|
|
|
0.1
|
|
|
0.2
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Net periodic pension expense
|
$
|
6.8
|
|
|
$
|
3.2
|
|
|
$
|
4.3
|
|
|
$
|
0.1
|
|
|
$
|
0.2
|
|
|
$
|
0.3
|
|
The following table summarizes the weighted-average assumptions used in determining pension costs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Benefit Plan
|
|
Non-U.S. Benefit Plan
|
|
2017
|
|
2016
|
|
2015
|
|
2017
|
|
2016
|
|
2015
|
Discount rate
|
4.3
|
%
|
|
4.6
|
%
|
|
4.2
|
%
|
|
2.6
|
%
|
|
3.7
|
%
|
|
3.5
|
%
|
Rate of increase in compensation levels
|
—
|
|
|
—
|
|
|
3.5
|
%
|
|
—
|
|
|
—
|
|
|
—
|
|
Expected long-term rate of return on plan assets
|
7.1
|
%
|
|
7.5
|
%
|
|
7.8
|
%
|
|
4.2
|
%
|
|
4.9
|
%
|
|
4.7
|
%
|
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)
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Benefit obligation, beginning of year
|
$
|
180.6
|
|
|
$
|
174.3
|
|
|
$
|
51.7
|
|
|
$
|
55.7
|
|
Service cost
|
—
|
|
|
—
|
|
|
0.2
|
|
|
0.2
|
|
Interest cost
|
7.6
|
|
|
7.8
|
|
|
1.4
|
|
|
1.8
|
|
Actuarial loss (gain)
|
12.9
|
|
|
7.7
|
|
|
(0.1
|
)
|
|
7.8
|
|
Benefits and expenses paid
|
(8.4
|
)
|
|
(9.2
|
)
|
|
(3.3
|
)
|
|
(4.2
|
)
|
Settlement payments
|
(13.7
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
Foreign currency translation
|
—
|
|
|
—
|
|
|
4.8
|
|
|
(9.6
|
)
|
Benefit obligation, end of year
|
$
|
179.0
|
|
|
$
|
180.6
|
|
|
$
|
54.7
|
|
|
$
|
51.7
|
|
Accumulated benefit obligation, end of year
|
$
|
179.0
|
|
|
$
|
180.6
|
|
|
$
|
54.7
|
|
|
$
|
51.7
|
|
The following table summarizes the weighted-average assumptions used in determining benefit obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Benefit Plan
|
|
Non-U.S. Benefit Plan
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Discount rate
|
3.7
|
%
|
|
4.3
|
%
|
|
2.5
|
%
|
|
2.6
|
%
|
|
|
|
|
|
|
|
FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)
|
The following summarizes the changes in the fair value of plan assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Benefit Plan
|
|
Non-U.S. Benefit Plan
|
(in millions)
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Fair value of plan assets, beginning of year
|
$
|
131.1
|
|
|
$
|
128.1
|
|
|
$
|
48.5
|
|
|
$
|
54.3
|
|
Actual return on plan assets
(a)
|
17.7
|
|
|
6.6
|
|
|
3.9
|
|
|
6.2
|
|
Company contribution
|
5.0
|
|
|
5.6
|
|
|
0.9
|
|
|
1.3
|
|
Benefits and expenses paid
|
(8.4
|
)
|
|
(9.2
|
)
|
|
(3.3
|
)
|
|
(4.2
|
)
|
Settlement payments
|
(13.7
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
Foreign currency translation
|
—
|
|
|
—
|
|
|
4.7
|
|
|
(9.1
|
)
|
Fair value of plan assets, end of year
|
$
|
131.7
|
|
|
$
|
131.1
|
|
|
$
|
54.7
|
|
|
$
|
48.5
|
|
|
|
(a)
|
Actual return on plan assets of the U.S. benefit plan for the years ended
December 31, 2017
and
2016
, was net of fees, commissions and other expenses paid from plan assets of
$2.2 million
and
$1.9 million
, respectively.
|
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
|
|
2017
|
|
2016
|
(in millions)
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
Cash and cash equivalents
|
$
|
4.2
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
4.2
|
|
|
$
|
5.7
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
5.7
|
|
Equity securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Large Cap
|
39.7
|
|
|
—
|
|
|
—
|
|
|
39.7
|
|
|
36.4
|
|
|
0.1
|
|
|
—
|
|
|
36.5
|
|
U.S. Small and Mid Cap
|
18.5
|
|
|
—
|
|
|
—
|
|
|
18.5
|
|
|
16.9
|
|
|
—
|
|
|
—
|
|
|
16.9
|
|
Developed international
|
12.3
|
|
|
7.1
|
|
|
—
|
|
|
19.4
|
|
|
8.6
|
|
|
7.7
|
|
|
—
|
|
|
16.3
|
|
Emerging markets
|
12.1
|
|
|
0.8
|
|
|
—
|
|
|
12.9
|
|
|
11.9
|
|
|
0.5
|
|
|
—
|
|
|
12.4
|
|
Fixed income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government securities
|
6.6
|
|
|
—
|
|
|
—
|
|
|
6.6
|
|
|
7.1
|
|
|
—
|
|
|
—
|
|
|
7.1
|
|
Asset-backed securities
|
—
|
|
|
11.7
|
|
|
—
|
|
|
11.7
|
|
|
—
|
|
|
9.9
|
|
|
—
|
|
|
9.9
|
|
Corporate bonds
|
—
|
|
|
13.9
|
|
|
—
|
|
|
13.9
|
|
|
—
|
|
|
14.9
|
|
|
—
|
|
|
14.9
|
|
Other investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mutual funds
|
1.4
|
|
|
—
|
|
|
—
|
|
|
1.4
|
|
|
5.6
|
|
|
—
|
|
|
—
|
|
|
5.6
|
|
Real estate
|
3.1
|
|
|
—
|
|
|
—
|
|
|
3.1
|
|
|
5.4
|
|
|
—
|
|
|
—
|
|
|
5.4
|
|
Total assets at fair value
(a)
|
$
|
97.9
|
|
|
$
|
33.5
|
|
|
$
|
—
|
|
|
$
|
131.4
|
|
|
$
|
97.6
|
|
|
$
|
33.1
|
|
|
$
|
—
|
|
|
$
|
130.7
|
|
|
|
(a)
|
Total assets at fair value in the table above exclude a net receivable of
$0.3 million
and
$0.4 million
at
December 31, 2017
and
2016
, respectively.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-U. S. Benefit Plan
|
|
2017
|
|
2016
|
(in millions)
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
Cash
|
$
|
0.8
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
0.8
|
|
|
$
|
0.4
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
0.4
|
|
Equity securities
|
—
|
|
|
41.1
|
|
|
—
|
|
|
41.1
|
|
|
—
|
|
|
41.9
|
|
|
—
|
|
|
41.9
|
|
Fixed income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government securities
|
3.6
|
|
|
—
|
|
|
—
|
|
|
3.6
|
|
|
1.3
|
|
|
—
|
|
|
—
|
|
|
1.3
|
|
Corporate bonds
|
6.8
|
|
|
2.4
|
|
|
—
|
|
|
9.2
|
|
|
2.6
|
|
|
2.3
|
|
|
—
|
|
|
4.9
|
|
Total assets at fair value
|
$
|
11.2
|
|
|
$
|
43.5
|
|
|
$
|
—
|
|
|
$
|
54.7
|
|
|
$
|
4.3
|
|
|
$
|
44.2
|
|
|
$
|
—
|
|
|
$
|
48.5
|
|
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
7.0%
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
53%
and
73%
equity securities, (ii) between
25%
and
45%
fixed income securities and (iii) between
0%
and
20%
in 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
65%
and
75%
equity securities and between
25%
and
35%
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 the year ended
December 31, 2015
.
|
|
|
|
|
|
|
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)
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Fair value of plan assets, end of year
|
$
|
131.7
|
|
|
$
|
131.1
|
|
|
$
|
54.7
|
|
|
$
|
48.5
|
|
Benefit obligation, end of year
|
179.0
|
|
|
180.6
|
|
|
54.7
|
|
|
51.7
|
|
Funded status, end of year
|
$
|
(47.3
|
)
|
|
$
|
(49.5
|
)
|
|
$
|
—
|
|
|
$
|
(3.2
|
)
|
The following summarizes the amounts recognized within our Consolidated Balance Sheets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Benefit Plan
|
|
Non-U.S. Benefit Plan
|
(in millions)
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Amounts recognized in Total liabilities include:
|
|
|
|
|
|
|
|
Long-term pension and other post-retirement benefit liabilities
|
$
|
47.3
|
|
|
$
|
49.5
|
|
|
$
|
—
|
|
|
$
|
3.2
|
|
Net liability recorded
|
$
|
47.3
|
|
|
$
|
49.5
|
|
|
$
|
—
|
|
|
$
|
3.2
|
|
Amounts recognized in Accumulated other comprehensive loss include:
|
|
|
|
|
|
|
|
Net actuarial loss
|
$
|
80.2
|
|
|
$
|
84.1
|
|
|
$
|
17.8
|
|
|
$
|
18.8
|
|
Net amount recognized, pre-tax
|
$
|
80.2
|
|
|
$
|
84.1
|
|
|
$
|
17.8
|
|
|
$
|
18.8
|
|
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
is being 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 is also being applied to the U.K. benefit plan, which has been fully frozen for a number of years. The Company expects
$3.6 million
of the net actuarial loss to be amortized from
Accumulated other comprehensive loss
into net periodic benefit cost in
2018
.
The Company expects to contribute up to
$5.1 million
to the U.S. benefit plan and up to
$1.4 million
to the non-U.S. benefit plan in
2018
. 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
|
2018
|
$
|
9.2
|
|
|
$
|
2.4
|
|
2019
|
9.1
|
|
|
2.5
|
|
2020
|
9.6
|
|
|
2.6
|
|
2021
|
9.8
|
|
|
2.7
|
|
2022
|
10.3
|
|
|
2.8
|
|
2023-2027
|
53.9
|
|
|
15.6
|
|
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
2017
,
$6.9 million
in
2016
and
$7.5 million
in
2015
.
|
|
|
|
|
|
|
FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)
|
Multi-Employer Pension Plans
The Company also participates in two multi-employer pension plans that provide defined benefits to employees under U.S. collective bargaining agreements, as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Fund
|
|
EIN/Pension Plan Number
|
|
Pension Protection Act Zone Status
|
|
FIP/RP Status Pending/ Implemented
(a)
|
|
Surcharge Imposed
|
|
Expiration of Collective Bargaining Agreement
|
|
|
2017
|
|
2016
|
|
|
|
IAM National Pension Fund
(b)
|
|
51-6031295/002
|
|
Green
|
|
Green
|
|
No
|
|
No
|
|
5/31/2018
|
Sheet Metal Worker’s National Pension Fund
(b)
|
|
52-6112463/001
|
|
Yellow
|
|
Yellow
|
|
FIP Implemented
|
|
No
|
|
6/27/2020
|
|
|
(a)
|
Indicates whether the plan has a financial improvement plan (“FIP”) or a rehabilitation plan (“RP”) which is either pending or has been implemented.
|
|
|
(b)
|
The plans’ year-end to which the zone status relates is
December 31, 2016
and
2015
.
|
Contributions to these plans totaled
$0.2 million
,
$0.1 million
and
$0.2 million
for
2017
,
2016
and
2015
, respectively. The Company’s contributions do not represent more than 5% of the total contributions to the plans as indicated in their most recently available annual reports dated
December 31, 2016
.
The risks of participating in a multi-employer pension plan are different from a single-employer plan in that (i) assets contributed to the multi-employer plan by one employer may be used to provide benefits to employees of other participating employers; (ii) if a participating employer stops contributing to the plan, the unfunded obligations of the plan may be borne by the remaining participating employers; and (iii) if the Company chooses to stop participating in the multi-employer pension plan, the Company may be required to pay the plan an amount based on the unfunded status of the plan, referred to as a withdrawal liability.
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, 2017
, the Company had outstanding performance and financial standby letters of credit, as well as outstanding bid and performance bonds, aggregating
$21.3 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.
Following the
June 3, 2016
acquisition of JJE, the Company has transactions involving the sale of equipment to certain of its customers which include (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, 2017
, the single year and maximum potential cash payments the Company could be required to make to repurchase equipment under these agreements were each
$4.5 million
. 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. The Company has recorded the residual liability for potential losses related to the repurchase exposures, which 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 Sheet based on historical experience and current facts and circumstances, and the amounts recognized during the years ended
December 31, 2017
and
2016
, respectively, were not material to the Company’s financial position or results of operations. Historical cash requirements and losses associated with these obligations have not been significant, but could increase if customer defaults exceed current expectations.
|
|
|
|
|
|
|
FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)
|
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.
During the year ended
December 31, 2017
, the Company recognized an estimated liability within the Environmental Solutions Group in connection with a specific warranty matter. It is reasonably possible that the Company’s estimate may change in the near term as more information becomes available; however, the ultimate resolution of this matter is not expected to have a material adverse effect on the Company’s results of operations, financial position or liquidity.
The following table summarizes the changes in the Company’s warranty liabilities:
|
|
|
|
|
|
|
|
|
(in millions)
|
2017
|
|
2016
|
Balance at January 1
|
$
|
6.4
|
|
|
$
|
7.4
|
|
Provisions to expense
|
6.6
|
|
|
5.5
|
|
Acquisitions
|
1.7
|
|
|
—
|
|
Payments
|
(6.3
|
)
|
|
(6.5
|
)
|
Balance at December 31
|
$
|
8.4
|
|
|
$
|
6.4
|
|
Environmental Liabilities
In May 2012, the Company sold a facility in Pearland, Texas. The facility was previously used by the Company’s discontinued Pauluhn business, which manufactured marine, offshore and industrial lighting products. The site is in the process of remediation, and it is probable that the site will incur future costs. As such, as of
December 31, 2017
and
2016
, environmental remediation reserves of
$0.5 million
and
$0.6 million
, respectively, have been included in liabilities of discontinued operations on the Consolidated Balance Sheets. 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.
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FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)
|
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.
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. Pursuant to these orders, these plaintiffs had six months thereafter to refile their cases in jurisdictions where these firefighters are located. Prior to this six-month deadline, some of the attorneys representing these plaintiffs contacted the Company regarding possible settlement of these cases. During the year ended
December 31, 2017
, the Company entered into a global settlement agreement with two attorneys who represented approximately
1,090
of these plaintiffs. Under the terms of the settlement agreement, the Company offered
$700
per plaintiff to settle these cases.
717
plaintiffs accepted this offer as a final settlement. The attorneys representing these plaintiffs have agreed to withdraw from representing plaintiffs who have not responded to the settlement offer. It is the Company’s position that the non-settling plaintiffs who failed to timely refile their cases following the February 2017 dismissal by the Circuit Court of Cook County are now barred from doing so by the statute of limitations. The Company also has filed a venue motion seeking to transfer to DuPage County cases involving
10
plaintiffs who reside and work in Illinois but outside of Cook County. The Court granted this motion on June 28, 2017.
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FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)
|
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.
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 thereafter moved to recover various fees and costs in this case, asserting that plaintiffs’ counsel failed to properly investigate these claims prior to filing suit. The Court granted this motion on April 25, 2017, awarding
$0.1 million
to the Company. Plaintiffs’ counsel has appealed this Order. 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
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FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)
|
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 2017, plaintiffs filed additional cases in the Court of Common Pleas, Philadelphia County, involving over
100
Philadelphia firefighter plaintiffs. During January 2017, plaintiffs filed a motion to consolidate and bifurcate, similar to a motion filed in the Pittsburgh hearing loss cases, as described below. The Company has filed an opposition to this motion. These cases were then transferred to the mass tort program in Philadelphia for pretrial purposes. Plaintiffs’ counsel thereafter dismissed several plaintiffs. During November 2017, a trial involving
one
Philadelphia firefighter occurred. The jury returned a verdict in favor of the Company in this trial. As of
December 31, 2017
, a total of
75
firefighters are involved in cases pending in the Philadelphia mass tort program.
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. Each trial will involve
eight
firefighters. Prior to the first scheduled trial in Pittsburgh, the Court granted the Company’s motion for summary judgment and dismissed all claims asserted by plaintiff firefighters involved in this trial. Plaintiffs have appealed this dismissal. 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 sought one trial involving liability issues which will apply to all Pittsburgh firefighters who have filed suit against the Company. The Company filed an opposition to this motion. On April 18, 2017, the trial court granted plaintiffs’ motion to bifurcate the next Pittsburgh trial. Pursuant to a motion for clarification filed by the Company, the Court ruled that the bifurcation order will only apply to
six
plaintiffs who are part of the next trial group in Pittsburgh. The Company thereafter sought an interlocutory appeal of the Court’s bifurcation order. The appellate court declined to accept the appeal at this time. A bifurcated trial began on September 27, 2017 in Allegheny County, Pennsylvania. Prior to and during trial,
two
plaintiffs were dismissed, resulting in
four
plaintiffs remaining for trial. After approximately two weeks of trial, the jury found that the Company’s siren product was not defective or unreasonably dangerous and rendered a verdict in favor of the Company. A second trial involving Pittsburgh firefighters began during January 2018. At the outset of this trial, plaintiffs’ attorneys requested that the Company consider settlement of various cases. This trial was continued until March 2018 to allow the parties to further discuss possible settlement. As of
December 31, 2017
, the Company has recognized its best estimate of a potential settlement amount. While it is reasonably possible that the ultimate resolution of this matter may result in a loss in excess of the amount accrued, a reasonable estimate of the incremental loss or range of losses cannot be made. 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. During August 2017,
five
cases involving
70
firefighter plaintiffs were filed in Lackawanna County, Pennsylvania. These cases involve firefighter plaintiffs who originally filed in Cook County and were dismissed pursuant to the Company’s forum nonconveniens motion. As of
December 31, 2017
, a total of
263
firefighters are involved in cases filed in Allegheny and Lackawanna counties in Pennsylvania.
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. All of the cases filed in Erie County, New York have been removed to federal court in the Western District of New York. Plaintiffs have filed a motion to consolidate and bifurcate these cases, similar to the motion filed in the Pittsburgh hearing loss cases, as described above. The Company has filed an opposition to the motion. 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 subsequently was transferred to federal court in the Northern District of New York and thereafter dismissed. During April 2015 through January 2016,
29
new cases involving a total of
235
firefighters were filed in various counties in the New York City area. During December 2016 through October 2017 additional cases were filed in these jurisdictions. As of December 31, 2017, a total of
535
firefighters are involved in cases filed in the state of New York.
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
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FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)
|
New Jersey firefighter was filed in the United States District Court of New Jersey. As of December 31, 2017, a total of
89
firefighters are currently involved in cases filed in New Jersey. On May 2, 2017, plaintiffs filed a motion to consolidate and bifurcate in the pending federal court case in New Jersey. This motion is similar to bifurcation motions filed by plaintiffs in Pittsburgh, Buffalo and Philadelphia. The Court has denied this motion as premature. The parties have filed a petition to consolidate all New Jersey state court cases for pretrial purposes.
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. During August 2017, plaintiffs filed additional cases in Suffolk County court. The Company has moved to transfer various cases filed in Suffolk county to other counties in Massachusetts where plaintiffs reside and work. As of December 31, 2017, a total of
218
firefighters are involved in cases filed in Massachusetts.
During August and September 2017, plaintiffs’ attorneys filed additional hearing loss cases in Florida. The Company is the only named defendant. These cases have been filed in several different counties in Florida, including Tampa, Miami and Orlando municipalities. Plaintiffs have agreed to stipulate that they will not seek more than
$75,000
in damages in any individual plaintiff case. As of December 31, 2017, a total of
166
firefighters are involved in cases filed in Florida.
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, 2017, 2016 and 2015
, the Company recorded reimbursements from CNA of
$0.6 million
,
$0.2 million
and
$0.3 million
, respectively, related to legal costs.
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”), completed in January 2016, 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 decided not to further appeal the Supreme Court’s ruling and, during
the year ended December 31, 2017
, settled the liability due to Morita.
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FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)
|
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 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, 2017, 2016 and 2015
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, 2017, 2016 and 2015
, options to purchase
0.7 million
,
1.3 million
and
0.8 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions, except per share data)
|
2017
|
|
2016
|
|
2015
|
Income from continuing operations
|
$
|
60.5
|
|
|
$
|
39.4
|
|
|
$
|
65.8
|
|
Gain (loss) from discontinued operations and disposal, net of tax
|
1.1
|
|
|
4.4
|
|
|
(2.3
|
)
|
Net income
|
$
|
61.6
|
|
|
$
|
43.8
|
|
|
$
|
63.5
|
|
Weighted average shares outstanding — Basic
|
59.7
|
|
|
60.4
|
|
|
62.2
|
|
Dilutive effect of common stock equivalents
|
0.7
|
|
|
0.8
|
|
|
1.2
|
|
Weighted average shares outstanding — Diluted
|
60.4
|
|
|
61.2
|
|
|
63.4
|
|
Basic earnings per share:
|
|
|
|
|
|
Earnings from continuing operations
|
$
|
1.01
|
|
|
$
|
0.65
|
|
|
$
|
1.06
|
|
Earnings (loss) from discontinued operations and disposal, net of tax
|
0.02
|
|
|
0.07
|
|
|
(0.04
|
)
|
Net earnings per share
|
$
|
1.03
|
|
|
$
|
0.72
|
|
|
$
|
1.02
|
|
Diluted earnings per share:
|
|
|
|
|
|
Earnings from continuing operations
|
$
|
1.00
|
|
|
$
|
0.64
|
|
|
$
|
1.04
|
|
Earnings (loss) from discontinued operations and disposal, net of tax
|
0.02
|
|
|
0.07
|
|
|
(0.04
|
)
|
Net earnings per share
|
$
|
1.02
|
|
|
$
|
0.71
|
|
|
$
|
1.00
|
|
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, 2017
, approximately
4.9 million
shares were available for future issuance under the plan.
The total compensation expense related to all grants awarded under the plan was
$4.6 million
,
$4.8 million
and
$6.7 million
, for the years ended
December 31, 2017
,
2016
and
2015
, respectively. The related income tax benefits recognized in earnings were
$1.1 million
,
$2.2 million
and
$2.2 million
for the years ended
December 31, 2017
,
2016
and
2015
, 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
|
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FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)
|
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 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
2017
,
2016
and
2015
was
$7.00
,
$4.25
and
$6.12
, respectively.
The fair value of each option grant was estimated using the Black-Scholes option pricing model with the following weighted average assumptions:
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
2015
|
Dividend yield
|
1.7
|
%
|
|
2.2
|
%
|
|
1.5
|
%
|
Expected volatility
|
45
|
%
|
|
43
|
%
|
|
46
|
%
|
Risk free interest rate
|
2.2
|
%
|
|
1.3
|
%
|
|
1.5
|
%
|
Weighted average expected option life in years
|
7.5
|
|
|
5.8
|
|
|
5.7
|
|
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)
|
2017
|
|
2016
|
|
2015
|
|
2017
|
|
2016
|
|
2015
|
Outstanding, at beginning of year
|
2.6
|
|
|
2.1
|
|
|
2.0
|
|
|
$
|
10.71
|
|
|
$
|
10.29
|
|
|
$
|
9.28
|
|
Granted
|
0.5
|
|
|
0.7
|
|
|
0.3
|
|
|
15.30
|
|
|
12.69
|
|
|
16.08
|
|
Exercised
|
(0.3
|
)
|
|
(0.1
|
)
|
|
(0.1
|
)
|
|
10.53
|
|
|
8.39
|
|
|
7.34
|
|
Canceled or expired
|
(0.5
|
)
|
|
(0.1
|
)
|
|
(0.1
|
)
|
|
14.10
|
|
|
15.77
|
|
|
14.69
|
|
Outstanding, at end of year
|
2.3
|
|
|
2.6
|
|
|
2.1
|
|
|
$
|
11.08
|
|
|
$
|
10.71
|
|
|
$
|
10.29
|
|
Exercisable, at end of year
|
1.6
|
|
|
1.6
|
|
|
1.4
|
|
|
$
|
9.57
|
|
|
$
|
8.96
|
|
|
$
|
8.47
|
|
At
December 31, 2017
, options that have vested and are expected to vest totaled
2.2 million
shares, with a weighted average exercise price of
$10.91
, and represent the sum of
1.6 million
vested (or exercisable) options and
0.6 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, 2017
.
The following table summarizes information for stock options outstanding as of
December 31, 2017
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
|
1.0
|
|
|
4.0
|
|
$
|
6.63
|
|
|
1.0
|
|
|
$
|
6.63
|
|
10.01 — 15.00
|
0.8
|
|
|
7.5
|
|
13.02
|
|
|
0.4
|
|
|
13.30
|
|
15.01 — 20.00
|
0.5
|
|
|
8.1
|
|
16.51
|
|
|
0.2
|
|
|
16.09
|
|
|
2.3
|
|
|
6.2
|
|
$
|
11.08
|
|
|
1.6
|
|
|
$
|
9.57
|
|
The aggregate intrinsic value of stock options outstanding and exercisable at
December 31, 2017
was
$20.8 million
and
$16.9 million
, respectively. The total intrinsic value of stock options exercised was
$2.3 million
,
$0.4 million
and
$0.8 million
for the years ended
December 31, 2017
,
2016
and
2015
, respectively. The related tax benefits were
$0.9 million
,
$0.1 million
and
$0.2
|
|
|
|
|
|
|
FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)
|
million
for the years ended
December 31, 2017
,
2016
and
2015
, respectively. Cash received from the exercise of stock options was
$1.6 million
,
$0.5 million
and
$1.0 million
for the years ended
December 31, 2017
,
2016
and
2015
, respectively.
The total compensation expense related to all stock option compensation plans was $
2.2 million
, $
2.1 million
and $
2.0 million
for the years ended
December 31, 2017
,
2016
and
2015
, respectively. As of
December 31, 2017
, there was
$2.3 million
of total unrecognized compensation cost related to stock options that is expected to be recognized over the weighted-average period of approximately
1.7
years.
Restricted Stock
Restricted stock awards and restricted stock units primarily cliff vest 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, 2017
:
|
|
|
|
|
|
|
|
|
Number of
Restricted Shares
|
|
Weighted Average
Price per Share
|
|
(in millions)
|
|
|
Outstanding and non-vested, at December 31, 2016
|
0.2
|
|
|
$
|
14.03
|
|
Granted
|
0.2
|
|
|
16.94
|
|
Vested
|
(0.1
|
)
|
|
15.09
|
|
Forfeited
|
(0.1
|
)
|
|
15.69
|
|
Outstanding and non-vested, at December 31, 2017
|
0.2
|
|
|
$
|
15.52
|
|
The total grant-date fair value of restricted stock that vested in the years ended
December 31, 2017
,
2016
and
2015
was
$1.5 million
,
$1.3 million
and
$1.3 million
, respectively.
The total compensation expense related to all restricted stock compensation plans was
$1.6 million
,
$1.2 million
and
$1.2 million
for the years ended
December 31, 2017
,
2016
and
2015
, respectively. As of
December 31, 2017
, there was
$1.2 million
of total unrecognized compensation cost related to restricted stock that is expected to be recognized over the weighted-average period of approximately
2.1
years.
Performance Awards
In each of the three years in the period ended
December 31, 2017
, 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, 2017 for the 2015 grants, the
three
-year period ended December 31, 2018 for the 2016 grants and the
three
-year period ended December 31, 2019 for the 2017 grants.
The PSUs granted in 2017 have a
three
-year performance period ending December 31, 2019, 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, 2019.
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 ROIC, which are performance conditions per ASC 718. If earned, these shares would vest on December 31, 2018.
|
|
|
|
|
|
|
FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)
|
The PSUs granted in 2015 had a
three
-year performance period ending December 31, 2017, in which a certain cumulative EPS from continuing operations and a certain average ROIC was targeted. The EPS and ROIC thresholds during the
three
-year performance period were not achieved, and none of the target shares were earned.
The total grant-date fair value of PSUs that vested in the years ended
December 31, 2017
,
2016
and
2015
was
$0.3 million
,
$3.7 million
and
$3.7 million
, respectively.
Compensation expense included in the Consolidated Statements of Operations for the PSUs in the years ended
December 31, 2017
,
2016
and
2015
was
$0.8 million
,
$1.5 million
and
$3.5 million
, respectively. As of
December 31, 2017
, there was
$2.0 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, 2017
:
|
|
|
|
|
|
|
|
|
Number of PSUs
|
|
Weighted Average Price per Share
|
|
(in millions)
|
|
|
Outstanding and non-vested, at December 31, 2016
|
0.4
|
|
|
$
|
13.91
|
|
Granted
|
0.2
|
|
|
17.00
|
|
Vested
|
—
|
|
|
15.83
|
|
Forfeited
(a)
|
(0.3
|
)
|
|
14.95
|
|
Outstanding and non-vested, at December 31, 2017
|
0.3
|
|
|
$
|
15.19
|
|
|
|
(a)
|
Includes
0.1 million
PSUs, representing the effect of the PSUs granted in 2015 not meeting the targets over the applicable performance period, which ended on
December 31, 2017
.
|
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 year ended
December 31, 2015
was
$1.6 million
. 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
66.1 million
and
65.4 million
common shares issued as of
December 31, 2017
and
2016
, respectively. Of those amounts,
60.0 million
and
59.6 million
common shares were outstanding as of
December 31, 2017
and
2016
, 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
|
|
|
|
|
|
|
FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)
|
redemption features and liquidation preferences. The Company has not designated or issued any preference stock as of
December 31, 2017
.
Dividends
The Company declared and paid dividends totaling
$16.8 million
,
$16.9 million
and
$15.6 million
during
2017
,
2016
and
2015
, respectively.
On
February 19, 2018
, the Board declared a quarterly cash dividend of
$0.07
per common share payable on
March 19, 2018
to holders of record at the close of business on
March 5, 2018
.
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.
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.
No
shares were repurchased during the year ended
December 31, 2017
.
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.
|
|
|
|
|
|
|
FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)
|
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
|
|
Unrealized
Gain on
Derivatives
|
|
Total
|
Balance at January 1, 2017
|
$
|
(79.0
|
)
|
|
$
|
(13.0
|
)
|
|
$
|
—
|
|
|
$
|
(92.0
|
)
|
Other comprehensive (loss) income before reclassifications
|
(2.2
|
)
|
|
10.5
|
|
|
0.8
|
|
|
9.1
|
|
Amounts reclassified from accumulated other comprehensive loss
|
5.8
|
|
|
—
|
|
|
0.2
|
|
|
6.0
|
|
Net current-period other comprehensive income
|
3.6
|
|
|
10.5
|
|
|
1.0
|
|
|
15.1
|
|
Balance at December 31, 2017
|
$
|
(75.4
|
)
|
|
$
|
(2.5
|
)
|
|
$
|
1.0
|
|
|
$
|
(76.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
(a)
|
Actuarial Losses
(c)
|
|
Foreign
Currency Translation
(d)
|
|
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
|
)
|
|
|
(a)
|
Amounts in parenthesis indicate losses.
|
|
|
(b)
|
During
the year ended December 31, 2017
, the Company reclassified
$6.1 million
of actuarial losses from
Accumulated other comprehensive loss
to
Pension settlement charges
on the Consolidated Statements of Operations.
|
|
|
(c)
|
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
.
|
|
|
(d)
|
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 amounts 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)
|
|
2017
|
|
2016
|
|
|
|
(in millions)
(b)
|
|
|
Amortization of actuarial losses of defined benefit pension plans
|
|
$
|
(3.1
|
)
|
|
$
|
(6.2
|
)
|
|
(c)
|
Recognition of actuarial losses associated with pension settlement
|
|
(6.1
|
)
|
|
—
|
|
|
Pension settlement charges
|
Interest expense on interest rate swap
|
|
(0.3
|
)
|
|
—
|
|
|
Interest expense
|
Total before tax
|
|
(9.5
|
)
|
|
(6.2
|
)
|
|
|
Income tax benefit
|
|
3.5
|
|
|
2.2
|
|
|
Income tax expense
|
Total reclassifications for the period, net of tax
|
|
$
|
(6.0
|
)
|
|
$
|
(4.0
|
)
|
|
|
|
|
(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.
|
|
|
|
|
|
|
|
FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)
|
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 resurfacing equipment and snow-removal equipment.
In addition, as discussed in Note
2
– Acquisitions, on
June 2, 2017
, the Company completed the acquisition of TBEI. TBEI is a leading U.S. manufacturer of dump truck bodies and trailers serving maintenance and infrastructure end-markets. Products are sold to both municipal and industrial customers under the Ox Bodies
®
, Crysteel
®
, J-Craft
®
, Duraclass
®
, Rugby
®
and Travis
®
brand names, either through a dealer network or direct sales to service customers generally depending on the type and geographic location of the customer. The Company expects that the acquisition will enable it to strengthen the Environmental Solutions Group’s market position as a specialty vehicle manufacturer in maintenance and infrastructure end-markets, leveraging its expertise in building chassis-based vehicles.
As discussed in Note
2
– Acquisitions, the assets and liabilities of TBEI have been consolidated into the Consolidated Balance Sheet as of
December 31, 2017
, while the post-acquisition results of operations have been included in the Consolidated Statements of Operations, within the Environmental Solutions Group, subsequent to the
June 2, 2017
closing date. We are in the process of determining the impact, if any, that the TBEI acquisition may have on our reportable segments.
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 and amortization 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 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
$224.4 million
in
2017
,
$197.7 million
in
2016
and
$191.2 million
in
2015
, of which sales exported from the U.S. aggregated
$58.0 million
,
$88.0 million
and
$146.2 million
, respectively.
The following tables summarize the Company’s continuing operations by segment, including net sales, operating income, depreciation and amortization, total assets and capital expenditures:
|
|
|
|
|
|
|
FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
2017
|
|
2016
|
|
2015
|
Net sales:
|
|
|
|
|
|
Environmental Solutions
|
$
|
692.6
|
|
|
$
|
490.7
|
|
|
$
|
534.1
|
|
Safety and Security Systems
|
205.9
|
|
|
217.2
|
|
|
233.9
|
|
Total net sales
|
$
|
898.5
|
|
|
$
|
707.9
|
|
|
$
|
768.0
|
|
Operating income:
|
|
|
|
|
|
Environmental Solutions
|
$
|
72.4
|
|
|
$
|
54.1
|
|
|
$
|
96.9
|
|
Safety and Security Systems
|
27.0
|
|
|
27.0
|
|
|
32.3
|
|
Corporate and eliminations
(a)
|
(32.3
|
)
|
|
(23.4
|
)
|
|
(26.0
|
)
|
Total operating income
|
67.1
|
|
|
57.7
|
|
|
103.2
|
|
Interest expense
|
7.3
|
|
|
1.9
|
|
|
2.3
|
|
Debt settlement charges
|
—
|
|
|
0.3
|
|
|
—
|
|
Other (income) expense, net
|
(1.2
|
)
|
|
(1.3
|
)
|
|
1.0
|
|
Income before income taxes
|
$
|
61.0
|
|
|
$
|
56.8
|
|
|
$
|
99.9
|
|
|
|
(a)
|
Corporate operating expenses in
the year ended December 31, 2017
include pension settlement charges of
$6.1 million
, as disclosed in Note
9
– Pensions.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
2017
|
|
2016
|
|
2015
|
Depreciation and amortization:
|
|
|
|
|
|
Environmental Solutions
|
$
|
25.7
|
|
|
$
|
14.5
|
|
|
$
|
7.3
|
|
Safety and Security Systems
|
4.1
|
|
|
4.4
|
|
|
4.8
|
|
Corporate
|
0.2
|
|
|
0.2
|
|
|
0.2
|
|
Total depreciation and amortization
|
$
|
30.0
|
|
|
$
|
19.1
|
|
|
$
|
12.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
2017
|
|
2016
|
|
2015
|
Total assets:
|
|
|
|
|
|
Environmental Solutions
|
$
|
746.4
|
|
|
$
|
393.3
|
|
|
$
|
250.6
|
|
Safety and Security Systems
|
211.8
|
|
|
200.1
|
|
|
209.6
|
|
Corporate and eliminations
|
33.6
|
|
|
48.7
|
|
|
99.2
|
|
Total assets of continuing operations
|
991.8
|
|
|
642.1
|
|
|
559.4
|
|
Total assets of discontinued operations
|
0.5
|
|
|
1.1
|
|
|
107.1
|
|
Total assets
|
$
|
992.3
|
|
|
$
|
643.2
|
|
|
$
|
666.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
2017
|
|
2016
|
|
2015
|
Capital expenditures:
|
|
|
|
|
|
Environmental Solutions
|
$
|
5.2
|
|
|
$
|
3.7
|
|
|
$
|
4.5
|
|
Safety and Security Systems
|
2.2
|
|
|
1.8
|
|
|
3.9
|
|
Corporate
|
0.6
|
|
|
0.6
|
|
|
1.2
|
|
Total capital expenditures
|
$
|
8.0
|
|
|
$
|
6.1
|
|
|
$
|
9.6
|
|
The following table summarizes net sales by geographic region based on the location of the end customer:
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
2017
|
|
2016
|
|
2015
|
Net sales:
|
|
|
|
|
|
U.S.
|
$
|
674.1
|
|
|
$
|
510.2
|
|
|
$
|
576.8
|
|
Canada
|
142.6
|
|
|
111.5
|
|
|
75.9
|
|
Europe/Other
|
81.8
|
|
|
86.2
|
|
|
115.3
|
|
Total net sales
|
$
|
898.5
|
|
|
$
|
707.9
|
|
|
$
|
768.0
|
|
|
|
|
|
|
|
|
FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)
|
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)
|
2017
|
|
2016
|
|
2015
|
Long-lived assets (excluding deferred tax and intangible assets):
|
|
|
|
|
|
U.S.
|
$
|
97.0
|
|
|
$
|
78.7
|
|
|
$
|
53.3
|
|
Canada
|
52.3
|
|
|
46.1
|
|
|
—
|
|
Europe
|
3.1
|
|
|
2.5
|
|
|
2.6
|
|
Other
|
0.3
|
|
|
0.3
|
|
|
0.3
|
|
Total long-lived assets
|
$
|
152.7
|
|
|
$
|
127.6
|
|
|
$
|
56.2
|
|
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, 2017
, the Company recorded expenses of
$0.6 million
, primarily related to the closure of a manufacturing facility which was completed during the year within the Safety and Security Systems Group.
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.
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:
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
Balance at January 1
|
$
|
0.4
|
|
|
$
|
—
|
|
Charge to expense
|
0.6
|
|
|
1.7
|
|
Cash payments
|
(0.7
|
)
|
|
(1.3
|
)
|
Balance at December 31
|
$
|
0.3
|
|
|
$
|
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.
|
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.
|
|
|
|
|
|
|
FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)
|
Interest Rate Swap
As described in Note
7
– Debt, the Company entered into an interest rate swap as a means of fixing the floating interest rate component on a portion of its floating-rate debt. The Company classified the interest rate swap as Level 2 due to the use of a discounted cash flow model based on the terms of the contract and the interest rate curve (Level 2 inputs) to calculate the fair value of the swap.
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
$8.0 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, 2017
and
2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurement at December 31, 2017 Using
|
(in millions)
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
Assets:
|
|
|
|
|
|
|
|
Cash equivalents
|
$
|
14.4
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
14.4
|
|
Interest rate swap
|
—
|
|
|
1.6
|
|
|
—
|
|
|
1.6
|
|
Liabilities:
|
|
|
|
|
|
|
|
Contingent consideration
|
—
|
|
|
—
|
|
|
6.3
|
|
|
6.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurement at December 31, 2016 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 years ended
December 31, 2017
and
2016
:
|
|
|
|
|
|
|
|
|
(in millions)
|
Year Ended December 31, 2017
|
|
Year Ended December 31, 2016
|
Contingent consideration liability, at beginning of period
|
$
|
5.1
|
|
|
$
|
—
|
|
Issuance of contingent consideration in connection with acquisitions
|
—
|
|
|
4.9
|
|
Foreign currency translation
|
0.4
|
|
|
(0.2
|
)
|
Total losses included in earnings
(a)
|
0.8
|
|
|
0.4
|
|
Contingent consideration liability, at end of period
|
$
|
6.3
|
|
|
$
|
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.
|
|
|
|
|
|
|
|
FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)
|
NOTE
18
— DISCONTINUED OPERATIONS
In the year ended
December 31, 2017
, the Company recorded a net gain from discontinued operations and disposal of
$1.1 million
, primarily due to an adjustment of foreign tax credits associated with the sale of the Fire Rescue Group and adjustments of estimated product liability obligations of previously discontinued businesses, resulting from updated actuarial valuations.
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 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 FSTech.
The activity of the Company’s discontinued operations in each of the years ended
December 31, 2017
,
2016
and
2015
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, 2017
.
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
11
– Legal Proceedings, 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 decided not to further appeal the Supreme Court’s ruling and, during the
the year ended December 31, 2017
, settled the liability due to Morita.
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
|
|
|
|
|
|
|
FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)
|
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, 2017
:
|
|
|
|
|
|
|
|
|
(in millions)
|
2016
(a)
|
|
2015
|
Net sales
|
$
|
4.2
|
|
|
$
|
100.0
|
|
Cost of sales
|
3.9
|
|
|
80.8
|
|
Gross profit
|
0.3
|
|
|
19.2
|
|
Selling, engineering, general and administrative expenses
|
1.1
|
|
|
17.1
|
|
Restructuring
|
—
|
|
|
0.8
|
|
Operating (loss) income
|
(0.8
|
)
|
|
1.3
|
|
Other income, net
|
—
|
|
|
(0.2
|
)
|
(Loss) income before income taxes
|
(0.8
|
)
|
|
1.5
|
|
Income tax (benefit) expense
|
(0.2
|
)
|
|
0.3
|
|
Net (loss) income from operations
|
$
|
(0.6
|
)
|
|
$
|
1.2
|
|
|
|
(a)
|
Only includes activity in the period up to the completion of the sale on
January 29, 2016
.
|
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, 2017
and
2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
(in millions)
|
Fire Rescue
|
|
Other
|
|
Total
|
|
Fire Rescue
|
|
Other
|
|
Total
|
Deferred tax assets
|
$
|
—
|
|
|
$
|
0.5
|
|
|
$
|
0.5
|
|
|
$
|
—
|
|
|
$
|
1.1
|
|
|
$
|
1.1
|
|
Long-term assets of discontinued operations
|
$
|
—
|
|
|
$
|
0.5
|
|
|
$
|
0.5
|
|
|
$
|
—
|
|
|
$
|
1.1
|
|
|
$
|
1.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
Other current liabilities
|
$
|
—
|
|
|
$
|
0.5
|
|
|
$
|
0.5
|
|
|
$
|
1.3
|
|
|
$
|
0.8
|
|
|
$
|
2.1
|
|
Current liabilities of discontinued operations
|
$
|
—
|
|
|
$
|
0.5
|
|
|
$
|
0.5
|
|
|
$
|
1.3
|
|
|
$
|
0.8
|
|
|
$
|
2.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other long-term liabilities
|
$
|
—
|
|
|
$
|
1.5
|
|
|
$
|
1.5
|
|
|
$
|
—
|
|
|
$
|
2.0
|
|
|
$
|
2.0
|
|
Long-term liabilities of discontinued operations
|
$
|
—
|
|
|
$
|
1.5
|
|
|
$
|
1.5
|
|
|
$
|
—
|
|
|
$
|
2.0
|
|
|
$
|
2.0
|
|
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, 2017
and
2016
is
$0.5 million
and
$0.6 million
, respectively, related to environmental remediation at the Pearland, Texas facility, and
$1.4 million
and
$1.8 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 Financial Accounting Standards Board (the “FASB”) issued ASU No. 2014-09,
Revenue from Contracts with Customers (Topic 606)
, 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
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FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)
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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
, 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 2014-09 that 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 Company adopted the new revenue standard effective January 1, 2018, following the “modified retrospective” method of adoption. In preparation for the adoption of the new standard, the Company established a project management team that was responsible for analyzing the impact of ASU 2014-09, and the related amendments, across all revenue streams. The project management team reviewed 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. The Company’s revenue is primarily generated from the sale of finished products to customers. Those sales predominantly contain a single delivery element and revenue is recognized at a single point in time when ownership, risks and benefits transfer. The timing of revenue recognition for these transactions was not significantly impacted by the new standard. Based on the implementation analysis performed, the Company has concluded that the adoption of the revised guidance will not have a material impact on its financial position, results of operations, or cash flows. While the impact of adoption will not be material, the Company expects to disclose the following adoption impacts in its Form 10-Q for the first quarter of 2018: (i) a reduction in net sales of less than 1% within the Environmental Solutions Group segment based on a revised “Principal vs. Agent” analysis resulting in a change from gross to net presentation, with a corresponding reduction in cost of sales, and (ii) presentation of a right of return asset and a refund liability on the Consolidated Balance Sheet, primarily related to parts and safety product sales for which a right of return exists, which is expected to increase current assets and current liabilities by less than 1%. The Company has also designed, and is in the process of implementing, the appropriate controls over gathering the information required to support the expanded disclosure requirements. The Company will provide these expanded revenue recognition disclosures based on the new qualitative and quantitative disclosure requirements of the standard in its Form 10-Q for the first quarter of 2018.
In February 2016, the FASB issued ASU No. 2016-02,
Leases (Topic 842)
, 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 currently expects to adopt this guidance effective January 1, 2019. In preparation for the adoption of the new standard, the Company has established a project management team responsible for analyzing the impact of ASU 2016-02. The project management team is currently evaluating the impact that the adoption of this guidance will have on the Company’s 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. The amendments in this ASU should be applied using a retrospective transition method to each period presented. If it is impracticable to apply the amendments retrospectively for some of the issues, the amendments for those issues would be applied prospectively as of the earliest date practicable. The Company adopted this guidance effective January 1, 2018 and concluded that it did not have a material impact on its historical cash flow presentation.
In October 2016, the FASB issued ASU No. 2016-16,
Income Taxes (Topic 740)
,
Intra-Entity Transfers of Assets Other Than Inventory
. This guidance requires the income tax consequences of an intra-entity transfer of an asset other than inventory to be recognized when the transfer occurs, instead of when the asset is sold to an outside party. The pronouncement is effective for annual reporting periods beginning after December 15, 2017, including interim reporting periods within those annual reporting
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FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)
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periods, with early adoption permitted. The amendments in this ASU should be applied on a modified retrospective basis, with an adjustment reflecting the cumulative effect of adoption being recorded directly to retained earnings as of the beginning of the period of adoption. The Company adopted this guidance effective January 1, 2018 and concluded that it did not have a material impact on its consolidated financial statements.
In January 2017, the FASB issued ASU No. 2017-04,
Intangibles
–
Goodwill and Other (Topic 350), Simplifying the Test for Goodwill Impairment
, which eliminates the second step of the two-step quantitative approach for testing goodwill for potential impairment. An entity will therefore perform the goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount, and recognize an impairment charge for the amount by which the carrying amount exceeds the fair value, not to exceed the total amount of goodwill allocated to the reporting unit. An entity still has the option to perform a qualitative assessment to determine if the quantitative impairment test is necessary. ASU 2017-04 is effective for fiscal years beginning after December 15, 2019 on a prospective basis, with early adoption permitted. The Company adopted this guidance effective January 1, 2018, and will apply the revised guidance prospectively to its future goodwill impairment tests.
In March 2017, the FASB issued ASU No. 2017-07,
Compensation
–
Retirement Benefits (Topic 715), Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost
. This guidance requires that only the service cost component be included on the same line as other compensation costs on the statements of operations. All other components of net periodic pension cost should be reported separately from the service cost component and outside a subtotal of operating income. The guidance also specifies that only the service cost component of net periodic pension cost is eligible for capitalization. The amendments in this ASU are effective for fiscal years beginning after December 15, 2017 and interim periods within those fiscal years. The amendments related to the presentation of the service cost and other components of net periodic pension cost included in this ASU should be applied retrospectively, whereas the amendments relating to the capitalization of the service cost component of net periodic pension cost should be applied prospectively. The Company adopted this guidance effective January 1, 2018. Although the retroactive application of requirements relating to the presentation of the service cost and other components of net periodic pension cost will have no overall impact on the Company’s
Income before income taxes
or
Income from continuing operations
in either of the years ended
December 31, 2017
or
2016
,
Operating income
for the years ended
December 31, 2017
and
2016
is expected to increase by
$6.5 million
and
$3.1 million
, respectively, with
Other (income) expense, net
for the respective periods expected to decrease by the same amount.
In August 2017, the FASB issued ASU No. 2017-12,
Derivatives and Hedging (Topic 815), Targeted Improvements to Accounting for Hedging Activities
, which intends to better align risk management activities and financial reporting for hedging relationships through changes to both the designation and measurement guidance for qualifying hedging relationships and presentation of hedge results. The amendments also make certain targeted improvements to simplify the application of the hedge accounting guidance by easing certain documentation and assessment requirements. ASU 2017-12 is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted. The amendments in this ASU should be applied on a modified retrospective or prospective basis, depending on the area covered by the update. The Company adopted this guidance effective January 1, 2018 and concluded that it did not have a material impact on its consolidated financial statements.
In February 2018, the FASB issued ASU No. 2018-02,
Income Statement - Reporting Comprehensive Income (Topic 220):
Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income,
that permits entities to reclassify tax effects stranded in accumulated other comprehensive income as a result of the 2017 Tax Act to retained earnings. ASU 2018-12 is effective for all entities for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted. The amendments in this ASU may be applied retrospectively or in the period of adoption. The Company is currently evaluating the impact that the adoption of this guidance will have on its consolidated financial statements.
No other new accounting pronouncements issued, but not yet adopted, are expected to have a material impact on the Company’s results of operations, financial position or cash flow.
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
2017
, the Company’s interim quarterly periods ended April 1, July 1, September 30 and December 31. In
2016
, the Company’s interim quarterly periods ended April 2, July 2, October 1 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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2017
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(in millions, except per share data)
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March 31
(a)
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June 30
(b)
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September 30
(c)
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December 31
(d)
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Net sales
|
$
|
177.8
|
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$
|
224.4
|
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$
|
248.7
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$
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247.6
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Gross profit
|
43.6
|
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|
54.7
|
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|
61.3
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61.6
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Income from continuing operations
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7.2
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11.5
|
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12.5
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29.3
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Gain (loss) from discontinued operations and disposal, net
|
0.1
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(0.1
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)
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—
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1.1
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Net income
|
$
|
7.3
|
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|
$
|
11.4
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$
|
12.5
|
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$
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30.4
|
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Diluted earnings per share:
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Earnings from continuing operations
|
$
|
0.12
|
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$
|
0.19
|
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$
|
0.21
|
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$
|
0.48
|
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Earnings (loss) from discontinued operations
|
0.00
|
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|
0.00
|
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—
|
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|
0.02
|
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Net earnings per share
|
$
|
0.12
|
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|
$
|
0.19
|
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$
|
0.21
|
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$
|
0.50
|
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(a)
|
Income from continuing operations includes purchase accounting expenses, acquisition and integration-related expenses, restructuring charges and executive severance costs of
$0.5 million
,
$0.5 million
,
$0.3 million
and
$0.7 million
, respectively.
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(b)
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Income from continuing operations includes purchase accounting expenses, acquisition and integration-related expenses, and restructuring charges of
$2.5 million
,
$1.0 million
and
$0.1 million
, respectively.
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(c)
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Income from continuing operations includes purchase accounting expenses, acquisition and integration-related expenses, and restructuring charges of
$1.3 million
,
$0.7 million
and
$0.1 million
, respectively, as well as
$0.6 million
of tax expense associated with a change in the enacted state tax rate in Illinois.
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(d)
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Income from continuing operations includes purchase accounting expenses, acquisition and integration-related expenses, restructuring charges, pension settlement charges and hearing loss settlement charges of
$0.5 million
,
$0.5 million
,
$0.1 million
,
$6.1 million
and
$1.5 million
, respectively, as well as a
$20.8 million
net benefit from special tax items, primarily represented by the Company’s preliminary estimate of the impact of the 2017 Tax Act, including the effect of the reduction in the corporate tax rate in the U.S.
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2016
(a)
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(in millions, except per share data)
|
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
|
$
|
172.8
|
|
|
$
|
172.3
|
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$
|
186.7
|
|
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$
|
176.1
|
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Gross profit
|
47.4
|
|
|
45.0
|
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45.3
|
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45.4
|
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|
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Income from continuing operations
|
10.4
|
|
|
9.4
|
|
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7.5
|
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12.1
|
|
Gain (loss) from discontinued operations and disposal, net
|
3.2
|
|
|
(0.3
|
)
|
|
1.0
|
|
|
0.5
|
|
Net income
|
$
|
13.6
|
|
|
$
|
9.1
|
|
|
$
|
8.5
|
|
|
$
|
12.6
|
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Diluted earnings per share:
|
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|
|
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Earnings from continuing operations
|
$
|
0.17
|
|
|
$
|
0.15
|
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|
$
|
0.12
|
|
|
$
|
0.20
|
|
Earnings (loss) from discontinued operations
|
0.05
|
|
|
0.00
|
|
|
0.02
|
|
|
0.01
|
|
Net earnings per share
|
$
|
0.22
|
|
|
$
|
0.15
|
|
|
$
|
0.14
|
|
|
$
|
0.21
|
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(a)
|
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)
|
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)
|
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)
|
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)
|
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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