# FEDERAL SIGNAL CORP /DE/ (FSS) FY 2021 MD&A

Verbatim Item 7 Management's Discussion and Analysis from FEDERAL SIGNAL CORP /DE/'s 10-K for fiscal year 2021.

SEC filing source: https://www.sec.gov/Archives/edgar/data/277509/000027750922000006/fss-20211231.htm
Accession: 0000277509-22-000006
Filing date: 2022-03-01
Report date: 2021-12-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary.
Confidence: high

Company profile: /company/FSS/
All MD&A years: /company/FSS/mda/
Next year: /company/FSS/mda/fy2022/ (FY 2022)

Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations.

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

Executive Summary

The Company is a leading global manufacturer and supplier of (i) vehicles and equipment for maintenance and infrastructure end-markets, including sewer cleaners, industrial vacuum loaders, safe-digging trucks, street sweepers, waterblasting equipment, road-marking and line-removal equipment, dump truck bodies, trailers and metal extraction support equipment, and (ii) public safety equipment, such as vehicle lightbars and sirens, industrial signaling equipment, public warning systems and general alarm/public address systems. In addition, we engage in the sale of parts, service and repair, equipment rentals and training as part of a comprehensive aftermarket offering to our customer base. We operate 20 manufacturing facilities in five countries and provide products and integrated solutions to municipal, governmental, industrial and commercial customers in all regions of the world.

As described in Note 17 – Segment Information to the accompanying consolidated financial statements, the Company’s business units are organized in two reportable segments: the Environmental Solutions Group and the Safety and Security Systems Group.

Coronavirus Update

The coronavirus pandemic adversely impacted our operating results for the year ended December 31, 2020. As market conditions have gradually improved, we have seen strong recovery in customer demand, with orders for the year ended December 31, 2021 increasing by $492 million, or 47%, compared to the prior year. This order improvement has contributed to a record backlog of $629 million as of December 31, 2021.

However, the pace of economic recovery in many countries and high levels of demand have placed significant pressure on global supply chains, which has been exacerbated by labor shortages and transportation challenges. In particular, there have been significant global shortages in semi-conductors and component parts, which among other things has led to a decline in the availability of chassis in North America. These supply chain disruptions have impacted our ability to obtain certain raw materials and purchased components that are necessary to our production processes, including the ability to obtain a sufficient quantity of chassis from third-party suppliers to maximize production efficiencies and deliver products to our customers. With these supply chain challenges, we have also experienced increases in the cost of raw materials, such as steel, and have taken measures designed to mitigate the associated impacts. While we were able to largely mitigate these issues during the year ended December 31, 2021, we cannot provide any assurance that such mitigation efforts will be successful in addressing further supply chain disruption, especially with respect to chassis, which may impact our ability to service our customers, effectively roll out and realize price increases to offset the effects of commodity inflation and sustain our profit margins.

We continue to closely monitor the impact of the pandemic, and its emerging variants, on our business, including how it is affecting our employees, customers, supply chain and distribution network. The overall magnitude of the direct and indirect impact of the pandemic on our operating and financial results remains uncertain and will largely depend on the duration of the pandemic and the measures implemented in response, as well as the effect on our customers and suppliers.

Operating and Financial Performance in 2021

Despite the challenges created by the coronavirus pandemic, the Company was able to sustain a high level of financial performance and make progress against several long-term objectives in 2021. Included among the Company’s highlights in 2021 were the following:

•Orders exceeded $1.5 billion for the first time in the Company’s history, and were up $492 million, or 47%, from last year.

•Backlog at December 31, 2021 was $629 million, a new Company record, and more than double the backlog at the end of last year.

•Net sales for the year ended December 31, 2021 were $1.2 billion, an increase of $82 million, or 7% from last year.

•For the year ended December 31, 2021, we reported operating income and income from continuing operations of $130.7 million and $100.6 million, respectively.

16

Table of Contents

•On a consolidated basis, we reported adjusted EBITDA* of $180.5 million for the year ended December 31, 2021, which translated to an adjusted EBITDA margin* of 14.9%, towards the high-end of our target range.

•Cash flow from continuing operating activities for the year ended December 31, 2021 was $101.8 million.

•With the positive operating cash flow, we ended the year with $41 million of cash and $209 million of availability for borrowings under our $500 million credit facility, which was executed in July 2019. The five-year facility can be increased by an additional $250 million for acquisitions.

•With our strong balance sheet, positive operating cash flow, and capacity under our revolving credit facility, we are well positioned to continue to invest in internal growth initiatives, pursue strategic acquisitions and consider ways to return value to stockholders, as we did during 2021:

◦Our capital expenditures in 2021 were approximately $37 million, most of which related to the acquisition of our Elgin, Illinois manufacturing facility, which we had previously leased. We also continued to make strategic investments for the future by purchasing new machinery and equipment aimed at gaining operating efficiencies and expanding capacity at several of our production facilities.

◦We continue to invest in new product development and are encouraged that these efforts will provide additional opportunities to further diversify our customer base, penetrate new end-markets or gain access to new geographic regions.

◦We completed three acquisitions in 2021, with the addition of OSW, Ground Force and Deist providing us with opportunities to expand our geographic footprint and augment our specialty vehicle product offerings.

◦We demonstrated our commitment to returning value to our stockholders by paying cash dividends of $22.0 million, and spending $15.4 million repurchasing shares under our authorized repurchase program.

•Our eighty-twenty improvement initiatives remain a critical part of our culture and we continue to focus on reducing product costs and improving manufacturing efficiencies across all our businesses.

•To highlight our ongoing focus on operating in a socially responsible and sustainable manner, we published our second annual Sustainability Report in November 2021.

*The Company uses adjusted earnings before interest, tax, depreciation and amortization (“adjusted EBITDA”) and the ratio of adjusted EBITDA to net sales (“adjusted EBITDA margin”) as additional measures which are representative of its underlying performance and to improve the comparability of results across reporting periods. Refer to the Results of Operations section for further discussion regarding these non-GAAP metrics and a reconciliation of each to the most comparable GAAP measure for each of the periods presented.

17

Table of Contents

Results of Operations

The following table summarizes our Consolidated Statements of Operations as of, and for the years ended, December 31, 2021, 2020 and 2019, and illustrates the key financial indicators used to assess our consolidated financial results:

[[GREPCENT_TABLE]]
[["","For the Years Ended December 31,","","Change"],["($ in millions, except per share data)","2021","","2020","","2019","","2021 vs. 2020","","2020 vs. 2019"],["Net sales","$","1,213.2","","","$","1,130.8","","","$","1,221.3","","","$","82.4","","","$","(90.5)"],["Cost of sales","924.5","","","837.2","","","898.5","","","87.3","","","(61.3)"],["Gross profit","288.7","","","293.6","","","322.8","","","(4.9)","","","(29.2)"],["Selling, engineering, general and administrative expenses","149.2","","","149.2","","","164.4","","","\u2014","","","(15.2)"],["Amortization expense","10.9","","","9.6","","","8.8","","","1.3","","","0.8"],["Acquisition and integration-related (benefits) expenses","(2.1)","","","2.1","","","2.5","","","(4.2)","","","(0.4)"],["Restructuring","\u2014","","","1.3","","","\u2014","","","(1.3)","","","1.3"],["Operating income","130.7","","","131.4","","","147.1","","","(0.7)","","","(15.7)"],["Interest expense","4.5","","","5.7","","","7.9","","","(1.2)","","","(2.2)"],["Pension settlement charges","10.3","","","\u2014","","","\u2014","","","10.3","","","\u2014"],["Other (income) expense, net","(1.7)","","","1.1","","","0.6","","","(2.8)","","","0.5"],["Income before income taxes","117.6","","","124.6","","","138.6","","","(7.0)","","","(14.0)"],["Income tax expense","17.0","","","28.5","","","30.2","","","(11.5)","","","(1.7)"],["Income from continuing operations","100.6","","","96.1","","","108.4","","","4.5","","","(12.3)"],["Gain from discontinued operations and disposal, net of tax","\u2014","","","0.1","","","0.1","","","(0.1)","","","\u2014"],["Net income","$","100.6","","","$","96.2","","","$","108.5","","","$","4.4","","","$","(12.3)"],["Other data:"],["Operating margin","10.8","%","","11.6","%","","12.0","%","","(0.8)","%","","(0.4)","%"],["Adjusted EBITDA (a)","$","180.5","","","$","182.2","","","$","191.3","","","$","(1.7)","","","$","(9.1)"],["Adjusted EBITDA margin (a)","14.9","%","","16.1","%","","15.7","%","","(1.2)","%","","0.4","%"],["Diluted earnings per share \u2014 Continuing operations","$","1.63","","","$","1.56","","","$","1.76","","","$","0.07","","","$","(0.20)"],["Total orders","1,538.8","","","1,047.1","","","1,269.0","","","491.7","","","(221.9)"],["Backlog","628.9","","","303.9","","","386.9","","","325.0","","","(83.0)"],["Depreciation and amortization","50.4","","","44.8","","","41.5","","","5.6","","","3.3"]]
[[/GREPCENT_TABLE]]

(a)The Company uses adjusted EBITDA and adjusted EBITDA margin as additional measures which are representative of its underlying performance and to improve the comparability of results across reporting periods. We believe that investors use versions of these metrics in a similar manner. For these reasons, the Company believes that adjusted EBITDA and adjusted EBITDA margin are meaningful metrics to investors in evaluating the Company’s underlying financial performance. Adjusted EBITDA is a non-GAAP measure that represents the total of income from continuing operations, interest expense, pension settlement charges, acquisition and integration-related (benefits) expenses, restructuring activity, coronavirus-related expenses, purchase accounting effects, other income/expense, income tax expense, depreciation and amortization expense and the impact of adoption of a new lease accounting standard, where applicable. Adjusted EBITDA margin is a non-GAAP measure that represents the total of income from continuing operations, interest expense, pension settlement charges, acquisition and integration-related (benefits) expenses, restructuring activity, coronavirus-related expenses, purchase accounting effects, other income/expense, income tax expense, depreciation and amortization expense and the impact of adoption of a new lease accounting standard, where applicable, divided by net sales for the applicable period(s). Other companies may use different methods to calculate adjusted EBITDA and adjusted EBITDA margin.

A discussion of changes in the Company’s financial condition and results of operations during the year ended December 31, 2020 compared to the year ended December 31, 2019 has been omitted from this Annual Report on Form 10-K, but may be found under the heading “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020, filed with the SEC on February 25, 2021.

Year ended December 31, 2021 vs. year ended December 31, 2020

Net sales

Net sales for the year ended December 31, 2021 increased by $82.4 million, or 7%, compared to the prior year. The Environmental Solutions Group reported a net sales increase of $88.2 million, or 10%, primarily due to a $55.8 million

18

Table of Contents

improvement in aftermarket revenues, inclusive of a $30.0 million increase in used equipment sales, increases in sales of dump truck bodies, industrial vacuum loaders and waterblasting equipment of $27.4 million, $7.5 million and $6.9 million, respectively, and a $12.2 million favorable foreign currency translation impact. Partially offsetting these improvements were reductions in shipments of street sweepers and sewer cleaners of $14.5 million and $13.8 million, respectively. Within the Safety and Security Systems Group, net sales decreased by $5.8 million, or 3%, primarily due to reductions in sales of public safety equipment and warning systems of $7.7 million and $2.5 million, respectively, partially offset by a $2.2 million increase in sales of industrial signaling equipment and a $2.2 million favorable foreign currency translation impact.

Cost of sales

For the year ended December 31, 2021, cost of sales increased by $87.3 million, or 10%, compared to the prior year, largely due to an increase of $90.1 million, or 13%, within the Environmental Solutions Group, primarily related to increased sales volumes, inclusive of current-year acquisition effects, higher material costs, an $11.6 million unfavorable foreign currency translation impact and a $3.8 million increase in depreciation expense. Within the Safety and Security Systems Group, cost of sales decreased by $2.8 million, or 2%, primarily related to lower sales volumes, partially offset by a $1.6 million unfavorable foreign currency translation impact and higher material and freight costs.

Gross profit

For the year ended December 31, 2021, gross profit decreased by $4.9 million, or 2%, compared to the prior year, primarily due to reductions of $3.0 million and $1.9 million within the Safety and Security Systems Group and Environmental Solutions Group, respectively. Gross profit as a percentage of net sales (“gross profit margin”) for the year ended December 31, 2021 was 23.8%, compared to 26.0% in the prior year, primarily driven by reductions within the Environmental Solutions Group and Safety and Security Systems Group of 220 basis points and 40 basis points, respectively.

Selling, engineering, general and administrative (“SEG&A”) expenses

For the year ended December 31, 2021, SEG&A expenses remained consistent with the prior year, with a $1.5 million reduction in Corporate SEG&A expenses being largely offset by a $1.4 million increase within the Environmental Solutions Group. As a percentage of net sales, SEG&A expenses decreased from 13.2% in the prior year, to 12.3% in the current year.

Operating income

Operating income for the year ended December 31, 2021 decreased by $0.7 million, or 1%, compared to the prior year, largely due to the $4.9 million reduction in gross profit and a $1.3 million increase in amortization expense, partially offset by a $4.2 million decrease in acquisition-related costs and the non-recurrence of $1.3 million of restructuring charges that were recognized in the prior year. Consolidated operating margin for the year ended December 31, 2021 was 10.8%, compared to 11.6% in the prior year.

Interest expense

Interest expense for the year ended December 31, 2021 decreased by $1.2 million, or 21%, compared to the prior year, largely due to lower average debt levels in comparison to the prior year.

Pension settlement charges

During the year ended December 31, 2021, the Company recognized a pension settlement charge of $10.3 million in connection with the purchase of a group annuity contract from an insurance company, under which approximately $25 million of the projected benefit obligation of the Company’s U.S. defined benefit plan was transferred to the insurance company. For further discussion, see Note 11 – Pension and Other Post-Employment Plans to the accompanying consolidated financial statements.

Other (income) expense, net

For the year ended December 31, 2021, Other (income) expense, net, totaled $1.7 million of income, largely due to the recognition of $1.1 million of net periodic pension benefit and $0.3 million of foreign currency transaction gains. For the year ended December 31, 2020, Other (income) expense, net, totaled $1.1 million of expense, largely due to the recognition of a $2.3 million charge associated with the withdrawal from a multi-employer pension plan, partially offset by $0.5 million of net periodic pension benefit and $0.4 million of foreign currency transaction gains.

Income tax expense

19

Table of Contents

The Company recognized income tax expense of $17.0 million for the year ended December 31, 2021, compared to $28.5 million for the year ended December 31, 2020. The reduction in income tax expense in the current year was primarily due to the recognition of a $3.4 million tax benefit associated with the release of state valuation allowances and a $3.3 million tax benefit associated with the remeasurement of deferred taxes for changes in state tax apportionment, both of which resulted from a change in tax status during the year, a $2.0 million increase in excess tax benefits from stock compensation activity and the effects of lower pre-tax earnings. Including these items, the Company’s effective tax rate for the year ended December 31, 2021 was 14.5%, compared to 22.9% in 2020. For further discussion, see Note 10 – Income Taxes to the accompanying consolidated financial statements.

Income from continuing operations

Income from continuing operations for the year ended December 31, 2021 increased by $4.5 million, or 5%, compared to the prior year, largely due to a $11.5 million decrease in income tax expense, the $2.8 million increase in other income and the $1.2 million reduction in interest expense, partially offset by the recognition of the $10.3 million pension settlement charge and the reduced operating income.

Adjusted EBITDA

Adjusted EBITDA for the year ended December 31, 2021 was $180.5 million, compared to $182.2 million in the prior year. Adjusted EBITDA margin for the year ended December 31, 2021 was 14.9%, compared to 16.1% in the prior year.

The following table summarizes the Company’s adjusted EBITDA and adjusted EBITDA margin and reconciles income from continuing operations to adjusted EBITDA for each of the three years in the period ended December 31, 2021:

[[GREPCENT_TABLE]]
[["","For the Years Ended December 31,"],["($ in millions)","2021","","2020","","2019"],["Income from continuing operations","$","100.6","","","$","96.1","","","$","108.4"],["Add (less):"],["Interest expense","4.5","","","5.7","","","7.9"],["Pension settlement charges","10.3","","","\u2014","","","\u2014"],["Acquisition and integration-related (benefits) expenses","(2.1)","","","2.1","","","2.5"],["Restructuring","\u2014","","","1.3","","","\u2014"],["Coronavirus-related expenses (a)","1.2","","","2.3","","","\u2014"],["Purchase accounting effects (b)","0.3","","","0.3","","","0.2"],["Other (income) expense, net","(1.7)","","","1.1","","","0.6"],["Income tax expense","17.0","","","28.5","","","30.2"],["Depreciation and amortization","50.4","","","44.8","","","41.5"],["Adjusted EBITDA","$","180.5","","","$","182.2","","","$","191.3"],["Net sales","$","1,213.2","","","$","1,130.8","","","$","1,221.3"],["Adjusted EBITDA margin","14.9","%","","16.1","%","","15.7","%"]]
[[/GREPCENT_TABLE]]

(a)Coronavirus-related expenses relate to direct expenses incurred in connection with the Company's response to the coronavirus pandemic, that are incremental to, and separable from, normal operations. Such expenses primarily relate to incremental paid time off provided to employees and costs incurred to implement enhanced workplace safety protocols.

(b)Purchase accounting effects represent the step-up in the valuation of equipment acquired in recent business combinations that was sold during the periods presented.

20

Table of Contents

Environmental Solutions

The following table summarizes the Environmental Solutions Group’s operating results as of, and for the years ended, December 31, 2021, 2020 and 2019:

[[GREPCENT_TABLE]]
[["","For the Years Ended December 31,","","Change"],["($ in millions)","2021","","2020","","2019","","2021 vs. 2020","","2020 vs. 2019"],["Net sales","$","1,004.0","","","$","915.8","","","$","992.9","","","$","88.2","","","$","(77.1)"],["Operating income","120.5","","","124.3","","","139.4","","","(3.8)","","","(15.1)"],["Other data:"],["Operating margin","12.0","%","","13.6","%","","14.0","%","","(1.6)","%","","(0.4)","%"],["Total orders","$","1,297.3","","","$","840.0","","","$","1,038.0","","","$","457.3","","","$","(198.0)"],["Backlog","576.4","","","282.5","","","357.6","","","293.9","","","(75.1)"],["Depreciation and amortization","46.7","","","41.3","","","38.1","","","5.4","","","3.2"]]
[[/GREPCENT_TABLE]]

Year ended December 31, 2021 vs. year ended December 31, 2020

Total orders increased by $457.3 million, or 54%, for the year ended December 31, 2021. U.S. orders increased by $416.6 million, or 63%, primarily due to improvements in orders for sewer cleaners, street sweepers, dump truck bodies, safe-digging trucks, trailers, industrial vacuum loaders, metal extraction support equipment and road-marking and line-removal equipment of $103.9 million, $67.6 million, $46.7 million, $37.3 million, $24.7 million, $21.3 million, $15.1 million and $10.4 million, respectively. In addition, upon acquiring OSW, Ground Force and Deist, we acquired a backlog of U.S. orders aggregating to $36.3 million, while aftermarket demand also increased by $36.3 million. Non-U.S. orders increased by $40.7 million, or 22%, primarily due to a $17.2 improvement in aftermarket demand, increases in orders for sewer cleaners, dump truck bodies, and industrial vacuum loaders of $7.9 million, $6.9 million, and $3.5 million, respectively, and a $11.9 million favorable foreign currency translation impact. In addition, upon acquiring OSW, Ground Force and Deist, we acquired a backlog of non-U.S. orders aggregating to $5.0 million. Partially offsetting these improvements was a $14.3 million reduction in orders for refuse trucks, primarily associated with the timing of large fleet orders in the prior-year period.

Net sales increased by $88.2 million, or 10%, for the year ended December 31, 2021. U.S. sales increased by $58.2 million, or 8%, largely due to a $40.1 million increase in aftermarket revenues and a $22.1 million increase in sales of dump truck bodies, partially offset by a $12.0 million reduction in shipments of sewer cleaners. Non-U.S. sales increased by $30.0 million, or 18%, primarily due to a $15.7 million improvement in aftermarket revenues, a $5.3 million increase in sales of dump truck bodies and a $12.2 million favorable foreign currency translation impact, partially offset by a $6.7 million reduction in shipments of street sweepers.

Cost of sales increased by $90.1 million, or 13%, for the year ended December 31, 2021, primarily due to increased sales volumes, inclusive of current-year acquisition effects, higher material costs, an $11.6 million unfavorable foreign currency translation impact and a $3.8 million increase in depreciation expense. Including these factors, gross profit margin for the year ended December 31, 2021 was 21.1%, compared to 23.3% in the prior year, with the impact of higher material costs and production inefficiencies associated with supply chain disruptions being partially offset by pricing actions and a more favorable sales mix, associated with the increase in aftermarket demand.

SEG&A expenses increased by $1.4 million, or 2%, for the year ended December 31, 2021, primarily due to the addition of expenses from current-year acquisitions. As a percentage of net sales, SEG&A expenses decreased from 8.6% in the prior year, to 8.0% in the current year.

Operating income decreased by $3.8 million, or 3%, for the year ended December 31, 2021, largely due to a $1.9 million reduction in gross profit, the $1.4 million increase in SEG&A expenses and a $1.3 million increase in amortization expense, partially offset by the non-recurrence of $0.7 million of restructuring charges that were recognized in the prior year and a $0.1 million decrease in acquisition-related costs.

Backlog was $576.4 million at December 31, 2021, compared to $282.5 million at December 31, 2020.

21

Table of Contents

Safety and Security Systems

The following table summarizes the Safety and Security Systems Group’s operating results as of, and for the years ended, December 31, 2021, 2020 and 2019:

[[GREPCENT_TABLE]]
[["","For the Years Ended December 31,","","Change"],["($ in millions)","2021","","2020","","2019","","2021 vs. 2020","","2020 vs. 2019"],["Net sales","$","209.2","","","$","215.0","","","$","228.4","","","$","(5.8)","","","$","(13.4)"],["Operating income","32.7","","","35.5","","","38.6","","","(2.8)","","","(3.1)"],["Other data:"],["Operating margin","15.6","%","","16.5","%","","16.9","%","","(0.9)","%","","(0.4)","%"],["Total orders","$","241.5","","","$","207.1","","","$","231.0","","","$","34.4","","","$","(23.9)"],["Backlog","52.5","","","21.4","","","29.3","","","31.1","","","(7.9)"],["Depreciation and amortization","3.6","","","3.4","","","3.3","","","0.2","","","0.1"]]
[[/GREPCENT_TABLE]]

Year ended December 31, 2021 vs. year ended December 31, 2020

Total orders increased by $34.4 million, or 17%, for the year ended December 31, 2021. U.S. orders increased by $15.6 million, or 12%, compared to the prior year, driven by improvements in orders for public safety equipment and industrial signaling equipment of $12.2 million and $6.3 million, respectively, partially offset by a $2.9 million reduction in orders for warning systems. Non-U.S. orders increased by $18.8 million, or 23%, due to improvements in orders for public safety equipment and industrial signaling equipment of $15.8 million and $3.0 million, respectively, as well as a $2.7 million favorable foreign currency translation impact, partially offset by a $2.7 million reduction in orders for warning systems.

Net sales decreased by $5.8 million, or 3%, for the year ended December 31, 2021. U.S. sales decreased by $3.7 million, or 3%, driven by reductions in sales of warning systems and public safety equipment of $4.2 million and $1.3 million, respectively, partially offset by a $1.8 million increase in sales of industrial signaling equipment. Non-U.S. sales decreased by $2.1 million, or 2%, largely due to a $6.4 million reduction in sales of public safety equipment, partially offset by an increase in sales of warning systems of $1.7 million, as well as a $2.2 million favorable foreign currency translation impact.

Cost of sales decreased by $2.8 million, or 2%, for the year ended December 31, 2021, primarily related to lower sales volumes, partially offset by a $1.6 million unfavorable foreign currency translation impact and higher material and freight costs. Gross profit margin for the year ended December 31, 2021 was 36.9%, compared to 37.3% in the prior year, with the decrease primarily attributable to the impact of higher material and freight costs.

SEG&A expenses increased by $0.1 million for the year ended December 31, 2021. As a percentage of net sales, SEG&A expenses were 21.2% in the current year, compared with 20.6% in the prior year.

Operating income decreased by $2.8 million, or 8%, for the year ended December 31, 2021, primarily due to a $3.0 million reduction in gross profit, partially offset by the non-recurrence of $0.3 million of restructuring charges that were recognized in the prior year.

Backlog was $52.5 million at December 31, 2021, compared to $21.4 million at December 31, 2020.

Corporate Expense

Corporate operating expenses were $22.5 million, $28.4 million and $30.9 million for the years ended December 31, 2021, 2020 and 2019, respectively.

For the year ended December 31, 2021, corporate operating expenses decreased by $5.9 million, primarily due to a $4.1 million decrease in acquisition and integration-related expenses, of which $3.5 million related to a reduction in the estimated fair value of contingent consideration, as well as lower incentive-based compensation costs.

The Company’s hearing loss litigation has historically been managed by the Company’s legal staff resident at the corporate office and not by management at either segment. In accordance with Accounting Standards Codification (“ASC”) 280, Segment Reporting, which provides that segment reporting should follow the management of the item and that certain expenses may be corporate expenses, these legal expenses (which are not part of the normal operating activities of any of our reportable segments) are reported and managed as corporate expenses.

22

Table of Contents

Financial Condition, Liquidity and Capital Resources

The Company uses its cash flow from operations to fund growth and to make capital investments that sustain its operations, reduce costs, or both. Beyond these uses, remaining cash is used to pay down debt, repurchase shares, fund dividend payments and make pension contributions. The Company may also choose to invest in the acquisition of businesses. In the absence of significant unanticipated cash demands, we believe that the Company’s existing cash balances, cash flow from operations and borrowings available under the 2019 Credit Agreement will provide funds sufficient for these purposes. The net cash flows associated with the Company’s rental equipment transactions are included in cash flow from operating activities.

The Company’s cash and cash equivalents totaled $40.5 million, $81.7 million and $31.6 million as of December 31, 2021, 2020 and 2019, respectively. As of December 31, 2021, $18.2 million of cash and cash equivalents was held by foreign subsidiaries. Cash and cash equivalents held by subsidiaries outside the U.S. typically are held in the currency of the country in which it is located. The Company uses this cash to fund the operating activities of its foreign subsidiaries and for further investment in foreign operations. Generally, the Company has considered such cash to be indefinitely reinvested in its foreign operations and the Company’s current plans do not demonstrate a need to repatriate such cash to fund U.S. operations. However, in the event that these funds were needed to fund U.S. operations or to satisfy U.S. obligations, they generally could be repatriated. The repatriation of these funds may cause the Company to incur additional U.S. income tax expense, dependent on income tax laws and other circumstances at the time any such amounts were repatriated.

Net cash provided by operating activities totaled $101.8 million, $136.2 million and $103.1 million in 2021, 2020 and 2019, respectively. The reduction in cash generated by operating activities in 2021 compared to the prior year was primarily due to a $13.2 million increase in income tax payments associated with tax planning initiatives, as well as differences in the timing of certain payments, with the prior year benefiting from the deferral of $7.3 million of payroll tax payments under the Coronavirus Aid, Relief, and Economic Security Act, of which, $3.7 million was remitted in the current year. The year-over-year change also reflects increases in working capital, primarily due to the strategic stocking of critical inventory components, such as chassis, to support demand levels and partially mitigate current supply chain constraints.

Net cash used for investing activities totaled $168.7 million, $34.4 million and $84.4 million in 2021, 2020 and 2019, respectively. In each of the years presented, cash was used to fund the purchase of properties and equipment, with $37.4 million, $29.7 million and $35.4 million of capital expenditures in 2021, 2020 and 2019, respectively. Capital expenditures in 2021 included the acquisition of the Company’s Elgin, Illinois manufacturing facility for $19.8 million, whereas capital expenditures in 2020 and 2019 included the expansion of a number of the Company’s other production facilities. In addition, as discussed further in Note 2 – Acquisitions to the accompanying consolidated financial statements, the Company completed three acquisitions during 2021 for aggregate initial consideration of $131.8 million, excluding cash acquired. In 2020, the Company paid $6.2 million to acquire certain assets and operations of Public Works Equipment and Supply, Inc. (“PWE”) and received $0.8 million as part of the finalization of certain post-closing adjustments in connection with the acquisition of MRL, which it acquired in 2019 for an initial $49.6 million, net of cash acquired.

Net cash of $26.4 million was provided by financing activities in 2021, compared to a net cash usage of $53.4 million and $24.6 million in 2020 and 2019, respectively. In 2021, the Company borrowed $70.5 million under its revolving credit facility, primarily to fund current-year acquisitions, and received $4.2 million from stock option exercises. The Company also funded cash dividends and share repurchases of $22.0 million and $15.4 million, respectively, and redeemed $10.7 million of stock in order to remit funds to tax authorities to satisfy employees’ tax withholdings following the vesting of stock-based compensation and the exercise of stock options. In 2020, the Company paid down $11.8 million of net borrowings, funded cash dividends and share repurchases of $19.4 million and $13.7 million, respectively, and redeemed $9.1 million of stock in order to remit funds to tax authorities to satisfy employees’ minimum tax withholdings. In 2019, the Company increased net borrowings by $7.4 million, primarily to fund the acquisition of MRL. In addition, the Company funded payments of $10.3 million relating to acquisitions completed in 2016, paid cash dividends of $19.3 million, incurred $1.0 million of debt refinancing costs, repurchased $1.0 million of treasury stock, and redeemed $2.1 million of stock to satisfy employees’ tax withholdings.

On July 30, 2019, the Company entered into the 2019 Credit Agreement, by and among the Company (the “U.S. Borrower”) and certain of its foreign subsidiaries (collectively, the “Borrowers”), Wells Fargo Bank, National Association, as administrative agent, swingline lender and issuing lender, JPMorgan Chase Bank, N.A. as syndication agent, and the other lenders and parties signatory thereto.

The 2019 Credit Agreement is a $500 million revolving credit facility, maturing on July 30, 2024, that provides for borrowings in the form of loans or letters of credit up to the aggregate availability under the facility, with a sub-limit of $75 million for letters of credit. The 2019 Credit Agreement allows for the Borrowers to borrow in denominations of U.S. Dollars, Canadian Dollars, Euros or British Pounds (with borrowings in non-U.S. currencies subject to a sublimit of $200 million). In addition, the Company may cause the commitments to increase by up to an additional $250 million, subject to the approval of the applicable

23

Table of Contents

lenders providing such additional financing. Borrowings under the 2019 Credit Agreement may be used for working capital and general corporate purposes, including acquisitions.

The Company’s material domestic subsidiaries provide guarantees for all obligations of the Borrowers under the 2019 Credit Agreement, which is secured by a first priority security interest in (i) all existing or hereafter acquired domestic property and assets of the U.S. Borrower and material domestic subsidiaries, (ii) the stock or other equity interests in each of the material domestic subsidiaries and (iii) 65% of outstanding voting capital stock of certain first-tier foreign subsidiaries, subject to certain exclusions.

Borrowings under the 2019 Credit Agreement bear interest, at the Company’s option, at a base rate or a Eurocurrency or SONIA daily rate (as each is defined in the 2019 Credit Agreement), plus, in each case, an applicable margin. The applicable margin ranges from zero to 0.75% for base rate borrowings and 1.00% to 1.75% for Eurocurrency or SONIA daily rate borrowings. The Company must also pay a commitment fee to the lenders ranging between 0.10% to 0.25% per annum on the unused portion of the $500 million revolving credit facility along with other standard fees. Letter of credit fees are payable on outstanding letters of credit in an amount equal to the applicable Eurocurrency or SONIA daily rate margin plus other customary fees.

The Company is subject to certain net leverage ratio and interest coverage ratio financial covenants under the 2019 Credit Agreement that are to be measured at each fiscal quarter-end. The Company was in compliance with all such covenants as of December 31, 2021. The 2019 Credit Agreement also includes a series of “covenant holiday” periods, which allow for the temporary increase of the minimum net leverage ratio following the completion of a permitted acquisition, or a series of acquisitions, when the aggregate consideration over a period of twelve months exceeds $75 million. In addition, the 2019 Credit Agreement includes customary negative covenants, subject to certain exceptions, restricting or limiting the Company’s and its subsidiaries’ ability to, among other things: (i) make non-ordinary course dispositions of assets; (ii) make certain fundamental business changes, such as mergers, consolidations or any similar combination; (iii) make restricted payments, including dividends and stock repurchases; (iv) incur indebtedness; (v) make certain loans and investments; (vi) create liens; (vii) transact with affiliates; (viii) enter into sale/leaseback transactions; (ix) make negative pledges; and (x) modify subordinated debt documents.

Under the 2019 Credit Agreement, restricted payments, including dividends and stock repurchases, shall be permitted if (i) the Company’s leverage ratio is less than or equal to 3.25; (ii) the Company is in compliance with all other financial covenants; and (iii) there are no existing defaults under the 2019 Credit Agreement. If its leverage ratio is more than 3.25, the Company is still permitted to fund (i) up to $35 million of dividend payments and stock repurchases in any fiscal year; and (ii) an incremental $50 million of other cash payments in the aggregate during the term of the 2019 Credit Agreement.

The 2019 Credit Agreement contains customary events of default. If an event of default occurs and is continuing, the Borrowers may be required immediately to repay all amounts outstanding under the 2019 Credit Agreement and the commitments from the lenders may be terminated.

As of December 31, 2021, there was $280.7 million of cash drawn and $10.1 million of undrawn letters of credit under the 2019 Credit Agreement, with $209.2 million of net availability for borrowings.

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

[[GREPCENT_TABLE]]
[["","For the Years Ended December 31,"],["(in millions)","2021","","2020","","2019"],["Gross borrowings","$","214.0","","","$","82.6","","","$","84.0"],["Gross payments","143.5","","","94.4","","","76.6"]]
[[/GREPCENT_TABLE]]

Aggregate maturities of total borrowings due amount to approximately $0.6 million in 2022, $0.5 million in 2023, $281.2 million in 2024, and $0.5 million in 2025. The weighted average interest rate on long-term borrowings was 1.5% at December 31, 2021.

The Company paid interest of $3.9 million in 2021, $5.4 million in 2020 and $7.8 million in 2019.

The Company paid income taxes of $35.5 million in 2021, $22.3 million in 2020 and $25.7 million in 2019.

Cash dividends of $22.0 million, $19.4 million and $19.3 million were declared and paid to stockholders in 2021, 2020 and 2019, respectively.

24

Table of Contents

On February 16, 2022, the Company completed the acquisition of its University Park, Illinois manufacturing facility for approximately $28 million. Excluding this acquisition, the Company anticipates that capital expenditures for 2022 will be in the range of $25 million to $30 million. The Company believes that its financial resources and major sources of liquidity, including cash flow from operations and borrowing capacity, will be adequate to meet its operating needs, capital needs and financial commitments.

Contractual Obligations and Off-Balance Sheet Arrangements

The following table summarizes the Company’s contractual obligations and payments due by period as of December 31, 2021:

[[GREPCENT_TABLE]]
[["","Payments Due by Period"],["(in millions)","Total","","Less than 1 Year","","2-3 Years","","4-5 Years","","More than 5 Years"],["Long-term debt","$","280.7","","","$","\u2014","","","$","280.7","","","$","\u2014","","","$","\u2014"],["Interest payments on long-term debt (a)","12.3","","","4.1","","","8.2","","","\u2014","","","\u2014"],["Operating lease obligations (b)","32.9","","","9.7","","","12.1","","","5.8","","","5.3"],["Finance lease obligations","2.1","","","0.6","","","1.0","","","0.5","","","\u2014"],["Purchase obligations (c)","230.7","","","219.6","","","10.8","","","0.3","","","\u2014"],["Pension contributions (d)","1.0","","","1.0","","","\u2014","","","\u2014","","","\u2014"],["Contingent earn-out payments (e)","2.7","","","0.7","","","2.0","","","\u2014","","","\u2014"],["Total contractual obligations (f)","$","562.4","","","$","235.7","","","$","314.8","","","$","6.6","","","$","5.3"]]
[[/GREPCENT_TABLE]]

(a)    Amounts represent estimated contractual interest payments on outstanding long-term debt.

(b)    Amounts include contractual obligations associated with lease arrangements with an initial term of twelve months or less, which are not recorded on the Consolidated Balance Sheets. For further discussion, see Note 4 – Leases to the accompanying consolidated financial statements.

(c)    Purchase obligations primarily relate to commercial chassis and other contracts in the ordinary course of business.

(d)    The Company expects to contribute up to $1.0 million to the non-U.S. benefit plan in 2022, which represents the minimum required contribution. The Company does not currently expect to make any contributions to the U.S. benefit plan in 2022. Future contributions to the plans will be based on such factors as (i) annual service cost, (ii) the financial return on plan assets, (iii) interest rate movements that affect discount rates applied to plan liabilities and (iv) the value of benefit payments made. Due to the high degree of uncertainty regarding the potential future cash outflows associated with these plans, the Company is unable to provide a reasonably reliable estimate of the amounts and periods in which any additional liabilities might be paid.

(e)    Represents the fair value of the contingent earn-out payments associated with the acquisitions of MRL and Deist. For further discussion, see Note 2 – Acquisitions to the accompanying consolidated financial statements.

(f)    As of December 31, 2021, the Company had a liability of approximately $1.2 million for unrecognized tax benefits. For further discussion, see Note 10 – Income Taxes to the accompanying consolidated financial statements. Due to the uncertainties related to these tax matters, the Company generally cannot make a reasonably reliable estimate of the period of cash settlement for this liability. As such, the potential future cash outflows are not included in the table above. We do not expect any significant change to our unrecognized tax benefits as a result of potential expiration of statute of limitations and settlements with tax authorities.

The following table summarizes the Company’s off-balance sheet arrangements and the notional amount by expiration period as of December 31, 2021:

[[GREPCENT_TABLE]]
[["","Notional Amount by Expiration Period"],["(in millions)","Total","","Less than 1 Year","","2-3 Years","","4-5 Years"],["Financial standby letters of credit (a)","$","9.8","","","$","9.8","","","$","\u2014","","","$","\u2014"],["Performance standby letters of credit (a)","0.3","","","0.3","","","\u2014","","","\u2014"],["Performance and bid bonds (b)","18.5","","","18.1","","","0.4","","","\u2014"],["Repurchase obligations (c)","2.7","","","0.6","","","1.3","","","0.8"],["Total off-balance sheet arrangements","$","31.3","","","$","28.8","","","$","1.7","","","$","0.8"]]
[[/GREPCENT_TABLE]]

(a)     Financial standby letters of credit largely relate to casualty insurance policies for the Company’s workers’ compensation, automobile, general liability and product liability policies. Performance standby letters of credit primarily represent guarantees of performance of certain subsidiaries that engage in transactions with foreign customers.

(b)    Performance and bid bonds primarily relate to guarantees of performance of certain subsidiaries that engage in transactions with domestic and foreign customers.

(c)     Relates to certain transactions that the Company has entered into involving the sale of equipment to certain of its customers which included (i) guarantees to repurchase the equipment for a fixed price at a future date and (ii) guarantees to repurchase the equipment from the third-party lender in the event of default by the customer. For further discussion, see Note 12 – Commitments and Contingencies to the accompanying consolidated financial statements.

25

Table of Contents

Critical Accounting Policies and Estimates

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

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 more frequently if indicators of impairment exist. The Company performed its annual goodwill impairment test as of October 31, 2021.

In testing the goodwill of its reporting units for potential impairment, the Company applies either a qualitative or quantitative test, in accordance with ASC 350, Intangibles – Goodwill and Other.

A qualitative approach may be applied when the Company concludes that it is not “more likely than not” that the fair value of a reporting unit is less than its carrying value. In conducting a qualitative assessment, the Company analyzes a variety of events or factors that may influence the fair value of the reporting unit, including, but not limited to: the results of prior quantitative assessments performed; changes in the carrying amount; actual and projected financial performance; relevant market data for both the Company and its guideline comparable companies; industry outlook; and macroeconomic conditions. Significant judgment is used to evaluate the totality of these events and factors to make the determination of whether it is more likely than not that the fair value of the reporting unit is less than its carrying value. In this situation, the Company would not be required to perform the quantitative impairment test described below.

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

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

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

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

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

In 2021, the Company performed a combination of qualitative and quantitative impairment tests to assess the goodwill of its reporting units for potential impairment. For one reporting unit, a quantitative impairment test was performed, using a combination of the income and market approaches to determine the fair value of the reporting unit. The valuation was prepared

26

Table of Contents

by a third-party valuation specialist. One measure of the sensitivity of assumptions used in the impairment analysis is the amount by which each reporting unit “passed” (fair value exceeds the carrying value). The fair value of the reporting unit exceeded its carrying value by more than 20%, and, therefore, no impairment was recognized. For its other reporting units, the Company applied the qualitative approach to assess the goodwill of its reporting units for potential impairment and concluded that it was not “more likely than not” that the fair value of the Company’s reporting units were less than their carrying values. Accordingly, further quantitative testing was not required to be performed.

The Company had no goodwill impairments in 2021, 2020 or 2019. For all reporting units, a 10% decrease in the estimated fair value would have had no effect on the carrying value of goodwill at the annual measurement date in 2021. However, adverse changes to the Company’s business environment and future cash flow could cause us to record impairment charges in future periods, which could be material. See Note 8 – Goodwill and Other Intangible Assets to the accompanying consolidated financial statements for a summary of the Company’s goodwill by segment.

Indefinite-lived Intangible Assets

An intangible asset determined to have an indefinite useful life is not amortized. Indefinite-lived intangible assets are tested for impairment on an annual basis at year-end, or more frequently if an event occurs or circumstances change that indicate the fair value of an indefinite-lived intangible asset could be below its carrying amount. The Company’s indefinite-lived intangible assets include trade names associated with acquisitions.

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 may be applied when the Company concludes that it is not “more likely than not” that the fair value of the indefinite-lived intangible assets 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.

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

In 2021, the Company performed a combination of qualitative and quantitative impairment tests over its indefinite-lived intangible assets. The fair value of the indefinite-lived intangible asset that was quantitatively tested for impairment exceeded its carrying value by approximately 50%, and, therefore, no impairment was recognized. This valuation was prepared by a third-party valuation specialist. Further, the Company concluded that it was not “more likely than not” that the fair value of indefinite-lived intangible assets that were qualitatively tested for impairment were less than the carrying amounts. Accordingly, further quantitative testing was not required to be performed.

The Company had no indefinite-lived intangible asset impairments in 2021, 2020 or 2019. Although the Company believes its estimates of fair value are reasonable, actual financial results could differ from estimated financial results due to the inherent uncertainty involved in making such estimates. The use of alternative estimates and assumptions could increase or decrease the estimated fair value of the assets and potentially result in different impacts to the Company’s results of operations. Actual results may differ from the Company’s estimates.

See Note 8 – Goodwill and Other Intangible Assets to the accompanying consolidated financial statements for a summary of the Company’s indefinite-lived intangible assets.

Revenue Recognition

Revenue is recognized when performance obligations under the terms of a contract with the customer are satisfied; generally this occurs at a point in time, with the transfer of control of the Company’s products or services to customers. For most of the Company’s product sales, these criteria are met at the time the product is shipped; however, occasionally control passes later or earlier than shipment due to customer contract or letter of credit terms. In circumstances where credit is extended, payment terms generally range from 30 to 120 days and customer deposits may be required.

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

The Company enters into sales arrangements that may provide for multiple performance obligations to a customer. These arrangements may include software and non-software components that function together to deliver the products’ essential

27

Table of Contents

functionality. The Company identifies all performance obligations that are to be delivered separately under the sales arrangement and allocates revenue to each performance obligation based on its relative standalone selling price. The Company uses an observable price to determine the standalone selling price or a cost plus margin approach when one is not available. In general, performance obligations include hardware, integration and installation services. The allocated revenue for each performance obligation is recognized as such performance obligations are satisfied.

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

28

Table of Contents