Management's Discussion and Analysis of Financial Condition and Results of
Operations ("MD&A") is designed to provide information that is supplemental to,
and should be read together with, the condensed consolidated financial
statements and the accompanying notes contained in this Form 10-Q, as well as
Federal Signal Corporation's Annual Report on Form 10-K for the year ended
December 31, 2020. References herein to the "Company," "we," "our," or "us"
refer collectively to Federal Signal Corporation and its subsidiaries.
Information in MD&A is intended to assist the reader in obtaining an
understanding of (i) the condensed 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 condensed consolidated
financial statements. The Company's results for interim periods should not be
regarded as necessarily indicative of results that may be expected for the
entire year, which may differ materially due to, among other things, the risk
factors described under Part I, Item 1A, Risk Factors, of the Company's Annual
Report on Form 10-K for the year ended December 31, 2020, which was filed with
the SEC on February 25, 2021.
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, vacuum- and hydro-excavation trucks
(collectively, "safe-digging trucks"), street sweepers, road-marking and
line-removal equipment, waterblasting equipment, dump truck bodies and trailers,
and (ii) safety, security and communication equipment, such as lights, sirens
and warning systems. In addition, we sell parts and provide service, repair,
equipment rentals and training as part of a comprehensive aftermarket offering
to our customer base. We operate 17 principal 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 12 - Segment Information to the accompanying condensed
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.
COVID-19 Update
The COVID-19 pandemic adversely impacted our operating results for the three and
nine months ended September 30, 2020. As market conditions have gradually
improved, we have seen a meaningful improvement in net sales, increased
operating income and strong recovery in customer demand, with year-over-year
order increases of 32% and 42%, in the three and nine months ended September 30,
2021, respectively. These order improvements have contributed to a record
backlog of $487 million as of September 30, 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 to mitigate the associated impacts. While
we were able to largely mitigate these issues during the first nine months of
2021, we cannot provide 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 COVID-19 pandemic, including
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 Results
Net sales for the three months ended September 30, 2021 increased by $18.5
million, or 7%, compared to the prior-year quarter. Our Environmental Solutions
Group reported a net sales increase of $18.1 million, or 8%, primarily due to an
$11.3 million improvement in aftermarket revenues, increases in sales of dump
truck bodies, industrial vacuum loaders, waterblasting equipment, refuse trucks
and safe-digging trucks of $8.0 million, $4.9 million, $3.6 million, $3.5
million, and $2.1 million, respectively, and a $2.0 million favorable foreign
currency translation impact. Partially offsetting these improvements was a $19.2
million reduction in shipments of sewer cleaners. Within our Safety and Security
Systems Group, net sales increased by
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$0.4 million, or 1%, primarily due to a $0.5 million increase in sales of
industrial signaling equipment and a $0.5 million favorable foreign currency
translation impact, partially offset by a $0.8 million reduction in sales of
warning systems.
For the nine months ended September 30, 2021, net sales increased by $75.8
million, or 9%, compared to the prior-year period. Our Environmental Solutions
Group reported a net sales increase of $80.3 million, or 12%, primarily due to a
$40.2 million improvement in aftermarket revenues, inclusive of a $10.3 million
increase in used equipment sales, increases in sales of dump truck bodies,
refuse trucks and waterblasting equipment of $23.5 million, $10.8 million and
$6.6 million, respectively, and a $11.0 million favorable foreign currency
translation impact. Partially offsetting these improvements were reductions in
shipments of street sweepers, sewer cleaners and safe-digging trucks of $10.8
million, $8.2 million and $7.8 million, respectively. Within our Safety and
Security Systems Group, net sales decreased by $4.5 million, or 3%, primarily
due to reductions in sales of public safety equipment and warning systems of
$5.9 million and $2.4 million, respectively, partially offset by a $2.6 million
favorable foreign currency translation impact.
Operating income for the three months ended September 30, 2021 increased by $0.3
million, or 1%, compared to the prior-year quarter, primarily driven by a $2.3
million reduction in Corporate expenses and a $0.2 million improvement within
our Safety and Security Systems Group, partially offset by a $2.2 million
reduction within our Environmental Solutions Group. Consolidated operating
margin for the three months ended September 30, 2021 was 11.5%, compared to
12.2% in the prior-year quarter.
For the nine months ended September 30, 2021, operating income increased by $3.0
million, or 3%, compared to the prior-year period, primarily driven by an
improvement of $5.4 million within our Environmental Solutions Group, partially
offset by a $2.6 million decrease in our Safety and Security Systems Group.
Consolidated operating margin for the nine months ended September 30, 2021 was
11.0%, compared to 11.7% in the prior-year period.
Income before income taxes for the three months ended September 30, 2021
increased by $0.6 million, or 2%, compared to the prior-year quarter. The
increase resulted from the higher operating income, a $0.2 million increase in
other income and a $0.1 million reduction in interest expense.
For the nine months ended September 30, 2021, income before income taxes
increased by $7.4 million, or 8%, compared to the prior-year period. The
increase resulted from the higher operating income, a $3.2 million decrease in
other expense and a $1.2 million reduction in interest expense.
Net income for the three months ended September 30, 2021 increased by $3.9
million compared to the prior-year quarter, largely due to a $3.3 million
reduction in income tax expense and the aforementioned increase in income before
taxes. For the nine months ended September 30, 2021, net income increased by
$11.0 million compared to the prior-year period, largely due to the
aforementioned increase in income before taxes and a $3.6 million decrease in
income tax expense. The effective tax rate for the three and nine months ended
September 30, 2021 was 12.8% and 17.6%, respectively. We currently expect our
full-year effective tax rate to be approximately 18%.
Total orders for the three months ended September 30, 2021 were $350.4 million,
an increase of $84.6 million, or 32%, as compared to the prior-year quarter. Our
Environmental Solutions Group reported total orders of $292.1 million in the
three months ended September 30, 2021, an increase of $72.1 million, or 33% in
comparison to the prior-year quarter. Orders in the three months ended September
30, 2021 within our Safety and Security Systems Group were $58.3 million, an
increase of $12.5 million, or 27%, compared to the prior-year quarter.
Total orders for the nine months ended September 30, 2021 were $1,095.0 million,
an increase of $324.0 million, or 42%, as compared to the prior-year period. Our
Environmental Solutions Group reported total orders of $916.0 million in the
nine months ended September 30, 2021, up $300.8 million, or 49% in comparison to
the prior-year period. Orders in the nine months ended September 30, 2021 within
our Safety and Security Systems Group were $179.0 million, an increase of $23.2
million or 15%, compared to the prior-year period.
Our consolidated backlog at September 30, 2021 was $487 million, an improvement
of $167 million, or 52%, compared to the prior-year quarter.
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Results of Operations The following table summarizes our Condensed Consolidated Statements of Operations and illustrates the key financial indicators used to assess our consolidated financial results:


                                                         Three Months Ended September 30,                       Nine Months Ended September 30,
($ in millions, except per share data)                2021                2020           Change              2021                2020           Change
Net sales                                        $     298.3           $ 279.8          $ 18.5          $     911.8           $ 836.0          $ 75.8
Cost of sales                                          227.4             207.2            20.2                690.5             618.3            72.2
Gross profit                                            70.9              72.6            (1.7)               221.3             217.7             3.6
Selling, engineering, general and administrative
expenses                                                36.2              38.4            (2.2)               119.8             118.0             1.8
Acquisition and integration-related expenses             0.4               0.2             0.2                  0.9               0.8             0.1
Restructuring                                              -                 -               -                    -               1.3            (1.3)
Operating income                                        34.3              34.0             0.3                100.6              97.6             3.0
Interest expense                                         1.1               1.2            (0.1)                 3.3               4.5            (1.2)

Other (income) expense, net                             (0.3)             (0.1)           (0.2)                (1.1)              2.1            (3.2)
Income before income taxes                              33.5              32.9             0.6                 98.4              91.0             7.4
Income tax expense                                       4.3               7.6            (3.3)                17.3              20.9            (3.6)

Net income                                       $      29.2           $  25.3          $  3.9          $      81.1           $  70.1          $ 11.0
Operating data:
Operating margin                                        11.5   %          12.2  %         (0.7) %              11.0   %          11.7  %         (0.7) %
Diluted earnings per share                       $      0.47           $  0.41          $ 0.06          $      1.31           $  1.14          $ 0.17
Total orders                                           350.4             265.8            84.6              1,095.0             771.0           324.0
Backlog                                                487.1             319.7           167.4                487.1             319.7           167.4
Depreciation and amortization                           12.7              11.2             1.5                 37.5              33.1             4.4


Net sales
Net sales for the three months ended September 30, 2021 increased by $18.5
million, or 7%, compared to the prior-year quarter. The Environmental Solutions
Group reported a net sales increase of $18.1 million, or 8%, primarily due to an
$11.3 million improvement in aftermarket revenues, increases in sales of dump
truck bodies, industrial vacuum loaders, waterblasting equipment, refuse trucks
and safe-digging trucks of $8.0 million, $4.9 million, $3.6 million, $3.5
million, and $2.1 million, respectively, and a $2.0 million favorable foreign
currency translation impact. Partially offsetting these improvements was a $19.2
million reduction in shipments of sewer cleaners. Within the Safety and Security
Systems Group, net sales increased by $0.4 million, or 1%, primarily due to a
$0.5 million increase in sales of industrial signaling equipment and a $0.5
million favorable foreign currency translation impact, partially offset by a
$0.8 million reduction in sales of warning systems.
For the nine months ended September 30, 2021, net sales increased by $75.8
million, or 9%, compared to the prior-year period. The Environmental Solutions
Group reported a net sales increase of $80.3 million, or 12%, primarily due to a
$40.2 million improvement in aftermarket revenues, inclusive of a $10.3 million
increase in used equipment sales, increases in sales of dump truck bodies,
refuse trucks and waterblasting equipment of $23.5 million, $10.8 million and
$6.6 million, respectively, and a $11.0 million favorable foreign currency
translation impact. Partially offsetting these improvements were reductions in
shipments of street sweepers, sewer cleaners and safe-digging trucks of $10.8
million, $8.2 million and $7.8 million, respectively. Within the Safety and
Security Systems Group, net sales decreased by $4.5 million, or 3%, primarily
due to reductions in sales of public safety equipment and warning systems of
$5.9 million and $2.4 million, respectively, partially offset by a $2.6 million
favorable foreign currency translation impact.
Cost of sales
Cost of sales increased by $20.2 million, or 10%, for the three months ended
September 30, 2021 compared to the prior-year quarter, largely due to an
increase of $19.8 million, or 11%, within the Environmental Solutions Group,
primarily related to increased sales volumes, inclusive of current-year
acquisition effects, higher material costs, a $2.1 million unfavorable foreign
currency translation impact and a $1.0 million increase in depreciation expense.
Within the Safety and Security Systems Group, cost of sales increased by $0.4
million, or 1%, primarily related to a $0.3 million unfavorable foreign currency
translation impact.
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For the nine months ended September 30, 2021, cost of sales increased by $72.2
million, or 12%, compared to the prior-year period, largely due to an increase
of $73.4 million, or 14%, within the Environmental Solutions Group, primarily
related to increased sales volumes, inclusive of current-year acquisition
effects, higher material costs, a $10.6 million unfavorable foreign currency
translation impact and a $3.0 million increase in depreciation expense. Within
the Safety and Security Systems Group, cost of sales decreased by $1.2 million,
or 1%, primarily related to lower sales volumes, partially offset by a $2.0
million unfavorable foreign currency translation impact.
Gross profit
Gross profit decreased by $1.7 million, or 2%, for the three months ended
September 30, 2021 compared to the prior-year quarter, primarily due to a $1.7
million reduction within the Environmental Solutions Group. Gross profit as a
percentage of revenues ("gross profit margin") for the three months ended
September 30, 2021 was 23.8%, compared to 25.9% in the prior-year quarter,
primarily due to reductions in the Environmental Solutions Group and the Safety
and Security Systems Group of 240 basis points and 30 basis points,
respectively.
For the nine months ended September 30, 2021, gross profit increased by $3.6
million, or 2%, compared to the prior-year period, due to an improvement of $6.9
million within the Environmental Solutions Group, partially offset by a
reduction of $3.3 million within the Safety and Security Systems Group. Gross
profit margin for the nine months ended September 30, 2021 was 24.3%, compared
to 26.0% in the prior-year period, primarily due to reductions in the
Environmental Solutions Group and the Safety and Security Systems Group of 150
basis points and 100 basis points, respectively.
Selling, engineering, general and administrative expenses ("SEG&A")
SEG&A expenses for the three months ended September 30, 2021 decreased by $2.2
million, or 6%, compared to the prior-year quarter, primarily due to a $2.5
million reduction in Corporate SEG&A expenses, partially offset by a $0.5
million increase within the Environmental Solutions Group. As a percentage of
net sales, SEG&A expenses were 12.1% in the current-year quarter, down from
13.7% in the prior-year quarter.
For the nine months ended September 30, 2021, SEG&A expenses increased by $1.8
million, or 2%, compared to the prior-year period, primarily due to a $2.3
million increase within the Environmental Solutions Group, partially offset by a
$0.4 million reduction within the Safety and Security Systems Group. As a
percentage of net sales, SEG&A expenses were 13.1% in the current-year period,
down from 14.1% in the prior-year period.
Operating income
Operating income for the three months ended September 30, 2021 increased by $0.3
million, or 1%, compared to the prior-year quarter, primarily driven by a $2.3
million reduction in Corporate expenses and a $0.2 million improvement within
the Safety and Security Systems Group, partially offset by a $2.2 million
reduction within the Environmental Solutions Group. Consolidated operating
margin for the three months ended September 30, 2021 was 11.5%, compared to
12.2% in the prior-year quarter.
For the nine months ended September 30, 2021, operating income increased by $3.0
million, or 3%, compared to the prior-year period, primarily driven by an
improvement of $5.4 million within the Environmental Solutions Group, partially
offset by a $2.6 million decrease in the Safety and Security Systems Group.
Consolidated operating margin for the nine months ended September 30, 2021 was
11.0%, compared to 11.7% in the prior-year period.
Interest expense
Interest expense for the three and nine months ended September 30, 2021
decreased by $0.1 million and $1.2 million, respectively, in comparison to the
corresponding periods in the prior year. The reductions in both periods were
largely due to lower average debt levels.
Other (income) expense, net
For the three months ended September 30, 2021, other income of $0.3 million was
realized, whereas in the prior-year quarter, other income of $0.1 million was
recognized, with the increase primarily due to the recognition of more net
periodic pension benefit in the current-year quarter.
For the nine months ended September 30, 2021, other income of $1.1 million was
realized, whereas in the prior-year period, other expense of $2.1 million was
recognized. The decrease in other expense was primarily due to a $2.1 million
reduction in charges associated with multi-employer pension plan withdrawals, in
addition to the recognition of $0.5 million more net periodic pension benefit in
the current-year period and a $0.5 million increase in foreign currency
transaction gains.
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Income tax expense
The Company recognized income tax expense of $4.3 million and $7.6 million for
the three months ended September 30, 2021 and 2020, respectively. The decrease
in tax expense in the current-year quarter was largely due to the recognition of
a $3.4 million tax benefit associated with the release of state valuation
allowances and a $1.1 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 quarter, partially offset by the
recognition of $1.2 million less excess tax benefits from stock compensation
activity compared to the prior-year quarter. Including these items, the
Company's effective tax rate for the three months ended September 30, 2021 was
12.8%, compared to 23.1% in the prior-year quarter.
For the nine months ended September 30, 2021 and 2020, the Company recognized
income tax expense of $17.3 million and $20.9 million, respectively. The
decrease in tax expense in the current-year period was largely due to the
recognition of a $3.4 million tax benefit associated with the release of state
valuation allowances and a $1.1 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, and the recognition of $0.5 million
more excess tax benefits from stock compensation activity compared to the
prior-year period, partially offset by higher pre-tax income levels. Including
these items, the Company's effective tax rate for the nine months ended
September 30, 2021 was 17.6%, compared to 23.0% in the prior-year period.
Net income
Net income for the three months ended September 30, 2021 increased by $3.9
million compared to the prior-year quarter, largely due to a $3.3 million
decrease in income tax expense, the aforementioned improvement in operating
income, the $0.2 million increase in other income, and the $0.1 million
reduction in interest expense.
For the nine months ended September 30, 2021, net income increased by $11.0
million compared to the prior-year period, largely due to a $3.6 million
decrease in income tax expense, the aforementioned improvement in operating
income, the $3.2 million decrease in other expense, and the $1.2 million
reduction in interest expense.
Environmental Solutions
The following table summarizes the Environmental Solutions Group's operating
results as of and for the three and nine months ended September 30, 2021 and
2020:
                                                 Three Months Ended September 30,                       Nine Months Ended September 30,
($ in millions)                               2021                2020           Change              2021               2020            Change
Net sales                                $     249.1           $ 231.0          $ 18.1          $    758.5           $ 678.2          $  80.3
Operating income                                30.8              33.0            (2.2)               96.4              91.0              5.4
Operating data:
Operating margin                                12.4   %          14.3  %         (1.9) %             12.7   %          13.4  %          (0.7) %
Total orders                             $     292.1           $ 220.0          $ 72.1          $    916.0           $ 615.2          $ 300.8
Backlog                                        440.8             292.6           148.2               440.8             292.6            148.2
Depreciation and amortization                   11.8              10.4             1.4                34.7              30.6              4.1


Three months ended September 30, 2021 vs. three months ended September 30, 2020
Total orders for the three months ended September 30, 2021 increased by $72.1
million, or 33%, compared to the prior-year quarter. U.S. orders increased by
$81.9 million, or 52%, primarily due to improvements in orders for street
sweepers, safe-digging trucks, sewer cleaners, trailers, industrial vacuum
loaders and dump truck bodies of $26.9 million, $9.2 million, $8.3 million, $7.7
million, $6.7 million and $6.4 million, respectively. Additionally, aftermarket
demand increased by $10.1 million. Non-U.S. orders decreased by $9.8 million, or
16%, primarily due to a $22.0 million reduction in orders for refuse trucks,
associated with the timing of large fleet orders in the prior-year period,
partially offset by increases in orders for safe-digging trucks and sewer
cleaners of $5.1 million and $2.7 million, as well as a $2.6 million favorable
foreign currency translation impact.
Net sales for the three months ended September 30, 2021 increased by $18.1
million, or 8%, compared to the prior-year quarter. For the three months ended
September 30, 2021, U.S. sales increased by $15.3 million, or 8%, largely due to
a $12.5 million improvement in aftermarket revenues and increases in sales of
dump truck bodies, industrial vacuum loaders, safe-digging trucks and
waterblasting equipment of $6.5 million, $4.9 million, $4.3 million and $2.8
million, respectively. Partially offsetting these improvements was a $16.7
million reduction in shipments of sewer cleaners. Non-U.S. sales increased by
$2.8
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million, or 6%, primarily due to a $3.5 million increase in sales of refuse
trucks and a $2.0 million favorable foreign currency translation impact,
partially offset by a $2.5 million reduction in shipments of sewer cleaners.
Cost of sales for the three months ended September 30, 2021 increased by $19.8
million, or 11%, compared to the prior-year quarter, primarily due to increased
sales volumes, inclusive of current-year acquisition effects, higher material
costs, a $2.1 million unfavorable foreign currency translation impact and a $1.0
million increase in depreciation expense. Gross profit margin for the three
months ended September 30, 2021 was 21.3%, compared to 23.7% in the prior-year
quarter, 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 for the three months ended September 30, 2021 increased by $0.5
million, or 2%, compared to the prior-year quarter, primarily due to the
addition of costs from current-year acquisitions, inclusive of a $0.4 million
increase in amortization expense. As a percentage of net sales, SEG&A expenses
decreased from 9.4% in the prior-year quarter, to 8.9% in the current-year
quarter.
Operating income for the three months ended September 30, 2021 decreased by $2.2
million, or 7%, compared to the prior-year quarter, largely due to a $1.7
million reduction in gross profit and the $0.5 million increase in SEG&A
expenses.
Nine months ended September 30, 2021 vs. nine months ended September 30, 2020
Total orders for the nine months ended September 30, 2021 increased by $300.8
million, or 49%, compared to the prior-year period. U.S. orders increased by
$272.9 million, or 58%, primarily due to improvements in orders for sewer
cleaners, street sweepers, dump truck bodies, industrial vacuum loaders,
safe-digging trucks and trailers of $53.5 million, $49.7 million, $49.2 million,
$18.7 million, $17.6 million and $12.6 million, respectively, as well as the
inclusion of $20.9 million of backlog acquired in connection with the
acquisition of OSW Equipment & Repair, LLC ("OSW") and an increase in
aftermarket demand of $27.3 million. Non-U.S. orders increased by $27.9 million,
or 20%, primarily due to a $17.6 million improvement in aftermarket demand,
increases in orders for sewer cleaners, dump truck bodies, safe-digging trucks
and industrial vacuum loaders of $8.7 million, $5.2 million, $4.8 million and
$1.9 million, respectively, and a $10.6 million favorable foreign currency
translation impact. In addition, the OSW transaction resulted in the inclusion
of $2.9 million of acquired backlog. Partially offsetting these improvements was
a $20.9 million reduction in orders for refuse trucks, primarily associated with
the timing of large fleet orders in the prior-year period, and a $4.9 million
decrease in orders for street sweepers.
Net sales for the nine months ended September 30, 2021 increased by $80.3
million, or 12%, compared to the prior-year period. U.S. sales increased by
$41.7 million, or 7%, largely due to a $26.2 million increase in aftermarket
revenues and increases in sales of dump truck bodies, waterblasting equipment,
industrial vacuum loaders and trailers of $19.6 million, $4.6 million, $4.3
million and $2.6 million, partially offset by reductions in shipments of sewer
cleaners, safe-digging trucks and street sweepers of $7.8 million, $6.3 million
and $5.6 million, respectively. Non-U.S. sales increased by $38.6 million, or
32%, primarily due to a $14.0 million improvement in aftermarket revenues, an
$11.5 million increase in sales of refuse trucks and a $11.0 million favorable
foreign currency translation impact.
Cost of sales for the nine months ended September 30, 2021 increased by $73.4
million, or 14%, compared to the prior-year period, primarily due to increased
sales volumes, inclusive of current-year acquisition effects, higher material
costs, a $10.6 million unfavorable foreign currency translation impact and a
$3.0 million increase in depreciation expense. Including these factors, gross
profit margin for the nine months ended September 30, 2021 was 21.8%, compared
to 23.3% in the prior-year period 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 for the nine months ended September 30, 2021 increased by $2.3
million, or 3%, compared to the prior-year period, primarily due to the addition
of costs from current-year acquisitions, inclusive of a $1.0 million increase in
amortization expense. As a percentage of net sales, SEG&A expenses decreased
from 9.8% in the prior-year period, to 9.0% in the current-year period.
Operating income for the nine months ended September 30, 2021 increased by $5.4
million, or 6%, compared to the prior-year period, largely due to a $6.9 million
improvement in gross profit and reductions in restructuring and
acquisition-related expenses of $0.7 million and $0.1 million, respectively,
partially offset by the $2.3 million increase in SEG&A expenses.
Backlog was $440.8 million at September 30, 2021, compared to $292.6 million at
September 30, 2020.
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Safety and Security Systems
The following table summarizes the Safety and Security Systems Group's operating
results as of and for the three and nine months ended September 30, 2021 and
2020:
                                                 Three Months Ended September 30,                      Nine Months Ended September 30,
($ in millions)                                2021              2020           Change              2021                2020           Change
Net sales                                 $     49.2           $ 48.8          $  0.4          $     153.3           $ 157.8          $ (4.5)
Operating income                                 7.6              7.4             0.2                 22.6              25.2            (2.6)
Operating data:
Operating margin                                15.4   %         15.2  %          0.2  %              14.7   %          16.0  %         (1.3) %
Total orders                              $     58.3           $ 45.8          $ 12.5          $     179.0           $ 155.8          $ 23.2
Backlog                                         46.3             27.1            19.2                 46.3              27.1            19.2
Depreciation and amortization                    0.9              0.8             0.1                  2.7               2.5             0.2


Three months ended September 30, 2021 vs. three months ended September 30, 2020
Total orders for the three months ended September 30, 2021 increased by $12.5
million, or 27%, compared with the prior-year quarter. U.S. orders increased by
$3.6 million, primarily driven by improvements in orders for public safety
equipment and industrial signaling equipment of $2.0 million and $1.3 million,
respectively. Non-U.S. orders increased by $8.9 million, largely due to
improvements in orders for public safety equipment and warning systems of $6.8
million and $1.4 million, respectively, as well as a $0.4 million favorable
foreign currency translation impact.
Net sales for the three months ended September 30, 2021 increased by $0.4
million, or 1%, compared to the prior-year quarter. U.S. sales decreased by $1.2
million, primarily driven by a $1.6 million reduction in sales of warning
systems. Non-U.S. sales increased by $1.6 million, largely due to a $0.8 million
improvement in sales of warning systems, as well as a $0.5 million favorable
foreign currency translation impact.
Cost of sales for the three months ended September 30, 2021 increased by $0.4
million, or 1%, compared to the prior-year quarter, primarily related to an
unfavorable foreign currency translation impact of $0.2 million. Gross profit
margin for the three months ended September 30, 2021 was 36.4%, compared to
36.7% in the prior-year quarter, with the decrease primarily attributable to
unfavorable sales mix and the impact of higher material and freight costs.
SEG&A expenses for the three months ended September 30, 2021 decreased by $0.2
million, or 2%, compared to the prior-year quarter. As a percentage of net
sales, SEG&A expenses decreased from 21.5% in the prior-year quarter, to 20.9%
in the current-year quarter.
Operating income for the three months ended September 30, 2021 increased by $0.2
million, or 3%, compared to the prior-year quarter, primarily due to the $0.2
million reduction in SEG&A expenses.
Nine months ended September 30, 2021 vs. nine months ended September 30, 2020
Total orders for the nine months ended September 30, 2021 increased by $23.2
million, or 15%, compared with the prior-year period. U.S. orders increased by
$12.3 million, primarily driven by improvements in orders for public safety
equipment and industrial signaling equipment of $8.3 million and $5.4 million,
respectively, partially offset by a $1.4 million reduction in orders for warning
systems. Non-U.S. orders increased by $10.9 million, largely due to improvements
in orders for public safety equipment and industrial signaling equipment of $6.5
million and $2.1 million, respectively, as well as a $3.2 million favorable
foreign currency translation impact, partially offset by a $0.9 million
reduction in orders for warning systems.
Net sales for the nine months ended September 30, 2021 decreased by $4.5
million, or 3%, compared with the prior-year period. U.S. sales decreased by
$0.1 million, primarily driven by a $3.0 million reduction in sales of warning
systems, partially offset by improvements in sales of public safety equipment
and industrial signaling equipment of $1.6 million and $1.3 million,
respectively. Non-U.S. sales decreased by $4.4 million, primarily due to a $7.5
million reduction in sales of public safety equipment associated with the timing
of a large fleet shipment in the prior-year period, partially offset by a $2.5
million favorable foreign currency translation impact and a $0.6 million
improvement in sales of warning systems.
Cost of sales for the nine months ended September 30, 2021 decreased by $1.2
million, or 1%, compared with the prior-year period, primarily related to lower
sales volumes, partially offset by a $1.9 million unfavorable foreign currency
translation impact. Gross profit margin for the nine months ended September 30,
2021 was 36.7%, compared to 37.7% in the prior-year period, with the decrease
primarily attributable to unfavorable sales mix and the impact of higher
material and freight costs.
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SEG&A expenses for the nine months ended September 30, 2021 decreased by $0.4
million, or 1%, compared with the prior-year period. As a percentage of net
sales, SEG&A expenses were 21.9% in the current-year period, compared to 21.5%
in the prior-year period.
Operating income for the nine months ended September 30, 2021 decreased by $2.6
million, or 10%, compared to the prior-year period, primarily due to a $3.3
million reduction in gross profit, partially offset by the $0.4 million decrease
in SEG&A expenses and the non-recurrence of $0.3 million of restructuring
expenses that were recognized in the prior-year period.
Backlog was $46.3 million at September 30, 2021, compared to $27.1 million at
September 30, 2020.
Corporate Expenses
Corporate operating expenses for the three months ended September 30, 2021 were
$4.1 million, compared to $6.4 million in the prior-year quarter, with the
reduction primarily due to reductions in incentive compensation costs and
post-employment expenses.
Corporate operating expenses for the nine months ended September 30, 2021 were
$18.4 million, down from $18.6 million in the prior-year period, with the
reduction primarily due to lower incentive compensation costs, partially offset
by higher post-employment expenses.
Seasonality of Company's Business
Certain of the Company's businesses are susceptible to the influences of
seasonal factors, including buying patterns, delivery patterns and productivity
influences from holiday periods and weather. In general, the Company tends to
have lower equipment sales in the first calendar quarter of each year compared
to other quarters as a result of these factors. In addition, rental income and
parts sales are generally higher in the second and third quarters of the year,
because many of the Company's products are used for maintenance activities in
North America, where usage is typically lower during periods of harsher weather
conditions.
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. As of
September 30, 2021, there was $250.2 million of cash drawn and $10.3 million of
undrawn letters of credit under the 2019 Credit Agreement, with $239.5 million
of availability for borrowings. 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 $88.0 million and $81.7 million
as of September 30, 2021 and December 31, 2020, respectively. As of
September 30, 2021, $22.2 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 permanently reinvested in its foreign
operations and the Company's current plans do not demonstrate a need to
repatriate such cash to fund U.S. operations. However, in the event that these
funds are 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 are repatriated.
Net cash of $55.1 million was provided by operating activities in the nine
months ended September 30, 2021, compared to $79.6 million in the prior-year
period, with the year-over-year change primarily due to higher tax payments as a
result of tax planning initiatives, increased taxable income and differences in
the timing of certain payments, with the prior-period benefiting from the
deferral of $4.8 million in payroll tax payments under the Coronavirus Aid,
Relief, and Economic Security Act, of which, $3.7 million was remitted in the
current-year period. The year-over-year change also included a $3.2 million
decrease in pension contributions and 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 of $64.5 million was used for investing activities in the nine months
ended September 30, 2021, compared to $29.2 million in the prior-year period.
During the nine months ended September 30, 2021, the Company paid initial
consideration of $53.5 million to acquire OSW. Capital expenditures in the nine
months ended September 30, 2021 and 2020 were $12.5 million and $24.3 million,
respectively. During the nine months ended September 30, 2020, the Company also
paid $6.2 million to
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acquire certain assets and operations of Public Works Equipment and Supply, Inc.
and received $0.8 million as part of the finalization of certain post-closing
adjustments in connection with the acquisition of the assets of Mark Rite Lines
Equipment Company, Inc.
Net cash of $16.4 million was provided by financing activities in the nine
months ended September 30, 2021, compared with a net cash usage of $16.0 million
in the prior-year period. In the nine months ended September 30, 2021, the
Company borrowed $40.1 million against its revolving credit facility, primarily
to fund the acquisitions of OSW and the assets of Ground Force Manufacturing
LLC, and received $4.1 million from stock option exercises. The Company also
funded cash dividends and share repurchases of $16.5 million and $3.4 million,
respectively, and redeemed $7.8 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 the nine months
ended September 30, 2020, the Company borrowed $20.5 million against its
revolving credit facility, funded cash dividends and share repurchases of $14.5
million and $13.7 million, respectively, and redeemed $9.0 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.
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 September 30, 2021.
The Company anticipates that capital expenditures for 2021, including
investments associated with certain ongoing plant expansions, will be in the
range of $20 million to $25 million.
Contractual Obligations and Off-Balance Sheet Arrangements
During the nine months ended September 30, 2021, there have been no material
changes in the Company's contractual obligations and off-balance sheet
arrangements as described in Item 7, Management's Discussion and Analysis of
Financial Condition and Results of Operations, of the Company's Annual Report on
Form 10-K for the year ended December 31, 2020.
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