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 asFederal Signal Corporation's Annual Report on Form 10-K for the year endedDecember 31, 2020 . References herein to the "Company," "we," "our," or "us" refer collectively toFederal 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 endedDecember 31, 2020 , which was filed with theSEC onFebruary 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: theEnvironmental Solutions Group and theSafety and Security Systems Group . COVID-19 Update The COVID-19 pandemic adversely impacted our operating results for the three and nine months endedSeptember 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 endedSeptember 30, 2021 , respectively. These order improvements have contributed to a record backlog of$487 million as ofSeptember 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 inNorth 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 endedSeptember 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 ourSafety and Security Systems Group , net sales increased by 27
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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 endedSeptember 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 ourSafety 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 endedSeptember 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 ourSafety and Security Systems Group , partially offset by a$2.2 million reduction within ourEnvironmental Solutions Group . Consolidated operating margin for the three months endedSeptember 30, 2021 was 11.5%, compared to 12.2% in the prior-year quarter. For the nine months endedSeptember 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 ourEnvironmental Solutions Group , partially offset by a$2.6 million decrease in ourSafety and Security Systems Group . Consolidated operating margin for the nine months endedSeptember 30, 2021 was 11.0%, compared to 11.7% in the prior-year period. Income before income taxes for the three months endedSeptember 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 endedSeptember 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 endedSeptember 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 endedSeptember 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 endedSeptember 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 endedSeptember 30, 2021 were$350.4 million , an increase of$84.6 million , or 32%, as compared to the prior-year quarter. OurEnvironmental Solutions Group reported total orders of$292.1 million in the three months endedSeptember 30, 2021 , an increase of$72.1 million , or 33% in comparison to the prior-year quarter. Orders in the three months endedSeptember 30, 2021 within ourSafety 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 endedSeptember 30, 2021 were$1,095.0 million , an increase of$324.0 million , or 42%, as compared to the prior-year period. OurEnvironmental Solutions Group reported total orders of$916.0 million in the nine months endedSeptember 30, 2021 , up$300.8 million , or 49% in comparison to the prior-year period. Orders in the nine months endedSeptember 30, 2021 within ourSafety 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 atSeptember 30, 2021 was$487 million , an improvement of$167 million , or 52%, compared to the prior-year quarter. 28
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Results of Operations The following table summarizes our Condensed Consolidated Statements of Operations and illustrates the key financial indicators used to assess our consolidated financial results:
Three Months Ended September 30, Nine Months Ended September 30, ($ 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 endedSeptember 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 theSafety 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 endedSeptember 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 theSafety 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 endedSeptember 30, 2021 compared to the prior-year quarter, largely due to an increase of$19.8 million , or 11%, within theEnvironmental 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 theSafety 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. 29
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For the nine months endedSeptember 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 theEnvironmental 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 theSafety 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 endedSeptember 30, 2021 compared to the prior-year quarter, primarily due to a$1.7 million reduction within theEnvironmental Solutions Group . Gross profit as a percentage of revenues ("gross profit margin") for the three months endedSeptember 30, 2021 was 23.8%, compared to 25.9% in the prior-year quarter, primarily due to reductions in theEnvironmental Solutions Group and theSafety and Security Systems Group of 240 basis points and 30 basis points, respectively. For the nine months endedSeptember 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 theEnvironmental Solutions Group , partially offset by a reduction of$3.3 million within theSafety and Security Systems Group . Gross profit margin for the nine months endedSeptember 30, 2021 was 24.3%, compared to 26.0% in the prior-year period, primarily due to reductions in theEnvironmental Solutions Group and theSafety 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 endedSeptember 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 theEnvironmental 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 endedSeptember 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 theEnvironmental Solutions Group , partially offset by a$0.4 million reduction within theSafety 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 endedSeptember 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 theSafety and Security Systems Group , partially offset by a$2.2 million reduction within theEnvironmental Solutions Group . Consolidated operating margin for the three months endedSeptember 30, 2021 was 11.5%, compared to 12.2% in the prior-year quarter. For the nine months endedSeptember 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 theEnvironmental Solutions Group , partially offset by a$2.6 million decrease in theSafety and Security Systems Group . Consolidated operating margin for the nine months endedSeptember 30, 2021 was 11.0%, compared to 11.7% in the prior-year period. Interest expense Interest expense for the three and nine months endedSeptember 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 endedSeptember 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 endedSeptember 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. 30
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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 endedSeptember 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 endedSeptember 30, 2021 was 12.8%, compared to 23.1% in the prior-year quarter. For the nine months endedSeptember 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 endedSeptember 30, 2021 was 17.6%, compared to 23.0% in the prior-year period. Net income Net income for the three months endedSeptember 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 endedSeptember 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$1.2 million reduction in interest expense. Environmental Solutions The following table summarizes theEnvironmental Solutions Group's operating results as of and for the three and nine months endedSeptember 30, 2021 and 2020: Three Months Ended September 30, Nine Months Ended September 30, ($ 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 endedSeptember 30, 2021 vs. three months endedSeptember 30, 2020 Total orders for the three months endedSeptember 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 endedSeptember 30, 2021 increased by$18.1 million , or 8%, compared to the prior-year quarter. For the three months endedSeptember 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 31
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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 endedSeptember 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 endedSeptember 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 endedSeptember 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 endedSeptember 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 endedSeptember 30, 2021 vs. nine months endedSeptember 30, 2020 Total orders for the nine months endedSeptember 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 ofOSW 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 endedSeptember 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 endedSeptember 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 endedSeptember 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 endedSeptember 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 endedSeptember 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 atSeptember 30, 2021 , compared to$292.6 million atSeptember 30, 2020 . 32
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Safety and Security Systems The following table summarizes theSafety and Security Systems Group's operating results as of and for the three and nine months endedSeptember 30, 2021 and 2020: Three Months Ended September 30, Nine Months Ended September 30, ($ 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 endedSeptember 30, 2021 vs. three months endedSeptember 30, 2020 Total orders for the three months endedSeptember 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 endedSeptember 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 endedSeptember 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 endedSeptember 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 endedSeptember 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 endedSeptember 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 endedSeptember 30, 2021 vs. nine months endedSeptember 30, 2020 Total orders for the nine months endedSeptember 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 endedSeptember 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 endedSeptember 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 endedSeptember 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. 33
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SEG&A expenses for the nine months endedSeptember 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 endedSeptember 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 atSeptember 30, 2021 , compared to$27.1 million atSeptember 30, 2020 . Corporate Expenses Corporate operating expenses for the three months endedSeptember 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 endedSeptember 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 inNorth America , where usage is typically lower during periods of harsher weather conditions. Financial Condition, Liquidity and Capital ResourcesThe 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 ofSeptember 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 ofSeptember 30, 2021 andDecember 31, 2020 , respectively. As ofSeptember 30, 2021 ,$22.2 million of cash and cash equivalents was held by foreign subsidiaries. Cash and cash equivalents held by subsidiaries outside theU.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 fundU.S. operations. However, in the event that these funds are needed to fundU.S. operations or to satisfyU.S. obligations, they generally could be repatriated. The repatriation of these funds may cause the Company to incur additionalU.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 endedSeptember 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 endedSeptember 30, 2021 , compared to$29.2 million in the prior-year period. During the nine months endedSeptember 30, 2021 , the Company paid initial consideration of$53.5 million to acquire OSW. Capital expenditures in the nine months endedSeptember 30, 2021 and 2020 were$12.5 million and$24.3 million , respectively. During the nine months endedSeptember 30, 2020 , the Company also paid$6.2 million to 34
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acquire certain assets and operations ofPublic 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 ofMark Rite Lines Equipment Company, Inc. Net cash of$16.4 million was provided by financing activities in the nine months endedSeptember 30, 2021 , compared with a net cash usage of$16.0 million in the prior-year period. In the nine months endedSeptember 30, 2021 , the Company borrowed$40.1 million against its revolving credit facility, primarily to fund the acquisitions of OSW and the assets ofGround 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 endedSeptember 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 ofSeptember 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 endedSeptember 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 endedDecember 31, 2020 . 35
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