UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON,
Washington, D.C. 20549
FORM
Form 10-K
COMMISSION FILE NUMBERSECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2005
Commission File Number 1-6003
FEDERAL SIGNAL CORPORATION
(Exact
(Exact name of the RegistrantCompany as specified in its charter)
| Delaware | 36-1063330 | |
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
| 1415 Oak Brook, Illinois (Address of principal executive offices) | 60523 (Zip Code) | |
The Company’s telephone number, including area code
(630) 954-2000
SECURITIES REGISTERED PURSUANT TO SECTION
Securities registered pursuant to Section 12(b) OF THE ACT:
of the Act:
| Title of Each Class | Name of Each Exchange on Which Registered | |
| Common Stock, par value $1.00 per share, with preferred share purchase rights | New York Stock Exchange |
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes þ No o
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes o No þ
Indicate by check mark whether the RegistrantCompany (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the RegistrantCompany was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X]þ No [ ]o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (sec.229.405 (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of the Registrant'sCompany’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X]o
Indicate by check mark if the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b(2) of the Exchange Act. (Check one).
Large accelerated filer þ Accelerated filer o Non-accelerated filer o
Indicate by check mark if the registrant is a shell company, in Rule 12b(2) of the Exchange Act. Yes o No þ
State the aggregate market value of voting stock held by nonaffiliates of the RegistrantCompany as of June 30, 2003.2005: Common stock, $1.00 par value -- $784,350,110— $742,402,050
Indicate the number of shares outstanding of each of the Registrant'sCompany’s classes of common stock, as of January 30, 2004.31, 2006: Common stock, $1.00 par value -- 47,964,470— 48,123,114 shares
DOCUMENTS INCORPORATED BY REFERENCE
Documents Incorporated By Reference
Portions of the proxy statement for the Annual Meeting of Shareholders to be held on April 30, 200425, 2006 are incorporated by reference in Part III.
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FEDERAL SIGNAL CORPORATION
INDEX TO FORM
Index to Form 10-K
PART I
ITEM 1. BUSINESS.
| Item 1. | Business. |
Federal Signal Corporation, founded in 1901, was reincorporated as a Delaware Corporation in 1969. The companyCompany is a worldwide manufacturer and supplier of street cleaning and vacuum loader and refuse collection vehicles; fire rescue vehicles; safety, signaling and communication equipmentequipment; and parking systems; and tooling products. Federal Signal Corporation and its subsidiaries (referred to collectively as the "Registrant"“the Company” or "company"“Company” herein, unless context otherwise indicates) operates manufacturing facilities in 5240 plants around the world in 12 countries serving customers in North America, South America, Europe and Asia.approximately 100 countries in all regions of the world. The RegistrantCompany also provides customer and dealer financing to support the sale of its vehicles.
NARRATIVE DESCRIPTION OF BUSINESS
Narrative Description of Business
Products manufactured and services rendered by the RegistrantCompany are divided into four major operating groups: Environmental Products, Fire Rescue, Safety Products and Tool. The individual operating companies are organized as such because they share certain characteristics, including technology, marketing, distribution and product application, thatwhich create long-term synergies.
Financial information (net sales, foreign sales, export sales, operating income and identifiable assets) concerning the Registrant'sCompany’s four operating segments as of, and for each of the three years in the period ended, December 31, 20032005 included in Note MN of the financial statements contained under Item 8 of thethis Form 10-K is incorporated herein by reference.
ENVIRONMENTAL PRODUCTS GROUP
| Environmental Products Group |
The Environmental Products Group manufactures and markets worldwide a full range of street cleaning and vacuum loader and refuse collection vehicles as well as high-performance water blasting equipment. Products are also manufactured for the emergingnewer markets of hydro-excavation, glycol recovery and surface cleaning. The group competes under the Elgin, RAVO, Vactor, Guzzler Jetstream, Leach and WittkeJetstream brand names. The group'sgroup’s vehicles and equipment are manufactured in North America and Europe.
Through the Elgin brand name, the RegistrantCompany is the leading U.S.US brand of street sweepers primarily designed for large-scale cleaning of curbed streets, parking lots and other paved surfaces utilizing mechanical sweeping, vacuum and recirculating air technology for cleaning. RAVO is a market leader in Europe for high-quality, compact and self-propelled sweepers that utilize vacuum technology for pick-up.
In March 2001, the group acquired all of the assets of Athey Products
Corporation ("Athey") from bankruptcy proceedings. Athey was a primary
competitor to Elgin's mechanical sweepers. Subsequent to the purchase, the group
sold, or otherwise recovered for cash, a substantial portion of the assets of
Athey. All sweepers are currently marketed under the Elgin brand name.
Vactor is a leading manufacturer of municipal combination catch basin/sewer cleaning vacuum trucks. Guzzler is a leader in industrial vacuum loaders that clean up industrial waste or recover and recycle valuable raw materials. Jetstream manufactures high pressure waterblast equipment and accessories for commercial and industrial cleaning and maintenance operations.
In September
Segment results have been restated to exclude losses from Leach, which has been reclassified as a discontinued operation. Leach is a manufacturer of refuse truck bodies with operations in Medicine Hat, Alberta and October 2002, the group acquired Leachoffices in Appleton, Wisconsin. The Company ("Leach")
and Wittke, Inc. ("Wittke"). The acquisitions of Leach and Wittke diversified
the Registrant's environmental vehicle offering with a complete refuse hauling
product line of front, side and rear loaders that was able to leverage the
group's pre-existing dealer channel, integrate Leach's already existing dealer
network and incorporate Wittke's direct distribution channel. Refuse truck body
sales aggregated 26% of total group sales in 2003.
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FIRE RESCUE GROUPis evaluating divestiture alternatives for this business.
| Fire Rescue Group |
The Fire Rescue Group manufactures a broad range of fire rescue vehicles in its facilities located in North America and Europe. The group sells vehicles under the following brand names:E-ONE, Superior, Saulsbury and Bronto Skylift.
E-ONE is a leading brand of aluminum, custom-made fire rescue, airport rescue and firefighting vehicles. Superior brand trucks are manufactured and distributed primarily for the Canadian market and U.S.US wildlands markets.
Saulsbury is a leading manufacturer of stainless steel-bodied fire trucks and
rescue vehicles in the United States. Under the Bronto Skylift brand name, the RegistrantCompany manufactures vehicle-mounted aerial
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access platforms in Finland. In October 2001,The Company also produces stainless-steel bodied fire trucks and rescue vehicles under the Registrant acquired a majority interest in Plastisol
Holdings B.V. ("Plastisol"), located in the Netherlands. Plastisol manufactures
cabs and bodies for fire apparatus using glass-fiber reinforced polyester.
SAFETY PRODUCTS GROUPSaulsbury brand name.
| Safety Products Group |
The Safety Products Group manufactures emergency vehicle warning lights and sirens;sirens, industrial and outdoor signaling, warning, lighting and communication devices; hazardous liquid containment products and computer-based parking revenue and access control systems application software.systems. Products are sold under the Federal Signal, Target Tech, VAMA, Pauluhn, Victor Justrite and Federal APD brand names. The group maintainsoperates manufacturing facilities in North America, Europe and South America and
Europe.Africa. Many of the group'sgroup’s products are designed in accordance with various regulatory codes and standards, and meet agency approvals such as Factory Mutual
(FM) and Underwriters Laboratory (UL), International Electrotechnical Commission (IEC) and American Bureau of Shipping (ABS).
TOOL GROUP
| Tool Group |
The Tool Group manufactures, and in some cases is a reseller of, a broad range of consumable carbide and superhard insert tooling for cutoff, drilling, milling and deep grooving metal cutting applications; precision tooling, ejector pins, core pins, sleeves and accessories for the plastic injection mold industryindustry; and precision tooling and die components for the metal stamping industry. Tooling products are marketed under the Dayton, JPT, TTI, Manchester, Clapp DicoOTM, ClappDico and PCS brand names and manufactured in North America, Europe and Asia.
| Restructurings |
In June 2004, the Company announced the implementation of the first steps of a broad restructuring initiative aimed at enhancing the Company’s competitive profile. The Registrant's investmentmeasures announced addressed three key issues: improving the profitability of the Fire Rescue Group, divesting non-strategic business activities, and improving the Company’s overhead cost structure.
The initiatives included the following restructuring plans and divestitures:
| • | Closure of Preble, New York plant — By the end of 2004, the Company had closed its 120,000 square foot production facilities in Preble, New York and consolidated US production of fire rescue vehicles into its Ocala, Florida operations. | |
| • | Sale of interest in Plastisol B.V. Holdings — In 2004, the Company sold its 54% majority ownership interest in Plastisol B.V. Holdings to its minority partner. The Company acquired its ownership interest in Plastisol in 2001. Plastisol manufactures glassfiber reinforced polyester fire truck cabs and bodies mainly for the European and Asian markets. | |
| • | Safety Storage Inc. joint venture — In June 2004, the Company concluded the sale of its 30% minority ownership interest in Safety Storage, Inc. to the majority owner. Safety Storage makes mobile buildings for the off-site storage of hazardous waste. | |
| • | Industrial leasing portfolio — In 2001, the Company made the strategic decision to exit the leasing business for industrial customers. During 2004, the Company sold a $10 million portion of its industrial leases to a financial institution and continued the runoff of the rest of the portfolio; proceeds were used to pay down debt. | |
| • | Dayton France manufacturing consolidation — The Company has completed reduction of certain manufacturing activities at Dayton France. |
In the fourth quarter of 2005 the Company completed the closure of operations in Federal APD do Brasil, LTDA, which produced parking systems for the local market. In the fourth quarter of 2004, the Company divested Technical Tool, Group grew significantly due toInc., a series of acquisitions from 1999 through 2001. In July 1999, the group acquired
Clapp & Haney Tool Company, the leading U.S.small manufacturer and marketer of
polycrystalline diamond and cubic boron nitride consumable tooling. In March
2000, the group acquired P.C.S. Company, a supplier of precision beverage can tooling, pins
and accessories to the plastic injection mold industry. In January 2001, the
group acquired On Time MachiningJustrite Manufacturing Company, L.L.C., a leading manufacturer of indexable insert
drillsproducts for the safe storage of flammable and milling cutters for use in metal cutting applications.
FINANCIAL SERVICEShazardous materials.
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| Financial Services |
The RegistrantCompany offers a variety of short- and long-term financing primarily to its Environmental Products and Fire Rescue independent dealers and customers. The company's loans areCompany provides financing, principally through sales-type leases, to (i) municipal and industrial customers to purchase vehicles and (ii) independent dealers to finance the purchase of vehicle inventory. The loansFinancings are typically secured by vehicles and, in the case of the independent dealers, the dealer'sdealer’s personal guarantee. In late 2001, the RegistrantCompany decided to significantly curtail new lendingleasing to industrial customers, whichwho generally have a higher credit risk; this portfolio is diminishingcontinues to diminish over time.
MARKETING AND DISTRIBUTIONtime as no new leases were extended to industrial customers in 2005. At December 31, 2005, the Company’s investment in leases to industrial customers declined to 6% of its lease financing and other receivables.
Marketing and Distribution
The RegistrantCompany believes its national and global dealer networknetworks for Environmental Products and Fire Rescue vehicles distinguishes itself from its competitors. Dealer representatives are on-hand to demonstrate the vehicle'svehicles’ functionality and capability to customers as well as service the vehicles on a timely basis. The acquisitions of the refuse businesses provide a unique
opportunity for the Registrant's already existing dealers to offer another
product line in their showrooms. Wittke sold direct to customers at the time of
the acquisition
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and while it still maintains that direct distribution channel, the dealer
network is being utilized to capture market share in its respective markets. The
Registrant believes that Wittke's direct distribution channel is also a
competitive advantage in that dealer commissions are avoided and the sales force
is more focused.
The Safety Products Group companies sell to industrial customers through manufacturers' representativesapproximately 2,000 wholesalers/distributors who sell to approximately 1,500 wholesalers.are supported by Company sales personnel and/or independent manufacturer’s representatives. Products are also sold to governmental customers through more than 900 active independent distributors as well as through original equipment manufacturers and direct sales. International sales are made through the group'sgroup’s independent foreign distributors or on a direct basis.
Because of the consumable nature of the Tool Group'sGroup’s products, volume depends mainly on repeat orders from thousands of customers. Many of the Tool Group'sGroup’s customers have some ability to produce certain products themselves, but at a cost disadvantage. Major market emphasis is placed on quality of product, delivery and level of service. Inventories for certain products, constituting about half of the group’s sales are maintained to assure prompt service to the customer, with thewhile other products are made to order. The average order for standard tools is filled in less than one week for domestic shipments and within two weeks for international shipments.
CUSTOMERS AND BACKLOG
Customers and Backlog
Approximately 40%41%, 31%37% and 29%22% of the Registrant'sCompany’s total 20032005 orders were to U.S.US municipal and government customers, U.S.US commercial and industrial customerscustomers; and non-U.S.non-US customers, respectively. Waste Management, Inc. accounted
for approximately 25% of the Registrant's 2003 refuse sales. No other single customer accounted for a material part of the Registrant'sCompany’s business.
The company's U.S.Company’s US municipal and government customers depend on tax revenues.revenues to support spending. A sluggish industrial economy, therefore, will eventually impact a municipality'smunicipality’s revenue base as jobs are lost and profits decline. Generally, thea municipal troughslowdown lags far enough behind the industrial slowdown such that the industrial economy is growing again by the time municipalities reduce their spending. The U.S.US economic downturn from 2001 to 2003 lasted longer than expected, allowing spending cuts by municipalities to affect the companyCompany during the same time period as weak industrial demand was experienced. During 2005, the Company saw municipal and governmental orders increase 10% from 2004, reflecting the return of government orders lagging the stronger industrial economy in 2004.
The Registrant'sCompany’s backlog totaled $362$390 million and $422$415 million as of December 31, 20032005 and 2002,2004, respectively. The 14%6% decrease is primarily dueattributed to weak refuseimproved throughput in US fire truck demand, deteriorating municipal government budgetsmanufacturing operations and orders
for vehicular emergency lights and sirens,installations against a $19 million initial installment of
the Dallas/Fort Worthlarge parking projectsystem contract received in the third quarter of 2002 and
an unusually high Fire Rescue backlog at the end of 2002 due to poor production
performance in its U.S. plants.2004. A substantial majority of the orders in backlog at December 31, 20032005 are expected to be filled within the current fiscal year.
SUPPLIERSduring 2006.
Suppliers
The RegistrantCompany purchases a wide variety of raw materials from around the world for use in the manufacture of its products, from around the world, although the majority of current purchases are from North American sources. To minimize availability, price and quality risk, the RegistrantCompany is party to numerous supplier strategic alliances. Although certain materials are obtained from either a single-source supplier or a limited number of suppliers,
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the RegistrantCompany has identified alternative sources to minimize the interruption to its business in the event of supply problems.
Components critical in the production of the Registrant'sCompany’s vehicles (such as engines, transmissions, drivetrains, axles and tires) are purchased from a select number of suppliers and may be specified by the customer. The RegistrantCompany also purchases raw and fabricated aluminum and steel as well as commercial chassis with certain specifications from a few sources.
The RegistrantCompany believes it has adequate supplies or sources of availability of the raw material and components necessary to meet its needs. However, there are risks and uncertainties with respect to the supply of certain of these raw materials that could impact their price, quality and availability in sufficient quantities.
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COMPETITION
During 2005, the Company was able to recover increased pricing imposed by steel and steel-product suppliers in 2004.
Competition
Within the Environmental Products Group, Elgin is recognized as the market leader among several domestic sweeper competitors and differentiates itself primarily on product performance. RAVO also competes on product performance through its vacuum technology and successfully leads in market share for compact sweepers among several regional European manufacturers. Vactor and Guzzler both maintain the leading domestic position in their respective marketplaces by enhancing product performance with leading technology and application flexibility. Jetstream is the market leader in the in-plant cleaning segment of the US waterblast industry competing on price and delivery performance. Combined, Leach and Wittke are third in market share for
refuse bodies; their vehicles compete on product performance through technology
and service delivery via their dealer network.
E-ONE is a leading manufacturer of U.S.US aluminum-bodied fire apparatus and custom chassis in a market served by approximately ten key manufacturers and hundreds ofapproximately 70 small regional manufacturers. With its unique welded, extruded aluminum design,E-ONE is the U.S.US market leader in aluminum aerials. In addition,E-ONE is the global market share leader of industrial pumpers serving the petrochemical industry with two primary international competitors and a few smaller manufacturers.E-ONE also competes with six manufacturers worldwide in the production of airport rescue and firefighting vehicles, consistently holding at least a number two position. The Saulsbury product line complements these offerings with stainless steel-bodied fire trucks and rescue vehicles. Bronto Skylift is the foremostleading manufacturer of high reach telescopingarticulating platforms for the global fire rescue and electric utility markets.
Within specific product categories and domestic markets, the Safety Products Group companies are typically the leaders among three to four strong competitors and sixseveral additional ancillary market participants. The group’s international market position varies from leader to ancillary participant depending on the geographic region and product line. Generally, competition is intense as to all of the group'sgroup’s products and is based on price, including competitive bidding, reputation, performance and servicing.
The Tool Group companies compete with several hundred competitors worldwide. In North America, the RegistrantCompany holds a share position ranging from number one to number fourthree depending on the product offering. In addition,
Research and Development
The information concerning the Registrant believes it is a major supplier within these product lines.
RESEARCH AND DEVELOPMENT
The Registrant invests in research to support development of new products
and the enhancement of existing products and services. The Registrant believes
this investment is important to maintain and/or enhance it leadership position
in key markets. Expenditures forCompany’s research and development activities is included in Note N of the financial statements contained under Item 8 of this Form 10-K is incorporated herein by the Registrant were
approximately $33.2 million in 2003, $26.5 million in 2002reference.
Patents and $20.0 million in
2001.
PATENTS AND TRADEMARKSTrademarks
The RegistrantCompany owns a number of patents and possesses rights under others to which it attaches importance, but does not believe that its business as a whole is materially dependent upon any such patents or rights. The RegistrantCompany also owns a number of trademarks that it believes are important in connection with the identification of its products and associated goodwill with customers, but no material part of the Registrant'sCompany’s business is dependent on such trademarks.
EMPLOYEES
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Employees
The RegistrantCompany employed over 6,8005,500 people in ongoing businesses at the close of 20032005 as compared to 7,400nearly 5,600 employees at the end of 2002.2004. Approximately 10%17% of the Registrant'sCompany’s domestic hourly workers were unionized at December 31, 2003.2005. The RegistrantCompany believes relations with its employees have beencontinues to be good.
GOVERNMENTAL REGULATION
Governmental Regulation of the Environment
The RegistrantCompany believes it is in substantial compliancesubstantially complies with federal, state and local provisions that have been enacted or adopted regulating the discharge of materials into the environment, or otherwise relating to the protection of the environment. Capital expenditures in 20032005 attributable to compliance with such laws 5
were not material. The RegistrantCompany believes that the overall impact of compliance with environmental regulations will not have a material effect on itits future operations.
SEASONALITY
Seasonality
Certain of the Registrant'sCompany’s businesses are susceptible to the influences of seasonal buying or delivery patterns. The Registrant'sCompany’s businesses which tend to have lower sales in the first calendar quarter compared to other quarters as a result of these influences are street sweeping, fire rescue products, outdoor warning, municipal emergency signal products and parking systems.
ADDITIONAL INFORMATION
Additional Information
The RegistrantCompany makes its annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports available, free of charge, through its Internet website (http://www.federalsignal.com) as soon as reasonably practical after it electronically files or furnishes such materials to the Securities and Exchange Commission ("SEC"(“SEC”). All of the Registrant'sCompany’s filings may be read or copied at the SEC'sSEC’s Public Reference Room at 450 Fifth100 F Street, NW,NE, Washington, DC 20549. Information on the operation of the Public FilingReference Room can be obtained by calling the SEC at1-800-SEC-0330. The SEC maintains an Internet website (http://www.sec.gov) that contains reports, proxy and information statements and other information regarding issuers that file electronically.
ITEM 2. PROPERTIES.
| Item 1A. | Risk Factors. |
The following are some of the risks that we face in our business. The list of risk factors is not exhaustive. There can be no assurance that we have correctly identified and appropriately assessed all factors affecting our business or that publicly available and other information with respect to these matters is complete and correct. Additional risks not presently known to us or that we currently believe to be immaterial also may adversely impact us. Should any risks and uncertainties develop into actual events, these developments could have material adverse effects on our business, financial condition and results of operations.
Our financial results are subject to considerable cyclicality.
Our ability to be profitable depends heavily on varying conditions in the United States government and municipal markets and the overall United States economy. The markets in which we compete are subject to considerable cyclicality, and move in response to cycles in the overall business environment and are particularly sensitive to the industrial sector. Many of our customers are municipal governmental agencies, and as such, we are dependent on municipal government spending. Spending by our municipal customers can be affected by local political circumstances, budgetary constraints, and other factors. The United States government and municipalities depend heavily on tax revenues as a source of their spending and, accordingly, there is a correlation, usually lagged by one or two years, between the overall strength of the United States economy and our sales to the United States government and municipalities. Therefore, downturns in the United States economy are likely to result in decreases in demand for our products. During previous economic downturns, we experienced decreases in sales and profitability, and we expect our business to remain subject to similar economic fluctuations in the future.
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The inability to obtain raw materials, component parts, and/or finished goods in a timely and cost-effective manner from suppliers would adversely affect our ability to manufacture and market our products.
We purchase raw materials and component parts from suppliers to be used in the manufacturing of our products. In addition, we purchase certain finished goods from suppliers. Changes in our relationships with suppliers or increases in the costs of purchased raw materials, component parts or finished goods could result in manufacturing interruptions, delays, inefficiencies or our inability to market products. In addition, our profit margins would decrease if prices of purchased raw materials, component parts, or finished goods increase and we are unable to pass on those increases to our customers.
We operate in highly competitive markets.
The markets in which we operate are highly competitive. The intensity of this competition, which is expected to continue, can result in price discounting and margin pressures throughout the industry and adversely affects our ability to increase or maintain prices for our products. In addition, certain of our competitors may have lower overall labor or material costs.
Failure to keep pace with technological developments may adversely affect our operations.
We are engaged in an industry which will be affected by future technological developments. The introduction of products or processes utilizing new technologies could render our existing products or processes obsolete or unmarketable. Our success will depend upon our ability to develop and introduce on a timely and cost-effective basis new products, processes and applications that keep pace with technological developments and address increasingly sophisticated customer requirements. We may not be successful in identifying, developing and marketing new products, applications and processes and product or process enhancements. We may experience difficulties that could delay or prevent the successful development, introduction and marketing of product or process enhancements or new products, applications or processes. Our products, applications or processes may not adequately meet the requirements of the marketplace and achieve market acceptance. Our business, operating results and financial condition could be materially and adversely affected if we were to incur delays in developing new products, applications or processes or product or process enhancements or if our products do not gain market acceptance.
Our ability to operate our Company effectively could be impaired if we fail to attract and retain key personnel.
Our ability to operate our businesses and implement our strategies depends, in part, on the efforts of our executive officers and other key employees. In addition, our future success will depend on, among other factors, our ability to attract and retain qualified personnel, including finance personnel, research professionals, technical sales professionals and engineers. The loss of the services of any key employee or the failure to attract or retain other qualified personnel could have a material adverse effect on our business or business prospects.
We have international operations that are subject to foreign economic and political uncertainties.
Our business is subject to fluctuations in demand and changing international economic and political conditions which are beyond our control. As of December 31, 2003,2005, approximately 30% of our net sales were to customers outside the RegistrantUnited States; with approximately 20% of net sales being supplied from our overseas operations. We expect a significant portion of our revenues and profits to come from international sales for the foreseeable future. Operating in the international marketplace exposes us to a number of risks, including abrupt changes in foreign government policies and regulations and, in some cases, international hostilities. To the extent that our international operations are affected by unexpected and adverse foreign economic and political conditions, we may experience project disruptions and losses which could significantly reduce our revenues and profits.
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Some of our contracts are denominated in foreign currencies, which result in additional risk of fluctuating currency values and exchange rates, hard currency shortages and controls on currency exchange. Changes in the value of foreign currencies could increase our US dollar costs for, or reduce our US dollar revenues from, our foreign operations. Any increased costs or reduced revenues as a result of foreign currency fluctuations could affect our profits.
We may incur material losses and costs as a result of product liability, warranty, recall claims or other lawsuits or claims that may be brought against us.
We are exposed to product liability and warranty claims in the normal course of business in the event that our products actually or allegedly fail to perform as expected or the use of our products results, or is alleged to result, in bodily injury and/or property damage. Accordingly, we could experience material warranty or product liability costs in the future and incur significant costs to defend against these claims. We currently carry insurance and maintain reserves for product liability claims. However, we cannot be assured that our insurance coverage will be adequate if such claims do arise, and any liability not covered by insurance could have a material adverse impact on our business. A future claim could involve the imposition of punitive damages, the award of which, pursuant to state laws, may not be covered by insurance. In addition, warranty claims are not covered by our product liability coverage. Any product liability or warranty issues may adversely impact our reputation as a manufacturer of high quality, safe products and may have a material adverse effect on our business.
The costs associated with complying with environmental and safety regulations could lower our margins.
We, like other manufacturers, continue to face heavy governmental regulation of our products, especially in the areas of environment and employee health and safety. Complying with environmental and safety requirements has added and will continue to add to the cost of our products, and could increase the capital required. While we believe that we are in compliance in all material respects with these laws and regulations, we cannot assure you that we will not be adversely impacted by costs, liabilities or claims with respect to our operations under existing laws or those that may be adopted. These requirements are complex, change frequently and have tended to become more stringent over time. Therefore, we could incur substantial costs, including cleanup costs, fines and civil or criminal sanctions as a result of violations, or liabilities under, environmental laws and safety regulations.
We are subject to a number of restrictive debt covenants.
Our credit facility and other debt instruments contain certain restrictive debt covenants that may hinder our ability to take advantage of attractive business opportunities. Our ability to meet these covenants may be affected by factors outside our control. Failure to meet one or more of these covenants may result in an event of default. Upon an event of default, our lender(s) may be entitled to declare all amounts outstanding as due and payable.
| Item 1B. | Unresolved Staff Comments. |
None.
| Item 2. | Properties. |
As of December 31, 2005, the Company utilized 3323 principal manufacturing plants located throughout North America, as well as 1613 in Europe, 1 in South Africa 1 in South America, and 12 in the Far East.
In total, the RegistrantCompany devoted approximately 2,402,0001.6 million square feet to manufacturing and 1,132,0001.0 million square feet to service, warehousing and office space as of December 31, 2003.2005. Of the total square footage, approximately 32%31% is devoted to the Safety Products Group, 12%15% to the Tool Group, 25%23% to the Fire Rescue Group and 31% to the Environmental Products Group. Approximately 71%72% of the total square footage is owned by the Registrant,Company, with the remaining 29%28% being leased.
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All of the Registrant'sCompany’s properties, as well as the related machinery and equipment, are considered to be well-maintained, suitable and adequate for their intended purposes. In the aggregate, these facilities are of sufficient capacity for the Registrant'sCompany’s current business needs.
ITEM 3. LEGAL PROCEEDINGS.
| Item 3. | Legal Proceedings. |
The information concerning the Registrant'sCompany’s legal proceedings included in Note LM of the financial statements contained under Item 8 of this Form 10-K is incorporated herein by reference.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
| Item 4. | Submission of Matters to a Vote of Security Holders. |
No matters were submitted to a vote of security holders through the solicitation of proxies or otherwise during the three months ended December 31, 2003.
2005.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Federal Signal Corporation's
| Item 5. | Market for Company’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities. |
| (a) | Market Information |
The Company’s common stock is listed and traded on the New York Stock Exchange ("NYSE"(“NYSE”) under the symbol FSS. At December 31, 2005, there were no material restrictions on the Company’s ability to pay dividends. The information concerning the Registrant'sCompany’s market price range and dividend per share data included in Note RS of the financial statements contained under Item 8 of this Form 10-K is incorporated herein by reference.
As of January 30, 2004,31, 2006, there were 3,5873,126 holders of record of the Registrant'sCompany’s common stock.
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ITEM 6. SELECTED FINANCIAL DATA.
The following table presents the selected financial information of the
Registrant as of and for the 11 years ended December 31, 2003:
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(a) continuing operations only
(b) in 1996, includes gain on sale of subsidiary of $4.7 million pre-tax, $2.8
million after-tax or $.06 per share
(c) in 1995, includes the effect of a nonrecurring charge for a litigation
settlement related to a discontinued business of $4.2 million after-tax
(d) excludes cumulative effects of changes in accounting
(e) reflects 4-for-3 stock split in 1994
(f) manufacturing operations only
(g) in 2001, increase largely attributable to refinancing of short-term debt
with funded long-term debt
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The information concerning the Registrant's selected quarterlyCompany’s dividend per share data included in Note RS of the financial statements contained under Item 8 of this Form 10-K is incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
| (b) | Not applicable |
| (c) | Not applicable |
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| Item 6. | Selected Financial Data. |
The following table presents the selected financial information of the Company as of and for the five years ended December 31, 2005:
| 2005 | 2004 | 2003 | 2002 | 2001 | ||||||||||||||||||
| Operating Results (dollars in millions): | ||||||||||||||||||||||
| Net sales(a) | $ | 1,156.9 | $ | 1,063.9 | $ | 1,058.2 | $ | 980.9 | $ | 1,030.9 | ||||||||||||
| Income before income taxes(a) | $ | 46.3 | $ | 4.9 | $ | 44.2 | $ | 56.6 | $ | 59.9 | ||||||||||||
| Income from continuing operations(a) | $ | 47.3 | $ | 9.5 | $ | 36.5 | $ | 43.7 | $ | 44.1 | ||||||||||||
| Operating margin(a) | 6.0 | % | 2.7 | % | 6.0 | % | 7.9 | % | 8.5 | % | ||||||||||||
| Return on average common shareholders’ equity(b) | (1.2 | )% | (0.6 | )% | 9.1 | % | 12.1 | % | 13.2 | % | ||||||||||||
| Common Stock Data (per share): | ||||||||||||||||||||||
| Income (loss) from continuing operations — diluted | $ | .98 | $ | .20 | $ | .76 | $ | .95 | $ | .97 | ||||||||||||
| Cash dividends | $ | .24 | $ | .40 | $ | .80 | $ | .80 | $ | .78 | ||||||||||||
| Market price range: | ||||||||||||||||||||||
| High | $ | 17.95 | $ | 20.56 | $ | 20.79 | $ | 27.07 | $ | 24.63 | ||||||||||||
| Low | $ | 13.80 | $ | 15.75 | $ | 13.60 | $ | 16.00 | $ | 17.00 | ||||||||||||
| Average common shares outstanding (in millions) | 48.2 | 48.1 | 48.0 | 45.9 | 45.4 | |||||||||||||||||
| Financial Position at Year-End (dollars in millions): | ||||||||||||||||||||||
| Working capital(a)(c) | $ | 164.9 | $ | 162.1 | $ | 104.7 | $ | 158.5 | $ | 162.0 | ||||||||||||
| Current ratio(a)(c) | 1.6 | 1.7 | 1.4 | 1.8 | 1.9 | |||||||||||||||||
| Total assets | $ | 1,119.5 | $ | 1,132.4 | $ | 1,177.5 | $ | 1,155.9 | $ | 1,012.7 | ||||||||||||
| Long-term debt, net of current portion | $ | 203.7 | $ | 215.7 | $ | 194.1 | $ | 344.5 | $ | 232.7 | ||||||||||||
| Shareholders’ equity | $ | 376.3 | $ | 412.7 | $ | 422.5 | $ | 398.0 | $ | 359.4 | ||||||||||||
| Debt-to-capitalization ratio(d) | 43.0 | % | 37.0 | % | 40.0 | % | 44.0 | % | 44.0 | % | ||||||||||||
| Other (dollars in millions): | ||||||||||||||||||||||
| Orders(a) | $ | 1,138.7 | $ | 1,123.5 | $ | 1,007.6 | $ | 1,046.6 | $ | 1,039.1 | ||||||||||||
| Backlog(a) | $ | 390.0 | $ | 415.0 | $ | 333.1 | $ | 415.3 | $ | 341.3 | ||||||||||||
| Net cash provided by operating activities | $ | 72.9 | $ | 52.5 | $ | 70.3 | $ | 102.1 | $ | 69.0 | ||||||||||||
| Net cash provided by (used for) investing activities | $ | (3.0 | ) | $ | 34.1 | $ | (10.1 | ) | $ | (71.0 | ) | $ | (33.1 | ) | ||||||||
| Net cash provided by (used for) financing activities | $ | 7.1 | $ | (81.7 | ) | $ | (59.9 | ) | $ | (38.2 | ) | $ | (32.6 | ) | ||||||||
| Capital expenditures(a) | $ | 19.5 | $ | 20.1 | $ | 16.8 | $ | 18.8 | $ | 17.8 | ||||||||||||
| Depreciation and amortization(a) | $ | 21.5 | $ | 19.6 | $ | 18.4 | $ | 20.2 | $ | 18.9 | ||||||||||||
| Employees(a) | 5,500 | 5,600 | 5,881 | 6,244 | 6,297 | |||||||||||||||||
| (a) | continuing operations only, prior year amounts have been reclassified for discontinued operations as discussed in Note K to the financial statements | |
| (b) | excludes cumulative effects of changes in accounting | |
| (c) | working capital: current manufacturing assets less current manufacturing liabilities; current ratio: current manufacturing assets divided by current manufacturing liabilities | |
| (d) | manufacturing operations: total manufacturing debt divided by the sum of total manufacturing debt plus manufacturing equity(e) |
9
| (e) | manufacturing equity: total equity less financial services assets plus financial services borrowings |
The 2005, 2004 and 2003 income before income taxes for continuing operations include restructuring costs of $.7 million, $7.0 million and $4.8 million, respectively. These costs are further explained in Item 7 under Restructuring Charges and in Note L to the financial statements. The 2005 income before income taxes was impacted by a $6.7 million gain on the sale of two industrial lighting product lines. The 2004 income before income taxes was impacted by a $10.6 million loss incurred on a large contract for fire apparatus in the Netherlands, as more completely described in Item 7 under Fire Rescue Operations.
The selected financial data set forth above should be read in conjunction with the Company’s consolidated financial statements, including the notes thereto, and Item 7 of this Form 10-K.
The information concerning the Company’s selected quarterly data included in Note S of the financial statements contained under Item 8 of this Form 10-K is incorporated herein by reference.
| Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations. |
Federal Signal Corporation manufactures a broad range of fire rescue
vehicles;products, including: municipal and industrial cleaning vehicles and equipment; fire rescue vehicles; safety, signaling and communication equipment and tooling products. Due to technology, marketing, distribution and product application synergies, the company'sCompany’s business units are organized and managed in four operating segments: Environmental Products, Fire Rescue, Environmental Products, Safety Products and Tool. The companyCompany also provides customer and dealer financing to support the sale of vehicles. The information concerning the company'sCompany’s manufacturing businesses included in Item 1 of this Form 10-K and Notes K and MNote N of the financial statements contained under Item 8 of this Form 10-K are incorporated herein by reference.
RESULTS OF OPERATIONS
Orders increased 2% in 2003
This Form 10-K, reports filed by the Company with the Securities and Exchange Commission (“SEC”) and comments made by management contain the words such as “may,” “will,” “believe,” “expect,” “anticipate,” “intend,” “plan,” “project,” “estimate” and “objective” or the negative thereof or similar terminology concerning the Company’s future financial performance, business strategy, plans, goals and objectives. These expressions are intended to $1.14 billion asidentify forward-looking statements within the benefitmeaning of the refuse
truck body businesses acquiredPrivate Securities Litigation Reform Act of 1995. Forward-looking statements include information concerning the Company’s possible or assumed future performance or results of operations and are not guarantees. While these statements are based on assumptions and judgments that management has made in late 2002light of industry experience as well as perceptions of historical trends, current conditions, expected future developments and other factors believed to be appropriate under the circumstances, they are subject to risks, uncertainties and other factors that may cause the Company’s actual results, performance or achievements to be materially different.
These risks and uncertainties, some of which are beyond the Company’s control, include the cyclical nature of the Company’s industrial and municipal markets, technological advances by competitors, the Company’s ability to improve its operating performance in its fire rescue plants, increased warranty and product liability expenses, risks associated with supplier and other partner alliances, changes in cost competitiveness including those resulting from foreign currency translation
effectsmovements, disruptions in the supply of parts or components from the sole source suppliers and subcontractors, retention of key employees and general changes in the competitive environment. These risks and uncertainties include, but are not limited to, the risk factors described under Item 1A, “Risk Factors,” in this Form 10-K. These factors may not constitute all factors that could cause actual results to differ materially from those discussed in any forward-looking statement. The Company operates in a continually changing business environment and new factors emerge from time to time. The Company cannot predict such factors nor can it assess the impact, if any, of such factors on non-U.S. sales more than offset order declinesits financial position or results of operations. Accordingly, forward-looking statements should not be relied upon as a predictor of actual results. The Company disclaims any responsibility to update any forward-looking statement provided in other businesses.
Excludingthis Form 10-K.
10
Results of Operations
The following table summarizes the newly-acquired refuse businesses, orders declined 3%Company’s results of operations and operating metrics for each of the three years in 2003,
reflecting weakthe period ended December 31, 2005 ($ in millions, except per share amounts):
| 2005 | 2004 | 2003 | |||||||||||
| Net sales | $ | 1,156.9 | $ | 1,063.9 | $ | 1,058.2 | |||||||
| Cost of sales | (865.4 | ) | (814.9 | ) | (769.2 | ) | |||||||
| Operating expenses | (221.6 | ) | (213.6 | ) | (220.7 | ) | |||||||
| Restructuring charges | (0.7 | ) | (7.0 | ) | (4.8 | ) | |||||||
| Operating income | 69.2 | 28.4 | 63.5 | ||||||||||
| Interest expense | (23.1 | ) | (20.6 | ) | (18.8 | ) | |||||||
| Other income (expense) | .2 | (2.9 | ) | (.5 | ) | ||||||||
| Income tax benefit (charge) | 1.0 | 4.6 | (7.7 | ) | |||||||||
| Income from continuing operations | 47.3 | 9.5 | 36.5 | ||||||||||
| Discontinued operations | (51.9 | ) | (11.8 | ) | .8 | ||||||||
| Net (loss) income | $ | (4.6 | ) | $ | (2.3 | ) | $ | 37.3 | |||||
Other data: | |||||||||||||
| Operating margin | 6.0 | % | 2.7 | % | 6.0 | % | |||||||
| Income per share — continuing operations | $ | .98 | $ | 0.20 | $ | 0.76 | |||||||
| 2005 | 2004 | 2003 | ||||||||||
| Analysis of orders: | ||||||||||||
| Total orders | $ | 1,138.7 | $ | 1,123.5 | $ | 1,007.6 | ||||||
| Change in orders year on year | 1.0 | % | 12.0 | % | ||||||||
| Change in US municipal and government orders year over year | 10.0 | % | (6.0 | )% | ||||||||
| Change in US industrial and commercial orders year over year | (6.0 | )% | 4.0 | % | ||||||||
| Change in non-US orders year over year | (2.0 | )% | 16.0 | % | ||||||||
US municipal and government orders increased in 2005 primarily due to strong demand for fire apparatus and vacuum equipment. The decrease in 2005 US industrial markets present throughoutand commercial orders was due to a $47 million parking system contract received in 2004. Excluding this contract, orders rose 10%, largely due to strength in industrial vacuum trucks and fire apparatus. The decrease in non-US orders in 2005 was primarily due to reduced sales of fire apparatus and a product line divestiture in the year.third quarter.
Sales increased 14% to $1.21 billion9% in 2003 largely2005 from 2004 as a result of strength in the refusefire rescue and vacuum truck body business acquisitionsbusinesses and increased Fire Rescue deliveries.deliveries against a large parking system contract. The 14%
sales increaseCompany’s operating income of $69.2 million in 2005 included 6% from acquisitions, 3% from foreign currency
translation effects, 1% from price increases and 4% from volume. Despiterestructuring charges of $.7 million as the significantrestructuring activities announced in 2004 were completed. The increase in sales, income from continuing operations declined 18%of $37.8 million compared to 2004 reflected the increase in 2003. Cyclically weak U.S. municipalsales across all groups and industrial markets adversely affected
sales of high margin productsalso lower operating costs in the Safety Productsfire rescue business and Tool groupslower restructuring costs partially offset by higher corporate expense and depressed earningsinterest expense.
Interest expense increased 12% to $23.1 million in 2005 compared to 2004. This increase was largely due to higher short-term interest rates.
The Company’s 2005 effective tax rate on continuing operations of (2.1)% reflects a benefit of $6.0 million primarily due to a reduction in reserves in the refuse truck body businesses. In addition, production
facility shutdown chargessecond quarter associated with the completion of an audit of the Company’s US tax returns which encompassed the years 1999 — 2003, a $1.6 million benefit recorded to recognize the differences that existed between the recorded deferred tax liabilities and higher pensionthe amount that should have been recorded based on an analysis of timing differences between financial reporting and health care costs adversely
affected 2003 results. Partially offsetting were lower interest expensetax reporting, the effect of tax-exempt municipal income and income taxes. As a result, diluted earnings per share from continuing operations
declined 22% to $.79 in 2003 compared to $1.01 in 2002.
In 2002, diluted income per share from continuing operations totaled $1.01
on sales of $1.06 billion. This compares to earnings per share of $1.03 in 2001
on sales of $1.07 billion. Sales declined in the Fire Rescue and Tool groups;
the Environmental Products and Safety Products groups both saw increases. The
overall 1% sales decline reflected essentially flat selling prices in 2002 on
continued weak industrial market conditions; the refuse body acquisitions$2.5 million benefit in the fourth quarter of 2002 increased sales approximately 2%. Sales to customers in
the United States declined 5% in 2002 and sales to non-U.S. customers increased
10% (3% net of currency effects). Orders increased 4% in 2002 to $1.12 billion2005 due to the additionrepatriation of foreign cash balances associated with the American Jobs Creation Act; this benefit was realized because a portion of the repatriated earnings had previously been reserved at higher tax rates.
The net loss for 2005 of $4.6 million included $51.9 million of loss from discontinued operations. Discontinued operations in 2005 included the refuse truck bodybusiness, trading under the Leach brand name, which is
11
classified as a business held for sale at December 31, 2005, and Federal APD do Brasil, LTDA, where operations were closed in the fourth quarter.
In 2004, the increase in orders year on year was due to a $47 million airport parking system order and increases in US municipal and government orders. Export orders grew, primarily due to strong fire apparatus and environmental products. Sales were flat compared to 2003 with higher non-US sales being offset by weak US markets. The decline in income from continuing operations was driven by inability to quickly pass on increases in raw material prices, restructuring charges of $7.0 million, a $10.6 million charge related to a largemulti-unit, multi-year Netherlands fire rescue equipment contract, higher corporate expenses and higher interest cost.
The Company’s operating income decreased $35.1 million in 2004 compared to 2003. Included in the results were restructuring charges of $7.0 million in 2004 and $4.8 million in 2003.
The Company recorded a net loss for 2004 of $2.3 million, which included $11.8 million of loss from discontinued operations. Discontinued operations in 2004 include Justrite Manufacturing Company, L.L.C. and Technical Tooling, Inc., which were divested by the Company in the fourth quarter of 2004 and strength in safety products markets, particularly the $19 million initial
installment on the Dallas/Fort Worth International Airport parking revenue
control system award received in the third quarter.Plastisol B.V. Holdings divested mid-year. Net income in 2003 includedwas $37.3 million including a $.4 million after-tax charge, or $.01 per
diluted share, relating to the loss on the sale of the discontinued Sign Group operations completedoperations.
Interest expense increased 10% to $20.6 million in 2004 compared to 2003. This increase was primarily due to higher short-term interest rates in the second quarter. Net income in 2002 included an $8.0
million after-tax charge relating to the cumulative effecthalf of a change in
accounting for goodwill required by Statement of Financial Accounting Standards
(SFAS) No. 142, "Goodwill and Other Intangible Assets". Net income in 2001
included $5.5 million of after-tax expense relating to goodwill amortization;
beginning in 2002, goodwill is no longer amortized in accordance with SFAS No.
142.
8
2004.
The following table summarizes the company's results of operations for the
three-year period ended December 31, 2003 (in millions):
Operating income decreased 19% to $66.0 million in 2003 from $81.9 million
in 2002. This 2.3 percentage point decline in operating margin from 7.8% in 2002
to 5.5% in 2003 reflects continued weakness in U.S. municipal and industrial
markets, costs incurred to shut down production facilities in the U.K. and New
York and increased employee pension and health care costs partly offset by
material costs savings from new supplier alliances. The effects of weak markets
were particularly evident in the results of the Environmental Products, Safety
Products and Tool groups; Fire Rescue enjoyed sales and earnings increases,
resulting in part from high backlogs at the beginning of 2003. In 2002,
operating income declined 11% from $92.0 million in 2001 resulting in a .8
percentage point decrease in operating margin from 8.6% in 2001. The 2002 margin
decline was essentially due to a very slow industrial economy that reduced sales
of the company's higher-margin industrial products, reduced throughput and
higher production costs that adversely affected Fire Rescue Group profitability
and flat pricing.
Interest expense declined 2% to $19.8 million in 2003 from $20.1 million in
2002. This was as a result of slightly lower debt levels, favorable interest
rate swap agreements and amortization of deferred gains on previously-terminated
interest rate swaps; these factors were partially offset by higher borrowing
costs as Standard and Poor's reduced their short-term debt rating of the company
to A-3. The company replaced commercial paper borrowings with higher cost
committed bank lines. The impact on 2003's operations as a result of the debt
rating reduction totaled approximately $1.0 million. In 2002, interest expense
declined $6.3 million, or 24%, from 2001 largely as a result of a much lower
short-term interest rate environment in 2002. The lower interest rates were
partially offset by increased borrowings in the fourth quarter of 2002 related
to the acquisitions of the refuse truck body businesses. Weighted-average
interest rates on short-term borrowings were 2.0% in 2003, 2.0% in 2002 and 4.6%
in 2001.
The company'sCompany’s 2004 effective tax rate on continuing operations of 18.1% in 2003 was significantly below(92.4)% reflected the 24.4% rate in 2002 andtax benefit of the 27.7% rate in 2001. The lower tax rate in 2003
reflectsloss incurred as well as the effect of a one-time benefit associated with the closure of a
production facility in the U.K. and the higher relative impact of tax credits and the effect of tax-exempt municipal income.
The reductionCompany sponsors a number of deferred benefit retirement plans in the effective tax rate in 2002
from 2001 reflects the increased mixUS covering certain of tax-exempt revenues earned by the
company's Environmental Productsits salaried and Fire Rescue groups, lower tax rateshourly employees. Assumptions used for actuarial valuations of the
company's foreign operations, eliminating the amortization of non-deductible
goodwill for financial reporting purposes due to the adoption of SFAS No. 142
and reduction in reserve needs for now-closed tax issues.US pension plans:
| January 1, 2006 | January 1, 2005 | January 1, 2004 | ||||||||||
| Discount rate | 5.75 | 6.00 | 6.25 | |||||||||
| Expected long-term rate of return | 8.50 | 9.00 | 9.00 | |||||||||
| Rate of increase in compensation levels | 3.50 | 3.50 | 3.50 | |||||||||
| Mortality tables used | RP2000 | GAM83 | GAM83 | |||||||||
| Approximate impact of change in assumptions, after tax | $1.3 million loss | $.5 million loss | ||||||||||
| Approximate impact of change in assumptions, EPS | $(.03) | $(.01) | ||||||||||
The company changed its assumptions for discount rates used in determining
the actuarial present values of accumulated and projected benefit obligations
for its postretirement plans. The company reduced the discount rate to 6.25% as
of December 31, 2003 from 6.75% and 7.30% as of December 31, 2002 and 2001,
9
respectively, for its U.S. plans because of lower prevailing interest rates. The
changes in the assumptions resulted in additional pension expense of $2.2
million in 2002 and an additional increase of $2.7 million in 2003. In January
2004, the company also established its other significant cost assumptions for
its U.S. pension plans as follows: expected long-term rate of return on plan
assets -- 9.0%; rate of increase in compensation levels -- 3.5%. The company
expects that the change in these assumptions will further increase 2004 pension
costs by approximately $2.4 million, or $.03 per share, compared to 2003. In
2001, the company incurred approximately $.7 million in nonrecurring pension
costs as a result of the company's fourth quarter 2001 restructuring. The
company alsoCompany recorded an after-tax charge of $8.9 million in 2005, $0 in 2004 and $.4 million in 2003 and $13.8
million in 2002 to other comprehensive income representing the effect of an additional minimum pension liability. Like many companies,The Company is evaluating alternative strategies for implementing a common retirement plan across its US businesses. Among other things, the company's pensionstrategy provides for a more predictable retirement plan performance was adversely affected by low asset returns and lower interest
rates.cost.
Certain of the company'sCompany’s businesses are susceptible to the influences of seasonal buying or delivery patterns. The company'sCompany’s businesses which tend to have lower sales in the first calendar quarter compared to other quarters as a result of these influences are street sweeping, fire rescue products, outdoor warning, municipal emergency signal products and parking systems.
ENVIRONMENTAL PRODUCTS OPERATIONS
12
Restructuring Charges
The following charttable summarizes the Company’s restructuring charges by segment for each of the three years in the period ended December 31, 2005 ($ in millions):
| 2005 | 2004 | 2003 | ||||||||||
| Environmental Products | $ | $ | $ | .6 | ||||||||
| Fire Rescue | .9 | 5.4 | ||||||||||
| Safety Products | 3.3 | |||||||||||
| Tool | (.2 | ) | 1.2 | .9 | ||||||||
| Corporate | .4 | |||||||||||
| Total | $ | .7 | $ | 7.0 | $ | 4.8 | ||||||
In June 2004, the Company announced the implementation of the first steps of a broad restructuring initiative. The plan aimed at enhancing the Company’s competitive profile and creating a solid foundation for annual revenue growth in the high single digits. The measures included improving the profitability of the fire rescue and European tooling operations, divesting non-strategic business activities and improving the Company’s overhead cost structure.
The Company closed its 120,000 square foot production facilities in Preble, New York and consolidated US production of fire rescue vehicles into its Ocala, Florida operations as of December 31, 2004. The consolidation was possible because successful lean manufacturing initiatives reduced manufacturing space requirements in the Fire Rescue Group, and because of progress made to rationalize and restructure the broad array of vehicle offerings. The Fire Rescue Group incurred $5.4 million in restructuring charges for the year ended December 31, 2004 and a further $.9 million in 2005 bringing the total to $6.3 million. This consisted of $2.5 million in real property and manufacturing equipment impairment, $3.5 million in employee severance and related costs and $.3 million of other costs.
The Company also reduced the level of tooling production in France transferring some production to its Portugal facility, which began operations in 2003. The transfer was part of a broader plan to reduce fixed overhead and shift the manufacturing footprint to lower-cost locations. The Tool Group incurred $1.2 million in restructuring costs for the year ended December 31, 2004 and recorded a gain of $0.2 million against restructuring costs in 2005 due to a better than expected salvage value for manufacturing equipment. The total of $1.0 million consisted of severance for terminated employees.
The Company’s corporate office incurred $.4 million in restructuring charges for the year ended December 31, 2004; these costs related to outside services directly attributable to the restructuring plan.
The 2004 restructuring plan is complete as of December 31, 2005.
In the first quarter of 2003, the Company approved a restructuring plan that principally consisted of the closure of two manufacturing facilities to improve operating efficiencies and reduce costs. The Company closed a facility in the United Kingdom and reduced headcount at other Safety Products Group businesses resulting in restructuring costs of $3.3 million for the year ended December 31, 2003, principally consisting of equipment impairments and employee termination and benefit costs. The Tool Group incurred $.9 million of restructuring charges for the year ended December 31, 2003, principally consisting of severance costs relating to the closure of a manufacturing facility in New York. The Environmental Products Group incurred $.6 million of restructuring charges for the year ended December 31, 2003 relating to ceasing production of certain sweeper products and reduction in personnel.
13
Environmental Products Operations
The following table presents the Environmental Products Group'sGroup’s results of operations for each of the three-yearthree years in the period endingended December 31, 2003 (in2005 ($ in millions):
LINE GRAPH
Orders
| 2005 | 2004 | 2003 | ||||||||||
| Total orders | $ | 361.9 | $ | 311.2 | $ | 258.0 | ||||||
| US orders | 268.1 | 233.5 | 195.1 | |||||||||
| Non-US orders | 93.8 | 77.7 | 62.9 | |||||||||
| Net sales | 347.7 | 294.6 | 261.8 | |||||||||
| Operating income | 28.9 | 25.2 | 19.8 | |||||||||
| Operating margin | 8.3 | % | 8.6 | % | 7.6 | % | ||||||
Segment results have been restated to exclude losses from Leach, which has been presented as a discontinued operation. Leach is a manufacturer of refuse truck bodies with operations in Medicine Hat, Alberta and offices in Appleton, Wisconsin. The Company is evaluating divestiture alternatives for this business.
Full year orders of $361.9 million increased 16% with increases at all operations. US vacuum truck and sewer cleaner orders were strong throughout the year. Higher sweeper volumes were the primary driver of the 21% increase in 2003non-US orders. Revenue of $347.7 million was up 18% over 2004 primarily due to increased shipment volumes and higher pricing. Price increases were implemented in late-2004 and early-2005 to offset escalating raw material costs. Operating income increased primarily due to the full-year effect of the refuse
truck body acquisitions. Excluding the effects of the acquisitions, ordersincrease in sales. The full year operating margin for 2005 declined 4% reflecting weak U.S. municipal demand. Orders increased 7%to 8.3% from 8.6% in 2002
due mainly to the refuse acquisitions. Global sweeper orders declined 2% in
2002, as increased international business was more than offset by a 15%
reduction in U.S. orders in light of deteriorating municipal government budgets.
Net sales increased 19% to $353 million in 2003 from $296 million in 2002
due to the full-year effect of the refuse body truck acquisitions; net sales of
non-refuse operations declined 5% reflecting weak U.S. municipal demand and a
reduction in finance revenues reflecting the runoff of the industrial leasing
portfolio following the company's decision in 2001 to curtail this lending
activity. Net sales increased 6% in 2002 from $281 million in 2001 largely2004 as a result of expenses related to a China joint venture initiated in the refuse truck body acquisitions in late 2002.
Operating income declined 23% to $17.7 million in 2003 from $23.0 million
in 2002 resulting in a corresponding decrease in operating margin to 5.0% from
7.7%. This decline is in large part dueyear and costs related to the low profitabilityprogression of an enterprise business system implementation.
In 2004, the refuse
businesses, the continued weakening of the U.S. municipal markets, lower finance
revenuesgroup’s sales increase resulted from higher prices, a stronger Euro and earnings from industrial customer financings and one-time costs
incurred to consolidate U.S. sweeper production facilities and convert European
sweepers to new EU standards. In 2002, operating income increased 14% from $20.2
million in 2001 principally due to improved operating results for sweepers, more
than offsetting the effects of lower volumes and adverse product mix in other
product lines in the group.
10
FIRE RESCUE OPERATIONShigher unit volume.
Fire Rescue Operations
The following graphtable presents the Fire Rescue Group'sGroup’s results of operations for each of the three-yearthree years in the period ended December 31, 2003 (in2005 ($ in millions):
LINE GRAPH
The group's orders decreased 2%
| 2005 | 2004 | 2003 | ||||||||||
| Total orders | $ | 354.7 | $ | 355.8 | $ | 369.0 | ||||||
| US orders | 234.7 | 211.9 | 249.5 | |||||||||
| Non-US orders | 120.0 | 143.9 | 119.5 | |||||||||
| Net sales | 371.2 | 360.9 | 402.1 | |||||||||
| Operating income (loss) | 2.3 | (23.9 | ) | 14.7 | ||||||||
| Operating margin | .6 | % | (6.6 | )% | 3.7 | % | ||||||
Orders were essentially flat in 2005 compared to 2004. US municipal fire truck demand was strong throughout the year; however this increase was offset by lower international orders. Revenue rose 3% to $371.2 million and operating margin recovered to 0.6% due to performance improvements in the Ocala, Florida operation, lower restructuring charges and the realization of the benefits of the 2004 restructuring. Operating margin for 2004 of (6.6)% included the loss recorded on the multi-year fire equipment contract.
Orders declined 4% to $355.8 million in 2004 from $369.0 million in 2003 reflecting the weaker U.S.primarily due to weakness in US municipal and government markets primarily in the second and third quarters, and
lower export orders which tend to be somewhat volatile. Orders increased 1% in
2002 as strong orders at European businessesdemand more than offset a modestoffsetting increased non-US orders. The 2004 decline elsewhere.
Net sales increased 24%in orders was caused by market resistance to $416price increases on stainless steel trucks, temporary restrictions placed by the Company on stainless steel truck orders while production was moved from Preble, New York to Ocala, Florida, and the Company’s decision to reduce discounting of fire apparatus.
Sales declined 10% to $360.9 million in 2004 from $402.1 million in 2003 with the decline resulting principally from $334lower municipal and government volumes partially offset by an increase in currency of 1%.
14
Results in 2005 included $.9 million in 2002.
High backlogs at the beginning of 2003 and improvementsrestructuring charges. Results in productivity and
delivery drove the sales increase. The group's sales increased largely as a
result of increased productivity in its U.S. production facilities and the
beneficial translation effects of stronger Euro and Canadian currencies. In
2002, net sales declined 10% from $3732004 included $5.4 million in 2001 as reduced throughputrestructuring charges and deliveries ina $10.6 million loss incurred on a large multi-year contract for complex fire apparatus for the U.S. production facilities resulted from more complex units
and prototypes.
Operating income increased 29% to $14.5 million in 2003 from $11.2 million
in 2002 resulting in a slight operating margin improvement to 3.5%. Improved
productivity of the U.S. operations more than offset higher costs incurred to
improve the group's selling and manufacturing processes. In 2002, operating
income declined 60% from $27 million and an operating margin of 7.3% in 2001;
income and margin declined due to the lower sales levels coupled with higher
production costs.
SAFETY PRODUCTS OPERATIONSRoyal Netherlands Air Force.
Safety Products Operations
The following charttable presents the Safety Product Group'sGroup’s results of operations for each of the three-yearthree years in the period ended December 31, 2003 (in2005 ($ in millions):
LINE GRAPH
| 2005 | 2004 | 2003 | ||||||||||
| Total orders | $ | 259.5 | $ | 294.7 | $ | 228.7 | ||||||
| US orders | 164.8 | 199.4 | 143.2 | |||||||||
| Non-US orders | 94.7 | 95.3 | 85.5 | |||||||||
| Net sales | 276.5 | 247.4 | 241.1 | |||||||||
| Operating income | 45.0 | 33.5 | 28.1 | |||||||||
| Operating margin | 16.3 | % | 13.5 | % | 11.7 | % | ||||||
Orders declined 7%decreased 12% in 2003 essentially2005 largely due to a $47 million airport parking system order received in 2004. Excluding that order, an overall order increase of 5% was achieved due to strong demand in US industrial and commercial sectors. Full year revenues increased 12% in 2005 due to deliveries against the group bookinglarge airport parking system contract and strength in police products, electrical products and oil and mining related hazardous lighting products.
Operating income in 2005 included a $19$6.7 million order forgain on the Dallas/ Fort Worth parking project in 2002; excluding this
project,sale of two industrial lighting product lines. The remainder of the group's orders were flat. Orders increased 6% in
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2002income increase was largely due to the largeincreased sales.
Orders increased 29% in 2004 including 20% from a $47 million airport parking projectsystem order for the Port Authority of New York and success in increasing
market shareNew Jersey, 3% from emergency vehicular warning products, and 2% from currency. US municipal and government orders increased 10% from strong demand for Europeanmilitary and nuclear warning systems and for municipal police products.
Net sales increasedrose 3% to $247.4 million in 2004. Higher unit volumes in industrial lighting and signaling and emergency vehicular warning systems contributed 3% and foreign currency impacts contributed 2% to the sales increase. Partially offsetting these increases were lower parking revenue and control systems, which declined in 2004 following strong sales in 2003 to $278 million from $270 million in 2002
reflecting progress ondriven by a large project for the Dallas/Fort Worth International Airport parking
project andAirport.
Operating income increased 19% to $33.5 million in 2004 following depressed earnings in 2003 resulting from costs related to the strength of the Euro against the U.S. dollar offset by a weak
municipal police products market and the shutdownclosure of a production facility in the U.K. and an unfavorable mix of product sales lowering operating margins.
Tool Operations
The following table presents the Tool Group’s results of operations for each of the three years in the period ended December 31, 2005 ($ in millions):
| 2005 | 2004 | 2003 | ||||||||||
| Total orders | $ | 162.6 | $ | 161.8 | $ | 151.9 | ||||||
| US orders | 117.6 | 116.8 | 107.6 | |||||||||
| Non-US orders | 45.0 | 45.0 | 44.3 | |||||||||
| Net sales | 161.5 | 161.0 | 153.2 | |||||||||
| Operating income | 16.8 | 15.3 | 14.9 | |||||||||
| Operating margin | 10.4 | % | 9.5 | % | 9.8 | % | ||||||
US orders increased 1% in 2005 due mainly to price increases. The stronger US industrial economy was offset by the weak automobile market. Sales increased 5%were relatively flat in 2002 from $256both US and non-US markets during 2005. The operating income increase of $1.5 million in 20012005 was primarily due to lower restructuring costs, lower
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operating costs due to the 2004 restructuring initiatives and efficiencies due to the installation of an enterprise business system in 2004.
In the US, tooling orders increased deliveries of outdoor warning systems9% in 2004 as the US industrial economy strengthened from the prior year. International orders were flat compared to 2003 as strength in Asian tooling markets, and to a lesser extent Canadian tooling markets, was offset by weakness in the European police products.
Despitemetal forming market throughout the year. The 5% increase in net sales in 2004 reflected stronger demand for industrial cutting tools and die components in the US, Canada and Asia, and stronger European currencies.
The 2% growth in sales, operating income declined 23%in 2004 resulted from $41.4increased sales volumes, higher pricing, and productivity improvements. While tool steel cost increased during 2004, the group fully recovered the impact through increased sales prices.
The Tool group incurred $1.2 million of restructuring charges in 2004 and recorded a $.2 million gain in 2005.
Corporate Expense
Corporate expenses totaled $23.8 million in 2002 to $31.82005, $21.7 million in 2004 and $14.0 million in 2003. The operating margin decrease from
15.3% to 11.4%increase in 2005 reflects a pre-tax charge of $2.5 million for costshigher expenses associated with incentive compensation and salaries associated with improved earnings and increased headcount. Incentive compensation include bonuses and stock awards. The increase in 2004 reflects higher expenses associated with firefighter hearing loss litigation, increased product liability reserves, higher independent audit and audit staff expense to meet requirements of Sarbanes-Oxley Section 404 and the shutdownaddition of a production facility in the U.K., weaker sales of
high-margin municipal products coupled with higher sales of lower margin parking
products,centralized human resources and higher pension and health care costs. In 2002, operating income
increased 9% and margins strengthened due to higher net sales, partly offset by
increased pension expense.
TOOL OPERATIONSinformation technologies departments.
Legal Matters
The following graph presents the Tool Group's results of operations for the
three-year period ended December 31, 2003 (in millions):
LINE GRAPH
Net sales increased 2% to $160 million in 2003 from $156 million in 2002;
the increase was principally a result of growth in the international precision
tooling markets, largely attributable to the strong European currency. Partially
offsetting was a weak U.S. cutting tool market, as automotive customers
continued their low capital investment despite strong production. In 2002, net
sales declined 3% from $162 million in 2001, a reflection of lower cutting tool
sales, which represented about one-quarter of the group's sales.
Operating income declined 15% to $15.9 million in 2003 from $18.7 million
in 2002. The decline in operating income and a reduction in operating margin
from 12.0% in 2002 to 10.0% in 2003 was largely due to cutting tool pricing
pressures, costs and operating inefficiencies associated with the closure of a
New York production facility, increased sales of third party resale products and
significantly higher pension and medical costs. In 2002, operating income
declined 3% from $19.3 million in 2001 due to lower sales volumes, cutting tool
pricing pressures and the effect of lower fixed cost absorption caused by
inventory reductions made possible by successful lean enterprise initiatives.
CORPORATE EXPENSE
Corporate expenses totaled $14.0 million in 2003, $12.4 million in 2002 and
$12.6 million in 2001. The 13% increase in 2003 reflects an increased bad debt
provision and higher pension expense.
The companyCompany has been sued by over 1,5002,400 firefighters in 2733 separate cases alleging that exposure to the company'sCompany’s sirens impaired their hearing. The companyCompany has successfully defended itself in over 40 similar cases and contests the allegations. The discovery phase of the litigation beginsbegan in 2004; the company intendsCompany continues to
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aggressively defend the matter and expects to incur approximately $3.6 million
in legal fees in 2004.matter. For further details regarding this and other legal matters, refer to Note LM in the financial statements included in Item 8 of this Form 10-K.
FINANCIAL SERVICES ACTIVITIES
Financial Services Activities
The company maintains a largeCompany maintained an investment ($230of $169.2 million and $227$196.5 million at December 31, 20032005 and 2002, respectively)2004, respectively in lease financing and other receivables that are generated primarily by its Environmental Products and Fire Rescue operations.customers. The increasedecrease in leasing assets primarily resulted from Fire Rescue's strong 2003
deliveriesearly loan payoffs, and subsequent lease financing offset by the company'scontinued runoff of the industrial leasing portfolio resulting from the Company’s decision to cease lendingno longer extend new leases to customers in certain commercial and industrial markets.customers. Financial services assets generally have repayment terms ranging from one to ten years. These assets are 87%94% and 91% leveraged due toas of December 31, 2005 and 2004, respectively, consistent with their overall quality; financial services debt was $201$158.9 million and $202$178.4 million at December 31, 20032005 and 2002,2004, respectively.
Financial revenues totaled $13$9.6 million, $16$12.1 million and $16$13.4 million in 2003, 20022005, 2004 and 2001,2003, respectively. The 17% decline in 2003 is primarily due to2005 and 2004 reflects the company's decision to cease financing newsale of a portion of the Company’s industrial product salesleasing portfolio and lower lending rates due to the declining interest rate environment.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCESfinancings of municipal product sales.
Financial Condition, Liquidity and Capital Resources
During the three-year period ended December 31, 2003,2005, the companyCompany utilized its strong cash flows from operations to pay cash dividends to shareholders and to fund sustaining and cost reduction capital needs of its operations; to fund in whole or in part strategic
acquisitions of companies operating in markets related to those already served
by the company; and to pay increasing amounts in cash dividends to shareholders.operations. Beyond these uses, remaining cash was used to pay down debt, and to repurchase shares of common stock.stock and make voluntary pension contributions.
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The company'sCompany’s cash and cash equivalents totaled $10.1$91.9 million, $9.8$14.9 million and $16.9$10.0 million as of December 31, 2003, 20022005, 2004 and 2001,2003, respectively. The following table summarizes the company'sCompany’s cash flows for each of the three-yearthree years in the period ended December 31, 2003 (in2005 ($ in millions):
| 2005 | 2004 | 2003 | ||||||||||
| Operating cash flow | $ | 72.9 | $ | 52.5 | $ | 70.3 | ||||||
| Dividends | (13.5 | ) | (19.3 | ) | (38.3 | ) | ||||||
| Capital expenditures | (19.5 | ) | (20.1 | ) | (16.8 | ) | ||||||
| Dispositions of businesses | 49.1 | 7.5 | ||||||||||
| Purchases of treasury stock | (5.0 | ) | (.1 | ) | ||||||||
| Borrowing activity, net | 24.9 | (62.4 | ) | (24.0 | ) | |||||||
| All other, net | 17.2 | 5.1 | 1.7 | |||||||||
| Increase in cash | $ | 77.0 | $ | 4.9 | $ | .3 | ||||||
Operating cash flow increased by $20.4 million to $72.9 million in 2005 compared to 2004. Income from operations increased due to improved sales in environmental and safety products, operational improvements in fire rescue and lower restructuring costs. Working capital improvements were the primary reason for the remaining increase.
Operating cash flow declined to $75.4$52.5 million in 2004 from $70.3 million in 2003 due to operating losses incurred by the Fire Rescue Group, higher corporate expenses, lower proceeds ($7.7 million) from $88.4 million in
2002, in large part reflecting lower earnings, timing of customer advances, the disproportionate increase in foreign sales with longer payment terms and
multi-year contracts. Cash flows benefited from favorable settlementstermination of interest rate swaps and foreign currency hedges as well as continued
improvementsincremental payments of $5.4 million relating to restructuring plans, partially offset by increased collections attributable to the Company’s financial services activities and the sale of a portion of the taxable leasing portfolio.
In 2005, the Company sold four former production facilities and two industrial lighting product lines for total cash proceeds of $22.0 million. In 2004, the Company disposed of Justrite Manufacturing Company, L.L.C. and Technical Tooling, Inc. for cash proceeds of $40.1 million and $6.5 million, respectively. In addition, the Company divested its 54% majority interest in inventory productivity as evidenced by inventory turns risingPlastisol B.V. Holdings to 4.8 at December 31, 2003. Operating cash flow decreased in 2002 from $95.1the minority partner for $2.5 million in 2001 due to lower earningscash and a discretionary $5.0 million pension
contribution madenote receivable of $.4 million. The divestitures in view of2004 were in conjunction with the company's strong cash position and weak pension
asset performance. The company also experienced reductionsCompany’s restructuring initiatives announced in working capital
driven by improved collections, lower inventory levels due to lean enterprise
initiatives andJune 2004. In 2003, the receipt of more advance payments from customers. The
company's operating cash flows fluctuate on a quarterly basis due to sales
seasonality and associated working capital requirements.
The companyCompany completed the sale of the Sign Group in April 2003 for cash of $7.5 million and a $4.2 million note receivable. The company acquired
In March 2005, the refuse
businessesCompany entered into a loan agreement secured by certain leases of theE-One business. For more detail on this loan agreement refer to Note E — Debt, contained in 2002 for $101.3 million, funded with cashthis Form 10-K. As of $48.1 millionDecember 31, 2005 the balance on this facility was $91.4 million. On February 3, 2006 the Company amended and stock valued at $43.4 million plus the assumption of $9.8 million of debt. The
13
company paid $19.7 million in 2001 to acquire Athey Products Corporation,
Plastisol Holdings B.V. and two small Tool Group companies including the
assumption of debt.
In order to show the distinct characteristics of the company's investment
inextended its manufacturing and financial service activities, the company has presented
separately these investments and their related liabilities. Different ratios of
debt and equity support each of these two types of activities.
In April 2003, Standard and Poor's lowered the company's debt rating from
A-2 to A-3 making short-term borrowing in the commercial paper market no longer
viable. After drawing on the $300 million back-up credit facility to pay off the
commercial paper holders, the company replaced it with a new $250 million
unsecuredbank revolving credit facility maturing in 2006 bearing interest at a
variable rate of LIBOR plus .83%.from $75 million to $110 million. At December 31, 2003, $752005 there was no balance drawn under the existing revolving credit facility.
In 2004, the Company repaid $62.4 million of debt by utilizing the proceeds from the sale of the three aforementioned businesses as well as the positive cash flow from operations. In 2004, the Company voluntarily reduced the size of its revolving credit facility from $250 million to $200 million. At December 31, 2004, $45 million was outstanding under this agreement. The company also secured $50 million in
private placement financing with increments maturing in 2008, 2010 and 2013
bearing interest at a variable rate of LIBOR plus 1.04%. The rating downgrade
resulted in the company incurring an additional $1.0 million in borrowing costs
in 2003. The incremental cost was partially offset by favorable interest rate
swap agreements. The company paid down $22.2 million of borrowings in 2003.
During the fourth quarter of 2002, the company issued long-term debt of
$100 million at an average interest rate of 5.1% with terms ranging from six to
ten years. The company issued the debt to replace $48 million of short-term debt
incurred to fund the refuse business acquisitions and to replace other existing
short-term debt.
The company's debt facilities contain covenants relating to a maximum
debt-to-capitalization ratio, minimum interest coverage and minimum net worth.
As of December 31, 2003, the company was in compliance with the financial
covenants of its debt agreements.revolving credit facility.
At December 31, 2003,2005, total manufacturing debt was $265$276.3 million, representing 40%43% of capitalization, downup from 44%37% ($296234.6 million) as of December 31, 2002.2004. The manufacturing debt-to-capitalizationreported ratio is subject to variations based on seasonal working capital requirements.was adversely impacted by unusually high cash balances held in anticipation of debt repayments early in 2006. Manufacturing debt, net of cash, totaled $184.4 million and $219.7 million in 2005 and 2004, respectively. The companyCompany believes that its municipal financial services assets, due to their improved overall quality, are capable of sustaining a leverage ratio of 91%. At both95% at December 31, 2003 and 2002, the company's debt-to-capitalization2005. The Company’sdebt-to-capitalization ratio for its financial services activities was 87% for its continuing operations.
Cash dividends increased by $2.3 million from $36.0 million in 2002 to
$38.3 million in 2003 due to the additional shares issued in late 2002 for the
refuse acquisitions; the company paid dividends of $.80 per share in 2003. In
October 2003, the company announced a 50% reduction in the quarterly dividend to
improve its long-term position in view of the further weakening of the U.S.
state94% and municipal markets and the lack of a conclusive rebound in the
industrial economy. The reduction is expected to improve the company's future
financial flexibility.
Management focuses substantial effort on improving the utilization of the
company's working capital. The company's primary working capital as a percent of
net sales was 23.3% and 22.4%91% as of December 31, 20032005 and 2002,2004, respectively.
Cash dividends decreased to $13.5 million in 2005 from $19.3 million in 2004. The companyCompany declared dividends of $.24 per share in 2005 and $.40 per share in 2004. Cash dividends in 2004 decreased by $19.0 million from $38.3 million in 2003. In February 2006, the Company kept its first quarter dividend at $.06 per share.
17
The Company anticipates that its financial resources and major sources of liquidity, including cash flow from operations and borrowing capacity, will continue to be adequate to meet its operating and capital needs in addition to its financial commitments.
14
CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS
Contractual Obligations and Commercial Commitments
The following table presents a summary of the company'sCompany’s contractual obligations and payments due by period as of December 31, 2003 (in2005 ($ in millions):
| Payments Due by Period | ||||||||||||||||||||
| Less than | More than | |||||||||||||||||||
| Total | 1 Year | 2-3 Years | 4-5 Years | 5 Years | ||||||||||||||||
| Short-term obligations | $ | 6.6 | $ | 6.6 | $ | $ | $ | |||||||||||||
| Long-term debt | 431.3 | 104.5 | 117.8 | 95.6 | 113.4 | |||||||||||||||
| Operating lease obligations | 31.1 | 7.1 | 10.1 | 6.9 | 7.0 | |||||||||||||||
| Fair value of interest rate swaps | 6.7 | .1 | .5 | 1.6 | 4.5 | |||||||||||||||
| Fair value of foreign exchange contracts | (1.4 | ) | (1.4 | ) | ||||||||||||||||
| Total contractual obligations | $ | 474.3 | $ | 116.9 | $ | 128.4 | $ | 104.1 | $ | 124.9 | ||||||||||
The companyCompany is party to various interest rate swap agreements in conjunction with the management of borrowing costs. As of December 31, 2003,2005, the fair value of the company'sCompany’s net position would result in cash proceedspayments of $9.4$6.7 million. Future changes in the U.S.US interest rate environment would correspondingly affect the fair value and ultimate settlement of the contracts.
The companyCompany also enters into foreign currency forward contracts to protect against the variability in exchange rates on cash flows of its foreign subsidiaries. As of December 31, 2003,2005, the unrealized gain on the company'sCompany’s foreign currency forwardexchange contracts totaled $2.5$1.4 million. Volatility in the future exchange rates between the U.S.US dollar and Euro and Canadian dollar will impact final settlement.
The following table presents a summary of the company'sCompany’s commercial commitments and the notional amount expiration by period (in($ in millions):
The security bonds for casualty insurance policies relate to the company's
worker'sCompany’s workers’ compensation, automobile, general liability and product liability policies. The outstandingOutstanding financial standby letters of credit represent guarantees of performance by foreign subsidiaries that engage in cross-border transactions with foreign governments.customers.
| Notional Amount Expiration by Period | ||||||||||||||||
| Less than | 2-3 | 4-5 | ||||||||||||||
| Total | 1 Year | Years | Years | |||||||||||||
| Financial standby letters of credit for casualty insurance policies | $ | 34.4 | $ | 34.4 | $ | $ | ||||||||||
| Guaranteed residual value obligations | 2.6 | 2.3 | .2 | .1 | ||||||||||||
| Total commercial commitments | $ | 37.0 | $ | 36.7 | $ | .2 | $ | .1 | ||||||||
Security bonds for casualty insurance
policies................................. $ 25.1 $ 25.1
Financial standby letters of credit........ 10.3 10.1 $ .2
Guaranteed residual value obligations...... 3.5 .1 $ .6 $ 2.7 .1
Guarantees of the indebtedness of others... .8 .6 .2
------- ------- ---- ------ ----
Total commercial commitments............... $ 39.7 $ 35.9 $ .8 $ 2.7 $ .3
======= ======= ==== ====== ====
In limited circumstances, the companyCompany guarantees the residual value on vehicles in order to facilitate a sale. The companyCompany also guaranteed the debt of an independent dealer that sells the company'sCompany’s vehicles. The companyCompany believes its risk of loss is low; no losses have been incurred to date. The inability of the companyCompany to enter into these types of arrangements in the future due to unforeseen circumstances is not expected to have a material impact on its financial position, results of operations or cash flows.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and
18
the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The companyCompany considers the following policies to be the most critical in understanding the 15
judgments that are involved in the preparation of the company'sCompany’s consolidated financial statements and the uncertainties that could impact the company'sCompany’s financial condition, results of operations and cash flows.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
| Allowances for Doubtful Accounts |
The companyCompany performs ongoing credit evaluations of its customers. The company'sCompany’s policy is to establish, on a quarterly basis, an allowanceallowances for doubtful accounts based on factors such as historical loss trends, credit quality of the present portfolio, collateral value and general economic conditions. If the historical loss trend increased or decreased 10% in 2003,2005, the company'sCompany’s operating income would have decreased or increased by $.3$.1 million, respectively. Though management considers the valuation of the allowanceallowances proper and adequate, changes in the economy and/or deterioration of the financial condition of the company'sCompany’s customers could affect the reserve balances required.
WARRANTY RESERVE
| Inventory Reserve |
The company'sCompany performs ongoing evaluations to ensure that reserves for excess and obsolete inventory are properly identified and recorded. The reserve balance includes both specific and general reserves. Specific reserves at 100% are established based on the identification of separately identifiable obsolete products and materials. General reserves for materials are established based upon formulas which are established based on, among other things, the level of current inventory relative to recent usage, estimated scrap value and the level of estimated future usage. Historically, this reserve policy has given a close approximation of the Company’s experience with excess and obsolete inventory. The Company does not foresee a need to revise its reserve policy in the future. However, from time to time unusual buying patterns or shifts in demand may cause large movements in the reserve balance.
| Warranty Reserve |
The Company’s products generally carry express warranties that provide repairs at no cost to the customer or the issuance of credit. The length of the warranty term depends on the product sold, but generally extends from six months to five years based on the terms that are generally accepted in the company'sCompany’s marketplaces. Certain components necessary to manufacture the company'sCompany’s vehicles (including chassis, engines and transmissions) are covered under an original manufacturers'manufacturers’ warranty. Such manufacturers'manufacturers’ warranties are extended directly to end customers.
The companyCompany accrues its estimated exposure to warranty claims at the time of sale based upon historical warranty claim costs as a percentage of sales. Management reviews these estimates on a quarterly basis and adjusts the warranty provisions as actual experience differs from historical estimates. Infrequently, a material warranty issue can arise which is outside the norm of the company'sCompany’s historical experience; costs related to such issues, if any, are provided for when they become probable and estimable.
The company'sCompany’s warranty cost as a percentage of net sales totaled 1.5%1.1% in 2003, 1.0%2005, 1.3% in 20022004 and 1.2%1.4% in 2001.2003. The increasedecrease in the rate in 20032005 is primarily due to the acquisitions of the refuse truck body businessesimprovements in late
2002 which experience higher warranty claims due to their usage pattern and the
introduction of new custom fire rescue vehicles that incurred higher warranty
costs when used for the first time. Although managementbusiness. Management believes the current
liabilityreserve recorded at December 31, 2005 is appropriate, aappropriate. A 10% increase or decrease in the estimated warranty costs in 20032005 would have decreased or increased operating income by $1.8$1.1 million, respectively.
WORKER'S COMPENSATION AND PRODUCT LIABILITY RESERVES
| Workers’ Compensation and Product Liability Reserves |
Due to the nature of the products manufactured, the Company is subject to product liability claims in the ordinary course of business. The companyCompany is partially self-insured for worker'sworkers’ compensation and product liability claims with various stop-loss thresholds. When a worker's compensation claim is filed, aan initial liability is estimated, if any is expected, to settle the claim. This liability is periodically updated as more claim facts become known. The establishment and update of a liabilityliabilities for unpaid claims, including claims incurred but not reported, is based on the assessment by the company'sCompany’s claim administrator of each claim, management's estimatean independent actuarial valuation of
19
the nature and severity of total claims and an independent actuarial valuation.management’s estimate. The companyCompany utilizes a third-party claims administrator to pay claims, track and evaluate actual claims experience forand ensure consistency in the data used in the actuarial valuation. While management believes the current
reserve is adequate, a 10% increase or decrease in the average cost per claim in
2003 would have decreased or increased operating income by $.3 million,
respectively.
Due to the nature of the products manufactured, the company is subject to
product liability claims in the ordinary course of business. The company is
partially self-insured for its product liability exposures; it records a
liability when a potential loss associated with an asserted claim is probable
and reasonably estimable. The liability is based on an assessment of each claim
by the company's third party administrator, management's current knowledge of
the matter and consultation with counsel. Management believes that the liabilityreserve established at December 31, 2005 appropriately reflects the company'sCompany’s risk exposure. 16
GOODWILL IMPAIRMENTThe Company has not established any reserve for potential losses resulting from hearing loss litigation (see Note M); if the Company is not successful in its defense, it will record a charge for such claims, to the extent they exceed insurance recoveries, at the time a judgment or settlement is made.
| Goodwill Impairment |
In accordance with SFAS No. 142, "Goodwill“Goodwill and Other Intangible Assets"Assets”, the companyCompany ceased amortization of goodwill and indefinite-lived intangible assets effective January 1, 2002. SFAS No. 142 also requires the companyCompany to test these assets annually for impairment; the companyCompany performs this test at the
beginning ofin the fourth quarter unless impairment indicators arise earlier. The companyCompany continues to amortize definite-lived intangible assets over their useful life.
A review for impairment requires judgment in estimated cash flows based upon estimates of future sales, operating income, working capital improvements and capital expenditures. Management utilizes a discounted cash flow approach to determine the fair value of the company'sCompany’s reporting units. If the sum of the expected discounted cash flows of the reporting unit is less than its carrying value, an impairment loss is required against the unit'sunit’s goodwill.
In accordance with SFAS No. 142's transition rules, the company performed
an assessment as of January 1, 2002, the date of the statement's adoption. This
evaluation resulted in an $8.0 million impairment charge in 2002 related to a
niche Tool Group business.
The annual testing conducted in 20022005 and 20032004 did not result in any impairment.
Although management believes that the assumptions and estimates used were reasonable, a sensitivity analysis for each reporting unit is performed along with the impairment test. The analysis indicated that a 10%5% change in the sales
growth, operating margin or working capital percentage assumptionsassumption would not resulthave resulted in a goodwill impairment in any goodwill impairment.
MARKET RISK MANAGEMENTgroup.
Financial Market Risk Management
The companyCompany is subject to market risk associated with changes in interest rates and foreign exchange rates. To mitigate this risk, the companyCompany utilizes interest rate swaps and foreign currency options and forward contracts. The companyCompany does not hold or issue derivative financial instruments for trading or speculative purposes and is not party to leverageleveraged derivatives.
INTEREST RATE RISK
| Interest Rate Risk |
The companyCompany manages its exposure to interest rate movements by maintainingtargeting a proportionate relationship between fixed-rate debt to total debt generally within established percentages.percentages of between 40% and 60%. The companyCompany uses funded fixed-rate borrowings as well as interest rate swap agreements to balance its overall fixed/floating interest rate mix.
Of the company'sCompany’s debt at December 31, 2003, 43%2005, 36% was used to support financial services assets; the weighted average remaining life of those assets is typically under three years and the debt is match-funded to the financing assets. The company is currently comfortable with a sizeable portion of floating
rate debt to support these financial services assets, since a rise in borrowing
rates would normally correspond with a rise in lending rates within a reasonable
period.
17
The following table summarizespresents the company's financial instrumentsprincipal cash flows and weighted average interest rates by year of maturity for the Company’s total debt obligations held at December 31, 2003 that are sensitive to changes in interest rates, including
debt obligations and interest rate swaps (dollars2005 ($ in millions):
For interest rate swaps, the
| Expected Maturity Date | ||||||||||||||||||||||||||||||||
| Fair | ||||||||||||||||||||||||||||||||
| 2006 | 2007 | 2008 | 2009 | 2010 | Thereafter | Total | Value | |||||||||||||||||||||||||
| Fixed rate | $ | 83.5 | $ | 27.8 | $ | 35.2 | $ | 25.1 | $ | 25.2 | $ | 93.1 | $ | 289.9 | $ | 302.0 | ||||||||||||||||
| Average interest rate | 5.8 | % | 5.9 | % | 5.8 | % | 5.7 | % | 5.6 | % | 5.5 | % | ||||||||||||||||||||
| Variable rate | $ | 27.6 | $ | 18.8 | $ | 36.0 | $ | 14.0 | $ | 31.3 | $ | 20.3 | $ | 148.0 | $ | 148.0 | ||||||||||||||||
| Average interest rate | 5.5 | % | 5.4 | % | 5.4 | % | 5.4 | % | 5.4 | % | 5.3 | % | 5.2 | % | ||||||||||||||||||
20
The following table presents notional amounts and weighted average interest rates by expected (contractual) maturity dates.date for the Company’s interest rate swap contracts held at December 31, 2005 ($ in millions). Notional amounts are used to calculate the contractual payments to be exchanged under the contract. Weighted average variable rates are based on implied forward rates in the yield curve at the reporting date.
At December 31, 2003 and 2002, the company was party to interest rate swap
agreements with aggregate notional amounts of $400 million and $270 million,
respectively.
| Expected Maturity Date | ||||||||||||||||||||||||||||||||
| Fair | ||||||||||||||||||||||||||||||||
| 2006 | 2007 | 2008 | 2009 | 2010 | Thereafter | Total | Value | |||||||||||||||||||||||||
| Pay fixed, receive variable | $ | 10.0 | $ | $ | 25.0 | $ | 10.0 | $ | 10.0 | $ | $ | 55.0 | $ | .7 | ||||||||||||||||||
| Average pay rate | 3.8 | % | 5.1 | % | 3.8 | % | 3.8 | % | ||||||||||||||||||||||||
| Average receive rate | 4.8 | % | 4.7 | % | 4.8 | % | 4.9 | % | ||||||||||||||||||||||||
| Receive fixed, pay variable | $ | 17.1 | $ | 17.1 | $ | 25.1 | $ | 15.1 | $ | 15.1 | $ | 63.4 | $ | 152.9 | $ | (7.4 | ) | |||||||||||||||
| Average pay rate | 7.9 | % | 7.8 | % | 7.2 | % | 6.8 | % | 6.9 | % | 6.9 | % | ||||||||||||||||||||
| Average receive rate | 6.5 | % | 6.5 | % | 6.0 | % | 5.7 | % | 5.7 | % | 5.7 | % | ||||||||||||||||||||
See Note H to the consolidated financial statements in this Form 10-Kfor a description of these agreements. All of the interest rate swap agreements
qualify for hedge accounting treatment.
FOREIGN EXCHANGE RATE RISK
| Foreign Exchange Rate Risk |
The companyCompany has foreign currency exposures related to buying and selling in currencies other than the local currency in which it operates. The companyCompany utilizes foreign currency options and forward contracts to manage risks associated with
sales and purchase commitments as well as forecast transactions denominated in
foreign currencies.
18
these risks.
The following table summarizes the company'sCompany’s foreign currency forward
contract hedgingderivative instruments as of December 31, 2003 by2005. All are expected settlement date
(dollarsto settle in 2006. ($ in millions):
At December 31, 2003 and 2002, the company was party to foreign currency
forward contracts with aggregate notional amounts of $59 million and $47
million, respectively.
| Expected | ||||||||||||||
| Settlement Date | ||||||||||||||
| 2006 | ||||||||||||||
| Average | ||||||||||||||
| Notional | Contract | Fair | ||||||||||||
| Amount | Rate | Value | ||||||||||||
| Forward contracts: | ||||||||||||||
| Buy Euros, sell US dollars | $ | 6.7 | 1.20 | $ | ||||||||||
| Buy Canadian dollars, sell US dollars | 7.1 | 1.40 | 1.5 | |||||||||||
| Other currencies | 3.4 | (.1 | ) | |||||||||||
| Total forward contracts | 17.2 | 1.4 | ||||||||||||
| Options: | ||||||||||||||
| Buy Canadian dollars, sell US dollars | 17.9 | 1.12 | ||||||||||||
| Buy US dollars, sell Euros | 16.7 | 1.17 | (.3 | ) | ||||||||||
| Total options | 34.6 | (.3 | ) | |||||||||||
| Total foreign currency derivatives | $ | 51.8 | $ | 1.1 | ||||||||||
See Note H to the consolidated financial statements for a description of these agreements. All of these derivative instruments qualify for hedge accounting treatment.
FORWARD-LOOKING STATEMENTS
This Form 10-K, reports filed by the company with the SEC on Forms 10-Q and
8-K and comments made by management contain the words such as "believe,"
"expect," "anticipate," "intend," "plan," "estimate" and "objective". These
expressions are intended to identify forward-looking statements. Forward-
looking statements include information concerning the company's possible or
assumed future results of operations. While these statements are based on
assumptions and judgments that management has made in light of industry
experience as well as perceptions of historical trends, current conditions,
expected future developments and other factors believed to be appropriate under
the circumstances, actual results could differ materially. These statements are
not guarantees of performance or results.
OTHER MATTERS
Other Matters
The companyCompany has a business conduct policy applicable to all employees and regularly monitors compliance with that policy. The companyCompany has determined that it had no significant related party transactions forin each of the three-yearthree years in the period endingended December 31, 2003.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.2005.
21
| Item 7A. | Quantitative and Qualitative Disclosures About Market Risk. |
The information contained under the caption Market Risk Management included in Item 7 of this Form 10-K is incorporated herein by reference.
19
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
| Item 8. | Financial Statements and Supplementary Data. |
22
FEDERAL SIGNAL CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
| Page | ||||
| 24 | ||||
| 26 | ||||
| 27 | ||||
| 28 | ||||
| 29 | ||||
| 30 | ||||
23
REPORT OF INDEPENDENT AUDITORS
REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and Board of Directors
of Federal Signal Corporation
We have audited the accompanying consolidated balance sheets of Federal Signal Corporation and subsidiaries as of December 31, 20032005 and 20022004, and the related consolidated statements of income, comprehensive incomeoperations, shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2003.2005. Our audits also included the financial statement schedule listed in the Index at Item 15(a)2.. These financial statements and schedule are the responsibility of the company'sCompany’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with auditingthe standards generally
accepted inof the United States.Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Federal Signal Corporation and subsidiaries as ofat December 31, 20032005 and 2002,2004, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 20032005, in conformity with accounting
principlesUS generally accepted in the United States.accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth herein.
As discussedtherein.
We also have audited, in Notesaccordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Federal Signal Corporation’s internal control over financial reporting as of December 31, 2005, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 22, 2006 expressed an unqualified opinion thereon.
 |
Chicago, Illinois
February 22, 2006
24
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and Board of Directors
of Federal Signal Corporation
We have audited management’s assessment, included in Item 9A(b) of the accompanying Form 10-K, that Federal Signal Corporation maintained effective internal control over financial reporting as of December 31, 2005, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Federal Signal Corporation’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A Company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and Pthe preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A Company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company
changedCompany are being made only in accordance with authorizations of management and directors of the Company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the financial statements.
Because of its methodinherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of accountingany evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, management’s assessment that Federal Signal Corporation maintained effective internal control over financial reporting as of December 31, 2005, is fairly stated, in all material respects, based on the COSO criteria. Also, in our opinion, Federal Signal Corporation maintained, in all material respects, effective internal control over financial reporting as of December 31, 2005, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets as of December 31, 2005 and 2004, and the related consolidated statements of operations, shareholders’ equity and cash flows for goodwilleach of the three years in the period ended December 31, 2005 of Federal Signal Corporation and other intangibles in 2002.
SIG ERNST & YOUNG LLP
our report dated February 22, 2006, expressed an unqualified opinion thereon.
|
Chicago, Illinois
January 29, 2004
21
February 22, 2006
25
FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
| December 31, | |||||||||||
| 2005 | 2004 | ||||||||||
| ($ in millions) | |||||||||||
| ASSETS | |||||||||||
| Manufacturing activities: | |||||||||||
| Current assets | |||||||||||
| Cash and cash equivalents | $ | 91.9 | $ | 14.9 | |||||||
| Accounts receivable, net of allowances for doubtful accounts of $2.7 million and $2.2 million, respectively | 170.0 | 192.1 | |||||||||
| Inventories — Note B | 158.0 | 153.1 | |||||||||
| Other current assets | 24.8 | 19.3 | |||||||||
| Total current assets | 444.7 | 379.4 | |||||||||
| Properties and equipment — Note C | 92.8 | 100.8 | |||||||||
| Other assets | |||||||||||
| Goodwill — Note Q | 333.4 | 337.1 | |||||||||
| Other deferred charges and assets | 40.0 | 43.3 | |||||||||
| Total manufacturing assets | 910.9 | 860.6 | |||||||||
| Assets of discontinued operations — Note K | 39.4 | 75.3 | |||||||||
| Financial services activities — Lease financing and other receivables, net of allowances for doubtful accounts of $3.9 million and $3.9 million, respectively, and net of unearned finance revenue — Note D | 169.2 | 196.5 | |||||||||
| Total assets | $ | 1,119.5 | $ | 1,132.4 | |||||||
| LIABILITIES AND SHAREHOLDERS’ EQUITY | |||||||||||
| Manufacturing activities: | |||||||||||
| Current liabilities | |||||||||||
| Short-term borrowings — Note E | $ | 6.6 | $ | 7.6 | |||||||
| Current portion of long-term borrowings — Note E | 66.0 | 11.3 | |||||||||
| Accounts payable | 75.6 | 70.3 | |||||||||
| Accrued liabilities | |||||||||||
| Compensation and withholding taxes | 35.1 | 30.5 | |||||||||
| Customer deposits | 33.0 | 24.5 | |||||||||
| Other | 63.5 | 73.1 | |||||||||
| Total current liabilities | 279.8 | 217.3 | |||||||||
| Long-term borrowings — Note E | 203.7 | 215.7 | |||||||||
| Long-term pension and other liabilities | 50.5 | 34.3 | |||||||||
| Deferred income taxes — Note F | 26.0 | 56.6 | |||||||||
| Total manufacturing liabilities | 560.0 | 523.9 | |||||||||
| Liabilities of discontinued operations | 24.3 | 17.4 | |||||||||
| Financial services activities — Borrowings — Note E | 158.9 | 178.4 | |||||||||
| Total liabilities | 743.2 | 719.7 | |||||||||
| Shareholders’ equity — Notes I and J | |||||||||||
| Common stock, $1 par value per share, 90.0 million shares authorized, 48.8 million and 48.6 million shares issued, respectively | 48.8 | 48.6 | |||||||||
| Capital in excess of par value | 98.2 | 94.4 | |||||||||
| Retained earnings | 278.9 | 295.8 | |||||||||
| Treasury stock, .7 million and .4 million shares, respectively, at cost | (18.1 | ) | (13.6 | ) | |||||||
| Deferred stock awards | (4.8 | ) | (3.1 | ) | |||||||
| Accumulated other comprehensive (loss) income | |||||||||||
| Foreign currency translation | (5.7 | ) | 3.2 | ||||||||
| Net derivative gain, cash flow hedges | 2.1 | 1.6 | |||||||||
| Minimum pension liability | (23.1 | ) | (14.2 | ) | |||||||
| Total | (26.7 | ) | (9.4 | ) | |||||||
| Total shareholders’ equity | 376.3 | 412.7 | |||||||||
| Total liabilities and shareholders’ equity | $ | 1,119.5 | $ | 1,132.4 | |||||||
See notes to consolidated financial statements.
22
26
FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
OPERATIONS
| For the Years Ended December 31, | ||||||||||||||
| 2005 | 2004 | 2003 | ||||||||||||
| ($ in millions, except per share data) | ||||||||||||||
| Net sales | $ | 1,156.9 | $ | 1,063.9 | $ | 1,058.2 | ||||||||
| Costs and expenses | ||||||||||||||
| Cost of sales | 865.4 | 814.9 | 769.2 | |||||||||||
| Selling, general and administrative | 228.3 | 213.6 | 220.7 | |||||||||||
| Gain on sale of product line | (6.7 | ) | ||||||||||||
| Restructuring charges | .7 | 7.0 | 4.8 | |||||||||||
| Operating income | 69.2 | 28.4 | 63.5 | |||||||||||
| Interest expense | 23.1 | 20.6 | 18.8 | |||||||||||
| Other income (expense) | .2 | (2.9 | ) | (.5 | ) | |||||||||
| Income (expense) before income taxes | 46.3 | 4.9 | 44.2 | |||||||||||
| Income tax benefit (charge) — Note F | 1.0 | 4.6 | (7.7 | ) | ||||||||||
| Income from continuing operations | 47.3 | 9.5 | 36.5 | |||||||||||
| Discontinued operations — Note K: | ||||||||||||||
| (Loss) income from operations, net of tax (benefit) charge of $(12.4) million, $(6.2) million and $0.4 million, respectively | (50.3 | ) | (18.5 | ) | 1.2 | |||||||||
| (Loss) gain on dispositions, net of tax (benefit) charge of $(1.2) million, $7.9 million, and $.0 million, respectively | (1.6 | ) | 6.7 | (.4 | ) | |||||||||
| Net (loss) income* | $ | (4.6 | ) | $ | (2.3 | ) | $ | 37.3 | ||||||
| Basic and diluted income (loss) per share | ||||||||||||||
| Income from continuing operations | $ | .98 | $ | .20 | $ | .76 | ||||||||
| Discontinued operations: | ||||||||||||||
| (Loss) income from operations, net of taxes | (1.05 | ) | (.39 | ) | .03 | |||||||||
| (Loss) gain on dispositions, net of taxes | (.03 | ) | .14 | (.01 | ) | |||||||||
| Net (loss) income* | $ | (.10 | ) | $ | (.05 | ) | $ | .78 | ||||||
| * | amounts may not add to total due to rounding |
See notes to consolidated financial statements.
23
27
FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
SHAREHOLDERS’ EQUITY
| Accumulated | ||||||||||||||||||||||||||||||
| Common | Capital in | Other | ||||||||||||||||||||||||||||
| Stock | Excess of | Deferred | Comprehensive | |||||||||||||||||||||||||||
| Par | Par | Retained | Treasury | Stock | Income | |||||||||||||||||||||||||
| Value | Value | Earnings | Stock | Awards | (Loss) | Total | ||||||||||||||||||||||||
| ($ in millions) | ||||||||||||||||||||||||||||||
| Balance at December 31, 2002, | $ | 48.4 | $ | 91.1 | $ | 313.7 | $ | (18.0 | ) | $ | (3.2 | ) | $ | (34.0 | ) | $ | 398.0 | |||||||||||||
| Comprehensive income: | ||||||||||||||||||||||||||||||
| Net income | 37.3 | 37.3 | ||||||||||||||||||||||||||||
| Foreign currency translation | 14.4 | 14.4 | ||||||||||||||||||||||||||||
| Unrealized gains on derivatives, net of $1.1 million tax expense | 1.9 | 1.9 | ||||||||||||||||||||||||||||
| Minimum pension liability, net of $.2 million tax benefit | (.4 | ) | (.4 | ) | ||||||||||||||||||||||||||
| Comprehensive income | 53.2 | |||||||||||||||||||||||||||||
| Cash dividends declared | (33.6 | ) | (33.6 | ) | ||||||||||||||||||||||||||
| Compensation plans: | ||||||||||||||||||||||||||||||
| Exercise of stock options | .1 | .1 | ||||||||||||||||||||||||||||
| Stock awards granted | .8 | (.8 | ) | |||||||||||||||||||||||||||
| Related tax benefits | .2 | .2 | ||||||||||||||||||||||||||||
| Amortization of deferred stock awards | 1.2 | 1.2 | ||||||||||||||||||||||||||||
| Treasury stock: | ||||||||||||||||||||||||||||||
| Issuance | 3.3 | 3.3 | ||||||||||||||||||||||||||||
| Purchases | (.1 | ) | (.1 | ) | ||||||||||||||||||||||||||
| Retirement | (.2 | ) | .2 | |||||||||||||||||||||||||||
| Other | (.1 | ) | (.2 | ) | .5 | .2 | ||||||||||||||||||||||||
| Balance at December 31, 2003 | 48.4 | 91.9 | 317.4 | (14.8 | ) | (2.3 | ) | (18.1 | ) | 422.5 | ||||||||||||||||||||
| Comprehensive income: | ||||||||||||||||||||||||||||||
| Net loss | (2.3 | ) | (2.3 | ) | ||||||||||||||||||||||||||
| Foreign currency translation | 6.8 | 6.8 | ||||||||||||||||||||||||||||
| Unrealized gains on derivatives, net of $1.2 million tax expense | 1.9 | 1.9 | ||||||||||||||||||||||||||||
| Comprehensive income | 6.4 | |||||||||||||||||||||||||||||
| Cash dividends declared | (19.3 | ) | (19.3 | ) | ||||||||||||||||||||||||||
| Compensation plans: | ||||||||||||||||||||||||||||||
| Exercise of stock options | .1 | .4 | .5 | |||||||||||||||||||||||||||
| Stock awards granted | .2 | 2.9 | .1 | (3.2 | ) | |||||||||||||||||||||||||
| Related tax benefits | .5 | .5 | ||||||||||||||||||||||||||||
| Amortization of deferred stock awards | 1.0 | 1.0 | ||||||||||||||||||||||||||||
| Other | (.1 | ) | (1.3 | ) | 1.1 | 1.4 | 1.1 | |||||||||||||||||||||||
| Balance at December 31, 2004 | 48.6 | 94.4 | 295.8 | (13.6 | ) | (3.1 | ) | (9.4 | ) | 412.7 | ||||||||||||||||||||
| Comprehensive loss: | ||||||||||||||||||||||||||||||
| Net loss | (4.6 | ) | (4.6 | ) | ||||||||||||||||||||||||||
| Foreign currency translation | (8.9 | ) | (8.9 | ) | ||||||||||||||||||||||||||
| Unrealized gains on derivatives, net of $.3 million tax expense | .5 | .5 | ||||||||||||||||||||||||||||
| Minimum pension liability, net of $5.3 million tax expense | (8.9 | ) | (8.9 | ) | ||||||||||||||||||||||||||
| Comprehensive loss: | (21.9 | ) | ||||||||||||||||||||||||||||
| Cash dividends declared | (11.6 | ) | (11.6 | ) | ||||||||||||||||||||||||||
| Compensation plans: | ||||||||||||||||||||||||||||||
| Exercise of stock options | .3 | .3 | ||||||||||||||||||||||||||||
| Stock awards granted | .2 | 4.7 | (.1 | ) | (4.8 | ) | ||||||||||||||||||||||||
| Related tax benefits | ||||||||||||||||||||||||||||||
| Amortization of deferred stock awards | 2.1 | 2.1 | ||||||||||||||||||||||||||||
| Treasury stock: | ||||||||||||||||||||||||||||||
| Purchases | (5.0 | ) | (5.0 | ) | ||||||||||||||||||||||||||
| Other | (1.2 | ) | (.7 | ) | .6 | 1.0 | (.3 | ) | ||||||||||||||||||||||
| Balance at December 31, 2005 | $ | 48.8 | $ | 98.2 | $ | 278.9 | $ | (18.1 | ) | $ | (4.8 | ) | $ | (26.7 | ) | $ | 376.3 | |||||||||||||
See notes to consolidated financial statements.
24
28
FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
| For the Years Ended | ||||||||||||||
| December 31, | ||||||||||||||
| 2005 | 2004 | 2003 | ||||||||||||
| ($ in millions) | ||||||||||||||
| Operating activities | ||||||||||||||
| Net (loss) income | $ | (4.6 | ) | $ | (2.3 | ) | $ | 37.3 | ||||||
| Adjustments to reconcile net income (loss) to net cash provided by operating activities: | ||||||||||||||
| Loss (income) on discontinued operations | 50.3 | 18.5 | (1.2 | ) | ||||||||||
| (Gain) loss on disposition of discontinued operations | 1.6 | (6.7 | ) | 0.4 | ||||||||||
| Non-cash restructuring charges | 0.3 | 7.1 | 1.9 | |||||||||||
| Gain on sale of product line | (6.7 | ) | ||||||||||||
| Loss on minority interest divestiture | 2.9 | (0.5 | ) | |||||||||||
| Depreciation and amortization | 21.5 | 19.6 | 18.4 | |||||||||||
| Provision for doubtful accounts | (2.3 | ) | 3.3 | 3.2 | ||||||||||
| Deferred income taxes | (4.4 | ) | 13.0 | 4.5 | ||||||||||
| Changes in operating assets and liabilities, net of effects from acquisitions and dispositions of companies | ||||||||||||||
| Accounts receivable | 10.2 | (12.2 | ) | (14.1 | ) | |||||||||
| Inventories | (.7 | ) | (10.5 | ) | 7.4 | |||||||||
| Other current assets | (3.6 | ) | 7.4 | 1.7 | ||||||||||
| Lease financing and other receivables | 27.2 | 31.0 | (5.1 | ) | ||||||||||
| Accounts payable | 6.5 | 5.0 | 5.3 | |||||||||||
| Customer deposits | 9.2 | 2.8 | (9.6 | ) | ||||||||||
| Accrued liabilities | 1.6 | 8.0 | (4.5 | ) | ||||||||||
| Income taxes | (22.9 | ) | (28.0 | ) | 2.5 | |||||||||
| Pension contributions | (7.7 | ) | (5.2 | ) | (6.0 | ) | ||||||||
| Other | 8.7 | 4.8 | 11.6 | |||||||||||
| Net cash provided by continuing operating activities | 84.2 | 58.5 | 53.2 | |||||||||||
| Net cash used for discontinued operating activities | (11.3 | ) | (6.0 | ) | 17.1 | |||||||||
| Net cash provided by operating activities | 72.9 | 52.5 | 70.3 | |||||||||||
| Investing activities | ||||||||||||||
| Purchases of properties and equipment | (19.5 | ) | (20.1 | ) | (16.8 | ) | ||||||||
| Proceeds from sales of properties and equipment | 10.1 | |||||||||||||
| Proceeds from sale of product line | 11.9 | |||||||||||||
| Investment in joint venture | (0.7 | ) | ||||||||||||
| Other, net | (1.2 | ) | 5.5 | (0.8 | ) | |||||||||
| Net cash provided (used for) continuing investing activities | 0.6 | (14.6 | ) | (17.6 | ) | |||||||||
| Net cash provided by (used for) discontinued investing activities | (3.6 | ) | 48.7 | 7.5 | ||||||||||
| Net cash provided by (used for) investing activities | (3.0 | ) | 34.1 | (10.1 | ) | |||||||||
| Financing activities | ||||||||||||||
| Proceeds (reduction) in short-term borrowings, net | 53.8 | (36.3 | ) | (66.0 | ) | |||||||||
| Proceeds from issuance of long-term borrowings | 104.2 | 42.0 | ||||||||||||
| Repayment of long-term borrowings | (133.1 | ) | (26.1 | ) | ||||||||||
| Purchases of treasury stock | (5.0 | ) | (0.1 | ) | ||||||||||
| Cash dividends paid to shareholders | (13.5 | ) | (19.3 | ) | (38.3 | ) | ||||||||
| Other, net | 0.7 | 0.7 | ||||||||||||
| Net cash provided by (used for) continuing financing activities | 7.1 | (81.7 | ) | (61.7 | ) | |||||||||
| Net cash used for discontinued financing activities | 1.8 | |||||||||||||
| Net cash provided by (used for) financing activities | 7.1 | (81.7 | ) | (59.9 | ) | |||||||||
| Increase in cash and cash equivalents | 77.0 | 4.9 | 0.3 | |||||||||||
| Cash and cash equivalents at beginning of year | 14.9 | 10.0 | 9.7 | |||||||||||
| Cash and cash equivalents at end of year | $ | 91.9 | $ | 14.9 | $ | 10.0 | ||||||||
See notes to consolidated financial statements.
25
29
FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ in millions, except per share data)
NOTE A --— SIGNIFICANT ACCOUNTING POLICIES
Principles of consolidation: The consolidated financial statements include the accounts of Federal Signal Corporation and all of its subsidiaries. All significant intercompany balances and transactions have been eliminated.
Reclassifications: Certain balances in 2004 and 2003 have been reclassified to conform to the 2005 presentation. Included with the reclassifications are restatements for discontinued operations. The discontinued operations arise out of the Environmental Products and Safety Products segments.
Cash equivalents: The companyCompany considers all highly liquid investments with a maturity of three-months or less, when purchased, to be cash equivalents.
Allowance
Accounts receivable, lease financing and other receivables and allowances for doubtful accounts: A receivable is considered past due if payments have not been received within agreed upon invoice terms. The companyCompany’s policy is generally to not charge interest on trade receivables after the invoice becomes past due, but to charge interest on lease receivables. The Company maintains an allowanceallowances for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments on the outstanding accounts receivable.receivable and outstanding lease financing and other receivables. The allowance isallowances are each maintained at a level considered appropriate based on historical and other factors that affect collectibility. These factors include historical trends of write-offs, recoveries and credit losses; the monitoring of portfolio credit quality; and current and projected economic and market conditions. If the financial condition of the company'sCompany’s customers were to deteriorate, resulting in an impairment of the ability to make payments, additional allowances may be required.
Inventories: Inventories The Company’s inventories are stated at the lower of cost or market. At December 31, 20032005 and 2002,2004, approximately 55%45% and 47% of the company'sCompany’s inventories arewere costed using the FIFO (first-in, first-out) method.method, respectively. The remaining portion of the company'sCompany’s inventories is costed using the LIFO (last-in,(last-in, first-out) method. Included in the cost of inventories is raw materials, direct wages and associated production costs.
Properties and depreciation: Properties and equipment are stated at cost. Depreciation, for financial reporting purposes, is computed principally on the straight-line method over the estimated useful lives of the assets. Depreciation ranges from 8 to 40 years for buildings and 3 to 15 years for machinery and equipment. Leasehold improvements are depreciated over the shorter of the remaining life of the lease or the useful life of the improvement. Property, plant and equipment and other long-term assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. If the sum of the expected undiscounted cash flows is less than the carrying value of the related asset or group of assets, a loss is recognized for the difference between the fair value and carrying value of the asset or group of assets. Such analyses necessarily involve significant judgment.
Intangible assets: Intangible assets principally consist of costs in excess of fair values of net assets acquired in purchase transactions. These assets are assessed yearly for impairment at the beginning ofin the fourth quarter and also between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. Definite lived intangible assets are amortized using the straight-line method.
Stock-based compensation plans: On December 16, 2004, the Financial Accounting Standards Board (FASB) issued FASB Statement No. 123 (revised 2004),Share Based Payment, which is a revision of FASB Statement No. 123,Accounting for Stock Based Compensation. Statement 123(R) supersedes APB Opinion No. 25,Accounting for Stock Issued to Employeesand amends FASB Statement No. 95,Statement of Cash Flows. Generally, the approach in Statement 123(R) is similar to the approach described in Statement 123.
30
FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ in millions, except per share data) — (Continued)
However, Statement 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on fair values. Pro forma disclosure is no longer an alternative.
In April 2005, the Securities and Exchange Commission (“SEC”) issued a release that amends the compliance dates for Statement 123(R). In compliance with the SEC’s rule the Company will apply Statement 123(R) as of January 1, 2006.
Statement 123(R) permits public companies to adopt its requirements using one of two methods:
A “modified prospective” method in which compensation cost is recognized beginning with the effective date (a) based on the requirements of Statement 123(R) for all share-based payments granted after the effective date and (b) based on the requirements of Statement 123(R) for all awards granted to employees prior to the effective date of Statement 123(R) that remained unvested on the effective date.
A “modified retrospective” method which includes the requirements of the modified prospective method described above, but also permits entities to restate, based on the amounts previously recognized under Statement 123(R) for purposes of pro forma disclosures, either (a) all prior periods presented or (b) prior interim periods of the year of adoption.
The companyCompany plans to adopt Statement 123(R) using the modified prospective method. It is expected that the fair value of options will be estimated using a Black-Scholes option pricing model.
The Company has twothree stock-based compensation plans, which are described more fully in Note I. The companyAs permitted by Statement 123 the Company accounts for these plans underusing the recognition and measurement principlesintrinsic value method of APB Opinion No. 25, "Accounting for25. Stock Issuedcompensation expense reflected in net income relates to Employees",restricted stock awards which vested over four years through 2004 and related
interpretations. Nothree years beginning in 2005. With regard to stock options granted, no stock-based employee compensation cost is reflected in net income (loss), as all options granted under those plans had an exercise price equal to the market value of the underlying common stock at the date of grant.
The weighted average
Accordingly, the adoption of Statement 123(R)’s fair value permethod will have a significant impact on our results of operations, although it will have no impact on our overall financial position. The impact of adoption of Statement 123(R) cannot be predicted at this time because it will depend on the levels of share based-payments granted in the future. However, had we adopted Statement 123(R) in prior periods, the impact of options granted was $2.97that standard would have approximated the impact of Statement 123 as described in 2003, $4.52 in 2002 and $5.33 in 2001. The fair valuethe disclosure of options was estimated
at the grant date using a Black-Scholes option pricing model with the following
weighted average assumptions: risk free interest rates of 3.6% in 2003, 2.7% in
2002 and 4.4% in 2001; dividend yield of 4.5% in 2003, 4.1% in 2002 and 3.5% in
2001; market volatility of the company's common stock of .28 in 2003, 2002 and
2001; and a weighted average expected life of the options of approximately 8
years for 2003, 2002, and 2001.
The following table illustrates the effect onpro forma net income and earnings per share forin Note I to our consolidated financial statements. Statement 123(R) also requires the three-year period ended December 31, 2003 if the company had
applied fair value recognition provisionsbenefits of Statementtax deductions in excess of Financial Accounting
Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation",recognized compensation cost to all
26
FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
stock-based employee compensation. For purposes of pro forma disclosure, the
estimated fair value of the options usingbe reported as a Black-Scholes option pricing model
is amortized to expense over the option's vesting period.
The intent of the Black-Scholes option valuation model is to provide
estimates of fair values of traded options that have no vesting restrictions and
are fully transferable. Option valuation models require the use of highly
subjective assumptions including expected stock price volatility. The company
has utilized the Black-Scholes method to produce the pro forma disclosuresfinancing cash flow, rather than as an operating cash flow as required under SFAS No. 123current literature. This requirement will reduce net operating cash flows and 148. In management's opinion, existing valuation
models do not necessarily provide a reliable single measureincrease net financing cash flows in periods after adoption. While the Company cannot estimate what those amounts will be in the future, because they depend on, among other things, when employees exercise stocks options, the amount of the fair value of
its employee stock options because the company's employee stock options have
significantly different characteristics from those of traded optionsoperating cash flows recognized in prior periods for such excess tax deductions were $0.3 million, $0.5 million and the
assumptions used$0.1 million in applying option valuation methodologies, including the
Black-Scholes model, are highly subjective.
2005, 2004 and 2003, respectively.
Use of estimates: The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Warranty: Sales of somemany of the company'sCompany’s products carry express warranties based on the terms that are generally accepted in the company'sCompany’s marketplaces. The companyCompany records provisions for estimated
31
FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ in millions, except per share data) — (Continued)
warranty at the time of sale based on historical experience and periodically adjusts these provisions to reflect actual experience. Infrequently, a material warranty issue can arise which is beyond the scope of the company'sCompany’s historical experience. The companyCompany provides for these issues as they become probable and estimable.
Product liability and worker'sworkers’ compensation liability: Due to the nature of the company'sCompany’s products, the companyCompany is subject to claims for product liability and worker'sworkers’ compensation in the normal course of business. The companyCompany is self-insured for a portion of these claims. The companyCompany establishes a liability using a third partythird-party actuary for any known outstanding matters, including a reserve for claims incurred but not yet reported.
Financial instruments: The companyCompany enters into agreements (derivative financial instruments) to manage the risks associated with interest rates and foreign exchange rates. The companyCompany does not actively trade such instruments nor enter into such agreements for speculative purposes. The companyCompany principally utilizes two types of derivative financial instruments: 1) interest rate swaps to manage its interest rate risk, and 2) foreign currency forward exchange and option contracts to manage risks associated with sales and expenses (forecast or committed) denominated in foreign currencies.
27
FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
On the date a derivative contract is entered into, the companyCompany designates the derivative as one of the following types of hedging instruments and accounts for the derivative as follows:
Fair value hedge: A hedge of a recognized asset or liability or an unrecognized firm commitment is declared as a fair value hedge. For fair value hedges, both the effective and ineffective portions of the changes in the fair value of the derivative, along with the gain or loss on the hedged item that is attributable to the hedged risk, are recorded in earnings and reported in the consolidated statements of income on the same line as the hedged item.
Cash flow hedge: A hedge of a forecastedforecast transaction or of the variability of cash flows to be received or paid related to a recognized asset or liability is declared as a cash flow hedge. The effective portion of the change in the fair value of a derivative that is declared as a cash flow hedge is recorded in accumulated other comprehensive income. When the hedged item impacts the income statement, the gain or loss included in accumulated other comprehensive income is reported on the same line in the consolidated statements of income as the hedged item. In addition, both the fair value of changes excluded from the company'sCompany’s effectiveness assessments and the ineffective portion of the changes in the fair value of derivatives used as cash flow hedges are reported in selling, general and administrative expenses in the consolidated statements of income.operations.
The companyCompany formally documents its hedge relationships, including identification of the hedging instruments and the hedged items, as well as its risk management objectives and strategies for undertaking the hedge transaction. Derivatives are recorded in the consolidated balance sheets at fair value in other assets and other liabilities. This process includes linking derivatives that are designated as hedges of specific forecastedforecast transactions. The companyCompany also formally assesses, both at inception and at least quarterly thereafter, whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in either the fair value or cash flows of the hedged item. If it is determined that a derivative ceases to be a highly effective hedge, or if the anticipated transaction is no longer likely to occur, the companyCompany discontinues hedge accounting, and any deferred gains or losses are recorded in selling, general and administrative expenses. Amounts related to terminated interest rate swaps are deferred and amortized as an adjustment to interest expense over the original period of interest exposure, provided the designated liability continues to exist or is probable of occurring.
Revenue recognition: The companyCompany recognizes revenuesrevenue when all of the following are satisfied: persuasive evidence of an arrangement exists, the price is fixed or determinable, collectibility is reasonably assured and deliverytitle has occurredpassed or services have been rendered. In most instances, this occurs at the
time thatTypically, title passes at time of shipment,
32
FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ in millions, except per share data) — (Continued)
however occasionally title passes later or earlier than shipment due to the customer based on the respective sales agreement.contracts or letter of credit terms. Infrequently, a salesales contract qualifies for percentage of completion or for multiple-element accounting. Sales
accounted for under thisFor percentage of completion revenues, the Company utilizes thecost-to-cost method were immaterial forand the three-year period ended
December 31, 2003.contract payments are received as progress payments as costs are incurred or based on installation and performance milestones. At the inception of a sales-type lease, the Company records the product sales price and related costs and expenses of the sale. Financing revenues are included in income over the life of the lease. Management believes that all relevant criteria and conditions are considered when recognizing revenues.
Product shipping costs: Product shipping costs are expensed as incurred and are included in cost of sales.
Income (loss) per share: Basic net income per share is calculated using income available to common shareholders (net income) divided by the weighted average number of common shares outstanding during the year. Diluted net income per share is calculated in the same manner except that the denominator is increased to include the weighted number of additional shares that would have been outstanding had dilutive stock option shares been actually issued. The companyCompany uses the treasury stock method to calculate dilutive shares. See Note NO for the calculation of basic and diluted net income per share.
28
FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE B --— INVENTORIES
Inventories at December 31 are summarized as follows:
| 2005 | 2004 | |||||||
| Finished goods | $ | 40.2 | $ | 43.5 | ||||
| Work in process | 59.3 | 49.8 | ||||||
| Raw materials | 58.5 | 59.8 | ||||||
| Total inventories | $ | 158.0 | $ | 153.1 | ||||
If the companyCompany had used thefirst-in, first-out cost method exclusively, which approximates replacement cost, inventories would have aggregated $188,377,000$170.7 million and $192,342,000$163.1 million at December 31, 20032005 and 2002,2004, respectively.
NOTE C --— PROPERTIES AND EQUIPMENT
A comparative summary of properties
Properties and equipment at December 31 isare summarized as follows:
| 2005 | 2004 | |||||||
| Land | $ | 8.0 | $ | 9.2 | ||||
| Buildings and improvements | 54.2 | 55.0 | ||||||
| Machinery and equipment | 224.8 | 225.4 | ||||||
| Accumulated depreciation | (194.2 | ) | (188.8 | ) | ||||
| Total properties and equipment | $ | 92.8 | $ | 100.8 | ||||
NOTE D --— LEASE FINANCING AND OTHER RECEIVABLES
As an added service to its customers, the companyCompany is engaged in financial services activities. These activities primarily consist of providing long-term financing for certain U.S.US customers purchasing vehicle-based products from the company'sCompany’s Environmental Products and Fire Rescue groups. A substantial portion of these receivables is due from municipalities and volunteer fire departments. Financing is provided through
33
FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ in millions, except per share data) — (Continued)
sales-type lease contracts with terms that generally range from one to ten years.
At the inception of the lease, the company records the product sales price
and related costs and expenses of the sale. Financing revenues are included in
income over the life of the lease. The amounts recorded as lease financing receivables represent amounts equivalent to normal selling prices less subsequent customer payments.
Leases past due more than 120 days are evaluated and a determination made whether or not to place the lease in a non-accrual status based upon customer payment history and other relevant information at the time of the evaluation.
Lease financing and other receivables will become due as follows: $80,881,000 in 2004, $38,158,000 in 2005, $27,962,000$61.8 million in 2006, $21,354,000$28.5 million in 2007, $17,091,000$20.8 million in 2008, $17.5 million in 2009, $13.8 million in 2010 and $47,161,000$30.7 million thereafter. At December 31, 20032005 and 2002,2004, unearned finance revenue on these leases aggregated $32,055,000$20.8 million and $35,561,000,$24.5 million, respectively.
29
FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE E --— DEBT
Short-term borrowings at December 31 consisted of the following:
Of
| 2005 | 2004 | |||||||
| Revolving Credit Facility | $ | $ | 45.0 | |||||
| Other foreign lines of credit | 6.6 | 7.6 | ||||||
| Total short-term borrowings | 6.6 | 52.6 | ||||||
| Less short-term financial services activities — borrowings | (45.0 | ) | ||||||
| Net short-term borrowings | $ | 6.6 | $ | 7.6 | ||||
On February 3, 2006, the above amounts, $36,347,000 and $137,022,000 are classified as
financial services activities borrowings at December 31, 2003 and 2002,
respectively.
In June 2003, the companyCompany entered into a $250,000,000 unsecured revolving
credit facility maturing in 2006 with a syndicatean Amended and Restated Credit Agreement (“Amended Credit Agreement”) and terminated the Revolving Credit Facility. The Amended Credit Agreement provides for borrowings of banks. The facility
replaced an existing $300,000,000 commercial paper backup credit facility. At
Decemberup to $110.0 million and matures March 31, 2003, $75,000,000 was outstanding under this agreement.2009. Borrowings under the facilityAmended Credit Agreement bear interest, at a variable rate ofthe Company’s option, at either the Base Rate or LIBOR, plus .83% as ofan applicable margin. The applicable margin ranges from .25% to 1.00% for Base Rate borrowings and 1.50% to 2.25% for LIBOR borrowings depending on the Company’s total indebtedness to capital ratio.
The Amended Credit Agreement contains certain financial covenants for each fiscal quarter ending on or after December 31, 2003. The facility includes covenants relating to a maximum
debt-to-capitalization ratio, minimum net worth and minimum2005 that include maintaining an interest coverage ratio.ratio of not less than 2.5 through September 30, 2006 and 3.0 thereafter. The companyCompany has beenthe right to request, subject to certain conditions, an increase of up to $15 million in compliance with all quarterly covenants during
2003. Commitment fees paid on unused revolving credit facilities during the three years ended December 31, 2003 were insignificant.aggregate commitment under the Amended Credit Agreement. The Company has no borrowings outstanding under the Amended Credit Agreement.
Weighted average interest rates on short-term borrowings were 2.17%7.25% and 1.75%3.28% at December 31, 20032005 and 2002,2004, respectively. 30
The 7.25% rate shown for December 31, 2005 was associated with a small short-notice draw at a foreign subsidiary and is not reflective of the Company’s usual borrowing rates.
34
FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Long-term borrowings
($ in millions, except per share data) — (Continued)
Long-Term Borrowings at December 31 consisted of the following:
Of the above amounts, $165,000,000 and $65,000,000 are classified as financial services activities borrowings are $178.4 million at December 31, 20032004. Also at December 31, 2004, short-term borrowings were $45.0 million and 2002,
respectively.
In June 2003, the companylong-term borrowings were $133.4 million.
| 2005 | 2004 | ||||||||
| 6.79% Unsecured Private Placement note due in annual installments of $10.0 million due 2007-2011 | $ | 50.0 | $ | 50.0 | |||||
| 6.37% Unsecured Private Placement note due in annual installments of $10.0 million due 2005-2008 | 30.0 | 40.0 | |||||||
| 6.60% Unsecured Private Placement note due in annual installments of $7.1 million due 2005-2011 | 42.9 | 50.0 | |||||||
| 4.93% Unsecured Private Placement note due in annual installments of $8.0 million due 2008-2012 | 40.0 | 40.0 | |||||||
| 5.24% Unsecured Private Placement note due 2012 | 60.0 | 60.0 | |||||||
| 5.49% Unsecured Private Placement note due 2006 | 65.0 | 65.0 | |||||||
| Unsecured Private Placement note, floating rate (5.57% and 3.59% at December 31, 2005 and 2004, respectively) due 2008-2013 | 50.0 | 50.0 | |||||||
| Loan Agreement (described below), due 2006-2017 | 91.4 | ||||||||
| Other | 2.0 | 3.4 | |||||||
| 431.3 | 358.4 | ||||||||
| Fair value of interest rate swaps | (6.9 | ) | (6.7 | ) | |||||
| Unamortized balance of terminated fair value interest rate swaps | 4.2 | 8.7 | |||||||
| 428.6 | 360.4 | ||||||||
| Less current maturities, excluding financial services activities | (66.0 | ) | (11.3 | ) | |||||
| Less financial services activities — borrowings | (158.9 | ) | (133.4 | ) | |||||
| Total long-term borrowings, net | $ | 203.7 | $ | 215.7 | |||||
Total long-term borrowings................................ $359,130,000 $344,544,000
============ ============
On March 24, 2005,E-One, Inc.(“E-One”), a wholly-owned subsidiary of Federal Signal Corporation, entered into an agreement with Bank of America Leasing & Capital, LLC (the “Loan Agreement”) with respect to a $50,000,000 private placement
agreementnonrecourse loan facility (the “Facility”).E-One’s indebtedness and other obligations under the Loan Agreement are payable out of certain customer leases of emergency equipment and other collateral as described in the Loan Agreement. On March 24, 2005,E-One borrowed $75 million under the Facility.E-One borrowed an additional $29.2 million on December 15, 2005. Under the Loan Agreement,E-One may borrow additional amounts under the Facility, at the discretion of the lender, in an amount equal to 95% of the net present value of any additional customer leases included under the Facility. As of December 31, 2005, $12.8 million in lease payments have been applied to reduce reliance on short-term debt.the Facility balance to $91.4 million.
The agreementLoan Agreement contains covenants and events of default that are ordinary and customary for similar credit facilities. At the election ofE-One, the Facility bears interest at a variablefixed rate or a floating LIBOR rate. The $91.4 million outstanding at December 31, 2005 in the Facility bore interest at a30-day floating LIBOR rate plus 1.35% (5.72% as of LIBOR plus 1.04%December 31, 2005). The obligations ofE-One under the Loan Agreement are nonrecourse toE-One and the Company, except with $20,000,000 maturingrespect to certain representations and warranties.E-One’s recourse obligations under the Loan Agreement are guaranteed by the Company.
In connection with the closing of the Loan Agreement, the Company utilized the proceeds from the initial funding of the Loan Agreement to repay approximately $63.0 million outstanding under its previous
35
FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ in millions, except per share data) — (Continued)
revolving credit facility, and the remainder of the proceeds were used by the Company for general corporate purposes.
Aggregate maturities of total borrowings amount to approximately $111.1 million in 2006, $46.6 million in 2007, $71.2 million in 2008, $20,000,000$39.1 million in 2009, $56.5 million in 2010 and $10,000,000 in 2013.
Aggregate maturities of long-term debt amount to approximately $25,151,000
in 2004, $17,582,000 in 2005, $82,143,000 in 2006, $27,143,000 in 2007,
$55,143,000 in 2008 and $173,428,000$113.4 million thereafter. The fair values of these borrowings aggregated $389,631,000$450.0 million and $356,367,000$412.9 million at December 31, 20032005 and 2002,2004, respectively. Included in 2006 maturities of $111.1 million are $38.5 million attributable to financial services borrowings.
For each of the above long-termPrivate Placement notes, significant covenants consist of a maximum debt-to-capitalizationdebt-to-capitalization ratio and minimum net worth. At December 31, 2003,2005, all of the company'sCompany’s retained earnings were free of any restrictions and the companyCompany was in compliance with the financial covenants of its debtand agreements.
At December 31, 20032005 and 2002,2004, deferred financing fees totaled $2,305,000total $1.2 and $1,327,000, respectively.$1.8 million, respectively, and are included in other deferred charges and assets on the balance sheet.
The companyCompany paid interest of $21,458,000$24.8 million in 2003, $20,796,0002005, $24.1 million in 20022004 and $26,097,000$21.3 million in 2001.2003. See Note H regarding the company'sCompany’s utilization of derivative financial instruments relating to outstanding debt.
31
FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE F --— INCOME TAXES
The provisions for income taxes for the three-year period ended December 31, 2005 consisted of the following:
| 2005 | 2004 | 2003 | |||||||||||
| Current: | |||||||||||||
| Federal | $ | 29.5 | $ | (30.0 | ) | $ | (6.4 | ) | |||||
| Foreign | 7.1 | 6.4 | 6.9 | ||||||||||
| State and local | 1.1 | .4 | .3 | ||||||||||
| 37.7 | (23.2 | ) | .8 | ||||||||||
| Deferred: | |||||||||||||
| Federal | (38.0 | ) | 19.3 | 7.4 | |||||||||
| Foreign | (.4 | ) | (.2 | ) | (.7 | ) | |||||||
| State and local | (.3 | ) | (.5 | ) | .2 | ||||||||
| (38.7 | ) | 18.6 | 6.9 | ||||||||||
| Total income taxes | $ | (1.0 | ) | $ | (4.6 | ) | $ | 7.7 | |||||
36
FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ in millions, except per share data) — (Continued)
Differences between the statutory federal income tax rate and the effective income tax rate for the three-year period ended December 31, 2005 are summarized below:
32
| 2005 | 2004 | 2003 | ||||||||||
| Statutory federal income tax rate | 35.0 | % | 35.0 | % | 35.0 | % | ||||||
| State income taxes, net of federal tax benefit | 1.7 | (.1 | ) | 1.5 | ||||||||
| Tax-exempt interest | (5.4 | ) | (56.8 | ) | (6.7 | ) | ||||||
| Benefits from shutdown of U.K. facility | 0.0 | 0.0 | (6.4 | ) | ||||||||
| Dividend repatriation | (5.5 | ) | 0.0 | 0.0 | ||||||||
| Strategy relating to sale of U.K. lighting business | (4.0 | ) | 0.0 | 0.0 | ||||||||
| Exports benefit | (1.7 | ) | (22.2 | ) | (2.3 | ) | ||||||
| Tax reserves | (17.2 | ) | (3.1 | ) | 0.0 | |||||||
| R&D tax credits | (1.3 | ) | (23.7 | ) | (2.0 | ) | ||||||
| Foreign tax effects | (2.9 | ) | (23.3 | ) | (1.7 | ) | ||||||
| Valuation allowances | 1.1 | 4.7 | 1.5 | |||||||||
| Other, net | (1.9 | ) | (2.9 | ) | (1.4 | ) | ||||||
| Effective income tax rate | (2.1 | )% | (92.4 | )% | 17.5 | % | ||||||
The Company’s effective tax rate of (2.1)% reflects a benefit of $6.0 million primarily due to a reduction in reserves in the second quarter associated with the completion of an audit of the Company’s US tax returns which encompassed the years 1999 through 2003.
On October 22, 2004, the American Jobs Creation Act was signed into law. One provision of the legislation allowed certain repatriated foreign earnings to be taxed at 5.25%, provided certain provisions are met. During 2005, the Company recognized a tax benefit of approximately $2.5 million related to the repatriation of foreign earnings under the Act. The benefit was realized because a portion of the repatriated earnings had previously been reserved at higher tax rates.
37
FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
($ in millions, except per share data) — (Continued)
Deferred income tax assets and liabilities at December 31 are summarized as follows:
| 2005 | 2004 | |||||||||
| Deferred tax assets: | ||||||||||
| Accrued expenses | $ | 12.4 | $ | 11.6 | ||||||
| Net operating loss, alternative minimum tax, research and development, and foreign tax credit carry forwards | 20.8 | 11.1 | ||||||||
| Other — primarily minimum pension liability | 8.9 | |||||||||
| Gross deferred tax assets | 42.1 | 22.7 | ||||||||
| Valuation allowance | (3.4 | ) | (5.0 | ) | ||||||
| Total deferred tax assets | 38.7 | 17.7 | ||||||||
| Deferred tax liabilities: | ||||||||||
| Depreciation and amortization | (45.8 | ) | (47.6 | ) | ||||||
| Revenue recognition | (2.7 | ) | (2.9 | ) | ||||||
| Pension liabilities | (3.5 | ) | (6.6 | ) | ||||||
| Other | 0.0 | (7.2 | ) | |||||||
| Undistributed earnings of non-US subsidiary | (.2 | ) | (5.6 | ) | ||||||
| Gross deferred tax liabilities | (52.2 | ) | (69.9 | ) | ||||||
| Net deferred tax liability | $ | (13.5 | ) | $ | (52.2 | ) | ||||
Federal and state income taxes have not been provided on accumulated undistributed earnings of certain foreign subsidiaries aggregating approximately $65.0 million at December 31, 2005, as such earnings have been reinvested in the business. The majoritydetermination of the amount of the unrecognized deferred tax liability related to the undistributed earnings is not practicable.
The deferred tax asset for tax loss carryforwards includes state net operating loss carryforwards of subsidiaries$1.2 million, which will begin to expire in 2006; foreign net operating loss carryforwards of $2.3 million of which $1.7 million has an indefinite life. The deferred tax asset for tax credit carryforwards includes US research tax credit carryforwards of $3.8 million, which will begin to expire in 2022, US foreign tax credits of $9.0 million, which will begin to expire in 2013 and US alternative minimum tax credit carryforwards of $4.5 million with no expiration.
Valuation allowances totaling $3.4 million have no expiration dates.been established and include $1.1 million related to state net operating loss carryforwards and $2.3 million related to the foreign net operating loss carryforwards.
The net deferred tax liability at December 31 is classified in the balance sheet as follows:
| 2005 | 2004 | |||||||
| Current net deferred tax assets | $ | 12.5 | $ | 4.4 | ||||
| Long-term net deferred tax liability | (26.0 | ) | (56.6 | ) | ||||
| $ | (13.5 | ) | $ | (52.2 | ) | |||
The companyCompany paid income taxes of $9,662,000$9.8 million in 2003, $8,662,0002005, $6.3 million in 20022004 and $15,193,000$9.7 million in 2001.2003.
38
FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ in millions, except per share data) — (Continued)
Income from continuing operations before taxes for the three-year period ended December 31, 2005 consisted of the following:
| 2005 | 2004 | 2003 | ||||||||||
| United States | $ | 20.4 | $ | (14.0 | ) | $ | 26.1 | |||||
| Non-US | 25.9 | 18.9 | 18.1 | |||||||||
| $ | 46.3 | $ | 4.9 | $ | 44.2 | |||||||
NOTE G --— POSTRETIREMENT BENEFITS
The companyCompany and its subsidiaries sponsor a number of defined benefit retirement plans in the US covering certain of its salaried employees and hourly employees
not covered by plans under collective bargaining agreements.employees. Benefits under these plans are primarily based on final average compensation and years of service as defined within the provisions of the individual plans. The companyCompany also participates in several multiemployer retirement plans that provide defined benefits to employees under certain collective bargaining agreements.
The companyCompany uses December 31 and September 30 measurement dates for its U.S.US and non-U.S.non-US benefit plans, respectively.
33
FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
U.S. BENEFIT PLANS
The components of net periodic pension expense (credit)for the three-year period ended December 31, 2005 are summarized as follows:
| US Benefit Plans | Non-US Benefit Plan | ||||||||||||||||||||||||
| 2005 | 2004 | 2003 | 2005 | 2004 | 2003 | ||||||||||||||||||||
| Company-sponsored plans | |||||||||||||||||||||||||
| Service cost | $ | 4.8 | $ | 4.6 | $ | 4.1 | $ | .2 | $ | .2 | $ | .2 | |||||||||||||
| Interest cost | 8.1 | 7.7 | 7.1 | 2.8 | 2.6 | 2.2 | |||||||||||||||||||
| Expected return on plan assets | (8.8 | ) | (8.2 | ) | (7.8 | ) | (3.6 | ) | (3.2 | ) | (2.7 | ) | |||||||||||||
| Amortization of transition amount | (.2 | ) | (.2 | ) | (.2 | ) | |||||||||||||||||||
| Other | 1.9 | 1.6 | .9 | .7 | .9 | .8 | |||||||||||||||||||
| 5.8 | 5.5 | 4.1 | .1 | .5 | .5 | ||||||||||||||||||||
| Multiemployer plans | .3 | .2 | .2 | ||||||||||||||||||||||
| Net periodic pension expense | $ | 6.1 | $ | 5.7 | $ | 4.3 | $ | .1 | $ | .5 | $ | .5 | |||||||||||||
The following table summarizes the weighted-average assumptions used in determining pension costs for the three-year period ended December 31, 2003 and
the company's assumptions2005:
| US Benefit Plans | Non-US Benefit Plan | |||||||||||||||||||||||
| 2005 | 2004 | 2003 | 2005 | 2004 | 2003 | |||||||||||||||||||
| Discount rate | 6.00 | % | 6.25 | % | 6.75 | % | 5.75 | % | 5.50 | % | 5.50 | % | ||||||||||||
| Rate of increase in compensation levels | 3.50 | % | 3.50 | % | 3.50 | % | NA* | NA* | 2.50 | % | ||||||||||||||
| Expected long term rate of return on plan assets | 9.00 | % | 9.00 | % | 9.00 | % | 8.30 | % | 8.30 | % | 8.00 | % | ||||||||||||
| * | Non-US plan benefits are no longer adjusted for 39 FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ($ in millions, except per share data) — (Continued) The following summarizes the changes in the projected benefit obligation and plan assets, the funded status of the
The following table summarizes the weighted-average assumptions used in determining benefit obligations as of December 31,
40 FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ($ in millions, except per share data) — (Continued) The following table summarizes the
The investment strategy for the As of December 31, Plan assets for the non-US benefit plans consist principally of a diversified portfolio of equity securities, U.K. government obligations and fixed interest securities. The The
The Company also sponsors a number of defined contribution pension plans covering a majority of its employees. Participation in the plans is at each 41 FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ($ in millions, except per share data) — (Continued) The cost of these plans, including the plans of companies acquired during the three-year period ended December 31, Prior to September 30, 2003, the In December 2003, the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the NOTE H All derivative financial instruments are reported on the balance sheet at their respective fair values. Changes in fair value are recognized either in earnings or equity, depending on the nature of the underlying exposure being hedged and how effective a derivative is at offsetting price movements in the underlying exposure. All of the To manage interest costs, the At December 31, 42 FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ($ in millions, except per share data) — (Continued) The fair values of interest rate swaps are based on quotes from financial institutions. The following table summarizes the
In 2004 and 2003, From time to time the Company designates foreign currency forward exchange contracts as fair value hedges to protect against the variability in exchange rates on short-term intercompany borrowings and firm commitments denominated in foreign currencies. The The following table summarizes the
The NOTE I The The plan approved in 1996 and amended in 1999 and 2003 authorized the grant of up to 43 FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ($ in millions, except per share data) — (Continued) The plan approved in Stock options are primarily granted at the fair market value of the shares on the date of Stock option activity for the three-year period ended December 31,
The following table summarizes information concerning stock options outstanding
Stock award shares are granted to employees at no cost. 44 FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ($ in millions, except per share data) — (Continued) respective vesting
Under the 1988 plan, no benefit shares or units were available for future grant during the three-year period ending December 31, The fair value of each option grant was estimated using the Black-Scholes option pricing model with the following assumptions:
The following table illustrates the effect on net income (loss) and earnings (loss) per share for the three-year period ended December 31, 2005 if the Company had applied fair value recognition provisions of Statement of Financial Accounting Standards (“SFAS”) No. 123, “Accounting for Stock-Based Compensation”,to all stock-based employee compensation. For purposes of pro forma disclosure, the estimated fair value of the options using a Black-Scholes option pricing model is amortized to expense over the option’s vesting period.
The intent of the Black-Scholes option valuation model is to provide estimates of fair values of traded options that have no vesting restrictions and are fully transferable. Option valuation models require the use of highly subjective assumptions including expected stock price volatility. The Company has utilized the Black-Scholes method to produce the pro forma disclosures required under SFAS Nos. 123 and 148. In management’s opinion, existing valuation models do not necessarily provide a reliable single measure of the fair value of its employee stock options because the Company’s employee stock options have significantly different characteristics from those of traded options and the assumptions used in applying option valuation methodologies, including the Black-Scholes model, are highly subjective. 45 FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ($ in millions, except per share data) — (Continued) NOTE J The The Company’s board of directors is also authorized to provide for the issuance of .8 million shares of preference stock at a par value of $1 In July 1998, the NOTE K The following table presents the operating results of the Company’s discontinued operations for the three-year period ended December 31,
46 FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ($ in millions, except per share data) — (Continued) In December 2005, the Company determined that its investment in the refuse business, operating under the Leach brand name, is no longer strategic. The assets of this business are held for sale as of December 31, 2005 and The Company initiated a
This restructuring was completed in the The
In December 2005, the In conjunction with the strategic restructuring initiatives announced in June 2004 (see Note L), the Company determined that its investments in Justrite Manufacturing, L.L.C. (“Justrite”), Technical Tooling, Inc. (“TTI”) and Plastisol B.V. Holdings (“Plastisol”) were no longer strategic investments and divested its interests. In December 2004, the Company sold Justrite for $40.1 million in cash resulting in an $11.1 million gain on disposal of discontinued operations for the year ended December 31, 2004. Justrite manufactured hazardous liquid containment products including safety cans and cabinets for flammables and corrosives, specialty containers and drum safety equipment. Revenues amounted to $39.7 million and $35.9 million for the years ended December 31, 2004 and 2003, respectively. Income before income taxes totaled $5.0 million 47 FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ($ in millions, except per share data) — (Continued) and $3.5 million for the years ended December 31, 2004 and 2003, respectively. Sale proceeds were used to repay debt. In October 2004, the Company divested TTI for $6.5 million in cash resulting in a $1.4 million gain on disposal of discontinued operations for the year ended December 31, 2004. TTI manufactured a full line of can body-making precision tooling for beverage can producers worldwide. Revenues were $6.5 million and $6.6 million for the years ended December 31, 2004 and 2003, respectively. Operating income before income taxes totaled $1.1 million and $1.0 million for the years ended December 31, 2004 and 2003, respectively. Sale proceeds were used to repay debt. In July 2004, the Company sold its 54% majority ownership interest in Plastisol to the minority partner for $2.5 million in cash and a $.4 million note receivable resulting in a $5.2 million loss on disposal of discontinued operations for the year ended December 31, 2004. The Company acquired its ownership interest in 2001. Plastisol manufactured glass fiber reinforced polyester fire truck cabs and bodies mainly for European and Asian markets. Revenues totaled $7.7 million and $13.6 million for the years ended December 31, 2004 and 2003, respectively. Operating losses before income taxes totaled $.1 million and $.7 million for the years ended December 31, 2004 and 2003, respectively. Sale proceeds were used to repay debt. In April 2003, the Company completed the sale of the Sign Group to a third party for cash of $7.5 million and a $4.0 million note receivable resulting in a $.4 million loss on disposal of discontinued operations for the year ended December 31, 2003. The Company incurred an additional $.6 million loss on disposal of discontinued operations for the year ended December 31, 2004, reflecting the resolution of a contingent liability. The Sign Group manufactured illuminated, nonilluminated and electronic advertising sign displays primarily for commercial and industrial markets and contracted to provide maintenance services for the signs it manufactured as well as signs manufactured by others. Revenue for the year ended December 31, 2003 was $12.8 million. The Sign Group’s operations before income taxes were break even for the year ended December 31, 2003. The Company retained certain assets and liabilities in conjunction with the sale. Sale proceeds were used to repay debt. NOTE L
In 2004, the Company announced the implementation of a number of initiatives including restructuring of certain of its operations and the dispositions of certain assets. The 2004 restructuring initiatives focused on plant consolidations and product rationalization in order to streamline the Company’s operations; the actions taken were aimed at improving the profitability of the fire rescue and European tooling businesses as well as improving the Company’s overhead cost structure. The asset dispositions consisted of asset sales of certain operations the Company considered no longer integral to the long-term strategy of its business. In 2003, the Company also effected two plant consolidations to reduce costs of the Company’s industrial warning and communications business and US tooling business. 48 FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ($ in millions, except per share data) — (Continued) The following table summarizes the 2004 restructuring actions taken, and the pre-tax charges to expense incurred in 2004 and 2005:
In 2003 total restructuring expense was $4.8 million of which $2.9 million were cash payments and $1.9 million were non-cash activities. All payments were made in 2003. The following presents an analysis of the restructuring reserves for the years ended December 31, 2004 and 2005:
Severance charges in 2005 consist of termination and benefit costs for direct manufacturing employees involuntarily terminated prior to December 31, 2005. There were no asset impairment charges in 2005. Severance charges in 2004 consisted of termination and benefit costs for direct manufacturing employees involuntarily terminated prior to December 31, 2004. The costs of retention bonuses for employees not severed as of December 31, 2004 were recognized ratably over the subsequent service period. Asset impairment charges included $2.5 million of net realizable value adjustments on real property and manufacturing equipment. 49 FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ($ in millions, except per share data) — (Continued)
The Company completed two significant asset dispositions in 2005. In May 2005, the Company sold the land and buildings of the refuse truck body plant in Oshkosh, Wisconsin for proceeds of $5.8 million and recorded a pre-tax gain of $1.0 million. In July 2005, the Company sold two product lines in Newcastle, England for proceeds of $11.9 million and recorded a pre-tax gain of $6.7 million. The Company also sold three other properties for total proceeds of $4.3 million and total pre-tax gains of $1.3 million. The Company completed three asset dispositions during 2004. First, the Company sold its 30% minority share in Safety Storage, Inc. (“SSI”) to the majority shareholder in June 2004 for a nominal amount and, in connection therewith, recorded a $2.9 million loss in the second quarter of 2004. Under the terms of the transaction, the Company was released from any future liability arising from a judgment awarded to a third party creditor of SSI. The non-operating loss is included in other expense for the year ended December 31, 2004. In 2004, the Company also divested a modest amount of operating assets located at a manufacturing facility in Kelowna, British Columbia. The net assets, primarily consisting of inventories and manufacturing equipment and property, were sold by the Company for approximately net book value. In 2004 the Company sold approximately $9.6 million of industrial leasing assets to an independent party. The assets represented amounts due from industrial customers of the Company; the Company had earlier indicated that it would no longer extend financing to industrial customers. The Company received cash for the sale for an amount approximating its net book value at the time of sale. Proceeds from these sales were used to pay down debt. NOTE M — LEGAL PROCEEDINGS The The 50 FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ($ in NOTE The Information regarding the Company’s discontinued operations is included in Note K — Discontinued Operations. The segment information included herein has been reclassified to reflect such discontinued operations. Environmental Products Fire Rescue Safety Products Tool Net sales by operating segment reflect sales of products and services and financial revenues to external customers, as reported in the Revenues attributed to customers located outside of the The Company invests in research to support development of new products and the enhancement of existing products and services. The Company believes this investment is important to maintain and/or enhance its leadership position in key markets. Expenditures for research and development by the Company were approximately $19.9 million in 2005, $27.6 million in 2004 and $32.5 million in 2003. 51 FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ($ in millions, except per share data) — (Continued) A summary of the
52 FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ($ in millions, except per share data) — (Continued)
The following table presents financial revenues (included in net sales) by segment
Due to the nature of the 53 FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ($ in millions, except per share data) — (Continued) The segment information provided below is classified based on geographic location of the
NOTE The following table summarizes the information used in computing basic and diluted income per share for each of the
Diluted income (loss) per share is calculated by dividing net income (loss) by the weighted average common shares outstanding plus additional common shares that would have been outstanding assuming the exercise ofin-the-money stock options. As of December 31, 2005 and 2004, .0 million and .1 million employee stock options, respectively, were considered potential dilutive common shares. These stock options, however, are antidilutive due to the net loss for the years ended December 31, 2005 and 2004. As a result, they are excluded from the denominator for the diluted income per share calculation. There are total options outstanding of 2.7 million, 2.6 million and 2.4 million as of December 31, 2005, 2004 and 2003, respectively. NOTE The 54 FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ($ in 2006, At December 31, The Changes in the
The The The following table summarizes the carrying amounts and fair values of the Company’s financial instruments at December 31, 2005:
55 FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ($ in millions, except per share data) — (Continued) NOTE In The
Under SFAS No. 142, the The components of the
Other intangible assets are included in the consolidated balance sheets within “other deferred charges and assets”. Amortization expense for the year ended December 31, 2005, 2004 and 2003 totaled NOTE In 56 FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ($ in millions, except per share data) — (Continued) reviewed the In December NOTE S — SELECTED QUARTERLY DATA (UNAUDITED) Effective January 1, 2004, the Company began reporting its interim quarterly periods on a13-week basis ending on a Saturday with the fiscal year ending on December 31. For convenience purposes, the Company uses “March 31”, “June 30”, “September 30” and “December 31” to refer to its results of operations for the quarterly periods ended. In 2005, the Company’s interim quarterly periods ended April 2, July 2, October 1 and December 31 The following is a summary of the quarterly results of operations, including income per share, for the Company for the quarterly periods of fiscal 2005 and 2004. Restatements of previously reported amounts represent discontinued operations as described in Footnote K.
57 FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ($ in millions, except per share data) — (Continued) The
The Company recorded a $10.6 million pre-tax charge in the fourth quarter of The Company recorded a $6.7 million pre-tax gain in the The Company recorded $34.1 million of after-tax impairment charges, in the fourth quarter of 2005 in order to state the assets of the Leach business, which is a discontinued operation, at fair value. 58
None.
The Company carried out an evaluation, under the supervision and
The Company’s management is responsible for establishing and maintaining an adequate system of internal control over financial reporting, as defined in the Exchange Act Rule 13a-15(f). Management conducted an assessment of the Company’s internal control over financial reporting based on the framework established by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control — Integrated Framework. Based on the assessment, management concluded that, as of December 31,
There was no significant change in the Company’s internal control over financial reporting that occurred during the Item 9B. Other Information. In December 2005, the management of On February 21, 2006, the Company publicly announced its plan to exit the Refuse Business and, on such date, the Company first informed its employees of the plan and that the plan may involve involuntary terminations. The employees were also informed of the benefits that employees may be entitled to receive if they are terminated as part of the plan. The Company is actively pursuing a sale of the Refuse Business as a going concern and has held discussions with potentially interested parties. Note K — Discontinued Operations in this Form 10-K for the year ended December 31, 2005 denotes impairment charges that were made as a result of stating the assets at fair value as of December 31, 2005. However, the Company is unable in good faith to make a determination at this time of the estimated amount or range of amounts to be incurred for the benefits that employees may be entitled to receive from the Company or other future cash expenditures or charges associated with its plan to exit the Refuse Business. As permitted by Item 2.05 of Form 8-K, the Company will file a Report on Form 8-K within four business days after the Company’s determination of such amounts. 59 PART III
The information under the caption The following is a list of the
These officers hold office until the next annual meeting of the Board of Directors following their election and until their successors There are no family relationships among any of the foregoing executive officers. The Company has adopted a code of ethics that applies to its principal executive officer, principal financial officer and principal accounting officer. This code of ethics and the Company’s corporate governance policies are posted on the Company’s website at http://federalsignal.com. The Company intends to satisfy its disclosure requirements regarding amendments to or waivers from its code of ethics by posting such information 60 and Compensation and Benefits Committee of the
The information contained under the
The information contained under the
The information contained under the
The information under the caption PART IV
(a)1. Financial Statements The following consolidated financial statements of Federal Signal Corporation and Subsidiaries contained under Item 8 of this Form 10-K are incorporated herein by reference:
2. Financial Statement Schedules The following consolidated financial statement schedule of Federal Signal Corporation and Subsidiaries, for the three years ended December 31,
All other schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions or are inapplicable, and therefore, have been omitted. 3. Exhibits See Exhibit Index. 61 Signatures Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
February 22, 2006 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below, as of February 21, 2006, by the following persons on behalf of the Company and in the capacities indicated.
62 SCHEDULE II FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES Valuation and Qualifying Accounts For the Years Ended December 31, 2005, 2004 and 2003
Warranty liability: The changes in the Company’s warranty liabilities are analyzed in Note P — Commitments, Guarantees and Fair Values of Financial Instruments 63 EXHIBIT INDEX The following exhibits, other than those incorporated by reference, have been included in the
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