UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
þ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 20082010
Commission File Number 1-6003
FEDERAL SIGNAL CORPORATION
(Exact name of the Company as specified in its charter)
| | | |
| Delaware | | 36-1063330 |
(State or other jurisdiction of
incorporation or organization) | | (I.R.S. Employer
Identification No.) |
1415 West 22nd Street,
Oak Brook, Illinois | | 60523
(Zip Code) |
| (Address of principal executive offices) | | |
The Company’s telephone number, including area code
(630) 954-2000
Securities registered pursuant to Section 12(b) 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 o No þ
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 Company (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 Company was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 ofregulation S-T (§ 232.405 of this chapter) during the preceeding 12 months (or shorter period that the registrant was required to submit and post such files). Yes o No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 ofRegulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of the Company’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of thisForm 10-K or any amendment to thisForm 10-K. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” inRule 12b-2 of the Exchange Act. (Check one):
| | | | | | | |
Large accelerated filer þo | | Accelerated filer oþ | | Non-accelerated filer o
(Do not check if a smaller reporting company) | | Smaller reporting company o |
Indicate by check mark if the registrant is a shell company, inRule 12b-212 b-2 of the Exchange Act. Yes o No þ
State the aggregate market value of voting stock held by nonaffiliates of the Company as of June 30, 2008:2010: Common stock, $1.00 par value — $554,199,456$371,834,220
Indicate the number of shares outstanding of each of the Company’s classes of common stock, as of January 31, 2009:February 28, 2011: Common stock, $1.00 par value — 47,371,12262,133,115 shares
Documents Incorporated By Reference
Portions of the definitive proxy statement for the 20092011 Annual Meeting of Shareholders are incorporated by reference in Part III.
FEDERAL SIGNAL CORPORATION
Index toForm 10-K
ThisForm 10-K and other reports filed by Federal Signal Corporation and subsidiaries (“the Company”) with the Securities and Exchange Commission and comments made by management may 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 identify forward-looking statements within the meaning of the Private 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.guarantees of future events or results. 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, 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, municipal, government and commercial markets,markets; restrictive debt covenants; impairment of goodwill and other indefinite lived intangible assets; ability to use net operating loss (“NOL”) carryovers to reduce future tax payments; availability of credit and third-party financing for customers, volatility in securities tradingcustomers; technological advances by competitors; the ability of the Company to expand into new geographic markets economic downturns, risks associated with suppliers, dealer and other partner alliances,to anticipate and meet customer demands for new products and product enhancements; domestic and foreign governmental policy change; changes in cost competitiveness including those resulting from foreign currency movements, technological advancesmovements; increased competition and pricing pressures in the markets served by competitors,the Company; retention of key employees; volatility in securities trading markets; economic downturns; increased warranty and product liability expenses and client service interruption; an ability to expand our business through acquisitions, our ability to finance acquisitions or successfully integrate acquired companies; unknown liabilities assumed in connection with acquisitions; unforeseen developments in contingencies such as litigation; protection and validity of patent and other intellectual property rights; the Company’s ability to achieve expected savings from integration, synergy and other cost-control initiatives; compliance with environmental and safety regulations, restrictive debt covenants,regulations; disruptions in the supply of parts or components from sole source suppliers and subcontractors, retention of key employeessubcontractors; risks associated with suppliers, dealer and other partner alliances; increased competition and pricing pressures in the markets served by the Company; disruptions within our dealer market; risks associated with work stoppages and other labor relations matters; restructuring and impairment charges as we continue to evaluate opportunities to restructure our business in an effort to optimize the cost structure; 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 thisthe Company’s Annual Report onForm 10-K.10-K,Form 10-Qs and other filings with the SEC. 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 its 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 thisForm 10-K.
Explanatory Note
In thisForm 10-K, we are restating our unaudited selected quarterly financial data for the first three quarters of 2010. We have not filed an amendment to our previously issued quarters. These prior interim period adjustments individually and in the aggregate are not material to the financial results for previously issued interim financial data in 2010. For more detailed information about the restatement, please see Note 19, “Summary of Quarterly Financial Information (unaudited)” in the accompanying Consolidated Financial Statements.
PART I
Federal Signal Corporation, founded in 1901, was reincorporated as a Delaware Corporationcorporation in 1969. The Company designs and manufactures a suite of products and integrated solutions for municipal, governmental, industrial and commercial customers. Federal Signal’s portfolio of products includes safety and security systems, vacuum loader vehicles, street sweepers, truck mounted aerial platforms, waterblasters, and waterblasters.technology and solutions for intelligent transportation systems. Federal Signal Corporation and its subsidiaries (referred to collectively as “the Company” or “Company” herein, unless context otherwise indicates) operatesoperate 20 manufacturing facilities in 21 plants in 96 countries around the world serving customers in approximately 100 countries in all regions of the world.
Narrative Description of Business
ProductsEffective June 6, 2010, the Company reorganized its segments to better align the Company’s intelligent transportation and public safety businesses for growth. As a result of this reorganization, the Company created a new operating segment called Federal Signal Technologies Group (“FSTech”) that includes the vehicle classification software, automated license plate recognition and parking systems businesses from our Safety and Security Systems operating segment and the newly acquired businesses, Sirit and VESystems. The Safety and Security Systems operating segment retained the businesses that offer systems for campus and community alerting, emergency vehicles, first responder interoperable communications, industrial communications and command and municipal security.
As a result of this reorganization, products manufactured and services rendered by the Company are divided into threefour major operating segments: Federal Signal Technologies, Safety and Security Systems, Fire Rescue and Environmental Solutions. The individual operating companiesbusinesses are organized as such because they share certain characteristics, including technology, marketing, distribution and product application, which create long-term synergies.
Financial information (net sales, operating income (loss), depreciation and amortization, capital expenditures and identifiable assets) concerning the Company’s threefour operating segments as of December 31, 2010 and 2009, and for each of the three years in the period ended, December 31, 20082010 are included in Note 1516 to the Consolidated Financial Statements included under Item 8 of Part II of thisForm 10-K, and incorporated herein by reference. Information regarding the Company’s discontinued operations is included in Note 1213 to the Consolidated Financial Statements included under itemItem 8 of Part II of thisForm 10-K, and incorporated herein by reference.
Federal Signal Technologies Group
Our Federal Signal Technologies Group is a provider of technologies and solutions to the intelligent transportation systems and public safety markets and other applications. These products and solutions provide end users with the tools needed to automate data collection and analysis, transaction processing and asset tracking. FSTech provides technology platforms and services to customers in the areas of radio frequency identification systems (“RFID”), transaction processing vehicle classification, electronic toll collection, automated license plate recognition (“ALPR”), electronic vehicle registration, parking and access control, cashless payment solutions, congestion charging, traffic management, site security solutions and supply chain systems. Products are sold under
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PIPStm, Idris®, Sirittm and VESystemstm brand names. FSTech operates manufacturing facilities in North America and Europe.
Safety and Security Systems Group
Federal Signal Corporation’sOur Safety and Security Systems Group designs, manufacturesis a leading manufacturer and deployssupplier of comprehensive safety and security systems and products that help law enforcement, fire/fire rescue, and EMS, emergency operationsmedical services, campuses, military facilities and industrial plant/facility first responderssites use to protect people property and the environment.
property. Offerings include systems for automated license plate recognition, campus and community alerting, emergency vehicles, first responder interoperable communications, industrial communications, and command and municipal networked security and parking revenue and access control for municipal, governmental and industrial applications.security. Specific products include access control devices, lightbars and sirens, public warning sirens and public safety software and automated license plate recognition cameras.
software. Products are sold under the Federal Signaltm, Federal Signal VAMA Federal APD, Pauluhn, PIPS,tm, Target Tech® and Victortm brand names. The groupGroup operates manufacturing facilities in North America, Europe, and South Africa. Many
Segment results have been restated for all periods presented to exclude the operations of the group’s products are designedGroup’s China Wholly Owned Foreign Entity (“China WOFE”) business, which was reclassified as discontinued operations in accordance with various regulatory codes2010, and standardsthe Riverchase and meet agency approvals suchPauluhn businesses, which were reclassified as Underwriters Laboratory (UL), International Electrotechnical Commission (IEC)discontinued operations and American Bureau of Shipping (ABS).sold in 2010 and 2009, respectively.
Fire Rescue Group
TheOur Fire Rescue Group is the world leader in designinga leading manufacturer and manufacturingsupplier of sophisticated, vehicle-mounted, aerial platforms for fire fighting, rescue, electric utility and industrial uses. End customers include fire departments, industrial fire services, electric utilities, maintenance rental companies for applications such as fire fighting and rescue, transmission line maintenance, and installation and maintenance of wind turbines. The group’sGroup’s telescopic/articulated aerial platforms are designed in accordance with various regulatory codes and standards, such as European Norms (EN)(“EN”), National Fire Protection Association (NFPA)(“NFPA”) and American National Standards Institute (ANSI)(“ANSI”). In addition to equipment sales, the groupGroup sells parts, service and training as part of a complete offering to its customer base. The groupGroup manufactures in Finland and sells globally under the Bronto Skylift® brand name.
Segment results have been restated for all periods presented to exclude the operations of the group’sGroup’sE-ONE business which were reclassified as discontinued operations and sold in 2008.
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Environmental Solutions Group
TheOur Environmental Solutions Group manufacturesis a leading manufacturer and markets worldwidesupplier of a full range of street cleaningsweeper and vacuum loader vehiclestrucks and high-performance water blasting equipment. Products arewaterblasting equipment for municipal and industrial customers. We also manufacturedmanufacture products for the newer markets of hydro-excavation, glycol recovery and surface cleaning.cleaning for utility and industrial customers. Products are sold under the Elgin RAVO,®, Vactor®, Guzzler® and Jetstreamtm brand names. The groupGroup primarily manufactures its vehicles and equipment in the United States and Europe.States.
Under the Elgin brand name, the Company sells the leading U.S. 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 forpick-up.
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 water blastwaterblast equipment and accessories for commercial and industrial cleaning and maintenance operations. In addition to equipment sales, the groupGroup is increasingly engaged in the sale of parts and tooling, service and repair, equipment rentals and training as part of a complete offering to its customer base.
Segment results have been restated for all periods presented to exclude the operation of the Group’s China WOFE business, which was reclassified as discontinued operations in 2010, and the Ravo business, which was sold in 2009.
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Tool Group
In 2008, the Company sold the remaining businesses within the Tool Group, referred to collectively as “Die and Mold Operations”.Operations.” The results of the Die and Mold Operations are reported within discontinued operations for all periods presented.
Financial Services
The Company ceased entering into new financial services activities in 2008 and sold 92% of its municipal lease portfolio.portfolio during 2008. The operationsoperating results and gain recorded upon sale are reported within discontinued operations. At December 31, 2008,2010, the remaining leases and floor plan receivable balances, net of reserves, of $5.6$1.6 million were included on the balance sheet as Assets of Discontinued Operations.Operations, net.
Marketing and Distribution
The Federal Signal Technologies Group companies sell RFID, ALPR, and Back Office management systems and products to municipal and governmental tollway agencies and tollway system integrators. These systems, products and services are sold domestically through a combination of a direct sales force and independent agents. Internationally these systems, products and services are sold through a network of independent representatives. Parking products and systems are sold to municipal agencies, hospitals, universities and private parking operators through an independent network of 110 domestic and international distributors.
The Safety and Security Systems Group companies sell to industrial customers through approximately 2,000 wholesalers/distributors who are supported by Company sales personneland/or independent manufacturers’ representatives. Products are also sold to municipal and governmental customers through more than 9001,900 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. The Company also sells comprehensive integrated warning and interoperable communications and parking systems through a combination of a direct sales force and distributors.
The Fire Rescue and Environmental Solutions Groups use dealer networks and direct sales to service customers generally depending on the type and location of the customer. The Environmental Solutions direct sales channel concentrates on the industrial, utility and construction market segments while the dealer networks focus primarily on the municipal markets. The Company believes its national and global dealer networks for vehicles distinguishesdistinguish it from its competitors. Dealer representatives demonstrate the vehicles’ functionality and capability to customers and service the vehicles on a timely basis.
Customers and Backlog
Approximately 29%33%, 25%29% and 46%38% of the Company’s total 20082010 orders were to U.S. municipal and government customers, U.S. commercial and industrial customers, andnon-U.S. customers, respectively. No single customer accounted for 10% or more of the Company’s business.
The Company’s U.S. municipal and government customers depend on tax revenues to support spending. A sluggish industrial economy, therefore, will eventually impact a municipality’s revenue base as tax receipts decline
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due to higher levels of unemployment and declining profits. Additionally, a decline in housing prices may yield lower property tax receipts. During 2008,2010, the Company’s U.S. municipal and government orders declined 12%increased 2% from 2007,2009, compared to a 5% increase13% decrease in these orders in 20072009 as compared to 2006.
Orders2008, due to the global economic recession. The U.S. commercial and industrial segment relateorders increased 67% from 2009, compared to the energy industries, principally oil and gas production and coal mining,a decrease of 38% in these orders in 2009 compared to industrial contractors and rental companies and to parking operators.2008.
RoughlyApproximately 70% of orders tonon-U.S. customers flow to municipalities and governments while approximately 30% flow to industrial and commercial customers. TheNon-U.S. municipal and government segment is essentially similar to the U.S. municipal and government segment in that it is largely dependent on tax revenues to support spending. Of thenon-U.S. orders, the Company typically sells approximately 50%36% of its products intoin Europe, 16% in Canada, 15% intoin the Middle East and Africa, 12% in China and less than 10% in any other particular region.
The Company’s backlog totaled $301$216.8 million at December 31, 2008,2010, which averages to nearly fourthree months of shipments overall. Backlogs vary by groupGroup due to the nature of the Company’s products and buying patterns of its customers. Safety and Security Systems typically maintains an average backlog of two months of shipments,
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Environmental Solutions maintains an average backlog of three to four months of shipments, and Fire Rescue normally sixmaintains an average backlog of five months of shipments.shipments, and FSTech maintains a two to three month average backlog, excluding maintenance contracts that cover a period of more than one year.
Suppliers
The Company purchases a wide variety of raw materials from around the world for use in the manufacture of its products, although the majority of current purchases are from North American sources. To minimize the risks of availability, price and quality, risk, the Company is party to numerous strategic supplier arrangements. Although certain materials are obtained from either a single-source supplier or a limited number of suppliers, the Company has identified alternative sources to minimize the interruption toof its business in the event of supply problems.
Components critical to the production of the Company’s vehicles, such as engines and hydraulic systems, are purchased from a select number of suppliers. The Company also purchases raw and fabricated steel as well as commercial chassis with certain specifications from a few sources.
The Company believes it has adequate supplies or sources of availability of the raw materials 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.
Competition
Within FSTech, the RFID and Back Office product lines are recognized as leading innovators. They maintain a top tier leadership position amongst three to four major competitors and ancillary market participants depending on geography. The Advanced Imaging product line maintains a domestic market leadership position by capitalizing on product technical leadership and application innovation. The Parking product line competes in a crowded, competitive market and leverages its distribution network and flexible product offerings to compete as one of the top tier suppliers.
Within specific product categories and domestic markets, the Safety and Security Systems Group companies are among the leaders with three to four strong competitors and several additional ancillary market participants. The group’sGroup’s international market position varies from leader to ancillary participant depending on the geographic region and product line. Generally, competition is intense with all of the group’sGroup’s products, and purchase decisions are made based on competitive bidding, price, reputation, performance and servicing.
Within the Fire Rescue Group, Bronto Skylift is established as the global leader for aerial platforms used in fire fighting, rescue and industrial markets. Competitor offerings can include trailer mounted articulated aerials and traditional fire trucks with ladders. Bronto competes on product performance where it holds technological advantages in its designs, materials and production processes.
Within the Environmental Solutions Group, Elgin is recognized as the market leader among several domestic sweeper competitors and differentiates itself primarily on product performance. RAVO, the Company’s Dutch compact sweeper manufacturer, also competes on product performance through its vacuum technology and successfully leads in market share for mid-sized 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 a market leader in the in-plant cleaning segment of the U.S. waterblast industry, competing on product performance and rapid delivery.
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Research and Development
The information concerningCompany invests in research to support development of new products and the Company’senhancement of existing products and services. The Company believes this investment is important to maintainand/or enhance its leadership position in key markets. Expenditures for research and development activities includedby the Company were approximately $18.8 million in Note 15 of the Consolidated Financial Statements included under Item 8 of Part II of thisForm 10-K is incorporated herein by reference.2010, $19.0 million in 2009 and $20.9 million in 2008.
Patents and Trademarks
The Company 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 Company also owns a number of trademarks that it believes are important in connection with the identification of its products
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and associated goodwill with customers, but no material part of the Company’s business is dependent on such trademarks.
Employees
The Company employed over 3,300approximately 2,800 people in ongoing businesses at the close of 2008.2010. Approximately 32%28% of the Company’s domestic hourly workers were unionizedrepresented by unions at December 31, 2008.2010. The Company believes relations with its employees continue to be good.
Governmental Regulation of the Environment
The Company believes it substantially 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 20082010 attributable to compliance with such laws were not material. The Company believes that the overall impact of compliance with environmental regulations will not have a material adverse effect on its future operations.
Seasonality
Certain of the Company’sCompany businesses are susceptible to the influences of seasonal buying or delivery patterns.patterns causing lower sales typically in both the first and third calendar quarters as compared to other quarters. The Company’s businesses whichthat 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, emergency signaling productsexperience this seasonality include aerial platforms and parking systems.European light bars and sirens.
Additional Information
The Company makes its Annual Reports onForm 10-K, Quarterly Reports onForm 10-Q, Current Reports onForm 8-K, other reports and information filed with the SEC 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 SEC. Additionally, the Company makes its proxy statement and its Annual Report to stockholders available at the same internet website(http://www.federalsignal.com), free of charge, when sent to stockholders prior to the meeting date. All of the Company’s filings may be read or copied at the SEC’s Public Reference Room at 100 F.F Street, N.E., Room 1580, Washington, DC 20549. Information on the operation of the Public Reference 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.
We may occasionally make forward-looking statements and estimates such as forecasts and projections of our future performance or statements of our plans and objectives. These forward-looking statements may be contained in, among other things, filings with the Securities and Exchange Commission, including this Annual Report onForm 10-K, press releases made by us and in oral statements made by our officers. Actual results could differ materially from those contained in such forward-looking statements. Important factors that could cause our actual
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results to differ from those contained in such forward-looking statements include, among other things, the risks described below.
The execution of our growth strategy is dependent upon the continued availability of credit andthird-party financing arrangements for our customers.
The recent economic downturn has resulted in tighter credit markets, which could adversely affect our customers’ ability to secure the financing necessary to proceed or continue with purchases of our products and services. Our customers’ or potential customers’ inability to secure financing for projects could result in the delay, cancellation or down-sizing of new purchases or the suspension of purchases already under contract, which could cause a decline in the demand for our products and services and negatively impact our revenues and earnings.
We rely on access to financial markets to finance a portion of our working capital requirements and support our liquidity needs. Access to these markets may be adversely affected by factors beyond our control, including turmoil in the financial services industry, volatility in securities trading markets and general economic downturns.
We draw upon our revolving credit facility and our operating cash flow to fund working capital needs, capital expenditures, strategic acquisitions, pension contributions, debt repayments, share repurchases and dividends. Market disruptions such as those currently being experienced in the U.S. and abroad have materially impacted liquidity in the credit and debt markets, making financing terms for borrowers less attractive and in certain cases have resulted in the unavailability of certain types of financing. Continued uncertainty in the financial markets may negatively impact our ability to access additional financing or to refinance our existing credit facility or existing debt arrangements on favorable terms or at all, which could negatively affect our ability to fund current and future operations as well as future acquisitions and development. These disruptions may include turmoil in the financial services industry, unprecedented volatility in the markets where our outstanding securities trade, and general economic downturns in the areas where we do business. If we are unable to access monies at competitive rates, or if our short-term or long-term borrowings costs dramatically increase, our ability to finance our operations, meet our short-term obligations and implement our operating strategy could be adversely affected.
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 industrial markets in which we compete are subject to considerable cyclicality, and move in response to cycles in the overall business environment. Many of our customers are municipal governmental agencies, and as such,a result, 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 historical correlation of a one or two year lag 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
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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.
We were not incompliance with our restrictive debt covenants as of December 31, 2010.
Our revolving credit facility and other debt instruments contain certain restrictive debt covenants and other customary events of default. These restrictive covenants include, among other things, an interest coverage ratio of 3.0:1.0 in all quarters and a maximumdebt-to-total-capitalization ratio of 0.5:1.0 as of December 31, 2010.
The inabilityCompany was in violation of its Interest Coverage Ratio covenant minimum requirement as defined in the Second Amended and restated Credit Agreement and the Note Purchase Agreements for the fiscal quarter ended December 31, 2010.
On March 15, 2011, the Company executed the Third Amendment and Waiver to obtain raw materials, component parts, and/Second Amended and Restated Credit Agreement dated as of April 25, 2007, among the Company, the lenders party thereto, and Bank of Montreal, as Agent (“the Third Amendment and Waiver”). On the same date, the Company also executed the Second Global Amendment and Waiver to the Note Purchase Agreements (“Second Global Amendment”) with the holders of its private placement notes (the “Notes”). Both the Third Amendment and Waiver and the Second Global Amendment include a permanent waiver of compliance with the Interest Coverage Ratio covenant for the Company’s fiscal quarter ended December 31, 2010. Included in the terms of the Third Amendment and Waiver and the Second Global Amendment are the replacement of the Interest Coverage Ratio covenant with a minimum EBITDA covenant effective January 1, 2011 with the first required reporting period on April 2, 2011, an increase in pricing to the Company’s revolving Credit Facility pricing grid, an increase in pricing for the outstanding Notes, mandatory prepayments from proceeds of asset sales, restrictions on use of excess cash flow, restrictions on dividend payments, share repurchases and other restricted payments and a 50 basis points fee paid to the bank lenders and holders of Notes upon execution of the Third Amendment and Waiver and the Second Global Amendment. There can be no assurance that we will be able to meet all of the revised financial covenants and other conditions required by our Credit Agreements in the future. In the event of a future default, our lenders may not grant additional waivers of future covenant violations and declare all amounts outstanding as due and payable, which would negatively impact our liquidity and our ability to operate. In addition, financial and other covenants we have with our lenders will limit our ability to incur additional indebtedness, make investments, pay dividends and engage in other transactions, and the leverage may cause potential lenders to be less willing to loan funds to us in the future.
We rely on access to financial markets to finance a portion of our working capital requirements and support our liquidity needs. Access to these markets may be adversely affected by factors beyond our control, including turmoil in the financial services industry, volatility in securities trading markets and general economic downturns.
We draw upon our revolving credit facility and our operating cash flow to fund working capital needs, capital expenditures, strategic acquisitions, pension contributions, debt repayments, share repurchases and dividends. Market disruptions such as those recently experienced in the United States and abroad have materially impacted liquidity in the credit and debt markets, making financing terms for borrowers less attractive and in certain cases resulting in the unavailability of certain types of financing. Continued uncertainty in the financial markets may negatively impact our ability to access additional financing or finished goods in a timely andcost-effective manner from suppliers would adverselyto refinance our revolving credit facility or existing debt arrangements on favorable terms or at all, which could negatively affect our ability to manufacturefund current and market our products.
We purchase raw materialsfuture operations as well as future acquisitions 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 anddevelopment. If we are unable to passaccess financing at competitive rates, or if our short-term or long-term borrowings costs dramatically increase, our ability to finance our operations, meet our short-term debt obligations and implement our operating strategy could be adversely affected.
We recognized impairment charges for our goodwill and other indefinite lived intangible assets.
In the fourth quarter of 2010, the Company recognized $67.1 million and $11.8 million of impairment charges on those increases togoodwill and trade names, respectively, within the FSTech segment. The goodwill impairment charge is an estimate and may be adjusted during the first quarter of 2011 upon completion of a detailed second step impairment analysis. In accordance with generally accepted accounting principles, we periodically assess our customers.goodwill and
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We operateother indefinite lived intangible assets to determine if they are impaired. Significant negative industry or economic trends, disruptions to our business, unexpected significant changes or planned changes in highly competitive markets.the use of our assets and market capitalization declines may result in additional future impairments to goodwill and other long lived assets. Future impairment charges could significantly affect our results of operations in the periods recognized. Impairment charges would also reduce our consolidated shareholders’ equity and increase ourdebt-to-total-capitalization ratio, which may result in an event of default under our revolving credit facility and other debt instruments. Upon an event of default, if not waived by our lenders, our lenders may declare all amounts outstanding as due and payable. See Note 5 — Goodwill and Other Intangible Assets for further detail.
The markets Our ability to use net operating loss (“NOL”) carryovers to reduce future tax payments could be negatively impacted if there is a change in which we operate are highly competitive. The intensity of this competition, whichour ownership or a failure to generate sufficient taxable income.
Presently, there is expected to continue, can result in price discounting and margin pressures throughout the industry and adversely affectsno annual limitation on our ability to use U.S. federal NOLs to reduce future income taxes. However, if an ownership change as defined in Section 382 of the Internal Revenue Code of 1986, as amended, occurs with respect to our capital stock, our ability to use NOLs would be limited to specific annual amounts. Generally, an ownership change occurs if certain persons or groups increase or maintain pricestheir aggregate ownership by more than 50 percentage points of our total capital stock in a three-year period. If an ownership change occurs, our ability to use domestic NOLs to reduce taxable income is generally limited to an annual amount based on the fair market value of our stock immediately prior to the ownership change multiplied by the long-term tax-exempt interest rate. NOLs that exceed the Section 382 limitation in any year continue to be allowed as carry forwards for the remainder of the20-year carry forward period and can be used to offset taxable income for years within the carryover period subject to the limitation in each year. Our use of new NOLs arising after the date of an ownership change would not be affected. If more than a 50% ownership change were to occur, use of our NOLs to reduce payments of federal taxable income may be deferred to later years within the20-year carryover period; however, if the carryover period for any loss year expires, the use of the remaining NOLs for the loss year will be prohibited. If we should fail to generate a sufficient level of taxable income prior to the expiration of the NOL carry forward periods, then we will lose the ability to apply the NOLs as offsets to future taxable income.
The execution of our growth strategy is dependent upon the continued availability of credit and third-party financing arrangements for our products. In addition, certaincustomers.
Economic downturns result in tighter credit markets, which could adversely affect our customers’ ability to secure the financing or to secure the financing at favorable terms or interest rates necessary to proceed or continue with purchases of our competitors may have lower overall laborproducts and services. Our customers’ or material costs.
We have international operations that are subjectpotential customers’ inability to foreign economicsecure financing for projects could result in the delay, cancellation or down-sizing of new purchases or the suspension of purchases already under contract, which could cause a decline in the demand for our products and political uncertainties.
Our business is subject to fluctuations in demandservices and changing international economic and political conditions which are beyond our control. During 2008, approximately 43% of our sales were to customers outside the United States; with approximately 32% of sales being supplied from our overseas operations. We expect a significant and increasing portion ofnegatively impact 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.earnings.
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. Although currency exposure is hedged in the short term, over the longer term changes in the value of foreign currencies could increase our U.S. dollar costs for, or reduce our U.S. dollar revenues from, our foreign operations. Any increased costs or reduced revenues as a result of foreign currency fluctuations could affect our profits.
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, processesapplications and applicationsprocesses 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.
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Our efforts to develop new products and services or enhance existing products and services involve substantial research, development and marketing expenses, and the resulting new or enhanced products or services may not generate sufficient revenues to justify the expense.
We place a high priority on developing new products and services, as well as enhancing our existing products and services. As a result of these efforts, we may be required to expend substantial research, development and marketing resources, and the time and expense required to develop a new product or service or enhance an existing product or service are difficult to predict. We may not succeed in developing, introducing or marketing new products or services or product or service enhancements. In addition, we cannot be certain that any new or enhanced product or service will generate sufficient revenue to justify the expense and resources devoted to this product diversification effort.
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 that are beyond our control. 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, restrictive domestic and international trade regulations, U.S. laws applicable to foreign operations, such as the Foreign Corrupt Practices Act (“FCPA”), political, religious and economic instability, local labor market conditions, the imposition of foreign tariffs and other trade barriers 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. Additionally, penalties for non-compliance with laws applicable to international business and trade, such as FCPA, could negatively impact our business.
Some of our contracts are denominated in foreign currencies, which results 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 over the longer term could increase our U.S. dollar costs for, or reduce our U.S. dollar revenues from, our foreign operations. Any increased costs or reduced revenues as a result of foreign currency fluctuations could adversely affect our profits.
We operate in highly competitive markets.
The markets in which we operate are highly competitive. Many of our competitors have significantly greater financial resources than the Company. The intensity of this competition, which is expected to continue, can result in price discounting and margin pressures throughout the industry and may adversely affect our ability to increase or maintain prices for our products. In addition, certain of our competitors may have lower overall labor or material costs. In addition, our contracts with municipal and other governmental customers are in some cases awarded and renewed through competitive bidding. We may not be successful in obtaining or renewing these contracts, which could be harmful to our business and financial performance.
Our ability to operate 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 may incur material losses and costs as a result of product liability, warranty, recall claims, client service interruption 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 injuryand/or property damage. Accordingly,For example, we have been sued by firefighters seeking damages claiming
8
that exposure to our sirens has impaired their hearing and that the sirens are therefore defective. In addition, we are subject to other claims and litigation from time to time as further described in the notes to our consolidated financial statements. In addition, we could experience material liability or contractual damage costs due to software or service interruption in our FSTech business. We could experience material warranty or product liability costs in the future and incur significant costs to defend against these claims. We carry insurance and maintain reserves for product liability claims. However, we cannot be assuredassure 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 results
6
of operations and financial position. 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 or other claims are not typically covered by insurance coverage.insurance. 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.
We may be unsuccessful in our future acquisitions, if any, which may have an adverse effect on our business.
Our long-term strategy includes expanding into adjacent markets through selective acquisitions of companies, complementary technologies and organic growth in order to enhance our global market position and broaden our product offerings. This strategy may involve the acquisition of companies that, among other things, enable us to build on our existing strength in a market or that give us access to proprietary technologies that are strategically valuable or allows us to leverage our distribution channels. In connection with this strategy, we could face certain risks and uncertainties in addition to those we face in theday-to-day operations of our business. We also may be unable to identify suitable targets for acquisition or make acquisitions at favorable prices. If we identify a suitable acquisition candidate, our ability to successfully implement the acquisition would depend on a variety of factors, including our ability to obtain financing on acceptable terms. In addition, our acquisition activities could be disrupted by overtures from competitors for the targeted companies, governmental regulation and rapid developments in our industry that decrease the value of a target’s products or services.
Acquisitions involve risks, including those associated with the following:
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| • | integrating the operations, financial reporting, disparate technologies and personnel of acquired companies; |
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| • | managing geographically dispersed operations; |
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| • | diverting management’s attention from other business concerns; |
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| • | entering markets or lines of business in which we have either limited or no direct experience; and |
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| • | potentially losing key employees, customers and strategic partners of acquired companies. |
We also may not achieve anticipated revenue and cost benefits. Acquisitions may not be accretive to our earnings and may negatively impact our results of operations as a result of, among other things, the incurrence of debt, one time write-offs of goodwill, and amortization expenses of other intangible assets. In addition, future acquisitions could result in dilutive issuances of equity securities.
We have substantially increased our leverage in order to finance acquisitions, and we are subject to restrictive covenants that will affect our ability to engage in business transactions.
We have incurred significant indebtedness for the financing of acquisitions. Increased indebtedness may reduce our flexibility to respond to changing business and economic conditions or fund capital expenditures or working capital needs because we will require additional funds to service our indebtedness. In addition, financial and other covenants we have with our lenders will limit our ability to incur additional indebtedness, make investments, pay dividends and engage in other transactions, and the leverage may cause potential lenders to be less willing to loan funds to us in the future.
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Businesses acquired by us may have liabilities which are not known to us.
We may assume liabilities in connection with the acquisition of businesses. There may be liabilities that we fail or are unable to discover in the course of performing due diligence investigations on the acquired businesses. In these circumstances, we cannot assure that our rights to indemnification from sellers of the acquired businesses to us will be sufficient in amount, scope or duration to fully offset the possible liabilities associated with the businesses or property acquired. Any such liabilities, individually or in the aggregate, could 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 the 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 may 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,violation of, or liabilities under, environmental laws and safety regulations.
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, shortages, production delays or work stoppages by the employees of such suppliers could have a material adverse effect on our ability to timely manufacture and market products. In addition, 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.
Disruptions within our dealer network could adversely affect our business.
We rely on a national and global dealer network to market certain of our products and services. A disruption in our dealer network within a specific local market could temporarily have an adverse impact on our business within the affected market. In addition, the loss or termination of a significant number of dealers could cause difficulties in marketing and distributing our products and have an adverse effect on our business, operating results or financial condition.
Our business may be adversely impacted by work stoppages and other labor relations matters.
We are subject to a numberrisk of restrictive debt covenants.
Our credit facilitywork stoppages and other debt instruments contain certain restrictive debt covenantslabor relations matters because a significant portion of our workforce is unionized. As of December 31, 2010, approximately 28% of our hourly workers are represented by labor unions and other customary eventsare covered by collective bargaining agreements. Many of defaultthese agreements include provisions that may hinderlimit our ability to realize cost savings. Any strikes, threats of strikes, or other resistance in connection with the negotiation of new labor agreements or otherwise could materially adversely affect our business as well as impair our ability to implement further measures to reduce structural costs and improve production efficiencies. On February 23, 2011, the Company’s subsidiary, Vactor Manufacturing Inc., located in Streator, Illinois, received notice that the International Brotherhood of the Boilermakers filed a petition under the National Labor Relations Act, seeking certification to represent approximately 300 hourly employees for the purpose of collective bargaining. The election to determine whether a majority of the employees identified wish to be represented by the union for the purpose of collective bargaining normally occurs within 42 days of the filing of the petition, subject to adjustment in certain events.
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�� We could incur restructuring and impairment charges as we continue operating or to take advantage of attractiveevaluate opportunities to restructure our business opportunities. These restrictive covenantsand rationalize our manufacturing operations in an effort to optimize the cost structure.
We continue to evaluate opportunities to restructure our business and rationalize our manufacturing operations in an effort to optimize the cost structure which could include, among other things, an interest coverage ratioactions, additional rationalization of 3.00:1our manufacturing operations. These actions could result in all quarters effective with the first quartersignificant charges which could adversely affect our financial condition and results of 2009operations. Future actions could result in restructuring and a minimum net worth of $275.0 million at all times. Our abilityrelated charges, including but not limited to comply with these restrictive covenants may be affected by the other factors described in this “Risk Factors” sectionimpairments, employee termination costs and charges for pension and other factors outside our control. Failurepost retirement contractual benefits and pension curtailments that could be significant. We have substantial amounts of long-lived assets, including goodwill and intangible assets, which are subject to comply with oneperiodic impairment analysis and review. Identifying and assessing whether impairment indicators exist, or moreif events or changes in circumstances have occurred, including market conditions, operating results, competition and general economic conditions, requires significant judgment. Any of these restrictive covenants maythe above future actions could result in charges that could have an eventadverse effect on our financial condition and results of default. Upon an event of default, if not waived by our lenders, our lenders may declare all amounts outstanding as due and payable. If we are unable to comply with the restrictive covenants in the future, we would be required to obtain further modifications from our lenders or secure another source of financing. If our current lenders accelerate the maturity of our indebtedness, we may not have sufficient capital available at that time to pay the amounts due to our lenders on a timely basis. In addition, these restrictive covenants may prevent us from engaging in transactions that benefit us, including responding to changing business and economic conditions and taking advantage of attractive business opportunities.operations.
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| Item 1B. | Unresolved Staff Comments. |
None.On December 27, 2010, the Company received a letter from the SEC whereby the SEC requested additional disclosure in future filings regarding (i) the determination of estimated useful lives associated with customer relationship intangible assets and (ii) the nature and terms of the deferred retention payments required in 2010 as a result of the acquisition of Diamond Consulting Services Limited and the related accounting. The Company responded to the SEC with the requested information in a comment response letter dated February 14, 2011 filed as correspondence with the SEC. The Company has not received a response from the SEC to the Company’s response letter. The Company has addressed the items raised by the SEC in this Form 10-K.
As of December 31, 2008,2010, the Company utilized 10 principal manufacturing plants located throughout North America, as well as 9 in Europe, and 1 in South Africa and 1 in the Far East.Africa.
In total, the Company devoted approximately 1.11.0 million square feet to manufacturing and 0.80.7 million square feet to service, warehousing and office space as of December 31, 2008.2010. Of the total square footage, approximately 47%40% is devoted to the Safety and Security Systems Group, 8%9% to the Fire Rescue Group, and 45%40% to the Environmental Solutions Group, and 11% to the Federal Signal Technologies Group. Approximately 22%19% of the total square footage is owned by the Company with the remaining 78%81% being leased.
All of the Company’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 Company’s current business needs.
In connection with the Company’s execution of the Third Amendment and Waiver and the Second Global Amendment on March 15, 2011, the Company’s facility located in Streator, Illinois will be mortgaged to support its obligation thereunder. A complete list of amended terms and conditions can be found in the Third Amendment and Waiver and the Second Global Amendment, which are included as Exhibits to this Form10-K.
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| Item 3. | Legal Proceedings. |
The information concerning the Company’s legal proceedings included in Note 1415 of the financial statementsConsolidated Financial Statements contained under Item 8 of Part II of thisForm 10-K is incorporated herein by reference.
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| Item 4. | Submission of Matters to a Vote of Security Holders.[Removed and Reserved] |
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No matters were submitted to a vote of security holders through the solicitation of proxies or otherwise during the three months ended December 31, 2008.
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Item 4A. | Executive Officers. |
The following is a list of the Company’s executive officers, their ages, business experience and positions and offices as of February 1, 2009:
William G. Barker, III, age 50, was appointed Senior Vice President and Chief Financial Officer in December 2008. Mr. Barker was Senior Vice President and Chief Financial Officer of Sun-Times Media Group from 2007 to 2008. He was Vice President, Finance and Strategy, Gatorade of PepsiCo, Inc. from 2001 to 2007.
David E. Janek, age 45, was appointed Vice President and Controller in August 2008. Mr. Janek was Vice President and Treasurer from 2006 to 2008 and was Vice President Finance, Safety and Security Systems Group from 2002 to 2006.
Fred H. Lietz, age 54, was appointed Vice President and Chief Procurement Officer in May 2007. Mr. Lietz was Vice President of Global Procurement and Logistics at Andrew Corporation from 2001 to 2006.
David R. McConnaughey, age 52, was appointed President of Federal Signal’s Safety and Security Systems Group in March 2006. Previously, Mr. McConnaughey was President Maytag All Brand Service from 2005 to March 2006 and Vice President Maytag All Brand Service from 2004 to 2005. Previously, Mr. McConnaughey held several roles with Maytag Corporation including Vice President and G.M. Amana Brand 2003 to 2004 and Vice President Supply Chain 2002 to 2003.
William H. Osborne, age 48, was appointed Chief Executive Officer and President in September 2008. Mr. Osborne was President and Chief Executive Officer of Ford of Australia in 2008. From 2005 to 2008 Mr. Osborne was the President and Chief Executive Officer of Ford of Canada and from 2003 to 2005 he was the Executive Director, Pickup Truck and Commercial Vehicles, North American Truck Business of Ford Motor Company.
Esa Peltola, age 57, was appointed President of Bronto Skylift Oy Ab in July 2007. Mr. Peltola was Managing Director of Bronto Skylift from 1998 to 2007.
Jennifer L. Sherman, age 44, was appointed Senior Vice President, Human Resources, General Counsel and Secretary in April 2008. Ms. Sherman was Vice President, General Counsel and Secretary from 2004 to 2007 and was Deputy General Counsel and Assistant Secretary from 1998 to 2004.
Mark D. Weber, age 51, was appointed President of the Environmental Solutions Group in April 2003. Mr. Weber was Vice President Sweeper Products for the Environmental Solutions Group from 2002 to 2003 and General Manager of Elgin Sweeper Company from 2001 to 2002.
These officers hold office until the next annual meeting of the Board of Directors following their election and until their successors have been elected and qualified.
There are no family relationships among any of the foregoing executive officers.
PART II
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| Item 5. | Market for Company’sRegistrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities. |
The Company’s common stock is listed and traded on the New York Stock Exchange (“NYSE”) under the symbol FSS. At December 31, 2008,2010, there were no material restrictions on the Company’s ability to pay dividends. The information concerning the Company’s market price range data included in Note 1819 of the Consolidated Financial Statements contained under Item 8 of Part II of thisForm 10-K is incorporated herein by reference.
As of January 31, 2009,February 28, 2011, there were 2,7112,431 holders of record of the Company’s common stock.
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The following graph compares the cumulative5-year total return provided to shareholders on the Company’s common stock relative to the cumulative total returns of the Russell 2000 index, the S&P Industrials index, and the S&P Midcap 400 index. An investment of $100 (with reinvestment of all dividends) is assumed to have been made in our common stock and in each index on December 31, 2003 and its relative performance is tracked through December 31, 2008.
Comparison of 5 Year Cumulative Total Return*
Federal Signal Corporation
*$100 invested on 12/31/03 in stock & index-including reinvestment of dividends. Fiscal year ending December 31.
Copyright© 2009 S&P, a division of The McGraw-Hill Companies Inc. All rights reserved.
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| | | | 12/03 | | | 12/04 | | | 12/05 | | | 12/06 | | | 12/07 | | | 12/08 |
| Federal Signal Corporation | | | | 100.00 | | | | | 103.05 | | | | | 88.90 | | | | | 96.44 | | | | | 68.63 | | | | | 51.29 | |
| Russell 2000 | | | | 100.00 | | | | | 118.33 | | | | | 123.72 | | | | | 146.44 | | | | | 144.15 | | | | | 95.44 | |
| S&P Midcap 400 | | | | 100.00 | | | | | 116.48 | | | | | 131.11 | | | | | 144.64 | | | | | 156.18 | | | | | 99.59 | |
| S&P Industrials | | | | 100.00 | | | | | 118.03 | | | | | 120.78 | | | | | 136.83 | | | | | 153.29 | | | | | 92.09 | |
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The stock price performance included in this graph is not necessarily indicative of future stock price performance.
The information concerning the Company’s quarterly dividend per share data included in Note 1819 of the Consolidated Financial Statements contained under Item 8 of Part II of thisForm 10-K is incorporated herein by reference. The payment of future dividends is at the discretion of the Company’s Board of Directors and will depend, among other things, upon future earnings and cash flows, capital requirements, the Company’s general financial condition, general business conditions and other factors. Accordingly, the Company’s Board of Directors may at any time reduce or eliminate the Company’s quarterly dividend based on these factors. Effective March 15, 2011, the Company’s ability to pay dividends is restricted under the Company’s amended revolving credit facility and debt instruments. Under the terms of the Third Amendment and Waiver, dividends shall be permitted only if the following conditions are met:
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| • | No default or event of default shall exist or shall result from such payment; |
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| • | Minimum availability under the Credit Agreement after giving effect to such restricted payment and any credit extensions in connection therewith of $18.0 million; and |
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| • | Dividends may not exceed the lesser of (a) $625,000 (i.e., $0.01 per share) during any fiscal quarter and (b) Free Cash Flow for such quarter. “Free Cash Flow” means Excess Cash Flow before giving effect to dividends. The $625,000 limit will be increased to allow for the payment of dividends of $0.01 per share during any fiscal quarter for such share of stock sold for cash in a public or private offering after the effective date of the Third Amendment and Waiver. |
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| • | The Company has met or exceeded its projected EBITDA at such time. |
A complete list of amended terms and conditions can be found in the Third Amendment and Waiver and the Second Global Amendment, which are included as Exhibits to this Form 10-K.
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| (d) | Securities Authorized for Issuance under Equity Compensation |
Information concerning the Company’s equity compensation plans is included under Item 12 of Part III of thisForm 10-K.
The graph below matches Federal Signal Corporation’s cumulative5-year total shareholder return on common stock with the cumulative total returns of the Russell 2000 Index, the S&P Midcap 400, and the S&P Industrials Index. The graph tracks the performance of a $100 investment in our common stock and in each index (with the reinvestment of all dividends) from December 31, 2005 to December 31, 2010.
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COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among Federal Signal Corporation, The Russell 2000 Index,
The S&P Midcap 400 Index and the S&P Industrials Index
*$100 invested on 12/31/05 in stock or index, including reinvestment of dividends.
Fiscal year ending December 31.
Copyright© 2010 S&P, a division of The McGraw-Hill Companies Inc. All rights reserved.
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| | | 12/05 | | | 12/06 | | | 12/07 | | | 12/08 | | | 12/09 | | | 12/10 | |
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| Federal Signal Corporation | | | 100.00 | | | | 108.48 | | | | 77.20 | | | | 57.69 | | | | 44.08 | | | | 52.03 | |
| Russell 2000 | | | 100.00 | | | | 118.37 | | | | 116.51 | | | | 77.15 | | | | 98.11 | | | | 124.46 | |
| S&P Midcap 400 | | | 100.00 | | | | 110.32 | | | | 119.12 | | | | 75.96 | | | | 104.36 | | | | 132.16 | |
| S&P Industrials | | | 100.00 | | | | 113.29 | | | | 126.92 | | | | 76.25 | | | | 92.21 | | | | 116.86 | |
The stock price performance included in this graph is not necessarily indicative of future stock price performance. Notwithstanding anything set forth in any of our previous filings under the Securities Act of 1933, as amended, or the Securities Act of 1934, as amended, which might be incorporated into future filings in whole or part, including this Annual Report onForm 10-K, the preceding performance graph shall not be deemed incorporated by reference into any such findings.
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| Item 6. | Selected Financial Data. |
The following table presents the selected financial information of the Company as of and for each of the five years in the period ended December 31, 2008:31:
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| | | 2008 | | | 2007 | | | 2006 | | | 2005 | | | 2004 | |
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| Operating Results (dollars in millions): | | | | | | | | | | | | | | | | | | | | |
| Net sales(a) | | $ | 958.8 | | | $ | 934.3 | | | $ | 792.7 | | | $ | 697.0 | | | $ | 610.0 | |
| Income before income taxes(a) | | | 26.3 | | | | 53.6 | | | | 40.0 | | | | 38.2 | | | | 23.9 | |
| Income from continuing operations(a) | | | 31.3 | | | | 39.7 | | | | 31.2 | | | | 39.7 | | | | 19.3 | |
| Operating margin(a) | | | 5.8 | % | | | 8.0 | % | | | 7.5 | % | | | 7.6 | % | | | 6.1 | % |
| Return on average common shareholders’ equity | | | (26.2 | )% | | | 13.2 | % | | | 6.0 | % | | | (1.2 | )% | | | (0.6 | )% |
| Common Stock Data (per share): | | | | | | | | | | | | | | | | | | | | |
| Income from continuing operations — diluted | | $ | 0.66 | | | $ | 0.83 | | | $ | 0.65 | | | $ | 0.82 | | | $ | 0.40 | |
| Cash dividends per share | | | 0.24 | | | | 0.24 | | | | 0.24 | | | | 0.24 | | | | 0.40 | |
| Market price range: | | | | | | | | | | | | | | | | | | | | |
| High | | $ | 17.50 | | | $ | 17.00 | | | $ | 19.75 | | | $ | 17.95 | | | $ | 20.56 | |
| Low | | | 5.10 | | | | 10.82 | | | | 12.69 | | | | 13.80 | | | | 15.75 | |
| Average common shares outstanding (in millions) | | | 47.7 | | | | 47.9 | | | | 48.0 | | | | 48.2 | | | | 48.1 | |
| Financial Position at Year-End (dollars in millions): | | | | | | | | | | | | | | | | | | | | |
| Working capital(a)(b) | | $ | 158.9 | | | $ | 95.4 | | | $ | 51.0 | | | $ | 61.4 | | | $ | 48.4 | |
| Current ratio(a)(b) | | | 1.9 | | | | 1.4 | | | | 1.2 | | | | 1.3 | | | | 1.3 | |
| Total assets | | | 834.0 | | | | 1,169.6 | | | | 1,050.9 | | | | 1,119.5 | | | | 1,132.4 | |
| Long-term debt, net of current portion | | | 241.2 | | | | 240.7 | | | | 160.3 | | | | 203.7 | | | | 215.7 | |
| Shareholders’ equity | | | 284.5 | | | | 445.3 | | | | 386.4 | | | | 376.3 | | | | 412.7 | |
| Debt-to-capitalization ratio(c) | | | 49.5 | % | | | 39.3 | % | | | 36.8 | % | | | 42.0 | % | | | 36.2 | % |
| Net debt-to-capitalization ratio(d) | | | 46.3 | % | | | 38.3 | % | | | 35.1 | % | | | 32.9 | % | | | 34.7 | % |
| Other (dollars in millions): | | | | | | | | | | | | | | | | | | | | |
| Orders(a) | | $ | 940.4 | | | $ | 998.2 | | | $ | 855.9 | | | $ | 694.6 | | | $ | 685.6 | |
| Backlog(a) | | | 301.1 | | | | 331.7 | | | | 249.4 | | | | 178.2 | | | | 192.4 | |
| Net cash provided by operating activities | | | 123.7 | | | | 65.4 | | | | 29.7 | | | | 70.6 | | | | 52.5 | |
| Net cash provided by (used for) investing activities | | | 54.6 | | | | (106.6 | ) | | | (19.3 | ) | | | (0.7 | ) | | | 34.1 | |
| Net cash (used for) provided by financing activities | | | (166.7 | ) | | | 36.8 | | | | (83.0 | ) | | | 7.1 | | | | (81.7 | ) |
| Capital expenditures(a) | | | 28.5 | | | | 20.1 | | | | 12.2 | | | | 8.1 | | | | 9.5 | |
| Depreciation and amortization(a) | | | 15.5 | | | | 14.1 | | | | 9.5 | | | | 9.6 | | | | 7.8 | |
| Employees(a) | | | 3,317 | | | | 3,495 | | | | 3,192 | | | | 3,002 | | | | 2,819 | |
| | | | | | | | | | | | | | | | | | | | | |
| | | 2010 | | | 2009 | | | 2008 | | | 2007 | | | 2006 | |
| |
| Operating Results ($ in millions): | | | | | | | | | | | | | | | | | | | | |
| Net sales (a) | | $ | 726.5 | | | $ | 750.4 | | | $ | 878.0 | | | $ | 854.5 | | | $ | 720.8 | |
| (Loss) income before income taxes (a) | | | (88.4 | ) | | | 25.1 | | | | 22.6 | | | | 47.5 | | | | 34.9 | |
| (Loss) income from continuing operations(a) | | | (160.7 | ) | | | 19.8 | | | | 28.7 | | | | 35.3 | | | | 26.8 | |
| Operating margin (a) | | | (10.6 | )% | | | 4.8 | % | | | 5.9 | % | | | 8.1 | % | | | 6.8 | % |
| Return on average common shareholders’ equity | | | (33.8 | )% | | | 7.5 | % | | | (25.9 | )% | | | 13.1 | % | | | 5.7 | % |
| Common Stock Data (per share): | | | | | | | | | | | | | | | | | | | | |
| (Loss) income from continuing operations — diluted | | $ | (2.79 | ) | | $ | 0.41 | | | $ | 0.61 | | | $ | 0.74 | | | $ | 0.56 | |
| Cash dividends per share | | | 0.24 | | | | 0.24 | | | | 0.24 | | | | 0.24 | | | | 0.24 | |
| Market price range: | | | | | | | | | | | | | | | | | | | | |
| High | | $ | 10.30 | | | $ | 9.30 | | | $ | 17.50 | | | $ | 17.00 | | | $ | 19.75 | |
| Low | | | 4.91 | | | | 3.73 | | | | 5.10 | | | | 10.82 | | | | 12.69 | |
| Average common shares outstanding (in millions) | | | 57.6 | | | | 48.6 | | | | 47.7 | | | | 47.9 | | | | 48.0 | |
| Financial Position at Year-End ($ in millions): | | | | | | | | | | | | | | | | | | | | |
| Working capital (a)(b) | | $ | 85.4 | | | $ | 113.2 | | | $ | 147.7 | | | $ | 83.3 | | | $ | 42.9 | |
| Current ratio (a)(b) | | | 1.4 | | | | 1.7 | | | | 1.8 | | | | 1.4 | | | | 1.2 | |
| Total assets | | | 764.5 | | | | 744.5 | | | | 839.0 | | | | 1,172.9 | | | | 1,054.3 | |
| Long-term debt, net of current portion | | | 184.4 | | | | 159.7 | | | | 241.2 | | | | 240.7 | | | | 160.3 | |
| Shareholders’ equity | | | 220.9 | | | | 328.7 | | | | 287.1 | | | | 447.3 | | | | 388.6 | |
Debt-to-capitalization ratio (c) | | | 54.3 | % | | | 38.0 | % | | | 49.3 | % | | | 39.2 | % | | | 36.7 | % |
Netdebt-to-capitalization ratio (d) | | | 47.6 | % | | | 35.4 | % | | | 46.1 | % | | | 38.2 | % | | | 35.0 | % |
| Other ($ in millions): | | | | | | | | | | | | | | | | | | | | |
| Orders(a) | | $ | 742.6 | | | $ | 638.7 | | | $ | 859.5 | | | $ | 919.2 | | | $ | 782.5 | |
| Backlog (a) | | | 216.8 | | | | 171.2 | | | | 287.3 | | | | 319.3 | | | | 237.2 | |
| Net cash provided by operating activities | | | 31.2 | | | | 62.4 | | | | 123.7 | | | | 65.4 | | | | 29.7 | |
| Net cash (used for) provided by investing activities | | | (108.0 | ) | | | 31.0 | | | | 54.6 | | | | (106.6 | ) | | | (19.3 | ) |
| Net cash provided by (used for) financing activities | | | 117.6 | | | | (96.5 | ) | | | (166.7 | ) | | | 36.8 | | | | (83.0 | ) |
| Capital expenditures (a) | | | 12.8 | | | | 14.4 | | | | 27.9 | | | | 19.5 | | | | 11.7 | |
| Depreciation and amortization (a) | | | 19.2 | | | | 14.7 | | | | 14.3 | | | | 13.0 | | | | 8.8 | |
| Employees (a) | | | 2,812 | | | | 2,605 | | | | 3,024 | | | | 3,192 | | | | 2,915 | |
| | |
| (a) | | continuingContinuing operations only, prior year amounts have been reclassified for discontinued operations as discussed in Note 1213 to the financial statementsConsolidated Financial Statements |
| |
| (b) | | workingWorking capital: current assets less current liabilities; current ratio: current assets divided by current liabilities |
| |
| (c) | | totalTotal debt divided by the sum of total debt plus equity |
| |
| (d) | | net debt to capitalization ratio: debtDebt less cash and cash equivalents and short-term investments divided by equity plus debt less cash and cash equivalents and short-term investments |
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The 2008 and 2004(Loss) income before income taxes includes restructuring costs of $5.0 million, $1.5 million, and $2.7 million for the years ended December 31, 2010, 2009, and $0.42008, respectively. The 2010 loss before income taxes was
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impacted by $78.9 million respectively.of goodwill and intangible asset impairment charges recorded in the FSTech Group, $3.9 million in acquisition and integration related costs associated with Sirit and VESystems, and a $3.8 million settlement charge related to the ongoing firefighter hearing loss litigation. In the fourth quarter of 2010, the Company recorded $85.0 million of valuation allowance to reflect the amount of domestic deferred tax assets that may not be realized. The 2010 operating loss was also impacted by higher research and development costs and amortization expenses due to the newly acquired businesses, Sirit, VESystems and Diamond, and the recognition of deferred retention expenses associated with Diamond. The 2008 income before income taxes was impacted by a $6.9 million loss incurred to settle a dispute and write off assets associated with a large parking systems contract, and a $13.0 million loss associated with ongoing operations as well as the Company’s decision to terminate funding of a joint venture in China (“China Joint Venture”). The 20052006 loss before income taxes was impacted by a $6.7 million gain on the sale of two industrial lighting product lines.
The selected financial data set forth above should be read in conjunction with the Company’s consolidated financial statements,Consolidated Financial Statements, including the notes thereto, contained under Item 8 of Part II of thisForm 10-Kand Item 7 of Part II of thisForm 10-K.
The information concerning the Company’s selected quarterly data included in Note 1819 of the financial statementsConsolidated Financial Statements contained under Item 8 of thisForm 10-K is incorporated herein by reference.
| |
| Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations. |
Management’s Discussion and Analysis of Financial Condition of Operations (“MD&A”) is designed to provide information that is supplemental to and shall be read together with the consolidated financial statements and the accompanying notes contained in this Annual Report onForm 10-K for the year ended December 31, 2010. Information in MD&A is intended to assist the reader in obtaining an understanding of the consolidated financial statements, information about the Company’s business segments and how the results of those segments impact the Company’s results of operations and financial condition as a whole, and how certain accounting principles affect the Company’s consolidated financial statements.
Executive Summary
The Company designsis a leading global manufacturer and manufacturessupplier of (i) safety, security and communication equipment, (ii) street sweepers and other environmental vehicles and equipment, and (iii) vehicle-mounted, aerial platforms for fire fighting, rescue, electric utility and industrial uses. We also are a suitedesigner and supplier of technology-based products and services for the public safety and intelligent transportation systems markets. In addition, the Company is increasingly engaged in the sale of parts and tooling, service and repair, equipment rentals and training as part of a comprehensive offering to our customer base. We operate 20 manufacturing facilities in 6 countries and provide our products and integrated solutions forto municipal, governmental, industrial and commercial customers. Federal Signal’s products include safety and security systems, vacuum loader vehicles, street sweepers, truck mounted aerial platforms and waterblasters. Duecustomers throughout the world.
Effective June 6, 2010, the Company reorganized its segments to technology, marketing, distribution and product application synergies,better align the Company’s business units are organizedintelligent transportation and managed in threepublic safety businesses for growth. As a result of this reorganization, the Company created a new operating segments:segment called Federal Signal Technologies (“FSTech”) that includes the vehicle classification software, automated license plate recognition and parking systems businesses from our Safety and Security Systems Fire Rescueoperating segment and Environmental Solutions.the newly acquired businesses, Sirit and VESystems. The information concerningSafety and Security Systems operating segment retained the Company’s manufacturing businesses included in Item 1 of thisForm 10-Kthat offer systems for campus and Note 15 of the financial statements contained under Item 8 of thisForm 10-K are incorporated herein by reference.community alerting, emergency vehicles, first responder interoperable communications, industrial communications and command and municipal security.
As a result of this reorganization, our four operating segments are as follows:
Federal Signal Technologies Group
Our Federal Signal Technologies Group is a provider of technologies and solutions to the intelligent transportation systems and public safety markets and other applications. These products and solutions provide end users with the tools needed to automate data collection and analysis, transaction processing and asset tracking.
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FSTech provides technology platforms and services to customers in the areas of radio frequency identification systems, transaction processing vehicle classification, electronic toll collection, automated license plate recognition, electronic vehicle registration, parking and access control, cashless payment solutions, congestion charging, traffic management, site security solutions and supply chain systems. Products are sold under PIPStm, Idris®, Sirittm and VESystemstm brand names. The Group operates manufacturing facilities in North America and Europe.
Safety and Security Systems Group
Our Safety and Security Systems Group is a leading manufacturer and supplier of comprehensive systems and products that law enforcement, fire rescue, emergency medical services, campuses, military facilities and industrial sites use to protect people and property. Offerings include systems for campus and community alerting, emergency vehicles, public safety interoperable communications, industrial communications and command and municipal networked security. Specific products include lightbars and sirens, public warning sirens and public safety software. Products are sold under the Federal Signaltm, Federal Signal VAMAtm, Target Tech® and Victortm brand names. The Group operates manufacturing facilities in North America, Europe, and South Africa.
Environmental Solutions Group
Our Environmental Solutions Group is a leading manufacturer and supplier of a full range of street sweeper and vacuum trucks and high-performance waterblasting equipment for municipal and industrial customers. We also manufacture products for the newer markets of hydro-excavation, glycol recovery and surface cleaning for utility and industrial customers. Products are sold under the Elgin®, Vactor®, Guzzler® and Jetstreamtm brand names. The Group primarily manufactures its vehicles and equipment in the United States.
Under the Elgin brand name, the Company sells the leading U.S. 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. 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 addition to equipment sales, the Group is increasingly engaged in the sale of parts and tooling, service and repair, equipment rentals and training as part of a complete offering to its customer base.
Fire Rescue Group
Our Fire Rescue Group is a leading manufacturer and supplier of sophisticated, vehicle-mounted, aerial platforms for fire fighting, rescue, electric utility and industrial uses. End customers include fire departments, industrial fire services, electric utilities, maintenance rental companies for applications such as fire fighting and rescue, transmission line maintenance, and installation and maintenance of wind turbines. The Group’s telescopic/articulated aerial platforms are designed in accordance with various regulatory codes and standards, such as European Norms (“EN”), National Fire Protection Association (“NFPA”) and American National Standards Institute (“ANSI”). In addition to equipment sales, the Group sells parts, service and training as part of a complete offering to its customer base. The Group manufactures in Finland and sells globally under the Bronto Skylift® brand name.
Results of Operations
Operating results have been restated to exclude the following operations discontinued during 2008: all2010: the China WOFE business formerly reported within the Environmental Solutions Group segment, and the China WOFE and the Riverchase businesses offormerly reported within the former ToolSafety and Security Systems Group allE-ONE businesses, and all Financial Services activities and businesses.segment. Information relating to each of these discontinued operations is presented in Note 1213 of the financial statementsConsolidated Financial Statements contained under Item 8 of thisForm 10-K.
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Orders and backlog
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 2008 | | 2007 | | 2006 | | | 2010 | | 2009 | | 2008 |
| |
| Analysis of orders: | | | | | | | | | | | | | | | | | | | | | |
| Total orders ($ in millions): | | $ | 940.4 | | | $ | 998.2 | | | $ | 855.9 | | | $ | 742.6 | | | $ | 638.7 | | | $ | 859.5 | |
| Change in orders year over year | | | (5.8 | )% | | | 16.6 | % | | | | | | | 16.3 | % | | | (25.7 | )% | | | (6.5 | )% |
| Change in U.S. municipal and government orders year over year | | | (12.2 | )% | | | 5.4 | % | | | | | | | 2.1 | % | | | (13.4 | )% | | | (12.4 | )% |
| Change in U.S. industrial and commercial orders year over year | | | (8.2 | )% | | | 13.5 | % | | | | | | | 66.8 | % | | | (37.9 | )% | | | (8.0 | )% |
Change innon-U.S. orders year over year | | | 0.3 | % | | | 28.6 | % | | | | | | | 3.9 | % | | | (27.6 | )% | | | (0.7 | )% |
Orders in 2010 increased 16% compared to 2009 as a result of strong industrial market demands for vacuum trucks and the orders associated with the newly acquired businesses Sirit and VESystems. U.S. municipal and government orders increased 2.1% in 2010 driven by a $13.5 million increase in orders for sewer cleaners and a $2.1 million increase in ALPR cameras, offset by a decrease of $8.5 million in first responder products, and a $2.1 million decline in outdoor warning systems. U.S. industrial and commercial orders increased 67% driven by a $41.5 million increase in orders for vacuum trucks, a $22.5 million increase associated with the newly acquired businesses, a $8.5 million increase in parking system products, a $7.6 million increase in Safety and Security Systems products, and a $6.1 million increase in waterblasters.Non-U.S. orders increased 4% as compared to prior year primarily due to an increase in orders related to the newly acquired businesses of $7.1 million, an increase of $3.3 million in Bronto units, and a $2.8 million increase in Safety and Security Systems products.Non-U.S. orders increased 3.9% although such increase would have been 6% when excluding the effect of unfavorable foreign currency translation.
Orders in 2009 fell 26% compared to 2008, reflecting weakness across all segments and most markets due to the global economic recession. U.S. municipal and government orders decreased 12%13% in 20082009, primarily as a result of decreased orders of sweepers of $22.3 million, sewer cleaners of $13.1$16.8 million, public safety products of $9.5 million, sweepers of $5.2 million, and a $12.3$5.5 million decline in police products offset by an increase in automated license plate recognition (“ALPR”) cameras of approximately $6.1 million.outdoor warning systems. U.S. industrial and commercial orders decreased 8%38% driven by lowera $51.5 million reduction in orders for sweepers and vacuum trucks of $21.2 million and a $12.8 million reduction in parking system orders of $6.1 million, offset by an increase in Bronto articulated aerial devices of approximately $4.7 million.for Safety and Security Systems products.Non-U.S. orders remained relatively flatdecreased 28% as compared to prior year, with increases in ALPR cameras of $15.1 million and European sweeper orders and water blasters of $4.7 million, offset byprimarily due to a decrease in Bronto articulated aerial devicesplatforms of approximately $16.6 million.
U.S. municipal$63.1 million and government orders increased 5% in 2007 primarily due to strength in police products, sweepers and the addition of ALPR cameras. U.S. industrial and commercial orders increased 14% on continued high demand for industrial vacuum trucks and an increase in orders for hazardous area lighting and industrial signal and communications equipment.Non-U.S. orders increased 29%, and included a 35% increase in sales of products manufactured outside of the U.S. and increases in U.S. exports$21.0 million decline in Safety and Security Systems and Environmental Solutions. Favorableproducts.Non-U.S. orders declined 28%, although such difference is 26% when excluding the effect of unfavorable foreign currency movements estimated at $33 million also improved 2007 compared to 2006.translation.
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Consolidated results of operations
The following table summarizes the Company’s results of operations and selected operating metrics for each of the three years in the period ended December 31 2008 ($ in millions, except per share amounts):
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 2008 | | 2007 | | 2006 | | | 2010 | | 2009 | | 2008 | |
| |
| Net sales | | $ | 958.8 | | | $ | 934.3 | | | $ | 792.7 | | | $ | 726.5 | | | $ | 750.4 | | | $ | 878.0 | |
| Cost of sales | | | (706.9 | ) | | | (685.9 | ) | | | (576.5 | ) | | | 542.3 | | | | 557.3 | | | | 643.0 | |
| | | | | | | | | | | | | | | |
| Gross profit | | | 251.9 | | | | 248.4 | | | | 216.2 | | | | 184.2 | | | | 193.1 | | | | 235.0 | |
| Operating expenses | | | (193.7 | ) | | | (173.2 | ) | | | (157.1 | ) | |
| Selling, engineering, general and administrative | | | | 173.3 | | | | 155.8 | | | | 180.6 | |
| Acquisition and integration related costs | | | | 3.9 | | | | - | | | | - | |
| Goodwill and intangible assets impairment | | | | 78.9 | | | | - | | | | - | |
| Restructuring charges | | | (2.7 | ) | | | — | | | | — | | | | 5.0 | | | | 1.5 | | | | 2.7 | |
| | | | | | | | | | | | | | | |
| Operating income | | | 55.5 | | | | 75.2 | | | | 59.1 | | |
| Operating (loss) income | | | | (76.9 | ) | | | 35.8 | | | | 51.7 | |
| Interest expense | | | (15.3 | ) | | | (18.5 | ) | | | (17.0 | ) | | | 10.3 | | | | 11.4 | | | | 15.3 | |
| Loss on investment in joint venture | | | (13.0 | ) | | | (3.3 | ) | | | (1.9 | ) | |
| Other (expense) income | | | (0.9 | ) | | | 0.2 | | | | (0.2 | ) | |
| Income tax benefit (expense) | | | 5.0 | | | | (13.9 | ) | | | (8.8 | ) | |
| (Gain) loss on investment in joint venture | | | | (0.1 | ) | | | (1.2 | ) | | | 13.0 | |
| Other expense | | | | 1.3 | | | | 0.5 | | | | 0.8 | |
| Income tax (provision) benefit | | | | (72.3 | ) | | | (5.3 | ) | | | 6.1 | |
| | | | | | | | | | | | | | | |
| Income from continuing operations | | | 31.3 | | | | 39.7 | | | | 31.2 | | |
| (Loss) income from continuing operations | | | | (160.7 | ) | | | 19.8 | | | | 28.7 | |
| (Loss) gain from discontinued operations and disposal, net of tax | | | (126.9 | ) | | | 15.2 | | | | (8.5 | ) | | | (15.0 | ) | | | 3.3 | | | | (123.7 | ) |
| | | | | | | | | | | | | | | |
| Net (loss) income | | $ | (95.6 | ) | | $ | 54.9 | | | $ | 22.7 | | | $ | (175.7 | ) | | $ | 23.1 | | | $ | (95.0 | ) |
| | | | | | | | | | | | | | | |
Other data: | | | | | | | | | | | | | | | | | | | | | | | | |
| Operating margin | | | 5.8 | % | | | 8.0 | % | | | 7.5 | % | | | (10.6 | )% | | | 4.8 | % | | | 5.9 | % |
| Earnings per share — continuing operations | | $ | 0.66 | | | $ | 0.83 | | | $ | 0.65 | | |
| (Loss) earnings per share — continuing operations | | | $ | (2.79 | ) | | $ | 0.41 | | | $ | 0.61 | |
| Orders | | | | 742.6 | | | | 638.7 | | | | 859.5 | |
| Depreciation and amortization | | | | 19.2 | | | | 14.7 | | | | 14.3 | |
Year Ended December 31, 20082010 vs. December 31, 20072009
Net sales decreased 3% or $23.9 million compared to 2009 as a result of lower volume caused by soft municipal spending in most western market segments, partially offset by a stronger demand from the industrial market and increases resulting from FSTech acquisitions. Unfavorable foreign currency movement, most notably a stronger U.S. dollar versus European currencies in the comparable prior year periods, reduced sales by 1%. Gross profit margin of 25.4% in 2010 was consistent with 2009. Operating loss was $76.9 million in 2010 compared to operating income of $35.8 million in 2009, primarily due to goodwill and indefinite lived intangible asset impairment of $78.9 million in the FSTech Group, higher selling, engineering, general, and administrative expense (“SEG&A”) of $17.5 million, acquisition and integration related costs of $3.9 million, and higher restructuring costs of $3.5 million. SEG&A expenses increased 3% over 2007 or 1% after removingdue to a $3.8 million settlement charge in connection with the favorable effectsCompany’s ongoing hearing loss litigation. In addition, the Company incurred higher research and development costs, amortization expenses, and additional costs due to higher headcounts related to the newly acquired businesses, Sirit, VESystem and Diamond, and recognition of deferred retention expenses associated with Diamond. See Note 2 for further discussion of the deferred retention expenses.
Interest expense decreased 10% from 2009, primarily due to lower average borrowing cost of debt.
Other expense of $1.3 million includes realized losses from foreign currency translationtransactions, offset by realized gains from derivatives contracts.
The 2010 effective tax rate on (loss) income from continuing operations increased to (81.7%) from 21.1% in the prior year. The Company’s 2010 effective rate of (81.7%) includes aggregate tax expense of $85.0 million related to a domestic valuation allowance and non-deductible goodwill impairments of $19.5 million. The 2009 rate benefitted from a weaker U.S. dollar. Sales volume increasesreduction in benefits for an R&D tax credit and foreign tax effects.
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Loss from continuing operations was $160.7 million in 2010, compared to income from continuing operations of $19.8 million in 2009. The decrease of $180.5 million was primarily due to a valuation allowance of $85.0 million recorded in the fourth quarter of 2010 to reflect the amount of domestic deferred tax assets that may not be realized, goodwill and trade name impairment charges of $67.1 million and $11.8 million, respectively, due to a reduction in the estimated sales and cash flow of the FSTech segment and from other charges in operating loss as described above.
Loss from discontinued operations and disposal was $15.0 million in 2010 compared to a gain from discontinued operations and disposal of $3.3 million in 2009. Of the $15.0 million loss from discontinued operations, $5.0 million relates to product liability and settlement costs associated with the Company’s discontinuedE-ONE business, $7.2 million relates to the discontinuation of the Riverchase and China WOFE businesses, and $2.2 million related to the environmental remediation liability at Fire Rescue were largelythe Company’s Pearland, Texas site. Net gain from discontinued operations totaled $3.3 million in 2009. The gain primarily related to the sale of the Company’s RAVO and Pauluhn businesses, partially offset by reductions at Environmental Solutions; while Safety and Security Systems were relatively flat (see segment discussions below)a tax benefit adjustment related to the sale of the Pauluhn business. For further discussion of the discontinued operations, see Note 13 of the Consolidated Financial Statements contained under Item 8 of Part II of thisForm 10-K.
Year Ended December 31, 2009 vs. December 31, 2008
Net sales decreased 14.5% or $127.6 million compared to 2008 as a direct result of a decrease in volume as the global economic recession reduced demand for the Company’s products across most market segments. Unfavorable foreign currency movement, most notably a stronger U.S. dollar versus European currencies in the comparable prior year periods, reduced sales by 1%. Gross profit margins fell slightly in 20082009 to 26.3%25.7% from 26.6% due largely to the absence of a favorable $1.8 million excise tax settlement which occurred in 2007.26.8%. Operating income decreased by 26%30.8% in 2008 as the gross profit increase of $3.5 million was more than offset by an increase of $20.5 million of operating expenses2009 due to $9.9lower sales volumes offset in part by lower spending in both fixed manufacturing and SEG&A of $31.2 million. Operating income also benefitted from the absence of $6.9 million of higher legal costs associated with the Company’s ongoing firefighter hearing loss litigation, $6.2 million of increasedin charges to settle a dispute and write off assets associated with a parking systems contract, to install revenue control equipment at the Dallas Fort Worth (DFW) airport, and $2.7$5.8 million of restructuringin lower legal and trial costs largely due to severance associated with streamlining the management structure.Company’s ongoing firefighter hearing loss litigation.
Interest expense decreased 17%25% from 2007,2008, primarily due to lower interest rates and lower average borrowings in 20082009 from a reduction in net debt of $30.7$65.0 million. The Company paid down debt using net proceeds of $3.4$11.9 million from the working capital reductionssale of RAVO and sale ofE-ONE, $59.9$34.0 million from the sale of its Tool Group businesses, and $35.8 million from the sale-leaseback of its Elgin and University Park, Illinois plants.Pauluhn business. For further discussion of the discontinued operations, see Note 1213 of the financial statementsConsolidated Financial Statements contained under Item 8 of Part II of thisForm 10-K.
LossesIn 2009, the Company recorded a gain of $1.2 million associated with the shutdown of the China Joint Venture, which is related to the sale of the remaining assets of the business. In 2008, losses on the Company’s investment in a joint venture inthe China Joint Venture totaled $13.0 million in 2008.million. The Company’s share of operating losses was $0 in 2009 and $2.6 million in 2008 versus $3.3 million in 2007.2008. A charge of $10.4 million was taken in 2008 to reflect the Company’s contingent obligations to guarantyguarantee the debt of the joint venture and to guarantyguarantee the investment of one of its joint venture partners. A review of the market and forecasts of the joint venture’s cash flows indicated its bank debt was unlikely to be repaid and it was unlikely to provide a return to the joint venture partners. In February 2009, the Company decidedpartners agreed to terminate funding to this venture. Significant uncertainties exist, however, including a requirement to obtain unanimous partner approval as well as Chinese government approval tovoluntarily liquidate the entity. The Company anticipates closure costs in 2009 in the range of $1.0 to $2.0 million.China Joint Venture.
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Other expenses of $0.9$0.5 million include realized losses from foreign currency transactions and on derivatives contracts.
The 20082009 effective tax rate on income from continuing operations decreasedincreased to (19.0)%21.1% from 25.9%(27.0%) in the prior year. The 2008 rate benefited from a capital loss utilization tax strategy on a sale/leaseback of real estate properties, the China Joint Venture shutdown tax benefits, and a higher mix of profits in lower taxed countries.
The Company’s 2009 effective rate of 21.1% benefitted from an R&D tax credit and foreign tax effects.
Income from continuing operations decreased 21%31% from 2007 primarily2008 due to lower operating income as described above and a resulthigher effective tax rate, offset by the benefits of lower interest expense of $3.9 million and other expense of $0.3 million.
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Net income was $23.1 million in 2009 versus a net loss of $95.0 million in 2008. In 2009, there was an after-tax gain from discontinued operations of $3.3 million mainly from the sale of the aforementioned chargesCompany’s RAVO and Pauluhn businesses, offset by the loss from the Riverchase and China WOFE businesses that were discontinued in operating expenses, loss on joint venture and offsetting tax benefits.
2010. Net loss was $95.6 million in 2008 versus net income of $54.9 million in 2007. Losseslosses from discontinued operations totaled $126.9$123.7 million in 2008, relating primarily to the impairment of assets and sale of the Company’s Die and Mold Operations andE-ONE. The Company also discontinued its financial services activities during 2008 which generated income of $0.3 million. A net gain of $15.2 million on discontinued operations in 2007 resulted primarily from the sale of the Cutting Tool Operations in that year. For further discussion of the discontinued operations, see Note 1213 of the Consolidated Financial Statements contained under Item 8 of Part II of thisForm 10-K.
Year Ended December 31, 2007 vs. December 31, 2006
Net sales increased 18% over 2006 or 15% without the favorable effects of currency translation from a weaker U.S. dollar. All groups experienced sizable sales volume increases, where Safety and Security Systems was up $62.7 million, Environmental Solutions was up $51.7 million and Fire Rescue was up $27.2 million. Gross profit margins fell to 26.6% in 2007 from 27.2% in 2006 due to costs associated with the launch and production of the new Elgin Pelican sweeper in the U.S. offset in part by a favorable $1.8 million excise tax settlement received in 2007.
Operating income rose 27% over 2006 primarily as a result of the leverage from higher sales volumes and a relative reduction in operating expenses, which as a percent of sales were 18.5% in 2007 down from 19.8% in 2006. Selling expenses were relatively lower and product development costs were relatively higher at Safety and Security Systems and at Environmental Solutions due largely to the mix of product shipments and a focus on new products.
Interest expense increased 9%, or $1.5 million from 2006, primarily due to an increase in borrowings to fund the PIPS Technologies acquisition in August 2007.
Loss on investment in joint venture rose 74% to $3.3 million in 2007 as additional costs were incurred to build the infrastructure of the operating entity.
The 2007 effective tax rate on income from continuing operations increased to 25.9% from 22.1% in the prior year. The 2007 rate benefited from the Company’s foreign tax planning strategies including dividend repatriation, foreign entity financing and a legal entity restructuring in Canada. The 2006 rate benefited from tax reserve reductions and a higher mix of profits in lower taxed foreign jurisdictions.
Income from continuing operations increased 27% in 2007 primarily as a result of the higher sales volumes and lower relative operating expenses offset by the higher effective tax rate.
Net income more than doubled to $54.9 million for the year ended December 31, 2007 versus $22.7 million in 2006. For 2007, after completion of the sale of the Cutting Tool Operations in the first quarter, substantial completion of the wind-down of the Refuse business, and the restated operating results for the operations discontinued in 2008, the Company realized a net after-tax gain on the sale of previously discontinued operations of $15.2 million, compared to a loss of $8.5 million in the prior year. For further discussion of the discontinued operations, see Note 12 of the financial statements contained under Item 8 of thisForm 10-K.
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Safety and Security Systems Operations
The following table presents the Safety and Security Systems Group’s results of operations for each of the three years in the period ended December 31 2008 ($ in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 2008 | | 2007 | | 2006 | | | 2010 | | 2009 | | 2008 |
| |
| Total orders | | $ | 367.1 | | | $ | 367.5 | | | $ | 305.5 | | | $ | 215.6 | | | $ | 216.3 | | | $ | 276.3 | |
| U.S. orders | | | 202.5 | | | | 216.3 | | | | 184.9 | | |
Non-U.S. orders | | | 164.6 | | | | 151.2 | | | | 120.6 | | |
| Net sales | | | 371.8 | | | | 367.2 | | | | 304.5 | | | | 214.5 | | | | 225.8 | | | | 276.7 | |
| Operating income | | | 40.3 | | | | 49.6 | | | | 41.2 | | | | 23.7 | | | | 24.1 | | | | 40.1 | |
| Operating margin | | | 10.8 | % | | | 13.5 | % | | | 13.5 | % | | | 11.0 | % | | | 10.7 | % | | | 14.5 | % |
| Depreciation and amortization | | | | 3.7 | | | | 3.1 | | | | 3.5 | |
Orders remained relativelywere flat in 2008 as compared to 2007.the prior year period. U.S. orders decreased 6%3% or $3.5 million due to weaklower municipal spending and a relative softeningof $11 million in the police, fire and outdoor warning markets, offset by stronger industrial economy compared to 2007. For 2008, orders in the U.S. fell $12.3 million for police products, $6.1 million for parking systems, and $2.8 million for hazardous area lighting products. Partly offsetting these declines were an increase in ordersdemand of $2.1 million for outdoor warnings systems and $6.1 million for automated license plate recognition (“ALPR”) cameras made by PIPS Technologies, which was acquired in the third quarter of 2007.$7.6 million.Non-U.S. orders in 2008 increased 9% over the prior year3% or 6% when excluding the favorable effects of currency translation$2.8 million due to strengthstronger demand in outdoor warning systemspolice and the addition of PIPS Technologies acquired in 2007.industrial products.
Net sales increased 1% in 2008. An increase in shipmentsdecreased 5% or $11.3 million compared to 2009 caused by lower municipal spending, and unfavorable currency impact of ALPR cameras during 2008 of $19.2$1.8 million, and industrial communications systems of $2.4 million waspartially offset by strong industrial demand. Although the sale volumes were down, the operating income in 2010 kept flat compared to 2009 due to the lower operating expenses. Operating expenses were lower than the prior year by $5.0 million driven by cost reduction initiatives throughout the Company. As a $17.7result, the operating margin improved 0.3% compare to the prior year.
Orders declined 22% in 2009 as compared to 2008 with declines in most market segments, primarily as a result of the global economic recession. U.S. orders decreased 18% due to softness in oil and gas markets and a decline in municipal spending due to the global economic recession. U.S. orders in 2009 decreased $10.5 million decreasefor warning systems, $8.6 million for police products, and $8.3 million for industrial signaling and communication systems.Non-U.S. orders decreased 25% compared to 2008 primarily due to a decline in global vehicular lighting and siren sales. Operating income in 2008 declined 19% and operating margins fell, primarily due to $6.2 millionsales of increased charges to settle a dispute and write off assets associated with the DFW parking system contract, and $1.8 million of employee severance costs associated with restructuring initiatives, and $0.8 million associated with other cost reduction initiatives.
Orders improved 20% in 2007 over 2006 with strength across all market segments, except for outdoor warning systems which declined by $1.0$21.0 million. U.S. orders rose 17% due primarily to an increase of $9.1 million for police products, $6.3 million for hazardous area lighting products and $5.7 million of parking systems.Non-U.S. orders increased 25% in 2007 or 19% without the favorable effects of currency translation. The acquisition of PIPS Technologies in the third quarter of 2007 contributed $6.4 million. During 2007, the Company introduced a next generation and more reliable LED light bar technology which drove a $30.7 million increase in global orders for vehicular warning systems.
Net sales increased 21% and improveddecreased 18% as compared to 2008 with decreases across most market segments with a $34.9 million increase in global vehicularall businesses except warning systems, which increased $1.6 million driven by international and a $19.2 million increase in industrial communication and hazardous area products. The PIPS Technologies acquisition contributed $9.6 million for 2007.military segments. Operating income increased 20% in 2007 over 2006 and2009 declined 40% as a result of lower sales volumes. Operating expenses were lower than the operating margin remained at 13.5%. The leverageprior year by $6.2 million driven by cost management initiatives implemented in 2009. Operating margins declined 3.8% compared to 2008 as a result of higherthe lower sales volume was offset partly by increased costs associated with expanding the product portfolio and market reach.volumes.
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Fire Rescue Operations
The following table presents the Fire Rescue Group’s results of operations for each of the three years in the period ended December 31 2008 ($ in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 2008 | | 2007 | | 2006 | | | 2010 | | 2009 | | 2008 |
| |
| Total orders | | $ | 162.3 | | | $ | 174.1 | | | $ | 115.0 | | | $ | 101.3 | | | $ | 96.6 | | | $ | 162.3 | |
| U.S. orders | | | 6.5 | | | | 1.7 | | | | 2.7 | | |
Non-U.S. orders | | | 155.8 | | | | 172.4 | | | | 112.3 | | |
| Net sales | | | 145.5 | | | | 117.9 | | | | 90.7 | | | | 108.8 | | | | 160.0 | | | | 145.5 | |
| Operating income | | | 10.4 | | | | 7.9 | | | | 5.6 | | | | 9.4 | | | | 19.2 | | | | 10.4 | |
| Operating margin | | | 7.1 | % | | | 6.7 | % | | | 6.2 | % | | | 8.6 | % | | | 12.0 | % | | | 7.1 | % |
| Depreciation and amortization | | | | 2.2 | | | | 1.9 | | | | 1.4 | |
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Orders in 2008 decreased 7% from2010 increased 5% or $4.7 million compared to the prior year, or 15% when excluding the favorable effectsnet of an unfavorable currency translation. Bronto’s entire order decline existed within its industrial markets, primarily with weakness in Europe. Orders from the group’s formerE-ONE business drove theimpact of $5.4 million. The increase in U.S. orders. Bronto’s fire rescue markets were flat overall duringorders was mainly due to the year.increased demand in the Asia market, as the demands for both fire-lift and industrial products remained slow in most western markets.
Net sales in 2008 increased 23%2010 decreased 32% and 29% excluding currency translation, compared to the prior year due to the weak demands in most regions except the Asia market. Operating income decreased 51% and operating margin decreased by 3.4% due to the lower sales volumes and lower gross profit margin, partially offset by the margin improvements related to cost reductions and process improvements.
Orders in 2009 decreased 40% from the prior year or 19% whenas the global economic recession reduced demand for the Company’s products in both fire-lift and industrial, and markets were weak in all regions.
Net sales in 2009 increased 10% and 14% excluding the favorable effects of currency translation. Bronto’s unusually largetranslation, compared to 2008. Unusually high backlog which exceeded 12 months of shipments at the end of 2007, allowed for2008 and the recent plant expansion enabled strong shipments in 2008shipment levels especially during the fourth quarter despite athe reduction in orders during the year. Bronto completed a plant expansion in 2008, and with a backlog that remains at 12 months, the Company expects Bronto’s shipments will be strong next year despite a weak global economy.
orders. Operating income rose 32%and margin increased 85% and 70%, respectively, due to the increase in 2008 and operating margins improvedsales volumes as a result of the increased sales volumes. Higher product costs for steel and other components and inefficiencies caused bywell as margin improvements related to the plant expansion offset some of the sales volume impact.
Orders in 2007 improved 51% over 2006 or 38% when excluding the favorable effects of currency translation. Bronto’s demand was strong across both of its primary market segments (industrial and fire rescue) and particularly in Europe and Asia. Net sales rose 30% in 2007 or 21% when excluding the favorable effects of currency translation. Shipments were higher due to the strong order intake, limited only by the company’s production capacity. Operating income rose 41% in 2007 and operating margins improved as a result of the leverage from higher sales volumes.process improvements.
Environmental Solutions Operations
The following table presents the Environmental Solutions Group’s results of operations for each of the three years in the period ended December 31 2008 ($ in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 2008 | | 2007 | | 2006 | | | 2010 | | 2009 | | 2008 |
| |
| Total orders | | $ | 411.0 | | | $ | 456.6 | | | $ | 435.4 | | | $ | 328.2 | | | $ | 265.1 | | | $ | 357.3 | |
| U.S. orders | | | 297.8 | | | | 347.6 | | | | 331.8 | | |
Non-U.S. orders | | | 113.2 | | | | 109.0 | | | | 103.6 | | |
| Net sales | | | 441.5 | | | | 449.2 | | | | 397.5 | | | | 309.8 | | | | 299.6 | | | | 387.6 | |
| Operating income | | | 35.5 | | | | 38.8 | | | | 35.3 | | | | 17.9 | | | | 15.1 | | | | 34.9 | |
| Operating margin | | | 8.0 | % | | | 8.6 | % | | | 8.9 | % | | | 5.8 | % | | | 5.0 | % | | | 9.0 | % |
| Depreciation and amortization | | | | 4.7 | | | | 4.5 | | | | 3.9 | |
Orders of $411.0 million in 2008 were 10% below2010 increased 24% or $63.1 compared to the prior year.year due to an increase in demand of sewer cleaning and industrial vacuum trucks. U.S. orders decreased 14%increased 30% in 20082010 from the prior year as weakdriven by a $55.0 million increase in sewer cleaning and industrial vacuum trucks, a $6.1 million increase in waterblasters, a $0.8 increase in parts sales and a $0.7 million increase in sweepers.Non-U.S. orders increased slightly by 1% or $0.5 million compared to the prior year.
Net sales increased 3% or $10.2 million compared to the prior year period driven by higher sales volume in waterblaster and parts sales of $8.2 million, and better price mix in street sweepers, sewer cleaning and industrial vacuum trucks of $1.4 million. Operating income increased 19% and operating margin improved by 1%, respectively, due to the increase in sales volumes compared to the prior year.
Orders in 2009 decreased 26% or $92.2 million compared to 2008 due to the global economic recession and reduced municipal and industrial markets drovespending. U.S. orders decreased 30% in 2009 from 2008 driven by a $28.9 million reduction in sweepers and a $28.1$71.3 million reduction in sewer cleaning and industrial vacuum trucks, offset bya $9.0 million reduction in waterblasters and an increase of $5.8
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$8.4 million reduction in waterblasters.sweepers.Non-U.S. orders increased 4% entirely by favorable foreign currency translation fromdecreased 5% due to a weaker U.S. dollar. market environment for sweepers.
Net sales in 2008decreased 23% compared to 2007 decreased 2% as a decline2008 on lower sales volume in U.S sweeper shipments of $23.6 million more than offset a $13.6 million increase in global shipments of sewer cleaning and industrial vacuum trucks.trucks of $61.3 million, street sweepers of $16.4 million and waterblasters of $9.7 million. The flow through of the decline in sales volume resulted in a $19.8 million reduction in operating income and a lower operating margin.
Federal Signal Technologies
The following table presents the Federal Signal Technologies Group’s results of operations for each of the three years in the period ended December 31($ in millions):
| | | | | | | | | | | | | |
| | | 2010 | | 2009 | | 2008 |
| |
| Total orders | | $ | 97.5 | | | $ | 60.7 | | | $ | 63.6 | |
| Net sales | | | 93.4 | | | | 65.0 | | | | 68.2 | |
| Operating (loss) income | | | (89.3 | ) | | | 6.0 | | | | (3.0 | ) |
| Operating margin | | | (95.6 | )% | | | 9.2 | % | | | (4.4 | )% |
| Depreciation and amortization | | | 7.8 | | | | 4.4 | | | | 4.9 | |
Orders increased 61% or $36.8 million compared to the prior year as results of orders attributed to the newly acquired businesses, Sirit, VESystems, and Diamond, and stronger demands in industrial parking system products and the ALPR cameras in U.S. markets. U.S. orders in 2010 increased 92% or $32.9 million driven by increases of $22.5 million attributed to the newly acquired businesses, $8.5 million from the parking system products, and $2.1 million from ALPR cameras in U.S. markets. Non-US orders increased 16% or $3.9 million, primarily driven by an increase of $7.1 million from the newly acquired businesses, offset by decreases of $2.1 million in ALPR cameras in European markets and $1.1 million in parking system products.
Net sales increased 44% or $28.4 million compared to the prior year due to sales from the newly acquired businesses of Sirit, VESystems, and Diamond, of $31.5 million, offset by a decrease of $3.1 million in parking systems. Operating loss was $89.3 million in 2010, compared to operating income of $6.0 million in 2009. Included in the 2010 operating loss was $78.9 million of goodwill and indefinite lived intangible asset impairment charges that are discussed further in Note 5. The operating loss was also impacted by increased operating expenses of $23.5 million as result of higher research and development costs, higher amortization expense due to the newly acquired businesses, Sirit, VESystems, and Diamond, and recognition of deferred retention expenses associated with Diamond.
The deferred retention expense is calculated in accordance with the sale and purchase agreement of Diamond dated December 9, 2009. A sum of £1,000,000 (one million pounds sterling) was payable to the former owners of Diamond on or before January 31, 2011 in the event that the former owners of Diamond were employed by the Company on December 31, 2010 and were at that time actively engaged in the business. An additional amount of £1,000,000 (one million pounds sterling) is payable to the former owners of Diamond on or before January 31, 2012 in the event that former owners of Diamond are employed by the Company on December 31, 2011 and are at that time actively engaged in the business. The former owners of Diamond did maintain employment through December 31, 2010 and have been paid the first contingent payment of £1,000,000 (one million pounds sterling).
In accordance withASC 805-10-55-25, the deferred retention payments are being treated as compensation expense for post combination services as the contingent payments are automatically forfeited if employment is terminated. The total contingency of £2,000,000 (two million pounds sterling) is being expensed ratably over the two year period that the employees are required to stay in order to earn the retention payment.
Orders in 2009 declined 5% or $2.9 million as compared to 2008 with declines in most market segments, with the exception of automated license plate recognition (“ALPR”) cameras in U.S. market. U.S. orders in 2009 increased $5.4 million in ALPR cameras offset by a decrease of $4.5 million for parking systems.Non-U.S. ordersdecreased 9%14% or $4.0 million due to the global economic recession.
Net sales in 2009 decreased 5% or $3.2 million compared to 2008 due to lower sales volumes and the absenceweaker European markets as a result of a favorable $1.8the global economic recession. Sales of ALPR cameras decreased $6.5 million excise tax settlement which occurred in 2007.
In 2007, orders increased 5% over the 2006 year. U.S. orders increased 5% due to solid demand for industrial vacuum trucks and the impact of higher priced chassis associated with new 2007 EPA standards.Non-U.S. orders increased 5% driven by stronger U.S. exports of sewer cleaners and industrial vacuum trucks primarily to the Middle East. Net sales compared to 2006 grew 13% on higher unit volumes of primarily vacuum trucks and overall higher pricing due in part to higher priced chassis.
Operating income in 2007 rose 10% over 2006, however, the operating margin in 2007 declined as the favorable benefits of higher pricing and sales volume were more thanEuropean markets, offset by increased chassis costs, temporarily high material costs, new product development, ERP implementation, product launches and initiatives to increase manufacturing efficiency.
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by an increase of $5.9 million in U.S. markets, and the sale of parking systems decreased $2.7 million. Operating income increased $9.0 million driven by cost management initiatives implemented in 2009 and the absence of $5.3 million in charges in 2008 to settle a dispute and write-off assets associated with a parking system contract.
Corporate Expense
Corporate expenses totaled $38.6 million in 2010, $28.6 million in 2009, and $30.7 million in 2008, $21.1 million in 2007 and $23.0 million in 2006.2008. The 45%35% increase in 2008 expense2010 is primarily due to $9.9$3.9 million in acquisition and integration related costs associated with Sirit and VESystems, a $3.8 million settlement charge related to the ongoing firefighter hearing loss litigation, $1.2 million of higherrestructuring costs, and a $1.0 million expense related to the departure of the Company’s former President and Chief Executive Officer. See Note 15 for further discussion of the hearing loss litigation charge of $3.8 million.
The 7% decrease in 2009 is due to $5.8 million in lower legal and trial costs associated with the Company’s ongoing firefighter hearing loss litigation, and $1.5offset by $2.6 million of costs associated with the hiring ofcosts for a new chief executive officer and chief financial officer, reducedproxy contest initiated by loweran activist shareholder. Other offsetting amounts include higher bonus and stock-based compensation costs of $1.8approximately $1.2 million.
The 8% reduction in 2007 expense was benefited by the receipt of $3.7 million in reimbursements from one of the Company’s insurers for certain out of pocket expenses related to the Company’s ongoing firefighter hearing loss litigation. The reimbursement essentially offset the legal expenses in 2007 associated with this litigation.
The hearing loss litigation has historically been managed by the Company’s legal staff resident at the corporate office and not by management at any reporting segment. In accordance with SFAS 131ASC Topic 280, “Segment Reporting,” which provides that segment reporting should follow the management of the item and that some expenses can be corporate expenses, these legal expenses (which are extremely unusual and not part of the normal operating activities of any of our operating segments), are reported and managed as corporate expenses. Only the Company and no current or divested subsidiariessubsidiary is a named party to these lawsuits.
Legal Matters
The Company has been sued by over 2,500 firefighters in numerous separate cases alleging that exposure to the Company’s sirens impaired their hearing. The Company contests the allegations. Over 100 cases have been dismissed in Cook County, including 27 by way of verdict. The Company continues to aggressively defend the matter. The Company has negotiated settlements with certain firefighter claimants. For further details regarding this and other legal matters, refer to Note 1415 in the financial statementsConsolidated Financial Statements included in Item 8 of Part II of thisForm 10-K.
Financial Condition, Liquidity and Capital Resources
During each of the three years in the period ended December 31, 2008,2010, the Company used its cash flows from operations to pay cash dividends to shareholders, to fund growth, and to make capital investments that both sustain and reduce the cost of its operations. Beyond these uses, remaining cash was used to fund acquisitions, pay down debt, to repurchase shares of common stock and make voluntary pension contributions.
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The Company’s cash and cash equivalents totaled $23.4$62.1 million, $12.5$21.1 million, and $15.8$23.4 million as of December 31, 2008, 20072010, 2009 and 2006,2008, respectively. The following table summarizes the Company’s cash flows for each of the three years in the period ended December 31 2008 ($ in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 2008 | | 2007 | | 2006 | | | 2010 | | 2009 | | 2008 | |
| |
| Operating cash flow | | $ | 123.7 | | | $ | 65.4 | | | $ | 29.7 | | |
| Proceeds from sale of properties, plant and equipment | | | 38.0 | | | | 0.6 | | | | 0.2 | | |
| Capital expenditures | | | (28.5 | ) | | | (20.1 | ) | | | (12.2 | ) | |
| Net cash provided by operating activities | | | $ | 31.2 | | | $ | 62.4 | | | $ | 123.7 | |
| Proceeds from sales of properties, plant and equipment | | | | 1.9 | | | | 4.0 | | | | 38.0 | |
| Purchases of properties and equipment | | | | (12.8 | ) | | | (14.4 | ) | | | (27.9 | ) |
| Payments for acquisitions, net of cash acquired | | | — | | | | (147.5 | ) | | | — | | | | (97.3 | ) | | | (13.5 | ) | | | - | |
| Gross proceeds from sale of discontinued businesses | | | 65.9 | | | | 65.4 | | | | — | | | | 0.2 | | | | 47.1 | | | | 65.9 | |
| Proceeds from Equity offering, net of fees | | | | 71.2 | | | | - | | | | - | |
| Borrowing activity, net | | | (20.1 | ) | | | 59.6 | | | | (50.7 | ) | | | 60.1 | | | | (77.7 | ) | | | (20.1 | ) |
| Dividends | | | (11.5 | ) | | | (11.5 | ) | | | (11.5 | ) | |
| Cash dividends paid to shareholder | | | | (13.3 | ) | | | (11.7 | ) | | | (11.5 | ) |
| Purchases of treasury stock | | | (6.0 | ) | | | — | | | | (12.1 | ) | | | - | | | | - | | | | (6.0 | ) |
| Payments for discontinued financing activities | | | (129.3 | ) | | | (11.7 | ) | | | (9.8 | ) | | | (1.0 | ) | | | (7.3 | ) | | | (129.3 | ) |
| All other, net | | | (21.3 | ) | | | (3.5 | ) | | | (4.0 | ) | | | 0.8 | | | | 8.8 | | | | (21.9 | ) |
| | | | | | | | | | | | | | | |
| Increase (decrease) in cash | | $ | 10.9 | | | $ | (3.3 | ) | | $ | (70.4 | ) | |
| Increase (decrease) in cash and cash equivalents | | | $ | 41.0 | | | $ | (2.3 | ) | | $ | 10.9 | |
| | | | | | | | | | | | | | | |
OperatingNet cash flow roseprovided by $58.3operating activities totaled $31.2 million and $62.4 million in 2008 compared to 2007.2010 and 2009, respectively. The increase in 2008decrease was primarily driven by a $103.1 millionreduction in the underlying results of operations, an increase in inventories, and a decrease in cash flow from discontinued operating activities offset by a reduction of $44.8 million in cash provided by continuing operating activities. In 2008,the fourth quarter of 2010, the Company discontinuedrecorded an $85.0 million valuation allowance against its DieU.S. deferred tax assets as a non-cash charge to income tax expense. Recording the valuation allowance does not restrict the Company’s ability to utilize the future deductions and Mold Operations,E-ONE businessnet operating losses associated with the deferred tax assets assuming taxable income is recognized in future periods. During the fourth quarter of 2010, the Company performed its annual goodwill and Financial Services activities which generated cashindefinite-lived intangible asset impairment assessment, and determined that the goodwill and trade names associated with FSTech Group reporting unit were impaired and recorded impairment charges of $126.2$67.1 million and $11.8 million, respectively. As of December 31, 2010, the goodwill impairment charge is an estimate and may be adjusted during the year. During
16
the year, the Company entered intofirst quarter of 2011 upon completion of a program agreement with Banc of America Public Capital Corp. to sell certain of its municipal leases by December 31, 2008. Approximately 92% of the Company’s municipal leases were sold under the program for net cash proceeds of approximately $94.0 million. The reduction in cash provided by continuing operations of $44.8 million was caused primarily by an increase in accounts receivable from the timing of shipments in 2008, a decrease in accounts payable and higher pension contributions in 2008.detailed second step impairment analysis.
Proceeds from the sale of properties, plant and equipment in 2008 are primarily the result of net cash proceeds of $35.8 million received from a sale-leasebacksale leaseback of the Company’s Elgin and University Park, Illinois plants.
Capital expenditures rose $8.4decreased in 2010 by $1.6 million compared to 2009 due primarily due to decreased spending on maintenance of equipment. Capital expenditures decreased $13.5 million in 2009 compared to 2008 from 2007 due primarily to the expansion of the Company’s plants in Pori, Finland and in Streator, Illinois. Capital expenditures increasedIllinois that occurred in 2007 compared2008.
The Company acquired two businesses in 2010 that are key components to 2006 asthe development of the Company’s ERP system designintelligent transportation systems strategy. VESystems was acquired for $34.8 million, of which $24.6 million was a cash payment. Sirit was acquired for CDN $77.1 million (USD $74.9 million), all of which was paid in cash. The acquisitions were funded with the Company’s existing cash balances and implementation gained momentum duringdebt drawn against the year.Company’s $250 million revolving credit facility. In addition to the use of cash and debt, the Company issued 1.2 million shares of Federal Signal Corporation common stock to fund a portion of the cost of purchasing VESystems. The issuances increased the total number of Company common stock shares outstanding. See Note 2 of the notes to the Consolidated Financial Statements for additional information on the acquisitions.
In 2007,2009, the Company acquired three businesses, Codespear LLC in JanuaryDiamond Consulting Services Ltd. for $17.4 million in cash, Riverchase Technologies in July for $6.7 million in cash, and PIPS Technologies in August for $126.3$13.5 million in cash. See Note 102 of the notes to the consolidated financial statementsConsolidated Financial Statements for additional information on these acquisitions.the acquisition. The Company funded the acquisitionsacquisition through cash provided by operations, additional bank borrowings, and from proceeds received from the sale of the Cutting Tool Operations,RAVO and Pauluhn businesses, included in discontinued operations in 2006,2009, and sold in January, 2007 for $65.4net proceeds of $45.1 million in cash. See Note 1213 of the notes to the consolidated financial statementsConsolidated Financial Statements for additional information on the sale of the Cutting Tool Operations.RAVO and Pauluhn businesses.
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In 2008, the Company divested its Die and Mold Operations andE-ONE business for net cash proceeds of $59.9 million and a payment of $0.6 million, respectively. Gross proceeds from the sale ofE-ONE were $3.4 million, of which $0.5 million had been received at December 31, 2008.
TheIn May 2010, the Company paidissued 12.1 million common shares at a price of $6.25 per share for total gross proceeds of $75.6 million. After deducting direct fees, net proceeds totaled $71.2 million. Proceeds from the equity offering were used to pay down a totaldebt.
In 2010, net borrowings increased $60.1 million, largely due to the acquisitions of $151.7the Sirit and VESystems businesses. In 2009, net borrowings decreased $77.7 million, largely upon pay downs upon the receipt of debt duringcash from the sales of the RAVO and Pauluhn businesses included in discontinued operations in 2009. In 2008, net borrowings decreased $20.1 million, largely upon receipt of cash from the aforementioned sale of its municipal leasing portfolio which was included in discontinued operations in 2008 and the aforementioned2008 sale leaseback transactions. In 2007, the Company had an increase in net borrowings of $59.6 million due to the acquisition of PIPS Technologies in the second half of the year. In 2006, net borrowings were reduced by $50.7 million mainly as a result of excess cash that was used to pay down debt.
Payments for discontinued financing activities of $129.3 million in 2008 reflect the repayment of financial service borrowings as a result of the Company’s decision to exit the municipal lease financing business. Other year over year activity reflects
The Company was in violation of its Interest Coverage Ratio covenant minimum requirement as defined in the changeSecond Amended and restated Credit Agreement (the “Credit Agreement”) and the Note Purchase Agreements for the fiscal quarter ended December 31, 2010. The Company was in borrowings associatedcompliance with the divested Die and Mold Tooling andE-ONE businesses.financial covenants throughout 2009.
In April, 2007,On March 15, 2011, the Company amended its Revolving Credit Agreement. Thisexecuted the Third Amendment and Waiver to Second Amended and Restated Credit Agreement dated as of April 25, 2007, among the Company, the lenders party thereto, and Bank of Montreal, as Agent (“the Third Amendment and Waiver”). On the same date, the Company also executed the Second Global Amendment and Waiver to the Note Purchase Agreements (“Second Global Amendment”) with the holders of its private placement notes (the “Notes”). Both the Third Amendment and Waiver and the Second Global Amendment include a permanent waiver of compliance with the Interest Coverage Ratio covenant for the Company’s fiscal quarter ended December 31, 2010. Included in the terms of the Third Amendment and Waiver and the Second Global Amendment are the replacement of the Interest Coverage Ratio covenant with a minimum EBITDA covenant effective January 1, 2011 with the first required reporting period on April 2, 2011, an increase in pricing to the Company’s revolving Credit Agreement”) providesFacility pricing grid, an increase in pricing for borrowingsthe outstanding Notes, mandatory prepayments from proceeds of asset sales, restrictions on use of excess cash flow, restrictions on dividend payments, share repurchases and other restricted payments and a 50 basis points fee paid to the bank lenders and holders of the Notes upon execution of the Third Amendment and Waiver and the Second Global Amendment.
The Third Amendment and Waiver permanently reduced the available commitments to the Company’s Credit Agreement from $250.0 million to $240.0 million. The Company’s ability to obtain new advances is now limited to $18.0 million as of the execution date of the Third Amendment and maturesWaiver. Borrowings up to the first $18.0 million of new advances under the Credit Agreement are senior in right of payment to the existing borrowings under the Credit Agreement and outstanding debt under the Notes. The Company may repay and reborrow amounts up to $18.0 million of new advances. The Company may also repay amounts greater than $18.0 million under the Credit Agreement, and subject to certain other provisions, the bank lenders will make available those commitments dollar for dollar under the Credit Agreement to $240.0 million.
The outstanding debt under the Company’s Revolving Credit Facility and Notes will be prepaid on a pro rata basis in accordance with their pro rata percentages on a quarterly basis by an amount equal to the Excess Cash Flow for that quarter.
Excess Cash Flow is defined as EBITDA for the applicable quarter minus the sum of interest, scheduled principal payments, cash taxes, cash dividends and capital expenditures paid in accordance with the revolving credit agreement for that quarter plus after the second fiscal quarter of 2011, the aggregate amount that the Company’s working capital has decreased in the ordinary course during such period. The Excess Cash Flow pro rata payment against the Credit Agreement outstanding debt will concurrently and permanently reduce the same amount of Credit Agreement commitments. The commitments may be reinstated with approval from all bank lenders within the Credit Agreement.
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A complete list of amended terms and conditions can be found in the Third Amendment and Waiver and the Second Global Amendment, which are included as Exhibits to this Form 10-K. See Note 6 of the notes to the Consolidated Financial Statements for additional information.
On April 2012. It also allows27, 2009, the Company executed the Global Amendment to Note Purchase Agreements (the “Global Amendment”) with the holders of its private placement debt notes. The Global Amendment included a provision allowing the Company to borrow upprepay $50.0 million of principal of the $173.4 million Notes outstanding at par with no prepayment penalty. The prepayment was executed on April 28, 2009, and included principal, related accrued interest and a fee of $0.2 million totaling $51.1 million. The prepayment was funded by the Company’s available capacity under its revolving credit facility.
The Global Amendment included changes to $35the Notes’ coupon interest rates. The coupon interest rates on the Notes were increased by 100 basis points upon execution of the Global Amendment. On January 1, 2010, the outstanding Notes’ coupon interest rates increased by an additional 100 basis points. On April 1, 2010, the outstanding Notes’ coupon interest rates increased an additional 200 basis points.
The Global Amendment also included changes and additions to various covenants within the Note Agreements. Financial covenants were modified to more closely align with those included in the Company’s revolving credit facility agreement, which allows for the exclusion of various charges when computing covenants for minimum net worth and maximum debt to capitalization.
Aggregate maturities of total borrowings amount to approximately $78.0 million in an alternative currency under the swing line provision. As2011, $178.9 million in 2012 and $6.8 million in 2013 and $0.2 million in 2014 thereafter. The fair values of these borrowings aggregated $261.7 million and $205.0 million at December 31, 2007 €22.52010 and 2009, respectively. Included in 2011 maturities are $1.8 million or $32.6of othernon-U.S. lines of credit, $1.3 million was drawn as alternative currencyof other debt, $6.5 million of private placement debt, $68.0 million of revolving credit facility, and $66.0$0.4 million was drawn on the Credit Agreement for a total of $98.6 million drawn under the Credit Agreement. The Company was in compliance with all debt covenants throughout 2007.
In December, 2007, the Company amended the Loan Agreement betweenE-ONE and Banc of America Leasing & Capital, LLC to allow borrowings against the leases ofE-One Inc.,E-One New York, Inc., Elgin Sweeper Company and Vactor Manufacturing, Inc. The outstanding balance on this agreement was $96.6 million as of December 31, 2007 and was paid off completely by August 2008.capital lease obligations.
In March 2008, the Company requested and was grantedexecuted an amendment (the “Second Credit Amendment”) to the Revolving Credit Agreement. Affected items in theFacility. The Second Credit Amendment includedmodified the definitions of Consolidated Net Worth and EBIT, reducingreduced the Total Indebtedness to Capital ratio maximum to .50, reducing0.50, reduced the minimum Interest Coverage Ratio requirement from 2:1 to 2.75:1 for the four quarters ending in 2008, and reducingreduced the required minimum percentage of consolidated assets directly owned by the Credit Agreement’s borrower and guarantors to 50%. The amendment also allowed for the unencumbered sale of theE-ONEE-One business. At December 31, 2008, a total of $97.0 million was drawn against the Credit Agreement. The Company was in compliance with all debt covenants throughout 2008.
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At December 31, 2006, $21.8 million was drawn against the Company’s $125 million Amended Credit Agreement revolving credit line. This Amended Credit Agreement was increased from $75 million to $125 million during 2006. The Company borrowed $23.6 million in September, 2006 through the Banc of America Loan Agreement, the balance on this facility as of December 31, 2006 was $90.7 million. Also in 2006, a $65 million private placement note matured and was repaid using a combination of cash flow from operations and borrowings under the Amended Credit Agreement revolving credit line.
Cash dividends paid to shareholders in 2010, 2009 and 2008 2007were $13.3 million, $11.7 million and 2006 were $11.5 million.million, respectively. The Company declared dividends of $0.24 per share in 2008, 20072010, 2009 and 2006.2008.
During 2006 and 2008, the Company completed repurchases totaling $12.1 million and $6.0 million respectively, of stock under share repurchase programs approved by the Board of Directors. Treasury stock purchases reflect the Company’s policy to purchase sharesDirectors to offset the dilutive effects of stock-based compensation. No such purchases were made in 2010 or 2009.
Total debt net of cash and short-term investments included in continuing operations was $245.5$200.3 million representing 46%48% of total capitalization at December 31, 20082010 versus $276.2$180.5 million or 38%35% of total capitalization at December 31, 2007.2009. The increase in the percentage of debt to total capitalization in 2008, despite the reduction in debt,2010 was due to a reduction in equity of $160.8$107.8 million caused primarily byand an increase in the net after tax losses associated with the divestituresdebt of the Die and Mold Operations andE-ONE. In 2008, the Company’s aggregate borrowing capacity was maintained.$19.8 million.
The Company anticipates that capital expenditures for 20092011 will approximate $20$15 million and will be restricted to no more than $15 million per the terms of the Third Amendment and Waiver and the Second Global Amendment. The Company believes that its financial resources and major sources of liquidity, including cash flow from operations and borrowing capacity, will be adequate to meet its operating and capital needs in addition to its financial commitments.
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Contractual Obligations and Commercial Commitments
The following table presents a summary of the Company’s contractual obligations and payments due by period as of December 31, 20082010 ($ in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Payments Due by Period | | | Payments Due by Period | |
| | | | | Less than
| | | | | | More than
| | | | | Less than
| | | | | | More than
| |
| | | Total | | 1 Year | | 2-3 Years | | 4-5 Years | | 5 Years | | | Total | | 1 Year | | 2-3 Years | | 4-5 Years | | 5 Years | |
| |
| Short-term obligations | | $ | 12.6 | | | $ | 12.6 | | | $ | — | | | $ | — | | | $ | — | | | $ | 1.8 | | | $ | 1.8 | | | | - | | | | - | | | | - | |
| Long-term debt* | | | 270.4 | | | | 25.1 | | | | 70.3 | | | | 175.0 | | | | — | | | | 261.1 | | | | 75.8 | | | | 185.3 | | | | - | | | | - | |
| Operating lease obligations | | | 74.9 | | | | 9.9 | | | | 14.0 | | | | 10.2 | | | | 40.8 | | | | 66.5 | | | | 9.6 | | | | 13.2 | | | | 11.4 | | | | 32.3 | |
| Fair value of interest rate swaps | | | 2.1 | | | | 0.4 | | | | 1.7 | | | | — | | | | — | | |
| Capital lease obligations | | | | 1.0 | | | | 0.4 | | | | 0.4 | | | | 0.2 | | | | - | |
| Interest payments on long term debt | | | 24.0 | | | | 8.5 | | | | 11.5 | | | | 4.0 | | | | — | | | | 8.6 | | | | 4.1 | | | | 4.2 | | | | 0.3 | | | | - | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Total contractual obligations | | $ | 384.0 | | | $ | 56.5 | | | $ | 97.5 | | | $ | 189.2 | | | $ | 40.8 | | | $ | 339.0 | | | $ | 91.7 | | | $ | 203.1 | | | $ | 11.9 | | | $ | 32.3 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | |
| * | | Long term debt includes financial service borrowings which isare reported in discontinued operations.operations and current portion of long term debt. |
The Company is party to various interest rate swap agreements in conjunction with the management of borrowing costs. As of December 31, 2008, the fair value of the Company’s net position would result in cash payments of $0.9 million. Future changes in the U.S. interest rate environment would correspondingly affect the fair value and ultimate settlement of the contracts.
The Company also enters into foreign currency forward contracts to protect against the variability in exchange rates on cash flows and intercompany transactions with its foreign subsidiaries. As of December 31, 2008,2010, there is $0.7$0.1 million of unrealized losses on the Company’s foreign exchange contracts. Volatility in the future exchange rates between the U.S. dollar and the Euro, and Canadian dollar, and British pound will impact the final settlement of any of these contracts.
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The following table presents a summary of the Company’s commercial commitments and the notional amount by expiration period as of December 31, 2010 ($ in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Notional Amount by Expiration Period | | | Notional Amount by Expiration Period | |
| | | | | Less than
| | 2-3
| | 4-5
| | | | | Less than
| | 2-3
| | 4-5
| |
| | | Total | | 1 Year | | Years | | Years | | | Total | | 1 Year | | Years | | Years | |
| |
| Financial standby letters of credit | | $ | 31.6 | | | $ | 31.4 | | | $ | — | | | $ | 0.2 | | | $ | 27.5 | | | $ | 27.3 | | | $ | 0.1 | | | $ | 0.1 | |
| Performance standby letters of credit | | | 2.4 | | | | 2.4 | | | | — | | | | — | | | | 2.1 | | | | 2.1 | | | | - | | | | - | |
| Purchase obligations | | | 2.8 | | | | 2.8 | | | | — | | | | — | | | | 18.1 | | | | 18.1 | | | | - | | | | - | |
| Guaranteed residual value obligations | | | 1.6 | | | | 1.6 | | | | — | | | | — | | |
| | | | | | | | | | | | | | | | | | | |
| Total commercial commitments | | $ | 38.4 | | | $ | 38.2 | | | $ | — | | | $ | 0.2 | | | $ | 47.7 | | | $ | 47.5 | | | $ | 0.1 | | | $ | 0.1 | |
| | | | | | | | | | | | | | | | | | | |
Financial standby letters of credit largely relate to casualty insurance policies for the Company’s workers’ compensation, automobile, general liability and product liability policies. Performance standby letters of credit represent guarantees of performance by foreign subsidiaries that engage in cross-border transactions with foreign customers.
Purchase obligations relate to commercial chassis.
In limited circumstances, the Company guarantees the residual value on vehicles in order to facilitate a sale. The Company believes its risk of loss is low; no losses have been incurred to date. The inability of the Company 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.
As of December 31, 2008,2010, the Company has a liability of approximately $5.9$4.1 million for unrecognized tax benefits (refer to Note 5)7). Due to the uncertainties related to these tax matters, the Company cannot make a reasonably reliable estimate of the period of cash settlement for this liability.
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 the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The Company considers the following policies to be the most critical in understanding the judgments that are involved in the preparation of the Company’s consolidated financial statementsConsolidated Financial Statements and the uncertainties that could impact the Company’s financial condition, results of operations and cash flows.
Revenue Recognition
Net sales consist primarily of revenue from the sale of equipment, environmental vehicles, vehicle mounted aerial platforms, parts, software, service and maintenance contracts.
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The Company recognizes revenue for products when persuasive evidence of an arrangement exists, delivery has occurred, the sales price is fixed or determinable, and collection is probable. Product is considered delivered to the customer once it has been shipped and title and risk of loss have been transferred. For most of the Company’s product sales, these criteria are met at the time the product is shipped; however, occasionally title passes later or earlier than shipment due to customer contracts or letter of credit terms. If at the outset of an arrangement the Company determines the arrangement fee is not or is presumed not to be fixed or determinable, revenue is deferred and subsequently recognized as amounts become due and payable and all other criteria for revenue recognition have been met.
For any product within these groups that either is software or is considered software-related, the Company accounts for such products in accordance with the specific industry accounting guidance for software and software-related transactions.
The Company accounts for multiple element arrangements that consist only of software or software-related products in accordance with industry specific accounting guidance for software and software-related transactions. If a multiple-element arrangement includes software and other deliverables that are neither software nor software-related, the Company applies various revenue-related Generally Accepted Accounting Principles “GAAP” to determine if those deliverables constitute separate units of accounting from the software or software-related deliverables. If the Company can separate the deliverables, the Company applies the industry specific accounting guidance to the software and software-related deliverables and applies other appropriate guidance to the non-software related deliverables. Revenue on arrangements that include multiple elements such as hardware, software, and services is allocated to each element based on the relative fair value of each element. Each element’s allocated revenue is recognized when the revenue recognition criteria for that element have been met. Fair value is generally determined by vendor specific objective evidence (“VSOE”), which is based on the price charged when each element is sold separately. If the Company cannot objectively determine the fair value of any undelivered element included in a multiple-element arrangement, the Company defers revenue until all elements are delivered and services have been performed, or until fair value can objectively be determined for any remaining undelivered elements. When the fair value of a delivered element has not been established, but fair value exists for the undelivered elements, the Company uses the residual method to recognize revenue if the fair value of all undelivered elements is determinable. Under the residual method, the fair value of the undelivered elements is deferred and the remaining portion of the arrangement fee is allocated to the delivered elements and is recognized as revenue.
Implementation services include the design, development, testing, and installation of systems. These services are recognized pursuant toSOP 81-1, Accounting for Performance of Construction-Type Contracts and Certain Production-Type Contracts. In such cases, the Company is required to make reasonably dependable estimates relative to the extent of progress toward completion by comparing the total hours incurred to the estimated total hours for the arrangement and, accordingly, would apply thepercentage-of-completion method. If the Company were unable to make reasonably dependable estimates of progress towards completion, then it would use the completed-contract method, under which revenue is recognized only upon completion of the services. If total cost estimates exceed the anticipated revenue, then the estimated loss on the arrangement is recorded at the inception of the arrangement or at the time the loss becomes apparent.
Revenue from maintenance contracts is deferred and recognized ratably over the coverage period. These contracts typically extend phone support, software updates and upgrades, technical support and equipment repairs.
Certain products which include software elements that are considered to be “more than incidental” are sold with post-contract support, which may include certain upgrade rights that are offered to customers in connection with software sales or the sale of extended warranty and maintenance contracts. The Company defers revenue for the fair value of the upgrade rights until the future obligation is fulfilled or the right to the upgrade expires. When the Company’s software products are available with maintenance agreements that grant customers rights to unspecified future upgrades over the maintenance term on awhen-and-if-available basis, revenue associated with such maintenance is recognized ratably over the maintenance term.
Allowances for Doubtful Accounts
The Company performs ongoing credit evaluations of its customers. The Company’s policy is to establish, on a quarterly basis, allowances for doubtful accounts based on factors such as historical loss trends, credit quality of the
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present portfolio, collateral value, and general economic conditions. If the historical loss trend increased or decreased 10% in 2008,2010, the Company’s operating income would have decreased or increased by $0.1 million, respectively. Though management considers the valuation of the allowances proper and adequate, changes in the economyand/or deterioration of the financial condition of the Company’s customers could affect the reserve balances required.
Inventory Reserve
The Company 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 separatelyfor identifiable obsolete products and materials. General reserves for materials and finished goods are established based upon formulas which are established by reference, to, 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
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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. The length of the warranty term depends on the product sold, but generally extends from six monthsone to fiveten years based on the terms that are generally accepted in the Company’s marketplaces. Certain components necessary to manufacture the Company’s vehicles (including chassis, engines, and transmissions) are covered under an original manufacturers’ warranty. Such manufacturers’ warranties are extended directly to end customers.
The Company 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’s historical experience; costs related to such issues, if any, are provided for when they become probable and estimable.
The Company’s warranty costs as a percentage of net sales totaled 1.0% in 2008, 0.9%2010, 1.3% in 20072009, and 0.8%1.0% in 2006.2008. The increasedecrease in the rate in 20082010 is primarily due to increaseddecreased costs in the Fire RescueEnvironmental Solutions Group. Management believes the reserve recorded at December 31, 20082010 is appropriate. A 10% increase or decrease in the estimated warranty costs in 20082010 would have decreased or increased operating income by $0.9$0.8 million, respectively.
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 Company is partially self-funded for workers’ compensation and product liability claims with various retention and excess coverage thresholds. After the claim is filed, an initial liability is estimated, if any is expected, to resolve the claim. This liability is periodically updated as more claim facts become known. The establishment and update of liabilities for unpaid claims, including claims incurred but not reported, is based on the assessment by the Company’s claim administrator of each claim, an independent actuarial valuation of the nature and severity of total claims, and management’s estimate. The Company utilizes a third-party claims administrator to pay claims, track and evaluate actual claims experience, and ensure consistency in the data used in the actuarial valuation. Management believes that the reserve established at December 31, 20082010 appropriately reflects the Company’s risk exposure. The Company has not established a reserve for potential losses resulting from the firefighter hearing loss litigation (see Note 1415 to the Company’s Consolidated Financial Statements included in Item 8 of Part II of thisForm 10-K);. ifIf the Company is not successful in its defense after exhausting all appellate options, it will record a charge for such claims, to the extent they exceed insurance recoveries, at the appropriate time.
Goodwill Impairment
In accordanceGoodwill represents the excess of the cost of an acquired business over the amounts assigned to its net assets. Goodwill is not amortized but is tested for impairment at a reporting unit level on an annual basis or when an event
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occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. The Company performed its annual goodwill impairment test as of October 31, 2010.
Goodwill is tested for impairment based on a two-step test. The first step, used to identify potential impairment, compares the fair value of a reporting unit with Statementits carrying amount, including goodwill. If the fair value of Financial Accounting Standards (“SFAS”) No. 142, “Goodwilla reporting unit exceeds its carrying amount, goodwill of the reporting unit is not impaired and Other Intangible Assets,the second step of the impairment test is unnecessary. If the carrying amount of a reporting unit exceeds its fair value, the second step of the goodwill impairment test is performed to measure the amount of impairment loss, if any. The second step compares the implied fair value of reporting unit goodwill with the carrying amount of that goodwill. If the carrying amount of reporting unit goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to that excess. The Company generally determines the fair value of its reporting units using two valuation methods: the “Income Approach — Discounted Cash Flow Analysis” method, and the “Market Approach — Guideline Public Company Method.”
Under the “Income Approach — Discounted Cash Flow Analysis” method the key assumptions consider projected sales, cost of sales, and operating expenses. These assumptions were determined by management utilizing our internal operating plan, growth rates for revenues and operating expenses, and margin assumptions. An additional key assumption under this approach is the discount rate, which is determined by looking at current risk-free rates of capital, current market interest rates, and the evaluation of risk premium relevant to the business segment. If our assumptions relative to growth rates were to change or were incorrect, our fair value calculation may change, which could result in impairment. The Company’s risk factors are discussed under Item 1A of thisForm 10-K.
Under the “Market Approach — Guideline Public Company Method” the Company ceased amortization of goodwill and indefinite-lived intangible assets effective January 1, 2002. SFAS No. 142 also requiresidentified several publicly traded companies, including Federal Signal, which we believe have sufficiently relevant similarities. For these companies the Company calculated the mean ratio of invested capital to testrevenues and invested capital to EBITDA. Similar to the income approach discussed above, sales, cost of sales, operating expenses, and their respective growth rates are key assumptions utilized. The market prices of Federal Signal and other guideline companies are additional key assumptions. If these assets annuallymarket prices increase, the estimated market value would increase. If the market prices decrease, the estimated market value would decrease.
The results of these two methods are weighted based upon management’s evaluation of the relevance of the two approaches. In the current year evaluation management determined that the income approach provided a more relevant measure of each reporting unit’s fair value and used it to determine reporting unit fair value. Management used the market approach to corroborate the results of the income approach. Management used the income approach to determine fair value of the reporting units because it considers anticipated future financial performance. The market approach is based upon historical and current economic conditions which might not reflect the long term prospects or opportunities for impairment; the Company performs this test inbusiness segment being evaluated.
During the fourth quarter unlessof 2010, the Company performed the annual assessment, determined that the goodwill associated with the FSTech Group reporting unit was impaired, and recorded impairment indicators arise earlier.charges of $67.1 million. The impairment charge resulted from decreased sales and cash flow estimated in our FSTech Group. As of December 31, 2010, the goodwill impairment charge is an estimate and may be adjusted during the first quarter of 2011 upon completion of a detailed second step impairment analysis. We have not completed the second step because we are awaiting additional information needed to value certain assets of the reporting unit. We will complete the second step in the first quarter of 2011 and changes to the estimated impairment we have recorded could be material. The fair values of the other reporting units exceeded their respective carrying amounts by 10% or more. The Company continueshad no goodwill impairments in 2009 or 2008. Adverse changes to amortize definite-livedthe Company’s business environment and future cash flows could cause us to record impairment charges in future periods which could be material. See Note 5 of the Consolidated Financial Statements for further information.
Indefinite lived Intangible Assets
An intangible asset determined to have an indefinite useful life is not amortized. Indefinite lived intangible assets over theirare evaluated each reporting period to determine whether events and circumstances continue to support an
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indefinite useful life. These assets are tested for impairment annually, or more frequently if events or changes in circumstances indicate that the asset might be impaired.
A review forThe impairment requires judgment in estimated cash flows based upon estimatestest consists of future sales, operating income, working capital improvements and capital expenditures. Management utilizes a discounted cash flow approach to determinecomparison of the fair value of the Company’s reporting units.indefinite lived intangible asset with its carrying amount. If the sumcarrying amount of the expected discounted cash flows of the reporting unit is less thanan intangible asset exceeds its carryingfair value, an impairment loss is required against the unit’s goodwill.recognized in an amount equal to that excess.
TheSignificant judgment is applied when evaluating if an intangible asset has an indefinite useful life. In addition, for indefinite lived intangible assets, significant judgment is applied in testing for impairment. This judgment includes developing cash flow projections, selecting appropriate discount rates, identifying relevant market comparables, and incorporating general economic and market conditions. During the fourth quarter of 2010, as a result of the annual testing conducted in 2008, 2007 and 2006 did not result in impairment.
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Although management believesassessment, the Company concluded that the assumptionsfair value determined by the income approach, of certain trade names in the FSTech Group was lower than the carrying value. As a result, the Company recognized a $11.8 million impairment charge to trade names within the FSTech segment in the fourth quarter of 2010. The Company had no impairments in 2009 and estimates used were reasonable, a sensitivity analysis2008. Adverse changes to the Company’s business environment and future cash flows could cause us to record impairment charges in future periods, which could be material. See Note 5 of the Consolidated Financial Statements for each reporting unit is performed along with the impairment test. The analysis indicated that a 10% reduction to earnings before interest and taxes to all future years would not have resulted in a goodwill impairment in any group.further information.
Postretirement Benefits
The Company sponsors domestic and foreign defined benefit pension and other postretirement plans. Major assumptions used in the accounting for these employee benefit plans include the discount rate, expected return on plan assets and rate of increase in employee compensation levels. A change in any of these assumptions would have an effect on net periodic pension and postretirement benefit costs.
The following table summarizes the impact that a change in these assumptions would have on the Company’s operating income:income ($ in millions):
| | | | | | | | | | |
| | | Assumption Change: | | | | | | | | | |
| | | 25 Basis
| | 25 Basis
| | | Assumption change: |
| | | Point Increase | | Point Decrease | | | 25 Basis Point Increase | | 25 Basis Point Decrease |
| |
| Discount rate | | | 0.5 | | | | (0.5 | ) | | | 0.3 | | | | (0.3 | ) |
| Return on assets | | | 0.3 | | | | (0.3 | ) | | | 0.2 | | | | (0.2 | ) |
| Employee compensation levels | | | (0.1 | ) | | | 0.1 | | | | - | | | | - | |
The weighted-average discount rate used to measure pension liabilities and costs is set by reference to published, high-quality bond indices. However, these indices give only an indication of the appropriate discount rate because the cash flows of the bonds comprising the indices do not precisely match the projected benefit payment stream of the plan precisely.plan. For this reason, we also consider the individual characteristics of the plan, such as projected cash flow patterns and payment durations, when setting the discount rate. The weighted-average discount rate used to measure U.S. pension liabilities increaseddecreased from 6.0% in 20072009 to 6.8%5.75% in 2008.2010. See Note 68 to the Consolidated Financial Statements for further discussion.
Stock-Based Compensation Expense
The Company accounts for stock-based compensation in accordance with SFAS No. 123(R). SFAS No. 123(R)ASC Topic 718, “Compensation — Stock Compensation” which requires all share-based payments to employees, including grants of employee stock options and restricted stock, to be recognized in the financial statements based on their respective grant date fair values. We use the Black-Scholes option pricing model to estimate the fair value of the stock option awards. The Black-Scholes model requires the use of highly subjective and complex assumptions, including the Company’s stock price, expected volatility, expected term, risk-free interest rate, and expected dividend yield. For expected volatility, we base the assumption on the historical volatility of the Company’s common stock. The expected term of the awards is based on historical data regarding employees’ option exercise behaviors. The risk-free interest rate assumption is based on observed interest rates appropriate for the terms of the awards. The dividend yield assumption is based on the Company’s history and expectation of dividend payouts. In addition to the requirement for fair value estimates, SFAS No. 123(R)ASC Topic 718 also requires the recording of an expense that is net of an anticipated
31
forfeiture rate. Therefore, only expenses associated with awards that are ultimately expected to vest are included in our financial statements. Our forfeiture rate is determined based on our historical option cancellation experience.
We evaluate the Black-Scholes assumptions that we use to value our awards on a quarterly basis. With respect to the forfeiture rate, we revise the rate if actual forfeitures differ from our estimates. If factors change and we employ different assumptions, stock-based compensation expenseexpenses related to future stock-based payments may differ significantly from estimates recorded in prior periods.
Income Taxes
Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying values of existing assets and liabilities and their respective tax bases. Deferred tax assets are also recorded with respect to net operating losses and other tax attribute carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the years in which temporary differences are expected to be recovered or settled. Valuation allowances are established when it is more likely than not that deferred tax assets will not be realized. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the income of the period that includes the enactment date.
The ultimate recovery of deferred tax assets is dependent upon the amount and timing of future taxable income, and other factors such as the taxing jurisdiction in which the asset is to be recovered. A high degree of judgment is required to determine if, and the extent that, valuation allowances should be recorded against deferred tax assets. We have provided a valuation allowance at December 31, 2010 of $85.0 million against our net domestic deferred tax assets based on our assessment of past operating results, estimates of future taxable income, and the feasibility of tax planning strategies. Specifically, beginning in the fourth quarter of 2010 we had three years of cumulative losses from continuing operations. We believe having three years of cumulative losses from continuing operations limits our ability to look to future taxable income as a source for recovering our deferred tax assets. We will continue to evaluate our ability to utilize our deferred tax assets and, as a result, we may increase or decrease our valuation allowance in future periods. Although we believe that our approach to estimates and judgments as described herein is reasonable, actual results could differ and we may be exposed to increases or decreases in income taxes that could be material. There were no similar charges recognized in 2009.
Accounting for uncertainty in income taxes addresses the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements. We recognize the tax benefit from an uncertain tax position if it is more likely than not that the tax position will be sustained on examination by taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position are measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement.
The guidance on accounting for uncertainty in income taxes also provides guidance on de-recognition and classification, and requires companies to elect and disclose their method of reporting interest and penalties on income taxes. We recognize interest and penalties related to uncertain tax positions as part of Income tax expense.
Financial Market Risk Management
The Company is subject to market risk associated with changes in interest rates and foreign exchange rates. To mitigate this risk, the Company utilizes interest rate swaps and foreign currency options and forward contracts. The Company does not hold or issue derivative financial instruments for trading or speculative purposes and is not party to leveraged derivatives contracts.
21
Interest Rate Risk
The Company manages its exposure to interest rate movements by targeting a proportionate relationship between fixed-rate debt to total debt generally within established percentages of between 40% and 60%. The Company uses funded fixed-rate borrowings as well as interest rate swap agreements to balance its overall fixed/floating interest rate mix. During the month of June 2010, floating to fixed interest rate swaps with a total notional amount of $70 million matured and that portion of the Company’s debt was left floating rate. Since the floating rate of interest
32
the Company receives on its revolving credit facility has favorable pricing further enhanced by historically low LIBOR rates, the Company decided to maintain a percentage of floating rate debt outside of the 40% to 60% targets.
The following table presents the principal cash flows and weighted average interest rates by year of maturity for the Company’s total debt obligations held at December 31, 20082010 ($ in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Expected Maturity Date | | | Fair
| |
| | | 2009 | | | 2010 | | | 2011 | | | 2012 | | | Thereafter | | | Total | | | Value | |
| |
| Fixed rate | | $ | 25.1 | | | $ | 25.1 | | | $ | 25.2 | | | $ | 68.0 | | | $ | — | | | $ | 143.4 | | | $ | 146.7 | |
| Average interest rate | | | 5.7 | % | | | 5.6 | % | | | 5.5 | % | | | 5.2 | % | | | — | | | | 5.5 | % | | | — | |
| Variable rate | | $ | — | | | $ | 20.0 | | | $ | — | | | $ | 97.0 | | | $ | 10.0 | | | $ | 127.0 | | | $ | 127.0 | |
| Average interest rate | | | — | | | | 4.2 | % | | | — | | | | 4.0 | % | | | 4.9 | % | | | 4.1 | % | | | — | |
The following table presents notional amounts and weighted average interest rates by expected (contractual) maturity date for the Company’s interest rate swap contracts held at December 31, 2008 ($ 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.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Expected Maturity Date | | | Fair
| |
| | | 2009 | | | 2010 | | | 2011 | | | 2012 | | | Thereafter | | | Total | | | Value | |
| |
| Pay fixed, receive variable | | $ | 15.0 | | | $ | 35.0 | | | $ | 10.0 | | | $ | — | | | $ | — | | | $ | 60.0 | | | $ | (2.7 | ) |
| Average pay rate | | | 6.8 | % | | | 5.8 | % | | | 8.3 | % | | | — | | | | — | | | | — | | | | — | |
| Average receive rate | | | 1.5 | % | | | 1.6 | % | | | 1.6 | % | | | — | | | | — | | | | — | | | | — | |
| Receive fixed, pay variable | | $ | 10.0 | | | $ | 10.0 | | | $ | 10.0 | | | $ | 20.0 | | | $ | — | | | $ | 50.0 | | | $ | 1.7 | |
| Average pay rate | | | 5.3 | % | | | 5.4 | % | | | 5.4 | % | | | 3.3 | % | | | — | | | | — | | | | — | |
| Average receive rate | | | 6.8 | % | | | 6.8 | % | | | 6.8 | % | | | 5.2 | % | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Expected Maturity Date | | Fair
|
| | | 2011 | | 2012 | | 2013 | | 2014 | | Thereafter | | Total | | Value |
| |
| Fixed rate | | $ | 5.8 | | | $ | 28.0 | | | $ | - | | | $ | - | | | $ | - | | | $ | 33.8 | | | $ | 31.7 | |
| Average interest rate | | | 12.5 | % | | | 12.6 | % | | | - | | | | - | | | | - | | | | 12.5 | % | | | - | |
| Variable rate | | $ | 72.2 | | | $ | 150.8 | | | $ | 6.8 | | | $ | 0.1 | | | $ | 0.1 | | | $ | 230.0 | | | $ | 230.0 | |
| Average interest rate | | | 4.8 | % | | | 4.8 | % | | | 9.5 | % | | | - | | | | - | | | | 4.9 | % | | | - | |
See Note 79 to the consolidated financial statementsConsolidated Financial Statements in thisForm 10-K for a description of these agreements. A 100 basis point increase or decrease in variable interest rates in 20082010 would have increased or decreased interest expense by $1.3$1.9 million, respectively.
Foreign Exchange Rate Risk
Although the majority of our sales, expenses and cash flows are transactiontransacted in U.S. dollars, we havethe Company has exposure to changes in foreign currency exchange rates, primarily the Euro and the British Pound.pound. If average annual foreign exchange rates had collectively weakened against the U.S. dollar by 10%, our pre-tax earnings in 20082010 would have decreased by $3.0$3.8 million from foreign currency translation.
The Company has foreign currency exposures related to buying and selling in currencies other than the local currency in which it operates. The Company utilizes foreign currency options and forward contracts to manage these risks.
22
The following table summarizes the Company’s foreign currency derivative instruments as of December 31, 2008.2010. All are expected to settle in 20092011 ($ in millions):
| | | | | | | | | | | | | |
| | | Expected
| | | | |
| | | Settlement Date
| | | | |
| | | 2009 | | | | |
| | | | | | Average
| | | | |
| | | Notional
| | | Contract
| | | Fair
| |
| | | Amount | | | Rate | | | Value | |
| |
| Forward contracts: | | | | | | | | | | | | |
| Buy Euros, sell U.S. dollars | | $ | 11.6 | | | | 1.5 | | | $ | (0.5 | ) |
| Buy U.S dollars, sell Euros | | | 19.7 | | | | | | | | 1.7 | |
| Buy Euros, sell CAD | | | 11.9 | | | | | | | | (1.5 | ) |
| Other currencies | | | 5.4 | | | | | | | | (1.0 | ) |
| | | | | | | | | | | | | |
| Total forward contracts | | | 48.6 | | | | | | | | (1.3 | ) |
| Options: | | | | | | | | | | | | |
| Buy U.S. dollars, sell Euros | | | 10.6 | | | | 1.5 | | | | 1.6 | |
| | | | | | | | | | | | | |
| Total foreign currency derivatives | | $ | 59.2 | | | | | | | $ | 0.3 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | Expected
| | | | |
| | | Settlement Date | | | | |
| | | 2011 | | | | |
| | | | | | Average
| | | | |
| | | Notional
| | | Contract
| | | Fair
| |
| | | Amount | | | Rate | | | Value | |
| |
| Forward contracts: | | | | | | | | | | | | |
| Buy U.S dollars, sell Euros | | $ | 16.8 | | | | 1.3 | | | $ | (0.3 | ) |
| Buy British Pounds, sell Euros | | | 5.2 | | | | | | | | (0.1 | ) |
| Buy British Pounds, sell Euros | | | 2.3 | | | | | | | | - | |
| Other currencies | | | 4.1 | | | | | | | | (0.2 | ) |
| | | | | | | | | | | | | |
| Total foreign currency derivatives | | $ | 28.4 | | | | | | | $ | (0.6 | ) |
| | | | | | | | | | | | | |
See Note 79 to the Consolidated Financial Statements in thisForm 10-K for a description of these agreements.
Forward exchange contracts are recorded as a natural hedge when the hedged item is a recorded asset or liability that is revalued each accounting period, in accordance with SFAS No. 52,ASC Topic 830, “Foreign Currency Translation”.Matters.” For derivatives designated as natural hedges, changes in fair values are reported in the “Other income (expense)” line of the Consolidated Statements of Operations.
Other Matters
The Company has a business conduct policy applicable to all employees and regularly monitors compliance with that policy. The Company has determined that it had no significant related party transactions in each of the three years in the period ended December 31, 2008.2010.
33
| |
| Item 7A. | Quantitative and Qualitative Disclosures About Market Risk. |
The information contained under the caption Financial Market Risk Management included in Item 7 of thisForm 10-K is incorporated herein by reference.
| |
| Item 8. | Financial Statements and Supplementary Data. |
2334
FEDERAL SIGNAL CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
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2435
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMReport of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders
of Federal Signal Corporation
We have audited the accompanying consolidated balance sheets of Federal Signal Corporation as of December 31, 20082010 and 2007,2009, and the related consolidated statements of operations, shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2008.2010. Our audits also included the financial statement schedule listed in the Index at Item 15(a). These financial statements and schedule are the responsibility of the Company’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 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 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 at December 31, 20082010 and 2007,2009, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2008,2010, in accordanceconformity with U.S. generally accepted 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 therein.
As discussed in Note 5 to the consolidated financial statements, on January 1, 2007, Federal Signal Corporation changed its method of accounting for uncertain tax positions to conform with Financial Accounting Standards Board Interpretation No. 48, “Accounting for Uncertainty in Income Taxes.” Additionally, as discussed in Note 1 to the consolidated financial statements, on December 31, 2006, Federal Signal Corporation changed its method of accounting for defined benefit pension and other postretirement benefit plans to conform with SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans — an amendment of FASB Statements No. 87, 88, 106 and 132(R).”
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Federal Signal Corporation’s internal control over financial reporting as of December 31, 2008,2010, 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 27, 2009,March 16, 2011, expressed an unqualified opinion thereon.
Ernst & Young LLP
Chicago, Illinois
Chicago, IL
February 27, 2009March 16, 2011
2536
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders
of Federal Signal Corporation
We have audited Federal Signal Corporation’s internal control over financial reporting as of December 31, 2008,2010, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the(“the COSO criteria)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 included in Management’s Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the company’sCompany’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, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, 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 the 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 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 inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any 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.
As indicated in Management’s Annual Report on Internal Control over Financial Reporting included in Item 9(b), management’s assessment of and conclusion on the effectiveness of internal control over financial reporting did not include the internal controls of Sirit, Inc. and Subsidiaries and VESystems, LLC and Subsidiaries, which are included in the 2010 consolidated financial statements of Federal Signal Corporation and constituted $97.6 million and $90.6 million of total and net assets, respectively, as of December 31, 2010, and $30.2 million and $(40.7) million of revenues and net loss, respectively, for the year then ended. Our audit of internal control over financial reporting of Federal Signal Corporation also did not include an evaluation of the internal control over financial reporting of Sirit, Inc. and Subsidiaries and VESystems, LLC.
In our opinion, Federal Signal Corporation maintained, in all material respects, effective internal control over financial reporting as of December 31, 2008,2010, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Federal Signal Corporation as of December 31, 20082010 and 2007,2009, and the related consolidated statements of operations, shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 20082010 of Federal Signal Corporation and our report dated February 27, 2009March 16, 2011 expressed an unqualified opinion thereon.
Ernst & Young LLP
Chicago, Illinois
Chicago, IL
February 27, 2009March 16, 2011
2637
| | | | | | | | | | | | | | | | | |
| | | December 31, | | | December 31, | |
| | | 2008 | | 2007 | | | 2010 | | 2009 | |
| | | ($ in millions) | | | ($ in millions) | |
| |
ASSETS | ASSETS | ASSETS |
| Current assets | | | | | | | | | | | | | | | | |
| Cash and cash equivalents | | $ | 23.4 | | | $ | 12.5 | | | $ | 62.1 | | | $ | 21.1 | |
| Short-term investments | | | 10.0 | | | | — | | |
| Accounts receivable, net of allowances for doubtful accounts of $2.0 million and $3.8 million, respectively | | | 153.2 | | | | 147.8 | | |
| Inventories — Note 2 | | | 137.1 | | | | 121.8 | | |
| Accounts receivable, net of allowances for doubtful accounts of $2.8 million and $2.4 million, respectively | | | | 100.4 | | | | 119.7 | |
| Inventories — Note 3 | | | | 119.6 | | | | 110.7 | |
| Other current assets | | | 21.6 | | | | 28.6 | | | | 17.9 | | | | 25.9 | |
| | | | | | | | | | | |
| Total current assets | | | 345.3 | | | | 310.7 | | | | 300.0 | | | | 277.4 | |
| Properties and equipment — Note 3 | | | 65.4 | | | | 59.5 | | |
| Properties and equipment — Note 4 | | | | 63.2 | | | | 64.2 | |
| Other assets | | | | | | | | | | | | | | | | |
| Goodwill — Note 11 | | | 328.1 | | | | 344.7 | | |
| Intangible assets, net — Note 11 | | | 47.8 | | | | 65.2 | | |
| Deferred tax assets — Note 5 | | | 30.3 | | | | 1.8 | | |
| Goodwill — Note 5 | | | | 310.4 | | | | 319.6 | |
| Intangible assets, net — Note 5 | | | | 84.4 | | | | 50.5 | |
| Deferred tax assets — Note 7 | | | | - | | | | 17.2 | |
| Deferred charges and other assets | | | 4.4 | | | | 5.4 | | | | 3.4 | | | | 1.7 | |
| | | | | | | | | | | |
| Total assets of continuing operations | | | 821.3 | | | | 787.3 | | | | 761.4 | | | | 730.6 | |
| Assets of discontinued operations, net — Note 12 | | | 12.7 | | | | 382.3 | | |
| Assets of discontinued operations, net — Note 13 | | | | 3.1 | | | | 13.9 | |
| | | | | | | | | | | |
| Total assets | | $ | 834.0 | | | $ | 1,169.6 | | | $ | 764.5 | | | $ | 744.5 | |
| | | | | | | | | | | |
| LIABILITIES AND SHAREHOLDERS’ EQUITY | LIABILITIES AND SHAREHOLDERS’ EQUITY | LIABILITIES AND SHAREHOLDERS’ EQUITY |
| Current liabilities | | | | | | | | | | | | | | | | |
| Short-term borrowings — Note 4 | | $ | 12.6 | | | $ | 2.6 | | |
| Current portion of long-term borrowings — Note 4 | | | 25.1 | | | | 45.4 | | |
| Short-term borrowings — Note 6 | | | $ | 1.8 | | | $ | - | |
| Current portion of long-term borrowings and capital lease obligations — Note 6 | | | | 76.2 | | | | 41.9 | |
| Accounts payable | | | 56.4 | | | | 66.2 | | | | 53.5 | | | | 44.8 | |
| Accrued liabilities | | | | | | | | | | | | | | | | |
| Compensation and withholding taxes | | | 25.1 | | | | 26.8 | | | | 21.2 | | | | 20.8 | |
| Customer deposits | | | 17.4 | | | | 17.7 | | | | 10.2 | | | | 10.4 | |
| Deferred revenue | | | | 10.6 | | | | 4.3 | |
| Other | | | 49.8 | | | | 56.6 | | | | 41.1 | | | | 42.0 | |
| | | | | | | | | | | |
| Total current liabilities | | | 186.4 | | | | 215.3 | | | | 214.6 | | | | 164.2 | |
| Long-term borrowings — Note 4 | | | 241.2 | | | | 240.7 | | |
| Long-term pension liabilities | | | 58.0 | | | | 12.6 | | |
| Deferred gain — Note 3 | | | 26.2 | | | | — | | |
| Long-term borrowings and capital lease obligations — Note 6 | | | | 184.4 | | | | 159.7 | |
| Long-term pension and other postretirement benefit liabilities | | | | 41.3 | | | | 39.6 | |
| Deferred gain — Note 4 | | | | 23.5 | | | | 24.2 | |
| Deferred tax liabilities — Note 7 | | | | 45.8 | | | | - | |
| Other long-term liabilities | | | 13.3 | | | | 19.7 | | | | 15.8 | | | | 12.2 | |
| Deferred income taxes — Note 5 | | | — | | | | 25.2 | | |
| | | | | | | | | | | |
| Total liabilities of continuing operations | | | 525.1 | | | | 513.5 | | | | 525.4 | | | | 399.9 | |
| Liabilities of discontinued operations — Note 12 | | | 24.4 | | | | 210.8 | | |
| Liabilities of discontinued operations — Note 13 | | | | 18.2 | | | | 15.9 | |
| | | | | | | | | | | |
| Total liabilities | | | 549.5 | | | | 724.3 | | | | 543.6 | | | | 415.8 | |
| Shareholders’ equity — Notes 8 and 9 | | | | | | | | | |
| Common stock, $1 par value per share, 90.0 million shares authorized, 49.3 million and 49.4 million shares issued, respectively | | | 49.3 | | | | 49.4 | | |
| Shareholders’ equity — Notes 10 and 11 | | | | | | | | | |
| Common stock, $1 par value per share, 90.0 million shares authorized, 63.0 million and 49.6 million shares issued, respectively | | | | 63.0 | | | | 49.6 | |
| Capital in excess of par value | | | 106.4 | | | | 103.2 | | | | 164.7 | | | | 93.8 | |
| Retained earnings | | | 226.4 | | | | 333.8 | | | | 50.6 | | | | 240.4 | |
| Treasury stock, 1.9 million and 1.5 million shares, respectively, at cost | | | (36.1 | ) | | | (30.1 | ) | |
| Accumulated other comprehensive (loss) income | | | | | | | | | |
| Foreign currency translation, net | | | (4.1 | ) | | | 15.9 | | |
| Net derivative loss, cash flow hedges, net | | | (0.9 | ) | | | (2.0 | ) | |
| Unrecognized pension and postretirement losses, net | | | (56.5 | ) | | | (24.9 | ) | |
| | | | | | | |
| Total | | | (61.5 | ) | | | (11.0 | ) | |
| Treasury stock, 0.9 million and 0.8 million shares, respectively, at cost | | | | (15.8 | ) | | | (15.8 | ) |
| Accumulated other comprehensive loss | | | | (41.6 | ) | | | (39.3 | ) |
| | | | | | | | | | | |
| Total shareholders’ equity | | | 284.5 | | | | 445.3 | | | | 220.9 | | | | 328.7 | |
| | | | | | | | | | | |
| Total liabilities and shareholders’ equity | | $ | 834.0 | | | $ | 1,169.6 | | | $ | 764.5 | | | $ | 744.5 | |
| | | | | | | | | | | |
See notes to consolidated financial statements.
2738
FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
| | | | | | | | | | | | | |
| | | For the Years Ended December 31, | |
| | | 2008 | | | 2007 | | | 2006 | |
| | | ($ in millions, except per share data) | |
| |
| Net sales | | $ | 958.8 | | | $ | 934.3 | | | $ | 792.7 | |
| Costs and expenses | | | | | | | | | | | | |
| Cost of sales | | | 706.9 | | | | 685.9 | | | | 576.5 | |
| Selling, engineering, general and administrative | | | 193.7 | | | | 173.2 | | | | 157.1 | |
| Restructuring charges — Note 13 | | | 2.7 | | | | — | | | | — | |
| | | | | | | | | | | | | |
| Operating income | | | 55.5 | | | | 75.2 | | | | 59.1 | |
| Interest expense | | | 15.3 | | | | 18.5 | | | | 17.0 | |
| Loss on investment in joint venture | | | 13.0 | | | | 3.3 | | | | 1.9 | |
| Other expense (income) | | | 0.9 | | | | (0.2 | ) | | | 0.2 | |
| | | | | | | | | | | | | |
| Income before income taxes | | | 26.3 | | | | 53.6 | | | | 40.0 | |
| Income tax benefit (provision) — Note 5 | | | 5.0 | | | | (13.9 | ) | | | (8.8 | ) |
| | | | | | | | | | | | | |
| Income from continuing operations | | | 31.3 | | | | 39.7 | | | | 31.2 | |
| Discontinued operations — Note 12: | | | | | | | | | | | | |
| (Loss) gain from discontinued operations and disposal, net of tax benefit of $18.0 million, $4.0 million and $2.5 million, respectively | | | (126.9 | ) | | | 15.2 | | | | (8.5 | ) |
| | | | | | | | | | | | | |
| Net (loss) income | | $ | (95.6 | ) | | $ | 54.9 | | | $ | 22.7 | |
| | | | | | | | | | | | | |
| Basic and diluted earnings (loss) per share Earnings from continuing operations | | $ | 0.66 | | | $ | 0.83 | | | $ | 0.65 | |
| (Loss) gain from discontinued operations and disposal, net of taxes | | | (2.67 | ) | | | 0.32 | | | | (0.18 | ) |
| | | | | | | | | | | | | |
| Net (loss) earnings per share | | $ | (2.01 | ) | | $ | 1.15 | | | $ | 0.47 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | For the Years Ended December 31, | |
| | | 2010 | | | 2009 | | | 2008 | |
| | | ($ in millions, except per share data) | |
| |
| Net sales | | $ | 726.5 | | | $ | 750.4 | | | $ | 878.0 | |
| Costs and expenses | | | | | | | | | | | | |
| Cost of sales | | | 542.3 | | | | 557.3 | | | | 643.0 | |
| Selling, engineering, general and administrative | | | 173.3 | | | | 155.8 | | | | 180.6 | |
| Acquisition and integration related costs | | | 3.9 | | | | - | | | | - | |
| Goodwill and intangible assets impairment— Note 5 | | | 78.9 | | | | - | | | | - | |
| Restructuring charges — Note 14 | | | 5.0 | | | | 1.5 | | | | 2.7 | |
| | | | | | | | | | | | | |
| Operating (loss) income | | | (76.9 | ) | | | 35.8 | | | | 51.7 | |
| Interest expense | | | 10.3 | | | | 11.4 | | | | 15.3 | |
| (Gain) loss on investment in joint venture | | | (0.1 | ) | | | (1.2 | ) | | | 13.0 | |
| Other expense | | | 1.3 | | | | 0.5 | | | | 0.8 | |
| | | | | | | | | | | | | |
| (Loss) income before income taxes | | | (88.4 | ) | | | 25.1 | | | | 22.6 | |
| Income tax (provision) benefit — Note 7 | | | (72.3 | ) | | | (5.3 | ) | | | 6.1 | |
| | | | | | | | | | | | | |
| (Loss) income from continuing operations | | | (160.7 | ) | | | 19.8 | | | | 28.7 | |
| Discontinued operations — Note 13 | | | | | | | | | | | | |
| (Loss) gain from discontinued operations and disposal, net of tax (expense) benefit of $0.0 million, ($1.0) million, and $16.6 million, respectively | | | (15.0 | ) | | | 3.3 | | | | (123.7 | ) |
| | | | | | | | | | | | | |
| Net (loss) income | | $ | (175.7 | ) | | $ | 23.1 | | | $ | (95.0 | ) |
| | | | | | | | | | | | | |
| Basic and diluted (loss) earnings per share | | | | | | | | | | | | |
| (Loss) earnings from continuing operations | | $ | (2.79 | ) | | $ | 0.41 | | | $ | 0.61 | |
| (Loss) earnings from discontinued operations and disposal, net of taxes | | | (0.26 | ) | | | 0.06 | | | | (2.60 | ) |
| | | | | | | | | | | | | |
| Net (loss) earnings per share | | $ | (3.05 | ) | | $ | 0.47 | | | $ | (1.99 | ) |
| | | | | | | | | | | | | |
See notes to consolidated financial statements.
2839
FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Common
| | Capital in
| | | | | | | | Accumulated
| | | | | | | | | | | | | Accumulated
| | | |
| | | Stock
| | Excess of
| | | | | | Deferred
| | Other
| | | | | Common
| | Capital in
| | | | | | Other
| | | |
| | | Par
| | Par
| | Retained
| | Treasury
| | Stock
| | Comprehensive
| | | | | Stock Par
| | Excess of
| | Retained
| | Treasury
| | Comprehensive
| | | |
| | | Value | | Value | | Earnings | | Stock | | Awards | | Loss | | Total | | | Value | | Par Value | | Earnings | | Stock | | Loss | | Total | |
| | | ($ in millions) | | | | | | | ($ in millions) | | | | | |
| | |
| Balance at December 31, 2005 | | | 48.8 | | | | 98.2 | | | | 278.9 | | | | (18.1 | ) | | | (4.8 | ) | | | (26.7 | ) | | | 376.3 | | |
| Comprehensive income: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net income | | | | | | | | | | | 22.7 | | | | | | | | | | | | | | | | 22.7 | | |
| Foreign currency translation | | | | | | | | | | | | | | | | | | | | | | | 10.0 | | | | 10.0 | | |
| Unrealized losses on derivatives, net of $1.3 million tax benefit | | | | | | | | | | | | | | | | | | | | | | | (2.2 | ) | | | (2.2 | ) | |
| Minimum pension liability, net of $2.3 million tax expense | | | | | | | | | | | | | | | | | | | | | | | 4.0 | | | | 4.0 | | |
| | | | | |
| Comprehensive income | | | | | | | | | | | | | | | | | | | | | | | | | | | 34.5 | | |
| Adjustments to adopt SFAS 158, net of $4.8 million tax benefit | | | | | | | | | | | | | | | | | | | | | | | (8.2 | ) | | | (8.2 | ) | |
| Cash dividends declared | | | | | | | | | | | (11.5 | ) | | | | | | | | | | | | | | | (11.5 | ) | |
| Reclassification of deferred stock awards | | | | | | | (4.8 | ) | | | | | | | | | | | 4.8 | | | | | | | | — | | |
| Share based payments: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Exercise of stock options | | | | | | | 0.5 | | | | | | | | | | | | | | | | | | | | 0.5 | | |
| Excess tax benefits on share based payments | | | | | | | 0.3 | | | | | | | | | | | | | | | | | | | | 0.3 | | |
| Awards and options | | | 0.3 | | | | 5.5 | | | | | | | | | | | | | | | | | | | | 5.8 | | |
| Treasury stock purchases | | | | | | | | | | | | | | | (12.1 | ) | | | | | | | | | | | (12.1 | ) | |
| Other | | | | | | | 0.1 | | | | 0.6 | | | | 0.1 | | | | | | | | | | | | 0.8 | | |
| | | | | | | | | | | | | | | | | |
| Balance at December 31, 2006 | | $ | 49.1 | | | $ | 99.8 | | | $ | 290.7 | | | $ | (30.1 | ) | | $ | — | | | $ | (23.1 | ) | | $ | 386.4 | | |
| Comprehensive income: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net income | | | | | | | | | | | 54.9 | | | | | | | | | | | | | | | | 54.9 | | |
| Foreign currency translation | | | | | | | | | | | | | | | | | | | | | | | 11.7 | | | | 11.7 | | |
| Unrealized losses on derivatives, net of $1.2 million tax benefit | | | | | | | | | | | | | | | | | | | | | | | (2.0 | ) | | | (2.0 | ) | |
| Amortization of pension and postretirement losses, net of $1.8 million tax expense | | | | | | | | | | | | | | | | | | | | | | | 1.9 | | | | 1.9 | | |
| | | | | |
| Comprehensive income | | | | | | | | | | | | | | | | | | | | | | | | | | | 66.5 | | |
| Adjustments to adopt FIN 48 | | | | | | | | | | | (0.7 | ) | | | | | | | | | | | | | | | (0.7 | ) | |
| Adjustments to adopt SFAS 158, net of $0.0 million tax expense | | | | | | | | | | | 0.4 | | | | | | | | | | | | 0.5 | | | | 0.9 | | |
| Cash dividends declared | | | | | | | | | | | (11.5 | ) | | | | | | | | | | | | | | | (11.5 | ) | |
| Share based payments: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Stock awards and options | | | 0.3 | | | | 3.2 | | | | | | | | | | | | | | | | | | | | 3.5 | | |
| Excess tax benefits on share based payments | | | | | | | 0.2 | | | | | | | | | | | | | | | | | | | | 0.2 | | |
| | | | | | | | | | | | | | | | |
| Balance at December 31, 2007 | | $ | 49.4 | | | $ | 103.2 | | | $ | 333.8 | | | $ | (30.1 | ) | | $ | — | | | $ | (11.0 | ) | | $ | 445.3 | | | $ | 49.4 | | | $ | 103.2 | | | $ | 335.8 | | | $ | (30.1 | ) | | $ | (11.0 | ) | | $ | 447.3 | |
| Comprehensive loss: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net loss | | | | | | | | | | | (95.6 | ) | | | | | | | | | | | | | | | (95.6 | ) | | | | | | | | | | | (95.0 | ) | | | | | | | | | | | (95.0 | ) |
| Foreign currency translation | | | | | | | | | | | | | | | | | | | | | | | (20.0 | ) | | | (20.0 | ) | | | | | | | | | | | | | | | | | | | (20.0 | ) | | | (20.0 | ) |
| Unrealized gains on derivatives, net of $0.7 million tax expense | | | | | | | | | | | | | | | | | | | | | | | 1.1 | | | | 1.1 | | | | | | | | | | | | | | | | | | | | 1.1 | | | | 1.1 | |
| Change in unrecognized losses related to pension benefit plans, net of $16.3 million tax benefit | | | | | | | | | | | | | | | | | | | | | | | (31.6 | ) | | | (31.6 | ) | | | | | | | | | | | | | | | | | | | (31.6 | ) | | | (31.6 | ) |
| | | | | | | |
| Comprehensive loss | | | | | | | | | | | | | | | | | | | | | | | | | | | (146.1 | ) | | | | | | | | | | | | | | | | | | | | | | | (145.5 | ) |
| Adjustment to adopt EITF 06 — 04 | | | | | | | | | | | (0.3 | ) | | | | | | | | | | | | | | | (0.3 | ) | |
| Adjustment to adopt ASC Topic 715 (EITF 06 — 04) | | | | | | | | | | | | (0.3 | ) | | | | | | | | | | | (0.3 | ) |
| Cash dividends declared | | | | | | | | | | | (11.5 | ) | | | | | | | | | | | | | | | (11.5 | ) | | | | | | | | | | | (11.5 | ) | | | | | | | | | | | (11.5 | ) |
| Share based payments: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Non-vested stock and options | | | | | | | 2.9 | | | | | | | | | | | | | | | | | | | | 2.9 | | | | | | | | 2.9 | | | | | �� | | | | | | | | | | | 2.9 | |
| Stock awards | | | | | | | 0.6 | | | | | | | | | | | | | | | | | | | | 0.6 | | | | | | | | 0.6 | | | | | | | | | | | | | | | | 0.6 | |
| Common stock cancelled | | | (0.1 | ) | | | (0.3 | ) | | | | | | | | | | | | | | | | | | | (0.4 | ) | | | (0.1 | ) | | | (0.3 | ) | | | | | | | | | | | | | | | (0.4 | ) |
| Treasury stock purchases | | | | | | | | | | | | | | | (6.0 | ) | | | | | | | | | | | (6.0 | ) | | | | | | | | | | | | | | | (6.0 | ) | | | | | | | (6.0 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Balance at December 31, 2008 | | $ | 49.3 | | | $ | 106.4 | | | $ | 226.4 | | | $ | (36.1 | ) | | $ | — | | | $ | (61.5 | ) | | $ | 284.5 | | | | 49.3 | | | | 106.4 | | | | 229.0 | | | | (36.1 | ) | | | (61.5 | ) | | | 287.1 | |
| Comprehensive loss: | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net income | | | | | | | | | | | | 23.1 | | | | | | | | | | | | 23.1 | |
| Foreign currency translation | | | | | | | | | | | | | | | | | | | | 12.6 | | | | 12.6 | |
| Unrealized gains on derivatives, net of $0.1 million tax expense | | | | | | | | | | | | | | | | | | | | 0.2 | | | | 0.2 | |
| Change in unrecognized gains related to pension benefit plans, net of $5.4 million tax expense | | | | | | | | | | | | | | | | | | | | 9.4 | | | | 9.4 | |
| | | | | | | | | | | | | | | | | | | |
| Comprehensive income | | | | | | | | | | | | | | | | | | | | | | | | 45.3 | |
| Cash dividends declared | | | | | | | | | | | | (11.7 | ) | | | | | | | | | | | (11.7 | ) |
| Share based payments: | | | | | | | | | | | | | | | | | | | | | | | | | |
| Non-vested stock and options | | | | | | | | 3.1 | | | | | | | | | | | | | | | | 3.1 | |
| Stock awards | | | | 0.4 | | | | 0.4 | | | | | | | | | | | | | | | | 0.8 | |
| Common stock cancelled | | | | (0.1 | ) | | | (0.2 | ) | | | | | | | | | | | | | | | (0.3 | ) |
| Issuance of common stock from treasury | | | | | | | | (15.9 | ) | | | | | | | 20.3 | | | | | | | | 4.4 | |
| | | | | | | | | | | | | | | |
| Balance at December 31, 2009 | | | | 49.6 | | | | 93.8 | | | | 240.4 | | | | (15.8 | ) | | | (39.3 | ) | | | 328.7 | |
| Comprehensive loss: | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net loss | | | | | | | | | | | | (175.7 | ) | | | | | | | | | | | (175.7 | ) |
| Foreign currency translation | | | | | | | | | | | | | | | | | | | | (4.5 | ) | | | (4.5 | ) |
| Unrealized gains on derivatives, net of $0.0 million tax expense | | | | | | | | | | | | | | | | | | | | 0.8 | | | | 0.8 | |
| Change in unrecognized gains related to pension benefit plans, net of $0.0 million tax expense | | | | | | | | | | | | | | | | | | | | 1.4 | | | | 1.4 | |
| | | | | |
| Comprehensive loss | | | | | | | | | | | | | | | | | | | | | | | | (178.0 | ) |
| Shares issued for acquisition | | | | 1.2 | | | | 9.0 | | | | | | | | | | | | | | | | 10.2 | |
| Equity offering, net of fees | | | | 12.1 | | | | 59.1 | | | | | | | | | | | | | | | | 71.2 | |
| Cash dividends declared | | | | | | | | | | | | (14.1 | ) | | | | | | | | | | | (14.1 | ) |
| Share based payments: | | | | | | | | | | | | | | | | | | | | | | | | | |
| Non-vested stock and options | | | | | | | | 2.3 | | | | | | | | | | | | | | | | 2.3 | |
| Stock awards | | | | 0.1 | | | | 0.3 | | | | | | | | | | | | | | | | 0.4 | |
| Common stock cancelled | | | | | | | | 0.2 | | | | | | | | | | | | | | | | 0.2 | |
| | | | | | | | | | | | | | | |
| Balance at December 31, 2010 | | | $ | 63.0 | | | $ | 164.7 | | | $ | 50.6 | | | $ | (15.8 | ) | | $ | (41.6 | ) | | $ | 220.9 | |
| | | | | | | | | | | | | | | |
See notes to consolidated financial statements.
2940
FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | For the Years Ended
| | | For the Years Ended
| |
| | | December 31, | | | December 31, | |
| | | 2008 | | 2007 | | 2006 | | | 2010 | | 2009 | | 2008 | |
| | | ($ in millions) | | | ($ in millions) | |
| |
| Operating activities | | | | | | | | | | | | | | | | | | | | | | | | |
| Net (loss) income | | $ | (95.6 | ) | | $ | 54.9 | | | $ | 22.7 | | | $ | (175.7 | ) | | $ | 23.1 | | | $ | (95.0 | ) |
| Adjustments to reconcile net income (loss) to net cash provided by operating activities: | | | | | | | | | | | | | | | | | | | | | | | | |
| Loss (gain) on discontinued operations and disposal | | | 126.9 | | | | (15.2 | ) | | | 8.5 | | | | 15.0 | | | | (3.3 | ) | | | 123.7 | |
| Loss on joint venture | | | 13.0 | | | | 3.3 | | | | 1.9 | | |
| (Gain) loss on joint venture | | | | (0.1 | ) | | | (1.2 | ) | | | 13.0 | |
| Goodwill and intangible assets impairment | | | | 78.9 | | | | - | | | | - | |
| Valuation allowance | | | | 85.0 | | | | - | | | | - | |
| Depreciation and amortization | | | 15.5 | | | | 14.1 | | | | 9.5 | | | | 19.2 | | | | 14.7 | | | | 14.3 | |
| Stock option and award compensation expense | | | 2.9 | | | | 3.5 | | | | 5.8 | | | | 2.3 | | | | 3.1 | | | | 2.9 | |
| Provision for doubtful accounts | | | 7.2 | | | | 0.7 | | | | 0.8 | | | | 1.2 | | | | 0.9 | | | | 7.1 | |
| Deferred income taxes | | | (14.6 | ) | | | 5.4 | | | | (2.0 | ) | | | (13.7 | ) | | | 3.7 | | | | (14.4 | ) |
| Changes in operating assets and liabilities, net of effects from acquisitions and dispositions of companies | | | | | | | | | | | | | | | | | | | | | | | | |
| Accounts receivable | | | (16.2 | ) | | | 3.5 | | | | (29.9 | ) | | | 19.6 | | | | 17.8 | | | | (14.3 | ) |
| Inventories | | | (17.6 | ) | | | (18.5 | ) | | | (20.6 | ) | | | (7.9 | ) | | | 21.8 | | | | (18.5 | ) |
| Other current assets | | | 1.8 | | | | (0.6 | ) | | | (1.6 | ) | | | 2.6 | | | | (0.7 | ) | | | 1.9 | |
| Accounts payable | | | (8.1 | ) | | | (2.5 | ) | | | 12.2 | | | | 4.0 | | | | (3.3 | ) | | | (10.5 | ) |
| Customer deposits | | | — | | | | 3.6 | | | | 1.7 | | | | - | | | | (7.4 | ) | | | - | |
| Accrued liabilities | | | (2.7 | ) | | | 0.4 | | | | 1.4 | | | | (3.4 | ) | | | (5.8 | ) | | | (1.9 | ) |
| Income taxes | | | (8.0 | ) | | | (2.6 | ) | | | (1.3 | ) | | | (1.2 | ) | | | 1.9 | | | | (7.9 | ) |
| Pension contributions | | | (11.5 | ) | | | (6.7 | ) | | | (11.3 | ) | | | (1.1 | ) | | | (1.0 | ) | | | (11.5 | ) |
| Deferred revenue | | | | 6.3 | | | | 0.2 | | | | 2.0 | |
| Other | | | 4.5 | | | | (1.0 | ) | | | (0.4 | ) | | | 6.8 | | | | (3.5 | ) | | | 2.5 | |
| | | | | | | | | | | | | | | |
| Net cash (used for) provided by continuing operating activities | | | (2.5 | ) | | | 42.3 | | | | (2.6 | ) | |
| Net cash provided by discontinued operating activities | | | 126.2 | | | | 23.1 | | | | 32.3 | | |
| Net cash provided by (used for) continuing operating activities | | | | 37.8 | | | | 61.0 | | | | (6.6 | ) |
| Net cash (used for) provided by discontinued operating activities | | | | (6.6 | ) | | | 1.4 | | | | 130.3 | |
| | | | | | | | | | | | | | | |
| Net cash provided by operating activities | | | 123.7 | | | | 65.4 | | | | 29.7 | | | | 31.2 | | | | 62.4 | | | | 123.7 | |
| Investing activities | | | | | | | | | | | | | | | | | | | | | | | | |
| Purchases of properties and equipment | | | (28.5 | ) | | | (20.1 | ) | | | (12.2 | ) | | | (12.8 | ) | | | (14.4 | ) | | | (27.9 | ) |
| Proceeds from sales of properties and equipment | | | 38.0 | | | | 0.6 | | | | 0.2 | | | | 1.9 | | | | 4.0 | | | | 38.0 | |
| Investment in joint venture | | | — | | | | — | | | | (1.9 | ) | |
| Payments for acquisitions, net of cash acquired | | | — | | | | (147.5 | ) | | | — | | | | (97.3 | ) | | | (13.5 | ) | | | - | |
| Other, net | | | (10.1 | ) | | | (1.7 | ) | | | — | | | | - | | | | 10.0 | | | | (10.1 | ) |
| | | | | | | | | | | | | | | |
| Net cash used for continuing investing activities | | | (0.6 | ) | | | (168.7 | ) | | | (13.9 | ) | | | (108.2 | ) | | | (13.9 | ) | | | (0.0 | ) |
| Net cash provided by (used for) discontinued investing activities | | | 55.2 | | | | 62.1 | | | | (5.4 | ) | |
| Net cash provided by discontinued investing activities | | | | 0.2 | | | | 44.9 | | | | 54.6 | |
| | | | | | | | | | | | | | | |
| Net cash provided by (used for) investing activities | | | 54.6 | | | | (106.6 | ) | | | (19.3 | ) | |
| Net cash (used for) provided by investing activities | | | | (108.0 | ) | | | 31.0 | | | | 54.6 | |
| Financing activities | | | | | | | | | | | | | | | | | | | | | | | | |
| Increase (reduction) in short-term borrowings, net | | | 0.6 | | | | (28.3 | ) | | | 23.7 | | | | 130.9 | | | | (12.6 | ) | | | 0.6 | |
| Proceeds from issuance of long-term borrowings | | | 148.8 | | | | 230.1 | | | | 23.6 | | | | - | | | | 12.5 | | | | 148.8 | |
| Repayment of long-term borrowings | | | (169.5 | ) | | | (142.2 | ) | | | (98.0 | ) | | | (70.8 | ) | | | (77.6 | ) | | | (169.5 | ) |
| Purchases of treasury stock | | | (6.0 | ) | | | — | | | | (12.1 | ) | | | - | | | | - | | | | (6.0 | ) |
| Cash dividends paid to shareholders | | | (11.5 | ) | | | (11.5 | ) | | | (11.5 | ) | | | (13.3 | ) | | | (11.7 | ) | | | (11.5 | ) |
| Proceeds from Equity offering, net | | | | 71.2 | | | | - | | | | - | |
| Other, net | | | 0.2 | | | | 0.4 | | | | 1.1 | | | | 0.6 | | | | 0.2 | | | | 0.2 | |
| | | | | | | | | | | | | | | |
| Net cash (used for) provided by continuing financing activities | | | (37.4 | ) | | | 48.5 | | | | (73.2 | ) | |
| Net cash provided by (used for) continuing financing activities | | | | 118.6 | | | | (89.2 | ) | | | (37.4 | ) |
| Net cash used for discontinued financing activities | | | (129.3 | ) | | | (11.7 | ) | | | (9.8 | ) | | | (1.0 | ) | | | (7.3 | ) | | | (129.3 | ) |
| | | | | | | | | | | | | | | |
| Net cash (used for) provided by financing activities | | | (166.7 | ) | | | 36.8 | | | | (83.0 | ) | |
| Net cash provided by (used for) financing activities | | | | 117.6 | | | | (96.5 | ) | | | (166.7 | ) |
| | | | | | | | | | | | | | | |
| Effects of foreign exchange rate changes on cash | | | (0.7 | ) | | | 1.1 | | | | 2.2 | | | | 0.2 | | | | 0.8 | | | | (0.7 | ) |
| Increase (decrease) in cash and cash equivalents | | | 10.9 | | | | (3.3 | ) | | | (70.4 | ) | | | 41.0 | | | | (2.3 | ) | | | 10.9 | |
| Cash and cash equivalents at beginning of year | | | 12.5 | | | | 15.8 | | | | 86.2 | | | | 21.1 | | | | 23.4 | | | | 12.5 | |
| | | | | | | | | | | | | | | |
| Cash and cash equivalents at end of year | | $ | 23.4 | | | $ | 12.5 | | | $ | 15.8 | | | $ | 62.1 | | | $ | 21.1 | | | $ | 23.4 | |
| | | | | | | | | | | | | | | |
See notes to consolidated financial statements.
3041
FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
($ in millions, except per share data)
NOTE 1 — SIGNIFICANT ACCOUNTING POLICIES
| |
| NOTE 1 — | SIGNIFICANT ACCOUNTING POLICIES |
Basis of presentation: The accompanying consolidated financial statements include the accounts of Federal Signal Corporation and all of its significant subsidiaries (the(“Federal Signal” or the “Company”) and have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). All significant intercompany balances and transactions have been eliminated in consolidation. These consolidated financial statements include estimates and assumptions by management that effect the amounts reported in the consolidated financial statements. Actual results could differ from these estimates. The operating results of businesses divested during 2008, 20072010, 2009, and 20062008 have been excluded since the date of sale, and have been reported prior to sale as discontinued operations (See Note 12 ).13). Certain prior year amounts have been reclassified to conform to the current year presentation.
Effective June 6, 2010, the Company reorganized its segments to better align the Company’s intelligent transportation and public safety businesses for growth. As a result of this reorganization, the Company created a new operating segment called Federal Signal Technologies Group (“FSTech”) that includes the vehicle classification software, automated license plate recognition and parking systems businesses from our Safety and Security Systems operating segment and the newly acquired businesses, Sirit and VESystems. The Safety and Security Systems operating segment retained the businesses that offer systems for campus and community alerting, emergency vehicles, first responder interoperable communications, industrial communications and command and municipal security.
As a result of this reorganization, products manufactured and services rendered by the Company are divided into four major operating segments: Federal Signal Technologies, Safety and Security Systems, Fire Rescue and Environmental Solutions. The individual operating businesses are organized as such because they share certain characteristics, including technology, marketing, distribution and product application, which create long-term synergies.
The Company identified certain adjustments related to the timing of recording revenue on certain arrangements primarily in the FSTech Group. The revenue related adjustments resulted in a decrease in previously reported revenue during the quarters ended April 3, July 3, and October 2, 2010 of $1.6 million, $2.5 million, and $2.1 million, respectively. The revenue related adjustments resulted in a decrease in previously reported income (loss) from continuing operations during the quarters ended April 3, July 3, and October 2, 2010 of $1.4 million, $2.2 million, and $1.3 million, respectively. These prior interim period adjustments individually and in the aggregate are not material to the financial results for previously issued interim financial data in 2010. We have not filed an amendment to our previously issued quarters. The significant corrections included:
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| • | The Company offerswhen-and-if-available upgrade rights to its customers in connection with the sale of software and firmware. The Company did not defer the revenue for the fair value of the upgrade rights until the future obligation was fulfilled or the right to the specified upgrade expired. |
| • | The Company entered into certain transactions that contained extended payment terms and other conditions that would have required a deferral of revenue. The Company recognized revenue before the risk and rewards of ownership transferred. |
| • | The Company entered into certain arrangements to provide customized systems which required the Company to make estimates relative to the extent of progress toward completion. The Company was unable to make reasonably dependable estimates, resulting in recording profits prematurely. |
ForeignNon-U.S. Operations: Assets and liabilities of foreignNon-U.S. subsidiaries, other than those whose functional currency is the U.S. dollar, are translated at current exchange rates with the related translation adjustments reported in stockholders’shareholders’ equity as a component of accumulated other comprehensive income (loss). Income statementloss. Statements of Operations accounts are translated at the average exchange rate during the period. Where the U.S. dollar is considered the functional currency, monetary assets and liabilities are translated at current exchange rates with the related adjustment included in net income. Non-monetary assets and liabilities are translated at historical exchange rates.
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The Company incurs foreign currency transaction gains/losses relating to assets and liabilities that are denominated in a currency other than the functional currency. For 2008, 20072010, 2009 and 2006,2008, the Company incurred foreign currency transactiontranslation losses, included in other expensesexpense in the StatementConsolidated Statements of Operations, of $0.5$1.3 million, $0.4$0.3 million, and $0.6$0.7 million, respectively.
Cash equivalents: The Company considers all highly liquid investments with a maturity of three-months or less, when purchased, to be cash equivalents.
Short-term investments: Short term investments are stated at cost since they represent highly liquid certificates of deposit that mature June 11, 2009.
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 Company’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 allowances for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments on the outstanding accounts receivable and outstanding lease financing and other receivables. The allowances are each maintained at a level considered appropriate based on historical and other factors that affect collectibility.collectability. These factors include historical trends of write-offs, recoveries and credit losses; portfolio credit quality; and current and projected economic and market conditions. If the financial condition of the Company’s customers were to deteriorate, resulting in a reduced ability to make payments, additional allowances may be required.
Inventories: The Company’s inventories are statedvalued at the lower of cost or market. At December 31, 2008 and 2007, approximately 78% of the Company’s inventories were costedCost is determined using the FIFO method. The remaining portion of the Company’s inventories is costed using the LIFO(last-in,first-in, first-out)first-out (“FIFO”) method. Included in the cost of inventories are raw materials, direct wages and associated production costs.
Properties and equipment and related depreciation: Properties and equipment are stated at cost. Depreciation for financial reporting purposes, is computed principally onusing the straight-line method over the estimated useful lives of the assets. Depreciation rangesUseful lives range 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
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FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ in millions, except per share data) — (Continued)
recognized for the difference between the fair value and carrying value of the asset or group of assets. Such analyses necessarily involve significant judgment.
Goodwill and Other Intangible assets: Intangible assets principally consist of costs inGoodwill represents the excess of fair valuesthe cost of an acquired business over the amounts assigned to its net assets acquired in purchase transactions. These assets are assessed yearlyassets. Goodwill is not amortized but is tested for impairment in the fourth quarter and also betweenat a reporting unit level on an annual tests ifbasis or when an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. The Company performed its annual goodwill impairment test as of October 31, 2010.
Goodwill is tested for impairment based on a two-step test. The first step, used to identify potential impairment, compares the fair value of a reporting unit with its carrying amount, including goodwill. If the fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is not impaired and the second step of the impairment test is unnecessary. If the carrying amount of a reporting unit exceeds its fair value, the second step of the goodwill impairment test is performed to measure the amount of impairment loss, if any. The second step compares the implied fair value of reporting unit goodwill with the carrying amount of that goodwill. If the carrying amount of reporting unit goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to that excess. The Company generally determines the fair value of its reporting units using two valuation methods: the “Income Approach — Discounted Cash Flow Analysis” method, and the “Market Approach — Guideline Public Company Method.”
Under the “Income Approach — Discounted Cash Flow Analysis” method the key assumptions consider projected sales, cost of sales, and operating expenses. These assumptions were determined by management utilizing our internal operating plan, growth rates for revenues and operating expenses, and margin assumptions. An additional key assumption under this approach is the discount rate, which is determined by looking at current risk-free rates of capital, current market interest rates, and the evaluation of risk premium relevant to the business segment. If our
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assumptions relative to growth rates were to change or were incorrect, our fair value calculation may change, which could result in impairment.
Under the “Market Approach — Guideline Public Company Method” the Company identified several publicly traded companies, including Federal Signal, which we believe have sufficiently relevant similarities. For these companies the Company calculated the mean ratio of invested capital to revenues and invested capital to EBITDA. Similar to the income approach discussed above, sales, cost of sales, operating expenses, and their respective growth rates are key assumptions utilized. The market prices of Federal Signal and other guideline companies are additional key assumptions. If these market prices increase, the estimated market value would increase. If the market prices decrease, the estimated market value would decrease.
The results of these two methods are weighted based upon management’s evaluation of the relevance of the two approaches. In the current year evaluation management determined that the income approach provided a more relevant measure of each reporting unit’s fair value and used it to determine reporting unit fair value. Management used the market approach to corroborate the results of the income approach. Management used the income approach to determine fair value of the reporting units because it considers anticipated future financial performance. The market approach is based upon historical and current economic conditions which might not reflect the long term prospects or opportunities for the business segment being evaluated.
During the fourth quarter of 2010, the Company performed the annual assessment, determined that the goodwill associated with the FSTech Group reporting unit was impaired, and recorded impairment charges of $67.1 million. The impairment charge resulted from decreased sales and cash flow estimated in our FSTech Group. As of December 31, 2010, the goodwill impairment charge is an estimate and may be adjusted during the first quarter of 2011 upon completion of a detailed second step impairment analysis. We have not completed the second step because we are awaiting additional information needed to value certain assets of the reporting unit. We will complete the second step in the first quarter of 2011 and changes to the estimated impairment we have recorded could be material. The fair values of the other reporting units exceeded their respective carrying amounts by 10% or more. The Company had no goodwill impairments in 2009 or 2008. Adverse changes to the Company’s business environment and future cash flows could cause us to record impairment charges in future periods which could be material. See Note 5 of the Consolidated Financial Statements for further information.
An intangible asset determined to have an indefinite useful life is not amortized. Indefinite lived intangible assets are evaluated each reporting period to determine whether events and circumstances continue to support an indefinite useful life. These assets are tested for impairment annually, or more frequently if events or changes in circumstances indicate that the asset might be impaired.
The impairment test consists of a comparison of the fair value of the indefinite lived intangible asset with its carrying amount. If the carrying amount of an intangible asset exceeds its fair value, an impairment loss is recognized in an amount equal to that excess.
Significant judgment is applied when evaluating if an intangible asset has an indefinite useful life. In addition, for indefinite lived intangible assets, significant judgment is applied in testing for impairment. This judgment includes developing cash flow projections, selecting appropriate discount rates, identifying relevant market comparables, and incorporating general economic and market conditions. During the fourth quarter of 2010, as a result of the annual assessment, the Company concluded that the fair value determined by the income approach, of certain trade names in the FSTech Group was lower than the carrying value. As a result, the Company recognized a $11.8 million impairment charge to trade names within the FSTech segment in the fourth quarter of 2010. The Company had no impairments in 2009 and 2008. Adverse changes to the Company’s business environment and future cash flows could cause us to record impairment charges in future periods, which could be material. See Note 5 of the Consolidated Financial Statements for further information.
Definite lived intangible assets are amortized using the straight-line method.method over the estimated useful lives and are tested for impairment if indicators exist.
Stock-based compensation plans: The Company has various stock-based compensation plans, described more fully in Note 8.10.
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The Company accounts for stock-based compensation in accordance with the provisions of SFAS 123(R).ASC Topic 718, “Compensation — Stock Compensation.” The fair value of stock options areis determined using a Black-Scholes option pricing model.
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.
Concentration Risk: Our financial condition, results of operations, and cash flows are subject to a concentration risk of union employees. As of December 31, 2010, approximately 28% of the Company’s domestic hourly works were represented by unions. On February 23, 2011, the Company’s subsidiary, Vactor Manufacturing Inc., located in Streator, Illinois, received notice that the International Brotherhood of the Boilermakers filed a petition under the National Labor Relations Act, seeking certification to represent approximately 300 hourly employees for the purpose of collective bargaining. The election to determine whether a majority of the employees identified wish to be represented by the union for the purpose of collective bargaining normally occurs within 42 days of the filing of the petition, subject to adjustment in certain events.
Warranty: Sales of many of the Company’s products carry express warranties based on the terms that are generally accepted in the Company’s marketplaces. The Company records provisions for estimated 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’s historical experience. The Company provides for these issues as they become probable and estimable.
Product liability and workers’ compensation liability: Due to the nature of the Company’s products, the Company is subject to claims for product liability and workers’ compensation in the normal course of business. The Company is self-funded for a portion of these claims. The Company establishes a reserve using a third-party actuary for any known outstanding matters, including a reserve for claims incurred but not yet reported.
Financial instruments: The Company enters into agreements (derivative financial instruments) to manage the risks associated with interest rates and foreign exchange rates. The Company does not actively trade such instruments nor enter into such agreements for speculative purposes. The Company 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.
On the date a derivative contract is entered into, the Company 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 operations on the same line as the hedged item.
Cash flow hedge: A hedge of a forecast 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 statement of operations, the gain or loss previously included in accumulated other comprehensive income is reported on the same line in the consolidated statements of operations as the hedged item. In addition, both the fair value of changes excluded from the Company’s effectiveness
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FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ in millions, except per share data) — (Continued)
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 expensesOther Expense in the consolidated statements of operations.
The Company 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 deferred charges and assets and
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other accrued liabilities. This process includes linking derivatives that are designated as hedges of specific forecast transactions. The Company 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 Company discontinues hedge accounting, and any deferred gains or losses are recorded in selling, general and administrative expenses.Other Expense. 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.
Fair value of financial instruments: In September 2006, the Financial Accounting Standards Board (FASB) issued FAS 157,ASC Topic 820, “Fair Value Measurements and Disclosures,” which defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles (“GAAP”)GAAP, and expands disclosure about fair value measurements. In February 2008, the FASB issued FASB Staff PositionNo. 157-b, “Effective Date of FASB Statement No. 157” (“FSP 157-b”), which provides a one year deferral of the effective date of FAS 157 for non-financial assets and non-financial liabilities, except those that are recognized or disclosed in the financial statements at fair value at least annually. In accordance with this interpretation, theThe Company has only adopted the provisions of FAS 157ASC Topic 820 with respect to its financial assets and liabilities that are measured at fair value within the financial statements as of January 1, 2008. The Company adopted the provisions of ASC Topic 820 with respect to its non-financial assets and non-financial liabilities as of January 1, 2009. The adoption of FAS 157ASC Topic 820 did not have a material impact on the Company’s fair value measurements. The provisions of FAS 157 have not been appliedmeasurements and the required disclosures are contained in the notes to non-financial assetsConsolidated Financial Statements.
ASC Topic 820 established a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include: Level 1, defined as observable inputs such as quoted prices in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and non-financial liabilities.Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions.
In February 2007, the FASB issued FAS 159, “The Fair Value Option for Financial Assets and Financial Liabilities — including an amendment to FASB Statement No. 115,”ASC Topic 825, “Financial Instruments”, which permits entities to choose to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value. The Company adopted this statement as of January 1, 2008 and has elected not to apply the fair value option to any of its financial instruments at this time.
Business Combinations: In December 2007, the FASB issued ASC Topic 805, “Business Combinations” which expands the definition of a business and a business combination; requires the fair value of the purchase price of an acquisition, including the issuance of equity securities to be determined on the acquisition date; requires that all assets, liabilities, contingent consideration, contingencies and in-process research and development costs of an acquired business be recorded at fair value at the acquisition date; requires that acquisition costs generally be expensed as incurred; requires that restructuring costs generally be expensed in periods subsequent to the acquisition date; and requires changes in accounting for deferred tax asset valuation allowances and acquired income tax uncertainties after the measurement period to impact income tax expense. The Company adopted the guidance on January 1, 2009.
Split-dollar life insurance arrangements: In September 2006, the EITF issuedaccordance with ASC TopicEITF 06-04,715-60, “Accounting for Deferred Compensation and Postretirement Benefit Aspects of Split-Dollar Life Insurance Arrangements”.EITF 06-04“Defined benefit plans — other postretirement” which concludes that an employer should recognize a liability for post-employment benefits promised to an employee. This guidance is effective for fiscal years beginning after December 15, 2007. The Company has one arrangement that meets these criteria and has recorded a liability of approximately $0.3 million in 2008.
Earnings (loss) per share: Basic earnings (loss) per share is computed by dividing net income (loss) by the weighted average common shares outstanding, which totaled 47.7 million, 47.9$0.4 million and 48.0$0.4 million for 2008, 2007 and 2006, respectively. Diluted earnings (loss) per share is calculated by dividing net income (loss) by the weighted average common shares outstanding plus additional common shares that would have been outstanding assuming the exercise of stock options that are dilutive. The Company uses the treasury stock method to calculate dilutive shares. The weighted average number of shares outstanding for diluted earnings (loss) per share were 47.7 million, 47.9 million and 48.0 million for 2008, 2007 and 2006, respectively. In 2008, 2007 and 2006, options to purchase 2.5 million, 2.4 million and 2.6 million shares of common stock, respectively, were excluded from the calculation of the number of shares outstanding as their effects were anti-dilutive. For the year endedat December 31, 2008, 28,503 performance share units were also excluded from the calculation of the number of shares outstanding for diluted earnings per share because their effects were anti-dilutive.
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FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ in millions, except per share data) — (Continued)2010 and 2009, respectively.
Revenue recognition: Net sales consist primarily of revenue from the sale of equipment, environmental vehicles, vehicle mounted aerial platforms, parts, software, service, and maintenance contracts.
The Company recognizes revenue for products when all of the following are satisfied: persuasive evidence of an arrangement exists, delivery has occurred, the sales price is fixed or determinable, collectibilityand collection is reasonably assuredprobable. Product is considered delivered to the customer once it has been shipped and title has passed or servicesand risk of loss have been rendered. Typically, title passestransferred. For most of the Company’s product sales, these criteria are met at the time of shipment,the product is shipped; however, occasionally title passes later or earlier than shipment due to customer contracts or letter of credit terms. Infrequently, a sales contract qualifies for percentageIf at the outset of completion or for multiple-element accounting. For percentage of completion revenues,an arrangement the Company utilizesdetermines the cost-to-costarrangement fee is not, or is presumed not to be, fixed or determinable, revenue is deferred and subsequently recognized as amounts become due and payable and all other criteria for revenue recognition have been met.
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For any product within these groups that either is software or is considered software-related, the Company accounts for such products in accordance with the specific industry accounting guidance for software and software-related transactions.
The Company accounts for multiple element arrangements that consist only of software or software-related products in accordance with industry specific accounting guidance for software and software-related transactions. If a multiple-element arrangement includes software and other deliverables that are neither software nor software-related, the Company applies various revenue-related GAAP to determine if those deliverables constitute separate units of accounting from the software or software-related deliverables. If the Company can separate the deliverables, the Company applies the industry specific accounting guidance to the software and software-related deliverables and applies other appropriate guidance to the non-software-related deliverables. Revenue on arrangements that include multiple elements such as hardware, software, and services is allocated to each element based on the relative fair value of each element. Each element’s allocated revenue is recognized when the revenue recognition criteria for that element have been met. Fair value is generally determined by vendor specific objective evidence (“VSOE”), which is based on the price charged when each element is sold separately. If the Company cannot objectively determine the fair value of any undelivered element included in a multiple-element arrangement, the Company defers revenue until all elements are delivered and services have been performed, or until fair value can objectively be determined for any remaining undelivered elements. When the fair value of a delivered element has not been established, but fair value exists for the undelivered elements, the Company uses the residual method to recognize revenue if the fair value of all undelivered elements is determinable. Under the residual method, the fair value of the undelivered elements is deferred and the contract paymentsremaining portion of the arrangement fee is allocated to the delivered elements and is recognized as revenue.
Implementation services include the design, development, testing, and installation of systems. These services are received asrecognized pursuant toSOP 81-1, Accounting for Performance of Construction-Type Contracts and Certain Production-Type Contracts. In such cases, the Company is required to make reasonably dependable estimates relative to the extent of progress payments as costs aretoward completion by comparing the total hours incurred or basedto the estimated total hours for the arrangement and, accordingly, would apply thepercentage-of-completion method. If the Company were unable to make reasonably dependable estimates of progress towards completion, then it would use the completed-contract method, under which revenue is recognized only upon completion of the services. If total cost estimates exceed the anticipated revenue, then the estimated loss on installation and performance milestones. Atthe arrangement is recorded at the inception of a sales-type lease, the arrangement or at the time the loss becomes apparent.
Revenue from maintenance contracts is deferred and recognized ratably over the coverage period. These contracts typically extend phone support, software updates and upgrades, technical support, and equipment repairs.
Certain products which include software elements that are considered to be “more than incidental” are sold with post-contract support, which may include certain upgrade rights that are offered to customers in connection with software sales or the sale of extended warranty and maintenance contracts. The Company recordsdefers revenue for the product sales price and related costs and expensesfair value of the sale. Financing revenuesupgrade rights until the future obligation is fulfilled or the right to the upgrade expires. When the Company’s software products are included in incomeavailable with maintenance agreements that grant customers rights to unspecified future upgrades over the life ofmaintenance term on a when and if available basis, revenue associated with such maintenance is recognized ratably over the lease. Management believes that all relevant criteria and conditions are considered when recognizing revenues.maintenance term.
Net sales: Net sales are net of returns and allowances. Returns and allowances are calculated and recorded as a percentage of revenue based upon historical returns. Gross sales includes salesales of products and billed freight related to product sales. Freight has not historically comprised a material component of gross sales.
Product shipping costs: Product shipping costs are expensed as incurred and are included in cost of sales.
Postretirement benefits: In September 2006, the FASB issued Statement of Financial Accounting Standards No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans — an amendment of FASB Statements No. 87, 88, 106, and 132R (“SFAS 158”). Under SFAS 158, the funded status of each pension and other postretirement benefit plan at the year-end measurement date is required to be reported as an asset (for overfunded plans) or a liability (for underfunded plans), replacing the accrued or prepaid asset currently recorded and reversing any amounts previously recorded with respect to any additional minimum liability.
The Company adopted the recognition provisions of SFAS 158 effective December 31,2006. As a result of adopting the recognition provisions, the Company recognized an increase in accumulated other comprehensive loss of $8.2 million, net of a $4.8 million tax benefit.
The Company also adopted the measurement date provisions of SFAS 158 as of December 31, 2007. Previously, the Company’s non-US defined benefit plan had a September 30 measurement date. The effect of this adoption increased pension assets and retained earnings by $0.4 million.
Investments: In 2005, the Company entered into an agreement with the Shanghai Environmental Sanitary Vehicle and Equipment Factory (SHW)(“SHW”) and United Motor Works (UMW)(“UMW”) to form a joint venture (“China Joint Venture”) to manufacture specialty vehicles in the Peoples Republic of China.China (“China Joint Venture”). The investment in the joint venture iswas accounted for under the equity method in accordance with APB No. 18.method. The Company’s 50% interest in the venture doesdid not represent a controlling interest. In February 2009, the Company decided to terminate funding to this venture as a review of the market and forecasts of the joint venture’s cash flows indicated its bank debt was unlikely to be repaid
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and that its assets were impaired. A charge of $10.4 million was taken in 2008 and reported in the Statements of Operations as loss on investment in joint venture to write-down completely the Company’s investment, and to reflect the Company’s $9.4 million obligation to guaranty the debt of the joint venture and $1.0 million obligation to guaranty the investment of UMW. The debt guaranty is included in Short-term BorrowingsIn 2009, the partners agreed to voluntarily liquidate the joint venture. A net gain of $0.1 million and the investment guaranty is included in Accrued liabilities — Other$1.2 million was reported in the Consolidated Balance Sheet at December 31, 2008.Statements of Operations as a gain in investment in joint venture that pertains primarily to the liquidation of assets in 2010 and 2009, respectively. The Company’s share of operating losses was $2.6 million $3.3 million and $1.9 million in each of the three yearsyear ended December 31, 2008, 2007,2008.
Income Taxes: We file a consolidated U.S. federal income tax return for Federal Signal Corporation and 2006, respectively.its eligible domestic subsidiaries. Ournon-U.S. subsidiaries file income tax returns in their respective local jurisdictions. We account for income taxes under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and tax benefit carry forwards. Deferred tax assets and liabilities at the end of each period are determined using enacted tax rates. A valuation allowance is established or maintained when, based on currently available information and other factors, it is more likely than not that all or a portion of a deferred tax asset will not be realized.
Accounting standards on accounting for uncertainty in income taxes address the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements. Under the guidance on accounting for uncertainty in income taxes, we may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position are measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement. The guidance on accounting for uncertainty in income taxes also provides guidance on de-recognition, classification, interest and penalties on income taxes, and accounting in interim periods.
NOTE 2 — ACQUISITIONS
Sirit Inc. and Subsidiaries
On March 5, 2010, the Company acquired all of the issued and outstanding common shares of Sirit Inc. and Subsidiaries (“Sirit”) for total cash consideration of CDN $77.1 million (USD $74.9 million). Sirit designs, develops and manufactures radio frequency identification device technology for applications such as tolling, electronic vehicle registration, parking and access control, cashless payments, supply chain management and asset tracking solutions. The acquisition of Sirit supports the Company’s long-term strategy by creating growth opportunities and revenue synergies. The results of Sirit are included within the FSTech operating segment.
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The following table summarizes the fair values of the assets acquired and liabilities assumed from the acquisition of Sirit. Since the acquisition and the initial preliminary purchase price allocation included in the Company’sFEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
Form 10-Q for the first quarter ended March 31, 2010, net adjustments of $0.2 million were made to the fair values of the assets acquired and liabilities assumed with a corresponding adjustment to goodwill. These adjustments are summarized in the table presented below:
| | | | | | | | | | | | | |
| | | | | | 2010
| | | | |
| | | | | | Adjustments
| | | | |
| | | Initial
| | | to Fair
| | | December 31,
| |
| ($ in millions) | | Valuation | | | Value | | | 2010 | |
| |
| Purchase Price | | $ | 74.9 | | | $ | - | | | $ | 74.9 | |
| Fair Value of Assets Acquired: | | | | | | | | | | | | |
| Current assets | | | 7.0 | | | | - | | | | 7.0 | |
| Fixed assets | | | 1.6 | | | | - | | | | 1.6 | |
| Intangible assets | | | 37.1 | | | | - | | | | 37.1 | |
| Other assets | | | 0.4 | | | | - | | | | 0.4 | |
| | | | | | | | | | | | | |
| Total Assets Acquired | | | 46.1 | | | | - | | | | 46.1 | |
| | | | | | | | | | | | | |
| Fair Value of Liabilities Assumed: | | | | | | | | | | | | |
| Current liabilities | | | 13.2 | | | | (0.1 | ) | | | 13.1 | |
| Deferred tax liabilities, net | | | 2.4 | | | | 0.3 | | | | 2.7 | |
| | | | | | | | | | | | | |
| Total Liabilities Assumed | | | 15.6 | | | | 0.2 | | | | 15.8 | |
| | | | | | | | | | | | | |
| Goodwill (1) | | | 44.4 | | | | 0.2 | | | | 44.6 | |
| | | | | | | | | | | | | |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ in millions, except per share data) — (Continued)
| | |
| (1) | | The goodwill of $44.6 million is non-deductible for tax purposes. |
VESystems, LLC and Subsidiaries
NOTEOn March 2, — INVENTORIES2010, the Company acquired all of the equity interests in VESystems, LLC and Subsidiaries (“VESystems”) for an aggregate purchase price of $34.8 million. The consideration transferred consisted of cash in the amount of approximately $24.6 million and 1,220,311 shares of Federal Signal common stock with an acquisition date fair value of $10.2 million. VESystems designs, develops and deploys advanced software applications and customer management systems and services for the electronic toll collection and port industries. The acquisition of VESystems supports the Company’s long-term strategy by creating growth opportunities and revenue synergies. The results of VESystems are included within the FSTech operating segment.
49
The following table summarizes the fair values of the assets acquired and liabilities assumed from the acquisition of VESystems. Since the acquisition and the initial preliminary purchase price allocation included in the Company’sForm 10-Q for the first quarter ended March 31, 2010, net adjustments of $0.3 million were made to the fair values of the assets acquired and liabilities assumed with a corresponding adjustment to goodwill. These adjustments are summarized in the table presented below.
| | | | | | | | | | | | | |
| | | | | | 2010
| | | | |
| | | | | | Adjustments
| | | | |
| | | Initial
| | | to Fair
| | | December 31,
| |
| ($ in millions) | | Valuation | | | Value | | | 2010 | |
| |
| Purchase Price | | $ | 34.8 | | | $ | - | | | $ | 34.8 | |
| Fair Value of Assets Acquired: | | | | | | | | | | | | |
| Current assets | | | 2.2 | | | | - | | | | 2.2 | |
| Fixed assets | | | 0.1 | | | | - | | | | 0.1 | |
| Intangible assets | | | 16.1 | | | | - | | | | 16.1 | |
| Other assets | | | 0.5 | | | | - | | | | 0.5 | |
| | | | | | | | | | | | | |
| Total Assets Acquired | | | 18.9 | | | | - | | | | 18.9 | |
| | | | | | | | | | | | | |
| Fair Value of Liabilities Assumed: | | | | | | | | | | | | |
| Current liabilities | | | 1.9 | | | | 0.3 | | | | 2.2 | |
| | | | | | | | | | | | | |
| Total Liabilities Assumed | | | 1.9 | | | | 0.3 | | | | 2.2 | |
| | | | | | | | | | | | | |
| Goodwill (2) | | | 17.8 | | | | 0.3 | | | | 18.1 | |
| | | | | | | | | | | | | |
| | |
| (2) | | The goodwill of $18.1 million is deductible for tax purposes over 15 years, starting in 2010. |
Diamond Consulting Services Ltd.
On December 9, 2009, the Company acquired all equity interests of Diamond Consulting Services Ltd. (“Diamond”) for total consideration of $13.9 million. In addition to the consideration paid, the Company may be required to pay up to $3.2 million of retention payments in future years. The deferred retention expense is calculated in accordance with the sale and purchase agreement of Diamond dated December 9, 2009. A sum of £1,000,000 (one million pounds sterling) was payable to the former owners of Diamond on or before January 31, 2011 in the event that the former owners of Diamond were employed by the Company on December 31, 2010 and were at that time actively engaged in the business. An additional amount of £1,000,000 (one million pounds sterling) is payable to the former owners of Diamond on or before January 31, 2012 in the event that former owners of Diamond are employed by the Company on December 31, 2011 and are at that time actively engaged in the business. The former owners of Diamond did maintain employment through December 31, 2010 and were paid the first contingent payment of £1,000,000 (one million pounds sterling) in January 2011.
In accordance withASC 805-10-55-25, the deferred retention payments are being treated as compensation expense for post combination services as the contingent payments are automatically forfeited if employment is terminated. The total contingency of £2,000,000 (two million pounds sterling) is being expensed ratably over the two year period that the employees are required to stay in order to earn the retention payment.
Diamond specializes in vehicle classification systems for tolling and other intelligent transportation systems. The acquisition supports the Company’s long-term strategy by creating growth opportunities and revenue synergies. The results of Diamond are included in the FSTech operating segment.
50
The following table summarizes the fair values of the assets acquired and liabilities assumed from the acquisition of Diamond. Since the acquisition and the initial preliminary purchase price allocation included in the Company’sForm 10-K for the year ended December 31, 2009, net adjustments of ($0.5) million were made to the fair values of the assets acquired and liabilities assumed with a corresponding adjustment to goodwill. These adjustments are summarized in the table presented below.
| | | | | | | | | | | | | |
| | | | | | 2010
| | | | |
| | | | | | Adjustments
| | | | |
| | | Initial
| | | to Fair
| | | December 31,
| |
| ($ in millions) | | Valuation | | | Value | | | 2010 | |
| |
| Purchase Price | | $ | 13.5 | | | $ | 0.4 | | | $ | 13.9 | |
| Fair Value of Assets Acquired: | | | | | | | | | | | | |
| Current assets | | | 0.7 | | | | - | | | | 0.7 | |
| Intangible assets | | | 6.9 | | | | (0.1 | ) | | | 6.8 | |
| Other assets | | | 0.2 | | | | - | | | | 0.2 | |
| | | | | | | | | | | | | |
| Total Assets Acquired | | | 7.8 | | | | (0.1 | ) | | | 7.7 | |
| | | | | | | | | | | | | |
| Fair Value of Liabilities Assumed: | | | | | | | | | | | | |
| Current liabilities | | | 1.0 | | | | (0.1 | ) | | | 0.9 | |
| Deferred tax liabilities, net | | | 2.8 | | | | (0.9 | ) | | | 1.9 | |
| | | | | | | | | | | | | |
| Total Liabilities Assumed | | | 3.8 | | | | (1.0 | ) | | | 2.8 | |
| | | | | | | | | | | | | |
| Goodwill (3) | | | 9.5 | | | | (0.5 | ) | | | 9.0 | |
| | | | | | | | | | | | | |
| | |
| (3) | | The goodwill of $9.0 million is non-deductible for tax purposes. |
The following table summarizes the preliminary fair value of amortizable and indefinite-lived intangible assets as of their respective acquisition dates:
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Sirit | | | VESystems | | | Diamond | |
| | | | | | Estimated useful
| | | | | | Estimated useful
| | | | | | Estimated useful
| |
| ($ in millions) | | Fair Value | | | life (in years) | | | Fair Value | | | life (in years) | | | Fair Value | | | life (in years) | |
| |
| Amortizable intangible assets: | | | | | | | | | | | | | | | | | | | | | | | | |
| Patents | | $ | - | | | | | | | $ | - | | | | | | | $ | 1.7 | | | | 10 | |
| Customer relationships | | | 18.0 | | | | 18 | | | | 9.5 | | | | 17 | | | $ | 1.5 | | | | 10 | |
| Technology | | | 12.1 | | | | 9 | | | | 4.9 | | | | 16 | | | | 2.0 | | | | 15 | |
| Non-compete | | | 2.9 | | | | 5 | | | | 0.4 | | | | 5 | | | | 0.6 | | | | 5 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Total amortizable intangible assets | | $ | 33.0 | | | | | | | $ | 14.8 | | | | | | | $ | 5.8 | | | | | |
| Indefinite-lived intangibles: | | | | | | | | | | | | | | | | | | | | | | | | |
| Trade names | | $ | 4.1 | | | | | | | $ | 1.3 | | | | | | | | 1.0 | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Total intangible assets | | $ | 37.1 | | | | | | | $ | 16.1 | | | | | | | $ | 6.8 | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
The Company determined the useful life of its customer relationship intangible assets in accordance with ASC 350, Goodwill and Other. In accordance withASC 350-30-35-2, the useful lives are based on the period during which 95% of the undiscounted cash flows of the assets will be realized. In addition to analyzing the pattern of benefit demonstrated by the asset’s cash flow stream, the Company also considered factors discussed inASC 350-30-35-3 and determined that the useful lives are appropriate.
51
Subsequent to the completion of the aforementioned acquisitions and in association with the Company’s annual impairment assessment, the Company recorded charges of $67.1 million and $11.8 million to impair goodwill and certain trade names within the FSTech Group, respectively. See Note 5 for additional information.
Pro Forma Condensed Combined Financial Information
The following unaudited pro forma condensed combined financial information presents the results of operations of the Company as they may have appeared if the closing of Sirit and VESystems, presented in the aggregate, had been completed on January 1, 2010 and January 1, 2009, respectively:
| | | | | | | | | |
| | | December 31, | |
| ($ in millions, except per share data) | | 2010 | | | 2009 | |
| |
| Net sales | | $ | 734.8 | | | $ | 797.0 | |
| (Loss) income from continuing operations | | | (160.3 | ) | | | 14.0 | |
| (Loss) earnings from continuing operations — per basic and diluted share | | $ | (2.78 | ) | | $ | 0.28 | |
The unaudited pro forma condensed combined financial information is presented for illustrative purposes only and does not indicate the actual financial results of the Company had the closing of Sirit and VESystems been completed on January 1, 2010 and January 1, 2009, respectively, nor is it indicative of the results of operations in future periods. Included in the unaudited pro forma combined financial information for the years ended December 31, 2010 and 2009 were pro forma adjustments to reflect the results of operations of Sirit and VESystems as well as the impact of amortizing certain acquisition accounting adjustments such as amortizable intangible assets. The pro forma condensed financial information does not indicate the impact of possible business model changes, nor does it consider any potential impacts of current market conditions, expense efficiencies or other factors. The combined net sales and net loss for the year ended December 31, 2010 was $30.2 million and $(40.7) million, respectively.
Acquisition and Integration Related Expenses
For the year ended December 31, 2010, pretax charges totaling $3.9 million were recorded for acquisition and integration related costs. For the year ended December 31, 2009, there were no charges recorded for acquisitions and integration related costs. These charges, which were expensed in accordance with the accounting guidance for business combinations, were recorded in “Acquisition and integration related costs” and are included as a component of Corporate expenses.
Inventories at December 31 are summarized as follows:follows ($ in millions):
| | | | | | | | | | | | | | | | | |
| | | 2008 | | 2007 | | | 2010 | | 2009 | |
| |
| Raw materials | | $ | 67.0 | | | $ | 62.3 | | | $ | 55.0 | | | $ | 52.9 | |
| Work in process | | | 34.1 | | | | 26.4 | | | | 29.0 | | | | 27.8 | |
| Finished goods | | | 36.0 | | | | 33.1 | | | | 35.6 | | | | 30.0 | |
| | | | | | | | | | | |
| Total inventories | | $ | 137.1 | | | $ | 121.8 | | | $ | 119.6 | | | $ | 110.7 | |
| | | | | | | | | | | |
If the Company had used thefirst-in, first-out cost method exclusively, which approximates replacement cost, inventories would have aggregated $141.5 million and $125.2 million at December 31, 2008 and 2007, respectively.
NOTE 3 — PROPERTIES AND EQUIPMENT
| |
| NOTE 4 — | PROPERTIES AND EQUIPMENT |
Properties and equipment at December 31 are summarized as follows:follows ($ in millions):
| | | | | | | | | | | | | | | | | |
| | | 2008 | | 2007 | | | 2010 | | 2009 | |
| |
| Land | | $ | 1.4 | | | $ | 3.6 | | | $ | 0.3 | | | $ | 0.3 | |
| Buildings and improvements | | | 20.7 | | | | 31.9 | | | | 23.1 | | | | 22.6 | |
| Machinery and equipment | | | 141.3 | | | | 126.4 | | | | 141.1 | | | | 137.8 | |
| Accumulated depreciation | | | (98.0 | ) | | | (102.4 | ) | | | (101.3 | ) | | | (96.5 | ) |
| | | | | | | | | | | |
| Total properties and equipment | | $ | 65.4 | | | $ | 59.5 | | | $ | 63.2 | | | $ | 64.2 | |
| | | | | | | | | | | |
52
In July 2008, the Company entered into sale-leaseback transactions for its Elgin and University Park, Illinois plant locations. Net proceeds received were $35.8 million, resulting in a deferred gain of $29.0 million. The deferred gain will beis being amortized over the15-year life of the respective leases. The balance was $23.5 million and $24.2 million at December 31, 2010 and 2009, respectively.
The Company leases certain facilities and equipment under operating leases, some of which contain options to renew. Total rental expense on all operating leases was $9.5$11.4 million in 2008, $8.02010, $10.3 million in 20072009, and $6.1$9.3 million in 2006.2008. Sublease income and contingent rentals relating to operating leases were insignificant. At December 31, 2008,2010, minimum future rental commitments under operating leases having noncancelablenon-cancelable lease terms in excess of one year aggregated $74.9$66.5 million payable as follows: $9.9 million in 2009, $7.5 million in 2010, $6.5$9.6 million in 2011, $5.6$7.0 million in 2012, $4.6$6.2 million in 2013, $6.1 million in 2014, $5.3 million in 2015, and $40.8$32.3 million thereafter.
| |
| NOTE 5 — | GOODWILL AND OTHER INTANGIBLE ASSETS |
NOTE 4
Changes in the carrying amount of goodwill and trade names for the years ended December 31, 2010 and 2009, by operating segment, were as follows ($ in millions):
| | | | | | | | | | | | | | | | | | | | | |
| Goodwill | | | | | | | | | | | | | | | |
| | | Environmental
| | | Fire
| | | Safety
| | | Federal Signal
| | | | |
| ($ in millions) | | Solutions | | | Rescue | | | & Security | | | Technologies | | | Total | |
| |
| December 31, 2008 | | $ | 120.3 | | | $ | 33.0 | | | $ | 118.4 | | | $ | 31.9 | | | $ | 303.6 | |
| Acquisitions | | | - | | | | - | | | | - | | | | 9.5 | | | | 9.5 | |
| Translation/Adjustments | | | 0.1 | | | | 1.7 | | | | 2.5 | | | | 2.2 | | | | 6.5 | |
| | | | | | | | | | | | | | | | | | | | | |
| December 31, 2009 | | | 120.4 | | | | 34.7 | | | | 120.9 | | | | 43.6 | | | | 319.6 | |
| Acquisitions | | | - | | | | - | | | | - | | | | 62.2 | | | | 62.2 | |
| Translation/Adjustments | | | - | | | | (0.8 | ) | | | (2.7 | ) | | | (0.8 | ) | | | (4.3 | ) |
| Impairment | | | - | | | | - | | | | - | | | | (67.1 | ) | | | (67.1 | ) |
| | | | | | | | | | | | | | | | | | | | | |
| December 31, 2010 | | $ | 120.4 | | | $ | 33.9 | | | $ | 118.2 | | | $ | 37.9 | | | $ | 310.4 | |
| | | | | | | | | | | | | | | | | | | | | |
| | |
| Trade names | | | | | | | | | | | | | | | |
| | | Environmental
| | | Fire
| | | Safety
| | | Federal Signal
| | | | |
| ($ in millions) | | Solutions | | | Rescue | | | & Security | | | Technologies | | | Total | |
| |
| December 31, 2008 | | $ | - | | | $ | - | | | $ | - | | | $ | 19.4 | | | $ | 19.4 | |
| Acquisitions | | | - | | | | - | | | | - | | | | 3.4 | | | | 3.4 | |
| Translation/Adjustments | | | - | | | | - | | | | - | | | | 1.6 | | | | 1.6 | |
| | | | | | | | | | | | | | | | | | | | | |
| December 31, 2009 | | | - | | | | - | | | | - | | | | 24.4 | | | | 24.4 | |
| Acquisitions | | | - | | | | - | | | | - | | | | 5.4 | | | | 5.4 | |
| Translation/Adjustments | | | - | | | | - | | | | - | | | | (2.7 | ) | | | (2.7 | ) |
| Impairment | | | - | | | | - | | | | - | | | | (11.8 | ) | | | (11.8 | ) |
| | | | | | | | | | | | | | | | | | | | | |
| December 31, 2010 | | $ | - | | | $ | - | | | $ | - | | | $ | 15.3 | | | $ | 15.3 | |
| | | | | | | | | | | | | | | | | | | | | |
| | |
| * | | Goodwill by operating segment at December 31, 2008 and December 31, 2009 has been restated to reflect the changes in operating segments described in Note 16. |
53
The following table provides the gross carrying value and accumulated amortization for each major class of intangible assets:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Weighted
| | | | | | | | | | | | | | | | | | | |
| | | Average
| | | December 31, 2010 | | | December 31, 2009 | |
| | | Useful
| | | Gross
| | | | | | Net
| | | Gross
| | | | | | Net
| |
| | | Life
| | | Carrying
| | | Accumulated
| | | Carrying
| | | Carrying
| | | Accumulated
| | | Carrying
| |
| ($ in millions) | | (Years) | | | Value | | | Amortization | | | Value | | | Value | | | Amortization | | | Value | |
| |
| Amortizable Intangible Assets: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Developed software | | | 6 | | | $ | 23.0 | | | $ | (17.5 | ) | | $ | 5.5 | | | $ | 21.6 | | | $ | (15.6 | ) | | $ | 6.0 | |
| Patents | | | 10 | | | | 2.3 | | | | (0.6 | ) | | | 1.7 | | | | 0.7 | | | | (0.5 | ) | | | 0.2 | |
| Customer relationships | | | 15 | | | | 45.0 | | | | (7.3 | ) | | | 37.7 | | | | 19.0 | | | | (4.2 | ) | | | 14.8 | |
| Technology | | | 11 | | | | 23.7 | | | | (3.1 | ) | | | 20.6 | | | | 5.6 | | | | (1.2 | ) | | | 4.4 | |
| Other | | | 5 | | | | 5.7 | | | | (2.1 | ) | | | 3.6 | | | | 1.8 | | | | (1.1 | ) | | | 0.7 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Total | | | 12 | | | | 99.7 | | | | (30.6 | ) | | | 69.1 | | | | 48.7 | | | | (22.6 | ) | | | 26.1 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Indefinite-lived Intangible Assets: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Trade names | | | | | | | 15.3 | | | | - | | | | 15.3 | | | | 24.4 | | | | - | | | | 24.4 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Total | | | | | | $ | 115.0 | | | $ | (30.6 | ) | | $ | 84.4 | | | $ | 73.1 | | | $ | (22.6 | ) | | $ | 50.5 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Amortization expense for the years ended December 31, 2010, 2009, and 2008 totaled $8.2 million, $5.2 million, and $4.6 million, respectively. The Company estimates that the aggregate amortization expenses will be $9.2 million in 2011, $8.2 million in 2012, $6.9 million in 2013, $6.8 million in 2014, $6.2 million in 2015, and $31.8 million thereafter. Actual amounts of amortization may differ from estimated amounts due to additional intangible asset acquisitions, changes in foreign currency rates, impairment of intangible assets, and other events.
The Company accounts for goodwill and indefinite-lived intangible assets in accordance with ASC 360 “Intangibles — DEBTGoodwill and Other”, as indicated in Note 1.
During the fourth quarter of 2010, the Company performed its annual assessment and determined that the goodwill and certain trade names within the FSTech Group reporting unit were impaired, and recorded impairment charges of $67.1 million and $11.8 million, respectively. The impairment charges resulted from decreased sales and cash flow estimated in our FSTech Group. As of December 31, 2010, the goodwill impairment charge is an estimate and may be adjusted during the first quarter of 2011 upon completion of a detailed second step impairment analysis.
Short-term borrowings at December 31 consisted of the following:following ($ in millions):
| | | | | | | | | |
| | | 2008 | | | 2007 | |
| |
| Capital lease obligations | | $ | — | | | $ | 1.8 | |
| China Joint Venture debt guarantee | | | 9.4 | | | | — | |
| Other foreign lines of credit | | | 3.2 | | | | 0.8 | |
| | | | | | | | | |
| Total short-term borrowings | | $ | 12.6 | | | $ | 2.6 | |
| | | | | | | | | |
| | | | | | | | | |
| | | 2010 | | | 2009 | |
| |
Non-U.S. lines of credit | | $ | 1.8 | | | $ | - | |
| | | | | | | | | |
| Total short-term borrowings | | $ | 1.8 | | | $ | - | |
| | | | | | | | | |
3554
FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ in millions, except per share data) — (Continued)
Long-Term BorrowingsLong-term borrowings at December 31 consisted of the following:following ($ in millions):
| | | | | | | | | |
| | | 2008 | | | 2007 | |
| |
6.79% Unsecured Private Placement note with annual installments of $10.0 million due2008-2011 | | $ | 30.0 | | | $ | 40.0 | |
6.37% Unsecured Private Placement note with annual installments of $10.0 million due2005-2008 | | | — | | | | 10.0 | |
6.60% Unsecured Private Placement note with annual installments of $7.1 million due2008-2011 | | | 21.4 | | | | 28.6 | |
4.93% Unsecured Private Placement note with annual installments of $8.0 million due2008-2012 | | | 32.0 | | | | 40.0 | |
| 5.24% Unsecured Private Placement note due 2012 | | | 60.0 | | | | 60.0 | |
Unsecured Private Placement note, floating rate (4.83% and 5.87% at December 31, 2008 and 2007, respectively) due2010-2013 | | | 30.0 | | | | 50.0 | |
| Amended Loan Agreement (described below) | | | — | | | | 96.6 | |
| Alternative Currency Facility (within Revolving Credit Facility) | | | 10.1 | | | | 32.6 | |
| Revolving Credit Facility | | | 86.9 | | | | 66.0 | |
| | | | | | | | | |
| | | | 270.4 | | | | 423.8 | |
| Fair value of interest rate swaps | | | 1.1 | | | | (1.0 | ) |
| Unamortized balance of terminated fair value interest rate swaps | | | 0.6 | | | | 0.7 | |
| | | | | | | | | |
| | | | 272.1 | | | | 423.5 | |
| Less current maturities, excluding financial services activities | | | (25.1 | ) | | | (45.4 | ) |
| Less financial services activities — borrowings (included in discontinued operations) | | | (5.8 | ) | | | (137.4 | ) |
| | | | | | | | | |
| Total long-term borrowings, net | | $ | 241.2 | | | $ | 240.7 | |
| | | | | | | | | |
| | | | | | | | | |
| ($ in millions) | | 2010 | | | 2009 | |
| |
| Revolving Credit Facility | | $ | 214.6 | | | $ | 85.0 | |
| Alternative Currency Facility (within Revolving Credit Facility) | | | 4.0 | | | | 16.2 | |
10.79% Unsecured Private Placement note with annual installments of $10.0 million due2010-2011 | | | 1.3 | | | | 11.4 | |
10.60% Unsecured Private Placement note with annual installments of $7.1 million due2010-2011 | | | 0.6 | | | | 8.1 | |
8.93% Unsecured Private Placement note with annual installments of $8.0 million due2010-2012 | | | - | | | | 14.8 | |
| 9.24% Unsecured Private Placement note due 2012 | | | 31.9 | | | | 42.7 | |
Unsecured Private Placement note, floating rate (5.63% and 2.35% at September 30, 2010 and December 31, 2009, respectively) due2010-2013 | | | 7.1 | | | | 21.3 | |
| Subsidiary Loan Agreement | | | 1.0 | | | | 3.2 | |
| Capital Lease Obligations | | | 1.0 | | | | - | |
| | | | | | | | | |
| | | | 261.5 | | | | 202.7 | |
| Unamortized balance of terminated fair value interest rate swaps | | | 0.6 | | | | 1.4 | |
| | | | | | | | | |
| | | | 262.1 | | | | 204.1 | |
| Less current maturities, excluding financial services activities | | | (75.8 | ) | | | (41.9 | ) |
| Less current capital lease obligations | | | (0.4 | ) | | | - | |
| Less financial services activities — borrowings (included in discontinued operations) | | | (1.5 | ) | | | (2.5 | ) |
| | | | | | | | | |
| Total long-term borrowings and capital lease obligations, net | | $ | 184.4 | | | $ | 159.7 | |
| | | | | | | | | |
The Company was in violation of its Interest Coverage Ratio covenant minimum requirement as defined in the Second Amended and restated Credit Agreement (the “Credit Agreement”) and the Note Purchase Agreements for the fiscal quarter ended December 31, 2010. The Company was in compliance with the financial covenants throughout 2009.
On March 15, 2011, the Company executed the Third Amendment and Waiver to Second Amended and Restated Credit Agreement dated as of April 25, 2007, among the Company, the lenders party thereto, and Bank of Montreal, as Agent (“the Third Amendment and Waiver”). On the same date, the Company also executed the Second Global Amendment and Waiver to the Note Purchase Agreements (“Second Global Amendment”) with the holders of its private placement notes (the “Notes”). Both the Third Amendment and Waiver and the Second Global Amendment include a permanent waiver of compliance with the Interest Coverage Ratio covenant for the Company’s fiscal quarter ended December 31, 2010. Included in the terms of the Third Amendment and Waiver and the Second Global Amendment are the replacement of the Interest Coverage Ratio covenant with a minimum EBITDA covenant effective January 1, 2011 with the first required reporting period on April 2, 2011, an increase in pricing to the Company’s revolving Credit Facility pricing grid, an increase in pricing for the outstanding Notes, mandatory prepayments from proceeds of asset sales, restrictions on use of excess cash flow, restrictions on dividend payments, share repurchases and other restricted payments and a 50 basis points fee paid to the bank lenders and holders of the Notes upon execution of the Third Amendment and Waiver and the Second Global Amendment.
The new minimum EBITDA covenant will be tested quarterly as of the last day of the fiscal quarters ending April 2, 2011 and July 2, 2011, and monthly thereafter (commencing on August 6, 2011), in each case on a trailing12-month basis, except that EBITDA for the fiscal quarters ending April 2, 2011 and July 2, 2011, and the fiscal months of July through November, both inclusive, of 2011 will be calculated using the Company’syear-to-date EBITDA through the test date.
55
As required in the Third Amendment and Waiver and the Second Global Amendment, on March 15, 2011, the Company repaid $30.0 million that was applied to the amounts outstandings under the Credit Agreement and the Notes on a pro rata basis (i.e. 85.8% for the bank lenders under the Revolving Credit Facility and 14.2% for the Notes.) The $30.0 million has abeen included within the current portion of long-term borrowings and capital lease obligations on the Consolidated Balance Sheet as of December 31, 2010.
The Third Amendment and Waiver permanently reduced the available commitments to the Company’s Credit Agreement from $250.0 million line that expires April 25, 2012to $240.0 million. The Company’s ability to obtain new advances is now limited to $18.0 million as of the execution date of the Third Amendment and Waiver. Borrowings up to the first $18.0 million of new advances under its Revolvingthe Credit Facility. Agreement are senior in right of payment to the existing borrowings under the Credit Agreement and outstanding debt under the Notes. The Company may repay and reborrow amounts up to $18.0 million of new advances. The Company may also repay amounts greater than $18.0 million under the Credit Agreement, and subject to certain other provisions, the bank lenders will make available those commitments dollar for dollar under the Credit Agreement to $240.0 million.
Borrowings under the facility per the Third Amendment and Waiver bear interest, at the Company’s option, at the Base Rate or LIBOR, plus an applicable margin. The applicable margin ranges from 0.00% to 0.75%is 2.00% for Base Rate borrowings and 1.00% to 2.00%3.00% for LIBOR borrowings dependingfor the period January 1, 2011 through June 30, 2011, 2.50% for Base Rate borrowings and 3.50% for LIBOR borrowings from July 1, 2011 through September 30, 2011, 2.75% for Base Rate borrowings and 3.75% for LIBOR borrowings from October 1, 2011 through December 31, 2011, 3.00% for Base Rate borrowings and 4.00% for LIBOR borrowings from January 1, 2012 through March 31, 2012 and 3.25% for Base Rate borrowings and 4.25% for LIBOR borrowings thereafter. The Third Amendment and Waiver requires a LIBOR floor of 1.50% beginning January 1, 2011. The six-month LIBOR borrowing option will be removed. Interest on the Company’s total indebtedness to capital ratio.all loans will be payable monthly. The default rate increase in interest rates will be 300 basis points. At December 31, 2008,2010 and 2009, the Company’s applicable margin over LIBOR and Base Rate borrowings was 1.50% and 0.25%, respectively.
The Second Global Amendment required an increase in interest rates applicable to the Notes by the same amounts as the interest rate increases under the Company’s Revolving Credit Facility. Also, under the Second Global Amendment, the default rate increase in interest rates will be 300 basis points. The Company also agreed to pay to each consenting Noteholder a consent fee equal to 0.50% of the outstanding principal amounts of the Notes.
The outstanding debt under the Company’s Revolving Credit Facility and Notes will be prepaid on a pro rata basis in accordance with their pro rata percentages on a quarterly basis by an amount equal to the Excess Cash Flow for that quarter.
Excess Cash Flow is defined as EBITDA for the applicable quarter minus the sum of interest, scheduled principal payments, cash taxes, cash dividends and capital expenditures paid in accordance with the revolving credit agreement for that quarter plus after the second fiscal quarter of 2011, the aggregate amount that the Company’s working capital has decreased in the ordinary course during such period. The Excess Cash Flow pro rata payment against the Credit Agreement outstanding debt will concurrently and permanently reduce the same amount of Credit Agreement commitments. The commitments may be reinstated with approval from all bank lenders within the Credit Agreement.
The Company has recorded $42.6 million of amounts which are expected to be paid in 2011 in connection with the excess cash flow requirement as a component of current portion of long-term borrowings and capital lease obligations on the Consolidated Balance Sheet as of December 31, 2010.
56
After the effective date of the Third Amendment and Waiver, the Credit Agreement will be secured by afirst-priority perfected security interest in substantially all of the tangible and intangible assets of the Company and the domestic subsidiaries as the guarantors.
Under the term of the Third Amendment and Waiver, no share repurchases and other restricted payments will be permitted going forward except with the consent of the Required Lenders and the Noteholders. Dividends shall be permitted only if the following conditions are met:
| | |
| • | No default or event of default shall exist or shall result from such payment; |
|
| • | Minimum availability under the Credit Agreement after giving effect to such restricted payment and any credit extensions in connection therewith of $18.0 million; |
|
| • | Dividends may not exceed the lesser of (a) $625,000 (i.e., $0.01 per share) during any fiscal quarter and (b) Free Cash Flow for such quarter. “Free Cash Flow” means Excess Cash Flow before giving effect to dividends. The $625,000 limit will be increased to allow for the payment of dividends of $0.01 per share during any fiscal quarter for such share of stock sold for cash in a public or private offering after the effective date of the Third Amendment and Waivers; and |
|
| • | The Company has met or exceeded its projected EBITDA at such time. |
The amendments also contain certain covenants that restrict the Company’s ability make voluntarily debt payments, acquisitions, or dispositions without the lender’s consent. In addition certain limitations are placed on the Company’s capital expenditure levels in future years.
In March 2008, the Company executed an amendment (the “Second Credit Amendment”) to the Revolving Credit Facility. The Second Credit Amendment modified the definitions of Consolidated Net Worth and EBIT, reduced the Total Indebtedness to Capital ratio maximum to 0.50, reduced the minimum Interest Coverage Ratio requirement and reduced the required minimum percentage of consolidated assets directly owned by the Credit Agreement’s borrower and guarantors to 50%. The amendment also allowed for the unencumbered sale of theE-One business.
On September 6, 2007 Federal Signal of Europe B.V. y CIA , SC, a restricted subsidiary of the Company, entered into a Supplemental Agreement to the Company’s Second Amended and Restated Credit Agreement (“Alternative Currency Facility”) whereby Federal Signal of Europe B.V. y CIA , SC, became a Designated Alternative Currency Borrower for the purpose of making swing loans denominated in Euros.
57
In March 2008, the Company requested and was granted an amendment (the “Second Credit Amendment”) to the Revolving Credit Facility. Affected items in the Second Credit Amendment included the definitions of Consolidated Net Worth and EBIT, reducing the Total Indebtedness to Capital ratio maximum to .50, reducing the minimum Interest Coverage Ratio requirement which ranged from 2:1 to 2.75:1 for the four quarters ending in 2008, reducing the required minimum percentage of consolidated assets directly owned by the Credit Agreement’s borrower and guarantors to 50%. The amendment allowed for the unencumbered sale of theE-One business.
As of December 31, 2008, €7.22010, €3.0 million (or $10.1$4.0 million), was drawn on the Alternative Currency Facility and $86.9$214.6 million was drawn on the Second Amended Credit AgreementAmendment for a total of $97.0$218.6 million drawn under the Second Amended and Restated Credit Agreement leaving available borrowings of $153.0 million.
36
FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
$31.4 million, not including $29.0 million of capacity used for existing letters of credit.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ in millions, except per share data) — (Continued)On April 27, 2009, the Company executed the Global Amendment to Note Purchase Agreements (the “Global Amendment”) with the holders of its private placement debt notes (the “Notes”). The Global Amendment included a provision allowing the Company to prepay $50.0 million of principal of the $173.4 million Notes outstanding at par with no prepayment penalty. The prepayment was executed on April 28, 2009, and included principal, related accrued interest and a fee of $0.2 million totaling $51.1 million. The prepayment was funded by the Company’s available capacity under its revolving credit facility.
Weighted averageThe Global Amendment included changes to the Notes’ coupon interest rates. The coupon interest rates on short-term borrowingsthe Notes were 5.94%increased by 100 basis points upon execution of the Global Amendment. On January 1, 2010, the outstanding Notes’ coupon interest rates increased by an additional 100 basis points. On April 1, 2010, the outstanding Notes’ coupon interest rates increased an additional 200 basis points.
The Global Amendment also included changes and 6.95% at December 31, 2008additions to various covenants within the Notes Agreements. Financial covenants were modified to more closely align with those included in the Company’s revolving credit facility, which allows for the exclusion of various charges when computing covenants for minimum net worth and 2007, respectively.maximum debt to capitalization.
On March 24, 2005,E-ONE, Inc.(“E-ONE”), formerlyFebruary 10, 2009 Bronto Skylift OY AB, a wholly-owned subsidiary of the Company, entered into a loan agreement with Bancin which principal and interest is paid semi-annually and the loan expires two years after the loan date. At the end of America Leasing & Capital, LLC (the “Loan Agreement”) underDecember 31, 2010 the balance outstanding was $1.0 million.
The outstanding unsecured Private Placement Notes’ coupon interest rates increased by a nonrecourse loan facility.E-One’s indebtedness and other obligations undertotal of 3% from December 31, 2009. The coupon interest rates increased by 1% on January 1, 2010 as required per the Loan Agreement were payable out of certain customer leases of emergency equipment and other collateralApril 2009 Global Amendment to the Note Purchase Agreements. The coupon rates also increased by an additional 2% on April 1, 2010 as described in the Loan Agreement. In December 2007, the Loan Agreement was amended to include customer leases ofE-One Inc.,E-One New York, Inc., Elgin Sweeper Company and Vactor Manufacturing, Inc. (“Amended Loan Agreement”). In August 2008, the outstanding debta result of the Amended Loan AgreementCompany’s private placement debt rating not improving by one rating level on or before April 1, 2010.
On September 1, 2010, the Company prepaid $20.0 million of its outstanding principal balance of its private placement debt at par with no prepayment penalty and related accrued interest of $0.4 million. The prepayment was paid in full, priorfunded by the Company’s available capacity under its revolving credit facility.
As of December 31, 2010, $1.8 million was drawn against the Company’snon-U.S. lines of credit which provide for borrowings up to the sale ofE-ONE.$17.5 million.
Aggregate maturities of total borrowings amount to approximately $37.7 million in 2009, $45.2 million in 2010, $25.1$78.0 million in 2011, $165.0$178.9 million in 2012 and $10.0$6.8 million in 2013.2013 and $0.2 million in 2014 thereafter. The fair values of these borrowings aggregated $286.3$261.7 million and $430.1$205.0 million at December 31, 20082010 and 2007,2009, respectively. Included in 20092011 maturities are $1.8 million of $37.7 million are $9.4 million associated with the Company’s guaranty of the China Joint Venture debt, $3.2 million on other foreignnon-U.S. lines of credit, and $25.1$1.3 million of other debt, $6.5 million of private placement debt, amortization.
For each$68.0 million of the above Private Placement notes, covenants include a maximum debt-to-capitalization ratiorevolving credit facility, and $0.4 million of 60% and minimum net worth of $275.0 million. At December 31, 2008, all of the Company’s retained earnings were free of any restrictions and the Company was in compliance with the financial covenants and agreements.capital lease obligations.
At December 31, 20082010 and 2007,2009, deferred financing fees, which are amortized over the remaining life of the debt, totaled $1.3$0.5 million and $1.5$0.9 million, respectively, and are included in other deferred charges and other assets on the balance sheet.
The Company paid interest of $9.7 million in 2010, $11.3 million in 2009 and $21.4 million in 2008, $26.2 million in 2007 and $24.4 million in 2006.2008. See Note 79 regarding the Company’s utilization of derivative financial instruments relating to outstanding debt.
NOTE 5 — INCOME TAXESWeighted average interest rates on short-term borrowings was 2.36% at December 31, 2010.
58
The provision/(benefit) for income taxes for each of the three years in the period ended December 31 2008 consisted of the following:following ($ in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 2008 | | 2007 | | 2006 | | | 2010 | | 2009 | | 2008 | |
| |
| Current: | | | | | | | | | | | | | | | | | | | | | | | | |
| Federal | | $ | 3.3 | | | $ | 2.6 | | | $ | 6.1 | | | $ | (3.0 | ) | | $ | (3.9 | ) | | $ | 2.0 | |
| Foreign | | | 5.8 | | | | 6.0 | | | | 4.6 | | | | 5.2 | | | | 5.7 | | | | 5.8 | |
| State and local | | | 0.5 | | | | (0.1 | ) | | | 0.1 | | | | 0.3 | | | | (0.2 | ) | | | 0.5 | |
| | | | | | | | | | | | | | | |
| | | | 9.6 | | | | 8.5 | | | | 10.8 | | | | 2.5 | | | | 1.6 | | | | 8.3 | |
| Deferred: | | | | | | | | | | | | | | | | | | | | | | | | |
| Federal | | | (14.9 | ) | | | 4.9 | | | | (2.8 | ) | | $ | 71.4 | | | | 2.7 | | | | (14.7 | ) |
| Foreign | | | 0.4 | | | | (0.1 | ) | | | 0.2 | | | | (4.1 | ) | | | 0.5 | | | | 0.4 | |
| State and local | | | (0.1 | ) | | | 0.6 | | | | 0.6 | | | | 2.5 | | | | 0.5 | | | | (0.1 | ) |
| | | | | | | | | | | | | | | |
| | | | (14.6 | ) | | | 5.4 | | | | (2.0 | ) | | | 69.8 | | | | 3.7 | | | | (14.4 | ) |
| | | | | | | | | | | | | | | |
| Total income tax (benefit) provision | | $ | (5.0 | ) | | $ | 13.9 | | | $ | 8.8 | | | $ | 72.3 | | | $ | 5.3 | | | $ | (6.1 | ) |
| | | | | | | | | | | | | | | |
37
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 each of the three years in the period ended December 31 2008 are summarized below:
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 2008 | | 2007 | | 2006 | | | 2010 | | 2009 | | 2008 | |
| |
| Statutory federal income tax rate | | | 35.0 | % | | | 35.0 | % | | | 35.0 | % | | | 35.0 | % | | | 35.0 | % | | | 35.0 | % |
| State income taxes, net of federal tax benefit | | | 2.1 | | | | 2.5 | | | | 1.5 | | | | (0.2 | ) | | | 0.8 | | | | 2.1 | |
| Domestic Valuation Allowance | | | | (96.2 | ) | | | - | | | | - | |
| Non-deductible goodwill impairments | | | | (22.0 | ) | | | - | | | | - | |
| Losses on China Joint Venture and legal entity restructuring | | | (12.2 | ) | | | — | | | | | | | | - | | | | - | | | | (13.1 | ) |
| Dividend repatriation | | | — | | | | (2.8 | ) | | | — | | |
| Capital loss utilization via sale/leaseback | | | (31.5 | ) | | | — | | | | — | | |
| Exports benefit | | | — | | | | — | | | | (2.6 | ) | |
| Non-deductible acquisition costs | | | | (0.5 | ) | | | 1.2 | | | | - | |
| Capital loss utilization via sale leaseback | | | | - | | | | - | | | | (36.7 | ) |
| Tax reserves | | | 0.4 | | | | 1.5 | | | | (4.4 | ) | | | 1.1 | | | | (2.5 | ) | | | 1.3 | |
| R&D tax credits | | | (2.2 | ) | | | (1.0 | ) | | | (1.1 | ) | | | 0.6 | | | | (1.9 | ) | | | (2.5 | ) |
| Foreign tax rate effects | | | (9.8 | ) | | | (4.3 | ) | | | (3.9 | ) | | | 0.8 | | | | (11.3 | ) | | | (11.3 | ) |
| Foreign financing strategies | | | — | | | | (1.2 | ) | | | (0.9 | ) | |
| Capital loss — Canadian legal entity restructuring | | | — | | | | (2.7 | ) | | | — | | |
| Other, net | | | (0.8 | ) | | | (1.1 | ) | | | (1.5 | ) | | | (0.3 | ) | | | (0.2 | ) | | | (1.8 | ) |
| | | | | | | | | | | | | | | |
| Effective income tax rate | | | (19.0 | )% | | | 25.9 | % | | | 22.1 | % | | | (81.7 | )% | | | 21.1 | % | | | (27.0 | )% |
| | | | | | | | | | | | | | | |
The Company’s 2010 effective rate of (81.7)% includes tax expense related to a domestic valuation allowance and non-deductible goodwill impairments.
The Company’s 2009 effective rate of 21.1% reflects a benefit for the reduction in reserves primarily due to the completion of an audit of the Company’s 2006 U.S. tax return in accordance with ASC Topic 740, “Income Taxes” The Company’s effective rate also reflects benefits for the R&D tax credit and foreign tax rate effects.
The Company’s 2008 effective tax rate of (19.0)(27.0)% reflects a benefit of $8.2 million for the utilization of capital loss carryforwards resulting from the sale-leasebacksale lease back transaction for two U.S. based manufacturing facilities and a benefit of $3.1 million for losses in the China Joint Venture previously not recognized.
59
Deferred income tax assets and liabilities at December 31 are summarized as follows:follows ($ in millions):
| | | | | | | | | | | | | | | | | |
| | | 2008 | | 2007 | | | 2010 | | 2009 | |
| |
| Deferred tax assets: | | | | | | | | | | | | | | | | |
| Depreciation and amortization — sale leaseback | | | $ | 9.5 | | | $ | 12.7 | |
| Accrued expenses | | $ | 19.5 | | | $ | 12.8 | | | | 30.8 | | | | 25.7 | |
| Net operating loss, capital loss, alternative minimum tax, research and development, and foreign tax credit carryforwards | | | 61.8 | | | | 40.8 | | | | 70.0 | | | | 56.0 | |
| Tax effect of items in other comprehensive income | | | 31.2 | | | | 6.4 | | |
| Definite lived intangibles | | | | 5.8 | | | | 1.0 | |
| Pension benefits | | | | 17.8 | | | | 15.8 | |
| Other | | | 3.0 | | | | 0.1 | | | | 0.1 | | | | 0.4 | |
| Deferred revenue | | | | 1.9 | | | | — | |
| | | | | | | | | | | |
| Gross deferred tax assets | | | 115.5 | | | | 60.1 | | | | 135.9 | | | | 111.6 | |
| Valuation allowance | | | (33.9 | ) | | | (15.9 | ) | | | (109.1 | ) | | | (25.2 | ) |
| | | | | | | | | | | |
| Total deferred tax assets | | | 81.6 | | | | 44.2 | | | | 26.8 | | | | 86.4 | |
| Deferred tax liabilities: | | | | | | | | | | | | | | | | |
| Depreciation and amortization | | | (38.0 | ) | | | (51.8 | ) | | | (12.0 | ) | | | (16.7 | ) |
| Revenue recognition | | | (0.6 | ) | | | (0.8 | ) | |
| Pension liabilities | | | (9.9 | ) | | | (6.4 | ) | |
Undistributed earnings ofnon-U.S. subsidiary | | | (1.0 | ) | | | (0.7 | ) | |
| Expenses capitalized for tax | | | | (4.1 | ) | | | (5.6 | ) |
| Indefinite lived intangibles | | | | (43.2 | ) | | | (41.9 | ) |
| Definite lived intangibles | | | | (11.3 | ) | | | — | |
| Other | | | | (1.8 | ) | | | (1.9 | ) |
| | | | | | | | | | | |
| Gross deferred tax liabilities | | | (49.5 | ) | | | (59.7 | ) | | | (72.4 | ) | | | (66.1 | ) |
| | | | | | | | | | | |
| Net deferred tax asset (liability) | | $ | 32.1 | | | $ | (15.5 | ) | |
| Net deferred tax asset / (liability) | | | $ | (45.6 | ) | | $ | 20.3 | |
| | | | | | | | | | | |
Federal and state income taxes have not been provided on accumulated undistributed earnings of certain foreign subsidiaries aggregating approximately $79.6$85.2 million and $97.2 million at December 31, 2008,2010 and 2009, respectively; as such earnings have been
38
FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ in millions, except per share data) — (Continued)
reinvested in the business. The determination of the amount of the unrecognized deferred tax liability related to the undistributed earnings is not practicable.
In the fourth quarter of 2010, the Company determined that $15 million of previously undistributed earnings at one of the Company’s foreign subsidiaries would be repatriated in 2011. As a result of this change, the Company increased its deferred tax liabilities related to the $15 million by $0.2 million. The remainder of the foreign subsidiaries undistributed earnings is indefinitely reinvested.
The deferred tax asset for tax loss carryforwards at December 31, 2010, includes Federal net operating loss carryforwards of $4.8$2.7 million, which begin to expire in 2026, state net operating loss carryforwards of $1.3 million, which begin to expire in 2019; foreign net operating loss carryforwards of $2.2 million of which $0.1 million has an indefinite life; $22.2 million for capital loss carryforwards that will expire in 2012 and 2013. The deferred tax asset for tax credit carryforwards includes U.S. research tax credit carryforwards of $5.6 million, which will begin to expire in 2022, U.S. foreign tax credits of $15.5 million, which will begin to expire in 2015 and U.S. alternative minimum tax credit carryforwards of $3.4 million with no expiration.
The deferred tax asset for tax loss carryforwards at December 31, 2009, includes Federal net operating loss carryforwards of $1.9 million, which begin to expire in 2029, state net operating loss carryforwards of $1.5$1.0 million, which will begin to expire in 2019; foreign net operating loss carryforwards of $2.7$0.9 million of which $1.4$0.9 million has an indefinite life; $29.8$23.4 million for capital loss carryforwards that will expire in 2012 and 2013. The deferred tax asset for tax credit carryforwards includes U.S. research tax credit carryforwards of $5.0 million, which will begin to expire in 2022, U.S. foreign tax credits of $14.2$15.5 million, which will begin to expire in 2015 and U.S. alternative minimum tax credit carryforwards of $3.8$3.4 million with no expiration.
Valuation allowances totaling $33.9$109.1 million have been established at December 31, 2010 and include $1.4$1.3 million related to state net operating loss carryforwards, $2.2 million related to the foreign net operating loss
60
carryforwards, $22.2 million related to capital loss carryforwards, and $83.4 million related to domestic deferred tax assets
Valuation allowances totaling $25.2 million have been established at December 31, 2009 and include $0.9 million related to state net operating loss carryforwards and $2.7$0.9 million related to the foreign net operating loss carryforwards and $29.8$23.4 million related to capital loss carryforwards.
The net deferred tax asset at December 31 is classified in the balance sheet as follows:follows ($ in millions):
| | | | | | | | | |
| | | 2008 | | 2007 |
| |
| Current net deferred tax assets (included in Other current assets in the Consolidated Balance Sheets) | | $ | 1.8 | | | $ | 9.8 | |
| Long-term net deferred tax asset (liability) | | | 30.3 | | | | (25.3 | ) |
| | | | | | | | | |
| | | $ | 32.1 | | | $ | (15.5 | ) |
| | | | | | | | | |
| | | | | | | | | |
| | | 2010 | | | 2009 | |
| |
| Current net deferred tax assets | | $ | 15.9 | | | $ | 3.1 | |
| Current valuation allowance | | | (15.7 | ) | | | — | |
| | | | | | | | | |
| Total deferred tax asset (included in Other current assets in the Consolidated Balance Sheets) | | $ | 0.2 | | | $ | 3.1 | |
| | | | | | | | | |
| Long-term net deferred tax asset | | $ | 47.6 | | | $ | 42.4 | |
| Long-term valuation allowance | | | (93.4 | ) | | | (25.2 | ) |
| | | | | | | | | |
| Long-term net deferred tax asset/ (liability) | | $ | (45.8 | ) | | $ | 17.2 | |
| | | | | | | | | |
ASC Topic 740, “Income Taxes,” requires that the future realization of deferred tax assets depends on the existence of sufficient taxable income in future periods. Possible sources of taxable income include taxable income in carryback periods, the future reversal of existing taxable temporary differences recorded as a deferred tax liability, tax-planning strategies that generate future income or gains in excess of anticipated losses in the carryforward period and projected future taxable income. If, based upon all available evidence, both positive and negative, it is more likely than not such deferred tax assets will not be realized, a valuation allowance is recorded. Significant weight is given to positive and negative evidence that is objectively verifiable. A company’s three-year cumulative loss position is significant negative evidence in considering whether deferred tax assets are realizable and the accounting guidance restricts the amount of reliance the Company can place on projected taxable income to support the recovery of the deferred tax assets.
As of December 31, 2008,2009, the Company iswas in a net U.S. deferred tax asset position of $42.3$34.4 million. Additionally, the Company hashad incurred cumulative domestic losses forin each of the last three years.years in the period ended December 31, 2009. Under the provisions of FAS 109,ASC Topic 740, “Income Taxes,” the Company may beconsidered if it was required to establish a valuation allowance for its U.S. deferred tax assets. However, FAS 109ASC Topic 740, provides that a valuation allowance may not be needed if the Company can demonstrate a strong earnings history exclusive of the losses that created the deferred tax assets coupled with evidence indicating that loss is due to an unusual, infrequent, or extraordinary item and not a continuing condition. TheAs of December 31, 2009, the Company considershad considered that the cumulative three year domestic loss was primarily due to losses recorded on discontinued operations and disposaldisposals during the three year period then ended and accordingly, no valuation allowance has beenwas established for the net U.S. deferred tax asset position as of December 31, 2008.2009.
In the fourth quarter of 2010, the company recorded an $85.0 million valuation allowance against our U.S. Federal deferred tax assets as a non-cash charge to income tax expense after the Company fell into a cumulative three year domestic loss position after excluding the results of discontinued operations and disposals. In reaching this conclusion, the Company considered the weak municipal markets in the United States and significant impairment charges, which have led to a three-year cumulative U.S. loss position from continuing operations in the fourth quarter of 2010. Recording the valuation allowance does not restrict our ability to utilize the future deductions and net operating losses associated with the deferred tax assets assuming taxable income is recognized in future periods.
The $26.8 million of deferred tax assets at December 31, 2010, for which no valuation allowance is recorded, is anticipated to be realized through the future reversal of existing taxable temporary differences recorded as deferred tax liabilities at December 31, 2010. Should the company determine that it would not be able to realize our remaining deferred tax assets in the future, an adjustment to the valuation allowance would be recorded in the period such determination is made. The need to maintain a valuation allowance against deferred tax assets may cause greater volatility in our effective tax rate.
61
The Company paid income taxes of $6.8 million in 2010, $5.1 million in 2009, and $6.1 million in 2008, $7.0 million in 2007 and $6.9 million in 2006.2008.
Income from continuing operations before taxes for each of the three years in the period ended December 31 2008 consisted of the following:following ($ in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 2008 | | 2007 | | 2006 | | 2010 | | 2009 | | 2008 | |
| |
| United States | | $ | 1.4 | | | $ | 31.4 | | | $ | 23.0 | | | $ | (74.5 | ) | | $ | 4.4 | | | $ | (1.6 | ) |
| Non-U.S | | | 24.9 | | | | 22.2 | | | | 17.1 | | |
| Non-U.S. | | | | (13.9 | ) | | | 20.7 | | | | 24.2 | |
| | | | | | | | | | | | | | | |
| | | $ | 26.3 | | | $ | 53.6 | | | $ | 40.1 | | | $ | (88.4 | ) | | $ | 25.1 | | | $ | 22.6 | |
| | | | | | | | | | | | | | | |
On January 1, 2007, the Company adopted the provisions of FIN 48. As a result, an increase of $0.7 million in the liability for unrecognized tax benefits and a $0.7 million reduction in retained earnings were recorded in 2007.
39
FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ in millions, except per share data) — (Continued)
The following table summarizes the activity related to the Company’s unrecognized tax benefits:benefits ($ in millions):
| | | | | |
| Balance at January 1, 2007 | | $ | 6.2 | |
| Increases related to current year tax positions | | | 1.8 | |
| Increases from prior period positions | | | 0.6 | |
| Decreases due to lapse of statute of limitations | | | (0.2 | ) |
| Decreases from prior periods | | | (0.1 | ) |
| | | | | |
| Balance at December 31, 2007 | | $ | 8.3 | |
| Increases related to current year tax positions | | | 0.8 | |
| Decreases due to settlements with tax authorities | | | (0.9 | ) |
| Decreases due to lapse of statute of limitations | | | (0.7 | ) |
| Decreases from prior periods | | | (2.5 | ) |
| | | | | |
| Balance at December��31, 2008 | | $ | 5.0 | |
| | | | | |
| | | | | |
| Balance at January 1, 2009 | | $ | 5.0 | |
| Increases related to current year tax positions | | | 1.4 | |
| Decreases due to lapse of statute of limitation | | | (0.5 | ) |
| Decreases due to settlements with tax authorities | | | (1.0 | ) |
| | | | | |
| Balance at December 31, 2009 | | $ | 4.9 | |
| Increases related to current year tax | | | 0.6 | |
| Decreases due to settlements with tax authorities | | | (1.5 | ) |
| Decreases due to lapse of statute of limitations | | | (0.2 | ) |
| | | | | |
| Balance at December 31, 2010 | | $ | 3.8 | |
| | | | | |
Included in the unrecognized tax benefits of $5.0$3.8 million at December 31, 20082010 was $4.4$4.1 million of tax benefits that if recognized, would impact our annual effective tax rate. The Company’s continuing practice is to recognize interest and penalties related to income tax matters in income tax expense. Interest and penalties amounting to $0.8 million and $0.1 million, respectively, are included in the consolidated balance sheet but are not included in the table above. We expect our unrecognized tax benefits to decrease by $0.4$1.3 million over the next 12 months.months due to potential expiration of statute of limitations.
Included in the unrecognized tax benefits of $4.9 million at December 31, 2009 was $4.7 million of tax benefits that if recognized, would impact our annual effective tax rate. The Company’s continuing practice is to recognize interest and penalties related to income tax matters in income tax expense. Interest and penalties amounting to $0.7 million and $0.1 million, respectively, are included in the consolidated balance sheet but are not included in the table above.
We file U.S., state and foreign income tax returns in jurisdictions with varying statutes of limitations. The 20052007 through 20082010 tax years generally remain subject to examination by federal and most state tax authorities. In significant foreign jurisdictions, the 20032005 through 20082010 tax years generally remain subject to examination by their respective tax authorities.
NOTE 6 — POSTRETIREMENT BENEFITS
| |
| NOTE 8 — | POSTRETIREMENT BENEFITS |
The Company and its subsidiaries sponsor a number of defined benefit retirement plans covering certain of its salaried and hourly employees. Benefits under these plans are primarily based on final average compensation and years of service as defined within the provisions of the individual plans. The Company also participates in a retirement plan that provides defined benefits to employees under certain collective bargaining agreements.
The Company uses a December 31 measurement date for its U.S. andnon-U.S. benefit plans in accordance with SFAS 158.ASC Topic 715, “Compensation — Retirement Benefits.”
4062
FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ in millions, except per share data) — (Continued)
The components of net periodic pension expense for each of the three years in the period ended December 31, 2008 are summarized as follows:follows ($ in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | U.S. Benefit Plans | | Non-U.S. Benefit Plan | | | U.S. Benefit Plans | | Non-U.S. Benefit Plan | |
| | | 2008 | | 2007 | | 2006 | | 2008 | | 2007 | | 2006 | | | 2010 | | 2009 | | 2008 | | 2010 | | 2009 | | 2008 | |
| |
| Company-sponsored plans | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Service cost | | $ | 0.9 | | | $ | 1.8 | | | $ | 4.3 | | | $ | 0.2 | | | $ | 0.2 | | | $ | 0.2 | | | $ | - | | | $ | - | | | $ | 0.9 | | | $ | 0.2 | | | $ | 0.2 | | | $ | 0.2 | |
| Interest cost | | | 8.7 | | | | 8.8 | | | | 8.6 | | | | 3.3 | | | | 3.1 | | | | 2.7 | | | | 7.9 | | | | 8.0 | | | | 8.7 | | | | 2.7 | | | | 2.6 | | | | 3.3 | |
| Expected return on plan assets | | | (10.8 | ) | | | (10.9 | ) | | | (9.9 | ) | | | (4.0 | ) | | | (4.2 | ) | | | (3.8 | ) | | | (8.7 | ) | | | (9.5 | ) | | | (10.8 | ) | | | (3.1 | ) | | | (2.7 | ) | | | (4.0 | ) |
| Amortization of actuarial loss | | | 0.6 | | | | 1.6 | | | | 1.4 | | | | 0.5 | | | | 0.6 | | | | 0.6 | | | | 3.6 | | | | 2.0 | | | | 0.6 | | | | 0.8 | | | | 1.1 | | | | 0.5 | |
| Amortization of prior service cost | | | — | | | | — | | | | 0.1 | | | | — | | | | — | | | | — | | |
| Curtailment charge | | | 0.4 | | | | — | | | | 1.3 | | | | — | | | | — | | | | — | | | | - | | | | - | | | | 0.4 | | | | - | | | | - | | | | - | |
| Settlement charge | | | 5.9 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | - | | | | - | | | | 5.9 | | | | - | | | | - | | | | - | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | 5.7 | | | | 1.3 | | | | 5.8 | | | | — | | | | (0.3 | ) | | | (0.3 | ) | | | 2.8 | | | | 0.5 | | | | 5.7 | | | | 0.6 | | | | 1.2 | | | | - | |
| Multiemployer plans | | | 0.2 | | | | 0.2 | | | | 0.3 | | | | — | | | | — | | | | — | | |
| Multi-employer plans | | | | 0.2 | | | | 0.2 | | | | 0.2 | | | | - | | | | - | | | | - | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net periodic pension expense (income) | | $ | 5.9 | | | $ | 1.5 | | | $ | 6.1 | | | $ | — | | | $ | (0.3 | ) | | $ | (0.3 | ) | |
| Net periodic pension expense | | | $ | 3.0 | | | $ | 0.7 | | | $ | 5.9 | | | $ | 0.6 | | | $ | 1.2 | | | $ | - | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
On April 21, 2008, the Company sold its Die and Mold Operations. The operations were included in discontinued operations for all periods presented through the sale date. As a result of an amendment related to this sale, the Company was required to recognize a curtailment adjustment of $0.4 million and subsequently, a settlement charge of $5.9 million under SFAS No. 88, “Employers’ Accounting for Settlements and Curtailments of Defined Benefit Plans and for Termination Benefits”.ASC Topic 715, “Compensation — Retirement Benefits.” Pension expense relating to the Tool segment employees, excluding the previously mentioned charges, was $0.3 million $1.3 million and $1.9 million for each of the three yearsyear ended December 31, 2008, 2007 and 2006, respectively.
The remeasurement of these defined benefit plans as a result of the sale of the Die and Mold Operations also included a change in the weighted average discount rate to determine pension costs from 6.45% used at January 1, 2008 to 6.6% at the May 1, 2008 remeasurement date, and to 6.8% at the July 1, 2008 remeasurement date.2008.
On April 28,December 31, 2008, an amendment to the Company’s U.S. defined benefit plans for University Park, Illinois IBEW employees within the Safety and Security Systems Group was approved. The amendment froze servicebenefit accruals for these employees as of December 31, 2008. On July 17, 2006, a similar amendment to the Company’s defined benefit plans for all U.S. employees, except for Tool segment employees and University Park, Illinois IBEW employees within the Safety and Security Systems Group was approved by the Company’s Board of Directors. The amendment froze service accruals for these employees as of December 31, 2006. The participants do, however, continue to accrue benefits resulting from future salary increases through 2016. As a result of the amendment, the Company was required to recognize a curtailment charge under SFAS No. 88, “Employers’ Accounting for Settlements and Curtailments of Defined Benefit Plans and for Termination Benefits” due to the recognition of prior service costs. The Company recognized a curtailment charge of $1.3 million measured at July 1, 2006, which was recorded during the quarter ended September 30, 2006 and is recognized in the table above, reflecting the unamortized portion of prior benefit changes.
41
FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ in millions, except per share data) — (Continued)
The following table summarizes the weighted-average assumptions used in determining pension costs in each of the three years infor the period ended December 31, 2008:31:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | U.S. Benefit Plans | | Non-U.S. Benefit Plan | | | U.S. Benefit Plans | | Non-U.S. Benefit Plan | |
| | | 2008 | | 2007 | | 2006 | | 2008 | | 2007 | | 2006 | | | 2010 | | 2009 | | 2008 | | 2010 | | 2009 | | 2008 | |
| |
| Discount rate | | | 6.8 | % | | | 6.0 | % | | | 6.1 | % | | | 5.9 | % | | | 5.8 | % | | | 5.2 | % | | | 6.0 | % | | | 6.5 | % | | | 6.8 | % | | | 5.7 | % | | | 5.7 | % | | | 5.9 | % |
| Rate of increase in compensation levels | | | 3.5 | % | | | 3.5 | % | | | 3.5 | % | | | N/A | * | | | N/A | * | | | NA | * | | | 3.5 | % | | | 3.5 | % | | | 3.5 | % | | | N/A* | | | | N/A | | | | N/A | |
| Expected long term rate of return on plan assets | | | 8.5 | % | | | 8.5 | % | | | 8.5 | % | | | 6.6 | % | | | 6.9 | % | | | 7.0 | % | | | 8.5 | % | | | 8.5 | % | | | 8.5 | % | | | 6.5 | % | | | 6.8 | % | | | 6.6 | % |
| | |
| * | | Non-U.S. plan benefits are not adjusted for compensation level changes |
The following summarizes the changes in the projected benefit obligation and plan assets, the funded status of the Company-sponsored plans, and the major assumptions used to determine these amounts at December 31:31 ($ in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | U.S. Benefit Plans | | Non-U.S. Benefit Plan | | | U.S. Benefit Plans | | Non-U.S. Benefit Plan | |
| | | 2008 | | 2007 | | 2008 | | 2007 | | | 2010 | | 2009 | | 2010 | | 2009 | |
| |
| Change in Benefit Obligation | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Benefit obligation, beginning of year | | $ | 142.5 | | | $ | 143.2 | | | $ | 61.3 | | | $ | 59.0 | | | $ | 133.5 | | | $ | 129.7 | | | $ | 50.0 | | | $ | 42.6 | |
| Service cost | | | 0.9 | | | | 1.8 | | | | 0.2 | | | | 0.2 | | | | - | | | | - | | | | 0.2 | | | | 0.2 | |
| Interest cost | | | 8.7 | | | | 8.8 | | | | 3.3 | | | | 3.1 | | | | 7.9 | | | | 8.0 | | | | 2.7 | | | | 2.6 | |
| Actuarial (gain)/loss | | | (1.9 | ) | | | (6.4 | ) | | | (3.4 | ) | | | 2.1 | | | | 6.1 | | | | 3.1 | | | | 3.0 | | | | 3.2 | |
| Benefits paid | | | (21.2 | ) | | | (4.9 | ) | | | (3.0 | ) | | | (3.9 | ) | | | (9.1 | ) | | | (7.3 | ) | | | (2.4 | ) | | | (2.8 | ) |
| Curtailments | | | (2.0 | ) | | | — | | | | — | | | | — | | |
| Settlements | | | 2.7 | | | | — | | | | — | | | | — | | |
| Translation and other | | | — | | | | — | | | | (15.8 | ) | | | 0.8 | | | | - | | | | - | | | | (0.9 | ) | | | 4.2 | |
| | | | | | | | | | | | | | | | | | | |
| Benefit obligation, end of year | | $ | 129.7 | | | $ | 142.5 | | | $ | 42.6 | | | $ | 61.3 | | | $ | 138.4 | | | $ | 133.5 | | | $ | 52.6 | | | $ | 50.0 | |
| | | | | | | | | | | | | | | | | | | |
| Accumulated benefit obligation, end of year | | $ | 125.2 | | | $ | 129.8 | | | $ | 42.6 | | | $ | 61.3 | | | $ | 136.5 | | | $ | 132.0 | | | $ | 52.6 | | | $ | 50.0 | |
| | | | | | | | | | | | | | | | | | | |
63
The following table summarizes the weighted-average assumptions used in determining benefit obligations as of December 31, 2008 and 2007:31:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | U.S. Benefit Plans | | Non-U.S. Benefit Plan | | U.S. Benefit Plans | | Non-U.S. Benefit Plan | |
| | | 2008 | | 2007 | | 2008 | | 2007 | | 2010 | | 2009 | | 2010 | | 2009 | |
| |
| Discount rate | | | 6.5 | % | | | 6.45 | % | | | 5.9 | % | | | 5.8 | % | | | 5.75 | % | | | 6.0 | % | | | 5.4 | % | | | 5.7 | % |
| Rate of increase in compensation levels | | | 3.5 | % | | | 3.5 | % | | | N/A | | | | N/A | | | | 3.5 | % | | | 3.5 | % | | | N/A | | | | N/A | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | U.S. Benefit Plans | | Non-U.S. Benefit Plan | | | U.S. Benefit Plans | | Non-U.S. Benefit Plan | |
| | | 2008 | | 2007 | | 2008 | | 2007 | | | 2010 | | 2009 | | 2010 | | 2009 | |
| |
| Change in Plan Assets | | | | | | | | | | | | | | | | | |
| Change in Plan Assets ($ in millions) | | | | | | | | | | | | | | | | | |
| Fair value of plan assets, beginning of year | | $ | 132.9 | | | $ | 125.0 | | | $ | 63.3 | | | $ | 58.7 | | | $ | 101.0 | | | $ | 79.1 | | | $ | 48.2 | | | $ | 38.9 | |
| Actual return on plan assets | | | (42.6 | ) | | | 7.8 | | | | (8.2 | ) | | | 5.7 | | | | 12.9 | | | | 24.8 | | | | 4.6 | | | | 7.2 | |
| Company contribution | | | 10.0 | | | | 5.0 | | | | 1.6 | | | | 1.7 | | | | - | | | | 4.4 | | | | 1.1 | | | | 1.0 | |
| Benefits and expenses paid | | | (21.2 | ) | | | (4.9 | ) | | | (2.9 | ) | | | (3.9 | ) | | | (9.1 | ) | | | (7.3 | ) | | | (2.4 | ) | | | (2.8 | ) |
| Translation and other | | | — | | | | — | | | | (14.9 | ) | | | 1.1 | | | | - | | | | - | | | | (0.9 | ) | | | 3.9 | |
| | | | | | | | | | | | | | | | | | | |
| Fair value of plan assets, end of year | | $ | 79.1 | | | $ | 132.9 | | | $ | 38.9 | | | $ | 63.3 | | | $ | 104.8 | | | $ | 101.0 | | | $ | 50.6 | | | $ | 48.2 | |
| | | | | | | | | | | | | | | | | | | |
42
FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ in millions, except per share data) — (Continued)
The amounts included in Translation and other in the preceding tables reflect the impact of the change in measurement date from September 30 to December 31 for the year ended December 31, 2007 as well as foreign exchange translation for thenon-U.S. benefit plan.
The plan asset’s fair value measurement level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement.
Following is a description of the valuation methodologies used for assets measured at fair value for U.S. plan:
Cash and Cash Equivalents — Valued at net asset value as provided by the administrator of the fund.
U.S. Government and agency securities — Valued at the closing price reported on the active market on which the security is traded or valued by the trustee at year-end using various pricing services of financial institutions.
Common stock — Valued at the closing price reported on the active market on which the security is traded.
Collective/Common trust — Valued at the net asset value, based on quoted market value of the underlying assets, of shares held by the Plan at year end.
Mutual funds — Valued at the net asset value, based on quoted market prices in active markets, of shares held by the Plan at year end.
Unallocated insurance contract — A guaranteed investment contract valued at fair value by discounting the related cash flows based on current yields of similar instruments with comparable durations considering the creditworthiness of the issuer.
Partnership — A hedge fund of funds investments consisting of equity and debt security and other instruments. The exchange traded assets are valued through the use of independent trading feeds (Bloomberg, Reuters, Etc.). Grosvenor Institutional Partners, LP records the fund’s investment in an underlying portfolio on the trade date as determined by the governing documents of the relevant portfolio and values the investment in a portfolio at the net asset value of such investment as reported by the manager of such portfolio.
Plan assets for thenon-U.S. benefit plans are based on quoted prices in active markets for identical assets.
64
The following table summarizes the Company’s asset allocationspension assets in a three-tier fair value hierarchy for its benefits plansbenefit plan as of December 31 2008 and 2007 and the target allocation for 2009 by asset category:($ in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | U.S. Benefit Plans | | | Non-U.S. Benefit Plan | |
| | | | | | Percentage of
| | | | | | Percentage of
| |
| | | Target
| | | Plan Assets as of
| | | Target
| | | Plan Assets as of
| |
| | | Percent
| | | December 31 | | | Percent
| | | December 31, | |
| | | 2009 | | | 2008 | | | 2007 | | | 2009 | | | 2008 | | | 2007 | |
| |
| Equity securities | | | 60-85 | % | | | 72 | % | | | 74 | % | | | 50-70 | % | | | 52 | % | | | 60 | % |
| Fixed income securities | | | 10-30 | % | | | 14 | % | | | 16 | % | | | 30-50 | % | | | 36 | % | | | 30 | % |
| Alternative investments | | | 0-15 | % | | | 14 | % | | | 10 | % | | | — | | | | — | | | | — | |
| Cash | | | — | | | | — | | | | — | | | | — | | | | 12 | % | | | 10 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Total | | | | | | | 100 | % | | | 100 | % | | | | | | | 100 | % | | | 100 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | U. S. Benefit Plans | |
| | | 2010 | | | 2009 | |
| | | Level 1 | | | Level 2 | | | Level 3 | | | Total | | | Level 1 | | | Level 2 | | | Level 3 | | | Total | |
| |
| Cash and Cash Equivalents | | $ | - | | | $ | 1.5 | | | $ | - | | | $ | 1.5 | | | $ | 0.8 | | | $ | - | | | $ | - | | | $ | 0.8 | |
| Equities | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| U.S. Large Cap | | | 27.0 | | | | - | | | | - | | | | 27.0 | | | | - | | | | 18.0 | | | | - | | | | 18.0 | |
| U.S. Small and Mid Cap | | | 11.8 | | | | 0.4 | | | | - | | | | 12.2 | | | | 5.6 | | | | - | | | | - | | | | 5.6 | |
| Developed International | | | 5.1 | | | | 0.1 | | | | - | | | | 5.2 | | | | - | | | | 13.8 | | | | - | | | | 13.8 | |
| Emerging Markets | | | 3.5 | | | | - | | | | - | | | | 3.5 | | | | - | | | | - | | | | - | | | | - | |
| Fixed Income | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Government Bonds | | | 6.8 | | | | - | | | | - | | | | 6.8 | | | | - | | | | - | | | | - | | | | - | |
| Asset-backed Securities | | | - | | | | 4.8 | | | | - | | | | 4.8 | | | | - | | | | - | | | | - | | | | - | |
| Federal Signal Common Stock | | | 6.4 | | | | 0.2 | | | | - | | | | 6.6 | | | | 5.7 | | | | | | | | | | | | 5.7 | |
| Collective/Common Trust and Other | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Mutual Funds | | | 36.2 | | | | 1.0 | | | | - | | | | 37.2 | | | | 45.9 | | | | - | | | | - | | | | 45.9 | |
| Unallocated Insurance policy | | | - | | | | - | | | | - | | | | - | | | | - | | | | 0.9 | | | | - | | | | 0.9 | |
| Partnership | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 10.3 | | | | 10.3 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Total assets at fair value | | $ | 96.8 | | | $ | 8.0 | | | $ | - | | | $ | 104.8 | | | $ | 58.0 | | | $ | 32.7 | | | $ | 10.3 | | | $ | 101.0 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Non-U. S. Benefit Plan | |
| | | 2010 | | | 2009 | |
| | | Level 1 | | | Level 2 | | | Level 3 | | | Total | | | Level 1 | | | Level 2 | | | Level 3 | | | Total | |
| |
| Equity Securities | | $ | 31.0 | | | $ | - | | | $ | - | | | $ | 31.0 | | | $ | 28.7 | | | $ | - | | | $ | - | | | $ | 28.7 | |
| Government Securities | | | 4.7 | | | | | | | | | | | | 4.7 | | | | 7.1 | | | | | | | | | | | | 7.1 | |
| Company Securities | | | 5.4 | | | | - | | | | - | | | | 5.4 | | | | 5.2 | | | | - | | | | - | | | | 5.2 | |
| Insurance Policy | | | 0.3 | | | | - | | | | - | | | | 0.3 | | | | 0.3 | | | | - | | | | - | | | | 0.3 | |
| Cash | | | 9.2 | | | | - | | | | - | | | | 9.2 | | | | 6.9 | | | | - | | | | - | | | | 6.9 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Total | | $ | 50.6 | | | $ | - | | | $ | - | | | $ | 50.6 | | | $ | 48.2 | | | $ | - | | | $ | - | | | $ | 48.2 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
The following table summarizes the changes in the fair value of the Plan’s level 3 assets as of December 31:
| | | | | | | | | |
| | | 2010 | | | 2009 | |
| |
| Change in Level 3 plan Assets ($ in millions): | | | | | | | | |
| Fair value of the assets, beginning of year | | $ | 10.3 | | | $ | 11.0 | |
| Unrealized Gain (loss) | | | 0.1 | | | | 1.3 | |
| Purchases (sales) | | | (10.4 | ) | | | (2.0 | ) |
| | | | | | | | | |
| Fair value of the assets, end of year | | $ | - | | | $ | 10.3 | |
| | | | | | | | | |
The Company recently adopted a structured derisking investment strategy for the U.S. benefitpension plans is to 1)improve alignment of assets and liabilities that includes: (1) maintain a diversified portfolio that can provide a near-term weighted-average target return of 8.5%8.2% or more, 2)more; (2) maintain liquidity to meet obligationsobligations; and 3)(3) prudently manage administrative and management costs. The plan invests in equity, alternative, and fixed income instruments. The U.S. plan investment strategy and target asset allocation are under review and the Company expects to implement changes once the review is reviewed regularly and portfolio investments are rebalanced periodically when considered appropriate.finalized. The use of derivatives is allowed in limited circumstances. The plan held no derivatives during the years ended December 31, 20082010 and 2007.2009.
Plan assets for thenon-U.S. benefit plan consist principally of a diversified portfolio of equity securities, U.K. government obligations, and fixed interest securities.
65
As of December 31, 20082010 and 2007,2009, equity securities included 0.20.9 million and 0.9 million shares of the Company’s common stock valued at $1.9$6.4 million and $2.7$5.6 million, respectively. Dividends paid on the Company’s common stock to the pension trusts aggregated $0.1$0.2 million and $0.3 million in each of the years ended December 31, 20082010 and 2007.2009, respectively.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | U.S. Benefit Plans | | Non-U.S. Benefit Plan | | | U.S. Benefit Plans | | Non-U.S. Benefit Plan | |
| | | 2008 | | 2007 | | 2008 | | 2007 | | | 2010 | | 2009 | | 2010 | | 2009 | |
| |
| Funded status, end of year | | | | | | | | | | | | | | | | | |
| Funded status, end of year ($ in millions): | | | | | | | | | | | | | | | | | |
| Fair value of plan assets | | $ | 79.1 | | | $ | 132.9 | | | $ | 38.9 | | | $ | 63.3 | | | $ | 104.8 | | | $ | 101.0 | | | $ | 50.6 | | | $ | 48.2 | |
| Benefit obligations | | | 129.7 | | | | 142.5 | | | | 42.6 | | | | 61.3 | | | | 138.4 | | | | 133.5 | | | | 52.6 | | | | 50.0 | |
| | | | | | | | | | | | | | | | | | | |
| Funded status | | $ | (50.6 | ) | | $ | (9.6 | ) | | $ | (3.7 | ) | | $ | 2.0 | | | $ | (33.6 | ) | | $ | (32.5 | ) | | $ | (2.0 | ) | | $ | (1.8 | ) |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | U.S. Benefit Plans | | | Non-U.S. Benefit Plan | |
| | | 2010 | | | 2009 | | | 2010 | | | 2009 | |
| |
Amounts recognized in the Balance Sheet
consist of ($ in millions): | | | | | | | | | | | | | | | | |
| Long term pension liabilities | | $ | (33.6 | ) | | $ | (32.5 | ) | | $ | (2.0 | ) | | $ | (1.8 | ) |
| Accumulated other comprehensive loss, pre-tax | | | 55.4 | | | | 57.2 | | | | 15.6 | | | | 15.1 | |
| | | | | | | | | | | | | | | | | |
| Net amount recognized | | $ | 21.8 | | | $ | 24.7 | | | $ | 13.6 | | | $ | 13.3 | |
| | | | | | | | | | | | | | | | | |
Amounts recognized in the Balance Sheet consist of:
| | | | | | | | | | | | | | | | | |
| | | U.S. Benefit Plans | | | Non-U.S. Benefit Plan | |
| | | 2008 | | | 2007 | | | 2008 | | | 2007 | |
| |
| Long term pension liabilities | | $ | (50.6 | ) | | $ | (9.6 | ) | | $ | (3.7 | ) | | $ | N/A | |
| Other current assets | | | N/A | | | | N/A | | | | — | | | | 2.0 | |
| Accumulated other comprehensive loss, pre-tax | | | 71.4 | | | | 26.1 | | | | 16.0 | | | | 13.2 | |
| | | | | | | | | | | | | | | | | |
| Net amount recognized | | $ | 20.8 | | | $ | 16.5 | | | $ | 12.3 | | | $ | 15.2 | |
| | | | | | | | | | | | | | | | | |
43
FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ in millions, except per share data) — (Continued)
Amounts recognized in Accumulated Other Comprehensive Income consist of:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | U.S. Benefit Plans | | Non-U.S. Benefit Plan | | | U.S. Benefit Plans | | Non-U.S. Benefit Plan | |
| | | 2008 | | 2007 | | 2008 | | 2007 | | | 2010 | | 2009 | | 2010 | | 2009 | |
| |
| Amounts recognized in Accumulated Other Comprehensive Income consist of ($ in millions): | | | | | | | | | | | | | | | | | |
| Net actuarial loss | | $ | 71.4 | | | $ | 25.7 | | | $ | 16.0 | | | $ | 13.2 | | | $ | 55.4 | | | $ | 57.2 | | | $ | 15.6 | | | $ | 15.1 | |
| Prior service cost | | | — | | | | 0.4 | | | | — | | | | — | | | | - | | | | - | | | | - | | | | - | |
| | | | | | | | | | | | | | | | | | | |
| Net amount recognized, pre-tax | | $ | 71.4 | | | $ | 26.1 | | | $ | 16.0 | | | $ | 13.2 | | | $ | 55.4 | | | $ | 57.2 | | | $ | 15.6 | | | $ | 15.1 | |
| | | | | | | | | | | | | | | | | | | |
The Company expects $3.1$5.5 million relating to amortization of the actuarial loss to be amortized from Accumulated Other Comprehensive IncomeLoss into Net Periodic Benefit Cost in 2009.2011.
The Company expects to contribute up to $10.0$6.6 million to the U.S. benefit plans in 20092011 and up to $1.0 million to thenon-U.S. plan. Future contributions to the plans will be based on such factors as annual service cost as well as return on plan asset values, interest rate movements, and benefit payments.
The following table presents the benefits expected to be paid under the Company’s defined benefit plans in each of the next five years, and in aggregate for the five years thereafter:thereafter ($ in millions):
| | | | | | | | | | | | | | | | | |
| | | U.S. Benefit
| | Non-U.S.
| | | U.S. Benefit
| | Non-U.S.
|
| | | Plans | | Benefit Plan | | | Plans | | Benefit Plan |
| |
| 2009 | | $ | 6.1 | | | $ | 2.1 | | |
| 2010 | | | 6.6 | | | | 2.2 | | |
| 2011 | | | 7.0 | | | | 2.3 | | | $ | 6.6 | | | $ | 2.5 | |
| 2012 | | | 7.3 | | | | 2.4 | | | | 6.9 | | | | 2.6 | |
| 2013 | | | 7.9 | | | | 2.5 | | | | 7.5 | | | | 2.7 | |
| 2014-2018 | | | 46.2 | | | | 13.9 | | |
| 2014 | | | | 7.8 | | | | 2.8 | |
| 2015 | | | | 9.1 | | | | 2.9 | |
| 2016-2020 | | | | 47.4 | | | | 16.1 | |
The Company also sponsors a number of defined contribution pension plans covering a majority of its employees. Through 2006 participation in the plans was at each employee’s election and Company contributions to these plans were based on a percentage of employee contributions. Effective January 1, 2007, participationParticipation is via automatic enrollment; employees may elect to opt out of the plan. Company contributions to the plan are now based on employees’ age and service as well as a percentage of employee contributions. In January 1, 2009, the Company suspended the Company match of Federal Signal non-union employees’ 401(k) contribution to the plans. Effective January 1, 2010, the Company reinstated the company matching contribution.
66
The cost of these plans during each of the three years in the period ended December 31, 2008,2010, was $6.3 million in 2010, $4.8 million in 2009 and $8.2 million in 2008, $9.9 million in 2007 and $5.6 million in 2006.2008.
Prior to September 30, 2003, the Company also provided medical benefits to certain eligible retired employees. These benefits were funded when the claims were incurred. Participants generally became eligible for these benefits at age 60 after completing at least fifteen years of service. The plan provided for the payment of specified percentages of medical expenses reduced by any deductible and payments made by other primary group coverage and government programs. Effective September 30, 2003, the Company amended the retiree medical plan and effectively canceled coverage for all eligible active employees except for retirees and a limited group that qualified under a formula based on age and years of service. Accumulated postretirement benefit liabilities of $1.7$1.2 million and $2.3$1.4 million at December 31, 20082010 and 2007,2009, respectively, were fully accrued. The net periodic postretirement benefit costs have not been significant during the three-year period ended December 31, 2008.2010.
44
| |
| NOTE 9 — | DERIVATIVE FINANCIAL INSTRUMENTS AND FAIR VALUE MEASUREMENTS |
FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ in millions, except per share data) — (Continued)
NOTE 7 — DERIVATIVE FINANCIAL INSTRUMENTS AND FAIR VALUE MEASUREMENTS
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. The Company’s derivative positions existing at December 31, 2008 qualified for hedge accounting under SFAS No. 133, except as described below.
To manage interest costs, the Company utilizes interest rate swaps in combination with its funded debt. Interest rate swaps executed in conjunction with long-term private placements effectively convert fixed rate debt to variable rate debt. At December 31,In March 2008, the Company’s receive fixed, pay variable swap agreements with aFASB amended and revised existing financial institution terminatesstatement disclosure requirements related to derivative instruments and hedging activities. The requirements enhance disclosures for derivative instruments, including those used in 2012. These agreementshedging activities. The Company adopted the requirements on January 1, 2009 and the required disclosures are designated as fair value hedges. In the second quarter of 2005, the Company de-designated a fair value hedge. The derivative does not qualify for hedge accounting under SFAS No. 133 and is marked-to-market with the offsetting adjustment recorded to income.included herein.
At December 31, 2008,2009, the Company was also party to interest rate swap agreements with financial institutions in which the Company pays interest at a fixed rate and receives interest at variable LIBOR rates. These derivative instruments terminateterminated in 2010. These interest rate swap agreements are designated as cash flow hedges. In the second quarter of 2005, the Company entered into an interest rate swap which was not designated as a hedge and is marked-to-market with the offsetting adjustment recorded to income.
The fair values of interest rate swaps are based on quotes from financial institutions. The following table summarizes the Company’s interest rate swaps at December 31, 2008 and 2007:
| | | | | | | | | | | | | | | | | |
| | | Fair Value Swaps | | | Cash Flow Swaps | |
| | | 2008 | | | 2007 | | | 2008 | | | 2007 | |
| |
| Notional amount | | $ | 50.0 | | | $ | 138.7 | | | $ | 60.0 | | | $ | 135.0 | |
| Fair value | | | 1.7 | | | | (1.3 | ) | | | (2.7 | ) | | | (0.9 | ) |
| Average pay rate | | | 4.9 | % | | | 7.7 | % | | | 6.5 | % | | | 6.0 | % |
| Average receive rate | | | 6.2 | % | | | 6.8 | % | | | 3.6 | % | | | 6.1 | % |
In 2008 and 2007, the Company cancelled various interest rate swaps associated with its debt portfolio in response to movements in the interest rate market. These transactions resulted in net cash payments of $0.0 million and $0.3 million in 2008 and 2007, respectively. The associated losses on the interest rate swaps are being amortized to interest expense over the life of the underlying debt. As of December 31, 2008 and 2007, the Company had unamortized gains of $0.6 million and $0.8 million, respectively.
The Company manages the volatility of cash flows caused by fluctuations in currency rates by entering into foreign exchange forward contracts and options. These derivative instruments may be designated as cash flow hedges that hedge portions of the Company’s anticipated third-party purchases and forecast sales denominated in foreign currencies. The Company also enters into foreign exchange contracts that are not intended to qualify for hedge accounting, in accordance with SFAS 133, but are intended to offset the effect on earnings of foreign currency movements on short and long termlong-term intercompany transactions. Gains and losses on these derivative instruments are recorded through earnings.
45
FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ in millions, except per share data) — (Continued)
The following table summarizes the Company’s foreign exchange contracts at December 31, 2008 and 2007:
| | | | | | | | | | | | | | | | | |
| | | 2008 | | | 2007 | |
| | | Notional
| | | Fair
| | | Notional
| | | Fair
| |
| | | Amount | | | Value | | | Amount | | | Value | |
| |
| Foreign exchange forwards | | $ | 48.6 | | | $ | (1.3 | ) | | $ | 55.9 | | | $ | (3.2 | ) |
| Options | | | 10.6 | | | | 1.6 | | | | 10.3 | | | | — | |
| | | | | | | | | | | | | | | | | |
| Total | | $ | 59.2 | | | $ | 0.3 | | | $ | 66.2 | | | $ | (3.2 | ) |
| | | | | | | | | | | | | | | | | |
The Company expects $1.2 million of pre-tax net losses on cash flow hedges that are reported in accumulated other comprehensive income as of December 31, 2008 to be reclassified into earnings in 2009 as the respective hedged transactions affect earnings.
For assets and liabilities measured at fair value on a recurring basis, during the period under the provisions of FAS 157, the Company uses an income approach to value the assets and liabilities for outstanding derivative contracts which include interest rate swap and foreign currency forward contracts. ThisThe income approach consists of a discounted cash flow model that takes into account the present value of future cash flows under the terms of the contracts using current market information as of the reporting date, such as prevailing interest rates and foreign currency spot and forward rates. As noted in Note 2, the Company adopted the provisions of FAS 157 with respect to its financial assets and liabilities that are measured at fair value within the consolidated financial statements. The Company has deferred the application of the provisions of this statement to its non-financial assets and liabilities in accordance with FSP 157-b. The following table provides a summary of the fair values of assets and liabilities under FAS 157:($ in millions):
| | | | | | | | | | | | | | | | | |
| | | | | | Fair Value Measurements at December 31, 2008 | |
| | | | | | Quoted Prices in Active
| | | Significant Other
| | | Significant
| |
| | | | | | Markets for Identical
| | | Observable Inputs
| | | Unobservable Inputs
| |
| | | Total | | | Assets (Level 1) | | | (Level 2) | | | (Level 3) | |
| |
Assets | | | | | | | | | | | | | | | | |
| Derivatives | | $ | 4.4 | | | $ | — | | | $ | 4.4 | | | $ | — | |
| Short-term investments | | | 10.0 | | | | | | | | 10.0 | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | Fair Value Measurements at December 31, 2010 |
| | | | Quoted Prices in Active
| | Significant Other
| | Significant
|
| | | | Markets for Identical
| | Observable Inputs
| | Unobservable Inputs
|
| | Total | | Assets (Level 1) | | (Level 2) | | (Level 3) |
|
Assets | | | | | | | | | | | | | | | | |
| Derivatives | | $ | - | | | $ | - | | | $ | - | | | $ | - | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | Fair Value Measurements at December 31, 2008 | | | | | Fair Value Measurements at December 31, 2010 |
| | | | | Quoted Prices in Active
| | Significant Other
| | Significant
| | | | | Quoted Prices in Active
| | Significant Other
| | Significant
|
| | | | | Markets for Identical
| | Observable Inputs
| | Unobservable Inputs
| | | | | Markets for Identical
| | Observable Inputs
| | Unobservable Inputs
|
| | | Total | | Assets (Level 1) | | (Level 2) | | (Level 3) | | | Total | | Assets (Level 1) | | (Level 2) | | (Level 3) |
| |
Liabilities | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Derivatives | | $ | (5.1 | ) | | $ | — | | | $ | (5.1 | ) | | $ | — | | | $ | 0.6 | | | $ | - | | | $ | 0.6 | | | $ | - | |
| | | | | | | | | | | | | | | | | | | |
67
| | | | | | | | | | | | | | | | |
| | | | Fair Value Measurements at December 31, 2009 |
| | | | Quoted Prices in Active
| | Significant Other
| | Significant
|
| | | | Markets for Identical
| | Observable Inputs
| | Unobservable Inputs
|
| | Total | | Assets (Level 1) | | (Level 2) | | (Level 3) |
|
Assets | | | | | | | | | | | | | | | | |
| Derivatives | | $ | - | | | $ | - | | | $ | - | | | $ | - | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | Fair Value Measurements at December 31, 2009 |
| | | | | Quoted Prices in Active
| | Significant Other
| | Significant
|
| | | | | Markets for Identical
| | Observable Inputs
| | Unobservable Inputs
|
| | | Total | | Assets (Level 1) | | (Level 2) | | (Level 3) |
| |
Liabilities | | | | | | | | | | | | | | | | |
| Derivatives | | $ | 1.0 | | | $ | - | | | $ | 1.0 | | | $ | - | |
| | | | | | | | | | | | | | | | | |
NOTE 8 — STOCK-BASED COMPENSATIONThe fair value of the Company’s derivative instruments was recorded as follows at December 31, 2010 and 2009 ($ in millions):
| | | | | | | | | | | | | |
| | | Asset Derivatives | | | Liability Derivatives | |
| | | December 31, 2010 | | | December 31, 2010 | |
| | | Balance Sheet
| | Fair
| | | | | Fair
| |
| | | Location | | Value | | | Balance Sheet Location | | Value | |
| |
| Derivatives designated as hedging instruments: | | | | | | | | | | | | |
| Interest rate contracts | | | | | | | | Other current liabilities | | $ | - | |
| Foreign exchange | | Other current assets | | | - | | | Other current liabilities | | | 0.2 | |
| | | | | | | | | | | | | |
| Total derivatives designated as hedging instruments | | | | | - | | | | | | 0.2 | |
| Derivatives not designated as hedging instruments: | | | | | | | | | | | | |
| Foreign exchange | | Accounts receivable, net | | | - | | | Other current liabilities | | | 0.4 | |
| | | | | | | | | | | | | |
| Total derivatives not designated as hedging instruments | | | | | - | | | | | | 0.4 | |
| | | | | | | | | | | | | |
| Total derivatives | | | | $ | - | | | | | $ | 0.6 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | Asset Derivatives | | | Liability Derivatives | |
| | | December 31, 2009 | | | December 31, 2009 | |
| | | Balance Sheet
| | Fair
| | | | | Fair
| |
| | | Location | | Value | | | Balance Sheet Location | | Value | |
| |
| Derivatives designated as hedging instruments: | | | | | | | | | | | | |
| Interest rate contracts | | | | | | | | Other current liabilities | | $ | 0.5 | |
| Foreign exchange | | Other current assets | | | - | | | Other current liabilities | | | 0.1 | |
| | | | | | | | | | | | | |
| Total derivatives designated as hedging instruments | | | | | - | | | | | | 0.6 | |
| Derivatives not designated as hedging instruments: | | | | | | | | | | | | |
| Foreign exchange | | Accounts receivable, net | | | - | | | Other current liabilities | | | 0.4 | |
| | | | | | | | | | | | | |
| Total derivatives not designated as hedging instruments | | | | | - | | | | | | 0.4 | |
| | | | | | | | | | | | | |
| Total derivatives | | | | $ | - | | | | | $ | 1.0 | |
| | | | | | | | | | | | | |
68
The effect of derivative instruments on the consolidated statement of operations for the year ended December 31, 2010 and 2009, respectively ($ in millions):
| | | | | | | | | | | |
| | | | | | | | Amount of Gain/(Loss)
| |
2010 | | Amount of Gain/(Loss)
| | | Location of Gain/(Loss)
| | Reclassified from
| |
Derivatives in
| | Recognized in OCI
| | | Reclassified from
| | Accumulated OCI
| |
Cash Flow Hedging
| | on Derivative
| | | Accumulated OCI into
| | into Income
| |
Relationships | | (Effective Portion) | | | Income (Effective Portion) | | (Effective Portion) | |
| |
| Interest rate contracts | | $ | 0.4 | | | Interest expense | | $ | 0.5 | |
| Foreign exchange | | | (1.2 | ) | | Net sales | | | 1.0 | |
| | | | | | | | | | | |
| Total | | $ | (0.8 | ) | | | | $ | 1.5 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | Amount of Gain/(Loss)
| |
2009 | | Amount of Gain/(Loss)
| | | Location of Gain/(Loss)
| | Reclassified from
| |
Derivatives in
| | Recognized in OCI
| | | Reclassified from
| | Accumulated OCI
| |
Cash Flow Hedging
| | on Derivative
| | | Accumulated OCI into
| | into Income
| |
Relationships | | (Effective Portion) | | | Income (Effective Portion) | | (Effective Portion) | |
| |
| Interest rate contracts | | $ | (0.4 | ) | | Interest expense | | $ | 0.2 | |
| Foreign exchange | | | — | | | Net sales | | | 0.5 | |
| Foreign exchange | | | 0.1 | | | Other income (expense), net | | | (0.7 | ) |
| | | | | | | | | | | |
| Total | | $ | (0.3 | ) | | | | $ | — | |
| | | | | | | | | | | |
The location and amount of gain (loss) recognized in income on derivatives not designated as hedging instruments are as follows for the years ended December 31, 2010 and 2009, respectively ($ in millions):
| | | | | | |
| | Location in Consolidated
| | Amount of Gain
| |
2010 | | Statement of Operations | | (Loss) Recognized | |
|
| Foreign currency contracts | | Other income (expense) , net | | | 1.4 | |
| | | | | | |
| Total gain (loss) | | | | $ | 1.4 | |
| | | | | | |
| | | | | | | |
| | | Location in Consolidated
| | Amount of Gain
| |
2009 | | Statement of Operations | | (Loss) Recognized | |
| |
| Interest rate swaps | | Interest expense | | $ | 0.2 | |
| | | | | | | |
| Foreign currency contracts | | Other income (expense) , net | | | 1.5 | |
| | | | | | | |
| Total gain (loss) | | | | $ | 1.7 | |
| | | | | | | |
At December 31, 2010 and 2009, accumulated other comprehensive loss associated with interest rate swaps and foreign exchange contracts qualifying for hedge accounting treatment was $0.5 million and $0.7 million, respectively, net of income tax effects. The Company expects $0.3 million of pre-tax net gain on cash flow hedges that are reported in accumulated other comprehensive loss as of December 31, 2010 to be reclassified into earnings within the next 12 months as the respective hedged transactions affect earnings.
The following table summarizes the carrying amounts and fair values of the Company’s financial instruments at December 31 ($ in millions):
| | | | | | | | | | | | | | | | | |
| | | 2010 | | | 2009 | |
| | | Notional
| | | Fair
| | | Notional
| | | Fair
| |
| | | Amount | | | Value | | | Amount | | | Value | |
| |
| Short-term debt | | $ | 1.8 | | | $ | 1.8 | | | $ | - | | | $ | - | |
| Long-term debt* | | | 262.1 | | | | 259.9 | | | | 204.1 | | | | 205.0 | |
| Interest rate contracts | | | - | | | | - | | | | 70.0 | | | | (0.5 | ) |
| Foreign exchange contracts | | | 28.3 | | | | (0.6 | ) | | | 24.1 | | | | (0.5 | ) |
| | |
| * | | Long-term debt includes financial service borrowings for all periods presented, which is included in discontinued operations, current portions of long term debt and capital lease obligations. |
69
The carrying value of short-term debt approximates fair value due to its short maturity. The fair value of long-term debt is based on interest rates that are currently available to us for issuance of debt with similar terms and remaining maturities.
The following table summarizes the Company’s money market accounts in a three-tier fair value hierarchy as of December 31 ($ in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 2010 | | 2009 |
| | | Level 1 | | Level 2 | | Level 3 | | Total | | Level 1 | | Level 2 | | Level 3 | | Total |
| |
| Cash equivalents | | $ | 37.0 | | | $ | - | | | $ | - | | | $ | 37.0 | | | $ | 4.5 | | | $ | - | | | $ | - | | | $ | 4.5 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Total | | $ | 37.0 | | | $ | - | | | $ | - | | | $ | 37.0 | | | $ | 4.5 | | | $ | - | | | $ | - | | | $ | 4.5 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| |
| NOTE 10 — | STOCK-BASED COMPENSATION |
The Company’s stock benefit plans, approved by the Company’s shareholders and administered by the Compensation and Benefits Committee of the Board of Directors of the Company, provides for the grant of incentive and non-incentive stock options, restricted stock, and other stock-based awards or units to key employees and directors. The plans, as amended, authorize the grant of up to 4.07.8 million benefit shares or units through April 2015.2020. These share or unit amounts exclude amounts that were issued under predecessor plans.
Stock options are granted atgrade vest equally over the three years from the date of the grant. The cost of stock options, based on the fair market value of the shares on the date of grant.grant, is being charged to expense over the respective vesting periods. Stock options normally become exercisable at a rate of one-third annually and in full on the third anniversary date. All options and rights must be exercised within ten years from date of grant. At the Company’s discretion, vested stock option holders are permitted to elect an alternative settlement method in lieu of purchasing common stock at the option price. The
46
FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ in millions, except per share data) — (Continued)
alternative settlement method permits the employee to receive, without payment to the Company, cash, shares of common stock, or a combination thereof equal to the excess of market value of common stock over the option purchase price. The Company intends to settle all such options in common stock.
The weighted average fair value of options granted during 2010, 2009, and 2008 2007was $3.27, $2.00, and 2006 was $3.60, $5.68, and $6.21, respectively. The fair value of each option grant was estimated using the Black-Scholes option pricing model with the following assumptions:
| | | | | | | | | | | | | | | | | | | |
| | | 2008 | | 2007 | | 2006 | | | 2010 | | 2009 | | 2008 | |
| |
| Dividend yield | | | 1.7 | % | | | 1.7 | % | | | 1.3 | % | | | 2.9 | % | | | 3.7 | % | | | 1.7 | % |
| Expected volatility | | | 33 | % | | | 31 | % | | | 30 | % | | | 48 | % | | | 40 | % | | | 33 | % |
| Risk free interest rate | | | 3.2 | % | | | 4.4 | % | | | 4.6 | % | | | 2.0 | % | | | 2.2 | % | | | 3.2 | % |
| Weighted average expected option life in years | | | 6.4 | | | | 7 | | | | 7 | | | | 5.9 | | | | 6.5 | | | | 6.4 | |
The expected life of options represents the weighted average period of time that options granted are expected to be outstanding giving consideration to vesting schedules and the Company’s historical exercise patterns. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of the grant for periods corresponding with the expected life of the options. Expected volatility is based on historical volatilities of the Company’s common stock. Dividend yields are based on historical dividend payments.
70
Stock option activity for the three years ended December 31, 20082010 was as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Option Shares | | Weighted Average Exercise Price | | | Option Shares | | Weighted Average Exercise Price | |
| | | 2008 | | 2007 | | 2006 | | 2008 | | 2007 | | 2006 | | | 2010 | | 2009 | | 2008 | | 2010 | | 2009 | | 2008 | |
| | | (In millions) | | | | | | | | | (In millions) | | | | | | | | | |
| |
| Outstanding at beginning of year | | | 2.4 | | | | 2.6 | | | | 2.7 | | | $ | 17.47 | | | $ | 18.15 | | | $ | 19.15 | | | | 2.1 | | | | 2.3 | | | | 2.4 | | | $ | 13.60 | | | $ | 16.20 | | | $ | 17.47 | |
| Granted | | | 0.6 | | | | 0.5 | | | | 0.6 | | | | 11.13 | | | | 15.69 | | | | 16.93 | | | | 0.4 | | | | 0.5 | | | | 0.6 | | | | 8.93 | | | | 6.74 | | | | 11.13 | |
| Cancelled or expired | | | (0.7 | ) | | | (0.6 | ) | | | (0.7 | ) | | | 16.00 | | | | 19.67 | | | | 21.26 | | | | (0.6 | ) | | | (0.7 | ) | | | (0.7 | ) | | | 13.47 | | | | 17.00 | | | | 16.00 | |
| Exercised | | | — | | | | (0.1 | ) | | | — | | | | — | | | | 15.06 | | | | 16.23 | | | | - | | | | - | | | | - | | | | 6.68 | | | | - | | | | - | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Outstanding at end of year | | | 2.3 | | | | 2.4 | | | | 2.6 | | | $ | 16.20 | | | $ | 17.47 | | | $ | 18.15 | | | | 1.9 | | | | 2.1 | | | | 2.3 | | | $ | 12.61 | | | $ | 13.60 | | | $ | 16.20 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Exercisable at end of year | | | 1.6 | | | | 1.5 | | | | 1.7 | | | $ | 17.68 | | | $ | 18.28 | | | $ | 18.84 | | | | 1.2 | | | | 1.3 | | | | 1.6 | | | $ | 14.84 | | | $ | 16.35 | | | $ | 17.68 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
The following table summarizes information concerning stock options outstanding as of December 31, 20082010 under all plans:
| | | | | | | | | | | | | | | | | | | | | |
| | | Options Outstanding | | | Options Exercisable | |
| | | | | | | | | Weighted
| | | | | | Weighted
| |
| | | | | | Weighted
| | | Average
| | | | | | Average
| |
| | | | | | Average
| | | Exercise
| | | | | | Exercise
| |
Range of Exercise Prices | | Shares | | | Remaining Life | | | Price | | | Shares | | | Price | |
| | | (in millions) | | | (in years) | | | | | | (in millions) | | | | |
| |
| $ 7.61 - $11.00 | | | 0.4 | | | | 9.2 | | | $ | 10.56 | | | | — | | | $ | — | |
| 11.01 - 15.00 | | | 0.2 | | | | 7.5 | | | | 13.86 | | | | 0.1 | | | | 13.26 | |
| 15.01 - 17.00 | | | 1.0 | | | | 4.2 | | | | 16.15 | | | | 0.8 | | | | 16.12 | |
| 17.01 - 21.00 | | | 0.5 | | | | 2.2 | | | | 19.31 | | | | 0.5 | | | | 19.33 | |
| 21.01 - 26.13 | | | 0.2 | | | | 1.4 | | | | 22.63 | | | | 0.2 | | | | 22.63 | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | 2.3 | | | | 4.7 | | | $ | 16.20 | | | | 1.6 | | | $ | 17.68 | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | Options Exercisable | |
| | | Options Outstanding | | | Weighted
| | | | | | Weighted
| |
| | | | | | Weighted
| | | Average
| | | | | | Average
| |
| | | | | | Average
| | | Exercise
| | | | | | Exercise
| |
Range of Exercise Prices | | Shares | | | Remaining Life | | | Price | | | Shares | | | Price | |
| | | (in millions) | | | (in years) | | | | | | (in millions) | | | | |
| |
| $ 5.00 — $9.00 | | | 0.5 | | | | 7.8 | | | $ | 6.47 | | | | 0.1 | | | $ | 6.76 | |
| 9.01 — 13.00 | | | 0.6 | | | | 7.9 | | | | 10.49 | | | | 0.3 | | | | 10.89 | |
| 13.01 — 17.00 | | | 0.6 | | | | 3.6 | | | | 16.14 | | | | 0.6 | | | | 16.16 | |
| 17.01 — 21.00 | | | 0.1 | | | | 2.7 | | | | 19.06 | | | | 0.1 | | | | 19.06 | |
| 21.01 — 25.00 | | | 0.1 | | | | 0.6 | | | | 22.44 | | | | 0.1 | | | | 22.44 | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | 1.9 | | | | 5.7 | | | $ | 12.61 | | | | 1.2 | | | $ | 14.84 | |
| | | | | | | | | | | | | | | | | | | | | |
The exercise price of stock options outstanding and exercisable at December 31, 20082010 exceeded the market value and therefore, the aggregate intrinsic value was near zero. The closing price on December 31, 20082010 was $8.21.
47
FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ in millions, except per share data) — (Continued)$6.86.
Restricted stock awards are granted to employees at no cost. Through 2004, these awards primarily vested at the rate of 25% annually commencing one year from the date of award, provided the recipient was still employed by the Company on the vesting date. Beginning in 2005, awards primarily cliff vest at the third anniversary from the date of award, provided the recipient is still employed by the Company on the vesting date. The cost of restricted stock awards, based on the fair market value at the date of grant, is being charged to expense over the respective vesting periods. The following table summarizes restricted stock grants for the twelve month period ended December 31, 2008:2010:
| | | | | | | | | |
| | | Number of
| | | Weighted Average
| |
| (shares in millions) | | Restricted Shares | | | Price per Share | |
| |
| Outstanding and non-vested at December 31, 2007 | | | 0.8 | | | $ | 16.28 | |
| Granted | | | 0.4 | | | | 10.95 | |
| Vested | | | (0.2 | ) | | | 15.23 | |
| Cancelled | | | (0.4 | ) | | | 15.55 | |
| | | | | | | | | |
| Outstanding and non-vested at December 31, 2008 | | | 0.6 | | | $ | 13.86 | |
| | | | | | | | | |
(shares in millions)
| | | | | | | | | |
| | | Number of
| | | Weighted Average
| |
| | | restricted shares | | | Price per Share | |
| |
| Outstanding and non-vested at December 31, 2009 | | | 0.6 | | | $ | 10.09 | |
| Granted | | | 0.3 | | | | 9.42 | |
| Vested | | | (0.1 | ) | | | 15.70 | |
| Cancelled | | | (0.2 | ) | | | 9.68 | |
| | | | | | | | | |
| Outstanding and non-vested at December 31, 2010 | | | 0.6 | | | $ | 8.78 | |
| | | | | | | | | |
The total compensation expense related to all share-based compensation plans was $2.9$2.3 million, $3.5$3.1 million, and $5.8$2.9 million for the years ended December 31, 2008, 20072010, 2009, and 2006,2008, respectively. Also, as of December 31, 2008,2010, the total remaining unrecognized compensation cost related to stock awards of stock options amounted to $2.2$1.3 million, which will be amortized over the weighted-average period of approximately 1.5 years.18 months.
71
Beginning in 2008, the Company established a long term incentive plan for Executive Officersexecutive officers under which awards thereunder are classified as equity in accordance with SFAS 123R.ASC Topic 718, “Compensation — Stock Compensation.” The ultimate payment of the performance shares units will be based on the Company’s stock performance as compared to the stock performance of a peer group. Compensation expense for the stock performance portion of the plan is based on the fair value of the plan that is determined on the day the plan is established. The fair value is calculated using a Monte Carlo simulation model. The total compensation expense for these awards is being amortized over a three-year service period. Compensation expense relating to these awards included in the Consolidated Statement of Operations was ($0.1) million, $0.4 million, and $0.1 million, for 2010, 2009, and 2008, was $0.1 million.respectively. As of December 31, 2008,2010, the unrecognized compensation cost relating to these plans was $0.6 million, which will be amortized over the remaining requisite service period of 2 years.period.
NOTE 9 — SHAREHOLDERS’ EQUITY
| |
| NOTE 11 — | SHAREHOLDERS’ EQUITY |
The Company’s board of directors has the authority to issue 90.0 million shares of common stock at a par value of $1 per share. The holders of common stock (i) may receive dividends subject to all of the rights of the holders of preference stock,stock; (ii) shall be entitled to share ratably upon any liquidation of the Company in the assets of the Company, if any, remaining after payment in full to the holders of preference stockstock; and (iii) receive one vote for each common share held and shall vote together share for share with the holders of voting shares of preference stock as one class for the election of directors and for all other purposes. The Company has 49.363.0 million and 49.449.6 million common shares issued as of December 31, 20082010 and 2007,2009, respectively. Of those amounts, 47.762.2 million and 47.948.8 million common shares were outstanding as of December 31, 20082010 and 2007,2009, respectively.
The Company’s board of directors is also authorized to provide for the issuance of 0.8 million shares of preference stock at a par value of $1 per share. The authority of the board of directors includes, but is not limited to, the determination of the dividend rate, voting rights, conversion and redemption features, and liquidation preferences. The Company has not issued any preference stock as of December 31, 2008.2010.
In May 2010, the Company issued 12.1 million shares of common stock at a price of $6.25 per share for total gross proceeds of $75.6 million. After deducting direct fees, net proceeds to the Company totaled $71.2 million. Proceeds from the equity offering were used to pay down debt.
| |
| NOTE 12 — | EARNINGS (LOSS) PER SHARE |
Earnings (Loss) per share — basic is computed by dividing income or loss available to common stockholders by the weighted average number of shares of common stock outstanding for the period. Earnings (loss) per share — diluted reflects the potential dilution that could occur if options issued under stock-based compensation awards were converted into common stock. In 2010, 2009, and 2008, options to purchase 1.9 million, 2.1 million, and 2.5 million shares of the Company’s common stock had exercise prices that were greater than the average market price of those shares during the respective reporting periods. As a result, these shares are excluded from the earnings per share calculation as they are anti-dilutive.
4872
FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($The following is a reconciliation of net income (loss) to earnings per share — basic and diluted — at December 31 ($ in millions, except per share data) — (Continued)amounts):
NOTE 10 — ACQUISITIONS
On January 15, 2007, the Company acquired the net assetsComputation of Codespear LLC, a Birmingham, Michigan based, privately held developer of specialized software used in emergency management situations, for $16.6 million in cash plus an additional $0.8 million payment based on working capital and contingent consideration adjustments which were finalized in the third quarter of 2007. In addition, there are potential additional earnout payments for up to three years following the transaction, if specific performance targets are met. Any additional payments related to this contingency will be accounted for as additional goodwill, however, as of December 31, 2008, the performance targets have not been met and no additional payments are due. As a result of the acquisition, the Company recorded the addition of $12.2 million of goodwill in 2007, which was deductible for tax purposes, and $5.2 million of acquired developed software. The results since the date of acquisition are included in the Safety and Security Systems segment.
On July 25, 2007, the Company acquired the net assets of Riverchase Technologies, a software development firm that specializes in serving the municipal safety market and includes a suite of products for small to medium size municipalities that includes CAD, RMS, mobile data, mobile video and mobile handheld solutions which enable emergency response agencies to manage and communicate remotely with their fleets. The purchase price was $6.7 million in cash plus an additional payment of $0.2 million for a working capital adjustment which was paid in the first quarter of 2008, as well as potential earnout payments for up to two years following the transaction, if specific performance targets are met. As of December 31, 2008, these performance targets have not been met and no additional payments are due. As a result of the acquisition, the Company recorded the addition of $2.9 million of goodwill in 2007, which was deductible for tax purposes, $3.6 million of acquired developed software and $0.2 million of net assets. The results since the date of acquisition are included in the Safety and Security Systems segment.
On August 6, 2007, the Company acquired 100% of the voting interests in PIPS Technology Limited, a private company limited by shares incorporated in England and Wales, (the UK Company), and PIPS Technology, Inc., a Tennessee corporation (the U.S. Company), together referred to as the PIPS Technology companies (“PIPS Technologies”). PIPS Technologies is a global leader in the design and manufacture of automated license plate recognition (“ALPR”) technology and optical character recognition software. ALPR solutions are used in control and surveillance applications in markets such as traffic and tolling, law enforcement, public safety and access control. ALPR-enabled cameras are used on emergency vehicles and mounted on stationary support structures at access entry and tolling points to capture license plate details for tolling, congestion zone charging and law enforcement purposes. The results since the date of acquisition are included in the Safety and Security Systems segment.
PIPS Technologies was acquired for approximately $123.4 million in cash plus acquisition related costs of approximately $3.0 million. The purchase price is subject to potential additional earnout payments through 2010, if specific performance targets are met. Additional payments related to this contingency, if any, will be accounted for as goodwill, however, as of December 31, 2008, the performance targets have not been met and no additional payments are due. The acquisition was funded through available cash balances and borrowings under the Company’s credit facility.
Earnings (Loss) per Common Share
49
FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ in millions, except per share data) — (Continued)
The allocation of the purchase price is shown in the table below.
| | | | | |
| ($ in million) | | | |
| |
| Goodwill | | $ | 75.5 | |
| Intangible assets: | | | | |
| Customer relationships | | | 20.5 | |
| Technology | | | 6.0 | |
| Trade name | | | 26.1 | |
| Plant, property & equipment | | | 0.8 | |
| Deferred tax asset | | | 5.7 | |
| Deferred tax liability | | | (15.1 | ) |
| Other assets acquired and liabilities assumed | | | 6.9 | |
| | | | | |
| Total acquisition cost | | $ | 126.4 | |
| | | | | |
| | | | | | | | | | | | | |
| | | 2010 | | | 2009 | | | 2008 | |
| |
| (Loss) income from continuing operations | | $ | (160.7 | ) | | $ | 19.8 | | | $ | 28.7 | |
| (Loss) gain from discontinued operations and disposal, net of tax | | | (15.0 | ) | | | 3.3 | | | | (123.7 | ) |
| | | | | | | | | | | | | |
| Net (loss) income | | $ | (175.7 | ) | | $ | 23.1 | | | $ | (95.0 | ) |
| | | | | | | | | | | | | |
| Average shares outstanding — basic | | | 57.6 | | | | 48.6 | | | | 47.7 | |
| Dilutive effect of stock options and other | | | - | | | | - | | | | - | |
| | | | | | | | | | | | | |
| Diluted shares outstanding | | | 57.6 | | | | 48.6 | | | | 47.7 | |
| | | | | | | | | | | | | |
| (Loss) earnings from continuing operations per share | | | | | | | | | | | | |
| Basic | | $ | (2.79 | ) | | $ | 0.41 | | | $ | 0.61 | |
| | | | | | | | | | | | | |
| Diluted | | $ | (2.79 | ) | | $ | 0.41 | | | $ | 0.61 | |
| | | | | | | | | | | | | |
| (Loss) earnings from discontinued operations per share | | | | | | | | | | | | |
| Basic | | $ | (0.26 | ) | | $ | 0.06 | | | $ | (2.60 | ) |
| | | | | | | | | | | | | |
| Diluted | | $ | (0.26 | ) | | $ | 0.06 | | | $ | (2.60 | ) |
| | | | | | | | | | | | | |
| (Loss) earnings per share | | | | | | | | | | | | |
| Basic | | $ | (3.05 | ) | | $ | 0.47 | | | $ | (1.99 | ) |
| | | | | | | | | | | | | |
| Diluted | | $ | (3.05 | ) | | $ | 0.47 | | | $ | (1.99 | ) |
| | | | | | | | | | | | | |
The acquisition gave rise to goodwill of $75.5 million as the Company paid a premium over the fair value of the net tangible and identifiable intangible assets acquired in the PIPS Technologies acquisition, largely due to the growth prospects of the business, its strategic fit and revenue synergies. ALPR technology is experiencing tremendous demand throughout the world as governments and municipalities seek the dual purpose of providing security and increased revenues through such applications as tolling congestion. The acquisition adds a core building block of video analytics to the Company’s safety and security systems from which other operating businesses could build. The Safety and Security Systems Group was already integrating ALPR cameras from PIPS Technologies in its largest parking systems, and the camera technology and systems can be integrated into other core offerings.
Goodwill and trade name intangible assets have indefinite lives and therefore will not be subject to amortization, but will instead be subject to an annual impairment test. Approximately €29 million of the goodwill is deductible by a European subsidiary of the Company. Technology will be amortized over a10-year life and customer relationships will be amortized over a10-year life in the U.K and a5-year life in the U.S.
The unaudited financial information in the table below summarizes the combined results of operations of the Company and PIPS Technologies, on a pro forma basis, as though PIPS Technologies had been acquired as of January 1, 2006. The pro forma financial information is presented for informational purposes only and is not indicative of the results of operations that would have been achieved if the acquisition had taken place at the beginning of the period or of results that may occur in the future. Proforma financial information for the acquisition of Codespear and Riverchase has not been presented due to immateriality.
| | | | | | | | | |
| | | Year Ended December 31 | |
| | | 2007 | | | 2006 | |
| ($ in millions) | | | | |
| |
| Proforma net sales | | $ | 948.2 | | | $ | 819.1 | |
| Proforma income from continuing operations | | | 39.4 | | | | 32.9 | |
| Proforma net income | | | 54.6 | | | | 24.4 | |
| Proforma earnings per share from continuing operations — basic and diluted | | $ | 0.82 | | | $ | 0.68 | |
50
FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ in millions, except per share data) — (Continued)
NOTE 11 — GOODWILL AND OTHER INTANGIBLE ASSETS
In accordance with SFAS No. 142, “Goodwill and Other Intangible Assets”, goodwill and other intangible assets deemed to have indefinite lives are no longer amortized but are subject to annual impairment tests. Other intangible assets continue to be amortized over their useful lives.
Changes in the carrying amount of goodwill for the years ended December 31, 2008 and 2007, by operating segment, were as follows:
| | | | | | | | | | | | | | | | | |
| | | Environmental
| | | Fire
| | | Safety
| | | | |
| | | Solutions | | | Rescue | | | Security | | | Total | |
| |
| December 31, 2006 | | $ | 126.2 | | | $ | 32.4 | | | $ | 90.0 | | | $ | 248.6 | |
| Acquisitions | | | — | | | | — | | | | 90.5 | | | | 90.5 | |
| Translation | | | 0.5 | | | | 3.1 | | | | 2.0 | | | | 5.6 | |
| | | | | | | | | | | | | | | | | |
| December 31, 2007 | | | 126.7 | | | | 35.5 | | | | 182.5 | | | | 344.7 | |
| Adjustments | | | — | | | | — | | | | 0.3 | | | | 0.3 | |
| Translation | | | (0.2 | ) | | | (2.5 | ) | | | (14.2 | ) | | | (16.9 | ) |
| | | | | | | | | | | | | | | | | |
| December 31, 2008 | | $ | 126.5 | | | $ | 33.0 | | | $ | 168.6 | | | $ | 328.1 | |
| | | | | | | | | | | | | | | | | |
Under SFAS No. 142, the Company is required to test its goodwill annually for impairment; the Company performs this test in the fourth quarter. The Company performed this test in 2008 and determined that there was no impairment. The Company determined the fair value of each reporting unit by calculating the present value of expected future cash flows. See Note 10 for a discussion of goodwill additions as a result of acquisitions made in the year ended December 31, 2007.
OTHER INTANGIBLE ASSETS
In 2008, the carrying value of other intangible assets was impacted by changes in foreign currency exchange rates. In 2007, the Company acquired intangible assets through acquisition. See Note 10 for a discussion of intangible additions as a result of acquisitions made in the year ended December 31, 2007. Following are the carrying amount and accumulated amortization of these assets as of December 31:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | 2008 | | | 2007 | |
| | | Weighted-
| | | | | | | | | | | | | | | | | | | |
| | | Average
| | | Gross
| | | | | | Net
| | | Gross
| | | | | | Net
| |
| | | Useful Life
| | | Carrying
| | | Accumulated
| | | Carrying
| | | Carrying
| | | Accumulated
| | | Carrying
| |
| | | (Years) | | | Value | | | Amortization | | | Value | | | Value | | | Amortization | | | Value | |
| |
| Definite lived (amortizable): | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Developed software | | | 6 | | | $ | 24.6 | | | $ | (14.1 | ) | | $ | 10.5 | | | $ | 24.2 | | | $ | (10.9 | ) | | $ | 13.3 | |
| Patents | | | 5-10 | | | | 0.6 | | | | (0.4 | ) | | | 0.2 | | | | 0.6 | | | | (0.4 | ) | | | 0.2 | |
| Customer relationships | | | 5-10 | | | | 15.0 | | | | (2.3 | ) | | | 12.7 | | | | 20.1 | | | | (0.9 | ) | | | 19.2 | |
| Technology | | | 10 | | | | 4.5 | | | | (0.6 | ) | | | 3.9 | | | | 5.9 | | | | (0.3 | ) | | | 5.6 | |
| Other | | | 3 | | | | 1.8 | | | | (0.8 | ) | | | 1.0 | | | | 1.8 | | | | (0.5 | ) | | | 1.3 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | 46.5 | | | | (18.2 | ) | | | 28.3 | | | | 52.6 | | | | (13.0 | ) | | | 39.6 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Indefinite lived: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Trade name | | | | | | | 19.5 | | | | | | | | 19.5 | | | | 25.6 | | | | | | | | 25.6 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Total | | | | | | $ | 66.0 | | | $ | (18.2 | ) | | $ | 47.8 | | | $ | 78.2 | | | $ | (13.0 | ) | | $ | 65.2 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
51
FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ in millions, except per share data) — (Continued)
Amortization expense for the years ended December 31, 2008, 2007 and 2006 totaled $5.2 million, $4.2 million and $2.0 million, respectively. The Company estimates that the aggregate amortization expense will be $5.4 million in 2009, $5.1 million in 2010, $5.0 million in 2011, $3.9 million in 2012, $2.3 million in 2013 and $6.6 million thereafter. Actual amounts of amortization expense may differ from estimated amounts due to additional intangible asset acquisitions, changes in foreign currency exchange rates, impairment of intangible assets, accelerated amortization of intangible assets and other events.
NOTE 12 — DISCONTINUED OPERATIONS
| |
| NOTE 13 — | DISCONTINUED OPERATIONS |
The following table presents the operating results of the Company’s discontinued operations for the three-year period ended December 31 2008:($ in millions):
| | | | | | | | | | | | | |
| E-ONE (Fire Rescue Segment) | | 2008 | | | 2007 | | | 2006 | |
| |
| Net sales | | $ | 157.1 | | | $ | 201.3 | | | $ | 278.5 | |
| Costs and expenses | | | (168.2 | ) | | | (226.9 | ) | | | (283.6 | ) |
| | | | | | | | | | | | | |
| Loss before income taxes | | | (11.1 | ) | | | (25.6 | ) | | | (5.1 | ) |
| Income tax benefit | | | 4.9 | | | | 10.4 | | | | 1.1 | |
| | | | | | | | | | | | | |
| Loss from discontinued operations | | $ | (6.2 | ) | | $ | (15.2 | ) | | $ | (4.0 | ) |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| Pauluhn (SSG Segment) | | 2010 | | | 2009 | | | 2008 | |
| |
| Net sales | | $ | - | | | $ | 17.3 | | | $ | 25.9 | |
| Costs and expenses | | | - | | | | (14.6 | ) | | | (20.6 | ) |
| | | | | | | | | | | | | |
| Income before income taxes | | | - | | | | 2.7 | | | | 5.3 | |
| Income tax (expense) | | | - | | | | (0.9 | ) | | | (1.8 | ) |
| | | | | | | | | | | | | |
| Income from discontinued operations | | $ | - | | | $ | 1.8 | | | $ | 3.5 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Die and Mold Operations (Tool Segment) | | 2008 | | 2007 | | 2006 | | |
| RAVO (ESG Segment) | | | 2010 | | 2009 | | 2008 | |
| |
| Net sales | | $ | 39.7 | | | $ | 119.3 | | | $ | 122.9 | | | $ | - | | | $ | 28.2 | | | $ | 53.9 | |
| Costs and expenses | | | (39.2 | ) | | | (112.5 | ) | | | (114.6 | ) | | | - | | | | (27.4 | ) | | | (52.7 | ) |
| | | | | | | | | | | | | | | |
| Income before income taxes | | | 0.5 | | | | 6.8 | | | | 8.3 | | | | - | | | | 0.8 | | | | 1.2 | |
| Income tax expense | | | (0.7 | ) | | | (3.0 | ) | | | (2.9 | ) | |
| Income tax (expense) | | | | - | | | | - | | | | - | |
| | | | | | | | | | | | | | | |
| (Loss) income from discontinued operations | | $ | (0.2 | ) | | $ | 3.8 | | | $ | 5.4 | | |
| Income from discontinued operations | | | $ | - | | | $ | 0.8 | | | $ | 1.2 | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| Refuse and Cutting Tool Operations (ESG and Tool Segments) | | 2008 | | | 2007 | | | 2006 | |
| |
| Net sales | | $ | — | | | $ | 3.0 | | | $ | 83.9 | |
| Costs and expenses | | | — | | | | (2.8 | ) | | | (86.0 | ) |
| | | | | | | | | | | | | |
| Income (loss) before income taxes | | | — | | | | 0.2 | | | | (2.1 | ) |
| Income tax benefit (expense) | | | 1.9 | | | | (0.1 | ) | | | 0.1 | |
| | | | | | | | | | | | | |
| Income (loss) from discontinued operations | | $ | 1.9 | | | $ | 0.1 | | | $ | (2.0 | ) |
| | | | | | | | | | | | | |
73
| | | | | | | | | | | | | |
| E-ONE (Fire Rescue Segment) | | 2010 | | | 2009 | | | 2008 | |
| |
| Net sales | | $ | - | | | $ | - | | | $ | 157.1 | |
| Costs and expenses | | | - | | | | - | | | | (168.2 | ) |
| | | | | | | | | | | | | |
| Loss before income taxes | | | - | | | | - | | | | (11.1 | ) |
| Income tax (expense) benefit | | | - | | | | (0.7 | ) | | | 4.9 | |
| | | | | | | | | | | | | |
| Loss from discontinued operations | | $ | - | | | $ | (0.7 | ) | | $ | (6.2 | ) |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| Financial Services | | 2008 | | | 2007 | | | 2006 | |
| |
| Net sales | | $ | 4.3 | | | $ | 7.4 | | | $ | 8.2 | |
| Costs and expenses | | | (5.7 | ) | | | (8.2 | ) | | | (8.7 | ) |
| | | | | | | | | | | | | |
| Loss before income taxes | | | (1.4 | ) | | | (0.8 | ) | | | (0.5 | ) |
| Income tax benefit | | | 1.7 | | | | 2.2 | | | | 2.3 | |
| | | | | | | | | | | | | |
| Income from discontinued operations | | $ | 0.3 | | | $ | 1.4 | | | $ | 1.8 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| Die and Mold Operations (Tool Segment) | | 2010 | | | 2009 | | | 2008 | |
| |
| Net sales | | $ | - | | | $ | - | | | $ | 39.7 | |
| Costs and expenses | | | - | | | | - | | | | (39.2 | ) |
| | | | | | | | | | | | | |
| Income before income taxes | | | - | | | | - | | | | 0.5 | |
| Income tax (expense) | | | - | | | | - | | | | (0.7 | ) |
| | | | | | | | | | | | | |
| Loss from discontinued operations | | $ | - | | | $ | - | | | $ | (0.2 | ) |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| Financial Services | | 2010 | | | 2009 | | | 2008 | |
| |
| Net sales | | $ | 0.1 | | | $ | 0.2 | | | $ | 4.3 | |
| Costs and expenses | | | (0.1 | ) | | | (0.4 | ) | | | (5.7 | ) |
| | | | | | | | | | | | | |
| Loss before income taxes | | | - | | | | (0.2 | ) | | | (1.4 | ) |
| Income tax benefit | | | - | | | | 0.1 | | | | 1.7 | |
| | | | | | | | | | | | | |
| (Loss) income from discontinued operations | | $ | - | | | $ | (0.1 | ) | | $ | 0.3 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| Riverchase (SSG Segment) | | 2010 | | | 2009 | | | 2008 | |
| |
| Net sales | | $ | - | | | $ | 1.3 | | | $ | 0.9 | |
| Costs and expenses | | | (1.3 | ) | | | (2.5 | ) | | | (2.0 | ) |
| | | | | | | | | | | | | |
| Loss before income taxes | | | (1.3 | ) | | | (1.2 | ) | | | (1.1 | ) |
| Income tax benefit | | | - | | | | 0.4 | | | | 0.4 | |
| | | | | | | | | | | | | |
| Loss from discontinued operations | | $ | (1.3 | ) | | $ | (0.8 | ) | | $ | (0.7 | ) |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| SSG WOFE (SSG Segment) | | 2010 | | | 2009 | | | 2008 | |
| |
| Net sales | | $ | 1.0 | | | $ | 0.5 | | | $ | 0.1 | |
| Costs and expenses | | | (2.0 | ) | | | (1.2 | ) | | | (0.8 | ) |
| | | | | | | | | | | | | |
| Loss before income taxes | | | (1.0 | ) | | | (0.7 | ) | | | (0.7 | ) |
| Income tax benefit | | | - | | | | - | | | | - | |
| | | | | | | | | | | | | |
| Loss from discontinued operations | | $ | (1.0 | ) | | $ | (0.7 | ) | | $ | (0.7 | ) |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| ESG WOFE (ESG Segment) | | 2010 | | | 2009 | | | 2008 | |
| |
| Net sales | | $ | 0.5 | | | $ | 0.3 | | | $ | - | |
| Costs and expenses | | | (1.2 | ) | | | (0.5 | ) | | | - | |
| | | | | | | | | | | | | |
| Loss before income taxes | | | (0.7 | ) | | | (0.2 | ) | | | - | |
| Income tax benefit | | | - | | | | - | | | | - | |
| | | | | | | | | | | | | |
| Loss from discontinued operations | | $ | (0.7 | ) | | $ | (0.2 | ) | | $ | - | |
| | | | | | | | | | | | | |
74
| | | | | | | | | | | | | |
| Refuse (ESG Segment) | | 2010 | | | 2009 | | | 2008 | |
| |
| Net sales | | $ | - | | | $ | - | | | $ | - | |
| Costs and expenses | | | - | | | | - | | | | - | |
| | | | | | | | | | | | | |
| Income before income taxes | | | - | | | | - | | | | - | |
| Income tax benefit | | | - | | | | - | | | | 1.9 | |
| | | | | | | | | | | | | |
| Income from discontinued operations | | $ | - | | | $ | - | | | $ | 1.9 | |
| | | | | | | | | | | | | |
In December 2010, the Company determined that its China WOFE business was no longer strategic. The results of China WOFE operations previously were included within the Environmental Solutions and Safety and Security Systems Groups. The loss includes a write-down of $2.1 million to reflect the estimated fair value of the net assets and certain other costs associated with the dissolution of the business.
On September 1, 2010, the Company sold its Riverchase business for $0.2 million, which had previously been reported as part of the Safety and Security Systems operating segment. The Company’s Riverchase business developed a suite of products that enables emergency response agencies to manage and communicate remotely with their fleets. The Company wrote down assets of the Riverchase business to net realizable value, resulting in a net loss of $2.1 million. The net loss included the write-off of $1.9 million of intangible assets.
On November 30, 2009, the Company sold 100% of the shares of Pauluhn, located in Pearland, Texas, for $35.0 million of which $3.2 million was received in 2010. The results of Pauluhn’s operations were previously included within the Safety and Security Systems Group. Pauluhn provided marine, offshore and industrial lighting products with innovative solutions for hazardous locations and corrosive environments. In association with the sale, the Company recognized a gain on disposal of discontinued operations of Pauluhn of $14.3 million at December 31, 2009, which included a gain of $1.8 million transferred from cumulative translation adjustments. The gain included costs associated with the sale of $1.1 million and the write-off of $18.3 million of goodwill of the Safety and Security Systems Group attributable to Pauluhn. Proceeds from the sale were used to pay down debt and fund core operations. For the years ended December 31, 2010 and 2009, the Company recorded a loss of $2.2 million and $0.7 million, respectively, related to an environmental remediation liability. In December 2010, the Company decided to sell the Pauluhn building after receiving a notice of termination of leasing agreement from the tenant. The net book value of the building was written down by $0.4 million to its estimated net realizable value.
In accordance with GAAP, the goodwill attributable to Pauluhn was determined based on its fair value in comparison to the fair value of the remaining businesses with the Safety and Security Systems Group excluding Federal APD, a business that represents its own reporting unit. The sale price of $35.0 million represented the fair value of Pauluhn, which was 10.4% of the fair value of the entire Safety and Security Systems Group excluding Federal APD, based on a discounted cash flow of the Safety and Security Systems Group’s remaining businesses. This 10.4% was then applied to the Group’s goodwill balance of $175.1 million to derive the goodwill attributable to Pauluhn of $18.2 million.
On July 16, 2009, the Company sold 100% of the shares of its European sweeper business, Ravo Holdings B.V., (“Ravo”) located in the Netherlands for €8.5 million, or approximately $12.1 million. The Ravo businesses were classified as discontinued operations as of the second quarter of 2009. The results of Ravo’s operations were previously included within the Environmental Solutions Group. In association with this sale, the Company recognized a loss on disposal of discontinued operations of Ravo of $11.3 million at December 31, 2009. The loss includes a write-down of $4.9 million to reflect the fair value of the net assets sold, costs associated with the sale of $0.2 million, a gain of $0.3 million transferred from cumulative translation adjustments, and the write-off of $6.2 million of goodwill of the Environmental Solutions Group attributable to Ravo. Proceeds from the sale were used to pay down debt and fund core operations.
In accordance with GAAP, the goodwill attributable to Ravo was determined based on its fair value in comparison to the fair value of the remaining businesses within the Environmental Solutions Group. The sale price of $12.1 million represented the fair value of Ravo, which was 5% of the fair value of the entire Environmental Solutions Group, as the remaining businesses are more profitable and have greater earnings potential than Ravo.
75
This 5% was then applied to the Group’s goodwill balance of $126.4 million to derive the goodwill attributable to Ravo of $6.2 million.
All of the Company’sE-ONE businesses were discontinued in 2008 leaving just the Company’s Bronto businesses within its Fire Rescue segment. On August 5, 2008, the Company sold 100% of the shares ofE-ONE, Inc. located in Ocala, Florida for approximately $20.0 million subject to an initial working capital adjustment that
52
FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ in millions, except per share data) — (Continued)
resulted in cash proceeds of $0.5 million at closing. The final working capital adjustment was concluded in December 2008, resulting in additional cash proceeds of $2.9 million received January 2009.Florida. The after-tax loss on the sale for the year ended December 31, 2008 totaled $85.0 million, which related primarily to after-tax impairment charges that reflect the fair value of the net assets and the impairment of $6.2 million of goodwill attributable to theE-ONE business. The goodwill impairment computationofE-ONE was based on its fair value in comparison to the relative fair valuesvalue of the Bronto businesses. The sale price ofE-ONE, and Bronto, the two reporting units withinwhich was representative of its fair value, was approximately 14% of the Fire Rescue Group. AtGroup’s fair value. Applying the time14% to the Fire Rescue Group’s goodwill yielded goodwill attributable toE-ONE of the impairment,$6.2 million. The Bronto businesses’ fair value was significantly greater thanE-ONE’s fair value since Bronto was profitable and growing, whileE-ONE was available for sale, sounprofitable and losing market share. For the best determination of its value was the contractual sales priceyear ended December 31, 2010, the Company had negotiated withrecorded a buyer forloss of $5.0 million primarily related to a change in the business. Bronto’s value was based on a discounted cash flow analysis using its projected cash flows over a five year period. The $6.2 million attributed toE-ONE represented 14%estimate of the total goodwill of the group.workers compensation and product liability reserves.
The Company provided its domestic municipal customers with the opportunity to finance purchases through leasing arrangements with the Company. Following the sale of theE-ONE business, the Company elected to discontinue its financial services activities through divestiture of this leasing portfolio. During the year,In 2008, the Company sold its municipal leasing portfolio to Banc of America Public Capital Corp. in several tranches for a gain of $0.3 million. Proceeds from the sale of the portfolio were used to repay debt associated with these assets. In October, 2008, the Company discontinued entirely its practice of providing lease financing to its customers and all other financial service activities, principally its dealer floor planning.
On April 21, 2008, the Company completed the sale of Dayton Progress Corporation (excluding Dayton Hong Kong) and its subsidiary, PCS Company, referred to collectively as “Die and Mold Operations,” for $65.5 million. The after-tax loss on disposal for the year ended December 31, 2008 was $35.3 million primarily due to asset impairments; includedimpairments. Included in the loss on disposal is the remaining goodwill of the Tool Group of $55.8 million. The Company also decided to close the Dayton Hong Kong operation incurring a $4.6 million pre-tax impairment charge related to this business for the year ended December 31, 2008. The Die and Mold operationsOperations produced special precision perforating components for metal stamping applications and tooling components for the plastic injection mold and the die cast industries. Sale proceeds were used to repay debt.
On January 31, 2007, the Company completed the sale of Manchester Tool Company, On Time Machining Company and Clapp Dico, referred to collectively as the “Cutting Tool Operations” which were part of the Tool Group for $65.4 million. There was a net gain on disposal of discontinued operations of $24.6 million for the year ended December 31, 2007. These operations produced industrial cutting tools, engineered components and advanced materials consumed in production processes. No asset impairment charges were recorded in conjunction with the disposal.
In December 2005, the Company determined that its investment in the Refuse business operating under the Leach brand name was no longer strategic. The majority of the assets of the business have been sold since that time and the operation has been shut down. For the years ended December 31, 20082010 and 2007,2009, the Company recorded an after-taxa gain of $2.2$0.7 million and $0.5$0.0 million, respectively, primarily related to a revision in the estimate of product liability reserves. For the year ended December 31, 2006, the loss from disposal of discontinued operations included $9.7 million of after tax impairment charges related to the disposal of refuse assets.
53
FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ in millions, except per share data) — (Continued)
The following table shows an analysis of assets and liabilities of discontinued operations as of December 31:
| | | | | | | | | | |
| | | 2008 | | 2007 | | | | | | | | | |
| ($ in millions) | ($ in millions) | | | | | 2010 | | 2009 | |
| |
| Current assets | | $ | 6.9 | | | $ | 133.0 | | | $ | - | | | $ | 3.3 | |
| Properties and equipment | | | 0.2 | | | | 38.1 | | | | 0.7 | | | | 1.3 | |
| Long-term assets | | | — | | | | 64.4 | | | | 0.8 | | | | 6.7 | |
| Financial service assets, net | | | 5.6 | | | | 146.8 | | | | 1.6 | | | | 2.6 | |
| | | | | | | | | | | |
| Total assets of discontinued operations | | $ | 12.7 | | | $ | 382.3 | | | $ | 3.1 | | | $ | 13.9 | |
| | | | | | | | | | | |
| Current liabilities | | | 6.1 | | | | 46.5 | | | $ | 5.9 | | | $ | 2.6 | |
| Long-term liabilities | | | 13.1 | | | | 26.9 | | | | 10.8 | | | | 10.8 | |
| Financial service liabilities | | | 5.2 | | | | 137.4 | | | | 1.5 | | | | 2.5 | |
| | | | | | | | | | | |
| Total liabilities of discontinued operations | | $ | 24.4 | | | $ | 210.8 | | | $ | 18.2 | | | $ | 15.9 | |
| | | | | | | | | | | |
Included in current liabilities at December 31, 2010 and 2009 is $2.6 million and $0.7 million, respectively, related to environment remediation at the Pearland, Texas facility, which was previously used by the Company’s discontinued Pauluhn business. Included in long-term liabilities at December 31, 2010 and 2009 is $7.7$6.0 million and
76
$7.0 million, respectively, relating to estimated product liability obligations of the North American refuse truck body business.
| |
| NOTE 14 — | NOTE 13 — RESTRUCTURING |
During fiscal 2010 and 2009, the Company announced restructuring initiatives. As of December 31, 2010 and 2009, the Company’s total restructuring accrual was $2.5 million and $1.3 million included in Accrued Liabilities Other, respectively. The Company continues to review its business for opportunities to reduce operating expenses and focus on executing its strategy based on core competencies and cost efficiencies.
2010 Plan
During the second quarter of 2010, the Company announced restructuring initiatives focused on aligning the Company’s cost base with revenues and other functional reorganizations and recorded $4.6 million in restructuring charges related to a global reduction in force across all functions. Total restructuring payment of $4.6 million is expected to be completed by the third quarter of 2011.
2009 Plan
In July 2009, the Company began an initiative to consolidate a number of manufacturing and distribution operations into the Company’s University Park, Illinois, plant collectively known as the Footprint restructuring plan (“Footprint”). The Company recorded an additional $0.4 million in charges related to the Footprint plan. The Company completed these actions as of December 31, 2010.
2008 Plan
In December 2008, the Company announced an objective to reduce salaried personnel costs by 13% in 2009 when compared to 2008 levels. This cost reduction was to affect not only salaries, benefits and equity compensation, but also contracted services and travel expenses. A process was created to review every organizational chart and employee reporting relationship within the companyCompany with the purpose of increasing spans of control of each manager and to better improve management oversight. In addition, certain contracted services were reviewed for termination. A charge of $2.7 million was recorded in the fourth quarter of 2008 to reflect severance and other costs associated with a salaried employee reduction in force and contract terminations. The Company expects allThere were no meaningful changes to the estimate of these actions will be completed by Marchcharges at December 31, 2010 and 2009.
The following table summarizes the 20082010 restructuring charges by segment and the total charges estimated to be incurred:incurred ($ in millions):
| | | | | | | | | | |
| | | | Pre-Tax
| | | |
| | | | | | | | | | | Restructuring
| | | |
| | | Pre-Tax
| | | | | Charges at
| | | |
| | | Restructuring
| | Estimate of
| | | December 31,
| | Estimate of
| |
Group | | Charges in 2008 | | Total Charges | | | 2010 | | Total Charges | |
| |
| Safety and Security | | $ | 1.8 | | | $ | 1.8 | | |
| Environmental Solutions | | | 0.3 | | | | 0.3 | | | $ | 0.8 | | | $ | 0.8 | |
| Safety and Security Systems | | | | 1.8 | | | | 1.8 | |
| Fire Rescue | | | | 0.6 | | | | 0.6 | |
| Federal Signal Technologies | | | | 0.6 | | | | 0.6 | |
| Corporate | | | 0.6 | | | | 0.6 | | | | 1.2 | | | | 1.2 | |
| | | | | | | | | | | |
| Total restructuring | | | $ | 5.0 | | | $ | 5.0 | |
| | | $ | 2.7 | | | $ | 2.7 | | | | | | |
| | | | | | | |
77
The following presents an analysis of the restructuring reserves for the year endedincluded in other accrued liabilities as of December 31, 2008:2010 and 2009, respectively ($ in millions):
| | | | | | | | | | | | | |
| | | Severance | | | Other | | | Total | |
| |
| Balance as of January 1, 2008 | | $ | — | | | $ | — | | | $ | — | |
| Charges to expense | | | 2.1 | | | | 0.6 | | | | 2.7 | |
| Cash payments | | | (0.1 | ) | | | — | | | | (0.1 | ) |
| | | | | | | | | | | | | |
| Balance as of December 31, 2008 | | $ | 2.0 | | | $ | 0.6 | | | $ | 2.6 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | Severance | | | Other | | | Total | |
| |
2010 Plan | | | | | | | | | | | | |
| Balance as of December 31, 2009 | | $ | - | | | $ | - | | | $ | - | |
| Charges to selling, general and administrative expenses | | | 3.6 | | | | 1.0 | | | | 4.6 | |
| Cash payments | | | (1.7 | ) | | | (0.4 | ) | | | (2.1 | ) |
| | | | | | | | | | | | | |
| Balance as of December 31, 2010 | | $ | 1.9 | | | $ | 0.6 | | | $ | 2.5 | |
| | | | | | | | | | | | | |
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FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
| | | | | | | | | | | | | |
| | | Severance | | | Other | | | Total | |
| |
2009 Plan | | | | | | | | | | | | |
| Balance as of December 31, 2008 | | $ | - | | | $ | - | | | $ | - | |
| Charges to selling, general and administrative expenses | | | 1.1 | | | | 0.4 | | | | 1.5 | |
| Cash payments | | | (0.4 | ) | | | - | | | | (0.4 | ) |
| | | | | | | | | | | | | |
| Balance as of December 31, 2009 | | $ | 0.7 | | | $ | 0.4 | | | $ | 1.1 | |
| | | | | | | | | | | | | |
| Charges to selling, general and administrative expenses | | | 0.4 | | | | - | | | | 0.4 | |
| Cash payments | | | (1.1 | ) | | | (0.4 | ) | | | (1.5 | ) |
| | | | | | | | | | | | | |
| Balance as of December 31, 2010 | | $ | - | | | $ | - | | | $ | - | |
| | | | | | | | | | | | | |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ in millions, except per share data) — (Continued)
| | | | | | | | | | | | | |
| | | Severance | | | Other | | | Total | |
| |
2008 Plan | | | | | | | | | | | | |
| Balance as of December 31, 2007 | | $ | - | | | $ | - | | | $ | - | |
| Charges to selling, general and administrative expenses | | | 2.1 | | | | 0.6 | | | | 2.7 | |
| Cash payments | | | (0.1 | ) | | | - | | | | (0.1 | ) |
| | | | | | | | | | | | | |
| Balance as of December 31, 2008 | | $ | 2.0 | | | $ | 0.6 | | | $ | 2.6 | |
| | | | | | | | | | | | | |
| Charges to selling, general and administrative expenses | | | - | | | | - | | | | - | |
| Cash payments | | | (1.9 | ) | | | (0.5 | ) | | | (2.4 | ) |
| | | | | | | | | | | | | |
| Balance as of December 31, 2009 | | $ | 0.1 | | | $ | 0.1 | | | $ | 0.2 | |
| | | | | | | | | | | | | |
| Charges to selling, general and administrative expenses | | | - | | | | - | | | | - | |
| Cash payments | | | (0.1 | ) | | | (0.1 | ) | | | (0.2 | ) |
| Balance as of December 31, 2010 | | | - | | | | - | | | | - | |
| | | | | | | | | | | | | |
Severance charges in 2008 consisted of termination and benefit costs for salaried manufacturing, engineering, sales, general and administrative employees that will be involuntarily terminated in the first quarter of 2009. There were no asset impairment charges associated with this restructuring in 2008. The Company incurred no restructuring charges in the years ended December 31, 2007 and 2006.
NOTE 14 — LEGAL PROCEEDINGS
| |
| NOTE 15 — | LEGAL PROCEEDINGS |
The Company is subject to various claims, other pending and possible legal actions for product liability and other damages and other matters arising out of the conduct of the Company’s business. The Company believes, based on current knowledge and after consultation with counsel, that the outcome of such claims and actions will not have a materialan adverse effect on the Company’s consolidated financial position or the results of operations. However, in the event of unexpected future developments, it is possible that the ultimate resolution of such matters, if unfavorable, could have a material adverse effect on the Company’s results of operations.
The Company has been sued in Chicago, Illinois by firefighters seeking damages claiming that exposure to the Company’s sirens has impaired their hearing and that the sirens are therefore defective. There are presentlywere 33 cases filed during the period1999-2004, involving a total of 2,443 plaintiffs pending in the Circuit Court of Cook County, Illinois. The trial of the first 27 of these plaintiffs’ claims began on March 18, 2008 and ended on April 25, 2008, when a Cook County jury returned a unanimous verdict in favor of the Company and absolved the Company of any liability for all 27 of these claims, which had been consolidated for trial. Since the first trial concluded, another 63 cases were dismissed, all during 2008.Company. An additional 40 Chicago firefighter plaintiffs were selected for trial to begin on January 5, 2009. Plaintiffs’ counsel later moved to reduce the number of plaintiffs from 3640 to 9. Trial of
78
these nine plaintiffs began on FebFebruary 6, 2009 and concluded on February 20, 2009 with a verdict returned against the Company and for the plaintiffs in varying amounts totaling $0.4 million. Additional trial dates of Chicago plaintiff firefighters areThe Company is appealing this verdict. All trials previously scheduled in Cook County during 2009 and 2010.2010 are stayed pending the result of this appeal. Since February 20, 2009, the Company is aware of six additional cases that have been filed in Cook County, involving 299 plaintiffs.
Federal SignalThe Company has also been sued on this issue outside of the Cook County, Illinois venue. WithMost of these cases have involved lawsuits filed by a single attorney in the exceptionCourt of matters on appeal, Federal Signal is currently a defendant in 6 such hearing loss lawsuits in Pennsylvania, involvingCommon Pleas, Philadelphia County, Pennsylvania. Since September 2007, this attorney filed a total of 6 plaintiffs. Two71 lawsuits, involving 71 plaintiffs in this jurisdiction. Three of these lawsuitscases have been setdismissed pursuant to pretrial motion filed by the Company. Another case has been voluntarily dismissed. Prior to trial in four cases, the Company paid nominal sums, which included reimbursements of expenses, to obtain dismissals. Three trials have occurred in Philadelphia involving these cases. The first trial involving one of these plaintiffs began on February 16, 2010 and ended on March 2, 2010, when the jury returned a verdict for the plaintiff. In particular, the jury found that the Company’s siren was not defectively designed, but that the Company negligently constructed the siren. The jury awarded damages in the amount of $0.1 million which was subsequently reduced to $0.08 million. The Company appealed this verdict. Another trial, duringinvolving 9 Philadelphia firefighter plaintiffs, began on June 14, 2010 and ended on June 25, 2010 when the jury returned a defense verdict for the Company as to all claims and all plaintiffs involved in that trial. The third trial, involving 9 Philadelphia firefighter plaintiffs, began on July 19, 2010 and ended on July 30, 2010 when the jury returned a defense verdict for the Company as to all claims and all plaintiffs involved in that trial.
Following defense verdicts in the last two Philadelphia trials, the Company negotiated settlements with respect to all remaining filed cases in Philadelphia as well as other firefighter claimants represented by that attorney. On January 4,th Quarter 2011, the Company received approval the of 2009. Allits Board of Directors and entered into a Global Settlement Agreement (the “Settlement Agreement”) with the law firm of the plaintiffsattorney representing the Philadelphia claimants, on behalf of eleven hundred and twenty-five (1,125) claimants the firm represents (the “Claimants”) and who have stipulatedasserted Product Claims against the Company (the “Claims”). The Settlement Agreement had been executed by management of the Company and the law firm on December 31, 2010, subject to approval of the Company’s Board of Directors. Three hundred and eight (308) of these Claimants have lawsuits pending against the Company in Cook County, Illinois.
The Settlement Agreement provides that the Company shall pay (the “Settlement Payment”) a total amount of $3.8 million to settle the Claims (including the costs, fees and other expenses of the Firm in connection with its representation of the Claimants), subject to certain terms, conditions and procedures set forth in the Settlement Agreement. In order for the Company to be required to make the Settlement Payment: (i) each Claimant who agrees to settle his or claimedher Claims must sign a release acceptable to the Company (a “Release”); (ii) each Claimant who agrees to the settlement and who is a plaintiff in a lawsuit, must dismiss his or her lawsuit, with prejudice; (iii) by March 31, 2011, at least 93% of the Claimants identified in Appendix A to the Settlement Agreement must have agreed to settle their Claims and provide a signed Release to the Company; and (iv) the law firm shall have withdrawn from representing any Claimants who do not agree to the settlement including those who have filed lawsuits.
If less than $75,00093% of the Claimants identified in damages. FourAppendix A to the Settlement Agreement agree to settle their Claims and provide a signed Release to the Company by March 31, 2011, the Settlement Agreement becomes null and void and the Company will not be required to make the Settlement Payment. If the conditions to the settlement set forth in the Settlement Agreement are met, but less than 100% of the Claimants have agreed to settle their Claims and sign a Release, the Settlement Payment will be reduced by the percentage of Claimants who do not agree to the settlement.
The Company generally denies the allegations made in the Claims and lawsuits and denies that its products caused any injuries to the Claimants. Nonetheless, to avoid the expense and uncertainty of further litigation, the Company has entered into the Settlement Agreement for the purpose of minimizing its expenses, including legal fees, and the inconvenience and distraction of the Claims and lawsuits.
Firefighters have brought hearing loss claims against the Company in jurisdictions other than Philadelphia. Those cases, however, have also been dismissed, including four cases in the Supreme Court of Kings County, New
79
York which were dismissed on January 25, 2008 after the court granted Federal Signal’sthe Company’s motion to dismiss which eliminated all claims pending in New York.dismiss. The Courttrail court subsequently denied reconsideration of its ruling. These cases are on appeal. All plaintiffs who have filed hearing loss cases against Federal Signal in other jurisdictions have dismissed their claims.On appeal, the appellate court affirmed the trial court’s dismissal of these cases. Plaintiffs’ attorneys have threatened to file additional lawsuits. The Company intends to vigorously defend all of these lawsuits. The Company successfully defended approximately 41 similar cases in Philadelphia, Pennsylvania in 1999 resulting in a series of unanimous jury verdicts in favor of the Company.
Federal Signal’s ongoing negotiations with CNA over insurance coverage on these claims have resulted in an agreement under which CNA reimbursed $3.7 million toreimbursements of a portion of the Company duringCompany’s defense costs. In the year ended December 31, 2007 for past defense costs.2010, the Company recorded $0.6 million of reimbursements from CNA as a reduction of corporate operating expenses of which $0.6 million has been received as of December 31, 2010. In the years ended December 31, 2009 and 2008, the Company recorded $0.7 million and $1.7 million, respectively, of CNA reimbursements.
E-One, a former subsidiary of the Company, has been named as a defendant in a product liability case in Massachusetts involving a firefighter who claims to have been injured as a result of an accident involving anE-One pumper firetruck. In particular, plaintiff required amputation of a leg resulting from this accident. The accident allegedly occurred on August 7, 2005 when the firetruck was inadvertently placed into drive during pumping operations and “ran away,” pinning plaintiff against another firetruck. Plaintiff alleges, among other things, that the truck was defective and unreasonably dangerous because it failed to include certain alleged safety devices. After the accident, the Massachusetts Department of Labor investigated the accident and concluded that various errors and omissions by the Fire Department and driver/operator of the pumper contributed to causing the accident. In addition to damages recoverable under typical product liability cases, plaintiff has also sought recovery under the Massachusetts Deceptive Trade Practices Act. At a mediation on October 5, 2010, the parties tentatively agreed to coversettle this case. The settlement was approved by the Company’s Board Directors and approved by the Court during November 2010. The settlement was paid in the fourth quarter of 2010 by contributions from Federal Signal (on behalf ofE-One),E-One’s insurance carrier, and an insurance carrier forE-One’s dealer who was also named as a percentage of defense costs amounting to approximately $1.7 million of which $1.4 million had been received through December 31, 2008.defendant in the case.
| |
| NOTE 16 — | NOTE 15 — SEGMENT AND RELATED INFORMATION |
Effective June 6, 2010, the Company reorganized its segments to better align the Company’s intelligent transportation and public safety businesses for future growth. As a result of this reorganization, the Company created a new operating segment called Federal Signal Technologies that includes the vehicle classification software, automated license plate recognition and parking systems businesses from our Safety and Security Systems operating segment and the newly acquired businesses, Sirit and VESystems. The Safety and Security Systems operating segment retained the businesses that offer systems for campus and community alerting, emergency vehicles, first responder interoperable communications, industrial communications and command and municipal security. Results for prior periods have been restated to reflect the June 2010 reorganization described above.
The Company has threefour continuing operating segments as defined under SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information.ASC Topic 280, “Segment Reporting.” Business units are organized under each segment because they share certain characteristics, such as technology, marketing, distribution and product application, which create long-term synergies. The principal activities of the Company’s operating segments are as follows:
Information regarding the Company’s discontinued operations is included in Note 1213 — Discontinued Operations. The segment information included herein has been reclassified to reflect such discontinued operations.
Federal Signal Technologies — Our Federal Signal Technologies Group is a provider of technologies and solutions to the Intelligent Transportation Systems and public safety markets and other applications. These products and solutions provide end users with the tools needed to automate data collection and analysis, transaction processing and asset tracking. FSTech provides technology platforms and services to customers in the areas of radio frequency identification systems, transaction processing vehicle classification, electronic toll collection, automated license plate recognition, electronic vehicle registration, parking and access control, cashless payment solutions, congestion charging, traffic management, site security solutions and supply chain systems. Products are sold under PIPStm, Idris®, Sirittm and VESystemstm brand names. The Group operates manufacturing facilities in North American and Europe.
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FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ in millions, except per share data) — (Continued)
Safety and Security Systems — Our Safety and Security Systems Group companies produceis a varietyleading manufacturer and supplier of comprehensive systems and products that law enforcement, fire rescue, emergency medical services, campuses, military facilities and industrial sites use to protect people and property. Offerings include systems for automated license plate recognition, campus and community alerting, emergency vehicles, first responder interoperable communications, industrial communications and command and municipal networked security and parking revenue and access control for municipal, governmental and industrial applications.security. Specific products include access control devices, lightbars and sirens, public warning sirens and public safety software and automated license plate recognition cameras. The group’s productssoftware. Products are sold primarily to industrial, municipalunder the Federal Signaltm, Federal Signal VAMAtm, Target Tech®, and governmental customers.Victortm brand names. The Group operates manufacturing facilities in North America, Europe, and South Africa.
Fire Rescue — The Fire Rescue Group manufactures articulated and telescopic aerial platforms for rescue and fire fighting and for maintenance purposes. This groupGroup sells to municipal and industrial fire services, civil defense authorities, rental companies, electric utilities and industrial customers.
Environmental Solutions — The Environmental Solutions Group manufactures a variety of self-propelled street cleaning vehicles, vacuum loader vehicles, municipal catch basin/sewer cleaning vacuum trucks, and water blastingwaterblasting equipment. Environmental Solutions sells primarily to municipal and government customers and industrial contractors.
Corporate contains those items that are not included in our other operating segments.
Net sales by operating segment reflect sales of products and services and financial revenues to external customers, as reported in the Company’s consolidated statements of operations. Intersegment sales are insignificant. The Company evaluates performance based on operating income of the respective segment. Operating income includes all revenues, costs and expenses directly related to the segment involved. In determining operating segment income, neither corporate nor interest expenses are included. Operating segment depreciation expense, identifiable assets and capital expenditures relate to those assets that are utilized by the respective operating segment. Corporate assets consist principally of cash and cash equivalents, short-term investments, notes and other receivables and fixed assets. The accounting policies of each operating segment are the same as those described in the summary of significant accounting policies.
Revenues attributed to customers located outside of the U.S. aggregated $412.8$285.8 million in 2010, $333.4 million in 2009, and $352.9 million in 2008, $376.7 million in 2007 and $310.8 million in 2006. Of that,of which sales exported from the U.S. aggregated $112.4 million, $113.5 million, and $110.8 million, in 2008, $116.4 million in 2007 and $101.6 million in 2006.respectively.
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 maintainand/or enhance its leadership position in key markets. Expenditures for research and development by the Company were approximately $23.4$18.8 million in 2008, $23.52010, $19.0 million in 20072009 and $15.7$20.9 million in 2006.2008.
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FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ in millions, except per share data) — (Continued)
A summary of the Company’s continuing operations by segment for each of the three years in the period ended December 31 2008 is as follows:follows ($ in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 2008 | | 2007 | | 2006 | | | 2010 | | 2009 | | 2008 | |
| |
| Net sales | | | | | | | | | | | | | | | | | | | | | | | | |
| Safety and Security Systems | | $ | 371.8 | | | $ | 367.2 | | | $ | 304.5 | | | $ | 214.5 | | | $ | 225.8 | | | $ | 276.7 | |
| Fire Rescue | | | 145.5 | | | | 117.9 | | | | 90.7 | | | | 108.8 | | | | 160.0 | | | | 145.5 | |
| Environmental Solutions | | | 441.5 | | | | 449.2 | | | | 397.5 | | | | 309.8 | | | | 299.6 | | | | 387.6 | |
| Federal Signal Technologies | | | | 93.4 | | | | 65.0 | | | | 68.2 | |
| | | | | | | | | | | | | | | |
| Total net sales | | $ | 958.8 | | | $ | 934.3 | | | $ | 792.7 | | | $ | 726.5 | | | $ | 750.4 | | | $ | 878.0 | |
| | | | | | | | | | | | | | | |
| Operating income (loss) | | | | | | | | | | | | | | | | | | | | | | | | |
| Safety and Security Systems | | $ | 40.3 | | | $ | 49.6 | | | $ | 41.2 | | | $ | 23.7 | | | $ | 24.1 | | | $ | 40.1 | |
| Fire Rescue | | | 10.4 | | | | 7.9 | | | | 5.6 | | | | 9.4 | | | | 19.2 | | | | 10.4 | |
| Environmental Solutions | | | 35.5 | | | | 38.8 | | | | 35.3 | | | | 17.9 | | | | 15.1 | | | | 34.9 | |
| Federal Signal Technologies | | | | (89.3 | ) | | | 6.0 | | | | (3.0 | ) |
| Corporate expense | | | (30.7 | ) | | | (21.1 | ) | | | (23.0 | ) | | | (38.6 | ) | | | (28.6 | ) | | | (30.7 | ) |
| | | | | | | | | | | | | | | |
| Total operating income | | | 55.5 | | | | 75.2 | | | | 59.1 | | |
| Total operating (Loss) income | | | | (76.9 | ) | | | 35.8 | | | | 51.7 | |
| Interest expense | | | (15.3 | ) | | | (18.5 | ) | | | (17.0 | ) | | | (10.3 | ) | | | (11.4 | ) | | | (15.3 | ) |
| Loss on investment in joint venture (Environmental Solutions Segment) | | | (13.0 | ) | | | (3.3 | ) | | | (1.9 | ) | |
| Other (expense) income | | | (0.9 | ) | | | 0.2 | | | | (0.2 | ) | |
| Gain (loss) on investment in joint venture (Environmental Solutions Segment) | | | | 0.1 | | | | 1.2 | | | | (13.0 | ) |
| Other (expense) | | | | (1.3 | ) | | | (0.5 | ) | | | (0.8 | ) |
| | | | | | | | | | | | | | | |
| Income before income taxes | | $ | 26.3 | | | $ | 53.6 | | | $ | 40.0 | | |
| (Loss) income before income taxes | | | $ | (88.4 | ) | | $ | 25.1 | | | $ | 22.6 | |
| | | | | | | | | | | | | | | |
| Depreciation and amortization | | | | | | | | | | | | | | | | | | | | | | | | |
| Safety and Security Systems | | $ | 9.3 | | | $ | 8.3 | | | $ | 4.9 | | | $ | 3.7 | | | $ | 3.1 | | | $ | 3.5 | |
| Fire Rescue | | | 1.4 | | | | 1.3 | | | | 1.1 | | | | 2.2 | | | | 1.9 | | | | 1.4 | |
| Environmental Solutions | | | 4.2 | | | | 3.9 | | | | 3.1 | | | | 4.7 | | | | 4.5 | | | | 3.9 | |
| Federal Signal Technologies | | | | 7.8 | | | | 4.4 | | | | 4.9 | |
| Corporate | | | 0.6 | | | | 0.6 | | | | 0.4 | | | | 0.8 | | | | 0.8 | | | | 0.6 | |
| | | | | | | | | | | | | | | |
| Total depreciation and amortization | | $ | 15.5 | | | $ | 14.1 | | | $ | 9.5 | | | $ | 19.2 | | | $ | 14.7 | | | $ | 14.3 | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | 2008 | | 2007 | | | 2010 | | 2009 | |
| |
| Identifiable assets | | | | | | | | | | | | | | | | |
| Safety and Security Systems | | $ | 334.7 | | | $ | 387.3 | | | $ | 246.9 | | | $ | 255.1 | |
| Fire Rescue | | | 141.0 | | | | 118.3 | | | | 123.1 | | | | 140.5 | |
| Environmental Solutions | | | 277.8 | | | | 251.7 | | | | 240.6 | | | | 235.2 | |
| Federal Signal Technologies | | | | 104.8 | | | | 64.7 | |
| Corporate | | | 67.8 | | | | 30.0 | | | | 46.0 | | | | 35.1 | |
| | | | | | | | | | | |
| Total assets of continuing operations | | | 821.3 | | | | 787.3 | | | | 761.4 | | | | 730.6 | |
| Assets of discontinued operations | | | 12.7 | | | | 382.3 | | | | 3.1 | | | | 13.9 | |
| | | | | | | | | | | |
| Total identifiable assets | | $ | 834.0 | | | $ | 1,169.6 | | | $ | 764.5 | | | $ | 744.5 | |
| | | | | | | | | | | |
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FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ in millions, except per share data) — (Continued)
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 2008 | | 2007 | | 2006 | | | 2010 | | 2009 | | 2008 | |
| |
| Capital expenditures | | | | | | | | | | | | | | | | | | | | | | | | |
| Safety and Security Systems | | $ | 4.7 | | | $ | 4.6 | | | $ | 4.2 | | | $ | 3.0 | | | $ | 2.6 | | | $ | 3.7 | |
| Fire Rescue | | | 8.5 | | | | 4.6 | | | | 1.4 | | | | 1.1 | | | | 2.2 | | | | 8.5 | |
| Environmental Solutions | | | 14.5 | | | | 10.2 | | | | 5.4 | | | | 6.5 | | | | 8.9 | | | | 14.1 | |
| Federal Signal Technologies | | | | 1.5 | | | | 0.4 | | | | 0.8 | |
| Corporate | | | 0.8 | | | | 0.7 | | | | 1.2 | | | | 0.7 | | | | 0.3 | | | | 0.8 | |
| | | | | | | | | | | | | | | |
| Total capital expenditures | | $ | 28.5 | | | $ | 20.1 | | | $ | 12.2 | | | $ | 12.8 | | | $ | 14.4 | | | $ | 27.9 | |
| | | | | | | | | | | | | | | |
The segment information provided below is classified based on geographic location of the Company’s subsidiaries:subsidiaries ($ in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 2008 | | 2007 | | 2006 | | | 2010 | | 2009 | | 2008 | |
| |
Net sales | | | | | | | | | | | | | | | | | | | | | | | | |
| United States | | $ | 545.9 | | | $ | 557.6 | | | $ | 481.9 | | | $ | 440.7 | | | $ | 417.0 | | | $ | 525.1 | |
| Europe | | | 379.8 | | | | 337.0 | | | | 271.0 | | | | 244.7 | | | | 299.2 | | | | 323.1 | |
| Canada | | | 33.1 | | | | 39.7 | | | | 39.8 | | | | 41.1 | | | | 34.2 | | | | 29.8 | |
| | | | | | | | | | | | | | | |
| | | $ | 958.8 | | | $ | 934.3 | | | $ | 792.7 | | | $ | 726.5 | | | $ | 750.4 | | | $ | 878.0 | |
| | | | | | | | | | | | | | | |
Long-lived assets | | | | | | | | | | | | | | | | | | | | | | | | |
| United States | | $ | 276.1 | | | $ | 226.8 | | | | | | | $ | 231.0 | | | $ | 203.7 | | | | | |
| Europe | | | 180.5 | | | | 228.8 | | | | | | | | 202.1 | | | | 239.3 | | | | | |
| Canada | | | 13.5 | | | | 16.7 | | | | | | | | 27.1 | | | | 9.2 | | | | | |
| Other | | | 5.9 | | | | 4.3 | | | | | | | | 1.2 | | | | 1.0 | | | | | |
| | | | | | | | | | | |
| | | $ | 476.0 | | | $ | 476.6 | | | | | | | $ | 461.4 | | | $ | 453.2 | | | | | |
| | | | | | | | | | | |
NOTE 16 — COMMITMENTS, GUARANTEES AND FAIR VALUES OF FINANCIAL INSTRUMENTS
At December 31, 20082010 and 2007,2009, the Company had outstanding standby letters of credit aggregating $34.0$29.6 million and $34.4$33.3 million, respectively, principally to act as security for retention levels related to casualty insurance policies and to guarantee the performance of subsidiaries that engage in export transactions to foreign governments and municipalities.
The Company guarantees the bank debt of the China Joint Venture up to a maximum of $12.5 million. The outstanding amount of the guaranteed debt at December 31, 2008 was $9.4 million. Prior to December 31, 2008, no charges associated with this guarantee had been incurred. In connection with the Company’s annual review of the market conditions and long range forecasts of the joint venture’s cash flows, the Company determined it was probable that it would be obligated to repay the bank debt of the joint venture. The Company recognized a $9.4 million liability for this debt guarantee recorded in short-term borrowings in the Consolidated Balance Sheet at December 31, 2008.
The Company issues product performance warranties to customers with the sale of its products. The specific terms and conditions of these warranties vary depending upon the product sold and country in which the Company does business, with warranty periods generally ranging from six monthsone to fiveten years. The Company estimates the costs that may be incurred under its basic limited warranty and records a liability in the amount of such costs at the time the sale of the related product is recognized. Factors that affect the Company’s warranty liability include the number of units under warranty from time to time, historical and anticipated rates of warranty claims, and costs per
58
FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ in millions, except per share data) — (Continued)
claim. The Company periodically assesses the adequacy of its recorded warranty liabilities and adjusts the amounts as necessary.
Changes in the Company’s warranty liabilities for the years ended December 31, 20082010 and 20072009 were as follows:follows ($ in millions):
| | | | | | | | | | | | | | | | | |
| | | 2008 | | 2007 | | | 2010 | | 2009 | |
| |
| Balance at January 1 | | $ | 5.9 | | | $ | 5.2 | | | $ | 6.2 | | | $ | 5.8 | |
| Provisions to expense | | | 9.2 | | | | 8.2 | | | | 7.5 | | | | 9.4 | |
| Actual costs incurred | | | (8.7 | ) | | | (7.5 | ) | | | (8.0 | ) | | | (9.0 | ) |
| | | | | | | | | | | |
| Balance at December 31 | | $ | 6.4 | | | $ | 5.9 | | | $ | 5.7 | | | $ | 6.2 | |
| | | | | | | | | | | |
The Company also provides residual value guarantees on vehicles sold to certain customers. Proceeds received in excess of the fair value of the guarantee are deferred and amortized into income ratably over the life of the guarantee. These transactions have been recorded as operating leases and liabilities equal to the fair value of the guarantees were recognized. The notional amounts of the residual value guarantees were $1.6 million and $2.1 million as of December 31, 2008 and 2007, respectively. No losses have been incurred as of December 31, 2008. The guarantees expire in 2009.
The following table summarizes the carrying amounts and fair values of the Company’s financial instruments at December 31, 2008:
| | | | | | | | | | | | | | | | | |
| | | 2008 | | | 2007 | |
| | | Notional
| | | Fair
| | | Notional
| | | Fair
| |
| | | Amount | | | Value | | | Amount | | | Value | |
| |
| Short-term debt — Note 4 | | $ | 12.6 | | | $ | 12.6 | | | $ | 2.6 | | | $ | 2.6 | |
| Long-term debt — Note 4* | | | 270.4 | | | | 273.7 | | | | 423.8 | | | | 427.5 | |
| Fair value swaps — Note 7 | | | 50.0 | | | | 1.7 | | | | 138.7 | | | | (1.3 | ) |
| Cash flow swaps — Note 7 | | | 60.0 | | | | (2.7 | ) | | | 135.0 | | | | (0.9 | ) |
| Foreign exchange contracts — Note 7 | | | 59.2 | | | | 0.3 | | | | 66.2 | | | | (3.2 | ) |
| | |
* | | Long term debt includes financial service borrowings for all periods presented, which is included in discontinued operations. |
The Dallas Fort Worth (“DFW”) airport gave Federal APD certain notices of non-performance and default, most recently in March 2008, regarding the $18.0 million contract for installation of a new parking and revenue control system at the airport, and DFW demanded that Federal APD cure its alleged non-performance. DFW also provided a copy of the non-performance and default letters to the Company’s surety carrier. The most recent non-performance and default claim relates principally to certain disagreements as to the timeliness of certain work under the contract and whether certain of Federal APD’s work has complied with contract specifications. Federal APD disputed that there was any basis under the contract for the non-performance or default as alleged by DFW. DFW terminated the contract effective July 29, 2008. Federal APD disputed that DFW was entitled to terminate the contract for cause and asserted that it was entitled to damages as a result of DFW’s conduct. DFW and Federal APD each filed a lawsuit against the other which were pending in the United States District Court for the Northern District of Texas, Dallas Division, asserting claims for breach of contract and other damages arising from the contract and its termination. In December 2008, the parties executed a settlement agreement resolving all disputes between them, including all claims asserted in the pending litigation, and all payment terms have been satisfied. The Company established reserves totaling $8.2 million in relation to this contract and settlement.
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FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
The Company has retained an environmental consultant to conduct an environmental risk assessment at its Pearland, Texas facility. The facility, which was previously used by the Company’s discontinued Pauluhn business, manufactured marine, offshore, and industrial lighting products. While the Company has not completed the risk assessment analysis, it appears probable the site will require remediation. An undiscounted estimate of the range of costs to remediate the site is $1.6 million to $2.6 million, depending upon the remediation approach and other factors. As of December 31, 2010, $2.6 million has been recorded, of which $1.9 million is included in liabilities of discontinued operations. The Company’s estimate may change in the near term as more information becomes available; however the costs are not expected to have a material adverse effect on the Company’s results of operations, financial position or liquidity.
| |
| NOTE 18 — | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ in millions, except per share data) — (Continued)
NOTE 17 — NEW ACCOUNTING PRONOUNCEMENTS
|
In October 2009, the FASB issued Accounting Standard Update (“ASU”)No. 2009-14,Topic 985- Certain Revenue Arrangements That Include Software Elements,which amended the accounting standards for revenue recognition to remove tangible products containing software components and non-software components that function together to deliver the products’ essential functionality from the scope of industry-specific software revenue recognition guidance.
In December 2007,October 2009, the FASB also issued FAS ASUNo. 141 (revised 2007), “Business Combinations” (“FAS 141(R)”), which expands the definition of a business and a business combination, requires the fair value of the purchase price of an acquisition including the issuance of equity securities to be determined on the acquisition date, requires that all assets, liabilities, contingent consideration, contingencies and in-process research and development costs of an acquired business be recorded at fair value at the acquisition date, requires that acquisition costs generally be expensed as incurred, requires that restructuring costs generally be expensed in periods subsequent to the acquisition date, and requires changes in accounting for deferred tax asset valuation allowances and acquired income tax uncertainties after the measurement period to impact income tax expense. The Company will be required to adopt FAS 141(R) on January 1, 2009. The Company expects FAS 141(R) may have a material impact on its results of operations or consolidated financial statements in periods subsequent to or concurrent with future acquisitions.
In December 2007, the FASB issued FAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements, an Amendment of ARB No. 51” (“FAS 160”)2009-13,Topic 605- Multiple-Deliverable Revenue Arrangement, which changes the accounting and reporting for minority interests such that minority interests will be recharacterized as noncontrolling interests and will belevel of evidence of standalone selling price required to be reported as a component of equity, and requires that purchases or sales of equity interests that do not resultseparate deliverables in a change in control bemultiple deliverable revenue arrangement by allowing a company to make its best estimate of the selling price of deliverables when more objective evidence of selling price is not available and eliminates the use of residual method. ASUNo. 2009-13 applies to multiple deliverable revenue arrangements that are not accounted for as equity transactionsunder other accounting pronouncements and uponretains the use of vendor-specific objective evidence of selling price (“VSOE”) if available and third-party evidence of selling price, when VSOE is unavailable.
ASUNo. 2009-14 and ASUNo. 2009-13 are effective prospectively for revenue arrangements entered into or materially modified in fiscal year beginning on or after June 15, 2010, with early adoption permitted. If adoption is elected in a lossperiod other than the beginning of control, requiresa fiscal year, the interest sold, as well as any interest retained,amendments in these standards must be applied retrospectively to be recorded at fair value with any gain or loss recognized in earnings.the beginning of the fiscal year. The Company is currently assessing the effects that ASUNo. 2009-14 and ASUNo. 2009-13will be requiredhave on its consolidated results of operations and financial condition.
No other new accounting pronouncements issued or effective during 2010 has had or is expected to adopt FAS 160 on January 1, 2009. The adoption of FAS 160 did not have a material impact on the Company’s operations or consolidated financial statements.Consolidated Financial Statements.
In March 2008, the FASB issued Statement of FAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities, an amendment of FAS 133” (“FAS 161”). This new standard requires enhanced disclosures for derivative instruments, including those used in hedging activities. It is effective for fiscal years and interim periods beginning after November 15, 2008, and will be applicable to the Company in the first quarter of fiscal 2009. The principal impact to the Company will be to require the Company to expand its disclosure regarding its derivative instruments.
60
| |
| NOTE 19 — | SELECTED QUARTERLY DATA (UNAUDITED) |
FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ in millions, except per share data) — (Continued)
NOTE 18 — SELECTED QUARTERLY DATA (UNAUDITED)
Effective January 1, 2004, theThe Company began reportingreports its interim quarterly periods on a 13-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 2008,2010, the Company’s interim quarterly periods ended April 3, July 3, October 2, and December 31; and in 2009, the Company’s interim quarterly periods ended March 29,28, June 28,27, September 2726, and December 31, respectively.
The Company identified certain adjustments related to the timing of recording revenue on certain arrangements primarily in the FSTech Group. The revenue related adjustments resulted in a decrease in previously reported revenue during the quarters ended April 3, July 3, and October 2, 2010 of $1.6 million, $2.5 million and $2.1 million, respectively. The revenue related adjustments resulted in a decrease in previously reported income (loss) from continuing operations during the quarters ended April 3, July 3, and October 2, 2010 of $1.4 million, $2.2 million, and $1.3 million, respectively. These prior interim period adjustments individually and in 2007, the Company’saggregate are not material to the financial results for previously issued interim quarterly periods ended March 31, June 30, September 29financial data in 2010. We have not filed an amendment to our previously issued quarters. The significant corrections included:
| | |
| • | The Company includes when and if available upgrade rights to its customers in connection with the sale of software and firmware of certain hardware. The Company did not defer the revenue for the fair value of the upgrade rights until the future obligation is fulfilled or the right to the specified upgrade expires. |
| • | The Company entered into certain transactions that contained extended payment terms and other conditions that would have required deferral of revenue. The Company recognized revenue before the risk and rewards of ownership transferred. |
84
| | |
| • | The Company entered into certain arrangements to provide customized systems which required the Company to make estimates relative to the extent of progress toward completion. The Company was unable to make reasonably dependable estimates resulting in recording profits prematurely. |
The previously reported results have also been restated to reflect discontinued operations as described in Note 13 and December 31, respectively.a change in accounting method as discussed in Notes 1 and 3.
The following is a summary of the restated quarterly results of operations, including income per share, for the Company for the quarterly periods of fiscal 20082010 and 2007. Restatements of previously reported amounts represent discontinued operations as described2009 ($ in Note 12.millions, except per share amount):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | For the Quarterly Period Ended | | | April 3, 2010 | | July 3, 2010 | | October 2, 2010 | | |
| | | 2008 | | 2007 | | | As Previously
| | | | As Previously
| | | | As Previously
| | | | December 31,
|
| | | March 29 | | June 28 | | September 27 | | December 31 | | March 31 | | June 30 | | September 29 | | December 31 | | | Reported | | As Restated | | Reported | | As Restated | | Reported | | As Restated | | 2010 |
| |
| Net sales | | $ | 226.4 | | | $ | 252.9 | | | $ | 225.6 | | | $ | 253.8 | | | $ | 211.1 | | | $ | 241.3 | | | $ | 226.8 | | | $ | 255.1 | | | $ | 166.2 | | | $ | 164.6 | | | $ | 198.1 | | | $ | 195.6 | | | $ | 181.7 | | | $ | 179.6 | | | $ | 186.7 | |
| Gross margin | | | 58.2 | | | | 66.4 | | | | 58.0 | | | | 69.2 | | | | 53.7 | | | | 65.1 | | | | 62.4 | | | | 67.2 | | | | 41.7 | | | | 40.3 | | | | 53.4 | | | | 51.2 | | | | 45.8 | | | | 44.5 | | | | 48.2 | |
| Income from continuing operations | | | 4.1 | | | | 7.7 | | | | 14.6 | | | | 4.9 | | | | 7.2 | | | | 11.7 | | | | 9.8 | | | | 11.0 | | |
| (Loss) gain from discontinued operations | | | (2.6 | ) | | | 0.6 | | | | (1.5 | ) | | | (0.7 | ) | | | (1.0 | ) | | | (0.8 | ) | | | (5.0 | ) | | | (3.2 | ) | |
| (Loss) gain on disposition | | | (86.4 | ) | | | (21.7 | ) | | | 1.1 | | | | (15.7 | ) | | | 24.5 | | | | 0.2 | | | | (0.2 | ) | | | 0.7 | | |
| (Loss) income from continuing operations | | | | (2.6 | ) | | | (4.0 | ) | | | 1.7 | | | | (0.5 | ) | | | 3.5 | | | | 2.2 | | | | (158.4 | ) |
| (Loss) gain from discontinued operations and disposal | | | | (1.0 | ) | | | (1.0 | ) | | | (2.2 | ) | | | (2.2 | ) | | | (1.0 | ) | | | (1.0 | ) | | | (10.8 | ) |
| Net (loss) income | | | (84.9 | ) | | | (13.4 | ) | | | 14.2 | | | | (11.5 | ) | | | 30.7 | | | | 11.1 | | | | 4.6 | | | | 8.5 | | | | (3.6 | ) | | | (5.0 | ) | | | (0.5 | ) | | | (2.7 | ) | | | 2.5 | | | | 1.2 | | | | (169.2 | ) |
| Per share data — diluted: Income from continuing operations | | $ | 0.09 | | | $ | 0.16 | | | $ | 0.31 | | | $ | 0.10 | | | $ | 0.15 | | | $ | 0.25 | | | $ | 0.21 | | | $ | 0.23 | | |
| (Loss) income from discontinued operations | | | (1.86 | ) | | | (0.44 | ) | | | (0.01 | ) | | | (0.34 | ) | | | 0.49 | | | | (0.02 | ) | | | (0.12 | ) | | | (0.05 | ) | |
| Per share data — diluted: (Loss) earnings from continuing operations | | | $ | (0.05 | ) | | $ | (0.08 | ) | | $ | 0.03 | | | $ | (0.01 | ) | | $ | 0.06 | | | $ | 0.04 | | | $ | (2.55 | ) |
| (Loss) earnings from discontinued operations | | | | (0.02 | ) | | | (0.02 | ) | | | (0.04 | ) | | | (0.04 | ) | | | (0.02 | ) | | | (0.02 | ) | | | (0.17 | ) |
| Weighted Average Common Shares Outstanding: | | | | | | | | | | | | | | | | | | | | | | |
| Basic | | | | 49.2 | | | | 49.2 | | | | 57.1 | | | | 57.1 | | | | 62.2 | | | | 62.2 | | | | 62.2 | |
| Diluted | | | | 49.2 | | | | 49.2 | | | | 57.2 | | | | 57.2 | | | | 62.3 | | | | 62.3 | | | | 62.2 | |
| Net (loss) income | | | (1.77 | ) | | | (0.28 | ) | | | 0.30 | | | | (0.24 | ) | | | 0.64 | | | | 0.23 | | | | 0.09 | | | | 0.18 | | | | (0.07 | ) | | | (0.10 | ) | | | (0.01 | ) | | | (0.05 | ) | | | 0.04 | | | | 0.02 | | | | (2.72 | ) |
| Dividends paid per share | | | 0.06 | | | | 0.06 | | | | 0.06 | | | | 0.06 | | | | 0.06 | | | | 0.06 | | | | 0.06 | | | | 0.06 | | | | 0.06 | | | | 0.06 | | | | 0.06 | | | | 0.06 | | | | 0.06 | | | | 0.06 | | | | 0.06 | |
| Market price range per share High | | | 14.37 | | | | 14.70 | | | | 17.50 | | | | 13.48 | | | | 17.00 | | | | 16.78 | | | | 16.48 | | | | 17.00 | | |
| Market price range per share | | | | | | | | | | | | | | | | | | | | | | |
| High | | | | 9.50 | | | | 9.50 | | | | 10.30 | | | | 10.30 | | | | 6.95 | | | | 6.95 | | | | 7.16 | |
| Low | | | 9.10 | | | | 11.53 | | | | 10.91 | | | | 5.10 | | | | 14.29 | | | | 15.19 | | | | 12.71 | | | | 10.82 | | | | 6.02 | | | | 6.02 | | | | 5.58 | | | | 5.58 | | | | 4.91 | | | | 4.91 | | | | 5.22 | |
| | | | | | | | | | | | | | | | | |
| | | 2009 | |
| | | March 28 | | | June 27 | | | September 26 | | | December 31 | |
| |
| Net sales | | $ | 184.4 | | | $ | 198.3 | | | $ | 162.1 | | | $ | 205.6 | |
| Gross margin | | | 46.5 | | | | 52.0 | | | | 40.3 | | | | 54.3 | |
| Income from continuing operations | | | 0.6 | | | | 4.7 | | | | 5.1 | | | | 9.4 | |
| Gain (loss) from discontinued operations and disposal | | | 0.4 | | | | (9.6 | ) | | | (0.8 | ) | | | 13.3 | |
| Net income (loss) | | | 1.0 | | | | (5.0 | ) | | | 4.4 | | | | 22.7 | |
| Per share data — diluted: Earnings from continuing operations | | $ | 0.01 | | | $ | 0.10 | | | $ | 0.11 | | | $ | 0.19 | |
| Earnings (loss) from discontinued operations | | | 0.01 | | | | (0.20 | ) | | | (0.02 | ) | | | 0.27 | |
| Net income (loss) | | | 0.02 | | | | (0.10 | ) | | | 0.09 | | | | 0.46 | |
| Dividends paid per share | | | 0.06 | | | | 0.06 | | | | 0.06 | | | | 0.06 | |
| Market price range per share | | | | | | | | | | | | | | | | |
| High | | | 9.28 | | | | 9.17 | | | | 9.30 | | | | 7.80 | |
| Low | | | 3.73 | | | | 4.93 | | | | 6.76 | | | | 5.43 | |
The Company recorded $3.9$85.0 million of after-tax chargesvaluation allowance in the fourth quarter of 2010 to income fromtax provision on continuing operations into reflect the quarter ended December 31, 2008 associated with its investment in a joint venture in China.estimated amount of domestic deferred tax assets that may not be realized.
6185
| |
| Item 9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. |
None.
| |
| Item 9A. | Controls and Procedures. |
| |
| (a) | Evaluation of Disclosure Controls and Procedures |
The Company carried out an evaluation, under the supervision and with the participation of its management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s “disclosure controls and procedures” (as defined in the Exchange ActRule 13a-15(e)) as of the end of the period covered by this report. report.. The Company completed our acquisitions of VESystems, LLC and Sirit Inc. on March 2, 2010 and March 5, 2010, respectively. As permitted by U.S. Securities and Exchange Commission regulations, management’s assessment as of December 31, 2010 did not include the internal controls of VESystems, LLC and Sirit Inc., which are included in our consolidated financial statements as of December 31, 2010. The combined total assets and net assets of VESystems, LLC and Sirit Inc. are $97.6 million and $90.6 million, respectively, as of December 31, 2010, and the combined net revenue and net loss for the year ended December 31, 2010 were $30.2 million and $(40.7) million, respectively.
Based uponon that evaluation, which excluded an assessment of internal control over financial reporting of the acquired operations of VESystems, LLC and Sirit Inc., the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective.were effective as of December 31, 2010.
| |
| (b) | Management’s Annual Report on Internal Control over Financial Reporting and Attestation Report of the Registered Public Accounting Firm |
The Company’s management is responsible for establishing and maintaining an adequate system of internal control over financial reporting, as defined in the Exchange ActRule 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, 2008,2010, the Company’s internal control over financial reporting is effective.
Ernst & Young LLP, an independent registered public accounting firm, has audited the Consolidated Financial Statements included in this Annual Report onForm 10-K and, as part of their audit, has issued its report, included herein, on the effectiveness of the Company’s internal control over financial reporting. See “Report of Independent Registered Public Accounting Firm” on page 23.
| |
| (c) | Changes in Internal Control over Financial Reporting |
From time to time, the Company may make changes aimed at enhancing the effectiveness of the controls and to ensure that the systems evolve with the business. In the fourth quarter of 2010, Diane Van Steenbergen was appointed to the position of Vice President of Finance for the FSTech Group. There were no changes in the Company’s internal control over financial reporting that occurred during the Company’s most recently completed fiscal quarter that have materially affected, or isare reasonably likely to materially affect, the Company’s internal control over financial reporting.
| |
| Item 9B. | Other Information. |
None.
86
PART III
| |
| Item 10. | Directors, Executive Officers and Corporate Governance. |
Information regarding directors and nominees for directors is set forth in the Company’s Proxy Statement for its 20092011 Annual Meeting of Stockholders and is incorporated herein by reference. For information concerning
The following is a list of the Company’s executive officers, see “Executive Officerstheir ages, business experience and positions and offices as of February 1, 2011:
Dennis J. Martin, age 60, was appointed President and Chief Executive Officer in October 2010 and was appointed to the Board of Directors in March 2008. Mr. Martin has been an independent business consultant since 2005 and was the Chairman, President and Chief Executive Officer of General Binding Corporation from 2001 to 2005.
Charles F. Avery, Jr., age 46, was appointed Vice President, Information Technology and Controller in March 2010. Mr. Avery was Vice President Finance for the Environmental Solutions Group from 2005 to March 2010.
William G. Barker, III, age 52, was appointed Senior Vice President and Chief Financial Officer in December 2008. Mr. Barker was Senior Vice President and Chief Financial Officer of Sun-Times Media Group from 2007 to 2008. He was Vice President, Finance and Strategy, Gatorade of PepsiCo, Inc. from 2001 to 2007.
David E. Janek, age 47, was appointed President of the Registrant” set forthSafety and Security Systems Group in Part I hereof. March 2010. Mr. Janek was Vice President and Controller from August 2008 to February 2010. Mr. Janek was Vice President and Treasurer from 2006 to 2008 and was Vice President Finance for the Safety and Security Systems Group from 2002 to 2006.
Esa Peltola, age 59, was appointed President of Bronto Skylift Oy Ab in July 2007. Mr. Peltola was Managing Director of Bronto Skylift from 1998 to 2007.
Manfred A. Rietsch, age 69, was appointed President of the Federal Signal Technologies Group in April 2010. Mr. Rietsch was the founder and Chief Executive Officer of VESystems, LLC, established in 2000.
Jennifer L. Sherman, age 46, was appointed Chief Administrative Officer, Senior Vice President, General Counsel and Secretary in October 2010. Ms. Sherman was Senior Vice President, Human Resources, General Counsel and Secretary from April 2008 to July 2010. Ms. Sherman was Vice President, General Counsel and Secretary from 2004 to March 2008 and was Deputy General Counsel and Assistant Secretary from 1998 to 2004.
Mark D. Weber, age 53, was appointed President of the Environmental Solutions Group in April 2003. Mr. Weber was Vice President Sweeper Products for the Environmental Solutions Group from 2002 to 2003, and General Manager of Elgin Sweeper Company from 2001 to 2002.
These officers hold office until the next annual meeting of the Board of Directors following their election and until their successors have been elected and qualified.
There are no family relationships among any of the foregoing executive officers
Information regarding Compliance with Section 16(a) of the Exchange Act is set forth in the Company’s 20092011 Proxy Statement under the caption “Section 16(a) Beneficial Ownership Reporting Compliance” and is incorporated herein by reference. Information regarding the Company’s Audit Committee, CorporateNominating and Governance Committee, Nominating Committee, and Compensation and Benefits Committee are set forth in the Company’s 20092011 Proxy Statement under the caption “Information Concerning the Board of Directors” and is incorporated herein by reference.
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 athttp://www.federalsignal.com. The Company intends to satisfy its disclosure requirements regarding amendments to or waivers from its code of ethics by posting such information on this website. The charters of the Audit Committee, Nominating and Corporate Governance Committee, Nominating Committee and
62
Compensation and Benefits Committee of the Company’s Board of Directors are available on the Company’s website and are also available in print free of charge.
87
| |
| Item 11. | Executive Compensation. |
The information contained under the captions “Information Concerning the Board of Directors”, “Compensation Committee Interlocks and Insider Participation”, “Compensation Discussion and Analysis”, “Compensation and Benefits Committee Report” and “Executive Compensation in the Last Fiscal Year” of the Company’s 20092011 Proxy Statement is incorporated herein by reference.
| |
| Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters. |
Information regarding security ownership of certain beneficial owners, of all directors and nominees, of the named executive officers, and of directors and executive officers as a group is set forth in the Company’s 20092011 Proxy Statement under the caption “Ownership of Our Common Stock” and is incorporated herein by reference. Information regarding our equity compensation plans is set forth in the Company’s 20092011 Proxy Statement under the caption “Equity Compensation Plan Information” and is incorporated herein by reference.
| |
| Item 13. | Certain Relationships and Related Transactions, and Director Independence. |
Information regarding certain relationships is hereby incorporated by reference from the Company’s 20092011 Proxy Statement under the heading “Information Concerning the Board of Directors” and under the heading “Certain Relationships and Related Party Transactions”.
| |
| Item 14. | Principal Accountant Fees and Services. |
Information regarding principal accountant fees and services is incorporated by reference from the Company’s 20092011 Proxy Statement under the heading “Accounting Information”Fees”.
PART IV
| |
| Item 15. | Exhibits and Financial Statement Schedules. |
(a) 1. Financial Statements
The following consolidated financial statements of Federal Signal Corporation and Subsidiaries and the report of the Independent Registered Public Accounting Firm contained under Item 8 of thisForm 10-K are incorporated herein by reference:
Consolidated Balance Sheets as of December 31, 20082010 and 20072009
Consolidated Statements of Operations for the Years Ended December 31, 2008, 20072010, 2009 and 20062008
Consolidated Statements of Shareholders’ Equity for the Years Ended December 31, 2008, 20072010, 2009 and 20062008
Consolidated Statements of Cash Flows for the Years Ended December 31, 2008, 20072010, 2009 and 20062008
Notes to Consolidated Financial Statements
2. Financial Statement Schedules
The following consolidated financial statement schedule of Federal Signal Corporation and Subsidiaries, for the three years ended December 31, 20082010 is filed as a part of this reportReport in response to Item 15(a)(2):
Schedule II — Valuation and Qualifying Accounts
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.
6388
Signatures
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
FEDERAL SIGNAL CORPORATION
| | |
| | By: | /s/ William H. OsborneDennis J Martin |
William H. OsborneDennis J. Martin
President and Chief Executive Officer
(Principal Executive Officer)
February 27, 2009Date: March 16, 2011
6489
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below, as of February 27, 2009,March 16, 2011, by the following persons on behalf of the Company and in the capacities indicated.
| | | | | |
| | | |
/s/ William H. OsborneDennis J. Martin
William H. OsborneDennis J. Martin | | President and Chief
Executive Officer
Board of Director
(Principal Executive Officer) |
| | | |
/s/ William G. Barker
William G. Barker | | Senior Vice President and Chief
Financial Officer
(Principal Financial Officer) |
| | | |
/s/ David E. JanekCharles F. Avery, Jr.
David E. JanekCharles F. Avery, Jr. | | Vice President and Controller
(Principal Accounting Officer) |
| | | |
/s/ James C. JanningE. Goodwin
James C. JanningE. Goodwin | | Chairman and Director |
| | | |
/s/ Charles R. Campbell
Charles R. Campbell | | Director |
| | | |
/s/ Robert M. Gerrity
Robert M. Gerrity | | Director |
| | |
/s/ Robert S. Hamada
Robert S. Hamada | | Director |
| | |
/s/ Paul W. Jones
Paul W. Jones | | Director |
| | |
/s/ John F. McCartney
John F. McCartney | | Director |
| | | |
/s/ Brenda L. Reichelderfer
Brenda L. Reichelderfer | | Director |
| | | |
/s/ James E. GoodwinJoseph R. Wright
James E. GoodwinJoseph R. Wright | | Director |
| | | |
/s/ Dennis J. MartinDominic A. Romeo
Dennis J. MartinDominic A. Romeo | | Director |
| | | |
/s/ JosephRichard R. WrightMudge
JosephRichard R. WrightMudge | | Director |
6590
SCHEDULE II
FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
Valuation and Qualifying Accounts
For the Years Ended December 31, 2008, 20072010, 2009 and 20062008
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | Deductions | | | | | | | | | Deductions | | | |
| | | | | Additions | | Accounts
| | | | | | | Additions | | Accounts
| | | |
| | | Balance at
| | Charged to
| | Written off
| | Balance
| | | Balance at
| | Charged to
| | Written off
| | Balance
| |
| | | Beginning
| | Costs and
| | Net of
| | at End
| | | Beginning
| | Costs and
| | Net of
| | at End
| |
Description | | of Year | | Expenses | | Recoveries | | of Year | | | of Year | | Expenses | | Recoveries | | of Year | |
| | | ($ in millions) | | | | | ($ in millions) | | | |
| |
| Allowance for doubtful accounts: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year ended December 31, 2010: | | | $ | 2.4 | | | $ | 1.2 | | | $ | (0.8 | ) | | $ | 2.8 | |
| | | | | | �� | | | |
| Year ended December 31, 2009: | | | $ | 2.0 | | | $ | 0.9 | | | $ | (0.5 | ) | | $ | 2.4 | |
| | | | | | | |
| Year ended December 31, 2008: | | $ | 3.8 | | | $ | 7.2 | | | $ | (9.0 | ) | | $ | 2.0 | | | $ | 3.6 | | | $ | 7.2 | | | $ | (8.8 | ) | | $ | 2.0 | |
| | | | | | | | | | | |
| Year ended December 31, 2007: | | $ | 2.0 | | | $ | 1.9 | | | $ | (0.1 | ) | | $ | 3.8 | | |
| Inventory obsolescence: | | | | | | | | | | | | | | | | | |
| Year ended December 31, 2010: | | | $ | 7.6 | | | $ | 2.4 | | | $ | (2.3 | ) | | $ | 7.7 | |
| | | | | | | | | | | |
| Year ended December 31, 2006: | | $ | 1.6 | | | $ | 0.8 | | | $ | (0.3 | ) | | $ | 2.0 | | |
| Year ended December 31, 2009: | | | $ | 5.9 | | | $ | 4.6 | | | $ | (2.9 | ) | | $ | 7.6 | |
| | | | | | | | | | | |
| Inventory obsolescence: | | | | | | | | | | | | | | | | | |
| Year ended December 31, 2008: | | $ | 6.9 | | | $ | 2.4 | | | $ | (3.2 | ) | | $ | 6.1 | | | $ | 6.8 | | | $ | 2.2 | | | $ | (3.1 | ) | | $ | 5.9 | |
| | | | | | | | | | | |
| Year ended December 31, 2007: | | $ | 4.8 | | | $ | 2.8 | | | $ | (0.7 | ) | | $ | 6.9 | | |
| Product liability and workers’ compensation: | | | | | | | | | | | | | | | | | |
| Year ended December 31, 2010: | | | $ | 5.9 | | | $ | 6.4 | | | $ | (4.1 | ) | | $ | 8.2 | |
| | | | | | | | | | | |
| Year ended December 31, 2006: | | $ | 4.4 | | | $ | 2.0 | | | $ | (1.6 | ) | | $ | 4.8 | | |
| Year ended December 31, 2009: | | | $ | 5.8 | | | $ | 3.5 | | | $ | (3.4 | ) | | $ | 5.9 | |
| | | | | | | | | | | |
| Product liability and workers’ compensation: | | | | | | | | | | | | | | | | | |
| Year ended December 31, 2008: | | $ | 6.7 | | | $ | 2.9 | | | $ | (3.8 | ) | | $ | 5.8 | | | $ | 6.7 | | | $ | 2.9 | | | $ | (3.8 | ) | | $ | 5.8 | |
| | | | | | | | | | | |
| Year ended December 31, 2007: | | $ | 7.7 | | | $ | 3.2 | | | $ | (4.2 | ) | | $ | 6.7 | | |
| Income tax valuation allowances: | | | | | | | | | | | | | | | | | |
| Year ended December 31, 2010: | | | $ | 25.2 | | | $ | 86.0 | | | $ | (2.1 | ) | | $ | 109.1 | |
| | | | | | | | | | | |
| Year ended December 31, 2006: | | $ | 7.6 | | | $ | 4.3 | | | $ | (4.2 | ) | | $ | 7.7 | | |
| Year ended December 31, 2009: | | | $ | 32.5 | | | $ | 0.1 | | | $ | (7.4 | ) | | $ | 25.2 | |
| | | | | | | | | | | |
| Income tax valuation allowances: | | | | | | | | | | | | | | | | | |
| Year ended December 31, 2008: | | $ | 15.9 | | | $ | 26.7 | | | $ | (8.7 | ) | | $ | 33.9 | | | $ | 14.1 | | | $ | 26.7 | | | $ | (8.3 | ) | | $ | 32.5 | |
| | | | | | | | | | | |
| Year ended December 31, 2007: | | $ | 3.9 | | | $ | 14.2 | | | $ | (2.2 | ) | | $ | 15.9 | | |
| | | | | | | |
| Year ended December 31, 2006: | | $ | 3.1 | | | $ | 1.1 | | | $ | (0.3 | ) | | $ | 3.9 | | |
| | | | | | | |
| Warranty liability: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
The changes in the Company’s warranty liabilities are analyzed in Note 1617 — Commitments, Guarantees and Fair Values of Financial Instruments.Commitments.
6691
EXHIBIT INDEX
The following exhibits, other than those incorporated by reference, have been included in the Company’sForm 10-K filed with the Securities and Exchange Commission. The Company shall furnish copies of these exhibits upon written request to the Corporate Secretary at the address given on the cover page. (* denotes exhibit filed in thisForm 10-K)
| | | | | | | |
| 3 | .3. | | a. | | Restated Certificate of Incorporation of the Company. Incorporated by reference to Exhibit (3)(a)3.1 to the Company’sForm 10-K8-K for the year ended December 31, 1991.filed April 30, 2010. |
| | | | b. | | Amended and Restated By-laws of the Company, as further amended December 5, 2008.Company. Incorporated by reference to Exhibit 3.b3.2 to the Company’sForm 8-K for December 5, 2008.filed April 30, 2010. |
| 4 | .4. | | a. | | Second Amended and Restated Credit Agreement dated April 25, 2007 among the Company, Bank of Montreal and other third party lenders named therein.therein, dated April 25, 2007. Incorporated by reference to Exhibit 10.3 to the Company’sForm 10-Q for the quarter ended September 30, 2007. |
| | | | | b. | | Supplemental Agreement to the Second Amended and Restated Credit Agreement among Federal Signal Corporation,the Company, Federal Signal of Europe B.V. y CIA, SC, and Bank of Montreal, Ireland and other third party lenders named therein, dated September 6, 2007. Incorporated by reference to Exhibit (4)(c)4.C to the Company’sForm 10-K for the year ended December 31, 20072007. |
| | | | c. | | Second Amendment and Waiver to the Second Amended and Restated Credit Agreement, dated March 27, 2008. Incorporated by reference to Exhibit 10.2 to the Company’sForm 10-Q for the quarter ended March 31, 2008. |
| | 10 | .d. | | Global Amendment to Note Purchase Agreements between the Company and the holders of senior notes named therein, dated April 27, 2009. Incorporated by reference to Exhibit 10.1 to the Company’sForm 10-Q for the quarter ended March 31, 2009. |
| | e. | | Third Amendment and Waiver to the Second Amended and Restated Credit Agreement, dated March 15, 2011.* |
| | f. | | Second Global Amendment and Waiver to the Note Purchase Agreements, dated March 15, 2011.* |
| 10. | | a. | | The 1996 Stock Benefit Plan, as amended. Incorporated by reference to Exhibit 10.A10.(A) to the Company’sForm 10-K for the year ended December 31, 2006.2003.(1) |
| | | | b. | | Supplemental Pension Plan. Incorporated by reference to Exhibit 10.C to the Company’sForm 10-K for the year ended December 31, 1995.(1) |
| | | | c. | | Executive Disability, Survivor and Retirement Plan. Incorporated by reference to Exhibit 10.D to the Company’sForm 10-K for the year ended December 31, 1995.(1) |
| | | | | d. | | Director Deferred Compensation Plan. Incorporated by reference to Exhibit 10.H to the Company’sForm 10-K for the year ended December 31, 1997.(1) |
| | | | | e. | | 2005 Executive Incentive Compensation Plan. Incorporated by reference to Appendix B to the Company’s Proxy Statement dated March 22, 2005 filed on Schedule 14A.(1) |
| | | | f. | | Pension Agreement with Stephanie K. Kushner. Incorporated by reference to Exhibit 10.G to the Company’sForm 10-K for the year ended December 31, 2002.(1) |
| | | f. | | Savings Restoration Plan, as amended and restated January 1, 2007. Incorporated by reference to Exhibit 10.FF to the Company’sForm 10-K for the year ended December 31, 2008.(1) |
| | | g. | | Executive Incentive PerformanceFirst Amendment of the Federal Signal Corporation Savings Restoration Plan. Incorporated by reference to Appendix CExhibit 10.MM to the Company’s Proxy Statement dated March 22, 2005 filed on Schedule 14A.Form 10-K for the year ended December 31, 2008.(1) |
| | h. | | Second Amendment to Federal Signal Corporation Savings Restoration Plan. Incorporated by reference to Exhibit 10.NN to the Company’sForm 10-K for the year ended December 31, 2008.(1) |
| | i. | | Third Amendment to Federal Signal Corporation Savings Restoration Plan. Incorporated by reference to Exhibit 10.OO to the Company’sForm 10-K for the year ended December 31, 2008.(1) |
| | j. | | Severance Policy for Executive Employees, as amended January 1, 2008. Incorporated by reference to Exhibit 10.GG to the Company’sForm 10-K for the year ended December 31, 2008.(1) |
| | k. | | Form of 2008 ExecutiveChange-In-Control Severance Agreement (Tier 1) with certain executive officers. Incorporated by reference to Exhibit 10.HH to the Company’sForm 10-K for the year ended December 31, 2008.(1) |
| | l. | | Form of 2008 ExecutiveChange-In-Control Severance Agreement (Tier 2) with and certain executive officers. Incorporated by reference to Exhibit 10.II to the Company’sForm 10-K for the year ended December 31, 2008.(1) |
92
| | | | | h. |
| | Release and Severancem. | | Employment Letter Agreement between the Company and Marc F. Gustafson, effective July 17, 2007.William G. Barker, III dated November 10, 2008. Incorporated by reference to Exhibit 10.410.JJ to the Company’sForm 10-K for the year ended December 31, 2008.(1) |
| | n. | | Forms of Equity Award Agreements. Incorporated by reference to Exhibit 10.LL to the Company’sForm 10-K for the year ended December 31, 2008, Exhibit 10.2 to the Company’sForm 10-Q for the quarter ended September 30, 2007.(1) |
| | | | i. | | Consulting Letter Agreement between the CompanyMarch 31, 2009 and Marc F. Gustafson, effective July 17, 2007. Incorporated by reference to Exhibit 10.410 to the Company’sForm 10-Q for the quarter ended SeptemberJune 30, 2007.2010.(1) |
| | | o. | | j. | | Stock Purchase Agreement between the Company and Alan K. Sefton dated August 6, 2007.Short Term Incentive Bonus Plan. Incorporated by reference to Exhibit 10.1 to the Company’sForm 10-Q8-K for the quarter ended September 30, 2007.filed on February 26, 2009.(1) |
| | | p. | | k. | | Share Purchase Agreement between Alan Keith Sefton andamong Fayat, Federal Signal of Europe B.V. y CIA, SC and the other parties named therein.Company, dated July 16, 2009. Incorporated by reference to Exhibit 10.2 to the Company’sForm 10-Q for the quarter ended SeptemberJune 30, 2007.2009. |
| | | q. | | l.Arrangement Agreement between the Company and 1815315 Ontario Limited and Sirit Inc., dated January 13, 2010. Incorporated by reference to Exhibit 10.1 to the Company’sForm 8-K filed January 15, 2010. |
| | r. | | Release and Severance Agreement between the Company and Robert D. Welding,David R. McConnaughey, dated January 21, 2008.20, 2010. Incorporated by reference to Exhibit (10)(l) to10.00 of the Company’sForm 10-K for the year ended December 31, 2007.filed February 26, 2010.(1) |
| | | s. | | m. | | EmploymentRelease and Severance Agreement by and between the Company and William H. Osborne, dated September 15, 2008.Osborne. Incorporated by reference to Exhibit 10.1 to the Company’sForm 8-K filed September 18, 2008.November 3, 2010.(1) |
67
| | | | | | |
| | | t. | | n. | | Global Settlement Agreement between and among the Company and the Ramius Group, dated March 12, 2008.law firm of Cappelli Mustin LLC, including each attorney with Cappelli Mustin. Incorporated by reference to Exhibit 1010.1 to the Company’sForm 8-K filed March 13, 2008.January 10, 2011. |
| | | u. | | o. | | Release andForm of 2010 ExecutiveChange-In-Control Severance Agreement between the Company and Kimberly L. Dickens, dated March 19, 2008.with certain executive officers (Tier 1). Incorporated by reference to Exhibit 10.1 to the Company’sForm 10-Q for the quarter ended March 31, 2008.2010.(1) |
| | | v. | | p. | | Stock PurchaseForm of 2010 ExecutiveChange-In-Control Severance Agreement among Connell Limited Partnership, Federal Signal Corporation, and Federal Signal of Europe B.V., dated April 3, 2008. Incorporated by reference to Exhibit 10.3 to the Company’sForm 10-Q for the quarter ended March 31, 2008. |
| | | | q. | | Tax-Exempt Lease Purchase Agreement (Elgin Sweeper Company) between Elgin Sweeper Company and Banc of America Public Capital Corp dated June 27, 2008. Incorporated by reference to Exhibit 10.1 to the Company’sForm 10-Q for the quarter ended June 30, 2008. |
| | | | r. | | Guaranty and Payment Agreement (Elgin Sweeper Company) Federal Signal Corporation in favor of Banc of America Public Capital Corp dated June 27, 2008.with certain executive officers (Tier 2). Incorporated by reference to Exhibit 10.2 to the Company’sForm 10-Q for the quarter ended June 30, 2008.March 31, 2010.(1) |
| | | w. | | s. | | Tax-Exempt Lease PurchaseEmployment Agreement(E-One New York, Inc.) betweenE-One New York, Inc. the Company and Banc of America Public Capital CorpManfred Rietsch, dated June 27, 2008.2010. Incorporated by reference to Exhibit 10.3 to the Company’sForm 10-Q for the quarter ended June 30, 2008. |
| | | | t. | | Guaranty and Payment Agreement(E-One New York, Inc.) by Federal Signal Corporation in favor of Banc of America Public Capital Corp dated June 27, 2008. Incorporated by reference to Exhibit 10.4 to the Company’sForm 10-Q for the quarter ended June 30, 2008.March 31, 2010.(1) |
| | | | u. | | Tax-Exempt Lease Purchase Agreement(E-One, Inc.) amongE-One, Inc., Federal Signal Corporation and Banc of America Public Capital Corp dated June 27, 2008. Incorporated by reference to Exhibit 10.5 to the Company’sForm 10-Q for the quarter ended June 30, 2008. |
| | | | v. | | Guaranty and Payment Agreement(E-One, Inc.) by Federal Signal Corporation in favor of Banc of America Public Capital Corp dated June 27, 2008. Incorporated by reference to Exhibit 10.6 to the Company’sForm 10-Q for the quarter ended June 30, 2008. |
| | | | w. | | Tax-Exempt Lease Purchase Agreement (Federal Signal Corporation) between Federal Signal Corporation and Banc of America Public Capital Corp dated June 27, 2008. Incorporated by reference to Exhibit 10.7 to the Company’sForm 10-Q for the quarter ended June 30, 2008. |
| | | | x. | | Tax-Exempt Lease Purchase Agreement (FS Depot, Inc.) between FS Depot, Inc. and Banc of America Public Capital Corp dated June 27, 2008.2005 Executive Incentive Compensation Plan (2010 Restatement). Incorporated by reference to Exhibit 10.8Appendix B to the Company’sForm 10-Q for the quarter ended June 30, 2008. Definitive Proxy Statement filed on Schedule 14A filed March 25, 2010.(1) |
| | | | y. | | Guaranty and Payment Agreement (FS Depot, Inc.) by Federal Signal Corporation in favor of Banc of America Public Capital Corp dated June 27, 2008.Executive Incentive Performance Plan, as amended and restated. Incorporated by reference to Exhibit 10.9Appendix C to the Company’sForm 10-Q for the quarter ended June 30, 2008. Definitive Proxy Statement filed on Schedule 14A filed March 25, 2010.(1) |
| | | | z. | | Tax-Exempt Lease PurchaseRelease and Severance Agreement (Vactor Manufacturing, Inc.)by and between Vactor Manufacturing, Inc.the Company and Banc of America Public Capital CorpJennifer M. Erfurth, dated June 27, 2008. Incorporated by reference to Exhibit 10.10 to the Company’sForm 10-Q for the quarter ended June 30, 2008.January 7, 2011.(1)* |
| | | | aa. | | GuarantyRelease and PaymentSeverance Agreement (Vactor Manufacturing, Inc.) by Federal Signal Corporation in favorand between the Company and Fred H. Lietz dated January 7, 2011.(1)* |
| 12. | | | | Statement re Computation of BancRatio of America Public Capital Corp dated June 27, 2008.Earnings to Fixed Charges. Incorporated by reference to Exhibit 10.1112.1 to the Company’sForm 10-QS-3 for the quarter ended June 30, 2008.filed March 18, 2010. |
| 14. | | | | bb. | | AgreementCode of PurchaseEthics for Chief Executive Officer and Sale between Federal Signal Corporation and Centerpoint Properties Trust dated July 2, 2008.Senior Financial Officers, as amended. Incorporated by reference to Exhibit 10.1214 to the Company’sForm 10-Q10-K for the quarteryear ended June 30, 2008.December 31, 2003. |
| 21. | | | | cc. | | Lease (Elgin) between Centerpoint Properties Trust and Elgin Sweeper Company dated July 2, 2008. Incorporated by reference to Exhibit 10.13 toSubsidiaries of the Company’sForm 10-Q for the quarter ended June 30, 2008.Company.* |
| 23. | | | | dd. | | Lease (University Park) between Centerpoint Properties Trust and Federal Signal Corporation dated July 2, 2008. Incorporated by reference to Exhibit 10.14 to the Company’sForm 10-Q for the quarter ended June 30, 2008.Consent of Independent Registered Public Accounting Firm.* |
| 31.1 | | | | ee. | | Management Incentive Plan.CEO Certification under Section 302 of the Sarbanes-Oxley Act.*(1) |
| 31.2 | | | | ff.CFO Certification under Section 302 of the Sarbanes-Oxley Act.* |
| 32.1 | | Savings Restoration Plan, as amended and Restated January 1, 2007. | | CEO Certification of Periodic Report under Section 906 of the Sarbanes-Oxley Act.*(1) |
| 32.2 | | | | CFO Certification of Periodic Report under Section 906 of the Sarbanes-Oxley Act.* |
| 99.1 | | | | Press Release* |
| 99.2 | | | | Q4 Earnings Call Presentation Slides.* |
68
| | | | | | | |
| | | | | gg. | | Severance Policy for Executive Employees, as amended January, 2008.*(1) |
| | | | | hh. | | Form of ExecutiveChange-In-Control Severance Agreement (Tier 1) with William G. Barker, III and certain other executive officers.*(1) |
| | | | | ii. | | Form of ExecutiveChange-In-Control Severance Agreement (Tier 2) with John A. DeLeonardis and certain other executive officers.*(1) |
| | | | | jj. | | Employment Letter Agreement between the Company and William G. Barker, III dated November 10, 2008.*(1) |
| | | | | kk. | | Release and Severance Agreement between the Company and Stephanie K. Kushner, dated December 30, 2008.*(1) |
| | | | | ll. | | Forms of Equity Award Agreements*(1) |
| | | | | mm. | | First Amendment of the Federal Signal Corporation Savings Restoration Plan.*(1) |
| | | | | nn. | | Second Amendment to Federal Signal Corporation Savings Restoration Plan.*(1) |
| | | | | oo. | | Third Amendment to Federal Signal Corporation Savings Restoration Plan.*(1) |
| | 14 | . | | | | Code of Ethics for Chief Executive Officer and Senior Financial Officers, as amended. Incorporated by reference to Exhibit 14 to the Company’sForm 10-K for the year ended December 31, 2003. |
| | 21 | . | | | | Subsidiaries of the Company.* |
| | 23 | . | | | | Consent of Independent Registered Public Accounting Firm.* |
| | 31 | .1 | | | | CEO Certification under Section 302 of the Sarbanes-Oxley Act.* |
| | 31 | .2 | | | | CFO Certification under Section 302 of the Sarbanes-Oxley Act.* |
| | 32 | .1 | | | | CEO Certification of Periodic Report under Section 906 of the Sarbanes-Oxley Act.* |
| | 32 | .2 | | | | CFO Certification of Periodic Report under Section 906 of the Sarbanes-Oxley Act.* |
| | |
| * | | Filed herewith. |
|
| (1) | | Management contract or compensatory plan or arrangement. |
6993
Federal Signal Corporation
Corporate and Stockholder Information
| | |
Management | | Board of Directors |
|
William G. Barker, III
Senior Vice President and Chief Financial Officer
John A. DeLeonardis
Vice President, Taxes
David E. Janek
Vice President and Controller
Fred H. Lietz
Vice President and Chief Procurement Officer
David R. McConnaughey
President, Safety and Security Systems Group
William H. Osborne
President and Chief Executive Officer
Esa Peltola
President, Bronto Skylift Oy Ab
Jennifer L. Sherman
Senior Vice President Human Resources, General Counsel and Secretary
Mark D. Weber
President, Environmental Solutions Group
| | James C. Janning, 61
Chairman of the Board
Group President Harbour Group, Ltd.
Charles R. Campbell, 69
Retired, Consultant
The Everest Group
Robert M. Gerrity, 71
Director and Principal Gerrity Partners
James E. Goodwin, 64
Former Chairman and Chief Executive Officer of United Airlines
Robert S. Hamada, 71
Edward Eagle Brown Distinguished Service
Professor of Finance, Emeritus Graduate
School of Business, University of Chicago
Paul W. Jones, 60
Chairman and Chief Executive Officer
A. O. Smith Corporation
Dennis J. Martin,58
Former Chairman, President and Chief Executive Officer
General Binding Corporation
John F. McCartney, 56
Chairman, Westcon Group, Inc. and
A. M. Castle & Co.
Brenda L. Reichelderfer, 50
Retired Senior Vice President and Chief Technology
Officer, ITT Corporation
Joseph R. Wright,70
Chief Executive Officer Scientific Games Corporation |
| | |
Corporate Information | | |
| | |
Form 10-K and Other Reports and Information
Our Annual Report andForm 10-K, Quarterly Reports onForm 10-Q, Proxy Statement and other reports that we file with the SEC are available on our website at federalsignal.com. In addition, copies of these reports may be obtained without charge by contacting:
Investor Relations
Federal Signal Corporation
1415 W. 22nd St., Suite 1100
Oak Brook, IL 60523
630-954-2000
http://www.federalsignal.com
Stock Trading Information
New York Stock Exchange
Symbol: FSS | | Transfer Agent and Registrar
National City Bank
Shareholder Services Operations
Locator 5352
P.O. Box 92301
Cleveland, OH 44101-4301
800-622-6757
2009 Annual Meeting of Stockholders
Tuesday, April 21, 2009, 3:30 pm
Regency Towers Conference Center
1515 W. 22nd Street
Oak Brook, IL 60523
Independent Registered Public Accounting Firm
Ernst & Young, LLP |
