Table of Contents
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, 2005
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 (Address of principal executive offices) |
60523 (Zip Code) |
|
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 þ No o
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Exchange
Act. Yes o No þ
Indicate by check mark whether the 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 if disclosure of delinquent filers
pursuant to Item 405 of
Regulation 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 this
Form 10-K or any
amendment to this
Form 10-K. o
Indicate by check mark if the registrant is a large accelerated
filer, an accelerated filer, or a non-accelerated filer. See
definition of “accelerated filer and large accelerated
filer” in Rule 12b(2) of the Exchange Act. (Check one).
Large accelerated
filer þ Accelerated
filer o Non-accelerated
filer o
Indicate by check mark if the registrant is a shell company, in
Rule 12b(2) of the Exchange
Act. Yes o No þ
State the aggregate market value of voting stock held by
nonaffiliates of the Company as of June 30, 2005: Common
stock, $1.00 par value — $742,402,050
Indicate the number of shares outstanding of each of the
Company’s classes of common stock, as of January 31,
2006: Common stock, $1.00 par value —
48,123,114 shares
Documents Incorporated By Reference
Portions of the proxy statement for the Annual Meeting of
Shareholders to be held on April 25, 2006 are incorporated
by reference in Part III.
FEDERAL SIGNAL CORPORATION
Index to
Form 10-K
Table of Contents
PART I
| Item 1. | Business. |
Federal Signal Corporation, founded in 1901, was reincorporated
as a Delaware Corporation in 1969. The Company is a worldwide
manufacturer and supplier of street cleaning and vacuum loader
vehicles; fire rescue vehicles; safety, signaling and
communication equipment; and parking systems; and tooling
products. Federal Signal Corporation and its subsidiaries
(referred to collectively as “the Company” or
“Company” herein, unless context otherwise indicates)
operates manufacturing facilities in 40 plants around the world
in 12 countries serving customers in approximately 100
countries in all regions of the world. The Company also provides
customer and dealer financing to support the sale of its
vehicles.
Narrative Description of Business
Products manufactured and services rendered by the Company are
divided into four major operating groups: Environmental
Products, Fire Rescue, Safety Products and Tool. The individual
operating companies are organized as such because they share
certain characteristics, including technology, marketing,
distribution and product application, which create long-term
synergies.
Financial information (net sales, foreign sales, export sales,
operating income and identifiable assets) concerning the
Company’s four operating segments as of, and for each of
the three years in the period ended, December 31, 2005
included in Note N of the financial statements contained
under Item 8 of this
Form 10-K is
incorporated herein by reference.
| Environmental Products Group |
The Environmental Products Group manufactures and markets
worldwide a full range of street cleaning and vacuum loader
vehicles as well as high-performance water blasting equipment.
Products are also manufactured for the newer markets of
hydro-excavation, glycol recovery and surface cleaning. The
group competes under the Elgin, RAVO, Vactor, Guzzler and
Jetstream brand names. The group’s vehicles and equipment
are manufactured in North America and Europe.
Through the Elgin brand name, the Company is the leading US
brand of street sweepers primarily designed for large-scale
cleaning of curbed streets, parking lots and other paved
surfaces utilizing mechanical sweeping, vacuum and recirculating
air technology for cleaning. RAVO is a market leader in Europe
for high-quality, compact and self-propelled sweepers that
utilize vacuum technology for pick-up.
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.
Segment results have been restated to exclude losses from Leach,
which has been reclassified as a discontinued operation. Leach
is a manufacturer of refuse truck bodies with operations in
Medicine Hat, Alberta and offices in Appleton, Wisconsin. The
Company is evaluating divestiture alternatives for this business.
| Fire Rescue Group |
The Fire Rescue Group manufactures a broad range of fire rescue
vehicles in its facilities located in North America and Europe.
The group sells vehicles under the following brand names:
E-ONE, Superior,
Saulsbury and Bronto Skylift.
E-ONE is a leading
brand of aluminum, custom-made fire rescue, airport rescue and
firefighting vehicles. Superior brand trucks are manufactured
and distributed primarily for the Canadian market and US
wildlands markets. Under the Bronto Skylift brand name, the
Company manufactures vehicle-mounted aerial
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access platforms in Finland. The Company also produces
stainless-steel bodied fire trucks and rescue vehicles under the
Saulsbury brand name.
| Safety Products Group |
The Safety Products Group manufactures emergency vehicle warning
lights and sirens, industrial and outdoor signaling, warning,
lighting and communication devices; and parking revenue and
access control systems. Products are sold under the Federal
Signal, Target Tech, VAMA, Pauluhn, Victor and Federal APD brand
names. The group operates manufacturing facilities in North
America, Europe and South Africa. Many of the group’s
products are designed in accordance with various regulatory
codes and standards, and meet agency approvals such as
Underwriters Laboratory (UL), International Electrotechnical
Commission (IEC) and American Bureau of Shipping (ABS).
| Tool Group |
The Tool Group manufactures, and in some cases is a reseller of,
a broad range of consumable carbide and superhard insert tooling
for cutoff, drilling, milling and deep grooving metal cutting
applications; precision tooling, ejector pins, core pins,
sleeves and accessories for the plastic injection mold industry;
and precision tooling and die components for the metal stamping
industry. Tooling products are marketed under the Dayton,
Manchester, OTM, ClappDico and PCS brand names and manufactured
in North America, Europe and Asia.
| Restructurings |
In June 2004, the Company announced the implementation of the
first steps of a broad restructuring initiative aimed at
enhancing the Company’s competitive profile. The measures
announced addressed three key issues: improving the
profitability of the Fire Rescue Group, divesting non-strategic
business activities, and improving the Company’s overhead
cost structure.
The initiatives included the following restructuring plans and
divestitures:
| • | Closure of Preble, New York plant — By the end of 2004, the Company had closed its 120,000 square foot production facilities in Preble, New York and consolidated US production of fire rescue vehicles into its Ocala, Florida operations. | |
| • | Sale of interest in Plastisol B.V. Holdings — In 2004, the Company sold its 54% majority ownership interest in Plastisol B.V. Holdings to its minority partner. The Company acquired its ownership interest in Plastisol in 2001. Plastisol manufactures glassfiber reinforced polyester fire truck cabs and bodies mainly for the European and Asian markets. | |
| • | Safety Storage Inc. joint venture — In June 2004, the Company concluded the sale of its 30% minority ownership interest in Safety Storage, Inc. to the majority owner. Safety Storage makes mobile buildings for the off-site storage of hazardous waste. | |
| • | Industrial leasing portfolio — In 2001, the Company made the strategic decision to exit the leasing business for industrial customers. During 2004, the Company sold a $10 million portion of its industrial leases to a financial institution and continued the runoff of the rest of the portfolio; proceeds were used to pay down debt. | |
| • | Dayton France manufacturing consolidation — The Company has completed reduction of certain manufacturing activities at Dayton France. |
In the fourth quarter of 2005 the Company completed the closure
of operations in Federal APD do Brasil, LTDA, which produced
parking systems for the local market. In the fourth quarter of
2004, the Company divested Technical Tool, Inc., a small
manufacturer of precision beverage can tooling, and Justrite
Manufacturing Company, L.L.C., a leading manufacturer of
products for the safe storage of flammable and hazardous
materials.
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| Financial Services |
The Company offers a variety of short- and long-term financing
primarily to its Environmental Products and Fire Rescue
independent dealers and customers. The Company provides
financing, principally through sales-type leases, to
(i) municipal and industrial customers to purchase vehicles
and (ii) independent dealers to finance the purchase of
vehicle inventory. Financings are typically secured by vehicles
and, in the case of the independent dealers, the dealer’s
personal guarantee. In 2001, the Company decided to curtail new
leasing to industrial customers, who generally have a higher
credit risk; this portfolio continues to diminish over time as
no new leases were extended to industrial customers in 2005. At
December 31, 2005, the Company’s investment in leases
to industrial customers declined to 6% of its lease financing
and other receivables.
Marketing and Distribution
The Company believes its national and global dealer networks for
Environmental Products and Fire Rescue vehicles distinguishes
itself from its competitors. Dealer representatives are on-hand
to demonstrate the vehicles’ functionality and capability
to customers as well as service the vehicles on a timely basis.
The Safety Products Group companies sell to industrial customers
through approximately 2,000 wholesalers/distributors who are
supported by Company sales personnel and/or independent
manufacturer’s representatives. Products are also sold to
governmental customers through more than 900 active independent
distributors as well as through original equipment manufacturers
and direct sales. International sales are made through the
group’s independent foreign distributors or on a direct
basis.
Because of the consumable nature of the Tool Group’s
products, volume depends mainly on repeat orders from thousands
of customers. Many of the Tool Group’s customers have some
ability to produce certain products themselves, but at a cost
disadvantage. Major market emphasis is placed on quality of
product, delivery and level of service. Inventories for certain
products, constituting about half of the group’s sales are
maintained to assure prompt service to the customer, while other
products are made to order. The average order for standard tools
is filled in less than one week for domestic shipments and
within two weeks for international shipments.
Customers and Backlog
Approximately 41%, 37% and 22% of the Company’s total 2005
orders were to US municipal and government customers, US
commercial and industrial customers; and non-US customers,
respectively. No single customer accounted for a material part
of the Company’s business.
The Company’s US 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 jobs are lost and profits decline. Generally, a
municipal slowdown lags far enough behind the industrial
slowdown such that the industrial economy is growing again by
the time municipalities reduce their spending. The US economic
downturn from 2001 to 2003 lasted longer than expected, allowing
spending cuts by municipalities to affect the Company during the
same time period as weak industrial demand was experienced.
During 2005, the Company saw municipal and governmental orders
increase 10% from 2004, reflecting the return of government
orders lagging the stronger industrial economy in 2004.
The Company’s backlog totaled $390 million and
$415 million as of December 31, 2005 and 2004,
respectively. The 6% decrease is primarily attributed to
improved throughput in US fire truck manufacturing
operations and installations against a large parking system
contract received in 2004. A substantial majority of the orders
in backlog at December 31, 2005 are expected to be filled
during 2006.
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 availability, price and quality
risk, the Company is party to numerous supplier strategic
alliances. Although certain materials are obtained from either a
single-source supplier or a limited number of suppliers,
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the Company has identified alternative sources to minimize the
interruption to its business in the event of supply problems.
Components critical in the production of the Company’s
vehicles (such as engines, transmissions, drivetrains, axles and
tires) are purchased from a select number of suppliers and may
be specified by the customer. The Company also purchases raw and
fabricated aluminum and 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 material and components necessary to
meet its needs. However, there are risks and uncertainties with
respect to the supply of certain of these raw materials that
could impact their price, quality and availability in sufficient
quantities.
During 2005, the Company was able to recover increased pricing
imposed by steel and steel-product suppliers in 2004.
Competition
Within the Environmental Products Group, Elgin is recognized as
the market leader among several domestic sweeper competitors and
differentiates itself primarily on product performance. RAVO
also competes on product performance through its vacuum
technology and successfully leads in market share for compact
sweepers among several regional European manufacturers. Vactor
and Guzzler both maintain the leading domestic position in their
respective marketplaces by enhancing product performance with
leading technology and application flexibility. Jetstream is the
market leader in the in-plant cleaning segment of the US
waterblast industry competing on price and delivery performance.
E-ONE is a leading manufacturer of US aluminum-bodied fire
apparatus and custom chassis in a market served by approximately
ten key manufacturers and approximately 70 small regional
manufacturers. With its unique welded, extruded aluminum design,
E-ONE is the US market
leader in aluminum aerials. In addition,
E-ONE is the global
market share leader of industrial pumpers serving the
petrochemical industry with two primary international
competitors and a few smaller manufacturers.
E-ONE also competes
with six manufacturers worldwide in the production of airport
rescue and firefighting vehicles, consistently holding at least
a number two position. The Saulsbury product line complements
these offerings with stainless steel-bodied fire trucks and
rescue vehicles. Bronto Skylift is the leading manufacturer of
articulating platforms for the global fire rescue markets.
Within specific product categories and domestic markets, the
Safety Products Group companies are typically the leaders among
three to four strong competitors and several additional
ancillary market participants. The group’s international
market position varies from leader to ancillary participant
depending on the geographic region and product line. Generally,
competition is intense as to all of the group’s products
and is based on price, including competitive bidding,
reputation, performance and servicing.
The Tool Group companies compete with several hundred
competitors worldwide. In North America, the Company holds a
share position ranging from number one to number three depending
on the product offering.
Research and Development
The information concerning the Company’s research and
development activities is included in Note N of the
financial statements contained under Item 8 of this
Form 10-K is
incorporated herein by reference.
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 and associated goodwill with
customers, but no material part of the Company’s business
is dependent on such trademarks.
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Employees
The Company employed over 5,500 people in ongoing businesses at
the close of 2005 as compared to nearly 5,600 employees at the
end of 2004. Approximately 17% of the Company’s domestic
hourly workers were unionized at December 31, 2005. The
Company believes relations with its employees continues 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 2005 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 effect on its future operations.
Seasonality
Certain of the Company’s businesses are susceptible to the
influences of seasonal buying or delivery patterns. The
Company’s businesses which tend to have lower sales in the
first calendar quarter compared to other quarters as a result of
these influences are street sweeping, fire rescue products,
outdoor warning, municipal emergency signal products and parking
systems.
Additional Information
The Company makes its annual reports on
Form 10-K,
quarterly reports on
Form 10-Q, current
reports on
Form 8-K and
amendments to those reports available, free of charge, through
its Internet website (http://www.federalsignal.com) as soon as
reasonably practical after it electronically files or furnishes
such materials to the Securities and Exchange Commission
(“SEC”). All of the Company’s filings may be read
or copied at the SEC’s Public Reference Room at 100 F
Street, NE, Washington, DC 20549. Information on the operation
of the Public Reference Room can be obtained by calling the SEC
at 1-800-SEC-0330. The
SEC maintains an Internet website (http://www.sec.gov) that
contains reports, proxy and information statements and other
information regarding issuers that file electronically.
| Item 1A. | Risk Factors. |
The following are some of the risks that we face in our
business. The list of risk factors is not exhaustive. There can
be no assurance that we have correctly identified and
appropriately assessed all factors affecting our business or
that publicly available and other information with respect to
these matters is complete and correct. Additional risks not
presently known to us or that we currently believe to be
immaterial also may adversely impact us. Should any risks and
uncertainties develop into actual events, these developments
could have material adverse effects on our business, financial
condition and results of operations.
Our financial results are subject to considerable
cyclicality.
Our ability to be profitable depends heavily on varying
conditions in the United States government and municipal markets
and the overall United States economy. The markets in which we
compete are subject to considerable cyclicality, and move in
response to cycles in the overall business environment and are
particularly sensitive to the industrial sector. Many of our
customers are municipal governmental agencies, and as such, we
are dependent on municipal government spending. Spending by our
municipal customers can be affected by local political
circumstances, budgetary constraints, and other factors. The
United States government and municipalities depend heavily on
tax revenues as a source of their spending and, accordingly,
there is a correlation, usually lagged by one or two years,
between the overall strength of the United States economy and
our sales to the United States government and municipalities.
Therefore, downturns in the United States economy are likely to
result in decreases in demand for our products. During previous
economic downturns, we experienced decreases in sales and
profitability, and we expect our business to remain subject to
similar economic fluctuations in the future.
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The inability to obtain raw materials, component parts,
and/or finished goods in a timely and cost-effective manner from
suppliers would adversely affect our ability to manufacture and
market our products.
We purchase raw materials and component parts from suppliers to
be used in the manufacturing of our products. In addition, we
purchase certain finished goods from suppliers. Changes in our
relationships with suppliers or increases in the costs of
purchased raw materials, component parts or finished goods could
result in manufacturing interruptions, delays, inefficiencies or
our inability to market products. In addition, our profit
margins would decrease if prices of purchased raw materials,
component parts, or finished goods increase and we are unable to
pass on those increases to our customers.
We operate in highly competitive markets.
The markets in which we operate are highly competitive. The
intensity of this competition, which is expected to continue,
can result in price discounting and margin pressures throughout
the industry and adversely affects our ability to increase or
maintain prices for our products. In addition, certain of our
competitors may have lower overall labor or material costs.
Failure to keep pace with technological developments may
adversely affect our operations.
We are engaged in an industry which will be affected by future
technological developments. The introduction of products or
processes utilizing new technologies could render our existing
products or processes obsolete or unmarketable. Our success will
depend upon our ability to develop and introduce on a timely and
cost-effective basis new products, processes and applications
that keep pace with technological developments and address
increasingly sophisticated customer requirements. We may not be
successful in identifying, developing and marketing new
products, applications and processes and product or process
enhancements. We may experience difficulties that could delay or
prevent the successful development, introduction and marketing
of product or process enhancements or new products, applications
or processes. Our products, applications or processes may not
adequately meet the requirements of the marketplace and achieve
market acceptance. Our business, operating results and financial
condition could be materially and adversely affected if we were
to incur delays in developing new products, applications or
processes or product or process enhancements or if our products
do not gain market acceptance.
Our ability to operate our Company effectively could be
impaired if we fail to attract and retain key personnel.
Our ability to operate our businesses and implement our
strategies depends, in part, on the efforts of our executive
officers and other key employees. In addition, our future
success will depend on, among other factors, our ability to
attract and retain qualified personnel, including finance
personnel, research professionals, technical sales professionals
and engineers. The loss of the services of any key employee or
the failure to attract or retain other qualified personnel could
have a material adverse effect on our business or business
prospects.
We have international operations that are subject to foreign
economic and political uncertainties.
Our business is subject to fluctuations in demand and changing
international economic and political conditions which are beyond
our control. As of December 31, 2005, approximately 30% of
our net sales were to customers outside the United States; with
approximately 20% of net sales being supplied from our overseas
operations. We expect a significant portion of our revenues and
profits to come from international sales for the foreseeable
future. Operating in the international marketplace exposes us to
a number of risks, including abrupt changes in foreign
government policies and regulations and, in some cases,
international hostilities. To the extent that our international
operations are affected by unexpected and adverse foreign
economic and political conditions, we may experience project
disruptions and losses which could significantly reduce our
revenues and profits.
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Some of our contracts are denominated in foreign currencies,
which result in additional risk of fluctuating currency values
and exchange rates, hard currency shortages and controls on
currency exchange. Changes in the value of foreign currencies
could increase our US dollar costs for, or reduce our
US dollar revenues from, our foreign operations. Any
increased costs or reduced revenues as a result of foreign
currency fluctuations could affect our profits.
We may incur material losses and costs as a result of product
liability, warranty, recall claims or other lawsuits or claims
that may be brought against us.
We are exposed to product liability and warranty claims in the
normal course of business in the event that our products
actually or allegedly fail to perform as expected or the use of
our products results, or is alleged to result, in bodily injury
and/or property damage. Accordingly, we could experience
material warranty or product liability costs in the future and
incur significant costs to defend against these claims. We
currently carry insurance and maintain reserves for product
liability claims. However, we cannot be assured that our
insurance coverage will be adequate if such claims do arise, and
any liability not covered by insurance could have a material
adverse impact on our business. A future claim could involve the
imposition of punitive damages, the award of which, pursuant to
state laws, may not be covered by insurance. In addition,
warranty claims are not covered by our product liability
coverage. Any product liability or warranty issues may adversely
impact our reputation as a manufacturer of high quality, safe
products and may have a material adverse effect on our business.
The costs associated with complying with environmental and
safety regulations could lower our margins.
We, like other manufacturers, continue to face heavy
governmental regulation of our products, especially in the areas
of environment and employee health and safety. Complying with
environmental and safety requirements has added and will
continue to add to the cost of our products, and could increase
the capital required. While we believe that we are in compliance
in all material respects with these laws and regulations, we
cannot assure you that we will not be adversely impacted by
costs, liabilities or claims with respect to our operations
under existing laws or those that may be adopted. These
requirements are complex, change frequently and have tended to
become more stringent over time. Therefore, we could incur
substantial costs, including cleanup costs, fines and civil or
criminal sanctions as a result of violations, or liabilities
under, environmental laws and safety regulations.
We are subject to a number of restrictive debt covenants.
Our credit facility and other debt instruments contain certain
restrictive debt covenants that may hinder our ability to take
advantage of attractive business opportunities. Our ability to
meet these covenants may be affected by factors outside our
control. Failure to meet one or more of these covenants may
result in an event of default. Upon an event of default, our
lender(s) may be entitled to declare all amounts outstanding as
due and payable.
| Item 1B. | Unresolved Staff Comments. |
None.
| Item 2. | Properties. |
As of December 31, 2005, the Company utilized
23 principal manufacturing plants located throughout North
America, as well as 13 in Europe, 1 in South Africa and 2 in the
Far East.
In total, the Company devoted approximately 1.6 million
square feet to manufacturing and 1.0 million square feet to
service, warehousing and office space as of December 31,
2005. Of the total square footage, approximately 31% is devoted
to the Safety Products Group, 15% to the Tool Group, 23% to the
Fire Rescue Group and 31% to the Environmental Products Group.
Approximately 72% of the total square footage is owned by the
Company, with the remaining 28% being leased.
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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.
| Item 3. | Legal Proceedings. |
The information concerning the Company’s legal proceedings
included in Note M of the financial statements contained
under Item 8 of this
Form 10-K is
incorporated herein by reference.
| Item 4. | Submission of Matters to a Vote of Security Holders. |
No matters were submitted to a vote of security holders through
the solicitation of proxies or otherwise during the three months
ended December 31, 2005.
PART II
| Item 5. | Market for Company’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities. |
| (a) | Market Information |
The Company’s common stock is listed and traded on the New
York Stock Exchange (“NYSE”) under the symbol FSS. At
December 31, 2005, there were no material restrictions on
the Company’s ability to pay dividends. The information
concerning the Company’s market price range data included
in Note S of the financial statements contained under
Item 8 of this
Form 10-K is
incorporated herein by reference.
As of January 31, 2006, there were 3,126 holders of record
of the Company’s common stock.
The information concerning the Company’s dividend per share
data included in Note S of the financial statements
contained under Item 8 of this
Form 10-K is
incorporated herein by reference.
| (b) | Not applicable |
| (c) | Not applicable |
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| Item 6. | Selected Financial Data. |
The following table presents the selected financial information
of the Company as of and for the five years ended
December 31, 2005:
| 2005 | 2004 | 2003 | 2002 | 2001 | ||||||||||||||||||
|
Operating Results (dollars in millions):
|
||||||||||||||||||||||
|
Net sales(a)
|
$ | 1,156.9 | $ | 1,063.9 | $ | 1,058.2 | $ | 980.9 | $ | 1,030.9 | ||||||||||||
|
Income before income taxes(a)
|
$ | 46.3 | $ | 4.9 | $ | 44.2 | $ | 56.6 | $ | 59.9 | ||||||||||||
|
Income from continuing operations(a)
|
$ | 47.3 | $ | 9.5 | $ | 36.5 | $ | 43.7 | $ | 44.1 | ||||||||||||
|
Operating margin(a)
|
6.0 | % | 2.7 | % | 6.0 | % | 7.9 | % | 8.5 | % | ||||||||||||
|
Return on average common shareholders’ equity(b)
|
(1.2 | )% | (0.6 | )% | 9.1 | % | 12.1 | % | 13.2 | % | ||||||||||||
|
Common Stock Data (per share):
|
||||||||||||||||||||||
|
Income (loss) from continuing operations — diluted
|
$ | .98 | $ | .20 | $ | .76 | $ | .95 | $ | .97 | ||||||||||||
|
Cash dividends
|
$ | .24 | $ | .40 | $ | .80 | $ | .80 | $ | .78 | ||||||||||||
|
Market price range:
|
||||||||||||||||||||||
|
High
|
$ | 17.95 | $ | 20.56 | $ | 20.79 | $ | 27.07 | $ | 24.63 | ||||||||||||
|
Low
|
$ | 13.80 | $ | 15.75 | $ | 13.60 | $ | 16.00 | $ | 17.00 | ||||||||||||
|
Average common shares outstanding (in millions)
|
48.2 | 48.1 | 48.0 | 45.9 | 45.4 | |||||||||||||||||
|
Financial Position at Year-End (dollars in millions):
|
||||||||||||||||||||||
|
Working capital(a)(c)
|
$ | 164.9 | $ | 162.1 | $ | 104.7 | $ | 158.5 | $ | 162.0 | ||||||||||||
|
Current ratio(a)(c)
|
1.6 | 1.7 | 1.4 | 1.8 | 1.9 | |||||||||||||||||
|
Total assets
|
$ | 1,119.5 | $ | 1,132.4 | $ | 1,177.5 | $ | 1,155.9 | $ | 1,012.7 | ||||||||||||
|
Long-term debt, net of current portion
|
$ | 203.7 | $ | 215.7 | $ | 194.1 | $ | 344.5 | $ | 232.7 | ||||||||||||
|
Shareholders’ equity
|
$ | 376.3 | $ | 412.7 | $ | 422.5 | $ | 398.0 | $ | 359.4 | ||||||||||||
|
Debt-to-capitalization ratio(d)
|
43.0 | % | 37.0 | % | 40.0 | % | 44.0 | % | 44.0 | % | ||||||||||||
|
Other (dollars in millions):
|
||||||||||||||||||||||
|
Orders(a)
|
$ | 1,138.7 | $ | 1,123.5 | $ | 1,007.6 | $ | 1,046.6 | $ | 1,039.1 | ||||||||||||
|
Backlog(a)
|
$ | 390.0 | $ | 415.0 | $ | 333.1 | $ | 415.3 | $ | 341.3 | ||||||||||||
|
Net cash provided by operating activities
|
$ | 72.9 | $ | 52.5 | $ | 70.3 | $ | 102.1 | $ | 69.0 | ||||||||||||
|
Net cash provided by (used for) investing activities
|
$ | (3.0 | ) | $ | 34.1 | $ | (10.1 | ) | $ | (71.0 | ) | $ | (33.1 | ) | ||||||||
|
Net cash provided by (used for) financing activities
|
$ | 7.1 | $ | (81.7 | ) | $ | (59.9 | ) | $ | (38.2 | ) | $ | (32.6 | ) | ||||||||
|
Capital expenditures(a)
|
$ | 19.5 | $ | 20.1 | $ | 16.8 | $ | 18.8 | $ | 17.8 | ||||||||||||
|
Depreciation and amortization(a)
|
$ | 21.5 | $ | 19.6 | $ | 18.4 | $ | 20.2 | $ | 18.9 | ||||||||||||
|
Employees(a)
|
5,500 | 5,600 | 5,881 | 6,244 | 6,297 | |||||||||||||||||
| (a) | continuing operations only, prior year amounts have been reclassified for discontinued operations as discussed in Note K to the financial statements | |
| (b) | excludes cumulative effects of changes in accounting | |
| (c) | working capital: current manufacturing assets less current manufacturing liabilities; current ratio: current manufacturing assets divided by current manufacturing liabilities | |
| (d) | manufacturing operations: total manufacturing debt divided by the sum of total manufacturing debt plus manufacturing equity(e) |
9
Table of Contents
| (e) | manufacturing equity: total equity less financial services assets plus financial services borrowings |
The 2005, 2004 and 2003 income before income taxes for
continuing operations include restructuring costs of
$.7 million, $7.0 million and $4.8 million,
respectively. These costs are further explained in Item 7
under Restructuring Charges and in Note L to the financial
statements. The 2005 income before income taxes was impacted by
a $6.7 million gain on the sale of two industrial lighting
product lines. The 2004 income before income taxes was impacted
by a $10.6 million loss incurred on a large contract for
fire apparatus in the Netherlands, as more completely described
in Item 7 under Fire Rescue Operations.
The selected financial data set forth above should be read in
conjunction with the Company’s consolidated financial
statements, including the notes thereto, and Item 7 of this
Form 10-K.
The information concerning the Company’s selected quarterly
data included in Note S of the financial statements
contained under Item 8 of this
Form 10-K is
incorporated herein by reference.
| Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations. |
Federal Signal Corporation manufactures a broad range of
products, including: municipal and industrial cleaning vehicles
and equipment; fire rescue vehicles; safety, signaling and
communication equipment and tooling products. Due to technology,
marketing, distribution and product application synergies, the
Company’s business units are organized and managed in four
operating segments: Environmental Products, Fire Rescue, Safety
Products and Tool. The Company also provides customer and dealer
financing to support the sale of vehicles. The information
concerning the Company’s manufacturing businesses included
in Item 1 of this
Form 10-K and
Note N of the financial statements contained under
Item 8 of this
Form 10-K are
incorporated herein by reference.
This Form 10-K,
reports filed by the Company with the Securities and Exchange
Commission (“SEC”) and comments made by management
contain the words such as “may,” “will,”
“believe,” “expect,” “anticipate,”
“intend,” “plan,” “project,”
“estimate” and “objective” or the negative
thereof or similar terminology concerning the Company’s
future financial performance, business strategy, plans, goals
and objectives. These expressions are intended to 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. 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 and municipal markets, technological
advances by competitors, the Company’s ability to improve
its operating performance in its fire rescue plants, increased
warranty and product liability expenses, risks associated with
supplier and other partner alliances, changes in cost
competitiveness including those resulting from foreign currency
movements, disruptions in the supply of parts or components from
the sole source suppliers and subcontractors, retention of key
employees and general changes in the competitive environment.
These risks and uncertainties include, but are not limited to,
the risk factors described under Item 1A, “Risk
Factors,” in this
Form 10-K. These
factors may not constitute all factors that could cause actual
results to differ materially from those discussed in any
forward-looking statement. The Company operates in a continually
changing business environment and new factors emerge from time
to time. The Company cannot predict such factors nor can it
assess the impact, if any, of such factors on 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 this
Form 10-K.
10
Table of Contents
Results of Operations
The following table summarizes the Company’s results of
operations and operating metrics for each of the three years in
the period ended December 31, 2005 ($ in millions, except
per share amounts):
| 2005 | 2004 | 2003 | |||||||||||
|
Net sales
|
$ | 1,156.9 | $ | 1,063.9 | $ | 1,058.2 | |||||||
|
Cost of sales
|
(865.4 | ) | (814.9 | ) | (769.2 | ) | |||||||
|
Operating expenses
|
(221.6 | ) | (213.6 | ) | (220.7 | ) | |||||||
|
Restructuring charges
|
(0.7 | ) | (7.0 | ) | (4.8 | ) | |||||||
|
Operating income
|
69.2 | 28.4 | 63.5 | ||||||||||
|
Interest expense
|
(23.1 | ) | (20.6 | ) | (18.8 | ) | |||||||
|
Other income (expense)
|
.2 | (2.9 | ) | (.5 | ) | ||||||||
|
Income tax benefit (charge)
|
1.0 | 4.6 | (7.7 | ) | |||||||||
|
Income from continuing operations
|
47.3 | 9.5 | 36.5 | ||||||||||
|
Discontinued operations
|
(51.9 | ) | (11.8 | ) | .8 | ||||||||
|
Net (loss) income
|
$ | (4.6 | ) | $ | (2.3 | ) | $ | 37.3 | |||||
|
Other data:
|
|||||||||||||
|
Operating margin
|
6.0 | % | 2.7 | % | 6.0 | % | |||||||
|
Income per share — continuing operations
|
$ | .98 | $ | 0.20 | $ | 0.76 | |||||||
| 2005 | 2004 | 2003 | ||||||||||
| Analysis of orders: | ||||||||||||
|
Total orders
|
$ | 1,138.7 | $ | 1,123.5 | $ | 1,007.6 | ||||||
|
Change in orders year on year
|
1.0 | % | 12.0 | % | ||||||||
|
Change in US municipal and government orders year over year
|
10.0 | % | (6.0 | )% | ||||||||
|
Change in US industrial and commercial orders year over year
|
(6.0 | )% | 4.0 | % | ||||||||
|
Change in non-US orders year over year
|
(2.0 | )% | 16.0 | % | ||||||||
US municipal and government orders increased in 2005 primarily
due to strong demand for fire apparatus and vacuum equipment.
The decrease in 2005 US industrial and commercial orders was due
to a $47 million parking system contract received in 2004.
Excluding this contract, orders rose 10%, largely due to
strength in industrial vacuum trucks and fire apparatus. The
decrease in non-US orders in 2005 was primarily due to reduced
sales of fire apparatus and a product line divestiture in the
third quarter.
Sales increased 9% in 2005 from 2004 as a result of strength in
the fire rescue and vacuum truck businesses and deliveries
against a large parking system contract. The Company’s
operating income of $69.2 million in 2005 included
restructuring charges of $.7 million as the restructuring
activities announced in 2004 were completed. The increase in
income from continuing operations of $37.8 million compared
to 2004 reflected the increase in sales across all groups and
also lower operating costs in the fire rescue business and lower
restructuring costs partially offset by higher corporate expense
and interest expense.
Interest expense increased 12% to $23.1 million in 2005
compared to 2004. This increase was largely due to higher
short-term interest rates.
The Company’s 2005 effective tax rate on continuing
operations of (2.1)% reflects a benefit of $6.0 million
primarily due to a reduction in reserves in the second quarter
associated with the completion of an audit of the Company’s
US tax returns which encompassed the years 1999 —
2003, a $1.6 million benefit recorded to recognize the
differences that existed between the recorded deferred tax
liabilities and the amount that should have been recorded based
on an analysis of timing differences between financial reporting
and tax reporting, the effect of tax-exempt municipal income and
a $2.5 million benefit in the fourth quarter of 2005 due to
the repatriation of foreign cash balances associated with the
American Jobs Creation Act; this benefit was realized because a
portion of the repatriated earnings had previously been reserved
at higher tax rates.
The net loss for 2005 of $4.6 million included
$51.9 million of loss from discontinued operations.
Discontinued operations in 2005 included the refuse business,
trading under the Leach brand name, which is
11
Table of Contents
classified as a business held for sale at December 31,
2005, and Federal APD do Brasil, LTDA, where operations were
closed in the fourth quarter.
In 2004, the increase in orders year on year was due to a
$47 million airport parking system order and increases in
US municipal and government orders. Export orders grew,
primarily due to strong fire apparatus and environmental
products. Sales were flat compared to 2003 with higher non-US
sales being offset by weak US markets. The decline in income
from continuing operations was driven by inability to quickly
pass on increases in raw material prices, restructuring charges
of $7.0 million, a $10.6 million charge related to a
large multi-unit,
multi-year Netherlands fire rescue equipment contract, higher
corporate expenses and higher interest cost.
The Company’s operating income decreased $35.1 million
in 2004 compared to 2003. Included in the results were
restructuring charges of $7.0 million in 2004 and
$4.8 million in 2003.
The Company recorded a net loss for 2004 of $2.3 million,
which included $11.8 million of loss from discontinued
operations. Discontinued operations in 2004 include Justrite
Manufacturing Company, L.L.C. and Technical Tooling, Inc., which
were divested by the Company in the fourth quarter of 2004 and
Plastisol B.V. Holdings divested mid-year. Net income in 2003
was $37.3 million including a $.4 million after-tax
loss on the sale of the discontinued Sign Group operations.
Interest expense increased 10% to $20.6 million in 2004
compared to 2003. This increase was primarily due to higher
short-term interest rates in the second half of 2004.
The Company’s 2004 effective tax rate on continuing
operations of (92.4)% reflected the tax benefit of the loss
incurred as well as the impact of tax credits and the effect of
tax-exempt municipal income.
The Company sponsors a number of deferred benefit retirement
plans in the US covering certain of its salaried and hourly
employees. Assumptions used for actuarial valuations of US
pension plans:
| January 1, 2006 | January 1, 2005 | January 1, 2004 | ||||||||||
|
Discount rate
|
5.75 | 6.00 | 6.25 | |||||||||
|
Expected long-term rate of return
|
8.50 | 9.00 | 9.00 | |||||||||
|
Rate of increase in compensation levels
|
3.50 | 3.50 | 3.50 | |||||||||
|
Mortality tables used
|
RP2000 | GAM83 | GAM83 | |||||||||
|
Approximate impact of change in assumptions, after tax
|
$1.3 million loss | $.5 million loss | ||||||||||
|
Approximate impact of change in assumptions, EPS
|
$(.03) | $(.01) | ||||||||||
The Company recorded an after-tax charge of $8.9 million in
2005, $0 in 2004 and $.4 million in 2003 to other
comprehensive income representing the effect of an additional
minimum pension liability. The Company is evaluating alternative
strategies for implementing a common retirement plan across its
US businesses. Among other things, the strategy provides for a
more predictable retirement plan cost.
Certain of the Company’s businesses are susceptible to the
influences of seasonal buying or delivery patterns. The
Company’s businesses which tend to have lower sales in the
first calendar quarter compared to other quarters as a result of
these influences are street sweeping, fire rescue products,
outdoor warning, municipal emergency signal products and parking
systems.
12
Table of Contents
Restructuring Charges
The following table summarizes the Company’s restructuring
charges by segment for each of the three years in the period
ended December 31, 2005 ($ in millions):
| 2005 | 2004 | 2003 | ||||||||||
|
Environmental Products
|
$ | $ | $ | .6 | ||||||||
|
Fire Rescue
|
.9 | 5.4 | ||||||||||
|
Safety Products
|
3.3 | |||||||||||
|
Tool
|
(.2 | ) | 1.2 | .9 | ||||||||
|
Corporate
|
.4 | |||||||||||
|
Total
|
$ | .7 | $ | 7.0 | $ | 4.8 | ||||||
In June 2004, the Company announced the implementation of the
first steps of a broad restructuring initiative. The plan aimed
at enhancing the Company’s competitive profile and creating
a solid foundation for annual revenue growth in the high single
digits. The measures included improving the profitability of the
fire rescue and European tooling operations, divesting
non-strategic business activities and improving the
Company’s overhead cost structure.
The Company closed its 120,000 square foot production
facilities in Preble, New York and consolidated US production of
fire rescue vehicles into its Ocala, Florida operations as of
December 31, 2004. The consolidation was possible because
successful lean manufacturing initiatives reduced manufacturing
space requirements in the Fire Rescue Group, and because of
progress made to rationalize and restructure the broad array of
vehicle offerings. The Fire Rescue Group incurred
$5.4 million in restructuring charges for the year ended
December 31, 2004 and a further $.9 million in 2005
bringing the total to $6.3 million. This consisted of
$2.5 million in real property and manufacturing equipment
impairment, $3.5 million in employee severance and related
costs and $.3 million of other costs.
The Company also reduced the level of tooling production in
France transferring some production to its Portugal facility,
which began operations in 2003. The transfer was part of a
broader plan to reduce fixed overhead and shift the
manufacturing footprint to lower-cost locations. The Tool Group
incurred $1.2 million in restructuring costs for the year
ended December 31, 2004 and recorded a gain of
$0.2 million against restructuring costs in 2005 due to a
better than expected salvage value for manufacturing equipment.
The total of $1.0 million consisted of severance for
terminated employees.
The Company’s corporate office incurred $.4 million in
restructuring charges for the year ended December 31, 2004;
these costs related to outside services directly attributable to
the restructuring plan.
The 2004 restructuring plan is complete as of December 31,
2005.
In the first quarter of 2003, the Company approved a
restructuring plan that principally consisted of the closure of
two manufacturing facilities to improve operating efficiencies
and reduce costs. The Company closed a facility in the United
Kingdom and reduced headcount at other Safety Products Group
businesses resulting in restructuring costs of $3.3 million
for the year ended December 31, 2003, principally
consisting of equipment impairments and employee termination and
benefit costs. The Tool Group incurred $.9 million of
restructuring charges for the year ended December 31, 2003,
principally consisting of severance costs relating to the
closure of a manufacturing facility in New York. The
Environmental Products Group incurred $.6 million of
restructuring charges for the year ended December 31, 2003
relating to ceasing production of certain sweeper products and
reduction in personnel.
13
Table of Contents
Environmental Products Operations
The following table presents the Environmental Products
Group’s results of operations for each of the three years
in the period ended December 31, 2005 ($ in millions):
| 2005 | 2004 | 2003 | ||||||||||
|
Total orders
|
$ | 361.9 | $ | 311.2 | $ | 258.0 | ||||||
|
US orders
|
268.1 | 233.5 | 195.1 | |||||||||
|
Non-US orders
|
93.8 | 77.7 | 62.9 | |||||||||
|
Net sales
|
347.7 | 294.6 | 261.8 | |||||||||
|
Operating income
|
28.9 | 25.2 | 19.8 | |||||||||
|
Operating margin
|
8.3 | % | 8.6 | % | 7.6 | % | ||||||
Segment results have been restated to exclude losses from Leach,
which has been presented as a discontinued operation. Leach is a
manufacturer of refuse truck bodies with operations in Medicine
Hat, Alberta and offices in Appleton, Wisconsin. The Company is
evaluating divestiture alternatives for this business.
Full year orders of $361.9 million increased 16% with
increases at all operations. US vacuum truck and sewer cleaner
orders were strong throughout the year. Higher sweeper volumes
were the primary driver of the 21% increase in non-US orders.
Revenue of $347.7 million was up 18% over 2004 primarily
due to increased shipment volumes and higher pricing. Price
increases were implemented in late-2004 and early-2005 to offset
escalating raw material costs. Operating income increased
primarily due to the increase in sales. The full year operating
margin for 2005 declined to 8.3% from 8.6% in 2004 as a result
of expenses related to a China joint venture initiated in the
year and costs related to the progression of an enterprise
business system implementation.
In 2004, the group’s sales increase resulted from higher
prices, a stronger Euro and higher unit volume.
Fire Rescue Operations
The following table presents the Fire Rescue Group’s
results of operations for each of the three years in the period
ended December 31, 2005 ($ in millions):
| 2005 | 2004 | 2003 | ||||||||||
|
Total orders
|
$ | 354.7 | $ | 355.8 | $ | 369.0 | ||||||
|
US orders
|
234.7 | 211.9 | 249.5 | |||||||||
|
Non-US orders
|
120.0 | 143.9 | 119.5 | |||||||||
|
Net sales
|
371.2 | 360.9 | 402.1 | |||||||||
|
Operating income (loss)
|
2.3 | (23.9 | ) | 14.7 | ||||||||
|
Operating margin
|
.6 | % | (6.6 | )% | 3.7 | % | ||||||
Orders were essentially flat in 2005 compared to 2004. US
municipal fire truck demand was strong throughout the year;
however this increase was offset by lower international orders.
Revenue rose 3% to $371.2 million and operating margin
recovered to 0.6% due to performance improvements in the Ocala,
Florida operation, lower restructuring charges and the
realization of the benefits of the 2004 restructuring. Operating
margin for 2004 of (6.6)% included the loss recorded on the
multi-year fire equipment contract.
Orders declined 4% to $355.8 million in 2004 from
$369.0 million in 2003 primarily due to weakness in US
municipal and government demand more than offsetting increased
non-US orders. The 2004 decline in orders was caused by market
resistance to price increases on stainless steel trucks,
temporary restrictions placed by the Company on stainless steel
truck orders while production was moved from Preble, New York to
Ocala, Florida, and the Company’s decision to reduce
discounting of fire apparatus.
Sales declined 10% to $360.9 million in 2004 from
$402.1 million in 2003 with the decline resulting
principally from lower municipal and government volumes
partially offset by an increase in currency of 1%.
14
Table of Contents
Results in 2005 included $.9 million in restructuring
charges. Results in 2004 included $5.4 million in
restructuring charges and a $10.6 million loss incurred on
a large multi-year contract for complex fire apparatus for the
Royal Netherlands Air Force.
Safety Products Operations
The following table presents the Safety Product Group’s
results of operations for each of the three years in the period
ended December 31, 2005 ($ in millions):
| 2005 | 2004 | 2003 | ||||||||||
|
Total orders
|
$ | 259.5 | $ | 294.7 | $ | 228.7 | ||||||
|
US orders
|
164.8 | 199.4 | 143.2 | |||||||||
|
Non-US orders
|
94.7 | 95.3 | 85.5 | |||||||||
|
Net sales
|
276.5 | 247.4 | 241.1 | |||||||||
|
Operating income
|
45.0 | 33.5 | 28.1 | |||||||||
|
Operating margin
|
16.3 | % | 13.5 | % | 11.7 | % | ||||||
Orders decreased 12% in 2005 largely due to a $47 million
airport parking system order received in 2004. Excluding that
order, an overall order increase of 5% was achieved due to
strong demand in US industrial and commercial sectors. Full year
revenues increased 12% in 2005 due to deliveries against the
large airport parking system contract and strength in police
products, electrical products and oil and mining related
hazardous lighting products.
Operating income in 2005 included a $6.7 million gain on
the sale of two industrial lighting product lines. The remainder
of the income increase was largely due to the increased sales.
Orders increased 29% in 2004 including 20% from a
$47 million airport parking system order for the Port
Authority of New York and New Jersey, 3% from emergency
vehicular warning products, and 2% from currency. US municipal
and government orders increased 10% from strong demand for
military and nuclear warning systems and for municipal police
products.
Net sales rose 3% to $247.4 million in 2004. Higher unit
volumes in industrial lighting and signaling and emergency
vehicular warning systems contributed 3% and foreign currency
impacts contributed 2% to the sales increase. Partially
offsetting these increases were lower parking revenue and
control systems, which declined in 2004 following strong sales
in 2003 driven by a large project for the Dallas/Fort Worth
International Airport.
Operating income increased 19% to $33.5 million in 2004
following depressed earnings in 2003 resulting from costs
related to the closure of a production facility in the U.K. and
an unfavorable mix of product sales lowering operating margins.
Tool Operations
The following table presents the Tool Group’s results of
operations for each of the three years in the period ended
December 31, 2005 ($ in millions):
| 2005 | 2004 | 2003 | ||||||||||
|
Total orders
|
$ | 162.6 | $ | 161.8 | $ | 151.9 | ||||||
|
US orders
|
117.6 | 116.8 | 107.6 | |||||||||
|
Non-US orders
|
45.0 | 45.0 | 44.3 | |||||||||
|
Net sales
|
161.5 | 161.0 | 153.2 | |||||||||
|
Operating income
|
16.8 | 15.3 | 14.9 | |||||||||
|
Operating margin
|
10.4 | % | 9.5 | % | 9.8 | % | ||||||
US orders increased 1% in 2005 due mainly to price increases.
The stronger US industrial economy was offset by the weak
automobile market. Sales were relatively flat in both US and
non-US markets during 2005. The operating income increase of
$1.5 million in 2005 was primarily due to lower restructuring
costs, lower
15
Table of Contents
operating costs due to the 2004 restructuring initiatives and
efficiencies due to the installation of an enterprise business
system in 2004.
In the US, tooling orders increased 9% in 2004 as the US
industrial economy strengthened from the prior year.
International orders were flat compared to 2003 as strength in
Asian tooling markets, and to a lesser extent Canadian tooling
markets, was offset by weakness in the European metal forming
market throughout the year. The 5% increase in net sales in 2004
reflected stronger demand for industrial cutting tools and die
components in the US, Canada and Asia, and stronger European
currencies.
The 2% growth in operating income in 2004 resulted from
increased sales volumes, higher pricing, and productivity
improvements. While tool steel cost increased during 2004, the
group fully recovered the impact through increased sales prices.
The Tool group incurred $1.2 million of restructuring
charges in 2004 and recorded a $.2 million gain in 2005.
Corporate Expense
Corporate expenses totaled $23.8 million in 2005,
$21.7 million in 2004 and $14.0 million in 2003. The
increase in 2005 reflects higher expenses associated with
incentive compensation and salaries associated with improved
earnings and increased headcount. Incentive compensation include
bonuses and stock awards. The increase in 2004 reflects higher
expenses associated with firefighter hearing loss litigation,
increased product liability reserves, higher independent audit
and audit staff expense to meet requirements of Sarbanes-Oxley
Section 404 and the addition of a centralized human
resources and information technologies departments.
Legal Matters
The Company has been sued by over 2,400 firefighters in 33
separate cases alleging that exposure to the Company’s
sirens impaired their hearing. The Company has successfully
defended itself in over 40 similar cases and contests the
allegations. The discovery phase of the litigation began in
2004; the Company continues to aggressively defend the matter.
For further details regarding this and other legal matters,
refer to Note M in the financial statements included in
Item 8 of this
Form 10-K.
Financial Services Activities
The Company maintained an investment of $169.2 million and
$196.5 million at December 31, 2005 and 2004,
respectively in lease financing and other receivables that are
generated primarily by its Environmental Products and Fire
Rescue customers. The decrease in leasing assets primarily
resulted from early loan payoffs, and the continued runoff of
the industrial leasing portfolio resulting from the
Company’s decision to no longer extend new leases to
industrial customers. Financial services assets generally have
repayment terms ranging from one to ten years. These assets are
94% and 91% leveraged as of December 31, 2005 and 2004,
respectively, consistent with their overall quality; financial
services debt was $158.9 million and $178.4 million at
December 31, 2005 and 2004, respectively.
Financial revenues totaled $9.6 million, $12.1 million
and $13.4 million in 2005, 2004 and 2003, respectively. The
decline in 2005 and 2004 reflects the sale of a portion of the
Company’s industrial leasing portfolio and lower financings
of municipal product sales.
Financial Condition, Liquidity and Capital Resources
During the three-year period ended December 31, 2005, the
Company utilized its cash flows from operations to pay cash
dividends to shareholders and to fund sustaining and cost
reduction capital needs of its operations. Beyond these uses,
remaining cash was used to pay down debt, to repurchase shares
of common stock and make voluntary pension contributions.
16
Table of Contents
The Company’s cash and cash equivalents totaled
$91.9 million, $14.9 million and $10.0 million as
of December 31, 2005, 2004 and 2003, respectively. The
following table summarizes the Company’s cash flows for
each of the three years in the period ended December 31,
2005 ($ in millions):
| 2005 | 2004 | 2003 | ||||||||||
|
Operating cash flow
|
$ | 72.9 | $ | 52.5 | $ | 70.3 | ||||||
|
Dividends
|
(13.5 | ) | (19.3 | ) | (38.3 | ) | ||||||
|
Capital expenditures
|
(19.5 | ) | (20.1 | ) | (16.8 | ) | ||||||
|
Dispositions of businesses
|
49.1 | 7.5 | ||||||||||
|
Purchases of treasury stock
|
(5.0 | ) | (.1 | ) | ||||||||
|
Borrowing activity, net
|
24.9 | (62.4 | ) | (24.0 | ) | |||||||
|
All other, net
|
17.2 | 5.1 | 1.7 | |||||||||
|
Increase in cash
|
$ | 77.0 | $ | 4.9 | $ | .3 | ||||||
Operating cash flow increased by $20.4 million to
$72.9 million in 2005 compared to 2004. Income from
operations increased due to improved sales in environmental and
safety products, operational improvements in fire rescue and
lower restructuring costs. Working capital improvements were the
primary reason for the remaining increase.
Operating cash flow declined to $52.5 million in 2004 from
$70.3 million in 2003 due to operating losses incurred by
the Fire Rescue Group, higher corporate expenses, lower proceeds
($7.7 million) from the termination of interest rate swaps
and incremental payments of $5.4 million relating to
restructuring plans, partially offset by increased collections
attributable to the Company’s financial services activities
and the sale of a portion of the taxable leasing portfolio.
In 2005, the Company sold four former production facilities and
two industrial lighting product lines for total cash
proceeds of $22.0 million. In 2004, the Company disposed of
Justrite Manufacturing Company, L.L.C. and Technical Tooling,
Inc. for cash proceeds of $40.1 million and
$6.5 million, respectively. In addition, the Company
divested its 54% majority interest in Plastisol B.V. Holdings to
the minority partner for $2.5 million in cash and a note
receivable of $.4 million. The divestitures in 2004 were in
conjunction with the Company’s restructuring initiatives
announced in June 2004. In 2003, the Company completed the sale
of the Sign Group for cash of $7.5 million and a
$4.2 million note receivable.
In March 2005, the Company entered into a loan agreement secured
by certain leases of the
E-One business. For
more detail on this loan agreement refer to
Note E — Debt, contained in this
Form 10-K. As of
December 31, 2005 the balance on this facility was
$91.4 million. On February 3, 2006 the Company amended
and extended its bank revolving credit facility from
$75 million to $110 million. At December 31, 2005
there was no balance drawn under the existing revolving credit
facility.
In 2004, the Company repaid $62.4 million of debt by
utilizing the proceeds from the sale of the three aforementioned
businesses as well as the positive cash flow from operations. In
2004, the Company voluntarily reduced the size of its revolving
credit facility from $250 million to $200 million. At
December 31, 2004, $45 million was outstanding under
the revolving credit facility.
At December 31, 2005, total manufacturing debt was
$276.3 million, representing 43% of capitalization, up from
37% ($234.6 million) as of December 31, 2004. The
reported ratio was adversely impacted by unusually high cash
balances held in anticipation of debt repayments early in 2006.
Manufacturing debt, net of cash, totaled $184.4 million and
$219.7 million in 2005 and 2004, respectively. The Company
believes that its municipal financial services assets, due to
their improved overall quality, are capable of sustaining a
leverage ratio of 95% at December 31, 2005. The
Company’s
debt-to-capitalization
ratio for its financial services activities was 94% and 91% as
of December 31, 2005 and 2004, respectively.
Cash dividends decreased to $13.5 million in 2005 from
$19.3 million in 2004. The Company declared dividends of
$.24 per share in 2005 and $.40 per share in 2004.
Cash dividends in 2004 decreased by $19.0 million from
$38.3 million in 2003. In February 2006, the Company kept
its first quarter dividend at $.06 per share.
17
Table of Contents
The Company anticipates that its financial resources and major
sources of liquidity, including cash flow from operations and
borrowing capacity, will be adequate to meet its operating and
capital needs in addition to its financial commitments.
Contractual Obligations and Commercial Commitments
The following table presents a summary of the Company’s
contractual obligations and payments due by period as of
December 31, 2005 ($ in millions):
| Payments Due by Period | ||||||||||||||||||||
| Less than | More than | |||||||||||||||||||
| Total | 1 Year | 2-3 Years | 4-5 Years | 5 Years | ||||||||||||||||
|
Short-term obligations
|
$ | 6.6 | $ | 6.6 | $ | $ | $ | |||||||||||||
|
Long-term debt
|
431.3 | 104.5 | 117.8 | 95.6 | 113.4 | |||||||||||||||
|
Operating lease obligations
|
31.1 | 7.1 | 10.1 | 6.9 | 7.0 | |||||||||||||||
|
Fair value of interest rate swaps
|
6.7 | .1 | .5 | 1.6 | 4.5 | |||||||||||||||
|
Fair value of foreign exchange contracts
|
(1.4 | ) | (1.4 | ) | ||||||||||||||||
|
Total contractual obligations
|
$ | 474.3 | $ | 116.9 | $ | 128.4 | $ | 104.1 | $ | 124.9 | ||||||||||
The Company is party to various interest rate swap agreements in
conjunction with the management of borrowing costs. As of
December 31, 2005, the fair value of the Company’s net
position would result in cash payments of $6.7 million.
Future changes in the US 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 of its foreign subsidiaries. As of December 31, 2005,
the unrealized gain on the Company’s foreign exchange
contracts totaled $1.4 million. Volatility in the future
exchange rates between the US dollar and Euro and Canadian
dollar will impact final settlement.
The following table presents a summary of the Company’s
commercial commitments and the notional amount expiration by
period ($ in millions):
| Notional Amount Expiration by Period | ||||||||||||||||
| Less than | 2-3 | 4-5 | ||||||||||||||
| Total | 1 Year | Years | Years | |||||||||||||
|
Financial standby letters of credit for casualty insurance
policies
|
$ | 34.4 | $ | 34.4 | $ | $ | ||||||||||
|
Guaranteed residual value obligations
|
2.6 | 2.3 | .2 | .1 | ||||||||||||
|
Total commercial commitments
|
$ | 37.0 | $ | 36.7 | $ | .2 | $ | .1 | ||||||||
Security bonds for casualty insurance policies relate to the
Company’s workers’ compensation, automobile, general
liability and product liability policies. Outstanding financial
standby letters of credit represent guarantees of performance by
foreign subsidiaries that engage in cross-border transactions
with foreign customers.
In limited circumstances, the Company guarantees the residual
value on vehicles in order to facilitate a sale. The Company
also guaranteed the debt of an independent dealer that sells the
Company’s vehicles. 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.
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States
requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities at the date of
the financial statements and
18
Table of Contents
the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those
estimates. The Company considers the following policies to be
the most critical in understanding the judgments that are
involved in the preparation of the Company’s consolidated
financial statements and the uncertainties that could impact the
Company’s financial condition, results of operations and
cash flows.
| 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
present portfolio, collateral value and general economic
conditions. If the historical loss trend increased or decreased
10% in 2005, the Company’s operating income would have
decreased or increased by $.1 million, respectively. Though
management considers the valuation of the allowances proper and
adequate, changes in the economy and/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 separately identifiable obsolete products and
materials. General reserves for materials are established based
upon formulas which are established based on, among other
things, the level of current inventory relative to recent usage,
estimated scrap value and the level of estimated future usage.
Historically, this reserve policy has given a close
approximation of the Company’s experience with excess and
obsolete inventory. The Company does not foresee a need to
revise its reserve policy in the future. However, from time to
time unusual buying patterns or shifts in demand may cause large
movements in the reserve balance.
| Warranty Reserve |
The Company’s products generally carry express warranties
that provide repairs at no cost to the customer or the issuance
of credit. The length of the warranty term depends on the
product sold, but generally extends from six months to five
years based on the terms that are generally accepted in the
Company’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 cost as a percentage of net sales
totaled 1.1% in 2005, 1.3% in 2004 and 1.4% in 2003. The
decrease in the rate in 2005 is primarily due to improvements in
the fire rescue business. Management believes the reserve
recorded at December 31, 2005 is appropriate. A 10%
increase or decrease in the estimated warranty costs in 2005
would have decreased or increased operating income by
$1.1 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-insured for
workers’ compensation and product liability claims with
various stop-loss thresholds. When a claim is filed, an initial
liability is estimated, if any is expected, to settle the claim.
This liability is periodically updated as more claim facts
become known. The establishment and update of 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
19
Table of Contents
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, 2005 appropriately reflects the
Company’s risk exposure. The Company has not established
any reserve for potential losses resulting from hearing loss
litigation (see Note M); if the Company is not successful
in its defense, it will record a charge for such claims, to the
extent they exceed insurance recoveries, at the time a judgment
or settlement is made.
| Goodwill Impairment |
In accordance with SFAS No. 142, “Goodwill and
Other Intangible Assets”, the Company ceased amortization
of goodwill and indefinite-lived intangible assets effective
January 1, 2002. SFAS No. 142 also requires the
Company to test these assets annually for impairment; the
Company performs this test in the fourth quarter unless
impairment indicators arise earlier. The Company continues to
amortize definite-lived intangible assets over their useful life.
A review for impairment requires judgment in estimated cash
flows based upon estimates of future sales, operating income,
working capital improvements and capital expenditures.
Management utilizes a discounted cash flow approach to determine
the fair value of the Company’s reporting units. If the sum
of the expected discounted cash flows of the reporting unit is
less than its carrying value, an impairment loss is required
against the unit’s goodwill.
The annual testing conducted in 2005 and 2004 did not result in
any impairment.
Although management believes that the assumptions and estimates
used were reasonable, a sensitivity analysis for each reporting
unit is performed along with the impairment test. The analysis
indicated that a 5% change in the operating margin assumption
would not have resulted in a goodwill impairment in any group.
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.
| 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.
Of the Company’s debt at December 31, 2005, 36% was
used to support financial services assets; the weighted average
remaining life of those assets is typically under three years
and the debt is match-funded to the financing assets.
The 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,
2005 ($ in millions):
| Expected Maturity Date | ||||||||||||||||||||||||||||||||
| Fair | ||||||||||||||||||||||||||||||||
| 2006 | 2007 | 2008 | 2009 | 2010 | Thereafter | Total | Value | |||||||||||||||||||||||||
|
Fixed rate
|
$ | 83.5 | $ | 27.8 | $ | 35.2 | $ | 25.1 | $ | 25.2 | $ | 93.1 | $ | 289.9 | $ | 302.0 | ||||||||||||||||
|
Average interest rate
|
5.8 | % | 5.9 | % | 5.8 | % | 5.7 | % | 5.6 | % | 5.5 | % | ||||||||||||||||||||
|
Variable rate
|
$ | 27.6 | $ | 18.8 | $ | 36.0 | $ | 14.0 | $ | 31.3 | $ | 20.3 | $ | 148.0 | $ | 148.0 | ||||||||||||||||
|
Average interest rate
|
5.5 | % | 5.4 | % | 5.4 | % | 5.4 | % | 5.4 | % | 5.3 | % | 5.2 | % | ||||||||||||||||||
20
Table of Contents
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, 2005 ($ in millions). Notional amounts are
used to calculate the contractual payments to be exchanged under
the contract. Weighted average variable rates are based on
implied forward rates in the yield curve at the reporting date.
| Expected Maturity Date | ||||||||||||||||||||||||||||||||
| Fair | ||||||||||||||||||||||||||||||||
| 2006 | 2007 | 2008 | 2009 | 2010 | Thereafter | Total | Value | |||||||||||||||||||||||||
|
Pay fixed, receive variable
|
$ | 10.0 | $ | $ | 25.0 | $ | 10.0 | $ | 10.0 | $ | $ | 55.0 | $ | .7 | ||||||||||||||||||
|
Average pay rate
|
3.8 | % | 5.1 | % | 3.8 | % | 3.8 | % | ||||||||||||||||||||||||
|
Average receive rate
|
4.8 | % | 4.7 | % | 4.8 | % | 4.9 | % | ||||||||||||||||||||||||
|
Receive fixed, pay variable
|
$ | 17.1 | $ | 17.1 | $ | 25.1 | $ | 15.1 | $ | 15.1 | $ | 63.4 | $ | 152.9 | $ | (7.4 | ) | |||||||||||||||
|
Average pay rate
|
7.9 | % | 7.8 | % | 7.2 | % | 6.8 | % | 6.9 | % | 6.9 | % | ||||||||||||||||||||
|
Average receive rate
|
6.5 | % | 6.5 | % | 6.0 | % | 5.7 | % | 5.7 | % | 5.7 | % | ||||||||||||||||||||
See Note H to the consolidated financial statements in this
Form 10-K for a
description of these agreements.
| Foreign Exchange Rate Risk |
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.
The following table summarizes the Company’s foreign
currency derivative instruments as of December 31, 2005.
All are expected to settle in 2006. ($ in millions):
| Expected | ||||||||||||||
| Settlement Date | ||||||||||||||
| 2006 | ||||||||||||||
| Average | ||||||||||||||
| Notional | Contract | Fair | ||||||||||||
| Amount | Rate | Value | ||||||||||||
|
Forward contracts:
|
||||||||||||||
|
Buy Euros, sell US dollars
|
$ | 6.7 | 1.20 | $ | ||||||||||
|
Buy Canadian dollars, sell US dollars
|
7.1 | 1.40 | 1.5 | |||||||||||
|
Other currencies
|
3.4 | (.1 | ) | |||||||||||
|
Total forward contracts
|
17.2 | 1.4 | ||||||||||||
|
Options:
|
||||||||||||||
|
Buy Canadian dollars, sell US dollars
|
17.9 | 1.12 | ||||||||||||
|
Buy US dollars, sell Euros
|
16.7 | 1.17 | (.3 | ) | ||||||||||
|
Total options
|
34.6 | (.3 | ) | |||||||||||
|
Total foreign currency derivatives
|
$ | 51.8 | $ | 1.1 | ||||||||||
See Note H to the consolidated financial statements for a
description of these agreements. All of these derivative
instruments qualify for hedge accounting treatment.
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, 2005.
21
Table of Contents
| Item 7A. | Quantitative and Qualitative Disclosures About Market Risk. |
The information contained under the caption Market Risk
Management included in Item 7 of this
Form 10-K is
incorporated herein by reference.
| Item 8. | Financial Statements and Supplementary Data. |
22
Table of Contents
FEDERAL SIGNAL CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
| Page | ||||
| 24 | ||||
| 26 | ||||
| 27 | ||||
| 28 | ||||
| 29 | ||||
| 30 | ||||
23
Table of Contents
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and Board of Directors
of Federal Signal Corporation
We have audited the accompanying consolidated balance sheets of
Federal Signal Corporation and subsidiaries as of
December 31, 2005 and 2004, and the related consolidated
statements of operations, shareholders’ equity and cash
flows for each of the three years in the period ended
December 31, 2005. 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 and
subsidiaries at December 31, 2005 and 2004, and the
consolidated results of their operations and their cash flows
for each of the three years in the period ended
December 31, 2005, in conformity with US 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.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
effectiveness of Federal Signal Corporation’s internal
control over financial reporting as of December 31, 2005,
based on criteria established in Internal Control-Integrated
Framework issued by the Committee of Sponsoring Organizations of
the Treadway Commission and our report dated February 22,
2006 expressed an unqualified opinion thereon.
 |
Chicago, Illinois
February 22, 2006
24
Table of Contents
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and Board of Directors
of Federal Signal Corporation
We have audited management’s assessment, included in
Item 9A(b) of the accompanying
Form 10-K, that
Federal Signal Corporation maintained effective internal control
over financial reporting as of December 31, 2005, based on
criteria established in Internal Control — Integrated
Framework issued by the Committee of Sponsoring Organizations of
the Treadway Commission (the COSO criteria). Federal Signal
Corporation’s management is responsible for maintaining
effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over
financial reporting. Our responsibility is to express an opinion
on management’s assessment and an opinion on the
effectiveness of the Company’s internal control over
financial reporting based on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control
over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of
internal control over financial reporting, evaluating
management’s assessment, testing and evaluating the design
and operating effectiveness of internal control, and performing
such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable
basis for our opinion.
A Company’s internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and 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.
In our opinion, management’s assessment that Federal Signal
Corporation maintained effective internal control over financial
reporting as of December 31, 2005, is fairly stated, in all
material respects, based on the COSO criteria. Also, in our
opinion, Federal Signal Corporation maintained, in all material
respects, effective internal control over financial reporting as
of December 31, 2005, based on the COSO criteria.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
consolidated balance sheets as of December 31, 2005 and
2004, and the related consolidated statements of operations,
shareholders’ equity and cash flows for each of the three
years in the period ended December 31, 2005 of Federal
Signal Corporation and our report dated February 22, 2006,
expressed an unqualified opinion thereon.
|
|
Chicago, Illinois
February 22, 2006
25
Table of Contents
FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
| December 31, | |||||||||||
| 2005 | 2004 | ||||||||||
| ($ in millions) | |||||||||||
| ASSETS | |||||||||||
|
Manufacturing activities:
|
|||||||||||
|
Current assets
|
|||||||||||
|
Cash and cash equivalents
|
$ | 91.9 | $ | 14.9 | |||||||
|
Accounts receivable, net of allowances for doubtful accounts of
$2.7 million and $2.2 million, respectively
|
170.0 | 192.1 | |||||||||
|
Inventories — Note B
|
158.0 | 153.1 | |||||||||
|
Other current assets
|
24.8 | 19.3 | |||||||||
|
Total current assets
|
444.7 | 379.4 | |||||||||
|
Properties and equipment — Note C
|
92.8 | 100.8 | |||||||||
|
Other assets
|
|||||||||||
|
Goodwill — Note Q
|
333.4 | 337.1 | |||||||||
|
Other deferred charges and assets
|
40.0 | 43.3 | |||||||||
|
Total manufacturing assets
|
910.9 | 860.6 | |||||||||
|
Assets of discontinued operations — Note K
|
39.4 | 75.3 | |||||||||
|
Financial services activities — Lease financing and
other receivables, net of allowances for doubtful accounts of
$3.9 million and $3.9 million, respectively, and net
of unearned finance revenue — Note D
|
169.2 | 196.5 | |||||||||
|
Total assets
|
$ | 1,119.5 | $ | 1,132.4 | |||||||
| LIABILITIES AND SHAREHOLDERS’ EQUITY | |||||||||||
|
Manufacturing activities:
|
|||||||||||
|
Current liabilities
|
|||||||||||
|
Short-term borrowings — Note E
|
$ | 6.6 | $ | 7.6 | |||||||
|
Current portion of long-term borrowings — Note E
|
66.0 | 11.3 | |||||||||
|
Accounts payable
|
75.6 | 70.3 | |||||||||
|
Accrued liabilities
|
|||||||||||
|
Compensation and withholding taxes
|
35.1 | 30.5 | |||||||||
|
Customer deposits
|
33.0 | 24.5 | |||||||||
|
Other
|
63.5 | 73.1 | |||||||||
|
Total current liabilities
|
279.8 | 217.3 | |||||||||
|
Long-term borrowings — Note E
|
203.7 | 215.7 | |||||||||
|
Long-term pension and other liabilities
|
50.5 | 34.3 | |||||||||
|
Deferred income taxes — Note F
|
26.0 | 56.6 | |||||||||
|
Total manufacturing liabilities
|
560.0 | 523.9 | |||||||||
|
Liabilities of discontinued operations
|
24.3 | 17.4 | |||||||||
|
Financial services activities — Borrowings —
Note E
|
158.9 | 178.4 | |||||||||
|
Total liabilities
|
743.2 | 719.7 | |||||||||
|
Shareholders’ equity — Notes I and J
|
|||||||||||
|
Common stock, $1 par value per share, 90.0 million
shares authorized, 48.8 million and 48.6 million
shares issued, respectively
|
48.8 | 48.6 | |||||||||
|
Capital in excess of par value
|
98.2 | 94.4 | |||||||||
|
Retained earnings
|
278.9 | 295.8 | |||||||||
|
Treasury stock, .7 million and .4 million shares,
respectively, at cost
|
(18.1 | ) | (13.6 | ) | |||||||
|
Deferred stock awards
|
(4.8 | ) | (3.1 | ) | |||||||
|
Accumulated other comprehensive (loss) income
|
|||||||||||
|
Foreign currency translation
|
(5.7 | ) | 3.2 | ||||||||
|
Net derivative gain, cash flow hedges
|
2.1 | 1.6 | |||||||||
|
Minimum pension liability
|
(23.1 | ) | (14.2 | ) | |||||||
|
Total
|
(26.7 | ) | (9.4 | ) | |||||||
|
Total shareholders’ equity
|
376.3 | 412.7 | |||||||||
|
Total liabilities and shareholders’ equity
|
$ | 1,119.5 | $ | 1,132.4 | |||||||
See notes to consolidated financial statements.
26
Table of Contents
FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
| For the Years Ended December 31, | ||||||||||||||
| 2005 | 2004 | 2003 | ||||||||||||
| ($ in millions, except per share data) | ||||||||||||||
|
Net sales
|
$ | 1,156.9 | $ | 1,063.9 | $ | 1,058.2 | ||||||||
|
Costs and expenses
|
||||||||||||||
|
Cost of sales
|
865.4 | 814.9 | 769.2 | |||||||||||
|
Selling, general and administrative
|
228.3 | 213.6 | 220.7 | |||||||||||
|
Gain on sale of product line
|
(6.7 | ) | ||||||||||||
|
Restructuring charges
|
.7 | 7.0 | 4.8 | |||||||||||
|
Operating income
|
69.2 | 28.4 | 63.5 | |||||||||||
|
Interest expense
|
23.1 | 20.6 | 18.8 | |||||||||||
|
Other income (expense)
|
.2 | (2.9 | ) | (.5 | ) | |||||||||
|
Income (expense) before income taxes
|
46.3 | 4.9 | 44.2 | |||||||||||
|
Income tax benefit (charge) — Note F
|
1.0 | 4.6 | (7.7 | ) | ||||||||||
|
Income from continuing operations
|
47.3 | 9.5 | 36.5 | |||||||||||
|
Discontinued operations — Note K:
|
||||||||||||||
|
(Loss) income from operations, net of tax (benefit) charge of
$(12.4) million, $(6.2) million and $0.4 million,
respectively
|
(50.3 | ) | (18.5 | ) | 1.2 | |||||||||
|
(Loss) gain on dispositions, net of tax (benefit) charge of
$(1.2) million, $7.9 million, and $.0 million,
respectively
|
(1.6 | ) | 6.7 | (.4 | ) | |||||||||
|
Net (loss) income*
|
$ | (4.6 | ) | $ | (2.3 | ) | $ | 37.3 | ||||||
|
Basic and diluted income (loss) per share
|
||||||||||||||
|
Income from continuing operations
|
$ | .98 | $ | .20 | $ | .76 | ||||||||
|
Discontinued operations:
|
||||||||||||||
|
(Loss) income from operations, net of taxes
|
(1.05 | ) | (.39 | ) | .03 | |||||||||
|
(Loss) gain on dispositions, net of taxes
|
(.03 | ) | .14 | (.01 | ) | |||||||||
|
Net (loss) income*
|
$ | (.10 | ) | $ | (.05 | ) | $ | .78 | ||||||
| * | amounts may not add to total due to rounding |
See notes to consolidated financial statements.
27
Table of Contents
FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
| Accumulated | ||||||||||||||||||||||||||||||
| Common | Capital in | Other | ||||||||||||||||||||||||||||
| Stock | Excess of | Deferred | Comprehensive | |||||||||||||||||||||||||||
| Par | Par | Retained | Treasury | Stock | Income | |||||||||||||||||||||||||
| Value | Value | Earnings | Stock | Awards | (Loss) | Total | ||||||||||||||||||||||||
| ($ in millions) | ||||||||||||||||||||||||||||||
|
Balance at December 31, 2002,
|
$ | 48.4 | $ | 91.1 | $ | 313.7 | $ | (18.0 | ) | $ | (3.2 | ) | $ | (34.0 | ) | $ | 398.0 | |||||||||||||
|
Comprehensive income:
|
||||||||||||||||||||||||||||||
|
Net income
|
37.3 | 37.3 | ||||||||||||||||||||||||||||
|
Foreign currency translation
|
14.4 | 14.4 | ||||||||||||||||||||||||||||
|
Unrealized gains on derivatives, net of $1.1 million tax
expense
|
1.9 | 1.9 | ||||||||||||||||||||||||||||
|
Minimum pension liability, net of $.2 million tax benefit
|
(.4 | ) | (.4 | ) | ||||||||||||||||||||||||||
|
Comprehensive income
|
53.2 | |||||||||||||||||||||||||||||
|
Cash dividends declared
|
(33.6 | ) | (33.6 | ) | ||||||||||||||||||||||||||
|
Compensation plans:
|
||||||||||||||||||||||||||||||
|
Exercise of stock options
|
.1 | .1 | ||||||||||||||||||||||||||||
|
Stock awards granted
|
.8 | (.8 | ) | |||||||||||||||||||||||||||
|
Related tax benefits
|
.2 | .2 | ||||||||||||||||||||||||||||
|
Amortization of deferred stock awards
|
1.2 | 1.2 | ||||||||||||||||||||||||||||
|
Treasury stock:
|
||||||||||||||||||||||||||||||
|
Issuance
|
3.3 | 3.3 | ||||||||||||||||||||||||||||
|
Purchases
|
(.1 | ) | (.1 | ) | ||||||||||||||||||||||||||
|
Retirement
|
(.2 | ) | .2 | |||||||||||||||||||||||||||
|
Other
|
(.1 | ) | (.2 | ) | .5 | .2 | ||||||||||||||||||||||||
|
Balance at December 31, 2003
|
48.4 | 91.9 | 317.4 | (14.8 | ) | (2.3 | ) | (18.1 | ) | 422.5 | ||||||||||||||||||||
|
Comprehensive income:
|
||||||||||||||||||||||||||||||
|
Net loss
|
(2.3 | ) | (2.3 | ) | ||||||||||||||||||||||||||
|
Foreign currency translation
|
6.8 | 6.8 | ||||||||||||||||||||||||||||
|
Unrealized gains on derivatives, net of $1.2 million tax
expense
|
1.9 | 1.9 | ||||||||||||||||||||||||||||
|
Comprehensive income
|
6.4 | |||||||||||||||||||||||||||||
|
Cash dividends declared
|
(19.3 | ) | (19.3 | ) | ||||||||||||||||||||||||||
|
Compensation plans:
|
||||||||||||||||||||||||||||||
|
Exercise of stock options
|
.1 | .4 | .5 | |||||||||||||||||||||||||||
|
Stock awards granted
|
.2 | 2.9 | .1 | (3.2 | ) | |||||||||||||||||||||||||
|
Related tax benefits
|
.5 | .5 | ||||||||||||||||||||||||||||
|
Amortization of deferred stock awards
|
1.0 | 1.0 | ||||||||||||||||||||||||||||
|
Other
|
(.1 | ) | (1.3 | ) | 1.1 | 1.4 | 1.1 | |||||||||||||||||||||||
|
Balance at December 31, 2004
|
48.6 | 94.4 | 295.8 | (13.6 | ) | (3.1 | ) | (9.4 | ) | 412.7 | ||||||||||||||||||||
|
Comprehensive loss:
|
||||||||||||||||||||||||||||||
|
Net loss
|
(4.6 | ) | (4.6 | ) | ||||||||||||||||||||||||||
|
Foreign currency translation
|
(8.9 | ) | (8.9 | ) | ||||||||||||||||||||||||||
|
Unrealized gains on derivatives, net of $.3 million tax
expense
|
.5 | .5 | ||||||||||||||||||||||||||||
|
Minimum pension liability, net of $5.3 million tax expense
|
(8.9 | ) | (8.9 | ) | ||||||||||||||||||||||||||
|
Comprehensive loss:
|
(21.9 | ) | ||||||||||||||||||||||||||||
|
Cash dividends declared
|
(11.6 | ) | (11.6 | ) | ||||||||||||||||||||||||||
|
Compensation plans:
|
||||||||||||||||||||||||||||||
|
Exercise of stock options
|
.3 | .3 | ||||||||||||||||||||||||||||
|
Stock awards granted
|
.2 | 4.7 | (.1 | ) | (4.8 | ) | ||||||||||||||||||||||||
|
Related tax benefits
|
||||||||||||||||||||||||||||||
|
Amortization of deferred stock awards
|
2.1 | 2.1 | ||||||||||||||||||||||||||||
|
Treasury stock:
|
||||||||||||||||||||||||||||||
|
Purchases
|
(5.0 | ) | (5.0 | ) | ||||||||||||||||||||||||||
|
Other
|
(1.2 | ) | (.7 | ) | .6 | 1.0 | (.3 | ) | ||||||||||||||||||||||
|
Balance at December 31, 2005
|
$ | 48.8 | $ | 98.2 | $ | 278.9 | $ | (18.1 | ) | $ | (4.8 | ) | $ | (26.7 | ) | $ | 376.3 | |||||||||||||
See notes to consolidated financial statements.
28
Table of Contents
FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
| For the Years Ended | ||||||||||||||
| December 31, | ||||||||||||||
| 2005 | 2004 | 2003 | ||||||||||||
| ($ in millions) | ||||||||||||||
|
Operating activities
|
||||||||||||||
|
Net (loss) income
|
$ | (4.6 | ) | $ | (2.3 | ) | $ | 37.3 | ||||||
|
Adjustments to reconcile net income (loss) to net cash provided
by operating activities:
|
||||||||||||||
|
Loss (income) on discontinued operations
|
50.3 | 18.5 | (1.2 | ) | ||||||||||
|
(Gain) loss on disposition of discontinued operations
|
1.6 | (6.7 | ) | 0.4 | ||||||||||
|
Non-cash restructuring charges
|
0.3 | 7.1 | 1.9 | |||||||||||
|
Gain on sale of product line
|
(6.7 | ) | ||||||||||||
|
Loss on minority interest divestiture
|
2.9 | (0.5 | ) | |||||||||||
|
Depreciation and amortization
|
21.5 | 19.6 | 18.4 | |||||||||||
|
Provision for doubtful accounts
|
(2.3 | ) | 3.3 | 3.2 | ||||||||||
|
Deferred income taxes
|
(4.4 | ) | 13.0 | 4.5 | ||||||||||
|
Changes in operating assets and liabilities, net of effects from
acquisitions and dispositions of companies
|
||||||||||||||
|
Accounts receivable
|
10.2 | (12.2 | ) | (14.1 | ) | |||||||||
|
Inventories
|
(.7 | ) | (10.5 | ) | 7.4 | |||||||||
|
Other current assets
|
(3.6 | ) | 7.4 | 1.7 | ||||||||||
|
Lease financing and other receivables
|
27.2 | 31.0 | (5.1 | ) | ||||||||||
|
Accounts payable
|
6.5 | 5.0 | 5.3 | |||||||||||
|
Customer deposits
|
9.2 | 2.8 | (9.6 | ) | ||||||||||
|
Accrued liabilities
|
1.6 | 8.0 | (4.5 | ) | ||||||||||
|
Income taxes
|
(22.9 | ) | (28.0 | ) | 2.5 | |||||||||
|
Pension contributions
|
(7.7 | ) | (5.2 | ) | (6.0 | ) | ||||||||
|
Other
|
8.7 | 4.8 | 11.6 | |||||||||||
|
Net cash provided by continuing operating activities
|
84.2 | 58.5 | 53.2 | |||||||||||
|
Net cash used for discontinued operating activities
|
(11.3 | ) | (6.0 | ) | 17.1 | |||||||||
|
Net cash provided by operating activities
|
72.9 | 52.5 | 70.3 | |||||||||||
|
Investing activities
|
||||||||||||||
|
Purchases of properties and equipment
|
(19.5 | ) | (20.1 | ) | (16.8 | ) | ||||||||
|
Proceeds from sales of properties and equipment
|
10.1 | |||||||||||||
|
Proceeds from sale of product line
|
11.9 | |||||||||||||
|
Investment in joint venture
|
(0.7 | ) | ||||||||||||
|
Other, net
|
(1.2 | ) | 5.5 | (0.8 | ) | |||||||||
|
Net cash provided (used for) continuing investing activities
|
0.6 | (14.6 | ) | (17.6 | ) | |||||||||
|
Net cash provided by (used for) discontinued investing activities
|
(3.6 | ) | 48.7 | 7.5 | ||||||||||
|
Net cash provided by (used for) investing activities
|
(3.0 | ) | 34.1 | (10.1 | ) | |||||||||
|
Financing activities
|
||||||||||||||
|
Proceeds (reduction) in short-term borrowings, net
|
53.8 | (36.3 | ) | (66.0 | ) | |||||||||
|
Proceeds from issuance of long-term borrowings
|
104.2 | 42.0 | ||||||||||||
|
Repayment of long-term borrowings
|
(133.1 | ) | (26.1 | ) | ||||||||||
|
Purchases of treasury stock
|
(5.0 | ) | (0.1 | ) | ||||||||||
|
Cash dividends paid to shareholders
|
(13.5 | ) | (19.3 | ) | (38.3 | ) | ||||||||
|
Other, net
|
0.7 | 0.7 | ||||||||||||
|
Net cash provided by (used for) continuing financing activities
|
7.1 | (81.7 | ) | (61.7 | ) | |||||||||
|
Net cash used for discontinued financing activities
|
1.8 | |||||||||||||
|
Net cash provided by (used for) financing activities
|
7.1 | (81.7 | ) | (59.9 | ) | |||||||||
|
Increase in cash and cash equivalents
|
77.0 | 4.9 | 0.3 | |||||||||||
|
Cash and cash equivalents at beginning of year
|
14.9 | 10.0 | 9.7 | |||||||||||
|
Cash and cash equivalents at end of year
|
$ | 91.9 | $ | 14.9 | $ | 10.0 | ||||||||
See notes to consolidated financial statements.
29
Table of Contents
FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ in millions, except per share data)
NOTE A — SIGNIFICANT ACCOUNTING POLICIES
Principles of consolidation: The consolidated financial
statements include the accounts of Federal Signal Corporation
and all of its subsidiaries. All significant intercompany
balances and transactions have been eliminated.
Reclassifications: Certain balances in 2004 and 2003 have
been reclassified to conform to the 2005 presentation. Included
with the reclassifications are restatements for discontinued
operations. The discontinued operations arise out of the
Environmental Products and Safety Products segments.
Cash equivalents: The Company considers all highly liquid
investments with a maturity of three-months or less, when
purchased, to be cash equivalents.
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. 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 an impairment of the
ability to make payments, additional allowances may be required.
Inventories: The Company’s inventories are stated at
the lower of cost or market. At December 31, 2005 and 2004,
approximately 45% and 47% of the Company’s inventories were
costed using the FIFO method, respectively. The remaining
portion of the Company’s inventories is costed using the
LIFO (last-in,
first-out) method. Included in the cost of inventories is raw
materials, direct wages and associated production costs.
Properties and depreciation: Properties and equipment are
stated at cost. Depreciation, for financial reporting purposes,
is computed principally on the straight-line method over the
estimated useful lives of the assets. Depreciation ranges from 8
to 40 years for buildings and 3 to 15 years for machinery and
equipment. Leasehold improvements are depreciated over the
shorter of the remaining life of the lease or the useful life of
the improvement. Property, plant and equipment and other
long-term assets are reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount may
not be recoverable. If the sum of the expected undiscounted cash
flows is less than the carrying value of the related asset or
group of assets, a loss is recognized for the difference between
the fair value and carrying value of the asset or group of
assets. Such analyses necessarily involve significant judgment.
Intangible assets: Intangible assets principally consist
of costs in excess of fair values of net assets acquired in
purchase transactions. These assets are assessed yearly for
impairment in the fourth quarter and also between annual tests
if an event occurs or circumstances change that would more
likely than not reduce the fair value of a reporting unit below
its carrying amount. Definite lived intangible assets are
amortized using the straight-line method.
Stock-based compensation plans: On December 16,
2004, the Financial Accounting Standards Board
(FASB) issued FASB Statement No. 123 (revised 2004),
Share Based Payment, which is a revision of FASB
Statement No. 123, Accounting for Stock Based
Compensation. Statement 123(R) supersedes APB Opinion
No. 25, Accounting for Stock Issued to Employees and
amends FASB Statement No. 95, Statement of Cash
Flows. Generally, the approach in Statement 123(R) is
similar to the approach described in Statement 123.
30
Table of Contents
FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ in millions, except per share
data) — (Continued)
However, Statement 123(R) requires all share-based payments
to employees, including grants of employee stock options, to be
recognized in the income statement based on fair values. Pro
forma disclosure is no longer an alternative.
In April 2005, the Securities and Exchange Commission
(“SEC”) issued a release that amends the compliance
dates for Statement 123(R). In compliance with the
SEC’s rule the Company will apply Statement 123(R) as
of January 1, 2006.
Statement 123(R) permits public companies to adopt its
requirements using one of two methods:
A “modified prospective” method in which compensation
cost is recognized beginning with the effective date
(a) based on the requirements of Statement 123(R) for
all share-based payments granted after the effective date and
(b) based on the requirements of Statement 123(R) for
all awards granted to employees prior to the effective date of
Statement 123(R) that remained unvested on the effective
date.
A “modified retrospective” method which includes the
requirements of the modified prospective method described above,
but also permits entities to restate, based on the amounts
previously recognized under Statement 123(R) for purposes
of pro forma disclosures, either (a) all prior periods
presented or (b) prior interim periods of the year of
adoption.
The Company plans to adopt Statement 123(R) using the
modified prospective method. It is expected that the fair value
of options will be estimated using a Black-Scholes option
pricing model.
The Company has three stock-based compensation plans, which are
described more fully in Note I. As permitted by
Statement 123 the Company accounts for these plans using
the intrinsic value method of APB Opinion No. 25. Stock
compensation expense reflected in net income relates to
restricted stock awards which vested over four years through
2004 and three years beginning in 2005. With regard to stock
options granted, no stock-based employee compensation cost is
reflected in net income (loss), as all options granted under
those plans had an exercise price equal to the market value of
the underlying common stock at the date of grant.
Accordingly, the adoption of Statement 123(R)’s fair
value method will have a significant impact on our results of
operations, although it will have no impact on our overall
financial position. The impact of adoption of
Statement 123(R) cannot be predicted at this time because
it will depend on the levels of share based-payments granted in
the future. However, had we adopted Statement 123(R) in
prior periods, the impact of that standard would have
approximated the impact of Statement 123 as described in
the disclosure of pro forma net income and earnings per share in
Note I to our consolidated financial statements.
Statement 123(R) also requires the benefits of tax
deductions in excess of recognized compensation cost to be
reported as a financing cash flow, rather than as an operating
cash flow as required under current literature. This requirement
will reduce net operating cash flows and increase net financing
cash flows in periods after adoption. While the Company cannot
estimate what those amounts will be in the future, because they
depend on, among other things, when employees exercise stocks
options, the amount of operating cash flows recognized in prior
periods for such excess tax deductions were $0.3 million,
$0.5 million and $0.1 million in 2005, 2004 and 2003,
respectively.
Use of estimates: The preparation of financial statements
in conformity with accounting principles generally accepted in
the United States requires management to make estimates and
assumptions that affect the reported amounts of assets and
liabilities, disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual
results could differ from those estimates.
Warranty: Sales of many of the Company’s products
carry express warranties based on the terms that are generally
accepted in the Company’s marketplaces. The Company records
provisions for estimated
31
Table of Contents
FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ in millions, except per share
data) — (Continued)
warranty at the time of sale based on historical experience and
periodically adjusts these provisions to reflect actual
experience. Infrequently, a material warranty issue can arise
which is beyond the scope of the Company’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-insured for a portion of these claims. The
Company establishes a liability 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 income 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 income statement, the gain or loss included in
accumulated other comprehensive income is reported on the same
line in the consolidated statements of income as the hedged
item. In addition, both the fair value of changes excluded from
the Company’s effectiveness assessments and the ineffective
portion of the changes in the fair value of derivatives used as
cash flow hedges are reported in selling, general and
administrative expenses in the consolidated statements of
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 assets and other 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.
Amounts related to terminated interest rate swaps are deferred
and amortized as an adjustment to interest expense over the
original period of interest exposure, provided the designated
liability continues to exist or is probable of occurring.
Revenue recognition: The Company recognizes revenue when
all of the following are satisfied: persuasive evidence of an
arrangement exists, the price is fixed or determinable,
collectibility is reasonably assured and title has passed or
services have been rendered. Typically, title passes at time of
shipment,
32
Table of Contents
FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ in millions, except per share
data) — (Continued)
however occasionally title passes later or earlier than shipment
due to customer contracts or letter of credit terms.
Infrequently, a sales contract qualifies for percentage of
completion or for multiple-element accounting. For percentage of
completion revenues, the Company utilizes the
cost-to-cost method and
the contract payments are received as progress payments as costs
are incurred or based on installation and performance
milestones. At the inception of a sales-type lease, the Company
records the product sales price and related costs and expenses
of the sale. Financing revenues are included in income over the
life of the lease. Management believes that all relevant
criteria and conditions are considered when recognizing revenues.
Product shipping costs: Product shipping costs are
expensed as incurred and are included in cost of sales.
Income (loss) per share: Basic net income per share is
calculated using income available to common shareholders (net
income) divided by the weighted average number of common shares
outstanding during the year. Diluted net income per share is
calculated in the same manner except that the denominator is
increased to include the weighted number of additional shares
that would have been outstanding had dilutive stock option
shares been actually issued. The Company uses the treasury stock
method to calculate dilutive shares. See Note O for the
calculation of basic and diluted net income per share.
NOTE B — INVENTORIES
Inventories at December 31 are summarized as follows:
| 2005 | 2004 | |||||||
|
Finished goods
|
$ | 40.2 | $ | 43.5 | ||||
|
Work in process
|
59.3 | 49.8 | ||||||
|
Raw materials
|
58.5 | 59.8 | ||||||
|
Total inventories
|
$ | 158.0 | $ | 153.1 | ||||
If the Company had used the
first-in, first-out
cost method exclusively, which approximates replacement cost,
inventories would have aggregated $170.7 million and
$163.1 million at December 31, 2005 and 2004,
respectively.
NOTE C — PROPERTIES AND EQUIPMENT
Properties and equipment at December 31 are summarized as
follows:
| 2005 | 2004 | |||||||
|
Land
|
$ | 8.0 | $ | 9.2 | ||||
|
Buildings and improvements
|
54.2 | 55.0 | ||||||
|
Machinery and equipment
|
224.8 | 225.4 | ||||||
|
Accumulated depreciation
|
(194.2 | ) | (188.8 | ) | ||||
|
Total properties and equipment
|
$ | 92.8 | $ | 100.8 | ||||
NOTE D — LEASE FINANCING AND OTHER RECEIVABLES
As an added service to its customers, the Company is engaged in
financial services activities. These activities primarily
consist of providing long-term financing for certain US
customers purchasing vehicle-based products from the
Company’s Environmental Products and Fire Rescue groups. A
substantial portion of these receivables is due from
municipalities and volunteer fire departments. Financing is
provided through
33
Table of Contents
FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ in millions, except per share
data) — (Continued)
sales-type lease contracts with terms that generally range from
one to ten years. The amounts recorded as lease financing
receivables represent amounts equivalent to normal selling
prices less subsequent customer payments.
Leases past due more than 120 days are evaluated and a
determination made whether or not to place the lease in a
non-accrual status based upon customer payment history and other
relevant information at the time of the evaluation.
Lease financing and other receivables will become due as
follows: $61.8 million in 2006, $28.5 million in 2007,
$20.8 million in 2008, $17.5 million in 2009,
$13.8 million in 2010 and $30.7 million thereafter. At
December 31, 2005 and 2004, unearned finance revenue on
these leases aggregated $20.8 million and
$24.5 million, respectively.
NOTE E — DEBT
Short-term borrowings at December 31 consisted of the
following:
| 2005 | 2004 | |||||||
|
Revolving Credit Facility
|
$ | $ | 45.0 | |||||
|
Other foreign lines of credit
|
6.6 | 7.6 | ||||||
|
Total short-term borrowings
|
6.6 | 52.6 | ||||||
|
Less short-term financial services activities —
borrowings
|
(45.0 | ) | ||||||
|
Net short-term borrowings
|
$ | 6.6 | $ | 7.6 | ||||
On February 3, 2006, the Company entered into an Amended
and Restated Credit Agreement (“Amended Credit
Agreement”) and terminated the Revolving Credit Facility.
The Amended Credit Agreement provides for borrowings of up to
$110.0 million and matures March 31, 2009. Borrowings
under the Amended Credit Agreement bear interest, at the
Company’s option, at either the Base Rate or LIBOR, plus an
applicable margin. The applicable margin ranges from .25% to
1.00% for Base Rate borrowings and 1.50% to 2.25% for LIBOR
borrowings depending on the Company’s total indebtedness to
capital ratio.
The Amended Credit Agreement contains certain financial
covenants for each fiscal quarter ending on or after
December 31, 2005 that include maintaining an interest
coverage ratio of not less than 2.5 through September 30,
2006 and 3.0 thereafter. The Company has the right to request,
subject to certain conditions, an increase of up to
$15 million in the aggregate commitment under the Amended
Credit Agreement. The Company has no borrowings outstanding
under the Amended Credit Agreement.
Weighted average interest rates on short-term borrowings were
7.25% and 3.28% at December 31, 2005 and 2004,
respectively. The 7.25% rate shown for December 31, 2005
was associated with a small short-notice draw at a foreign
subsidiary and is not reflective of the Company’s usual
borrowing rates.
34
Table of Contents
FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ in millions, except per share
data) — (Continued)
Long-Term Borrowings at December 31 consisted of the
following:
| 2005 | 2004 | ||||||||
|
6.79% Unsecured Private Placement note due in annual
installments of $10.0 million due 2007-2011
|
$ | 50.0 | $ | 50.0 | |||||
|
6.37% Unsecured Private Placement note due in annual
installments of $10.0 million due 2005-2008
|
30.0 | 40.0 | |||||||
|
6.60% Unsecured Private Placement note due in annual
installments of $7.1 million due 2005-2011
|
42.9 | 50.0 | |||||||
|
4.93% Unsecured Private Placement note due in annual
installments of $8.0 million due 2008-2012
|
40.0 | 40.0 | |||||||
|
5.24% Unsecured Private Placement note due 2012
|
60.0 | 60.0 | |||||||
|
5.49% Unsecured Private Placement note due 2006
|
65.0 | 65.0 | |||||||
|
Unsecured Private Placement note, floating rate (5.57% and 3.59%
at December 31, 2005 and 2004, respectively) due 2008-2013
|
50.0 | 50.0 | |||||||
|
Loan Agreement (described below), due 2006-2017
|
91.4 | ||||||||
|
Other
|
2.0 | 3.4 | |||||||
| 431.3 | 358.4 | ||||||||
|
Fair value of interest rate swaps
|
(6.9 | ) | (6.7 | ) | |||||
|
Unamortized balance of terminated fair value interest rate swaps
|
4.2 | 8.7 | |||||||
| 428.6 | 360.4 | ||||||||
|
Less current maturities, excluding financial services activities
|
(66.0 | ) | (11.3 | ) | |||||
|
Less financial services activities — borrowings
|
(158.9 | ) | (133.4 | ) | |||||
|
Total long-term borrowings, net
|
$ | 203.7 | $ | 215.7 | |||||
Total financial services activities borrowings are
$178.4 million at December 31, 2004. Also at
December 31, 2004, short-term borrowings were
$45.0 million and long-term borrowings were
$133.4 million.
On March 24, 2005,
E-One, Inc.
(“E-One”), a
wholly-owned subsidiary of Federal Signal Corporation, entered
into an agreement with Bank of America Leasing &
Capital, LLC (the “Loan Agreement”) with respect to a
nonrecourse loan facility (the “Facility”).
E-One’s
indebtedness and other obligations under the Loan Agreement are
payable out of certain customer leases of emergency equipment
and other collateral as described in the Loan Agreement. On
March 24, 2005,
E-One borrowed
$75 million under the Facility.
E-One borrowed an
additional $29.2 million on December 15, 2005. Under
the Loan Agreement,
E-One may borrow
additional amounts under the Facility, at the discretion of the
lender, in an amount equal to 95% of the net present value of
any additional customer leases included under the Facility. As
of December 31, 2005, $12.8 million in lease payments
have been applied to reduce the Facility balance to
$91.4 million.
The Loan Agreement contains covenants and events of default that
are ordinary and customary for similar credit facilities. At the
election of E-One, the
Facility bears interest at a fixed rate or a floating LIBOR
rate. The $91.4 million outstanding at December 31,
2005 in the Facility bore interest at a
30-day floating LIBOR
rate plus 1.35% (5.72% as of December 31, 2005). The
obligations of E-One
under the Loan Agreement are nonrecourse to
E-One and the Company,
except with respect to certain representations and warranties.
E-One’s recourse
obligations under the Loan Agreement are guaranteed by the
Company.
In connection with the closing of the Loan Agreement, the
Company utilized the proceeds from the initial funding of the
Loan Agreement to repay approximately $63.0 million
outstanding under its previous
35
Table of Contents
FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ in millions, except per share
data) — (Continued)
revolving credit facility, and the remainder of the proceeds
were used by the Company for general corporate purposes.
Aggregate maturities of total borrowings amount to approximately
$111.1 million in 2006, $46.6 million in 2007,
$71.2 million in 2008, $39.1 million in 2009,
$56.5 million in 2010 and $113.4 million thereafter.
The fair values of these borrowings aggregated
$450.0 million and $412.9 million at December 31,
2005 and 2004, respectively. Included in 2006 maturities of
$111.1 million are $38.5 million attributable to
financial services borrowings.
For each of the above Private Placement notes, significant
covenants consist of a maximum
debt-to-capitalization
ratio and minimum net worth. At December 31, 2005, all of
the Company’s retained earnings were free of any
restrictions and the Company was in compliance with the
financial covenants and agreements.
At December 31, 2005 and 2004, deferred financing fees
total $1.2 and $1.8 million, respectively, and are included
in other deferred charges and assets on the balance sheet.
The Company paid interest of $24.8 million in 2005,
$24.1 million in 2004 and $21.3 million in 2003. See
Note H regarding the Company’s utilization of
derivative financial instruments relating to outstanding debt.
NOTE F — INCOME TAXES
The provisions for income taxes for the three-year period ended
December 31, 2005 consisted of the following:
| 2005 | 2004 | 2003 | |||||||||||
|
Current:
|
|||||||||||||
|
Federal
|
$ | 29.5 | $ | (30.0 | ) | $ | (6.4 | ) | |||||
|
Foreign
|
7.1 | 6.4 | 6.9 | ||||||||||
|
State and local
|
1.1 | .4 | .3 | ||||||||||
| 37.7 | (23.2 | ) | .8 | ||||||||||
|
Deferred:
|
|||||||||||||
|
Federal
|
(38.0 | ) | 19.3 | 7.4 | |||||||||
|
Foreign
|
(.4 | ) | (.2 | ) | (.7 | ) | |||||||
|
State and local
|
(.3 | ) | (.5 | ) | .2 | ||||||||
| (38.7 | ) | 18.6 | 6.9 | ||||||||||
|
Total income taxes
|
$ | (1.0 | ) | $ | (4.6 | ) | $ | 7.7 | |||||
36
Table of Contents
FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ in millions, except per share
data) — (Continued)
Differences between the statutory federal income tax rate and
the effective income tax rate for the three-year period ended
December 31, 2005 are summarized below:
| 2005 | 2004 | 2003 | ||||||||||
|
Statutory federal income tax rate
|
35.0 | % | 35.0 | % | 35.0 | % | ||||||
|
State income taxes, net of federal tax benefit
|
1.7 | (.1 | ) | 1.5 | ||||||||
|
Tax-exempt interest
|
(5.4 | ) | (56.8 | ) | (6.7 | ) | ||||||
|
Benefits from shutdown of U.K. facility
|
0.0 | 0.0 | (6.4 | ) | ||||||||
|
Dividend repatriation
|
(5.5 | ) | 0.0 | 0.0 | ||||||||
|
Strategy relating to sale of U.K. lighting business
|
(4.0 | ) | 0.0 | 0.0 | ||||||||
|
Exports benefit
|
(1.7 | ) | (22.2 | ) | (2.3 | ) | ||||||
|
Tax reserves
|
(17.2 | ) | (3.1 | ) | 0.0 | |||||||
|
R&D tax credits
|
(1.3 | ) | (23.7 | ) | (2.0 | ) | ||||||
|
Foreign tax effects
|
(2.9 | ) | (23.3 | ) | (1.7 | ) | ||||||
|
Valuation allowances
|
1.1 | 4.7 | 1.5 | |||||||||
|
Other, net
|
(1.9 | ) | (2.9 | ) | (1.4 | ) | ||||||
|
Effective income tax rate
|
(2.1 | )% | (92.4 | )% | 17.5 | % | ||||||
The Company’s effective tax rate of (2.1)% reflects a
benefit of $6.0 million primarily due to a reduction in
reserves in the second quarter associated with the completion of
an audit of the Company’s US tax returns which encompassed
the years 1999 through 2003.
On October 22, 2004, the American Jobs Creation Act was
signed into law. One provision of the legislation allowed
certain repatriated foreign earnings to be taxed at 5.25%,
provided certain provisions are met. During 2005, the Company
recognized a tax benefit of approximately $2.5 million
related to the repatriation of foreign earnings under the Act.
The benefit was realized because a portion of the repatriated
earnings had previously been reserved at higher tax rates.
37
Table of Contents
FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ in millions, except per share
data) — (Continued)
Deferred income tax assets and liabilities at December 31
are summarized as follows:
| 2005 | 2004 | |||||||||
|
Deferred tax assets:
|
||||||||||
|
Accrued expenses
|
$ | 12.4 | $ | 11.6 | ||||||
|
Net operating loss, alternative minimum tax, research and
development, and foreign tax credit carry forwards
|
20.8 | 11.1 | ||||||||
|
Other — primarily minimum pension liability
|
8.9 | |||||||||
|
Gross deferred tax assets
|
42.1 | 22.7 | ||||||||
|
Valuation allowance
|
(3.4 | ) | (5.0 | ) | ||||||
|
Total deferred tax assets
|
38.7 | 17.7 | ||||||||
|
Deferred tax liabilities:
|
||||||||||
|
Depreciation and amortization
|
(45.8 | ) | (47.6 | ) | ||||||
|
Revenue recognition
|
(2.7 | ) | (2.9 | ) | ||||||
|
Pension liabilities
|
(3.5 | ) | (6.6 | ) | ||||||
|
Other
|
0.0 | (7.2 | ) | |||||||
|
Undistributed earnings of non-US subsidiary
|
(.2 | ) | (5.6 | ) | ||||||
|
Gross deferred tax liabilities
|
(52.2 | ) | (69.9 | ) | ||||||
|
Net deferred tax liability
|
$ | (13.5 | ) | $ | (52.2 | ) | ||||
Federal and state income taxes have not been provided on
accumulated undistributed earnings of certain foreign
subsidiaries aggregating approximately $65.0 million at
December 31, 2005, as such earnings have been reinvested in
the business. The determination of the amount of the
unrecognized deferred tax liability related to the undistributed
earnings is not practicable.
The deferred tax asset for tax loss carryforwards includes state
net operating loss carryforwards of $1.2 million, which
will begin to expire in 2006; foreign net operating loss
carryforwards of $2.3 million of which $1.7 million
has an indefinite life. The deferred tax asset for tax credit
carryforwards includes US research tax credit carryforwards of
$3.8 million, which will begin to expire in 2022, US
foreign tax credits of $9.0 million, which will begin to
expire in 2013 and US alternative minimum tax credit
carryforwards of $4.5 million with no expiration.
Valuation allowances totaling $3.4 million have been
established and include $1.1 million related to state net
operating loss carryforwards and $2.3 million related to
the foreign net operating loss carryforwards.
The net deferred tax liability at December 31 is classified
in the balance sheet as follows:
| 2005 | 2004 | |||||||
|
Current net deferred tax assets
|
$ | 12.5 | $ | 4.4 | ||||
|
Long-term net deferred tax liability
|
(26.0 | ) | (56.6 | ) | ||||
| $ | (13.5 | ) | $ | (52.2 | ) | |||
The Company paid income taxes of $9.8 million in 2005,
$6.3 million in 2004 and $9.7 million in 2003.
38
Table of Contents
FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ in millions, except per share
data) — (Continued)
Income from continuing operations before taxes for the
three-year period ended December 31, 2005 consisted of the
following:
| 2005 | 2004 | 2003 | ||||||||||
|
United States
|
$ | 20.4 | $ | (14.0 | ) | $ | 26.1 | |||||
|
Non-US
|
25.9 | 18.9 | 18.1 | |||||||||
| $ | 46.3 | $ | 4.9 | $ | 44.2 | |||||||
NOTE G — POSTRETIREMENT BENEFITS
The Company and its subsidiaries sponsor a number of defined
benefit retirement plans in the US 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 several retirement plans
that provide defined benefits to employees under certain
collective bargaining agreements.
The Company uses December 31 and September 30
measurement dates for its US and non-US benefit plans,
respectively.
The components of net periodic pension expense for the
three-year period ended December 31, 2005 are summarized as
follows:
| US Benefit Plans | Non-US Benefit Plan | ||||||||||||||||||||||||
| 2005 | 2004 | 2003 | 2005 | 2004 | 2003 | ||||||||||||||||||||
|
Company-sponsored plans
|
|||||||||||||||||||||||||
|
Service cost
|
$ | 4.8 | $ | 4.6 | $ | 4.1 | $ | .2 | $ | .2 | $ | .2 | |||||||||||||
|
Interest cost
|
8.1 | 7.7 | 7.1 | 2.8 | 2.6 | 2.2 | |||||||||||||||||||
|
Expected return on plan assets
|
(8.8 | ) | (8.2 | ) | (7.8 | ) | (3.6 | ) | (3.2 | ) | (2.7 | ) | |||||||||||||
|
Amortization of transition amount
|
(.2 | ) | (.2 | ) | (.2 | ) | |||||||||||||||||||
|
Other
|
1.9 | 1.6 | .9 | .7 | .9 | .8 | |||||||||||||||||||
| 5.8 | 5.5 | 4.1 | .1 | .5 | .5 | ||||||||||||||||||||
|
Multiemployer plans
|
.3 | .2 | .2 | ||||||||||||||||||||||
|
Net periodic pension expense
|
$ | 6.1 | $ | 5.7 | $ | 4.3 | $ | .1 | $ | .5 | $ | .5 | |||||||||||||
The following table summarizes the weighted-average assumptions
used in determining pension costs for the three-year period
ended December 31, 2005:
| US Benefit Plans | Non-US Benefit Plan | |||||||||||||||||||||||
| 2005 | 2004 | 2003 | 2005 | 2004 | 2003 | |||||||||||||||||||
|
Discount rate
|
6.00 | % | 6.25 | % | 6.75 | % | 5.75 | % | 5.50 | % | 5.50 | % | ||||||||||||
|
Rate of increase in compensation levels
|
3.50 | % | 3.50 | % | 3.50 | % | NA* | NA* | 2.50 | % | ||||||||||||||
|
Expected long term rate of return on plan assets
|
9.00 | % | 9.00 | % | 9.00 | % | 8.30 | % | 8.30 | % | 8.00 | % | ||||||||||||
| * | Non-US plan benefits are no longer adjusted for compensation level changes |
39
Table of Contents
FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ in millions, except per share
data) — (Continued)
The following summarizes the changes in the projected benefit
obligation and plan assets, the funded status of the
Company-sponsored plans and the major assumptions used to
determine these amounts at December 31:
| Non-US Benefit | |||||||||||||||||
| US Benefit Plans | Plan | ||||||||||||||||
| 2005 | 2004 | 2005 | 2004 | ||||||||||||||
|
Projected benefit obligation at beginning of year
|
$ | 134.2 | $ | 120.9 | $ | 49.3 | $ | 46.3 | |||||||||
|
Service cost
|
4.8 | 4.6 | .2 | .2 | |||||||||||||
|
Interest cost
|
8.2 | 7.7 | 2.8 | 2.6 | |||||||||||||
|
Actuarial loss (gain)
|
10.6 | 4.4 | 4.4 | (1.5 | ) | ||||||||||||
|
Benefits paid
|
(4.6 | ) | (3.4 | ) | (3.3 | ) | (2.1 | ) | |||||||||
|
Increase due to translation
|
(1.2 | ) | 3.8 | ||||||||||||||
|
Projected benefit obligation at end of year
|
$ | 153.2 | $ | 134.2 | $ | 52.2 | $ | 49.3 | |||||||||
|
Accumulated benefit obligation at end of year
|
$ | 134.2 | $ | 117.6 | $ | 52.2 | $ | 49.3 | |||||||||
|
Fair value of plan assets at beginning of year
|
$ | 102.6 | $ | 88.6 | $ | 43.5 | $ | 38.2 | |||||||||
|
Actual return on plan assets
|
4.5 | 8.6 | 7.5 | 3.6 | |||||||||||||
|
Company contribution
|
5.3 | 8.8 | 2.2 | .8 | |||||||||||||
|
Benefits and expenses paid
|
(4.6 | ) | (3.4 | ) | (3.3 | ) | (2.3 | ) | |||||||||
|
Increase due to translation
|
(1.1 | ) | 3.2 | ||||||||||||||
|
Fair value of plan assets at end of year
|
$ | 107.8 | $ | 102.6 | $ | 48.8 | $ | 43.5 | |||||||||
|
Funded status of plan at end of year
|
$ | (45.4 | ) | $ | (31.6 | ) | $ | (3.4 | ) | $ | (5.8 | ) | |||||
|
Unrecognized actuarial loss
|
52.4 | 39.2 | 13.3 | 13.5 | |||||||||||||
|
Unrecognized prior service cost
|
1.7 | 1.7 | |||||||||||||||
|
Unrecognized net transition obligation
|
(.1 | ) | |||||||||||||||
|
Net amount recognized as prepaid benefit cost in the balance
sheet
|
$ | 8.7 | $ | 9.2 | $ | 9.9 | $ | 7.7 | |||||||||
|
Amounts recognized in the balance sheet consist of:
|
|||||||||||||||||
|
Prepaid benefit cost
|
$ | 8.7 | $ | 9.2 | $ | 9.9 | $ | 7.7 | |||||||||
|
Accrued benefit liability
|
(35.1 | ) | (24.2 | ) | (3.3 | ) | |||||||||||
|
Intangible asset
|
1.7 | 1.7 | |||||||||||||||
|
Accumulated other comprehensive income, pre-tax
|
33.4 | 22.5 | 3.3 | ||||||||||||||
|
Net amount recognized
|
$ | 8.7 | $ | 9.2 | $ | 9.9 | $ | 7.7 | |||||||||
The following table summarizes the weighted-average assumptions
used in determining benefit obligations as of December 31,
2005 and 2004:
| US Benefit | Non-US | |||||||||||||||
| Plans | Benefit Plan | |||||||||||||||
| 2005 | 2004 | 2005 | 2004 | |||||||||||||
|
Discount rate
|
5.75 | % | 6.00 | % | 5.10 | % | 5.75 | % | ||||||||
|
Rate of increase in compensation levels
|
3.50 | % | 3.50 | % | NA* | NA* | ||||||||||
|
Expected long-term rate of return on plan assets
|
8.50 | % | 9.00 | % | 7.80 | % | 8.30 | % | ||||||||
| * | Non-US plan benefits are no longer adjusted for compensation level charges. |
40
Table of Contents
FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ in millions, except per share
data) — (Continued)
The following table summarizes the Company’s asset
allocations for its benefits plans as of December 31, 2005
and 2004 and the target allocation for 2006 by asset category:
| US Benefit Plans | Non-US Benefit Plan | |||||||||||||||||||||||
| Percentage of | Percentage of | |||||||||||||||||||||||
| Plan Assets | Plan Assets | |||||||||||||||||||||||
| as of | Target | as of | Target | |||||||||||||||||||||
| December 31, | Allocation | September 30, | Allocation | |||||||||||||||||||||
| 2005 | 2004 | 2006 | 2005 | 2004 | 2006 | |||||||||||||||||||
|
Equity securities
|
77 | % | 77 | % | 75 | % | 61 | % | 57 | % | 60 | % | ||||||||||||
|
Fixed income securities
|
23 | % | 23 | % | 25 | % | 36 | % | 42 | % | 40 | % | ||||||||||||
|
Cash
|
3 | % | 1 | % | ||||||||||||||||||||
|
Total
|
100 | % | 100 | % | 100 | % | 100 | % | 100 | % | 100 | % | ||||||||||||
The investment strategy for the US benefit plans is to
1) maintain a liquid, diversified portfolio that can
provide a weighted-average target return of 8.5% or more,
2) maintain liquidity to meet obligations and
3) prudently manage administrative and management costs.
The plan invests in equity and fixed income instruments. The
equity allocation has an upper limit of 80% of plan assets with
US equities comprising 50% to 80% while Company stock may
comprise up to 10%. The fixed income allocation has an upper
limit of 40% of plan assets with US high grade fixed income
securities comprising 15% to 40%; US high yield fixed income
investments may comprise up to 15% of plan assets. The use of
derivatives is allowed in limited circumstances. The plan held
no derivatives during the years ended December 31, 2005 and
2004.
As of December 31, 2005 and 2004, equity securities
included .2 million and .3 million shares of the
Company’s common stock valued at $3.5 million and
$6.0 million, respectively. Dividends paid on the
Company’s common stock to the pension trusts aggregated
$.1 million and $.2 million for each of the years
ended December 31, 2005 and 2004, respectively.
Plan assets for the non-US benefit plans consist principally of
a diversified portfolio of equity securities, U.K. government
obligations and fixed interest securities.
The Company expects to contribute approximately
$10.0 million to the US benefit plans in 2006. Future
contributions to the plans will be based on such factors as
annual service cost as well as impacts to 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:
| US Benefit | Non-US | |||||||
| Plans | Benefit Plan | |||||||
|
2006
|
$ | 4.1 | $ | 2.4 | ||||
|
2007
|
4.3 | 2.5 | ||||||
|
2008
|
4.8 | 2.6 | ||||||
|
2009
|
5.2 | 2.8 | ||||||
|
2010
|
5.8 | 3.0 | ||||||
|
2011-2015
|
41.3 | 17.5 | ||||||
| $ | 65.5 | $ | 30.8 | |||||
The Company also sponsors a number of defined contribution
pension plans covering a majority of its employees.
Participation in the plans is at each employee’s election.
Company contributions to these plans are based on a percentage
of employee contributions.
41
Table of Contents
FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ in millions, except per share
data) — (Continued)
The cost of these plans, including the plans of companies
acquired during the three-year period ended December 31,
2005, was $5.7 million in 2005, $6.0 million in 2004
and $5.2 million in 2003.
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 $2.8 million and
$2.1 million at December 31, 2005 and 2004,
respectively, were fully accrued. The net periodic
postretirement benefit costs have not been significant during
the three-year period ended December 31, 2005.
In December 2003, the Medicare Prescription Drug, Improvement
and Modernization Act of 2003 (the “Act”) became law.
The Act introduced a prescription drug benefit under Medicare
and a federal subsidy to sponsors of certain retiree health care
benefit plans. The Act did not have a material impact on the
Company’s accumulated postretirement obligations, results
of operations or cash flows.
NOTE H — DERIVATIVE FINANCIAL INSTRUMENTS
All derivative financial instruments are reported on the balance
sheet at their respective fair values. Changes in fair value are
recognized either in earnings or equity, depending on the nature
of the underlying exposure being hedged and how effective a
derivative is at offsetting price movements in the underlying
exposure. All of the Company’s derivative positions
existing at December 31, 2005 qualified for hedge
accounting under SFAS No. 133, except as described
below. Derivatives documentation policies comply with the
requirements of SFAS No. 133.
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 converted fixed rate debt to variable rate debt. At
December 31, 2005, the Company’s receive fixed, pay
variable swap agreements with financial institutions terminate
in varying amounts between 2006 to 2012. These agreements are
designated as fair value hedges. In the second quarter of 2005,
the Company dedesignated 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.
At December 31, 2005, 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
terminate in varying amounts between 2006 to 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.
42
Table of Contents
FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ in millions, except per share
data) — (Continued)
The fair values of interest rate swaps are based on quotes from
financial institutions. The following table summarizes the
Company’s interest rate swaps at December 31, 2005 and
2004:
| Fair Value Swaps | Cash Flow Swaps | |||||||||||||||
| 2005 | 2004 | 2005 | 2004 | |||||||||||||
|
Notional amount
|
$ | 202.9 | $ | 220.0 | $ | 105.0 | $ | 85.0 | ||||||||
|
Fair value
|
(10.0 | ) | (6.7 | ) | 3.3 | .8 | ||||||||||
|
Average pay rate
|
7.2 | % | 5.5 | % | 6.3 | % | 4.4 | % | ||||||||
|
Average receive rate
|
6.0 | % | 6.0 | % | 6.2 | % | 2.5 | % | ||||||||
In 2004 and 2003, 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 a cash payment of $.5 million in 2004 and cash
receipts of $7.2 million in 2003. The associated gains were
deferred and are being amortized as a reduction to interest
expense over the life of the underlying debt. The unamortized
balance of these gains at December 31, 2005 and 2004 was
$4.2 million and $8.7 million, respectively.
From time to time the Company designates foreign currency
forward exchange contracts as fair value hedges to protect
against the variability in exchange rates on short-term
intercompany borrowings and firm commitments denominated in
foreign currencies. There were no outstanding foreign currency
fair value hedges as of December 31, 2005.
The Company also manages the volatility of cash flows caused by
fluctuations in currency rates by entering into foreign exchange
forward contracts and options. These derivative instruments
hedge portions of the Company’s anticipated third-party
purchases and forecasted intercompany sales denominated in
foreign currencies and mature in 2006.
The following table summarizes the Company’s foreign
exchange contracts at December 31, 2005 and 2004:
| 2005 | 2004 | |||||||||||||||
| Notional | Fair | Notional | Fair | |||||||||||||
| Amount | Value | Amount | Value | |||||||||||||
|
Fair value forwards
|
$ | $ | $ | 9.9 | $ | (.1 | ) | |||||||||
|
Cash flow forwards
|
17.2 | 1.4 | 24.9 | 2.6 | ||||||||||||
|
Options
|
34.6 | (.3 | ) | 25.1 | .4 | |||||||||||
|
Total
|
$ | 51.8 | $ | 1.1 | $ | 59.9 | $ | 2.9 | ||||||||
The Company expects $1.1 million of net gains that are
reported in accumulated other comprehensive income as of
December 31, 2005 to be reclassified into earnings in 2006
as the respective hedged transactions will affect 2006 earnings.
NOTE I — STOCK-BASED COMPENSATION
The Company’s stock benefit plans, approved by the
Company’s shareholders, authorize the grant of benefit
shares or units to key employees and directors. The plan
approved in 1988 authorized, until May 1998, the grant of up to
2.7 million benefit shares or units (as adjusted for
subsequent stock splits and dividends).
The plan approved in 1996 and amended in 1999 and 2003
authorized the grant of up to 4.0 million benefit shares or
units until April 2006. These share or unit amounts exclude
amounts that were issued under predecessor plans. Benefit shares
or units include incentive and non-incentive stock options,
stock awards and other stock units.
43
Table of Contents
FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ in millions, except per share
data) — (Continued)
The plan approved in April 2005 authorized the grant of
4.0 million benefit shares or units until April 2015. These
share or unit amounts exclude amounts that were issued under
predecessor plans. Benefit shares or units include incentive and
non-incentive stock options, stock awards and other stock units.
Stock options are primarily granted at the fair market value of
the shares on the date of grant. Through 2004, they normally
became exercisable one year after grant at a rate of one-half
annually and were exercisable in full on the second anniversary
date. Beginning in 2005, 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 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.
Stock option activity for the three-year period ended
December 31, 2005 was as follows:
| Weighted Average Price per | ||||||||||||||||||||||||
| Option Shares | Share | |||||||||||||||||||||||
| 2005 | 2004 | 2003 | 2005 | 2004 | 2003 | |||||||||||||||||||
| (In millions) | ||||||||||||||||||||||||
|
Outstanding at beginning of year
|
2.6 | 2.4 | 2.2 | $ | 19.84 | $ | 20.06 | $ | 21.33 | |||||||||||||||
|
Granted
|
.6 | .5 | .5 | 15.69 | 18.74 | 15.37 | ||||||||||||||||||
|
Cancelled or expired
|
(.5 | ) | (.2 | ) | (.3 | ) | 19.09 | 20.14 | 20.92 | |||||||||||||||
|
Exercised
|
(.1 | ) | 15.26 | 15.65 | 18.84 | |||||||||||||||||||
|
Outstanding at end of year
|
2.7 | 2.6 | 2.4 | 19.15 | 19.84 | 20.06 | ||||||||||||||||||
|
Exercisable at end of year
|
1.8 | 1.8 | 1.5 | $ | 20.19 | $ | 20.70 | $ | 21.25 | |||||||||||||||
The following table summarizes information concerning stock
options outstanding as of December 31, 2005 under all plans:
| Options Remaining | 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) | ||||||||||||||||||
|
$14.01 - $16.00
|
.3 | 7.6 | $ | 14.87 | .2 | $ | 14.83 | |||||||||||||
|
16.01 - 18.00
|
.8 | 7.6 | 16.17 | .3 | 16.15 | |||||||||||||||
|
18.01 - 20.00
|
.4 | 8.0 | 18.84 | .2 | 18.92 | |||||||||||||||
|
20.01 - 22.00
|
.7 | 3.8 | 21.10 | .6 | 21.10 | |||||||||||||||
|
22.01 - 24.00
|
.4 | 3.5 | 23.47 | .4 | 23.48 | |||||||||||||||
|
24.01 - 26.00
|
.1 | 1.3 | 24.96 | .1 | 24.81 | |||||||||||||||
| 2.7 | 5.8 | $ | 19.15 | 1.8 | $ | 20.19 | ||||||||||||||
Stock award shares are granted to employees at no cost. Through
2004 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
stock awards, based on the fair market value at the date of
grant, is being charged to expense over the
44
Table of Contents
FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ in millions, except per share
data) — (Continued)
respective vesting periods. The following table summarizes stock
award grants for the three-year period ended December 31,
2005:
| 2005 | 2004 | 2003 | ||||||||||
|
Number of shares granted (in millions)
|
.3 | .2 | .0 | |||||||||
|
Fair value of shares granted
|
$ | 4.9 | $ | 3.2 | $ | .8 | ||||||
|
Weighted average fair value per share
|
$ | 15.26 | $ | 19.19 | $ | 15.81 | ||||||
|
Compensation expense recorded
|
$ | 2.1 | $ | 1.0 | $ | 1.2 | ||||||
Under the 1988 plan, no benefit shares or units were available
for future grant during the three-year period ending
December 31, 2005. Under the 1996 plan, as amended, the
following benefit shares or units were available for future
grant: .6 million at December 31, 2005,
..8 million at December 31, 2004 and 1.2 million
at December 31, 2003. Under the 2005 plan, 3.8 million
benefit shares or units were available for future grant at
December 31, 2005.
The fair value of each option grant was estimated using the
Black-Scholes option pricing model with the following
assumptions:
| 2005 | 2004 | 2003 | ||||||||||
|
Dividend yield
|
1.7 | % | 2.1 | % | 4.5 | % | ||||||
|
Expected volatility
|
27 | % | 32 | % | 28 | % | ||||||
|
Risk free interest rate
|
4.2 | % | 3.5 | % | 3.6 | % | ||||||
|
Weighted average expected option life in years
|
8 | 8 | 8 | |||||||||
|
Weighted average per share value of options granted during the
year
|
$ | 4.93 | $ | 5.96 | $ | 2.97 | ||||||
The following table illustrates the effect on net income (loss)
and earnings (loss) per share for the three-year period ended
December 31, 2005 if the Company had applied fair value
recognition provisions of Statement of Financial Accounting
Standards (“SFAS”) No. 123, “Accounting for
Stock-Based Compensation”, to all stock-based
employee compensation. For purposes of pro forma disclosure, the
estimated fair value of the options using a Black-Scholes option
pricing model is amortized to expense over the option’s
vesting period.
| 2005 | 2004 | 2003 | |||||||||||
|
Reported net (loss) income
|
$ | (4.6 | ) | $ | (2.3 | ) | $ | 37.3 | |||||
|
Add: Stock-based employee compensation expense included in
reported net (loss) income net of related tax effects
|
1.3 | .6 | .7 | ||||||||||
|
Deduct: Total stock-based employee compensation expense
determined under the fair-value method for all awards, net of
related tax effects
|
(2.6 | ) | (2.3 | ) | (1.5 | ) | |||||||
|
Pro forma net (loss) income
|
$ | (5.9 | ) | $ | (4.0 | ) | $ | 36.5 | |||||
|
Basic and diluted net (loss) income per common share:
|
|||||||||||||
|
Reported net (loss) income
|
$ | (.10 | ) | $ | (.05 | ) | $ | .78 | |||||
|
Pro forma net (loss) income
|
$ | (.12 | ) | $ | (.08 | ) | $ | .76 | |||||
The intent of the Black-Scholes option valuation model is to
provide estimates of fair values of traded options that have no
vesting restrictions and are fully transferable. Option
valuation models require the use of highly subjective
assumptions including expected stock price volatility. The
Company has utilized the Black-Scholes method to produce the pro
forma disclosures required under SFAS Nos. 123 and 148. In
management’s opinion, existing valuation models do not
necessarily provide a reliable single measure of the fair value
of its employee stock options because the Company’s
employee stock options have significantly different
characteristics from those of traded options and the assumptions
used in applying option valuation methodologies, including the
Black-Scholes model, are highly subjective.
45
Table of Contents
FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ in millions, except per share
data) — (Continued)
NOTE J — 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, (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 stock 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 48.8 million and 48.6 million common
shares issued as of December 31, 2005 and 2004,
respectively. Of those amounts 48.1 million and
48.1 million common shares were outstanding as of
December 31, 2005 and 2004, respectively.
The Company’s board of directors is also authorized to
provide for the issuance of .8 million shares of preference
stock at a par value of $1 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, 2005.
In July 1998, the Company declared a dividend distribution of
one preferred share purchase right on each share of common stock
outstanding on and after August 18, 1998. The rights are
not exercisable until the rights distribution date, defined as
the earlier of: 1) the tenth day following a public
announcement that a person or group of affiliated or associated
persons acquired or obtained the right to acquire beneficial
ownership of 20% or more of the outstanding common stock or
2) the tenth day following the commencement or announcement
of an intention to make a tender offer or exchange offer, the
consummation of which would result in the beneficial ownership
by a person or group of 30% or more of such outstanding common
shares. Each right, when exercisable, entitles the holder to
purchase from the Company one one-hundredth of a share of
Series A Preferred stock of the Company at a price of
$100 per one one-hundredth of a preferred share, subject to
adjustment. The Company is entitled to redeem the rights at
$.10 per right, payable in cash or common shares, at any
time prior to the expiration of twenty days following the public
announcement that a 20% position has been acquired. In the event
that the Company is acquired in a merger or other business
combination transaction or 50% or more of its consolidated
assets or earning power is sold, proper provision will be made
so that each holder of a right will thereafter have the right to
receive, upon the exercise thereof at the then current exercise
price of a right, that number of shares of common stock of the
acquiring Company which at the time of such transaction would
have a market value of two times the exercise price of the
right. The rights expire on August 18, 2008 unless earlier
redeemed by the Company. Until exercised, the holder of a right,
as such, will have no rights as a shareholder, including,
without limitation, the right to vote or to receive dividends.
NOTE K — DISCONTINUED OPERATIONS
The following table presents the operating results of the
Company’s discontinued operations for the three-year period
ended December 31, 2005:
| 2005 | 2004 | 2003 | ||||||||||
|
Net sales
|
$ | 63.8 | $ | 128.9 | $ | 161.3 | ||||||
|
Costs and expenses
|
(126.5 | ) | (153.6 | ) | (159.7 | ) | ||||||
|
(Loss) income before income taxes
|
(62.7 | ) | (24.7 | ) | 1.6 | |||||||
|
Income tax charge (benefit)
|
(12.4 | ) | (6.2 | ) | .4 | |||||||
|
(Loss) income from discontinued operations
|
$ | (50.3 | ) | $ | (18.5 | ) | $ | 1.2 | ||||
46
Table of Contents
FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ in millions, except per share
data) — (Continued)
In December 2005, the Company determined that its investment in
the refuse business, operating under the Leach brand name, is no
longer strategic. The assets of this business are held for sale
as of December 31, 2005 and the Company is evaluating
divestiture alternatives for this business. The loss from
discontinued operations included $34.1 million of after-tax
impairment charges, related to the Leach business. These charges
were necessary to state the assets at fair value and included
the write off of $14.0 million of goodwill attributable to
the refuse business.
The Company initiated a restructuring in 2004 to consolidate the
production of all refuse vehicles into its facility in Medicine
Hat, Alberta. The following table summarizes the restructuring
actions taken and the pre-tax charges to expense in 2004 and
2005 relating to this initiative:
| Pre-tax | Pre-tax | Total pre-tax | ||||||||||
| restructuring | restructuring | restructuring | ||||||||||
| Initiative | charges in 2004 | charges in 2005 | charges | |||||||||
|
Closure of refuse truck production facility in Oshkosh,
Wisconsin and consolidation into its facility in Medicine Hat,
Alberta
|
$ | 8.4 | $ | 2.0 | $ | 10.4 | ||||||
This restructuring was completed in the fourth quarter of 2005.
The following table shows an analysis of assets and liabilities
of discontinued operations as of December 31:
| ($ in millions) | 2005 | 2004 | ||||||
|
Current assets
|
$ | 32.6 | $ | 45.5 | ||||
|
Properties and equipment
|
6.8 | 10.1 | ||||||
|
Goodwill
|
15.4 | |||||||
|
Intangibles
|
4.3 | |||||||
|
Total assets
|
$ | 39.4 | $ | 75.3 | ||||
|
Current liabilities
|
22.3 | 17.4 | ||||||
|
Long-term liabilities
|
2.0 | |||||||
|
Total liabilities
|
$ | 24.3 | $ | 17.4 | ||||
In December 2005, the Company completed the closure of
operations at Federal APD do Brasil, LTDA. The loss on disposal
was $1.6 million due to asset impairments and closure
costs; this included $0.9 million of goodwill attributable
to this business. This business produced parking systems for the
local market primarily in Brazil. Revenues amounted to
$.9 million, $1.8 million and $1.3 million for
the years ended December 31, 2005, 2004 and 2003,
respectively. Loss before income taxes totaled $0.5 million
and $0.6 million for the years ended December 31, 2005
and 2004, respectively. Income before income taxes totaled
$0.1 million for the year ended December 31, 2003.
In conjunction with the strategic restructuring initiatives
announced in June 2004 (see Note L), the Company determined
that its investments in Justrite Manufacturing, L.L.C.
(“Justrite”), Technical Tooling, Inc.
(“TTI”) and Plastisol B.V. Holdings
(“Plastisol”) were no longer strategic investments and
divested its interests.
In December 2004, the Company sold Justrite for
$40.1 million in cash resulting in an $11.1 million
gain on disposal of discontinued operations for the year ended
December 31, 2004. Justrite manufactured hazardous liquid
containment products including safety cans and cabinets for
flammables and corrosives, specialty containers and drum safety
equipment. Revenues amounted to $39.7 million and
$35.9 million for the years ended December 31, 2004
and 2003, respectively. Income before income taxes totaled
$5.0 million
47
Table of Contents
FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ in millions, except per share
data) — (Continued)
and $3.5 million for the years ended December 31, 2004
and 2003, respectively. Sale proceeds were used to repay debt.
In October 2004, the Company divested TTI for $6.5 million
in cash resulting in a $1.4 million gain on disposal of
discontinued operations for the year ended December 31,
2004. TTI manufactured a full line of can body-making precision
tooling for beverage can producers worldwide. Revenues were
$6.5 million and $6.6 million for the years ended
December 31, 2004 and 2003, respectively. Operating income
before income taxes totaled $1.1 million and
$1.0 million for the years ended December 31, 2004 and
2003, respectively. Sale proceeds were used to repay debt.
In July 2004, the Company sold its 54% majority ownership
interest in Plastisol to the minority partner for
$2.5 million in cash and a $.4 million note receivable
resulting in a $5.2 million loss on disposal of
discontinued operations for the year ended December 31,
2004. The Company acquired its ownership interest in 2001.
Plastisol manufactured glass fiber reinforced polyester fire
truck cabs and bodies mainly for European and Asian markets.
Revenues totaled $7.7 million and $13.6 million for
the years ended December 31, 2004 and 2003, respectively.
Operating losses before income taxes totaled $.1 million
and $.7 million for the years ended December 31, 2004
and 2003, respectively. Sale proceeds were used to repay debt.
In April 2003, the Company completed the sale of the Sign Group
to a third party for cash of $7.5 million and a
$4.0 million note receivable resulting in a
$.4 million loss on disposal of discontinued operations for
the year ended December 31, 2003. The Company incurred an
additional $.6 million loss on disposal of discontinued
operations for the year ended December 31, 2004, reflecting
the resolution of a contingent liability. The Sign Group
manufactured illuminated, nonilluminated and electronic
advertising sign displays primarily for commercial and
industrial markets and contracted to provide maintenance
services for the signs it manufactured as well as signs
manufactured by others. Revenue for the year ended
December 31, 2003 was $12.8 million. The Sign
Group’s operations before income taxes were break even for
the year ended December 31, 2003. The Company retained
certain assets and liabilities in conjunction with the sale.
Sale proceeds were used to repay debt.
NOTE L — RESTRUCTURING CHARGES AND ASSET
DISPOSITIONS
| Restructuring charges |
In 2004, the Company announced the implementation of a number of
initiatives including restructuring of certain of its operations
and the dispositions of certain assets. The 2004 restructuring
initiatives focused on plant consolidations and product
rationalization in order to streamline the Company’s
operations; the actions taken were aimed at improving the
profitability of the fire rescue and European tooling businesses
as well as improving the Company’s overhead cost structure.
The asset dispositions consisted of asset sales of certain
operations the Company considered no longer integral to the
long-term strategy of its business. In 2003, the Company also
effected two plant consolidations to reduce costs of the
Company’s industrial warning and communications business
and US tooling business.
48
Table of Contents
FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ in millions, except per share
data) — (Continued)
The following table summarizes the 2004 restructuring actions
taken, and the pre-tax charges to expense incurred in 2004 and
2005:
| Pre-Tax | Pre-Tax | |||||||||||||
| Restructuring | Restructuring | |||||||||||||
| Group | Initiative | Charges in 2004 | Charges in 2005 | Total Charges | ||||||||||
|
Fire Rescue
|
Closure of the production facilities located in Preble, New York and consolidation of US production of fire rescue vehicles into the Ocala, Florida operations; completed in the first quarter of 2005 | $ | 5.4 | $ | .9 | $ | 6.3 | |||||||
|
Tool
|
Reducing manufacturing activities relating to tooling products in France and outsourcing production to its Portugal facility; completed in the fourth quarter of 2005 | 1.2 | (.2 | ) | 1.0 | |||||||||
|
Corporate
|
Planning and organizing restructuring activities | .4 | .4 | |||||||||||
| $ | 7.0 | $ | .7 | $ | 7.7 | |||||||||
In 2003 total restructuring expense was $4.8 million of
which $2.9 million were cash payments and $1.9 million
were non-cash activities. All payments were made in 2003.
The following presents an analysis of the restructuring reserves
for the years ended December 31, 2004 and 2005:
| Asset | ||||||||||||||||
| Severance | Impairment | Other | Total | |||||||||||||
|
Balance as of January 1, 2004
|
$ | — | $ | — | $ | — | $ | — | ||||||||
|
Charges to expense
|
3.5 | 2.7 | .8 | 7.0 | ||||||||||||
|
Cash payments
|
(1.6 | ) | (.7 | ) | (2.3 | ) | ||||||||||
|
Non-cash activity
|
.1 | (2.7 | ) | (2.6 | ) | |||||||||||
|
Balance as of December 31, 2004
|
2.0 | — | .1 | 2.1 | ||||||||||||
|
Charges to expense
|
.5 | .2 | .7 | |||||||||||||
|
Cash payments
|
(2.6 | ) | (.5 | ) | (3.1 | ) | ||||||||||
|
Non-cash activity
|
.1 | .2 | .3 | |||||||||||||
|
Balance as of December 31, 2005
|
$ | — | $ | — | $ | — | $ | — | ||||||||
Severance charges in 2005 consist of termination and benefit
costs for direct manufacturing employees involuntarily
terminated prior to December 31, 2005. There were no asset
impairment charges in 2005.
Severance charges in 2004 consisted of termination and benefit
costs for direct manufacturing employees involuntarily
terminated prior to December 31, 2004. The costs of
retention bonuses for employees not severed as of
December 31, 2004 were recognized ratably over the
subsequent service period. Asset impairment charges included
$2.5 million of net realizable value adjustments on real
property and manufacturing equipment.
49
Table of Contents
FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ in millions, except per share
data) — (Continued)
| Asset dispositions |
The Company completed two significant asset dispositions in
2005. In May 2005, the Company sold the land and buildings of
the refuse truck body plant in Oshkosh, Wisconsin for proceeds
of $5.8 million and recorded a pre-tax gain of
$1.0 million. In July 2005, the Company sold two product
lines in Newcastle, England for proceeds of $11.9 million
and recorded a pre-tax gain of $6.7 million. The Company
also sold three other properties for total proceeds of
$4.3 million and total pre-tax gains of $1.3 million.
The Company completed three asset dispositions during 2004.
First, the Company sold its 30% minority share in Safety
Storage, Inc. (“SSI”) to the majority shareholder in
June 2004 for a nominal amount and, in connection therewith,
recorded a $2.9 million loss in the second quarter of 2004.
Under the terms of the transaction, the Company was released
from any future liability arising from a judgment awarded to a
third party creditor of SSI. The non-operating loss is included
in other expense for the year ended December 31, 2004.
In 2004, the Company also divested a modest amount of operating
assets located at a manufacturing facility in Kelowna, British
Columbia. The net assets, primarily consisting of inventories
and manufacturing equipment and property, were sold by the
Company for approximately net book value.
In 2004 the Company sold approximately $9.6 million of
industrial leasing assets to an independent party. The assets
represented amounts due from industrial customers of the
Company; the Company had earlier indicated that it would no
longer extend financing to industrial customers. The Company
received cash for the sale for an amount approximating its net
book value at the time of sale. Proceeds from these sales were
used to pay down debt.
NOTE M — LEGAL PROCEEDINGS
The 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 material 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 presently 33 cases filed during
the period 1999-2004, involving a total of 2,498 plaintiffs
pending in the Circuit Court of Cook County, Illinois. Of that
total number, 18 plaintiffs have been dismissed outright and
another 36 plaintiffs appeared in duplicate cases. These
plaintiffs were dismissed from the duplicate cases. The
plaintiffs’ attorneys have threatened to bring more suits
in the future. The Company believes that these product liability
suits have no merit and that sirens are necessary in emergency
situations and save lives. The discovery phase of the litigation
began in 2004; the Company is aggressively defending the
matters. A trial judge was assigned to these cases on
October 11, 2005. He set trial dates for the first four
cases as follows: Rago, et al. v. Federal Signal
Corp., No. 99L4752 (August 14, 2006); Lamb,
et al. v. Federal Signal Corp., No. 00L6485
(September 5, 2006); North, et al. v.
Federal Signal Corp., No. 00L6486 (October 23, 2006);
and Polo, et al. v. Federal Signal Corp., No.
00L6487 (December 14, 2006). The judge denied
plaintiff’s motion to assert a claim for punitive damages
on February 7, 2006. 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.
50
Table of Contents
FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ in millions, except per share
data) — (Continued)
NOTE N — SEGMENT AND RELATED INFORMATION
The Company has four continuing operating segments as defined
under SFAS No. 131, “Disclosures about Segments
of an Enterprise and Related Information.” Business units
are organized under each segment because they share certain
characteristics, such as technology, marketing 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 K — Discontinued Operations.
The segment information included herein has been reclassified to
reflect such discontinued operations.
Environmental Products — Environmental Products
manufactures a variety of self-propelled street cleaning
vehicles, vacuum loader vehicles, municipal catch basin/sewer
cleaning vacuum trucks and water blasting equipment.
Environmental Products sells primarily to municipal and
government customers; and contractors.
Fire Rescue — Fire Rescue manufactures chassis;
fire trucks, including Class A pumpers, mini-pumpers and
tankers; airport and other rescue vehicles, aerial access
platforms and aerial ladder trucks. This group sells primarily
to municipal customers, volunteer fire departments and
government customers.
Safety Products — Safety Products produces a
variety of visual and audible warning and signal devices;
paging, local signaling, and building security, parking and
access control systems and hazardous area lighting. The
group’s products are sold primarily to industrial,
municipal and government customers.
Tool — Tool manufactures a variety of
consumable tools which include die components for the metal
stamping industry, a large selection of precision metal products
for plastic molding needs and a line of precision metal cutting
and grooving tools including tungsten carbide and
polycrystalline diamond and cubic boron nitride products for
superhard applications. The group’s products are sold
almost entirely to industrial customers.
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
income. 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, 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 US
aggregated $332.6 million in 2005, $349.6 million in
2004 and $347.4 million in 2003. Of that, sales exported
from the US aggregated $100.8 million in 2005,
$108.8 million in 2004 and $157.4 million in 2003.
The Company invests in research to support development of new
products and the enhancement of existing products and services.
The Company believes this investment is important to maintain
and/or enhance its leadership position in key markets.
Expenditures for research and development by the Company were
approximately $19.9 million in 2005, $27.6 million in
2004 and $32.5 million in 2003.
51
Table of Contents
FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ in millions, except per share
data) — (Continued)
A summary of the Company’s continuing operations by segment
for the three-year period ended December 31, 2005 is as
follows:
| 2005 | 2004 | 2003 | |||||||||||
|
Net sales
|
|||||||||||||
|
Environmental Products
|
$ | 347.7 | $ | 294.6 | $ | 261.8 | |||||||
|
Fire Rescue
|
371.2 | 360.9 | 402.1 | ||||||||||
|
Safety Products
|
276.5 | 247.4 | 241.1 | ||||||||||
|
Tool
|
161.5 | 161.0 | 153.2 | ||||||||||
|
Total net sales
|
$ | 1,156.9 | $ | 1,063.9 | $ | 1,058.2 | |||||||
|
Operating income (loss)
|
|||||||||||||
|
Environmental Products
|
$ | 28.9 | $ | 25.2 | $ | 19.8 | |||||||
|
Fire Rescue
|
2.3 | (23.9 | ) | 14.7 | |||||||||
|
Safety Products
|
45.0 | 33.5 | 28.1 | ||||||||||
|
Tool
|
16.8 | 15.3 | 14.9 | ||||||||||
|
Corporate expense
|
(23.8 | ) | (21.7 | ) | (14.0 | ) | |||||||
|
Total operating income (loss)
|
69.2 | 28.4 | 63.5 | ||||||||||
|
Interest expense
|
(23.1 | ) | (20.6 | ) | (18.8 | ) | |||||||
|
Other income (expense)
|
.2 | (2.9 | ) | (.5 | ) | ||||||||
|
Income (loss) before income taxes
|
$ | 46.3 | $ | 4.9 | $ | 44.2 | |||||||
|
Depreciation and amortization
|
|||||||||||||
|
Environmental Products
|
$ | 3.2 | $ | 2.6 | $ | 2.8 | |||||||
|
Fire Rescue
|
4.8 | 5.1 | 4.5 | ||||||||||
|
Safety Products
|
4.5 | 5.0 | 5.0 | ||||||||||
|
Tool
|
8.1 | 7.9 | 7.3 | ||||||||||
|
Corporate
|
.9 | (1.0 | ) | (1.2 | ) | ||||||||
|
Total depreciation and amortization
|
$ | 21.5 | $ | 19.6 | $ | 18.4 | |||||||
52
Table of Contents
FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ in millions, except per share
data) — (Continued)
| 2005 | 2004 | 2003 | |||||||||||||
|
Identifiable assets
|
|||||||||||||||
|
Manufacturing activities
|
|||||||||||||||
|
Environmental Products
|
$ | 245.0 | $ | 214.6 | $ | 219.0 | |||||||||
|
Fire Rescue
|
216.6 | 232.7 | 227.4 | ||||||||||||
|
Safety Products
|
181.5 | 212.0 | 203.9 | ||||||||||||
|
Tool
|
166.5 | 167.2 | 163.2 | ||||||||||||
|
Corporate
|
101.3 | 34.1 | 36.8 | ||||||||||||
|
Total manufacturing activities
|
910.9 | 860.6 | 850.3 | ||||||||||||
|
Assets of discontinued operations
|
39.4 | 75.3 | 97.1 | ||||||||||||
|
Financial services activities
|
|||||||||||||||
|
Environmental Products
|
30.5 | 41.4 | 55.4 | ||||||||||||
|
Fire Rescue
|
138.7 | 155.1 | 174.7 | ||||||||||||
|
Total financial services activities
|
169.2 | 196.5 | 230.1 | ||||||||||||
|
Total identifiable assets
|
$ | 1,119.5 | $ | 1,132.4 | $ | 1,177.5 | |||||||||
| 2005 | 2004 | 2003 | |||||||||||
|
Additions to long-lived assets
|
|||||||||||||
|
Environmental Products
|
$ | 4.6 | $ | 4.3 | $ | 13.2 | |||||||
|
Fire Rescue
|
3.4 | 5.5 | 5.7 | ||||||||||
|
Safety Products
|
2.3 | 5.1 | 7.9 | ||||||||||
|
Tool
|
5.8 | 5.9 | 5.5 | ||||||||||
|
Corporate
|
.2 | 1.7 | 8.6 | ||||||||||
|
Total additions to long-lived assets
|
$ | 16.3 | $ | 22.5 | $ | 40.9 | |||||||
The following table presents financial revenues (included in net
sales) by segment in each of the three years in the period ended
December 31, 2005 as follows:
| 2005 | 2004 | 2003 | |||||||||||
|
Financial revenues
|
|||||||||||||
|
Environmental Products
|
$ | 2.2 | $ | 3.5 | $ | 4.5 | |||||||
|
Fire Rescue
|
7.4 | 8.6 | 8.9 | ||||||||||
|
Total financial revenues
|
$ | 9.6 | $ | 12.1 | $ | 13.4 | |||||||
Due to the nature of the Company’s customers, a significant
portion of the Environmental Products and Fire Rescue financial
revenues is exempt from federal income tax.
53
Table of Contents
FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ in millions, except per share
data) — (Continued)
The segment information provided below is classified based on
geographic location of the Company’s subsidiaries:
| 2005 | 2004 | 2003 | |||||||||||
|
Net sales
|
|||||||||||||
|
United States
|
$ | 814.7 | $ | 702.2 | $ | 697.5 | |||||||
|
Europe
|
271.5 | 280.8 | 290.2 | ||||||||||
|
Canada
|
61.1 | 68.8 | 57.1 | ||||||||||
|
Other
|
9.6 | 12.1 | 13.4 | ||||||||||
| $ | 1,156.9 | $ | 1,063.9 | $ | 1,058.2 | ||||||||
|
Long-lived assets
|
|||||||||||||
|
United States
|
$ | 345.3 | $ | 355.2 | $ | 367.2 | |||||||
|
Europe
|
47.3 | 53.1 | 49.8 | ||||||||||
|
Canada
|
72.5 | 72.5 | 77.2 | ||||||||||
|
Other
|
1.1 | .4 | 1.1 | ||||||||||
| $ | 466.2 | $ | 481.2 | $ | 495.3 | ||||||||
NOTE O — NET INCOME (LOSS) PER SHARE
The following table summarizes the information used in computing
basic and diluted income per share for each of the three years
in the period ended December 31, 2005:
| 2005 | 2004 | 2003 | ||||||||||
|
Numerator for both basic and diluted income per share
computations — net income (loss)
|
$ | (4.6 | ) | $ | (2.3 | ) | $ | 37.3 | ||||
|
Denominator for basic income per share — weighted
average shares outstanding
|
48.2 | 48.1 | 48.0 | |||||||||
|
Effect of employee stock options (potential dilutive common
shares)
|
||||||||||||
|
Denominator for diluted income per share — adjusted
shares
|
48.2 | 48.1 | 48.0 | |||||||||
Diluted income (loss) per share is calculated by dividing net
income (loss) by the weighted average common shares outstanding
plus additional common shares that would have been outstanding
assuming the exercise of
in-the-money stock
options. As of December 31, 2005 and 2004, .0 million
and .1 million employee stock options, respectively, were
considered potential dilutive common shares. These stock
options, however, are antidilutive due to the net loss for the
years ended December 31, 2005 and 2004. As a result, they
are excluded from the denominator for the diluted income per
share calculation. There are total options outstanding of
2.7 million, 2.6 million and 2.4 million as of
December 31, 2005, 2004 and 2003, respectively.
NOTE P — COMMITMENTS, GUARANTEES AND FAIR VALUES OF
FINANCIAL INSTRUMENTS
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 $8.1 million in
2005, $7.6 million in 2004 and $8.7 million in 2003.
Sublease income and contingent rentals relating to operating
leases were insignificant. At December 31, 2005, minimum
future rental commitments under operating leases having
noncancelable lease terms in excess of one year aggregated
$31.1 million payable as follows: $7.1 million in
54
Table of Contents
FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ in millions, except per share
data) — (Continued)
2006, $5.8 million in 2007, $4.3 million in 2008,
$3.7 million in 2009, $3.2 million in 2010 and
$7.0 million thereafter.
At December 31, 2005 and 2004, the Company had outstanding
standby letters of credit aggregating $34.4 million and
$36.3 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 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 months to five 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 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, 2005 and 2004 were as follows:
| 2005 | 2004 | |||||||
|
Balance at January 1
|
$ | 11.1 | $ | 12.7 | ||||
|
Provisions to expense
|
12.7 | 16.4 | ||||||
|
Actual costs incurred
|
(11.7 | ) | (18.0 | ) | ||||
|
Balance at December 31
|
$ | 12.1 | $ | 11.1 | ||||
The Company guarantees the debt of a third-party dealer that
sells the Company’s vehicles. The notional amounts of the
guaranteed debt as of December 31, 2005 and 2004 totaled
$.7 million, for both years. No losses have been incurred
as of December 31, 2005.
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 issued in
2004 were recognized. The notional amounts of the residual value
guarantees were $2.6 million and $3.4 million as of
December 31, 2005 and 2004, respectively. No losses have
been incurred as of December 31, 2005. The guarantees
expire between 2005 and 2010.
The following table summarizes the carrying amounts and fair
values of the Company’s financial instruments at
December 31, 2005:
| 2005 | 2004 | |||||||||||||||
| Notional | Fair | Notional | Fair | |||||||||||||
| Amount | Value | Amount | Value | |||||||||||||
|
Short-term debt (Note E)
|
$ | 6.6 | $ | 6.6 | $ | 52.6 | $ | 52.6 | ||||||||
|
Long-term debt (Note E)
|
431.3 | 443.4 | 358.4 | 360.3 | ||||||||||||
|
Fair value swaps (Note H)
|
202.9 | (10.0 | ) | 220.0 | (6.7 | ) | ||||||||||
|
Cash flow swaps (Note H)
|
105.0 | 3.3 | 85.0 | .8 | ||||||||||||
|
Foreign exchange contracts (Note H)
|
17.2 | 1.4 | 34.8 | 2.5 | ||||||||||||
55
Table of Contents
FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ in millions, except per share
data) — (Continued)
NOTE Q — 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.
The Company determined the fair value of the reporting unit by
calculating the present value of expected future cash flows.
Changes in the carrying amount of goodwill for the years ended
December 31, 2005 and 2004, by operating segment, were as
follows:
| Environmental | Fire | Safety | ||||||||||||||||||
| Products | Rescue | Products | Tool | Total | ||||||||||||||||
|
December 31, 2003
|
$ | 127.0 | $ | 37.8 | $ | 88.5 | $ | 82.0 | $ | 335.3 | ||||||||||
|
Adjustments
|
(.9 | ) | (.9 | ) | ||||||||||||||||
|
Translation
|
.3 | 1.1 | 1.4 | (.1 | ) | 2.7 | ||||||||||||||
|
December 31, 2004
|
126.4 | 38.9 | 89.9 | 81.9 | 337.1 | |||||||||||||||
|
Translation
|
(.6 | ) | (1.9 | ) | (1.2 | ) | (3.7 | ) | ||||||||||||
|
December 31, 2005
|
$ | 125.8 | $ | 37.0 | $ | 88.7 | $ | 81.9 | $ | 333.4 | ||||||||||
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
2005 and determined that there was no impairment.
The components of the Company’s other intangible assets are
as follows:
| December 31, 2005 | December 31, 2004 | ||||||||||||||||||||||||||||
| Weighted- | |||||||||||||||||||||||||||||
| Average | Gross | Net | Gross | Net | |||||||||||||||||||||||||
| Useful Life | Carrying | Accumulated | Carrying | Carrying | Accumulated | Carrying | |||||||||||||||||||||||
| (Years) | Value | Amortization | Value | Value | Amortization | Value | |||||||||||||||||||||||
|
Amortizable:
|
|||||||||||||||||||||||||||||
|
Developed software
|
6 | $ | 14.7 | $ | (6.4 | ) | $ | 8.3 | $ | 13.4 | $ | (4.7 | ) | $ | 8.7 | ||||||||||||||
|
Patents
|
5-10 | 3.8 | (2.7 | ) | 1.1 | 3.9 | (2.4 | ) | 1.5 | ||||||||||||||||||||
|
Other
|
3 | .1 | .1 | ||||||||||||||||||||||||||
|
Total
|
$ | 18.6 | $ | (9.1 | ) | $ | 9.5 | $ | 17.3 | $ | (7.1 | ) | $ | 10.2 | |||||||||||||||
Other intangible assets are included in the consolidated balance
sheets within “other deferred charges and assets”.
Amortization expense for the year ended December 31, 2005,
2004 and 2003 totaled $2.5 million, $1.2 million and
$1.2 million, respectively. The Company estimates that the
aggregate amortization expense will be $2.2 million in
2006, $1.9 million in 2007, $1.8 million in 2008,
$1.4 million in 2009, $.9 million in 2010 and
$1.4 million thereafter.
NOTE R — NEW ACCOUNTING PRONOUNCEMENTS
In November 2004, the FASB issued SFAS No. 151,
“Inventory Costs”, which amends ARB 43,
Chapter 4, “Inventory Pricing”.
SFAS No. 151 clarifies the treatment of abnormal
amounts of idle facility expense, freight, handling costs, and
wasted materials to be treated as current-period charges. The
provisions of SFAS No. 151 are effective for fiscal
years beginning after June 15, 2005. The Company currently
applies overhead based upon actual rates excluding the
influences of abnormal shutdown periods. Management has
56
Table of Contents
FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ in millions, except per share
data) — (Continued)
reviewed the implications of SFAS No. 151 and
determined its adoption will have no material effect on the
Company’s consolidated results of operations and statement
of financial position. The Company will apply the provisions of
SFAS No. 151 as of January 1, 2006.
In December 2004, the FASB issued SFAS No. 153,
“Exchanges of Nonmonetary Assets” which was effective
for fiscal periods beginning after June 15, 2005. The
statement eliminates the exception from fair value measurement
for nonmonetary exchanges of similar productive assets in
APB 29 and replaces it with an exception for exchanges that
do not have commercial substance. The Company has completed its
evaluation of SFAS No. 153 and has determined that the
statement does not have a material effect on the Company’s
consolidated results of operations or consolidated financial
position. The Company will apply the provisions of
SFAS No. 153 as of January 1, 2006.
NOTE S — SELECTED QUARTERLY DATA (UNAUDITED)
Effective January 1, 2004, the Company began reporting 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 2005, the Company’s interim quarterly periods
ended April 2, July 2, October 1 and
December 31 and in 2004, the Company’s interim
quarterly periods ended April 3, July 3, October 2 and
December 31, respectively.
The following is a summary of the quarterly results of
operations, including income per share, for the Company for the
quarterly periods of fiscal 2005 and 2004. Restatements of
previously reported amounts represent discontinued operations as
described in Footnote K.
| For the Quarterly Period Ended | |||||||||||||||||||||||||||||||||
| 2005 | 2004 | ||||||||||||||||||||||||||||||||
| March 31 | June 30 | September 30 | December 31 | March 31 | June 30 | September 30 | December 31 | ||||||||||||||||||||||||||
|
Net sales
|
$ | 264.0 | $ | 300.5 | $ | 285.6 | $ | 306.8 | $ | 242.7 | $ | 268.6 | $ | 252.2 | $ | 300.4 | |||||||||||||||||
|
Gross margin
|
68.1 | 72.9 | 70.4 | 80.1 | 62.5 | 67.3 | 60.0 | 59.2 | |||||||||||||||||||||||||
|
Income (loss) from continuing operations
|
4.3 | 15.5 | 14.0 | 13.5 | 3.8 | 3.0 | 2.8 | (.1 | ) | ||||||||||||||||||||||||
|
(Loss) from discontinued operations
|
(4.5 | ) | (4.3 | ) | (3.7 | ) | (37.8 | ) | (1.6 | ) | (5.3 | ) | (5.4 | ) | (6.2 | ) | |||||||||||||||||
|
Gain (loss) on disposition
|
(1.6 | ) | (4.4 | ) | (1.3 | ) | 12.4 | ||||||||||||||||||||||||||
|
Net income (loss)
|
(.2 | ) | 11.2 | 10.3 | (25.9 | ) | 2.2 | (6.7 | ) | (3.9 | ) | 6.1 | |||||||||||||||||||||
|
Per share data — diluted:
|
|||||||||||||||||||||||||||||||||
|
Income from continuing operations
|
.09 | .32 | .29 | .28 | .08 | .06 | .06 | ||||||||||||||||||||||||||
|
Income (loss) from discontinued operations
|
(.09 | ) | (.09 | ) | (.08 | ) | (.82 | ) | (.04 | ) | (.20 | ) | (.14 | ) | .13 | ||||||||||||||||||
|
Net income (loss)*
|
.23 | .21 | (.54 | ) | .04 | (.14 | ) | (.08 | ) | .13 | |||||||||||||||||||||||
|
Dividends paid per share
|
.06 | .06 | .06 | .06 | .10 | .10 | .10 | .10 | |||||||||||||||||||||||||
|
Market price range per share
|
|||||||||||||||||||||||||||||||||
|
High
|
17.88 | 16.50 | 17.95 | 17.15 | 20.03 | 20.56 | 19.14 | 19.18 | |||||||||||||||||||||||||
|
Low
|
14.45 | 13.80 | 15.55 | 14.80 | 17.62 | 16.88 | 15.75 | 16.01 | |||||||||||||||||||||||||
| * | amounts may not add due to rounding |
57
Table of Contents
FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ in millions, except per share
data) — (Continued)
The Company incurred pre-tax restructuring charges (see
Note L) as follows:
| Period Ending: | 2005 | 2004 | ||||||
|
March 31
|
$ | .3 | $ | |||||
|
June 30
|
.4 | 3.8 | ||||||
|
September 30
|
.7 | |||||||
|
December 31
|
2.5 | |||||||
The Company recorded a $10.6 million pre-tax charge in the
fourth quarter of 2004 on a large
multi-unit, multi-year
Netherlands fire rescue equipment contract, resulting from a
reassessment of project costs and a reassessment of expected
recoveries under supplier contracts.
The Company recorded a $6.7 million pre-tax gain in the
third quarter of 2005 relating to the sale of two industrial
lighting product lines.
The Company recorded $34.1 million of after-tax impairment
charges, in the fourth quarter of 2005 in order to state the
assets of the Leach business, which is a discontinued operation,
at fair value.
58
Table of Contents
| 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 Act
Rule 13a-15(e)) as
of the end of the period covered by this report. Based upon that
evaluation, the Chief Executive Officer and Chief Financial
Officer concluded that the Company’s disclosure controls
and procedures are effective.
| (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 Act
Rule 13a-15(f).
Management conducted an assessment of the Company’s
internal control over financial reporting based on the framework
established by the Committee of Sponsoring Organizations of the
Treadway Commission in Internal Control — Integrated
Framework. Based on the assessment, management concluded that,
as of December 31, 2005, the Company’s internal
control over financial reporting is effective. Management’s
assessment of the effectiveness of the Company’s internal
control over financial reporting as of December 31, 2005,
has been audited by Ernst & Young LLP, the
Company’s independent registered public accounting firm, as
stated in their report which is included herein.
| (c) | Changes in Internal Control over Financial Reporting |
There was no significant change in the Company’s internal
control over financial reporting that occurred during the
Company’s most recently completed fiscal quarter that has
materially affected, or is reasonably likely to materially
affect, the Company’s internal control over financial
reporting.
Item 9B. Other
Information.
In December 2005, the management of Federal Signal Corporation
(the “Company”) committed to a plan to exit its refuse
truck body business (the “Refuse Business”) after
concluding that the Refuse Business no longer furthered the
Company’s long-term strategic objectives. The Company has
classified the Refuse Business as held for sale and the
financial condition, results of operations and cash flows of the
Refuse Business are reported as discontinued operations in this
Form 10-K for the
year ended December 31, 2005. The Company’s management
currently believes that it is probable that the sale of the
Refuse Business will be completed during 2006.
On February 21, 2006, the Company publicly announced its
plan to exit the Refuse Business and, on such date, the Company
first informed its employees of the plan and that the plan may
involve involuntary terminations. The employees were also
informed of the benefits that employees may be entitled to
receive if they are terminated as part of the plan.
The Company is actively pursuing a sale of the Refuse Business
as a going concern and has held discussions with potentially
interested parties. Note K — Discontinued
Operations in this
Form 10-K for the
year ended December 31, 2005 denotes impairment charges
that were made as a result of stating the assets at fair value
as of December 31, 2005. However, the Company is unable in
good faith to make a determination at this time of the estimated
amount or range of amounts to be incurred for the benefits that
employees may be entitled to receive from the Company or other
future cash expenditures or charges associated with its plan to
exit the Refuse Business. As permitted by Item 2.05 of
Form 8-K, the
Company will file a Report on
Form 8-K within
four business days after the Company’s determination of
such amounts.
59
Table of Contents
PART III
| Item 10. | Directors and Executive Officers of the Company. |
The information under the caption
“Proposal 1 — Election of Directors”
and “Section 16(a) Beneficial Ownership Reporting
Compliance” contained in the Company’s Proxy Statement
for the Annual Meeting of Shareholders held on April 25,
2006 is incorporated herein by reference.
The following is a list of the Company’s executive
officers, their ages, business experience and positions and
offices as of February 1, 2006:
| Paul Brown, age 42, was appointed Vice President and Controller in March 2005. He served as Vice President-Internal Audit from April 2004. Previously, Mr. Brown was Vice President Finance-Flame Retardants, for Great Lakes Chemical Corporation from 2000 to April 2004. | |
| Stephen C. Buck, age 57, was appointed President of the Safety Products Group in February 1998. Mr. Buck was previously President of the Tool Group. | |
| Kimberly Dickens, age 44, was elected as Vice President Human Resources in April 2004. Previously, Ms. Dickens was appointed Vice President Human Resources for BorgWarner, Inc. from 2002 to March 2004, and Vice President Human Resources for BorgWarner Transmission Systems from 1999 to 2002. | |
| Marc L. Gustafson, age 53, was appointed Group President, Fire Rescue Group effective October 7, 2004. Previously, Mr. Gustafson was President of American LaFrance in 2003, Board Member (non-paid position) and laborer for Habitat for Humanity from 2001 to 2003 and President and CEO for Volvo Trucks NA from 1996 to 2001. | |
| Stephanie K. Kushner, age 50, was elected as Vice President and Chief Financial Officer in February 2002. Previously, Ms. Kushner was Vice President — Treasury and Corporate Development for FMC Technologies in 2001 and Vice President and Treasurer for FMC Corporation from 1999 – 2001. | |
| Karen N. Latham, age 46, was elected Vice President and Treasurer in December 2002. Ms. Latham was Senior Vice President from 2001 to 2002 with Coffou Partners, Inc. and a consultant from 1998 to 2001 with Egon Zehnder International, Inc. | |
| Jennifer L. Sherman, age 41, was appointed Vice President, General Counsel and Secretary effective March 2004. Ms. Sherman was previously Deputy General Counsel and Assistant Secretary from 1998. | |
| Mark D. Weber, age 48, was appointed President of the Environmental Products Group in April 2003. Mr. Weber was Vice President Sweeper Products for the Environmental Products Group from 2002 – 2003, General Manager of Elgin Sweeper Company from 2001 – 2002 and Vice President of Operations at Elgin Sweeper from 1996 – 2001. | |
| Robert D. Welding, age 57, was elected President and Chief Executive Officer and elected to the Board of Directors in December 2003. Previously, Mr. Welding was Executive Vice President of BorgWarner, Inc. from 1999 – 2003, President of BorgWarner, Inc.’s Driveline Group from 2002 – 2003, President of BorgWarner Transmission Systems, Inc. from 1996 – 2003 and Vice President of BorgWarner, Inc. from 1996 – 1999. |
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.
The Company has adopted a code of ethics that applies to its
principal executive officer, principal financial officer and
principal accounting officer. This code of ethics and the
Company’s corporate governance policies are posted on the
Company’s website at http://federalsignal.com. The Company
intends to satisfy its disclosure requirements regarding
amendments to or waivers from its code of ethics by posting such
information on this website. The charters of the Audit
Committee, Nomination and Governance Committee
60
Table of Contents
and 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.
| Item 11. | Executive Compensation. |
The information contained under the captions “Compensation
of Board Members” and “Executive Compensation” of
the Company’s Proxy Statement for the Annual Meeting of
Shareholders to be held April 25, 2006 is incorporated
herein by reference.
| Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters. |
The information contained under the captions “Security
Ownership of Certain Beneficial Owners” and “Equity
Compensation Plan Information” of the Company’s Proxy
Statement for the Annual Meeting of Shareholders to be held
April 25, 2006 is incorporated herein by reference.
| Item 13. | Certain Relationships and Related Transactions. |
The information contained under the caption “Certain
Relationships and Related Transactions” of the
Company’s Proxy Statement for the Annual Meeting of
Shareholders to be held April 25, 2006 is incorporated
herein by reference.
| Item 14. | Principal Accountant Fees and Services. |
The information under the caption
“Proposal 2 — Ratification of Appointment of
Ernst & Young LLP as Independent Public Accountants for
2006 — Accounting Information” and “Board of
Directors and Committees” in the Company’s Proxy
Statement for the Annual Meeting of Shareholders to be held on
April 25, 2006 is incorporated herein by reference.
PART IV
| Item 15. | Exhibits and Financial Statement Schedules. |
(a) 1. Financial Statements
The following consolidated financial statements of Federal
Signal Corporation and Subsidiaries contained under Item 8
of this Form 10-K
are incorporated herein by reference:
| Consolidated Balance Sheets as of December 31, 2005 and 2004 | |
| Consolidated Statements of Operations for the Years Ended December 31, 2005, 2004 and 2003 | |
| Consolidated Statements of Shareholders’ Equity for the Years Ended December 31, 2005, 2004 and 2003 | |
| Consolidated Statements of Cash Flows for the Years Ended December 31, 2005, 2004 and 2003 | |
| 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, 2005 is filed as a part of this report
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.
61
Table of Contents
Signatures
Pursuant to the requirements of Section 13 or 15
(d) of the Securities Exchange Act of 1934, the Company has
duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
| FEDERAL SIGNAL CORPORATION |
| By: | /s/ Robert D. Welding |
|
|
|
| Robert D. Welding | |
| President, Chief Executive | |
| Officer and Director | |
| (Principal Executive Officer) |
February 22, 2006
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below, as of February 21,
2006, by the following persons on behalf of the Company and in
the capacities indicated.
|
/s/ Robert D. Welding Robert D. Welding |
President, Chief Executive Officer and Director (Principal Executive Officer) |
|||
|
/s/ Stephanie K. Kushner Stephanie K. Kushner |
Vice President and Chief Financial Officer (Principal Financial Officer) |
|||
|
/s/ Paul Brown Paul Brown |
Vice President and Controller (Principal Accounting Officer) |
|||
|
/s/ James C. Janning James C. Janning |
Chairman and Director | |||
|
/s/ Charles R. Campbell Charles R. Campbell |
Director | |||
|
/s/ Robert M. Gerrity Robert M. Gerrity |
Director | |||
|
/s/ James E. Goodwin James E. Goodwin |
Director | |||
|
/s/ Robert S. Hamada Robert S. Hamada |
Director | |||
|
/s/ Paul W. Jones Paul W. Jones |
Director | |||
|
/s/ John McCartney John McCartney |
Director | |||
62
Table of Contents
SCHEDULE II
FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
Valuation and Qualifying Accounts
For the Years Ended December 31, 2005, 2004 and 2003
| Deductions | ||||||||||||||||||
| Additions | Accounts | |||||||||||||||||
| Balance at | Charged to | Written off | Balance | |||||||||||||||
| Beginning | Costs and | Net of | at End | |||||||||||||||
| Description | of Year | Expenses | Recoveries | of Year | ||||||||||||||
| ($ in millions) | ||||||||||||||||||
|
Allowance for doubtful accounts
|
||||||||||||||||||
|
Year ended December 31, 2005:
|
||||||||||||||||||
|
Manufacturing activities
|
$ | 2.2 | $ | 2.7 | ||||||||||||||
|
Financial service activities
|
3.9 | 3.9 | ||||||||||||||||
|
Total
|
$ | 6.1 | $ | 2.8 | $ | (2.3 | ) | $ | 6.6 | |||||||||
|
Year ended December 31, 2004:
|
||||||||||||||||||
|
Manufacturing activities
|
$ | 2.4 | $ | 2.2 | ||||||||||||||
|
Financial service activities
|
2.9 | 3.9 | ||||||||||||||||
|
Total
|
$ | 5.3 | $ | 3.0 | $ | (2.2 | ) | $ | 6.1 | |||||||||
|
Year ended December 31, 2003:
|
||||||||||||||||||
|
Manufacturing activities
|
$ | 2.5 | $ | 2.4 | ||||||||||||||
|
Financial service activities
|
1.0 | 2.9 | ||||||||||||||||
|
Total
|
$ | 3.5 | $ | 3.5 | $ | (1.7 | ) | $ | 5.3 | |||||||||
|
Inventory obsolescence
|
||||||||||||||||||
|
Year ended December 31, 2005:
|
||||||||||||||||||
|
Manufacturing activities
|
$ | 6.2 | $ | 2.6 | $ | (3.0 | ) | $ | 5.8 | |||||||||
|
Year ended December 31, 2004:
|
||||||||||||||||||
|
Manufacturing activities
|
$ | 5.2 | $ | 4.1 | $ | (3.1 | ) | $ | 6.2 | |||||||||
|
Year ended December 31, 2003:
|
||||||||||||||||||
|
Manufacturing activities
|
$ | 4.6 | $ | 4.4 | $ | (3.8 | ) | $ | 5.2 | |||||||||
|
Product liability and workers’ compensation
|
||||||||||||||||||
|
Year ended December 31, 2005:
|
||||||||||||||||||
|
Manufacturing activities
|
$ | 7.9 | $ | 7.4 | $ | (6.2 | ) | $ | 9.1 | |||||||||
|
Year ended December 31, 2004:
|
||||||||||||||||||
|
Manufacturing activities
|
$ | 6.2 | $ | 8.6 | $ | (6.9 | ) | $ | 7.9 | |||||||||
|
Year ended December 31, 2003:
|
||||||||||||||||||
|
Manufacturing activities
|
$ | 6.1 | $ | 6.7 | $ | (6.6 | ) | $ | 6.2 | |||||||||
Warranty liability:
The changes in the Company’s warranty liabilities are
analyzed in Note P — Commitments, Guarantees and
Fair Values of Financial Instruments
63
Table of Contents
EXHIBIT INDEX
The following exhibits, other than those incorporated by
reference, have been included in the Company’s
Form 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 this
Form 10-K)
|
3.
|
a. | Restated Certificate of Incorporation of the Company, filed as Exhibit (3)(a) to the Company’s Form 10-K for the year ended December 31, 1996 is incorporated herein by reference. | ||
| b. | By-laws of the Company, as amended February 13, 2004, filed as Exhibit 3.b to the Company’s Form 10-K for the year ended December 31, 2003 is incorporated herein by reference. | |||
|
4.
|
a. | Rights Agreement dated 7/9/98, filed as Exhibit (4) to the Company’s Form 8-A dated July 28, 1998 is incorporated herein by reference. | ||
| b. | Amended and Restated Credit Agreement dated February 3, 2006 by and among the Company, Harris N.A. and other third party lenders named therein.* | |||
| c. | The Company has no other long-term debt agreements for which the related outstanding debt exceeds 10% of consolidated total assets as of December 31, 2004. Copies of debt instruments for which the related debt is less than 10% of consolidated total assets will be furnished to the Commission upon request. | |||
|
10.
|
a. | The 1996 Stock Benefit Plan, as amended April 17, 2003, filed as Exhibit 10(a) to the Company’s Form 10-K for the year ended December 31, 2003 is incorporated herein by reference. (1) | ||
| b. | Federal Signal Corporation Management Incentive Plan is hereby filed as Exhibit (10)(b) to the Company’s 10-K for the year ended December 31, 2004 is incorporated herein by reference. (1) | |||
| c. | Supplemental Pension Plan, filed as Exhibit (10)(c) to the Company’s Form 10-K for the year ended December 31, 1995 is incorporated herein by reference. (1) | |||
| d. | Executive Disability, Survivor and Retirement Plan, filed as Exhibit (10)(d) to the Company’s Form 10-K for the year ended December 31, 1995 is incorporated herein by reference. (1) | |||
| e. | Supplemental Savings and Investment Plan, filed as Exhibit (10)(f) to the Company’s Form 10-K for the year ended December 31, 1993 is incorporated herein by reference. (1) | |||
| f. | Employment Agreement with Robert D. Welding filed as Exhibit 10.f to the Company’s Form 10-K for the year ended December 31, 2003 is incorporated herein by reference. (1) | |||
| g. | Retirement and Settlement Agreement with Joseph J. Ross filed as Exhibit 10.g to the Company’s Form 10-K for the year ended December 31, 2003 is incorporated herein by reference. (1) | |||
| h. | Pension Agreement with Stephanie K. Kushner, filed as Exhibit (10)(g) to the Company’s Form 10-K for the year ended December 31, 2002 is incorporated herein by reference. (1) | |||
| i. | Employment Termination Agreement with Stephanie K. Kushner, filed as Exhibit (10)(h) to the Company’s Form 10-K for the year ended December 31, 2002 is incorporated herein by reference. (1) | |||
| j. | Severance Policy for Executive Employees filed as Exhibit (10)(j) to the Company’s 10-K for the year ended December 31, 2004 is incorporated herein by reference. (1) | |||
| k. | Change of Control Agreement with Stephanie K. Kushner, filed as Exhibit (10) (i) to the Company’s Form 10-K for the year ended December 31, 2001 is incorporated herein by reference. (1) | |||
| l. | General Release and Separation Agreement, dated February 29, 2004, with Kim A. Wehrenberg, filed as Exhibit 10 to the Company’s Form 10-Q for the quarterly period ended March 31, 2004 is incorporated herein by reference. (1) | |||
64
Table of Contents
| m. | Form of Executive Change-In-Control Severance Agreement dated July 2004 between Federal Signal Corporation and each of Robert D. Welding, Stephanie K. Kushner, Jennifer L. Sherman, Alexander D. Craig, Kimberly L. Dickens, Mark D. Weber, Stephen C. Buck and Alan G. Ringler, filed as Exhibit 10.1 to the Company’s Form 10-Q for the quarterly period ended October 2, 2004 is incorporated herein by reference. (1) | |||
| n. | Form of Executive Change-In-Control Severance Agreement dated July 2004 between Federal Signal Corporation and Duane A. Doerle, Richard L. Ritz, Karen N. Latham, Paul Brown, John A. DeLeonardis and Matt J. Saviello, filed as Exhibit 10.2 to the Company’s Form 10-Q for the quarterly period ended October 2, 2004 is incorporated herein by reference. (1) | |||
| o. | Director Deferred Compensation Plan, filed as Exhibit (10)(h) to the Company’s Form 10-K for the year ended December 31, 1997 is incorporated herein by reference (1). | |||
| p. | Broad Based Stock Option Plan, filed as Exhibit (99) to the Company’s Form S-8 dated January 31, 2002 is incorporated herein by reference. This plan was terminated on July 18, 2002, and no shares were issued pursuant to this plan. (1) | |||
|
11.
|
Computation of per share earnings is furnished in Note P of the financial statements contained under Item 8 of this 10-K and thereby incorporated herein by reference. | |||
|
14.
|
Code of Ethics for CEO and Senior Financial Officers, as amended February 13, 2004, filed as Exhibit 14 to the Company’s Form 10-K for the year ended December 31, 2003 is incorporated herein by reference. | |||
|
21.
|
Subsidiaries of the Company, filed as Exhibit 21 to the Company’s Form 10-K for the year end December 31, 2004 is incorporated herein by reference. | |||
|
23.
|
Consent of Independent Registered Public Accounting Firm, as filed herein.* | |||
|
31.1
|
CEO Certification under Section 302 of the Sarbanes-Oxley Act, as filed herein.* | |||
|
31.2
|
CFO Certification under Section 302 of the Sarbanes-Oxley Act, as filed herein.* | |||
|
32.1
|
CEO Certification of Periodic Report under Section 906 of the Sarbanes-Oxley Act, as filed herein.* | |||
|
32.2
|
CFO Certification of Periodic Report under Section 906 of the Sarbanes-Oxley Act, as filed herein.* | |||
| (1) | Management contract or compensatory plan or arrangement. |
65