UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON,
Washington, D.C. 20549
FORM
Form 10-K
COMMISSION FILE NUMBERSECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2004
Commission File Number 1-6003
FEDERAL SIGNAL CORPORATION
(Exact
(Exact name of the RegistrantCompany as specified in its charter)
Delaware | 36-1063330 | |
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
| 1415 Oak Brook, Illinois (Address of principal executive offices) | 60523 (Zip Code) | |
The Company’s telephone number, including area code
(630) 954-2000
SECURITIES REGISTERED PURSUANT TO SECTION
Securities registered pursuant to Section 12(b) OF THE ACT:
of the Act:
| Title of Each Class | Name of Each Exchange on Which Registered | |
| Common Stock, par value $1.00 per share, with preferred share purchase rights | New York Stock Exchange |
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the RegistrantCompany (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the RegistrantCompany was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X]þ No [ ]o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (sec.229.405(§229.405 of this chapter) is not contained herein, and will not be contained, to the best of the Registrant'sCompany’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X]o
Indicate by check mark whether the Company is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes þ No o
State the aggregate market value of voting stock held by nonaffiliates of the RegistrantCompany as of June 30, 2003.2004: Common stock, $1.00 par value -- $784,350,110— $876,612,549
Indicate the number of shares outstanding of each of the Registrant'sCompany’s classes of common stock, as of January 30, 2004.31, 2005: Common stock, $1.00 par value -- 47,964,470— 48,139,256 shares
DOCUMENTS INCORPORATED BY REFERENCE
Documents Incorporated By Reference
Portions of the proxy statement for the Annual Meeting of Shareholders to be held on April 30, 200427, 2005 are incorporated by reference in PartParts II and III.
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FEDERAL SIGNAL CORPORATION
INDEX TO FORM
Index to Form 10-K
PART I
ITEM 1. BUSINESS.
| Item 1. | Business. |
Federal Signal Corporation, founded in 1901, was reincorporated as a Delaware Corporation in 1969. The companyCompany is a worldwide manufacturer and supplier of street cleaning, vacuum loader and refuse collection vehicles; fire rescue vehicles; safety, signaling and communication equipment, parking systems and tooling products. Federal Signal Corporation and its subsidiaries (referred to collectively as the "Registrant"“Company” or "company"“company” herein, unless context otherwise indicates) operates manufacturing facilities in 5242 plants around the world in 12 countries serving customers in North America, South America, Europe and Asia. The RegistrantCompany also provides customer and dealer financing to support the sale of its vehicles.
NARRATIVE DESCRIPTION OF BUSINESS
Narrative Description of Business
Products manufactured and services rendered by the RegistrantCompany are divided into four major operating groups: Environmental Products, Fire Rescue, Safety Products and Tool. The individual operating companies are organized as such because they share certain characteristics, including technology, marketing, distribution and product application, thatwhich create long-term synergies.
Financial information (net sales, foreign sales, export sales, operating income and identifiable assets) concerning the Registrant'sCompany’s four operating segments as of and for the three years ended December 31, 20032004 included in Note MO of the financial statements contained under Item 8 of the Form 10-K is incorporated herein by reference.
ENVIRONMENTAL PRODUCTS GROUP
| Environmental Products Group |
The Environmental Products Group manufactures and markets worldwide a full range of street cleaning, vacuum loader and refuse collection vehicles as well as high-performance water blasting equipment. Products are also manufactured for the emerging markets of hydro-excavation, glycol recovery and surface cleaning. The group competes under the Elgin, RAVO, Vactor, Guzzler, Jetstream Leach and WittkeLeach brand names. The group'sgroup’s vehicles and equipment are manufactured in North America and Europe.
Through the Elgin brand name, the RegistrantCompany is the leading U.S.US brand of street sweepers primarily designed for large-scale cleaning of curbed streets, parking lots and other paved surfaces utilizing mechanical sweeping, vacuum and recirculating air technology for cleaning. RAVO is a market leader in Europe for high-quality, compact and self-propelled sweepers that utilize vacuum technology for pick-up.
In March 2001, the group acquired all of the assets of Athey Products
Corporation ("Athey") from bankruptcy proceedings. Athey was a primary
competitor to Elgin's mechanical sweepers. Subsequent to the purchase, the group
sold, or otherwise recovered for cash, a substantial portion of the assets of
Athey. All sweepers are currently marketed under the Elgin brand name.
Vactor is a leading manufacturer of municipal combination catch basin/sewer cleaning vacuum trucks. Guzzler is a leader in industrial vacuum loaders that clean up industrial waste or recover and recycle valuable raw materials. Jetstream manufactures high pressure waterblast equipment and accessories for commercial and industrial cleaning and maintenance operations.
In September and October 2002, the group acquired Leach Company ("Leach"(“Leach”) and Wittke, Inc. ("Wittke"(“Wittke”). The acquisitions of Leach and Wittke diversified the Registrant'sCompany’s environmental vehicle offering with a completeline of refuse hauling product line of front, side and rear loadersproducts that was able to leverage the group'sgroup’s pre-existing dealer channel, integrate Leach'sLeach’s already existing dealer network and incorporate Wittke'sWittke’s direct distribution channel. In June 2004, the refuse product lines were consolidated under the single brand name, Leach, and will be manufactured solely at the Company’s Medicine Hat, Alberta facility beginning in April 2005. Refuse truck body sales aggregated 26%20% of total group sales in 2003.
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FIRE RESCUE GROUP2004.
| 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.
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E-ONE is a leading brand of aluminum, custom-made fire rescue, airport rescue and firefighting vehicles. Superior brand trucks are manufactured and distributed primarily for the Canadian market and U.S.US wildlands markets.
Saulsbury is a leading manufacturer of stainless steel-bodied fire trucks and
rescue vehicles in the United States. Under the Bronto Skylift brand name, the RegistrantCompany manufactures vehicle-mounted aerial access platforms in Finland. In October 2001,The Company also produces stainless-steel bodied fire trucks and rescue vehicles under the Registrant acquired a majority interest in Plastisol
Holdings B.V. ("Plastisol"), located in the Netherlands. Plastisol manufactures
cabs and bodies for fire apparatus using glass-fiber reinforced polyester.
SAFETY PRODUCTS GROUPSaulsbury brand name.
| Safety Products Group |
The Safety Products Group manufactures emergency vehicle warning lights and sirens; industrial and outdoor signaling, warning, lighting and communication devices; hazardous liquid containment productsdevices and computer-based parking revenue and access control systems application software.systems. Products are sold under the Federal Signal, Target Tech, VAMA, Pauluhn, Victor Justrite and Federal APD brand names. The group maintainsoperates manufacturing facilities in North America, South America, Europe and Europe.South Africa. Many of the group'sgroup’s products are designed in accordance with various regulatory codes and standards, and meet agency approvals such as Factory Mutual
(FM) and Underwriters Laboratory (UL), International Electrotechnical Commission (IEC) and American Bureau of Shipping (ABS).
TOOL GROUP
| Tool Group |
The Tool Group manufactures 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, JPT, TTI, Manchester, Clapp DicoClappDico and PCS brand names and manufactured in North America, Europe and Asia.
The Registrant's investment
| 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 and creating a solid foundation for annual revenue growth targeted in the high single digits. The measures announced addressed three key issues: improving the profitability of the Fire Rescue Group and refuse truck body business, 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 — 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. | |
| • | Sale of Kelowna components production site — The company sold its Kelowna production facility in British Columbia to a management-led buyout group. The facility, which produced components for Class 8 trucks and also supplied certain components for Wittke refuse truck bodies, was acquired as part of the Wittke refuse truck body acquisition in 2002. | |
| • | Closure of Leach production facility — The company moved forward on its decision to close its Leach production facility in Oshkosh, Wisconsin, and consolidate production of rear-loading refuse vehicles into its facility in Medicine Hat, Alberta. Concurrent with this move, production of Road Wizard sweepers has been transferred from Medicine Hat to the company’s sweeper plant in Elgin, Illinois. This consolidation was in process at the end of 2004 and the company expects to complete the project by the end of the first quarter of 2005. |
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| • | 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 began reducing certain manufacturing activities at Dayton France and transferred related production to its facility in Portugal, which began operations in 2003. The transfer is part of a broader plan to reduce fixed overhead and shift the manufacturing footprint to lower-cost locations. |
In addition to the above actions, the company, in the fourth quarter of 2004, also divested Technical Tool, Group grew significantly due toInc., a series of acquisitions from 1999 through 2001. In July 1999, the group acquired
Clapp & Haney Tool Company, the leading U.S.small manufacturer and marketer of
polycrystalline diamond and cubic boron nitride consumable tooling. In March
2000, the group acquired P.C.S. Company, a supplier of precision beverage can tooling, pins
and accessories to the plastic injection mold industry. In January 2001, the
group acquired On Time MachiningJustrite Manufacturing Company, L.L.C., a leading manufacturer of indexable insert
drillsproducts for the safe storage of flammable and milling cutters for use in metal cutting applications.
FINANCIAL SERVICEShazardous materials.
| Financial Services |
The RegistrantCompany offers a variety of short- and long-term financing primarily to its Environmental Products and Fire Rescue independent dealers and customers. The company's loans arecompany provides financing, principally through sales-type leases, to (i) municipal and industrial customers to purchase vehicles and (ii) independent dealers to finance the purchase of vehicle inventory. The loansFinancings are typically secured by vehicles and, in the case of the independent dealers, the dealer'sdealer’s personal guarantee. In late 2001, the RegistrantCompany decided to significantly curtail new lendingleasing to industrial customers, whichwho generally have a higher credit risk; this portfolio is diminishingcontinues to diminish over time.
MARKETING AND DISTRIBUTIONtime as no new leases were extended to industrial customers in 2004. At December 31, 2004, the Company’s investment in leases to industrial customers declined to 8% of its lease financing and other receivables.
Marketing and Distribution
The RegistrantCompany believes its national and global dealer network for Environmental Products and Fire Rescue vehicles distinguishes itself from its competitors. Dealer representatives are on-hand to demonstrate the vehicle'svehicles’ functionality and capability to customers as well as service the vehicles on a timely basis. The acquisitions of the refuse businesses provideprovided a unique opportunity for the Registrant'sCompany’s already existing dealers to offer another product line in their showrooms. Wittke sold direct to customers at the time of
the acquisition
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and while it still maintains that direct distribution channel, the dealer
network is being utilized to capture market share in its respective markets. The
Registrant believes that Wittke's direct distribution channel is also a
competitive advantage in that dealer commissions are avoided and the sales force
is more focused.
The Safety Products Group companies sell to industrial customers through manufacturers'manufacturers’ representatives who sell to approximately 1,5002,000 wholesalers. Products are also sold to governmental customers through more than 900 active independent distributors as well as through original equipment manufacturers and direct sales. International sales are made through the group'sgroup’s independent foreign distributors or on a direct basis.
Because of the nature of the Tool Group'sGroup’s products, volume depends mainly on repeat orders from thousands of customers. Many of the Tool Group'sGroup’s customers have some ability to produce certain products themselves, but at a cost disadvantage. Major market emphasis is placed on quality of product, delivery and level of service. Inventories are maintained to assure prompt service to the customer with the average order for standard tools filled in less than one week for domestic shipments and within two weeks for international shipments.
CUSTOMERS AND BACKLOG
Customers and Backlog
Approximately 40%38%, 31% and 29%31% of the Registrant'sCompany’s total 20032004 orders were to U.S.US municipal and government customers, U.S.US commercial and industrial customers and non-U.S.non-US customers, respectively. Waste Management, Inc. accounted
for approximately 25% of the Registrant's 2003 refuse sales. No other single customer accounted for a material part of the Registrant'sCompany’s business.
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The company's U.S.company’s US municipal and government customers depend on tax revenues. A sluggish industrial economy, therefore, will eventually impact a municipality'smunicipality’s revenue base as jobs are lost and profits decline. Generally, the municipal trough lags far enough behind the industrial slowdown such that the industrial economy is growing again by the time municipalities reduce their spending. The U.S.US economic downturn from 2001 to 2003 lasted longer than expected, allowing spending cuts by municipalities to affect the company during the same time period as weak industrial demand was experienced. During 2004, the company saw municipal and governmental orders flat to 2003 levels. Orders for fire apparatus declined but were offset by increases in most of the company’s other products.
The Registrant'sCompany’s backlog totaled $362$432 million and $422$347 million as of December 31, 20032004 and 2002,2003, respectively. The 14% decrease25% increase is primarily due to weak refuse truck demand, deteriorating municipal government budgets and orders
for vehicular emergency lights and sirens, a $19$47 million initial installment of
the Dallas/Fort Worthairport parking project received infrom the third quarter of 2002New York and an unusually high Fire Rescue backlog at the end of 2002 due to poor production
performance in its U.S. plants.New Jersey Port Authority, strong domestic and international demand for sweepers and increased orders for vacuum trucks. A substantial majority of the orders in backlog at December 31, 20032004 are expected to be filled within the current fiscal year.
SUPPLIERS
Suppliers
The RegistrantCompany purchases a wide variety of raw materials for use in the manufacture of its products from around the world, although the majority of current purchases are from North American sources. To minimize availability, price and quality risk, the RegistrantCompany is party to numerous supplier strategic alliances. Although certain materials are obtained from either a single-source supplier or a limited number of suppliers, the RegistrantCompany has identified alternative sources to minimize the interruption to its business in the event of supply problems.
Components critical in the production of the Registrant'sCompany’s vehicles (such as engines, transmissions, drivetrains, axles and tires) are purchased from a select number of suppliers and may be specified by the customer. The RegistrantCompany also purchases raw and fabricated aluminum and steel as well as commercial chassis with certain specifications from a few sources.
The RegistrantCompany believes it has adequate supplies or sources of availability of the raw material and components necessary to meet its needs. However, there are risks and uncertainties with respect to the supply of certain of these raw materials that could impact their price and availability in sufficient quantities.
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COMPETITION
During 2004, rapidly increasing prices and tighter availability of steel significantly affected the company’s financial performance, particularly in its refuse truck body and fire rescue operations. Steel and steel-product suppliers increased pricing and imposed surcharges on a significant portion of the company’s purchased materials. The Company was unable to fully recover these increases from its customers due to the nature of the municipal bidding process and sales cycle.
Competition
Within the Environmental Products Group, Elgin is recognized as the market leader among several 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 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 competing on price and delivery performance. Combined, Leach and Wittke areis third in market share for refuse bodies; theirits vehicles compete on product performance through technology and service delivery via theirthe group’s dealer network.
E-ONE is a leading manufacturer of U.S.US aluminum-bodied fire apparatus and custom chassis in a market served by approximately ten key manufacturers and hundreds ofapproximately 90 small regional manufacturers. With its unique welded, extruded aluminum design, E-ONE is the U.S.US market leader in 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
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two position. The Saulsbury product line complements these offerings with stainless steel-bodied fire trucks and rescue vehicles. Bronto Skylift is the foremost manufacturer of high reach telescoping platforms for the global fire rescue and electric utility markets.
Within specific product categories and domestic markets, the Safety Products Group companies are typically the leaders among three to four strong competitors and sixseveral additional ancillary market participants. The group’s international market position varies from leader to ancillary participant depending on the geographic region and product line. Generally, competition is intense as to all of the group'sgroup’s products and is based on price, including competitive bidding, reputation, performance and servicing.
The Tool Group companies compete with several hundred competitors worldwide. In North America, the RegistrantCompany holds a share position from number one to number fourthree depending on the product offering. In addition,
Research and Development
The information concerning the Registrant believes it is a major supplier within these product lines.
RESEARCH AND DEVELOPMENT
The Registrant invests in research to support development of new products
and the enhancement of existing products and services. The Registrant believes
this investment is important to maintain and/or enhance it leadership position
in key markets. Expenditures forCompany’s research and development activities is included in Note O of the financial statements contained under Item 8 of this Form 10-K is incorporated herein by the Registrant were
approximately $33.2 million in 2003, $26.5 million in 2002reference.
Patents and $20.0 million in
2001.
PATENTS AND TRADEMARKSTrademarks
The RegistrantCompany owns a number of patents and possesses rights under others to which it attaches importance, but does not believe that its business as a whole is materially dependent upon any such patents or rights. The RegistrantCompany also owns a number of trademarks that it believes are important in connection with the identification of its products and associated goodwill with customers, but no material part of the Registrant'sCompany’s business is dependent on such trademarks.
EMPLOYEES
Employees
The RegistrantCompany employed over 6,8006,100 people in ongoing businesses at the close of 20032004 as compared to 7,400nearly 6,500 employees at the end of 2002.2003. Approximately 10% of the Registrant'sCompany’s domestic hourly workers were unionized at December 31, 2003.2004. The RegistrantCompany believes relations with its employees have beencontinued to be good.
GOVERNMENTAL REGULATION
Governmental Regulation of the Environment
The RegistrantCompany believes it is in substantial compliance 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 20032004 attributable to compliance with such laws 5
were not material. The RegistrantCompany believes that the overall impact of compliance with environmental regulations will not have a material effect on itits future operations.
SEASONALITY
Seasonality
Certain of the Registrant'sCompany’s businesses are susceptible to the influences of seasonal buying or delivery patterns. The Registrant'sCompany’s businesses which tend to have lower sales in the first calendar quarter compared to other quarters as a result of these influences are street sweeping, fire rescue products, outdoor warning, municipal emergency signal products and parking systems.
ADDITIONAL INFORMATION
Additional Information
The RegistrantCompany makes its annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports available, free of charge, through its Internet website (http:(http://www.federalsignal.com)www.federalsignal.com) as soon as reasonably practical after it electronically files or furnishes such materials to the Securities and Exchange Commission ("SEC"(“SEC”). All of the Registrant'sCompany’s filings may be read or copied at the SEC'sSEC’s Public Reference Room at 450 Fifth Street, NW, Washington, DC 20549. Information on the operation of the Public FilingReference Room can be obtained by calling the SEC at 1-800-SEC-0330. The SEC
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maintains an Internet website (http:(http://www.sec.gov)www.sec.gov) that contains reports, proxy and information statements and other information regarding issuers that file electronically.
ITEM 2. PROPERTIES.
| Item 2. | Properties. |
As of December 31, 2003,2004, the RegistrantCompany utilized 3325 principal manufacturing plants located throughout North America, as well as 1614 in Europe, 1 in South Africa, 1 in South America, and 1 in the Far East.
In total, the RegistrantCompany devoted approximately 2,402,0001.8 million square feet to manufacturing and 1,132,0001.0 million square feet to service, warehousing and office space as of December 31, 2003.2004. Of the total square footage, approximately 32%30% is devoted to the Safety Products Group, 12%14% to the Tool Group, 25%20% to the Fire Rescue Group and 31%36% to the Environmental Products Group. Approximately 71%79% of the total square footage is owned by the Registrant,Company, with the remaining 29%21% being leased.
All of the Registrant'sCompany’s properties, as well as the related machinery and equipment, are considered to be well-maintained, suitable and adequate for their intended purposes. In the aggregate, these facilities are of sufficient capacity for the Registrant'sCompany’s current business needs.
ITEM 3. LEGAL PROCEEDINGS.
| Item 3. | Legal Proceedings. |
The information concerning the Registrant'sCompany’s legal proceedings included in Note LN of the financial statements contained under Item 8 of this Form 10-K is incorporated herein by reference.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
| Item 4. | Submission of Matters to a Vote of Security Holders. |
No matters were submitted to a vote of security holders through the solicitation of proxies or otherwise during the three months ended December 31, 2003.
2004.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Federal Signal Corporation's
| Item 5. | Market for Company’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities. |
| (a) | Market Information |
The Company’s common stock is listed and traded on the New York Stock Exchange ("NYSE"(“NYSE”) under the symbol FSS. At December 31, 2004, all of the Company’s retained earnings were free of any restrictions. The information concerning the Registrant'sCompany’s market price range and dividend per share data included in Note RT of the financial statements contained under Item 8 of this Form 10-K is incorporated herein by reference.
| (b) | Holders |
As of January 30, 2004,31, 2005, there were 3,5873,294 holders of record of the Registrant'sCompany’s common stock.
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ITEM 6. SELECTED FINANCIAL DATA.
The following table presents the selected financial information of the
Registrant as of and for the 11 years ended December 31, 2003:
| (c) | Dividends |
The information concerning the Registrant's selected quarterlyCompany’s dividend per share data included in Note RT 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.
| (d) | Securities Authorized for Issuance under Equity Compensation Plans |
The information contained under the caption “Proposal 2 — Approval of the Federal Signal Corporation 2005 Executive Incentive Compensation Plan” of the Company’s Proxy Statement for the Annual Meeting of Shareholders to be held on April 27, 2005 is incorporated herein by reference.
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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 eleven years ended December 31, 2004:
| 2004 | 2003 | 2002 | 2001 | 2000 | 1999 | 1998 | 1997 | 1996 | 1995 | 1994 | ||||||||||||||||||||||||||||||||||||
| Operating Results (dollars in millions): | ||||||||||||||||||||||||||||||||||||||||||||||
| Net sales(a) | $ | 1,139.0 | $ | 1,150.7 | $ | 1,001.6 | $ | 1,032.3 | $ | 1,068.4 | $ | 939.0 | $ | 894.9 | $ | 818.3 | $ | 774.4 | $ | 709.0 | $ | 588.0 | ||||||||||||||||||||||||
| Income (loss) before income taxes(a) | $ | (25.3 | ) | $ | 42.0 | $ | 56.9 | $ | 60.2 | $ | 79.3 | $ | 73.4 | $ | 72.7 | $ | 79.7 | $ | 85.5 | $ | 69.5 | $ | 65.2 | |||||||||||||||||||||||
| Income (loss) from continuing operations(a) | $ | (12.7 | ) | $ | 35.1 | $ | 43.5 | $ | 43.9 | $ | 54.5 | $ | 50.7 | $ | 51.0 | $ | 53.7 | $ | 52.8 | $ | 47.0 | $ | 41.2 | |||||||||||||||||||||||
| Operating margin(a) | .0 | % | 5.4 | % | 7.8 | % | 8.5 | % | 10.4 | % | 10.2 | % | 10.1 | % | 11.1 | % | 11.4 | % | 11.6 | % | 11.8 | % | ||||||||||||||||||||||||
| Return on average common shareholders’ equity(b) | (.6 | )% | 9.1 | % | 12.1 | % | 13.3 | % | 16.4 | % | 17.0 | % | 19.1 | % | 20.6 | % | 23.8 | % | 22.0 | % | 22.3 | % | ||||||||||||||||||||||||
| Common Stock Data (per share): | ||||||||||||||||||||||||||||||||||||||||||||||
| Income (loss) from continuing operations — diluted | $ | (.26 | ) | $ | .73 | $ | .95 | $ | .97 | $ | 1.20 | $ | 1.10 | $ | 1.11 | $ | 1.17 | $ | 1.15 | $ | 1.03 | $ | .90 | |||||||||||||||||||||||
| Cash dividends | $ | .40 | $ | .80 | $ | .80 | $ | .78 | $ | .76 | $ | .74 | $ | .71 | $ | .67 | $ | .58 | $ | .50 | $ | .42 | ||||||||||||||||||||||||
| Market price range: | ||||||||||||||||||||||||||||||||||||||||||||||
| High | $ | 20.56 | $ | 20.79 | $ | 27.07 | $ | 24.63 | $ | 24.13 | $ | 28.06 | $ | 27.50 | $ | 26.75 | $ | 28.25 | $ | 25.88 | $ | 21.38 | ||||||||||||||||||||||||
| Low | $ | 15.75 | $ | 13.60 | $ | 16.00 | $ | 17.00 | $ | 14.75 | $ | 15.06 | $ | 20.00 | $ | 19.88 | $ | 20.88 | $ | 19.63 | $ | 16.88 | ||||||||||||||||||||||||
| Average common shares outstanding (in millions) | 48.2 | 48.0 | 45.9 | 45.4 | 45.5 | 46.0 | 45.8 | 45.8 | 45.9 | 45.8 | 45.9 | |||||||||||||||||||||||||||||||||||
| Financial Position at Year-End (dollars in millions): | ||||||||||||||||||||||||||||||||||||||||||||||
| Working capital(c) | $ | 188.7 | $ | 114.2 | $ | 167.6 | $ | 144.3 | $ | 55.0 | $ | 66.7 | $ | 109.5 | $ | 35.1 | $ | 32.8 | $ | 43.6 | $ | 49.3 | ||||||||||||||||||||||||
| Current ratio(c) | 1.8 | 1.4 | 1.8 | 1.9 | 1.2 | 1.3 | 1.6 | 1.2 | 1.1 | 1.2 | 1.4 | |||||||||||||||||||||||||||||||||||
| Total assets | $ | 1,125.9 | $ | 1,171.0 | $ | 1,152.3 | $ | 1,013.6 | $ | 987.6 | $ | 945.4 | $ | 832.6 | $ | 725.0 | $ | 700.6 | $ | 618.0 | $ | 519.2 | ||||||||||||||||||||||||
| Long-term debt, net of current portion | $ | 342.0 | $ | 359.1 | $ | 344.5 | $ | 232.7 | $ | 125.4 | $ | 134.4 | $ | 137.2 | $ | 32.1 | $ | 34.3 | $ | 39.7 | $ | 34.9 | ||||||||||||||||||||||||
| Shareholders’ equity | $ | 412.7 | $ | 422.5 | $ | 398.1 | $ | 359.4 | $ | 357.4 | $ | 354.0 | $ | 321.8 | $ | 299.8 | $ | 272.8 | $ | 248.1 | $ | 220.3 | ||||||||||||||||||||||||
| Debt-to-capitalization ratio(d) | 37 | % | 40 | % | 44 | % | 44 | % | 45 | % | 42 | % | 37 | % | 30 | % | 28 | % | 29 | % | 22 | % | ||||||||||||||||||||||||
| Other (dollars in millions): | ||||||||||||||||||||||||||||||||||||||||||||||
| Orders(a) | $ | 1,204.1 | $ | 1,091.6 | $ | 1,071.5 | $ | 1,039.1 | $ | 1,076.8 | $ | 981.5 | $ | 926.3 | $ | 848.5 | $ | 812.2 | $ | 668.3 | $ | 608.5 | ||||||||||||||||||||||||
| Backlog(a) | $ | 431.6 | $ | 346.6 | $ | 415.3 | $ | 341.3 | $ | 335.9 | $ | 325.7 | $ | 299.0 | $ | 248.4 | $ | 221.6 | $ | 187.0 | $ | 201.6 | ||||||||||||||||||||||||
| Net cash provided by operating activities(e) | $ | 52.5 | $ | 70.3 | $ | 102.1 | $ | 69.0 | $ | 43.0 | $ | 33.9 | $ | 68.7 | $ | 67.7 | $ | 37.9 | $ | 42.6 | $ | 37.0 | ||||||||||||||||||||||||
| Net cash provided by (used for) investing activities(e) | $ | 34.1 | $ | (10.1 | ) | $ | (71.0 | ) | $ | (33.1 | ) | $ | (43.4 | ) | $ | (81.3 | ) | $ | (86.2 | ) | $ | (41.9 | ) | $ | (30.7 | ) | $ | (67.8 | ) | $ | (80.1 | ) | ||||||||||||||
| Net cash provided by (used for) financing activities | $ | (80.4 | ) | $ | (59.9 | ) | $ | (38.2 | ) | $ | (32.6 | ) | $ | 5.2 | $ | 40.9 | $ | 22.2 | $ | (27.5 | ) | $ | (4.1 | ) | $ | 29.9 | $ | 45.1 | ||||||||||||||||||
| Capital expenditures(a) | $ | 20.5 | $ | 16.8 | $ | 18.8 | $ | 17.8 | $ | 21.2 | $ | 22.0 | $ | 18.9 | $ | 17.9 | $ | 14.7 | $ | 13.8 | $ | 9.4 | ||||||||||||||||||||||||
| Depreciation(a) | $ | 22.5 | $ | 22.1 | $ | 20.2 | $ | 18.9 | $ | 18.6 | $ | 16.2 | $ | 13.8 | $ | 12.1 | $ | 10.6 | $ | 9.4 | $ | 8.2 | ||||||||||||||||||||||||
| Employees(a) | 6,134 | 6,454 | 7,013 | 6,297 | 6,700 | 6,497 | 6,210 | 5,794 | 5,410 | 5,222 | 4,405 | |||||||||||||||||||||||||||||||||||
| (a) | continuing operations only | |
| (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 | |
| (e) | see Note A regarding change in presentation of cash flows from lease financing and other receivables |
7
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 T of the financial statements contained under Item 8 of this Form 10-K is incorporated herein by reference.
| Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations. |
Federal Signal Corporation manufactures a broad range of fire rescue
vehicles;products, including: municipal and industrial cleaning vehicles and equipment; fire rescue vehicles; safety, signaling and communication equipment and tooling products. Due to technology, marketing, distribution and product application synergies, the company'scompany’s business units are organized and managed in four operating segments: Environmental Products, Fire Rescue, Environmental Products, Safety Products and Tool. The company also provides customer and dealer financing to support the sale of vehicles. The information concerning the company'scompany’s manufacturing businesses included in Item 1 of this Form 10-K and Notes K and MO of the financial statements contained under Item 8 of this Form 10-K are incorporated herein by reference.
RESULTS OF OPERATIONS
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 and refuse body plants, risks associated with the execution of planned plant closures, 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.
8
Results of Operations
The following table summarizes the company’s results of operations and operating metrics for the three-year period ended December 31, 2004 ($ in millions except per share amounts):
| 2004 | 2003 | 2002 | |||||||||||
| Net sales | $ | 1,139.0 | $ | 1,150.7 | $ | 1,001.6 | |||||||
| Cost of sales | (895.7 | ) | (849.8 | ) | (719.2 | ) | |||||||
| Operating expenses | (228.4 | ) | (234.4 | ) | (205.1 | ) | |||||||
| Restructuring charges | (15.4 | ) | (4.8 | ) | |||||||||
| Operating income (loss) | (.5 | ) | 61.7 | 77.3 | |||||||||
| Interest expense and other | (24.8 | ) | (19.7 | ) | (20.4 | ) | |||||||
| Income taxes | 12.6 | (6.9 | ) | (13.4 | ) | ||||||||
| Income (loss) from continuing operations | (12.7 | ) | 35.1 | 43.5 | |||||||||
| Discontinued operations and change in accounting principle | 10.4 | 2.2 | (5.3 | ) | |||||||||
| Net income (loss) | $ | (2.3 | ) | $ | 37.3 | $ | 38.2 | ||||||
Other data: | |||||||||||||
| Orders | $ | 1,204.1 | $ | 1,091.6 | $ | 1,071.5 | |||||||
| Operating margin | 0.0 | % | 5.4 | % | 7.7 | % | |||||||
| Income (loss) per share — continuing operations | $ | (.26 | ) | $ | .73 | $ | .95 | ||||||
Orders increased 2%10% in 20032004 to $1.20 billion from $1.09 billion in 2003. US orders rose 8% with strength in most municipal and industrial product lines. Orders in 2004 include a $47 million airport parking system order and significantly lower municipal fire apparatus orders. Non-US orders increased 17% for the year with 8% due to stronger non-US currencies. The increase was driven by export orders for fire rescue apparatus and environmental products, and growth in international orders for aerial devices. Sales declined 1% to $1.14 billion as a result of weakness in the benefitfire rescue and refuse truck body businesses. Excluding these businesses, sales increased 7% in 2004. The company reported a loss from continuing operations of $12.7 million, reflecting losses incurred by the fire rescue and refuse truck body businesses, acquiredrestructuring charges, and higher corporate and interest expenses. The loss from continuing operations was $.26 per share in 2004 compared to income of $.73 in 2003. Earnings from discontinued operations totaled $.22 per share in 2004 with the company recording a net loss of $.05 per share.
In 2003, diluted income per share from continuing operations totaled $.73 on sales of $1.15 billion. Sales in 2003 rose over 2002’s results principally due to the full year effect of the refuse business acquisitions made in late 2002 and foreign currency translation
effects on non-U.S.increased Fire Rescue Group shipments. Despite the increase in sales, more than offset order declinesoperating income declined in other businesses.
Excluding the newly-acquired refuse businesses, orders declined 3% in 2003,
reflecting weak2003. Weak US municipal and industrial markets present throughout the year.
Sales increased 14% to $1.21 billion in 2003 largely as a result of the refuse
truck body business acquisitions and increased Fire Rescue deliveries. The 14%
sales increase included 6% from acquisitions, 3% from foreign currency
translation effects, 1% from price increases and 4% from volume. Despite the
significant increase in sales, income from continuing operations declined 18% in
2003. Cyclically weak U.S. municipal and industrial markets adversely affecteddepressed sales of highhigher margin products in the Safety Products and Tool groups and depressedreduced earnings in the refuse truck body businesses. In addition, production
facility shutdown charges
The company recorded a net loss for 2004 of $2.3 million, which included $10.4 million of income from discontinued operations. Discontinued operations include Justrite Manufacturing Company, L.L.C. and higher pension and health care costs adversely
affected 2003 results. Partially offsettingTechnical Tooling, Inc., which were lower interest expense and
income taxes. As a result, diluted earnings per share from continuing operations
declined 22% to $.79 in 2003 compared to $1.01 in 2002.
In 2002, diluted income per share from continuing operations totaled $1.01
on sales of $1.06 billion. This compares to earnings per share of $1.03 in 2001
on sales of $1.07 billion. Sales declined indivested by the Fire Rescue and Tool groups;
the Environmental Products and Safety Products groups both saw increases. The
overall 1% sales decline reflected essentially flat selling prices in 2002 on
continued weak industrial market conditions; the refuse body acquisitionscompany in the fourth quarter of 2002 increased sales approximately 2%. Sales to customers in
the United States declined 5% in 20022004 and sales to non-U.S. customers increased
10% (3% net of currency effects). Orders increased 4% in 2002 to $1.12 billion
due to the addition of the refuse truck body orders in the fourth quarter and
strength in safety products markets, particularly the $19 million initial
installment on the Dallas/Fort Worth International Airport parking revenue
control system award received in the third quarter.Plastisol B.V. Holdings divested mid-year. Net income in 2003 includedwas $37.3 million including a $.4 million after-tax charge, or $.01 per
diluted share, relating to the loss on the sale of the discontinued Sign Group operations completed in the second quarter.operations. Net income in 2002 included an $8.0 million after-tax charge relating to the cumulative effect of a change in accounting for goodwill required by Statement of Financial Accounting Standards (SFAS) No. 142, "Goodwill“Goodwill and Other Intangible Assets"Assets”. Net income in 2001
included $5.5 million of after-tax expense relating to goodwill amortization;
beginning in 2002,In accordance with SFAS No. 142, goodwill is no longer amortized beginning in accordance with SFAS No.
142.
8
2002.
The following table summarizes the company's resultscompany recorded an operating loss of operations for the
three-year period ended December 31, 2003 (in millions):
Operating income decreased 19% to $66.0$.5 million in 2003 from $81.92004 compared to operating income of $61.7 million in 2002. This 2.3 percentage point2003. Included in the results were restructuring charges of $15.4 million in 2004 and $4.8 million in 2003. In addition to the increased restructuring charges, the 2004 decline in operating margin from 7.8% in 2002
to 5.5% in 2003 reflects continued weakness in U.S. municipalresults was driven by losses incurred by the refuse truck body and industrial
markets, costs incurred to shut downfire rescue businesses and higher corporate expenses. The refuse truck body operations experienced lower production facilities in the U.K. and New
York and increased employee pension and health care costs partly offset byvolumes, higher raw material costs savings from new supplier alliances. The effects of weak markets
were particularly evidentrelated to steel and steel components, and higher operational expenses due in part to the resultsimpact of the Environmental Products, Safety
Products and Tool groups; Fire Rescue enjoyed sales and earnings increases,
resulting in part from high backlogs at the beginning of 2003. In 2002,
operating income declined 11% from $92.0 million in 2001 resulting in a .8
percentage point decrease in operating margin from 8.6% in 2001.stronger
9
Canadian dollar. The 2002 margin
decline was essentially due to a very slow industrial economy that reduced sales
of the company's higher-margin industrial products, reduced throughput and
higher production costs that adversely affected Fire Rescue Group profitabilityrecorded a loss on a large, multi-year contract for fire apparatus and flat pricing.experienced lower margins due largely to higher material costs related to steel and aluminum components and low production. Operating income increased in Safety Products, Tool and Environmental Products businesses excluding refuse truck bodies largely as a result of increased sales and generally stronger markets.
Interest expense increased 7% to $20.8 million in 2004 from $19.4 million in 2003. This increase was primarily due to higher short-term interest rates in the second half of 2004. Interest expense declined 2% toin 2003 from $19.8 million in 2003 from $20.1 million in
2002. This was2002 as a result of slightly lower debt levels, favorable interest rate swap agreements and amortization of deferred gains on previously-terminated interest rate swaps; these factors were partially offset by higher borrowing costs as Standard and Poor'sPoor’s reduced their short-term debt rating of the company to A-3. TheIn 2003, the company replaced commercial paper borrowings with higher cost committed bank lines. The impact on 2003's2003’s operations as a result of the debt rating reduction totaled approximately $1.0 million. In 2002, interest expense
declined $6.3 million, or 24%, from 2001 largely as a result of a much lower
short-term interest rate environment in 2002.
The lower interest rates were
partially offset by increased borrowings in the fourth quarter of 2002 related
to the acquisitions of the refuse truck body businesses. Weighted-average
interest rates on short-term borrowings were 2.0% in 2003, 2.0% in 2002 and 4.6%
in 2001.
The company'scompany’s 2004 effective tax rate of 18.1%(49.8)% reflects 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’s effective tax rate of 16.5% in 2003 was significantly below the 24.4%23.6% rate in 2002 and the 27.7% rate in 2001.2002. The lower tax rate in 2003 reflects the effect of a one-time benefit associated with the closure of a production facility in the U.K.United Kingdom (U.K.) and the higher relative impact of tax credits and tax-exempt municipal income. The reduction in the effective tax rate in 2002
from 2001 reflects the increased mix of tax-exempt revenues earned by the
company's Environmental Products and Fire Rescue groups, lower tax rates of the
company's foreign operations, eliminating the amortization of non-deductible
goodwill for financial reporting purposes due to the adoption of SFAS No. 142
and reduction in reserve needs for now-closed tax issues.
The company changed its assumptions for discount rates used in determining the actuarial present values of accumulated and projected benefit obligations for its postretirement plans. The company reduced the discount rate for its US plans to 6.00% as of December 31, 2004 from 6.25% and 6.75% as of December 31, 2003 from 6.75% and 7.30% as of December 31, 2002, and 2001,
9
respectively, for its U.S. plans because of lower prevailing interest rates.respectively. The changes in the assumptions resulted in additional pension expense of $2.2
million in 2002 and an additional increase of $2.7 million in 2003.2003 and a further increase of $1.5 million in 2004. In January 2004, the company also established its other significant cost assumptions for its U.S.US pension plans as follows: expected long-term rate of return on plan assets --— 9.0%; rate of increase in compensation levels --— 3.5%. These assumptions remain unchanged for 2005. The company expects that the change in these assumptionsthe discount rate assumption will further increase 20042005 pension costs by approximately $2.4$.5 million to $1.0 million, or $.03about $.01 per share, compared to 2003. In
2001, the company incurred approximately $.7 million in nonrecurring pension
costs as a result of the company's fourth quarter 2001 restructuring.2004. The company also recorded an after-tax charge of $.4 million in 2003 and $13.8 million in 2002 to other comprehensive income representing the effect of an additional minimum pension liability. Like many companies,During 2003 and 2004, the company's pensioncompany took some initial steps to move toward a common retirement benefit platform. One of these steps has been to close off participation in defined benefit plans by new hires for a significant majority of its operations. Among other things, the strategy provides for a more predictable retirement plan performance was adversely affected by low asset returns and lower interest
rates.cost.
Certain of the company'scompany’s businesses are susceptible to the influences of seasonal buying or delivery patterns. The company'scompany’s businesses which tend to have lower sales in the first calendar quarter compared to other quarters as a result of these influences are street sweeping, fire rescue products, outdoor warning, municipal emergency signal products and parking systems.
ENVIRONMENTAL PRODUCTS OPERATIONS
Restructuring Charges
The following chart presentstable summarizes the Environmental Products Group's results of
operationscompany’s restructuring charges by segment for the three-yeartwo-year period endingended December 31, 2003 (in2004 ($ in millions):
LINE GRAPH
Orders increased 16%
| 2004 | 2003 | |||||||
| Environmental Products | $ | 8.4 | $ | .6 | ||||
| Fire Rescue | 5.4 | |||||||
| Safety Products | 3.3 | |||||||
| Tool | 1.2 | .9 | ||||||
| Corporate | .4 | |||||||
| Total | $ | 15.4 | $ | 4.8 | ||||
In June 2004, the company announced the implementation of the first steps of a broad restructuring initiative. The plan is aimed at enhancing the company’s competitive profile and creating a solid foundation for
10
annual revenue growth in 2003 due to the full-year effecthigh single digits. The measures included improving the profitability of the refuse truck body, acquisitions. Excludingfire rescue and European tooling operations, divesting non-strategic business activities and improving the effectscompany’s overhead cost structure.
The company decided to close its Leach production facility in Oshkosh, Wisconsin, and consolidate production of rear-loading refuse truck bodies into its facility in Medicine Hat, Alberta. The company expects to complete the acquisitions, orders
declined 4% reflecting weak U.S. municipal demand. Orders increased 7%plant closure and transfer production in 2002
due mainly to the refuse acquisitions. Global sweeper orders declined 2% in
2002, as increased international business was more than offset by a 15%
reduction in U.S. orders in light of deteriorating municipal government budgets.
Net sales increased 19% to $353early 2005. The Environmental Products Group incurred $8.4 million in 2003 from $296restructuring charges for the year ended December 31, 2004. The total consisted of a $2.9 million impairment charge to adjust the value of certain manufacturing equipment to its net realizable value, a $1.5 million write-off of a tradename valued as an intangible asset, $2.9 million relating to employee severance and related costs and $1.1 million of other costs. The company expects to incur a total of approximately $10.5 million in 2002
duerestructuring charges to complete its restructuring plan for the full-year effect ofgroup with the refuse body truck acquisitions; net sales of
non-refuse operations declined 5% reflecting weak U.S. municipal demandremainder occurring in 2005. The remaining $2.9 million expected to be incurred in 2005 principally relates to employee severance and a
reduction in finance revenues reflecting the runoff of the industrial leasing
portfolio following the company's decision in 2001 to curtail this lending
activity. Net sales increased 6% in 2002 from $281 million in 2001 largely as a
result of the refuse truck body acquisitions in late 2002.
Operating income declined 23% to $17.7 million in 2003 from $23.0 million
in 2002 resulting in a corresponding decrease in operating margin to 5.0% from
7.7%. This decline is in large part due to the low profitability of the refuse
businesses, the continued weakening of the U.S. municipal markets, lower finance
revenues and earnings from industrial customer financings and one-time costs
incurred to consolidate U.S. sweeperrelated costs.
The company closed its 120,000 square foot production facilities in Preble, New York and convert European
sweepers to new EU standards. In 2002, operating income increased 14% from $20.2
millionconsolidated 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 2001 principally due to improved operating results for sweepers, more
than offsetting the effects of lower volumes and adverse product mix in other
product lines in the group.
10
FIRE RESCUE OPERATIONS
The following graph presents the Fire Rescue Group'sGroup, and because of progress made to rationalize and structure the broad array of vehicle offerings. The Fire Rescue Group incurred $5.4 million in restructuring charges for the year ended December 31, 2004. The total consisted of $2.5 million in real property and manufacturing equipment impairment, $2.6 million in employee severance and related costs and $.3 million of other costs. The company expects to incur total restructuring costs of $6.1 million with the remainder occurring in 2005.
The company is also reducing the level of tooling production in France and transferring some production to its Portugal facility, which began operations in 2003. The transfer is 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. The total consisted of manufacturing equipment impairment of $.2 million and severance for terminated employees of $1.0 million. The company expects to complete the consolidation by the second quarter of 2005 at a total estimated cost of $1.3 million.
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.
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 $.6 million of restructuring charges for the year ended December 31, 2003 relating to ceasing production of certain sweeper products and reduction in personnel.
Environmental Products Operations
The following table presents the Environmental Products Group’s results of operations for the three-year period ended December 31, 2003 (in2004 ($ in millions):
LINE GRAPH
| 2004 | 2003 | 2002 | ||||||||||
| Orders | $ | 389.7 | $ | 342.0 | $ | 294.2 | ||||||
| Net sales | 367.9 | 352.9 | 296.4 | |||||||||
| Operating income (loss) | (3.8 | ) | 17.7 | 23.0 | ||||||||
| Operating margin | (1.0 | )% | 5.0 | % | 7.8 | % | ||||||
11
Orders were 14% higher in 2004, largely driven by sweeper and sewer cleaner trucks. The group'sincrease is from both higher unit volume and higher pricing. US orders decreased 2% in 2003were up 12% principally reflecting the weaker U.S.stronger US municipal demand. Non-US orders were up 30% on stronger orders for sweepers, sewer cleaning trucks, and government markets primarilyindustrial vacuum trucks in the secondMiddle East and third quarters,Asia, and lower exportfor sweepers in Europe. In 2003, orders which tendincreased 16% due to be somewhat volatile. Ordersthe refuse truck body business acquisitions. Excluding these acquisitions, orders were down 4% primarily due to weaker US municipal demand in 2003.
Net sales increased 1%4% to $368 million in 2002 as strong orders at European businesses2004 from $353 million in 2003. Combined, sweeper and sewer cleaner sales increased 13% to more than offset the 20% lower refuse truck body sales. The group’s sales increase resulted from slightly higher prices, a modest decline
elsewhere.
Netstronger Euro, accounting for approximately 1% of the increase, and slightly higher unit volume. Refuse truck body sales were down due to the loss of business from one large industrial customer. In 2003, net sales increased 24%19% due to $416 millionrefuse truck body acquisitions; excluding refuse business, net sales declined 5% in 2003 from $334 million in 2002.
High backlogs at the beginning of 2003 and improvements in productivity and
delivery drove the sales increase. The group's sales increased largely as a result of increased productivity in its U.S. production facilitiesweak US municipal demand and the beneficial translation effectscompany’s decision to reduce industrial lending activity.
The group reported an operating loss of stronger Euro and Canadian currencies. In
2002, net sales declined 10% from $373$3.8 million in 2001 as reduced throughput and
deliveries2004 compared to income of $17.7 million in 2003. The group incurred $8.4 million in charges from restructuring activities in 2004. The poorer results were mainly due to losses in the U.S.refuse truck body business, which was impacted by lower production facilities resulted from more complex unitsvolumes, higher raw material costs and prototypes.
Operating income increased 29% to $14.5operating expenses driven by the stronger Canadian dollar. Refuse steel and steel component costs increased $6.3 million in 2004 and were partially offset by higher sales pricing levels. Higher steel and steel component costs were largely offset by sales price increases during the year in all other businesses in the group. In 2003, operating income declined 23% from $11.2$23 million in 2002 resulting in a slight operating margin improvement to 3.5%. Improved
productivity of the U.S. operations more than offset higher costs incurred to
improve the group's selling and manufacturing processes. In 2002, operating
income declined 60% from $27 million and an operating margin of 7.3% in 2001;
income and margin declinedprincipally due to theweakness in US municipal markets, lower sales levels coupledfinancing revenues and one-time costs associated with highersweeper production costs.
SAFETY PRODUCTS OPERATIONSfacility consolidation and sweeper conversion to new EU standards.
Fire Rescue Operations
The following charttable presents the Safety Product Group'sFire Rescue Group’s results of operations for the three-year period ended December 31, 2003 (in2004 ($ in millions):
LINE GRAPH
| 2004 | 2003 | 2002 | ||||||||||
| Orders | $ | 355.8 | $ | 369.0 | $ | 373.6 | ||||||
| Net sales | 360.9 | 402.2 | 317.1 | |||||||||
| Operating income (loss) | (23.2 | ) | 14.8 | 11.4 | ||||||||
| Operating margin | (6.4 | )% | 3.7 | % | 3.6 | % | ||||||
Orders declined 7%4% to $356 million in 2004 from $369 million in 2003 essentiallyprimarily due to weakness in US municipal and government demand more than offsetting increased non-US orders. The 2004 decline in orders was caused by price increases, temporary restrictions placed by the group bookingcompany 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. In 2003, orders declined 2% primarily stemming from weakness in US municipal and government markets and lower export orders.
Sales declined 10% to $361 million in 2004 from $402 million in 2003 with the decline resulting principally from lower volume partially offset by an increase in currency of 1%. The company estimates that approximately 2-3% of the volume decline resulted from a $19
million orderchange in sales and discounting terms with its dealers. Increased shipments of wildland and brush products and non-US aerial products were more than offset by declines in fire fighting and rescue vehicles for the Dallas/ Fort Worth parking project in 2002; excluding this
project, the group's orders were flat. Orders increased 6% in
11
2002 largely due to the large airport parking project and success in increasing
market share for European police products.US markets. Net sales increased 3% in 2003 to $278 million from $270increased as a result of productivity improvements and stronger European and Canadian currencies.
The group recorded an operating loss of $23.2 million in 2002
reflecting progress on the Dallas/Fort Worth International Airport parking
project and the strength2004 compared to income of the Euro against the U.S. dollar offset by a weak
municipal police products market and the shutdown of a production facility in
the U.K. Sales increased 5% in 2002 from $256 million in 2001 due to increased
deliveries of outdoor warning systems and European police products.
Despite the growth in sales, operating income declined 23% from $41.4
million in 2002 to $31.8$14.8 million in 2003. The operating margin decrease from
15.3% to 11.4% reflectsResults in 2004 included $5.4 million in restructuring charges and a pre-tax charge of $2.5$10.6 million loss incurred on a large multi-year contract for costs associated
withcomplex fire apparatus for the shutdown of a production facilityRoyal Netherlands Air Force. Operational issues throughout the year in the U.K., weaker sales of
high-margin municipal products coupled with higher sales of lower margin parking
products, and higher pension and health care costs. In 2002, operating income
increased 9% and margins strengthened due to higher net sales, partly offset by
increased pension expense.
TOOL OPERATIONSOcala, Florida plant also adversely impacted profitability.
12
Safety Products Operations
The following graphtable presents the Tool Group'sSafety Product Group’s results of operations for the three-year period ended December 31, 2004 ($ in millions):
| 2004 | 2003 | 2002 | ||||||||||
| Orders | $ | 296.7 | $ | 228.7 | $ | 252.3 | ||||||
| Net sales | 249.2 | 242.4 | 237.4 | |||||||||
| Operating income | 32.9 | 28.3 | 37.3 | |||||||||
| Operating margin | 13.2 | % | 11.6 | % | 15.7 | % | ||||||
Orders increased 30% 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. In 2003, (inorders declined 7% following a large parking system order received in 2002 for the Dallas/ Fort Worth International Airport.
Net sales rose 3% to $249 million in 2004 from $242 million in 2003. 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 17% to $32.9 million following depressed earnings in 2003 resulting from costs related to the closure of a production facility in the U.K. and an unfavorable mix of product sales lowering operating margins. Higher sales volumes made up 5% of the growth in 2004 and currency contributed 3%.
Tool Operations
The following table presents the Tool Group’s results of operations for the three-year period ended December 31, 2004 ($ in millions):
LINE GRAPH
| 2004 | 2003 | 2002 | ||||||||||
| Orders | $ | 161.8 | $ | 151.9 | $ | 151.4 | ||||||
| Net sales | 161.0 | 153.2 | 150.7 | |||||||||
| Operating income | 15.3 | 14.9 | 18.0 | |||||||||
| Operating margin | 9.5 | % | 9.8 | % | 11.9 | % | ||||||
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 cutting tool market throughout the year. Net sales increased 2%5% to $160$161 million in 20032004 from $156$153 million in 2002;2003; approximately 2% of the increase was principallyresulted from currency with most of the balance a result of growthincreased volume. The increase reflects stronger demand for industrial cutting tools and die components in the international precision
tooling markets, largely attributableUS, Canada and Asia. In 2003, sales increased 2% mainly due to the stronga stronger European currency. Partially
offsetting wascurrency and a weak U.S.US cutting tool market, as automotive customers
continued their low capital investment despite strong production. In 2002, net
sales declined 3% from $162market.
Operating income increased 2% to $15.3 million in 2001, a reflection of lower cutting2004 from $14.9 million in 2003. The growth 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 which represented about one-quarter of the group's sales.
Operatingprices. In 2003, operating income declined 15% to $15.9 million in 2003resulting from $18.7 million
in 2002. The decline in operating income and a reduction in operating margin
from 12.0% in 2002 to 10.0% in 2003 was largely due to cutting tool pricing pressures, costs and operating inefficiencies associated withrelated to the closure of a New York production facility, increased sales of third party resale products and significantly higher pension and medical costs. In 2002, operating income
declined 3% from $19.3The group incurred $1.2 million of restructuring charges in 2004 and $.9 million in 2001 due to lower sales volumes, cutting tool
pricing pressures and the effect of lower fixed cost absorption caused by
inventory reductions made possible by successful lean enterprise initiatives.
CORPORATE EXPENSE2003.
13
Corporate Expense
Corporate expenses totaled $21.7 million in 2004, $14.0 million in 2003 and $12.4 million in 20022002. The increase in 2004 reflects higher expenses associated with firefighter hearing loss litigation, increased product liability reserves, higher independent audit and $12.6 million in 2001.audit staff expense to meet the requirements of Sarbanes-Oxley Section 404, and the addition of centralized human resources and information technology departments. The 13% increase in 2003 reflects an increased bad debt provision and higher pension expense.
Legal Matters
The company has been sued by over 1,5002,400 firefighters in 2733 separate cases alleging that exposure to the company'scompany’s sirens impaired their hearing. The company has successfully defended itself in over 40 similar cases and contests the allegations. The discovery phase of the litigation beginsbegan in 2004; the company intendscontinues to
12
aggressively defend the matter and expects to incur approximately $3.6 million
in legal fees in 2004.matter. For further details regarding this and other legal matters, refer to Note LN in the financial statements included in Item 8 of this Form 10-K.
FINANCIAL SERVICES ACTIVITIES
Financial Services Activities
The company maintains a largean investment ($230197 million and $227$230 million at December 31, 20032004 and 2002,2003, respectively) in lease financing and other receivables that are generated by its Environmental Products and Fire Rescue operations. The increasedecrease in leasing assets primarily resulted from Fire Rescue's strong 2003
deliveriesearly loan payoffs, the sale of a $9.6 million portion of the taxable leasing portfolio, and subsequentthe continued runoff of the remaining taxable lease financing offset byportfolio resulting from the company'scompany’s decision to cease lendingno longer extend new leases to customers in certain commercial and industrial markets.customers. Financial services assets generally have repayment terms ranging from one to ten years. These assets are 91% and 87% leveraged due toas of December 31, 2004 and 2003, respectively, consistent with their overall quality; financial services debt was $201$178 million and $202$201 million at December 31, 2004 and 2003, respectively.
Financial revenues totaled $12.2 million, $13.4 million and $16.1 million in 2004, 2003 and 2002, respectively. Financial revenues totaled $13 million, $16 millionThe decline in 2004 reflects the sale of a portion of the company’s taxable portfolio and $16 million in
2003, 2002 and 2001, respectively.lower financings of municipal product sales. The 17% decline in 2003 is primarily due toreflected the company'scompany’s decision to cease financing new industrial product sales and lower lending rates due to thea declining interest rate environment.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Financial Condition, Liquidity and Capital Resources
During the three-year period ended December 31, 2003,2004, the company utilized its strong cash flows from operations to pay cash dividends to shareholders, to fund sustaining and cost reduction capital needs of its operations;operations, and to fund in whole or in part strategic acquisitions of companies operating in markets related to those already served by the company; and to pay increasing amounts in cash dividends to shareholders.company. Beyond these uses, remaining cash was used to pay down debt and to repurchase shares of common stock.
In 2004, the company began classifying all cash flows from lease financing and other receivables as part of its operating activities. Cash flows from operating activities for the years ended December 31, 2003 and 2002 in the consolidated statement of cash flows have been revised to include changes in lease financing and other receivables which have been reclassified to conform to the 2004 presentation. Management decided to adopt the above-described method as a result of concerns raised by staff of the Securities and Exchange Commission regarding the company’s previous presentation. The company'scompany’s presentation of cash flows in previously issued financial statements reflected the following:
| • | Financial services revenues were recorded as a component of net income which is included in cash flows from operating activities. | |
| • | Principal extensions and principal collections under lease financing agreements were each included in cash flows from investing activities; no cash was received by the company on a consolidated basis when a sale, recognized as a sales-type lease, was made to a customer. |
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The consolidated statement of cash flows has been adjusted to reflect the fact that there is no cash received by the consolidated entity upon the initial sale of inventory recognized as a sales-type lease and to properly classify cash receipts from the sale of inventory as operating activities. A reconciliation of amounts previously reported in the consolidated statement of cash flows to the amounts in the current presentation can be found in Note A — Significant Accounting Policies.
The company’s cash and cash equivalents totaled $10.1$14.9 million, $9.8$10.0 million and $16.9$9.7 million as of December 31, 2004, 2003 2002 and 2001,2002, respectively. The following table summarizes the company'scompany’s cash flows for the three-yearthree–year period ended December 31, 2003 (in2004 ($ in millions):
| 2004 | 2003 | 2002 | ||||||||||
| Operating cash flow | $ | 52.5 | $ | 70.3 | $ | 102.1 | ||||||
| Dividends | (19.3 | ) | (38.3 | ) | (36.0 | ) | ||||||
| Capital expenditures | (20.5 | ) | (16.8 | ) | (18.8 | ) | ||||||
| Dispositions (acquisitions) of businesses | 49.1 | 7.5 | (48.1 | ) | ||||||||
| Purchases of treasury stock | (.1 | ) | (4.4 | ) | ||||||||
| Borrowing activity, net | (62.4 | ) | (22.2 | ) | (1.1 | ) | ||||||
| All other, net | 5.5 | (.1 | ) | (.8 | ) | |||||||
| Increase (decrease) in cash | $ | 4.9 | $ | .3 | $ | (7.1 | ) | |||||
Operating cash flow declined to $75.4$52.5 million in 2004 from $70.3 million in 2003 due to operating losses incurred by the Fire Rescue Group and refuse truck body operations, higher corporate expenses, lower proceeds ($7.7 million) from $88.4the 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 addition, the company made contributions of $9.6 million to its pension plans in 2004 compared with $4.2 million in 2003. Operating cash flow in 2003 declined from $102.1 million in 2002, in large part reflecting lower earnings, an increase in lease financing receivables in 2003 compared to a significant decline in 2002, timing of customer advances, the disproportionate increase in foreign sales with longer payment terms and multi-year contracts. Cash flows in 2003 also benefited from favorable settlements of interest rate swaps and foreign currency hedges as well as continued improvements in inventory productivity as evidenced by inventory turns rising to 4.8 at December 31, 2003. Operating
In 2004, the company disposed of Justrite Manufacturing Company, L.L.C. and Technical Tooling, Inc. for cash flow decreasedproceeds of $40.1 million and $6.5 million, respectively. In addition, the company divested its 54% majority interest in 2002 from $95.1Plastisol B.V. Holdings to the minority partner for $2.5 million in 2001 due to lower earningscash and a discretionary $5.0 million pension
contribution madenote receivable of $.4 million. These 2004 divestitures were in view ofconjunction with the company's strong cash position and weak pension
asset performance. The company also experienced reductionscompany’s restructuring initiatives announced in working capital
driven by improved collections, lower inventory levels due to lean enterprise
initiatives andJune 2004. In 2003, the receipt of more advance payments from customers. The
company's operating cash flows fluctuate on a quarterly basis due to sales
seasonality and associated working capital requirements.
The company completed the sale of the Sign Group in April 2003 for cash of $7.5 million and a $4.2 million note receivable. The company acquired the refuse truck body businesses in 2002 for $101.3 million, funded with cash of $48.1 million and stock valued at $43.4 million plus the assumption of $9.8 million of debt. The
13
In 2004, the company paid $19.7repaid $62.4 million in 2001 to acquire Athey Products Corporation,
Plastisol Holdings B.V. and two small Tool Group companies includingof debt by utilizing the assumption of debt.
In order to showproceeds from the distinct characteristicssale of the company's investment
in its manufacturing and financial service activities,three aforementioned businesses as well as the positive cash flow from operations. In June 2004, the company has presented
separately these investments and their related liabilities. Different ratiosvoluntarily reduced the size of debt and equity support each of these two types of activities.its credit facility from $250 million to $200 million. At December 31, 2004, $45 million was outstanding under this agreement.
In April 2003, Standard and Poor'sPoor’s lowered the company'scompany’s debt rating from A-2 to A-3 making short-term borrowing in the commercial paper market no longer viable.feasible. After drawing on a portion of the $300 million back-up credit facility to pay off the commercial paper holders,outstandings, the company replaced itthe $300 million facility in 2003 with a new $250 million unsecured revolving credit facility maturing in November 2006 bearing interest at a variable rate of LIBOR plus .83%. At December 31, 2003, $75 million was outstanding under this agreement. TheIn June 2003, the company also secured $50 million in private placement financing with increments maturing in 2008, 2010 and 2013 bearing interest at a variable rate of LIBOR plus an average of 1.04%. The rating downgrade resulted in the company incurring an additional $1.0 million in
15
borrowing costs in 2003. The incremental cost was partially offset by favorable interest rate swap agreements. The company paid down $22.2 million of borrowings in 2003.
During the fourth quarter of 2002, the company issued long-term debt of
$100 million at an average interest rate of 5.1% with terms ranging from six to
ten years.
The company issued the debt to replace $48 million of short-term debt
incurred to fund the refuse business acquisitions and to replace other existing
short-term debt.
The company's debt facilities containcompany’s revolving credit facility contains covenants relating to a maximum debt-to-capitalization ratio, minimum interest coverage and minimum net worth. Due to weak operating results, the company’s results were below the minimum interest coverage covenant as of December 31, 2004. The company was granted a temporary waiver of this covenant until April 1, 2005. As of December 31, 2003,2004, the company was in compliance with theall financial covenants, of its debt agreements.as adjusted. At December 31, 2003,2004, the company had borrowings of $45 million against its revolving credit facility. In January 2005, the company voluntarily reduced its revolving line of credit to $150 million due to reduced borrowing requirements. In March 2005, the company obtained a permanent amendment to its interest coverage covenant. At December 31, 2004, total manufacturing debt was $265$235 million, representing 40%37% of capitalization, down from 44%40% ($296263 million) as of December 31, 2002. The manufacturing debt-to-capitalization ratio
is subject to variations based on seasonal working capital requirements.2003. The company believes that its financial services assets, due to their improved overall quality, are capable of sustaining a leverage ratio of 91%. At both at December 31, 2003 and 2002, the company's2004. The company’s debt-to-capitalization ratio for its financial services activities was 91% and 87% for its continuing operations.as of December 31, 2004 and 2003, respectively.
Cash dividends increased by $2.3 million from $36.0decreased to $19.3 million in 2002 to2004 from $38.3 million in 2003 due to the additional shares issued in late 2002 for the
refuse acquisitions; the company paid dividends of $.80 per share in 2003. In October 2003, the company announced a 50% reduction in the quarterly dividend to improve its long-term position in view of the further weakening of the U.S.US state and municipal markets and the lack of a conclusive rebound in the industrial economy. The reduction is expectedeconomy; the company paid dividends of $.40 per share in 2004. Cash dividends in 2003 increased by $2.3 million from $36.0 million in 2002 due to improve the company's future
financial flexibility.
Management focuses substantial effort on improvingadditional shares issued in late 2002 for the utilizationrefuse acquisitions; the company paid dividends of $.80 per share in 2003. In February 2005, the company's working capital. The company's primary working capital as a percent of
net sales was 23.3% and 22.4% as of December 31, 2003 and 2002, respectively.company reduced its first quarter dividend to $.06 per share compared to $.10 per share in 2004.
The company anticipates that its financial resources and major sources of liquidity, including cash flow from operations and borrowing capacity, will continue to be adequate to meet its operating and capital needs in addition to its financial commitments.
14
CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS
Contractual Obligations and Commercial Commitments
The following table presents a summary of the company'scompany’s contractual obligations and payments due by period as of December 31, 2003 (in2004 ($ in millions):
| �� | Payments Due by Period | |||||||||||||||||||
| Less than | More than | |||||||||||||||||||
| Total | 1 Year | 1 - 3 Years | 3 - 5 Years | 5 Years | ||||||||||||||||
| Long-term debt | $ | 358.6 | $ | 18.6 | $ | 111.3 | $ | 80.2 | $ | 148.5 | ||||||||||
| Operating lease obligations | 26.4 | 6.2 | 8.6 | 5.1 | 6.5 | |||||||||||||||
| Fair value of interest rate swaps | 5.9 | .3 | .8 | .9 | 3.9 | |||||||||||||||
| Fair value of foreign exchange contracts | (2.9 | ) | (1.6 | ) | (1.3 | ) | ||||||||||||||
| Total contractual obligations | $ | 388.0 | $ | 23.5 | $ | 119.4 | $ | 86.2 | $ | 158.9 | ||||||||||
The company is party to various interest rate swap agreements in conjunction with the management of borrowing costs. As of December 31, 2003,2004, the fair value of the company'scompany’s net position would result in cash proceedspayments of $9.4$5.9 million. Future changes in the U.S.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, 2003,2004, the unrealized gain on the company'scompany’s foreign currency forwardexchange contracts totaled $2.5$2.9 million. Volatility in the future exchange rates between the U.S.US dollar and Euro and Canadian dollar will impact final settlement.
16
The following table presents a summary of the company'scompany’s commercial commitments and the notional amount expiration by period (in($ in millions):
The security bonds for casualty insurance policies relate to the company's
worker'scompany’s workers’ compensation, automobile, general liability and product liability policies. The outstandingOutstanding financial standby letters of credit represent guarantees of performance by foreign subsidiaries that engage in cross-border transactions with foreign governments.customers.
| Notional Amount Expiration by Period | ||||||||||||||||
| Less than | 1 - 3 | 3 - 5 | ||||||||||||||
| Total | 1 Year | Years | Years | |||||||||||||
| Security bonds for casualty insurance policies | $ | 29.5 | $ | 29.5 | ||||||||||||
| Financial standby letters of credit | 6.8 | 6.1 | $ | .7 | ||||||||||||
| Guaranteed residual value obligations | 3.4 | 2.8 | $ | .6 | ||||||||||||
| Guarantees of the indebtedness of others | .7 | .6 | .1 | |||||||||||||
| Total commercial commitments | $ | 40.4 | $ | 36.2 | $ | 3.6 | $ | .6 | ||||||||
Security bonds for casualty insurance
policies................................. $ 25.1 $ 25.1
Financial standby letters of credit........ 10.3 10.1 $ .2
Guaranteed residual value obligations...... 3.5 .1 $ .6 $ 2.7 .1
Guarantees of the indebtedness of others... .8 .6 .2
------- ------- ---- ------ ----
Total commercial commitments............... $ 39.7 $ 35.9 $ .8 $ 2.7 $ .3
======= ======= ==== ====== ====
In limited circumstances, the 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'scompany’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
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The company considers the following policies to be the most critical in understanding the 15
judgments that are involved in the preparation of the company'scompany’s consolidated financial statements and the uncertainties that could impact the company'scompany’s financial condition, results of operations and cash flows.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
| Allowances for Doubtful Accounts |
The company performs ongoing credit evaluations of its customers. The company'scompany’s policy is to establish, on a quarterly basis, an allowanceallowances for doubtful accounts based on factors such as historical loss trends, credit quality of the present portfolio, collateral value and general economic conditions. If the historical loss trend increased or decreased 10% in 2003,2004, the company'scompany’s operating income would have decreased or increased by $.3 million, respectively. Though management considers the valuation of the allowanceallowances proper and adequate, changes in the economy and/or deterioration of the financial condition of the company'scompany’s customers could affect the reserve balances required.
WARRANTY RESERVE
| Warranty Reserve |
The company'scompany’s products generally carry express warranties that provide repairs at no cost to the customer or the issuance of credit. The length of the warranty term depends on the product sold, but generally extends from six months to five years based on the terms that are generally accepted in the company'scompany’s marketplaces. Certain components necessary to manufacture the company'scompany’s vehicles (including chassis, engines and transmissions) are covered under an original manufacturers'manufacturers’ warranty. Such manufacturers'manufacturers’ warranties are extended directly to end customers.
The 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
17
warranty issue can arise which is outside the norm of the company'scompany’s historical experience; costs related to such issues, if any, are provided for when they become probable and estimable.
The company'scompany’s warranty cost as a percentage of net sales totaled 1.5%1.4% in 2004, 1.4% in 2003 and 1.0% in 2002 and 1.2% in 2001.2002. The increase in the rate in 2003 is primarily due to the acquisitions of the refuse truck body businesses in late 2002 which experience higher warranty claims due to their usage pattern, and to the introduction of new custom fire rescue vehicles that incurred higher warranty costs when used for the first time. Although managementManagement believes the current
liabilityreserve recorded at December 31, 2004 is appropriate, aappropriate. A 10% increase or decrease in the estimated warranty costs in 20032004 would have decreased or increased operating income by $1.8$1.6 million, respectively.
WORKER'S COMPENSATION AND PRODUCT LIABILITY RESERVES
| Worker’s Compensation and Product Liability Reserves |
The company is partially self-insured for worker'sworker’s compensation claims with various stop-loss thresholds. When a worker'sworker’s compensation claim is filed, a liability is estimated, if any is expected, to settle the claim. The establishment of a liability for unpaid claims, including claims incurred but not reported, is based on the assessment by the company'scompany’s claim administrator of each claim, management'smanagement’s estimate of the nature and severity of total claims and an independent actuarial valuation. The company utilizes a third-party administrator to track and evaluate actual claims experience for consistency in the data used in the actuarial valuation. While management believes the current reserve is adequate, a 10% increase or decrease in the average cost per claim in 20032004 would have decreased or increased operating income by $.3 million, respectively.
Due to the nature of the products manufactured, the company is subject to product liability claims in the ordinary course of business. The company is partially self-insured for its product liability exposures; it records a liabilityreserve when a potential loss associated with an asserted claim is probable and reasonably estimable. The liability is based on an assessment of each claim by the company'scompany’s third party administrator, management'smanagement’s current knowledge of the matter and consultation with counsel. Management believes that the liabilityreserve established at December 31, 2004 appropriately reflects the company'scompany’s risk exposure. 16
GOODWILL IMPAIRMENTThe company has not established any reserve for potential losses resulting from hearing loss litigation (see Note N); if the company is not successful in its defense, it will record a charge for such claims at the time a judgment or settlement is made.
| Goodwill Impairment |
In accordance with SFAS No. 142, "Goodwill“Goodwill and Other Intangible Assets"Assets”, the 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 at the beginning of 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'scompany’s reporting units. If the sum of the expected discounted cash flows of the reporting unit is less than its carrying value, an impairment loss is required against the unit'sunit’s goodwill.
In accordance with SFAS No. 142's142’s transition rules, the company performed an assessment as of January 1, 2002, the date of the statement'sstatement’s adoption. This evaluation resulted in an $8.0 million impairment charge in 2002 related to a niche Tool Group business. The annual testing conducted in 20022003 and 20032004 did not result in any impairment.
Although management believes that the assumptions and estimates used were reasonable, a sensitivity analysis for each reporting unit is performed along with the impairment test. The analysis indicated that a 10%5% change in the sales
growth, operating margin or working capital percentage assumptions would notassumption could result in anya goodwill impairment.
MARKET RISK MANAGEMENTimpairment in the Environmental Products Group of approximately $2 million. A significant portion of the goodwill in this group arose with the
18
acquisitions of the refuse truck body businesses in 2002, which have had poor operating results since acquisition.
Financial Market Risk Management
The company is subject to market risk associated with changes in interest rates and foreign exchange rates. To mitigate this risk, the company utilizes interest rate swaps and foreign currency options and forward contracts. The company does not hold or issue derivative financial instruments for trading or speculative purposes and is not party to leverageleveraged derivatives.
INTEREST RATE RISK
| Interest Rate Risk |
The company manages its exposure to interest rate movements by maintaining a proportionate relationship between fixed-rate debt to total debt generally within established percentages.percentages of between 40% and 60%. The company uses funded fixed-rate borrowings as well as interest rate swap agreements to balance its overall fixed/floating interest rate mix.
Of the company'scompany’s debt at December 31, 2003,2004, 43% was used to support financial services assets; the weighted average remaining life of those assets is typically under three years and the debt is match-funded to the financing assets. The company is currently comfortable with a sizeable portion of floating
rate debt to support these financial services assets, since a rise in borrowing
rates would normally correspond with a rise in lending rates within a reasonable
period.
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The following table summarizespresents the company's financial instrumentsprincipal cash flows and weighted average interest rates by year of maturity for the company’s total debt obligations held at December 31, 2003 that are sensitive to changes in interest rates, including
debt obligations and interest rate swaps (dollars2004 ($ in millions):
For interest rate swaps, the
| Expected Maturity Date | ||||||||||||||||||||||||||||||||
| Fair | ||||||||||||||||||||||||||||||||
| 2005 | 2006 | 2007 | 2008 | 2009 | Thereafter | Total | Value | |||||||||||||||||||||||||
| Fixed rate | $ | 18.6 | $ | 83.6 | $ | 27.8 | $ | 35.2 | $ | 25.1 | $ | 118.3 | $ | 308.6 | $ | 310.3 | ||||||||||||||||
| Average interest rate | 5.8 | % | 5.8 | % | 5.9 | % | 5.8 | % | 5.7 | % | 5.5 | % | ||||||||||||||||||||
| Variable rate | $ | 52.4 | $ | 20.0 | $ | 30.0 | $ | 102.4 | $ | 102.4 | ||||||||||||||||||||||
| Average interest rate | 3.5 | % | 4.8 | % | 5.3 | % | ||||||||||||||||||||||||||
The following table presents notional amounts and weighted average interest rates by expected (contractual) maturity dates.date for the company’s interest rate swap contracts held at December 31, 2004 ($ in millions). Notional amounts are used to calculate the contractual payments to be exchanged under the contract. Weighted average variable rates are based on implied forward rates in the yield curve at the reporting date.
At December 31, 2003 and 2002, the company was party to interest rate swap
agreements with aggregate notional amounts of $400 million and $270 million,
respectively.
| Expected Maturity Date | ||||||||||||||||||||||||||||||||
| Fair | ||||||||||||||||||||||||||||||||
| 2005 | 2006 | 2007 | 2008 | 2009 | Thereafter | Total | Value | |||||||||||||||||||||||||
| Pay fixed, receive variable | $ | 30.0 | $ | 10.0 | $ | 25.0 | $ | 10.0 | $ | 10.0 | $ | 85.0 | $ | .8 | ||||||||||||||||||
| Average pay rate | 4.5 | % | 3.8 | % | 5.1 | % | 3.8 | % | 3.8 | % | ||||||||||||||||||||||
| Average receive rate | 2.8 | % | 3.3 | % | 3.8 | % | 3.9 | % | 4.1 | % | ||||||||||||||||||||||
| Receive fixed, pay variable | $ | 17.1 | $ | 17.1 | $ | 27.2 | $ | 35.2 | $ | 25.1 | $ | 98.3 | $ | 220.0 | $ | (6.7 | ) | |||||||||||||||
| Average pay rate | 5.8 | % | 6.3 | % | 6.9 | % | 6.6 | % | 6.6 | % | 6.4 | % | ||||||||||||||||||||
| Average receive rate | 6.5 | % | 6.5 | % | 6.6 | % | 6.2 | % | 6.1 | % | 5.7 | % | ||||||||||||||||||||
See Note H to the consolidated financial statements for a description of these agreements. All of the interest rate swap agreements qualify for hedge accounting treatment.
FOREIGN EXCHANGE RATE RISK
| Foreign Exchange Rate Risk |
The 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 risks associated with
sales and purchase commitments as well as forecast transactions denominated in
foreign currencies.
18
these risks.
19
The following table summarizes the company'scompany’s foreign currency forward
contract hedgingderivative instruments as of December 31, 20032004 by expected settlement date (dollars($ in millions):
At December 31, 2003 and 2002, the company was party to foreign currency
forward contracts with aggregate notional amounts of $59 million and $47
million, respectively.
| Expected Settlement Date | ||||||||||||||||||||||||||
| 2005 | 2006 | |||||||||||||||||||||||||
| Average | Average | |||||||||||||||||||||||||
| Notional | Contract | Notional | Contract | Fair | ||||||||||||||||||||||
| Amount | Rate | Amount | Rate | Total | Value | |||||||||||||||||||||
| Forward contracts: | ||||||||||||||||||||||||||
| Buy Euros, sell US dollars | $ | 13.9 | 1.34 | $ | 13.9 | $ | .1 | |||||||||||||||||||
| Buy Canadian dollars, sell US dollars | 7.1 | 1.40 | $ | 7.1 | 1.40 | 14.2 | 2.4 | |||||||||||||||||||
| Other currencies | 6.7 | 6.7 | ||||||||||||||||||||||||
| Total forward contracts | 27.7 | 7.1 | 34.8 | 2.5 | ||||||||||||||||||||||
| Options: | ||||||||||||||||||||||||||
| Buy Canadian dollars, sell US dollars | 16.7 | 1.20 | 16.7 | .4 | ||||||||||||||||||||||
| Buy US dollars, sell Euros | 8.4 | 1.20 | 8.4 | |||||||||||||||||||||||
| Total options | 25.1 | 25.1 | .4 | |||||||||||||||||||||||
| Total foreign currency derivatives | $ | 52.8 | $ | 7.1 | $ | 59.9 | $ | 2.9 | ||||||||||||||||||
See Note H to the consolidated financial statements for a description of these agreements. All of these derivative instruments qualify for hedge accounting treatment.
FORWARD-LOOKING STATEMENTS
This Form 10-K, reports filed by the company with the SEC on Forms 10-Q and
8-K and comments made by management contain the words such as "believe,"
"expect," "anticipate," "intend," "plan," "estimate" and "objective". These
expressions are intended to identify forward-looking statements. Forward-
looking statements include information concerning the company's possible or
assumed future results of operations. While these statements are based on
assumptions and judgments that management has made in light of industry
experience as well as perceptions of historical trends, current conditions,
expected future developments and other factors believed to be appropriate under
the circumstances, actual results could differ materially. These statements are
not guarantees of performance or results.
OTHER MATTERS
Other Matters
The 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 for the three-year period ending December 31, 2003.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.2004.
| Item 7A. | Quantitative and Qualitative Disclosures About Market Risk. |
The information contained under the caption Market Risk Management included in Item 7 of this Form 10-K is incorporated herein by reference.
19
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
20
| Item 8. | Financial Statements and Supplementary Data. |
FEDERAL SIGNAL CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
| Page | ||||
| 22 | ||||
| 24 | ||||
| 25 | ||||
| 26 | ||||
| 27 | ||||
| 28 | ||||
21
REPORT OF INDEPENDENT AUDITORS
REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and Board of Directors
of Federal Signal Corporation
We have audited the accompanying consolidated balance sheets of Federal Signal Corporation and subsidiaries as of December 31, 20032004 and 20022003, and the related consolidated statements of income comprehensive income(loss), shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2003.2004. Our audits also included the financial statement schedule listed in the Index at Item 15(a)2.. These financial statements and schedule are the responsibility of the company'sCompany’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with auditingthe standards generally
accepted inof the United States.Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Federal Signal Corporation and subsidiaries as ofat December 31, 20032004 and 2002,2003, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 20032004, in conformity with accounting
principlesUS generally accepted in the United States.accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth herein.
As discussedtherein.
We also have audited, in Notesaccordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Federal Signal Corporation’s internal control over financial reporting as of December 31, 2004, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 9, 2005 expressed an unqualified opinion thereon.
 |
Chicago, Illinois
March 9, 2005
except for Note E, as to which the date is
March 15, 2005
22
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, 2004, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Federal Signal Corporation’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and Pthe preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company changedare being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its methodinherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of accountingany evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, management’s assessment that Federal Signal Corporation maintained effective internal control over financial reporting as of December 31, 2004, 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, 2004, 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, 2004 and 2003, and the related consolidated statements of income (loss), shareholders’ equity and cash flows for goodwilleach of the three years in the period ended December 31, 2004 of Federal Signal Corporation and other intangibles in 2002.
SIG ERNST & YOUNG LLP
our report dated March 9, 2005, except for Note E, as to which the date is March 15, 2005, expressed an unqualified opinion thereon.
|
Chicago, Illinois
January 29, 2004
21
March 9, 2005
23
FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
| December 31, | |||||||||||
| 2004 | 2003 | ||||||||||
| ($ in millions) | |||||||||||
| ASSETS | |||||||||||
| Manufacturing activities: | |||||||||||
| Current assets | |||||||||||
| Cash and cash equivalents | $ | 14.9 | $ | 10.0 | |||||||
| Accounts receivable, net of allowances for doubtful accounts of $2.3 million and $2.5 million, respectively | 200.6 | 185.9 | |||||||||
| Inventories — Note B | 178.2 | 172.5 | |||||||||
| Other current assets | 24.7 | 19.2 | |||||||||
| Total current assets | 418.4 | 387.6 | |||||||||
| Properties and equipment — Note C | 110.9 | 118.7 | |||||||||
| Other assets | |||||||||||
| Goodwill, net of accumulated amortization | 352.5 | 350.6 | |||||||||
| Other deferred charges and assets | 47.6 | 61.0 | |||||||||
| Total manufacturing assets | 929.4 | 917.9 | |||||||||
| Net assets of discontinued operations | 23.0 | ||||||||||
| Financial services activities — Lease financing and other receivables, net of allowances for doubtful accounts of $3.9 million and $2.5 million, respectively, and net of unearned finance revenue — Note D | 196.5 | 230.1 | |||||||||
| Total assets | $ | 1,125.9 | $ | 1,171.0 | |||||||
| LIABILITIES AND SHAREHOLDERS’ EQUITY | |||||||||||
| Manufacturing activities: | |||||||||||
| Current liabilities | |||||||||||
| Short-term borrowings — Note E | $ | 18.9 | $ | 68.6 | |||||||
| Accounts payable | 79.6 | 76.2 | |||||||||
| Accrued liabilities | |||||||||||
| Compensation and withholding taxes | 30.8 | 30.4 | |||||||||
| Customer deposits | 24.5 | 21.2 | |||||||||
| Other | 75.9 | 65.6 | |||||||||
| Income taxes | 2.6 | ||||||||||
| Total current liabilities | 229.7 | 264.6 | |||||||||
| Long-term borrowings — Note E | 215.7 | 194.1 | |||||||||
| Long-term pension and other liabilities | 34.3 | 49.1 | |||||||||
| Deferred income taxes — Note F | 55.1 | 39.4 | |||||||||
| Total manufacturing liabilities | 534.8 | 547.2 | |||||||||
| Financial services activities — Borrowings — Note E | 178.4 | 201.3 | |||||||||
| Total liabilities | 713.2 | 748.5 | |||||||||
| Shareholders’ equity — Notes I and J | |||||||||||
| Common stock, $1 par value per share, 90.0 million shares authorized, 48.6 million and 48.4 million shares issued, respectively | 48.6 | 48.4 | |||||||||
| Capital in excess of par value | 94.4 | 91.9 | |||||||||
| Retained earnings — Note E | 295.8 | 317.4 | |||||||||
| Treasury stock, .4 million and .5 million shares, respectively, at cost | (13.6 | ) | (14.8 | ) | |||||||
| Deferred stock awards | (3.1 | ) | (2.3 | ) | |||||||
| Accumulated other comprehensive income (loss) | |||||||||||
| Foreign currency translation | 3.1 | (3.7 | ) | ||||||||
| Net derivative loss, cash flow hedges | 1.7 | �� | (.2 | ) | |||||||
| Minimum pension liability | (14.2 | ) | (14.2 | ) | |||||||
| Total | (9.4 | ) | (18.1 | ) | |||||||
| Total shareholders’ equity | 412.7 | 422.5 | |||||||||
| Total liabilities and shareholders’ equity | $ | 1,125.9 | $ | 1,171.0 | |||||||
See notes to consolidated financial statements.
22
24
FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
| For the Years Ended December 31, | ||||||||||||||
| 2004 | 2003 | 2002 | ||||||||||||
| ($ in millions, except per share data) | ||||||||||||||
| Net sales | $ | 1,139.0 | $ | 1,150.7 | $ | 1,001.6 | ||||||||
| Costs and expenses | ||||||||||||||
| Cost of sales | (895.7 | ) | (849.8 | ) | (719.2 | ) | ||||||||
| Selling, general and administrative | (228.4 | ) | (234.4 | ) | (205.1 | ) | ||||||||
| Restructuring charges | (15.4 | ) | (4.8 | ) | ||||||||||
| Operating income (loss) | (.5 | ) | 61.7 | 77.3 | ||||||||||
| Interest expense | (20.8 | ) | (19.4 | ) | (19.8 | ) | ||||||||
| Other expense, net | (4.0 | ) | (.3 | ) | (.6 | ) | ||||||||
| Income (loss) before income taxes | (25.3 | ) | 42.0 | 56.9 | ||||||||||
| Income taxes — Note F | 12.6 | (6.9 | ) | (13.4 | ) | |||||||||
| Income (loss) from continuing operations | (12.7 | ) | 35.1 | 43.5 | ||||||||||
| Discontinued operations — Note L: | ||||||||||||||
| Income from operations, net of taxes of $2.2 million, $1.4 million and $1.4 million, respectively | 3.7 | 2.6 | 2.7 | |||||||||||
| Gain (loss) on dispositions, net of taxes (benefit) of $7.9 million and $(.2) million, respectively | 6.7 | (.4 | ) | |||||||||||
| Cumulative effect of change in accounting, net of taxes | (8.0 | ) | ||||||||||||
| Net income (loss) | $ | (2.3 | ) | $ | 37.3 | $ | 38.2 | |||||||
| Basic and diluted income (loss) per share | ||||||||||||||
| Income (loss) from continuing operations | $ | (.26 | ) | $ | .73 | $ | .95 | |||||||
| Discontinued operations: | ||||||||||||||
| Income from operations, net of taxes | .08 | .05 | .06 | |||||||||||
| Gain (loss) on dispositions, net of taxes | .14 | (.01 | ) | |||||||||||
| Cumulative effect of change in accounting, net of taxes | (.17 | ) | ||||||||||||
| Net income (loss)* | $ | (.05 | ) | $ | .78 | $ | .83 | |||||||
| * | amounts may not add to total due to rounding |
See notes to consolidated financial statements.
23
25
FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
SHAREHOLDERS’ EQUITY
| Common | Capital in | Accumulated | ||||||||||||||||||||||||||||
| Stock | Excess of | Deferred | Other | |||||||||||||||||||||||||||
| Par | Par | Retained | Treasury | Stock | Comprehensive | |||||||||||||||||||||||||
| Value | Value | Earnings | Stock | Awards | Loss | Total | ||||||||||||||||||||||||
| ($ in millions) | ||||||||||||||||||||||||||||||
| Balance at December 31, 2001 | $ | 47.4 | $ | 73.2 | $ | 312.2 | $ | (45.5 | ) | $ | (2.2 | ) | $ | (25.7 | ) | $ | 359.4 | |||||||||||||
| Comprehensive income: | ||||||||||||||||||||||||||||||
| Net income | 38.2 | 38.2 | ||||||||||||||||||||||||||||
| Foreign currency translation | 7.6 | 7.6 | ||||||||||||||||||||||||||||
| Unrealized losses on derivatives, net of $1.2 million tax benefit | (2.1 | ) | (2.1 | ) | ||||||||||||||||||||||||||
| Minimum pension liability, net of $8.1 million tax benefit | (13.8 | ) | (13.8 | ) | ||||||||||||||||||||||||||
| Comprehensive income | 29.9 | |||||||||||||||||||||||||||||
| Issuance of stock for purchase of companies | .8 | 12.8 | 29.9 | 43.5 | ||||||||||||||||||||||||||
| Cash dividends declared | (36.7 | ) | (36.7 | ) | ||||||||||||||||||||||||||
| Compensation plans: | ||||||||||||||||||||||||||||||
| Exercise of stock options | .2 | 4.0 | (1.3 | ) | 2.9 | |||||||||||||||||||||||||
| Stock awards granted | .1 | 2.4 | (2.5 | ) | — | |||||||||||||||||||||||||
| Related tax benefits | .1 | .1 | ||||||||||||||||||||||||||||
| Amortization of deferred stock awards | 1.5 | 1.5 | ||||||||||||||||||||||||||||
| Treasury stock: | ||||||||||||||||||||||||||||||
| Issuance | 1.9 | 1.9 | ||||||||||||||||||||||||||||
| Purchases | (4.4 | ) | (4.4 | ) | ||||||||||||||||||||||||||
| Retirement | (.1 | ) | (1.4 | ) | 1.5 | — | ||||||||||||||||||||||||
| Other | (.1 | ) | (.1 | ) | ||||||||||||||||||||||||||
| 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 | |||||||||||||
See notes to consolidated financial statements.
24
26
FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
| For the Years Ended | ||||||||||||||
| December 31, | ||||||||||||||
| 2004 | 2003 | 2002 | ||||||||||||
| ($ in millions) | ||||||||||||||
| Operating activities | ||||||||||||||
| Net income (loss) | $ | (2.3 | ) | $ | 37.3 | $ | 38.2 | |||||||
| Adjustments to reconcile net income (loss) to net cash provided by operating activities: | ||||||||||||||
| Cumulative effect of change in accounting | 8.0 | |||||||||||||
| (Gain) loss on disposition of discontinued operations | (6.7 | ) | .4 | |||||||||||
| Depreciation and amortization | 22.4 | 22.4 | 22.2 | |||||||||||
| Non-cash restructuring charges | 7.1 | 1.9 | ||||||||||||
| Loss on minority interest divestiture | 2.9 | |||||||||||||
| Provision for doubtful accounts | 3.3 | 3.2 | 1.7 | |||||||||||
| Deferred income taxes | 13.8 | 5.0 | 2.4 | |||||||||||
| Changes in operating assets and liabilities, net of effects from acquisitions and dispositions of companies | ||||||||||||||
| Accounts receivable | (14.5 | ) | (5.6 | ) | (5.1 | ) | ||||||||
| Inventories | (6.1 | ) | 6.8 | (2.1 | ) | |||||||||
| Other current assets | 3.0 | 1.4 | (4.2 | ) | ||||||||||
| Lease financing and other receivables | 31.0 | (5.1 | ) | 13.7 | ||||||||||
| Accounts payable | 2.5 | 1.9 | 12.1 | |||||||||||
| Customer deposits | 3.4 | (9.6 | ) | 9.5 | ||||||||||
| Accrued liabilities | 7.7 | 4.8 | ||||||||||||
| Income taxes | (19.5 | ) | (.1 | ) | 3.4 | |||||||||
| Other | 4.5 | 5.6 | 2.3 | |||||||||||
| Net cash provided by operating activities | 52.5 | 70.3 | 102.1 | |||||||||||
| Investing activities | ||||||||||||||
| Purchases of properties and equipment | (20.5 | ) | (16.8 | ) | (18.8 | ) | ||||||||
| Payments for purchases of companies, net of cash acquired, excludes $43.5 million of common stock issued in 2002 | (48.1 | ) | ||||||||||||
| Proceeds from sales of discontinued operations | 49.1 | 7.5 | ||||||||||||
| Other, net | 5.5 | (.8 | ) | (4.1 | ) | |||||||||
| Net cash provided by (used for) investing activities | 34.1 | (10.1 | ) | (71.0 | ) | |||||||||
| Financing activities | ||||||||||||||
| Reduction in short-term borrowings, net | (36.3 | ) | (68.2 | ) | (98.3 | ) | ||||||||
| Proceeds from issuance of long-term borrowings | 46.0 | 97.2 | ||||||||||||
| Repayment of long-term borrowings | (26.1 | ) | ||||||||||||
| Purchases of treasury stock | (.1 | ) | (4.4 | ) | ||||||||||
| Cash dividends paid to shareholders | (19.3 | ) | (38.3 | ) | (36.0 | ) | ||||||||
| Other, net | .7 | 3.3 | ||||||||||||
| Net cash used for financing activities | (81.7 | ) | (59.9 | ) | (38.2 | ) | ||||||||
| Increase (decrease) in cash and cash equivalents | 4.9 | .3 | (7.1 | ) | ||||||||||
| Cash and cash equivalents at beginning of year | 10.0 | 9.7 | 16.8 | |||||||||||
| Cash and cash equivalents at end of year | $ | 14.9 | $ | 10.0 | $ | 9.7 | ||||||||
See notes to consolidated financial statements.
25
27
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.
Change in presentation of cash flows from lease financing and other receivables: In 2004, the company began classifying all cash flows from lease financing and other receivables as part of its operating activities. Cash flows from operating activities for the years ended December 31, 2003 and 2002 in the consolidated statement of cash flows have been revised to include changes in lease financing and other receivables which have been reclassified to conform to the 2004 presentation. Management decided to adopt the above-described method as a result of concerns raised by staff of the Securities and Exchange Commission regarding the company’s previous presentation. The company’s presentation of cash flows in previously issued financial statements reflected the following:
| • | Financial services revenues were recorded as a component of net income which is included in cash flows from operating activities. | |
| • | Principal extensions and principal collections under lease financing agreements were each included in cash flows from investing activities; no cash was received by the company on a consolidated basis when a sale, recognized as a sales-type lease, was made to a customer. |
The consolidated statement of cash flows has been adjusted to reflect the fact that there is no cash received by the consolidated entity upon the initial sale of inventory recognized as a sales-type lease and to properly classify cash receipts from the sale of inventory as operating activities.
A reconciliation of amounts previously reported in the consolidated statement of cash flows to the amounts in the current presentation follows:
| 2003 | 2002 | |||||||||
| Net cash provided by operating activities | ||||||||||
| Previously reported | $ | 75.4 | $ | 88.4 | ||||||
| Change in operating asset — Lease financing and other receivables | (5.1 | ) | 13.7 | |||||||
| Currently reported | $ | 70.3 | $ | 102.1 | ||||||
| Net cash used for investing activities | ||||||||||
| Previously reported | $ | (15.2 | ) | $ | (57.3 | ) | ||||
| Amounts previously included and now reclassified to operating activities | ||||||||||
| Principal extensions under lease financing agreements | 167.1 | 155.3 | ||||||||
| Principal collections under lease financing agreements | (162.0 | ) | (169.0 | ) | ||||||
| Change in operating asset — Lease financing and other receivables | 5.1 | (13.7 | ) | |||||||
| Currently reported | $ | (10.1 | ) | $ | (71.0 | ) | ||||
Cash equivalents: The company considers all highly liquid investments with a maturity of three-months or less, when purchased, to be cash equivalents.
Allowance
Accounts receivable 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. The company maintains an allowanceallowances for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments
28
FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
on the outstanding accounts receivable.receivable and outstanding lease financing and other receivables. The allowance isallowances are each maintained at a level considered appropriate based on historical and other factors that affect collectibility. These factors include historical trends of write-offs, recoveries and credit losses; the monitoring of portfolio credit quality; and current and projected economic and market conditions. If the financial condition of the company'scompany’s customers were to deteriorate, resulting in an impairment of the ability to make payments, additional allowances may be required.
Inventories: Inventories are stated at the lower of cost or market. At December 31, 2004 and 2003, approximately 49% and 2002, approximately 55%54% of the company'scompany’s inventories are costed using the FIFO (first-in, first-out) method.method, respectively. The remaining portion of the company'scompany’s inventories is costed using the LIFO (last-in, first-out) method.
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. Property, plant and equipment and other long-term assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. If the sum of the expected undiscounted cash flows is less than the carrying value of the related asset or group of assets, a loss is recognized for the difference between the fair value and carrying value of the asset or group of assets. Such analyses necessarily involve significant judgment.
Intangible assets: Intangible assets principally consist of costs in excess of fair values of net assets acquired in purchase transactions. These assets are assessed yearly for impairment at the beginning of 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.
Stock-based compensation plans: The company has two stock-based compensation plans, which are described more fully in Note I. The company accounts for these plans under the recognition and measurement principles of APB Opinion No. 25, "Accounting“Accounting for Stock Issued to Employees"Employees”, and related interpretations. NoStock compensation expense reflected in net income relates to restricted stock awards which vest over four years. With regard to stock options granted, no stock-based employee compensation cost is reflected in net income, as all options granted under those plans had an exercise price equal to the market value of the underlying common stock at the date of grant.
The weighted average fair value per share of options granted was $5.96 in 2004, $2.97 in 2003 and $4.52 in 2002 and $5.33 in 2001.2002. The fair value of options was estimated at the grant date using a Black-Scholes option pricing model with the following weighted average assumptions: risk free interest rates of 3.5% in 2004, 3.6% in 2003 and 2.7% in 2002 and 4.4% in 2001;2002; dividend yield of 2.1% in 2004, 4.5% in 2003 and 4.1% in 2002 and 3.5% in
2001;2002; market volatility of the company'scompany’s common stock of .32 in 2004 and .28 in 2003 2002 and 2001;2002; and a weighted average expected life of the options of approximately 8 years for 2004, 2003 2002, and 2001.2002.
29
FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following table illustrates the effect on net income and earnings per share for the three-year period ended December 31, 20032004 if the company had applied fair value recognition provisions of Statement of Financial Accounting Standards ("SFAS"(“SFAS”) No. 123, "Accounting“Accounting for Stock-Based Compensation"Compensation”,to all
26
FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) stock-based employee compensation. For purposes of pro forma disclosure, the estimated fair value of the options using a Black-Scholes option pricing model is amortized to expense over the option'soption’s vesting period.
| 2004 | 2003 | 2002 | |||||||||||
| Reported net income (loss) | $ | (2.3 | ) | $ | 37.3 | $ | 38.2 | ||||||
| Add: Stock-based employee compensation expense included in reported net income (loss) net of related tax effects | .6 | .7 | 1.0 | ||||||||||
| Deduct: Total stock-based employee compensation expense determined under the fair-value method for all awards, net of related tax effects | (2.3 | ) | (1.5 | ) | (2.1 | ) | |||||||
| Pro forma net income (loss) | $ | (4.0 | ) | $ | 36.5 | $ | 37.1 | ||||||
| Basic and diluted net income (loss) per common share | |||||||||||||
| Reported net income (loss) | $ | (.05 | ) | $ | .78 | $ | .83 | ||||||
| Pro forma net income (loss) | $ | (.08 | ) | $ | .76 | $ | .81 | ||||||
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 No.Nos. 123 and 148. In management'smanagement’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'scompany’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.
Use of estimates: The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Warranty: Sales of somemany of the company'scompany’s products carry express warranties based on the terms that are generally accepted in the company'scompany’s marketplaces. The company records provisions for estimated warranty at the time of sale based on historical experience and periodically adjusts these provisions to reflect actual experience. Infrequently, a material warranty issue can arise which is beyond the scope of the company'scompany’s historical experience. The company provides for these issues as they become probable and estimable.
Product liability and worker'sworkers’ compensation liability: Due to the nature of the company'scompany’s products, the company is subject to claims for product liability and worker'sworkers’ 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 partythird-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.
27
30
FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)— (Continued)
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 forecastedforecast transaction or of the variability of cash flows to be received or paid related to a recognized asset or liability is declared as a cash flow hedge. The effective portion of the change in the fair value of a derivative that is declared as a cash flow hedge is recorded in accumulated other comprehensive income. When the hedged item impacts the income statement, the gain or loss included in accumulated other comprehensive income is reported on the same line in the consolidated statements of income as the hedged item. In addition, both the fair value of changes excluded from the company'scompany’s effectiveness assessments and the ineffective portion of the changes in the fair value of derivatives used as cash flow hedges are reported in selling, general and administrative expenses in the consolidated statements of income.
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 forecastedforecast 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 revenuessales when all of the following are satisfied: persuasive evidence of an arrangement exists, the price is fixed or determinable, collectibility is reasonably assured and delivery has occurred or services have been rendered. In most instances, this occurs at the time that title passes to the customer based on the respective sales agreement. Infrequently, a salesales contract qualifies for percentage of completion or for multiple-element accounting. Sales
accounted for under this method were immaterial forFor percentage of completion revenues, the three-year period ended
December 31, 2003.company utilizes the cost-to-cost method. 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 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 NP for the calculation of basic and diluted net income per share.
28
31
FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
— (Continued)
NOTE B --— INVENTORIES
Inventories at December 31 are summarized as follows:
| 2004 | 2003 | |||||||
| Finished goods | $ | 49.0 | $ | 48.9 | ||||
| Work in process | 50.8 | 60.4 | ||||||
| Raw materials | 78.4 | 63.2 | ||||||
| Total inventories | $ | 178.2 | $ | 172.5 | ||||
If the company had used the first-in, first-out cost method exclusively, which approximates replacement cost, inventories would have aggregated $188,377,000$189.9 million and $192,342,000$180.2 million at December 31, 2004 and 2003, and 2002, respectively.
NOTE C --— PROPERTIES AND EQUIPMENT
A comparative summary of properties
Properties and equipment at December 31 isare summarized as follows:
| 2004 | 2003 | |||||||
| Land | $ | 9.2 | $ | 9.5 | ||||
| Buildings and improvements | 62.0 | 58.7 | ||||||
| Machinery and equipment | 233.9 | 226.6 | ||||||
| Accumulated depreciation | (194.2 | ) | (176.1 | ) | ||||
| Total properties and equipment | $ | 110.9 | $ | 118.7 | ||||
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 U.S.US customers purchasing vehicle-based products from the company'scompany’s Environmental Products and Fire Rescue groups. A substantial portion of these receivables is due from municipalities and volunteer fire departments. Financing is provided through sales-type lease contracts with terms that generally range from one to ten years.
At the inception of the lease, the company records the product sales price
and related costs and expenses of the sale. Financing revenues are included in
income over the life of the lease. The amounts recorded as lease financing receivables represent amounts equivalent to normal selling prices less subsequent customer payments.
Leases past due more than 120 days are evaluated and a determination made whether or not to place the lease in a non-accrual status based upon customer payment history and other relevant information at the time of the evaluation.
Lease financing and other receivables will become due as follows: $80,881,000 in 2004, $38,158,000$76.6 million in 2005, $27,962,000$29.5 million in 2006, $21,354,000$23.4 million in 2007, $17,091,000$18.9 million in 2008, $15.6 million in 2009 and $47,161,000$36.4 million thereafter. At December 31, 20032004 and 2002,2003, unearned finance revenue on these leases aggregated $32,055,000$24.5 million and $35,561,000,$32.1 million, respectively.
29
FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE E --— DEBT
Short-term borrowings at December 31 consisted of the following:
| 2004 | 2003 | |||||||
| Revolving credit facility | $ | 45.0 | $ | 75.0 | ||||
| Notes payable | 7.4 | 4.7 | ||||||
| Current maturities of long-term debt | 18.6 | 25.2 | ||||||
| Total short-term borrowings | $ | 71.0 | $ | 104.9 | ||||
32
FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Of the above amounts, $36,347,000$52.1 million and $137,022,000$36.3 million are classified as financial services activities borrowings at December 31, 2004 and 2003, respectively.
In April 2003, Standard and 2002,
respectively.Poor’s downgraded the company’s debt rating from A-2 to A-3; as a result, the company stopped issuing commercial paper and drew necessary funds on its $300.0 million unsecured revolving bank facility. In June 2003, the company entered into a $250,000,000new $250.0 million unsecured revolving credit facility maturing in November 2006 with a syndicate of banks. The facility replaced anthe existing $300,000,000 commercial paper backup$300.0 million credit facility. At December 31, 2003, $75,000,000$75.0 million was outstanding under this agreement. Borrowings
under the facility bearagreement bearing interest at a variable rate of LIBOR plus .83% as of
December 31, 2003...83%. The facility includes covenants relating to a maximum debt-to-capitalization ratio, minimum net worth and minimum interest coverage ratio.
In June 2004, the company renegotiated its revolving credit facility covenants to exclude restructuring and other one-time charges, to reduce the minimum interest coverage ratio from 3.0 to 2.5 and to voluntarily reduce the size of the credit facility from $250.0 million to $200.0 million. The company’s results for the year ended December 31, 2004 were below the minimum interest coverage covenant as of December 31, 2004. The company has beenobtained a temporary waiver of this interest coverage covenant from 2.5 to 1.9 until April 1, 2005. The company was in compliance with all quarterlyof its covenants, during
2003. Commitment fees paid on unusedas adjusted, as of December 31, 2004. As of December 31, 2004, $45.0 million was outstanding under this facility bearing interest at a variable rate of LIBOR plus ..83%. After year-end, due to reduced borrowing requirements, the company voluntarily reduced its revolving credit facilities duringline to $150 million, effective January 31, 2005. On March 15, 2005, the three years endedcompany obtained a permanent amendment to the interest coverage covenant. This amendment redefined the coverage ratio and reset the required minimum level to 2.0 for December 31, 2003 were insignificant.2004 to June 30, 2005 and 2.5 for September 30, 2005 and thereafter. The company was in compliance with the amended covenant at December 31, 2004 and expects to remain in compliance with its covenants.
Weighted average interest rates on short-term borrowings were 2.17%3.28% and 1.75%2.17% at December 31, 2004 and 2003, and 2002, respectively.
30
FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Long-term borrowings at December 31 consisted of the following:
| 2004 | 2003 | ||||||||
| Unsecured borrowings: | |||||||||
| 6.79% note due in annual installments of $10.0 million due 2007-2011 | $ | 50.0 | $ | 50.0 | |||||
| 6.37% note due in annual installments of $10.0 million due 2005-2008 | 40.0 | 50.0 | |||||||
| 6.60% note due in annual installments of $7.1 million due 2005-2011 | 50.0 | 50.0 | |||||||
| 4.93% note due in annual installments of $8.0 million due 2008-2012 | 40.0 | 40.0 | |||||||
| 5.24% note due 2012 | 60.0 | 60.0 | |||||||
| 5.49% note due 2006 | 65.0 | 65.0 | |||||||
| 7.99% note due 2004 | 15.0 | ||||||||
| Floating rate (3.59% and 2.21% at December 31, 2004 and 2003, respectively) note due 2008-2013 | 50.0 | 50.0 | |||||||
| Other | 3.6 | .6 | |||||||
| 358.6 | 380.6 | ||||||||
| Fair value of interest rate swaps | (6.7 | ) | (7.9 | ) | |||||
| Unamortized balance of terminated fair value interest rate swaps | 8.7 | 11.6 | |||||||
| 360.6 | 384.3 | ||||||||
| Less current maturities | (18.6 | ) | (25.2 | ) | |||||
| Total long-term borrowings | $ | 342.0 | $ | 359.1 | |||||
33
FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Of the above amounts, $165,000,000$126.3 million and $65,000,000$165.0 million are classified as financial services activities borrowings at December 31, 2004 and 2003, and 2002,
respectively.
In June 2003, the company entered into a $50,000,000$50.0 million private placement agreement to reduce reliance on short-term debt. The agreement bears interest at a variable rate of LIBOR plus an average of 1.04% with $20,000,000$20.0 million maturing in 2008, $20,000,000$20.0 million in 2010 and $10,000,000$10.0 million in 2013.
Aggregate maturities of long-term debt amount to approximately $25,151,000
in 2004, $17,582,000$18.6 million in 2005, $82,143,000$83.6 million in 2006, $27,143,000$27.8 million in 2007, $55,143,000$55.2 million in 2008, $25.1 million in 2009 and $173,428,000$148.3 million thereafter. The fair values of these borrowings aggregated $389,631,000$360.3 million and $356,367,000$389.6 million at December 31, 2004 and 2003, and
2002, respectively.
For each of the above long-term notes, significant covenants consist of a maximum debt-to-capitalization ratio and minimum net worth. At December 31, 2003,2004, all of the company'scompany’s retained earnings were free of any restrictions and the company was in compliance with the financial covenants of its long-term debt agreements.
At December 31, 20032004 and 2002,2003, deferred financing fees totaled $2,305,000$1.8 million and $1,327,000,$2.3 million, respectively.
The company paid interest of $21,458,000$24.1 million in 2004, $21.3 million in 2003 $20,796,000and $20.7 million in 2002 and
$26,097,000 in 2001.2002. See Note H regarding the company'scompany’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, 2004 consisted of the following:
| 2004 | 2003 | 2002 | |||||||||||
| Current: | |||||||||||||
| Federal | $ | (32.7 | ) | $ | (6.0 | ) | $ | 4.0 | |||||
| Foreign | 6.4 | 7.0 | 6.0 | ||||||||||
| State and local | (.1 | ) | .9 | 1.0 | |||||||||
| (26.4 | ) | 1.9 | 11.0 | ||||||||||
| Deferred: | |||||||||||||
| Federal | 15.5 | 6.2 | 2.4 | ||||||||||
| Foreign | (1.0 | ) | (.8 | ) | (.7 | ) | |||||||
| State and local | (.7 | ) | (.4 | ) | .7 | ||||||||
| 13.8 | 5.0 | 2.4 | |||||||||||
| Total income taxes | $ | (12.6 | ) | $ | 6.9 | $ | 13.4 | ||||||
34
FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE F -- INCOME TAXES
The provisions for income taxes consisted of the following:
— (Continued)
Differences between the statutory federal income tax rate and the effective income tax rate for the three-year period ended December 31, 2004 are summarized below:
32
FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
| 2004 | 2003 | 2002 | ||||||||||
| Statutory federal income tax rate | (35.0 | )% | 35.0 | % | 35.0 | % | ||||||
| State income taxes, net of federal tax benefit | (3.0 | ) | 1.4 | 1.5 | ||||||||
| Tax-exempt interest | (11.1 | ) | (7.0 | ) | (5.7 | ) | ||||||
| Benefits from shutdown of U.K. facility | (6.7 | ) | ||||||||||
| Exports benefit | (4.3 | ) | (2.4 | ) | (1.6 | ) | ||||||
| R&D tax credits | (4.6 | ) | (2.1 | ) | (1.3 | ) | ||||||
| Reduction for prior years taxes | (.6 | ) | .1 | (2.3 | ) | |||||||
| Valuation allowances — foreign net operating losses | 11.3 | 1.3 | .6 | |||||||||
| Other, net | (2.5 | ) | (3.1 | ) | (2.6 | ) | ||||||
| Effective income tax rate | (49.8 | )% | 16.5 | % | 23.6 | % | ||||||
Deferred income tax assets and liabilities at December 31 are summarized as follows:
| 2004 | 2003 | |||||||||
| Deferred tax assets: | ||||||||||
| Accrued expenses | $ | 16.9 | $ | 14.6 | ||||||
| Net operating loss, alternative minimum tax, research and development, and foreign tax credit carry forwards | 14.5 | 7.2 | ||||||||
| Pension liabilities | 5.7 | |||||||||
| Other | 6.0 | |||||||||
| Gross deferred tax assets | 31.4 | 33.5 | ||||||||
| Valuation allowance | (7.5 | ) | (7.2 | ) | ||||||
| Total deferred tax assets | 23.9 | 26.3 | ||||||||
| Deferred tax liabilities: | ||||||||||
| Depreciation and amortization | (49.6 | ) | (44.1 | ) | ||||||
| Revenue recognition | (2.6 | ) | (3.7 | ) | ||||||
| Pension liabilities | (3.5 | ) | ||||||||
| Undistributed earnings of non-US subsidiary | (5.6 | ) | (5.0 | ) | ||||||
| Other | (2.9 | ) | ||||||||
| Gross deferred tax liabilities | (64.2 | ) | (52.8 | ) | ||||||
| Net deferred tax liability | $ | (40.3 | ) | $ | (26.5 | ) | ||||
On October 22, 2004, the American Jobs Creation Act was signed into law. One provision of the legislation allows for repatriated foreign earnings, after meeting certain thresholds, to be taxed at 5.25%. The majoritycompany may elect to avail itself of this legislation, and is in the process of evaluating the effects of this repatriation provision. The company expects to complete its evaluation within a reasonable period of time once clarifying language has been issued by Congress and the Internal Revenue Service. The range of possible dividend amounts that may qualify under this legislation is between zero and $104.0 million. The related range of potential income tax provision required is between zero and $6.0 million.
35
FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Federal and state income taxes have not been provided on accumulated undistributed earnings of certain foreign subsidiaries aggregating approximately $88 million at December 31, 2004, 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 company incurred a domestic tax loss in 2004 estimated at $6.0 million which may be carried forward for 20 years expiring in 2024.
The company has the following estimated credit carry forwards and expiration dates:
| Credit Carryforward | Amount | Expiration | ||||||
| Research & development | $ | 3.9 | 2022 – 2024 | |||||
| Alternative minimum tax | 1.6 | None | ||||||
| Foreign tax credit | 1.3 | 2013 | ||||||
| Total | $ | 6.8 | ||||||
The tax effect of foreign net operating losses in deferred tax assets expire as follows:
| Country | Amount | Expiration | ||||||
| Canada | $ | 3.7 | Over 90% in 2014 | |||||
| All other | 3.0 | None | ||||||
| Total | $ | 6.7 | ||||||
The company has a net valuation allowance of $6.5 million for the above net operating losses and foreign tax credits.
The company also has state net operating loss carryforwards of subsidiaries have
no expiration dates.$25.0 million, a majority of which expires in 2016. The approximate value of these carryforwards is $1.1 million for which a valuation allowance of $1.0 million is recorded.
The net deferred tax liability at December 31 is classified in the balance sheet as follows:
| 2004 | 2003 | |||||||
| Current net deferred tax assets | $ | 14.8 | $ | 12.9 | ||||
| Long-term net deferred tax liability | (55.1 | ) | (39.4 | ) | ||||
| $ | (40.3 | ) | $ | (26.5 | ) | |||
The company paid income taxes of $9,662,000$6.3 million in 2004, $9.7 million in 2003 $8,662,000and $8.7 million in 2002 and
$15,193,000 in 2001.2002.
Income from continuing operations before taxes for the three-year period ended December 31, 2004 consisted of the following:
| 2004 | 2003 | 2002 | ||||||||||
| United States | $ | (31.8 | ) | $ | 23.4 | $ | 40.7 | |||||
| Non-US | 6.5 | 18.6 | 16.2 | |||||||||
| $ | (25.3 | ) | $ | 42.0 | $ | 56.9 | ||||||
36
FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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 employees and hourly employees
not covered by plans under collective bargaining agreements.employees. Benefits under these plans are primarily based on final average compensation and years of service as defined within the provisions of the individual plans. The company also participates in several multiemployer retirement plans that provide defined benefits to employees under certain collective bargaining agreements.
Through 2002, a wholly-owned subsidiary sponsored a defined benefit plan for substantially all of its employees in the United Kingdom (non-US benefit plan). Benefits under this plan were based on final compensation and years of service as defined within the provisions of the plan. Effective December 31, 2002, the company curtailed the plan to reduce its cost structure. The curtailment froze each employee’s benefits, to be adjusted for inflation.
The company uses December 31 and September 30 measurement dates for its U.S.US and non-U.S.non-US benefit plans, respectively.
33
FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
U.S. BENEFIT PLANS
The components of net periodic pension expense (credit)for the three-year period ended December 31, 2004 are summarized as follows:
| US Benefit Plans | Non-US Benefit Plan | ||||||||||||||||||||||||
| 2004 | 2003 | 2002 | 2004 | 2003 | 2002 | ||||||||||||||||||||
| Company-sponsored plans | |||||||||||||||||||||||||
| Service cost | $ | 4.6 | $ | 4.1 | $ | 3.3 | $ | .2 | $ | .2 | $ | .5 | |||||||||||||
| Interest cost | 7.7 | 7.1 | 5.4 | 2.6 | 2.2 | 2.1 | |||||||||||||||||||
| Expected return on plan assets | (8.2 | ) | (7.8 | ) | (7.1 | ) | (3.2 | ) | (2.7 | ) | (2.7 | ) | |||||||||||||
| Amortization of transition amount | (.2 | ) | (.2 | ) | (.2 | ) | |||||||||||||||||||
| Other | 1.6 | .9 | .1 | .9 | .8 | .3 | |||||||||||||||||||
| 5.5 | 4.1 | 1.5 | .5 | .5 | .2 | ||||||||||||||||||||
| Multiemployer plans | .2 | .2 | .4 | ||||||||||||||||||||||
| Net periodic pension expense | $ | 5.7 | $ | 4.3 | $ | 1.9 | $ | .5 | $ | .5 | $ | .2 | |||||||||||||
The following table summarizes the weighted-average assumptions used in determining pension costs for the three-year period ended December 31, 2003 and
the company's assumptions2004:
| US Benefit Plans | Non-US Benefit Plan | |||||||||||||||||||||||
| 2004 | 2003 | 2002 | 2004 | 2003 | 2002 | |||||||||||||||||||
| Discount rate | 6.25 | % | 6.75 | % | 7.30 | % | 5.50 | % | 5.50 | % | 6.25 | % | ||||||||||||
| Rate of increase in compensation levels | 3.50 | % | 3.50 | % | 3.50 | % | NA* | 2.50 | % | 2.50 | % | |||||||||||||
| Expected long term rate of return on plan assets | 9.00 | % | 9.00 | % | 9.50 | % | 8.30 | % | 8.00 | % | 8.00 | % | ||||||||||||
| * | Non-US plan benefits are no longer adjusted for 37 FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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
The following table summarizes the weighted-average assumptions used in determining benefit obligations as of December 31,
38 FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The following table summarizes the
The investment strategy for the As of December 31, Plan assets for the non-US benefit plans consist principally of a diversified portfolio of equity securities, U.K. government obligations and The company expects to contribute 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:
The company also sponsors a number of defined contribution pension plans covering a majority of its employees. Participation in the plans is at each 39 FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) acquired during the three-year period ended December 31, 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 that 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 In December 2003, the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the NOTE H All derivative financial instruments are reported on the balance sheet at their respective fair values. Changes in fair value are recognized either in earnings or equity, depending on the nature of the underlying exposure being hedged and how effective a derivative is at offsetting price movements in the underlying exposure. All of the To manage interest costs, the company utilizes interest rate swaps in combination with its funded debt. At December 31, The fair values of interest rate swaps are based on quotes from financial institutions. The following table summarizes the
The company 40 FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) being amortized as a reduction to interest expense over the life of the underlying debt. The unamortized balance of these gains at December 31, 2004 and 2003 was $9.8 million and 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. These derivative instruments mature in The company also manages the volatility of cash flows caused by fluctuations in currency rates by entering into foreign exchange forward The following table summarizes the
The company expects NOTE I The The plan approved in 1996 and amended in 1999 and 2003 authorized the grant of up to Stock options are primarily granted at the fair market value of the shares on the date of grant and normally become exercisable one year after grant at a rate of one-half annually and are exercisable in full on the second anniversary date. All options and rights must be exercised within ten years from date of grant. At the 41 FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Stock option activity for the three-year period ended December 31,
The following table summarizes information concerning stock options outstanding
Stock award shares are granted to employees at no cost. Awards primarily vest at the rate of 25% annually commencing one year 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 four-year vesting period. The following table summarizes stock award grants for the three-year period ended December 31,
Under the 1988 plan, no benefit shares or units were available for future grant during the three-year period ending December 31, 42 FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE J — SHAREHOLDERS’ EQUITY The The company’s board of directors is also authorized to provide for the issuance of .8 million shares of preference stock at a par value of $1 per share. The authority of the 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 In September 2002, the company acquired Leach Company 43 FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) company also assumed The
NOTE L — DISCOUNTINUED OPERATIONS The following table presents the operating results of the company’s discontinued operations for the three-year period ended December 31, 2004:
In conjunction with the strategic restructuring initiatives announced in June 2004 (see Note M), 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, $35.9 million and $32.9 million for the years ended December 31, 2004, 2003 and 2002, respectively. Income before income taxes totaled $5.0 million, $3.5 million and 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, $6.6 mil- 44 FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) lion and $5.6 million for the years ended December 31, 2004, 2003 and 2002, respectively. Operating income before income taxes totaled $1.1 million, $1.0 million and $.7 million for the years ended December 31, 2004, 2003 and 2002, 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, $13.6 million and $17.1 million for the years ended December 31, 2004, 2003 and 2002, respectively. Operating losses before income taxes totaled $.1 million, $.7 million and $.5 million for the years ended December 31, 2004, 2003 and 2002, 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. Revenues for the years ended December 31, 2003 and 2002 were $12.8 million and $43.2 million, respectively. The Sign Group’s operations before income taxes were break even for the years ended December 31, 2003 and 2002. The company retained certain assets and liabilities in conjunction with the sale. Sale proceeds were used to repay debt. As of December 31, 2003, net assets of the company’s discontinued operations consisted of $17.8 million of current assets, $6.9 million of properties and equipment, $17.4 million of goodwill, $13.1 million of current liabilities and $6.0 million of long-term liabilities. NOTE
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 are aimed at improving the profitability of the fire rescue, refuse truck body 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. 45 FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) The following table summarizes the 2004 restructuring actions taken, the pre-tax charges to expense in 2004 and the total charges estimated to be incurred:
The company expects to incur the remaining $2.9 million of restructuring charges in 2005. The following table summarizes the 2003 restructuring actions taken and the pre-tax charges to expense:
These initiatives were announced and completed in 2003. 46 FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) The following presents an analysis of the restructuring reserves for the years ended December 31, 2003 and 2004:
Severance charges in 2003 consist of costs to terminate employees and the ratable recognition of retention bonuses for employees providing service until their termination date. Asset impairment charges consist of net realizable value adjustments to manufacturing equipment located in the United Kingdom. Severance charges in 2004 consist 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 are recognized ratably over the future service period. Asset impairment charges include $5.6 million of net realizable value adjustments on real property and manufacturing equipment and the write-off of an intangible asset valued at $1.5 million relating to a tradename that will no longer be used after the consolidation of the refuse businesses.
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. The company also divested a modest amount of operating assets located at a manufacturing facility in Kelowna, British Columbia in July 2004. The net assets, primarily consisting of inventories and manufacturing equipment and property, were sold by the company for approximately net book value. Finally, the company sold approximately $9.6 million of lease financing assets to an independent party. The financing 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 N — 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 47 FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) 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 The company has been sued in Chicago by firefighters NOTE The company has four continuing operating segments as defined under SFAS No. 131, Environmental Products Fire Rescue Safety Products Tool Net sales by operating segment reflect sales of products and services and financial revenues to external customers, as reported in the See Note K for a discussion of the Revenues attributed to customers located outside of the 48 FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 $27.6 million in 2004, $32.5 million in 2003 and $25.6 million in 2002. A summary of the
49 FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table presents financial revenues (included in net sales) by segment for the three-year period ended December 31,
Due to the nature of the The segment information provided below is classified based on geographic location of the
50 FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE The following table summarizes the information used in computing basic and diluted income per share for the three-year period ending December 31,
Diluted income per share is calculated by dividing net income 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, 2004, .1 million employee stock options were considered potential dilutive common shares. These stock options, however, are antidilutive due to the net loss for the year ended December 31, 2004. As a result, they are excluded from the denominator for the diluted income per share calculation.
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 At December 31, 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 51 FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) Changes in the
The 2003 business acquisitions reflect the revised estimate of warranty liabilities relating to the 2002 acquisitions of the refuse truck body businesses. Costs incurred in 2003 include one-time refuse truck body warranty campaign charges. The company guarantees the debt of a third-party dealer that sells the 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 The following table summarizes the carrying amounts and fair values of the company’s financial instruments at December 31:
NOTE In June 2001, the Financial Accounting Standards Board issued SFAS No. 141, As part of the adoption of SFAS No. 142, the company also completed a transitional goodwill impairment test and determined that 52 FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS value of expected future cash flows. Changes in the carrying amount of goodwill for the year ended December 31,
The 2003 adjustments reflect the finalization of property, equipment and intangible appraisals Under SFAS No. 142, the company is required to test its goodwill annually for impairment; the company performs this test at the beginning of the fourth quarter. The company performed this test in The components of the
The company recorded a $1.5 million impairment charge in 2004 to write off a tradename that will no longer be used after the consolidation of the refuse business in conjunction with the restructuring plan announced in June 2004. Other intangible assets are included in the consolidated balance sheets within “other deferred charges and assets”. Amortization expense for the year ended December 31, NOTE In December 2003, the FASB issued SFAS No. 132 (revised 2003), 53 FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) plans. SFAS No. 132 requires more detailed disclosures about plan assets, benefit obligations, cash flows, benefit costs and other relevant information. The disclosures are generally effective for fiscal years ending after December 31, 2003; a 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 will further review the implications of SFAS No. 151 to determine what effect, if any, its adoption will have on the company’s consolidated results of operations and statement of financial position. In December 2004, the FASB issued SFAS No. 123(R), “Share-Based Payment”, which revises SFAS No. 123 and supersedes APB 25. SFAS No. 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair value. Using a “modified grant-date approach”, the fair value of an equity award is estimated on the grant date and recognized over the requisite service period for all awards that vest. If the award does not vest, no compensation cost is recognized. The FASB continues to believe that the fair value of a stock option awarded to an employee generally must be estimated using an option pricing model. The provisions of SFAS No. 123(R) are effective at the beginning of the first interim or annual period beginning after June 15, 2005. Management believes the adoption of SFAS No. 123(R) will have an impact on the company’s consolidated results of operations and financial position but has not yet determined whether adoption will result in incremental compensation expense materially different than the amounts disclosed in Note A totaling $1.7 million, $.8 million and $1.1 million for the years ended December 31, 2004, 2003 and 2002, respectively. In December 2004, the FASB issued SFAS No. 153, “Exchanges of Nonmonetary Assets” which is effective for fiscal periods beginning after June 15, 2005 with earlier application permitted. 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 not completed its evaluation of SFAS No. 153 and has not yet determined whether the statement will have an effect on the company’s consolidated results of operations or consolidated financial position. NOTE T — 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. In 2003, the company’s interim quarterly periods ended on March 31, June 30, September 30 and December 31 year end. For convenience purposes, the company uses “March 31, 2004”, “June 30, 2004”, “September 30, 2004” and “December 31, 2004” to refer 54 FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS to its results of operations for the quarterly periods ended April 3, 2004, July 3, 2004, October 2, 2004 and December 31, 2004, respectively.
* | amounts may not add due to rounding | | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
The company incurred pre-tax restructuring charges (see Note M) as follows:
| Period Ending: | 2004 | 2003 | ||||||
| March 31 | $ | 1.6 | ||||||
| June 30 | $ | 8.0 | 2.6 | |||||
| September 30 | 3.0 | .4 | ||||||
| December 31 | 4.4 | .2 | ||||||
The company recorded a $10.6 million charge in the fourth quarter of $1,636,000, $2,587,000, $379,0002004 on a large multi-unit, multi-year Netherlands fire rescue equipment contract, resulting from a reassessment of project costs and $227,000 fora reassessment of expected recoveries under supplier contracts.
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| 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 three-month periods ended
March 31, 2003, June 30, 2003, September 30, 2003supervision and December 31, 2003,
respectively.
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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 Registrant's management, with the participation of its management, including the Registrant's Chief Executive Officer and Chief Financial Officer, has evaluatedof the effectiveness of the Registrant's disclosuredesign and operation of the Company’s “disclosure controls and proceduresprocedures” (as defined in the Exchange Act Rule 13a-15(e)) as of December 31, 2003.the end of the period covered by this report. Based onupon that evaluation, the Registrant's Chief Executive Officer and Chief Financial Officer concluded that the Registrant'sCompany’s disclosure controls and procedures were effectiveare 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, 2003. As a matter2004, the Company’s internal control over financial reporting is effective. Management’s assessment of
practice, the Registrant's management continues to review and document
disclosure controls and procedures, including internal controls and procedures
for financial reporting. From time to time, the Registrant may make changes
aimed at enhancing the effectiveness of the controls and to ensure that the
systems evolve with the business. There were no material changes in the
Registrant'sCompany’s internal controlscontrol over financial reporting as of December 31, 2004, 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 fourthCompany’s most recently completed fiscal quarter of 2003.
that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
Item 9B. Other Information.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
| Item 10. | Directors and Executive Officers of the Company. |
The information under the caption "Election“Proposal 1 — Election of Directors"Directors” and “Section 16(a) Beneficial Ownership Reporting Compliance” contained in the Registrant'sCompany’s Proxy Statement for the Annual Meeting of Shareholders to be held on April 30, 200427, 2005 is incorporated herein by reference.
The following is a list of the Registrant'sCompany’s executive officers, their ages, business experience and positions and offices as of March 1, 2004:
Robert D. Welding, age 55, was elected President and Chief Executive
Officer as well as to the Board of Directors in December 2003. Previously, Mr.
Welding was Executive Vice President of Borg Warner, Inc. from 1999 -- 2003,
President of Borg Warner, Inc.'s Driveline Group from 2002 -- 2003, President of
Borg Warner Transmission Systems, Inc. from 1996 -- 2003 and Vice President of
Borg Warner, Inc. from 1996 -- 1999. Mr. Welding also held senior level
positions with Volkswagen and General Motors.
John A. DeLeonardis, age 57, was elected Vice President -- Taxes in January
1992.
Duane A. Doerle, age 48, was elected Vice President -- Corporate
Development in July 1996.
Stephanie K. Kushner, age 48, 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 44, was elected Vice President and Treasurer in
December 2002. Ms. Latham was a Consultant from 1998 to 2001 with Egon Zehnder
International, Inc. and a Senior Vice President from 2001 to 2002 with Coffou
Partners, Inc.
Richard L. Ritz, age 50, was elected Vice President and Controller in
January 1991.
Jennifer L. Sherman, age 39,2005:
| Paul Brown, age 41, was appointed Vice President-Internal Audit in April 2004. Previously, Mr. Brown was Vice President Finance-Flame Retardants, for Great Lakes Chemical Corporation from May 2000 to April 2004 and Finance Director, Process Additives Division from 1999-2000 for Great Lakes Chemical Corporation. | |
| Stephen C. Buck, age 56, was appointed president of the Safety Products Group in February 1998. Mr. Buck was previously president of the Tool Group. |
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| Alexander D. Craig, age 50, was elected as Vice President and Chief Information Officer in April 2004. Previously, Mr. Craig was Vice President Business, Strategy and IT Development for Williams International from April 2002 to April 2004, Principal of Craig Research LLC from May 2001 to April 2002, Executive Vice President and Chief Technology Officer for Gale Group of Thomson Corporation from April 2000 to May 2001 and Vice President, New Business Development of Allied Tool Corporation from March 1996 to April 2000. | |
| John A. DeLeonardis, age 58, was elected Vice President-Taxes in January 1992. | |
| Kimberly Dickens, age 43, 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 52, 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 49, 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 45, was elected Vice President and Treasurer in December 2002. Ms. Latham was a Consultant from 1998 to 2001 with Egon Zehnder International, Inc. and a Senior Vice President from 2001 to 2002 with Coffou Partners, Inc. | |
| Alan G. Ringler, age 54, was promoted to the position of Tool Group President in February 1998. | |
| Richard L. Ritz, age 51, was elected Vice President and Controller in January 1991. | |
| Jennifer L. Sherman, age 40, was appointed Vice President, General Counsel and Secretary effective March | |
| Mark D. Weber, age 47, 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 56, was elected President and Chief Executive Officer as well as 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 shall have been elected and qualified.
There are no family relationships among any of the foregoing executive officers.
The information concerning the Registrant's "independentCompany’s “independent audit committee financial experts"experts”, as defined by the Sarbanes-Oxley Act and Securities and Exchange Commission, contained under the caption "Board“Board of Directors and Committees"Committees” of the Registrant'sCompany’s Proxy Statement for the Annual Meeting of Shareholders to be held April 30, 200427, 2005 is incorporated herein by reference.
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ITEM 11. EXECUTIVE COMPENSATION.
| Item 11. | Executive Compensation. |
The information contained under the caption "Executive Compensation"“Executive Compensation” of the Registrant'sCompany’s Proxy Statement for the Annual Meeting of Shareholders to be held April 30, 200427, 2005 is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS.
57
| Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters. |
The information contained under the captions "Security“Security Ownership of Certain Beneficial Owners"Owners” and "Equity“Proposal 2 — Approval of the Federal Signal Corporation 2005 Executive Incentive Compensation Plan Information"— Equity Compensation Plan Information” of the Registrant'sCompany’s Proxy Statement for the Annual Meeting of Shareholders to be held April 30, 200427, 2005 is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
| Item 13. | Certain Relationships and Related Transactions. |
The information contained under the caption "Executive Compensation"“Certain Relationships and Related Transactions” of the Registrant'sCompany’s Proxy Statement for the Annual Meeting of Shareholders to be held April 30, 200327, 2005 is incorporated herein by reference.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
| Item 14. | Principal Accountant Fees and Services. |
The information under the caption "Accounting Information"“Proposal 4 — Ratification of Appointment of Ernst & Young LLP as Independent Public Accountants for 2005 — Accounting Information” and "Board“Board of Directors and Committees"Committees” in the Registrant'sCompany’s Proxy Statement for the Annual Meeting of Shareholders to be held on April 30, 200427, 2005 is incorporated herein by reference.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
| 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, 2003 and 2002
Consolidated Statements of Income for the Years Ended December 31, 2003,
2002 and 2001
Consolidated Statements of Comprehensive Income for the Years Ended
December 31, 2003, 2002 and 2001
Consolidated Statements of Cash Flows for the Years Ended December 31,
2003, 2002 and 2001
| Consolidated Balance Sheets as of December 31, 2004 and 2003 | |
| Consolidated Statements of Income (Loss) for the Years Ended December 31, 2004, 2003 and 2002 | |
| Consolidated Statements of Shareholders’ Equity for the Years Ended December 31, 2004, 2003 and 2002 | |
| Consolidated Statements of Cash Flows for the Years Ended December 31, 2004, 2003 and 2002 | |
| 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, 20032004 is filed as a part of this report in response to Item 15(d)15(a)(2):
Schedule II --
| 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.
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3. Exhibits
See Exhibit Index.
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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) |
March 15, 2005
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below, as of March 15, 2005, 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/ Richard L. Ritz Richard L. Ritz | 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/ Robert S. Hamada Robert S. Hamada | Director | |||
Paul W. Jones | Director | |||
| /s/ Joan E. Ryan Joan E. Ryan | Director | |||
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SCHEDULE II
FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
Valuation and Qualifying Accounts
For the Years Ended December 31, 2004, 2003 and 2002
| 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) | ||||||||||||||||||
| Deducted from asset accounts — Allowance for doubtful accounts | ||||||||||||||||||
| Year ended December 31, 2004: | ||||||||||||||||||
| Manufacturing activities | $ | 2.5 | $ | 2.3 | ||||||||||||||
| Financial service activities | 2.5 | 3.9 | ||||||||||||||||
| Total | $ | 5.0 | $ | 3.3 | $ | (2.1 | ) | $ | 6.2 | |||||||||
| Year ended December 31, 2003: | ||||||||||||||||||
| Manufacturing activities | $ | 2.5 | $ | 2.5 | ||||||||||||||
| Financial service activities | 1.0 | 2.5 | ||||||||||||||||
| Total | $ | 3.5 | $ | 3.2 | $ | (1.7 | ) | $ | 5.0 | |||||||||
| Year ended December 31, 2002: | ||||||||||||||||||
| Manufacturing activities | $ | 2.3 | $ | 2.5 | ||||||||||||||
| Financial service activities | 1.0 | 1.0 | ||||||||||||||||
| Total | $ | 3.3 | $ | 2.2 | $ | (2.0 | ) | $ | 3.5 | |||||||||
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EXHIBIT INDEX
The following exhibits, other than those incorporated by reference, have been included in the Registrant'sCompany’s Form 10-K filed with the Securities and Exchange Commission. The RegistrantCompany 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 | ||
| b. | By-laws of the | |||
| 4. | a. | Rights Agreement dated 7/9/98, filed as Exhibit (4) to the | ||
| b. | The | |||
| 10. | a. | The 1996 Stock Benefit Plan, as amended April 17, 2003, | ||
| b. | Federal Signal Corporation Management Incentive Plan is hereby filed as Exhibit (10)(b).* | |||
| c. | Supplemental Pension Plan, filed as Exhibit (10)(c) to the | |||
| d. | Executive Disability, Survivor and Retirement Plan, filed as Exhibit (10)(d) to the | |||
| e. | Supplemental Savings and Investment Plan, filed as Exhibit (10)(f) to the | |||
| 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 | |||
| 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 | |||
| h. | Pension Agreement with Stephanie K. Kushner, filed as Exhibit (10)(g) to the | |||
| i. | Employment Termination Agreement with Stephanie K. Kushner, filed as Exhibit (10)(h) to the | |||
| j. | Severance Policy for Executive Employees is hereby filed as Exhibit (10) | |||
| k. | Change of Control Agreement with Stephanie K. Kushner, filed as Exhibit (10)(i) to the | |||
| 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. | |||
| 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. | |||
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| 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. | |||
| o. | Director Deferred Compensation Plan, filed as Exhibit (10)(h) to the | |||
| p. | Broad Based Stock Option Plan, filed as Exhibit (99) to the | |||
| 11. | Computation of per share earnings is furnished in Note | |||
| 13. | Annual Report to Shareholders for the year ended December 31, | |||
| 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 | |||
| 21. | Subsidiaries of the | |||
| 23. | Consent of Independent | |||
| 31.1 | CEO Certification under Section 302 of the Sarbanes-Oxley Act, | |||
| 31.2 | CFO Certification under Section 302 of the Sarbanes-Oxley Act, | |||
| 32.1 | CEO Certification of Periodic Report under Section 906 of the Sarbanes-Oxley Act, | |||
| t | ||||
| 32.2 | CFO Certification of Periodic Report under Section 906 of | |||