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UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-K
þ ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended December 31, 2007
Commission File Number 1-6003
FEDERAL SIGNAL
CORPORATION
(Exact name of the Company as
specified in its charter)
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Delaware
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36-1063330
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(State or other jurisdiction
of
incorporation or organization)
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(I.R.S. Employer
Identification No.)
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1415 West 22nd Street,
Oak Brook, Illinois
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60523
(Zip Code)
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(Address of principal executive
offices)
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The Companys telephone number, including area code
(630) 954-2000
Securities registered pursuant to Section 12(b) of the
Act:
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Title of Each Class
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Name of Each Exchange on Which Registered
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Common Stock, par value $1.00 per share,
with preferred share purchase rights
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New York Stock Exchange
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Securities registered pursuant to Section 12(g) of the
Act:
None
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes o No þ
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Exchange
Act. Yes o No þ
Indicate by check mark whether the Company (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the Company was
required to file such reports), and (2) has been subject to
such filing requirements for the past
90 days. Yes þ No o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
(§ 229.405 of this chapter) is not contained herein,
and will not be contained, to the best of the Companys
knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this
Form 10-K
or any amendment to this
Form 10-K. o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in
Rule 12b-2
of the Exchange Act. (Check one):
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Large accelerated filer
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Accelerated filer
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Non-accelerated
filer o
(Do not check if a smaller reporting company)
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Smaller reporting
company o
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Indicate by check mark if the registrant is a shell company, in
Rule 12b-2
of the Exchange
Act. Yes o No þ
State the aggregate market value of voting stock held by
nonaffiliates of the Company as of June 30, 2007: Common
stock, $1.00 par value $748,992,370
Indicate the number of shares outstanding of each of the
Companys classes of common stock, as of January 31,
2008: Common stock, $1.00 par value
47,787,969 shares
Documents
Incorporated By Reference
Portions of the definitive proxy statement for the Annual
Meeting of Shareholders to be held on April 22, 2008 are
incorporated by reference in Part III.
FEDERAL
SIGNAL CORPORATION
Index to
Form 10-K
This
Form 10-K
and other reports filed by Federal Signal Corporation and
subsidiaries (the Company) with the Securities and
Exchange Commission and comments made by management may contain
the words such as may, will,
believe, expect, anticipate,
intend, plan, project,
estimate and objective or the negative
thereof or similar terminology concerning the Companys
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 Companys
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 Companys actual results, performance or
achievements to be materially different.
These risks and uncertainties, some of which are beyond the
Companys control, include the cyclical nature of the
Companys industrial, municipal government and airport
markets, technological advances by competitors, increased
warranty and product liability expenses, risks associated with
supplier, dealer and other partner alliances, changes in cost
competitiveness including those resulting from foreign currency
movements, disruptions in the supply of parts or components from
sole source suppliers and subcontractors, retention of key
employees and general changes in the competitive environment.
These risks and uncertainties include, but are not limited to,
the risk factors described under Item 1A, Risk
Factors, in this
Form 10-K.
These factors may not constitute all factors that could cause
actual results to differ materially from those discussed in any
forward-looking statement. The Company operates in a continually
changing business environment and new factors emerge from time
to time. The Company cannot predict such factors nor can it
assess the impact, if any, of such factors on its financial
position or results of operations. Accordingly, forward-looking
statements should not be relied upon as a predictor of actual
results. The Company disclaims any responsibility to update any
forward-looking statement provided in this
Form 10-K.
PART I
Federal Signal Corporation, founded in 1901, was reincorporated
as a Delaware Corporation in 1969. The Company designs and
manufactures a suite of products and integrated solutions for
municipal, governmental, industrial and airport customers.
Federal Signals portfolio of products includes safety and
security systems, fire apparatus, aerial devices, street
sweepers, industrial vacuums, waterblasters, sewer cleaners and
consumable industrial tooling. Federal Signal Corporation and
its subsidiaries (referred to collectively as the
Company or Company herein, unless context
otherwise indicates) operates manufacturing facilities in 38
plants in 14 countries around the world serving customers in
approximately 100 countries in all regions of the world. The
Company also provides customer and dealer financing to support
the sale of its vehicles.
Narrative
Description of Business
Products manufactured and services rendered by the Company are
divided into four major operating groups: Safety and Security
Systems, Fire Rescue, Environmental Solutions and Tool. The
individual operating companies are organized as such because
they share certain characteristics, including technology,
marketing, distribution and product application, which create
long-term synergies.
Financial information (net sales, operating income, capital
expenditures and identifiable assets) concerning the
Companys four operating segments as of, and for each of
the three years in the period ended, December 31, 2007
included in Note 16 of the financial statements contained
under Item 8 of this
Form 10-K
is incorporated herein by reference.
Safety
and Security Systems Group
Federal Signal Corporations Safety and Security Systems
Group designs, manufactures and deploys comprehensive safety and
security systems that help law enforcement, fire/rescue and EMS,
emergency operations and industrial plant/facility first
responders protect people, property and the environment.
Solutions include systems for automated license plate
recognition, campus and community alerting, emergency vehicles,
first responder interoperable communications, industrial
communications and command, municipal networked security and
parking revenue and access control for municipal, governmental
and industrial applications. Specific products include access
control devices, lightbars and sirens, public warning sirens,
public safety software and automated license plate recognition
cameras.
Products are sold under the Federal Signal, Federal Signal VAMA,
Federal APD, Pauluhn, PIPS, Target Tech and Victor brand names.
The group operates manufacturing facilities in North America,
Europe and South Africa. Many of the groups products are
designed in accordance with various regulatory codes and
standards and meet agency approvals such as Underwriters
Laboratory (UL), International Electrotechnical Commission (IEC)
and American Bureau of Shipping (ABS).
Fire
Rescue Group
The Fire Rescue Group manufactures a broad range of fire rescue
apparatus and mission critical vehicles in its facilities
located in North America and Europe. The group sells vehicles
and equipment under the
E-One and
Bronto Skylift brand names.
E-ONE is a
leading brand of aluminum and stainless steel, custom-made
vehicles including pumpers, tankers aerial ladders, aerial
platforms, rescues, quick attack units, command centers and
airport rescue vehicles. Under the Bronto Skylift brand name,
the Company manufactures vehicle-mounted aerial access platforms
in Finland for fire and industrial uses globally.
1
Environmental
Solutions Group
The Environmental Solutions Group manufactures and markets
worldwide a full range of street cleaning and vacuum loader
vehicles and high-performance water blasting equipment. Products
are also manufactured for the newer markets of hydro-excavation,
glycol recovery and surface cleaning. Products are sold under
the Elgin, RAVO, Vactor, Guzzler, Shanghai Federal Signal and
Jetstream brand names. The groups vehicles and equipment
are manufactured in North America, Europe and Asia.
Under the Elgin brand name, the Company sells the leading US
brand of street sweepers primarily designed for large-scale
cleaning of curbed streets, parking lots and other paved
surfaces utilizing mechanical sweeping, vacuum and recirculating
air technology for cleaning. RAVO is a market leader in Europe
for high-quality, compact and
self-propelled
sweepers that utilize vacuum technology for
pick-up.
Vactor is a leading manufacturer of municipal combination catch
basin/sewer cleaning vacuum trucks. Guzzler is a leader in
industrial vacuum loaders that clean up industrial waste or
recover and recycle valuable raw materials. Shanghai Federal
Signal is a China-based joint venture manufacturer of refuse
truck bodies for waste collection and disposal for Asian
markets. Jetstream manufactures high pressure waterblast
equipment and accessories for commercial and industrial cleaning
and maintenance operations. In addition to equipment sales, the
group is increasingly engaged in the sale of parts and tooling,
service and repair, equipment rentals and training as part of a
complete offering to its customer base.
Segment results have been restated for all periods presented to
exclude losses from the North American refuse business, which
was reclassified as a discontinued operation in 2005. The
Company substantially disposed of the assets of this business
during 2006.
Tool
Group
The Tool Group manufactures, and in some cases is a reseller of,
a broad range of 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
Progress and PCS brand names and manufactured in North America,
Europe and Asia.
Segment results have been restated for all periods presented to
exclude the impact from Manchester Tool Company, On Time
Machining and ClappDico Corporation or Cutting Tool
Operations; which was reclassified as a discontinued
operation in 2006. The Company completed the sale of the Ohio
based Cutting Tool Operations on January 31, 2007.
Financial
Services
The Company offers a variety of short- and long-term financing
primarily to its Fire Rescue and Environmental Solutions
independent dealers and customers. The Company provides
financing, principally through sales-type leases, to
(i) municipal customers to purchase vehicles and
(ii) independent dealers to finance the purchase of vehicle
inventory. Financings are secured by vehicles and in the case of
the independent dealers, the dealers personal guarantee.
In 2001, the Company decided to curtail new leasing to
industrial customers, who generally have a higher credit risk;
this portfolio continues to diminish over time as outstanding
leases have been collected. By December 31, 2007, the
Companys investment in leases to industrial customers had
declined to 3% of its lease financing and other receivables.
Marketing
and Distribution
The Safety and Security Systems Group companies sell to
industrial customers through approximately 2,000
wholesalers/distributors who are supported by Company sales
personnel
and/or
independent manufacturers representatives. Products are
also sold to municipal and 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 groups independent foreign
distributors or on a direct basis. The Company also sells
comprehensive integrated warning, interoperable communications
and parking systems through a combination of a direct sales
force and distributors.
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Fire Rescue and Environmental Solutions use dealer networks and
direct sales to service customers generally depending on the
type and location of the customer. The Environmental Solutions
direct sales channel concentrates on the industrial, utility and
construction market segments while the dealer networks focus
primarily on the municipal markets. The Company believes its
national and global dealer networks for vehicles distinguishes
it from its competitors. Dealer representatives are on-hand to
demonstrate the vehicles functionality and capability to
customers and to service the vehicles on a timely basis.
The Tool Group sells to die and mold builders, plastic molders,
metal stampers and metal fabricators through distributors and a
direct sales organization. Because of the consumable nature of
most of the Tool Groups products, volume depends mainly on
repeat orders from thousands of customers and end users, driven
primarily by their production levels and to a lesser extent by
the volumes of new dies and molds being ordered for new
products. Many of the Tool Groups customers have some
ability to produce certain products themselves, but at a cost
disadvantage. Major market emphasis is placed on quality of
product, delivery, level of service and price. Inventories for
certain products are maintained to assure prompt service to the
customer, while other products are made to order. The average
order for standard tools is filled in less than one week for
domestic shipments and within two weeks for international
shipments.
Customers
and Backlog
Approximately 36%, 25% and 39% of the Companys total 2007
orders were to US municipal and government customers, US
commercial and industrial customers, and non-US customers,
respectively. No single customer accounted for a material part
of the Companys business. The Company believes its mix of
customers provides some measure of counter cyclicality during
economic cycles as the three customer bases are impacted
differently during the course of a cycle. The growing share of
non-US customers reduces the direct correlation to the US
economy.
The Companys US municipal and government customers depend
on tax revenues to support spending. A sluggish industrial
economy, therefore, will eventually impact a municipalitys
revenue base as tax receipts decline due to lost jobs and
declining profits. Historically, municipal slowdowns have lagged
behind industrial slowdowns such that the industrial economy is
growing again by the time municipalities reduce their spending.
During 2007, the Company saw municipal and governmental orders
decrease 1% from 2006, compared to a 3% increase in these orders
in 2006 compared to 2005.
The Companys backlog totaled $479 million and
$403 million as of December 31, 2007 and 2006,
respectively. The 19% increase is primarily attributed to strong
orders for vacuum trucks, sewer cleaners and truck mounted
aerial access platforms, partially offset by lower orders for
other fire rescue vehicles and street sweepers. A substantial
majority of the orders in backlog at December 31, 2007 are
expected to be filled during 2008.
Suppliers
The Company purchases a wide variety of raw materials from
around the world for use in the manufacture of its products,
although the majority of current purchases are from North
American sources. To minimize availability, price and quality
risk, the Company is party to numerous strategic supplier
arrangements. Although certain materials are obtained from
either a single-source supplier or a limited number of
suppliers, the Company has identified alternative sources to
minimize the interruption to its business in the event of supply
problems.
Components critical in the production of the Companys
vehicles (such as engines, transmissions, drivetrains, axles and
tires) are purchased from a select number of suppliers and may
be specified by the customer. The Company also purchases raw and
fabricated aluminum and steel as well as commercial chassis with
certain specifications from a few sources.
The Company believes it has adequate supplies or sources of
availability of the raw material and components necessary to
meet its needs. However, there are risks and uncertainties with
respect to the supply of certain of these raw materials that
could impact their price, quality and availability in sufficient
quantities.
3
Competition
Within specific product categories and domestic markets, the
Safety and Security Systems Group companies are among the
leaders with three to four strong competitors and several
additional ancillary market participants. The groups
international market position varies from leader to ancillary
participant depending on the geographic region and product line.
Generally, competition is intense with all of the groups
products and purchase decisions are made based on competitive
bidding, price, reputation, performance and servicing.
E-ONE is a
leading, single-source manufacturer of custom-built, aluminum
and stainless steel bodied fire apparatus and chassis in a
market served by approximately ten key manufacturers and
approximately 70 small, regional manufacturers.
E-ONE
occupies the number one or two position of the North American
pumper and aerial market based on units.
E-ONE is a
leading command vehicle provider to the city, state and federal
agencies for natural and man-made disaster response. In
addition,
E-ONE is a
global provider of industrial pumpers and aerials serving the
petrochemical and pharmaceutical industries.
E-ONE also
competes with six manufacturers worldwide in the production of
airport rescue and firefighting vehicles. Bronto Skylift is
established as the articulated aerial leader in the global fire
fighting, rescue and industrial platform markets; the Company
manufactures and distributes vehicle-mounted aerial access
platforms globally.
Within the Environmental Solutions Group, Elgin is recognized as
the market leader among several domestic sweeper competitors and
differentiates itself primarily on product performance. RAVO,
the Companys Dutch compact sweeper manufacturer, also
competes on product performance through its vacuum technology
and successfully leads in market share for mid-sized sweepers
among several regional European manufacturers. Vactor and
Guzzler both maintain the leading domestic position in their
respective marketplaces by enhancing product performance with
leading technology and application flexibility. Jetstream is a
market leader in the in-plant cleaning segment of the US
waterblast industry competing on product performance and rapid
delivery.
The Tool Group companies compete with several hundred
competitors worldwide. In North America, the Company holds a
share position ranging from number one to number three depending
on the product offering.
Research
and Development
The information concerning the Companys research and
development activities included in Note 16 of the financial
statements contained under Item 8 of this
Form 10-K
is incorporated herein by reference.
Patents
and Trademarks
The Company owns a number of patents and possesses rights under
others to which it attaches importance, but does not believe
that its business as a whole is materially dependent upon any
such patents or rights. The Company also owns a number of
trademarks that it believes are important in connection with the
identification of its products and associated goodwill with
customers, but no material part of the Companys business
is dependent on such trademarks.
Employees
The Company employed over 5,500 people in ongoing
businesses at the close of 2007. Approximately 17% of the
Companys domestic hourly workers were unionized at
December 31, 2007. The Company believes relations with its
employees continue to be good.
Governmental
Regulation of the Environment
The Company believes it substantially complies with federal,
state and local provisions that have been enacted or adopted
regulating the discharge of materials into the environment, or
otherwise relating to the protection of the environment. Capital
expenditures in 2007 attributable to compliance with such laws
were not material. The Company believes that the overall impact
of compliance with environmental regulations will not have a
material effect on its future operations.
4
Seasonality
Certain of the Companys businesses are susceptible to the
influences of seasonal buying or delivery patterns. The
Companys 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, emergency signaling products and parking
systems.
Additional
Information
The Company makes its Annual Reports on
Form 10-K,
Quarterly Reports on
Form 10-Q,
Current Reports on
Form 8-K,
other reports and information filed with the SEC and amendments
to those reports available, free of charge, through its Internet
website
(http://www.federalsignal.com)
as soon as reasonably practical after it electronically
files or furnishes such materials to the SEC. Additionally, the
Company makes its proxy statement and its Annual Report to
stockholders available at the same internet website
(http://www.federalsignal.com),
free of charge, when sent to stockholders through the meeting
date. All of the Companys filings may be read or copied at
the SECs Public Reference Room at 100 F. Street, N.E.,
Room 1580, Washington, DC 20549. Information on the
operation of the Public Reference Room can be obtained by
calling the SEC at 1-202-551-8090. The SEC maintains an Internet
website
(http://www.sec.gov)
that contains reports, proxy and information statements and
other information regarding issuers that file electronically.
The following are some of the risks that we face in our
business. The list of risk factors is not exhaustive. There can
be no assurance that we have correctly identified and
appropriately assessed all factors affecting our business or
that publicly available and other information with respect to
these matters is complete and correct. Additional risks not
presently known to us or that we currently believe to be
immaterial also may adversely impact us. Should any risks and
uncertainties develop into actual events, these developments
could have material adverse effects on our business, financial
condition and results of operations.
Our
financial results are subject to considerable
cyclicality.
Our ability to be profitable depends heavily on varying
conditions in the United States government and municipal markets
and the overall United States economy. The industrial markets in
which we compete are subject to considerable cyclicality, and
move in response to cycles in the overall business environment.
Many of our customers are municipal governmental agencies, and
as such, we are dependent on municipal government spending.
Spending by our municipal customers can be affected by local
political circumstances, budgetary constraints, and other
factors. The United States government and municipalities depend
heavily on tax revenues as a source of their spending and,
accordingly, there is a historical correlation, of a one or two
year lag between the overall strength of the United States
economy and our sales to the United States government and
municipalities. Therefore, downturns in the United States
economy are likely to result in decreases in demand for our
products. During previous economic downturns, we experienced
decreases in sales and profitability, and we expect our business
to remain subject to similar economic fluctuations in the future.
The
inability to obtain raw materials, component parts, and/or
finished goods in a timely and cost-effective manner from
suppliers would adversely affect our ability to manufacture and
market our products.
We purchase raw materials and component parts from suppliers to
be used in the manufacturing of our products. In addition, we
purchase certain finished goods from suppliers. Changes in our
relationships with suppliers or increases in the costs of
purchased raw materials, component parts or finished goods could
result in manufacturing interruptions, delays, inefficiencies or
our inability to market products. In addition, our profit
margins would decrease if prices of purchased raw materials,
component parts or finished goods increase and we are unable to
pass on those increases to our customers.
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We
operate in highly competitive markets.
The markets in which we operate are highly competitive. The
intensity of this competition, which is expected to continue,
can result in price discounting and margin pressures throughout
the industry and adversely affects our ability to increase or
maintain prices for our products. In addition, certain of our
competitors may have lower overall labor or material costs.
Failure
to keep pace with technological developments may adversely
affect our operations.
We are engaged in an industry which will be affected by future
technological developments. The introduction of products or
processes utilizing new technologies could render our existing
products or processes obsolete or unmarketable. Our success will
depend upon our ability to develop and introduce on a timely and
cost-effective basis new products, processes and applications
that keep pace with technological developments and address
increasingly sophisticated customer requirements. We may not be
successful in identifying, developing and marketing new
products, applications and processes and product or process
enhancements. We may experience difficulties that could delay or
prevent the successful development, introduction and marketing
of product or process enhancements or new products, applications
or processes. Our products, applications or processes may not
adequately meet the requirements of the marketplace and achieve
market acceptance. Our business, operating results and financial
condition could be materially and adversely affected if we were
to incur delays in developing new products, applications or
processes or product or process enhancements or if our products
do not gain market acceptance.
Our ability to operate our Company effectively could be
impaired if we fail to attract and retain key personnel.
Our ability to operate our businesses and implement our
strategies depends, in part, on the efforts of our executive
officers and other key employees. In addition, our future
success will depend on, among other factors, our ability to
attract and retain qualified personnel, including finance
personnel, research professionals, technical sales professionals
and engineers. The loss of the services of any key employee or
the failure to attract or retain other qualified personnel could
have a material adverse effect on our business or business
prospects.
We have
international operations that are subject to foreign economic
and political uncertainties.
Our business is subject to fluctuations in demand and changing
international economic and political conditions which are beyond
our control. During 2007, approximately 37% of our sales were to
customers outside the United States; with approximately 24% of
sales being supplied from our overseas operations. We expect a
significant and increasing portion of our revenues and profits
to come from international sales for the foreseeable future.
Operating in the international marketplace exposes us to a
number of risks, including abrupt changes in foreign government
policies and regulations and, in some cases, international
hostilities. To the extent that our international operations are
affected by unexpected and adverse foreign economic and
political conditions, we may experience project disruptions and
losses which could significantly reduce our revenues and profits.
Some of our contracts are denominated in foreign currencies,
which result in additional risk of fluctuating currency values
and exchange rates, hard currency shortages and controls on
currency exchange. Although currency exposure is hedged in the
short term, over the longer term changes in the value of foreign
currencies could increase our US dollar costs for, or reduce our
US dollar revenues from, our foreign operations. Any increased
costs or reduced revenues as a result of foreign currency
fluctuations could affect our profits.
We may
incur material losses and costs as a result of product
liability, warranty, recall claims or other lawsuits or claims
that may be brought against us.
We are exposed to product liability and warranty claims in the
normal course of business in the event that our products
actually or allegedly fail to perform as expected or the use of
our products results, or is alleged to result, in bodily injury
and/or
property damage. Accordingly, we could experience material
warranty or product liability costs in the future and incur
significant costs to defend against these claims. We carry
insurance and maintain reserves for product liability claims.
However, we cannot be assured that our insurance coverage will
be adequate if
6
such claims do arise, and any liability not covered by insurance
could have a material adverse impact on our results of
operations and financial position. A future claim could involve
the imposition of punitive damages, the award of which, pursuant
to state laws, may not be covered by insurance. In addition,
warranty or other claims are not typically covered by insurance
coverage. Any product liability or warranty issues may adversely
impact our reputation as a manufacturer of high quality, safe
products and may have a material adverse effect on our business.
The costs
associated with complying with environmental and safety
regulations could lower our margins.
We, like other manufacturers, continue to face heavy
governmental regulation of our products, especially in the areas
of the environment and employee health and safety. Complying
with environmental and safety requirements has added and will
continue to add to the cost of our products, and could increase
the capital required. While we believe that we are in compliance
in all material respects with these laws and regulations, we may
be adversely impacted by costs, liabilities or claims with
respect to our operations under existing laws or those that may
be adopted. These requirements are complex, change frequently
and have tended to become more stringent over time. Therefore,
we could incur substantial costs, including cleanup costs, fines
and civil or criminal sanctions as a result of violations, or
liabilities under, environmental laws and safety regulations.
We are
subject to a number of restrictive debt covenants.
Our credit facility and other debt instruments contain certain
restrictive debt covenants that may hinder our ability to take
advantage of attractive business opportunities. Our ability to
meet these covenants may be affected by factors outside our
control. Failure to meet one or more of these covenants may
result in an event of default. Upon an event of default, some of
our lenders may be entitled to declare all amounts outstanding
as due and payable.
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Item 1B.
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Unresolved
Staff
Comments.
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None.
As of December 31, 2007, the Company utilized 20 principal
manufacturing plants located throughout North America, as well
as 14 in Europe, 1 in South Africa and 3 in the Far East.
In total, the Company devoted approximately 1.3 million
square feet to manufacturing and 1.0 million square feet to
service, warehousing and office space as of December 31,
2007. Of the total square footage, approximately 38% is devoted
to the Safety and Security Systems Group, 14% to the Tool Group,
22% to the Fire Rescue Group and 26% to the Environmental
Solutions Group. Approximately 62% of the total square footage
is owned by the Company with the remaining 38% being leased.
All of the Companys 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
Companys current business needs.
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Item 3.
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Legal
Proceedings.
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The information concerning the Companys legal proceedings
included in Note 15 of the financial statements contained
under Item 8 of this
Form 10-K
is incorporated herein by reference.
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Item 4.
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Submission
of Matters to a Vote of Security
Holders.
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No matters were submitted to a vote of security holders through
the solicitation of proxies or otherwise during the three months
ended December 31, 2007.
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Item 4A.
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Executive
Officers.
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The following is a list of the Companys executive
officers, their ages, business experience and positions and
offices as of February 1, 2008:
Paul Brown, age 44, was appointed Vice President and
Controller in March 2005. He served as Vice President-Internal
Audit from April 2004. Previously, Mr. Brown was Vice
President Finance-Flame Retardants, for Great Lakes Chemical
Corporation from 2000 to April 2004.
Kimberly L. Dickens, age 46, was elected as Vice President
Human Resources in April 2004. Previously, Ms. Dickens was
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.
James E. Goodwin, age 63, was appointed interim President
and interim Chief Executive Officer on December 11, 2007.
Mr. Goodwin was elected to the Companys Board of
Directors in October 2005. Mr. Goodwin has been an
independent business consultant since 2001 and served as
Chairman and Chief Executive Officer of United Airlines from
1998 to 2001.
Peter R. Guile, age 42, was elected as President of
E-One, Inc.
in July 2007. Mr. Guile was division president of the
industrial systems business within the Safety and Security
Systems Group from 2001 to 2007.
David E. Janek, age 44, was appointed Vice President and
Treasurer in September 2006. Mr. Janek was Vice President
Finance, Safety and Security Systems Group from June 2002.
Stephanie K. Kushner, age 52, was elected as Senior Vice
President and Chief Financial Officer in April 2007.
Ms. Kushner was Vice President and Chief Financial Officer
from 2002 to 2007.
Fred H. Lietz, age 52, was appointed as Vice President and
Chief Procurement Officer in May 2007. Mr. Lietz was Vice
President of Global Procurement and Logistics at Andrew
Corporation from 2001 to 2006.
David R. McConnaughey, age 51, was appointed President of
Federal Signals Safety and Security Systems Group in March
2006. Previously, Mr. McConnaughey was President Maytag All
Brand Service from 2005 to March 2006 and Vice President Maytag
All Brand Service from 2004 to 2005. Previously,
Mr. McConnaughey held several roles with Maytag Corporation
including Vice President and G.M. Amana Brand 2003 to 2004 and
Vice President Supply Chain 2002 to 2003.
Esa Peltola, age 56 was elected as President of Bronto
Skylift OyAb in July 2007. Mr. Peltola was Managing
Director of Bronto Skylift from 1998 to 2007.
Jennifer L. Sherman, age 43, was appointed Vice President,
General Counsel and Secretary effective March 2004.
Ms. Sherman was previously Deputy General Counsel and
Assistant Secretary from 1998 to 2004.
Mark D. Weber, age 50, was appointed President of the
Environmental Solutions Group in April 2003. Mr. Weber was
Vice President Sweeper Products for the Environmental Solutions
Group from 2002 to 2003 and General Manager of Elgin Sweeper
Company from 2001 to 2002.
Michael K. Wons, age 43, was appointed Vice President and
Chief Information Officer in November 2006. Previously,
Mr. Wons was Senior Technology Strategy Director at
Microsoft Corporation from 2002 to 2006.
8
These officers hold office until the next annual meeting of the
Board of Directors following their election and until their
successors have been elected and qualified.
There are no family relationships among any of the foregoing
executive officers.
PART II
|
|
Item 5.
|
Market
for Companys Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities.
|
The Companys common stock is listed and traded on the New
York Stock Exchange (NYSE) under the symbol FSS. At
December 31, 2007, there were no material restrictions on
the Companys ability to pay dividends. The information
concerning the Companys market price range data included
in Note 19 of the financial statements contained under
Item 8 of this
Form 10-K
is incorporated herein by reference.
As of January 31, 2008, there were 2,859 holders of record
of the Companys common stock.
9
The following graph compares the cumulative
5-year total
return to shareholders on the Companys common stock
relative to the cumulative total returns of the Russell 2000
index, the S&P Industrials index, and the S&P Midcap
400 index. An investment of $100 (with reinvestment of all
dividends) is assumed to have been made in the companys
common stock and in each index on December 31, 2002 and its
relative performance is tracked through December 31, 2007.
Comparison
of 5 Year Cumulative Total Return*
Among
Federal Signal Corporation, The Russell 2000 Index,
The S & P Midcap 400
Index And The S & P Industrials Index
*$100 invested on 12/31/02 in stock or index-including
reinvestment of dividends. Fiscal year ending December 31.
Copyright
©
2007, Standard & Poors, a division of The
McGraw-Hill Companies, Inc. All rights reserved.
www.researchdatagroup.com/S&P.htm
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12/02
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12/03
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12/04
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12/05
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12/06
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12/07
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|
Federal Signal
Corporation
|
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100.00
|
|
|
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|
94.00
|
|
|
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|
96.87
|
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83.56
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90.65
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64.51
|
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Russell 2000 . . . . . .
|
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100.00
|
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147.25
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174.24
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182.18
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215.64
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212.26
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S&P Midcap 400
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100.00
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135.62
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157.97
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177.81
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196.16
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|
211.81
|
|
S&P
Industrials
|
|
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|
100.00
|
|
|
|
|
132.19
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|
156.03
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159.66
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180.88
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202.64
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The stock price performance included in this graph is not
necessarily indicative of future stock price performance.
The information concerning the Companys quarterly dividend
per share data included in Note 19 of the financial
statements contained under Item 8 of this
Form 10-K
is incorporated herein by reference.
10
|
|
Item 6.
|
Selected
Financial Data.
|
The following table presents the selected financial information
of the Company as of, and for each of the five years in the
period ended December 31, 2007:
|
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2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
Operating Results (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales(a)
|
|
$
|
1,268.1
|
|
|
$
|
1,211.6
|
|
|
$
|
1,119.0
|
|
|
$
|
1,024.5
|
|
|
$
|
1,023.1
|
|
Income (loss) before income taxes(a)
|
|
$
|
34.0
|
|
|
$
|
42.7
|
|
|
$
|
40.8
|
|
|
$
|
(0.5
|
)
|
|
$
|
41.4
|
|
Income from continuing operations(a)
|
|
$
|
29.8
|
|
|
$
|
34.4
|
|
|
$
|
43.9
|
|
|
$
|
6.1
|
|
|
$
|
34.7
|
|
Operating margin(a)
|
|
|
5.1
|
%
|
|
|
5.8
|
%
|
|
|
5.7
|
%
|
|
|
2.2
|
%
|
|
|
5.9
|
%
|
Return on average common shareholders equity
|
|
|
13.2
|
%
|
|
|
6.0
|
%
|
|
|
(1.2
|
)%
|
|
|
(0.6
|
)%
|
|
|
9.1
|
%
|
Common Stock Data (per share):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations diluted
|
|
$
|
0.62
|
|
|
$
|
0.72
|
|
|
$
|
0.91
|
|
|
$
|
0.13
|
|
|
$
|
0.72
|
|
Cash dividends
|
|
$
|
0.24
|
|
|
$
|
0.24
|
|
|
$
|
0.24
|
|
|
$
|
0.40
|
|
|
$
|
0.70
|
|
Market price range:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
High
|
|
$
|
17.00
|
|
|
$
|
19.75
|
|
|
$
|
17.95
|
|
|
$
|
20.56
|
|
|
$
|
20.79
|
|
Low
|
|
$
|
10.82
|
|
|
$
|
12.69
|
|
|
$
|
13.80
|
|
|
$
|
15.75
|
|
|
$
|
13.60
|
|
Average common shares outstanding (in millions)
|
|
|
47.9
|
|
|
|
48.0
|
|
|
|
48.2
|
|
|
|
48.1
|
|
|
|
48.0
|
|
Financial Position at Year-End (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Working capital(a)(b)
|
|
$
|
187.7
|
|
|
$
|
156.3
|
|
|
$
|
160.6
|
|
|
$
|
157.1
|
|
|
$
|
99.2
|
|
Current ratio(a)(b)
|
|
|
1.7
|
|
|
|
1.6
|
|
|
|
1.6
|
|
|
|
1.7
|
|
|
|
1.4
|
|
Total assets
|
|
$
|
1,177.1
|
|
|
$
|
1,049.4
|
|
|
$
|
1,119.5
|
|
|
$
|
1,132.4
|
|
|
$
|
1,177.5
|
|
Long-term debt, net of current portion
|
|
$
|
240.7
|
|
|
$
|
160.3
|
|
|
$
|
203.7
|
|
|
$
|
215.7
|
|
|
$
|
194.1
|
|
Shareholders equity
|
|
$
|
445.3
|
|
|
$
|
386.4
|
|
|
$
|
376.3
|
|
|
$
|
412.7
|
|
|
$
|
422.5
|
|
Debt-to-capitalization
ratio(c)
|
|
|
39.8
|
%
|
|
|
37.4
|
%
|
|
|
43.0
|
%
|
|
|
37.3
|
%
|
|
|
40.0
|
%
|
Net
debt-to-capitalization
ratio(e)
|
|
|
38.5
|
%
|
|
|
35.3
|
%
|
|
|
33.5
|
%
|
|
|
35.8
|
%
|
|
|
39.1
|
%
|
Other (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Orders(a)
|
|
$
|
1,342.5
|
|
|
$
|
1,230.1
|
|
|
$
|
1,100.5
|
|
|
$
|
1,083.7
|
|
|
$
|
972.7
|
|
Backlog(a)
|
|
$
|
479.0
|
|
|
$
|
403.3
|
|
|
$
|
386.2
|
|
|
$
|
411.9
|
|
|
$
|
330.3
|
|
Net cash provided by operating activities
|
|
$
|
65.4
|
|
|
$
|
29.7
|
|
|
$
|
70.6
|
|
|
$
|
52.5
|
|
|
$
|
70.3
|
|
Net cash provided by (used for) investing activities
|
|
$
|
(106.6
|
)
|
|
$
|
(19.3
|
)
|
|
$
|
(0.7
|
)
|
|
$
|
34.1
|
|
|
$
|
(10.1
|
)
|
Net cash provided by (used for) financing activities
|
|
$
|
36.8
|
|
|
$
|
(83.0
|
)
|
|
$
|
7.1
|
|
|
$
|
(81.7
|
)
|
|
$
|
(59.9
|
)
|
Capital expenditures(a)
|
|
$
|
23.5
|
|
|
$
|
18.2
|
|
|
$
|
16.6
|
|
|
$
|
19.4
|
|
|
$
|
16.8
|
|
Depreciation and amortization(a)
|
|
$
|
21.2
|
|
|
$
|
17.9
|
|
|
$
|
18.2
|
|
|
$
|
16.2
|
|
|
$
|
15.1
|
|
Employees(a)
|
|
|
5,544
|
|
|
|
5,469
|
|
|
|
5,367
|
|
|
|
5,382
|
|
|
|
5,666
|
|
|
|
|
(a) |
|
continuing operations only, prior year amounts have been
reclassified for discontinued operations as discussed in
Note 13 to the financial statements |
|
(b) |
|
working capital: current manufacturing assets less current
manufacturing liabilities; current ratio: current manufacturing
assets divided by current manufacturing liabilities |
|
(c) |
|
manufacturing operations: total manufacturing debt divided by
the sum of total manufacturing debt plus manufacturing equity(d) |
|
(d) |
|
manufacturing equity: total equity less financial services
assets plus financial services borrowings |
11
|
|
|
(e) |
|
net debt to capitalization ratio: manufacturing debt less cash
and cash equivalents divided by manufacturing equity less cash
and cash equivalents |
The 2005 and 2004 income (loss) before income taxes includes
restructuring costs of $0.7 million and $7.0 million,
respectively. The 2005 income before income taxes was impacted
by a $6.7 million gain on the sale of two industrial
lighting product lines. The 2004 loss before income taxes was
impacted by a $10.6 million loss incurred on a large
contract for fire apparatus in the Netherlands.
The selected financial data set forth above should be read in
conjunction with the Companys consolidated financial
statements, including the notes thereto, and Item 7 of this
Form 10-K.
The information concerning the Companys selected quarterly
data included in Note 19 of the financial statements
contained under Item 8 of this
Form 10-K
is incorporated herein by reference.
|
|
Item 7.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations.
|
The Company designs and manufactures a suite of products and
integrated solutions for municipal, governmental, industrial and
airport customers. Federal Signals portfolio of products
include aerial devices, street sweepers, fire apparatus, safety
and security systems, industrial vacuums, waterblasters, sewer
cleaners and consumable industrial tooling. Due to technology,
marketing, distribution and product application synergies, the
Companys business units are organized and managed in four
operating segments: Safety and Security Systems, Fire Rescue,
Environmental Solutions and Tool. The Company also provides
customer and dealer financing to support the sale of its
vehicles. The information concerning the Companys
manufacturing businesses included in Item 1 of this
Form 10-K
and Note 16 of the financial statements contained under
Item 8 of this
Form 10-K
are incorporated herein by reference.
Results
of Operations
Operating results have been restated to exclude the results of
the Cutting Tools Operations, formerly a component of the Tool
Group which was presented as discontinued operations in 2006 and
also to reflect the exclusion of the Refuse business which was
classified as a discontinued operation in 2005. The Company
completed the sale of the Cutting Tool Operations on
January 31, 2007. The assets of the Refuse business were
substantially sold in 2006.
Orders
and backlog
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Analysis of orders:
|
|
|
|
|
|
|
|
|
|
|
|
|
Total orders ($ in millions):
|
|
$
|
1,342.5
|
|
|
$
|
1,230.1
|
|
|
$
|
1,100.5
|
|
Change in orders year over year
|
|
|
9.1
|
%
|
|
|
12.0
|
%
|
|
|
|
|
Change in US municipal and government orders year over year
|
|
|
(1.2
|
)%
|
|
|
3.0
|
%
|
|
|
|
|
Change in US industrial and commercial orders year over year
|
|
|
7.5
|
%
|
|
|
14.0
|
%
|
|
|
|
|
Change in non-US orders year over year
|
|
|
22.3
|
%
|
|
|
23.0
|
%
|
|
|
|
|
US municipal and government orders decreased in 2007 as a result
of lower demand for fire trucks and sewer cleaners than the
previous year. US industrial and commercial orders increased 8%
on continued high demand for industrial vacuum trucks and an
increase in orders for hazardous area lighting and industrial
signal and communications equipment. Non-US orders increased 22%
and included a 31% increase in sales of products manufactured
outside of the US, and increases in US exports in Safety and
Security Systems and Environmental Solutions. The growth in
non-US orders also reflects favorable currency effects due to a
weaker US dollar.
US municipal and government orders increased 3% in 2006 as a
result of high demand for sweepers and sewer cleaners. US
industrial and commercial orders increased on continued strength
in industrial vacuum trucks and waterblasters. The substantial
increase in non-US orders includes a large fire truck order for
Montreal, Canada. Demand also increased for US exports in the
Fire Rescue, Safety and Security Systems, and Environmental
12
Solutions segments, and for products manufactured in Europe.
Favorable currency movements also improved 2007 compared to 2006.
Consolidated
results of operations
The following table summarizes the Companys results of
operations and operating metrics for each of the three years in
the period ended December 31, 2007 ($ in millions, except
per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Net sales
|
|
$
|
1,268.1
|
|
|
$
|
1,211.6
|
|
|
$
|
1,119.0
|
|
Cost of sales
|
|
|
(971.2
|
)
|
|
|
(927.2
|
)
|
|
|
(867.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
296.9
|
|
|
|
284.4
|
|
|
|
251.5
|
|
Operating expenses
|
|
|
(232.8
|
)
|
|
|
(214.5
|
)
|
|
|
(187.1
|
)
|
Restructuring charges
|
|
|
|
|
|
|
|
|
|
|
(0.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
64.1
|
|
|
|
69.9
|
|
|
|
63.7
|
|
Interest expense
|
|
|
(25.9
|
)
|
|
|
(25.0
|
)
|
|
|
(23.1
|
)
|
Other (expense) income
|
|
|
(4.2
|
)
|
|
|
(2.2
|
)
|
|
|
0.2
|
|
Income tax (expense) benefit
|
|
|
(4.2
|
)
|
|
|
(8.3
|
)
|
|
|
3.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
|
29.8
|
|
|
|
34.4
|
|
|
|
43.9
|
|
Discontinued operations
|
|
|
25.1
|
|
|
|
(11.7
|
)
|
|
|
(48.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
54.9
|
|
|
$
|
22.7
|
|
|
$
|
(4.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other data:
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating margin
|
|
|
5.1
|
%
|
|
|
5.8
|
%
|
|
|
5.7
|
%
|
Earnings per share continuing operations
|
|
$
|
0.62
|
|
|
$
|
0.72
|
|
|
$
|
0.91
|
|
Year
Ended December 31, 2007 vs. December 31,
2006
Net sales increased 5% over 2006 as the higher volume of Safety
and Security Systems together with Environmental Solutions
shipments more than offset the decrease in sales of
U.S. Fire Rescue apparatus. Gross profit was in line with
the prior year, however operating income decreased 8% and
operating margins contracted nearly one percent on higher
operating expenses. The addition of three new businesses through
acquisition in 2007, including the additional amortization of
intangible assets acquired, accounted for 41%, or
$7.7 million of the increase in operating expenses. Higher
commissions and marketing expenses including dealer incentives
and increases in costs associated with new product development
accounted for $10.1 million of incremental costs.
Interest expense increased 4% from 2006, primarily due to an
increase in borrowings in order to fund acquisitions in the year.
Other expenses include the Companys share of losses
relating to the joint venture in China of $3.3 million.
The 2007 effective tax rate relating to income from continuing
operations decreased to 12.5% from 19.4% in the prior year. The
2007 rate benefited from a higher mix of profits in lower taxed
countries, and the Companys foreign tax planning
strategies including dividend repatriation, foreign entity
financing, legal entity restructuring in Canada and the effect
of tax-exempt municipal income. The 2006 rate also benefited
from the effect of tax-exempt municipal income and the
completion of other favorable tax reduction strategies.
Income from continuing operations was 13% lower than the prior
year on lower operating income despite incremental benefits over
the prior year from a more favorable tax rate.
Net income more than doubled to $54.9 million for the year
ended December 31, 2007 versus $22.7 million in 2006.
For 2007, after completion of the sale of the Cutting Tool
Operations in the first quarter, and substantial completion of
the wind-down of the Refuse business, the Company realized a net
after-tax gain on the sale of previously discontinued operations
of $25.1 million, compared to a loss of $11.7 in prior year.
13
Year
Ended December 31, 2006 vs. December 31,
2005
Net sales increased 8% over 2005 attributable to a higher volume
of Safety and Security Systems and Environmental Solutions
shipments and increased pricing across all segments. Operating
income increased 10% and operating margins increased year over
year, on a 13% gross profit increase. Pricing and volume gains
overcame higher material and component costs to flow through to
earnings. Offsetting the increase in gross profit, was an
increase in operating expenses relating to higher sales
commissions and selling-related expenses, an increase in
stock-based compensation expense of $3.7 million and
incentive bonuses, at various levels throughout the Company, of
$2.1 million. Additionally, a gain of $6.7 million
from the sale of an industrial lighting product line reduced
operating expenses in 2005.
Interest expense increased 8% from 2005, primarily as a result
of higher interest rates and a greater mix of floating rate debt.
Other expenses included the Companys share of losses
relating to the
start-up of
the joint venture in China of $1.9 million.
The 2006 effective tax rate relating to income from continuing
operations increased to 19.4% from a tax benefit rate of 7.6%.
The effective tax rate in 2005 reflected benefits associated
with a reduction of reserves associated with the completion of a
multi-year audit of the Companys US tax returns in the
amount of $6.0 million, a benefit associated with the
reconciliation of deferred tax liabilities, the effect of
tax-exempt municipal income, benefits associated with the
repatriation of foreign earnings enabled under the American Jobs
Creation Act, as well as the completion of other favorable tax
reduction strategies. Income from continuing operations
decreased as a result of the less favorable tax rate in 2006.
Net income improved sixfold over the comparable 2005 period. Net
income in 2006 included an $11.7 million loss from
discontinued operations versus a $48.5 million loss in
2005. Discontinued operations in 2006 included the profitable
Cutting Tool Operations of the Tool reporting segment, which
were sold in January 2007. Also included in discontinued
operations are the 2006 operations of the North American Refuse
truck body business operating under the Leach brand name.
Substantially all of the assets of the Leach business were sold
during the second half of 2006.
Safety
and Security Systems Operations
The following table presents the Safety and Security Systems
Groups results of operations for each of the three years
in the period ended December 31, 2007 ($ in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Total orders
|
|
$
|
367.5
|
|
|
$
|
305.5
|
|
|
$
|
259.5
|
|
US orders
|
|
|
216.3
|
|
|
|
184.9
|
|
|
|
164.8
|
|
Non-US orders
|
|
|
151.2
|
|
|
|
120.6
|
|
|
|
94.7
|
|
Net sales
|
|
|
367.2
|
|
|
|
304.5
|
|
|
|
276.5
|
|
Operating income
|
|
|
49.6
|
|
|
|
41.2
|
|
|
|
45.0
|
|
Operating margin
|
|
|
13.5
|
%
|
|
|
13.5
|
%
|
|
|
16.3
|
%
|
Orders increased 20% over 2006 with strength across most market
segments. US orders rose 17% due to strength in light bars and
sirens for both police and fire customers. During 2007, the
Company introduced a next generation and more reliable LED
lightbar technology which drove significantly higher orders.
Non-US orders increased 25% over the prior year on strength in
vehicular warning and police products, and the addition of PIPS
Technologies.
Net sales increased 21% with broad-based improvement across the
business, particularly for energy-related markets. The mid-year
addition of PIPS Technologies automated license plate
recognition (ALPR) cameras added 3% to sales for the
year. Operating income increased 20% over the comparable period.
The operating margin remained at 13.5% as higher income from the
flow-through of higher sales volume that includes the addition
of PIPS Technologies, improved pricing, and favorable foreign
currency movement were offset by increased costs
14
associated with expanding the product portfolio and market
reach. Results were also adversely impacted by higher
implementation costs associated with profitable large airport
parking systems.
Orders improved 18% in 2006 over the comparable period in 2005
with strength across all major product lines, including
industrial signaling and communications, hazardous area
lighting, police products, warning systems, and parking systems.
Net sales increased 10% over 2005, on increased volumes across
all product lines, with the exception of airport parking
systems, and despite the absence of $8 million of revenue
from two industrial lighting product lines which were divested
in the third quarter of 2005.
Operating income decreased 9% in 2006 and a lower reported
operating margin resulted from the inclusion of a
$6.7 million gain on the sale of the industrial lighting
product lines in 2005. Excluding the gain and the operations of
the disposed product lines, the operating margin increased
slightly, on higher sales volume and improved pricing, offset by
higher compensation-related charges.
Fire
Rescue Operations
The following table presents the Fire Rescue Groups
results of operations for each of the three years in the period
ended December 31, 2007 ($ in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Total orders
|
|
$
|
397.5
|
|
|
$
|
365.0
|
|
|
$
|
354.7
|
|
US orders
|
|
|
175.4
|
|
|
|
199.3
|
|
|
|
234.7
|
|
Non-US orders
|
|
|
222.1
|
|
|
|
165.7
|
|
|
|
120.0
|
|
Net sales
|
|
|
330.8
|
|
|
|
384.8
|
|
|
|
371.2
|
|
Operating income (loss)
|
|
|
(11.0
|
)
|
|
|
6.8
|
|
|
|
2.3
|
|
Operating margin
|
|
|
(3.3
|
)%
|
|
|
1.8
|
%
|
|
|
0.6
|
%
|
Orders in 2007 were up 9% over the prior year on continued
strong demand and a richer mix of Bronto articulated aerial
devices. Orders for
E-One
products declined in the first 9 months of the year due to
disruptions in the North American dealer channel and changes in
leadership. During the second half of the year, transitions to
several new dealers to expand coverage over these territories
took place. US export orders were down slightly, compared to the
prior year, due to a large order for Montreal, Canada in 2006.
Net sales in the year declined 14% from the prior year as lower
E-One fire
apparatus volumes more than offset the growth in international
sales of Bronto aerial units. The operating loss incurred in
2007 is related to the lower sales volume and lower
manufacturing absorption experienced at
E-One.
Brontos higher production volume and favorable currency
movement were not sufficient to overcome
E-Ones
shortfall. The deterioration in the operating margin from the
prior year reflects the lower volume of fire trucks produced and
sold in 2007.
Orders in 2006 improved 3% over 2005, on strong aerial product
demand in the Bronto articulated aerial apparatus business,
particularly in the European and Asian markets as these
platforms increasingly displace traditional ladders. The decline
in US orders reflects effects of continuing changes in the
Companys dealer channel structure and policies. Sales
increased 4% over the same period in 2005, on higher realized
pricing across all product lines mainly due to pricing actions
taken in 2005 to recover escalating material costs, and due to
currency translation on non-US dollar denominated orders.
Partially offsetting these increases was the adverse impact of
lower shipments from the Ocala production facility.
The operating income increase in 2006 included a
$1.6 million benefit from the recovery of costs from
certain suppliers relating to a large contract substantially
completed in 2004. The benefit was partially offset by
$1.0 million of costs incurred for the closure of a
production facility in Red Deer, Alberta. The facility was sold
in December, 2006. Excluding the effect of these events,
operating income increased 170%, and operating margins improved
to 1.6%.
15
Environmental
Solutions Operations
The following table presents the Environmental Solutions
Groups results of operations for each of the three years
in the period ended December 31, 2007 ($ in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Total orders
|
|
$
|
458.2
|
|
|
$
|
437.2
|
|
|
$
|
361.9
|
|
US orders
|
|
|
349.2
|
|
|
|
333.6
|
|
|
|
268.1
|
|
Non-US orders
|
|
|
109.0
|
|
|
|
103.6
|
|
|
|
93.8
|
|
Net sales
|
|
|
450.8
|
|
|
|
399.4
|
|
|
|
347.7
|
|
Operating income
|
|
|
40.2
|
|
|
|
37.1
|
|
|
|
28.9
|
|
Operating margin
|
|
|
8.9
|
%
|
|
|
9.3
|
%
|
|
|
8.3
|
%
|
Orders of $458.2 million in 2007 were 5% ahead of the prior
year. US orders increased 5% over the prior year due to solid
demand for industrial vacuum trucks and the impact of higher
priced chassis associated with new 2007 EPA standards. Non-US
orders increased 5% driven by stronger US exports of sewer
cleaners and industrial vacuum trucks primarily to the Middle
East. Net sales compared to 2006 grew 13% on higher unit volumes
of primarily vacuum trucks and overall higher pricing due in
part to higher priced chassis.
Operating income improved modestly over the comparable period
however, the operating margin in 2007 declined as the favorable
benefits of higher pricing and sales volume were more than
offset by increased chassis costs, temporarily high material
costs, new product development, ERP implementation, product
launches and initiatives to increase manufacturing efficiency.
In 2006, orders increased 21% over 2005, showing strength and
improvement across all product lines, most notably in street
sweepers and vacuum trucks. Sales increased 15% over the prior
year on volume strength, higher pricing to offset increases in
material and component costs and favorable currency movement.
Operating income increased 28% over 2005. The operating margin
benefited from the flow through of increased product demand and
pricing and an improvement in production cost absorption, offset
by elevated operating costs incurred from executing growth
initiatives, including advancing the ERP system implementation,
global expansion, and new product development.
Tool
Operations
The following table presents the Tool Groups results of
operations for each of the three years in the period ended
December 31, 2007 ($ in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Total orders
|
|
$
|
119.3
|
|
|
$
|
122.4
|
|
|
$
|
124.4
|
|
US orders
|
|
|
76.0
|
|
|
|
82.6
|
|
|
|
82.5
|
|
Non-US orders
|
|
|
43.3
|
|
|
|
39.8
|
|
|
|
41.9
|
|
Net sales
|
|
|
119.3
|
|
|
|
122.9
|
|
|
|
123.6
|
|
Operating income
|
|
|
6.6
|
|
|
|
8.2
|
|
|
|
11.3
|
|
Operating margin
|
|
|
5.5
|
%
|
|
|
6.7
|
%
|
|
|
9.1
|
%
|
Orders and net sales in 2007 declined 2.5% and 2.9%,
respectively, from the comparable period in 2006, with weaker
die and mold sales impacted by the weak domestic automotive and
housing markets. Operating margins decreased from the prior year
principally as a result of the lower volume. Contributing to the
revenue and operating margin decline were UAW negotiations that
disrupted customer project completions, as well as automotive
production shutdowns and layoffs. Favorably, strength in the
Japanese and European market continues, operational productivity
has increased and operating expenses have declined.
Tool segment results were restated in 2006, to exclude the
results of the Cutting Tools Operations, which were presented as
discontinued operations. The Company completed the sale of the
Cutting Tool operations on January 31, 2007 resulting in a
gain of $24.6 million.
16
US orders remained flat in 2006, and non-US orders contracted
marginally. Sales were similarly impacted. All businesses
continue to feel the impact of a weak automotive market and
softness in the US housing market. Operating income declined 27%
partially as a result of approximately $0.9 million of
costs associated with a voluntary workforce reduction at the
Dayton, Ohio plant in 2006. In addition, a business system
conversion implementation error identified in 2006 resulted in
approximately $1.5 million of incremental costs associated
with lost productivity during the first half of 2006. These
events affected the operating margin by 2.4 percentage
points, and have since been satisfactorily resolved.
Corporate
Expense
Corporate expenses totaled $21.3 million in 2007,
$23.4 million in 2006 and $23.8 million in 2005. The
9% reduction in 2007 expense was benefited by the receipt of
$3.7 million in reimbursements from one of the
Companys insurers for certain out of pocket expenses
related to the Companys ongoing firefighter hearing loss
litigation. The reimbursement essentially offset the legal
expenses in 2007 associated with this litigation.
The 2% decrease in 2006 over 2005 reflects lower expenses
associated with firefighter hearing loss litigation and lower
bad debt expenses relating to leasing activities, offset by
higher compensation-related costs, particularly stock option
expense of $1.3 million, as the Company began expensing
stock options in 2006 as required under FASB Statement
No. 123(R).
Legal
Matters
The Company has been sued by over 2,500 firefighters in numerous
separate cases alleging that exposure to the Companys
sirens impaired their hearing. The Company has successfully
concluded over 40 similar cases and contests the allegations.
The Company continues to aggressively defend the matter. For
further details regarding this and other legal matters, refer to
Note 15 in the financial statements included in Item 8
of this
Form 10-K.
Financial
Services Activities
The Company maintained an investment of $146.8 million and
$158.9 million at December 31, 2007 and 2006,
respectively in lease financing and other receivables that are
generated primarily by its Fire Rescue and Environmental
Solutions customers. The decrease in leasing assets primarily
resulted from lower new bookings, early loan payoffs, and the
continued runoff of the industrial leasing portfolio resulting
from the Companys decision in 2001 to no longer extend new
leases to industrial customers. Financial services assets
generally have repayment terms ranging from one to fifteen
years. These assets are 94% leveraged as of December 31,
2007 and 2006, consistent with their overall quality; financial
services debt was $137.4 million and $149.0 million at
December 31, 2007 and 2006, respectively.
Financial service revenues totaled $7.4 million,
$8.2 million and $9.6 million in 2007, 2006 and 2005,
respectively. The decline in 2007 and 2006 reflects the
continued runoff of the Companys industrial leasing
portfolio and lower financings of municipal product sales.
Financial
Condition, Liquidity and Capital Resources
During each of the three years in the period ended
December 31, 2007, the Company used its cash flows from
operations to pay cash dividends to shareholders and to fund
sustaining and cost reduction capital needs of its operations.
Beyond these uses, remaining cash was used to fund acquisitions,
pay down debt, to repurchase shares of common stock and make
voluntary pension contributions.
17
The Companys cash and cash equivalents totaled
$16.0 million, $19.3 million and $91.9 million as
of December 31, 2007, 2006 and 2005, respectively. The
following table summarizes the Companys cash flows for
each of the three years in the period ended December 31,
2007 ($ in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Operating cash flow
|
|
$
|
65.4
|
|
|
$
|
29.7
|
|
|
$
|
70.6
|
|
Capital expenditures
|
|
|
(23.5
|
)
|
|
|
(18.2
|
)
|
|
|
(16.6
|
)
|
Payments for acquisitions, net of cash acquired
|
|
|
(147.5
|
)
|
|
|
|
|
|
|
|
|
Proceeds from sale of discontinued businesses
|
|
|
65.4
|
|
|
|
|
|
|
|
|
|
Borrowing activity, net
|
|
|
47.9
|
|
|
|
(60.5
|
)
|
|
|
24.9
|
|
Dividends
|
|
|
(11.5
|
)
|
|
|
(11.5
|
)
|
|
|
(13.5
|
)
|
Purchases of treasury stock
|
|
|
|
|
|
|
(12.1
|
)
|
|
|
(5.0
|
)
|
All other, net
|
|
|
0.5
|
|
|
|
|
|
|
|
16.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Decrease) increase in cash
|
|
$
|
(3.3
|
)
|
|
$
|
(72.6
|
)
|
|
$
|
77.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating cash flow increased by $35.7 million in 2007
compared to 2006. Primary working capital, composed of accounts
receivable, inventory, accounts payable, and customer deposits
provided $2.5 million of cash flow in 2007, compared with a
use of $33.5 million in the prior year. The improvement in
working capital was mainly due to lower December sales and
better collection of receivables compared to 2006. Pension
contributions to the Companys defined benefit plans in the
US and the UK were $6.7 million in 2007, compared to
$11.3 million in 2006.
In 2006, cash flow from operations decreased by
$40.9 million from 2005. The lower cash flow was driven by
increases in working capital requirements to support high
year-end sales; additional outsourcing to support higher sewer
cleaner and aerial device production levels; and inventory
pre-buying ahead of 2007 changes in US engine emission
regulations; and an $11.3 million contribution to the
Companys pension plans compared to $7.7 million in
2005.
The Companys investment in capital projects increased in
2007 compared to 2006 as the Companys ERP system design
and implementation gained momentum during the year. In 2006, the
Company disposed of the production facility in Red Deer, Alberta
for proceeds of $2.5 million. In 2005, the Company sold
four former production facilities and two industrial lighting
product lines for total cash proceeds of $22.0 million.
Proceeds from the disposals of property and product lines are
included in All other, net in 2006 and 2005.
In 2007, the Company acquired three businesses, Codespear LLC in
January for $17.4 million in cash, Riverchase Technologies
in July for $6.7 million in cash, and PIPS Technologies in
August for $126.3 million in cash. See Note 11 of the
notes to the consolidated financial statements for additional
information on these acquisitions. The Company funded the
acquisitions through cash provided by operations, additional
bank borrowings, and from proceeds received from the sale of the
Cutting Tool operations, included in discontinued operations in
2006, and sold in January, 2007 for $65.4 million in cash.
See Note 13 of the notes to the consolidated financial
statements for additional information on the sale of the Cutting
Tool operations.
On April 25, 2007, the Company amended its Revolving Credit
Agreement. This Second Amended and Restated Credit Agreement
(Credit Agreement) provides for borrowings of
$250.0 million and matures April, 2012. It also allows the
Company to borrow up to $35 million in an alternative
currency under the swing line provision. As of December 31,
2007 22.5 million, or $32.6 million, was drawn
as alternative currency and $66.0 million was drawn on the
Credit Agreement for a total of $98.6 million drawn under
the Credit Agreement. The Company was in compliance with all
debt covenants throughout 2007.
In December, 2007, the Company amended the Loan Agreement
between
E-One and
Banc of America Leasing & Capital, LLC to allow
borrowings against the leases of
E-One Inc.,
E-One New
York, Inc., Elgin Sweeper Company and Vactor Manufacturing, Inc.
The outstanding balance on this agreement was $96.6 million
as of December 31, 2007.
18
At December 31, 2006, $21.8 million was drawn against
the Companys $125 million Amended Credit Agreement
revolving credit line. This Amended Credit Agreement was
increased from $75 million to $125 million during
2006. The Company borrowed $23.6 million in September, 2006
through the Banc of America Loan Agreement, the balance on this
facility as of December 31, 2006 was $90.7 million.
Also in 2006, a $65 million private placement note matured
and was repaid using a combination of cash flow from operations
and borrowings under the Amended Credit Agreement revolving
credit line.
In March 2005, the Company entered into the loan agreement with
Banc of America secured by certain leases of the
E-One
business. For more detail on this loan agreement refer to
Note 5, contained in this
Form 10-K.
As of December 31, 2005 the balance on this facility was
$91.4 million and there was no balance drawn under the
Companys revolving credit facility.
During 2006, the Company repurchased $12.1 million of stock
under a 750,000 stock buy-back program approved by the Board of
Directors. Treasury stock purchases reflect the Companys
policy to purchase shares to offset the dilutive effects of
stock based compensation.
Cash dividends paid to shareholders in 2007 were
$11.5 million. Cash dividends decreased to
$11.5 million in 2006 from $13.5 million in 2005. The
Company declared dividends of $0.24 per share in 2007, 2006 and
2005.
Total manufacturing debt, net of cash, totaled
$272.7 million at December 31, 2007, or 40% of total
capitalization, up from 35% in 2006. At December 31, 2006,
total manufacturing debt, net of cash, was $205.7 million.
The Company believes that its municipal financial services
assets, due to their high overall quality, are capable of
sustaining a high leverage ratio. The Companys
debt-to-capitalization
ratio for its financial services activities was 94% at both
December 31, 2007 and 2006. In 2007, the Companys
aggregate borrowing capacity was maintained.
The Company anticipates that capital expenditures for 2008 will
approximate $37 million and that its financial resources
and major sources of liquidity, including cash flow from
operations and borrowing capacity, will be adequate to meet its
operating and capital needs in addition to its financial
commitments.
Contractual
Obligations and Commercial Commitments
The following table presents a summary of the Companys
contractual obligations and payments due by period as of
December 31, 2007 ($ in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period
|
|
|
|
|
|
|
Less than
|
|
|
|
|
|
|
|
|
More than
|
|
|
|
Total
|
|
|
1 Year
|
|
|
2-3 Years
|
|
|
4-5 Years
|
|
|
5 Years
|
|
|
Short-term obligations
|
|
$
|
2.6
|
|
|
$
|
2.6
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Long-term debt
|
|
|
423.8
|
|
|
|
79.2
|
|
|
|
105.0
|
|
|
|
213.8
|
|
|
|
25.8
|
|
Operating lease obligations
|
|
|
42.9
|
|
|
|
10.4
|
|
|
|
14.7
|
|
|
|
9.5
|
|
|
|
8.3
|
|
Fair value of interest rate swaps
|
|
|
2.2
|
|
|
|
0.4
|
|
|
|
0.2
|
|
|
|
1.6
|
|
|
|
|
|
Interest payments on long term debt
|
|
|
38.0
|
|
|
|
11.9
|
|
|
|
16.7
|
|
|
|
9.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual obligations
|
|
$
|
509.5
|
|
|
$
|
104.5
|
|
|
$
|
136.6
|
|
|
$
|
234.3
|
|
|
$
|
34.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company is party to various interest rate swap agreements in
conjunction with the management of borrowing costs. As of
December 31, 2007, the fair value of the Companys net
position would result in cash payments of $2.2 million.
Future changes in the US interest rate environment would
correspondingly affect the fair value and ultimate settlement of
the contracts.
The Company also enters into foreign currency forward contracts
to protect against the variability in exchange rates on cash
flows of its foreign subsidiaries. As of December 31, 2007,
there is no unrealized gain or loss on the Companys
foreign exchange contracts. Volatility in the future exchange
rates between the US dollar and Euro and Canadian dollar will
impact the final settlement.
19
The following table presents a summary of the Companys
commercial commitments and the notional amount by expiration
period ($ in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notional Amount by Expiration Period
|
|
|
|
|
|
|
Less than
|
|
|
2-3
|
|
|
4-5
|
|
|
|
Total
|
|
|
1 Year
|
|
|
Years
|
|
|
Years
|
|
|
Financial standby letters of credit
|
|
$
|
33.9
|
|
|
$
|
33.6
|
|
|
$
|
|
|
|
$
|
0.3
|
|
Performance standby letters of credit
|
|
|
0.6
|
|
|
|
0.4
|
|
|
|
0.2
|
|
|
|
|
|
Purchase obligations
|
|
|
2.9
|
|
|
|
2.9
|
|
|
|
|
|
|
|
|
|
Guaranteed residual value obligations
|
|
|
2.4
|
|
|
|
2.3
|
|
|
|
0.1
|
|
|
|
|
|
Funding to support China Joint Venture
|
|
|
7.0
|
|
|
|
3.6
|
|
|
|
3.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commercial commitments
|
|
$
|
46.8
|
|
|
$
|
42.8
|
|
|
$
|
3.7
|
|
|
$
|
0.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial standby letters of credit largely relate to casualty
insurance policies for the Companys workers
compensation, automobile, general liability and product
liability policies. Performance standby letters of credit
represent guarantees of performance by foreign subsidiaries that
engage in cross-border transactions with foreign customers.
Purchase obligations relate to commercial chassis and aerial
turntables.
In limited circumstances, the Company guarantees the residual
value on vehicles in order to facilitate a sale. The Company
believes its risk of loss is low; no losses have been incurred
to date. The inability of the Company to enter into these types
of arrangements in the future due to unforeseen circumstances is
not expected to have a material impact on its financial
position, results of operations or cash flows.
As of December 31, 2007, the Companys expected
payment for significant contractual obligations includes
approximately $9.9 million of liability for unrecognized
tax benefits associated with the adoption of Financial
Accounting Standards Board Interpretation No. 48. The
Company cannot make a reasonably reliable estimate of the period
of cash settlement for this liability.
Critical
Accounting Policies and Estimates
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States
requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could
differ from those estimates. The Company considers the following
policies to be the most critical in understanding the judgments
that are involved in the preparation of the Companys
consolidated financial statements and the uncertainties that
could impact the Companys financial condition, results of
operations and cash flows.
Allowances
for Doubtful Accounts
The Company performs ongoing credit evaluations of its
customers. The Companys policy is to establish, on a
quarterly basis, allowances for doubtful accounts based on
factors such as historical loss trends, credit quality of the
present portfolio, collateral value and general economic
conditions. If the historical loss trend increased or decreased
10% in 2007, the Companys operating income would have
decreased or increased by $0.1 million, respectively.
Though management considers the valuation of the allowances
proper and adequate, changes in the economy
and/or
deterioration of the financial condition of the Companys
customers could affect the reserve balances required.
Inventory
Reserve
The Company performs ongoing evaluations to ensure that reserves
for excess and obsolete inventory are properly identified and
recorded. The reserve balance includes both specific and general
reserves. Specific reserves at 100% are established based on the
identification of separately identifiable obsolete products and
materials. General reserves for materials are established based
upon formulas which are established by reference to, among
20
other things, the level of current inventory relative to recent
usage, estimated scrap value and the level of estimated future
usage. Historically, this reserve policy has given a close
approximation of the Companys experience with excess and
obsolete inventory. The Company does not foresee a need to
revise its reserve policy in the future. However, from time to
time unusual buying patterns or shifts in demand may cause large
movements in the reserve balance.
Warranty
Reserve
The Companys 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
Companys marketplaces. Certain components necessary to
manufacture the Companys vehicles (including chassis,
engines and transmissions) are covered under an original
manufacturers warranty. Such manufacturers
warranties are extended directly to end customers.
The Company accrues its estimated exposure to warranty claims at
the time of sale based upon historical warranty claim costs as a
percentage of sales. Management reviews these estimates on a
quarterly basis and adjusts the warranty provisions as actual
experience differs from historical estimates. Infrequently, a
material warranty issue can arise which is outside the norm of
the Companys historical experience; costs related to such
issues, if any, are provided for when they become probable and
estimable.
The Companys warranty costs as a percentage of net sales
totaled 1.2% in 2007, 1.0% in 2006 and 1.1% in 2005. The
increase in the rate in 2007 is primarily due to increased costs
in the Fire Rescue business. Management believes the reserve
recorded at December 31, 2007 is appropriate. A 10%
increase or decrease in the estimated warranty costs in 2007
would have decreased or increased operating income by
$1.5 million, respectively.
Workers
Compensation and Product Liability Reserves
Due to the nature of the products manufactured, the Company is
subject to product liability claims in the ordinary course of
business. The Company is partially self-funded for workers
compensation and product liability claims with various retention
and excess coverage thresholds. After the claim is filed, an
initial liability is estimated, if any is expected, to resolve
the claim. This liability is periodically updated as more claim
facts become known. The establishment and update of liabilities
for unpaid claims, including claims incurred but not reported,
is based on the assessment by the Companys claim
administrator of each claim, an independent actuarial valuation
of the nature and severity of total claims and managements
estimate. The Company utilizes a third-party claims
administrator to pay claims, track and evaluate actual claims
experience and ensure consistency in the data used in the
actuarial valuation. Management believes that the reserve
established at December 31, 2007 appropriately reflects the
Companys risk exposure. The Company has not established a
reserve for potential losses resulting from hearing loss
litigation (see Note 15 contained in Item 8 of this
Form 10-K);
if the Company is not successful in its defense after exhausting
all appellate options, it will record a charge for such claims,
to the extent they exceed insurance recoveries, at the
appropriate time.
Goodwill
Impairment
In accordance with SFAS No. 142, Goodwill and
Other Intangible Assets, the Company ceased amortization
of goodwill and indefinite-lived intangible assets effective
January 1, 2002. SFAS No. 142 also requires the
Company to test these assets annually for impairment; the
Company performs this test in the fourth quarter unless
impairment indicators arise earlier. The Company continues to
amortize definite-lived intangible assets over their useful life.
A review for impairment requires judgment in estimated cash
flows based upon estimates of future sales, operating income,
working capital improvements and capital expenditures.
Management utilizes a discounted cash flow approach to determine
the fair value of the Companys 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 units goodwill.
21
The annual testing conducted in 2007, 2006 and 2005 did not
result in any impairment.
Although management believes that the assumptions and estimates
used were reasonable, a sensitivity analysis for each reporting
unit is performed along with the impairment test. The analysis
indicated that a 5% change in the operating margin assumption
would not have resulted in a goodwill impairment in any group.
Postretirement
Benefits
The Company sponsors domestic and foreign defined benefit
pension and other postretirement plans. Major assumptions used
in the accounting for these employee benefit plans include the
discount rate, expected return on plan assets and rate of
increase in employee compensation levels. A change in any of
these assumptions would have an effect on net periodic pension
and postretirement benefit costs.
The following table summarizes the impact that a change in these
assumptions would have on the Companys operating income.
($ in millions):
|
|
|
|
|
|
|
|
|
|
|
Assumption Change:
|
|
|
|
25 Basis
|
|
|
25 Basis
|
|
|
|
Point Increase
|
|
|
Point Decrease
|
|
|
Discount rate
|
|
|
0.5
|
|
|
|
(0.5
|
)
|
Return on assets
|
|
|
0.2
|
|
|
|
(0.2
|
)
|
Increase in employee compensation levels
|
|
|
(0.3
|
)
|
|
|
0.3
|
|
The weighted-average discount rate used to measure pension
liabilities and costs is set by reference to published
high-quality bond indices. However, these indices give only an
indication of the appropriate discount rate because the cash
flows of the bonds comprising the indices do not match the
projected benefit payment stream of the plan precisely. For this
reason, we also consider the individual characteristics of the
plan, such as projected cash flow patterns and payment
durations, when setting the discount rate. The weighted-average
discount rate used to measure US pension liabilities decreased
from 6.13% in 2006 to 6.0% in 2007. See Note 7 to the
Consolidated Financial Statements for further discussion.
Stock-Based
Compensation Expense
Effective January 1, 2006, the Company adopted the
provisions of SFAS No. 123(R).
SFAS No. 123(R) requires all share-based payments to
employees, including grants of employee stock options and
restricted stock, to be recognized in the financial statements
based on their respective grant date fair values. We use the
Black-Scholes option pricing model to estimate the fair value of
the stock option awards. The Black-Scholes model requires the
use of highly subjective and complex assumptions, including the
Companys stock price, expected volatility, expected term,
risk-free interest rate and expected dividend yield. For
expected volatility, we base the assumption on the historical
volatility of the Companys common stock. The expected term
of the awards is based on historical data regarding
employees option exercise behaviors. The risk-free
interest rate assumption is based on observed interest rates
appropriate for the terms of the awards. The dividend yield
assumption is based on the Companys history and
expectation of dividend payouts. In addition to the requirement
for fair value estimates, SFAS No. 123(R) also
requires the recording of expense that is net of an anticipated
forfeiture rate. Therefore, only expenses associated with awards
that are ultimately expected to vest are included in our
financial statements. Our forfeiture rate is determined based on
our historical option cancellation experience.
We evaluate the Black-Scholes assumptions that we use to value
our awards on a quarterly basis. With respect to the forfeiture
rate, we revise the rate if actual forfeitures differ from our
estimates. If factors change and we employ different
assumptions, stock-based compensation expense related to future
stock-based payments may differ significantly from estimates
recorded in prior periods.
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
22
Company does not hold or issue derivative financial instruments
for trading or speculative purposes and is not party to
leveraged derivatives contracts.
Interest
Rate Risk
The Company manages its exposure to interest rate movements by
targeting a proportionate relationship between fixed-rate debt
to total debt generally within established percentages of
between 40% and 60%. The Company uses funded fixed-rate
borrowings as well as interest rate swap agreements to balance
its overall fixed/floating interest rate mix.
Of the Companys debt at December 31, 2007, 32% was
used to support financial services assets; the weighted average
remaining life of those assets is typically under three years
and the debt is substantially match-funded to the financing
assets.
The following table presents the principal cash flows and
weighted average interest rates by year of maturity for the
Companys total debt obligations held at December 31,
2007 ($ in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected Maturity Date
|
|
|
Fair
|
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
2012
|
|
|
Thereafter
|
|
|
Total
|
|
|
Value
|
|
|
Fixed rate
|
|
$
|
59.3
|
|
|
$
|
44.3
|
|
|
$
|
40.7
|
|
|
$
|
37.3
|
|
|
$
|
77.9
|
|
|
$
|
15.6
|
|
|
$
|
275.1
|
|
|
$
|
278.9
|
|
Average interest rate
|
|
|
5.9
|
%
|
|
|
5.8
|
%
|
|
|
5.7
|
%
|
|
|
5.6
|
%
|
|
|
5.4
|
%
|
|
|
6.0
|
%
|
|
|
5.7
|
%
|
|
|
|
|
Variable rate
|
|
$
|
22.6
|
|
|
$
|
0.0
|
|
|
$
|
20.0
|
|
|
$
|
0.0
|
|
|
$
|
98.6
|
|
|
$
|
10.0
|
|
|
$
|
151.2
|
|
|
$
|
151.1
|
|
Average interest rate
|
|
|
6.6
|
%
|
|
|
|
|
|
|
6.7
|
%
|
|
|
|
|
|
|
6.9
|
%
|
|
|
6.1
|
%
|
|
|
6.7
|
%
|
|
|
|
|
The following table presents notional amounts and weighted
average interest rates by expected (contractual) maturity date
for the Companys interest rate swap contracts held at
December 31, 2007 ($ in millions). Notional amounts are
used to calculate the contractual payments to be exchanged under
the contract. Weighted average variable rates are based on
implied forward rates in the yield curve at the reporting date.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected Maturity Date
|
|
|
Fair
|
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
2012
|
|
|
Thereafter
|
|
|
Total
|
|
|
Value
|
|
|
Pay fixed, receive variable
|
|
$
|
65.0
|
|
|
$
|
5.0
|
|
|
$
|
25.0
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
95.0
|
|
|
$
|
(0.5
|
)
|
Average pay rate
|
|
|
5.1
|
%
|
|
|
3.8
|
%
|
|
|
4.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average receive rate
|
|
|
4.7
|
%
|
|
|
4.8
|
%
|
|
|
4.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Receive fixed, pay variable
|
|
$
|
13.6
|
|
|
$
|
3.6
|
|
|
$
|
3.6
|
|
|
$
|
3.6
|
|
|
$
|
34.3
|
|
|
$
|
40.0
|
|
|
$
|
98.7
|
|
|
$
|
(0.4
|
)
|
Average pay rate
|
|
|
7.7
|
%
|
|
|
7.4
|
%
|
|
|
7.4
|
%
|
|
|
7.5
|
%
|
|
|
7.4
|
%
|
|
|
6.5
|
%
|
|
|
|
|
|
|
|
|
Average receive rate
|
|
|
6.4
|
%
|
|
|
6.6
|
%
|
|
|
6.6
|
%
|
|
|
6.6
|
%
|
|
|
7.6
|
%
|
|
|
5.2
|
%
|
|
|
|
|
|
|
|
|
See Note 8 to the consolidated financial statements in this
Form 10-K
for a description of these agreements. A 100 basis point
increase or decrease in variable interest rates in 2007 would
have increased or decreased interest expense by
$1.5 million, respectively.
Foreign
Exchange Rate Risk
The Company has foreign currency exposures related to buying and
selling in currencies other than the local currency in which it
operates. The Company utilizes foreign currency options and
forward contracts to manage these risks.
23
The following table summarizes the Companys foreign
currency derivative instruments as of December 31, 2007.
All are expected to settle in 2008 ($ in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected
|
|
|
|
|
|
|
Settlement Date
|
|
|
|
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Notional
|
|
|
Contract
|
|
|
Fair
|
|
|
|
Amount
|
|
|
Rate
|
|
|
Value
|
|
|
Forward contracts:
|
|
|
|
|
|
|
|
|
|
|
|
|
Buy Euros, sell US dollars
|
|
$
|
15.1
|
|
|
|
1.5
|
|
|
$
|
(0.1
|
)
|
Buy US dollars, sell Euros
|
|
|
20.0
|
|
|
|
|
|
|
|
(1.0
|
)
|
Buy US dollars, sell CAD
|
|
|
13.9
|
|
|
|
|
|
|
|
(1.8
|
)
|
Other currencies
|
|
|
6.9
|
|
|
|
|
|
|
|
(0.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total forward contracts
|
|
|
55.9
|
|
|
|
|
|
|
|
(3.2
|
)
|
Options:
|
|
|
|
|
|
|
|
|
|
|
|
|
Buy US dollars, sell Euros
|
|
|
10.3
|
|
|
|
1.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total foreign currency derivatives
|
|
$
|
66.2
|
|
|
|
|
|
|
$
|
(3.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Note 8 to the consolidated financial statements in this
Form 10-K
for a description of these agreements.
Forward exchange contracts are recorded as a natural hedge when
the hedged item is a recorded asset or liability that is
revalued each accounting period, in accordance with
SFAS No. 52, Foreign Currency Translation.
For derivatives designated as natural hedges, changes in fair
values are reported in the Other income (expense)
line of the Consolidated Statements of Operations.
Other
Matters
The Company has a business conduct policy applicable to all
employees and regularly monitors compliance with that policy.
The Company has determined that it had no significant related
party transactions in each of the three years in the period
ended December 31, 2007.
|
|
Item 7A.
|
Quantitative
and Qualitative Disclosures About Market Risk.
|
The information contained under the caption Financial Market
Risk Management included in Item 7 of this
Form 10-K
is incorporated herein by reference.
|
|
Item 8.
|
Financial
Statements and Supplementary Data.
|
24
FEDERAL
SIGNAL CORPORATION
INDEX TO
CONSOLIDATED FINANCIAL STATEMENTS
25
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Shareholders
of Federal Signal Corporation
We have audited the accompanying consolidated balance sheets of
Federal Signal Corporation as of December 31, 2007 and
2006, and the related consolidated statements of operations,
shareholders equity, and cash flows for each of the three
years in the period ended December 31, 2007. Our audits
also included the financial statement schedule listed in the
Index at Item 15(a). These financial statements and
schedule are the responsibility of the Companys
management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable
basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the consolidated
financial position of Federal Signal Corporation at
December 31, 2007 and 2006, and the consolidated results of
its operations and its cash flows for each of the three years in
the period ended December 31, 2007, in accordance with
U.S. generally accepted accounting principles. Also, in our
opinion, the related financial statement schedule, when
considered in relation to the basic financial statements taken
as a whole, presents fairly in all material respects the
information set forth therein.
As discussed in Notes 1 and 6 to the consolidated financial
statements, on January 1, 2007, Federal Signal Corporation
changed its method of accounting for uncertain tax positions to
conform with Financial Accounting Standards Board Interpretation
No. 48, Accounting for Uncertainty in Income
Taxes. On January 1, 2006, Federal Signal Corporation
changed its method of accounting for share-based awards to
conform with Statement of Financial Accounting Standards (SFAS)
No. 123(R), Share-Based Payment. Additionally,
on December 31, 2006, Federal Signal Corporation changed
its method of accounting for defined benefit pension and other
postretirement benefit plans to conform with
SFAS No. 158, Employers Accounting for
Defined Benefit Pension and Other Postretirement
Plans an amendment of FASB Statements No. 87,
88, 106 and 132(R).
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States),
Federal Signal Corporations internal control over
financial reporting as of December 31, 2007, based on
criteria established in Internal Control Integrated
Framework issued by the Committee of Sponsoring Organizations of
the Treadway Commission and our report dated February 26,
2008, expressed an unqualified opinion thereon.
Ernst & Young LLP
Chicago, IL
February 26, 2008
26
Report of
Independent Registered Public Accounting Firm
The Board of Directors and Shareholders
of Federal Signal Corporation
We have audited Federal Signal Corporations internal
control over financial reporting as of December 31, 2007,
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 Corporations management is responsible for
maintaining effective internal control over financial reporting,
and for its assessment of the effectiveness of internal control
over financial reporting included in Managements Annual
Report on Internal Control over Financial Reporting and
Attestation Report of the Registered Public Accounting Firm. Our
responsibility is to express an opinion on the companys
internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control
over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of
internal control over financial reporting, assessing the risk
that a material weakness exists, testing and evaluating the
design and operating effectiveness of internal control based on
the assessed risk, and performing such other procedures as we
considered necessary in the circumstances. We believe that our
audit provides a reasonable basis for our opinion.
A companys internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A companys
internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of
management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
In our opinion, Federal Signal Corporation maintained, in all
material respects, effective internal control over financial
reporting as of December 31, 2007, 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, 2007 and
2006, and the related consolidated statements of operations,
shareholders equity, and cash flows for each of the three
years in the period ended December 31, 2007 of Federal
Signal Corporation and our report dated February 26, 2008
expressed an unqualified opinion thereon.
Ernst & Young LLP
Chicago, IL
February 26, 2008
27
FEDERAL
SIGNAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
($ in millions)
|
|
|
ASSETS
|
Manufacturing activities:
|
|
|
|
|
|
|
|
|
Current assets
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
16.0
|
|
|
$
|
19.3
|
|
Accounts receivable, net of allowances for doubtful accounts of
$5.0 million and $3.0 million, respectively
|
|
|
176.1
|
|
|
|
192.1
|
|
Inventories Note 2
|
|
|
205.5
|
|
|
|
174.2
|
|
Other current assets
|
|
|
49.1
|
|
|
|
33.2
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
446.7
|
|
|
|
418.8
|
|
Properties and equipment Note 3
|
|
|
97.6
|
|
|
|
85.7
|
|
Other assets
|
|
|
|
|
|
|
|
|
Goodwill Note 12
|
|
|
406.7
|
|
|
|
310.6
|
|
Intangible assets, net Note 12
|
|
|
66.0
|
|
|
|
8.2
|
|
Deferred charges and other assets
|
|
|
8.8
|
|
|
|
9.4
|
|
|
|
|
|
|
|
|
|
|
Total manufacturing assets
|
|
|
1,025.8
|
|
|
|
832.7
|
|
Assets of discontinued operations Note 13
|
|
|
4.5
|
|
|
|
57.8
|
|
Financial services activities Lease financing and
other receivables, net of allowances for doubtful accounts of
$3.6 million and $4.0 million, respectively, and net
of unearned finance revenue Note 4
|
|
|
146.8
|
|
|
|
158.9
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
1,177.1
|
|
|
$
|
1,049.4
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY
|
Manufacturing activities:
|
|
|
|
|
|
|
|
|
Current liabilities Short-term borrowings Note 5
|
|
$
|
2.6
|
|
|
$
|
30.3
|
|
Current portion of long-term borrowings Note 5
|
|
|
45.4
|
|
|
|
34.4
|
|
Accounts payable
|
|
|
82.7
|
|
|
|
90.0
|
|
Accrued liabilities
|
|
|
|
|
|
|
|
|
Compensation and withholding taxes
|
|
|
33.7
|
|
|
|
35.9
|
|
Customer deposits
|
|
|
34.8
|
|
|
|
23.0
|
|
Other
|
|
|
59.8
|
|
|
|
48.9
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
259.0
|
|
|
|
262.5
|
|
Long-term borrowings Note 5
|
|
|
240.7
|
|
|
|
160.3
|
|
Long-term pension and other liabilities
|
|
|
32.3
|
|
|
|
39.3
|
|
Deferred income taxes Note 6
|
|
|
45.5
|
|
|
|
20.7
|
|
|
|
|
|
|
|
|
|
|
Total manufacturing liabilities
|
|
|
577.5
|
|
|
|
482.8
|
|
Liabilities of discontinued operations Note 13
|
|
|
16.9
|
|
|
|
31.2
|
|
Financial services activities Borrowings
Note 5
|
|
|
137.4
|
|
|
|
149.0
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
731.8
|
|
|
|
663.0
|
|
Shareholders equity Notes 9 and 10
|
|
|
|
|
|
|
|
|
Common stock, $1 par value per share, 90.0 million
shares authorized, 49.4 million and 49.1 million
shares issued, respectively
|
|
|
49.4
|
|
|
|
49.1
|
|
Capital in excess of par value
|
|
|
103.2
|
|
|
|
99.8
|
|
Retained earnings
|
|
|
333.8
|
|
|
|
290.7
|
|
Treasury stock, 1.5 million and 1.5 million shares,
respectively, at cost
|
|
|
(30.1
|
)
|
|
|
(30.1
|
)
|
Accumulated other comprehensive (loss) income
|
|
|
|
|
|
|
|
|
Foreign currency translation, net
|
|
|
15.9
|
|
|
|
4.2
|
|
Net derivative loss, cash flow hedges, net
|
|
|
(2.0
|
)
|
|
|
|
|
Unrecognized pension and postretirement losses, net
|
|
|
(24.9
|
)
|
|
|
(27.3
|
)
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
(11.0
|
)
|
|
|
(23.1
|
)
|
|
|
|
|
|
|
|
|
|
Total shareholders equity
|
|
|
445.3
|
|
|
|
386.4
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity
|
|
$
|
1,177.1
|
|
|
$
|
1,049.4
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
28
FEDERAL
SIGNAL CORPORATION AND SUBSIDIARIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
($ in millions, except per share data)
|
|
|
Net sales
|
|
$
|
1,268.1
|
|
|
$
|
1,211.6
|
|
|
$
|
1,119.0
|
|
Costs and expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales
|
|
|
971.2
|
|
|
|
927.2
|
|
|
|
867.5
|
|
Selling, engineering, general and administrative
|
|
|
232.8
|
|
|
|
214.5
|
|
|
|
193.8
|
|
Gain on sale of product line
|
|
|
|
|
|
|
|
|
|
|
(6.7
|
)
|
Restructuring charges
|
|
|
|
|
|
|
|
|
|
|
0.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
64.1
|
|
|
|
69.9
|
|
|
|
63.7
|
|
Interest expense
|
|
|
25.9
|
|
|
|
25.0
|
|
|
|
23.1
|
|
Other income (expense)
|
|
|
(4.2
|
)
|
|
|
(2.2
|
)
|
|
|
0.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
34.0
|
|
|
|
42.7
|
|
|
|
40.8
|
|
Income tax benefit (charge) Note 6
|
|
|
(4.2
|
)
|
|
|
(8.3
|
)
|
|
|
3.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
|
29.8
|
|
|
|
34.4
|
|
|
|
43.9
|
|
Discontinued operations Note 13:
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (loss) from discontinued operations and disposal, net of
tax (benefit) charge of $5.6 million, $(2.0) million
and $(11.5) million, respectively
|
|
|
25.1
|
|
|
|
(11.7
|
)
|
|
|
(48.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
54.9
|
|
|
$
|
22.7
|
|
|
$
|
(4.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted earnings (loss) per share Earnings from
continuing operations
|
|
$
|
0.62
|
|
|
$
|
0.72
|
|
|
$
|
0.91
|
|
Gain (loss) from discontinued operations and disposal, net of
taxes
|
|
|
0.53
|
|
|
|
(0.25
|
)
|
|
|
(1.01
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings (loss) per share
|
|
$
|
1.15
|
|
|
$
|
0.47
|
|
|
$
|
(0.10
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
29
FEDERAL
SIGNAL CORPORATION AND SUBSIDIARIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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, 2004
|
|
|
48.6
|
|
|
|
94.4
|
|
|
|
295.8
|
|
|
|
(13.6
|
)
|
|
|
(3.1
|
)
|
|
|
(9.4
|
)
|
|
|
412.7
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
(4.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4.6
|
)
|
Foreign currency translation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8.9
|
)
|
|
|
(8.9
|
)
|
Unrealized gains on derivatives, net of $0.3 million tax
expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.5
|
|
|
|
0.5
|
|
Minimum pension liability, net of $5.3 million tax benefit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8.9
|
)
|
|
|
(8.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(21.9
|
)
|
Cash dividends declared
|
|
|
|
|
|
|
|
|
|
|
(11.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(11.6
|
)
|
Share based payments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of stock options
|
|
|
|
|
|
|
0.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.3
|
|
Stock awards granted
|
|
|
0.2
|
|
|
|
4.7
|
|
|
|
|
|
|
|
(0.1
|
)
|
|
|
(4.8
|
)
|
|
|
|
|
|
|
|
|
Amortization of deferred stock awards
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2.1
|
|
|
|
|
|
|
|
2.1
|
|
Treasury stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5.0
|
)
|
|
|
|
|
|
|
|
|
|
|
(5.0
|
)
|
Other
|
|
|
|
|
|
|
(1.2
|
)
|
|
|
(0.7
|
)
|
|
|
0.6
|
|
|
|
1.0
|
|
|
|
|
|
|
|
(0.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2005
|
|
|
48.8
|
|
|
|
98.2
|
|
|
|
278.9
|
|
|
|
(18.1
|
)
|
|
|
(4.8
|
)
|
|
|
(26.7
|
)
|
|
|
376.3
|
|
Comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
22.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22.7
|
|
Foreign currency translation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.0
|
|
|
|
10.0
|
|
Unrealized losses on derivatives, net of $1.3 million tax
benefit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2.2
|
)
|
|
|
(2.2
|
)
|
Minimum pension liability, net of $2.3 million tax expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4.0
|
|
|
|
4.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
34.5
|
|
Adjustments to adopt SFAS 158, net of $4.8 million tax
benefit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8.2
|
)
|
|
|
(8.2
|
)
|
Cash dividends declared
|
|
|
|
|
|
|
|
|
|
|
(11.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(11.5
|
)
|
Reclassification of deferred stock awards
|
|
|
|
|
|
|
(4.8
|
)
|
|
|
|
|
|
|
|
|
|
|
4.8
|
|
|
|
|
|
|
|
|
|
Share based payments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of stock options
|
|
|
|
|
|
|
0.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.5
|
|
Excess tax benefits on share based payments
|
|
|
|
|
|
|
0.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.3
|
|
Awards and options
|
|
|
0.3
|
|
|
|
5.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5.8
|
|
Treasury stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(12.1
|
)
|
|
|
|
|
|
|
|
|
|
|
(12.1
|
)
|
Other
|
|
|
|
|
|
|
0.1
|
|
|
|
0.6
|
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
|
|
0.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2006
|
|
$
|
49.1
|
|
|
$
|
99.8
|
|
|
$
|
290.7
|
|
|
$
|
(30.1
|
)
|
|
$
|
|
|
|
$
|
(23.1
|
)
|
|
$
|
386.4
|
|
Comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
54.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
54.9
|
|
Foreign currency translation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11.7
|
|
|
|
11.7
|
|
Unrealized losses on derivatives, net of $1.2 million tax
benefit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2.0
|
)
|
|
|
(2.0
|
)
|
Amortization of pension and postretirement losses, net of
$1.8 million tax expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.9
|
|
|
|
1.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
66.5
|
|
Adjustments to adopt FIN 48
|
|
|
|
|
|
|
|
|
|
|
(0.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(0.7
|
)
|
Adjustments to adopt SFAS 158, net of $0.0 million tax
expense
|
|
|
|
|
|
|
|
|
|
|
0.4
|
|
|
|
|
|
|
|
|
|
|
|
0.5
|
|
|
|
0.9
|
|
Cash dividends declared
|
|
|
|
|
|
|
|
|
|
|
(11.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(11.5
|
)
|
Share based payments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock awards and options
|
|
|
0.3
|
|
|
|
3.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3.5
|
|
Excess tax benefits on share based payments
|
|
|
|
|
|
|
0.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2007
|
|
$
|
49.4
|
|
|
$
|
103.2
|
|
|
$
|
333.8
|
|
|
$
|
(30.1
|
)
|
|
$
|
|
|
|
$
|
(11.0
|
)
|
|
$
|
445.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
30
FEDERAL
SIGNAL CORPORATION AND SUBSIDIARIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
($ in millions)
|
|
|
Operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
54.9
|
|
|
$
|
22.7
|
|
|
$
|
(4.6
|
)
|
Adjustments to reconcile net income (loss) to net cash provided
by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
(Gain) loss on discontinued operations and disposal
|
|
|
(25.1
|
)
|
|
|
11.7
|
|
|
|
48.5
|
|
Non-cash restructuring charges
|
|
|
|
|
|
|
|
|
|
|
0.3
|
|
Gain on sale of product line
|
|
|
|
|
|
|
|
|
|
|
(6.7
|
)
|
Loss on joint venture
|
|
|
0.8
|
|
|
|
1.9
|
|
|
|
|
|
Gain on sale of properties and equipment
|
|
|
|
|
|
|
(1.4
|
)
|
|
|
(2.3
|
)
|
Depreciation and amortization
|
|
|
21.2
|
|
|
|
17.9
|
|
|
|
18.2
|
|
Stock option and award compensation expense
|
|
|
3.5
|
|
|
|
5.8
|
|
|
|
2.1
|
|
Provision for doubtful accounts
|
|
|
1.4
|
|
|
|
(1.4
|
)
|
|
|
(2.3
|
)
|
Deferred income taxes
|
|
|
18.3
|
|
|
|
(2.7
|
)
|
|
|
(39.7
|
)
|
Changes in operating assets and liabilities, net of effects from
acquisitions and dispositions of companies
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
27.9
|
|
|
|
(21.2
|
)
|
|
|
15.1
|
|
Inventories
|
|
|
(25.3
|
)
|
|
|
(15.8
|
)
|
|
|
4.3
|
|
Other current assets
|
|
|
0.5
|
|
|
|
(1.3
|
)
|
|
|
(3.4
|
)
|
Lease financing and other receivables
|
|
|
12.1
|
|
|
|
10.4
|
|
|
|
27.2
|
|
Accounts payable
|
|
|
(10.7
|
)
|
|
|
14.3
|
|
|
|
4.6
|
|
Customer deposits
|
|
|
10.6
|
|
|
|
(10.8
|
)
|
|
|
9.2
|
|
Accrued liabilities
|
|
|
(1.0
|
)
|
|
|
(2.1
|
)
|
|
|
(0.1
|
)
|
Income taxes
|
|
|
(15.1
|
)
|
|
|
2.3
|
|
|
|
0.5
|
|
Pension contributions
|
|
|
(6.7
|
)
|
|
|
(11.3
|
)
|
|
|
(7.7
|
)
|
Other
|
|
|
(1.8
|
)
|
|
|
6.0
|
|
|
|
6.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by continuing operating activities
|
|
|
65.5
|
|
|
|
25.0
|
|
|
|
69.9
|
|
Net cash (used for) provided by discontinued operating activities
|
|
|
(0.1
|
)
|
|
|
4.7
|
|
|
|
0.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
65.4
|
|
|
|
29.7
|
|
|
|
70.6
|
|
Investing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of properties and equipment
|
|
|
(23.5
|
)
|
|
|
(18.2
|
)
|
|
|
(16.6
|
)
|
Proceeds from sales of properties and equipment
|
|
|
0.7
|
|
|
|
2.5
|
|
|
|
10.1
|
|
Proceeds from sale of product line
|
|
|
|
|
|
|
|
|
|
|
11.9
|
|
Investment in joint venture
|
|
|
|
|
|
|
(2.0
|
)
|
|
|
(0.7
|
)
|
Payments for acquisitions, net of cash acquired
|
|
|
(147.5
|
)
|
|
|
|
|
|
|
|
|
Other, net
|
|
|
(1.7
|
)
|
|
|
(0.9
|
)
|
|
|
(1.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used for) provided by continuing investing activities
|
|
|
(172.0
|
)
|
|
|
(18.6
|
)
|
|
|
3.5
|
|
Net cash provided by (used for) discontinued investing activities
|
|
|
65.4
|
|
|
|
(0.7
|
)
|
|
|
(4.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used for investing activities
|
|
|
(106.6
|
)
|
|
|
(19.3
|
)
|
|
|
(0.7
|
)
|
Financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
(Reduction) increase in short-term borrowings, net
|
|
|
(28.3
|
)
|
|
|
23.7
|
|
|
|
53.8
|
|
Proceeds from issuance of long-term borrowings
|
|
|
230.1
|
|
|
|
23.6
|
|
|
|
104.2
|
|
Repayment of long-term borrowings
|
|
|
(153.9
|
)
|
|
|
(107.8
|
)
|
|
|
(133.1
|
)
|
Purchases of treasury stock
|
|
|
|
|
|
|
(12.1
|
)
|
|
|
(5.0
|
)
|
Cash dividends paid to shareholders
|
|
|
(11.5
|
)
|
|
|
(11.5
|
)
|
|
|
(13.5
|
)
|
Other, net
|
|
|
0.4
|
|
|
|
1.1
|
|
|
|
0.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used for) continuing financing activities
|
|
|
36.8
|
|
|
|
(83.0
|
)
|
|
|
7.1
|
|
Net cash used for discontinued financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used for) financing activities
|
|
|
36.8
|
|
|
|
(83.0
|
)
|
|
|
7.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effects of foreign exchange rate changes on cash
|
|
|
1.1
|
|
|
|
|
|
|
|
|
|
(Decrease) increase in cash and cash equivalents
|
|
|
(3.3
|
)
|
|
|
(72.6
|
)
|
|
|
77.0
|
|
Cash and cash equivalents at beginning of year
|
|
|
19.3
|
|
|
|
91.9
|
|
|
|
14.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of year
|
|
$
|
16.0
|
|
|
$
|
19.3
|
|
|
$
|
91.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
31
FEDERAL
SIGNAL CORPORATION AND SUBSIDIARIES
($ in millions, except per share data)
|
|
NOTE 1
|
SIGNIFICANT
ACCOUNTING POLICIES
|
Basis of presentation: The consolidated
financial statements include the accounts of Federal Signal
Corporation and all of its significant subsidiaries. All
significant intercompany balances and transactions have been
eliminated in consolidation.
Assets and liabilities of foreign subsidiaries, other than those
whose functional currency is the US dollar, are translated at
current exchange rates with the related translation adjustments
reported in stockholders equity as a component of
accumulated other comprehensive income (loss). Income statement
accounts are translated at the average exchange rate during the
period. Where the US dollar is considered the functional
currency, monetary assets and liabilities are translated at
current exchange rates with the related adjustment included in
net income. Non-monetary assets and liabilities are translated
at historical exchange rates. The Company incurs foreign
currency transaction gains/losses relating to assets and
liabilities that are denominated in a currency other than the
functional currency. For 2007, 2006 and 2005, the Company
incurred foreign currency transaction losses, included in other
expenses in the Statement of Operations, of $1.2 million,
$0.7 million and $0.6 million, respectively.
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.
Changes in presentation: Certain balances in
2006 have been reclassified to conform to the 2007 presentation.
The effect of this has been to reclassify $11.4 million
from current liabilities to long-term pension and other
liabilities in 2006.
Cash equivalents: The Company considers all
highly liquid investments with a maturity of three-months or
less, when purchased, to be cash equivalents.
Accounts receivable, lease financing and other receivables
and allowances for doubtful accounts: A receivable is
considered past due if payments have not been received within
agreed upon invoice terms. The Companys policy is
generally to not charge interest on trade receivables after the
invoice becomes past due, but to charge interest on lease
receivables. The Company maintains allowances for doubtful
accounts for estimated losses resulting from the inability of
its customers to make required payments on the outstanding
accounts receivable and outstanding lease financing and other
receivables. The allowances are each maintained at a level
considered appropriate based on historical and other factors
that affect collectibility. These factors include historical
trends of write-offs, recoveries and credit losses; portfolio
credit quality; and current and projected economic and market
conditions. If the financial condition of the Companys
customers were to deteriorate, resulting in a reduced ability to
make payments, additional allowances may be required.
Inventories: The Companys inventories
are stated at the lower of cost or market. At December 31,
2007 and 2006, approximately 58% and 43% of the Companys
inventories were costed using the FIFO method, respectively. The
remaining portion of the Companys inventories is costed
using the LIFO
(last-in,
first-out) method. Included in the cost of inventories are raw
materials, direct wages and associated production costs.
Properties and depreciation: Properties and
equipment are stated at cost. Depreciation, for financial
reporting purposes, is computed principally on the straight-line
method over the estimated useful lives of the assets.
Depreciation ranges from 8 to 40 years for buildings and 3
to 15 years for machinery and equipment. Leasehold
improvements are depreciated over the shorter of the remaining
life of the lease or the useful life of the improvement.
Property, plant and equipment and other long-term assets are
reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount may not be
recoverable. If the sum of the expected undiscounted cash flows
is less than the carrying value of the related asset or group of
assets, a loss is recognized for the difference between the fair
value and carrying value of the asset or group of assets. Such
analyses necessarily involve significant judgment.
32
FEDERAL
SIGNAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ in millions, except per share
data) (Continued)
Intangible assets: Intangible assets principally consist
of costs in excess of fair values of net assets acquired in
purchase transactions. These assets are assessed yearly for
impairment in the fourth quarter and also between annual tests
if an event occurs or circumstances change that would more
likely than not reduce the fair value of a reporting unit below
its carrying amount. Definite lived intangible assets are
amortized using the straight-line method.
Stock-based compensation plans: The Company
has various stock-based compensation plans, described more fully
in Note 9. Prior to January 1, 2006, as permitted by
Statement 123, the Company accounted for these plans using the
intrinsic value method of APB Opinion No. 25. Stock
compensation expense reflected in net income prior to
January 1, 2006 related to restricted stock awards which
vested over four years through 2004 and three years beginning in
2005. With regard to stock options granted, no stock-based
employee compensation expense was reflected in net income (loss)
prior to January 1, 2006, 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 which was the
measurement date.
The Company adopted Statement 123(R) on January 1, 2006
using the modified prospective method in which compensation cost
is recognized (a) based on the requirements of Statement
123(R) for all share-based payments granted after
January 1, 2006 and (b) based on the requirements of
Statement 123(R) for all awards granted to employees prior to
January 1, 2006 that remained unvested on January 1,
2006. The fair value of options is estimated using a
Black-Scholes option pricing model. Results for prior periods
have not been restated.
Accordingly, the adoption of Statement 123(R)s fair value
method reduced the Companys income before taxes by
$2.3 million in the year ended December 31, 2006. Had
we adopted Statement 123(R) in prior periods, the impact of that
standard would have approximated the impact of Statement 123 as
described in the disclosure of pro forma net income and earnings
per share in Note 9.
Statement 123(R) also requires the benefits of tax deductions in
excess of recognized compensation cost to be reported as a
financing cash flow, rather than as an operating cash flow. This
requirement decreased net operating cash flows and increased net
financing cash flows by $0.2 million and $0.3 million
in the years ended December 31, 2007 and 2006,
respectively. The amount included in operating cash flows
recognized for such excess tax deductions was $0.3 million
in the year ended December 31, 2005.
Use of estimates: The preparation of financial
statements in conformity with accounting principles generally
accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of
assets and liabilities, disclosure of contingent assets and
liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Warranty: Sales of many of the Companys
products carry express warranties based on the terms that are
generally accepted in the Companys 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 Companys historical experience. The Company provides
for these issues as they become probable and estimable.
Product liability and workers compensation liability:
Due to the nature of the Companys products, the
Company is subject to claims for product liability and
workers compensation in the normal course of business. The
Company is self-funded for a portion of these claims. The
Company establishes a reserve using a third-party actuary for
any known outstanding matters, including a reserve for claims
incurred but not yet reported.
Financial instruments: The Company enters into
agreements (derivative financial instruments) to manage the
risks associated with interest rates and foreign exchange rates.
The Company does not actively trade such instruments nor enter
into such agreements for speculative purposes. The Company
principally utilizes two types of derivative financial
instruments: 1) interest rate swaps to manage its interest
rate risk, and 2) foreign currency
33
FEDERAL
SIGNAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ in millions, except per share
data) (Continued)
forward exchange and option contracts to manage risks associated
with sales and expenses (forecast or committed) denominated in
foreign currencies.
On the date a derivative contract is entered into, the Company
designates the derivative as one of the following types of
hedging instruments and accounts for the derivative as follows:
Fair value hedge: A hedge of a recognized
asset or liability or an unrecognized firm commitment is
declared as a fair value hedge. For fair value hedges, both the
effective and ineffective portions of the changes in the fair
value of the derivative, along with the gain or loss on the
hedged item that is attributable to the hedged risk, are
recorded in earnings and reported in the consolidated statements
of operations on the same line as the hedged item.
Cash flow hedge: A hedge of a forecast
transaction or of the variability of cash flows to be received
or paid related to a recognized asset or liability is declared
as a cash flow hedge. The effective portion of the change in the
fair value of a derivative that is declared as a cash flow hedge
is recorded in accumulated other comprehensive income. When the
hedged item impacts the statement of operations, the gain or
loss previously included in accumulated other comprehensive
income is reported on the same line in the consolidated
statements of operations as the hedged item. In addition, both
the fair value of changes excluded from the Companys
effectiveness assessments and the ineffective portion of the
changes in the fair value of derivatives used as cash flow
hedges are reported in selling, general and administrative
expenses in the consolidated statements of operations.
The Company formally documents its hedge relationships,
including identification of the hedging instruments and the
hedged items, as well as its risk management objectives and
strategies for undertaking the hedge transaction. Derivatives
are recorded in the consolidated balance sheets at fair value in
other deferred charges and assets and other accrued liabilities.
This process includes linking derivatives that are designated as
hedges of specific forecast transactions. The Company also
formally assesses, both at inception and at least quarterly
thereafter, whether the derivatives that are used in hedging
transactions are highly effective in offsetting changes in
either the fair value or cash flows of the hedged item. If it is
determined that a derivative ceases to be a highly effective
hedge, or if the anticipated transaction is no longer likely to
occur, the Company discontinues hedge accounting, and any
deferred gains or losses are recorded in selling, general and
administrative expenses. 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.
Earnings (loss) per share: Basic earnings
(loss) per share is computed by dividing net income (loss) by
the weighted average common shares outstanding, which totaled
47.9 million, 48.0 million and 48.2 million for
2007, 2006 and 2005, respectively. Diluted earnings (loss) per
share is calculated by dividing net income (loss) by the
weighted average common shares outstanding plus additional
common shares that would have been outstanding assuming the
exercise of stock options that are dilutive. The Company uses
the treasury stock method to calculate dilutive shares. In 2005,
0.1 million employee stock options were considered
potential dilutive common shares, but were required to be
excluded from the denominator of the calculation as
anti-dilutive, due to the net loss for the year ended
December 31, 2005. The weighted average number of shares
outstanding for diluted earnings (loss) per share were
47.9 million, 48.0 million and 48.2 million for
2007, 2006 and 2005, respectively. In 2007, 2006 and 2005,
options to purchase 2.4 million, 2.6 million and
2.7 million shares of common stock were outstanding,
respectively.
Revenue recognition: The Company recognizes
revenue when all of the following are satisfied: persuasive
evidence of an arrangement exists, the price is fixed or
determinable, collectibility is reasonably assured and title has
passed or services have been rendered. Typically, title passes
at time of shipment, however occasionally title passes later or
earlier than shipment due to customer contracts or letter of
credit terms. Infrequently, a sales contract qualifies for
percentage of completion or for multiple-element accounting. For
percentage of completion revenues, the Company utilizes the
cost-to-cost method and the contract payments are received as
progress payments as costs are incurred or based on installation
and performance milestones. At the inception of a sales-type
lease, the Company records the product sales price and related
costs and expenses of the sale. Financing revenues are included
34
FEDERAL
SIGNAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ in millions, except per share
data) (Continued)
in income over the life of the lease. Management believes that
all relevant criteria and conditions are considered when
recognizing revenues.
Net sales: Net sales are net of returns and
allowances. Returns and allowances are calculated and recorded
as a percentage of revenue based upon historical returns. Gross
sales includes sale of products, lease financing revenues and
billed freight related to product sales. Freight and lease
financing revenues have not historically comprised a material
component of gross sales.
Product shipping costs: Product shipping costs
are expensed as incurred and are included in cost of sales.
Postretirement benefits: In September 2006, the FASB
issued Statement of Financial Accounting Standards No. 158,
Employers Accounting for Defined Benefit Pension and Other
Postretirement Plans an amendment of FASB Statements
No. 87, 88, 106, and 132R (SFAS 158).
Companies were required to adopt certain provisions of
SFAS 158 for the fiscal year ended December 31, 2006.
Under SFAS 158, the funded status of each pension and other
postretirement benefit plan at the year-end measurement date is
required to be reported as an asset (for overfunded plans) or a
liability (for underfunded plans), replacing the accrued or
prepaid asset currently recorded and reversing any amounts
previously recorded with respect to any additional minimum
liability.
SFAS 158 requires disclosure of the incremental effect of
adopting the standard on individual line items of the balance
sheet. Adopting SFAS 158 at December 31, 2006 had the
following effect on retirement benefit-related amounts reported
in the balance sheet:
Incremental Effect of Adopting SFAS 158
December 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Before Adoption of
|
|
|
Adjustments to
|
|
|
After Adoption of
|
|
|
|
SFAS 158*
|
|
|
Adopt SFAS 158
|
|
|
SFAS 158
|
|
|
|
Increase/(decrease)
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncurrent benefit asset
|
|
$
|
12.3
|
|
|
$
|
(12.3
|
)
|
|
$
|
|
|
Intangible asset
|
|
|
0.4
|
|
|
|
(0.4
|
)
|
|
|
|
|
Deferred tax asset **
|
|
|
11.5
|
|
|
|
4.8
|
|
|
|
16.3
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncurrent benefit liability
|
|
$
|
21.7
|
|
|
$
|
(0.7
|
)
|
|
$
|
21.0
|
|
Shareholders Equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated Other Comprehensive Income
|
|
$
|
(19.1
|
)
|
|
$
|
(8.2
|
)
|
|
$
|
(27.3
|
)
|
|
|
|
* |
|
Includes effects of additional minimum liability, if any, that
would have been recognized at December 31, 2007. |
|
** |
|
Assumes a 37% tax rate. |
35
FEDERAL
SIGNAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ in millions, except per share
data) (Continued)
Shareholders Equity and Accumulated Other Comprehensive
Income changed due to the change in the additional minimum
liability that would have been recognized at December 31,
2006, and the incremental effect of adopting SFAS 158 as
follows:
Changes in Shareholders Equity
Year ended December 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated Other
|
|
|
|
|
|
|
Comprehensive
|
|
|
Comprehensive
|
|
|
|
Total
|
|
|
Income
|
|
|
Income
|
|
|
Balance at December 31, 2005
|
|
|
|
|
|
|
|
|
|
$
|
(23.1
|
)
|
Decrease in Additional Minimum Liability included in Other
Comprehensive Income, net of tax
|
|
|
4.0
|
|
|
|
4.0
|
|
|
|
4.0
|
|
Adjustments to adopt SFAS 158, net of tax
|
|
|
(8.2
|
)
|
|
|
|
|
|
|
(8.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2006
|
|
|
|
|
|
|
|
|
|
$
|
(27.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company also adopted the measured date provisions of
SFAS 158 as of December 31, 2007. Previously, the
Companys non-US defined benefit plan had a September 30
measurement date. The effect of this adoption increased pension
assets and retained earnings by $0.4 million.
Investments: In 2005, the Company entered into an
agreement with the Shanghai Environmental Sanitary Vehicle and
Equipment Factory (SHW) and United Motor Works (UMW) to form a
joint venture to manufacture specialty vehicles in the Peoples
Republic of China. The joint venture is initially intended to
provide a platform for our Environmental Solutions Groups
(ESG) expansion into Asia and globally. Our investment in the
joint venture is accounted for under the equity method in
accordance with APB No. 18. The Companys 50% interest
in the venture does not represent a controlling interest. The
investment is carried at cost or less, adjusted to reflect our
proportionate share of income or loss. The Company would
recognize a loss on this investment should there be an
other-than-temporary loss in value of the investment. Losses
related to the joint venture are included in other expenses in
the Statements of Operations and amounted to $3.3 million,
$1.9 million, and $0.0 million in each of the three
years ended December 31, 2007, 2006, and 2005,
respectively. Our investment in the China joint venture is
included together with Other deferred charges and
assets in the Consolidated Balance Sheet. The carrying
amount of this investment was $0.0 million and
$0.8 million at December 31, 2007 and 2006,
respectively.
Inventories at December 31 are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Raw materials
|
|
$
|
79.4
|
|
|
$
|
73.9
|
|
Work in process
|
|
|
49.8
|
|
|
|
40.8
|
|
Finished goods
|
|
|
76.3
|
|
|
|
59.5
|
|
|
|
|
|
|
|
|
|
|
Total inventories
|
|
$
|
205.5
|
|
|
$
|
174.2
|
|
|
|
|
|
|
|
|
|
|
If the Company had used the
first-in,
first-out cost method exclusively, which approximates
replacement cost, inventories would have aggregated
$220.1 million and $187.9 million at December 31,
2007 and 2006, respectively.
36
FEDERAL
SIGNAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ in millions, except per share
data) (Continued)
|
|
NOTE 3
|
PROPERTIES
AND EQUIPMENT
|
Properties and equipment at December 31 are summarized as
follows:
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Land
|
|
$
|
8.1
|
|
|
$
|
7.6
|
|
Buildings and improvements
|
|
|
54.1
|
|
|
|
49.3
|
|
Machinery and equipment
|
|
|
227.6
|
|
|
|
205.7
|
|
Accumulated depreciation
|
|
|
(192.2
|
)
|
|
|
(176.9
|
)
|
|
|
|
|
|
|
|
|
|
Total properties and equipment
|
|
$
|
97.6
|
|
|
$
|
85.7
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE 4
|
LEASE
FINANCING AND OTHER RECEIVABLES
|
As an added service to its customers, the Company is engaged in
financial services activities. These activities primarily
consist of providing long-term financing for certain US
customers purchasing vehicle-based products from the
Companys Fire Rescue and Environmental Solutions 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 fifteen years. The amounts recorded
as lease financing receivables represent amounts equivalent to
normal selling prices less subsequent customer payments.
Leases past due more than 90 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.
Financial service revenues totaled $7.4 million,
$8.2 million and $9.6 million in 2007, 2006 and 2005
respectively. The decline in 2007 and 2006 reflects the
continued runoff of the Companys industrial leasing
portfolio and lower financings of municipal product sales.
Lease financing and other receivables will become due as
follows: $67.3 million in 2008, $21.3 million in 2009,
$17.1 million in 2010, $13.6 million in 2011,
$11.3 million in 2012 and $19.8 million thereafter. At
December 31, 2007 and 2006, unearned finance revenue on
these leases aggregated $15.2 million and
$19.2 million, respectively.
Short-term borrowings at December 31 consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Capital lease obligations
|
|
$
|
1.8
|
|
|
$
|
|
|
Revolving Credit Facility
|
|
|
|
|
|
|
21.8
|
|
Other foreign lines of credit
|
|
|
0.8
|
|
|
|
8.5
|
|
|
|
|
|
|
|
|
|
|
Total short-term borrowings
|
|
$
|
2.6
|
|
|
$
|
30.3
|
|
|
|
|
|
|
|
|
|
|
37
FEDERAL
SIGNAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ in millions, except per share
data) (Continued)
Long-Term Borrowings at December 31 consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
6.79% Unsecured Private Placement note with annual installments
of $10.0 million due
2007-2011
|
|
$
|
40.0
|
|
|
$
|
50.0
|
|
6.37% Unsecured Private Placement note with annual installments
of $10.0 million due
2005-2008
|
|
|
10.0
|
|
|
|
20.0
|
|
6.60% Unsecured Private Placement note with annual installments
of $7.1 million due
2005-2011
|
|
|
28.6
|
|
|
|
35.7
|
|
4.93% Unsecured Private Placement note with annual installments
of $8.0 million due
2008-2012
|
|
|
40.0
|
|
|
|
40.0
|
|
5.24% Unsecured Private Placement note due 2012
|
|
|
60.0
|
|
|
|
60.0
|
|
Unsecured Private Placement note, floating rate (5.87% and 6.41%
at December 31, 2007 and 2006, respectively) due
2008-2013
|
|
|
50.0
|
|
|
|
50.0
|
|
Second Amended Loan Agreement (described below), due
2007-2017
|
|
|
96.6
|
|
|
|
90.7
|
|
Alternative Currency Facility (within Revolving Credit Facility)
|
|
|
32.6
|
|
|
|
|
|
Revolving Credit Facility
|
|
|
66.0
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
0.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
423.8
|
|
|
|
347.1
|
|
Fair value of interest rate swaps
|
|
|
(1.0
|
)
|
|
|
(4.6
|
)
|
Unamortized balance of terminated fair value interest rate swaps
|
|
|
0.7
|
|
|
|
1.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
423.5
|
|
|
|
343.7
|
|
Less current maturities, excluding financial services activities
|
|
|
(45.4
|
)
|
|
|
(34.4
|
)
|
Less financial services activities borrowings
|
|
|
(137.4
|
)
|
|
|
(149.0
|
)
|
|
|
|
|
|
|
|
|
|
Total long-term borrowings, net
|
|
$
|
240.7
|
|
|
$
|
160.3
|
|
|
|
|
|
|
|
|
|
|
On April 25, 2007, the Company entered into the Second
Amended and Restated Credit Agreement (Second Amended
Credit Agreement) thereby replacing its previous Revolving
Credit Facility. The Second Amended Credit Agreement provided
for borrowings up to $250.0 million and matures
April 25, 2012. Borrowings under the Second Amended Credit
Agreement bear interest, at the Companys options, at
either the Base Rate or LIBOR, plus an applicable margin. The
applicable margin ranges from 0.00% to 0.75% for Base Rate
borrowings and 1.00% to 2.00% for LIBOR borrowings depending on
the Companys total indebtedness to capital ratio.
On September 6, 2007 Federal Signal of Europe B.V. y CIA,
SC a subsidiary of the Company, entered into a Supplemental
Agreement to the Companys Second Amended and Restated
Credit Agreement (Alternative Currency Facility)
whereby Federal Signal of Europe B.V. y CIA, SC, became a
Designated Alternative Currency Borrower for the purpose of
making swing loans denominated in Euros.
The Second Amended Credit Agreement contains certain financial
covenants for each fiscal quarter ending on or after
March 31, 2007 that includes maintaining an interest
coverage ratio of not less than 3.0 to 1.0.
As of December 31, 2007, 22.5 million, or
$32.6 million, was drawn on the Alternative Currency
Facility and $66.0 million was drawn on the Second Amended
Credit Agreement for a total of $98.6 million drawn under
the Second Amended Credit Agreement leaving available borrowings
of $151.4 million.
Weighted average interest rates on short-term borrowings were
6.95% and 7.60% at December 31, 2007 and 2006, respectively.
38
FEDERAL
SIGNAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ in millions, except per share
data) (Continued)
On March 24, 2005,
E-One, Inc.
(E-One),
a wholly-owned subsidiary of Federal Signal Corporation, entered
into a loan agreement with Banc of America Leasing &
Capital, LLC (the Loan Agreement) under a
nonrecourse loan facility (the Facility).
E-Ones
indebtedness and other obligations under the Loan Agreement are
payable out of certain customer leases of emergency equipment
and other collateral as described in the Loan Agreement. Under
the Loan Agreement,
E-One may
borrow additional amounts under the Facility, at the discretion
of the lender, in an amount equal to 95% of the net present
value of any additional customer leases included under the
Facility.
In December 2007, the Loan Agreement was amended to include
customer leases of
E-One Inc.,
E-One New
York, Inc., Elgin Sweeper Company and Vactor Manufacturing, Inc.
under the Facility (Amended Loan Agreement).
The Amended Loan Agreement contains covenants and events of
default that are ordinary and customary for similar credit
facilities. At the election of the Company, upon each new draw
down to increase the loan, the Amended Loan Agreement bears
interest at a fixed rate or a floating LIBOR rate. The
$96.6 million outstanding at December 31, 2007 bore
interest at an average fixed rate of 5.95% as of
December 31, 2007. The obligations under the Amended Loan
Agreement are nonrecourse to the Company, except with respect to
certain representations and warranties.
Aggregate maturities of total borrowings amount to approximately
$81.8 million in 2008, $44.3 million in 2009,
$60.7 million in 2010, $37.3 million in 2011,
$176.5 million in 2012 and $25.8 million thereafter.
The fair values of these borrowings aggregated
$430.1 million and $381.8 million at December 31,
2007 and 2006, respectively. Included in 2008 maturities of
$81.8 million are $33.8 million attributable to
financial services borrowings and $2.6 million of
short-term revolving debt.
For each of the above Private Placement notes, significant
covenants consist of a maximum debt-to-capitalization ratio and
minimum net worth. At December 31, 2007, all of the
Companys retained earnings were free of any restrictions
and the Company was in compliance with the financial covenants
and agreements.
At December 31, 2007 and 2006, deferred financing fees
totaled $1.5 million and $1.0 million, respectively,
and are included in other deferred charges and assets on the
balance sheet.
The Company paid interest of $26.2 million in 2007,
$24.4 million in 2006 and $24.8 million in 2005. See
Note 8 regarding the Companys utilization of
derivative financial instruments relating to outstanding debt.
39
FEDERAL
SIGNAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ in millions, except per share
data) (Continued)
The provision/(benefit) for income taxes for each of the three
years in the period ended December 31, 2007 consisted of
the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
(20.8
|
)
|
|
$
|
5.9
|
|
|
$
|
28.4
|
|
Foreign
|
|
|
6.8
|
|
|
|
4.9
|
|
|
|
7.1
|
|
State and local
|
|
|
(0.1
|
)
|
|
|
0.2
|
|
|
|
1.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(14.1
|
)
|
|
|
11.0
|
|
|
|
36.6
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
17.9
|
|
|
|
(3.4
|
)
|
|
|
(38.9
|
)
|
Foreign
|
|
|
(0.1
|
)
|
|
|
0.2
|
|
|
|
(0.4
|
)
|
State and local
|
|
|
0.5
|
|
|
|
0.5
|
|
|
|
(0.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18.3
|
|
|
|
(2.7
|
)
|
|
|
(39.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income taxes
|
|
$
|
4.2
|
|
|
$
|
8.3
|
|
|
$
|
(3.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Differences between the statutory federal income tax rate and
the effective income tax rate for each of the three years in the
period ended December 31, 2007 are summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
Statutory federal income tax rate
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
|
|
|
|
State income taxes, net of federal tax benefit
|
|
|
1.2
|
|
|
|
1.5
|
|
|
|
1.6
|
|
|
|
|
|
Tax-exempt interest
|
|
|
(5.8
|
)
|
|
|
(5.1
|
)
|
|
|
(6.1
|
)
|
|
|
|
|
Dividend repatriation
|
|
|
(5.8
|
)
|
|
|
|
|
|
|
(6.2
|
)
|
|
|
|
|
Strategy relating to sale of U.K. lighting business
|
|
|
|
|
|
|
|
|
|
|
(4.6
|
)
|
|
|
|
|
Exports benefit
|
|
|
|
|
|
|
(2.3
|
)
|
|
|
(1.9
|
)
|
|
|
|
|
Tax reserves
|
|
|
2.9
|
|
|
|
(4.4
|
)
|
|
|
(19.5
|
)
|
|
|
|
|
R&D tax credits
|
|
|
(2.8
|
)
|
|
|
(1.9
|
)
|
|
|
(1.5
|
)
|
|
|
|
|
Foreign tax effects
|
|
|
(5.2
|
)
|
|
|
(1.5
|
)
|
|
|
(4.5
|
)
|
|
|
|
|
Valuation allowances
|
|
|
0.3
|
|
|
|
(0.7
|
)
|
|
|
1.2
|
|
|
|
|
|
Foreign financing strategies
|
|
|
(2.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital loss Canadian legal entity restructuring
|
|
|
(4.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Other, net
|
|
|
(0.3
|
)
|
|
|
(1.2
|
)
|
|
|
(1.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective income tax rate
|
|
|
12.5
|
%
|
|
|
19.4
|
%
|
|
|
(7.6
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Companys 2005 effective tax rate of (7.6)% reflected a
benefit of $6.0 million primarily due to a reduction in
reserves in the 2005 second quarter associated with the
completion of an audit of the Companys US tax returns
which encompassed the years 1999 through 2003.
On October 22, 2004, the American Jobs Creation Act was
signed into law. One provision of the legislation allowed
certain repatriated foreign earnings to be taxed at 5.25%,
provided certain provisions are met. During 2005, the Company
recognized a tax benefit of approximately $2.5 million
related to the repatriation of foreign earnings under the Act.
40
FEDERAL
SIGNAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ in millions, except per share
data) (Continued)
Deferred income tax assets and liabilities at December 31 are
summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued expenses
|
|
$
|
20.3
|
|
|
$
|
14.6
|
|
|
$
|
11.8
|
|
Net operating loss, capital loss, alternative minimum tax,
research and development, and foreign tax credit carry forwards
|
|
|
42.7
|
|
|
|
33.9
|
|
|
|
20.8
|
|
Other
|
|
|
(3.2
|
)
|
|
|
9.3
|
|
|
|
9.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross deferred tax assets
|
|
|
59.8
|
|
|
|
57.8
|
|
|
|
41.7
|
|
Valuation allowance
|
|
|
(17.8
|
)
|
|
|
(5.4
|
)
|
|
|
(3.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
|
42.0
|
|
|
|
52.4
|
|
|
|
38.3
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
(65.5
|
)
|
|
|
(48.6
|
)
|
|
|
(36.3
|
)
|
Revenue recognition
|
|
|
(0.8
|
)
|
|
|
(0.3
|
)
|
|
|
(2.7
|
)
|
Pension liabilities
|
|
|
(6.4
|
)
|
|
|
(4.9
|
)
|
|
|
(3.5
|
)
|
Undistributed earnings of non-US subsidiary
|
|
|
(0.7
|
)
|
|
|
(0.4
|
)
|
|
|
(0.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross deferred tax liabilities
|
|
|
(73.4
|
)
|
|
|
(54.2
|
)
|
|
|
(42.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax liability
|
|
$
|
(31.4
|
)
|
|
$
|
(1.8
|
)
|
|
$
|
(4.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal and state income taxes have not been provided on
accumulated undistributed earnings of certain foreign
subsidiaries aggregating approximately $76.9 million at
December 31, 2007, as such earnings have been reinvested in
the business. The determination of the amount of the
unrecognized deferred tax liability related to the undistributed
earnings is not practicable.
The deferred tax asset for tax loss carryforwards includes state
net operating loss carryforwards of $1.5 million, which
will begin to expire in 2019; foreign net operating loss
carryforwards of $4.0 million of which $2.3 million
has an indefinite life; $12.6 million for capital loss
carryforwards that will expire in 2012. The deferred tax asset
for tax credit carryforwards includes US research tax credit
carryforwards of $5.6 million, which will begin to expire
in 2022, US foreign tax credits of $14.5 million, which
will begin to expire in 2013 and US alternative minimum tax
credit carryforwards of $4.5 million with no expiration.
Valuation allowances totaling $17.8 million have been
established and include $1.4 million related to state net
operating loss carryforwards and $3.8 million related to
the foreign net operating loss carryforwards and
$12.6 million related to capital loss carryforwards.
The net deferred tax liability at December 31 is classified in
the balance sheet as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Current net deferred tax assets (included in Other current
assets in the Consolidated Balance Sheets)
|
|
$
|
14.1
|
|
|
$
|
18.9
|
|
|
$
|
11.9
|
|
Long-term net deferred tax liability
|
|
|
(45.5
|
)
|
|
|
(20.7
|
)
|
|
|
(16.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(31.4
|
)
|
|
$
|
(1.8
|
)
|
|
$
|
(4.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company paid income taxes of $7.0 million in 2007,
$6.9 million in 2006 and $9.8 million in 2005.
41
FEDERAL
SIGNAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ in millions, except per share
data) (Continued)
Income from continuing operations before taxes for each of the
three years in the period ended December 31, 2007 consisted
of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
United States
|
|
$
|
9.1
|
|
|
$
|
27.3
|
|
|
$
|
14.9
|
|
Non-US
|
|
|
24.9
|
|
|
|
15.4
|
|
|
|
25.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
34.0
|
|
|
$
|
42.7
|
|
|
$
|
40.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On January 1, 2007, the Company adopted the provisions of
FIN 48. As a result, an increase of $0.7 million in
the liability for unrecognized tax benefits and a
$0.7 million reduction in retained earnings were booked in
2007.
The following table summarizes the activity related to the
Companys unrecognized tax benefits:
|
|
|
|
|
Balance at January 1, 2007
|
|
$
|
6.2
|
|
Increases related to current year tax positions
|
|
|
1.8
|
|
Increases from prior period positions
|
|
|
0.6
|
|
Decreases due to lapse of statute of limitations
|
|
|
(0.2
|
)
|
Decreases from prior periods
|
|
|
(0.1
|
)
|
|
|
|
|
|
Balance at December 31, 2007
|
|
$
|
8.3
|
|
|
|
|
|
|
Included in the unrecognized tax benefits of $8.3 million
at December 31, 2007 was $5.8 million of tax benefits
that if recognized, would reduce our annual effective tax rate.
The Companys continuing practice is to recognize interest
and penalties related to income tax matters in income tax
expense. Interest and penalties amounting to $1.5 million
and $0.2 million respectively are included in the
consolidated balance sheet but are not included in the table
above. We do not expect our unrecognized tax benefits to change
significantly over the next 12 months.
We file US, state and foreign income tax returns in
jurisdictions with varying statutes of limitations. The 2004
through 2007 tax years generally remain subject to examination
by federal and most state tax authorities. In significant
foreign jurisdictions, the 2002 through 2007 tax years generally
remain subject to examination by their respective tax
authorities.
|
|
NOTE 7
|
POSTRETIREMENT
BENEFITS
|
The Company and its subsidiaries sponsor a number of defined
benefit retirement plans in the US covering certain of its
salaried and hourly employees. Benefits under these plans are
primarily based on final average compensation and years of
service as defined within the provisions of the individual
plans. The Company also participates in several retirement plans
that provide defined benefits to employees under certain
collective bargaining agreements.
The Company uses a December 31 measurement date for its US and
non-US benefit plans in accordance with SFAS 158.
42
FEDERAL
SIGNAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ in millions, except per share
data) (Continued)
The components of net periodic pension expense for each of the
three years in the period ended December 31, 2007 are
summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
US Benefit Plans
|
|
|
Non-US Benefit Plan
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Company-sponsored plans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost
|
|
$
|
1.8
|
|
|
$
|
4.3
|
|
|
$
|
4.8
|
|
|
$
|
0.2
|
|
|
$
|
0.2
|
|
|
$
|
0.2
|
|
Interest cost
|
|
|
8.8
|
|
|
|
8.6
|
|
|
|
8.2
|
|
|
|
3.1
|
|
|
|
2.7
|
|
|
|
2.8
|
|
Expected return on plan assets
|
|
|
(10.9
|
)
|
|
|
(9.9
|
)
|
|
|
(8.8
|
)
|
|
|
(4.2
|
)
|
|
|
(3.8
|
)
|
|
|
(3.6
|
)
|
Amortization of actuarial loss
|
|
|
1.6
|
|
|
|
1.4
|
|
|
|
1.8
|
|
|
|
0.6
|
|
|
|
0.6
|
|
|
|
0.7
|
|
Amortization of prior service cost
|
|
|
|
|
|
|
0.1
|
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Curtailment charge
|
|
|
|
|
|
|
1.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
(0.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.3
|
|
|
|
5.8
|
|
|
|
5.8
|
|
|
|
(0.3
|
)
|
|
|
(0.3
|
)
|
|
|
0.1
|
|
Multiemployer plans
|
|
|
0.2
|
|
|
|
0.3
|
|
|
|
0.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic pension expense (income)
|
|
$
|
1.5
|
|
|
$
|
6.1
|
|
|
$
|
6.1
|
|
|
$
|
(0.3
|
)
|
|
$
|
(0.3
|
)
|
|
$
|
0.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On July 17, 2006, an amendment to the Companys US
defined benefit plans for all of the Companys employees,
except for Tool segment employees and University Park, Illinois
IBEW employees within the Safety and Security Systems Group, was
approved by the Companys Board of Directors. The amendment
freezes service accruals for these employees as of
December 31, 2006. The participants will, however, continue
to accrue benefits resulting from future salary increases
through 2016. As a result of the amendment, the Company was
required to recognize a curtailment charge under
SFAS No. 88, Employers Accounting for
Settlements and Curtailments of Defined Benefit Plans and for
Termination Benefits due to the recognition of prior
service costs. The Company recognized a curtailment charge of
$1.3 million measured at July 1, 2006, which was
recorded during the quarter ended September 30, 2006 and is
recognized in the table above, reflecting the unamortized
portion of prior benefit changes.
The following table summarizes the weighted-average assumptions
used in determining pension costs in each of the three years in
the period ended December 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
US Benefit Plans
|
|
|
Non-US Benefit Plan
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Discount rate
|
|
|
6.0
|
%
|
|
|
6.1
|
%
|
|
|
6.0
|
%
|
|
|
5.8
|
%
|
|
|
5.2
|
%
|
|
|
5.8
|
%
|
Rate of increase in compensation levels
|
|
|
3.5
|
%
|
|
|
3.5
|
%
|
|
|
3.5
|
%
|
|
|
N/A*
|
|
|
|
NA*
|
|
|
|
NA*
|
|
Expected long term rate of return on plan assets
|
|
|
8.5
|
%
|
|
|
8.5
|
%
|
|
|
9.0
|
%
|
|
|
6.9
|
%
|
|
|
7.0
|
%
|
|
|
8.3
|
%
|
|
|
|
* |
|
Non-US plan benefits are not adjusted for compensation level
changes |
43
FEDERAL
SIGNAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ in millions, except per share
data) (Continued)
The following summarizes the changes in the projected benefit
obligation and plan assets, the funded status of the
Company-sponsored plans and the major assumptions used to
determine these amounts at December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
US Benefit Plans
|
|
|
Non-US Benefit Plan
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
Change in Benefit Obligation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit obligation, beginning of year
|
|
$
|
143.2
|
|
|
$
|
153.2
|
|
|
$
|
59.0
|
|
|
$
|
52.2
|
|
Service cost
|
|
|
1.8
|
|
|
|
4.3
|
|
|
|
0.2
|
|
|
|
0.2
|
|
Interest cost
|
|
|
8.8
|
|
|
|
8.6
|
|
|
|
3.1
|
|
|
|
2.7
|
|
Plan amendments
|
|
|
|
|
|
|
(4.4
|
)
|
|
|
|
|
|
|
|
|
Actuarial (gain)/loss
|
|
|
(6.4
|
)
|
|
|
(9.3
|
)
|
|
|
2.1
|
|
|
|
0.6
|
|
Benefits paid
|
|
|
(4.9
|
)
|
|
|
(9.2
|
)
|
|
|
(3.9
|
)
|
|
|
(2.5
|
)
|
Other
|
|
|
|
|
|
|
|
|
|
|
0.8
|
|
|
|
5.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit obligation, end of year
|
|
$
|
142.5
|
|
|
$
|
143.2
|
|
|
$
|
61.3
|
|
|
$
|
59.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated benefit obligation, end of year
|
|
$
|
129.8
|
|
|
$
|
131.2
|
|
|
$
|
61.3
|
|
|
$
|
59.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes the weighted-average assumptions
used in determining benefit obligations as of December 31,
2007 and 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
US Benefit Plans
|
|
|
Non-US Benefit Plan
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
Discount rate
|
|
|
6.5
|
%
|
|
|
6.0
|
%
|
|
|
5.8
|
%
|
|
|
5.2
|
%
|
Rate of increase in compensation levels
|
|
|
3.5
|
%
|
|
|
3.5
|
%
|
|
|
N/A
|
|
|
|
N/A
|
|
Change in Plan Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
US Benefit Plans
|
|
|
Non-US Benefit Plan
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
Fair value of plan assets, beginning of year
|
|
$
|
125.0
|
|
|
$
|
107.8
|
|
|
$
|
58.7
|
|
|
$
|
48.8
|
|
Actual return on plan assets
|
|
|
7.8
|
|
|
|
16.4
|
|
|
|
5.7
|
|
|
|
5.4
|
|
Company contribution
|
|
|
5.0
|
|
|
|
10.0
|
|
|
|
1.7
|
|
|
|
1.3
|
|
Benefits and expenses paid
|
|
|
(4.9
|
)
|
|
|
(9.2
|
)
|
|
|
(3.9
|
)
|
|
|
(2.5
|
)
|
Other
|
|
|
|
|
|
|
|
|
|
|
1.1
|
|
|
|
5.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets, end of year
|
|
$
|
132.9
|
|
|
$
|
125.0
|
|
|
$
|
63.3
|
|
|
$
|
58.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The amounts included in Other in the preceding tables reflect
the impact of the change in measurement date from September 30
to December 31 and foreign exchange translation for the non-US
benefit plan.
44
FEDERAL
SIGNAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ in millions, except per share
data) (Continued)
The following table summarizes the Companys asset
allocations for its benefits plans as of December 31, 2007
and 2006 and the target allocation for 2008 by asset category:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
US Benefit Plans
|
|
|
Non-US Benefit Plan
|
|
|
|
Target
|
|
|
Percentage of
|
|
|
Target
|
|
|
Percentage of
|
|
|
|
Percent
|
|
|
Plan Assets as of December 31
|
|
|
Percent
|
|
|
Plan Assets as of December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Equity securities
|
|
|
60-85
|
%
|
|
|
74
|
%
|
|
|
81
|
%
|
|
|
50-70
|
%
|
|
|
60
|
%
|
|
|
67
|
%
|
Fixed income securities
|
|
|
10-30
|
%
|
|
|
16
|
%
|
|
|
19
|
%
|
|
|
30-50
|
%
|
|
|
30
|
%
|
|
|
31
|
%
|
Alternative investments
|
|
|
0-15
|
%
|
|
|
10
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10
|
%
|
|
|
2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The investment strategy for the US benefit plans is to
1) maintain a diversified portfolio that can provide a
weighted-average target return of 8.5% or more, 2) maintain
liquidity to meet obligations and 3) prudently manage
administrative and management costs. The plan invests in equity,
alternative and fixed income instruments. The asset allocation
is reviewed regularly and portfolio investments are rebalanced
periodically when considered appropriate. The use of derivatives
is allowed in limited circumstances. The plan held no
derivatives during the years ended December 31, 2007 and
2006.
Plan assets for the non-US benefit plan consist principally of a
diversified portfolio of equity securities, U.K. government
obligations and fixed interest securities.
As of December 31, 2007 and 2006, equity securities
included 0.2 million shares of the Companys common
stock valued at $2.7 million and $3.8 million,
respectively. Dividends paid on the Companys common stock
to the pension trusts aggregated $0.1 million in each of
the years ended December 31, 2007 and 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
US Benefit Plans
|
|
|
Non-US Benefit Plan
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
Funded status, end of year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets
|
|
$
|
132.9
|
|
|
$
|
125.0
|
|
|
$
|
63.3
|
|
|
$
|
58.7
|
|
Benefit obligations
|
|
|
142.5
|
|
|
|
143.2
|
|
|
|
61.3
|
|
|
|
59.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funded status
|
|
$
|
(9.6
|
)
|
|
$
|
(18.2
|
)
|
|
$
|
2.0
|
|
|
$
|
(0.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts recognized in the Balance Sheet consist of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
US Benefit Plans
|
|
|
Non-US Benefit Plan
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
Noncurrent liability
|
|
$
|
(9.6
|
)
|
|
$
|
(18.2
|
)
|
|
$
|
N/A
|
|
|
$
|
(0.3
|
)
|
Prepaid benefit cost
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
2.0
|
|
|
|
N/A
|
|
Accrued benefit liability
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
Intangible asset
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
Accumulated other comprehensive loss, pre-tax
|
|
|
26.1
|
|
|
|
31.0
|
|
|
|
13.2
|
|
|
|
12.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net amount recognized
|
|
$
|
16.5
|
|
|
$
|
12.8
|
|
|
$
|
15.2
|
|
|
$
|
12.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
45
FEDERAL
SIGNAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ in millions, except per share
data) (Continued)
Amounts recognized in Accumulated Other Comprehensive Income
consist of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
US Benefit Plans
|
|
|
Non-US Benefit Plan
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
Net actuarial loss
|
|
$
|
25.7
|
|
|
$
|
30.6
|
|
|
$
|
13.2
|
|
|
$
|
12.6
|
|
Prior service cost
|
|
|
0.4
|
|
|
|
0.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net amount recognized, pre-tax
|
|
$
|
26.1
|
|
|
$
|
31.0
|
|
|
$
|
13.2
|
|
|
$
|
12.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company expects $1.4 million relating to amortization
of the actuarial loss to be amortized from Accumulated Other
Comprehensive Income into Net Periodic Benefit Cost in 2008.
The Company expects to contribute up to $10.0 million to
the US benefit plans in 2008 and approximately $1.5 million
to the non-US plan. Future contributions to the plans will be
based on such factors as annual service cost as well as impacts
to plan asset values, interest rate movements and benefit
payments.
The following table presents the benefits expected to be paid
under the Companys defined benefit plans in each of the
next five years, and in aggregate for the five years thereafter:
|
|
|
|
|
|
|
|
|
|
|
US Benefit
|
|
|
Non-US
|
|
|
|
Plans
|
|
|
Benefit Plan
|
|
|
2008
|
|
$
|
4.9
|
|
|
$
|
3.0
|
|
2009
|
|
|
5.2
|
|
|
|
3.1
|
|
2010
|
|
|
5.6
|
|
|
|
3.4
|
|
2011
|
|
|
6.1
|
|
|
|
3.6
|
|
2012
|
|
|
6.8
|
|
|
|
3.7
|
|
2013-2017
|
|
|
43.3
|
|
|
|
21.2
|
|
The Company also sponsors a number of defined contribution
pension plans covering a majority of its employees. Through 2006
participation in the plans was at each employees election
and Company contributions to these plans were based on a
percentage of employee contributions. Effective January 1,
2007, participation is via automatic enrollment; employees may
elect to opt out of the plan. Company contributions to the plan
are now based on employees age and service as well as a
percentage of employee contributions.
The cost of these plans during each of the three years in the
period ended December 31, 2007, was $9.9 million in
2007, $5.6 million in 2006 and $5.7 million in 2005.
Prior to September 30, 2003, the Company also provided
medical benefits to certain eligible retired employees. These
benefits were funded when the claims were incurred. Participants
generally became eligible for these benefits at age 60
after completing at least fifteen years of service. The plan
provided for the payment of specified percentages of medical
expenses reduced by any deductible and payments made by other
primary group coverage and government programs. Effective
September 30, 2003, the Company amended the retiree medical
plan and effectively canceled coverage for all eligible active
employees except for retirees and a limited group that qualified
under a formula based on age and years of service. Accumulated
postretirement benefit liabilities of $2.3 million and
$2.5 million at December 31, 2007 and 2006,
respectively, were fully accrued. The net periodic
postretirement benefit costs have not been significant during
the three-year period ended December 31, 2007.
|
|
NOTE 8
|
DERIVATIVE
FINANCIAL INSTRUMENTS
|
Derivative financial instruments are reported on the balance
sheet at their respective fair values. Changes in fair value are
recognized either in earnings or equity, depending on the nature
of the underlying exposure being hedged and how effective a
derivative is at offsetting price movements in the underlying
exposure. The Companys derivative positions existing at
December 31, 2007 qualified for hedge accounting under
SFAS No. 133, except as described below. Derivatives
documentation policies comply with the requirements of
SFAS No. 133.
46
FEDERAL
SIGNAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ in millions, except per share
data) (Continued)
To manage interest costs, the Company utilizes interest rate
swaps in combination with its funded debt. Interest rate swaps
executed in conjunction with long-term private placements
effectively convert fixed rate debt to variable rate debt. At
December 31, 2007, the Companys receive fixed, pay
variable swap agreements with financial institutions terminate
in varying amounts between 2008 and 2012. These agreements are
designated as fair value hedges. In the second quarter of 2005,
the Company de-designated a fair value hedge. The derivative
does not qualify for hedge accounting under
SFAS No. 133 and is marked-to-market with the
offsetting adjustment recorded to income.
At December 31, 2007, the Company was also party to
interest rate swap agreements with financial institutions in
which the Company pays interest at a fixed rate and receives
interest at variable LIBOR rates. These derivative instruments
terminate in varying amounts between 2008 and 2010. These
interest rate swap agreements are designated as cash flow
hedges. In the second quarter of 2005, the Company entered into
an interest rate swap which was not designated as a hedge and is
marked-to-market with the offsetting adjustment recorded to
income.
The fair values of interest rate swaps are based on quotes from
financial institutions. The following table summarizes the
Companys interest rate swaps at December 31, 2007 and
2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Swaps
|
|
|
Cash Flow Swaps
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
Notional amount
|
|
$
|
138.7
|
|
|
$
|
147.9
|
|
|
$
|
135.0
|
|
|
$
|
85.0
|
|
Fair value
|
|
|
(1.3
|
)
|
|
|
(7.2
|
)
|
|
|
(0.9
|
)
|
|
|
1.6
|
%
|
Average pay rate
|
|
|
7.7
|
%
|
|
|
8.0
|
%
|
|
|
6.0
|
%
|
|
|
6.9
|
%
|
Average receive rate
|
|
|
6.8
|
%
|
|
|
6.0
|
%
|
|
|
6.1
|
%
|
|
|
7.6
|
%
|
In 2007 and 2006, the Company cancelled various interest rate
swaps associated with its debt portfolio in response to
movements in the interest rate market. These transactions
resulted in net cash payments of $0.3 million and
$1.9 million in 2007 and 2006, respectively. The associated
losses on the interest rate swaps are being amortized to
interest expense over the life of the underlying debt. As of
December 31, 2007 and 2006, the Company had unamortized
gains of $0.8 million and $1.2 million, respectively.
The Company manages the volatility of cash flows caused by
fluctuations in currency rates by entering into foreign exchange
forward contracts and options. These derivative instruments may
be designated as cash flow hedges that hedge portions of the
Companys anticipated third-party purchases and forecast
sales denominated in foreign currencies. The Company also enters
into foreign exchange contracts that are not intended to qualify
for hedge accounting in accordance with SFAS 133, but are
intended to offset the effect on earnings of foreign currency
movements on short and long term intercompany transactions.
Gains and losses on these derivative instruments are recorded
through earnings.
The following table summarizes the Companys foreign
exchange contracts at December 31, 2007 and 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
|
Notional
|
|
|
Fair
|
|
|
Notional
|
|
|
Fair
|
|
|
|
Amount
|
|
|
Value
|
|
|
Amount
|
|
|
Value
|
|
|
Foreign exchange forwards
|
|
$
|
55.9
|
|
|
$
|
(3.2
|
)
|
|
$
|
7.2
|
|
|
$
|
(0.2
|
)
|
Options
|
|
|
10.3
|
|
|
|
|
|
|
|
8.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
66.2
|
|
|
$
|
(3.2
|
)
|
|
$
|
15.6
|
|
|
$
|
(0.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company expects $2.9 million of net losses on cash flow
hedges that are reported in accumulated other comprehensive
income as of December 31, 2007 to be reclassified into
earnings in 2008 as the respective hedged transactions affect
earnings.
47
FEDERAL
SIGNAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ in millions, except per share
data) (Continued)
|
|
NOTE 9
|
STOCK-BASED
COMPENSATION
|
The Companys stock benefit plans, approved by the
Companys shareholders, and administered by the
Compensation and Benefits Committee of the Board of Directors of
the Company, provides for the grant of incentive and
non-incentive stock options, restricted stock and other
stock-based awards or units to key employees and directors. The
plans, as amended, authorize the grant of up to 4.0 million
benefit shares or units through April 2015. These share or unit
amounts exclude amounts that were issued under predecessor
plans. Benefit shares or units include incentive and
non-incentive stock options, restricted stock awards and other
stock awards or units.
Stock options are granted at the fair market value of the shares
on the date of grant. Through 2004, they normally became
exercisable one year after grant at a rate of one-half annually
and were exercisable in full on the second anniversary date.
Beginning in 2005, stock options normally become exercisable at
a rate of one-third annually and in full on the third
anniversary date. All options and rights must be exercised
within ten years from date of grant. At the Companys
discretion, vested stock option holders are permitted to elect
an alternative settlement method in lieu of purchasing common
stock at the option price. The alternative settlement method
permits the employee to receive, without payment to the Company,
cash, shares of common stock or a combination thereof equal to
the excess of market value of common stock over the option
purchase price. The Company intends to settle all such options
in common stock.
The weighted average fair value of options granted during 2007,
2006 and 2005 was $5.68, $6.21 and $4.93, respectively. The fair
value of each option grant was estimated using the Black-Scholes
option pricing model with the following assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Dividend yield
|
|
|
1.7
|
%
|
|
|
1.3
|
%
|
|
|
1.7
|
%
|
Expected volatility
|
|
|
31
|
%
|
|
|
30
|
%
|
|
|
27
|
%
|
Risk free interest rate
|
|
|
4.4
|
%
|
|
|
4.6
|
%
|
|
|
4.2
|
%
|
Weighted average expected option life in years
|
|
|
7
|
|
|
|
7
|
|
|
|
8
|
|
The expected life of options represents the weighted average
period of time that options granted are expected to be
outstanding giving consideration to vesting schedules and the
Companys historical exercise patterns. The risk-free
interest rate is based on the US Treasury yield curve in effect
at the time of the grant for periods corresponding with the
expected life of the options. Expected volatility is based on
historical volatilities of the Companys common stock.
Dividend yields are based on historical dividend payments.
Stock option activity for the three years ended
December 31, 2007 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Option Shares
|
|
|
Weighted Average Exercise Price
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In millions)
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at beginning of year
|
|
|
2.6
|
|
|
|
2.7
|
|
|
|
2.6
|
|
|
$
|
18.15
|
|
|
$
|
19.15
|
|
|
$
|
19.84
|
|
Granted
|
|
|
0.5
|
|
|
|
0.6
|
|
|
|
0.6
|
|
|
|
15.69
|
|
|
|
16.93
|
|
|
|
15.69
|
|
Cancelled or expired
|
|
|
(0.6
|
)
|
|
|
(0.7
|
)
|
|
|
(0.5
|
)
|
|
|
19.67
|
|
|
|
21.26
|
|
|
|
19.09
|
|
Exercised
|
|
|
(0.1
|
)
|
|
|
(0.0
|
)
|
|
|
(0.0
|
)
|
|
|
15.06
|
|
|
|
16.23
|
|
|
|
15.26
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at end of year
|
|
|
2.4
|
|
|
|
2.6
|
|
|
|
2.7
|
|
|
$
|
17.47
|
|
|
$
|
18.15
|
|
|
$
|
19.15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at end of year
|
|
|
1.5
|
|
|
|
1.7
|
|
|
|
1.8
|
|
|
$
|
18.28
|
|
|
$
|
18.84
|
|
|
$
|
20.19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
48
FEDERAL
SIGNAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ in millions, except per share
data) (Continued)
The following table summarizes information concerning stock
options outstanding as of December 31, 2007 under all plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
|
Options Exercisable
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Exercise
|
|
|
|
|
|
Exercise
|
|
|
|
|
Range of Exercise Prices
|
|
Shares
|
|
|
Remaining Life
|
|
|
Price
|
|
|
Shares
|
|
|
Price
|
|
|
|
|
|
|
(In millions)
|
|
|
(In years)
|
|
|
|
|
|
(In millions)
|
|
|
|
|
|
|
|
|
$12.00 - $16.00
|
|
|
0.3
|
|
|
|
6.7
|
|
|
$
|
14.46
|
|
|
|
0.2
|
|
|
$
|
15.03
|
|
|
|
|
|
16.01 - 18.00
|
|
|
1.3
|
|
|
|
7.5
|
|
|
|
16.37
|
|
|
|
0.6
|
|
|
|
16.32
|
|
|
|
|
|
18.01 - 20.00
|
|
|
0.4
|
|
|
|
4.5
|
|
|
|
18.84
|
|
|
|
0.3
|
|
|
|
18.83
|
|
|
|
|
|
20.01 - 22.00
|
|
|
0.3
|
|
|
|
2.0
|
|
|
|
21.38
|
|
|
|
0.3
|
|
|
|
21.38
|
|
|
|
|
|
22.01 - 26.40
|
|
|
0.1
|
|
|
|
2.9
|
|
|
|
23.55
|
|
|
|
0.1
|
|
|
|
23.55
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2.4
|
|
|
|
6.1
|
|
|
$
|
17.47
|
|
|
|
1.5
|
|
|
$
|
18.28
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The exercise price of stock options outstanding and exercisable
at December 31, 2007 exceeded the market value and
therefore, the aggregate intrinsic value was zero. The closing
price on December 31, 2007 was $11.22.
The following table illustrates the effect on net income and
earnings per share for the year ended December 31, 2005 if
the Company had applied fair value recognition provisions of
Statement of Financial Accounting Standards (SFAS)
No. 123, Accounting for Stock-Based
Compensation, to all stock-based employee compensation.
For purposes of pro forma disclosure, the estimated fair value
of the options using a Black-Scholes option pricing model is
amortized to expense over the options vesting period.
|
|
|
|
|
|
|
2005
|
|
|
Reported net loss
|
|
$
|
(4.6
|
)
|
Add: Stock-based employee compensation expense included in
reported net loss, net of related tax effects
|
|
|
1.3
|
|
Deduct: Total stock-based employee compensation expense
determined under the fair-value method for all awards, net of
related tax effects
|
|
|
(2.6
|
)
|
|
|
|
|
|
Pro forma net loss
|
|
$
|
(5.9
|
)
|
|
|
|
|
|
Basic and diluted loss per common share:
|
|
|
|
|
Reported loss per share
|
|
$
|
(0.10
|
)
|
Pro forma loss per share
|
|
$
|
(0.12
|
)
|
Restricted stock awards are granted to employees at no cost.
Through 2004, these awards primarily vested at the rate of 25%
annually commencing one year from the date of award, provided
the recipient was still employed by the Company on the vesting
date. Beginning in 2005, awards primarily cliff vest at the
third anniversary from the date of award, provided the recipient
is still employed by the Company on the vesting date. The cost
of restricted stock awards, based on the fair market value at
the date of grant, is being charged to expense over the
respective
49
FEDERAL
SIGNAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ in millions, except per share
data) (Continued)
vesting periods. The following table summarizes restricted stock
grants for the twelve month period ended December 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
Weighted Average
|
|
(Shares in millions)
|
|
Restricted Shares
|
|
|
Price per Share
|
|
|
Outstanding and non-vested at December 31, 2006
|
|
|
0.6
|
|
|
$
|
16.70
|
|
Granted
|
|
|
0.4
|
|
|
|
15.43
|
|
Vested
|
|
|
(0.1
|
)
|
|
|
14.23
|
|
Cancelled
|
|
|
(0.1
|
)
|
|
|
16.65
|
|
|
|
|
|
|
|
|
|
|
Outstanding and non-vested at December 31, 2007
|
|
|
0.8
|
|
|
$
|
16.28
|
|
|
|
|
|
|
|
|
|
|
The total compensation expense related to all share-based
compensation plans was $3.5 million, $5.8 million, and
$2.1 million for the years ended December 31, 2007,
2006 and 2005, respectively. Also, as of December 31, 2007,
the total remaining unrecognized compensation cost related to
awards of stock options amounted to $3.3 million, which
will be amortized over the weighted-average period of
approximately 1.4 years.
|
|
NOTE 10
|
SHAREHOLDERS
EQUITY
|
The Companys board of directors has the authority to issue
90.0 million shares of common stock at a par value of $1
per share. The holders of common stock (i) may receive
dividends subject to all of the rights of the holders of
preference stock, (ii) shall be entitled to share ratably
upon any liquidation of the Company in the assets of the
Company, if any, remaining after payment in full to the holders
of preference stock and (iii) receive one vote for each
common share held and shall vote together share for share with
the holders of voting shares of preference stock as one class
for the election of directors and for all other purposes. The
Company has 49.4 million and 49.1 million common
shares issued as of December 31, 2007 and 2006,
respectively. Of those amounts 47.9 million and
47.6 million common shares were outstanding as of
December 31, 2007 and 2006, respectively.
The Companys board of directors is also authorized to
provide for the issuance of 0.8 million shares of
preference stock at a par value of $1 per share. The authority
of the board of directors includes, but is not limited to, the
determination of the dividend rate, voting rights, conversion
and redemption features and liquidation preferences. The Company
has not issued any preference stock as of December 31, 2007.
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 $.10
per right, payable in cash or common shares, at any time prior
to the expiration of twenty days following the public
announcement that a 20% position has been acquired. In the event
that the Company is acquired in a merger or other business
combination transaction or 50% or more of its consolidated
assets or earning power is sold, proper provision will be made
so that each holder of a right will thereafter have the right to
receive, upon the exercise thereof at the then current exercise
price of a right, that number of shares of common stock of the
acquiring company which at the time of such transaction would
have a market value of two times the exercise price of the
right. The rights expire on August 18, 2008 unless earlier
redeemed by the Company. Until exercised, the holder of a right,
as such, will have no rights as a shareholder, including,
without limitation, the right to vote or to receive dividends.
50
FEDERAL
SIGNAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ in millions, except per share
data) (Continued)
On January 15, 2007, the Company acquired the net assets of
Codespear LLC, a Birmingham, Michigan based, privately held
developer of specialized software used in emergency management
situations, for $16.6 million in cash plus an additional
$0.8 million payment based on working capital and
contingent consideration adjustments which were finalized in the
third quarter. In addition, there are potential additional
earnout payments for up to three years following the
transaction, if specific performance targets are met. Any
additional payments related to this contingency will be
accounted for as additional goodwill. As of December 31,
2007 as a result of the acquisition, the Company recorded the
addition of $12.2 million of goodwill, none of which is
deductible for tax purposes, and $5.2 million of acquired
developed software. The results since the date of acquisition
have been included in the Safety and Security Systems segment.
On July 25, 2007, the Company acquired the net assets of
Riverchase Technologies, a software development firm that
specializes in serving the municipal safety market and includes
a suite of products for small to medium size municipalities that
includes CAD, RMS, mobile data, mobile video and mobile handheld
solutions which enable emergency response agencies to manage and
communicate remotely with their fleets. The purchase price was
$6.7 million in cash plus additional payments for working
capital adjustments, as well as potential earnout payments for
up to two years following the transaction, if specific
performance targets are met. As of December 31, 2007 as a
result of the acquisition, the Company recorded the addition of
$2.9 million of goodwill, none of which is deductible for
tax purposes, $3.6 million of acquired developed software
and $0.2 million of net assets. The results since the date
of acquisition have been included in the Safety and Security
Systems segment.
On August 6, 2007, the Company acquired 100% of the voting
interests in PIPS Technology Limited, a private company limited
by shares incorporated in England and Wales, (the UK Company),
and PIPS Technology, Inc., a Tennessee corporation (the US
Company), together referred to as PIPS Technology companies
(PIPS Technologies). PIPS Technologies is a global
leader in the design and manufacture of automated license plate
recognition (ALPR) technology and optical character
recognition software. ALPR solutions are used in control and
surveillance applications in markets such as traffic and
tolling, law enforcement, public safety and access control.
ALPR-enabled cameras are used on emergency vehicles and mounted
on stationary support structures at access entry and tolling
points to capture license plate details for tolling, congestion
zone charging and law enforcement purposes. The results since
the date of acquisition have been included in the Safety and
Security Systems segment.
PIPS Technologies was acquired for approximately
$123.4 million in cash plus acquisition related costs of
approximately $2.9 million. The purchase price is subject
to potential additional earnout payments through 2010, if
specific performance targets are met. Additional payments
related to this contingency, if any, will be accounted for as
goodwill. The acquisition was funded through available cash
balances and borrowings under the Companys credit facility.
The allocation of the purchase price is shown in the table below.
|
|
|
|
|
|
|
($s in million)
|
|
|
Goodwill
|
|
$
|
75.4
|
|
Intangible assets:
|
|
|
|
|
Customer relationships
|
|
|
20.5
|
|
Technology
|
|
|
6.0
|
|
Trade name
|
|
|
26.1
|
|
Plant, property & equipment
|
|
|
0.8
|
|
Deferred tax asset
|
|
|
5.7
|
|
Deferred tax liability
|
|
|
(15.1
|
)
|
Other assets acquired and liabilities assumed
|
|
|
6.9
|
|
|
|
|
|
|
Total acquisition cost
|
|
$
|
126.3
|
|
|
|
|
|
|
51
FEDERAL
SIGNAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ in millions, except per share
data) (Continued)
Goodwill and trade name intangible assets have indefinite lives
and therefore will not be subject to amortization, but will
instead be subject to an annual impairment test. The Company is
still evaluating whether any of the goodwill is deductible for
tax purposes. Technology will be amortized over a
10-year life
and customer relationships will be amortized over a
10-year life
in the U.K and a
5-year life
in the U.S. The Company engaged KPMG LLP to perform the
evaluation to allocate the purchase price.
The unaudited financial information in the table below
summarizes the combined results of operations of the Company and
PIPS Technologies, on a pro forma basis, as though PIPS
Technologies had been acquired as of January 1, 2006. The
pro forma financial information is presented for informational
purposes only and is not indicative of the results of operations
that would have been achieved if the acquisition had taken place
at the beginning of the period or of results that may occur in
the future. Proforma financial information for the acquisition
of Codespear and Riverchase has not been presented due to
immateriality.
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31
|
|
|
|
2007
|
|
|
2006
|
|
|
|
($ in millions)
|
|
|
Proforma net revenue
|
|
$
|
1,282.0
|
|
|
$
|
1,238.0
|
|
Proforma income from continuing operations
|
|
|
29.5
|
|
|
|
36.1
|
|
Proforma net income
|
|
|
54.6
|
|
|
|
24.4
|
|
Proforma earnings per share from continuing
operations basic and diluted
|
|
$
|
0.61
|
|
|
$
|
0.75
|
|
|
|
NOTE 12
|
GOODWILL
AND OTHER INTANGIBLE ASSETS
|
In accordance with SFAS No. 142, Goodwill and
Other Intangible Assets, goodwill and other intangible
assets deemed to have indefinite lives are no longer amortized
but are subject to annual impairment tests. Other intangible
assets continue to be amortized over their useful lives.
Changes in the carrying amount of goodwill for the years ended
December 31, 2007 and 2006, by operating segment, were as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Environmental
|
|
|
Fire
|
|
|
Safety
|
|
|
|
|
|
|
|
|
|
Solutions
|
|
|
Rescue
|
|
|
Security
|
|
|
Tool
|
|
|
Total
|
|
|
December 31, 2005
|
|
$
|
125.8
|
|
|
$
|
37.0
|
|
|
$
|
88.7
|
|
|
$
|
55.8
|
|
|
$
|
307.3
|
|
Translation
|
|
|
0.4
|
|
|
|
1.6
|
|
|
|
1.3
|
|
|
|
|
|
|
|
3.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2006
|
|
|
126.2
|
|
|
|
38.6
|
|
|
|
90.0
|
|
|
|
55.8
|
|
|
|
310.6
|
|
Acquisitions
|
|
|
|
|
|
|
|
|
|
|
90.5
|
|
|
|
|
|
|
|
90.5
|
|
Translation
|
|
|
0.5
|
|
|
|
3.1
|
|
|
|
2.0
|
|
|
|
|
|
|
|
5.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007
|
|
$
|
126.7
|
|
|
$
|
41.7
|
|
|
$
|
182.5
|
|
|
$
|
55.8
|
|
|
$
|
406.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Under SFAS No. 142, the Company is required to test
its goodwill annually for impairment; the Company performs this
test in the fourth quarter. The Company performed this test in
2007 and determined that there was no impairment. The Company
determined the fair value of each reporting unit by calculating
the present value of expected future cash flows. See
Note 11 for a discussion of goodwill additions, as a result
of acquisitions in the year ended December 31, 2007.
52
FEDERAL
SIGNAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ in millions, except per share
data) (Continued)
The components of the Companys other intangible assets are
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
December 31, 2007
|
|
|
December 31, 2006
|
|
|
|
Average
|
|
|
Gross
|
|
|
|
|
|
Net
|
|
|
Gross
|
|
|
|
|
|
Net
|
|
|
|
Useful Life
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
Carrying
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
Carrying
|
|
|
|
(Years)
|
|
|
Value
|
|
|
Amortization
|
|
|
Value
|
|
|
Value
|
|
|
Amortization
|
|
|
Value
|
|
|
Definite lived (amortizable):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Developed software
|
|
|
6
|
|
|
$
|
24.2
|
|
|
$
|
(10.9
|
)
|
|
$
|
13.3
|
|
|
$
|
15.3
|
|
|
$
|
(8.3
|
)
|
|
$
|
7.0
|
|
Patents
|
|
|
5-10
|
|
|
|
0.6
|
|
|
|
(0.4
|
)
|
|
|
0.2
|
|
|
|
0.5
|
|
|
|
(0.4
|
)
|
|
|
0.1
|
|
Customer relationships
|
|
|
5-10
|
|
|
|
20.1
|
|
|
|
(0.9
|
)
|
|
|
19.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Technology
|
|
|
10
|
|
|
|
5.9
|
|
|
|
(0.3
|
)
|
|
|
5.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
3
|
|
|
|
2.8
|
|
|
|
(0.7
|
)
|
|
|
2.1
|
|
|
|
1.2
|
|
|
|
(0.1
|
)
|
|
|
1.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
53.6
|
|
|
|
(13.2
|
)
|
|
|
40.4
|
|
|
|
17.0
|
|
|
|
(8.8
|
)
|
|
|
8.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Indefinite lived :
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade name
|
|
|
|
|
|
|
25.6
|
|
|
|
|
|
|
|
25.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
$
|
79.2
|
|
|
$
|
(13.2
|
)
|
|
$
|
66.0
|
|
|
$
|
17.0
|
|
|
$
|
(8.8
|
)
|
|
$
|
8.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Note 11 for a discussion of intangible additions as a
result of acquisitions in the year ended December 31, 2007.
Amortization expense for the year ended December 31, 2007,
2006 and 2005 totaled $4.6 million, $2.2 million and
$1.7 million, respectively. The Company estimates that the
aggregate amortization expense will be $6.3 million in
2008, $6.2 million in 2009, $5.7 million in 2010,
$5.5 million in 2011, $4.4 million in 2012 and
$12.3 million thereafter.
|
|
NOTE 13
|
DISCONTINUED
OPERATIONS
|
The following table shows an analysis of assets and liabilities
of discontinued operations as of December 31:
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
|
($ in millions)
|
|
|
Current assets
|
|
$
|
4.5
|
|
|
$
|
18.2
|
|
Properties and equipment
|
|
|
|
|
|
|
12.9
|
|
Long-term assets
|
|
|
|
|
|
|
26.7
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
4.5
|
|
|
$
|
57.8
|
|
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
|
0.2
|
|
|
|
7.2
|
|
Long-term liabilities
|
|
|
16.7
|
|
|
|
24.0
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
$
|
16.9
|
|
|
$
|
31.2
|
|
|
|
|
|
|
|
|
|
|
Included in long-term liabilities is $13.7 million relating
to estimated product liability obligations of the North American
refuse truck body business.
53
FEDERAL
SIGNAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ in millions, except per share
data) (Continued)
The following table presents the operating results of the
Companys discontinued operations for the three-year period
ended December 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Net sales
|
|
$
|
3.1
|
|
|
$
|
83.8
|
|
|
$
|
101.7
|
|
Costs and expenses
|
|
|
(2.9
|
)
|
|
|
(97.5
|
)
|
|
|
(161.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
0.2
|
|
|
|
(13.7
|
)
|
|
|
(60.0
|
)
|
Income tax benefit
|
|
|
0.3
|
|
|
|
2.0
|
|
|
|
11.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from discontinued operations
|
|
$
|
0.5
|
|
|
$
|
(11.7
|
)
|
|
$
|
(48.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On January 31, 2007, the Company completed the sale of
Manchester Tool Company, On Time Machining Company and Clapp
Dico, referred to collectively as the Cutting Tool
Operations which were part of the Tool Group for
$65.4 million. There was a net gain on disposal of
discontinued operations of $24.6 million for the year ended
December 31, 2007. These operations produced industrial
cutting tools, engineered components and advanced materials
consumed in production processes. Included in long-term assets
of discontinued operations at December 31, 2006 was
$26.1 million of goodwill. No asset impairment charges were
recorded in conjunction with the disposal. Revenues relating to
Cutting Tool Operations amounted to $3.0 million,
$37.8 million and $37.9 million for the years ended
December 31, 2007, 2006 and 2005, respectively. Income from
Cutting Tool operations, net of tax, were $0.2 million,
$4.1 million and $3.4 million for the years ended
December 31, 2007, 2006 and 2005, respectively.
In December 2005, the Company determined that its investment in
the North American refuse truck body business, operating under
the Leach brand name, was no longer strategic. The assets of
this business were held for sale as of December 31, 2005
and 2006. In August 2006, the Company completed the sale of
certain Leach refuse truck body business assets. The transaction
included specified inventories and equipment and responsibility
of the Wisconsin office and associated employees. The
transaction did not include the Companys Alberta
manufacturing facility which has subsequently been sold. The
loss from discontinued operations included $9.7 million and
$34.1 million of after tax impairment charges related to
the disposal of refuse assets for the years ended
December 31, 2006 and 2005, respectively. Losses from the
operations of the business, net of tax, were $6.1 million
and $15.7 million for the years ended December 31,
2006 and 2005, respectively.
In December 2005, the Company completed the closure of
operations at Federal APD do Brasil, LTDA. The loss on disposal
was $1.6 million after tax due to asset impairments and
closure costs; this included $0.9 million of goodwill
attributable to this business. This business produced parking
systems for the local market primarily in Brazil. Revenues
amounted to $0.9 million for the year ended
December 31, 2005. Losses from operations, net of tax,
totaled $0.5 million for the year ended December 31,
2005.
|
|
NOTE 14
|
ASSET
DISPOSITIONS
|
In December 2006, the Company disposed of the land and buildings
of the fire truck plant in Red Deer, Alberta for proceeds of
$2.5 million and recorded a pre-tax gain of
$1.4 million.
In 2005, the Company completed two significant asset
dispositions. In May 2005, the Company sold the land and
buildings of the refuse truck body plant in Oshkosh, Wisconsin
for proceeds of $5.8 million and recorded a pre-tax gain of
$1.0 million. In July 2005, the Company sold two product
lines in Newcastle, England for proceeds of $11.9 million
and recorded a pre-tax gain of $6.7 million. The Company
also sold three other properties for total proceeds of
$4.3 million and total pre-tax gains of $1.3 million.
54
FEDERAL
SIGNAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ in millions, except per share
data) (Continued)
|
|
NOTE 15
|
LEGAL
PROCEEDINGS
|
The Company is subject to various claims, other pending and
possible legal actions for product liability and other damages
and other matters arising out of the conduct of the
Companys business. The Company believes, based on current
knowledge and after consultation with counsel, that the outcome
of such claims and actions will not have a material adverse
effect on the Companys consolidated financial position or
the results of operations. However, in the event of unexpected
future developments, it is possible that the ultimate resolution
of such matters, if unfavorable, could have a material adverse
effect on the Companys results of operations.
The Company has been sued in Chicago, Illinois by firefighters
seeking damages claiming that exposure to the Companys
sirens has impaired their hearing and that the sirens are
therefore defective. There are presently 33 cases filed during
the period
1999-2004,
involving a total of 2,498 plaintiffs pending in the Circuit
Court of Cook County, Illinois. The plaintiffs attorneys
have threatened to bring more suits in the future. The Company
is aggressively defending the matters and believes that these
product liability suits have no merit and that sirens are
necessary in emergency situations and save lives. The court
ordered that the trial of the first 28 plaintiffs will begin on
March 18, 2008. The Company has retained the experienced
Chicago trial law firm of Bartlit Beck Herman
Palenchar & Scott to try the first case. A second
trial has been ordered of an as yet unspecified number of
plaintiffs in June 2008. Thereafter, trials involving other
Chicago fire fighters are scheduled to take place every four
months. On December 13, 2007 the trial judge denied a
second motion filed by plaintiffs seeking to add a claim for
punitive damages against Federal Signal. The Company
successfully defeated Plaintiffs earlier motion in
February 2006.
Federal Signal has been sued outside of the Cook County venue by
a relatively small number of plaintiffs. To date, 24 plaintiffs
have filed 15 lawsuits in 10 jurisdictions in four states. With
the exception of the four plaintiffs who have filed suit in New
Jersey, all plaintiffs have stipulated to or claimed less than
$75,000 in damages. Four cases in the Supreme Court of Kings
County, New York were dismissed on January 25, 2008 after
the court granted Federal Signals motion to dismiss which
eliminated all claims pending in New York. The four states in
which plaintiffs currently have filings include the following:
Missouri (Circuit Courts of Clay and Jackson Counties); Maryland
(Circuit Courts for Baltimore City, Montgomery County and Prince
Georges County); New Jersey (Bergen, Essex, Hudson and
Passaic Counties); and, Pennsylvania (Court of Common Pleas of
Philadelphia County). The Company intends to vigorously defend
all of these lawsuits. The Company successfully defended
approximately 41 similar cases in Philadelphia, Pennsylvania in
1999 resulting in a series of unanimous jury verdicts in favor
of the Company.
Federal Signals ongoing negotiations with CNA over
insurance coverage resulted in an agreement under which CNA
reimbursed $3.7 million to the Company in 2007 representing
a percentage of past defense costs and agreed to cover a
percentage of defense costs going forward.
|
|
NOTE 16
|
SEGMENT
AND RELATED INFORMATION
|
The Company has four continuing operating segments as defined
under SFAS No. 131, Disclosures about Segments
of an Enterprise and Related Information. Business units
are organized under each segment because they share certain
characteristics, such as technology, marketing, distribution and
product application, which create long-term synergies. The
principal activities of the Companys operating segments
are as follows:
Information regarding the Companys discontinued operations
is included in Note 13 Discontinued Operations.
The segment information included herein has been reclassified to
reflect such discontinued operations.
Safety and Security Systems Safety and
Security Systems Group companies produce a variety of systems
for automated license plate recognition, campus and community
alerting, emergency vehicles, first responder interoperable
communications, industrial communications and command, municipal
networked security and parking revenue and access control for
municipal, governmental and industrial applications. Specific
products include access control devices, lightbars and sirens,
public warning sirens, public safety software and automated
55
FEDERAL
SIGNAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ in millions, except per share
data) (Continued)
license plate recognition cameras. The groups products are
sold primarily to industrial, municipal and governmental
customers.
Fire Rescue Fire Rescue manufactures chassis;
fire trucks, including Class A pumpers, mini-pumpers and
tankers; airport and other rescue vehicles, aerial access
platforms and aerial ladder devices. This group sells primarily
to municipal and government customers, volunteer fire
departments and industry.
Environmental Solutions Environmental
Solutions manufactures a variety of self-propelled street
cleaning vehicles, vacuum loader vehicles, municipal catch
basin/sewer cleaning vacuum trucks and water blasting equipment.
Environmental Solutions sells primarily to municipal and
government customers and industrial contractors.
Tool Tool manufactures a variety of
consumable tools which include die components for the metal
stamping industry and a large selection of precision metal
products for plastic molding needs. The groups products
are sold almost entirely to industrial customers.
Net sales by operating segment reflect sales of products and
services and financial revenues to external customers, as
reported in the Companys consolidated statements of
operations. Intersegment sales are insignificant. The Company
evaluates performance based on operating income of the
respective segment. Operating income includes all revenues,
costs and expenses directly related to the segment involved. In
determining operating segment income, neither corporate nor
interest expenses are included. Operating segment depreciation
expense, identifiable assets and capital expenditures relate to
those assets that are utilized by the respective operating
segment. Corporate assets consist principally of cash and cash
equivalents, notes and other receivables and fixed assets. The
accounting policies of each operating segment are the same as
those described in the summary of significant accounting
policies.
Revenues attributed to customers located outside of the US
aggregated $467.1 million in 2007, $420.9 million in
2006 and $329.5 million in 2005. Of that, sales exported
from the US aggregated $163.7 million in 2007,
$151.4 million in 2006 and $100.8 million in 2005.
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
$30.9 million in 2007, $23.1 million in 2006 and
$19.7 million in 2005.
56
FEDERAL
SIGNAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ in millions, except per share
data) (Continued)
A summary of the Companys continuing operations by segment
for each of the three years in the period ended
December 31, 2007 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Net sales
|
|
|
|
|
|
|
|
|
|
|
|
|
Safety and Security Systems
|
|
$
|
367.2
|
|
|
$
|
304.5
|
|
|
$
|
276.5
|
|
Fire Rescue
|
|
|
330.8
|
|
|
|
384.8
|
|
|
|
371.2
|
|
Environmental Solutions
|
|
|
450.8
|
|
|
|
399.4
|
|
|
|
347.7
|
|
Tool
|
|
|
119.3
|
|
|
|
122.9
|
|
|
|
123.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net sales
|
|
$
|
1,268.1
|
|
|
$
|
1,211.6
|
|
|
$
|
1,119.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
|
|