SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
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COMMISSION FILE NUMBER 1-6003
FEDERAL SIGNAL CORPORATION
(Exact name of the Registrant as specified in its charter)
DELAWARE 36-1063330
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1415 WEST 22ND STREET,
OAK BROOK, ILLINOIS 60523
(Address of principal executive offices) (Zip Code)
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THE REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (630) 954-2000
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
---------------------------------------------- ----------------------------------------------
Common Stock, par value $1.00 per share, with New York Stock Exchange
preferred share purchase rights
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SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: NONE
Indicate by check mark whether the Registrant (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 Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (sec.229.405 of this chapter) is not contained herein, and will not be contained, to the best of the Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X]
State the aggregate market value of voting stock held by nonaffiliates of the Registrant as of June 30, 2003.
Common stock, $1.00 par value -- $784,350,110
Indicate the number of shares outstanding of each of the Registrant's classes of common stock, as of January 30, 2004.
Common stock, $1.00 par value -- 47,964,470 shares
DOCUMENTS INCORPORATED BY REFERENCE
FEDERAL SIGNAL CORPORATION
INDEX TO FORM 10-K
PAGE
----
PART I
Item 1. Business.................................................... 2
Item 2. Properties.................................................. 6
Item 3. Legal Proceedings........................................... 6
Item 4. Submission of Matters to a Vote of Security Holders......... 6
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters......................................... 6
Item 6. Selected Financial Data..................................... 7
Item 7. Management's Discussion and Analysis of Financial Conditions
and Results of Operations................................... 8
Item 7a. Quantitative and Qualitative Disclosures about Market
Risk........................................................ 19
Item 8. Financial Statements and Supplementary Data................. 20
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 53
Item 9a. Controls and Procedures..................................... 53
PART III
Item 10. Directors and Executive Officers of the Registrant.......... 53
Item 11. Executive Compensation...................................... 54
Item 12. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters.................. 54
Item 13. Certain Relationships and Related Transactions.............. 54
Item 14. Principal Accountant Fees and Services...................... 54
PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports on Form
8-K......................................................... 54
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PART I
ITEM 1. BUSINESS.
Federal Signal Corporation, founded in 1901, was reincorporated as a Delaware Corporation in 1969. The company is a worldwide manufacturer and supplier of street cleaning, vacuum loader and refuse collection vehicles; fire rescue vehicles; safety, signaling and communication equipment and tooling products. Federal Signal Corporation and its subsidiaries (referred to collectively as the "Registrant" or "company" herein, unless context otherwise indicates) operates manufacturing facilities in 52 plants around the world in 12 countries serving customers in North America, South America, Europe and Asia. The Registrant also provides customer and dealer financing to support the sale of its vehicles.
NARRATIVE DESCRIPTION OF BUSINESS
Products manufactured and services rendered by the Registrant are divided into four major operating groups: Environmental Products, Fire Rescue, Safety Products and Tool. The individual operating companies are organized as such because they share certain characteristics, including technology, marketing, distribution and product application, that create long-term synergies.
Financial information (net sales, foreign sales, export sales, operating income and identifiable assets) concerning the Registrant's four operating segments as of and for the three years ended December 31, 2003 included in Note M of the financial statements contained under Item 8 of the Form 10-K is incorporated herein by reference.
ENVIRONMENTAL PRODUCTS GROUP
The Environmental Products Group manufactures and markets worldwide a full range of street cleaning, vacuum loader and refuse collection vehicles as well as high-performance water blasting equipment. Products are also manufactured for the emerging markets of hydro-excavation, glycol recovery and surface cleaning. The group competes under the Elgin, RAVO, Vactor, Guzzler, Jetstream, Leach and Wittke brand names. The group's vehicles and equipment are manufactured in North America and Europe.
Through the Elgin brand name, the Registrant is the leading U.S. brand of street sweepers primarily designed for large-scale cleaning of curbed streets, parking lots and other paved surfaces utilizing mechanical sweeping, vacuum and recirculating air technology for cleaning. RAVO is a market leader in Europe for high-quality, compact and self-propelled sweepers that utilize vacuum technology for pick-up.
In March 2001, the group acquired all of the assets of Athey Products Corporation ("Athey") from bankruptcy proceedings. Athey was a primary competitor to Elgin's mechanical sweepers. Subsequent to the purchase, the group sold, or otherwise recovered for cash, a substantial portion of the assets of Athey. All sweepers are currently marketed under the Elgin brand name.
Vactor is a leading manufacturer of municipal combination catch basin/sewer cleaning vacuum trucks. Guzzler is a leader in industrial vacuum loaders that clean up industrial waste or recover and recycle valuable raw materials. Jetstream manufactures high pressure waterblast equipment and accessories for commercial and industrial cleaning and maintenance operations.
In September and October 2002, the group acquired Leach Company ("Leach") and Wittke, Inc. ("Wittke"). The acquisitions of Leach and Wittke diversified the Registrant's environmental vehicle offering with a complete refuse hauling product line of front, side and rear loaders that was able to leverage the group's pre-existing dealer channel, integrate Leach's already existing dealer network and incorporate Wittke's direct distribution channel. Refuse truck body sales aggregated 26% of total group sales in 2003.
FIRE RESCUE GROUP
The Fire Rescue Group manufactures a broad range of fire rescue vehicles in its facilities located in North America and Europe. The group sells vehicles under the following brand names: E-ONE, Superior, Saulsbury and Bronto Skylift.
E-ONE is a leading brand of aluminum, custom-made fire rescue, airport rescue and firefighting vehicles. Superior brand trucks are manufactured and distributed primarily for the Canadian market and U.S. wildlands markets. Saulsbury is a leading manufacturer of stainless steel-bodied fire trucks and rescue vehicles in the United States. Under the Bronto Skylift brand name, the Registrant manufactures vehicle-mounted aerial access platforms in Finland.
In October 2001, the Registrant acquired a majority interest in Plastisol Holdings B.V. ("Plastisol"), located in the Netherlands. Plastisol manufactures cabs and bodies for fire apparatus using glass-fiber reinforced polyester.
SAFETY PRODUCTS GROUP
The Safety Products Group manufactures emergency vehicle warning lights and sirens; industrial and outdoor signaling, warning, lighting and communication devices; hazardous liquid containment products and computer-based parking revenue and access control systems application software. Products are sold under the Federal Signal, VAMA, Pauluhn, Victor, Justrite and Federal APD brand names. The group maintains manufacturing facilities in North America, South America and Europe. Many of the group's products are designed in accordance with various regulatory codes and standards, and meet agency approvals such as Factory Mutual (FM) and Underwriters Laboratory (UL).
TOOL GROUP
The Tool Group manufactures a broad range of consumable carbide and superhard insert tooling for cutoff, drilling, milling and deep grooving metal cutting applications; precision tooling, ejector pins, core pins, sleeves and accessories for the plastic injection mold industry and precision tooling and die components for the metal stamping industry. Tooling products are marketed under the Dayton, JPT, TTI, Manchester, Clapp Dico and PCS brand names and manufactured in North America, Europe and Asia.
The Registrant's investment in the Tool Group grew significantly due to a series of acquisitions from 1999 through 2001. In July 1999, the group acquired Clapp & Haney Tool Company, the leading U.S. manufacturer and marketer of polycrystalline diamond and cubic boron nitride consumable tooling. In March 2000, the group acquired P.C.S. Company, a supplier of precision tooling, pins and accessories to the plastic injection mold industry. In January 2001, the group acquired On Time Machining Company, a manufacturer of indexable insert drills and milling cutters for use in metal cutting applications.
FINANCIAL SERVICES
The Registrant offers a variety of short- and long-term financing primarily to its Environmental Products and Fire Rescue independent dealers and customers. The company's loans are to (i) municipal and industrial customers to purchase vehicles and (ii) independent dealers to finance the purchase of vehicle inventory. The loans are typically secured by vehicles and, in the case of the independent dealers, the dealer's personal guarantee. In late 2001, the Registrant decided to significantly curtail new lending to industrial customers, which generally have a higher credit risk; this portfolio is diminishing over time.
MARKETING AND DISTRIBUTION
The Registrant believes its national and global dealer network for
Environmental Products and Fire Rescue vehicles distinguishes itself from its
competitors. Dealer representatives are on-hand to demonstrate the vehicle's
functionality and capability to customers as well as service the vehicles on a
timely basis. The acquisitions of the refuse businesses provide a unique
opportunity for the Registrant's already existing dealers to offer another
product line in their showrooms. Wittke sold direct to customers at the time of
the acquisition
and while it still maintains that direct distribution channel, the dealer network is being utilized to capture market share in its respective markets. The Registrant believes that Wittke's direct distribution channel is also a competitive advantage in that dealer commissions are avoided and the sales force is more focused.
The Safety Products Group companies sell to industrial customers through manufacturers' representatives who sell to approximately 1,500 wholesalers. Products are also sold to governmental customers through more than 900 active independent distributors as well as through original equipment manufacturers and direct sales. International sales are made through the group's independent foreign distributors or on a direct basis.
Because of the nature of the Tool Group's products, volume depends mainly on repeat orders from thousands of customers. Many of the Tool Group's customers have some ability to produce certain products themselves, but at a cost disadvantage. Major market emphasis is placed on quality of product, delivery and level of service. Inventories are maintained to assure prompt service to the customer with the average order for standard tools filled in less than one week for domestic shipments and within two weeks for international shipments.
CUSTOMERS AND BACKLOG
Approximately 40%, 31% and 29% of the Registrant's total 2003 orders were to U.S. municipal and government customers, U.S. commercial and industrial customers and non-U.S. customers, respectively. Waste Management, Inc. accounted for approximately 25% of the Registrant's 2003 refuse sales. No other single customer accounted for a material part of the Registrant's business.
The company's U.S. municipal and government customers depend on tax revenues. A sluggish industrial economy, therefore, will eventually impact a municipality's revenue base as jobs are lost and profits decline. Generally, the municipal trough lags far enough behind the industrial slowdown such that the industrial economy is growing again by the time municipalities reduce their spending. The U.S. economic downturn from 2001 to 2003 lasted longer than expected, allowing spending cuts by municipalities to affect the company during the same time period as weak industrial demand was experienced.
The Registrant's backlog totaled $362 million and $422 million as of December 31, 2003 and 2002, respectively. The 14% decrease is primarily due to weak refuse truck demand, deteriorating municipal government budgets and orders for vehicular emergency lights and sirens, a $19 million initial installment of the Dallas/Fort Worth parking project received in the third quarter of 2002 and an unusually high Fire Rescue backlog at the end of 2002 due to poor production performance in its U.S. plants. A substantial majority of the orders in backlog at December 31, 2003 are expected to be filled within the current fiscal year.
SUPPLIERS
The Registrant purchases a wide variety of raw materials for use in the manufacture of its products from around the world, although the majority of current purchases are from North American sources. To minimize availability, price and quality risk, the Registrant is party to numerous supplier strategic alliances. Although certain materials are obtained from either a single-source supplier or a limited number of suppliers, the Registrant has identified alternative sources to minimize the interruption to its business in the event of supply problems.
Components critical in the production of the Registrant's vehicles (such as engines, transmissions, drivetrains, axles and tires) are purchased from a select number of suppliers and may be specified by the customer. The Registrant also purchases raw and fabricated aluminum and steel as well as commercial chassis with certain specifications from a few sources.
The Registrant believes it has adequate supplies or sources of availability of the raw material and components necessary to meet its needs. However, there are risks and uncertainties with respect to the supply of certain of these raw materials that could impact their price and availability in sufficient quantities.
COMPETITION
Within the Environmental Products Group, Elgin is recognized as the market leader among several competitors and differentiates itself primarily on product performance. RAVO also competes on product performance through its vacuum technology and successfully leads in market share for compact sweepers among several regional European manufacturers. Vactor and Guzzler both maintain the leading position in their respective marketplaces by enhancing product performance with leading technology and application flexibility. Jetstream is the market leader in the in-plant cleaning segment competing on price and delivery performance. Combined, Leach and Wittke are third in market share for refuse bodies; their vehicles compete on product performance through technology and service delivery via their dealer network.
E-ONE is a leading manufacturer of U.S. aluminum-bodied fire apparatus and custom chassis in a market served by approximately ten key manufacturers and hundreds of small regional manufacturers. With its unique welded, extruded aluminum design, E-ONE is the U.S. market leader in aerials. In addition, E-ONE is the global market share leader of industrial pumpers serving the petrochemical industry with two primary international competitors and a few smaller manufacturers. E-ONE also competes with six manufacturers worldwide in the production of airport rescue and firefighting vehicles, consistently holding at least a number two position. The Saulsbury product line complements these offerings with stainless steel-bodied fire trucks and rescue vehicles. Bronto Skylift is the foremost manufacturer of high reach telescoping platforms for the global fire rescue and electric utility markets.
Within specific product categories and domestic markets, the Safety Products Group companies are typically the leaders among three to four strong competitors and six additional ancillary market participants. The international market position varies from leader to ancillary participant depending on the geographic region and product line. Generally, competition is intense as to all of the group's products and is based on price, including competitive bidding, reputation, performance and servicing.
The Tool Group companies compete with several hundred competitors worldwide. In North America, the Registrant holds a share position from number one to number four depending on the product offering. In addition, the Registrant believes it is a major supplier within these product lines.
RESEARCH AND DEVELOPMENT
The Registrant invests in research to support development of new products and the enhancement of existing products and services. The Registrant believes this investment is important to maintain and/or enhance it leadership position in key markets. Expenditures for research and development by the Registrant were approximately $33.2 million in 2003, $26.5 million in 2002 and $20.0 million in 2001.
PATENTS AND TRADEMARKS
The Registrant 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 Registrant also owns a number of trademarks that it believes are important in connection with the identification of its products and associated goodwill with customers, but no material part of the Registrant's business is dependent on such trademarks.
EMPLOYEES
The Registrant employed over 6,800 people in ongoing businesses at the close of 2003 as compared to 7,400 employees at the end of 2002. Approximately 10% of the Registrant's domestic hourly workers were unionized at December 31, 2003. The Registrant believes relations with its employees have been good.
GOVERNMENTAL REGULATION
The Registrant believes it is in substantial compliance with federal, state
and local provisions that have been enacted or adopted regulating the discharge
of materials into the environment, or otherwise relating to the protection of
the environment. Capital expenditures in 2003 attributable to compliance with
such laws
were not material. The Registrant believes that the overall impact of compliance with environmental regulations will not have a material effect on it future operations.
SEASONALITY
Certain of the Registrant's businesses are susceptible to the influences of seasonal buying or delivery patterns. The Registrant's businesses which tend to have lower sales in the first calendar quarter compared to other quarters as a result of these influences are street sweeping, fire rescue products, outdoor warning, municipal emergency signal products and parking systems.
ADDITIONAL INFORMATION
The Registrant makes its annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports available, free of charge, through its Internet website (http://www.federalsignal.com) as soon as reasonably practical after it electronically files or furnishes such materials to the Securities and Exchange Commission ("SEC"). All of the Registrant's filings may be read or copied at the SEC's Public Reference Room at 450 Fifth Street, NW, Washington, DC 20549. Information on the operation of the Public Filing Room can be obtained by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet website (http://www.sec.gov) that contains reports, proxy and information statements and other information regarding issuers that file electronically.
ITEM 2. PROPERTIES.
As of December 31, 2003, the Registrant utilized 33 principal manufacturing plants located throughout North America, as well as 16 in Europe, 1 in South Africa, 1 in South America, and 1 in the Far East.
In total, the Registrant devoted approximately 2,402,000 square feet to manufacturing and 1,132,000 square feet to service, warehousing and office space as of December 31, 2003. Of the total square footage, approximately 32% is devoted to the Safety Products Group, 12% to the Tool Group, 25% to the Fire Rescue Group and 31% to the Environmental Products Group. Approximately 71% of the total square footage is owned by the Registrant, with the remaining 29% being leased.
All of the Registrant's properties, as well as the related machinery and equipment, are considered to be well-maintained, suitable and adequate for their intended purposes. In the aggregate, these facilities are of sufficient capacity for the Registrant's current business needs.
ITEM 3. LEGAL PROCEEDINGS.
The information concerning the Registrant's legal proceedings included in Note L of the financial statements contained under Item 8 of this Form 10-K is incorporated herein by reference.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of security holders through the solicitation of proxies or otherwise during the three months ended December 31, 2003.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Federal Signal Corporation's common stock is listed and traded on the New York Stock Exchange ("NYSE") under the symbol FSS. The information concerning the Registrant's market price range and dividend per share data included in Note R of the financial statements contained under Item 8 of this Form 10-K is incorporated herein by reference. As of January 30, 2004, there were 3,587 holders of record of the Registrant's common stock.
ITEM 6. SELECTED FINANCIAL DATA.
The following table presents the selected financial information of the Registrant as of and for the 11 years ended December 31, 2003:
2003 2002 2001 2000 1999 1998 1997 1996 1995 1994
-------- -------- -------- -------- -------- ------ ------ ------ ------ ------
Operating Results (dollars in
millions):
Net sales(a)................. $1,206.8 $1,057.2 $1,072.2 $1,106.1 $ 977.2 $936.8 $858.6 $814.1 $744.9 $611.1
Income before income
taxes(a,b)................. $ 46.0 $ 61.1 $ 64.5 $ 84.4 $ 79.3 $ 79.4 $ 81.5 $ 86.6 $ 77.8 $ 66.2
Income from continuing
operations(a,b)............ $ 37.7 $ 46.2 $ 46.6 $ 57.7 $ 54.4 $ 55.1 $ 56.9 $ 57.8 $ 51.9 $ 44.3
Operating margin(a).......... 5.5% $ 7.8% 8.6% 10.5% 10.4% 10.4% 11.2% 11.8% 12.1% 12.2%
Return on average common
shareholders'
equity(b,c,d).............. 9.1% 12.1% 13.3% 16.4% 17.0% 19.1% 20.6% 23.8% 22.0% 22.3%
Common Stock Data (per
share)(e):
Income from continuing
operations -- diluted...... $ .79 $ 1.01 $ 1.03 $ 1.27 $ 1.18 $ 1.20 $ 1.24 $ 1.26 $ 1.13 $ .96
Cash dividends............... $ .80 $ .80 $ .78 $ .76 $ .74 $ .71 $ .67 $ .58 $ .50 $ .42
Market price range:
High....................... $ 20.79 $ 27.07 $ 24.63 $ 24.13 $ 28.06 $27.50 $26.75 $28.25 $25.88 $21.38
Low........................ $ 13.60 $ 16.00 $ 17.00 $ 14.75 $ 15.06 $20.00 $19.88 $20.88 $19.63 $16.88
Average common shares
outstanding (in
thousands)................. 47,984 45,939 45,443 45,521 45,958 45,846 45,840 45,885 45,776 45,948
Financial Position at Year-End
(dollars in millions):
Working capital(f,g)......... $ 119.2 $ 172.9 $ 151.6 $ 60.0 $ 71.6 $116.0 $ 41.6 $ 40.6 $ 48.8 $ 53.9
Current ratio(f,g)........... 1.4 1.8 1.8 1.2 1.3 1.6 1.2 1.2 1.3 1.4
Total assets................. $1,186.4 $1,168.4 $1,026.9 $1,001.4 $ 948.6 $836.0 $727.9 $703.9 $620.0 $521.6
Long-term debt, net of
current portion(f)......... $ 194.1 $ 279.5 $ 232.7 $ 125.4 $ 134.4 $137.2 $ 32.1 $ 34.3 $ 39.7 $ 34.9
Shareholders' equity......... $ 422.5 $ 398.1 $ 359.4 $ 357.4 $ 354.0 $321.8 $299.8 $272.8 $248.1 $220.3
Debt-to-capitalization
ratio(f)................... 40% 44% 44% 45% 42% 37% 30% 28% 29% 22%
Other (dollars in millions):
Orders(a).................... $1,143.8 $1,121.2 $1,082.4 $1,113.7 $1,018.8 $967.9 $888.8 $851.3 $704.9 $631.5
Backlog(a)................... $ 361.8 $ 422.0 $ 352.2 $ 339.9 $ 329.5 $305.0 $254.7 $227.6 $190.0 $204.0
Net cash provided by
operating activities....... $ 75.4 $ 88.4 $ 95.1 $ 64.4 $ 57.7 $ 75.5 $ 64.2 $ 61.4 $ 62.9 $ 53.8
Net cash used for investing
activities................. $ (15.2) $ (57.3) $ (59.2) $ (64.8) $ (105.1) $(93.0) $(38.4) $(54.2) $(88.1) $(96.9)
Net cash provided by (used
for) financing
activities................. $ (59.8) $ (38.1) $ (32.6) $ 5.2 $ 40.9 $ 22.2 $(27.5) $ (4.1) $ 29.9 $ 45.1
Capital expenditures(a)...... $ 17.9 $ 20.1 $ 18.4 $ 22.3 $ 23.4 $ 19.2 $ 18.2 $ 15.2 $ 14.2 $ 9.9
Depreciation(a).............. $ 23.9 $ 21.7 $ 20.0 $ 19.5 $ 17.1 $ 14.9 $ 13.3 $ 11.8 $ 10.5 $ 8.9
Employees(a)................. 6,812 7,378 6,631 6,936 6,750 6,531 6,102 5,721 5,469 4,638
1993
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Operating Results (dollars in
millions):
Net sales(a)................. $506.7
Income before income
taxes(a,b)................. $ 57.6
Income from continuing
operations(a,b)............ $ 39.0
Operating margin(a).......... 12.4%
Return on average common
shareholders'
equity(b,c,d).............. 21.0%
Common Stock Data (per
share)(e):
Income from continuing
operations -- diluted...... $ .85
Cash dividends............... $ .36
Market price range:
High....................... $21.00
Low........................ $15.75
Average common shares
outstanding (in
thousands)................. 46,155
Financial Position at Year-End
(dollars in millions):
Working capital(f,g)......... $ 52.8
Current ratio(f,g)........... 1.5
Total assets................. $405.7
Long-term debt, net of
current portion(f)......... $ 21.1
Shareholders' equity......... $199.2
Debt-to-capitalization
ratio(f)................... 1%
Other (dollars in millions):
Orders(a).................... $526.0
Backlog(a)................... $167.6
Net cash provided by
operating activities....... $ 48.8
Net cash used for investing
activities................. $(38.1)
Net cash provided by (used
for) financing
activities................. $(10.3)
Capital expenditures(a)...... $ 9.1
Depreciation(a).............. $ 7.5
Employees(a)................. 3,847
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(b) in 1996, includes gain on sale of subsidiary of $4.7 million pre-tax, $2.8 million after-tax or $.06 per share
(c) in 1995, includes the effect of a nonrecurring charge for a litigation settlement related to a discontinued business of $4.2 million after-tax
(d) excludes cumulative effects of changes in accounting
(e) reflects 4-for-3 stock split in 1994
(f) manufacturing operations only
(g) in 2001, increase largely attributable to refinancing of short-term debt with funded long-term debt
The information concerning the Registrant's selected quarterly data included in Note R of the financial statements contained under Item 8 of this Form 10-K is incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Federal Signal Corporation manufactures a broad range of fire rescue vehicles; municipal and industrial cleaning vehicles and equipment; safety, signaling and communication equipment and tooling products. Due to technology, marketing, distribution and product application synergies, the company's business units are organized and managed in four operating segments: Fire Rescue, Environmental Products, Safety Products and Tool. The company also provides customer and dealer financing to support the sale of vehicles. The information concerning the company's manufacturing businesses included in Item 1 of this Form 10-K and Notes K and M of the financial statements contained under Item 8 of this Form 10-K are incorporated herein by reference.
RESULTS OF OPERATIONS
Orders increased 2% in 2003 to $1.14 billion as the benefit of the refuse truck body businesses acquired in late 2002 and foreign currency translation effects on non-U.S. sales more than offset order declines in other businesses. Excluding the newly-acquired refuse businesses, orders declined 3% in 2003, reflecting weak municipal and industrial markets present throughout the year. Sales increased 14% to $1.21 billion in 2003 largely as a result of the refuse truck body business acquisitions and increased Fire Rescue deliveries. The 14% sales increase included 6% from acquisitions, 3% from foreign currency translation effects, 1% from price increases and 4% from volume. Despite the significant increase in sales, income from continuing operations declined 18% in 2003. Cyclically weak U.S. municipal and industrial markets adversely affected sales of high margin products in the Safety Products and Tool groups and depressed earnings in the refuse truck body businesses. In addition, production facility shutdown charges and higher pension and health care costs adversely affected 2003 results. Partially offsetting were lower interest expense and income taxes. As a result, diluted earnings per share from continuing operations declined 22% to $.79 in 2003 compared to $1.01 in 2002.
In 2002, diluted income per share from continuing operations totaled $1.01 on sales of $1.06 billion. This compares to earnings per share of $1.03 in 2001 on sales of $1.07 billion. Sales declined in the Fire Rescue and Tool groups; the Environmental Products and Safety Products groups both saw increases. The overall 1% sales decline reflected essentially flat selling prices in 2002 on continued weak industrial market conditions; the refuse body acquisitions in the fourth quarter of 2002 increased sales approximately 2%. Sales to customers in the United States declined 5% in 2002 and sales to non-U.S. customers increased 10% (3% net of currency effects). Orders increased 4% in 2002 to $1.12 billion due to the addition of the refuse truck body orders in the fourth quarter and strength in safety products markets, particularly the $19 million initial installment on the Dallas/Fort Worth International Airport parking revenue control system award received in the third quarter.
Net income in 2003 included a $.4 million after-tax charge, or $.01 per diluted share, relating to the loss on sale of the discontinued Sign Group operations completed in the second quarter. Net income in 2002 included an $8.0 million after-tax charge relating to the cumulative effect of a change in accounting for goodwill required by Statement of Financial Accounting Standards (SFAS) No. 142, "Goodwill and Other Intangible Assets". Net income in 2001 included $5.5 million of after-tax expense relating to goodwill amortization; beginning in 2002, goodwill is no longer amortized in accordance with SFAS No. 142.
The following table summarizes the company's results of operations for the three-year period ended December 31, 2003 (in millions):
2003 2002 2001
------------------ ------------------ ------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
-------- ------- -------- ------- -------- -------
Net sales............................. $1,206.8 100.0% $1,057.2 100.0% $1,072.2 100.0%
Cost of sales......................... 891.7 73.9 758.2 71.7 759.9 70.9
-------- ----- -------- ----- -------- -----
Gross profit.......................... 315.1 26.1 299.0 28.3 312.3 29.1
Operating expenses.................... 249.1 20.6 217.1 20.5 220.3 20.5
-------- ----- -------- ----- -------- -----
Operating income...................... 66.0 5.5 81.9 7.8 92.0 8.6
Interest expense and other............ (20.0) (1.7) (20.8) (2.0) (27.5) (2.6)
Income taxes.......................... (8.3) (0.7) (14.9) (1.4) (17.9) (1.7)
-------- ----- -------- ----- -------- -----
Income from continuing operations..... 37.7 3.1 46.2 4.4 46.6 4.3
Discontinued operations and change in
accounting principle................ (0.4) (8.0) (0.8) 1.0 0.1
-------- ----- -------- ----- -------- -----
Net income............................ $ 37.3 3.1% $ 38.2 3.6% $ 47.6 4.4%
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Operating income decreased 19% to $66.0 million in 2003 from $81.9 million in 2002. This 2.3 percentage point decline in operating margin from 7.8% in 2002 to 5.5% in 2003 reflects continued weakness in U.S. municipal and industrial markets, costs incurred to shut down production facilities in the U.K. and New York and increased employee pension and health care costs partly offset by material costs savings from new supplier alliances. The effects of weak markets were particularly evident in the results of the Environmental Products, Safety Products and Tool groups; Fire Rescue enjoyed sales and earnings increases, resulting in part from high backlogs at the beginning of 2003. In 2002, operating income declined 11% from $92.0 million in 2001 resulting in a .8 percentage point decrease in operating margin from 8.6% in 2001. The 2002 margin decline was essentially due to a very slow industrial economy that reduced sales of the company's higher-margin industrial products, reduced throughput and higher production costs that adversely affected Fire Rescue Group profitability and flat pricing.
Interest expense declined 2% to $19.8 million in 2003 from $20.1 million in 2002. This was as a result of slightly lower debt levels, favorable interest rate swap agreements and amortization of deferred gains on previously-terminated interest rate swaps; these factors were partially offset by higher borrowing costs as Standard and Poor's reduced their short-term debt rating of the company to A-3. The company replaced commercial paper borrowings with higher cost committed bank lines. The impact on 2003's operations as a result of the debt rating reduction totaled approximately $1.0 million. In 2002, interest expense declined $6.3 million, or 24%, from 2001 largely as a result of a much lower short-term interest rate environment in 2002. The lower interest rates were partially offset by increased borrowings in the fourth quarter of 2002 related to the acquisitions of the refuse truck body businesses. Weighted-average interest rates on short-term borrowings were 2.0% in 2003, 2.0% in 2002 and 4.6% in 2001.
The company's effective tax rate of 18.1% in 2003 was significantly below the 24.4% rate in 2002 and the 27.7% rate in 2001. The lower tax rate in 2003 reflects the effect of a one-time benefit associated with the closure of a production facility in the U.K. and the higher relative impact of tax credits and tax-exempt municipal income. The reduction in the effective tax rate in 2002 from 2001 reflects the increased mix of tax-exempt revenues earned by the company's Environmental Products and Fire Rescue groups, lower tax rates of the company's foreign operations, eliminating the amortization of non-deductible goodwill for financial reporting purposes due to the adoption of SFAS No. 142 and reduction in reserve needs for now-closed tax issues.
The company changed its assumptions for discount rates used in determining the actuarial present values of accumulated and projected benefit obligations for its postretirement plans. The company reduced the discount rate to 6.25% as of December 31, 2003 from 6.75% and 7.30% as of December 31, 2002 and 2001,
respectively, for its U.S. plans because of lower prevailing interest rates. The changes in the assumptions resulted in additional pension expense of $2.2 million in 2002 and an additional increase of $2.7 million in 2003. In January 2004, the company also established its other significant cost assumptions for its U.S. pension plans as follows: expected long-term rate of return on plan assets -- 9.0%; rate of increase in compensation levels -- 3.5%. The company expects that the change in these assumptions will further increase 2004 pension costs by approximately $2.4 million, or $.03 per share, compared to 2003. In 2001, the company incurred approximately $.7 million in nonrecurring pension costs as a result of the company's fourth quarter 2001 restructuring. The company also recorded an after-tax charge of $.4 million in 2003 and $13.8 million in 2002 to other comprehensive income representing the effect of an additional minimum pension liability. Like many companies, the company's pension plan performance was adversely affected by low asset returns and lower interest rates.
Certain of the company's businesses are susceptible to the influences of seasonal buying or delivery patterns. The company's businesses which tend to have lower sales in the first calendar quarter compared to other quarters as a result of these influences are street sweeping, fire rescue products, outdoor warning, municipal emergency signal products and parking systems.
ENVIRONMENTAL PRODUCTS OPERATIONS
The following chart presents the Environmental Products Group's results of operations for the three-year period ending December 31, 2003 (in millions):
LINE GRAPH
Orders increased 16% in 2003 due to the full-year effect of the refuse truck body acquisitions. Excluding the effects of the acquisitions, orders declined 4% reflecting weak U.S. municipal demand. Orders increased 7% in 2002 due mainly to the refuse acquisitions. Global sweeper orders declined 2% in 2002, as increased international business was more than offset by a 15% reduction in U.S. orders in light of deteriorating municipal government budgets.
Net sales increased 19% to $353 million in 2003 from $296 million in 2002 due to the full-year effect of the refuse body truck acquisitions; net sales of non-refuse operations declined 5% reflecting weak U.S. municipal demand and a reduction in finance revenues reflecting the runoff of the industrial leasing portfolio following the company's decision in 2001 to curtail this lending activity. Net sales increased 6% in 2002 from $281 million in 2001 largely as a result of the refuse truck body acquisitions in late 2002.
Operating income declined 23% to $17.7 million in 2003 from $23.0 million in 2002 resulting in a corresponding decrease in operating margin to 5.0% from 7.7%. This decline is in large part due to the low profitability of the refuse businesses, the continued weakening of the U.S. municipal markets, lower finance revenues and earnings from industrial customer financings and one-time costs incurred to consolidate U.S. sweeper production facilities and convert European sweepers to new EU standards. In 2002, operating income increased 14% from $20.2 million in 2001 principally due to improved operating results for sweepers, more than offsetting the effects of lower volumes and adverse product mix in other product lines in the group.
FIRE RESCUE OPERATIONS
The following graph presents the Fire Rescue Group's results of operations for the three-year period ended December 31, 2003 (in millions):
LINE GRAPH
The group's orders decreased 2% in 2003 reflecting the weaker U.S. municipal and government markets primarily in the second and third quarters, and lower export orders which tend to be somewhat volatile. Orders increased 1% in 2002 as strong orders at European businesses more than offset a modest decline elsewhere.
Net sales increased 24% to $416 million in 2003 from $334 million in 2002. High backlogs at the beginning of 2003 and improvements in productivity and delivery drove the sales increase. The group's sales increased largely as a result of increased productivity in its U.S. production facilities and the beneficial translation effects of stronger Euro and Canadian currencies. In 2002, net sales declined 10% from $373 million in 2001 as reduced throughput and deliveries in the U.S. production facilities resulted from more complex units and prototypes.
Operating income increased 29% to $14.5 million in 2003 from $11.2 million in 2002 resulting in a slight operating margin improvement to 3.5%. Improved productivity of the U.S. operations more than offset higher costs incurred to improve the group's selling and manufacturing processes. In 2002, operating income declined 60% from $27 million and an operating margin of 7.3% in 2001; income and margin declined due to the lower sales levels coupled with higher production costs.
SAFETY PRODUCTS OPERATIONS
The following chart presents the Safety Product Group's results of operations for the three-year period ended December 31, 2003 (in millions):
LINE GRAPH
Orders declined 7% in 2003 essentially due to the group booking a $19 million order for the Dallas/ Fort Worth parking project in 2002; excluding this project, the group's orders were flat. Orders increased 6% in
2002 largely due to the large airport parking project and success in increasing market share for European police products.
Net sales increased 3% in 2003 to $278 million from $270 million in 2002 reflecting progress on the Dallas/Fort Worth International Airport parking project and the strength of the Euro against the U.S. dollar offset by a weak municipal police products market and the shutdown of a production facility in the U.K. Sales increased 5% in 2002 from $256 million in 2001 due to increased deliveries of outdoor warning systems and European police products.
Despite the growth in sales, operating income declined 23% from $41.4 million in 2002 to $31.8 million in 2003. The operating margin decrease from 15.3% to 11.4% reflects a pre-tax charge of $2.5 million for costs associated with the shutdown of a production facility in the U.K., weaker sales of high-margin municipal products coupled with higher sales of lower margin parking products, and higher pension and health care costs. In 2002, operating income increased 9% and margins strengthened due to higher net sales, partly offset by increased pension expense.
TOOL OPERATIONS
The following graph presents the Tool Group's results of operations for the three-year period ended December 31, 2003 (in millions):
LINE GRAPH
Net sales increased 2% to $160 million in 2003 from $156 million in 2002; the increase was principally a result of growth in the international precision tooling markets, largely attributable to the strong European currency. Partially offsetting was a weak U.S. cutting tool market, as automotive customers continued their low capital investment despite strong production. In 2002, net sales declined 3% from $162 million in 2001, a reflection of lower cutting tool sales, which represented about one-quarter of the group's sales.
Operating income declined 15% to $15.9 million in 2003 from $18.7 million in 2002. The decline in operating income and a reduction in operating margin from 12.0% in 2002 to 10.0% in 2003 was largely due to cutting tool pricing pressures, costs and operating inefficiencies associated with the closure of a New York production facility, increased sales of third party resale products and significantly higher pension and medical costs. In 2002, operating income declined 3% from $19.3 million in 2001 due to lower sales volumes, cutting tool pricing pressures and the effect of lower fixed cost absorption caused by inventory reductions made possible by successful lean enterprise initiatives.
CORPORATE EXPENSE
Corporate expenses totaled $14.0 million in 2003, $12.4 million in 2002 and $12.6 million in 2001. The 13% increase in 2003 reflects an increased bad debt provision and higher pension expense.
The company has been sued by over 1,500 firefighters in 27 separate cases alleging that exposure to the company's sirens impaired their hearing. The company has successfully defended itself in over 40 similar cases and contests the allegations. The discovery phase of the litigation begins in 2004; the company intends to
aggressively defend the matter and expects to incur approximately $3.6 million in legal fees in 2004. For further details, refer to Note L in the financial statements included in Item 8 of this Form 10-K.
FINANCIAL SERVICES ACTIVITIES
The company maintains a large investment ($230 million and $227 million at December 31, 2003 and 2002, respectively) in lease financing and other receivables that are generated by its Environmental Products and Fire Rescue operations. The increase in assets resulted from Fire Rescue's strong 2003 deliveries and subsequent lease financing offset by the company's decision to cease lending to customers in certain commercial and industrial markets. Financial services assets have repayment terms ranging from one to ten years. These assets are 87% leveraged due to their overall quality; financial services debt was $201 million and $202 million at December 31, 2003 and 2002, respectively.
Financial revenues totaled $13 million, $16 million and $16 million in 2003, 2002 and 2001, respectively. The 17% decline in 2003 is primarily due to the company's decision to cease financing new industrial product sales and lower lending rates due to the declining interest rate environment.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
During the three-year period ended December 31, 2003, the company utilized its strong cash flows from operations to fund sustaining and cost reduction capital needs of its operations; to fund in whole or in part strategic acquisitions of companies operating in markets related to those already served by the company; and to pay increasing amounts in cash dividends to shareholders. Beyond these uses, remaining cash was used to pay down debt and to repurchase shares of common stock.
The company's cash and cash equivalents totaled $10.1 million, $9.8 million and $16.9 million as of December 31, 2003, 2002 and 2001, respectively. The following table summarizes the company's cash flows for the three-year period ended December 31, 2003 (in millions):
2003 2002 2001
------ ------ ------
Operating cash flow........................................ $ 75.4 $ 88.4 $ 95.1
Capital expenditures....................................... (17.9) (20.1) (18.4)
Dispositions and acquisitions.............................. 7.5 (48.1) (19.7)
Financial services activities, net......................... (5.1) 13.7 (26.1)
Borrowing activity, net.................................... (22.2) (1.1) 13.4
Purchases of treasury stock................................ (.1) (4.4) (13.2)
Dividends.................................................. (38.3) (36.0) (35.2)
Other...................................................... 1.0 0.5 7.4
------ ------ ------
Increase (decrease) in cash................................ $ 0.3 $ (7.1) $ 3.3
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Operating cash flow declined to $75.4 million in 2003 from $88.4 million in 2002, in large part reflecting lower earnings, timing of customer advances, the disproportionate increase in foreign sales with longer payment terms and multi-year contracts. Cash flows benefited from favorable settlements of interest rate swaps and foreign currency hedges as well as continued improvements in inventory productivity as evidenced by inventory turns rising to 4.8 at December 31, 2003. Operating cash flow decreased in 2002 from $95.1 million in 2001 due to lower earnings and a discretionary $5.0 million pension contribution made in view of the company's strong cash position and weak pension asset performance. The company also experienced reductions in working capital driven by improved collections, lower inventory levels due to lean enterprise initiatives and the receipt of more advance payments from customers. The company's operating cash flows fluctuate on a quarterly basis due to sales seasonality and associated working capital requirements.
The company completed the sale of the Sign Group in April 2003 for cash of $7.5 million and a $4.2 million note receivable. The company acquired the refuse businesses in 2002 for $101.3 million, funded with cash of $48.1 million and stock valued at $43.4 million plus the assumption of $9.8 million of debt. The
company paid $19.7 million in 2001 to acquire Athey Products Corporation, Plastisol Holdings B.V. and two small Tool Group companies including the assumption of debt.
In order to show the distinct characteristics of the company's investment in its manufacturing and financial service activities, the company has presented separately these investments and their related liabilities. Different ratios of debt and equity support each of these two types of activities.
In April 2003, Standard and Poor's lowered the company's debt rating from A-2 to A-3 making short-term borrowing in the commercial paper market no longer viable. After drawing on the $300 million back-up credit facility to pay off the commercial paper holders, the company replaced it with a new $250 million unsecured revolving credit facility maturing in 2006 bearing interest at a variable rate of LIBOR plus .83%. At December 31, 2003, $75 million was outstanding under this agreement. The company also secured $50 million in private placement financing with increments maturing in 2008, 2010 and 2013 bearing interest at a variable rate of LIBOR plus 1.04%. The rating downgrade resulted in the company incurring an additional $1.0 million in borrowing costs in 2003. The incremental cost was partially offset by favorable interest rate swap agreements. The company paid down $22.2 million of borrowings in 2003.
During the fourth quarter of 2002, the company issued long-term debt of $100 million at an average interest rate of 5.1% with terms ranging from six to ten years. The company issued the debt to replace $48 million of short-term debt incurred to fund the refuse business acquisitions and to replace other existing short-term debt.
The company's debt facilities contain covenants relating to a maximum debt-to-capitalization ratio, minimum interest coverage and minimum net worth. As of December 31, 2003, the company was in compliance with the financial covenants of its debt agreements. At December 31, 2003, total manufacturing debt was $265 million, representing 40% of capitalization, down from 44% ($296 million) as of December 31, 2002. The manufacturing debt-to-capitalization ratio is subject to variations based on seasonal working capital requirements. The company believes that its financial services assets, due to their overall quality, are capable of sustaining a leverage ratio of 91%. At both December 31, 2003 and 2002, the company's debt-to-capitalization ratio for its financial services activities was 87% for its continuing operations.
Cash dividends increased by $2.3 million from $36.0 million in 2002 to $38.3 million in 2003 due to the additional shares issued in late 2002 for the refuse acquisitions; the company paid dividends of $.80 per share in 2003. In October 2003, the company announced a 50% reduction in the quarterly dividend to improve its long-term position in view of the further weakening of the U.S. state and municipal markets and the lack of a conclusive rebound in the industrial economy. The reduction is expected to improve the company's future financial flexibility.
Management focuses substantial effort on improving the utilization of the company's working capital. The company's primary working capital as a percent of net sales was 23.3% and 22.4% as of December 31, 2003 and 2002, respectively. The company anticipates that its financial resources and major sources of liquidity, including cash flow from operations and borrowing capacity, will continue to be adequate to meet its operating and capital needs in addition to its financial commitments.
CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS
The following table presents a summary of the company's contractual obligations and payments due by period as of December 31, 2003 (in millions):
PAYMENTS DUE BY PERIOD
----------------------------------------------------------
LESS THAN 1 - 3 3 - 5 MORE THAN
TOTAL 1 YEAR YEARS YEARS 5 YEARS
------ --------- ----------- ----------- ---------
Long-term debt............................. $380.6 $25.2 $ 99.8 $82.2 $173.4
Capital lease obligations.................. 0.2 0.2
Operating lease obligations................ 27.6 7.6 9.1 5.3 5.6
Fair value of interest rate swaps.......... (9.4) (0.3) (2.3) (1.4) (5.4)
Fair value of foreign currency forward
contracts................................ (2.5) (1.7) (0.8)
------ ----- ------ ----- ------
Total contractual obligations.............. $396.5 $31.0 $105.8 $86.1 $173.6
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The company is party to various interest rate swap agreements in conjunction with the management of borrowing costs. As of December 31, 2003, the fair value of the company's net position would result in cash proceeds of $9.4 million. Future changes in the U.S. interest rate environment would correspondingly affect the fair value and ultimate settlement of the contracts.
The company also enters into foreign currency forward contracts to protect against the variability in exchange rates on cash flows of its foreign subsidiaries. As of December 31, 2003, the unrealized gain on the company's foreign currency forward contracts totaled $2.5 million. Volatility in the future exchange rates between the U.S. dollar and Euro and Canadian dollar will impact final settlement.
The following table presents a summary of the company's commercial commitments and the notional amount expiration by period (in millions):
NOTIONAL AMOUNT EXPIRATION BY PERIOD
-------------------------------------------------------
LESS THAN 1 - 3 3 - 5 MORE THAN
TOTAL 1 YEAR YEARS YEARS 5 YEARS
------- ---------------- ----- ------ ---------
Security bonds for casualty insurance
policies................................. $ 25.1 $ 25.1
Financial standby letters of credit........ 10.3 10.1 $ .2
Guaranteed residual value obligations...... 3.5 .1 $ .6 $ 2.7 .1
Guarantees of the indebtedness of others... .8 .6 .2
------- ------- ---- ------ ----
Total commercial commitments............... $ 39.7 $ 35.9 $ .8 $ 2.7 $ .3
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The security bonds for casualty insurance policies relate to the company's worker's compensation, automobile, general liability and product liability policies. The outstanding financial standby letters of credit represent guarantees of performance by foreign subsidiaries that engage in cross-border transactions with foreign governments.
In limited circumstances, the company guarantees the residual value on vehicles in order to facilitate a sale. The company also guaranteed the debt of an independent dealer that sells the company's vehicles. The company believes its risk of loss is low; no losses have been incurred to date. The inability of the company to enter into these types of arrangements in the future due to unforeseen circumstances is not expected to have a material impact on its financial position, results of operations or cash flows.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The company considers the following policies to be the most critical in understanding the
judgments that are involved in the preparation of the company's consolidated financial statements and the uncertainties that could impact the company's financial condition, results of operations and cash flows.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
The company performs ongoing credit evaluations of its customers. The company's policy is to establish, on a quarterly basis, an allowance for doubtful accounts based on factors such as historical loss trends, credit quality of the present portfolio, collateral value and general economic conditions. If the historical loss trend increased or decreased 10% in 2003, the company's operating income would have decreased or increased by $.3 million, respectively. Though management considers the valuation of the allowance proper and adequate, changes in the economy and/or deterioration of the financial condition of the company's customers could affect the reserve balances required.
WARRANTY RESERVE
The company's products generally carry express warranties that provide repairs at no cost to the customer or the issuance of credit. The length of the warranty term depends on the product sold, but generally extends from six months to five years based on the terms that are generally accepted in the company's marketplaces. Certain components necessary to manufacture the company's vehicles (including chassis, engines and transmissions) are covered under an original manufacturers' warranty. Such manufacturers' warranties are extended directly to end customers.
The company accrues its estimated exposure to warranty claims at the time of sale based upon historical warranty claim costs as a percentage of sales. Management reviews these estimates on a quarterly basis and adjusts the warranty provisions as actual experience differs from historical estimates. Infrequently, a material warranty issue can arise which is outside the norm of the company's historical experience; costs related to such issues, if any, are provided for when they become probable and estimable.
The company's warranty cost as a percentage of net sales totaled 1.5% in 2003, 1.0% in 2002 and 1.2% in 2001. The increase in the rate in 2003 is primarily due to the acquisitions of the refuse truck body businesses in late 2002 which experience higher warranty claims due to their usage pattern and the introduction of new custom fire rescue vehicles that incurred higher warranty costs when used for the first time. Although management believes the current liability is appropriate, a 10% increase or decrease in the estimated warranty costs in 2003 would have decreased or increased operating income by $1.8 million, respectively.
WORKER'S COMPENSATION AND PRODUCT LIABILITY RESERVES
The company is partially self-insured for worker's compensation claims with various stop-loss thresholds. When a worker's compensation claim is filed, a liability is estimated, if any is expected, to settle the claim. The establishment of a liability for unpaid claims, including claims incurred but not reported, is based on the assessment by the company's claim administrator of each claim, management's estimate of the nature and severity of total claims and an independent actuarial valuation. The company utilizes a third-party administrator to track and evaluate actual claims experience for consistency in the data used in the actuarial valuation. While management believes the current reserve is adequate, a 10% increase or decrease in the average cost per claim in 2003 would have decreased or increased operating income by $.3 million, respectively.
Due to the nature of the products manufactured, the company is subject to product liability claims in the ordinary course of business. The company is partially self-insured for its product liability exposures; it records a liability when a potential loss associated with an asserted claim is probable and reasonably estimable. The liability is based on an assessment of each claim by the company's third party administrator, management's current knowledge of the matter and consultation with counsel. Management believes that the liability established appropriately reflects the company's risk exposure.
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 at the beginning of the fourth quarter unless impairment indicators arise earlier. The company continues to amortize definite-lived intangible assets over their useful life.
A review for impairment requires judgment in estimated cash flows based upon estimates of future sales, operating income, working capital improvements and capital expenditures. Management utilizes a discounted cash flow approach to determine the fair value of the company's reporting units. If the sum of the expected discounted cash flows of the reporting unit is less than its carrying value, an impairment loss is required against the unit's goodwill.
In accordance with SFAS No. 142's transition rules, the company performed an assessment as of January 1, 2002, the date of the statement's adoption. This evaluation resulted in an $8.0 million impairment charge in 2002 related to a niche Tool Group business. The annual testing conducted in 2002 and 2003 did not result in any impairment.
Although management believes that the assumptions and estimates used were reasonable, a sensitivity analysis for each reporting unit is performed along with the impairment test. The analysis indicated that a 10% change in the sales growth, operating margin or working capital percentage assumptions would not result in any goodwill impairment.
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 forward contracts. The company does not hold or issue derivative financial instruments for trading or speculative purposes and is not party to leverage derivatives.
INTEREST RATE RISK
The company manages its exposure to interest rate movements by maintaining a proportionate relationship between fixed-rate debt to total debt within established percentages. The company uses funded fixed-rate borrowings as well as interest rate swap agreements to balance its overall fixed/floating interest rate mix.
Of the company's debt at December 31, 2003, 43% was used to support financial services assets; the average remaining life of those assets is typically under three years and the debt is match-funded to the financing assets. The company is currently comfortable with a sizeable portion of floating rate debt to support these financial services assets, since a rise in borrowing rates would normally correspond with a rise in lending rates within a reasonable period.
The following table summarizes the company's financial instruments held at December 31, 2003 that are sensitive to changes in interest rates, including debt obligations and interest rate swaps (dollars in millions):
EXPECTED MATURITY DATE
-----------------------------------------------------------
2004 2005 2006 2007 2008 THEREAFTER TOTAL FAIR VALUE
----- ----- ----- ----- ----- ---------- ------ ----------
Long-term debt
Fixed rate
Principal.................... $25.2 $17.6 $82.2 $27.1 $35.1 $143.4 $330.6 $339.6
Average interest rate........ 6.0% 5.9% 5.8% 5.9% 5.8% 5.7% 5.9%
Variable rate
Principal.................... $20.0 $ 30.0 $ 50.0 $ 50.0
Average interest rate........ 2.2% 2.2% 2.2%
Short-term debt -- variable rate
Principal.................... $82.0 $ 82.0 $ 82.0
Average interest rate........ 2.2% 2.2%
Interest rate swaps (pay fixed,
receive variable)
Notional amount.............. $30.0 $30.0 $10.0 $25.0 $ 20.0 $115.0 $ (1.5)
Average pay rate............. 4.1% 4.5% 3.8% 5.1% 3.8% 4.3%
Average receive rate......... 1.5% 2.1% 2.7% 3.7% 4.0% 2.7%
Interest rate swaps (receive
fixed, pay variable)
Notional amount.............. $10.0 $17.1 $72.1 $27.2 $35.2 $123.4 $285.0 $ (7.9)
Average pay rate............. 4.7% 5.1% 6.1% 6.5% 6.5% 6.5% 6.2%
Average receive rate......... 6.4% 6.5% 5.7% 6.6% 6.2% 5.8% 6.0%
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For interest rate swaps, the table presents notional amounts and weighted average interest rates by expected (contractual) maturity dates. Notional amounts are used to calculate the contractual payments to be exchanged under the contract. Weighted average variable rates are based on implied forward rates in the yield curve at the reporting date.
At December 31, 2003 and 2002, the company was party to interest rate swap agreements with aggregate notional amounts of $400 million and $270 million, respectively. See Note H to the consolidated financial statements for a description of these agreements. All of the interest rate swap agreements qualify for hedge accounting treatment.
FOREIGN EXCHANGE RATE RISK
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 forward contracts to manage risks associated with sales and purchase commitments as well as forecast transactions denominated in foreign currencies.
The following table summarizes the company's foreign currency forward contract hedging instruments as of December 31, 2003 by expected settlement date (dollars in millions):
EXPECTED SETTLEMENT DATE
----------------------------- FAIR
2004 2005 2006 TOTAL VALUE
----- ----- ----- ----- -----
Firm commitments
Pay U.S. dollars, receive Euro
Notional amount................................... $19.7 $19.7 $ 0.3
Average contract rate............................. 0.81 0.81
Other European currencies
Notional amount................................... $ 2.4 $ 2.4
Forecast transactions
Pay U.S. dollars, receive Canadian dollars
Notional amount................................... $17.5 $ 7.1 $ 7.1 $31.7 $ 1.8
Average contract rate............................. 1.37 1.40 1.40 1.39
Receive U.S. dollars, pay Canadian dollars
Notional amount................................... $ 3.2 $ 3.2 $ 0.9
Average contract rate............................. 1.31 1.31
Receive U.S. dollars, pay Euro
Notional amount................................... $ 2.5 $ 2.5 $(0.5)
Average contract rate............................. .88 .88
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At December 31, 2003 and 2002, the company was party to foreign currency forward contracts with aggregate notional amounts of $59 million and $47 million, respectively. See Note H to the consolidated financial statements for a description of these agreements. All of these derivative instruments qualify for hedge accounting treatment.
FORWARD-LOOKING STATEMENTS
This Form 10-K, reports filed by the company with the SEC on Forms 10-Q and 8-K and comments made by management contain the words such as "believe," "expect," "anticipate," "intend," "plan," "estimate" and "objective". These expressions are intended to identify forward-looking statements. Forward- looking statements include information concerning the company's possible or assumed future results of operations. While these statements are based on assumptions and judgments that management has made in light of industry experience as well as perceptions of historical trends, current conditions, expected future developments and other factors believed to be appropriate under the circumstances, actual results could differ materially. These statements are not guarantees of performance or results.
OTHER MATTERS
The company has a business conduct policy applicable to all employees and regularly monitors compliance with that policy. The company has determined that it had no significant related party transactions for the three-year period ending December 31, 2003.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The information contained under the caption Market Risk Management included in Item 7 of this Form 10-K is incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
FEDERAL SIGNAL CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
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Report of Independent Auditors.............................. 21
Consolidated Balance Sheets as of December 31, 2003 and
2002...................................................... 22
Consolidated Statements of Income for the Years Ended
December 31, 2003, 2002 and 2001.......................... 23
Consolidated Statements of Comprehensive Income for the
Years Ended December 31, 2003, 2002 and 2001.............. 24
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2003, 2002 and 2001.......................... 25
Notes to Consolidated Financial Statements.................. 26
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REPORT OF INDEPENDENT AUDITORS
To the Shareholders and Board of Directors of Federal Signal Corporation
We have audited the accompanying consolidated balance sheets of Federal Signal Corporation and subsidiaries as of December 31, 2003 and 2002 and the related consolidated statements of income, comprehensive income and cash flows for each of the three years in the period ended December 31, 2003. Our audits also included the financial statement schedule listed in Item 15(a)2. These financial statements and schedule are the responsibility of the company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Federal Signal Corporation and subsidiaries as of December 31, 2003 and 2002, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2003 in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth herein.
As discussed in Notes A and P to the financial statements, the company changed its method of accounting for goodwill and other intangibles in 2002.
SIG ERNST & YOUNG LLP
Chicago, Illinois
January 29, 2004
FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
-------------------------------
2003 2002
-------------- --------------
ASSETS
Manufacturing activities:
Current assets
Cash and cash equivalents.............................. $ 10,119,000 $ 9,782,000
Accounts receivable, net of allowances for doubtful
accounts of $2,993,000 and $2,640,000,
respectively......................................... 196,356,000 181,843,000
Inventories -- Note B.................................. 180,688,000 183,802,000
Prepaid expenses....................................... 16,389,000 19,390,000
-------------- --------------
Total current assets................................... 403,552,000 394,817,000
Properties and equipment -- Note C........................ 125,573,000 143,932,000
Other assets
Goodwill, net of accumulated amortization.............. 366,414,000 348,435,000
Other deferred charges and assets...................... 60,759,000 44,046,000
-------------- --------------
Total manufacturing assets................................ 956,298,000 931,230,000
-------------- --------------
Net assets of discontinued operations....................... 10,392,000
Financial services activities -- Lease financing and other
receivables, net of allowances for doubtful accounts of
$2,496,000 and $1,002,000, respectively, and net of
unearned finance revenue -- Note D........................ 230,111,000 226,788,000
-------------- --------------
Total assets................................................ $1,186,409,000 $1,168,410,000
============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
Manufacturing activities:
Current liabilities
Short-term borrowings -- Note E........................ $ 70,837,000 $ 16,432,000
Accounts payable....................................... 82,525,000 76,082,000
Accrued liabilities
Compensation and withholding taxes................... 30,542,000 29,274,000
Customer deposits.................................... 21,224,000 28,326,000
Other................................................ 76,941,000 66,007,000
Income taxes........................................... 2,301,000 5,763,000
-------------- --------------
Total current liabilities.............................. 284,370,000 221,884,000
Long-term borrowings -- Note E............................ 194,130,000 279,544,000
Long-term pension and other liabilities................... 38,692,000 32,656,000
Deferred income taxes -- Note F........................... 44,820,000 33,495,000
-------------- --------------
Total manufacturing liabilities........................... 562,012,000 567,579,000
-------------- --------------
Financial services activities -- Borrowings -- Note E..... 201,347,000 202,022,000
-------------- --------------
Total liabilities......................................... 763,359,000 769,601,000
-------------- --------------
Minority interest in subsidiary -- Note K................... 541,000 744,000
Shareholders' equity -- Notes I and J
Common stock, $1 par value, 90,000,000 shares authorized,
48,439,000 and 48,394,000 shares issued,
respectively........................................... 48,439,000 48,394,000
Capital in excess of par value............................ 91,898,000 91,114,000
Retained earnings -- Note E............................... 317,404,000 313,684,000
Treasury stock, 521,000 and 734,000 shares, respectively,
at cost................................................ (14,850,000) (18,026,000)
Deferred stock awards..................................... (2,309,000) (3,136,000)
Accumulated other comprehensive income (loss)
Foreign currency translation........................... (3,701,000) (18,084,000)
Net derivative loss, cash flow hedges.................. (222,000) (2,098,000)
Minimum pension liability.............................. (14,150,000) (13,783,000)
-------------- --------------
Total shareholders' equity................................ 422,509,000 398,065,000
-------------- --------------
Total liabilities and shareholders' equity.................. $1,186,409,000 $1,168,410,000
============== ==============
|
See notes to consolidated financial statements.
FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31,
------------------------------------------------
2003 2002 2001
-------------- -------------- --------------
Net sales............................................ $1,206,798,000 $1,057,201,000 $1,072,175,000
Costs and expenses
Cost of sales...................................... (891,723,000) (758,205,000) (759,914,000)
Selling, general and administrative................ (249,097,000) (217,053,000) (220,257,000)
-------------- -------------- --------------
Operating income..................................... 65,978,000 81,943,000 92,004,000
Interest expense..................................... (19,750,000) (20,075,000) (26,368,000)
Other expense, net................................... (414,000) (895,000) (1,182,000)
Minority interest.................................... 203,000 129,000
-------------- -------------- --------------
Income before income taxes........................... 46,017,000 61,102,000 64,454,000
Income taxes -- Note F............................... (8,345,000) (14,923,000) (17,864,000)
-------------- -------------- --------------
Income from continuing operations.................... 37,672,000 46,179,000 46,590,000
Income (loss) from discontinued operations, net of
taxes.............................................. (369,000) 983,000
Cumulative effect of change in accounting, net of
taxes.............................................. (7,984,000)
-------------- -------------- --------------
Net income........................................... $ 37,303,000 $ 38,195,000 $ 47,573,000
============== ============== ==============
Basic income per share
Income from continuing operations.................. $ .79 $ 1.01 $ 1.03
Income (loss) from discontinued operations, net of
taxes............................................ (.01) .02
Cumulative effect of change in accounting, net of
taxes............................................ (.17)
-------------- -------------- --------------
Net income*........................................ $ .78 $ .83 $ 1.05
============== ============== ==============
Diluted income per share
Income from continuing operations.................. $ .79 $ 1.01 $ 1.03
Income (loss) from discontinued operations, net of
taxes............................................ (.01) .02
Cumulative effect of change in accounting, net of
taxes............................................ (.17)
-------------- -------------- --------------
Net income*........................................ $ .78 $ .83 $ 1.05
============== ============== ==============
|
* amounts may not add to total due to rounding
See notes to consolidated financial statements.
FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------------
2003 2002 2001
----------- ------------ -----------
Net income........................................... $37,303,000 $ 38,195,000 $47,573,000
Other comprehensive income (loss), net of related tax
provision (benefit)
Foreign currency translation adjustment, net of
taxes of $8,447,000 in 2003, $4,449,000 in 2002
and ($2,053,000) in 2001........................ 14,383,000 7,576,000 (3,495,000)
Net derivative gain (loss), cash flow hedges, net
of taxes of $1,102,000 in 2003 and ($1,232,000)
in 2002......................................... 1,876,000 (2,098,000)
Minimum pension liability, net of tax benefit of
($216,000) in 2003 and ($8,094,000) in 2002..... (367,000) (13,783,000)
----------- ------------ -----------
Comprehensive income................................. $53,195,000 $ 29,890,000 $44,078,000
=========== ============ ===========
|
See notes to consolidated financial statements.
FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------------------
2003 2002 2001
------------- ------------- -------------
Operating activities
Net income.................................... $ 37,303,000 $ 38,195,000 $ 47,573,000
Adjustments to reconcile net income to net
cash provided by operating activities:
Cumulative effect of change in
accounting............................... 7,984,000
Loss (income) from discontinued
operations............................... 369,000 (983,000)
Depreciation and amortization.............. 24,435,000 23,995,000 30,258,000
Provision for doubtful accounts............ 3,175,000 1,721,000 1,087,000
Deferred income taxes...................... 5,035,000 2,387,000 (458,000)
Settlement of hedging contracts............ 7,174,000 4,560,000 2,435,000
Other, net................................. 3,608,000 466,000 (1,178,000)
Changes in operating assets and
liabilities, net of effects from
acquisitions of companies
Accounts receivable...................... (5,587,000) (5,052,000) 11,047,000
Inventories.............................. 6,771,000 (2,126,000) 10,085,000
Prepaid expenses......................... 1,385,000 (4,211,000) (3,961,000)
Accounts payable......................... 1,937,000 12,056,000 (10,372,000)
Customer deposits........................ (9,616,000) 9,549,000 7,536,000
Accrued liabilities...................... (550,000) (4,610,000) (1,972,000)
Income taxes............................. (62,000) 3,436,000 4,016,000
------------- ------------- -------------
Net cash provided by operating activities....... 75,377,000 88,350,000 95,113,000
------------- ------------- -------------
Investing activities
Purchases of properties and equipment......... (17,850,000) (20,144,000) (18,424,000)
Principal extensions under lease financing
agreements................................. (167,160,000) (155,293,000) (174,457,000)
Principal collections under lease financing
agreements................................. 162,042,000 169,025,000 148,375,000
Payments for purchases of companies, net of
cash acquired, excludes $43,418,000 of
common stock issued in 2002................ (48,059,000) (19,657,000)
Proceeds from sale of discontinued
operations................................. 7,453,000
Other, net.................................... 313,000 (2,858,000) 4,953,000
------------- ------------- -------------
Net cash used for investing activities........ (15,202,000) (57,329,000) (59,210,000)
------------- ------------- -------------
Financing activities
Reduction in short-term borrowings, net....... (68,194,000) (98,273,000) (91,696,000)
Increase in long-term borrowings, net......... 46,042,000 97,211,000 105,130,000
Purchases of treasury stock................... (117,000) (4,356,000) (13,155,000)
Cash dividends paid to shareholders........... (38,333,000) (35,983,000) (35,150,000)
Other, net.................................... 764,000 3,280,000 2,294,000
------------- ------------- -------------
Net cash used for financing activities........ (59,838,000) (38,121,000) (32,577,000)
------------- ------------- -------------
Increase (decrease) in cash and cash
equivalents................................... 337,000 (7,100,000) 3,326,000
Cash and cash equivalents at beginning of
year.......................................... 9,782,000 16,882,000 13,556,000
------------- ------------- -------------
Cash and cash equivalents at end of year........ $ 10,119,000 $ 9,782,000 $ 16,882,000
============= ============= =============
|
See notes to consolidated financial statements.
FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A -- SIGNIFICANT ACCOUNTING POLICIES
Principles of consolidation: The consolidated financial statements include the accounts of Federal Signal Corporation and all of its subsidiaries. All significant intercompany balances and transactions have been eliminated.
Cash equivalents: The company considers all highly liquid investments with a maturity of three-months or less, when purchased, to be cash equivalents.
Allowance for doubtful accounts: The company maintains an allowance for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments on the outstanding accounts receivable. The allowance is maintained at a level considered appropriate based on historical and other factors that affect collectibility. These factors include historical trends of write-offs, recoveries and credit losses; the monitoring of portfolio credit quality; and current and projected economic and market conditions. If the financial condition of the company's customers were to deteriorate, resulting in an impairment of the ability to make payments, additional allowances may be required.
Inventories: Inventories are stated at the lower of cost or market. At December 31, 2003 and 2002, approximately 55% of the company's inventories are costed using the FIFO (first-in, first-out) method. The remaining portion of the company's inventories is costed using the LIFO (last-in, first-out) method.
Properties and depreciation: Properties and equipment are stated at cost. Depreciation, for financial reporting purposes, is computed principally on the straight-line method over the estimated useful lives of the assets. Property, plant and equipment and other long-term assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. If the sum of the expected undiscounted cash flows is less than the carrying value of the related asset or group of assets, a loss is recognized for the difference between the fair value and carrying value of the asset or group of assets. Such analyses necessarily involve significant judgment.
Intangible assets: Intangible assets principally consist of costs in excess of fair values of net assets acquired in purchase transactions. These assets are assessed yearly for impairment at the beginning of the fourth quarter and also between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount.
Stock-based compensation plans: The company has two stock-based compensation plans, which are described more fully in Note I. The company accounts for these plans under the recognition and measurement principles of APB Opinion No. 25, "Accounting for Stock Issued to Employees", and related interpretations. No stock-based employee compensation cost is reflected in net income, as all options granted under those plans had an exercise price equal to the market value of the underlying common stock at the date of grant.
The weighted average fair value per share of options granted was $2.97 in 2003, $4.52 in 2002 and $5.33 in 2001. The fair value of options was estimated at the grant date using a Black-Scholes option pricing model with the following weighted average assumptions: risk free interest rates of 3.6% in 2003, 2.7% in 2002 and 4.4% in 2001; dividend yield of 4.5% in 2003, 4.1% in 2002 and 3.5% in 2001; market volatility of the company's common stock of .28 in 2003, 2002 and 2001; and a weighted average expected life of the options of approximately 8 years for 2003, 2002, and 2001.
The following table illustrates the effect on net income and earnings per share for the three-year period ended December 31, 2003 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
FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
stock-based employee compensation. For purposes of pro forma disclosure, the estimated fair value of the options using a Black-Scholes option pricing model is amortized to expense over the option's vesting period.
2003 2002 2001
----------- ----------- -----------
Reported net income........................... $37,303,000 $38,195,000 $47,573,000
Deduct: Total stock-based employee
compensation expense determined under the
fair-value method for all awards, net of
related tax effects......................... 839,000 1,052,000 1,079,000
----------- ----------- -----------
Pro forma net income.......................... $36,464,000 $37,143,000 $46,494,000
=========== =========== ===========
Basic net income per common share
Reported net income......................... $ .78 $ .83 $ 1.05
Pro forma net income........................ $ .76 $ .81 $ 1.03
Diluted net income per common share
Reported net income......................... $ .78 $ .83 $ 1.05
Pro forma net income........................ $ .76 $ .81 $ 1.02
|
The intent of the Black-Scholes option valuation model is to provide estimates of fair values of traded options that have no vesting restrictions and are fully transferable. Option valuation models require the use of highly subjective assumptions including expected stock price volatility. The company has utilized the Black-Scholes method to produce the pro forma disclosures required under SFAS No. 123 and 148. In management's opinion, existing valuation models do not necessarily provide a reliable single measure of the fair value of its employee stock options because the company's employee stock options have significantly different characteristics from those of traded options and the assumptions used in applying option valuation methodologies, including the Black-Scholes model, are highly subjective.
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 some of the company's products carry express warranties based on the terms that are generally accepted in the company's marketplaces. The company records provisions for estimated warranty at the time of sale based on historical experience and periodically adjusts these provisions to reflect actual experience. Infrequently, a material warranty issue can arise which is beyond the scope of the company's historical experience. The company provides for these issues as they become probable and estimable.
Product liability and worker's compensation liability: Due to the nature of the company's products, the company is subject to claims for product liability and worker's compensation in the normal course of business. The company is self-insured for a portion of these claims. The company establishes a liability using a third party actuary for any known outstanding matters, including a reserve for claims incurred but not yet reported.
Financial instruments: The company enters into agreements (derivative financial instruments) to manage the risks associated with interest rates and foreign exchange rates. The company does not actively trade such instruments nor enter into such agreements for speculative purposes. The company principally utilizes two types of derivative financial instruments: 1) interest rate swaps to manage its interest rate risk, and 2) foreign currency forward exchange contracts to manage risks associated with sales and expenses (forecast or committed) denominated in foreign currencies.
FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
On the date a derivative contract is entered into, the company designates the derivative as one of the following types of hedging instruments and accounts for the derivative as follows:
Fair value hedge: A hedge of a recognized asset or liability or an unrecognized firm commitment is declared as a fair value hedge. For fair value hedges, both the effective and ineffective portions of the changes in the fair value of the derivative, along with the gain or loss on the hedged item that is attributable to the hedged risk, are recorded in earnings and reported in the consolidated statements of income on the same line as the hedged item.
Cash flow hedge: A hedge of a forecasted transaction or of the variability of cash flows to be received or paid related to a recognized asset or liability is declared as a cash flow hedge. The effective portion of the change in the fair value of a derivative that is declared as a cash flow hedge is recorded in accumulated other comprehensive income. When the hedged item impacts the income statement, the gain or loss included in accumulated other comprehensive income is reported on the same line in the consolidated statements of income as the hedged item. In addition, both the fair value of changes excluded from the company's effectiveness assessments and the ineffective portion of the changes in the fair value of derivatives used as cash flow hedges are reported in selling, general and administrative expenses in the consolidated statements of income.
The company formally documents its hedge relationships, including identification of the hedging instruments and the hedged items, as well as its risk management objectives and strategies for undertaking the hedge transaction. Derivatives are recorded in the consolidated balance sheets at fair value in other assets and other liabilities. This process includes linking derivatives that are designated as hedges of specific forecasted transactions. The company also formally assesses, both at inception and at least quarterly thereafter, whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in either the fair value or cash flows of the hedged item. If it is determined that a derivative ceases to be a highly effective hedge, or if the anticipated transaction is no longer likely to occur, the company discontinues hedge accounting, and any deferred gains or losses are recorded in selling, general and administrative expenses. Amounts related to terminated interest rate swaps are deferred and amortized as an adjustment to interest expense over the original period of interest exposure, provided the designated liability continues to exist or is probable of occurring.
Revenue recognition: The company recognizes revenues when all of the following are satisfied: persuasive evidence of an arrangement exists, the price is fixed or determinable, collectibility is reasonably assured and delivery has occurred or services have been rendered. In most instances, this occurs at the time that title passes to the customer based on the respective sales agreement. Infrequently, a sale qualifies for percentage of completion accounting. Sales accounted for under this method were immaterial for the three-year period ended December 31, 2003. Management believes that all relevant criteria and conditions are considered when recognizing sales.
Income per share: Basic net income per share is calculated using income available to common shareholders (net income) divided by the weighted average number of common shares outstanding during the year. Diluted net income per share is calculated in the same manner except that the denominator is increased to include the weighted number of additional shares that would have been outstanding had dilutive stock option shares been actually issued. The company uses the treasury stock method to calculate dilutive shares. See Note N for the calculation of basic and diluted net income per share.
FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE B -- INVENTORIES
Inventories at December 31 are summarized as follows:
2003 2002
------------ ------------
Finished goods........................................... $ 51,115,000 $ 50,952,000
Work in process.......................................... 63,708,000 63,971,000
Raw materials............................................ 65,865,000 68,879,000
------------ ------------
Total inventories........................................ $180,688,000 $183,802,000
============ ============
|
If the company had used the first-in, first-out cost method exclusively, which approximates replacement cost, inventories would have aggregated $188,377,000 and $192,342,000 at December 31, 2003 and 2002, respectively.
NOTE C -- PROPERTIES AND EQUIPMENT
A comparative summary of properties and equipment at December 31 is as follows:
2003 2002
------------- -------------
Land................................................... $ 6,070,000 $ 6,251,000
Buildings and improvements............................. 63,292,000 69,359,000
Machinery and equipment................................ 244,615,000 233,677,000
Accumulated depreciation............................... (188,404,000) (165,355,000)
------------- -------------
Total properties and equipment......................... $ 125,573,000 $ 143,932,000
============= =============
|
NOTE D -- LEASE FINANCING AND OTHER RECEIVABLES
As an added service to its customers, the company is engaged in financial services activities. These activities primarily consist of providing long-term financing for certain U.S. customers purchasing vehicle-based products from the company's Environmental Products and Fire Rescue groups. A substantial portion of these receivables is due from municipalities and volunteer fire departments. Financing is provided through sales-type lease contracts with terms that range from one to ten years.
At the inception of the lease, the company records the product sales price and related costs and expenses of the sale. Financing revenues are included in income over the life of the lease. The amounts recorded as lease financing receivables represent amounts equivalent to normal selling prices less subsequent customer payments.
Lease financing and other receivables will become due as follows:
$80,881,000 in 2004, $38,158,000 in 2005, $27,962,000 in 2006, $21,354,000 in
2007, $17,091,000 in 2008 and $47,161,000 thereafter. At December 31, 2003 and
2002, unearned finance revenue on these leases aggregated $32,055,000 and
$35,561,000, respectively.
FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE E -- DEBT
Short-term borrowings at December 31 consisted of the following:
2003 2002
------------ ------------
Commercial paper......................................... $115,435,000
Revolving credit facility................................ $ 75,000,000
Notes payable............................................ 7,033,000 37,363,000
Current maturities of long-term debt..................... 25,151,000 656,000
------------ ------------
Total short-term borrowings.............................. $107,184,000 $153,454,000
============ ============
|
Of the above amounts, $36,347,000 and $137,022,000 are classified as financial services activities borrowings at December 31, 2003 and 2002, respectively.
In June 2003, the company entered into a $250,000,000 unsecured revolving credit facility maturing in 2006 with a syndicate of banks. The facility replaced an existing $300,000,000 commercial paper backup credit facility. At December 31, 2003, $75,000,000 was outstanding under this agreement. Borrowings under the facility bear interest at a variable rate of LIBOR plus .83% as of December 31, 2003. The facility includes covenants relating to a maximum debt-to-capitalization ratio, minimum net worth and minimum interest coverage ratio. The company has been in compliance with all quarterly covenants during 2003. Commitment fees paid on unused revolving credit facilities during the three years ended December 31, 2003 were insignificant.
Weighted average interest rates on short-term borrowings were 2.17% and 1.75% at December 31, 2003 and 2002, respectively.
FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Long-term borrowings at December 31 consisted of the following:
2003 2002
------------ ------------
6.79% unsecured note payable in annual installments of
$10,000,000 due 2007-2011............................... $ 50,000,000 $ 50,000,000
6.37% unsecured note payable in annual installments of
$10,000,000 due 2004-2008............................... 50,000,000 50,000,000
6.60% unsecured note payable in annual installments of
$7,143,000 due 2005-2011................................ 50,000,000 50,000,000
4.93% unsecured note payable in annual installments of
$8,000,000 due 2008-2012................................ 40,000,000 40,000,000
5.24% unsecured note payable due 2012..................... 60,000,000 60,000,000
5.49% unsecured note payable due 2006..................... 65,000,000 65,000,000
7.99% unsecured note payable due 2004..................... 15,000,000 15,000,000
Floating rate (2.21% at December 31, 2003) unsecured note
payable due 2008-2013................................... 50,000,000
Floating rate (5.80% at December 31, 2002) secured note
payable in monthly installments due 2011................ 4,540,000
Other..................................................... 590,000 514,000
------------ ------------
380,590,000 335,054,000
Fair value of interest rate swaps......................... (7,904,000) 3,600,000
Unamortized balance of terminated fair value interest rate
swaps................................................... 11,595,000 6,546,000
------------ ------------
384,281,000 345,200,000
Less current maturities................................... (25,151,000) (656,000)
------------ ------------
Total long-term borrowings................................ $359,130,000 $344,544,000
============ ============
|
Of the above amounts, $165,000,000 and $65,000,000 are classified as financial services activities borrowings at December 31, 2003 and 2002, respectively.
In June 2003, the company entered into a $50,000,000 private placement agreement to reduce reliance on short-term debt. The agreement bears interest at a variable rate of LIBOR plus 1.04% with $20,000,000 maturing in 2008, $20,000,000 in 2010 and $10,000,000 in 2013.
Aggregate maturities of long-term debt amount to approximately $25,151,000 in 2004, $17,582,000 in 2005, $82,143,000 in 2006, $27,143,000 in 2007, $55,143,000 in 2008 and $173,428,000 thereafter. The fair values of these borrowings aggregated $389,631,000 and $356,367,000 at December 31, 2003 and 2002, respectively.
For each of the above long-term notes, significant covenants consist of a maximum debt-to-capitalization ratio and minimum net worth. At December 31, 2003, all of the company's retained earnings were free of any restrictions and the company was in compliance with the financial covenants of its debt agreements.
At December 31, 2003 and 2002, deferred financing fees totaled $2,305,000 and $1,327,000, respectively.
The company paid interest of $21,458,000 in 2003, $20,796,000 in 2002 and $26,097,000 in 2001. See Note H regarding the company's utilization of derivative financial instruments relating to outstanding debt.
FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE F -- INCOME TAXES
The provisions for income taxes consisted of the following:
2003 2002 2001
----------- ----------- -----------
Current:
Federal..................................... $(4,594,000) $ 5,562,000 $11,257,000
Foreign..................................... 7,002,000 6,006,000 5,411,000
State and local............................. 902,000 968,000 1,654,000
----------- ----------- -----------
3,310,000 12,536,000 18,322,000
Deferred:
Federal..................................... 6,155,000 2,330,000 (826,000)
Foreign..................................... (713,000) (686,000) 140,000
State and local............................. (407,000) 743,000 228,000
----------- ----------- -----------
5,035,000 2,387,000 (458,000)
----------- ----------- -----------
Total income taxes............................ $ 8,345,000 $14,923,000 $17,864,000
=========== =========== ===========
|
Differences between the statutory federal income tax rate and the effective income tax rate are summarized below:
2003 2002 2001
---- ---- ----
Statutory federal income tax rate........................... 35.0% 35.0% 35.0%
State income taxes, net of federal tax benefit.............. 1.1 1.8 1.9
Tax-exempt interest......................................... (6.4) (5.3) (4.7)
Benefits from shutdown of U.K. facility..................... (6.2)
Exports benefit............................................. (2.2) (1.5) (1.3)
R&D tax credits............................................. (1.9) (1.2) (1.2)
Reduction for prior years taxes............................. (0.1) (2.3) (1.3)
Other, net.................................................. (1.2) (2.1) (0.7)
---- ---- ----
Effective income tax rate................................... 18.1% 24.4% 27.7%
==== ==== ====
|
FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Deferred income tax assets and liabilities at December 31 are summarized as follows:
2003 2002
------------ ------------
Deferred tax assets:
Accrued expenses....................................... $ 14,593,000 $ 17,194,000
Net operating loss carry forwards...................... 7,200,000 5,400,000
Pension liabilities.................................... 5,653,000 4,639,000
Other.................................................. 1,077,000 2,800,000
------------ ------------
Gross deferred tax assets........................... 28,523,000 30,033,000
Valuation allowance.................................... (7,200,000) (5,400,000)
------------ ------------
Total deferred tax assets........................... 21,323,000 24,633,000
Deferred tax liabilities:
Depreciation and amortization.......................... (49,506,000) (48,962,000)
Revenue recognition.................................... (3,739,000) (2,558,000)
------------ ------------
Gross deferred tax liabilities...................... (53,245,000) (51,520,000)
------------ ------------
Net deferred tax liability............................... $(31,922,000) $(26,887,000)
============ ============
|
The majority of the net operating loss carryforwards of subsidiaries have no expiration dates.
The net deferred tax liability at December 31 is classified in the balance sheet as follows:
2003 2002
------------ ------------
Current net deferred tax assets.......................... $ 12,898,000 $ 6,608,000
Long-term net deferred tax liability..................... (44,820,000) (33,495,000)
------------ ------------
$(31,922,000) $(26,887,000)
============ ============
|
The company paid income taxes of $9,662,000 in 2003, $8,662,000 in 2002 and $15,193,000 in 2001.
Income before taxes consisted of the following:
2003 2002 2001
----------- ----------- -----------
United States................................. $27,918,000 $45,295,000 $48,335,000
Non-U.S. ..................................... 18,099,000 15,807,000 16,119,000
----------- ----------- -----------
$46,017,000 $61,102,000 $64,454,000
=========== =========== ===========
|
NOTE G -- POSTRETIREMENT BENEFITS
The company and its subsidiaries sponsor a number of defined benefit retirement plans covering certain of its salaried employees and hourly employees not covered by plans under collective bargaining agreements. Benefits under these plans are primarily based on final average compensation and years of service as defined within the provisions of the individual plans. The company also participates in several multiemployer retirement plans that provide defined benefits to employees under certain collective bargaining agreements.
The company uses December 31 and September 30 measurement dates for its U.S. and non-U.S. benefit plans, respectively.
FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
U.S. BENEFIT PLANS
The components of net periodic pension expense (credit) are summarized as follows:
2003 2002 2001
----------- ----------- -----------
Company-sponsored plans
Service cost................................ $ 4,089,000 $ 3,291,000 $ 2,597,000
Interest cost............................... 7,104,000 5,372,000 4,635,000
Expected return on plan assets.............. (7,842,000) (7,073,000) (9,020,000)
Amortization of transition amount........... (230,000) (230,000) (230,000)
Other....................................... 916,000 118,000 666,000
----------- ----------- -----------
4,037,000 1,478,000 (1,352,000)
Multiemployer plans........................... 226,000 445,000 534,000
----------- ----------- -----------
Net periodic pension expense (credit)......... $ 4,263,000 $ 1,923,000 $ (818,000)
=========== =========== ===========
|
The following table summarizes the weighted-average assumptions used in determining pension costs for the three-year period ended December 31, 2003 and the company's assumptions for 2004:
2004 2003 2002 2001
---- ---- ---- -----
Discount rate............................................. 6.25% 6.75% 7.30% 7.70%
Rate of increase in compensation levels................... 3.50 3.50 3.50 4.00
Expected long-term rate of return on plan assets.......... 9.00 9.00 9.50 12.00
|
FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (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.
2003 2002
------------ ------------
Projected benefit obligation, January 1.................. $105,992,000 $ 66,228,000
Assumption of obligation in business acquisition......... 27,269,000
Service cost............................................. 4,089,000 3,291,000
Interest cost............................................ 7,104,000 5,372,000
Actuarial loss........................................... 6,902,000 6,231,000
Benefits paid............................................ (3,197,000) (2,399,000)
------------ ------------
Projected benefit obligation, December 31................ $120,890,000 $105,992,000
============ ============
Accumulated benefit obligation, December 31.............. $105,570,000 $ 90,195,000
============ ============
Fair value of plan assets, January 1..................... $ 74,135,000 $ 60,187,000
Assumption of assets in business acquisition............. 18,390,000
Actual return on plan assets............................. 13,839,000 (7,043,000)
Company contribution..................................... 3,795,000 5,000,000
Benefits paid............................................ (3,197,000) (2,399,000)
------------ ------------
Fair value of plan assets, December 31................... $ 88,572,000 $ 74,135,000
============ ============
Funded status of plan, December 31....................... $(32,318,000) $(31,857,000)
Unrecognized actuarial loss.............................. 36,244,000 36,652,000
Unrecognized prior service cost.......................... 1,889,000 2,007,000
Unrecognized net transition obligation................... 126,000 (618,000)
------------ ------------
Net amount recognized as prepaid benefit cost in the
balance sheet.......................................... $ 5,941,000 $ 6,184,000
============ ============
Amounts recognized in the balance sheet consist of:
Prepaid benefit cost................................... $ 14,269,000 $ 14,956,000
Accrued benefit liability.............................. (32,677,000) (32,656,000)
Intangible asset....................................... 1,890,000 2,007,000
Accumulated other comprehensive income, pre-tax........ 22,459,000 21,877,000
------------ ------------
Net amount recognized.................................. $ 5,941,000 $ 6,184,000
============ ============
|
The following table summarizes the weighted-average assumptions used in determining benefit obligations as of December 31, 2003 and 2002:
2003 2002
---- ----
Discount rate............................................... 6.25% 6.75%
Rate of increase in compensation levels..................... 3.50 3.50
Expected long-term rate of return on plan assets............ 9.00 9.50
|
FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table summarizes the company's asset allocations for its U.S. benefits plans as of December 31, 2003 and 2002 and target allocation for 2004 by asset category:
PERCENTAGE OF
PLAN ASSETS
AS OF TARGET
DECEMBER 31 ALLOCATION
------------- ----------
2003 2002 2004
----- ----- ----
Equity securities........................................... 80% 74% 75%
Fixed income securities..................................... 20 26 25
--- --- ---
Total....................................................... 100% 100% 100%
=== === ===
|
The investment strategy for the U.S. benefit plans is to 1) maintain a liquid, diversified portfolio that can provide a weighted-average annual return of at least 9%, 2) maintain liquidity to meet obligations and 3) prudently manage administrative and management costs. The plan invests in equity and fixed income markets. The equity allocation has an upper limit of 80% of plan assets with U.S. equities comprising 50% to 80% while company stock may comprise up to 10%. The fixed income allocation has an upper limit 40% of plan assets with U.S. high grade fixed income securities comprising 15% to 40%; U.S. high yield fixed income investments may comprise up to 15% of plan assets. The use of derivatives is allowed in limited circumstances. The plan held no derivatives during the years ended December 31, 2003 and 2002.
As of December 31, 2003 and 2002, equity securities included 503,400 shares of the company's common stock valued at $8,820,000 and $9,776,000, respectively. Dividends paid on the company's common stock to the pension trusts aggregated $403,000 for each of the years ended December 31, 2003 and 2002, respectively.
The company expects to contribute $3,000,000 or more to the U.S. benefit plans in 2004. 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 company also sponsors a number of defined contribution pension plans covering a majority of its employees. Participation in the plans is at each employee's election. Company contributions to these plans are based on a percentage of employee contributions. The cost of these plans, including the plans of companies acquired during the three-year period ended December 31, 2003, was $5,168,000 in 2003, $5,396,000 in 2002 and $5,252,000 in 2001.
Prior to September 30, 2003, the company also provided medical benefits to certain eligible retired employees. These benefits were funded when the claims were incurred. Participants generally became eligible for these benefits at age 60 after completing at least fifteen years of service. The plan provided for the payment of specified percentages of medical expenses reduced by any deductible and payments made by other primary group coverage and government programs. Effective September 30, 2003, the company amended the retiree medical plan that effectively canceled coverage for all eligible active employees except for retirees and a limited group that qualified under a formula based on age and years of service. Accumulated postretirement benefit liabilities of $4,752,000 and $5,562,000 at December 31, 2003 and 2002, respectively, were fully accrued. The net periodic postretirement benefit costs have not been significant during the three-year period ended December 31, 2003.
In December 2003, the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the "Act") became law. The Act introduced a prescription drug benefit under Medicare and a federal subsidy to sponsors of certain retiree health care benefit plans. The Act did not and will not have a material impact on the company's accumulated postretirement obligations, results of operations or cash flows.
FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NON-U.S. BENEFIT PLAN
Through 2002, a wholly-owned subsidiary sponsored a defined benefit plan for substantially all of its employees in the United Kingdom. Benefits under this plan were based on final compensation and years of service as defined within the provisions of the plan. Effective December 31, 2002, the company curtailed the plan to reduce its cost structure resulting in a gain of $192,000. The curtailment froze each employee's benefits, to be adjusted for inflation.
Net periodic pension expenses or credits during the three-year period ended December 31, 2003 were not significant. The company recognized a curtailment gain of $192,000 in 2002. The following table summarizes the changes in the projected benefit obligation and plan assets, the funded status of the company-sponsored plan and the major assumptions used to determine these amounts.
2003 2002
----------- -----------
Projected benefit obligation, October 1.................... $40,888,000 $34,192,000
Service cost............................................... 170,000 500,000
Interest cost.............................................. 2,248,000 2,106,000
Actuarial loss............................................. 2,437,000 3,461,000
Employee contributions..................................... 91,000
Benefits paid.............................................. (1,935,000) (1,689,000)
Curtailment gain........................................... (192,000)
Increase due to translation................................ 2,540,000 2,419,000
----------- -----------
Projected benefit obligation, September 30................. $46,348,000 $40,888,000
=========== ===========
Fair value of plan assets, October 1....................... $34,080,000 $33,881,000
Actual return on plan assets............................... 3,648,000 (511,000)
Company contribution....................................... 446,000 390,000
Employee contribution...................................... 91,000
Benefits paid.............................................. (1,935,000) (1,689,000)
Plan expenses.............................................. (170,000) (155,000)
Increase due to translation................................ 2,101,000 2,073,000
----------- -----------
Fair value of plan assets, September 30.................... $38,170,000 $34,080,000
=========== ===========
Funded status of plan, September 30........................ $(8,178,000) $(6,808,000)
Unrecognized actuarial loss................................ 14,816,000 12,949,000
----------- -----------
Net amount recognized as prepaid benefit cost in the
balance sheet............................................ $ 6,638,000 $ 6,141,000
=========== ===========
|
Plan assets consist principally of a broadly diversified portfolio of equity securities, U.K. government obligations and fixed interest securities.
The following significant assumptions were used in determining pension costs for the three-year period ended December 31, 2003:
2003 2002 2001
---- ---- ----
Discount rate............................................... 5.50% 6.25% 6.50%
Rate of increase in compensation levels..................... 2.50 2.50 3.00
Expected long-term rate of return on plan assets............ 8.00 8.00 8.50
|
FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The weighted-average discount rate used in determining the actuarial present value of all pension obligations at both September 30, 2003 and 2002 was 5.50%.
NOTE H -- DERIVATIVE FINANCIAL INSTRUMENTS
All derivative financial instruments are reported on the balance sheet at their respective fair values. Changes in fair value are recognized either in earnings or equity, depending on the nature of the underlying exposure being hedged and how effective a derivative is at offsetting price movements in the underlying exposure. All of the company's derivative positions existing at December 31, 2003 qualified for hedge accounting under SFAS No. 133. Derivatives documentation policies comply with the standard's requirements.
To manage interest costs, the company utilizes interest rate swaps in combination with its funded debt. Interest rate swaps executed during 2003 and 2002 in conjunction with long-term private placements effectively converted fixed rate debt to variable rate debt. At December 31, 2003, the company's receive fixed, pay variable swap agreements with financial institutions terminate in varying amounts during 2004 to 2012. These agreements are designated as fair value hedges and are 100% effective; no amounts were excluded from the assessment of hedge effectiveness.
At December 31, 2003, the company was also party to agreements with financial institutions to swap interest rates in which the company pays interest at a fixed rate and receives interest at variable LIBOR rates. These derivative instruments terminate in varying amounts during 2004 to 2010. These interest rate swap agreements are designated as cash flow hedges and are 100% effective; no amounts were excluded from the assessment of hedge effectiveness.
The fair values of interest rate swaps are based on quotes from financial institutions. The following table summarizes the company's interest rate swaps at December 31, 2003 and 2002:
2003 2002
------------ ------------
Fair value swaps:
Notional amount........................................ $285,000,000 $205,000,000
Fair value............................................. $ (7,904,000) $ 3,600,000
Average pay rate....................................... 3.9% 3.0%
Average receive rate................................... 6.0% 5.6%
Cash flow swaps:
Notional amount........................................ $115,000,000 $ 65,000,000
Fair value............................................. $ (1,542,000) $ (2,400,000)
Average pay rate....................................... 4.3% 4.8%
Average receive rate................................... 1.2% 1.4%
|
The company sold various interest rate swaps associated with its debt portfolio in response to movements in the interest rate market. These transactions resulted in cash receipts of $7,174,000 in 2003, $4,560,000 in 2002 and $2,435,000 in 2001. The associated gains were deferred and are being amortized as a reduction to interest expense over the life of the underlying debt. The unamortized balance of these gains at December 31, 2003 and 2002 was $13,037,000 and $6,732,000, respectively.
The company designates foreign currency forward exchange contracts as fair value hedges to protect against the variability in exchange rates on short-term intercompany borrowings and firm commitments denominated in foreign currencies. These derivative instruments mature in 2004.
FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The company also manages the volatility of cash flows caused by fluctuations in currency rates by entering into foreign exchange forward contracts. These derivative instruments hedge portions of the company's anticipated third party purchases and forecast intercompany sales denominated in foreign currencies and mature from 2004 to 2006.
The following table summarizes the company's foreign exchange forward contracts at December 31, 2003 and 2002:
2003 2002
------------------------ -----------------------
NOTIONAL FAIR NOTIONAL FAIR
AMOUNT VALUE AMOUNT VALUE
----------- ---------- ----------- ---------
Fair value hedges:
Purchase Euros................... $19,656,000 $ 329,000 $ 9,583,000 (107,000)
Other European currencies........ 2,377,000 8,000 1,223,000 (8,000)
----------- ---------- ----------- ---------
Total fair value hedges....... 22,033,000 337,000 10,806,000 (115,000)
Cash flow hedges:
Purchase Canadian dollars........ 31,759,000 1,777,000 36,319,000 (201,000)
Sell Canadian dollars............ 3,155,000 942,000
Sell Euros....................... 2,521,000 (513,000)
----------- ---------- ----------- ---------
Total fair value hedges....... 37,435,000 2,206,000 36,319,000 (201,000)
----------- ---------- ----------- ---------
Total.............................. $59,468,000 $2,543,000 $47,125,000 $(316,000)
=========== ========== =========== =========
|
The company expects $1,327,000 of net gains that are reported in accumulated other comprehensive income as of December 31, 2003 to be reclassified into earnings in 2004 as the respective hedged transactions will affect 2004 earnings.
NOTE I -- STOCK-BASED COMPENSATION
The company's stock benefit plans, approved by the company's shareholders, authorize the grant of benefit shares or units to key employees and directors. The plan approved in 1988 authorized, until May 1998, the grant of up to 2,737,500 benefit shares or units (as adjusted for subsequent stock splits and dividends). The plan approved in 1996 and amended in 1999 and 2003 authorized the grant of up to 4,000,000 benefit shares or units until April 2006. These share or unit amounts exclude amounts that were issued under predecessor plans. Benefit shares or units include incentive and non-incentive stock options, stock awards and other stock units. The plan approved in December 2001 authorized the grant of up to 1,000,000 benefit shares until December 2011. No grants were made under this plan and the plan was canceled in July 2002.
Stock options are primarily granted at the fair market value of the shares on the date of grant and normally become exercisable one year after grant at a rate of one-half annually and are exercisable in full on the second anniversary date. All options and rights must be exercised within ten years from date of grant. At the company's discretion, vested stock option holders are permitted to elect an alternative settlement method in lieu of purchasing common stock at the option price. The alternative settlement method permits the employee to receive, without payment to the company, cash, shares of common stock or a combination thereof equal to the excess of market value of common stock over the option purchase price. The company expects to settle all such options in common stock.
FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Stock option activity for the three-year period ended December 31, 2003 follows (number of shares in thousands, prices in dollars per share):
OPTION SHARES WEIGHTED AVERAGE PRICE ($)
--------------------- ---------------------------
2003 2002 2001 2003 2002 2001
----- ----- ----- ------- ------- -------
Outstanding at beginning of year........ 2,220 2,323 2,178 21.33 20.86 19.84
Granted................................. 551 279 519 15.37 22.84 21.24
Canceled or expired..................... (314) (149) (88) 20.92 21.87 19.93
Exercised............................... (26) (233) (286) 18.84 18.09 14.09
----- ----- ----- ----- ----- -----
Outstanding at end of year.............. 2,431 2,220 2,323 20.06 21.33 20.86
===== ===== ===== ===== ===== =====
Exercisable at end of year.............. 1,513 1,452 1,602 21.25 21.28 21.10
===== ===== ===== ===== ===== =====
|
For options outstanding at December 31, 2003, the number (in thousands), weighted average exercise prices in dollars per share, and weighted average remaining terms were as follows:
PERIOD IN WHICH OPTIONS WERE GRANTED
-------------------------------------------------
03-02 01-00 99-98 97-96 95-94 AGGREGATE
----- ----- ----- ----- ----- ---------
Number outstanding................ 773 394 521 611 132 2,431
Exercise price range ($):
High............................ 25.67 22.31 26.13 25.38 24.38 26.13
Low............................. 13.01 15.56 14.94 20.44 16.00 13.01
Weighted average:
Exercise price ($).............. 17.55 21.33 19.97 22.55 19.73 20.06
Remaining term (years).......... 9 7 5 3 1 6
|
Stock award shares are granted to employees at no cost. Awards primarily vest at the rate of 25% annually commencing one year from the date of award, provided the recipient is still employed by the company on the vesting date. The cost of stock awards, based on the fair market value at the date of grant, is being charged to expense over the four-year vesting period. The following table summarizes stock award grants for the three-year period ended December 31, 2003:
2003 2002 2001
---------- ---------- ----------
Number of shares granted......................... 57,000 109,700 92,500
Fair value of shares granted..................... $ 901,000 $2,494,000 $1,677,000
Weighted average fair value per share............ $ 15.81 $ 22.73 $ 18.13
Compensation expense recorded.................... $1,216,000 $1,537,000 $1,345,000
|
Under the 1988 plan, no benefit shares or units were available for future grant during the three-year period ending December 31, 2003. Under the 1996 plan, as amended, the following benefit shares or units were available for future grant: 1,243,000 at December 31, 2003, 144,000 at December 31, 2002 and 410,000 at December 31, 2001.
NOTE J -- SHAREHOLDERS' EQUITY
The company has 90,000,000 authorized shares of common stock, $1 par value and 800,000 authorized and unissued shares of preference stock, $1 par value.
FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The changes in shareholders' equity for each of the three years in the period ended December 31, 2003 were as follows:
ACCUMULATED
CAPITAL IN DEFERRED OTHER
COMMON STOCK EXCESS OF RETAINED TREASURY STOCK COMPREHENSIVE
PAR VALUE PAR VALUE EARNINGS STOCK AWARDS INCOME
------------ ----------- ------------ ------------ ----------- -------------
Balance at December 31, 2000 --
47,067,000 shares issued.......... $47,067,000 $68,693,000 $299,985,000 $(34,302,000) $(1,847,000) $(22,165,000)
Net income.......................... 47,573,000
Cash dividends declared............. (35,352,000)
Exercise of stock options:
Cash proceeds..................... 211,000 2,835,000
Exchange of shares................ 75,000 909,000 (984,000)
Stock awards granted................ 93,000 1,834,000 (1,927,000)
Tax benefits related to stock
compensation plans................ 402,000
Retirement of treasury stock........ (56,000) (1,258,000) 1,314,000
Purchases of 579,000 shares of
treasury stock.................... (13,155,000)
Issued 93,000 shares from treasury
for purchases of companies........ 1,900,000
Amortization of deferred stock
awards............................ 1,345,000
Foreign currency translation
adjustment, net................... (3,495,000)
Other............................... (12,000) (238,000) (259,000) 250,000
----------- ----------- ------------ ------------ ----------- ------------
Balance at December 31, 2001 --
47,378,000 shares issued.......... 47,378,000 73,177,000 312,206,000 (45,486,000) (2,179,000) (25,660,000)
Net income.......................... 38,195,000
Cash dividends declared............. (36,717,000)
Exercise of stock options:
Cash proceeds..................... 150,000 2,788,000
Exchange of shares................ 81,000 1,193,000 (1,274,000)
Stock awards granted................ 110,000 2,426,000 (2,536,000)
Tax benefits related to stock
compensation plans................ 178,000
Retirement of treasury stock........ (73,000) (1,396,000) 1,469,000
Purchases of 203,000 shares of
treasury stock.................... (4,356,000)
Issued 750,000 new shares and
1,639,000 shares from treasury for
purchases of companies............ 750,000 12,788,000 29,880,000
Issued 79,000 shares from treasury
for retirement plan match......... 1,873,000
Amortization of deferred stock
awards............................ 1,537,000
Foreign currency translation
adjustment, net................... 7,576,000
Net derivative (loss), cash flow
hedges............................ (2,098,000)
Record minimum pension liability,
net of tax........................ (13,783,000)
Other............................... (2,000) (40,000) (132,000) 42,000
----------- ----------- ------------ ------------ ----------- ------------
Balance at December 31, 2002 --
48,394,000 shares issued.......... 48,394,000 91,114,000 313,684,000 (18,026,000) (3,136,000) (33,965,000)
|
FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
ACCUMULATED
CAPITAL IN DEFERRED OTHER
COMMON STOCK EXCESS OF RETAINED TREASURY STOCK COMPREHENSIVE
PAR VALUE PAR VALUE EARNINGS STOCK AWARDS INCOME
------------ ----------- ------------ ------------ ----------- -------------
Balance at December 31, 2002 --
48,394,000 shares issued.......... 48,394,000 91,114,000 313,684,000 (18,026,000) (3,136,000) (33,965,000)
Net income.......................... 37,303,000
Cash dividends declared............. (33,583,000)
Exercise of stock options:
Cash proceeds..................... 26,000 57,000
Stock awards granted................ 57,000 844,000 (901,000)
Tax benefits related to stock
compensation plans................ 186,000
Retirement of treasury stock........ (13,000) (214,000) 227,000
Purchases of 6,000 shares of
treasury stock.................... (117,000)
Issued 219,000 shares from treasury
for retirement plan match......... 3,274,000
Amortization of deferred stock
awards............................ 1,216,000
Foreign currency translation
adjustment, net................... 14,383,000
Net derivative (loss), cash flow
hedges............................ 1,876,000
Minimum pension liability, net of
tax............................... (367,000)
Other............................... (25,000) (89,000) (208,000) 512,000
----------- ----------- ------------ ------------ ----------- ------------
Balance at December 31, 2003 --
48,439,000 shares issued.......... $48,439,000 $91,898,000 $317,404,000 $(14,850,000) $(2,309,000) $(18,073,000)
=========== =========== ============ ============ =========== ============
|
In July 1998, the company declared a dividend distribution of one preferred share purchase right on each share of common stock outstanding on and after August 18, 1998. The rights are not exercisable until the rights distribution date, defined as the earlier of: 1) the tenth day following a public announcement that a person or group of affiliated or associated persons acquired or obtained the right to acquire beneficial ownership of 20% or more of the outstanding common stock or 2) the tenth day following the commencement or announcement of an intention to make a tender offer or exchange offer, the consummation of which would result in the beneficial ownership by a person or group of 30% or more of such outstanding common shares. Each right, when exercisable, entitles the holder to purchase from the company one one-hundredth of a share of Series A Preferred stock of the company at a price of $100 per one one-hundredth of a preferred share, subject to adjustment. The company is entitled to redeem the rights at $.10 per right, payable in cash or common shares, at any time prior to the expiration of twenty days following the public announcement that a 20% position has been acquired. In the event that the company is acquired in a merger or other business combination transaction or 50% or more of its consolidated assets or earning power is sold, proper provision will be made so that each holder of a right will thereafter have the right to receive, upon the exercise thereof at the then current exercise price of a right, that number of shares of common stock of the acquiring company which at the time of such transaction would have a market value of two times the exercise price of the right. The rights expire on August 18, 2008 unless earlier redeemed by the company. Until exercised, the holder of a right, as such, will have no rights as a shareholder, including, without limitation, the right to vote or to receive dividends.
NOTE K -- ACQUISITIONS
During the three-year period ended December 31, 2003, the company made the following acquisitions, principally all for cash, except as otherwise noted.
In September 2002, the company acquired Leach Company ("Leach"), a leading manufacturer of rear load refuse collection bodies located in Oshkosh, Wisconsin. Leach, whose market strength is primarily in
FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
government and municipal markets, utilizes a dealer channel similar to other Environmental Products Group operations. In October 2002, the company also acquired Wittke, Inc. ("Wittke"), a manufacturer of dynamic truck-mounted refuse collection equipment located in Medicine Hat, Alberta, Canada and Kelowna, British Columbia, Canada. Wittke brand products include front load, side load and automated side load refuse truck bodies. Wittke sold direct to customers at the time of the acquisition, and is particularly strong in the private contractors and large waste hauling company market segments. The company acquired Leach and Wittke using a combination of cash and stock totaling $101,260,000. As a result of these 2002 acquisitions, the company has recorded $11,400,000 of working capital, $19,602,000 of fixed and other long-term assets, $5,660,000 of intangible assets, $2,332,000 of restructuring costs incurred in connection with the shut down of an acquired, non-strategic components facility, $8,082,000 of long-term liabilities and $75,012,000 of goodwill. The company also assumed $9,800,000 in debt. An insignificant portion of the related goodwill is expected to be deductible for tax purposes. In 2003, the company finalized the property, equipment and intangible appraisals, restructuring plans and warranty campaigns resulting in an increase to goodwill of $9,961,000.
In March 2001, the company acquired all of the assets of Athey Products Corporation ("Athey") from bankruptcy proceedings. Athey was a primary competitor to Environmental Products Group's line of mechanical sweepers. Subsequent to the purchase, the company sold off substantially all assets of Athey. The company finalized Athey's asset appraisals in 2002 which increased goodwill by $1,510,000. In September 2001, the company acquired a majority interest in Plastisol Holdings B.V., located in the Netherlands. Plastisol is a small manufacturer of cabs and bodies for fire apparatus using glassfiber reinforced polyester. The company also made two small Tool Group acquisitions during 2001. As a result of the 2001 acquisitions, the company recorded approximately $5,800,000 of working capital, $9,400,000 of fixed and other assets and $12,100,000 of costs in excess of fair value.
All of the acquisitions in the three-year period ended December 31, 2003 have been accounted for as purchases. Accordingly, the results of operations of the acquired companies have been included in the consolidated statements of income from the effective dates of the acquisitions. Assuming the 2002 acquisitions occurred January 1, 2001, the company estimates the following pro forma amounts for the years ended December 31, 2002 and 2001:
2002 2001
-------------- --------------
Net sales............................................. $1,175,388,000 $1,197,791,000
Income from continuing operations..................... 32,136,000 44,907,000
Net income............................................ 24,152,000 45,890,000
Basic income per share
Income from continuing operations................... $ .70 $ .99
Net income.......................................... .53 1.01
Diluted income per share
Income from continuing operations................... $ .70 $ .98
Net income.......................................... .52 1.01
|
NOTE L -- LEGAL PROCEEDINGS
The company is subject to various claims, other pending and possible legal actions for product liability and other damages and other matters arising out of the conduct of the company's business. The company believes, based on current knowledge and after consultation with counsel, that the outcome of such claims and actions will not have a material adverse effect on the company's consolidated financial position or the results of operations. However, in the event of unexpected future developments, it is possible that the ultimate resolution of such matters, if unfavorable, could have a material adverse effect on the company's results of operations.
FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The company has been sued by firefighters in Chicago seeking damages and claiming that exposure to the company's sirens has impaired their hearing and that the sirens are therefore defective. There are presently 26 cases filed during the period 1999-2003, involving a total of 1,663 plaintiffs pending in the Circuit Court of Cook County, Illinois. An additional lawsuit has been filed in Williamson County, Illinois against the company and 15 other unrelated co-defendants seeking class certification for plaintiffs claiming damages to their hearing allegedly as a result of exposure to the company's sirens and design defects in the unrelated co-defendant's fire trucks. The plaintiffs' attorneys have threatened to bring more suits if the company does not settle these cases. The company believes that these product liability suits have no merit and that sirens are necessary in emergency situations and save lives. The discovery phase of the litigation begins in 2004; the company intends to aggressively defend the matter. The company successfully defended approximately 41 similar cases in Philadelphia in 1999 after a series of unanimous jury verdicts in favor of the company.
In early 2004, a judge in Orange County, California entered a $10,185,000 judgment against Safety Storage, Inc. ("SSI") on grounds that SSI defrauded a third party creditor. The company holds a 30% minority interest investment in SSI valued at $3,400,000 as of December 31, 2003. SSI is considering filing for bankruptcy reorganization under Chapter 11 and then appealing the verdict. The company believes that the ultimate loss, if any, will be limited to its investment.
NOTE M -- SEGMENT AND RELATED INFORMATION
The company has four continuing operating segments as defined under SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information". Business units are organized under each segment because they share certain characteristics, such as technology, marketing and product application, which create long-term synergies. The principal activities of the company's operating segments are as follows:
Environmental Products -- Environmental Products manufactures a variety of self-propelled street cleaning vehicles, vacuum loader vehicles, municipal catch basin/sewer cleaning vacuum trucks, refuse truck bodies and water blasting equipment. Environmental Products sells primarily to municipal customers, contractors and government 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 trucks. This group sells primarily to municipal customers, volunteer fire departments and government customers.
Safety Products -- Safety Products produces a variety of visual and audible warning and signal devices; paging, local signaling, and building security, parking and access control systems; hazardous area lighting; and equipment for storage, transfer, use and disposal of flammable and hazardous materials. The group's products are sold primarily to industrial, municipal and government customers.
Tool -- Tool manufactures a variety of consumable tools which include die components for the metal stamping industry, a large selection of precision metal products for nonstamping needs and a line of precision cutting and grooving tools including polycrystalline diamond and cubic boron nitride products for superhard applications. The group's products are sold predominately to industrial markets.
Net sales by operating segment reflect sales of products and services and
financial revenues to external customers, as reported in the company's
consolidated statements of income. Intersegment sales are insignificant. The
company evaluates performance based on operating income of the respective
segment. Operating income includes all revenues, costs and expenses directly
related to the segment involved. In determining operating segment income,
neither corporate nor interest expenses are included. Operating segment
depreciation expense, identifiable assets and capital expenditures relate to
those assets that are utilized by the respective operating segment. Corporate
assets consist principally of cash and cash equivalents, notes and other
receivables and fixed assets. The accounting policies of each operating segment
are the same as those described in the summary of significant accounting
policies.
FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
See Note K for a discussion of the company's acquisition activity during the three-year period ended December 31, 2003.
Revenues attributed to customers located outside of the U.S. aggregated $374,826,000 in 2003, $293,248,000 in 2002 and $267,531,000 in 2001. Sales exported from the U.S. aggregated $118,257,000 in 2003, $77,517,000 in 2002 and $87,064,000 in 2001.
FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A summary of the company's continuing operations by segment for the three-year period ended December 31, 2003 is as follows:
2003 2002 2001
-------------- -------------- --------------
Net sales
Environmental Products...................... $ 352,946,000 $ 296,372,000 $ 280,708,000
Fire Rescue................................. 415,761,000 334,213,000 373,428,000
Safety Products............................. 278,352,000 270,273,000 256,261,000
Tool........................................ 159,739,000 156,343,000 161,778,000
-------------- -------------- --------------
Total net sales............................. $1,206,798,000 $1,057,201,000 $1,072,175,000
============== ============== ==============
Operating income
Environmental Products...................... $ 17,723,000 $ 22,961,000 $ 20,159,000
Fire Rescue................................. 14,473,000 11,239,000 27,194,000
Safety Products............................. 31,821,000 41,432,000 37,917,000
Tool........................................ 15,923,000 18,716,000 19,290,000
Corporate expense........................... (13,962,000) (12,405,000) (12,556,000)
-------------- -------------- --------------
Total operating income...................... 65,978,000 81,943,000 92,004,000
Interest expense.............................. (19,750,000) (20,075,000) (26,368,000)
Other expense................................. (414,000) (895,000) (1,182,000)
Minority interest............................. 203,000 129,000
-------------- -------------- --------------
Income before income taxes.................... $ 46,017,000 $ 61,102,000 $ 64,454,000
============== ============== ==============
Depreciation and amortization
Environmental Products...................... $ 6,796,000 $ 4,452,000 $ 5,510,000
Fire Rescue................................. 5,296,000 4,511,000 5,199,000
Safety Products............................. 6,005,000 6,378,000 9,316,000
Tool........................................ 7,571,000 7,530,000 9,418,000
Corporate................................... (1,233,000) 1,124,000 815,000
-------------- -------------- --------------
Total depreciation and amortization......... $ 24,435,000 $ 23,995,000 $ 30,258,000
============== ============== ==============
Identifiable assets
Manufacturing activities
Environmental Products................... $ 283,792,000 $ 286,865,000 $ 153,406,000
Fire Rescue.............................. 242,359,000 225,305,000 203,749,000
Safety Products.......................... 228,071,000 214,560,000 214,071,000
Tool..................................... 167,326,000 170,343,000 176,580,000
Corporate................................ 34,750,000 34,157,000 25,599,000
-------------- -------------- --------------
Total manufacturing activities........... 956,298,000 931,230,000 773,405,000
-------------- -------------- --------------
Financial services activities
Environmental Products................... 55,431,000 65,542,000 72,581,000
Fire Rescue.............................. 174,680,000 161,246,000 166,539,000
-------------- -------------- --------------
Total financial services activities...... 230,111,000 226,788,000 239,120,000
-------------- -------------- --------------
Total identifiable assets................... $1,186,409,000 $1,158,018,000 $1,012,525,000
============== ============== ==============
Additions to long-lived assets
Environmental Products...................... $ 23,432,000 $ 100,899,000 $ 13,754,000
Fire Rescue................................. 6,229,000 5,178,000 6,466,000
Safety Products............................. 8,506,000 5,817,000 4,105,000
Tool........................................ 5,504,000 11,421,000 19,373,000
Corporate................................... 8,628,000 2,442,000 30,000
-------------- -------------- --------------
Total additions to long-lived assets........ $ 52,299,000 $ 125,757,000 $ 43,728,000
============== ============== ==============
|
FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table presents financial revenues (included in net sales) by segment for the three-year period ended December 31, 2003 is as follows:
2003 2002 2001
----------- ----------- -----------
Financial revenues
Environmental Products...................... $ 4,443,000 $ 6,511,000 $ 6,049,000
Fire Rescue................................. 8,911,000 9,632,000 9,490,000
----------- ----------- -----------
Total financial revenues.................... $13,354,000 $16,143,000 $15,539,000
=========== =========== ===========
|
Due to the nature of the company's customers, a significant portion of the Environmental Products and Fire Rescue financial revenues is exempt from federal income tax.
The segment information provided below is classified based on geographic location of the company's subsidiaries:
2003 2002 2001
-------------- -------------- --------------
NET SALES:
United States....................... $ 893,593,000 $ 841,470,000 $ 891,708,000
Europe.............................. 207,309,000 173,482,000 143,861,000
Canada.............................. 96,418,000 34,063,000 29,447,000
Other............................... 9,478,000 8,186,000 7,159,000
-------------- -------------- --------------
$1,206,798,000 $1,057,201,000 $1,072,175,000
============== ============== ==============
LONG-LIVED ASSETS
United States....................... $ 410,518,000 $ 408,822,000 $ 388,197,000
Europe.............................. 55,341,000 47,714,000 35,724,000
Canada.............................. 85,637,000 78,702,000 6,976,000
Other............................... 1,250,000 1,175,000 183,000
-------------- -------------- --------------
$ 552,746,000 $ 536,413,000 $ 431,080,000
============== ============== ==============
|
During 2000, the company decided to divest the operations of the Sign Group and began to search for a qualified buyer of that business. The Sign Group manufactured illuminated, non-illuminated and electronic advertising sign displays primarily for commercial and industrial markets and contracted to provide maintenance services for the signs it manufactured as well as signs manufactured by others. The Sign Group was carried as a discontinued business since the strategic decision was made to exit the business. On April 30, 2003, the company completed the sale of the Sign Group to a third party for cash and a note receivable, which together approximated the net book value of the business. Sign revenues for the years ended December 31, 2003, 2002 and 2001 were $12,844,000, $43,245,000 and $58,817,000, respectively. The Registrant retained certain assets and liabilities in conjunction with the sale.
In 2003, the company incurred $4,829,000 in restructuring charges relating to the consolidation of facilities and operations and reductions in work force. Of this amount, the Environmental Products Group incurred costs of $640,000, the Safety Products Group incurred $3,289,000 and the Tool Group incurred $900,000. There was no remaining liability at December 31, 2003.
The company also incurred $3,627,000 in restructuring charges during 2001 principally resulting from reductions in work force through early retirement and job eliminations. Of this amount, the Environmental Products Group incurred costs of $798,000, the Fire Rescue Group incurred costs of $854,000, the Safety Products Group incurred costs of $461,000 and the Tool Group incurred costs of $1,514,000.
FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE N -- NET INCOME PER SHARE
The following table summarizes the information used in computing basic and diluted income per share for the three-year period ending December 31, 2003:
2003 2002 2001
----------- ----------- -----------
Numerator for both basic and diluted income
per share computations -- net income........ $37,303,000 $38,195,000 $47,573,000
=========== =========== ===========
Denominator for basic income per
share -- weighted average shares
outstanding................................. 47,951,000 45,824,000 45,314,000
Effect of employee stock options (dilutive
potential common shares).................... 33,000 115,000 129,000
----------- ----------- -----------
Denominator for diluted income per share --
adjusted shares............................. 47,984,000 45,939,000 45,443,000
=========== =========== ===========
|
NOTE O -- COMMITMENTS AND GUARANTEES
The company leases certain facilities and equipment under operating leases, some of which contain options to renew. Total rental expense on all operating leases was $8,742,000 in 2003, $8,483,000 in 2002 and $7,985,000 in 2001. Sublease income and contingent rentals relating to operating leases were insignificant. At December 31, 2003, minimum future rental commitments under operating leases having noncancelable lease terms in excess of one year aggregated $27,658,000 payable as follows: $7,616,000 in 2004, $5,106,000 in 2005, $4,007,000 in 2006, $3,101,000 in 2007, $2,181,000 in 2008 and $5,647,000 thereafter.
At December 31, 2003 and 2002, the company had outstanding standby letters of credit aggregating $35,458,000 and $32,298,000, respectively, principally to act as security for retention levels related to casualty insurance policies and to guarantee the performance of subsidiaries that engage in export transactions to foreign governments and municipalities.
The company issues product performance warranties to customers with the sale of its products. The specific terms and conditions of these warranties vary depending upon the product sold and country in which the company does business with warranty periods generally ranging from 6 months to 5 years. The company estimates the costs that may be incurred under its basic limited warranty and records a liability in the amount of such costs at the time the sale of the related product is recognized. Factors that affect the company's warranty liability include the number of units under warranty from time to time, historical and anticipated rates of warranty claims and costs per claim. The company periodically assesses the adequacy of its recorded warranty liabilities and adjusts the amounts as necessary.
Changes in the company's warranty liabilities for the years ended December 31, 2003 and 2002 were as follows:
2003 2002
------------ ------------
Balance at January 1..................................... $ 13,714,000 $ 6,786,000
Provisions to expense.................................... 17,618,000 11,098,000
Actual costs incurred.................................... (23,167,000) (12,608,000)
Business acquisitions.................................... 4,696,000 8,438,000
------------ ------------
Balance at December 31................................... $ 12,861,000 $ 13,714,000
============ ============
|
FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The 2003 business acquisitions reflect the revised estimate of warranty liabilities relating to the 2002 acquisitions of the refuse truck body businesses. Costs incurred in 2003 include one-time refuse truck body warranty campaign charges.
The company guarantees the debt of a third-party dealer that sells the company's vehicles. The notional amounts of the guaranteed debt as of December 31, 2003 and 2002 totaled $750,000 and $810,000, respectively. No losses have been incurred as of December 31, 2003. The guarantees expire between 2004 and 2006.
The company also provides residual value guarantees on vehicles sold to certain customers. Proceeds received in excess of the fair value of the guarantee are deferred and amortized into income ratably over the life of the guarantee. These transactions have been recorded as operating leases and liabilities equal to the fair value of the guarantees issued in 2003 were recognized. The notional amounts of the residual value guarantees were $3,480,000 and $1,336,000 as of December 31, 2003 and 2002, respectively. No losses have been incurred as of December 31, 2003. The guarantees expire between 2004 and 2010.
NOTE P -- GOODWILL AND OTHER INTANGIBLE ASSETS
In June 2001, the Financial Accounting Standards Board issued SFAS No. 141, "Business Combinations", and No. 142, "Goodwill and Other Intangible Assets", effective for fiscal years beginning after December 15, 2001. Under the new rules, goodwill and intangible assets deemed to have indefinite lives are no longer amortized but are subject to annual impairment tests in accordance with these statements. Other intangible assets continue to be amortized over their useful lives.
The company adopted SFAS No. 142 effective January 1, 2002 and accordingly discontinued the amortization of goodwill. A reconciliation of previously reported net income and earnings per share to the amounts adjusted for the exclusion of goodwill amortization, net of the related income tax effect, for the year ended December 31, 2001 follows:
2001
-----------
Reported net income......................................... $47,573,000
Add back: goodwill amortization, net of tax................. 5,503,000
-----------
Adjusted net income......................................... $53,076,000
===========
Basic net income per common share
Reported net income....................................... $ 1.05
Goodwill amortization, net of tax......................... .12
-----------
Adjusted net income....................................... $ 1.17
===========
Diluted net income per common share
Reported net income....................................... $ 1.05
Goodwill amortization, net of tax......................... .12
-----------
Adjusted net income....................................... $ 1.17
===========
|
As part of the adoption of SFAS No. 142, the company also completed a transitional goodwill impairment test and determined that $7,984,000 of goodwill related to a niche Tool Group business was impaired. This amount was recognized in the first quarter of 2002 as a charge to net income resulting from a cumulative effect of a change in accounting. The company determined the fair value of the reporting unit by
FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
calculating the present value of expected future cash flows. Changes in the carrying amount of goodwill for the year ended December 31, 2003, by operating segment, were as follows:
ENVIRONMENTAL
PRODUCTS FIRE RESCUE SAFETY PRODUCTS TOOL TOTAL
------------- ----------- --------------- ----------- ------------
December 31, 2001........ $ 61,722,000 $33,356,000 $ 98,900,000 $86,910,000 $280,888,000
Impairment............... (7,984,000) (7,984,000)
Acquisitions............. 65,051,000 65,051,000
Adjustments.............. 1,510,000 3,670,000 5,180,000
Translation.............. 574,000 3,574,000 1,085,000 67,000 5,300,000
------------ ----------- ------------ ----------- ------------
December 31, 2002........ 128,857,000 36,930,000 99,985,000 82,663,000 348,435,000
Adjustments.............. 9,961,000 9,961,000
Translation.............. 1,119,000 4,275,000 2,436,000 188,000 8,018,000
------------ ----------- ------------ ----------- ------------
December 31, 2003........ $139,937,000 $41,205,000 $102,421,000 $82,851,000 $366,414,000
============ =========== ============ =========== ============
|
The 2002 adjustments represent the final assessment of the asset values recorded in connection with the 2001 acquisition of Athey Products Corporation and a contingency payment made to the former owners of a tool business acquired in 2001 under the terms of the sale and purchase agreement. The 2003 adjustments reflect the finalization of property, equipment and intangible appraisals, restructuring plans and warranty campaigns relating to the 2002 acquisitions of the refuse truck body businesses.
Under SFAS 142, the company is required to test its goodwill annually for impairment; the company performs this test at the beginning of the fourth quarter. The company performed this test in 2003 and determined that there was no impairment.
The components of the company's other intangible assets as of December 31, 2003 are as follows:
WEIGHTED- GROSS NET
AVERAGE CARRYING ACCUMULATED CARRYING
USEFUL LIFE VALUE AMORTIZATION VALUE
----------- ---------- ------------ ----------
(YEARS)
Amortizable:
Customer relationships............... 20 $1,850,000 (116,000) $1,734,000
Distribution network................. 40 1,300,000 (41,000) 1,259,000
Non-amortizable tradenames............. 2,510,000 2,510,000
---------- ------------ ----------
Total.................................. $5,660,000 $(157,000) $5,503,000
========== ============ ==========
|
Amortization expense for the year ended December 31, 2003 totaled $157,000. The company estimates that the aggregate amortization expense will be $125,000 for each of the years 2004 through 2008 and $2,368,000 thereafter.
NOTE Q -- NEW ACCOUNTING PRONOUNCEMENTS
In September 2002, the Financial Accounting Standards Board ("FASB") issued SFAS No. 146, "Accounting for Exit or Disposal Activities". SFAS No. 146 addresses significant issues regarding the recognition, measurement and reporting of costs that are associated with exit and disposal activities, including restructuring activities that are currently accounted for under EITF No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (Including Certain Costs Incurred in a Restructuring)". The scope of SFAS No. 146 also includes costs related to terminating a contract that is not a capital lease and termination benefits that employees who are involuntarily terminated
FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
receive under the terms of a one-time benefit arrangement that is not an ongoing benefit arrangement or an individual deferred-compensation contract. The adoption of the provisions of SFAS No. 146 on January 1, 2003 did not have a material impact on the company's consolidated financial position, results of operations or cash flows.
In November 2002, the FASB issued Interpretation No. ("FIN") 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others". FIN 45 applies to financial guarantees, performance guarantees, indemnification agreements and indirect guarantees of the indebtedness of others. FIN 45 requires the recognition of a liability, at inception, equal to its fair value for guarantee obligations issued or modified after December 31, 2002. FIN 45 also clarifies disclosure requirements to be made by a guarantor for certain guarantees. The disclosure provisions of FIN 45 were effective for the fiscal years ending after December 15, 2002. The company adopted the disclosure provisions of FIN 45 as of December 31, 2002 and the accounting requirements on January 1, 2003, which did not have a material impact on the company's consolidated financial position, results of operations or cash flows. Refer to Note O for the required disclosures.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation -- Transition and Disclosure -- An Amendment of FASB Statement No. 123". This statement provides for transitions if a company elects to adopt SFAS No. 123 and also provides for some additional disclosures in the financial statements for the year ended December 31, 2002. The company accounts for its stock compensation under APB 25, and accordingly has adopted the additional disclosures as of December 31, 2002.
In January 2003, the FASB issued FIN 46, "Consolidation of Variable Interest Entities". FIN 46 requires the consolidation of a variable interest entity by its primary beneficiary if the entity does not effectively disperse risks among the parties involved. A variable interest entity is any legal structure used for business purposes with equity investors who (i) provide an insufficient level of financial support, (ii) are unable to make decisions about the entity's activities through voting rights or (iii) do not share in the profits and losses of the entity. A primary beneficiary is defined as an enterprise that absorbs a majority of the entity's expected losses, receives a majority of the entity's residual returns, or both. FIN 46 was effective immediately for all interests in variable interest entities created after January 31, 2003, including certain disclosure requirements. In October 2003, the FASB issued Staff Position No. 46-6, "Effective Date of FASB Interpretation No. 46, Consolidation of Variable Interest Entities," that deferred the effective date of FIN 46 until the end of the first reporting period after December 15, 2003. The adoption of the provisions of FIN 46 as of December 31, 2003 did not have a material impact on the company's consolidated financial position, results of operations or cash flows.
In December 2003, the FASB issued SFAS No. 132 (revised 2003), "Employers Disclosures about Pensions and Other Postretirement Benefits" to improve financial statement disclosures for defined benefit plans. SFAS 132 requires more detailed disclosures about plan assets, benefit obligations, cash flows, benefit costs and other relevant information. The disclosures are generally effective for fiscal years ending after December 31, 2003; a six month delay in the effective date was provided for non-U.S. plans. The company adopted the additional disclosure provisions of SFAS 132 for its U.S. plans as of December 31, 2003.
FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE R -- SELECTED QUARTERLY DATA (UNAUDITED)
FOR THE THREE-MONTH PERIOD ENDED
---------------------------------------------------------------------------------------------------
2003 2002
------------------------------------------------ ------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- -------- ------------ ----------- -------- -------- ------------ -----------
(IN THOUSANDS OF DOLLARS EXCEPT PER SHARE AMOUNTS)
Net sales................... $291,951 $311,041 $287,810 $315,996 $245,644 $257,864 $261,615 $292,078
Gross margin................ 74,349 83,091 78,046 79,589 69,890 74,747 74,062 80,297
Income from continuing
operations................ 6,467 9,947 9,939 11,319 9,794 10,712 12,493 13,180
Loss from discontinued
operations................ (369)
Cumulative effect of change
in accounting............. (7,984)
Net income.................. 6,467 9,578 9,939 11,319 1,810 10,712 12,493 13,180
Per share data -- diluted:
Income from continuing
operations.............. .14 .21 .21 .24 .22 .24 .28 .28
Loss from discontinued
operations.............. (.01)
Cumulative effect of
change in accounting.... (.18)
Net income*............... .14 .20 .21 .24 .04 .24 .28 .28
Dividends paid per share.... .20 .20 .20 .20 .20 .20 .20 .20
Market price range per share
High...................... 20.38 19.57 20.79 17.95 27.07 25.98 24.50 19.93
Low....................... 13.60 14.27 14.90 13.80 19.90 21.55 18.10 16.00
|
* amounts may not add due to rounding
The company incurred pre-tax restructuring charges (see Note M) of $1,636,000, $2,587,000, $379,000 and $227,000 for the three-month periods ended March 31, 2003, June 30, 2003, September 30, 2003 and December 31, 2003, respectively.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
ITEM 9A. CONTROLS AND PROCEDURES.
(a) Evaluation of Disclosure Controls and Procedures
The Registrant's management, with the participation of the Registrant's Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Registrant's disclosure controls and procedures as of December 31, 2003. Based on that evaluation, the Registrant's Chief Executive Officer and Chief Financial Officer concluded that the Registrant's disclosure controls and procedures were effective as of December 31, 2003. As a matter of practice, the Registrant's management continues to review and document disclosure controls and procedures, including internal controls and procedures for financial reporting. From time to time, the Registrant may make changes aimed at enhancing the effectiveness of the controls and to ensure that the systems evolve with the business. There were no material changes in the Registrant's internal controls over financial reporting during the fourth quarter of 2003.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information under the caption "Election of Directors" contained in the Registrant's Proxy Statement for the Annual Meeting of Shareholders to be held on April 30, 2004 is incorporated herein by reference.
The following is a list of the Registrant's executive officers, their ages, business experience and positions and offices as of March 1, 2004:
Robert D. Welding, age 55, was elected President and Chief Executive Officer as well as to the Board of Directors in December 2003. Previously, Mr. Welding was Executive Vice President of Borg Warner, Inc. from 1999 -- 2003, President of Borg Warner, Inc.'s Driveline Group from 2002 -- 2003, President of Borg Warner Transmission Systems, Inc. from 1996 -- 2003 and Vice President of Borg Warner, Inc. from 1996 -- 1999. Mr. Welding also held senior level positions with Volkswagen and General Motors.
John A. DeLeonardis, age 57, was elected Vice President -- Taxes in January 1992.
Duane A. Doerle, age 48, was elected Vice President -- Corporate Development in July 1996.
Stephanie K. Kushner, age 48, was elected as Vice President and Chief Financial Officer in February 2002. Previously, Ms. Kushner was Vice President -- Treasury and Corporate Development for FMC Technologies in 2001 and Vice President and Treasurer for FMC Corporation from 1999-2001.
Karen N. Latham, age 44, was elected Vice President and Treasurer in December 2002. Ms. Latham was a Consultant from 1998 to 2001 with Egon Zehnder International, Inc. and a Senior Vice President from 2001 to 2002 with Coffou Partners, Inc.
Richard L. Ritz, age 50, was elected Vice President and Controller in January 1991.
Jennifer L. Sherman, age 39, was appointed Vice President, General Counsel and Secretary effective March 1, 2004. Ms. Sherman was previously Deputy General Counsel and Assistant Secretary since 1998.
These officers hold office until the next annual meeting of the Board of Directors following their election and until their successors shall have been elected and qualified.
There are no family relationships among any of the foregoing executive officers.
The information concerning the Registrant's "independent audit committee financial experts", as defined by the Sarbanes-Oxley Act and Securities and Exchange Commission, contained under the caption "Board of Directors and Committees" of the Registrant's Proxy Statement for the Annual Meeting of Shareholders to be held April 30, 2004 is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION.
The information contained under the caption "Executive Compensation" of the Registrant's Proxy Statement for the Annual Meeting of Shareholders to be held April 30, 2004 is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.
The information contained under the captions "Security Ownership of Certain Beneficial Owners" and "Equity Compensation Plan Information" of the Registrant's Proxy Statement for the Annual Meeting of Shareholders to be held April 30, 2004 is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information contained under the caption "Executive Compensation" of the Registrant's Proxy Statement for the Annual Meeting of Shareholders to be held April 30, 2003 is incorporated herein by reference.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
The information under the caption "Accounting Information" and "Board of Directors and Committees" in the Registrant's Proxy Statement for the Annual Meeting of Shareholders to be held on April 30, 2004 is incorporated herein by reference.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a)1. Financial Statements
The following consolidated financial statements of Federal Signal Corporation and Subsidiaries contained under Item 8 of this Form 10-K are incorporated herein by reference:
Consolidated Balance Sheets as of December 31, 2003 and 2002
Consolidated Statements of Income for the Years Ended December 31, 2003, 2002 and 2001
Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2003, 2002 and 2001
Consolidated Statements of Cash Flows for the Years Ended December 31, 2003, 2002 and 2001
Notes to Consolidated Financial Statements
2. Financial Statement Schedules
The following consolidated financial statement schedule of Federal Signal Corporation and Subsidiaries, for the three years ended December 31, 2003 is filed as a part of this report in response to Item 15(d):
Schedule II -- Valuation and Qualifying Accounts
All other schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions or are inapplicable, and therefore, have been omitted.
3. Exhibits
The following exhibits, other than those incorporated by reference, have been included in the Registrant's Form 10-K filed with the Securities and Exchange Commission. The Registrant shall furnish copies of these exhibits upon written request to the Corporate Secretary at the address given on the cover page.
3. a. Restated Certificate of Incorporation of the Registrant,
filed as Exhibit (3)(a) to the Registrant's Form 10-K for
the year ended December 31, 1996 is incorporated herein by
reference.
b. By-laws of the Registrant, as amended February 13, 2004, as
incorporated herein.
4. a. Rights Agreement dated 7/9/98, filed as Exhibit (4) to the
Registrant's Form 8-A dated July 28, 1998 is incorporated
herein by reference.
b. The Registrant has no long-term debt agreements for which
the related outstanding debt exceeds 10% of consolidated
total assets as of December 31, 2003. Copies of debt
instruments for which the related debt is less than 10% of
consolidated total assets will be furnished to the
Commission upon request.
10. a. The 1996 Stock Benefit Plan, as amended April 17, 2003, as
incorporated herein.
b. Corporate Management Incentive Bonus Plan, filed as Exhibit
(10)(b) to the Registrant's Form 10-K for the year ended
December 31, 2002 is incorporate herein by reference.
c. Supplemental Pension Plan, filed as Exhibit (10)(c) to the
Registrant's Form 10-K for the year ended December 31, 1995
is incorporated herein by reference.
d. Executive Disability, Survivor and Retirement Plan, filed as
Exhibit (10)(d) to the Registrant's Form 10-K for the year
ended December 31, 1995 is incorporated herein by reference.
e. Supplemental Savings and Investment Plan, filed as Exhibit
(10)(f) to the Registrant's Form 10-K for the year ended
December 31, 1993 is incorporated herein by reference.
f. Employment Agreement with Robert D. Welding as incorporated
herein.
g. Retirement and Settlement Agreement with Joseph J. Ross as
incorporated herein.
h. Pension Agreement with Stephanie K. Kushner, filed as
Exhibit (10)(g) to the Registrant's Form 10-K for the year
ended December 31, 2002 is incorporated herein by reference.
i. Employment Termination Agreement with Stephanie K. Kushner,
filed as Exhibit (10)(h) to the Registrant's Form 10-K for
the year ended December 31, 2002 is incorporated herein by
reference.
j. Change of Control Agreement with Kim A. Wehrenberg, filed as
Exhibit (10)(h) to the Registrant's Form 10-K for the year
ended December 31, 1994 is incorporated herein by reference.
k. Change of Control Agreement with Stephanie K. Kushner, filed
as Exhibit (10)(i) to the Registrant's Form 10-K for the
year ended December 31, 2001 is incorporated herein by
reference.
l. Director Deferred Compensation Plan, filed as Exhibit
(10)(h) to the Registrant's Form 10-K for the year ended
December 31, 1997 is incorporated herein by reference.
m. Retirement Plan for Outside Directors (applies only to
individuals who became a director prior to October 9, 1997),
filed as Exhibit (10)(I) to the Registrant's Form 10-K for
the year ended December 31, 1997 is incorporated herein by
reference.
n. Broad Based Stock Option Plan, filed as Exhibit (99) to the
Registrant's Form S-8 dated January 31, 2002 is incorporated
herein by reference. This plan was terminated on July 18,
2002, and no shares were issued pursuant to this plan.
11. Computation of per share earnings is furnished in Note N of
the financial statements contained under Item 8 of this 10-K
and thereby incorporated herein by reference.
13. Annual Report to Shareholders for the year ended December
31, 2003. Such report is furnished for the information of
the Commission only and is not to be deemed "filed" as part
of this filing.
14. Code of Ethics for CEO and Senior Financial Officers, as
amended February 13, 2004, as incorporated herein.
21. Subsidiaries of the Registrant
|
23. Consent of Independent Auditors
31. 1 CEO Certification under Section 302 of the Sarbanes-Oxley
Act
31. 2 CFO Certification under Section 302 of the Sarbanes-Oxley
Act
32. 1 CEO Certification of Periodic Report under Section 906 of
the Sarbanes-Oxley Act
32. 2 CFO Certification of Periodic Report under Section 906 of
the Sarbanes-Oxley Act
|
(b) Reports on Form 8-K for the three months ended December 31, 2003
A Form 8-K was filed on October 22, 2003, under Items 7 and 12, reporting the Registrant's press release dated October 22, 2003 that disclosed its financial results for the third quarter ended September 30, 2003.
(c) The exhibits contained under Item 15(a)(3) of this Form 10-K are incorporated herein by reference.
(d) The schedule contained under Item 15(a)(2) of this Form 10-K is incorporated herein by reference.
OTHER MATTERS
For the purposes of complying with the amendments to the rules governing Form S-3 and Form S-8 (effective July 13, 1990) under the Securities Act of 1933, the undersigned, the Registrant, hereby undertakes as follows, which undertaking shall be incorporated by reference into the Registrant's Registration Statements on Form S-3 Nos. 333-71886, 333-76372 and 333-98993 dated October 19, 2001, January 7, 2002 and August 30, 2002, respectively and Form S-8 Nos. 33-41721, 33-49476, 33-14251, 33-89509 and 333-81798 dated July 15, 1991, June 9, 1992, October 16, 1996, October 22, 1999, and January 31, 2002, respectively:
Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue.
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
FEDERAL SIGNAL CORPORATION
BY: /s/ ROBERT D. WELDING
------------------------------------
ROBERT D. WELDING
President, Chief Executive
Officer and Director
|
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below, as of March 10, 2004, by the following persons on behalf of the Registrant and in the capacities indicated.
/s/ STEPHANIE K. KUSHNER
-------------------------------------------------------
Stephanie K. Kushner
Vice President and
Chief Financial Officer
/s/ RICHARD L. RITZ
-------------------------------------------------------
Richard L. Ritz
Vice President and Controller
/s/ JAMES C. JANNING
-------------------------------------------------------
James C. Janning
Chairman and Director
/s/ CHARLES R. CAMPBELL
-------------------------------------------------------
Charles R. Campbell
Director
/s/ PAUL W. JONES
-------------------------------------------------------
Paul W. Jones
Director
/s/ WALDEN W. O'DELL
-------------------------------------------------------
Walden W. O'Dell
Director
/s/ JOAN E. RYAN
-------------------------------------------------------
Joan E. Ryan
Director
/s/ RICHARD R. THOMAS
-------------------------------------------------------
Richard R. Thomas
Director
/s/ ROBERT M. GERRITY
-------------------------------------------------------
Robert M. Gerrity
Director
/s/ ROBERT S. HAMADA
-------------------------------------------------------
Robert S. Hamada
Director
|
FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
ADDITIONS DEDUCTIONS
---------- -----------
ACCOUNTS
BALANCE AT CHARGED TO WRITTEN OFF
BEGINNING OF COSTS AND NET OF BALANCE AT
DESCRIPTION YEAR EXPENSES RECOVERIES END OF YEAR
----------- ------------ ---------- ----------- -----------
Deducted from asset accounts --
Allowance for doubtful accounts
Year ended December 31, 2003:
Manufacturing activities................ $2,640,000 $2,993,000
Financial service activities............ 1,002,000 2,496,000
---------- ----------
Total................................... $3,642,000 $3,175,000 $1,328,000 $5,489,000
========== ==========
Year ended December 31, 2002:
Manufacturing activities................ $2,355,000 $2,640,000
Financial service activities............ 1,005,000 1,002,000
---------- ----------
Total................................... $3,360,000 $2,290,000 $2,008,000 $3,642,000
========== ==========
Year ended December 31, 2001:
Manufacturing activities................ $2,629,000 $2,355,000
Financial service activities............ 683,000 1,005,000
---------- ----------
Total................................... $3,312,000 $2,382,000 $2,334,000 $3,360,000
========== ==========
|
Exhibit 3.b
BY-LAWS
OF
FEDERAL SIGNAL CORPORATION
(a Delaware Corporation)
February 13, 2004
BY-LAWS
OF
FEDERAL SIGNAL CORPORATION
(a Delaware Corporation)
ARTICLE I
Offices. Books and Records.
Section 1.1 Offices. The registered office of FEDERAL SIGNAL CORPORATION (herein called the "Corporation") within the State of Delaware shall be in the City of Wilmington, County of New Castle. The Corporation may also have such other offices at such other places both within or without the State of Delaware as the Board of Directors of the Corporation (herein called the "Board) may from time to time determine or the business of the Corporation may require.
Section 1.2. Books and records. The books and records of the Corporation shall be kept at the principal business office of the Corporation, or at such other place or places as the Board shall from time to time determine.
ARTICLE II
Meetings of Stockholders.
Section 2.1. Place of meetings. Meetings of stockholders shall be held at such place, within or without the State of Delaware, as may be fixed from time to time by the Board and specified in the respective notices or waivers of notice thereof, provided that if the Board shall not so fix the place of any meeting of stockholders or if any special meeting of stockholders is called by a person or persons other than the Board, such meeting shall be held at the principal business office of the Corporation.
Section 2.2. Annual Meetings. An annual meeting of stock-holders for the purpose of electing directors and the transaction of such other business as may properly be brought before the meeting shall be held each year at such time as may from time to time be determined by the Board. In the absence of such a determination by the Board prior to twenty (20) days before the fourth Friday in April of each year, such annual meeting shall be held on the fourth Friday in April at the hour of 11:00 A.M., unless a legal holiday, and if a legal holiday, then on the next succeeding business day which is not a legal holiday. If, for any reason, the annual meeting shall not be held at the time herein provided, the same may be held at any time thereafter upon notice as hereinafter provided or the business thereof may be transacted at any special meeting of stockholders called for that purpose.
Section 2.3. Special meetings of stockholders. Special meetings of stockholders for any purpose or purposes, unless otherwise prescribed by law, may be called at any time by the Board of Directors. The business transacted at any special meeting of stockholders shall be limited to the purpose or purposes stated in the call thereof.
Section 2.4. Notice of meetings. Written notice of every meeting of stockholders stating the place, day and hour of the meeting, unless otherwise prescribed by law or the Certificate of Incorporation (meaning always herein the Certificate of Incorporation of the Corporation as the same may be amended from time to time), shall be given, personally or by mail, not less than ten nor more than sixty days before the date of the meeting, to each stockholder of record entitled to vote at such meeting. The notice of a special meeting
shall state the purpose for which the meeting is called and shall also indicate that it is being issued by or at the direction of the person or persons calling the meeting.
Section 2.5. List of stockholders. The Secretary of the Corporation shall make, at least ten days before each meeting of stockholders, a complete list of the stockholders entitled to vote at the meeting, arranged in alphabetical order, showing the address of and the number of shares of each class of stock of the Corporation registered in the name of each stockholder. Such list shall be open to the examination of any stockholder, for any purpose germane to the meeting, during ordinary business hours, for a period of at least ten days prior to the meeting, either at a place in the city where the meeting is to be held, which place shall be specified in the notice of the meeting, or, if not so specified, at the place where the meeting is to be held. Such list shall be produced at the time and place of the meeting and kept during the whole time thereof for inspection by any stockholder who is present.
Section 2.6. Quorum and adjournments. For the purpose of any action to be taken by stockholders at any meeting, the presence in person or by proxy of the holders of those of the shares of stock of the Corporation issued and outstanding and entitled to vote thereat as shall have a majority of the voting power of all such shares shall be necessary and sufficient to constitute a quorum for the transaction of business, except as otherwise expressly provided by law or by the Certificate of Incorporation. If, however, such quorum shall not be present or represented at any meeting of the stockholders, the stockholders entitled to vote thereat present in person or represented by proxy shall have power to adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present or represented. At such adjourned meeting at which a quorum shall be present or represented, any business may be transacted which might have been transacted at the meeting as originally notified. The absence from any meeting of the number required by law, or by the Certificate of Incorporation or these by-laws, for action upon any given matter shall not prevent action at such meeting upon any other matter or matters which may properly come before the meeting and subject was on the agenda of the meeting, if the number required in respect of such other matter or matters shall be present. Nothing in these by-laws shall affect the right to adjourn any meeting from time to time where a quorum is present.
Section 2.7. Organization. At any meeting of stockholders, the Chair or in his/her absence, the President or Chief Executive Officer, a Vice President, or in the absence of all of the foregoing, a person chosen by a majority of the votes entitled to be cast by the stockholders of the Corporation present in person or by proxy and entitled to vote thereat shall act as Chair; and the Secretary, or in his absence an Assistant Secretary; or in the absence of the Secretary and all Assistant Secretaries, a person whom the Chair of the meeting shall appoint shall act as secretary of the meeting. The Board, in advance of any meeting of stockholders, may appoint one or more inspectors of election to act at such meeting or any adjournment thereof. If inspectors are not so appointed, the Chair of such meeting may, and on the request of any stockholder entitled to vote thereat shall, appoint one or more inspectors. In case any person appointed fails to appear or to act, the vacancy may be filled by the Chair of the meeting. Each inspector, before entering upon the discharge of his duties, shall take and sign an oath faithfully to execute the duties of inspector at such meeting with strict impartiality and according to the best of his/her ability. The duties of the inspectors shall be to ascertain and report the number of shares represented at the meeting, to determine the validity and effect of all proxies, to count all votes and report the results thereof, and to do such other acts as are proper to conduct elections and voting with impartiality and fairness to the stockholders. If no inspector is appointed as herein provided, such duties shall be performed by the secretary of the meeting.
The Chair of the meeting shall have the right to decide, without appeal, the order of business for such meeting and all procedural motions, questions and other matters (including the right to limit discussion as being unreasonably cumulative or prolonged or
irrelevant to a pending question) pending before the meeting. The Corporation shall keep minutes of the proceedings of its stockholders.
Section 2.8. Voting by stockholders. Except as otherwise expressly provided by law or by the Certificate of Incorporation or these by-laws, each stockholder present in person or by proxy at any meeting shall have, on each matter on which such stockholder is entitled to vote, one vote with respect to each share of stock registered in his name on the books of the Corporation:
(a) On the date fixed pursuant to Section 8.5 hereof as the record date for the determination of stockholders entitled to notice of and to vote at such meeting, or
(b) If no record date is so fixed, then at the close of business on the day next preceding the day on which notice of such meeting is given, or, if no notice is given and notice is waived, at the close of business on the day next preceding the day on which such meeting is held.
Any stockholder entitled to vote at any meeting may vote either in person or by proxy appointed by an instrument in writing, signed by such stockholder (or by his attorney-in-fact thereunto authorized in writing) and delivered to the secretary of the meeting; provided, however, that no proxy shall be valid after eleven months from the date of its execution unless otherwise provided in the proxy.
Every matter other than the election of Directors to be decided by stockholders at any meeting (except as otherwise expressly provided by law or by the Certificate of Incorporation) shall be decided, if a quorum be present, by the vote of the majority of the shares voting with respect to the issue to be decided. In the election of directors, these persons shall be elected who receive the highest number of votes cast in the election.
Unless directed by the Chair of the meeting or demanded by the holders of a majority of the shares of stock of the Corporation present in person or by proxy at any meeting and entitled to vote thereon, the vote on any matter need not be by ballot. Upon any such direction or demand for a vote by ballot upon any matter, such vote shall be so taken. On a vote by ballot, each ballot shall be signed by the stockholder voting or by his proxy, if there be such proxy, and shall state the number of shares voted by him or her.
ARTICLE III
Board of Directors
Section 3.1. General powers. The business and affairs of the Corporation shall be managed by the Board as from time to time constituted. The Board may exercise all powers, rights and privileges of the Corporation (whether expressed or implied in the Certificate of Incorporation or conferred by law) and do all acts and things which may be done by the Corporation, as are not by law, the Certificate of Incorporation or these by-laws directed or required to be exercised or done by the stockholders.
Section 3.2. Number, qualifications and term of office. The entire Board shall consist of the number of directors determined by resolution of the Board of Directors from time to time, provided such number of directors shall not be less than six (6) nor more than ten (10). The directors shall be divided into three classes; Class I, Class II and Class III. The number of directors in each class shall be as nearly equal as possible. The term of office of each of the initial Class I directors shall expire at the annual meeting of stockholders in 1970, the term of office of each of the initial Class II directors shall expire at the annual meeting of stockholders in 1971 and the term of office of each of the initial Class III directors shall expire at the annual meeting of stockholders in 1972. Subsequent term of office of directors of each class shall expire at the third annual meeting succeeding the annual meeting at which the preceding term of office of directors of
that class expire. Notwithstanding the foregoing, the term of office of a director shall continue after the annual meeting at which it is to expire until the successor to such director shall be elected and qualified unless the directorship is eliminated in which case the term of office shall expire at the appropriate annual meeting, or at any earlier time when such office, being lawfully vacant, is eliminated. Directors shall be at least twenty-one years of age. A person elected as a director shall be deemed to have qualified as a director if he shall have met the qualifications of directors prescribed by law, the Certificate of Incorporation and these by-laws and if he shall have indicated, in any form whatever, his willingness to serve as a director of the Corporation.
Section 3.3. Election of directors. Directors of the class whose terms then expire shall be elected, as provided in these by-laws, at each annual meeting of the stockholders, or if for any reason the election shall not have been held at an annual meeting, at any special meeting called for that purpose after proper notice. Directors shall be elected solely from a list of persons nominated for directors at the meeting. Nominations of candidates for election as directors of the Corporation at any meeting of stockholders to elect director(s) (an "Election Meeting") may be made by the Board of Directors at a meeting of the Board, or by written consent of directors in lieu of a meeting, not less than 30 days prior to the date of the Election Meeting. At the request of the Secretary of the Corporation each proposed nominee shall provide the corporation with such information concerning him or herself as is required under the proxy solicitation rules of the Securities and Exchange Commission. Any stockholder eligible to vote at the Election Meeting who intends to make a nomination at the meeting may do so by first delivering notice, at least 30 days prior to the date of the Election Meeting, to the Secretary of the Corporation setting forth: the name, age, business and residence addresses, the principal occupation or employment, the number of Corporation shares beneficially owned and a consent to serve as a director if elected for each such nominee that would be required for a nominee under the Securities and Exchange Commission rules for solicitation of proxies on behalf of the Corporation. In the event that a person is validly designated as a nominee in accordance with this Section 3.3 and shall thereafter become unable or unwilling to stand for election to the Board of Directors, such person's nominator may designate a substitute nominee. If the Chair of the Election Meeting determines that a nomination was not made in accordance with foregoing procedures, such nomination shall be void and not allowed.
Section 3.4. Removal of directors. A director may be removed from office during the term of such office but only upon a showing of good cause, such removal to be by affirmative vote of a majority of the outstanding shares entitled to vote for the election of such director and which removal may only be taken at a special meeting of stockholders called for that purpose.
A special meeting of the stockholders as herein referred to may only be held after a hearing on the matter of cause claimed to exist has been held by the full Board of Directors of the Company at which hearing the director or directors proposed for removal shall be given an adequate opportunity for preparation and attendance in person (together with representation by counsel); provided, however, that such hearing shall be held only after written notice has been given to said director or directors proposed for removal specifying the matters of cause claimed to exist. The conclusions of said hearing shall be reported by the Board of Directors in writing accompanying the notice of the special stockholders' meeting sent to each stockholder eligible to vote at said special meeting.
Section 3.5. Newly created directorships and vacancies. Newly created directorships resulting from an increase in the number of directors and vacancies occurring in the Board for any reason may be filled by the affirmative vote of a majority of the remaining directors then in office, although less than a quorum of the Board exists. A director elected to fill a vacancy shall be elected for the unexpired portion of the term of his predecessor in office. A director elected to fill a newly created directorship shall serve for the term provided herein for the class of directors for which such director was elected.
Section 3.6. Place of meetings. The Board may hold its meetings at any place within or without the State of Delaware.
Section 3.7. Annual meeting. A meeting of the Board for the purposes of organization, election of officers and transaction of other business shall be held, if practicable, on the day of each annual meeting of stockholders for election of directors and at the place of the holding of said annual meeting. No notice of any such meeting held at such time and place need be given. Such meeting may be held at any other time and place as shall be specified in a notice given as hereinafter provided for special meetings of the Board.
Section 3.8. Regular meetings. Regular meetings of the Board may be held without notice, or with such notice thereof given by the Secretary as may be prescribed from time to time, at such time and place as may from time to time be specified in a resolution or resolutions adopted by the Board.
Section 3.9. Special meetings. Special meetings of the Board may be called at any time by the Board, the Chair, the Chief Executive Officer, or any three directors. Notice of such meetings shall be given by the Secretary, either personally or by telephone or by mail or by telegram or by cable-gram, to each director not less than 48 hours before the time of such meeting, which shall be fixed by the person or persons calling such meeting, but need not state the purposes thereof except as otherwise required by law or these by-laws.
Section 3.10. Quorum and manner of acting. At each meeting of the Board, the presence of a majority of the entire Board shall be necessary to constitute a quorum for the transaction of business. Any vote of a majority of the directors present at the time of taking such vote, if a quorum shall be present at such time, shall be the act of the Board, except as may be otherwise specifically provided by law, the Certificate of Incorporation or these by-laws. Any meeting of the Board may be adjourned from time to time by a majority vote of the directors present at such meeting. In the absence of a quorum at such a meeting, a majority of the directors present thereat may adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present thereat. Notice of any adjourned meeting need not be given.
Section 3.11. Presence at meetings. Directors may participate in any meeting of the Board, or any meeting of the Executive Committee or any other committee of the Board of which they are members, by means of conference telephone or similar communications equipment by means of which all persons participating in such meeting (whether participating by virtue of this provision or otherwise) can hear each other, and participation in a meeting pursuant to this provision shall constitute presence in person at such meeting.
Section 3.12. Organization and procedure. At each meeting of the Board, the Chair, or in the absence of the Chair, the Chair of the Nominating and Governance Committee or a director chosen by the Board, shall act as Chair of the meeting. The Secretary of the Board (if one shall be appointed pursuant to Section 3.16 of these by-laws), or in his/her absence (or if one shall not be so appointed) the Secretary of the Corporation, or in his absence an Assistant Secretary of the Corporation, or in the absence of all of the foregoing a person appointed by the Chair of the meeting, shall act as Secretary of the meeting. The Chair of the meeting shall, without relinquishing the Chairship of the meeting, have full power of discussion and voting power in respect of any matter before the meeting.
Section 3.13. Minutes of meetings. The Board shall have minutes kept of its proceedings.
Section 3.14. Informal action by unanimous consent. Unless otherwise restricted by statute, the provisions of the Certificate of Incorporation or these by-laws, any action
required or permitted to be taken at any meeting of the Board or the Executive Committee or any other committee of the Board may be taken without a meeting if all members of the Board or Executive Committee or other committee, as the case may be, consent thereto in writing, and the writing or writings are filed with the minutes of proceedings of the Board, Executive Committee or other committee.
Section 3.15. Compensation. Directors shall be entitled to receive such fees and expenses, if any, for attendance at meetings of the Board, and in addition such fixed compensation for services as directors, as may be fixed from time to time by resolution of the Board; provided that no such fee or compensation shall be paid to any director who is at the time a regularly salaried officer or employee of the Corporation. Directors shall also be entitled to receive such compensation for services rendered to the Corporation as officers, members of committees, or in any other capacity, other than as directors, as may be provided from time to time by resolution of the Board, and shall also be entitled to reimbursement for expenses incurred in the performance of any such services.
ARTICLE IV
Committees of the Board.
Section 4.1. Committees of the Board. The committees of the Board shall consist of an Executive Committee, an Audit Committee, a Compensation and Benefits Committee, a Nominating and Governance Committee and such other committees of the Board as may from time to time be established by a resolution of the Board. Except as otherwise provided in these by-laws, each committee of the Board shall consist of not less than two members of the Board.
Section 4.2. Appointment and term of office of committee members, designation of alternates and chairmen. The members of each committee of the Board shall be appointed by the Board as the Board in its discretion may determine, subject however, to any specific requirements of law, the Certificate of Incorporation or these by-laws regarding membership on such committees. The Board may designate one or more other directors to serve as alternates for the members of any committee of the Board in such order and manner as may be fixed by the Board. Unless otherwise provided by these by-laws or by the resolution of the Board designating or establishing any such committee, the members of each such committee shall serve thereon for a term of office beginning with the date of appointment thereto and until the next annual meeting of the Board and until their respective successors shall be appointed; provided, however, that any member of any such committee may be removed or his office declared vacant at any time by the Board without assigning (and without there existing) any reason or cause as the basis thereof. A Chair of each committee of the Board may be designated by the Board from among the members of each such committee subject to any limitations imposed by these by-laws, but in the absence of any such designation, or in the absence of a designated Chair at any meeting of any such committee, the members of such committee may designate one of its members as Chair of such committee or the meeting, as the case may be.
Section 4.3. Procedure, meetings, voting and records. Each committee of the Board may prescribe for the conduct of its business such rules and regulations, not inconsistent with these by-laws or with such resolutions for the guidance and control of such committee as may from time to time be passed by the Board, as it shall deem necessary or desirable, including, without limitation, rules fixing the time and place of meetings and the notice to be given thereof, if any. A majority of the members of a committee of the Board shall constitute a quorum. The adoption of any resolution or the taking of any other action by any committee of the Board shall require the affirmative vote of a majority of the members of such committee as from time to time constituted. In the absence or disqualification of any member of such committee or committees, the member or members thereof present at any meeting and not disqualified from voting, whether or not he or they constitute a quorum, may
unanimously appoint another member of the Board of Directors to act at the meeting in the place of any such absent or disqualified member. The Executive Committee shall keep minutes of its proceedings, but, unless required by resolution of the Board, other committees of the Board need not keep minutes of their proceedings but shall maintain such written records of actions taken by such committees as may be necessary or appropriate to evidence such actions. All actions taken by committees of the Board shall be reported to the Board at the meeting thereof held next after the taking of such action.
Section 4.4. General power and authority and limitations. The committees of the Board shall have and may exercise such power and authority as are expressly provided by these by-laws or from time to time conferred by resolution of the Board, and such other power and authority implicit in or incidental thereto, subject in all instances to all specific limitation imposed by law or by the Certificate of Incorporation. No committee of the Board, however, shall have the power or authority of the Board with reference to amending the Certificate of Incorporation, adopting an agreement of merger or consolidation, recommending to the stockholders a dissolution of the Corporation or a revocation of a dissolution or amending the by-laws of the Corporation. In addition, and unless such power and authority shall be conferred in whole or in part by resolution of the Board, no committee of the Board shall have the power or authority of the Board to establish any other committee of the Board, to confer or withdraw the power or authority of any other committee of the Board, or to appoint or remove any member of any other committee of the Board. Any power or authority of any committee of the Board conferred by resolution of the Board may at any time and from time to time thereafter be altered or withdrawn by resolution of the Board, provided, however, that any such alteration or withdrawal shall not impair or invalidate any exercise of such power or authority prior thereto.
Section 4.5. Executive Committee. The Executive Committee shall consist of not less than three members of the Board, as from time to time appointed by resolution of the Board, one of whom shall be the Chair or the Chief Executive Officer. The Board shall also designate a member of the Executive Committee to be the Chair of the Executive Committee. The Executive Committee shall have, to the fullest extent permitted by law, but subject to any specific limitation imposed by the Certificate of Incorporation, these by-laws or a resolution of the Board, all of the power and authority vested in or retained by the Board (whether or not the Executive Committee is specifically mentioned in the statute, the provision of the Certificate of Incorporation or these by-laws, the resolution or other instrument vesting or retaining any such power or authority); and the Executive Committee may exercise such power and authority in such manner as it shall deem for the best interests of the Corporation in all cases in which specific directions shall not have been given by the Board.
Section 4.6. Audit Committee. The Audit Committee shall consist of not less than three members of the Board as from time to time appointed by resolution of the Board. No member of the Board who is also an employee of the Corporation shall be eligible to serve on the Audit Committee. The Audit Committee shall review and, as it shall deem appropriate, recommend to the Board internal accounting and financial controls of the Corporation and accounting principles and auditing practices and procedures employed in the preparation of financial statements of the Corporation and the review thereof of independent public accountants for the Corporation. The Audit Committee shall make recommendations to the Board concerning the engagement of independent public accountants to audit the annual financial statements of the Corporation and the scope of the audit to be undertaken by such accountants and perform such other duties as the Board may direct by resolution.
Section 4.7. Compensation and Benefits Committee. The Compensation and Benefits Committee shall consist of not less than three members of the Board as from time to time appointed by resolution of the Board. No member of the Board who is also an employee of the Corporation shall be eligible to serve on the Compensation and Benefits Committee. The Compensation and Benefits Committee shall review and, as it deems appropriate, recommend to the Chair, the Chief Executive Officer and the Board policies, practices and procedures
relating to compensation of managerial employees and the establishment, investment of funds and administration of employee benefit plans, shall have and exercise all authority under employee stock option plans as the committee therein designated to administer such plans, and shall otherwise advise and consult with the Chair or Chief Executive Officer as may be requested regarding managerial personnel policies and perform such other duties as the Board may direct by resolution.
Section 4.8. Nominating and Governance Committee. The Nominating and Governance Committee shall consist of not less than three members of the Board as from time to time appointed by resolution of the Board. No member of the Board who is also an employee of the Corporation shall be eligible to serve on the Nominating and Governance Committee. The Nominating and Governance Committee shall identify and recommend individuals to become directors of the Corporation, recommend to the Board governance guidelines for the Corporation and compensation for directors and perform such other duties as the Board may direct by resolution.
Section 4.9. Other committees of the Board. Other committees of the Board shall have such power and authority, and such functions, duties and compensation as the Board may designate.
ARTICLE V
Officers
Section 5.1. Designation. The principal officers of the Corporation shall be a Chief Executive Officer, a President, a Chief Operating Officer, one or more Vice Presidents, a Chief Financial Officer, a Secretary, a Treasurer, and a Controller; and there may be such other officers, and such agents and employees, as shall be appointed in accordance with the provisions of Section 5.5 of these by-laws. Any two or more offices may be held by the same person and all offices do not need to be filled except the Chief Executive Officer, President, Secretary and Treasurer.
Section 5.2. Election and qualifications. The principal officers of the Corporation shall be elected annually by the Board at a meeting on the day of the annual meeting of stockholders. The Chair shall be chosen from among the Directors.
Section 5.3. Term of office. Each principal officer of the corporation shall hold office until the next annual meeting of the Board following his election and until his successor shall have been elected and qualified, or until his death, or until he shall resign, or until he shall have been removed at any time by the Board with or without cause. The removal of an officer without cause shall be without prejudice to his contract rights, if any. The election of an officer shall not of itself create contract rights.
Section 5.4. Vacancies. A vacancy in the office of a principal officer shall be filled for the unexpired portion of the term in a manner prescribed in these by-laws for regular election to such office. In the interim between the occurrence of any such vacancy and a meeting of the Board, the Chair or the Chief Executive Officer may by appointment fill such vacancy for a term which shall expire at the next meeting of the Board unless such appointment shall be confirmed at such meeting.
Section 5.5. Appointive officers and agents. The Board or the Chief Executive Officer may appoint such officers, other than principal officers, including one or more Assistant Vice Presidents, Assistant Secretaries, Assistant Treasurers, Assistant Controllers, and Divisional Vice Presidents and other divisional officers, and such agents and employees, as the Board or the Chief Executive Officer may deem necessary or advisable, each of whom shall hold his/her office or his/her position, as the case may be, for such period, have such authority, and perform such duties as may be provided in these by-laws or
as the Board may from time to time determine. The Chief Executive Officer may prescribe additional duties to be performed by such officers, agents and employees, and the Chief Executive Officer may at any time suspend the duties, of whatever nature, of any such officer, agent or employee.
Section 5.6. Compensation. The compensation of the Chair and the compensation of the Chief Executive Officer shall be fixed from time to time by the Board. The Chief Executive Officer shall recommend and the Board or a Board committee shall fix and determine, the compensation of all other principal officers, agents and employees of the Corporation, unless the Board shall by resolution otherwise direct.
Section 5.7. Bonds. The Treasurer and any Assistant Treasurer, and such other officers and agents of the Corporation as the Board or the Chair or the Chief Executive Officer shall prescribe, may be required each to give bond to the Corporation in such form and amount and with such surety as the Board or the Chair or the Chief Executive Officer may determine, conditioned upon the faithful performance of the duties of his office, and upon the restoration to the Corporation in the case of his/her death, resignation, retirement or removal, of all books, vouchers, moneys or other papers or things in his/her possession or under his/her control belonging to the Corporation. The Corporation shall pay the premium cost of such bonds.
Section 5.8. Employment contracts. Every employment for personal services to be rendered to the Corporation shall be at the pleasure of the Corporation unless under a contract in writing which has been duly executed on behalf of the Corporation and has been approved, authorized or ratified by the Board or executed or approved by the Chair or the Chief Executive Officer.
Section 5.9. Chair of the Board. The Chair of the Board shall not be considered an officer of the Corporation unless the Board shall by resolution otherwise direct. The Chair of the Board shall be a director chosen by the Board. The Chair shall preside, if present, at Board of Director meetings and shareholder meetings and shall perform such other duties as the Board shall direct by resolution from time to time.
Section 5.10. Chief Executive Officer. The Chief Executive Officer shall be the chief executive officer of the Corporation and shall preside at meetings of the shareholders and the Board of Directors if the Chair is not present and the Nominating and Governance Chair is not present. Subject to the Board of Directors, he shall be in general and active charge of the entire business and all the affairs of the company and shall be its chief policy-making officer. He shall have such other powers and perform such other duties as may be prescribed by the Board of Directors or provided in the By-Laws. Whenever the President is unable to serve, by reason of sickness, absence or otherwise, the Chief Executive Officer shall perform all the duties and functions and exercise all the powers of the President.
Section 5.11. President. Under the direction of the Chief Executive Officer, and subject to the Board of Directors, the President shall have general charge of the business operations. Whenever the Chief Executive Officer is unable to serve, by reason of sickness, absence or otherwise, the President shall have the powers and perform the duties of the Chief Executive Officer. He/she shall have such other powers and perform such other duties as may be prescribed by the Chief Executive Officer or the Board of Directors or as may be provided in the by-laws.
Section 5.12. Vice Presidents. Each Vice President shall have such power and perform such duties as the Board may from time to time prescribe or as the Chief Executive Officer may from time to time delegate to him or her. At the request of the Chair, the President or the Chief Executive Officer, the Vice President may, in the case of the absence or inability to act of the Chair, President or Chief Executive Officer, temporarily act in their place. In the case of the death of the Chair, President or Chief Executive Officer, or in the case of their absence or inability to act without having designated a Vice
President to act temporarily in their place, the Vice President or Vice Presidents so to perform the duties, or any particular duty, of the President or Chief Executive Officer shall be designated by the Board.
Section 5.13. Chief Financial Officer. The Chief Financial Officer of the Corporation shall, under the direction of the Chief Executive Officer, be responsible for all financial and accounting matters and for the direction of the offices of Treasurer and Controller. Such officer shall have such other powers and shall perform such other duties as the Board may from time to time prescribe or the Chief Executive Officer may from time to time delegate to him or her.
Section 5.14. Secretary. The Secretary of the Corporation shall attend all meetings of the stockholders and shall be and act as the secretary of such meetings. Except where the Board has appointed a person to act as Secretary of the Board, he/she shall attend all meetings of the Board and Executive Committee and shall be and act as the secretary of such meetings. He/she shall give, or cause to be given, all notices provided for in these by-laws or required by the Certificate of Incorporation or by law; he/she shall be custodian of the records an of the seal of the Corporation and see that the seal is affixed to all documents the execution of which on behalf of the Corporation under its seal is duly authorized in accordance with these by-laws; he/she shall have charge of the stock certificate books of the Corporation, and keep or cause to be kept the stock certificate books, stock transfer books and stock ledgers in such manner as to show, at all times, the amount of the capital stock issued and outstanding, the classes and series thereof, if any, the names alphabetically arranged, the places of residence of the holders of record thereof, the number of shares held by each and the time when each became a holder of record; he shall have charge of all books, records and papers of the Corporation relating to its organization as a Corporation, and shall see that all reports, statements and other documents required by law are properly kept or filed, except to the extent that the same are to be kept or filed by the Controller or any appointive officer, agent or employee; he/she may sign with the Chair or the Chief Executive Officer or any Vice President any of all certificates of stock of the Corporation; and in general shall exercise all powers and perform all duties incident to the office of Secretary and such other powers and duties as may from time to time be assigned to him or her by the Board or the Chief Executive Officer or be prescribed by these by-laws.
Section 5.15. Assistant Secretaries. The Assistant Secretaries shall assist at all times in the performance of the duties of the Secretary, subject to his/her control and direction, and, in the absence of the Secretary, the Assistant Secretary designated therefor by the Board or Chief Executive Officer, or in the absence of such designation, any Assistant Secretary, shall exercise the powers and perform the duties of the Secretary. The Assistant Secretaries shall exercise such other powers and perform such other duties as may from time to time be assigned to them by the Board, the Chief Executive Officer or the Secretary, or be prescribed by these by-laws.
Section 5.16 Treasurer. The Treasurer shall have charge of and be responsible for the collection, receipt, custody and disbursements of the corporate funds and securities; he/she shall be responsible for the deposit of all moneys, and other valuable effects, in the name and to the credit of the Corporation in such depositories as may be designated by the Board (or by an officer of the corporation pursuant to any delegation of such authority by the Board); he/she shall disburse the funds of the Corporation as may be ordered by the Board or as may be pursuant to authorizations of the Board or these by-laws, taking proper vouchers for such disbursements; he shall, subject to the supervision and direction of the Chief Financial Officer, be responsible for carrying out policies of the Corporation with respect to the approving, granting or extending of credit by the Corporation; he shall, subject to the supervision and direction of the Chief Financial Officer, have the custody of such books, receipted vouchers and other books and papers as in the practical business operations of the Corporation shall naturally belong to the office or custody of the Treasurer, or as shall be placed in his custody by the Board, by the Executive Committee, by
the Chief Executive Officer or the Chief Financial Officer, and the Treasurer shall give to the Board or any committee thereof, whenever they may require it, an account of all his/her transactions as Treasurer; and in general he/she shall exercise all powers and perform all duties incident to the office of Treasurer and such other powers and duties as may from time to time be assigned to him or her by the Board or Chief Executive Officer or Chief Financial Officer or be prescribed by these by-laws.
Section 5.17. Assistant Treasurers. The Assistant Treasurers shall assist at all times in the performance of the duties of the Treasurer, subject to his control and direction, and, in the absence of the Treasurer, the Assistant Treasurer designated therefor by the Board, the Chief Executive Officer, or in the absence of such designation, any Assistant Treasurer shall exercise the powers and perform the duties of the Treasurer. The Assistant Treasurers shall exercise such other powers and perform such other duties as may from time to time be assigned to them by the Board, the Chief Executive Officer, the Chief Financial Officer, or the Treasurer, or be prescribed by these by-laws.
Section 5.18. Controller. The Controller shall be the Chief Accounting Officer of the Corporation and shall have charge of the Corporation's books of accounts, and, subject to the provisions of this Section 5.17, shall be under the direction of the Chief Financial Officer. He/she shall maintain full and accurate records of all assets, liabilities, commitments and financial transactions of the Corporation; he/she shall see that an adequate system of internal control is maintained and that all reasonable measures are taken to protect the Corporation's assets; he/she shall supervise the approval of all expenditures; he/she shall compile costs of production and distribution; he/she shall prepare and interpret all statistical records and reports of the Corporation; he/she shall render such financial statements and other information as may be directed by the Board; and, in general, he/she shall perform all the duties ordinarily connected with the office of Controller and such other duties as from time to time may be assigned to him or her by the Board or any committee thereof or the Chair or the Chief Executive Officer or the Chief Financial Officer. His/her duties shall extend to all subsidiary corporations and, so far as the Board or the Chair or the Chief Executive Officer or the Chief Financial Officer may deem practicable, to all affiliated corporations. The Controller shall report to the Chair or the Chief Executive Officer and the Chief Financial Officer from time to time all matters affecting the financial affairs of the Corporation. He/she may also consult with the Chair or Chief Executive Officer from time to time in respect of matters affecting the financial affairs of the Corporation; he/she shall furnish the Chief Executive Officer with such information as the Chief Executive Officer may from time to time request; and he/she shall report to the Chair or the Chief Executive Officer all matters which in his opinion should be brought to the attention of the Board; and in the event such matters are not reasonably brought to the attention of the Board, he may present the same to the Board in writing. When requested by the Board or a committee thereof, he/she shall report directly to the Board or such committee in reference to any and all matters pertaining to his duties and falling within the function of his/her office.
Section 5.19. Assistant Controllers. The Assistant Controllers shall assist at all times in the performance of and duties of the Controller, subject to his/her control and direction, and, in the absence of the Controller, the Assistant Controller designated therefor by the Board, the Chief Executive Officer, or the Chief Financial Officer, or in the absence of such designation, any Assistant Controller, shall exercise the powers and perform the duties of the Controller. The Assistant Controllers shall exercise such other powers and perform such other duties as may from time to time be assigned to them by the Board, the Chair or the Chief Executive Officer, the Chief Financial Officer, or the Controller, or be prescribed by these by-laws.
ARTICLE VI
Indemnification.
Section 6.1. Indemnification of directors and officers. The Corporation shall, to the fullest extent to which it is empowered to do so by the general Corporation Law of Delaware, or any other applicable laws, as from time to time in effect, indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative, by reason of the fact that he/she is or was a director or officer of the Corporation, or is or was serving at the request of the Corporation as a director or officer of another corporation, partnership, joint venture, trust or other enterprise, against all expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by him or her in connection with such action, suit or proceeding. Any director, officer or employee of the Corporation who is or was serving as a director or officer of a subsidiary of the Corporation or of any entity in which the Corporation holds an equity interest shall be deemed to serve in such capacity at the request of the Corporation.
Expenses incurred in defending a civil or criminal action, suit or proceeding may be paid by the Corporation in advance of the final disposition of such action, suit or proceeding as authorized by the Board of Directors in the specific case upon receipt of an undertaking by or on behalf of the director or officer to repay such amount unless it shall ultimately be determined that he or she is entitled to be indemnified by the Corporation as authorized in this Article VI.
Section 6.2. Contract with the Corporation. The provisions of this Article VI shall be deemed to be a contract between the Corporation and each director or officer who serves in any such capacity at any time while this Article and the relevant provisions of the General Corporation Laws of Delaware or other applicable law, if any, are in effect, and any repeal or modification of this Article VI or any such law shall not affect any rights or obligations then existing with respect to any state of facts then or theretofore existing or any action, suit or proceeding theretofore or thereafter brought or threatened based in whole or in part upon any such state of facts.
Section 6.3. Indemnification of employees and agents. Persons who are not covered by the foregoing provisions of this Article VI and who are or were employees or agents of the Corporation, or are or were serving at the request of the Corporation as employees or agents of another corporation, partnership, joint venture, trust or other enterprise, may be indemnified to the extent authorized at any time or from time to time by the Board.
Section 6.4. Other rights of indemnification. The indemnification provided or permitted by this Article VI shall not be deemed exclusive of any other rights to which those indemnified may be entitled by law or otherwise, and shall continue as to a person who has ceased to be a director, officer, employee or agent and shall inure to the benefit of the heirs, executors and administrators of such a person.
ARTICLE VII
Checks, Contracts, Loans and Bank Accounts.
Section 7.1. Checks, drafts, etc. All checks, drafts, bills of exchange or other orders for the payment of money, obligations, notes, or other evidences indebtedness, bills of lading, warehouse receipts and insurance certificates of the corporation, shall be signed or endorsed as the Board may direct.
Section 7.2. Contracts. The Board may authorize one or more officers, agents or employees of the Corporation to enter into any contract or execute and deliver any contract or other instruments in the name and on behalf of the Corporation, and such authority may be general or confined to specific instances.
Section 7.3. Loans. No loans shall be contracted on behalf of the Corporation and no evidence of indebtedness shall be issued in its name unless authorized by a resolution of the Board. Such authority may be general or confined to specific instances.
Section 7.4. Deposits. All funds of the Corporation shall be deposited from time to time to the credit of the Corporation in such general or special bank account or accounts in such banks, trust companies or other depositories as the Board, the President Chief Executive Officer, or the Treasurer may from time to time designate; and the Board may make such general or special rules and regulations with respect thereto, not inconsistent with the provisions of these by-laws, as it may deem expedient.
ARTICLE VIII
Shares and Their Transfer.
Section 8.1. Certificates of stock. Certificates of stock of the Corporation shall be in such form, consistent with all applicable provisions of law, as shall be approved by the Board. They shall be signed by the President or the Chief Executive Officer or a Vice President and by the Secretary or an Assistant Secretary, which signatures may be by engraved or imprinted facsimile on any certificate countersigned by a transfer agent or registered by a registrar. In case any officer who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer before such certificate is issued, it may be issued by the Corporation with the same effect as if he/she were such officer at the date of issue.
Section 8.2. Transfer of stock. Transfers of shares of stock of the Corporation shall be made on payment of all taxes thereon and presentment to the Corporation or its transfer agent for cancellation of the certificate or certificates for such shares (except as hereinafter provided in the case of loss, destruction, theft or mutilation of certificates) properly endorsed by the registered holder thereof or accompanied by proper evidence of succession, assignment or authority to transfer, together with such reasonable assurance as the Corporation or its transfer agent may require that the said endorsement is genuine and effective. A person in whose name shares of stock are registered on the books of the Corporation shall be deemed the owner thereof by the Corporation, and, upon any transfer of shares, the person or persons into whose name or names such shares shall be transferred shall be substituted for the person or persons out of whose name or names such shares shall have been transferred, with respect to all rights, privileges and obligations of holders of stock of the Corporation as against the Corporation or any other person or persons.
Section 8.3. Lost, destroyed, stolen, and mutilated certificates. The holder of any stock of the Corporation shall immediately notify the Corporation of any loss, destruction, theft or mutilation of the certificates for any such stock, and the Board may, in its discretion, cause to be issued to him or her a new certificate or certificates of stock, upon the surrender of the mutilated certificate, or in case of loss, destruction or theft, upon satisfactory proof of such loss, destruction or theft; and, the Board may, in its discretion, require the owner of the lost, destroyed or stolen certificate, or his legal representative, to give the Corporation a bond in such sum and in such form and with such surety or sureties as it may direct, to indemnify the Corporation against any claim that may be made against it with respect to the certificate or certificates alleged to have been lost, destroyed or stolen. The powers hereinabove vested in the Board may be delegated by
it to any officer or officers of the Corporation.
Section 8.4. Transfer agent and registrar and regulations. The Corporation shall, if and whenever the Board shall so determine, maintain one or more transfer offices or agencies, each in the charge of a transfer agent designated by the Board, where the shares of the stock of the Corporation shall be directly transferable, and also one or more registry offices, each in the charge of a registrar designated by the Board, where such shares of stock shall be registered, and no certificate for shares of stock of the Corporation in respect of which a transfer agent and registrar shall have been designated shall be valid unless countersigned by such transfer agent and registered by such registrar. The Board may also make such additional rules and regulations as it may deem expedient concerning the issue, transfer and registration of certificates for shares of the stock of the Corporation. The Corporation may itself, at the discretion of the Board, act as transfer agent in such a manner as the Board shall direct.
Section 8.5. Record date. For the purpose of determining the stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof, or to express consent to or dissent from any proposal without a meeting, or for the purpose of determining the stockholders entitled to receive payment of any dividend or the allotment of any rights, or for the purpose of any other action, the Board may fix, in advance, a date as the record date for any such determination of stockholders. Such date shall not be more than sixty nor less than ten days before the date of any meeting nor more than sixty days prior to any such action. When a determination of stockholders of record entitled to notice of or to vote at any meeting of stockholders has been made as provided herein, such determination shall apply to any adjournment thereof, unless the Board fixes a new record date for the adjourned meeting.
ARTICLE IX
Miscellaneous Provisions.
Section 9.1. Seal. The seal of the Corporation shall be in circular form, with the name of the Corporation on the circumference, and the words "Incorporated under the laws of the State of Delaware" in the center. Said seal may be used by causing it or a facsimile or equivalent thereof to be impressed or affixed or reproduced.
Section 9.2. Fiscal year. The Fiscal year of the Corporation shall end on December 31 of each year.
Section 9.3. Notices. Any notice required by these by-laws or otherwise, to be given shall be deemed to have been given in person if delivered in person to the person to whom such notice is addressed, and shall be deemed to have been deposited in the United States mail, enclosed in a postage prepaid envelope, and shall be deemed to have been given by wireless, telegraph or cable when the same shall have been delivered for prepaid transmission into the custody of a company ordinarily engaged in the transmission of such messages; such postage prepaid envelope or such wireless, telegraph or cable message being addressed to such person at his/her address as it appears on such books and records of the Corporation, or if no address appears on such book and records, then at such address as shall be otherwise known to the Secretary, or if no such address appears on such books and records or is otherwise known to the Secretary, then in care of the registered agent of the Corporation in the State of Delaware. Whenever, by any provisions of the Certificate of Incorporation or these by-laws, or otherwise, any notice is required to be given any specified number of days before any meeting or event, the day on which such notice was given shall be counted, but the day of such meeting or other event shall not be counted, in determining whether or not notice has been given in proper time in a particular case.
Section 9.4. Waiver of notice. Whenever any notice is required to be given under the provisions of the laws of the State of Delaware, the Certificate of Incorporation or these by-laws, a waiver thereof in writing, signed by the person entitled to such notice, or his proxy in the case of a stockholder, whether before or after the time stated therein, shall be deemed equivalent thereto. Except as may be otherwise specifically provided by law, any waiver by mail, telegraph, cable or wireless, bearing the name of the person entitled to notice shall be deemed a waiver in writing duly signed. The presence of any stockholder at any meeting, either in person or by proxy, without protesting prior to the conclusion of the meeting the lack of notice of such meeting, shall constitute a waiver of notice by him or her; and attendance by a director at any meeting of the Board, without protesting prior to such meeting, or at its commencement the lack of notice to him or her, shall constitute a waiver of notice by him or her of such meeting.
Section 9.5. Resignations. Any officer or director may resign at any time by giving written notice to the Chair or the Chief Executive Officer or the Secretary. Such resignation shall take effect at the time specified in the notice, or if no time is specified, at the time such notice shall be given. Unless otherwise specified in any notice of resignation, the acceptance of such resignation shall not be necessary to make it effective. No such resignation shall serve to release the person submitting it from any liability or duty to the Corporation, whether created by law, the Certificate of Incorporation, these by-laws, a resolution or directive of the Board or under any contract between such person and the Corporation, unless the Board shall expressly and specifically release such person from any such liability or duty.
Section 9.6. Emergency by-laws. The Board may adopt emergency by-laws, as permitted by law to be operative during any emergency resulting from an attack on the United States or on a locality in which the Corporation conducts its business or customarily holds meetings of the Board or its stockholders, or during any nuclear or atomic disaster, or during the existence of any catastrophe, or other similar emergency condition as a result of which a quorum of the Board or of the Executive Committee cannot readily be convened for action. The provisions of such Emergency by-laws shall, while operative, supersede all contrary provisions of law, the Certificate of Incorporation, or these by-laws.
ARTICLE X
Severability; Amendments.
Section 10.1. Severability. If any provision of these by-laws, or its application thereof to any person or circumstance is held invalid, the remainder of these by-laws and the application of such provision to other persons or circumstances shall not be affected thereby.
Section 10.2. Amendments. These by-laws may be amended or repealed by the Board at any annual, regular or special meeting thereof by an affirmative vote of 2/3's of the directors.
Exhibit 10.a
FEDERAL SIGNAL CORPORATION
STOCK BENEFIT PLAN
(as amended on April 17, 2003)
1. Purpose of the Plan.
The purpose of this Stock Benefit Plan (the "Plan") is to secure for Federal Signal Corporation, a Delaware corporation (the "Corporation"), and its stockholders the benefits of incentive compensation of the management personnel of the Corporation and its subsidiaries and to ensure a tax deduction for the Corporation for certain compensation under the Plan. By virtue of the benefits available under the Plan, directors and employees who are responsible for the future growth and continued success of the Corporation have an opportunity to participate in the appreciation in the value of the stock of the Corporation which furnishes them with an incentive to work for and contribute to such appreciation through the growth and success of the Corporation. In addition, it is generally recognized that incentive compensation programs aid in retaining and encouraging key employees of ability and in recruiting additional able employees.
2. Shares Subject to the Plan.
An aggregate of 2,500,000 plus an additional 1,500,000 shares of Common Stock ($1.00 par value) of the Corporation shall be subject to the Plan and such shares may be issued under the Plan pursuant to Stock Options, Stock Awards or such other Stock Unit Awards (collectively "Benefits") as the Committee, as defined below, in its discretion, may determine and the total number of Benefit shares or units that can be granted under the Plan shall not exceed 2,500,000 plus an additional 1,500,000 shares except as set forth in the next paragraph. (amended 4/17/03) Such shares may be either authorized but unissued shares or shares now or hereafter held in the treasury of the Corporation.
In the event that any option under the Plan expires or is terminated without being exercised for any reason prior to the end of the period during which options may be granted under the Plan, the shares theretofore subject to such option, or the unexercised portion thereof, shall again become available for grant under the Plan. In the event that any shares granted as stock awards or stock unit awards expire, terminate or become the property of the Corporation pursuant to the Plan, the number of such shares shall again become available for granting as Benefits awards under the Plan.
3. Administration of the Plan.
A. The Committee.
The Plan shall be administered by the Compensation/Stock Option Committee of the Board of Directors or such other committee as shall be designated by the Board of Directors (the "Committee"). The Committee shall consist of not less than two Directors of the Corporation, and shall be appointed by the Board of Directors. Any decision or determination reduced to writing and signed by all the members of the Committee shall be fully as effective as if it had been made by a majority vote at a meeting duly called and held. The Committee may appoint a secretary (who need not be a member of the Committee) and may make such rules and regulations for the conduct of its business as it shall deem advisable. No member of the Committee shall be liable, in the absence of bad faith, for any act or omission with respect to his or her service on the Committee. Service on the Committee shall constitute service as a Director of the Corporation so that members of the Committee shall be entitled to indemnification and reimbursement as Directors of the Corporation.
B. Authority of the Committee.
Subject to the express provisions of the Plan, the Committee shall have plenary authority, in its discretion, to determine the employees to whom, and the time or times at which, Benefits shall be granted and the number of shares to be subject to each Benefit provided, however, no individual may receive more than 100,000 of the shares per year under the Plan. In making such determinations, the Committee may take into account the nature of the services rendered or expected to be rendered by the respective employees, their present and potential contributions to the Corporation's success, the anticipated number of years of effective service remaining and such other factors as the Committee in its discretion shall deem relevant. Subject to the express provisions of the Plan, the Committee shall also have plenary authority to interpret the Plan, to prescribe, amend and rescind rules and regulations relating to it, to determine the terms and conditions of the respective Benefits (which terms and conditions need not be the same in each case), to impose restrictions on any shares issued as or pursuant to the Benefits and to determine the manner in which such restrictions may be removed, and to make all other determinations deemed necessary or advisable in administering the Plan. The Committee may specify in the original terms of any Benefit or, if not so specified, shall determine whether any authorized leave of absence or absence on military or governmental service or for any other reason shall constitute a termination of employment for purposes of the Plan. The Committee shall have the authority to issue shares of Common Stock or pursuant to the Benefits and to determine the consideration received by the Corporation for such Benefits granted pursuant to the Plan. The determination of the Committee on the matters referred to in this paragraph shall be conclusive.
C. Granting Date.
The action of the Committee with respect to the granting of a Benefit shall take place on such date as a majority of the members of the Committee at a meeting shall make a determination with respect to the granting of a Benefit or, in the absence of a meeting, on such date as a written designation covering such Benefit shall have been authorized by all members of the Committee. The effective date of the grant of a Benefit (the "Granting Date") shall be the date specified by the Committee in its determination or designation relating to the award of such Benefit, provided that the Committee may not designate a Granting Date with respect to any Benefit which shall be earlier than the date on which the granting of such Benefit shall have been approved by the Committee.
4. Eligibility.
Benefits may be granted to employees (which term shall be deemed to include officers) who on the Granting Date (or, with respect to Benefits that are not incentive stock options, within 30 days thereafter in the instance of newly hired employees) are in the employ of the Corporation or one of its then subsidiary corporations (the "subsidiaries"), as defined in Section 425 of the Internal Revenue Code of 1954, as amended (the "Code"), and Directors. Below market stock options may also be granted to any Director of the Corporation in lieu of part or all of their Directors' fees in accordance with Section 8 of this Plan.
5. Terms and Conditions of Options.
A. Purchase Price and Terms of Options.
(i) The purchase price of the Common Stock under each option shall be determined by the Committee, but for options granted under Section 5 of the Plan, the price shall not be less than 100% of the fair market value of the Common Stock, as determined by the Committee, on the Granting Date for such option.
(ii) Options granted under this Plan may be either Incentive Stock Options (as defined in Section 422A of the Code) or Non-Incentive Stock Options (i.e., options which are not within the Section 422A definition).
a. Incentive Stock Options: Subject to the minimum option price specified in subparagraph 5(A)(i) hereof, the terms of each incentive stock option granted under the Plan, which may be different in each case, shall include those terms which are required by Section 422A of the Code, and such other terms not inconsistent therewith as the Committee may determine.
b. Non-Incentive Stock Options: Subject to minimum option price specified in subparagraph 5(A)(i) hereof, the terms of each stock option granted under this Plan that is not an incentive stock option, which terms may be different in each case, shall be determined by the Committee.
B. Term of Options.
The term of each option granted under the Plan shall be for a period of ten years unless otherwise determined by the Committee. Each option shall become exercisable, unless otherwise determined by the Committee in its discretion, with respect to one-half the number of shares subject thereto after the first anniversary following the Granting Date, and shall be exercisable with respect to all shares subject thereto after the second anniversary following the Granting Date.
C. Restrictions on Transfer and Exercise.
(i) Except as hereinafter provided, no option granted pursuant to the Plan may be exercised at any time unless the holder thereof is then an employee of the Corporation or of a subsidiary. Options granted under the Plan shall not be affected by any change of employment so long as the grantee continues to be an employee of the Corporation or of a subsidiary. Retirement pursuant to the Corporation's then prevailing retirement policies and plans shall be deemed to be a termination of employment.
(ii) Unless the Committee determines otherwise, in the event of the termination of employment of a grantee of an option (otherwise than by reason of death), such option may be exercised (only to the extent that the employee was entitled to do so at the termination of his employment) at any time within (1) for options that are not incentive stock options, (a) two years after such termination if such termination is due to disability (as defined in Section 105(d)(4) of the Code) or retirement unless, at the time of employment termination, the Committee extends the period of exercise, (b) three months after such termination in all other cases, unless such period shall be extended by the Committee in its discretion; or (2) in the case of incentive stock options, (a) one year after such termination if such termination is due to disability (as defined in Section 105(d)(4) of the Code) or such lesser time as the Committee may specify from time to time, or (b) three months after such termination in all other cases unless such period shall be extended by the Committee in its discretion. In no event shall an option be exercisable after the expiration date of the option.
(iii) Unless the Committee determines otherwise, if a grantee shall die while an employee of the Corporation or a subsidiary or within three months after the termination of employment of the grantee, an option held by such grantee may be
exercised to the extent the option was exercisable by such grantee at the date of death, by a legatee or legatees of such option under the grantee's last will, or by the grantee's personal representative or distributees, at any time within one year after the grantee's death, provided that in no event shall the option be exercised after the expiration of the period of the option.
(iv) No option granted under the Plan shall be transferable otherwise than by will or the law of descent and distribution and an option may be exercised, during the lifetime of the grantee thereof, only by the grantee thereof.
D. Exercise of Options; Alternative Settlement Methods.
(i) Subject to the limitations set forth in the Plan and the original terms of the option, any option granted and exercisable pursuant to the Plan may be exercised in whole or in part from time to time. Except in the case of the election of an alternative settlement method as hereinafter provided, payment for shares of Common Stock purchased shall be made in full at the time that an option, or any part thereof, is exercised. Unless the Committee determines otherwise in its discretion, a grantee holding an option may make all or a portion of payment upon exercise of an option through delivery of shares of Common Stock of the Corporation. Any shares so delivered shall be valued at the closing price on the New York Stock Exchange on the date of the exercise of the option (or, if no such closing price is available, the value shall be determined in such other manner as the Committee may deem appropriate).
(ii) The Committee, in its discretion, may provide that any option granted pursuant to the Plan may, by its terms, confer upon the grantee the right to elect any of the alternative settlement methods set forth in subparagraph (iv) below.
(iii) The Committee may, in its discretion and at the request of a grantee holding an option granted pursuant to the Plan that does not by its terms include the right to elect any of such alternative settlement methods, permit the election of any of such alternative methods by the grantee. The Committee, in its discretion, may at the request of the holder of an option on the Common Stock of the Corporation, which option is exercisable at the time of the request and which was granted pursuant to any stock option plan or other similar plan heretofore established for the benefit of employees of the Corporation, permit the election of any of such alternative methods by such holder. The authority of the Committee to permit such elections of alternative settlement methods shall not confer upon the grantee or holder of any option the right to such an election.
(iv) The alternative settlement methods are: (a) cash equal to the excess of the value of one share of Common Stock over the purchase price set forth in the option times the number of shares as to which the option is exercised; (b) the number of full shares of Common Stock having an aggregate value not greater than the cash amount calculated under alternative (a); (c) any combination of cash and full shares having an aggregate value not greater than the cash amount calculated under alternative (a). Notwithstanding the other provisions of the Plan, election of an alternative settlement method involving the receipt of cash shall be subject to the approval of the Committee at the time of such election. For purposes of determining an alternative settlement, the value per share of Common Stock shall be the closing price on the New York Stock Exchange on the date of the exercise of the option (or, if no such closing price is available, the value shall be determined in such other manner as the Committee may deem appropriate).
(v) In the event that an option granted or to be granted under the Plan is not an incentive stock option under Section 422A of the Code, then the Committee may, in its discretion, commit the Corporation to pay to the option holder, at the time the taxes or an amount of cash equal to the amount of income tax payable by the grantee as a result of the option exercise and as a result of this tax reimbursement.
(vi) Exercise of an option in any manner, including an exercise involving an election of an alternative settlement method, shall result in a decrease in the number of shares which thereafter may be available for purposes of granting options under the Plan by the number of shares as to which the option is exercised.
E. Manner of Exercise.
An option shall be exercised by giving a written notice to the Secretary of the Corporation stating the number of shares of Common Stock with respect to which the option is being exercised and containing such other information as the Secretary may request, including the election requesting authorization of an alternative settlement method.
6. Stock Awards.
A. Award of Shares.
Stock awards will consist of shares of Common Stock of the Corporation issued to eligible officers, and to directors, if they so elect, in lieu of their director fees being paid in cash. (amended 4/17/03)
B. Restrictions on Transfer.
Stock awards shall be subject to such terms and conditions as the Committee determines to be appropriate, including, without limitation, restrictions on the sale or other disposition of such shares. Except as hereinafter provided, or unless the Committee determines otherwise (either at the time of the grant of a stock award or at any time thereafter), shares granted as stock awards pursuant to the Plan shall not be sold, transferred, assigned or otherwise disposed of by the grantee. In the event of termination of full time employment (including, but not limited to, the retirement of the grantee) for any reason prior to the termination date of any restrictions pertaining to the stock award, the shares then subject to restrictions shall become the property of the Corporation, provided, however, that the obligation not to dispose of shares acquired pursuant to a stock award and the right of the Corporation to receive such shares shall lapse, unless the Committee determines otherwise in its discretion, as to one-fourth (or such other portion as the Committee shall establish in the stock award) of the shares received in one stock award on each of the first four anniversary dates following the Granting Date thereof (or on such other date(s) as the Committee shall establish in the stock award), and provided further that the Committee may determine (either at the time of the grant of a stock award or at any time thereafter) that in the event a grantee's employment is terminated on account of death, the permanent disability of such grantee or upon such other conditions as the Committee may approve, all restrictions remaining on shares granted to such grantee shall lapse and such shares shall not become the property of the Corporation.
All restrictions applicable to any stock award shall apply to any shares resulting from a stock dividend, stock split, or other distribution of shares of the Corporation with respect to the stock award, effective as of the Granting Date of such stock award.
All restrictions applicable to any stock award shall lapse (1) as to all shares granted in such award, in the event any tender offer subject to Section 14(d) of the Securities Exchange Act of 1934, or any successor thereto, shall be made for any of the outstanding Common Stock of the Corporation, or (2) as to any securities, property, cash or combinations thereof received in exchange for stock award shares pursuant to any merger, consolidation, liquidation or dissolution of the Corporation.
7. Stock Unit Awards.
In order to enable the Corporation and Committee to respond quickly to significant developments in applicable tax and other legislation and regulations and
interpretations thereof, and to trends in executive compensation practices, the Committee shall also be authorized to grant to participants, either alone or in addition to other Benefits granted under the Plan, awards of stock and other awards that are valued in whole or in part by reference to, or are otherwise based on Common Stock of the Corporation ("stock unit awards") such as phantom stock, below market options, performance units, etc. Other stock unit awards may be paid in Common Stock of the Corporation, cash or any other form of property as the Committee shall determine.
The Committee shall determine the key employees to whom other stock unit awards are to be made, the times at which such awards are to be made, the number of shares to be granted pursuant to such awards and all other conditions of such awards. The provisions of the stock unit awards need not be the same with respect to each recipient. The participant shall not be permitted to sell, assign, transfer, pledge, or otherwise encumber the shares prior to the later of the date on which the shares are issued, or the date on which any applicable restriction, performance or deferral period lapses. Stock (including securities convertible into stock) granted pursuant to other stock unit awards may be issued for no cash consideration or for such minimum consideration as may be required by applicable law. Stock (including securities convertible into stock) purchased pursuant to purchase rights granted pursuant to other stock unit awards may be purchased for such consideration as the Committee shall determine which price shall not be less than par value of such stock or other securities on the date of grant.
8. Director Options.
Directors of the Corporation may elect to receive below-market stock options in lieu of part or all of their Director fees. Such options shall be granted at a price of $1.00 (par value of the Common Stock) per share. The number of shares to be granted shall be determined by dividing the amount of Director fees (that the Director irrevocably elected to take in the form of below market options instead of cash) by the fair market value of a share of Common Stock on the date of grant after subtracting the $1.00 option price from such fair market value. These options shall be 100% vested on the date of grant, but shall not be exercisable until six months after the date of grant. The term of these options shall be for ten years and they shall not be transferable otherwise than by will or the laws of descent and distribution and may only be exercised by the Director, his guardian or legal representative during the Director's lifetime. Election of an alternative settlement method shall not be available for these options.
9. Stockholder and Employment Rights.
A holder of an option shall have none of the rights of a stockholder with respect to any of the shares subject to option until such shares shall be issued upon the exercise of the option.
Subject to the other provisions of the Plan, upon the date of issuance of certificates representing a stock award, the grantee shall have all the rights of a stockholder including the right to receive dividends and to vote the shares. However, the certificates representing such shares and any shares of the Corporation issued with respect thereto or in exchange therefore shall be held by the Corporation for account of the grantee and the grantee shall deliver to the Corporation upon request a stock power or powers executed in blank, covering such shares. As and when restrictions lapse, the certificates representing such shares shall be released to the grantee.
Nothing in the Plan or in any Benefit granted pursuant to the Plan shall, in the absence of an express provision to the contrary, confer on any individual any right to be or to continue in the employ of the Corporation or any of its subsidiaries or shall interfere in any way with the right of the Corporation or any of its subsidiaries to terminate the employment of any individual at any time.
10. Adjustments in Common Stock.
The aggregate number of shares of Common Stock of the Corporation on which Benefits may be granted hereunder, the number of shares thereof covered by each outstanding Benefit, the price per share thereof in each such Benefit may all be approximately adjusted, as the Board of Directors or the Committee may determine, for any increase or decrease in the number of shares of Common Stock of the Corporation resulting from a subdivision or consolidation of shares whether through reorganization, recapitalization, stock split-up or combination of shares, or the payment of a stock dividend or other increase or decrease in such shares effected without receipt of consideration by the Corporation.
Subject to any required action by the stockholders, if the Corporation shall be the surviving corporation in any merger or consolidation, any Benefit granted hereunder shall pertain to and apply to the securities to which a holder of the number of shares of Common Stock subject to the Benefit would have been entitled pursuant to the merger or consolidation. Upon a dissolution of the Corporation, or a merger or consolidation in which the Corporation is not the surviving corporation, every Benefit outstanding hereunder shall terminate, provided, however, that in the case of such dissolution, merger or consolidation, then during the period thirty days prior to the record date of such event, each holder of an Benefit granted pursuant to the Plan shall have a right to exercise the Benefit, in whole or in part, notwithstanding any other provision of the Plan or Benefit agreement.
11. Amendment and Termination.
Unless the Plan shall theretofore have been terminated, the Plan shall terminate on, and no Benefit shall be granted hereunder after, April 17, 2006, provided that the Board of Directors of the Corporation may at any time prior to that date terminate the Plan.
The Board of Directors shall have complete power and authority to amend the Plan, provided, however, that except as expressly permitted in the Plan, the Board of Directors shall not, without the affirmative vote of the holders of a majority of the voting stock of the Corporation, increase the maximum number of shares on which Benefits may be granted amend the formula for determination of the purchase price of shares on which options may be granted, extend the period during which Benefits may be granted, or amend the requirements as to the class of employees eligible to receive Benefits.
No termination or amendment of the Plan may, without the consent of the holder of any outstanding Benefit, adversely affect the rights of such holder or grantee. The termination of the Plan shall not affect restrictions applicable to any Benefits, outstanding or existing at the time of such termination.
12. Effectiveness of the Plan.
The Plan shall become effective on adoption by the Board of Directors of the Corporation, and approval by the holders of a majority of the voting stock of the Corporation. Should such holders fail so to approve it, the Plan and all actions taken thereunder shall be and become null and void. Any other provisions of the Plan to the contrary notwithstanding, no Benefits granted under the Plan may be exercised or vested until after such stockholder approval.
13. Government and Other Regulations.
The obligation of the Corporation to sell or deliver shares under Benefits granted pursuant to the Plan shall be subject to all applicable laws, rules and regulations, and to such approvals by any governmental agencies as may be required.
Exhibit 10.f
EMPLOYMENT AGREEMENT WITH ROBERT D. WELDING
December 10, 2003
Mr. Robert D. Welding
1478 High Court
Bloomfield Hills, MI 48602
Dear Mr. Welding:
Pursuant to authorization of its Board of Directors (the "Board"), this letter will set forth certain of the terms and conditions of your continuing employment by Federal Signal Corporation ("Federal") as an executive officer of Federal. By your acceptance hereof you agree that your employment shall continue upon the terms and conditions hereinafter set forth.
1. Term, Compensation and Services
1.1 The term of your employment pursuant to this agreement shall continue from the date hereof until the December 31 following your 65th birthday, subject to earlier termination of employment by Federal or you as hereinafter provided.
1.2 During the term of your employment, you will be compensated at the annual rate as may from time to time be fixed by resolution of the Board, provided, however, that your annual rate of compensation shall in no event be less than $600,000 and provided further that such minimum annual rate may be increased by resolution of the Board which resolution shall be binding on Federal for the remaining term of this agreement. Your annual compensation shall be payable monthly and you shall be reimbursed for business, travel and entertainment expenses in accordance with Federal's prevailing policies. In its discretion, the Board may pay you additional salary or bonuses.
1.3 You agree to devote your full business time and efforts to the rendition of such services to Federal as may be designated by the Board, subject, however, to customary vacations and provided that you shall be excused from performing services during any period of absence or inability relating to illness or physical or mental disability. You will at all times be subject to the direction and supervision of the Board. You may devote a reasonable amount of time to civic and community affairs but shall not perform services during the term of your employment for any other business organization in any capacity without the prior consent of the Board.
2. Termination
2.1 Your employment shall be subject to termination by Federal at any time for cause if you shall fail in any material respect to perform your duties hereunder (other than by reason of illness or physical or mental disability), shall breach any provision hereof in any material respect, or shall engage in any dishonest or fraudulent acts or conduct in the performance of your duties to Federal. Termination by Federal pursuant to the preceding sentence shall require that you receive thirty days prior written notice of the basis for termination and that you fail to cure or correct the basis for the termination during such thirty day period. In addition, you may, at your option, voluntarily terminate your employment hereunder by giving Federal at least 90 days prior written notice
thereof. Upon any termination under this paragraph 2.1, all obligations of Federal hereunder shall immediately terminate and, without limiting the foregoing, Federal shall have no obligation under this agreement to make payments to you in respect of any period subsequent to such termination. However, termination under this paragraph shall not affect Federal's obligations, if any, to make payments as required by other compensation or employee benefit plans maintained by Federal.
2.2 Your employment shall be subject to termination by Federal at any time without cause by notifying you in writing of such termination not less than ten days prior to the effective date thereof. Upon any termination of employment pursuant to this paragraph 2.2, Federal shall be obligated to pay to you, or to your designated beneficiary if you shall not be living, an amount equal to one year's salary at the minimum annual rate then in effect, or, if less, an amount equal to the period from termination until the December 31 following your 65th birthday. The total amount owing to you or your designated beneficiary under this paragraph 2.2 shall be paid in twelve equal monthly installments. Installment payments shall commence as soon as practicable following the effective date of termination and shall not bear interest. For purposes of this paragraph 2.2 any material breach by Federal of its obligations hereunder which are not cured after thirty days written notice given to Federal by you, may, at your option, be treated by you as a termination of your employment without cause. Amounts payable to you under this paragraph 2.2 shall be in addition to other payments, if any, required by other compensation or employee benefit plans maintained by Federal.
2.3 (a) In the event that a "change of control" (as hereinafter defined) of Federal occurs during the term of this agreement, you may at your option terminate this agreement any time during the one year following such change of control by giving thirty days prior written notice of termination to Federal. Upon such termination, Federal shall be obligated to pay to you or your designated beneficiary (if you are deceased), immediately in one lump sum an amount equal to your average annualized W-2 compensation for the five most recent taxable years ending before the date on which the change of control occurs (if you have less than five years of employment with Federal, your average annualized W-2 compensation shall be the average of the actual years of your employment with Federal), multiplied by three and then reduced by $1.00. In the event of termination by you under this paragraph 2.3, you shall also be entitled to receive all payments and compensation under any other compensation or employee benefit plans of Federal. Furthermore, to the extent you are not fully vested under any such plan, amounts payable under any such other plan shall be supplemented by Federal to the extent necessary so that the amounts payable under such plan are at least equal to the amount you would have received had you remained employed by Federal at the minimum salary then in effect until your 65th birthday.
(b) A "change of control" shall mean (i) the filing with the
Securities and Exchange Commission by any person or "group" of a report
disclosing beneficial ownership by such person or group of shares of stock
entitled to cast more than 40% of the votes in the election of directors, or
(ii) the election of any person or persons as a director or directors at a
meeting of Federal's stockholders at which proxies solicited on behalf of
Federal's Board or management were not voted in favor of the election of such
person or persons, or (iii) the occurrence of any other event which would
require an affirmative response to Item 6(e) of Schedule 14A (the Proxy
Statement Disclosure Rules) as now in effect, regarding a change of control. The
date of a change of control specified in clause (iii) shall be the date Federal
is first advised by its counsel or counsel specified in the next sentence that
an event of the type specified in clause (iii) has occurred. Any dispute as to
whether an event specified in clause (iii) of the preceding sentence has
occurred shall be conclusively resolved by an opinion of independent counsel
selected by the Chairman of the Securities Law Committee of the Chicago Bar
Association, which may be requested by you or Federal at any time.
2.4 In the event of your death prior to the effective date of any termination of your employment pursuant to paragraphs 2.1, 2.2 or 2.3 hereof, Federal shall be obligated to pay to your designated beneficiary, in not more than eighteen equal monthly installments, an amount equal to one year's compensation at the minimum annual rate in effect hereunder at the date of death. Installment payments shall commence as soon as practicable following the date of death and shall not bear interest. This payment is in addition to any Company life insurance you may be entitled to under Federal's benefit plans.
2.5 In no event shall any termination of your employment under any provision of this agreement relieve you from complying fully with your agreements set forth in paragraphs 3.1 and 3.2 hereof.
3. Non-competition and Trade Secrets Agreements
3.1 During the term of your employment and for a period of thirty-six months following termination of employment for any reason, or following expiration of the term hereof, you agree that you will not directly or indirectly act as an officer, director, consultant, employee or principal for any entity which is competitive with Federal. An entity is deemed competitive with Federal if it is engaged in a line of business in which Federal has derived at least 10% of its revenues during the two years prior to termination of employment in the same geographic area in which Federal conducts such business.
3.2 You further covenant that at no time following such termination of employment will you, without prior written consent of Federal, divulge to anyone any trade secret or confidential corporation information concerning Federal or otherwise use any such information to the detriment of Federal.
3.3 Paragraph 3.1 shall not prohibit you from investing in any securities of any corporation which is competitive with Federal whose securities, or any of them, are listed on a national securities exchange or traded in the over-the-counter market if you shall own less than 3% of the outstanding voting stock of such corporation.
4. General Provisions
4.1 In the event you shall inquire, by written notice to Federal, whether any proposed action on your part would be considered by Federal to be prohibited by or in breach of the terms hereof, Federal shall have forty-five days after the giving of such notice, to express in writing to you its position with respect thereto, and in the event such writing shall not be given to you, such proposed action (as set forth in your notice to Federal) shall not be a violation of or in breach of the terms hereof.
4.2 The term "designated beneficiary" as used in this agreement shall mean such person or persons as you designate to receive payments hereunder in the latest written notice received by the Company from you which specifies a person or persons as a designated beneficiary hereunder and in the absence of such written notice shall mean your estate. Federal may conclusively rely on any written notice specifying or changing a designated beneficiary which it believes to be authentic.
4.3 Except as context otherwise requires, reference herein to Federal shall include its subsidiaries and references to the Board shall include committees thereof to the extent that any applicable powers of the Board are or shall be delegated to any such committees.
4.4 The terms and conditions hereof shall constitute the entire agreement between the parties and shall supersede all prior written or oral understandings between you and Federal concerning the subject matter hereof. The agreement may not
be amended or altered except in writing signed by the parties and approved by a resolution of the Board. Neither party may assign its rights hereunder without the written consent of the other.
4.5 All notices required or permitted to be given pursuant to this agreement shall be given in writing, if to you, then at the address set forth at the beginning hereof or at such other address as you may specify in writing to Federal; and, if to Federal, then to the Secretary of Federal at Federal's corporate office. All notices shall be deemed to have been given when delivered in person, or if mailed, 48 hours after depositing same in the United States mail, properly addressed, and postage prepaid.
4.6 In the event that you or your designated beneficiary shall be required to commence litigation to enforce you rights under this agreement or otherwise your rights under this agreement shall ever be involved in any litigation, the Company shall indemnify you or your designated beneficiary against all costs and expenses (including attorneys fees) reasonably incurred by you in connection with such litigation except to the extent that it is determined by the court in such litigation that you are not entitled to such indemnification because you breached your obligations hereunder. The Company shall, prior to the outcome or settlement of such litigation, advance funds to you or your designated beneficiary as you or your designated beneficiary request for the purpose of paying your reasonable legal fees and expenses pending the outcome or settlement of such litigation provided that, as a condition of such advances, you or your designated beneficiary execute a written undertaking agreeing to return to the Company all amounts so advanced together with 12% per annum interest thereon if it is determined by the court that you are not entitled to indemnification under this paragraph 4.6.
Very truly yours,
FEDERAL SIGNAL CORPORATION
The foregoing terms and
conditions are accepted and
agreed to effective this _____
day of _____________, 2003
Exhibit 10.g
RETIREMENT AND SETTLEMENT AGREEMENT WITH JOSEPH J. ROSS
This Retirement and Settlement Agreement (the "Agreement") sets forth the agreement between Joseph J. Ross and Federal Signal Corporation, including all of its subsidiaries, (the "Company") in connection with Mr. Ross' employment with the Company and his retirement. In consideration of the mutual promises contained herein and other good consideration, receipt and sufficiency of which are hereby acknowledged, the parties agree as follows:
Mr. Ross retired as an officer and director of the Company on January 15, 2004. He will retire as an employee of Federal Signal Corporation ("Federal") on January 31, 2004.
As a retiree Mr. Ross is entitled to benefits under the following plans based on employment from May 9, 1983 through January 31, 2004 and the standard terms and conditions of these plans (including any spouse or former spouse rights):
Federal Signal Corporation (Qualified) Retirement Plan. If payments under this plan start immediately as a single life annuity the amount would be $38,876 annually.
Federal Signal Corporation Supplemental Pension for Designated Management Employees. If payments under this plan start immediately as a single life annuity the amount would be $131,335 annually.
Retirement Survivor and Disability Plan for Key Employees of Federal Signal Corporation with a plan benefit cap of $112,250 for Mr. Ross. If payments under this plan start immediately the amount would be $89,800 for 15 years.
Federal Signal Corporation 401(k) Retirement Plan
Federal Signal Employee Welfare Benefit Plan for director retiree medical coverage
Federal Signal Supplemental Savings and Investment Plan
Federal Signal Corporation Stock Benefit Plan with options as set forth in Exhibit 1. All unvested stock awards under the plan are cancelled.
The option to assume the lease on his company car on or before January 31, 2004. Mr. Ross shall obtain his own car insurance for this car upon the assumption of the lease.
The Company has two life insurance policies on Mr. Ross with current cash surrender value of about $660,000 and current face value of about $1,500,000. The Company agrees to keep those policies in full force and effect, in an amount of at least $1,000,000, until Mr. Ross' death. Mr. Ross shall be entitled to designate a beneficiary, including modifying such designation, for the amount of insurance set forth in the column entitled "Total Benefit to Executive" in Exhibit 2 attached hereto. Mr. Ross shall be responsible for any taxes on the imputed income from this insurance.
Mr. Ross will be paid his regular salary through January 31, 2004. Mr. Ross shall have the option to assume the lease on his company car. If he assumes the lease he agrees to obtain his own car insurance immediately.
The granting of the 100,000 shares of stock options on January 19, 2004, the vesting of unvested stock options and the extension of the option exercise periods and the life insurance benefit set forth above are all additional compensation that is being give to Mr. Ross in consideration of the following:
Except for compensation and benefits specifically set forth in this Agreement, Mr. Ross hereby unconditionally releases, acquits and discharges the Company and its benefit plans, affiliates, directors, officers and employees from all claims, demands, liabilities and causes of action of every kind, nature and description, known or unknown, including but not limited to any resulting from his employment with the Company, retirement or service on the Board of Directors. This general release includes, but is not limited to, any rights or claims under the Civil Rights Act, which prohibits discrimination in employment based on race, color, national origin, disability, religion or sex, the Americans with Disabilities Act, the Family Medical Leave Act, the Age Discrimination in Employment Act, which prohibits age discrimination in employment; or any other federal, state or local laws or regulations prohibiting employment discrimination. This Agreement does not waive or release any rights Mr. Ross may have under the Age Discrimination in Employment Act which arise after he signs this Agreement. Mr. Ross promises never to file a lawsuit asserting any claim that is released in this Agreement.
Mr. Ross agrees that the compensation set forth in this Agreement is in lieu of any and all other compensation or payments due from the Company including any unused vacation, unreimbursed expenses, etc.
Mr. Ross agrees to abide by the Non-Compete Agreement attached as Exhibit 3, which is hereby amended to extend the non-compete period from one year after employment ends to the five-year option exercise period set forth in Exhibit 1.
Mr. Ross agrees to cooperate with the Company in any litigation the Company becomes involved in related to his work for the Company including providing testimony at depositions or trials. Mr. Ross will be compensated at the rate of $2,000 per day, plus expenses.
Mr. Ross has 21 days to review and consider signing this Agreement. He is encouraged to consult with an attorney before signing this Agreement. He may revoke this Agreement within seven days after signing it by delivering written notice to the Company at 1415 West 22nd St., Oak Brook, Illinois. If Mr. Ross revokes this Agreement, it will be void and he will not be entitled to the extra compensation set forth herein.
This is the entire Agreement between Mr. Ross and the Company. The Company has made no promises to Mr. Ross other than as set forth in this Agreement.
Mr. Ross acknowledges that he has read this Agreement, understands it and is voluntarily entering into it.
Accepted: Federal Signal Corporation ________________________________ By:________________________________ Joseph J. Ross ________________________________ Date |
Exhibit 14
CODE OF ETHICS FOR CEO AND SENIOR FINANCIAL OFFICERS
(as amended February 13, 2004)
The Company has Standard Policies and Practices that establish controls over, among other things, business conduct, improper payments and financial reporting. These Standard Policies and Practices are applicable to all employees. In addition to the Standard Policies and Practices, the CEO and senior financial officers are subject to the following specific code of ethics:
1. The CEO and all senior financial officers shall act with honesty and integrity, avoiding actual or apparent conflicts of interest in personal and professional relationships. They will achieve responsible use of and control over all Company assets and resources employed by or entrusted to them, and provide information that is accurate, complete, objective, relevant, timely and understandable. They will respect the confidentiality of information acquired in the course of work except when authorized or otherwise legally obligated to disclose. They will promptly bring to the attention of the Audit Committee any material information that affects the disclosures made by the Company in its public filings.
2. The CEO and all senior financial officers shall comply with rules and regulations of federal, state, provincial and local governments, and other appropriate private and public regulatory agencies. They will promptly bring to the attention of the General Counsel or the CEO and to the Audit Committee any information concerning a material violation of any of these laws, rules or regulations applicable to the Company and the operation of its business, by the Company or any agent thereof, or of violation of the Company's Standard Policies and Practices, or of these additional policies.
3. The CEO and all senior financial officers shall promptly bring to the attention of the Audit Committee any information he or she may have concerning (a) significant deficiencies in the design or operation of internal controls that could adversely affect the Company's ability to record, process, summarize and report financial data or (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the Company's financial reporting, disclosures or internal controls.
4. The Board of Directors or Committee thereof shall determine appropriate actions to be taken in the event of violations of the Company's Standard Policies and Practices or of this Code of Ethics by the CEO and the Company's senior financial officers. Such actions shall be reasonably designed to deter wrongdoing and to promote accountability for adherence to the Company's Standard Policies and Practices and to this Code of Ethics.
EXHIBIT 21
FEDERAL SIGNAL CORPORATION
SUBSIDIARIES OF THE REGISTRANT
The following table sets forth information concerning significant subsidiaries of the Registrant.
JURISDICTION IN
NAME WHICH ORGANIZED
---- ---------------
Bronto Skylift Oy Ab........................................ Finland
Clapp Dico Corporation...................................... Ohio
Dayton Progress Canada, Ltd. ............................... Ontario, Canada
Dayton Progress Corporation................................. Ohio
Dayton Progress International Corporation................... Ohio
Dayton Progress -- Perfuradores, LDA........................ Portugal
Dayton Progress (U.K.), Ltd. ............................... United Kingdom
Elgin Sweeper Company....................................... Delaware
E-ONE, Inc. ................................................ Delaware
Federal APD, Inc. .......................................... Michigan
Federal APD do Brasil....................................... Brazil
Federal Signal Credit Corporation........................... Delaware
Federal Signal International (FSC), Ltd. ................... Jamaica, W.I.
Federal Signal U.K. Holdings, Ltd. ......................... United Kingdom
Federal Signal VAMA, S.A. .................................. Spain
Guzzler Manufacturing, Inc. ................................ Alabama
Jamestown Precision Tooling, Inc. .......................... New York
Jetstream of Houston, Inc. ................................. Texas
Jetstream of Houston, LLP................................... Texas
Justrite Manufacturing Company, L.L.C. ..................... Delaware
Leach Company, Inc. ........................................ Wisconsin
Manchester Tool Company..................................... Delaware
Dayton Progress, S.A.S. .................................... France
Nippon Dayton Progress K.K. ................................ Japan
NRL Corp. .................................................. Alberta, Canada
On Time Machining Company, Inc. ............................ Ohio
Pauluhn Electric Manufacturing Company...................... New York
Pauluhn Electric Manufacturing Company, LLP................. Texas
P.C.S. Company.............................................. Michigan
Plastisol Holdings B.V. .................................... Netherlands
Ravo International (Van Raaij Holdings BV and its Netherlands
subsidiaries).............................................
E-ONE New York, Inc. ....................................... New York
Dayton Progress GmbH........................................ Germany
E-ONE Canada, Ltd. ......................................... Alberta, Canada
Technical Tooling, Inc. .................................... Minnesota
Vactor Manufacturing, Inc. ................................. Illinois
Victor Industrial Equipment Ltd. ........................... South Africa
Victor Industries, Ltd. .................................... United Kingdom
Victor Products USA Inc. ................................... Delaware
Wittke, Inc. ............................................... Alberta, Canada
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EXHIBIT 23
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements (Form S-8 Nos. 33-41721, 33-49476, 33-14251, 33-89509 and 333-81798) pertaining to the Stock Option Plan and Employee Savings and Investment Plans of Federal Signal Corporation and to the incorporation by reference in the Registration Statements (Form S-3 Nos. 333-71886, 333-76372 and 333-98993) of Federal Signal Corporation and in the related Prospectuses of our report dated January 29, 2004, with respect to the consolidated financial statements and schedule of Federal Signal Corporation included in the Annual Report (Form 10-K) of Federal Signal Corporation for the year ended December 31, 2003.
[ERNST & YOUNG LLP SIGNATURE]
Chicago, Illinois
March 10, 2004
EXHIBIT 31.1
CEO CERTIFICATION UNDER SECTION 302 OF THE SARBANES-OXLEY ACT
I, Robert D. Welding, certify that:
1. I have reviewed this annual report Form 10-K of Federal Signal Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
3. Based on my knowledge, the financial statements and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this report;
4. The Registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e) for the Registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Evaluated the effectiveness of the Registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period in which this report is being prepared;
c) Disclosed in this report any change in the Registrant's internal control over financial reporting that occurred during the Registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Registrant's internal control over financial reporting; and
5. The Registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant's auditors and the audit committee of Registrant's board of directors:
a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant's ability to record, process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant's internal control over financial reporting.
Date: February 19, 2004
/s/ ROBERT D. WELDING
--------------------------------------
Robert D. Welding
President and Chief Executive Officer
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EXHIBIT 31.2
CFO CERTIFICATION UNDER SECTION 302 OF THE SARBANES-OXLEY ACT
I, Stephanie K. Kushner, certify that:
1. I have reviewed this annual report Form 10-K of Federal Signal Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
3. Based on my knowledge, the financial statements and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this report;
4. The Registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e) for the Registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Evaluated the effectiveness of the Registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period in which this report is being prepared;
c) Disclosed in this report any change in the Registrant's internal control over financial reporting that occurred during the Registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Registrant's internal control over financial reporting; and
5. The Registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant's auditors and the audit committee of Registrant's board of directors:
a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant's ability to record, process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant's internal control over financial reporting.
Date: February 19, 2004
/s/ STEPHANIE K. KUSHNER
--------------------------------------
Stephanie K. Kushner
Vice President and Chief Financial
Officer
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EXHIBIT 32.1
CEO CERTIFICATION OF PERIODIC REPORT UNDER
SECTION 906 OF THE SARBANES-OXLEY ACT
I, Robert D. Welding, President and Chief Executive Officer of Federal Signal Corporation (the "Company"), certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that:
(1) the Annual Report on Form 10-K of the Company for the year ended
December 31, 2003 (the "Report") fully complies with the requirements of
Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C.
78m or 78o(d)); and
(2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Dated: February 19, 2004
/s/ ROBERT D. WELDING
---------------------------------------------------------
Robert D. Welding
President and Chief Executive Officer
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EXHIBIT 32.2
CFO CERTIFICATION OF PERIODIC REPORT UNDER SECTION 906 OF THE SARBANES-OXLEY ACT
I, Stephanie Kushner, Vice President and Chief Financial Officer of Federal Signal Corporation (the "Company"), certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that:
(1) the Annual Report on Form 10-K of the Company for the year ended
December 31, 2003 (the "Report") fully complies with the requirements of
Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C.
78m or 78o(d)); and
(2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Dated: February 19, 2004
/s/ STEPHANIE K. KUSHNER
---------------------------------------------------------
Stephanie K. Kushner
Vice President and Chief Financial Officer
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