-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Ll5JRgg9P0p7hFD85AJAD6We0M9vWVXxZxEqzFnk5coUeDrARzBCv9cFdc26jgXe 2MmN/1RVCirBk8wsoSujPw== 0000277509-03-000002.txt : 20030327 0000277509-03-000002.hdr.sgml : 20030327 20030327164550 ACCESSION NUMBER: 0000277509-03-000002 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 20021231 FILED AS OF DATE: 20030327 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FEDERAL SIGNAL CORP /DE/ CENTRAL INDEX KEY: 0000277509 STANDARD INDUSTRIAL CLASSIFICATION: MOTOR VEHICLES & PASSENGER CAR BODIES [3711] IRS NUMBER: 361063330 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-06003 FILM NUMBER: 03621438 BUSINESS ADDRESS: STREET 1: 1415 W 22ND ST STE 1100 CITY: OAK BROOK STATE: IL ZIP: 60523 BUSINESS PHONE: 7089542000 MAIL ADDRESS: STREET 1: 1415 W 22ND ST STE 1100 CITY: OAK BROOK STATE: IL ZIP: 60523 FORMER COMPANY: FORMER CONFORMED NAME: FEDERAL SIGN & SIGNAL CORP /DE/ DATE OF NAME CHANGE: 19600201 10-K 1 fs200210k.txt FORM 10-K 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, 2002 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from __________ to __________ 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) The Registrant's telephone number, including area code (630) 954-2000 Securities registered pursuant to Section 12(b) of the Act: Name of Each Exchange Title of Each Class on Which Registered Common Stock, par value$1.00 per share, New York Stock Exchange with preferred share purchase rights 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 (ss.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, 2002. Common stock, $1.00 par value -- $889,617,080 Indicate the number of shares outstanding of each of the Registrant's classes of common stock, as of March 1, 2003. Common stock, $1.00 par value - 47,967,626 shares Documents Incorporated by Reference Portions of the Annual Report to Shareholders for the year ended December 31, 2002 are incorporated by reference into Parts I & II. Portions of the proxy statement for the Annual Meeting of Shareholders to be held on April 17, 2003 are incorporated by reference in Part III. PART I Item 1. Business. Federal Signal Corporation, founded in 1901, was reincorporated as a Delaware Corporation in 1969. The company is a manufacturer and worldwide supplier of safety, signaling and communications equipment, hazardous area lighting, fire rescue vehicles, vehicle-mounted aerial access platforms, street sweeping and vacuum loader vehicles, refuse collection truck bodies, high pressure water blasting systems, parking revenue and access control equipment, carbide and superhard tipped cutting tools, precision metal stamping punches and related die components, plastic injection mold components and custom on-premise signage. Products produced and services rendered by the Registrant and its subsidiaries (referred to collectively as the "Registrant" herein, unless context otherwise indicates) are divided into four major operating groups: Safety Products, Tool, Environmental Products and Fire Rescue. A smaller group, Sign, reported as discontinued operations in the Registrant's financial statements, is currently being offered for sale. Business units are organized under each segment because they share certain characteristics, such as technology, marketing, and product application that create long-term synergies. The Financial Review and Note M - Segment Information included in the Notes to Consolidated Financial Statements contained in the Annual Report to Shareholders for the year ended December 31, 2002 are incorporated herein by reference. Developments, including acquisitions and divestitures of businesses, considered significant to the Registrant or individual segments are described under the following discussions of the applicable groups. Environmental Products Group The Environmental Products Group manufactures and markets worldwide a full range of street and parking lot sweeping, industrial vacuuming, municipal catch basin/sewer cleaning vehicles, high-performance waterblasting equipment, and refuse collection truck bodies. Products are also manufactured for the emerging markets of hydro-excavation, glycol recovery and surface cleaning. The group competes in these markets under major brand names of Elgin, Ravo, Athey, Guzzler, Jetstream, Wittke and Leach. Most sales are made to governmental customers including municipalities, private contractors and industrial plants. Elgin is the leading U.S. brand of street sweepers available for municipalities and contractors. Utilizing three basic cleaning methods (mechanical sweeping, vacuuming and recirculating air), Elgin brand products are primarily designed for large-scale cleaning of curbed streets, parking lots and other paved surfaces. The group acquired Five Star Manufacturing in January 1998, a manufacturer of a single-engine mechanical sweeper designed for and by contractors. This acquisition enhanced the group's share in the private contractor market. In March 2001, the group acquired all of the assets of Athey Products Corporation 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. Manufacture of all Elgin brand sweepers is at the Elgin, Illinois facility. Elgin's parts distribution center is also located in Elgin, Illinois. RAVO, headquartered in the Netherlands, is a market leader in Europe for high-quality compact self-propelled sweepers. RAVO sweepers, which utilize vacuum technology for pick-up, range in size from the compact 3 Series (2.3 cubic meters) to the popular 5 series (4.3 cubic meters). RAVO products are sold worldwide and have significant share throughout Europe, Asia, the Middle East and Latin America. The products are primarily sold through a dealer network. Vactor, located in Streator, Illinois, is the leading manufacturer of municipal combination catch basin/sewer cleaning vacuum trucks. The acquisition of Vactor provided a significant expansion of municipal equipment and enhanced the domestic and international dealer networks of both Elgin and Vactor. Guzzler is a leader in industrial vacuum loaders that clean up industrial waste or recover and recycle valuable raw materials. Products are designed to vacuum a full spectrum of materials - from solids and dry bulk powders to liquids, slurries and thick sludge. In late 2000, the Environmental Products Group consolidated production of its Guzzler industrial vacuum products from Birmingham, Alabama into its Streator, Illinois manufacturing facilities to take advantage of manufacturing efficiencies and technology synergies. Jetstream of Houston, ("Jetstream"), acquired in August 1998, is a Houston-based manufacturer of high pressure waterblast equipment and accessories for commercial and industrial cleaning and maintenance operations with pressures from 6,000 psi to 40,000 psi. This acquisition provided significant growth opportunities in existing Jetstream markets as well as strong customer base synergies for cross-selling to the industrial vacuum loader (Guzzler) contractor customers. In March 2000, the group acquired the Vaxjet patented closed-loop surface cleaner. This product utilizes waterblast technology to remove oil, dirt and other accumulations from various surfaces while vacuuming, filtering and recycling the wash water. This patented technology incorporates several of the Environmental Products Group's existing technologies including high-pressure water and vacuum technology. The market is still emerging and appears to be regulation driven, but could be significant as regulations are enforced. Vaxjet products are manufactured in the group's Streator, Illinois facilities. In September of 2002 the group acquired Leach Company of Oshkosh, WI, a leading manufacturer of rear loading refuse collection bodies. Since first revolutionizing the industry in 1959, Leach engineering has earned a reputation for developing new products, features and enhancements. Their market strength is primarily in the government and municipal markets. In addition, Leach markets via a similar dealer channel as Elgin and Vactor and therefore presents significant opportunities to expand and strengthen the worldwide Environmental Products Group dealer network. Wittke, a market focused manufacturer of dynamic truck mounted equipment and parts located in Medicine Hat, Alberta, Canada was acquired in October of 2002, complimenting the Leach acquisition. 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, is particularly strong in the private contractors and large waste hauling company market segments. A parts manufacturing facility in Kelowna, B.C., Canada, was acquired along with the main manufacturing plant in Medicine Hat. All of the Environmental Products Group companies also have significant manufacturing, marketing and sales efforts in accessories and replacement parts for their products. Some products and components thereof are not manufactured by the group but are purchased for incorporation with products of the group's manufacture. The group competes with several U.S. and non-U.S. manufacturers. Due to the diversity of products offered, no meaningful estimate of either the number of competitors or the group's relative position within the global market can be made, although the group does believe it is a major supplier within these product lines. At December 31, 2002, Environmental Products Group backlog was $84.1 million compared to $68.6 million at December 31, 2001. A substantial majority of the orders in the backlog at December 31, 2002 are reasonably expected to be filled within the current fiscal year. Fire Rescue Group The Fire Rescue Group manufactures fire/emergency apparatus, rescue vehicles and aerial access platforms under the following brand names: Emergency One (E-One), Bronto Skylift, Saulsbury, Superior and Plastisol. The group's products are manufactured in its facilities located in Ocala, Florida; Preble, New York; Red Deer, Alberta; Tampere and Pori, Finland; and Stellendam and Wanroij, Netherlands. E-One is a leading brand of fire rescue vehicles including pumpers, tankers, aerial ladder trucks, custom chassis, and airport rescue and fire fighting vehicles (each of aluminum construction for rust-free operation and energy efficiency). E-One products are marketed and sold throughout the U.S. and the world. A full range of Superior brand truck bodies are manufactured and distributed primarily for the Canadian market and U.S. wildlands markets. Superior is the leading brand of fire/emergency apparatus in Canada. Headquartered in Tampere, Finland, Bronto manufactures vehicle-mounted aerial access platforms. Bronto is the leading manufacturer of such platforms for fire rescue markets in the world and a leading manufacturer of heavy-duty industrial platforms. In January 1998, the Registrant acquired Saulsbury Fire Equipment Corp., the leading manufacturer of stainless steel-bodied fire trucks and rescue vehicles in the United States. The Saulsbury brand of steel-bodied products complements the E-One brand of aluminum-bodied fire apparatus and custom fire chassis. The acquisition of Saulsbury Fire provided the group with additional distribution, a service center in the northeast United States and additional manufacturing capacity for aluminum-bodied trucks in the U.S. In October 2001, the Registrant 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 glass-fiber reinforced polyester. All of the Fire Rescue Group businesses also sell accessories and replacement parts for their products. Some products and components thereof are not manufactured by the group but are purchased for incorporation with products of the group's manufacture. The majority of Fire Rescue Group sales are made primarily to municipal customers, volunteer fire departments and government customers both in U.S. and non-U.S. markets. The group competes with several U.S. and non-U.S. manufacturers and due to the diversity of products offered, no meaningful estimate of either the number of competitors or the group's relative position within the global market can be made, although the group does believe it is a major supplier within these product lines. The group competes with numerous non-U.S. manufacturers, principally in non-U.S. markets. At December 31, 2002, Fire Rescue Group backlog was $282.2 million compared to $241.2 million at December 31, 2001. A substantial majority of the orders in the backlog at December 31, 2002 are reasonably expected to be filled within the current fiscal year. Safety Products Group Significant subsidiaries or operations of the Safety Products Group include the Signal Products Division, Aplicaciones Tecnologicas VAMA S.A. (VAMA), Victor Industries Ltd. (Victor), Pauluhn Electric Mfg. Co., Justrite Manufacturing Company (Justrite), and Federal APD. Virtually all of these businesses have the leading position in their respective domestic markets. The group also includes a number of other business units, most of which have been acquired within the past five years and which are described later below. The group's products principally consist of: emergency vehicular signaling, industrial signaling and lighting, outdoor warning systems, hazardous liquid containment products and parking revenue and control systems. Emergency vehicular signaling includes a variety of visual and audible warning, signaling and communications devices sold to police, fire, medical and other emergency agencies and departments, utilities and municipal services departments, vehicle towing and oversized trucking services firms. Products primarily include vehicle warning lights, sirens and auxiliary lights. Industrial signaling and lighting includes a variety of visual and audible warning, signaling and communications devices used by a broad range of industrial customers as well as hazardous area lighting and communications products used by mines, petrochemical plants, offshore oil platforms and other hazardous industrial sites. Products include industrial signal lights, sirens, horns, bells and solid-state audible signals, audio/visual emergency warning, intercom and evacuation systems, specialized area lights, control ballasts, connectors, and microprocessor-based public address and multi-party paging systems. Outdoor warning systems are primarily sold to city, state and federal emergency preparedness agencies, military agencies and departments, nuclear power plants and large industrial facilities. Products include outdoor emergency warning and evacuation systems to provide notification of natural disaster and other emergency situations. Hazardous liquid containment products include safety cabinets for flammables and corrosives; safety and dispenser cans; waste receptacles and disposal cans; spill control pallets and overpacks; and hazardous material storage buildings, lockers, pallets and platforms. Parking, revenue control, and access control equipment and systems include parking and security gates, card access readers, ticket issuing devices, coin and token units, fee computers, automatic paystations, various forms of electronic control units and personal computer-based revenue and access control systems. During the five-year period ending December 31, 2002, the following businesses were acquired and became part of the Safety Products Group: Principal Entity Headquarters Acquired Principal Products/Services Millbank England January 1999 Commercial and industrial communications systems Atkinson Dynamics Illinois August 1998 Industrial intercoms, communications systems Stinger Spike California September 1998 Tire deflation products for the law enforcement industry Citicomp Brazil October 1998 Parking equipment - Brazil NRL Corp. Canada November 1998 Explosion-proof lighting for land based oil and gas rigs Extec Ltd. England December 1998 Explosion-proof telephone housing Warning and signaling products, which account for the principal portion of the group's business, are marketed to both industrial and governmental users. 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). Products are sold 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 large number of the group's products, the group competes with a variety of manufacturers and suppliers and encounters varying competitive conditions among its different products and different classes of customers. Because of the variety of such products and customers, no meaningful estimate of either the total number of competitors or the group's overall competitive position within the global market can be made. Generally, competition is intense as to all of the group's products and, as to most such products, is based on price, including competitive bidding, product reputation and performance, and product servicing. The backlogs of orders of the Safety Products Group products at December 31, 2002 and 2001 were $44.3 million and $31.6 million, respectively. Almost all of the backlog of orders at December 31, 2002 are reasonably expected to be filled within the current fiscal year. Tool Group The Tool Group manufactures a broad range of carbide and superhard cutting tools, mold-tooling products and punches and other die components used in metal stamping and metal cutting operations. The cutting tool operations manufacture consumable carbide and superhard insert tooling for cutoff and deep grooving metal cutting applications. These operations include Manchester Tool Company and Clapp Dico Corporation. 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. The group's smaller Dico-brand superhard cutting-tool operations were consolidated into the larger, more efficient Whitehouse, Ohio facilities in October 2000. Together these two combined operations are now referred to as Clapp Dico. In January 2001, the group acquired On Time Machining Company (OTM), a manufacturer of indexable insert drills and milling cutters for use in metal cutting applications. The group also made one small product line acquisition within the year. In March 2000, the Tool Group acquired P.C.S. Company (P.C.S.) located in Fraser, Michigan. P.C.S. provides precision tooling, ejector pins, core pins, sleeves and accessories to the growing plastic injection mold industry. By combining selective marketing and sales functions with the die components business, the P.C.S. acquisition enhances future growth prospects for both product segments. The die components and precision tooling operations manufacture and purchase for resale an extensive variety of consumable standard and special die components for the metal stamping industry. These components consist of piercing punches, matched die matrixes, punch holders or retainers, can and body punches, precision ground high alloy parts and many other products related to a metal stamper's needs. The die components and precision tooling operations also produce a large variety of consumable precision metal products for customers' nonstamping needs, including special heat exchanger tools, beverage container tools, powder compacting tools and molding components. Subsidiaries of the die components and precision tooling operations include: Dayton Progress Corporation, Dayton Progress GmbH, Jamestown Precision Tooling, Inc., Technical Tooling, Inc. (TTI) and Dayton Progress SAS. Because of the nature of and market for the group's products, competition is keen at both domestic and international levels. Many 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. Tool Group products are capital intensive with the only significant outside cost being the purchase of the tool steel, carbide, cubic boron nitride and polycrystalline diamond material, as well as items necessary for manufacturing. 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. Tool Group customers include metal and plastic fabricators and tool and die shops throughout the world. Because of the nature of the products, volume depends mainly on repeat orders from customers numbering in the thousands. These products are used in the manufacturing process of a broad range of items such as automobiles, appliances, construction products, electrical motors, switches and components and a wide variety of other household and industrial goods. Almost all business is done with private industry. The group's products are marketed in the United States, and many international markets, principally through industrial distributors. Foreign-owned manufacturing, sales and distribution facilities are located in Woodbridge, Ontario; Tokyo, Japan; Warwickshire, England; Alcobaca, Portugal; Oberursel, Germany; and Meaux, France. The group competes with several U.S. and non-U.S. manufacturers and due to the diversity of products offered, no meaningful estimate of either the number of competitors or the group's relative position within the global market can be made, although the group does believe it is a major supplier within these product lines. The group competes with numerous non-U.S. manufacturers, principally in non-U.S. markets. The order backlogs of the Tool Group as of December 31, 2002 and December 31, 2001 were $11.4 million and $10.7 million, respectively. The entire backlog of orders at December 31, 2002 is expected to be filled within the current fiscal year. Sign Group The Sign Group manufactures and markets outdoor signs, neon and displays. The group additionally provides repair services and also enters into multi-year maintenance service contracts for signs and other electrical equipment such as parking lot lights and message boards. Its operations are oriented to custom designing and engineering of commercial and industrial signs or groups of signs for its customers. The sale and lease of signs and the sale of maintenance contracts are conducted primarily through the group's direct sales organization that operates from sales and manufacturing facilities located strategically throughout the continental U.S. Customers for sign products and services consist primarily of multi-location commercial businesses and large commercial and institutional developments. Some of the group's displays are leased to customers for terms of typically three to five years, with both the lease and the maintenance portions of many such contracts then renewed for successive periods. The group is nationally a principal producer of high-end custom and custom-quantity signs. The group's marketing strategies focus on market segments to which it can provide a unique set of services. The group has multiple regional and national competitors. Competition for sign products and services is intense and competitive factors are largely quality, price, project and program management capabilities, aesthetic and design considerations and lease/maintenance services. Total backlog at December 31, 2002, applicable to sign products and services was approximately $38.1 million compared to approximately $45.8 million at December 31, 2001. A significant part of the group's sign products and services backlog relates to sign maintenance contracts that are usually performed over three to five years. At December 31, 2002, the Sign Group had a backlog of in-service sign maintenance contracts of approximately $34.0 million compared to approximately $37.5 million at December 31, 2001. With the exception of the sign maintenance contracts, most of the backlog orders at December 31, 2002 are reasonably expected to be filled within the current fiscal year. During 2000, the Registrant announced it is seeking buyers for the Sign Group due to the Registrant focusing on growth strategies for its other groups. The results of the Sign Group are reported as discontinued operations in the Registrant's consolidated financial statements. Additional Information The Registrant's sources and availability of materials and components are not materially dependent upon either a single vendor or very few vendors. 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. The Registrant's business is not materially dependent upon research activities relating to the development of new products or services or the improvement of existing products and services, but such activities are of importance as to some of the Registrant's products. Expenditures for research and development by the Registrant were approximately $26.5 million in 2002, $20.0 million in 2001 and $18.8 million in 2000. Note M - Segment and Related Information, presented in the Registrant's Annual Report to Shareholders for the year ended December 31, 2002, contains information concerning the Registrant's foreign sales, export sales and operations by geographic area, and is incorporated herein by reference. 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, outdoor warning, other municipal emergency signal products, parking systems, aerial access platform manufacturing operations and signage. No material part of the business of the Registrant is dependent either upon a single customer or very few customers. The Registrant 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. These provisions have had no material adverse impact upon capital expenditures, earnings or competitive position of the Registrant and its subsidiaries. The Registrant employed over 7,400 people in ongoing businesses at the close of 2002. The Registrant believes relations with its employees have been good. Available 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. 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, 2002, the Registrant utilized thirty-eight principal manufacturing plants located throughout North America, as well as sixteen in Europe, one in South Africa, one in South America, and one in the Far East. In total, the Registrant devoted approximately 2,558,000 square feet to manufacturing and 1,222,000 square feet to service, warehousing and office space as of December 31, 2002. Of the total square footage, approximately 30% is devoted to the Safety Products Group, 11% to the Tool Group, 23% to the Fire Rescue Group, 30% to the Environmental Products Group and 6% to the Sign Group. Approximately 66% of the total square footage is owned by the Registrant, with the remaining 34% 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 Registrant 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 Registrant's business. The Registrant 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 Registrant's consolidated financial position or the results of operations. The Registrant has been sued by firefighters in Chicago seeking damages and claiming that exposure to the Registrant's sirens has impaired their hearing and that the sirens are therefore defective. There were sixteen cases filed during the period 1999-2002, involving a total of 1,004 plaintiffs pending in the Circuit Court of Cook County, Illinois. The plaintiff's attorneys have threatened to bring more suits if the Registrant does not settle these cases. The Registrant believes that these product liability suits have no merit and that sirens are necessary in emergency situations and save lives. The Registrant successfully defended approximately 41 similar cases in Philadelphia in 1999 after a series of unanimous jury verdicts in favor of the Registrant. 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, 2002. PART II Item 5. Market for the Registrant's Common Stock and Related Security Holder Matters. Federal Signal Corporation's Common Stock is listed and traded on the New York Stock Exchange under the symbol FSS. Market price range and dividend per share data listed in Note S - Selected Quarterly Data (Unaudited) contained in the Annual Report to Shareholders for the years ended December 31, 2002 and 2001 is incorporated herein by reference. As of March 1, 2003, there were 3,716 holders of record of the Registrant's common stock. Certain long-term debt agreements impose restrictions on the Registrant's ability to pay cash dividends on its common stock. All of the retained earnings at December 31, 2002 were free of any restrictions. Item 6. Selected Financial Data. Selected Financial Data contained in the Registrant's Annual Report to Shareholders for the year ended December 31, 2002 is incorporated herein by reference. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. The Financial Review contained in the Registrant's Annual Report to Shareholders for the year ended December 31, 2002 is incorporated herein by reference. Item 7a. Qualitative and Quantitative Disclosures About Market Risk. The Financial Review caption "Market Risk Management" contained in the Registrant's Annual Report to Shareholders for the year ended December 31, 2002 is incorporated herein by reference. Item 8. Financial Statements and Supplementary Data. The consolidated financial statements and accompanying footnotes of the Registrant and the report of the independent auditors set forth in the Registrant's Annual Report to Shareholders for the year ended December 31, 2002 are incorporated herein by reference. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. None. 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 17, 2003 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, 2002: Joseph J. Ross, age 57, was elected Chairman, President and Chief Executive Officer in February 1990. Mr. Ross continues to serve in the capacities of Chairman and Chief Executive Officer. John A. DeLeonardis, age 55, was elected Vice President-Taxes in January 1992. Duane A. Doerle, age 47, was elected Vice President-Corporate Development in July 1996. Stephanie K. Kushner, age 47, 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, Vice President and Treasurer for FMC Corporation from 1999-2001, and Director of Financial Planning of FMC Corporation from 1997-1999. Karen N. Latham, age 43, was elected Vice President and Treasurer in December 2002. Previously, Ms. Latham spent ten years in corporate banking (1981 - - 1986 and 1987 - 1990 with Harris Bank and 1986 - 1987 with Citicorp) and seven years in corporate senior financial roles. Specifically, she was Vice President/Treasurer with Vigoro Corporation, and its successor organization, IMC Global, Inc., from 1990 to 1997 and Vice President/Chief Financial Officer with Florsheim Corporation in 1997. More recently, she 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 49, was elected Vice President and Controller in January 1991. Kim A. Wehrenberg, age 51, was elected Vice President, General Counsel and Secretary effective October 1986. 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. 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 17, 2003 is incorporated herein by reference. Item 12. Security Ownership of Certain Beneficial Owners and Management. 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 17, 2003 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 17, 2003 is incorporated herein by reference. Other Matters The Registrant has two directors that qualify as "independent audit committee financial experts", as defined by the Sarbanes-Oxley Act and Securities and Exchange Commission, on its Audit Committee. These directors are Mr. Charles R. Campbell, Chairman of the Audit Committee and Principal of The Everest Group, and Ms. Joan E. Ryan, Senior Vice President and Chief Financial Officer of SIRVA, Inc. PART IV Item 14. Controls and Procedures. (a) Evaluation of Disclosure Controls and Procedures As required by new Rule 13a-15 under the Securities Exchange Act of 1934, within the 90 days prior to the date of this report, the Registrant carried out an evaluation under the supervision and with the participation of the Registrant's management, including the Chief Executive Officer (CEO) and Chief Financial Officer (CFO), of the effectiveness of the design and operation of the disclosure controls and procedures. Based upon that evaluation, the management, including the CEO and CFO, concluded that the disclosure controls and procedures were effective to ensure that information required to be disclosed by the Registrant in the reports it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission's rules and forms. In connection with the new rules and as a matter of practice, the Registrant 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 have been no significant changes in the internal controls or in other factors that could significantly affect internal controls subsequent to the date the Registrant carried out its evaluation. (b) Changes in Internal Controls None. 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 included in the Registrant's Annual Report to Shareholders for the year ended December 31, 2002 are filed as a part of this report and are incorporated by reference in Item 8: Consolidated Balance Sheets -- December 31, 2002 and 2001 Consolidated Statements of Income -- Years ended December 31, 2002, 2001 and 2000 Consolidated Statements of Comprehensive Income -- Years ended December 31, 2002, 2001 and 2000 Consolidated Statements of Cash Flows -- Years ended December 31, 2002, 2001 and 2000 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, 2002 is filed as a part of this report in response to Item 14(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 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, filed as Exhibit (3)(b) to the Registrant's Form 10-K for the year ended December 31, 2000 is incorporated herein by reference. 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, 2002. 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 amended 1996 Stock Benefit Plan, filed as Exhibit (10)(a) to the Registrant's Form 10-K for the year ended December 31, 1998 is incorporated herein by reference. b. Corporate Management Incentive Bonus Plan as incorporated herein. 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 Joseph J. Ross, filed as Exhibit (10)(g) to the Registrant's Form 10-K for the year ended December 31, 1994 is incorporated herein by reference. g. Pension Agreement with Stephanie K. Kushner as incorporated herein. h. Employment Termination Agreement with Stephanie K. Kushner as incorporated herein. i. 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. j. 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. k. 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. l. 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. m. 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. 13.Annual Report to Shareholders for the year ended December 31, 2002. Such report, except for those portions thereof that are expressly incorporated by reference in this Form 10-K, is furnished for the information of the Commission only and is not to be deemed "filed" as part of this filing. 21.Subsidiaries of the Registrant 23.Consent of Independent Auditors 99.a. CEO Certification of Periodic Report under Section 906 of Sarbanes-Oxley Act. b. CFO Certification of Periodic Report under Section 906 of Sarbanes-Oxley Act. c. Code of Ethics for CEO and Senior Financial Officers. (b) Reports on Form 8-K for the three months ended December 31, 2002 None. (c) and (d) The response to this portion of Item 14 is being submitted as a separate section of this report. 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. 33-12876, 33-22311, 33-38494, 33-41721, 33-49476, 33-14251, 33-89509 and 333-81798 dated April 14, 1987, June 26, 1988, December 28, 1990, 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/ Joseph J. Ross Joseph J. Ross Chairman, 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 27, 2003, by the following persons on behalf of the Registrant and in the capacities indicated. /s/ Stephanie K. Kushner /s/ Charles R. Campbell Stephanie K. Kushner Charles R. Campbell Vice President and Chief Director Financial Officer /s/ Richard L. Ritz /s/ James C. Janning Richard L. Ritz James C. Janning Vice President and Controller Director /s/ Paul W. Jones Paul W. Jones Director /s/ James A. Lovell, Jr. James A. Lovell, Jr. 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 CEO Certification Under Section 302 of the Sarbanes-Oxley Act I, Joseph J. Ross, certify that: 1. I have reviewed this annual report Form 10-K of Federal Signal Corporation; 2. Based on my knowledge, this annual 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 annual 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 annual report. 4. The Registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the Registrant and have: a) designed such disclosure controls and procedures 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 annual report is being prepared. b) evaluated the effectiveness of the Registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The Registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the Registrant's auditors and the audit committee of Registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the Registrant's ability to record, process, summarize and report financial data and have identified for the Registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant's internal controls; and 6. The Registrant's other certifying officers and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: March 27, 2003 /s/ Joseph J. Ross Joseph J. Ross Chairman and Chief Executive Officer 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 annual 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 annual 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 annual report. 4. The Registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the Registrant and have: a) designed such disclosure controls and procedures 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 annual report is being prepared. b) evaluated the effectiveness of the Registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The Registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the Registrant's auditors and the audit committee of Registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the Registrant's ability to record, process, summarize and report financial data and have identified for the Registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant's internal controls; and 6. The Registrant's other certifying officers and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: March 27, 2003 /s/ Stephanie K. Kushner Stephanie K. Kushner Vice President and Chief Financial Officer SCHEDULE II FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES Valuation and Qualifying Accounts For the Years Ended December 31, 2002, 2001 and 2000 Deductions Additions Accounts Balance at Charged to written off Balance beginning costs and net of at end Description of year expenses recoveries of year ----------- -------- -------- --------- ------- Deducted from asset accounts - Allowance for doubtful accounts 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 Year ended December 31, 2000: Manufacturing activities $2,901,000 $2,629,000 Financial service activities 976,000 683,000 --------- --------- Total $3,877,000 $881,000 $1,446,000 $3,312,000 EX-10.B 3 ex10b.txt CORPORATE MANAGEMENT INCENTIVE BONUS PLAN EXHIBIT 10.b FEDERAL SIGNAL CORPORATION Corporate Management Incentive Bonus Plan The incentive bonus plan has been established to provide an incentive to key corporate officers and management employees of Federal Signal Corporation to attain the highest performance possible in each year. The plan provides key executives with an opportunity to add to their total annual compensation, if the corporation attains prescribed levels of return on capital and increases in net income and the participant fulfills agreed upon objectives during the year. The details of the plan follow. I. Incentive bonus calculations A) Target bonus A target bonus amount will be established for each plan participant in the plan. This target bonus amount will be based upon a specified percentage of the participant's salary. B) Bonus goals 1) A specified portion of the bonus amount will be based on corporate return on capital (ROC). For this purpose, ROC is defined as the percent of after-tax income excluding after-tax unusual or extraordinary items (see Section IIC3) plus interest on debt divided by the year's monthly average of the sum of stockholders' equity plus debt. With regard to this portion of the bonus determination, each participant's bonus will be subject to calculation in accordance with the scale on Attachment A for total corporate performance. 2) A specified portion of the bonus amount will be based on the corporation's increase in net income for the year over the prior year's net income. For this calculation, "net income" is defined by generally accepted accounting principles subject to inclusion or exclusion of unusual or extraordinary items as decided by the Chief Executive Officer. With regard to this portion of the bonus determination, each participant's bonus will be subject to calculation in accordance with the scale on Attachment B for total corporate performance. 3) A specified portion of the bonus amount is discretionary based on an evaluation of the participant's performance (see Section IIB). This part of your bonus also constitutes payment for any unused vacation and by accepting the bonus payment you waive any claims for payment for unused vacation. With regard to this portion of the bonus determination, each participant's bonus will be subject to paragraph IIB. below. II. Administration A) Determination of bonus award Following the completion of the year-end audit, the actual bonus for each participant will be calculated as follows: 1) Multiply the applicable target bonus by the respective bonus factor as determined by Attachments A and B. 2) The discretionary award factor will be determined in accordance with IIB. below by the employee's supervisor, which in turn requires "one-over-one" approval. The discretionary target bonus will then be multiplied by the discretionary award factor. B) Determination of discretionary award Each participant will be evaluated against the following criteria: 1) General performance of the participant's responsibilities. 2) Meeting the participant's objectives and/or priorities. 3) Evaluation of initiative, attitude, and dedication to the company. 4) Management development of self and subordinates. 5) Professional and personal conduct. C) Other considerations 1) Bonus awards will be paid only to participants who are actively employed as of the bonus payment date. 2) In the event of the retirement of a participant during the management incentive bonus plan year, the amount of bonus award will be based on the full year results with credit for the number of completed months worked as a percent of the full plan year. 3) Net income as used in Section IB1 will be inclusive of any changes in reserves, but will exclude any capital gains or losses and other unusual gains or losses such as proceeds of fire or casualty insurance or changes in accounting practices. In cases of uncertainty, the decision of the Chief Executive Officer will be final. EX-10.G 4 ex10g.txt PENSION AGREEMENT WITH STEPHANIE K. KUSHNER EXHIBIT 10.g PENSION AGREEMENT Stephanie K. Kushner's January 22, 2002 employment offer included two options for a supplemental pension: (a) a non-qualified benefit of $50,000 per year commencing at retirement on or after age 57 or (b) in the event the company adopts a supplemental pension plan which is calculated in accordance with the Company's qualified plan but which includes all base salary and bonus in the calculations, the amount so calculated. Under either option there is no vesting until five years after her date of hire. With respect to option (a), her annual benefit earned during each of her first ten years of employment is equal to $5,000 per year (for example, if she left the company after six years of employment, she would have a deferred vested benefit equal to $30,000 per year, payable at age 57). EX-10.H 5 ex10h.txt EMPLOYMENT TERMINATION AGREEMENT WITH STEPHANIE K. KUSHNER EXHIBIT 10.h EMPLOYMENT TERMINATION AGREEMENT March 7, 2003 Ms. Stephanie Kushner Dear Stephanie: This letter is to confirm our agreement that in the event Federal Signal Corporation terminates your employment without cause, Federal will pay you, or your designated beneficiary should you die while payments are pending, an amount equal to one year's salary at the annual rate then in effect, less any applicable taxes or other deductions. The amount owing to you hereunder shall be paid in twelve equal monthly installments. The amounts payable to you hereunder shall be in addition to other payments, if any, required, as of your termination date, by other compensation or employee benefit plans maintained by Federal; however, you shall not be entitled to any employee benefits which require actual employment during the twelve-month period. Termination of employment by Federal "without cause" means that Federal terminates your employment for reason(s) other than (1) you fail to perform your duties as an executive officer of Federal in any material respect (other than by reason of illness or physical or mental disability), or (2) you engage in any dishonest or fraudulent acts or conduct in the performance of your duties to Federal. In exchange for payments hereunder, you agree (1) to provide consulting services for up to 10 hours per month to Federal during the payment period, (2) not to compete with Federal or assist any entity that competes with Federal for a period of two years after the payments are made hereunder (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) not to hire or assist in hiring any Federal employees for one year after termination of your employment, (4) not to disclose any Federal trade secrets or confidential information, and (5) to execute a release satisfactory to Federal of any and all claims you may have against Federal or its affiliates. Sincerely, Accepted: The foregoing terms and conditions are accepted and agreed to effective this ____ day of ___________, 2003 EX-13 6 ex13.txt ANNUAL REPORT TO SHAREHOLDERS FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES SELECTED FINANCIAL DATA
2002 2001 2000 1999 1998 1997 1996 1995 1994 1993 ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- OPERATING RESULTS (DOLLARS IN MILLIONS): Net sales (a) $1,057.2 $1,072.2 $1,106.1 $ 977.2 $936.8 $858.6 $814.1 $744.9 $611.1 $506.7 Income before income taxes (a,b) $ 61.1 $ 64.5 $ 84.4 $ 79.3 $ 79.4 $ 81.5 $ 86.6 $ 77.8 $ 66.2 $ 57.6 Income from continuing operations (a,b) $ 46.2 $ 46.6 $ 57.7 $ 54.4 $ 55.1 $ 56.9 $ 57.8 $ 51.9 $ 44.3 $ 39.0 Operating margin (a) 7.8% 8.6% 10.5% 10.4% 10.4% 11.2% 11.8% 12.1% 12.2% 12.4% Return on average common shareholders' equity (b,c,d) 12.1% 13.3% 16.4% 17.0% 19.1% 20.6% 23.8% 22.0% 22.3% 21.0% COMMON STOCK DATA (PER SHARE) (E): Income from continuing operations--diluted $ 1.01 $ 1.03 $ 1.27 $ 1.18 $ 1.20 $ 1.24 $ 1.26 $ 1.13 $ .96 $ .85 Cash dividends $ .80 $ .78 $ .76 $ .74 $ .71 $ .67 $ .58 $ .50 $ .42 $ .36 Market price range: High $ 27.07 $ 24.63 $ 24.13 $ 28.06 $27.50 $26.75 $28.25 $25.88 $21.38 $21.00 Low $ 16.00 $ 17.00 $ 14.75 $ 15.06 $20.00 $19.88 $20.88 $19.63 $16.88 $15.75 Average common shares outstanding (in thousands) 45,939 45,443 45,521 45,958 45,846 45,840 45,885 45,776 45,948 46,155 FINANCIAL POSITION AT YEAR-END (DOLLARS IN MILLIONS): Working capital (f,g) $ 172.9 $ 151.6 $ 60.0 $ 71.6 $116.0 $ 41.6 $ 40.6 $ 48.8 $ 53.9 $ 52.8 Current ratio (f,g) 1.8 1.8 1.2 1.3 1.6 1.2 1.2 1.3 1.4 1.5 Total assets $1,168.4 $1,026.9 $1,001.4 $ 948.6 $836.0 $727.9 $703.9 $620.0 $521.6 $405.7 Long-term debt, net of current portion (f) $ 279.5 $ 232.7 $ 125.4 $ 134.4 $137.2 $ 32.1 $ 34.3 $ 39.7 $ 34.9 $ 21.1 Shareholders' equity $ 398.1 $ 359.4 $ 357.4 $ 354.0 $321.8 $299.8 $272.8 $248.1 $220.3 $199.2 Debt-to-capitalization ratio (f) 44% 44% 45% 42% 37% 30% 28% 29% 22% 1% OTHER (DOLLARS IN MILLIONS): New business (a) $1,121.2 $1,082.4 $1,113.7 $1,018.8 $967.9 $888.8 $851.3 $704.9 $631.5 $526.0 Backlog (a) $ 422.0 $ 352.2 $ 339.9 $ 329.5 $305.0 $254.7 $227.6 $190.0 $204.0 $167.6 Net cash provided by operating activities $ 88.4 $ 95.1 $ 64.4 $ 57.7 $ 75.5 $ 64.2 $ 61.4 $ 62.9 $ 53.8 $ 48.8 Net cash (used for) investing activities $ (57.3) $ (59.2) $ (64.8) $(105.1) $(93.0) $(38.4) $(54.2) $(88.1) $(96.9) $(38.1) Net cash provided by (used for) financing activities $ (38.1) $ (32.6) $ 5.2 $ 40.9 $ 22.2 $(27.5) $ (4.1) $ 29.9 $ 45.1 $(10.3) Capital expenditures (a) $ 20.1 $ 18.4 $ 22.3 $ 23.4 $ 19.2 $ 18.2 $ 15.2 $ 14.2 $ 9.9 $ 9.1 Depreciation (a) $ 21.7 $ 20.0 $ 19.5 $ 17.1 $ 14.9 $ 13.3 $ 11.8 $ 10.5 $ 8.9 $ 7.5 Employees (a) 7,378 6,631 6,936 6,750 6,531 6,102 5,721 5,469 4,638 3,847 1992 ---- OPERATING RESULTS (DOLLARS IN MILLIONS): Net sales (a) $462.1 Income before income taxes (a,b) $ 51.7 Income from continuing operations (a,b) $ 35.6 Operating margin (a) 12.3% Return on average common shareholders' equity (b,c,d) 20.0% COMMON STOCK DATA (PER SHARE) (E): Income from continuing operations--diluted $ .77 Cash dividends $ .31 Market price range: High $17.63 Low $12.38 Average common shares outstanding (in thousands) 46,157 FINANCIAL POSITION AT YEAR-END (DOLLARS IN MILLIONS): Working capital (f,g) $ 49.5 Current ratio (f,g) 1.6 Total assets $363.7 Long-term debt, net of current portion (f) $ 16.2 Shareholders' equity $179.0 Debt-to-capitalization ratio (f) 2% OTHER (DOLLARS IN MILLIONS): New business (a) $455.0 Backlog (a) $143.4 Net cash provided by operating activities $ 40.2 Net cash (used for) investing activities $(26.9) Net cash provided by (used for) financing activities $(11.2) Capital expenditures (a) $ 7.6 Depreciation (a) $ 6.8 Employees (a) 3,635
- --------------- (a) continuing operations only (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 3-for-2 stock split in 1992 and a 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 26 FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
DECEMBER 31, -------------------------------- 2002 2001 ---- ---- ASSETS Manufacturing activities: Current assets Cash and cash equivalents $ 9,782,000 $ 16,882,000 Accounts receivable, net of allowances for doubtful accounts of $2,640,000 and $2,355,000, respectively 181,843,000 158,994,000 Inventories--Note B 183,802,000 152,841,000 Prepaid expenses 19,390,000 13,608,000 -------------- -------------- Total current assets 394,817,000 342,325,000 Properties and equipment--Note C 143,932,000 113,742,000 Other assets Goodwill, net of accumulated amortization 348,435,000 280,888,000 Other deferred charges and assets 44,046,000 36,450,000 -------------- -------------- Total manufacturing assets 931,230,000 773,405,000 -------------- -------------- Net assets of discontinued operations, including financial assets 10,392,000 14,396,000 Financial services activities--Lease financing and other receivables, net of allowances for doubtful accounts of $1,002,000 and $1,005,000, respectively, and net of unearned finance revenue--Note D 226,788,000 239,120,000 -------------- -------------- Total assets $1,168,410,000 $1,026,921,000 ============== ============== LIABILITIES AND SHAREHOLDERS' EQUITY Manufacturing activities: Current liabilities Short-term borrowings--Note E $ 16,432,000 $ 28,849,000 Accounts payable 76,082,000 53,292,000 Accrued liabilities Compensation and withholding taxes 29,274,000 24,816,000 Customer deposits 28,326,000 17,584,000 Other 66,007,000 55,484,000 Income taxes--Note F 5,763,000 10,712,000 -------------- -------------- Total current liabilities 221,884,000 190,737,000 Long-term borrowings--Note E 279,544,000 232,678,000 Long-term pension liabilities 32,656,000 Deferred income taxes--Note F 33,495,000 29,280,000 -------------- -------------- Total manufacturing liabilities 567,579,000 452,695,000 -------------- -------------- Financial services activities--Borrowings--Note E 202,022,000 213,917,000 -------------- -------------- Total liabilities 769,601,000 666,612,000 -------------- -------------- Minority interest in subsidiary--Note K 744,000 873,000 Shareholders' equity--Notes I and J Common stock, $1 par value, 90,000,000 shares authorized, 48,394,000 and 47,378,000 shares issued, respectively 48,394,000 47,378,000 Capital in excess of par value 91,114,000 73,177,000 Retained earnings--Note E 313,684,000 312,206,000 Treasury stock, 734,000 and 2,249,000 shares, respectively, at cost (18,026,000) (45,486,000) Deferred stock awards (3,136,000) (2,179,000) Accumulated other comprehensive income (loss) Foreign currency translation (18,084,000) (25,660,000) Net derivative (loss), cash flow hedges (2,098,000) Minimum pension liability (13,783,000) -------------- -------------- Total shareholders' equity 398,065,000 359,436,000 -------------- -------------- Total liabilities and shareholders' equity $1,168,410,000 $1,026,921,000 ============== ==============
See notes to consolidated financial statements. 27 FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, -------------------------------------------------- 2002 2001 2000 ---- ---- ---- Net sales $1,057,201,000 $1,072,175,000 $1,106,127,000 Costs and expenses Cost of sales (758,205,000) (759,914,000) (768,783,000) Selling, general and administrative (217,053,000) (220,257,000) (220,690,000) -------------- -------------- -------------- Operating income 81,943,000 92,004,000 116,654,000 Interest expense (20,075,000) (26,368,000) (31,401,000) Other income (expense), net (895,000) (1,182,000) (839,000) Minority interest 129,000 -------------- -------------- -------------- Income before income taxes 61,102,000 64,454,000 84,414,000 Income taxes--Note F (14,923,000) (17,864,000) (26,759,000) -------------- -------------- -------------- Income from continuing operations 46,179,000 46,590,000 57,655,000 Income from discontinued operations, net of taxes 983,000 726,000 Cumulative effect of change in accounting, net of taxes (7,984,000) (844,000) -------------- -------------- -------------- Net income $ 38,195,000 $ 47,573,000 $ 57,537,000 ============== ============== ============== Basic income per share Income from continuing operations $ 1.01 $ 1.03 $ 1.27 Income from discontinued operations, net of taxes .02 .02 Cumulative effect of change in accounting, net of taxes (.17) (.02) -------------- -------------- -------------- Net income* $ .83 $ 1.05 $ 1.27 ============== ============== ============== Diluted income per share Income from continuing operations $ 1.01 $ 1.03 $ 1.27 Income from discontinued operations, net of taxes .02 .02 Cumulative effect of change in accounting, net of taxes (.17) (.02) -------------- -------------- -------------- Net income* $ .83 $ 1.05 $ 1.26 ============== ============== ==============
- --------------- * amounts may not add to total due to rounding See notes to consolidated financial statements. 28 FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE YEARS ENDED DECEMBER 31, ------------------------------------------ 2002 2001 2000 ---- ---- ---- Net income $ 38,195,000 $47,573,000 $57,537,000 Other comprehensive income (loss), net of related tax provision (benefit) Foreign currency translation adjustment, net of taxes of $4,449,000 in 2002, ($2,053,000) in 2001 and ($2,853,000) in 2000 7,576,000 (3,495,000) (4,857,000) Net derivative (loss), cash flow hedges, net of tax benefit of ($1,232,000) in 2002 (2,098,000) Minimum pension liability, net of tax benefit of ($8,094,000) in 2002 (13,783,000) ------------ ----------- ----------- Comprehensive income $ 29,890,000 $44,078,000 $52,680,000 ============ =========== ===========
See notes to consolidated financial statements. 29 FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, ----------------------------------------------- 2002 2001 2000 ---- ---- ---- Operating activities Net income $ 38,195,000 $ 47,573,000 $ 57,537,000 Adjustments to reconcile net income to net cash provided by operating activities: Cumulative effect of change in accounting 7,984,000 844,000 Depreciation 21,693,000 20,036,000 19,482,000 Amortization 2,302,000 10,222,000 9,575,000 Provision for doubtful accounts 1,721,000 1,087,000 881,000 Deferred income taxes 2,387,000 (458,000) (220,000) Other, net 5,026,000 274,000 (102,000) Changes in operating assets and liabilities, net of effects from acquisitions of companies Accounts receivable (5,052,000) 11,047,000 (10,012,000) Inventories (2,126,000) 10,085,000 7,522,000 Prepaid expenses (4,211,000) (3,961,000) (120,000) Accounts payable 12,056,000 (10,372,000) (9,567,000) Customer deposits 9,549,000 7,536,000 (8,453,000) Accrued liabilities (4,610,000) (1,972,000) (2,249,000) Income taxes 3,436,000 4,016,000 (728,000) ------------- ------------- ------------- Net cash provided by operating activities 88,350,000 95,113,000 64,390,000 ------------- ------------- ------------- Investing activities Purchases of properties and equipment (20,144,000) (18,424,000) (22,288,000) Principal extensions under lease financing agreements (155,293,000) (174,457,000) (143,850,000) Principal collections under lease financing agreements 169,025,000 148,375,000 122,412,000 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) (24,401,000) Other, net (2,858,000) 4,953,000 3,297,000 ------------- ------------- ------------- Net cash used for investing activities (57,329,000) (59,210,000) (64,830,000) ------------- ------------- ------------- Financing activities Increase (reduction) in short-term borrowings, net (98,273,000) (91,696,000) 61,482,000 Increase (reduction) in long-term borrowings 97,211,000 105,130,000 (4,961,000) Purchases of treasury stock (4,356,000) (13,155,000) (17,279,000) Cash dividends paid to shareholders (35,983,000) (35,150,000) (34,534,000) Other, net 3,280,000 2,294,000 524,000 ------------- ------------- ------------- Net cash (used for) provided by financing activities (38,121,000) (32,577,000) 5,232,000 ------------- ------------- ------------- Increase (decrease) in cash and cash equivalents (7,100,000) 3,326,000 4,792,000 Cash and cash equivalents at beginning of year 16,882,000 13,556,000 8,764,000 ------------- ------------- ------------- Cash and cash equivalents at end of year $ 9,782,000 $ 16,882,000 $ 13,556,000 ============= ============= =============
See notes to consolidated financial statements. 30 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, 2002 and 2001, approximately 45% and 48%, respectively, of the company's inventories are costed using the LIFO (last-in, first-out) method. The remaining portion of the company's inventories is costed using the FIFO (first-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 (including amortizable intangible 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 $4.52 in 2002, $5.33 in 2001 and $4.86 in 2000. 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 2.7% in 2002, 4.4% in 2001 and 5.0% in 2000; dividend yield of 4.1% in 2002, 3.5% in 2001 and 3.9% in 2000; market volatility of the company's common stock of .28 in 2002 and 2001 and .27 in 2000; and a weighted average expected life of the options of approximately 8 years for 2002, 2001 and 2000. 31 FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The following table illustrates the effect on net income and earnings per share for the three-year period ended December 31, 2002 if the company had applied fair value recognition provisions of Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation", to all stock-based employee compensation. For purposes of pro forma disclosure, the estimated fair value of the options is amortized to expense over the option's vesting period.
2002 2001 2000 ---- ---- ---- Reported net income $38,195,000 $47,573,000 $57,537,000 Deduct: Total stock-based employee compensation expense determined under the fair-value method for all awards, net of related tax effects 1,052,000 1,079,000 737,000 ----------- ----------- ----------- Pro forma net income $37,143,000 $46,494,000 $56,800,000 =========== =========== =========== Basic net income per common share Reported net income $ .83 $ 1.05 $ 1.27 Pro forma net income $ .81 $ 1.03 $ 1.25 Diluted net income per common share Reported net income $ .83 $ 1.05 $ 1.26 Pro forma net income $ .81 $ 1.02 $ 1.25
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 (forecasted or committed) denominated in foreign currencies. On the date a derivative contract is entered into, the company designates the derivative as one of the following types of hedging instruments and accounts for the derivative as follows: 32 FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 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: Effective January 1, 2000, the company changed its method of accounting for recognizing revenues as required by Staff Accounting Bulletin No. 101 issued by the Securities and Exchange Commission. Effective with the change, 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, 2002. Management believes that all relevant criteria and conditions are considered when recognizing sales. In years prior to 2000, the company recognized substantially all of its revenues for product sales as products were shipped, as this method was then in compliance with generally accepted accounting principles. See Note P. 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. RECLASSIFICATION: Certain amounts in the 2001 balance sheet have been reclassified to conform to the 2002 presentation. 33 FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE B--INVENTORIES Inventories at December 31 are summarized as follows:
2002 2001 ---- ---- Finished goods $ 50,952,000 $ 50,148,000 Work in process 63,971,000 39,258,000 Raw materials 68,879,000 63,435,000 ------------ ------------ Total inventories $183,802,000 $152,841,000 ============ ============
If the company had used the first-in, first-out cost method exclusively, which approximates replacement cost, inventories would have aggregated $192,342,000 and $161,913,000 at December 31, 2002 and 2001, respectively. NOTE C--PROPERTIES AND EQUIPMENT A comparative summary of properties and equipment at December 31 is as follows:
2002 2001 ---- ---- Land $ 6,251,000 $ 5,606,000 Buildings and improvements 69,359,000 53,854,000 Machinery and equipment 233,677,000 198,047,000 Accumulated depreciation (165,355,000) (143,765,000) ------------- ------------- Total properties and equipment $ 143,932,000 $ 113,742,000 ============= =============
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: $74,259,000 in 2003, $37,577,000 in 2004, $33,767,000 in 2005, $22,492,000 in 2006, $15,820,000 in 2007 and $43,875,000 thereafter. At December 31, 2002 and 2001, unearned finance revenue on these leases aggregated $35,561,000 and $36,134,000, respectively. NOTE E--DEBT Short-term borrowings at December 31 consisted of the following:
2002 2001 ---- ---- Commercial paper $115,435,000 $203,082,000 Notes payable 37,363,000 30,798,000 Current maturities of long-term debt 656,000 8,886,000 ------------ ------------ Total short-term borrowings $153,454,000 $242,766,000 ============ ============
Of the above amounts, $137,022,000 and $213,917,000 are classified as financial services activities borrowings at December 31, 2002 and 2001, respectively. 34 FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Long-term borrowings at December 31 consisted of the following:
2002 2001 ---- ---- 6.79% unsecured note payable in annual installments of $10,000,000 in 2007-2011 $ 50,000,000 $ 50,000,000 6.37% unsecured note payable in annual installments of $10,000,000 in 2004-2008 50,000,000 50,000,000 6.60% unsecured note payable in annual installments of $7,143,000 in 2005-2011 50,000,000 50,000,000 4.93% unsecured note payable in annual installments of $8,000,000 in 2008-2012 40,000,000 5.24% unsecured note payable in 2012 60,000,000 5.49% unsecured note payable in 2006 65,000,000 65,000,000 7.99% unsecured note payable in 2004 15,000,000 15,000,000 7.59% unsecured note payable in 2002 8,000,000 Floating rate (5.80% at December 31, 2002) secured note payable in monthly installments ending in 2011 4,540,000 Floating rate secured note payable in monthly installments ending in 2004 2,207,000 Fair value adjustment of notes 10,146,000 Other 514,000 1,357,000 ------------ ------------ 345,200,000 241,564,000 Less current maturities 656,000 8,886,000 ------------ ------------ Total long-term borrowings $344,544,000 $232,678,000 ============ ============
Of the above amounts, $65,000,000 is classified as financial services activities borrowings at December 31, 2002. Aggregate maturities of long-term debt amount to approximately $656,000 in 2003, $25,591,000 in 2004, $17,667,000 in 2005, $82,638,000 in 2006, $27,593,000 in 2007 and $180,909,000 thereafter. The fair values of these borrowings were $316,300,000 and $242,500,000 at December 31, 2002 and 2001, respectively. The 6.79%, 6.37%, 6.60%, 4.93%, 5.24% and 5.49% notes contain covenants relating to a maximum debt-capital ratio and minimum net worth. The 7.99% note contains various restrictions relating to maintenance of minimum working capital, payments of cash dividends, purchases of the company's stock, and principal and interest of any subordinated debt. At December 31, 2002, 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. The company paid interest of $20,796,000 in 2002, $26,097,000 in 2001 and $31,780,000 in 2000. Weighted average interest rates on short-term borrowings were 1.75% and 2.65% at December 31, 2002 and 2001, respectively. See Note H regarding the company's utilization of derivative financial instruments relating to outstanding debt. At December 31, 2002, the company had unused credit lines of $300,000,000, of which $166,000,000 expires June 12, 2003 and $134,000,000 expires June 17, 2004. Commitment fees, paid in lieu of compensating balances, were insignificant. 35 FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE F--INCOME TAXES The provisions for income taxes consisted of the following:
2002 2001 2000 ---- ---- ---- CURRENT: Federal $ 5,562,000 $11,257,000 $19,119,000 Foreign 6,006,000 5,411,000 5,036,000 State and local 968,000 1,654,000 2,824,000 ----------- ----------- ----------- 12,536,000 18,322,000 26,979,000 DEFERRED: Federal 2,330,000 (826,000) 426,000 Foreign (686,000) 140,000 (424,000) State and local 743,000 228,000 (222,000) ----------- ----------- ----------- 2,387,000 (458,000) (220,000) ----------- ----------- ----------- Total income taxes $14,923,000 $17,864,000 $26,759,000 =========== =========== ===========
Differences between the statutory federal income tax rate and the effective income tax rate are summarized below:
2002 2001 2000 ---- ---- ---- Statutory federal income tax rate 35.0% 35.0% 35.0% State income taxes, net of federal tax benefit 1.8 1.9 2.0 Tax-exempt interest (5.3) (4.7) (3.3) Exports benefit (1.5) (1.3) (1.2) Reduction for prior years taxes (2.3) (1.3) (1.0) Other, net (3.3) (1.9) 0.2 ---- ---- ---- Effective income tax rate 24.4% 27.7% 31.7% ==== ==== ====
The company had net current deferred income tax benefits of $6,608,000 and $4,780,000 recorded in the balance sheet at December 31, 2002 and 2001, respectively. The company paid income taxes of $8,662,000 in 2002, $15,193,000 in 2001 and $24,481,000 in 2000. Net deferred tax liabilities (assets) comprised the following at December 31, 2002: Depreciation and amortization--$48,962,000; revenue recognized on custom manufacturing contracts--$2,558,000; accrued pension benefits--($4,639,000); accrued expenses deductible in future periods--($17,194,000); net operating loss carryforwards of subsidiaries--($5,400,000); valuation allowance for net operating loss carryforwards--$5,400,000; and other--($2,800,000). Net deferred tax liabilities (assets) comprised the following at December 31, 2001: Depreciation and amortization--$36,371,000; revenue recognized on custom manufacturing contracts--$2,535,000; accrued pension benefits--$4,507,000; accrued expenses deductible in future periods--($18,675,000); net operating loss carryforwards of subsidiaries--($4,271,000); valuation allowance for net operating loss carryforwards--$4,271,000; and other--($238,000). The majority of the net operating loss carryforwards of subsidiaries have no expiration dates. Income before taxes consisted of the following:
2002 2001 2000 ---- ---- ---- United States $45,295,000 $48,335,000 $71,734,000 Non-U.S 15,807,000 16,119,000 12,680,000 ----------- ----------- ----------- $61,102,000 $64,454,000 $84,414,000 =========== =========== ===========
36 FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE G--POSTRETIREMENT BENEFITS The company and its subsidiaries sponsor a number of defined benefit retirement plans 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. U.S. BENEFIT PLANS The components of net periodic pension expense (credit) are summarized as follows:
2002 2001 2000 ---- ---- ---- Company-sponsored plans Service cost $ 3,291,000 $ 2,597,000 $ 2,251,000 Interest cost 5,372,000 4,635,000 4,537,000 Expected return on plan assets (7,073,000) (9,020,000) (8,961,000) Amortization of transition amount (230,000) (230,000) (230,000) Other 118,000 666,000 (228,000) ----------- ----------- ----------- 1,478,000 (1,352,000) (2,631,000) Multiemployer plans 445,000 534,000 636,000 ----------- ----------- ----------- Net periodic pension expense (credit) $ 1,923,000 $ (818,000) $(1,995,000) =========== =========== ===========
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.
2002 2001 ---- ---- Projected benefit obligation, January 1 $ 66,228,000 $60,656,000 Assumption of obligation in business acquisition 27,269,000 Service cost 3,291,000 2,597,000 Interest cost 5,372,000 4,635,000 Actuarial (gain)loss 6,231,000 3,972,000 Benefits paid (2,399,000) (5,632,000) ------------ ----------- Projected benefit obligation, December 31 $105,992,000 $66,228,000 ============ =========== Fair value of plan assets, January 1 $ 60,187,000 $68,078,000 Assumption of assets in business acquisition 18,390,000 Adjustment to prior year actual return (612,000) Actual return on plan assets (7,043,000) (1,647,000) Company contribution 5,000,000 Benefits paid (2,399,000) (5,632,000) ------------ ----------- Fair value of plan assets, December 31 $ 74,135,000 $60,187,000 ============ =========== Funded status of plan, December 31 $(31,857,000) $(6,041,000) Unrecognized actuarial (gain)loss 36,652,000 18,285,000 Unrecognized prior service cost 2,007,000 (88,000) Unrecognized net transition obligation (618,000) (848,000) ------------ ----------- Net amount recognized as prepaid benefit cost in the balance sheet $ 6,184,000 $11,308,000 ============ =========== Amounts recognized in the balance sheet consist of: Prepaid benefit cost $ 14,956,000 $11,308,000 Accrued benefit liability (32,656,000) Intangible asset 2,007,000 Accumulated other comprehensive income, pre-tax 21,877,000 ------------ ----------- Net amount recognized $ 6,184,000 $11,308,000 ============ ===========
37 FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Plan assets consist principally of a broadly diversified portfolio of equity securities and corporate and U.S. government obligations. Included in plan assets at December 31, 2002 and 2001 were 503,400 and 653,400 shares of the company's common stock valued at $9,776,000 and $14,551,000, respectively. Dividends paid on the company's common stock to the pension trusts aggregated $403,000 and $506,000, respectively, for the years ended December 31, 2002 and 2001. The following table summarizes the significant assumptions used in determining pension costs for the three-year period ended December 31, 2002 and the company's assumptions for 2003:
2003 2002 2001 2000 ---- ---- ---- ---- Discount rate 6.75% 7.3% 7.7% 8.1% Rate of increase in compensation levels 3.5% 3.5% 4% 4% Expected long-term rate of return on plan assets 9.0% 9.5% 12% 12%
The weighted average discount rates used in determining the actuarial present value of all pension obligations at December 31, 2002 and 2001 were 6.75% and 7.3%, respectively. The discount rate at the end of the year is one of the significant assumptions used in determining pension costs for the following year. The company expects that the change in the above assumptions will increase 2003 pension costs by approximately $3,600,000 compared to 2002. 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, 2002, was $5,396,000 in 2002, $5,252,000 in 2001 and $4,886,000 in 2000. The company also provides certain medical, dental and life benefits to certain eligible retired employees. These benefits are funded when the claims are incurred. Participants generally become eligible for these benefits at age 60 after completing at least fifteen years of service. The plan provides for the payment of specified percentages of medical and dental expenses reduced by any deductible and payments made by other primary group coverage and government programs. The company will continue to reduce the percentage of the cost of benefits that it will pay since the company's future costs are limited to 150% of the 1992 cost. Accumulated postretirement benefit liabilities of $5,562,000 and $3,988,000 at December 31, 2002 and 2001, respectively, were fully accrued. The net periodic postretirement benefit costs have not been significant during the three-year period ended December 31, 2002. NON-U.S. BENEFIT PLAN A wholly-owned subsidiary sponsors a defined benefit plan for substantially all of its employees in the United Kingdom. Benefits under this plan are based on final compensation and years of service as defined within the provisions of the plan. 38 FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Net periodic pension expenses or credits during the three-year period ended December 31, 2002 were not significant. The following table 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.
2002 2001 ---- ---- Projected benefit obligation, October 1 $34,192,000 $33,649,000 Service cost 500,000 468,000 Interest cost 2,106,000 2,101,000 Actuarial (gain)loss 3,461,000 (338,000) Employee contributions 91,000 90,000 Benefits paid (1,689,000) (1,766,000) Increase (decrease) due to translation 2,227,000 (12,000) ----------- ----------- Projected benefit obligation, September 30 $40,888,000 $34,192,000 =========== =========== Fair value of plan assets, October 1 $33,881,000 $38,193,000 Actual return on plan assets (511,000) (2,815,000) Company contribution 390,000 381,000 Employee contribution 91,000 90,000 Benefits paid (1,689,000) (1,766,000) Plan expenses (155,000) (124,000) Increase (decrease) due to translation 2,073,000 (78,000) ----------- ----------- Fair value of plan assets, September 30 $34,080,000 $33,881,000 =========== =========== Funded status of plan, September 30 $(6,808,000) $ (311,000) Unrecognized actuarial loss 12,949,000 6,438,000 ----------- ----------- Net amount recognized as prepaid benefit cost in the balance sheet $ 6,141,000 $ 6,127,000 =========== ===========
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, 2002:
2002 2001 2000 ---- ---- ---- Discount rate 6.25% 6.5% 6.5% Rate of increase in compensation levels 2.5% 3% 3% Expected long-term rate of return on plan assets 8.0% 8.5% 8.5%
The weighted average discount rate used in determining the actuarial present value of all pension obligations at September 30, 2002 and 2001 were 5.5% and 6.25%, respectively. 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, 2002 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 2002 and 2001 in conjunction with long-term private placements effectively converted fixed rate debt to variable rate debt. At December 31, 2002, the company had receive fixed, pay variable swap agreements with financial institutions having notional amounts aggregating $205,000,000 which terminate in varying amounts during 2006 to 2012. These agreements are accounted for as fair value hedges and are 100% effective; no amounts were excluded from the assessment of hedge effectiveness. 39 FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) At December 31, 2002, the company also had agreements with financial institutions to swap interest rates in which the company pays interest at a fixed rate and receives interest at the three-month LIBOR rate. These agreements had notional amounts aggregating $65,000,000 and terminate in varying amounts during 2004 to 2008; the agreement allows the counterparties to cancel the swaps at three-month intervals. If at any three-month extension date the counterparty decides not to extend the swap, it is terminated and no further obligations are due by either party. These interest rate swap agreements are accounted for as cash flow hedges and are 100% effective; no amounts were excluded from the assessment of hedge effectiveness. The fair values of interest rate and currency swaps are based on quotes from financial institutions. The following table summarizes the company's interest rate swaps at December 31, 2002 and 2001:
2002 2001 --------------- --------------- FAIR FAIR TOTAL VALUE TOTAL VALUE ----- ----- ----- ----- Pay fixed, receive variable Notional amount $ 65.0 $(2.4) $ 25.0 $(1.4) Average pay rate 4.8% 5.1% Average receive rate 1.4% 2.0% Receive fixed, pay variable Notional amount $205.0 $ 3.6 $105.0 $(2.5) Average pay rate 3.0% 3.2% Average receive rate 5.6% 6.1%
The company defers the benefits of terminated interest rate swaps and amortizes the amount as an offset to interest expense over the life of the underlying debt. The unamortized balance at December 31, 2002 and 2001 was $6,732,000 and $2,496,000, respectively. Foreign exchange forward contracts were $47,126,000 at December 31, 2002 and insignificant at December 31, 2001. Most of these contracts at December 31, 2002 were used to purchase Canadian dollars and expire at various dates in 2003; the fair value of these contracts was ($316,000) at December 31, 2002. NOTE I--STOCK-BASED COMPENSATION The company's stock benefit plans, approved by the company's shareholders, authorize the grant of benefit shares or units to key employees and directors. The plan approved in 1988 authorized, until May 1998, the grant of up to 2,737,500 benefit shares or units (as adjusted for subsequent stock splits and dividends). The plan approved in 1996 and amended in 1999 authorizes the grant of up to 2,500,000 benefit shares or units until April 2006. These share or unit amounts exclude amounts that were issued under predecessor plans. Benefit shares or units include incentive and non-incentive stock options, stock awards and other stock units. The plan approved in December 2001 authorized the grant of up to 1,000,000 benefit shares until December 2011. No grants were made under this plan and the plan was canceled in July 2002. Stock options are primarily granted at the fair market value of the shares on the date of grant and become exercisable one year after grant at a rate of one-half annually and are exercisable in full on the second anniversary date. All options and rights must be exercised within ten years from date of grant. At the company's discretion, vested stock option holders are permitted to elect an alternative settlement method in lieu of purchasing common stock at the option price. The alternative settlement method permits the employee to receive, without payment to the company, cash, shares of common stock or a combination thereof equal to the excess of market value of common stock over the option purchase price. The company expects to settle all such options in common stock. 40 FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Stock option activity for the three-year period ended December 31, 2002 follows (number of shares in 000's, prices in dollars per share):
OPTION SHARES WEIGHTED AVERAGE PRICE ($) ----------------------- -------------------------- 2002 2001 2000 2002 2001 2000 ---- ---- ---- ---- ---- ---- Outstanding at beginning of year 2,323 2,178 2,312 20.86 19.84 19.29 Granted 279 519 63 22.84 21.24 18.65 Canceled or expired (149) (88) (36) 21.87 19.93 21.74 Exercised (233) (286) (161) 18.09 14.09 11.05 ----- ----- ----- Outstanding at end of year 2,220 2,323 2,178 21.33 20.86 19.84 ===== ===== ===== Exercisable at end of year 1,452 1,602 1,588 21.28 21.10 19.95 ===== ===== =====
For options outstanding at December 31, 2002, 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 ------------------------------------------------------ 02-01 00-99 98-97 96-95 94-93 AGGREGATE ----- ----- ----- ----- ----- --------- Number outstanding 729 422 464 362 243 2,220 Exercise price range ($): High 25.67 26.13 25.38 24.75 20.62 26.13 Low 16.05 14.94 20.06 20.12 16.00 14.94 Weighted average: Exercise price ($) 21.83 18.54 21.76 23.96 19.89 21.33 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, 2002:
2002 2001 2000 ---- ---- ---- Number of shares granted 109,700 92,500 69,500 Fair value of shares granted $2,494,000 $1,677,000 $1,108,000 Weighted average fair value per share $ 22.73 $ 18.13 $ 15.94 Compensation expense recorded $1,537,000 $1,345,000 $1,499,000
Under the 1988 plan, no benefit shares or units were available for future grant during the three-year period ending December 31, 2002. Under the 1996 plan, the following benefit shares or units were available for future grant: 144,000 at December 31, 2002, 410,000 at December 31, 2001 and 937,000 at December 31, 2000. 41 FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 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. The changes in shareholders' equity for each of the three years in the period ended December 31, 2002 were as follows:
ACCUMULATED COMMON CAPITAL IN DEFERRED OTHER STOCK PAR EXCESS OF RETAINED TREASURY STOCK COMPREHENSIVE VALUE PAR VALUE EARNINGS STOCK AWARDS INCOME --------- ---------- -------- -------- -------- ------------- Balance at December 31, 1999--46,889,000 shares issued $46,889,000 $66,762,000 $276,951,000 $(17,023,000) $(2,238,000) $(17,308,000) Net income 57,537,000 Cash dividends declared (34,503,000) Exercise of stock options: Cash proceeds 82,000 961,000 Exchange of shares 79,000 697,000 (776,000) Stock awards granted 69,000 1,039,000 (1,108,000) Tax benefits related to stock compensation plans 302,000 Retirement of treasury stock (52,000) (1,068,000) 1,120,000 Purchases of 988,000 shares of treasury stock (17,279,000) Amortization of deferred stock awards 1,499,000 Foreign currency translation adjustment, net (4,857,000) Other (344,000) ----------- ----------- ------------ ------------ ----------- ------------ 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 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) =========== =========== ============ ============ =========== ============
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 42 FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 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, 2002, the company made the following acquisitions, principally all for cash, except as otherwise noted. In September 2002, the company acquired Leach Company of Oshkosh, WI, a leading manufacturer of rear load refuse collection bodies. Leach, whose market strength is primarily in government and municipal markets, utilizes a dealer channel similar to other Environmental Products Group operations. In October 2002, the company also acquired Wittke, Inc., a manufacturer of dynamic truck-mounted refuse collection equipment located in Medicine Hat, Alberta and Kelowna, British Columbia. 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 for a total of $101.6 million. As a result of these 2002 acquisitions, the company recorded approximately $16.3 million of working capital, $20.2 million of fixed and other assets and $65.1 million of costs in excess of fair value. The company also assumed $10.1 million in debt. The assigned values of these acquisitions are based upon preliminary estimates. An insignificant portion of the related goodwill is expected to be deductible for tax purposes. In March 2001, the company acquired all of the assets of Athey Products Corporation 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. 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 $5.8 million of working capital, $9.4 million of fixed and other assets and $12.1 million of costs in excess of fair value. In March 2000, the company acquired P.C.S. Company. Located near Detroit, Michigan, P.C.S. offers a comprehensive line of tooling components for the plastic injection mold and the die cast industries. The company also made a small Environmental Products Group acquisition during the first quarter of 2000. As a result of the 2000 acquisitions, the company recorded approximately $9.9 million of working capital, $3.8 million of fixed and other assets and $10.7 million of costs in excess of fair value. All of the acquisitions in the three-year period ended December 31, 2002 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 and 2001 43 FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 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
The company made no significant changes to the values originally assigned to assets and liabilities recorded as a result of acquisitions made prior to 2002. 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. 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 were sixteen cases filed during the period 1999-2002, involving a total of 1,004 plaintiffs pending in the Circuit Court of Cook County, Illinois. 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 company successfully defended approximately 41 similar cases in Philadelphia in 1999 after a series of unanimous jury verdicts in favor of the company. NOTE M--SEGMENT AND RELATED INFORMATION The company has four continuing operating segments as defined under Statement of Financial Accounting Standards 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. 44 FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 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. See Note K for a discussion of the company's acquisition activity during the three-year period ended December 31, 2002. Non-U.S. sales, which include sales exported from the U.S. and sales made by non-U.S. operations, aggregated $293,248,000 in 2002, $267,531,000 in 2001 and $274,168,000 in 2000. Sales exported from the U.S. aggregated $77,517,000 in 2002, $87,064,000 in 2001 and $102,402,000 in 2000. 45 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, 2002 is as follows:
2002 2001 2000 ---- ---- ---- Net sales Environmental Products $ 296,372,000 $ 280,708,000 $ 255,269,000 Fire Rescue 334,213,000 373,428,000 389,311,000 Safety Products 270,273,000 256,261,000 267,062,000 Tool 156,343,000 161,778,000 194,485,000 -------------- -------------- -------------- Total net sales $1,057,201,000 $1,072,175,000 $1,106,127,000 ============== ============== ============== Operating income Environmental Products $ 22,961,000 $ 20,159,000 $ 23,101,000 Fire Rescue 11,239,000 27,194,000 24,940,000 Safety Products 41,432,000 37,917,000 43,721,000 Tool 18,716,000 19,290,000 35,298,000 Corporate expense (12,405,000) (12,556,000) (10,406,000) -------------- -------------- -------------- Total operating income 81,943,000 92,004,000 116,654,000 Interest expense (20,075,000) (26,368,000) (31,401,000) Other income (expense) (895,000) (1,182,000) (839,000) Minority interest 129,000 -------------- -------------- -------------- Income before income taxes $ 61,102,000 $ 64,454,000 $ 84,414,000 ============== ============== ============== Depreciation and amortization Environmental Products $ 4,452,000 $ 5,510,000 $ 5,030,000 Fire Rescue 4,511,000 5,199,000 5,304,000 Safety Products 6,378,000 9,316,000 8,978,000 Tool 7,530,000 9,418,000 8,907,000 Corporate 1,124,000 815,000 838,000 -------------- -------------- -------------- Total depreciation and amortization $ 23,995,000 $ 30,258,000 $ 29,057,000 ============== ============== ============== Identifiable assets Manufacturing activities Environmental Products $ 286,865,000 $ 153,406,000 $ 149,622,000 Fire Rescue 225,305,000 203,749,000 201,960,000 Safety Products 210,489,000 209,036,000 220,867,000 Tool 170,343,000 176,580,000 175,884,000 Corporate 38,228,000 30,634,000 24,343,000 -------------- -------------- -------------- Total manufacturing activities 931,230,000 773,405,000 772,676,000 -------------- -------------- -------------- Financial services activities Environmental Products 65,542,000 72,581,000 69,055,000 Fire Rescue 161,246,000 166,539,000 145,175,000 -------------- -------------- -------------- Total financial services activities 226,788,000 239,120,000 214,230,000 -------------- -------------- -------------- Total identifiable assets $1,158,018,000 $1,012,525,000 $ 986,906,000 ============== ============== ============== Additions to long-lived assets Environmental Products $ 100,899,000 $ 13,754,000 $ 5,574,000 Fire Rescue 5,178,000 6,466,000 4,958,000 Safety Products 5,817,000 4,105,000 5,333,000 Tool 11,421,000 19,373,000 19,857,000 Corporate 2,442,000 30,000 23,000 -------------- -------------- -------------- Total additions to long-lived assets $ 125,757,000 $ 43,728,000 $ 35,745,000 ============== ============== ============== Financial revenues (included in net sales) Environmental Products $ 6,511,000 $ 6,049,000 $ 6,113,000 Fire Rescue 9,632,000 9,490,000 8,082,000 -------------- -------------- -------------- Total financial revenues $ 16,143,000 $ 15,539,000 $ 14,195,000 ============== ============== ==============
46 FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 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. A summary of the company's continuing operations by geographic area for the three-year period ended December 31, 2002 is as follows:
2002 2001 2000 ---- ---- ---- UNITED STATES Net sales $841,470,000 $891,708,000 $934,361,000 Operating income 66,130,000 76,630,000 103,704,000 Long-lived assets 408,822,000 376,890,000 344,367,000 ALL NON-U.S. (principally Europe) Net sales $215,731,000 $180,467,000 $171,766,000 Operating income 15,813,000 15,374,000 12,950,000 Long-lived assets 127,591,000 42,883,000 69,027,000
The company had no significant amounts of sales to or long-lived assets in an individual country outside of the United States. 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 manufactures for sale or lease illuminated, non-illuminated and electronic advertising sign displays primarily for commercial and industrial markets. It also enters into contracts to provide maintenance service for the signs it manufactures as well as for signs manufactured by others. The results of the Sign operations are reported as discontinued operations in the financial statements. Sign revenues for the years ended December 31, 2002, 2001 and 2000 were $43,245,000, $58,817,000 and $59,846,000, respectively. The company is currently reviewing offers by potential acquirers of the Sign Group. The company does not expect to record a loss on this sale. The company 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. In 2000, the company also incurred $3,744,000 in restructuring charges relating to the consolidation of facilities and operations. Of this amount, the Environmental Products Group incurred costs of $2,773,000 and the Tool Group incurred $971,000. There was no remaining liability at December 31, 2002. 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, 2002:
2002 2001 2000 ---- ---- ---- Numerator for both basic and diluted income per share computations--net income $38,195,000 $47,573,000 $57,537,000 =========== =========== =========== Denominator for basic income per share--weighted average shares outstanding 45,824,000 45,314,000 45,388,000 Effect of employee stock options (dilutive potential common shares) 115,000 129,000 133,000 ----------- ----------- ----------- Denominator for diluted income per share--adjusted shares 45,939,000 45,443,000 45,521,000 =========== =========== ===========
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 $8,483,000 in 2002, $7,985,000 in 2001 and $8,297,000 in 2000. Sublease income and contingent rentals relating to operating leases were insignificant. At December 31, 2002, minimum future rental commitments under operating leases having noncancelable lease terms in excess of 47 FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) one year aggregated $29,574,000 payable as follows: $8,047,000 in 2003, $5,762,000 in 2004, $3,922,000 in 2005, $3,128,000 in 2006, $2,731,000 in 2007 and $5,984,000 thereafter. At December 31, 2002 and 2001, the company had outstanding standby letters of credit aggregating $21,472,000 and $19,858,000, 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, 2002 and 2001 were as follows:
2002 2001 ---- ---- Balance at January 1 $ 6,786,000 $ 4,689,000 Provisions to expense 11,098,000 13,339,000 Actual costs incurred (12,608,000) (11,242,000) Liabilities assumed in business acquisitions 8,438,000 ------------ ------------ Balance at December 31 $ 13,714,000 $ 6,786,000 ============ ============
NOTE P--CHANGE IN ACCOUNTING-REVENUE RECOGNITION In the fourth quarter of 2000, the company changed its method of accounting for recognizing revenues for product sales. Effective with this change, retroactively applied to January 1, 2000, the company recognizes revenues based upon the respective terms of delivery for each sale agreement. This change was required by Staff Accounting Bulletin (SAB) No. 101 issued by the Securities and Exchange Commission. In years prior to 2000, the company recognized substantially all of its revenues for product sales as products were shipped, as this method was then in compliance with generally accepted accounting principles. For the year ended December 31, 2000, the company recognized sales of $10,052,000 and the related operating income of $1,362,000 resulting from the change in accounting method; these amounts were previously recognized in sales and income in 1999 under the company's previous accounting method. These sales and the related income also account for the cumulative effect of the change in accounting method on prior years, which resulted in a charge to net income of $844,000 (net of taxes of $518,000), or $.02 per diluted share. This charge reflects the adoption of SAB No. 101 and is included in the year ended December 31, 2000. Pro-forma net income amounts for the three-year period ending December 31, 2002, assuming the change in method was retroactively applied to the beginning of that period, are as follows:
2002 2001 2000 ---- ---- ---- Net income $38,195,000 $47,573,000 $58,381,000 Diluted net income per share $ .83 $ 1.05 $ 1.28
NOTE Q--GOODWILL 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 48 FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) amounts adjusted for the exclusion of goodwill amortization, net of the related income tax effect, for the three-year period ended December 31, 2002 follows:
2002 2001 2000 ---- ---- ---- Reported net income $38,195,000 $47,573,000 $57,537,000 Add back: goodwill amortization, net of tax 5,503,000 5,174,000 ----------- ----------- ----------- Adjusted net income $38,195,000 $53,076,000 $62,711,000 =========== =========== =========== Basic net income per common share Reported net income $ .83 $ 1.05 $ 1.27 Goodwill amortization, net of tax .12 .11 ----------- ----------- ----------- Adjusted net income $ .83 $ 1.17 $ 1.38 =========== =========== =========== Diluted net income per common share Reported net income $ .83 $ 1.05 $ 1.26 Goodwill amortization, net of tax .12 .11 ----------- ----------- ----------- Adjusted net income $ .83 $ 1.17 $ 1.37 =========== =========== ===========
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 calculating the present value of expected future cash flows. Changes in the carrying amount of goodwill for the year ended December 31, 2002, by operating segment, were as follows:
ENVIRONMENTAL PRODUCTS FIRE RESCUE SAFETY PRODUCTS TOOL TOTAL ------------- ----------- --------------- ---- ----- Goodwill balance, 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) Goodwill acquired 65,051,000 65,051,000 Translation and other 2,084,000 3,574,000 1,085,000 3,737,000 10,480,000 ------------ ----------- ----------- ----------- ------------ Goodwill balance, December 31, 2002 $128,857,000 $36,930,000 $99,985,000 $82,663,000 $348,435,000 ============ =========== =========== =========== ============
Other intangible assets (amortized and not amortized) were insignificant for the year ended December 31, 2002. Under SFAS 142, the company is required to test its goodwill annually for impairment, which is performed at the beginning of the fourth quarter. The company performed this testing as required in the fourth quarter of 2002 and determined that there was no impairment. NOTE R--NEW ACCOUNTING PRONOUNCEMENTS In September 2002, the Financial Accounting Standards Board 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 receive under the terms of a one-time benefit arrangement that is not an ongoing benefit arrangement or an individual deferred-compensation contract. SFAS No. 146 will be effective for exit or disposal activities that are initiated after December 31, 2002. The company has no current exit or disposal activities planned that would be affected by this statement. 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 49 FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 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 has adopted this statement. The company accounts for its stock compensation under APB 25, and accordingly has added the additional disclosures. NOTE S--SELECTED QUARTERLY DATA (UNAUDITED) (in thousands of dollars except per share amounts)
FOR THE THREE-MONTH PERIOD ENDED --------------------------------------------------------------------------------------- 2002 2001 ------------------------------------------ ------------------------------------------ MARCH JUNE SEPTEMBER DECEMBER MARCH JUNE SEPTEMBER DECEMBER 31 30 30 31 31 30 30 31 ----- ---- --------- -------- ----- ---- --------- -------- Net sales $245,644 $257,864 $261,615 $292,078 $258,007 $286,817 $253,403 $273,948 Gross margin 69,890 74,747 74,062 80,297 79,940 85,681 72,129 74,511 Income from continuing operations 9,794 10,712 12,493 13,180 11,626 16,712 8,853 9,399 Income from discontinued operations 307 298 378 Cumulative effect of change in accounting (7,984) Net income 1,810 10,712 12,493 13,180 11,626 17,019 9,151 9,777 Per share data--diluted: Income from continuing operations .22 .24 .28 .28 .26 .37 .20 .21 Income from discontinued operations .01 .01 .01 Cumulative effect of change in accounting (.18) Net income* .04 .24 .28 .28 .26 .37 .20 .22 Dividends paid per share .20 .20 .20 .20 .195 .195 .195 .195 Market price range per share High 27.07 25.98 24.50 19.93 24.15 24.63 24.01 22.94 Low 19.90 21.55 18.10 16.00 18.40 18.80 17.00 17.20
* amounts may not add due to rounding The company incurred pre-tax restructuring charges (see Note M) of $3,627,000 for the three-month period and year ending December 31, 2001. 50 REPORT OF ERNST & YOUNG LLP, 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, 2002 and 2001 and the related consolidated statements of income, comprehensive income and cash flows for each of the three years in the period ended December 31, 2002. These financial statements are the responsibility of the company's management. Our responsibility is to express an opinion on these financial statements 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, 2002 and 2001, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2002 in conformity with accounting principles generally accepted in the United States. As discussed in Notes A, P and Q to the financial statements, the company changed its method of accounting for goodwill and other intangibles and revenue recognition in 2002 and 2000, respectively. [ERNST & YOUNG LLP SIGNATURE] Chicago, Illinois January 28, 2003 51 FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES FINANCIAL REVIEW CONSOLIDATED RESULTS OF OPERATIONS Federal Signal Corporation's diluted income per share from continuing operations for 2002 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. The 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% in functional currency). Orders increased 4% in 2002 to $1.1 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 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; goodwill was not amortized in 2002 in accordance with SFAS No. 142. Net sales declined 3% in 2001 to $1.07 billion compared to the $1.11 billion in 2000. Income from continuing operations was $46.6 million in 2001 compared to $57.7 million in 2000. Diluted income per share from continuing operations was $1.03 in 2001 compared to $1.27 in 2000; earnings were adversely affected by $.05 in restructuring charges in both 2001 and 2000. Net income in 2001 was $47.6 million, or $1.05 per diluted share compared to $57.5 million, or $1.26 per diluted share, in 2000. Net income per share amounts included $.02 per share in both 2001 and 2000 from the discontinued operations of the Sign Group. Net income in 2000 also included a $.02 per share charge relating to the cumulative effect of a change in accounting for revenue recognition required by Staff Accounting Bulletin (SAB) No. 101 issued by the Securities and Exchange Commission. The 2001 sales results of the company's continuing operations reflected a very weak industrial economy in the U.S. as well as order and sales delays in the company's Fire Rescue and Safety Products groups. Sales prices in 2001 were essentially flat with the prior year reflecting the weaker industrial market conditions; the effects of acquisitions on 2001 sales comparisons to 2000 were insignificant. Sales to customers in the United States declined 3% in 2001 and sales to non-U.S. customers declined 2% (1% in functional currency). Incoming orders declined 3% in 2001 with orders from U.S. customers off 3% from a year ago and orders from non-U.S. customers down 1%. The company focuses on operating margin, rather than either the gross margin component or the selling, general, and administrative (SG&A) cost component of operating margin when setting overall Federal Signal performance targets and monitoring results. The reasons for this focus are: 1) the distinct differences in the cost structures of the company's businesses, and 2) the varying growth rates of these individual businesses. This combination dictates that the separate operating margin components are only useful in managing individual business performance. In looking at total profitability of the company's U.S. and non-U.S. operations, the company recognizes that some of its U.S. operations have benefited from selling their products through distribution channels of non-U.S. operations. The following table summarizes the company's gross margins and operating margins for the last five years (percent of sales):
2002 2001 2000 1999 1998 ---- ---- ---- ---- ---- Net sales 100.0% 100.0% 100.0% 100.0% 100.0% Cost of sales 71.7 70.9 69.5 69.2 69.0 ----- ----- ----- ----- ----- Gross profit margin 28.3 29.1 30.5 30.8 31.0 SG&A expenses 20.5 20.5 20.0 20.4 20.6 ----- ----- ----- ----- ----- Operating margin 7.8% 8.6% 10.5% 10.4% 10.4% ===== ===== ===== ===== =====
Gross profit margins of 28.3% in 2002 are somewhat lower than the average of the 1998-2001 period (30.3%) largely reflecting three significant factors: a very slow industrial economy reduced sales of the company's high-margin industrial products and resulted in a temporary shift to lower gross margin products; reduced throughput and higher production costs adversely affected Fire Rescue Group profitability; and competitive price pressures reduced the potential for price increases on the company's products. SG&A expenses as a percent of sales were 20.5% in 2002, essentially flat with the average of the preceding four-year period. Operating margin 52 FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES FINANCIAL REVIEW (CONTINUED) was 7.8% in 2002 compared to 2001's 8.6%. This compares to the average of 10.0% for the 1998-2001 period. Operating margins in 2002 declined largely as a result of the same reasons gross margins declined. 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, parking systems and signage. GROUP OPERATIONS ENVIRONMENTAL PRODUCTS In 2002, orders were 7% above the prior year, due mainly to the refuse truck body acquisitions. Global sweeper orders declined 2%, as increased international business was more than offset by a 15% reduction in U.S. orders. U.S. municipal orders trended down during the course of the year in light of deteriorating state and local governmental budgets. Revenues rose 6%, mainly due to the refuse truck body acquisitions. Operating income increased 3%, with improved operating results for sweepers, more than offsetting lower margins on other product lines resulting from product mix and lower volumes. In 2001, Environmental Products Group sales rose 10% and new orders rose 2%. Earnings before restructuring charges decreased 19%. Sales growth was strong in U.S. municipal sweepers, augmented by the acquisition of the assets of Athey Products Corporation in March. Industrial vacuum truck and industrial water blaster sales were down moderately for the full year, but slowed dramatically in the last half of the year. Operating earnings declined substantially as continuing vacuum truck plant consolidation costs and new-product-related costs, plus a lower margin sales mix, reduced operating margin. The group incurred restructuring charges of $.8 million in 2001. FIRE RESCUE In 2002, orders for Fire Rescue increased 1%, as strong orders at European businesses more than offset a modest decline elsewhere. Sales declined 11%, largely as a result of operating difficulties at U.S. production facilities. During 2002, these plants experienced reduced throughput and higher production costs resulting from a trend toward more complex units as well as development costs associated with prototype units. Operating income fell 60% as a result of the higher production costs and lower sales. In 2001, Fire Rescue Group earnings before restructuring charges were up 12% on a 4% decline in sales. New orders declined 2%. New orders and sales declined on essentially flat worldwide markets as orders were delayed in the U.S. by a Federal government subsidy program for fire apparatus and by the September 11 events which changed fire department priorities in the fourth quarter. Earnings increased significantly as group manufacturing operations continued to improve, raising overall operating margin. The group incurred $.9 million in restructuring charges in 2001. SAFETY PRODUCTS In 2002, orders for Safety Products rose 6%, due to large airport parking and control systems awards and success in increasing market share for European police products. Revenue rose 5%, due to increased deliveries of outdoor warning systems and European police products. Operating income improved 3% due to higher revenues, partly offset by increased pension expense. In 2001, Safety Products Group earnings before restructuring charges fell 12% on a 4% sales decline. New orders increased 4%. New orders were up for all major product lines except industrial. Sales fell as substantial projects in parking equipment and outdoor warning systems were delayed into 2002. The delay between orders and installation of these projects was the major cause of the group's reduced earnings and margins in 2001. TOOL In 2002, sales declined 3%, a reflection of lower cutting tools sales, which represent about one-quarter of tool product sales. Despite relatively strong automotive production, low capital investment resulted in continued weakness for these products. Operating income declined 14% because of lower sales volumes, and the effect of 53 FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES FINANCIAL REVIEW (CONTINUED) lower fixed cost absorption caused by inventory reductions made possible by successful lean enterprise initiatives. Pricing pressures on cutting tools also adversely affected operating income. In 2001, Tool Group earnings, before restructuring charges of approximately $1.5 million, fell 43% on a 17% decline in sales. New orders declined 19%. New orders, sales and earnings all declined sharply in very weak global industrial markets; the most severe decline was in North America and the earnings weakness was across all major product lines. Markets continued to weaken throughout 2001. Notwithstanding the sales decline, the group held its leading market shares and increased that share in certain product lines. SIGN (DISCONTINUED OPERATIONS) In 2000, the company decided to divest the Sign Group and began searching for a buyer of this business. The group saw markets weaken in 2002 and 2001. The results of this group are reported as discontinued operations in the company's consolidated financial statements. Due to the slower economic environment in 2002 and 2001, it has taken longer to sell the entity than originally planned. At year-end the company was in negotiations with a third party for the sale of the Sign Group. The company does not expect to record a loss on this sale. CORPORATE AND OTHER Corporate expense was $12.4 million in 2002, down slightly from the $12.6 million in 2001. Interest expense declined $6.3 million, or 24%, in 2002 largely as a result of a much lower short-term interest rate environment in 2002. The much lower interest rates were partially offset by increased borrowings in the fourth quarter of 2002 related to cash paid in the acquisitions of businesses. The decrease in interest expense of $5.0 million in 2001 was largely as a result of the lower short-term interest rate environment that was partially offset by a significant refinancing of short-term debt with funded debt at higher interest rates. Weighted average interest rates on short-term borrowings were 2.0% in 2002, 4.6% in 2001 and 6.5% in 2000. At the end of 2002, 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 6.75% at the end of 2002 from the 7.3% used at the end of 2001 for its U.S. plan because of the lower interest rate environment experienced at the end of 2002. In January 2003, the company established its other significant cost assumptions for its U.S. benefits 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 increase 2003 pension costs by approximately $.05 per share compared to 2002. The company incurred approximately $.7 million in nonrecurring pension costs in 2001 as a result of the company's fourth quarter 2001 restructuring. The company's effective tax rate in 2002 of 24.4% was down from the 27.7% in 2001 and the 31.7% in 2000. The lower tax rate in 2002 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. During the fourth quarter of 2002, the company recorded an after-tax charge of $13.8 million 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. FINANCIAL SERVICES ACTIVITIES The company maintains a large investment ($227 million and $239 million at December 31, 2002 and 2001, respectively) in lease financing and other receivables that are generated by its environmental products and fire rescue operations. For the five-year period ending December 31, 2002 these assets continued to be leveraged in accordance with the company's stated financial objectives (see further discussion in "Financial Position and Cash Flow"). 54 FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES FINANCIAL REVIEW (CONTINUED) Financial services assets have repayment terms ranging from one to ten years. The decrease in these assets resulted from the company's 2001 decision to cease lending to customers in certain commercial and industrial markets. FINANCIAL POSITION AND CASH FLOW For the full year, operating cash flow totaled $88 million, down $7 million from 2001 in part because of a discretionary $5 million pension contribution made in view of the company's strong cash position and weak pension asset performance. During 2002, the company saw reductions in average working capital driven by improved collections, lower inventory levels due to lean enterprise initiatives, and the receipt of more advance payments from customers. Improved inventory utilization should further improve cash flow in 2003 as the company continues to make process improvements in all of its groups as a part of the company-wide lean enterprise initiative. During the 1998-2002 period, the company utilized its strong cash flows from operations and available debt capacity to: 1) fund in whole or in part strategic acquisitions of companies operating in markets related to those already served by the company; 2) purchase increasing amounts of equipment principally to provide for further cost reductions and increased productive capacity for the future as well as tooling for new products; 3) pay increasing amounts in cash dividends to shareholders; and 4) repurchase a small percentage of its outstanding common stock each year. Cash flows for the five-year period ending December 31, 2002 are summarized as follows (in millions):
2002 2001 2000 1999 1998 ---- ---- ---- ---- ---- Cash provided by (used for): Operating activities $ 88.4 $ 95.1 $ 64.4 $ 57.7 $ 75.5 Investing activities (57.3) (59.2) (64.8) (105.1) (93.0) Financing activities (38.1) (32.6) 5.2 40.9 22.2
In order to show the distinct characteristics of the company's investment in its manufacturing activities and its investment in its financial services 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. At year-end, total manufacturing debt was $296 million, representing 44% of capitalization; the ratio was unchanged from the prior year-end. The company believes that its financial assets, due to their overall quality, are capable of sustaining a leverage ratio of 87%. At both December 31, 2002 and 2001, the company's debt-to-capitalization ratio for its financial services activities was 87% for its continuing operations. As indicated earlier, management focuses substantial effort on improving the utilization of the company's working capital. The company's current ratio for its manufacturing operations was 1.8 at both December 31, 2002 and 2001. The company anticipates that its financial resources and major sources of liquidity, including cash flow from operations, will continue to be adequate to meet its operating and capital needs in addition to its financial commitments. During the fourth quarter of 2002, the company issued long-term debt of $100 million at an average interest rate of 5.1%, at 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. MARKET RISK MANAGEMENT The company is subject to risks associated with changes in interest rates and foreign exchange rates. The company principally utilizes two types of derivative financial instruments: 1) interest rate swaps and 2) foreign exchange forward contracts to manage risks associated with sales and purchase commitments denominated in foreign currencies. The company does not hold or issue derivative financial instruments for trading or speculative purposes and is not a party to leveraged derivatives. Of the company's debt at December 31, 2002, 41% was used to support financial services assets; the average remaining life of those assets is typically under three years. The company is currently comfortable with a sizeable 55 FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES FINANCIAL REVIEW (CONTINUED) 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 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. At December 31, 2002 and 2001, the company was party to interest rate swap agreements with aggregate notional amounts of $270,000,000 and $130,000,000, 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. Significant interest rate sensitive instruments at December 31, 2002 and 2001 were as follows (dollars in millions):
2002 2001 --------------------------------------------------------------------- --------------- FAIR FAIR 2003 2004 2005 2006 2007 THEREAFTER TOTAL VALUE TOTAL VALUE ---- ---- ---- ---- ---- ---------- ----- ----- ----- ----- Long-term debt Fixed rate Principal $ .2 $25.2 $17.2 $82.2 $27.1 $178.6 $330.5 $311.8 $239.3 $240.3 Average interest rate 5.8% 5.8% 5.7% 5.6% 5.6% 5.5% 5.7% 6.2% Variable rate Principal $ .5 $ .4 $ .4 $ .5 $ .5 $ 2.3 $ 4.6 $ 4.5 $ 2.2 $ 2.2 Average interest rate 5.8% 5.8% 5.8% 5.8% 5.8% 5.8% 5.8% 3.2% Short-term debt--variable rate Principal $152.8 $152.8 $152.8 $233.9 $233.9 Average interest rate 1.8% 1.8% 2.7% Interest rate swaps (pay fixed, receive variable) Notional amount $20.0 $20.0 $ 25.0 $ 65.0 $ (2.4) $ 25.0 $ (1.4) Average pay rate 4.2% 4.8% 5.1% 4.8% 5.1% Average receive rate 1.4% 1.4% 1.4% 1.4% 2.0% Interest rate swaps (receive fixed, pay variable) Notional amount $55.0 $10.0 $140.0 $205.0 $ 3.6 $105.0 $ (2.5) Average pay rate 3.5% 4.0% 2.7% 3.0% 3.2% Average receive rate 5.5% 6.8% 5.6% 5.6% 6.1%
The company had $47,126,000 of foreign exchange forward contracts outstanding at December 31, 2002. Most of these contracts were used to purchase Canadian dollars and expire at various dates in 2003; the fair value of these contracts was ($316,000) at December 31, 2002. CRITICAL ACCOUNTING POLICIES 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 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. The 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. 56 FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES FINANCIAL REVIEW (CONTINUED) 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: 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. Goodwill Impairment: Under SFAS No. 142, "Goodwill and Other Intangible Assets", the company is required to test its goodwill annually for impairment, which is performed at the beginning of the fourth quarter. This review for impairment requires judgment in estimating future sales, earnings and cash flows to determine the fair value of the reporting units. 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, 2002. The company has reviewed its financial arrangements and has determined that off-balance sheet arrangements, other than disclosed in the notes to the financial statements, do not exceed $1 million. 57 EX-21 7 ex21.txt SUBSIDIARIES OF THE REGISTRANT EXHIBIT 21 FEDERAL SIGNAL CORPORATION Subsidiaries of the Registrant The following table sets forth information concerning significant subsidiaries of the Registrant. Jurisdiction in which Name Organized Aplicaciones Tecnologicas VAMA S.A. Spain 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 Emergency One, Inc. Delaware Federal APD, Inc. Michigan Federal Signal Credit Corporation Delaware Federal Signal International (FSC), Ltd. Jamaica, W.I. Federal Signal Ltd. United Kingdom Five Star Manufacturing North Carolina Guzzler Manufacturing, Inc. Alabama Jamestown Punch and 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 M.J. Industries, S.A. France Nippon Dayton Progress K.K. Japan NRL Corp. Alberta, Canada 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 subsidiaries) Netherlands Saulsbury Fire Equipment Corp. New York Schneider Stanznormalien GmbH Germany Superior Emergency Vehicles, 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 EX-23 8 ex23.txt CONSENT OF INDEPENDENT AUDITORS EXHIBIT 23 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in this Annual Report (Form 10-K) of Federal Signal Corporation of our report dated January 28, 2003, included in the Federal Signal Corporation Annual Report to Shareholders for the year ended December 31, 2002. Our audits also included the financial statement schedule of Federal Signal Corporation listed in Item 15(a)2. This schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, the financial statement schedule referred to above, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein. We also consent to the incorporation by reference in the Registration Statements (Form S-8 Nos. 33-12876, 33-22311, 33-38494, 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 28, 2003, with respect to the consolidated financial statements of Federal Signal Corporation incorporated by reference, and our report included in the preceding paragraph with respect to the financial statement schedule included in this Annual Report (Form 10-K) of Federal Signal Corporation. Ernst & Young LLP Chicago, Illinois March 26, 2003 EX-99.A 9 ex99a.txt CEO CERTIFICATION OF PERIODIC REPORT EXHIBIT 99.a CEO Certification of Periodic Report under Section 906 of the Sarbanes-Oxley Act I, Joseph J. Ross, Chairman 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, 2002 (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: March 27, 2003 /s/ Joseph J. Ross Joseph J. Ross Chairman and Chief Executive Officer EX-99.B 10 ex99b.txt CFO CERTIFICATION OF PERIODIC REPORT EXHIBIT 99.b CFO Certification of Periodic Report under Section 906 of the Sarbanes-Oxley Act I, Stephanie K. 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, 2002 (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: March 27, 2003 /s/ Stephanie K. Kushner Stephanie K. Kushner Vice President and Chief Financial Officer EX-99.C 11 ex99c.txt CODE OF ETHICS FOR CEO AND SENIOR FINANCIAL OFFICERS EXHIBIT 99.c CODE OF ETHICS FOR CEO AND SENIOR FINANCIAL OFFICERS 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, 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. -----END PRIVACY-ENHANCED MESSAGE-----