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, 1999
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 March 1, 2000.
Common stock, $1.00 par value -- $618,531,017
Indicate the number of shares outstanding of each of the Registrant's classes of
common stock, as of March 1, 2000.
Common stock, $1.00 par value - 45,303,256 shares
Documents Incorporated by Reference
--------------------------------------
Portions of the Annual Report to Shareholders for the year ended December 31,
1999 are incorporated by reference into Parts I & II. Portions of the proxy
statement for the Annual Meeting of Shareholders to be held on April 20, 2000
are incorporated by reference in Part III.
<PAGE>
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, high pressure water blasting systems,
parking revenue and access control equipment, custom on-premise signage, carbide
cutting tools, precision punches and related die components.
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 five identified groups: Safety
Products, Sign, Tool, Environmental Products and Fire Rescue. 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, 1999 are incorporated herein by reference.
Developments, including acquisitions and divestitures of businesses,
considered significant to the company or individual segments are described under
the following discussions of the applicable groups.
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: (1) a variety of visual and
audible warning, signaling, and communications devices used by private industry,
federal, state and local governments, building contractors, police, fire and
medical fleets, utilities and civil defense; (2) hazardous area lighting and
communications products used by mines, petrochemical plants, offshore oil
platforms and other hazardous industrial sites; (3) safety containment products
for handling and storing hazardous materials used by a wide variety of
industrial and laboratory customers as well as military agencies and municipal,
state and federal governments; and (4) parking, revenue control, and access
control equipment and systems for parking facilities, commercial businesses,
bridge and pier installation and residential developments.
Visual and audible warning and signaling devices include emergency vehicle
warning lights, electromechanical and electronic vehicle sirens and industrial
signal lights, sirens, horns, bells and solid state audible signals,
audio/visual emergency warning and evacuation systems, including weather and
nuclear power plant warning notification systems and industrial intercoms and
communications systems.
Hazardous area lighting and communications products include specialized
lights, control ballasts, connectors, and microprocessor-based public address
and multi-party paging systems.
<PAGE>
Safety 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 period 1995 through 1999, 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
Akusta IFE England October 1997 Heavy duty and
explosion-proof
communications equipment
Pauluhn Electric Texas July 1997 Hazardous area and
explosion-proof
electrical products
Victor England June 1996 Hazardous area
industrial lighting
products
Target Tech Illinois December 1995 Amber signaling
products for
construction and work
vehicles
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.
<PAGE>
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 backlog of orders of the Safety Products Group products believed to be
firm at December 31, 1999 and 1998 was $27.3 million and $25.7 million,
respectively. Almost all of the backlog of orders at December 31, 1999, are
reasonably expected to be filled within the current fiscal year.
Sign Group
The Sign Group, operating principally under the name "Federal Sign",
designs, engineers, manufactures, installs and maintains sign displays for both
sale and lease. The group additionally provides sign repair services and also
enters into maintenance service contracts for signs it manufactures as well as
signs produced by other manufacturers. 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 sale organization that operates
from its twenty-four principal sales and manufacturing facilities located
strategically throughout the continental U.S. Customers for sign products and
services consist of local commercial businesses, as well as major national and
multi-national companies.
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, 1999, applicable to sign products and services
was approximately $49.2 million compared to approximately $54.7 million at
December 31, 1998. A significant part of the group's sign products and services
backlog relates to sign maintenance contracts since such contracts are usually
performed over long periods of time. At December 31, 1999, the Sign Group had a
backlog of in-service sign maintenance contracts of approximately $28.2 million
compared to approximately $32.4 million at December 31, 1998. With the exception
of the sign maintenance contracts, most of the backlog orders at December 31,
1999, are reasonably expected to be filled within the current fiscal year.
In January 2000, the Registrant announced it is seeking buyers for the Sign
Group due to the company focusing its growth strategies into its other groups.
<PAGE>
Tool Group
Tool Group products are produced by the group's wholly-owned subsidiaries.
The die components and precision tooling operations include: Dayton Progress
Corporation, Schneider Stanznormalien GmbH (Schneider), Jamestown Precision
Tooling, Inc., Technical Tooling, Inc. (TTI), and M.J. Industries (MJI). The
cutting tool operations include Manchester Tool Company, Clapp & Haney Tool
Company and Dico Corporation. During the period 1995 to 1996, sales and revenue
were also generated by Bassett Rotary Tool Company, a manufacturer of rotary
carbide cutting tools, which was sold at the end of 1996.
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.
During the period 1995 through 1999, the die components and precision
tooling operations continued to broaden the markets they serve through the
following acquisitions:
Principal
Entity Headquarters Acquired Principal Products/Services
MJI France August 1996 Precision punch and die
components
TTI Minnesota July 1996 Body punch tooling
The acquisitions of these businesses provide manufacturing capabilities on
the European continent and greater access to European markets and complement and
broaden the operations' can and body punch product lines.
The carbide cutting tool operations manufacture consumable carbide and
superhard insert tooling for cutoff and deep grooving metal cutting
applications. In July 1999, the company acquired Clapp & Haney Tool Company
("Clapp & Haney"). Located near Toledo, Ohio, Clapp & Haney is the leading U.S.
manufacturer and marketer of polycrystalline diamond and cubic boron nitride
consumable tooling.
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
Weston, Ontario; Tokyo, Japan; Warwickshire, England; Frankfurt, Germany; and
Meaux, France.
<PAGE>
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, 1999 and December
31, 1998 were $13.1 million and $9.4 million, respectively. All of the backlog
of orders at December 31, 1999 is 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 and is composed of Emergency One, Inc., Bronto
Skylift Oy Ab (Bronto), Superior Emergency Vehicles, Ltd., and Saulsbury Fire
Equipment Corp.
Emergency One, Inc. (E-One) is a leading manufacturer 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).
Superior Emergency Vehicles, Ltd. manufactures and distributes a full range
of fire truck bodies primarily for the Canadian market. It is the leading
manufacturer of these products in Canada. Superior also manufactures products
for the U.S. market sold by the group's U.S. dealerships.
Acquired in August 1995 and 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.
Acquired in January 1998 and located in Tully, NY, Saulsbury Fire Equipment
Corp. ("Saulsbury") is the leading manufacturer of stainless steel-bodied fire
trucks and rescue vehicles in the United States. Saulsbury's steel-bodied
products complement E-One's aluminum-bodied fire apparatus and custom fire
chassis. In addition, Saulsbury provides the group with additional distribution,
as well as a service center in the northeast United States.
All of the Fire Rescue Group companies 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 domestic and
overseas.
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, 1999, Fire Rescue Group backlog was $246.5 million compared
to $207.4 million at December 31, 1998. A substantial majority of the orders in
the backlog at December 31, 1999, are reasonably expected to be filled within
the current fiscal year.
<PAGE>
Environmental Products
Environmental Products manufactures street sweeping, industrial vacuuming
and municipal catch basin/sewer cleaning vehicles and high-pressure water
blasting equipment. Environmental Products is composed of Elgin Sweeper Company,
Vactor Manufacturing, Inc. (Vactor), Guzzler Manufacturing, Inc. (Guzzler), Ravo
International, Five Star Manufacturing and Jetstream of Houston, Inc.
Environmental Products manufactures a variety of self-propelled street
cleaning vehicles, vacuum loader vehicles and municipal catch basin/sewer
cleaning vacuum trucks as well as high pressure water blasting equipment. Most
sales are made to municipal customers, private contractors and government
customers.
Elgin Sweeper Company is the leading manufacturer in the United States of
self-propelled street cleaning vehicles. Utilizing three basic cleaning methods
(mechanical sweeping, vacuuming and recirculating air), Elgin's products are
primarily designed for large-scale cleaning of curbed streets and other paved
surfaces.
Ravo International is a leading European manufacturer and marketer of
self-propelled street and sewer cleaning vehicles. Utilizing the vacuuming
cleaning method, Ravo's products are primarily designed for cleaning of curbed
streets and other paved surfaces.
Guzzler is the leading manufacturer in the United States of waste removal
vehicles using vacuum-based technology, for worldwide industrial and
environmental markets. The acquisition of Guzzler complemented Elgin Sweeper
Company's product distribution and provided for increased exposure to the
industrial marketplace for both Elgin and Guzzler.
Vactor is the leading U.S. 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 Sweeper and Vactor.
Acquired in January 1998, and based in Youngsville, North Carolina, Five
Star Manufacturing began in 1996 with a unique design concept for street
sweepers: the Broom Bear four-wheeled mechanical street sweeper and the Air Bear
four-wheeled recirculating air street sweeper. This acquisition accelerates
Federal's entry into a market niche where the potential for substantial growth
opportunities exist.
Jetstream of Houston, Inc. ("Jetstream"), acquired in August 1998, is a
Houston-based manufacturer of water blasting equipment. Jetstream sells its
products predominately to the industrial vacuum loader customer base. This
provides product and service cross-selling opportunities for the previously
existing industrial customer base as well as the customer set already being
served by Jetstream.
All of the Environmental Products Group companies 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.
A majority of the group's sales are made primarily to municipal customers
and government customers both domestic and overseas.
<PAGE>
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, 1999, Environmental Products Group backlog was $57.2 million
compared to $62.5 million at December 31, 1998. A substantial majority of the
orders in the backlog at December 31, 1999 are reasonably expected to be filled
within current fiscal year.
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 which 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 $15.8 million in 1999,
$11.9 million in 1998 and $12.0 million in 1997. Fire Rescue, Environmental
Products and Safety Products each had sizeable increases in 1999.
Note M - Segment Information, presented in the Registrant's Annual Report to
Shareholders for the year ended December 31, 1999, 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 signage, street sweeping, outdoor warning, other
municipal emergency signal products, parking systems and aerial access platform
manufacturing operations.
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 which 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
7,000 people in ongoing businesses at the close of 1999. The Registrant believes
relations with its employees have been good.
Item 2. Properties.
As of December 31, 1999, the Registrant utilized thirty-four principal
manufacturing plants located throughout North America, as well as fourteen in
Europe, one in South Africa, one in South America, and one in the Far East. In
addition, there were forty-five sales and service/warehouse sites, with
thirty-six being U.S.-based and nine located overseas.
<PAGE>
In total, the Registrant devoted approximately 1,962,000 square feet to
manufacturing and 1,009,000 square feet to service, warehousing and office space
as of December 31, 1999. Of the total square footage, approximately 39% is
devoted to the Safety Products Group, 8% to the Sign Group, 11% to the Tool
Group, 24% to the Fire Rescue Group and 18% to the Environmental Products Group.
Approximately 65% of the total square footage is owned by the Registrant, with
the remaining 35% 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.
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,
1999.
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 P - Selected Quarterly Data (Unaudited) contained in
the Annual Report to Shareholders for the year ended December 31, 1999 is
incorporated herein by reference. As of March 1, 2000, there were 4,489 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, 1999 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, 1999 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, 1999 is incorporated herein by
reference.
<PAGE>
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, 1999
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, 1999
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 20, 2000 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, 1999:
Joseph J. Ross, age 54, was elected Chairman, President and Chief Executive
Officer in February 1990.
John A. DeLeonardis, age 52, was elected Vice President-Taxes in January
1992.
Duane A. Doerle, age 44, was elected Vice President-Corporate Development in
July 1996. Previously, he served as Director-Corporate Development since April
1992.
Henry L. Dykema, age 60, was appointed as Vice President and Chief Financial
Officer in January 1995.
Richard G. Gibb, age 56, was appointed Executive Vice President in January
1998. Previously, Mr. Gibb was President of the Safety Products Group and the
Signal Products Division, having served in those capacities since April 1995 and
February 1985, respectively.
Robert W. Racic, age 51, was elected Vice President and Treasurer in April
1984.
Richard L. Ritz, age 46, was elected Vice President and Controller in
January 1991.
Kim A. Wehrenberg, age 48, 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.
<PAGE>
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 20, 2000 is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and
Management.
The information contained under the caption "Security Ownership of Certain
Beneficial Owners" of the Registrant's Proxy Statement for the Annual Meeting of
Shareholders to be held April 20, 2000 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 20, 2000 is incorporated herein by reference.
PART IV
Item 14. 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, 1999 are filed as a part of
this report and are incorporated by reference in Item 8:
Consolidated Balance Sheets -- December 31, 1999 and 1998
Consolidated Statements of Income -- Years ended December
31, 1999, 1998 and 1997
Consolidated Statements of Comprehensive Income -- Years
ended
December 31, 1999, 1998 and 1997
Consolidated Statements of Cash Flows -- Years ended December 31,
1999, 1998 and 1997
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, 1999
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.
<PAGE>
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, 1996 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, 1998. 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, filed as Exhibit (10)(b)
to the Registrant's Form 10-K for the year ended December 31, 1998
is incorporated herein by reference.
c. Supplemental Pension Plan, filed as Exhibit (10)(c) to the
Registrant's Form 10-K for the year ended December 31, 1995 is
incorporated herein by reference.
d. Executive Disability, Survivor and Retirement Plan, filed as Exhibit
(10)(d) to the Registrant's Form 10-K for the year ended December
31, 1995 is incorporated herein by reference.
e. Supplemental Savings and Investment Plan, filed as Exhibit (10)(f)
to the Registrant's Form 10-K for the year ended December 31, 1993
is incorporated herein by reference.
f. Employment Agreement with 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. 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.
h. 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.
i. 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.
13.Annual Report to Shareholders for the year ended December 31, 1999.
Such report, except for those portions thereof which 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.
<PAGE>
21.Subsidiaries of the Registrant
23.Consent of Independent Auditors
27.Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K were filed for the three months ended December 31,
1999.
(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-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-8 Nos. 33-12876, 33-22311, 33-38494, 33-41721, 33-49476, 33-14251 and
33-89509 dated April 14, 1987, June 26, 1988, December 28, 1990, July 15, 1991,
June 9, 1992, October 16, 1996 and October 22, 1999, 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.
<PAGE>
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
Chairman, President, Chief Executive
Officer and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below, as of March 30, 2000, by the following persons on behalf
of the Registrant and in the capacities indicated.
/s/ Henry L. Dykema /s/ Charles R. Campbell
Vice President and Chief Director
Financial Officer
/s/ Richard L. Ritz /s/ James C. Janning
Vice President and Controller Director
/s/ Paul W. Jones
Director
/s/ James A. Lovell, Jr.
Director
/s/ Thomas N. McGowen, Jr.
Director
/s/ Richard R. Thomas
Director
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE II
FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
Valuation and Qualifying Accounts
For the Years Ended December 31, 1999, 1998 and 1997
<S> <C> <C> <C> <C>
Deductions
Additions Accounts
Balance at Charged to written off Balance
beginning costs and net of at end
Description of year expenses recoveries of year
---------- ----------- ----------- ----------
Year ended December 31, 1999:
Deducted from asset accounts:
Allowance for doubtful accounts
Manufacturing activities $2,499,000 $3,321,000
Financial service activities 1,607,000 1,849,000
---------- ----------
Total $4,106,000 $3,111,000 $2,047,000 $5,170,000
Year ended December 31, 1998:
Deducted from asset accounts:
Allowance for doubtful accounts
Manufacturing activities $2,527,000 $2,499,000
Financial service activities 1,772,000 1,607,000
---------- ----------
Total $4,299,000 $1,358,000 $1,551,000 $4,106,000
Year ended December 31, 1997:
Deducted from asset accounts:
Allowance for doubtful accounts
Manufacturing activities $2,602,000 $2,527,000
Financial service activities 1,348,000 1,772,000
---------- ----------
Total $3,950,000 $2,421,000 $2,072,000 $4,299,000
</TABLE>
<TABLE>
<CAPTION>
Federal Signal Corporation and Subsidiaries
Selected Financial Data
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1999 1998 1997 1996 1995 1994 1993 1992 1991 1990 1989
Operating Results
(dollars in millions):
Net sales (e) $1,061.9 $1,002.8 $924.9 $896.4 $816.1 $677.2 $565.2 $518.2 $466.9 $439.4 $398.4
Income before income
taxes (a,b,e) $ 84.4 $ 86.2 $ 84.8 $ 93.4 $ 77.3 $ 70.2 $ 58.8 $ 49.9 $ 45.6 $ 42.5 $ 34.6
Income from continuing
operations (a,b) $ 57.5 $ 59.4 $ 59.0 $ 62.0 $ 51.6 $ 46.8 $ 39.8 $ 34.5 $ 31.0 $ 28.1 $ 22.1
Operating margin (e) 10.0% 10.1% 10.8% 11.5% 11.8% 11.6% 11.3% 10.6% 10.8% 10.8% 10.6%
Return on average common
shareholders' equity (a,b) 17.0% 19.1% 20.6% 23.8% 22.0% 22.3% 21.0% 20.0% 20.0% 20.4% 18.7%
Common Stock Data
(per share) (c):
Income from continuing
operations - diluted $ 1.25 $ 1.30 $ 1.29 $ 1.35 $ 1.13 $ 1.02 $ 0.86 $ 0.75 $ 0.67 $ 0.61 $ 0.48
Cash dividends $ 0.74 $ 0.71 $ 0.67 $ 0.58 $ 0.50 $ 0.42 $ 0.36 $ 0.31 $ 0.27 $ 0.22 $ 0.19
Market price range:
High $ 28 1/16 $ 27 1/2 $26 3/4 $28 1/4 $25 7/8 $21 3/8 $ 21 $17 5/8 $15 3/16 $10 3/4 $7 1/8
Low $ 15 1/16 $ 20 $19 7/8 $20 7/8 $19 5/8 $16 7/8 $15 3/4 $12 3/8 $ 9 1/4 $6 3/16 $4 1/4
Average common shares
outstanding (in thousands) 45,958 45,846 45,840 45,885 45,776 45,948 46,155 46,157 46,126 46,038 46,103
Financial Position at Year-End
(dollars in millions):
Working capital (d) $ 76.7 $ 116.0 $ 41.6 $ 40.6 $ 48.8 $ 53.9 $ 52.8 $ 49.5 $ 44.9 $ 42.7 $ 63.8
Current ratio (d) 1.3 1.6 1.2 1.2 1.3 1.4 1.5 1.6 1.5 1.5 2.1
Total assets $ 961.0 $ 836.0 $727.9 $703.9 $620.0 $521.6 $405.7 $363.7 $341.2 $295.8 $271.3
Long-term debt, net of
current portion $ 134.4 $ 137.2 $ 32.1 $ 34.3 $ 39.7 $ 34.9 $ 21.1 $ 16.2 $ 15.6 $ 15.8 $ 16.8
Shareholders' equity $ 354.0 $ 321.8 $299.8 $272.8 $248.1 $220.3 $199.2 $179.0 $164.8 $146.4 $130.4
Debt-to-capitalization
ratio (d) 42% 37% 30% 28% 29% 22% 1% 2% 1% 2% 10%
Other (dollars in millions):
New business (e) $1,098.5 $1,038.2 $956.2 $924.6 $780.5 $700.3 $584.2 $510.3 $462.7 $467.6 $429.9
Backlog (e) $ 393.3 $ 359.7 $308.2 $280.0 $251.4 $261.0 $221.8 $198.0 $203.2 $199.9 $171.7
Net cash provided by
operating activities $ 57.7 $ 75.5 $ 64.2 $ 61.4 $ 62.9 $ 53.8 $ 48.8 $ 40.2 $ 43.9 $ 48.3 $ 34.6
Net cash (used for)
investing activities $ (105.1) $ (93.0) $(38.4) $(54.2) $(88.1) $(96.9) $(38.1) $(26.9) $(47.8) $(14.7) $(24.1)
Net cash provided by
(used for)financing
activities $ 40.9 $ 22.2 $(27.5) $ (4.1) $ 29.9 $ 45.1 $(10.3) $(11.2) $ 2.5 $(34.6) $ (8.9)
Capital expenditures (e) $ 24.4 $ 20.4 $ 19.6 $ 16.9 $ 15.7 $ 11.1 $ 10.1 $ 8.8 $ 12.0 $ 8.3 $ 9.2
Depreciation (e) $ 18.3 $ 16.3 $ 14.8 $ 13.2 $ 11.8 $ 10.3 $ 9.2 $ 8.7 $ 8.2 $ 7.8 $ 7.9
Employees (e) 7,226 7,006 6,591 6,233 6,015 5,243 4,426 4,268 4,212 4,158 4,142
- -------------------------
(a) in 1996, includes gain on sale of subsidiary of $4.7 million pre-tax, $2.8
million after-tax or $.06 per share
(b) in 1995, includes the impact of a nonrecurring charge for a litigation
settlement of $6.7 million pre-tax, $4.2 million after-tax or $.09 per share
(c) reflects 10% stock dividend paid in 1989, 3-for-2 stock splits in 1990, 1991
and 1992, and a 4-for-3 stock split in 1994
(d) manufacturing operations only
(e) continuing operations only
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Federal Signal Corporation and Subsidiaries
Consolidated Balance Sheets December 31,
1999 1998
---- ----
<S> <C> <C>
Assets
Manufacturing activities:
Current assets
Cash and cash equivalents $ 8,764,000 $ 15,316,000
Accounts receivable, net of allowances for doubtful accounts of
$3,321,000and $2,499,000, respectively 165,682,000 159,080,000
Inventories - Note B 162,709,000 131,961,000
Prepaid expenses 8,982,000 4,850,000
------------ ------------
Total current assets 346,137,000 311,207,000
Properties and equipment - Note C 115,363,000 97,367,000
Other assets
Intangible assets, net of accumulated amortization 277,217,000 232,233,000
Other deferred charges and assets 24,412,000 21,147,000
------------ ------------
Total manufacturing assets 763,129,000 661,954,000
------------ ------------
Financial services activities - Lease financing and other receivables,
net of allowances for doubtful accounts of $1,849,000 and $1,607,000,
respectively, and net of unearned finance revenue - Note D 197,832,000 174,045,000
------------ ------------
Total assets $960,961,000 $835,999,000
============ ============
Liabilities and Shareholders' Equity
Manufacturing activities:
Current liabilities
Short-term borrowings - Note E $ 99,204,000 $ 37,097,000
Accounts payable 74,324,000 62,976,000
Accrued liabilities
Compensation and withholding taxes 24,773,000 21,897,000
Other 62,822,000 65,128,000
Income taxes - Note F 8,340,000 8,095,000
------------ ------------
Total current liabilities 269,463,000 195,193,000
Other liabilities
Long-term borrowings - Note E 134,410,000 137,152,000
Deferred income taxes - Note F 30,445,000 30,212,000
------------ ------------
Total manufacturing liabilities 434,318,000 362,557,000
------------ ------------
Financial services activities - Borrowings - Note E 172,610,000 151,660,000
------------ ------------
Total liabilities 606,928,000 514,217,000
------------ ------------
Shareholders' equity - Notes I and J
Common stock, $1 par value, 90,000,000
shares authorized, 46,889,000 and
46,668,000 shares issued, respectively 46,889,000 46,668,000
Capital in excess of par value 66,762,000 63,461,000
Retained earnings - Note E 276,951,000 253,366,000
Treasury stock, 775,000 and 1,339,000 shares,
respectively, at cost (17,023,000) (29,161,000)
Deferred stock awards (2,238,000) (1,834,000)
Accumulated other comprehensive income (17,308,000) (10,718,000)
------------ ------------
Total shareholders' equity 354,033,000 321,782,000
------------ ------------
Total liabilities and shareholders' equity $960,961,000 $835,999,000
============ ============
See notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Federal Signal Corporation and Subsidiaries
Consolidated Statements of Income
<S> <C> <C> <C>
For the years ended December 31,
---------------------------------------------------
1999 1998 1997
---- ---- ----
Net sales $1,061,896,000 $1,002,787,000 $ 924,912,000
Costs and expenses
Cost of sales 740,535,000 694,659,000 634,068,000
Selling, general and administrative 214,856,000 206,378,000 191,170,000
-------------- -------------- -------------
Operating income 106,505,000 101,750,000 99,674,000
Interest expense (23,339,000) (19,336,000) (17,163,000)
Other income, net 1,230,000 3,820,000 2,336,000
-------------- -------------- -------------
Income before income taxes 84,396,000 86,234,000 84,847,000
Income taxes - Note F 26,859,000 26,838,000 25,878,000
-------------- -------------- -------------
Net income $ 57,537,000 $ 59,396,000 $ 58,969,000
============== ============== =============
Basic net income per share $ 1.26 $ 1.30 $ 1.30
============== ============== =============
Diluted net income per share $ 1.25 $ 1.30 $ 1.29
============== ============== =============
See notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Federal Signal Corporation and Subsidiaries
Consolidated Statements of Comprehensive Income
<S> <C> <C> <C>
For the years ended December 31,
-------------------------------------------------
1999 1998 1997
---- ---- ----
Net income $57,537,000 $59,396,000 $58,969,000
Other comprehensive income (loss) - Foreign
currency translation adjustment, net (6,590,000) 2,059,000 (8,173,000)
----------- ----------- -----------
Comprehensive income $50,947,000 $61,455,000 $50,796,000
=========== =========== ===========
See notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Federal Signal Corporation and Subsidiaries
Consolidated Statements of Cash Flows
<S> <C> <C> <C>
For the years ended December 31,
---------------------------------------------------
1999 1998 1997
---- ---- ----
Operating activities
Net income $ 57,537,000 $ 59,396,000 $ 58,969,000
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 18,310,000 16,269,000 14,789,000
Amortization 8,927,000 7,317,000 5,756,000
Provision for doubtful accounts 2,098,000 1,358,000 2,421,000
Deferred income taxes 753,000 4,029,000 4,080,000
Other, net (1,075,000) (1,162,000) (1,392,000)
Changes in operating assets and liabilities, net of
effects from acquisitions of companies
Accounts receivable (10,162,000) (5,943,000) (8,688,000)
Inventories (29,634,000) (13,213,000) (833,000)
Prepaid expenses (4,020,000) 1,116,000 (528,000)
Accounts payable 12,490,000 9,372,000 (10,839,000)
Accrued liabilities 46,000 (1,562,000) 3,073,000
Income taxes 2,386,000 (1,484,000) (2,611,000)
------------- ------------- ------------
Net cash provided by operating activities 57,656,000 75,493,000 64,197,000
------------- ------------- ------------
Investing activities
Purchases of properties and equipment (24,356,000) (20,409,000) (19,611,000)
Principal extensions under lease financing agreements (131,791,000) (109,132,000) (113,148,000)
Principal collections under lease financing agreements 108,004,000 102,342,000 116,622,000
Payments for purchases of companies, net of cash acquired,
excludes $15,715,000 of common stock issued in 1999 (57,932,000) (64,349,000) (29,601,000)
Other, net 979,000 (1,481,000) 7,341,000
------------- ------------- -------------
Net cash used for investing activities (105,096,000) (93,029,000) (38,397,000)
------------- ------------- -------------
Financing activities
Addition to short-term borrowings, net 78,768,000 58,184,000 13,601,000
Increase (reduction) in long-term borrowings (2,883,000) 4,902,000 (2,164,000)
Purchases of treasury stock (3,592,000) (9,842,000) (10,204,000)
Cash dividends paid to shareholders (33,574,000) (32,145,000) (29,307,000)
Other, net 2,169,000 1,067,000 529,000
------------- ------------- -------------
Net cash provided by (used for) financing activities 40,888,000 22,166,000 (27,545,000)
------------- ------------- -------------
Increase (decrease) in cash and cash equivalents (6,552,000) 4,630,000 (1,745,000)
Cash and cash equivalents at beginning of year 15,316,000 10,686,000 12,431,000
------------- ------------- -------------
Cash and cash equivalents at end of year $ 8,764,000 $ 15,316,000 $ 10,686,000
============= ============= =============
See notes to consolidated financial statements.
</TABLE>
<PAGE>
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.
Inventories: Inventories are stated at the lower of cost or market. At December
31, 1999 and 1998, approximately 56% and 45%, 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.
Intangible assets: Intangible assets principally consist of costs in excess of
fair values of net assets acquired in purchase transactions and are generally
being amortized over forty years. Accumulated amortization aggregated
$34,184,000 and $27,184,000 at December 31, 1999 and 1998, respectively. The
company makes regular periodic assessments to determine if factors are present
which indicate that an impairment of intangibles may exist. If factors indicate
that an impairment may exist, the company makes an estimate of the related
future cash flows. The undiscounted cash flows, excluding interest, are compared
to the related book value including the intangibles. If such cash flows are less
than the book value, the company makes an estimate of the fair value of the
related business to determine the amount of impairment loss, if any, to be
recorded as a reduction of the recorded intangibles.
Use of estimates: The preparation of financial statements in conformity with
generally accepted accounting principles 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.
Financial instruments: The company enters 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
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 purchase commitments denominated in foreign
currencies. The differential between the interest to be received and the
interest to be paid under interest rate swap agreements is accrued as interest
rates change and is recognized as an adjustment to interest expense; the related
amount payable to or receivable from the counterparties is included in accrued
liabilities or other assets. Unrealized gains and losses on the forward exchange
contracts are deferred and recognized in income in the same period as the
related hedged foreign currency transaction.
Revenue recognition: Substantially all of the company's sales are recorded as
products are shipped or services are rendered. The percentage-of-completion
method of accounting is used in certain limited instances for
custom-manufactured products where, due to the nature of specific orders,
production and delivery schedules exceed normal schedules.
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.
<PAGE>
Note B - Inventories
Inventories at December 31 are summarized as follows:
1999 1998
---- ----
Finished goods $ 40,589,000 $ 35,925,000
Work in process 63,064,000 32,613,000
Raw materials 59,056,000 63,423,000
------------ ------------
Total inventories $162,709,000 $131,961,000
============ ============
If the first-in, first-out cost method, which approximates replacement cost, had
been used exclusively by the company, inventories would have aggregated
$172,422,000 and $140,819,000 at December 31, 1999 and 1998, respectively.
Note C - Properties and Equipment
A comparative summary of properties and equipment at December 31 is as follows:
1999 1998
---- ----
Land $ 6,167,000 $ 5,922,000
Buildings and improvements 52,662,000 47,785,000
Machinery and equipment 182,557,000 157,392,000
Accumulated depreciation (126,023,000) (113,732,000)
------------ ------------
Total properties and equipment $115,363,000 $ 97,367,000
============ ============
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 customers of the company's environmental products and fire
rescue operations (vehicle-related) and sign operations. A substantial portion
of the vehicle-related receivables is due from municipalities. Financing is
provided through sales-type lease contracts with terms that range typically as
follows:
Sign-related leases 3-5 years
Vehicle-related leases 2-10 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: $60,354,000 in
2000, $37,829,000 in 2001, $31,124,000 in 2002, $22,415,000 in 2003, $15,004,000
in 2004 and $32,955,000 thereafter. At December 31, 1999 and 1998, unearned
finance revenue on these leases aggregated $32,900,000 and $29,261,000,
respectively.
Note E - Debt
Short-term borrowings at December 31 consisted of the following:
1999 1998
---- ----
Commercial paper $210,602,000 $ 86,365,000
Notes payable 57,278,000 98,834,000
Current maturities of long-term debt 3,934,000 3,558,000
------------ ------------
Total short-term borrowings $271,814,000 $188,757,000
============ ============
<PAGE>
Long-term borrowings at December 31 consisted of the following:
1999 1998
---- ----
6.59% unsecured note payable in
annual installments of $10,000,000
in 2007-2011 $ 50,000,000
4.25% unsecured note payable in
quarterly installments ending in 2001 1,800,000 $ 2,856,000
7.59% unsecured note payable in 2001
($4,000,000) and 2002 ($8,000,000) 12,000,000 12,000,000
7.99% unsecured note payable in 2004 15,000,000 15,000,000
6.58% unsecured discounted note
payable in annual installments of
$1,000,000 ending in 2001 1,919,000 2,790,000
Floating rate (5.08% at December 31, 1999)
secured note payable in monthly
installments ending in 2004 6,907,000 6,591,000
Notes payable backed by long-term
credit lines 50,000,000 100,000,000
Other 718,000 1,473,000
------------ ------------
138,344,000 140,710,000
Less current maturities 3,934,000 3,558,000
------------ ------------
Total long-term borrowings $134,410,000 $137,152,000
============ ============
Aggregate maturities of long-term debt amount to approximately $3,934,000 in
2000, $6,985,000 in 2001, $9,522,000 in 2002, $1,527,000 in 2003, $66,376,000 in
2004 and $50,000,000 thereafter. The fair values of borrowings are not
substantially different from recorded amounts.
The 7.59% and 7.99% notes contain 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, 1999, 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 $24,888,000 in 1999, $18,600,000 in 1998 and
$16,800,000 in 1997. Weighted average interest rates on short-term borrowings
were 6.2% and 5.8% at December 31, 1999 and 1998, respectively. See Note H
regarding the company's utilization of derivative financial instruments relating
to outstanding debt.
At December 31, 1999, the company had unused credit lines of $365,000,000, of
which $30,000,000 expired on January 15, 2000, $201,000,000 expires June 17,
2000 and $134,000,000 expires June 17, 2004. Commitment fees, paid in lieu of
compensating balances, were insignificant.
Note F - Income Taxes
The provisions for income taxes consisted of the following:
1999 1998 1997
---- ---- ----
Current:
Federal $19,874,000 $17,419,000 $17,034,000
Foreign 3,759,000 2,486,000 2,138,000
State and local 2,473,000 2,904,000 2,626,000
----------- ----------- -----------
26,106,000 22,809,000 21,798,000
Deferred:
Federal 139,000 2,360,000 1,712,000
Foreign 347,000 1,619,000 1,994,000
State and local 267,000 50,000 374,000
----------- ----------- -----------
753,000 4,029,000 4,080,000
----------- ----------- -----------
Total income taxes $26,859,000 $26,838,000 $25,878,000
=========== =========== ===========
<PAGE>
Differences between the statutory federal income tax rate and the effective
income tax rate are summarized below:
1999 1998 1997
---- ---- ----
Statutory federal income tax rate 35.0% 35.0% 35.0%
State income taxes, net of federal
tax benefit 2.1 2.2 2.3
Tax-exempt interest (3.0) (3.0) (3.1)
Foreign sales corporation tax benefit (1.2) (1.3) (1.7)
Other, net (1.1) (1.8) (2.0)
---- ---- ----
Effective income tax rate 31.8% 31.1% 30.5%
==== ==== ====
The company had net current deferred income tax benefits of $2,632,000 and
$2,803,000 recorded in the balance sheet at December 31, 1999 and 1998,
respectively. The company paid income taxes of $21,933,000 in 1999, $24,419,000
in 1998 and $23,354,000 in 1997.
Net deferred tax liabilities (assets) comprised the following at December 31,
1999: Depreciation and amortization - $30,780,000; revenue recognized on lease
financing receivables and custom manufacturing contracts - $3,856,000; accrued
pension benefits $5,030,000; accrued expenses deductible in future periods -
$(9,236,000); and other - $(2,617,000).
Net deferred tax liabilities (assets) comprised the following at December 31,
1998: Depreciation and amortization - $27,366,000; revenue recognized on lease
financing receivables and custom manufacturing contracts - $4,974,000; accrued
pension benefits $2,437,000; accrued expenses deductible in future periods -
$(7,246,000); and other - $(122,000).
Income before income taxes consisted of the following:
1999 1998 1997
---- ---- ----
United States $70,840,000 $73,760,000 $72,165,000
Non-U.S. 13,556,000 12,474,000 12,682,000
----------- ----------- -----------
$84,396,000 $86,234,000 $84,847,000
=========== =========== ===========
Note G - Postretirement Benefits
The company and its subsidiaries sponsor a number of defined benefit retirement
plans covering certain of its salaried employees and hourly employees not
covered by plans under collective bargaining agreements. Benefits under these
plans are primarily based on final average compensation and years of service as
defined within the provisions of the individual plans. The company also
participates in several multiemployer retirement plans that provide defined
benefits to employees under certain collective bargaining agreements.
U.S. Benefit Plans
<TABLE>
The components of net periodic pension (credit) are summarized as follows:
<S> <C> <C> <C>
1999 1998 1997
---- ---- ----
Company-sponsored plans
Service cost $3,036,000 $2,546,000 $2,103,000
Interest cost 4,313,000 3,947,000 3,536,000
Expected return on plan assets (8,165,000) (7,225,000) (6,550,000)
Amortization of transition amount (230,000) (183,000) (183,000)
Other (8,000) (8,000) (107,000)
----------- ---------- ----------
(1,054,000) (923,000) (1,201,000)
Multiemployer plans 690,000 661,000 618,000
----------- ---------- ----------
Net periodic pension (credit) $ (364,000) $ (262,000) $ (583,000)
=========== ========== ==========
</TABLE>
<PAGE>
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.
1999 1998
---- ----
Projected benefit obligation,
January 1 $62,079,000 $53,137,000
Service cost 3,036,000 2,546,000
Interest cost 4,313,000 3,947,000
Actuarial(gain)loss (15,411,000) 4,506,000
Benefits paid (1,993,000) (2,057,000)
----------- -----------
Projected benefit obligation,
December 31 $52,024,000 $62,079,000
=========== ===========
Fair value of plan assets,
January 1 $72,903,000 $60,890,000
Actual return on plan assets (1,917,000) 13,454,000
Company contribution 3,000 616,000
Benefits paid (1,981,000) (2,057,000)
----------- -----------
Fair value of plan assets,
December 31 $69,008,000 $72,903,000
=========== ===========
Funded status of plan, December 31 $16,984,000 $10,824,000
Unrecognized actuarial gain (9,080,000) (3,739,000)
Unrecognized prior service cost (110,000) (118,000)
Unrecognized net transition obligation (1,308,000) (1,538,000)
----------- -----------
Net amount recognized as prepaid benefit
cost in the balance sheet $ 6,486,000 $ 5,429,000
=========== ===========
Plan assets consist principally of a broadly diversified portfolio of equity
securities, corporate and U.S. government obligations and guaranteed-return
insurance contracts. Included in plan assets at December 31, 1999 and 1998 were
653,400 shares of the company's common stock valued at $10,495,000 and
$17,887,000, respectively. Dividends paid on the company's common stock to the
pension trusts aggregated $484,000 and $463,000, respectively, for the years
ended December 31, 1999 and 1998.
The following significant assumptions were used in determining pension costs for
the three-year period ended December 31, 1999:
1999 1998 1997
---- ---- ----
Discount rate 6.8% 7.2% 7.8%
Rate of increase in
compensation levels 4% 4% 4%
Expected long-term rate of
return on plan assets 12% 12% 12%
The weighted average discount rates used in determining the actuarial present
value of all pension obligations at December 31, 1999 and 1998 were 8.1% and
6.8%, respectively.
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,
1999, was $3,993,000 in 1999, $3,790,000 in 1998 and $3,768,000 in 1997.
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 corporation 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 $3,929,000
and $3,238,000 at December 31, 1999 and 1998, respectively, were fully accrued.
The net periodic postretirement benefit costs have not been significant during
the three-year period ended December 31, 1999.
<PAGE>
Non-U.S. Benefit Plan
Victor Products 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.
Net periodic pension credits during the three-year period ended December 31,1999
were not significant. 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.
1999 1998
---- ----
Projected benefit obligation,
October 1 $40,520,000 $31,399,000
Service cost 696,000 758,000
Interest cost 2,308,000 2,354,000
Actuarial (gain) loss (3,430,000) 5,941,000
Employee contributions 112,000 120,000
Benefits paid (1,884,000) (1,796,000)
Increase (decrease) due to translation (1,254,000) 1,744,000
----------- -----------
Projected benefit obligation,
September 30 $37,068,000 $40,520,000
=========== ===========
Fair value of plan assets,
October 1 $39,222,000 $35,685,000
Actual return on plan assets 3,276,000 3,408,000
Company contribution 164,000 135,000
Employee contributions 112,000 120,000
Benefits paid (1,884,000) (1,796,000)
Plan expenses (124,000) (163,000)
Increase (decrease) due to translation (1,226,000) 1,833,000
----------- -----------
Fair value of plan assets,
September 30 $39,540,000 $39,222,000
=========== ===========
Funded status of plan, September 30 $ 2,472,000 $(1,298,000)
Unrecognized actuarial loss 2,794,000 6,658,000
----------- -----------
Net amount recognized as prepaid benefit
cost in the balance sheet $ 5,266,000 $ 5,360,000
=========== ===========
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
1999 and 1998:
1999 1998
---- ----
Discount rate 6% 7.5%
Rate of increase in
compensation levels 3.5% 4%
Expected long-term rate of
return on plan assets 8% 8%
The weighted average discount rates used in determining the actuarial present
value of all pension obligations at September 30, 1999 and 1998 were 6.5% and
6.0%, respectively.
<PAGE>
Note H - Derivative Financial Instruments
At December 31, 1999, the company had five agreements with financial
institutions to swap interest rates.
The first agreement is based on a notional amount of $25,000,000. This agreement
commenced in January 1997 and expires in January 2001. The company pays interest
at a fixed rate of 5.99% and receives interest at the three-month LIBOR rate.
The second agreement is also based on a notional amount of $25,000,000. This
agreement commenced in January 1997 and expires in January 2000. The company
pays interest at a fixed rate of interest of 5.92% and receives interest at the
three-month LIBOR rate, with a cap on the LIBOR rate of 7.50% throughout the
entire term of the swap.
The third agreement is based on a notional amount of $50,000,000. The company
pays interest at a fixed rate of 5.25% and receives interest at the three-month
LIBOR rate. The swap expires in October 2007. The agreement allows the
counterparty to cancel the swap at three-month intervals commencing in October
1999. This agreement terminated January 6, 2000 at the election of the
counterparty.
The fourth agreement is based on a notional amount of $25,000,000. The company
pays interest at a fixed rate of 5.13% and receives interest at the three-month
LIBOR rate. The swap expires in February 2008. The agreement allows the
counterparty to cancel the swap at three-month intervals commencing in February
2001. 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.
The fifth agreement is based on a notional amount of $25,000,000. The company
pays interest at a fixed rate of 5.15% and receives interest at the three-month
LIBOR rate. The swap expires in May 2008. The agreement allows the counterparty
to cancel the swap at three-month intervals commencing in May 2000.
At December 31, 1998, the company had similar swap agreements on notional
amounts totaling $150 million. The estimated cost (benefit) to terminate these
agreements was ($599,000) and $4,878,000 at December 31, 1999 and 1998,
respectively.
Note I - Stock-Based Compensation
The company's stock benefit plans, approved by the company's shareholders,
authorize the grant of benefit shares or units to key employees and directors.
The plan approved in 1988 authorized, until May 1998, the grant of up to
2,737,500 benefit shares or units (as adjusted for subsequent stock splits and
dividends). The plan approved in 1996 and amended in 1999 authorizes the grant
of up to 2,500,000 benefit shares or units until April 2006. These share or unit
amounts exclude amounts that were issued under predecessor plans. Benefit shares
or units include stock options, both incentive and non-incentive, stock awards
and other stock units.
Stock options are primarily granted at the fair market value of the shares on
the date of grant and become exercisable one year after grant at a rate of
one-half annually and are exercisable in full on the second anniversary date.
All options and rights must be exercised within ten years from date of grant. At
the company's discretion, vested stock option holders are permitted to elect an
alternative settlement method in lieu of purchasing common stock at the option
price. The alternative settlement method permits the employee to receive,
without payment to the company, cash, shares of common stock or a combination
thereof equal to the excess of market value of common stock over the option
purchase price.
The company has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" (APB 25). Under APB 25, no
compensation expense is recognized when the exercise price of stock options
equals the market price of the underlying stock on the date of grant.
Stock option activity for the three-year period ended December 31, 1999 follows
(number of shares in 000's, prices in dollars per share):
Option shares Weighted average price ($)
----------------------- --------------------------
1999 1998 1997 1999 1998 1997
---- ---- ---- ---- ---- ----
Outstanding at
beginning of year 2,025 2,036 2,185 18.80 17.98 14.49
Granted 489 180 411 18.57 23.56 20.80
Canceled or expired (35) (59) (36) 21.99 22.43 23.47
Exercised (167) (132) (524) 10.65 11.77 5.27
----- ----- -----
Outstanding at
end of year 2,312 2,025 2,036 19.29 18.80 17.98
===== ===== =====
Exercisable at
end of year 1,468 1,523 1,332 18.71 18.00 16.09
===== ===== =====
<PAGE>
For options outstanding at December 31, 1999, 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
-----------------------------------------------------
99-98 97-96 95-94 93-92 91-90 Aggregate
----- ----- ----- ----- ----- ---------
Number outstanding 661 792 182 310 367 2,312
Exercise price range ($):
High 26.13 25.38 24.38 20.62 13.69 26.13
Low 14.06 20.44 16.00 12.09 6.61 6.61
Weighted average:
Exercise price ($) 20.05 22.59 19.72 17.84 11.80 19.29
Remaining term (years) 9 7 5 3 2 6
The weighted average fair value of options granted was $3.58 per share during
1999, $5.24 per share during 1998 and $5.06 per share during 1997. The fair
value of those 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 6.4% in 1999, 4.6% in 1998, and 5.6% in 1997; dividend yield
of 4.8% in 1999, 2.5% in 1998 and 2.3% in 1997; market volatility of the
company's common stock of .23 in 1999, .20 in 1998 and .18 in 1997; and a
weighted average expected life of the options of approximately 7 years for 1997
through 1999. For purposes of pro forma disclosure, the estimated fair value of
the options is amortized to expense over the option's vesting period. On a pro
forma basis, the company's net income would have been $56,523,000 or $1.23 per
share for the year ended December 31, 1999, $58,202,000 or $1.27 per share for
the year ended December 31, 1998 and $57,930,000 or $1.26 per share for the year
ended December 31, 1997. The calculated pro forma impact on 1997-1999 net income
and net income per share amounts are not necessarily indicative of future
amounts until application of the disclosure rules are applied to all
outstanding, nonvested awards.
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
Financial Accounting Standard No. 123, "Accounting and Disclosure of Stock-Based
Compensation". 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.
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 company granted stock
award shares of 65,000 in 1999, 58,000 in 1998 and 45,000 in 1997. The fair
values of these shares were $1,712,000, $1,289,000 and $1,181,000, respectively.
Compensation expense related to stock award shares recorded during these periods
was $1,308,000, $1,173,000 and $971,000, respectively.
Under the 1988 plan, no benefit shares or units were available for future grant
during the three-year period ending December 31, 1999. Under the 1996 plan, the
following benefit shares or units were available for future grant: 1,040,000 at
December 31, 1999, 69,000 at December 31, 1998 and 258,000 at December 31, 1997.
<PAGE>
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, 1999 were as follows:
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Accumulated
Common Capital in Deferred other
stock excess of Retained Treasury stock comprehensive
par value par value earnings stock awards income
Balance at December 31, 1996 - ----------- ----------- ------------ ------------ ----------- -------------
45,986,000 shares issued $45,986,000 $57,138,000 $190,181,000 $(14,404,000) $(1,508,000) $(4,604,000)
Net income 58,969,000
Cash dividends declared (22,718,000)
Exercise of stock options:
Cash proceeds 294,000 1,571,000
Exchange of shares 230,000 672,000 (902,000)
Stock awards granted 45,000 1,136,000 (1,181,000)
Tax benefits related to stock
compensation plans 1,805,000
Retirement of treasury stock (54,000) (1,293,000) 1,347,000
Purchases of 227,000 shares of
treasury stock (5,291,000)
Amortization of deferred stock 971,000
awards
Foreign currency translation
adjustment, net (8,173,000)
Other (445,000)
----------- ----------- ------------ ------------ ----------- -------------
Balance at December 31, 1997 -
46,501,000 shares issued 46,501,000 61,029,000 226,432,000 (19,695,000) (1,718,000) (12,777,000)
Net income 59,396,000
Cash dividends declared (32,462,000)
Exercise of stock options:
Cash proceeds 100,000 1,292,000
Exchange of shares 31,000 129,000 (160,000)
Stock awards granted 58,000 1,231,000 (1,289,000)
Tax benefits related to stock
compensation plans 265,000
Retirement of treasury stock (22,000) (482,000) 504,000
Purchases of 444,000 shares of
treasury stock (9,466,000)
Amortization of deferred stock
awards 1,173,000
Foreign currency translation
adjustment, net 2,059,000
Other (3,000) (344,000)
----------- ----------- ------------ ------------ ----------- ------------
Balance at December 31, 1998 -
46,668,000 shares issued 46,668,000 63,461,000 253,366,000 (29,161,000) (1,834,000) (10,718,000)
Net income 57,537,000
Cash dividends declared (33,952,000)
Exercise of stock options:
Cash proceeds 147,000 1,472,000
Exchange of shares 21,000 99,000 (120,000)
Stock awards granted 65,000 1,647,000 (1,712,000)
Tax benefits related to stock
compensation plans 363,000
Retirement of treasury stock (12,000) (280,000) 292,000
Purchases of 141,000 shares of
treasury stock (3,582,000)
Issued 706,000 shares from
treasury for purchases of
companies 15,715,000
Amortization of deferred stock
awards 1,308,000
Foreign currency translation
adjustment, net (6,590,000)
Other (167,000)
----------- ----------- ------------ ------------ ----------- ------------
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)
=========== =========== ============ ============ =========== ============
</TABLE>
<PAGE>
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. This plan replaces a similar plan approved in 1988. The rights
are not exercisable until the rights distribution date, defined as the earlier
of: 1) the tenth day following a public announcement that a person or group of
affiliated or associated persons acquired or obtained the right to acquire
beneficial ownership of 20% or more of the outstanding common stock or 2) the
tenth day following the commencement or announcement of an intention to make a
tender offer or exchange offer, the consummation of which would result in the
beneficial ownership by a person or group of 30% or more of such outstanding
common shares. Each right, when exercisable, entitles the holder to purchase
from the company one one-hundredth of a share of Series A Preferred stock of the
company at a price of $100 per one one-hundredth of a preferred share, subject
to adjustment. The company is entitled to redeem the rights at $.10 per right,
payable in cash or common shares, at any time prior to the expiration of twenty
days following the public announcement that a 20% position has been acquired. In
the event that the company is acquired in a merger or other business combination
transaction or 50% or more of its consolidated assets or earning power is sold,
proper provision will be made so that each holder of a right will thereafter
have the right to receive, upon the exercise thereof at the then current
exercise price of a right, that number of shares of common stock of the
acquiring company which at the time of such transaction would have a market
value of two times the exercise price of the right. The rights expire on August
18, 2008 unless earlier redeemed by the company. Until exercised, the holder of
a right, as such, will have no rights as a shareholder, including, without
limitation, the right to vote or to receive dividends.
Note K - Acquisitions
During the three-year period ended December 31, 1999, the company made the
following acquisitions, principally all for cash, except as otherwise noted. In
July 1999, the company acquired Clapp & Haney Tool Company ("Clapp & Haney") for
cash and stock. Located near Toledo, Ohio, Clapp & Haney is the leading U.S.
manufacturer and marketer of polycrystalline diamond and cubic boron nitride
consumable tooling. The company also made a small Safety Products Group
acquisition during the early part of 1999. As a result of the 1999 acquisitions,
the company recorded approximately $4.9 million of working capital, $12.2
million of fixed and other assets and $56.1 million of costs in excess of fair
value. The assigned values of these acquisitions are based upon preliminary
estimates. In January 1998, the company acquired Saulsbury Fire Equipment
Corporation ("Saulsbury") and Five Star Manufacturing Company ("Five Star"). In
August 1998, the company acquired Jetstream of Houston ("Jetstream"). Saulsbury,
located in Tully, New York, is the leading manufacturer of stainless
steel-bodied fire trucks and rescue vehicles in the United States. Five Star,
based in Youngsville, North Carolina, manufactures mechanical and recirculating
air street sweepers. Located in Houston, Texas, Jetstream is a leading
manufacturer of high-pressure water blasting equipment. The company also made
several small Safety Products Group acquisitions during the last half of the
year. As a result of the 1998 acquisitions, the company recorded approximately
$10.5 million of working capital, $8.0 million of fixed and other assets and
$47.9 million of costs in excess of fair value. In July 1997, the company
acquired the equity of Pauluhn Electric Mfg. Co. ("Pauluhn"). Pauluhn, based
near Houston, Texas, is a manufacturer and marketer of hazardous area and
explosion proof electrical products. In October 1997, the company also acquired
the equity of Akusta IFE, Ltd. ("Akusta"). Akusta, based in the United Kingdom,
is a supplier of microprocessor-based public address, general alarm, paging and
intercom systems for use in hazardous environments. As a result of the 1997
acquisitions, the company recorded approximately $6.6 million of working
capital, $.8 million of fixed and other assets and $29.2 million of costs in
excess of fair value.
All of the acquisitions in the three-year period ended December 31, 1999 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 1999 and 1998
acquisitions occurred January 1, 1998, the company estimates that reported
consolidated net sales would have been increased by 1% and 4% in 1999 and 1998,
respectively, while reported net income would have been increased by 1% in 1999
and 4% in 1998. The company made no significant changes to the values originally
assigned to assets and liabilities recorded as a result of acquisitions made
prior to 1999.
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.
<PAGE>
Note M - Segment and Related Information
The company has five operating segments as defined under Statement of Financial
Accounting Standards (SFAS) No. 131, "Disclosures about Segments of an
Enterprise and Related Information". Business units are organized under each
segment because they share certain characteristics, such as technology,
marketing, and product application, which create long-term synergies. The
principal activities of the company's operating segments are as follows:
Environmental Products - Environmental Products manufactures a variety of
self-propelled street cleaning vehicles, vacuum loader vehicles and municipal
catch basin/sewer cleaning vacuum trucks. 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.
Sign - Sign manufactures for sale or lease illuminated, non-illuminated and
electronic advertising sign displays primarily for commercial and industrial
markets. It also enters contracts to provide maintenance service for the signs
it manufactures as well as for signs manufactured by others.
Tool - Tool manufactures a variety of perishable tools which include die
components for the metal stamping industry, a large selection of precision metal
products for nonstamping needs and a line of precision cutting and grooving
tools including polycrystalline diamond and cubic boron nitride products for
superhard applications. The group's products are sold predominately to
industrial markets.
Net sales by operating segment reflects 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 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, 1999.
Non-U.S. sales, which include sales exported from the U.S. and sales made by
non-U.S. operations, aggregated $266,736,000 in 1999, $267,886,000 in 1998 and
$261,218,000 in 1997. Sales exported from the U.S. aggregated $106,427,000 in
1999, $99,459,000 in 1998 and $89,163,000 in 1997.
<PAGE>
A summary of the company's operations by segment for the three-year period ended
December 31, 1999 is as follows:
<TABLE>
<S> <C> <C> <C>
1999 1998 1997
---- ---- ----
Net sales
Environmental Products $ 247,097,000 $ 219,812,000 $ 185,629,000
Fire Rescue 310,008,000 318,038,000 311,879,000
Safety Products 261,940,000 253,020,000 221,624,000
Sign 84,687,000 65,953,000 66,349,000
Tool 158,164,000 145,964,000 139,431,000
-------------- -------------- --------------
Total net sales $1,061,896,000 $1,002,787,000 $ 924,912,000
============== ============== ==============
Operating income
Environmental Products $ 24,454,000 $ 19,559,000 $ 15,894,000
Fire Rescue 10,900,000 14,526,000 26,877,000
Safety Products 41,384,000 40,601,000 29,779,000
Sign 5,153,000 3,878,000 3,306,000
Tool 33,303,000 31,426,000 30,841,000
Corporate expense (8,689,000) (8,240,000) (7,023,000)
-------------- -------------- --------------
Total operating income 106,505,000 101,750,000 99,674,000
Interest expense (23,339,000) (19,336,000) (17,163,000)
Other income 1,230,000 3,820,000 2,336,000
-------------- -------------- --------------
Income before income
taxes $ 84,396,000 $ 86,234,000 $ 84,847,000
============== ============== ==============
Depreciation and amortization
Environmental Products $ 4,609,000 $ 3,869,000 $ 3,046,000
Fire Rescue 5,299,000 4,605,000 4,001,000
Safety Products 8,925,000 8,210,000 7,030,000
Sign 1,440,000 1,507,000 1,628,000
Tool 6,115,000 4,448,000 4,130,000
Corporate 849,000 947,000 710,000
-------------- -------------- --------------
Total depreciation and
amortization $ 27,237,000 $ 23,586,000 $ 20,545,000
============== ============== ==============
Identifiable assets
Manufacturing activities
Environmental Products $ 143,320,000 $ 139,819,000 $ 102,237,000
Fire Rescue 200,950,000 178,818,000 146,233,000
Safety Products 227,073,000 224,605,000 199,113,000
Sign 24,191,000 22,896,000 21,485,000
Tool 155,095,000 85,013,000 80,554,000
Corporate 12,500,000 10,803,000 11,193,000
--------------- -------------- --------------
Total manufacturing
activities 763,129,000 661,954,000 560,815,000
--------------- -------------- --------------
Financial services activities
Environmental Products 66,096,000 51,499,000 37,606,000
Fire Rescue 125,165,000 114,163,000 118,937,000
Sign 6,571,000 8,383,000 10,547,000
--------------- -------------- --------------
Total financial services
activities 197,832,000 174,045,000 167,090,000
--------------- -------------- --------------
Total identifiable assets $ 960,961,000 $ 835,999,000 $ 727,905,000
=============== ============== ==============
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C> <C>
1999 1998 1997
---- ---- ----
Additions to long-lived assets
Environmental Products $ 3,241,000 $ 32,685,000 $ 1,516,000
Fire Rescue 4,598,000 18,603,000 3,223,000
Safety Products 13,496,000 17,348,000 38,232,000
Sign 952,000 1,236,000 1,430,000
Tool 70,243,000 6,404,000 5,127,000
Corporate 26,000 33,000 83,000
--------------- ---------------- --------------
Total additions to long-lived
assets $ 92,556,000 $ 76,309,000 $ 49,611,000
=============== ================ ==============
Financial revenues (included in
net sales)
Environmental Products $ 5,170,000 $ 3,904,000 $ 3,254,000
Fire Rescue 7,166,000 7,606,000 7,876,000
Sign 1,006,000 1,230,000 2,090,000
--------------- ---------------- --------------
Total financial revenues $ 13,342,000 $ 12,740,000 $ 13,220,000
=============== ================ ==============
</TABLE>
<PAGE>
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 operations by geographic area for the three-year
period ended December 31, 1999 is as follows:
<TABLE>
<S> <C> <C> <C>
1999 1998 1997
---- ---- ----
United States
Net sales $901,587,000 $834,360,000 $752,857,000
Operating income 93,165,000 87,077,000 85,849,000
Long-lived assets 360,013,000 289,899,000 237,373,000
All non-U.S. (principally
Europe)
Net sales $160,309,000 $168,427,000 $172,055,000
Operating income 13,340,000 14,673,000 13,825,000
Long-lived assets 56,979,000 60,848,000 54,820,000
</TABLE>
The company had no significant amounts of sales to or long-lived assets in an
individual country outside of the United States.
Note N - Net Income per Share
The following table summarizes the information used in computing basic and
diluted income per share:
<TABLE>
<CAPTION>
Year ending December 31,
---------------------------------------------------
<S> <C> <C> <C>
1999 1998 1997
---- ---- ----
Numerator for both basic
and diluted income per share
computations - net income $57,537,000 $59,396,000 $58,969,000
=========== =========== ===========
Denominator for basic income
per share - weighted average
shares outstanding 45,775,000 45,568,000 45,332,000
Effect of employee stock options
(dilutive potential common shares) 183,000 278,000 508,000
----------- ----------- -----------
Denominator for diluted income
per share - adjusted shares 45,958,000 45,846,000 45,840,000
=========== =========== ===========
</TABLE>
Note O - Commitments
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 $8,037,000 in 1999, $8,426,000 in 1998 and $7,613,000 in 1997. Sublease
income and contingent rentals relating to operating leases were insignificant.
At December 31, 1999, minimum future rental commitments under operating leases
having noncancelable lease terms in excess of one year aggregated $31,826,000
payable as follows: $7,258,000 in 2000, $5,481,000 in 2001, $3,637,000 in 2002,
$2,879,000 in 2003, $2,720,000 in 2004 and $9,851,000 thereafter.
At December 31, 1999, the company had outstanding standby letters of credit
aggregating $22,300,000 principally to act as security for retention levels
related to casualty insurance policies and to guarantee the performance of
subsidiaries which engage in export transactions to foreign governments and
municipalities.
<PAGE>
Note P - Selected Quarterly Data (Unaudited) (in thousands of dollars except per
share amounts)
<TABLE>
<CAPTION>
For the three-month period ended
-----------------------------------------------------------------------------------------------------
1999 1998
----------------------------------------------- ------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
March June September December March June September December
31 30 30 31 31 30 30 31
-------- -------- -------- -------- -------- -------- -------- --------
Net sales $253,294 $265,439 $260,938 $282,225 $231,230 $250,121 $248,914 $272,522
Gross margin 77,075 79,281 79,023 85,982 71,050 79,595 76,353 81,130
Net income 13,047 13,692 13,789 17,009 10,846 16,013 16,271 16,266
Per share data:
Net income - .29 .30 .30 .37 .24 .35 .36 .36
diluted
Dividends paid .1850 .1850 .1850 .1850 .1775 .1775 .1775 .1775
Market price
range
High 28 1/16 26 3/16 22 3/8 20 1/8 24 24 5/8 25 27 1/2
Low 20 19 3/16 18 11/16 15 1/16 20 1/4 21 1/8 20 1/8 20
</TABLE>
<PAGE>
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, 1999 and 1998 and the related
consolidated statements of income, comprehensive income and cash flows for each
of the three years in the period ended December 31, 1999. 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, 1999 and 1998, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1999 in conformity with accounting
principles generally accepted in the United States.
Ernst & Young LLP
Chicago, Illinois
January 26, 2000
<PAGE>
Federal Signal Corporation and Subsidiaries
Financial Review
Consolidated Results of Operations
Federal Signal Corporation's net sales increased to $1.06 billion in 1999 from
$1.0 billion in 1998. Net income declined 3% to $57.5 million in 1999, or $1.25
per share on a diluted basis, compared to $59.4 million in 1998, or $1.30 per
share on a diluted basis. This decline was principally a result of lower
earnings in the company's Fire Rescue Group. The 1999 sales increase of 6% was a
result of a 1% increase in prices and a 5% increase in volume including 3%
relating to added volume from acquired businesses. Sales to customers in the
United States increased 8% in 1999 while sales to non-U.S. customers declined
slightly. Incoming orders also increased 6% in 1999 with orders from U.S.
customers increasing 5% and orders from non-U.S. customers increasing 7%.
In 1998, net sales increased 8% to $1.0 billion compared to the $925 million
recorded in 1997. Net income in 1998 increased 1% to $59.4 million, or $1.30 per
share on a diluted basis. This compares to 1997's net income of $59.0 million,
or $1.29 per share. The 8% sales increase in 1998 resulted from a 4% increase in
volume and 4% due to acquisitions of businesses. Sales to customers in the
United States increased 11% in 1998 including the effects of acquisitions. Sales
to non-U.S. customers increased 3%. Orders from U.S. customers increased 15% in
1998 about half of which resulted from newly acquired businesses; orders from
non-U.S. customers declined 8% in 1998.
In managing its businesses, the company recognizes that value creation is
driven, in large part, by sales growth and efficient utilization of resources.
In managing its resources, the principal value driver is increasing operating
margins and then maintaining them at appropriate high levels. The distinct
differences in the cost structures of the company's businesses and varying
growth rates, including those caused by acquisitions, can affect the comparisons
between years in the gross margin ratio and the ratio of selling, general and
administrative (SG&A) expenses. Accordingly, the company will continue to focus
primarily on improving operating margins when reviewing its total company
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):
<TABLE>
<S> <C> <C> <C> <C> <C>
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
Net sales 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales 69.7 69.3 68.6 69.2 69.6
----- ----- ----- ----- -----
Gross profit margin 30.3 30.7 31.4 30.8 30.4
SG&A expenses 20.3 20.6 20.6 19.3 18.6
----- ----- ----- ----- -----
Operating margin 10.0% 10.1% 10.8% 11.5% 11.8%
===== ===== ===== ===== =====
</TABLE>
Gross profit margins of 30.3% in 1999 and 30.7% in 1998 are somewhat lower than
the average of the 1995-1997 period (30.9%). SG&A expenses as a percent of sales
improved somewhat in 1999, declining to 20.3%; this compares to 20.6% in 1998
and the 1995-1997 average of 19.5%. Since operating margins have been declining
from the company's high achieved in 1995, an explanation of that trend is
warranted. The decline in the company's operating margin since 1995, for the
most part, reflects lower operating margins of the Fire Rescue Group. Operating
margins of the company's businesses outside of the Fire Rescue Group were 12.7%
in both 1999 and 1998 compared to an average of 12.4% in the 1995-1997 period.
In 1997 and 1998 and again in 1999, significant operating issues in the Fire
Rescue Group adversely affected the company's margins. Chassis and related
component supply shortages, while affecting many of the company's vehicle-based
businesses in 1997 and 1998, had its most severe impact on the U.S.-based fire
rescue business. Shortages of components and skilled people and installation of
an enterprise resource planning system adversely affected Fire Rescue sales and
earnings in 1999. There were also other factors that caused changes in the
company's operating margins. In 1997, gross margins and the ratio of SG&A
expenses both increased largely as a result of: 1) the effects of the
acquisitions of Victor Products and Pauluhn and 2) the additive effect on gross
margin and SG&A expenses from significant commissions relating to certain large
fire rescue vehicle sales.
While operating income grew 5% in 1999, other income declined sharply from the
$3.8 million reported in 1998, which included gains from the settlement of
litigation claims and from the sales of land and other underutilized assets.
<PAGE>
Interest expense increased $4.0 million in 1999 largely as a result of
borrowings related to acquisitions of businesses for cash in 1999,
production-related increases in inventories and increases in financial services
assets, partially offset by lower interest rates. The 1998 increase in interest
expense occurred largely because of increased borrowings caused by acquisitions
of businesses for cash and increases in financial services assets. Weighted
average interest rates on short-term borrowings were 5.4% in 1999 and 5.8% in
1998 and 1997.
The company's effective tax rate of 31.8% increased in 1999 from the 31.1% in
1998 as a result of a few individually insignificant factors, some of which are
not expected to recur. The increase in 1998 to 31.1% from the 30.5% in 1997 was
largely due to benefits recorded in 1997 relating to the company's amendment of
certain previously filed federal income tax returns based upon a refined method
of determining income on its export sales.
At the end of 1999, 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 increased the discount
rate to 8.1% from the 6.8% used at the end of 1998 for its U.S. plan because of
the higher interest rate environment experienced at the end of 1999. The company
expects that the change in assumptions will not have a significant impact on
2000 results of operations.
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, outdoor warning, municipal
emergency signal products, parking systems, signage and fire rescue products.
Group Operations
Four of the company's five operating segments achieved higher sales and earnings
in 1999 with Environmental Products and Sign sales and earnings increasing
significantly above 1998. Fire Rescue's sales were moderately lower and its
earnings declined significantly.
Environmental Products
Environmental Products sales and earnings increased 12% and 25%, respectively,
in 1999. Orders increased 5%. Sales and earnings from municipal sewer cleaners
increased significantly in 1999, due in part from a very large backlog at the
beginning of the year; the group's results also benefited from a 1998
acquisition of a manufacturer of high pressure blasting systems. Offsetting a
part of these increases were lower sales and a profit decline in industrial
vacuum trucks reflecting weak markets for this product line in 1999. The group's
1999 improvements follow sales and earnings increases in 1998. Sales and
earnings of sewer cleaners and industrial vacuum trucks in 1998 improved
significantly over 1997. The acquisitions of Five Star and Jetstream also
contributed to 1998 sales and earnings increases. Sewer cleaner orders outpaced
shipments in 1998, which were negatively affected by the lack of commercial
truck chassis availability in late 1997 and into 1998. Chassis supply
constraints substantially abated by year-end 1998 and sewer cleaner backlogs
were at record levels at December 31, 1998.
Fire Rescue
Fire Rescue sales declined 3% and earnings fell 25% in 1999. Fire Rescue orders
improved 6% as markets remained active throughout 1999. The group's sales and
earnings declines reflect the significant production problems experienced
throughout the year by Emergency One. Component supply problems continued into
1999 and Emergency One's April 1, 1999 implementation of an enterprise resource
planning system and shortages of qualified workers also had a negative effect on
production. Emergency One saw fourth quarter 1999 production and shipments
improve substantially over levels achieved in the first part of 1999 and expects
to attain improving levels of performance in 2000. Fire Rescue sales increased
moderately in 1998 while earnings declined from 1997 levels substantially as a
result of chassis and related component supply shortages. Fire Rescue sales in
1998 were up over 1997 largely as a result of the acquisition of Saulsbury Fire
in January 1998; Saulsbury's operating margin in 1998 was well below the rate
achieved by the remainder of the group and contributed to the group's margin
decline.
<PAGE>
Safety Products
Safety Products Group sales increased 4% and earnings increased 2% in 1999.
Orders increased 4%. The group's emergency vehicle signal, parking and outdoor
warning system product lines saw significant sales and earnings gains in 1999.
These improvements were partially offset in 1999 by lower sales and earnings of
hazardous area lighting products, which resulted from very weak energy-related
market conditions, and lower earnings from sales of hazardous liquid containment
products. These results follow the group's substantial increases in sales and
earnings in 1998 when all of the group's businesses increased sales and
earnings. The group's European warning lights business and hazardous area
lighting business saw dramatic earnings improvements on strong sales gains in
1998. Profitability of the hazardous liquid containment business also improved
in 1998.
Sign
The Sign Group's sales increased 28% and earnings increased 33% in 1999 as
orders increased 13% in a healthy market and the group reduced its backlogs.
Sign's 1998 earnings increased strongly on sales that were about even with 1997.
Continued aggressive cost reduction programs, including closure of a
manufacturing facility, and improved project management were principal reasons
for the increased 1998 earnings. In January 2000, the company announced it is
seeking buyers for the Sign Group due to the company focusing its growth
strategies into its other groups.
Tool
Tool Group sales and earnings increased 8% and 6%, respectively, in 1999; orders
increased 7%. The mid-1999 acquisition of the Clapp & Haney Tool Company more
than offset the effects of slow markets, which produced lower sales and earnings
in some of the group's other tool businesses. Excluding the effect of the
acquisition in 1999, U.S. sales increased 1% while non-U.S. sales declined 5%
reflecting lower automotive die build programs in Germany and Japan. Tool sales
and earnings increased modestly in 1998. U.S. sales grew 3% in 1998 reflecting a
more difficult industrial market while non-U.S. sales grew 11%. Automotive die
build programs in Germany and Japan bolstered non-U.S. sales in 1998.
Financial Services Activities
The company maintains a large investment ($197.8 million and $174.0 million at
December 31, 1999 and 1998, respectively) in lease financing and other
receivables which are generated principally by its environmental products and
fire rescue operations with the remainder generated by its sign operations. For
the five-year period ending December 31, 1999, these assets continued to be
leveraged in accordance with the company's stated financial objectives (see
further discussion in "Financial Position and Cash Flow").
Financial services assets have repayment terms generally ranging from two to ten
years. The increases in these assets resulted from increasing sales of
environmental and fire rescue products as well as continuing acceptance by
customers of the benefits of using the company as their source of financing
vehicle purchases.
Financial Position and Cash Flow
The company emphasizes generating strong cash flows from operations, reaching a
record $75.5 million in 1998. Cash flow from operations declined to $57.7
million in 1999 as inventory levels increased to support higher production in
vehicle businesses, particularly Fire Rescue. At December 31, 1999 the company's
primary working capital (accounts receivable and inventory less accounts
payable) as a percent of sales increased somewhat over 1998's percent. The
increase is largely because of carrying higher Fire Rescue inventories. The
company expects improvement in its operating cash flow as it continues to focus
aggressively on earnings growth as well as working capital management.
During the 1995-1999 period, the company utilized its strong cash flows from
operations 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) increase its investment in financial services activities;
4) pay increasing amounts in cash dividends to shareholders; and 5) repurchase a
small percentage of its outstanding common stock each year.
<PAGE>
Cash flows for the five-year period ending December 31, 1999 are summarized as
follows (in millions):
<TABLE>
<S> <C> <C> <C> <C> <C>
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
Cash provided by (used for):
Operating activities $ 57.7 $ 75.5 $ 64.2 $ 61.4 $ 62.9
Investing activities (105.1) (93.0) (38.4) (54.2) (88.1)
Financing activities 40.9 22.2 (27.5) (4.1) 29.9
</TABLE>
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.
One of the company's financial objectives is to maintain a strong financial
position. At December 31, 1999, the company's debt-to-capitalization ratio of
its manufacturing operations was 42% compared to 37% a year earlier. The
increase largely reflects the $58 million used for acquisitions of businesses
during 1999; the company expects to reduce the debt-to-capitalization ratio of
its manufacturing operations during 2000 to under 40%. 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, 1999 and 1998, the company's
debt-to-capitalization ratio for its financial services activities was 87%.
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 1.3 at December 31, 1999 and 1.6 at December
31, 1998. The decline in 1999 is largely due to additional short-term borrowings
incurred primarily to fund acquisitions. 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.
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 currency forward
exchange 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.
The company uses interest rate swap agreements to reduce interest rate risk.
Interest rate swaps change the fixed/floating interest rate mix of the company's
debt portfolio. At December 31, 1999, the company was a party to interest rate
swap agreements with aggregate notional amounts totaling $150,000,000. See Note
H to the consolidated financial statements for a description of these interest
rate swap agreements.
The company manages its exposure to interest rate movements by maintaining a
proportionate relationship between fixed debt to total debt within established
percentages. The company uses actual fixed rate borrowings as well as interest
rate swap agreements to provide fixed interest rates.
A substantial portion of the company's debt is 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 portion of
floating rate debt, since a rise in borrowing rates would normally correspond
with a rise in lending rates in a reasonable period.
<PAGE>
Significant interest rate sensitive instruments at December 31, 1999 and 1998
were as follows (dollars in millions):
<TABLE>
<CAPTION>
1999 1998
------------------------------------------------------------------------------- ---------------
Fair Fair
2000 2001 2002 2003 2004 Thereafter Total value Total value
---- ---- ---- ---- ---- ---------- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Long-term debt
Fixed rate
Principal $2.5 $5.6 $8.1 $.1 $15.1 $50.0 $81.4 $74.7 $34.1 $36.4
Average interest rate 6.9% 7.0% 7.0% 6.9% 6.9% 6.6% 6.9% 7.7%
Variable rate
Principal $1.4 $1.4 $1.4 $1.4 $51.3 $56.9 $56.9 $106.6 $106.6
Average interest rate 6.1% 6.1% 6.1% 6.1% 6.2% 6.1% 5.9%
Short-term debt -
variable rate
Principal $267.9 $267.9 $267.9 $185.2 $185.2
Average interest rate 6.2% 6.2% 5.8%
Interest rate swaps (pay
fixed, receive variable)
Notional amount $25.0 $25.0 $100.0 $150.0 $.6 $150.0 $(4.9)
Average pay rate 5.9% 6.0% 5.2%
Average receive rate 6.2% 6.2% 6.1%
</TABLE>
The company did not have a significant amount of forward exchange contracts
outstanding at December 31, 1999.
Other Matters
Asia/Pacific
The company has observed that events in the financial markets relating to the
Asia/Pacific Rim region have generated interest in the potential impact on the
company's future sales and earnings. In 1999, orders from customers in this
region approximated 3% of total company orders, down from 4% in 1998 and 6% in
1997. The company believes that the general economies of the Asia/Pacific Rim
have essentially stabilized and appear to be improving.
Year 2000
The Year 2000 ("Y2K") issue refers to the risk that systems, products and
equipment using date-sensitive software or computer chips with two-digit date
fields may recognize a date using "00" as the year 1900 rather than the year
2000. This situation could result in systems failures, miscalculations and
business interruptions that could have a materially adverse impact on the
company.
The company did not experience and does not believe it will experience any
significant adverse effects from Y2K-related incidents.
The costs of the company's Year 2000 transition program were essentially funded
with cash flows from operations. Some of these costs related solely to the
modification of existing systems, while others were for new systems, which
improve business functionality. In total, these costs were not substantially
different from the normal, recurring costs incurred for systems development and
implementation. As a result, these costs did not have a material adverse effect
on the company's overall results of operations or cash flows.
New accounting pronouncements
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities", the adoption of
which will be required by no later than the beginning of 2001. This statement
standardizes the accounting treatment for derivative instruments. The company
has not yet determined the effects, if any, this statement will have on its
reported results of operations, nor when it will adopt the provisions of this
statement.
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
--------------------------- ----------------
Akusta IFE, Ltd. United Kingdom
Aplicaciones Tecnologicas VAMA S.A. Spain
Bronto Skylift Oy Ab Finland
Clapp & Haney Tool Company Ohio
Dayton Progress Canada, Ltd. Ontario, Canada
Dayton Progress Corporation Ohio
Dayton Progress International Corporation Ohio
Dayton Progress (U.K.), Ltd. United Kingdom
Dico Corporation Michigan
Dunbar-Nunn Corporation California
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.
Five Star Manufacturing North Carolina
Guzzler Manufacturing, Inc. Alabama
Jamestown Punch and Tooling, Inc. New York
Jetstream of Houston Texas
Justrite Manufacturing Company, L.L.C. Delaware
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
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
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 26, 2000, included in
the Federal Signal Corporation Annual report to Shareholders for the year ended
December 31, 1999.
Our audits also included the financial statement schedule of Federal Signal
Corporation listed in Item 14(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 and
33-89509) pertaining to the Stock Option Plan and Employee Savings and
Investment Plans of our report dated January 26, 2000, with respect to the
consolidated financial statements incorporated herein 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 29, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Registrant's consolidated condensed balance sheet as of December 31, 1999 and
consolidated condensed statement of income for the twelve months ended December
31, 1999, and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 8764
<SECURITIES> 0
<RECEIVABLES> 169003
<ALLOWANCES> 3321
<INVENTORY> 162709
<CURRENT-ASSETS> 346137 <F1>
<PP&E> 241386
<DEPRECIATION> 126023
<TOTAL-ASSETS> 960961
<CURRENT-LIABILITIES> 269463 <F1>
<BONDS> 134410
0
0
<COMMON> 46889
<OTHER-SE> 307144
<TOTAL-LIABILITY-AND-EQUITY> 960961
<SALES> 1061896
<TOTAL-REVENUES> 1061896
<CGS> 740535
<TOTAL-COSTS> 740535
<OTHER-EXPENSES> 214856
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 23339
<INCOME-PRETAX> 84396
<INCOME-TAX> 26859
<INCOME-CONTINUING> 57537
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 57537
<EPS-BASIC> 1.26
<EPS-DILUTED> 1.25
<FN>
<F1>MANUFACTURING OPERATIONS ONLY
</FN>
</TABLE>
