FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 (Mark One) x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2001 OR o 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 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, IL 60523 (Address of principal executive offices) (Zip code) (630) 954-2001 (Registrant's telephone number including area code) Not applicable (Former name, former address, and former fiscal year, if changed since last report) 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 the number of shares outstanding of each of the Registrant's classes of common stock, as of the latest practicable date. Title Common Stock, $1.00 par value 45,600,000 shares outstanding at July 31, 2001
Part I. Financial Information Item 1. Financial Statements INTRODUCTION The consolidated condensed financial statements of Federal Signal Corporation and subsidiaries included herein have been prepared by the Registrant, without an audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations, although the Registrant believes that the disclosures are adequate to make the information presented not misleading. It is suggested that these consolidated condensed financial statements be read in conjunction with the consolidated financial statements and the notes thereto included in the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 2000.
<TABLE> <CAPTION> FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited) Three months ended June 30, Six months ended June 30, 2001 2000 2001 2000 <S> <C> <C> <C> <C> Net sales $ 286,817,000 $ 286,825,000 $ 544,824,000 $ 547,006,000 Costs and expenses: Cost of sales (201,136,000) (198,039,000) (379,203,000) (375,413,000) Selling, general and administrative (54,835,000) (56,755,000) (110,919,000) (110,910,000) ----------- ----------- ----------- ----------- Operating income 30,846,000 32,031,000 54,702,000 60,683,000 Interest expense (6,705,000) (7,992,000) (14,515,000) (14,962,000) Other income (expense), net 31,000 176,000 127,000 (1,066,000) ----------- ----------- ----------- ----------- Income from continuing operations before income taxes 24,172,000 24,215,000 40,314,000 44,655,000 Income taxes (7,460,000) (8,017,000) (11,976,000) (14,694,000) ----------- ----------- ----------- ----------- Income from continuing operations 16,712,000 16,198,000 28,338,000 29,961,000 Income from discontinued operations, net of tax 307,000 172,000 307,000 1,111,000 Cumulative effect of change in accounting (844,000) ----------- ----------- ----------- ----------- Net income $ 17,019,000 $ 16,370,000 $ 28,645,000 $ 30,228,000 =========== =========== =========== =========== COMMON STOCK DATA: Basic and diluted net income per share: Income from continuing operations $.37 $.36 $.62 $.66 Income from discontinued operations .01 .01 .02 Cumulative effect of change in accounting (.02) ---- ---- ---- ---- Net income* $.37 $.36 $.63 $.66 ==== ==== ==== ==== Weighted average common shares outstanding Basic 45,541,000 45,307,000 45,476,000 45,460,000 Diluted 45,709,000 45,436,000 45,641,000 45,555,000 Cash dividends per share $.1950 $.1900 $.3900 $.3800 of common stock * amounts above may not add due to rounding See notes to condensed consolidated financial statements. </TABLE>
<TABLE> <CAPTION> FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited) Three months ended June 30, Six months ended June 30, 2001 2000 2001 2000 <S> <C> <C> <C> <C> Net income $ 17,019,000 $ 16,370,000 $ 28,645,000 $ 30,228,000 Other comprehensive income (loss), net of tax - Foreign currency translation adjustments (731,000) (1,537,000) (4,903,000) (3,832,000) ---------- ---------- ---------- ---------- Comprehensive income $ 16,288,000 $ 14,833,000 $ 23,742,000 $ 26,396,000 ========== ========== ========== ========== </TABLE> See notes to condensed consolidated financial statements.
<TABLE> <CAPTION> FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS June 30, December 31, 2001 2000 (a) --------- ---------- (unaudited) <S> <C> <C> ASSETS Manufacturing activities Current assets: Cash and cash equivalents $ 17,834,000 $ 13,556,000 Trade accounts receivable, net of allowances for doubtful accounts 165,235,000 167,964,000 Inventories: Raw materials 69,677,000 66,856,000 Work in process 51,363,000 45,127,000 Finished goods 48,826,000 45,636,000 Prepaid expenses 10,616,000 9,797,000 ------------- ----------- Total current assets 363,551,000 348,936,000 Properties and equipment: Land 5,317,000 5,291,000 Buildings and improvements 56,576,000 51,755,000 Machinery and equipment 194,040,000 184,990,000 Accumulated depreciation (136,314,000) (129,440,000) ------------- ----------- Net properties and equipment 119,619,000 112,596,000 ------------- ----------- Intangible assets, net of accumulated amortization 277,539,000 274,925,000 Other deferred charges and assets 28,762,000 25,873,000 Total manufacturing assets 789,471,000 762,330,000 Net assets of discontinued operations, including financial assets 17,161,000 14,558,000 Financial services activities - Lease financing receivables, net of allowances for doubtful accounts 228,650,000 214,230,000 ------------- ----------- Total assets $ 1,035,282,000 $ 991,118,000 ============= =========== See notes to condensed consolidated financial statements. (a) The balance sheet at December 31, 2000 has been derived from the audited financial statements at that date. </TABLE>
<TABLE> <CAPTION> FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS -- Continued June 30, December 31, 2001 2000 (a) ---------- ---------- <S> <C> <C> (Unaudited) LIABILITIES Manufacturing activities Current liabilities: Short-term borrowings $ 52,601,000 $ 145,813,000 Trade accounts payable 64,938,000 60,878,000 Accrued liabilities and income taxes 94,886,000 82,229,000 ------------- ----------- Total current liabilities 212,425,000 288,920,000 Long-term borrowings 226,760,000 125,449,000 Deferred income taxes 24,956,000 27,835,000 ------------- ----------- Total manufacturing liabilities 464,141,000 442,204,000 ------------- ----------- Financial services activities - Borrowings 205,143,000 191,483,000 SHAREHOLDERS' EQUITY Common stock - par value 47,295,000 47,067,000 Capital in excess of par value 72,002,000 68,693,000 Retained earnings 310,902,000 299,985,000 Treasury stock (34,231,000) (34,302,000) Deferred stock awards (2,902,000) (1,847,000) Accumulated other comprehensive income (27,068,000) (22,165,000) ------------- ----------- Total shareholders' equity 365,998,000 357,431,000 ------------- ----------- Total liabilities and shareholders' equity $ 1,035,282,000 $ 991,118,000 ============= =========== See notes to condensed consolidated financial statements. (a) The balance sheet at December 31, 2000 has been derived from the audited financial statements at that date. </TABLE>
<TABLE> <CAPTION> FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) Six Months Ended June 30, 2001 2000 <S> <C> <C> Operating activities: Net income $ 28,645,000 $ 30,228,000 Depreciation 9,941,000 9,730,000 Amortization 4,985,000 4,866,000 Working capital changes and other 2,493,000 (6,872,000) ---------- ---------- Net cash provided by operating activities 46,064,000 37,952,000 Investing activities: Purchases of properties and equipment (11,200,000) (11,079,000) Principal extensions under lease financing agreements (84,106,000) (73,558,000) Principal collections under lease financing agreements 68,383,000 57,275,000 Payments for purchases of companies, net of cash acquired (18,457,000) (24,401,000) Other, net (75,000) 700,000 ---------- ---------- Net cash used for investing activities (45,455,000) (51,063,000) Financing activities: Increase (decrease) in short-term borrowings, net (79,552,000) 63,243,000 Increase (decrease) in long-term borrowings 99,321,000 (2,352,000) Purchases of treasury stock (17,284,000) Cash dividends paid to shareholders (17,479,000) (25,925,000) Other, net 1,379,000 (92,000) ---------- ---------- Net cash provided by financing activities 3,669,000 17,590,000 Increase in cash and cash equivalents 4,278,000 4,479,000 Cash and cash equivalents at beginning of period 13,556,000 8,764,000 ---------- ---------- Cash and cash equivalents at end of period $ 17,834,000 $ 13,243,000 ========== ========== See notes to condensed consolidated financial statements. </TABLE>
FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. It is suggested that the condensed consolidated financial statements be read in conjunction with the financial statements and the notes thereto included in the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 2000. 2. Management of the Registrant has announced its intent to divest the operations of the Sign Group. The condensed consolidated financial statements have been prepared on a basis that reflects the operations of the Sign Group as discontinued operations. The net book value of the Sign Group's assets aggregated $17,161,000 at June 30, 2001; management believes that the value ultimately to be received for these assets will exceed the recorded net book value. 3. In the opinion of the Registrant, the information contained herein reflects all adjustments necessary to present fairly the Registrant's financial position, results of operations and cash flows for the interim periods. Such adjustments are of a normal recurring nature. The operating results for the three months and six months ended June 30, 2001 are not necessarily indicative of the results to be expected for the full year of 2001. 4. Interest paid for the six-month periods ended June 30, 2001 and 2000 was $14,150,000 and $15,525,000, respectively. Income taxes paid for these same periods were $4,598,000 and $11,415,000, respectively. 5. In June 2001, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards No. 141, Business Combinations, and No. 142, Goodwill and Other Intangible Assets, effective for fiscal years beginning after December 15, 2001. Under the new rules, goodwill and intangible assets deemed to have indefinite lives will no longer be amortized but will be subject to annual impairment tests in accordance with these statements. Other intangible assets will continue to be amortized over their useful lives. The Registrant will apply the new rules on accounting for goodwill and other intangible assets beginning in the first quarter of 2002. Application of nonamortization provisions of the statement is expected to result in an increase in net income, preliminarily in the range of $4.5 million ($.10 per share) per year. During 2002, the Registrant will perform the first of the required impairment tests of goodwill and indefinite-lived intangible assets of January 1, 2002 and has not yet determined what the effect of these tests will be on the earnings and financial position of the Registrant. 6. The following table summarizes the information used in computing basic and diluted income per share: <TABLE> <CAPTION> Three Months Ended June 30, Six Months Ended June 30, 2001 2000 2001 2000 <S> <C> <C> <C> <C> Numerators for both basic and diluted income per share computations: Income from continuing operations $16,712,000 $16,198,000 $28,338,000 $29,961,000 Income from discontinued operations 307,000 172,000 307,000 1,111,000 Cumulative effect of change in accounting (844,000) ---------- ---------- ---------- ---------- Net income $17,019,000 $16,370,000 $28,645,000 $30,228,000 ========== ========== ========== ========== Denominator for basic income per share - weighted average shares outstanding 45,541,000 45,307,000 45,476,000 45,460,000 Effect of employee stock options (dilutive potential common shares) 168,000 129,000 165,000 95,000 ---------- ---------- ---------- ---------- Denominator for diluted income per share - adjusted shares 45,709,000 45,436,000 45,641,000 45,555,000 ========== ========== ========== ========== </TABLE>
7. The following table summarizes the Registrant's operations by segment for the three-month and six-month periods ended June 30, 2001 and 2000. <TABLE> <CAPTION> Three Months Ended Six Months Ended June 30, June 30, 2001 2000 2001 2000 ---- ---- ---- ---- <S> <C> <C> <C> <C> Net sales Environmental Products $ 74,643,000 $ 67,741,000 $ 139,485,000 $ 130,262,000 Fire Rescue 104,555,000 98,860,000 188,394,000 178,142,000 Safety Products 65,331,000 69,294,000 129,711,000 139,284,000 Tool 42,288,000 50,930,000 87,234,000 99,318,000 ----------- ----------- ----------- ----------- Total net sales $ 286,817,000 $ 286,825,000 $ 544,824,000 $ 547,006,000 =========== =========== =========== =========== Operating income Environmental Products $ 8,202,000 $ 7,967,000 $ 12,725,000 $ 13,984,000 Fire Rescue 9,404,000 5,545,000 14,791,000 9,557,000 Safety Products 10,006,000 11,281,000 19,716,000 22,510,000 Tool 6,188,000 10,002,000 13,505,000 20,154,000 Corporate expense (2,954,000) (2,764,000) (6,035,000) (5,522,000) ---------- ---------- ---------- ---------- Total operating income 30,846,000 32,031,000 54,702,000 60,683,000 Interest expense (6,705,000) (7,992,000) (14,515,000) (14,962,000) Other income (expense) 31,000 176,000 127,000 (1,066,000) ---------- ---------- ---------- ---------- Income before income taxes $ 24,172,000 $ 24,215,000 $ 40,314,000 $ 44,655,000 ========== ========== ========== ========== </TABLE> There have been no material changes in total assets from the amount disclosed in the Registrant's last annual report.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operation. FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL POSITION AND RESULTS OF OPERATIONS SECOND QUARTER 2001 Comparison with Second Quarter 2000 Federal Signal Corporation reported diluted earnings per share from continuing operations of $.37 for the second quarter, up 3% compared to $.36 last year. Second quarter net sales were $287 million, flat to last year. Diluted net income per share was also $.37, up 3% over last year. Second quarter Environmental Products Group new orders were up 7%. Sales increased 10%, while earnings rose 3%. Good U.S. municipal demand for the group's street sweepers, coupled with the positive impact of the late first quarter acquisition of the assets of Athey Products Corporation, resulted in a 40% increase in new orders for that segment. European sweeper orders were down about 40% due to quarterly buying patterns, not because of a market slowdown. Of the 10% sales increase, about 4% of that amount is attributable to the Athey acquisition. Deliveries were strong in all U.S. and European municipal markets. Deliveries of U.S. industrial vacuum trucks were down about 40%, reflecting weak industrial/contractor market demand. As anticipated, the group raised its operating margin substantially over the first quarter as productivity and sales mix improved. Fire Rescue Group earnings rose sharply, up 70% on a 6% sales increase. Operating margin rose to 9.0% from 5.6% last year. New orders increased 10%. Underlying demand in municipal markets remains healthy. New orders included a $31 million order for 34 aircraft rescue and fire fighting vehicles for the Royal Netherlands Air Force and Amsterdam's Schiphol Airport. These units will ship over a three-year period starting early in 2002. In the U.S., many committed buyers deferred placing orders until after September 30 as they await results of a federal government grant program for fire apparatus. This program provides $15 million for apparatus purchases this year. However, over 10,000 requests for $1.9 billion in assistance on fire apparatus purchases have been submitted. Applicants will only be considered if they do not have an order pending for their apparatus. The order deferral has resulted in a sharp decrease in orders in the second quarter and expected orders in the third quarter but should result in an increase in fourth quarter orders; this situation will defer fire truck apparatus deliveries into 2002. The estimated effect of the orders deferred and the large non-U.S. order is a contribution of about $.05 to $.07 per share to 2002. The significant increase in operating margin resulted from a higher margin sales mix for the quarter, productivity improvements in North American and Finnish operations and the increased volume. Second quarter Safety Products Group sales were down 6% and earnings declined 11%. New orders for Safety Products Group were essentially flat. Oilfield-related markets were strong, industrial markets were mostly weak and U.S. municipal markets were good. The group's sales fell as global industrial sales declined, mainly a result of the weak U.S. marketplace; global municipal sales were about even with last year, with the U.S. stronger. Operating income fell as the reduced sales lowered operating margin. Tool Group earnings were down 38% on a 17% sales decline. New orders declined 20%.Tool Group new orders in the U.S. were broadly lower as general North American market conditions weakened further during the quarter. New orders also softened slightly in our European markets. U.S. sales were down 19% and non-U.S. sales were down 6%. Tool Group operating margin declined to 14.6% from 19.6% last year on the sharp reduction in sales volume and product mix changes that were partially offset by cost reduction actions. Once the economic recovery begins, the company expects a significant recovery in operating margin due to our high variable gross margin. Since Tool Group products have a very short order lead-time, the group will respond quickly when an increase in U.S. manufacturing activity occurs. Gross profit as percent of net sales declined to 29.9% in the second quarter of 2001 from 31.0% in the second quarter of 2000. The percentage decrease was largely attributable to a change in sales mix reflecting: a) increasing sales of vehicle-based products in the Environmental Products and Fire Rescue groups, both of which have lower gross margins than the other groups, and b) declining sales in the company's Safety Products and Tool groups. Selling, general and administrative expenses as a percent of net sales improved to 19.1% in the second quarter of 2001 compared to 19.8% last year also reflecting the change in sales mix. Interest expense declined to $6.7 million from $8.0 million largely as a result of a much lower interest rate environment partially offset by increased borrowings to finance recent business acquisitions and increased financial services assets. The effective tax rate for the second quarter of 2001 declined to 30.9% from 33.1% in 2000 reflecting the favorable effects of non-U.S. tax benefits.
Comparison of First Six Months 2001 to Same Period 2000 Diluted income per share from continuing operations for the first six months of 2001 was $.62 compared to $.66 in 2000. Income from continuing operations was $28.3 million compared to $30.0 million last year. Sales for the first six months were $545 million compared to $547 million in 2000. Gross profit as a percent of net sales decreased to 30.4% in the first six months of 2001 from 31.4% in 2000. Selling, general and administrative expenses as a percent of net sales essentially remained flat with the prior year period. The decline in the gross profit percentage is largely a result of the same reasons cited above for the second quarter. Interest expense declined to $14.5 million from $14.9 million largely as a result of the same reasons cited above for the second quarter. The effective tax rate of 29.7% for the first six months of 2001 declined from the 32.9% in 2000 largely as a result of favorable benefits from research and development credits and non-U.S. tax benefits. Seasonality of Registrant's Business Certain of the Registrant's businesses are susceptible to the influences of seasonal buying or delivery patterns. The Registrant's businesses which tend to have lower sales in the first calendar quarter compared to other quarters as a result of these influences are street sweeping, outdoor warning, municipal emergency signal products, parking systems, fire rescue products and signage. Financial Position and Liquidity at June 30, 2001 The current ratio applicable to manufacturing activities was 1.7 at June 30, 2001 compared to 1.2 at December 31, 2000. Working capital (manufacturing operations) at June 30, 2001 was $151.1 million compared to $60.0 million at the most recent year-end. The current ratio and working capital both increased from year-end levels primarily as a result of the company's recent debt refinancing, shifting approximately $100 million from short-term to long-term borrowings. The debt-to-capitalization ratio applicable to manufacturing activities was 45% at both June 30, 2001 and December 31, 2000. The debt-to-capitalization ratio applicable to financial services activities was 87% at both June 30, 2001 and December 31, 2000. Current financial resources and anticipated funds from the Registrant's operations are expected to be adequate to meet future cash requirements. Part II. Other Information Responses to items one through four and item six are omitted since these items are either inapplicable or the response thereto would be negative. Item 5. Other Information. Subsequent to the company's earnings release of July 18, 2001, the company discovered that its backlogs for the Fire Rescue Group have been incorrectly reported in the company's 1999 and 2000 Forms 10-K due to an error in accounting for changes in orders by customers subsequent to initial order receipt. Consolidated backlogs at December 31, 1999 and for each of the quarters ended during the period of calendar years 2000 and 2001 were reported and should have been reported as follows (amounts in $000's): 12/31/99 3/31/00 6/30/00 9/30/00 12/31/00 3/31/01 6/30/01 -------- ------- ------- ------- -------- ------- ------- As previously reported 344,090 351,459 345,914 332,282 361,015 373,023 362,208 As correctly reported 329,463 337,659 332,876 312,984 339,871 349,835 334,364 Fire Rescue Group backlogs previously reported in the company's Form 10-K should have been reported as $231,873 and $234,424 at December 31, 1999 and December 31, 2000. While this correction restates the absolute amount of backlog, the rate of change in backlog over the period December 1999 to June 2001 is not materially different from that previously reported. This reporting error had no effect on the operations of the group or the company.
SIGNATURES Pursuant to the requirements 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 8/14/01 By: /s/ Henry L. Dykema Date Henry L. Dykema, Vice President and Chief Financial Officer