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, 2002 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ________ to ___________ Commission file number: 1-6003 Federal Signal Corporation (Exact name of 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 45,305,000 shares outstanding at July 31, 2002
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, 2001.
<TABLE> <CAPTION> FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited) Three months ended June 30, Six months ended June 30, 2002 2001 2002 2001 ---- ---- ---- ---- <S> <C> <C> <C> <C> Net sales $ 257,864,000 $ 286,817,000 $ 503,508,000 $ 544,824,000 Costs and expenses: Cost of sales (183,117,000) (201,136,000) (358,871,000) (379,203,000) Selling, general and administrative (54,345,000) (54,835,000) (105,622,000) (110,919,000) ----------- ----------- ----------- ----------- Operating income 20,402,000 30,846,000 39,015,000 54,702,000 Interest expense (5,064,000) (6,705,000) (9,847,000) (14,515,000) Other income (expense), net (440,000) 31,000 (286,000) 127,000 Minority interest (43,000) (15,000) ----------- ----------- ----------- ----------- Income from continuing operations before income taxes 14,855,000 24,172,000 28,867,000 40,314,000 Income taxes (4,143,000) (7,460,000) (8,361,000) (11,976,000) ----------- ----------- ----------- ----------- Income from continuing operations 10,712,000 16,712,000 20,506,000 28,338,000 Income from discontinued operations, net of tax 307,000 307,000 Cumulative effect of change in accounting (7,984,000) ----------- ---------- ----------- ----------- Net income $ 10,712,000 $ 17,019,000 $ 12,522,000 $ 28,645,000 =========== =========== =========== =========== COMMON STOCK DATA: Basic and diluted net income per share: Income from continuing operations $.24 $.37 $.45 $.62 Income from discontinued operations .01 .01 Cumulative effect of change in accounting (.18) --- --- --- --- Net income* $.24 $.37 $.28 $.63 === === === === Weighted average common shares outstanding Basic 45,264,000 45,541,000 45,198,000 45,476,000 Diluted 45,461,000 45,709,000 45,394,000 45,641,000 Cash dividends per share of common stock $.2000 $.1950 $.4000 $.3900 * amounts above may not add due to rounding </TABLE> See notes to condensed consolidated financial statements.
<TABLE> <CAPTION> FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited) Three months ended June 30, Six months ended June 30, 2002 2001 2002 2001 ---- ---- ---- ---- <S> <C> <C> <C> <C> Net income $10,712,000 $17,019,000 $12,522,000 $28,645,000 Other comprehensive income (loss), net of tax - Foreign currency translation adjustments 6,471,000 (731,000) 5,427,000 (4,903,000) Net derivative (loss), cash flow hedges (613,000) (613,000) ---------- ---------- ---------- ---------- Comprehensive income $16,570,000 $16,288,000 $17,336,000 $23,742,000 ========== ========== ========== ========== </TABLE> See notes to condensed consolidated financial statements.
FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS June 30, December 31, 2002 2001 (a) -------- ------------ (Unaudited) ASSETS Manufacturing activities - Current assets: Cash and cash equivalents $ 14,507,000 $ 16,882,000 Trade accounts receivable, net of allowances for doubtful accounts 148,973,000 158,994,000 Inventories: Raw materials 59,479,000 63,435,000 Work in process 56,213,000 39,258,000 Finished goods 43,885,000 50,148,000 Prepaid expenses 16,455,000 13,608,000 ------------- ------------- Total current assets 339,512,000 342,325,000 Properties and equipment: Land 5,663,000 5,606,000 Buildings and improvements 54,522,000 53,854,000 Machinery and equipment 208,148,000 198,047,000 Accumulated depreciation (155,246,000) (143,765,000) ------------- ------------- Net properties and equipment 113,087,000 113,742,000 ------------- ------------- Intangible assets, net of accumulated amortization 281,685,000 280,888,000 Other deferred charges and assets 27,253,000 25,143,000 ------------- ------------- Total manufacturing assets 761,537,000 762,098,000 Net assets of discontinued operations, including financial assets 12,417,000 14,396,000 Financial services activities - Lease financing receivables, net of allowances for doubtful accounts 237,622,000 239,120,000 ------------- ------------- Total assets $1,011,576,000 $1,015,614,000 ============= ============= See notes to condensed consolidated financial statements. (a) The balance sheet at December 31, 2001 has been derived from the audited financial statements at that date.
FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS -- Continued June 30, December 31, 2002 2001 (a) ---------- ------------ (Unaudited) LIABILITIES Manufacturing activities - Current liabilities: Short-term borrowings $ 14,459,000 $ 28,849,000 Trade accounts payable 63,968,000 53,292,000 Accrued liabilities and income taxes 105,036,000 97,289,000 ------------- ------------- Total current liabilities 183,463,000 179,430,000 Long-term borrowings 223,548,000 232,678,000 Deferred income taxes 32,107,000 29,280,000 ------------- ------------- Total manufacturing liabilities 439,118,000 441,388,000 ------------- ------------- Financial services activities - Borrowings 212,122,000 213,917,000 Minority interest in subsidiary 888,000 873,000 SHAREHOLDERS' EQUITY Common stock - par value 47,574,000 47,378,000 Capital in excess of par value 76,983,000 73,177,000 Retained earnings 306,625,000 312,206,000 Treasury stock (47,906,000) (45,486,000) Deferred stock awards (2,982,000) (2,179,000) Accumulated other comprehensive income (20,846,000) (25,660,000) ------------- ------------- Total shareholders' equity 359,448,000 359,436,000 ------------- ------------- Total liabilities and shareholders' equity $1,011,576,000 $1,015,614,000 ============= ============= See notes to condensed consolidated financial statements. (a) The balance sheet at December 31, 2001 has been derived from the audited financial statements at that date.
FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) Six Months Ended June 30, 2002 2001 ------ ------ Operating activities: Net income $ 12,522,000 $ 28,645,000 Cumulative effect of change in accounting 7,984,000 Depreciation 10,565,000 9,941,000 Amortization 977,000 4,985,000 Working capital changes and other 25,101,000 2,493,000 ---------- ---------- Net cash provided by operating activities 57,149,000 46,064,000 Investing activities: Purchases of properties and equipment (8,347,000) (11,200,000) Principal extensions under lease financing agreements (77,675,000) (84,106,000) Principal collections under lease financing agreements 80,151,000 68,383,000 Payments for purchases of companies, net of cash acquired (18,457,000) Other, net (2,626,000) (75,000) ---------- ---------- Net cash used for investing activities (8,497,000) (45,455,000) Financing activities: Increase (decrease) in short-term borrowings, net (29,034,000) (79,552,000) Increase (decrease) in long-term borrowings (2,021,000) 99,321,000 Purchases of treasury stock (4,328,000) Cash dividends paid to shareholders (17,866,000) (17,479,000) Other, net 2,222,000 1,379,000 ---------- ---------- Net cash provided by(used for)financing (51,027,000) 3,669,000 Increase (decrease) in cash and cash equivalents (2,375,000) 4,278,000 Cash and cash equivalents at beginning of period 16,882,000 13,556,000 ---------- ---------- Cash and cash equivalents at end of period $ 14,507,000 $ 17,834,000 ========== ========== See notes to condensed consolidated financial statements.
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, 2001. 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 $12,417,000 at June 30, 2002; 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, 2002 are not necessarily indicative of the results to be expected for the full year of 2002. 4. Interest paid for the six-month periods ended June 30, 2002 and 2001 was $10,021,000 and $14,150,000, respectively. Income taxes paid for these same periods were $3,722,000 and $4,598,000, respectively. 5. In June 2001, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards (SFAS) No. 141, "Business Combinations", and No. 142, "Goodwill and Other Intangible Assets", effective for fiscal years beginning after December 15, 2001. Under the new rules, goodwill and intangible assets deemed to have indefinite lives 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 has adopted Financial Accounting Standards (SFAS) No. 142, "Goodwill and Other Intangible Assets", and accordingly discontinued the amortization of goodwill effective January 1, 2002. A reconciliation of previously reported net income and earnings per share to the amounts adjusted for the exclusion of goodwill amortization, net of the related income tax effect, follows: <TABLE> <CAPTION> Three Months Ended Six Months Ended June 2002 2001 2002 2001 ---- ---- ---- ---- <S> <C> <C> <C> <C> Reported net income $10,712,000 $17,019,000 $12,522,000 $28,645,000 Add back: goodwill amortization, net of tax 1,367,000 2,736,000 ---------- ---------- ---------- ---------- Adjusted net income $10,712,000 $18,386,000 $12,522,000 $31,381,000 ========== ========== ========== ========== Basic and diluted net income per common share Reported net income $.24 $.37 $.28 $.63 Goodwill amortization, net of tax .03 .06 --- --- --- --- Adjusted net income $.24 $.40 $.28 $.69 === === === === </TABLE>
Changes in the carrying amount of goodwill for the quarter ended June 30, 2002, by operating segment, are as follows: <TABLE> <CAPTION> Environmental Fire Safety Products Rescue Products Tool Total ------------ ----------- ------------- ------------ ----------- <S> <C> <C> <C> <C> <C> Goodwill balance March 31, 2002 $63,194,000 $33,471,000 $98,494,000 $82,618,000 $277,777,000 Translation and other 429,000 2,476,000 979,000 24,000 3,908,000 ---------- ---------- ---------- ---------- ----------- Goodwill balance June 30, 2002 $63,623,000 $35,947,000 $99,473,000 $82,642,000 $281,685,000 ========== ========== ========== ========== =========== </TABLE> Other intangible assets (amortized and not amortized) were insignificant for the quarter ended June 30, 2002. 6. The following table summarizes the information used in computing basic and diluted income per share: <TABLE> <CAPTION> Three Months Ended June Six Months Ended June 30, 2002 2001 2002 2001 ---- ---- ---- ---- <S> <C> <C> <C> <C> Numerators for both basic and diluted income per share computations: Income from continuing operations $ 10,712,000 $ 16,712,000 $ 20,506,000 $ 28,338,000 Income from discontinued operations 307,000 307,000 Cumulative effect of change in accounting (7,984,000) ---------- ---------- ---------- ---------- Net income $ 10,712,000 $ 17,019,000 $ 12,522,000 $ 28,645,000 ========== ========== ========== ========== Denominator for basic income per share - weighted average shares outstanding 45,264,000 45,541,000 45,198,000 45,476,000 Effect of employee stock options (dilutive potential common shares) 197,000 168,000 196,000 165,000 ---------- ---------- ---------- ---------- Denominator for diluted income per share - adjusted shares 45,461,000 45,709,000 45,394,000 45,641,000 ========== ========== ========== ========== </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. Segment operating income for 2001 was restated to exclude the amortization of goodwill. <TABLE> <CAPTION> Three Months Ended June Six Months Ended June 30, 2002 2001 2002 2001 ---- ---- ---- ---- <S> <C> <C> <C> <C> Net sales Environmental Products $ 70,540,000 $ 74,643,000 $ 145,292,000 $ 139,485,000 Fire Rescue 82,735,000 104,555,000 149,984,000 188,394,000 Safety Products 64,322,000 65,331,000 128,967,000 129,711,000 Tool 40,267,000 42,288,000 79,265,000 87,234,000 ----------- ----------- ----------- ----------- Total net sales $257,864,000 $286,817,000 $503,508,000 $544,824,000 =========== =========== =========== =========== Operating income Environmental Products $ 5,931,000 $ 8,711,000 $ 12,518,000 $ 13,731,000 Fire Rescue 3,551,000 9,666,000 5,220,000 15,324,000 Safety Products 8,831,000 10,607,000 18,098,000 20,921,000 Tool 5,046,000 6,777,000 9,170,000 14,687,000 Goodwill amortization (1,961,000) (3,926,000) Corporate expense (2,957,000) (2,954,000) (5,991,000) (6,035,000) ---------- ---------- ---------- ---------- Total operating income 20,402,000 30,846,000 39,015,000 54,702,000 Interest expense (5,064,000) (6,705,000) (9,847,000) (14,515,000) Minority interest (43,000) (15,000) Other income (expense) (440,000) 31,000 (286,000) 127,000 ---------- ---------- ---------- ---------- Income before income taxes $ 14,855,000 $ 24,172,000 $ 28,867,000 $ 40,314,000 ========== ========== ========== ========== </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 Operations. FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL POSITION AND RESULTS OF OPERATIONS SECOND QUARTER 2002 Comparison with Second Quarter 2001 Federal Signal Corporation reported diluted earnings per share of $.24 from continuing operations for the second quarter of 2002 on sales of $258 million. This compares to earnings per share of $.37 on sales of $287 million for the same period in 2001. New orders were $294 million, up 7% from last year due to record second quarter Fire Rescue business, which more than offset weaker industrial and commercial orders from continuing operations. As required by the new accounting rules, goodwill is no longer amortized as of January 1, 2002; this favorably affected income from continuing operations by $.03 for the second quarter. Second quarter Environmental Products Group new orders declined 4%. Sales declined 5% and operating earnings were 32% lower. As expected, weakness in industrial markets resulted in lower earnings for the group. Municipal orders and sales declined modestly due mainly to lower demand for sewer cleaners. Margins were lower due to the significantly lower sales of higher-margin industrial products. Fire Rescue Group orders were 24% higher. Sales were 21% lower and earnings were 63% below prior year. Record second quarter orders resulted in June 30 record backlog of $278 million for the group. Sales in the quarter were below prior year due to order delays early in the fourth quarter of 2001 and lower producible backlog at the beginning of the quarter. Earnings trended up from the first quarter but remained significantly below 2001. The reduction reflected a less favorable sales mix, in particular lower sales of high-margin aerial products. Earnings were also adversely affected by production inefficiencies, as higher employment levels were maintained to meet the ramp up in shipments in the second half of the year. Safety Products Group orders and sales were 2% below prior year, and earnings were 17% lower. Worldwide orders declined slightly as delays in awards for parking revenue control equipment were largely offset by continuing global strength in outdoor warning systems. Operating income was lower due to weakness in industrial markets, and higher pension expense. On July 3, the group received a notice of contract award for up to $34 million for the installation and long-term maintenance of a parking and revenue control system for the Dallas-Fort Worth International Airport. This represents a record commercial award for the company. Tool Group sales declined 5% and earnings were 26% lower. The sales decline reflected the continued weak industrial economy with sales per day slightly lower than the first quarter. Operating income fell on lower sales volume and reduced inventories as the group continued to implement lean enterprise practices. Gross profit as a percent of net sales declined to 29.0% in the second quarter of 2002 from 29.9% in the second quarter of 2001. The percentage decrease was largely attributable to lower volumes and sales mix. Selling, general and administrative expenses as a percent of net sales increased to 21.1% in the second quarter of 2002 compared to 19.1% last year as the effect of maintaining certain fixed costs in a period of sales decline more than offset the benefit of the elimination of goodwill amortization. Interest expense declined to $5.1 million from $6.7 million as a result of lower short-term interest rates and lower outstanding debt. The effective tax rate for the second quarter of 2002 declined to 27.9% from 30.9% in 2001 reflecting the lower taxable income. Comparison of First Six Months 2002 to Same Period 2001 Diluted income per share from continuing operations for the first six months of 2002 was $.45 on sales of $504 million. This compares to earnings per share of $.62 in 2001 on sales of $545 million. The reduction from the prior year reflects broadly weaker industrial and commercial markets and the timing of Fire Rescue shipments. As discussed above, goodwill is no longer amortized as of January 1, 2002; this favorably affected income from continuing operations by $.06 for the first six months of 2002.
Gross profit as a percent of net sales decreased to 28.7% in the first six months of 2002 from 30.4% in 2001. The decline in the gross profit percentage is largely a result of the same reasons cited above for the second quarter. Selling, general and administrative expenses as a percent of net sales increased to 21.0% in the first half of 2002 compared to 20.4% last year as the effect of maintaining certain fixed costs in a period of sales decline more than offset the benefit of the elimination of goodwill amortization. Interest expense declined to $9.8 million from $14.5 million largely as a result of the same reasons cited above for the second quarter. The effective tax rate of 29.0% for the first six months of 2002 declined from the 29.7% in 2001 largely as a result of lower taxable income. 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, 2002 Operating cash flow of $57.1 million for first six months of 2002, was up 24% over the prior year due to lower working capital resulting from improved collections and improved inventory management from successful lean manufacturing programs. Working capital (manufacturing operations) at June 30, 2002 was $156.0 million compared to $162.9 million at the most recent year-end. The debt-to-capitalization ratio applicable to manufacturing activities was 42% at June 30, 2002 down from 44% at December 31, 2001, reflecting the company's strong cash flows and $29 million reduction of short-term debt. As per company policy, the debt-to-capitalization ratio applicable to financial services activities was 87% at both June 30, 2002 and December 31, 2001. 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 five are omitted since these items are either inapplicable or the response thereto would be negative. Item 6. Exhibit 99.1 - Certification of Periodic Report from the CEO Exhibit 99.2 - Certification of Periodic Report from the CFO 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 8/9/02 By: /s/ Stephanie K. Kushner Date Stephanie K. Kushner, Vice President and Chief Financial Officer