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 September 30, 1995 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, ILLINOIS 60521 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (708) 954-2000 NONE (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 issuer's classes of common stock, as of October 31, 1995. Common Stock, $1.00 par value -- 45,286,000 PART I. FINANCIAL INFORMATION FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES INTRODUCTION The consolidated condensed financial statements of Federal Signal Corporation and subsidiaries included herein have been prepared by the Registrant, without 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, 1994. <TABLE> FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF INCOME (Unaudited) <CAPTION> Three Months Ended September 30 Nine Months Ended September 30 1995 1994 1995 1994 <S> <C> <C> <C> <C> Net sales $207,880,000 $181,283,000 $594,367,000 $483,390,000 Costs and expenses: Cost of sales 145,067,000 125,868,000 413,394,000 333,333,000 Selling, general and administrative 37,865,000 34,705,000 111,772,000 95,089,000 Other (income) and expenses: Interest expense 3,427,000 2,510,000 9,925,000 5,676,000 Other income (315,000) (326,000) (790,000) (327,000) 186,044,000 162,757,000 534,301,000 433,771,000 Income before income taxes 21,836,000 18,526,000 60,066,000 49,619,000 Income taxes 7,207,000 6,090,000 20,165,000 16,631,000 Net income $ 14,629,000 $ 12,436,000 $ 39,901,000 $ 32,988,000 COMMON STOCK DATA: Net income per share $ .32 $ .27 $ .87 $ .72 Average common shares outstanding 45,894,000 45,894,000 45,862,000 45,975,000 Cash dividends per share of common stock $ .13 $ .11 $ .38 $ .32 <FN> See notes to consolidated condensed financial statements. </TABLE> FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES CONSOLIDATED CONDENSED BALANCE SHEETS September 30 December 31 1995 1994 (a) (Unaudited) ASSETS Manufacturing activities - Current assets: Cash and cash equivalents $ 1,144,000 $ 4,605,000 Trade accounts receivable, net of allowances for doubtful accounts 137,549,000 107,985,000 Inventories: Raw materials 53,153,000 36,490,000 Work in process 27,609,000 22,355,000 Finished goods 22,740,000 20,054,000 Prepaid expenses 4,706,000 4,807,000 Total current assets 246,901,000 196,296,000 Properties and equipment: Land 5,728,000 5,740,000 Buildings and improvements 38,855,000 38,045,000 Machinery and equipment 121,119,000 109,841,000 Accumulated depreciation (87,338,000) (80,788,000) Net properties and equipment 78,364,000 72,838,000 Intangible assets, net of accumulated amortization 132,764,000 115,306,000 Other deferred charges and assets 11,027,000 9,972,000 Total manufacturing assets 469,056,000 394,412,000 Financial services activities - Lease financing receivables, net of allowances for doubtful accounts 144,493,000 127,188,000 Total assets $613,549,000 $521,600,000 See notes to consolidated condensed financial statements. (a) The balance sheet at December 31, 1994 has been derived from the audited financial statements at that date. FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES CONSOLIDATED CONDENSED BALANCE SHEETS -- Continued September 30 December 31 1995 1994 (a) (Unaudited) LIABILITIES Manufacturing activities - Current liabilities: Short-term borrowings $ 63,960,000 $ 25,222,000 Trade accounts payable 45,642,000 44,918,000 Accrued liabilities and income taxes 79,913,000 72,238,000 Total current liabilities 189,515,000 142,378,000 Long-term borrowings 40,119,000 34,878,000 Deferred income taxes 15,158,000 13,778,000 Total manufacturing liabilities 244,792,000 191,034,000 Financial services activities - Short-term borrowings 125,244,000 110,252,000 Total liabilities 370,036,000 301,286,000 SHAREHOLDERS' EQUITY Common stock - par value 45,826,000 45,767,000 Capital in excess of par value 54,347,000 53,756,000 Retained earnings 156,046,000 133,138,000 Treasury stock (10,296,000) (7,880,000) Deferred stock awards (1,239,000) (1,688,000) Foreign currency translation (1,171,000) (2,779,000) Total shareholders' equity 243,513,000 220,314,000 Total liabilities and shareholders' equity $613,549,000 $521,600,000 See notes to consolidated condensed financial statements. (a) The balance sheet at December 31, 1994 has been derived from the audited financial statements at that date. FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) Nine Months Ended September 30 1995 1994 Operating activities: Net income $ 39,901,000 $ 32,988,000 Depreciation 8,886,000 7,700,000 Amortization 3,366,000 3,035,000 Working capital changes and other (22,535,000) (13,441,000) Net cash provided by operating activities 29,618,000 30,282,000 Investing activities: Purchases of properties and equipment (12,351,000) (7,565,000) Principal extensions under lease financing agreements (87,925,000) (63,778,000) Principal collections under lease financing agreements 70,620,000 56,031,000 Payments for purchases of companies, net of cash acquired (31,066,000) (69,563,000) Other, net (6,199,000) (519,000) Net cash used for investing activities (66,921,000) (85,394,000) Financing activities: Addition to short-term borrowings 53,685,000 67,203,000 Addition to long-term borrowings 4,723,000 13,190,000 Purchases of treasury stock (3,049,000) (9,736,000) Cash dividends paid to shareholders (21,767,000) (18,462,000) Other, net 250,000 341,000 Net cash provided by financing activities 33,842,000 52,536,000 Decrease in cash and cash equivalents (3,461,000) (2,576,000) Cash and cash equivalents at beginning of period 4,605,000 2,576,000 Cash and cash equivalents at end of period $ 1,144,000 $ --- See notes to consolidated condensed financial statements. FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Unaudited) 1. It is suggested that the consolidated condensed 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, 1994. 2. 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 nine months ended September 30, 1995, are not necessarily indicative of the results to be expected for the full year of 1995. 3. Interest paid for the nine-month periods ended September 30, 1995 and 1994 was $10,482,000 and $5,228,000, respectively. Income taxes paid for these same periods were $20,539,000 and $11,721,000. 4. On August 4, 1995, the United States Fifth Circuit Court of Appeals vacated a $17,745,000 judgment rendered against the Registrant in June 1993. The judgment had been rendered against the Registrant by the Federal District Court in the Western District of Texas for alleged violation of the Texas Deceptive Trade Practices Act and misrepresentations to Duravision, Inc. and Manufacturers Product Research Group of North America, Inc. (MPR) in connection with a 1988 research and development project for indoor advertising. The Court of Appeals determined that the damages found by the jury were not sufficiently supported by the evidence and remanded the case for retrial on what damages, if any, Duravision and MPR can prove. The Registrant intends to vigorously defend the matter upon retrial. In advance of retrial, the Registrant is engaged in mediation pursuant to a motion in the trial court. It is not known what the outcome of this mediation will be at this time. The Registrant believes that the ultimate resolution of this contingency will not have a material effect on its financial condition nor on its results of operations or cash flows. The Registrant cannot reasonably estimate the ultimate amount of a loss, if any, which may result from resolution of the case. Accordingly, the Registrant has not recorded any accruals for potential losses which may result. FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL POSITION AND RESULTS OF OPERATIONS THIRD QUARTER 1995 Comparison with Third Quarter 1994 Third quarter sales of $207.9 million increased 15% over last year's $181.3 million. Net income rose 18% to $14.6 million compared to $12.4 million in the third quarter of 1994. Earnings per share of $.32 increased 19% over last year's third quarter of $.27. New business for the quarter totaled $184.3 million compared to $184.7 million in the third quarter of 1994. Backlogs stood at $257.6 million at September 30, 1995 compared to $249.4 million a year ago. In the third quarter, the Vehicle, Tool and Sign groups achieved significant increases in earnings while the Safety Products Group earnings were about even with a very strong prior year third quarter. All four of the company's groups achieved higher sales compared to a year ago. The Vehicle Group's earnings increased 15% over last year's third quarter while sales increased 25%. About half of the sales increase resulted from the acquisition of Bronto Skylift which occurred August 4, 1995. The group's fire apparatus and street sweeping businesses both achieved double-digit sales and earnings increases in the third quarter. Vehicle Group new business was 2% below last year due to timing of orders received at Emergency One and the impact on last year's third quarter of a strong promotional program to penetrate the rural fire market. Earnings for the Tool Group increased 54% while sales increased 4%. The group's 1994 third quarter earnings included the adverse effects of certain non-recurring charges. Excluding these charges from last year's results, 1995 third quarter earnings would have increased 11%. The Sign Group's earnings increased 61% on a sales increase of 7%. Operating margins again improved as a result of higher manufacturing margins reflecting the group's strategic focus on high value projects. Third quarter new business was 17% lower compared to the very strong results achieved a year ago. The Safety Products Group's sales and earnings were essentially flat with those of a year ago. Strong sales and a favorable product mix at Signal Products reported in last year's third quarter made it difficult for the group to improve over that performance. However, new business for the group did increase solidly over the prior year with all of the group's units showing improved results. Cost of sales as a percent of net sales increased from 69.4% in the third quarter of 1994 to 69.8% in the third quarter of 1995. The percentage increase was primarily due to the large sales increase in the Vehicle Group, which tends to have lower gross margins than the other groups. Selling, general and administrative expenses as a percent of net sales decreased to 18.2% in the third quarter of 1995 from 19.1% in the third quarter of 1994. The decrease was attributed to the increase in sales volume, as well as management's continued efforts in containing operating expenses through cost reduction programs. The effective tax rate for the third quarter of 1995 was 33.0%, compared to the third quarter 1994 rate of 32.9%. Comparison of First Nine Months 1995 to Same Period 1994 Sales for the first nine months were $594.4 million, 23% higher than the $483.4 million reported for the similar period in 1994. Net income for the first nine months of 1995 increased 21% to $39.9 million compared to $33.0 million in 1994. For the first nine months, earnings per share were $.87, 21% higher than the $.72 reported for the same period a year ago. Cost of products sold as a percent of net sales increased to 69.6% in the first nine months of 1995 from 69.0% in the first nine months of 1994. The percentage increase was principally due to the reasons cited above for the third quarter. Selling, general and administrative expenses decreased to 18.8% of net sales in the first nine months of 1995 from 19.7% in the same period a year ago. The percentage decrease was mainly due to the reasons cited above for the third quarter. The effective tax rate for the first nine months of 1995 was 33.6%, compared to the 33.5% reported for the first nine months of 1994. 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 signage, street sweeping, outdoor warning, other municipal emergency signal products and parking systems manufacturing operations. Financial Position and Liquidity at September 30, 1995 The current ratio applicable to manufacturing activities was 1.3 at September 30, 1995 compared to 1.4 at December 31, 1994. Working capital (manufacturing operations) at September 30, 1995 was $57.4 million compared to $53.9 million at the most recent year end. The decrease in the current ratio is due to a high level of short-term borrowings which were incurred for the recent purchase of Bronto Skylift. The increase in working capital results from record setting shipment levels in the third quarter. The debt to capitalization ratio applicable to manufacturing activities was 30% at September 30, 1995 compared to 22% at December 31, 1994. The debt to capitalization ratio applicable to financial services activities was 87% at September 30, 1995 and December 31, 1994. The increase in manufacturing debt resulted from short-term debt incurred to purchase the recent acquisition, as mentioned above, as well as increases in working capital, capital expenditures, taxes paid and dividend payments. Capital expenditures during the first nine months of 1995 were $12.4 million compared to $7.6 million for the same period a year ago. Capital expenditures for the full year 1994 were $11.1 million. The Registrant anticipates that capital expenditures for the full year 1995 will be approximately 40% to 50% greater than 1994 full year amounts. At September 30, 1995 the Registrant held 512,418 shares of treasury stock at a cost of $10.3 million. Included in these amounts were 117,305 shares at a cost of $2.4 million purchased during the nine-month period ended September 30, 1995. Modest amounts of additional shares are being considered for purchase in the open market during the remainder of 1995. Current financial resources and anticipated funds from the Registrant's operations are expected to be adequate to meet future cash requirements. See Note 4 of the Notes to Consolidated Condensed Financial Statements regarding the Duravision contingency. PART II. OTHER INFORMATION FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES Responses to items two through six are omitted since these items are either inapplicable or the response thereto would be negative. Item 1. Legal Proceedings See Note 4 of the Notes to Consolidated Condensed Financial Statements. SIGNATURE 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 (Registrant) Date November 10, 1995 Henry L. Dykema Vice President and Chief Financial Officer