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, 1998 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 60523-9945 (Address of principal executive offices) (Zip code) (630) 954-2000 (Registrant's telephone number including area code) 1415 West 22nd Street Oak Brook, IL 60523 (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 45,705,361 shares outstanding at July 31, 1998
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 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 Proxy Statement for the Annual Meeting of Shareholders held on April 15, 1998.
<TABLE> FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited) <CAPTION> Three Months Ended June 30 Six Months Ended June 30 1998 1997 1998 1997 <S> <C> <C> <C> <C> Net sales $250,121,000 $236,156,000 $481,351,000 $460,641,000 Costs and expenses: Cost of sales 170,526,000 158,893,000 330,706,000 312,954,000 Selling, general and administrative 51,496,000 50,144,000 102,279,000 96,768,000 Other (income) and expenses: Interest expense 4,865,000 4,154,000 9,332,000 8,091,000 Other (income) expense (225,000) (640,000) (386,000) (1,166,000) ----------- ----------- ----------- ----------- 226,662,000 212,551,000 441,931,000 416,647,000 ----------- ----------- ----------- ----------- Income before income taxes 23,459,000 23,605,000 39,420,000 43,994,000 Income taxes 7,446,000 7,546,000 12,561,000 14,319,000 ----------- ----------- ----------- ----------- Net income $ 16,013,000 $ 16,059,000 $26,859,000 $29,675,000 =========== =========== ========== ========== COMMON STOCK DATA: Basic net income per share $ .35 $ .35 $ .59 $ .66 =========== =========== ========== ========== Diluted net income per share $ .35 $ .35 $ .58 $ .65 =========== =========== ========== ========== Weighted average common shares outstanding: Basic 45,710,000 45,251,000 45,693,000 45,254,000 Diluted 45,988,000 45,820,000 45,974,000 45,824,000 Cash dividends per share of common stock $ .1775 $ .1675 $ .3550 $ .3350 <FN> See notes to condensed consolidated financial statements. </FN> </TABLE>
<TABLE> FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited) <CAPTION> Three Months Ended June 30 Six Months Ended June 30 1998 1997 1998 1997 <S> <C> <C> <C> <C> Net income $16,013,000 $16,059,000 $26,859,000 $29,675,000 Other comprehensive income (loss)- Foreign currency translation adjustments 435,000 (1,935,000) (1,407,000) (6,017,000) ---------- ---------- ---------- ---------- Comprehensive income $16,448,000 $14,124,000 $25,452,000 $23,658,000 ========== ========== ========== ========== <FN> See notes to condensed consolidated financial statements. </FN> </TABLE>
FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS June 30 December 31 1998 1997 (a) --------- -------- (Unaudited) ASSETS Manufacturing activities - Current assets: Cash and cash equivalents $10,769,000 $10,686,000 Trade accounts receivable, net of allowances for doubtful accounts 151,252,000 142,973,000 Inventories: Raw materials 63,438,000 55,524,000 Work in process 34,408,000 25,043,000 Finished goods 33,435,000 28,816,000 ----------- ----------- Total inventories 131,281,000 109,383,000 Prepaid expenses 5,038,000 5,580,000 ----------- ----------- Total current assets 298,340,000 268,622,000 Properties and equipment: Land 5,715,000 5,134,000 Buildings and improvements 44,796,000 40,190,000 Machinery and equipment 151,366,000 142,043,000 Accumulated depreciation (110,193,000) (102,658,000) ----------- ----------- Net properties and equipment 91,684,000 84,709,000 Intangible assets, net of accumulated amortization 195,929,000 188,002,000 Other deferred charges and assets 20,567,000 19,482,000 ----------- ----------- Total manufacturing assets 606,520,000 560,815,000 Financial services activities - Lease financing receivables, net of allowances for doubtful accounts 170,098,000 167,090,000 ----------- ----------- Total assets $776,618,000 $727,905,000 =========== =========== See notes to condensed consolidated financial statements. (a)The balance sheet at December 31, 1997 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 1998 1997 (a) --------- -------- (Unaudited) LIABILITIES Manufacturing activities - Current liabilities: Short-term borrowings $116,106,000 $86,158,000 Trade accounts payable 60,087,000 50,385,000 Accrued liabilities and income taxes 89,061,000 90,486,000 ---------- ----------- Total current liabilities 265,254,000 227,029,000 Long-term borrowings 30,443,000 32,110,000 Deferred income taxes 23,581,000 23,581,000 ----------- ----------- Total manufacturing liabilities 319,278,000 282,720,000 Financial services activities -Borrowings 148,148,000 145,413,000 Total liabilities 467,426,000 428,133,000 SHAREHOLDERS' EQUITY Common stock - par value 46,611,000 46,501,000 Capital in excess of par value 62,939,000 61,029,000 Retained earnings 236,988,000 226,432,000 Treasury stock (20,727,000) (19,695,000) Deferred stock awards (2,435,000) (1,718,000) Accumulated other comprehensive income (14,184,000) (12,777,000) ----------- ----------- Total shareholders' equity 309,192,000 299,772,000 ----------- ----------- Total liabilities and shareholders' equity $776,618,000 $727,905,000 =========== =========== See notes to condensed consolidated financial statements. (a) The balance sheet at December 31, 1997 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 1998 1997 Operating activities: Net income $26,859,000 $29,675,000 Depreciation 8,233,000 7,367,000 Amortization 3,377,000 2,776,000 Working capital changes and other (11,010,000) (26,919,000) ---------- ---------- Net cash provided by operating activities 27,459,000 12,899,000 Investing activities: Purchases of properties and equipment (10,515,000) (9,737,000) Principal extensions under lease financing agreements (49,306,000) (59,327,000) Principal collections under lease financing agreements 46,298,000 54,020,000 Payments for purchases of companies, net of cash acquired (23,080,000) Other, net 69,000 2,678,000 ---------- ---------- Net cash used for investing activities (36,534,000) (12,366,000) Financing activities: Additional short-term borrowings, net 34,245,000 20,799,000 Reduction of long-term borrowings (1,667,000) (1,638,000) Purchases of treasury stock (57,000) (5,282,000) Cash dividends paid to shareholders (23,982,000) (21,716,000) Other, net 619,000 257,000 ---------- ---------- Net cash provided by (used for) financing activities 9,158,000 (7,580,000) Increase (Decrease) in cash and cash equivalents 83,000 (7,047,000) Cash and cash equivalents at beginning of period 10,686,000 12,431,000 ---------- ---------- Cash and cash equivalents at end of period $10,769,000 $ 5,384,000 ========== ========== 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 Proxy Statement for the Annual Meeting of Shareholders held on April 15, 1998. 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 six months ended June 30, 1998, are not necessarily indicative of the results to be expected for the full year of 1998. 3. Interest paid for the six-month periods ended June 30, 1998 and 1997 was $10,157,000 and $8,419,000, respectively. Income taxes paid for these same periods were $11,383,000 and $16,843,000, respectively. 4. 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 -------------------------------------------------------- 1998 1997 1998 1997 <S> <C> <C> <C> <C> Numerator for both basic and diluted income per share computations - net income $16,013,000 $16,059,000 $26,859,000 $29,675,000 ========== ========== ========== ========== Denominator for basic income per share - weighted average shares outstanding 45,710,000 45,251,000 45,693,000 45,254,000 Effect of employee stock options (dilutive potential common shares) 278,000 569,000 281,000 570,000 ---------- ---------- ---------- ---------- Denominator for diluted income per share - adjusted shares 45,988,000 45,820,000 45,974,000 45,824,000 ========== ========== ========== ========== <FN> </FN> </TABLE> 5. In 1998, the company adopted Statement of Financial Accounting Standard (SFAS) No. 130, "Reporting Comprehensive Income", which requires companies to report all changes in equity during a period, except those resulting from investments by owners and distributions to owners, in a financial statement for the period in which they are recognized. The prior year has been restated to conform to the requirements of SFAS No. 130.
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 1998 Comparison with Second Quarter 1997 Federal Signal Corporation achieved record quarterly sales during the second quarter of 1998. New orders increased 9% and sales increased 6% over the second quarter of 1997. Diluted earnings per share of $.35 for the second quarter were even with last year's results. Sales increased to $250.1 million compared to $236.2 million in the same period a year ago. Net income of $16.0 million was essentially even with last year's second quarter. Operating margins improved sharply over 1998's first quarter. Backlogs at June 30, 1998 were $336.4 million, an increase of 36% over the $246.6 million a year ago and up 9% from the beginning of the year with most of the backlog increase generated by the Vehicle Group. Three of the company's four groups achieved earnings increases over last year's second quarter. The Safety Products and Tool groups again reported growth in orders, sales and operating income over last year's results. The Sign Group's earnings increased slightly in the second quarter though sales declined from last year's comparatively strong second quarter. Vehicle Group sales grew modestly in the second quarter while earnings declined. The Safety Products Group's orders rose 21% in the second quarter driven by strong increases in lighting products, signaling and hazardous material containment products. Sales increased 20% while earnings increased 38% on strong margin expansion resulting from the continuing excellent performance of the U.S.-based hazardous lighting business acquired in mid-1997. The return to normal margins in the hazardous material containment business, whose 1997 results were adversely affected by a one-time charge, also benefited the group's performance. Vehicle Group orders increased 9% with fire rescue growing at a somewhat higher rate than environmental products. Fire rescue orders increased in the U.S., reflecting higher orders for traditional aluminum-bodied vehicles as well as the addition of stainless steel-bodied vehicles resulting from the company's acquisition of Saulsbury Fire in January of this year. Environmental products orders rose as increases in street sweepers, sewer cleaners and industrial vacuum vehicles for use in the U.S. more than offset a decline in non-U.S. street sweeper orders from a very high level last year. Vehicle Group sales increased 3% while earnings declined 15%. Truck chassis supply shortages again caused lower sales volumes, productivity problems and lower margins in key U.S.-based vehicle businesses. Based on input from the group's suppliers, we continue to believe that the chassis supply shortage should alleviate in the second half of 1998. Tool Group orders increased a strong 8% in the second quarter. Orders for punches and related components and cutting tool orders both improved over last year with cutting tools growing at the highest rate. The group's sales and earnings both increased 6% with operating margin improving slightly over last year. Orders and sales declined at the Sign Group, the smallest of the company's four groups. Sign Group second quarter orders declined 22% from year ago levels, although bidding activity remains good. The timing of order placement in Sign's important large customer market continues to result in uneven order patterns. Sales fell 16% as a result of slow second quarter orders and low backlogs at the end of the first quarter. Though sales were lower, the group produced earnings just above last year's second quarter. Sign improved its gross margins and reduced operating expenses, in part a result of implementing various new processes which should continue to benefit the group. As a result, Sign's operating margin substantially increased over the first quarter of 1998 and last year's second quarter. Gross profit as a percent of net sales declined from 32.7% in the second quarter of 1997 to 31.8% in the second quarter of 1998. The percentage decline was largely attributable to production inefficiencies experienced in the Vehicle Group coupled with the inclusion in the second quarter of 1997 of a significant fire rescue-related commission in the company's sales inflating last year's gross profit margin. Partially offsetting these items was a favorable improvement in customer mix on the company's gross profit percentage. Selling, general and administrative expenses as a percent of net sales decreased to 20.6% from 21.2% in the second quarter of 1997 due primarily to reduced fire rescue sales commissions. The effective tax rate for the second quarter of 1998 was 31.7% compared to the second quarter 1997 rate of 32.0%. This decrease mainly resulted from higher percentages of tax-exempt interest income and foreign income taxed at lower rates. Comparison of First Six Months 1998 to Same Period 1997 Orders for the first six months of 1998 increased 14% over the same period a year ago. For the first six months of 1998, sales of $481.4 million increased 4% over the $460.6 million last year. Net income of $26.9 million for the first six months of 1998 declined from last year's $29.7 million. Diluted earnings per share declined to $.58 in 1998 from $.65 in 1997. The earnings decline for the first six months occurred as a result of lower first quarter earnings caused mainly by vendor-related chassis supply shortages for the Vehicle Group. Gross profit as a percent of net sales declined to 31.3% in the first six months of 1998 from 32.1% in the first six months of 1997 due to the reasons cited above for the second quarter. Selling, general and administrative expenses increased modestly to 21.2% of net sales in the first six months of 1998 from 21.0% in the same period a year ago. Interest expense increased from $8.1 million to $9.3 million largely as a result of increased borrowings to finance recent business acquisitions. The effective tax rate was 31.9% for the first half of 1998 declining from the 32.5% for the first half of 1997 due to the reasons cited above for the second quarter. 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, municipal emergency signal products, parking systems and fire rescue products. Financial Position and Liquidity at June 30, 1998 The current ratio applicable to manufacturing activities was 1.1 at June 30, 1998 compared to 1.2 at December 31, 1997. Working capital (manufacturing operations) at June 30, 1998 was $33.1 million compared to $41.6 million at the most recent year end. The decrease in working capital principally resulted from the company's use of short-term debt to fund two acquisitions in January 1998. The debt to capitalization ratio applicable to manufacturing activities was 32% at June 30, 1998 compared to 28% at December 31, 1997. The debt to capitalization ratio applicable to financial services activities was 87% at June 30, 1998 and December 31, 1997. Current financial resources and anticipated funds from the Registrant's operations are expected to be adequate to meet future cash requirements including capital expenditures and modest amounts of additional stock purchases. Part II. Other Information Responses to items one through six are omitted since these items are either inapplicable or the response thereto would be negative. 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 08/13/98 By: /s/ Henry L. Dykema Henry L. Dykema, Vice President and Chief Financial Officer