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, 2001 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 45,018,000 shares outstanding at October 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> FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited) Three months ended Nine months ended September 30, September 30, <S> <C> <C> <C> <C> 2001 2000 2001 2000 ---- ---- ---- ---- Net sales $ 253,403,000 $ 258,577,000 $ 798,227,000 $ 805,583,000 Costs and expenses: Cost of sales (181,274,000) (178,043,000) (560,477,000) (553,456,000) Selling, general and administrative (52,976,000) (51,824,000) (163,895,000) (162,734,000) ----------- ----------- ----------- ----------- Operating income 19,153,000 28,710,000 73,855,000 89,393,000 Interest expense (6,264,000) (8,217,000) (20,779,000) (23,179,000) Other income (expense), net (769,000) 133,000 (642,000) (933,000) ----------- ----------- ----------- ----------- Income from continuing operations before income taxes 12,120,000 20,626,000 52,434,000 65,281,000 Income taxes (3,267,000) (5,921,000) (15,243,000) (20,615,000) ---------- ---------- ----------- ----------- Income from continuing operations 8,853,000 14,705,000 37,191,000 44,666,000 Income (loss) from discontinued operations, net of tax 298,000 (25,000) 605,000 1,086,000 Cumulative effect of change in accounting (844,000) --------- ---------- ---------- ---------- Net income $ 9,151,000 $ 14,680,000 $ 37,796,000 $ 44,908,000 ========= ========== ========== ========== COMMON STOCK DATA: Basic and diluted net income per share: Income from continuing operations $.20 $.32 $.82 $.98 Income from discontinued operations .01 .01 .02 Cumulative effect of change in accounting (.02) --- --- --- --- Net income* $.20 $.32 $.83 $.99 === === === === Weighted average common shares outstanding Basic 45,217,000 45,302,000 45,388,000 45,407,000 Diluted 45,307,000 45,468,000 45,528,000 45,526,000 Cash dividends per share of common stock $.1950 $.1900 $.5850 $.5700 * amounts above may not add due to rounding See notes to condensed consolidated financial statements. </TABLE>
FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited) <TABLE> Three months ended Nine months ended September 30, September 30, 2001 2000 2001 2000 ---- ---- ---- ---- <S> <C> <C> <C> <C> Net income $ 9,151,000 $ 14,680,000 $ 37,796,000 $ 44,908,000 Other comprehensive income (loss), net of tax - Foreign currency translation adjustments 2,728,000 (3,794,000) (2,175,000) (7,626,000) ---------- ---------- ---------- ---------- Comprehensive income $ 11,879,000 $ 10,886,000 $ 35,621,000 $ 37,282,000 ========== ========== ========== ========== See notes to condensed consolidated financial statements. </TABLE>
FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS September 30, December 31, 2001 2000 (a) ----------- ---------- (Unaudited) ASSETS Manufacturing activities Current assets: Cash and cash equivalents $ 14,843,000 $ 13,556,000 Trade accounts receivable, net of allowances for doubtful accounts 152,669,000 167,964,000 Inventories: Raw materials 69,292,000 66,856,000 Work in process 51,060,000 45,127,000 Finished goods 52,180,000 45,636,000 Prepaid expenses 12,480,000 9,797,000 ------------- ----------- Total current assets 352,524,000 348,936,000 Properties and equipment: Land 7,591,000 5,291,000 Buildings and improvements 53,008,000 51,755,000 Machinery and equipment 195,887,000 184,990,000 Accumulated depreciation (141,099,000) (129,440,000) ------------- ----------- Net properties and equipment 115,387,000 112,596,000 ------------- ----------- Intangible assets, net of accumulated amortization 283,840,000 274,925,000 Other deferred charges and assets 27,577,000 25,873,000 ------------- ----------- Total manufacturing assets 779,328,000 762,330,000 Net assets of discontinued operations, including financial assets 16,012,000 14,558,000 Financial services activities - Lease financing receivables, net of allowances for doubtful accounts 238,850,000 214,230,000 ------------- ----------- Total assets $ 1,034,190,000 $ 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.
FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS -- Continued September 30, December 31, 2001 2000 (a) ------------ ------------ (Unaudited) LIABILITIES Manufacturing activities Current liabilities: Short-term borrowings $ 48,490,000 $ 145,813,000 Trade accounts payable 60,715,000 60,878,000 Accrued liabilities and income taxes 106,449,000 82,229,000 ------------- ----------- Total current liabilities 215,654,000 288,920,000 Long-term borrowings 220,839,000 125,449,000 Deferred income taxes 26,559,000 27,835,000 ------------- ----------- Total manufacturing liabilities 463,052,000 442,204,000 ------------- ----------- Financial services activities - Borrowings 214,200,000 191,483,000 Minority interest in subsidiary 865,000 SHAREHOLDERS' EQUITY Common stock - par value 47,281,000 47,067,000 Capital in excess of par value 71,684,000 68,693,000 Retained earnings 311,243,000 299,985,000 Treasury stock (47,386,000) (34,302,000) Deferred stock awards (2,409,000) (1,847,000) Accumulated other comprehensive income (24,340,000) (22,165,000) ------------- ----------- Total shareholders' equity 356,073,000 357,431,000 ------------- ----------- Total liabilities and shareholders' equity $ 1,034,190,000 $ 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.
FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) Nine Months Ended September 30, 2001 2000 ---- ---- Operating activities: Net income $ 37,796,000 $ 44,908,000 Depreciation 15,005,000 14,692,000 Amortization 7,504,000 7,229,000 Working capital changes and other 16,258,000 (23,637,000) ---------- ---------- Net cash provided by operating activities 76,563,000 43,192,000 Investing activities: Purchases of properties and equipment (14,146,000) (17,241,000) Principal extensions under lease financing agreements (134,977,000) (107,880,000) Principal collections under lease financing agreements 108,889,000 88,510,000 Payments for purchases of companies, net of cash acquired (19,657,000) (24,401,000) Other, net 3,684,000 2,833,000 ---------- ---------- Net cash used for investing activities (56,207,000) (58,179,000) Financing activities: Increase (decrease) in short-term borrowings, net (74,606,000) 67,938,000 Increase (decrease) in long-term borrowings 93,905,000 (2,416,000) Purchases of treasury stock (13,155,000) (17,280,000) Cash dividends paid to shareholders (26,372,000) (34,534,000) Other, net 1,159,000 (252,000) ---------- ---------- Net cash provided by (used for) financing activities (19,069,000) 13,456,000 Increase (decrease) in cash and cash equivalents 1,287,000 (1,531,000) Cash and cash equivalents at beginning of period 13,556,000 8,764,000 ---------- ---------- Cash and cash equivalents at end of period $ 14,843,000 $ 7,233,000 ========== ========== 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, 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 $16,012,000 at September 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 nine months ended September 30, 2001 are not necessarily indicative of the results to be expected for the full year of 2001. 4. Interest paid for the nine-month periods ended September 30, 2001 and 2000 was $19,042,000 and $23,510,000, respectively. Income taxes paid for these same periods were $5,785,000 and $20,528,000, 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 non-amortization provisions of the statement is expected to result in an increase in net income, preliminarily estimated to be in the range of $5.3 million ($.12 per share) per year. During 2002, the Registrant will perform the first of the required impairment tests of goodwill and indefinite-lived intangible assets as 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: Three Months Ended Nine Months Ended September 30, September 30, 2001 2000 2001 2000 ---- ---- ---- ---- Numerators for both basic and diluted income per share computations: Income from continuing operations $ 8,853,000 $ 14,705,000 $ 37,191,000 $ 44,666,000 Income (loss) from discontinued operations 298,000 (25,000) 605,000 1,086,000 Cumulative effect of change in accounting (844,000) --------- ---------- ---------- ---------- Net income $ 9,151,000 $ 14,680,000 $ 37,796,000 $ 44,908,000 ========= ========== ========== ========== Denominator for basic income per share - weighted average shares outstanding 45,217,000 45,302,000 45,388,000 45,407,000 Effect of employee stock options (dilutive potential common shares) 90,000 166,000 140,000 119,000 ---------- ---------- ---------- ---------- Denominator for diluted income per share - adjusted shares 45,307,000 45,468,000 45,528,000 45,526,000 ========== ========== ========== ==========
7. The following table summarizes the Registrant's operations by segment for the three-month and nine-month periods ended September 30, 2001 and 2000. <TABLE> Three Months Ended Nine Months Ended September 30, September 30, 2001 2000 2001 2000 ---- ---- ---- ---- <S> <C> <C> <C> <C> Net sales Environmental Products $ 70,615,000 $ 65,631,000 $ 210,100,000 $ 195,893,000 Fire Rescue 82,646,000 80,808,000 271,040,000 258,950,000 Safety Products 62,650,000 63,938,000 192,361,000 203,222,000 Tool 37,492,000 48,200,000 124,726,000 147,518,000 ----------- ----------- ----------- ----------- Total net sales $ 253,403,000 $ 258,577,000 $ 798,227,000 $ 805,583,000 =========== =========== =========== =========== Operating income Environmental Products $ 3,648,000 $ 7,262,000 $ 16,373,000 $ 21,246,000 Fire Rescue 5,888,000 4,017,000 20,679,000 13,574,000 Safety Products 9,003,000 11,150,000 28,719,000 33,660,000 Tool 3,645,000 8,469,000 17,150,000 28,623,000 Corporate expense (3,031,000) (2,188,000) (9,066,000) (7,710,000) ---------- ---------- ---------- ---------- Total operating income 19,153,000 28,710,000 73,855,000 89,393,000 Interest expense (6,264,000) (8,217,000) (20,779,000) (23,179,000) Other income (expense) (769,000) 133,000 (642,000) (933,000) ---------- ---------- ---------- ---------- Income before income taxes $ 12,120,000 $ 20,626,000 $ 52,434,000 $ 65,281,000 ========== ========== ========== ========== There have been no material changes in total assets from the amount disclosed in the Registrant's last annual report. </TABLE>
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 THIRD QUARTER 2001 Comparison with Third Quarter 2000 Federal Signal Corporation reported diluted earnings per share from continuing operations of $.20 for the third quarter compared to $.32 last year. Third quarter net sales were $253 million compared to $259 million last year. Third quarter Environmental Products Group new orders were up 6%. Sales increased 8%, while earnings declined 50%. Continuing U.S. municipal demand drove new orders for street sweepers up 17% and sales up 26%. Industrial vacuum truck and waterblaster new orders and sales were very weak. Group operating margin declined to 5.2% from 11.1% last year, mainly as a result of a short-term increase in new product development expenses and very weak industrial product sales. Fire Rescue Group earnings again rose sharply, up 47% on a 2% sales increase. New orders decreased 7%. U.S. new orders were down 4% while non-U.S. orders decreased 15%. During the third quarter, the Federal Emergency Management Agency began issuing grants and grant request denials to U.S. fire departments requesting assistance from the 2001 federal grant program for fire apparatus. As a result, new order activity began to improve in September. The group has received a number of orders from New York City and is working to provide emergency replacement trucks as soon as possible. Underlying U.S. municipal demand for fire apparatus appears to be good and bidding activity has increased in the U.S. following the September 11 terrorist attacks. Sales increased 2% and the group's North American operations continued to improve, combining to raise the group's operating margin to 7.1% from 5.0% last year. Third quarter Safety Products Group sales were down 2%, while earnings declined 19%. New orders rose 12%. While global industrial demand remained flat, global municipal orders rose sharply driving the group's new orders up 12%. A late-incoming order pattern during the quarter, customer-induced project installation delays and relatively modest backlogs caused sales to decline 2%. The group's operating margin was reduced to 14.4% from 17.4% last year by a combination of unfavorable product mix changes and the effect of lower volume, which could not be fully offset within the quarter by lower operating expenses. Tool Group earnings were down 57% as sales decreased 22%. New orders were down 24%. Very weak U.S. tool markets continued during the quarter, with further weakening evidenced in the last two weeks of September. Auto production again weakened and parts shortages related to transportation delays slowed U.S. manufacturers' abilities to receive parts and complete scheduled production, further dampening orders for the group's products. The sharp volume decrease and price-cutting by a number of smaller competitors reduced the group's operating margin to 9.7% from 17.6% last year. In order to partially mitigate the adverse effects of volume and price declines, the group implemented a number of aggressive cost reduction programs. Gross profit as a percent of net sales declined to 28.5% in the third quarter of 2001 from 31.1% in the third quarter of 2000. Improved gross margin in the Fire Rescue Group was more than offset by declines in the other groups, including the effect of the significant volume decline in the Tool Group. Selling, general and administrative expenses as a percent of net sales increased to 20.9% in the third quarter of 2001 compared to 20.0% last year reflecting the company's lower sales volume and higher new product development expenses in the Environmental Products Group. Interest expense declined to $6.3 million from $8.2 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 third quarter of 2001 declined to 27.0% from 28.7% in 2000 reflecting the reduction in the company's taxable income and closure of certain tax issues in previously filed returns.
Comparison of First Nine Months 2001 to Same Period 2000 Diluted income per share from continuing operations for the first nine months of 2001 was $.82 compared to $.98 a year ago. Sales for the first nine months were $798 million compared to $806 million in 2000. Gross profit as a percent of net sales decreased to 29.8% in the first nine months of 2001 from 31.3% 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 third quarter. Interest expense declined to $20.8 million from $23.2 million largely as a result of the same reasons cited above for the third quarter. The effective tax rate of 29.1% for the first nine months of 2001 declined from the 31.6% in 2000 largely as a result of favorable benefits from research and development credits, non-U.S. tax benefits, a reduction in the company's taxable income and closure of certain tax issues in previously filed returns. 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 September 30, 2001 The current ratio applicable to manufacturing activities was 1.6 at September 30, 2001 compared to 1.2 at December 31, 2000. Working capital (manufacturing operations) at September 30, 2001 was $136.9 million compared to $60.0 million at December 31, 2000. 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 September 30, 2001 and December 31, 2000. The debt-to-capitalization ratio applicable to financial services activities was 87% at both September 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 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 11/9/01 By: /s/ Henry L. Dykema Date Henry L. Dykema, Vice President and Chief Financial Officer