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, 1999 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 46,175,342 shares outstanding at July 31, 1999
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, 1999.
<TABLE> FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited) <CAPTION> Three Months Ended June 30 Six Months Ended June 30 1999 1998 1999 1998 <S> <C> <C> <C> <C> Net sales $265,439,000 $250,121,000 $518,733,000 $481,351,000 Costs and expenses: Cost of sales 186,158,000 170,526,000 362,377,000 330,706,000 Selling, general and administrative 53,645,000 51,496,000 106,622,000 102,279,000 Other (income) and expenses: Interest expense 5,363,000 4,865,000 10,550,000 9,332,000 Other (income) (11,000) (225,000) (454,000) (386,000) ---------- ----------- ----------- --------- 245,155,000 226,662,000 479,095,000 441,931,000 ----------- ----------- ----------- ----------- Income before income taxes 20,284,000 23,459,000 39,638,000 39,420,000 Income taxes 6,592,000 7,446,000 12,899,000 12,561,000 ----------- ----------- ----------- ----------- Net income $ 13,692,000 $ 16,013,000 $26,739,000 $26,859,000 =========== =========== ========== ========== COMMON STOCK DATA: Basic net income per share $ .30 $ .35 $ .59 $ .59 =========== =========== ========== ========= Diluted net income per share $ .30 $ .35 $ .59 $ .58 =========== =========== ========== ========== Weighted average common shares outstanding: Basic 45,464,000 45,710,000 45,450,000 45,693,000 Diluted 45,699,000 45,988,000 45,699,000 45,974,000 Cash dividends per share of common stock $ .1850 $ .1775 $ .3700 $ .3550 </TABLE> See notes to condensed consolidated financial statements. <TABLE> FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited) <CAPTION> Three Months Ended June 30 Six Months Ended June 30 1999 1998 1999 1998 <S> <C> <C> <C> <C> Net income $13,692,000 $16,013,000 $26,739,000 $26,859,000 Other comprehensive income (loss)- Foreign currency translation adjustments (1,152,000) 435,000 (3,914,000) (1,407,000) ---------- ---------- ---------- ---------- Comprehensive income $12,540,000 $16,448,000 $22,825,000 $25,452,000 ========== ========== ========== ========== </TABLE> See notes to condensed consolidated financial statements.
FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS June 30 December 31 1999 1998 (a) --------- -------- (Unaudited) ASSETS Manufacturing activities - Current assets: Cash and cash equivalents $20,377,000 $15,316,000 Trade accounts receivable, net of allowances for doubtful accounts 155,663,000 159,080,000 Inventories: Raw materials 63,657,000 63,423,000 Work in process 41,454,000 32,613,000 Finished goods 35,899,000 35,925,000 ----------- ----------- Total inventories 141,010,000 131,961,000 Prepaid expenses 7,220,000 4,850,000 ----------- ----------- Total current assets 324,270,000 311,207,000 Properties and equipment: Land 6,059,000 5,922,000 Buildings and improvements 47,699,000 47,785,000 Machinery and equipment 168,415,000 157,392,000 Accumulated depreciation (119,074,000) (113,732,000) ----------- ----------- Net properties and equipment 103,099,000 97,367,000 Intangible assets, net of accumulated amortization 225,123,000 232,233,000 Other deferred charges and assets 25,444,000 21,147,000 ----------- ----------- Total manufacturing assets 677,936,000 661,954,000 Financial services activities - Lease financing receivables, net of allowances for doubtful accounts 181,717,000 174,045,000 ----------- ----------- Total assets $859,653,000 $835,999,000 =========== =========== See notes to condensed consolidated financial statements. (a)The balance sheet at December 31, 1998 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 1999 1998 (a) --------- -------- (Unaudited) LIABILITIES Manufacturing activities - Current liabilities: Short-term borrowings $58,043,000 $37,097,000 Trade accounts payable 64,508,000 62,976,000 Accrued liabilities and income taxes 83,474,000 95,120,000 ---------- ----------- Total current liabilities 206,025,000 195,193,000 Long-term borrowings 135,357,000 137,152,000 Deferred income taxes 27,913,000 30,212,000 ----------- ----------- Total manufacturing liabilities 369,295,000 362,557,000 Financial services activities -Borrowings 158,459,000 151,660,000 Total liabilities 527,754,000 514,217,000 SHAREHOLDERS' EQUITY Common stock - par value 46,826,000 46,668,000 Capital in excess of par value 66,037,000 63,461,000 Retained earnings 263,254,000 253,366,000 Treasury stock (26,886,000) (29,161,000) Deferred stock awards (2,700,000) (1,834,000) Accumulated other comprehensive income (14,632,000) (10,718,000) ----------- ----------- Total shareholders' equity 331,899,000 321,782,000 ----------- ----------- Total liabilities and shareholders' equity $859,653,000 $835,999,000 =========== =========== See notes to condensed consolidated financial statements. (a) The balance sheet at December 31, 1998 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 1999 1998 Operating activities: Net income $26,739,000 $26,859,000 Depreciation 8,893,000 8,233,000 Amortization 3,958,000 3,377,000 Working capital changes and other (14,075,000) (11,010,000) ---------- ---------- Net cash provided by operating activities 25,515,000 27,459,000 Investing activities: Purchases of properties and equipment (13,895,000) (10,515,000) Principal extensions under lease financing agreements (59,689,000) (49,306,000) Principal collections under lease financing agreements 52,017,000 46,298,000 Payments for purchases of companies, net of cash acquired (2,655,000) (23,080,000) Other, net 1,648,000 69,000 ---------- ---------- Net cash used for investing activities (22,574,000) (36,534,000) Financing activities: Additional short-term borrowings, net 27,821,000 34,245,000 Reduction of long-term borrowings (1,874,000) (1,667,000) Purchases of treasury stock (285,000) (57,000) Cash dividends paid to shareholders (25,039,000) (23,982,000) Other, net 1,497,000 619,000 ---------- ---------- Net cash provided by financing activities 2,120,000 9,158,000 Increase in cash and cash equivalents 5,061,000 83,000 Cash and cash equivalents at beginning of period 15,316,000 10,686,000 ---------- ---------- Cash and cash equivalents at end of period $20,377,000 $10,769,000 ========== ========== 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, 1999. 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, 1999, are not necessarily indicative of the results to be expected for the full year of 1999. 3. Interest paid for the six-month periods ended June 30, 1999 and 1998 was $12,067,000 and $10,157,000, respectively. Income taxes paid for these same periods were $9,720,000 and $11,383,000, 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 ---------------------------- ----------------------------- 1999 1998 1999 1998 ---- ---- ---- ---- <S> <C> <C> <C> <C> Numerator for both basic and diluted income per share computations - net income $13,692,000 $16,013,000 $26,739,000 $26,859,000 ========== ========== ========== ========== Denominator for basic income per share - weighted average shares outstanding 45,464,000 45,710,000 45,450,000 45,693,000 Effect of employee stock options (dilutive potential common shares) 235,000 278,000 249,000 281,000 ---------- ---------- ---------- ---------- Denominator for diluted income per share - adjusted shares 45,699,000 45,988,000 45,699,000 45,974,000 ========== ========== ========== ========== </TABLE> 5. The following table summarizes the registrant's operations by segment for the three months and six months ended June 30, 1999 and 1998. <TABLE> <CAPTION> Three months ended June 30 Six months ended June 30 1999 1998 1999 1998 <S> <C> <C> <C> <C> Net sales Environmental Products $ 64,936,000 $ 56,222,000 $126,057,000 $106,828,000 Fire Rescue 75,616,000 77,281,000 148,723,000 147,715,000 Safety Products 66,305,000 63,507,000 130,502,000 124,133,000 Sign 22,448,000 15,982,000 40,081,000 28,857,000 Tool 36,134,000 37,129,000 73,370,000 73,818,000 ----------- ----------- ----------- ----------- Total net sales $265,439,000 $250,121,000 $518,733,000 $481,351,000 =========== =========== =========== =========== Operating income Environmental Products $ 7,199,000 $ 5,095,000 $13,629,000 $ 8,813,000 Fire Rescue 2,514,000 5,562,000 3,918,000 8,631,000 Safety Products 9,456,000 10,216,000 18,577,000 19,100,000 Sign 1,647,000 1,544,000 2,953,000 713,000 Tool 7,160,000 7,822,000 15,082,000 15,322,000 Corporate expense (2,340,000) (2,140,000) (4,425,000) (4,213,000) ---------- ---------- ---------- ---------- Total operating income 25,636,000 28,099,000 49,734,000 48,366,000 Interest expense (5,363,000) (4,865,000) (10,550,000) (9,332,000) Other income 11,000 225,000 454,000 386,000 ---------- ---------- ---------- ---------- Income before income taxes $20,284,000 $23,459,000 $39,638,000 $39,420,000 ========== ========== ========== ========== </TABLE> The basis of segmentation and the basis of measurement of segment profit or loss are consistent with those used in the Registrant's last annual report. 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 1999 Comparison with Second Quarter 1998 Federal Signal Corporation reported record second quarter new orders, sales and backlog. New orders were up 9% to $274 million, sales were up 6% to $265 million and backlog rose 9% to $367 million. As anticipated, second quarter diluted earnings per share declined to $.30 from $.35 last year, and net income declined to $13.7 million from $16.0 million in 1998. In the second quarter, all groups except the Tool Group increased new orders and sales. New order growth was led by the Vehicle and Sign groups, with Sign also leading the company's sales growth in the quarter. Weakness in many parts of the U.S. industrial marketplace is adversely impacting performance in all Federal Signal groups except Sign. Vehicle Group new orders were up 9% in the second quarter, with municipal markets generally strong except Asia-Pacific. Fire rescue segment orders were particularly strong, with new orders up 20%. Vehicle Group sales were up 5%, led by a 15% increase in the environmental products segment. Vehicle Group backlog rose 11% to $273 million, a record, as manufacturing constraints held back fire apparatus deliveries in the U.S. These manufacturing constraints were greatest in April during the startup of a new management information system; productivity and throughput rose through the remainder of the quarter. Vehicle Group operating income declined 9%, with continued strong performance in the environmental products segment and a weak performance in the U.S. fire rescue segment. The fire rescue income comparison to last year's second quarter was adversely affected by an unusually strong income performance by the non-U.S. fire rescue segment in that quarter. The Tool Group sells to broad industrial markets, and weakness in many of these caused Tool orders and sales to decline 3% for the quarter. The only market that is very active for the Tool Group is U.S. automotive manufacturing. Group income was down 8%, mainly as a result of reduced sales. The Safety Products Group's new orders rose 5% in the second quarter. Sales were up 4%, as strength in emergency products and parking security devices offset significant declines in hazardous area lighting (related to declines in oil and gas exploration spending) and softness in industrial markets. The weak sales areas are among the highest margin in the Safety Products Group, causing the group's income to be down 7% for the quarter. Sign Group second quarter sales increased 40% as new orders rose 67% over a weak second quarter of 1998. Sign Group income grew 7%, as it reported against an unusually high margin second quarter in 1998. The group continues to improve its marketing execution and enjoy good market growth. Gross profit as a percent of net sales declined from 31.8% in the second quarter of 1998 to 29.9% in the second quarter of 1999. The percentage decline was largely attributable to lower gross margins in the fire rescue and Sign segments and a lower proportion of Tool Group sales partly offset by an improved margin in the environmental products segment. Selling, general and administrative expenses as a percent of net sales decreased to 20.2% from 20.6% in the second quarter of 1998 due primarily to a lower ratio of marketing costs, largely as a result of increased volume in the Sign and fire rescue segments. Interest expense increased from $4.9 million in 1998 to $5.4 million in 1999 as a result of increased borrowings to finance business acquisitions offset partially by lower interest rates. The effective tax rate for the second quarter of 1999 was 32.5% compared to the second quarter 1998 rate of 31.7%. This increased tax rate mainly resulted from a lower proportion of tax-exempt interest income and a lower proportion of foreign income that is taxed at lower rates.
Comparison of First Six Months 1999 to Same Period 1998 Orders for the first six months of 1999 increased 8% over the same period a year ago. For the first six months of 1999, sales of $518.7 million increased 8% over the $481.4 million last year. Net income of $26.7 million for the first six months of 1999 declined from last year's $26.9 million. Diluted earnings per share increased to $.59 in 1999 from $.58 in 1998. The essentially flat earnings for the first six months occurred as a result of manufacturing constraints which held back fire rescue deliveries in the U.S. combined with weakness in certain industrial markets, both U.S. and non-U.S. Gross profit as a percent of net sales declined to 30.1% in the first six months of 1999 from 31.3% in the first six months of 1998. Selling, general and administrative expenses decreased to 20.6% of net sales in the first six months of 1998 from 21.2% in the same period a year ago. The percentage changes were primarily due to the reasons cited above for the second quarter. Interest expense increased from $9.3 million to $10.6 million largely as a result of increased borrowings to finance recent business acquisitions partially offset by lower interest rates. The effective tax rate was 32.5% for the first half of 1999 increased from the 31.9% for the first half of 1998 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, 1999 The current ratio applicable to manufacturing activities was 1.6 at both June 30, 1999 and December 31, 1998. Working capital (manufacturing operations) at June 30, 1999 was $118.2 million compared to $116.0 million at the most recent year end. The debt-to-capitalization ratio applicable to manufacturing activities increased to 39% at June 30, 1999 compared to 37% at December 31, 1998 largely as a result of borrowings incurred to finance business acquisitions. The debt to capitalization ratio applicable to financial services activities was 87% at June 30, 1999 and December 31, 1998. 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. Year 2000 Reference should be made to Registrant's discussion of the Year 2000 issue in the Financial Review included in its Annual Report on Form 10-K for the fiscal year ended December 31, 1998. The company is continuing the final phases of correcting systems with identified deficiencies and plans to complete the final validation testing of its Year 2000 compliance program by early fourth quarter 1999. The company currently believes all essential processes, systems, and business functions will comply with the Year 2000 requirements by early fourth quarter 1999. While the company does not expect that the consequences of any unsuccessful modifications would significantly affect the financial position, liquidity, or results of operations, there can be no assurance that failure to be fully compliant by 2000 would not have an impact on the company. The company is continuing to survey critical suppliers, distributors and customers to assure that their systems will be Year 2000 compliant and anticipates this survey will essentially be complete by early fourth quarter 1999. While the failure of a single third party to timely achieve Year 2000 compliance should not have a material adverse effect on the company's results of operations in a particular period, the failure of several key third parties to achieve such compliance could have such an effect. The company will develop contingency plans by early fourth quarter 1999 to alter business relationships in the event certain third parties fail to become Year 2000 compliant. The costs of the company's Year 2000 transition program are being funded with cash flows from operations. Some of these costs relate solely to the modification of existing systems, while others are for new systems, which will improve business functionality. In total, these costs are not expected to be substantially different from the normal, recurring costs that are incurred for systems development and implementation. As a result, these costs are not expected to have a material adverse effect on the company's overall results of operations or cash flows.
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 08/13/99 By: /s/ Henry L. Dykema