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, 2000 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 (Address of principal executive offices) (Zip code) (630) 954-2000 (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 45,324,054 shares outstanding at October 31, 2000
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, 1999.
FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited) Three months ended Nine months ended September 30, September 30, 2000 1999 2000 1999 ---- ---- ---- ---- Net sales $270,884,000 $237,243,000 $820,771,000 $715,895,000 Costs and expenses: Cost of sales (187,865,000) (162,999,000) (565,184,000) (496,011,000) Selling, general and administrative (51,843,000) (49,415,000) (163,092,000) (148,274,000) Restructuring charges (837,000) (912,000) ----------- ---------- ----------- ----------- Operating income 30,339,000 24,829,000 91,583,000 71,610,000 Interest expense (8,217,000) (6,578,000) (23,179,000) (17,128,000) Other income (expense), net 133,000 921,000 (933,000) 1,388,000 ----------- ----------- ----------- ----------- Income from continuing operations before income taxes 22,255,000 19,172,000 67,471,000 55,870,000 Income taxes (6,540,000) (5,799,000) (21,447,000) (17,581,000) ----------- ----------- ----------- ----------- Income from continuing operations 15,715,000 13,373,000 46,024,000 38,289,000 Income from discontinued operations, net of tax (25,000) 416,000 1,086,000 2,239,000 ----------- ----------- ----------- ----------- Net income $ 15,690,000 $ 13,789,000 $ 47,110,000 $ 40,528,000 =========== =========== =========== =========== COMMON STOCK DATA: Basic net income per share: Income from continuing operations $.35 $.29 $1.01 $.84 Income from discontinued operations .00 .01 .02 .05 --- --- --- --- Net income $.35 $.30 $1.04* $.89 === === === === * amounts above do not add due to rounding Diluted net income per share: Income from continuing operations $.35 $.29 $1.01 $.83 Income from discontinued operations .00 .01 .02 .05 --- --- --- --- Net income $.35 $.30 $1.03 $.88 === === ==== === Weighted average common shares outstanding Basic 45,302,000 46,140,000 45,407,000 45,679,000 Diluted 45,468,000 46,295,000 45,526,000 45,897,000 Cash dividends per share of common stock $.1900 $.1850 $.5700 $.5550 See notes to condensed consolidated financial statements.
FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited) Three months ended Nine months ended September 30, September 30, 2000 1999 2000 1999 ---- ---- ---- ---- Net income $15,690,000 $13,789,000 $47,110,000 $40,528,000 Other comprehensive income (loss), net of tax - Foreign currency translation adjustments (3,794,000) 804,000 (7,626,000) (3,110,000) ---------- ---------- ---------- ---------- Comprehensive income $11,896,000 $14,593,000 $39,484,000 $37,418,000 ========== ========== ========== ========== See notes to condensed consolidated financial statements.
FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS September 30, December 31, 2000 1999 (a) ---------- ---------- (Unaudited) ASSETS Manufacturing activities Current assets: Cash and cash equivalents $ 7,233,000 $ 8,764,000 Trade accounts receivable, net of allowances for doubtful accounts 160,913,000 152,956,000 Inventories: Raw materials 68,930,000 58,487,000 Work in process 53,757,000 60,894,000 Finished goods 45,882,000 40,589,000 Prepaid expenses 8,198,000 8,895,000 ----------- ----------- Total current assets 344,913,000 330,585,000 Properties and equipment: Land 5,648,000 5,717,000 Buildings and improvements 52,451,000 50,365,000 Machinery and equipment 182,519,000 169,110,000 Accumulated depreciation (126,464,000) (113,980,000) ----------- ----------- Net properties and equipment 114,154,000 111,212,000 Intangible assets, net of accumulated amortization 275,366,000 273,844,000 Other deferred charges and assets 25,986,000 23,592,000 ----------- ----------- Total manufacturing assets 760,419,000 739,233,000 Net assets of discontinued operations, including financial assets 19,490,000 20,767,000 Financial services activities - Lease financing receivables, net of allowances for doubtful accounts 210,631,000 191,261,000 ----------- ----------- Total assets $ 990,540,000 $ 951,261,000 =========== =========== See notes to condensed consolidated financial statements. (a) The balance sheet at December 31, 1999 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, 2000 1999 (a) ----------- ----------- (Unaudited) LIABILITIES Manufacturing activities Current liabilities: Short-term borrowings $ 151,316,000 $ 99,204,000 Trade accounts payable 61,860,000 68,533,000 Accrued liabilities and income taxes 82,154,000 92,026,000 ----------- ----------- Total current liabilities 295,330,000 259,763,000 Long-term borrowings 131,994,000 134,410,000 Deferred income taxes 23,306,000 30,445,000 ------------ ----------- Total manufacturing liabilities 450,630,000 424,618,000 Financial services activities - Borrowings 188,436,000 172,610,000 SHAREHOLDERS' EQUITY Common stock - par value 46,998,000 46,889,000 Capital in excess of par value 67,913,000 66,762,000 Retained earnings 298,150,000 276,951,000 Treasury stock (34,303,000) (17,023,000) Deferred stock awards (2,350,000) (2,238,000) Accumulated other comprehensive income (24,934,000) (17,308,000) ----------- ----------- Total shareholders' equity 351,474,000 354,033,000 ------------ ----------- Total liabilities and shareholders' equity $ 990,540,000 $ 951,261,000 ============ =========== See notes to condensed consolidated financial statements. (a) The balance sheet at December 31, 1999 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, 2000 1999 ---- ---- Operating activities: Net income $ 47,110,000 $ 40,528,000 Depreciation 14,692,000 12,561,000 Amortization 7,229,000 5,961,000 Working capital changes and other (25,839,000) (21,153,000) ----------- ---------- Net cash provided by operating activities 43,192,000 37,897,000 Investing activities: Purchases of properties and equipment (17,241,000) (18,532,000) Principal extensions under lease financing agreements (107,880,000) (95,037,000) Principal collections under lease financing agreements 88,510,000 79,389,000 Payments for purchases of companies, net of cash acquired (24,401,000) (60,033,000) Other, net 2,833,000 1,067,000 ----------- ---------- Net cash used for investing activities (58,179,000) (93,146,000) Financing activities: Additional short-term borrowings, net 67,938,000 99,052,000 Reduction of long-term borrowings (2,416,000) (1,498,000) Purchases of treasury stock (17,280,000) (3,592,000) Cash dividends paid to shareholders (34,534,000) (33,574,000) Other, net (252,000) 1,953,000 ----------- ---------- Net cash provided by financing activities 13,456,000 62,341,000 Increase (decrease) in cash and cash equivalents (1,531,000) 7,092,000 Cash and cash equivalents at beginning of period 8,764,000 15,316,000 ----------- ---------- Cash and cash equivalents at end of period $ 7,233,000 $ 22,408,000 =========== ========== 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, 1999. 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; accordingly the 1999 condensed consolidated statements of income, balance sheet and cash flows have been restated. The net book value of the Sign Group's assets aggregated $19,490,000 at September 30, 2000; management believes that the value ultimately to be received for these assets will exceed the recorded net book value. 3. Management of the Registrant has announced it is consolidating its Alabama-based industrial vacuum truck manufacturing operations into its Illinois-based operations. In addition, the Registrant is eliminating certain manufacturing facilities in its Tool Group that became redundant with a recent acquisition. The Registrant has incurred costs related to these restructuring activities, which principally have been relocation of people and inventories and recruiting and training of new personnel. 4. 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, 2000 are not necessarily indicative of the results to be expected for the full year of 2000. 5. Interest paid for the nine-month periods ended September 30, 2000 and 1999 was $23,510,000 and $17,100,000, respectively. Income taxes paid for these same periods were $20,528,000 and $15,438,000, respectively. 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, 2000 1999 2000 1999 ---- ---- ---- ---- Numerators for both basic and diluted income per share computations: Income from continuing operations $15,715,000 $13,373,000 $46,024,000 $38,289,000 Income (loss) from discontinued operations (25,000) 416,000 1,086,000 2,239,000 ---------- ---------- ---------- ---------- Net income $15,690,000 $13,789,000 $47,110,000 $40,528,000 ========== ========== ========== ========== Denominator for basic income per share - weighted average shares outstanding 45,302,000 46,140,000 45,407,000 45,679,000 Effect of employee stock options (dilutive potential common shares) 166,000 155,000 119,000 218,000 ---------- ---------- ---------- ---------- Denominator for diluted income per share - adjusted shares 45,468,000 46,295,000 45,526,000 45,897,000 ========== ========== ========== ==========
7. The following table summarizes the Registrant's operations by segment for the three-month and nine-month periods ended September 30, 2000 and 1999. Three Months Ended Nine Months Ended September 30, September 30, 2000 1999 2000 1999 ---- ---- ---- ---- Net sales Environmental Products $ 65,631,000 $ 61,914,000 $195,893,000 $187,971,000 Fire Rescue 93,115,000 70,075,000 274,138,000 218,798,000 Safety Products 63,938,000 62,959,000 203,222,000 193,461,000 Tool 48,200,000 42,295,000 147,518,000 115,665,000 ----------- ----------- ----------- ----------- Total net sales $270,884,000 $237,243,000 $820,771,000 $715,895,000 =========== =========== =========== =========== Operating income Environmental Products $ 7,262,000 $6,468,000 $21,246,000 $20,097,000 Fire Rescue 5,646,000 2,182,000 15,764,000 6,100,000 Safety Products 11,150,000 9,985,000 33,660,000 28,562,000 Tool 8,469,000 8,439,000 28,623,000 23,521,000 Corporate expense (2,188,000) (2,245,000) (7,710,000) (6,670,000) ---------- ---------- ---------- ---------- Total operating income 30,339,000 24,829,000 91,583,000 71,610,000 Interest expense (8,217,000) (6,578,000) (23,179,000) (17,128,000) Other income (expense) 133,000 921,000 (933,000) 1,388,000 ---------- ---------- ---------- ---------- Income from continuing operations before income taxes $22,255,000 $19,172,000 $67,471,000 $55,870,000 ========== ========== ========== ========== Except as discussed in Note 2 above, 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.
10 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 2000 Comparison with Third Quarter 1999 Federal Signal Corporation reported diluted earnings per share from continuing operations of $.35 for the third quarter up from $.29 last year. Diluted net income per share including the results of the discontinued Sign operations was $.35 compared to $.30 in 1999. Diluted per share amounts for continuing operations and net income in 2000 both include $.01 related to charges recorded for restructurings of the company's Environmental Products and Tool groups. Diluted earnings per share from continuing operations rose 21% (24% excluding restructuring charges). Net income was $15.7 million, up from $13.8 million in 1999. Sales and net income were at record levels for the third quarter. In the third quarter, sales and income growth were led by the Fire Rescue Group. Fire Rescue Group income more than doubled on a 33% sales increase, driven by even greater increases in sales and income from North American operations. Orders were up 6% sequentially versus the second quarter, and many orders were again delayed into the fourth quarter. Environmental Products Group sales were up 6% on a 2% increase in orders. Before restructuring charges approximating $.6 million, income rose 21%. Sales growth was solid across the group, but new orders for the industrial market were slow. The consolidation of the two vacuum truck manufacturing plants is generating the restructuring charges in this group; the consolidation will be essentially complete at the end of the fourth quarter and is expected to produce savings beginning in the first quarter of 2001. Total 2000 restructuring charges for the Environmental Products Group are expected to be approximately $.04 per share, with approximately $.03 of the total expected to occur in the fourth quarter. Safety Products Group earnings rose 12% on a 2% increase in sales. The strong margin improvement came mostly on strong sales of higher-margin products and expense reductions. Orders were down 10% mainly as a result of oilfield-related orders that were down in a market that remains very weak and the negative effect of currency translation on our European orders. Tool Group sales rose 14% and orders were up 17%. Excluding the PCS mold tooling business acquired in March of this year, orders were up 2% and sales were essentially flat. As anticipated, tool orders slowed somewhat during the quarter, but still grew modestly over last year's third quarter. Cutting tool orders remained somewhat stronger than punch and die component orders. Income rose 3% before restructuring charges of $.3 million in the quarter; the restructuring charges resulted from a consolidation of two cutting tool manufacturing plants that will be completed in the fourth quarter. A similar charge is expected in the fourth quarter, with benefits to begin in the first quarter of 2001. Gross profit as percent of net sales declined to 30.6% in the third quarter of 2000 from 31.3% in the third quarter of 1999. The percentage decrease was largely attributable to the significant increase in sales in the Fire Rescue Group compared to the sales increases in other groups; the Fire Rescue Group has a lower gross profit percentage than the company's other groups. Selling, general and administrative expenses as a percent of net sales improved to 19.4% (19.1% excluding restructuring charges) in the third quarter of 2000 compared to 20.8% last year reflecting the significant increase in sales volume. Restructuring charges of approximately $.8 million incurred during the third quarter represent expenses related principally to relocation of people and inventories and recruiting and training of new personnel. Interest expense increased to $8.2 million from $6.6 million largely as a result of: 1) increased borrowings to finance recent business acquisitions, increased financial services assets and additional purchases of treasury shares and 2) higher interest rates. The effective tax rate for the third quarter of 2000 declined to 29.4% from 30.2% in 1999 largely as a result of the closure of certain tax issues in previously filed tax returns.
Comparison of First Nine Months 2000 to Same Period 1999 Diluted net income per share from continuing operations for the first nine months, including approximately $.01 in restructuring charges discussed above, rose 22% to $1.01. Diluted net income per share including the results of the discontinued Sign operations was $1.03 and net income was $47.1 million for the first nine months. For the first nine months, sales were up 15% and group operating income, including restructuring charges of approximately $.9 million, was up 27%. Gross profit as a percent of net sales increased to 31.1% in the first nine months of 2000 from 30.7% in the first nine months of 1999. Selling, general and administrative expenses as a percent of net sales decreased to 20.0% (19.9% excluding restructuring charges) in the first nine months of 2000 from 20.7% in the same period a year ago. The improvement in the gross profit percentage largely resulted from productivity improvements in the company's Fire Rescue Group operations. The improvement in the ratio of selling, general and administrative expenses resulted largely from the significant sales improvement and an improved cost structure of the company's operations. Interest expense increased to $23.2 million from $17.1 million largely as a result of the same reasons cited above for the third quarter. The effective tax rate of 31.8% for the first nine months of 2000 was not significantly different from the 31.5% in the same period for 1999. 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, 2000 The current ratio applicable to manufacturing activities was 1.2 at September 30, 2000 compared to 1.3 at December 31, 1999. Working capital (manufacturing operations) at September 30, 2000 was $49.6 million compared to $70.8 million at the most recent year-end. The debt-to-capitalization ratio applicable to manufacturing activities was 47% at September 30, 2000 compared to 42% at December 31, 1999. The decline in the current ratio and working capital since December 31, 1999 is attributable to an increase in short-term debt incurred to fund an acquisition of a small tool company, payments of dividends to common shareholders and purchases of additional treasury shares. The debt-to-capitalization ratio applicable to financial services activities was 87% at September 30, 2000 and December 31, 1999. 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 repurchases. Other The Securities and Exchange Commission (SEC) has issued Staff Accounting Bulletins #101, #101A and #101B that provide rules governing revenue recognition for exchange-listed companies. The Registrant's policy for the principal portion of its revenues is to recognize revenue in its financial statements when goods are shipped (see footnote A to the Registrant's 1999 consolidated financial statements). The SEC's bulletins were recently supplemented with guidance on several types of specific transactions. At this time, the Registrant has not determined the effects of the changes in reported results of operations that may be required as a result of the SEC's bulletins. In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" and subsequently amended by Statements 137 and 138, the adoption of which will be required by no later than the beginning of 2001. This statement standardizes the accounting treatment for derivative instruments. The company has not completed its final determination of the effects, if any, this statement will have on its reported results of operations, nor when it will adopt the provisions of this statement.
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 11/8/00 By: /s/ Henry L. Dykema Date Henry L. Dykema, Vice President and Chief Financial Officer