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 March 31, 2002 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 45,260,000 shares outstanding at April 30, 2002
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, 2001.
FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited) Three months ended March 31, -------------------------------- 2002 2001 ------ ------ Net sales $ 245,644,000 $ 258,007,000 Costs and expenses: Cost of sales (175,754,000) (178,067,000) Selling, general and administrative (51,277,000) (56,084,000) ----------- ----------- Operating income 18,613,000 23,856,000 Interest expense (4,783,000) (7,810,000) Other income, net 154,000 96,000 Minority interest 28,000 ----------- ----------- Income from continuing operations before income taxes 14,012,000 16,142,000 Income taxes (4,218,000) (4,516,000) ----------- ----------- Income from continuing operations 9,794,000 11,626,000 Cumulative effect of change in accounting (7,984,000) ----------- ----------- Net income $ 1,810,000 $ 11,626,000 =========== =========== COMMON STOCK DATA: Basic and diluted net income per share: Income from continuing operations $ .22 $ .26 Cumulative effect of change in accounting (.18) --- --- Net income $ .04 $ .26 === === Weighted average common shares outstanding Basic 45,133,000 45,412,000 Diluted 45,327,000 45,573,000 Cash dividends per share of common stock $ .200 $ .195 See notes to condensed consolidated financial statements.
FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited) Three months ended March 31, ---------------------------- 2002 2001 ------ ------ Net income $ 1,810,000 $ 11,626,000 Other comprehensive income (loss), net of tax - Foreign currency translation adjustments (1,044,000) (4,172,000) --------- --------- Comprehensive income $ 766,000 $ 7,454,000 ========= ========= See notes to condensed consolidated financial statements.
FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS March 31, December 31, 2002 2001 (a) --------- ----------- (Unaudited) ASSETS Manufacturing activities - Current assets: Cash and cash equivalents $ 20,066,000 $ 16,882,000 Trade accounts receivable, net of allowances for doubtful accounts 149,655,000 158,994,000 Inventories: Raw materials 65,301,000 63,435,000 Work in process 43,414,000 39,258,000 Finished goods 47,864,000 50,148,000 Prepaid expenses 15,184,000 13,608,000 ------------- ------------- Total current assets 341,484,000 342,325,000 Properties and equipment: Land 5,554,000 5,606,000 Buildings and improvements 54,388,000 53,854,000 Machinery and equipment 201,337,000 198,047,000 Accumulated depreciation (150,066,000) (143,765,000) ------------- ------------- Net properties and equipment 111,213,000 113,742,000 ============= ============= Goodwill, net of accumulated amortization 277,777,000 280,888,000 Other deferred charges and assets 27,834,000 25,143,000 ------------- ------------- Total manufacturing assets 758,308,000 762,098,000 Net assets of discontinued operations, including financial assets 12,935,000 14,396,000 Financial services activities - Lease financing receivables, net of allowances for doubtful accounts 240,102,000 239,120,000 ------------- ------------- Total assets $ 1,011,345,000 $ 1,015,614,000 ============= ============= See notes to condensed consolidated financial statements. (a) The balance sheet at December 31, 2001 has been derived from the audited financial statements at that date.
FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS -- Continued March 31, December 31, 2002 2001 (a) ------------ ----------- LIABILITIES (Unaudited) Manufacturing activities - Current liabilities: Short-term borrowings $ 19,649,000 28,849,000 Trade accounts payable 63,474,000 53,292,000 Accrued liabilities and income taxes 102,127,000 97,289,000 ------------- ------------- Total current liabilities 185,250,000 179,430,000 Long-term borrowings 230,973,000 232,678,000 Deferred income taxes 28,667,000 29,280,000 ------------- ------------- Total manufacturing liabilities 444,890,000 441,388,000 ------------- ------------- Financial services activities - Borrowings 214,310,000 213,917,000 Minority interest in subsidiary 845,000 873,000 SHAREHOLDERS' EQUITY Common stock - par value 47,560,000 47,378,000 Capital in excess of par value 76,737,000 73,177,000 Retained earnings 304,989,000 312,206,000 Treasury stock (47,934,000) (45,486,000) Deferred stock awards (3,348,000) (2,179,000) Accumulated other comprehensive income (26,704,000) (25,660,000) ------------- ------------- Total shareholders' equity 351,300,000 359,436,000 ------------- ------------- Total liabilities and shareholders' equity $ 1,011,345,000 $ 1,015,614,000 ============= ============= See notes to condensed consolidated financial statements. (a) The balance sheet at December 31, 2001 has been derived from the audited financial statements at that date.
FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) Three Months Ended March 31, ---------------------------- 2002 2001 ------ ------ Operating activities: Net income $ 1,810,000 $ 11,626,000 Cumulative effect of change in accounting 7,984,000 Depreciation 5,230,000 5,067,000 Amortization 478,000 2,666,000 Working capital changes and other 18,411,000 2,554,000 ---------- ---------- Net cash provided by operating activities 33,913,000 21,913,000 Investing activities: Purchases of properties and equipment (2,763,000) (7,020,000) Principal extensions under lease financing agreements (37,513,000) (40,679,000) Principal collections under lease financing agreements 37,037,000 35,041,000 Payments for purchases of companies, net of cash acquired (18,457,000) Other, net (2,929,000) (1,204,000) ---------- ---------- Net cash used for investing activities (6,168,000) (32,319,000) Financing activities: Increase (decrease) in short-term borrowings, net (11,544,000) 21,578,000 Decrease in long-term borrowings (1,942,000) (1,230,000) Purchases of treasury stock (4,356,000) Cash dividends paid to shareholders (8,814,000) (8,619,000) Other, net 2,095,000 457,000 ---------- ---------- Net cash provided by (used for) financing activities (24,561,000) 12,186,000 ---------- ---------- Increase in cash and cash equivalents 3,184,000 1,780,000 Cash and cash equivalents at beginning of period 16,882,000 13,556,000 ---------- ---------- Cash and cash equivalents at end of period $ 20,066,000 $ 15,336,000 ========== ========== 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, 2001. 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 $12,935,000 at March 31, 2002; 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 ended March 31, 2002 are not necessarily indicative of the results to be expected for the full year of 2002. 4. Interest paid for the three-month periods ended March 31, 2002 and 2001 was $3,159,000 and $6,877,000, respectively. Income taxes paid for these same periods were $891,000 and $685,000, respectively. 5. In June 2001, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards (SFAS) 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 has adopted SFAS No. 142, and accordingly discontinued the amortization of goodwill effective January 1, 2002. As part of the adoption, the Registrant also completed a transitional goodwill impairment test and determined that $7,984,000 of goodwill related to a niche Tool group business was impaired. This amount has been recognized as a charge to net income as a cumulative effect of a change in accounting. The Registrant determined the fair value of the reporting unit by calculating the present value of expected future cash flows. A reconciliation of previously reported net income and earnings per share to the amounts adjusted for the exclusion of goodwill amortization, net of the related income tax effect, follows: Three Months Ended March 31, ------------------------------ 2002 2001 ------- ------- Reported net income $ 1,810,000 $ 11,626,000 Add back: goodwill amortization, net of tax 1,369,000 --------- ---------- Adjusted net income $ 1,810,000 $ 12,995,000 ========= ========== Basic and diluted net income per common share Reported net income $ .04 $ .26 Goodwill amortization, net of tax .03 --- --- Adjusted net income $ .04 $ .29 === ===
Changes in the carrying amount of goodwill for the quarter ended March 31, 2002, by operating segment, are as follows: <TABLE> <CAPTION> Environmental Safety Products Fire Rescue Products Tool Total ------------- ------------- ----------- --------- --------- <S> <C> <C> <C> <C> <C> Goodwill balance January 1, 2002 $ 61,722,000 $ 33,356,000 $ 98,900,000 $ 86,910,000 $ 280,888,000 Impairment (7,984,000) (7,984,000) Translation and other 1,472,000 115,000 (406,000) 3,692,000 4,873,000 ----------- ---------- ---------- ---------- ----------- Goodwill balance March 31, 2002 $ 63,194,000 $ 33,471,000 $ 98,494,000 $ 82,618,000 $ 277,777,000 =========== ========== ========== ========== =========== </TABLE> Other intangible assets (amortized and not amortized) were insignificant for the quarter ended March 31, 2002. 6. The following table summarizes the information used in computing basic and diluted income per share: Three Months Ended March 31, ---------------------------- 2002 2001 ------ ------ Numerators for both basic and diluted income per share computations: Income from continuing operations $ 9,794,000 $ 11,626,000 Cumulative effect of change in accounting (7,984,000) --------- ---------- Net income $ 1,810,000 $ 11,626,000 ========= ========== Denominator for basic income per share - weighted average shares outstanding 45,133,000 45,412,000 Effect of employee stock options (dilutive potential common shares) 194,000 161,000 ---------- ---------- Denominator for diluted income per share - adjusted shares 45,327,000 45,573,000 ========== ==========
7. The following table summarizes the Registrant's operations by segment for the three-month period ended March 31, 2002 and 2001. Three Months Ended March 31, ------------------------------------ 2002 2001 ------ ------ Net sales Environmental Products $ 74,752,000 $ 64,842,000 Fire Rescue 67,249,000 83,839,000 Safety Products 64,645,000 64,380,000 Tool 38,998,000 44,946,000 ----------- ----------- Total net sales $ 245,644,000 $ 258,007,000 =========== =========== Operating income Environmental Products $ 6,587,000 $ 4,523,000 Fire Rescue 1,669,000 5,387,000 Safety Products 9,267,000 9,710,000 Tool 4,124,000 7,317,000 Corporate expense (3,034,000) (3,081,000) ---------- ---------- Total operating income 18,613,000 23,856,000 Interest expense (4,783,000) (7,810,000) Minority interest 28,000 Other income 154,000 96,000 ---------- ---------- Income before income taxes $ 14,012,000 $ 16,142,000 ========== ========== There have been no material changes in total assets from the amount disclosed in the Registrant's last annual report except as in accordance with SFAS No. 142. See Footnote 5.
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 FIRST QUARTER 2002 Comparison with First Quarter 2001 Federal Signal Corporation reported diluted earnings per share of $.22 from continuing operations for the first quarter of 2002 on sales of $246 million. This compares to earnings per share of $.26 on sales of $258 million for the same period in 2001. New orders were $251 million, down 7% compared to $270 million in last year's first quarter, reflecting weaker industrial markets. Backlog increased during the quarter to $353 million at quarter-end compared to $350 million a year ago. During the quarter, the company adopted the new goodwill accounting standard, which resulted in a one-time after-tax charge of $8 million or $.18 per share to write off the goodwill associated with a niche Tool Group business. This charge represents about 3% of the total goodwill carried on the company's books. Environmental Products Group earnings increased 31% and sales increased 15%. The group's new orders declined 3%. Strong opening backlogs and improving productivity in the group's U.S. street sweeper and municipal sewer cleaner businesses resulted in sharply higher sales and operating earnings. New orders were below 2001; order delays for the group's municipal sewer cleaning trucks and weakness in industrial water blasting products more than offset worldwide sweeper order gains of 4%. Fire Rescue Group sales fell 20% and earnings declined 71%. New orders declined 5%. U.S. orders rose slightly while orders for Canadian and Finnish products declined. The sharp sales decline exceeded the modest decline in new orders due to the timing of shipments. During mid-2001, U.S. orders declined significantly due to uncertainties surrounding the FIRE Act grant program; as we expected, that order pattern is now adversely affecting sales and margins. In addition, fourth quarter 2001 orders were placed predominantly in December as municipalities reassessed priorities following the events of September 11th. Operating earnings declined essentially as a result of the much lower sales and production volumes. Safety Products Group sales were flat with last year while earnings declined 10%. The group's new orders declined 10%. Flat sales resulted from strong beginning backlogs for outdoor warning systems and emergency lights and sirens, which offset the impact of lower deliveries of parking and revenue control equipment and industrial lighting products. Operating earnings declined for industrial businesses and group earnings were also adversely affected by higher pension expenses. Tool Group orders declined 10% and sales declined 13%. Group earnings fell 48%. Compared to the prior year the group's orders and sales declined reflecting a much slower industrial demand. Though still relatively weak, first quarter orders and sales improved 5% above fourth quarter 2001, mainly as a result of higher U.S. auto demand. Lower earnings resulted from the reduction in sales, as well as lower plant loading due in part to successful reductions in finished goods inventory requirements. Gross margin decreased from 31.0% in the first quarter of 2001 to 28.5% in the first quarter of 2002, primarily due to the lower sales and production volume in the Fire Rescue and Tool groups. Selling, general and administrative expenses as a percent of net sales decreased to 20.9% from 21.7% primarily as a result of the company no longer amortizing goodwill in 2002. Interest expense decreased to $4,783,000 compared to $7,810,000 in the same quarter last year, reflecting the lower interest rate environment. The effective tax rate increased to 30.1% from 28.0% in 2001 largely as a result of favorable benefits from research and development credits in 2001 not recurring in 2002. <Page> 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 March 31, 2002 First quarter operating cash flow totaled $34 million, up $12 million from 2001, due to lower working capital resulting from improved collections and improved inventory management from successful lean manufacturing programs. Working capital (manufacturing operations) at March 31, 2002 was $156.2 million compared to $162.9 million at the most recent year-end. Working capital decreased from the year-end level primarily due to lower receivables reflecting improved collections and a lower level of sales in the quarter. The debt-to-capitalization ratio applicable to manufacturing activities was 44% at both March 31, 2002 and December 31, 2001. The debt-to-capitalization ratio applicable to financial services activities was 87% at both March 31, 2002 and December 31, 2001. 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, two, three, five and six are omitted since these items are either inapplicable or the response thereto would be negative. Item 4. Submission of Matters to a Vote of Security Holders At its Annual Meeting of Stockholders on April 18, 2002, the stockholders of the Registrant voted to elect three directors. Out of the 45,099,378 shares entitled to vote, holders of 39,350,807 shares voted. Shareholders elected Charles R. Campbell, Paul W. Jones and James A. Lovell, Jr. as directors for three-year terms. Holders of 38,565,350; 39,017,888 and 38,942,991 shares voted for the respective directors, while holders of 785,457; 332,919 and 407,816 shares withheld votes regarding the respective directors. 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 5/8/02 By: /s/ Stephanie K. Kushner Date Stephanie K. Kushner, Vice President and Chief Financial Officer