EXHIBIT 13
- ----------
1994 ANNUAL REPORT TO SHAREHOLDERS OF FEDERAL SIGNAL CORPORATION
- -----------------------------------------------------------------
FEDERAL SIGNAL CORPORATION
Selected Financial Data
1994 1993 1992 1991 1990 1989 1988 1987 1986 1985 1984
Operating Results (dollars in
millions):
Net sales $ 677.2 $ 565.2 $ 518.2 $ 466.9 $ 439.4 $ 398.4 $ 361.4 $ 305.8 $ 273.3 $ 264.5 $ 241.3
Income before income taxes (a) $ 70.2 $ 58.8 $ 49.9 $ 45.6 $ 42.5 $ 34.6 $ 28.4 $ 23.8 $ 20.9 $ 16.3 $ 14.9
Income from continuing
operations (b) $ 46.8 $ 39.8 $ 34.5 $ 31.0 $ 28.1 $ 22.1 $ 18.2 $ 14.5 $ 12.3 $ 11.9 $ 9.2
Operating margin 11.6% 11.3% 10.6% 10.8% 10.8% 10.6% 9.6% 8.6% 8.5% 7.2% 7.3%
Return on average common
shareholders' equity 22.3% 21.0% 20.0% 20.0% 20.4% 18.7% 17.0% 14.5% 12.2% 13.3% 11.0%
Common Stock Data
(per share) (c):
Income from continuing
operations $ 1.02 $ 0.86 $ 0.75 $ 0.67 $ 0.61 $ 0.48 $ 0.40 $ 0.31 $ 0.26 $ 0.26 $ 0.20
Cash dividends $ 0.42 $ 0.36 $ 0.31 $ 0.27 $ 0.22 $ 0.19 $ 0.16 $ 0.15 $ 0.15 $ 0.15 $ 0.15
Market price range:
High $21-3/8 $21 $17-5/8 $15-1/4 $10-3/4 $7-1/8 $4-7/8 $4-7/8 $4-1/2 $3-3/4 $3-5/8
Low $16-7/8 $15-3/4 $12-3/8 $9-1/4 $6-1/4 $4-1/4 $3-1/2 $2-7/8 $3-1/8 $2-5/8 $2-1/2
Average common shares
outstanding (in thousands) 45,957 46,293 46,128 46,126 46,038 46,103 45,639 47,137 46,767 45,335 45,357
Financial Position at Year-End
(dollars in millions):
Working capital (d) $ 53.9 $ 52.8 $ 49.5 $ 44.9 $ 42.7 $ 63.8 $ 59.5 $ 53.9 $ 52.8 $ 58.2 $ 60.6
Current ratio (d) 1.4 1.5 1.6 1.5 1.5 2.1 2.0 1.9 2.2 2.3 2.5
Total assets $ 521.6 $ 405.7 $ 363.7 $ 341.2 $ 295.8 $ 271.3 $ 251.1 $ 233.3 $ 191.4 $ 187.4 $ 178.7
Shareholders' equity $ 220.3 $ 199.2 $ 179.0 $ 164.8 $ 146.4 $ 130.4 $ 115.5 $ 103.2 $ 102.4 $ 91.1 $ 85.3
Debt to capitalization ratio (d) 22% 1% 2% 1% 2% 10% 18% 22% 4% 15% 18%
Other (dollars in millions) (e):
New business $ 700.3 $ 584.2 $ 510.3 $ 462.7 $ 467.6 $ 429.9 $ 382.4 $ 328.3 $ 276.4 $ 274.6 $ 246.5
Backlog $ 261.0 $ 221.8 $ 198.0 $ 203.2 $ 199.9 $ 171.7 $ 140.2 $ 119.2 $ 96.7 $ 93.6 $ 83.5
Net cash provided by operating
activities $ 53.8 $ 48.8 $ 40.2 $ 43.9 $ 48.3 $ 34.6 $ 22.5 $ 20.1 $ 22.7 $ 16.5 $ 13.6
Net cash (used for) investing
activities $ (96.9) $ (38.1) $ (26.9) $ (47.8) $ (14.7) $ (24.1) $ (20.8) $ (37.7) $ (12.8) $ (6.9) $ (9.0)
Net cash provided by (used for)
financing activities $ 45.1 $ (10.3) $ (11.2) $ 2.5 $ (34.6) $ (8.9) $ (3.3) $ 17.8 $ (9.9) $ (9.4) $ (5.1)
Capital expenditures $ 11.1 $ 10.1 $ 8.8 $ 12.0 $ 8.3 $ 9.2 $ 7.3 $ 6.9 $ 6.3 $ 6.9 $ 4.5
Depreciation $ 10.3 $ 9.2 $ 8.7 $ 8.2 $ 7.8 $ 7.9 $ 7.1 $ 5.5 $ 5.2 $ 5.3 $ 4.8
Employees 5,243 4,426 4,268 4,212 4,158 4,142 3,880 3,653 3,183 3,190 2,962
<FN>
(a) in 1985, reflects pre-tax provisions to expense for non-recurring charges of $4.6 million
(b) in 1992, reflects net cumulative effects of accounting changes for postretirement benefits and income taxes of $30,000; in 1985,
reflects cumulative effect of accounting change for investment tax credits of $2.2 million and after-tax provisions to expense
for non-recurring charges of $2.3 million
(c) reflects 10% stock dividends each paid in 1988 and 1989, 3-for-2 stock splits in 1990, 1991 and 1992, and a 4-for-3 stock split
distributed March 1, 1994
(d) manufacturing operations only
(e) continuing operations only
FINANCIAL REVIEW
Consolidated Results of Operations
Federal Signal Corporation again achieved record levels of net sales
and net income in 1994. Net sales increased to $677.2 million, 20%
higher than 1993's $565.2 million. Net income increased 18% to $46.8
million in 1994 from $39.8 million in 1993. These increases follow
1993's increases of 9% in sales and 15% in net income. Net income per
share for 1994 increased 19% to $1.02 per share compared to $.86 in
1993 and $.75 per share in 1992.
The 1994 sales increase of 20% resulted from volume increases of 19%
(including 8% resulting from the acquisitions of Justrite
Manufacturing in May and Vactor Manufacturing at the end of June) and
price increases of 1%. Domestic sales increased 21% in 1994 while
foreign sales increased 15%. Excluding the sales of Justrite and
Vactor, domestic sales were 12% higher in 1994 while foreign sales
increased 8%. Foreign sales accounted for 19% of the company's total
sales in 1994 compared to 20% of total sales in 1993.
The 1994 sales increases follow a 9% increase in sales in 1993. The
increase in sales in 1993 resulted from volume increases of 8%
(including 4% from the acquisition of Guzzler Manufacturing in March
1993) and price increases of 1%. Excluding the sales of Guzzler in
1993, domestic sales were 10% above 1992. Foreign sales declined 7%
in 1993 largely due to the recessionary European economic environment
then present.
Operating margins have increased from 10.8% in 1990 to 11.6% in 1994,
despite generally declining gross profit margins as the following
table shows:
(percent of sales)
1994 1993 1992 1991 1990
Net sales 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales 69.0 67.8 68.2 67.9 66.8
Gross profit margin 31.0 32.2 31.8 32.1 33.2
Selling, general and
administrative expenses 19.4 20.9 21.2 21.3 22.4
Operating margin 11.6% 11.3% 10.6% 10.8% 10.8%
Gross profit margins have generally declined principally due to sales
of the Vehicle Group increasing greater than sales of the other
groups. The Vehicle Group normally experiences higher cost of sales
percentages but lower operating expense percentages than the other
groups. This was exacerbated in 1992 due to the late 1991
acquisitions of Superior Emergency Vehicles and Frontline Emergency
Vehicles. This trend reversed in 1993 due to improving gross margins
of three of the company's four groups, most notably Safety Products
and Sign. Due to the reorganization costs incurred in 1992 for newly
acquired businesses and certain costs incurred at Ravo for development
and other operational changes, the percentage of selling, general and
administrative expenses did not decline in 1992 as rapidly as normally
would be expected. In 1993 and 1994, however, reductions in the
percentage of selling, general and administrative costs did occur.
The reductions in 1993 and 1994 are a result of: 1) higher sales, and
the resultant impact of fixed costs being spread over those higher
sales, and 2) operational improvements made, particularly in the Sign
Group. All of the company's groups continue to work toward reducing
their costs.
Because of the varied nature of its operations, the company recognizes
that changes in operating income as a percentage of net sales on a
consolidated basis may sometimes distort its real operating
performance. In order to monitor the operating performance of its
operations, the company utilizes various methods, one of which is a
return on assets approach. Return on assets is defined as operating
income divided by the identifiable assets of its businesses. In
recent years, the company's operations have achieved strong returns as
summarized in the chart below.
The company has improved its return on assets of its existing
businesses over the years by increasing operating margins and asset
turnover. Return for the total company remained even with last year's
level. Return on assets for the Sign and Vehicle groups increased
above 1993 while the return for the Safety Products and Tool groups
declined. Excluding the effects of the acquisition of Justrite made
in 1994, return on manufacturing assets for the Safety Products Group
improved.
The company acquires businesses which meet the company's growth and
other strategic objectives. In large part as a result of intangibles
arising from our acquisitions, it is anticipated that businesses
acquired will not generate the same levels of returns as the company's
other businesses for some time following their respective acquisition.
However, the company's strategies include making constant improvements
in all of its businesses. The results of these efforts are evidenced
by the improving returns on manufacturing assets of businesses
operated for two years or more. Excluding the effects of the
companies acquired in 1994, the company's return on manufacturing
assets increased to 24% in 1994 from 22% in 1993. The declines in
1991 and 1992 and the even results in 1993 and 1994 were due solely to
the acquisitions made during those respective years or late in
previous years. Excluding the effects of companies acquired, returns
on assets were as follows: 26% in 1991 and 1992, and 24% in 1993. In
addition to continuing programs undertaken to reduce manufacturing and
operating costs and improve productivity, the company also has
continuing programs to improve asset turnover. Improving inventory
turnover and accelerating the collection of accounts receivable have
also had a significant positive impact on return on assets.
Interest expense increased $2.4 million in 1994 following a decline of
$.3 million in 1993. The increase in 1994 was the result of
substantially increased borrowings caused largely by two factors: 1)
$69.6 million relating to the acquisitions for cash of Justrite and
Vactor, and 2) a $16.8 million increase in financial services assets
which occurred during the year. In addition, weighted average
interest rates on short-term borrowings experienced in 1994 were 4.5%
compared to 3.5% in 1993. Interest expense declined $.3 million in
1993 principally as a result of lower interest rates partially offset
by increased average borrowings required to fund the purchase of
Guzzler Manufacturing in March 1993, increases in financial services
assets and repurchases of the company's stock at the end of 1992.
The company's effective tax rate of 33.4% in 1994 increased from rates
of 32.3% and 31.0% in 1993 and 1992, respectively. The increase in
1994 results from: 1) the fact that the 1993 rate included the impact
of favorable tax return audit results, and 2) tax-exempt interest
income has become a lower percentage of the company's total income.
The increase in 1993 was largely due to the enacted change in the
statutory federal income tax rate partially offset by the favorable
audit results impact.
In November 1992, the Financial Accounting Standards Board issued SFAS
No. 112, "Employers' Accounting for Postemployment Benefits." This
statement is required to be adopted no later than for the year ended
1994. The company's adoption of this statement in 1994 had an
insignificant impact on results of operations for the year.
At the end of 1994, the company changed its assumptions for discount
rates used in determining the actuarial present values of accumulated
and projected benefit obligations for its postretirement plans from
7.6% to 8.9%. This increase resulted from the higher interest rate
environment being experienced at the end of 1994. The company also
increased its estimate for projected rates of increase in compensation
levels from 4% to 5% for future years despite relatively low levels of
inflation. The expectation that somewhat increasing levels of
inflation will continue for the foreseeable future is based upon
recent increases in interest rates which are reflective of a
potentially higher inflationary trend. The company expects that the
changes in assumptions will have an insignificant impact on 1995
results of operations.
Certain of the company's businesses are susceptible to the influences
of seasonal buying or delivery patterns. The company'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, other municipal emergency signal products
and parking systems manufacturing operations.
Group Operations
Domestic markets were generally stronger in 1994 for all four of the
company's groups. As mentioned previously, foreign sales increased 8%
(excluding acquisitions) in 1994. The Safety Products, Vehicle and
Tool groups achieved much higher foreign sales in 1994. For the
second year in a row, all four groups achieved increases in both sales
and earnings.
Safety Products
Safety Products Group sales increased 29% in 1994 resulting from
increased sales at Signal Products and Federal APD and the acquisition
of Justrite. Justrite, acquired in May 1994, accounted for about
three-fourths of the increase. Domestic sales were up 35% (8%
excluding Justrite) while foreign sales increased 11% (6% excluding
Justrite). Earnings increased 44% in 1994; a little over two-thirds
of the increase was attributable to Justrite.
For the eighth consecutive year, the Safety Products Group's operating
margin increased. Cost reductions, the impact of recent new product
sales, and increased penetration of foreign markets contributed to the
improved results including an increase in the group's return on
manufacturing assets (excluding the dilutive effect of the newly
acquired Justrite). The Safety Products Group further improved its
manufacturing throughput and reduced manufacturing costs and operating
expenses. For the seventh year in a row, Signal Products made
improvements in its inventory turnover. Reductions in inventories
resulted in LIFO credits of $.3 million in 1993 and $.5 million in
1992. The acquisition of Justrite in May 1994 and the acquisition of
VAMA in 1992 resulted in a dilutive effect on the group's return on
manufacturing assets. The group's return on manufacturing assets in
1992 increased to 38% (excluding VAMA) and in 1994 increased to 36%
(excluding Justrite, including VAMA).
Sign
After posting losses in 1991 and 1992, the Sign Group made substantial
internal improvements and returned to profitability in 1993.
Additional further improvements resulted in lower expenses and
improved operating margins culminating in a profit of $4.0 million in
1994. Commercial and industrial construction activity appears to have
stabilized and after a two-year period of declining sales Sign
achieved sales increases in 1993 (4%) and 1994 (13%). While increased
sales levels contributed to the group's improved profitability in 1993
and 1994, steps taken to consolidate its manufacturing resources,
increased training, and a focus on higher margin sales were the
essential reasons for its improved profitability. The group's break-
even point has been substantially reduced over the past three years
and has had a positive impact on its cost competitiveness. The Sign
Group anticipates that its markets in 1995 will be somewhat similar to
those experienced in 1994. The steps taken by the group and the
continued stable market conditions expected for 1995 should result in
improved operating results next year.
Tool
In 1994, the Tool Group achieved a 9% increase in sales and a 1%
increase in income. Excluding the impacts of certain charges that are
not expected to recur, earnings increased in 1994 at nearly the same
rate as sales. Domestic sales increased 8% in 1994 while foreign sales
increased 13%. Dayton Progress again increased its domestic market
share and experienced the favorable impacts of improved economies in its
key foreign markets. The 1994 foreign sales gains follow a 7% decline
in 1993 which was principally caused by the weak economies in Europe and
Japan. The declines in the returns on manufacturing assets have
resulted from the following principal factors: 1) the impact of the
nonrecurring charges (excluding these charges, the return would have
been 37% in 1994), 2) the impact of the acquisitions of Dico, Schneider
Stanznormalien and Container Tool (excluding this effect, the return
would have been 42% in 1993 and 48% in 1992), and 3) competitive price
pressure which negatively affected margins in 1991. Returns on
manufacturing assets available through investments in newly acquired
companies have been lower than historical returns produced by existing
operations. As mentioned earlier, this is anticipated in the company's
acquisition objectives. The company anticipates improving returns on
assets in 1995 for the group's operations excluding the impacts of
future acquisitions, if any, that may be made.
Vehicle
Earnings for the Vehicle Group increased 11% in 1994 on a sales increase
of 22%. Excluding the effects of Vactor Manufacturing which was
acquired in mid-1994, sales would have increased approximately 14% while
earnings would have increased about 8%. Domestic sales increased 24% in
1994 (16% excluding Vactor). Foreign sales increased 17% in 1994 (9%
excluding Vactor). Strong domestic sales were achieved by Emergency
One, Elgin and Guzzler. While foreign sales were lower at Elgin, all of
the group's other units experienced strong increases. The group's
sweeper and industrial vacuum businesses both achieved strong sales and
earnings increases in 1994. While further improvement is expected in
1995, the rate of improvement will likely be somewhat less than in 1994.
Fire apparatus earnings were down somewhat in 1994 principally resulting
from a temporary shift into lower margin products. A substantial
improvement in operating results is expected in the fire apparatus
business in 1995. Return on manufacturing assets for the group improved
in 1994 reversing the decline since 1991. The previous declines were
the result of the dilutive impact of acquisitions in each of the years
ended December 31, 1992 and 1993. Returns on manufacturing assets for
this period excluding acquisitions were as follows: 21% in 1992
(excluding Superior and Frontline), 17% in 1993 (excluding Guzzler) and
17% in 1994 (excluding Vactor).
Financial Services Activities
The company maintains a large investment ($128.4 million at December 31,
1994) in lease financing and other receivables which are generated
principally by its vehicle operations with the balance generated by its
sign operations. These assets continued to be conservatively leveraged
in accordance with the company's stated financial objectives for these
assets for the five-year period ending December 31, 1994 (see further
discussion in Financial Position and Cash Flow).
Financial services assets have repayment terms generally ranging from
two to eight years. The increases in these assets resulted from
increasing sales of the Vehicle Group as well as continuing greater
acceptance by customers of the benefits of using the company as their
source of financing vehicle purchases. In accordance with the company's
change in strategy regarding financing risk tolerance and profitability
with respect to its Sign operations, financing assets for the Sign Group
have declined in recent years.
Financial Position and Cash Flow
The company emphasizes generating strong cash flows from operations.
During 1994, cash flow from operations increased to a level of $53.8
million compared to $48.8 million in 1993 and $40.2 million in 1992.
These results are directly reflective of: 1) efforts to lower costs,
and 2) the amount of improvement (reduction) in the relative amounts of
working capital required to support the company's increased sales
volumes. The company has reduced its average working capital to sales
ratio (8% during 1994) by nearly half since 1987 principally by
improving its days-sales-outstanding and inventory turnover ratios. As
a result of the reductions achieved so far, the company anticipates that
significant further reduction in the working capital to sales ratio is
unlikely to be achieved going forward. Nevertheless, the company
expects continued improvement in its operating cash flow as it focuses
aggressively on its efficiencies and costs as well as its working
capital management.
During the 1990-1994 period, the company has utilized its strong cash
flows from operations to: 1) fund in whole or in part strategic
acquisitions of companies operating in markets related to those already
served by the company; 2) purchase increasing amounts of equipment
principally to provide for further cost reductions and increased
productive capacity for the future as well as tooling for new products;
3) increase its investment in financial services activities; 4) pay
increasing amounts in cash dividends to shareholders; and 5) repurchase
up to 1-2% of its outstanding common stock each year.
Cash flows for the five-year period ending December 31, 1994 are
summarized as follows:
(in millions)
1994 1993 1992 1991 1990
Cash provided by
(used for):
Operating activities $ 53.8 $ 48.8 $ 40.2 $ 43.9 $ 48.3
Investing activities (96.9) (38.1) (26.9) (47.8) (14.7)
Financing activities 45.1 (10.3) (11.2) 2.5 (34.6)
Increase (decrease) in
cash and cash
equivalents $ 2.0 $ .4 $ 2.1 $ (1.4) $ (1.0)
In order to show the distinct characteristics of the company's
investment in its manufacturing activities and its investment in its
financial services activities, the company has presented separately
these investments and their related liabilities. Each of these two
types of activities are supported by different percentages of debt and
equity.
One of the company's financial objectives is to maintain a strong
financial position. The company defines its goal as normally having a
debt to capitalization ratio of 30% or less for its manufacturing
operations. At December 31, 1994 and 1993, the company's debt to
capitalization ratios of its manufacturing operations were 22% and 1%,
respectively. The increase in this ratio occurred largely due to the
1994 acquisitions of Justrite and Vactor for cash. The strong operating
cash flows enabled a decline in this ratio during the second half of
1994 from the 28% level at June 30 (immediately after the company's
acquisition of Vactor). Also, at December 31, 1994 and 1993, the
company's debt to capitalization ratios for its financial services
activities were 87% and 86%, respectively. The company believes that
its financial assets, due to their overall quality, are capable of
sustaining a leverage ratio in the range of 85% to 87% on average. The
company intends to maintain this range of leverage for its financial
activities in the future and at the same time fulfill its financial
objective with respect to its manufacturing debt to capitalization
ratio. These intentions are consistent with its investment grade credit
rating obtained in connection with its commercial paper program.
As indicated earlier, substantial effort is focused on improving the
utilization of the company's working capital. The company's current
ratio for its manufacturing operations was 1.4 at December 31, 1994 and
1.5 at December 31, 1993. These ratios are slightly lower than those in
prior years as a result of reduced working capital needs for receivables
and inventories and improved management of cash disbursements as well as
increased short-term debt. The company anticipates that its financial
resources and major sources of liquidity, including cash flow from
operations, will continue to be adequate to meet its operating and
capital needs in addition to its financial commitments.
FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31,
1994 1993
Assets
Manufacturing activities:
Current assets
Cash and cash equivalents $ 4,605,000 $ 2,576,000
Accounts receivable, net of allowances
for doubtful accounts of $2,848,000
and $2,215,000, respectively 107,985,000 81,593,000
Inventories - Note C 78,899,000 63,022,000
Prepaid expenses 4,807,000 4,627,000
Total current assets 196,296,000 151,818,000
Properties and equipment - Note D 72,838,000 62,204,000
Other assets
Intangible assets, net of accumulated amortization 115,306,000 65,436,000
Other deferred charges and assets 9,972,000 15,666,000
Total manufacturing assets 394,412,000 295,124,000
Financial services activities
Lease financing and other receivables, net of allowances
for doubtful accounts of $1,174,000 and $976,000,
respectively, and net of unearned finance
revenue - Note E 127,188,000 110,580,000
Total assets $ 521,600,000 $ 405,704,000
Liabilities and Shareholders' Equity
Manufacturing activities:
Current liabilities
Short-term borrowings - Note F $ 25,222,000 $ 282,000
Accounts payable 44,918,000 33,363,000
Accrued liabilities
Compensation and withholding taxes 19,032,000 16,601,000
Other - Note B 45,943,000 44,541,000
Income taxes - Notes B and G 7,263,000 4,269,000
Total current liabilities 142,378,000 99,056,000
Other liabilities
Long-term borrowings - Note F 34,878,000 1,344,000
Deferred income taxes - Notes B and G 13,778,000 10,929,000
Total manufacturing liabilities 191,034,000 111,329,000
Financial services activities - Note F
Short-term borrowings 110,252,000 75,433,000
Long-term borrowings 19,734,000
Total financial services liabilities 110,252,000 95,167,000
Total liabilities 301,286,000 206,496,000
Contingency - Note M
Shareholders' equity - Notes J and K
Common stock, $1 par value, 90,000,000 shares
authorized, 45,767,000 and 45,738,000 shares
issued, respectively 45,767,000 45,738,000
Capital in excess of par value 53,756,000 54,045,000
Retained earnings - Note F 133,138,000 105,471,000
Treasury stock, 395,000 shares, at cost (7,880,000)
Deferred stock awards (1,688,000) (1,715,000)
Foreign currency translation adjustment (2,779,000) (4,331,000)
Total shareholders' equity 220,314,000 199,208,000
Total liabilities and shareholders' equity $ 521,600,000 $ 405,704,000
<FN>
See notes to consolidated financial statements.
FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31,
1994 1993 1992
Net sales $ 677,228,000 $ 565,163,000 $ 518,223,000
Other income, net 412,000 1,048,000 1,214,000
Costs and expenses
Cost of sales 467,494,000 383,087,000 353,231,000
Selling, general and administrative 131,466,000 118,192,000 109,834,000
Interest expense 8,499,000 6,136,000 6,471,000
Total costs and expenses 607,459,000 507,415,000 469,536,000
Income before income taxes 70,181,000 58,796,000 49,901,000
Income taxes - Note G 23,411,000 19,016,000 15,471,000
Income before cumulative effects of changes in
accounting methods 46,770,000 39,780,000 34,430,000
Cumulative effects of changes in accounting
methods - Note B 30,000
Net income $ 46,770,000 $ 39,780,000 $ 34,460,000
Net income per share $ 1.02 $ 0.86 $ 0.75
Average common shares outstanding 45,957,000 46,293,000 46,128,000
<FN>
See notes to consolidated financial statements.
FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31,
1994 1993 1992
Operating activities
Net income $ 46,770,000 $ 39,780,000 $ 34,460,000
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 10,302,000 9,215,000 8,732,000
Cumulative effects of changes in accounting methods (30,000)
Provision for doubtful accounts 1,809,000 2,710,000 2,521,000
Deferred income taxes 3,544,000 (350,000) 2,213,000
Other, net 5,518,000 (1,844,000) (764,000)
Changes in operating assets and liabilities net of
effects from acquisitions and divestitures of companies
Accounts receivable (20,050,000) (10,742,000) 1,165,000
Inventories (4,458,000) (400,000) 1,054,000
Prepaid expenses (108,000) (935,000) 1,126,000
Accounts payable 5,217,000 5,193,000 (4,170,000)
Accrued liabilities 2,713,000 3,378,000 (4,474,000)
Income taxes 2,505,000 2,746,000 (1,594,000)
Net cash provided by operating activities 53,762,000 48,751,000 40,239,000
Investing activities
Purchases of properties and equipment (11,108,000) (10,139,000) (8,835,000)
Principal extensions under lease financing agreements (97,988,000) (70,470,000) (66,400,000)
Principal collections under lease financing agreements 81,182,000 64,041,000 63,063,000
Payments for purchases of companies, net of cash acquired (69,563,000) (22,869,000) (14,825,000)
Other, net 613,000 1,378,000 79,000
Net cash used for investing activities (96,864,000) (38,059,000) (26,918,000)
Financing activities
Addition to short-term borrowings 59,699,000 2,542,000 8,160,000
Principal payments on long-term borrowings (1,811,000) (1,002,000) (1,215,000)
Principal extensions under long-term borrowings 15,000,000 5,080,000
Purchases of treasury stock (9,736,000) (1,778,000) (4,679,000)
Cash dividends paid to shareholders (18,462,000) (15,938,000) (13,848,000)
Other, net 441,000 757,000 391,000
Net cash provided by (used for) financing activities 45,131,000 (10,339,000) (11,191,000)
Increase in cash and cash equivalents 2,029,000 353,000 2,130,000
Cash and cash equivalents at beginning of year 2,576,000 2,223,000 93,000
Cash and cash equivalents at end of year $ 4,605,000 $ 2,576,000 $ 2,223,000
<FN>
See notes to consolidated financial statements.
Federal Signal Corporation and Subsidiaries
Notes to Consolidated Financial Statements
Note A - Significant Accounting Policies
Principles of consolidation: The consolidated financial statements
include the accounts of Federal Signal Corporation and all of its
subsidiaries.
Cash equivalents: The company considers all highly liquid investments
with a maturity of three months or less, when purchased, to be cash
equivalents.
Inventories: Inventories are stated at the lower of cost or market.
At December 31, 1994 and 1993, approximately 60% and 67%,
respectively, of the company's inventories are costed using the LIFO
(last-in, first-out) method. The remaining portion of the company's
inventories are costed using the FIFO (first-in, first-out) method.
Properties and depreciation: Properties and equipment are stated at
cost. Depreciation, for financial reporting purposes, is computed
principally on the straight-line method over the estimated useful
lives of the assets.
Intangible assets: Intangible assets principally consist of costs in
excess of fair values of net assets acquired in purchase transactions
and are generally being amortized over forty years. Accumulated
amortization aggregated $9,469,000 and $6,737,000 at December 31, 1994
and 1993, respectively. The company makes regular periodic
assessments to determine if factors are present which indicate that an
impairment of intangibles may exist. If factors indicate that an
impairment may exist, the company makes an estimate of the related
future cash flows. The undiscounted cash flows, excluding interest,
are compared to the related book value including the intangibles. If
such cash flows are less than the book value, the company makes an
estimate of the fair value of the related business to determine the
amount of impairment loss, if any, to be recorded as a reduction of
the recorded intangibles.
Revenue recognition: Substantially all of the company's sales are
recorded as products are shipped or services are rendered. The
percentage-of-completion method of accounting is used in certain
instances for custom-manufactured products where, due to the nature of
specific orders, production and delivery schedules exceed normal
schedules.
Income per share: Income per share was computed on the basis of the
weighted average number of common and common equivalent shares
(dilutive stock options) outstanding during the year.
Note B - Changes in Accounting for Postretirement Benefits and
Income Taxes
Effective January 1, 1992, the company adopted the provisions of
Statements of Financial Accounting Standards (SFAS) No. 106,
"Employers' Accounting for Postretirement Benefits Other Than
Pensions," and No. 109, "Accounting for Income Taxes." The provisions
of SFAS No. 106 require that expenses associated with certain
postretirement benefits be recognized during the eligible service
lives of the respective employees. Prior to adoption of SFAS No. 106,
the company recorded the expenses for such benefits when the claims
were incurred. The company elected to recognize the transition
obligation of $1,931,000 ($1,231,000 net of the related income tax
benefits) immediately in net income in 1992, the year of adoption.
The provisions of SFAS No. 109 require that income tax liabilities and
assets are to be determined based upon tax rates and legislation
enacted as of the respective balance sheet date. Prior to the
company's adoption of SFAS No. 109, the company's income tax
liabilities and assets were determined using historical tax rates.
The company elected to record the cumulative adjustment of $1,261,000
in net income in 1992, the year of adoption.
Note C - Inventories
Inventories at December 31 are summarized as follows:
1994 1993
Finished goods $20,054,000 $15,860,000
Work in process 22,355,000 18,567,000
Raw materials 36,490,000 28,595,000
Total inventories $78,899,000 $63,022,000
If the first-in, first-out cost method, which approximates replacement
cost, had been used by the company, inventories would have aggregated
$88,093,000 and $71,541,000 at December 31, 1994 and 1993,
respectively.
Note D - Properties and Equipment
A comparative summary of properties and equipment at December 31 is as
follows:
1994 1993
Land $ 5,740,000 $ 5,502,000
Buildings and improvements 38,045,000 36,014,000
Machinery and equipment 109,841,000 93,481,000
Accumulated depreciation (80,788,000) (72,793,000)
Total properties and equipment $72,838,000 $62,204,000
Note E - Lease Financing and Other Receivables
As an added service to its customers, the company is engaged in
financial services activities. These activities primarily consist of
providing long-term financing for certain customers of the company's
sign and vehicle operations. A substantial portion of the lease
financing receivables of the Vehicle Group are due from
municipalities. Financing is provided through sales-type lease
contracts with terms which range typically as follows:
Sign-related leases 3 - 5 years
Vehicle-related leases 2 - 8 years
At the inception of the lease, the company records the product sales
price and related costs and expenses of the sale. Financing revenues
are included in income over the life of the lease. The amounts
recorded as lease financing receivables represent amounts equivalent
to normal selling prices less subsequent customer payments.
Lease financing and other receivables will become due as follows:
$44,917,000 in 1995, $23,620,000 in 1996, $19,328,000 in 1997,
$13,820,000 in 1998, $9,432,000 in 1999 and $17,245,000 thereafter.
At December 31, 1994 and 1993, unearned finance revenue on these
leases aggregated $21,347,000 and $18,924,000, respectively.
Note F - Debt
Short-term borrowings at December 31 consisted of the following:
1994 1993
Commercial paper $ $21,422,000
Notes payable 134,289,000 53,021,000
Current maturities of long-term debt 1,185,000 1,272,000
Total short-term borrowings $135,474,000 $75,715,000
Long-term borrowings at December 31 consisted of the following:
1994 1993
7.59% unsecured note payable in 2001
($4,000,000) and 2002 ($8,000,000) $12,000,000 $12,000,000
7.99% unsecured note payable in 2004 15,000,000
6.58% unsecured discounted notes
payable in annual installments of
$1,000,000 ending in 2001 5,769,000 6,403,000
Other 3,294,000 3,947,000
Subtotal 36,063,000 22,350,000
Less current maturities 1,185,000 1,272,000
Total long-term borrowings $34,878,000 $21,078,000
Aggregate maturities of long-term debt amount to approximately
$1,185,000 in 1995, $1,073,000 in 1996, $3,655,000 in 1997, $987,000
in 1998 and $767,000 in 1999. The company believes that the fair
values of borrowings are not substantially different from recorded
amounts.
The 7.59% and 7.99% notes contain various restrictions relating to
maintenance of minimum working capital, payments of cash dividends,
purchases of the company's stock, and principal and interest of any
subordinated debt. All of the company's retained earnings at December
31, 1994 were free of any restrictions.
The company paid interest of $6,943,000 in 1994, $5,437,000 in 1993
and $5,871,000 in 1992. Weighted average interest rates on short-term
borrowings were 5.8% and 3.6% at December 31, 1994 and 1993,
respectively.
At December 31, 1994, the company had unused credit lines of
$60,000,000, which expire on June 20, 1998. Commitment fees, paid in
lieu of compensating balances, were insignificant.
Note G - Income Taxes
The provisions for income taxes consisted of the following:
1994 1993 1992
Current:
Federal and foreign $17,775,000 $17,200,000 $11,817,000
State and local 2,092,000 1,946,000 1,441,000
Total 19,867,000 19,146,000 13,258,000
Deferred (credit):
Federal and foreign 3,333,000 (226,000) 2,117,000
State and local 211,000 (124,000) 96,000
Total 3,544,000 (350,000) 2,213,000
Enacted rate change
effect on deferred
liabilities 220,000
Total income taxes $23,411,000 $19,016,000 $15,471,000
Differences between the statutory federal income tax rate and the
effective income tax rate are summarized below:
1994 1993 1992
Statutory federal income tax rate 35.0% 35.0% 34.0%
State income taxes, net of federal
tax benefit 2.1 2.0 2.0
Tax-exempt interest (2.6) (3.0) (3.4)
Enacted rate change effect on
deferred liabilities .4
Other, net (1.1) (2.1) (1.6)
Effective income tax rate 33.4% 32.3% 31.0%
The company had net current deferred income tax benefits of $1,362,000
and $2,057,000 recorded in the balance sheet at December 31, 1994 and
1993, respectively. The company paid income taxes of $17,735,000 in
1994, $16,938,000 in 1993 and $13,503,000 in 1992.
Deferred tax liabilities (assets) comprised the following at
December 31, 1994: Depreciation and amortization - $14,296,000;
revenue recognized on lease financing receivables and custom
manufacturing contracts - $8,143,000; accrued expenses deductible in
future periods - $(9,283,000); and other $(740,000). Deferred tax
liabilities (assets) comprised the following at December 31, 1993:
Depreciation and amortization - $10,708,000; revenue recognized on
lease financing receivables and custom manufacturing contracts -
$8,393,000; accrued expenses deductible in future periods -
$(7,593,000); and other $(2,636,000).
Note H - Postretirement Benefits
The company and its subsidiaries sponsor a number of defined benefit
retirement plans covering certain of its salaried employees and hourly
employees not covered by plans under collective bargaining agreements.
Benefits under these plans are primarily based on final average
compensation as defined within the provisions of the individual plans.
The company's policy is to contribute amounts sufficient to meet the
minimum funding requirements of applicable laws and regulations. Plan
assets consist principally of a broadly diversified portfolio of
equity securities, corporate and U.S. Government obligations and
guaranteed-return insurance contracts. The company also participates
in several multiemployer retirement plans which provide benefits to
employees under certain collective bargaining agreements.
Pension expense is summarized as follows:
1994 1993 1992
Company-sponsored plans
Service cost $1,687,000 $1,511,000 $1,415,000
Interest cost 2,437,000 2,290,000 2,053,000
Return on plan assets 581,000 (6,428,000) (3,827,000)
Other amortization and
deferral (5,521,000) 1,943,000 (219,000)
Total (816,000) (684,000) (578,000)
Multiemployer plans 337,000 561,000 530,000
Total pension expense
(credit) $ (479,000) $ (123,000) $ (48,000)
The following summarizes the funded status of the company-sponsored
plans at December 31, 1994 and 1993 and the major assumptions used to
determine these amounts. At December 31, 1994 and 1993, all of the
company's plans had assets which exceeded accumulated benefits.
1994 1993
Actuarial present value of:
Vested benefit obligation $21,904,000 $24,193,000
Nonvested benefits 1,746,000 1,874,000
Accumulated benefit obligation $23,650,000 $26,067,000
Actuarial present value of projected
benefit obligation $31,072,000 $32,457,000
Plan assets at market value 43,318,000 45,058,000
Plan assets in excess of projected
benefit obligation 12,246,000 12,601,000
Unrecognized net obligation at
January 1, 1994 and 1993,
respectively (2,270,000) (2,455,000)
Unrecognized net experience
(gain) (9,660,000) (10,646,000)
Net pension asset (liability) $ 316,000 $ (500,000)
The following significant assumptions were used in determining pension
costs for the years ended December 31, 1994, 1993 and 1992:
1994 1993 1992
Discount rate 7.6% 8.5% 8.5%
Rate of increase in
compensation levels 4% 5% 5%
Expected long-term rate of
return on plan assets 11% 11% 11%
The weighted average discount rates used in determining the actuarial
present value of all pension obligations at December 31, 1994 and 1993
were 8.9% and 7.6%, respectively.
The company also sponsors a number of defined contribution pension
plans covering a majority of its employees. Participation in the plans
is at each employee's election. Company contributions to these plans
are based on a percentage of employee contributions. The cost of these
plans was $2,900,000 in 1994 (including newly acquired companies),
$2,160,000 in 1993 and $2,130,000 in 1992.
The company also provides certain medical, dental and life benefits to
certain eligible retired employees. These benefits are funded when the
claims are incurred. Participants generally become eligible for these
benefits at age 60 after completing at least fifteen years of service.
The plan provides for the payment of specified percentages of medical
and dental expenses reduced by any deductible and payments made by
other primary group coverage and government programs. The corporation
will continue to reduce the percentage of the cost of benefits that it
will pay since the company's future costs are limited to 150% of the
1992 cost.
The following table sets forth the status of the retiree health care
benefits at December 31, 1994 and 1993, respectively:
1994 1993
Accumulated postretirement benefit
obligation:
Retirees $ 638,000 $ 696,000
Fully eligible active
plan participants 30,000 22,000
Other active plan participants 1,510,000 1,465,000
Unrecognized net experience gain 163,000
Accrued postretirement benefit
liability $2,341,000 $2,183,000
The net periodic postretirement benefit cost for 1994, 1993 and 1992
consisted of the following:
1994 1993 1992
Service cost of
benefits earned $112,000 $ 89,000 $ 94,000
Interest cost on
accumulated postretirement
benefit obligation 179,000 163,000 167,000
Net periodic postretirement
benefit cost $291,000 $252,000 $261,000
The expected postretirement benefit obligation was measured using an
assumed 12% increase in the per capita claims medical costs and a 10%
increase in the per capita dental claims costs for 1993. These
increases are reduced by .65% and .55%, respectively, after 1993
through 2003 and remain at 5.5% and 4.5%, respectively, thereafter.
The weighted average discount rate used in determining the accumulated
postretirement benefit obligation was 8.9% at December 31, 1994 and
7.6% at December 31, 1993. If the health care cost trend rates were
increased 1%, the accumulated postretirement benefit obligation as of
December 31, 1994 would have increased by 1%. The effect of this
change on the aggregate of service and interest cost for 1994 would be
an increase of 2%.
Note I - Derivative Financial Instruments
The company enters into agreements (derivative financial instruments)
to manage the risks associated with certain aspects of its business.
The company does not actively trade such instruments nor enter into
such agreements for speculative purposes. The company principally
utilizes two types of derivative financial instruments: 1) interest
rate swaps to manage its interest rate risk, and 2) foreign currency
forward exchange contracts to manage risks associated with sales and
purchase commitments denominated in foreign currencies.
At December 31, 1994, the company had agreements with financial
institutions to swap interest rates on notional amounts totaling $15
million. One of the agreements expires in 1995 and provides that the
company will pay interest at an average fixed annual rate of 7.12% on
a notional amount of $5 million and will receive interest based upon
the London Interbank Offered Rate (LIBOR). The other agreement expires
in 1997 and provides that the company will receive a fixed annual rate
of 5.08% and will pay interest at the LIBOR with a maximum floating
rate of 7.50% for the last twelve months of the agreement. The
differential between the amount received and the amount paid is accrued
as interest rates change and recognized as an adjustment to interest
expense; the related amount payable to or receivable from the
counterparties is included in accrued liabilities or other assets. The
estimated cost to terminate these agreements was $500,000 at
December 31, 1994.
At December 31, 1994, the company had foreign currency forward exchange
contracts designated and effective as hedges which become due in
various amounts and at various dates through February 1997 totalling
$3,000,000. All such contracts at December 31, 1994 were for the
purpose of hedging purchase commitments. Unrealized gains and losses
on the forward exchange contracts are deferred and will be recognized
in income in the same period as the hedged transaction. The difference
between the contract value and the fair value was insignificant at
December 31, 1994.
Note J - Stock Options and Awards
The company's stock benefit plan, approved by the company's
shareholders, authorizes the grant of up to 2,737,500 (as adjusted for
subsequent stock splits and dividends) benefit shares or units to key
employees and directors until May 1998. This excludes shares which
were issued under predecessor plans. Benefit shares or units include
stock options, both incentive and non-incentive, stock awards and other
stock units.
Stock options are primarily granted at the fair market value of the
shares on the date of grant and become exercisable one year after grant
at a rate of one-half annually and are exercisable in full on the
second anniversary date. All options and rights must be exercised
within ten years from date of grant. At the company's discretion,
vested stock option holders are permitted to elect an alternative
settlement method in lieu of purchasing common stock at the option
price. The alternative settlement method permits the employee to
receive, without payment to the company, cash, shares of common stock
or a combination thereof equal to the excess of market value of common
stock over the option purchase price.
Changes in outstanding shares under option during 1994 were as follows:
Option
Option shares price range
Outstanding at December 31, 1993 1,694,334 $ 2.80-$20.63
Granted 211,438 $17.50-$20.63
Canceled or expired (17,329) $11.17-$20.16
Exercised (73,311) $ 2.80-$15.47
Outstanding at December 31, 1994 1,815,132 $ 3.21-$20.63
Exercisable at December 31, 1994 1,302,771 $ 3.21-$20.63
Stock award shares are granted to employees at no cost. Awards
primarily vest at the rate of 25% annually commencing one year from the
date of award, provided the recipient is still employed by the company
on the vesting date. The cost of stock awards, based on the fair
market value at the date of grant, is being charged to expense over the
four-year vesting period.
Available for future grant were 425,950 and 658,707 benefit shares or
units at December 31, 1994 and 1993, respectively.
Note K - Shareholders' Equity
The company has 90,000,000 authorized shares of common stock, $1 par value and 800,000 authorized and unissued shares of preference
stock, $1 par value.
The changes in shareholders' equity for each of the three years in the period ended December 31, 1994 were as follows:
Foreign
Common Capital in Deferred currency
stock excess of Retained Treasury stock translation
par value par value earnings stock awards adjustment
Balance at December 31, 1991 -
23,541,000 shares issued $23,541,000 $93,156,000 $62,063,000 $(12,871,000) $(2,118,000) $1,003,000
Net income 34,460,000
Cash dividends declared (14,363,000)
Conversion of debentures 133,000 798,000
Exercise of stock options:
Cash proceeds 56,000 337,000
Exchange of shares 69,000 300,000 (369,000)
Stock awards granted 26,000 508,000 (534,000)
Tax benefits related to stock
compensation plans 656,000
Retirement of treasury stock (44,000) (812,000) 856,000
Purchases of 264,000 shares
of treasury stock (5,249,000)
3-for-2 stock split,
10,697,000 shares issued 10,697,000 (23,590,000) 12,893,000
Amortization of deferred stock
awards 711,000
Foreign currency translation
adjustment (2,915,000)
Other 69,000 (487,000)
Balance at December 31, 1992 -
34,478,000 shares issued 34,478,000 71,422,000 82,160,000 (5,227,000) (1,941,000) (1,912,000)
Net income 39,780,000
Cash dividends declared (16,469,000)
Exercise of stock options:
Cash proceeds 86,000 438,000
Exchange of shares 155,000 938,000 (1,093,000)
Stock awards granted 30,000 659,000 (689,000)
Stock awards canceled (2,000) (57,000) 59,000
Tax benefits related to stock
compensation plans 1,562,000
Retirement of treasury stock (81,000) (1,929,000) 2,010,000
Purchases of 99,000 shares of
treasury stock (2,689,000)
4-for-3 stock split,
11,072,000 shares issued 11,072,000 (18,988,000) 7,916,000
Amortization of deferred stock
awards 856,000
Foreign currency translation
adjustment (2,419,000)
Other (917,000)
Balance at December 31, 1993 -
45,738,000 shares issued 45,738,000 54,045,000 105,471,000 - (1,715,000) (4,331,000)
Net income 46,770,000
Cash dividends declared (19,103,000)
Exercise of stock options:
Cash proceeds 67,000 393,000
Exchange of shares 6,000 21,000 (27,000)
Stock awards granted 43,000 770,000 (813,000)
Stock awards canceled (4,000) (59,000) 63,000
Tax benefits related to stock
compensation plans 206,000
Retirement of treasury stock (12,000) (213,000) 225,000
Purchases of 466,000 shares
of treasury stock (9,339,000)
Shares purchased subsequent to
December 31, 1993 used to
effect 4-for-3 stock split (71,000) (1,387,000) 1,458,000
Amortization of deferred stock
awards 777,000
Foreign currency translation
adjustment 1,552,000
Other (20,000) (197,000)
Balance at December 31, 1994 -
45,767,000 shares issued $45,767,000 $53,756,000 $133,138,000 $(7,880,000) $(1,688,000) $(2,779,000)
In June 1988, the company declared a dividend distribution of one
preferred share purchase right on each share of common stock
outstanding on and after July 5, 1988. The rights are not exercisable
until the rights distribution date, defined as the earlier of: 1) the
tenth day following a public announcement that a person or group of
affiliated or associated persons acquired or obtained the right to
acquire beneficial ownership of 20% or more of the outstanding common
stock or 2) the tenth day following the commencement or announcement
of an intention to make a tender offer or exchange offer, the
consummation of which would result in the beneficial ownership by a
person or group of 30% or more of such outstanding common shares. Each
right, when exercisable, entitles the holder to purchase from the
company one one-hundredth of a share of Series A Preferred stock of the
company at a price of $90 per one one-hundredth of a preferred share,
subject to adjustment. The company is entitled to redeem the rights at
$.10 per right, payable in cash or common shares, at any time prior to
the expiration of twenty days following the public announcement that a
20% position has been acquired. In the event that the company is
acquired in a merger or other business combination transaction or 50%
or more of its consolidated assets or earning power is sold, proper
provision will be made so that each holder of a right will thereafter
have the right to receive, upon the exercise thereof at the then
current exercise price of a right, that number of shares of common
stock of the acquiring company which at the time of such transaction
would have a market value of two times the exercise price of the right.
The rights expire on July 5, 1998 unless earlier redeemed by the
company. Until exercised, the holder of a right, as such, will have no
rights as a shareholder, including, without limitation, the right to
vote or to receive dividends.
Note L - Acquisitions
During the three-year period ended December 31, 1994, the company made
the following acquisitions, all principally for cash and, in certain
instances, earnouts to be based upon the future profitability of the
respective business. Generally, earnouts are payable at the end of a
five-year period, a portion of which are sometimes guaranteed. In June
1994, the company acquired the principal operating assets and assumed
the principal operating liabilities of Peabody Myers Corporation
("Vactor"). Vactor is an Illinois-based manufacturer of municipal
combination catch basin/sewer cleaning vacuum trucks. In May 1994, the
company acquired the principal operating assets and assumed the
principal operating liabilities of Justrite Manufacturing Company, an
Illinois-based manufacturer of safety equipment for the storage,
transfer, use and disposal of flammable and hazardous materials. As a
result of the 1994 acquisitions, the company recorded approximately
$9.9 million of working capital, $10.3 million of fixed and other
assets and $49.6 million of costs in excess of fair values. In March
1993, the company acquired the outstanding shares of Guzzler
Manufacturing, Inc., an Alabama-based manufacturer of vacuum loader
vehicles. As a result of this acquisition, the company recorded
approximately $6.0 million of working capital, $6.1 million of fixed
and other assets, $.8 million of debt assumed and $12.7 million of
costs in excess of fair values. In November 1992, the company acquired
the outstanding shares of Dico Corporation, a Michigan-based
manufacturer of polycrystalline diamond and cubic boron nitride cutting
tools. In May 1992, the company acquired the outstanding shares of
Aplicaciones Tecnologicas Vama S.L., a leading European manufacturer of
emergency vehicular signaling products located in Barcelona, Spain. In
March 1992, the company acquired the assets of Schneider Stanznormalien
GmbH, a German manufacturer of precision punch and die components, for
cash. As a result of the 1992 acquisitions, the company recorded
approximately $7.2 million of working capital, $2.8 million of fixed
and other assets, $.5 million of debt assumed and $12.0 million of
costs in excess of fair values.
All of the acquisitions in the three-year period ended December 31,
1994 have been accounted for as purchases. Accordingly, the results of
operations of the acquired companies have been included in the
consolidated statements of income from the effective dates of the
acquisitions. Assuming the 1994 and 1993 acquisitions occurred on
January 1, 1993, the company estimates that consolidated net sales
would have been increased 6% and 15% in 1994 and 1993, respectively,
while net income would have increased 2% and 9%, respectively.
Note M - Contingency
On May 3, 1993, a Texas federal court jury rendered a verdict of
$17,745,000 against Federal Sign, a division of the company, for
alleged violation of the Texas Deceptive Trade Practices Act and
misrepresentations to Duravision, Inc. and Manufacturers Product
Research Group of North America, Inc. in connection with a 1988
research and development project for indoor advertising signs. The
company believes the court erroneously excluded important evidence and
that the verdict was against the weight of the evidence. Both inside
and outside counsel that initially handled the case opined at the time
of the verdict that the likelihood of a substantially unfavorable
result to the company on appeal was remote. Trial counsel has turned
the case over to new appellate counsel and has stated they cannot
currently give an opinion on the appeal because they are no longer
handling the case. Appellate counsel now handling the appeal of the
case has not issued an opinion on its outcome. However, if the company
loses its appeal of this case, there would be a charge to earnings for
this $17,745,000 verdict, plus interest and attorney fees of up to
$11,000,000. On the other hand, there would be no such charges to
earnings for a decision reversing the original verdict or the appellate
court could issue a decision somewhere in between. Depending on the
outcome of this matter, an adverse decision may have a material effect
on results of operations and cash flows in the periods that the
appellate court decision is made and required payments are made. The
company believes that the ultimate resolution of this contingency,
however, will not have a material effect on its financial condition nor
its results of operations or cash flows for periods subsequent to the
appellate court decision and payments required as a result of such
decision. The company cannot reasonably estimate the ultimate amount
of a judgment, if any, or interest and attorney fees, if any, which may
result from an adverse appellate court decision. Accordingly, the
company has not recorded any accruals for potential losses which may
result from an adverse judgment. In the event of an adverse decision,
the company intends to aggressively pursue a substantial recovery from
its original trial counsel in this matter.
Note N - Segment Information
The principal activities of the company's primary industry segments are
as follows:
Safety Products Group: The Safety Products Group produces: a variety
of visual and audible warning and signal devices used by private
industry and various governmental agencies; paging, local signaling,
and building security, parking and access control systems; and
equipment for storage, transfer, use and disposal of flammable and
hazardous materials.
Sign Group: The Sign Group manufactures for sale or lease illuminated,
non-illuminated and electronic advertising sign displays. It also
enters into contracts to provide maintenance service for the signs it
manufactures as well as for signs manufactured by others.
Tool Group: The Tool Group manufactures a variety of perishable tools
which include die components for the metal stamping industry, a large
selection of precision metal products for non-stamping needs and a line
of precision cutting and deep grooving tools.
Vehicle Group: The Vehicle Group manufactures: chassis; fire trucks
including Class A pumpers, mini-pumpers and tankers; airport and other
rescue vehicles, ambulances and aerial ladder trucks; a variety of
self-propelled street cleaning vehicles; vacuum loader vehicles and
municipal catch basin/sewer cleaning vacuum trucks.
Total revenue by business segment reflects sales to unaffiliated
customers, as reported in the company's consolidated statements of
income. Operating profit includes all costs and expenses directly
related to the segment involved. In determining operating profit,
neither corporate nor interest expenses were included. Business
segment depreciation expense, identifiable assets and capital
expenditures relate to those assets that are utilized by the respective
business segment. Corporate assets consist principally of cash and
cash equivalents, notes and other receivables and fixed assets.
Foreign sales, including export and foreign operations, aggregated
$129,896,000 in 1994, $113,210,000 in 1993 and $121,332,000 in 1992.
Export sales aggregated $67,341,000 in 1994, $59,324,000 in 1993 and
$61,355,000 in 1992.
A summary of the company's operations by geographic area for the three-
year period ended December 31, 1994 is as follows (in thousands):
1994 1993 1992
United States
Net sales $614,673 $511,277 $458,246
Operating income 76,190 62,977 53,863
Identifiable assets 463,621 353,172 307,088
All foreign (principally
Europe, Canada and Japan)
Net sales $ 62,555 $ 53,886 $ 59,977
Operating income 2,078 907 1,295
Identifiable assets 57,979 52,532 56,571
For the years ended December 31,
(in thousands)
1994 1993 1992
Net sales
Safety Products $135,424 $104,927 $ 95,946
Sign 66,090 58,550 56,074
Tool 121,657 111,879 99,619
Vehicle 354,057 289,807 266,584
Total net sales $677,228 $565,163 $518,223
Operating income
Safety Products $ 23,313 $ 16,159 $ 13,518
Sign 3,988 1,169 (1,815)
Tool 23,475 23,273 21,715
Vehicle 33,531 30,289 28,267
Corporate expense (6,039) (7,006) (6,527)
Total operating income 78,268 63,884 55,158
Interest expense (8,499) (6,136) (6,471)
Other income 412 1,048 1,214
Income before income taxes $ 70,181 $ 58,796 $ 49,901
Depreciation
Safety Products $ 2,693 $ 1,757 $ 1,792
Sign 1,400 1,684 1,856
Tool 2,386 2,313 1,957
Vehicle 3,772 3,412 3,082
Corporate 51 49 45
Total depreciation $ 10,302 $ 9,215 $ 8,732
Identifiable assets
Manufacturing activities
Safety Products $ 98,438 $ 51,092 $ 47,043
Sign 26,771 24,480 23,237
Tool 66,729 62,035 61,803
Vehicle 192,436 142,158 120,507
Corporate 10,038 15,359 7,080
Total manufacturing
activities 394,412 295,124 259,670
Financial services activities
Sign 13,836 17,282 19,958
Vehicle 113,352 93,298 84,031
Total financial services
activities 127,188 110,580 103,989
Total identifiable assets $521,600 $405,704 $363,659
Capital expenditures
Safety Products $ 2,409 $ 2,675 $ 1,366
Sign 1,218 988 1,227
Tool 4,200 2,614 2,710
Vehicle 3,245 3,848 3,513
Corporate 36 14 19
Total capital expenditures $ 11,108 $ 10,139 $ 8,835
Note O - Selected Quarterly Data (Unaudited)
(in thousands of dollars except per share amounts)
For the three months ended
1 9 9 4 1 9 9 3
March June September December March June September December
31 30 30 31 31 30 30 31
Net sales $138,106 $164,001 $181,283 $193,838 $127,447 $146,463 $142,740 $148,513
Gross margin $ 42,891 $ 51,751 $ 55,415 $ 59,677 $ 40,472 $ 46,244 $ 46,365 $ 48,995
Net income $ 8,156 $ 12,396 $ 12,436 $ 13,782 $ 7,151 $ 10,602 $ 10,661 $ 11,366
Per share data:
Net income $ .18 $ .27 $ .27 $ .30 $ .15 $ .23 $ .23 $ .25
Dividends paid $ .11 $ .11 $ .11 $ .11 $ .09 $ .09 $ .09 $ .09
Market price range
High $ 21 3/8 $ 20 3/8 $ 20 5/8 $ 21 $ 18 1/4 $ 19 $ 21 $ 21
Low $ 19 1/4 $ 16 7/8 $ 17 $ 17 3/4 $ 15 3/4 $ 16 1/2 $ 17 7/8 $ 19 1/2
Report of Ernst & Young LLP, Independent Auditors
To the Shareholders and Board of Directors
of Federal Signal Corporation
We have audited the accompanying consolidated balance sheets of Federal
Signal Corporation and subsidiaries as of December 31, 1994 and 1993,
and the related consolidated statements of income and cash flows for
each of the three years in the period ended December 31, 1994. These
financial statements are the responsibility of the company's
management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position
of Federal Signal Corporation and subsidiaries as of December 31, 1994
and 1993, and the consolidated results of their operations and their
cash flows for each of the three years in the period ended
December 31, 1994, in conformity with generally accepted accounting
principles.
As discussed in Note M to the financial statements, during 1993 a Texas
federal court jury rendered a verdict of $17,745,000, plus interest and
attorney fees, against Federal Sign, a division of the company, for
alleged violation of the Texas Deceptive Trade Practices Act and
misrepresentation related to a research and development project. The
company has appealed the verdict. The company cannot reasonably
estimate the ultimate outcome of the litigation. Accordingly, no
provision for any liability that may result has been made in the
financial statements.
Ernst & Young LLP
Chicago, Illinois
January 23, 1995
APPENDIX A
- ----------
FEDERAL SIGNAL CORPORATION
1994 Annual Report Graphic Material
The following table sets forth bar graph information contained in the
Financial Review section of the 1994 Annual Report paper format. It is
presented here in tabular format in order to conform with electronic
filing requirements.
(IN PERCENT)
1990 1991 1992 1993 1994
RETURN ON MANUFACTURING
ASSETS:
Total Company (1) 25% 24% 22% 22% 22%
Safety Products (2) 24% 30% 31% 34% 29%
Sign 10% -10% -12% 1% 12%
Tool 46% 44% 41% 37% 35%
Vehicle (3) 21% 22% 17% 15% 16%
(1) excluding acquisitions, return was 24% in 1994
(2) excluding acquisitions, return was 36% in 1994
(3) excluding acquisitions, return was 17% in 1994