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, 1998
OR
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________ to ___________
Commission file number: 1-6003
Federal Signal Corporation
(Exact name of Registrant as specified in its charter)
Delaware 36-1063330
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1415 West 22nd Street
Oak Brook, IL 60523-9945
(Address of principal executive offices) (Zip code)
(630) 954-2000
(Registrant's telephone number including area code)
1415 West 22nd Street
Oak Brook, IL 60523
(Former name, former address, and former fiscal year, if changed since
last report)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes X
No ____
Indicate the number of shares outstanding of each of the
registrant's classes of common stock, as of the latest practicable date.
Title
Common Stock, $1.00 par value 45,314,120 shares outstanding at
October 31, 1998
Part I. Financial Information
Item 1. Financial Statements
INTRODUCTION
The consolidated condensed financial statements of Federal Signal
Corporation and subsidiaries included herein have been prepared by the
Registrant, without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations, although the
Registrant believes that the disclosures are adequate to make the
information presented not misleading. It is suggested that these
consolidated condensed financial statements be read in conjunction with
the consolidated financial statements and the notes thereto included in
the Registrant's Proxy Statement for the Annual Meeting of Shareholders
held on April 15, 1998.
FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
Three Months Ended September 30 Nine Months Ended September 30
1998 1997 1998 1997
Net sales $248,914,000 $229,318,000 $730,265,000 $689,959,000
Costs and expenses:
Cost of sales 172,561,000 157,554,000 503,267,000 470,508,000
Selling, general and administrative 49,754,000 45,037,000 152,033,000 141,805,000
Other (income) and expenses:
Interest expense 4,717,000 4,459,000 14,049,000 12,550,000
Other (income) expense (1,808,000) (482,000) (2,194,000) (1,648,000)
------------ ----------- ----------- -----------
225,224,000 206,568,000 667,155,000 623,215,000
----------- ----------- ----------- -----------
Income before income taxes 23,690,000 22,750,000 63,110,000 66,744,000
Income taxes 7,419,000 6,780,000 19,980,000 21,099,000
----------- ----------- ----------- -----------
Net income $ 16,271,000 $ 15,970,000 $43,130,000 $45,645,000
=========== =========== ========== ==========
COMMON STOCK DATA:
Basic net income per share $ .36 $ .35 $ .94 $ 1.01
=========== =========== ========== =========
Diluted net income per share $ .36 $ .35 $ .94 $ 1.00
=========== =========== ========== =========
Weighted average common shares outstanding:
Basic 45,558,000 45,274,000 45,654,000 45,261,000
Diluted 45,816,000 45,832,000 45,927,000 45,826,000
Cash dividends per share of common stock $ .1775 $ .1675 $ .5325 $ .5025
<FN>
See notes to condensed consolidated financial statements.
</FN>
FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
Three Months Ended September 30 Nine Months Ended September 30
1998 1997 1998 1997
Net income $16,271,000 $15,970,000 $43,130,000 $45,645,000
Other comprehensive income (loss)-
Foreign currency translation adjustments 4,007,000 (1,129,000) 2,600,000 (7,146,000)
---------- ---------- ---------- ----------
Comprehensive income $20,278,000 $14,841,000 $45,730,000 $38,499,000
========== ========== ========== ==========
<FN>
See notes to condensed consolidated financial statements.
</FN>
FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
September 30 December 31
1998 1997 (a)
--------- --------
(Unaudited)
ASSETS
Manufacturing activities -
Current assets:
Cash and cash equivalents $15,321,000 $10,686,000
Trade accounts receivable, net of
allowances for doubtful accounts 148,499,000 142,973,000
Inventories:
Raw materials 63,957,000 55,524,000
Work in process 38,937,000 25,043,000
Finished goods 37,678,000 28,816,000
----------- -----------
Total inventories 140,572,000 109,383,000
Prepaid expenses 4,669,000 5,580,000
----------- -----------
Total current assets 309,061,000 268,622,000
Properties and equipment:
Land 5,757,000 5,134,000
Buildings and improvements 44,853,000 40,190,000
Machinery and equipment 153,874,000 142,043,000
Accumulated depreciation (111,916,000) (102,658,000)
----------- -----------
Net properties and equipment 92,568,000 84,709,000
Intangible assets, net of
accumulated amortization 228,232,000 188,002,000
Other deferred charges and assets 21,748,000 19,482,000
----------- -----------
Total manufacturing assets 651,609,000 560,815,000
Financial services activities -
Lease financing receivables, net of
allowances for doubtful accounts 172,857,000 167,090,000
----------- -----------
Total assets $824,466,000 $727,905,000
=========== ===========
See notes to condensed consolidated financial statements.
(a)The balance sheet at December 31, 1997 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
1998 1997 (a)
--------- --------
(Unaudited)
LIABILITIES
Manufacturing activities -
Current liabilities:
Short-term borrowings $54,651,000 $86,158,000
Trade accounts payable 60,486,000 50,385,000
Accrued liabilities and income taxes 89,735,000 90,486,000
---------- -----------
Total current liabilities 204,872,000 227,029,000
Long-term borrowings 130,223,000 32,110,000
Deferred income taxes 25,108,000 23,581,000
----------- -----------
Total manufacturing liabilities 360,203,000 282,720,000
Financial services activities -Borrowings 150,622,000 145,413,000
Total liabilities 510,825,000 428,133,000
SHAREHOLDERS' EQUITY
Common stock - par value 46,579,000 46,501,000
Capital in excess of par value 62,701,000 61,029,000
Retained earnings 245,152,000 226,432,000
Treasury stock (28,524,000) (19,695,000)
Deferred stock awards (2,090,000) (1,718,000)
Accumulated other comprehensive income (10,177,000) (12,777,000)
----------- -----------
Total shareholders' equity 313,641,000 299,772,000
----------- -----------
Total liabilities and
shareholders' equity $824,466,000 $727,905,000
=========== ===========
See notes to condensed consolidated financial statements.
(a) The balance sheet at December 31, 1997 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
1998 1997
Operating activities:
Net income $43,130,000 $45,645,000
Depreciation 12,515,000 11,085,000
Amortization 5,157,000 4,186,000
Working capital changes and other (14,860,000) (9,196,000)
---------- ----------
Net cash provided by operating
activities 45,942,000 51,720,000
Investing activities:
Purchases of properties and
equipment (14,502,000) (15,949,000)
Principal extensions under
lease financing agreements (80,247,000) (85,088,000)
Principal collections under
lease financing agreements 74,480,000 83,886,000
Payments for purchases of companies,
net of cash acquired (56,606,000) (29,144,000)
Other, net (1,020,000) 4,222,000
---------- ----------
Net cash used for investing activities (77,895,000) (42,073,000)
Financing activities:
Additional short-term
borrowings, net 74,893,000 32,041,000
Reduction of long-term borrowings (1,317,000) (1,895,000)
Purchases of treasury stock (5,209,000) (5,323,000)
Cash dividends paid to shareholders (32,145,000) (29,307,000)
Other, net 366,000 317,000
---------- ----------
Net cash provided by (used for) financing
activities 36,588,000 (4,167,000)
Increase in cash and cash
equivalents 4,635,000 5,480,000
Cash and cash equivalents at
beginning of period 10,686,000 12,431,000
---------- ----------
Cash and cash equivalents at
end of period $15,321,000 $ 17,911,000
========== ===========
See notes to condensed consolidated financial statements.
FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
1. It is suggested that the condensed consolidated financial
statements be read in conjunction with the financial statements and
the notes thereto included in the Registrant's Proxy Statement for
the Annual Meeting of Shareholders held on April 15, 1998.
2. In the opinion of the Registrant, the information contained herein
reflects all adjustments necessary to present fairly the
Registrant's financial position, results of operations and cash
flows for the interim periods. Such adjustments are of a normal
recurring nature. The operating results for the three months and
nine months ended September 30, 1998 are not necessarily indicative
of the results to be expected for the full year of 1998.
3. Interest paid for the nine-month periods ended September 30, 1998
and 1997 was $14,096,000 and $13,023,000, respectively. Income
taxes paid for these same periods were $17,041,000 and $19,985,000,
respectively.
4. The following table summarizes the information used in computing
basic and diluted income per share:
Three Months Ended September 30 Nine Months Ended September 30
1998 1997 1998 1997
Numerator for both basic
and diluted income per share
computations - net income $16,271,000 $15,970,000 $43,130,000 $45,645,000
========== ========== ========== ==========
Denominator for basic income
per share - weighted average
shares outstanding 45,558,000 45,274,000 45,654,000 45,261,000
Effect of employee stock options
(dilutive potential common shares) 258,000 558,000 273,000 565,000
---------- ---------- ---------- ----------
Denominator for diluted income
per share - adjusted shares 45,816,000 45,832,000 45,927,000 45,826,000
========== ========== ========== ==========
<FN>
</FN>
5. In 1998, the company adopted Statement of Financial Accounting
Standard (SFAS) No. 130, "Reporting Comprehensive Income", which
requires companies to report all changes in equity during a period,
except those resulting from investments by owners and distributions
to owners, in a financial statement for the period in which they
are recognized. The prior year has been restated to conform to the
requirements of SFAS No. 130.
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 1998
Comparison with Third Quarter 1997
Federal Signal Corporation sales and earnings increased to record third
quarter levels. Sales increased 9% to $249 million from $229 million last
year. Diluted earnings per share increased to $.36, 3% over last year's
$.35 per share. Net income increased to $16.3 million in the third
quarter compared to $16.0 million last year. Backlogs at September
30,1998 were $331 million, an increase of 26% over the $263 million a
year ago and up 7% from the beginning of the year with most of the
backlog increase generated by the Vehicle Group.
Sales increased in all four groups, while earnings and operating margins
improved over last year's third quarter in three of the company's four
groups. The Safety Products, Tool and Sign groups experienced strong
earnings improvements over last year while Vehicle Group earnings
declined due to results at the group's fire rescue operations.
Safety Products' orders increased 7% in the third quarter largely as a
result of increased orders for parking systems and hazardous area and
municipal lighting products. The group's earnings increased 21% on a 12%
increase in sales, with margins improving in most major product lines.
With the exception of the Asia-Pacific region, the group generally
continues to see good markets, in particular its municipal markets. The
strong performance in this group was aided during the quarter by success
with new products. Additionally, the group made three small product line
acquisitions that open additional market niches going forward.
Vehicle Group sales increased 8% while third quarter earnings declined
29% as profit declines of the group's fire rescue business more than
offset gains made in environmental products.
* Environmental products orders increased 33% on very good U.S.
municipal markets, more than offsetting a slowing in U.S. industrial
orders. Sales and earnings increases were also very strong,
continuing the momentum from the first half of the year. In
addition, the group acquired a small water blasting equipment
manufacturer late in the quarter, opening a new industrial cleaning
segment to complement the industrial vacuum loader vehicle business.
* Fire rescue orders were down 24% in the quarter. The market outside
the U.S. remains slow and non-U.S. orders were down from last year's
third quarter. Underlying demand in the U.S. municipal market
remains healthy; however, a number of orders expected during the
third quarter are now expected in the fourth quarter. Fire rescue
sales were up slightly over last year's third quarter as a result of
the acquisition of Saulsbury Fire in January of this year. Excluding
this acquisition, operating income in the U.S. continued to be
impacted by the results of chassis shortages earlier in the year and
increases in operating expenses. As chassis became available, the
group's U.S. fire apparatus business began to increase production
and hired a large number of new employees whose learning curve
reduced overall productivity; also the majority of its third quarter
shipments resulted from 1997 orders and pricing levels - again a
result of production issues in the first half of the year.
The Vehicle Group's ability to obtain chassis from its suppliers has
improved considerably over that experienced earlier in the year. While
purchase order lead times are still well above historical averages, most
supplier deliveries became more dependable in the third quarter and this
situation is expected to continue to improve.
Tool Group earnings increased 8% in the third quarter as operating
margins improved on a sales increase of 7%. Orders increased 2% in the
third quarter, a rate of increase slower than experienced in the first
half of this year. Non-U.S. orders in the die components segment
increased sharply as large automotive die-build programs continued into
the quarter in Japan and Germany. However, U.S. orders for die components
and carbide cutting tools declined modestly reflecting lower industrial
demand.
Sign Group earnings more than doubled last year's third quarter on a
sales increase of 5%. Incoming orders increased slightly over last year's
strong third quarter and are up significantly over quarterly levels
achieved in the first half of this year. The group's operating margin
again increased, reflecting the benefits of many improvements made in its
operations over the past year.
Gross profit as a percent of net sales declined from 31.3% in the third
quarter of 1997 to 30.7% in the third quarter of 1998. The percentage
decline was largely attributable to production inefficiencies experienced
in the Vehicle Group. Selling, general and administrative expenses as a
percent of net sales increased to 20.0% from 19.6% in the third quarter
of 1997. The effective tax rate for the third quarter of 1998 was 31.3%
compared to the third quarter 1997 rate of 29.8%. The percentage increase
was due to the fact that last year's rate included non-recurring tax
benefits associated with prior years' export sales of U.S. products.
Comparison of First Nine Months 1998 to Same Period 1997
Orders for the first nine months of 1998 increased 9% over the same
period a year ago. For the first nine months of 1998, sales of $730.3
million increased 6% over the $690.0 million last year. Net income of
$43.1 million for the first nine months of 1998 declined from last year's
$45.6 million. Diluted earnings per share declined to $.94 in 1998 from
$1.00 in 1997. The earnings decline for the first nine months occurred as
a result of lower first quarter earnings caused mainly by vendor-related
chassis supply shortages for the Vehicle Group.
Gross profit as a percent of net sales declined to 31.1% in the first
nine months of 1998 from 31.8% in the first nine months of 1997 due to
the reasons cited above for the third quarter. Selling, general and
administrative expenses increased slightly to 20.8% of net sales in the
first nine months of 1998 from 20.6% in the same period a year ago.
Interest expense increased from $12.6 million to $14.0 million largely as
a result of increased borrowings to finance recent business acquisitions.
The effective tax rate was 31.7% for the first nine months of 1998,
slightly above the 31.6% for the same time frame in 1997.
Seasonality of Registrant's Business
Certain of the Registrant's businesses are susceptible to the influences
of seasonal buying or delivery patterns. The Registrant's businesses
which tend to have lower sales in the first calendar quarter compared to
other quarters as a result of these influences are signage, street
sweeping, outdoor warning, municipal emergency signal products, parking
systems and fire rescue products.
Financial Position and Liquidity at September 30, 1998
The current ratio applicable to manufacturing activities was 1.5 at
September 30, 1998 compared to 1.2 at December 31, 1997. Working capital
(manufacturing operations) at September 30, 1998 was $104.2 million
compared to $41.6 million at the most recent year end. The increase in
working capital principally resulted from the company's reclassification
of $100 million of short-term debt (backed by a long term credit
agreement) to long-term debt in September 1998. The debt to
capitalization ratio applicable to manufacturing increased to 37% at
September 30, 1998 from 28% at December 31, 1997, largely due to
acquisitions of companies during 1998. The debt to capitalization ratio
applicable to financial services activities was 87% at September 30, 1998
and December 31, 1997.
Current financial resources and anticipated funds from the Registrant's
operations are expected to be adequate to meet future cash requirements
including capital expenditures and modest amounts of additional stock
purchases.
Other Event
In August 1998, the Registrant acquired Jetstream of Houston, Inc. for
cash. Based in Houston, Jetstream is a $11 million manufacturer of
waterjetting equipment used primarily in the industrial contractor
maintenance market.
Impact of the Year 2000 Issue
This section contains certain forward-looking statements that are based
on management's current views and assumptions regarding future events,
future business conditions and the outlook for the company based on
currently available information. These statements are qualified by
reference to the section "Forward Looking Statements" on page 29 of the
company's Annual Report for the year ended December 31, 1997.
The Year 2000 ("Y2K") issue refers to the risk that systems, products and
equipment using date-sensitive software or computer chips with two-digit
date fields may recognize a date using "00" as the year 1900 rather than
the year 2000. This situation could result in systems failures,
miscalculations and business interruptions that could have a materially
adverse impact on the company.
The company is a diversified and decentralized manufacturing concern and
has over twenty business units. Business unit management has primary
responsibility for achieving Y2K compliance and has appointed Y2K project
coordinators for each site within their divisions. These coordinators
report both to the management of the applicable business unit and the
company's Director of Internal Audit, who is the overall coordinator of
the company's Y2K compliance effort. The Director periodically reports to
the company's Chairman and to the Audit Committee of the Board of
Directors.
The company has assessed its Y2K risks and established its priorities in
addressing these risks. The company is currently in the final phases of
correcting systems with identified deficiencies and plans to complete the
final validation testing of its Year 2000 compliance program by the
middle of 1999. The company currently believes all essential processes,
systems, and business functions will comply with the Year 2000
requirements by the middle of 1999. While the company does not expect
that the consequences of any unsuccessful modifications would
significantly affect the financial position, liquidity, or results of
operations, there can be no assurance that failure to be fully compliant
by 2000 would not have an impact on the company. The company is also
surveying critical suppliers, distributors and customers to assure that
their systems will be Year 2000 compliant and anticipates this survey
will essentially be complete by early 1999. While the failure of a single
third party to timely achieve Year 2000 compliance should not have a
material adverse effect on the company's results of operations in a
particular period, the failure of several key third parties to achieve
such compliance could have such an effect. The company will develop
contingency plans by the middle of 1999 to alter business relationships
in the event certain third parties fail to become Year 2000 compliant.
The costs of the company's Year 2000 transition program are being funded
with cashflows from operations. Some of these costs relate solely to the
modification of existing systems, while others are for new systems, which
will improve business functionality. In total, these costs are not
expected to be substantially different from the normal, recurring costs
that are incurred for systems development and implementation. As a
result, these costs are not expected to have a material adverse effect on
the company's overall results of operations or cash flows.
Part II. Other Information
Responses to items one, three, four and five are omitted since these
items are either inapplicable or the response thereto would be negative.
Item 2. Changes in Securities.
(a) On July 9, 1998 the Board of Directors of the Registrant
declared a dividend distribution of one Preferred Share Purchase
Right for each outstanding share of common stock, par value $1.00
per share, of the Registrant. The Rights dividend was distributed
on August 18, 1998 to shareholders of record on that date. Each
Right entitles the registered holder, under certain
circumstances, to purchase from the Registrant one one-hundredth
of a share of a Series A Preferred Stock, $1.00 par value, of the
Registrant at a price of $100 per one one-hundredth of a
preferred share, subject to adjustment. The Rights will be
exerciseable only if a person or group acquires 20% or more of
the Registrant's common stock or announces a bona fide tender
offer for 30% or more of the common stock. The Board of Directors
of the Registrant will be entitled to redeem the Rights at $.10
per Right, in cash or common stock.
Item 6. Exhibits and Reports on Form 8-K.
(a) Rights Agreement dated July 9, 1998, filed as Exhibit (1) to
Registrant's Form 8-K, dated July 9, 1998 is incorporated herein
by reference.
(b) Form 8-K, dated July 9, 1998, reported the distribution of
Preferred Share Purchase Rights (See Item 2 above).
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
11/13/98 By: /s/ Henry L. Dykema
Henry L. Dykema, Vice President and Chief Financial Officer