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, 1999
OR
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________ to ___________
Commission file number: 1-6003
Federal Signal Corporation
(Exact name of Registrant as specified in its charter)
Delaware 36-1063330
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1415 West 22nd Street
Oak Brook, IL 60523-9945
(Address of principal executive offices) (Zip code)
(630) 954-2000
(Registrant's telephone number including area code)
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 46,100,074 shares outstanding at
October 31, 1999
Part I. Financial Information
Item 1. Financial Statements
INTRODUCTION
The consolidated condensed financial statements of Federal Signal Corporation
and subsidiaries included herein have been prepared by the Registrant, without
audit, pursuant to the rules and regulations of the Securities and Exchange
Commission. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations, although the Registrant believes that the disclosures are adequate
to make the information presented not misleading. It is suggested that these
consolidated condensed financial statements be read in conjunction with the
consolidated financial statements and the notes thereto included in the
Registrant's Annual Report on Form 10-K for the fiscal year ended December 31,
1998.
FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
Three Months Ended September 30 Nine Months Ended September 30
1999 1998 1999 1998
Net sales $260,938,000 $248,914,000 $779,671,000 $730,265,000
Costs and expenses:
Cost of sales 181,915,000 172,561,000 544,292,000 503,267,000
Selling, general and administrative 53,526,000 49,754,000 160,148,000 152,033,000
Other (income) and expenses:
Interest expense 6,578,000 4,717,000 17,128,000 14,049,000
Other (income) (924,000) (1,808,000) (1,378,000) (2,194,000)
----------- ----------- ----------- -----------
241,095,000 225,224,000 720,190,000 667,155,000
----------- ----------- ----------- -----------
Income before income taxes 19,843,000 23,690,000 59,481,000 63,110,000
Income taxes 6,054,000 7,419,000 18,953,000 19,980,000
----------- ----------- ----------- -----------
Net income $ 13,789,000 $ 16,271,000 $ 40,528,000 $ 43,130,000
=========== =========== ========== ==========
COMMON STOCK DATA:
Basic net income per share $ .30 $ .36 $ .89 $ .94
=========== =========== ========== =========
Diluted net income per share $ .30 $ .36 $ .88 $ .94
=========== =========== ========== =========
Weighted average common shares outstanding:
Basic 46,140,000 45,558,000 45,679,000 45,654,000
Diluted 46,295,000 45,816,000 45,897,000 45,927,000
Cash dividends per share of common stock $ .1850 $ .1775 $ .5550 $ .5325
See notes to condensed consolidated financial statements.
FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
Three Months Ended September 30 Nine Months Ended September 30
1999 1998 1999 1998
Net income $13,789,000 $16,271,000 $40,528,000 $43,130,000
Other comprehensive income (loss)-
Foreign currency translation adjustments 804,000 4,007,000 (3,110,000) 2,600,000
---------- ---------- ---------- ----------
Comprehensive income $14,593,000 $20,278,000 $37,418,000 $45,730,000
========== ========== ========== ==========
See notes to condensed consolidated financial statements.
FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
September 30 December 31
1999 1998 (a)
--------- --------
(Unaudited)
ASSETS
Manufacturing activities -
Current assets:
Cash and cash equivalents $22,408,000 $15,316,000
Trade accounts receivable, net of
allowances for doubtful accounts 160,331,000 159,080,000
Inventories:
Raw materials 65,815,000 63,423,000
Work in process 64,143,000 32,613,000
Finished goods 34,169,000 35,925,000
----------- -----------
Total inventories 164,127,000 131,961,000
Prepaid expenses 9,498,000 4,850,000
----------- -----------
Total current assets 356,364,000 311,207,000
Properties and equipment:
Land 6,192,000 5,922,000
Buildings and improvements 50,698,000 47,785,000
Machinery and equipment 184,510,000 157,392,000
Accumulated depreciation (122,760,000) (113,732,000)
----------- -----------
Net properties and equipment 118,640,000 97,367,000
Intangible assets, net of
accumulated amortization 276,846,000 232,233,000
Other deferred charges and assets 25,764,000 21,147,000
----------- -----------
Total manufacturing assets 777,614,000 661,954,000
Financial services activities -
Lease financing receivables, net of
allowances for doubtful accounts 188,630,000 174,045,000
----------- -----------
Total assets $966,244,000 $835,999,000
=========== ===========
See notes to condensed consolidated financial statements.
(a)The balance sheet at December 31, 1998 has been derived from the audited
financial statements at that date.
FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS -- Continued
September 30 December 31
1999 1998 (a)
--------- --------
(Unaudited)
LIABILITIES
Manufacturing activities -
Current liabilities:
Short-term borrowings $127,581,000 $37,097,000
Trade accounts payable 68,281,000 62,976,000
Accrued liabilities and income taxes 93,398,000 95,120,000
----------- -----------
Total current liabilities 289,260,000 195,193,000
Long-term borrowings 135,811,000 137,152,000
Deferred income taxes 28,385,000 30,212,000
----------- -----------
Total manufacturing liabilities 453,456,000 362,557,000
Financial services activities -Borrowings 164,501,000 151,660,000
Total liabilities 617,957,000 514,217,000
SHAREHOLDERS' EQUITY
Common stock - par value 46,888,000 46,668,000
Capital in excess of par value 66,273,000 63,461,000
Retained earnings 268,463,000 253,366,000
Treasury stock (17,038,000) (29,161,000)
Deferred stock awards (2,471,000) (1,834,000)
Accumulated other comprehensive income (13,828,000) (10,718,000)
----------- -----------
Total shareholders' equity 348,287,000 321,782,000
----------- -----------
Total liabilities and
shareholders' equity $966,244,000 $835,999,000
=========== ===========
See notes to condensed consolidated financial statements.
(a) The balance sheet at December 31, 1998 has been derived from the audited
financial statements at that date.
FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Nine Months Ended September 30
1999 1998
Operating activities:
Net income $40,528,000 $43,130,000
Depreciation 13,523,000 12,515,000
Amortization 6,049,000 5,157,000
Working capital changes and other (22,203,000) (14,860,000)
---------- ----------
Net cash provided by operating
activities 37,897,000 45,942,000
Investing activities:
Purchases of properties and
equipment (19,164,000) (14,502,000)
Principal extensions under
lease financing agreements (97,729,000) (80,247,000)
Principal collections under
lease financing agreements 83,144,000 74,480,000
Payments for purchases of companies,
net of cash acquired (60,033,000) (56,606,000)
Other, net 636,000 (1,020,000)
---------- ----------
Net cash used for investing activities (93,146,000) (77,895,000)
Financing activities:
Additional short-term
borrowings, net 99,052,000 74,893,000
Reduction of long-term borrowings (1,498,000) (1,317,000)
Purchases of treasury stock (3,592,000) (5,209,000)
Cash dividends paid to shareholders (33,574,000) (32,145,000)
Other, net 1,953,000 366,000
---------- ----------
Net cash provided by financing
activities 62,341,000 36,588,000
Increase in cash and cash
equivalents 7,092,000 4,635,000
Cash and cash equivalents at
beginning of period 15,316,000 10,686,000
---------- ----------
Cash and cash equivalents at
end of period $22,408,000 $15,321,000
========== ==========
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, 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, 1999 are
not necessarily indicative of the results to be expected for the full year
of 1999.
3. Interest paid for the nine-month periods ended September 30, 1999 and 1998
was $17,100,000 and $14,096,000, respectively. Income taxes paid for these
same periods were $15,438,000 and $17,041,000, 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
1999 1998 1999 1998
Numerator for both basic
and diluted income per share
computations - net income $13,789,000 $16,271,000 $40,528,000 $43,130,000
========== ========== ========== ==========
Denominator for basic income
per share - weighted average
shares outstanding 46,140,000 45,558,000 45,679,000 45,654,000
Effect of employee stock options
(dilutive potential common shares) 155,000 258,000 218,000 273,000
---------- ---------- ---------- ----------
Denominator for diluted income
per share - adjusted shares 46,295,000 45,816,000 45,897,000 45,927,000
========== ========== ========== ==========
5. The following table summarizes the Registrant's operations by segment for
the three months and nine months ended September 30, 1999 and 1998:
Three months ended September 30 Nine months ended September 30
1999 1998 1999 1998
Net sales
Environmental Products $ 61,914,000 $ 54,487,000 $187,971,000 $161,315,000
Fire Rescue 70,075,000 76,243,000 218,798,000 223,958,000
Safety Products 62,959,000 64,463,000 193,461,000 188,596,000
Sign 23,695,000 17,064,000 63,776,000 45,921,000
Tool 42,295,000 36,657,000 115,665,000 110,475,000
----------- ----------- ----------- -----------
Total net sales $260,938,000 $248,914,000 $779,671,000 $730,265,000
=========== =========== =========== ===========
Operating income
Environmental Products $ 6,468,000 $ 4,896,000 $20,097,000 $13,709,000
Fire Rescue 2,182,000 2,895,000 6,100,000 11,526,000
Safety Products 9,985,000 11,226,000 28,562,000 30,326,000
Sign 668,000 1,258,000 3,621,000 1,971,000
Tool 8,439,000 8,136,000 23,521,000 23,458,000
Corporate expense (2,245,000) (1,812,000) (6,670,000) (6,025,000)
---------- ---------- ---------- ----------
Total operating income 25,497,000 26,599,000 75,231,000 74,965,000
Interest expense (6,578,000) (4,717,000) (17,128,000) (14,049,000)
Other income 924,000 1,808,000 1,378,000 2,194,000
---------- ---------- ---------- ----------
Income before income taxes $19,843,000 $23,690,000 $59,481,000 $63,110,000
========== ========== ========== ==========
As a result of the significant increase in Tool Group assets resulting
largely from a business acquisition in the third quarter of 1999, the
Registrant is providing a comparison of identifiable assets at September
30, 1999 to those at December 31, 1998 in the following table.
September 30, December 31,
1999 1998
Identifiable assets
Manufacturing activities
Environmental Products $149,468,000 $139,819,000
Fire Rescue 197,577,000 178,818,000
Safety Products 234,161,000 224,605,000
Sign 28,314,000 22,896,000
Tool 156,593,000 85,013,000
Corporate 11,501,000 10,803,000
----------- -----------
Total manufacturing activities 777,614,000 661,954,000
----------- -----------
Financial services activities
Environmental Products 63,213,000 51,499,000
Fire Rescue 118,097,000 114,163,000
Sign 7,320,000 8,383,000
----------- -----------
Total financial services activities 188,630,000 174,045,000
----------- -----------
Total identifiable assets $966,244,000 $835,999,000
=========== ===========
The basis of segmentation and the basis of measurement of segment profit
or loss are consistent with those used in the Registrant's last annual
report.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL POSITION AND
RESULTS OF OPERATIONS
THIRD QUARTER 1999
Comparison with Third Quarter 1998
Federal Signal Corporation reported record third quarter new orders, sales and
backlog. New orders were up 15% to $279 million, sales increased 5% to $261
million and backlog rose 18% to $390 million. Most of the backlog increase was
in the fire rescue segment. Third quarter diluted earnings per share declined to
$.30 from $.36 last year. Operating income declined 4%. While manufacturing
issues at the U.S. fire apparatus business remain the company's largest
opportunity for earnings improvement, the largest single factor contributing to
the year-over-year shortfall is market weakness in the company's oil and gas
related businesses. Net income declined from $16.3 million to $13.8 million
because of the lower operating income, increased interest costs and a decline in
non-operating income.
In the third quarter, new order growth was led by the Vehicle Group's fire
rescue segment. Since fire rescue products require the longest lead times within
the company, this strong order demand will have more benefit to the year 2000
than to this year. All groups except Safety Products increased sales.
Vehicle Group new orders were up 24% in the third quarter, with municipal
markets generally strong, particularly for fire rescue vehicles. Group earnings
were up 11% on a 1% sales increase.
Environmental products' earnings increased 32% on a sales increase of 14%.
New orders were up 7% as strong growth in non-U.S. sweeper orders outweighed
a decline in U.S. industrial vacuum truck orders. The U.S. market remains
strong for municipal vacuum trucks. However, softer U.S. orders for municipal
street sweepers and further softening of the industrial vacuum truck sector
occurred during the third quarter. The water blasting business acquisition,
made in August of last year, is performing very well and was important to
year-over-year results in the quarter.
Fire rescue orders were up 38% on strength in municipal markets generally
everywhere (except Asia-Pacific) as compared to a relatively weak order level
last year. Fire rescue sales were down 8% and earnings were down 25% from
last year's third quarter. Emergency One, which has been experiencing
production problems, saw apparatus deliveries in the third quarter increase
13% over the second quarter of this year, as plants increased throughput and
productivity. Emergency One manufacturing is increasingly benefiting from the
capabilities of its new (April 1999 start-up) enterprise resource planning
system for production planning and control and is increasingly effective in
dealing with various supply shortages caused by the still over-heated truck
chassis market. The particular mix of products which delivered in the quarter
was unfavorable for both sales and margins. The mix of scheduled deliveries
for the fourth quarter is significantly richer in higher price and higher
margin vehicles, many of which were partially completed in the third quarter.
These partially completed vehicles were a key component of the higher
inventory levels in fire rescue during the quarter. Third quarter fire rescue
backlog approximates three quarters sales, about 50% higher than normal. This
situation has not affected the segment's competitive position, and provides
an additional amount of higher priced backlog for delivery in coming
quarters. The fire rescue segment continues to plan additional production
ramp-up in order to reduce that backlog in the year 2000.
Tool Group new orders rose 14%, sales were up 15% and earnings were up 4% for
the quarter. The favorable performance was attributable to the acquisition of
the leading U.S. manufacturer of "superhard" consumable tooling at the beginning
of this quarter. As has been the case throughout the year, Tool's only active
market in the U.S. was automotive manufacturing; the group's foreign markets
remain mixed, but mainly slow.
Sign Group third quarter sales increased 39%; orders declined 3% from last
year's strong third quarter. While slightly below last year, orders ran at a
roughly $80 million annual rate, continuing the trend that began in the second
half of last year. Earnings were down 47% in the quarter, caused by project
overruns on certain bid-type construction contracts. These contracts represented
a significant portion of Sign's production and sales activities in the third
quarter. Sign management will limit future involvement in this small market
segment composed of large one-time, bid projects. Sign has shown dramatic
improvement in 1999 with first nine months orders up 19%, sales up 39% and
income up 84%. Sign's expected fourth quarter operating margin should
approximate the rate it achieved in the first half of 1999.
Safety Products Group orders were up 4% in the quarter, as very strong emergency
signals and parking security devices orders were partially offset by continuing
very weak hazardous area lighting orders (oil and gas exploration spending
related) and still weak industrial orders. Sales decreased 2%, as results in the
weak markets more than offset emergency signals and parking devices strength.
Safety Products' earnings declined 11% in the quarter compared to the 1998 third
quarter (which had an unusually strong margin); however, third quarter operating
margin strengthened considerably compared to the first half of 1999 on
relatively broad-based better performance of the group's businesses excluding
hazardous area lighting.
Gross profit as a percent of net sales declined to 30.3% in the third quarter of
1999 from 30.7% in the third quarter of 1998. The percentage decline was largely
attributable to lower gross margins in fire rescue and safety products segments
and project overruns in the Sign Group. These declines were partly offset by
improvement in the Environmental Products Group. Selling, general and
administrative expenses as a percent of net sales increased to 20.5% from 20.0%
in the third quarter of 1998 largely as a result of changes in business mix.
Interest expense increased to $6.6 million in the third quarter of 1999 compared
to $4.7 million in 1998 reflecting increased borrowings to finance business
acquisitions offset partially by lower interest rates. The effective tax rate
for the third quarter of 1999 was 30.5% compared to the third quarter 1998 rate
of 31.3%. The rate decrease was due largely to the realization of certain
non-taxable income in the third quarter of 1999.
Comparison of First Nine Months 1999 to Same Period 1998
Orders for the first nine months were up 10% and sales rose 7% to $780 million.
Diluted earnings per share for the first nine months declined to $.88 from $.94
last year. Net income declined to $40.5 million from $43.1 million in 1998. The
slight increase in operating income in the first nine months of 1999 was more
than offset by the increase in interest expense.
Gross profit as a percent of net sales declined to 30.2% in the first nine
months of 1999 from 31.1% in the first nine months of 1998. The percentage
decline was largely attributable to lower gross margins in the fire rescue and
sign segments and a lower proportion of Tool Group sales partly offset by an
improved margin in the environmental products segment. Selling, general and
administrative expenses decreased slightly to 20.5% of net sales in the first
nine months of 1999 from 20.8% in the same period a year ago. Interest expense
increased from $14.0 million to $17.1 million largely as a result of increased
borrowings to finance recent business acquisitions. The effective tax rate was
31.9% for the first nine months of 1999, slightly above the 31.7% for the same
time frame in 1998.
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, Liquidity and Market Risk at September 30, 1999
The current ratio applicable to manufacturing activities was 1.2 at September
30, 1999 compared to 1.6 at December 31, 1998. Working capital (manufacturing
operations) at September 30, 1998 was $67.1 million compared to $116.0 million
at the most recent year-end. The debt-to-capitalization ratio applicable to
manufacturing increased to 45% at September 30, 1999 from 37% at December 31,
1998, largely as a result of borrowings incurred to finance business
acquisitions. The debt-to-capitalization ratio applicable to financial services
activities was 87% at September 30, 1999 and December 31, 1998.
Current financial resources and anticipated cash flows 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.
At September 30, 1999, the Registrant's exposure to market risk had not
materially changed from December 31, 1998.
Impact of the Year 2000 Issue
Reference should be made to Registrant's discussion of the Year 2000 issue in
the Financial Review included in its Annual Report on Form 10-K for the fiscal
year ended December 31, 1998.
The company is completing the final phases of correcting systems with identified
deficiencies and plans to complete the final validation testing of its Year 2000
compliance program by December 31, 1999. The company currently believes all
major processes, systems, and business functions comply with the Year 2000
requirements and the remainder will comply by December 31, 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 absolute assurance that failure to be fully
compliant by 2000 would not have an impact on the company. The company is
continuing to survey critical suppliers, distributors and customers to assure
that their systems will be Year 2000 compliant and anticipates this survey will
essentially be complete by early fourth quarter 1999. While the failure of a
single third party to timely achieve Year 2000 compliance should not have a
material adverse effect on the company's results of operations in a particular
period, the failure of several key third parties to achieve such compliance
could have such an effect. The company has essentially completed its contingency
plans to alter business relationships in the event certain third parties fail to
become Year 2000 compliant.
The costs of the company's Year 2000 transition program are being funded with
cash flows from operations. Some of these costs relate solely to the
modification of existing systems, while others are for new systems, which will
improve business functionality. In total, these costs are not expected to be
substantially different from the normal, recurring costs that are incurred for
systems development and implementation. As a result, these costs are not
expected to have a material adverse effect on the company's overall results of
operations or cash flows.
Part II. Other Information
Responses to items one through six are omitted since these items are either
inapplicable or the response thereto would be negative.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Federal Signal Corporation
11/12/99 By: /s/ Henry L. Dykema
Henry L. Dykema
Vice President and Chief Financial Officer