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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 June 30, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to ___________
Commission file number: 1-6003
Federal Signal Corporation
(Exact name of Registrant as specified in its charter)
Delaware 36-1063330
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1415 West 22nd Street
Oak Brook, IL 60523
(Address of principal executive offices) (Zip code)
(630) 954-2001
(Registrant's telephone number including area code)
Not applicable
(Former name, former address, and former fiscal year, if changed
since last report)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No ____
Indicate the number of shares outstanding of each of the Registrant's
classes of common stock, as of the latest practicable date.
Title
Common Stock, $1.00 par value 45,305,000 shares outstanding at July 31, 2002
Part I. Financial Information
Item 1. Financial Statements
INTRODUCTION
The consolidated condensed financial statements of Federal Signal Corporation
and subsidiaries included herein have been prepared by the Registrant, without
an audit, pursuant to the rules and regulations of the Securities and Exchange
Commission. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations, although the Registrant believes that the disclosures are adequate
to make the information presented not misleading. It is suggested that these
consolidated condensed financial statements be read in conjunction with the
consolidated financial statements and the notes thereto included in the
Registrant's Annual Report on Form 10-K for the fiscal year ended December 31,
2001.
FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
Three months ended June 30, Six months ended June 30,
2002 2001 2002 2001
---- ---- ---- ----
Net sales $ 257,864,000 $ 286,817,000 $ 503,508,000 $ 544,824,000
Costs and expenses:
Cost of sales (183,117,000) (201,136,000) (358,871,000) (379,203,000)
Selling, general and
administrative (54,345,000) (54,835,000) (105,622,000) (110,919,000)
----------- ----------- ----------- -----------
Operating income 20,402,000 30,846,000 39,015,000 54,702,000
Interest expense (5,064,000) (6,705,000) (9,847,000) (14,515,000)
Other income (expense),
net (440,000) 31,000 (286,000) 127,000
Minority interest (43,000) (15,000)
----------- ----------- ----------- -----------
Income from continuing
operations before income
taxes 14,855,000 24,172,000 28,867,000 40,314,000
Income taxes (4,143,000) (7,460,000) (8,361,000) (11,976,000)
----------- ----------- ----------- -----------
Income from continuing
operations 10,712,000 16,712,000 20,506,000 28,338,000
Income from discontinued
operations, net of tax 307,000 307,000
Cumulative effect of
change in accounting (7,984,000)
----------- ---------- ----------- -----------
Net income $ 10,712,000 $ 17,019,000 $ 12,522,000 $ 28,645,000
=========== =========== =========== ===========
COMMON STOCK DATA:
Basic and diluted net
income per share:
Income from continuing
operations $.24 $.37 $.45 $.62
Income from discontinued
operations .01 .01
Cumulative effect of
change in accounting (.18)
--- --- --- ---
Net income* $.24 $.37 $.28 $.63
=== === === ===
Weighted average common
shares outstanding
Basic 45,264,000 45,541,000 45,198,000 45,476,000
Diluted 45,461,000 45,709,000 45,394,000 45,641,000
Cash dividends per share
of common stock $.2000 $.1950 $.4000 $.3900
* amounts above may not add due to rounding
See notes to condensed consolidated financial statements.
FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
Three months ended June 30, Six months ended June 30,
2002 2001 2002 2001
---- ---- ---- ----
Net income $10,712,000 $17,019,000 $12,522,000 $28,645,000
Other comprehensive income
(loss), net of tax -
Foreign currency
translation adjustments 6,471,000 (731,000) 5,427,000 (4,903,000)
Net derivative (loss),
cash flow hedges (613,000) (613,000)
---------- ---------- ---------- ----------
Comprehensive income $16,570,000 $16,288,000 $17,336,000 $23,742,000
========== ========== ========== ==========
See notes to condensed consolidated financial statements.
FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
June 30, December 31,
2002 2001 (a)
-------- ------------
(Unaudited)
ASSETS
Manufacturing activities -
Current assets:
Cash and cash equivalents $ 14,507,000 $ 16,882,000
Trade accounts receivable, net of
allowances for doubtful accounts 148,973,000 158,994,000
Inventories:
Raw materials 59,479,000 63,435,000
Work in process 56,213,000 39,258,000
Finished goods 43,885,000 50,148,000
Prepaid expenses 16,455,000 13,608,000
------------- -------------
Total current assets 339,512,000 342,325,000
Properties and equipment:
Land 5,663,000 5,606,000
Buildings and improvements 54,522,000 53,854,000
Machinery and equipment 208,148,000 198,047,000
Accumulated depreciation (155,246,000) (143,765,000)
------------- -------------
Net properties and equipment 113,087,000 113,742,000
------------- -------------
Intangible assets, net of accumulated
amortization 281,685,000 280,888,000
Other deferred charges and assets 27,253,000 25,143,000
------------- -------------
Total manufacturing assets 761,537,000 762,098,000
Net assets of discontinued operations,
including financial assets 12,417,000 14,396,000
Financial services activities -
Lease financing receivables,
net of allowances for
doubtful accounts 237,622,000 239,120,000
------------- -------------
Total assets $1,011,576,000 $1,015,614,000
============= =============
See notes to condensed consolidated financial statements.
(a) The balance sheet at December 31, 2001 has been derived from the audited
financial statements at that date.
FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS -- Continued
June 30, December 31,
2002 2001 (a)
---------- ------------
(Unaudited)
LIABILITIES
Manufacturing activities -
Current liabilities:
Short-term borrowings $ 14,459,000 $ 28,849,000
Trade accounts payable 63,968,000 53,292,000
Accrued liabilities and income taxes 105,036,000 97,289,000
------------- -------------
Total current liabilities 183,463,000 179,430,000
Long-term borrowings 223,548,000 232,678,000
Deferred income taxes 32,107,000 29,280,000
------------- -------------
Total manufacturing liabilities 439,118,000 441,388,000
------------- -------------
Financial services activities - Borrowings 212,122,000 213,917,000
Minority interest in subsidiary 888,000 873,000
SHAREHOLDERS' EQUITY
Common stock - par value 47,574,000 47,378,000
Capital in excess of par value 76,983,000 73,177,000
Retained earnings 306,625,000 312,206,000
Treasury stock (47,906,000) (45,486,000)
Deferred stock awards (2,982,000) (2,179,000)
Accumulated other comprehensive income (20,846,000) (25,660,000)
------------- -------------
Total shareholders' equity 359,448,000 359,436,000
------------- -------------
Total liabilities and
shareholders' equity $1,011,576,000 $1,015,614,000
============= =============
See notes to condensed consolidated financial statements.
(a) The balance sheet at December 31, 2001 has been derived from the audited
financial statements at that date.
FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Six Months Ended June 30,
2002 2001
------ ------
Operating activities:
Net income $ 12,522,000 $ 28,645,000
Cumulative effect of change in accounting 7,984,000
Depreciation 10,565,000 9,941,000
Amortization 977,000 4,985,000
Working capital changes and other 25,101,000 2,493,000
---------- ----------
Net cash provided by operating activities 57,149,000 46,064,000
Investing activities:
Purchases of properties and equipment (8,347,000) (11,200,000)
Principal extensions under lease financing
agreements (77,675,000) (84,106,000)
Principal collections under lease financing
agreements 80,151,000 68,383,000
Payments for purchases of companies,
net of cash acquired (18,457,000)
Other, net (2,626,000) (75,000)
---------- ----------
Net cash used for investing activities (8,497,000) (45,455,000)
Financing activities:
Increase (decrease) in short-term
borrowings, net (29,034,000) (79,552,000)
Increase (decrease) in long-term borrowings (2,021,000) 99,321,000
Purchases of treasury stock (4,328,000)
Cash dividends paid to shareholders (17,866,000) (17,479,000)
Other, net 2,222,000 1,379,000
---------- ----------
Net cash provided by(used for)financing (51,027,000) 3,669,000
Increase (decrease) in cash and cash
equivalents (2,375,000) 4,278,000
Cash and cash equivalents at beginning of
period 16,882,000 13,556,000
---------- ----------
Cash and cash equivalents at end of
period $ 14,507,000 $ 17,834,000
========== ==========
See notes to condensed consolidated financial statements.
FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
1. It is suggested that the condensed consolidated financial statements be
read in conjunction with the financial statements and the notes thereto
included in the Registrant's Annual Report on Form 10-K for the fiscal
year ended December 31, 2001.
2. Management of the Registrant has announced its intent to divest the
operations of the Sign Group. The condensed consolidated financial
statements have been prepared on a basis that reflects the operations of
the Sign Group as discontinued operations. The net book value of the Sign
Group's assets aggregated $12,417,000 at June 30, 2002; management
believes that the value ultimately to be received for these assets will
exceed the recorded net book value.
3. In the opinion of the Registrant, the information contained herein
reflects all adjustments necessary to present fairly the Registrant's
financial position, results of operations and cash flows for the interim
periods. Such adjustments are of a normal recurring nature. The operating
results for the three months and six months ended June 30, 2002 are not
necessarily indicative of the results to be expected for the full year of
2002.
4. Interest paid for the six-month periods ended June 30, 2002 and 2001 was
$10,021,000 and $14,150,000, respectively. Income taxes paid for these
same periods were $3,722,000 and $4,598,000, respectively.
5. In June 2001, the Financial Accounting Standards Board issued Statements
of Financial Accounting Standards (SFAS) No. 141, "Business Combinations",
and No. 142, "Goodwill and Other Intangible Assets", effective for fiscal
years beginning after December 15, 2001. Under the new rules, goodwill and
intangible assets deemed to have indefinite lives will no longer be
amortized but will be subject to annual impairment tests in accordance
with these statements. Other intangible assets will continue to be
amortized over their useful lives.
The Registrant has adopted Financial Accounting Standards (SFAS) No. 142,
"Goodwill and Other Intangible Assets", and accordingly discontinued the
amortization of goodwill effective January 1, 2002. A reconciliation of
previously reported net income and earnings per share to the amounts
adjusted for the exclusion of goodwill amortization, net of the related
income tax effect, follows:
Three Months Ended Six Months Ended June
2002 2001 2002 2001
---- ---- ---- ----
Reported net income $10,712,000 $17,019,000 $12,522,000 $28,645,000
Add back: goodwill
amortization,
net of tax 1,367,000 2,736,000
---------- ---------- ---------- ----------
Adjusted net income $10,712,000 $18,386,000 $12,522,000 $31,381,000
========== ========== ========== ==========
Basic and diluted net
income per common share
Reported net income $.24 $.37 $.28 $.63
Goodwill amortization,
net of tax .03 .06
--- --- --- ---
Adjusted net income $.24 $.40 $.28 $.69
=== === === ===
Changes in the carrying amount of goodwill for the quarter ended June 30,
2002, by operating segment, are as follows:
Environmental Fire Safety
Products Rescue Products Tool Total
------------ ----------- ------------- ------------ -----------
Goodwill balance
March 31, 2002 $63,194,000 $33,471,000 $98,494,000 $82,618,000 $277,777,000
Translation and
other 429,000 2,476,000 979,000 24,000 3,908,000
---------- ---------- ---------- ---------- -----------
Goodwill balance
June 30, 2002 $63,623,000 $35,947,000 $99,473,000 $82,642,000 $281,685,000
========== ========== ========== ========== ===========
Other intangible assets (amortized and not amortized) were insignificant
for the quarter ended June 30, 2002.
6. The following table summarizes the information used in computing basic and
diluted income per share:
Three Months Ended June Six Months Ended June 30,
2002 2001 2002 2001
---- ---- ---- ----
Numerators for both basic
and diluted income per
share computations:
Income from continuing
operations $ 10,712,000 $ 16,712,000 $ 20,506,000 $ 28,338,000
Income from discontinued
operations 307,000 307,000
Cumulative effect of
change in accounting (7,984,000)
---------- ---------- ---------- ----------
Net income $ 10,712,000 $ 17,019,000 $ 12,522,000 $ 28,645,000
========== ========== ========== ==========
Denominator for basic
income per share -
weighted average shares
outstanding 45,264,000 45,541,000 45,198,000 45,476,000
Effect of employee stock
options (dilutive potential
common shares) 197,000 168,000 196,000 165,000
---------- ---------- ---------- ----------
Denominator for diluted
income per share -
adjusted shares 45,461,000 45,709,000 45,394,000 45,641,000
========== ========== ========== ==========
7. The following table summarizes the Registrant's operations by segment for
the three-month and six-month periods ended June 30, 2001 and 2000.
Segment operating income for 2001 was restated to exclude the amortization
of goodwill.
Three Months Ended June Six Months Ended June 30,
2002 2001 2002 2001
---- ---- ---- ----
Net sales
Environmental Products $ 70,540,000 $ 74,643,000 $ 145,292,000 $ 139,485,000
Fire Rescue 82,735,000 104,555,000 149,984,000 188,394,000
Safety Products 64,322,000 65,331,000 128,967,000 129,711,000
Tool 40,267,000 42,288,000 79,265,000 87,234,000
----------- ----------- ----------- -----------
Total net sales $257,864,000 $286,817,000 $503,508,000 $544,824,000
=========== =========== =========== ===========
Operating income
Environmental Products $ 5,931,000 $ 8,711,000 $ 12,518,000 $ 13,731,000
Fire Rescue 3,551,000 9,666,000 5,220,000 15,324,000
Safety Products 8,831,000 10,607,000 18,098,000 20,921,000
Tool 5,046,000 6,777,000 9,170,000 14,687,000
Goodwill amortization (1,961,000) (3,926,000)
Corporate expense (2,957,000) (2,954,000) (5,991,000) (6,035,000)
---------- ---------- ---------- ----------
Total operating income 20,402,000 30,846,000 39,015,000 54,702,000
Interest expense (5,064,000) (6,705,000) (9,847,000) (14,515,000)
Minority interest (43,000) (15,000)
Other income (expense) (440,000) 31,000 (286,000) 127,000
---------- ---------- ---------- ----------
Income before income taxes $ 14,855,000 $ 24,172,000 $ 28,867,000 $ 40,314,000
========== ========== ========== ==========
There have been no material changes in total assets from the amount
disclosed 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
SECOND QUARTER 2002
Comparison with Second Quarter 2001
Federal Signal Corporation reported diluted earnings per share of $.24 from
continuing operations for the second quarter of 2002 on sales of $258 million.
This compares to earnings per share of $.37 on sales of $287 million for the
same period in 2001. New orders were $294 million, up 7% from last year due to
record second quarter Fire Rescue business, which more than offset weaker
industrial and commercial orders from continuing operations. As required by the
new accounting rules, goodwill is no longer amortized as of January 1, 2002;
this favorably affected income from continuing operations by $.03 for the second
quarter.
Second quarter Environmental Products Group new orders declined 4%. Sales
declined 5% and operating earnings were 32% lower. As expected, weakness in
industrial markets resulted in lower earnings for the group. Municipal orders
and sales declined modestly due mainly to lower demand for sewer cleaners.
Margins were lower due to the significantly lower sales of higher-margin
industrial products.
Fire Rescue Group orders were 24% higher. Sales were 21% lower and earnings were
63% below prior year. Record second quarter orders resulted in June 30 record
backlog of $278 million for the group. Sales in the quarter were below prior
year due to order delays early in the fourth quarter of 2001 and lower
producible backlog at the beginning of the quarter. Earnings trended up from the
first quarter but remained significantly below 2001. The reduction reflected a
less favorable sales mix, in particular lower sales of high-margin aerial
products. Earnings were also adversely affected by production inefficiencies, as
higher employment levels were maintained to meet the ramp up in shipments in the
second half of the year.
Safety Products Group orders and sales were 2% below prior year, and earnings
were 17% lower. Worldwide orders declined slightly as delays in awards for
parking revenue control equipment were largely offset by continuing global
strength in outdoor warning systems. Operating income was lower due to weakness
in industrial markets, and higher pension expense. On July 3, the group received
a notice of contract award for up to $34 million for the installation and
long-term maintenance of a parking and revenue control system for the
Dallas-Fort Worth International Airport. This represents a record commercial
award for the company.
Tool Group sales declined 5% and earnings were 26% lower. The sales decline
reflected the continued weak industrial economy with sales per day slightly
lower than the first quarter. Operating income fell on lower sales volume and
reduced inventories as the group continued to implement lean enterprise
practices.
Gross profit as a percent of net sales declined to 29.0% in the second quarter
of 2002 from 29.9% in the second quarter of 2001. The percentage decrease was
largely attributable to lower volumes and sales mix. Selling, general and
administrative expenses as a percent of net sales increased to 21.1% in the
second quarter of 2002 compared to 19.1% last year as the effect of maintaining
certain fixed costs in a period of sales decline more than offset the benefit of
the elimination of goodwill amortization. Interest expense declined to $5.1
million from $6.7 million as a result of lower short-term interest rates and
lower outstanding debt. The effective tax rate for the second quarter of 2002
declined to 27.9% from 30.9% in 2001 reflecting the lower taxable income.
Comparison of First Six Months 2002 to Same Period 2001
Diluted income per share from continuing operations for the first six months of
2002 was $.45 on sales of $504 million. This compares to earnings per share of
$.62 in 2001 on sales of $545 million. The reduction from the prior year
reflects broadly weaker industrial and commercial markets and the timing of Fire
Rescue shipments. As discussed above, goodwill is no longer amortized as of
January 1, 2002; this favorably affected income from continuing operations by
$.06 for the first six months of 2002.
Gross profit as a percent of net sales decreased to 28.7% in the first six
months of 2002 from 30.4% in 2001. The decline in the gross profit percentage is
largely a result of the same reasons cited above for the second quarter.
Selling, general and administrative expenses as a percent of net sales increased
to 21.0% in the first half of 2002 compared to 20.4% last year as the effect of
maintaining certain fixed costs in a period of sales decline more than offset
the benefit of the elimination of goodwill amortization. Interest expense
declined to $9.8 million from $14.5 million largely as a result of the same
reasons cited above for the second quarter. The effective tax rate of 29.0% for
the first six months of 2002 declined from the 29.7% in 2001 largely as a result
of lower taxable income.
Seasonality of Registrant's Business
Certain of the Registrant's businesses are susceptible to the influences of
seasonal buying or delivery patterns. The Registrant's businesses which tend to
have lower sales in the first calendar quarter compared to other quarters as a
result of these influences are street sweeping, outdoor warning, municipal
emergency signal products, parking systems, fire rescue products and signage.
Financial Position and Liquidity at June 30, 2002
Operating cash flow of $57.1 million for first six months of 2002, was up 24%
over the prior year due to lower working capital resulting from improved
collections and improved inventory management from successful lean manufacturing
programs. Working capital (manufacturing operations) at June 30, 2002 was $156.0
million compared to $162.9 million at the most recent year-end. The
debt-to-capitalization ratio applicable to manufacturing activities was 42% at
June 30, 2002 down from 44% at December 31, 2001, reflecting the company's
strong cash flows and $29 million reduction of short-term debt. As per company
policy, the debt-to-capitalization ratio applicable to financial services
activities was 87% at both June 30, 2002 and December 31, 2001.
Current financial resources and anticipated funds from the Registrant's
operations are expected to be adequate to meet future cash requirements.
Part II. Other Information
Responses to items one through five are omitted since these items are either
inapplicable or the response thereto would be negative.
Item 6. Exhibit 99.1 - Certification of Periodic Report from the CEO
Exhibit 99.2 - Certification of Periodic Report from the CFO
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
8/9/02 By: /s/ Stephanie K. Kushner
Date Stephanie K. Kushner, Vice President and Chief
Financial Officer